It’s called a wealth tax and it’s going to cost individuals with a taxable income exceeding $500,000 an additional 2 percent in Ontario taxes. This new tax, which took effect July 1, will be phased in over 2012 and 2013. This means the collective federal/provincial tax rate will increase ultimately to 49.5 percent from 46.4 percent. Half those amounts will be applied in 2012.
The Ontario government instituted the wealth tax foreseeing that the extra tax income would generate an additional $470 million each year in revenues. Those revenues will be applied against the province’s $15 billion deficit, which the province anticipates eliminating by 2017/18. The wealth tax, in turn, should be eliminated at that time.
When any new taxes are implemented, I would advise you to consider if and how you might be affected and to evaluate your tax planning options accordingly. Here are a few suggestions:
A spousal loan
In order to reduce the fallout from the wealth tax, you could transfer your investment income to a low-income spouse via a spousal loan. The best way is to set up a formal loan at CRA rates. Your lower-income spouse should then be able to generate investment income from the loaned funds but at a lower tax rate.
Contribute to RRSPs
RRSP contributions are among the easiest and best methods for decreasing your taxes, as long as you or your spouse still have room to contribute. RRSP funds provide immediate benefits through tax deductions and in addition they continue to grow while the tax is deferred. Any investment income or capital gains earned from an RRSP will not be taxed until they are withdrawn from your plan.
Trust income splitting
While straightforward income splitting can help you avoid the wealth tax short-term, it may also offer long-term benefits if, as an alternative, you can tax a family member who is in a lower tax bracket. A popular substitute to splitting income with your family is to set up a family trust, which enables you to transfer investment income to family members with lower incomes. Please note, in Ontario, an individual who has no other source of income, may earn the following amounts annually tax-free: up to $10,500 of interest, $21,000 of capital gains or $50,000 of eligible dividends.
If you do not need all of your investment income for your living expenses, you could earn all or a portion of the investment income in a corporation. It is worth noting that investment or holding corporations in Ontario have not been very appealing for investment purposes lately because of the higher corporate tax rates on investment income. Regardless, if you compare an investment corporation’s tax rate at roughly 46.17 percent to the increased tax rate of 49.53 percent, you will see there is still a clear benefit to deferring.
Leaving funds in your Corporation
Incorporated professionals and small business owners could consider leaving funds within your corporation to be taxed, but only to the point where you do not require them for personal needs. Significant tax deferrals may result from this approach, especially if the corporation is eligible for the small business deduction.
These tax planning alternatives can at least help you reduce the effect of the new wealth tax on your personal income tax liabilities both this year and beyond. But please call me for more information and advice on this new tax at (905) 633-6313.