A new federal government took the reins on October 19th with promises to “strengthen the middle class”. On December 7, 2015 the Finance Minister tabled a Notice of Ways and Means Motion (NWMM) which was consistent with the Liberal electoral platform. Starting January 1, 2016, the tax rate on income between $45,282 and $90,563 will be reduced to 20.5% from 22% and a new tax rate will be added on income over $200,000 which will increase the top rate to 33% from 29%. For Ontarians, the combined top personal tax rate will be a whopping 53.53%.
For corporations, the NWMM increased the corporate refundable taxes on investment income, which for Ontario corporations, will increase the tax rate on investment income to 50.17% from 46.17%. In addition, the refundable taxes payable on portfolio dividends has increased to 38 1/3% from 33 1/3%. Both of these increases are to refundable taxes, so although they don’t affect the total tax cost of earning investment income in a corporation, they reduce the benefit of tax deferral.
But what about the other corporate measures that the Liberals discussed? The Liberal government raised concerns that a large percentage of small corporations are actually just a way for wealthy Canadians to save on their taxes. Although they support the decrease of 2% in the small business tax rate over the next four years they want to make sure it’s done “the right way”. When they released their plan on September 26 they said the following:
“As we reduce the small business tax rate to 9 percent from 11 percent, we will ensure that Canadian-Controlled Private Corporation (CCPC) status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses. Michael Wolfson from the University of Ottawa estimates that approximately $500 million per year is lost, particularly as high-income individuals use CCPC status as an income splitting tool.”
For greater certainly, a professional corporation is a CCPC. The two greatest benefits of a professional corporation for doctors and dentists are income splitting with family members and utilizing small business tax rates to defer tax. While nothing has been stated as to how they would enact such a change, a recent Quebec budget gives us some idea. Their budget requires private corporations to employ a minimum of three full-time employees or be in the primary or manufacturing sectors in order to qualify for a reduced small business rate of tax. Many professional corporations would not qualify under these new requirements and therefore would not be eligible for the small business tax rate. Although it would not completely eliminate the tax-deferral advantage, it would certainly reduce it.
Whether or not these tax-related promises come to fruition or how they will be enacted has yet to be determined. Details of any formally proposed tax changes would be made available as part of the Liberals’ first federal budget which is expected in early 2016. Once the government formally announces their intended tax changes, your DJB advisor will be available to ensure the most tax-efficient structure is in place for you.
Article written by: Carolyn Teutenberg, CPA, CA