Commentary Archives - Page 3 of 13

Tax implications of divorce

In a divorce, on top everything else, there’s the way it affects your taxes. Inevitably, assets accumulated during a marriage will be divided, and the guidelines on how they will be divided will often differ across provinces. Beyond the division, there’s also how the taxes attached to certain assets and support matters for children will affect each person’s taxes. An amicable divorce can allow the parties, separating but still willing to work together to some extent, to plan how the final disposition of their assets will be executed to control any taxes that might apply.

Key Takeaways:

Individuals must notify the CRA of their status change (using Form RC65 Marital Status Change) once separated more than 90 consecutive days.
Separation agreements/court orders must be registered with the CRA in cases where spousal support must be paid, because spousal support payments are treated differently than child-support payments for tax purposes.
In shared parenting, if certain conditions are met, typically both parents will share benefits and credits like Canada Child Benefit (CCB), GST/HST credit and eligible dependant credit.

“Assets acquired and debts incurred during a marriage are included in determining family property and distributed equally when the marriage ends.”

What’s the best time to transfer a TFSA between institutions?

Putting money into a TFSA is a great way to save up for retirement. Knowing the regulations that control when and how contributions and withdrawals work will help you avoid any penalties and fees that can apply in certain circumstances. For example, if you change banks, simply taking the money out of the TFSA at your old institution and depositing it with your new could cost you. There are procedures for how to transfer the TFSA funds without penalty, but they must be followed.

Key Takeaways:

TFSA deposits reduce your TFSA room, and withdrawals increase it but the catch is that this doesn’t apply for withdrawals until the subsequent year. If you recontribute early, you may be penalized.
Financial institutions have their own transfer forms to transfer a TFSA from one institution to another, and doing it this way means there are no tax forms to file with the CRA.
You may be able to transfer your investments “in-kind” between institutions, but not all investments are eligible.

“Understanding the ins and outs of Tax Free Savings Account (TFSA) contributions and withdrawals is important to maximize TFSA room, increase tax-free growth, and avoid fees and penalties. “

5 Tips For Limiting The Amount Corporations And Their Shareholders Pay The CRA

Corporations and their shareholders often end up paying more than expected to the CRA because of decisions made in previous years. To minimize taxes paid, there are strategies businesses can apply. It starts with setting up the correct corporate structure and involving the right people early. For example, involving an accountant in larger business decisions at the beginning, means that the business can minimize the tax consequences on purchases, like limiting the capital gains deduction.

Key Takeaways:

Make sure your current corporate structure reflects current tax law, and file proper returns along with keep good records.
Get tax advice before major transactions, and plan for the capital gains deduction.
Have an estate plan, and make sure your executors know to get tax advices as soon as possible.

“Just like any other big transaction, planning, or lack thereof, can have a huge positive, or negative, impact on the potential tax liability.”

Avoiding tax is okay, but know the boundaries

Under Canadian law, there is legal precedent for being allowed to order your financial affairs in such a way to minimize or even eliminate any taxes you would otherwise owe. However, the government passed a law, called the General Anti Avoidance Rule (GAAR), as an attempt to draw a line between use and abuse of the tax code for this purpose. The line is simple; if the Canada Revenue Agency wants to object to your tax return, and how you have structured your finances for tax purposes, the GAAR legislation permits the CRA to take you to court for a judge to examine the matter.

Key Takeaways:

One of the three conditions for the GAAR to apply is that there had to be a tax benefit. If you can demonstrate that you didn’t obtain any tax benefit, you could escape the GAAR.
Second, the tax benefit you received had to result from a transaction, or series of transactions, where you were intending to avoid tax as a key motivator. If you can show another primary reason for the transaction(s), then GAAR might not apply.
Third, the avoidance transaction had to be abusive.

“Make sure you’re aware of the three conditions for the GAAR to apply, to avoid a battle that you may have, at best, a 50/50 chance of winning.”

The best way to transfer investments to your spouse

There are tax implications when transferring investments to your spouse. A straight transfer of a capital asset doesn’t mean the capital gains are also transferred, and the taxes on the capital gain or dividend would still be your responsibility. Depending on your goals for transferring investments, there are a number of ways to do it. For instance, if you want to avoid future taxes, consider loaning the funds to your spouse at the minimum prescribed interest rate, which is currently 2 percent If you have a large amount invested, you can even make the loan to a family trust that you run with many beneficiaries.

Key Takeaways:

Transferring mutual funds or stocks can be done on an adjusted cost base and the current fair market value (FMV).
Transfering into a spouse’s RRSP or TSFA ensures subsequent income, and withdrawals will not be taxed back to the giver, but it also means the giver will need to claim a capital gain at the time of transfer due to it being deemed a disposition.
Using a spousal loan allows future income to be generated in the name of a spouse. The interest paid would be tax deductible by your spouse and taxable to the spouse loaning the money. There may still be deferred capital gains unless you sell it first to transfer the cash, or elect to claim it on your tax return at fair market value.

“A transfer of capital assets leads to attribution between spouses, such that any subsequent income – whether dividends, interest, capital gains, or other income – are taxable back to you.”

Tax tip – Warning: Buyer beware when it comes to Health Spending Accounts

Canada Revenue Agency (CRA) is cautioning business about Health Spending Accounts (HSA) tax schemes. In particular, they are warning people to be aware of invalid HSA deductions. Any business that is incorporated can offer this plan to their employees and shareholders so long as the latter also earns a T4 income. A sole proprietorship is not eligible for this type of plan because they don’t have any arm’s-length employees. If you’re unsure, be sure to get a second opinion from a tax professional.

Key Takeaways:

HSAs are self-insured health plans offered by employers for their employees who live in Canada. They provide a way for small businesses to provide tax-free health and dental benefits to their employees (and their employees’ family members).
Corporations with as few as one employee are eligible, as well as exclusively for shareholders in the company provided they are employees earning a T4 income.
Owners and their employees of unincorporated businesses or sole proprietors are also eligible if the owner has at least one arm’s-length employee.

“A valid HSA plan must conform to private health service plan rules set out in the Income Tax Act.”

What to do if you have a tax dispute with the government

If you are one of the many Canadians who has received a reassessment notice from the CRA, you need to respond with an objection notice before the 90-day deadline to enter what is known as the objection stage. After a decision to your objection, if you are still being asked to pay, you can file for an appeal in tax court with a good chance of settling before your court date. Another option is to file a Voluntary Disclose before any action by the CRA is taken if you think you made a mistake on your return; however, you may still be subject to a penalty regardless of if the disclosure is valid.

Key Takeaways:

When filing an objection, it’s best to include new evidence or documents to support why the reassessment was incorrect, because the taxpayer has the burden to show that it is wrong.
Typically, it takes 9 to 12 months for the CRA to assign an appeals officer and review an objection.
After the CRA’s decision at the objection stage a person has 90 days before proceeding to the Tax Court stage, which roughly takes 18 months,although it can take longer because of securing a court date for a hearing.

“Tax disputes are evidentiary disputes that require digging to prove a case. They are also legal disputes based on the interpretation of certain tax provisions, and always occur between the government (the Canadian Revenue Agency) and taxpayers.”

Canada’s credit score obsession is leading people to make bad financial decisions

Often Canadians feel a false sense of security when they find out they have a higher credit score. A higher score can lead to more borrowing, creating a cycle of debt that the borrower can never get out of. The largest element of your credit score is your payment history. Paying the minimal amount on time will increase your score, while paying the balance in full and making extra payments will not improve your score. Utilizing more credit than you need to can also increase your score, making you feel safe to borrow more. Before borrowing, always consider your finances and not your score.

Key Takeaways:

Too much information about a persons credit score is available online and that information has led to unwise actions related to credit.
Even someone with a high credit score can end up becoming insolvent.
Credit scores reward indebtedness, because credit scores are a product for the banks.

“Trying to game the system by tailoring your borrowing habits to what you think is the right credit score ‘formula’ can actually improve your credit score while making you financially worse off.”

How you draw down your retirement savings could save you thousands — this program proves it

Retirees wanting to maximize their retirement income frequently face a host of complex scenarios when trying to find the right timing and income optimization method for their unique situation. Often, there is a lack of information and tools available to people to help them determine the best plan for them. One new tool is called “Cascades.” It helps determine when to draw/spend and delegate money in the most tax efficient way. The program also shows a year by year chart of where and when money should be spent. In the example, it determined that the couple’s estate would be a few hundred thousand larger if they first drew on non-registered funds, then registered, and finally from their TFSA account.

Key Takeaways:

There may be as many as 26 distinct sources of income a retired couple may encounter.
It’s not as simple as merely maximizing each stream of income because tax brackets, clawbacks of government benefits and other considerations all interact in complex ways.
The emphasis is on finding the “winning strategy,” defined as providing the highest estate value, net of taxes and fees, at the expected life expectancy.

“Once it’s time to start using your retirement savings, it can be tricky to figure out what money to take out when and from where.”

For common-law couples, estate planning is full of pitfalls. Here’s how to avoid some of them

Common law couples or those who are married for the second time have more inherent estate planning issues than married couples. If one partner dies before the other, the survivor may end up owning property with the deceased’s children. Assets can be too little or too much when the deceased partner’s children are also beneficiaries. Retirement plans if left to the survivor could also be heavily taxed. It’s best to seek financial help to ensure that both the surviving partner is compensated while avoiding these common pitfalls.

Key Takeaways:

Estate planning can be difficult as each partner may bring into the relationship different or uneven financial needs like own children’s needs, having their own property; past obligations.
An advantage of common-law spouses and couples in second marriages holding real estate as tenants in common is that their ownership can be transferred to whomever they wish.
Certain types of assets can pass more efficiently to a surviving spouse or common-law partner than to children.

“Talking about dying and proactively planning for it can be difficult, but it is easier for married couples who started with nothing and built their nest egg together. Common-law couples and those who remarry may [want to] manage their financial affairs separately.”