Financial Post
Jamie Golombek, managing director for tax and estate planning with CIBC, runs through the tax and tax credit measures in the federal budget that directly affect Canadians’ wallets.
The federal government has followed through on its promise in last year’s budget to update the alternative minimum tax (AMT), which is a parallel tax calculation that allows fewer deductions, exemptions and tax credits than under the ordinary income tax rules.
The current AMT system applies a flat 15-per-cent tax rate with a standard $40,000 exemption amount instead of the usual progressive tax rates. An individual pays the AMT or regular tax, whichever is higher. Additional
... moreThe federal government has followed through on its promise in last year’s budget to update the alternative minimum tax (AMT), which is a parallel tax calculation that allows fewer deductions, exemptions and tax credits than under the ordinary income tax rules.
The current AMT system applies a flat 15-per-cent tax rate with a standard $40,000 exemption amount instead of the usual progressive tax rates. An individual pays the AMT or regular tax, whichever is higher. Additional tax paid as a result of the AMT can be carried forward for seven years and used to offset regular tax to the extent that regular tax exceeds AMT in those years.
In the 2022 federal budget, the government bumped up the top federal bracket to 33 per cent (from 29 per cent) in 2016, but expressed concern that “some high-income Canadians still pay relatively little in personal income tax as a share of their income.” For example, according to the 2022 budget materials, 28 per cent of filers with gross income of more than $400,000 pay an average federal tax rate of 15 per cent or less by using a variety of tax deductions and tax credits.
The government announced a formal review of the AMT, the results of which were originally supposed to come out in last fall’s economic update, but were delayed until the 2023 budget. The government on March 28 announced that “to better target the AMT to high-income individuals,” several changes would be made to the calculation of AMT beginning in 2024. The changes include broadening the AMT base by further limiting tax preferences (exemptions, deductions, and credits), increasing the AMT rate and raising the AMT exemption.
Capital gains and stock options
Under the regular tax system, only 50 per cent of capital gains are taxable. No widespread changes to the capital gains inclusion rate were proposed, but the government is upping the inclusion rate for AMT purposes to 100 per cent, from 80 per cent. The budget also proposed that 100 per cent of the benefit associated with the exercise of employee stock options will be included in the AMT base.
Donations of publicly listed securities
Under the regular tax system, in-kind donations of publicly traded shares, mutual funds or segregated fund trusts to a registered charity give donors a tax receipt equal to the fair market value of the securities or funds being donated, and allow donors to avoid paying capital gains tax on any accrued gain. A similar rule applies to the donation of securities obtained through the exercise of employee stock options.
Under the AMT system, the budget proposed to include 30 per cent of capital gains on donations of publicly listed securities in the AMT base. This 30-per-cent inclusion rate would also apply to employee stock option benefits when the underlying publicly listed securities are donated to charity.
Deductions and expenses
Under the updated rules, the AMT base will be broadened by disallowing 50 per cent of various deductions, including employment expenses (other than those incurred to earn commission income), moving expenses, child-care expenses, interest and carrying charges incurred to earn income from property, deduction for limited partnership losses of other years and non-capital loss carryovers.
Non-refundable credits
Currently, most non-refundable federal tax credits can be credited against the AMT. The budget proposed that only 50 per cent of non-refundable tax credits would be allowed to reduce the AMT, subject to a few exceptions. Most notably, the proposed AMT would continue to use the cash (that is, not grossed-up) value of Canadian dividends and fully disallow the dividend tax credit.
The AMT exemption
The exemption amount is a deduction available to all individuals and is intended to protect lower- and middle-income individuals from being subject to the AMT. The budget proposed to increase the exemption from $40,000 to the start of the fourth federal tax bracket. That bracket is $165,430 for 2023, but based on expected indexation for the 2024 taxation year, that bracket, and thus the new AMT exemption amount, would be approximately $173,000 for 2024, indexed annually to inflation thereafter.
The AMT rate
The budget proposed to increase the AMT rate to 20.5 per cent, up from 15 per cent, corresponding to the rate applicable to the second federal income tax bracket.
All told, the amendments to the AMT are expected to generate an estimated $3 billion in revenues over five years, beginning in 2024. With these changes, more than 99 per cent of the AMT paid by individuals will be paid by those who earn more than $300,000 per year, with 80 per cent of the AMT being paid by those earning over $1 million annually.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.
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By Julie Cazzin with Janet Gray
Q: I’m a 29-year-old graphic artist earning $6,000 a month after tax. This year, I paid off my $30,000 student loan debt. I have $20,000 in my tax-free savings account (TFSA), but I’m not sure what to do with it. I’m doing some long-term planning, and 10 years from now I would like to work only two days a week so I can pursue my hobbies. I recently started reading about investing, but don’t know where to
... moreBy Julie Cazzin with Janet Gray
Q: I’m a 29-year-old graphic artist earning $6,000 a month after tax. This year, I paid off my $30,000 student loan debt. I have $20,000 in my tax-free savings account (TFSA), but I’m not sure what to do with it. I’m doing some long-term planning, and 10 years from now I would like to work only two days a week so I can pursue my hobbies. I recently started reading about investing, but don’t know where to start. Can you give me some good savings and investing advice? — Merlita
FP Answers: Merlita, having no or little debt and some savings certainly gives you more options. Let’s start by clarifying the difference between saving and investing.
Saving is protecting your money and keeping it secure so it doesn’t decrease in value. This is usually best for short-term use and/or emergency funds, and done with products such as high-interest savings accounts or guaranteed investment certificates (GICs). For longer-term goals and future use, you want to make your money work for you. You do this by investing it.
Start by clarifying your goals, which are the jobs you need your money to do. This is easier if you look at your goals by time chunks: short term (less than 12 months), medium term (one to five years) and long term (six years or more). Try to attach a cost estimate and date to each goal. It will make it easier to plan for.
Some examples of goals could be a holiday within the next year that will cost $1,200 (short term), a new car purchase in the next three years costing $35,000 (medium term) and a goal to retire at age 55 with an annual retirement income of $60,000 (long term).
With the future cost known, you can calculate how much to save while remembering to factor in the investment growth for longer-term goals. For instance, if you need $1,200 in 12 months, the math is simple: you need to save $100 each month. If you are saving for a retirement in 20 or 30 years, the calculations get trickier as there are many factors to consider, so speaking to a financial planner is helpful.
You might have many goals with potentially different start dates. Once you know the amount needed and the timeline, you are then able to narrow down the asset class (cash, bonds or stocks/equities) needed to match each goal. Choose an investment that is the right tool for the job.
A long-term goal suits longer-term investments, which usually indicates equity or stock investments. A short-term or more immediate goal suits cash. Medium-term goals are better suited to income assets, such as GICs.
Note, the overriding decider is your own risk tolerance. Some call this their “stomach” factor. What does your stomach tell you about the risk you are considering? How much risk can you tolerate? This is another way of asking how much loss you can afford before your goal’s timeline is up.
With a short-term goal, you would not be able to quickly recover if your money decreased in value before you needed to use it, but if it was a longer-term goal, you would have time to recover and wait for the value to gradually increase again.
Any financial account you open — whether it be a registered retirement savings plan (RRSP) or TFSA — asks you to analyze your risk tolerance on the initial application, and usually annually after that to allow for changes in goals and timelines.
Merlita, you are looking at a longer-term, 10-year goal. Longer-term investments such as equities — mainly in the form of mutual funds and exchange-traded funds (ETFs) for most small investors — are more suited for those goals so that growth can compound over time and increase the amount you started with.
It’s also wise to regularly review and revise your goals since factors such as interest rates, the economy, employment income and lifestyle can all influence them.
Try to consistently add to your base amount. Set up automatic contributions that match your pay schedule. These contributions encourage investors to deposit to their account whether the value of their investments is up or down. This is known as dollar-cost averaging. You will get a better average price for your investments because you are buying more frequently and at different price points due to different purchase dates rather than buying them all at one time at one singular price.
Look for the service level you require from your investment company. This is usually indicated by how involved you want to be. Some investors want to manage their investments themselves using a DIY brokerage account. The fees are low and you do all the transactions, research and monitoring yourself.
Other investors use a digital online adviser (also called a robo-adviser). They allow you to input your information and required data, and choose a product their algorithms suggest. The fees are a little higher, but you can speak to their call centre if needed.
Investors can also work with an investment adviser. There is a fee for this, either a percentage of your portfolio’s value or a fee built into the investment product you purchase. Many of them offer services such as insurance, banking and mortgage products.
The takeaway here is to determine how much advice and involvement you want regarding your investments, then make sure you do your research to find the best fit.
Janet Gray is an advice-only certified financial planner with Money Coaches Canada in Ottawa.
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As first-time homebuyers prepare for the launch of the tax-free first home savings account (FHSA) later this year, let’s not forget it may be used in conjunction with the existing Home Buyers’ Plan (HBP) to assist with the purchase of a first home.
Indeed, for many first-time homebuyers, especially those who plan to buy their first home within the next few years, having the ability to tap into existing registered retirement savings plans (RRSPs) via the HBP
... moreAs first-time homebuyers prepare for the launch of the tax-free first home savings account (FHSA) later this year, let’s not forget it may be used in conjunction with the existing Home Buyers’ Plan (HBP) to assist with the purchase of a first home.
Indeed, for many first-time homebuyers, especially those who plan to buy their first home within the next few years, having the ability to tap into existing registered retirement savings plans (RRSPs) via the HBP may be the only way to come up with a sufficient down payment.
But the HBP comes with its own set of rules that could potentially land you in trouble with the taxman if not followed, which is what happened in a recent case. Before delving into the details, let’s review some HBP basics.
The HBP allows a first-time homebuyer to withdraw up to $35,000 from an RRSP to purchase or build a first home without having to pay tax on the withdrawal. Amounts withdrawn under the HBP must be repaid to an RRSP over a period not exceeding 15 years, starting the second year following the year of the withdrawal. Amounts not repaid in a particular year, as required, must be included in income.
In the recent tax case, a taxpayer and his spouse purchased their first home together in 2006, each of them making withdrawals from their respective RRSPs as part of the HBP. In 2012, the taxpayer’s spouse had an outstanding HBP balance of $13,142. In 2013, she went into her local bank branch to make a payment into her RRSP to pay off this HBP balance.
Unfortunately, it seems her bank mistakenly placed this payment into her spousal RRSP account for which the taxpayer (the husband) was the contributor, rather than into her personal RRSP account. She then claimed this $13,142 contribution as an HBP repayment on her 2013 tax return.
The taxpayer also made an RRSP contribution of $13,111 in repayment of his own HBP balance, and claimed that repayment on his return. But because of the alleged bank error, the Canada Revenue Agency took the position that the taxpayer was also the contributor of the $13,142 HBP payment made by his spouse, which resulted in the taxpayer being in an overcontribution situation in 2013.
Fast forward to 2018, when the taxpayer mistakenly contributed an additional $19,000 to his RRSP following a pension buyout. It was this overcontribution that led the CRA to assess a penalty tax, which is equal to one per cent per month for each month the overcontribution (in excess of an allowable $2,000) remains in the RRSP.
The taxpayer testified it was only during a December 2020 phone call with a CRA representative that he learned of the CRA’s position that he had both made an accidental overcontribution in 2018 relating to his pension buyback, and that he still had a $13,142 excess contribution from 2013.
Following this call, the taxpayer realized this situation resulted from what he considered to be a bank error when it processed his spouse’s HBP repayment.
In July 2021, the taxpayer requested the CRA waive this tax. Under the Income Tax Act, the CRA has the discretion to cancel or waive the overcontribution tax when the excess contributions were made because of a reasonable error and the taxpayer took, or was taking, reasonable steps to remove the excess.
The CRA denied the taxpayer’s first request because he did not provide an amended RRSP receipt or a letter from his bank acknowledging the alleged error, and “it was the (taxpayer’s) responsibility to make sure that all contributions were made according to the rules and regulations.”
But the taxpayer was unable to get an amended receipt or bank letter because more than seven years had passed since the time of the HBP repayment, and he was told his bank no longer had records of the transaction.
In May 2022, the taxpayer submitted a second request to waive the tax. In response, the CRA acknowledged the taxpayer’s RRSP excess contributions were not intentional, but, nonetheless, “third-party errors do not normally justify the cancellation of a tax.”
In addition, the CRA claimed the taxpayer was informed of his excess RRSP contributions on his 2017 and 2018 Notices of Assessment (NOAs), and his bank would still have had the required records from 2013 had the taxpayer acted upon this information at that time.
As a result, the CRA again denied the taxpayer’s request for relief, concluding “there were no circumstances beyond the (taxpayer’s) control, such as a natural or human-made disaster, that would permit the cancellation of the penalty,” and it expressed “regret” that its decision “cannot be more favourable.”
The taxpayer appealed the CRA’s second decision to the Federal Court, which heard the case in Toronto on March 6. He argued there was no information in the 2017 and 2018 NOAs that could have alerted him to the CRA’s position that he had made an RRSP overcontribution of $13,142 back in 2013 relating to the HBP repayment.
The judge agreed, saying it was “unclear to me how the (CRA) could have concluded that, simply by alerting the (taxpayer) to the fact that he was in an overcontribution situation, the 2017 and 2018 NOAs were sufficient to put him on notice that CRA considered him to have made (an) overcontribution in 2013 such that he could pursue that subject with (his bank). I consider this reasoning to be lacking in logic and transparency.”
The taxpayer had hoped for a court order immediately cancelling the overcontribution tax, but the judge referred the matter back to the CRA to be reconsidered by a different decision-maker. The judge also rejected the taxpayer’s damages claim of $1 for “causing mental illness and stress during the time of the COVID-19 pandemic,” but did award him his out-of-pocket court disbursement costs.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.
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