With interest rates low, Canadians are thinking about refinancing their mortgages but is it worth it?
I know I'm an optimist, but I can't help thinking that there is a silver lining inside this cloud of bad news.
Equity markets are see-sawing back and forth and yet there is an opportunity to build wealth in a low interest rate environment.
Where do interest rates touch most Canadians? Our mortgages. As rates have inched lower and lower, refinancing your existing mortgage becomes more and more appealing, especially if you have a large amount of equity in your home and large amounts of high interest debt, such as credit cards.
Let us discuss an example where there is $150,000 outstanding on a locked-in fixed rate mortgage set up in January 2008, at six per cent for a five-year term, with 45 months still remaining on the term. Also in our example, we will assume there is $50,000 of miscellaneous credit card debts with an average interest rate of 19%. Assuming a 3% minimum payment on the credit cards, your payments would be approximately $916/mo. for the mortgage plus an additional $1,500/mo. for the credit cards equalling a total of $2,416/mo.
If you chose to refinance your mortgage and add all your credit card debt into it, using the current posted 4 year rate of 4.4%, you could reduce your payments to $1,268 a month. Itseems pretty obvious, at first glance, that this is a good idea.
However, to break the existing mortgage you would generally need to pay the greater of three months interest or the interest rate differential (IRD).
A quick calculation shows that three months interest would be $2,250, whereas the IRD would be somewhere around $9,000; depending on your institutions formula. So the cost of breaking the mortgage would be $9,000. Let's assume you went ahead with this and locked in for that four-year term at 4.4 per cent.
The interest savings over the next four years on $209,000 would be $18,555 if you made the minimum mortgage payment. That's quite a bit more than what it cost to break the mortgage, but there is still more to consider. As your debt is currently arranged, after 4 years you would owe approximately $133,781, but if you refinance you will owe approximately $182,401. That is a big difference. Although you owe $48,620 more, adding together the $55,104 you’ve saved in monthly payments and $18,555 in interest savings you are ahead $25,039 after the 4 years.
This makes the decision fairly easy, but the tough decision is what to do with the $1,148 in monthly savings. The most popular decisions are to pay down the mortgage faster, contribute to your RRSP, or a combination of the two.
1. To pay down the mortgage faster you would combine all the debt into the mortgage as discussed above, but maintain the same monthly payment you are currently making. The additional $1,148/mo. would be applied directly to the mortgage principle, greatly reducing interest over the long term. In our example, making the extra payments would reduce the balance at the end of the 4 year term to $122,259. It would also reduce the interest cost for the term making your total savings from refinancing after all costs $34,094.
2. Contributing the monthly savings to an RRSP each month can work even better. If you are in a 35% tax bracket, the contributions would generate an annual tax savings of $4,821. If we assume the RRSP only earns 5% annually, the balance of the RRSP will be $60,960 after the 4 year term. Your total savings from refinancing now becomes $50,179.
3. A combination strategy would usually involve contributing the monthly savings to an RRSP each month and using the annual tax savings to pay down the mortgage. Using the assumptions from the previous option, you would still have $60,960 in your RRSP after 4 years, but instead of spending the $4,821 you get back on your taxes each year, you apply it to the mortgage. This brings your mortgage balance down to $166,670 and again increases your interest savings. At the end of the term your total savings from refinancing after all costs is $52,443.
While refinancing is not always the best solution for everyone, if you have a lot of equity in your home and are carrying high interest debt, it may be worth meeting with your financial planner to see if this strategy can work for you.
On January 27, 2009, the Federal Government tabled the 2009 Budget. With the economy in a recession and the political platform uncertain, many are calling this the most important budget since the deficit-fighting budgets of the mid-1990s. The focus of this budget is to provide a potent economic stimulus to encourage spending and restore confidence in a weak economy, and to do so in a timely, targeted and temporary manner. Reducing taxes helps to achieve these goals. Budget 2009 provides a number of tax measures that will impact the tax and estate planning needs of many Canadian investors. Please note that these measures are not yet law, and may undergo revisions before receiving Royal Assent. A summary of these measures follows.
· Changes to rules for personal taxation
· Changes to rules for corporate taxation
· Other measures of note
Changes to Personal Taxation
1) Increase to Basic Personal Amount and Lowest Income Tax Brackets
Budget 2009 proposes to increase the basic personal amount and the two lowest personal tax brackets by 7.5% above their 2008 levels, effective January 1, 2009. These measures are designed to provide immediate tax relief, particularly for low- to middle-income Canadians. The basic personal amount represents the amount Canadians can earn without federal tax and the bracket thresholds represent income taxed at graduated tax rates.
The increases can be summarized as follows:
|
2008
|
2009
|
|
Basic Personal Amount
|
$9,600
|
$10,320
|
|
1st tax bracket - Upper limit (15% tax rate)
|
$37,885
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$40,726
|
|
2nd tax bracket - Upper limit (22% tax rate)
|
$75,769
|
$81,452
|
These amounts will be indexed for inflation for 2010 and subsequent years.
2) Increase to Age Credit
The federal government proposes to increase the Age Credit, a non-refundable tax credit for Canadians age 65 or older. The credit is targeted to those seniors that need it most – low- and middle-income earners. Once net income reaches $32,312, the credit is phased out at a rate of 15% and is fully eliminated once net income reaches $68,365. Budget 2009 proposes to increase the amount on which the credit is calculated by $1,000 to $6,408 effective January 1, 2009.
With the $1,000 enhancement to the credit, the income level at which the Age Credit is fully phased out will increase by over $6,600 to $75,032. This provides up to $150 in additional federal tax savings each year. The credit will be indexed for inflation annually.
3) Enhanced Working Income Tax Benefit (WITB)
The Working Income Tax Benefit (WITB) was introduced in the 2007 Federal Budget to help ensure low-income Canadians are better off financially by obtaining employment. For low-income Canadians, working can often mean paying higher taxes and receiving less income support.
Budget 2009 proposes to enhance tax relief under the WITB for 2009 and subsequent years. It is expected that the enhancement will result in a doubling of total tax relief under the WITB. The federal government will work with the provinces and territories to design final parameters of the enhanced WITB with a view towards announcing the enhancements later in 2009. The enhancements should be available for the 2009 tax filing.
4) Increase to Home Buyers’ Plan Withdrawal Limit
To help stimulate growth in the housing sector, the Home Buyers’ Plan (HBP) withdrawal limit (which allows tax-free withdrawals from an RRSP subject to a 15-year repayment period) is proposed to increase to $25,000 from $20,000. This change will apply to 2009 and subsequent calendar years in respect of withdrawals made after January 27, 2009.
5) New First-Time Home Buyers’ Tax Credit
Budget 2009 proposes to introduce a new non-refundable tax credit for first-time home buyers. The credit will be calculated based on an amount of $5,000 and will provide tax savings of up to $750 to reduce the costs of first home purchases completed after January 27, 2009.
An individual will be considered a first-time home buyer if neither the individual nor the individual’s spouse or common-law partner owned and lived in another home in the calendar year of the home purchase or in any of the four preceding calendar years. A qualifying home will be one that is currently eligible for the Home Buyers’ Plan which the individual or a spouse or common-law partner intends to occupy as a principal place of residence. The credit will also be available for certain acquisitions of a home by or for the benefit of an individual who is eligible for the disability tax credit.
Any unused portion of an individual’s First-Time Home Buyers’ Tax Credit can be claimed by the individual’s spouse or common-law partner, but the total amount claimed cannot be more than the maximum amount that would be claimable for the year by any one of those individuals.
6) New Home Renovation Tax Credit
To stimulate economic growth and encourage Canadians to invest in improvements to their homes, Budget 2009 proposes to introduce a temporary Home Renovation Tax Credit (HRTC). The non-refundable tax credit will be for eligible expenditures made in respect of eligible dwellings. The credit will apply to expenditures in excess of $1,000, but not more than $10,000 This results in a maximum credit of $1,350 ($9,000 x 15%).
The credit will apply only to the 2009 taxation year; that is, expenditures for work performed, or goods acquired, after January 27, 2009 and before February 1, 2010. The credit will not be available in respect of expenditures made in that period if the expenditure is made pursuant to an agreement entered into before January 28, 2009. Eligibility will be family-based, which will generally consist of an individual, a spouse or common-law partner (where applicable) and children under the age of 18 throughout 2009. Any unused credit can be shared amongst family members, but cannot exceed the maximum amount for the family.
Eligible dwellings will generally include a house, cottage or condominium if it is used for personal purposes. Eligible expenditures are renovations or alterations of an eligible dwelling provided the renovation or alteration is of an enduring nature. Routine repairs and maintenance will not qualify. Eligible expenditures include:
• Renovating a kitchen, bathroom, or basement
• New carpet or hardwood floors
• Building an addition, deck, fence or retaining wall
• A new furnace or water heater
• Painting the interior or exterior of a house
• Resurfacing a driveway
• Laying new sod
Ineligible expenditures include:
• Furniture and appliances (refrigerator, stove, couch)
• Purchase of tools
• Carpet cleaning
• Maintenance contracts (furnace cleaning, snow removal, lawn care, pool cleaning, etc.)
7) RRSP/RRIF Losses After Death
The fair market value of investments held in an RRSP/RRIF at the time of the annuitant’s death is generally included in the income of the deceased for the year of death. An increase in the value of the RRSP/RRIF assets after death is generally included in the income of beneficiaries on distribution of the RRSP/RRIF. There is, however, no existing provision to recognize a decrease in the value of RRSP/RRIF assets that occurs after the annuitant’s death and before those assets are distributed to beneficiaries.
Budget 2009 proposes to allow the amount of post-death decreases in RRSPs/RRIFs to be carried back and deducted against the year-of-death RRSP/RRIF income included in the deceased’s final return. The amount that can be carried back will generally be the difference between the deceased annuitant’s required RRSP/RRIF income inclusion as a result of death, and the total of all amounts paid out of the RRSP/RRIF after death of the annuitant.
This measure will apply in respect of deceased annuitants’ RRSPs/RRIFs where the final distribution from the RRSP/RRIF occurs after 2008.
8) Mineral Exploration Tax Credit Extended
Flow-through shares allow companies to pass eligible expenses to investors who can deduct them on their personal tax returns. This facilitates the raising of funds for exploration activities in Canada. The mineral exploration tax credit (METC) is an additional temporary benefit that provides a 15% credit to investors for specified mineral exploration expenses incurred by the company.
The availability of the credit is set to expire at the end of March 2009. Budget 2009 proposes to extend this credit for one year to flow-through share investments entered into on or before March 31, 2010.
9) Increase to the National Child Benefit Supplement and Canada Child Tax Benefit
The National Child Benefit Supplement (NCB) and Canada Child Tax Benefit (CCTB) are income-sensitive benefits generally paid to lower income families. Once family income reaches a certain amount, the benefits are generally phased out. Budget 2009 proposes to increase the income level at which the CCTB begins to phase out to $40,726. The income level at which the NCB begins to phase out will increase by $1,894 such that it is completely phased out by $40,726 for the majority of families.
Changes to Corporate Taxation
1) Small Business Limit
The small business deduction currently reduces the federal corporate income tax rate applied on the first $400,000 of active business income for CCPCs (Canadian-controlled private corporations) to 11%. In order to provide additional tax relief to small businesses, Budget 2009 proposes to increase the small business limit (the annual amount of active business income eligible for the reduced tax rate) to $500,000, retroactive to January 1, 2009. Corporations with a non-calendar year-end will be entitled to a pro-rated amount of the new, higher small business limit.
Small businesses that have incomes less than the small business limit receive additional benefits. Thus, this proposed increase to the small business limit would allow more small businesses to take advantage of these benefits. These benefits include:
• Eligibility to make quarterly tax installments as opposed to monthly
• Pay corporate taxes by the end of the third month after the end of their taxation year, as opposed to two months
• The $3M SR&ED (Scientific Research and Experimental Development) expenditure limit will begin to be clawed back at $500,000 and fully phased out at $800,000, as opposed to $400,000 and $700,000
2) Acceleration of Capital Cost Allowance (CCA)
Capital cost allowance (CCA) is a business expense that is used to reduce business income over time. It represents the cost of depreciating property that cannot be written off all in one year.
a) Manufacturing & Processing
In Budget 2007, proposals were made to increase the CCA rate to 50% (from 30%) for investments in machinery and equipment acquired on or after March 19, 2007 and before 2009 that was used primarily in manufacturing or processing activity. Budget 2008 then extended the accelerated CCA treatment for investment in the manufacturing and processing sector for three additional years. This included a one-year extension of the 50% straight-line accelerated rate for eligible assets acquired after March 18, 2007 and before 2010 (instead of before 2009), followed by accelerated CCA treatment for assets acquired in 2010 and 2011 on a declining basis. Budget 2009 proposes to replace the accelerated CCA treatment for assets acquired in 2010 and 2011 on a declining basis with the 50% CCA rate on a straight-line basis. This results in depreciating these eligible assets at a quicker rate. The half-year rule, which restricts the CCA deduction to one-half the normal CCA rate in the year the assets is first available, will apply to this measure.
Other Measures of Note
1) Acquisition of Control of a Corporation – Time of Acquisition
The Income Tax Act provides for various tax consequences in circumstances where control of a corporation has been acquired. As a result of a 2006 Federal Court of Appeal decision, control of a corporation is generally deemed to have been acquired at the beginning of the day on which control of the corporation was acquired, instead of at the particular time of that day at which the transaction that caused the acquisition of control occurs. This difference in timing of acquisition of control can produce anomalies in relation to the sellers entitlement to various tax benefits (such as the $750K capital gains exemption), that depend on who has control of the corporation at the time of the transfer.
Budget 2009 proposes to amend the deeming rule regarding the timing of an acquisition of control of a corporation to ensure that it does not affect the status of a corporation as a CCPC at the time of the transaction that caused the change of control.
2) Electronic Filing Requirements & Penalties
Budget 2008 introduced the Canada Revenue Agency’s (CRA) commitment to create cost savings through increased efficiencies in the implementation of its programs. As part of its continued commitment to these goals, Budget 2009 will require mandatory electronic filing for corporations that have annual gross revenues in excess of $1 million for a taxation year. This measure will apply in respect of corporate income tax returns for taxation years that end after 2009. In addition, the number of information tax returns that can be filed by a taxpayer will be reduced to 50 from 500. This will, in practice, apply to T4 information returns for employment income. This measure will also apply in respect of information returns required to be filed after 2009.
With respect to penalties relating to these new electronic filing requirements, Budget 2009 proposes to introduce a penalty for filing a corporate income tax return in an incorrect format, and to reduce the penalties applicable for late filed or incorrectly filed information returns.
3) Previously Announced Measures
Budget 2009 confirms the Government’s intention to proceed with a number of previously announced tax measures, such as
• Measures included in the Notice of Ways and Means Motion tabled by the Government in Parliament on November 28, 2008, including the reduced 2008 minimum withdrawal amounts in respect of Registered Retirement Income Funds
• Extension of the 2008 deadline for Registered Disability Savings Plan contributions, announced on December 23, 2008
This Budget Summary is prepared for information only and is not intended to address the circumstances of any particular individual or entity.
The Ontario government tabled its 2009 Budget on March 26. Much of the attention has been focused on the single, harmonized provincial and federal sales tax system. The focus of the Budget summaries provided by our team is usually geared towards personal and business income tax measures of interest to your clients. However, since the single sales tax system will affect the majority of Ontarians, we will address these proposed changes as well, in addition to personal and business income tax changes.
Personal Tax Measures
a) Reduction in Tax Rate of Lowest Income Bracket
The budget proposes to provide personal income tax relief by cutting the first tax rate by one full percentage point, from 6.05% to 5.05%, effective January 1, 2010. The reduced tax rate applies to individuals with income less than $36,848.
b) Ontario Dividend Tax Credit
As a result of the corporate tax rate reductions (see below), adjustments to the Ontario dividend tax credit are proposed in order to maintain integration between the corporate / personal tax systems. The Dividend Tax Credit on Eligible Dividends is proposed to fall from 7.7% to 6.4%, effective January 1, 2010.
c) Increasing Access to Locked-In Accounts
The budget proposes to enhance access to locked-in funds by increasing, from 25% to 50%, unlocking permitted on purchase of new LIFs, effective January 1, 2010. The budget also proposes to waive financial hardship application withdrawal fees for Ontario locked-in accounts for a two-year period. This waiver will take effect for applications approved on or after April 1, 2009.
d) Tax Free Savings Accounts
The Ontario government proposes to change the Succession Law Reform Act to allow for beneficiary designations of TFSAs. Beneficiaries will be able to receive TFSA proceeds outside of a will in the same way that beneficiaries can receive proceeds of RRSPs and RRIFs, thus avoiding Estate Administration Tax (i.e probate fees) on TFSA assets.
e) Other measures of note
• Ontario will follow federal proposals to:
o Increase the Home Buyers Plan withdrawal limit from $20,000 to $25,000
o Allow a deduction for the amount of post death decreases in the value of an RRSP/RRIF from the date of death to final distribution, which can be deducted against the year of death RRSP / RRIF income inclusion
• Effective 2010, The Ontario Senior Homeowners Property Tax Grant will be doubled from $250 to $500.
• Thresholds for seniors receiving Ontario property and sales tax credits will be increased. Effective 2010, this will be replaced with a new Ontario Sales Tax Credit and a new Ontario property tax credit.
Business Tax Measures
a) The Budget proposes to cut corporate income tax rates, effective July 1, 2010, as follows:
• The general corporate tax rate from 14% to 12% and further reduced to 10% over three years.
• The small business tax rate will be cut from 5.5% to 4.5%
• The small business deduction surtax of 4.25% will be eliminated.
• Parallel of the 2009 federal budget proposal to provide a temporary 100% accelerated CCA rate for eligible computers and software acquired after January 27, 2009 and before February 2011.
The new Single Sales Tax System
The talk of the budget is over the harmonization of RST (Ontario Retail Sales Tax) and the federal GST. The budget proposes, beginning July 1, 2010 to combine the two tax structures into one, value-added, single tax structure of 13% (8% provincial and 5% federal), administered by the CRA.
This change (along with the other proposed business changes above) is designed to make Ontario businesses more competitive in the global economy, to preserve and create jobs in Ontario during a difficult economic period. The complexities of the sales tax system is beyond the scope of this analysis, but suffice to say that harmonization will entitle businesses to be reimbursed for provincial taxes paid in the acquisition of supplies used in the business; similar to the way GST is administered. This means that businesses will see cost savings, but the question of whether the lower prices will flow to consumers remains to be seen.
There are exemptions however to the provincial portion of the single sales tax. Point-of-sale rebates will be introduced for the provincial portion of the tax for the following items; books, children’s clothing and footwear, children’s car seats and car booster seats, diapers, and feminine hygiene products. In short, the new 13% single sales tax will apply to most items that are currently subject to GST with limited exemptions.
To help transition Ontarians to the new system, the government is proposing temporary payments to households. The payments will be paid as follows:
• Three payments to Ontario tax filers over age 18 in each of June 2010, December 2010 and June 2011. The payments would total $1,000 for eligible families with an income < $160,000 and $300 for eligible individuals with incomes < $80,000.
Other Points of Note
• Purchasers of newly constructed homes under $400,000 would be entitled to a new housing rebate equal to 75% of the provincial taxes paid.
• Rebate amounts would be reduced for new homes priced between $400,000 and $500,000