Few breaks for families in budget

The federal government’s 2013 budget unveiled Thursday contains a select few initiatives aimed at reducing costs at the household level including efforts to close the U.S.-Canada price gap for young families.

The budget proposes to eliminate border tariffs on baby clothing and sporting equipment. The so-called “hockey credit” assumes retailers will pass the added savings on to consumers. The decision comes with a commitment to monitor prices and add to the list of affected goods.

Here’s a breakdown of existing tariffs on the affected goods (source: Budget 2013, Department of Finance)

The government also said it aims to create a “comprehensive financial consumer code” governing things like mobile banking and elderly financial abuse among others.

New tax breaks

The government plans to enhance the Adoption Expense Tax Credit. Under the new rules, families will be able to claim a 15% tax credit on eligible adoption expenses including mandatory provincial home studies and adoption courses for a benefit of up to $11,669 per child.

The document also introduces a new, temporary tax credit for first-time charitable donations claimants to “encourage all young Canadians to donate to charity.” The First-Time Donor’s Super Credit will increase the value of the existing tax credit by 25% on cash donations of up to $1,000 if neither the taxpayer nor their spouse has claimed the credit since 2007. On a gift of $500, that’s an extra $125 in tax help.

Tax loopholes tightened

While the budget offered little in the way of incentives for average Canadians, there were a few measures aimed at tightening up tax loopholes used by investors and business owners.

If you have a safety deposit box and have been claiming the cost of keeping that box as a work or investment related expense you will no longer be able to. The government says paperless record-keeping have made safety deposit boxes less critical to investors. “Taxpayers using safety deposit boxes are increasingly likely to be using the boxes for personal purposes (e.g., to safeguard valuables), rather than for an income-earning purpose,” it said.

MoneySense’s resident tax expert and President of the Knowledge Bureau Evelyn Jacks says other changes to the tax system are “more significant than meets the eye.”

Shareholders and business-owners of privately-held Canadian corporations can expect a tax increase on dividend disbursements starting next year.

While the dividend gross-up for non-eligible disbursement has been reduced—from 25% to18%—the amount of tax on these disbursements has increased by approximately 1.6%, explained Don Carson, a chartered accountant representing the CICA, and a tax partner at Markham, Ont.-based MNP accounting firm.

That means if you earned $100, you’d report $118 as dividend income and be charged 72% on those earnings (the new Dividend Tax Credit rate for non-eligible dividends), rather than the 67%.

“If you were earning $135,000 or more, your federal tax rate on those earnings would rise from 19.6% to 21.2%,” Carson said.

“That is concerning for those small business owners who are counting on those dividends to fund their retirement,” Jacks said.

However, the vast majority of Canadians will not be impacted by these changes as most investors hold shares in public corporations, which are eligible for the current Dividend Tax Credit (which includes a 25% gross up and a corresponding Dividend Tax Credit of 2/3, or 67%).

This tax increase on these specific dividends is by far the largest revenue take from the government, Jacks said.

On the plus side, the capital gains deduction will increases to $800,000 starting in 2014 and will be indexed to inflation thereafter.

Also noteworthy are changes to life the way life insurance annuities are taxed. Anyone holding a leverage life insurance annuity, or a 10/8 arrangements (another leverage insurance product) will now be subject to accrual-based taxation and no deduction will be allowed for any portion of the insurance premium paid on the policy.

These federal changes do not impact regular life insurance held in a corporation, only the two types of life insurance arrangements that enable high net worth individuals to avoid paying personal tax on the withdrawals of retained earnings from a private corporation.

“The government doesn’t like the fact that these policies—which are completely legally permissible under the current Income Tax Act—get very good tax results, so they’re trying to shut the door,” Carson said.

The changes come into effect immediately, meaning that anyone holding these types of insurance investment policies will be subject to tax immediately.

“These changes will only really affect high net worth Canadians who can afford more sophisticated techniques for tax sheltering.”

Pension news

Details on forthcoming pooled retirement pension plans or PRPPs were slim as the feds wait for the provinces to adopt legislation.

In general, the budget renews the federal government’s commitment to return to a balanced budget by 2015-16 by continuing to restrain the growth in direct program spending.

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