2003 Tax Changes 

Taxation

2003 Tax Changes

Once again, it's time to look at the federal tax changes that have taken place during the year.

FROM: JAN-FEB 2004 ISSUE | BY DON GOODISON

There were some significant tax developments in 2003, as the federal government brought down a budget containing a few changes to the Income Tax Act.

Basic Changes

In keeping with the indexing provisions, personal tax credits increased in 2003. Figure 1 compares the credits for 2003 and 2002.

Figure 1

The spouse and equivalent-to-spouse credit is reduced when the dependant's net income exceeds $659 and is completely eliminated when the dependant's net income reaches $7,245. The infirm dependant credit begins to reduce when the dependant's net income exceeds $5,197 and is eliminated at $8,860. Likewise, the caregiver credit is reduced when the net income of the person being cared for exceeds $12,509 and is eliminated at $16,172. Finally, the age credit begins to reduce when net income exceeds $28,193 and is gone when net income reaches $53,450.

In addition to the increases in personal tax credits, individuals saw further tax reductions resulting from the expansion of the tax brackets in 2003. Figure 2 compares the 2002 and 2003 tax rates.

Figure 2

Canada Pension Plan (CPP) and Employment Insurance (EI) rates also changed in 2003. CPP rates increased from 4.70 per cent to 4.95 per cent on pensionable earnings, and the maximum pensionable earnings increased from $39,100 to $39,900. See Figure 3.

Figure 3

While CPP rates and contributions continue to rise, EI rates continue their downward trend. The premium rate reduced from 2.2 per cent in 2002 to 2.1 per cent in 2003. Maximum annual premiums for an employee dropped from $858 in 2002 to $819 in 2003. Correspondingly, the employer portion, which is 1.4 times the employee premium, decreased from $1,201.20 in 2002 to $1,146.60 in 2003.

Budget Changes

With budget surpluses now the norm, the federal government has been handing out minor tax breaks in addition to the ongoing indexing of personal amounts and tax brackets. The 2003 Federal Budget saw a number of tax "gifts" that will benefit individuals and corporations.

Canada Child Tax Benefit

The Canada Child Tax Benefit replaced the Family Allowance several years ago. Unlike the Family Allowance, the benefit is not subject to tax or claw back if the family income exceeds a certain amount. It is, however, only available to lower income families. There are two components to the Canada Child Tax Benefit: the base benefit, which is targeted to low and middle income families, and the National Child Benefit supplement, which provides additional assistance to low income families.

The 2003 budget proposed to increase the National Child Benefit supplement by $150 per child in July 2003, $185 in July 2005, and $185 in July 2006. These increases will see the maximum Canada Child Tax Benefit for the first child reach $2,632 in July 2003 and $3,243 in July 2007, subject to indexing.

In addition, the budget proposed a new $1,600 Child Disability Benefit, which will supplement the Canada Child Tax Benefit. In order to receive this benefit, the child must meet the eligibility criteria for the disability tax credit. The Child Disability Benefit will be paid to low income families with net family income below the amount at which the National Child Benefit is phased out — $33,487 in July 2003 for families with three children or less. Benefits for families whose net income exceeds this amount will be reduced by 12.2 per cent for one disabled child, 22.7 per cent for two disabled children, and 32.6 per cent for three or more disabled children. The benefit will be lost when net family income reaches $46,602 for one disabled child; $47,584 for two, and $48,211 for families with three disabled children.

RRSP/RRIF Rollover

On the death of an annuitant under a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF), the value of the RRSP or RRIF must be added to the deceased's income in the year of death. The tax rules permit a rollover to the deceased's surviving spouse, common-law partner, children, or grandchildren who were financially dependent on the deceased.

In the case of a dependent child or grandchild, the value of the plan is included in the child's income unless the child is physically or mentally infirm. In that case, the proceeds may be transferred to the child's RRSP or an immediate life annuity. In order to be considered financially dependent on the deceased, the child's net income cannot exceed $7,634. The budget proposes to increase that amount to $13,814 for 2003 and subsequent tax years. This amount will be indexed starting in 2004.

Medical Expenses Expanded

For 2003, the list of eligible medical expenses has been expanded to include:

• Amounts paid on behalf of an individual with a speech or hearing impairment for real-time captioning services if the payment is made to a person who is in the business of providing such services;
• Amounts paid, on behalf of an individual with a mental or physical impairment, for note-taking services if
  

  	(i)	the payment is made to a person who is in the business of providing such services, and
  	(ii)	the individual has been certified by a medical practitioner to be an individual who, because of that impairment, requires those services;

• The cost of voice recognition software used by an individual with a physical impairment if the individual has been certified by a medical practitioner to be an individual who, because of that impairment, requires that software; and
• The incremental cost, to an individual who suffers from celiac disease, of acquiring gluten-free food products as compared to the cost of comparable non-gluten-free food products, if the individual has been certified by a medical practitioner to be an individual who, because of that disease, requires a gluten-free diet.

Deferred Income Plans

In the distant past, the federal government laid out a plan that would allow contributions to deferred income plans to increase to a maximum of $15,500 per year. If memory serves me, the maximum was to be reached in 1996. However, the plans were delayed again and again, until most of us all but forgot them. The maximum was stuck at $13,500 from 1996 until 2002. Then in 2003, like the phoenix rising from the ashes, contribution limits were changed – at least for Registered Pension Plans (RPP). The limit for the chosen few who contribute to RPPs was increased to $14,500. Those who continued to contribute to RRSPs would not see an increase in their contribution rates until 2004, at which time the maximum would rise to $14,500. And those who contributed to Deferred Profit Sharing Plans (DPSP) were restricted to 50 per cent of the RPP limit. In February 2003, this was changed for the better; the new limits are outlined in Figure 4.

Figure 4

Capital Gains

In addition to the Capital Gains Deduction available to individuals who dispose of shares in a qualifying small business, the federal government introduced a rollover provision, which allows an investor to defer tax on the sale of qualifying small business shares. The rollover is available when the individual subsequently invests in shares of a qualifying small business. When this provision was introduced in 2000, restrictions as to the size of the corporation and the amount of the investment were imposed. These restrictions were relaxed in 2001, and further relaxed by the 2003 budget by:

• Eliminating the $2,000,000 original investment limit for each eligible small business corporation or related group;
• Eliminating the $2,000,000 qualifying cost limit for replacement shares in an eligible small business corporation or related group; and
• Extending the time for acquiring replacement shares to any time in the year in which the disposition is made, or within 120 days after the end of that year.

Automobile Breaks

Where an employer-provided automobile is available for personal use, the Income Tax Act provides for a minimum standby charge to be added to the employee's income as a taxable benefit. Where personal use is less than 1,000 kilometres per month and the vehicle is used substantially in the performance of the employee's duties, the standby charge can be reduced accordingly. The 2003 budget proposed to change this provision where:

• The automobile is used primarily in connection with performing the duties of employment; and
• Personal use is less than 1,667 kilometres per month (20,004 kilometres per year).

While this summary does not include every revision that took place last year, it does represent the major changes that will have an impact on our income tax returns for 2003. Happy tax season!

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Don Goodison, CFP, FCGA, is a partner of Kemp Harvey Goodison, Certified General Accountants, in Burnaby, B.C. E-mail goodison@axionet.com.