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.

By David Christianson, BA, R.F.P., CFP, TEP Last week's 50 basis point drop in interest rates, now reflected in the major banks' prime lending rates, may spell opportunity for your clients (and you) to reduce your borrowing costs. The chartered banks' prime lending rate, the rate at which they lend money to their most creditworthy customers, has gone from 5.25% one year ago to 2.5% today. This means that if you have a line of credit at prime plus 1% with an average balance of $10,000, your annual interest has decreased from $620 to $350. A $100,000 variable rate mortgage might have cost about $5,000 in annual interest last year, while this year you will pay about $3,700. Variable rate loans are the easy ones. Any loan that is tied to the prime rate, like a line of credit or a variable rate mortgage, has automatically adjusted its interest rate to give you the saving. Consumers don't have to do anything with those loans. Where the real potential exists is with a large mortgage that was at a fixed rate, which is likely in the range of 7% if it was taken out a year ago, and could be rewritten today at just over 5%, or as low as 3.5% if you are willing to go variable rate.  Here are some rates being offered by National Bank to their large mortgage customers:   Minimum Mortgage: $300,000.00 Rate Guarantee: 30 days 1 Year fixed: 2.91 % 2 Year fixed: 3.55 %3 Year fixed: 3.96 % 4 Year fixed: 4.29 % 5 Year fixed: 4.60 % 5 Year Variable: Prime +1: 3.5 % All-In-One: Prime + 1: 3.5 % The trade-off is often a penalty though, which may be three months of interest. You need to check on the prepayment privileges for each mortgage. Some banks will allow the borrower to "blend and extendî, which means adding time to the term of the loan and receiving benefit for the new lower rates on the extension to the term.   Credit cards If the credit card balance is not paid off every month, then interest is charged (retroactively to the date of purchase, often) on the outstanding amount. If this happens once, then interest is charged until two successive months go by with a zero balance. The interest rates are usually in the range of 18% or more. Electronics and furniture companies often have loans charging as much as 24% or more. This is something many consumers don't understand. If someone accepts the great offer of "no interest until 2010î, then they better make sure they pay off the balance before the first payment is due. Obviously, paying off these credit cards and consumer debts is where the greatest potential interest rate saving exists. Debt consolidation - either by setting up a fixed term loan or a line of credit - can save hundreds of dollars of interest each year, or even thousands if a person has large debts. If you have high interest rate, non-deductible debt, then now is a great time to talk to your bank or credit union (or their competitor) about how you can save on interest costs. Don't let them talk you into more loan than you need, though, and don't let cheap money convince you to go further into debt. "Re-pricing initiativesî Here's a funny thing - the banks' actual cost of money has gone up over the last 18 months, in spite of all its declines in interest rates. They are not deemed as creditworthy as they were a year ago, and their own credit is much tighter. This means the banks are scrambling to provide these loans at low rates and still make a profit. Many of the banks are undergoing what they euphemistically call "re-pricing initiatives", which means raising the rates on existing lines of credit. At least two major banks are sending out letters "advisingî customers of an increase in their interest rates, relative to prime. I was pretty perturbed last week when I got a letter from my bank's head office letting me know that my line of credit with being raised from prime plus 1% to prime plus 3%, without consultation or reason. Although it will end up being cheaper than it was a year ago, I don't want it to increase and was extremely put off by the way they approached it. My bank manager is sympathetic and is encouraging me to continue to harass the head office person who had the gall to sign the letter. He left no contact information, but I've been able to track him down and clog up his voice mail. New borrowing I'm going to say two contradictory things here. The first is that if the recession has a person worrying about job security, it's likely not a time to borrow more money, just because interest rates are low. It's a time to build up cash and make sure that any existing loan payments could be handled through an interruption in income. The contradiction is that this is theoretically the ideal time to be borrowing to invest. When you borrow to invest, the interest you pay is tax-deductible. The time to buy investments is when they are low. Whether a person is inclined to purchase an investment property to rent out or invest in the stock market, there's no doubt that prices are low. However, an important consideration is obviously whether prices are going to go lower and, especially, whether they will stay low for a long period of time. My only point in bringing this up is that people were quite anxious to borrow money to invest two years ago, when the stock markets were 40% higher and the prime rate for borrowing was 2.5% higher. The tough part about buying low is that you actually have to do it - you have to buy when things look really bad, which they do now, and when any sensible person would be running for the hills. Now, having gotten your attention, I am not recommending that anyone run out and borrow to invest, although I would be less likely to talk them out of it now than I would have been one year ago. David Christianson is author of The Knowledge Bureau's certificate course "Client Centred Practices" and is a nationally recognized expert in successful communication between investors and their financial advisors, with a specialty in the ethical behaviour of financial planners. His many industry and professional awards attest to his success in communicating this knowledge to professionals and clients alike.  

The Canada Revenue Agency has announced the prescribed annual interest rates that will apply to any amounts owed to the CRA and to any amounts the CRA owes to individuals and corporations. These rates are calculated quarterly in accordance with applicable legislation and will be in effect from April 1, 2009, to June 30, 2009. Income tax The interest rate charged on overdue taxes, Canada Pension Plan contributions, and Employment Insurance Premiums will be 5%. The interest rate paid on overpayments will be 3%. The interest rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans will be 1%. Each of these rates represents a 1% drop from the rates in effect from the last quarter. Other taxes The interest rate on overdue and overpaid remittances for the following taxes will be: Tax and Duty Overdue remittances Overpaid remittances GST 5% 3% HST 5% 3% Air Travellers Security Charge 5% 3% Excise Tax (non GST) 5% 3% Excise Duty (except Brewer Licensees) 5% 3% Excise Duty (Brewer Licensees) 3% N/A Softwood Lumber Products Export Charge 5% 3%

Stay tuned for budget commentary from The Knowledge Bureau. Manitoba needs to take a close look at personal taxation as it contemplates a future within a financial crisis. Some thoughts for the Finance Minister: Financial strength comes from what you own. Tax systems must make it possible for people in all income brackets to accumulate and keep capital while they are financially productive, and then stop stripping it away when they are not. That way their assets can sustain them, when they can no longer work, taking a strain off social support requirements. It is important to note that different income sources are subject to different marginal rates of tax. Further, risk and reward plays into the tax systemóbusiness and capital losses offsetting income and capital gains over time will show different income results for tax purposes. Particularly in these difficult times, we need to understand whether we agree as a society that it is important to reward those who are brave enough to invest their money within highly volatile marketplaces, at least with the ability to offset taxable income with losses, particularly when those losses often result from the employment of workforces, which creates taxpayers. The unfairness in the system comes in large part from the taxing of non-discretionary incomesóincreasing non-refundable tax credits like the basic personal amount can help here. Other culprits are bracket creepówhich Manitoba notoriously keeps in place year over year--and for the low and middle classes in particular, high marginal tax rates in clawback zones. . .which generally occur with incomes under the top brackets. Tax rates, brackets and clawback zones need urgent review in this province. Taxing one time lump sums from unexpected sources like severance packages is also problematic. Governments need to consider income averaging as a solution to spiking marginal tax rates leading to unfairness in certain situations like these. Farmers could also benefit greatly from a return to averaging over 5 years. High user fees also transfer taxes disproportionately to the low and middle classes. This needs to be added to the discussion. Finally a global economy requires that volatility associated with currency fluctuations and future inflationary pressures are better addressed in the tax mix. It's tough to be a finance minister these days. . .we wish the Minister luck in his deliberations and recommendations for stimulus and change.

Many people are preparing to pay their March 15 quarterly instalment and worrying about their April 30 tax liabilities, while they watch their portfolios languish in turbulent times. You should be preparing not to pay, especially if it hurts the portfolio further by generating withdrawals that are not required. Check out Tax Tips 1 and 2, the first in a new ongoing series of information tips now forming part of Your News. Add your own tips too, as you make it through tax season 2008. Two things to know before you overpay instalments or avoid your obligations on April 30: You can avoid the March 15 and June 15 quarterly instalments if your income is expected to drop in 2009. Simply request that instalments be based on an estimate of 2009 taxable income by writing a letter to CRA. However, note that interest will be charged if instalments are deficient when you file your 2009 tax return. You can avoid late filing, gross negligence and tax evasion penalties if you file on time, but then make arrangements with the collections department at CRA to pay over time. Interest will be charged as CRA waits for its money, but that's a much better wayóand ultimately less expensive way--to handle the issue than the Ostrich Approach.

A summary of upcoming deadlines:   Monday, March 2, 2009 - RRSP, RDSP and Labor sponsored fund donation deadlines   Monday, March 16, 2009 - Instalment payment deadline   Tuesday, March 31, 2009 - T3 receipts to be received   Later of March 2, 2009 or thirty days after legislation passes (which has not occurred yet)- Recontributions to an RRIF   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.  

With tax season upon us once again, it is time to take a look at some of the changes regarding personal income tax filings.  One area that prompts many questions is the pension splitting rules which were introduced for the 2007 tax year.  Let's review some of the rules for splitting pensions: Pension Income Amount Claim. A taxpayer who is over 65 at the end of the year and receiving pension income or who is under 65 but receives qualified pension income may claim the lesser of the pension income or qualified pension income, as the case may be, and $2,000 Claimants Over Age 65. Pension income includes amounts included in the taxpayer's income for the year that are: payments in respect of a life annuity from a superannuation or pension plan, RRSP annuity, RRIF payment, DPSP annuity, the interest portion of annuity payments, and amounts accrued under certain life insurance policies and annuities. Claimants Under Age 65: Qualified pension income includes amounts included in the taxpayer's income for the year that are: payments in respect of a life annuity from a superannuation or pension plan, and amounts received from the following because of the death of the taxpayer's spouse: RRSP annuity, RRIF payment, DPSP annuity, amounts accrued under certain life insurance policies and annuities. Excluded: Specifically excluded from the definitions of pension and qualified pension income are: Old Age Security, Canada or Quebec Pension Plan Benefits, a death benefit an amount that is included in income but for whom a deduction is taken (such as exempt foreign pension or the deducted portion of US Social Security) a payment received out of or under a salary deferral arrangement, a retirement compensation arrangement, an employee benefit plan, an employee trust or the Saskatchewan Pension Plan. Claim the pension income amount on line 314 of Schedule 1 Federal Tax. No separate form is provided by CRA for calculating the Pension Income Amount but an area is provided on the Federal Worksheet to calculate the amount. If the taxpayer has a spouse or common-law partner and the taxpayer's income is low enough that the pension income amount is of no benefit, then the unused amount may be transferred to the spouse or common-law partner using Schedule 2 Federal Amounts Transferred From Your Spouse or Common-law Partner. As the provincial pension amount varies by province, the transfer of the provincial amount will differ from the federal amount and must be performed on a special Schedule 2 for the province of residence. In some provinces, the Pension Income Amount is indexed. Note: As 2007 was the first year of the provision and many software optimizations were not perfected or available on time, it is recommended that last year's choices be reviewed. T1ADJ adjustment requests will be allowed on the election.