With April come many glorious events: springtime, the return of baseball and tax-filing season. Here are some tax issues you should keep in mind as you anticipate questions from your clients about their 2014 returns:
– Family tax cut. Introduced in late October and effective for the 2014 taxation year, the family tax cut (FTC) offers some couples with children under the age of 18 an opportunity, effectively, to split income. However, the credit available is limited to a set amount, and many couples with families will end up receiving no benefit from the FTC whatsoever.
“[You] may get questions from clients, such as ‘Why am I not getting the tax credit? Why am I not getting as much as I thought I would get?'” says Aurèle Courcelles, director of tax and estate planning with Investors Group Inc. in Winnipeg.
The FTC offers couples who have at least one eligible child a non-refundable tax credit of up to $2,000 based on a notional transfer of up to $50,000 of net income from a higher-income spouse to a lower-income spouse. The amount of the credit is the difference between a couple’s combined taxes payable without the notional transfer being applied and the amount of combined taxes payable after the notional transfer is applied.
In cases in which there is significant difference in income between one spouse and another – for example, one spouse has an income of $120,000 while the other spouse has no income – the 2014 FTC credit would be the full $2,000, based on a notional transfer of $50,000.
However, if both spouses have incomes within the same tax bracket, there would be no FTC tax savings. Other couples may receive an FTC credit, but at an amount less than the maximum $2,000, if there is a less significant difference in their income levels and tax brackets.
Unlike other forms of income splitting, such as pension- income splitting, the FTC is not regarded as “true” income splitting. That’s because no income actually is transferred from one spouse to the other. As a result, benefits and tax credits that are calculated based on income, such as the GST/HST credit or the Canada child tax benefit, will not be affected. In addition, the FTC credit is federal only; there is no provincial FTC.
While some of your clients may not be in a position to receive an FTC credit, there still are opportunities for you to plan tax strategy around other forms of income splitting, says Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce‘s wealth advisory services division.
Spousal or family loans, for example, allow clients to lend funds to a lower-income spouse or family member, who then can invest those funds and be taxed at their lower tax rate, without the income being attributed back to the individual who made the loan.
Such loans must be made at the federal government’s prescribed rate of interest, which is 1% until June 30.
– First-time donor’s super credit. The first-time donor’s super credit (FTDSC), introduced for the 2013 tax season, allows clients who have not claimed a donation tax credit since 2007 an additional 25% credit on top of the usual donation tax credit on up to $1,000 of donations. The FTDSC can be claimed once between now and 2017.
“[Because] there is a five-year carry-forward for donations,” Golombek says,”I would wait until the amount [of donations] gets to $1,000, then claim [the FTDSC] if you haven’t claimed a donation tax credit since 2007.”
– Children’s fitness amount. The limit of eligible children’s fitness credit expenses has been doubled to $1,000 from $500. Based on the federal tax credit rate of 15%, the maximum non-refundable tax credit available now is $150. For the 2015 taxation year, the children’s fitness amount will become a refundable credit.
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