Find out how the Federal Budget could impact your tax return.
Budget 2009: Personal Tax Cuts and Credits for Canadian Taxpayers
The recent Federal Budget introduced a number of tax credits and cuts for just about every Canadian taxpayer. Though the credits will take effect on your 2009 tax return, the tax cuts will mean most Canadians will see a little more on every paycheque in the spring.
- All Canadians will benefit from the increase to the basic personal amount from $9,600 to $10,320 in 2009. The basic personal amount is the income you can earn before paying taxes.
- The income threshold on the first tax bracket will increase to $40,726 from $37,885. This means you can earn up to $40,726 and pay 15 per cent tax on this income.
- The second tax bracket was also increased from $75,769 to $81,452. So if you earn $81,452, you will be taxed for the first $40,726 at 15 per cent and the rest of your income at 22 per cent.
These tax savings will be handled through payroll deductions through employers. The income thresholds should be updated by Spring 2009.
The budget also had some specific tax credits for different groups of Canadian taxpayers:
- Starting July 2009, low-income families with two children will see and an increase to the National Child Benefit of up to $436.
- Seniors will see an increase to the age amount of $1,000, providing a tax savings of $150.
Homes and home ownership also a prominent role with the following changes:
- The existing Home Buyer’s Plan (HBP) has been enhanced to allow a non-taxable withdrawal of $25,000 towards the purchase of a home – up from $20,000. First time home buyers can also claim a new tax credit of up to $5,000 for closing costs.
- For existing homeowners, the Home Renovation Tax Credit will provide a 15 per cent tax credit on eligible home renovations in excess of $1,000 and up to $10,000.
Overall, the budget could be seen as good news for Canadian taxpayers. The increase to the personal amount and raising the income threshold should mean a few more dollars every paycheque for the rest of 2009. If you are planning any major renovations or a new home purchase, you can expect a little credit when you file your 2009 tax return.
What You Should Know for 2008
For the 2008 tax return, the tax bracket thresholds and personal amounts have all been adjusted according to an indexation factor of 1.9%, with the exception of the basic personal amount, spouse or common-law partner amount and amount for an eligible dependant. These amounts remain at $9,600. However, they will be increased to $10,100 for 2009. The amounts and income thresholds used to calculate the GST/HST Credit and the Child Tax Benefit beginning with the July 2009 payments will be increased by the 2009 indexation factor of 2.5%. There are no changes to the personal tax rates.
Advance Payments for Working Income Tax Benefit (WITB)
Taxpayers who believed that they would be able to claim the Working Income Tax Benefit (WITB) on their 2008 tax return may have already applied for an advance payment of up to one half of their estimated entitlement. The advance payment would have been divided by the number of payment dates left in the year at the time the application was processed and paid in equal instalments on the remaining dates. The payment dates were April 4, July 4 and October 3, 2008, and January 5, 2009. Applications were made on Form RC201 Working Income Tax Benefit Advance Payments Application for 2008.
The amount paid will be reported on an RC210 Statement of Working Income Tax Benefit information slip and must be added to the taxpayer’s net federal tax for 2008, thus reducing his or her refund or increasing his or her balance due.
Individuals who received advance payments of the WITB for 2008 must file a 2008 tax return if they want to apply for advance payments again in 2009. In the case of couples, advance payments of the WITB are made to only one spouse or common-law partner. That spouse or common-law partner must be the one who claims the basic WITB on their 2008 tax returns.
Pension Income Splitting
There are no changes to the rules governing pension income splitting for 2008. However, requests for late, amended or revoked elections in respect of pension income splitting will now be allowed for up to three years after the normal filing deadline.
It was first stated that late elections would only be allowed if the taxpayer could “demonstrate that the failure to file the election on time was beyond the taxpayer's control and would cause unintended tax consequences.” However, the CRA has since decided to accept late elections without question. Therefore, taxpayers who wish to change the amount they want to split, will now be allowed to do so without providing an explanation.
Reduction of the required minimum withdrawal amount for Registered Retirement Income Funds (RRIFs)
The Economic & Fiscal Statement of November 27, 2008 contained a proposal to reduce the required minimum withdrawal amount for Registered Retirement Income Funds (RRIFs) by 25% for 2008. This was in response to the impact of the financial meltdown on retirement savings. Seniors groups had been lobbying the government to modify the minimum withdrawal rules so as to allow retirees to keep more funds in their RRIFs while markets recover. Note that this reduction will only apply to the 2008 taxation year.
For example, if the minimum withdrawal for 2008 would otherwise have been $10,000, it will be reduced to $7,500 (calculated as $10,000 − [$10,000 x 25%]).
Taxpayers who have already withdrawn more than the reduced 2008 minimum amount will be allowed to re-contribute the excess to their RRIFs and claim a deduction on their 2008 tax returns. The deadline for doing this will be the later of March 1, 2009 and 30 days after the proposal is enacted. If the proposal were not enacted until June 30, 2009, they would therefore have until July 30, 2009 to make the re-contribution. Assuming they had already filed their 2008 tax return, they would then have to request an adjustment to claim the deduction.
The Economic and Fiscal Statement had not been voted on at the time Parliament was prorogued on December 4, 2008. However, the CRA are administering the RRIF provisions on the assumption that they will be reintroduced and ultimately enacted.
Business Income
Forms T2124 Statement of Business Activities and T2032 Statement of Professional Activities were eliminated. They were merged to create the new Form T2125 Statement of Business or Professional Activities. The only substantial difference between this new form and the old ones is that details of the gross business income are summarized separately on page 1.
The Registered Disability Savings Plans (RDSPs)
Registered Disability Savings Plans (RDSPs) are designed to provide tax-assisted savings for taxpayers who qualify for the disability amount and only became available in late 2008.
Contributions to RDSPs are not deductible and anyone can contribute to them, even the disabled beneficiary of the plan. Taxation of any income they earn is deferred until a withdrawal is made from the plan. Although there is a lifetime contribution limit of $200,000, there is no annual contribution limit. A contribution of $200,000 could therefore be made in the first year.
The Canada Disability Savings Grant (CDSGs) is a government incentive that will provide matching government contributions equal to:
- For taxpayers with family net income up to $75,769 in the second preceding year (i.e., 2006 for 2008 grants), 300% on the first $500 and 200% on the next $1,000, and
- For taxpayers with family net income in excess of $75,769, 100% on the first $1,000.
Until the age of 18, the thresholds are based on the income of the disabled taxpayer’s parents or guardian. Thereafter, they are based on the taxpayer’s own income and that of his or her spouse or common-law partner. This applies even if the taxpayer continues to live with his or her parents. CDSGs are payable until the year in which the plan beneficiary attains age 49. However, a maximum of $70,000 may be made over the course of a beneficiary’s lifetime (which would be the equivalent of 20 years in which the maximum grant was payable).
The Canada Disability Savings Bond (CDSB) will be paid regardless of whether anyone else makes contributions to the plan. It will be paid as follows:
- Taxpayers with family net income of up to $21,287 in the second preceding year (i.e., 2006 for 2008 payments) will receive the maximum $1,000 bond.
- Taxpayers with family net income between $21,287 and $37,885 will receive a partial bond.
As in the case of the CDSG grants, the thresholds are based on the income of the disabled taxpayer’s parents or guardian until the taxpayer reaches 18. Thereafter, they are based on the taxpayer’s own income and that of his or her spouse or common-law partner. CDSBs will be paid every year for a maximum of 20 years. However, like CDSGs, they are only payable until the year in which the taxpayer attains age 49.
CDSGs and CDSBs made in the past ten years, along with related earnings, will have to be paid back if there is a withdrawal from the plan, the beneficiary loses eligibility for the disability amount, or the beneficiary dies. Unless the beneficiary dies or loses eligibility for the disability amount, a taxpayer who received CDSBs or CDSGs at the maximum age of 49 will therefore not be required to make a repayment as long as he or she waits until the age of 60 before receiving disability assistance payments.
Payments from the plan to the disabled beneficiary are referred to as “disability assistance payments.” These do not have to begin until the beneficiary turns 60. However, once they begin to be made, they must be paid at least annually. Only the portion of the payment related to earnings, CDSG grants and CDSB bonds will be taxable.
Disability assistance payments will be excluded from net income for the purpose of calculating the GST/HST credit, the Canada Child Tax Benefit, the OAS and EI clawback, the refundable medical expense supplement and the Working Income Tax Benefit (WITB).
Introduction of the Tax-free Savings Account (TFSA)
Beginning in 2009, most taxpayers will be able to contribute up to $5,000 per year to a Tax-free Savings Account (TFSA). Contributions to TFSAs will not be tax deductible. However, income earned in the plans will not be taxable, even when withdrawn. Nor will it be included in the calculation of income-dependent benefits such as the GST/HST Credit, the Child Tax Benefit, the Guaranteed Income Supplement or the calculation of dependency claims. Because TFSAs are not geared towards retirement savings in particular, amounts can be withdrawn at any age and for any purpose. Taxpayers could therefore use them for saving towards the purchase of a house or starting a business or simply putting money away for a rainy day. If they do not make a withdrawal, funds could accumulate indefinitely.
Even though they were introduced with the 2008 Federal budget, TFSAs will not affect the preparation of the 2008 tax returns and are only effective on January 1st, 2009.
The general rules are that taxpayers must be 18 years of age or older in order to open a TFSA. Eligible taxpayers who are resident of Canada at some time in the year will accumulate $5,000 of TFSA contribution room each year, regardless of their income. Unused contribution room may be carried forward to future years indefinitely.
For example, a taxpayer who contributes $2,000 to a TFSA in 2009 will therefore have contribution room of $8,000 in 2010 (calculated as $3,000 from 2009 plus $5,000 for 2010). Amounts withdrawn from a TFSA will also be added back to the taxpayer’s contribution room for the following year.
The CRA will only determine TFSA contribution room for taxpayers who file a tax return each year. Their calculation will be based on information provided by TFSA issuers. Taxpayers will be advised on their Notice of Assessment. Excess contributions to a TFSA will be subject to a 1% per month penalty tax in the same manner as excess contributions to an RRSP.
The types of investments that taxpayers can hold in a TFSA are generally the same as those that can be held in an RRSP and include GICs, bonds, mutual funds and publicly-traded securities. Since the income generated in a TFSA is not taxable, the interest paid on loans taken out to acquire a TFSA and management fees paid by a plan holder are not tax deductible.
