Tax Year In Review
A top-10 list of major changes for your clients
by Jamie Golombek
My, what a busy tax year it's been. What with tax cuts, other tax increases, new tax credits and a miscellany of new rules, there's no shortage of things to talk to our clients about come year-end.
Here's my top-10 list of major tax changes (and opportunities) that you may wish to discuss with your clients this December.
1. Donations of appreciated securities to registered charities
The May 2006 federal budget completely eliminated the tax on "in-kind" donations of securities, mutual funds and segregated funds to registered charities. December is the ideal time to sit down with philanthropic clients and remind them of this significant opportunity to donate appreciated securities to charity, producing a tax receipt equal to the fair market value of the investment donated while at the same time eliminating any capital gains tax otherwise payable. If done by December 31st, a 2006 tax receipt can still be obtained.
2. Doubling of the pension income credit to $2,000
The 2006 budget, in an effort "to provide greater tax relief to pensioners", doubled the maximum amount that is used in calculating the eligible pension credit to $2,000 from $1,000, effective for 2006.
For clients 65 and over, ensure that they receive at least $2,000 a year from their registered retirement income funds (RRIFs) so that they can take advantage of this credit. Clients aged 65 to 68 need not convert their entire registered retirement savings plan (RRSP) to a RRIF until the year in which they turn 69; however, should they wish to take advantage of this credit, you may wish to discuss with them the possibility of transferring some of their RRSP money to a RRIF prior to age 69 so they will be in a position to claim this credit.
3. The new Universal Child Care Benefit
As discussed in my September 2006 column "Summer tax changes" published in FORUM, clients who have eligible children should already be receiving their $100 monthly UCCB payment for each qualifying child under the age of six. If not, ensure they apply so that they can collect any retroactive payments owing back to July 2006.
4. The new dividend rules
The federal government lowered the effective tax rate on eligible dividends received in 2006 by increasing the gross-up to 145 per cent while at the same time enhancing the dividend tax credit. Most provinces (other than Quebec) have also agreed to lower their effective tax rate on dividends as well. Ensure clients are aware of this new opportunity to add tax-effective dividends to their non-registered portfolios for 2006 and beyond.
5. Scholarship and bursary income
If your clients have children in university or
college in 2006 who have received scholarships or bursaries, you may wish to remind them the full amount of any scholarship, bursary or fellowship income has now been exempted from tax (as opposed to the previous limit of $3,000 annually).
6. Public transit credit
Clients who took public transit in 2006 should be reminded not to throw out their monthly transit pass receipts as they will be required to calculate the new non-refundable federal public transit pass credit, equal to 15.25 per cent of the cost of the monthly passes as of July 2006.
7. Donation tax shelters
Tax shelters are most heavily marketed in the last few weeks of the year. Caution clients who may be approached by tax shelter promoters that, in April 2006, the Supreme Court of Canada failed to grant leave to appeal four donation tax shelter cases involving the donation of artwork to charity for amounts higher than the donors paid. This refusal essentially upheld the Federal Court's finding in four test cases that the donation credit should be no higher than the amounts actually paid for the artwork. Be sure clients get independent legal and/or tax advice before investing in any new tax donation scheme, making sure the promoter can appropriately distinguish why "it's different this time".
8. Beware the Singleton shuffle
If you've got clients who have used a Singleton-type plan to replace non-deductible debt with tax-deductible debt, they may want to pay close attention to the April 2006 General Anti-Avoidance Rule (GAAR) decision in Lipson (2006 TCC 148) in which the Tax Court shut down a Singleton-type of tax planning arrangement as "abusive". The decision is currently under appeal by the taxpayer.
9. Exercise caution with joint ownership
Clients who insist on re-registering their accounts as "joint with right of survivorship" with adult children ought to pay close attention to two Supreme Court cases heard in Ottawa this month (Pecore v. Pecore and Saylor v. Brooks). Each case involved a dispute as to who was the "true" joint owner of an investment account that was put into "joint" names with a daughter by a father. In each case, upon the fathers' deaths, the true ownership of each of the accounts was called into question by the survivors.
10. BCE conversion to an income trust
Many clients own shares in BCE that may be converted to income trust units in 2007. The conversion, as currently proposed at the time of writing, will be done on a fully taxable basis, meaning that some clients may experience a significant capital gains tax bill in 2007. Consider proactively planning to trigger some capital losses, either in late 2006 or 2007 to help shelter some of the BCE conversion gains from capital gains tax.