Ontario Budget: Tax Planning is Critical for High Earners

Retroactive tax hikes hurt family financial plans and make it difficult for them to responsibly plan for their financial futures.

Yet, that’s exactly what’s at stake with Ontario’s significant tax hikes on high earners and small business, reintroduced in its budget this week. To preserve wealth in 2014 and offset higher taxation on income, planning to minimize personal tax during work life and at retirement must begin immediately for business owners, employees with higher incomes and, in particular, with executors who will preside over a significant untaxed estate.

Consider the changes to the high income tax brackets. It had been slated to start at just over $514,000. For 2014, however, two new brackets will grab more tax from those whose income exceeds $150,000 and $220,000. This is of particular concern when someone dies with untaxed balances in RRSPs or RRIFs  because your estate will now pay more if you die with untaxed income over $150,000 and don’t have a spouse to roll the balances over to. Also, bracket creep will extract more from accumulated savings before they are passed along to heirs because these income thresholds will not be adjusted for inflation in the future.

For owners of Canadian Small Business Corporations that claim the small business deduction, the increases in taxation for their other-than-eligible dividends puts a significant new tax on retirement income from these sources. This is in addition to the new Ontario Retirement Pension Plan costs that will increase payroll tax costs of these corporations.

Consider the following table for a comparison of 2013 and 2014 rates for dividends. There is a 2.58% increase in marginal tax rate charged on incomes up to $40,120 and a 4.09% increase when taxable income is between $87,908 and $136,270. In fact, at the top that bracket – taxable income over $509,000 – the increase is only 3.66%.

Federal and Ontario Marginal Tax Rates for Dividend Income in 2014 and 2013

2014

2013 Equivalent Rate

Taxable Income*

Small Bus. Corp. Div.

Eligible Div.

Small Bus. Corp. Div.

Eligible Div.

Up to $40,120

5.35%

-6.86%

2.77%

-1.89%

$40,120 to $43,953

10.19%

-1.20%

7.90%

3.77%

$43,954 to $70,651

18.45%

8.46%

16.65%

13.43%

$70,652 to $80,242

20.61%

10.99%

17.81%

14.19%

$80,243 to $83,237

23.45%

14.31%

20.82%

17.52%

$83,238 to $87,907

28.19%

19.86%

23.82%

19.88%

$87,908 to $136,270

32.91%

25.38%

28.82%

25.40%

$136,271 to $150,000

36.45%

29.52%

32.57%

29.54%

$150,001 to $220,000

38.29%

31.67%

32.57%

29.54%

$220,001 to $509,000

40.13%

33.82%

32.57%

29.54%

Over $509,000

40.13%

33.82%

36.47%

33.85%

* income ranges slightly lower for 2013    © Knowledge Bureau, Inc.

For small business owners, important planning options include a review of business profitability factors to take into account the increased taxation shareholders now face in their after-tax incomes. What business expense line items must be reduced to take this into account? How much more revenue must be earned at the top line and how will this affect pricing strategies for goods and services?

From a personal tax point of view, deferring income into the future may be wise if this is a year of unusually high income. Year-end planning could also involve a smaller bonus, paying lower income earners in the family more salary if they work in the business, or giving more to charity before year end. Taking the biggest possible registered pension plan and RRSP deductions is a current year strategy, but this must be weighed against future taxation liabilities.

Planning for retirement income will also involve maximizing TFSA contribution room to help to reduce future taxable income levels; so will planning to average in taxable RRSP and RPP withdrawals over a longer time horizon in retirement. A longer withdrawal period will often help to minimize taxation over the entire period by avoiding the high income surtax thresholds.

Portfolio performance, too, is under more pressure. The markets must return several percentage points more to account for these tax changes. Now is a good time to review untaxed accrued gains in non-registered accounts and investments in which return of capital has created a tax liability.

It’s Your Money, Your Life. Because taxes are going up significantly for high earners and potentially the taxes paid on the final returns of deceased taxpayers, it’s best to do some tax planning well in advance of the end of this year to preserve your tax return. Take the time to see an MFA-Retirement Income Specialist to help you preserve income-producing capital in the future.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of the 2014 three day think tank in Horseshoe Bay, Texas Nov 9-12 will be “Think BIG: Find the Sweet Spots in Wealth Management”  Follow Evelyn on Twitter at @EvelynJacks.

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