Tax rates, TFSA limits changed. Now what?

2016 tax rates, TFSA limits changed. Now what?

By Special to MoneySense on December 8, 2015
Estimated reading time: 3 minutes

There's no rush to stuff your TFSA but there are other moves to make

OTTAWA – High-income Canadians looking to minimize their federal income tax should look at taking any bonuses they may be due or big capital gains this year to avoid paying more when Ottawa’s new top rate kicks in next year. Tax experts say if you are lucky enough to find yourself in Ottawa’s new top bracket — those earning $200,000 or more — you shouldn’t defer any income that you can take this year because you’ll pay more if you do. Mariska Loeppky, director of tax and estate planning at Investors Group, said if you’re in the top bracket you can save yourself four per cent in federal tax for every dollar you can push into 2015 compared with 2016. “In a high-income tax rate environment you’re going to want to look at all the things that can help you save tax,” she said. Loeppky also suggested people may also want to defer claiming this year’s RRSP contribution until the 2016 tax year to maximize the benefit. She estimated that those in the top bracket could save $800 by deferring the deduction on a $20,000 contribution. “Nothing says you have to take the deduction in 2015,” she said, noting that the downside is that people won’t see the boost in their tax refund until they file their 2016 taxes if they defer the deduction. “But if you’ve got quite a bit of RRSP contribution room, it will save you a little bit more money next year if you decide to claim the deduction then.” However, if you’re in the middle bracket that is getting a tax cut, the opposite is true. You likely don’t want to defer any deductions. Michelle Munroe, director of tax planning at Fidelity Investments, also said that as long as it won’t push you into a higher bracket, you may want to defer any bonus you might be in line to receive until next year. “It depends on how big the bonus is,” she said. “You don’t want to push yourself into a higher tax category.” In addition to the tax rate changes, Ottawa is ending the controversial income-splitting plan for families next year. The government is also rolling back the annual tax-free savings account contribution limit to $5,500 from $10,000 this year. However contributions will be indexed to inflation as of next year. Loeppky said the TFSA remains an effective tool for investing tax-free, but the amount you will be able to shelter will be less. Why there’s no rush to contribute to your TFSA this year » The Liberal changes to TFSA contributions were actually historic » The NDP had called on the government to reduce the rate on the lowest income bracket instead of the middle income bracket because that would help the lowest income Canadians. However, Finance Minister Bill Morneau said the move Monday was only the first step of the government’s plan and promised more in the budget. During the election campaign, the Liberals promised a new child benefit program that would benefit for low-income Canadians that would be gradually reduced as a family’s income rises. The program would replace the universal child care benefit that paid a $160 per child per month, regardless of family income.