It’s a good budget year for tax planners serving families, business owners and farmers. Clients interested in donating to private foundations will be happy, disability advocates have been successful in their lobbying efforts and, perhaps most important for many advisors, seniors facing their 69th birthdays can wait another two years before converting their RRSPs.
Finance Minister Jim Flaherty tabled his 2007 Budget plan in the House of Commons this afternoon. If passed, the document puts forth a number of interesting new tax incentives and contains a host of new planning options for advisors to discuss with clients.
In the grand scheme, Budget 2007 proposes to legislate the Tax Back Guarantee, introduced in Advantage Canada, a Fall 2006 document released with Finance Canada’s quarterly Fiscal Update. If passed, the guarantee would ensure the interest savings resulting from any debt reduction would be applied directly to reduce personal income taxes — unplanned surpluses in the future would be applied to reduce federal debt and all associated interest savings would be used to further reduce personal income taxes.
For example, the federal debt was reduced by $13.2 billion in 2005 and 2006 and the government is planning to reduce the debt by another $9.2 billion in 2006 and 2007 and $3 billion each year between 2007 and 2009. This debt reduction translated into $1.1 billion in interest savings, rising to $1.3 billion in 2008 and 2009. The Tax Back Guarantee provides $1.1 billion and $1.3 billion to permanently reduce personal income taxes. If the final surplus for 2006 and 2007 be higher than currently projected, the additional interest savings would be allocated to personal income tax reductions in Budget 2008.
Bringing it down to a more usable level, the guarantee, enshrined in legislation, would require that surpluses be applied to personal income tax perks and initiatives in future budget announcements. To learn more about the big picture, click here to read Budget 2007: A Conservative balancing act.
Tax planning for families, children and the philanthropically inclined
For families, Budget 2007 includes a four-part Working Families Tax Plan. “There were many personal tax relief options we could have pursued in this budget. We made a choice,” the finance minister said in his speech to the House of Commons. “We need to make it more affordable for people to have children and to raise them.”
The four-part plan includes:
- A $2,000 per child tax credit for children under 18. The credit translates into roughly $310 in savings for 90% of families who qualify.
- Increasing spousal and dependent amounts to match the basic personal amount for families with only one breadwinner. In the past, the so called “marriage penalty” meant the income earning spouse in the family could claim their own basic personal amount, $8,929 for 2007, plus a lesser spousal amount for the partner without income. The tax savings works to $209 in savings for two parent families with one spouse who earns little income. Single parents and clients caring for a dependent will also benefit.
- Improvements to the RESP program that eliminate the $4,000 limit on annual contributions and increase the lifetime contribution limit to $50,000 from $42,000. The announcement also proposes to increase the maximum annual Canada Education Savings Grant to $500 from $400.
- Finally, clients closing in on their 69th birthdays can wait another two years before they convert their RPPs and RRSPs — the government announcement proposes to raise the age limit to 71 from 69. For seniors, the government will also implement the Tax Fairness Plan, announced on October 31, 2006, including a $1,000 increase in the age credit amount, raising it to $5,066 and officially allow pension income splitting.
“There’s nothing new there,” says Jamie Golombek, vice-president of tax and estate planning at AIM Trimark Investments. “People are in the same situation that they were in on October 31. Those who had a lot of exposure to income trusts will still be disappointed because they’re going to proceed to tax income trusts as previously announced, but for others, particularly those who have a spouse with no pension income upon retirement, this is a huge opportunity because the ability to split pension income is tremendous.”
What is new are changes permitting phased retirement are aimed at encouraging older workers to stay in the labour market. The change would allow an employer to simultaneously pay a partial pension to an employee and provide further pension benefit accruals to the employee.
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For RRSPs as well, the budget announcement proposes to amend the list of qualified investments that can be held in registered plans to include most investment grade debt and publicly listed securities.
Parents of children with severe disabilities, meanwhile, who are concerned about providing for their care in the future, could soon be able to invest in a Registered Disability Savings Plan, similar to an RESP. The government announced it will spend $25 million and $115 million over the next two years and $200 million a year thereafter to establish the plan.
Starting in 2008, the plan, based generally on the existing RESP model, will allow individuals eligible for the disability tax credit (DTC), their parent or other legal representative, to establish an RDSP for the benefit of the DTC-eligible individual. Parents, beneficiaries and others wishing to save will be able to contribute to an RDSP. Contributions will be permitted up until the end of the year in which a beneficiary reaches age 59, to a lifetime maximum of $200,000. Annual RDSP contributions will attract Canada Disability Savings Grants (CDSGs) at matching rates of 100%, 200% or 300%, depending on family income and the amount contributed, up to a maximum lifetime CDSG limit of $70,000.
An RDSP will be eligible to receive CDSGs up until the end of the year in which the plan beneficiary turns 49. Canada Disability Savings Bonds (CDSBs) of up to $1,000 per year will also be provided to RDSPs established by low and modest-income families, up to a maximum lifetime CDSB limit of $20,000. The maximum annual $1,000 CDSB will be paid to an RDSP where family net income does not exceed $20,883.
On the charitable tax planning front, 2007 budget changes, following on the heels of past budget announcements that made it possible for clients to make donations of securities to public charities, will allow clients to donate their shares to private foundations as well.
Finally, building on initiatives announced last year to increase support aimed at building up child care services in Canada — the government committed to provide $250 million annually to support the creation of up to 25,000 new spaces, beginning in 2007 — Budget 2007 proposes to provide a 25% investment tax credit to businesses that create new child care spaces in the workplace, to a maximum of $10,000 per space created.
Tax planning for businesses
For corporations and businesses, the budget announcement proposes to reduce the general corporate income tax rate from 21% to 19% by 2010 and further reduce the rate to 18.5% in 2011. The budget also focuses on the capital cost allowance system for writing off manufacturing equipment. “It’s time to support our manufacturers through a dramatic, new capital cost allowance incentive,” Flaherty told ministers on Monday afternoon. “Accelerated capital cost allowances permit a faster write-off to encourage economic investment and to create jobs.”
From now until the end of 2008, he says the government will allow manufacturers to capitalize on current economic conditions, use their reserves of cash and completely write off new investments in equipment over a two-year period instead of the typical seven years allowed. The temporary measure will apply to investments in new machinery and equipment on or after March 19, 2007 and before 2009. “This is like a shot of adrenaline for our manufacturers. It will help Canadian businesses invest in new technology and better compete on the world stage.”
The changes proposed will also shorten the write-off period for computers and non-residential buildings — the announcement increases the capital cost allowance rate from 4% to 10% for buildings used in manufacturing and processing, and from 45% to 55% for computers.
In a nod to the Canadian Federation of Independent Business (CFIB), Flaherty’s announcements for small businesses include a promise to reduce the number of annual tax filings and remittances required by the CRA, but the big announcement increases the lifetime capital gains exemption, raising it from $500,000 to $750,000, effective immediately.
In addition to the increased capital gains exemption for farmers, fishers and small business owners, farmers could benefit from a new income stabilization program to help manage the business risk that comes with plant or animal disease or extreme weather conditions. According to budget documents, “the Government now proposes a separate, simpler and more responsive income stabilization program, through the establishment of a new savings account program for farmers,” by replacing the top tier of the current Canadian Agricultural Income Stabilization program.
Government contributions and income earned on government contributions would only be taxable on withdrawal. Farmer contributions and income earned on farmer contributions would be treated like regular investments for tax purposes. The Government also proposes to build in a cost-of-production element with these savings accounts. Specifically, it says in years where the costs of production are rising for the sector as a whole, the federal government will make additional contributions to the new savings accounts.
Since the proposed program costs will be split on a 60:40 basis, the government says it will release more information regarding the new farm savings accounts, including details regarding tax treatment, after discussing the proposed plans with provinces and territories.
Other tax measures
Tax savings that don’t fit neatly into planning for families or businesses include enhanced credits for truck drivers, environmentally conscious clients buying green vehicles and cross border shoppers.
For long-haul truck drivers, deductions for meal expenses will rise to 80%, up from 50%.
Environmentally conscious clients and some marketing savvy car dealerships, could benefit from a new performance based rebate program announced, that offers up to $2,000 for the purchase of a new fuel-efficient or alternative fuel vehicle.
Finally, the budget proposes to double the value of goods that may be imported duty and tax free by Canadian residents returning to the country after a 48-hour absence, increasing the amount to $400, up from $200.
Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com
(03/19/07)
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