Up to speed: An overview of tax changes in 2008

Need a little tax tutorial before plunging into another RRSP season? Bring yourself up to speed on this year’s tax changes with this succinct overview.

2008 tax brackets and personal tax credits

2008 saw a continuation of full inflation indexing of the federal tax brackets. The updated brackets are as follows:

Note that the above rates are federal tax brackets; each province other than Alberta (which has adopted a flat tax) also has its own set of brackets, which may vary significantly from the federal numbers.

Maximum CPP contributions for 2008 are $2,049, while the maximum employment insurance premium for 2008 is $711. The year’s maximum pensionable earnings (YMPE) for 2008 is up $1,200 to $44,900. The maximum annual RRSP contribution limit is up to $20,000 from $19,000 in 2007.

The basic personal amount, as well as the spousal or partner amounts, was increased to $9,600.

RESP changes

While the 2007 federal budget eliminated the annual RESP contribution limit and increased the lifetime RESP contribution limit to $50,000, this year’s federal budget brought about two more positive changes. The first one is the extension of time limits for RESPs.

Contributions to RESPs can now be made for 31 years following the year in which the plan is entered into, up from 21 years. Additionally, the RESP can remain open for 35 years following the year of opening.

These two measures make RESPs far more flexible, by allowing students to use the funds for an undergraduate degree or diploma and then, should there be additional funds left over, use those to fund post-graduate work or a professional degree.

The second change announced this year was a relaxing of the rules surrounding payments made to RESP beneficiaries. Called “Educational Assistance Payments” (EAPs), these could only be received from an RESP if, at the time of the payment, the student was “enrolled” in a qualifying post-secondary program.

A concern was that, should a student graduate from school in May with extra funds remaining in the plan, there was no legal way for the student to receive an EAP. With the new change, a six-month grace period has been introduced that allows RESP beneficiaries to receive EAPs for up to six months after ceasing to be enrolled in a qualifying program, provided that the payment would have qualified if it had been made immediately before the student’s enrolment ceased.

In addition, this past summer, in its first published “RESP Bulletin,” the Canada Revenue Agency’s Registered Plans Directorate introduced an “EAP threshold limit” of $20,000, to be indexed annually. The purpose of the limit is to minimize the administrative burden imposed on RESP promoters who often had to request documentation related to an RESP beneficiary’s expenses before making an EAP to the student.

Under the new guideline, the CRA no longer expects RESP promoters to assess the reasonableness of each expense and will consider as acceptable all EAP requests below $20,000. The change was effective August 12, 2008.

Note that there is still a $5,000 EAP limit during the first semester of enrolment, which can be waived on a case-by-case basis, with government permission.

Unlocking federal life income funds

May 2008 saw the formal adoption of the new federal unlocking rules. The rules allow individuals who have funds in federal locked-in RRSPs and life income funds (LIFs) to have greater access to their money beyond current maximum withdrawal limits.

Individuals can now access funds from their LIFs in three situations: small balances, financial hardship and a one-time 50% unlocking.

Individuals who are at least 55 years of age with locked-in RRSPs and LIFs worth less than the small balance limit ($22,450 in 2008) can wind up their accounts and take the cash (which would be fully taxable) or transfer the funds to another tax-deferred savings vehicle, such as an RRSP or RRIF, in which there are no maximum withdrawal limits.

This change allows individuals with small holdings to consolidate their pension assets into a single registered vehicle, thereby minimizing administrative costs or other burdens associated with multiple small accounts.

Under the “financial hardship” option, any LIF holder, regardless of age, who is facing a job upset, medical- or disability-related expenses can unlock up to the small balance limit ($22,450).

Finally, and perhaps most beneficially, is the new opportunity for those at least 55 years of age to unlock up to 50% of their LIF holdings and either cash them out (fully taxable) or transfer the funds into an RRSP or RRIF.

When can you begin unlocking? Check with the financial institution that administers your LIF to see if it has made the necessary amendments to allow such unlocking.

Creditor protection for RRSPs and RRIFs upon bankruptcy

July 2008 ushered in changes to the federal Bankruptcy and Insolvency Act. As I’ve written about before, the new legislation contains the long-awaited change extending creditor protection in the event of bankruptcy to all RRSP and RRIF savings in Canada.

Before the change (and depending on specific provincial exemptions), only employer-sponsored registered pension plans and insurance-based products such as segregated funds, enjoyed protection from the claims of creditors upon bankruptcy.

The new law formally exempts all RRSPs and RRIFs, including registered bank deposits, registered mutual funds and self-directed plans, from being liquidated on behalf of creditors when an investor declares personal bankruptcy.

The only condition is that any RRSP contributions made in the 12 months prior to bankruptcy will not be exempt from seizure unless your provincial law states otherwise. This is a major win for professionals and business owners.

Registered Disability Savings Plan (RDSP)

The RDSP is a new registered savings plan that permits individuals to save up to $200,000 on a tax-deferred basis for someone with a disability. It also comes with generous government incentives in the form of the new Canada Disability Savings Grant and the Canada Disability Savings Bond, which can provide up to $90,000 in free government money based on only $30,000 of personal contributions.

The first RDSPs are expected be launched in December 2008.

Tax-loss selling

For tax-loss selling, to guarantee that a trade is settled in 2008, the trade date must be December 24, 2008, or earlier. This will make sure that the settlement takes place in 2008 and that any losses realized are available to the taxpayer this year. Any trade made after December 24, 2008, will not settle until 2009 and therefore those losses would not be available until next year.

Payments required by year-end

December 31 is the final payment date to claim a 2008 tax deduction/credit for various items, including:

investment counselling fees.

Tax-Free Savings Accounts (TFSAs)

Finally, perhaps the biggest tax announcement in 2008 was the introduction of the new TFSA, set to be launched on January 1, 2009. These new accounts will allow Canadian residents 18 years of age or older to contribute up to $5,000 per year to their TFSA, and any income or gains will remain tax free for life when earned inside the TFSA.

Avoid the administrative onslaught of new account openings in January by opening TFSAs early, where permitted, and then funding them in early 2009.

Jamie Golombek, CA, CPA, CFP, CLU, TEP, is Managing Director, Tax & Estate Planning, CIBC Private Wealth Management in Toronto. Contact jamie.golombek@cibc.com

(11/04/08)

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