Federal Tax Changes: How They Affect Physicians

On December 7, 2015, the federal government announced some changes to Canada’s taxation laws, including a reduction in the TFSA contribution limit and the creation of a new highest personal tax bracket.

Here’s how the changes could impact the finances of Canadian physicians as well as some planning opportunities physicians should review with their tax advisor.

TFSA Contribution Limit is $5,500 Again

The annual TFSA contribution limit will revert back to $5,500 from its current $10,000 limit, effective January 1, 2016. Going forward, the TFSA limit will be indexed for inflation (in increments of $500).

Planning Opportunities

• Top up your contribution. If you can, top up your TFSA prior to December 31, since you can still contribute $10,000 for 2015. Any unused contribution room from 2015 or a prior year can be carried forward indefinitely.
• Avoid over-contribution penalties. Check your planned TFSA contributions for 2016, especially if you use pre-authorized transfers to contribute; you don’t want to unintentionally over-contribute to your TFSA in 2016.

Personal Income Tax Changes

New top tax rate: Effective January 1, 2016, for individual taxpayers, a new tax rate of 33% will apply to taxable income in excess of $200,000. The previous top rate of 29% will continue to apply to taxable incomes between $140,388 and $200,000.

In addition to the new top rate, the second tier income tax rate will drop from 22% to 20.5% on taxable incomes between $45,282 and $90,563.

Charitable donations: As a result of the new tax bracket, the federal charitable donation non-refundable tax credit is changing, effective January 1, 2016.

• Donations made after 2015 in excess of $200 will now generate a federal non-refundable tax credit of 33% to the extent that the taxpayer has taxable income in excess of $200,000.
• In every other case, donations in excess of $200 will continue to generate a federal non-refundable tax credit of 29%.

Estates and trusts: The new tax bracket and 33% rate will also apply to all estate and trusts, with the exception of qualified disability trusts and graduated rate estates.

Impact to incorporated physicians: Incorporated physicians should see no immediate changes to the corporate taxes other than the changes necessary to align corporate attributes with the new personal top tax bracket.

Planning Opportunities

• Accelerate taxable transactions. Where possible, consider accelerating your taxable transactions so that they’re reported in 2015 instead of 2016. Some examples:
• Pay amounts (bonus or dividend) from your medical professional corporation before December 31, 2015.
• Realize capital gains in a personal investment portfolio in 2015.

If you are in the highest tax bracket, completing these transactions before December 31, 2015 could save you as much as 4% in income tax. Consult your tax advisor to determine what opportunities apply to your particular circumstances.

• Defer discretionary tax deductions. Instead of taking certain tax deductions in 2015, consider waiting until 2016. For instance, if you’ll be in the new top tax bracket in 2016, you could make your RRSP contribution in 2015, but defer claiming it for tax purposes until 2016, which could yield an additional 4% of tax savings.
• Increase 2016 tax instalment payments. If you personally earn in excess of $200,000, consider increasing your tax instalment payments to reflect the potentially higher taxes in 2016.

MD and the Canadian Medical Association will continue to monitor any aspects of the federal government’s fiscal agenda that may specifically impact physicians in Canada. If you have any questions regarding these tax changes, your MD Advisor can provide you with more information.