Budget 2015 - Detailed Personal Tax Roundup

Self-sufficiency in self-funding future retirements is clearly an issue and the big news coming out of this budget is the opportunity to do so.

TFSA Contribution Limits

Effective for 2015 and subsequent taxation years, the TFSA contribution limit is set to $10,000 per year.  The indexing that increased the previous limit from $5,000 to $5,500 is gone.  The $10,000 limit will remain at that level until legislation is introduced to change it.  This, of course, means the real dollar limit will drift lower over time as inflation eats away at the value of the $10,000 contribution.

This is great news for both young taxpayers and the elderly.

For the younger taxpayer, the potential to earn a tax-free retirement income has increased immensely.   Consider a younger taxpayer who contributes $10,000 annually to their TFSA, earning a modest 5% return over a 40-year period.  The deposits will have grown to more than $1.2million.  Even taking into account inflation, the dollar value of the TFSA will be almost $600,000 in current dollars.  This will result in a tax-free annuity of almost $24,000 annually for a 40-year retirement.   Add on OAS and CPP and that single savings plan could adequately fund their retirement.

For the elderly, the increased contribution limit will make it easier to minimize taxes while melting down their RRSPs or RRIFs.  Although the time horizons are much shorter, the ability to earn income on more non-registered funds without paying the tax man will increase the income available to fund expenses in retirement.

Changes for Seniors

Two budget provisions are targeted squarely at seniors.  The revised RRIF minimum withdrawal rates and the new Home Accessibility Tax Credit.

RRIF Rules

Beginning this year, the minimum required withdrawal amount between ages 71 and 94 is reduced.  The minimum before age 71 remains at (1 – age)/90 while the minimum for age 95 and over remains at 20%.  All other minimums are reduced.  For example, at age 71, the minimum withdrawal rate is reduced from 7.38% to 5.28%.  The result is that seniors can keep their RRIF accumulations sheltered for a longer period of time and have greater flexibility over the way the money is withdrawn.

Example
Henry is 71 and has just converted his RRSP savings of $300,000 into a RRIF.  Under the old rules, he would have to have withdrawn a minimum of $22,140 from his RRIF for 2015.  Under the new rules, his minimum withdrawal for 2015 is only $15,840.  This reduces his taxable income for the year by $6,300 and leaves the $6,300 in the RRIF for use in later years.

Seniors who have already withdrawn more than the new required minimum from their RRIFs in 2015 will be allowed to return the amount in excess of the new minimum (but not any amounts in excess of the old minimum) to their RRIFs for 2015. The amount must be repaid by February 29, 2016. A deduction for the amount repaid may be claimed on their 2015 tax return.

Home Accessibility Tax Credit

The new Home Accessibility Tax Credit is a non-refundable credit for the cost of renovations or alterations to a dwelling that allow a taxpayer who is 65 or older or who is eligible for the disability amount to gain access to or be more mobile or functional within the dwelling.  The maximum credit is 15% of $10,000 or $1,500.  The requirements for the renovations are similar to those for claiming renovations for disabled individuals as a medical expense.  Where the expenditure qualify for both credits, both credits may be claimed.

The credit may be claimed by the senior or disabled person or by anyone who is claiming any of the following credit for that person:

• Amount for spouse or common-law partner;
• Amount for an eligible dependant;
• Caregiver amount; or
• Amount for an infirm dependant.

Small Business Owners and Investors

The federal corporate tax rate applicable to small business corporations (taxable income less than $500,000) will be reduced by 0.5% per year for years 2016 to 2019.  The rates are shown in the following table:

This reduction in corporate tax rates will mean more after-tax income for the corporation to use to build the business or to pay out as dividends.  For the investors receiving dividends, this could be good news as dividend rates could increase as tax rates decrease.  On the flip side of the coin, the last column in the table above shows the dividend tax credit rate available to investor.  As the corporate taxes decrease, the dividend tax credit decreases resulting in a higher marginal tax rate on that dividend income. Here's how that looks:

For businesses that pay their after-tax income to their investors rather than using it to build the business, this changes simply moves the taxation of the income from the corporation to the investor.

Farmers and Fishers

Good news for taxpayers who are transitioning out of their businesses through a sale of qualified farm or fishing property:  the maximum capital gains exemption increases to $1,000,000 ($500,000 taxable gains) on the sale of the property after April 20, 2015.  This is an increase over the $813,600 exemption available on the sale of qualified small business corporation shares.   The exemption is, of course, a lifetime exemption and is reduced by any capital gains exemption claimed previously.

The $1,000,000 figure will not be indexed.

Patronage Dividends

Patronage dividends received by farmers from agricultural co-ops are taxable income in so much as they represent a reduction in the cost of deductible farm expenses.  Currently, the tax on such dividends may be deferred if the dividends are received in the form of shares in the co-op.  The current tax deferral provision expires in 2015.  The Budget extends this deferral by five year to 2020.

Students

The budget proposes to reduce the expected level of parental contribution under the Canada Student Loans Program making loans available to a larger number of students.  In addition, the current reduction in support for working student who earn more than $100 per week while studying will be eliminated.

Other Changes

Donations of Capital Gains Proceeds

Currently taxpayers who donate publicly-traded shares, ecologically sensitive land, and certified cultural property are exempted from the capital gain on the increase in value of the donated shares.

For donations made after 2016, the exemption from capital gains will be extended to the proceeds from the disposition of shares in a private corporation or from real estate if the proceeds are donated within 30 days of the sale of the property.

Example
Phil purchased his cottage in 2008 for $100,000 and sold it in 2017 for $450,000.  The cottage was never designated as Phil’s principal residence so the entire $350,000 capital gain is taxable.  If Phil donates $150,000 of the proceeds to a registered charity, he can exempt $150,000 / $450,000 x $350,000 = $116,667 of the capital gain from tax, in addition to receiving a charitable donation credit for the $150,000 donation. 

Donation to Foreign Charitable Foundations

The budget proposes that foreign charitable donations may be classed as qualified donees (i.e. the donation tax credit may be made for donations made to the foundation) if the foundation receives a gift from the Government of Canada and they are providing disaster relief or humanitarian aid or if they are carrying on activities in the national interest of Canada.

Foreign Asset Reporting

Form T1135 Foreign Income Verification Statement and the rules around reporting foreign holding have changed several times over the last couple of years.  For 2015 and subsequent years, the government will be changes those rules again.  The Budget proposes to simplify the reporting requirements when the value of the foreign assets does not exceed $250,000.  The newer simplified rules will thus apply to assets with values between $100,000 and $250,000.  The existing rules will apply where the taxpayer has foreign assets whose value exceeds $250,000.

Failure to Report Income

For taxpayers who fail to report income more than once in a four-year period, some relief is in store.

Penalties will no longer be assessed if the amount that is nor reported is less than $500.  In addition, the penalty will not exceed 50% of the tax saved by not reporting the income.  Previously, the penalty was a flat 10% of the income not reported.  This penalty will thus be eliminated for non-taxable individuals who fail to report taxable income.

Employment Insurance Compassionate Care Benefits

As of January 2016, the maximum benefit period for claiming Compassionate Care Benefits from Employment Insurance will increase from the current six weeks to six months.