Finance Minister Joe Oliver welcomed the Royal Assent of the Economic Action Plan 2015 on June 24th. Specific budget elements will affect Canadians’ personal finances, individual investments and small businesses. Tax-Free Savings Accounts and RRIF minimum withdrawls top the list of changes.
It is important to review these changes with our team of professionals who will evaluate how they can impact your long-term planning. For instance, although RRIF minimums are changed, it still may be advisable to take out more than the minimum if your marginal tax bracket is low. For others, reducing the minimum payments will allow more Old Age Security to be received. On tax-free accounts, repositioning non-registered assets to TFSAs would shelter future gains from tax. However, it is important to assess the tax consequences of doing so and it may be advisable to spread taxes over a number of years, depending on marginal tax rates.
Below are some budget highlights. As always, our team is here to help evaluate if any of these changes affect your long-term planning. Don’t hesitate to contact our office and we will review your plan.
The TFSA annual contribution limit is increased to $10,000 for 2015 and for subsequent years. It is important to note that there will no longer be any indexing to inflation in the future. What does this mean to you? If you contributed your limit for each year, including this year before the increase, your total contribution to date would be $36,500. You are able to top up your TFSA for this year by $4,500, making the total allowable contribution limit to date $41,000.
The existing RRIF factors were determined on the basis of providing a regular stream of payments from age 71 to 100, assuming a 7% nominal rate of return on RRIF assets and indexing at 1% annually.
Budget 2015 adjusts the RRIF minimum withdrawal factors that apply in respect of ages 71 to 94, on the basis of a 5% nominal rate of return and 2% indexing.
There is no change to the minimum withdrawal factors that apply in respect of ages 70 and under, which will continue to be determined by the formula 1/(90 – age).
The new RRIF factors apply for 2015 and subsequent taxation years. We are verifying what the process will be for 2015 but, according to one of our main providers, it is believed that RRIF holders who at any time in 2015 withdraw more than the reduced 2015 minimum amount will be permitted to re-contribute the excess to their RRIFs, up to the amount of the reduction in the minimum withdrawal amount provided by this measure. Re-contributions will be permitted until February 29, 2016 and will be deductible for the 2015 taxation year. Similar rules will apply to those receiving annual payments from a defined contribution RPP or a PRPP.
To assist seniors with disabilities, a new non-refundable credit provides tax relief of 15% on up to $10,000 of eligible expenditures on a dwelling designed to allow the qualifying individual to gain access to, or to be more mobile or functional within, the dwelling or to reduce the risk of harm to the qualifying individual within the dwelling or in gaining access to the dwelling.
To qualify, individuals must be:
• 65 years of age or older at the end of the particular taxation year; and
• eligible for the Disability Tax Credit at any time in a particular taxation year.
Depending on circumstances, the credit may be claimed by a spouse or common law partner, or certain close family relations.
Expenditures will not be eligible if they are by a person not dealing at arm’s length with the qualifying or eligible individual, unless that person is registered for Goods and Services Tax/ Harmonized Sales Tax. Any eligible expenditure claimed must be supported by a receipt.
The credit will apply in respect of eligible expenditures for work performed and paid for and/or goods acquired after 2015.
Budget 2012 had introduced a temporary measure to allow a qualifying family member (i.e., a beneficiary’s parent, spouse or common-law partner) to become the plan holder of an RDSP for an adult individual who may lack the capacity to enter into a contract. Budget 2012 indicated that this measure would apply until the end of 2016. To allow remaining provinces and territories to address these issues, Budget 2015 extends the measure to 2018. The rules implementing the Budget 2012 measure will not otherwise be changed and a qualifying family member who becomes a plan holder before the end of 2018 can remain the plan holder after 2018.
The small business deduction currently reduces to 11% the federal corporate income tax rate applied to the first $500,000 per year of qualifying active business income of a Canadian-controlled private corporation (CCPC).
To further reduce taxes paid by small businesses, Budget 2015 incorporates a two percentage-point decrease in the 11% small business tax rate. The reduction will be implemented as follows:
• effective January 1, 2016, the rate will be reduced to 10.5%;
• effective January 1, 2017, the rate will be reduced to 10%;
• effective January 1, 2018, the rate will be reduced to 9.5%; and
• effective January 1, 2019, the rate will be reduced to 9%.
The reduction in the small business tax rate will be pro-rated for corporations with taxation years that do not coincide with the calendar year.
In conjunction with the reduction in the small business tax rate, Budget 2015 also adjusts the gross-up factor and dividend tax credit (DTC) rate applicable to non-eligible dividends (generally dividends distributed from corporate income taxed at the small business tax rate).
The LCGE for capital gains realized on the disposition of qualified small business corporation shares and qualified farm or fishing property is $813,600 in 2015 and is indexed to inflation. Budget 2015 will increase the LCGE on qualified farm or fishing property to $1million, applying to dispositions that occur on or after Budget Day, April 21, 2015.
The small business deduction is available on up to $500,000 of active business income of a Canadian-controlled private corporation. Active business income does not include income from a “specified investment business,” which is generally a business the principal purpose of which is to derive income from property.
This is a non-refundable tax credit worth up to $2,000 for households where at least one child under the age of 18 resides with the parents/spouses. It is calculated based on the reduction in family tax due (up to $2,000 maximum) on a notional transfer of up to $50,000 from one parent to the other.
The monthly amount for children under age six is increased by $60 for a total of $160, effective January 2015.
The UCCB program is expanded to provide $60 per month for children aged six through 17. Again, this will be effective January 2015.
This provision is an enhancement to an existing deduction, which generally must be claimed by the lower-income spouse. The additional $1,000 deduction could yield as much as $290 in after-tax value based on the individual’s federal marginal tax bracket rate, applied on a per-child basis.
Donations to registered Canadian charities and other qualified recipients are eligible for a charitable donation tax credit (if the donor is an individual) or deduction (if the donor is a corporation). In addition, donations of publicly-listed securities to qualified recipients are exempt from capital gains tax.
Budget 2015 incorporates an exemption from capital gains tax in respect of certain dispositions of private corporation shares and real estate. The exemption will be available where:
• cash proceeds from the disposition of the private corporation shares or real estate are donated to a qualified recipient within 30 days after the disposition; and
• the private corporation shares or real estate are sold to a purchaser that is dealing at arm’s length with both the donor and the qualified recipient to which cash proceeds are donated.
This measure will apply to donations made in respect of dispositions occurring after 2016.
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