Tax changes for the 2005 filing year

3 min read

With tax season rolling around, it’s time to take stock of some policy changes you should know about. One of the benefits of minority governments is that they tend to propose favourable tax policies in case a snap election is called. That’s precisely what the Martin administration did late last year, and Canadians are emerging as the big winners — if those changes make it into law.

In his November economic statement, Finance Minister Ralph Goodale introduced a slew of measures designed to let Canadians hold on to more of their hard-earned money. These include increases in many personal exemptions, rate cuts and relaxed deduction eligibility requirements. However, according to one expert, those measures are in a legal limbo.

“The proposed changes were based on a ways and means motion to amend the Income Tax Act that was deposited but not ratified,” says Beatrice Fenelon, a spokeswoman for
Canada Revenue Agency. “We have prepared our documentation, forms and information kits based on the premise that these changes will take effect. But that is by no means certain.”

The upshot is that tax professionals, public officials, payroll department personnel and industry experts are working under cloudy conditions. That being said, we’ve compiled a list of the important changes Canadians can expect to encounter while preparing their 2005 returns.

Indexing and bracket changes
“There aren’t a lot of super-exciting tax changes that are being implemented this year,” says Karen Yull, a tax principal at Grant Thornton. “However there are many small modifications that can add up to a big difference for those that benefit from them.”

As usual, the major tax brackets, exemptions, deductions and credits are being indexed upward in order to eliminate the effects of “bracket creep,” which is the tendency for taxes to rise as inflation-adjusted earnings move into higher brackets and are taxed at greater rates.

Under the new brackets, your first $35,595 of taxable income is taxed at 15 per cent and the amount between $35,595 and $71,190 is taxed at 22 per cent. You’ll pay 26 per cent on earnings between $71,190 and $115,739, and earnings in excess of $115,739 are taxed at 29 per cent.

Tax cuts and personal exemption changes
In addition to the indexing, the government’s pre-election economic statement called for many of the basic personal amounts to be revised upward. As a result, they have increased by far more than just the inflation rate.

For example, the basic personal amount rises by $700 to $6,448. The spousal amount jumps by $595 to $7,344, and the maximum amount for the Child Disability Benefit supplement is now $2,000. In addition, the tax rate on the lowest bracket was cut from 16 per cent to 15 per cent.

Those who pay medical expenses on behalf of dependants other than spouses or minor children will also be happy, because the maximum eligible amount will rise from $5,000 to $10,000. However that change will only take effect for expenses incurred starting in the 2006 taxation year.

Adoption expenses credits
Another key policy change has been the government’s increasing recognition of the societal benefits derived from facilitating the adoption process, particularly expensive overseas adoptions.

Starting this year, couples can now claim as much as $10,000 in eligible adoption expenses for each child less than 18 years old. Among the expenses you can claim are fees paid to an adoption agency, translation expenses, mandatory fees as well as “reasonable and necessary travel and living expenses of the child and the adoptive parents.”

RRSP limit changes and foreign content restriction removal
Some of the most important tax changes that are due to be implemented are related to Registered Retirement Savings Plans, or RRSPs. For one, the foreign ownership limit has been abolished. In the past, self-directed RRSP-holders, mutual fund managers and investment advisers had to keep rigorous track of RRSP investments in order to ensure that the amount of foreign securities in a given portfolio didn’t rise above 30 per cent.

In many cases, this required a considerable amount of paperwork and oversight, especially during times when asset prices fluctuated dramatically. As a result of the rule changes, Canadians now have more flexibility in managing their retirement money, a key benefit in an increasingly globalized investment environment. Furthermore, the regulatory paperwork is now a thing of the past.

The RRSP deduction limits are also going up. For 2005, the limit is $16,500. That amount is scheduled to rise to $18,000 next year and to $22,000 by 2010. The change will put a significant amount of money into the pockets of upper income earners.

Computer filing is likely to rise again
Another long-term trend that is likely to continue is the number of tax returns that are filed using the CRA’s Net File service. Last year the number of returns filed using this service shot up more than 14 per cent to 3.48 million. This is a strong indication that Canadians are becoming increasingly comfortable both with using the Internet and with the tax authority’s website.

For more information about tax changes that might affect you, check out the CRA’s
website or visit Bankrate.ca’s
Tax Centre.


Peter Diekmeyer is the Montreal Gazette’s management columnist.