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How to Manage Your Taxes in an Environment of Increasing Tax Rates

18/11/2015


In Canada, we have been fortunate to enjoy an environment of decreasing tax rates since the Jean Chretien era. Those of us who lived or were residents in Alberta for tax purposes, were even more fortunate than our fellow Canadians in other provinces.

In Alberta this spring, the NDP came to power and brought in a significant tax increase in their wake. We just watched Justin Trudeau’s Liberals win a decisive majority federally and their platform includes substantial tax increases for everyone making more than $200,000 per year, while including a very modest reduction for families in the middle tax bracket. If the Liberals enact their platform in the 2016 budget and include a retroactive tax increase like the NDPs did in Alberta, 2016 will cost many Canadian families significantly more in tax dollars than they are used to paying. 

Below is a summary of the personal tax rates in each of 2015 and 2016, assuming the Liberal party enacts their platform for the 2016 year. In each province, the rates will be rising, and in Alberta, the rates will be increasing much more than the rest of Canada.

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2015 Chart
2016 Chart 

With this in mind, there is some planning that should be considered for 2015. As a business owner, you will have more opportunity to plan your overall tax impact. If you work for a salary and are in the highest marginal rates, there is still planning to be done this year.

  • Prepaying Tax: This is counterintuitive to our previous planning ideas, but when tax rates are increasing, you may consider taking your dividends in 2015 versus 2016. This will be especially valuable if you have large cash needs in the near future. In most provinces, the tax rate on dividends will increase just over 5% on the amount of the dividend, but in Alberta, it will be over 11% when including the provincial tax rate increase. 
  • Dividends vs Salaries: I have written blogs previously titled Salary vs Dividends: A Brief Overview. In that blog, I had mentioned it was slightly better to have income earned in a corporation and pay it out as a dividend. If you make more than $200,000 a year, you will want to discuss this strategy fully with your advisor to ensure it still makes sense for you. There are times we may choose to pay income as salaries or bonuses versus using a dividend strategy, as the overall tax rate on corporate income flowed out as dividends has increased and it is now more costly than just taking salaries. Therefore, the advantage of the deferral will need to be considered when developing your remuneration strategy, and care must be taken to consider other personal criteria, such as CPP and the new Ontario Retirement Pension Plan (ORPP).
  • Dividends Increase Your Income More: If you have dividends included in your personal income, they are generally taxed at lower rates than other types of income like salaries and interest, to account for the corporate tax that has already been paid on this income. However, dividends have a gross-up factor included in them and the amount shown on your tax return can be up to 38% higher than the actual amount received. This can have the impact of pushing you into the top tax brackets more quickly and could increase your overall tax burden on other income.
  • Consider Your Tax Jurisdiction: Many wealthy families have chosen to be residents of Alberta to benefit from the ‘Alberta Tax Advantage’, while having secondary homes elsewhere in Canada.  These families will need to discuss where they should be resident for tax purposes in this new environment. As Alberta’s top tax bracket taxes income above $300,000, there are still advantages to paying tax in Alberta, but it is reduced compared to prior years.
  • BC Surtax on High Income Earners: The B.C. surtax is slated to be rescinded in 2016, but to rescind this would cause B.C. to be the lowest taxed province in Canada. It will be interesting to watch the B.C. budget to see if they actually remove this. If they do drop their tax rates, this may impact where families with homes in both Alberta and B.C. will file.
  • Defer Deducting RRSP Contributions: If you have an RRSP contribution in the first 60 days of 2016 and you are making more than $200,000 per year, you will likely choose to deduct this in 2016 vs 2015, as the overall tax benefit of the deduction will be significantly better in 2016.
  • Flow-through Shares: Much like RRSPs, the deduction from renounced expenses will be better for your 2016 personal tax return than your 2015 return. You may want to acquire flow-through shares in 2016.
  • Advanced Planning Techniques: There are also many advanced planning techniques that could be considered to ensure you are not paying more than required. If you are planning asset purchases or looking for ways to remove cash from your operating companies, there are many different ideas that could be considered, such as using holding companies to hold non-essential corporate assets, etc.

The time for planning is now. If you are going to be impacted by these new tax rates, now is the time to develop your overall tax strategy. In order to determine the strategy that works best for you and your family, it is recommended you speak with your local MNP Tax Advisor today.

To learn more, contact Kim Drever, CPA, CA, at 780.832.4287 or [email protected], or your local MNP Tax Advisor.