Etobicoke District Chartered Professional
Accounts Associa7on
“INTEGRATION – 2015, 2016 and
BEYOND”
Presented by Allen Church CPA, CA
Tel: 416.571.4930
achurch@acfamilywealth.com
AGENDA
•
•
•
•
Review 2015 tax rates
Review 2016 tax rates
Integra7on
Proposed changes to s.55(2)
Summary of Rate Changes
• The 2015 federal budget announced changes
to the small business tax rate and the taxa7on
of non-eligible dividends;
• The December 2015 No7ce of Ways and
Means introduced a new federal tax bracket
and an increase in the tax rate on corporate
investment income
Small Business Tax Rate and Non-Eligible
Dividends
2015
2016
2017
2018
2019
Gross up (%) - s.82(1)
18
17
17
16
15
Dividend tax credit (%) * - s.121
13
12.31
11.72
11.03
10.38
Federal Small Business Tax Rate (%)
11
10.5
10
9.5
9
Ontario Small Business Tax Rate (%)
4.5
4.5
4.5
4.5
4.5
Combined Small Business Tax Rate (%)
15.5
15
14.5
14
13.5
* Reported as a % of the actual dividend
Integra7on – 2015
Top Tax Bracket
ABI
< $500,000
> $500,000
Investment
Capital Gains
Income
100,000
100,000
100,000
100,000
Corp Tax
(15,500)
(26,500)
(46,170)
(23,085)
84,500
73,500
53,830
76,915
0
0
26,667
13,334
84,500
73,500
80,497
90,249
0
0
0
(50,000)
84,500
73,500
80,497
40,249
(33,910)
(24,858)
(32,303)
(16,152)
0
0
0
50,000
50,590
48,642
48,194
74,097
Salary
100,000
100,000
100,000
100,000
Personal tax
(49,530)
(49,530)
(49,530)
(24,765)
Aber tax income
50,470
50,470
50,470
75,235
Tax deferral / (cost)
34,030
23,030
3,360
1,680
Tax savings / (cost)
120
(1,828)
(2,276)
(1,138)
Aber tax corporate cash
Dividend refund
Available for dividend
Capital dividend
Taxable dividend
Personal tax
Capital dividend
Aber tax personal cash
Integra7on – 2015
Top Tax Bracket w/ EHT
ABI
< $500,000
> $500,000
Investment
Capital Gains
Income
100,000
100,000
100,000
100,000
Corp Tax
(15,500)
(26,500)
(46,170)
(23,085)
84,500
73,500
53,830
76,915
0
0
26,667
13,334
84,500
73,500
80,497
90,249
0
0
0
(50,000)
84,500
73,500
80,497
40,249
(33,910)
(24,858)
(32,303)
(16,152)
0
0
0
50,000
Aber tax personal cash
50,590
48,642
48,194
74,097
Salary
98,352
98,567
98,950
99,475
(48,714)
(48,820)
(49,010)
(24,635)
Aber tax income
49,638
49,747
49,940
74,840
Tax deferral / (cost)
34,862
23,753
3,890
2,075
Tax savings / (cost)
952
(1,104)
(1,747)
(743)
Aber tax corporate cash
Dividend refund
Available for dividend
Capital dividend
Taxable dividend
Personal tax
Capital dividend
Personal tax
What’s New for 2016
§ Federal tax on income > $200,000 = 33%
§ Tax credit for dona7ons increased to 33% to
the extent of income taxed @ 33%
§ Kiddie tax rate increased to 33%
§ Tax rate for intervivos trust increased to 33%
§ Dividend refund rate increased to 38 1/3%
prorated for taxa7on years ending aber 2015
What’s New for 2016
§ Part IV tax on dividends increased to 38 1/3%
for dividends received aber 2015
§ Tax on CCPC investment income increased to
50.17% prorated for taxa7on years beginning
before 2016 ( and ending aber 2015)
Integra7on – 2016
Top Tax Bracket
ABI
< $500,000
Income
Corp Tax
Aber tax corporate cash
Dividend refund
Available for dividend
Capital dividend
Taxable dividend
Personal tax
Capital dividend
Aber tax personal cash
Salary
Personal tax
Aber tax income
Tax deferral / (cost)
Tax savings / (cost)
> $500,000
Investment
Capital Gains
100,000
(15,000)
85,000
0
85,000
0
85,000
(38,505)
0
100,000
(26,500)
73,500
0
73,500
0
73,500
(28,915)
0
100,000
(50,170)
49,830
30,667
80,497
0
80,497
(36,465)
0
100,000
(25,085)
74,915
15,334
90,249
(50,000)
40,249
(18,233)
50,000
46,495
44,585
44,032
72,016
100,000
(53,530)
46,470
100,000
(53,530)
46,470
100,000
(53,530)
46,470
100,000
(26,765)
73,235
38,530
25
27,030
(1,885)
3,360
(2,438)
1,680
(1,219)
Safe Income Extrac7on
§ Pay $1,000,000 dividend pre sale
§ Reduce capital gain by $1,000,000
Holdco
Opco
Safe Income Extrac7on
Income
Safe income
Safe income
Corporate
Personal
No GRIP
w/ GRIP
Capital Gain
Capital Gain
100,000
100,000
Corp Tax
Aber tax corporate cash
100,000
(25,085)
100,000
100,000
74,915
0
0
15,334
100,000
100,000
90,249
0
0
(50,000)
Taxable dividend / Capital gain
100,000
100,000
40,249
100,000
Personal tax
(45,300)
(39,340)
(18,233)
(26,765)
0
0
50,000
0
Aber tax personal cash
54,700
60,660
72,016
73,235
Tax deferral / (accelera7on)
26,765
26,765
1,680
0
(18,535)
(12,575)
(1,219)
0
Dividend refund
Available for dividend
Capital dividend
Capital dividend
Tax savings / (cost)
What Does All This Mean
§ Reconsider bonus strategy
§ Greater benefits from income splilng
§ Greater benefits from realizing capital gains vs
dividends
§ Increased cost to earning investment income
through a corpora7on
§ Increased mo7va7on for tax planning
Proposed Changes to s.55(2)
§ Where s.55(2) applies,
– Dividend deemed not to be a dividend, and
– Dividend is deemed to be a gain from the
disposi7on of capital property
Proposed Changes to s.55(2)
§ S.55(2) applies where:
ØDividend recipient en7tled to a deduc7on re
dividend under s.112(1) / (2) or 138(6);
ØPurpose of dividend is to reduce capital gain on
disposi7on of a share or
ØPurpose of dividend is to effect significant reduc7on in
FMV of any share or significant increase in cost of
property, and
ØDividend exceeds safe income
Implica7ons for Risk Management
§ Opco pays $1M dividend to Holdco.
Holdco
§ Holdco lends $1M back to Opco
§ No safe income in Opco
Opco
Ø 55(2.1)(a) applies – Holdco gets
deduc7on under 112(1)
Ø 55(2.1)(b) applies – purpose of dividend to
reduce FMV of Opco shares
Ø 55(2.1)c applies – no safe income
Implica7ons for Risk Management
§ See CRA comments at 2015 Conference
Roundtable:
– Confirms 55(2) could apply
– Scheme of Act is NOT to exempt all payments
between corpora7ons that could be dividends at
corporate law
– Reference to “lumpy dividend” – CRA indicated
55(2) should not apply to normal course dividends
Implica7ons for Risk Management
§ Determina7on of purpose based on:
ØFacts of situa7on
ØAc7ons taken by par7es
ØLudco (2001 SCC 62) – “…courts should objec7vely
ascertain the nature of the purpose, guided by
both subjec7ve and objec7ve manifesta7ons of
purpose”
ØLook to what the taxpayer intends to accomplish
with a reduc7on in value
Takeaway
§ Pre April 2015 – dividends between connected
corpora7ons are generally tax free
§ Aber April 2015 – assume dividends between
connected corpora7ons are taxable un7l you
prove otherwise!!
§ Much s7ll unclear as to how CRA will
administer the proposed changes
QUESTIONS??