Tax Tips (7) – Helpful information you should know
The following are a few new or enhanced tax changes that you may wish to consider when preparing your taxes for this year and the years ahead.
CHILD TAX CREDIT
Following up on last year’s introduction of the Universal Child Care Benefit, which provides a payment of $100 a month per child under age 6, parents are now able to claim a non-refundable tax credit of $2,000 for each child under the age of 18 years. At the lowest personal federal tax rate this will result in tax savings of up to $300 per child. Note that any unused portion of the credit can be transferred to the parent’s spouse or common-law partner. Also, this tax credit is available regardless of a parent’s income level.
SPOUSAL AND OTHER AMOUNTS
The amounts used to calculate the spousal and wholly dependant tax credit (previously $7,581) have been increased to match the basic personal amount of $9,600 for 2007. Going forward, the credit amounts will increase to match announced increases in the basic personal amount.
REGISTERED EDUCATION SAVINGS PLANS (RESPS)
As a means of providing more flexibility to families who save through RESPs, and to make RESPs more responsive to the changing needs of education today, changes have been made to the RESP program. The $4,000 annual RESP contribution limit has been eliminated, and the lifetime RESP contribution limit has been increased to $50,000 from $42,000.
The Canada Education Savings Grant (CESG) rules have also been changed. The maximum annual RESP contribution that will qualify for the 20 per cent CESG has increased to $2,500 from $2,000, thus increasing the maximum annual CESG per beneficiary to $500 from $400 per year. The maximum CESG for a year has increased to $1,000 from $800 if there is unused grant room from previous years. However, the lifetime CESG limit of $7,200 has not been changed.
REGISTERED DISABILITY SAVINGS PLANS (RDSPS)
The federal government announced the introduction of RDSPs, the Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB) to help parents and others save for the long-term financial security of people with severe disabilities. Intended to commence in 2008, the plan will be similar in design to the existing RESP.
Canadian residents who qualify for the disability tax credit or their parents or legal representative may establish the RDSP. The beneficiary will be the disabled individual and will be required to have a social insurance number to open a plan.
Contributions to an RDSP are not deductible but may qualify for a CDSG and a CDSB, which are based on family income. The maximum lifetime contribution per beneficiary is $200,000 with no annual limit. In addition, anyone can contribute to the plan up until the end of the year in which the beneficiary turns 59 years of age.
The investment income on contributions in the RDSP, CDSGs and CDSBs will accumulate tax-free and only the investment growth, CDSG and CDSBs will be included in the beneficiary’s income for tax purposes when paid out of an RDSP. However, payments from the RDSP will not affect other benefits such as the Canada Child Tax Benefit, the Goods and Services Tax credit, Old Age Security and Employment Insurance benefits.
The only individuals entitled to receive payments from the RDSP are the beneficiary or their legal representative and payments must commence by the end of the year in which the beneficiary reaches 60 years of age. Unlike RESPs though, contributors will not be entitled to a refund of their contributions.
LIFETIME CAPITAL GAINS EXEMPTION 1
The 2007 Federal Budget has proposed to increase the lifetime capital gains exemption amount to $750,000 from $500,000. The exemption will apply to dispositions of qualified small business corporation shares and qualified farm or fishing property that occur on or after March 19, 2007.
REDUCING TAX DEDUCTIONS AT SOURCE
The idea of a tax refund, particularly a large tax refund, is cause for celebration for most people, but it shouldn’t be. The reality is that a tax refund means you have paid the Canada Revenue Agency (CRA) too much tax throughout the year.
In essence, you have provided the government with an interest-free loan. The larger the refund, the larger the loan amount. You shouldn’t have to wait until the following spring to get your money back. Fortunately, there is a solution.
If you have non-payroll RRSP contributions, child care expenses, interest expenses on investment loans, alimony, maintenance or support payments, charitable donations or rental losses, you can reduce the amount of tax deducted at source by your employer. Simply complete CRA Form T1213, “Request to Reduce Tax Deductions at Source,” a straightforward one-page form, and send or take it to your local tax office.2 If approved, CRA will authorize your employer to deduct less tax from your pay.
Note that the new $2,000 child tax credit previously mentioned can also be used to reduce the tax deducted from each pay and consequently increase one’s “take home” pay.
Employees may notify their employer’s payroll department by submitting either of the following documents:
1. Complete a revised TD1 form found on the CRA website, or
2. Complete and return the Child Amount Notice. The amount claimed on the completed Child Amount Notice will be used to adjust your credit amount(s) in the payroll system and will also be attached to the existing TD1 on file as supporting documentation. The Child Amount Notice can be accessed online through the CRA website at: http://www.cra-arc.gc.ca
1 At time of printing this proposal had not yet passed into law.
Content provided courtesy of Manulife Investments
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