On October 19, 2015, Canada elected a Liberal government for the first time in 10 years, as Justin Trudeau’s party won a majority of the seats in the House of Commons. In their election platform, the Liberals made several promises aimed at increasing tax revenue. Although the platform does not detail the timing of these changes, Mr. Trudeau’s plan for his first 100 days includes introducing, as part of his government’s first bill, a set of significant changes to income tax rates and tax credits for families.
- More taxes
Currently, there are four federal income tax rates, topping out at 29% for earnings above $138,586. The Liberals have promised to create a new tax bracket of 33% for income over $200,000. When provincial tax rates are factored in, the result will be a top marginal rate of over 50% in many provinces. For example, in Ontario, the top marginal rate will be 53.53%, in Québec, it will be 53.31%, in Alberta, it will be 48% (taking into account proposed provincial increases) and in British Columbia, it will be 47.70%. Tax-wise, the most expensive place to live in Canada will be New Brunswick, with a top tax rate of 58.75%.
For federal tax purposes, for someone earning taxable income of $300,000, this would mean an extra $3,330 in taxes. For someone earning $500,000, it would mean an extra $11,330 in taxes. It is likely that these changes will be effective beginning January 1, 2016.
The Liberals are also promising to cancel income splitting, which allowed some families to reduce their annual tax bill by up to $2,000.
- A cap on the stock option deduction
Currently, if the required conditions are met, when an executive exercises a stock option, a one-half deduction is available to allow for capital gains like tax treatment on exercise. There is currently no limit on the amount of the option benefit that is eligible for the one-half deduction. The Liberals have promised to introduce a cap of $100,000 on the amount that can be claimed through this stock option deduction. Unfortunately, there is currently no clarity on whether the cap would apply to all company stock options, including those that are issued by Canadian controlled private corporations. The Liberals have stated that stock options are a useful tool for start-up companies.
- A reduction in TFSA contribution limits
In the 2015 federal budget, the Conservatives increased the annual tax-free savings account (TFSA) contribution limit from $5,500 to $10,000. The Liberals have promised to reduce the limit back to $5,500 starting in 2016, but not to retroactively change the contribution limits. In 2016, aggregate TFSA contribution room will likely grow but to $46,500 (as opposed to $51,000).
What can be done in the interim?
- Employers can advise their employees as to the new tax rate changes set out above.
- Employers and external counsel can review any existing compensation plans in light of the proposed changes to the stock option deduction rules.
- Executives can contribute to a TFSA to maximize contribution room in 2015.