What does the budget mean for Canadians’ personal finances?

This article was first published on MoneySense:

Not surprisingly, with an election just around the corner and budget surpluses forecast for years to come, the 2015 federal budget delivered plenty of goodies for the personal finances of Canadians. The widely expected boost to TFSA annual contribution limits and easing of RRIF withdrawal rules were in the budget, as were a host of other pocketbook-friendly proposals. “A typical two-earner Canadian family of four will receive tax relief and increased benefits of up to $6,600 in 2015,” said a Department of Finance news release. Let’s look at the details.

Tax Free Savings Account (TFSA)

The TFSA annual contribution limit is to be increased to $10,000 effective this year. However, the contribution limit will no longer be indexed to inflation. According to the budget document, the expected cost to the federal government of this measure over the next five years will be $1.1 billion, the largest of the proposed changes to the personal income tax.

The budget document provides statistics on TFSA holders that would seem to counter the notion TFSAs mainly benefit the rich. It observes: “Individuals with annual income less than $80,000 accounted for more than 80 per cent of all TFSA holders and about 75 per cent of TFSA assets as of the end of 2013 …. about 60 per cent of the individuals contributing the maximum amount to their TFSAs had incomes less than $60,000 in 2013.”

Registered Retirement Income Fund (RRIF)

Budget 2015 proposes to reduce minimum withdrawal rates on RRIFs for persons 71 to 94 years old. For example, the old minimum withdrawal rate of 7.38% drops to 5.28% for 71 year olds. For persons 95 and older, the existing rate of 20% remains in place. The expected cost to the federal government of this change over the next five years is $670 million, the second largest to affect the personal income tax.

The old withdrawal rates were based on a 7% nominal rate of return on RRIF assets and 1% indexing. The new rates are based on a 5% nominal rate of return and 2% indexing—which are “more consistent with historical real rates of return on a portfolio of investments and expected inflation,” noted Budget 2015.

The change comes into effect for the 2015 taxation year and subsequent years. RRIF holders who contribute more the new withdrawal rate in 2015 will be able to re-contribute the excess up to the old withdrawal rate.

Home Accessibility Tax Credit (HATC)

The HATC will help seniors and disabled persons pay for the cost of renovations to make their homes safer and more accessible. The total amount claimed “for the year in respect of the eligible dwelling must not exceed $10,000.” At an estimated cost of $180 million over the next five years, this is the third largest reduction of tax revenues for the personal income tax.

Other major measures tied to personal finances

The government is introducing a number of other measures that have consequences for the personal finances of Canadians, although they were first announced last fall and not in Budget 2015. They include:

• Expanding the Universal Child Care Benefit as of Jan. 1, 2015 (increasing it to $160 a month for each child under six years of age and creating a new benefit of $60 a month for children aged 6 to 17) to replace the Child Tax Credit
• Introduction of the Family Tax Cut (already included on the 2014 tax return), which allows the transfer of up to $50,000 of taxable income to a spouse for a family with children under 18 – but the tax credit is capped at $2,000
• Child Care Expense Deduction limit raised in 2015 to $8,000 for children under 7 and to $5000 for children aged 7 to 16
• Doubling of Children’s Fitness Tax Credit to $1,000 (already on 2014 return)

A variety of smaller changes are proposed in the budget. Let’s briefly review them:

Financial assistance for post-secondary students

Further reductions in financial barriers to post-secondary education are planned. The Canada Student Grant will be made available to low- and middle-income students enrolled in educational programs with a minimum of 34 weeks (currently, students must be enrolled in programs having a minimum duration of 60 weeks to qualify). Also planned is a reduction in the expected parental contribution under the Canada Student Loans Program, and elimination of “in-study student income” so that students can work and gain valuable labour-market experience while attending school without having to worry about a reduction in their financial assistance.”

Veteran benefits

Support for disabled veterans is to be improved in four ways: i) a new Retirement Income Security Benefit for moderately to severely disabled veterans, ii) expanded access to the Permanent Impairment Allowance, iii) enhancement of the Earnings Loss Benefit and iv) a new tax-free Family Caregiver Relief Benefit for caregivers of veterans.

Other

• An exemption to capital gains taxes for individual and corporate donors on the sale of private shares or real estate to an arm’s length party if the proceeds are donated within 30 days
• Increase in the lifetime tax exemption for capital gains realized on the disposition of small business corporations and farm or fishing properties from $813,600 to $1 million
• Extention of Employment Insurance Compassionate Care Benefits from six weeks to six months for Canadians caring for “gravely ill and dying family members.”
• Lowering the Employment Insurance premium rate to a level no higher than what is needed to pay for the program over time (the rate is expected to drop from $1.88 in 2016 to an estimated $1.49 in 2017, a reduction of 21%)
• Amendments to the Bank Act to strengthen protection of financial consumers, for example requirements for cooling-off periods that allow consumers with second thoughts to cancel an agreement without financial penalty
• Implementation of the Taxpayer Protection and Bank Recapitalization regime that allows a failing bank to be restructured by converting its debt into common stock instead of having taxpayers bail it out
• Extension of the measure that allows a family member to become the plan holder of a Registered Disability Savings Plan (RDSP) for an adult who may lack the ability to enter into a contract
• Amendments of various tax acts to permit the sharing of taxpayer information within Canada Revenue Agency to facilitate the collection of non-tax debt under certain federal and provincial programs
• Repeated failure to report income on a tax return will not be penalized by 10% of the unreported income if the unreported income is less than $500 over the the current and previous three taxation years
• Revision to the Family Tax Cut to ensure couples claiming the Family Tax Cut while transferring education-related credits (Tuition, Education and Textbook Tax Credits) among themselves receive the “appropriate value of the Family Tax Cut.”
• The government intends to establish an expert panel to study the scope for an Adult Fitness Tax Credit; it also has an initiative in progress to investigate the price gap between U.S. and Canadian goods and services, plus a commitment to work with mortgage lenders to improve voluntary disclosure of mortgage prepayment penalty fees