Before diving into this month’s article on the 2015 Federal Budget, I wanted to pass along some other news that I hope helps the cause. First, for those of you who haven’t already got the memo, the wholesale changes to life insurance and annuity taxation originally scheduled for 2016 won’t be effective until 2017. For those of you considering permanent life insurance or those retirees considering buying an annuity with non-registered loot, this gives you one extra year to take the plunge, as products purchased before the impending changes will continue to benefit from today’s rules. There are also a couple rather clever investment strategies using specially designed universal life insurance policies that won’t be nearly as attractive in the future. Single Pay policies that allow you to shelter a lifetime’s worth of tax and potentially creditor-sheltered payments will no longer offered. In addition, multiple life policies that insure several generations at the same time while also sheltering additional investment dollars will no longer be able to pay out the entire investment account tax-free at the first death unless the policy is in place before the deadline.
On a completely unrelated note, I want to pass along an article written by my friend Peter Temple, who helps people struggling with debt get out from under it and get a fresh start. This article is particularly useful for young adults just trying to make their way in the world or anyone emerging from bankruptcy or with a history of late / missed loan payments: http://ht.ly/MHj61 If you do know anybody still struggling with debt, get them to give Peter a call.
Finally, I’m pleased to announce that I’ve been invited to speak at a Canadian Moneysaver event in Toronto in late October. I’ll post more details as they become available. In the meantime, if you haven’t checked out this mag yet, then no time like the present: http://www.canadianmoneysaver.ca/
Budget 2015 – The Down and Dirty
I’m almost embarrassed to say that I actually enjoy Budget Day more than Christmas. That is not to say that I think Christmas sucks; it’s just that budget day can potentially offer gifts to both me and my clients that probably won’t break or go out of fashion 6 months later. Even better, after the big day, I get to play with these gifts in order to determine who will benefit the most from the tax changes and the best ways to take advantage. Although there are often a few lumps of coal mixed in with the candy canes (such as the tax changes to testamentary trusts the other year), there are a least a few positives most years. This year is no exception. In no particular order, here are this year’s highlights:
- TFSA limits increase from $5,500 to $10,000. Although the budget has not been enacted yet and the Liberals have pledged to undo the bulk of this year’s tax changes should they win this fall’s election, the CRA has indicated that taxpayers are free to top up their TFSAs immediately. This means someone who had already maxed out contributions can pop in an extra $4,500. Accordingly, even this change soon becomes a fleeting memory, I suggest making hay while the sun shines if funds permit. You may even want to top up your spouse’s account as well or perhaps even your children’s if you’ve been either advancing their inheritance early or taking advantage of their room for your investments until they have their own money to contribute. The one downside to this change is that each year’s new contribution room will be frozen at $10,000 unless a future government increases the limit or indexes it to inflation, which had been the case under the old rules.
- RRIF Withdrawal Requirements have decreased significantly. It has been over 20 years since the government had tweaked the table to determine the minimum amount that had to be withdrawn from a RRIF each year. Although life expectancies have probably changed for the better since then, average investment returns have definitely taken a turn for the worse. In other words, RRIFs were shrinking faster than expected while the money inside them had to fund a longer retirement than initially anticipated.I’ve attached a link to the new withdrawal schedule: http://www.taxtips.ca/rrsp/rrif-minimum-withdrawal-factors.htm To recap, the senior must withdraw a set percentage of the January 1 value of his or her RRIF each year (or that of his spouse if this was the age selected when the RRIF was set up). Under the existing rules, a senior aged 71 on January first must withdraw 7.38% of the fund value that year. The new rules would lower that to 5.26% and wouldn’t reach 7.38% again until 11 years later. This means that per $100,00 inside the RRIF, each senior aged 71 now gets to delay paying the piper if they so choose and continue to shelter an additional $2,000 of RRIF income this year.As an added benefit, these changes might keep some seniors from paying tax in a higher tax bracket if they decide to only with withdraw the minimum and may even save them some OAS pension dollars as well, since this income-related pension starts getting clawed back at $.15 on the dollar once their taxable income reaches about $73,000. The potential downside may be a higher tax bill at death, although I vastly prefer this scenario to the prospect of subsiding on Hamburger Helper during my so-called Golden Years if my RRIF runs out early. Ultimately, while decreasing the minimum withdrawal is a good thing, it’s still important to carefully strategize how much you should withdraw each year from a financial planning perspective. Just because you can keep more inside your RRIF doesn’t mean that this is always a good idea.Finally, this change applies for the 2015 tax year, which means that you may be able recontribute some money to your RRIF by the end of February if you only withdrew the minimum and don’t even need that much. On another note, since institutions holding your RRIFs don’t have to hold back any of the minimum withdrawal amount for income tax purposes, a lower RRIF minimum will mean more tax will be withheld on your RRIF withdrawals in the future than at present if you withdraw more than the minimum. Essentially, this might mean that you are prepaying more of that year’s tax bill or setting yourself up for a higher tax refund.
- Upcoming Small Business Tax Cuts. Over the next 5 years, the tax rates for small incorporated businesses on their first $500,000 of income will gradually decline by a total of 2% in .5% incremental. As the dividend tax credit for small business dividends is also based on this rate, this credit will also decline. Ultimately, this most benefits business reinvesting money back into themselves or those that purchase investments inside their operating or holding company. It shouldn’t marginally affect businesses that dividend out most of their income earned each year but, since dividend tax credit for small business dividends will also decline, this will slightly penalize businesses that have already banked up earnings inside the company during years when small business income was taxed at a higher rate; although they will have paid more tax on the original business income inside the company in the first place, they won’t get as much tax relief as they enjoy at present when paying some of those profits out as dividends.
- Increase in the Lifetime Capital Gains Exemption to $1,000,000 . . . but only for farmers and fisherman. In other words, business owners won’t benefit from this change. Moreover, the bumped-up exemption to farmers and fishers isn’t as significant as it sounds. It was already at $813,600 and that amount was indexed. The $1,000,000 is not, which means that it will stay at $1,000,000 until the indexed exemption rate for small businesses ($813,600 in 2015) eventually catches up, at which time the rate for farmers and fishers will be indexed accordingly.
- More tax relief when donating land or private company share sale proceeds to charity. Over the last several years, donors contributing shares in publically traded securities (i.e. mutual funds, stocks and bonds) got a double benefit when donating the assets directly rather than merely donating cash: they could claim a tax credit equal to the security’s value when donated and the government also ignored any unrealized capital gains tax owing on the donated security. In extreme cases, such as when donating shares that were exclusively capital gains, the donor would only really be out of pocket less than 35% of the value donated when including both the charitable tax credit and capital gains avoided. This opportunity to benefit twice has now been extended to people who sell either land or private company shares and donate cash within 90 days. As you might expect, there are some safeguards in place to avoid potential abuse of this new provision.
- Disabled seniors 6% and older renovating their homes may get a tax credit on their first $10,000 of qualifying renos designed to make their homes more accessible. In dollars and cents, this translates into as much as $1,500 of tax relief.
- The family tax cut announced last year has been modified so that families can best use other education-related tax credits to maximize their savings. In broad strokes, a couple with children under 18 can notionally show up to $50,000 of the higher income spouse’s income on the lower income spouse’s return so it’s taxed at a lower rate. Ultimately, as is often the case with government credits, the result might not be quite as breathtaking as one might imagine at first glance: the maximum amount any family can save through this credit tops out at $2,000. Moreover, even though the $50,000 may have been notionally taxed at the lower spouse’s rates, the money still belongs to the higher income spouse. This means that if the money is invested, gains would be taxed in the hands of the spouse with the big bucks rather than the spouse with the big heart. Seniors are eligible for this benefit but only if they don’t elect to split pension income.
- There are some other smaller benefits as well, such as expanding compassionate care leave when tending to gravely ill family members from 6 weeks to 6 months and giving family members another 2 years to set up Registered Disability Pension Plans for a relative, after which the disabled person must do so directly or through a court-appointed representative. Ultimately, the plan is eventually for a family member to get appointed by a court to represent the disabled person when necessary and then have this representative set the plan up in the disabled person’s name.
As you might expect in an election year when the economy isn’t in an utter state of shambles, this year’s budget offered something for almost everyone, just like Christmas. On the hand, since there is an election this fall and probably a new budget if the Conservatives are defeated, which could mean a second Federal Budget in 2015. Who said Christmas only comes once a year?