FEDERAL BUDGET 2015 INSIGHTS FROM OUR TAX & ESTATE PLANNING PROFESSIONALS A balanced-budget, low-tax plan for 2015 The Conservative Government has announced that it has fulfilled its promises and that the budget is now balanced in their Economic Action Plan 2015. With the culmination of several years of strong fiscal management, Minister of Finance, Joe Oliver, announced on April 21, 2015 that the Government s priorities have succeeded in balancing the budget. The deficit has been reduced from $55.6 billion at the height of the global economic and financial crisis to a projected surplus of $1.4 billion for 2015 16. The Government continues to assert their priorities to create well-paying and secure jobs for Canadians and to lower taxes for Canadian families and businesses. These positive messages are not surprising in light of the upcoming federal election, slated for the Fall of 2015. However, quoting from Budget 2015 documents, the job is not done and the Government must stay the course to protect the economic interests of Canadians and the security of Canada. Several Budget proposals focus on reducing taxes for small business, providing more flexibility for retirement income for seniors and increasing opportunities for Canadians to save for their future. Budget 2015 targets specific tax savings measures to benefit key stakeholders partly in response to pressure from many industry groups. Following are some key measures as described in the Budget 2015 document and the impact they will have on you. Richardson GMP: Trusted. Canadian. Independent. Richardson GMP is Canada s largest independent wealth management firm, entrusted with over $28 billion in client assets. With offices across the country, we are home to some of Canada s most distinguished Investment Advisors. All Richardson GMP Advisors share a passion for professionalism and a commitment to delivering unbiased and unparalleled wealth management solutions. We are proudly Canadian. Fiercely independent. And dedicated to earning and rewarding your trust as stewards of your wealth. Tax & Estate Planning As an individual investor or a business owner you have unique objectives and priorities that need to be considered. At Richardson GMP, your Investment Advisor collaborates with our in-house Tax & Estate Planning professionals to deliver customized wealth management solutions designed to address tax, estate, insurance, philanthropic and succession needs. Our approach. Our expertise. Our experience. Our difference.
FEDERAL BUDGET 2015: A BALANCED-BUDGET, LOW-TAX PLAN FOR 2015 2 KEY BUDGET PROPOSALS For individuals Increase in the annual contribution limit for TFSAs to $10,000 beginning in 2015 Extended Employment Insurance Compassionate Care Benefits from six weeks to six months to better support Canadians caring for gravely ill family members Streamlined T1135 reporting for taxpayers with less than $250,000 of foreign holdings For seniors Lower RRIF minimum annual withdrawals based on longer mortality expectations creates more flexibility for retirement income Introduction of a Home Accessibility Tax Credit for seniors and individuals with disabilities For business Reduced tax rates on active business income below the Small Business Limit Increased Lifetime Capital Gains Exemption for Farm and Fishery businesses to $1 million For charities Extension of the preferred tax benefits to the gift of private company shares and real estate to qualified charitable organizations Broadening investment options to include limited partnerships PERSONAL TAX MEASURES Following are details of some of the key personal tax measures that have changed in Budget 2015. Tax-Free Savings Accounts The TFSA was introduced with an annual contribution limit of $5,000 per individual, indexed to inflation in $500 increments. On January 1, 2013, the TFSA annual contribution limit increased to $5,500 due to indexation. Budget 2015 proposes to increase the TFSA annual contribution limit to $10,000. This increase will apply as of January 1, 2015, so that a single annual contribution limit of $10,000 applies to the 2015 and subsequent calendar years. The TFSA annual contribution limit will no longer be indexed to inflation. Minimum withdrawal factors for Registered Retirement Income Funds (RRIFs) A Registered Retirement Savings Plan (RRSP) must be converted to a Registered Retirement Income Fund (RRIF), or the savings used to purchase a qualifying annuity, by the end of the year in which the RRSP holder attains 71 years of age. Contributions to a RRIF are not permitted and a minimum amount must be withdrawn annually beginning the year after it is established (i.e., no later than the year in which the RRIF holder attains 72 years of age). To determine the required minimum withdrawal amount, a percentage factor corresponding to the RRIF holder s age at the beginning of the year is applied to
FEDERAL BUDGET 2015: A BALANCED-BUDGET, LOW-TAX PLAN FOR 2015 3 the value of the RRIF assets at the beginning of the year. At the time of establishing the RRIF, holders also have the option to base the minimum withdrawal amounts on the age of their spouse or common-law partner. The existing RRIF factors were determined on the basis of providing a regular stream of payments from age 71 to 100 assuming a seven per cent nominal rate of return on RRIF assets and indexing at one per cent annually. Budget 2015 proposes to adjust the RRIF minimum withdrawal factors that apply in respect of ages 71 to 94, on the basis of a five per cent nominal rate of return and two per cent indexing. These assumptions are more consistent with long-term historical real rates of return on a portfolio of investments and expected inflation. The new RRIF factors will permit holders to preserve more of their RRIF savings in order to provide income at older ages, while continuing to ensure that the tax deferral provided on RRSP/RRIF savings serves a retirement income purpose. The new RRIF factors will apply for the 2015 and subsequent taxation years. To provide flexibility, RRIF holders who at any time in 2015 withdraw more than the reduced 2015 minimum amount will be permitted to re-contribute the excess (up to the amount of the reduction in the minimum withdrawal amount provided by this measure) to their RRIFs. Re-contributions will be permitted until February 29, 2016 and will be deductible for the 2015 taxation year. Extended Compassionate Care Benefits The demands of caring for a gravely ill family member can strain the job security of workers and the financial security of their families. Through the Employment Insurance program, Compassionate Care Benefits provide financial assistance to people who have to be away from work temporarily to care for a family member who is gravely ill with a significant risk of death. Budget 2015 proposes to extend the duration of Compassionate Care Benefits from the current six weeks to six months as of January 2016. Home Accessibility Tax Credit Budget 2015 proposes to introduce a new Home Accessibility Tax Credit. The proposed non-refundable credit will provide tax relief of 15 per cent on up to $10,000 of eligible expenditures per calendar year, per qualifying individual, to a maximum of $10,000 per eligible dwelling. Qualifying individuals Seniors and persons with disabilities will be considered qualifying individuals for the purposes of the Home Accessibility Tax Credit and will be able to claim the credit. Example: Mary is age 85 and the fair market value of her RRIF on December 21, 2014 was $100,000. Under the existing rules, Mary would be required to withdraw a minimum of $10,330 from her RRIF in 2015. Under the proposed rules, her minimum withdrawal in 2015 would be $8,510. All withdrawals from the RRIF are taxable in Mary s hands. Age (start of year) RRIF factors Existing Factor New Factor % % 71 7.38 5.28 72 7.48 5.40 73 7.59 5.53 74 7.71 5.67 75 7.85 5.82 76 7.99 5.98 77 8.15 6.17 78 8.33 6.36 79 8.53 6.58 80 8.75 6.82 81 8.99 7.08 82 9.27 7.38 83 9.58 7.71 84 9.93 8.08 85 10.33 8.51 86 10.79 8.99 87 11.33 9.55 88 11.96 10.21 89 12.71 10.99 90 13.62 11.92 91 14.73 13.06 92 16.12 14.49 93 17.92 16.34 94 20.00 18.79 95 20.00 20.00
FEDERAL BUDGET 2015: A BALANCED-BUDGET, LOW-TAX PLAN FOR 2015 4 For the purposes of this credit: seniors are individuals who are 65 years of age or older at the end of the particular taxation year; and persons with disabilities are individuals who are eligible for the Disability Tax Credit at any time in a particular taxation year. The Home Accessibility Tax Credit may also be claimed by the following individuals (provided that all other conditions are met): the spouse or common-law partner of the qualifying individual; a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the qualifying individual; or a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the qualifying individual s spouse or common-law partner. Where one or more qualifying individuals or eligible individuals make a claim in respect of an eligible dwelling, the total of all amounts claimed by the qualifying individual(s) and eligible individuals for the year in respect of the eligible dwelling must not exceed $10,000. Streamlining T1135 reporting requirements A Canadian-resident individual, corporation or trust and certain partnerships that, at any time in a taxation year, owns specified foreign property with a total cost of more than $100,000 must file a Foreign Income Verification Statement (Form T1135) with the Canada Revenue Agency. To reduce the compliance burden on taxpayers, Budget 2015 proposes that if the total cost of a taxpayer s specified foreign property is less than $250,000 throughout the year, the taxpayer will be able to report these assets under a new simplified foreign asset reporting system, for tax years beginning after 2014. The current reporting requirements will continue to apply to taxpayers with specified foreign property that has a total cost at any time during the year of $250,000 or more. CORPORATE TAX MEASURES Following are details of some of the key corporate tax measures that have changed in Budget 2015. Small business tax rate The small business deduction currently reduces to 11 per cent the federal corporate income tax rate applying to the first $500,000 per year of qualifying active business income of a Canadian-controlled private corporation (CCPC). To compensate a taxable individual receiving dividends for corporate income taxes that are presumed to have been paid on the corporate income that funded those dividends, the tax rules provide a Dividend Tax Credit (DTC). The DTC is generally meant to ensure that income earned by a corporation and paid out to an individual as a dividend will be subject to the same amount of tax as income earned directly by the individual. To further reduce taxes paid by small businesses, Budget 2015 proposes a two percentage-point decrease in the 11-per-cent small business tax rate to a 9-per-cent small business tax rate by January 1, 2019.
FEDERAL BUDGET 2015: A BALANCED-BUDGET, LOW-TAX PLAN FOR 2015 5 In conjunction with the proposed reduction in the small business tax rate, Budget 2015 also proposes to adjust the gross-up factor and DTC rate applicable to non-eligible dividends (generally dividends distributed from corporate income taxed at the small business tax rate). See the chart to the right for the proposed changes. Lifetime capital gains exemption for qualified farm or fishing property Small business tax rate reduction and DTC adjustment for non-eligible dividends Small business tax rate (%) 2015 2016 2017 2018 As of 2019 11 10.5 10 9.5 9 Gross-up (%) 18 17 17 16 15 The income tax system provides an individual with a lifetime tax exemption for capital gains realized on the disposition of qualified small business corporation shares and qualified farm or fishing property. The amount of the Lifetime DTC (%) 11 10.5 10 9.5 9 Capital Gains Exemption (LCGE) is $813,600 in 2015 and is indexed to inflation. Budget 2015 proposes to increase the LCGE to apply to up to $1 million of capital gains realized by an individual on the disposition of qualified farm or fishing property. This measure will apply to dispositions of qualified farm or fishing property that occur on or after Budget Day. For taxation years after 2015, the LCGE for qualified farm or fishing property will be maintained at $1 million until the indexed LCGE applicable to capital gains realized on the disposition of qualified small business shares ($813,600 in 2015) exceeds $1 million. At that time, the same LCGE limit, indexed to inflation, will once again apply to the three types of property. Other corporate measures continue to focus on reducing red tape for businesses, for example by making it easier for new employers to remit taxes on a quarterly basis. The Government also proposes further consultation with certain businesses in relation to the definition of active and passive business income for tax purposes. Budget 2015 promises to provide support for small businesses through the Small Business Job Credit and Employment Insurance (EI) premium freezes for three years, followed by a committed reduction in EI premiums to a seven-year break-even rate in 2017. CHARITABLE GIVING Donations involving private corporation shares or real estate Donations to registered Canadian charities and other qualified donees are eligible for a charitable donation tax credit (if the donor is an individual) or deduction (if the donor is a corporation). In addition, donations of publicly listed securities to qualified donees are exempt from capital gains tax. Donations of ecologically sensitive land and certified cultural property to certain qualified donees are also exempt from capital gains tax. In contrast, taxable capital gains can arise on donations of private corporation shares or other types of real estate.
FEDERAL BUDGET 2015: A BALANCED-BUDGET, LOW-TAX PLAN FOR 2015 6 To increase support for charities, Budget 2015 proposes to provide an exemption from capital gains tax in respect of certain dispositions of private corporation shares and real estate. The exemption will be available where: cash proceeds from the disposition of the private corporation shares or real estate are donated to a qualified donee within 30 days after the disposition; and the private corporation shares or real estate are sold to a purchaser that is dealing at arm s length with both the donor and the qualified donee to which cash proceeds are donated. The exempt portion of the capital gain will be determined by reference to the proportion that the cash proceeds donated is of the total proceeds from the disposition of the shares or real estate. Anti-avoidance rules may limit the application of the new rules for certain dispositions. This measure will apply to donations made in respect of dispositions occurring after 2016. Providing charities with more flexibility to diversify their investments Canadian charities, especially foundations, often invest a portion of their resources in long-term investments. Economic Action Plan 2015 proposes to permit charities to invest in limited partnerships. This would allow charities to diversify their investment portfolios to better support their charitable purposes. This measure applies in respect of investments in limited partnerships that are made or acquired on or after Budget Day. OTHER MEASURES Tax avoidance of corporate capital gains (Section 55) The Income Tax Act contains an anti-avoidance rule that generally taxes as capital gains certain otherwise tax-deductible inter-corporate dividends. This rule typically applies where a corporation that is about to dispose of shares of another corporation receives from that other corporation tax-deductible dividends that in substance reflect the untaxed appreciation in the value of the other corporation. Budget 2015 proposes an amendment to ensure that the anti-avoidance rule applies where one of the purposes of a dividend is to effect a significant reduction in the fair market value of any share or a significant increase in the total cost of properties of the recipient of the dividend. As well, changes will address the use of stock dividends (i.e., dividends that consist of additional shares of the same corporation). Synthetic equity arrangements The Income Tax Act permits a corporation to deduct, subject to certain exceptions, taxable dividends received in computing its taxable income. This inter-corporate dividend deduction is intended to limit the imposition of multiple levels of corporate taxation on earnings distributed from one corporation to another. The existing dividend rental arrangement rules are intended to deny the inter-corporate dividend deduction to a shareholder where the main reason for an arrangement is to enable the shareholder to receive a dividend on a share and the economic exposure (expressed as a taxpayer s risk of loss or opportunity for gain or profit) to the share accrues to someone else. Budget 2015 proposes to modify the dividend rental arrangement rules to deny the inter-corporate dividend deduction on dividends received by a taxpayer on a Canadian share in respect of which there is a synthetic equity arrangement.
FEDERAL BUDGET 2015: A BALANCED-BUDGET, LOW-TAX PLAN FOR 2015 7 CONCLUSION Budget 2015 confidently asserts the success of the Government s fiscal policy over the last several years; the books are balanced and the Government continues to support growth in jobs and security for Canadians. Not surprising in an election year, the messaging is very positive and several measures promise tax savings for average Canadians. Small businesses in Canada can expect to experience significant tax reductions which are to be implemented over the next 4 years. All Canadian residents will also benefit from the increased annual contribution limit for Tax Free Savings Accounts effective January 1, 2015 and expanded charitable giving options. Seniors will be most interested in the introduction of new factors for retirement income withdrawals from their Registered Retirement Income Fund accounts which better reflect increased life expectancies. This will provide them with more flexibility in managing their retirement income. New measures will assist Canadians with the financial impact of health care issues through the new Home Accessibility Tax Credit and the extension of the Compassionate Care Benefit. The material provided in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal or tax advice. This material does not take into account your particular situation and is not intended as a recommendation. It is for general purposes only and you should seek advice regarding your particular circumstance from your personal tax and/or legal advisors. This material is based upon information considered to be reliable, but neither Richardson GMP Limited nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Apr. 2015 Insurance services are offered through Richardson GMP Insurance Services Limited in BC, AB, SK, MB, NWT, ON, QC, NS, NB, PEI and NL. Additional administrative support and policy management are provided by PPI Partners. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited. Richardson GMP Limited, Member Canadian Investor Protection Fund. 15143.04.15