Budget Measures Get the Green Light: Bill C-15 Receives Royal Assent

On March 26th, Bill C-15 received Royal Assent. A synopsis of some of the most significant elements of the Bill appear here; provisions that advisors and clients should be discussing when preparing tax returns before the end of April.  This includes the fact that the GST/HST Credit has now been replaced – but your clients may not know this.  There are new Capital Cost Allowance Provisions for rental property owners, provisions for the disabled and the Personal Support Workers Tax Credit is now law.

Canada needs to focus its limited resources where they are likely to make a difference, argues Michael Hart in a new C.D. Howe commentary entitled Breaking Free: A post-mercantilist trade and productivity agenda for Canada. That makes East Asia a priority, he contends, although Canada should not forget its long-time trading party, the United States. "The rapidly expanding markets of China, India and other Asian countries are well worth the pursuit,î Hart writes, "but the U.S. market will remain the bread and butter of the Canadian economy for the foreseeable future.î Hart, who is the Simon Reisman Chair in Trade Policy at the Norman Paterson School of International Affairs at Carleton University in Ottawa, says Canada needs to adapt to a world of "value chains, evolving trade and investment patterns, and deepening global integration.î That means getting rid of "home-grown impedimentsî such as anti-dumping and countervailing duty regimes, ineffective subsidies and procurement preferences, tariff restrictions in supply-managed sectors, overabundant regulations and restrictions on foreign ownership. Since the late 1990s, Canada's trade performance has stagnated. Canada's share of the world export market has dropped to 2.5% from 4.5% in 2000. Going hand in hand with Canada's lagging trade performance is productivity. "To revitalize Canadian trade and improve Canada's productivity performance,î Hart writes, "Canadians will have to be prepared to address remaining barriers to greater global engagement. "Progress on these issues requires a better understanding of the nature of modern production and exchange, the changing patterns of Canadian trade and investment, and the barriers, both domestic and international, to gaining greater advantage from deepening global integration,î he maintains.   Additional Educational Resource: Distinguished Advisor Workshops  

Canadians may be well served by their banks but even so, at some point or other, we have all had a disagreement with our bank. The federal Bank Act requires banks to have a procedure for handling customer complaints but how that is done has become the subject of hot debate recently. Now, the Department of Finance has waded in with proposed legislation and it is looking for comments from interested parties. In 1996, what was to become the Ombudsman for Banking Services and Investments (OBSI)  was established to provide a free and independent service for resolving small-business owners' disputes with their banks. Over the next few years, OBSI's mandate expanded to include consumers of banking and investment services. Securities regulators require investment dealers to be members of OBSI, but the Bank Act has no such requirement. It is not mandatory for banks to be members ó and therein lays the problem. Two of the Big Five banks have withdrawn from OBSI ó Royal Bank of Canada in 2008 and TD Bank in late 2011 ó and hired a company called ADR Chambers Banking Ombuds Office to provide their dispute-resolution services. The feds responded with proposed legislation, first in 2010 and again in July. The 2010 legislation said banks could belong to only federally approved external complaints bodies and it gave the Financial Consumer Agency of Canada (FCAC) the authority to monitor and enforce compliance. The legislation  now proposed seeks to establish explicit standards that external complaint bodies must meet ó including standards for independence, timeliness and transparency. "These proposed regulations will also require banks to cooperate with their external complaints body,î says the Department of Finance press release, "by, for example, informing customers of the name and contact information of their external complaints body so that consumers clearly know who to contact when a dispute arises.î But many in the financial services industry feels the legislation doesn't go far enough. The government should simply legislate that all banks be members of OBSI. The Canadian Foundation for Advancement of Investor Rights (Fair Canada)  points out that the proposed legislation falls short of the G20 Principles on Financial Consumer Protection. "Banks will be able to entertain bids from approved service providers and choose the one that gives them the best deal and serves their interests,î FAIR pointed out in a recent newsletter. "This could result in severe risks to independence and impartiality, two principles which are fundamental to effective dispute resolution for consumers.î Furthermore, FAIR notes the difference between a private external complaints body and an ombudsman: "An ombudsman, such as OBSI, has a responsibility to assist consumers with the complaints process, including the articulation of their complaint. Current private, for-profit external complaints bodies typically do not provide this support to consumers. Vulnerable consumers, including seniors and immigrants, may abandon legitimate complaints due to the barriers they will face in articulating their claims.î The 30-day comment period began July 13 with the publication of the regulations in Canada Gazette. Comments must cite the Canada Gazette, Part Ⅰ, and its date of publication and be addressed to Jane Pearse, Director, Financial Institutions Division, Department of Finance, L'Esplanade Laurier, 15th Floor, East Tower, 140 O'Connor Street, Ottawa, ON K1A 0G5 (fax: 613-943-1334; email: finlegis@fin.gc.ca).   Free Trials: Certificate Self-Study Courses - Earn CE/CPD Credits, Too!  

You have prepared for many aspects of retirement but you have one nagging concern: how much will you be able to withdraw from your non-registered investments each year and still have enough to last as long as you do ó and possibly leave a legacy? To help you sort through the options, Knowledge Bureau has built the Fixed vs Variable Income Calculator, part of the Knowledge Bureau's Client Relationship Toolkit. Generally, you are well-prepared for retirement: you have several sources of cash flow; you know how much you need to cover daily costs; and you know how much is coming in each month from fixed income sources such as Canada Pension Plan (CPP), Old-Age Security (OAS) and your RRIF. But what it comes to your savings, you are stymied. If you withdraw too much each year, you're liable to run out of money; if you take too little, you may not be able to meet your lifestyle goals. There are three options to consider: you can live off the earnings from your investments and leave the capital to your children; you can take a fixed amount each year and leave the capital to your heirs; you could take the maximum fixed amount each year using some or all of the capital to finance your desired lifestyle. Using the using the Fixed vs Variable Income Calculator, letís examine the three options using the calculatorís defaults: $500,000 in mutual or segregated funds (income will be taxed and the adjusted cost base (ACB) of the funds will be reduced);) life expectancy 20 years from now; 45% marginal tax rate; 2.7% inflation; returns on your investments of 1%, 2.5%, 3.5% in years one, two and three, respectively, then 4% annually thereafter. Option 1: Fixed income: Optimize for capital preservation Given the above rate of returns and you withdraw only the income earned by your investments, you can withdraw an annual cash amount of $14,518 (before taxes, indexed at 2.7% for inflation) for 20 years. At the end of that time, your nest egg will be $500,049. Option 2: Variable income: Use 1% of capital annually If you withdraw cash earned by your investments at the above rate plus 1% of capital a year, at the end of 20 years, you will still have $408,953. Option 3: Fixed Income: Optimize for Income If you want to maximize withdrawals to use up all your capital, you can withdraw an annual amount of $27,873 (before taxes, indexed). At the end of 20 years, your nest egg will be depleted to $47. The calculator allows you to enter your own beginning capital, marginal tax rate, inflation adjustment, life expectancy and expected rates of return. You can also look at RRSP/RRIF investments (income is not taxed but withdrawals are) or other investments (such as GICs) where the income is taxed but no tax liability accrues due to ACB adjustments. If you've not taken a look at this powerful calculator, sign up for a free trial today.

It isn't just the weather ó the record-high temperatures, the lack of rain, the surplus of rain ó that has made this summer chaotic. The economic environment has played its part, as well. Record-low interest rates, euro zone uncertainty and unusually volatile markets continue to take their toll on Canadians' accumulated wealth. Yet, since the 2008 start of the financial crisis, some Canadians have fared better than others ó those who have stayed true to their investment strategy and made the most of tax-efficient investing. Consider these numbers from Statistics Canada. In 2010, the latest year for which statistics are available, the number of taxfilers reporting investment income (7.5 million) and the amount of investment income they reported ($50 billion) declined. (Investment income is the sum of dividend income from taxable Canadian corporations and interest income from investments in non-tax-sheltered vehicles.) But those with dividend income fared dramatically better than those with only interest income. ∑ The number of savers ó those who report interest income ó declined 15.3% to slightly less than 3.8million taxfilers. Total interest income reported decreased 24.2% to$6 billion. ∑ Investors, those who report both dividend income and interest income, held their ground, or even showed marginal gains. In this case, 3.7 million investors reported $44 billion in income. Although the number of investors declined by 0.3%, the total dividend and interest income reported increased 0.4%. Clearly, in a low-interest rate environment, if you are counting on interest-bearing investments to provide the bulk of your future income, you're losing ground ó even before the eroding effects of inflation and taxes. Bring taxes into the mix and, again, investors make out better than savers. As the table below demonstrates, dividend income is subject to significantly lower marginal tax rates (MTR), providing an important hedge against inflation. The source of your income, then, makes a difference in how much you keep ó and that's what tax-efficient investing is all about. As the table below shows, depending on the taxpayer's province of residence, a taxpayer in the middle-income tax bracket pays a MTR anywhere from 29.7% to 36.95% on "ordinary income,î that is, income from employment, pensions and interest. The lowest MTR, however, is on "eligible dividends,î those earned from investments in publicly traded companies and certain large private corporations. The marginal tax rates that apply to various categories of income:     Province   2012 taxable income range ($)   Ordinary income (%)   Capital gains (%)   Dividends: small bus. (%)   Eligible dividends (%)   British Columbia  Alberta  Saskatchewan  Manitoba  Ontario  Nova Scotia                        42,708 to 74,028<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" /> 42,708 to 85,414 42,708 to 85,414 42,708 to 67,000 42,708 to 68,719 42,708 to 59,180  29.70   32.00 35.00 34.75 31.15 36.95 14.85 16.00 17.50 17.38 15.58 18.48 16.21 18.96 22.08 24.58 16.65 19.90 6.46 9.63 12.39 16.19 13.42 18.05 Source: Knowledge Bureau's EverGreen Explanatory Notes Indeed, the difference between the highest and lowest MTR is 30.49 percentage points. You would be further ahead, for example, to earn eligible dividends in British Columbia than interest in Nova Scotia. It's Your Money. Your Life. Today, the negligible returns on money put into savings accounts are erased by taxes and inflation. Indeed, some will turn negative. Statistics suggest that those who have made even slight headway in building financial wealth have had investment portfolios that contained suitable exposure to equities. Particularly in these uncertain times, you need a strategic plan that will allow you to grow your wealth and manage your  risk. Tax and investment professionals can help with that planning as well as help mitigate behavioural responses that can reduce your long-term wealth accumulation. Evelyn Jacks is president of Knowledge Bureau, best-selling author of close to 50 tax and wealth planning books and keynote speaker at the Distinguished Advisor Conference in Naples, Florida, Nov 11 to 14. Additional Educational Resources: Financial Recovery in a Fragile World and EverGreen Explanatory Notes.  

There is no doubt where readers of Knowledge Bureau Report stand concerning July's poll question,  "Should governments have regulated exorbitant credit card rates instead of mortgage amortization periods?î Of the 72 readers who responded, 83% believe governments should regulate the interest rates charged by credit card companies. In fact, regardless of how readers voted, they are in agreement on one thing: interest rates on credit cards ó be it 20% for bank credit cards or 30% for department store credit cards ó are way too high. And the economic reality is very few people can afford to pay their balances in full each month so the high-interest debt piles up. They are paying interest on interest. Where readers differ is on the cure. The "Noî vote thinks credit card debt is the individual's responsibility; if you don't have it, don't spend it. Consider Rosalind's comment: "Credit cards are intended to provide short-term credit. One should pay off credit cards every month, thus avoiding paying any interest charges at all. If you can't do that, don't make the purchase.î Some members of the "Yesî contingent put forward another solution: they suggest credit card rates bear some relationship to prime. As one reader pointed out: "They bear no correlation to prevailing rates in the marketplace!î As Ken White commented: "I know it's not that simple but I feel credit card rates should at least fluctuate with prime. "I have always felt that by dropping credit card rates,î White adds, "you will put cash into consumer's hands and increase their net worth within 30 days of doing so.î Other readers blame the easy availability of credit. Many Canadians have multiple cards and credit-card issuers are happy to raise the credit limits on those cards, taking the enthusiastic consumer further into debt. Then, in this environment of low-interest rates and high house prices, many consumers are consolidating their credit card debt in lower-cost lines of credit or mortgages. "It is too easy to get large credit card limits,î wrote a reader, "and have several credit cards. With the interest rates so high a lot of people take their cards up to the limit and then find they will never pay them off without getting a loan, consolidating with their mortgage.î Added Darren: "The problem goes far beyond mortgages and credit cards. It occurs when the individual rebuilds a debt load on top of existing 'consolidated' debt loads. What needs to be regulated is how the lenders of money can extend people too far. We consolidate, then keep the credit cards and line of credit 'just in case' and reconsolidate again. The serious issue will come when there is no more room for consolidation.îOne solution, suggested by yet another reader: set at a maximum credit card limit of 20% of the card holder's annual net income. There were certainly a few readers who were vocal about the government shortening the amortization periods. Granted, over the term of the mortgage, the mortgagee pays less interest and saves more. But in the short term, mortgage payments are higher with mortgages with 25-year amortization periods than with 30-year periods. "It is much more difficult to purchase a home without going into debt,î wrote Rosalind, "and with the cost of housing as high as it is, many families will find it harder than ever to afford the increased mortgage payment which results from the shortened amortization period.î Added another reader: "Longer amortization periods can definitely work in favour of a mortgage holder if he or she knows how to take advantage of the ability to continue to make the payments they can afford, and by doing so, pay down principal much quicker.î Knowledge Bureau Report would like to thank readers for responding to July's poll question and sharing their comments. August's poll asks: "Should Canadiansí retirement plans include leaving a legacy for their children?î We look forward to your comments. Additional Educational Resource: Debt and Cash Flow Management  

On July 25, the Department of Finance released draft legislation that aims to curtail the use of "stapledî securities in Specified Investment Flow-Through entities (SIFTs) and real estate investment trusts (REITs), thereby increasing the fairness of Canada's tax system. As Finance explains in its Explanatory Notes  to the legislative proposal, "a stapled security involves two or more separate securities that are ëstapled' together such that the securities are not freely transferable independently of each other.î Stapled securities allow SIFTs and REITs to take deductions that "frustrateî the policy objectives of Canada's Income Tax Act. The federal proposal, which was deemed to have come into effect on July 20, 2012, introduces two new sections to the Act that operate in conjunction with one another: section 12.6 and section 18.3. The latter introduces a regime that denies deductions for amounts that are paid or payable in respect of certain types of stapled securities. To avoid the application of section 18.3, an entity ó such as a SIFT or REIT ó must "un-stapleî its affected securities. The effect of section 12.6 is to disregard any un-stapling that is not permanent and irrevocable, explains the notes. When the federal government announced the Tax Fairness Plan in 2007, it indicated that, if structures or transactions that were clearly devised to frustrate policy objectives emerged, they would be subject to change. These amendments are meant to close some loopholes that clever tax planners have been using and, thus, the rules retain their tax fairness initiative. The proposed amendments to the SIFT rules are technical in nature, but not extremely complicated. Sometimes a corporation or a SIFT (alone or with a subsidiary) would issue equity and debt instruments, at least one of which was publicly traded, that are stapled together. Notwithstanding the general rules applicable to the deductibility of interest, the proposed amendments provide that interest that is paid or payable on the debt portion of such a stapled security will not be deductible in computing the income of the payer for income tax purposes. Arrangements that involve shares issued by publicly traded corporations, the distributions of which are treated as dividends for tax purposes, are not intended to be affected by this recent amendment. The amendments apply to the stapled securities of a trust, corporation or partnership, if one or more of the stapled securities is listed or traded on a stock exchange or other public market and any of the following applies: the stapled securities are both issued by the entity, one of the stapled securities is issued by the entity, and the other by a subsidiary of the entity, or one of the stapled securities is issued by a REIT or the subsidiary of a REIT. Overall, the amendments have placed SIFTs in a similar tax situation as public corporations. Prior to these amendments SIFTs were largely treated the same way individual taxpayers were ó having to pay tax instalments, for example. From now on, however, SIFTs will be required to estimate tax instalments and pay them on a monthly basis, just like corporations. In the backgrounder information relating to this news release the government stated that it "will continue to monitor Canadian tax planning for structures and transactions that might frustrate the policy objectives of the Tax Fairness Plan and will, as necessary, take appropriate corrective action.î Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.