Warm-up for Tax Time 

Taxation

Warm-up for Tax Time

As we head into tax season, "Tax Forum" columnist Don Goodison presents his popular annual overview of changes to federal taxation.

FROM: JAN-FEB 2005 ISSUE | BY DON GOODISON

The federal government, following its precedent of the previous few years, did not make many changes to the Income Tax Act in 2004. However, there are a few revisions which will have a significant effect on taxpayers.

Basic Changes

Let's begin with the more mundane changes: the annual indexing of tax rates, tax credits, CPP and EI contributions, and contributions to deferred income plans. First, the basic personal credits and how they compare with 2003:

The spousal and equivalent-to-spouse credit is reduced when the dependant's net income exceeds $681, and is completely eliminated when the dependant's net income reaches $7,481. The infirm dependant credit is reduced when the dependant's net income exceeds $5,368 and is eliminated at $9,149.

Likewise, the caregiver credit is reduced when the net income of the person being cared for exceeds $12,921 and is eliminated at $16,703. Finally, the age credit is reduced when net income exceeds $29,124 and isn't available when net income reaches $55,204.

In addition to the increases in personal tax credits, individuals saw further tax reductions resulting from the expansion of the tax brackets in 2004. A comparison of the 2003 and 2004 brackets and tax rates is as follows:

The combination of increased tax credits and expanded tax brackets will put at least $41 in an individual's pocket, assuming no increase in taxable income. However, a single individual whose taxable income in 2003 was $113,805 will see a reduction of $682 in their federal taxes.

Canada Pension Plan contributions rose in 2004, with the maximum contribution at $1,831.50, calculated as follows:

Employment Insurance premiums dropped, with the rate reduced to 1.98 per cent of insurable earnings from 2.1 per cent in 2003. Maximum annual premiums for an employee dropped from $819 in 2003 to $772.20 in 2004. Correspondingly, the employer portion, which is 1.4 times the employee premium, decreased from $1,146.60 in 2003 to $1,081.08 in 2004.

Contributions to deferred income plans also changed. The following table compares the contribution maximums from 1995 to 2006.

Budget Changes

On March 23, 2004, the federal government brought down its 2004 budget, and on September 16, legislation dealing with the 2004 budget provisions was released in draft form.

Disabled taxpayers are currently permitted to claim the cost of disability supports for employment and education, through either the attendant care deduction or as a medical tax credit. The budget proposed to replace the attendant care deduction with a disability supports deduction. This new deduction, commencing in 2004, will include both attendant care expenses and other eligible disability support expenses. Disability support expenses are limited to:

• Sign-language interpretation services used by individuals who have a speech or hearing impairment;
• Real-time captioning services used by individuals who have a speech or hearing impairment;
• Teletypewriters or similar devices that enable deaf or mute individuals to make and receive phone calls;
• Devices or equipment designed exclusively for use by blind individuals in the operation of a computer (e.g. a Braille printer or a large-print onscreen device);
• Optical scanners or similar devices designed for use by blind individuals to enable them to read print; and,
• Electronic speech synthesizers that enable mute individuals to communicate through a portable keyboard.

The deduction will also be available for the following supports, provided they are prescribed by a medical practitioner:

• Note-taking services used by individuals with mental or physical impairments;
• Voice-recognition software used by individuals with a physical impairment;
• Tutoring services used by individuals with a learning disability or a mental impairment;
• Talking textbooks used by individuals with a perceptual disability in connection with the individual's enrolment at a secondary school in Canada or designated educational institution; and
• Attendant care services provided in Canada used by individuals with a mental or physical infirmity (and paid to persons who are not the taxpayer's spouse or common-law partner or under 18 years of age).

Taxpayers paying medical expenses for dependent relatives also get some relief. The current rules reduce the deduction of medical expenses paid on behalf of a dependent relative that is not a spouse or equivalent by 4.25 times the amount by which the dependant's net income exceeds the basic personal amount.

Commencing in 2004, medical expenses incurred on behalf of minor children will be pooled with the medical expenses of the taxpayer and his or her spouse or common-law partner, without regard to the income of the child. Medical expenses paid on behalf of other dependent relatives will be available to the extent that they exceed the lesser of three per cent of the dependant's net income, or $1,813, to a maximum of $5,000.

Students enrolled in post-secondary education relating to their employment were denied the education tax credit. Beginning in 2004, the deduction will be available to those students provided their employer reimburses no part of the costs of education.

Business losses incurred by a taxpayer currently may be applied against other income up to a total of 10 years, three years back, and seven years forward. The budget proposes that losses incurred after March 22, 2004, be available up to 10 years forward for a total of 13 years.

As anyone who has ever purchased a computer knows, these machines seem obsolete within five minutes of installation. The capital cost allowance rate on computers is currently set at 30 per cent. For computer equipment purchased after March 22, 2004, the rate will be increased to 45 per cent. Similarly the capital cost allowance rate on data network infrastructure, currently at 20 per cent, will increase to 30 per cent for equipment acquired after March 22.

It has been held by the courts over the years that certain fines and penalties incurred in the course of business, such as fines paid by truckers for overweight loads, are tax deductible. Many in government felt it was immoral to permit such deductions, and the 2004 budget acceded to their wishes. No deduction will be allowed for fines or penalties imposed after March 22, 2004, under the law of Canada, a province, or a foreign state. The exception is penalty interest imposed under the Excise Act, the Air Travellers Security Charge Act, and the GST/HST portions of the Excise Tax Act.

Earlier this year, the Supreme Court of Canada held that the federal government was limited to the same restrictions as everyone else when it came to the time limit for collecting debts owed to it. In keeping with its normal response to decisions it doesn't like, the government changed the rules to suit its purposes. Bill C30, which was passed on May 14, 2004, extends the government's limitation period on collection of tax debts to 10 years. This legislation applies to all tax debts owing on March 4, 2004.

The government also introduced legislation to limit the deductions of losses where, in their opinion, there is no chance of profit from the operation. While still in the discussion stage, the new legislation is sweeping and complex. The proposed amendment to Section 3 shows how serious the government is:

3.1 (1) Limit on loss — A taxpayer has a loss for a taxation year from a source that is a business or property only if, in the year, it is reasonable to expect that the taxpayer will realize a cumulative profit from that business or property for the period in which the taxpayer has carried on, and can reasonably be expected to carry on, that business or has held, and can reasonably be expected to hold, that property.

I will agree that there are taxpayers who attempt to write off "losses" that arise from phantom businesses. An example would be a high handicap golfer who claims to be a professional golfer and tries to write off the cost of his green fees, equipment, and lessons. However, I find it distasteful that the government can come along years later, with the benefit of hindsight, and disallow a taxpayer's legitimate losses. I really hope the government reconsiders this legislation.

Enjoy your 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.