The 2007 Federal Budget - Tax Implications for Individuals

FEDERAL BUDGET; MARCH 19, 2007

Lifetime Capital Gains Exemption

The lifetime capital gains exemption will be increased from $500,000 to $750,000 for gains realized on dispositions after March 18, 2007 of qualified farm and fishing property and qualified small business corporation shares, subject to transitional rules for 2007. This proposal can benefit individuals who own qualifying property, whether or not they have previously utilized any of the $500,000 exemption.

Age Limit For Maturing RPPs And RRSPs

The Budget proposes to increase the age at which Registered Pension Plans (RPPs) and Registered Retirement Savings Plans (RRSPs) mature from the end of the year in which the RRSP annuitant or RPP member turns 69 to 71. This proposal will benefit individuals who turn 69, 70 or 71 in 2007 or subsequent years in that they will be able to make contributions in 2007 and 2008 where contribution room is available.
Existing registered plan annuities will be permitted to be amended to reflect the later conversion age. Employers will also be allowed to amend their RPPs to allow benefits to accrue and contributions to be made in respect of employees who are 71 or younger at the end of 2007.

Registered Education Savings Plans (RESPs)

The Budget proposes to eliminate the maximum annual contribution and increase the lifetime limit from $42,000 to $50,000. In addition, the maximum annual RESP contribution qualifying for the 20% Canada Education Savings Grant (CESG) will be increased from $2,000 to $2,500 for 2007 and subsequent years. Consequently, the annual CESG will be increased from $400 to $500 for each qualifying child. However, the lifetime CESG limit of $7,200 will not be increased.
The RESP rules will be expanded for 2007 and subsequent years to allow qualifying part-time programs which do not meet the current 10 hour per week requirement, to allow Educational Assistance Payments (EAPs) from the RESP where the program requires at least 12 hours per month of courses. Under this proposal, students 16 or over will be able to receive up to $2,500 of EAPs for each 13-week semester of part-time study.

Registered Disability Savings Plan (RDSP)

The Budget proposes a new RDSP, generally based on the existing Registered Education Savings Plan (RESP), combined with a Canada Disability Savings Grant (CDSG) program and a Canada Disability Savings Bond (CDSB) program. The Government will work with financial institutions to put the necessary administrative mechanisms in place to allow RDSPs to be offered commencing in 2008.

Any person resident in Canada eligible for the disability tax credit (DTC), or their parent or other legal representative, will be eligible to establish an RDSP. Contributions to an RDSP will not be deductible and the investment income earned in the RDSP will not be taxed while the funds are retained within the RDSP. Funds paid out of the RDSP will be taxable except to the extent that they exceed the contributions to the plan.

Contributions are limited to a lifetime maximum of $200,000 for the disabled beneficiary, with no annual limit. There will be no restriction on who can contribute. Contributions can be made until the end of the year in which the beneficiary reaches 59.

RDSP contributions will qualify for CDSGs, to a lifetime limit of $70,000, until the end of the year in which the beneficiary reaches age 49, at matching rates of 100%, 200% or 300%, depending upon family net income and the amount contributed. Families with a net income of up to $74,357 will qualify for a 300% grant on the first $500 of contribution and a 200% grant on the next $1,000 of contribution. Families with a net income over $74,357 will qualify for a 100% grant. These family income thresholds are in 2007 dollars and will be indexed to inflation for 2008 and subsequent years. Family net income will consist of the beneficiary and their spouse or common-law partner’s income for years after the beneficiary reaches 18.
Independent of contributions by or on behalf of the beneficiary, and any CDSGs that the RDSP receives, CDSBs of up to $1,000 will be paid annually to an RDSP, until the end of the year in which the beneficiary reaches 49. The maximum of $1,000 is payable where family net income does not exceed $20,883 and a portion of the $1,000 is payable where family net income does not exceed $37,178. These income thresholds are in 2007 dollars and will be indexed to inflation for 2008 and subsequent years. CDSBs are not contingent on contributions to an RDSP. There will be a lifetime limit of $20,000 on CDSBs.

Payments from an RDSP will be required to commence by the end of the year in which the beneficiary reaches 60 and will be subject to an annual maximum determined by reference to life expectancy and the value of the property of the plan. Only the beneficiary or their legal representative will be allowed to receive payments. Contributors will not be entitled to a refund of contributions.
Where the beneficiary ceases to qualify for the DTC or dies, an RDSP will be required to repay all CDSGs and CDSBs, along with the related investment income earned in the ten years prior to a payment from the plan. The remaining funds in the RDSP, net of contributions, will then be taxable to the beneficiary or their estate.
Amounts paid out of an RDSP will not be included in income for purposes of income-tested benefits such as Old Age Security or Employment Insurance benefits. In addition, the federal government will work with the provinces and territories to ensure that the RDSP is an effective savings vehicle to improve the financial security of children with severe disabilities. In this regard, the federal government noted that RDSP assets and income payments from the plan should supplement and not reduce income support provided under provincial and territorial programs. It will be very important how each province and territory handles this RDSP issue.

Working Income Tax Benefit

Commencing in 2007, a new refundable credit will be available to low-income persons with either employment or business income. The credit will be 20% of earned income in excess of $3,000 to a maximum of $500 ($1,000 for couples and single parents). The credit will be reduced by 15% of net family income in excess of $9,500 ($14,500 for couples and single parents).
An additional credit will be allowed, for a person with a disability, of 20% of earned income in excess of $1,750 to a maximum of $250.

To qualify for the credit the individual must be resident in Canada throughout the year and have attained age 19 by the end of the year. However, persons who are full-time students for more than three months will not qualify unless they have a dependent child.

Non-Refundable Credits

Commencing in 2007, a new credit may be claimed for children under the age of 18. The credit is based on $2,000 and will result in a reduction in income tax payable of $310 per child in 2007.

Public Transit Tax Credit

Effective January 1, 2007, the public transit tax credit will be extended to cost-per-trip electronic payment cards if the cards are used for at least 32 one-way trips in a 31-day period. To be eligible, the transit authority must record the usage, the cost of the trips and provide receipts to the individual with this information.

To alleviate the cash-flow impediment of purchasing monthly passes, four consecutive weekly passes will qualify for the credit. The weekly passes must provide for unlimited transit use for a period of 5 to 7 days.

Trust T3 Income Tax Returns

Many taxpayers and tax professionals have concerns about the existing due-date for T3 slips. The Government is proposing to develop a process that will have commercial trusts, including income trusts, prepare their T3 returns in sufficient time for taxpayers to prepare their tax returns.

SALES, EXCISE TAX AND OTHER MEASURES

48 Hour Travelers’ Exemption

Travelers returning to Canada after March 19, 2007 will be allowed to bring back goods valued at up to $400 (previously $200) without having to pay duties or taxes, including customs duty, GST/HST and federal excise tax, provided they have been out of Canada for 48 hours or more.

The dollar limits that apply to 24-hour and 7-day travel remain unchanged, as do the limits on alcohol and tobacco.

Green Levy on “Gas Guzzlers”

A tax on fuel inefficient vehicles is being introduced for new vehicles delivered to dealers or imported after March 19, 2007. The Green Levy will apply to new automobiles designed primarily to carry passengers including station wagons, vans and SUVs, but not pick-up trucks.

The levy will be based on the vehicle’s weighted average fuel consumption.
The levy will not apply to vehicles that are manufactured in Canada for export, or to vehicles that are imported and subsequently exported. The levy also will not apply to vehicles in dealer inventory on March 19, 2007, or where a sales agreement with the final consumer is entered into before March 20, 2007 calling for delivery before July 2007.

Rebate for Fuel Efficient Vehicles

The government is introducing a program to provide rebates on the purchase of fuel efficient vehicles. The basic rebate amount of $1,000 to a maximum of $2,000 is applicable for vehicle purchases or leases (minimum 12 months) after March 19, 2007.
The vehicles eligible for rebate will be listed on Transport Canada’s website (www.tc.gc.ca). The payment of rebates is expected to begin in the fall of 2007 once administration and delivery systems have been put in place.