2014 Budget brings targeted tax changes

For the average Canadian, there’s little to gain from the Federal Budget issued yesterday in Ottawa, says Jamie Golombek, managing director of Tax and Estate Planning with CIBC Wealth Advisory Services.

The document doesn’t contain any broad-based tax plans, he explains. There are no changes to tax rates, RRSP limits or TFSA limits.

But one targeted measure would affect high net worth people who own law firms or other professionals services firms through expansion of the kiddie tax, or the tax on split income.

“There are measures in the Income Tax Act aimed at preventing income splitting with minor children,” says Golombek. “For example, if a private company pays dividends to minor children, those dividends are taxed at the highest rate, even though the kids would normally be taxed at a lower rate.

“This year’s budget extends the kiddie tax to include business and rental income that’s earned through a trust or a partnership structure.”

Typically in these firms, a partner provides services, but her minor child is the beneficiary of a trust that’s allocated a share of partnership income earned as a result of the adult partner’s services.

“Starting right away, for 2014, that income is now subject to the kiddie tax, and taxable at the high rate,” he says.

Another change that’s been expected was elimination of graduated tax rates for testamentary trusts.

“We often set up a testamentary trust in a will so a client’s able to provide graduated tax rates for the income after death – we call this post-mortem income splitting,” Golombek says. “After 2015 this will be eliminated.”

The final thing for wealthy people, particularly immigrants, is immediate elimination of the immigration trust, which is a tax measure in the income tax act allowing a new immigrant to Canada to leave money offshore in a trust. For the first five years, there was no Canadian tax on that money.

“That five-year tax holiday for new immigrants has been eliminated,” he says. “That was a surprise to many people.”