Old Chestnut Becomes a Small Centrepiece
Arthur Drache, February 26, 2008
Within minutes of the delivery of the federal Budget, Stephane Dion took the issue of an election off the table. This was a prudent move (to use the much overworked adjective that the Tories have been using for weeks) because the offering could not have generated passion in any political breast.
The budget projects revenues of $241.9-billion in the coming year, down a little more than one per cent, and a surplus of $2.3-billion, down from $10.2-billion this year. In the following year the surplus is projected to shrink to just $1.3-billion. All we need is a mild recession and the country will be in a deficit position.
The drop in revenues and, in turn, the surplus reflects not only the impact of $1.4-billion in new tax cuts and new spending, and measures from the October Economic Statement, but a much weaker economy. The budget projects growth this year of just 1.7%, down sharply from the 2.4% expected at the time of the fall economic statement. The expected rebound next year to 2.4% is also less than the 2.7% expected last fall.
The main personal tax item of the 2008 Budget is an old chestnut which has been a hobby-horse of a lot of conservative economists. It is a plan which allows the contributions of funds on a non-deductible basis to a Tax Free Savings Account (TFSA)
While contributions to a TFSA will not be deductible in computing income for tax purposes, income, losses and gains in respect of investments held within a TFSA, as well as amounts withdrawn, will not be included in computing income for tax purposes or taken into account in determining eligibility for income-tested benefits or credits delivered through the income tax system (for example, the Canada Child Tax Benefit, the Goods and Services Tax Credit and the Age Credit). Nor will such amounts be taken into account in determining other benefits that are based on the individual’s income level, such as Old Age Security benefits, the Guaranteed Income Supplement or Employment Insurance benefits. We can imagine how much somebody who receives GIS will use this sort of plan.
Any individual (other than a trust) who is resident in Canada and 18 years of age or older will be eligible to establish a TFSA. The individual will be required to provide the issuer of the account with his or her Social Insurance Number when the account is established. An individual will be permitted to hold more than one TFSA.
An individual will be able to make total TFSA contributions up to the contribution room he or she has available. Starting in 2009, individuals 18 years of age and older will acquire $5,000 of TFSA contribution room each year. The $5,000 limit will be indexed to inflation and the annual additions to contribution room will be rounded to the nearest $500. Unused contribution room will be carried forward to future years. Obviously, when thirty years have gone by and the individual still has large-scale contribution room and substantial investible income, the beauty of the plan becomes obvious.
A TFSA will generally be permitted to hold the same investments as a Registered Retirement Savings Plan (RRSP). The RRSP qualified investment rules accommodate a broad range of investments guaranteed investment certificates and, in certain cases, shares of small business corporations.
Because the investment income within, and withdrawals from, a TFSA will not be taxable, interest on money borrowed to invest in a TFSA will not be deductible in computing income for tax purposes. There will be no prohibition in the Income Tax Act on an individual’s ability to use their TFSA assets as collateral for a loan.
Income attribution rules will not apply. Generally, an individual’s TFSA will lose its tax-exempt status upon the death of the individual. (That is, investment income and gains that accrue in the account after the individual’s death will be taxable, while those that accrued before death will remain exempt.) However, an individual will be permitted to name his or her spouse or common-law partner as the successor account holder, in which case the account will maintain its tax-exempt status. Alternatively, the assets of a deceased individual’s TFSA may be transferred to a TFSA of the surviving spouse or common-law partner, regardless of whether the survivor has available contribution room, and without reducing the survivor’s existing room.
This sort of plan will of course start to compete with RESPs, RRSPs and other savings plans. It is essentially a plan for those with plenty of excess money.which is why under previous governments the plan had always been rejected.
The other personal tax changes are far less dramatic, which gives you and idea how uninspiring this year’s offering is.
. Currently, contributions to an RESP can be made for 21 years following the year in which the plan is generally entered into. An RESP must be terminated by the end of the year that includes the 25th anniversary of the opening of the plan. These limits are extended by an additional four and five years, respectively, for single-beneficiary RESPs if the beneficiary qualifies for the Disability Tax Credit (DTC). Finally, no contributions maybe made to a family plan for a beneficiary who is 21 years of age or older.
. There is a modest increase in the Northern Residents deduction.
. There are some new additions to the eligibility for the medical expenses tax credit which has of course been devalued by the drop in the tax credit rate for 15.5% to 15%.
. There are also some promises to fine tune the registered disability savings plan.
It a nutshell, this budget had little to offer because the table was more or less bare after the October Economic Statement. The TFSA is a nod to the Flaherty/Harper conservative constituency and means nothing at this stage of the game. Of course, its creation would allow a future government to boost the limits substantially when the political climate becomes ripe.