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By Jonathan Chevreau
National Post
Advisor Post
Monday, May 08, 2006 |
Despite the 28 different tax cuts unveiled in the federal budget last week, financial advisors have come up with only a handful of new planning opportunities.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “Advisors will find something in the budget for practically every client. This budget presents a number of planning decisions for clients who own businesses.”
Had the hoped-for deferral of capital gains tax been implemented, they would have had a planning bonanza. As it is, they are making do with the elimination of capital gains tax on securities donated to charity.
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| Conservative MP Garth Turner: We are making the tax code more complicated.... Ultimately we need to get to the point where we simplify the tax code. |
One clever gambit was suggested in an AIM Trimark Investments conference call to advisors made the day after the budget. Jamie Golombek, vice-president of taxation, said the break on charitable donations could be used even if you don't actually wish to sell your shares. "What you could do is donate them to charity, realize the gains and buy them back because there is no superficial gain rule."
Clay Gillespie suggested a variation of this: the new capital gains rules for donated securities could be used in conjunction with energy flow-through tax shelters, which the budget has preserved.
Typically, a flow-through deal generates a first-year write-off of 90% or more of the amount of flow-through shares purchased. After a few years, these structures are usually converted into traditional mutual funds, creating a large capital gains tax liability. At that point, Gillespie suggests those who had planned to make charitable donations anyway could give the mutual funds to a registered charity, thereby eliminating the tax liability.
Other than that, advisors will mostly be making sure clients remember the many new tax breaks and credits, such as the pension income tax credit, which rises from $1,000 to $2,000. Golombek says advisors should ensure clients increase the amount of money being withdrawn from registered retirement income funds to come up to at least that level.
Clients without that much RRIF income could use non-registered funds instead: Gillespie suggests guaranteed income certificates purchased through life insurance companies could do the trick since they are considered to be deferred annuities.
"Advisors will find something in the budget for practically every client," says Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc., "This budget presents a number of planning decisions for clients who own businesses."
One Vancouver-based broker who did not want to be named lamented the additional complexity that will face clients when they file their taxes a year from now. Tax receipts will have to be attached to returns in order to qualify for such new measures as the $500 Fitness Tax Credit (for children under 16) or the Public Transit Pass Credit.
Even Conservative MP Garth Turner concedes this point: "We are making the tax code more complicated, no doubt. With all these tax credits for textbooks and transit, we're using tax credits as a blunt instrument," Turner told me, "Ultimately we need to get to the point where we simplify the tax code."
In the budget bulletin issued by Mackenzie Financial Corp., Sandy Cardy, vice-president of tax, begins by recapping personal tax rates and taxation of dividends. The budget proposes to implement the November proposal by the Liberals to increase the federal dividend tax credit from 13.3% to 19%. If the provinces go along with it (Quebec has already said it won't) then the marginal tax rate on dividends would be comparable to that of capital gains, according to Mackenzie.
Cardy reviews the rise of the bottom tax bracket from 15% to 15.25% in 2006 and 15.5% in 2007. This used to be 16% until the Liberal mini-budget of November 2005. Relative to the 16%, any of the new lower rates in the bottom bracket "means we get less back on our tax credits," Cardy said. "Because all tax credits are leveraged to the bottom rate, that's not a good thing."
If the bottom rate goes down, people pay a little less income tax but forget they will get less back in the form of tax credits leveraged to that rate, Cardy says.
None of the corporate budget analyses mention the higher tax brackets the Liberals proposed to cut in November. Recall they planned to cut the 22% rate to 21% and the 26% rate to 25% on Jan. 1, 2010, had they remained in power. That is also when they would have raised the threshold on the top (29%) bracket to $200,000 from $118,000.
Why then did the Tories leave intact the Liberal plan to cut the lowest rate to 15% from 16% in 2005? That was the only measure scheduled to begin on Jan. 1, 2005 and that became a fait accompli as far as the Canada Revenue Agency was concerned.
When Canadians filed their taxes by the May 1 deadline last week, the 15% figure was in place, even though it was never actually legislated. The Tories wisely left it intact for calendar 2005, since it would otherwise have triggered a nightmare of revised tax returns that would have cost the treasury more than the extra tax it could have collected. But the amount rises to 15.25% for the 2006 tax year and 15.5% in 2007, which will make the host of new tax credits slightly more valuable with each rise.
However, it is clear the Tories were seriously considering cutting the next two higher tax brackets in line with the Liberal mini-budget. I refer readers to Terence Corcoran's column last Thursday, where he reprints a version of a video accidentally posted on the Finance department's Web site on budget day. It was soon pulled but in one version Finance Minister Jim Flaherty said they would be "permanently reducing the bottom three personal income tax rates; and increasing the amount you can earn at these lower rates."
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