Now that the Conservatives have reached a majority, and the budget has been moved forward by the house, we would like to highlight some of the key points that may concern your finances.

Registered Plans

RRSPs:

The budget proposes to introduce new anti-avoidance rules for RRSPs and RRIFs similar to the rules already in place for Tax Free Savings Accounts (TFSAs). The rules create additional taxation on certain ‘prohibited’ and ‘non-qualified’ investments that essentially exploit the tax benefits provided by an RRSP/RRIF.

What is an advantage?
An advantage may generally be described as:

• A benefit obtained from a transaction that is intended to unduly exploit the tax attributes of an RRSP/RRIF, which could include a reduction in the value of an RRSP/RRIF without a corresponding income inclusion.
• An advantage also includes certain other transactions such as benefits from "swap transactions". These advantages will be subject to a tax that is generally equal to their fair market value, representing a 100% tax.
• As well, an advantage includes income earned on a prohibited investment after March 22, 2011.

What is a prohibited investment?
A prohibited investment generally includes debt of the RRSP/RRIF annuitant and investments in entities in which the annuitant or a non-arm's length person has a significant interest (generally 10% or more) or with which the annuitant does not deal at arm's length. A special tax equal to 50% of the fair market value of the investment will apply to an annuitant on acquisition of a prohibited investment by his or her RRSP/RRIF (or at the time that an investment becomes prohibited). This tax may be refundable under certain circumstances.  Basically, this statute would limit the ability to utilize strategies where an individual holds their own mortgage within their RRSP and other similar strategies.

What is a Non-Qualified Investment?
A non-qualified investment is property that is not a qualified investment as described in the Income Tax Act and the Income Tax Regulations. Annuitants of RRSPs/RRIFs that own non-qualified investments will be subject to a special tax of 50% of the fair market value of the non-qualified investment. The tax liability will apply at the time that a non-qualified investment is acquired by the RRSP/RRIF or at the time an investment becomes non-qualified. This tax may be refundable under certain circumstances.

Examples of non-qualified investments include shares in private investment holding companies or foreign private companies and real estate.

Individual Pension Plans:

The latest budget proposes annual minimum amounts be withdrawn from IPPs once a plan member reaches age 72, which mirrors the current minimum withdrawals from RRIFs.

More importantly, the budget proposes a major change for plans with three or fewer members that impacts the way past service is contributed to new pension plans that are created post budget.  Essentially this change will disallow a past service contribution to be funded from the corporation which generates a deduction, if there is available capital in the plan members RRSP (Registered accounts). This greatly reduces the tax benefits for NEW IPPs where the members have significant assets their RRSP.  The loss of deductibility will unquestionably alter the saving habits of small business owners going forward and will greatly reduce the effectiveness of an IPP in the majority of cases.  Post-budget, Trevor Parry of Gordon B. Lang & Associates, one of the primary actuaries that we have used in the past, wrote an interesting response to this budget change.  It can be viewed at the following link:

    http://opinion.financialpost.com/2011/06/13/unhappy-ipp-actuaries-respond-to-budget-2-0/

RESPs: Transfers can now be made between individual RESPs for siblings without triggering tax penalties or repayments of Canada Education Savings Grants. The change only applies to asset transfers made after 2010.  This essentially brings an individual plan in line with a family plan as it relates to siblings and adds flexibility for families with separate RESPs for each of their children.

RDSPs: Registered Disability Savings Plan beneficiaries with shortened life expectancies will have more flexibility to withdraw assets without requiring repayment of other programs, such as Canada Disability Savings Grants.

Other Highlights from the Budget…

Guaranteed Income Supplement: The budget tops up the GIS, providing an additional $600 per year for single seniors, and up to $840 per year for senior couples.

Other Student Assistance: Eligibility for federal student loans and grants has been expanded for both full- and part-time post-secondary students. The in-study income exemption will be doubled to $100 per week and part-time students with high family incomes will now be eligible for a Canada Student Loan. There are also extensions of Education and Textbook tax credits for students working abroad.

Children’s Art Tax Credit: Expanding on a popular program for parents who enroll kids in fitness activities, Ottawa proposed a credit of up to $500 of eligible expenses for children’s programs associated with artistic, cultural recreational and developmental activities.

Family Caregiver Tax Credit: The budget introduces a 15% non-refundable credit on an amount of $2,000 to provide tax relief to caregivers of all types of infirm dependent relatives, including spouses, common-law partners and minor children.

Home Renovation: Renewed funding for the Clean Air Agenda provides $400 million in 2011–12 for the ecoENERGY Retrofit to help homeowners pay for energy efficient upgrades.

Business Owners: Small businesses will receive a one-year break in EI payouts under a new Hiring Credit for Small Business. The government also gave a two-year extension of the popular 50% straight-line accelerated Capital Cost Allowance for manufacturing or processing machinery and equipment.

If you have any questions on how the budget may impact you or your family, please do not hesitate to contact us.