Making Sense of it All - Recent Federal Budget Changes
With the abundance of new personal tax incentives and credits that have been introduced in recent budgets, it is not surprising that you might have a lot of questions as to how they work. These changes include measures affecting Registered Retirement Savings Plans (RRSPs), the new Child Tax Credit, the Children’s Fitness Tax Credit and the Transit Pass Tax Credit. To help you make sense of it all, below is more information on these measures, in a question and answer format.
RRSPs
Q – How do the changes in the 2007 budget affecting the maturity of RRSPs affect me?
A – Before the 2007 federal budget, RRSPs matured by December 31st of the year in which you turned age 69. What this means is that prior to that date, you must collapse your RRSP and pay tax on the fair market value of the plan at that time, purchase an annuity or transfer the assets to a Registered Retirement Income Fund (RRIF). If an annuity is purchased or assets are transferred to a RRIF, no tax is paid on the conversion. As a result of the budget measures, the age limit at which an RRSP matures has been increased to the end of the year in which a taxpayer turns 71.
Q – What does this mean if I am turning 69 in 2007?
A – If you are turning 69 in 2007 there is an immediate benefit as you can defer the conversion of your RRSP into a RRIF by two years.
Q – What does this mean if I am turning 70 or 71 in 2007?
A – Provided that you have contribution room available, either due to the fact that you have unused RRSP carryforward that was never used by age 69 or because you have earned income that has generated new RRSP contribution room, a new RRSP can be opened in 2007 to provide a tax deduction on your current year’s tax return. Alternatively, you could transfer your existing RRIF back into an RRSP as long as it is reconverted back to a RRIF before the end of the year in which you turn age 71.
If you have a RRIF, you will also not be required to make a withdrawal.
Q – Are financial institutions set up to handle this change?
A – On June 22, 2007, the legislation regarding the age limit of maturing RRSPs received Royal Assent. What this means is that financial institutions will, in the near future, be able to open RRSPs, to transfer a RRIF back to an RRSP and to stop RRIF withdrawals for a 70 or 71 year old individual.
Child Tax Credit
Q – What is the new Child Tax Credit?
A – The Child Tax Credit is a new non-refundable credit that is claimed by parents. The credit is to be calculated by multiplying the lowest personal income tax rate for the year, which in 2007 is 15.5%, by $2,000 for each child who is under age 18 at the end of the taxation year.
Q – Which parent is eligible to claim the Child Tax Credit?
A – In circumstances where the child resides with both parents throughout the year, either parent would be entitled to the Child Tax Credit. Any unused portion could be transferred to that parent’s spouse or common-law partner.
If the child does not reside with both parents throughout the year, the parent who is entitled to claim the amount for an eligible dependant will be able to claim the Child Tax Credit. To qualify for the Eligible Dependant Tax Credit, an individual must support a qualified dependant who lived with them in a home that they maintained and must be unmarried or living apart from their spouse and did not support or was not supported by their spouse. For purposes of the Eligible Dependant Tax Credit, a qualified dependant includes:
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a parent or grandparent by blood, marriage, common-law partnership or adoption; or
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a child, grandchild, brother or sister by blood, marriage, common-law partnership or adoption who is either under 18, or mentally or physically infirm.
Q – When can I begin to claim the credit?
A – Taxpayers can claim the Child Tax Credit when they file their 2007 personal tax return. Currently, the Child Tax Credit is offered at the federal level. At this time, Saskatchewan is the only province that offers a similar credit.
Children’s Fitness Tax Credit
Q – Is there a new tax credit available when I register my child in an eligible program of physical activity?
A – Yes, starting in 2007, the Children’s Fitness Tax Credit will allow parents to claim a maximum of $500 per year for eligible fees paid for each child who is under 16 at any time during the year. Like other non-refundable tax credits, the Children’s Fitness Tax Credit is calculated by multiplying the eligible amount by the lowest marginal tax rate, which in 2007 is 15.5%. The Children’s Fitness Tax Credit is a federal credit. As of yet, Manitoba is the only province that has indicated that it will parallel the federal credit, although Nova Scotia already had a similar credit.
Q – What types of activities qualify for the Children’s Fitness Tax Credit?
A – Expenses eligible for the Children’s Fitness Tax Credit must be a fee paid as a cost for registration or membership in a program of physical activity. The types of costs that can be included are costs related to a program’s administration, instruction, rental of required facilities and, in some circumstances, costs for uniforms and equipment. Costs associated with accommodation, travel and food are not eligible for the credit.
In order to qualify for the credit, the program of physical activity must be ongoing, meaning a minimum of eight weeks long with at least one session per week. In the case of children’s camps, the program must be five consecutive days and more than 50% of the program must be devoted to physical activity. The program must be supervised, suitable for children, and substantially all of the activities must include a significant amount of physical activity that contributes to cardio-respiratory endurance plus one or more of muscular strength, muscular endurance, flexibility or balance. Eligible activities include many sports, as well as other children’s recreational programs that also involve significant physical activity, such as dance. The government has not provided a listing of the specific activities that qualify for the credit and, as a result, there is considerable uncertainty as to exactly what is eligible.
Q – How do I claim the credit?
A – Ask for a receipt from organizations providing eligible programs of physical activity in which your child is enrolled. The organizations will determine the part of the fee that qualifies for the credit.
You will need to keep the receipts issued by the organizations that deliver the programs. You will not need to submit receipts when you file your tax return, but you must keep them in case the CRA asks for them to verify your claim.
Transit Pass Tax Credit
Q – Were there any changes made to the Transit Pass tax credit in the 2007 federal budget?
A – The Transit Pass Tax Credit is a non-refundable tax credit available to individuals who purchase public transit passes for travel that occurs after June 30, 2006. Eligible passes are those issued by public commuter transit services that provide unlimited use of the service for an uninterrupted period of at least 28 days.
As proposed in the 2007 federal budget, beginning January 1, 2007, the Transit Pass Tax Credit will be expanded to include costs for:
Q – How is the Transit Pass Tax Credit calculated?
A – The Transit Pass Tax Credit is equal to the lowest marginal tax rate, which in 2007 is 15.5%, multiplied by the amount paid in respect of eligible public transit costs for the year.
Amounts eligible for the credit are reduced by a reimbursement, allowance, or any other form of assistance an individual receives in respect of the cost of an eligible public transit pass, unless the amount has been included in the individual’s taxable income as a taxable benefit.
Q – I did not keep receipts or old passes between January 1st and today. Would I still be able to claim the credit for those “undocumented” costs?
A – Taxpayers are expected to provide appropriate supporting documentation for any tax credit claimed, if requested to do so by the CRA.
Should you have any questions regarding these or any other budget changes, contact your BDO tax advisor.
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How Will the New GST/HST Rules Affect You?
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