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2006 Tax Facts Update for Processing 2005 T1 and T2 Tax Returns
15 Jan 2006

Originally Published Online by ProConnection Newsletter, Intuit Canada, Vol. 3 - Issue 4 - JAN 2006

 

TAX FACTS

Back by Popular Demand

Eileen Reppenhagen, Certified QuickBooks ProAdvisor

2006 Tax Facts Update for Processing 2005 T1 and T2 Tax Returns


The information provided in this article has been compiled as a REFERENCE TOOL ONLY.
Please refer to CRA updates and rulings prior to using the following material.


RRSP Reminder

March 1, 2006 is the deadline for contributing to an RRSP for the 2005 tax year. December 31 of the year a person turns 69 years of age is the last day he/she can contribute to their own RRSP.

Amounts that are NOT Taxed as Personal Income

You do NOT have to include certain amounts in personal income disclosure. The following is a list of some items NOT included in personal taxable income.

  • Lottery winnings.
  • Most gifts and/or inheritances you receive.
  • Most amounts received from a life insurance policy following a death.
  • Any GST/HST credit and Canada Child Tax Benefit payments, along with those from related provincial and territorial programs
  • The compensation you received from a province or territory; if you were a victim of a criminal act or a motor vehicle accident, the compensation you received from a province or territory is not taxable.
  • Quebec family allowances and also the Allowances for Handicapped Children paid by the province of Quebec.
  • Amounts paid by Canada or an ally, on the condition that the amount is not taxable in that country, with regards to disability or death due to war service
  • Most payments of the type referred to as "strike pay" that is received by a member from his/her union who is on strike or locked out, even if the member performs picketing duties as a requirement of that membership.
  • Amounts received under the Income Tax Act Regulation 233(2). There is a list of exceptions for social assistance, including: medical expenses, child care expenses, funeral expenses, legal expenses, job training or counseling paid in the year as a part of a series of payments, the total of which in the year does not exceed $500 or is not part of a series of payments. But remember, just because you received it tax free, doesn’t mean you can pay it to someone else tax free.
  • Amounts received relating to foster children S. 81(1)(h).
  • Social assistance for providing a home for someone who is not a relative, i.e. foster children, as long as it is in your home, not theirs, S. 81(1) (h).
  • Note: interest earned on any of the above amounts is taxable (for example: if you deposit your lotto winning in a term deposit, the interest earned from it is taxable).

Employment Insurance

  • Effective January 1st 2006 the EI, employment insurance contribution rate is reduced from $1.95 per $100.00 to $1.87 per $100.00 of insurable earnings. This change was announced November 2005. This change represents the 12th decrease in EI since 1994.
  • Compared to 2004, this current reduction indicates a savings of $31.20 to an employee who makes the maximum contribution.
  • This also includes a decrease in the employer’s rate paid from $2.73 per $100 down to $2.62 of insurable earnings.
  • As for the maximum insurable earnings, that remains the same: $39,000.

Canada Pension Plan

  • CPP – Canada Pension Plan pensionable earnings for 2006 is set at a ceiling of up to $42,100.00 announced November, 2005. This is an increase from 2005 when the ceiling was set at $41,100.00.
  • Employees who earn more that the ceiling of $42,100.00 in 2006 are not required or permitted to make extra contributions to the CPP.
  • For 2006 the basic exemption amount remains at $3,500.00. Employees who earn less than the basic exemption amount do not need to make contributions to CPP.
  • The maximum employee and employer contributions to the 2006 plan will be $1,910.70.
  • The maximum self employed contribution is set at $3,821.40 for 2006. The rate has stayed flat at 4.95% and 9.9% for self-employed people.

Benefits for Canadians

Announced by the Minister of Finance on December 9, 2005

The personal tax rate drops from 16% to 15% effective January 1, 2005 (yes it’s retroactive), which means that all personal amounts are calculated at 15% instead of 16%! Federal corporate tax rates stay the same.

Note: The benefits for Canadians listed here are for information purposes only. Please refer to the CRA for the full indexation. All personal income tax amounts will be adjusted by 2.2 per cent in 2006 to ensure that inflation does not cause people to pay more tax.
 

Personal Income Tax Levels
2005
2006
Note: 2005 amounts reflect the November 2005 changes (Bill 80) retro to January 1, 2005
Amount for basic personal
8,648
9,039
Amount for spouse and/or common-law
7,344
7,675
     Net income threshold
735
768
Taxable income at which 22-per-cent bracket commences
35,595
36,378
Taxable income at which 26-per-cent bracket commences
71,190
72,756

Taxable income at which 29-per-cent bracket commences

115,739
118,285

 

Credit Amounts to Reflect Needs
2005
2006
 
Amount for infirm dependant
3,848
3,933
     Net income threshold
5,460
5,580
Caregiver amount
3,848
3,933
     Net income threshold
13,141
13,430
Disability amount
6,596
6,741
Supplement for children with a disability
3,848
3,933
Amount allowed for child care & attendant care before supplement reduction
2,303
2,254
Medical expense tax credit: 3% of the net income ceiling
1,844
1,884
Maximum Adoption Expense Amount (*****NEW!!!)
10,000
10,000
Refundable medical expense tax credit supplement
750
1,000
     Minimum earnings threshold
2,857
2,919
     Family net income threshold
21,663
22,663
Age amount
3,979
4,066
     Net income threshold
29,619
30,270
Repayment threshold for Old Age Security
60,806
62,144

 

G.S.T. Goods and Service Tax Credit
2005
2006
 
The maximum for an Adult
227
232
The maximum for an Child
120
122
Single supplement
120
122
The phased-in threshold for the single supplement
7,377
7,539
The credit starts to phase out at a family net income of:
29,618
30,270
NOTE: Benefits paid on a year cycle commencing in July include: Good & Service Tax, Canadian Child Tax Benefit and the Child Disability Benefit

 

C.C.T.B. (Canada Child Tax Benefit)
2005
2006
 
Base amount (benefit)
1,228
1,255
Additional benefit for a third child
86
88
Plus, additional benefit for a child under seven years old
243
249
The family net income at which point the base benefit commences to phase out
35,595
36,378

 

N.C.B. (National Child Benefit Suplement)
2005
2006
 
For the 1st child
1,722
1,945
For the 2nd child
1,502
1,720
For the 3rd child
1,420
1,637
The family net income at which point the supplement commences to phase out
35,595
36,378

 

Child Disability Benefit
2005
2006
 
The maximum benefit
2,000
2,300
The family net income at which point the benefit commences to phase out
35,595
36,378

 

The Benefits listed here are for information purposes only. Please refer to the CRA for the full indexation.

CRA INTEREST RATES:

1. Canada Revenue Agency interest rates for the first calendar quarter

Ottawa, December 2, 2005... The Canada Revenue Agency (CRA) today announced the prescribed annual interest rates that will apply to any amounts owed to the CRA and to any amounts the CRA owes to individuals and corporations. These rates are calculated quarterly in accordance with applicable legislation and will be in effect from January 1, 2006 to March 31, 2006.

2. Income Tax

  • The interest rate charged on overdue taxes, Canada Pension Plan contributions and Employment Insurance Premiums will be 7%.
  • The interest rate paid on overpayments will be 5%.
  • The interest rate used to calculate taxable benefits for employees & S/H from interest-free & low-interest loans will be 3%.

3. Other taxes

The interest rate on overdue and overpaid remittances for the following taxes will be:

Tax & Duty
Overdue remittances
Overpaid remittances
 
Goods and Services Tax
2.4333% 
2.4333%  
Harmonized Sales Tax
2.4333% 
2.4333%  
Air Travelers Security Charge
2.4333% 
2.4333%  
Excise Tax (non GST)
7.0%
5.0%  
Excise Duty (except Brewer Licensees)
7.0%
5.0% 
Excise Duty (Brewer Licensees)
5.0%
N/A

Business Registration

  • The CRA now requests that all new registrants provide the social insurance number of at least one of the owners and/or directors of the corporation when registering, along with the activity of the business.

Business Limits

A corporation’s business limit gradually increases from the point of $200,000 to $300,000 providing that the corporation is not associated with another corporation.

When a taxation year straddles a calendar year, the maximum allowable limit for a business is then prorated based on the number of days in each of the calendar years.

When a CCPC is ‘associated’ with one or more corporations during the year, they must file Schedule 23 (Agreement among Associated CCPC to allocate the business limit available).

  • On Schedule 23 a % of the business limit is allocated to each of the corporations involved in the association and the total percentage cannot be greater than 100%

The allowable maximum business limit is as follows:

  • 200,000 providing the calendar year is 2002 or prior
  • 225,000 if the calendar year is 2003
  • 250,000 if the calendar year is 2004
  • 275,000 if the calendar year is 2005
  • 300,000 if the calendar year is 2006 or subsequent

Arm’s Length

The Income Tax Act deems some entities and/or people to be arm’s length. Two entities and/or people are said to be at arm’s length with one another, if they are independent and have no undue influence of the other.

Non Arm’s Length

Entities and/or people are considered at non arm’s length when the parties are ‘related persons’ who are connected by blood, marriage and/or common-law partnership or adoption. Blood relationships normally do not include: aunts, uncles, cousins, nieces, and/or nephews for the purpose of the Income Tax Act. See Interpretation bulletin IT419R2 on the CRA web site’s list: ‘Interpretation Bulletins’.

2005 Automobile Deduction Limits and Expense Benefit Rates for Business Entities

Minister of Finance announced December 6, 2005, automobile expense deduction limits and the prescribed rates for the automobile operating expense benefit that will apply in 2006, which include:

  • The ceiling on the capital cost of a passenger vehicle for capital cost allowance (CCA) purposes will remain $30,000 along with the applicable federal and provincial sales taxes for acquisition after 2005. This ceiling restricts the cost of a vehicle for which CCA may be claimed.
  • The limit on deductible leasing costs will remain $800 per month along with the applicable federal and provincial sales taxes for leases entered into after 2005 which ensures that the level of deductions for leased and purchased vehicles stays consistent. Another restriction prorates deductible lease costs where the value of the vehicle exceeds the capital cost ceiling.
  • The maximum allowable interest deduction for amounts borrowed to purchase an automobile will stay at $300 per month for loans related to vehicles acquired after 2005 reflecting the reasonable cost of financing a vehicle for business purposes.
  • The limit on the deduction of tax-exempt allowances paid by employers to employees using their personal vehicle for business purposes will be 50 cents, an increase of 5 cents per kilometer for the first 5,000 kilometers driven and 44 cents for each additional kilometer.
    • For the Yukon Territory, Northwest Territories and Nunavut, the tax-exempt allowance will rise to 54 cents for the first 5,000 kilometers driven and 48 cents for each additional kilometer. The allowance amounts reflect the cost of owning and operating an automobile, which considers financing, insurance, maintenance, fuel costs and amortization.
  • The taxable benefit relating to the personal portion of automobile operating expenses paid by employers will increase to 22 cents per kilometer.
    • For taxpayers employed principally in selling or leasing automobiles, the prescribed rate will be 19 cents per kilometer.
    • The additional benefit of having an employer-provided vehicle available for personal use (i.e., the automobile standby charge) is calculated separately and is classified as deemed income on the employee’s T4.

Joint Ventures versus a Partnership

A Partnership is considered a ‘person’ for registration purposes; whereas a joint venture is not. Thus, a Partnership can have a business number (BN), but a Joint Venture cannot.

A Joint Venture is limited in scope, whereas a Partnership is considered to be an ongoing business relationship that exists between people carrying on a common business.

In a Joint Venture, one of the candidates involved is chosen to be the ‘Participatory Partner’ and is responsible to remit the GST. etc. This person assumes the administrative role in the venture.

Markevich Amendment

The Markevich amendment to the Income Tax Act, Bill C 30, was passed in Parliament on May 30, 2004. This amendment creates a ten year limitation period on the collection of tax debts within certain circumstances.

This new limitation period on the collection of debt from taxes is retroactive since it affects all income tax debts equally that occur prior to and subsequent to March 4, 2004.

Child Disability Benefit (CDB)

  • The (CDB) Child Disability Benefit is a monthly tax-free benefit paid to a maximum of $166.67 per month or $2,000 annual paid to low and modest-income earning families, who care for a child under the age 18 who has a severe and a prolonged mental and/or physical impairment. This increases to $191.67 per month or $2,300 annually in 2006.
  • This CDB is paid monthly as a supplement to the Canada Child Tax Benefit (CCTB) and Children’s Special Allowances (CSA) payments.
  • It is paid monthly as a supplement to the CCTB and CSA payments.
  • Who can receive the CDB?
    • Families eligible for the CCTB for a child will receive the CDB only if their child also qualifies for the Disability Tax Credit, disability amount, and detail of this information on the disability amount; can be found in the Information Concerning People with Disabilities (RC4064) guide. Eligibility is explained on Form T2201, Disability Tax Credit Certificate.
  • How to apply?
    • If you receive the CCTB but have not filed the Form T2201, Disability Tax Credit Certificate, for a child that may qualify as eligible, you must complete this form and have it signed by a qualified person (Doctor), then send it to the CRA tax center nearest to you. Note that the Disability Tax Credit is not only for children, it is for all taxpayers.
    • CRA will than determine if you are eligible to receive the child disability benefit.
    • Note that a new T2201 with increased descriptions and categories that now include Cumulative Functions and changes Perceiving Thinking and Remembering to Mental Functions. Note that Type I Childhood Diabetes qualifies for Life Sustaining Therapy. I recommend that you review the Information for Persons with Disabilities Guide RC4064 which includes the form T2201 with every single client this year. The new guide is on the web and you can order the booklets from CRA on the web in early January 2006.

Medical Expenses

Times were that you could claim your total eligible medical expenses on line 330. Under new legislation you can now claim only the total eligible medical expenses that you or your spouse or your common-law partner paid for on line 330:

  • You yourself;
  • Your spouse or your common-law partner; or
  • You or your spouse or your common-law partner's children born in 1988 or later and who depended on you for support.

For all other dependants, medical expenses must be claimed on line 331. The limit is $5,000 for 2004 and increased to $10,000 for 2005. The threshold is 3% of the dependent’s net income, which means you have to be comfortable that they filed their tax return correctly too. That can be challenging, especially if the dependent is not reporting their all of their income, or is secretive and has issues with privacy.

You are eligible to claim medical expenses paid in any 12-month period in the year as long as they weren't claimed in the previous year. Normally you can claim all amounts paid, even if they were not paid in Canada. Your total expenses have to be more than $1,813.00 or 3% of your net income, whichever is less and is claimed on line 236. If you are claiming attendant care costs for a retirement home or nursing home costs, you might have to ask the facility to split the receipt out by month if you want to split the claim any other way than by the calendar year. Most care facilities report annually for 12 months and it may or may not be reasonable to split the receipt into 12 equal months.

For deceased persons who passed away in 2005, a claim may be made for expenses paid during any 24-month period that includes the date of death, but only if they were not claimed during any other year.

Some medical expenses can be claimed as an expense under disability supports if the taxpayer is working or attending school. The list of those expenses in available on T929 Disability Supports. The list of disability supports was expanded in the 2005 budget and those items were included in the last minute changes in November that should be considered.

There are more new medical expenses in the Budget for 2005 which were included in the last minute Bills before the house and were passed. The New Revised RC4064 now lists a comprehensive listing of medical expenses, disability supports, devices and equipment. Make sure you take time to review this important guide with all of your clients. It was revised this year and issued December 15, 2005: Review Guide.

F.Y.I. Interesting GAAR cases in 2005

Mathew v. Canada (Eugene Kaulius), et al. v. Her Majesty the Queen (FC) where taxpayer lost

Here Majesty the Queen v. Canada Trustco Mortgage Company (FC) where the taxpayer won and if Kaulius had not lost, Canada Trustco would not have won

Why were these cases interesting? Because of the discussion about how to interpret statutes in a textual, contextual and purposive way. What the words say, how the words relate to each other, the themes and the purpose, in other words why the section is there in the first place, matters. Discussion included, how if the words are not there, do not read them in.

What else is new in 2005?

Please note: this is not an inclusive list.

If you have not attended a tax update yet, you should definitely be registering for a course near you, soon. There are many changes, and what’s so confusing is that some of the changes were given First Reading immediately prior to the dissolution of Parliament and are being considered as if they passed.

Some changes to the Income Tax Act have been in the works for years, like the interest deductibility and reasonable expectation of profit rules, as well a,s a huge number of technical amendments to the Income Tax Act and they are not yet law.

Visit: What’s New on the CRA website for current updates: What's New.

  • There is a new guide Keeping Records. It was released in June 2005
  • Review your electronic records storage
  • Changes to Excise Tax Act on clocks and watches now and other jewelry by 2009
  • My Account now includes tax returns and direct deposit information
  • My Account will allow your clients to authorize you directly on line
  • All T1013’s and RC59 authorizations will soon be required to be filed with original signatures, no more faxes... and will be time limited to a maximum of 3 years
  • Voluntary Disclosures has a new no-names policy
  • Online requests by business
  • CRA is creating Centers of expertise
  • Fairness was limited to 10 years as of December 31, 2004
  • New box for non taxable return of capital on T3 slips to assist you with reconciliation of mutual fund ACB
  • The maximum of $5,000 transferable medical is increased to $10,000 for dependents with the disability tax credit qualification
  • An adoption tax credit for expenses like adoption agencies and legal fees up to $10,000 in 2005
  • Changes to dividends to adjust for Flow Thru Entities because investors want enhanced yield on after tax investments
  • The Auditor General’s report to the House of Commons in November 2005 highlights that CRA has not been verifying Tax Returns for Domestic Trusts. Yes, that means T3 Trust returns. Expect to see compliance work commence shortly on trust returns.

Quebec Income Tax Return for 2005

This link gives you access to the PDF version of information required to complete a Quebec Personal Income Tax Return for 2005 http://www.revenu.gouv.qc.ca/eng/formulaires/tp/tp-1-v.asp.


The information in this article has been compiled as a REFERENCE TOOL ONLY.
Please refer to CRA updates and rulings prior to using the above material.


Eileen Reppenhagen, QuickBooks ProAdvisor 

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