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Jim Maroney

:: 2002 personal tax return changes adds the effect of indexing on various tax credits, tax brackets and income testing thresholds

:: No sooner is the 2003 RRSP season relegated to the history books, the dreaded income tax season rears its ugly head. Of course, the ugliness of tax season depends, in large part, on your personal tax situation – if you’re expecting a refund you’ve been chomping at the bit to get on with it; if you’re facing a payable situation, you’ve probably been laying awake at night scheming.

Before you hunker down for endless hours pounding away on a calculator it’s time for a quick tour of some of the changes to the 2002 personal tax return.

Comparing the 2001 personal tax return to the 2002 version, the most obvious change is the effect of indexing on the various tax credits, tax brackets, income testing thresholds and so on. Since 2000, these items have been indexed to the average Consumer Price Index for the twelve-month period ending on September 30 of the preceding year. Following this formula, the factor applied in adjusting the applicable 2002 amounts was 3 per cent. Because of the way the formula works I can already give you the heads up for 2003 when the factor will be 1.6 per cent.

As an example, for 2002 the CPI indexing has caused the federal basic personal amount (i.e., the amount of income all taxpayers can earn without paying federal tax) to rise from $7,412 to $7,634. Similar adjustments have been made to the various federal personal credits (e.g., the married amount) and the federal tax brackets as well, with one notable exception – the pension credit.

Seniors, if you’re looking for another reason to get out your protest sign and start raising a stink this is your taxation cause celebre. For some inexplicable reason, the lowly pension credit has been mired at a measly $1,000 for as long as I can remember (or, better yet, as long as someone with a good memory can remember). At its current $1,000 level, this tax credit saves seniors a whopping $221 of income tax each year – the equivalent of a cup of coffee (Starbucks excepted) every couple of days.

Why this credit is not indexed and all others are escapes me. Of course a cynic might suggest that, with the first of the baby-boomers about to retire, the mandarins in Ottawa see some big dollars to be had by keeping this credit frozen.

Now that I’m in an ornery mood, I’ll turn my attention to the provincial government’s contribution to plucking the chicken. Last year around this time I wrote an article describing how the federal and provincial governments had “de-linked” allowing the provinces to establish their own distinct block of refundable and non-refundable tax credits, tax brackets etc. This “de-linking” resulted in taxpayers having to complete separate income tax calculations for the federal and provincial income tax amounts. Prior to “de-linking” the provincial share of taxes was simply calculated as a percentage of federal tax.

Our first taste of this new system was in 2000 although the system worked reasonably well that year because the provincial personal amounts were identical to the federal personal amounts. Unfortunately, this wasn’t the case for 2001 and many taxpayers found themselves confused when they tried to use their 2000 personal tax return as a roadmap.

A logical person might expect that the provincial government would use the same indexing factor as the federal government but, sorry folks, that’s not what’s taken place. Rather than increasing the various tax credits and tax brackets by the same 3 per cent the feds followed when adjusting their 2002 tax amounts, our provincial government has seen fit to increase the provincial equivalents by 2.1 per cent – that is, of course, with the exception of the $1,000 pension credit.

I’m not entirely sure of the formula the provincial government used to derive the 2.1 per cent indexing factor but my guess is that, like its federal counterpart, the adjustment is linked to changes in the CPI, although, in this case we’d be talking about the change in our province’s CPI. So the feds give taxpayers credit for national changes to CPI and the provincial government gives credit for provincial changes to CPI.

Or course this has certain logic to it, however, it does mean that the federal and provincial personal amounts, tax brackets etc. will continue to diverge as long as there are differences between the federal and provincial CPI.

Other changes to the 2002 personal tax return are relatively insignificant. The bottom of Schedule 7 now requires disclosure of the amounts withdrawn from an RRSP under the Home Buyer’s Plan. Schedule 11 has been revised for greater clarity by separating the calculation of tuition and education amounts available for transfer to another individual or carryforward to a future year.

All in all, you should find the 2002 version of the personal tax return very similar to the 2001 version.

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Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

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