2015 has been a year of significant change to the political landscape in Canada and in Alberta which has resulted in significant changes to the income tax rates for Alberta residents.
Legislation enacted by the Federal Conservative government on June 14, 2015 and by the Alberta NDP government on June 29, 2015 together with the tax rates as proposed by the recently elected Federal Liberal government in their party platform have all contributed to these changes.
The specific details with respect to a number of the proposed tax changes by the Liberal government have not yet been announced, including the effective date of such changes. Our comments that follow assume such changes will be made effective January 1, 2016.
A. Personal Tax Rates
(a) In brief, with respect to personal income tax rates:
Table 1 shows the combined Federal / Alberta income tax rates as enacted and as proposed for 2015 and 2016 together with the 2014 rates for comparison.
Combined Individual Federal and Alberta Tax Rates
|$0 to $44,401||25.00%||25.00%||25.00%||25.00%|
|$44,401 to $89,401||32.00%||32.00%||32.00%||30.50%|
|$89,401 to $125,00||36.00%||36.00%||36.00%||36.00%|
|$125,000 to $138,586||36.00%||36.50%||38.00%||38.00%|
|$138,586 to $150,000||39.00%||39.50%||41.00%||41.00%|
|$150,000 to $200,000||39.00%||39.75%||42.00%||42.00%|
|$200,000 to $300,000||39.00%||40.00%||43.00%||47.00%|
|In excess of $300,000||39.00%||40.25%||44.00%||48.00%|
* These proposed rates include the changes to the Federal personal tax rates indicated in the Liberal government’s platform.
(b) Observations and Facts – Table 1
• The 10% Alberta flat tax has been replaced with a graduated tax rate system. Alberta tax rates have increased for income in excess of $125,000 effective January 1, 2016. The 2015 tax rates have also increased due to a phase-in of the 2016 tax rate changes.
• The Federal tax rate on income in excess of $200,000 is proposed to increase by 4% (from 29% in 2014 to 33% in 2016).
• The Alberta tax rate on income in excess of $300,000 has increased from 10% in 2014 to 11.25% in 2015 and to 15% in 2016.
• The top combined marginal tax rate for Alberta residents on income in excess of $300,000 has increased from 39% in 2014 to 40.25% in 2015 and to 48.00% in 2016.
• For taxable income of $125,000 or less, there is no marginal tax rate increase in 2016 from 2015 rates. • The combined marginal tax rate for 2016 on an income in the $138,586 to $150,000 level (41.00%) is slightly higher than the top marginal tax rate for 2015 applicable to income in excess of $300,000 (40.25%).
• For taxable income levels $125,000-$200,000 Alberta residents will see a modest increase in tax rates in 2016 compared to 2015. If an Alberta resident with a base taxable income of $125,000 receives an additional $75,000 of ordinary income in 2015 rather than in 2016, the income tax saving is $1,500.00. Taxable Income Tax Saving $125,000 – $138,856 $203.79 $138,856 – $150,000 $171.21 $150,000 – $200,000 $1,125.00 Total $1,500.00
• For Alberta residents with taxable income in excess of $200,000, the combined marginal tax rate has increased significantly in 2016 compared to 2015 rates for all categories of income as outlined on Table 2:
Combined Individual Federal and Alberta Tax Rates
(The following rates include the proposed changes to the Federal personal tax rates indicated in the Liberal government’s platform)
|$200,000 to $300,000|
|Net Increase – 2016||7.00%||3.50%||9.66%||8.68%|
|In excess of $300,000|
|Net Increase – 2016||7.75%||3.87%||10.69%||9.56%|
B. Tax planning for 2015
With the increase in the personal tax rates for 2016 for Alberta residents with taxable income in excess of $125,000, tax savings may be achieved if income otherwise taxable in 2016 and subsequent years is taxed in 2015. Tax savings may also be achieved if deductions in computing taxable income in 2015 can be deferred to 2016 or subsequent years.
If these planning strategies are undertaken with respect to income in excess of $200,000, significant tax savings may be achieved. In addition, the Liberal party platform included other key initiatives that, if enacted, will reduce future tax benefits.
Consideration should be given to the following:
(a) For individuals:
• Accelerate income so that it is received in 2015 rather than in 2016 or subsequent years: Bonuses could be paid in 2015 rather than deferring to 2016 or later.
» Realize capital gains in 2015. Exercise vested public company stock options that are “in the money” in 2015. This may also avoid the impact of the Liberal party platform initiative to cap the amount of the stock option deduction that can be claimed on an annual basis (on up to $100,000 in annual stock option gains) or to restrict the availability of the stock option deduction to “start-up” companies only?
» Realize the deferred stock option benefit on private company shares or public company shares by triggering a disposition of such shares in 2015.
» Withdraw funds in excess of the minimum amount required to be taken from a RRIF.
» Do not claim any capital gains reserve available for 2015. Defer utilization of any net capital losses carry-forward from 2014 to years subsequent to 2015.
• If not already made, contribute $10,000 to your TFSA for 2015 prior to any possible rollback. The 2015 Federal budget increased the annual contribution from $5,500 to $10,000 starting in 2015 but the Liberal party has proposed to reduce the annual limit back to $5,500.
• Contribute the maximum to your RRSP in 2015 but claim the deduction in 2016 or subsequent taxation years. • Reorganize your affairs to allow for future income splitting with a spouse and children including the use of a trust or interest bearing loans.
(b) For individuals with ownership in a private corporation:
• Accelerate the receipt of income from the private corporation in the form of eligible and/or non-eligible dividends and bonuses that could be paid by the corporation in 2015 rather than deferring the payment to 2016 or subsequent years.
• Have the Canadian-controlled private corporation pay eligible and/or non-eligible dividends to shareholders in 2015 sufficient to generate a full refund of refundable tax on hand or estimated to be on hand for the company’s taxation year that includes December 31, 2015.
• Reorganize the shareholding of the corporation to allow for future income splitting with inactive spouses and adult children through the receipt of dividends, including consideration for the use of a trust.
• Accelerate the wind-up or liquidation of a corporation to 2015, if being considered for 2016 or a subsequent year.
(c) Other issues for consideration:
• Acceleration of income or the postponement of tax deductions to increase taxable income in 2015 results in a requirement to fund the prepayment of income taxes otherwise payable in 2016 or subsequent taxation years, albeit, at a lesser amount.
• Acceleration of income from private corporations in the form of bonuses and/or dividends may be in breach of bank covenants’, provisions of a unanimous shareholder agreement, bonding requirements, a separation agreement, etc.
Disclaimer: The commentary in this Tax Alert assumes the Liberal party platform initiatives will be enacted effective January 1, 2016. Specific details with respect to the initiatives are not yet known. The tax planning strategies outlined above are not all inclusive and are provided for general information only. This Tax Alert should not be construed as specific tax advice and each individual should consult with his or her own tax advisor to determine what, if any, tax planning strategies should be undertaken.