2014 Federal Budget Highlights

This special issue is designed to highlight the budget changes that will have the greatest impact on our clients.  It is not meant to be an exhaustive list of the new budget measures.  If you have questions about any of the budget announcements, please let us know.

GST/HST Credit – Positive change

Beginning with your 2014 tax return, you will no longer have to check the box on your T1 General personal tax return asking whether you want to apply for the GST/HST Credit.  CRA will automatically determine whether or not you are eligible to receive the credit.  The Credit will be paid to the spouse or common-law partner whose tax return is assessed first.

Medical Expense Tax Credit (METC)

Two new eligible expenses are being added to the list of expenses for which an individual is entitled to the METC.  These are:

• The design and subsequent adjustment of an individualized therapy plan provided that the cost of the therapy itself would be eligible for the METC, such as applied behavior analysis therapy for children with autism, assuming certain conditions are met.
• The cost, care and maintenance expenses related to service animals specially trained to assist an individual in managing their severe disabilities.  This would also include reasonable travel expenses to obtain the necessary training.

Donations Made by Will/Beneficiary

Budget 2014 will provide additional flexibility in how donations by will or beneficiary designation will be treated for tax purposes for deaths after 2015.  Under the new rule, beginning in 2016, donations made by will and designation will no longer be deemed to be made by an individual immediately before the individual’s death, but rather will be deemed to have been made by the estate at the time the property is donated to the registered charity.  That means that the estate would then have the option to allocate the donation to the taxation year in which the donation is made, an earlier taxation year of the estate, or the last two taxation years of the individual who died. 

Pension Transfer Limits when Commuting a Pension Plan

If you leave a defined benefit pension plan, there are rules in the Income Tax Act that determine how much of your commuted value can be transferred tax-free into an RRSP.  If the pension plan is underfunded, that reduces the amount of the commuted value that can remain tax sheltered. 

In 2011, the government introduced a special rule to cover these situations, but only where an underfunded pension plan of an insolvent employer is being wound up.  Budget 2014 proposes to extend this rule to any commuted value paid to a departing employee under the following conditions:  the payment has been reduced due to plan underfunding and the reduction in the estimated pension benefit that results in the reduced commuted value payment is approved pursuant to the applicable pension benefits standards legislation.   This will apply to commuted value payments made after 2012. 

We await details for how individuals who transferred the commuted value of their pension plan in 2013 can take advantage of this new rule retroactively.

Elimination of Graduated Tax Rates of Testamentary Trusts 

The graduated rate taxation for testamentary trusts (trusts created by a Will) will be significantly curtailed. 

Starting in 2016, flat top-rate taxation would apply to testamentary trusts created by wills as well as to estates “after a reasonable period of administration” of 36 months.  The benefits of graduated rate taxation is now limited to the first three years of an estate. 

Thankfully, graduated rates will continue to be available indefinitely for testamentary trusts whose beneficiaries are individuals who are eligible for the federal disability tax credit.