The 2015 Budget: Registered Disability Savings Plan

A Registered Disability Savings Plan (RDSP) is a savings tool intended to assist individuals who qualify for the disability tax credit.  The disabled individual and friends and family of the disabled individual can set aside up to $200,000 in a special tax-deferred account for the future use of the individual.

If the disabled individual is an adult, the disabled individual is the holder of the RDSP.  However, concern was expressed that some disabled adults might not have sufficient mental capacity to enter into a plan contract.  In order to deal with this issue, the federal government introduced rules in 2012 that allowed qualifying family members to become the plan holder on behalf of the disabled individual.

Capacity to enter into a contract is a provincial responsibility.  The 2012 rules were intended to be temporary rules in the expectation that the provinces would enact legislation that would address the capacity issue.  In British Columbia, for example, the Representation Agreement Act allows for the appointment of a trusted person as the legal representative of a disabled individual even if the disabled individual would not normally be considered to have the capacity to appoint someone as a power of attorney.

As not all provinces have yet addressed this issue, the federal government is extending the 2012 rules.  Instead of expiring at the end of 2016, the rules will continue to apply until the end of 2018.  Additionally, a qualifying family member who becomes a plan holder before the end of 2018 can remain as the plan holder after the end of 2018.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

The 2015 Budget: Home Accessibility Tax Credit

The 2015 federal budget proposes to introduce a new Home Accessibility Tax Credit effective as of the start of 2016.  This non-refundable credit is intended to assist with the cost of making capital improvements to a private home so that elderly or disabled individuals can move around more safely within the home or can gain easier access to the home.  For example, installation of a wheelchair ramp, a walk-in bathtub or a grab bar would typically qualify for the credit.

The proposed credit will provide 15% tax relief on up to $10,000 of eligible expenditures per calendar year, per qualifying individual, to a maximum of $10,000 per eligible dwelling.

The credit assists qualifying individuals, defined as individuals who are at least 65 years old at the end of a taxation year or who can claim the Disability Tax Credit at any time in the year.  In case the qualifying individual does not have sufficient income to claim full advantage of the credit, however, eligible relatives of the qualifying individual can claim the credit in some cases.  An eligible relative could be a spouse or common-law partner of the qualifying individual or a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the qualifying individual.

Expenditures must be incurred in respect of the principal residence of the qualifying individual.  If the qualifying individual does not own a principal residence, expenditures can be made in respect of the principal residence of an eligible relative provided that the qualifying individual ordinarily inhabits that dwelling with the eligible relative.

Expenditures must be incurred in respect of an item that becomes an integral part of the principal residence.  Items such as furniture and appliances will not qualify for the credit.

While the credit was announced as part of the 2015 budget, the credit will apply only in respect of expenditures for work performed and goods acquired after the end of 2015.  Expenditures incurred in 2015 will not qualify.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

2015 Budget Penalty Changes

The 2015 federal budget makes some changes in the penalty regime that applies if a taxpayer fails to comply with his or her obligations under the Income Tax Act.  The changes correct an anomaly in the law.  Under that anomaly, a penalty for a repeated failure to report income could have been out of all proportion to the actual amount of income that was not reported.

Rather than reviewing the details of the change, I will take this opportunity to remind everyone to avoid penalties in the first place by making sure to file on time and to report all transactions that need to be reported.  For most Canadian individuals, the 2014 filing deadline is fast approaching (April 30).  If you or your spouse carried on an unincorporated business in 2014, the filing deadline is June 15 (but any balance of tax owing is still due by April 30).

If you hold foreign assets (even foreign assets held in a Canadian brokerage account) and the assets have an aggregate cost of more than $100,000 (measured in Canadian dollars), your tax return has to include details about those foreign assets (even if you have reported the income from the assets).  Limited exceptions apply for specific foreign assets, such as a foreign vacation home that is used only for personal purposes (in other words, that is not rented out to others at any point).

It is always wise to file on time in order to avoid unnecessary penalties.  If you have not filed in past years, or have failed to report all income or foreign assets in the past, you may be able to avoid penalties by voluntarily disclosing the failure to the Canada Revenue Agency (the CRA).  In order to avoid penalties, you must approach the CRA before the CRA approaches you or starts an audit.  

Generally, voluntary disclosures are initiated on a no-names basis through a law firm so that you do not have to disclose your name until you have an idea of what the CRA will require in order to correct the past omission.  While voluntary disclosures are also called tax amnesties, interest will generally be payable on the unpaid tax.  What the voluntary disclosure avoids is the imposition of penalties and the possibility of jail time for tax evasion.

If you need advice about the voluntary disclosure program or believe that you may need to make a disclosure, please contact Layli Antinuk at 250-360-2110.  Any conversations will be protected by lawyer-client privilege.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

The 2015 Budget: Registered Retirement Income Funds

On reaching age 71, many Canadians convert their registered retirement savings plans (RRSP’s) into Registered Retirement Income Funds (RRIF’s).  While this prevents immediate taxation of the amount in the RRSP, a portion of the RRIF must be withdrawn each year.  The amount withdrawn from the RRIF is brought into income and is subject to income tax.

Effective for 2015, the new federal Budget reduces the minimum amount that must be withdrawn each year for individuals between the ages of 71 and 94.  This will allow for more capital to remain in the RRIF for the purpose of generating tax-deferred income inside the plan.

The actual amount of the reduction will depend on various factors, including the amount in the RRIF and the age of the person in question.

If you have already withdrawn an amount from your RRIF and the amount exceeds the new lower minimum requirement, you will be able to re-contribute that excess withdrawal as long as you do so before February 29, 2016.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

The 2015 Budget: Tax Free Savings Accounts

The 2015 Budget gives with one hand and takes with the other.  As of January 1, 2015, Canadians can transfer up to $10,000 per year into a Tax-Free Savings Account (TFSA).  The pre-budget limit was $5,500 per year.

While this is good news in the short term, the TFSA contribution limit will no longer be indexed to inflation.  This means that the contribution limit will be capped at $10,000 per year until some future legislative change.

It still makes sense to contribute to a TFSA each year.  While contributions are not tax-deductible, income and capital gains earned inside a TFSA are tax-free (even when withdrawn from the TFSA).  Even if the annual limit is capped at $10,000, you can have an additional $10,000 per year earning a tax-free return.  Over 10 years, that means $100,000 in capital earning a tax-free return.  Bit by bit builds up over time.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

Budget 2015: Capital Gains Exemption

A Canadian-resident individual can realize up to $813,600 in tax-free capital gains on the sale of specific types of assets.  Qualifying assets include the following.

• Shares of a Canadian-controlled private corporation (an “Active Business Corporation”) that uses substantially all its assets in an active business carried on primarily in Canada.  With proper structuring, this can include shares in a holding corporation that holds only shares in a qualifying active business corporation.
• Qualified Farm Property and Qualified Fishing Property (whether or not a corporation is involved).

The 2015 federal budget will increase the capital gains exemption limit to $1 million, but only in respect of capital gains realized on or after April 21, 2015 from the disposition of Qualified Farm Property and Qualified Fishing Property.

The new $1 million limit for Qualified Farm Property and Qualified Fishing Property will be fixed at $1 million (no inflation adjustments) until such time as the capital gains exemption limit (currently $813,600) for shares of an Active Business Corporation reaches $1 million through inflation adjustments.  Once that occurs, the Active Business Corporation and Qualified Farm Property and Qualified Fishing Property limits will march forward from that point on at the same level (with annual inflation adjustments).

The capital gains exemption limits are lifetime limits available to each individual resident in Canada.  For this reason, it is an advantage for each family member to hold an interest in an asset that might qualify for the exemption on a sale.  Such interests can be held through a family trust so as to provide additional flexibility in respect of capital gains exemption claims.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

Reduction in Tax Rate on Active Business Income

A Canadian-controlled private corporation (CCPC) pays a reduced tax rate on its first $500,000 in annual income from a qualifying active business. The 2015 federal budget announced a 2% reduction in the federal portion of this rate over the next four years. This is a decline of 0.5% per year starting on January 1, 2016.

For a CCPC that carries on an active business solely in British Columbia, the combined income tax rate on the first $500,000 of active business income will decline from the current 13.5% to the following rates (assuming no change in provincial income tax rates).

January 1, 2016: 13%
January 1, 2017: 12.5%
January 1, 2018: 12%
January 1, 2019: 11.5%
As long as the after-tax income is kept in corporate form, the lower rate leads to a significant deferral of income tax.

Disadvantages can arise if the income is kept inside the business corporation. For example, shares of the business corporation can cease to qualify for the capital gains exemption if the business corporation holds too many investment assets. These disadvantages can be avoided by having the business corporation pay all its surplus after-tax cash to a properly-structured holding corporation. The payment would be in the form of a tax-free inter-corporate dividend. The surplus after-tax cash (as of 2019, 88.5 cents per dollar of business profit) can then be invested inside the holding corporation without impairing a shareholder’s ability to claim the capital gains exemption on a future sale of shares of the business corporation.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.