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A thorough analysis of today’s financial news—delivered weekly to your inbox or via social media. As part of Knowledge Bureau’s interactive network, the Report covers current issues on the tax and financial services landscape and provides a wide range of professional benefits, including access to peer-to-peer blogs, opinion polls, online lessons, and vital industry information from Canada’s only multi-disciplinary financial educator.

This Week’s Edition of KBR:

June Poll

The CRA recently signed a secret settlement with wealthy KPMG clients involved in an offshore tax scheme.  Do you agree with this?

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Year End Planning for the Financial Crisis

The global financial crisis, which is of significant concern to investors and retirees in planning the right outcomes before the end of 2008, must also be considered by executors dealing with the financial consequences at death for Canada's aging demographic. The opportunity to add value as an informed executor of the estate of grandparents, parents, and siblings is both an honour and a large responsibility that can be extremely costly when the correct tax consequences are missed. Evelyn Jacks and a detailed workshop on planning with trusts with John Poyser. Tax and financial advisors who want to be up to speed on the latest information to maximize tax savings on personal transitions, will want to participate November 14 to 21 in Winnipeg, Toronto, Calgary, Vancouver and Edmonton. "Practical education on year end planning for families and individual investors in this critical time will be discussed in detail," says Evelyn Jacks, President and Founder of The Knowledge Bureau. "However, we also are very pleased to review the astute preparation of the final return of those who pass away this year, in conjunction with various trust structures available. We believe this is of particular relevance in light of the significant financial turbulence we are experiencing today." John Poyser, LL.B. from the firm Inkster, Christie, Hughes and Knowledge Bureau Faculty Member, will host a detailed discussion on that subject. Did you know, for example, that when a person passes away and their estate passes, in whole or in part, to a spouse or spouse trust, it is possible to "harvest capital losses?" John will show that is achieved by opting out of the rollover available under subsection 70(6) on an asset by asset basis. To the extent that assets might have a pent up capital gain and certain other assets might have pent up capital losses, the executors can trigger gains and losses on a targeted basis to cross-cancel them in the deceased's income tax return rather than carrying them forward into the estate where they might not be effectively used. Advisors and the executors they work with, must also be aware of rules relating to qualified farm property and qualifying small business corporations, where a capital gains exemption is available. Depending on the terms of the trust, the designation does not have to be made evenly or equally among a collection of beneficiaries, but can be made in a way where the gains are allocated to the beneficiaries who have the most opportunity to take advantage of it, and other forms of income are allocated to other beneficiaries. Early registration for The November Year End Tax Planning Workshops ends October 31. To register call 1-866-953-4769 or enrol online. Dates, cities and venues appear below:   Date City Venue November 14 Winnipeg The Manitoba Club Register Now November 17 Toronto East Crowne Plaza Don Valley Register Now November 18 Toronto West Crowne Plaza Hotel Toronto Airport Register Now November 19 Calgary Carriage House Inn Register Now November 20 Vancouver Terminal City Club Register Now November 21 Edmonton Four Points by Sheraton Edmonton South Register Now Click here for more details.

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Your Questions re Tax-Free Savings Accounts (TFSA)

As January 2009 is fast approaching, Tax-Free Savings accounts are often seen in the headlines or being advertised at your local bank. The new Tax-Free Savings Account (TFSA) is a registered account in which investment earning, including capital gains accumulate tax free. 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. 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. Some common questions regarding TFSAs are as follows: Q: Can a corporation hold a Tax Free Savings Account (TFSA)? A: Legislation provides that an individual (other than a trust) who is resident in Canada and 18 years of age or older would be eligible to establish a TFSA.  S. 248 of the Income Tax Act defines an individual as a person other than a corporation.  Thus, a corporation is not be eligible to establish a TFSA.   Q: What slips are associated with a TFSA? A: At this time the only form that has been provided for a TFSA is Form RC236 Application for a TFSA (Tax-Free Savings Account) Identification Number.  This form is for use by the issuers of a TFSA.  No forms have been announced for use by individuals. CRA has announced that it will provide taxpayers the amount of the available TFSA contribution room each year on their Notice of Assessment, based on information provided by the issuers of the TFSA.  CRA has also indicated that taxpayers will have to file returns in order to establish their contribution room. In addition, the CRA has provided details of the information that TFSA issuers must provide each year.  These details include: Name, date of birth, and Social Insurance Number of plan holder, TFSA Account Number, Details of each contribution, withdrawal, transfer in, and transfer out, Fair Market Value of the plan at December 31 of the taxation year. The deadline for the issuers to file their TFSA returns is 60 days after the end of the taxation year. Given that contributions are not deductible and withdrawals are not taxable, it may well be that there will be no reporting requirements by the individual plan holder.  However, CRA has not made its intention clear in this respect.  CRA has confirmed that there will not be a prescribed form for transfer of TFSA amounts between financial institutions. Q: Can a Flow-Through Limited Partnership be held within an RRSP? Within a TFSA? A: The same rules apply to an RRSP and TFSA.  There are no specific restrictions in the Income Tax Act for flow-through shares or limited partnerships that invest in flow-through shares from being held within an RRSP or TFSA, so long as they are listed on a prescribed stock exchange in Canada.  Typically, flow-through shares will not be publicly traded during the first 18-24 months and will then be rolled over into a mutual fund that is publicly traded.  During the period that the flow-through shares are not publicly traded, they are not eligible RRSP or TFSA investments. Caution should also be exercised when considering flow-through shares (or limited partnerships that invest in flow-through shares) in either an RRSP or a TFSA.  Since neither an RRSP nor a TFSA can benefit from the flow-through expenses, it may not make sense to purchase the flow-through shares in an RRSP or TFSA.  Investors may consider whether it is a good idea to transfer those shares or partnership units into their RRSP or TFSA after they have deducted the flow-through deductions.  If the shares are traded on a prescribed exchange, such a transfer will result in a deemed disposition for income tax purposes at the fair market value (FMV) of the shares.  The adjusted cost base of the shares will be zero so the entire FMV of the shares will be reported as a capital gain. If the shares or units increase in value the capital gain within the TFSA will be tax-free.  If they decrease in value, then the loss will not be deductible.  Given the tax-preferred treatment of capital gains, investors should consider whether a registered account is really the best place to hold such investments.  On the other hand if the investor feels that the investment will yield fully-taxable income, then the tax-free status of the TFSA or tax-deferred status of the RRSP may be beneficial.

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What is an Eligible Dependant?

For many Canadians, the filing of a personal income tax return is the most significant financial transaction of the year. In order the get the biggest bang for your buck when filing your personal tax return in 2009, it is important to know the various non-refundable tax credits that are available to you. In the October 30, 2007 Economic Statement, the minister announced changes to the basic personal amount, the amount for spouse or common-law partner and the amount for an eligible dependant. For 2007 and 2008, these amounts are set at $9,600. For 2009, these amounts are set at $10,100. The income threshold at which these amounts are reduced is set at zero. Definitions S. 118(1)(b) provides that a taxpayer who did not claim the Spouse or Common-law Partner Amount was not married or living common law or was married or living common law but did not live with a spouse or common-law partner and did not support or was not supported by a spouse or common-law partner and who supports and lives with a dependant in a home which the taxpayer maintains, may claim a specified amount for that dependant as a non-refundable tax credit against taxes payable. This credit was previously referred to as the "equivalent-to-spouse" credit, and is typically claimed by a single parent with whom a dependent child resides. Specified Amount The amount is identical to the Spouse or Common-Law Partner Amount. The claim is reduced by the dependant's net income for the year. The amounts prescribed in the Income Tax Act are indexed annually under S. 117.1 to reflect changes in the average consumer price index. However, these amounts have been set at $9,600 for 2007 and 2008 and at $10,100 for 2009. Filing Requirements Use Schedule 5 Details of Dependant to list the dependant and the claim being made; calculate the amount on the Federal Worksheet; and claim the amount on line 305 of Schedule 1 Federal Tax. Qualifying Dependants To qualify, the dependant must be a child, grandchild, brother, or sister of the taxpayerby blood, marriage, common-law partnership, or adoption, the taxpayer's parent or grandparent by blood, marriage, common-law partnership, or adoption or either under 18 years of age or wholly dependent on the taxpayer because of mental or physical infirmity. These qualifications need not be met throughout the year but must be met at some time during the year. S. 118(4) contains the following rules that apply to claiming the amount for an eligible dependant: S. 118(4)(a) - only one person can claim the Amount for Eligible Dependants in respect of the same dependant S. 118(4)(a.1) - no one may claim the Amount for Eligible Dependants if someone else is claiming the Amount for Spouse or Common-law Partner for that dependant S. 118(4)(b) - only one claim may be made for the Amount for Eligible Dependants for the same home. Where more than one taxpayer qualifies to make the claim, the taxpayers must agree who will make the claim or no one will be allowed to. S. 118(4)(c) - if a claim for the Amount for Eligible Dependants is made in respect of a dependant, no one may claim the Amount for Infirm Dependants or the Caregiver Amount in respect of the same dependant. In addition, S. 118(5) provides that no amount may be claimed by a person who is required to pay support to a spouse or common-law partner, or former spouse of common-law partner with respect to the person for whom the claim would be made. This provision applies where either the person lives separate and apart from the former spouse, or claims a deduction for spousal support. Example: Amount for an Eligible Dependant Issue: John and Joan separated during the year. They have two minor children, Jessie and Julie, who live two weeks a month with Joan and two weeks a month with John. Under federal guidelines, John is required to make monthly payments to Joan for the maintenance of the children. John and Joan agree that she will claim Jessie as a dependant and that John will claim Julie. Will this work? Answer: It will not. Joan is entitled to claim a credit for either Jessie or Julie as an eligible dependant, as she is married but not living with John, and she supports both children in the home she maintains. John also meets these tests, but he is required to make child maintenance payments to Joan and is therefore not eligible to claim the credit. Definition of Infirmity The term "infirm" is not defined in the Income Tax Act and CRA takes the position that the term takes on its ordinary meaning (see Appendix A of IT 513). The only guidance given is that the degree of the infirmity must be such that it requires the person to be dependent on the individual for a considerable period of time. Temporary illness is not classed as infirmity. Infirmity is not the same as disability. Death of a Taxpayer In the year of death, the Amount for Eligible Dependants may be claimed in full on the final return and on any of the optional returns filed for the deceased. Part-year Residents Part-year residents must pro-rate the Amount for Eligible Dependants under S. 118.91 according to the number of days they are resident in Canada divided by the number of days in the taxation year. Bankruptcy Where an individual becomes bankrupt in the year, the Amount for Eligible Dependants on the pre- and post-bankruptcy returns must be pro-rated according to the number of days in each period. Non-Residents Deemed residents may claim the Amount for Eligible Dependants. Non-residents filing under S. 217 may be eligible for some or all of the amount. Other non-residents filing under S. 216 or S. 216.1 may not claim the Amount for Eligible Dependants.   Subscribe to EverGreen Explanatory Notes for more information. Or attend The Knowledge Bureau's November Year End Tax Planning Workshop coming to a city near you November 14 to 21.

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Special Report: Extension of Private Pension Plan Funding

The status of federally regulated private pension plans has been a point of discussion for many people, as the large drop in equity markets has caused major funding deficiencies. Under current rules, the decline in market values would require many of the pension fund sponsors to make large contributions to these funds and this requirement could endanger the economic viability of those firms leading to job loss, or worse, bankruptcy. In a recent editorial in this publication, the problems faced by organizations who cannot meet pension funding requirements was discussed. The majority of Canadians are rightly concerned about the current market conditions and how this will impact their financial futures, in particular as it relates to their jobs, and the stability of their retirement savings. In light of these concerns, the Federal Government has proposed to extend the solvency funding payment schedule to 10 years from the current time, for solvency deficiencies determined as of December 31, 2008. These extensions will be subject to certain conditions: both members and retirees would need to agree to the extended schedule alternatively, the difference between the 5- and 10-year payment schedule would need to be secured by a letter of credit. Either one of these two conditions would need to be met by December 31, 2009 for the extension to be granted. If neither were secured by the end of 2009, the plan would be required to fund the deficiency over the following 5 years. Note that the structure and requirements for solvency funding will be the subject of consultations in 2009 for the purpose of reviewing the Pension Benefits Standards Act, 1985 and the changes required to the funding framework required by law to address the issues facing defined benefit and defined contribution pensions. FOR THE MOST UP-TO-DATE FISCAL AND TAX NEWS AFFECTING CANADIANS AND THEIR ADVISORS ENROL IN EVERGREEN EXPLANATORY NOTES.

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Special Report: Economic and Fiscal Outlook Statistics

Budget surpluses will disappear, real GDP growth will stagnate but then recover nicely by 2010 and both inflation and interest rates will drop in 2009 according to this economic update. The Canadian dollar is expected to recover to exceed its 2008 level as well, by 2011. In fact, the private sector forecasts, shown below are indicative of a full recovery in a couple of years, as per the chart below. That's significantly good news. Average Private Sector Forecasts: November 27, 2008 Economic Statement, Canada Average 2008 2009 2010 2011ñ13 (per cent, unless otherwise indicated) Real GDP growth February 2008 budget 1.7 2.4 2.9 2.6 November 2008 Economic and Fiscal Statement 0.6 0.3 2.6 2.9 GDP inflation February 2008 budget 1.8 1.9 1.8 1.6 November 2008 Economic and Fiscal Statement 3.8 0.5 1.8 2.2 Nominal GDP growth February 2008 budget 3.5 4.3 4.7 4.2 November 2008 Economic and Fiscal Statement 4.4 0.8 4.4 5.1 Nominal GDP level (billions of dollars) February 2008 budget1 1,590 1,659 1,738 1,890 November 2008 Economic and Fiscal Statement 1,603 1,615 1,687 1,870 3-month treasury bill rate February 2008 budget 3.2 3.8 4.5 4.5 November 2008 Economic and Fiscal Statement 2.4 1.9 2.7 4.2 10-year government bond rate February 2008 budget 3.6 4.2 4.8 5.0 November 2008 Economic and Fiscal Statement 3.7 3.7 4.2 5.0 Consumer Price Index (CPI) inflation February 2008 budget 1.5 1.9 2.0 2.1 November 2008 Economic and Fiscal Statement 2.6 1.7 1.9 2.1 Oil price level (US dollars per barrel) February 2008 budget 82.1 79.8 82.3 77.5 November 2008 Economic and Fiscal Statement 102.5 72.0 79.0 91.1 Exchange rate (US cents/C$) February 2008 budget 98.0 95.5 95.5 96.2 November 2008 Economic and Fiscal Statement 94.9 85.6 88.7 95.8 Unemployment rate February 2008 budget 6.3 6.4 6.2 6.0 November 2008 Economic and Fiscal Statement 6.1 6.9 6.7 6.2 U.S. real GDP growth February 2008 budget 1.5 2.4 3.0 2.7 November 2008 Economic and Fiscal Statement 1.4 -0.4 2.1 3.0 1 Nominal GDP levels have been adjusted to reflect 2008 revisions to Canada's National Income and Expenditure Accounts.Source: Department of Finance survey of private sector forecasters. Risks and Uncertainties The government reports that since the February 26, 2008 Federal Budget, revised projects have reduced revenues and certain expenses. These figures provide an important glimpse at the fallout expected from the financial crisis. Revenues are now projected to be $3.2 billion lower in 2008ñ09 and $8.9billion lower in 2009ñ10, citing the following reasons: ìThe downward revisions reflect both the weaker-than-expected 2007ñ08 results and the weaker economic outlook. The downward revisions in 2008ñ09 are driven by revisions to the corporate income tax forecast. For 2009ñ10, all major revenue streams have been revised down, reflecting the weaker economic outlook.î On the good news side, total program expenses are also expected to be lower in 2008ñ09 than projected in Budget 2008, largely as a result of lower-than-expected direct program expenses. However, in 2009ñ10, program expenses are higher than projected as it is anticipated there will be increased Employment Insurance costsóindicating more job losses are to comeóand elderly benefits. Equalization costs to provinces will also be higher than projected in the budget. Revenue Outlook as per the November 27, 2008 Economic Statement: Actual Projection 2007ñ2008 2008ñ2009 2009ñ2010 2010ñ2011 2011ñ2012 2012ñ2013 2013ñ2014 (millions of dollars) Tax revenues Income tax Personal income tax 113,063 118,685 121,460 127,365 135,445 143,290 151,330 Corporate income tax 40,628 34,080 33,090 35,390 35,750 36,765 38,950 Other income tax 5,693 5,815 5,525 6,015 6,220 6,510 6,860 Total income tax 159,384 158,580 160,070 168,770 177,410 186,560 197,145 Excise taxes/duties Goods and services tax 29,920 26,840 27,640 29,060 30,485 31,895 33,465 Customs import duties 3,903 4,200 4,355 4,640 4,940 5,240 5,530 Other excise taxes/duties 10,384 10,770 10,520 10,230 10,095 10,285 10,225 Total excise taxes/duties 44,207 41,815 42,520 43,930 45,520 47,420 49,220 Total tax revenues 203,591 200,395 202,590 212,700 222,930 233,980 246,365 Employment Insurance premium revenues 16,558 16,500 17,350 17,675 17,670 18,110 18,690 Other revenues 22,271 22,135 28,550 28,525 30,340 31,840 32,205 Total budgetary revenues 242,420 239,030 248,490 258,895 270,940 283,930 297,260 Per cent of GDP Personal income tax 7.4 7.4 7.5 7.5 7.6 7.7 7.7 Corporate income tax 2.6 2.1 2.0 2.1 2.0 2.0 2.0 Goods and services tax 1.9 1.7 1.7 1.7 1.7 1.7 1.7 Total tax revenues 13.3 12.5 12.5 12.6 12.5 12.5 12.6 Employment Insurance premium revenues 1.1 1.0 1.1 1.0 1.0 1.0 1.0 Other revenues 1.5 1.4 1.8 1.7 1.7 1.7 1.6 Total 15.8 14.9 15.4 15.3 15.2 15.2 15.2 Total absent Insured Mortgage Purchase Program 15.8 14.9 15.2 15.2 15.1 15.0 15.0 Note: Totals may not add due to rounding. The revised fiscal outlook confirms the disappearance of budgetary surpluses: Summary of Changes in the Fiscal Outlook Since the February 2008 Budget Actual Projection 2007ñ08 2008ñ09 2009ñ10 (billions of dollars) February 2008 budget underlying surplus 10.2 2.3 1.3 Impact of economic and fiscal developments Budgetary revenues Personal income tax 0.5 0.3 -4.0 Corporate income tax -1.8 -2.8 -3.5 Other income tax -0.2 -0.1 -0.6 Goods and services tax -0.8 -0.7 -1.2 Other revenues 0.1 0.0 0.4 Total revenues -2.1 -3.2 -8.9 Program expenses1 Major transfers to persons 0.1 -0.4 -1.2 Major transfers to other levels of government2 -0.4 -0.1 -0.4 Direct program expenses 2.0 1.3 0.4 Total program expenses 1.7 0.9 -1.1 Public debt charges -0.2 0.2 2.8 Total economic and fiscal developments -0.6 -2.1 -7.2 Impact of actions in this Statement 0.6 6.0 Revised surplus 9.6 0.8 0.1 Note: Totals may not add due to rounding.1 A positive number implies a decrease in spending and an improvement in the budgetary balance. A negative number implies an increase in spending and a deterioration in the budgetary balance.2 Includes putting Equalization on a sustainable growth path.

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