On April 21, 2015 Canada’s Minister of Finance, Joe Oliver, tabled in Parliament a balanced budget for 2015 that includes several investor-friendly tax measures that should prove beneficial to most individuals, including seniors. We would like to highlight some of these in this article.
TFSA Annual Limit Increased
For starters, the annual contribution limit for eligible individuals (permanent residents aged 18 years or older) holding a TFSA (Tax Free Savings Account) was raised from $5,500 to $10,000. When the TFSA investment account was first introduced, the federal government stated it would be indexed to inflation, which is why the annual contribution limit was raised from $5,000 when the account was first initiated in 2009 to $5,500 in 2013. Now, starting in 2015, the annual contribution limit has been set at $10,000, but without inflation indexing. So, for an individual who has not opened up a TFSA account as of yet, and has been 18 years of age or older since 2009 and fulfills other eligibility requirements, the total contribution limit for 2015 is $41,500. This is very beneficial to individual investors, as it allows for a greater opportunity to shelter a higher level of investment returns from tax. Many will argue that the TFSA is really only something for the wealthiest Canadians, and benefits them most. However, evidence shows that Canadians making under $80,000 annually were the group most likely to contribute the maximum allowable for the TFSA every year, even more so that those making higher incomes. As well, the additional contribution room may help individuals decide more easily whether to contribute to an RRSP (Registered Retirement Savings Plan), or to use the TFSA as the preferred investment vehicle.
Minimum RRIF Withdrawals Lowered
With Canadians living longer, and the financial environment indicating that interest rates will remain lower for longer, many retirees could outlive their retirement nest egg. The budget includes provisions to address this real problem. When an individual turns 71 years of age, their RRSP account must turn into a RRIF (Registered Retirement Income Fund) account. Once an RRIF, the investor must withdraw a minimum amount from the account as income, starting at 7.38% of the total value of the account. The withdrawal amounts increase over time, capping out at 20% when the investor turns 94 years old. The increasing withdrawal amounts are intended to limit the life of the RRIF account. However, two issues arise from this situation – 1) individuals may outlive the useful life of the RRIF account (based on the assumptions of 7% annual return, 1% inflation indexing and the current minimum withdrawal schedule); 2) the current low interest rate environment would not support the assumption of an annual return of 7% because as the individual ages, their risk/return profile also changes, and with the current interest rate environment and an individual’s risk tolerance lowering over time, there is a concern that the payments would last as long or be meaningful in later years.
Hence, the government has lowered the return assumptions used in calculating the annual return on the assets inside the RRIF account (from 7% to 5%), increased the inflation indexing (from 1% to 2%) and thus lowered the starting point for minimum withdrawal rate schedule (from 7.38% to 5.28%) while escalating the withdrawal rate factor more slowly over time. These adjustments should allow individuals to lower their mandatory withdrawal from the RRIF account over time. This will help in two ways – allowing the assets inside an RRIF to deplete more slowly, prolonging the useful life of the RRIF account, and; mitigate any potential bump up to a higher tax bracket, which may result from higher mandatory RRIF withdrawals, when added to usual CPP (Canada Pension Plan), OAS (Old Age Security), GIS (Guaranteed Income Supplement) and private pension payments. Also, this could help reduce the likelihood of cut backs to individual GIS payments.
Along with the above, several other investor-friendly measures were introduced, including: a new Home Accessibility Tax Credit (tax relief of 15% on $10,000 of eligible expenditures per year); extension of qualified family member rule for RDSP (Registered Disability Savings Plan) from 2016 to 2018; improvements to the calculation of the Family Tax Cut; capital gains exemptions when donating private company shares or real estate to charity, among other measures. For more information individuals should review in detail the budget as presented.
Ontario Government Budget
Finally, on April 23rd the Ontario government also presented their 2015 budget, which is projecting a $8.5 billion deficit, and a forecast for a balanced budget in 2017. The important points were that there were no changes to the personal tax brackets and tax rates and no changes to the corporate tax rates. Also, some measures were introduced to make the use of some tax-avoiding technologies illegal.
In conclusion, we underline that individuals should take advantage of the increased TFSA limits, and to be aware that the minimum withdrawal amounts for RRIFs have been lowered.
Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union Limited
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