CALU SPECIAL REPORT | APRIL 2015

Transcription

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CALU SPECIAL REPORT | APRIL 2015
April 2015
CALU Special Report
Budget 2015:
Positioning for the
Fall Election
by 2019-20. The budget documents note the
conservative nature of these estimates, indicating
they were determined after adjusting downward
gross domestic product (GDP) estimates provided
by private sector forecasters, and the inclusion of a
contingency fund starting at $1 billion in 2014-15 and
increasing to $3 billion by 2019-20.
Introduction
The budget papers also highlight how well Canada
has performed since the end of the recession (June
2009) in comparison with other G7 countries, noting:
On April 21 Finance Minister Oliver tabled his first
budget, which is described with the lengthy moniker
“Strong Leadership: A Balanced Budget, Low-Tax Plan
for Jobs, Growth and Security”. While many of the key
proposals had been leaked to the media in advance
of budget day, there is much more in Budget 2015
that should satisfy a number of constituents going
into the fall election. In this Special CALU Report we’ll
try to synthesize over 500 pages of text and graphs
into those key elements which are relevant to CALU
members and your clients.
The Fiscal Position
The Conservative party had publicly gone “on the
record” that they planned to deliver a balanced
budget for the 2015-16 fiscal year. But with the price
of oil going into a tailspin at the beginning of this year,
the government was forced to delay the release of
the budget, re-evaluate the federal finances and take
corrective measures, including the multi-billion
dollar sale of shares in General Motors. This time was
apparently put to good use as the Finance Minister
announced there will be a surplus of $1.4 billion in
the upcoming fiscal year, increasing to $4.8 billion
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CALU Special Report | April 2015
Canada has the lowest overall marginal effective
tax rate on new business investment at approximately 17.5%;
Canada has the highest real GDP growth since the
start of the recovery; and
Canada is still on target to reduce the federal debt
to GDP ratio to 25% by 2021, and to reduce this
ratio to pre-recession levels by 2017.
The budget papers also summarize the impact of tax
relief provided by successive Conservative budgets,
indicating that Canadian families and individuals will
receive approximately $37 billion in tax relief and
increased benefits in 2015-16 due to tax changes
since 2006. In a similar vein, it is estimated that
federal budgets since 2006 (including this budget) will
reduce taxes on businesses by almost $15 billion in
2015-16.
With this background, Budget 2015 announced the
government’s intention to implement measures which
focus on three key areas:
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1. Supporting jobs and growth,
2. Helping families and communities prosper, and
3. Ensuring the security of Canadians.
Below is a discussion of those key budget proposals
that will impact CALU members and their clients.
RRIF Minimum Withdrawal Factors
Registered Retirement Saving Plan (RRSP) annuitants
are required under the Income Tax Act (the “Act”)
to annuitize or transfer their RRSP funds into a
registered retirement income fund (RRIF) no later
than the end of the year in which they reach age 71.
The Act further prescribes a minimum amount that
must be withdrawn from a RRIF on an annual basis
(the “RRIF minimum factor”), with a minimum of 4% of
the beginning of year balance at age 65, increasing to
7.38% by age 71, and 20% from age 94 onwards. The
current RRIF minimum percentages for ages 71+ were
determined in 1992 and, according to the budget
documents, the factors were based on providing
a regular stream of payments from age 71 to 100
assuming a 7% nominal rate of return on RRIF assets
and indexing at 1% annually.
It should be noted that the same age-based factors
are used to determine the minimum amount that
must be withdrawn annually, starting at age 71, from
a defined contribution registered pension plan (RPP)
(including individual pension plans (IPPs)) and pooled
registered pension plans (PRPPs).
When these factors were determined, interest rates
on long-term Government of Canada bonds ranged
from 6-8%, and mortality tables indicated that a male
aged 65 would on average live to age 80 and a female
aged 65 would on average live to age 84. However,
since then long-term interest rates have declined
dramatically, and combined with increasing lifespans,
could result in RRIF holders outliving their retirement
savings. The premature withdrawal of funds also
exposes those withdrawals and any re-invested
Conference for
Advanced Life Underwriting
www.calu.com
President – Kevin Wark, LL.B, CLU, TEP
Administrative Assistant –
Susan Carolan
Administrator, Membership & Accounting –
Jenna Mantle
Communications Consultant –
Caroline Spivak, ICD.D
Administrative Consultant – Val Osborne
amounts to income taxes as well as the possible clawback of the Guaranteed Income Supplement (GIS),
Old Age Security (OAS) and other benefits, further
increasing the risk that RRIF holders won’t have
sufficient funds to meet their needs throughout their
retirement years.
In late 2014, CALU formed the RRIF Minimum
Working Group, chaired by Clay Gillespie, to highlight
these concerns to the federal government. The
Working Group developed an awareness strategy
which included CALU publishing an article on the
RRIF Minimum Rules by Moshe Milevsky; making
representations to a number of Members of
Parliament (MPs) and senior policy advisors; making
a 2015 pre-budget submission to the House of
Commons Finance Committee; and appearing before
Conference for Advanced
Life Underwriting
Suite 504 - 220 Duncan Mill Road
North York, ON M3B 3J5
Tel: 647-799-1006 • www.calu.com
April 2015 | CALU Special Report
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the House Finance Committee which resulted in the
Finance Committee formally recommending that
the Department of Finance (Finance) review the RRIF
factors.
We are pleased to report that CALU’s concerns
have been addressed in Budget 2015. In particular,
the budget proposes to adjust the RRIF minimum
withdrawal factors that apply from ages 71 to 94,
on the basis of a 5% nominal rate of return and 2%
indexing. The new RRIF factors will permit holders to
preserve more of their RRIF savings in order to provide
income at older ages, while continuing to ensure that
the tax deferral provided on RRSP/RRIF savings serves
a retirement income purpose. There will be no change
to the minimum withdrawal factors that apply in
respect of ages 70 and under, which will continue to be
determined by the formula 1/(90 – age).
The new RRIF factors will apply for the 2015 and
subsequent taxation years. To provide flexibility,
RRIF holders who at any time in 2015 withdraw
more than the reduced 2015 minimum amount will
be permitted to re-contribute the excess (up to the
amount of the reduction in the minimum withdrawal
amount provided by this measure) to their RRIFs. Recontributions will be permitted until Feb. 29, 2016 and
will be deductible for the 2015 taxation year. Similar
rules will apply to those receiving annual payments
from a defined contribution RPP or a PRPP.
The chart below illustrates the RRIF capital remaining
at the end of each year based on the current and
proposed RRIF factors. Please refer to Schedule A
for a comparison of the new and current factors. It is
estimated that this change will result in approximately
$670 million of tax relief over the next four federal
fiscal years.
Capital Preserved Under the RRIF Factors
Age 71 Capital Preserved ($)
Age
Existing RRIF factors
New RRIF factors
Difference
(% more remaining)
71
100,000 100,000
-
80 64,000
77,000 20
85
47,000
62,000
32
90
30,000
44,000
47
95
15,000
24,000
60
10,000
67
1006,000
Notes:
1. For an individual 71 years of age at the start of 2015 with $100,000 in RRIF capital making
the required minimum RRIF withdrawal each year.
2. Age 71 capital preserved at older ages is expressed in terms of the real (or constant)
dollar value of the capital (i.e., the value of the capital adjusted for inflation after age 71).
The calculations assume a 5% nominal rate of return on RRIF assets and 2% inflation.
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Tax Free Savings Account Top-Up
One of the most anticipated tax measures of Budget
2015 was a change to the Tax Free Savings Account
(TFSA) annual contribution rate of $5,500 – and the
government has delivered on this. The new annual
contribution limit is $10,000, effective Jan. 1, 2015, but
the automatic indexing of the annual contribution limit
has been eliminated. The budget documents indicate
that this measure will cost the federal government
approximately $1.1 billion over the next four years –
but notes that in the long run, due to de-indexing of
the contribution limit, the loss of revenue will be not
much more than what would have been expected
under the current rules.
Donations Involving
Private Shares or Real Estate
In response to requests from registered charities,
new rules were introduced in the 2008 federal
budget that reduced the capital gain realized on
the donation of certain securities (including shares
in public corporations, units in a mutual fund trust
and an interest in a segregated fund policy) to nil.
This effectively increased the value of the charitable
donation by eliminating the tax liability arising from
the disposition of the security.
Since the introduction of this measure the charitable
sector has made ongoing representations to the
government to expand the exemption from tax to the
donation of private shares or real estate. However,
Finance has resisted this change primarily due to
valuation concerns – how would the charity or the
Canada Revenue Agency (CRA) verify the appropriate
amount to receipt for a gift that may be illiquid and/or
whose value cannot be easily ascertained?
It appears that Budget 2015 has come up with an
elegant solution to the valuation issue by exempting
individual and corporate donors from tax on the sale
of private shares or real estate to an arm’s-length
party, if the cash proceeds are donated within 30
days. If a portion of the cash proceeds is donated,
the exemption from capital gains tax would apply to
that portion. This measure will apply to donations in
respect of dispositions occurring after 2016.
There is no draft legislation included in the Notice of
Ways and Means Motion accompanying Budget 2015,
so it is not clear whether debt of any sort received on
the sale may qualify as “cash proceeds” in order to
gain access to the exemption from tax. As well, it is not
clear how this measure might apply on death, where
the estate sells the shares or real estate and donates
the proceeds to a charity.
Anti-avoidance rules will ensure that the exemption is
not available in circumstances where, within five years
after the disposition:
the donor (or a person not dealing at arm’s length
with the donor) directly or indirectly re-acquires
any property that had been sold;
in the case of shares, the donor (or a person not
dealing at arm’s length with the donor) acquires
shares substituted for the shares that had been
sold; or
in the case of shares, the shares of a corporation
that had been sold are redeemed and the donor
does not deal at arm’s length with the corporation
at the time of the redemption.
Where the anti-avoidance rules apply, the exemption
will be reversed by including the previously exempted
amount in the income of the donor in the year of the
reacquisition by the donor (or the non-arm’s-length
person) or the redemption.
It is estimated that this measure will reduce federal
revenues by about $265 million over the 2016-17 to
2019-20 period.
Life Underwriting
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Small Business Tax Rate and
Dividend Tax Credit
The small business deduction currently reduces to 11%
the federal corporate income tax rate applying to the
first $500,000 per year of qualifying active business
income of a Canadian-controlled private corporation
(CCPC). There is a requirement to allocate the annual
eligible income limit of $500,000 among associated
corporations. Access to the small business deduction
is phased out on a straight-line basis for CCPCs having
between $10 million and $15 million of taxable capital
employed in Canada.
Budget 2015 proposes a two percentage-point
decrease in the 11% small business tax rate. The
reduction will be effective as follows:
Jan. 1, 2016, the rate will be reduced to 10.5%;
Jan. 1, 2017, the rate will be reduced to 10%;
Jan. 1, 2018, the rate will be reduced to 9.5%; and
Jan. 1, 2019, the rate will be reduced to 9%.
The reduction in the small business rate will be prorated for corporations with taxation years that do not
coincide with the calendar year.
In conjunction with the proposed reduction in the
small business tax rate, Budget 2015 also proposes to
adjust the gross-up factor and dividend tax credit (DTC)
rate applicable to non-eligible dividends (generally
dividends distributed from corporate income taxed at
the small business tax rate). Specifically, Budget 2015
proposes to adjust the gross-up factor applicable to
non-eligible dividends from 18% to 17% effective
Jan. 1, 2016, 16% effective Jan. 1, 2018 and 15%
effective Jan. 1, 2019. The corresponding DTC rate will
also be adjusted, moving from 13/18 to 21/29 of the
gross-up amount effective Jan. 1, 2016, 20/29 of the
gross-up amount effective Jan. 1, 2017, and 9/13 of the
gross-up amount effective Jan. 1, 2019.
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Expressed as a percentage of the grossed-up amount
of a non-eligible dividend, the effective rate of the DTC
in respect of such a dividend will be 10.5% in 2016,
10% in 2017, 9.5% in 2018 and 9% after 2018, in line
with the proposed reductions in the small business tax
rate.
It is estimated that this measure will reduce taxes for
small businesses and their owners by $2.7 billion over
the 2015-16 to 2019-20 taxation years.
Lifetime Capital Gains Exemption
Increase for Farmers and Fishers
Owners of farm and fishing businesses have been the
focus of several tax measures over the last few years,
including enhancing the capital gains exemption credit
to the same level as is available for owners of small
business corporations in 2014. To allow farm and
fishing business owners to maintain more of their
capital for retirement, the Budget proposes to
increase the Lifetime Capital Gains Exemption (LCGE)
applicable to capital gains realized on the disposition
of qualified farm or fishing property to $1 million
for dispositions that occur on or after April 21, 2015.
After 2015, the LCGE for owners of farms and fishing
businesses will be the greater of $1 million and the
indexed LCGE for owners of qualified small business
shares (currently $813,600 in 2015). The Budget
estimates this will save owners of farm and fishing
businesses approximately $50 million in capital gains
taxes over the next four years.
Form T1135 Simplified Reporting
Many clients and advisors have been grappling with
onerous Form T1135 reporting of foreign property –
this is required for individuals, corporations and trusts
that own, at any time in a taxation year, specified
foreign property with a total cost more than $100,000.
The form will be simplified to reduce the compliance
burden for taxation years that begin after 2014. If the
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taxpayer’s total cost of specified foreign property is
less than $250,000 throughout the year, the taxpayer
will be able to report these assets to the CRA under
a new simplified foreign asset reporting system. The
current reporting requirements will unfortunately
continue to apply to taxpayers with specified foreign
property with a total cost of $250,000 or more.
Registered Disability Savings Plans –
Relief extended to 2018
To facilitate the establishment of registered disability
savings plans (RDSPs) for individuals who may not
have capacity to enter into such arrangements, the
government had announced in 2012 a temporary
measure to allow a qualifying family member to
become a planholder. This measure, which would
otherwise have applied only to the end of 2016, has
been extended by Budget 2015 to the end of 2018.
This extension is intended to provide provinces and
territories with additional time to make changes to
laws and procedures to allow for the appointment
of an appropriate legal representative for disabled
individuals without undue legal or procedural
difficulty.
Tax Avoidance of Corporate Capital
Gains – New anti-avoidance rules
The Budget contains proposed amendments to
section 55 of the Act, which is an anti-avoidance
measure that aims to prevent corporate tax planning
involving the conversion of capital gains to tax-free
intercorporate dividends. The measures specifically
address recent planning challenged by the CRA in
the courts, and also make additional changes. These
measures are applicable to dividends paid after
April 20, 2015, and so anyone considering corporate
planning will want to ensure a careful review of the
proposed changes before proceeding.
Other Budget 2015 Measures of Interest
The following is a summary of other budget proposals
that may be of interest to CALU members:
In 2017 the government will implement a new
rate-setting mechanism for Employment Insurance
(EI) premiums and any cumulative surplus in the EI
operating account will be returned to employers
and employees through lower EI premium rates. It
is anticipated that this will reduce EI premium rates
by approximately 20% starting in 2017.
The small business deduction is available on up to
$500,000 of active business income of a Canadiancontrolled private corporation. The government
plans to conduct a review of the active versus
passive business income rules for purposes of the
small business deduction in response to concerns
expressed by some taxpayers such as owners of
self-storage facilities and campgrounds.
A new Home Accessibility Tax Credit will provide up
to $1,500 in tax relief in order for qualifying individuals, including seniors and persons with disabilities, to make accessibility and safety related home
improvements to their principal residence.
Through the Employment Insurance program,
Compassionate Care Benefits provide financial
assistance to people who have to be away from
work temporarily to care for a family member who
is gravely ill with a significant risk of death. The government plans to extend the duration of benefits
from the current six weeks to six month, effective
January 2016.
A national strategy on financial literacy will be
launched in 2015-16 under the guidance of the
Financial Literacy Leader.
The federal government is continuing to assess a
voluntary target benefit pension option for federally regulated plans, and will consider changes to
income tax rules to appropriately accommodate
target benefit plans.
Life Underwriting
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Previously Announced Measures
The government had been busy announcing several
new programs and tax measures over the past year,
but reiterated these in the budget documents. Perhaps
the most significant of these are the Family Tax Cut
and the enhanced Universal Child Care Benefit (UCCB),
announced in October 2014. The Family Tax Cut is a
non-refundable tax credit of up to $2,000 for couples
with children under the age of 18, effective for the
2014 taxation year, which allows income splitting
between eligible spouses. The UCCB proposal provides
an increased benefit of $160 per month for children
under the age of six and a new benefit of $60 per
month for children aged six through 17, effective for
the 2015 taxation year. Another measure previously
announced is the doubling of the children’s fitness tax
credit which is also proposed to be refundable.
What’s Not Included in Budget 2015?
There are no new proposals affecting the taxation
of life insurance, transfers of life insurance policies,
the determination of the capital dividend account
(CDA) of a private corporation or deductibility of
interest on funds borrowed for the purpose of earning income.
While there are several positive tax changes affecting seniors (i.e., TFSAs, RRIF minimum factor, the
Home Accessibility Tax Credit) as well as a discussion on health care fund issues, there is no specific
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discussion in Budget 2015 on the need to develop a
federal/provincial strategy on funding issues relating to long term care expenses, as advocated by
CALU.
The federal government had previously announced
plans to introduce an Adult Fitness Tax Credit. The
government indicates that it intends to establish an
expert panel to study the potential scope of such a
credit.
There was no commentary relating to whether
Finance will be introducing changes to the rules
introduced in Budget 2014 relating to graduated
rate estates, charitable gifts on death and the
taxation of spousal/alter ego/joint partner trust on
death (effective in 2016).
Summary
Finance Minister Oliver has tried to deliver a budget
that will position the Conservative government for
success in the next election. On first blush this budget
(including the measures announced last fall) should
have significant appeal to seniors, small business
owners and families. Time will tell how this will impact
Conservative support at the polls this coming fall.
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Schedule A
Comparison of Current and Proposed RRIF Minimum Factors
Si
Existing and New RRIF Factors
Age (at start of year)
Existing Factor (%)
New Factor (%)
71
7.38
5.28
72
7.48
5.40
73
7.59
5.53
74
7.71
5.67
75
7.85
5.82
76
7.99
5.98
77
8.15
6.17
78
8.33
6.36
79
8.53
6.58
80
8.75
6.82
81
8.99
7.08
82
9.27
7.38
83
9.58
7.71
84
9.93
8.08
85
10.33
8.51
86
10.79
8.99
87
11.33
9.55
88
11.96
10.21
89
12.71
10.99
90
13.62
11.92
91
14.73
13.06
92
16.12
14.49
93
17.92
16.34
94
20.00
18.79
95 & over
20.00
20.00
Life Underwriting
RRIF (%
Withdraw
7.38%
7.48%
7.59%
7.71%
7.85%
7.99%
8.15%
8.33%
8.53%
8.75%
8.99%
9.27%
9.58%
9.93%
10.33%
10.79%
11.33%
11.96%
12.71%
13.62%
14.73%
16.12%
17.92%
20%
20%
20%
20%
20%
20%
20%
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About CALU
The Conference for Advanced Life Underwriting (CALU) is a national professional membership association of
established financial advisors (life insurance, wealth management and employee benefits), accounting, tax, legal
and actuarial professionals. For more than 20 years CALU has engaged in political advocacy and government
relations activities relating to advanced planning issues on behalf of its members and the members of its sister
organization, Advocis, The Financial Advisors Association of Canada. Through these efforts, CALU represents the
interests of some 11,000 insurance and financial advisors and in turn the interests of millions of Canadians. For
more information please visit www.CALU.com.
Life Underwriting
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CALU SPECIAL REPORT | APRIL 2015

Transcription

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