Canadian Tax Issues 2021 and Beyond

The BC economy is reopening slowly. We need to start planning for the “normal” time again as the physical threats brought about by the pandemic subside.  Which means, bc tax planning will move up in importance in the very near future.

With all the government assistance and money printing that went on during the heart of the pandemic, taxpayers who owned assets benefitted greatly from asset appreciation.  Assets such as real estate, stocks, bitcoins, etc. appreciated tremendously during the pandemic and continue to do so.  

On the flip side, Canadian taxpayers will also have to pick up the cost of the financial benefits provided to Canadians during the pandemic.  Tax increases are on the way.

Higher Tax Rates in BC

The simplest way to increase revenue is increate the tax rate on the same amount of income.  Many Canadians have noticed that the amount of income taxes they have been paying have been increasing at a quick rate since 2017.

Also, CPP contributions by employees and employers are expected to grow to 5.95 percent of salary by each party by year 2023, with the maximum pensionable earnings ceiling estimated to be around $ 67,000.  CPP is not an income tax but a payroll tax that impacts take home pay of Canadian employees. 

Stagnant wages, higher income tax rates, higher CPP rates with expected inflation will greatly reduce the amount of after-tax income available to meet family obligations and nondiscretionary spending.

Higher Capital Gains Inclusion Rate

For many years now, there has been whispers that the capital gains inclusion rate would be increased from the current fifty percent inclusion rate.  With the asset appreciation that occurred during the pandemic, particularly with real estate prices in major Canadian cities, the whispers have become louder.  As a reminder to the younger taxpayers, Canadians have been here before.  During the 1990, our capital gain inclusion rate increased from 50% to 66.67% to 75% before coming back down to the current 50%.    

A higher capital gains inclusion with higher inflation and the current tax brackets will seriously impact real return on investments for Canadians.   Hence, the use of tax shelters will become all the more important.  For many years, tax practitioners have been advising individual taxpayers that the problem with RRSP is that withdrawals from this account (which will have capital gains embedded) is taxable at 100% whereas capital gains outside of the RRSP is taxable only at 50%.  The use of RRSP will be crucial with a higher capital gains inclusion rate.  Of course, there is always the TFSA where contributions are not tax deductible and neither are the withdrawals. 

For corporate taxpayers who use retained earnings to invest, the higher inclusion rate will exacerbates the very complex set of rules on investment income earned by CCPS, brought into legislation by the current government during 2017/2018.   

Complex Rules for Investment Income Earned by CCPCs

If you are a CCPC with retained earnings invested in assets during the last 18 months, chances are there are capital gains realized or to be realized.  With the complex new rules introduced during 2018 on adjusted aggregate investment income, a small corporation could be hit with the higher corporate tax rate on its entire active income and its shareholders paying higher personal taxes on dividends as well.  Also, a higher capital gains inclusion rate would decrease the CDA balance available for tax free extraction on realized capital gains.

Dividends Paid by a CCPC

Many owners/managers of CCPC have noticed that for the same amount of ineligible dividends, the tax bill has been increasing over the last few years.  This is due to the few taxation adjustments made on ineligible dividends over the past few years which impacted the taxes paid by the recipient.  Increases to the tax rates on ineligible dividends along with the reduction of the small business deduction limit once adjusted aggregate investment income exceeds $ 50,000 per year for a CCPC, many shareholders could be faced with the alternative minimum tax when filing their personal tax return.

Mew & Company – Corporate Tax Accountants

Above is a small sample of tax issues facing Canadian taxpayers and the tax planning opportunities to be discussed with your tax advisors before this year end.