by Ron Clarke
To offer some perspective on the 2023 budget, for the first time in decades the federal budget was packed with detail for public view.
Why?
The thought is that the government was trying to mitigate the complaints from the general public that arise after the presentation of a budget with its little offering of the meat and potatoes behind the headlines.
Or perhaps the quantity of detail given in the budget may have been offered because of several high profile good news taxation stories the government wants to talk about.
The highest profile announcement in the budget was the new First Home Savings Account (FHSA) that began April 1, 2023.
Given the high cost of buying a home, especially for those not in the market yet, this program is designed to help first time home buyers, as defined by not having owned a home in the past five years and that includes the spouse who also can’t have owned a home in that period.
The best way to describe the FHSA is that it offers the best features of the RRSP and of the Tax Free Savings Account (TFSA).
This is to say, the contributions into a FHSA are a tax deduction like an RRSP, and the withdrawals from a FHSA are tax free like a TFSA.
There is a $8,000 annual maximum contribution to a maximum of $40,000 in total.
And each spouse can have a FHSA, potentially creating an $80,000 combined pool of funds.
As an aside, the FHSA funds can be combined with the maximum $35,000 RRSP Home Buyers Plan withdrawal, and with both spouses having an RRSP, the home purchase pool of funds could be as high as $150,000.
Reminder that the funds withdrawn from an RRSP for a Home Buyers Plan must be re-contributed to the RRSP or they will become taxable income.
Final point regarding the FHSA, the $40,000 contribution room does not exist until the FHSA is opened with an initial deposit, as minor as it may be.
So, longer term foresight is needed to ensure there is enough timing to take full advantage of the FHSA.
If there is intention to use one, open it now.
Second final point, any FHSA funds not used can be transferred to one’s RRSP account tax free and without effecting the contribution limit.
Okay, the final, final point.
For tax deduction purposes, the FHSA contribution period is the calendar year and does not extend 60 days into the new year like RRSP contributions.
So, if you want to use a FHSA contribution as a tax deduction, you must make that contribution before Dec. 31.
Second announcement of note within the 2023 budget.
The Registered Education Savings Plan (RESP) withdrawal amounts have been increased from $5,000 for full time programs to $8,000, and half that amount for part time programs.
Good news when one considers the cost of going to school, and that’s not just talking about the cost of tuition.
RESP contributions are not a tax deduction and any investment growth within the RESP plus the government grant top-ups are considered taxable income.
When withdrawn, these amounts are taxable income in the student’s hands.
The third announcement in the budget is the increase to the Alternative Minimum Tax (AMT).
The AMT has been around for years and to keep its explanation simple, it’s designed so that the wealthy who may have access to many tax tools to reduce tax, do have to pay a minimum level of tax on investments sold.
The AMT tax rate has been increased from 15 per cent to 20.5 per cent, although the AMT will not apply until the specific investment profit is over $173,000, up from $40,000.
Finally, and quite frankly the most far reaching announcement, is the government’s strengthening of the 1987 General Anti Avoidance Rule (GAAR), a law that the Courts of Canada have sided with Canada Revenue Agency time again when a case reaches this level.
The use of the GAAR law comes into play when it can be proven that a transaction was not completed for commercial purposes, but rather it was an abusive transaction undertaken or tax shelter created to simply avoid tax.
If this catches your attention, do your research.
Ron Clarke, owner of JBS Business Services in Trail, provides accounting and tax services.