Tax Alert - Tax Rate Increases Announced in Alberta

June 2015

The new NDP government has introduced legislation that will increase corporate taxes and implement a tiered personal tax system that targets higher income-earning Albertans. Bill 2, An Act to Restore Fairness to Public Revenue, received first reading on June 18, 2015 and includes the following tax changes:

  1. The general corporate tax rate will increase from 10% to 12% effective July 1, 2015. The rate change will be prorated for tax years that straddle the effective date. A legislative amendment will also be made to increase the provincial small business deduction rate to keep the small business tax rate at 3%.
  2. The personal tax rate on income over $125,000 will increase, as the following personal tiered tax system will be implemented:
Taxable Income 2015 ​2016 and later​
From​ To​
$0 $125,000 10% 10%
$125,000 $150,000 10.5% 12%
$150,000 $200,000 10.75% 13%
$200,000 $300,000 11% 14%
$300,000 and over 11.25% 15%


Note that the rates for 2015 are based on the 2016 and later rates being effective October 1, 2015; therefore, the tax rate increases are not fully implemented until 2016. The taxable income thresholds will be indexed for taxation years ending after December 31, 2016.

It should also be noted that trusts subject to tax at the highest rate will be taxed at the highest tiered tax rate noted above, as will split income (i.e. income subject to the “kiddie tax”).

Finally, Alberta sets dividend tax credit rates specifically and there were no proposed changes to these rates. As the impact of the changes on 2015 will not be as pronounced, it is possible that changes may still be made for 2016 and subsequent years. The changes in Bill 2 will increase the top combined federal and provincial tax rate on eligible dividends from 19.3% for 2014 to 21% for 2015 and 26.2% for 2016. In the case of ineligible dividends, the top combined federal and provincial tax rate will increase from 29.4% for 2014 to 30.8% for 2015 and 35.7% for 2016.

The impact of these changes on tax integration is discussed in the Appendix to this Alert.

The NDP government has also confirmed in a news release that they will not proceed with the Health Care Contribution Levy or certain fee increases proposed by the former government.

A full budget is expected in the fall.

If you have any questions on how these tax changes will affect you, contact your BDO advisor.


Appendix: The Impact of the Changes on Tax Integration

The concept of integration is central to the overall scheme of our tax system. The concept of integration is important because a corporation is a distinct legal entity, and as such, corporations are taxed on the profit that they earn. Since shareholders are subsequently taxed on dividends received from those corporate profits, there is an inherent element of double taxation built into the tax system. This double taxation is addressed in whole or part by the dividend gross-up and tax credit mechanism that applies to taxable dividends paid by Canadian corporations and received by individuals and trusts. The gross-up requires taxpayers to include a greater amount of income than the actual dividend received in order to approximate the pre-tax income of the corporation. The dividend tax credit represents the approximate amount of corporate tax paid by the corporation. In theory, the overall tax paid by the shareholder and the corporation should be equivalent to tax that would have been paid at the personal rate had the same income been earned directly by the shareholder.

The charts below show the comparison of business income earned by a corporation and income earned directly by an individual. The first chart applies for income subject to the general tax rate without the benefit of a small business deduction and the second chart shows the calculation for small business income. Both charts assume that the corporation has a December 31 taxation year end. It is also assumed that the individual pays personal tax at the top rate in Alberta.

General Business Income Integration – This chart calculates the tax cost of flowing general rate business income through a corporation and paying it to a top-rate shareholder as an eligible dividend:
  2014   2015   2016  
  Income earned by the business
  Corporate taxes payable
$100.00  
(25.00)  
$100.00  
(26.00)  
$100.00  
(27.00)  
  Income available as an eligible dividend
  Personal tax payable on eligible dividend
75.00  
(14.47)  
74.00  
(15.55)  
73.00  
(19.12)  
  Net cash to shareholder $60.53   $58.45   $53.88  
  Total corporate and personal tax $39.47   $41.55   $46.12  
  Personal tax at top rates 39.00   40.25   44.00  
  Cost of earning income in a corporation and paying it as a dividend $0.47   $1.30   $2.12  
  Tax deferral provided by the corporation $14.00   $14.25   $17.00  
 
Small Business Income Integration – This chart calculates the tax cost of flowing small business income through a corporation and paying it to a top-rate shareholder as an ineligible dividend.
  2014   2015   2016  
  Income earned by the business
  Corporate taxes payable
$100.00  
(14.00)  
$100.00  
(14.00)  
$100.00  
(13.50)  
  Income available as an ineligible dividend
  Personal tax payable on ineligible dividend
86.00  
(25.25)  
86.00  
(26.52)  
86.50  
(30.90)  
  Net cash to shareholder $60.75   $59.48   $55.60  
  Total corporate and personal tax $39.25   $40.52   $44.40  
  Personal tax at top rates 39.00   40.25   44.00  
  Cost of earning income in a corporation and
  paying it as a dividend
$0.25   $0.27   $0.40  
  Tax deferral provided by the corporation $25.00   $26.25   $30.50  

The information in this publication is current as of June 29, 2015.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.