Lower RRIF rates; more changes to T1135

The rules for reporting specified foreign income are changing again.

Responding to longstanding frustrations with Form T1135, the government announced today that there will be a streamlined process for taxpayers with between $100,000 and $250,000 in specified foreign income.

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The form will be ready for the 2015 tax year.

People with $250,000 or more of specified foreign property to report will continue to follow existing reporting requirements.

Lower RRIF withdrawal minimums

Seniors won’t have to withdraw as much money from their retirement savings under new RRIF rules in today’s federal budget.

Currently, when retirees turn 71, they must withdraw a minimum of 7.38% from their RRIFs. Today’s budget proposes to lower that mandatory withdrawal to 5.28%.

Withdrawal rates still increase every year, but instead of topping out at 20% at age 94, that cap is reached at age 95.

The change is meant to reduce the risk of people outliving their savings. Investment industry groups, including CALU, and seniors’ groups, such as CARP, have been calling for RRIF changes as Canadians’ life expectancies have increased.

The government estimates the change will mean that a 90-year-old will have 50% more capital than she would under current rates.

Advisors should ensure wealthier Canadians won’t leave too much money inside their RRIFs, which would lead to a high tax liability upon death, says Doug Carroll, vice-president of tax and estate planning at Invesco.

“If you’re just deferring the taxes, it feels good that you have this accumulated amount, but you may have a pending negative waiting for your estate,” he says. “You may decide that even though you’ll be triggering some taxes by taking some of that out, you’ll be triggering it at whatever your marginal tax rate is, rather than potentially in an estate, where it gets pushed up into higher brackets.”

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But if a client is already in the top marginal bracket, letting money accumulate in a RRIF won’t lead to higher taxes on a terminal return, says Kim Moody, director, Canadian Tax Advisory at Moodys Gartner Tax Law.

The previous rules are from 1992. Industry groups had hoped the government would not only change withdrawal rates but also push back or eliminate the age at which mandatory withdrawals begin.

The government estimates the rule change will save seniors $670 million in taxes between 2015 and 2020.

The RRIF change, taken with the increase in annual TFSA contribution limits to $10,000, provides seniors with “increased flexibility to manage their savings in a tax-efficient manner,” the government says. In 2013, 2.7 million seniors had TFSAs.

More for seniors

In another budget item aimed at seniors and people who qualify for the Disability Tax Credit, the government has introduced the Home Accessibility Tax Credit. It’s a 15% non-refundable tax credit on up to $10,000 of renovations, such as wheelchair ramps, for up to $1,500 of savings starting in 2016. Other items include walk-in bathtubs and wheel-in showers.

Small biz

Small business owners who sell their companies can now get a tax break if they sell their private company shares and donate the proceeds to charity. Proceeds from the sale of real estate or private shares are now exempt from capital gains tax, if the proceeds are donated within 30 days of sale. Carroll says their treatment is now similar to donations of public shares.

To be eligible, the disposition must be in 2017 or later. The government expects the change will cost $265 million in forgone tax revenue by 2020.

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