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Top 5 tax changes advisors need to know

New government, new tax changes. Here’s what you need to tell your clients about before 2017.


Date: November 14, 2016

With the advent of the new Liberal government have come new tax changes. And this year there are more changes than usual, says Blaine Cameron, a tax partner with KPMG in Hamilton, all of which is spawning some innovative thinking among advisors.

The biggest change? The one to the top marginal rate. Anyone who earns more than $200,000 in income will now be hit with a 33 per cent federal tax rate instead of the usual 29 per cent.

That’s causing more people to incorporate, says Mr. Cameron, because money kept inside a corporation has a lower tax rate than personal income. The federal tax rate for companies with less than $500,000 in revenues is 10.5 per cent.

“We’re seeing more incorporations than we’ve ever seen before,” says Mr. Cameron. “There’s a fairly significant deferral to earn active income in a corporation, versus earning the income in the corporation and then flowing that out personally by way of salary or dividend. That deferral right now is very significant ? we’re really planning into that.”

Evelyn Jacks, founder and president of Winnipeg-based Knowledge Bureau, says that advisors need to remind clients now about tax changes affecting their personal tax brackets. That way, they have time to offset higher taxes through a variety of strategies, such as increases in RRSP contributions or charitable donations, before 2017 rolls around.

Advisors should also be checking in with clients to ensure they’re aware of any family-related tax changes. With changes to the child benefit programs, people need to know if they qualify for the new benefits, and they should also think carefully about how they want to use the money they do receive, says Ms. Jacks.

Here are some key tax changes that advisors and clients need to be aware of:

Personal tax rates have changed. The tax rate on income between $45,282 and $90,563 has dropped to 20.5 per cent from 22 per cent. For those clients close to the upper threshold of a tax bracket, advisors might want to suggest contributing to RRSPs to lower their income, which would move them into a lower tax bracket and thus avoid higher taxes, says Ms. Jacks. Conversely, on income over $200,000, the rate has increased to 33 per cent from 29 per cent. In these cases, charitable donations may be one way to offset taxes, she says, again by lowering income.

TFSA contribution limits are lower. The TFSA contribution limit has dropped back to $5,500 in 2016 from $10,000 in 2015, and “it’s a very good year-end conversation point [for advisors],” says Ms. Jacks. “It’s a good idea for advisors to track how much unused TFSA contribution room people really have – and that goes for every adult member in the family.” She says if a client hasn’t maxed out their contributions every year since TFSAs were introduced, they may have up to $46,500 in contribution room.

Donation credits have changed. For those earning over $200,000, there’s now a 33 per cent donation credit rate – up from 29 per cent. According to Deloitte, “for any donations made in excess of $200 where the individual’s taxable income is less than $200,000, a 29 per cent credit will continue to apply.” That’s good news for higher-net-worth individuals: “They’re going to have an increased benefit as a result of the 33 per cent bracket that we didn’t have before,” says Ms. Jacks. To maximize that tax-savings opportunity, “financial advisors should find out the true value of their [clients’] new charitable donations,” she says.

A new child benefit. The Trudeau government replaced the Child Tax Credit, the Universal Child Care Benefit and the Canada Child Tax Benefit with a new Canada Child Benefit that better helps families with lower net incomes. Higher-earning families won’t qualify for the full child benefit amount, but reducing net family income through such things as larger-than-usual RRSP contributions may help qualify them for a portion of the benefit, says Ms. Jacks. The Children’s Fitness Tax Credit and Children’s Arts Tax Credit, worth up to $150 and $75 per child, respectively, are also being cut in half in 2016 and then eliminated.

Eligible capital property will be taxed differently. Capital gains are taxed in a corporation at essentially the same rate an individual is taxed at, says Mr. Cameron. In the 2016 federal budget, the government introduced changes to the way eligible capital property is taxed in a corporation.

“Currently, when a corporation sells those kinds of assets, they’re taxed at 50 per cent of the active business income tax rate, which may range from 13 per cent to 15.5 per cent, depending on what province a corporation is resident of,” says Mr. Cameron. “Now, what’s going to happen is that they will be taxed at a capital gain rate of approximately 25 per cent. Depending on what province you’re in, you’re losing a tax deferral of approximately 12 per cent.”

Mr. Cameron says advisors should recognize the impact of these changes and start planning now. “Are there transactions that may be done in 2016 that basically crystallize any gains or solidify any tax deferral that’s currently in place?” he says. “They should start doing some planning today.”

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