Claiming Medical Expenses: Free Healthcare?

Free Health Care? Did you know that Canadians spend on average more than $1,000 on medical expenses each year? It’s estimated that government programs, via our taxes, cover about 72% of medical expenses, which means that we pay for the rest. Your clients may be over-paying on their taxes because they don’t know about medical expense deductions. 

As discussed in a previous issue of Breaking Tax and Investment news, the RDSP may be established for an individual who has a severe and prolonged physical or mental impairment and qualifies for the disability tax credit during the year of establishment, or would have if the restriction for the attendant care amount were disregarded. Contributions may not be made to the plan in years for which the individual is not DTC-eligible. In that case the plan must be terminated by the end of the year following the year in which the beneficiary ceases to the DTC-eligible.  The deadline for contributions for the 2008 year is March 2, 2009 so don't miss out on the government sweeteners as outlined in our article on January 21st. Some additional points to note regarding the Registered Disability Savings Plans are as follows: The maximum annual CDSB contribution is $1,000 and is earned where family income does not exceed $21,278. The CDSB amount is phased out completely when family income is $37,885. Again, the limits are 2008 amounts and will be indexed annually. There is a lifetime maximum of $20,000 for CDSBs. Like the CDSG, CDSBs will not be paid after the beneficiary of the RDSP turns 49. Note: Repayments of all CDSGs and CDSBs will be required in the ten years preceding one of the following events: (a) a withdrawal from the plan, (b) loss of eligibility for the DTC or (c) death of the beneficiary. Death or Cessation of Qualification Where the beneficiary dies, or ceases to qualify for a RDSP (presumably when the disability ceases), any CDSG or CDSB funded to the plan within the ten years preceding death, and the income earned on such amounts, must be repaid. Amounts in excess of contributions, after taking into account the repayment, will be included in income of the beneficiary in the year of death (or cessation of disability). It is not clear what happens if withdrawals and/or investment performance result in the RDSP having less than is required to be repaid. Presumably any shortfall represents a debt of the estate. Impact on Other Means-tested Support RDSP withdrawals will not affect any other means-tested support delivered through the income tax system including, in particular, the OAS or Employment Insurance benefits. The Federal government intends to work with the provinces to ensure that the benefits of the RDSP are not eroded by a clawback of provincially provided support. Director of the Plan. An RDSP may have one or more directors responsible for the principal decision making with respect to the plan including directing investments and the amount and timing of payments out of the plan. This could include, for example, the mother and father of the beneficiary, a parent and the beneficiary of the plan, once that beneficiary reaches the age of majority, a parent who is a successor director (in the event of the death of one parent); and an entity which acquires the rights of a director in the event of that director's death. Directors are jointly liable with the beneficiary or the beneficiary's estate for taxes arising in a non-compliant plan, described below. Non-taxable Portion of RDSP Payments. The non-taxable portion is the same as the proportion that contributions to the plan is to the total value of the plan's assets, less the assistance holdback amount, described below. Assistance Holdback Amount. A disability assistance payment will not be allowed to be made if the payment causes the fair market value of the plan's assets to fall below the ìassistance holdback amountî. This is the amount that could be required to be repaid under the Canada Disability Savings Actóthe total amount of grants and bonds paid into the plan by the government in the ten-year period preceding the disability assistance payment, plus associated investment income. Should the plan become ìnon-compliantî it will be automatically deregistered and the taxable portion will be included in income. If a repayment is subsequently made, a deduction is possible. Repayments of amounts received under the Canada Disability Savings Act, effective the 2007 tax year will qualify for a deduction on Line 232. ITA Section 4(3)(a) and 60(z). Withholding taxes. It is expected that the Regulations will allow $15,000 to be withdrawn annually without the requirement for withholding taxes. Payments over this amount will be subject to the same withholding rules as RRIFs. Only the taxable portion of the payment are taken into account for these purposes. Interest on money borrowed. Amounts borrowed to make a contribution to a registered plan, including a RDSP is not deductible. Interest is usually deducted on Line 221 Carrying Charges for eligible investments. ITA Section 18(11). Gains and Losses. Taxpayers who sell investments outside a registered plan to invest into one will be prohibited from claiming the losses on the disposition of the assets for that purpose. This rule is extended to the RDSP investor effective 2008. ITA Section 40(2)(g). Attribution Rules. Contributions made to an RDSP will not be subject to the usual attribution rules which require that income from property transferred to a spouse or common law spouse or other individuals under 18 must be reported by the transferor. ITA 74.5(12)and 75(3)(a) Tax Free Rollovers. A tax-deferred rollover of property may be accomplished when the transferor is a RDSP trust so that funds can move from one such plan to another on a tax free basis in cases where the beneficial ownership  does not change. ITA 107.4(l)(j). Trusts and Their Beneficiaries. The 21 year deemed disposition rule will not apply to RDSPs. ITA 108(1) GST Credits. For the purpose of this refundable federal credit, the definition of adjusted income will exclude  payments from an RDSP so as not to reduce GSTC payments, effective 2008. ITA 122.5(1) Canada Child Tax Benefits. For the purpose of this refundable federal credit, the definition of adjusted income will exclude payments from an RDSP so as not to reduce CCTB payments, effective 2008. ITA 122.6 OAS Benefits. For the purpose of recovering OAS benefits, the definition of adjusted income will exclude payments from an RDSP from the base upon which the tax on OAS benefits is calculated. ITA 180.2 Changes in Residency. Beneficiaries of RDSPs will not be treated as having disposed of their rights under an RDSP upon immigration or emigration, similar to the rules in place now for RRSPs and other deferred income plans. ITA 128.1(10) Death of a Beneficiary. In this case, the plan must allow for remaining amounts to be paid into the beneficiary's estate and for the plan to be terminated by the end of the year following the year of the beneficiary's death. ITA 146.4(4)(n)   For more tax tips, purchase a copy of Essential Tax Facts written by The Knowledge Bureau's President, Evelyn Jacks, to learn how to ace your 2008 tax return and save money all year long.  

By Evelyn Jacks It's curling season and apparently CRA has it's eye on the rock too, given a recent question I was asked about the tax status of income received by curlers for their athletic endeavors. That's prompted this overview of taxation of prizes, and it might be a good idea for professional advisors to review these rules with their star clients to avoid protracted and expensive legal challenges that could just be distracting enough to force their winning eyes off the curling rock. And that would be a shame. Athletes are taxable on their income like all other taxpayers but may qualify for special tax treatment depending on their circumstances. What we need to review carefully is under what circumstances the income is earned and whether it may be exempt, deferred or reduced by expenses. Windfalls. Income may be tax exempt for example, if the taxpayer received a ìWindfall.î CRA's IT 334 discusses miscellaneous income sources including windfalls to determine whether any aspect of the win is taxable. In general a "windfall" is not subject to tax but factors indicating that a particular receipt is a windfall include the following: the taxpayer had: ∑ no enforceable claim to the payment, ∑ made no organized effort to receive the payment, ∑ neither sought after nor solicited the payment, ∑ had no customary or specific expectation to receive the payment, ∑ had no reason to expect the payment would recur, ∑ the payment was from a source that is not a customary source of income for the taxpayer, ∑ the payment was not in consideration for or in recognition of property, services or anything else provided or to be provided by the taxpayer, and ∑ the payment was not earned by the taxpayer as a result of any activity or pursuit of gain carried on by the taxpayer and was not earned in any other manner. The factors above are based on those set out in the decision of The Queen v. Cranswick, (1982) CTC 69, 82 DTC 6073 (F.C.A.). Gifts and Other Voluntary Payments. Amounts received as gifts, that is, voluntary transfers of real or personal property without consideration, are not subject to tax in the hands of the recipient. However, when a benefit is received by an employee from an employer, or from some other person, the amount of the payment or the value of the transfer or benefit is generally included in income. Certain tax free benefits are specified in the act. Similarly, voluntary payments (or other transfers or benefits) received by virtue of a profession or by virtue of carrying on a business are taxable receipts. Some related issues are discussed in the current version of IT-490, Barter Transactions Games of Chance. Under circumstances discussed in CRA's IT 213, which outlines taxation of games of chance or other one-time prizes: IT 213 points out: Is it a lottery scheme? Amounts received under this arrangement is not taxable as either a capital gain or income unless, unless due to the circumstances applying to the lottery scheme, the prize can be considered to be income from employment, business or property or a prize for achievement referred to in paragraph 56(1)(n). Is it a game of chance? A lottery has been defined as a scheme for distributing prizes by lot or chance among persons who have purchased a ticket or a right to the chance. If real skill or merit plays a part in determining the distribution of the prize the scheme is not a lottery (unless it is based essentially on chance and the degree of skill is minimal). Again, when the chances of a prize are obtained wholly gratuitously, as for instance, a prize awarded to the winner of a game, the scheme is not a lottery. Is it a pool betting system? A "pool system" of betting is defined in the Athletic Contests and Events Pools Act as a pool system of betting on any combination of two or more professional athletic contests or events. The fact that a degree of skill is involved in the selection of the outcome of the contest or event in the pool betting distinguishes it from a lottery scheme. No taxable capital gains or allowable capital losses arise from the disposition of a chance to win a bet or a right to receive an amount as winnings on a bet in connection with a pool system of betting referred to in section 188.1 of the Criminal Code. The nature of pool system betting is such that the only winnings are in the form of cash from the respective pool. Consequently, no additional capital gain or loss tax consequences could arise on subsequent disposition of the winnings and therefore it is not necessary to deem the winnings to have been acquired at fair market value. Is it a gift? When the prize has been received as a gift, it is not included in computing income at the time of receipt. However, the recipient will be deemed to have acquired the prize at its fair market value , which means that a subsequent disposition of the prize will result in a capital gain on any increase in value since the time of its acquisition. A prize can be reasonably considered to be a gift from the viewpoint of the recipient, even though chance and/or skill may have been involved in the win. Ordinarily a gift is not considered to have been made until the donee has received delivery of the gift and accepted it in a completed and irreversible transaction. Is it Income? The prize will be received as income where it is received by virtue of the recipient's employment , received by virtue of the recipient's business or received in respect of an achievement in a field of endeavor ordinarily carried on by the recipient pursuant to paragraph 56(1)(n) (see IT-75R2). Is it an Achievement in a Field of Endeavor? The amount of a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer can be considered to be an award to a particular person selected from a group of potential recipients and given for something that is accomplished, attained or carried out successfully. The amounts are generally included in income under in subparagraph 56(1)(n)(i) however, the type of prize contemplated is restricted. The criteria for awarding the prize must be such that a recipient is rewarded for success in an area in which the recipient regularly applies effort. Therefore, an amount generally qualifies as a prize for purposes of subparagraph 56(1)(n)(i) if it is paid in recognition of a genuine accomplishment in a challenging area, whether it be of an academic, vocational or technical nature. A prize that is not included in subparagraph 56(1)(n)(i) is considered to be a "windfall" and is not required to be included in income unless it is also a business receipt or income from employment. If an employee receives, from his or her employer, a prize or other award related to sales or other work performance, the fair market value of such an incentive is regarded as remuneration for services. Accordingly, this amount must be included in income under subsection 5(1). If there is no employer-employee relationship between the payer and the recipient of an amount and it can be established that the amount is a business receipt, the amount is included in income under subsection 9(1). However, if the amount received is a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer and it cannot be regarded as a business receipt (and is not a prescribed prize as discussed in ∂20), then the amount is included under subparagraph 56(1)(n)(i). Is it an Entrance Fee or Reimbursement of Costs? Where the prize is not received as income and is not a gift, no amount will be included in income upon receipt of the prize and the provisions of paragraph 69(1)(c) will not apply. Such a situation would arise where the contestant has incurred a cost towards winning the prize such as purchasing a ticket or paying an entrance fee entitling the contestant to participation in the contest. In such a case, while there are no tax consequences resulting from receipt of the prize, any subsequent disposition of that prize may result in a capital gain or loss. In computing any such gain or loss the taxpayer's cost of the prize will be the original cost of the ticket or entrance fee rather than the fair market value of the prize. Where "personal use property" is involved, the $1,000 exemption contained in subsection 46(1) may eliminate any capital gains on disposition of a prize. Is it a Prize Received by an Amateur Athlete? As you may have read recently in The Knowledge Bureau's Breaking News, changes were recently made to Amateur Athletic Trusts which allow for a deferral of income received from prizes, endorsements, etc. in order to preserve the athlete's status as an amateur so that he/she can continue to compete at an amateur level. Taxation of prizes will only happen when the amounts are distributed to the athlete. The rules have recently been extended to a broader category of athletes including an amateur who is a member of a registered Canadian amateur athletic association and eligible to compete in international sporting events as a Canadian national team member. Specific filing rules as per CRA's recent bulletin link here.   These revenues will generally be taxed on the earlier of the following two dates: the date the funds are distributed to the athlete; eight years after the creation of the trust or the last year in which the athlete was eligible to compete as a Canadian national team member in an international sporting event, whichever comes first. Eligible income earned in 2008 that is contributed to a qualifying arrangement before March 3, 2009, will be deemed to be income of the amateur athlete trust for 2009 and not the athlete's income for 2008 provided the athlete elects to do so by the filing due date of the athlete's 2008 tax return (generally April 30, 2009). Is it Business Income? Income that does not qualify under the rules above should be reported as self-employed earnings, as per the story below, but remember that when you report your share of business income, you can also write off expenses against it including your share of travel, hotel, meals, etc. Volume Discounts and Rebates. Volume bonuses or rebates from suppliers are included in computing a purchaser's business income. However, where a supplier provides customers with free tickets for a draw for a prize with the winning ticket to be drawn strictly by chance, the prize is ordinarily considered a gift. Its value is not included in the recipient's business income. On the other hand, if real skill or merit is involved in the win, it will be a question of fact to be determined in accordance with the circumstances in each case whether the prize is a gift or whether its value is business income to the recipient. Evelyn Jacks is President of The Knowledge Bureau and author of Master Your Taxes and Essential Tax Facts which can be purchased from www.knowledgebureau.com. Copies of this article may be purchased for a fee by calling 1-866-953-4769.

By John Mill LL.M. Recently I was asked by a student in The Cross Border Taxation Course whether US stock purchased through a Canadian broker is a ìtangibleî for US estate tax purposes. This is a good question because in general terms non-resident aliens only have to worry about US estate tax attaching to tangible property situated in the US. The term used to describe this category of property is ìUS situs propertyî. The answer to the question is ìno ñ US stock is always an intangibleî. However, when it comes to the US estate tax consequences, US stock, the situs of the stock and the mode or manner of stock purchase are irrelevant. The estate tax sections in ìSubchapter BóEstates of Non-residents Not Citizens of the United Statesî set out the US estate tax consequences of owning US stock at death: IRC ß2104. Property within the United States (a) Stock in corporation For purposes of this (estate tax) subchapter shares of stock owned and held by a non-resident not a citizen of the United States shall be deemed property within the United States only if issued by a domestic corporation. However, once a stock is gifted it no longer forms part of the estate for estate tax purposes. Gifts of US stock are treated differently than bequests of US stock because the IRC says intangibles are exempt from Gift tax, US stocks are intangibles: ß2501. Imposition of (Gift) tax (a) Taxable transfers (1) General rule A tax, computed as provided in section 2502, is hereby imposed for each calendar year on the transfer of property by gift during such calendar year by any individual resident or non-resident. (2) Transfers of intangible property Except as provided in paragraph (3), paragraph (1) shall not apply to the transfer of intangible property by a non-resident not a citizen of the United States. Now let's switch gears to the old ìcash in the mattressî debate: is ìcashî an intangible? On the one hand cash represents a ìrightî to a certain value; on the other it is a fungible ìbearerî instrument that you can hold in your hand. The IRS says cash located in the US is tangible property subject to US estate tax; others disagree. I am not aware of any cases one way or the other. There is no list of US situs assets, the facts surrounding each asset are unique and must be considered. IRC ß2105 gives some guidance including the fact that bank deposits held by NRAs are considered property ìwithoutî the US. IRC ß2105. Property (of NRAs) without the United States": (a) Proceeds of life insurance For purposes of this subchapter, the amount receivable as insurance on the life of a nonresident not a citizen of the United States shall not be deemed property within the United States. (b) Bank deposits and certain other debt obligations For purposes of this subchapter, the following shall not be deemed property within the United Statesó (1) amounts described in section 871 (i)(3), if any interest thereon would not be subject to tax by reason of section 871 (i)(1) were such interest received by the decedent at the time of his death, (2) deposits with a foreign branch of a domestic corporation or domestic partnership, if such branch is engaged in the commercial banking business, (3) debt obligations, if, without regard to whether a statement meeting the requirements of section 871 (h)(5) has been received, any interest thereon would be eligible for the exemption from tax under section 871 (h)(1) were such interest received by the decedent at the time of his death, and (4) obligations which would be original issue discount obligations as defined in section 871 (g)(1) but for subparagraph (B)(i) thereof, if any interest thereon (were such interest received by the decedent at the time of his death) would not be effectively connected with the conduct of a trade or business within the United States. Notwithstanding the preceding sentence, if any portion of the interest on an obligation referred to in paragraph (3) would not be eligible for the exemption referred to in paragraph (3) by reason of section 871 (h)(4) if the interest were received by the decedent at the time of his death, then an appropriate portion (as determined in a manner prescribed by the Secretary) of the value (as determined for purposes of this chapter) of such debt obligation shall be deemed property within the United States. (c) Works of art on loan for exhibition For purposes of this subchapter, works of art owned by a nonresident not a citizen of the United States shall not be deemed property within the United States if such works of art areó (1) imported into the United States solely for exhibition purposes, (2) loaned for such purposes, to a public gallery or museum, no part of the net earnings of which inures to the benefit of any private stockholder or individual, and (3) at the time of the death of the owner, on exhibition, or en route to or from exhibition, in such a public gallery or museum. (d) Stock in a RIC (1) In general For purposes of this subchapter, stock in a regulated investment company (as defined in section 851) owned by a nonresident not a citizen of the United States shall not be deemed property within the United States in the proportion that, at the end of the quarter of such investment company's taxable year immediately preceding a decedent's date of death (or at such other time as the Secretary may designate in regulations), the assets of the investment company that were qualifying assets with respect to the decedent bore to the total assets of the investment company. (2) Qualifying assets For purposes of this subsection, qualifying assets with respect to a decedent are assets that, if owned directly by the decedent, would have beenó (A) amounts, deposits, or debt obligations described in subsection (b) of this section, (B) debt obligations described in the last sentence of section 2104 (c), or (C) other property not within the United States. (3) Termination This subsection shall not apply to estates of decedents dying after December 31, 2007. Some other rules that may assist are: Annuity contracts enforceable against a U.S Corporations are U.S. situs property. Treas. Reg. ß20.2104- 1(a)(4). Partnership interest have situs where the partnership business is carried on. Rev Rul 55- 701, 1955-2 CB 836. A beneficial trust interest that does not terminate at his/her death, situs is determined by the situs of each asset held by the trust.7 See Comm'r v. Nevius, 76 2d 109 (2d Cir.), rev'g 30 BTA 70, cert. denied, 296 US 591 (1935). As stated in the course material the Competent Authority (CA) assists taxpayers, who make a formal request, in resolving cross border disputes with tax authorities. The CA does not provide advice or assist in the filing of returns. John Mill LL.M., is a Canadian lawyer specializing in cross border issues and author of The Knowledge Bureau's Cross Border Taxation Course.

In our next issue of Breaking Tax and Investment News we will bring you articles on Curling Tax Woes, US Estate Tax and a Checklist for RDSP Investors (Part II).

The Long Term vs The Short Term By Evelyn Jacks In preparing to comment about the January 27, 2009 federal budget, my research activities took me to a number of excellent papers written over the past decade about the effects of public monetary policy and specifically debt and deficit spending on the wealth of nations. A particularly excellent study I came across was done in January 1998 by Douglas W. Elmendorf or the US Federal Reserve Board and N. Gregory Mankiw of Harvard University and NBER. Their paper was prepared for the Handbook of Macroeconomics. Some excellent points, very relevant to the analysis of this budget were made. I'd like to share some of these with you: On Taxes and Spending Patterns: Current patterns of taxes and spending are unsustainable in most industrialized countries over the next twenty-five years. The primary causes of this situation are the aging of their populations and the rising relative cost of medical care. Between 1990 and 2030, longer lifespans and continued low birthrates will sharply increase the ratio of retirees to working adults. In most countries, health care has absorbed an increasing share of national income over the past several decades. The aging of the population and the increasing cost of health care will put a significant strain on government finances over the coming decades. The numbers show a marked deterioration in the fiscal situation of almost every country. On the Effect of Debt on the Economy: In the Short Run: an increase in demand will raise national income; this being a common justification for a policy of cutting taxes or increasing government spending by running deficits when the economy is faced with a possible recession. In the Long Run: temporary increases in aggregate demand which matter in the short run are less important in the long run. Consider: A country with a large debt is likely to face high interest rates. Monetary policy may reduce interest rates in the short run, but in the long run will leave real interest rates roughly unchanged and inflation and nominal interest rates higher. A country with a large debt may have difficulty financing an ongoing deficit through additional borrowing and may be tempted to produce more money to finance it. This could lead to inflation. A country with large debt loses the ability to use tax revenue for service requirements (ie health care and pensions) to service the debt. The interests of future taxpayers are not be represented. Fiscal flexibility of government is lost. Government debt makes the economy more vulnerable to a crisis of international confidence. Foreign investors could lose confidence in dollar-denominated assetsócapital flight would therefore sharply depreciate the dollar. Diminished political independence or international leadership could result. The authors conclude that a temporary change in taxes has only a small effect on the consumption of forward-looking consumers. Further, the most important long-run effect of government debt is to reduce national wealth. Baby boomers planning for retirement are certainly forward looking, and concerned about their wealth, and that of the country poised to cover their needs in old age. For them, the question to consider is whether temporary tax reductions and deficit spending serve them and their heirs well in the long run? Evelyn Jacks is President of The Knowledge Bureau and author of Master Your Taxes

Boomers and Deficits Deficit Spending and Debt Sober Economic Indicators It's About Financial Literacy Technical Provisions: Some Highlights For Employees And Their Employers: For Seniors: For Home Buyers Business Tax Provisions What was Missed Finance Minister Jim Flaherty brought down what some might consider the most important federal budget this century, taking steps to stimulate the economy in unprecedented difficult times. In the midst of what is now called a broad-based recession that began in the fourth quarter of 2008, one that is expected to last at least three quarters, deficit spending is a reality again for the first time in a decade. Boomers and Deficits. Today's deficits will surely become the taxes of tomorrow. This trend is of particular significance to the ten million or so baby boomers who make up approximately one third of our population and just under 50% of our tax filers. By the year 2011, the first boomers will reach age 65. According to Infrastructure Canada, those age 65 and over are the most intensive users of the health care system, a financing burden yet to come for Canadian governments. (For more information link here). At best, this budget will require taxpayers to ask hard questions, not only about the financial state of the nation, but about their own ability to fund retirement income and health care costs, if governments are stretched by new financing costs. What effects will deficit spending today have on public pensions and the health care system? How will deficits affect taxation on after-tax retirement income or wealth transition in the future? How will incomes of boomer offspring fare on an after-tax basis? Now is a good time to revisit retirement income plans, family succession and estate plans in an attempt to better understand financial needs for a future, which could certainly include tax increases on income or capital. Deficits Lead to Accumulated Debt. Canadians are poised to lose the progress they have made in paying down their collective public debt throughout the past decade. Projected Deficit Spending Per January 27, 2009 Federal Budget: 2008-09 $1.1 Billion 2009-10 $33.7 Billion 2010-11 $29.8 Billion 2011-12 $13.0 Billion 2012-13 $7.3 Billion 2013-14 $0.7 Billion Spending in the budget has been focused in the following areas to support the fallout of difficult economic circumstances for workers, families and businesses: SPENDING SUMMARY: Infrastructure $12 Billion Tax Reductions: $20 Billion Housing Construction and Renovations $7.8 Billion Financial Security: $200 Billion Skills Training $8.3 Billion Business Support $7.5 Billion According to Statistics Canada, in 1995 federal governments had been spending more than they collected for 25 consecutive years leading, with interest costs eating up 26% of the entire budget by that time. This paved the way to the highest net federal debt in our history--$588 Billionóby 1997. However, with a reduction in program spending and a growing economy, Canada recorded a surplus for the first time in 28 years in 1997/98; and with consecutive surpluses continuing into the new century, the net federal debt had been reduced to $457.6 billion in 2007/08. Now, the accumulated federal debt will go back up to $542 Billion dollars, close to its 2001 level of $545 Billion. What will be important to watch is the cost of servicing this debt. Should increases in interest rates be part of our future, they will eat more of the revenues Canadian taxpayers can raise, potentially cutting into health care and pension funding ability. SOBER ECONOMIC INDICATORS. It may be a good time to buy a home or a commercial building; however returns on investments will languish for a while yet. The Economic Indicators in this budget are also more sober than in prior budgets: The outlook for nominal GDP growth in Canada has been reduced to -1.2 percent from 0.8 percent in November. The tax base for government revenue will be $25 Billion lower in 2009 and $30 Billion lower in 2010 than originally anticipated in the fall. Short-term interest rates are expected to fall to 0.8 percent in 2009 and 1.7 percent in 2010. The outlook for long-term interest rates has also been revised downward to average 2.8 percent in 2009 and 3.4 percent in 2010, from 3.7 percent and 4.2 percent, respectively, at the time of the November 2008 Economic Statement. Slower economic growth is expected to increase the unemployment rate in Canada to 7.5 percent in 2009 and 7.7 percent in 2010, compared to 6.9 percent in 2009 and 6.7 percent in 2010 as forecast in the Statement. PRIVATE SECTOR FORECASTS, JANUARY 27, 2009 FEDERAL BUDGET Table 2.1Average Private Sector Forecasts 2008 2009 2010 Average2011ñ14 (per cent, unless otherwise indicated) Real GDP growth February2008 budget 1.7 2.4 2.9 n.a. November2008 Economic and Fiscal Statement 0.6 0.3 2.6 2.8 January2009 private sector forecast 0.7 -0.8 2.4 3.0 GDP inflation February2008 budget 1.8 1.9 1.8 n.a. November2008 Economic and Fiscal Statement 3.8 0.5 1.8 2.1 January2009 private sector forecast 4.1 -0.4 1.7 2.2 Nominal GDP growth February2008 budget 3.5 4.3 4.7 n.a. November2008 Economic and Fiscal Statement 4.4 0.8 4.4 5.0 January2009 private sector forecast 4.8 -1.2 4.2 5.2 Nominal GDP level (billions of dollars) February2008 budget1 1,590 1,659 1,738 n.a. November2008 Economic and Fiscal Statement 1,603 1,615 1,687 1,914 January2009 private sector forecast 1,609 1,590 1,657 1,893 3-month treasury bill rate February2008 budget 3.2 3.8 4.5 n.a. November2008 Economic and Fiscal Statement 2.4 1.9 2.7 4.2 January2009 private sector forecast 2.3 0.8 1.7 4.0 10-year government bond rate February2008 budget 3.6 4.2 4.8 n.a. November2008 Economic and Fiscal Statement 3.7 3.7 4.2 5.1 January2009 private sector forecast 3.6 2.8 3.4 5.0 Consumer Price Index (CPI) inflation February2008 budget 1.5 1.9 2.0 n.a. November2008 Economic and Fiscal Statement 2.6 1.7 1.9 2.0 January2009 private sector forecast 2.4 0.7 1.9 2.0 Oil price level (US dollars per barrel) February2008 budget 82.1 79.8 82.3 n.a. November2008 Economic and Fiscal Statement 102.5 72.0 79.0 89.7 January2009 private sector forecast 99.9 50.2 63.8 82.9 Exchange rate (US cents/C$) February2008 budget 98.0 95.5 95.5 n.a. November2008 Economic and Fiscal Statement 94.9 85.6 88.7 96.0 January2009 private sector forecast 94.1 81.2 85.5 94.4 Unemployment rate February2008 budget 6.3 6.4 6.2 n.a. November2008 Economic and Fiscal Statement 6.1 6.9 6.7 6.2 January2009 private sector forecast 6.1 7.5 7.7 6.4 U.S. real GDP growth February2008 budget 1.5 2.4 3.0 n.a. November2008 Economic and Fiscal Statement 1.4 -0.4 2.1 2.9 January2009 private sector forecast 1.2 -1.8 2.1 3.1 1 Nominal GDP levels have been adjusted to reflect May 2008 revisions to Canada's National Income and Expenditure Accounts.Source: Department of Finance survey of private sector forecasters. IT'S ABOUT FINANCIAL LITERACY. Financial literacy is the ability to understand personal and broader financial matters, apply that knowledge and assume responsibility for one's financial decisions. The federal budget defined financial literacy as an important life skill that empowers consumers to make the best financial decisions in their particular circumstances. The government plans to establish an independent task force, which will make recommendations to the Minister of Finance on a cohesive national strategy on financial literacy, to enable Canadians to take better control of their own financial futures. Financial advisors who themselves work as educators as they manage wealth together with their clients make a significant contribution to the best financial decision-making for the family. TECHNICAL PROVISIONS. The Notice of Ways and Means Motions detailed changes to amend the Income Tax Act discussed below: BROAD-BASED TAX RELIEF: The Budget has introduced minor broad based tax changes, meaning they will apply to everyone reaching the following income levels: The Basic Personal Amount has been increased to $10,320, retroactive to January 1, 2009. The top income threshold for the 15% lowest-tax bracket has increased from $38,832 to $40,726 The top income threshold of the next tax bracket (22%) has increased to $81,452 from the projected $77,664. Normal indexation will apply to the new basic personal amount and bracket thresholds for future years. TARGETED TAX RELIEF: Targeted tax relief in this budget focuses on employees, seniors and home owners, as well as business owners. FOR EMPLOYEES AND THEIR EMPLOYERS: Employment Insurance Benefit Changes. EI premium rates will be frozen at $1.73 per $100 for both 2009 and 2010. This is good news for the plans contributors: employees and employers. Working Income Tax Benefit Changes. This credit, currently set at $510 maximum for a single taxpayer, is a bridge from welfare to the workforce. The new budget proposes to enhance it to provide a refundable tax credit of 25 percent of each dollar of earned income in excess of $3,000, reaching a maximum benefit of $925 at $6,700 of earned income. Once income exceeds $10,500, the benefit would be reduced at a rate of 15 percent of each additional dollar, until the benefit is fully phased-out at an income of $16,667. The WITB thereby reduces average effective marginal tax rates on earned income between $3,000 and $10,000. The WITB clawback however, increases these rates on earned income between $10,000 and $20,000, as it is being phased out. Despite this increase, it is the government's hope that the WITB ìstrengthens incentives to find and keep a job, by increasing the net returns from work.î EI Benefit Changes And Training Initiatives. For those about to lose their jobs, some help from Employment Insurance: For the next two years all regular Employment Insurance (EI) benefit entitlements will be increased by five extra weeks to 50 weeks from 45 weeks. EI income benefits will be extended for two years to Canadians participating in longer-term training, benefiting up to 10,000 workers. Work-sharing agreements will be extended by 14weeks, to a maximum of 52 weeks, so more Canadians can continue working. Wage Earner Protection Programs will be extended to cover severance and termination pay owed to eligible workers impacted by employers' bankruptcy. EI is also to be changed to allow earlier access to EI benefits for workers who received severance packages if they use some or all of their severance pay to purchase skills upgrading or training. Consultations will begin for the development of options to provide self-employed Canadians with access to EI maternity and parental benefits. Increased funding for training delivered through the Employment Insurance program by $1billion over two years. $500 million will be invested over two years in a Strategic Training and Transition Fund to support the particular needs of individuals who do not qualify for EI training, such as the self-employed or those who have been out of work for a prolonged period of time. $55 million will be provided over two years to help young Canadians find summer jobs. Older workers and their families will receive an additional $60 million over three years for the Targeted Initiative for Older Workers and the program will be expanded to include workers in small cities. Skilled labour shortages will be addressed with $40 million a year to launch the $2,000 Apprenticeship Completion Grant. $50 million will be provided over two years for a national foreign credential recognition framework in partnership with provinces and territories. An additional $100 million over three years in the Aboriginal Skills and Employment Partnership (ASEP) initiative, expected to support the creation of 6,000 jobs for Aboriginal Canadians. $75 million will be invested in a two-year Aboriginal Skills and Training Strategic Investment Fund. An additional $87.5 million will be provided over three years to temporarily expand the Canada Graduate Scholarships program. And an additional $3.5 million will be provided over two years to offer an additional 600 graduate internships through the Industrial Research and Development Internship program launched in Budget 2007. FOR SENIORS: There is some good news in the budget for seniors: Age Credit rises for seniors: Seniors aged 65 or more will benefit from a $1,000 increase in the Age Credit, which rises from $5,408 to $6,408, with indexing thereafter. Age Credit Clawback: The age credit is phased out at $32,312 (no change from prior rules) and is completely phased out at $75,032, an increase from the prior $68,365. RRIF Recontributions. The Government will also be proceeding with the proposal announced in the November 2008 Economic and Fiscal Statement to reduce the required minimum Registered Retirement Income Fund withdrawal for 2008 by 25 percent to recognize the impact of the deterioration in market conditions on retirement savings. RRSP or RRIF losses after death. The amount of post-death decreases in value of these plans will be carried back and deducted against the income included in the year of death. FOR FAMILIES WITH CHILDREN: Child Tax Benefit Threshold Increases: Low-income families can earn an extra $1,894 and still receive the maximum National Child Benefit supplement, providing additional benefits of up to $436 annually.