Tax changes in 2008
Tax changes in 2008
By Steve Hirji, CGA
1. TAX FREE SAVINGS ACCOUNT (TFSA)
The government is trying to encourage public to save after experiencing the issue of high personal debt levels in USA and Canada. Prior to 2008 all investment income (e.g. interest, dividend, capital gains) was taxable with interest being taxed the most. Furthermore interest rates on savings are so low now that if they are subject to tax the investor would receive very little income from their investments (e.g interest on GIC are currently as low as 1.25%).
Taxpayers can contribute maximum of $5,000.00 per year per individual. Husband & wife can contribute total of $10,000.00. Income earned under TFSA is tax free. However there is no deduction (unlike RRSP contribution) against other income for contributions made. If you don’t use the $5000.00 limit in one year you can carry forward the contribution room to future years. Withdrawals under TFSA are not taxable. This compares favourable with RRSP where all RRSP withdrawals are taxable.
REDUCTION IN CORPORATE TAX RATE.
Federal Corporate tax rate was reduced in 2008. total corporate tax rate for both federal & provincial is approximate 20% on company net income after expenses.
If you are a sole proprietor, you are taxed on net income (after business expenses). This net income is taxed on marginal tax rate which could be as high as 50%.
If you incorporate your business the income will be taxed at low corporate rate of 20%. This low rate of tax is only applicable if you keep the money in the corporation. If you take the money out of the company you are subject to personal tax rate on withdrawals which can be as high as 50%.
RRSP – CREDITOR PROTECTION
In the past RRSP were not credit proof. In case of bankruptcy or liquidation creditors could dip into your RRSP funds to settle debts. Taxpayers therefore did not put too much money into RRSP fearing the insecurity of RRSP plans. RRSP plans are now credit proof as they are trust accounts not personal accounts.
PENSION SPLITTING FOR SENIORS TO SAVE TAX.
(introduced in 2007)
Up to 50% of certain pension income can be split with spouse. Pension is transferred from higher tax-bracket spouse to lower tax-bracket spouse. It only works if the tax rates of spouse are remarkably different (e.g. husbands with higher income has tax rate of 50% while wife with lower income has tax rate of 25%)
CHILDREN’S FITNESS TAX CREDIT. (introduced in 2007)
For children under age 16 you can claim fitness program fees up to $500.00 as fitness tax credit. Relates to physical activity programs only, not hobbies or entertainment.
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Steve Hirji is a professional accountant and has a private practice specializing in accounting and tax matters. He is located at 25 Denison Rd West (at Eglinton West & Weston Rd) and can be reached at 416 245 7529.
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