2008 year in review, part 5 of 8.

Canadian taxpayers saw a number of new developments on the personal tax front in 2008, including the introduction of a brand new vehicle for tax-free savings. That change, in addition to a number of others, should give Canadians more options in terms of long-term tax and retirement planning.

“Each of the changes gives people more flexibility in terms of doing their overall planning, whether it’s their cash-flow planning, their access to different funds or even how they fund their RESPs,” says Jeff Greenberg, vice president of financial advisory support in the wealth management services department of the Royal Bank of Canada in Toronto. “More flexibility gives people more choices if they can eventually get to their end goal – financing the things that they want.”

The biggest development was the introduction of the tax-free savings account, which will available on Jan. 2, 2009. The TFSA allows Canadian residents to invest $5,000 a year in after-tax money in a tax-free account and withdraw it at any time without paying taxes. Unused contribution room is carried forward indefinitely, and any amount withdrawn from the account is added to contribution room for the following year.

Although the TFSA will have little impact on most Canadians’ financial planning in 2009, the program is set to have greater impact in coming years when contribution room and asset levels inside the plan start to build, experts say.

“In five or 10 years, TFSAs will be as integral — or perhaps even more relevant to some people’s financial planning — as RRSPs or RESPs,” says Jason Safar, a Mississauga, Ont.-based partner in the tax services practice of PricewaterhouseCoopers LLP.

Looking for ways to make the registered education savings plan more flexible, the feds increased the number of years a contribution can be made to an RESP to 31 years from 21 years. Also, the deadline for terminating the plan increased to 35 years from 25 years.

The moves were designed to give beneficiaries more flexibility in the timing of their attendance of post-secondary school and the length of the programs. The increase in contribution years to 31 gave families more flexibility in opening a family RESP.

“It’s a nice thing for a family that has a gap in the ages between the kids. Not every family has kids that are born a year or two apart,” Safar said.

The federal government also gave Canadians who have life income funds more options in accessing the funds. Those who are 55 or older will be able to wind up small LIFs of up to $22,450, or to convert them into a tax-deferred savings vehicle, such as an RRSP. For larger LIFs, those 55-plus individuals will be entitled to a one-time conversion of up to 50% of the LIF holdings into a tax-deferred savings vehicle with no maximum withdrawal limits. Finally, all individuals facing financial hardship, if they meet certain tests, will be entitled to unlock up to $22,450.

In 2008, the feds finally released the rules governing the registered disability savings program, which had been introduced a year earlier.

Families can contribute up to $200,000 on a beneficiary’s behalf, up until he or she turns 59. Payments to the beneficiary must begin by the end of the year in which he or she turns 60. The feds will partly match contributions with a disability savings grant or the Canada disability savings bond, according to the size of the contribution and income levels.

The feds have said they will allow a deceased parent’s registered plan to be transferred tax-free into an RDSP as long as it falls within the $200,000 limit. Contributions to an RDSP won’t be tax-deductible, but payments from family RDSP contributions aren’t considered taxable income.

In November, the feds gave Canadians a 25% reduction in mandatory minimum withdrawals in their registered retirement income funds. Minimum amounts are set on Jan. 1 each year based on an individual’s age and plan balance at that time. That dollar amount has to be paid out as a minimum from the RRIF. Now, with the change, Canadians with RRIFs need only withdraw 75% of that amount.

That tax change, introduced for the 2008 tax year to help Canadians who have been hit hard by collapsing equity values, has not been passed into law, but tax authorities say Canadian individuals and financial institutions can proceed as if the change has already been passed into law.

@page_break@“There’s been pretty specific wording and notes that come out from the Canada Revenue Agency that they’re going to treat it as legislation for 2008,” Greenberg says. “Financial institutions are allowing people to [make withdrawals at 75% of the 2008 minimum].”

Finally, the CRA continues to crack down on charitable gifting schemes — complicated financial transactions involving a charitable donation — with the primary motive of generating lucrative tax credits or deductions for the individual making the donation. The CRA, which sees these schemes as a way to avoid tax illegitimately, has said it is auditing every such scheme it runs across.

On the corporate taxation side, the big news for the year was the ratification of the fifth protocol to the Canada-U.S. Tax Treaty. The recent changes to the treaty are intended to make it easier for Canadian and U.S. corporations to do business in the other country, and to settle long-standing tax questions affecting individuals who own property, live, or work in the other country.

Another significant change is the elimination of the withholding tax paid on interest to arm’s-length non-residents.

“Previously, if you wanted to borrow from a bank in the U.S., or somewhere else, you would have to cover the expense of a 10% withholding tax charged to the lender, which then makes the interest unreasonable compared to your local market rate,” Safar explains. “By removing the withholding tax, you have a more competitive [North American] financing structure.”

IE