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We should all be very pleased to be paying our taxes this year. For the first time since 1985, the Government of Canada has given the Canadian taxpayer some significant personal income tax relief. Paul Martin came out with TWO pre-election budgets during the year 2000, both of which had plenty of long overdue tax cuts for the overtaxed Canadian public. Let's look at the highlights: - In the first budget, the government finally decided to index the income thresholds of the various tax brackets to the CPI-consumer price index. This is something that has been silently "gouging" us for years. It's known as "bracket creep". The various tax bracket thresholds have been the same since 1985 but lets face it, we make more money than in 85 just simply because of inflation; Yet that second bracket (26%) continued to kick in after $29,590 for all these years. It's unbelievable that it's gone on this long! So after the budgets it looks like this: - Everyone's basic personal amount is now $7,231 (last year it was $6,794). The new threshold income level to go from the first rate to the second (17% to 26%) is now $30,004. The threshold from the second to the third (26% to 29%) is now $60,009. Also, with the October budget, beginning in 2001, the three tax rates are all being lowered to - 16%, 22%, and 26%. A fourth rate of 29% is being applied to taxable income OVER $100,000. Next, let's look at the federal surtax. Or as I liked to call it, "the nuisance tax". The fed surtax was applied to taxpayers whose federal taxes were $12,500 or greater. It was a flat 5% on the amount of fed tax in excess of $12,500. I gotta tell ya, there were a lot of people, myself included who really hated this tax! Anyway, for the year 2000 it only applies to taxpayers whose fed tax is over $18,000. As of 2001, it's completely gone. Next, in my opinion, was the biggest tax treat of them all: the lowering of the capital gains inclusion rate. In 1999 the capital gains inclusion rate was 75%. Meaning that 75% of any capital gains a taxpayer had on a stock, mutual fund or property; had to be included in their taxable income. With the February budget, that rate was dropped to 66.67% and with the October budget, to 50%. The government did this to bring Canada's rate in line with those of other G7 countries encouraging foreign capital to invest in Canada. For my clients, it’s a clear message to invest in equity mutual funds outside your RRSP since the eventual capital gain is going to be a lot cheaper from a tax perspective. Especially for a husband and wife who can split the gain between them. This past year’s returns aside. foreign growth mutual funds are still the best way to take advantage of this reduction in capital gains tax. Students made out well in the budgets. The tax free level on scholarships and bursaries went to $3,000 from $500. This means that the tuition and ed. credits that can be passed to the parents of the student will also go up. The full-time student ed. credit went from $200 per month to $400; part-time from $60 to $120. Stock options used to be taxable to the employee, when they were granted, if the option price was better than the trading price (which it always was). Now, eligible stock options granted to employees, up to $100,000 per year, are no longer taxable UNTIL the shares are disposed of. So what does this bounty of tax treats from the Government of Canada mean to us? And how can we best take advantage of this tax reduction? For starters, most employers deducted federal witholding taxes from their employees’ salaries based on 1999 rates, which are now lower. So when you file your return, even if you haven't put a dime into your RRSP, you're probably going to get a good refund. So if there were ever a good time to make a February RRSP contribution, this would be it. However, RRSPs have lost a lot of their attractiveness with the decrease in the capital gains inclusion rate. I mean, why invest money with all the restrictions of the RRSP, and have the government monitor it for the rest of your life? You can invest outside the RRSP with no restrictions, and pay minimal tax on the eventual gain. I tell my clients that they should consider rolling their RRSP investment's over into a RRIF, and start withdrawing a monthly amount. Then use that monthly amount to make the payment on an interest-only investment loan from the bank (i.e. use the equity in your house as collateral). Invest the proceeds from the interest-only loan in foreign growth mutual funds. The T4 slip they'll earn from the RRIF withdrawals will be cancelled out by the interest deduction on the investment loan. There won't be any effect on the monthly cashflow. Wait six or seven years and the mutual funds should have doubled in value by then. Cash out half of the mutual funds to pay off the loan, (stagger that redemption over two tax years i.e. Dec.-Jan., to further reduce the cap gains tax), and walk away with the rest. Net effect; the taxpayer has essentially transplanted their RRSP to open money, and haven't paid any taxes on that money. This strategy has worked well for many years and now will work even better with the lower inclusion rate. It's not something that everyone can do but in my opinion, for those who can, it's a no-brainer. So have fun filing your tax return this year. It's the first time in a long time we've got something to smile about at tax time.
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