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Book Excerpt

Take advantage of changes to this year's tax return Add to ...

The following excerpt is from Essential Tax Facts by Evelyn Jacks. On Monday, April 11 at noon (ET), join us for a live discussion with Ms. Jacks.

There are always numerous changes to the tax return year over year, although the form may look similar. To read between and behind the lines we’ve prepared this summary of news. Further explanations and specific tax tips to help you maximize your opportunities will follow in Parts 2 to 6 of this book. We’ve broken our discussion of the changes into several categories:

A. Free Money: Refundable Tax Credits

B. Changes to Your Relationship with the Tax Department

C. Calculating Your Taxes –Tax Brackets and Rates

D. Calculating Your Non-Refundable Credits

E. Clawback Zones F. Provincial Taxes

G. Taxation of Different Income Sources H. Maximizing Your Earnings: Employees, Students, Retirees, Investors and Proprietors.

A. Free money: Refundable tax credits

This is the first thing you need to know about: both the federal and provincial governments provide refundable tax credits to Canadian tax filers. Your eligibility for these credits depends on your net income level, not whether or not you pay taxes. That means you can have zero income and pay zero taxes but still receive refundable tax credits–simply by filing a tax return.

That’s right, free money! The income thresholds and amounts payable are indexed to inflation, and so they change every year. This is news you should know as it can make a big difference to your monthly cash flow.

Refundable tax credits are based on Net Income–Line 236 of your tax return and the return of your spouse or common-law partner–in other words, the combination of your two net incomes. This is one of the most important lines on the tax return because of its impact on the size of your credits. You can reduce your net income by making an RRSP contribution if you are eligible; or by claiming expenses like child care, moving expenses or carrying charges like your safety deposit box or tax deductible interest. Even deducting your union dues will make a difference.

The actual amount of certain credits you’ll receive is not obvious; they are not on the return at all because CRA does the calculations for you. You’ll be sent the money, but only if you file a return. But knowing the numbers is important, so you can identify the opportunity, maximize the amounts owing to you, and plan to save the money if you can for important goals, like an education, for example.

There are three important refundable tax credits from the Federal Government, described below; provincial governments may also provide similar income supports in some cases.

1. Working Income Tax Benefit. This credit was introduced to supplement the cost of working for those living on social assistance and going back to work. To receive it, you must complete Schedule 6 on your return, be at least age 19 or have a child, earn a minimum amount of net income, ($3,000 in most provinces; $4,750 in BC, $2,760 in Alberta and $6,000 in Nunavut, not including Universal Child Care Benefits and certain capital gains from stock options). If your net income is under certain clawback thresholds, you’ll receive a maximum credit of $931 in most provinces if you are single; $1,690 if you have a family. (Again, those amounts vary in BC, Alberta and Nunavut). An additional supplement is available to disabled taxpayers.

2. GST Credit. The GST Credit and Child Tax Benefit are based on a July to June “benefit year”. Income levels quoted in the chart below refer to your net income from the previous taxation year. You are eligible to receive the GST credit if you are at least 19 and a resident of Canada at the time the payment is due. So, you’ll want to file a tax return if you will be 19 by April 30, 2012 to start receiving it after your 19th birthday, as it is paid quarterly. A GST credit can also be claimed for your child, but specifically not for a foster child.

GST Credit

July 2010 to June 2011

July 2011 to June 2012*

Adult maximum

$250

$252

Child maximum

$131

$132

Single supplement

$131

$132

Phase-in threshold for the single supplement

$8,096

$8,145

Family net income at which credit begins to phase out

$32,506

$32,701

*Amounts estimated. Reductions based on family net income on your 2010 return.

3. The Child Tax Benefit. This lucrative tax benefit is paid monthly, to parents with certain net income levels, described below. Application for this credit generally happens upon the birth of a child and it also initiates another benefit: the Universal Child Care Benefit (UCCB).

This latter benefit is not based on your income; rather it is universally received by all parents with children under the age of 6. Many provinces supplement the Child Tax Benefit for their residents. These supplements are included with the cheque received from the Federal government.

Something new for payments received after June 2011: In the case of separated families, each parent who lives with the child can receive 50 per cent of any GST Credit, Child Tax Benefits and Universal Child Care Benefits.

Child tax benefit

July 2010 to June 2011

July 2011 to June 2012*

Per month

Base benefit

1,348

$1,356

$113

Additional benefit for third child

94

$95

$7.92

Family net income at which base benefit begins to phase out

40,970

$41,216



National Child Benefit (NCB): First child

2,088

$2,101

$175.08

NCB: Second child

1,848

$1,859

$154.92

NCB: Third child

1,758

$1,769

$147.42

Family income at which NCB begins to phase out

23,855

$23,998



Family net income at which NCB supplement phase-out ends

40,970

$41,216



Child Disability Benefit (CDB) Maximum

2,470

$2,485

$207.08

Family net income at which CDB begins to phase out

40,970

$41,216



*Amounts estimated. Reductions based on family net income on your 2010 return.

B. Changes to your relationship with the tax department Notices by Email. CRA will now allow you to receive your Notice of Assessment either by mail or email. The word “mailed” has been changed to “sent” in numerous sections of the Income Tax Act to accommodate this change. This brings up an interesting issue around privacy. The content of the notices will not be included in email messages but will instead be posted to the taxpayer’s secure electronic account and the email message will indicate to the taxpayer that the notice has been posted. The existing “My Account” and “My Business Account” functionality will be used for you to accesses the Notice.

Because timing is so important to preserve your opportunities for appeal, your electronic notices will be presumed to have been sent and received on the date that the email message is sent to the email address most recently received from the taxpayer. Therefore, the onus is on you to check your email and notify CRA if you want email directed to another address. Taxpayers also have the right to revoke authorization for electronic transmission of notices regarding their accounts.

Changes to the Canada-US Tax Treaty. On September 21, 2007 an agreement was signed to amend the Canada/US Tax Convention (also referred to as the “tax treaty”). This is the fifth time the tax treaty has been amended, therefore the amending document is referred to as the Fifth Protocol. The Fifth Protocol came into effect on December 2008 in Canada and makes several changes to the way incomes are taxed when people have lived, worked and retired in our two countries. You will notice references to this throughout this summary of changes.

C. Calculating your taxes – tax brackets and rates

You’ll be reporting your total taxable income on the federal tax return (Line 150), reducing it with specific deductions and then arriving at a figure known as “Taxable Income” (line 260). In between is the important figure we talked about earlier–Net Income on Line 236–upon which refundable and non-refundable tax credits are calculated. It will come up again, later.

Both the federal and provincial governments charge taxes on your “world income” if you are a resident of Canada. So, the definition of “taxable income” is the same for federal and provincial purposes in all provinces except Quebec. After that, things change.

Your federal tax brackets refer to the amount of income that’s subject to specific tax rates. Know that certain income sources are completely exempt, like earnings in your Tax Free Savings Account, for example. However, most income sources, including barter transactions, are taxable.

After taking off allowable deductions, your taxable income is subject to the following rates:

2009 Brackets

2009 Federal Rates

2010 Brackets

2010 Federal Rates

Up to $10,320

0

Up to $10,382

0

$10,321 to $40,726

15 per cent

$10,382 to $40,970

15 per cent

$40,727 to $81,452

22 per cent

$40,971 to $81,941

22 per cent

$81,453 to $126,264

26 per cent

$81,942 to $127,021

26 per cent

Over $126,264

29 per cent

Over $127,021

29 per cent

D. Calculating your non-refundable credits

The federal tax on your income is now reduced by a number of provisions, including your personal non-refundable tax credits, summarized below.

These amounts are multiplied by the lowest tax rate (15 per cent) to arrive at the dollar amount used to reduce federal tax. Because most of them are subject to indexing, they will change, year over year. And they are highly personal– focused on what’s happening in your family that makes your tax filing situation unique. This summary follows the order of federal Schedule 1.

Line 300–Basic Personal Amount. The Basic Personal Amount or “tax free zone” for 2010 is $10,382. Every Canadian could earn up to $865.17 a month in 2010 without paying any tax.

Line 301–Age Amount. The 2010 Age Amount is $6,446. The Amount is clawed back by 15 per cent of net income in excess of $32,506 and eliminated when net income is $75,479.

Line 303–Spouse or Common-Law Partner Amount. The amount on which the Spousal Amount credit is calculated has increased to $10,382 in 2010. It is reduced by every dollar the spouse makes. It’s important to remember that your “spouse” is the person to whom you are married. Your common-law partner is someone who has been living with you in a conjugal relationship for at least 12 continuous months, and/or the parent of your child by birth or adoption, or someone who has custody and control of your child, who is wholly dependent on that person for support.

Whew! Relationships are complicated, aren’t they?

Line 305–Amount for an Eligible Dependant. The amount for an eligible dependant is equal to the spousal amount: $10,382 for 2010. This provision is an “equivalent to spouse” amount for taxpayers who don’t have a spouse or common-law partner, which generally will be claimed for the child with the lowest income.

308 and 310–CPP Contributions. Both employer and employee contribute to the Canada Pension Plan. Owners of unincorporated businesses must remit both portions with their tax return, something which can cause a hardship if they hadn’t budgeted on the lump sum payment. The maximum pensionable earnings were $47,200 for 2010, with a basic exemption of $3,500. The contribution rate is 4.95 per cent of the remainder, so the maximum employee contribution for 2010 is $2,163.15 or $180.26 a month. For the self-employed the maximum is $4,326.30.

Line 312 and 317–EI Premiums. This is based on minimum insurable earnings of $2,000 and maximum earnings of $43,200 in 2010. The premium rate was 1.73 per cent, making the maximum premium $747.36 in 2010. The employer pays a rate of 1.4 per cent of this. The EI premium rate increase for 2011 will be limited to 1.78 per cent (an increase of 0.05 per cent). For 2011 and subsequent years, the increase will be no more than 0.10 per cent per year. The Quebec premium rate is 1.36 per cent for 2010. Beginning in 2010, self-employed taxpayers may opt into paying EI premiums in order to gain maternity, parental, sickness and compassionate care benefits. Premiums paid are the same as an employee would pay.

Line 306–Amount For Infirm Dependant Over 18. The amount claimable for 2010 is $4,223 and will be reduced by the dependant’s net income over $5,992. The definition of dependant for these purposes is your child or grandchild, or your or your spouse’s parent, grandparent, brother, sister, aunt, uncle, niece, or nephew; born in 1992 or earlier. This person must have a marked impairment in physical or mental functions, be a resident of Canada and be dependent on you or others for support. It can also be someone older than you (e.g. your parent). The amount is not claimable if you claimed the dependant for the Amount for Eligible Dependant or the Caregiver Amount.

Line 313–Adoption Expense Tax Credit. For 2010, the maximum amount claimable is $10,975 for the adoption of each child under 18. This can be claimed by either spouse.

Line 314–Pension Income Amount. The amount claimable is not subject to indexing and therefore remains at $2,000 year over year. It offsets periodic pension income sources reported on Line 115 of the tax return or transferred from your spouse on line 116.

Line 315–Caregiver Amount. For 2010, the maximum claim is $4,223 reduced by the dependant’s net income in excess of $14,422. The dependant to whom you are giving care must be living with you. This can be your or your spouse’s child or grandchild; brother, sister, niece, nephew, aunt, uncle, parent, or grandparent. The dependant must be resident in Canada, over 18 and dependent due to a mental or physical impairment. Claims for a parent or grandparent are allowed, even if they are not impaired, so long as they are over age 65. This amount is not available to those who make support payments for the child.

Line 316–Disability Tax Credit. The basic disability amount is subject to indexing from year to year. For 2010, the maximum $7,239. Form T2201 Disability Tax Credit Certificate must be signed by a medical practitioner to qualify. For those supporting a disabled minor, this amount is enhanced by an indexed supplement of $4,223 for 2010, for a total claim of $11,462 for 2010. This is reduced by amounts claimed as child care expenses on Line 214 and the disability supports deduction on Line 215 in excess of a Basic Child Care Amount of $2,473 for 2010.

Line 323 and 324–Tuition, Education and Textbook Amount for Students and Transfers from Students. The tuition, education and textbook amounts must be claimed first by the student and if not needed, can be transferred to a supporting individual. They have not been indexed for 2010 and therefore remain at current level:

  • Tuition fees paid must be over $100 to each individual qualifying postsecondary institution the student attended.
  • Education amounts of $400 per month for full time students and $120 for part time students are possible and are meant to offset the costs of going to school.
  • Textbook amounts claimable are $65 a month more for full time students and $20 a month more for part time students.
  • The maximum transfer ($5,000 less the student’s claim) of the amounts above to supporting spouses, parents or grandparents is unchanged as well but is claimed on Line 324.

Line 319–Interest Paid on Student Loans. Students who are indebted under the Canada Student Loans Act, the Canada Student Financial or a similar provincial loan for post-secondary education can make a claim for interest paid on those loans for the current year or five immediately preceding years, as long as the loan was not co-mingled or consolidated with another loan.

Any unclaimed amounts can be carried forward five years. No claim is possible if you have a judgement against you if you defaulted in the past.

Line 326–Amount Transferred from Spouse or Common-Law Partner.

The following amounts can be transferred: the age amount, amount for minor children (born in 1993 or later; see below), pension income amount, disability amount and the tuition, education, and textbook amount for the current year (no unclaimed amounts from prior years).

Line 363–Canada Employment Credit. This amount is available to those reporting employment income on Line 101 or 104 of the tax return. It is provided to offset the costs of going to work. The maximum amount is $1,051 for 2010.

Line 364–Credit for Public Transit Passes. This credit allows for the deduction of the cost of public transit passes for travel in Canada on local buses, streetcars, commuter trains or subways and ferries. The pass must entitle the person to travel for an uninterrupted period of at least 5 days when the pass is purchased, but you have to purchase enough passes to travel for at least 20 days in any 28-day period. You can make the claim for yourself, your spouse, and children under 19 at the end of the year.

Line 365–Children’s Fitness Amount. The amount for children’s fitness is not indexed but remains at the lesser of $500 and the amount of qualifying expenses. The child must be under 16 to qualify; however, where the child is eligible for the disability amount, the child may be under 18 and the claim is increased by $500 (even if the amount paid is less than $500).

Line 367–Amount for Children Born In 1993 Or Later. For 2010, the amount to be claimed for each child is $2,101, provided the child earned no more than the Basic Personal Amount. Many people are unaware that this claim can be made for children under 18, provided the child lived with both parents throughout the year. The amount can be transferred from one spouse to the other for the best claim. Use the full amount even if your child was born on December 31–the credit can be claimed in full in the year of birth, death or adoption. In the case of shared parenting, an agreement on who will claim the amount will be required and in the case of single parents, the claim may only be made by the parent who made the claim for the “amount for eligible child”.

Line 368–Home Renovation Tax Credit. This provision was temporary and eliminated after 2009. Expenses incurred in January 2010 must be claimed on the 2009 return as this credit is not available for 2010.

Line 369 Line–First-Time Home Buyer’s Tax Credit. A non-refundable credit of up to $750 ($5,000 amount x 15 per cent credit rate) is available for first-time home buyers who purchase a qualifying home after January 27, 2009. The taxpayer and spouse may not have owned a home in the current year of any of the prior four calendar years. This criteria need not be met if the purchase of a home is for a taxpayer who is eligible for the Disability Tax Credit.

The HBTC may be claimed by either spouse so long as the home is registered in their name. Where one spouse does not need the full amount of the credit, the remainder may be claimed by the other spouse. Where two or more individuals purchase a home, the credit may be shared between them so long as the total claim does not exceed $5,000.

Line 330 To 332–Medical Expenses. This is always one of the most underclaimed areas of the tax return, and there are some changes for 2010. For expenses incurred after March 4, 2010, the cost of medical or dental services, or any related expenses, provided for purely cosmetic purposes are not claimable, unless the services are necessary for medical or reconstructive purposes. This includes botox and cosmetic dental work, for example.

Line 330 is used to claim medical expenses incurred in any 12 month period ending in the tax year for yourself, your spouse and minor children.

The claim is reduced by 3 per cent of your net income to a maximum of $2,024.

Claim amounts for other dependants on Line 331, using the same 12 month period. This time, however, use 3 per cent of their net income. The claim can be made for adult children, parents, grandparents, brothers, sisters, uncles, aunts, nephews or nieces resident in Canada to a maximum of $10,000, if these people depended on you for support.

Note that an additional refundable credit may be claimed on line 452 for medical expenses; however you must have actively earned income to do so.

(This excludes pensions or employment insurance benefits). This amount increased to $1,074 for 2010 and is reduced by 5 per cent of the taxpayer’s net income in excess of $23,775.

Line 349–Charitable Donations. Canadians are very generous and the tax system provides a significant reward when money is given or eligible shares are transferred to your favourite charity. Be aware however, that CRA can revoke charitable status and will not allow claims for participating in charitable donation schemes. The claim is 15 per cent of the first $200 and 29 per cent on the balance given. Those benefits are higher once provincial tax rates are factored in. When publicly traded shares are donated, any gain on the value of the shares since purchase will be tax-exempt and you’ll get a donation claim for the full value of the shares at the time they are donated. For exchanges of a partnership interest after February 26, 2008 or the transfer of shares in a private corporation for publicly traded shares, the gains will also be exempt if the publicly traded shares are donated to a qualified donee within 30 days of the exchange.

E. Clawback zones

The refundable and non-refundable tax credits you may be entitled to could be “clawed back”, if net income level exceeds certain thresholds. This is true of Old Age Security and Employment Insurance benefits as well. It’s always important to explore ways to reduce your net income, by contributing to an RRSP, for example, if you are age-eligible and have the required “earned income”. More about that later.

F. Provincial taxes

Your provincial taxes are determined based on where you live on December 31 of the tax year.

G. Taxation of different income sources

What’s important about all of the tax rates and brackets, is how they apply to different income sources you may have. This is a great “aha moment” for many taxpayers, who might have thought all income was taxed similarly. Not so. You want to watch your marginal tax rates–how much you’ll earn on the next dollar you make–because this can also vary greatly, especially when you combine federal and provincial rates.

H. Maximizing your earnings

1. News for Employees

Tax reporting for employees is relatively straight forward: The income is reported on a T4 slip and there have been no significant changes, except as it relates to benefits received through employment. These are summarized briefly below:

Employee Life and Health Trusts. Employers often contribute to group health and benefit plans under which the employee may choose to customize benefits. An employer’s contribution to an employee life and health trust (ELHT) is a Canadian resident trust, established by one or more employers to provide designated employee benefits for the benefit of ordinary employees, rather than key employees.

An ELHT can include any combination of group sickness or accident benefits, private health services plan benefits or group term life insurance benefits for employees or former employees of an employer, who can deduct the contributions, but here’s what’s new: only to the extent of designated employee benefits provided in a particular tax year. Any pre-funding therefore is deductible only in a future year when benefits are paid. Contributions in excess of amounts actuarially determined to be necessary to fund benefits are not deductible at all.

Here’s what you need to know as an employee: your contributions are not deductible, but could qualify for the medical expense tax credit, to the extent that they are contributions to a private health services plan held by the trust. Your contributions to a wage loss replacement plan that is administered by the employee life and health trust would reduce the taxable portion of any wage loss replacement received from the trust.

Ordinary benefits received from the plan are generally not taxable. However benefits such as employer-paid disability insurance benefits or payments on wind-up of the trust would be taxable. These rules apply to 2010 and subsequent years.

Taxation of Security Stock Option Benefits. This was likely the biggest change in the 2010 federal budget. Briefly, employees who receive stock option benefits from their employers will have a tax consequence in the year they exercise the options if they work for a public company or mutual fund trust. Previously up to $100,000 of stock option benefits could be deferred.

Also, for options exercised after March 4, 2010, the securities option deduction will only be available when the employee actually acquires the shares. Employees who cash out their options with their employer will not be eligible for the deduction. This closes a loophole where the employer could deduct the amount paid to the employee while the employee effectively paid tax on one-half of the cash they received.

Securities options, however, are still a valuable employee benefit, which allow the employee to participate in the increase in the value of the employer company’s stocks without having to purchase the stocks and with no risk prior to exercise.

Contributing to Registered Pension Plans. Employees may contribute to employer-provided pension plans at work, or to their own private pension plans, typically RRSPs. These registered plans are subject to contribution limits which change year-over-year and are indicated below:

  • RPP Contribution Deduction Limits: (a) Money Purchase or Defined Contribution (DC) Plans: $22,450 for 2010; thereafter the amounts will be indexed. (b) Defined Benefit (DB) Plans: starting in 2010, 1/9 the money purchase limit above.
  • RRSP Contribution limits: 18 per cent of last year’s earned income to a maximum of $22,000 (based on earned income of at least $122,222); for 2011 it will be $22,450 (based on earned income of at least $124,722 in 2010).

Note: Canada-US Tax Treaty: Note that cross-border workers may deduct their pension contributions made in the country where they work, in their residence country.

Employment Deductions. Employees may deduct limited out-of-pocket expenditures from the income reported on their tax return. The theory is that employers should be reimbursing employees for these costs otherwise.

Changes for 2010 are described below:

Truck Drivers’ Meal Expenses. Generally, only 50 per cent of an outlay for food or beverage for human consumption is deductible under the Income Tax Act.

But, a long-haul truck driver may claim 75 per cent of those expenses in 2010 and 80 per cent in tax years 2011 and beyond.

Auto Log Books. Employees who are required to use their own or an employer-provided car must keep an auto log book to back up claims for auto expenses. The requirements for keeping such logs has been relaxed and is described in more detail under the section for self employment.

Northern Residents Deductions. Both the basic residency amount and the additional residency amounts increase from $7.50 per day to $8.25 per day for 2008 and later years.

2. News for Students

Scholarship Exemptions. Students who receive scholarships qualify for an exemption for 100 per cent of scholarship income if they qualify for the full-time education amount. A full-time education amount may be claimed for each whole or part month in the year that the student was enrolled in a qualifying educational program at a designated educational institution and was enrolled full time, was enrolled only part-time but qualified for the disability amount, or was enrolled part time because of a mental or physical impairment.

Students who receive scholarship income but do not qualify to claim the full-time education amount may exempt up to $500 of scholarship income. The news for 2010 is that for students in part time programs, the scholarship exemption will be limited to tuition paid plus costs of program related materials , except where the student also qualifies for the Disability Tax Credit.

In addition, where the scholarship is received for a program that consists mainly of research, the education amount (and therefore the scholarship exemption) only applies if the program leads to a degree or diploma from a post-secondary educational institute.

Provincial tuition rebate programs. Several provinces have recently begun to reimburse tuition paid to post-secondary graduates if they remain in the province. Saskatchewan will reimburse 100 per cent of the tuition paid if the graduate remains in the province long enough, while Manitoba will reimburse up to 60 per cent, (both these credits are refundable) while New Brunswick will reimburse 50 per cent. (This is accomplished through a separate form, not integrated with the tax system). Check this out when filing your tax return, as many students appear to have missed this in the past.

News for Retirees

Retirees receive pension income generally from two sources: public pension, which consists of monthly payments from the Old Age Security (OAS) and the Canada Pension Plan (CPP), and private pension sources: employersponsored plans (also known as Registered Pension Plans or RPPs) and savings in self financed registered funds like the Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), Registered Disability Savings Plan (RDSP), or Tax Free Savings Account (TFSA) or other non-registered deposits.

Public Pensions. The OAS is a universal benefit, received by everyone who has reached age 65 regardless of income or contribution to the plan so long as they are resident in Canada for at least 10 years. Low income earners receive a supplement to the OAS, called the Guaranteed Income Supplement (GIS). The CPP is a contributory plan. The amount you receive is based on how much you and your employer contributed during your working life.

These amounts are indexed according to a formula linked to the Consumer Price Index (CPI), and so income levels will change. For 2010, OAS benefits total $6,222.15.

We mentioned earlier that the OAS can be “clawed back” if your individual net income exceeds a certain threshold. OAS is clawed back at a rate of 15 per cent as net income exceeds the base amount. OAS is fully clawed back when net income equals the sum of the base amount and the maximum OAS for the year, divided by 15 per cent.

For tax year 2010, net income that exceeds $66,733 will be subject to clawback. The OAS will be completely lost when net income exceeds $108,214. This is on an individual, not family basis. Therefore a couple can earn up to $216,428 before OAS is completely lost.

Guaranteed Income Supplement Benefit Payments are made to certain low income seniors to supplement income levels. The amounts differ depending on family status but for singles the supplement was $7,853.67, when income is below $15,816 (excluding OAS). Spouses Allowances are also paid in certain cases. These amounts are technically not taxable. Here’s what we mean: they are reported on the tax return for the purposes of increasing net income on line 236, but are deducted again on Line 250 before taxable income is calculated.

Canada Pension Plan Benefit Rates. For 2010, the maximum monthly retirement pension from CPP was $934.17 per month for a total of $11,210.04. The maximum disability pension was $1,126.76 a month or $13,521.12, and amounts were available for a disabled contributor’s children, for survivors of contributors, orphans and a lump sum death benefit. Be aware that where couples as individuals qualify for the maximum retirement benefit, the retirement and survivor benefits are combined into one individual maximum of $934.17. It makes a case for other retirement savings options where a “last to die” option is available.

Changes Coming to the Canada Pension Plan. Recent changes have been announced to the CPP, to be effective with the 2012 calendar year.

These include:

  • Eliminating the work cessation test for those who want to take CPP benefits before age 65. They no longer will have to stop working or reduce hours to do so.
  • Increasing the number of low-earnings drop out years, which allows for periods of unemployment or full time attendance at school to be disregarded when calculating pension benefit maximums. The drop out rate is currently 15 per cent, and this will increase to 16 per cent in 2012, 17 per cent in 2014.
  • Allowing workers to continue to work and make CPP contributions at the same time. To clarify, those who continue to work and receive CPP retirement benefits would be required to continue to contribute to the CPP up to age 65. Beyond age 65, retirees would have the option to continue to contribute if they want to increase the pension amount for future years. There does not appear to be any specific proposals to change the age 70 limit for CPP contributions.

Wage-loss Replacement Plan. Such payments are now exempt from pensionable employment definition under the CPP and so contributions are not required.

Roth IRAs. These are retirement compensation arrangements entered into by those working in the US. Contributions are not deductible, but investment earnings accrue tax free for US tax purposes, much like the TFSA in Canada. Under recent changes to the Canada-US Income Tax Convention, a Roth IRA will be a classified a “pension” for purposes of the Convention, as long as no contribution is made to the Roth IRA after December 31, 2008, while the individual is resident in Canada. In that case, income accumulating in the plan will continue to be tax deferred here in Canada.

Taxpayers who established Canadian residence prior to January 1, 2010 and had a Roth IRA, must file an election before April 30, 2011 if they wish to defer Canadian taxes on income earned within the Roth IRA. Taxpayers who establish residence after December 31, 2009 have until the filing due date for the return for that year to file the election.

U.S. Social Security Benefits. Canada will tax US Social Security and Tier 1 Railroad Retirement Benefits under new rules for benefits received before January 1, 1996 and after January 1, 2010. Prior to 1996, the amount of the exempt pension was 50 per cent. After that, 15 per cent of the amount will be exempt from tax in Canada. The March 4, 2010 budget reinstated the exempt portion to 50 per cent for Canadian residents in receipt of U.S. Social Security benefits before January 1, 1996, retroactive to January 1, 2010.

German Pensions. Retirees receiving foreign pensions have recently had a surprise–the German government is requiring the filing of German tax returns to report the income there. Fifty per cent of German social security benefits became taxable in Canada in 2003 and beginning in 2005, further changes were announced.

  • For pensions which began in 2005 or earlier, the portion of the pension that is non-taxable in Canada is 50 per cent for 2005 and 2006. The nontaxable amount determined in the second year remains constant for all subsequent years.
  • For pensions which began after 2005, the percentage that is non-taxable in Canada is set in the year that the pension starts. The 50 per cent rate for 2005 increases by 2 per cent each year for the period 2006 to 2020 and then increases by 1 per cent each year until the taxable percentage reaches 100 per cent for pensions which begin in 2040 or later. For 2010, that taxable percentage is 60 per cent of pension received.

RRSP and RRIF Losses after Death. For tax years after 2008, a deduction will be allowed on the final return of a deceased taxpayer for the decrease in value of the assets that were in the taxpayer’s RRSP or RRIF after the taxpayer’s death and before those assets are distributed to the beneficiaries so long as the distribution is made before the end of the year following the year of death. At death the FMV of those assets were included in the deceased’s income. Depending on the timing of the distribution, this may require an adjustment be filed by the taxpayer’s legal representative. Form RC249 has been created for executors to document the decline in value of RRSP assets.

News for Investors

Whether you earn dividend income, received stock option benefits or are investing in the Tax Free Savings Account or Registered Disability Savings Plan, there are a number of changes for you to take note of this year.

Dividend Income. As a result of reductions in corporate tax rates, the treatment of eligible dividends will be adjusted for 2010. Actual dividends received will be grossed up for tax purposes by 44 per cent, if they come from eligible public or private corporations. Then, in computing taxes payable, a dividend tax credit of 17.98 per cent will be allowed to offset this grossed-up amount. Be aware that grossed-up dividends will affect the size of net income (Line 236), which can in turn reduce refundable and non-refundable tax credits. Seniors especially should keep an eye on their income planning so that Old Age Security, pharmacy deductibles and per diems at nursing homes are not artificially inflated with this source.

Prescribed Rates For Shareholder And Inter Spousal Loans. The past several years have been good ones in which to borrow from your own corporation through a shareholder’s loan, or divide assets between spouses through inter-spousal loan arrangements. The interest rate to be charged on these loans, as prescribed by CRA, has been quite low: only 1 per cent since the 2nd quarter of 2009 and throughout 2010. This compares to a 4 per cent rate at the start of 2008.

If you made a loan to transfer assets to your spouse, be sure that interest is paid on that loan by January 30 of the year following the year in which the money was outstanding. The lender will have to report that interest on his or her tax return but the borrower may claim the interest paid as a carrying charge.

Capital Gains and Losses. There are some important changes for investors with income-producing assets this year: Claiming Losses. It is possible to apply capital losses suffered in prior years to offset capital gains this year. In fact you can use unclaimed capital losses from tax year 1972 to 2009 on the 2010 tax return. If you missed reporting a capital loss on your tax return in the past ten years, you can still file an adjustment to those returns to preserve it. Capital losses incurred in the current year are first used to offset gains in the current year, then can be carried back three years or forward indefinitely.

Recognizing Departure Tax. In addition, changes under the Canada-US Tax Treaty now recognize the departure tax that emigrants from Canada are subject to. Under new rules, the taxpayer may elect in the new home country, to have disposed of and reacquired the property at the time of change at its new cost base. What is interesting about this change is that it will apply to dispositions since September 17, 2000.

Taxation of Employee Securities Options. Prior to March 4, 2010 employees who exercised their option to receive securities from the employer could defer up to $100,000 of the benefit to a future year. An election has to be filed by January 16, 2011 for any such transactions made in 2010. However, this election is no longer available for options exercised after budget date.

Also, employees who exercise a stock option after 2010 will notice the employer has withheld and remitted to CRA an amount to reflect the tax due on the stock option benefit.

There is special relief for those who dispose of previously deferred stock options prior to 2015. Taxpayers who are in a loss situation as a result of the sale or disposition of those shares may be eligible to elect alternate treatment of the disposition. If the alternate treatment is elected, the employee is deemed to have realized a capital gain equal to the amount of the employee securities option taxable benefit. This deemed gain will offset the loss on the sale of the securities. A special tax must be paid in that case, equal to the amounts actually received on the disposition so the election will only make sense where the proceeds of disposition are less than the tax that would have been payable on the taxable benefit less the securities option deduction.

Also, the deemed gain will be excluded from the definition of “adjusted income” for the purposed of the Child Tax Benefit and the GST Credit.

This treatment may be elected for dispositions after March 3, 2010 and before 2015.

TFSA Income Inclusion on Death. Income earned within a Tax Free Savings Account is tax exempt until the death of the TFSA holder. Income becomes taxable after the death of the last holder of a TFSA. However, under new rules applying after October 16, 2009, the tax exempt status of the plan continues until the end of the year following the year of death.

Any income earned or capital appreciation accrued by the TFSA trust in the “exempt” post-death period will be included in the income of the recipient if paid out to that person in the period, or otherwise in the trust’s income in its first taxable year. Income earned in respect of non-qualified investments will also be included in the recipient’s income.

Registered Disability Savings Plans. The RDSP is an excellent way to establish a private pension plan for disabled persons who qualify for the Disability Tax Credit and are under the age of 60. Up to $200,000 can be deposited and there is no annual maximum. No deduction is available but the income in the plan accrues tax free. In addition the government provides lucrative Grants and Bonds to speed up the accumulation of tax free income in the plan: Canada Disability Savings Grants (CDSG) are payable until the end of the year in which the beneficiary turns 49. The government will match contributions based on family net income levels if the beneficiary is under 18; for disabled adults, their own net income is used. For example for family net income over $81,941, the CDSG is $1 for every $1 contributed up to $1,000.

For incomes under $81,942, $3 is matched to every $1 contributed for the first $500; then $2 is matched to every next dollar up to $1,000. A beneficiary can earn up to $70,000 in CDSGs in a lifetime.

The Canada Disability Savings Bonds (CDSB) will provide an additional amount of $1,000 when family income is less than $23,855 and a partial amount for incomes up to $40,970 in 2010.

Catch-Up of RDSP Grants and Bonds. Under new rules which start in 2011, unused entitlements to Canada Disability Savings Grants and Bonds will be calculated for the 10 years prior to the opening date (but after 2008) and paid into the plan in the year the plan is opened. Therefore, if you have been eligible to contribute to the RDSP since 2008 but haven’t, you’ll be able to receive your CDSG and CDSB entitlements when you do open an account just as if you had opened the plan in 2008.

RRSP Rollovers to RDSPs. For deaths occurring after March 3, 2010, RRSP, RRIF and RPP balances remaining at death can be rolled over on a tax-free basis to an RDSP of a surviving child or grandchild. Such rollovers are limited to the recipient’s RDSP contribution room and will not generate CDSG. Where the taxpayer died after 2007 and before 2011, transitional rules enable the same tax treatment if the contribution is made after June 30, 2011 and before 2012.

If the amounts are transferred into an RDSP, the recipient may claim a deduction for the lesser of the amount included in income and the amount transferred.



Excerpted from Evelyn Jacks’ Essential Tax Facts. © 2010 Evelyn Jacks Productions. All rights reserved. Excerpted with permission of the publisher Knowledge Bureau, Inc.

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