News
Tax time, 2016: A look at seven changes this year
November 10, 2016

Tax season is upon us, and there are a number of changes to keep in mind for your return this year.

Family Tax Cut

The Family Tax Cut allows parents or common-law partners with children under 18 years old to split their income to shrink their tax burden. The higher-earning partner can transfer up to $50,000 of income to the lower-earning partner, for a tax credit of up to $2,000.

Caroline Battista, senior tax analyst with H&R Block, says income splitting is most beneficial for spouses or common-law partners who have a big difference between their incomes. But she recommends that all families take a look at the credit.

“I’ve seen people who might not get the full $2,000. But I had many clients last year that got $300 or $400, and who wouldn’t want that?” Battista told CTVNews.ca

Enhanced Universal Child Care Benefit

The Enhanced Universal Child Care Benefit, which was introduced in 2015, is also on its way out, with the Liberal government promising to introduce a new, tax-free Canada child tax benefit later this year. However, families will have to account for the UCCB when they file their tax returns this year.

The UCCB saw families receive $160 per month for each child under six years old, and $60 per month for each child aged six through 17.  

Battista points out that families will have to pay tax on the UCCB, which replaced the Child Tax Credit that was worth an average of $337 per child.

“So people are seeing smaller refunds,” she said.

New tax brackets

The Liberal government campaigned on a tax cut for the middle class and a tax hike for the top one per cent of income earners.

Beginning this year, the federal marginal tax rate on those earning between $45,283 to $90,563 will drop from 22 per cent to 20.5 per cent. Those earning more than $200,000 will see their tax rate increase from 29 per cent to 33 per cent.

Paul Woolford, tax partner at KPMG, says it’s important for higher-income earners to keep these changes in mind when filing their 2015 taxes.

“For those higher income earners, there’s some thought of not deducting your RRSPs in 2015 and applying it in 2016,” he said.

Woolford said the same goes for other discretionary deductions, such as certain medical expenses.

“You’re forgoing a benefit in 2015, but in theory you should get a bigger bang for your buck in 2016, when you’re taxed at potentially a higher level,” he said.

Child-care expenses

The amount parents can claim for child-care expenses has increased by $1,000 annually, per child, to $8,000 for a child under six and $5,000 for a child aged between seven and 16 years old.

Child fitness tax credit

The child fitness tax credit has changed from a non-refundable to a refundable credit, meaning that families who claim the program cost or registration fee for a physical activity can now receive up to $150 per child.

Battista said, since non-refundable credits go towards taxes you owe, lower income families often don’t submit the expenses.

“The good things about changes to the fitness tax credit to a refundable tax credit, it means that lower income families will still get the same benefit,” she said.

Canada Apprentice Loan

Students in a designated Red Seal trade program can now claim interest on their government student loans.

Tax-Free Saving Accounts

The Liberal government is reducing the contribution limit for Tax-Free Saving Accounts to $5,500 after the former Conservative government raised the limit to $10,000 in 2015.

But Woolford said it’s important to keep in mind that there’s no loss of the $10,000, as the room  in your TFSA accumulates, and you can use it in later years.

“There’s no benefit of a tax deduction, but you can invest without paying tax,” he said. “The takeaway is: don’t lose sight of that, that’s an important vehicle to shelter investment income from tax.”

Christina Commisso, CTVNews.ca Writer

Tax Treatment of Trusts: Finance Canada Responds to Concerns of Practitioners
December 02, 2015

Recently a group of professional organizations, including the Society of Trust and Estate Practitioners (STEP), expressed their concerns about amendments to the Income Tax Act (the Act), which received Royal Assent on December 16, 2014. The provisions, related to subsection 104(13.4), the tax treatment of trusts, come into effect on January 1, 2016. The Department of Finance responded to those concerns in an open letter on November 16, 2015, a summary of which follows.

Prior to subsection 104(13.4) becoming effective, certain income of spousal trusts that is deemed to be recognized on the lifetime beneficiary’s death is not able to be paid to beneficiaries on a tax-deductible basis and, therefore, the amounts are generally recognized in the trust for the relevant tax year.

The new subsection 104(13.4) modifies this tax treatment by deeming the trust’s taxation year in which the lifetime beneficiary’s death occurs to end at the end of the day on which that death occurs and deems the trust’s income for the year to have become payable to the lifetime beneficiary in that year.

Where subsection 104(13.4) applies to a trust and a beneficiary, they are held to be jointly and severally liable pursuant to subsection 160(1.4) for the tax. (However, the explanatory notes for that subsection provide that the Canada Revenue Agency will treat the trust as liable in the first instance for the tax.)

STEP and the other groups were primarily concerned with two issues with the new legislation. The first concern was the possibility that the tax liability under subsection 104(13.4) could be borne by the beneficiary’s estate, even though the trust’s property will be enjoyed by the trust’s beneficiaries.

The second concern surrounded charitable giving and the possible “stranding” of donation tax credits, which remain attributable to the trust, separate from the tax liability of the beneficiary. This could occur when an affected trust makes a gift of property after the death of the beneficiary. The effect of deeming all of the trust’s income for the taxation year in which the beneficiary dies to have become payable to the beneficiary, is that the trust itself will not have tax otherwise payable against which it can deduct the donation tax credit for the gift made.

The discussions with STEP and the other groups culminated in a suggestion by those groups that the tax treatment of these types of trusts should continue to apply to the income deemed to be recognized on the death of the beneficiary in the trust.

     

To enable this, the Department of Finance suggested that subsection 104(13.4) could remain largely as enacted, except paragraph 104(13.4)(b) would be amended so that it did not apply to a trust in respect of the death of a particular beneficiary unless:
a) the trust is immediately before the particular beneficiary’s death a testamentary trust that is a post-1971 spousal or common-law partner trust;
b) the trust was created by the will of a taxpayer who dies before 2017;
c) the particular beneficiary is resident in Canada immediately before the particular beneficiary’s death; and
d) the trust and the particular beneficiary’s graduated rate estate jointly elect in prescribed form to have that paragraph apply.

Also, in order to address the stranding issue mentioned above, there would be an option permitting a trust to allocate the eligible amount of a donation made by the trust after the beneficiary’s death, but during the calendar year in which the death occurs, to the taxation year in which the death occurs.

The Department of Finance claims that such a provision would be expected not to impose any additional compliance burden on the trust because paragraph 104(13.4)(c) has the effect of deferring the trust’s filing due date for that taxation year to the day that is 90 days after that calendar year.

The Department of Finance concludes the letter by stating that the main thrust of the new amendments to the Act are to ensure that trusts do not obtain unintended tax benefits, but that they will include in their consideration whether the above option should be recommended and whether additional amendments may be necessary to give effect to the overreaching objectives of fairness, neutrality and the prevention of tax base erosion.

Greer Jacks practices law in Victoria and contributes to the update of EverGreen Explanatory Notes and is an instructor of the Use of Trusts in Tax and Estate Planning Course.

Calculating Liberal Tax Changes
October 30, 2015

Future Family Financials: Calculating Liberal Tax Changes.

Posted: October 27, 2015 By : Knowledge Bureau
Posted in: Breaking News, Current Issue

How will the anticipated changes to the Family Tax Cuts under a new Liberal government look? We’ve crunched the numbers for you. The next Federal Budget and the 2016 indexing factors will confirm actual results; however, in reviewing estimates, we found a couple big winners: lower income families with children, and no income refundable tax credit filers with children.

In addition to the consequences of the impending Family Tax Cuts, it’s just too bad these families will also lose their recently-enhanced $10,000 TFSA contribution limit, which the Liberals are proposing to roll back to a $5500 limit. Leveraging those extra dollars in tax-free savings plan would have served to build a more significant private retirement fund for astute savers, no matter what their family situation.

Following are some sample scenarios, showing how the tax changes to come as a result of the election will affect various family financials. Be sure to check out other year-end planning scenarios with a free trial of Knowledge Bureau’s 2015 Income Tax Estimator.

Scenario 1: Couple with one earner, salary $85,000. Two children, one over 6, one under.

Provision Current Rules New Rules Difference
Federal Tax $11,885.35 $10,959.87 -$925
Family Tax Cut $2,000 $0 $2,000
UCCB $2,640 $0 -$2,640
CTB $1,330 $5,150 $3,820
Total $105

Conclusion: The savings due to the anticipated changes to the CTB (Child Tax Benefit), outweigh loss of UCCB and Family Tax Cut. Those families with one stay-at-home parent do not see as much improvement as those families where both parents are working, as shown below.

Scenario 2a: Couple, equal salaries of $42,500 each ($85,000 combined). Two children, one over 6, one under.

Provision Current Rules New Rules Difference
Federal Tax $8,585.24 $8,189.24 -$396
Family Tax Cut $0 $0 $0
UCCB $2,640 $0 -$2,640
CTB $1,330 $5,150 $3,820
Total $1,576

Conclusion: Savings due to extra CTB significantly outweigh loss of UCCB.

Scenario 2b: Couple earning $30,000 and $55,000 ($85,000 combined). Two children, one over 6, one under.

Provision Current Rules New Rules Difference
Federal Tax $8,808.11 $8,189.24 -$619
Family Tax Cut $920.22 $0 $920
UCCB $2,640 $0 -$2,640
CTB $1,330 $5,150 $3,820
Total $879

Conclusion:  Savings, mainly due to CTB, outweigh loss of UCCB and net tax increase from loss of Family Tax Cut, but overall tax savings are not as great as they are when incomes are equally split.

Scenario 3: Couple one earner, salary $40,000. Two children, one over 6, one under.

Provision Current Rules New Rules Difference
Federal Tax $2,442.19 $2,046.19 -$396
Family Tax Cut $0 $0 $0
UCCB $2,640 $0 -$2,640
CTB $4,022 $10,500 $6,478
Total $4,234

Conclusion: Significant win due to large increase in CTB – outweighs loss of UCCB. Small tax cut due to loss of UCCB.

Scenario 4: Couple earning $225,000 ($85,000 and $140,000). Two children, one over 6, one under.

Provision Current Rules New Rules Difference
Federal Tax $41,011.12 $39,049.75 -$1,961
Family Tax Cut $0 $0 $0
UCCB $2,640 $0 -$2,640
CTB $0 $0 $0
Total -$679

Conclusion: This couple suffers a net tax cost because UCCB is lost, mitigated somewhat by middle tax bracket rate cut.

Scenario 5: Retired couple with $71,000 income ($20,000 and $51,000, includes $20,000 qualifying pension income).

Provision Current Rules New Rules Difference
Federal Tax $4,644.01 $4,644.01 $0
Family Tax Cut $0 $0 $0
UCCB $0 $0 $0
CTB $0 $0 $0
Total $0

Conclusion: No change because Pension Income Splitting puts both spouses in lowest bracket so no benefit from rate cut. Deciding not to split would not help because the higher-income spouse would pay tax at a higher rate.

Scenario 6: Single person earing $70,000.

Provision Current Rules New Rules Difference
Federal Tax $9,888.40 $9,508.92 -$379
Family Tax Cut $0 $0 $0
UCCB $0 $0 $0
CTB $0 $0 $0
Total $379

Conclusion: Small tax savings due to 1.5% rate cut in middle tax bracket.

Scenario 7: Couple earning $115,000 ($35,000 and $80,000). No kids.

Provision Current Rules New Rules Difference
Federal Tax $15,134.86 $14,605.38 -$529
Family Tax Cut $0 $0 $0
UCCB $0 $0 $0
CTB $0 $0 $0
Total $529

Conclusion:  Tax saving due to rate cut in middle tax bracket.

    

Scenario 8: Single person earing $250,000.

Provision Current Rules New Rules Difference
Federal Tax $59,254.79 $60,587.79 $1,330
Family Tax Cut $0 $0 $0
UCCB $0 $0 $0
CTB $0 $0 $0
Total -$1,330

Conclusion: Net tax increase because 4% increase in tax on income over $200,000 exceeds 1.5% cut in middle tax bracket.

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