Federal Budget Update

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Once again, the government has delivered its annual flurry of tax changes and announcements regarding the financial state of affairs for Canada. Given the relative improvement in Canada's financial health, the government announced the bad news several days earlier, in the form of the CPP premium increases.

Here's a summary of some of the key tax changes. Check with your advisor for full details.

Students

* For 1997, the education credit rises to $150 ($200 for 1998 and later) for each month that a student is enrolled, full-time, at a post-secondary institution.

* Fees eligible for the tuition credit will include mandatory an-ciliary fees imposed by post-secondary institutions.

Currently, tuition and education credits must be claimed in the year in which they were incurred. Starting in 1997, students may carry forward unused credits indefinitely and claim them against taxes owing in later years. These changes do not extend to supporting individuals.

Registered education savings plan (RESPs) - RESPs assist individuals to save for post-secondary education by providing non-tax deductible contributions which grow on a tax deferred basis within a trust. The income is taxed, when paid out, in the hands of the named beneficiary. However, if the beneficiaries do not attend a post-secondary institution, the income reverts to the financial institution

For 1997 and later years, the limit on annual RESP contributions rises to $4,000 to an overall lifetime limit of $42,000.

The budget proposes that if the named beneficiaries are not enrolled in a post-secondary institution by the time they turn 21 and the plan is at least 10 years old, the contributor may withdraw the income from the plan on a taxable basis. This amount may be transferred into the contributor's RRSP, subject to available contribution limits. If the RESP income is not fully offset by the RRSP deduction, an additional 20 per cent tax will apply to the RESP income withdrawn.

Charitable donations - The taxable capital gain on certain shares and other securities donated to charities (other than private charitable foundations) will be reduced to 37.5 per cent from 75 per cent, applicable to donations made on or after February 18, 1997 and before 2002.

The budget proposes to change the limit for all charitable donations and Crown gifts to 75 per cent of net income, and an additional 25 per cent of any CCA recapture arising from donations of depreciable capital property, starting in 1997.

Changes were introduced to prevent potential abuses involving charities and "loan-back" arrangements with non-arm's length parties. …