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Changes that help, changes that hurt

Tax expert TIM CESTNICK lists the key tax changes that took place for 2004. Some changes will help you when filing your 2004 tax return, but some will hurt. One thing's for sure: These are changes you shouldn't ignore.

HELP

Tax brackets (thumbs up)

Each year, the federal and most provincial and territorial governments index their tax brackets to inflation, which will save you tax. Federal tax brackets were indexed beyond the inflation rate when increased for 2004. The lowest tax bracket was raised to $35,000 from $32,183 in 2003 while the middle tier was lifted to $70,000 from $64,368. The highest bracket rose to $113,804 from $104,648. On top of this, most provinces and territories indexed their own tax brackets to inflation. The exceptions were Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland.

Personal credits (thumbs up)

Federal personal tax credits were indexed upward by 3.3 per cent for 2004. The basic personal amount for 2004 is $8,012 vs. $7,756 a year earlier. This is the amount of income that any Canadian taxpayer can earn before becoming taxable. Other tax credits were indexed too. The actual credit in each case is 16 per cent of the respective amount. The bottom line?

A Canadian earning $60,000 will save on average an extra $291 in taxes in 2004 simply because of the indexing of tax brackets and personal tax credits. And the amount can be as high as $722 on average for those in the highest tax bracket.

Medical expenses (thumbs up)

The 2004 federal budget increased the claim for medical expenses that may be available in respect of a dependant. In the past, if the dependant's net income exceeded the basic personal amount, the allowable medical expenses in respect of that person was reduced. Beginning in 2004, expenses incurred for a minor child will not be clawed back by the child's income, if any. For other dependants, medical expenses in excess of 3 per cent of that dependant's income or $1,813 (whichever is less) will be allowed.

Disability support (thumbs up)

In 2004 the government replaced the attendant-care deduction with a broader "disability supports deduction" that will allow you to deduct the costs of certain services or devices purchased to allow you to attend work or school if you're disabled. Be sure to deduct these costs if you incurred them in 2004.

The costs include: Sign-language interpreter fees, real-time captioning services, teletypewriters or similar devices, devices or equipment to assist the blind in operating a computer or reading print, electronic speech synthesizers, note-taking devices, voice recognition software, tutoring services and talking text books.

Education credit (thumbs up)

The 2004 federal budget announced that the definition of "qualifying educational program" for purposes of the education tax credit will be expanded to include an otherwise eligible program that an individual takes in connection with his or her duties of employment. No credit will be available to the extent the employee is reimbursed for the cost of that education. If you incurred these tuition costs at your own expense in 2004, be sure to claim the education credit.

Police and armed forces (thumbs up)

The 2004 federal budget announced that members of the Canadian Forces, or a Canadian police force serving on certain high-risk missions will not face tax on employment income earned while serving on those missions, up to a certain maximum exemption (approximately $6,000 of income per month). This provision applies for 2004 and subsequent years. If you worked on a mission of this type in 2004, speak to your employer about this exemption -- your employer should know whether the mission qualifies.

RRSP and RPP limits (thumbs up)

The contribution limits for registered retirement savings plans and registered pension plans increased in 2004 to a maximum $15,500. Money-purchase RPPs enjoyed an increased limit of $16,500. These changes could mean a greater tax deduction available for 2004 if you're one of the few who maximized contributions. Keep in mind, you may not want to claim your full RRSP deduction in 2004 if you anticipate that you'll be able to apply that deduction against higher income dollars in the next two years. See my article dated March 26, 2005 for more on this (http://www.timcestnick.com).

Business losses (thumbs up)

A change in 2004 saw an increase in the length of time throughout which non-capital losses can be carried forward. The carry-forward period has been increased to 10 years from seven. There has been no change to the carry-back period of three years. Unused foreign tax credits can likewise be carried forward for 10 years under this proposal. This measure applies to all taxpayers for years that end after March 22, 2004. This is good news since some losses that may have otherwise expired last year will now be available to claim on your 2004 tax return.

Capital cost allowance (thumbs up)

Depreciation for tax purposes, called capital cost allowance (CCA), allows a taxpayer to deduct the cost of depreciable assets over their useful lives. Due to the fast pace of change in technology, the CCA rate for computer equipment was adjusted to 45 per cent from 30 in 2004. The CCA rate for data network infrastructure equipment was adjusted to 30 per cent from 20. The change applies to equipment acquired after March 22, 2004. This could mean a greater deduction when preparing your 2004 tax return -- so don't miss it!

HURT

Interest deductions (thumbs down)

The 2004 Quebec budget announced changes to the rules on interest deductibility in that province. Interest costs will be deductible only to the extent that investment income (including taxable capital gains) is reported in the year. To the extent interest costs cannot be deducted in a year, they can be carried back three years or forward indefinitely to be deducted in other years when investment income is reported.

This will affect many tax returns in Quebec for 2004. The federal government is proposing changes in this area too, although the law hasn't been changed yet. Read my article dated March 10, 2004 for more (http://www.timcestnick.com).

Taxpayer adjustments (thumbs down)

In the past, taxpayers were allowed to file a tax return late to obtain a refund, or request beneficial changes to past tax returns, for years back to 1985. The 2004 federal budget limited the late-filing to years that end in any of the 10 preceding calendar years. This measure comes into effect after 2004. If you have neglected to file past tax returns to claim refunds, you can go back to the 1995 tax year today to claim those refunds. Don't forget to do that this month.

Taxpayer debts (thumbs down)

In the case of Markevich vs. The Queen, the Supreme Court of Canada upheld a ruling against the Canada Revenue Agency. The decision provided that the plaintiff was not required to pay certain taxes owing since the limitation period in the applicable provincial Limitation Act had run out. So, the Department of Finance announced changes to the tax law in the 2004, which establish a 10-year limitation period for the collection of federal tax debts.

If you owe taxes this April and fail to pay them, you won't get off the hook for at least 10 years - and you can bet the CRA will do whatever it can to collect before that time. So, pay your taxes owing as soon as possible.

Fines and penalties (thumbs down)

Recent court decisions supported the notion that fines and penalties are generally deductible if incurred for the purpose of earning income. The Department of Finance didn't like this result, and in the 2004 federal budget announced a change to Canadian tax law that will disallow deductions for fines and penalties imposed by virtually any law (including foreign laws) after March 22, 2004. Fines and penalties resulting from a private contract are excluded from these rules. This could restrict some of the deductions you were thinking of claiming on your 2004 tax return, such as parking and speeding tickets.

Donation tax shelters (thumbs down)

In response to a growing number of buy-low, donate-high donation tax shelters, the Department of Finance announced new rules to limit the tax benefits of these schemes. Under these rules, the value of a gift of property for charitable donation purposes is limited to the donor's cost of the property if the property is donated within three years of its purchase by the donor, or where the property was acquired through a gifting arrangement or in contemplation of a donation. There are certain exceptions to the rules. If you're claiming one of these shelters on your 2004 tax return, simply be aware that you could face an audit and reassessment.

Restrictive covenants (thumbs down)

In the case of Manrell vs. the Queen, non-competition payments received by the plaintiff were deemed to be tax-free on the basis that the plaintiff did not dispose of any "property." The Department of Finance didn't appreciate this decision, and announced changes to the tax law such that payments received or receivable for restrictive covenants (non-competition payments, for example) after Oct. 7, 2003, will be taxable as ordinary income (with some exceptions that will tax the payment as capital gains). If you received any payments like this in 2004, you'll have to report them on your tax return for 2004.



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