Changes are coming to RDSPs, too
Registered disability savings plans (RDSPs) are tax-deferred accounts available to taxpayers who qualify for the disability tax credit. The government matches RDSP contributions with grants and bonds.
It is relatively easy to open an RDSP for a minor child. However, a taxpayer who has attained the age of majority and lacks the capacity to enter into a contract requires a legal representative or guardian to open an RDSP on their behalf. This onerous process can inhibit some people from benefiting from the account.
Since 2012, qualifying family members, namely a parent, spouse or common-law partner of the person with disabilities, have been able to open an RDSP for a beneficiary who lacks legal representation. This temporary measure is set to expire on Dec. 31, 2023, and the budget proposes extending the deadline to Dec. 31, 2026. The government also intends to expand the qualifying family member provision to include adult siblings of the RDSP beneficiary.
An RDSP can provide a return of up to 300% on contributions when you consider matching grants and bonds from the federal government, plus more from provincial and territorial incentives. The account also grows tax-deferred, and future withdrawals do not impact government means-tested benefit calculations. As a result, the RDSP is a fantastic savings tool for a person with disabilities. Extending the temporary measure and expanding the people who can open an RDSP account could help many more people take advantage of it.
Capital gains tax reforms? Not this year
Yet again, some commentators expected an increase in the capital gains inclusion rate, which has remained at 50% since 2000. Despite the speculation, the proportion of a capital gain that is taxable remains unchanged. Half of a capital gain therefore remains tax-free.
But, some changes to the alternative minimum tax for high earners
The alternative minimum tax (AMT) regime currently in place in Canada applies an alternative tax calculation to a taxpayer’s income. The formula adds back certain tax deductions, credits and exemptions and applies a flat tax rate to see if the actual tax payable is lower than the alternative calculation. If it is, the taxpayer must instead pay the AMT for the year.
The tax can generally be carried forward up to seven years and claimed in a future year. Basically, the AMT is meant to discourage taxpayers from claiming too many tax-preferred items, especially in multiple years.
The budget has proposed to raise the federal AMT rate from 15% to 20.5%, thus increasing the minimum tax payable. It will also expand the add-backs for certain deductions, including employment expenses, interest and carrying charges, limited partnership losses, and non-capital-loss carry-forwards. Only 50% of non-refundable tax credits will be calculated for the AMT, and 100% of the dividend tax credit will be excluded. A percentage of capital gains, stock option income, and capital gains on donated securities will be added back to income in the new AMT calculation.
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