Government change may shake up tax returns

With Liberals in the driver’s seat, middle-income earners will see 1.5% reduction in their 2016 filing

Thestar.com
Feb. 10, 2017

A change in government often means a change in taxation - a fact you’ll really notice on your return this year.

Many of the income tax policies that were part of the federal Liberal Party platform during the 2015 election campaign have now fully kicked in. And after nearly a decade of Conservative rule in Ottawa, there’s a slew of changes.

“It’s a different government. They usually want to put their stamp on it,” says Jason Safar, a partner in PricewaterhouseCoopers’ tax services practice.

Though you may have RRSPs on the brain this month with the impending March 1 deadline, the only change for these plans is to the contribution limit, up from $24,930 in 2015 to $25,370 for last year.

When it comes to tax, the biggest difference is to the federal rates on what you made in 2016.

The tax rate owed for the second-lowest income bracket (2016 taxable income between $45,281 and $90,563) has been reduced from 22 per cent to 20.5 per cent. That’s sure to be welcomed by middle-income earners.

Meanwhile, a new federal income-bracket has been added for 2016, increasing the rate on all taxable income in excess of $200,000 from 29 per cent to 33 per cent. And if you live in Ontario and make more than $220,000, it means that combined with the provincial tax rate you will pay 53.53 per cent on any dollar earned over the $220,000.

“If you’re in the mid-range (of earners), you’re going to be happy. Higher earners are already ticked,” says Terry Gibson, vice-president of E.E.S. Financial Services Ltd. “For the first time ever, these individuals will pay more to the government on every dollar than they keep. That will have a huge impact.”

For those taxpayers, Gibson suggests strategies to shift income or deductions between 2016 and 2017. For example, if you anticipate your taxable income in 2017 to be in excess of $200,000 while in 2016 your income was below $200,000, it may be beneficial to delay contributing to your RRSP, or to deduct your RRSP contributions for 2017.

“In many cases, the additional tax savings may be worth more than having use of the tax savings today,” says Gibson.

Another big change is to the Principal Residence Exemption, which allows a homeowner to be exempt from tax on capital gains as long as they’re selling their primary home. Until now, homeowners didn’t have to report the sale of their property on their tax return. But Ottawa has tightened the rules for the 2016 tax year to deter property flippers and foreign real-estate speculators.

Now, in order to prove that you qualify for the exemption, you will have to fill out an additional form to report the sale to the Canada Revenue Agency. Failure to file could result not only in paying tax on capital gains from the sale but also penalties of up to $8,000.

“Most people think it is a birthright that you don’t have to report anything on the sale of their house,” Safar says. “I think before, some people were playing fast and easy with the rules.”

Ottawa has also cancelled income splitting for families, a tax-reduction measure that allowed people to transfer up to $50,000 of income to a spouse with lower income if they had a child under 18. The former tax credit, introduced by the Conservatives, was capped at $2,000 and has been scrapped for the 2016 tax year.

It’s also the final year for some child tax credits for money spent on arts, fitness, education and textbooks, though the tuition tax credit remains for post-secondary students. And new for teachers is a 15 per cent refundable credit for up to $1,000 in qualifying school expenses.

Also effective for the 2016 tax year is the Child Care Expense Deduction. The maximum amount of deductible child care expenses was increased to $8,000 for each child under age of 7, to $5,000 for each child age 7 through age 16, and to $11,000 for any child eligible for the disability tax credit.

Seniors are also eligible for a tax credit to assist those eligible for the disability tax credit for certain home renovations. The Home Accessibility Tax Credit is 15 per cent of up to $10,000 in eligible expenses, including upgrades that help them improve access and increase mobility within the home.

Safar says new tax credits are nice, but hardly offset the wallop that well-off Canadians will take with the tax-rate increases.

Combined with the Liberal government’s reduction of Tax Free Saving Account contributions from $10,000 in 2015 to $5,500 in 2016 and 2017, “I think a lot of people are jarred by it,” says Safar.

“I really do question whether it’s a revenue-positive move for the government,” he noted, saying sophisticated investors will likely be looking even harder for ways to shelter their money from the tax man.

He added that the move is particularly galling for wealthier Canadians when “our closest neighbour will probably be lowering taxes” under U.S. President Donald Trump.

“It’s interesting times. The government is making some radical changes and it should translate into some budgetary impact,” adds Gibson. “Basically, they crunched the numbers and the bulk of it is additional tax paid by high-income earners.”