TAX TIPS

C DE ROCA-CHAN & CO, CGA

Your Partner for Success

TAX TIPS and TAX INFO ( excerpts from CRA )

Registered Retirement Savings Plans

RRSPs offer very important tax advantages: • Contributions made to an RRSP are tax deductible within certain contribution limits. Because of this, contributions will shelter other sources of taxable income. • Investment earnings are not taxed while they accumulate in the RRSP. For most investments, the earnings are subject to tax as they are earned or realized. But there is no “tax drain” in an RRSP. All of the earnings will be put to work for the annuitant in the plan. When funds are taken out of the plan, however, they are taxable. This is an important point to note. Because all funds received from the plan are potentially taxable, the real effect of an RRSP is that tax is deferred until then. In the meantime, however, the two tax advantages combine to enhance the accumulation of capital compared to funds invested in conventional investments. However, tax benefits for particular forms of investments, such as capital gains rates and the dividend tax credit, will generally be lost in an RRSP. There could also be another form of tax savings in that, by the time an individual is taxed on RRSP payments, he or she may have retired and may therefore be in a lower tax bracket. Eventually, the RRSP will mature (this can be no later than the end of the year in which the annuitant turns 69). At the maturity date, the annuitant should select a maturity option. This will determine how the annuitant will receive retirement income, which must begin when the plan matures in order to avoid taxation on the full amount in the RRSP.

   There are two basic types of maturity options: annuities and registered retirement income funds (RRIFs), both of which provide for minimum annual payouts. Most RRSPs, however, allow the annuitant to obtain funds from the plan prior to maturity, if necessary. On death, an individual is treated as if all RRSPs have collapsed; therefore the annuitant would be taxed based on the fair market value of the plan at the time. This tax may be deferred if the spouse/common-law partner or a financially dependent child or grandchild becomes entitled to receive payments from the RRSP.


RRSP dollar limits are as follows:

2006 .......... $18,000
2007 .......... $19,000
2008 .......... $20,000
2009 .......... $21,000
2010 .......... $22,000

After 2010, the RRSP dollar limit will be indexed to the growth in the average industrial wage. Note that since the contribution limit will be the lesser of the RRSP dollar limit for the current year and 18% of “earned income” for the immediately preceding year, there is for years in which the RRSP dollar limit changes a one-year time lag between the earned income limit and the RRSP dollar limit. That is, the 2006 contribution limit will be the lesser of $18,000 or 18% of 2005 earned income, so that the $18,000 RRSP dollar limit for 2006 is reached at $100,000 of 2005 earned income.

    Spousal RRSPs An individual may contribute to an RRSP of which he or she is a beneficiary and/or to a spouse's or common-law partner's RRSP (a spousal RRSP) plan. The latter provides a means of splitting retirement income between spouses or common-law partners. A spousal RRSP may also be advantageous where the spouse or common-law partner is younger, since a longer accumulation period will be available. However, if an amount is withdrawn from a spousal RRSP within two years from the year in which the last contribution was made, the withdrawal may be taxed in the hands of the contributing taxpayer. This special rule is designed to discourage the short-term use of a spousal RRSP as a means of income splitting. It should be noted that a taxpayer's ability to contribute to a spousal RRSP is not reduced if the spouse or common-law partner has earned income and has made a contribution to his or her own RRSP. A contribution to the spouse's or common-law partner's own RRSP must be made with his or her own funds. It is the CRA's view that the attribution rules will apply if funds are gifted to the spouse or common-law partner to contribute to his or her own RRSP. Individuals over age 69 with sufficient earned income may contribute to an unmatured spousal RRSP before the end of the year the spouse or common-law partner turns 69.

The Home Renovation Tax Credit

Save up to $1,350 on home improvements purchased before February 1, 2010.

Put your tax dollars back into your home.

What is the HRTC?

The HRTC is a non-refundable tax credit based on eligible expenditures incurred for work performed, or goods acquired, after January 27, 2009, and before February 1, 2010, under an agreement entered into after January 27, 2009. The HRTC can be claimed when filing your 2009 tax return.

The HRTC can be claimed for renovations and alterations of an enduring nature and that are integral to the eligible dwelling (such as your home or cottage) or the land that forms part of the eligible dwelling.

How is the HRTC calculated?

The 15% non-refundable tax credit can be claimed on eligible expenditures of more than $1,000 but not more than $10,000. The maximum tax credit that can be claimed to reduce your federal income tax is $1,350. However, if the total of your non-refundable tax credits is more than your federal income tax, you have no federal income tax to pay, and you will not receive a refund for the HRTC.

Example

William and his spouse Marie pay $5,000 to purchase an energy-efficient furnace for their home and $3,500 to build a deck at their cottage. They also decide to have the area around the deck landscaped for $2,500, bringing their total costs to $11,000 ($5,000 + $3,500 + $2,500). Marie claims expenses of $9,000 ($10,000 – $1,000), resulting in an HRTC of $1,350.

William and Marie may also be eligible for the ecoENERGY Retrofit – Homes grant. For more information about the ecoENERGY program, visit www.ecoaction.gc.ca.

Important things to remember

You do not have to submit your supporting documents with your income tax and benefit return; however, you must ensure this information is available should the Canada Revenue Agency request it.

To avoid problems with your HRTC claim, make sure you:

get your contracts in writing (www.hiringacontractor.com); and
keep your receipts.

Eligible expenses must be of an enduring nature and be integral to the eligible dwelling. The cost of routine repairs, maintenance, and expenditures not integral to the dwelling are not eligible.

Examples of eligible expenses

Renovating a kitchen, bathroom, or basement
New windows, doors, or flooring
Building an addition, garage, deck, shed, or fence
A new furnace, woodstove, fireplace, water softener, or water heater
A new driveway or resurfacing a driveway, re-shingling a roof or painting of a house
Landscaping – new sod, perennial shrubs and flowers, trees, etc.
Swimming pools (permanent – in-ground and above-ground)
Fixtures – blinds, shades, shutters, awnings, lights, fans, etc.
Associated costs such as permits, professional services, equipment rentals, and incidental expenses

Examples of non-eligible expenses

Furniture, appliances, tools, and audio and visual electronics
Routine repairs, maintenance and cleaning (e.g., furnace cleaning, snow removal, lawn care, pool cleaning, house cleaning)
Financing costs