Fall Federal Budget: Will Spending Be Cut?

Canada has historically presented an annual budget since Confederation in 1867, even through periods like World Wars and the Great Depression, but we have recently experienced the longest period without a full federal budget in our history. By the time the next one is brought down, expected in October 2025, it will have been 18 months since the controversial April 2024 budget which introduced the doomed capital gains inclusion rate hikes. What can we expect?

I have been blogging about how individuals and businesses can work hard to reduce their debt. While reduced consumer spending may add to Canada's sluggish economic outlook in the short term, on a personal level, cutting spending is a very good plan for shoring up your long-term financial stability. Without aggressive saving, it's possible that your debt, rather than your wealth, will be the legacy of your retirement. Getting your financial house in order sooner rather than later will help you find "redundant income,î that is, money that is available for savings after you have covered your regular expenses. That is income you can save and grow inside tax-efficient plans, including your RRSP or TFSA. Managing debt will also help you protect your savings from taxes and inflation, the two factors that are bound to erode your future wealth. You may be aware that governments' biggest source of revenue is taxes on personal income. If governments are to continue spending to stimulate the economy and if ongoing sluggish economic activity further reduces tax revenues, an important recourse for governments is raising taxes to meet the demand for government services. That scenario makes it even more important to manage your personal finances with tax savvy.To minimize personal income taxes, know your marginal tax rate on every source of income you or your investments generate.You can then tweak your income and cash flow plan with tax efficiency. It's also important to take a family approach and employ income-splitting techniques whenever you can.When you split and diversify your sources of income, you will pay fewer taxes. Finally don't forget the ideal order of investing which will give optimize your investment dollars by minimizing the tax impact. Decide what should come first: for example, your RRSP, your TFSA or an RESP. It's your money, your life. It's the tax-savvy steps you can take now that can help you build sustainable wealth. Speak to your tax advisors soon about creating new strategies to "average down your taxesî with income diversification, income splitting and the deferral of taxes on your investing activities. Evelyn Jacks is President of Knowledge Bureau and has recently been named one of Canada's Top 25 Women of Influence. Knowledge Bureau has just published new courses on debt management, updates to cross-border taxation issues and a new library of personal, corporate and GST tax matters to take recent court cases into account. For more information call 1-866-953-4768

If you pay by instalment, December 15 is the date for your last quarterly instalment in 2011 ó unless you are a farmer, in which case the date to remember is Dec. 31. It is also time to estimate income for 2012 and Canada Revenue Agency has posted on its website the booklet and forms that you and your tax advisor need. Instalments are periodic income tax payments that cover taxes that you would otherwise have to pay in a lump sum on April 30 of the following year. Instalments are not paid in advance; they are paid throughout the calendar year in which you earn the taxable income. According to P110 Paying Your Income Tax by Instalments, you have to pay your income tax by instalments for 2012 if your net tax owing is more than $3,000:  in 2012; and  in either 2011 or 2010. There are exceptions. For example, different rules apply if your main source of income in 2012 is self-employment income from farming or fishing. The guide provides more detailed information. Also on the CRA website are the worksheets you and/or your tax advisor will need to calculate tax payable: T2WS1 Calculating estimated tax payable and tax credits for 2012 T2WS2 Calculating monthly instalment payments for 2012 T2WS3 Calculating quarterly instalment payments for 2012 5000-S8_5005-S8 Schedule 8 - 5013, Non-Residents and Deemed Residents of Canada 2009 Additional Educational Resources: Distinguished Advisor Workshop January  

Risks to the stability of Canada's financial system are high and have increased markedly in the past six months, says the Governing Council of the Bank of Canada in its December Financial System Review. If you read the newspapers or watch television, you are well aware that the European sovereign debt crisis threatens global financial stability. And you are no doubt familiar with the risk a global economic downturn presents. But those are just the first of the main risks the Review highlights. The other three are: a disorderly resolution of global current account imbalances; a prolonged period of low interest rates, which could encourage imprudent risk-taking and/or erode the long-term soundness of some financial institutions; and, financial stress in the Canadian household sector. It is, perhaps, that last one that should cause us some reflection. "In Canada,î states the Bank of Canada, "the elevated levels of household debt and housing prices require continued vigilance and close co-operation among Canadian authorities.î The Bank of Canada believes the euro zone is already in recession and fears the U.S. could slide into recession as a result of fiscal consolidation and households cutting spending in order to pay down debt. Although Canada is relatively stable, it is vulnerable to global pressures. As Bank of Canada Governor Mark Carney noted in a recent speech, American demand for Canadian exports is already $30 billion less than normal. The accumulation of debt on the part of advanced economies vs the accumulation of assets on the part of emerging economies further add to shrinking global demand. Historically low interest rates ó which are expected to stay low ó are putting pressure on the returns of institutional investors such as insurance companies and defined-benefit pension plans. The Review notes the funded status of Canadian pension funds is approaching the all-time low reached in 2008. In fact, the Mercer Pension Health Index declined from 71% in the second quarter of 2011 to 64% at the end of October, "indicating that a representative pension plan faces a higher risk of being unable to fully meet its financial obligations.î Then there is the risk rising household debt presents to Canadian financial stability. The ratio of household debt to assets remains above its pre-crisis level, the Bank of Canada notes, and household net worth, which declined modestly in the second quarter of 2011, is expected to decline further in the third quarter. Canadian households' debt-to-income ratio reached a his­torical high of 149% in the second quarter, and has surpassed U.S. levels since the beginning of 2011. Household credit is growing at a faster rate than household incomes. "The rising indebtedness of Canadian households in recent years has increased the possibility that a significant proportion of households would be unable to make debt payments in the event of an adverse economic shock,î the Bank f Canada concludes. "This growing vulnerability has heightened the risk that a deteriora­tion in the credit quality of household loans would amplify the impact of the shock on the financial system.î In his speech, Carney referred to our reliance on "debt-fuelled household expendituresî for economic growth. It is, indeed, a threat to Canada's financial stability and is one more reason for Canadians to get their financial houses in order.   Additional Educational Resource: Financial Recovery In A Fragile World  

The amount you can contribute to a tax-free savings account (TFSA) will remain at $5,000 in 2012. Despite earlier speculation that indexing would push the contribution limit higher for 2012, Canada Revenue Agency has announced it will stay the same. When the federal government introduced the TFSA in 2009, it said the TFSA limit would be indexed to inflation and rounded to the nearest $500. The 2.8% indexing factor for 2012, when added to the 1.4% indexing factor for 2011 and the 0.6% for 2010 results in a calculation of $5,243.23, which, when rounded to the nearest $500, leaves the limit at $5,000 for 2012.The contribution limit for 2013 is likely to be $5,500 ó unless inflation is less than 0.13% this year. A TFSA is an important savings vehicle for individuals and families. Since 2009, Canadian residents 18 years of age or older have been able to contribute $5,000 in after-tax dollars annually to a TFSA. Although a contribution to a TFSA is not deductible for income tax purposes ó nor is interest on money borrowed to invest in a TFSA ó income generated in a TFSA can be withdrawn tax-free. As well, unused contribution room can be carried forward to later years, and withdrawals in a particular calendar year are added to the TFSA contribution room for the next calendar year. That means that a Canadian resident who has not opened a TFSA has $20,000 in unused contribution room come January 1, 2012. A TFSA is also "attribution-freeî because it is after-tax dollars, allowing you to make a contribution to a spouse's or child's account without having the gift attributed to you. However, it will not reduce your tax liability, the way a RRSP will. For many, then, the order of investing will be an RRSP up front to generate tax savings; then, assuming you have contribution room, you will leverage that tax refund into a TFSA. ADDITIONAL EDUCATIONAL RESOURCES: Reliable, Thoroughly Researched, Tax News You Need to Know: DAW IN JANUARY and EverGreen Explanatory Notes. ADDITIONAL EDUCATIONAL RESOURCES: Reliable, Thoroughly Researched, Tax News You Need to Know: DAW IN JANUARY and EverGreen Explanatory Notes.  

By Evelyn Jacks Finance Minister Jim Flaherty is asking Canadians for their views on how the upcoming federal budget should be structured to meet social and economic objectives. If you have an opinion on how to position Canada for economic and employment growth while reducing government spending ó all heady stuff ó go to the federal Department of Finance's new website at: online pre-budget consultations. The website's online polls asks four questions that all require a high level of financial literacy; a couple of them even require some knowledge of existing provisions. But don't let that stop you: what counts is what's left at the end of the day and your interests matter. The first consultation question, for example, focuses on Canadian businesses and asks whether there are any measures in the next phase of Canada's Economic Action Plan that should be revised, extended or shifted to promote job creation and economic growth? In my view, a few need extension, others should be added. For example, the federal budget should: Increase the restriction on claiming capital cost allowance (currently $30,000 plus taxes for "luxury vehiclesî). This could stimulate car sales while making the limit more reflective of market pricing. Increase write-offs of costs associated with setting up home workspaces and acquiring technology for those who have been downsized. Increase the tax-free withdrawal amount under the RRSP Lifelong Learning Plan to encourage entrepreneurs and their families to go back to school to get skills required to grow their businesses. Increase the tuition/education/textbook transferrable amount to supporting individuals from $5,000 to the full amount of unused credits. Extend the temporary Hiring Credit for Small Business. Extend the Targeted Initiative forOlder Workers to stay in the workforce. Extend the temporary accelerated capital cost allowance treatment for investment in manufacturing or processing machinery and equipment. It's your money, your life. Do you have any good ideas for stimulating the Canadian economy in a fragile world through our tax system? Have your say in the pre-budget consultation process. It could positively affect after-tax dollars in the future. Evelyn Jacks is President of Knowledge Bureau, author of Essential Tax Facts and co-author of Financial Recovery in a Fragile World available at http://www.knowledgebureau.com/Books.asp?tab=Titles  

Canada Revenue Agency holds tax evaders responsible for their actions and the consequences can be serious, as a Markham, Ont., taxpayer recently found out. Taxpayers who claim false expenses, credits or rebates are liable not only for correcting their tax returns and paying the full amount of tax owing, but also for penalties and interest. In addition, if convicted of tax evasion, offenders can be fined up to 200% of the tax evaded and sentenced up to five years in jail. That's exactly what happened to Brothers & Wright Electrical Services Inc. On November 11, the Markham firm pleaded guilty to one count of evading GST under the Excise Tax Act and one count of federal income tax evasion under the Income Tax Act. Brothers & Wright was fined $165,822, representing 200% of the total amount evaded, and given until November 30, 2012, to pay the fine (www.cra-arc.gc.ca/nwsrm/cnvctns/on/on111130-eng.html). As part of your yearend tax update it makes sense to file overdue tax returns voluntarily; that way you will avoid gross negligence and tax evasion penalties. If you have not filed previous years' tax returns or have not reported all income, if you have deducted expenses that aren't allowable or fraudently claimed refundable tax credits, you can voluntarily correct your tax affairs under the Voluntary Disclosures Program at http://www.cra-arc.gc.ca/gncy/nvstgtns/vdp-eng.html. The other option: speak to your tax professional immediately.   Additional Educational Resources: Distinguished Advisors Workshop January