Federal personal income tax rate changes for middle and high-income earning individuals

 

Notice to the Reader

The 2016 federal budget proposed additional consequential changes to recognize the proposed income tax rate of 33% for high-income earners. The following measures should be added to the list in question 8.

  • the relevant factor in the foreign affiliate rules
  • the recovery tax rule for qualified disability trusts
  • tax on personal services business income
  • tax on designated income of certain trusts (Part XII.2)
  • amateur athlete trusts
  • capital gains refund to mutual fund trust
  • charitable donations – deductions by trusts for gifts
  • employee profit sharing plans
1. What is the proposed change announced on December 7, 2015, in respect of the federal income tax rate for individuals with income in the second tax bracket?

For the 2016 and subsequent tax years, the federal personal income tax rate on taxable income of $45,282 to $90,563 (the second income tax bracket) will be reduced by 1.5% from 22% to 20.5%. The income tax threshold amounts will continue to be indexed annually as under the existing rules.

2. What is the proposed federal income tax rate change for high-income earners?

For 2016 and subsequent tax years, a new federal personal income tax bracket and rate has been proposed. Taxable income over $200,000 will be subject to a federal income tax rate of 33%. This income tax threshold amount will be indexed annually for years after 2016.

3. Once approved by Parliament, where will these changes be found when preparing a personal income tax return?

The changes to the federal personal income tax rates will appear on the Schedule 1, Federal Tax of the T1 income tax and benefit return package for the 2016 tax year. The T1 income tax and benefit return package for 2016 will be made available on the CRA website in January of 2017.

4. What are the proposed federal personal income tax bracket thresholds and rates for the 2016 tax year?

The 2016 federal income tax brackets and rates for individuals are:

  • 15% on taxable income of $0 to $45,282;
  • 20.5% (proposed) on taxable income above $45,282 but not more than $90,563;
  • 26% on taxable income above $90,563 but not more than $140,388;
  • 29% on taxable income above $140,388 but not more than $200,000; and
  • 33% on taxable income above $200,000 (proposed).

These income tax threshold amounts will be indexed annually for years after 2016.

5. How do the proposed federal personal income tax rate changes affect employers and payers?

Employers and payers are responsible to withhold and remit income tax deductions, as required under the Income Tax Act, from the salary, wages, pension or other remuneration paid to individuals based on these proposed new tax rates starting January 1, 2016. The payroll systems used by employers, payers and service providers will need to reflect these rates, so that the correct income tax deductions are made.

The proposed measures are subject to parliamentary approval and, if enacted as proposed, would be effective January 1, 2016. Therefore, the CRA recommends that employers and payers withhold income tax deductions based on the proposed legislation starting with the first payment in January 2016.

6. When will CRA update its electronic payroll deductions services used to calculate payroll deductions?

In December 2015, the CRA will update its Payroll Deductions Online Calculator, Publication T4032, Payroll Deductions Tables, Publication T4008, Payroll Deductions Supplementary Tables and Guide T4127, Payroll Deductions Formulas for Computer Programs to reflect the new federal personal income tax rates for 2016. The CRA encourages employers and payers to check the CRA website for more information.

7. What if an employer or payer has not changed their payroll system or processes starting with the first payment in 2016 and did not deduct enough income tax or over-deducted income tax from the individual’s remuneration, pension or other income?

Employers and payers may not be able to make the necessary changes to their systems for January 2016. This could result in an under-deduction or over-deduction of income tax at source from the salary, wages, pension or other remuneration paid to the individual. To correct this:

a) Under-deduction:

An individual can ask his or her employer or payer to increase the amount of income tax deducted on a subsequent payment(s) made in 2016. If the employer or payer does not increase the amount of income tax deducted, individuals may have a balance owing when they file their 2016 income tax and benefit return.

b) Over-deduction:

Employers and payers should reimburse the individual for the excess amount of income tax deducted, adjust the individual’s records to show the correct income tax deducted and reduce a future remittance to the CRA by the reimbursed amount. If the employer or payer does not reduce the amount of income tax deducted, individuals would be refunded any excess amount when they file their 2016 income tax and benefit return.

Note: The CRA will allow a reasonable time for payroll systems to be brought up-to-date. During this period, the CRA will not penalize employers or payers if they continue to withhold and remit income tax deductions based on the previous tax rates.

8. What consequential changes were announced for 2016 related to the proposed income tax rate for high-income earners?

Changes have been proposed to recognize the proposed income tax rate of 33% for high-income earners for the following:

  • the tax rate applicable to inter vivos trusts;
  • the calculation of the tax on split income applicable on certain passive income of individuals under the age of 18;
  • the calculation of refundable taxes on investment income of private corporations; and
  • the calculation of the Charitable Donation Tax Credit (to the extent that an individual’s taxable income is subject to this rate).
9. Where can I get more information on the change?

The CRA is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its Web pages often. All new forms, policies, and guidelines will be posted as they become available.

In the meantime, please consult the the Department of Finance Canada's announcement for further details.

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