Buried tax benefits of Budget 2009

The idea of Budget 2009 is to get more cash in Canadians’ hands, cash that, hopefully, they will be predisposed to spend, thereby stimulating the economy.

Encouragement for investors is much more subtle, but it is there. If you dig deeper into the budget, you will find other measures that could have a positive impact on your clients’ ability to invest. Chief among these is the budget’s extension of income tax relief. This is being done primarily by increasing the basic personal exemption and by increasing the dollar range of the first two personal income tax brackets, in effect increasing the amount of money that a person can earn while paying tax at a lower rate.

Nowhere is the government’s pump-priming approach more apparent than in its efforts to revive the housing sector. The centrepiece is the home renovation tax credit, a 15% non-refundable tax credit good only for the 2009 tax year for eligible home renovation expenditures.

The tax credit applies to expenditures ranging from $1,000 to $10,000 with a maximum credit of $1,350 ($10,000 minus $1,000 x 15%). Eligible expenses run the gamut from kitchen and bathroom renovations to new decks and sod laying. However, the tools used in a renovation project and new appliances won’t qualify, nor will a new lawn mower purchased to cut that freshly laid grass.

The effort to stimulate housing also includes a non-refundable tax credit that applies to $5,000 of a home’s value for first-time home buyers/builders. This translates into an actual maximum credit of $750. If people jointly buy a home, they have to share the $750. Unused portions can be passed to a spouse or common-law partner.

Another housing measure, which clearly relates to individuals’ investable assets, is an extension of the Home Buyers’ Plan. First-time buyers can now withdraw $25,000 tax free from their RRSPs rather the previous total of $20,000. This money must be repaid in scheduled installments over no more than 15 years; otherwise missed repayments will be included in the purchaser’s income that year.

While the brunt of this new tax relief is aimed at low and middle-income earners, it’s worth pointing out that, when coupled with other measures introduced since 2006, the relief applies all the way up the line. The following table, adapted from one in the 2009 budget, shows how it plays out at different income levels:

Tax Relief for Individuals by Family Income Group, 2009
Average Tax Relief in 2009
Total family Income	GST	Personal Income Tax		Total	Tax Relief as % of Net Tax Paid
		To Date	Budget 2009 (dollars)
Less than 15K	130	95	147	372	100
15K-30K	280	201	168	649	53
30K-45K	400	444	247	1,092	31
45K-60K	510	629	356	1,494	23
60K-80K	630	787	473	1,890	20
80K-100K	770	903	614	2,287	17
100K-150K	960	1,036	717	2,714	14
Over 150K	1,640	1,241	887	3,768	7
Source: Department of Finance

While a family with income between $15,000 and $30,000 receives a stunning 53% reduction in net taxes, a family earning between $60,000 and $80,000 will have a 20% reduction, or another $1,890 in their pockets. The scale declines with additional income, leaving those earning more than $150,000 with a 7% income tax reduction. Nevertheless this still amounts to $3,768 in extra cash.

Seniors will also have a bit more cash in hand thanks to a $1,000 increase in the age credit to $6,408. As well, the income level at which the age credit is eliminated rises to $75,032 from $68,365. Added in with general tax relief, the bottom line is that the majority of your clients are going to have more cash in hand available for investing.

Removing a thorny issue

From an estate planning viewpoint, many will applaud the fact that the government has cleared up the way RRSP and RRIF values are determined after an annuitant dies. Until now, the proceeds of these plans could be passed tax-free to a surviving spouse, common-law partner, dependent minor or a dependant disabled child. Otherwise, the fair market value of a plan or fund would have to be determined just before the holder’s death and then included in a final tax return.

Depending on the deceased’s income bracket and marginal tax rate, this could mean a substantial tax bill and a much diminished estate. One of the problems with this arrangement has been that RRSPs and RRIFs could lose money between the time the holder died and when the proceeds were paid out to inheritors — a plausible scenario given the current climate. This has left estates paying taxes based on values at the time of death rather than when an estate is actually wound up.

Ottawa’s solution in the recent budget is to allow the amount of diminished value in these plans after a person’s death to be deducted from the initial valuation in a final tax return. Taxes will be lessened and more will be available for distribution to inheritors. Final RRSP and RRIF payouts after January 1 will all benefit from this new treatment.

Ultimately, the worth of the federal budget does not lie in any particular measure. If it is to work, it will be through a well-executed, broad-based effort that helps revive the economy. It will also help if Canada receives both direct and indirect stimulation from fiscal policy efforts being made in the United States and other countries around the world. Specific types of tax credits won’t help investors nearly so much as a general economic revival.

(02/09/09)