2016 Tax Changes
Personal Tax Rate Changes
Effective January 1, 2016, the federal tax rate for income between $45,283 and $90,563 will be reduced to 20.5% (from 22%).
However, the federal tax rate for income over $200,000 will increase by 4% to 33% (from 29%).
In Ontario, this means that the top combined marginal tax rate for income over $220,000 is 53.53%.
Impact on Corporate Tax Rates
Corporate investment income for Canadian controlled private corporations is subject to a refundable tax. The purpose of this additional tax is to reduce the personal income tax deferral possibilities that individuals earning investment income directly might obtain by earning this income through a corporation.
The following changes have been implemented for tax years that end after 2015. For tax years beginning before 2016, the rate increase is prorated for the number of days in the tax year that are after 2015.
-Refundable tax on investment income - increased to 10 2/3% (from 6 2/3%)
-Refundable dividend tax on hand (RDTOH) - the percentage of aggregate investment income that can be included in RDTOH will be increased to 30 2/3% (from 26 2/3%)
-Dividend refund - the dividend refund rate will increase to 38 1/3% (from 33%)
-Part IV tax - this tax is imposed on certain taxable dividends received that are otherwise deductible in computing taxable income and will increase to 38 1/3% (from 33 1/3%)
Tax-Free Savings Accounts
The annual contribution limit for Tax-Free Savings Accounts (TFSAs) has been reduced to $5,500 (from $10,000) for 2016 and later years. This limit will be indexed to inflation and rounded to the nearest $500.
You can contribute to a TFSA as long as you are 18 or older and resident of Canada. Unused contribution room can be carried forward indefinitely. TFSA contributions are not tax-deductible but contributions as well as accumulated income can be withdrawn tax-free at any time.
If you have made no contributions to date and are 25 or older in 2016, you can contribute a total of $46,500 to you TFSA before the end of 2016.
In addition, some tax legislation originating from the 2014 Federal Budget took effect on January 1, 2016 regarding testamentary trusts.
A common estate planning strategy involves the use of a "testamentary trust" which is created at death (typically in the deceased's Will) to achieve various non-tax and tax benefits. One tax benefit was the ability to take advantage of the marginal tax rates available to individuals, allowing tax savings to be achieved on income that is retained in the testamentary trust.
Due to the government's concern regarding the growth in tax-motivated use of testamentary trusts, a change was made to tax these trusts at the top marginal rate. The change takes effect for 2016 and subsequent tax years.
However, two exceptions to the imposition of the top tax rate will apply:
1. During the first 36 months following death if designated as a Graduated Rate Estate;
2. Certain testamentary trusts whose beneficiaries are eligible for the federal Disability Tax Credit.
The new legislation will also eliminate some of the other special tax treatments accorded to testamentary trusts. For example, the trusts must have a December 31 tax year end and will be required to make quarterly instalments.