January 4, 2016

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Our 2016 Federal & British Columbia Key Tax Rate Highlights are outlined below. These Highlights were originally posted and circulated on December 21. Download a pdf copy of our updated 2016 Tax Rate Card.

 

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Key Tax Highlights for 2016

1)      The Federal top personal tax marginal rate is increasing 4% on taxable income in excess of $200,000 (impacting the “top one percenters”),

2)      The BC top personal tax rate is decreasing 2.1% on taxable income in excess of $151,051,

3)      The net effect of the changes in (1) and (2) is a net increase in the top marginal tax rate of 1.9% from 45.8% in 2015 to 47.7% in 2016,

4)      The Federal personal tax rate will decrease by 1.5% for the “middle income bracket” between taxable incomes of $45,282 and $90,563,

5)      In comparing the dollar amount of 2016 personal taxes payable by BC resident individuals at various income levels with those for 2015, here are a few observations:

  • At $100,000 of taxable income, you will pay $835 less tax in 2016 than in 2015. 
  • At $200,000 of taxable income, you will pay $1,940 less tax in 2016 than in 2015. 
  • These positives changes are driven by the reduction in BC tax noted in (2) and the reduction in federal tax at the middle income bracket noted in (4) above.
  • Once you exceed $200,000 of taxable income, the additional 4% federal tax kicks in, but even at $300,000 of taxable income you are still paying $40 less tax in 2016 than in 2015.
  • At taxable income of $500,000, you will pay $3,760 more tax in 2016 than in 2015.  The additional 4% federal tax on income over $200,000 more than offsets the favourable effects of the BC tax reduction and the federal tax reduction in the middle bracket.

6)      In addition to the changes to personal tax rates and the corporate tax rate on investment income noted in (7) below, the dividend tax credit and gross-up mechanics have changed the personal tax rates on dividends received in 2016.  

  • The 2016 top personal tax rate that will apply to eligible dividends has increased from 28.68% to 31.30%. 
  • The 2016 top personal tax rate that will apply to regular dividends has increased from 37.98% to 40.61%. 
  • The top tax rates on eligible dividends and regular dividends increased by 2.62% and 2.63% respectively. 
  • If the payment of taxable dividends to top rate individual shareholders is expected in 2016, serious consideration should be given to accelerating the payment of those dividends into December 2015.

7)      For corporations, there is a 4% increase to the federal corporate tax on investment income earned by CCPCs to keep the combined corporate tax rate on investment income relatively in line with the top personal tax rate.  You will see the new rate presented in the right hand column on the corporate chart.  The amount described as “refundable tax” on the card increased from 6 2/3% to 10 2/3%. 

  • In 2015, the top personal tax rate in BC of 45.8% is slightly higher than the 45.67% corporate tax rate on investment income so there was a small corporate deferral advantage.  In 2016, the corporate tax on investment income will be 49.67%, significantly higher than the top personal tax rate of 47.7% creating  a disadvantage to retaining investment funds in a corporation in 2016 versus 2015.   
  • The corporate tax rate charts are presented for December 31, 2016 year-ends and rates will be prorated for taxation years straddling December 31, 2015.

8)      For private corporations, the dividend refund rate increased by 5% from 33 1/3% to 38 1/3% of taxable dividends paid effective for taxation years ending after 2015. 

9)      Part IV tax payable on taxable dividends received by private corporations increases from 33 1/3% to 38 1/3% for taxation years that end after 2015.

10)   The rate for dividend refunds described in (8) is prorated for taxation years straddling December 31, 2015. The 38 1/3% rate for Part IV tax described in  (9) will apply for dividends received after December 31, 2015.

11)  The 2016 combined federal and BC rate on small business income had been reduced to 13% from 13.5% in 2015.  The rates are prorated for taxation years that straddle December 31, 2015.  As announced in 2015 Federal Budget, the federal tax rate for small business income will decrease from 11% to 10.5% in 2016.  This rate is for the first $500,000 of active business income earned by a Canadian-controlled private corporation.  This rate is scheduled to decrease by a further 0.5% each year until 2019 when it will be 9%.  The BC tax rate on small business income remains at 2.5%. 

12)   In comparing the total tax on income earned directly by a top-rate individual with that earned by a corporation which fully distributes its after-tax income by dividend to the individual shareholder, the existing disadvantage of incorporating  business income and investment income has increased modestly in BC.  The personal tax increases have not been fully compensated for in the dividend tax credit and gross-up mechanics.

13)   As the top personal tax rate has increased in 2016 while the general corporate tax rate on business income has not changed and the small business corporate rate declined slightly, there is an increased tax deferral advantage in BC of retaining income at the corporate level for 2016.  The existing small advantage to retaining investment income  at the corporate level in 2015 has become a disadvantage as the 2016 corporate tax rate has increased more than the corresponding increase in the 2016 personal tax rate (due to the offsetting BC personal tax reduction).

14)   Individuals and trusts resident outside of BC will want to be aware of the changes occurring in their particular tax jurisdiction in 2016. Alberta residents may be subject to very significant tax increases for 2016 and will want to consider accelerating personal income into 2015.

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To find out how these tax changes will impact you, contact your advisor at Smythe.

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