Tax changes are coming. You likely won’t notice it right away, but once the clock strikes twelve on January 1, 2016 many things will be different. The Liberal party welcomes the New Year with the following tax changes:

PERSONAL

  1. Higher taxes for high income earners
  • 4% increase in the federal tax rate from 29% to 33% on individuals for income over $200,000.
  • As a result of this increase, the maximum personal tax rate (combined Federal and Ontario) in 2016 for those with incomes over $200,000 will be as follows:
    • Ordinary income (salary, interest): 53%
    • Eligible dividends (from most public companies): 34%
    • Non-eligible dividends (from most PC/HSC/TSC): 30%
  1. Lower taxes for the middle class
    • 5% decrease in the federal tax rate from 22% to 20.5% on individuals with income more than $45,283 and less than $90,564. This will result in tax savings of up to $679. Even if your income is higher than $90,564, you will still benefit from this tax decrease on this portion (income between $45,283 and $90,564) of your income.
  2. Removal of income splitting tax credit
    • The family tax cut credit will no longer be available. This credit previously allowed some families to save up to $2,000 by splitting income between spouses. This take away isn’t a big deal for many dentists who had/have a PC as they can use the PC to income split with poorer family members.
  3. Tax Free Savings Accounts (TFSA)
    • Annual contribution limit to a TFSA will be reduced from $10,000 to $5,500 for 2016 and indexed to inflation thereafter. The new limit is the same as it was in 2014. Note, there is no rush to contribute to TFSA as the TFSA contribution limits prior to 2016 have not changed. Only the contribution limits after 2015 have been reduced.
  4. Child benefits
  • The Universal Child Care Benefit and Canada Child Tax Benefit will be replaced with a new Canada Child Benefit that is tax-free and paid out based on the family’s income, likely as reported on the 2015 personal tax returns. This change is effective July 1, 2016. If your household (DDS + spouse) makes more than $200,000 personal income, you will lose this benefit.
  1. Donations
    • Donations in excess of $200 receive a tax break at higher federal and provincial tax rates. As the highest federal tax rate has increased by 4%, this also means donations will get a 4% boost in tax breaks. For those with incomes in excess of $200,000 who donate, you could receive up to 50.4% (46.4% in 2015) of your donation back in a tax reduction. For those with incomes below $200,000, there will be no change in the tax breaks you receive from donating. DCY CLIENTS: Proceed to login with your username/password and this article will then provide you with a schedule that will help you to determine if you should donate personally OR through your PC.

CORPORATE

  1. Higher taxes on investment income inside PC/HSC/TSC/holding company
    • 4% increase on corporate taxes on investment income earned inside a Canadian-controlled private corporation. This raises the corporate tax rate on investment income from 46.17% to 50.17%. Note that a large percentage of the taxes paid on investment income are refundable to the corporation if and when taxable dividends are issued to shareholders.
  2. Higher taxes on dividend income inside PC/HSC/TSC/holding company
    • 5% increase on corporate taxes on dividends received from most Canadian corporations. These taxes are refundable to the corporation if and when dividends are issued/paid to shareholders.
  3. No changes have been proposed to the corporate tax rate on active business income at this time, which was 15.5% during 2015. Unless there are further changes, any active business income generated during 2016 will be taxed at 15%.

How can you prepare yourself?

  • Maximize the number of middle income earners in your household by income splitting with family members who are shareholders of your corporation. Pay dividends to them instead of yourself. A couple who has taxable income of $150,000 each will pay significantly less taxes than an individual reporting $300,000 of income. If your child, 18 and older, is going to University, consider: a) making them a dividend only shareholder of your PC, and b) paying them a dividend from your PC.
  • Consider taking out dividends or bonuses prior to January 1, 2016 if you regularly report income in excess of $200,000 and need money in the immediate future. Reporting more than $200,000 of income in 2015 is likely better than reporting more than $200,000 of income in 2016.
  • If you have available funds, top up your TFSA (up to your maximum limit) to maximize the potential growth of your TFSA. Investment returns require time to grow and compound. Better to start earlier than later.
  • Claim donations in 2016 to get back a potentially bigger tax break. Review our chart to see who should donate.
  • If you have large amounts of investments in your corporation, consider paying out dividends to lower income shareholders to get back some refundable taxes for the corporation.