Quebec: Dark times coming for investors?Posted: October 03, 2012 By: Walter Harder
Posted in: Breaking News, Tax Planning, Tax
As part of its election platform, Quebec's Parti Quebecois promised to eliminate the $200-a-person health tax for 2012. Now, in an attempt to recoup lost revenue, the newly elected minority government has proposed a number of changes.
As part of its election platform, Quebec's Parti Québécois promised to eliminate the $200-a-person health tax for 2012. Now, in an attempt to recoup lost revenue, the newly elected minority government has proposed a number of changes.
- reduce the provincial dividend tax credit by 50%,
- increase the capital gains inclusion rate to 75%,
- add two new provincial tax brackets — 28% for annual income over $130,000 and 31% for income over $250,000.
The Quebec government has billed these initiatives as "taxing the rich” and, while the changes may be that, they also result in huge tax increases for not-so-rich investors and a huge tax on accumulated capital at death.
Taxation of investment income. Consider Juliette, a retiree who does not have a registered pension plan (RPP) or RRSP accumulations but has saved for retirement her whole life. She has a modest income from Old Age Security ($6,500) and $38,000 from mutual funds which her tax-astute advisor has structured to produce $19,000 in dividend income and $19,000 in capital gains by using corporate class funds. Juliette's annual taxable income of $39,750 is in the lowest provincial tax bracket. She is definitely not a member of the targeted "rich.”
These proposed changes will have the following effects on Juliette's provincial taxes:
- the dividend tax credit (currently $2,826) will be reduced to $1,413, increasing taxes by $1,413;
- the capital gains inclusion will increase taxable income by $4,750 adding $936 to provincial taxes.
Under the new regime, with gross income of only $44,500, Juliette's total provincial taxes increase to $4,125 from $1,776 — a 132% increase! The elimination of the $200 health tax is offset by a $2,349 increase in income taxes.
Taxation of accumulations. Now, consider Pierre, a widower who died in 2012. In the year prior to death, Pierre had a modest income of $30,000; he also had registered retirement income fund (RRIF) accumulations of $300,000, a cottage with a capital gain of $200,000 and a principal residence.
- The increased capital gains inclusion rate will add $50,000 to his taxable income, which will be taxed at 31% provincially;
- The new tax brackets mean income over $130,000 will be subject to additional taxes of 4% and income over $250,000 will be subject to an additional 7%.
Combined, these changes will add $32,900 to Pierre's provincial tax bill on his final return. His provincial taxes will increase 34% to $129,600 from $96,700. Was Pierre one of the "rich” who was targeted by these tax changes?
The message from our federal government is to "get your financial house in order” and spend less and save more. Provincial tax proposals such as these seem to send a different message. These changes discourage investing and saving.
As Quebec's government is a minority government, there is a chance these changes may not be implemented exactly as proposed. However, there seems to be a trend toward provincial governments adding tax brackets that target the high-income earner. But these brackets also add extra taxes on RRSP accumulations and accumulated capital gains at death, affecting low- and middle-income taxpayers who have saved for a lifetime.
Walter Harder is the president of Walter Harder and Associates in Vancouver. He specializes in tax research and developing business-building tools. Harder leads tax research and web-tool development for the Knowledge Bureau.