Commentary Archives - Page 5 of 13

Is Income Splitting Dead?

Despite the Department of Finance changing the “income splitting” rules in 2018, there are no shortages of income splitting plans. Some of them take advantage of various provisions of the Income Tax Act while others are a little more complicated. The average business owner can become permanently trapped in the tax on split income (TOSI) legislation. Splitting income with family members to avoid the attribution rules using prescribed rate loans has become common, and can still work with the new TOSI rules. The TOSI rules do not apply to salaries to family members.

Key Takeaways:

The new tax law makes it nearly impossible for the average business owner to navigate, which means a tax professional is highly recommended.
It is very important that you keep the income from the PR Loan as passive income which then can be reported.
Salaries paid to family members must prove that they are income producing and be sure to only make reasonable deductions.

“No matter what the Department of Finance dreams up to stop perceived mischief, income splitting plans will survive, especially if the affected parties feel targeted, attacked and their overall tax situation is not fair.”

Do you need to make income tax instalment payments?

If you owe more than $3,000 in taxes from the previous tax year, then you may be asked by the CRA to pay your next year’s taxes in installments. Employees typically do not need to worry about instalments because their employer will withhold tax throughout the year. However, individuals with more than one source of income may be required to pay installments. Since installments are based on the previous year’s income, a one-time event that causes a spike can trigger an installment notice. If you’re unsure, check with a certified accountant to help you through the process.

Key Takeaways:

Installments are required when your net tax owing income is greater than $3,000 for the previous tax year.
The letter the CRA sends in February 2019 is based on your 2017 income and outlines the required payments on, or before, March 15 and June 15. The August letter is based on your actual 2018 net tax owing and outlines the required payments on, or before, Sept. 15 and Dec. 15.
If installments are late or less than the requested amount, taxpayers may have to pay interest and penalty charges, which cannot be deducted on their tax return.

“Twice a year, Canada Revenue Agency sends out instalment reminder letters to those taxpayers who are required to make payments.”

Cutting down capital gains tax on real estate sales

Real estate investors often dread paying capital gains. Unlike the stock market, real estate is seen as a long-term investment with larger capital gains. For real estate, capital gains are taxed at your marginal tax rate. Other forms of income like employment, interest and foreign dividends are taxed at twice the tax rate and taxable annually, whereas capital gains for real estate are deferred until the sale of the property. There are exceptions for qualified small business corporation (QSBC) shares and farm properties, which are subject to certain conditions. Losses from other non-registered investments can be used against your capital gains to lower your tax burden. You can even avoid paying capital gains yourself by freezing it and passing it along to the next generation, but eventually it will be triggered, so, how you set up a transfer matter.

Key Takeaways:

In the year of its sale, all past depreciation, also known as capital cost allowance (CCA), gets “recaptured” and taxed in addition to capital gains tax.
One good way to mitigate tax on a real estate sale is to defer RRSP contributions or deductions in anticipation of a large income inclusion from the sale of real estate.
In Canada, there is a capital gains tax exemption for real estate used by a taxpayer to earn income from a business, but rental real estate does not qualify as a “business.”

“One of the biggest deterrents I’ve observed with real estate investors is the dreaded capital gains tax hit.”

Paying income taxes is bad enough. Canada’s brutally complicated system makes it worse

A detailed examination of Canada’s system is long overdue. The Canadian tax system is complex and has become more so over the years. The original document was 4,000 words, and is now 1.1 million words. The tax guide includes complex tax codes and is further complicated by an increased number of tax credits and exceptions. This makes tax preparation more expensive for individuals and more costly for the government. Many other countries have made laws to simplify their tax laws. Canada is long overdue for a similar simplification. Reduction of tax credits could be balanced by lowering the tax rates. That way, it’s easier for taxpayers and the government, without any loss in revenue or increase in taxes.

Key Takeaways:

Canadas Income Tax System has not changed for the better over the last 25 years.
The high number of personal tax credits adds complexity and the number of credits has increased by 26 percent between 1991 and 2015.
The Income Tax Act’s length, inaccessible language, and numerous exceptions increase the cost of compliance for taxpayers, which amounted to an average of $501 per household in 2012.

“While Canada has made no major revisions of its Income Tax Act since the 1960s, other countries have implemented measures to reduce the size and complexity of their tax codes over the past 25 years.”

USMCA’s new duty allowances a heads up for Canadian e-tailers

The new North America trade deals present a challenge (and an opportunity) for Canadian retailers. The recent changes have increased the minimum transaction necessary to pay online duties and sales taxes on imports (“de minimis” rules), which makes online purchases at U.S. sites more attractive to Canadian shoppers. These changes should also serve as a wake-up call to Canadian businesses. Those who are not doing so already can take measures such as retooling websites, upgrading technology, and championing local credentials to consumers who want to buy Canadian.

Key Takeaways:

The US/Mexico/Canada agreement can result in increased profitability for Canadian Retail businesses if they up their game.
Canadians prefer to buy Canadian, so retailers need to make it as easy as possible for them to do so by utilizing new technology and trends, such as mobile commerce.
Brick and mortar stores should provide an enhanced experience to lure customers in and to buy.

“The truth is, Canadian retailers should worry less — and seize the moment to take advantage of change. The de minimis changes can offer new opportunities, particularly for small- and medium-size retailers in Canada.”

Personal Investor: Time for a post-deadline RRSP tax strategy – BNNBloomberg

Canadians often contribute to their RRSP specifically for the purpose of reducing their income to receive a tax refund. However, it’s important to look at the bigger picture to determine whether those contributions would be better placed in a TFSA rather than an RRSP from a retirement tax perspective. Investing too much in an RRSP can cause a greater amount of funds to be paid in taxes depending on if you’re in a higher tax bracket when you retire and may include a reduction in benefits. Diverting some of your funds to a non-taxed TFSA can help you avoid paying too much of your hard-earned retirement income to taxes.

Key Takeaways:

One of the problems of striking the right balance is not knowing how much investments will grow inside an RRSP.
Canadians now have the advantage of diverting some of their retirement savings from an RRSP to a TFSA, where withdrawals are never taxed.
Working with a professional can help you determine the mix of RRSP and TFSA contributions based on your situation.

“As odd as it may seem, there’s a real risk you could be contributing too much. Many senior Canadians regret packing their RRSPs through the years as they face higher tax brackets when they withdraw their money and, in some cases, forced minimum withdrawals that result in Old Age Security clawbacks.”

Late tax filing penalties could add up

Midnight tonight (April 30) is the deadline for Canadians to file their 2018 income tax returns. Everyone’s returns should be submitted to the Canada Revenue Agency (CRA) by this date, but it’s primarily anyone who owes money that should be concerned. Starting May 1, Canadians who owe money on their tax return will begin to face late fee penalties. Those who will receive a refund don’t face the same problem. However, if there are any omissions or false statements on your tax return, you could still face a penalty of $100 or 50 percent of the falsified amount. If you find yourself in this situation, you should contact your tax professional for advice as there are programs like the Voluntary Disclosures Program, which may be able to help you.

Key Takeaways:

Canadians who owe the CRA will face penalties starting May 1.
Late penalties on the amount owed start at 5 percent interest compounded daily. For each full month the return is late, one percent is added, up to a maximum of 12 months.
After a year of non-payment, the CRA charges 10 percent interest on the balance owing plus two per cent for each full month, up to 20 months. The rate is subject to change every three months.

“If you owe, the meter begins running May 1.”

The ins and outs of claiming moving expenses on your tax return

Under the Income Tax Act, you can write off moving expenses provided you’re moving for work, to run a business or to be a full-time student. Moving expenses can include ancillary costs like the cost of cancelling the lease for your previous home and utility hook-ups and disconnections. Costs associated with selling your old home, like notary or legal fees are also tax deductible. However, take care of what you claim, because expenses “must pertain directly to a move and cannot be incidental expenses.”

Key Takeaways:

For your moving expenses to qualify, your new home must be at least 40 kilometres closer to your new work or school.
Moving-related meal and vehicle expenses can be deducted in detail or simplified formats.
The costs on your vacant old home, such as mortgage interest, property taxes, home insurance premiums and the cost of heating and utilities, can be deducted up to a maximum of $5,000 – provided you make reasonable efforts to sell it.

“If you moved at some point this year, you may be entitled to a tax break for your moving expenses come tax time. But be careful, because not all expenses associated with your move may be tax deductible.”

Canadians love their tax refunds, but it’s blinding them to better tax plan

Most Canadians who receive a tax refund treat it like winning the lottery. However, financial planners point out that you actually overpaid during the year, and your money could have been better utilized instead of simply being returned at tax time. Canadians who file a T1213 form can keep more of their money throughout the year, and can then put it to use in investment accounts such as an RRSP. Canadians need to think differently about taxes, and especially tax refunds, because if done correctly, they can keep even more of their money.

Key Takeaways:

In the CIBC study, 63 percent of the 1,516 randomly selected Canadians didn’t know their tax refund was their own money, and instead believed that their tax refund was a “windfall of unexpected money.”
Filling out a T1213 “Request to Reduce Tax Deductions at Source” can reduce how much tax is withheld from each paycheque, which allows individuals to allocate it to RRSPs or childcare when they are paid, instead of waiting for a refund.
Instead of putting those funds into an everyday savings account, which taxes the interest income earned, choose investments with capital gains and dividends, which will be taxed less.

“The short-term euphoria of getting a tax refund that fades when you realize you’re getting your own money back,” Golombeck said in a release accompanying the poll. “A better plan is to ensure your portfolio operates as tax-efficiently as possible to keep more of your money throughout the year.”

Your cheatin’ heart: why do taxpayers lie?

Overstating deductions, and understating incomes are common ways people cheat on their taxes to the tune of $15 billion a year in Canada. People usually have their own personal reasons for cheating including feeling they owe too much or in anger against the Canada Revenue Agency. The CRA uses a number of ways to correct information such as through whistle blowers, encouraging honest reporting or offering voluntary disclosures. Of those who voluntarily disclose, two-thirds are motivated by external factors such as avoiding a penalty, and one-third did so because of a personal sense of ethics.

Key Takeaways:

Cheating occurs when a taxpayer deliberately overstates a deduction (such as a business expense) or understates income (such as cash tips).
The CRA combats incorrect information on tax returns through: 1) encouraging honest reporting on tax returns; 2) whistleblowers; and 3) voluntary disclosures.
If a taxpayer has cheated in the past, a voluntary disclosure allows them to report the correct amount without fear of penalty or even jail time.

“It’s probably no surprise to you that people cheat and lie on their taxes. And they do this to the tune of $15 billion dollars per year.”