Mark the date on your calendar if you haven’t already: April 30. That’s the day your taxes are due. While the basics are always the same – claim your income and then pay any taxes owing – some details often change year-to-year and last year was a particularly active year for tax changes. Here’s what you need to know before you file.
One of the biggest changes in 2016 was the introduction of a new top tier tax bracket. Anyone making more than $202,800 will now be taxed at 33% rate on income above that level.
Raising in the top tax bracket
One of the biggest changes in 2016 was the introduction of a new top tier tax bracket. Anyone making more than $202,800 will now be taxed at 33% rate on income above that level. Add in provincial taxes and some Canadians will be paying more than 50% on a portion of their income to the taxman, says Mariska Loeppky, Investors Group Director of Tax and Estate Planning.
Some tax-savvy Canadians already accounted for this change by paying more tax in 2015 than they needed to, which allowed that income to be taxed at that year’s rate. But most higher net worth Canadians will have to pay up. “People will see that they will be paying more on their tax returns,” she says.
Middle income Canadians, though, may notice that they’re paying less tax. For people earning between $45,916 and $91,831, the federal income tax rate dropped from 22% to 20.5%, for a savings of approximately $689, says Loeppky.
More capital gains
While the government didn’t follow through on raising the capital gains tax (nor did they increase it in this year’s budget, those making $202,800 or more will still be paying more when they sell a security at a gain, says Loeppky. That’s because capital gains and dividend taxes are taxed based on your current tax rate. Since the top rate has changed, so has the tax you’ll have to pay on investment income.
It’s not a big difference, but it’s still worth noting. For the highest earning Canadians living in Ontario, the capital gains rate increased from 24.76% to 26.76%, while the eligible dividend rate jumped from 33.82% to 39.34%. These changes make the RRSP and TFSA even more valuable to Canadians, she says, as income is allowed to grow in these accounts on a tax-deferred or tax-free basis. Maxing out an RRSP can also help reduce your overall taxes owing, which can mean the difference between paying 33% tax or a lower tax rate, says Loeppky.
Donation tax credit
The change to the top tax bracket has also impacted donation-related tax credits. Up until last year, higher net worth Canadians would receive a 29% federal credit on their charitable giving. Now, those in the highest tax bracket will get a 33% credit based on how much money you made over that $200,000 mark.
For instance, if you make $220,000 and donated $25,000 you’ll get a credit for 15% on the first $200, which has always been the case, a 33% credit on $20,000 (the amount over $200,000) and a 29% credit on $4,800. If you made $225,000 and donated $25,000, you’d get a 33% credit on every dollar minus $200. “Essentially those making more than $200,000 won’t be impacted by the tax increase at all if they choose to make a significant donation like that,” says Loeppky.
Family cuts and credits
Several changes were made last year that impact families. One big one was the elimination of the family tax cut, a short-lived federal non-refundable tax credit for couples with children. It was a form of income splitting introduced in 2014 that mainly benefitted middle and middle-high income households with one low-income spouse. It reduced a family’s federal income tax by up to $2,000 per year. “It was more beneficial for a higher income earner who had a spouse that was staying at home and taking care of the kids,” says Loeppky.
The children’s fitness and arts tax credits were also reduced in 2016 and will be eliminated in the 2017 tax season. Now, for fitness-related activities, parents can claim up to a maximum of $500 per child for eligible costs, typically sports fees, paid in 2016. This is down from the 2015 maximum of $1000. The arts credit, which covers art classes, music lessons and other activities intended to improve a child’s dexterity, has been reduced to $250 per child from $500 in 2015.
Of course, there are many other credits and deductions that people need to be aware of and much of this can be complicated. As always, talk to an accountant or an advisor to make sure you’re claiming what you’re entitled to. “It all makes a difference,” says Loeppky.