Wednesday, March 23, 2011
At this time, no one knows whether the budget will come to fruition, or if Canada will have an election. There are several tax incentives of interest should the budget pass in its current form.
Enhancing the Guaranteed Income Supplement (GIS) for Low Income Seniors – The budget proposes a new GIS top-up effective July 1, 2011 for seniors with little or no income other than OAS and GIS will receive additional annual benefits of up to $600 for single seniors and $840 for couples.
Children's Arts Tax Credit - This will allow parents to claim a 15 per cent non-refundable tax credit based on an amount of up to $500 in eligible expenses per child paid in a year for an eligible program of artistic, cultural, recreational or developmental activities. The program must be either a weekly program lasting a minimum of eight consecutive weeks or in the case of children's camps, a program lasting a minimum of five consecutive days
Family Caregiver Tax Credit - To provide new support to caregivers of dependents with a mental or physical infirmity, including spouses, common-law partners and minor children. This is an enhanced credit, proposed to begin in 2012.
Medical Expense Tax Credit (METC) - allows individuals with significant medical expenses to claim a credit in respect of eligible expenses incurred by himself or herself, his or her spouse or common-law partner, or his or her children under 18 years of age. Caregivers can also claim the METC in respect of a “dependent” relative. A "dependent" relative is a child who is 18 or older, a grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew, who is dependent on the taxpayer for support.
Under current rules, a caregiver may only claim the eligible expenses of a "dependent" relative that exceeds the lesser of 3 per cent of the dependant's net income and an indexed dollar threshold ($2,052 in 2011), to a maximum of $10,000. The 2011 Budget proposes to remove this $10,000 limit on eligible expenses that can be claimed under the METC in respect of a dependent relative. This is consistent with the normal METC rule, which has no maximum amount.
Tuition Tax Credit - Currently, tuition fees are eligible for a federal non-refundable credit of 15 per cent of the amount paid. The 2011 budget proposes to amend the tuition tax credit to recognize exams fees paid to an educational institution, professional association, provincial ministry or other similar institution to take an exam that is required to obtain a federally or provincially recognized professional status.
Education Tax Measures – Study Abroad - The tuition tax credit is currently available to a Canadian student in full-time attendance at a university outside of Canada in a course leading to a degree only to the extent that the tuition fees are paid in respect of a course of at least 13 consecutive weeks,
The 2011 budget proposes to change this requirement by reducing the minimum course-duration requirement that a Canadian student at a foreign university must meet from 13 consecutive weeks to three consecutive weeks.
Among various charity measures in the 2011 budget, the change that may have the most significant effect on individual donors is in the area of flow-through share donations,
Donation of Flow-through Shares - Over the past number of years, Canadians who wished to donate significant amounts to charity have been turning to flow-through shares as a means of funding their charitable giving at minimal cost. Flow-through shares are essentially shares issued by oil and gas, mining and renewable energy companies that renounce or "flow-through" their exploration, development and project start-up expenses to investors, who can deduct these expenses personally on their own tax returns. For tax purposes, flow-through shares are treated as having a tax cost or adjusted cost base (ACB) of zero when calculating any capital gain or loss from their ultimate disposition.
In a move that is expected to preserve $185 million of forgone tax revenue over the next five years, the government is changing the rules and is proposing to allow the exemption from capital gains tax on donations of flow-through shares only to the extent that a flow through investor's capital gain exceeds the amount paid for the shares, ignoring the deemed zero ACB of the flow-through shares.
So, following from the example above, if Jonathan were to buy $10,000 of flow-through shares issued today, his cost would still be $5,400, allowing for the flow-through deduction at 46%. Upon donation, his receipt would still be worth $4,600 (46% of $10,000), but his capital gains tax would be $2,300 (50% x 46% X $10,000) increasing the total cost of his donation from $800 to $3,100.
RESPs – Asset Sharing Among Siblings - To provide subscribers of separate individual plans with the same flexibility to allocate assets among siblings as exists for subscribers of family plans, the 2011 Budget proposes to allow transfers between individual RESPs for siblings, without any tax penalties and without triggering the repayment of Canada Education Savings Grants (CESGs), provided that the beneficiary of an RESP receiving the transfer of assets was under 21 when the plan was opened.
Registered Disability Savings Plans (RDSP) – Shortened Life Expectancy - RDSPs were introduced in the 2007 budget. They allow parents and others the option to contribute up to $200,000 towards the long-term financial security of a child with a severe disability. Investment income in an RDSP grows tax-free and can be supplemented with generous government credits and bonds in the form of the Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs).
The 2011 federal budget proposes to allow RDSP beneficiaries who have shortened life expectancies to withdraw more of their RDSP savings by permitting annual withdrawals without triggering the ten-year repayment rule.
An election will be available to take advantage of this new rule. If the election is filed for a beneficiary with a shortened life expectancy, withdrawals made at any time following that election will not trigger the repayment of CDSGs and CDSBs provided that the total of the taxable portions of the withdrawals does not exceed $10,000 annually.
Once an election has been made, no further contributions to the plan will be allowed, and no new CDSGs or CDSBs will be paid into the plan. After the death of the beneficiary, any CDSGs and CDSBs remaining in the plan that were received by the plan within the preceding 10 years must be repaid.
RRSPs / RRIFs – Anti Avoidance Rules - Rules similar to the existing TFSA anti-avoidance rules are being applied.
Individual Pension Plans - IPPs are defined benefit Registered Pension Plans (RPPs) established for small business owners and their spouse or other family member that are employed by the business.
The federal budget proposes two new tax measures that will apply specifically to IPPs.
• Minimum Withdrawals -The budget introduces a new rule that will require an IPP to pay out to a member, each year after the year in which he or she turns 71, the greater of the regular pension amount payable under the IPP terms and the minimum amount that would be required to be paid from the IPP to the member if the member's share of the IPP assets were held in a RRIF. According to the government, "This requirement will establish reasonable limits on deferrals of tax on IPP savings and generally ensure that such savings are received as income throughout the retirement period of the member, consistent with the basic purpose of RPPs" These rules will begin in 2012.
• Contributions for Past Service - The amount you can contribute to a defined benefit plan, including an IPP, is directly tied to the RRSP contribution limits. As a result, an IPP member's annual RRSP contribution limit is reduced by the estimated amount of annual saving in his or her IPP.
Employee Profit Sharing Plans - Finally, a heads up is warranted to business owners who use Employee Profit Sharing Plans (EPSPs). EPSPs allow business owners to share the profits of their business with their employees. While no changes have been formally announced in this budget, the government did indicate that it "will review the existing rules for EPSPs to determine whether technical improvements are required in this area."