The 2021 federal budget left the major pillars of Canadian personal tax largely untouched, but addressed two issues regarding RRSP and registered investment rules.
First, there’s good news for clients who are doing post-doctoral fellowships. The budget proposed to include post-doctoral fellowship income in “earned income” for RRSP purposes — meaning these fellows could accumulate additional RRSP room.
This measure would apply to post-doctoral fellowship income received in the 2021 taxation year and onward, as well as income earned from 2011 to 2020 if the taxpayer submits a request in writing to the Canada Revenue Agency.
The budget also looked at penalties incurred by registered investment vehicles that can hold only certain qualified investments due to having an insufficient number of unitholders. (For example, a mutual fund trust or corporation that is a registered investment for RRSPs can hold only investments qualified for an RRSP.)
Trusts and corporations that violate these rules and hold an unqualified investment incur a tax of 1% of that property’s fair market value when it was acquired for each month that the registered vehicle holds the property.
The budget proposed to proportionally allocate this tax to only the unitholders who are themselves subject to the qualified investment rules. For example, if 80% of unitholders have the units in their non-registered accounts and the remaining 20% hold the units in their RRSPs, the monthly tax imposed under the proposal would be 20% of 1% of the fair market value of the non-qualified investment at the time it was acquired.
This measure would apply to taxes imposed after 2020, as well as to taxpayers whose tax liability before 2021 has not been determined by the Canada Revenue Agency as of April 19.
Old age security
Ottawa said it wants to increase old age security (OAS) payments for those over 75 by 10% on an ongoing basis, as promised by the Liberal party in its 2019 election platform. According to the budget documents, the increase would provide additional benefits of $766 to full pensioners in the first year, and indexed to inflation going forward. The increase would begin in July 2022.
If a taxpayer is receiving higher OAS payments due to a deferral past age 65, the 10% increase will apply to the higher amount.
The feds have also proposed a one-time payment of $500 in August to OAS pensioners who will be 75 or older as of June 2022. The amount is anticipated to be taxable, and will be paid under the Department of Employment and Social Development Act — meaning it’s unlikely the recovery tax (known as the OAS clawback) will apply. This payment, which should arrive in August, would be excluded from the definition of income for the Guaranteed Income Supplement.
Other tax proposals
The 2021 federal budget introduced a few other tax proposals that could affect your clients.
- The budget is proposing to permit defined-contribution plan sponsors to correct accidental undercontributions made in the preceding five years by making additional contributions to an employee’s account, subject to a dollar limit. This measure would apply to additional contributions made, and amounts of overcontributions refunded, beginning with the 2021 taxation year.
- The government plans to implement a national, annual 1% tax on the value of residential real estate owned by non-Canadians if that property is “considered to be vacant or underused,” effective Jan. 1, 2022. The tax will require all owners who are not Canadian citizens or permanent residents to file a declaration as to the current use of the property.
- The capital cost allowance rules have been updated to accelerate depreciation for more clean energy technologies.
- Immediate expensing (as opposed to capital depreciation) would be available for “eligible property” acquired by a Canadian-controlled private corporation on or after April 19, 2021 and that becomes available for use before Jan. 1, 2024, up to a maximum amount of $1.5 million per taxation year.