Foremost among the missed ways Budget 2009 could have helped Canadians who lose their jobs was its failure to bring back tax-free rollovers of severance packages, says tax expert and author Evelyn Jacks.
Severance is typically paid out in a lump sum and taxable in the year received. Those who lost jobs in prior recessions were much better off because the retiring allowance let them shelter much of an employer package from tax. It let terminated employees “roll over” $2,000 a year tax-free into their RRSPs for each year of service before 1996. Those laid off today can only get the rollover for the pre-1996 employment years, not the dozen subsequent ones. Depending on when a pension is vested, another $1,500 might be able to be rolled over for service before 1989, says Jacks, who has just published her 42nd tax book, Master Your Taxes.
“We need to look at the taxing of severance packages,” Winnipeg-based Jacks said Wednesday. Jacks suggests investing as much of a severance package as possible into an RRSP, based on your unused contribution room. If possible, try to get your employer to stagger payments out, deferring some income (and therefore tax) into subsequent tax years.
People who lose their jobs underestimate their tax liabilities when they get severance and underestimate how much it costs to look for a new job, Jacks says. For example, if they have to pay for child care while looking for a job, they don’t realize employment insurance is not considered a qualifying earned income source for claiming child-care expenses. Those who receive E.I. may have to repay some benefits if net income exceeds $52,875 in 2009.
The minority government also missed the chance to bring back general averaging of income tax for those whose incomes fluctuate wildly over the years, typically artists and creative types. And while the budget provided tax relief for those who wish to buy first homes or renovate existing ones, Jacks says it could have gone further by extending the tax exemption on capital gains on a principal residence. The Tories could have extended that to two homes instead of just one, a measure that would have helped with intergenerational transfers and those affected by divorce.
Jacks would also have liked to have seen a bigger increase in the “tax-free zone.” Budget 2009 nudged up the basic personal amount that’s exempt from income tax to $10,320 but it “would have been nice to see that closer to the poverty line,” Jacks said. Currently, the low-income cutoff, or LICO, is around $22,000, she said.
The budget did little to help those who suffered RRSP losses due to the 2008 stock market crash – losses from stocks held in RRSPs or registered retirement income funds translate into proportional loss of precious contribution room. Despite the pain felt by retirees and near-retirees, RRSP limits were not raised in the budget.
The only break the budget gave to seniors who have lost money in their RRIFs was to confirm a previous decision to reduce mandated RRIF withdrawals by 25% for the 2008 tax year. That’s a far cry from CARP’s call for a two-year moratorium on taxable RRIF withdrawals, said Susan Eng, CARP vice-president of advocacy.