Tax Planning Highlights

Personal Tax Changes

Tax-Free Savings Account
A Tax-Free Savings Account (TFSA) is a registered account in which investment earning, including capital gains accumulate tax free.

Starting in 2009, taxpayers over the age of 17 may contribute up to $5,000 each year to such an account. If a taxpayer's contribution room is not used in one year it may be carried forward to the next year allowing for a larger contribution in that year. In some ways the TSFA is similar to an RRSP and in a lot of ways it is not. Contribution room in TFSA does not depend on "earned income" but is a flat $5,000 per year. Unlike the RRSP, contributions to a TSFA do not result in an income tax deduction and withdrawals from a TFSA are not reported as income nor be included in income for any income-tested benefits, such as the Canada Child Tax Benefit or Goods and Services Tax Credit.

The CRA will establish contribution room for all taxpayers on the basis of income tax returns filed. Taxpayers who do not file for a number of years may establish their contribution room by filing those returns.

Withdrawals
The proposed TFSA will be flexible in that when a taxpayer withdraws funds from a TFSA, those withdrawals will be added to the taxpayer's contribution room in the following year thereby allowing full access to the funds in the account with no penalty for withdrawal. However, like the RRSP, excess contributions will be subject to a 1% per month penalty tax.

TFSA Investments
The same rule for eligibility of investments within an RRSP will apply to investment within an TFSA. The budget proposes to implement additional rules to prohibit a TFSA from making investment in any entity with which the account holder does not deal at arm's length.

Like RRSPs, the cost of borrowing to invest in a TFSA are not deductible.

Attribution
The attribution rules will not apply to income earned within an TFSA so taxpayers may freely contribute funds to allow their spouses to take advantage of their TFSA contribution room.

Death
Upon death of the TFSA holder, the funds within the account may be rolled over into their spouse's TFSA or they may be withdrawn tax-free. Any amounts earned within a TSFA after the death of the taxpayer are taxable to the estate.

Other Transfers
Upon breakdown of a marriage or common-law partnership, the funds from one party's TFSA may be transferred tax-free to the other party's TFSA. This will have no effect on the contribution room of either of the parties.

Leaving Canada
Upon leaving Canada, a taxpayer may continue to hold a TFSA, however, no additional contribution room will be earned and no additional contributions may be made to the TFSA while the taxpayer remains a non-resident.

Other Proposals

Registered Education Savings Plans
The budget proposed to extend the period of contribution for RESPs by 10 years, beginning in 2008. For most beneficiaries, the current limit of 21 years will be extended to 31 years. For beneficiaries eligible for the Disability Tax Credit, the 25-year contribution period will be increased to 35 years.

Likewise the deadline for termination of the plan will be extended by 10 years - from the 25th anniversary of the plan to the 35th for most plans and from the 30th anniversary to the 40th anniversary for plans where the beneficiary is eligible for the Disability Tax Credit. The age limit for beneciaries will also increase from 21 years to 31 years.

The budget also proposes that beneficiaries under an RESP be allowed to receive of Educational Assistance Payments for up to six months after ceasing enrolment in a qualifying educational program.

Northern Residents Deduction
The current rates of $7.50 and $15.00 per day is increased to $8.25 and $16.50 per day for 2008 and subsequent years.

Medical Expenses
The maximum reduction in medical expense claim as a result of the 3% reduction will be increased from $1,926 to $1,962 for 2008.

Medical expenses previously allowed only to taxpayers who are blind, deaf or have a marked restriction to the use of their arms or legs are extended to those with severe autism or epilepsy.

Such expenses include

  • the cost of acquiring, caring for and maintaining an animal to assist the taxpayer
  • travel, board and lodging expenses for attending a school or other facility for training in the use and handling of such animals.

Additional medical deductions for 2008 and subsequent years:

  • altered auditory feedback devices for those with speech impairments
  • electrotherapy devices designed to be used by a person with a medical condition or a severe mobility impairment
  • standing devices designed for those with a severe mobility impairment to undertake standing therapy
  • pressure pulse therapy devices designed for use by those with balance disorders

Registered Disability Savings Plans
Minor adjustments to the proposed RDSP plans were announced. The plan is still to make RDSPs available sometime in 2008.

Mineral Exploration Tax Credit
The current Mineral Exploration Tax Credit, which was first introduced in 2000 will be extended to flow-through share agreements entered into on or before March 31, 2009.

Donation of Securities
The budget proposes to extend the current capital gains exemption on the donation of publicly-traded securities to include capital gains on the exchange of unlisted securities for publicly traded securities that are donated within 30 days of the exchange. This exemption will apply to donation made on or after February 26, 2008.

Dividend Gross-Up and Dividend Tax Credit
As a result of proposed reductions in the corporate tax rate, the treatment of eligible dividends will be adjusted starting in 2009 with the adjustments being finalized in 2012. The following table shows the proposed adjustments: