With the April 30 deadline for filing personal income tax returns looming, advi-sors and clients should note that the 2007 return form contains at least one significant change, and a host of smaller ones, from the 2006 return. Depending on individual circumstances, the changes could curb the Tax Department’s appetite for your clients’ money.
Moreover, you can use the next couple of weeks to focus on tax strategies beyond the 2007 tax year to help ensure your clients take advantage of tax-saving opportunities.
What’s the most significant change on the 2007 tax return? Pension income-splitting, says Jamie Golombek, vice president, tax and estate planning, with Toronto-based AIM Funds Management Inc. : “This is the first time ever that advisors and clients will have to deal with this, and if you do it properly, in the right sorts of situations, the benefits are tremendous.”
Pension income-splitting may apply if your clients have income from registered pension plans, registered retirement income funds, registered retirement savings plan annuities, lifetime income funds, locked-in retirement income funds or deferred profit-sharing plan annuities — as well as the Canada Pension Plan/Quebec Pension Plan. Clients must also meet certain age restrictions.
In general, up to 50% of the higher-earning spouse’s eligible pension income can be transferred to the lower-earning spouse. (Pension income-splitting affects lines 115, 116, 129 and 210 on the tax return, and requires Form T1032 and, in Quebec, Schedule Q.)
Golombek’s advice is to be proactive and contact clients who may be eligible to remind them not to miss an opportunity to save hundreds or even thousands of dollars, and potentially protect themselves from clawbacks on their old-age security benefits.
Other changes may apply to clients with children. For example:
> There is a new $2,000 tax credit for each child under age 18 (born in 1990 or later) that can be claimed by either parent (line 367) — and that can be claimed in full in the year of a child’s birth, death or adoption.
> Under proposed legislation, scholarships and bursaries earned in elementary and secondary school will no longer be taxable (line 130).
> The universal childcare benefit was introduced in 2006, but this year’s return includes for the first time a place to deduct UCCB repayments (line 213).
> And there’s the well-publicized children’s fitness amount (line 365), which allows parents to claim a maximum of $500 a child for costs related to registering that child (who is under age 16 at the beginning of the year) in eligible physical activity programs.
“I have three young children, and I know the fitness credit is available,” says Golombek. “But I’m going to go back now, over the next few weeks, and go through my tax file and reconcile and make sure that I have all of my receipts for all my children’s programs. If not, I have to start phoning around.”
The key for advisors, he says, is to remind clients so they can get a complete picture of their children’s physical activity programs in time, before the tax deadline.
“If a family has students or a disabled adult in the home, they often miss credits by not doing their returns together, because there are often opportunities to transfer credits to a supporting person. If you have kids at university, it’s a no-brainer — you have to do [the returns] together,” adds David Christianson, a financial advisor with Wellington West Total Wealth Management Inc. in Winnipeg.
For employees, the Canada employment amount (line 363) has been increased to a maximum of $1,000 for 2007, up from $250 in 2006. Under proposed legislation, eligibility for the public transit amount (line 364) has been expanded to include the cost of shorter-duration passes and electronic payment cards under certain conditions. There’s also a new place to declare apprenticeship incentive grants (line 130); and long-haul truck drivers can deduct 60% (up from 50%) of eligible meal and beverage expenses incurred after Mar. 18, 2007. Low-income households may be able to claim the new working income tax benefit (line 453) if they earned income from employment or a business.
Employers, meanwhile, can claim an investment tax credit (line 412) if they create new childcare spaces for their employees’ children and other children.
@page_break@There are a few highlights for investors. Under proposed legislation, donations of publicly listed securities to private foundations made after Mar. 18, 2007, will be free of capital gains taxes, just like donations to charity (line 127). The increased lifetime capital gains exemption ($750,000, up from $500,000) applies to dispositions of qualifying property (shares in small businesses, farm or fishing property) that took place after Mar. 18, 2007 (line 254). On the downside, investors in petroleum, natural gas or mining ventures can no longer deduct the resource allowance, as of January 2007 (line 224).
All of your clients will be affected by a 2007 reduction of the lowest federal personal income tax rate to 15% from 15.5%. In addition, the basic personal amount (line 300), spouse or common-law partner amount (line 303) and amount for an eligible dependant (line 303) have each increased to $9,600. And for those paying taxes in instalments, the instalment payment threshold has been raised to $3,000 ($1,800 in Quebec), meaning that clients who owe less than that amount in taxes don’t have to pay quarterly. Instead, they can wait and pay a single lump sum when they file their taxes in April.
How about next year? One core recommendation Christianson makes to his clients each year at tax time is to share all potentially relevant information with their tax preparers — to “keep no secrets.” When clients take that advice to heart, it makes it much easier for you to ensure they are taking advantage of all the tax-saving strategies available to them.
Both Christianson and Gol-ombek believe the tax-free savings account is the big tax-planning story for next year.
“A lot of advisors’ focus, for 2009 and going forward, will be how are we going to use this new vehicle in conjunction with other vehicles that are already established,” says Golombek. In other words, if a client has the choice of contributing to an RRSP, RESP or TFSA, how much should go into each plan?
That’s the type of thinking Golombek says should start now, as should planning related to pension income-splitting and charitable giving of eligible securities. IE
Pension income-splitting new on tax return
There are also lots of other changes that could help curb the Tax Department’s appetite
- By: Alison MacAlpine
- March 31, 2008 March 31, 2008
- 09:44