A middle class tax reduction was introduced for 2016. It has been called a middle class tax cut because it is supposed to primarily benefit the families of middle class Canadians.
This federal tax reduction affects income earned within the second tax bracket, which in 2016, is between $45,282 and $90,563.
Within this bracket, the federal tax rate will drop from 22% to 20.5%.
Not all income within this bracket will be taxed at the same rate in British Columbia. This is because provincial brackets are significantly different than those of their federal counterparts. Within this federal bracket, there are three tiers of taxes in British Columbia.
For income from $45,282 to $76,421, the total tax rate will be 28.2%. On income earned between $76,421 and $87,741, the rate increases to 31.0%.
Finally, income between $87,741 and $90,563 will be taxed at 32.79%. The maximum tax savings from this measure will be $679 per person.
Registered Retirement Income fund (RRIF) rules were recently changed to take into account the changing financial outlook for retirees. The government does not allow taxpayers to keep investments in their Registered Retirement Savings Plan (RRSP) for their entire lifetime. By the end of the year in which a taxpayer turns 71, they must have rolled their RRSP into a RRIF, or report all of the money in their RRSP as taxable income on their personal income tax return for that
Once the investments have been rolled into a RRIF, the government dictates the amounts that must be withdrawn from the RRIF on an annual basis.
Minimum annual withdrawal amounts, coupled with decreasing interest rates, were resulting in many retirees depleting their RRIF’s earlier than anticipated.
The original calculations used to determine the required withdrawal amounts from RRIF’s were based on assumptions that returns on investment would be 7%, and inflation would be 1%. This type of investment return is now unrealistic for most seniors with a conservative portfolio.
The new guidelines assume a 5% return on investments, as well as a 2% rate of inflation. Although a 5% return may still be higher than most retirees receive on their investments, it has helped to reduce the minimum withdrawal rate. The new minimum withdrawal rate for people who turn 71 in the year will be 5.28% of the balance in the RRIF. The previous minimum withdrawal rate was 7.38%. Furthermore, between the ages of 71 and 94, all minimum withdrawal rates have been lowered. By the time a taxpayer is 94, the minimum withdrawal rate is 20%, which is the same percentage that has been used in the past. For somebody who has withdrawn over 5.28% already from their RRIF, they will be allowed to repay their overpayment back into their RRIF. The excess must be recontributed
to the investment by February 29, 2016. One drawback of taking a smaller annual withdrawal is that the taxpayer may have a larger balance in their RRIF when they pass away, resulting in a higher total tax bill on cumulative withdrawals. This should be considered when determining how much is going to be withdrawn on an annual basis.
The recent federal budget changed regulations related to the taxability of capital gains on property that is donated to eligible charities. Several years ago, the federal government amended the tax act to encourage people to donate shares in public companies to their favourite charities. A taxpayer receives a charitable
donation receipt for the market value of the shares donated to the charity, but does not have to pay tax on any gains on the shares if they have increased in value since they were originally purchased. The federal government is now expanding this regulation to eliminate tax on capital gains that arise on the donation of real estate or private company shares.
In order for the disposition to be tax free, the following guidelines must be met:
• The seller must donate the proceeds received from the sale of the property, rather than donating the property itself.
• The seller must make the donation within 30 days of the sale.
• The purchaser must be at arm’s length (not related) to both the donor and the qualified donee.
• The disposition has to occur after 2016.
• The seller cannot buy back the land or shares within 5 years of the disposition. Note that in many instances, the sale of real estate or private company shares may have already held special taxation status if the property had qualified for the capital gains exemption on its disposition.
A welcome measure in the recent federal budget was the drop in corporate income taxes for small Canadian companies. The current federal general corporate
income tax rate is 15%. However, for those companies eligible for the small business deduction, federal tax on their first $500,000 of income is only 11%. Added to the British Columbia provincial tax rate of 2.5%, the total corporate tax rate for eligible income of small companies in British Columbia is 13.5%. Beginning in 2016, this rate will be decreased by ½ percent per year for four years. By 2019, the federal rate will be reduced to 9%, resulting in a total small business corporate tax rate of 11.5%. To offset part of the lost tax revenue from this measure, the federal government will be increasing the rate of tax that shareholders will pay on dividends received from these companies. Currently, the federal tax rate on dividends in the maximum tax bracket is 21.22%. By 2019, this tax rate will increase to 22.97%.
This new measure can provide some interesting tax planning opportunities for shareholders of small companies who do not need to access income earned by their eligible company until a later date.