What’s new for your 2007 tax returns
TaxBreaks, February 2008 (08-1)
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We are nearing the time of year when employers, financial institutions and other issuers are beginning to send out tax information slips. Apart from these information slips, you are probably also beginning to compile other documents you need to file your 2007 income tax returns. We would like to draw your attention to certain changes made in 2007, as well as to other noteworthy tax matters.
Little or no revenue?
To benefit from the Canada Child Tax Benefit, the new federal Working Income Tax Benefit, the Quebec child assistance payment and similar programs offered in most other Canadian provinces, you and your spouse must file an income tax return, even if one of you receives no income. The same is true if you wish to claim the federal GST/HST tax credit or the Quebec QST tax credit.
If you are a student and want to carry forward tuition fees that you cannot claim in 2007 because you did not have any income, because your income was not high enough, or because you wish to transfer any unused tuition fees to your spouse or parents, you should also file a tax return. If you reside in a province other than Quebec, you should attach your provincial Schedule 11 to Schedule 11 of your federal return. If you are a Quebec resident, you should file Schedule 11 with your federal return and the new Schedule T with your Quebec return so that the tax authorities can track these amounts.
It is also worth noting that if, in 2007, you studied at a university abroad that is recognized by the Canada Revenue Agency, you need to have the university fill out a TL11A form to confirm the amount of your tuition fees and the number of months you studied there.
Indexation and other changes
In 2007, the tax brackets and non-refundable income tax credits were indexed by 2.2% at the federal level and 2.03% in Quebec. New Brunswick, Ontario, Saskatchewan, Alberta, British Columbia and the three territories also increased most of their non-refundable income tax credits. Unlike the other provinces and territories, Prince Edward Island, Manitoba, and the Northwest Territories have not increased their income tax brackets.
Manitoba increased the basic personal amount, but also decreased the income tax rate applicable to taxable income between $30,544 and $65,000 from 13.5% to 13%. Newfoundland and Labrador decreased its surtax on provincial income taxes by half (from 9% to 4.5%).
In 2007, British Columbia introduced a non-refundable credit related to adoption fees that can go up to $10,000; this credit is similar to the credit introduced by the federal government and several other provinces starting in 2005. Alberta set the highest bracket for a non-refundable credit for charity donations from 12.75% to 21%; this province also increased the education tax credit to $600 for full-time students and to $180 for part-time students. Saskatchewan is now granting a non-refundable credit of $10,000 to post-secondary graduates who obtain a diploma.
Several other changes were made to federal legislation in 2007. Noteworthy changes include the following:
- If in 2007 you had to repay an amount included in your 2006 return for the Universal Child Care Benefit (UCCB), you can deduct the amount in box 12 of slip RC62.
- If you were an employee, you are eligible for the Canada employment credit of $1,000 ($250 in 2006).
- You can claim an amount of $2,000 for each of your children or those of your spouse or common law spouse if they are 18 or less at the end of the year.
- In effect since 2006, the amount for public transit was expanded in 2007 to include amounts you have spent on weekly passes and electronic fare cards.
Pension income splitting
If you received pension income in 2007 and your spouse (in this section the term “spouse” also includes common law spouses) had little or no income, this new tax measure is beneficial for you. Announced in October 2006, but applicable as of 2007, this measure allows for pension income splitting among spouses. The “splitting” itself is done through your respective tax returns: as a pensioner, when computing your net income calculation (federal: line 210; Quebec: line 250), you deduct the portion of pension income that you allocate to your spouse while your spouse includes the amount in computing his/her own net income (federal: line 116; Quebec line 123).
The pension income that is eligible generally represents the income that is placed in line 115 of your federal tax return and line 122 of your Quebec tax return. Note that income from the OAS, CPP or QPP is not eligible. You can allocate up to one-half of the income that qualifies for the existing pension income tax credit without any restrictions based on your spouse’s age.
If you are a Quebec taxpayer, you may indicate a different amount in the federal and Quebec tax returns, except if you or your spouse is residing outside Quebec. The allocation is made by filling out the new federal form T1032 and new Schedule Q of your Quebec tax return. You and your spouse must sign form T1032 and each attach a copy to your tax return if you file your returns in paper format; retain the signed document for potential audits if you file electronically. For Quebec tax purposes, you alone are obliged to fill out and attach Schedule Q to your tax return. As you fill out these documents, you will also notice that you must take the income withheld at source from the pension income you are splitting and allocate it to your spouse while deducting it from your own return.
Since pension income splitting has an impact on tax credits and the benefits that are calculated based on your net income (for example, the repayment of old age security benefits and the age amount), you must pay close attention to these items when making your calculations. In Quebec, the split amount must be included when computing your spouse’s total income and deducted from your income for purposes of computing the 1% contribution to the health services fund (Schedule F).
You should consider some of the following planning elements if you decide to split your pension income:
- If you reduce your net income to less than $104,000, you are, at the same time, reducing the repayment of your old age security benefits by $15 for each $100 of split pension income.
- Your spouse’s net income should not exceed $63,511, so that his/her own old age security income will not have to be reimbursed.
- The age tax credit will be reduced if the net income exceeds $30,936 by $15 for each $100.
- In Quebec, as soon as your and your spouse’s combined total net income exceeds $78,600, neither one of you is eligible to receive either the age amount or the retirement income amount.
Children’s fitness tax credit
For each of your children and your spouse’s children under 16 years of age at the beginning of 2007, you are eligible to a maximum amount of $500 per year for expenses paid in 2007 to register them in a physical activity program. If one of your children qualifies for the disability amount and is under age 18 at the beginning of the year, you may claim an additional $500 as long as registration fees of at least $100 were paid for registering to the program.
To be eligible, the program must be ongoing (one session per week for at least eight weeks or five consecutive days in the case of a children’s camp), supervised, and suitable for children; in addition, substantially all of the program’s activities must include a significant amount of physical activity that contributes to cardio-respiratory endurance, plus one or more of: muscular strength, muscular endurance, flexibility and balance.
If some of the expenses you paid also qualify as child care expenses, these expenses must first be deducted as such. In 2007, only Manitoba, Nova Scotia and the Yukon have programs that are similar to the federal program.
Working income tax benefit
This new credit is aimed at low-income individuals or families who have earned employment income or income from independent work. The benefit is equal to 20% of earned income in excess of $3,000 up to a maximum of $500 for individuals living alone (no dependants) and $1,000 for families (couples and single parents). The benefit amount is reduced by an amount equal to 15% of the net family income in excess of $9,500 for individuals living alone and in excess of $14,500 for families. Students with no dependent children and studying full-time for more than three months during a tax year are not eligible for the benefit. However, individuals who qualify for the mental/physical impairment credit may obtain an additional amount calculated based on different thresholds on earned income and net family income. The new Schedule 6 enables you to make the necessary calculations.
The dividends you received in 2007 from public corporations or other corporations resident in Canada that are not Canadian-controlled private corporations (CCPCs) are, as a general rule, eligible dividends. If you were a shareholder of a CCPC and in 2007 received dividends from this corporation’s income taxed at the general rate, these dividends are most likely eligible dividends as well.
Once they have been included in your federal taxable income, eligible dividends are grossed up by 45% and entitle you to a dividend tax credit of approximately 19% of the grossed-up amount, as opposed to dividends that are not-eligible dividends, which are grossed up by 25% and entitle you to a 13.33% credit of the grossed-up dividend.
The credit rate for dividends that applies to eligible dividends differs for each province and each territory. The table below shows the marginal rate of eligible dividends and not-eligible dividends in 2007. It takes into account the changes in effect in 2007 in Alberta, Manitoba, and Ontario.
|Province||Eligible dividends||Not-eligible dividends|
|Prince Edward Island||24.44%||33.61%|
|Newfoundland and Labrador||30.63%||35.60%|
Foreign mutual funds and other foreign investments
If you hold investments in foreign mutual funds or interests in other foreign investments, in the past few years you have undoubtedly become acquainted with the proposed rules concerning foreign investment entities (FIEs). The latest update of this federal legislative proposal, tabled in the House of Commons on October 29, 2007, defers the application of the rules to fiscal 2007, rather than 2003, as originally announced. These rules were created to put an end to the particular benefits enjoyed by Canadians holding foreign mutual funds which were not available to those holding Canadian mutual funds.
If during previous years you paid income taxes based on these new rules, even though they were not yet adopted, make sure to modify your tax returns accordingly. We would advise you to consult a tax expert on this matter and to find out whether, since 2007, your interests in foreign mutual funds or other foreign investments are FIEs and if they are still subject to the new rules and, if so, also to establish the amount to be added to your income.
Net capital losses
First, you need to determine if your total losses upon disposing of investments and other property in 2007 exceed your capital gains. If they do not, you will have realized a lower net capital gain because of such losses, and half the net gain is taxable. If, on the other hand, the total amount of your losses is greater than your gains, the tax laws provide an alternative: you can either use the loss in future periods against future capital gains, or, if you have declared a net capital gain in one of the three previous years (2004, 2005 or 2006), you can carry it back.
Carrying net capital losses from 2007 back to previous years can generally be a good move, because you will immediately recover income tax that you have already paid. Elections to carry back losses must be made using the appropriate forms (T1A for federal tax and TP-1012.A-V for Quebec) and not by filing a modified return. The federal T1A form can be joined to your income tax return or sent under separate cover, but the Quebec TP-1012.A-V form must be sent under separate cover. If your income tax returns are filed electronically, you must send a printed version of this form to the appropriate tax authorities in Quebec.
Capital gains realized on disposition of publicly listed securities are no longer taxable when the donation is made to a recognized recipient, including, after March 18, 2007, those made to a private foundation. The same is true for a donation of publicly listed shares that you acquired upon the exercise of stock options if the donation was made within 30 days of the exercise and in the same year.
If in a previous year you elected to defer the benefit related to the exercise of stock options and were still holding these shares as at December 31, 2007, do not forget to fill out and attach form T1212 to your federal income tax return. This form advises the tax authorities that you are still holding these shares and that the measures deferring the tax on this benefit are still in force. This form has no equivalent under Quebec legislation.
Changes particular to Quebec
Adjustment of investment expenses. The deduction for investment expenses you incur to earn investment income cannot exceed the income from these investments. You must complete Schedule N, “Adjustment of Investment Expenses,” if in 2007 you incurred investment expenses such as: a loss by a partnership in which you were a specified member; the expenses incurred to earn investment income; or a resource deduction. If your investment expenses exceed your investment income, you must record the calculated adjustment amount on line 260 of your tax return. Losses incurred from the rental of property are not considered investment expenses as defined by this measure.
Another adjustment must be performed, on line 276 of your return, if you claimed a net capital loss from other years or a loss related to a partnership in which you were a limited partner. This measure applies to all taxpayers who file tax returns in Quebec. Furthermore, the amounts recorded on lines 260 or 276, depending on the circumstance, could be used to reduce your investment income of the previous three years, or of subsequent years. To reduce your net investment income of previous years, complete form TP-1012.B-V and file it separately from your return.
Contribution to the Quebec Parental Insurance Plan. The Quebec Parental Insurance Plan (QPIP) stipulates that benefits be paid to all eligible workers — salaried or self-employed — who take maternity leave, paternity leave, parental leave, or adoption leave. This plan replaces the maternity benefits, parental benefits, and adoption benefits previously available to new Quebec parents under the federal employment insurance plan. Although your QPIP contributions were deducted at source if you were a Quebec taxpayer with employment income in 2007, you must contribute to the QPIP and fill out new Schedule R if you are declaring business income, if you have worked in Canada but outside Quebec, or if you have worked outside of Canada.
The maximum QPIP contribution is $434.83 if you are self-employed and is treated like a QPP contribution: a portion of the amount paid qualifies for a non-refundable tax credit whereas the other portion is deductible from your income calculation. The contribution amount, however, is $245.44 if you were a Quebec resident who worked outside of Quebec, and it qualifies for a non-refundable tax credit. Because the deduction or credit is also admissible for federal income tax purposes, you must also fill out Schedule 10 of the federal return.
Schedules. If you are a taxpayer in Quebec, the following new schedules may apply to you:
- Schedule J “Tax credit for home-support services for seniors.” Whether you have claimed this credit only upon preparing your tax return or whether you applied for and received advance payments during the year, you must fill out this new schedule.
- Schedule S “Amount transferred by a child 18 or over enrolled in post-secondary studies.” If you are 18 or over and enrolled in post-secondary studies and had no income for 2007, you can transfer a maximum amount of $6,650 to either parent.
- Schedule T “Tuition or examination fees and tuition transferred by a student.” Section A of Schedule M from prior years appears now in Schedule T. Section B of Schedule T lets you transfer unused tuition or examination fees to your father, mother, grandfather, grandmother or those of your spouse.
- Schedule D has been abolished, but the eligible deductions for strategic investments are still allowed in line 287: SME Growth Stock Plan (TP-965.55), investments in a Quebec business investment company (QBIC) and Cooperative Investment Plan (TP-965.32) and deduction related to Quebec resources.
Jean-Luc Beauregard, Montreal
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