Tax rate increases effective January 1, 2016

December 2015

The new federal government has come out of the gates with a bang, seeking to fulfill election promises of lowering the tax burden on the middle class and shifting that burden to high income earners. This commitment manifested in last week’s budget which will increase the top marginal tax rate as shown in the following table.

The rates reflect the total effective tax rate on an integration basis as funds flow out of a corporation into the shareholder’s hands. To the extent that income is taxed in a corporation and remains in the corporate entity there is a deferral on the additional tax that would have to be paid when a shareholder receives dividends from his corporation.

While the initial reaction may be to pay an additional bonus or dividends to the owner/manager before the rate increase in 2016 occurs, there are numerous other factors that should be considered. For instance, an additional bonus or dividend paid in 2015, while taxed at the lower rate, accelerates the tax payment. The decision to accelerate the tax must be compared to the opportunity of investing the accelerated payment at a rate of return of approximately 10% after-tax for the one year period. The decision to make a payment prior to 2016 will also depend on factors such as shareholder needs as well as certain corporate tax attributes such as the Refundable Dividend Tax on Hand.

Each situation requires a careful assessment of the shareholders’ needs and the particular facts of their situation. It would be prudent to evaluate all considerations before hastily increasing 2015 income to avoid the increase in tax rates.

Your Richter tax advisors can provide you with additional guidance, tailored to your particular situation.