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TAXFlash News from IncomeTaxCanada.net
:: Federal government at work: Spreading cash around like a giant manure spreader
:: It was budget week in Canada this past week with our federal and provincial governments presenting budgets on February 18. Mr. Everything in Ottawa, Deputy Prime Minister and Finance Minister, John Manley presented what is viewed as his first and last budget - a budget that spread cash around like a giant manure spreader. Indeed, for a moment last TuesdayI thought I was watching That 70’s Show. Mr. Manley may have tabled the budget in the House of Commons but this effort had Jean Chretien’s fingerprints all over it. Evidently, feeling legacy-less after almost 40 years of public service, our nostalgic Prime Minister wanted to go out with a bang and with a bang he’ll go. By now you’ve either heard or read of the billions to be spent here and there so I’ll devote my allotted space to covering some of the tax-related changes likely to affect you and me. Probably the most high-profile change included in the budget was the increase in the RRSP contribution limit. Changes to RRSP contribution limits have become a story straight out of Ripley’s Believe It Or Not. This sorry saga of increases, delays and reversals dates back to 1991 when a $11,500 limit was introduced with a promised $1,000 increase each year through 1995 with inflation indexing thereafter. Twelve years hence and the RRSP limit has been stuck at $13,500 – a level it reached in 1996. Nonetheless, the current budget assures taxpayers that the limit will be increased from $13,500 to $14,500 for 2003, from $14,500 to $15,500 for 2004, from $15,500 to $16,500 for 2005, from $15,500 plus inflation indexing to $18,000 in 2006. For 2007 onward the proposed RRSP limit is $18,000 plus indexing for inflation (actually average wage growth to be technically correct). Unfortunately, the budget did not change the old 18 per cent of earned income calculation used to determine RRSP contribution limits. This means that the proposed increase in contribution limits will benefit primarily those with higher incomes – lower and middle-income taxpayers will benefit little from this change. It would have been nice to have seen the 18 per cent limit increase to enable this latter group to earn more RRSP contribution room to allow them to better save for their retirement. With the 18 per cent of earned income limit here to stay, those in a position to manage the amount of their income in any given year, will require an earned income of $80,556 in 2002, $86,111 in 2003, $91,667 in 2004 and an even $100,000 in 2005 to achieve the maximum RRSP contribution limit available under the proposed changes. Similar changes were introduced for employer-sponsored Registered Pension Plans where limits are to be increased to $15,500 in 2003, $16,500 in 2004 and $18,000 in 2005 with inflation indexing from thereon. Taxpayers who drive company-owned vehicles will undoubtedly welcome the changes announced to what’s known as the “standby charge” in tax lingo. The current standby charge, calculated at 2 per cent of the original cost of the company-owned vehicle (two-thirds of the lease cost in the case of a leased vehicle), can be reduced only where personal use is less than 12,000 kilometres per year and business use is at least 90 per cent of the total vehicle use. The kilometre limit is generally not too difficult to meet but the 90 per cent business use is another story when you consider that driving to and from work is personal use and not business use. Starting this year, the annual personal kilometre limit is increased to 20,000 and the required business use is reduced to 50 per cent. This change should reduce the standby charge for many taxpayers driving employer-provided vehicles. Small but long-overdue changes were announced to the EI system – a system that has been running massive surpluses in recent years – surpluses that have disappeared into that federal sinkhole known as general revenue. Staring in 2004, the EI rate will be reduced from 2.1 per cent to 1.98 per cent. The maximum insurable earnings will remain at $39,000 and the employer’s share will stay at 1.4 times the employee’s premium. A promise was also made whereby the Government will consult on a new EI rate-setting regime for 2005 and beyond, based on the principles of transparency and of balancing premium revenues with expected program costs. The only question I have is why the delay? Small business owners will be pleased to learn that the $200,000 small business limit (the taxable income limit under which the low corporate tax rate applies) will be increased by $25,000 in each of the next four years starting this year. The new $300,000 limit will be reached in the year 2005. Like many of the other changes included in this week’s budget, this one is long overdue. The last time this limit was changed was back in 1982 when it increased from $150,000 to the current $200,000 level – a delay of over twenty years. Not surprisingly, proration will be required where the taxation year of the corporation does not coincide with the calendar year. In 2000, rules were introduced to allow individuals to defer the recognition of capital gains on the sale of eligible small business investments where the proceeds were subsequently reinvested in another eligible small business. The existing rules capped the original investment and reinvestment amount at $2 million. This cap has now been removed. The time limit on reinvestment has also been extended to any time within the year of disposition and up to 120 days after the end of that year. Finally, although the change is unlikely to be appreciated by most Canadians, following the recommendation of the Auditor General of Canada, the government has pledged to adopt full accrual accounting in preparing its books. Businesses in Canada follow full accrual accounting that is designed, in part, to prevent manipulation of revenues and expenses thereby presenting a fairer financial picture. As the budget puts it “under full accrual accounting, the Government will provide a more comprehensive accounting of its assets and liabilities, presenting a more transparent picture of the Government’s financial position and enhancing accountability, the management of liabilities and the stewardship of assets”. Once again the question I have is what took so long?
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com. |
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Jim Maroney