2015 Federal Budget Overview

Tax breaks and economic incentives have been peppered throughout Canada’s pre-election budget document with savers, seniors and small business corporations emerging as big winners. 

This despite the fact that tax revenues are expected to rise at a slower rate in the forecast period to 2020.

Further, the budget was silent on longer term issues outlined last November's  Fiscal update, which pre-warned that slower nominal GDP growth will limit the capacity of the federal government to continue to finance public expenditures at previous higher rates at the very time that population aging will put upward pressure on age-related programs like elderly benefits and health care.   

The Fraser Institute, for example, estimates that by the year 2040, taxpayers will need to find $109.4 billion for Old Age Security (OAS) benefits to payable to Canada’s 9.6 million baby boomers.  

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:  by max-funding a new $10,000 annual TFSA contribution limit, pre-retirees as well as those in retirement can take advantage of the tax-free savings opportunities to better withstand future shocks to equity or cash flow including OAS limitations or reductions, should they occur.

Highlights in this Special Budget Report include submissions by Walter Harder, DFA-Tax Service Specialist, Murray Leiter,  CFA and Evelyn Jacks, MFA.

QUICK TIPS:  NEW MEASURES IN THE APRIL 21, 2015 BUDGET

ESPECIALLY FOR SAVERS

The Tax Free Savings Account (TFSA) Contribution Limit is raised from $5,500 to $10,000 effective January 1, 2015 – that’s immediately – making the cumulative maximum contribution available now $41,000. However, the annual limit will no longer be CPI-indexed.

ESPECIALLY FOR SENIORS

The Registered Retirement Income Fund (RRIF) withdrawal minimums are reduced, based on factors of 5% nominal ROR and 2% indexing (versus previous 7% ROR and CPI 1% factors):

• This means that at age 71 the  withdrawal minimum is lowered from 7.38% to 5.28% (or 28.45%).  In addition the reduction decreases with age:  at age 94 from 20% to 18.79% (- 6.05%)
• These changes will apply effective 2015 / Excess 2015 withdrawals may be re-contributed to 2/29/2016

A new  Home Accessibility Tax Credit (HATC) will bring a 15%  non-refundable tax credit to  seniors (those age 65 or older) and disabled people (those eligible for the Disability Tax Credit) to supplement the costs of home renovations and improvements required for safety and  accessibility.  The credit will be available for expenditures made on or after January  1, 2016 to a maximum of $10,000 per year.

Registered Disability Savings Plan Changes.  Qualifying family members will be allowed to continue to be the plan holder to the end of 2018 if the disabled person cannot enter into the contract.

T1135 – Foreign Asset Reporting is to be streamlined for 2015 and beyond for those with foreign assets valued under $250,000. This will be welcome news for seniors who rent southern properties or own significant financial assets offshore.

ESPECIALLY FOR SMALL BUSINESS OWNERS

The Lifetime Capital Gains Exemption for Qualified Farm and Fishing Properties will rise from $813,600 to $1 million on sales on or after April 21, 2015.  The exemption will now be greater of $1 million and the indexed LCGE for QSBC shares.

Employment Insurance (EI):  Compassionate care benefits coverage will be increased from 6 weeks to 6 months, effective January 1, 2016.  In addition, the EI premium rate will be subject to a seven-year break-even premium rate-setting mechanism starting in 2017 to ensure that EI premiums collected do not exceed the EI program payment demands over time.  Over time this is expected to result in reduction in EI premium rates from $1.88 in 2016 to an estimated $1.29 in 2017.  The projected savings for contributors will be 21%.

Small Business Tax Rate is reduced  from 11% to 10.5% effective January 1,2016, then 10% (2017), 9.5% (2018), and finally  9%  on January 1, 2019.  There is no change to Small Business Deduction limit of $500,000 active income for these purposes but changes have been made to non-eligible dividend gross-up and dividend tax credit rates to coincide with these changes. 

The Accelerated 50% CCA for Manufacturing and Processing Equipment has been extended to 2026 and the claim will be made in new class 53.

Charities.   The Capital Gains Exemption for donated shares has been extended to shares of private corporations and real estate, provided the transactions are at arms-length and subject  to special GAAR rules over 5 subsequent years.  Charities may now also be invested in Limited Partnerships.