Canada | August 2015
Privately speaking

Each month, Deloitte Private will prepare a newsletter focusing on tax issues relevant to privately owned businesses. In this inaugural edition, we delve into the recent Alberta tax rate changes and outline their implications for privately owned businesses and their owners.

In this newsletter

Changing Alberta tax rates
Corporate tax rates
Personal tax rates
Integration of tax rates
Tax planning considerations
The Deloitte Private Tax team
Changing Alberta tax rates

On June 18, 2015, during its first legislative session, Alberta’s new NDP government introduced Bill 2, An Act to Restore Fairness to Public Revenues. This bill, which was passed by the legislature, increases both personal and corporate tax rates as follows:

  • general corporate tax rate increases from 10% to 12% effective July 1, 2015; and
  • personal tax rate increases effective October 1, 2015 for those taxpayers with annual incomes exceeding $125,000.

These changes are expected to generate additional revenues for the Alberta government and individuals and businesses will need to plan for their additional costs associated with the increases. Further details of the changes are outlined below followed by important tax planning considerations associated with the tax rate increases.

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Corporate tax rates

Effective July 1, 2015, Alberta’s general and manufacturing & processing (M&P) corporate tax rate increases from 10% to 12%. However, for small Canadian-controlled private corporations (CCPCs), Alberta’s small business tax rate remains unchanged at 3% on taxable income up to $500,000 per annum. The chart below illustrates Alberta’s new corporate tax rates.

Corporate income tax rates
Type of tax Alberta Combined Federal and Alberta
Prior to
July 1, 2015
July 1, 2015
2016 Prior to
July 1, 2015
July 1, 2015
General 10% 12% 12% 25% 27% 27%
M&P 10% 12% 12% 25% 27% 27%
Small business [1] 3% 3% 3% 14% 14% 13.5%[2]
Investment income
(including refundable taxes)
10% 12% 12% 44.67% 46.67% 46.67%
[1] The small business tax rate applies on the first $500,000 of taxable income for corporations that meet certain criteria.
[2] The 2015 Federal Budget will begin reducing the small business tax rate from 11% to 9% over four years commencing January 1, 2016.

For corporations whose taxation years straddle July 1, 2015, the corporate tax rate will be a blended average rate. For example, for a corporation with a taxation year running from January 1 to December 31, 2015, the blended Alberta corporate tax rate will be approximately 11%. Corporations with different year ends would have different blended rates depending on how much of their taxation year falls before and after July 1, 2015.

Although much has been made in the past about Alberta’s low corporate tax regime in comparison to other provinces, the increase to the general and M&P tax rates moves Alberta from the lowest to the middle of the pack in Canada.

Interestingly, with Alberta’s small business tax rate remaining unchanged, Alberta will continue to have one of the highest small business tax rates in Western Canada as British Columbia, Saskatchewan and Manitoba all have lower small business tax rates than Alberta. In fact, Manitoba’s provincial small business tax rate is nil.

The chart below illustrates how Alberta’s new July 1, 2015 corporate tax rates compare to other provinces/territories:

Province General M&P Small Business
Nova Scotia 16% 16% 3%
Prince Edward Island 16% 16% 4.5%
Yukon 15% 2.5% 3%
Newfoundland & Labrador 14% 5% 3%
Alberta 12% 12% 3%
Manitoba 12% 12% 0%
New Brunswick 12% 12% 4%
Nunavut 12% 12% 4%
Saskatchewan 12% 10% 2%
Quebec 11.9% 11.9% 8%
Northwest Territories 11.5% 11.5% 4%
Ontario 11.5% 10% 4.5%
British Columbia 11% 11% 2.5%

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Personal tax rates

Effective October 1, 2015, Alberta will implement a progressive taxation system similar to all other provinces and the federal government. As the new tax rates will take effect part-way through the 2015 calendar year, the effective 2015 tax rates will partially increase with the full impact of the increases taking effect in 2016.

The following chart illustrates this impact:

Taxable Income 2015 2016
$0 to $125,000 10% 10%
$125,001 to $150,000 10.5% 12%
$150,001 to $200,000 10.75% 13%
$200,001 to $300,000 11% 14%
Over $300,000 11.25% 15%

Commencing in 2017, Alberta’s tax brackets will be indexed to inflation.

For the different types of income (as noted below), Alberta’s top marginal tax rates will be as follows:

Combined Federal and Provincial
Taxation year Ordinary
2015 40.25% 20.1% 21.0% 30.84%
2016 44.0% 22.0% 26.2% 35.72%
2017 44.0% 22.0% 26.2% 36.30%
2018 44.0% 22.0% 26.2% 36.76%
2019 44.0% 22.0% 26.2% 37.17%

While Alberta’s top marginal tax rate will increase by 5% and will no longer be the lowest in Canada, Alberta will still remain as one of the lowest top-marginal-tax-rate jurisdictions in Canada.

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Integration of tax rates

Privately owned companies weighing the benefits and costs of taxing income corporately or personally should note that the rate increases will ultimately make it more costly to tax income through a corporation.

General corporate tax rate
To illustrate, if we assume that $100 of active income is taxed in a corporation (at the general corporate tax rate) with the after-tax amount distributed to individual shareholders (at the top marginal tax rate in Alberta), we get the following results:

2014 2015 2016 and
Corporate income
Less: corporate tax
Less: personal tax
on dividends
Remaining after-tax
60.5 58.5 53.9
Effective combined
tax rate
39.5% 41.5% 46.1%
Top marginal
Alberta tax rate on
income earned
39.0% 40.25% 44.0%
Cost of earning
through corporation
(0.5%) (1.25%) (2.1%)

As can be seen above, prior to the tax rate increases, the integration of Alberta’s personal and corporate tax rates for a privately owned business was almost tax neutral. However, commencing in 2015, the cost of taxing income in a corporation followed by a distribution to the shareholders will become more costly.

For owner-managed businesses, this may require re-considering their salary/dividend strategies – both in amount and timing. However, it is important to note that the personal taxes on dividends are only incurred if dividends are paid by a corporation to an individual. As such, the ability to defer the personal taxes noted above still remains.

Small business tax rate
For income taxed at the small business tax rate, Alberta has not currently proposed to change the corporate tax rate and the 2015 Federal Budget began a phased-in approach to lowering the federal small business tax rate over the next number of years. However, coinciding with this is an increase (both federally and provincially) in the non-eligible dividend tax rate. As a result, even with income subject to taxation at the small business tax rate, the net cost when considering latent personal taxes on dividends is expected to increase slightly over the next number of years.

As such, this will also require careful consideration for the owner-manager to ensure optimal tax results.

Investment income
For those with investment income, with a combination of increasing corporate tax rates and personal taxes on non-eligible dividends, it will be more costly to have investment income taxed in a corporation. However, unlike active business income, this increased cost will be incurred immediately as taxes on investment income generally cannot be deferred by delaying the payment of dividends. This is because investment income taxed in CCPCs is subject to a higher, refundable tax. This higher refundable tax is refunded to the corporation at a rate of $1 for every $3 of taxable dividends paid to shareholders.

Historically in Alberta, as the personal tax rates on dividends were always less than the above-noted 3:1 ratio, generally corporations would always pay out dividends to recover the refundable corporate tax.

However, by 2016, the personal tax rate on non-eligible dividends will be higher than this 3:1 ratio. As a result, it is no longer automatic for corporations with investment income to pay dividends to recover refundable taxes as the additional personal taxes may exceed the amount of corporate refund. Careful planning is required to achieve an optimal tax result.

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Tax planning considerations

Three key planning considerations with respect to Alberta’s tax rate increases include:

Timing of income recognition / tax deductions – While tax rates are partially increasing in 2015, the primary impact of the increases will take effect in 2016. As such, when considering planning opportunities, it is important for taxpayers to consider the timing of income recognition. For example, should dividends or bonuses be paid on December 31, 2015 or January 1, 2016? Similarly, where taxpayers have discretion on when to claim a deduction (i.e. RRSPs), taxpayers should consider that a deduction in 2016 will have more value than a deduction in 2015.
Investment income – With the changes in tax rates, taxpayers with investments in corporations face a changing landscape as it relates to traditional tax planning decisions. First, the timing of dividends from an investment holding company is critical as the tax impact could be significant. Second, in future years, traditional decisions regarding investment planning from a tax perspective will be significantly different from what they have historically been. Early tax planning is more important than ever.
Privately owned businesses - The new tax rates provide a number of planning opportunities (and pitfalls to avoid) with respect to privately owned businesses and their shareholders. For example, what bonus/dividend strategy should be utilized? Is there still a benefit to taxing income in a corporation first or should bonuses be increased? Are there opportunities regarding family planning and ownership structure? The short answer is that pro-active planning is imperative.

There are a number of opportunities, both corporate and personal, with the changes in the tax rates that we would be happy to discuss further with you.

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The Deloitte Private Tax team

Whatever your need, Deloitte professionals can lend you a hand. Contact them and find out how our evolving range of innovative ideas and pragmatic strategies allows us to help companies get the results they seek. You can also visit us online for further information at Deloitte Tax Services.

Canadian Managing Partner, Tax
Heather Evans

Jim MacGowan

Dominic Vendetti

François Imbeau

David Mason

Michael Belz

David Nielsen

National Deloitte Private Tax Leader
Brian Brophy

Brian Anderson

Mike D. Smith

Mike Bird

Trevor Thomson

British Columbia
Dallas McMurtrie

Deloitte Tax Services

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