March 5 2007

Annual Tax Update

Dear Client or Colleague

It is tax time once again and time for my brief synopsis of the events of the past year, from a tax point of view. Here are a few of the more significant tax occurrences and pronouncements that took place since we last met.

1) The change in taxation of income trusts.

On October 31 of last year, the government decided that income trusts, which were previously tax free vehicles that distributed all of their income to unit holders with little or no tax burden, are no longer in the best interests of the nation. The government has decided to tax these institutions as if they were regular public corporations commencing in 2011. The immediate result was dramatic drop in the market value of these types of investments, and a lot of pain experienced by the Canadian public to the extent that they were invested in them. To compensate, the government introduced a series of amendments to the income tax act to benefit the public, particularly senior citizens who were most heavily invested in the trusts, and who coincidently are the most diligent voters.

a) The deduction for pension income was doubled to $2000 per senior citizen. This applies to most private and some public pensions other than the CPP or OAS.

b) The personal tax credit allowed for taxpayers over 65 was increased from $4066 to $5066

c) The effective tax rate for dividends on shares of publicly traded corporations was reduced from approximately 30% to approximately 25%

d) Spouses can now allocate pension income from private pension plans or RRSP’s as they see fit when collected. This remedies the situation that occurred when one spouse in a high tax bracket resulting from a significant pension had much tax to pay, and the other with minimal income had none.

2) Automotive Expenses

There has been little change to these provisions. Taxpayers are allowed to spend up to $30,000 to acquire a car to be used in the conduct of their business, or spend up to $800 per month plus applicable sales taxes to lease one. Any leasing or acquisition costs incurred in excess of those amounts are at the taxpayers expense, meaning that they are not deductible.


The per kilometre amount that can be claimed by a taxpayer is no 50 cents for the first 5000 km’s and 44cents for all mileage above that. Note that if one claims a per kilometre amount for the use of their car, one is precluded from claiming itemized deductions.

3) Universal Child Care Benefit.

Many of you have heard of the universal child care benefit, an amount equal to $1200 per year per child. There are two issues to keep in mind with respect to this benefit,

a) Many people who do not receive the current child benefit will not receive this $1200 automatically. The government is using the current list of families that receive the tax free child benefits to determine who is eligible. Those people who are not eligible, which is generally families earning in excess of $70,000 will have to apply for this benefit separately

b) The benefit is taxable. It is taxed in the hands of the spouse with the lower net income.

4) Business and Rental Losses

Two years ago the Supreme Court ruled that losses could be deducted against other income without restriction as long as the business is a true business and contains no personal element. In other words, a rental property is a true investment and not a room in one’s house. Or a musician is a true musician who does not play guitar as a hobby. The Department of Finance is working on articulating a clearer understanding of when a business loss should be deductible.

5) Scholarship or Bursary Income

Effective 2006, all amounts received in the year on account of scholarships, fellowships, or bursaries are now completely free of tax. In prior years they were taxable to the extent that they exceeded $3000.

6) Corporate Tax Rate

There is an increasing differential between the rate of tax payable on income earned in a corporation and that earned personally. To the extent that income is retained in the corporation, that is, not paid out to shareholders as a salary or dividend, the rate of tax is a flat 18.6% on the first $300,000 of income and 27.6% on the next $100,000. This is considerably lower than what one would pay if one earned the income directly. Something to consider!

Anyhow, I will look forward to seeing you this year, and as usual, please organize your material so that I don’t tear my hair out and you don’t scoff at the fee.

Your Friend and Colleague,

Peter Herman CA