With the 2016 Federal budget hinting at a $29-billion deficit, I hesitate to say “Happy Easter” off the bat, but this is what the headlines said to us recently.
The new Federal government, sticking to its election promises, delivered a budget with a far larger deficit than it promised. With the price of oil still down, spelling reduced revenue for the government, this will be a year of challenges.
Therefore, I expect that the eyes of Ottawa will be on us, via taxes, to try and keep those deficits down. I am not certain that it has been finalized, but without question, tax rates on high incomes will rise.
For high earners, the rate at the upper level will climb to 33%. British Columbians earning incomes over $200,000 will pay tax at over 45% starting this year.
However, on the first $45,000 of taxable income, the Federal rate is 15%, and on the next $45,000 it climbs to 20.5% (and remember, taxable income is not the same as your gross income; some deductions are available). So for more moderate income earners, tax rates are more moderate.
Planning for it
In my opinion, with this large a deficit, revenue will be a problem, forcing the government to find new sources, or tap existing ones to a higher degree.
Therefore, accountants and other financial advisors will be busy this year, trying to help clients minimize their tax bills, or at least reign in tax increases a little.
Just because income tax rates may fall or not increase much, it does not mean other taxes won’t rise. I am not suggesting there is any GST hike being considered (I have not heard any such information), but in any case planning will be important, because as deficits continue, we should expect taxes to continue high, and other taxes may also be introduced over time.
The usual suspects
In my view, the first tax saving to look at is the RRSP. Start one, or start contributing to one earlier this year, so as to come closer to your maximum contribution, if possible. You can no longer afford to overlook the tax credits the RRSP brings.
Second, with the stock market now down, if you own stocks, take a look at them. If you own dividend-paying stocks, remember that in the calculation of the dividend tax credit, there is a gross up, which will bring your income higher, and may thereby bring you into a higher tax bracket.
The question then becomes if it makes sense to sell the stock(s), take a capital loss, and perhaps put the money instead into an RRSP or other investment that does not bring you that tax consequence.
Remember, every Canadian is allowed a capital gains exemption.
You should speak with an accountant to determine the state of your own exemption (note that the exemption applies only to a narrow type of shares) and what might be done with it. If you are eligible for such an exemption, even a sale with a capital gain will bring no tax consequences. It is worth investigating given the new tax environment we face.
A TFSA may also be worth considering. Though there is no tax credit from such an investment, there is no tax consequence to income/interest earned in it. As long as you can leave funds in the TFSA, you won’t suffer any tax from money earned in the TFSA. It’s worthwhile for the longer run.
Charitable donations may now become more significant in our tax environment. Again, I would recommend that, if possible, don’t leave donations for December.
Any donations will accumulate over the year and will help you save tax (in addition to helping the community!). And, donations of assets such as shares will save more. Donating shares that have appreciated in value will now save a lot of money in tax.
It’s something to discuss with an accountant, but the short story is that publicly traded shares that have gained can be donated to a registered charity and, first, you will not be taxed on the gain. In addition, you will get a mammoth tax saving from the donation.
Most of us, in the coming years, will pay more in taxes of many kinds. I expect income taxes are rising and will continue to rise in a budget deficit environment, so some tax planning is important for everyone.
This past April will be the last time at the lower rates. Once you get your refund or pay your tax still due, turn the wheels and start planning for the increases to come.
This ad ran in the Richmond News on March 24, 2016.