Summary of federal budget tax changes

(April 2007) As many pundits noted, Finance Minister Jim Flaherty’s second budget had a little for just about everybody. Once again seniors featured prominently in the budget. While tax season for 2006 is already upon us, it’s never too late to start tax planning for 2007. Often, by this time next year advisors will have forgotten about many of the tax changes. Your clients, for the most part, will almost certainly have forgotten. Here’s a cheat sheet for you to refer to throughout the year.

[Open as a PDF document]

Working income tax benefit A refundable tax credit for low-income Canadians. The credit is equal to 20% of earned income in excess of $3,000, to a maximum credit of $1,000 for families. The credit also includes an additional disability supplement for each person eligible for the disability tax credit with at least $1,750 of income. The additional credit is equal to 20% of personal income to a maximum credit of $250.

RESPs To make RESPs more flexible the government is proposing to eliminate the $4,000 annual maximum contribution, increase the lifetime maximum to $50,000 from $42,000, increase the amount of annual contribution eligible for the 20% CESG to $2,500 from $2,000 and extend RESP eligibility to part-time studies. Those who put the full lump sum into an RESP, however, will waive their ability to collect on CESGs in future years. To get the $500 annual CESG, Jamie Golombek, a tax expert with AIM Trimark Investments, suggests putting the $50,000 into tax-deferred investments that generate capital gains and transferring $2,500 annually into an RESP.

Lifetime capital gains exemption In lieu of tax relief on capital gains, the budget proposes to increase the current capital gains exemption. Capital gains realized on the disposition of a qualified farm and fishing property or a qualified small business corporation shares on or after the budget will be eligible for a lifetime exemption of $750,000, a $250,000 increase.

Retirement income / Phased retirement The budget includes a proposal to amend the Income Tax Act to allow workers to continue accruing pension benefits for work performed with the same employer after retirement or partial retirement. The budget proposes increasing the age when taxpayers must convert their RRSP to a RRIF from 69 to 71. This change will be extended to those taxpayers turning 70 and 71 in 2007. As a result, these taxpayers can waive the minimum withdrawal requirement from their existing RRIFs for 2007 and 2008.

To increase the flexibility within RRSPs and RRIFs, the government is allowing taxpayers to include: any debt obligation that has an investment grade rating and that is part of a minimum $25 million issuance and any security (other than futures contracts) that is listed on a designated stock exchange.

Registered Disability Savings Plan The budget includes a plan to introduce a RDSP along with a Canada Disability Savings Grant program and Canada Disability Savings Bond program. The RDSP , which would be structured along the same lines as the RESP, is expected to be available in 2008.

Child Tax Credit A new non-refundable tax credit is planned for each child under 18. The credit will be calculated as $2,000 multiplied by the lowest personal income tax rate for the year, resulting in a maximum credit of $310 per child.

Charitable giving The budget proposes to extend to private foundation the zero-inclusion rate for income and gains arising from gifts of publicly listed securities, placing gifts to private foundations on the same footing as gifts to public foundations. The budget also provides a special deduction to corporations that donate medicines from their inventory to charities that receive disbursements under a Canadian International Development Agency program.

Other highlights

• Elementary and secondary school scholarships will be fully tax exempt.
• Spousal and other personal amounts will increase to match the basic personal amount, to $8,929 in 2007.
• The public transit tax credit will be extended to include certain electronic payment cards and weekly passes (when at least four consecutive passes are purchased).
• Long-haul truck drivers will be able to deduct more of the cost of food and beverages. The amount will increase to 80%, up from 50%, over the next five years.
• The mineral exploration tax credit for flow-through share agreements, which was to expire at the end of March, will be extended by one year.
• The income tax threshold for individual tax instalments will increase to $3,000 ($1,800 in Quebec) from $2,000 ($1,200 in Quebec).
• Canadians leaving the country for more than 48 hours, but less than seven days, can bring back $400 in tax-exempt goods, an increase from $200.

What do you think? Let us know by sending your letters to feedback@advisor.ca.

(04/19/07)

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.