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The Department of Finance tabled draft legislative proposals to implement the remaining tax measures this spring's budget, along with several previously announced tax initiatives on July 14. Students of courses in the Knowledge Bureau Tax Services Specialist, Certified Bookkeeping Specialist and Tax Efficient Retirement Income Specialist programs will find a detailed synopsis posted on their Net Tools site. In brief, the proposals released draft legislation as follows: Personal Tax Provisions Implementation of many of the Tax Free Savings Account rules S. 18(1)(u) prohibits the deduction of fees related to an TFSA S. 18(11) prohibits the deduction of interest on money borrowed to contribute to a TFSA S. 40(2)(g) extends the stop-loss rule that applies to transfers to an RRSP or RRIF at a loss to transfers to a TFSA S. 74.5(12) adds an exception to the attribution rules for assets transferred to a spouse or common-law partner if those assets are contributed to that spouse's TFSA (and are not excess contributions). S. 104.4(1)(j) is amended to allow for the tax-free transfer between TFSAs S. 115.1(5.3) allows a charitable donation credit in the year of death for a donation of an individual's TFSA via a direct designation to a charity S. 128.1 is amended to include TFSAs in the list of assets that are not deemed disposed of on emigration S. 138.1(7) is amended to ensure that amounts payable out of a segregated fund policies held within a TFSA are not subject to taxation. S. 146.2 sets out the basic rules for TFSAs S. 149(1) makes a trust governed by a TFSA non-taxable Part XI.01 imposes a penalty tax on excess TFSA contributions, non-qualifying and prohibited investments, and on contributions made to a TFSA while the individual is a non-resident. S. 207 also imposes taxes on excess TFSA contributions, non-qualifying and prohibited investments, and on contributions made to a TFSA while the individual is a non-resident and includes the definitions of those terms S. 207.06 also allows the minister to waive those taxes in such cases as reasonable error or when penalties are imposed under Part XI.01 and S. 207 Business Tax Provisions The sharing of Business Number-related information in connection with government programs and services by more government entities Adjustments to the scientific research and experimental development investment tax credit rules S. 37(1.4) provides that certain SR&ED expenditures made outside Canada will be treated as having been made in Canada according to the rules set out in S. 37(1.5) and S. 37(9)(b) S. 37(2)(a) is amended to ensure that those expenses being treated as having been made in Canada under S. 37(1.4) cannot also be deducted as a current expense by virtue of having been made outside Canada An enhanced carry-forward for investment tax credits; Changes to computations of "eligible dividends", and the dividend tax credit to reflect lower corporate income tax rates in the future; S. 82(1)(b) adjusts the gross-up of eligible dividends to 44% for 2010, 41% for 2011, and 38% for 2012 and later years S. 121(b) adjusts the dividend tax credit for eligible dividends from 11/18 which is applicable to 2008 and 2009 to 10/17 for 2010, 13/23 for 2011 and 6/11 for 2012 and later years The extension of capital gains and losses treatment on an acquisition of control of a corporation to gains and losses that result from fluctuations in foreign exchange rates in respect of debt denominated in foreign currency; A clarification of the application of the excess corporate holdings rules for private foundations; Revised draft amendments relating to the computation of income, gains and losses of a foreign affiliate; Revised draft regulations that modify the tax treatment of foreign affiliate active business income earned in a jurisdiction with which Canada has concluded a tax information exchange agreement. New rules for the conversion of specified investment flow through (SIFT) trusts (often referred to as "income trusts") into corporations. Draft amendments to take into account financial institution accounting changes; Other provisions of the February 26, 2008 Budget were tabled on March 14, were passed in the House and received Royal Assent on June 18. The significant income tax provisions in that document included the legislative details behind the following: Tax-Free Savings Account investment details to begin in 2009. Notably, Investment income earned within the account will not be taxed and withdrawals will be tax-free. Related provisions included limitation of interest deductions, the extension of stop loss rules on the disposition of capital to a TFSA, softening of the Attribution Rules for property invested to a spouse or common-law partner's TFSA or that of a trust and rules relating to life insurance policies issued as a TFSA. Clarification of rules for the deductibility of over-the-counter medical costs including insulin purchases Changes to RESP contribution limits and time frames New rules relating to the Registered Disability Savings Plans (RDSPs) The Guaranteed Income Supplement earnings exemption increase The Northern Residents Deduction, which was increased by 10%, effective for the 2008 tax year. Reduction of the Dividend Gross up and related dividend tax credit on eligible dividends over the years 2010 to 2012 Rules regarding the donation of eligible medical gifts for the purposes of charitable activities outside of Canada Rules regarding donations resulting from the transfer of money from a deceased individual's RRSP or RRIF or TFSA. Disposition of Taxable Canadian Properties to afford ìsafe harbour protectionî to purchasers of property from non-resident vendors, a fine-tuning of rules surrounding withholding requirements has been tabled Other rules relating to changes in residency New rules surrounding taxes payable by SIFTs New rules surrounding Investment Tax Credits (ITCs) Details on the deduction of SR&ED expenditures incurred outside Canada Gifts of certain exchanged interest in a partnership for publicly traded shares which are then donated to a qualified donee within 30 days of the exchange The remaining tax measures to be implemented from Budget 2008 include numerous changes relating to the application of the GST/HST. These include a number of amendments of GST and HST with respect to health care services, including training for individuals with autism and other disabilities, prescription drugs, medical devices and the treatment of long-term residential care facilities. More details to follow in next week's issue.
It's half time, and that's a good time to review the income requirements of the owner-manager you may be working for. How should you begin this process? Here are some tips to consider: First, in determining the optimum income plan, each individual family member's total income and type will be important. It is important to ensure that the family member has enough total income to utilize fully his or her personal credits, excluding those that can be transferred to other family members. These are discussed below. So, the total amount of income is important. The type of income is equally important. The payment of a reasonable salary, for example, will increase both net and taxable income. It will also normally attract CPP and (often) EI contributions, both of which give rise to additional personal credits and may increase the family member's Canada Employment Credit. A decision to pay additional salary must take these into account. Another key issue is the fact that a salary is earned income for purposes of creating RRSP contribution room. If it is desirable to allow family members to accumulate retirement income there may be a preference for paying a salary. Dividend income, on the other hand increases both net income and taxable income as well, but also provides the dividend tax credit. Issues that need to be taken into account in evaluating the payment of a dividend as compensation include: the taxable amount of the dividend is greater than the cash amount, so dividends have a greater effect on clawbacks than do salary, dollar for dollar; dividend income is not earned income and does not create RRSP contribution room; dividend income is investment income for purposes of computing the Cumulative Net Investment Loss account, and the receipt of a dividend may increase access to the capital gains deduction; dividends paid from a private corporation to a minor will normally attract the kiddie tax, meaning that they are taxed at the highest possible rate; because of the dividend tax credit, the tax treatment of the dividend must be modeled closely where the taxpayer has relatively low income and may be in danger of not utilizing all of his or her personal credits. For more information on owner-manager tax planning, take The Knowledge Bureau's certificate course entitled Tax Planning for Corporate Owner-Managers. Next Time: Pitfalls with Surplus Investments Held in Corporate Accounts
Meet the Erosion Twins, Inflation and Taxes. Inflation has been out of the country for a while; Taxes is a homebody. They have a voracious appetite, respectively, for capital and income, and they need your support. Take Inflation for example. He's a growing boy. A June 19, 2008 news release from Statistics Canada confirmed that consumer prices rose 2.2% in May compared with May 2007, up from the 1.7% increase reported in April. According to the release, the 0.5 percentage point acceleration in the all-items Consumer Price Index (CPI) was the sharpest since September 2007. The main culprit? Over the past year, crude oil prices almost doubled. As a result, gasoline prices increased substantially across the country, rising the most in Quebec and Ontario. Higher mortgage interest costs were also a contributing factor to the rise in consumer prices in May; however, new housing prices continued to exert more upward pressure on this index than mortgage interest rates themselves. Canadians paid 1.9% more in May for store-bought food items compared with the same month last year, up from the 0.9% increase posted in April. Those households with a sweet tooth were most heavily burdened: prices for bakery products increased 13.2%, the fastest 12-month rise since October 1981. Inflation and Taxes together are big dependants in any household. Consider this scenario, as computed by The Knowledge Bureau's Retirement Savings Planner, (you can try a free demo at www.knowledgebureau.com/evergreen) Savings: $1,000 invested each year for 30 years at an average 5% return $69,761 Taxes: What's left after an average effective tax rate of 30% per year $38,513 Inflation: What's left after an average inflation rate of 2% per year $29,497 The Erosion Twins have been expensive. . .together they've eaten $40,264 of savings in a generation!
By now, most Canadians have achieved tax freedom ó for tax year 2007, at least ó and are well on their way to working for themselves now. Think about it. .. You've come through the March 15 quarterly income tax instalment, the April 30 tax filing deadline, the June 15 instalment and small business filing deadline, your corporate tax filing deadline and property tax payment deadline too. You've even paid up all your GST instalments, not to mention renewals of provincial auto, property and health insurance! And, you've probably received your tax refund, or are about to. For most Canadians this is the most significant financial event of the year ó an average of $1400 according to a recent news release from CRA. Fortunately there are so many great ways to leverage those interest-free, tax eroded dollars with a multitude of new tax-assisted savings plans to invest your tax refund into . . . The RRSP contribution maximum has increased for 2008: save up to 18% of your earned income to a maximum of $111,111 or $20,000 this year, less your Pension Adjustment amounts. Check your Notice of Assessment to determine your exact RRSP contribution room. You can start saving now to sock away up to $5000 per family member each year in the new TFSA ó the Tax-Free Savings Account. Your eligibility to contribute to the plan, starting in 2009 depends on whether or not you have filed a tax return. . .so tell the delinquents in your family to do so quickly. You can invest more into your child's RESP ó Registered Education Savings Plan: there is no annual limit and the lifetime limit has increased, too, to $50,000 The new RDSP ó Registered Disability Savings Plan, which is expected to be available by at least some financial institutions will provide a government-assisted asset-back savings plan for the vulnerable in our society. . .a great way to get involved in community assistance even if there is no disabled person in your family. What's the bad news? Let's face it, governments are still in your pocket. . .you'll see it through various increasing user fees, like often cost-prohibitive provincial and federal park entrance passes, or fuel taxes which add to high vacation travel costs; and increasing fees on utilities needed to run home air conditioners or heat the family pool! It's all very expensive. . .enough to tempt some to take a little extra comfort nipping from that wine cellar. . .even if the taxes on alcohol consumption make that cost prohibitive, too! Oh well, try to enjoy your after-tax dollar in the summer sun. . .and multiply its effectiveness by taking advantage of all the tax assistance you can get, because the Erosion Twins. . .Taxes and Inflation, clearly have an increasing appetite for your money. Next Time: Meet the Erosion Twins
With tax freedom day behind us many Canadians start working for themselves and their communities in July. CRA has issued a new guide for charities: RC 206: Basic Guidelines for Maintainng Charitable Registration. In addition, many taxpayers are interested in speaking to their advisors on the subject well before the end of the year. Following is an excerpt from the Tax Efficient Retirement Income Planning Course, dealing with this issue: Facts on Canadian Philanthorpy 5.7 million Canadians contributed $6.9 billion to charitable organizations in 2006 Statistics Canada reported that the total market value of stock held by Canadians at the end of 2006 was $1.4 trillion, an increase of $100 billion over the previous year Approximately one-half of that market value represents unrealized capital gains, suggesting that the opportunity for many shareholders to donate stock and save tax is very significant TD Economics estimates that the market value of stock held by Canadians in 10 years time could exceed $3 trillion, with as much as two-thirds of that in unrealized gains (tdeconomics.com). Demographic Trends Potential for philanthropy is immense: In Canada, between $15 and $20 trillion is expected to shift from parents to their children between now and middle of the century Baby boom generation is having significant impact on the world of charitable giving: not content to simply write a cheque and move on, donors expect transparency and accountability - they want to be involved. Many charities are revisiting the way they operate in order to attract these younger philanthropists General Rules At some point during the year many Canadians give to charities. Those gifts, usually of money, will be claimed on schedule 9 of the tax return. Unclaimed donations from the previous five years may also be claimed in the current year. Donations made through payroll deductions should also be claimed. These will show on the T4 slip. Generally you can claim all or part of your total donations, up to a limit of 75 percent of your net income reported on line 236. For the year a person dies and the year immediately prior year, this limit is 100 percent of the person's net income. It is generally most beneficial to claim donations made by both spouses together on one tax return. This is because the first $200 of donations is eligible for only a 15 percent tax credit, while any additional donations attract a tax credit of 29 percent. Combining donations will ensure the couple is subjected to the 15 percent limit on the first $200 only once, not twice. Donations made during the year do not have to be claimed on that years' return and may be carried forward to a subsequent year, up to five years. This may be of benefit, if, for example, you already have sufficient non-refundable tax credits to completely eliminate taxes payable. Only donations made to Canadian registered charities and other qualified donees may be claimed. A registered charity will show its charity registration number on the receipt. The slip must also indicate the Web address of the CRA. Click for more information and to registered in the Retirement Income Specialist program.