Federal Government Announces Tax Rate Changes and Reduced TFSA Limit
On December 7, 2015, Finance Minister Bill Morneau tabled legislation to implement certain priority measures,
one of the first actions taken by the new Liberal government since reopening Parliament on December 4, 2015. If
the legislation is passed – which is widely expected with a majority government – the measures would be
effective as of January 1, 2016.
Personal income tax rate changes
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The second personal income tax rate will be reduced to 20.5% from 22%;
A new 33% top personal income tax rate will be introduced on taxable income in excess of $200,000.
The following table shows existing and proposed personal income tax rates for 2016:
Existing and proposed personal income tax rates (federal), 2016
Taxable income
Existing rate (%)
Up to $45,282
15.0%
$45,282 - $90,563
22.0%
$90,563 - $140,388
26.0%
$140,388 - $200,000
29.0%
Over $200,000
29.0%
New rate (%)
15.0%
20.5%
26.0%
29.0%
33.0%
Reduced TFSA Contribution Limit and Reinstated Indexation
Effective January 1, 2016, the government proposes to return the Tax-Free Savings Account (TFSA) annual
contribution limit to $5,500 from $10,000. It also proposes to reinstate indexation of the annual limit for
subsequent years. (Indexation was eliminated by the previous Conservative government when the TFSA limit was
increased to $10,000 for 2015.) The following table indicates TFSA contribution limits since 2009, the year the
TFSA was introduced. Individuals who have made no contributions to date (and were age 18 or older in 2009) can
contribute $46,500 in 2016 using carryforward room from previous years.
Years
2009-2012
2013-2014
2015
2016
TFSA contribution limit
$5,000
$5,500
$10,000
$5,500
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Consequential changes due to the new 33% personal tax rate
In addition to the above changes, because a number of other income tax rules use the top personal tax rate, they
too will require adjustment to reflect the new rate. Adjustments are immediately proposed in the following areas
(effective for 2016 and subsequent years), with any remaining areas to be addressed at a later date:
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Trusts and estates: Certain trusts and estates will be subject to flat top-rate taxation at the new rate of
33%.
Tax on split income: The highest marginal tax rate currently applies to “split income” – generally, income
received by minors from private corporations. Going forward, the tax on split income will be subject to
flat top-rate taxation at the new rate of 33%.
Charitable donations: Donations to registered charities produce a Charitable Donations Tax Credit (CDTC).
The government proposes to amend the CDTC to allow higher-income donors (those subject to a 33%
marginal tax rate) to claim a 33% tax credit instead of 29% on donations made from income subject to tax
at the 33% rate. The following table summarizes 2015 and 2016 federal donation tax credit rates:
Donation Tax Credit
First $200 of donations
Donations in excess of $200
2015
15%
29%
Donations in excess of $200 from
income that exceeds $200,000
N/A
2016
15%
29% for donations from
income of up to
$200,000
33%
Investment income of private corporations: Certain refundable taxes are imposed on investment income
of private corporations to limit the ability to defer tax by using a corporation (versus earning the same
investment income personally). The government is proposing that the refundable taxes (and related
refund rates) be adjusted to reflect the new 33% personal income tax rate.
Other election promises not included in the above announcement (including the new Canada Child Benefit and
the elimination of income splitting for families with children) will be introduced at a later date.
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not guaranteed, their values change frequently and past performance may not be repeated. Published December 2015.