The federal budget of 1998 effected several changes in income tax law. The following budget sampler highlights certain changes that academics as individuals, employees, parents, consultants and retirees might review before submitting their 1998 income tax returns.
It should be noted that this text is for general information purposes only and is not intended to provide specific advice for any particular situation. No action should be taken on the basis of this material. Professional consultation with a tax expert is recommended in all cases.
Personal Amounts & Surtaxes
The budget introduced new supplemental personal amounts: $250 in 1998 and $500 in 1999. This sum is in addition to the basic personal, spousal and spousal equivalent amounts. The supplemental personal amount will be reduced by 4% of the individual's net income which exceeds $6,956. The supplement will be indexed at the same rate as other personal amounts.
The 1998 budget also introduced reductions in federal surtaxes: $125 in 1998 and $250 in 1999. These amounts will be reduced by 3% in 1998 (6% in 1999) of any basic federal tax over $8,333.
Alternative Minimum Tax
The calculation on which the Alternative Minimum Tax is based has been changed. Various payments to Registered Retirement Savings Plans and to Registered Pension Plans now are excluded, including the direct transfer of retiring allowances. This change is retroactive to 1994. Revenue Canada will refund any AMT previously paid on these amounts (once this provision has received Royal Assent).
Registered Education Savings Plan
For 1998 and subsequent years, a Canada Education Savings Grant of 20% on the first $2,000 in annual contributions to a Registered Education Savings Plan will be paid directly to the contributor. Grant contribution room can be carried forward to future years up to an annual contribution of $4,000 per child.
The courts have determined that various payments to employees required to relocate are not taxable, however, any reimbursement or compensation provided to employees in financing their residence will be included as income. Half of any payments exceeding $15,000 made to an employee in respect of the decreased value of the employee's former residence also will be treated as income. This provision applies to payments made after February 23, 1998 where the employee began work at the new location from June 1998. There are transitional rules which defer income inclusion where the employee began work at the new location before July 1998 until 2001. Thereafter, interest rate subsidies will be taxable to the employee.
Home Buyers' Plan
Prior to 1999, individuals on a one-time only basis could withdraw up to $20,000 from their RRSP to purchase a home in Canada for personal occupation. Starting in 1999, an individual may be eligible to participate a second time in the Home Buyer's Plan. The individual must have repaid all amounts previously borrowed under the plan and their spouse cannot have owned a home from January 1, 1995.
An individual who is eligible to claim the disability deduction now may withdraw from their RRSP funds to purchase a more accessible or functional home.
An individual related to or supporting a disabled individual also will be allowed to use the plan to acquire a more accessible or functional home.
Tax Relief for Students
Beginning in 1998, part-time students are eligible to claim educational tax credits of $60 per month. Eligible programs must last at least three consecutive weeks and involve a minimum of 12 hours of courses each month.
Starting in 1999, individuals may withdraw up to $10,000 annually to a maximum of $20,000 from their RRSPs if the individual or their spouse is enrolled in full-time training or higher education for at least three months of the year. Withdrawals must be repaid over a 10-year period beginning the year after the individual is no longer enrolled full-time, or in the sixth year following the first withdrawal, whichever is earlier. Individuals with disabilities using RRSPs for lifelong learning will be exempt from the requirement that their studies be on a full-time basis.
Pension Adjustment Reversals
Employees who have left their employer after 1996 now will be credited with a Pension Adjustment Reversal (PAR) equal to any forfeited benefits less those received upon termination from the plan. Employers must calculate and report the PAR to both the employee and Revenue Canada. Transition rules provide that the 1997 PAR will be reported in 1998 and will increase the 1998 contribution limit. Thereafter, PARs will increase the contribution limit in the year employment terminates. The reporting deadline for 1998 PARs is March 31, 1999. The deadline for making RRSP contributions for PARs only will be April 30, 1999.
Child Care Expenses
In 1998, the child care expense deduction for children under age seven will be $7,000, and $4,000 for children age seven to sixteen. Single parents may claim child care expenses in each month during which they are part-time students. The higher income parent may claim child care expenses where their spouse studies part-time.
Caregiver Tax Credits
Reasonable expenses to train an individual to care for a disabled dependent are eligible as a medical expense.
In 1998, where an individual maintains a home used as a residence for a disabled dependent, the individual may claim a credit. This credit is equal to the amount that $400 exceeds 17% of the individual's income over $11,500. In the case of parents or grandparents over 65, there is no requirement that they be dependent due to mental or physical infirmity.
Private Health Services Plans
From 1998, individuals may deduct from self-employed earnings amounts paid for private health services if either 50% of income is as a result of self-employment or is within $10,000 of the total of their other income. Restrictions apply on the amount of deductible premiums allowed.
It should be noted that the Income Tax Conventions Interpretation Act will be amended. For tax treaty purposes, pension payments will not be considered as annuities. Unless defined otherwise in such treaties, pensions will include payments under RRPs, RRSPs and Registered Retirement Investment Funds (RRIFs), plus any other retirement arrangements. Where tax treaties define pensions, the term extends to periodic payments.
Where a taxpayer disposes of "taxable Canadian property" after February 23, 1998 any income gain or loss thereon will be deemed to have arisen in Canada and taxed accordingly.
In addition to the tax changes for 1998 which were effected by the budget, Revenue Canada and Revenue Quebec regularly issue interpretation bulletins, rulings, opinions and technical notes on taxation matters. Recent court cases also can affect how tax law is applied in particular situations.
Text for this article was supplied by Budget 1998 documents and the accounting firm of Robertson Hill Parker Prins. For more information check out CAUT's Income Tax Guide at www.caut.ca.