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Federal Budget Contains Good News for Average Canadians

The March 4, 2010 Federal Budget was a cautious document in a post-financial crisis environment, delivering no additional tax increases for most Canadians, but at the same time, a couple of interesting tax changes.

In particular, families, students and investors saw some positive change, while executives and business owners have seen the last of certain tax loopholes surrounding stock option benefits.

Tax Changes for Single Parents. If you are sharing custody of your children with an ex-spouse, or receiving benefits as a single parent you'll be interested in two new provisions:

  • Joint Custody of Children: Effective for payments received after June 2011, where a child lives more or less equally with two individuals who live separately, each of the individuals will be eligible to receive 50% of the amount of any Canada Child Tax Benefit, Universal Child Care Benefit (UCCB) and GST Credit received in respect of the child. Tax Tip: Each parent should invest these benefits in the name of the child to build up a great education fund, but also to avoid tax on resulting investment earnings.

  • UCCB for Single Parents: Beginning in 2010, where the UCCB is received by a single parent, the parent may elect to include it either in their own income or in the income of the child who was claimed as an "eligible dependant"; that is one who qualifies for an equivalent-to-spouse tax credit. Where that child has little or no other income, this election will eliminate the tax on the UCCB. In addition, if the child invests the UCCB, resulting investment earnings are taxed in the hands of the child. Tax Tip: Be sure to invest the tax savings the parent earns from this reporting change; possibly in an RRSP to leverage the tax results. Child benefits should be invested in a separate account in the hands of the child.

Medical Expenses: More and more people are having cosmetic surgery and in some cases the costs will be tax deductible. A good example is reconstructive surgery required after an accident or an illness, like cancer. However, for expenses incurred after March 4, 2010, the cost of medical or dental services, or any related expenses, provided for purely cosmetic purposes, will not be deductible. This includes the cost of botox, liposuction, hair replacement or teeth whitening. Tax Tip: Medical expenses are often under-claimed. From glasses and dental work to hearing aids and their batteries, a host of medical expenses can be claimed in the best 12 month period ending in the tax year.

Tax Savings for Taxpayers Receiving US Social Security: For recipients of US Social Security Benefits received after January , 2010, including Tier 1 Railroad Retirement Benefits, a 50% income inclusion rate will be allowed, rather than the post-1995 inclusion rate of 85% for any benefits related to pre-1996 service . This is a significant tax saving for those workers and their survivors. The claim can be made for tax year 2010 and future years. Tax Tip: Review prior filed tax returns to see if the taxpayer or his/her survivors will qualify.

Students are Affected, too. There are two provisions of interest to students and their supporting individuals in this budget:

  • Scholarship Exemptions: Where students receive a scholarship, fellowship, or bursary in connection with a part-time program, the scholarship exemption will be limited to the amount of the tuition paid for the program plus the cost of program-related materials, starting in 2010. This limitation will not, however, apply to students who are entitled to the Disability Tax Credit. In addition:
    • Programs that are research-based and qualifying for the education amount, and leading to a degree or diploma will qualify for the exemption.

    • Post doctoral fellowships will be fully taxable.

  • Education Amount: The budget clarifies that a post-secondary program that consists principally of research will be eligible for the Education Amount (and a scholarship exemption) only if it leads to a college or CEGEP diploma, or a bachelor, masters or doctoral degree (or an equivalent degree). Post-doctoral fellowships will not be eligible.

Tax Tip: Be sure to take advantage of the scholarship exemption. Many taxpayers mistakenly claim these income sources as income. Errors on prior filed returns can be corrected for a ten year period; this year, we are able to correct tax years 2000 and forward.

RRSP Maximum Contribution Room. Taxpayers can contribute 18% of their earned income to a maximum of $22,000 in 2010. This amounts to $1833.33 a month for those who qualify. However, the RRSP is also a great place to invest proceeds from inheritances or severance packages, too. The resulting deduction will reduce net income on the tax return, which is the number used to calculate refundable and non-refundable tax credits. Making that contribution can therefore save you tax dollars and increase social benefit payments as well. Tax Tip: Check out your available RRSP contribution room for tax year 2010 on your Notice of Assessment or Reassessment received with this year's tax filings.

RRSP Rollovers to RDSPs (Registered Disability Savings Plans): As of March 5, 2010, the rollover rules for RRSP balances remaining at death are extended to allow for tax-free rollovers from the deceased taxpayer's RRSP to the RDSP of a surviving child or grandchild. Such rollovers are limited to the recipient's RDSP contribution room. The rollovers will also generate a Canada Disability Savings Grant. However, such contributions will not be allowed until July 2011 to give the government and financial institutions time to adjust their systems to deal with such rollovers. Where the taxpayer died after 2007 and before March 5, 2010, transition rules will be put into place so taxpayers can avail themselves of similar rollovers. Tax Tip: Canada Disability Savings Grants are lucrative and can amount to a dollar match of 3-to-1 in some cases, depending on income level. This is a great way for families to create a private pension for someone who qualifies for the Disability Tax Credit.

Catch-Up of RDSP Grants and Bonds: Starting in 2011, contributors will be allowed to make "catch up contributions" when an RDSP is opened, CESG and CDSB entitlements will be calculated for the 10 years prior to the opening date (but after 2008) based on the beneficiary's income in those years. CDSB entitlements from the catch-up period will be paid into the plan in the year the plan is opened. When contributions are made to the plan, the CESG rate earned by those contributions will be paid as if the contributions were made in the year that the entitlements were earned. Where the entitlement will be paid at different rates, the grants will be calculated at the highest rate first. Tax Tip: Keep track of unclaimed grants and bonds for use in the future when more cash flow may be available. An RRSP contribution can free up some of that money for reinvestment purposes.

 

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