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Financial planning tips

April 22, 2015

Federal budget: Tax breaks for Canadian families

New federal budget proposes changes to TFSAs, RRIFs and other tax relief measures for Canadian families. Here are seven ways you could benefit.

The federal budget unveiled Tuesday by Minister of Finance Joe Oliver projects a $1.4 billion surplus for the year — the first surplus in eight years.

“Setting aside the government’s use of its contingency fund to reach a surplus, it’s still good to see an end to the budget deficit,”  says Sadiq Adatia, Chief Investment Officer for Sun Life Global Investments. “It’s been a long time coming and in our view it sends a positive message about fiscal policy since the recession.”

The budget also brings some good news for Canadian taxpayers. Here are seven key highlights:

1. Increase in annual TFSA contribution limit

The annual contribution limit for Tax Free Savings Accounts (TFSAs) is being increased from $5,500 to $10,000, effective this year. This makes them more useful for both long- and short-term savings. If you’ve maxed out your RRSP, they provide you with another great way to shelter a portion of your investment earnings from income tax. And because withdrawals are not subject to tax, they are also a good option for saving for shorter-term goals such as the down payment on a home, a vacation or an emergency fund.

2. Reduction of RRIF withdrawal minimums

The budget proposes to reduce the minimum required withdrawal rates on Registered Retirement Income Funds (RRIFs) that apply to those age 71 to 94, to better reflect more recent long-term rates of return and expected inflation. For example, the current minimum withdrawal rate of 7.38% at age 71 would drop to 5.28%.

Cindy Crean, Managing Director of Private Client Services at Sun Life Global Investments, says, “With increased life expectancies, reducing the RRIF withdrawal minimums will provide retirees with the option to leave their funds in their RRIFs longer, for more tax-deferred growth. They will not be forced to take funds they do not need to support their lifestyle out of their RRIFs and pay tax. The existing rules may have also forced retirees to take so much out of their RRIFs that they may have experienced a clawback on their Old Age Security payments. Instead, they will now have more flexibility to draw income from other sources, such as non-registered savings or TFSAs that will not impact their taxable income.”

3. Home Accessibility Tax Credit

A proposed new Home Accessibility Tax Credit (HATC) will help seniors and people with disabilities make changes to improve the safety, access and functionality of their homes, by providing them with a 15% non-refundable income tax credit on up to $10,000 of eligible home renovation expenditures per year. Examples of eligible expenditures include costs associated with the purchase and installation of wheelchair ramps, walk-in bathtubs, wheel-in showers and grab bars.

4. Support for post-secondary students

Proposed changes to the Canada Student Loans program will help university students and their parents by reducing the expected parental contribution required to trigger student loans. In addition, it will eliminate the penalty on students who work by no longer reducing their financial assistance based on income they earn.

5. Extension of Compassionate Care Benefits

Current Employment Insurance Compassionate Care Benefits provide six weeks of employment insurance benefits to take leave from work to care for a dying family member. The budget proposes to extend this leave to six months, as of January 2016.

6. Improved benefits for veterans

Four measures provide additional support for disabled veterans:

  • A new Retirement Income Security Benefit provides additional financial security for disabled veterans over age 65.
  • The Permanent Impairment Allowance will be expanded to help compensate disabled veterans for the loss of career opportunities associated with their disabilities.
  • The Earnings Loss Benefit will be modified to ensure that part-time veterans have access to the same level of income support as regular and full-time veterans.
  • A new, tax-free Family Caregiver Relief Benefit will be created for the caregivers of veterans.

7. Tax cuts for small businesses

The budget proposes to cut the small business federal tax rate by 0.5% each year, from 11% in 2015 to 9% by 2019. This rate applies to the first $500,000 of active business income. The actual rate a business pays will vary depending on its province of residence, because the provinces also tax business income.

To review the full federal budget report, check out the Government of Canada’s Economic Action Plan 2015.

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