The federal budget presented last March took aim at several financial planning strategies used to reduce taxes. Although there’s still time to adjust your clients’ financial plans before these changes come into effect, you may want to begin considering other options.

Among the strategies being eliminated are: the tax advantages of 10/8s and leveraged insurance contracts (see story on page B4); tax-efficient mutual funds that convert interest income to capital gains (see page B6); and the taxation of testamentary trusts on which there is to be public consultation (see page B3).

The budget also eliminated the tax advantages of “synthetic dispositions,” which allowed high net-worth executives to monetize large exposures to their companies’ stocks while deferring capital gains taxes. This change became effective on March 22.

In addition, the dividend tax credit will be increased for non-eligible dividends from corporations not taxed at the corporate tax rate. These dividends now will be taxed at the same level as those from larger companies. (See story on page B4.)

There also were a couple of positive measures presented in the budget: the introduction of a first-time charitable donor’s “supercredit,” effective as of the 2013 taxation year (see story on page B12); an increase in the lifetime capital gains exemption to $800,000 from $750,000 as of the 2014 taxation year; and an extension of the period during which adoption expenses can be claimed for the adoption expense tax credit.

Here’s a look at the various measures in the budget that affect financial planning, excluding those for which there are separate stories (as indicated above):

lifetime capital gains. The increase in the lifetime capital gains exemption is very important for small-business owners, including financial and insurance advisors who are incorporated, says Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce‘s private wealth-management division in Toronto.

adoption expenses tax credit. This won’t affect many people, but is significant for those who are adopting a child. This 15% non-refundable credit used to apply only to expenses in the year in which the adoption was completed.

Now, the tax credit will apply to eligible expenses from the time the adoptive parent makes an application to adopt with either a provincial ministry responsible for adoption or an adoption agency licensed by a provincial government, or will apply to related expenses incurred from the time an adoption-related application to a Canadian court is made. These changes apply to adoptions finalized after 2012.

synthetic dispositions. These traditionally have allowed a taxpayer with a large exposure to a financial asset – such as stock options in the company at which he or she works – to enter into an agreement that effectively disposes of the property and thus eliminates the risk associated with it without paying capital gains on the asset until it’s sold.

However, under the new rules, such property will be deemed to have been sold when such agreements are entered into.

safety deposit boxes. The cost of these will no longer be a deduction. The budget notes that safety deposit boxes are increasingly used for personal purposes, such as safeguarding valuables, rather than for the storage of securities certificates.

mining exploration tax credit for flow-though shares. This is being extended for another year to March 31, 2014.

labour-sponsored venture-capital corporations (lsvccs) tax credit. The government is proposing to phase out this credit, reducing it to 10% from 15% on up to $5,000 in LSVCCs as of 2015, then to 5% as of 2016 and to zero in 2017. In addition, no LSVCCs were to be federally registered as of March 22. The budget invited public input about this proposal until May 31.

taxes in dispute. The Canada Revenue Agency (CRA) will be allowed to collect 50% of taxes assessed from questionable charitable donation tax shelters as of the 2013 taxation year. The budget also extends the normal reassessment period for tax shelters and reportable transactions, in cases in which required forms are filed late, to three years from the time the forms are filed.

registered pension plan contribution errors. Refunds will be allowed without CRA approval in the case of “reasonable” errors, such as when an employer makes a mistake in calculating an employee’s contributions for a given year – if the refund is made no later than Dec. 31 in the year following the year in which the error occurred.

trust loss trading. Trusts will be put on the same basis as corporations for arm’s-length loss trading transactions.

non-resident trusts. Rules related to non-resident trusts holding property that effectively is owned by a Canadian taxpayer are being tightened.

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