Budget 2012 Personal Tax ChangesPosted: March 29, 2012
Old Age Security (OAS) and the Guaranteed Income Supplement (GIS)
Age eligibility for the OAS and GIS programs increases to age 67 from age 65 beginning in 2023 and concluding in 2029. The eligibility for the (spouse's) Allowance and the Allowance for Survivors will also increase to age 62 from age 60 in the same time period.
Option to defer OAS
Beginning on July 1, 2013, seniors will have the option to defer receiving their OAS pension for up to five years, in a manner similar to the deferral of Canada Pension Plan (CPP) benefits. Those who begin to receive their pensions later will receive a proportionately larger pension.
Budget 2012 will add blood coagulation monitors for use by individuals who require anti-coagulation therapy ó including associated disposable peripherals such as pricking devices, lancets and test strips ó to the list of expenses eligible for the Medical Expense Tax Credit in 2012 and subsequent years. The devices must be prescribed by a medical practitioner.
Registered Disability Savings Plans (RDSPs)
Family members as plan holder
Under the current rules, many adults with disabilities have had difficulty establishing plans because their legal capacity to enter into a contract is doubtful. Provincial law requires that, to open an RDSP, the individual must be declared legally incompetent and a legal guardian named. Budget 2012 will allow, on a temporary basis, certain family members (spouse or common-law partner or parent) to become the plan holder of the RDSP for an adult individual who might not be able to enter into a contract. This measure will ensure that individuals may still benefit from RDSPs. In the meantime, the provinces and territories are expected to make more accommodating provisions.
Where the disabled individual is found not to be contractually competent, a legal representative of the disabled individual may replace the family member as the plan holder. This measure will become effective upon Royal Assent and will be in effect until Dec. 31, 2016.
Repayment of grants and bonds
For withdrawals from RDSPs after 2013, the "10-year Replacement Rule" will be replaced with a "Proportional Repayment Rule." Under the old rule, if any amount is withdrawn from a RDSP, any Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB) amounts received in the past 10 years must be repaid (except for SDSPs). Under the new rule, the repayment amount will be the lesser of
- the amount removed times three, and
the amount of the CDSG and CDSB amounts received in the past 10 years.
Example: Proportional Repayment Rule vs 10-year Replacement Rule
Issue: Arthur is the beneficiary of an RDSP. In the period 2008 to 2013, CDSG and CDSB contributions totalled $21,000. In 2014, he withdraws $1,000 from his RDSP. How much does he have to repay?
Answer: Under the 10-year Replacement Rule, he would have to repay the full $21,000 government assistance contributed. Under the Proportional Replacement Rule, he will have to repay $1,000 x 3 = $3,000 of government assistance.
Maximum annual limits for withdrawals
For withdrawals made after 2013, the maximum Lifetime Disability Assistance Payment (LDAP) will be increased to no less than 10% of the fair market value of the assets in the plan at the beginning of the year. Where the maximum amount under the existing LDAP formula exceeds 10% of the asset value, then the maximum is the amount determined under the LDAP formula.
Rollovers of Registered Education Savings Plans (RESPs)
Beginning in 2014, the current RESP rollover provisions to RRSPs will be extended to RDSPs. RESP investments, after Canada Education Savings Grants and Canada Education Savings Bonds have been repaid, may be rolled into an RDSP, so long as the plan holder has sufficient RDSP contribution room. These contributions will not generate CDSB or CDSGs. Withdrawals of rolled-over RESPs will be taxable.
Termination of RDSPs when a beneficiary is no longer disabled
When an RDSP beneficiary ceases to qualify for the Disability Amount, currently the RDSP must be terminated immediately. Beginning in 2014, when this happens, the beneficiary may make an election to continue the plan for up to four calendar years after the end of the calendar year in which the beneficiary ceases to be eligible for the Disability Amount. During the election period:
- No contributions will be permitted.
- No new CDSBs or CDSGs will be paid into the plan.
- Withdrawals will be permitted subject to the new Proportional Repayment Rule.
Current RDSPs which would be required to be terminated before 2014 will not be required to be terminated until the end of 2014.
Mineral Exploration Tax Credit
The Mineral Exploration Tax Credit will be extended for one more year for flow-through agreements entered into before March 31, 2013. With the "look-back rule," this means that the credits extend to agreements up to March 31, 2014.
Eligible and other than eligible dividends
For taxable dividends paid after March 28, 2012, the government will allow the payer of a dividend to designate what portion of that dividend is eligible and what portion is not for up to three years after the dividend is paid (a late designation).
Example: Reclassification of Dividends
Issue: In 2012, Harvey's corporation earned $550,000. At the end of the fiscal year (July 2012), the corporation issued a $100,000 dividend to Harvey as an other than eligible dividend as was done in prior years. In 2013, Harvey discovered that $50,000 of the dividends could have been eligible dividends because the corporation paid taxes on $50,000 at the higher tax rate. What can be done?
Answer: under the new rule, the corporation may make a late designation to designate $50,000 of the dividends as eligible.
Group Sickness and Accident Insurance Plans
Employer contributions made to a plan after March 28, 2012, that relate to coverage after 2012 and are not in respect of a wage-loss replacement benefit payable on a periodic basis (i.e. the benefits will not be taxable to the employee) will be a taxable benefit. Such contributions made in 2012 will be included in income in 2013.
Retirement Compensation Arrangements (RCAs)
New prohibited investment and advantage rules will apply to RCAs that have a beneficiary who has a significant interest in the employer (a "specified beneficiary"). These rules parallel the rules for TFSAs.
Prohibited investment rules
Beginning March 29, 2012, the custodian of an RCA will be liable for a 50% tax on the fair market value of any prohibited investments in the RCA. The tax may be refunded if the prohibited investment is disposed of by the end of the year following the year in which it was acquired.
A special tax equal to 100% of the fair market value of any RCA advantage will be payable in respect of any advantage extended, received or receivable after March 29, 2012. The definition of an advantage for an RCA will be adapted from the advantage rules from RRSPs. Advantages occurring before March 30, 2012, will not be subject to the tax if the amount of the advantage is included in income of the "specified beneficiary."
RCA tax refunds
Refunds of RCA taxes on contributions made after March 28, 2012, will not be refunded if the RCA property declines in value unless the decline cannot be reasonably attributed to prohibited investments or advantages.
Employee profit-sharing plans (EPSPs)
A special tax at the top marginal rate of the "specified employee" will be assessed for contributions to an employee profit-sharing plan for a "specified employee" to the extent that the contribution exceeds 20% of the employee's salary received that year. A "specified employee" is an employee who has a significant equity interest in the employer or does not deal at arm's length with the employer. This measure will apply to EPSP contributions made by an employer on or after Budget Day, other than contributions made before 2013 pursuant to a legally binding obligation arising under a written agreement or arrangement entered into before Budget Day.
Where this tax is applied, a deduction will be allowed for the excess EPSP contribution so that it is not taxed twice.
Life insurance policy exemption test
The criteria for determining if a life insurance policy is an exempt policy will change for policies issued after 2013. The government has made several technical proposals and will consult with key stakeholders on these proposed changes over the coming months.
Gifts to foreign charitable organizations
For gifts to foreign charitable organizations to be eligible for the donation tax credit, the organization must be a "qualified donee." Currently, the Canadian government must donate to these organizations for them to qualify. Beginning in 2013, foreign organizations that pursue activities:
- related to disaster relief or urgent humanitarian aid, or
- in the national interest of Canada
may apply to receive "qualified donee" status, even if they do not receive a donation from the government of Canada. Canada Revenue Agency will develop guidelines for granting such status.
Beginning June 1, 2012, the tariff exemption for goods brought into Canada will increase to $200 from $50 for travellers who are out of Canada for 24 hours or more, and to $800 for travellers who are out of Canada for 48 hours or more.