Year in Review – Tax Tips for 2009

• 15% on the first $40,726 of taxable income
• 22% on the next $40,726 of taxable income (on the portion of taxable income between $40,726 and $81,452)
• 26% on the next $44,812 of taxable income (on the portion of taxable income between $81,452 and $126,264)
• 29% of taxable income over $126,264

These rates are federal only, each province and territory has its own tax added to these rates.

Tax Credits Available to Reduce Tax Payable

The good news is that the basic personal amount, the amount Canadians can earn before paying federal income taxes, has increased from $9,600 last year to $10,320 for this year. These rates should be taken into consideration when determining your client’s tax planning.

New Credits Opportunities available in 2009

First Time HomeBuyers’ Tax Credit

This new non-refundable tax credit provides tax savings of up to $750 for home purchases which occurred after January 27, 2009. Buyers who qualified under the Homebuyers’ Plan for a home eligible for a Homebuyers’ withdrawal are eligible to claim this credit. The credit can be split between spouses or common-law partners to the maximum of the amount available to any one of them.

Increase to the Homebuyer’s Withdrawal Amount

In addition to the above credit, withdrawal amounts under the Homebuyer’s Plan made after January 27, 2009, have was increased from $20,000 to $25,000. This is the maximum allowable to be withdrawn from an individual’s Registered Retirement Savings Plan on a tax-deferred basis. The repayment remains at a maximum of 15 years.

Home Renovation Tax Credit

This new, non-refundable tax credit is available for eligible home renovations. “Eligible” means renovations costs for projects such as finishing a basement or remodeling a bathroom. Included in the expenses are the costs of any required building permits, equipment rentals or professional services.

A maximum Federal credit of 15% to a maximum of $1,350 can be claimed for expenses in excess of $1,000 but limited to a maximum expense of $10,000. As this is a short-term credit. Make sure your clients record expenses incurred after January 27, 2009 but before February 1, 2010. Any unused credit can be shared amongst family members, but only to the maximum amount of $1,350.

Changes to valuationDeduction now available for of RRSP and RRIF Losses after Death

Due to the market downturn, some RRSP or RRIF accounts were worth more at the time of death than the amounts paid out to beneficiaries of the valued at death at a higher value than was realized at the time the estate. paid out the proceeds of the account. This changed in 2009. This may have created a problem from an income tax point of view for some of your clients, since the estate was stuck paying tax on income that never got paid out to a beneficiary. Effective for estate distributions after 2008, Canada Revenue Agency will allow a deduction is now available against the RRSP or RRIF deemed disposition income inclusion value in cases where the value at death decreased by the time the plan was distributed.

Changes to Rules for Ontario Locked-In Plans

You probably recall that in 2008 a new “Life Income Fund” or LIF was introduced to replace existing Ontario-based LIFs and LRIFs. At that time, an election was added to allow an annuitant who was at least age 55 to unlock up to 25% of the value of the plan when opening the new LIF. The unlocked portion could be withdrawn as a taxable withdrawal, or transferred on a tax-deferredal basis to a non-locked in RRSP or RRIF.

The 2009 Ontario Budget increased the flexibility of the new LIF. As of January 1, 2010, up to 50% of a LIF may be unlocked. For clients who have already unlocked 25%, a further 25% of the original LIF value can be unlocked.

Introduction of the Tax-Free Savings Account

As of January 1, 2009, Canadian resident individuals who were at least 18 years of age could open a specially designated account. This account, called a “Tax Free Savings Account” or TFSA, is a registered account that allows after-tax contributions to grow tax-free.

Qualified individuals must file a Canadian income tax return to verify their age, residency and Social Insurance Number. Those qualified can contribute up to $5,000 in 2009 and each subsequent year. That limit will be indexed to inflation in future years. Canada Revenue Agency will track contribution room and report the unused contribution amount each year on the individual’s Notice of Assessment.

Although contributions are not tax-deductible; withdrawals of contributions and growth are tax-free. In addition, withdrawals generate new contribution room that is equal to the amount of the full withdrawal (including both principal and investment income). This means that if a $5,000 contribution is made and it grows to $5,300 by year-end, a full withdrawal prior to year-end of the full $5,300 will be non-taxable; and the contribution room for 2010 will be equal to $10,300 – the $withdrawn $5,300 withdrawn plus the $5,000 for the 2010 contribution year.

Other Planning Issues for Year-End

To help your clients claim as many tax deductions or credits as possible, remind them that some payments must be made by December 31st to be claimable on their 2009 Income Tax returns. These payments include:

• Interest paid on borrowed money used to generate investment income
• Investment counseling fees
• Alimony payments or child care expenses
• Charitable donations

Keeping up to date on tax changes throughout the year can help you and your clients save tax dollars and be fully prepared for the upcoming year.