How will the new federal government’s tax changes affect you?

While there have generally been good feelings surrounding the new Canadian government – a famous Canadian name, a younger, fresher outlook and an expectation of genuine change – those feelings may turn if and when a series of expected tax changes take effect.

I am going to highlight some of the rumoured changes that might impact Canadians as early as this December.

Change to federal tax brackets

A campaign promise of the new Liberal government was to offer tax relief to the middle class, while offsetting said relief by taxing the upper class. To make do on this promise, the Liberals plan to lower tax rates in the middle class income tax brackets, while adding a new tax bracket applicable to the wealthy.

Specifically, it is expected that they will cut the federal tax rate on income between $44,700 and $89,401 from 22% to 20.5%, and introduce a new tax bracket of 33% on income over $200,000. The current income tax bracket of 29% will now be compressed and capped between the income levels of $138,586 and $200,000. In short, Canadians who earn more than $200,000 can expect to pay more.

Proposed changes at a glance

2015 Taxable Income

Marginal Tax Rate

 

2016 Taxable Income

Marginal Tax Rate

first $44,701

15%

 

first $45,282

15%

over $44,701 up to $89,401

22%

 

over $45,282 up to $90,563

20.5%

over $89,401 up to $138,586

26%

 

over $90,563 up to $140,388

26.0%

over $138,586

29%

 

over $140,388 up to $200,000

29.0%

     

over $200,000

33.0%

Cap on the stock option deduction

When an employee is rewarded with equity-based compensation, specifically, with options to purchase their company’s stock under an employee stock option agreement, the difference between the fair market value of the security at the time the option is exercised and the price of the shares at the time the option was granted is treated as employment income.

Generally speaking, as long as the options were granted either at-the-money or out-of-the-money (which is jargon for the exercise price being at or above the market price of the stock at the time of grant), the employee is entitled to a deduction equal to one half of the employment income. This is known as the stock option deduction (not to be confused with the capital gains deduction).

The idea behind allowing this deduction is to, in effect, apply a tax rate of half of an individual’s normal tax rate on this specific type of income (thus keeping the effective tax rate on option appreciation in line with the tax rate on capital gain(s) income). The new government plans to cap the amount that will be eligible for this special tax treatment. In other words, not all stock options will be taxed at one half of an individual’s marginal rate – they will be taxed at a higher rate. There hasn’t been any detail on the order or magnitude of the change; however, it is understood that the change will increase the rate of taxation – not decrease it.

Decrease in Tax-Free Savings Account annual limit

In the 2015 federal budget, the annual TFSA contribution limit was increased from $5,500 (which was set to increase with inflation, in flat increments of $500) to $10,000. The former government’s announced plan was to keep the annual contribution limit at $10,000 for the foreseeable future. The Liberals are expected to reverse this change and lower the 2016 TFSA contribution limit back down to $5,500. I assume that the limits prior to 2016 will be honored, although I recommend topping up completely prior to January 1 (which, in all likeliness, is when the revised limit will take effect).

Cancelation of the Family Tax Cut (FTC)

In essence, this federal tax cut allowed families with children under the age of 18 to claim a non-refundable tax credit. Specifically, the FTC provided for a transfer of up to $50,000 of income from a higher-income spouse to a lower-income spouse, resulting in a credit that was capped at $2,000. It is believed that the new Liberal government will be cancelling this income-splitting mechanism altogether.

It is highly advisable that you contact your financial advisor if you feel that any of these expected changes will affect you. The changes are likely imminent, and as such, the sooner the better.

Scott McKenzie has more than 23 years’ experience advising executives, athletes and entrepreneurs. He provides multi-family office or direct financial counsel in the areas of financial planning, wealth management, investment counselling, investment management, tax planning, tax preparation, income and expense, retirement planning, estate planning, wills, and power of attorney.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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