NEW IN 2009

Home Renovation Tax Credit (Federal)

Individuals who incur home renovation expenses between January 28, 2009 and January 31, 2010 under an agreement entered into after January 27, 2009 may apply for a non-refundable credit in their 2009 income tax return for all eligible expenses that total more than $1,000 but not more than $10,000 for a maximum credit of $1,350 (15% of $9,000). This credit may be shared among all members of the same family. If two or more families share the ownership of an eligible dwelling, each family will be eligible to use their own separate credit.

In order for a dwelling to qualify for the tax credit, a taxpayer or family member must have owned the dwelling at the time the eligible expenses were incurred. Expenditures made on more than one eligible dwelling may be added together and the taxpayer's share of the expenses incurred for the renovation of the common areas of a condominium may be included.

Expenditures qualifying for the tax credit include the cost of renovations of an enduring nature but do not include regular maintenance. Work on the land on which the eligible dwelling is located may also be eligible. Taxpayers are permitted to perform the work themselves. However, expenses paid to a person related to the taxpayer for performing the work will not be eligible, unless this person is registered for GST/HST.

Tax Credit for Renovation and Home Improvement (Quebec)

Quebec residents may also benefit from a similar measure when they file their Quebec tax return, in the form of a refundable tax credit for all eligible expenditures in excess of $7,500, up to a maximum of $20,000, for which an agreement is concluded in 2009 and which are paid no later than June 30, 2010. The maximum credit is $2,500 (20% of $12,500).

Only expenses for a principal residence built before 2009 are eligible. If two or more families share the ownership of an eligible dwelling, the total of the amounts shown by each of them on their income tax return must not exceed the amount that would be granted if only one of them were entitled to the tax credit for the year. Expenses incurred for the renovation of the common areas of a condominium are not eligible.

Unlike the federal system, expenditures qualifying for the tax credit do not include work performed on the land on which the eligible dwelling is located. Quebec does not recognize expenditures for maintenance work of a more routine nature, such as repairing a leak or a door or applying paint solely to spruce up the appearance. The work must be performed by a qualified entity, who must, at the time the work is carried out, hold an appropriate licence issued by the Régie du bâtiment du Quebec. Eligible expenses will be reduced by any amount of government or non-government assistance received (such as amounts granted under the Rénovation Quebec program). Unlike the federal system, if an expense qualifies for both the tax credit for renovation and home improvement and the medical expense tax credit, only one of the two tax credits may be claimed.

PLANNING FOR OWNER-MANAGERS

Freeze or refreeze?

An estate freeze is used to ensure that future growth in the value of a company accumulates in the hands of a shareholder's heirs; it "freezes" the current fair market value of the company in preferred shares. In today's difficult economic environment, when the value of a business decreases substantially, the benefits of freezing are not fully realized, because new shareholders see the value of their shares fall. At such a time, it might be prudent to "unfreeze" the company and refreeze it.

Refreezing enables taxpayers to exchange their old preferred shares, obtained at the time of the initial freeze, for new shares with a lower redemption price. Any future gains in value will then be passed on to the holders of common shares. This type of planning helps reduce tax on the death of taxpayers by lowering the redemption price of their preferred shares and transferring more value to their heirs.

The operations of unfreezing and refreezing are accepted by tax authorities and are not considered to be tax avoidance activities, provided that the redemption price of new shares issued at the time of refreezing is equal to their fair market value at that time and the lower value of the company is not the result of a dividend stripping operation.

Salary/Dividend planning

Many factors must be considered in determining the most beneficial combination of remunerating the owner/manager of a closely-held corporation. As with other planning, each case must be examined separately and no one "rule of thumb" can apply to all situations.

Here are a few factors to be taken into consideration:

• The tax rate of the corporation; the small business deduction (SBD) rate was increased to $500,000 from $400,000 for active business income effective January 1, 2009
• The tax rate of the individual
• Exposure to Alternative Minimum Tax
• The need for salary income by the individual to qualify for RRSP and CPP/QPP contributions or to benefit from child care expenses
• Wage levies applicable to salaries, such as the Ontario Employer Health Tax and Quebec's Health Services Fund and 1% Training Tax (if the payroll exceeds $1,000,000)
• Quebec restrictions on the deductibility of investment expenses by individuals
• Whether eligible dividends can be paid to shareholders
• Full or partial loss of the dividend credit if taxable income is not high enough
• Higher net income with a dividend than with a salary, dividend income is grossed up by 45% or 25% (depending on whether the dividend is eligible or not) which can have an impact on certain credits and benefits

Some planning techniques include:

Remuneration that is accrued and expensed by a corporation must be paid to the employee within 179 days of the corporation's year-end. Where that year-end falls in the latter half of the calendar year (actually, after July 5), the corporation can cause the owner/manager's remuneration to fall into either the current or subsequent calendar year.

The payment of dividends can be used to reduce or eliminate the owner/manager's CNIL, thus maximizing the amount of capital gains exemption that may be available to the taxpayer.

To the extent that private corporations did not benefit from the small business deduction, the dividends paid from their active business income are eligible dividends that benefit from a lower tax rate. Since only Canadian residents may benefit from this type of dividend, it might be worthwhile to issue a separate category of shares for non-resident shareholders.

Dividend Tax Rates for Individuals

The tax rate on eligible dividends received by individuals will increase in 2010, particularly in Ontario. It could be advantageous to pay this type of dividend by the end of 2009. For non-eligible dividends, tax rates will increase in most of the provinces but can decrease in some of them. For residents of Quebec the top marginal rate will remain 36.35%.

Maximum combined marginal tax rates
		2009	2010	2011	2012
Ontario	Eligible dividends	23.06%	26.57%	28.19%	29.54%
	Non-Eligible dividends	31.34%	32.57%	32.57%	32.57%
Quebec	Eligible dividends	29.69%	30.68%	31.85%	32.81%
	Non-Eligible dividends	36.35%	36.35%	36.35%	36.35%

Income splitting

Investment income earned by an individual who invested money borrowed at low or no interest from a related person will be attributed back to the lender. Subject to a purpose test, this rule does not apply where the loan is to a related person other than a spouse or minor child. Nor will it apply where the loan is to a spouse or minor child if interest is charged at the prescribed rate in effect at the time the loan is made (the prescribed rate for the fourth quarter of 2009 is 1%). When utilizing this exception, interest must be paid no later than 30 days after the end of the year to avoid attribution of income.

For instance, the high-income spouse could lend investment funds to the low-income spouse at the current 1% rate and receive (and pay tax on) the interest income each year, for as long as the loan remains outstanding. The low-income spouse would pay tax on the income generated by the funds and deduct the interest paid to the high-income spouse.

Since the attribution rules are complex, caution is advised when contemplating a transfer of property or a loan to a spouse or a child (including transfers indirectly through a corporation or a trust).

Some other basic planning ideas would include:

• Gifting growth assets to a minor child, as the resulting capital gain is not attributed to the donor;
• Gifting property to a child who is not a minor;
• Segregating and re-investing "attributed" income of a spouse or minor child;
• Deposit Canada Child Tax Benefit (CCTB), Universal Child Care Benefit (UCCB) and Quebec Child assistance payments (CAP) directly into accounts opened in the children's names;
• Use the income of the spouse with the higher income to pay all the family's expenses so that the spouse with the lower income has more capital available for investment;
• Using a trust for the benefit of family members to hold shares of a closely-held corporation. However, there are restrictions in regard to income-splitting with minor children.

Spouses can choose to share their QPP and CPP retirement pensions.

Income splitting may be achieved by having your spouse be your business partner or by having a business owner pay reasonable salaries to his or her spouse or children.

Shareholder loans

Any loan granted by a corporation to an individual who is a shareholder or to a person with whom the shareholder does not deal at arm's length will be taxable in the year in which the loan is advanced, unless one of the following exceptions applies:

• The loan is repaid no later than 12 months following the corporation's fiscal year in which the loan was granted. It must be ensured that a new loan is not granted immediately to the shareholder to replace the old one, because the original loan will be taxed as if it had not been repaid
• If the shareholder received the loan in his or her capacity as an employee for the purpose of purchasing a home, a car or newly issued shares of the corporation. However, this type of loan must be available to all employees and bona fide arrangements for repayment must be made at the time the loan is made
• The loan is made in the normal course of the company's business activities

If the loan meets one of these exceptions, the shareholder will be required to pay to the corporation interest at a rate at least equal to the prescribed rate no later than January 30 each year.

If a shareholder loan exists at any time during the year, a taxable benefit must be calculated based on the prescribed interest rate, less the interest actually paid.

When a loan is repaid, the shareholder may claim a deduction up to the amount that had been included in income. It might be worthwhile for a corporation to make a loan to an adult child of the shareholder at a time when the child does not have much income. The loan may be repaid in a subsequent year, when the child's marginal tax rate is higher.

Since shareholder loans are not deductible from a corporation's income, it is recommended that shareholders verify whether it would be more advantageous to be paid a salary or a dividend.

It is very important that any loan contract between a corporation and one of its shareholders be adequately documented.

Capital gains exemption

A capital gains exemption is available for individuals to use in relation to gains realized on qualified small business corporation shares and some other properties. The maximum lifetime capital gain exemption is $750,000.

Notwithstanding the income attribution rules, it may be advantageous to transfer a certain portion of qualifying growth assets to children to enable future capital gains to be exempt from taxation by utilizing the child's capital gain exemption.

Consideration should be given to crystallizing a gain that qualifies for the exemption. Because of Alternative Minimum Tax (AMT), however, a crystallization may be more beneficial if spread over more than one year.

Be aware of the possible disadvantage of selling investments eligible for the $750,000 capital gains exemption and investments with losses in the same year. Capital losses realized in the year must be offset against capital gains of that year including "exempt" gains, thus leaving a smaller amount available to claim the exemption against. Investments with losses should therefore be kept until the next year.

Capital gains rollovers for small business investors

To improve access to capital for small businesses with high growth potential, there exists a tax measure that, subject to certain conditions, permits individuals to defer capital gains on eligible small business investments to the extent that the proceeds are reinvested in another eligible small business. The reinvestment in an eligible small business must be made at any time in the year of disposition or within the first 120 days of the following year.

Acquisition of assets

Accelerate the acquisition of depreciable property used in carrying on a business otherwise planned for the beginning of the next year. This will allow additional depreciation to be available to be claimed in the current year. The "available-for-use rules" should be considered (generally requiring the depreciable property to be used in operations for the depreciation deduction to be allowed).

Eligible computers and software acquired after January 27, 2009 and before February 2011 are entitled to a capital cost allowance of 100% the first year in which the assets are available for use.

Conversely, consider delaying until the subsequent year the acquisition of depreciable property in a class that would otherwise have a terminal loss in the current year.

Corporation tax on capital

In Ontario, the capital tax rate, which will be eliminated effective July 1, 2010, will drop from 0.225% of paid-up capital in 2009 to 0.15% for the first 6 months of 2010. Taxpayers affected are granted a $15 million deduction from paid-up capital. In Quebec the capital tax will be eliminated effective January 1, 2011. At the same time, the rate will fall from 0.24% in 2009 to 0.12% in 2010. A $1 million deduction applies to the paid-up capital of a group of associated corporations.

A corporation with liquid assets at its disposal may reduce its capital tax if, before its fiscal year-end, it uses them for the repayment of certain liabilities such as shareholder loans or to purchase eligible investments. However, the corporation must have held certain of these investments for a continuous period of at least 120 days, including the date of its fiscal year-end.

PLANNING FOR EMPLOYEES

Taxable benefits: what is and what's not?

In addition to their remuneration, employees may receive benefits from their employers, in the form of money, goods or services. Benefits are taxable or non-taxable, depending on the type, amounts and circumstances in which they are extended. Here is a non-exhaustive list of taxable benefits:

• An unreasonable allowance paid to an employee for the use of an automobile. A reasonable (non-taxable) allowance must be based solely on the number of kilometres traveled for business purposes and on a reasonable rate per kilometre
• Board or lodging, paid in full or in part, except for an employee working on a special work site or in a remote location
• A cash gift or award, including a certificate or gift card
• An interest-free or low-interest loan (see Shareholder loans)
• A parking space provided by the employer unless the employee must regularly use an automobile to carry out job-related duties
• A contribution to a professional association unless the employer is the main beneficiary of the payment. The employee may not deduct contributions paid by his or her employer if they are not taxable benefits
• The cost of a membership in a recreational facility
• The travel expenses for a business trip paid for a spouse accompanying an employee
• Tuition fees and scholarships, unless the training is done mainly for the benefit of the employer

The following benefits are not taxable:

• Child care expenses for a day-care service located in an establishment owned and managed by the employer, if the service is offered to all employees and not to the public
• Goods sold at a discount, unless they are sold below cost
• Up to two non-cash gifts or awards per year if their total value is no more than $500
• The costs of moving and looking for housing in order to transfer an employee from one of the employer's establishments to another
• Recreational facilities that are located in the employer's place of business and are available to all employees
• The cost of a party or other social event available to all employees not in excess of $100 per person

Taxable benefits must be added to the employees' income on their T4 slips (and Relevés 1 in Quebec). The employer must calculate the deductions at source taking into account the taxable benefits.

Personal Use of Employer's Vehicle

The personal use of an automobile supplied by the employer is a taxable benefit for the employee. Commuting from home to work is considered a personal use for the employee, while travelling between the employee's home and a place other than the employer's place of business (a client, for example) is not.

In Quebec, an employee who benefits from an automobile made available by the employer must supply the employer with a copy of the detailed logbook he or she maintains with respect to the automobile so as to allow the employer to accurately determine the employee's taxable benefits. The copy of the logbook has to be provided within ten days from the end of the year or from the end of the period in which the automobile was made available to the employee. Failure to provide the logbook to the employer will result in a penalty to the employee.

Employee Stock Options

Employees may defer the income inclusion from exercising qualifying employee stock options for publicly listed shares (subject to a $100,000 annual vesting limit) or shares of Canadian-controlled private corporations until the disposition of the shares. A deduction equal to 50% of the benefit (25% in Quebec) may be claimed in the year in which the benefit is included in income.

While the benefit arising from the exercise of options is equal to the difference between the exercise price and the fair market value of shares on the date the option is exercised, it is taxed as employment income and not as a capital gain; therefore, if after exercising options the employee does not immediately sell the shares and they lose value, their subsequent sale will result in a capital loss. This capital loss may not be applied against the benefit calculated at the time options were exercised.

Public Transportation Passes

At the federal level, individuals may apply for a non-refundable tax credit for the purchase of monthly or longer duration public transit passes.

In Quebec, businesses that reimburse their employees for the cost of a public transit pass or supply employees with such passes, may, in calculating their income, deduct an amount equivalent to 200% of the expense incurred. Where this applies, a taxable benefit will be added to the employee's income for federal purposes only.

Acquisition or Lease of a New Fuel-Efficient Vehicle

Since January 1, 2009, an individual or a corporation that has an establishment in Quebec may apply for a refundable tax credit for the acquisition or lease of a new fuel-efficient vehicle. A tax credit ranging from $2,000 to $4,000, based on the energy efficiency of the vehicle, may be claimed.

Reduction of Tax Deductions at Source

The deduction and credit items that an employer takes into consideration in establishing an employee's source deductions are limited. In addition to the employee's status and number of dependants, the calculation of source deductions takes into account, in particular, contributions to a registered pension plan, direct payments into the employee's RRSP and deductible alimony payments. Taxpayers may benefit from most of the deductions and credits to which they are entitled only after completing their income tax returns.

You can file Form T1213 to request that Canada Revenue Agency (CRA) approve a reduction in source deductions made by your employer for several items, including:

• Contributions to an RRSP (other than those paid directly by the employer)
• Child care expenses
• Deductible support payments
• Employment expenses
• Investment expenses
• Charitable donations
• Rental losses

If the request is accepted, the CRA will issue a letter of authorization to your employer for one or more years. Since approval of a reduction of tax deductions at source is not retroactive, it is important that you make the request as soon as possible before the start of 2010. Quebec also offers similar reductions of tax deductions at source upon filing of form TP-1016.

PLANNING FOR INVESTORS

Capital gains and losses

In order to recognize realized losses on your 2009 personal tax returns, trades on the TSX should be made on or before December 24th (check with your stockbroker for exact deadlines).

Capital losses realized in 2009 (net of any capital gains realized) can be carried back up to three years and carried forward indefinitely to offset capital gains reported in other years. It may be worthwhile to conduct an investment portfolio analysis in order to dispose of assets with unrealized losses.

Capital losses will not be recognized at the time of disposition where, during the period that begins 30 days before and ends 30 days after the disposition of the property, the taxpayer or a person affiliated with the taxpayer acquires an identical property (a "superficial loss"). This denied loss will be added to the adjusted cost base (ACB) of the property acquired by the affiliated person. This rule may be used advantageously to transfer a capital loss to an affiliated person.

Corporations should consider paying dividends out of the capital dividend account (essentially the tax-free portion of net capital gains) prior to the realization of capital losses.

Deductibility of Interest and Investment Expenses

Individuals who have debts should generally make it a priority to repay those with non-deductible interest. In general, interest on loans contracted for personal purposes will not be deductible, but interest on loans contracted to earn income will be. The courts have confirmed that a taxpayer can sell an income-producing asset to repay a debt with non-deductible interest and then contract a new debt for the purpose of repurchasing the same asset or to purchase another income-producing asset.

In Quebec, investment expenses incurred in the year are deductible up to the amount of investment income for that year. The excess amount may be carried back to the three preceding years or carried forward indefinitely.

Donations

It is fiscally advantageous to donate publicly traded securities to a registered charity. The amount of the donation receipt will be equivalent to the fair market value of the securities at the time of the donation. However any increase in value of the securities above the donor's original cost will not be subject to capital gain taxation.

Tax incentives on flow-through shares issued by companies in the resource sector may give even greater planning opportunities for investors.

For the past few years, the CRA has been particularly vigilant in its attempts to curb abusive strategies implemented to take advantage of fiscal regulations surrounding donations. For this reason, and also because strategies concerning donations of marketable securities may be complex, potential donors should consult their BGK advisor.

Foreign Withholding Taxes

Tax withheld at source abroad may be credited only at the rate permitted by the relevant tax treaty. Make sure, for example, that tax deducted from investment income in the United States does not exceed the rate provided for in the tax treaty. The withholding rate on dividends paid to an individual is limited to 15% and the withholding rate on interest is limited to 4% in 2009 and 0% in 2010. Any excess amounts withheld may have to be recovered from the source country.

Tax assisted investments

When considering tax-assisted investments, it should be noted that most are speculative in nature. While they may result in significant tax savings, there remains a cost to the investor. The decision to invest should be based on the quality of the investments as well as the favorable tax treatment they receive.

Investment in the Resources Industry

These investments, whether made directly, through a partnership or by the purchase of shares, allow the investor a deduction from income of varying amounts depending on whether the investment is in oil and gas or mining. At the federal level, a 100% deduction of the cost is granted for the portion of the securities that is invested in the resources sector. This deduction in turn reduces the ACB of the securities. A 15% credit is added to this deduction for funds invested in mining exploration. This non-refundable tax credit may be carried back 3 years or carried forward 20 years.

Most provinces have their own tax incentives for the purpose of stimulating their natural resource industries. In Quebec, a deduction of 100% of the cost is granted for the portion of the securities invested in resources. An additional deduction of up to 50% may be granted if the investment is made in Quebec. Ontario grants to investors a refundable tax credit corresponding to 5% of the eligible expenses in Ontario in the mining sector.

The tax rules and financial implications relating to these investments are complex, and each case must be examined individually.

Stock Savings Plan II (SSP II)

The Quebec Government has announced a new program, Stock Savings Plan II, to replace the SME Growth Stock Plan which will end on December 31, 2009. SSP II will last until December 31, 2014. Individuals residing in Quebec are permitted to deduct from their income 150% of their investment in eligible shares acquired before January 1, 2011. Investments acquired in 2009 must be held for at least two years after the end of the year, or until 2012.

During the minimum holding period, securities disposed of must be replaced by other eligible shares within 21 days, failing which holders may not use their current year's deductions or may be required to take a preceding year's deduction into income.

Alternative Minimum Tax (AMT)

The AMT imposes a minimum tax on certain individual taxpayers and could adversely affect those high-income individuals who have significant deductions arising from investments in tax shelters. Certain shelters such as flow-through shares of mining companies as well as large capital gains and eligible dividend income may subject the individual to AMT in 2009.

Taxpayers who paid the AMT in the past may have the opportunity to recover it in a subsequent year. Quebec has its own distinct version of AMT.

RETIREMENT PLANNING

Registered Retirement Savings Plan (RRSP)

The maximum amount that individuals are allowed to contribute to an RRSP in 2009 is the lesser of 18% of their earned income for 2008 (essentially employment income net of any expenses, business income and rental income) or $21,000 ($22,000 for 2010), plus unused RRSP contribution room from previous years. Both this amount and unused contributions from previous years are shown on the 2008 federal Notice of Assessment. Contributions to a Registered Pension Plan (RPP) or to a Deferred Profit-Sharing Plan (DPSP) reduce the amount of eligible contributions.

All or part of an RRSP contribution may be paid to a spousal plan without affecting the contribution available to the spouse. This tax planning strategy can allow income splitting between spouses. Individuals may contribute to their own RRSPs until the year in which they turn 71. If additional contribution room is generated subsequently RRSP contributions may be made to a spousal plan up to the end of the year in which the spouse turns 71. Individuals do not have to cash in their RRSPs when they leave Canada.

For individuals who anticipate that their income will be in a higher tax bracket in an upcoming year, it might be worthwhile to forego the deduction for an RRSP contribution in the current year. The amount of undeducted contributions must not exceed the RRSP contribution limit by more than $2,000 at any time, otherwise a penalty will be imposed for the excess amount.

RRSP contributions should, where possible, be made early in the year to benefit from the longer period that income is earned on a tax-sheltered basis within the RRSP. Please note that any interest paid on loans contracted in order to contribute to an RRSP will not be tax deductible, nor will RRSP management fees.

In-kind contributions may be made to self-directed RRSPs. However, this type of contribution may result in a capital gain or loss for tax purposes. A capital gain would be taxable, whereas a capital loss will be denied. It is therefore advisable not to transfer assets with unrealized capital losses to your RRSP. Since no distinction is made between types of RRSP income (interest, dividend or capital gain), it is more advantageous to hold within your RRSP assets that produce highly taxed income i.e. interest-generating assets.

A recipient of certain payments, most notably amounts received on leaving employment that are categorized as "retiring allowances", can transfer all or a portion (based on specific limits) to their own RRSP on a tax deferred basis.

If you turn 71 in 2009, you are required to collapse your RRSPs no later than December 31, 2009. To avoid having to pay a tax on the value of the RRSP when the RRSP matures, you may purchase an annuity or transfer the RRSP to a Registered Retirement Income Fund (RRIF) no later than December 31, 2009.

If you turn age 71 this year and consequently cannot contribute to an RRSP in 2010 (assuming a spousal plan contribution is not available), you may contribute your 2010 - available RRSP deduction in December 2009 (before winding-up your RRSP) and pay a maximum penalty of $200 (1% of $20,000).

Tax-Free Savings Account (TFSA)

Since January 2009, Canadian residents aged 18 and over may contribute up to $5,000 a year to a TFSA. With the TFSA, it is possible to earn tax-free investment income (including capital gains) rather than deferring taxation, as is the case with RRSPs. Unused contribution room will be carried forward to a subsequent year. Unlike an RRSP, which must be closed in the year in which the beneficiary turns 71, there is no requirement for closing a TFSA because of age.

Unlike the RRSP, amounts paid into a TFSA are not tax-deductible. However, when funds are withdrawn from a TFSA, no income tax is payable on capital and income earned in the account. The TFSA is therefore an especially attractive option when funds need to be invested temporarily. The TFSA might also be worthwhile for a taxpayer with little or no taxable income who cannot take advantage of the RRSP deduction.

Income earned in the account or withdrawals from a TFSA will have no effect on the tax benefits and credits calculated on the basis of the taxpayer's net income, such as the Canada Child Tax Benefit (CCTB), the Guaranteed Income Supplement (GIS), Old Age Security (OAS) benefits, the Age Credit, etc.

Most investments that may currently be held in an RRSP will also qualify for a TFSA. An exception applies to labour-sponsored fund units, which do not qualify for a TFSA. Interest paid on a loan contracted for the purpose of contributing to a TFSA is not deductible from income.

Individuals may not contribute to their spouse's TFSA, since only holders of TFSAs may contribute to their own accounts. However, they may give money to their spouse so that the spouse can make a TFSA contribution without the gift being subject to attribution rules. Funds may be withdrawn from the TFSA at any time, for any reason whatsoever. Withdrawals are not subject to income tax and may be reinvested in a TFSA with no reduction in the contribution limit, but only in a subsequent calendar year. As with RRSPs, TFSA contributions that exceed the contribution limit will be taxed at the rate of 1% per month.

If you cease to be a Canadian resident, you are not required to withdraw amounts from your TFSA. However, you will not accumulate TFSA contribution room during the years in which you are a non-resident.

Individual Pension Plan (IPP)

An IPP is an option for owners of incorporated businesses who wish to boost the amount of their retirement savings. Contributions are made by reference to the owner's salary and the pension benefit desired, and can significantly exceed RRSP contribution limits, including a potentially large past-service contribution (and deduction) by the corporate employer.

Labour Sponsored Funds (LSF)

An LSF is a labour-sponsored venture capital corporation that invests mainly in small and medium-sized businesses (such as the Fonds de solidarité FTQ and Fondaction in Quebec and VenGrowth Funds in Ontario). Individuals may claim a 30% non-refundable tax credit (15% at the federal level and 15% in most provinces) on the cost of their investment in a LSF. The maximum annual investment that qualifies for the credit is $5,000 both federally and in Quebec, for a combined credit of $1,500; and $7,500 in Ontario, for a combined credit of $1,875. Unused credits may not be carried forward.

In Quebec, the tax credit rate was temporarily raised from 15% to 25% for the acquisition of shares issued by Fondaction after May 31, 2009. In Ontario, the credit, which is currently 15%, will fall to 10% in 2010 and to 5% in 2011; it will be eliminated in 2012. Ontario also offers an additional 5% credit if the LSF invests in research. This credit will also be eliminated in 2012. Unlike other types of government-assisted investments, the net cost of units held in a LSF is not reduced by the amount of the tax credit, and the tax credit is not taxable in the year it is received.

LSFs are eligible investment for an RRSP. For a taxpayer with the highest marginal rate, the tax saving in 2009 will be 78.2% in Quebec (88.2% for Fondaction shares) and 76.41% in Ontario. An LSF unit purchased as a non-RRSP investment may be transferred to an RRSP later and qualify for the deduction at that time.

The redemption of LSF units is subject to several conditions. In Quebec, units must be kept until age 65 or retirement. Exceptions are provided for individuals in special circumstances (job loss, difficult financial situation, etc.). Credits must be refunded if the units were not held for at least two years. In Ontario, holders must keep their units for eight years after the purchase, otherwise the credit must be refunded, unless the individual becomes disabled or dies.

Historically, LSFs have yielded lower returns than shares of public companies. Consequently the advantage of this type of tax credit is reduced over the years, particularly for individuals residing in Quebec who are still far from retirement age. It therefore becomes more advantageous to contribute to such funds as retirement approaches.

PLANNING FOR RETIREES

Pension Income Splitting

Individuals who receive eligible pension income may elect to allocate up to 50% of this income to their spouse or common law partner. To take advantage of pension income splitting, both spouses must file form T1032 with their 2009 federal income tax returns. The amount attributed to the spouse will be deductible in the calculation of the transferor's income and be taken into account in the pension transferee's income. The pension income tax credit (see below) is granted to the pension transferee only if the transferred pension income qualifies as eligible pension income. Quebec has a similar pension splitting measure.

Eligible pension income means income eligible for the $2,000 pension income tax credit. For individuals aged 65 years and over, eligible pension income includes annuity payments from an RPP, an RRSP, a DPSP and payments from a RRIF. For individuals under 65, eligible pension income is restricted to annuity payments from an RPP and certain other payments received as the result of the death of a spouse or partner.

The main advantage of pension income splitting is that it allows this income to be taxed in the hands of the spouse with the lower tax rate. There are other reasons why pension income splitting may be beneficial:

• It may reduce or eliminate the Old Age Security (OAS) clawback for the spouse with the higher income
• It enables spouses with no pension income to use their pension income tax credit
• It may preserve part or all of the age credit
• It may reduce the Ontario Health Premium or the Quebec Health Services Fund contribution

Pension Income Credit

An individual may benefit from a federal tax credit of up to 15% of the lesser of $2,000 or eligible pension income, for a maximum credit of $300. OAS and CPP/QPP benefits and withdrawals from an RRSP do not constitute eligible pension income.

If there is not sufficient pension income to qualify for the full amount of the credit, additional qualifying income can be created by commencing to receive pension income in the form of a life annuity and, if age 65 or older, also by converting all or part of your RRSP plan into an annuity, or by simply purchasing an ordinary (unregistered) life annuity contract with other funds.

Ontario and Quebec offer a similar credit. In 2009, the Quebec credit is reduced by 15% of net family income in excess of $30,345.

Government Pensions

For persons who have turned or are about to turn 65, assure that OAS and CPP/QPP retirement applications are prepared.

Reduced CPP/QPP retirement benefits are available to persons between ages 60 to 65 and retired.

Enhanced CPP/QPP benefits are available if the application is delayed until after age 65 (up to age 70).

Old age spousal or widow(er)'s allowances may be available, based on an income test, to a person aged 60 to 64:

• whose spouse is a GIS (OAS Supplement) recipient, or
• who is a widow(er)

Taxpayers must repay their OAS in full or in part at the rate of 15% for net income in excess of $66,335.

Refundable Tax Credit for Home-Support Services for Seniors

Residents of Quebec over 70 years of age can claim this credit to help pay for eligible home-support services. A portion of rent and condo fees may also be covered. See Revenu Québec publication IN-102 for more details.

The credit can be claimed when filing the Quebec income tax return, it is therefore important to retain all relevant receipts.

The maximum credit for 2009 is $4,680 (30% of $15,600) and $6,480 (30% of $21,600) for dependent seniors. In 2009, the tax credit that a person or couple may apply for will be reduced by 3% of family income in excess of $51,180.

Quebec Prescription Drug Insurance Plan

When Quebec residents turn 65 they are automatically enrolled in the Quebec Prescription Drug Insurance Plan and are subject to the annual premium, a maximum of $577.50 for 2009. If you are in this situation and are also a member of a group insurance plan that fully covers prescriptions, you may request to the Régie de l'assurance maladie du Québec that you not be covered by the Quebec plan. If you opt out of the Quebec plan, ensure that you use the group plan only, and for every prescription purchased during the year. Nevertheless, you should properly assess the costs and benefits associated with the Quebec plan before opting out.

PLANNING FOR FAMILIES

Registered Education Savings Plan (RESP)

An RESP helps individuals who contribute to it achieve tax-free growth for the investments they will use to pay for the postsecondary education of designated beneficiaries. Subscribers usually name their children or the children of their spouses as beneficiaries, but may name other individuals (grandchildren, nephews, etc.), provided that they are Canadian residents under 21 years of age at the time of their designation. There are also family plans under which more than one beneficiary in the same family may receive RESP benefits. Since 2007 the lifetime contribution limit that may be contributed to all RESPs of a beneficiary is $50,000, with no annual limit. Excess contributions will be taxed at the rate of 1% for every month in which the lifetime contribution limit is exceeded.

In addition to capital and investment income, the RESP receives government assistance. The federal government awards the Canada Education Savings Grant (CESG), which is equal to 20% of the RESP contribution for each beneficiary up to the age of 17 inclusively. The CESG is limited to $500 per child per year (up to a maximum of $1,000 if the grant was not paid in full the previous year) with a lifetime contribution limit of $7,200. For families with an income not exceeding $77,664, the grant could be increased by an amount of up to $100 per child per year. Canada Learning Bonds (CLB) may also be available for low-income families.

The beneficiaries of an RESP will not be taxed on the withdrawal of the contributions but will be taxed on the withdrawal of accumulated income, including government assistance, which they will receive in the form of Educational Assistance Payments (EAP). Initial contributions may be remitted either to the beneficiary or the subscriber.

The Quebec Government established the Quebec Education Savings Incentive (QESI) under which it grants an amount equal to 10% of the contributions paid, up to a maximum of $250 a year ($300 for low- or medium-income families). Unused grant room may be carried forward to a subsequent year. The maximum lifetime grant is $3,600 per beneficiary. Although more and more RESP promoters have agreed to participate in the QESI, subscribers should check with their promoter to make sure they are participating in this measure.

If a beneficiary is not pursuing postsecondary studies and if his or her RESP is not transferred to the RESP of a brother or sister, the government assistance must be paid back and the subscriber must pay tax on the accumulated income. It is possible to avoid paying this tax if the accumulated income is transferred to the subscriber's RRSP, provided that this person's RRSP deduction limit is sufficiently high.

Contributions for 2009 must be made no later than December 31.

Registered Disability Savings Plan (RDSP)

An RDSP may be established for individuals who are eligible for the disability tax credit. Contributions may be paid (by the beneficiary or by another person, such as the father or mother) until the end of the year in which the beneficiary turns 59 years of age. While RDSP contributions are not tax-deductible, investment income earned in the plan and government assistance received under the plan are taxable only when paid to the beneficiary. The lifetime contribution limit is $200,000 for each beneficiary with no annual limit on contributions.

Government assistance is offered to families through the Canada Disability Savings Grant (CDSG) and, for low-income families, Canada Disability Savings Bonds (CDSB), which may be paid into an RDSP until the year in which the beneficiary turns 49 years of age. The CDSG will be 300%, 200% or 100% of the amount of the contribution based on the beneficiary's family income and amount contributed. An RDSP may receive up to $3,500 in CDSG matching grants annually. The lifetime CDSG limit is $70,000. CDSBs are paid out up to a maximum of $1,000 a year, for a lifetime limit of $20,000.

The RDSP must be closed no later than the end of the calendar year following the first full year in which the beneficiary is no longer considered to have a mental or physical disability. Government assistance must be paid back if the beneficiary ceases to be disabled, dies or ceases to be a resident of Canada.

The RRSP Home Buyer's Plan (HBP)

Subject to certain conditions, individuals purchasing a home for the first time may make tax-free withdrawals of up to $25,000 ($20,000 if the withdrawal was made before January 27, 2009) from RRSPs of which they are the beneficiaries. If the taxpayer has a spouse, the maximum amount of $25,000 applies to each of them.

Amounts withdrawn under the HBP must be repaid over a 15-year period, starting the second year after the withdrawal. Every year, your federal Notice of Assessment will show the minimum amount that you must put back in an RRSP, and any amount you have not recontributed will be taxed. If you intend to use this plan toward the end of the year, consider postponing your withdrawal to a date after December 31, which will allow you to postpone by one year the start of the repayment period for withdrawn amounts. In order to be eligible for the Home Buyers' Plan (HBP) funds must be kept in an RRSP for at least 90 days before the withdrawal, and all withdrawals must be made in a single calendar year.

Lifelong Learning Plan (LLP)

Eligible individuals are able to make tax-free withdrawals from an RRSP to finance full-time training or education for themselves or their spouses. Withdrawals may not exceed $10,000 in a year and will be permitted for a period of up to four calendar years, provided that the total amount withdrawn does not exceed $20,000.

Withdrawals under the plan will be repayable by the recipient in equal installments over a period of 10 years, with the first payment due no later than 60 days after the fifth year following the first withdrawal. Any amount not paid back will be taxed. It is possible to participate in this plan more than once under certain conditions.

Child Care Expenses Deduction and Credit

Child care expenses that are paid for children 16 and under at the end of the year (except in cases where the disability tax credit applies), so that individuals or their spouses can hold a job, operate a business or attend an educational institution in 2009 are eligible for a deduction for federal purposes. The spouse with the lower net income may deduct these expenses. Exceptions may apply, for instance if the spouse with the lower net income attended an educational institution during the year. For the weeks in which he or she was studying, the taxpayer with the higher income may deduct the child care expenses.

The maximum amount of eligible child care expenses for each child is $7,000 for children born after 2002 and $4,000 for children born before 2003. Owner-managers should ensure that their spouse earns enough salary to benefit from child care expenses.

In Quebec, child care expenses do not qualify for a deduction but qualify for a refundable tax credit. It is not necessary for both spouses to have earned income or net income since the calculation is done on the basis of family income. As announced in the 2009 budget, the maximum eligible child care expenses for a child under 7 was raised to $9,000. Taxpayers receiving parental insurance benefits may also take advantage of this measure. In 2009, the credit is 75% of eligible child care expenses in the case of a family with income of $31,520 or less and gradually drops to 26% as family income climbs to $140,450 and over. Unlike the federal system, eligible expenses do not include the reduced contribution of $7 per day. Either spouse may apply for the credit, or they may share it. A taxpayer may apply for advance quarterly payments if the estimated amount of the tax credit for the tax year in question is over $1,000.

INTERNATIONAL AND INTERPROVINCIAL PLANNING

U.S. citizens in Canada

A U.S. citizen resident in Canada must file Canadian and U.S. income tax returns, reporting worldwide income. These tax returns should usually be prepared by a competent professional advisor, due to the complex interplay of foreign tax credits.

U.S. citizens and residents with Canadian RRSPs or RRIFs are able to elect to defer recognition of the income arising in the plans until it is received. Recent IRS announcements have significantly increased the U.S. reporting requirements for such plans.

However, income earned inside RESPs and TFSAs is taxable in the U.S. in the year the income arises.

Departing from Canada

Canadian tax rules deem an individual who ceases residency in Canada to have disposed of and immediately reacquired each property owned at the time of emigration at proceeds equal to fair market value at that time. Accordingly, this deemed disposition will trigger capital gains (or losses) to be reported in the Canadian tax returns of the individual for the year. Canadian real properties, investment in RRSPs and RRIFs and most pension plans are excluded from the deemed disposition rules. A security can be posted in lieu of paying the tax liability arising from deemed dispositions. For deemed capital gains not in excess of $100,000 no security is required.

Snowbirds

Canadians who stay in the United States for a certain number of days every year run the risk of being considered a U.S. resident for U.S. tax purposes. If you are caught under the specific rules, but have spent less than 183 days in the U.S. in the current year, the "Closer Connection Exemption" may apply. The exemption is claimed by filing IRS form 8840 on a timely basis, generally by June 15 of the following year. Please contact your BGK advisor for more details.

Province of residence at the end of the year

Individuals must pay their provincial taxes in the province of residence as of December 31. If you anticipate that you will have to leave your province and move to another around that date, it may be advisable to move a few weeks earlier or later so that on December 31 you reside in the province offering the most advantageous tax treatment given your situation.

OTHER MATTERS TO CONSIDER

Personal income tax installments

Individuals who are required to make quarterly installments should review the amounts paid, to avoid or reduce the non-deductible interest charged (which can be onerous) on late or deficient installments. Individuals are required to remit their federal and Quebec installment payments on or before March 15, June 15, September 15 and December 15. For the 2009 taxation year, the threshold requiring an individual to make quarterly installments of federal income tax is $3,000 ($1,800 for residents of Quebec). The threshold for Quebec income tax purposes is $1,800.

If the tax liability for 2009 will be less than originally estimated, the December remittance can be reduced accordingly.

Canada Revenue Agency and Revenu Québec will continue to notify individuals required to remit installments of the amount of each installment determined on the basis of tax information from prior years. Payments made in accordance with these notifications will always avoid interest charges.

Did You Know...?

This and other issues of Current Developments are available on our website at http://www.bgk.ca/.

The matters described herein, as well as other techniques used in tax planning, should be subject to ongoing review and analysis and, frequently, some decisions may more appropriately be implemented earlier, rather than later, in the year.

DATES TO REMEMBER