The end of the calendar year is only a few weeks away so now is the time to consider your various year-end tax planning options! This month, we’ll look at two upcoming tax changes for 2014: (1) A change in the amount of the lifetime limit for the capital gains exemption; and (2) an increase in the tax rate on ordinary, or non-eligible dividend income received. Next month’s tax tip will focus on a number of general year-end tax planning tips.
Individuals are entitled to a special lifetime cumulative capital gains deduction of $750,000 on the disposition of qualified small business corporation (QSBC) shares, and certain qualified farming or fishing properties. This means that when all conditions are met, a lifetime maximum of $750,000 of capital gains realized by an individual on the disposition of such shares and/or properties may be exempt from tax. To qualify as a QSBC, a number of conditions must be satisfied, including the fact that the company must be a Canadian controlled private corporation (CCPC) and at least 90% of its assets must be used in an active business in Canada. The lifetime cumulative capital gains deduction limit is increasing from $750,000 to $800,000, effective January 1, 2014. If you are thinking of selling QSBC shares or qualified farming or fishing property and your cumulative gain that is eligible for the exemption will exceed the current $750,000 threshold, try to defer the disposition until 2014 to take advantage of the increase in the limit.
If you are a shareholder of a CCPC that is taxed at the lower small business tax rate , any dividends that you receive are likely to be ordinary dividends, sometimes referred to as non-eligible dividends. Dividends that are eligible dividends must be paid out of income taxed at the high corporate rate and must be designated as eligible dividends. If you are a shareholder expecting to receive non-eligible dividends, make sure that they are received before the end of 2013, as the tax rate applicable to such dividends will generally be increasing effective January 1, 2014. Assuming the top marginal rate of tax, depending on the province that you live in, the combined federal-provincial tax rate applicable to non-eligible dividend income will be increasing anywhere from approximately 1% to over 4.25% in 2014. Since everyone’s fact situation is different, your tax adviser should be consulted to determine the most tax effective way for you to be remunerated from your company.
1 The maximum capital gains deduction available on the disposition of such shares or properties is reduced by the amount of QSBC or other capital gains deductions previously claimed on any property by the individual.
2 Federal tax rate of 11% is available on the first $500,000 of taxable income earned by a CCPC from an active business carried on in Canada. The $500,000 limit must be shared by companies that are associated for tax purposes.