May
11
By Fin MacDonald
Fin MacDonald has over 20 years’ experience providing retirement and Income tax planning advice. Readers are however cautioned that responsibility falls on the taxpayer to ensure that all information is adequate and correct.
As I reach the deadline for the May Issue of the James Bay Beacon, we finally have a date for the Federal Budget, April 21, and there are leaks aplenty. So bear with me if some of my prognostications are a wee bit wide of the mark!
First, what we do know; the budget will have a 7.5 million dollar sales campaign, paid for by you and me. A typical federal budget’s promotion campaign costs three to four million dollars. This year you won’t be able to watch an NHL Playoff game without being told how wonderful the budget is.
Second, a “Balanced Budget Act” has been introduced. This outlines penalties for not meeting the requirement for the budget to be “balanced”. This, of course, is quite ironic given that the Conservatives have not balanced a budget since Fiscal Year 2007-2008. They also presided over Canada’s largest ever deficit in 2009-2010 – a whopping fifty-eight billion dollars. Since 2009-2010 the total amount added to Canada’s national debt (before interest) is 178 billion dollars. As an aside, people often ask “How in BC can we have ‘balanced budgets’ every year and our Provincial Debt goes up by billions every year. Anyone who has been responsible for the financial side of a business can tell you that there are Current expenditures and there are Capital expenditures. For example, the wages of your employees are Current, the cost of a new work truck or production machinery is Capital. The Capital expenditures are paid for over many years, not in one big bite. Same is true for government, a new bridge is a Capital expenditure, the maintenance of it is a Current expenditure.
Third, is all the talk about the doubling of the annual contribution limit for the Tax Free Savings Account from the current $5,500 to $11,000. TFSAs have, since their introduction in 2008, become quite popular but only 1 in 3 Canadians have opened one, and only 46% of those have maxed out their contribution room. This increase was a promise from the last election. Who would this benefit? In a town like Victoria this would benefit public servants, who, because they have little RRSP contribution room as they have defined benefit pension plans, are big users of TFSAs. Another group who would benefit is the Baby Boomer cohort. With a trillion dollar transfer of wealth from their parents over the next ten to twenty years, the ability to stash more of that beyond the reach of the taxman would be welcome.
Fourth, there is less talk about removing the $2,000 limit that was put in place for the savings from the family income splitting AKA Family Tax Cut, but this may well occur. Who would this benefit? The big winners would be one income families, for example, a family with one spouse making $100,000 per year would save $4,500 in total if the $2,000 cap was lifted. A two income family making that same $100,000 would only save the $700 currently allowed. A one income family making $200,000 would save $17,800! None of these savings are available to single parent families.
Fifth, is the campaign to end the minimum annual withdrawals from Registered Retirement Income Funds (RIFs). When the holder of a Registered Retirement Savings Plan (RRSP) turns 71 there are three options: take the money into income, purchase an annuity, or, transfer the funds to an RIF. Most people are now choosing to open an RIF because annuity rates are so low, and taking all the money into income negates the tax advantage. Once the RIF is opened a certain percentage of it must be withdrawn each year, based on your age. At age 72 the minimum amount is 7.48% of the total; this rises each year, until at age 94 and above, 20% of the total must be withdrawn. The rationale behind the campaign to end the mandatory withdrawals is that people are living longer and we should allow people to leave the money in their RIF until they need it. I would be surprised if Finance Minister Joe Oliver goes for this. An illustration of why: If you are not required to take the minimum out each year, you are not paying tax on it. If you wait until, say, you have major medical expenses or go into long term care; you will be able to use the Medical Expense Credit to shelter much of the income from tax. Again, I could be wrong!
Tax planning takes different forms depending upon where you are in life’s journey. A young family will want to set up Registered Education Savings Plan for their infants. While this does not provide tax savings, taking advantage of the grants available will help financially prepare your kids for post-secondary education. As the children grow, arts and fitness activities can recoup some of their costs through the tax credits available.
Saving for that first house can be done with your and your spouse’s Registered Retirement Savings Plans. The contributions to the RRSP reduce your taxes and up to $25,000 per person can be withdrawn under the Home Buyers’ Plan to help buy your first home. You may repay the amount withdrawn over 15 years, or you can elect to have that amount included in your income each year instead.
Another use of your RRSP funds is for the Lifelong Learning Plan. Under the plan, if you are going back to a qualifying post-secondary program on a full time basis (people with the Disability Tax Credit may enroll on a part time basis) you may withdraw up to $10,000 per year, to a maximum of $20,000. This is then either repaid or added to income in the same fashion as the Home Buyers’ Plan, except that the repayment period is 10 years.
Whether you are making a contribution to an RRSP or a TFSA, making regular monthly deposits enables your money to grow tax free for a much longer period than if your wait for the first 60 days of the year. Whether to make an RRSP or a TFSA contribution is based on many factors. How close to retirement are you? Will your retirement income be lower than it is now? Will you be eligible for social income supports such as the Guaranteed Income Supplement or the provincial Shelter Aid for Elderly Renters?
Next time, how did the budget affect your taxes? Using my lens of “Helping You to Keep More of YOUR Money” we’ll see what can be utilized.