BUDGET2014: Personal Tax Planning, Part 1

Another year, another budget. Sometimes I feel like I should not be surprised by what the Canadian government has in mind. Other years, I feel like a truck has side-swiped me out of nowhere.

This year’s budget had a bit of both. And if you have not had a chance to spend a couple of hours reading the ins and outs of the economic outlook according to the government of Prime Minister Stephen Harper, then here is a summary of some of the personal tax proposals that might affect you.

Personal Tax Measures

Split Income

Currently the Tax Act has a definition of “split income” aimed at minors so that they are taxed at the highest federal tax rate.

The Budget proposes to amend the definition of “split income” to include income that is directly or indirectly paid or allocated to a minor from a trust or partnership if the income is derived from a business or a rental property AND a person who is related to such a minor is either:

* Actively engaged on a regular basis in the activities of the trust or partnership to earn income from any business or rental property; or

* In the case of a partnership, has an interest in the partnership (whether held directly or through another partnership).

This measure will apply to the 2014 and subsequent taxation years.

Bye Bye Graduated Rates

This proposal was hinted at by the government in last year’s budget, so it came as no surprise that they actually made good on their threat.

Currently, testamentary trusts created under a Will get the benefit of the graduated tax rates. The Budget proposes that beginning in 2016, testamentary trusts (other than the first 36 months of an estate) will no longer benefit from the following:

* Gradated tax rates;

* Exemption from making income tax instalments; and

* Having an off-calendar year end.

As a result, after the first 36 months of an estate that arises after death, testamentary trusts will now be subject to a flat top-tax rate. There will continue to be access to graduated rates for trusts that have individuals eligible for the federal Disability Tax Credit as beneficiaries.

Tax Credits

Medical Expense Tax Credit – This credit will be expanded to include the design of an individualized therapy plan (subject to certain conditions) as well as expenses for service animals specially trained to assist individuals in managing severe diabetes.

Adoption Expense Tax Credit – Currently the maximum credit for adoption expenses is $11,774 per child. This amount has been increased to $15,000 per child for 2014 (to be indexed to inflation for years after 2014).

Mineral Exploration Tax

Credit – The Budget has extended the eligibility for the Mineral Exploration Tax Credit for flow-through share investors for one year. This applies to flow-through share agreements entered into on or before March 31, 2015.

GST/HST Credit – You will no longer be required to apply for the GST/HST credit on your return; rather the CRA will automatically determine if an individual is eligible to receive the GST/HST Credit. A notice of determination will be sent to you rather than having to apply for the credit. This measure will apply for 2014 income tax returns and for subsequent taxation years.

Search and Rescue Volunteers Tax Credit – The budget proposes a Search and Rescue Volunteers Tax Credit to allow eligible ground, air and marine search and rescue volunteers to claim a 15 per cent non-refundable tax credit based on an amount of $3,000. This measure will apply to the 2014 and subsequent taxation years.

Pension Transfer Limits

Back in 2011, a special rule was introduced in certain situations allowing a member leaving a defined benefit registered pension plan (RPP) – one whose estimated pension benefit was reduced due to plan underfunding – to disregard that benefit reduction when calculating the portion of a lump-sum commutation payment from the RPP that may be transferred to an RRSP on a tax-free basis (i.e., the transferable amount).

If the rule applies, the maximum transferable amount for a plan member who leaves an underfunded RPP will be the same as if the RPP was fully funded.

The budget proposes to extend this rule to commutation payments made, after 2012, to a plan member who leaves an RPP if that payment has been reduced due to plan underfunding and either:

* If the plan is an RPP other than an individual pension plan, the reduction in the estimated pension

benefit that results in the reduced commutation payment is approved pursuant to the applicable pension benefits standards legislation; or

* If the plan is an individual pension plan, the commutation payment to the plan member is the last payment made from the plan (i.e., the plan is being wound up).

This application of the rule must still be approved by the CRA.

– Samantha Prasad LL.B.


The TaxLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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