2010 Federal Budget Personal Tax Changes -Impact on Families affected by Disability
By Tom O-Dwyer of Ability Tax Group – abilitytax.ca
Increase in Personal Amount Exemptions
The basic personal amount exemption has been increased to $10,382 in 2010. If you had no other tax credits or deductions, you would be able to earn income of $10,382 tax free in 2010 before the marginal rate of income tax payable is calculated.
Increase in income threshold levels eligible for child tax benefits
The 2010 Budget increase the income threshold levels to allow families to earn $40,970 before the national child benefit supplement is completely phased out (partial phase-out begins at $23,855). For children under the age of eighteen who qualify for the disability tax credit (“DTC”), The child disability benefit increases to $2,470 annually and allows families to earn up to $40,970 before the benefit begins to phase out.
Carry Forward of RDSP Grants and Bonds
Under the current legislation, contributions to a Registered Disability Savings Plan (“RDSP”) are eligible for matching Canadian Disability Savings Grants (“CDSG”) of up to $3,500 annually (with a $70,000 lifetime limit) depending on the family’s income and the amount of contribution. In addition, a Canada Disability Savings Bond (“CDSB”) of up to $1,000 annually (with a $20,000 lifetime limit) is contributed to the RDSP for low to modest income families regardless if contributions have been made to the RDSP. Available since 2008, no provisions existed to allow beneficiaries of the RDSP to carry forward CDSG or CDSB entitlements from previous years.
Beginning in 2011, Budget 2010 proposes to amend the Canada Disability Savings Act to allow a carry forward of CDSG and CDSB entitlements for a period of 10 years (but not available before 2008) based on the beneficiaries family income in those years AND RDSP eligibility for each year of the carry forward. An annual maximum of $10,500 of CDSG’s will be paid on carry forward of unused entitlements. In addition, plan holders will receive annual statements of CDSG entitlements.
Increase in income thresholds eligible for RDSP Grants and Bonds
The 2010 budget increases income threshold levels to allow families to earn up to $81,941 and still qualify for the maximum annual CDSG’s. In addition, the budget increases income threshold levels to allow families to earn up to $23,855 and still qualify for the $1,000 CDSB. Families may earn up to $40,970 and receive partial CDSB entitlements.
Rollover of RRSP, RRIF, and RPP Proceeds to an RDSP upon death
Under the current provisions of the Income Tax Act, when the annuitant of a Registered Retirement Savings Plan (“RRSP”), Registered Retirement Income Fund (“RRIF”), or Registered Pension Plan (“RPP”) passes away, the value of the RRSP, RRIF, or RPP is generally included in the deceased’s income in the year of death. An exception to these provisions occur when the proceeds of the RRSP, RRIF, or RPP after death are distributed to the deceased’s surviving spouse (or common-law partner), or to a financially dependent child or grandchild. In such cases, the proceeds are included in the income of the recipient.
A further preferential tax treatment is available If the spouse (or common law partner), or child or grandchild was dependent on the deceased annuitant because of a physical or mental infirmity and receives distributions from the RRSP, RRIF, or RPP. An offsetting deduction may be claimed when the distributions are transferred (the tax deferred rollover) to the recipient’s RRSP or used to purchase an immediate life annuity. Generally, An infirm child or grandchild is considered financially dependent if the child’s (or grandchild’s) income for the year preceding the year of death of the annuitant does not exceed $17,621 (2010 rates).
Budget 2010 proposes to extend the above RRSP, RRIF, and RPP rollover provisions to allow proceeds to be transferred tax deferred to an RDSP of a child or grandchild of the deceased who qualifies for the RDSP and was financially dependent on the deceased. The contribution of the proceeds from a RRSP, RRIF, or RPP of the deceased to an RDSP will reduce the $200,000 lifetime contribution limit of the RDSP. These proceeds will not attract CDSG’s and the amount of proceeds will form part of the portion of disability assistance payments that is included in the beneficiary’s income when withdrawn from the RDSP. These measures will apply to deaths occurring on or after March 4, 2010. There are special transitional rules that will allow a contribution to be made to the RDSP of an infirm dependent child or grandchild when the death of an RRSP, RRIF, or RPP annuitant occurs after 2007 and before 2011 that would permit equivalent preferential tax treatment.
Child Benefits Entitlement-shared Custody
Under existing rules, only one eligible individual can receive the Canada Child Tax Benefit, the Universal Child Care Benefit, or the child component of the GST/HST Tax Credit (collectively the “Benefits”) that are payable in respect of a qualified dependent. Budget 2010 proposes to allow parents who live separately but share equal custody of a dependent to receive annually one-half of the above Benefits that they would receive if they were the sole eligible individual. Payments would be monthly for the Child Tax Benefit and Universal Benefit, and quarterly for the GST/HST Tax Credit. This measure will apply to Benefits payable commencing July, 2011.
Single Parents and Universal Child Care Benefits
The Universal Child Care Benefit (“UCCB”) provides families with a $100 a month (taxable) for each child under the age of six years. In two parent families, the UCCB is included in the income of the lower income spouse or common law partner. In single parent families, the UCCB is included in the single parent’s income. Under these existing provisions, the single parent may pay more tax on the UCCB amount than a single earner family at the same income level on the same UCCB amount. Beginning in 2010, Budget 2010 proposes to allow a single parent the option of including the aggregate UCCB amounts in his or her income or in the income of the dependant for whom an Eligible Dependant Credit is claimed. If a single parent is unable to claim an Eligible Dependant Credit, he or she will have the option to include the benefit in the income of the child for whom it is paid.
Election to Receive Electronic Notices
Budget 2010 proposes to amend the Income Tax Act to allow taxpayers to elect to receive electronic notices of Canada Revenue Agency (“CRA”) information usually sent by mail. For example, provided the taxpayer authorizes the CRA, the taxpayer may receive, via e-mail, notices of assessment or reassessment as well as determinations and re-determinations in respect of GST/HST credits and Canada Child Tax Benefit. This amendment does not apply to notices currently served personally or by registered mail.
Interesting Change for 2010
Budget 2010 proposes to change the inclusion rate for Canadian resident recipients of certain types of U.S. social security benefits. Currently, under Article XVIII of the Canada-U.S. Tax Treaty, 85% (inclusion rate) of such benefits received are required to be included into income. For U.S. social security benefits received after 2009, Budget 2010 proposes to reduce the inclusion rate to 50%. To qualify for the reduced inclusion rate, the taxpayer is required to be a Canadian resident continuously since 1996, and to have received qualifying U.S. social security benefits throughout the period. The above rate reduction apply to spouses or common law partners (who meet the above criteria) of taxpayers who have died.