Tax time is almost upon us and there are some recent changes which will affect many Canadian residents. The important changes to keep in mind are as follows:
The Family Tax Cut
This is the watered down version of income splitting plan that was introduced by the Harper government in 2011. The provisions allow couples with children under the age of 18 living with them to shift income from a higher income spouse to a lower income spouse so that the combined taxes payable will be reduced. The most that can be taxed in the lower-income spouse’s hands is $50,000 resulting in a federal non-refundable tax credit which will provide maximum savings of $2,000.
Increases in Child Related Expenses
Parents have also benefited from increases in the following:
- Children’s Fitness Tax Credit – Increased from $500 to $1,000;
- Universal Child Care Benefit – Increased from $1,200 to $ 1,920 for children under 6 and (new) $720 for each child age 6 through ugh 17;
- Child Care Expense Deduction – an increase of $1,000 (can’t claim until 2015);
- Adoption Expense Tax Credit – increased from $11,774 to $15,000.
The Expansion of the “Kiddie” Tax
Originally introduced in 2000, the kiddie tax was designed to eliminate the tax savings created by the splitting of certain types of income (most commonly dividend income from a private corporation) with children under the age of 18. The Federal Budget in 2014 has expanded the definition of split income exposed to the kiddie tax to include business and rental income that is paid by a third party to a minor. If the minor’s relatives perform an income generating function or has ownership in a partnership interest for this purpose the kiddie tax will now apply.
Foreign Account Tax Compliance (FATCA)
This U. S Legislation came into effect July 1, 2014 and requires the CRA to inform the Internal Revenue Service about the financial accounts of any U.S. person living in Canada. For these individuals, there is a possibility that they may be required to pay tax in the US especially with the new Medicare surtax on net investment income. As a result of FATCA there has been an appreciable increase in the amount of disclosure documentation for US persons living in Canada.
Canada Revenue Agency Revised Form T1135
Effective with 2014, taxpayers must now provide significantly more information about their foreign property. Form T1135 must be filed by Canadian residents, corporations and trusts who during the year owned specific foreign property having an adjusted cost base of more than $100,000. Filing is also required by partnerships that hold specified foreign property with an ACB of more than $100,000 where the non-resident member’s share of income or loss is less than 90% during the reporting period. If you are required to file Form T1135 be sure to review what Specified Foreign Property includes and what must be reported.
Changes to Testamentary Trusts
Since 1971 a Testamentary Trust has been an effective vehicle for estate planning due to the fact that these trusts currently enjoy graduated rates of tax in the same way that an individual taxpayer does. Testamentary Trusts are created by Will and become effective when the testator dies. Inter-vivos trusts which are created during an individual’s lifetime are taxed at the top marginal rate in the province in which the trust resides. This will change on January 1, 2016 when Testamentary Trusts will no longer enjoy preferential income tax treatment but will be subject to tax at the highest marginal rate similar to inter-vivos trusts. This is a significant change and will necessitate careful planning before the effective date. There are limited exceptions such as trusts created for the benefit of an individual who is eligible for the disability tax credit. Also, graduated rates of taxation will continue to apply for 36 months after the date of death.
As a result of this change, it is expected that there will be an increase in the use of inter-vivos trusts, alter ego and joint partner trusts.
It is not easy to keep up with all the changes affecting income taxes and the documents that must be filed. These are just a few of the recent changes that could affect many Canadian taxpayers this year. It is recommended that you check with your accountant about other changes that could also affect you.
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