The Money Mustache Community
Around the World => Canada Discussion => Topic started by: CPA CB on October 15, 2014, 03:12:10 PM
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Hey MMM'ers
I'm a Canadian Chartered Accountant with a significant amount of tax experience.
Just throwing this out there - this is the time to reassess your taxes and get questions answered. The holidays is far too late for appropriate tax planning.
If you have questions about Can"eh"dian taxes - I would be more than happy to offer the MMM discount of free advice. I hope this can serve as a reference point for future discussions for those of us who choose to live in Igloo's and drink Maple Syrup, as the tax discussions in the forum tend to revolve around our Southern NeighBOURS.
You ask - I'll do my best to answer based on what you provide.
Let the boring tax discussion begin!
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I have a tough one for you:
What is the best province/territory to live in in order to pay as little taxes as possible.
You may assume the following:
2 adults and 1-2 kids
Around 40,000$ income (your choice of capital gain, eligible dividend, RESP withdrawal, pension income)
Follow up question: Is it possible to pay 0$ taxes (you can adjust the source of income)?
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I am a Canadian employed by the Canadian branch of a US company. I participated in their ESPP and now hold several thousand US dollars worth of their stock. There were several purchases made at different price points at quarterly intervals. I will make a profit on the stock.
How do I calculate the amount of tax owed when I sell it and how can I minimize my tax bill beyond dumping all the money into my RSP?
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Hi Guses,
Interesting question -
The best province to live in from a tax perspective is Alberta, which has the lowest provincial, sales, and other extraneous taxes (fuel, liquor, etc.).
What is the nature of the income? Is it passive (investment) income? Are you operating a business?
Pension income can be split between spouses up to 50%. At $40k this would net relatively little in tax. I would guess around $3,000.
Without knowing a bit more, it would be tricky to give you a relevant answer - as I can't tell if this is earned or passive income, and whether you're working as an employee, operating a business, or are FIRE'd and loving life.
It is ABSOLUTELY possible to pay $0 tax personally on income. A great strategy is to incorporate your business or income stream, and include yourself, your wife, and your children as shareholders in separate classes of shares. After paying 15-18% tax on corporate earnings, you can distribute approximately $100k of dividends to yourself, spouse, and children (above 18), without paying personal income tax.
If you can add a bit more context I could tailor this a bit more to you specifically.
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Thanks for the answer CB.
We are contemplating moving (open to USA or Canada) once we FIRE. We are aiming to receive around 40,000$ in income per year from different sources and are looking at structuring this in the most efficient way possible.
We have a pension lined up when we are 50+ (12-30K$) and will have several hundred thousands in investments split among TFSA, RESP and taxable. A rental could also be part of the question.
For reference, this is in 6 or 7 years so we have time to think this through.
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So, if earning in the $60-70K range, how much should I invest in RRSP's to reduce paying income tax? Someone had told me that for every $1000 put into an RRSP I would get a $300 credit, but they didn't know if it was different in each tax bracket, which I would think it would be.
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So, if earning in the $60-70K range, how much should I invest in RRSP's to reduce paying income tax? Someone had told me that for every $1000 put into an RRSP I would get a $300 credit, but they didn't know if it was different in each tax bracket, which I would think it would be.
Which province are you in? It will make a bit of difference.
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Hi TrMama.
Great question.
Participating in an ESPP is a great way to invest, as typically speaking there is an inherent 'benefit' (in the way of reduced purchase prices, etc) available.
To answer your question - calculating taxes payable is a multi-step procedure.
1) Determine the fair market value of the shares you purchased as of the acquisition date. This will vary based on the date you purchase the shares. Add to reach a total amount of FMV, adjusting by the exchange rate at each purchase date (assuming they are USD shares). I'll assume $100K in this example. This is your adjusted cost base.
2) What did you buy the shares for? Same as above - adjust for the exchange rate on each purchase date to reach your out of pocket cost. I'll assume $50K. This is your purchase price.
Now, let's assume you purchased 100 shares. You paid $0.50 cents a share, for shares work $1.00 at the time (on average). If the value of the shares today is $1.25. If you sell all of them, your proceeds of disposition is $125,000. Assuming a 50% tax rate, it looks something like this.
Gain from $50 to $100K - FULLY Taxable as a "taxable benefit". This means your tax bill will be half of this gain, or $25,000.
Gain from $100 to $125K is a Capital Gain, which is only 'half' taxable. So your taxable capital gain is $12,500, and this is taxed at 50%. Tax bill on this of $6,250.
All in all - you'd end up paying $31,250 in total taxes by triggering the gain.
As far as tax-free transfers go - your best bets are to use any room in your TFSA or RRSP in terms of delaying taxes.
Alternately, if the amount is significant there are better ways to defer taxes, if the funds aren't needed. One way is to roll the shares into something called an 'inter-vivos' trust with your children listed as beneficiaries. This allows for deductions against income earned in the trust for childcare expenses, and also provides a tax efficient method to pay for their University education (as they will take the income, and not you) if you choose to do so.
In any case, I highly recommend discussing your options with your tax accountant before going forward with any transaction. It's far better to plan ahead if the amount is significant to ensure the correct tax minimization strategy is in place.
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So, if earning in the $60-70K range, how much should I invest in RRSP's to reduce paying income tax? Someone had told me that for every $1000 put into an RRSP I would get a $300 credit, but they didn't know if it was different in each tax bracket, which I would think it would be.
Which province are you in? It will make a bit of difference.
It also depends on how much RSP room you have available. Check your latest Notice of Assessment to find out how much you're allowed to deduct.
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Hey MMM'ers
I'm a Canadian Chartered Accountant with a significant amount of tax experience.
Just throwing this out there - this is the time to reassess your taxes and get questions answered. The holidays is far too late for appropriate tax planning.
If you have questions about Can"eh"dian taxes - I would be more than happy to offer the MMM discount of free advice. I hope this can serve as a reference point for future discussions for those of us who choose to live in Igloo's and drink Maple Syrup, as the tax discussions in the forum tend to revolve around our Southern NeighBOURS.
You ask - I'll do my best to answer based on what you provide.
Let the boring tax discussion begin!
Love the bolded above! Thanks for offering this service. I don't have any questions at this time but that might change :)
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To answer your question - calculating taxes payable is a multi-step procedure.
Thanks very much. You have fully confirmed for me that this particular ESPP has a very high PITA factor and several levels of risk. Once I liquidate my remaining shares, I'm pretty sure I won't participate again. I simply can't afford to buy enough of this stock to make it worth the accounting headache.
There's an 18 month mandatory hold between when I buy the shares (at a discount) and when I can sell them, plus the exchange rate is another wild card. Right now the exchange rate is great but the stock price is average. Shares must also be held in a taxable account.
What is the tax rate for a gain of under $10K?
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Thanks for the offer. I live in Ontario and own two CCPC companies (Opco and Holdco). All the retained earnings are flowed up to the parent - Holdco. I invest quite a lot in GICs for the business funds and want to take advantage of a special interest rate being offered by a bank that I already have a GIC at (this would put me over the CDIC coverage).
So, question is, are there any tax issues arising from moving money back from Holdco to Opco and having Opco hold the 5 year GIC ? (in order to increase the CDIC coverage)
I understand the liability issue of Opco holding the GIC.
I also understand (I think) that the loan from Holdco to Opco to purchase the GIC would be considered secured debt in the case of Opco going belly up for some reason.
Cheers.
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Hi CPA,
I have a question on behalf of my wife: her small Toronto-based not-for-profit company sometimes receives donations in US dollars. They convert them to Canadian dollars then later pay some of their contractors in US dollars. I told them that they're wasting 3% (1.5% each way) on conversion costs and that they should open a US dollar account with a Canadian bank. But they won't do it because they're worried the IRS can tax them if they hold $US. I say no way the IRS can come after them just for holding US dollars. Who's right?
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CPA CB, thanks for joining the forum and offering this. I would like to share my scenario and see if you have any critiques of my plan from a tax perspective.
Current income: me ~$95,000, wife ~$60,000. My wife just graduated from uni and started this job so she will earn about ~$40,000 this year. We live in AB and no kids and won't be having any for at least 5 years, barring surprises. Cheers for finally getting to a DINK situation! We both have DB pension jobs with similar lucrative pensions and expected retirement pension income. I don't anticipate large future raises for myself. My income should be pretty stable in the $95 - $100 range for the foreseeable future, adjusted 3% annually for inflation.
RRSP room: me $51,000, wife $24,000. Not including this years contributions/accumulation. I received a pension lump sum payment this year due to a career change and received $18,000 excess portion that comes off my RRSP room so I guess I really have $33,000. I accumulate about $8,500 per year in new room after my PA. My wife will accumulate somewhat less than that, I'm guessing ~$6,000 per year after PA.
TFSA room: me $37,000 , wife $25,500. Not including this years contributions/accumulation.
Due to my current higher income, my wife getting substantial raises until she tops out at about $85000, my wife being 3 years younger than I am, and my wife having significant unused tuition credits (Fed $16k AB $32k), I decided to focus on my side of the equation first.
This year I will be contributing $25,000 to my RRSP (above the pension transfer) and at least $11,000 to my TFSA. Next year I plan on contributing about $16,000 to my RRSP and should be "caught up" on my excess RRSP room and will try to contribute at least $20,000 to my TFSA. From that point on, I will be contributing as much to my RRSP and TFSA as I can going forward.
As for my wife, I will contribute $5,000 to her TFSA this year and I will try contribute at least $20,000 to her TFSA next year. From that point on her tuition credits will be used up and I will top up her RRSP to max it out kind of evenly over a two year period (like I am doing) and will max out her TFSA every year.
In the future, we will invest "extra" savings in a taxable account in Canadian dividend growth stocks split evenly between my wife and I, or if King Harper comes through for us and doubles the annual TFSA contribution limit I would invest in that first.
I have a rough 15 year goal to have a paid off mortgage (projected 12.5 years with current payments & interest rate) and be completely FI. At that point, depending on the career and kid situation, we would likely sell our house and move back to our home province of BC where both our parents live. We would maybe start a small business to keep busy and help pay some bills. Due to their lifestyle, I fully anticipate helping our parents out financially and physically to some extent in their old age. We live quite frugally and our monthly living expenses are about $3000 - $3500 including the mortgage.
Sorry for the long post. I know we are doing quite well from a savings perspective, but am I missing anything from a current tax or future tax view?
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So, if earning in the $60-70K range, how much should I invest in RRSP's to reduce paying income tax? Someone had told me that for every $1000 put into an RRSP I would get a $300 credit, but they didn't know if it was different in each tax bracket, which I would think it would be.
Which province are you in? It will make a bit of difference.
I am in Nova Scotia.
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Awesome.
I have a lot of retained earnings in my law corporation. After some research I determined it was best invested in business expansion, subsequent sale of shares (for capital gains exemption), and then a mixed use building with 60% of the floor space used for active business operations (for capital gains exemption).
What do you think?
-
So, if earning in the $60-70K range, how much should I invest in RRSP's to reduce paying income tax? Someone had told me that for every $1000 put into an RRSP I would get a $300 credit, but they didn't know if it was different in each tax bracket, which I would think it would be.
I am in Nova Scotia.
I don't intend to mislead you or steal CPA CB's thunder, but I would say that you could invest the full 18% of your gross income if your expenses are low enough. It still won't get you down to the $43953 income level where you get the big jump. NS does have a tax bracket at $59180, but it jumps only ~1.75% there so not a big difference. You should also try and figure out what your current and expected RE expenses will be. If your annual spending is between $43953 and $59180, you may just want to invest a smaller amount in your RRSP and top your TFSA instead. Play around with some scenarios on this: http://www.taxtips.ca/calculators/canadian-tax/canadian-tax-calculator.htm . You will be able to see exactly how much RRSP contributions will benefit you and how much your RRSP credit will be including %.
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To answer your question - calculating taxes payable is a multi-step procedure.
Thanks very much. You have fully confirmed for me that this particular ESPP has a very high PITA factor and several levels of risk. Once I liquidate my remaining shares, I'm pretty sure I won't participate again. I simply can't afford to buy enough of this stock to make it worth the accounting headache.
There's an 18 month mandatory hold between when I buy the shares (at a discount) and when I can sell them, plus the exchange rate is another wild card. Right now the exchange rate is great but the stock price is average. Shares must also be held in a taxable account.
What is the tax rate for a gain of under $10K?
Hi there -
The tax rate for a capital gain of $10,000 is your marginal tax rate divided by 2. So if you pay 30% - the rate is 15%. Just remember in your case a portion will be a taxable benefit at the 30% and the remainder at 15%.
You can find your marginal rates by looking at Canada Revenue Agency's website - they break down rates by income bracket for federal, provincial and combined.
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Thanks for the offer. I live in Ontario and own two CCPC companies (Opco and Holdco). All the retained earnings are flowed up to the parent - Holdco. I invest quite a lot in GICs for the business funds and want to take advantage of a special interest rate being offered by a bank that I already have a GIC at (this would put me over the CDIC coverage).
So, question is, are there any tax issues arising from moving money back from Holdco to Opco and having Opco hold the 5 year GIC ? (in order to increase the CDIC coverage)
I understand the liability issue of Opco holding the GIC.
I also understand (I think) that the loan from Holdco to Opco to purchase the GIC would be considered secured debt in the case of Opco going belly up for some reason.
Cheers.
Great question
It is possible to transfer funds back to the Opco as a related party transaction with no tax consequences.
That being said - are you so concerned with the CDIC to warrant the risk of holding the GIC's in your operating company? Generally the purpose of a Holdco is to limit your liability in the Opco without triggering a tax liability, so as to avoid the potential of losing the asset in the case of bankruptcy, lawsuits, etc.
This isn't necessarily a secured loan, you would have to draft up paperwork to secure the value of the loan against the investment asset.
Frankly, it sounds like a headache when compared to the relative low risk of losing funds through CDIC, especially considering these are GIC's which already bear the lowest risk.
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Hi CPA,
I have a question on behalf of my wife: her small Toronto-based not-for-profit company sometimes receives donations in US dollars. They convert them to Canadian dollars then later pay some of their contractors in US dollars. I told them that they're wasting 3% (1.5% each way) on conversion costs and that they should open a US dollar account with a Canadian bank. But they won't do it because they're worried the IRS can tax them if they hold $US. I say no way the IRS can come after them just for holding US dollars. Who's right?
You're correct! Holding US Dollars in a Canadian Bank Account has no implications with the IRS.
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CPA CB, thanks for joining the forum and offering this. I would like to share my scenario and see if you have any critiques of my plan from a tax perspective.
Current income: me ~$95,000, wife ~$60,000. My wife just graduated from uni and started this job so she will earn about ~$40,000 this year. We live in AB and no kids and won't be having any for at least 5 years, barring surprises. Cheers for finally getting to a DINK situation! We both have DB pension jobs with similar lucrative pensions and expected retirement pension income. I don't anticipate large future raises for myself. My income should be pretty stable in the $95 - $100 range for the foreseeable future, adjusted 3% annually for inflation.
RRSP room: me $51,000, wife $24,000. Not including this years contributions/accumulation. I received a pension lump sum payment this year due to a career change and received $18,000 excess portion that comes off my RRSP room so I guess I really have $33,000. I accumulate about $8,500 per year in new room after my PA. My wife will accumulate somewhat less than that, I'm guessing ~$6,000 per year after PA.
TFSA room: me $37,000 , wife $25,500. Not including this years contributions/accumulation.
Due to my current higher income, my wife getting substantial raises until she tops out at about $85000, my wife being 3 years younger than I am, and my wife having significant unused tuition credits (Fed $16k AB $32k), I decided to focus on my side of the equation first.
This year I will be contributing $25,000 to my RRSP (above the pension transfer) and at least $11,000 to my TFSA. Next year I plan on contributing about $16,000 to my RRSP and should be "caught up" on my excess RRSP room and will try to contribute at least $20,000 to my TFSA. From that point on, I will be contributing as much to my RRSP and TFSA as I can going forward.
As for my wife, I will contribute $5,000 to her TFSA this year and I will try contribute at least $20,000 to her TFSA next year. From that point on her tuition credits will be used up and I will top up her RRSP to max it out kind of evenly over a two year period (like I am doing) and will max out her TFSA every year.
In the future, we will invest "extra" savings in a taxable account in Canadian dividend growth stocks split evenly between my wife and I, or if King Harper comes through for us and doubles the annual TFSA contribution limit I would invest in that first.
I have a rough 15 year goal to have a paid off mortgage (projected 12.5 years with current payments & interest rate) and be completely FI. At that point, depending on the career and kid situation, we would likely sell our house and move back to our home province of BC where both our parents live. We would maybe start a small business to keep busy and help pay some bills. Due to their lifestyle, I fully anticipate helping our parents out financially and physically to some extent in their old age. We live quite frugally and our monthly living expenses are about $3000 - $3500 including the mortgage.
Sorry for the long post. I know we are doing quite well from a savings perspective, but am I missing anything from a current tax or future tax view?
Congratulations! It sounds like you're both on your way to FIRE soon.
With regards to your question, there are two major things I want to point out.
1) Your wife's tuition credits are available to you as well. You can transfer up to $5,000 of credits per year from her, so long as she is claiming $5,000 as well. Ultimately, you can use up these faster by taking advantage of this sooner rather than later.
2) As far as TFSA and RRSP strategy from a dollar value is concerned, it really depends on how you plan to invest the money, rather than the quantum of the investment.
TFSA's offer an excellent investment opportunity for any future capital gains. This means if you're looking to purchase stocks and ETF's - you want to pour capital into the TFSA first, and RRSP second. The reason being that the capital gains are sheltered in a TFSA (as withdrawals are tax free), whereas you will pay 2 times more than necessary on capital gains in an RRSP, by virtue that it is treated strictly as 'income'.
If you're looking for fixed income investments - then RRSP's are a better option as you can take advantage of the tax credit, and suffer no adverse consequences.
When you go to set up your small business in the future, I would recommend listing your parents as preferred shareholders. This will give you the ability to distribute funds to them on a pre-tax basis via dividend (without giving up control of the corporation), and people with no income can receive around $20-$30k tax free in dividends per annum.
Hope this helps!
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Awesome.
I have a lot of retained earnings in my law corporation. After some research I determined it was best invested in business expansion, subsequent sale of shares (for capital gains exemption), and then a mixed use building with 60% of the floor space used for active business operations (for capital gains exemption).
What do you think?
Hi Tortoro
Can you be more specific with regards to this capital gains exemption? Are you talking about the qualified small business corporation exemption (QSBCD)?
If this is the case, my first question is: Are you looking to divest of your practice in the next two years? If not, then worrying about QSBCD should be the furthest thing from your mind.
There are some options available that I think would be better suited to you.
Option 1: The practice (Opco) lends the money to a new corporation (LandCo) which purchases the building. Add your children or spouse if applicable as non-controlling shareholders so you can income split. At this point, LandCo can rent the property to Opco, and reduce the liability by the rental value on a monthly basis.
Option 2: This is a bit unconventional but is becoming more popular, especially with professionals. Do you have a Universal Life Insurance policy in your name?
If so, you can elect for the practice to purchase the policy from you at fair market value, and defer the tax gain until the realization of the plan (i.e. death) at which point the proceeds are taxable under the corporation (at a lesser rate).
It's a great way to pull money out of a corporation and defer the tax consequences into the future.
Hope this helps
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1) Your wife's tuition credits are available to you as well. You can transfer up to $5,000 of credits per year from her, so long as she is claiming $5,000 as well. Ultimately, you can use up these faster by taking advantage of this sooner rather than later.
When you go to set up your small business in the future, I would recommend listing your parents as preferred shareholders. This will give you the ability to distribute funds to them on a pre-tax basis via dividend (without giving up control of the corporation), and people with no income can receive around $20-$30k tax free in dividends per annum.
Hope this helps!
Thanks again! On point 1 I wasn't sure how it was going to work; I remember there being a rule about transferring amounts to spouses from previous years. For 2014 I know I can take some of her tuition credits because she was in school from Jan - May. Something to tackle come tax time I guess, but yes I will try claim as much of those as I possibly can due to my higher income.
I really like your suggestion related to the small business shareholder set-up. I know it's a little ways down the road for us yet, but this definitely would be a fantastic way to generate income to help our parents at minimal tax cost. We should have enough money to financially support our own lifestyle at a 3 - 4% withdrawal rate. It does sound a little funny that we would be working for the sole reason of supporting our parents, but a little work keeps us all sane I suppose.
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Let me start off with a BIG thank you, eh?! Awesome thread, and mega appreciation for your starting it.
Question: right now our taxes are pretty straightforward, but in the future they will be more complicated (mo' money, mo' problems). Would you recommend that we learn the ins and outs ourselves (got any resources?) or find a savvy and trustworthy accountant (how? Any tips?)
Thanks!
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Awesome.
I have a lot of retained earnings in my law corporation. After some research I determined it was best invested in business expansion, subsequent sale of shares (for capital gains exemption), and then a mixed use building with 60% of the floor space used for active business operations (for capital gains exemption).
What do you think?
Hi Tortoro
Can you be more specific with regards to this capital gains exemption? Are you talking about the qualified small business corporation exemption (QSBCD)?
If this is the case, my first question is: Are you looking to divest of your practice in the next two years? If not, then worrying about QSBCD should be the furthest thing from your mind.
There are some options available that I think would be better suited to you.
Option 1: The practice (Opco) lends the money to a new corporation (LandCo) which purchases the building. Add your children or spouse if applicable as non-controlling shareholders so you can income split. At this point, LandCo can rent the property to Opco, and reduce the liability by the rental value on a monthly basis.
Option 2: This is a bit unconventional but is becoming more popular, especially with professionals. Do you have a Universal Life Insurance policy in your name?
If so, you can elect for the practice to purchase the policy from you at fair market value, and defer the tax gain until the realization of the plan (i.e. death) at which point the proceeds are taxable under the corporation (at a lesser rate).
It's a great way to pull money out of a corporation and defer the tax consequences into the future.
Hope this helps
Yes to QSBDC. I do plan to sell 60% in 10% increments starting next year.
Yes to option one. That is how I plan to purchase the building.
No to option two. Why not? Not sure, I looked into it and thought "no" at the time but now cannot recollect why. I will review and look get back to you. Maybe I was incorrect.
Let me know if you have a legal question. Happy to provide an answer.
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Great question
It is possible to transfer funds back to the Opco as a related party transaction with no tax consequences.
That being said - are you so concerned with the CDIC to warrant the risk of holding the GIC's in your operating company? Generally the purpose of a Holdco is to limit your liability in the Opco without triggering a tax liability, so as to avoid the potential of losing the asset in the case of bankruptcy, lawsuits, etc.
This isn't necessarily a secured loan, you would have to draft up paperwork to secure the value of the loan against the investment asset.
Frankly, it sounds like a headache when compared to the relative low risk of losing funds through CDIC, especially considering these are GIC's which already bear the lowest risk.
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Thanks very much. Greatly appreciate your input. Yes, the basic question I suppose is (if there are no other tax implications) trading the liability of putting the funds back into the Opco versus the liability of having no CDIC coverage by keeping the funds in the Holdco. Something I will have to mull over.
Cheers.
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Let me start off with a BIG thank you, eh?! Awesome thread, and mega appreciation for your starting it.
Question: right now our taxes are pretty straightforward, but in the future they will be more complicated (mo' money, mo' problems). Would you recommend that we learn the ins and outs ourselves (got any resources?) or find a savvy and trustworthy accountant (how? Any tips?)
Thanks!
Hi LibraryJoy
I'd like to think I'm a savvy and trustworthy accountant!
There are a few things to remember on your quest to learn a bit more
1) There's tax accounting in theory, and tax accounting in practice - generally speaking, these tend to be quite different from one another.
2) The biggest issue with simple tax returns is the preparer. Changing people consistently, or doing it yourself can often lead to inconsistencies - sometimes you take a certain credit, the next year you forget it, etc. The biggest benefit (other than not doing your own taxes) that we offer is consistency, which means that as time goes on you'll have a continuously updated tax return in line with current tax laws.
When you say mo' money mo' problems - can you expand on how you see your situation becoming more complex? Perhaps I can provide some insight, and make it less problems.
Cheers
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Awesome.
I have a lot of retained earnings in my law corporation. After some research I determined it was best invested in business expansion, subsequent sale of shares (for capital gains exemption), and then a mixed use building with 60% of the floor space used for active business operations (for capital gains exemption).
What do you think?
Hi Tortoro
Can you be more specific with regards to this capital gains exemption? Are you talking about the qualified small business corporation exemption (QSBCD)?
If this is the case, my first question is: Are you looking to divest of your practice in the next two years? If not, then worrying about QSBCD should be the furthest thing from your mind.
There are some options available that I think would be better suited to you.
Option 1: The practice (Opco) lends the money to a new corporation (LandCo) which purchases the building. Add your children or spouse if applicable as non-controlling shareholders so you can income split. At this point, LandCo can rent the property to Opco, and reduce the liability by the rental value on a monthly basis.
Option 2: This is a bit unconventional but is becoming more popular, especially with professionals. Do you have a Universal Life Insurance policy in your name?
If so, you can elect for the practice to purchase the policy from you at fair market value, and defer the tax gain until the realization of the plan (i.e. death) at which point the proceeds are taxable under the corporation (at a lesser rate).
It's a great way to pull money out of a corporation and defer the tax consequences into the future.
Hope this helps
Yes to QSBDC. I do plan to sell 60% in 10% increments starting next year.
Yes to option one. That is how I plan to purchase the building.
No to option two. Why not? Not sure, I looked into it and thought "no" at the time but now cannot recollect why. I will review and look get back to you. Maybe I was incorrect.
Let me know if you have a legal question. Happy to provide an answer.
Sure - please do get back to me with regards to point 2.
As far as the QSBCD is concerned, my one comment with your proposed sale is that what you're proposing will make it difficult to be in line with the exemption.
One qualification is that you need to reach the 90 percent FMV asset test at the time of each disposition, each and every time. While this isn't impossible, it will likely lead to a fair bit of juggling within the P.Corp to ensure you continuously meet this threshold.
Do you know what the Paid-Up Capital of your corporation is? Remember to disburse any of this prior to the sale, otherwise you're basically giving away tax-free capital.
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Sure - please do get back to me with regards to point 2.
As far as the QSBCD is concerned, my one comment with your proposed sale is that what you're proposing will make it difficult to be in line with the exemption.
One qualification is that you need to reach the 90 percent FMV asset test at the time of each disposition, each and every time. While this isn't impossible, it will likely lead to a fair bit of juggling within the P.Corp to ensure you continuously meet this threshold.
Do you know what the Paid-Up Capital of your corporation is? Remember to disburse any of this prior to the sale, otherwise you're basically giving away tax-free capital.
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As far as the QSBCB 90% use of assets rule, I have significant retained earnings and each year of business this is added to as I only take out what I need to meet family expenses, which minimizes income tax.
My understand had been that I could take retained earnings and dividend them to another corporation (holdco) to use to purchase a building - potentially without tax consequences. That is something I had planned on taking to my accountant when I was ready to do this, which may be next year or the year after.
Other than the retained assets, my practice is virtual and assets are limited to a minor amount of computer equipment. The largest assets are goodwill/reputation and the existing client base.
As for the universal life, I did look at something like this several years ago and did not do it as I have term insurance that is adequate and my SO had some difficulties with universal life.
I don't really understand the dis/advantages of this strategy well enough but it immediately makes me concerned that this would impact the QSBCB capital gains tax exemption as the business would then have an asset not used in active business income and I do plan to sell if I can.
Once I've sold 40% I'm not sure why my other shareholders would want to buy my universal life insurance policy.
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Let me start off with a BIG thank you, eh?! Awesome thread, and mega appreciation for your starting it.
Question: right now our taxes are pretty straightforward, but in the future they will be more complicated (mo' money, mo' problems). Would you recommend that we learn the ins and outs ourselves (got any resources?) or find a savvy and trustworthy accountant (how? Any tips?)
Thanks!
Hi LibraryJoy
I'd like to think I'm a savvy and trustworthy accountant!
There are a few things to remember on your quest to learn a bit more
1) There's tax accounting in theory, and tax accounting in practice - generally speaking, these tend to be quite different from one another.
2) The biggest issue with simple tax returns is the preparer. Changing people consistently, or doing it yourself can often lead to inconsistencies - sometimes you take a certain credit, the next year you forget it, etc. The biggest benefit (other than not doing your own taxes) that we offer is consistency, which means that as time goes on you'll have a continuously updated tax return in line with current tax laws.
When you say mo' money mo' problems - can you expand on how you see your situation becoming more complex? Perhaps I can provide some insight, and make it less problems.
Cheers
Right now I make around 30k a year and my husband makes 60k. In the future, we will probably make 60k and 200k... Which I think makes taxes a little more complicated :) He's a doctor and will probably be incorporated (?) but apart from that I feel like we will need either expert advice or expert research to avoid paying crazy taxes.
I know we will also be doing the spousal RRSP thing. Aside from that, I'm clueless.
Good tip on having taxes done the same way continuously. I feel like it's very mustachian to do one's own taxes, but I don't want to be missing out on things due to ignorance.
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Sure - please do get back to me with regards to point 2.
As far as the QSBCD is concerned, my one comment with your proposed sale is that what you're proposing will make it difficult to be in line with the exemption.
One qualification is that you need to reach the 90 percent FMV asset test at the time of each disposition, each and every time. While this isn't impossible, it will likely lead to a fair bit of juggling within the P.Corp to ensure you continuously meet this threshold.
Do you know what the Paid-Up Capital of your corporation is? Remember to disburse any of this prior to the sale, otherwise you're basically giving away tax-free capital.
As far as the QSBCB 90% use of assets rule, I have significant retained earnings and each year of business this is added to as I only take out what I need to meet family expenses, which minimizes income tax.
My understand had been that I could take retained earnings and dividend them to another corporation (holdco) to use to purchase a building - potentially without tax consequences. That is something I had planned on taking to my accountant when I was ready to do this, which may be next year or the year after.
Other than the retained assets, my practice is virtual and assets are limited to a minor amount of computer equipment. The largest assets are goodwill/reputation and the existing client base.
As for the universal life, I did look at something like this several years ago and did not do it as I have term insurance that is adequate and my SO had some difficulties with universal life.
I don't really understand the dis/advantages of this strategy well enough but it immediately makes me concerned that this would impact the QSBCB capital gains tax exemption as the business would then have an asset not used in active business income and I do plan to sell if I can.
Once I've sold 40% I'm not sure why my other shareholders would want to buy my universal life insurance policy.
[/quote]
You're correct about The Universal Life - generally not worthwhile unless you already have it, as you're looking to sell in the near future. Just a consideration.
The 90% test means that virtually all of the cash (retained earnings) will need to get out of the company as quickly as possible. There is also a 50% requirement in the two years prior to selling, and it sounds like you're sitting on cash/liquidity which will push you under the threshold.
When it comes to dividends to a HoldCo- if you're operating a law practice as a professional corporation there is a very high probability that you can't do this. This is regulated provincially, but generally shareholders of professional corporations are limited to the professional(s), their family(ies) or another professional corporation...
If you find you can dividend up to a HoldCo - but remember that connected corporations (such as this) are subject to Part IV tax. This means that the Holdco will pay tax on this dividend, but it will also generate something called the Refundable Dividend Tax On Hand (RDTOH) which you can access when you dividend funds from the Holdco to yourself in the future.
A simpler route is setting up a LandCo and lending the money which won't have tax consequences.
Otherwise it sounds like you'll meet the tests for the capital gains exemption once you eliminate the cash from the P.Corp and wait for the 24 month period. Remember it's 50% over 2 years, and 90% at time of sale. However if you're going to piece it out, then you'll need to be distributing your retained earnings frequently throughout the entire 6 year period.
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Let me start off with a BIG thank you, eh?! Awesome thread, and mega appreciation for your starting it.
Question: right now our taxes are pretty straightforward, but in the future they will be more complicated (mo' money, mo' problems). Would you recommend that we learn the ins and outs ourselves (got any resources?) or find a savvy and trustworthy accountant (how? Any tips?)
Thanks!
Hi LibraryJoy
I'd like to think I'm a savvy and trustworthy accountant!
There are a few things to remember on your quest to learn a bit more
1) There's tax accounting in theory, and tax accounting in practice - generally speaking, these tend to be quite different from one another.
2) The biggest issue with simple tax returns is the preparer. Changing people consistently, or doing it yourself can often lead to inconsistencies - sometimes you take a certain credit, the next year you forget it, etc. The biggest benefit (other than not doing your own taxes) that we offer is consistency, which means that as time goes on you'll have a continuously updated tax return in line with current tax laws.
When you say mo' money mo' problems - can you expand on how you see your situation becoming more complex? Perhaps I can provide some insight, and make it less problems.
Cheers
Right now I make around 30k a year and my husband makes 60k. In the future, we will probably make 60k and 200k... Which I think makes taxes a little more complicated :) He's a doctor and will probably be incorporated (?) but apart from that I feel like we will need either expert advice or expert research to avoid paying crazy taxes.
I know we will also be doing the spousal RRSP thing. Aside from that, I'm clueless.
Good tip on having taxes done the same way continuously. I feel like it's very mustachian to do one's own taxes, but I don't want to be missing out on things due to ignorance.
Absolutely - your husband wants a Professional Corporation. This gives tax deferral and income splitting opportunities well beyond what he would otherwise be operating as (sole-proprietor). He would be crazy not to incorporate his practice!
I agree and disagree with the statement about your own taxes - if you can do it, it's a simple return, and do it well, then of course having an understanding of the Canadian tax system and filing your return is definitely Mustachian. That being said, I've yet to find a return that has been self prepared (or by another 'tax preparation' provider) that doesn't have at least medium sized errors, and typically speaking I find they are major.
However - your situation will become unique, and there are alternative tax deferral mechanisms available to business owners and professionals. This means recognizing opportunities when they aren't obvious, which is really a matter of experience vs. 'specific' knowledge. I would recommend that with whichever Accountant you choose, you want to make a point of understanding the structure of the business, how the shareholder structure works, and how it impacts your overall tax liability. Any good professional should be able to explain how these are inter-related based on your specific circumstances, as it will help you as the client to self-identify future opportunities to save money.
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When it comes to dividends to a HoldCo- if you're operating a law practice as a professional corporation there is a very high probability that you can't do this. This is regulated provincially, but generally shareholders of professional corporations are limited to the professional(s), their family(ies) or another professional corporation...
If you find you can dividend up to a HoldCo - but remember that connected corporations (such as this) are subject to Part IV tax. This means that the Holdco will pay tax on this dividend, but it will also generate something called the Refundable Dividend Tax On Hand (RDTOH) which you can access when you dividend funds from the Holdco to yourself in the future.
A simpler route is setting up a LandCo and lending the money which won't have tax consequences.
Wouldn't lending the money create an investment of the funds that might affect the capital gains exemption?
You are correct that only lawyers can hold voting shares in a law corporation.
I would be creating a second corporation to hold the dividends in which I am a shareholder in conjunction with a family trust. It is my understanding that the BC Law Society allows lawyers to own shares in a holding company, which in turn holds shares in the Professional Corporation.
B. Law Corporation
The distinguishing features of a law corporation are set out in s.82 of the Legal Profession Act:
....
(c) each voting share is legally and beneficially owned by a practising lawyer or by a
law corporation,
(d) each non-voting share is legally and beneficially owned by
(i) a practising lawyer,
(ii) a law corporation that is a voting shareholder,
(iii) a person who is a relative of or resides with a practising lawyer who is a
shareholder or who is a shareholder in a law corporation that is a
shareholder,
(iv) a corporation, all the shares of which are beneficially owned by one or
more of the individuals referred to in subparagraph (i) or (iii), or
(v) a trust, all the beneficiaries of which are individuals referred to in
subparagraph (i) or (iii),
(e) all of the directors and the president of the corporation are practising lawyers,
and
(f) all of the persons who will be practising law on behalf of the corporation are
persons described in section 81 (1).
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When it comes to dividends to a HoldCo- if you're operating a law practice as a professional corporation there is a very high probability that you can't do this. This is regulated provincially, but generally shareholders of professional corporations are limited to the professional(s), their family(ies) or another professional corporation...
If you find you can dividend up to a HoldCo - but remember that connected corporations (such as this) are subject to Part IV tax. This means that the Holdco will pay tax on this dividend, but it will also generate something called the Refundable Dividend Tax On Hand (RDTOH) which you can access when you dividend funds from the Holdco to yourself in the future.
A simpler route is setting up a LandCo and lending the money which won't have tax consequences.
Wouldn't lending the money create an investment of the funds that might affect the capital gains exemption?
You are correct that only lawyers can hold voting shares in a law corporation.
I would be creating a second corporation to hold the dividends in which I am a shareholder in conjunction with a family trust. It is my understanding that the BC Law Society allows lawyers to own shares in a holding company, which in turn holds shares in the Professional Corporation.
B. Law Corporation
The distinguishing features of a law corporation are set out in s.82 of the Legal Profession Act:
....
(c) each voting share is legally and beneficially owned by a practising lawyer or by a
law corporation,
(d) each non-voting share is legally and beneficially owned by
(i) a practising lawyer,
(ii) a law corporation that is a voting shareholder,
(iii) a person who is a relative of or resides with a practising lawyer who is a
shareholder or who is a shareholder in a law corporation that is a
shareholder,
(iv) a corporation, all the shares of which are beneficially owned by one or
more of the individuals referred to in subparagraph (i) or (iii), or
(v) a trust, all the beneficiaries of which are individuals referred to in
subparagraph (i) or (iii),
(e) all of the directors and the president of the corporation are practising lawyers,
and
(f) all of the persons who will be practising law on behalf of the corporation are
persons described in section 81 (1).
Hi Totoro,
So this is really a fascinating application here - I'm going to throw a bit of a cog in the wheel here and make a suggestion. I can see the big picture at this point.
There are two issues with the current idea -
1) You're giving away control of 'your' corporation, without protecting your assets
2) A corporation or trust can ONLY be Non-Voting shareholders (i.e. no control). Only another law corporation can hold voting shares.
My recommendation is that you 'crystallize' your capital gains in P.Corp by performing a Section 86 rollover into a New P.Corp ("HoldCo"). When you incorporate HoldCo - you can set up your family/kids with the trust of non-voting shares, and also as preferred shareholders should you choose to do so.
Pay yourself consideration, which you can dump into HoldCo if you choose. The good part here, the purification issue on capital gains is gone if you pay yourself enough consideration for the shares ("boot"), and at this point you trigger the QSBCD by tax deferring into HoldCo. This writes up the value of the shares to their CURRENT value, so when you go to sell the shares of P.Corp to new partners (sold by Holdco) a large component of the capital gain has already been shielded through a higher adjusted cost base.
This allows you to:
1) Dump funds into Holdco for the benefit of purchasing an office
2) Maintain 100% control of said property
3) Maintain control of the operations of P.Corp through Holdco - but also control 100% of funds sent through Holdco to you. This means you maintain better control of the assets of the corporation, and can divest your partnership share and still maintain beneficial tax treatments on a go-forward basis (estate planning etc.)
It's a bit more complex than what you were expecting - but as long as Holdco is a P.Corp then it is onside (so long as the trust is a non-voting shareholder).
If you have any questions shoot me a message and I can walk you through it in better detail as it would take a lot more writing (which people won't want to read) to go through it.
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Yes, we should talk. I will need some professional help. I do have a good accountant but if you have experience I'd be willing to talk about this with you. Wouldn't expect free advice for a complicated transaction.
I believe that your advice below is what had initially been recommended by the accountant.
"My recommendation is that you 'crystallize' your capital gains in P.Corp by performing a Section 86 rollover into a New P.Corp ("HoldCo"). When you incorporate HoldCo - you can set up your family/kids with the trust of non-voting shares, and also as preferred shareholders should you choose to do so."
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First, a big thank you for this thread and the offer to give advice.
We are looking at downsizing, and I am wondering about "income splitting" opportunities from the freed-up capital (my income is much higher than my wife's). We are both listed on the title; depending on how far we downsize, we may free up about $100-150K of equity after all costs. Mortgage remaining is about $70K.
My RRSP is maxed due to pension contributions; she doesn't earn enough part-time to get reduced taxes contributing to hers. TFSAs are nearly maxed. I'm assuming the new money would have to be put in non-registered investments, which we have not had yet. So a possibly very simple question: would the downsizing money be considered split evenly between us, or can the investments be fully in her name so income from them is taxed in her name? Are there other solutions we should be looking at? And I'm wondering in all this if we are better off keeping the mortgage rather than paying it off, if it means getting more invested in her name.
Thanks for any comments.
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First, a big thank you for this thread and the offer to give advice.
We are looking at downsizing, and I am wondering about "income splitting" opportunities from the freed-up capital (my income is much higher than my wife's). We are both listed on the title; depending on how far we downsize, we may free up about $100-150K of equity after all costs. Mortgage remaining is about $70K.
My RRSP is maxed due to pension contributions; she doesn't earn enough part-time to get reduced taxes contributing to hers. TFSAs are nearly maxed. I'm assuming the new money would have to be put in non-registered investments, which we have not had yet. So a possibly very simple question: would the downsizing money be considered split evenly between us, or can the investments be fully in her name so income from them is taxed in her name? Are there other solutions we should be looking at? And I'm wondering in all this if we are better off keeping the mortgage rather than paying it off, if it means getting more invested in her name.
Thanks for any comments.
Hi,
Is this a home that was purchased when you were together?
You won't be able to put all of the funds to her name, as it falls under the 'attribution' rules that CRA has to avoid income splitting in this manner. That being said - attribution rules are more heavily applied in the case of business owners in practicality, so you may want to put a bit more in your wife's name, depending on your risk tolerance with the tax man.
There are some other opportunities, depending on the age of your children (if you have any) and the nature of your employment - I'd need a bit more detail here to see if the cost would be worthwhile long-term.
Make sure with your non-registered investments that you chase capital gains , rather than fixed income GIC's or even dividends from a tax perspective. Chase the dividends and fixed income in your RRSP. Use non-reg and TFSA for capital gains.
Make sure you deduct any costs associated with investments - fees, accounting costs, interest expenses. Many people miss this.
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Hi,
Is this a home that was purchased when you were together?
Yes.
There are some other opportunities, depending on the age of your children (if you have any) and the nature of your employment - I'd need a bit more detail here to see if the cost would be worthwhile long-term.
Two dependent children away at university. We are in early 50s. I'm a salaried hospital employee. I could have the potential for doing some consulting work on the side, but it would be fairly complex (most options would be several hours away in the U.S.) and I wouldn't have enough time to generate much income from it. However, we could "retire" in a couple of years with me doing consulting work for the most part after that.
Make sure with your non-registered investments that you chase capital gains , rather than fixed income GIC's or even dividends from a tax perspective. Chase the dividends and fixed income in your RRSP. Use non-reg and TFSA for capital gains.
I thought dividend income had very little tax up to a certain income, hence for her non-reg I thought dividends could also be a good choice, particularly if we are looking to early retire and delay taking pensions as long as possible.
Make sure you deduct any costs associated with investments - fees, accounting costs, interest expenses. Many people miss this.
Yes, I have been missing this. Thanks!
-
Hi,
Is this a home that was purchased when you were together?
Yes.
There are some other opportunities, depending on the age of your children (if you have any) and the nature of your employment - I'd need a bit more detail here to see if the cost would be worthwhile long-term.
Two dependent children away at university. We are in early 50s. I'm a salaried hospital employee. I could have the potential for doing some consulting work on the side, but it would be fairly complex (most options would be several hours away in the U.S.) and I wouldn't have enough time to generate much income from it. However, we could "retire" in a couple of years with me doing consulting work for the most part after that.
Make sure with your non-registered investments that you chase capital gains , rather than fixed income GIC's or even dividends from a tax perspective. Chase the dividends and fixed income in your RRSP. Use non-reg and TFSA for capital gains.
I thought dividend income had very little tax up to a certain income, hence for her non-reg I thought dividends could also be a good choice, particularly if we are looking to early retire and delay taking pensions as long as possible.
Make sure you deduct any costs associated with investments - fees, accounting costs, interest expenses. Many people miss this.
Yes, I have been missing this. Thanks!
Alright this is great -
So for future planning purposes, the consulting work is an excellent vehicle for future tax deferral. Incorporate the company, and name your wife in a separate shareholder class. This will allow you to income split in the future. In fact, I would go so far as to name your children as preferred shareholders (non-voting) as well, so if there is any need to give them money this can be done through a dividend (pre-tax dollars).
If you were able to do this 'now' and generate income on the side - this could be a vehicle to help your kids pay for University (assuming you're paying since you said dependent) rather than pay in your after tax dollars.
Dividends have little to no tax impact, if the individual is not earning money, or earning very little. Assuming you make nothing, you can receive around $25k without a tax impact in eligible dividends.
Dividends are fine in a non-reg account, but just from a taxation standpoint you're better to make 5% in capital gains vs. 5% in dividends. Just don't shelter cap gains in the RRSP, and don't shelter dividends in a TFSA is a very important part tax-wise.
Remember to elect your principal residence when you sell the house to ensure you aren't hit with the tax bill.
If you want to get really savvy with the new house purchase - pay for it out-right, and take a line of credit out for the 70k balance and invest ALL of it. This means you can deduct the mortgage interest incurred against your investment income.
Good luck!
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Good luck!
Thanks, and thanks again for all your advice. Lots to think about!
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Thanks so much for answering these questions. I have a real estate investment tax question.
Two years ago, we converted our townhouse, which was our principal residence at the time, into an investment property and I want to make sure we handled it properly. We did this because we moved to a new house. We took some equity from the townhouse for the 20% downpayment on the new property, and it was our understanding that we could not deduct the interest on this portion on our income taxes. So this is how we handled it on our income taxes:
- The Mortgage on townhouse before we moved to our new house was $185,000. This was on a variable LOC mortgage.
- We borrowed an additional $83,000 for the downpayment on the new house, bringing the mortgage LOC up to $268,000.
- Our mortgage allows you to create sub accounts so that you can track different different debts at various rates, amortizations etc. and allows you to label each account. We immediately separated the two into sub accounts. We labeled the $185,000 "mortgage on rental property (with the address)" and the $83,000 as "downpayment on principal residence".
- The rent is used to pay both mortgages, but when we do our taxes, we have only been deducting the interest that is on the $185,000 sub account.
- We just replaced the furnace and also borrowed from the property to do so, we opened a third sub account for the furnace and labeled it furnace for rental property. We plan to deduct the interest on this portion as well.
Have we been reporting this properly?
Also, we would like to pay off the non-deductible $83,000 as soon as possible, because we can’t deduct it. Is there any tax reason we can’t do this? For example, would we be told we also had to pay the tax deductible portion down as well? I ask because a friend of mine owned a duplex and lived in one side – his single mortgage was for both units and he could only deduct half the mortgage interest, but if he paid down extra, he was told half had to go towards the tax deductible portion, and half to the non-deductible portion, however, his was one mortgage, so he couldn't really differentiate which part of his property it was applied to where as mine is clearly separated.
Thanks so much for the advice.
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In addition to my question in the above post, I wanted to ask whether we should be depreciating our rental properties on our income tax? So far we haven't, instead we've used our RRSP contributions to cancel out any tax we'd owe which kind of sucks because then we don't get any money back. We're just afraid that if we depreciate them we'll owe a lot of money when we sell, although the Canadian housing market is pretty high, so maybe that's not an issue. Do you usually advise depreciating or just paying the taxes? And how does one figure out what the value of the house is without the land?
Also, what are the tax implications of holding US equities in a TFSA? I know an RRSP is better and right now that's where our US stocks are, but we have little contribution room in our RRSP and lots in our TFSA. Would we only be taxed on dividends in the TFSA, or capital gains too?
Thanks in advance for the advice. :)
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In addition to my question in the above post, I wanted to ask whether we should be depreciating our rental properties on our income tax? So far we haven't, instead we've used our RRSP contributions to cancel out any tax we'd owe which kind of sucks because then we don't get any money back. We're just afraid that if we depreciate them we'll owe a lot of money when we sell, although the Canadian housing market is pretty high, so maybe that's not an issue. Do you usually advise depreciating or just paying the taxes? And how does one figure out what the value of the house is without the land?
Also, what are the tax implications of holding US equities in a TFSA? I know an RRSP is better and right now that's where our US stocks are, but we have little contribution room in our RRSP and lots in our TFSA. Would we only be taxed on dividends in the TFSA, or capital gains too?
Thanks in advance for the advice. :)
Hi C-Kat
Sorry for not replying sooner.
For the rental property - you are correct in assuming that the interest on the $185,000 IS deductible on your rental return, and therefore you should continue to do so.
The additional mortgage payment regarding the furnace is also deductible from an interest perspective.
As far as the furnace is concerned, one can make an argument whether to capitalize and amortize this as an asset, or to expense in the year it is installed. This is a judgment call - if it is a SUBSTANTIAL improvement in efficiency over the previous furnace, then you can lean towards capitalizing - if not, then better to expense. Ultimately you can lean to either side, but if you're looking to save taxes this year then I would expense it.
There are no implications as to which account to pay first. You should pay your mortgage first as it is non-deductible, and pay the other components thereafter.
Depreciation - this is a tricky question which is better discussed from an overall perspective.
It seems that you're familiar with the principal residence exemption for properties, and the rental property is no exception. You can elect this as your principal residence for the years inhabited, plus one year. This means that if you owned the property for ten years, and lived in it for two - 30% of the capital gain is covered by principal residence (2+1 years).
That being said - depreciating the property will lead to limited savings in taxes now (depreciation can't trigger a loss on rental income) but will lead to an increased tax bill when you go to sell the property. Considering you're depreciating at your purchase price, but selling on fair market value in the future, this can work against you if the value increases significantly.
For example - the purchase price is $200,000 - you depreciate $20,000 over time, or 10% of the house. This will save, for arguments sake, $6,000 in tax.
The biggest variables to consider is how much you will depreciate (as a % of the house), how long you will hold the house outside of principal residence, and your expected gain on sale. For any amount depreciated today, this % will be added back to the sale at full tax (called recapture), versus a capital gain which is only 50% taxable.
I generally advise clients to avoid depreciating rental properties. The upside is known in terms of tax savings, but the potential downsides are significant and unknown. With a high capital appreciation in value, you could end up paying 3 to 4 times more in tax than what was saved. It becomes a much safer bet as time progresses and real estate prices increase.
Hope this clarifies all of your questions
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In addition to my question in the above post, I wanted to ask whether we should be depreciating our rental properties on our income tax? So far we haven't, instead we've used our RRSP contributions to cancel out any tax we'd owe which kind of sucks because then we don't get any money back. We're just afraid that if we depreciate them we'll owe a lot of money when we sell, although the Canadian housing market is pretty high, so maybe that's not an issue. Do you usually advise depreciating or just paying the taxes? And how does one figure out what the value of the house is without the land?
Also, what are the tax implications of holding US equities in a TFSA? I know an RRSP is better and right now that's where our US stocks are, but we have little contribution room in our RRSP and lots in our TFSA. Would we only be taxed on dividends in the TFSA, or capital gains too?
Thanks in advance for the advice. :)
RRSP vs. TFSA
Forgot to respond to this -
No tax implications of holding US equity in a TFSA. Holding US equities in a US located (i.e. Bank of America, for example) would make it subject to withholding taxes, however as it is Canadian held you skip this.
RRSP Contributions are taxed FULLY upon withdrawal, which is why holding equities in RRSP's is not a tax efficient strategy (as capital gains are taxable at 50%, but you'll get taxed at 100% on withdrawal).
As far as TFSA is concerned, remember that the funds you place into this account is after-tax. Therefore, the funds you withdraw from this investment vehicle, regardless of source, are also not taxable, nor is any of the gains/dividends etc. earned yearly.
In short - RRSP is taxed on withdrawal. Any income or gains in a TFSA are not taxable.
Also - for a small real estate property the land and building aren't really severable in value, as the assessment to determine the relative allocations would likely exceed any benefit to CRA (since this expense would be deductible). Once you FIRE and become a real estate magnate, this is a different story...
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Mine is a very basic question about the benefits of filing tax returns as a common law couple. And I'm a bit embarrassed of my ignorance on the matter. I've been under the impression from those uneducated in the world of taxes that filing as couple will have a negative impact on the amount refunded. This can't possibly be true, can it?
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Mine is a very basic question about the benefits of filing tax returns as a common law couple. And I'm a bit embarrassed of my ignorance on the matter. I've been under the impression from those uneducated in the world of taxes that filing as couple will have a negative impact on the amount refunded. This can't possibly be true, can it?
Hi NatCat -
You'd be surprised, this is actually a somewhat common question and misconception.
The question really hinges on your view of your relationship. Do you view your financial picture as a whole (i.e. as a family unit) or as an independent group (i.e. you address your finances, yourself).
If you are just focusing on yourself, and not your partner and relationship, you may end up receiving a better tax 'bill' personally. However, this comes at the expense of your SO. From a holistic standpoint, you're better to file jointly (it never ever works against the joint filer) than separately.
You and your SO will do better or equal by filing (overall) than filing separately from a dollars perspective, every time. However, if you're worried the SO is going to go and buy a pool table with a refund, well, you're on your own with that one.
Hope this helps!
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If I sell an asset in a foreign currency (house, stocks) I pay cap gain on the difference between sale price and purchase price converted to CAD on the day of the transaction.
If I convert the foreign money to CAD on a different day, or over several days, how exactly do I report the exchange gain or loss?
How do I get credit for any difference in exchange rate in real life vs the BoC's posted rate (ie with a forex company there is going to be some drag, 0.5-1%, which on large transfers is not nothing!).
Also - I'm doing odd small online bits of... 'freelance microwork' or whatever, and getting paid either in gift cards or to paypal. I know I havento report this to the CRA, but I don't have to talk to the IRS - right? The work is being done here in Canada, the US has no right to anything (unlike selling a product in the US - like self publishing - where you have to have an ITIN).
I do have an ITIN for rental properties - still makes no difference to the above - right?
Cheers!
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If I sell an asset in a foreign currency (house, stocks) I pay cap gain on the difference between sale price and purchase price converted to CAD on the day of the transaction.
If I convert the foreign money to CAD on a different day, or over several days, how exactly do I report the exchange gain or loss?
How do I get credit for any difference in exchange rate in real life vs the BoC's posted rate (ie with a forex company there is going to be some drag, 0.5-1%, which on large transfers is not nothing!).
Also - I'm doing odd small online bits of... 'freelance microwork' or whatever, and getting paid either in gift cards or to paypal. I know I havento report this to the CRA, but I don't have to talk to the IRS - right? The work is being done here in Canada, the US has no right to anything (unlike selling a product in the US - like self publishing - where you have to have an ITIN).
I do have an ITIN for rental properties - still makes no difference to the above - right?
Cheers!
Hi Dave
As far as Forex is concerned, it makes things a bit more complex from a tracking perspective but overall it is manageable.
I understand based on what you've said that you're trading in foreign assets, and converting to CAD at a later date - unfortunately you only have two options in this regard (irrespective of conversion to CAD).
1) Pick the day's rate of the purchase and subsequent sale.
2) Use the average yearly rate.
This has to be done CONSISTENTLY however - which is key. You can't elect both, it's one or the other for all transactions in the year.
As far as the cost of exchange - use this as a cost of trading on your tax return. You're better to include these as costs, versus a step up in ACB, as capital gains are 50% taxable.
For the online work - it is taxable where the work is performed. Sounds like it's all in Canada, so the IRS really has no jurisdiction or ability to tax. Occasionally they will unfairly apply a withholding tax - however there are online forms to submit to the IRS should this not be appropriate (i.e. what you're doing).
Hope this helps!
-
If I sell an asset in a foreign currency (house, stocks) I pay cap gain on the difference between sale price and purchase price converted to CAD on the day of the transaction.
If I convert the foreign money to CAD on a different day, or over several days, how exactly do I report the exchange gain or loss?
How do I get credit for any difference in exchange rate in real life vs the BoC's posted rate (ie with a forex company there is going to be some drag, 0.5-1%, which on large transfers is not nothing!).
Also - I'm doing odd small online bits of... 'freelance microwork' or whatever, and getting paid either in gift cards or to paypal. I know I havento report this to the CRA, but I don't have to talk to the IRS - right? The work is being done here in Canada, the US has no right to anything (unlike selling a product in the US - like self publishing - where you have to have an ITIN).
I do have an ITIN for rental properties - still makes no difference to the above - right?
Cheers!
Hi Dave
As far as Forex is concerned, it makes things a bit more complex from a tracking perspective but overall it is manageable.
I understand based on what you've said that you're trading in foreign assets, and converting to CAD at a later date - unfortunately you only have two options in this regard (irrespective of conversion to CAD).
1) Pick the day's rate of the purchase and subsequent sale.
2) Use the average yearly rate.
This has to be done CONSISTENTLY however - which is key. You can't elect both, it's one or the other for all transactions in the year.
As far as the cost of exchange - use this as a cost of trading on your tax return. You're better to include these as costs, versus a step up in ACB, as capital gains are 50% taxable.
For the online work - it is taxable where the work is performed. Sounds like it's all in Canada, so the IRS really has no jurisdiction or ability to tax. Occasionally they will unfairly apply a withholding tax - however there are online forms to submit to the IRS should this not be appropriate (i.e. what you're doing).
Hope this helps!
Thanks.
Ok, so I'm self employed. I'm also selling my old house in the UK. In previous years it's been a no brainer - average CAD:GBP for the year. Are you saying I can still use the average if my selling of my house falls on one day, and the cap gains dwarfs everything else I've done this year? Like, the cap gains will be 3x my self employed income for the year.
I can just use the average for everything?
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This thread, and your responses, are really great. So far, as a newbie with little to no knowledge of tax and investment, I learned so many useful things.
I have a quick question related to income tax and residency. I work full time in the NWT and spend three weeks there, followed by two weeks in Calgary where my wife is. This is where our house is as well. In the NWT, I live a mustachian lifestyle and found ways to avoid having to rent an apartment, by combining house-sitting and couchsurfing, and the occasional night or two on my office couch. As far as I understand, I will be deemed a resident of the NWT in 2014 because that's where I will be on December 31. What do you think of this? If I can establish my residence in either jurisdiction, which one would legally be the most advantageous from an income tax perspective?
-
If I sell an asset in a foreign currency (house, stocks) I pay cap gain on the difference between sale price and purchase price converted to CAD on the day of the transaction.
If I convert the foreign money to CAD on a different day, or over several days, how exactly do I report the exchange gain or loss?
How do I get credit for any difference in exchange rate in real life vs the BoC's posted rate (ie with a forex company there is going to be some drag, 0.5-1%, which on large transfers is not nothing!).
Also - I'm doing odd small online bits of... 'freelance microwork' or whatever, and getting paid either in gift cards or to paypal. I know I havento report this to the CRA, but I don't have to talk to the IRS - right? The work is being done here in Canada, the US has no right to anything (unlike selling a product in the US - like self publishing - where you have to have an ITIN).
I do have an ITIN for rental properties - still makes no difference to the above - right?
Cheers!
Hi Dave
As far as Forex is concerned, it makes things a bit more complex from a tracking perspective but overall it is manageable.
I understand based on what you've said that you're trading in foreign assets, and converting to CAD at a later date - unfortunately you only have two options in this regard (irrespective of conversion to CAD).
1) Pick the day's rate of the purchase and subsequent sale.
2) Use the average yearly rate.
This has to be done CONSISTENTLY however - which is key. You can't elect both, it's one or the other for all transactions in the year.
As far as the cost of exchange - use this as a cost of trading on your tax return. You're better to include these as costs, versus a step up in ACB, as capital gains are 50% taxable.
For the online work - it is taxable where the work is performed. Sounds like it's all in Canada, so the IRS really has no jurisdiction or ability to tax. Occasionally they will unfairly apply a withholding tax - however there are online forms to submit to the IRS should this not be appropriate (i.e. what you're doing).
Hope this helps!
Thanks.
Ok, so I'm self employed. I'm also selling my old house in the UK. In previous years it's been a no brainer - average CAD:GBP for the year. Are you saying I can still use the average if my selling of my house falls on one day, and the cap gains dwarfs everything else I've done this year? Like, the cap gains will be 3x my self employed income for the year.
I can just use the average for everything?
Hi Dave,
That's correct - you can use the average, so long as this is done consistently.
You can't elect a 'new' way of doing things, unless it is reasonable to believe this is a more accurate way of reporting your income. In the case of a capital asset such as your old house, one could argue that the value fluctuates significantly based on Forex, and therefore an average for the year is more appropriate.
I can point you to the CRA's bulletin on this - it's old, but not out of date. http://www.cra-arc.gc.ca/E/pub/tp/it95r/it95r-e.txt
There's a fair bit of jargon, but it's a good reference point if you can decrypt it. Really the key is consistency - pick the day (settlement date) or the average for the month or year.
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This thread, and your responses, are really great. So far, as a newbie with little to no knowledge of tax and investment, I learned so many useful things.
I have a quick question related to income tax and residency. I work full time in the NWT and spend three weeks there, followed by two weeks in Calgary where my wife is. This is where our house is as well. In the NWT, I live a mustachian lifestyle and found ways to avoid having to rent an apartment, by combining house-sitting and couchsurfing, and the occasional night or two on my office couch. As far as I understand, I will be deemed a resident of the NWT in 2014 because that's where I will be on December 31. What do you think of this? If I can establish my residence in either jurisdiction, which one would legally be the most advantageous from an income tax perspective?
Hi ykphil.
Thanks for your review! Happy to help out fellow MMM'ers as best as I can. Glad to hear you're learning things - it's ultimately the point of the blog, and this topic as well.
It's interesting that you've stumbled onto what is a more oblique topic inside of a major issue - namely, that of establishing Residency. Typically this is approached from a Canada vs. Non-Canada perspective, but in your case this is Provincial.
As far as the rules go - it's determined by the extent of 'residential' ties in a given province. Given that you don't have any residential ties in NWT beyond employment, I would posit that you're a resident of Alberta. You have your house there, your spouse continues to reside in Alberta, and you also reside there on a frequent basis. The December 31st thing really doesn't play a role - if this were the case there would be many Canadians taking flights to tax havens for New Years (myself included).
If you're interested in reading more about this topic - http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s5/f1/s5-f1-c1-eng.html
To answer your second question, Alberta is considered the 'best' tax province in Canada - by having no PST and a flat 10% provincial rate, it is generally better for most taxpayers.
That being said - NWT has graduated rates (5.9% to 14.05%) which means that for anyone earning under about $100 to $120K you'll pay less tax in NWT vs. Alberta. In addition, NWT has an aggressive tax credit of up to $942 per taxpayer (depending on income - called a "PIT" Credit) - and the Federal Government also offers some deductions for Northern Residents.
http://www.cra-arc.gc.ca/E/pub/tp/it91r4/it91r4-e.html
Take a look at the link here as it will describe some credits which you may actually qualify for regardless of residency.
If you receive travel benefits between Alberta and NWT for work, and have to claim these as taxable income, you may be able to deduct these for income tax purposes. In addition, there may be some items you can deduct due to the nature of your employment in NWT.
In Conclusion
You're definitely an Alberta resident - but this 'may' not be a bad thing. Alberta is a low tax environment compared with other provinces (cough cough, Ontario) so in that sense you're better off. That being said, depending on your employment income, you could be better off as a NWT resident from a tax perspective.
Because of the Northern tax credits, the question of which is 'better' is largely dependent on your income. Under $100-$120k, NWT is technically better - but you may actually be able to access some of these credits regardless of your permanent residence in Alberta.
Hope this is helpful! You've got some research to see if your circumstances are applicable to get the federal credits, but you may save some money as a result.
Good luck!
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Thank you - very helpful. Just gotta hope I 'get' the average, or better, on settlement day then.
Or rather, when I bring money over, I guess. Hmmm.
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Thanks for this post, it's very kind of you.
Do you know what the impact to an early retiree is to withdrawing from their RRSP's? I have looked around and all I can see is that their will be a withholding-tax if you withdraw early but that you also have the option to convert to an RRIF. I think with the RRIF you can just withdraw funds and it's just regular income but I haven't been able to figure out if there is an age limitation to when the conversion can be done. So for someone in say their 40's who wants to take income from an RRSP do you know if it's possible without paying extra penalties beyond standard income tax?
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Thanks for this post, it's very kind of you.
Do you know what the impact to an early retiree is to withdrawing from their RRSP's? I have looked around and all I can see is that their will be a withholding-tax if you withdraw early but that you also have the option to convert to an RRIF. I think with the RRIF you can just withdraw funds and it's just regular income but I haven't been able to figure out if there is an age limitation to when the conversion can be done. So for someone in say their 40's who wants to take income from an RRSP do you know if it's possible without paying extra penalties beyond standard income tax?
Hi Frugal-
Great question!
There really is not a low-age limit on transferring your un-matured RRSP to a RRIF, however I wouldn't recommend this.
The RRIF is a fixed income package, which is to say you'll receive a flat yearly amount all of which is taxable. This takes 'control' of your 'earnings' (i.e. payout) out of your hands.
The RRSP is a better option in this regard. They're largely the same thing, except with the RRSP you have control over withdrawals.
There is no penalty to withdrawing from an RRSP at any time, except for tax consequences. You'll end up paying tax at whatever your marginal rate is. The withholding tax is standard - it isn't an additional tax, it's merely a pre-payment of the expected tax bill.
Are you planning to move in retirement, or stay in Canada?
I bring this up as an additional point, it may not be applicable to you, but it could be to others. If you're retiring early and moving abroad, RRSP's can be transferred at significantly more advantageous rates.
For instance, you could transfer your RRSP out of Canada and pay 0-10% tax (depending on the country) period... Tax bill done, and if you're in a low cost of living country you'll have more money, and the purchasing power of this cash also increases.
Food for thought, if you're ever looking to escape the cold!
Hope this helps
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Thanks CPA CB!
This is great news. If it's at the marginal tax rate then we will be paying very low income rates. I suspected the withholding tax wasn't an additional tax but the way the articles on line state things it's hard to tell. They always use the word penalty when it's really not at all.
Don't plan to move countries but will keep that in mind. Always good to know all of the options.
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Hi CPA CB, TuxedoEagle suggest to come here and bring some questions we got about using ETF for Smith Manoeuvre . In the Investor Alley, I started a thread "Canadian ETF for Smith Manoeuvre". I did not want to bring all the thread here but only the remaining questions.
I want to buy 100K of ZCN with HELOC on January 5th (or later if needed)
Do the CRA would mind if interests are not completely covered by revenue (dividends)?
If I get ZCN quarterly distributions from CDSinnovations.ca and adjust my ACB with help from AdjustedCostBase.ca, can I manage to keep my loan deductible and fill my tax report properly?
thanks
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Hi OP,
Thanks for answering these tax questions.
I have one of my own that I really would like answered so I'll try to provide as much info as possible.
I have no dependents and I'm single. I'm considering taking a job in a country that does not collect income tax and which does not have any tax agreement with Canada. I would be making approximately CAN$65000 per year and being able to save CAN$60000 of it due to my potential employer paying for living expenses/utilities/transportation. I would have nearly 8 weeks of vacation per year, of which I would spend most of it in Canada, living with my family in Alberta (where I live now).
From my understanding, I would need to sever residential ties with Canada so as not to have to pay income tax to the CRA.
My question is two-parts. First, based on my actions, can I choose whether or not I am a Canadian resident or resident of this foreign country? The guidelines surrounding this, from what I have been able to gather, are not very clear. To sever ties, I believe I would need to sell my car (I have no other property), close bank accounts, let my driver's license and insurance lapse, cancel all Canadian memberships, and establish these kinds of things in my new country.
Second, if I am able to choose whether or not to be a Canadian resident, which is more financially smart? I plan to work in this country for 2-5 years, max. I have ~$40000 of RRSP room to fill and ~$25000 of TFSA room to fill. If I continued to be a Canadian resident, I could put nearly all of my earnings into my RRSP and only have to pay ~$2000ish in tax. The rest could go into my TFSA. By the second year, I'd be able to fill my TFSA as well. By doing this, I don't lose making more TFSA and RRSP contribution room by being an expat non-resident. Or is it financially savvier to be a non-resident, and save all this money instead?
The second question, of course, is moot if the answer to the first question is that I can't control whether I'm seen as a Canadian resident or not because of how long I'll be out of the country every year.
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Hi CPA CB, TuxedoEagle suggest to come here and bring some questions we got about using ETF for Smith Manoeuvre . In the Investor Alley, I started a thread "Canadian ETF for Smith Manoeuvre". I did not want to bring all the thread here but only the remaining questions.
I want to buy 100K of ZCN with HELOC on January 5th (or later if needed)
Do the CRA would mind if interests are not completely covered by revenue (dividends)?
If I get ZCN quarterly distributions from CDSinnovations.ca and adjust my ACB with help from AdjustedCostBase.ca, can I manage to keep my loan deductible and fill my tax report properly?
thanks
Bonjour Le Barbu,
Great question. I've actually never heard this being referred to as the "Smith Manoeuvre" but nonetheless it is a legitimate way to pay less tax.
The key for this to work is that you're using the funds to generate what is known as "Investment Income" - which is interest or dividend income. Note that investments for capital gains purposes ONLY aren't eligible for this deduction.
Since you're investing in a dividend yielding ETF - the entirety of the interest is technically deductible, however there is a caveat. The Tax Act implies that these actions are undertaken with the reasonable expectation of earning a profit - if your interest payments are consistently outpacing your investment income, there is a chance they will deem a portion of this non-deductible. It's a grey area, but for now I would recommend deducting it all.
The other point I do have is that ZCN yields 2.59%, which isn't a heck of a lot. There are other Real Estate Investment Trusts out there that yield between 5-10%, so you may actually obtain a positive spread on yield vs. interest on the HELOC. Plus they distribute monthly!
Hope this helps
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Hi OP,
Thanks for answering these tax questions.
I have one of my own that I really would like answered so I'll try to provide as much info as possible.
I have no dependents and I'm single. I'm considering taking a job in a country that does not collect income tax and which does not have any tax agreement with Canada. I would be making approximately CAN$65000 per year and being able to save CAN$60000 of it due to my potential employer paying for living expenses/utilities/transportation. I would have nearly 8 weeks of vacation per year, of which I would spend most of it in Canada, living with my family in Alberta (where I live now).
From my understanding, I would need to sever residential ties with Canada so as not to have to pay income tax to the CRA.
My question is two-parts. First, based on my actions, can I choose whether or not I am a Canadian resident or resident of this foreign country? The guidelines surrounding this, from what I have been able to gather, are not very clear. To sever ties, I believe I would need to sell my car (I have no other property), close bank accounts, let my driver's license and insurance lapse, cancel all Canadian memberships, and establish these kinds of things in my new country.
Second, if I am able to choose whether or not to be a Canadian resident, which is more financially smart? I plan to work in this country for 2-5 years, max. I have ~$40000 of RRSP room to fill and ~$25000 of TFSA room to fill. If I continued to be a Canadian resident, I could put nearly all of my earnings into my RRSP and only have to pay ~$2000ish in tax. The rest could go into my TFSA. By the second year, I'd be able to fill my TFSA as well. By doing this, I don't lose making more TFSA and RRSP contribution room by being an expat non-resident. Or is it financially savvier to be a non-resident, and save all this money instead?
The second question, of course, is moot if the answer to the first question is that I can't control whether I'm seen as a Canadian resident or not because of how long I'll be out of the country every year.
Hi Panthalassa,
Congratulations on the job offer.
My first comment would be to eliminate the "plan to work in this country for 2-5 years, max" from your vocabulary entirely. If you're breaking residency, the intention is that it is a "permanent" break, the second this intention is temporary, you're a resident of Canada. This doesn't mean it is actually permanent - but really you want to make sure you emphasize this as your intention.
To answer your initial question - you're moving (permanently) to a tax haven. You want to do everything in your power to ensure you break residency with Canada.
The good news is, you really do not have any of what CRA calls "Significant Residential Ties". These are listed below for your reference - but no house, no spouse, no dependents. That's great news (for tax reasons, anyway).
There are also "Secondary" ties, to which you refer, which can be used to 'deem' you a resident of Canada. These are bank accounts, memberships, clothing/furniture, etc. None of these individually will tip the balance. Maybe you want to keep the Canadian bank account and transfer the money over for security purposes while you're abroad, and keep your driver's licence etc. These are all okay.
The one thing that I recommend you do is to complete the NR73 form, and submit to the CRA for an official determination of residency status. This way they will mail you their determination (should be a non-resident based on your description) and you have it in writing in case they unilaterally decide to change their mind later (something they like to do frequently.)
Good luck and have fun not paying taxes! Most of us on the forum envy you.
Significant residential ties
1.11 The residential ties of an individual that will almost always be significant residential ties for the purpose of determining residence status are the individual's:
•dwelling place (or places);
•spouse or common-law partner; and
•dependants.
1.12 Where an individual who leaves Canada keeps a dwelling place in Canada (whether owned or leased), available for his or her occupation, that dwelling place will be considered to be a significant residential tie with Canada during the individual's stay abroad. However, if an individual leases a dwelling place located in Canada to a third party on arm's-length terms and conditions, the CRA will take into account all of the circumstances of the situation (including the relationship between the individual and the third party, the real estate market at the time of the individual's departure from Canada, and the purpose of the stay abroad), and may consider the dwelling place not to be a significant residential tie with Canada except when taken together with other residential ties (see ¶ 1.26 for an example of this situation and see ¶ 1.15 for a discussion of the significance of secondary residential ties).
1.13 If an individual who is married or cohabiting with a common-law partner leaves Canada, but his or her spouse or common-law partner remains in Canada, then that spouse or common-law partner will usually be a significant residential tie with Canada during the individual's absence from Canada. Similarly, if an individual with dependants leaves Canada, but his or her dependants remain behind, then those dependants will usually be considered to be a significant residential tie with Canada while the individual is abroad. Where an individual was living separate and apart from his or her spouse or common-law partner prior to leaving Canada, by reason of a breakdown of their marriage or common-law partnership, that spouse or common-law partner will not be considered to be a significant tie with Canada.
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Thank you to stop by CPA CB
REITs are realy not suited for Smith Manoeuvre because ROC is a big % of their distributions. If I do not reinvest all of it and pull it out to increase my cashflow, I have to reduce loan of that same amount (ROC) and over time it's counter-productive.
Also, Canadian REIT MER are to high (0.35% to 0.6%). Many suggest XDV but here again, MER is 0.5%. FYI, Canadian broad market index ETF are only 0.05%
Don't forget the interest on the loan are tax-deductible: 3% x 62% = 1.9%. It's lower than the 2.59% yield of ZCN
Ed Rempel (on Million Dollar Journey's forum): -"Income is not required for deductibility of an investment loan. A mutual fund or stock that has never paid a distribution and is not specifically prevented in their prospectus from ever paying a dividend is find, based on IT-533. All that is required is a reasonable assumption that it could pay out income someday."
I will keep reading for more info before I pull the trigger !
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Thank you to stop by CPA CB
REITs are realy not suited for Smith Manoeuvre because ROC is a big % of their distributions. If I do not reinvest all of it and pull it out to increase my cashflow, I have to reduce loan of that same amount (ROC) and over time it's counter-productive.
Also, Canadian REIT MER are to high (0.35% to 0.6%). Many suggest XDV but here again, MER is 0.5%. FYI, Canadian broad market index ETF are only 0.05%
Don't forget the interest on the loan are tax-deductible: 3% x 62% = 1.9%. It's lower than the 2.59% yield of ZCN
Ed Rempel (on Million Dollar Journey's forum): -"Income is not required for deductibility of an investment loan. A mutual fund or stock that has never paid a distribution and is not specifically prevented in their prospectus from ever paying a dividend is find, based on IT-533. All that is required is a reasonable assumption that it could pay out income someday."
I will keep reading for more info before I pull the trigger !
Hi Le Barbu -
Sorry - I didn't mean REIT ETF's, I just meant directly.
In any case it sounds like you're onside with regards to ZCN.
As far as IT-533 is concerned - the exact wording is as follows, with examples provided:
Borrowing for investments including common shares
¶ 31. Where an investment (e.g., interest-bearing instrument or preferred shares) carries a stated interest or dividend rate, the purpose of earning income test will be met "absent a sham or window dressing or similar vitiating circumstances" (Ludco). Further, assuming all of the other requisite tests are met, interest will neither be denied in full nor restricted to the amount of income from the investment where the income does not exceed the interest expense, given the meaning of the term income as discussed in ¶ 10.
Where an investment does not carry a stated interest or dividend rate such as some common shares, the determination of the reasonable expectation of income at the time the investment is made is less clear. Normally, however, the CCRA considers interest costs in respect of funds borrowed to purchase common shares to be deductible on the basis that there is a reasonable expectation, at the time the shares are acquired, that the common shareholder will receive dividends. Nonetheless, each situation must be dealt with on the basis of the particular facts involved.
These comments are also generally applicable to investments in mutual fund trusts and mutual fund corporations.
Example 8
R Corp. is an investment vehicle designed to provide a capital return only to the investors in its common shares. The corporate policy with respect to R Corp. is that dividends will not be paid, that corporate earnings will be reinvested to increase the value of the shares and that shareholders are required to sell their shares to a third-party purchaser in a fixed number of years in order to realize their value. In this situation, it is not reasonable to expect income from such shareholdings and any interest expense on money borrowed to acquire R Corp. shares would not be deductible.
Example 9
S Corp. is raising capital by selling common shares. Its business plans indicate that its cash flow will be required to be reinvested for the foreseeable future and S Corp. discloses to shareholders that dividends will only be paid when operational circumstances permit (i.e., when cash flow exceeds requirements) or when it believes that shareholders could make better use of the cash. In this situation, the purpose of earning income test will generally be met and any interest on borrowed money to acquired S Corp. shares would be deductible.
So - if it is explicit in reinvesting capital in the company then it is not deductible. But if it isn't explicit then it could be deductible based on their interpretation.
Modification
Also for the others looking at this - In the case of Le Barbu this appears to be completely fine from a tax perspective, however... The CRA is notoriously inconsistent in their treatment of relative grey areas such as this. You should ensure that you consult with your accountant to make sure it's applicable in your specific circumstances.
Thanks to Le Barbu for the question!
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Interesting, so it's not black or white but black or grey then!
You're right, I'm onside with regards to ZCN! I'm long for 150K with this one already. I picked that ETF because it's broad, dirt cheap and indexed. Management fees of 0.05% mean 50$/year to manage 100k. XIC and VCN are aggresive competitors and MER are lower than ever because of that.
I'll sit on this until I get accountant aproval for my specific situation.
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To answer your initial question - you're moving (permanently) to a tax haven. You want to do everything in your power to ensure you break residency with Canada.
The good news is, you really do not have any of what CRA calls "Significant Residential Ties". These are listed below for your reference - but no house, no spouse, no dependents. That's great news (for tax reasons, anyway).
(...)
Good luck and have fun not paying taxes! Most of us on the forum envy you.
Hey CPA CB,
Thanks for the very quick reply! You didn't answer it directly but should I assume from your answer that there is no benefit to staying a resident of Canada for the purposes of creating new TFSA and RRSP contribution room (I have read on the CRA's website that as a non-resident you stop accumulating this room) and keeping up with CPP payments?
An additional question - do you think I will still qualify as a non-resident if I transfer my foreign earnings to my Canadian bank account and brokerage for investing? Right now I am buying TD e-series funds and would like to continue doing that (or possibly transferring to Questrade once I amass $100k. Would I be able to continue doing that as a non-resident? Also, does the fact that I would be paid in US dollars make any difference?
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To answer your initial question - you're moving (permanently) to a tax haven. You want to do everything in your power to ensure you break residency with Canada.
The good news is, you really do not have any of what CRA calls "Significant Residential Ties". These are listed below for your reference - but no house, no spouse, no dependents. That's great news (for tax reasons, anyway).
(...)
Good luck and have fun not paying taxes! Most of us on the forum envy you.
Hey CPA CB,
Thanks for the very quick reply! You didn't answer it directly but should I assume from your answer that there is no benefit to staying a resident of Canada for the purposes of creating new TFSA and RRSP contribution room (I have read on the CRA's website that as a non-resident you stop accumulating this room) and keeping up with CPP payments?
An additional question - do you think I will still qualify as a non-resident if I transfer my foreign earnings to my Canadian bank account and brokerage for investing? Right now I am buying TD e-series funds and would like to continue doing that (or possibly transferring to Questrade once I amass $100k. Would I be able to continue doing that as a non-resident? Also, does the fact that I would be paid in US dollars make any difference?
Hi,
There is absolutely no benefit whatsoever to maintaining residency for the purpose of RRSP and TFSA room. You'll be living in a country where capital gains and investment income are not even taxable, whereas the RRSP is taxable on withdrawal, and the TFSA is using after tax funds. CPP pays out half of your contributions if you contribute 100% over your lifespan, so you'll be foregoing a 50% tax by opting out of it.
To be more clear. Make sure that you are NOT a resident of Canada. There is no benefit whatsoever. You can keep your passport and bank account and that should be no issue, but make sure you break residency.
Being paid in USD will only affect you if you convert to Canadian, which would just be exchange rate... Beyond that, no difference whatsoever.
Good luck!
-
Another Q: This new (psuedo) income splitting thing for families. I can't make out if it'll effect THIS tax year or just from next?
How does it interact with the RRSP - if money goes in to an RRSP, does that make 'more room' at the lower contribution bracket or is it on pre-deduction earnings (ie say partner earned $35k, I earned $50, and $40k is where the brackets change - if they put $5k into their RRSP do we move $10k of my income to them, or still just $5k?).
How does it effect things like child benefit eligibility?
-
(Wow, really? Awesome!)
Mine aren't really tax questions, but they overlap a bit, and who knows?
Background
I am the only financial support for myself and one young child, both designated disabled.
Both designated for the Disability Tax Credit, thus RDSP.
Very low income, but have some savings.
Have just gotten set up with TD and TD Waterhouse.
If we use RDSPs, RESP, and a (disability) trust, and severely limit dividends and interest, we can also access some subsidies while our income is low. RRSPs are not allowed for some of the subsidy programs, and with my low earnings and the two Disability Tax Credits, I think a TFSA is moot in my case.
I am out-of-pocket a good $5000/yr for "biggie" disability-related items.
My Idea So Far:
Set up the trust, but leave it empty until we need the subsidies again (if ever)
Maximize child's RDSP for 2015 (already maximized to 2014)
Maximize my (brand new) RDSP to 2014, then again for 2015
Maximize child's RESP for 2015 (already maximized to 2014)
Leave $10,000 in a chequing account
Leave the rest in a non-registered account, invested via Waterhouse. (If we need the subsidies again at some point in the future, move this amount into the trust.)
Questions:
1. Is this a good plan? Am I missing anything?
2. What to invest the RDSPs, RESP, and remainder in? I was going to follow the Canadian Couch Potato model, but it says:
-"...investors managing multiple accounts (RRSPs, TFSAs and non-registered accounts) need to consider proper asset location to maximize tax-efficiency. For example, if you have no choice but to hold fixed income in a non-registered account, you should avoid bond ETFs altogether and consider substituting a ladder of GICs."
-"These have lower MERs than their Canadian counterparts and are exempt from US withholding taxes when held in an RRSP." [Again, mine can't be held in an RRSP. So where do I go?]
-
Another Q: This new (psuedo) income splitting thing for families. I can't make out if it'll effect THIS tax year or just from next?
How does it interact with the RRSP - if money goes in to an RRSP, does that make 'more room' at the lower contribution bracket or is it on pre-deduction earnings (ie say partner earned $35k, I earned $50, and $40k is where the brackets change - if they put $5k into their RRSP do we move $10k of my income to them, or still just $5k?).
How does it effect things like child benefit eligibility?
Split is for tax % calculations. It does not change RRSP room of each spousal but your tax rate. You will get a lower tax on income (taxed on 40 instead of 50). Your return is now marginal rate from 40k also (lower % since your taxes are lower). Same for spousal. Not sure it´s for 2014 but I hope so !
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Hi CPA BP,
I have question about RRSPs. My husband and I are confused about whether or not he should open an RRSP even though he has a pension plan through Canadian Forces (he's in the Navy). Is it necessary for him to have an RRSP even though he has a pension plan through the government? How would an RRSP affect his pension pay out or vice versa?
Thank you.
-
You can open a RRSP even if you have a pension plan, the contribition limit will be lower especialy if the pension plan is generous. Then seak for your marginal tax rate and you will know the refund a RRSP contribution will be. Most of the time, if individual gross income is more than 44k$, RRSP is a pretty good idea.
You can find your RRSP deduction limit on line (A) of the RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment (the 2-3 pages blue form you receive 1 month after tax filling).
hope this help
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This is very helpful! Thank you!!
You can open a RRSP even if you have a pension plan, the contribition limit will be lower especialy if the pension plan is generous. Then seak for your marginal tax rate and you will know the refund a RRSP contribution will be. Most of the time, if individual gross income is more than 44k$, RRSP is a pretty good idea.
You can find your RRSP deduction limit on line (A) of the RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment (the 2-3 pages blue form you receive 1 month after tax filling).
hope this help
-
Hi CPA BP,
I have question about RRSPs. My husband and I are confused about whether or not he should open an RRSP even though he has a pension plan through Canadian Forces (he's in the Navy). Is it necessary for him to have an RRSP even though he has a pension plan through the government? How would an RRSP affect his pension pay out or vice versa?
Thank you.
Hi MrsPotato
The truth about this is that it really depends.
Do you have an estimate regarding your husband's future pension income? This is the key to understanding whether an RRSP is right for your situation is the level of this pension income.
If it's significant, contrary to what LeBarbu has said, this is not advantageous as the offset of your tax savings today will be eaten up by paying significantly higher taxes upon retirement.
A better option for the time being would certainly be a TFSA account. This has no tax impact in the future, and is therefore more predictable. Once this is filled, then considering alternate options such as RRSP's could be worthwhile - but again, beware that RRSP's don't "save" tax - they defer it to a later date, when you hope your marginal rate will be lower. With a generous pension and CPP, will it truly be lower than today?
Hope this helps
-
Another Q: This new (psuedo) income splitting thing for families. I can't make out if it'll effect THIS tax year or just from next?
How does it interact with the RRSP - if money goes in to an RRSP, does that make 'more room' at the lower contribution bracket or is it on pre-deduction earnings (ie say partner earned $35k, I earned $50, and $40k is where the brackets change - if they put $5k into their RRSP do we move $10k of my income to them, or still just $5k?).
How does it effect things like child benefit eligibility?
Hi Daverobev,
At the moment, the logistics regarding the RRSP contributions and income splitting haven't been announced officially. When it is, I'll be sure to post this up for you.
For the record it is 2015 forward - so this isn't an issue in the current taxation year.
-
(Wow, really? Awesome!)
Mine aren't really tax questions, but they overlap a bit, and who knows?
Background
I am the only financial support for myself and one young child, both designated disabled.
Both designated for the Disability Tax Credit, thus RDSP.
Very low income, but have some savings.
Have just gotten set up with TD and TD Waterhouse.
If we use RDSPs, RESP, and a (disability) trust, and severely limit dividends and interest, we can also access some subsidies while our income is low. RRSPs are not allowed for some of the subsidy programs, and with my low earnings and the two Disability Tax Credits, I think a TFSA is moot in my case.
I am out-of-pocket a good $5000/yr for "biggie" disability-related items.
My Idea So Far:
Set up the trust, but leave it empty until we need the subsidies again (if ever)
Maximize child's RDSP for 2015 (already maximized to 2014)
Maximize my (brand new) RDSP to 2014, then again for 2015
Maximize child's RESP for 2015 (already maximized to 2014)
Leave $10,000 in a chequing account
Leave the rest in a non-registered account, invested via Waterhouse. (If we need the subsidies again at some point in the future, move this amount into the trust.)
Questions:
1. Is this a good plan? Am I missing anything?
2. What to invest the RDSPs, RESP, and remainder in? I was going to follow the Canadian Couch Potato model, but it says:
-"...investors managing multiple accounts (RRSPs, TFSAs and non-registered accounts) need to consider proper asset location to maximize tax-efficiency. For example, if you have no choice but to hold fixed income in a non-registered account, you should avoid bond ETFs altogether and consider substituting a ladder of GICs."
-"These have lower MERs than their Canadian counterparts and are exempt from US withholding taxes when held in an RRSP." [Again, mine can't be held in an RRSP. So where do I go?]
Hi Scrubbyfish -
I'm glad to hear that you're taking advantage of the RDSP system, which is a truly great program.
As far as I can tell, this plan seems good. Make sure you apply for the Canadian Disability Savings Grant and Bond as well, as these can help to accumulate funds in the RDSP.
As far as trusts are concerned - remember that they operate on a fixed life. Any 'inter vivos' trust such as this has a 21 year maximum lifespan. You may be better to hold off a few years in establishing said trust, and therefore save time later, and also save on the accounting/legal fees associated with running a trust while you don't really need it at this point.
In terms of investment advice, this tends to fall outside of my area of expertise as a Chartered Accountant, however, I can say that you want to hold passive investment income (i.e. capital gains and generally dividends) outside of registered accounts, and active investment income (interest income) in registered accounts. GIC's are 'stable' but come at a price - I would never recommend purchasing GIC's, as the interest offered in today's environment means you will approximately break-even with inflation, and may lose.
Hope this helps!
-
-"For the record it is 2015 forward - so this isn't an issue in the current taxation year."
What about this ?
"The new Family Tax Cut would apply for the 2014 and subsequent taxation years. Couples would be able to claim the credit when they file their 2014 tax returns. To benefit from the credit, each spouse must file a tax return. Either spouse may claim the credit"
http://www.fin.gc.ca/n14/data/14-155_1-eng.asp
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I have a question about taxes for students.
My daughter will turn 18 just before the end of the year and she just started university. She has earned $2770 gross over the summer and I took out $5000 from her RESP which is the taxed portion (growth/grants).
I still need to make one withdrawal of RESP to pay for second semester but I'm thinking to make the taxed portion be $1900 in order to minimize her taxes. The rest will be a withdrawal from my contributions.
Is this is the right track? I plan to use her tuition receipt on my taxes. Should I be withdrawing more from the taxed RESP portion?
My tax bracket is much higher but with RRSP contributions I'm hoping to get it under the 87k.
Thanks in advance!
-
Thanks so much, CPA CB!
Yes, we are set up for the RDSP's grants and bonds.
I didn't know that about the trust, but it's only relevant until I'm 65 anyway, which is only 22 years from now.
Thanks again!
-
-"For the record it is 2015 forward - so this isn't an issue in the current taxation year."
What about this ?
"The new Family Tax Cut would apply for the 2014 and subsequent taxation years. Couples would be able to claim the credit when they file their 2014 tax returns. To benefit from the credit, each spouse must file a tax return. Either spouse may claim the credit"
http://www.fin.gc.ca/n14/data/14-155_1-eng.asp
Oops!
That's correct - I was thinking the payments for Child Care. My mistake.
In either case, the details regarding roll-out are still in question with regards to how this affects the calculation of "earned income" i.e. what your RRSP contribution limit is calculated on. Best guess is that you will keep the room and this will only be a 'credit' with no impact on your taxes otherwise - but again, we will see when it is passed how that works out.
-
I have a question about taxes for students.
My daughter will turn 18 just before the end of the year and she just started university. She has earned $2770 gross over the summer and I took out $5000 from her RESP which is the taxed portion (growth/grants).
I still need to make one withdrawal of RESP to pay for second semester but I'm thinking to make the taxed portion be $1900 in order to minimize her taxes. The rest will be a withdrawal from my contributions.
Is this is the right track? I plan to use her tuition receipt on my taxes. Should I be withdrawing more from the taxed RESP portion?
My tax bracket is much higher but with RRSP contributions I'm hoping to get it under the 87k.
Thanks in advance!
Hi MS
Currently your daughter has earned only about $8,000 in taxable income this year, which is far below the minimum personal and working tax credits available. ($10-$13k, province dependent).
My suggestion would be to utilize taxable withdrawals under your daughter while you have the 'room' in her return to accommodate this additional income without tax consequences, or with minor consequences. You're better to cover her taxes than pay yourself, clearly.
Cheers
-
Thanks so much for answering these questions. I have a real estate investment tax question.
Two years ago, we converted our townhouse, which was our principal residence at the time, into an investment property and I want to make sure we handled it properly. We did this because we moved to a new house. We took some equity from the townhouse for the 20% downpayment on the new property, and it was our understanding that we could not deduct the interest on this portion on our income taxes. So this is how we handled it on our income taxes:
- The Mortgage on townhouse before we moved to our new house was $185,000. This was on a variable LOC mortgage.
- We borrowed an additional $83,000 for the downpayment on the new house, bringing the mortgage LOC up to $268,000.
- Our mortgage allows you to create sub accounts so that you can track different different debts at various rates, amortizations etc. and allows you to label each account. We immediately separated the two into sub accounts. We labeled the $185,000 "mortgage on rental property (with the address)" and the $83,000 as "downpayment on principal residence".
- The rent is used to pay both mortgages, but when we do our taxes, we have only been deducting the interest that is on the $185,000 sub account.
- We just replaced the furnace and also borrowed from the property to do so, we opened a third sub account for the furnace and labeled it furnace for rental property. We plan to deduct the interest on this portion as well.
Have we been reporting this properly?
Also, we would like to pay off the non-deductible $83,000 as soon as possible, because we can’t deduct it. Is there any tax reason we can’t do this? For example, would we be told we also had to pay the tax deductible portion down as well? I ask because a friend of mine owned a duplex and lived in one side – his single mortgage was for both units and he could only deduct half the mortgage interest, but if he paid down extra, he was told half had to go towards the tax deductible portion, and half to the non-deductible portion, however, his was one mortgage, so he couldn't really differentiate which part of his property it was applied to where as mine is clearly separated.
Thanks so much for the advice.
In addition to my question in the above post, I wanted to ask whether we should be depreciating our rental properties on our income tax? So far we haven't, instead we've used our RRSP contributions to cancel out any tax we'd owe which kind of sucks because then we don't get any money back. We're just afraid that if we depreciate them we'll owe a lot of money when we sell, although the Canadian housing market is pretty high, so maybe that's not an issue. Do you usually advise depreciating or just paying the taxes? And how does one figure out what the value of the house is without the land?
Also, what are the tax implications of holding US equities in a TFSA? I know an RRSP is better and right now that's where our US stocks are, but we have little contribution room in our RRSP and lots in our TFSA. Would we only be taxed on dividends in the TFSA, or capital gains too?
Thanks in advance for the advice. :)
Hi C-Kat
Sorry for not replying sooner.
For the rental property - you are correct in assuming that the interest on the $185,000 IS deductible on your rental return, and therefore you should continue to do so.
The additional mortgage payment regarding the furnace is also deductible from an interest perspective.
As far as the furnace is concerned, one can make an argument whether to capitalize and amortize this as an asset, or to expense in the year it is installed. This is a judgment call - if it is a SUBSTANTIAL improvement in efficiency over the previous furnace, then you can lean towards capitalizing - if not, then better to expense. Ultimately you can lean to either side, but if you're looking to save taxes this year then I would expense it.
There are no implications as to which account to pay first. You should pay your mortgage first as it is non-deductible, and pay the other components thereafter.
Depreciation - this is a tricky question which is better discussed from an overall perspective.
It seems that you're familiar with the principal residence exemption for properties, and the rental property is no exception. You can elect this as your principal residence for the years inhabited, plus one year. This means that if you owned the property for ten years, and lived in it for two - 30% of the capital gain is covered by principal residence (2+1 years).
That being said - depreciating the property will lead to limited savings in taxes now (depreciation can't trigger a loss on rental income) but will lead to an increased tax bill when you go to sell the property. Considering you're depreciating at your purchase price, but selling on fair market value in the future, this can work against you if the value increases significantly.
For example - the purchase price is $200,000 - you depreciate $20,000 over time, or 10% of the house. This will save, for arguments sake, $6,000 in tax.
The biggest variables to consider is how much you will depreciate (as a % of the house), how long you will hold the house outside of principal residence, and your expected gain on sale. For any amount depreciated today, this % will be added back to the sale at full tax (called recapture), versus a capital gain which is only 50% taxable.
I generally advise clients to avoid depreciating rental properties. The upside is known in terms of tax savings, but the potential downsides are significant and unknown. With a high capital appreciation in value, you could end up paying 3 to 4 times more in tax than what was saved. It becomes a much safer bet as time progresses and real estate prices increase.
Hope this clarifies all of your questions
Thank you so much for the advice. I've been thinking more about your response and have another question. Will revenue Canada say that I wasn't allowed to borrow the 83K from my house for another purpose? I'm not deducting the interest, so I assume they don't care and that I can use the equity in my rental for any purpose as long as I don't deduct the interest for it?
Also, you made some interesting points about the principal residence exemption for one year. When we moved to the new house, we immediately rented the townhouse out and we did file a return including the rental income for that year. Was that a mistake? We just assumed our new house had become our principal residence, but we didn't fill out any change of residence forms. I see them on the CRA site now, but didn't know about them before. Is this a problem? We've been renting the place out for two years now so its probably too late to submit it now.
Thanks!
-
Thanks so much for answering these questions. I have a real estate investment tax question.
Two years ago, we converted our townhouse, which was our principal residence at the time, into an investment property and I want to make sure we handled it properly. We did this because we moved to a new house. We took some equity from the townhouse for the 20% downpayment on the new property, and it was our understanding that we could not deduct the interest on this portion on our income taxes. So this is how we handled it on our income taxes:
- The Mortgage on townhouse before we moved to our new house was $185,000. This was on a variable LOC mortgage.
- We borrowed an additional $83,000 for the downpayment on the new house, bringing the mortgage LOC up to $268,000.
- Our mortgage allows you to create sub accounts so that you can track different different debts at various rates, amortizations etc. and allows you to label each account. We immediately separated the two into sub accounts. We labeled the $185,000 "mortgage on rental property (with the address)" and the $83,000 as "downpayment on principal residence".
- The rent is used to pay both mortgages, but when we do our taxes, we have only been deducting the interest that is on the $185,000 sub account.
- We just replaced the furnace and also borrowed from the property to do so, we opened a third sub account for the furnace and labeled it furnace for rental property. We plan to deduct the interest on this portion as well.
Have we been reporting this properly?
Also, we would like to pay off the non-deductible $83,000 as soon as possible, because we can’t deduct it. Is there any tax reason we can’t do this? For example, would we be told we also had to pay the tax deductible portion down as well? I ask because a friend of mine owned a duplex and lived in one side – his single mortgage was for both units and he could only deduct half the mortgage interest, but if he paid down extra, he was told half had to go towards the tax deductible portion, and half to the non-deductible portion, however, his was one mortgage, so he couldn't really differentiate which part of his property it was applied to where as mine is clearly separated.
Thanks so much for the advice.
In addition to my question in the above post, I wanted to ask whether we should be depreciating our rental properties on our income tax? So far we haven't, instead we've used our RRSP contributions to cancel out any tax we'd owe which kind of sucks because then we don't get any money back. We're just afraid that if we depreciate them we'll owe a lot of money when we sell, although the Canadian housing market is pretty high, so maybe that's not an issue. Do you usually advise depreciating or just paying the taxes? And how does one figure out what the value of the house is without the land?
Also, what are the tax implications of holding US equities in a TFSA? I know an RRSP is better and right now that's where our US stocks are, but we have little contribution room in our RRSP and lots in our TFSA. Would we only be taxed on dividends in the TFSA, or capital gains too?
Thanks in advance for the advice. :)
Hi C-Kat
Sorry for not replying sooner.
For the rental property - you are correct in assuming that the interest on the $185,000 IS deductible on your rental return, and therefore you should continue to do so.
The additional mortgage payment regarding the furnace is also deductible from an interest perspective.
As far as the furnace is concerned, one can make an argument whether to capitalize and amortize this as an asset, or to expense in the year it is installed. This is a judgment call - if it is a SUBSTANTIAL improvement in efficiency over the previous furnace, then you can lean towards capitalizing - if not, then better to expense. Ultimately you can lean to either side, but if you're looking to save taxes this year then I would expense it.
There are no implications as to which account to pay first. You should pay your mortgage first as it is non-deductible, and pay the other components thereafter.
Depreciation - this is a tricky question which is better discussed from an overall perspective.
It seems that you're familiar with the principal residence exemption for properties, and the rental property is no exception. You can elect this as your principal residence for the years inhabited, plus one year. This means that if you owned the property for ten years, and lived in it for two - 30% of the capital gain is covered by principal residence (2+1 years).
That being said - depreciating the property will lead to limited savings in taxes now (depreciation can't trigger a loss on rental income) but will lead to an increased tax bill when you go to sell the property. Considering you're depreciating at your purchase price, but selling on fair market value in the future, this can work against you if the value increases significantly.
For example - the purchase price is $200,000 - you depreciate $20,000 over time, or 10% of the house. This will save, for arguments sake, $6,000 in tax.
The biggest variables to consider is how much you will depreciate (as a % of the house), how long you will hold the house outside of principal residence, and your expected gain on sale. For any amount depreciated today, this % will be added back to the sale at full tax (called recapture), versus a capital gain which is only 50% taxable.
I generally advise clients to avoid depreciating rental properties. The upside is known in terms of tax savings, but the potential downsides are significant and unknown. With a high capital appreciation in value, you could end up paying 3 to 4 times more in tax than what was saved. It becomes a much safer bet as time progresses and real estate prices increase.
Hope this clarifies all of your questions
Thank you so much for the advice. I've been thinking more about your response and have another question. Will revenue Canada say that I wasn't allowed to borrow the 83K from my house for another purpose? I'm not deducting the interest, so I assume they don't care and that I can use the equity in my rental for any purpose as long as I don't deduct the interest for it?
Also, you made some interesting points about the principal residence exemption for one year. When we moved to the new house, we immediately rented the townhouse out and we did file a return including the rental income for that year. Was that a mistake? We just assumed our new house had become our principal residence, but we didn't fill out any change of residence forms. I see them on the CRA site now, but didn't know about them before. Is this a problem? We've been renting the place out for two years now so its probably too late to submit it now.
Thanks!
Hello,
The interest on the mortgage of the rental property is definitely a deductible expense. You're incurring this expense to obtain active income (through rental) and therefore this is a perfectly legitimate and deductible expense. Logistically speaking, it doesn't really matter where the money comes from, so long as the expense is reasonable and serves to create income for you. So any portion of the mortgage allocated to the rental home is deductible, the portion on your new house is not.
As far as principal residence is concerned, you don't need to file paperwork with CRA in this regard, until selling one of the two households in which case you will specify the years elected as your principal residence. As you're renting out the old home, it's clear when you moved, and will be able to claim the total number of calendar years owned (when you were living in the house) PLUS an additional year. So If you lived in the house for 10 years, you can claim 11 years of the PR exemption.
Good luck!
-
Currently your daughter has earned only about $8,000 in taxable income this year, which is far below the minimum personal and working tax credits available. ($10-$13k, province dependent).
My suggestion would be to utilize taxable withdrawals under your daughter while you have the 'room' in her return to accommodate this additional income without tax consequences, or with minor consequences. You're better to cover her taxes than pay yourself, clearly.
We're in Ontario. So are we looking at $11,138 as the federal basic personal amount or is it a different number?
Or is your suggestion that I just take out another $5000 taxable from her RESP and then when she does her taxes and has an amount owing, that I'd just pay that amount owing as it's less tax than I would pay?
Thanks!!
-
Currently your daughter has earned only about $8,000 in taxable income this year, which is far below the minimum personal and working tax credits available. ($10-$13k, province dependent).
My suggestion would be to utilize taxable withdrawals under your daughter while you have the 'room' in her return to accommodate this additional income without tax consequences, or with minor consequences. You're better to cover her taxes than pay yourself, clearly.
We're in Ontario. So are we looking at $11,138 as the federal basic personal amount or is it a different number?
Or is your suggestion that I just take out another $5000 taxable from her RESP and then when she does her taxes and has an amount owing, that I'd just pay that amount owing as it's less tax than I would pay?
Thanks!!
The tax impact above the $11,138 in total income to around $14-15k would be so negligible that I would recommend putting your cash flow needs from a logistics perspective ahead of tax planning. Plus she'll have some tuition credits which she can use to reduce her balance (doesn't matter you vs. her as they are refundable at 15% only...)
-
I just have to say again: CPA CB, it is SO NICE of you to do this for us all! A lovely Christmas gift :) Thanks again!
-
Currently your daughter has earned only about $8,000 in taxable income this year, which is far below the minimum personal and working tax credits available. ($10-$13k, province dependent).
My suggestion would be to utilize taxable withdrawals under your daughter while you have the 'room' in her return to accommodate this additional income without tax consequences, or with minor consequences. You're better to cover her taxes than pay yourself, clearly.
We're in Ontario. So are we looking at $11,138 as the federal basic personal amount or is it a different number?
Or is your suggestion that I just take out another $5000 taxable from her RESP and then when she does her taxes and has an amount owing, that I'd just pay that amount owing as it's less tax than I would pay?
Thanks!!
The tax impact above the $11,138 in total income to around $14-15k would be so negligible that I would recommend putting your cash flow needs from a logistics perspective ahead of tax planning. Plus she'll have some tuition credits which she can use to reduce her balance (doesn't matter you vs. her as they are refundable at 15% only...)
Increasing the daughter's net income from $11k to $15k will result in her receiving around $80 more in GST credit over the course of the next year. That may actually more than offset the income tax, depending on what nonrefundable credits are available to the daughter, resulting in a tax decrease by earning more income! (Indeed, $15k is quite possibly low enough to completely offset without using the tuition credit, depending on what your daughter has been up to.) I benefited from a similar thing myself when I was a student.
Awesome! I generally don't discuss the credits but this is an excellent point - in some cases a slightly higher 'income' can actually end up being advantageous in this sense.
Thanks Cathy!
-
I just have to say again: CPA CB, it is SO NICE of you to do this for us all! A lovely Christmas gift :) Thanks again!
It's my pleasure! Merry Christmas!
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On investments, what dividends and interest are listed on tax documents? All of them? That is, does it depend on what the source of dividends/interest is invested in?
For example, are dividends and interest created through RRSPs, RESPs, RDSPs, and TFSAs listed on tax slips, and must thus be listed on Schedule 4, Line 120, Line 121, T3 (Statement of Trust Income)? Or are dividends and interest earned in these exempt from being listed there?
Also, dividends that are automatically reinvested, are those listed on the above statements/lines, or are they exempt from being listed on those?
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On investments, what dividends and interest are listed on tax documents? All of them? That is, does it depend on what the source of dividends/interest is invested in?
For example, are dividends and interest created through RRSPs, RESPs, RDSPs, and TFSAs listed on tax slips, and must thus be listed on Schedule 4, Line 120, Line 121, T3 (Statement of Trust Income)? Or are dividends and interest earned in these exempt from being listed there?
Also, dividends that are automatically reinvested, are those listed on the above statements/lines, or are they exempt from being listed on those?
Hi Scrubbyfish
Only the taxable amount is listed on your forms for your tax return... So income earned in the RRSP or TFSA (for example) are not taxable, and therefore wouldn't be listed on any T-slips for your personal tax return... However, if you were to withdraw money from your RRSP, then you would receive a T4-RRSP slip.
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Thank you thank you for your generosity! I would love to ask you about principal residence exemption. We own a house in toronto (bought 2007) and a cottage (bought 1993/4.) (I realize this matters!)
The toronto home has appreciated by 3-400,000$ and cottage as appreciated 200,000.
What are the rules of the principal residence exemption?
If we sold the toronto house, and used the exemption. Then lived at the cottage for 2-3 years, it would be come our principal residence. If we sold the cottage after living there a while, could it be subject to the exemption too?
Hi there -
You can claim both as a principal residence, but not in the same years...
Roughly speaking -
Your house has appreciated by, let's say, $350,000 in the seven years you've been there. This is a gain of $50,000 per year.
Your cottage has appreciated by $200,000 in 20 years - a gain of $10,000 per year.
Elsewhere you'll note I've discussed the "plus one" rule - in that you 'add' a year of eligibility to your principal residence on any property.
So. Your house has the 'highest' marginal gain of $50k per year, so you would claim PR for SIX (that's right, six, not seven) as the plus one rule will top you up to cover the entire gain. I.e. no tax (yay)!
On the cottage, with six years claimed per above, you have 14 remaining years of eligibility. This means that 14+1 years (15) of your 20 years are covered by PR, or 75% of your gain.
Assuming you were selling both at the same time, this means only $50,000 of the gain on your cottage is eligible, and only half of this is taxable. So, you'll pay tax on the $25,000 of taxable capital gains. Obviously by owning the cottage longer, a higher proportion of this gain will be covered by this exemption, but inevitably you'll end up paying some tax when you go to sell it, since the years are better utilized on your home.
Hope this clarifies the process!
MERCI!!
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Only the taxable amount is listed on your forms for your tax return... So income earned in the RRSP or TFSA (for example) are not taxable, and therefore wouldn't be listed on any T-slips for your personal tax return...
Oh! Is income (dividends, interest) earned on money inside any registered program non-taxable? i.e., I only knew that interest earned in the TFSA is not taxable. Is this true of dividends earned in the TFSA, too, and interest and dividends in all registered programs?
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Only the taxable amount is listed on your forms for your tax return... So income earned in the RRSP or TFSA (for example) are not taxable, and therefore wouldn't be listed on any T-slips for your personal tax return...
Oh! Is income (dividends, interest) earned on money inside any registered program non-taxable? i.e., I only knew that interest earned in the TFSA is not taxable. Is this true of dividends earned in the TFSA, too, and interest and dividends in all registered programs?
Any growth inside a registered plan is 'outside' taxation. Anything in a TFSA will NEVER be taxed. Anything you withdraw from an RRSP will be taxed as income (the reverse of the decrease in taxable income when you put the money in), but no growth within the RRSP is taxed. Return of capital, interest, divis - all the same - no tax, nada.
You only get slips for what goes in and what comes out of an RRSP. And nothing at all for the TFSA.
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Thanks, daverobev!
I find this fascinating. I never knew. The impact of even $100 in dividends displaying on a slip/Schedule/Line 120/Line 121 is significant for me, and yet no accountant in four years mentioned this simple solution. Wow.
Wait, this also means I can use the Canadian Couch Potato model portfolios. i.e., I didn't actually need to avoid dividends/interest, only specific amounts on specific lines on my tax return. I thought it was one and the same, and now I understand that it's not.
I'm off to set up my own RDSP tomorrow, which will bring my son and I to a total of three registered accounts between us.
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Thanks, daverobev!
I find this fascinating. I never knew. The impact of even $100 in dividends displaying on a slip/Schedule/Line 120/Line 121 is significant for me, and yet no accountant in four years mentioned this simple solution. Wow.
Wait, this also means I can use the Canadian Couch Potato model portfolios. i.e., I didn't actually need to avoid dividends/interest, only specific amounts on specific lines on my tax return. I thought it was one and the same, and now I understand that it's not.
I'm off to set up my own RDSP tomorrow, which will bring my son and I to a total of three registered accounts between us.
That's correct -
The only thing to remember is that you want capital gains in your TFSA, and interest in your RRSP/RDSP.
The reason being that only 50% of capital gains are taxable in Canada, but if they are in your RRSP they are 100% taxable (when you withdraw them).
Good luck opening up the accounts!
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The only thing to remember is that you want capital gains in your TFSA, and interest in your RRSP/RDSP.
The reason being that only 50% of capital gains are taxable in Canada, but if they are in your RRSP they are 100% taxable (when you withdraw them).
Good luck opening up the accounts!
That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.
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CPA CB is right, and yes, you should put "growth" assets in TFSA. RRSP is sheltered, ´till you pull the money out. Bigger the ammount, bigger the taxes. TFSA will never ever be taxed again.
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The only thing to remember is that you want capital gains in your TFSA, and interest in your RRSP/RDSP.
The reason being that only 50% of capital gains are taxable in Canada, but if they are in your RRSP they are 100% taxable (when you withdraw them).
Good luck opening up the accounts!
That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.
Sadly it's true - I'm just going to take a sidebar here on semantics...
Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).
The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.
Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.
As a case study - Note, this is ONLY for capital gains purposes.
You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!
Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...
If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.
In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...
The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).
Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again
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The only thing to remember is that you want capital gains in your TFSA, and interest in your RRSP/RDSP.
The reason being that only 50% of capital gains are taxable in Canada, but if they are in your RRSP they are 100% taxable (when you withdraw them).
Good luck opening up the accounts!
That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.
Sadly it's true - I'm just going to take a sidebar here on semantics...
Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).
The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.
Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.
As a case study - Note, this is ONLY for capital gains purposes.
You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!
Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...
If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.
In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...
The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).
Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again
This is not a fair way to compare the TFSA and RRSP. The correct way to compare them is to assume that the 30% "refund" you received from investing into the RRSP was also itself invested into the RRSP. If you model it that way, you will discover that the TFSA and RRSP are exactly equivalent iff your initial and final marginal rate is the same. The only difference is that the TFSA is the superior instrument if your terminal marginal rate will be higher. The RRSP is the superior instrument if your terminal marginal rate will be lower.
The only other thing that's not equivalent is the contribution room rules, which could matter for some people, but ignoring that, the instruments are basically mirror images of each other when correctly compared.
Here's the formal proof:
Using the notation as follows:
x : amount of after-tax dollars to be invested
t : years until retirement
r : rate of return per year, assume annual compounding without loss of generality
a : marginal rate for any additional income now
b : marginal rate for any additional income at retirement
If you invest x into a TFSA, the value of the TFSA at retirement is x*(1+r)**t.
If you invest x/(1-a) into an RRSP (equivalent to x after-tax dollars), the value of the RRSP at retirement after taxes is (1-b)*(x/(1-a))*(1+r)**t.
So the value of the RRSP will exceed the value of the TFSA if and only if (1-b)/(1-a)>1 which is equivalent to a>b, or the original claim stated above, namely that the marginal rate for any additional income now exceeds the marginal rate for any additional income at retirement.
Long story short, for most people on these forums, the RRSP is better than the TFSA if you have room in both, regardless of what you intend to put inside the accounts.
If you intend to retire MMM-style early, RRSP will beat taxable accounts as well, because you will be paying approximately 0% tax at withdrawal (keeping in mind that some of the 4% rule can just be return of principal while you are extracting the contents of the RRSP), so the recharacterisation of capital gains as ordinary income does not hurt you. (If you intend for a more princely retirement, taxable accounts can beat RRSPs in some cases.)
US readers will recognise this is very similar to the situation in the USA except in Canada, you don't need workarounds like the "roth pipeline" because the RRSP allows withdrawing at any time. Indeed, moving to Canada is another way to extract the contents of your US 401(k) or IRA (known in Canada respectively as a "foreign pension plan" and a "foreign retirement arrangement") before the defined ages, because the Income Tax Act allows the contents of those plans to be rolled over into a Canadian RRSP without using any of your RRSP room (subject to some conditions). I may end up benefiting from this if I move back to Canada in the future.
Hello Cathy
Thanks for your response here. It brings up some interesting points.
I wish tax were as simple as your formula presented here - if it were the case I'd be writing this from a beach in the Caribbean (after I patented the equation), rather than the frigid and cloudy land of Canada.
You're correct - my case study was not an accurate reflection of RRSP vs. TFSA - however, it was perfectly accurate in the case of RRSP vs. TFSA in the case of Capital Gains, which was stated up front.
Rather than going through everything - I would like to point out a few errors in your calculation here -
The first being that, if you're withdrawing from an RRSP, you will most certainly be taxed. Returns of Capital in an RRSP are taxable, at your full marginal rate.
Secondly, the comment regarding Mustachianism and withdrawing from an RRSP are patently false - namely the comment that you can live on this income and be taxed at zero percent. If you plan to retire early (as many of us do) and withdraw from your RRSP, you have around $10,000 in withdrawals from an RRSP before getting taxed. If you think $10,000 is enough to live on for a year in Canada (or $20K as two people), I've got some great land to sell you up north that will make you rich... $10k a year in retirement does not a prince make. Plus - this discussion becomes moot once CPP and OAS kick in, which will eat up this room, meaning that your RRSP will now be taxed at a minimum of approximately 20% (not that different from my example, as you'll note).
The last, and biggest logical flaw here I think extends from the fact that my example was purely a capital gains one (for demonstration purposes) rather than a pure RRSP vs. TFSA comparison.
In your example - you state that so long as the marginal rate at retirement is less than the marginal rate today, the RRSP is a better option (in that, when a > b, the RRSP is better). This is a big over-simplification and skews the original question, which was regarding capital gains in these accounts.
In Canada, capital gains are only half-taxable... meaning that you're dealing with a marginal rate on capital gains that is half of what you'd deal with in an RRSP (ceteris paribus). Your equation doesn't factor this in, and treats all income as equally taxable (when they are not. Capital gains, dividends, and interest are all taxed at different rates - outside of RRSP's, where you are taxed at 100% for everything).
This means that your marginal rate today, needs to be significantly higher than in retirement.
To demonstrate, I'll change the figures - same gain, registered vs. non registered. You invest $100k, plus, since you're a high income earner, let's say 50% of that is a tax refund - so you get $150k in total investment.
I'll do the same - but in after-tax dollars... So I effectively "lose" 50k in this example from the start.
Even at the LOWEST possible brackets - you'll be taxed $200,000 (oops. $220,000 - you're taxed on the total amount... this is the only edit...)on your withdrawals (20% up to around 55k per year... accounting for the personal credit etc.). I'll be taxed at 10% - so $100,000. You got $50k up front, but I get $50k more (nominally speaking... not going to deal with PV, as stated, on this one).
There is no example here, where you don't lose in a nominal sense, other than around zero percent (which is fictitious in Canada - see part regarding land for sale above). The only time this breaks even is when the marginal rate is around 10%, ignoring time value of money. The marginal rate in retirement with CPP and OAS will be twice as high, i.e. 20%.
In short - the RRSP is a loser when it comes to capital gains.
Cathy isn't necessarily incorrect in her formula for interest, but with dividends it is more complex, and capital gains is even further. The story here is that in an RRSP you defer income until withdrawal, in a normal account they're triggered upon receipt (i.e. buy/sell stocks, receive dividends etc.) and in a TFSA any gains are not taxable. To say they are the same is to say dogs and fish are the same because they are both animals - in real life, they are entirely different, and very much depend on your situation.
I encourage specificity here, because in tax you need to know everything (age, marital status, expected retirement age, etc etc etc) to figure out what's right for YOU. Generalities are great to demonstrate a point, but are ultimately unrealistic in life. The point being - if you have $10,000 to invest in stocks and bonds, you're better to put the stocks in a TFSA, and the bonds in an RRSP. Growth is great - but you want to avoid double taxation in the case of capital gains in RRSPs.
Also - I wanted to add a caveat to your statement regarding US transfers to Canada. The US-Canada tax treaty is a complicated one - the US taxes on citizenship, and Canada of residency. (i.e. you always file in the US if you're a citizen - which is not the case in Canada. We can retain citizenship, move to the Cayman Islands, and say 'neener neener' to the CRA)
. If you're looking to transfer a 401k or IRA to Canada (RRSP and TFSA, respectively) I would HIGHLY recommend you speak with a qualified CPA (in Canada) who is experienced in these international tax issues - The rules are weird, residency based (in Canada), and definitely ones you want someone who deals with these issues constantly to look at (i.e. not me, who gets a snapshot on a blog... but someone who will go into much more detail). You want to ensure you do it right the first time.
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Well said, but I would add, dont take chaces, fill both and your "Futur Self" will enjoy ;)
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Hello I have two rental related questions that I couldn't find answers to on CRA's site:
We only put 5% down when buying a new investment property last year so had to pay $8,000 CMHC fees. Can these be deducted during taxes or do they become part of the cost of the property that we factor in when we sell?
Also, we paid land transfer fees and closing costs and didn't deduct them. Are they deductible or do they also become part of the cost of the property.
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Hello I have two rental related questions that I couldn't find answers to on CRA's site:
We only put 5% down when buying a new investment property last year so had to pay $8,000 CMHC fees. Can these be deducted during taxes or do they become part of the cost of the property that we factor in when we sell?
Also, we paid land transfer fees and closing costs and didn't deduct them. Are they deductible or do they also become part of the cost of the property.
Hi again C-Kat.
These are what I would call 'grey' area issues, so I'm going to go into a bit of tax theory before answering here...
These fees & costs have been incurred as a result of purchasing the rental property.
The rules regarding capitalizing (i.e. adding to your cost base) versus expensing are somewhat vague, and purely situation based.
Capitalizing an item requires that the cost is necessary to prepare the asset (in this case, the house) to produce income. Were these costs necessary to prepare the property for this income? Sure, but ultimately, they are really one time expenditures which are NOT capital in nature. If you needed to add a roof, this is capital (as an example).
That being said - the CRA will allow you to treat these costs either way. However, the correct treatment is expensing in the year incurred for your situation (in my opinion). These aren't true assets - they have no 'value' to add to your property as they are not transferrable, and really don't reflect the nature of your transaction.
In short, expense it!
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Hello I have two rental related questions that I couldn't find answers to on CRA's site:
We only put 5% down when buying a new investment property last year so had to pay $8,000 CMHC fees. Can these be deducted during taxes or do they become part of the cost of the property that we factor in when we sell?
Also, we paid land transfer fees and closing costs and didn't deduct them. Are they deductible or do they also become part of the cost of the property.
Hi again C-Kat.
These are what I would call 'grey' area issues, so I'm going to go into a bit of tax theory before answering here...
These fees & costs have been incurred as a result of purchasing the rental property.
The rules regarding capitalizing (i.e. adding to your cost base) versus expensing are somewhat vague, and purely situation based.
Capitalizing an item requires that the cost is necessary to prepare the asset (in this case, the house) to produce income. Were these costs necessary to prepare the property for this income? Sure, but ultimately, they are really one time expenditures which are NOT capital in nature. If you needed to add a roof, this is capital (as an example).
That being said - the CRA will allow you to treat these costs either way. However, the correct treatment is expensing in the year incurred for your situation (in my opinion). These aren't true assets - they have no 'value' to add to your property as they are not transferrable, and really don't reflect the nature of your transaction.
In short, expense it!
Thank you very much! But since we incurred the costs in 2013 and didn't expense them on our 2013 taxes is it too late? can we just resubmit our taxes? And we only had one months rent as income, as we close don the house in November, so will CRA have a problem with 8K CMHC and 5 K closing/land transfer as deductions?
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Hello I have two rental related questions that I couldn't find answers to on CRA's site:
We only put 5% down when buying a new investment property last year so had to pay $8,000 CMHC fees. Can these be deducted during taxes or do they become part of the cost of the property that we factor in when we sell?
Also, we paid land transfer fees and closing costs and didn't deduct them. Are they deductible or do they also become part of the cost of the property.
Hi again C-Kat.
These are what I would call 'grey' area issues, so I'm going to go into a bit of tax theory before answering here...
These fees & costs have been incurred as a result of purchasing the rental property.
The rules regarding capitalizing (i.e. adding to your cost base) versus expensing are somewhat vague, and purely situation based.
Capitalizing an item requires that the cost is necessary to prepare the asset (in this case, the house) to produce income. Were these costs necessary to prepare the property for this income? Sure, but ultimately, they are really one time expenditures which are NOT capital in nature. If you needed to add a roof, this is capital (as an example).
That being said - the CRA will allow you to treat these costs either way. However, the correct treatment is expensing in the year incurred for your situation (in my opinion). These aren't true assets - they have no 'value' to add to your property as they are not transferrable, and really don't reflect the nature of your transaction.
In short, expense it!
Thank you very much! But since we incurred the costs in 2013 and didn't expense them on our 2013 taxes is it too late? can we just resubmit our taxes? And we only had one months rent as income, as we close don the house in November, so will CRA have a problem with 8K CMHC and 5 K closing/land transfer as deductions?
Hi C-Kat - you can amend your return either online, or by filing a T1-Adj through the mail with CRA - you can find the link here http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/chngrtrn-eng.html
CRA will have no issue with regards to this, even given a shortened year, so to speak.
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Wow, thank you for this thread!
I have so much to learn that I don't even know how to formulate my questions properly. But what I've read so far is very helpful! So thanks!
I'll be back when I go gather some numbers and come back with specific questions. :D
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New question!
To be eligible for some income sources, I am required to put my assets into a trust, with me and my son as the beneficiaries. My mum is willing to act as my Trustee. However, I am newly understanding that this may make her the legal owner of the assets. That's fine by me, but if she becomes legal owner of assets held in trust for me and my son, does this impact (appear on) her tax return?
She is a senior with low income, and cannot afford to have additional income or assets attributed to her, as then she may lose the few subsidies she receives.
In terms of taxes (capital gains, growth, dividends, interest, etc), who does CRA view as "benefiting" from assets held by Person A in trust for Person B? Can only wealthy people afford to be Trustees?
In case it makes any difference, this will be what is called a discretionary trust or a Henson trust.
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Am I ever glad I found this thread. Thanks for offering assistance. I have several questions.
I live and work in BC.
Please correct me if I'm wrong anywhere. I may be making incorrect assumptions.
2 years ago I pulled $10k out of my RRSP to use under the homebuyers plan. I was planning on paying that back either this year or next year. Do I have to contribute that money back to my own RRSP or can I contribute that money to a spousal RRSP and fill out the form as paid back?
I am also contributing money to my wife's RRSP. Can I defer these RRSP contributions to next year? Meaning, can I contribute the money this year and claim the money next year?
Can I defer any or all of my personal RRSP contribution this year to next? Meaning, can I contribute the money this year and claim the money next year?
The reason I'm asking about the above is, I am starting a new job in January and the pay will be $22k more than I make this year.
Have you done any rough calculations on this before?
For example, see below. I used Federal income tax rates only. I understand there are provincial as well but I didn't want to do more math.
These situations do not take into account the $10k I need to pay back under the homebuyers plan. I understand that is a repayment and is not able to be claimed.
Situation A
2014 earn $68k, contribute $10k to RRSP (claim this year)
2015 earn $90k, contribute $10k to RRSP (claim this year)
Income tax savings are $10k * 22% = $2,200 in 2014
Income tax savings are $3k * 26% + $7k * 22% = $2320 in 2015
Total tax savings of $4,520 combined.
Situation B
2014 earn $68k, contribute $10k to RRSP (defer to next year and claim in 2015)
2015 earn $90k, contribute $10k to RRSP (claim $20k in 2015)
Income tax savings are $0 in 2014
Income tax savings are $3k * 26% + $17k * 22% = $4520 in 2015
Is this legal?
Is my math correct? It results in no savings. The tax savings are identical.
Thanks! :)
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You can contribute the yearly contribution as soon as jan 1st and even exceed by 2k$ with no penalty. You dont have to claim refunds right away, it's your call.
Your calculations looks good "federalwise" but double check with the BC marginal tax rates to be sure. When there is no real saving to delay refund, claim it right away do whatever you want with $$ (repay mortgage, invest).
As for the homebuyers plan, you can repay over 15 years but since there is no refund, it's about the same as contributing TFSA. I would better do this because it gives you more options down the road and all growth (cap + div + int) wont be taxed went you pull it out.
My 2 cents
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New question!
To be eligible for some income sources, I am required to put my assets into a trust, with me and my son as the beneficiaries. My mum is willing to act as my Trustee. However, I am newly understanding that this may make her the legal owner of the assets. That's fine by me, but if she becomes legal owner of assets held in trust for me and my son, does this impact (appear on) her tax return?
She is a senior with low income, and cannot afford to have additional income or assets attributed to her, as then she may lose the few subsidies she receives.
In terms of taxes (capital gains, growth, dividends, interest, etc), who does CRA view as "benefiting" from assets held by Person A in trust for Person B? Can only wealthy people afford to be Trustees?
In case it makes any difference, this will be what is called a discretionary trust or a Henson trust.
Hi there -
Any undistributed income will be attributable to the trust, not to your mother most certainly. She ultimately will have control on what to disburse to you, and when, however she does not retain control over the assets for personal use (i.e. nothing is attributable to her, and she can't take anything from the trust personally.)
Trusts are subject to their own set of rules - this means that you'll need to file a Trust Income Tax Return, in addition to your own personal income tax returns, which means that you'll likely be hiring someone like me to do this to you at a cost. I imagine your benefits will greatly out-pace said cost, but I just want you to be aware of this ahead of time.
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Am I ever glad I found this thread. Thanks for offering assistance. I have several questions.
I live and work in BC.
Please correct me if I'm wrong anywhere. I may be making incorrect assumptions.
2 years ago I pulled $10k out of my RRSP to use under the homebuyers plan. I was planning on paying that back either this year or next year. Do I have to contribute that money back to my own RRSP or can I contribute that money to a spousal RRSP and fill out the form as paid back?
I am also contributing money to my wife's RRSP. Can I defer these RRSP contributions to next year? Meaning, can I contribute the money this year and claim the money next year?
Can I defer any or all of my personal RRSP contribution this year to next? Meaning, can I contribute the money this year and claim the money next year?
The reason I'm asking about the above is, I am starting a new job in January and the pay will be $22k more than I make this year.
Have you done any rough calculations on this before?
For example, see below. I used Federal income tax rates only. I understand there are provincial as well but I didn't want to do more math.
These situations do not take into account the $10k I need to pay back under the homebuyers plan. I understand that is a repayment and is not able to be claimed.
Situation A
2014 earn $68k, contribute $10k to RRSP (claim this year)
2015 earn $90k, contribute $10k to RRSP (claim this year)
Income tax savings are $10k * 22% = $2,200 in 2014
Income tax savings are $3k * 26% + $7k * 22% = $2320 in 2015
Total tax savings of $4,520 combined.
Situation B
2014 earn $68k, contribute $10k to RRSP (defer to next year and claim in 2015)
2015 earn $90k, contribute $10k to RRSP (claim $20k in 2015)
Income tax savings are $0 in 2014
Income tax savings are $3k * 26% + $17k * 22% = $4520 in 2015
Is this legal?
Is my math correct? It results in no savings. The tax savings are identical.
Thanks! :)
Hi Hummer
You can only contribute to your own RRSP to repay the HBP (assuming it was pulled out of this account in the first place). Unfortunately you can't contribute to spousal in this regard.
You can absolutely choose to defer your RRSP deductions to a later year. This isn't typically on option on your standard run of the mill personal tax programs, so it may be something you want to engage an accountant to help you with. You'll have to file an additional Schedule (Sch. 7) in the future, to make use of these deductions.
Your math is essentially correct, but it negates the affect of "bracket creep" where the tax brackets associated with the 22% and 26% income levels will increase with indexing between 2014 and 2015.
The Canadian system favours a concept called integration, whereby it tries to (within reason) eliminate the need for aggressive tax planning solutions such as this. The idea being that the difference in these would be so minor, that it shouldn't impact your investment planning and capital decisions.
As Le Barbu correctly states, you'll want to cross check to BC taxes (and look at next years budget re: rates) to ensure you aren't missing anything in your assumptions.
Hope this clarifies!
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Thanks again, CPA CB! That's a relief.
Trusts are subject to their own set of rules - this means that you'll need to file a Trust Income Tax Return, in addition to your own personal income tax returns...
Oh! I didn't know that!
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CPA CB, thanks so much for the help!
I am American, but my husband is Canadian. We live and work in the US (he is on a visa). However, he travels to Canada frequently, and when there, he has done some sports betting and earned a good amount of profit ($10k-20k). No taxes were withheld. Does he need to pay Canadian taxes on that income? Is there any type of paperwork we should be saving? I know from a US perspective, we'll have to pay income taxes on the winnings.
Separately, seeing the potential in this, we'd like to set this up as a legit side business. He is developing a software algorithm to analyze sports data that would be developed solely in the US. We're considering establishing an LLC in the US as a software development company. Is there a way to set up a company in Canada that does the betting, but then pays the betting profits as a fee to the US business? We'd love to hear any other suggestions.
Thanks for your help!
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CPA CB, thanks so much for the help!
I am American, but my husband is Canadian. We live and work in the US (he is on a visa). However, he travels to Canada frequently, and when there, he has done some sports betting and earned a good amount of profit ($10k-20k). No taxes were withheld. Does he need to pay Canadian taxes on that income? Is there any type of paperwork we should be saving? I know from a US perspective, we'll have to pay income taxes on the winnings.
Separately, seeing the potential in this, we'd like to set this up as a legit side business. He is developing a software algorithm to analyze sports data that would be developed solely in the US. We're considering establishing an LLC in the US as a software development company. Is there a way to set up a company in Canada that does the betting, but then pays the betting profits as a fee to the US business? We'd love to hear any other suggestions.
Thanks for your help!
Hi NYC
You're right! He won't have to pay Canadian Tax in this sense, as it doesn't constitute "earned income". Earned income meaning it becomes a method to work to earn a living, rather than a windfall.
Let me circle back after doing some research on your corporate question here. It is either a) not possible, or b) somewhat complex, so I'd prefer to point you in the right direction after doing more research (as this is certainly unusual).
The one thing I will say - if you're going to bother with a foreign corporation, this may be more practical offshore, rather than Canada (where you will inevitably be taxed, in what is a highly regulated industry).
Will let you know! Great question.
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thank you very much! Would be very interested in any materials you can point us to. unfortunately, gambling is very tricky in the US, which is why we would be interested in a canadian company, but we hadn't thought offshore. if you have any materials on how to establish an offshore corporation, would be interested in that too! Thanks!
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New Question - Disability Tax Credit
I was recently approved for the DTC, retroactive to 2005. Two years within that period, my income was slightly higher than would allow for the full bond amount for my son and I (they don't seem to adjust for how many family members there are served by that income).
1. For calculation of RDSP bonds, what line on the tax return reflects the "family income"?
2. What Schedule and Line on a tax return shows the Disability Tax Credit for a dependent (and DTC for self, if different)?
3. When the DTC credit is applied retroactively to a given tax year, is the "family income" then reduced (for purposes of bond)?
4. If yes to #3, how do I get the DTC applied to retroactive tax years? Do I just write a letter to CRA to ask them to, or do I fill out an Adjustment paper for each year?
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thank you very much! Would be very interested in any materials you can point us to. unfortunately, gambling is very tricky in the US, which is why we would be interested in a canadian company, but we hadn't thought offshore. if you have any materials on how to establish an offshore corporation, would be interested in that too! Thanks!
Hi NYC,
Alright - so upon a bit more examination, here's what I've come up with.
Insofar as incorporating in Canada - I wouldn't want to say it's "impossible" but it most certainly is nearly so. The regulations here are equivalent to the United States in many regards, and are actually higher in others. In addition, these funds would be taxed, which is to say that you're not getting an advantage here vs. the US.
I'm going to add a quick disclaimer in here - I know next to nothing about US tax law, especially when it comes to what I'm about to say. Please consult a tax lawyer and/or tax accountant if you're serious here..
The other suggestion here is an offshore corporation, which makes these restrictions "go away" in a sense.
I'll be frank here - the costs are high, and you could end up spending more in fees than it's worth. If you're looking to really go for it, offshore is the way to go. Don't repatriate the funds if you can help it. All of the gambling websites etc. are done through offshore corporations, you'd be wise to take this route.
That being said - this is not a traditional business model. Gambling is a highly risky "business". Your husband has enjoyed some great success, but you really want to take a step back here and evaluate your options. Is this a viable business? He may have devised a system, but what happens when this system stops working?
If you're going through with it - I'm not trying to be negative, but I am trying to highlight some risks that you'll want to mitigate. Like any investment, you need to have an absolute strategy, to control the urge to double-down on a loss. You want to develop a plan for risk exposure - how much capital will you place on a bet? What is the risk tolerance? The problem with gambling, is that you can work your way up, and lose everything in a flash. This risk should be understood, and evaluated on a continuing basis.
Hope you find this helpful - not meaning to rain on the parade above, but if this is a serious entity then you want to make sure you protect yourself!
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New Question - Disability Tax Credit
I was recently approved for the DTC, retroactive to 2005. Two years within that period, my income was slightly higher than would allow for the full bond amount for my son and I (they don't seem to adjust for how many family members there are served by that income).
1. For calculation of RDSP bonds, what line on the tax return reflects the "family income"?
2. What Schedule and Line on a tax return shows the Disability Tax Credit for a dependent (and DTC for self, if different)?
3. When the DTC credit is applied retroactively to a given tax year, is the "family income" then reduced (for purposes of bond)?
4. If yes to #3, how do I get the DTC applied to retroactive tax years? Do I just write a letter to CRA to ask them to, or do I fill out an Adjustment paper for each year?
Hi there,
You're right - family income is just your and your spouses income - no adjustment for family members.
I'd suggest discussing this with someone who knows the RDSP process a bit better than I - as you know, this is a new program, and I'm thinking someone at the Canada Revenue Agency may know the answers a bit better. As far as questions 1 and 2 are concerned, I assume it is the total Line 120 income for you plus a spouse - but please verify.
As far as question 3 is concerned.. I believe the DTC would be applied retroactively.
I'll point you to this website, which may help a bit. http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rdsp-reei/cdsg-eng.html
Otherwise, give CRA a call and ask them your questions. It can't hurt!
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Otherwise, give CRA a call and ask them your questions. It can't hurt!
Oh, it hurts ;) Dealing with CRA phone reps is like dealing with TD Bank! However, the RDSP has a dedicated line which gives excellent info re: contributions, optimizing, etc. I haven't had to ask them about tax return lines and schedules, return adjustments, etc, before -not sure if they'll know about those- but I'll definitely give that a shot. The bad news is I have to call them at 7am while I'm getting my kid ready for school.
Yeah, I was hoping they would determine "low/medium/high income" by how many family members are living on that income. The RDSP program seems to be set up that whether you're free and single, or a single parent with eleven kids, the income cut-offs for the bond are exactly the same. Seems odd.
Yes, the DTC is applied retroactively when the disability designation is, but I don't know if the application of DTC actively reduces "family income" on the bond-determinant line. Hopefully I will know this, and the other things tomorrow!
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What form do I need to fill out to complete paying back the money I that I took out of my RRSP for the HBP?
Is there anything in particular that I need to have my bank do, where my RRSP is registered?
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What form do I need to fill out to complete paying back the money I that I took out of my RRSP for the HBP?
Is there anything in particular that I need to have my bank do, where my RRSP is registered?
On your tax return there's a place to specify how much of your RRSP contributions you're designating as HBP repayments. You don't need to do anything with your bank for this.
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Can I get greedy and ask another question ? ;o)
The DW and I plan to ER next year and buy a house in a cheaper area to live (GTA > Georgian bay area).
We have half the funds we need in cash(equiv.) and are going to take the other half as a "mortgage" from our Holdco.
I know the loan has to be properly documented like a real mortgage with terms of payment, interest rate, etc.. Questions are:
- what interest rate has to apply ? the current CRA mandated rate or the lowest documentable "commercially available" rate at the time ?
- do we have to structure it like a normal mortgage (5 yr terms, prepayment terms, etc..) or can we have flexibility to say pay it off in 2 years (somehow!) if we want (as long as the full principle/interest due was paid) or otherwise give ourselves whatever terms we want ?
- i assume that the Holdco has to pay full rate tax on the mortgage interest we pay it back because it is just that, interest income ?
I've done some reading on this and come across some different opinions and poorly worded government policy so anything you could do to shed light would be appreciated.
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Can I get greedy and ask another question ? ;o)
The DW and I plan to ER next year and buy a house in a cheaper area to live (GTA > Georgian bay area).
We have half the funds we need in cash(equiv.) and are going to take the other half as a "mortgage" from our Holdco.
I know the loan has to be properly documented like a real mortgage with terms of payment, interest rate, etc.. Questions are:
- what interest rate has to apply ? the current CRA mandated rate or the lowest documentable "commercially available" rate at the time ?
- do we have to structure it like a normal mortgage (5 yr terms, prepayment terms, etc..) or can we have flexibility to say pay it off in 2 years (somehow!) if we want (as long as the full principle/interest due was paid) or otherwise give ourselves whatever terms we want ?
- i assume that the Holdco has to pay full rate tax on the mortgage interest we pay it back because it is just that, interest income ?
I've done some reading on this and come across some different opinions and poorly worded government policy so anything you could do to shed light would be appreciated.
Hi Koogie,
Of course, asking multiple questions is appreciated - especially when we are dealing with topics such as this. To quote Gordon Gekko - Greed is good!
The prescribed rate of lending between a corporation and shareholders has remained constant at 1% for the past few quarters.
However, there is a specific section in the Income Tax Act that penalizes here (s 15.2) if the interest amount is not equivalent to an 'arms length' transaction. If CRA were to say you received a benefit from the loan (beyond that of a traditional mortgage) they can re-assess your return (in the year the loan was made) for the total loan amount... Sound unfair? It is.
You're right - this needs to be what the CRA calls a "bona fide" (hello 1930's) agreement. You need a set repayment plan, and at an interest rate that would be a fair market rate. What would the banks give you? 2.5%? I suggest you charge this rate through, to cover your back in this regard.
You can be flexible - but you need to operate on behalf of the corporation in good faith - what repayment terms are reasonable? 5 years? 10? You can go longer and pay in advance without issue.
The ultimate test here is if it would be in the ordinary course of business. Would your corporation extend the same or similar terms to John and Jane Doe under the circumstances? If so, you're onside, if not - you'll want to reconsider the terms. CRA has no issue with loaning money from a holdco - so long as it is in the same good faith - they expect the holdco to make money on this, and be taxed accordingly.
So - in short, make the loan on the (low end of) fair market terms - make the period reasonable and ensure this is signed as such. You don't want to get caught offside here - so you're better to pay a few thousand extra in interest (to yourself - which is taxed and distributed back to you) than to find yourself being re-assessed for the loan value.
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Hi CPA CB,
First off, thank you for offering your knowledge, I'm sure all the Canadians here appreciate it. I will probably have some specific tax question for you soon enough, but right now I would like to get some clarification regarding your earlier discussion of equities/capital gains in RRSPs.
Currently my marginal rate is 36% (Alberta resident, ~90k gross) and I'm maxing out TFSA contributions. So, if I buy growth equities in taxable accounts, I would be paying tax on capital gains at a rate of 18% when it comes time to sell (assuming the same tax bracket). If instead I contribute that money to an RRSP and buy the same equities I get a tax deduction and don't pay capital gains tax when selling but instead pay income tax when withdrawing the funds. If my living expenses remain roughly the same as they are now, I plan to need about 20k/year in ER with a paid off house. This can be accomplished by withdrawing 11k from RRSP and making up the 9k from a TFSA (0 income tax), or by withdrawing 20k from RRSP (about 7.8% income tax), or somewhere in between. Either way, the tax paid on the growth is less than the 18% I would be paying in capital gains tax, assuming all growth is from cap gains. Is this correct? Alternatively, if I ER and show no income, do I pay capital gains tax at a rate of 0% up to 11k on equities sold at that time?
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Hi CPA CB,
First off, thank you for offering your knowledge, I'm sure all the Canadians here appreciate it. I will probably have some specific tax question for you soon enough, but right now I would like to get some clarification regarding your earlier discussion of equities/capital gains in RRSPs.
Currently my marginal rate is 36% (Alberta resident, ~90k gross) and I'm maxing out TFSA contributions. So, if I buy growth equities in taxable accounts, I would be paying tax on capital gains at a rate of 18% when it comes time to sell (assuming the same tax bracket). If instead I contribute that money to an RRSP and buy the same equities I get a tax deduction and don't pay capital gains tax when selling but instead pay income tax when withdrawing the funds. If my living expenses remain roughly the same as they are now, I plan to need about 20k/year in ER with a paid off house. This can be accomplished by withdrawing 11k from RRSP and making up the 9k from a TFSA (0 income tax), or by withdrawing 20k from RRSP (about 7.8% income tax), or somewhere in between. Either way, the tax paid on the growth is less than the 18% I would be paying in capital gains tax, assuming all growth is from cap gains. Is this correct? Alternatively, if I ER and show no income, do I pay capital gains tax at a rate of 0% up to 11k on equities sold at that time?
Hi Posthumane -
Thanks for posting - I appreciate the opportunity to clarify for everyone here.
Capital gains are 50% taxable in Canada, as you know - RRSP's on the other hand, you receive a 100% deduction today, but you'll be taxed at 100% in the future, on the total amount, INCLUDING the initial investment.
For argument's sake - I will ignore the impact of triggering gains in a taxable account over the life of your investment (it screws up present valuing), but the result is largely the same.
Comparing % rates here ignores the reality of your situation - comparing percentages tends to skew things away from what will happen logistically.
So, in that light, I'm going to re-phrase how I've discussed this issue in the past.
If you invest $100,000 into your RRSP (at 39%) - let's assume you'll receive a tax refund of $40,000 (rounding).
Put otherwise - your tax savings in a taxable account needs to be over $40,000 to break even.
Assuming the lowest rate to expect here in Canada at 10% (which is generously low), your tax savings upon withdrawal are 5% from a taxable account (half of the 10% you'd be charged from an RRSP).
Now, $20,000 seems very low in Canadian terms - we have a high cost of living, and as you age this will increase with pharmaceuticals, insurance, etc.
Let's take this $20k though as an example - at 10% you'll pay $2,000 in tax per year. I'll pay $1,000 per year on my gains. In this scenario, it will take about 40 years to break even between the two. This is assuming a ludicrously low marginal rate, and a low cost of living. The current average mortality age of Men in Canada is 80.78, and Women is about 84.3 This means that if you're between 40 and 45, based on the above assumptions, I'll have made up the difference in the period.
To be a bit more reasonable here - let's assume you'll be withdrawing $30k per year, and let's say that the average taxes are 15%. You'll end up paying $4,500, and I'll be half that, at $2,250. I'm going to make up this $40,000 initial savings in under 18 years... So based on mortality rates that would mean you plan to retire at 62 or 63 (which I would posit is not ER).
The other point here is that the Canadian Government has not historically been known to be in the business of charity - if they're giving you $40,000 today, they'll be expecting a return on this investment down the road. If you need more proof in how uncharitable they are, you can research how aggressively the CRA is pursuing taxing TFSA accounts where the holders have seen significant gains since inception.
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...research how aggressively the CRA is pursuing taxing TFSA accounts where the holders have seen significant gains since inception.
Wha? I'm not grasping much of this discussion, so may have missed something about this. What are they taxing in a tax-free account?
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...research how aggressively the CRA is pursuing taxing TFSA accounts where the holders have seen significant gains since inception.
Wha? I'm not grasping much of this discussion, so may have missed something about this. What are they taxing in a tax-free account?
Hope the latest paragraph mean they can run an inquire if they think some "investments" are not clean (legal) ?
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Hi Koogie,
Of course, asking multiple questions is appreciated - especially when we are dealing with topics such as this. To quote Gordon Gekko - Greed is good!
The prescribed rate of lending between a corporation and shareholders has remained constant at 1% for the past few quarters.
However, there is a specific section in the Income Tax Act that penalizes here (s 15.2) if the interest amount is not equivalent to an 'arms length' transaction. If CRA were to say you received a benefit from the loan (beyond that of a traditional mortgage) they can re-assess your return (in the year the loan was made) for the total loan amount... Sound unfair? It is.
You're right - this needs to be what the CRA calls a "bona fide" (hello 1930's) agreement. You need a set repayment plan, and at an interest rate that would be a fair market rate. What would the banks give you? 2.5%? I suggest you charge this rate through, to cover your back in this regard.
You can be flexible - but you need to operate on behalf of the corporation in good faith - what repayment terms are reasonable? 5 years? 10? You can go longer and pay in advance without issue.
The ultimate test here is if it would be in the ordinary course of business. Would your corporation extend the same or similar terms to John and Jane Doe under the circumstances? If so, you're onside, if not - you'll want to reconsider the terms. CRA has no issue with loaning money from a holdco - so long as it is in the same good faith - they expect the holdco to make money on this, and be taxed accordingly.
So - in short, make the loan on the (low end of) fair market terms - make the period reasonable and ensure this is signed as such. You don't want to get caught offside here - so you're better to pay a few thousand extra in interest (to yourself - which is taxed and distributed back to you) than to find yourself being re-assessed for the loan value.
Thank you very much. Clear and concise and thorough. It is pretty much as I expected and honestly it makes sense from the arms length point of view. I was of course trying to think of a way to minimize the income flow from us back to the Holdco and the resultant "sticky" taxation that occurs as we move money from one "pile" to the other. CRA get their pound of flesh in the end, no matter what, as usual.
It is good to know about the terms. We'll probably calculate a near standard 20 year mortgage for ourselves, with very generous prepayment terms (mind you, including the full principal/calculated interest due).
Cheers.
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...research how aggressively the CRA is pursuing taxing TFSA accounts where the holders have seen significant gains since inception.
Wha? I'm not grasping much of this discussion, so may have missed something about this. What are they taxing in a tax-free account?
Hope the latest paragraph mean they can run an inquire if they think some "investments" are not clean (legal) ?
They're cracking down on day-traders and overall winners. See articles below for more information.
http://business.financialpost.com/2014/12/04/tfsa-holders-under-audit-banned-from-withdrawals-as-dealers-fear-getting-stuck-with-tax-bills/?__lsa=1546-22c6
http://business.financialpost.com/2014/12/02/canadians-with-too-many-wins-in-their-tfsa-being-targetted-by-cra/?__lsa=1546-22c6
http://business.financialpost.com/2014/12/02/heres-what-will-get-your-tfsa-audited-by-the-canada-revenue-agency/?__lsa=1546-22c6
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They're cracking down on day-traders and overall winners. See articles below for more information.
http://business.financialpost.com/2014/12/04/tfsa-holders-under-audit-banned-from-withdrawals-as-dealers-fear-getting-stuck-with-tax-bills/?__lsa=1546-22c6
http://business.financialpost.com/2014/12/02/canadians-with-too-many-wins-in-their-tfsa-being-targetted-by-cra/?__lsa=1546-22c6
http://business.financialpost.com/2014/12/02/heres-what-will-get-your-tfsa-audited-by-the-canada-revenue-agency/?__lsa=1546-22c6
Stunning. Not surprising, given case law I've read in other aspects of CRA stuff (defining "married-like", etc), but stunning nonetheless.
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Hi CPA CB,
First off, thank you for offering your knowledge, I'm sure all the Canadians here appreciate it. I will probably have some specific tax question for you soon enough, but right now I would like to get some clarification regarding your earlier discussion of equities/capital gains in RRSPs.
Currently my marginal rate is 36% (Alberta resident, ~90k gross) and I'm maxing out TFSA contributions. So, if I buy growth equities in taxable accounts, I would be paying tax on capital gains at a rate of 18% when it comes time to sell (assuming the same tax bracket). If instead I contribute that money to an RRSP and buy the same equities I get a tax deduction and don't pay capital gains tax when selling but instead pay income tax when withdrawing the funds. If my living expenses remain roughly the same as they are now, I plan to need about 20k/year in ER with a paid off house. This can be accomplished by withdrawing 11k from RRSP and making up the 9k from a TFSA (0 income tax), or by withdrawing 20k from RRSP (about 7.8% income tax), or somewhere in between. Either way, the tax paid on the growth is less than the 18% I would be paying in capital gains tax, assuming all growth is from cap gains. Is this correct? Alternatively, if I ER and show no income, do I pay capital gains tax at a rate of 0% up to 11k on equities sold at that time?
Hi Posthumane -
Thanks for posting - I appreciate the opportunity to clarify for everyone here.
Capital gains are 50% taxable in Canada, as you know - RRSP's on the other hand, you receive a 100% deduction today, but you'll be taxed at 100% in the future, on the total amount, INCLUDING the initial investment.
For argument's sake - I will ignore the impact of triggering gains in a taxable account over the life of your investment (it screws up present valuing), but the result is largely the same.
Comparing % rates here ignores the reality of your situation - comparing percentages tends to skew things away from what will happen logistically.
So, in that light, I'm going to re-phrase how I've discussed this issue in the past.
If you invest $100,000 into your RRSP (at 39%) - let's assume you'll receive a tax refund of $40,000 (rounding).
Put otherwise - your tax savings in a taxable account needs to be over $40,000 to break even.
Assuming the lowest rate to expect here in Canada at 10% (which is generously low), your tax savings upon withdrawal are 5% from a taxable account (half of the 10% you'd be charged from an RRSP).
Now, $20,000 seems very low in Canadian terms - we have a high cost of living, and as you age this will increase with pharmaceuticals, insurance, etc.
Let's take this $20k though as an example - at 10% you'll pay $2,000 in tax per year. I'll pay $1,000 per year on my gains. In this scenario, it will take about 40 years to break even between the two. This is assuming a ludicrously low marginal rate, and a low cost of living. The current average mortality age of Men in Canada is 80.78, and Women is about 84.3 This means that if you're between 40 and 45, based on the above assumptions, I'll have made up the difference in the period.
To be a bit more reasonable here - let's assume you'll be withdrawing $30k per year, and let's say that the average taxes are 15%. You'll end up paying $4,500, and I'll be half that, at $2,250. I'm going to make up this $40,000 initial savings in under 18 years... So based on mortality rates that would mean you plan to retire at 62 or 63 (which I would posit is not ER).
The other point here is that the Canadian Government has not historically been known to be in the business of charity - if they're giving you $40,000 today, they'll be expecting a return on this investment down the road. If you need more proof in how uncharitable they are, you can research how aggressively the CRA is pursuing taxing TFSA accounts where the holders have seen significant gains since inception.
Thanks for the reply CPA CB, that's a pretty thorough comparison. It seems that my at my ER plan scenario (at 45 with 20k/year expenses) it's almost a wash either way, with a slight advantage to taxable accounts. I know the 20k/person can work in Canada (though probably not in Toronto, Ottawa, Calgary, or Vancouver) since I currently spend about $35k/year including 17k of mortgage payments, and I will have the house paid off before ER time.
Are dividend paying bond funds treated the same as dividend paying equity or the same as individual bonds for tax purposes?
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Bonds funds ? Hope you mean bonds ETF. Anyway, bonds does not usualy pay "dividends", but more likely "interests". You can get the "split" from the funds provider, wait for T3 slip (issued only for taxables accounts) or if it is an ETF, take a look at a site like CDS Innovation to get it.
If your assets are all in RRSP or TFSA, dont botther with this, its sheltered anyway
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This thread makes me uneasy. Everyone, please remember to speak to a professional and double check the information that is given to you. I hope CPA CB is really who he says he is, but all we know is some anonymous person on the internet is giving accounting and tax advice. And to be fair, yes, CPA CB has also recommended this to readers a few times.
A few comments just don't sit right.
Let's take this $20k though as an example - at 10% you'll pay $2,000 in tax per year. I'll pay $1,000 per year on my gains. In this scenario, it will take about 40 years to break even between the two. This is assuming a ludicrously low marginal rate, and a low cost of living. The current average mortality age of Men in Canada is 80.78, and Women is about 84.3 This means that if you're between 40 and 45, based on the above assumptions, I'll have made up the difference in the period.
If 100k is invested in an RRSP (and 39% marginal tax as above) and 20K is pulled out per year in retirement, it can't take 40 years to break even - you run out of money long before that. Less taxes would be paid if money was sheltered. RRSPs are a good option for many Canadians, especially at a 39% marginal rate. In many situations, sheltered is better than unsheltered.
Also
Hello I have two rental related questions that I couldn't find answers to on CRA's site:
We only put 5% down when buying a new investment property last year so had to pay $8,000 CMHC fees. Can these be deducted during taxes or do they become part of the cost of the property that we factor in when we sell?
Also, we paid land transfer fees and closing costs and didn't deduct them. Are they deductible or do they also become part of the cost of the property.
Hi again C-Kat.
These are what I would call 'grey' area issues, so I'm going to go into a bit of tax theory before answering here...
These fees & costs have been incurred as a result of purchasing the rental property.
The rules regarding capitalizing (i.e. adding to your cost base) versus expensing are somewhat vague, and purely situation based.
Capitalizing an item requires that the cost is necessary to prepare the asset (in this case, the house) to produce income. Were these costs necessary to prepare the property for this income? Sure, but ultimately, they are really one time expenditures which are NOT capital in nature. If you needed to add a roof, this is capital (as an example).
That being said - the CRA will allow you to treat these costs either way. However, the correct treatment is expensing in the year incurred for your situation (in my opinion). These aren't true assets - they have no 'value' to add to your property as they are not transferrable, and really don't reflect the nature of your transaction.
In short, expense it!
According to the CRA:
“Line 8860 – Legal, acc
ounting, and other
professional fees
You can deduct fees for legal services to prepare leases or
collect overdue rents. If you
incur legal fees to buy your
rental property, you cannot deduct them from your gross
rental income. Instead, allocate the fees between land and
building and add them to their respective cost. For
example, you buy a property worth $200,000 ($50,000 for
the land and $150,000 for the building) and incur legal fees
of $10,000. Split the $10,000 proportionately between the
land and building. In this case, $2,500 is added to the cost of
the land (for a total of $52,500) and $7,500 is added to the
cost of the building (for a total of $157,500). For more
information, see “Land” on page 20.
Expenses you cannot deduct
Land transfer taxes
You cannot deduct land transfer taxes you paid when you
bought your property. Add thes
e amounts to the cost of the
property.”
http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-13e.pdf
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This thread makes me uneasy. Everyone, please remember to speak to a professional and double check the information that is given to you. I hope CPA CB is really who he says he is, but all we know is some anonymous person on the internet is giving accounting and tax advice. And to be fair, yes, CPA CB has also recommended this to readers a few times.
A few comments just don't sit right.
Let's take this $20k though as an example - at 10% you'll pay $2,000 in tax per year. I'll pay $1,000 per year on my gains. In this scenario, it will take about 40 years to break even between the two. This is assuming a ludicrously low marginal rate, and a low cost of living. The current average mortality age of Men in Canada is 80.78, and Women is about 84.3 This means that if you're between 40 and 45, based on the above assumptions, I'll have made up the difference in the period.
If 100k is invested in an RRSP (and 39% marginal tax as above) and 20K is pulled out per year in retirement, it can't take 40 years to break even - you run out of money long before that. Less taxes would be paid if money was sheltered. RRSPs are a good option for many Canadians, especially at a 39% marginal rate. In many situations, sheltered is better than unsheltered.
Also
Hello I have two rental related questions that I couldn't find answers to on CRA's site:
We only put 5% down when buying a new investment property last year so had to pay $8,000 CMHC fees. Can these be deducted during taxes or do they become part of the cost of the property that we factor in when we sell?
Also, we paid land transfer fees and closing costs and didn't deduct them. Are they deductible or do they also become part of the cost of the property.
Hi again C-Kat.
These are what I would call 'grey' area issues, so I'm going to go into a bit of tax theory before answering here...
These fees & costs have been incurred as a result of purchasing the rental property.
The rules regarding capitalizing (i.e. adding to your cost base) versus expensing are somewhat vague, and purely situation based.
Capitalizing an item requires that the cost is necessary to prepare the asset (in this case, the house) to produce income. Were these costs necessary to prepare the property for this income? Sure, but ultimately, they are really one time expenditures which are NOT capital in nature. If you needed to add a roof, this is capital (as an example).
That being said - the CRA will allow you to treat these costs either way. However, the correct treatment is expensing in the year incurred for your situation (in my opinion). These aren't true assets - they have no 'value' to add to your property as they are not transferrable, and really don't reflect the nature of your transaction.
In short, expense it!
According to the CRA:
“Line 8860 – Legal, acc
ounting, and other
professional fees
You can deduct fees for legal services to prepare leases or
collect overdue rents. If you
incur legal fees to buy your
rental property, you cannot deduct them from your gross
rental income. Instead, allocate the fees between land and
building and add them to their respective cost. For
example, you buy a property worth $200,000 ($50,000 for
the land and $150,000 for the building) and incur legal fees
of $10,000. Split the $10,000 proportionately between the
land and building. In this case, $2,500 is added to the cost of
the land (for a total of $52,500) and $7,500 is added to the
cost of the building (for a total of $157,500). For more
information, see “Land” on page 20.
Expenses you cannot deduct
Land transfer taxes
You cannot deduct land transfer taxes you paid when you
bought your property. Add thes
e amounts to the cost of the
property.”
http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-13e.pdf
Hello,
Looks like someone took their coffee strong this morning!
Indeed, I am an anonymous person online - if I hadn't said it explicitly before, this is really for informational purposes. I highly recommend anyone using this information vet it with either your accountant or tax lawyer, especially given the complexity of some of the questions.
Engage a CPA in your area, or a tax lawyer (or both if necessary) - as an aside to this, I happen to be a fully qualified CPA, CA, so if anyone wants to use me, you're welcome to send me a message (apologies for the personal plug). Some people have done this on the forum already.
In short - if you're going to used complex tax laws to your advantage, you should hire someone to help you with the process.
Morning Coffee has erred in his/her assessment of my RRSP vs. Taxable account analysis, by forgetting the impact of growth over time. If you invested the 100k today, at rates of 7% you'd expect to have 200k in 10 years, 400k in 20 years, and 800k in 30 years. This is approximate, but you get my drift.
As far as the land transfer tax question is concerned, you're absolutely correct - based on what you've audited here, land transfer fees must be added to the cost of the property (which can then be deducted as CCA, but I digress).
If this is the only over-step I've made thus far, I think I'm doing a pretty good job.
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It\s true that CPA CB is an anonymous person on the internet, but the beauty of tax discussions is that anyone reading them can personally go and verify the facts since the information is freely available to all. In fact, everybody should do so before making decisions based on such information. That being said, it is still good to have someone knowledgeable about the topic point out things you may have missed by virtue of not knowing the tax code in and out.
Bonds funds ? Hope you mean bonds ETF. Anyway, bonds does not usualy pay "dividends", but more likely "interests". You can get the "split" from the funds provider, wait for T3 slip (issued only for taxables accounts) or if it is an ETF, take a look at a site like CDS Innovation to get it.
If your assets are all in RRSP or TFSA, dont botther with this, its sheltered anyway
Keeping everything in sheltered accounts has worked for me up to this point but as of next year I will likely have both maxed out and I need to start thinking of the best way to allocate between taxable and sheltered accounts. Bonds, being an interest paying investment, are obviously best kept in sheltered accounts, canadian dividend paying equities can be in taxable due to favourable treatment, etc. ETFs and non-ET funds which hold REITs and various bond/equity combinations can be more tricky though, as some of their monthly/quarterly payouts may be interests, dividends, return of contributions, etc, or some combination thereof. I guess there probably isn't a very useful "general" answer to that as each one should be looked at individually.
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look at Canadian Couch Potato "Put Your Assets in Their Places"
RRSP ; US and Intenational stocks, Bonds
TFSA ; GIC's and REITs
Taxable accounts ; Canadian stock (common or preffered shares)
Make a big spread sheet to get the desired AA over many accounts and keep it simple
ex. I got only 11 holdings over 5 accounts
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Thanks for that tip/lead, Le Barbu! I will be checking out that CCP page, too.
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In an attempt to eliminate the confusing variables I don't need to concern myself with, I'm asking a different aspect of this question on another thread, and bring the Canadian tax part here.
Canadian Couch Potato says:
All the [CCP model] portfolios are suitable for tax-sheltered accounts. However, investors managing multiple accounts (RRSPs, TFSAs and non-registered accounts) need to consider proper asset location to maximize tax-efficiency. For example, if you have no choice but to hold fixed income in a non-registered account, you should avoid bond ETFs altogether and consider substituting a ladder of GICs.
I am a person "managing multiple accounts (RRSPs, TFSAs and non-registered accounts)", so apparently am supposed to "consider proper asset location to maximize tax-efficiency." And I may be a person that has "no choice but to hold fixed income in a non-registered account".
Questions:
1. If I am a person who does not earn enough from any source to owe any taxes, do I need to be concerned with maximizing tax-efficiency? Or am I an odd duck that can set this variable aside, and put things where I want and be no more or less tax efficient?
2. Is income from investments treated exactly the same as income from employment, etc? As an only-parent, kid with disability tax credit, and me with disability tax credit, the room for (employment) income is much higher than what I bring in. If investment income is taxed exactly the same as employment income is, I have oodles of room before I need to think about this, yes?
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Hi scrubbyfish, reading your last post, I think you're getting close from a good plan.
From what I understand of your situation, you have to consider the disability tax advantage when running your calculations. Interests are taxed exactly like an income, dividends and capital gain are slightly differents.
Feel free to give more details, but I would be very surprised if your RSSP and TFSA accounts cannot hold enough fixed income to get an appropriate AA??
Ex.: You want 40% fixed (bonds, GIC, cash), RSSP room is 50k and TFSA is 36,500$ (on 2015-01-01) meaning you have 86,500$ "sheltered". If all this is "fixed assets", you still want to get 130k in taxable account! Thats some dought, even for a Mustachian...
Do you have any debt? (even a mortgage). If not, you can consider you need less "fixed assets" than average investor. Is your job safe enough? Do you have a pension plan with your job? Are you close to retirement? Do you invest for a while or you are new at it? etc...
Take few minutes to read CCP article : Why Use a Strip Bond ETF? CCP suggest to replace the "bonds" portion with BXF in taxable account. MER are 0.2% and there it is tax advantaged (explained in the article).
Remember that fixed assets like bonds usualy match inflation on the long run and are usefull to smooth the ride. They are not intended to give any real return most of the time. Thats why I am 100% equities and intend to introduce bonds only when I will be 50+ with over 1M invested. I plan to get 15-25% maximum VSB (short gov. bonds) at this time.
If you come back with a bit more info, I can tell you what I would do with the investment plan.
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Thanks, Le Barbu! I have just now posted to you the more investment-related stuff over on the Investor Alley thread. See you there :)
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CPA CB, you sir, are awesome!
I am wondering if you have any suggestions for a budding mustachian. My mustache is very tiny at the moment, as my wife and I are in "my hair is on fire, emergency-pay-off-debt" mode!
What is the best way to minimize my taxes? This is my situation:
married with 3 very young children (ages 2,4, 6).
I Work full time earning $75k/year. I also own a new business that earns an additional $40k to $60k/year gross revenue. My wife is a stay at home mom, but does help with my business.
We live in Alberta. We have basically zero savings (we recently cashed out our meager RRSP to pay off some debts). We purchased our first house 2 years ago, and own one vehicle.
Expenses for my business are minimal (cell phones, computer/office supplies, maybe $100/month in gas for travel, insurance) totaling around $600/month. At the moment, our family vehicle is used for business work, but I am planning to purchase a second vehicle in early 2015 for business travel. Business travel is mainly driving around town, totaling between 150 km and 300 km per month. The nature of the work requires that I have a vehicle. I will also use the vehicle to drive to my other job, and occasionally use it for work at my job, as well as personal use. Can I claim the vehicle purchase entirely as business expense?
Should I incorporate my business? If I do, could I claim my second vehicle as a business expense? Any other tips to reduce taxes?
Thanks so much! You rock!
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Don't forget, these conventional rules of asset allocation / tax efficient investing might not apply to a Mustachian. Probably the biggest example is the RRSP, which is the best savings account for most Mustachians that earn an above average income and have low spending. Here's a clear, simplified example of why you should not ignore the RRSP, or follow tax-wise thinking that RRSP's should be used primarily for lower interest returns.
Scenario A: I live in Alberta (the easiest province for tax calculations because of the flat 10% income tax), I'm 30 years old, I earn $100,000 a year (36% bracket). My wife, also 30, earns $70,000 per year (32% bracket). Our spending is $40,000 per year, a lot of money for me if my mortgage was paid off. For simplicity sake let's say inflation, bracket adjustments, and salary increases don't exist. On my RRSP contributions, I only have to contribute $11,500 net income to max my $18,000 RRSP room because of course the RRSP is pre-tax. My wife only has to contribute $8,500 net to get to her $12,600 annual increase in RRSP room. After investing for 15 years, at 6% "real" return (remember inflation doesn't exist) the combined value of our RRSP's is $800,000, $470,000 for me, $330,000 for wifey. I want to slowly draw down the value of my RRSP before I hit 71, so let's say I move to a safer asset allocation and withdraw 5.5% a year for a gross income of $44,000. We file together, as we should, so on my $23,500 income, I pay a whopping $3,000 in tax for a rate of 11.6%. On wife's $18,150 income, she pays $1,100 tax for a rate of 6%. Our net income is a hair under $40,000.
Scenario B: Let's say I heard some things online that I interpreted to mean RRSP's shouldn't be used for stock investing and I choose to invest in a taxable account instead because I know stock returns are better than bond/GIC returns over a long period of time. Using the after-tax investment amounts ($11,500 for me and $8,500 for wifey), in 15 years at 6% I have $300,000 and wife has $220,000 for a total of $520,000. Now we know that capital gains are tax efficient so let's save ourselves the headache of calculating adjusted cost base and just say that at our spending levels our tax rates are 0%. We now have to draw 7.7% of our investment to get our $40,000 spending cash. Don't forget this 6% real return may be harder to achieve in a taxable account because if I'm panicky and buy and sell stocks throughout my buildup period I will have to pay taxes on the capital gains that exceed the capital losses.
In scenario A, retirement is definitely a reality. We retire at 45 years old and draw 5.5% a year for 15 years, by the time we hit 60 we can collect CPP, then OAS at 67, so our drawdown's will decrease according. I kept it very simple for this illustration, but we also have some easy tricks up our sleeve that can make our RRSP income more even, thereby reducing my tax rate and marginally increasing the wife's to make the scenario even more tax efficient. In fact, I bet we could make our true drawdown more like 5% instead of 5.5% because we could pay virtually no tax.
There are of course a few things to remember.
First, if you vision your retirement to include 2 homes, a large diesel guzzling hotel on wheels, 2 luxury vehicles, luxury vacations spanning the globe, and so on you will need much more than $40,000 per year so RRSP may not be as suitable from a tax perspective.
Second, if you earn money in the lowest tax bracket (generally less than $42-$44,000 per year), don't even bother with RRSP's because your savings will be marginal anyways.
Third, don't let your RRSP value run up to high; if you're say 55 years old and have over $1 million in RRSP accounts and spend only $30,000 a year you will start to hate the CRA when you turn 71 and they force you to withdraw amounts that double or triple your spending needs and pay exorbitant amounts of taxes... time to spoil your favorite charity or political party, or maybe consider a vow of perpetual poverty and join a convent or monastery. :)
Fourth, don't ignore the benefits of having NO DEBT (aside from qualifying investment loans I suppose) in retirement. You pay income taxes on the dollars it takes you to pay your debts off, so a mortgage and car payment or two might bump your gross income needs from $44,000 a year to $65,000 a year in a real hurry.
And finally, the no inflation, constant rate of return world where a couple earns $170,000 a year but only saves $30,600 of that with spending of $40,000 I used in my scenario isn't real, but hopefully it paints a somewhat accurate picture.
My point is not to get too tax sensitive and to know your own personal numbers. Holding GIC's in a TFSA (CCP advice) is not very smart from a simple view because the biggest benefit of the TFSA is the "no more taxes" part. GIC's real return is less than 1% on average, so if you invest $5,500 a year for 15 years in GIC you end up with $94,000. Of which $82,500 is your contributions. Very tax efficient indeed, but you wouldn't have paid much tax on that pitiful gain anyways. So try and max the return on the TFSA as much as you can (ie. invest in stocks!). Don't over think the Canadian dividend thing in taxable accounts because even with a DRIP you will be paying taxes on those payouts at a high rate throughout your saving period. For the $100,000 income dude in Alberta, you will pay over 25% tax on those dividends every year even though you won't be spending them. If I invest in a taxable account, I would much rather have my return in the form of capital gains that I can easily defer until retirement.
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CPA CB, you sir, are awesome!
I am wondering if you have any suggestions for a budding mustachian. My mustache is very tiny at the moment, as my wife and I are in "my hair is on fire, emergency-pay-off-debt" mode!
What is the best way to minimize my taxes? This is my situation:
married with 3 very young children (ages 2,4, 6).
I Work full time earning $75k/year. I also own a new business that earns an additional $40k to $60k/year gross revenue. My wife is a stay at home mom, but does help with my business.
We live in Alberta. We have basically zero savings (we recently cashed out our meager RRSP to pay off some debts). We purchased our first house 2 years ago, and own one vehicle.
Expenses for my business are minimal (cell phones, computer/office supplies, maybe $100/month in gas for travel, insurance) totaling around $600/month. At the moment, our family vehicle is used for business work, but I am planning to purchase a second vehicle in early 2015 for business travel. Business travel is mainly driving around town, totaling between 150 km and 300 km per month. The nature of the work requires that I have a vehicle. I will also use the vehicle to drive to my other job, and occasionally use it for work at my job, as well as personal use. Can I claim the vehicle purchase entirely as business expense?
Should I incorporate my business? If I do, could I claim my second vehicle as a business expense? Any other tips to reduce taxes?
Thanks so much! You rock!
Hi everyone - sorry for the delay in responding.
Scrubbyfish - I think your questions have been more than answered by Le Barbu and Tuxedo Eagle, who clearly know more about the investment end of these things than I do. I'll defer to their expertise in this regard.
Costco -
Congrats on getting started on the path to wealth here. It looks like you have a good sense of where you want to go.
With regards to incorporation, this is really an 'it depends' kind of question. There are tremendous upsides given your circumstances, and a few downsides to be aware of.
The downsides are in costs. Incorporating properly is expensive, and the yearly tax returns will cost an absolute bare minimum of $750-$1,000. This is minimum, many (including myself) would charge more. I can't emphasize enough the importance of hiring someone professionally to do this, and not using one of the online providers. You want to ensure this is done correctly the first time, as amending things can be a huge pain (and be a huge bill).
The upsides can be huge - firstly it provides an opportunity to income split with your wife via paying her a salary or dividends. Secondly, you'll be able to 'defer' your taxes by 'choosing' when to take income personally (via salary or dividends) and just pay the corporate rate (much lower) versus now where you have to take the income personally at a higher rate. I'd say you'll save a fair bit in taxes over the years, which will make it worthwhile.
In addition, include your children as preferred shareholders, so when they reach 18+ you can get money to them on a tax advantaged basis (dividend) instead of giving them money in after-tax dollars.
You will be able to claim the automobile purchase as a business expense - but the caveat will be that a portion of this expense will be added as a taxable benefit to your tax return, or your wife's, whomever uses the car. It's still better than the alternative (no expense). You'll want to keep an accurate log of miles used for business vs. personal as it is a multi-use vehicle.
In addition - home office expense! Write off some of your home utilities, and charge the corporation rent on a square footage basis. This is a great way to save money come tax time.
Hope this helps to clarify a bit!
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Scrubbyfish - I think your questions have been more than answered by Le Barbu and Tuxedo Eagle, who clearly know more about the investment end of these things than I do. I'll defer to their expertise in this regard.
Yes, thank you very much, Tuxedo Eagle and Le Barbu!
I continue my larger exploration over at: http://forum.mrmoneymustache.com/investor-alley/one-%28investing%29-question-at-a-time/
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Do you have any experience with the many complexities of Canadian residents with dual US/Canada citiizenship? I have family in Calgary and Vancouver and it sounds like a nightmare to figure taxes in both countries, what investments are subject to tax or not, and when investing in canada, the US IRS saying that is basically offshore accounts and subject to further taxing. The fines and fees are outrageous, and subject to 50% of assets each year. YIKES!!!! I would like to forward them to you if you have any experience in this type of taxes. It appears few do though.
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Do you have any experience with the many complexities of Canadian residents with dual US/Canada citiizenship? I have family in Calgary and Vancouver and it sounds like a nightmare to figure taxes in both countries, what investments are subject to tax or not, and when investing in canada, the US IRS saying that is basically offshore accounts and subject to further taxing. The fines and fees are outrageous, and subject to 50% of assets each year. YIKES!!!! I would like to forward them to you if you have any experience in this type of taxes. It appears few do though.
Hi Trout,
First I want to let you know that it things aren't as dire as they seem. Canada and the United States share what's called a tax treaty - in that they agree to collect tax together in order to avoid double taxation (at least, holistically). This means that your family is only supposed to pay the higher of the US or Canadian tax. Without knowing more, I couldn't comment on the fines you speak of, but these seem unusually punitive for the circumstances and I doubt they will apply.
Unfortunately, I understand the US Tax system only at a very high level, and therefore wouldn't be the appropriate fit for your family in this case. I've filed the odd US return, but really this is something outside of my area of expertise from a nitty gritty filing perspective.
However - Luckily, I actually receive this question a fair bit!
If you're interested, I know a certain group that excels in this area, and has CPAs north and south of the border, which means you'd be getting someone qualified in Canadian, and someone qualified in US, that deal with Expat (i.e. US citizens living abroad) issues. If you message me, I'd be more than happy to give out my contact information, and help to correspond with your family to guide them through this process.
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Would you be able to give me any information about the income-splitting option for families? This is something new that I don't know anything about but I think would benefit our family. My husband grossed over $100,000 this year and I am a stay at home mom.
I do have some income that I can claim this year (roughly $2,500) that I earned doing photography. I have never earned or claimed income that was not through a standard job with a T4 before. Can you give me any information about claiming this amount? Would I be able to write off my photography equipment as a business expense?
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Hello CPA!
My boyfriend and I are planning on moving to Canada in 6 months (June 2015). He is an American citizen (I sponsored him for permanent residency in Canada as a Common Law Partner) and I am a Canadian citizen. We have started looking into the tax complications of our situation and it seems very....well...complicated! My boyfriend and I have been living in NYC together for 3 years. We both have 401ks, and checking accounts with good amounts of money in them ($60,000 and $20,000). From what we understand my boyfriend will still always be taxed by the IRS even when we move to Canada.
We also have the issue of trying to move our 401ks from the US to Canada, which we may not be able to do until we find jobs and make a good income so as to offset the IRS taxing us for moving the money (from what I understand revenue Canada will give you a tax break if you get taxed by the IRS for brining your 401k into Canada).
I am also receiving $60,000 from my grandparents before we move. Will I be taxed in Canada if I start investing this money before I move? II have been filing as a non-resident of Canada. Would I still be able to file as a non-resident if I invest the money before I move? Also, will the IRS be able to tax the money earned off of the investment while I'm still in the US?
Any help would be greatly appreciated!
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Would you be able to give me any information about the income-splitting option for families? This is something new that I don't know anything about but I think would benefit our family. My husband grossed over $100,000 this year and I am a stay at home mom.
I do have some income that I can claim this year (roughly $2,500) that I earned doing photography. I have never earned or claimed income that was not through a standard job with a T4 before. Can you give me any information about claiming this amount? Would I be able to write off my photography equipment as a business expense?
If your husband earn 100k, and you 0$, your taxes use to be around 30k. Now, with the income-splitting, you will pay about 25k (like two 50k earners). Could be different from a province to another, this exemple is for Quebec. Just in case you don't know, here in Québekistan, the provincial gov. usualy offset (wash) everything the federal release. For my family, the Tories announcement makes us 2,500$ richer and 2 weeks later, the Liberals shaved 1,800$ from our pockets. Net = 700$ I just consider myself lucky it's not the PQ because the final result would have been -XXX$
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Hello CPA!
My boyfriend and I are planning on moving to Canada in 6 months (June 2015). He is an American citizen (I sponsored him for permanent residency in Canada as a Common Law Partner) and I am a Canadian citizen. We have started looking into the tax complications of our situation and it seems very....well...complicated! My boyfriend and I have been living in NYC together for 3 years. We both have 401ks, and checking accounts with good amounts of money in them ($60,000 and $20,000). From what we understand my boyfriend will still always be taxed by the IRS even when we move to Canada.
We also have the issue of trying to move our 401ks from the US to Canada, which we may not be able to do until we find jobs and make a good income so as to offset the IRS taxing us for moving the money (from what I understand revenue Canada will give you a tax break if you get taxed by the IRS for brining your 401k into Canada).
I am also receiving $60,000 from my grandparents before we move. Will I be taxed in Canada if I start investing this money before I move? II have been filing as a non-resident of Canada. Would I still be able to file as a non-resident if I invest the money before I move? Also, will the IRS be able to tax the money earned off of the investment while I'm still in the US?
Any help would be greatly appreciated!
Hello there,
Congratulations on the move!
You are correct that this is indeed a complex situation, as moving tax deferred accounts across the border (either way) tends to be a bit tricky.
You're right that the hubby will continue to be taxed by Uncle Sam - unless he renounces citizenship like many Americans have been doing recently to avoid US taxes. I've dubbed this manoeuvre as the "Burger King" - but it hasn't caught on just yet.
I'm not exactly a US tax expert here, however I do know someone at a firm that is specifically focused on US Expatriate taxes. If you send me a message directly I would be happy to put you in touch.
That being said - I am aware of something called the "Gift Tax" in the United States. Not entirely certain how this affects someone like yourself (i.e. are you a non-citizen spouse?) etc., you may want to look into this further before your grandparents give you the money. If it is taxable, just hold off until you officially return to Canada before they give it to you.
Hope this is helpful!
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I think I understand the concept of superficial losses but I was wondering if superficial gains also existed?
For example, lets say you decided to not work for a year and will be reporting little to no income on your next return. Could you sell a portion of your shares to realize a desired gain to report on your return, and then immediatly rebuy the shares and adjust their cost base? Since we have a progressive tax system and everyone gets the basic personal tax credit, this seems like a decent way to realize gains and have limited tax concequences.
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The only thing to remember is that you want capital gains in your TFSA, and interest in your RRSP/RDSP.
The reason being that only 50% of capital gains are taxable in Canada, but if they are in your RRSP they are 100% taxable (when you withdraw them).
Good luck opening up the accounts!
That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.
Sadly it's true - I'm just going to take a sidebar here on semantics...
Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).
The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.
Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.
As a case study - Note, this is ONLY for capital gains purposes.
You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!
Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...
If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.
In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...
The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).
Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again
Can I jump in here and ask about foreign withholding taxes? I see the benefit of a TFSA as a never-get-taxed-again vehicle, but doesn't holding US stocks in a TFSA kind of cancel this out because of the need to pay withholding taxes on any dividends gained? And do US withholding taxes apply to capital gains as well? I currently hold VUN (which causes me to have to pay withholding tax regardless), but eventually I am hoping to hold VTI and will be faced with whether to hold it in my RRSP or TFSA. From your perspective above it seems it should be held in the TFSA, but then do I lose 15% to withholding tax? If VTI were in a RRSP I wouldn't have to worry about this extra tax. This seems to be why Canadian Couch Potato places US stock ETFs in either the RRSP or a taxable account (which allows you to get your withholding tax back, correct?) instead of a TFSA. Would you say the benefits of holding a US stock ETF in a TFSA and not being able to recover any withholding tax is outweighed by the benefit of never paying tax again on the capital gains?
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I think I understand the concept of superficial losses but I was wondering if superficial gains also existed?
For example, lets say you decided to not work for a year and will be reporting little to no income on your next return. Could you sell a portion of your shares to realize a desired gain to report on your return, and then immediatly rebuy the shares and adjust their cost base? Since we have a progressive tax system and everyone gets the basic personal tax credit, this seems like a decent way to realize gains and have limited tax concequences.
Harvesting gains like this works, and will benefit you if you do it in a year when you have low income, as it will allow you to get the gains at a lower rate, possibly with zero tax, compared to if you liquidated in a later year when you had higher income.
Harvesting gains offers no benefit if it will be taxed the same now as it would be in future years when you eventually close the position for real.
I agree here - I haven't seen any rulings regarding this, and it is typical of Investors to do this.
If you want to be on the safe side, wait 30 days before re-purchasing the shares.
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The only thing to remember is that you want capital gains in your TFSA, and interest in your RRSP/RDSP.
The reason being that only 50% of capital gains are taxable in Canada, but if they are in your RRSP they are 100% taxable (when you withdraw them).
Good luck opening up the accounts!
That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.
Sadly it's true - I'm just going to take a sidebar here on semantics...
Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).
The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.
Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.
As a case study - Note, this is ONLY for capital gains purposes.
You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!
Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...
If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.
In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...
The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).
Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again
Can I jump in here and ask about foreign withholding taxes? I see the benefit of a TFSA as a never-get-taxed-again vehicle, but doesn't holding US stocks in a TFSA kind of cancel this out because of the need to pay withholding taxes on any dividends gained? And do US withholding taxes apply to capital gains as well? I currently hold VUN (which causes me to have to pay withholding tax regardless), but eventually I am hoping to hold VTI and will be faced with whether to hold it in my RRSP or TFSA. From your perspective above it seems it should be held in the TFSA, but then do I lose 15% to withholding tax? If VTI were in a RRSP I wouldn't have to worry about this extra tax. This seems to be why Canadian Couch Potato places US stock ETFs in either the RRSP or a taxable account (which allows you to get your withholding tax back, correct?) instead of a TFSA. Would you say the benefits of holding a US stock ETF in a TFSA and not being able to recover any withholding tax is outweighed by the benefit of never paying tax again on the capital gains?
With-holding taxes shouldn't be happening on Non-taxable accounts (i.e. RRSP and TFSA) per the US/Canada income tax treaty. However, should they decide to be a pain, you can claim a tax credit in this amount on your income tax return and 'get it back' or pay less in Canadian taxes...
I actually haven't seen withholding taxes in a TFSA in any of my clients at this point - so I'm surprised you've run into it.
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Wut? TFSA is not recognised as a retirement vehicle by the US and gets no special treatment. US stocks are subject to 30 or 15% withholding, depending on if you've filed a W-8BEN.
This is not recoverable from Canada, so it is lost. It is invisible as it is never seen inside the TFSA.
http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/
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Wut? TFSA is not recognised as a retirement vehicle by the US and gets no special treatment. US stocks are subject to 30 or 15% withholding, depending on if you've filed a W-8BEN.
This is not recoverable from Canada, so it is lost. It is invisible as it is never seen inside the TFSA.
http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/
This is why TFSA should hold some Canadian stuff like REITs or GICs unless your target AA is out of range
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Wut? TFSA is not recognised as a retirement vehicle by the US and gets no special treatment. US stocks are subject to 30 or 15% withholding, depending on if you've filed a W-8BEN.
This is not recoverable from Canada, so it is lost. It is invisible as it is never seen inside the TFSA.
http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/
This is why TFSA should hold some Canadian stuff like REITs or GICs unless your target AA is out of range
Or eligible, dividend paying ADRs - British ones, for example, do not withhold tax. BP, Unilever, Vodafone, etc, etc.
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Wut? TFSA is not recognised as a retirement vehicle by the US and gets no special treatment. US stocks are subject to 30 or 15% withholding, depending on if you've filed a W-8BEN.
This is not recoverable from Canada, so it is lost. It is invisible as it is never seen inside the TFSA.
http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/
This is why TFSA should hold some Canadian stuff like REITs or GICs unless your target AA is out of range
Or eligible, dividend paying ADRs - British ones, for example, do not withhold tax. BP, Unilever, Vodafone, etc, etc.
Ooops.
I read capital gains.
Dividends are 15% if you file that W8. I expect this to change in the future - to get in line with the RRSP vs 401k ie TFSA vs Roth IRA.
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Note that if more than 15% is withheld, you can still recover the amount above 15% by filing Form 1040NR with the IRS. (However, you cannot recover the portion above 15% as a Canadian foreign tax credit no matter what kind of account it is withheld in, because it is a voluntary payment, not a tax.)
In order to file 1040NR, you need an ITIN and then that is a proper tax return - no? I do one already as I have rentals.
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Note that if more than 15% is withheld, you can still recover the amount above 15% by filing Form 1040NR with the IRS. (However, you cannot recover the portion above 15% as a Canadian foreign tax credit no matter what kind of account it is withheld in, because it is a voluntary payment, not a tax.)
In order to file 1040NR, you need an ITIN and then that is a proper tax return - no? I do one already as I have rentals.
If you have an SSN, you have to use your SSN. Otherwise, you would use your ITIN. If you don't have an ITIN, you just include Form W-7 with Form 1040NR. I'm not sure what you are trying to ask about a "proper tax return". A Form 1040NR is indeed a tax return (for nonresident aliens). If you are a US citizen or resident alien you would use Form 1040 instead, but given that this is the Canadian tax thread, I assume most people would use Form 1040NR.
Moreover, if you are already filing Form 1040NR for some other reason, such as US-source rental income, then you must report your US dividend income on Form 1040NR as well, on line 10. The amount withheld by your Canadian broker is reportable on line 61(d) and the broker should have issued you a Form 1042-S showing the amount to report on that line.
Furthermore, if you have a SSN or ITIN, you are required to give it to anybody paying you US-source dividends so that they can issue you the Form 1042-S. If you have failed to provide your ITIN to your broker(s), you have actually violated both US law and Canadian law (in particular, section 162(6) of the Canadian Income Tax Act, which requires you to furnish your ITIN when it is required for an information return, which includes Form 1042-S).
If you are already filing Form 1040NR and failing to include your US dividends, perhaps because you thought they were already taken care of, you have unfortunately been completing the forms incorrectly, which can have serious consequences. You will want to look into filing amended US returns for those years.
Even if you have a W-8BEN on file?
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Hi, can anyone point me in the right direction about the tax implications for an American who sells a second home (not primary residence) in Canada?
I've only found this site to date, http://www.bcheritagelaw.com/blog/estate-planning/us-residents-owning-canadian-property-implications-and-solutions/, which states:
One-half of the capital gains is included in the calculation of income for Canadian tax purposes. US-resident individuals would pay Canadian federal tax on taxable capital gains at marginal rates ranging from 20.5% (on the portion of taxable capital gains below $300,000) and 43.7% (on the portion of the taxable capital gain exceeding $100,000). At top marginal rate, the effective rate of tax imposed by Canada on the capital gain would be 21.85% (43.7% times ½).
As an example, if the property was purchased (Canadian $) for $100k and sells for $350k, the capital gain is $250k. One-half of the capital gain is 125k. If I'm understanding the basic math, the tax would be $125k x 20.5% = 25.6k and the portion of the taxable capital gain exceeding $100k would be $25k x 43.7% = $10.9k for a total Canadian tax amount of ~$36.5k. Is that correct?
Is the capital gain also taxed at the provincial level (PEI)?
Does it matter if the property was used as a vacation rental during part of the ownership term rather than for exclusive personal use?
Will be calling Revenue Canada and trying to find a tax person who can address this, but appreciate any insight or resources! Thanks!
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Hi, can anyone point me in the right direction about the tax implications for an American who sells a second home (not primary residence) in Canada?
I've only found this site to date, http://www.bcheritagelaw.com/blog/estate-planning/us-residents-owning-canadian-property-implications-and-solutions/, which states:
One-half of the capital gains is included in the calculation of income for Canadian tax purposes. US-resident individuals would pay Canadian federal tax on taxable capital gains at marginal rates ranging from 20.5% (on the portion of taxable capital gains below $300,000) and 43.7% (on the portion of the taxable capital gain exceeding $100,000). At top marginal rate, the effective rate of tax imposed by Canada on the capital gain would be 21.85% (43.7% times ½).
As an example, if the property was purchased (Canadian $) for $100k and sells for $350k, the capital gain is $250k. One-half of the capital gain is 125k. If I'm understanding the basic math, the tax would be $125k x 20.5% = 25.6k and the portion of the taxable capital gain exceeding $100k would be $25k x 43.7% = $10.9k for a total Canadian tax amount of ~$36.5k. Is that correct?
Is the capital gain also taxed at the provincial level (PEI)?
Does it matter if the property was used as a vacation rental during part of the ownership term rather than for exclusive personal use?
Will be calling Revenue Canada and trying to find a tax person who can address this, but appreciate any insight or resources! Thanks!
Hi there -
This is a bit complex, as you note, and definitely requires someone who understands the ins and outs of the Canada/US Tax Treaty, for US Citizens. I've recommended people to Greenback Expat Tax Services for circumstances similar to this in the past, the obvious bonus with them is that you work with two CPA's (in this case, Canada and the US), instead of a just a Canadian CPA or US CPA, who knows a bit about tax in either circumstances.
Is this a dramatic capital gain, or minimal?
All the Best,
CPA CA
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Thank you CPA CB and Cathy! I'll check out the Greenback Tax service and really appreciate the specific tax form numbers...I was not having much luck on the Revenue Canada website.
The ultimate sale event won't happen immediately (just doing due diligence and researching the rental issue). It will make a difference if the tax rates are more favorable if the house is used for personal use for a certain time frame rather than as a rental. Thanks again!
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Question: Under the new Family tax cut (income splitting for families), if you have one of the spouses who makes all the income and the other none, would it make sense to contribute to RRSP's in the person with no income (with savings from prior earnings) in order to allocate more income under the splitting rules? for example, you can allocated up to $50,000, if you combine that with an RRSP contribution, could you in theory allocate more total income?
Any thoughts?
Thanks
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Question: Under the new Family tax cut (income splitting for families), if you have one of the spouses who makes all the income and the other none, would it make sense to contribute to RRSP's in the person with no income (with savings from prior earnings) in order to allocate more income under the splitting rules? for example, you can allocated up to $50,000, if you combine that with an RRSP contribution, could you in theory allocate more total income?
Any thoughts?
Thanks
You have to remember that the maximum benefit that can be gained form the family tax credit is $2k. If you had a > 100k income and your spouse had zero, moving 50k to the spouse would already bump up against that limit (difference of moving from 25k taxes paid for single 100k income to 2 x 9.4k for dual 50k incomes is greater than 2k).
EDIT: Also, and someone correct me if I'm mistaken on this, if your spouse's income is actually zero, you can claim the spouse as a dependent. The dependent amount is somewhere around 11k, so if you're in the 36% bracket this will actually gain you more than income splitting.
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I made a fairly large contribution to my RRSP recently that I plan to probably deduct in 2015. If I fill out T1213, get a letter of authority from the CRA, have my employer reduce my payroll withholdings, then I change my mind and want to use the deduction in 2016, will I or my employer face interest or penalties from the CRA. I realize this will result in a bigger tax bill at the end of 2015.
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I made a fairly large contribution to my RRSP recently that I plan to probably deduct in 2015. If I fill out T1213, get a letter of authority from the CRA, have my employer reduce my payroll withholdings, then I change my mind and want to use the deduction in 2016, will I or my employer face interest or penalties from the CRA. I realize this will result in a bigger tax bill at the end of 2015.
The response from the CRA will specify which year(s) you can use for the deduction. In both of my responses for two T1213 applications last year the CRA allowed me to make the deduction in either 2014 or 2015. You will not have any penalties unless you do not pay your taxes due. This is actually noted on the response letter from the CRA as well.
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Question: Under the new Family tax cut (income splitting for families), if you have one of the spouses who makes all the income and the other none, would it make sense to contribute to RRSP's in the person with no income (with savings from prior earnings) in order to allocate more income under the splitting rules? for example, you can allocated up to $50,000, if you combine that with an RRSP contribution, could you in theory allocate more total income?
Any thoughts?
Thanks
You have to remember that the maximum benefit that can be gained form the family tax credit is $2k. If you had a > 100k income and your spouse had zero, moving 50k to the spouse would already bump up against that limit (difference of moving from 25k taxes paid for single 100k income to 2 x 9.4k for dual 50k incomes is greater than 2k).
EDIT: Also, and someone correct me if I'm mistaken on this, if your spouse's income is actually zero, you can claim the spouse as a dependent. The dependent amount is somewhere around 11k, so if you're in the 36% bracket this will actually gain you more than income splitting.
Hi There,
You're right - if the income is zero for the spouse you can claim his/her Basic Personal Amount - Federally this is $11,138 for the 2014 Taxation Year. Just to be careful with terminology, this is not the same as an eligible dependant, where the rules differ significantly.
You can claim the basic amount AND income split however, so keep this in mind.
Also - you cannot contribute as the non-earner spouse to your own RRSP without running into issues with Attribution. This states that the income is coming from the earning spouse (and therefore is included in the earning spouse's income upon withdrawal) and also disallows the tax credit in the contribution year (effectively making this a double-tax). To the extent possible, it's better to minimize this risk.
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You're right - if the income is zero for the spouse you can claim his/her Basic Personal Amount - Federally this is $11,138 for the 2014 Taxation Year. Just to be careful with terminology, this is not the same as an eligible dependant, where the rules differ significantly.
You can claim the basic amount AND income split however, so keep this in mind.
You're right regarding the terminology, I just lump them together in my mind since the amounts are similar and neither apply to me at the moment.
I didn't know that the income splitting wouldn't affect the basic amount for a spouse though. Does it affect any other parts of the non-earning spouse's return such as GST credits, or does it only apply to the family tax credit in isolation?
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I am a Canadian currently considering selling a US vacation home. I got some information about what the IRS would take off the sale price (10% if under $300,000, and then I understand I could recover the withheld amount next year if home sold this year. Then I imagine I would have to report the capital gain on my Canadian return?
I appreciate any advice you could provide.
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I am a Canadian currently considering selling a US vacation home. I got some information about what the IRS would take off the sale price (10% if under $300,000, and then I understand I could recover the withheld amount next year if home sold this year. Then I imagine I would have to report the capital gain on my Canadian return?
I appreciate any advice you could provide.
First of all, you should understand that any amount that may be withheld from the sale proceeds is not necessarily the same as the amount you owe the US in tax on the sale proceeds.
On the topic of withholding, here is a summary of the law. Pursuant to 26 USC § 1445, when a nonresident alien sells property in the USA, the buyer must withhold 10% of the proceeds and remit it to the IRS, unless 10% is more than the amount of tax that will be finally owed on the sale, in which case the buyer should only withhold the actual tax liability (but the seller has to obtain from the IRS an advance calculation of the actual tax owed to benefit from this).
The general rule on withholding is subject to a number of exceptions. One exception is that if the buyer purchases the property to use a residence and the cost is less than $300,000, then the buyer is not required to withhold any tax from the proceeds (although they can if they want to). You can receive the entire proceeds in this case. Note that you may still owe tax to the IRS. We are only concerned at this juncture with withholding, not actual tax liability. In practice, the buyer may still withhold in this case because pursuant to 26 CFR 1.1445-2(d)(1), if the buyer does not withhold and then the IRS determines that they are not using the property as a residence, then the buyer is liable for the tax. I am guessing buyers may not want to take that risk.
Now that I have summarised withholding, let's discuss final tax liability.
Pursuant to 26 USC § 897, the disposition of property by a nonresident alien is subject to tax as if the gain were income effectively connected with a US trade or business. This means that the gain is taxed at graduated income tax rates. Alternative minimum tax may possibly also apply. You will need to file Form 1040NR to report the sale, figure the tax owed, and pay it and/or receive a refund of any amount withheld.
Note that withholding is based on the proceeds but the actual tax is only based on the gain. The actual tax rate may be more than 10% of the gain, but that could be less than 10% of the proceeds. However, if no tax was withheld because of the exception I mentioned, you may well have tax owing when you file Form 1040NR.
So that deals with your final tax liability to the USA.
As for Canada, you would indeed have a taxable capital gain. Half of your net capital gains are taxable at ordinary income rates in Canada. You can claim a foreign tax credit for your final tax liability to the USA. Note that you cannot claim a foreign tax credit based on the withholding, if any, that was remitted to the IRS. The credit is based on the actual final tax liability as figured on Form 1040NR. The CRA may require you to submit your Form 1040NR as proof that you are claiming the actual final liability and not the withholding amount.
You may also have a filing requirement and tax owing to the US state where the property is located.
That all said, this is just a summary of the laws. There are many exceptions and special cases. From your post, it seems you are very confused about the various requirements here. For that reason, you may want to pay for the services of an accountant or lawyer to help you.
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The only thing to remember is that you want capital gains in your TFSA, and interest in your RRSP/RDSP.
The reason being that only 50% of capital gains are taxable in Canada, but if they are in your RRSP they are 100% taxable (when you withdraw them).
Good luck opening up the accounts!
That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.
Sadly it's true - I'm just going to take a sidebar here on semantics...
Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).
The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.
Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.
As a case study - Note, this is ONLY for capital gains purposes.
You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!
Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...
If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.
In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...
The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).
Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again
The comparison between RRSP and TFSA for sheltering dividends doesn't appear to be fair because you're not taking into account pre vs after tax money. What am I missing here?
Using your example:
RRSP: the $100,000 in pre-tax money grows by $1,000,000 and the entire balance of 1.1 mil is taxed at 25% upon withdrawal, leaving you with $825,000.
TFSA: the $70,000 in after tax money (30% income tax) grows by only $700,000 and the entire balance of $770,000 is not taxed at all because it is sheltered, leaving you with $770,000.
There is more money left in the RRSP!!
Where did my math go wrong?
(turning $100k into $1 mil requires 12.2% growth over 20 years, so I used that same growth rate for the TFSA comparison, to be fair)
Thanks,
Greg
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The only thing to remember is that you want capital gains in your TFSA, and interest in your RRSP/RDSP.
The reason being that only 50% of capital gains are taxable in Canada, but if they are in your RRSP they are 100% taxable (when you withdraw them).
Good luck opening up the accounts!
That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.
Sadly it's true - I'm just going to take a sidebar here on semantics...
Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).
The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.
Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.
As a case study - Note, this is ONLY for capital gains purposes.
You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!
Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...
If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.
In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...
The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).
Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again
The comparison between RRSP and TFSA for sheltering dividends doesn't appear to be fair because you're not taking into account pre vs after tax money. What am I missing here?
Using your example:
RRSP: the $100,000 in pre-tax money grows by $1,000,000 and the entire balance of 1.1 mil is taxed at 25% upon withdrawal, leaving you with $825,000.
TFSA: the $70,000 in after tax money (30% income tax) grows by only $700,000 and the entire balance of $770,000 is not taxed at all because it is sheltered, leaving you with $770,000.
There is more money left in the RRSP!!
Where did my math go wrong?
(turning $100k into $1 mil requires 12.2% growth over 20 years, so I used that same growth rate for the TFSA comparison, to be fair)
Thanks,
Greg
Your math is pretty much right, but its the tax rates that make it go wacky. You're calculating 30% tax going in and 25% tax going out. Of course the RRSP will win in this situation, if you reinvest all of your tax refund back into the RRSP.
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The only thing to remember is that you want capital gains in your TFSA, and interest in your RRSP/RDSP.
The reason being that only 50% of capital gains are taxable in Canada, but if they are in your RRSP they are 100% taxable (when you withdraw them).
Good luck opening up the accounts!
That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.
Sadly it's true - I'm just going to take a sidebar here on semantics...
Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).
The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.
Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.
As a case study - Note, this is ONLY for capital gains purposes.
You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!
Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...
If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.
In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...
The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).
Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again
The comparison between RRSP and TFSA for sheltering dividends doesn't appear to be fair because you're not taking into account pre vs after tax money. What am I missing here?
Using your example:
RRSP: the $100,000 in pre-tax money grows by $1,000,000 and the entire balance of 1.1 mil is taxed at 25% upon withdrawal, leaving you with $825,000.
TFSA: the $70,000 in after tax money (30% income tax) grows by only $700,000 and the entire balance of $770,000 is not taxed at all because it is sheltered, leaving you with $770,000.
There is more money left in the RRSP!!
Where did my math go wrong?
(turning $100k into $1 mil requires 12.2% growth over 20 years, so I used that same growth rate for the TFSA comparison, to be fair)
Thanks,
Greg
Your math is pretty much right, but its the tax rates that make it go wacky. You're calculating 30% tax going in and 25% tax going out. Of course the RRSP will win in this situation, if you reinvest all of your tax refund back into the RRSP.
Well, I was using CPA CB's numbers. He says "The TFSA is clearly best" but the math doesn't support that conclusion. And this being the MMM forum, let's assume that the tax refund is always invested ;)
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Thanks Cathy,
The information you provided helps me understand a bit more about what's involved with actual selling of the property. Our realtor was saying 20% would need to be held, but I was able to find a publication on the IRS website that discussed 10% if the buyer was using the home as a principal residence and the home was under $300,000. It looks like I would need to use the services of a US/Canadian accountant when the time comes to be sure everything is looked after that needs to be.
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@guerilla1977: The argument made by CPA CB is a common one made by accountants and some financial planners. However, in my opinion, there are huge flaws with this reasoning for Mustachians particularly in relation to the taxable investment account.
RRSP vs TFSA is simple. If you reinvest your full refund (as you should) and your current marginal tax rate is higher than your retirement average tax rate the RRSP will win hands down every time. This means that for the majority of Canadians the RRSP will win. Problem is the majority of Canadians aren't Mustachian and they blow their tax refunds on flat screen TV's and chrome rims for their F150. So if you are not Mustachian and like shiny things, then the TFSA will win in the end.
Here's the round numbers math to prove it for someone with marginal tax rate when working of 40% and retirement average tax rate of 25%. Withdrawal rates are based on 5% per year. Lets pretend Harper doubled the TFSA limit for us to make this easy.
Scenario A blows his $4000 refund on an all-inclusive to Mexico every year: RRSP $10,000/yr for 30 yrs @ 6% = $875,000. Retirement income $43750 - 25% tax = $32800 spending money.
Scenario B skips the RRSP and is TFSA only (doesn't get that vacation either): TFSA $10,000/yr for 30 yrs @ 6% = $875,000. Retirement income $43750 - 0% tax = $43750 spending money. Yippee!
Scenario C is a Mustachian who reinvests his refund (and doesn't go to Mexico): RRSP $14,000/yr for 30 yrs @ 6% = $1,225,000. Retirement income $61250 - 25% tax = $45900 spending money. But wait, he's making more money so his tax rates go up right? Sure but he still only needs a max of $43750 to live so he can make some charitable donations or pay for his kids education and claim the tuition and he's still further ahead and his living standard during his earning years was the same as it would be with TFSA only. The extra money comes thanks to the government.
To tout taxable account benefits over an RRSP is just plain ridiculous unless you already have waaaayyyy tooo much money and find yourself in the awful position of earning too much income in retirement (ie. you dummy, you should have retired earlier). First, it is based on the presumption that you never, ever sell any of your investments during the whole 30 years and never end up owing any capital gains tax during this time. It is possible if you balance with equal capital losses, but even for the smarter than average investor this is difficult to achieve. Second, it assumes that your investments will never pay a dividend for that whole 30 years. Don't forget, even dividends reinvested are taxed first which cuts into your overall rate of return (an expense not realized in a tax advantaged account).
Scenario D is nothing but taxable who follows all the preceding caveats to a T (and no vacation): Taxable $10000/yr for 30 yrs @ 6% = $875,000. Retirement income $43750 - 12.5% tax = $38280 spending money.
Scenario E is only taxable, but he breaks a few rules and earns just 5% return (and no vacation): Taxable $10000/yr for 30 yrs @ 5% = $722,000. Retirement income $36100 - 12.5% tax = $31580 spending money.
I don't want to knock taxable too much because it still works decently well if you're disciplined. However it should come behind the RRSP and TFSA for the Mustachian, who by definition earns much more than they spend. Based on my spending, I am sure my retirement average tax rate is going to be 10% tops. I pay a hell of a lot more than that right now and I'm in the lowest tax province in the country.
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@Tuxedo
Thanks for taking the time to write such a long post! Very interesting.
I don't pretend to be an expert, but my impression is that many professionals don't totally understand how the RRSP works. The truth is that, assuming the same income tax rate at the point of contribution and withdrawal with your RRSP, the RRSP and the TFSA give you the EXACT SAME amount of money in the end.
So I hear people say "you pay marginal rate on dividends & cap gains inside an RRSP when you cash out. Why would you give up that tax advantage?" That is just not true. You do not pay any tax on those gains inside an RRSP, even when you cash out. The government is simply taking back all the money that they refunded you at the time of contribution, PLUS all the growth of that money. Your after tax contributions and ALL its growth is yours to keep, tax free!
To prove that point, if you assume a 30% rate (instead of the stated 25%) at the time of withdrawal in CPA CB's example (so it is now the same as the contribution rate), you end up with the same amount of money with the RRSP and the TFSA.
Here is a great video explaining the myth that RRSPs are worse than taxable accounts for dividend and cap gains growth: https://www.youtube.com/watch?v=Gf04BbqzJVc
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There is a situation where taxable accounts are superior to the registered ones. Specifically, at low income, the tax rate on eligible dividends can be negative. In Alberta, eligible dividends at low income are taxed at negative 0.03%. However, Ontario offers a far more generous negative 6.86% on eligible dividends at low income. This is a nonrefundable negative rate, but it can still offset taxes you might otherwise have to pay on your RRSP distributions.
The tax rate on distributions from an RRSP can never go below zero, so, in some cases, taxable eligible dividends could be an aspect of your Mustachian Canadian tax planning.
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Is there a place I can find the real (net) tax rate for elegible-dividends in Québec (or the way to calculate the gross-up and tax) in taxable account?
My marginal tax rate is 38% actually...
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Is there a place I can find the real (net) tax rate for elegible-dividends in Québec (or the way to calculate the gross-up and tax) in taxable account?
My marginal tax rate is 38% actually...
One of my favorite websites for tax info. www.taxtips.ca They have a great tax calculator there as well which calculates the gross up. I think its 38%.
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So, my tax rate for eligible dividends is 19.22% (combined fed+prov)
Thank you Tuxedo!
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I just want to say thank you to everyone who is participating in this discussion. It has been a very interesting read!
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A Home Business tax question for you ...
For the past 6 years, I've run a small photography side business. I've kept up to date claiming my income / capital expenses, etc. My average annual income over the years has been about $10K.
For 2013, I claimed a small loss (about $500) as I chose to take very few jobs.
For 2014, I did not bring any income in at all with the business. I will be claiming a loss of ~$1000 due to capital depreciation. I will not be claiming any home/vehicle/other expenses as, well, none were used.
Will this be a problem with CRA? How long can one do this before it's seen as abusive? Shall I close the business now and sell my gear, knowing that I might want to open shop again in a year or two?
Many thanks!
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Tuxedo, I agree with you regarding RRSP investments coming out ahead of TFSA and taxable accounts if your retirement average tax rate is lower than your working marginal rate (which I imagine is the case for almost everyone). The case of someone blowing their return is basically like getting zero tax advantage on contribution and a tax hit on withdrawal.
However, the question of where to put different types of investments may still be relevant, since many MMM followers will have maxed out their RRSP and TFSA contributions. If you have maxed RRSP and TFSA contributions and are contributing the left overs to a taxable account, having the lowest taxed allocation in the taxable account makes sense.
All that being said, Alberta is not the lowest taxed province. I've calculated that at my income and spending levels (36% bracket in Alberta) I would actually be better off in Ontario or BC since the progressive provincial income tax results in an income tax payment which would be low enough to offset the higher sales tax.
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I am a Canadian currently considering selling a US vacation home. I got some information about what the IRS would take off the sale price (10% if under $300,000, and then I understand I could recover the withheld amount next year if home sold this year. Then I imagine I would have to report the capital gain on my Canadian return?
I appreciate any advice you could provide.
First of all, you should understand that any amount that may be withheld from the sale proceeds is not necessarily the same as the amount you owe the US in tax on the sale proceeds.
On the topic of withholding, here is a summary of the law. Pursuant to 26 USC § 1445, when a nonresident alien sells property in the USA, the buyer must withhold 10% of the proceeds and remit it to the IRS, unless 10% is more than the amount of tax that will be finally owed on the sale, in which case the buyer should only withhold the actual tax liability (but the seller has to obtain from the IRS an advance calculation of the actual tax owed to benefit from this).
The general rule on withholding is subject to a number of exceptions. One exception is that if the buyer purchases the property to use a residence and the cost is less than $300,000, then the buyer is not required to withhold any tax from the proceeds (although they can if they want to). You can receive the entire proceeds in this case. Note that you may still owe tax to the IRS. We are only concerned at this juncture with withholding, not actual tax liability. In practice, the buyer may still withhold in this case because pursuant to 26 CFR 1.1445-2(d)(1), if the buyer does not withhold and then the IRS determines that they are not using the property as a residence, then the buyer is liable for the tax. I am guessing buyers may not want to take that risk.
Now that I have summarised withholding, let's discuss final tax liability.
Pursuant to 26 USC § 897, the disposition of property by a nonresident alien is subject to tax as if the gain were income effectively connected with a US trade or business. This means that the gain is taxed at graduated income tax rates. Alternative minimum tax may possibly also apply. You will need to file Form 1040NR to report the sale, figure the tax owed, and pay it and/or receive a refund of any amount withheld.
Note that withholding is based on the proceeds but the actual tax is only based on the gain. The actual tax rate may be more than 10% of the gain, but that could be less than 10% of the proceeds. However, if no tax was withheld because of the exception I mentioned, you may well have tax owing when you file Form 1040NR.
So that deals with your final tax liability to the USA.
As for Canada, you would indeed have a taxable capital gain. Half of your net capital gains are taxable at ordinary income rates in Canada. You can claim a foreign tax credit for your final tax liability to the USA. Note that you cannot claim a foreign tax credit based on the withholding, if any, that was remitted to the IRS. The credit is based on the actual final tax liability as figured on Form 1040NR. The CRA may require you to submit your Form 1040NR as proof that you are claiming the actual final liability and not the withholding amount.
You may also have a filing requirement and tax owing to the US state where the property is located.
That all said, this is just a summary of the laws. There are many exceptions and special cases. From your post, it seems you are very confused about the various requirements here. For that reason, you may want to pay for the services of an accountant or lawyer to help you.
I agree with Cathy here. I just finished an engagement like this, and there are complex rules to adhere by.
Pay special attention to the foreign tax credits from non-business income, as it gets ground down by the capital gain you claim in Canada v. the US.
Good luck!
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The only thing to remember is that you want capital gains in your TFSA, and interest in your RRSP/RDSP.
The reason being that only 50% of capital gains are taxable in Canada, but if they are in your RRSP they are 100% taxable (when you withdraw them).
Good luck opening up the accounts!
That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.
Sadly it's true - I'm just going to take a sidebar here on semantics...
Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).
The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.
Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.
As a case study - Note, this is ONLY for capital gains purposes.
You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!
Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...
If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.
In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...
The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).
Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again
The comparison between RRSP and TFSA for sheltering dividends doesn't appear to be fair because you're not taking into account pre vs after tax money. What am I missing here?
Using your example:
RRSP: the $100,000 in pre-tax money grows by $1,000,000 and the entire balance of 1.1 mil is taxed at 25% upon withdrawal, leaving you with $825,000.
TFSA: the $70,000 in after tax money (30% income tax) grows by only $700,000 and the entire balance of $770,000 is not taxed at all because it is sheltered, leaving you with $770,000.
There is more money left in the RRSP!!
Where did my math go wrong?
(turning $100k into $1 mil requires 12.2% growth over 20 years, so I used that same growth rate for the TFSA comparison, to be fair)
Thanks,
Greg
Your math is pretty much right, but its the tax rates that make it go wacky. You're calculating 30% tax going in and 25% tax going out. Of course the RRSP will win in this situation, if you reinvest all of your tax refund back into the RRSP.
Well, I was using CPA CB's numbers. He says "The TFSA is clearly best" but the math doesn't support that conclusion. And this being the MMM forum, let's assume that the tax refund is always invested ;)
Fair enough - but this being the MMM forum I also assume that the contribution maxes out the RRSP (haha). The issue with RRSP's are that capital gains are taxed at 100% upon withdrawal, versus the statute amount of 50%.
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RRSP vs TFSA is simple.
If you are a professional and a mustachian max both and put the rest into non-reg accounts. With a professional's income and a MMM saving rate neither the RRSP or the TFSA or both combined can handle all your badassness! ;)
The only tricky part I've noticed during my planning is that you don't want a massive RRSP when you turn 71 and have to start mandatory withdrawals.
If you are doing the ER thing you can start drawing down your RRSPs any time your marginal tax rate is less than when you contributed and still be ahead. Projecting ahead so that your RRSP when you are 71 is aligned with your annual COL factoring in CPP+OAS.
-- Vik
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Tuxedo, I agree with you regarding RRSP investments coming out ahead of TFSA and taxable accounts if your retirement average tax rate is lower than your working marginal rate (which I imagine is the case for almost everyone). The case of someone blowing their return is basically like getting zero tax advantage on contribution and a tax hit on withdrawal.
However, the question of where to put different types of investments may still be relevant, since many MMM followers will have maxed out their RRSP and TFSA contributions. If you have maxed RRSP and TFSA contributions and are contributing the left overs to a taxable account, having the lowest taxed allocation in the taxable account makes sense.
All that being said, Alberta is not the lowest taxed province. I've calculated that at my income and spending levels (36% bracket in Alberta) I would actually be better off in Ontario or BC since the progressive provincial income tax results in an income tax payment which would be low enough to offset the higher sales tax.
I'm just going to chime in here on this discussion.
To say this is a myth is a bit misleading - it is correct to say that in terms of money in money out, ceteris peribus, RRSP's and TFSA's approximately equal out.
The biggest flaw in some people's perspective here is that taxable income in retirement is lower than pre-retirement, and why this isn't necessarily true for the vast majority of individuals.
Us MMM's are an unusual lot, in that many of us are looking to pull the plug (so to speak) on the rat race, and FIRE at the earliest/most conservative time possible. This isn't true of the general population. Many people work work work, then retire with, lets say $2 million in their RRSP, and still have pensionable income on top of this. I've dealt with quite a few scenarios now where taxable income is actually higher in retirement than pre-retirement. Go figure.
I'm glad this conversation has raised such a discussion - the most prudent advice here is to utilize the registered vehicles available to you, keeping in mind that RRSP's tax cap gains at 100%, versus 50% non-reg, and at your average tax rate for TFSA (in that it is after tax dollars).
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RRSP vs TFSA is simple.
If you are a professional and a mustachian max both and put the rest into non-reg accounts. With a professional's income and a MMM saving rate neither the RRSP or the TFSA or both combined can handle all your badassness! ;)
The only tricky part I've noticed during my planning is that you don't want a massive RRSP when you turn 71 and have to start mandatory withdrawals.
If you are doing the ER thing you can start drawing down your RRSPs any time your marginal tax rate is less than when you contributed and still be ahead. Projecting ahead so that your RRSP when you are 71 is aligned with your annual COL factoring in CPP+OAS.
-- Vik
Exactly - folks forget the RRIF conversion at 71 (and get killed subsequently in unavoidable tax.)
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A Home Business tax question for you ...
For the past 6 years, I've run a small photography side business. I've kept up to date claiming my income / capital expenses, etc. My average annual income over the years has been about $10K.
For 2013, I claimed a small loss (about $500) as I chose to take very few jobs.
For 2014, I did not bring any income in at all with the business. I will be claiming a loss of ~$1000 due to capital depreciation. I will not be claiming any home/vehicle/other expenses as, well, none were used.
Will this be a problem with CRA? How long can one do this before it's seen as abusive? Shall I close the business now and sell my gear, knowing that I might want to open shop again in a year or two?
Many thanks!
I would suggest holding off on depreciating the asset (a choice) until you start earning income to claim against.
The test is a "reasonable expectation of profit" in wonk speak - which means you want to show at least some income to claim the deduction. Just hold off on claiming and then go for it when the business re-opened.
Good luck!
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Just as a note to everyone
You'll note my average response times are lagging these days as things have gotten positively CRAZY with tax returns and other matters. My apologies for this.
I'm checking in about once or twice a week and will make every effort to reply - but frankly there are quite a few people going through here and posting some good advice - I'll chime in eventually, but overall thanks for the help everyone!
Good luck for Tax Season 2015!
CPA CB
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I'm just going to chime in here on this discussion.
To say this is a myth is a bit misleading - it is correct to say that in terms of money in money out, ceteris peribus, RRSP's and TFSA's approximately equal out.
The biggest flaw in some people's perspective here is that taxable income in retirement is lower than pre-retirement, and why this isn't necessarily true for the vast majority of individuals.
Us MMM's are an unusual lot, in that many of us are looking to pull the plug (so to speak) on the rat race, and FIRE at the earliest/most conservative time possible. This isn't true of the general population. Many people work work work, then retire with, lets say $2 million in their RRSP, and still have pensionable income on top of this. I've dealt with quite a few scenarios now where taxable income is actually higher in retirement than pre-retirement. Go figure.
I'm glad this conversation has raised such a discussion - the most prudent advice here is to utilize the registered vehicles available to you, keeping in mind that RRSP's tax cap gains at 100%, versus 50% non-reg, and at your average tax rate for TFSA (in that it is after tax dollars).
This is a very good point. I know several people that have worked 30 years in a pensionable career. Then they retire (at age 55 or so) and take another job with a pension for 5-10 years, all the while earning their first pension as well and making huge amounts of money. They try to reduce their taxes, so they invest in an RRSP thinking it will help them out. Problem is they turn 65, retire, and start collecting CPP/OAS, plus their first pension, and now their second pension. Now they make so much in retirement that they get their OAS clawed back (effectively giving them an extremely high marginal tax rate). They also don't withdraw from their RRSP because they don't need the spending money. Then they turn 71 and the RRIF withdrawals start to kick in on top of this all, making their income even higher and they pay taxes through the nose.
For a person in this unfortunate situation, a TFSA and taxable investment account would have been much better options for sure. But then again, any true-blood Mustachian would have retired at 55 with the first pension...
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All that being said, Alberta is not the lowest taxed province. I've calculated that at my income and spending levels (36% bracket in Alberta) I would actually be better off in Ontario or BC since the progressive provincial income tax results in an income tax payment which would be low enough to offset the higher sales tax.
The correct statement would be: For sufficiently high income, Alberta has the lowest income tax of any jurisdiction in US or Canada, even lower than the US states with no income tax. The highest combined federal and provincial rate that you can pay in Alberta is 39%, consisting of 29% federal and 10% Alberta. By contrast, the highest federal marginal rate in the USA is 39.6%.
You do need to have a fairly large income for Alberta to be the lowest taxed jurisdiction. For less high incomes, other provinces can have lower taxes.
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To say this is a myth is a bit misleading - it is correct to say that in terms of money in money out, ceteris peribus, RRSP's and TFSA's approximately equal out.
Why are they approximate and not exactly equal?
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I have a T5 with foreign income and withholding on it.
The broker uses immediate date forex rates, but I use the yearly average.
This year it's only out $10 between their and my calcs (only one quarter of income), but how do I reconcile these numbers?
Getting there with my return... ugh.
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I have a T5 with foreign income and withholding on it.
The broker uses immediate date forex rates, but I use the yearly average.
This year it's only out $10 between their and my calcs (only one quarter of income), but how do I reconcile these numbers?
Getting there with my return... ugh.
According to s 261(2) of the Income Tax Act, RSC 1985, c 1 (5th Supp), in computing your Canadian tax return, the exchange rate to be used for an amount denominated in foreign currency is "the relevant spot rate for the day on which the particular amount arose". The "relevant spot rate" is further defined to mean "the rate quoted by the Bank of Canada for noon on the particular day" or from another source of information acceptable to the Minister.
So in terms of the law, your use of yearly average exchange rates may not be allowed (unless "acceptable to the Minister"). However, as a practical matter, the CRA may not care very much if the difference is as small as you say. You can either do nothing and hope they don't challenge it (which they probably won't), or you can attach a statement explaining the difference to your paper return.
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I have read most of the posts here with great interest and am now wondering if someone might have some advice for me?
I am a 54 year old married teacher who has decided to retire in the next few weeks. I have not taught for long and as a result will have a very modest pension.Spouse is also a teacher who will retire in 3 more years.
I can take a lump sum instead (prior to turning 55) but of course there are risks with investing that I wouldn't have with the monthly pension. I think I could do better by investing the lump sum, risks notwithstanding. But I will get dinged tax-wise. Here are the numbers:
Monthly pension $600 (indexed to inflation);
Lump sum: $100,000 half of which will be locked in (Lira) the other half unlocked and into an RRSP (so not taxed). The remaining amount is in cash: $93,000, taxed at the source. (approx $30,000 in taxes I'm assuming).Leaving me with about $60,000 to put into additional RRSP's and/or TFSA's. I have 30,000 room in TFSA's (spouse has 36,000)and $20,000 room in RRSP's (spouse has $20,000 also)
My questions are: 1) how to offset the big tax hit, other than doing RRSPs next year
2) Is taking the lump sum wise financially? I have done a comparison chart with my bank which showed the gains I would make over time if my investments made 5% (which would be greater than the inflation rate of approx. 3.85% for my pension)
I have looked at this from many angles and I am wondering if there is something I am missing, other than the risk I may be taking?
Advice appreciated!
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I have a T5 with foreign income and withholding on it.
The broker uses immediate date forex rates, but I use the yearly average.
This year it's only out $10 between their and my calcs (only one quarter of income), but how do I reconcile these numbers?
Getting there with my return... ugh.
According to s 261(2) of the Income Tax Act, RSC 1985, c 1 (5th Supp), in computing your Canadian tax return, the exchange rate to be used for an amount denominated in foreign currency is "the relevant spot rate for the day on which the particular amount arose". The "relevant spot rate" is further defined to mean "the rate quoted by the Bank of Canada for noon on the particular day" or from another source of information acceptable to the Minister.
So in terms of the law, your use of yearly average exchange rates may not be allowed (unless "acceptable to the Minister"). However, as a practical matter, the CRA may not care very much if the difference is as small as you say. You can either do nothing and hope they don't challenge it (which they probably won't), or you can attach a statement explaining the difference to your paper return.
I've read in several places that you can either do as you say, use the rate on the date, or if you receive income throughout the year you can use the annual rate.
Eg,
http://www.taxtips.ca/personaltax/investing/taxtreatment/shares.htm
The dividend income must be converted to Canadian dollars to determine the amount to include in your income. You can convert using the exchange rates on the dates your foreign dividend income is received, or you can use the average annual exchange rate, as published by the Bank of Canada, for all the dividends received in the year. See our Links page for links to foreign exchange rates. Whichever method you use should be used consistently.
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I think even the CRA website mentions using average rates in places. However, the actual law is as I described above (with citation). The rule dictated in the law is that the CRA can accept alternative rates if it wants but it is not obligated to do so when processing your return.
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I think even the CRA website mentions using average rates in places. However, the actual law is as I described above (with citation). The rule dictated in the law is that the CRA can accept alternative rates if it wants but it is not obligated to do so when processing your return.
Well, if nothing else, going and looking at stuff made me realise that while it's (probably) ok to use the yearly average for income (and I'm sticking to that), I can't do it for capital gains. Which is helpful - it just saved me some money because I thought I had to use the same method for 'everything', but it is only for income that it's (probably) permitted.
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I have read most of the posts here with great interest and am now wondering if someone might have some advice for me?
I am a 54 year old married teacher who has decided to retire in the next few weeks. I have not taught for long and as a result will have a very modest pension.Spouse is also a teacher who will retire in 3 more years.
I can take a lump sum instead (prior to turning 55) but of course there are risks with investing that I wouldn't have with the monthly pension. I think I could do better by investing the lump sum, risks notwithstanding. But I will get dinged tax-wise. Here are the numbers:
Monthly pension $600 (indexed to inflation);
Lump sum: $100,000 half of which will be locked in (Lira) the other half unlocked and into an RRSP (so not taxed). The remaining amount is in cash: $93,000, taxed at the source. (approx $30,000 in taxes I'm assuming).Leaving me with about $60,000 to put into additional RRSP's and/or TFSA's. I have 30,000 room in TFSA's (spouse has 36,000)and $20,000 room in RRSP's (spouse has $20,000 also)
My questions are: 1) how to offset the big tax hit, other than doing RRSPs next year
2) Is taking the lump sum wise financially? I have done a comparison chart with my bank which showed the gains I would make over time if my investments made 5% (which would be greater than the inflation rate of approx. 3.85% for my pension)
I have looked at this from many angles and I am wondering if there is something I am missing, other than the risk I may be taking?
Advice appreciated!
There are a few things to consider here, making this not an easy choice.
- How important is your earning income to your family income mix, especially in retirement. Can you easily get by with just your husbands income / pension?
- Do you guys have a very stable relationship?
- Do you have much for savings outside the pension?
- Are you comfortable with losing up to 40% of your investments?
- Are you sure you are calculating for inflation when running your own numbers?
- Does that $600 get rolled back once CPP kicks in?
My view: you are already close to 55 so you don't have a lot of free compounding time where you would not take withdrawals. For a total commuted value of $193,000, earning $7,200 in buying power for life is pretty darn good (works out to a return of 3.73 PLUS inflation which could be 1-3% or more). Your pension is guaranteed till death, so you can count on a check coming through every two weeks. That's important, especially if you live until well in your 90's.
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Tuxedo thank you very much for your reply. You have asked some good questions.
This is definitely not an easy decision and I have been tossing it around for over a year as I approached my 55th birthday.
Being an avid reader of MMM for several years now has given me the courage to look outside the financial box and to take some risks. Yes there are always risks in the market, risks I won't have if I take the pension, but is that risk not the same for anyone who invests in their rrsp's or TFSA's? Is that the line I draw, the actual possible risk I am taking with my pension?
With regard to your questions:
How important is your earning income to your family income mix, especially in retirement. Can you easily get by with just your husbands income / pension? It will be more important in 3 years when my husband retires and begins his pension (approx $3200/month) but we have learned to live on less and we have no debts (house paid for etc).
- Do you guys have a very stable relationship? Yes
- Do you have much for savings outside the pension? We have approx. $75,000 in RRSPs and $24,000 in RESPs (one child still at home in Grade 10; one graduating from post secondary this year;one going into 2nd and final year of post secondary)
- Are you comfortable with losing up to 40% of your investments? Not really! Is anyone? Is it not possible to go moderate risk and still do pretty well (i.e. better than 3.85%)?
- Are you sure you are calculating for inflation when running your own numbers? My bank did a comparison of 2 scenarios: the first assuming a 3.85% inflation rate until I'm 90. The 2nd assuming a 5% return, after fees etc. The numbers showed a good $70,000 difference over time.
- Does that $600 get rolled back once CPP kicks in? I don't think so but I will check on that.
I guess I want the chance to do a little better than the monthly amount, to have the flexibility, to be able to leave it to my kids when I and my husband are gone.
Any further feedback is most welcome!
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Funny question for you:
I'm part of Ontario's MicroFIT program where we sell what we generate from our solar panels to Ontario Hydro and they pay us for the power and HST. They screwed up our HST payments last year and paid us a fraction of the amount we should have received. I caught it this month and have made them pay back the missing money.
For my taxes for 2014 do I report the HST that they paid us, or the HST that they owed us (and paid back in 2015)?
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This is my second year in the program. Last year I reported income received during the year, so this would be 'cash reporting' then?
In my case the problem was caught, cheque was issued and I received the missing money all in 2015. The actual amount for energy generated was correctly paid out to me as per contract, just the HST wasn't paid properly on top of that.
I caught the underpayment error after filing my taxes and am wondering if I'll get in trouble over this. From the above, it sounds like I should have reported the missing amount on my taxes.
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Tuxedo thank you very much for your reply. You have asked some good questions.
This is definitely not an easy decision and I have been tossing it around for over a year as I approached my 55th birthday.
Being an avid reader of MMM for several years now has given me the courage to look outside the financial box and to take some risks. Yes there are always risks in the market, risks I won't have if I take the pension, but is that risk not the same for anyone who invests in their rrsp's or TFSA's? Is that the line I draw, the actual possible risk I am taking with my pension?
With regard to your questions:
How important is your earning income to your family income mix, especially in retirement. Can you easily get by with just your husbands income / pension? It will be more important in 3 years when my husband retires and begins his pension (approx $3200/month) but we have learned to live on less and we have no debts (house paid for etc).
- Do you guys have a very stable relationship? Yes
- Do you have much for savings outside the pension? We have approx. $75,000 in RRSPs and $24,000 in RESPs (one child still at home in Grade 10; one graduating from post secondary this year;one going into 2nd and final year of post secondary)
- Are you comfortable with losing up to 40% of your investments? Not really! Is anyone? Is it not possible to go moderate risk and still do pretty well (i.e. better than 3.85%)?
- Are you sure you are calculating for inflation when running your own numbers? My bank did a comparison of 2 scenarios: the first assuming a 3.85% inflation rate until I'm 90. The 2nd assuming a 5% return, after fees etc. The numbers showed a good $70,000 difference over time.
- Does that $600 get rolled back once CPP kicks in? I don't think so but I will check on that.
I guess I want the chance to do a little better than the monthly amount, to have the flexibility, to be able to leave it to my kids when I and my husband are gone.
Any further feedback is most welcome!
Typically gov't pensions don't get rolled back due to CPP/OAS - they are fixed, though I'm not familiar with the specifics of your teachers' pension.
Depending on how much pension contribution room you have, you could avoid paying tax on that 93K. The first part of your pension (50k LIRA and 50k unlocked) is presumably the transfer amount within tax limits - you would have already lost this contribution room through your pensions amount on your T4s. If you have 93k contribution room then there is no problem. If you end up having the entire 93k taxed with no other income that year then you'll be left with 170k or so. With a 4% withdrawal rate that would leave you with $6800 per year of sustainable income (4% is based on 7% nominal returns from investments minus 3% inflation).
I put in a starting balance of $170k at firecalc.com with a spending rate of $7200/year adjusted to inflation (same as your pension amount) and over a 30 year period it resulted in a failure rate of 8%. Over a 40 year period the failure rate was 24%. Conversely with a 193k starting balance the failure rates for 30 and 40 year periods were 1.8 and 6.7% respectively.
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Typically gov't pensions don't get rolled back due to CPP/OAS - they are fixed, though I'm not familiar with the specifics of your teachers' pension.
My government pension does.
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I used UFile the way I always did, filed my taxes no problemo, but then realized looking over the printouts there was no Schedule 3 attached or included in the return and there probably should have been. This is the first time I've ever rebalanced from one fund to another in my non-registered account and I know I have capital gains there to account for. But the friggin' program never asked me about it. (So much for trust!) I know money shows up from the T3 on "Interest and other investment income" area because it totals correctly for dividends but why didn't the program ask me about capital gains? Last year I had a T3 as well, but there wouldn't have been gains because I didn't rebalance in the non-reg account. So maybe when UFile carries forward last year's info it assumed I'd have a T5 but not be declaring a capital gain?
So, my question is: There should be a Schedule 3 because I transferred from a fund which was valued higher than the "Adjusted Cost Base", right? This is a TD mutual fund in a non-registered account. I transferred units from a bond e-series into a US e-series and from the foreign e-series into the Canadian one. Both of the funds I transferred out of were worth more than their book value.
It sucks, but I'm not too worried about having already filed the return. I had to make a correction based on dividend income of a T3 a few years ago, did it very easily on the CRA site, and they quickly sent me a new assessment of what I owed.
After note!: Now I'm really confused because the T3 has a blank Box 21 "Capital Gains". It's also blank under the "Capital Gains" column of transactions. Is there another form coming to me from the bank? Or do maybe the December transactions show up on next years' statements? Box 30 is what the CRA's guide says you should use for reporting capital gains from a T3 but it's also blank. WTF? :(
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Typically gov't pensions don't get rolled back due to CPP/OAS - they are fixed, though I'm not familiar with the specifics of your teachers' pension.
My government pension does.
Interesting, I stand corrected. Would you mind sharing which gov't/dept?
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After note!: Now I'm really confused because the T3 has a blank Box 21 "Capital Gains". It's also blank under the "Capital Gains" column of transactions. Is there another form coming to me from the bank? Or do maybe the December transactions show up on next years' statements? Box 30 is what the CRA's guide says you should use for reporting capital gains from a T3 but it's also blank. WTF? :(
The T3 slip only reports capital gains received as distributions from trusts.
The T5 slip only reports capital gains received as distributions from other securities.
For capital gains from the disposition of securities, you will need to compute it yourself from the records provided to you by your broker. Your broker should have provided you with a Form T5008 or equivalent statement listing your securities transactions for the year. You use that to calculate your capital gains.
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Many thanks! No 'Form T5008' yet--hopeully it just hasn't arrived yet? It would be nice if somewhere in the CRA's guide or the T3 itself it made a distinction between a capital gain distribution (as opposed to dividend?) and sell/disposition. The T3 boxes as they are and the funds/headings listed in the middle is all pretty confusing.
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"Capital gain dividend" is just another term for capital gains received as a distribution from something other than a trust.
The reason I said "Form T5008 or equivalent statement" is that the broker is not required to issue you a Form T5008. However, they are required to issue you something with the same information (namely, a list of your securities transactions that settled during the year). I believe Questrade calls theirs an "annual statement".
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Typically gov't pensions don't get rolled back due to CPP/OAS - they are fixed, though I'm not familiar with the specifics of your teachers' pension.
My government pension does.
Interesting, I stand corrected. Would you mind sharing which gov't/dept?
It's the Canadian Government pension plan, I don't work for the Can. Gov. but they manage our plan. You get the same set income, including CPP and Pension, the pension just pays more if you retire before eligible for CPP, then they reduce their pay out once you are pulling CPP. Of course, OP's might be different, and her CPP could be larger than her pension amount, assuming she had other employment before becoming a teacher.
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Just completed my NETFILE tax return today and sent it in. My overall fed+prov tax rate for 2014 was 10.8%. This means I will have a nice refund coming back even on top of my two T1213 Deduction at Source forms I was approved for.
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"Capital gain dividend" is just another term for capital gains received as a distribution from something other than a trust.
The reason I said "Form T5008 or equivalent statement" is that the broker is not required to issue you a Form T5008. However, they are required to issue you something with the same information (namely, a list of your securities transactions that settled during the year). I believe Questrade calls theirs an "annual statement".
If I don't get one in the mail from TD, do you think (because I made these switches in December) that I should be using information from the online "TD Mutual Funds Account Statement: Statement period: October 01,2014 to December 31,2014" ?
It shows the unit and prices of the transfers, but doesn't show the adjusted cost base at the time.
THANKS AGAIN--I REALLY APPRECIATE IT!!! :)
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It shows the unit and prices of the transfers, but doesn't show the adjusted cost base at the time.
Brokers are under no obligation to calculate your adjusted cost base. You have to calculate that yourself.
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One more, please? I've read this: "The adjusted cost base is calculated by of adding in the cost you paid to purchase all of your investments into a certain stock or mutual fund. Includign dividends." That is basically what a bank shows as "book value" right? What I paid for them overall verus "market value"--which they're worth at a given point in time.
I know exactly how many and how much I sold them for (at market value) on the 14th of December. But what I don't know is what the "book value" was on the 14th. I assume now I was supposed to write that down at that time? How the heck can I find it out now?
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"Book value" is an accounting term equal to the purchase price of the item minus some offsetting factors. For the purpose of your brokerage website, the book value is probably the price you paid for the security. That is not going to change over the period you hold it, since the price you paid is fixed when you first bought it (although the average price you paid can change if you buy more of them).
For a mutual fund, in general, the adjusted cost base is the price you paid to purchase the security including any commissions and exchange fees plus any return of capital distributions.
So let's assume you are dealing with security Q. You bought 5 shares of security Q at $5 per share and paid a $1 commission. Then later you bought 3 more shares of security Q at $10 per share and paid another $1 commission.
Your adjusted cost base in Q is $7.125 per share. If you later sell 2 shares of Q at $8 each, you have a capital gain of $0.875 per share, or a total capital gain of $1.75.
Your brokerage records should show what you originally paid for the security. You'll just have to go back in the records to the month or months where you bought the security.
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Your brokerage records should show what you originally paid for the security. You'll just have to go back in the records to the month or months where you bought the security.
Ersh... Yeah, dollar cost averaged bi-weekly for two years with extra money thrown in whenever I had it. Mint says 127 buy or reinvested dividend transactions in the non-registered bond fund since May 2012. TD's eDocument online statements only go back to April 2014. Guess I have some work to do, huh?
I never would have guessed one rebalance could be such a nightmare. ...Going to try to do all rebalancing in the tax sheltered accounts from now on.
Again--you've been great! Cheers!
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Just completed my NETFILE tax return today and sent it in. My overall fed+prov tax rate for 2014 was 10.8%. This means I will have a nice refund coming back even on top of my two T1213 Deduction at Source forms I was approved for.
I also fill that T1213 form every year and still get a huge refund. Last year, combined refund was 5k$ and this year it's 6,5k$. I don't really like the idea of lending money to the Gov @ 0% especially because I manage it in a better way...
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Capital loss question!
While married to my spouse, I suffered a large capital loss in my individual brokerage account which is now carried forward in my name. We now have a (solely) joint brokerage account.
Question: This year we have capital gains. I am unable to apply my past capital loss against the full 1/2 measure of our total capital gains. I can, of course apply it against my '50%' of the gain since we hold and contributed jointly to our joint brokerage. Does that make sense?
At any rate, is there any method by which I can maximize use of my carryforward capital losses against my spouse's (50% share) of any future capital gains?
Thanks in advance and good luck with your hectic end of year tax business CPA CB!!
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Capital loss question!
While married to my spouse, I suffered a large capital loss in my individual brokerage account which is now carried forward in my name. We now have a (solely) joint brokerage account.
Question: This year we have capital gains. I am unable to apply my past capital loss against the full 1/2 measure of our total capital gains. I can, of course apply it against my '50%' of the gain since we hold and contributed jointly to our joint brokerage. Does that make sense?
At any rate, is there any method by which I can maximize use of my carryforward capital losses against my spouse's (50% share) of any future capital gains?
Thanks in advance and good luck with your hectic end of year tax business CPA CB!!
Hi Ottawa,
Is it truly a jointly held and contributed account? What % of the ACB was purchased by you versus your spouse? You may be able to claim a higher percentage here, if many of the investments were purchased with your funds/earnings.
Can I ask why you have a joint brokerage account? Is it just a trust (legal trust, that is) reason? When did you incur these losses? Have you had any gains in the past 7 years? If so, you can file a T1-ADJ and apply these capital losses backwards. The good news is that you have 20 years from the year of the loss to carryforward, so they are usable eventually....
From a usability perspective - it's easier if held in your account solely for gains, but it seems like you've changed to joint holdings for a reason.
Cheers,
CPA CB
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Is it truly a jointly held and contributed account?
Yes
What % of the ACB was purchased by you versus your spouse? You may be able to claim a higher percentage here, if many of the investments were purchased with your funds/earnings
Good question...but our paycheques are effectively the same. So, 50%.
Can I ask why you have a joint brokerage account? Is it just a trust (legal trust, that is) reason?
Mainly for estate planning. The fact that we each contribute 50% helps with the simplicity. However, as we plan for ER, it is likely that my spouse will retire at least a year before me. At that time I will continue to contribute. I suppose that could potentially complicate things or does it really matter much?
When did you incur these losses?
Just a few years ago...
Have you had any gains in the past 7 years? If so, you can file a T1-ADJ and apply these capital losses backwards.
Yes, have carried back.
The good news is that you have 20 years from the year of the loss to carryforward, so they are usable eventually....
From a usability perspective - it's easier if held in your account solely for gains, but it seems like you've changed to joint holdings for a reason.
This is what I figure, and am not too worried in the end...The triggered capital gains have been pretty minor on purpose. However, at some stage in the future we will probably realise a larger cap gain. Is there a way to plan for this now, or will only 1/2 the capital gain be put up against a carryforward loss? Of course, if the capital gain is large enough the loss will be used up! :-)
Thanks!
Ottawa
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Is it truly a jointly held and contributed account?
Yes
What % of the ACB was purchased by you versus your spouse? You may be able to claim a higher percentage here, if many of the investments were purchased with your funds/earnings
Good question...but our paycheques are effectively the same. So, 50%.
Can I ask why you have a joint brokerage account? Is it just a trust (legal trust, that is) reason?
Mainly for estate planning. The fact that we each contribute 50% helps with the simplicity. However, as we plan for ER, it is likely that my spouse will retire at least a year before me. At that time I will continue to contribute. I suppose that could potentially complicate things or does it really matter much?
When did you incur these losses?
Just a few years ago...
Have you had any gains in the past 7 years? If so, you can file a T1-ADJ and apply these capital losses backwards.
Yes, have carried back.
The good news is that you have 20 years from the year of the loss to carryforward, so they are usable eventually....
From a usability perspective - it's easier if held in your account solely for gains, but it seems like you've changed to joint holdings for a reason.
This is what I figure, and am not too worried in the end...The triggered capital gains have been pretty minor on purpose. However, at some stage in the future we will probably realise a larger cap gain. Is there a way to plan for this now, or will only 1/2 the capital gain be put up against a carryforward loss? Of course, if the capital gain is large enough the loss will be used up! :-)
Thanks!
Ottawa
Hey Ottawa,
If you're keen on utilizing the gains sooner, I recommend transferring a portion of your funds to a personal brokerage account - this would be the cleanest way to do so, and ultimately transfer back after the fact.
Remember that for estate planning, the only thing you need to do is have your wife as a joint signatory, to avoid the issues with reaching the funds before probate. Beyond that, there are no estate issues, unless specified in your will.
Good luck!
CPA CB
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Your brokerage records should show what you originally paid for the security. You'll just have to go back in the records to the month or months where you bought the security.
Ersh... Yeah, dollar cost averaged bi-weekly for two years with extra money thrown in whenever I had it. Mint says 127 buy or reinvested dividend transactions in the non-registered bond fund since May 2012. TD's eDocument online statements only go back to April 2014. Guess I have some work to do, huh?
I never would have guessed one rebalance could be such a nightmare. ...Going to try to do all rebalancing in the tax sheltered accounts from now on.
Again--you've been great! Cheers!
Agreed with what Cathy is saying here - though in simpler terms, what did you pay, and what costs were incurred to purchase? When you sell, the gain is calculated on the 'average' purchase price including costs - and if you trade frequently this can be a logistical nightmare.
Cheers,
CPA CB
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Guys, I have a rather straightforward question!
Can someone recommend an accountancy firm or individual CAs who can advise on UK/Canada tax affairs for a British expat moving to London, Ontario?
Thanks!
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Guys, I have a rather straightforward question!
Can someone recommend an accountancy firm or individual CAs who can advise on UK/Canada tax affairs for a British expat moving to London, Ontario?
Thanks!
Happy to deal with you, if you want to message me directly we can chat about the issues. I've dealt with UK expats in the past, but we can discuss the complexities at this point.
Cheers,
CPA CB
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Am I required to report a bank account's interest income if under $50?
I think yes, but...
Bank doesn't provide slips if less than $50 of interest in account. (I had two accounts.)
Bank won't provide any other documentation unless I drive 500 kms to a branch and pay them $10.
Bank accidentally closed my account, such that I have no online access to last year's statements.
Accountant won't put in the estimate I gave him.
I can insist the accountant enter my best estimate, and I would overestimate to $60 to be safe. Is that the way to go?
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You need to report and pay tax on all "income for the year ... from a source inside or outside Canada" within the meaning of s 3 of the Income Tax Act, RSC 1985, c 1, unless otherwise exempted by an exception in the law.
Income tax is computed based on the law, not based on the forms or other documentation you may or may not have received. Let's suppose you earned $10 in interest in 2014. If the bank issued you a form saying you had earned $100,000 in interest, you would not need to pay tax on $100,000. You'd still only need to pay tax on $10. The numbers on the tax slips are, as a general rule, irrelevant to computing your income tax, in the sense that the taxation is based on the income, not the slips. So after you understand that, you know that of course it's irrelevant whether the bank issued you a form for the interest: the taxability of the income will depend on whether that income is taxable under the law, not on whether it appeared on a tax slip. (Obviously a discrepancy between the forms and your return will increase your chance of an audit, so in the case of a significant discrepancy, you would want to be armed with evidence that the forms are wrong.)
As for your actual question, you could try looking at mint.com or something like that, but if you don't know how much interest you were paid and it is small, I would just put an arbitrary value into the tax return and attach a statement explaining that I am unable to determine the correct value, but it's sufficiently small that it does not have a significant effect on the tax owing. There's no legal authority for this procedure but as a practical matter it is unlikely to be challenged by the CRA.
That said, you can probably come up with a better estimate than $60. Prevailing interest rates in Canada are around 1% for online banks and 0.3% for physical banks. You mention driving to a branch so we'll assume the interest rate was 0.3%. Do not have any idea of how much cash was in the account? To get $60 at 0.3% interest, you would have needed $20,000 in the account for the entire year. I'm sure you have some idea of how much cash was in the account and at what point during the year it was closed to allow you to determine a better estimate.
Also, if the account was really closed by the bank without your permission, then I would insist they provide you an annual statement without fee, since the problem is entirely their fault. You don't really need to do this for tax purposes, but if you want the documentation, you shouldn't have to pay $10 when the problem was caused by the bank.
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...you can probably come up with a better estimate than $60. Prevailing interest rates in Canada are around 1% for online banks and 0.3% for physical banks. You mention driving to a branch so we'll assume the interest rate was 0.3%. Do not have any idea of how much cash was in the account? To get $60 at 0.3% interest, you would have needed $20,000 in the account for the entire year. I'm sure you have some idea of how much cash was in the account and at what point during the year it was closed to allow you to determine a better estimate.
Money moved in and out in big slabs, so I can't do the math on a reasonably consistent figure for the year. I do, though, have 11/12 months of one account printed out from before they accidentally closed it -that's where I got my estimate from- and the bank was willing to tell me over the phone their calculation of total interest for one of the accounts (but not the other). I thought I'd add a few dollars for the missing month. (I use YNAB now, so won't have this problem in future, but I didn't have that for the first several months of 2104.)
Anyway, it seems the short answer is, "Yes, despite what the tax accountant says and the bank rep says, you do indeed need to declare the $50ish dollars." All good. And I like the idea of including a note. I will do that!
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Dumb question
I had capital losses this year and i'm worried i will forget about them in the future. Will my NOA show how much I have in unclaimed capital losses each year?
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In the paper and an BBN they've mentioned that CRA might start taxing people who are doing too well in their TFSAs. Do you know what the rules are surrounding this?
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Dumb question
I had capital losses this year and i'm worried i will forget about them in the future. Will my NOA show how much I have in unclaimed capital losses each year?
Yes it will - Also, if you have a CRA My Account you can look up any carryforward amounts online (very useful).
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In the paper and an BBN they've mentioned that CRA might start taxing people who are doing too well in their TFSAs. Do you know what the rules are surrounding this?
Hi C-Kat
First off, there are no "rules" here, but the CRA is attempting to apply a notional portion of the Income Tax Act (unfairly, in my opinion). Note this issue hasn't hit the Tax Court of Canada yet - so the jury is still out, so to speak.
It all stems from the difference between "earned income" and "unearned income" in the Act. Earned income being employment income, business income, really any activity where you directly attempt to earn a living (or part thereof) in the activity. This differs from unearned income, i.e. passive income such as dividends and capital gains, where yes - you make money, but it isn't what you do for a living. Then there is money, like gambling winnings, inheritances, etc. which are tax-free (unless you're a professional gambler, for example...)
This is where they're attempting to drive a wedge - if you've been overly successful in your portfolio, how actively are you pursuing gains? Are you trading frequently? Many times a day? The more successful and higher trade volume, this (to the CRA) begins to look like business income... Which is why they're going after the TFSA so aggressively.
So - if you trade very frequently and dedicate significant time to trading your TFSA portfolio, there is a risk they will attempt to convert this into Business Income which is 100% taxable.
As stated, there is currently no jurisprudence in the matter, and I wouldn't expect clarity for at least another year, if not further, as eventually it will trickle up to Court. If you are truly concerned, keep any receipts and statements including trading costs/management fees etc., as one would surmise that if the income is taxable, the expenses are deductible.
Hope this answers the question!
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In the paper and an BBN they've mentioned that CRA might start taxing people who are doing too well in their TFSAs. Do you know what the rules are surrounding this?
Hi C-Kat
First off, there are no "rules" here, but the CRA is attempting to apply a notional portion of the Income Tax Act (unfairly, in my opinion). Note this issue hasn't hit the Tax Court of Canada yet - so the jury is still out, so to speak.
It all stems from the difference between "earned income" and "unearned income" in the Act. Earned income being employment income, business income, really any activity where you directly attempt to earn a living (or part thereof) in the activity. This differs from unearned income, i.e. passive income such as dividends and capital gains, where yes - you make money, but it isn't what you do for a living. Then there is money, like gambling winnings, inheritances, etc. which are tax-free (unless you're a professional gambler, for example...)
This is where they're attempting to drive a wedge - if you've been overly successful in your portfolio, how actively are you pursuing gains? Are you trading frequently? Many times a day? The more successful and higher trade volume, this (to the CRA) begins to look like business income... Which is why they're going after the TFSA so aggressively.
So - if you trade very frequently and dedicate significant time to trading your TFSA portfolio, there is a risk they will attempt to convert this into Business Income which is 100% taxable.
As stated, there is currently no jurisprudence in the matter, and I wouldn't expect clarity for at least another year, if not further, as eventually it will trickle up to Court. If you are truly concerned, keep any receipts and statements including trading costs/management fees etc., as one would surmise that if the income is taxable, the expenses are deductible.
Hope this answers the question!
Thanks. I don't trade daily, but I do trade a few times a month. Often its just picking up more shares in an existing position. But I do also buy higher risk investments in my TFSA so if they do well I will sell and buy something else. I don't think 3 or 4 trades a month would qualify as a business, would it? Especially where I have a day job.
I assume CRA would love large gains in an RRSP, and not be opposed to frequent trading because it means more tax at withdrawl time.
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In the paper and an BBN they've mentioned that CRA might start taxing people who are doing too well in their TFSAs. Do you know what the rules are surrounding this?
Hi C-Kat
First off, there are no "rules" here, but the CRA is attempting to apply a notional portion of the Income Tax Act (unfairly, in my opinion). Note this issue hasn't hit the Tax Court of Canada yet - so the jury is still out, so to speak.
It all stems from the difference between "earned income" and "unearned income" in the Act. Earned income being employment income, business income, really any activity where you directly attempt to earn a living (or part thereof) in the activity. This differs from unearned income, i.e. passive income such as dividends and capital gains, where yes - you make money, but it isn't what you do for a living. Then there is money, like gambling winnings, inheritances, etc. which are tax-free (unless you're a professional gambler, for example...)
This is where they're attempting to drive a wedge - if you've been overly successful in your portfolio, how actively are you pursuing gains? Are you trading frequently? Many times a day? The more successful and higher trade volume, this (to the CRA) begins to look like business income... Which is why they're going after the TFSA so aggressively.
So - if you trade very frequently and dedicate significant time to trading your TFSA portfolio, there is a risk they will attempt to convert this into Business Income which is 100% taxable.
As stated, there is currently no jurisprudence in the matter, and I wouldn't expect clarity for at least another year, if not further, as eventually it will trickle up to Court. If you are truly concerned, keep any receipts and statements including trading costs/management fees etc., as one would surmise that if the income is taxable, the expenses are deductible.
Hope this answers the question!
Thanks. I don't trade daily, but I do trade a few times a month. Often its just picking up more shares in an existing position. But I do also buy higher risk investments in my TFSA so if they do well I will sell and buy something else. I don't think 3 or 4 trades a month would qualify as a business, would it? Especially where I have a day job.
I assume CRA would love large gains in an RRSP, and not be opposed to frequent trading because it means more tax at withdrawl time.
Correct - sounds like you're fine.
They don't attack the RRSP at all because it is all earned income on withdrawal. You're spot on there.
Cheers.
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I have a few question about today's budget:
-The TFSA increase aparently begins in 2015. Does this means that those of us who have already maxed out our TFSAs can add another $4,500 tommorow?
-I read that the small business tax rate will decrease to 9% by 2019. Will this be in increments? What will the small business rate be in 2016?
-Since the small business tax rate is decreasing, will the tax rates on ordinary dividends change? If not, won't integration no longer apply?
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I have a few question about today's budget:
-The TFSA increase aparently begins in 2015. Does this means that those of us who have already maxed out our TFSAs can add another $4,500 tommorow?
-I read that the small business tax rate will decrease to 9% by 2019. Will this be in increments? What will the small business rate be in 2016?
-Since the small business tax rate is decreasing, will the tax rates on ordinary dividends change? If not, won't integration no longer apply?
From what's being said at reddit's PersonalFinanceCanada sub, you can contribute the $4.5k now. CRA 'respects' the budget until it *fails*, which means voted down, which won't happen because there is a Con majority.
It is retroactive to Jan 1st.
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1. Is the tax rate for Corporations graduated, like the one for personal? Or is it a flat rate, and applicable to even the first dollar?
2. I know there is free, CRA-approved software for submitting personal tax returns. Is there also this for Corporations? (I'm getting ready for next year!) What about for a Trust?
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My Dad bought bbd.b shares (employer match) over almost 10 years
These shares are in a taxable account, DRIP was in place. He never tracked anything (read ACB here). From 1996 to 2003 (where most purchases occured), bbd.b average price was at least 10$. Today, it’s 2.66$ and he wants to sell to harvest the lost and offset a big capital gain from a plot of land sale.
Could he sell all of his bbd.b and wait for the slips to come in to do his taxes next year? Why he should try to get the ACB by himself? Do I miss something here?
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I have a few question about today's budget:
-The TFSA increase aparently begins in 2015. Does this means that those of us who have already maxed out our TFSAs can add another $4,500 tommorow?
-I read that the small business tax rate will decrease to 9% by 2019. Will this be in increments? What will the small business rate be in 2016?
-Since the small business tax rate is decreasing, will the tax rates on ordinary dividends change? If not, won't integration no longer apply?
From what's being said at reddit's PersonalFinanceCanada sub, you can contribute the $4.5k now. CRA 'respects' the budget until it *fails*, which means voted down, which won't happen because there is a Con majority.
It is retroactive to Jan 1st.
That's correct - It's $10,000 for the years 2015 and beyond.
Decrease to the Small Business Tax Rate and Corresponding Adjustment to Gross-Up and Dividend Tax Credit Rates
Budget 2015 proposes a 2 percentage point decrease in the small business tax rate from 11 per cent in 2015 to 9 per cent in 2019. The reduction will be implemented as follows:
•10.5 per cent effective January 1, 2016
•10 per cent effective January 1, 2017
•9.5 per cent effective January 1, 2018
•9 per cent effective January 1, 2019
In conjunction with such reductions, Budget 2015 also proposes to adjust the gross-up factor and dividend tax credit rate applicable to non-eligible dividends (basically, dividends sourced from corporate income that is taxed at the small business rate). The gross-up percentage will be decreased from 18 per cent in 2015 to 17 per cent in 2016 and 2017, 16 per cent in 2018 and 15 per cent in 2019 and thereafter. The corresponding dividend tax credit rate will be changed from 13/18 of the gross-up amount to 21/29 effective January 1, 2016, 20/29 effective January 1, 2017 and 9/13 of such amount effective January 1, 2019. The budget indicates that such adjustments are necessary in order to maintain (or at least attempt to achieve) the integration of the corporate and personal tax systems. However, there will not be appropriate integration for non-eligible dividends paid after 2015 from retained earnings that arose in previous taxation years...
Hopefully this helps to address some of your questions here - a you see, the reduction is graduated over the next few years, and the dividend gross-up and credits are being adjusted to try and keep integration intact.
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1. Is the tax rate for Corporations graduated, like the one for personal? Or is it a flat rate, and applicable to even the first dollar?
2. I know there is free, CRA-approved software for submitting personal tax returns. Is there also this for Corporations? (I'm getting ready for next year!) What about for a Trust?
Hi SF -
It is a flat rate - applicable to each dollar of PROFIT (not revenue) so in this regard it is somewhat different than personal taxes.
As far as free software - I'm not aware of any in terms of Corporate and Trust Returns. The level of diligence required for T2 (Corp) and T3 (Trust) returns is far higher than that of a personal return, and as such I would be surprised if there was a free package available.
There is a pay as you go software available - "Profile" by Intuit, which is reasonable for single returns... However, as I'm stating above, given the level of diligence required I would very much recommend you retain a professional in these matters to ensure your returns are filed appropriately.
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My Dad bought bbd.b shares (employer match) over almost 10 years
These shares are in a taxable account, DRIP was in place. He never tracked anything (read ACB here). From 1996 to 2003 (where most purchases occured), bbd.b average price was at least 10$. Today, it’s 2.66$ and he wants to sell to harvest the lost and offset a big capital gain from a plot of land sale.
Could he sell all of his bbd.b and wait for the slips to come in to do his taxes next year? Why he should try to get the ACB by himself? Do I miss something here?
Hi there -
He needs to calculate the ACB by himself, or if his investment brokerage account has a carried amount this will likely do. Make sure any transaction fees and carrying costs have been included as well. For many (read - most) brokerage accounts, they don't file slips for capital gains/losses and the burden of reporting falls on the taxpayer. He'll need to get this information together for next year's return if he chooses to sell. I assume the matching value of shares were reported as income in the years 1996-2003?
Just as a red flag - he'll want to look at the whole picture here, and by that I mean the use of the principal residence exemption.
It seems, based on what you've said, this exemption is available to this property. If so, you want to claim AT LEAST 1 year of the exemption (as this will shield two years of ownership). The loss of the year has no impact on the use for his house (as you get the number of years claimed plus one) as the exempted amount.
Calculate the yearly capital gain of this property and his house to determine which is better to use the exemption on for the remaining years.
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Funny question for you:
I'm part of Ontario's MicroFIT program where we sell what we generate from our solar panels to Ontario Hydro and they pay us for the power and HST. They screwed up our HST payments last year and paid us a fraction of the amount we should have received. I caught it this month and have made them pay back the missing money.
For my taxes for 2014 do I report the HST that they paid us, or the HST that they owed us (and paid back in 2015)?
I responded to a similar question in the American context yesterday: http://forum.mrmoneymustache.com/ask-a-mustachian/question-for-tax-peoples-2015-income-attributable-to-2014/msg578159/#msg578159
Obviously, this thread is Canadian, but the American principles are similar so you may want to read that post first.
The first question is: what accounting method do you use for income from this project?
If you use the cash method of accounting, then the question becomes: when did you receive the income?
Receipt of income is not necessarily when you can spend the cash; it can be earlier. In Canada, this topic is not explicitly addressed in any legislative instrument, but it's often referred to in the court cases. I can't find an appellate citation at the moment, but in Mintzer v. Canada, [1998] TCJ No 325, a judge of the Tax Court says, "Certain dictionary definitions of 'receive' or 'receipt' might leave one with the impression that something is not received unless it is actually taken into one's hands or possession. However the case law is clear that an amount may be included in income even where it is only notionally or constructively received". Unfortunately, that case is not available on CanLII (I read it through LexisNexis), so I can't provide a link.
If you were using the cash method of accounting, it would come down to whether you received the income in 2014 or in 2015, keeping in mind that the legal definition of "received" may be different from your intuition.
However, in your case, things may be simpler, because the CRA guidance says that you should use the accrual method of accounting for income received from the Ontario MicroFIT program. As explained by the CRA (http://www.cra-arc.gc.ca/tx/bsnss/thrtpcs/nt-ft/q1-eng.html#a2), "Generally, the Participant should report income using the accrual method of accounting. With this method, the Participant will report the income in the taxation year that the amount is earned under the Contract, regardless of when the amount is received."
If this is your first year dealing with this program, you can use the accrual method as the CRA says and then the issue is very simple. If it's not your first year, then you need to remain consistent with the same accounting method, so then the issue of when you "received" the income may come into play if you were using the cash method before.
I wish I had caught this earlier - but alas I will do so now.
Contrary to Cathy's response here - these issues are not one and the same: When you say, they screwed up the HST payments, I assume this means purely HST, and not income taxes (as HST is not income, in any way shape or form).
Given this is the case - it depends on how you filed your HST returns with the CRA - did you already report this HST as received? If so, you've paid up the correct amount. If this missing HST has not yet been reported, you can either file amendments for the given periods, or just include the amount on your next HST return and remit this to CRA accordingly.
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A Quick Budget Overview
Hi All -
Alright alright alright - after some prodding, please find my MMM birds-eye overview of the 2015 budget.
Just as a quick briefing, the 2015 budget is now released, which means your friendly neighbourhood tax accountants are scurrying around trying to make heads from tails, a mere week before the end of the 2014 tax season! As such. this is an abridged version, but hopefully I cover most of everyone's concerns...
If you're looking for commentary on synthetic equity dividends and subsection 55(2) capital gains stripping rules (I'm assuming Le Barbu, since you love asking technical questions here...haha) - you've come to the wrong place!
As such, here is a very quick overview of the budget - I've taken the liberty to include non-political satirical remarks to make this subject a bit more interesting.
First and foremost - It's balanced! Finally. Well, sort of... Apparently we took some money out of an emergency fund, and sold some GM shares. Let's just say it's close enough.
TFSA's - starting in 2015, the room is up to $10,000 per annum. This is an increase of $4,500 per year, however... The room will not be inflation indexed going forward.
Author's Note - Please. Please! Recognize that Tax Free Savings Account does not mean the money has to be in a Savings Account at the bank. This is a Tax Free Investment Account (bank lobbies be damned) so treat this accordingly, and make more than the currently offered whopping 1.05% interest rate offered at Tangerine.
Small Business (i.e. Corporations with under $500,000 profit per annum) - Expect your taxes to fall over the next few years. As posted earlier, the CCPC rate is dropping from 11% to 9% between now and the 2019 fiscal year for Federal taxes. This should mean a fair bit of savings for Entrepreneurs far and wide.
Manufacturing - If you happen to be in manufacturing, good news, you're getting a handout! A new rate of 50% depreciation on certain capital assets acquired between 2015 and 2026 will now be available... However, given how many manufacturers in Ontario are going belly-up, one wonders who will be using this one.
Home Accessibility Tax Credit - $10,000 tax credit (15% thereof) to improve accessibility of homes for "seniors" (65 and up) who are eligible for the disability tax credit. Not 65 and disabled but helping a loved one? Good news - you can claim this credit on your return (if you're paying for it) if you're a spouse, parent, grandparent, niece, nephew, or other qualifying individual. This is a maximum of $10,000 per residence, so if you're paying for upgrades to your parents' home, it's a maximum of $10,000 (assuming they're married and cohabiting.)
Lifetime Capital Gains Exemption for Farmers - Increase from $813,600 in capital gains to $1,000,000 on qualified farm or fishing properties. This is, give or take, a savings of about $25,000-$45,000 for our farmers and fishermen. If you were thinking of becoming a farmer, or selling your farm - this may help!
Donations and your Estate - The 2015 Budget now allows you to exempt gains on donations of cash from the sale of private company shares or real estate, if the proceeds are donated within 30 days of closing. This goes further than previous budgets, and does not extend to public companies at the moment, but it's a step in the right direction.
Universal Child Care Benefit - Those with little 'staches will rejoice at receiving an additional $60 per month, per child under the age of 6. You'll also get an additional $1,000 increase in room to claim childcare expenses.
Teenager stealing your booze and racking up your cell-phone bill? Good news - you'll now be entitled to $60 per month for children from ages 6 to 17. That should cover the unlimited data plan and some make your own brew... Right?
There are other more technical issues - but this will likely cover most of what you're looking for.
Overall
Much of this is information we've all known for some time, but are now a reality in black and white. Is it a game changer? Not particularly, but much of this is a step towards saving taxes for those prudent enough to take advantage.
The only game changer, and this will be interesting, is the impact of the TFSA on the once firmly held ground of the RRSP. With $10,000 per year in room going forward, this is very likely to become the investment vehicle of choice, especially since withdrawals are NOT INCOME. This means you can withdraw from the TFSA, and these funds will not have any affect on those pesky OAS and CPP claw-back rates.
Hope everyone has a happy and healthy 2015 - and can take advantage of these savings both now and going forward.
CPA CB
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It is a flat rate - applicable to each dollar of PROFIT (not revenue) so in this regard it is somewhat different than personal taxes.
As far as free software - I'm not aware of any in terms of Corporate and Trust Returns. The level of diligence required for T2 (Corp) and T3 (Trust) returns is far higher than that of a personal return, and as such I would be surprised if there was a free package available.
There is a pay as you go software available - "Profile" by Intuit, which is reasonable for single returns... However, as I'm stating above, given the level of diligence required I would very much recommend you retain a professional in these matters to ensure your returns are filed appropriately.
Thank you very much, CPA CB. With the time of year, I didn't think we'd be hearing from you for some time yet!
I thought the feedback might indeed be to go with a tax accountant for the Corp and Trust returns. Thanks.
My Corporate return (still recovering from massive losses two years ago) showed $11,000 taxable, $0 owing. I'm sure this is because of loss carry-forwards of way more than $11,000 but was confused to see only the $11,000 and $0 display on the "owing" page, rather than the "taxable minus losses = $0". Is that how it normally displays? (The application of the loss carry-forward is clearly shown in other pages.)
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Question for all these tax-smart people, especially CPA CB. I asked in another thread whether it is more advantageous to invest or pay down mortgage, given that my mortgage interest is an investment expense. That thread has sunk like the proverbial stone, lots of views, but not much discussion. Anyone here care to take a look and comment? Or maybe it is so obvious that no-one has bothered to add in anything. ;-( If it is the obvious thing to do, it would be nice to hear a few people say they think my reasoning is sound.
http://forum.mrmoneymustache.com/ask-a-mustachian/costbenefit-analysis-of-not-paying-down-my-mortgage-%28canada%29/ (http://forum.mrmoneymustache.com/ask-a-mustachian/costbenefit-analysis-of-not-paying-down-my-mortgage-%28canada%29/).
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It is a flat rate - applicable to each dollar of PROFIT (not revenue) so in this regard it is somewhat different than personal taxes.
As far as free software - I'm not aware of any in terms of Corporate and Trust Returns. The level of diligence required for T2 (Corp) and T3 (Trust) returns is far higher than that of a personal return, and as such I would be surprised if there was a free package available.
There is a pay as you go software available - "Profile" by Intuit, which is reasonable for single returns... However, as I'm stating above, given the level of diligence required I would very much recommend you retain a professional in these matters to ensure your returns are filed appropriately.
Thank you very much, CPA CB. With the time of year, I didn't think we'd be hearing from you for some time yet!
I thought the feedback might indeed be to go with a tax accountant for the Corp and Trust returns. Thanks.
My Corporate return (still recovering from massive losses two years ago) showed $11,000 taxable, $0 owing. I'm sure this is because of loss carry-forwards of way more than $11,000 but was confused to see only the $11,000 and $0 display on the "owing" page, rather than the "taxable minus losses = $0". Is that how it normally displays? (The application of the loss carry-forward is clearly shown in other pages.)
Yes, it is!
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Question for all these tax-smart people, especially CPA CB. I asked in another thread whether it is more advantageous to invest or pay down mortgage, given that my mortgage interest is an investment expense. That thread has sunk like the proverbial stone, lots of views, but not much discussion. Anyone here care to take a look and comment? Or maybe it is so obvious that no-one has bothered to add in anything. ;-( If it is the obvious thing to do, it would be nice to hear a few people say they think my reasoning is sound.
http://forum.mrmoneymustache.com/ask-a-mustachian/costbenefit-analysis-of-not-paying-down-my-mortgage-%28canada%29/ (http://forum.mrmoneymustache.com/ask-a-mustachian/costbenefit-analysis-of-not-paying-down-my-mortgage-%28canada%29/).
Hi Retired,
This is a multi-faceted question, and one which raises a few additional questions... It isn't technically a tax one, but I'll just throw some thoughts out here to help.
First and foremost - you aren't giving concrete figures here. From what I gather you're in a 15% marginal tax rate ($150 savings per $1,000) is this something you expect to continue into retirement? If you're paying $12k per year, and gaining 9K equity, one would assume you're saving about $450 per year with this strategy?
Risk and Rewards - At 63, you've got plenty of years ahead of you, but in terms of compounding income for the future, the years are much more limited than if you were, say, 40. At a 3.65% rate of interest on your mortgage (call it 3% after savings on taxes) - after inflation you need to clear about 5-6% per annum to break even. This isn't to say it's impossible, or even that challenging to beat - but it's a consideration nonetheless. Are you liquid enough to wait out a timing issue (i.e. you need money now, but your portfolio just dumped 10% of its value?)
Future Plans - You're somewhat newly divorced, and luckily from what I can tell you've escaped relatively in tact in terms of financial consequences. What are the rough plans now and into the future? Is this girlfriend a serious relationship? Are you looking to settle down with someone younger? Same age? Earning potential plays a role here - but someone a bit younger and still working will provide security on the home in terms of income. Not to make relationships about money - but it seems like 30% of the threads here are about relationships and money, so may as well start to address expectations in your head for your future plan.
Last but not least - How much is left on the house? How quickly can you pay off the mortgage with the matrimonial funds dumped into investments to grow? Ultimately, if you can treat these investments as a nest egg, but if find part-time fun work that keeps your flexibility and helps to pay down the mortgage end of things in the meantime, this may be your best option.
Contrary to what you've said, this is neither an obvious or easy decision to make. The fact that you've retired, are recently divorced, amongst other things - complicates the decision further. Sinking the money into the mortgage is theoretically less risky (fewer unknowns) but you can help to mitigate this risk quite easily by finding something to do, part time, that is fun, and pays. Maybe it's walking the neighbour's dog, or refinishing antique watches, or woodworking - who knows! You've retired, if you can find a way to monetize your hobby, this will help!
Good luck, I haven't really answered this question but hopefully have provided some points to think about.
Cheers,
CPA CB
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Hi Retired,[/i]
This is a multi-faceted question, and one which raises a few additional questions... It isn't technically a tax one, but I'll just throw some thoughts out here to help.
First and foremost - you aren't giving concrete figures here. From what I gather you're in a 15% marginal tax rate ($150 savings per $1,000) is this something you expect to continue into retirement? If you're paying $12k per year, and gaining 9K equity, one would assume you're saving about $450 per year with this strategy?
I am at the higher end of the federal "$44,701 up to $89,401" income category.
Risk and Rewards - At 63, you've got plenty of years ahead of you, but in terms of compounding income for the future, the years are much more limited than if you were, say, 40. At a 3.65% rate of interest on your mortgage (call it 3% after savings on taxes) - after inflation you need to clear about 5-6% per annum to break even. This isn't to say it's impossible, or even that challenging to beat - but it's a consideration nonetheless. Are you liquid enough to wait out a timing issue (i.e. you need money now, but your portfolio just dumped 10% of its value?)
Pension, RRIF, CPP and investment income are fine, no immediate need for big chunks of money, or need to get out of mortgage debt. Now that the lawyers are paid for, I am actually in the position of having more money coming in than my regular life expenses need. This is good since I have house projects that will soak up some of that money, that have been deferred for a few years. But I am not having to liquidate any investments, and don't expect to need to for quite some time.
Future Plans - You're somewhat newly divorced, and luckily from what I can tell you've escaped relatively in tact in terms of financial consequences. What are the rough plans now and into the future? Is this girlfriend a serious relationship? Are you looking to settle down with someone younger? Same age? Earning potential plays a role here - but someone a bit younger and still working will provide security on the home in terms of income. Not to make relationships about money - but it seems like 30% of the threads here are about relationships and money, so may as well start to address expectations in your head for your future plan.
Oh, the "girlfriend" is a friend, not a relationship. I am hetero female. The number of single, available men anything close to my age and interests in this small rural area is effectively zero, so no romantic prospects are in sight.
Last but not least - How much is left on the house? How quickly can you pay off the mortgage with the matrimonial funds dumped into investments to grow? Ultimately, if you can treat these investments as a nest egg, but if find part-time fun work that keeps your flexibility and helps to pay down the mortgage end of things in the meantime, this may be your best option.
Roughly $150,000 on the house, might realise $100,000 - $120,000 on the sale of the matrimonial home after all obligations are paid. There are projects on this house that have been waiting, plus I have nothing in TFSAs and I would like to maximize those. So realistically $50,000 to $60,000 available for the mortgage. Right now the projected finish is 18 years away, but with the open mortgage I can easily shorten that even without putting the lump sum on it.
Contrary to what you've said, this is neither an obvious or easy decision to make. The fact that you've retired, are recently divorced, amongst other things - complicates the decision further. Sinking the money into the mortgage is theoretically less risky (fewer unknowns) but you can help to mitigate this risk quite easily by finding something to do, part time, that is fun, and pays. Maybe it's walking the neighbour's dog, or refinishing antique watches, or woodworking - who knows! You've retired, if you can find a way to monetize your hobby, this will help!
My basic plan is to never work for money again - partly because I did not do an early retirement (I am on this forum for the lifestyle, not the early retirement), partly because jobs are few and far between in this area and we lose too many young people because of that, and partly because I am super busy with all the things in the community that are done by volunteers.
Good luck, I haven't really answered this question but hopefully have provided some points to think about.
Yes, you did, thank you, and I'm glad you think that it isn't that simplistic. I hope the added information here will give you and others the appropriate information for analysis. For the last 5+ years it has been an effort to keep afloat financially. I came out of the divorce financially OK, but I did definitely take a hit. Now I can actually do some planning (or at least I can once the matrimonial home sells). Given that my family history means I can easily make it to 90+, I do need to plan long-term as much as is possible.
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First of all thanks for all your great information!
I have a simple question for you,
my wife has a defined benefit pension but has 8500 in rrsp room. I have all of my savings in an rrsp at the moment. She has a higher income than I do and I would like to have her contribute to a spousal rrsp to claim the deduction and to try and even out our retirement incomes. What I'm finding confusing is 'how to actually do this'.
We share a bank account and every two weeks I invest in my e-series rrsp from our shared account. Would we continue to invest in the same way to add the extra 8500 and then when we submit our taxes next year, she claims 8500 of the deposit as a spousal rrsp? Or does a new rrsp need to be setup...
Many thanks!
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I've got a couple questions.
I'm looking make an investment through www.slicedinvesting.com, a new service which allows investors to invest in Hedge Funds. Due to the structure, I have a couple tax related questions:
- Likely any distributions from the fund would be subjest to withholding taxes, can the withholding be included in my tax return and thus reduce the chance of double taxation?
- Would any distributed capital gains also be subject to withholding taxes?
- Does an investor need to remit these taxes on their own?
- Any other US tax reporting requirements become required under this type of setup?
I believe I would be consider a limited partner of any investment made.
Appreciate any help before I commit any capital.
Everyone should checkout their platform. Great setup and allows average joe investors to access investments which are not correlated to equity markets in most instances.
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Hello and thank you so much for answering my questions. I have one more that I'd like to ask, concerning retirement tax planning.
I'm trying to decide whether my DH and I should be contributing to RRSPS or TFSAs. We both have RRSPs but because I will have a pension I stopped contributing to my RRSP and switched to a TFSA. I know pension income can be split between spouses but what about RRSP income?
Our details are as follows. At age 55 we plan to retire. I will receive a pension of $60,000 in today's dollars. My husband's work retirement plan is an RRSP with a company match, which projections show will be worth $700,000 at that time. We would withdraw 4% per year.
Ten years after we retire, we will get CPP and my pension will be clawed back somewhat. At 67 we will get OAS.
How would we be taxed on this combo? We both have additional RRSPs and TFSAs outside of this and are wondering which we should max out first? It is nice to get tax back on RRSP contributions, but I'm starting to think TFSAs would be better for retirement, so that we wouldn't end up in a higher tax bracket.
Thanks!
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Are you planning to take money out of an RRSP (one set of rules) or transfer it to a RRIF and take from that (another set of rules)?
Also, people tend to assume that they will turn their RRSP into a RRIF the year they turn 71, because that is when they have to do it. But you can put some or all of your RRSP into a RRIF earlier if that is more advantageous overall for you. For example, when I retired for real I put most of my RRSP into a RRIF and am taking out the minimum. I still had RRSP contribution room and used it, so I also have an RRSP that is going to sit there and grow until I need to shift it.
My husband's work retirement plan is an RRSP with a company match, which projections show will be worth $700,000 at that time. We would withdraw 4% per year.
Thanks!
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Are you planning to take money out of an RRSP (one set of rules) or transfer it to a RRIF and take from that (another set of rules)?
Also, people tend to assume that they will turn their RRSP into a RRIF the year they turn 71, because that is when they have to do it. But you can put some or all of your RRSP into a RRIF earlier if that is more advantageous overall for you. For example, when I retired for real I put most of my RRSP into a RRIF and am taking out the minimum. I still had RRSP contribution room and used it, so I also have an RRSP that is going to sit there and grow until I need to shift it.
My husband's work retirement plan is an RRSP with a company match, which projections show will be worth $700,000 at that time. We would withdraw 4% per year.
Thanks!
Good point. I hadn't thought about that distinction. We would do whatever worked best from a tax standpoint. What would you suggest?
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Good point. I hadn't thought about that distinction. We would do whatever worked best from a tax standpoint. What would you suggest?
Money out of an RRSP versus a RRIF, hmm. I don't have enough information and I am not an expert on this - I only know more than the average bear because I am in the middle of the RRSP thing. Most people here are too young ;-)
Any decent financial planner can work out various scenarios for you - the one I use at my bank did it for me. I can tell you how we did it, which might help.
First, you (I am using the generic "you" here) have to convert an RRSP to a RRIF (or use it to buy an annuity) by the time you hit 71, or your spouse does. If you do not need the income, this is a common choice - but what happens is that at 71 the required minimum withdrawal is high enough that people notice a big tax hit. Whereas if you start withdrawing earlier, the minimum withdrawal is much smaller, and for several years your RRIF should continue to grow. At some point your withdrawals (% withdrawn having to increase each year) will be greater than the growth and the total value will start to shrink. Each year the % coming out is higher, as the thinking behind the RRIF is that you should end up with zero in it if you live long enough, just as you would with a regular pension (when you hit your 90s the withdrawal rate is huge). Anyway, if you don't need the money you can invest it in something that is more under your control, a TFSA is the obvious choice if you have room. Income from a RRIF counts as taxable income, and affects OAS, which is another reason starting it at 71 has a big impact, the sudden large increase in income can trigger OAS clawback if it wasn't already happening.
When you take money out of an RRSP, there is with-holding tax. You lose that contribution room. And there are probably all sorts of other implications that I do not know about, because this is an area I haven't researched. I know there are ways to get it out for a house or education, but other than that, RRSPs are set up to really discourage people from taking money out of them.
TFSAs are wonderful, in that they are just what the name says, tax free when you take the money out. Of course they are done with after-tax dollars. But they don't count as taxable income, so if you are at the point of seeing OAS being affected by income, money from a TFSA is better. If OAS is irrelevant (you have so much money it is all clawed back, or so little you can't get to clawback position) then it isn't part of the calculations.
I don't think it matters where the RRSPs and TFSAs are, the tax rules are the same.
Re pension and CPP, I am in the same boat, my pension will drop when I hit 65 and am eligible for full CPP. I started CPP a bit early (divorce debt to pay) so my pension will drop more than my reduced CPP payment - the drop in pension will be roughly made up for by OAS.
Gordon Pape's book on TFSAs is really good, well worth a read.
So really, my advice to you is run a bunch of different scenarios and see which works out best in the long term. But check out the tax rules for each.
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First of all thanks for all your great information!
I have a simple question for you,
my wife has a defined benefit pension but has 8500 in rrsp room. I have all of my savings in an rrsp at the moment. She has a higher income than I do and I would like to have her contribute to a spousal rrsp to claim the deduction and to try and even out our retirement incomes. What I'm finding confusing is 'how to actually do this'.
We share a bank account and every two weeks I invest in my e-series rrsp from our shared account. Would we continue to invest in the same way to add the extra 8500 and then when we submit our taxes next year, she claims 8500 of the deposit as a spousal rrsp? Or does a new rrsp need to be setup...
Many thanks!
She should be able to put money directly into your RRSP - speak with your bank on logistics, but this doesn't need to be separate.
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Are you planning to take money out of an RRSP (one set of rules) or transfer it to a RRIF and take from that (another set of rules)?
Also, people tend to assume that they will turn their RRSP into a RRIF the year they turn 71, because that is when they have to do it. But you can put some or all of your RRSP into a RRIF earlier if that is more advantageous overall for you. For example, when I retired for real I put most of my RRSP into a RRIF and am taking out the minimum. I still had RRSP contribution room and used it, so I also have an RRSP that is going to sit there and grow until I need to shift it.
My husband's work retirement plan is an RRSP with a company match, which projections show will be worth $700,000 at that time. We would withdraw 4% per year.
Thanks!
Good point. I hadn't thought about that distinction. We would do whatever worked best from a tax standpoint. What would you suggest?
Hi there,
In terms of minimizing impact on future investments, the TFSA is a great way to shield future earnings as withdrawals are not considered "income". Retired @ 63 has good points here in terms of differences between the plans. Personally my view is that TFSA's are a better investment vehicle, as the savings are back-loaded in the sense that the taxes have been paid, and from here on out it is tax-shielded earnings with no impact on future benefits (at this point in any case.)
The RRIF rules have been loosened in this year's budget - from about 7% minimum to around 5% minimum withdrawal rates per year.
Hope this helps!
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Folks,
Going to take a brief moment to comment on an article which came across my desk yesterday.
http://news.nationalpost.com/news/canada/canadian-politics/ottawa-man-gives-1500-back-to-the-government-in-taxes-after-refusing-to-take-income-splitting-credit
The gist of this is simple - it's a publicity stunt... The article is misleading - he didn't "give back" the $1,500 - he just elected to not take the family tax credit, and receive as big of a refund. His line of reasoning is that, sure, he could have spent the money, but why not just let the government keep it?
I'd be curious to know what people are doing with their refunds - spending it is the assumed presumption of most, but I sincerely hope the MMM'ers are squirreling the funds away for the future, or at least a portion thereof.
I can't help but think how selfish this person is - clearly he has children and a family... But has opted to pay $1,500 (closer to $6-10k by the time his kids go to University, with interest), instead of investing in his family's future - children's education, TFSA account, RRSP, etc.
Or, should he feel so generous, why not donate directly to a cause his family believes in? Charity is a wonderful thing - as someone who serves on a few not-for-profit boards, I can safely say many great institutions out there are desperate for money, knowledge, and expertise.
This isn't a political commentary - but I find it troublesome that 1) the assumption that refunds are blown of frivolous items still exists, and 2) someone's need for attention extends beyond the well-being of their family - surely the CRA didn't leak this story, but it's clear he has systematically exploited the news system for recognition.
In that note - I ask, what are people doing with their refunds or tax savings this year? Are you spending, saving, or investing in the future (education, increasing property value, whatever the case may be.)
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In that note - I ask, what are people doing with their refunds or tax savings this year? Are you spending, saving, or investing in the future (education, increasing property value, whatever the case may be.)
I'm self-employed and pay my taxes in instalments. I have a pretty good handle on the taxes I owe so I tend to owe/get a refund of less than $500/yr. This year I owed ~$400.
I don't really see my tax savings as a separate item from my "general revenue" stream.
My typical monthly process is:
- total income for month from invoices
- set aside GST owing
- set aside my income tax estimate
- put aside mortgage payments for next month
- pay bills and VISA
- invest surplus in my RRSP/TFSA & Non-reg accounts
- repeat
If I did get an extra $500 in a particular year due to a tax credit or rate reduction it would get invested.
-- Vik
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In that note - I ask, what are people doing with their refunds or tax savings this year? Are you spending, saving, or investing in the future (education, increasing property value, whatever the case may be.)
Yeah, I thought that guy was a total dick. As you point out, he really only robbed his own family/humanity. That article would have actually kicked ass if he said that he donated the $1,500 to say Nepal earthquake fund (which the Canadian gov't is matching). Boom. $3,000 to charity.
Anyway, I took my $6,000 refund and rebalanced the portfolio by purchasing XEC (emerging markets etf).
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Took my 6,650$ refund to get the max subsidies out of RESP for the year (5k$) and 1,150$ to pay for a mistake I did in april (landlording attempt that turned bad). Still thinking what I should do with the 500$ remaining...
What about 48 bottles of red wine?
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In that note - I ask, what are people doing with their refunds or tax savings this year? Are you spending, saving, or investing in the future (education, increasing property value, whatever the case may be.)
I'm the sole provider for me and my son, and both of us are recognized federally as people with disabilities. I take every penny I can get, keep my spending as low as possible while maintaining quality of life and, yep, squirrel away everything else. I've maxed both our RDSPs to date, contributed to his RESP, invest the rest outside of those, and am working on finding a bank that will allow me to set up a TFSA Trust (we're not allowed this unless it's a Trust). I also make sure to share some of our money (as well as knowledge, time, energy, etc), and always look to put the Sharing money into approaches that I believe will help marginalized people near and far improve their financial footing.
So, I agree it's weird that this guy couldn't think of anything more productive to do with the credit.
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Took my $13,000 refund and added it to my TFSA!
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Took my $13,000 refund and added it to my TFSA!
You know about the T1213 form Tuxedo?
I know you can manage that money better than any government. That why I hate huge refund. I feel like I lend money @ 0%
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I received a large Canadian refund for tax year 2014 (~10,000 CAD).
I tried to avoid it during the year by filing Form T1213, but it was rejected for a meritless reason by the CRA. I actually filed two more times, each time responding to their meritless contentions, but they refused to approve it. The full story is too frustrating to describe in detail, so you'll just have to trust me that I was right and the CRA's position was devoid of merit.
I considered using the appeal process, but I decided I would just wait and eventually receive the refund. This turned out to be a serious mistake because between the money being withheld and me receiving the refund, it lost 10-20% of its value in USD.
Despite the loss of value, I still converted the refund to USD immediately, transferred it to the US banking system, and contributed it to one of my investment accounts.
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Can you help us get an idea of how capital gains will work on the sale of our rental property?
difference between evaluated price when we left and sale price is $80k.
How much taxes are we likely to pay on this? We're in Quebec.
We have 70 k RRSP contribution space (50 for DH, 20 for me) which we'll be fully topping up this year. Also need to get our net income down as low as possible because increase in income means increase in daycare costs with new law.
Thanks for your help! Sale goes through in June, so want to have an idea how much we keep back from investments to make sure we can pay the tax bill.
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Can you help us get an idea of how capital gains will work on the sale of our rental property?
difference between evaluated price when we left and sale price is $80k.
How much taxes are we likely to pay on this? We're in Quebec.
We have 70 k RRSP contribution space (50 for DH, 20 for me) which we'll be fully topping up this year. Also need to get our net income down as low as possible because increase in income means increase in daycare costs with new law.
Thanks for your help! Sale goes through in June, so want to have an idea how much we keep back from investments to make sure we can pay the tax bill.
Tax on capital gain is about 20% (but really depend on you income). You sold for 80k$ more than you paid for but you can reduce capital gain by deducting some improvement expenses. Fortunatly, you got almost 1 year to make your homework. Run different plans before to fill RRSPs, it may worth to keep some room for next years.
How come you got 70k$ room?
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Took my $13,000 refund and added it to my TFSA!
You know about the T1213 form Tuxedo?
I know you can manage that money better than any government. That why I hate huge refund. I feel like I lend money @ 0%
You bet! I used the T1213 twice last year for a total of $10,000. I made huge contributions to my RRSP at the end of January and February and filed my taxes early so I didn't feel it would be worthwhile to fuss with T1213 forms knowing my refund was going to come a few weeks later anyways.
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Happy Cinco de Mayo - IE Tax Filing day this year!
Best to those who have filed, a subtle "uh oh" to those who haven't - and anywhere in between.
As seen in the poll, there are more than a few of us saving and investing our resources, and no Apple Watches purchased to date. Mazel Tov!
To those of you considering an Apple Watch (even with a refund). Please don't. $700 plus for a timepiece is expensive (especially when the iPhone 7 or 8 comes out, rendering your iPhone and Watch useless) in a few years. If you're so inclined, go to a reputable dealer, buy a Patek Phillipe, and watch (get it?) the value grow.
A very happy, prosperous, and joyful 2015 tax year to the (suckers) people who file in Canada!
CPA CB
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Can you help us get an idea of how capital gains will work on the sale of our rental property?
difference between evaluated price when we left and sale price is $80k.
How much taxes are we likely to pay on this? We're in Quebec.
We have 70 k RRSP contribution space (50 for DH, 20 for me) which we'll be fully topping up this year. Also need to get our net income down as low as possible because increase in income means increase in daycare costs with new law.
Thanks for your help! Sale goes through in June, so want to have an idea how much we keep back from investments to make sure we can pay the tax bill.
Tax on capital gain is about 20% (but really depend on you income). You sold for 80k$ more than you paid for but you can reduce capital gain by deducting some improvement expenses. Fortunatly, you got almost 1 year to make your homework. Run different plans before to fill RRSPs, it may worth to keep some room for next years.
How come you got 70k$ room?
We'd been focused on paying off the HELOC we took out on the condo to buy our house. Paid it off just in time to sell the condo LOL. In the end it'll likely save us some taxes as well. So not planned likely helped us a little.
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Can you help us get an idea of how capital gains will work on the sale of our rental property?
difference between evaluated price when we left and sale price is $80k.
How much taxes are we likely to pay on this? We're in Quebec.
We have 70 k RRSP contribution space (50 for DH, 20 for me) which we'll be fully topping up this year. Also need to get our net income down as low as possible because increase in income means increase in daycare costs with new law.
Thanks for your help! Sale goes through in June, so want to have an idea how much we keep back from investments to make sure we can pay the tax bill.
Tax on capital gain is about 20% (but really depend on you income). You sold for 80k$ more than you paid for but you can reduce capital gain by deducting some improvement expenses. Fortunatly, you got almost 1 year to make your homework. Run different plans before to fill RRSPs, it may worth to keep some room for next years.
How come you got 70k$ room?
We'd been focused on paying off the HELOC we took out on the condo to buy our house. Paid it off just in time to sell the condo LOL. In the end it'll likely save us some taxes as well. So not planned likely helped us a little.
Sorry but you lost me here. The sale of the condo should be enough to repay the HELOC when you sold it? Since it's a HELOC, you have no penalty doing so. Because it was a rental, interests from HELOC were deductibles. ???
I would never skip the opportunity to save 38% income taxes to repay a 3% HELOC
I hope I missunderstand your story or you really need some advices
*Actually, I do both
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We took out the HELOC to use it to get our down payment on our primary residence to avoid paying mortgage insurance. We'd saved up 5% but then realized we could save the insurance if we got the HELOC so we did. No interest deduction because it was used to buy our primary residence and not a rental.
The interest rate ended up being variable at 4.5% so I wanted to get it down as quick as possible. Perhaps investments could have done slightly better, but we liked the security of paying down the debt first. And now it will serve us well to have the extra space in our rrsp to reduce our capital gains (I hope) as well as the increase in daycare fees this year that are now tied to income.
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We took out the HELOC to use it to get our down payment on our primary residence to avoid paying mortgage insurance. We'd saved up 5% but then realized we could save the insurance if we got the HELOC so we did. No interest deduction because it was used to buy our primary residence and not a rental.
The interest rate ended up being variable at 4.5% so I wanted to get it down as quick as possible. Perhaps investments could have done slightly better, but we liked the security of paying down the debt first. And now it will serve us well to have the extra space in our rrsp to reduce our capital gains (I hope) as well as the increase in daycare fees this year that are now tied to income.
I understand now! Run some numbers to make sure to stay in the 38% refund bracket with RRSP contributions. You may be better to spread it over 2-3 years.
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I'd be curious to know what people are doing with their refunds - spending it is the assumed presumption of most, but I sincerely hope the MMM'ers are squirreling the funds away for the future, or at least a portion thereof.
My hair is still on fire so I put the entire $680 towards paying off debt... and it felt GREAT!!!!
CPA CB I want to REALLY thank you for putting up this thread! I did my own taxes this year for the first time and it was hairy ... I mean scary lol... I am Canadian as well (Happy Canada day!!!) and just returned from maternity leave (loved the year off lol) ... but had a few issues not sure if you could advise me for next year...
I have been doing minimum RRSP's (until I get all my bills paid off) under $1000
I make just under $75,000 per year and my husband is not working outside the home. (He will be staying home to take care of our baby - bless him!).
My Mom passed away and left my 4 siblings and I a 200-acre farm near Toronto that we rent out to a farmer - rent for this year will be $10,000 - split 5 ways. (The way my brother set it up it is a rental and no longer a farm per se)
So this year I decided to do my own taxes to save some $$$ (and be a little more Mushtachian lol) ... I used an online program and everything was fine ... I think lol....
My question is: this rental - has a small house on it - I went up with my husband and did some repairs - doors/mosquito netting/rat poison/grass cutting/trimming etc ... is it acceptable to put these in as expenses? (for the materials??) and can I claim gas to get there?
In truth I think this property will be sold as 5 people making decisions is no fun at all ... and though we all get along we all have different ideas of what should/needs to be done with the property (hunting/no hunting in bush etc) ... and in fact for my little family selling would be the best bet as the revenue (less capital gains, I am told) ... will be enough to wipe out all of our bills, pay off my mortgage and likely have enough left to have a chunk to invest and really start our snowballing ... but that won't be done this year.
Anyways :) Thank you for any advice!!! :)
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I'd be curious to know what people are doing with their refunds - spending it is the assumed presumption of most, but I sincerely hope the MMM'ers are squirreling the funds away for the future, or at least a portion thereof.
My hair is still on fire so I put the entire $680 towards paying off debt... and it felt GREAT!!!!
CPA CB I want to REALLY thank you for putting up this thread! I did my own taxes this year for the first time and it was hairy ... I mean scary lol... I am Canadian as well (Happy Canada day!!!) and just returned from maternity leave (loved the year off lol) ... but had a few issues not sure if you could advise me for next year...
I have been doing minimum RRSP's (until I get all my bills paid off) under $1000
I make just under $75,000 per year and my husband is not working outside the home. (He will be staying home to take care of our baby - bless him!).
My Mom passed away and left my 4 siblings and I a 200-acre farm near Toronto that we rent out to a farmer - rent for this year will be $10,000 - split 5 ways. (The way my brother set it up it is a rental and no longer a farm per se)
So this year I decided to do my own taxes to save some $$$ (and be a little more Mushtachian lol) ... I used an online program and everything was fine ... I think lol....
My question is: this rental - has a small house on it - I went up with my husband and did some repairs - doors/mosquito netting/rat poison/grass cutting/trimming etc ... is it acceptable to put these in as expenses? (for the materials??) and can I claim gas to get there?
In truth I think this property will be sold as 5 people making decisions is no fun at all ... and though we all get along we all have different ideas of what should/needs to be done with the property (hunting/no hunting in bush etc) ... and in fact for my little family selling would be the best bet as the revenue (less capital gains, I am told) ... will be enough to wipe out all of our bills, pay off my mortgage and likely have enough left to have a chunk to invest and really start our snowballing ... but that won't be done this year.
Anyways :) Thank you for any advice!!! :)
Hi Sweet Life - it is my pleasure!
I'm sorry to hear about your mother.
My first question is - what was the disposal value of the property in your mother's final tax return? Farms have very specific and tax-advantageous rules. I hope this was taken care of appropriately on her 'deemed' disposition to you and your family.
As for the expenses - yes these are reasonable and in line with allowable expenses for rental properties. You should claim km rather than gas , which is $0.55 for the first 5000 km and $0.49 per km thereafter in 2015.
I suggest you either research the capital gains rules for farms (on CRA's website and CanLii if more advanced) or speak with a CPA who can guide you through the disposal process. Without knowing more, you could save many thousands of dollars on disposition by doing it 'correctly' versus just claiming it as a sale of property - farm property has weird rules, and you want to make sure you dot the I's and cross the T's.
Also - congrats on doing your own taxes! It can be a scary proposition, but a rewarding one.
Best of luck!
CPA CB
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I just graduated and started a job so I'll only be working 6 months this year making ~34k gross (65k salary).
Can I file a T1213 to reduce my taxes taken off my paycheck since I won't be making my full salary in 2015? The CRA website doesn't seem to mention a partial working year as a valid reason.
I'm in Ontario btw.
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@McBuck
You can fill the T1213 and see how they handle it. Is it your first "real big cash cow job"? I mean, do you have RRSP contributions historical datas?
I fill that kind of form every year since 1999 and some years they just send me the approval letter right away and some other years, they ask some questions to confirm everything is ok.
The good news is that you are "only" 6-8 months away now form filling taxes and get a refund...
Worst case scenario, you'll get a big refund and buy a chunk of Vanguard ETF in march 2016!
From my viewing, there is 2 different levels for someone who want to fill T1213. First level, liquidity shortage (to make weekly/monthly contributions). This level can be solved by contribuing a lump sum near the limit date (usually march 1st) and get a large refund few weeks after (if you fill your taxes fast and properly). Level 2 needs the T1213 to be solved because it's your money and the goverment is keeping it away from your bank account. Mentally, you feel like you lend money @ 0% and "lose" the return you should be making in the market.
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I just graduated and started a job so I'll only be working 6 months this year making ~34k gross (65k salary).
Can I file a T1213 to reduce my taxes taken off my paycheck since I won't be making my full salary in 2015? The CRA website doesn't seem to mention a partial working year as a valid reason.
I'm in Ontario btw.
Don't you have a ton of federal tuition/provincial tuition carryforwards that you can put on your TD1 so your employer will withhold almost no tax anyway?
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@McBuck
You can fill the T1213 and see how they handle it. Is it your first "real big cash cow job"? I mean, do you have RRSP contributions historical datas?
I fill that kind of form every year since 1999 and some years they just send me the approval letter right away and some other years, they ask some questions to confirm everything is ok.
The good news is that you are "only" 6-8 months away now form filling taxes and get a refund...
Worst case scenario, you'll get a big refund and buy a chunk of Vanguard ETF in march 2016!
From my viewing, there is 2 different levels for someone who want to fill T1213. First level, liquidity shortage (to make weekly/monthly contributions). This level can be solved by contribuing a lump sum near the limit date (usually march 1st) and get a large refund few weeks after (if you fill your taxes fast and properly). Level 2 needs the T1213 to be solved because it's your money and the goverment is keeping it away from your bank account. Mentally, you feel like you lend money @ 0% and "lose" the return you should be making in the market.
I had an internship which spanned 8 months in 2013 and 8 months in 2014. I claimed most of my tuition credits for those years but I have roughly $6k left. My RRSP contribution limit for 2015 is $19k and just started contributing with this job. I suppose I'll fill it out under "other" and if they reject it I'll get a few grand refund.
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Don't you have a ton of federal tuition/provincial tuition carryforwards that you can put on your TD1 so your employer will withhold almost no tax anyway?
The answer is "probably not".
In this post, "ITA" refers to the Income Tax Act, RSC 1985, c 1 (5th Supp). "Reg" refers to the Income Tax Regulations, CRC, c 945.
ITA § 153(1)(a) provides in relevant part that any person paying wages to any other person "shall deduct or withhold from the payment the amount determined in accordance with prescribed rules".
ITA § 221(1)(a) provides that the Governor in Council may may regulations "prescribing anything that, by this Act, is to be prescribed".
Reg § 107(2) provides that an employee may "elect[] to file a prescribed form for the year". Cryptically, the provision does not say what the form contains or what it is for.
Reg § 102(2) provides that when an employee files the prescribed form alluded to in Reg § 107(2), then the employer shall compute the employee's "estimated annual taxable income" for withholding purposes by subtracting the "the amount of that employee’s expenses in respect of the year as recorded by that employee on that form". The regulation does not say or limit what kind of expenses can be claimed on the form, but it the form does need to be the "prescribed form".
As far I can tell, no legal instrument actually tells us what this mysterious "prescribed form" is, but it's probably intended to be Form TD1 (http://www.cra-arc.gc.ca/E/pbg/tf/td1/td1-15e.pdf). Form TD1 does not appear to contain anywhere to claim carry forward education amounts. Section 5 of Form TD1 instructs the reader to enter an amount computed based on the present year only. Modifying the form to include carry forward amounts would probably cause it not to be the "prescribed form" anymore, meaning it would not reduce the amount of tax withheld from your wages.
Including the carry forward amounts in Form TD1 might also be a criminal offense contrary to ITA § 239(1)(a), which provides that anybody who has "made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation" is guilty of a criminal offense. However, the document contemplated by Reg § 107(2) is referred to as a "prescribed form", not a "return", "certificate", "statement", or "answer", so it's arguable whether this criminal offense applies.
The main weakness in the limitations of Form TD1 is that Form TD1 may not be authorised by law. There does not appear to be any instrument that says that Form TD1 is the "prescribed form" contemplated by Reg § 107(2). A related issue is that the general rule in administrative law is that a person authorised to make regulations must be the person who makes the regulations; he cannot further delegate that power. ITA § 221(1)(a) authorises the Governor in Council to make regulations; it does not authorise the CRA to do so. Parliament was aware of this principle of law, so it enacted ITA § 221(4) which provides that a regulation made by the Governor in Council may "incorporate by reference material as amended from time to time". This is arguably exactly what Reg § 107(2) does.
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Cathy - my tuition amounts are actually for Jan-Apr of this year, but my University doesn't release the t2202a until fall.
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Cathy - my tuition amounts are actually for Jan-Apr of this year, but my University doesn't release the t2202a until fall.
I was (and am) expressing no view on your situation.
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Not sure if someone can answer me here, should I get a will if I have no kids or wife. I mean if I die, all my assets (RRSP and TFSA) would go to my parents, but I figure if I am dead, it would automatically go to them, so mayb a will would be a waste of money, right??? Btw, I have no brothers or sisters.
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When you die and leave registered investments like RRSP's and name your parents as beneficiaries your estate will owe a chunk of change in taxes to the CRA. It is considered a deemed disposition on the date of your death.
The executor is the person appointed in a will to administer an estate. If you have no Will, someone, perhaps your family would have to apply to court for Letters of Administration to act essentially as an executor. Lawyers will be happy to guide your estate through this process, most likely at a cost way beyond what a simple Will would have cost in the first place. Why would you want to put your family through this court process in the first place?
The Executor/Administrator of your Will is responsible to identify the debts owed by the deceased at the time of his or her death, and to pay them, if there are sufficient assets to do so. This includes your taxes owing. The Executor will file your Terminal T1 return as well as T3 returns etc. Just because you died your debt does not. No funds can be distributed to beneficiaries until all debts have been dealt with.
I would suggest you seek legal council at once and get something drawn up that you will most likely change a few times over the years when life changes i.e get married, have kids, get divorced, and the likes but not having an estate plan at all is not a great idea...
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@fb132, even in your situation, a will is a good idea. It makes things a lot simpler and faster for your beloved. Your Mustachian? You'll find few hundred bucks for estate planning. Hope this help!
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@fb132, even in your situation, a will is a good idea. It makes things a lot simpler and faster for your beloved. Your Mustachian? You'll find few hundred bucks for estate planning. Hope this help!
I see you are from Quebec like I am. How much should I put aside to pay a notary for my will considering my only assets are my investments? I get alot of different numbers from different people. i figure 400$ should be enough, I mean, my stuff is not complicated, it's not like I own a home or a buisness. It will be simply rolling over my investments and whatever cash I have left to someone else.
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400$ is good, for 100$ more, you can get a mandatory as well. I got both 15 years ago.
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I just graduated and started a job so I'll only be working 6 months this year making ~34k gross (65k salary).
Can I file a T1213 to reduce my taxes taken off my paycheck since I won't be making my full salary in 2015? The CRA website doesn't seem to mention a partial working year as a valid reason.
I'm in Ontario btw.
I would recommend that you use your RRSP deduction in 2016 instead of 2015. Your marginal tax rate in 2015 is about 20% and your rate in 2015 will be 31%. By delaying the deduction by one year your risk free rate of return will be 55% (31%-20%/20%).
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Thanks for this great post.
I found the following and want to crunch some of my own numbers so I get better asset allocation and location.
http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/
I'll get some # in a few days. I just wanted to say "hi" so I can easily find you later. :)
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Don't think I've already asked this...
I sold a house in the UK last year. UK tax year is April 6th-April 5th. I've paid Canadian cap gains on the sale. Now I have to pay UK cap gains.
I'm right in thinking the cap gains get deducted from *last year's* Cdn return (under DTA etc, UK gets dibs because house is in UK), because the sale date is when the liability occurs - not when the tax year ends?
So I file an amendment to 2014 Cdn tax return showing all I pay to the UK, Canada gives me that money back.
Rite?
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Couple questions for you. Maybe this has been covered before but one is RRSP and one is TFSA
RRSP
I have a pension coming if i spend enough years at work. I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes. Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years? Then after using up my RRSP i would take my pension and get a higher amount then. This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points. are there any other withdrawl problems like age requirements? Current income is ~$80k depending on OT and such
TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit. For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000. And then i got a magical amount of $2000 in interest later that year before the new year's increase. I'm now officially over my limit am i not? Would i have to withdraw money so i would stay under the limit? How do i account for interest gained?
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Couple questions for you. Maybe this has been covered before but one is RRSP and one is TFSA
RRSP
I have a pension coming if i spend enough years at work. I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes. Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years? Then after using up my RRSP i would take my pension and get a higher amount then. This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points. are there any other withdrawl problems like age requirements? Current income is ~$80k depending on OT and such
TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit. For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000. And then i got a magical amount of $2000 in interest later that year before the new year's increase. I'm now officially over my limit am i not? Would i have to withdraw money so i would stay under the limit? How do i account for interest gained?
I have sort of the same question about RRSPs and early withdrawals.
As for the TFSA, any growth (interest, dividends, etc.) which occurs inside the TFSA is (obviously) tax-free and does not count toward your contribution limit. There are people who have done frightening well with their TFSA and have close to $100K in there. If your $19,000 grows to $25,000 or more, it doesn't matter--you still get to put in $10K next year anyway. So, the TFSA doesn't count growth, it only counts your actual contributions into it.
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I just graduated and started a job so I'll only be working 6 months this year making ~34k gross (65k salary).
Can I file a T1213 to reduce my taxes taken off my paycheck since I won't be making my full salary in 2015? The CRA website doesn't seem to mention a partial working year as a valid reason.
I'm in Ontario btw.
You can try! But as others have stated, it's an uphill battle. Include your tuition amounts on your TD1 though - this will help to reduce the with-holding.
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400$ is good, for 100$ more, you can get a mandatory as well. I got both 15 years ago.
If the assets are significant, I would recommend looking into a "Testamentary" Trust - or a Trust that is triggered on your demise for the assets. You'll avoid probate and can designate the beneficiaries.
Again - significant assets though - a few hundred thousand at a minimum...
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Don't think I've already asked this...
I sold a house in the UK last year. UK tax year is April 6th-April 5th. I've paid Canadian cap gains on the sale. Now I have to pay UK cap gains.
I'm right in thinking the cap gains get deducted from *last year's* Cdn return (under DTA etc, UK gets dibs because house is in UK), because the sale date is when the liability occurs - not when the tax year ends?
So I file an amendment to 2014 Cdn tax return showing all I pay to the UK, Canada gives me that money back.
Rite?
So - you sold the house in Calendar year 2014?
You're correct in asserting that the UK has the first 'right' on taxation in terms of the capital gains. Did you declare the gains in Canada in 2014?
Now, when you file your amendment, you'll effectively receive a tax credit which is more or less a pro-rata amount of your UK taxes paid. I don't want to get into the logistics of the calculation, but suffice it to say, it isn't a flat rate deduction, it's ground down.
Also, there are a variety of circumstances in which you could claim the principal residence deduction here. Principal residences do not need to be located in Canada, so there's the opportunity here to offset the gains. If you can, you want to claim at least 1 year of PR (so you get 2 years overall due to the 'plus one' rule), and your house in Alberta will be fully covered as well.
Hope this helps!
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Couple questions for you. Maybe this has been covered before but one is RRSP and one is TFSA
RRSP
I have a pension coming if i spend enough years at work. I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes. Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years? Then after using up my RRSP i would take my pension and get a higher amount then. This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points. are there any other withdrawl problems like age requirements? Current income is ~$80k depending on OT and such
TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit. For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000. And then i got a magical amount of $2000 in interest later that year before the new year's increase. I'm now officially over my limit am i not? Would i have to withdraw money so i would stay under the limit? How do i account for interest gained?
Hi,
TFSA - the limit is on money deposited (principal), rather than total amount. So in your case, you'd be fine.
As for the RRSP - no issues in terms of age requirements, my only concern in your case is delaying the pension.
Pensions are hard to value - but you want to consider your options here. By deferring your pension, this likely means you'll have to keep contributing to it, and you also 'lose' those years of cash flow in terms of collecting the funds. In this sense, there is rarely a 'loss' if you take your pension early, unless you live past at least about 80 years of age. If you give me more details - year of birth, pension contributions per annum, and your pension amount at 52 and another age, I can roughly give you an idea in terms of present value of the pension in both scenarios.
Good luck!
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Couple questions for you. Maybe this has been covered before but one is RRSP and one is TFSA
RRSP
I have a pension coming if i spend enough years at work. I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes. Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years? Then after using up my RRSP i would take my pension and get a higher amount then. This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points. are there any other withdrawl problems like age requirements? Current income is ~$80k depending on OT and such
TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit. For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000. And then i got a magical amount of $2000 in interest later that year before the new year's increase. I'm now officially over my limit am i not? Would i have to withdraw money so i would stay under the limit? How do i account for interest gained?
I have sort of the same question about RRSPs and early withdrawals.
As for the TFSA, any growth (interest, dividends, etc.) which occurs inside the TFSA is (obviously) tax-free and does not count toward your contribution limit. There are people who have done frightening well with their TFSA and have close to $100K in there. If your $19,000 grows to $25,000 or more, it doesn't matter--you still get to put in $10K next year anyway. So, the TFSA doesn't count growth, it only counts your actual contributions into it.
Same as answered below - but for RRSPs remember if you're withdrawing significant funds you're looking of a withholding tax of 15-25%.
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Hello my Can"EH"dians!
Just wanted to thank everyone for the great questions, comments, and helping me out (when I run out of time).
I wanted to point out that we are Royalty in terms of a tax topic here - 305 responses, which is first in terms of responses by a long-shot. Apparently Hockey, Taxes, and complaining about the weather are our national pastimes.
Also, a quick shout-out to Cathy "The Citation" for managing to fit eleven, that's right, ELEVEN, "§" into one response last Friday.
Keep the questions coming! I'm delighted that something I started on a whim has turned out so useful to you folks.
Hope everyone is enjoying the two weeks of summer! It'll be time to start re-building that Igloo before you know it.
CPA CB
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Couple questions for you. Maybe this has been covered before but one is RRSP and one is TFSA
RRSP
I have a pension coming if i spend enough years at work. I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes. Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years? Then after using up my RRSP i would take my pension and get a higher amount then. This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points. are there any other withdrawl problems like age requirements? Current income is ~$80k depending on OT and such
TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit. For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000. And then i got a magical amount of $2000 in interest later that year before the new year's increase. I'm now officially over my limit am i not? Would i have to withdraw money so i would stay under the limit? How do i account for interest gained?
Hi,
TFSA - the limit is on money deposited (principal), rather than total amount. So in your case, you'd be fine.
As for the RRSP - no issues in terms of age requirements, my only concern in your case is delaying the pension.
Pensions are hard to value - but you want to consider your options here. By deferring your pension, this likely means you'll have to keep contributing to it, and you also 'lose' those years of cash flow in terms of collecting the funds. In this sense, there is rarely a 'loss' if you take your pension early, unless you live past at least about 80 years of age. If you give me more details - year of birth, pension contributions per annum, and your pension amount at 52 and another age, I can roughly give you an idea in terms of present value of the pension in both scenarios.
Good luck!
Okay i would have to look into that for sure then. I thought you would be able to delay a year or three with out penalty. I figured a good way to pull RRSPs without a lot of taxes paid. Pension contributions was 5500, now up to about 6000 per year matched 1:1 by employer. Full time right now, age 30/1984, been working 7 years. Have 21-22 years to go(age 52). Would like to do the last 10 years at part time maybe .7eft if possible or less, depends on where i am by that point. Let them pay for my fun at that point. Work's pension estimators show a income of $3000/month before taxes depending on a bunch of variables by the end of my career and i think it assumes full time throughout. Current income is ~80k depending on OT At age 55 i would have estimates of $3600 monthly. both of those estimates are bound to drop a tiny bit if i go down in eft.
I love the idea of using RRSPs to reduce taxes, but if i have a solid pension, and not able to do a few years of low income, its not such a great option. I'd have to be very careful how i handled it down the road and would be easy to mess up especially if taxes go up
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Hello my Can"EH"dians!
Just wanted to thank everyone for the great questions, comments, and helping me out (when I run out of time).
I wanted to point out that we are Royalty in terms of a tax topic here - 305 responses, which is first in terms of responses by a long-shot. Apparently Hockey, Taxes, and complaining about the weather are our national pastimes.
Also, a quick shout-out to Cathy "The Citation" for managing to fit eleven, that's right, ELEVEN, "§" into one response last Friday.
Keep the questions coming! I'm delighted that something I started on a whim has turned out so useful to you folks.
Hope everyone is enjoying the two weeks of summer! It'll be time to start re-building that Igloo before you know it.
CPA CB
Thank you for the response CPA CB!! And as for the igloo building ... boo .... I am not looking forward to colder weather anytime soon lol... :) keep the info coming I am trying to soak it all up lol...
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400$ is good, for 100$ more, you can get a mandatory as well. I got both 15 years ago.
If the assets are significant, I would recommend looking into a "Testamentary" Trust - or a Trust that is triggered on your demise for the assets. You'll avoid probate and can designate the beneficiaries.
Again - significant assets though - a few hundred thousand at a minimum...
How much would be enough to think about that?
Our family NW is 850k$ actualy (RRSPs, TFSAs, RESP, taxable account and house minus mortgage). We also got a life insurance for 500k$/each. This mean if we both pass out, beneficiaries would get over 1,5M$...
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Don't think I've already asked this...
I sold a house in the UK last year. UK tax year is April 6th-April 5th. I've paid Canadian cap gains on the sale. Now I have to pay UK cap gains.
I'm right in thinking the cap gains get deducted from *last year's* Cdn return (under DTA etc, UK gets dibs because house is in UK), because the sale date is when the liability occurs - not when the tax year ends?
So I file an amendment to 2014 Cdn tax return showing all I pay to the UK, Canada gives me that money back.
Rite?
So - you sold the house in Calendar year 2014?
You're correct in asserting that the UK has the first 'right' on taxation in terms of the capital gains. Did you declare the gains in Canada in 2014?
Now, when you file your amendment, you'll effectively receive a tax credit which is more or less a pro-rata amount of your UK taxes paid. I don't want to get into the logistics of the calculation, but suffice it to say, it isn't a flat rate deduction, it's ground down.
Also, there are a variety of circumstances in which you could claim the principal residence deduction here. Principal residences do not need to be located in Canada, so there's the opportunity here to offset the gains. If you can, you want to claim at least 1 year of PR (so you get 2 years overall due to the 'plus one' rule), and your house in Alberta will be fully covered as well.
Hope this helps!
House sold in Nov I think it was, so Cdn 2014, UK 14-15; yes, tax paid to Canada. Principal res ded - no point AFAIK as it's been a rental since '07 or '08, and the amount paid to the UK is more than that deduction.. I think... I'm happy with what I've paid so far so don't want to get more complex, bad enough with all the currency changes. If it ends up that I get reassessed (likely?) and they want mucho mucho $$$ then I guess I'll go and see a professional and get them to redo the last 5 years, and probably find I'm owed rather than owe ;)
Thanks anyway. I think it's line 450 I need to amend online once I've paid the UK (or at least, when I get the bill).
Oh - one more - can I use the current exchange rate for when I pay the bill, or does that have to be the exchange rate from when the liability arose to the UK (what with the CAD weakening against the GBP, it'll be better to pay 2500 "now" pounds rather than 2500 "8 months ago" pounds - and it seems fair as in theory I have to transfer CAD to GBP NOW to pay the bill!).
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As I mentioned I found the following and want to crunch some of my own numbers so I get better asset allocation and “location” for DearWife and DearHusband.
http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/
Current situation 95K TOTAL:
15K cash
80K in two (yes only 2) Canadian stocks in an un-registered (face punch) joint account owned DW & DH (let’s assume book value 20K so lots of capital gains to pay.) One pays dividends the other doesn’t, both about 40K. Both are low right now but who knows when they will go up or down more.
20K TFSA room each DW & DH
20K RRSP room for DW
80K RRSP room for DH
Objective: Create a more balanced portfolio (Vanguard ~couch potato) and transfer into tax advantage accounts.
http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-Vanguard.pdf
Vanguards I am interested in:
25% VAB (Canadian bond mix)
25% VCN (Canadian stock mix)
25% VXC (Global stock mix)
25% VDY (Canadian dividend stock mix)
Steps:
Sell 20K of the stocks and add to 10K cash
OK now we each have 15K to invest
DW puts 15K into an RRSP: 10K VDY, 5K VAB
DH puts 15K into an RRSP: 10K VXC, 5K VAB
60K remaining in Stocks.
At the end of the year:
Sell another 20K stocks, bundle with new savings ~10K
Again we each have 15K to invest
DW puts 5K into and RRSP: 5K VXC (RRSP now full for her)
DW puts 10K into TFSA: 10K VCN
DH puts 15K into RRSP: 5K VAB, 5K VDY, 5K VCN
New picture January 2016
5K cash
40K 2 Canadian stocks
60K in Vanguard (All in registered accounts!)
Split:
15K VAB (Canadian bond mix)
15K VCN (Canadian stock mix)
15K VXC (Global stock mix)
15K VDY (Canadian dividend stock mix)
Do the tax rules on ETF work the same as stocks and bonds? I guess what I am asking is are there any general rules that VAB should be RRSP and VDY should be unregistered provided the others are full? Where is the best place to build up VXC (global)?
I believe the total 2015 capital gains tax from the 40K stocks that we sell is roughly = ((40-10)/2 )*40% = 6000
But this will be more than offset by reinvesting 20K+30K = 50K in an RRSP.
Should we be putting more into our TFSA? DH’s parents have him convinced RRSPs are a waste of time because you still pay the tax later. I see them as a beautiful way of offsetting the capital gains at this point in time. My guess/hope is that our retirement income is about the same as today.
Thanks for looking into this. I am sure there are many opinions on my allocation. I am still Canadian stock heavy. I can tweek 5K here or there, it's not that I don't care but I feel selling a bit of the risky stocks and the LOCATION is really the most important thing I need to optomise right now.
Thanks Again!!
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CPA CB,
First I would like to thank you for taking the time to help us navigate around the Canadian tax system to realize it`s benefits.
I have a question around the LCGE exemption for qualified farm property, and I`ll explain my situation:
Currently I have (3) farm properties that I have held for over (2) years solely in my personal name and ran as a sole proprietorship. I will be able to realize about $500k of capital gains upon the sale of these properties, but I want to make sure I fully qualify for the exemption in the eyes of the CRA. The one hang-up I think I`ll have is that I currently am employed with a company that allows me to generate more income from the employer than what I can from my farming proprietorship. What are your thoughts on how I can take advantage of selling these properties and taking advantage of the LCGE, what I see is now up to $1 million as per the 2015 budget.
Thanks in advance.
Cheers,
Sammy
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As I mentioned I found the following and want to crunch some of my own numbers so I get better asset allocation and “location” for DearWife and DearHusband.
http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/
Current situation 95K TOTAL:
15K cash
80K in two (yes only 2) Canadian stocks in an un-registered (face punch) joint account owned DW & DH (let’s assume book value 20K so lots of capital gains to pay.) One pays dividends the other doesn’t, both about 40K. Both are low right now but who knows when they will go up or down more.
20K TFSA room each DW & DH
20K RRSP room for DW
80K RRSP room for DH
Objective: Create a more balanced portfolio (Vanguard ~couch potato) and transfer into tax advantage accounts.
http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-Vanguard.pdf
Vanguards I am interested in:
25% VAB (Canadian bond mix)
25% VCN (Canadian stock mix)
25% VXC (Global stock mix)
25% VDY (Canadian dividend stock mix)
Steps:
Sell 20K of the stocks and add to 10K cash
OK now we each have 15K to invest
DW puts 15K into an RRSP: 10K VDY, 5K VAB
DH puts 15K into an RRSP: 10K VXC, 5K VAB
60K remaining in Stocks.
At the end of the year:
Sell another 20K stocks, bundle with new savings ~10K
Again we each have 15K to invest
DW puts 5K into and RRSP: 5K VXC (RRSP now full for her)
DW puts 10K into TFSA: 10K VCN
DH puts 15K into RRSP: 5K VAB, 5K VDY, 5K VCN
New picture January 2016
5K cash
40K 2 Canadian stocks
60K in Vanguard (All in registered accounts!)
Split:
15K VAB (Canadian bond mix)
15K VCN (Canadian stock mix)
15K VXC (Global stock mix)
15K VDY (Canadian dividend stock mix)
Do the tax rules on ETF work the same as stocks and bonds? I guess what I am asking is are there any general rules that VAB should be RRSP and VDY should be unregistered provided the others are full? Where is the best place to build up VXC (global)?
I believe the total 2015 capital gains tax from the 40K stocks that we sell is roughly = ((40-10)/2 )*40% = 6000
But this will be more than offset by reinvesting 20K+30K = 50K in an RRSP.
Should we be putting more into our TFSA? DH’s parents have him convinced RRSPs are a waste of time because you still pay the tax later. I see them as a beautiful way of offsetting the capital gains at this point in time. My guess/hope is that our retirement income is about the same as today.
Thanks for looking into this. I am sure there are many opinions on my allocation. I am still Canadian stock heavy. I can tweek 5K here or there, it's not that I don't care but I feel selling a bit of the risky stocks and the LOCATION is really the most important thing I need to optomise right now.
Thanks Again!!
@ K-ice my personal toughts:
Open an account on adjustedcostbase.ca and fill the information about your 2 Canadian stocks. If they are not crappy stocks, you may sell just a bit of each to get no capital gain. Run some simulations on the calculator using actual price of your stocks. Canadians stocks are tax advantaged in taxables accounts. Dont pay capital gain taxes now just for the purpose of not paying dividends taxes!
I dont know you age, salaries or Mustachian level but this is what I would do to keep it simple. I will assume you are between 25 and 35 and familial salary is 75-100k$. Fill your RRSP every year with available cashflow to get the 40% tax return. Let alone TFSA for now if you cannot take enough RRSP to lower your taxable income under +/-30k$ (each). Buy VXC (or XAW) ONLY until you reach 50k$ each in your RRSP. Then, you may perform a Norberts-Gambits and buy VTI and VXUS to be more tax efficient and lower your MER. Don't bother with VAB, especialy if you carry some debt (car, mortage), I do not believe it worth to be a lender AND a borrower at the same time.
Within 3-5 years from now, your AA will be like 35% canadian (2 stocks), 35%US and 30% international (according to VXC and XAW split). RRSP is the best place to hold some US and international holdings and taxable is pretty much efficient for canadian stocks. You will only suffer from diversification in Canada but it will be trivial in few years from now. If you go through a year with low salary (or early retirement!) then you can sell taxable holdings and take a smaller hit because of the lower tax bracket.
Indexing is not a religion!! If you look at the chart of you 2 stocks, they may go up and down with the VCN chart (use XIC for comparison over many years because it follows the TSX index for a lot longer than VCN). You'll be surprised how they act together most of the time.
Simplicity worth the peace of mind and will gives you the time to learn a lot without making big mistakes. You would end up with only 2 holding for each of you, 1 Canadian stock in taxable account and VXC in RRSP.
Hope this help!
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. Still thinking what I should do with the 500$ remaining...
What about 48 bottles of red wine?
For $500, you can make 120 bottles using homebrew kits.
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Don't think I've already asked this...
I sold a house in the UK last year. UK tax year is April 6th-April 5th. I've paid Canadian cap gains on the sale. Now I have to pay UK cap gains.
I'm right in thinking the cap gains get deducted from *last year's* Cdn return (under DTA etc, UK gets dibs because house is in UK), because the sale date is when the liability occurs - not when the tax year ends?
So I file an amendment to 2014 Cdn tax return showing all I pay to the UK, Canada gives me that money back.
Rite?
So - you sold the house in Calendar year 2014?
You're correct in asserting that the UK has the first 'right' on taxation in terms of the capital gains. Did you declare the gains in Canada in 2014?
Now, when you file your amendment, you'll effectively receive a tax credit which is more or less a pro-rata amount of your UK taxes paid. I don't want to get into the logistics of the calculation, but suffice it to say, it isn't a flat rate deduction, it's ground down.
Also, there are a variety of circumstances in which you could claim the principal residence deduction here. Principal residences do not need to be located in Canada, so there's the opportunity here to offset the gains. If you can, you want to claim at least 1 year of PR (so you get 2 years overall due to the 'plus one' rule), and your house in Alberta will be fully covered as well.
Hope this helps!
House sold in Nov I think it was, so Cdn 2014, UK 14-15; yes, tax paid to Canada. Principal res ded - no point AFAIK as it's been a rental since '07 or '08, and the amount paid to the UK is more than that deduction.. I think... I'm happy with what I've paid so far so don't want to get more complex, bad enough with all the currency changes. If it ends up that I get reassessed (likely?) and they want mucho mucho $$$ then I guess I'll go and see a professional and get them to redo the last 5 years, and probably find I'm owed rather than owe ;)
Thanks anyway. I think it's line 450 I need to amend online once I've paid the UK (or at least, when I get the bill).
Oh - one more - can I use the current exchange rate for when I pay the bill, or does that have to be the exchange rate from when the liability arose to the UK (what with the CAD weakening against the GBP, it'll be better to pay 2500 "now" pounds rather than 2500 "8 months ago" pounds - and it seems fair as in theory I have to transfer CAD to GBP NOW to pay the bill!).
Include the out of pocket cost - or cost as of when you pay it.
Cheers
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As I mentioned I found the following and want to crunch some of my own numbers so I get better asset allocation and “location” for DearWife and DearHusband.
http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/
Current situation 95K TOTAL:
15K cash
80K in two (yes only 2) Canadian stocks in an un-registered (face punch) joint account owned DW & DH (let’s assume book value 20K so lots of capital gains to pay.) One pays dividends the other doesn’t, both about 40K. Both are low right now but who knows when they will go up or down more.
20K TFSA room each DW & DH
20K RRSP room for DW
80K RRSP room for DH
Objective: Create a more balanced portfolio (Vanguard ~couch potato) and transfer into tax advantage accounts.
http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-Vanguard.pdf
Vanguards I am interested in:
25% VAB (Canadian bond mix)
25% VCN (Canadian stock mix)
25% VXC (Global stock mix)
25% VDY (Canadian dividend stock mix)
Steps:
Sell 20K of the stocks and add to 10K cash
OK now we each have 15K to invest
DW puts 15K into an RRSP: 10K VDY, 5K VAB
DH puts 15K into an RRSP: 10K VXC, 5K VAB
60K remaining in Stocks.
At the end of the year:
Sell another 20K stocks, bundle with new savings ~10K
Again we each have 15K to invest
DW puts 5K into and RRSP: 5K VXC (RRSP now full for her)
DW puts 10K into TFSA: 10K VCN
DH puts 15K into RRSP: 5K VAB, 5K VDY, 5K VCN
New picture January 2016
5K cash
40K 2 Canadian stocks
60K in Vanguard (All in registered accounts!)
Split:
15K VAB (Canadian bond mix)
15K VCN (Canadian stock mix)
15K VXC (Global stock mix)
15K VDY (Canadian dividend stock mix)
Do the tax rules on ETF work the same as stocks and bonds? I guess what I am asking is are there any general rules that VAB should be RRSP and VDY should be unregistered provided the others are full? Where is the best place to build up VXC (global)?
I believe the total 2015 capital gains tax from the 40K stocks that we sell is roughly = ((40-10)/2 )*40% = 6000
But this will be more than offset by reinvesting 20K+30K = 50K in an RRSP.
Should we be putting more into our TFSA? DH’s parents have him convinced RRSPs are a waste of time because you still pay the tax later. I see them as a beautiful way of offsetting the capital gains at this point in time. My guess/hope is that our retirement income is about the same as today.
Thanks for looking into this. I am sure there are many opinions on my allocation. I am still Canadian stock heavy. I can tweek 5K here or there, it's not that I don't care but I feel selling a bit of the risky stocks and the LOCATION is really the most important thing I need to optomise right now.
Thanks Again!!
Hi there,
Alright - very detailed!
I don't want to dive into investment allocation - beyond investing personally and earning above 'market' returns on certain picks of mine, I don't have the experience nor expertise to help you out in terms of the validity of Couch Potato and Vanguard Investments.
RRSP vs. TFSA - you'll note a fair bit of debate here in terms of which is better. I think they're complimentary - put the income earning stocks in your RRSP, and capital gains earning stocks into your TFSA. If you have room in both, this is certainly my recommendation. This means for non-dividend earning stocks, the TFSA is great (as re-investing dividends as a company implies a higher implicit growth rate, and thus capital gain).
I happen to agree with Le Barbu when he states that indexing is not a religion. Modern Portfolio Theory holds that you're mostly 'diversified' from specific risk (i.e. invest in Berkshire Hathaway and WB dies) at or around 7-15 individual stock holdings. Investing in multiple indices by this virtue means that you're really only exposed to broader market risk. To me - you want at least an index fund or two (generally one that goes with, and against, the broad market) and some individual stock picks based on fundamental analysis.
The benefit is to use the TFSA and RRSP together if you're looking to lower your marginal tax rate on investments in the long run!
Good luck
CPA CB
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Hi CPA CB
I generally have a good handle on my taxes, but a situation specific to my divorce agreement may end up being a tax issue. I hope you can provide some clarification.
As a couple we owned a house, the "matrimonial home". When we split I moved out and bought another house, "my house". We are putting the matrimonial home on the market in August, and since we are so late in the summer it may very well not sell until spring of 2016. In the divorce agreement we agreed to do nothing that would change the status of the matrimonial home as our principal residence, for tax purposes.
I would also like to sell my house, since I am seriously thinking of moving from Ontario to BC. If both the matrimonial home and my house sell in 2016, is the matrimonial home my "principle residence" for tax purposes? I am assuming it is. In that case I am guessing that I would have to declare capital gains (if any) on my house? And if I have to declare capital gains on it, what expenses are deductible? I am assuming any fees to sell it would be, but house improvements? Is there a good web site for this?
And if my house sold in 2016 and the matrimonial home didn't sell until 2017 (unlikely but always possible) what is the tax situation then?
This is such a mess, I wish we had always rented. One argument for renting that I haven't seen on the forums yet!
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To CPA CB,
back to the TFSA vs RRSP debate, right now I am investing 100% in the TFSA since my gross income is 35K$ per year. Should I continue doing what I am doing or should I put some towards the RRSP. FYI, I get a 2-3% raise every year, so i don't expect a huge bump in my salary in the near future.
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Thanks CPA CB and Le Barbu.
I think I'll set my goal to have 60k invested in in VXC by the end of the year. I think that is the best single ETF to balance my current Canadian stocks.
That will probably be split evenly RRSP TFSA.
I hope over half will come from new savings but I will need to top it up by selling some stocks.
I'll keep you posted.
Does anyone else has advice on where they put their Vanguard ETFs?
I would love to hear a personal example.
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To CPA CB,
back to the TFSA vs RRSP debate, right now I am investing 100% in the TFSA since my gross income is 35K$ per year. Should I continue doing what I am doing or should I put some towards the RRSP. FYI, I get a 2-3% raise every year, so i don't expect a huge bump in my salary in the near future.
@fb132, TFSA is the way to go till your gross is below 42-45k$ in Québec. You can top it up to 41k$ now.
The RRSP would give a 28,5% tax return wich looks good but this tax bracket starts at 14k$ gross (I expect you aim for at least 14k$/year for retirement, even if you are Black Belt Mustachian!). In other words, the tax return you'll get is like money you then owe as future taxes. The return on this money when invested will offset the taxes, it's about a toss game. TFSA is also a lot easier to pull out if you need money.
If you are just begening (carreer, job, family etc) I would suggest the following priorities: Repay all debt over 5% FIRST!!! Keep 1-3 months of expenses in cash in you account. Top-up your TFSA and invest in stocks* index Funds with low MER or ETFs.
*Invest in bonds only if your plan is to use TFSA for a down payment on a house or annother short term project or if you cannot stomach a market dowturn. I dont recomend bonds if you carry a debt.
Hope this help!
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@K-ice
I hold my ETFs at RBC Direst Investing. Why wouldn't you hold VXC at the same place you hold your Canadian Stocks
VXC is a good pick, XAW is a tad better but it's trivial. Dont forget you can switch to VTI and VXUS when you reach 50-100k$/account to be more tax efficient and lower your MER
Which Canadian stocks do you own? just curious...
Did you calculated ACB? Can you sell a bit without being taxed?
If you feel the urge to hold some bonds (VAB or VSB) they are more tax efficients in TFSA compared to US and Int holdings
Exemple for a fictive, simple, tax efficent portfolio (for someone who started with 1 Canadian stock in taxable account)
Taxable: 40k$ 1 Canadian stock
TFSA: 30k$ VXC and/or VAB
RRSP: 30k$ VXC (over 100k$ in RRSP, VTI and VXUS)
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Thanks Le Barbu
Sorry I wasn't clear. By "where" I ment RRSP vs TFSA.
So you did provide a useful example.
I read
http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/
Which recommends more bonds in RRSP if given a choice.
Do you know if VAB and individual bonds are treated the same tax wise?
As for my stocks they are BNE.TO and SPE.TO. They are both taking a beating but still above what I paid. I hate to sell low but I'm worried they could fall more.
Thanks for the VTI tip once +50K
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Thanks Le Barbu
Sorry I wasn't clear. By "where" I ment RRSP vs TFSA. So, just buy VXC as much as you can!
So you did provide a useful example.
I read
http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/
Which recommends more bonds in RRSP if given a choice. Bonds are best held in RRSP but you have to choose between bonds and non-canadian holdings in TFSA, I would definetly put bonds in TFSA and US+Int holdings in RRSP (because of the witholding taxes etc)
Do you know if VAB and individual bonds are treated the same tax wise? Yes
As for my stocks they are BNE.TO and SPE.TO. They are both taking a beating but still above what I paid. I hate to sell low but I'm worried they could fall more. You should read "as easy as ACB" from Dan Bartolotti (CCP) maybe some share could be sold without tax over capital gain. Depends of how many shares, price when you bought, split etc
Thanks for the VTI tip once +50K
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As for my stocks they are BNE.TO and SPE.TO. They are both taking a beating but still above what I paid. I hate to sell low but I'm worried they could fall more.
Over the last 10 years, BNE and SPE returned the same as XIC but with a lot more volatility. Over the last 5 years, BNE drags but SPE is flying, on average, you achieve good returns.
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Thanks Le Barbu
Sorry I wasn't clear. By "where" I ment RRSP vs TFSA.
So you did provide a useful example.
I read
http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/
Which recommends more bonds in RRSP if given a choice.
Do you know if VAB and individual bonds are treated the same tax wise?
As for my stocks they are BNE.TO and SPE.TO. They are both taking a beating but still above what I paid. I hate to sell low but I'm worried they could fall more.
Thanks for the VTI tip once +50K
I believe it's best to hold your highest growth potential assets in your TFSA to maximize the complete "tax-free" benefits that this account gives.
This means your bond holdings should be in your RRSP first. Yes, it is advantageous to put your US allocation in an RRSP for future possibilities to invest in US listed ETF's like VTI, but I believe the 15% withholding tax on dividends doesn't outweigh the lost potential of putting low growth assets like bonds in a TFSA.
Yes VAB is taxed the same as the most common individual bonds.
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@Tuxedo, valid arguments but at the end, it depends on individual situation. If someone use his TFSA for short term savings (down payment, emergency fund), VSB could be the way to go...
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To CPA CB,
back to the TFSA vs RRSP debate, right now I am investing 100% in the TFSA since my gross income is 35K$ per year. Should I continue doing what I am doing or should I put some towards the RRSP. FYI, I get a 2-3% raise every year, so i don't expect a huge bump in my salary in the near future.
@fb132, TFSA is the way to go till your gross is below 42-45k$ in Québec. You can top it up to 41k$ now.
The RRSP would give a 28,5% tax return wich looks good but this tax bracket starts at 14k$ gross (I expect you aim for at least 14k$/year for retirement, even if you are Black Belt Mustachian!). In other words, the tax return you'll get is like money you then owe as future taxes. The return on this money when invested will offset the taxes, it's about a toss game. TFSA is also a lot easier to pull out if you need money.
If you are just begening (carreer, job, family etc) I would suggest the following priorities: Repay all debt over 5% FIRST!!! Keep 1-3 months of expenses in cash in you account. Top-up your TFSA and invest in stocks* index Funds with low MER or ETFs.
*Invest in bonds only if your plan is to use TFSA for a down payment on a house or annother short term project or if you cannot stomach a market dowturn. I dont recomend bonds if you carry a debt.
Hope this help!
I use the Canadian Couch Potato guideline of 60% in VXC, 30% in VCN and 10% on VAB...I have no debts and I save minimum 50% of my income, so around 15-16K$ per year :)
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@fb132 Thanks but are those in RRSP or TFSA? And what is where?
@ Le Barbu & Tux
Ok. I think I got it.
VAB in TFSA for shorter term holdings.
VAB in RRSP for set it & forget it.
VIT in RRSP for the U.S. tax advantage
VXC and VCN will probably be in TFSA since they should be higher growth.
But putting those in an RRSP is not a bad idea if I want the tax refund today.
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@fb132 Thanks but are those in RRSP or TFSA? And what is where?
@ Le Barbu & Tux
Ok. I think I got it.
VAB in TFSA for shorter term holdings.
VAB in RRSP for set it & forget it.
VIT in RRSP for the U.S. tax advantage
VXC and VCN will probably be in TFSA since they should be higher growth.
But putting those in an RRSP is not a bad idea if I want the tax refund today.
Well I know I am in the lower tax bracket, so I put all three (VXC, VCN and VAB) in my TFSA simply because I have alot of room in there. I don't use the RRSP at all for now...well not until the TFSA is maxed.
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Hi CPA CB
I generally have a good handle on my taxes, but a situation specific to my divorce agreement may end up being a tax issue. I hope you can provide some clarification.
As a couple we owned a house, the "matrimonial home". When we split I moved out and bought another house, "my house". We are putting the matrimonial home on the market in August, and since we are so late in the summer it may very well not sell until spring of 2016. In the divorce agreement we agreed to do nothing that would change the status of the matrimonial home as our principal residence, for tax purposes.
I would also like to sell my house, since I am seriously thinking of moving from Ontario to BC. If both the matrimonial home and my house sell in 2016, is the matrimonial home my "principle residence" for tax purposes? I am assuming it is. In that case I am guessing that I would have to declare capital gains (if any) on my house? And if I have to declare capital gains on it, what expenses are deductible? I am assuming any fees to sell it would be, but house improvements? Is there a good web site for this?
And if my house sold in 2016 and the matrimonial home didn't sell until 2017 (unlikely but always possible) what is the tax situation then?
This is such a mess, I wish we had always rented. One argument for renting that I haven't seen on the forums yet!
Hello,
The way this works is quite simple, but I do have a few questions:
What is the official separation date? Is there a formal separation agreement signed (if so, when?)
Up until the date of formal separation (i.e. through agreement or divorce decree) the ITA regards yourself and your ex to be a 'family unit', which in this case means that you receive one PR deduction per annum, for both of you.
Now, I'm sure as you've read in the forum, I've mentioned the 'plus one' rule a few times here, which in essence means you receive an additional year of exemption 'free' upon claiming PR on any property. So, if the goal is to eliminate all capital gains on the marital home, you declare principal residence for all but one year, leaving the most recent year, say 2015, available to claim on your current home.
In doing so, you fully cover the marital home - and cover 2 years of PR on your current home, which I imagine will fully cover it as well from the sounds of it.
One thing that is often missed in divorce proceedings is a strategy to maximize 'after tax' dollars for both parties. You want to look at the marginal capital gain on BOTH properties on a per year basis to determine which property to use the PR shield on entirely. If it so happens your current home appreciated $20,000 per year, and the marital home $10,000, why not use the PR on the current home, and split the tax savings with your ex? If you're both better off, why not!
Best of luck - matrimonial proceedings are always difficult, just don't fall into the trap that usually happens in terms of costs. A family lawyer friend of mine told me once - "The only time family cases settle is when there's no money left for the lawyers to take". Beware!
CPA CB
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CPA CB,
First I would like to thank you for taking the time to help us navigate around the Canadian tax system to realize it`s benefits.
I have a question around the LCGE exemption for qualified farm property, and I`ll explain my situation:
Currently I have (3) farm properties that I have held for over (2) years solely in my personal name and ran as a sole proprietorship. I will be able to realize about $500k of capital gains upon the sale of these properties, but I want to make sure I fully qualify for the exemption in the eyes of the CRA. The one hang-up I think I`ll have is that I currently am employed with a company that allows me to generate more income from the employer than what I can from my farming proprietorship. What are your thoughts on how I can take advantage of selling these properties and taking advantage of the LCGE, what I see is now up to $1 million as per the 2015 budget.
Thanks in advance.
Cheers,
Sammy
Hi Sammy,
Thanks for your question - sorry I've just seen it now.
Okay - you're right that the biggest issue here is in the definition of 'principally' - in that the gross income from the farming business must exceed that of your employment income (in this case) for the two years prior to the sale.
The question is - how much does each individual farm make, and how does this compare to your employment income? Is it possible to expand the gross income from farming to beat employment income?
If you could give a bit more background I could be more specific here -
Thanks
CPA CB
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CPA CB,
Thanks for the response.
All farm properties operate as one farm, they are just (3) seperate titles. Income is not broken down on a per title basis.
There is not a good chance that I could have my gross farm income exceed income from my other employment source, but I do have an option I would like to run past you. Currently I am employed with a company, but I do have the option to contract and get paid into my corporation (holdco and opco). If I could get a wage paid into my corporation, and not draw any personal income from it, then my farming income would be the higher income personally (which could support my living). Would doing this for two years allow me to take advantage of the exemption? Also, just to confirm the exempion is now $1 MCAD?
Appreciate the help!
Sammy
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Couple questions for you. Maybe this has been covered before but one is RRSP and one is TFSA
RRSP
I have a pension coming if i spend enough years at work. I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes. Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years? Then after using up my RRSP i would take my pension and get a higher amount then. This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points. are there any other withdrawl problems like age requirements? Current income is ~$80k depending on OT and such
TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit. For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000. And then i got a magical amount of $2000 in interest later that year before the new year's increase. I'm now officially over my limit am i not? Would i have to withdraw money so i would stay under the limit? How do i account for interest gained?
Hi,
TFSA - the limit is on money deposited (principal), rather than total amount. So in your case, you'd be fine.
As for the RRSP - no issues in terms of age requirements, my only concern in your case is delaying the pension.
Pensions are hard to value - but you want to consider your options here. By deferring your pension, this likely means you'll have to keep contributing to it, and you also 'lose' those years of cash flow in terms of collecting the funds. In this sense, there is rarely a 'loss' if you take your pension early, unless you live past at least about 80 years of age. If you give me more details - year of birth, pension contributions per annum, and your pension amount at 52 and another age, I can roughly give you an idea in terms of present value of the pension in both scenarios.
Good luck!
If you're open to more pension questions, I'd love to get your thoughts on a thread I started : http://forum.mrmoneymustache.com/ask-a-mustachian/pension-question-(canada)-what-is-the-value-of-my-pension/
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CPA CB,
Thanks for the response.
All farm properties operate as one farm, they are just (3) seperate titles. Income is not broken down on a per title basis.
There is not a good chance that I could have my gross farm income exceed income from my other employment source, but I do have an option I would like to run past you. Currently I am employed with a company, but I do have the option to contract and get paid into my corporation (holdco and opco). If I could get a wage paid into my corporation, and not draw any personal income from it, then my farming income would be the higher income personally (which could support my living). Would doing this for two years allow me to take advantage of the exemption? Also, just to confirm the exempion is now $1 MCAD?
Appreciate the help!
Sammy
Hi Sammy -
Yes, it's $1,000,000 in capital gains, so $500,000 taxable capital gains are exempt.
It is possible to run through a business, certainly, but you want to ensure the relationship is truly that of a contractor/contractee rather than an employee. This means you need to ensure you cover the following:
Control - over when you work and how the work is performed.
You own your own tools/equipment
You have the risks/rewards of ownership - this means you control your profitability
You're not limited to the one contractor - the more external clients you have, the easier it is to prove this is not an employee/employer relationship.
Good luck!
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Couple questions for you. Maybe this has been covered before but one is RRSP and one is TFSA
RRSP
I have a pension coming if i spend enough years at work. I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes. Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years? Then after using up my RRSP i would take my pension and get a higher amount then. This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points. are there any other withdrawl problems like age requirements? Current income is ~$80k depending on OT and such
TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit. For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000. And then i got a magical amount of $2000 in interest later that year before the new year's increase. I'm now officially over my limit am i not? Would i have to withdraw money so i would stay under the limit? How do i account for interest gained?
Hi,
TFSA - the limit is on money deposited (principal), rather than total amount. So in your case, you'd be fine.
As for the RRSP - no issues in terms of age requirements, my only concern in your case is delaying the pension.
Pensions are hard to value - but you want to consider your options here. By deferring your pension, this likely means you'll have to keep contributing to it, and you also 'lose' those years of cash flow in terms of collecting the funds. In this sense, there is rarely a 'loss' if you take your pension early, unless you live past at least about 80 years of age. If you give me more details - year of birth, pension contributions per annum, and your pension amount at 52 and another age, I can roughly give you an idea in terms of present value of the pension in both scenarios.
Good luck!
If you're open to more pension questions, I'd love to get your thoughts on a thread I started : http://forum.mrmoneymustache.com/ask-a-mustachian/pension-question-(canada)-what-is-the-value-of-my-pension/
Hi Pharmastache
I'm happy to give you a rough idea of net present value - if you want to provide your age, gender, planned time of retirement, pension contributions per annum (yours), and pension income upon retirement/quitting I can at least give you a rough idea.
Mind you - this isn't necessarily the same as what you'll receive in 'commuting' your pension - but at least you'll know what it's worth to you!
You should have a pension book available to you, which shows how the pension is calculated etc. If you require another copy, you can obtain one through your employer or through the financial regulatory body in Manitoba (in your case.) In Ontario it is FSCO - in Manitoba, not sure what the acronym would be.
Hope this helps,
CPA CB
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Hello Fellow MMM'ers
Just starting up a quick poll here - how many of you want to see this topic 'stuck' at the top of the Tax Forum?
I figure if we round up enough Yay's someone from the powers that be will notice! It'd be helpful I'm sure to many of you who keep returning.
Looks like I can't actually change the poll now that it's locked out. So, just say yes in a reply!
Cheers,
CPA CB
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I'd love to see the Canadian version of the tax guide as a sticky, but find threads that keep themselves at the top of the page like this one has been far more relevant. Stickies tend to die. If you were to write up The Mustache Tax Guide (CAD version) and include a link to this thread for discussion, I can see that as far more useful.
http://forum.mrmoneymustache.com/taxes/the-mustache-tax-guide-(u-s-version)/
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Wife started business this year. Initially did not think she would be over $30,000 in sales as i understand GST is to be charged at $30k annually in sales or in the last four quarters.
So, should we register for GST and start charging, or wait until end of year and start charging Jan 1, 2016? What if her sales were say $35K this year....do we then owe 5% on the entire amount or just $5K?
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I don't know about ^, specifically, but I did learn to check the other pieces first, i.e. which businesses/income sources are required to charge GST. Some aren't.
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Wife started business this year. Initially did not think she would be over $30,000 in sales as i understand GST is to be charged at $30k annually in sales or in the last four quarters.
So, should we register for GST and start charging, or wait until end of year and start charging Jan 1, 2016? What if her sales were say $35K this year....do we then owe 5% on the entire amount or just $5K?
You register as soon as you are going to hit the 30k.
You're thinking of it 'wrong'. HST/GST/PST is just (for business to business) a pass through. You charge the same amount, but add on the tax and remit it to the government quarterly or yearly.
IF you are buying stuff and paying GST on it, you'll be better off registering sooner. If your clients are end-users (ie they don't claim back and GST paid) then yeah you'd want - for their sake/the look of your prices - to delay as long as possible.
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/rgstrng/menu-eng.html
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/rgstrng/smllspplrclc-eng.html
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Question re: taxation year ends.
I own and run a mid sized CCPC. It is two tier. Opco is 100% owned by Holdco and my wife and I each own half of Holdco. Due to an upcoming ownership change in my OPCO, I am going to move from paying myself (and spouse) salaries from the Opco as employees to an all dividend remuneration as shareholders (from Holdco).
My question is, does the timing of the change matter ? The ownership change will occur in Sept/Oct (I am taking on an OPCO partner) but I have full control over when I do the remuneration change. Our corporate year end (both companies) is August 31.
I am thinking of making the change come January 01 for the simple reason that our CA does the corporate returns and I do our personal tax returns. Therefore, less of a headache for me in 2015 and a clean start to 2016.
Right or wrong ?
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Question re: taxation year ends.
I own and run a mid sized CCPC. It is two tier. Opco is 100% owned by Holdco and my wife and I each own half of Holdco. Due to an upcoming ownership change in my OPCO, I am going to move from paying myself (and spouse) salaries from the Opco as employees to an all dividend remuneration as shareholders (from Holdco).
My question is, does the timing of the change matter ? The ownership change will occur in Sept/Oct (I am taking on an OPCO partner) but I have full control over when I do the remuneration change. Our corporate year end (both companies) is August 31.
I am thinking of making the change come January 01 for the simple reason that our CA does the corporate returns and I do our personal tax returns. Therefore, less of a headache for me in 2015 and a clean start to 2016.
Right or wrong ?
Hi Koogie,
I take it you sold a portion of your business then? Remember to ensure you triggered the QSBCD credits appropriately -
In terms of your accountant - making the transition is a relative no-brainer. If you opt to do dividends in 2015 however, remember that you'll need to file a T5 in addition to your regular T4 income.
The other consideration is Part IV tax here - Going forward, your Holdco will pay 33 1/3rd percent tax on the taxable dividends paid through Opco, but this is utilized as a tax credit when the income flows through to you personally in the Holdco. Just remember to keep this in mind for your planning purposes.
Hope this helps!
CPA CB
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Hi Koogie,
I take it you sold a portion of your business then? Remember to ensure you triggered the QSBCD credits appropriately -
In terms of your accountant - making the transition is a relative no-brainer. If you opt to do dividends in 2015 however, remember that you'll need to file a T5 in addition to your regular T4 income.
The other consideration is Part IV tax here - Going forward, your Holdco will pay 33 1/3rd percent tax on the taxable dividends paid through Opco, but this is utilized as a tax credit when the income flows through to you personally in the Holdco. Just remember to keep this in mind for your planning purposes.
Hope this helps!
CPA CB
Thanks. Yes, I am selling a minority share in the business. Unfortunately I can't crystalize any of the LCGE due to the nature of the setup of the business and the dormant funds it holds (so says my CA).
I do believe I will switch to a dividend remuneration come 2016. So, therefore, no need for a T5 until the end of next year but thanks for the reminder.
I am confused about the Part IV statement though. Are you assuming due to the sale that Opco and Holdco would no longer qualify as "connected companies" ? Or that outside dividends are earned by Opco ? All investments are actually held by Holdco.
Cheers.
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Hi Koogie,
I take it you sold a portion of your business then? Remember to ensure you triggered the QSBCD credits appropriately -
In terms of your accountant - making the transition is a relative no-brainer. If you opt to do dividends in 2015 however, remember that you'll need to file a T5 in addition to your regular T4 income.
The other consideration is Part IV tax here - Going forward, your Holdco will pay 33 1/3rd percent tax on the taxable dividends paid through Opco, but this is utilized as a tax credit when the income flows through to you personally in the Holdco. Just remember to keep this in mind for your planning purposes.
Hope this helps!
CPA CB
Thanks. Yes, I am selling a minority share in the business. Unfortunately I can't crystalize any of the LCGE due to the nature of the setup of the business and the dormant funds it holds (so says my CA).
I do believe I will switch to a dividend remuneration come 2016. So, therefore, no need for a T5 until the end of next year but thanks for the reminder.
I am confused about the Part IV statement though. Are you assuming due to the sale that Opco and Holdco would no longer qualify as "connected companies" ? Or that outside dividends are earned by Opco ? All investments are actually held by Holdco.
Cheers.
Hi Koogie,
It should still be a connected company - you've likely (hopefully if dividends are flowing to HoldCo) been paying Part IV Tax as is - so this won't necessarily change. The point was that if you're taking more remuneration in dividends, this will be a consideration for tax planning and timing purposes.
You end up getting this back as the money flows up to you personally (through Refundable dividend tax on hand).
Hope this clarifies a bit
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Hi Koogie,
It should still be a connected company - you've likely (hopefully if dividends are flowing to HoldCo) been paying Part IV Tax as is - so this won't necessarily change. The point was that if you're taking more remuneration in dividends, this will be a consideration for tax planning and timing purposes.
You end up getting this back as the money flows up to you personally (through Refundable dividend tax on hand).
Hope this clarifies a bit
Understood. I've been reading up about RDTOH and "think" I have a handle on it. I have a meeting this week with my CA so will get him to clarify everything.
Thanks again.
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Hi Koogie,
It should still be a connected company - you've likely (hopefully if dividends are flowing to HoldCo) been paying Part IV Tax as is - so this won't necessarily change. The point was that if you're taking more remuneration in dividends, this will be a consideration for tax planning and timing purposes.
You end up getting this back as the money flows up to you personally (through Refundable dividend tax on hand).
Hope this clarifies a bit
Understood. I've been reading up about RDTOH and "think" I have a handle on it. I have a meeting this week with my CA so will get him to clarify everything.
Thanks again.
No problem -
It's and odd concept - really it is the CRA's way of ensuring you pay personal tax on dividends when owned through a holding company, sooner rather than later. The 33 1/3rd percent tax is meant to roughly act as a 'deposit' on your future taxes, if you will.
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I'd love to see the Canadian version of the tax guide as a sticky, but find threads that keep themselves at the top of the page like this one has been far more relevant. Stickies tend to die. If you were to write up The Mustache Tax Guide (CAD version) and include a link to this thread for discussion, I can see that as far more useful.
http://forum.mrmoneymustache.com/taxes/the-mustache-tax-guide-(u-s-version)/
Great point - I'm doing this for the Employed and Self-Employed.
Stay tuned!
CPA CB
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Silly question about instalment payments.
I paid more than the "box 2" amount in March and June. Because of cap gains last year, my "box 2" amounts for September and December are massive. However, the "box 2" amounts I paid already were assuming I wasn't going to have much work in the second half of the year. But I've ended up being signed up for 3 days a week for the rest of the year.
So, the amount I will actually owe is more than double what I have already paid, but will probably be less than the sum of 4 "box 2" amounts. I honestly didn't anticipate the extra work at the end of the year.
Presumably I can pay the September "box 2" amount LESS THE OVERPAYMENT made in Mar-Jun and still "meet" the requirement to not have penalties?
Say:
box 2 Mar-Jun = 2k each, I paid 2.5k twice because that is what I thought 1/4 of the year's tax would be;
box 2 Sep-Dec = 5k each, can I pay 5k - (2 x 500 overpayment) = 4k in Sept and not get penalised?
Guessing with these fictional numbers my total for the year will be 12k not the 14k "box 2" suggests. But I can't go back in time and pay (1/4 of 12k = 3k) for March and June.
Make any sense? Any other options for paying less now? I don't mind paying the tax, it's just a lot next month when I didn't actually earn anything in July and won't necessarily have been paid for August's work by the Sept 15 deadline!
*Edit* got an answer elsewhere that I'm ok doing that, as the 'overpayments' are just listed as extra pre-credit and I can pay that much less to still be on track.
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Q. What is the tax rate on a Trust (personal)?
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Q. What is the tax rate on a Trust (personal)?
In a living trust, the tax rate is the highest marginal tax rate applicable to a person. However, you can make deductions on income and flow through to the beneficiary to pass this from high marginal rates to low marginal rates.
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Thanks, CPA CB.
I don't understand yet. I made a Trust for myself and my kid, such that I am both the settlor and one of the beneficiaries. How is the tax rate determined? i.e., For my individual taxes, outside of the Trust, my tax rate is 15%. Is that what CRA uses to determine tax rates on income generated inside the Trust?
I'm inclined to move a Corporate-owned asset into the Trust, but I keep being told Corporate tax rates are better than Trust tax rates. But it seems to me that in my case, they are both 15%.
Also, what deductions can be claimed against income in a Trust?
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Hey there Eh!
I have been slack in the RRSP investment game and am working to catch up. I don't know the exact amount but I probably have over $30k in available as per my last assessment. Would you recommend getting an RRSP loan and then apply the refund against the loan?
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Hey there Eh!
I have been slack in the RRSP investment game and am working to catch up. I don't know the exact amount but I probably have over $30k in available as per my last assessment. Would you recommend getting an RRSP loan and then apply the refund against the loan?
Make a contribution to reduce your taxable income to arround 30k$ (lower than that is not really worth). You got until march 1st 2016 to contribute. If you intend to get a loan, make it managable so you can repay with the refund 1-2 month later. Focus on maxing it out every year.
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Hi Koogie,
I take it you sold a portion of your business then? Remember to ensure you triggered the QSBCD credits appropriately -
In terms of your accountant - making the transition is a relative no-brainer. If you opt to do dividends in 2015 however, remember that you'll need to file a T5 in addition to your regular T4 income.
The other consideration is Part IV tax here - Going forward, your Holdco will pay 33 1/3rd percent tax on the taxable dividends paid through Opco, but this is utilized as a tax credit when the income flows through to you personally in the Holdco. Just remember to keep this in mind for your planning purposes.
Hope this helps!
CPA CB
Thanks. Yes, I am selling a minority share in the business. Unfortunately I can't crystalize any of the LCGE due to the nature of the setup of the business and the dormant funds it holds (so says my CA).
I do believe I will switch to a dividend remuneration come 2016. So, therefore, no need for a T5 until the end of next year but thanks for the reminder.
I am confused about the Part IV statement though. Are you assuming due to the sale that Opco and Holdco would no longer qualify as "connected companies" ? Or that outside dividends are earned by Opco ? All investments are actually held by Holdco.
Cheers.
Hi Koogie,
It should still be a connected company - you've likely (hopefully if dividends are flowing to HoldCo) been paying Part IV Tax as is - so this won't necessarily change. The point was that if you're taking more remuneration in dividends, this will be a consideration for tax planning and timing purposes.
You end up getting this back as the money flows up to you personally (through Refundable dividend tax on hand).
Hope this clarifies a bit
I thought connected corps were exempt from part 4 tax? Am I wrong?
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Q. What is the tax rate on a Trust (personal)?
In a living trust, the tax rate is the highest marginal tax rate applicable to a person. However, you can make deductions on income and flow through to the beneficiary to pass this from high marginal rates to low marginal rates.
Thanks, CPA CB.
I don't understand yet. I made a Trust for myself and my kid, such that I am both the settlor and one of the beneficiaries. How is the tax rate determined? i.e., For my individual taxes, outside of the Trust, my tax rate is 15%. Is that what CRA uses to determine tax rates on income generated inside the Trust?
I'm inclined to move a Corporate-owned asset into the Trust, but I keep being told Corporate tax rates are better than Trust tax rates. But it seems to me that in my case, they are both 15%.
Also, what deductions can be claimed against income in a Trust?
I think you may have misunderstood what CPA CB meant. Under the Canadian federal tax regime, the general rule is that the tax payable by a trust is 29% of its taxable income for the year. Income Tax Act, RSC 1985, c 1 (5th Supp), § 122(1)(a). The rate of 29% is also the highest marginal tax rate applicable to individuals, although that is technically just a coincidence since the structure of the legislation does not make those the same value. In other words, the general rule is that trusts do not pay graduated income tax, but rather a flat rate of 29%. However, the general rule is subject to a large number of exceptions, which I'll let CPA CB discuss if he wants to.
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In a taxable account of Canadian equities I currently have some "loser stocks" with a capital loss of about $7000.
First question:
If I sell the “loser stocks” in a year when I have no capital loss can I claim this loss in a future year?
I found this that scared me “Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.” (http://www.moneysense.ca/taxes/capital-gains-explained/)
At the same time I have "winner stocks" with a gain of $20,000.
Currently, I have not sold any stocks so this has not been realised.
But I have room in my registered accounts and I was thinking that I would transfer the "winner stocks" "in kind" into my TFSA. Even though they gained a lot, they are the lowest they have been in a while so now is a good time to “in kind” them over.
I understand that this will trigger a deemed deposition and I have calculated the tax at about ($20,000/2)*35% = $3500.
I wanted to offset this tax and I thought I could do that in two ways.
A) I could sell the “loser stocks”. Now my gain is only (13,000/2)*35% = $2275
(Not that much of an offset)
Or
B) I could purchase some RRSP with other cash, I think I need about $10,000 to offset the gain.
$10,000*35% = $3500 cash back
I am quite sure I can save the cash for the RRSP by the year end.
I also hope the “looser stocks” climb out, I am a buy and hold investor, and why sell low if I don’t need to.
Second & third Question:
Does my math and logic seam correct on how to offset the capital gain? Are there any pros and cons to A vs B I am missing?
Thanks!
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I think you may have misunderstood what CPA CB meant. Under the Canadian federal tax regime, the general rule is that the tax payable by a trust is 29% of its taxable income for the year. Income Tax Act, RSC 1985, c 1 (5th Supp), § 122(1)(a). The rate of 29% is also the highest marginal tax rate applicable to individuals, although that is technically just a coincidence since the structure of the legislation does not make those the same value. In other words, the general rule is that trusts do not pay graduated income tax, but rather a flat rate of 29%. However, the general rule is subject to a large number of exceptions, which I'll let CPA CB discuss if he wants to.
Thanks, Cathy! Yes, I didn't understand even that little bit, so was aiming for clarification. Okay, so 29% but exceptions. Will wait to hear from CPA CB on those.
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My first question here:
I was wondering if the CCTB and/or UCCB benefits we receive every month would count towards our income when calculating our RRSP contribution room.
My guess was that since CCTB is a non-taxable benefit it does not count, and maybe since UCCB is a taxable benefit it does count. Is this correct?
Thanks!
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My first question here:
I was wondering if the CCTB and/or UCCB benefits we receive every month would count towards our income when calculating our RRSP contribution room.
My guess was that since CCTB is a non-taxable benefit it does not count, and maybe since UCCB is a taxable benefit it does count. Is this correct?
Thanks!
Hi
Your maximum annual RRSP contribution is based on your earned income in the previous year. Earned income includes salaries, employee profit sharing income, business income, disability pensions (issued under the Canada and Quebec pension plans), taxable alimony or maintenance, and rental income.
Neither CCTB or UCCB count towards calculating your RRSP room.
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In a taxable account of Canadian equities I currently have some "loser stocks" with a capital loss of about $7000.
First question:
If I sell the “loser stocks” in a year when I have no capital loss can I claim this loss in a future year?
I found this that scared me “Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.” (http://www.moneysense.ca/taxes/capital-gains-explained/)
At the same time I have "winner stocks" with a gain of $20,000.
Currently, I have not sold any stocks so this has not been realised.
But I have room in my registered accounts and I was thinking that I would transfer the "winner stocks" "in kind" into my TFSA. Even though they gained a lot, they are the lowest they have been in a while so now is a good time to “in kind” them over.
I understand that this will trigger a deemed deposition and I have calculated the tax at about ($20,000/2)*35% = $3500.
I wanted to offset this tax and I thought I could do that in two ways.
A) I could sell the “loser stocks”. Now my gain is only (13,000/2)*35% = $2275
(Not that much of an offset)
Or
B) I could purchase some RRSP with other cash, I think I need about $10,000 to offset the gain.
$10,000*35% = $3500 cash back
I am quite sure I can save the cash for the RRSP by the year end.
I also hope the “looser stocks” climb out, I am a buy and hold investor, and why sell low if I don’t need to.
Second & third Question:
Does my math and logic seam correct on how to offset the capital gain? Are there any pros and cons to A vs B I am missing?
Thanks!
Hi
I am also a tax accountant (based in Quebec) so I guess I can pitch in to the great service CPA CB has been providing in this post.
1) If you have a capital loss in current year, you can use it to reduce any capital gains you had in the year, to a balance of zero. If your capital losses are more than your capital gains, you may have a net capital loss for the year. Generally, you can apply your net capital losses to taxable capital gains of the three preceding years and to taxable capital gains of any future years. So yes, you keep the losses until they are used.
2) Your logic re : offsetting capital gains of 20K. A capital gain of 20K will add 10K to your taxable income as you know. If you want to completely offset this, you need to contribute 10K to your RRSP, or have 20K in capital losses.
In my opinion what people miss the most when deciding on a tax issue, is considering all the other variables other than direct income tax. There is so much more to consider : impact on child care benefits, GST\PST refunds, reimbursement of daycare costs, Guaranteed income supplement, health tax (in Quebec) and the list goes on....
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My first question here:
I was wondering if the CCTB and/or UCCB benefits we receive every month would count towards our income when calculating our RRSP contribution room.
My guess was that since CCTB is a non-taxable benefit it does not count, and maybe since UCCB is a taxable benefit it does count. Is this correct?
Thanks!
Hi
Your maximum annual RRSP contribution is based on your earned income in the previous year. Earned income includes salaries, employee profit sharing income, business income, disability pensions (issued under the Canada and Quebec pension plans), taxable alimony or maintenance, and rental income.
Neither CCTB or UCCB count towards calculating your RRSP room.
Well, not the answer I was hoping for but I'm glad to know. Thanks!
I guess that means a little less tax-deferred saving than hoped for this year, and a little more in the TFSA... life is rough eh?
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Thanks GettingThere.
I've held on to the looser stocks, they are slowly climbing.
I did do the in-kind transfer so I will have a capital gain.
I have put about half of what I need in an RRSP to offset.
The other half should be doable by the February deadline if not sooner.
Thanks!
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K-Ice,
I forgot to mention one important thing in your case, for in kind transfers. If you transfer shares from a taxable account to a RRSP or TFSA, you must declare the capital gain as if you sold it at the price you transferred the shares. But if the result of the transfer is a capital LOSS, you can not claim the loss on your taxes. You must sell the shares first, incur the loss, transfer the money to your tax advantaged account, and rebuy the same shares 30 days later (if that's whatt you want). A bit stupid in my opinion, but that's how it works.
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Thanks for the tip.
I had read about the loss 30day thing but kind of forgot.
Anyway, I didn't touch the looser stock, it is a Canadian dividend stock so I will probably just let it sit outside of the TFSA or RRSP.
I still have some TFSA RRSP room but I will just fill it with new savings.
So many little rules to optimize these things.
Thanks
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I have a complicated tax question. My in-laws are canadian citizens, but my FIL used to work in the US, and has a 401k there. Unfortunately he passed away last week at 56, and now my MIL (age 52) needs to figure out what to do with it. I assume she is named as the beneficiary on it, assuming it works the same way as RRSPs, and once she provides the company with his death certificate she'll have ownership of it I suppose.
My question is how should she proceed in order to minimize the tax impact? What are the options? I found some information here (https://www.sunnet.sunlife.com/files/advisor/english/PDF/IRA_401k_to_RRSP.pdf) but I'm not sure I am interpreting it correctly. I think if she just took it all out now, she would pay 10% penalty plus 15% withholding tax, so that's likely not a good option. If she keeps it invested in the 401k until age 59.5, does that effectively avoid the 10% penalty (she may retire at around that time too, so maybe would avoid the 15% tax as well).
Thanks in advance!
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FI40, you are correct that your question is complicated, and it doesn't help that most of the existing literature on this topic is incorrect in some way or another. As I just noted in another post (http://forum.mrmoneymustache.com/taxes/living-trusts-estate-planning/msg826332/#msg826332), secondary sources do not have the force of law and are mainly useful as a starting point for research. You need to verify the claims in secondary sources by reading the primary sources (e.g. treaties, statutes, and case law). My posts here are, of course, also secondary sources of information and you similarly cannot rely on them.
The publication you linked to (https://www.sunnet.sunlife.com/files/advisor/english/PDF/IRA_401k_to_RRSP.pdf) ("Sunlife Publication") contains serious errors.
A plan commonly referred to as a 401(k) plan must hold assets in "a trust created or organized in the United States". 26 USC § 401(a). For the purpose of this post, the operative phrase there is "in the United States". In the case of a distribution from such a trust "in the United States" to a nonresident alien, the distribution is generally subject to a 30% tax "to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States". 26 USC § 871(a)(1). If the payee is "at no time during the taxable year ... engaged in trade or business in the United States", then the amount is not "effectively connected with the conduct of a trade or business within the United States" and the 30% tax applies. 26 CFR 1.871-7.
In furtherance of the above, when the distribution is made to a nonresident alien not engaged in a US trade or business, the payor is generally required to withhold 30% of the proceeds and remit them to the IRS. 26 USC § 1441(a). However, the provisions of the Internal Revenue Code are applied "with due regard to any treaty obligation of the United States which applies to such taxpayer". 26 USC § 894(a)(1). Assuming that the payee is a resident of Canada, the relevant treaty provides that the tax withheld is reduced to 15% if (and only if) the recipient of the distribution(s) is "the beneficial owner of a periodic pension payment". Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital (http://www.fin.gc.ca/treaties-conventions/usa_-eng.asp), Article XVIII, § 2(a).
The Sunlife Publication at page 2 claims that in the case of a distribution from a 401(k) plan to a nonresident alien who is a resident of Canada not engaged in a US trade or business, the withholding rate is always reduced to 15%. Unfortunately, this claim has no basis in law. The only authority cited by the Sunlife Publication for this proposition is 26 CFR 1.1441-2(b)(ii), but this regulation merely defines the term "fixed or determinable annual or periodical" for the purpose of "chapter 3 of the Internal Revenue Code and the regulations thereunder". This regulation has nothing to do with the meaning of "the beneficial owner of a periodic pension payment" as used in the treaty provision above. To be clear then, the withholding rate on the distribution, assuming that the payee is a nonresident alien who is a resident of Canada and not engaged in a US trade or business, will be 30% unless the payee is "the beneficial owner of a periodic pension payment", in which case it will be reduced to 15%. There is no precedential authority on the meaning of "the beneficial owner of a periodic pension payment" and certainly no authority suggesting that all recipients of the distributions from a 401(k) plan fall within the meaning of this phrase. In conclusion, the payee may have to pay a 30% tax to the US on the distribution, not necessarily the 15% claimed by the Sunlife Publication.
In addition to the above, and assuming that the payee is a resident is Canada, the 401(k) distribution will also have to be included in the payee's income for Canadian tax purposes. Income Tax Act, RSC 1985, c 1 (5th Supp) (https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-1-5th-supp/latest/rsc-1985-c-1-5th-supp.html) ("ITA"), § 56(1)(a)(i).
Fortunately, there are a few pieces of good news.
First, the 10% additional tax that you mention for distributions from a qualified retirement plan (you call it a "penalty") does not apply to a distribution made to a beneficiary after the death of the employee whose account it was. 26 USC § 72(t)(2)(A)(ii).
Second, the payee may be able to claim a tax credit in Canada for all or part of the 30% (or possibly 15%) tax that was paid to the US, depending on the overall Canadian tax profile of the payee and subject to all relevant statutory requirements. ITA § 126.
Third, the payee may be able to contribute the 401(k) proceeds to an RRSP and claim a deduction for same. Subject to various conditions, there is a Canadian deduction available for income that is "a superannuation or pension benefit ... payable out of or under a pension plan ... attributable to services rendered by the taxpayer or a spouse or common-law partner or former spouse or common-law partner of the taxpayer in a period throughout which that person was not resident in Canada". ITA § 60(j)(i). I bolded some of the most salient requirements, but there are also many other conditions not discussed here.
I hope this information is helpful, but as you surmised, this is a complicated topic, and this post is only a secondary source of general information intended to help with your research and is not a substitute for familiarising yourself with the primary sources, which contain other requirements not described here. The payee may benefit from retaining counsel to assist with this matter.
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Thank you so much Cathy for the detailed response! This is very helpful. I will look into the "periodic pension payment" issue and the Canadian tax credit and RRSP contribution options. Great to see all those primary sources referenced which I didn't know enough to even look for!
Thanks again!!
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Hi
On T2125 can one include GST on expenses if they are not registered for GST (ie still considered small supplier). I would think so since it's a cost of business and not able to claim ITC on it.
Also for CCA of items owned before start of business, I assume one can "transfer" them to the sole proprietorship at a deemed fair market value. Obviously if it was a Corporation this would be via s.85 rollover, however I assume on sole prop no form is needed?
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Hi all,
New to MMM and am sorting through "my house" and slowly getting things in order and an understanding of good things to be doing. My question is in regards to a second job. I have gotten one and am wondering what to set that at for deductions so that I don't get hit by the evil dreaded empire more than I am now. The second job I work at is saying that I have to give them a % rate that I would like to withhold for tax purposes.
I have searched and cannot find a somewhat easy way to calculate this.
The ultimate goal of the second job is to actually make some extra money to help get the "house" in order.
Thanks for any help. LOVE this site.
-a fellow Canadian-
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Hi all,
New to MMM and am sorting through "my house" and slowly getting things in order and an understanding of good things to be doing. My question is in regards to a second job. I have gotten one and am wondering what to set that at for deductions so that I don't get hit by the evil dreaded empire more than I am now. The second job I work at is saying that I have to give them a % rate that I would like to withhold for tax purposes.
I have searched and cannot find a somewhat easy way to calculate this.
The ultimate goal of the second job is to actually make some extra money to help get the "house" in order.
Thanks for any help. LOVE this site.
-a fellow Canadian-
Not sure what province you're from, but I think you can just use the tables here (for Ontario): http://www.taxtips.ca/taxrates/on.htm
You want to look at Marginal tax rates, for Other Income. Just choose the bracket that your primary job income is in (or combine brackets depending how much you'll be making at the side gig).
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Thanks for the info! Sorry, I forgot to include my home Province of Ontario.
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Hello all,
I'm back!
I will be getting to people's unanswered questions, in the meantime, thanks to everyone who has helped out their fellow MMM'er. I will state names - but don't have the time presently.
Everyone, I do want to take a quick moment to comment on the importance of voting (apolitically as possible). For what it's worth, I'm a moderate Libertarian - take it or leave it.
As a relatively young guy (30's), I'm proud that my grandfather, and all of his brothers fought, and survived D-Day. After 70 years, this does lose some meaning to us, but many of our descendants put their lives on the line (and their family's for that matter) to protect a notion of freedom, democracy, and the right to vote.
In this sense, I urge everyone to do the following.
1) Ignore the noise - there are a bountiful number of partisans on either side of this election. Ignore them entirely. I don't want to call them scumbags - so let's call them sheep.
2) Look at what the leaders have said, and the odds of this coming to fulfillment. Currently, the Conservatives have a really great record of making promises they keep - the other two haven't yet had the opportunity.
3) Weigh your options carefully, and considerably. What are your values, what's most important, and how does one affect the other? I.e. if you're passionate about X, but the accomplishment of Y and Z are necessary for X to succeed, you're likely better to vote for the party who will deliver with Y and Z, versus the one who says X will happen.
I'm keeping this as non-descript as possible, unlike Mike Myers and John Oliver... Sub in your values as necessary please.
Take the responsibility seriously, as if buying a car or a house. Test your assumptions, vote with who you think is going to do the best job, and be happy to fulfill your right and duty as a real Can'eh'dian. After all, it is guaranteed 2/3rds of the country will be complaining of the result - why not make sure you can too (winner or loser)?
We're all in it for the best of one another. Remember that, vote for whomever you think is best for you, and be proud.
All the best, and happy voting MMM'ers,
CPA CB
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This year I started a small business doing some landscaping and construction. I don't need the money but I enjoy the work and it keeps me busy in my spare time. I am operating the business as a sole proprietorship, not a corporation. Currently it earns about $20,000 in profit that I can't expense. I am looking for suggestions on options to minimize taxes by structuring the business differently or doing something with profits other than regular income.
I am a single guy working in a full-time, permanent job that pays $65,000 and will increase to $100,000 over the next few years. it provides full benefits as well as a good pension.
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Hey! Ok I have a weird situation that maybe MMM could have related to that I'm having a very tough time reconciling.
I was born in BC and worked there for one company right out of college until the age of 29 when I was internally
transferred to Los Angeles (31 now). Queue the big raise and woo hoo the beaches are nice!
In the 20ish months that I've lived here so far I have discovered mustachianism and have adapted it to a really neat beach bumish life.
I get my work done, live on the beach and save about 50% of my take home which amounts to about 40,000$ a year (spend 40k$ save 40k$ - luxurious - I should probably cut back).
But here is the problem I have that I can't seem to figure out. My Canadian 20s were not so fiscally sound and the only shining light was
an old boss who told me to cap my company sponsored retirement plan to get their max contribution. I have managed to consolidate an old motorbike loan
and a few large credit card balances into a line of credit @ 7.8% to the amount of 23,000$ CDN currently. I have been paying just above the minimum ~200$
each month and ignoring it (great debt strategy right?). I also have 72,000$ in a locked in retirement account and 18,000$ in an RRSP.
As a non-resident of Canada (I have filed the paperwork) I am entitled to withdraw both the RRSP and the Locked-In Retirement Account (LIRA) at a one time 25% penalty after
two years out of the country. (Right? I think? Sunlife confirmed it for me?)
So my thinking is - I paid more than 25% tax on the contributions to the LIRA and the RRSP. Shouldn't I take advantage of this situation and take my 72,000 + 18,000 -25% = 67,500$
and pay off my 23,000$ line of credit leaving me with 44,500$ Canadian cash to invest or move over the border at some point (the exchange rate hasn't helped my calculations)? Or do I slash
my US savings rate of 40,000$ to pay it off with a US to CDN transfer? Even if I were to do that should I not take the chance to unlock the ~90,000$ now? Both the LIRA and the RRSP are at
about 1.5-2.0% expense ratios which hurt now that I understand what that means.
Is my thinking sound? Any advice?
Thanks in advance for your time!
Chris
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This year I started a small business doing some landscaping and construction. I don't need the money but I enjoy the work and it keeps me busy in my spare time. I am operating the business as a sole proprietorship, not a corporation. Currently it earns about $20,000 in profit that I can't expense. I am looking for suggestions on options to minimize taxes by structuring the business differently or doing something with profits other than regular income.
I am a single guy working in a full-time, permanent job that pays $65,000 and will increase to $100,000 over the next few years. it provides full benefits as well as a good pension.
Hi Sierra,
Are you taking any expenses? Presumably so, and you've maximized the number of expenses you take.
The problem with sole-proprietorships are two-fold, which you rightly point out.
1) No tax deferral mechanism - profit earned now, is fully taxed now
2) No ability to income split.
With you take home earnings increasing I would ask, are you married, with children? If so, incorporating is a great way to income split dividends with your spouse, and even with children after they reach 18 years of age. You can leave the funds in the company, and only pay the corporate tax rate, and defer the personal component to when it is best, instead of being forced into it.
That being said - incorporating and filing corporate returns comes at a cost. $1k per year likely or more. Is it worthwhile? Maybe - it depends on your circumstances, and whether the business continues to grow.
Hope this helps!
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Thanks for your advice. Much appreciated.
I'm taking as many expenses as possible. Unfortunately some jobs have no expense other than travel.
As well I'm not married and no children. So it sounds like I don't have many options other than trying to include more expenses.
Thanks again for your help.
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Hey! Ok I have a weird situation that maybe MMM could have related to that I'm having a very tough time reconciling.
I was born in BC and worked there for one company right out of college until the age of 29 when I was internally
transferred to Los Angeles (31 now). Queue the big raise and woo hoo the beaches are nice!
In the 20ish months that I've lived here so far I have discovered mustachianism and have adapted it to a really neat beach bumish life.
I get my work done, live on the beach and save about 50% of my take home which amounts to about 40,000$ a year (spend 40k$ save 40k$ - luxurious - I should probably cut back).
But here is the problem I have that I can't seem to figure out. My Canadian 20s were not so fiscally sound and the only shining light was
an old boss who told me to cap my company sponsored retirement plan to get their max contribution. I have managed to consolidate an old motorbike loan
and a few large credit card balances into a line of credit @ 7.8% to the amount of 23,000$ CDN currently. I have been paying just above the minimum ~200$
each month and ignoring it (great debt strategy right?). I also have 72,000$ in a locked in retirement account and 18,000$ in an RRSP.
As a non-resident of Canada (I have filed the paperwork) I am entitled to withdraw both the RRSP and the Locked-In Retirement Account (LIRA) at a one time 25% penalty after
two years out of the country. (Right? I think? Sunlife confirmed it for me?)
So my thinking is - I paid more than 25% tax on the contributions to the LIRA and the RRSP. Shouldn't I take advantage of this situation and take my 72,000 + 18,000 -25% = 67,500$
and pay off my 23,000$ line of credit leaving me with 44,500$ Canadian cash to invest or move over the border at some point (the exchange rate hasn't helped my calculations)? Or do I slash
my US savings rate of 40,000$ to pay it off with a US to CDN transfer? Even if I were to do that should I not take the chance to unlock the ~90,000$ now? Both the LIRA and the RRSP are at
about 1.5-2.0% expense ratios which hurt now that I understand what that means.
Is my thinking sound? Any advice?
Thanks in advance for your time!
Chris
Hi Chris,
You're right in that you're getting dinged on the expense ratios. Unfortunately the exchange rate won't be swinging dramatically in your favour in terms of converting to USD any time soon (as far as I can tell), and as such I'd recommend keeping the funds in loonies for now.
That being said - transferring out of Sunlife and into a traditional RRSP/LIRA direct investing account would be highly recommended. You can avoid the expenses, and invest in what you want more actively.
8% is crazy for a line of credit - earning money in USD however means you're only looking at about $14-16k US to knock out this debt entirely, less than half a year. I would definitely do this as quickly as possible, as 8% is hard to beat in terms of investing.
As far as the 25% is concerned - if you keep the funds in Canadian dollars I wouldn't recommend it. In terms of compounding your investment, you're better to invest the 90k and earn on this (and pay the 25% flat tax later), rather than take the hit up front and crawl back up to 90k.
That being said, from a tax planning perspective, remember that RRSP's and LIRA's need to be reported specifically in your US tax return. Take a look at this article for a bit more detail - http://www.greenbacktaxservices.com/blog/canadian-retirement-tfsa-rrsp-treatment/
Hope this helps!
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Thanks for your advice. Much appreciated.
I'm taking as many expenses as possible. Unfortunately some jobs have no expense other than travel.
As well I'm not married and no children. So it sounds like I don't have many options other than trying to include more expenses.
Thanks again for your help.
Gotcha,
From there - look to your RRSP's and TFSA and contribute to at least attempt to offset current and future taxes. Purchase any equipment you may need prior to this year end so you can expense at least a portion of it up front as well.
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I have a question about spousal RRSP.
My marginal tax rate is about 36%
My SO’s tax rate is 31%
I have very little room in my RSP $10K and very little saved $20K. I barely accumulated any room since I spent years in school but now I should have a pension one day.
My self-employed SO has much more room $100K, and more saved $75K
I think our situation is odd since the higher income earner actually has less savings and less contribution room. None of the spousal RSP samples I found on the internet are like us.
SO is 3 years older and early 40’s
When retired, I think we would both be in about the 31% tax rate but no one has a crystal ball.
I plan on topping up my RSP this year. After that, can I make a spousal contribution? I don’t think so since I am at MY limit. So should I just put my extra cash into my spouse’s RRSP so it can grow tax free?
We are close to having our TFSA maxed as well.
My gut says it makes more sense to invest in a tax sheltered manner before unregistered regardless of whose name it is under.
Thanks
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I have a question about spousal RRSP.
My marginal tax rate is about 36%
My SO’s tax rate is 31%
I have very little room in my RSP $10K and very little saved $20K. I barely accumulated any room since I spent years in school but now I should have a pension one day.
My self-employed SO has much more room $100K, and more saved $75K
I think our situation is odd since the higher income earner actually has less savings and less contribution room. None of the spousal RSP samples I found on the internet are like us.
SO is 3 years older and early 40’s
When retired, I think we would both be in about the 31% tax rate but no one has a crystal ball.
I plan on topping up my RSP this year. After that, can I make a spousal contribution? I don’t think so since I am at MY limit. So should I just put my extra cash into my spouse’s RRSP so it can grow tax free?
We are close to having our TFSA maxed as well.
My gut says it makes more sense to invest in a tax sheltered manner before unregistered regardless of whose name it is under.
Thanks
Hi K,
It's a conundrum, certainly.
You're correct that contributing to a Spousal RRSP goes against YOUR RRSP limit - so your ability in this sense is restricted.
I don't necessarily agree with the statement that one should max out registered accounts prior to looking at unregistered. If this were all TFSA I would agree (there is literally no reason to not top out the TFSA), but an RRSP vs. Unregistered account discussion is warranted.
I've posted at length in this forum on the benefits of the RRSP, and cons of the RRSP, when comparing to an unregistered account. The RRSP is a good tax deferral mechanism - BUT if you're deferring Capital Gains you end up behind as your gains are now 100% taxable vs. 50% taxable.
People with pensions like yourself usually get hosed on RRSP's in retirement, as CPP+Pension+RRSP usually sticks you in a very high bracket.
Therefore you're best to invest in non-dividend paying stocks in an unregistered account (Berkshire Hathaway, for example) and dividend paying stocks (Banks, etc) in your RRSP.
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It's a conundrum, certainly.
...... but an RRSP vs. Unregistered account discussion is warranted.
The RRSP is a good tax deferral mechanism - BUT if you're deferring Capital Gains you end up behind as your gains are now 100% taxable vs. 50% taxable.
....
Therefore you're best to invest in non-dividend paying stocks in an unregistered account (Berkshire Hathaway, for example) and dividend paying stocks (Banks, etc) in your RRSP.
Thanks. I will do some more reading.
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I don't necessarily agree with the statement that one should max out registered accounts prior to looking at unregistered. If this were all TFSA I would agree (there is literally no reason to not top out the TFSA), but an RRSP vs. Unregistered account discussion is warranted.
I've posted at length in this forum on the benefits of the RRSP, and cons of the RRSP, when comparing to an unregistered account. The RRSP is a good tax deferral mechanism - BUT if you're deferring Capital Gains you end up behind as your gains are now 100% taxable vs. 50% taxable.
Sorry to jump in and derail you a bit, but I'm not sure I understand your position here regarding capital gains in the RRSP. Can we do a simple example?
Let's assume tax rate is the same now and in the future when the RRSP is withdrawn - that is a conservative assumption, since if it's lower in the future that favours the RRSP. Say 50%. We have $1000 pre-tax to invest, and will have 100% capital gains over time.
Taxable:
Start with $500 (1000*.5). End with 875 (extra 500 is taxed at 25%).
RRSP:
Start with $1000. End with 2000, which comes down to $1000 when you take it out. RRSP wins.
If I make the tax rate 30%, I get Taxable 700->1295, RRSP 1000->1400. RRSP wins again.
And this is assuming an equal tax rate at the end as at the start. It gets better for the RRSP for mustachians I believe, who tend to have a high income and then retire with a lower one. The one argument I can think of against what I'm saying is that for older folks the RRSP method might hurt their OAS payments. Again for mustachians retiring at like 40-50, there's time to manage this. There are probably other things I'm not thinking of. Just wanted to get your perspective on it! I'll go check your post history now, maybe I should have done that first.
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Having read some of the history, I think I might just be beating a dead horse. I believe my opinions are accurate for people in my situation.
Generally, as you have mentioned, tax rates are not always lower during retirement. Also age 71 is annoying. Also, future governments may mess with how RRSPs are taxed or put more rules on how they can be used, which would suck. Then again they could make cap gains tax 100% of your marginal rate or something so taxable stuff could get nerfed too.
By the way, thanks so much for starting this thread! Tons of great advice.
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Having read some of the history, I think I might just be beating a dead horse. I believe my opinions are accurate for people in my situation.
Generally, as you have mentioned, tax rates are not always lower during retirement. Also age 71 is annoying. Also, future governments may mess with how RRSPs are taxed or put more rules on how they can be used, which would suck. Then again they could make cap gains tax 100% of your marginal rate or something so taxable stuff could get nerfed too.
By the way, thanks so much for starting this thread! Tons of great advice.
Hey FI40 -
I think I have a proof somewhere in the forum here that you can see - it's hard to follow your example but let me try...
Let's assume in both cases you double your investment.
And also, we can assume a 30% marginal tax rate now and in retirement. Now, we could launch into a diatribe about this, but I find people are surprised to find out that after 65/67 with OAS, CPP, and RRSP income their yearly income is over 50-60k per year, and they were previously earning about the same.
Un-registered you're left with $1,850 after tax.
Registered is a bit trickier but here goes -
After you re-invest your refund you're at $1,300 as an initial investment.
Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.
Therefore your net after tax is $1,820.
In this example, the unregistered account wins by $30.
Yes, it ignores time value of money and incremental taxes on trading activity, but on the flip side it also ignores the fact that the vast majority of our clients do not re-invest 100% of their RRSP refunds. Po-tay-to, po-tah-to.
Also cap gains only count 50% towards your clawback ratios for OAS and CPP - RRSP are 100%. There are benefits and downfalls of both, but from a pure tax perspective you're better to save RRSP room for dividend/interest income, and capital gains unregistered. And have both in general, as has been recommended.
Hope this clarifies a tad.
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Un-registered you're left with $1,850 after tax.
I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.
Registered is a bit trickier but here goes -
After you re-invest your refund you're at $1,300 as an initial investment.
Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.
Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.
Therefore your net after tax is $1,820.
In this example, the unregistered account wins by $30.
So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.
Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?
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Un-registered you're left with $1,850 after tax.
I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.
Registered is a bit trickier but here goes -
After you re-invest your refund you're at $1,300 as an initial investment.
Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.
Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.
Therefore your net after tax is $1,820.
In this example, the unregistered account wins by $30.
So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.
Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?
Hi there,
You're putting the cart before the horse here -
The question is - I have $1,000 sitting in my bank account. Should I invest in an RRSP, or unregistered, given all gains will be capital gains. My tax rate is 30%, and I will re-invest the RRSP tax credit I receive in the future in the plan.
It's an apples to oranges comparison if you say I have $1,000 to contribute to non-registered, but $1,428 to registered because of future tax events. It has to start at the beginning, i.e. if I put $1,000 into Plan A vs. Plan B, which nets better?
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Un-registered you're left with $1,850 after tax.
I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.
Registered is a bit trickier but here goes -
After you re-invest your refund you're at $1,300 as an initial investment.
Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.
Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.
Therefore your net after tax is $1,820.
In this example, the unregistered account wins by $30.
So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.
Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?
Hi there,
You're putting the cart before the horse here -
The question is - I have $1,000 sitting in my bank account. Should I invest in an RRSP, or unregistered, given all gains will be capital gains. My tax rate is 30%, and I will re-invest the RRSP tax credit I receive in the future in the plan.
It's an apples to oranges comparison if you say I have $1,000 to contribute to non-registered, but $1,428 to registered because of future tax events. It has to start at the beginning, i.e. if I put $1,000 into Plan A vs. Plan B, which nets better?
If you do it that way, you are not accounting for the fact that when you re-invest the tax credit back into the RRSP, you get a refund for that too. I'm accounting for that effect in advance.
I agree there is a timing difference doing it the way I suggested, but if you just frame the question as "the contribution part happens within a year" then it's fine. We're talking about a long term investment here. To achieve what I'm talking about, someone could take out a loan for the $428 from the time they contribute to the RRSP until the time they get their tax refund. The cost of doing this is pretty small. Alternatively they can set up a plan with their employer to just not pay the tax in the first place! I forget the form that is used for that, but you know what I mean. Right?
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Un-registered you're left with $1,850 after tax.
I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.
Registered is a bit trickier but here goes -
After you re-invest your refund you're at $1,300 as an initial investment.
Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.
Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.
Therefore your net after tax is $1,820.
In this example, the unregistered account wins by $30.
So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.
Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?
Hi there,
You're putting the cart before the horse here -
The question is - I have $1,000 sitting in my bank account. Should I invest in an RRSP, or unregistered, given all gains will be capital gains. My tax rate is 30%, and I will re-invest the RRSP tax credit I receive in the future in the plan.
It's an apples to oranges comparison if you say I have $1,000 to contribute to non-registered, but $1,428 to registered because of future tax events. It has to start at the beginning, i.e. if I put $1,000 into Plan A vs. Plan B, which nets better?
If you do it that way, you are not accounting for the fact that when you re-invest the tax credit back into the RRSP, you get a refund for that too. I'm accounting for that effect in advance.
I agree there is a timing difference doing it the way I suggested, but if you just frame the question as "the contribution part happens within a year" then it's fine. We're talking about a long term investment here. To achieve what I'm talking about, someone could take out a loan for the $428 from the time they contribute to the RRSP until the time they get their tax refund. The cost of doing this is pretty small. Alternatively they can set up a plan with their employer to just not pay the tax in the first place! I forget the form that is used for that, but you know what I mean. Right?
Definitely!
I was keeping the scenario limited to the RRSP return from the first year, rather than counting years 2-4 as the return diminishes.
The issue is really more one of what we see in our practice. When it comes down to it, people aren't as efficient with their investments and reinvesting their refunds from an RRSP back into the product.
People may reinvest their tax refunds - but this is likely not close to their RRSP portion of the refund if they 'technically' owed tax at the end of the year. Too often we see someone who would have owed $1,000 in tax receive a $1,000 refund (so 2k back from the RRSP contribution) and they'll invest the $1,000 refund (or worse).
In addition, people generally have their RRSP and an unregistered account - and in this circumstance you're better to invest your fully taxable investment income in the RRSP, and capital gains earning investments in your unregistered account.
Point being - you're best to 'save' the RRSP room for dividend or interest income given the chance, where the difference is substantial. That being said, given how the vast majority treat refunds as lottery-esque windfalls, if people save at all it's a good thing!
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Hi, I am wondering if I would be able to save significant taxes by incorporating in my situation or what the best tax-saving strategy would be, especially given the tax increase expected with the new government:
Salary: $240,000, with usual payroll deductions for EI, CPP, income tax. RRSP gets max yearly contribution from payroll from salary income (but still have $80,000 room from previous years).
Self employment income: $260,000 +/- $20,000. Currently filing taxes as sole proprietor on my personal return.
(Total annual income around $500,000)
Spouse: $30,000/yr salary
Dependent: 5 yr old
Student Debt: $180,000 at 2.8%
Student Debt: $10,000 at 6% (interest tax deductible)
Mortgage: $380,000 at 2.6%, 5 yr term, amortized over 30yr to maximize cash flow in case of emergency, but I am setting aside enough each month for lump sum payments of $50,000 every year and enough to pay off the mortgage at the end of the term so I wouldn't need to renew.
From what I understand, if you can't leave money in the corporation, there isn't really a tax benefit to incorporating because of the costs and fees but I'm wondering about saving by income splitting with my spouse and if I would save by getting paid in dividends versus salary.
At this point, I basically need all of my income for expenses and debt because I just started working. I'm not sure what other strategies would be available to save.
Thank you.
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Hi, I am wondering if I would be able to save significant taxes by incorporating in my situation or what the best tax-saving strategy would be, especially given the tax increase expected with the new government:
Salary: $240,000, with usual payroll deductions for EI, CPP, income tax. RRSP gets max yearly contribution from payroll from salary income (but still have $80,000 room from previous years).
Self employment income: $260,000 +/- $20,000. Currently filing taxes as sole proprietor on my personal return.
(Total annual income around $500,000)
Spouse: $30,000/yr salary
Dependent: 5 yr old
Student Debt: $180,000 at 2.8%
Student Debt: $10,000 at 6% (interest tax deductible)
Mortgage: $380,000 at 2.6%, 5 yr term, amortized over 30yr to maximize cash flow in case of emergency, but I am setting aside enough each month for lump sum payments of $50,000 every year and enough to pay off the mortgage at the end of the term so I wouldn't need to renew.
From what I understand, if you can't leave money in the corporation, there isn't really a tax benefit to incorporating because of the costs and fees but I'm wondering about saving by income splitting with my spouse and if I would save by getting paid in dividends versus salary.
At this point, I basically need all of my income for expenses and debt because I just started working. I'm not sure what other strategies would be available to save.
Thank you.
Hi Marcus,
In a word, yes. Incorporating your business will definitely save you money if done correctly. In fact, I would say you're crazy not to in your circumstances.
You're absolutely correct in stating that the benefits of incorporation generally tend to stem from income splitting and tax deferral if you leave the funds in the company. There is some tax arbitrage in terms of dividend vs. salary, especially if you save on the payroll taxes as you would in your wife's case.
In addition - including your 5 year old as a shareholder is prudent - just don't bother with dividends or salary until they reach 18 (as the money will just be attributed as income back to you).
There are also benefits in terms of limited liability - but in the grand scheme of things you would save about 10% in taxes or potentially more.
Cheers,
CPA CB
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We are on the verge of mortgage free at 41, and ready to kick investing into high gear next year. However, I'm still tryin to figure out the TFSA vs RSP question.
Vik had a great post that helped.
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/
Vik February 9, 2015, 10:16 am
Older post, but I thought I would add to the Canadian content.
I put $$ into my RRSP at 22% – 29% Federal Tax rate [I’ll ignore the Provincial Tax rates as I contributed in 3 Provinces so it gets messy].
At 60 I’ll be getting ~$8400 CPP [2015$] and 67 I’ll get a total of ~$15,100 [2015$] CPP + OAS.
Currently the lowest Federal Tax bracket is 15% at $44.7K and below.
At 71 I’ll have to convert the RRSP to a RRIF at take out ~7% minimum which grows to ~16% over time. If my RRSP is too large I’ll end up being bumped up to a higher marginal rate tax bracket and potentially get some OAS benefits clawed back increasing my effective tax rate two ways.
It would be most advantageous to keep total income below ~$44.7K to get the biggest tax deferral benefit. At 71 that means $44.7K – $15.1 = $29.6K would be the maximum mandatory withdrawal. That corresponds to a RSSP worth $422K at 2015 $. Although keep in mind each year after 71 I’ll have to take out more $$ and that extra $$ will get taxed at the higher marginal tax rate. So it would be preferable to have shifted to even less RRSP income by this point and more TFSA or non-registered income.
My RRSP is already projected to exceed that adjusted for inflation so contributing more now will provide a much smaller deferred tax benefit than it did earlier in the program. If I am earning some unexpected income in my older years and/or tax rates go up I could quite possibly pay more tax then I would have if I had simply used the same $ for a non-registered investment.
There are a couple ways to deal with this:
1. analyze your income needs over time factoring in all sources of income. Identify any opportunities to harvest deferred tax benefits as you go along and withdraw from your RRSP at that time.
2. Stop RRSP contributions and max out TFSA accounts and then invest in non-registered accounts.
For example any year where my taxable income is less than $44.7K it makes sense to withdraw the difference from my RRSP and invest it in my TFSA or non-registered accounts. Say when I am 40 I have one year I travel a lot and only earn $15K from my consulting business [after deductions] I would take $29.7K out of my RRSP that year and see it taxed at 15% which is much lower than the 22%-29% I would have paid when I put the $$ in the RRSP and when I get to 71 I’ll have less $$ in the RRSP and reach a lower mandatory withdrawal rate.
If my projections for the later years of retirement indicate that mandatory RRSP withdrawals will be in a higher rate than what when I put them even if I jumped up to the 22% marginal rate bracket which is triggered between $44.7K and $89.4K. I might start withdrawing more from my RRSP earlier to optimize the actual taxes I pay.
Some important RRSP/TFSA tax facts
– RRSP is a tax deferral account it works best if you are making less $$ when you take the money out vs. when you put it in. If you are in a low tax bracket when you are saving you might be better off to max out your TFSA or invest in a non-registered account paying the tax owed now at the low rate and enjoying tax free income later in life.
– your RRSP only really works if you put the principal amount [say $1K] AND the tax credit [say $300] into the account. You are going to have to pay that tax later so if you spend the credit now you don’t get the full benefit of the plan.
– RRSP withdrawals become mandatory ay 71 so check the current rates and model your unavoidable income $$ in the later years to see what will happen.
– There is no penalty for early withdrawal from a RRSP. There is a witholding tax, but that is just a payment of tax owing to the Gov’t. When you file your return you will use that as tax already paid against the year’s burden. If you take your year’s RRSP withdrawal out in Dec and then file that year’s tax return as quickly as possible the next year you can minimize the amount of time the Gov’t has your money and you do not.
– you accrue TFSA contribution room every year regardless of income so you can [today 2015] put $5.5K/yr of any RRSP withdrawals into your TFSA to shelter its growth. This money is never taxed again and does not impact any income tested old age benefits.
– you will pay capital gains tax on income generated from non-registered accounts, but this is at a lower rate than the same gains inside a RRSP get taxed when you take them out [assuming you are earning the same base income at both times.
Sorry for the long comment, but it’s a topic worth thinking about.
My summary is:
– evaluate the income needs for your whole retirement [including CPP + OAS]
– project your RRSP value throughout your retirement and calculate the mandatory withdrawal income combined with CPP + OAS
– assess the likely input tax rate vs. output tax rate and use this to identify when it makes sense to put $$ in your RRSP and when to take it out.
– don’t miss out on opportunities to withdraw from your RRSP early at low tax rates if you have low income year.
– when you start using your investments to fund your lifestyle consider using RRSP $$ first until your RRSP is projected to provide a tax favourable income stream in your later years combined with CPP + OAS.
– don’t forget to max out your TFSA account every year to shelter your capital gains
– Canada has some pretty great retirement savings plans, but they take some analysis of your specific situation to get the most out of them.
— Vik
reply
Lori March 21, 2015, 8:54 am
Just remember that when you withdraw from an RRSP you don’t get that contribution room back, so you are permanently reducing your contribution limit.
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If you are making a higher income, especially over that $90,000 mark, and project low expenses in retirement, the RRSP is a great tool. But yeah, you need to be careful not to run your RRSP value too high because you don't want to get hit with high taxes and especially benefit clawbacks. So your RRSP number ultimately depends on your individual circumstances. Some important factors would be retirement age, working income, retirement expenses, and other income (dividends in taxable accounts, part time jobs, your own business, etc).
Aside from this, if you are married it would generally be smart to make sure you and your spouse end up with roughly equal RRSP account valuations so you can maximize the income and minimize the taxes when you retire (assuming you don't convert to RRIF immediately).
Personally, my goal is to build a relatively substantial RRSP account for the following reasons.
1) I make a good salary and I "re-invest" my tax refund immediately because I send in T1213 forms which reduces my taxes withheld on my paycheques
2) We plan to retire early (before 45 for sure), so I plan to withdraw lots of money for retirement expenses between 45 and 65. In fact, I aim to have virtually no RRSP money left by the time I turn 71. This means the RRSP is essentially a bridge for income. During this time my TFSA will compound nicely for 20 years making for fat tax free retirement savings when I'm 65.
3) Once I retire, I aim to withdraw about $20,000 a year each ($40,000 total) in today's dollars. The blended tax rates for this will be less than 7% once I add a few deductions. Not bad considering I'm getting about 35% back for RRSP contributions in my tax bracket.
All this said, I won't run up the value of my RRSP over somewhere around $250,000 each. If I have more to save, than I'm certainly best off to fill first the TFSA, then taxable accounts (again balanced between my wife and I for even dividend income in retirement).
I know many accountants will disagree because they see RRSP horror stories when their clients turn 71. But the value of the RRSP should not be dismissed for someone with low retirement expenses.
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If you are making a higher income, especially over that $90,000 mark, and project low expenses in retirement, the RRSP is a great tool. But yeah, you need to be careful not to run your RRSP value too high because you don't want to get hit with high taxes and especially benefit clawbacks. So your RRSP number ultimately depends on your individual circumstances. Some important factors would be retirement age, working income, retirement expenses, and other income (dividends in taxable accounts, part time jobs, your own business, etc).
Aside from this, if you are married it would generally be smart to make sure you and your spouse end up with roughly equal RRSP account valuations so you can maximize the income and minimize the taxes when you retire (assuming you don't convert to RRIF immediately).
Personally, my goal is to build a relatively substantial RRSP account for the following reasons.
1) I make a good salary and I "re-invest" my tax refund immediately because I send in T1213 forms which reduces my taxes withheld on my paycheques
2) We plan to retire early (before 45 for sure), so I plan to withdraw lots of money for retirement expenses between 45 and 65. In fact, I aim to have virtually no RRSP money left by the time I turn 71. This means the RRSP is essentially a bridge for income. During this time my TFSA will compound nicely for 20 years making for fat tax free retirement savings when I'm 65.
3) Once I retire, I aim to withdraw about $20,000 a year each ($40,000 total) in today's dollars. The blended tax rates for this will be less than 7% once I add a few deductions. Not bad considering I'm getting about 35% back for RRSP contributions in my tax bracket.
All this said, I won't run up the value of my RRSP over somewhere around $250,000 each. If I have more to save, than I'm certainly best off to fill first the TFSA, then taxable accounts (again balanced between my wife and I for even dividend income in retirement).
I know many accountants will disagree because they see RRSP horror stories when their clients turn 71. But the value of the RRSP should not be dismissed for someone with low retirement expenses.
It's absolutely valuable.
I tend to push the TFSA a bit more as truly the only drawback to this account is the cap limit presently. It's the all-purpose screwdriver of investment accounts, good for many things, just limited in terms of size.
The RRSP is a great tool - but it's more of a hammer. People need to be careful with it, or you end up hitting yourself with it.
To be clear, the MMM crowd is different from the 'average' Canadian.
RRSP refunds aren't really 'refunds', it is a tax deferral to re-invest. What we see is that people end up buying a new TV instead of reinvesting, which destroys the purpose of the RRSP in the first place. This, paired with restrictions and income related issues in retirement can lead people off a financial cliff and actually be a detriment.
In short, make sure you use the RRSP and plan it ahead of time like you Tuxedo - It's important to know how/when to use it.
Cheers
CPA CB
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If you are making a higher income, especially over that $90,000 mark, and project low expenses in retirement, the RRSP is a great tool. But yeah, you need to be careful not to run your RRSP value too high because you don't want to get hit with high taxes and especially benefit clawbacks. So your RRSP number ultimately depends on your individual circumstances. Some important factors would be retirement age, working income, retirement expenses, and other income (dividends in taxable accounts, part time jobs, your own business, etc).
Aside from this, if you are married it would generally be smart to make sure you and your spouse end up with roughly equal RRSP account valuations so you can maximize the income and minimize the taxes when you retire (assuming you don't convert to RRIF immediately).
Personally, my goal is to build a relatively substantial RRSP account for the following reasons.
1) I make a good salary and I "re-invest" my tax refund immediately because I send in T1213 forms which reduces my taxes withheld on my paycheques
2) We plan to retire early (before 45 for sure), so I plan to withdraw lots of money for retirement expenses between 45 and 65. In fact, I aim to have virtually no RRSP money left by the time I turn 71. This means the RRSP is essentially a bridge for income. During this time my TFSA will compound nicely for 20 years making for fat tax free retirement savings when I'm 65.
3) Once I retire, I aim to withdraw about $20,000 a year each ($40,000 total) in today's dollars. The blended tax rates for this will be less than 7% once I add a few deductions. Not bad considering I'm getting about 35% back for RRSP contributions in my tax bracket.
All this said, I won't run up the value of my RRSP over somewhere around $250,000 each. If I have more to save, than I'm certainly best off to fill first the TFSA, then taxable accounts (again balanced between my wife and I for even dividend income in retirement).
I know many accountants will disagree because they see RRSP horror stories when their clients turn 71. But the value of the RRSP should not be dismissed for someone with low retirement expenses.
Very smart and I'm planning the same thing. For me it's even more of a no-brainer as I'm at a 43.41% marginal tax rate. Probably though, my RRSP won't be large enough to get me from FI to 65, so I'll only start withdrawing from it once I'm 50-55 or so. Might as well keep it growing tax-deferred as long as possible.
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Another question about instalment payments.
I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.
If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?
Eg:
1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay
So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?
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So whats the difference between an RRSP and RRIF? What are the implications for someone wanting income from thier RRSP at age 50?
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So whats the difference between an RRSP and RRIF? What are the implications for someone wanting income from thier RRSP at age 50?
RRIF= you have to take money out of it. RRSP has no such restrictions.
The amount (which is a percentage) varies based on your age
http://www.cra-arc.gc.ca/E/pub/tp/ic78-18r6/ic78-18r6-e.html
IOW: Don't convert til you have to!
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So whats the difference between an RRSP and RRIF? What are the implications for someone wanting income from thier RRSP at age 50?
You can convert an RRSP to an RRIF at any time. However once you convert, you can no longer make contributions and you have to make minimum withdrawals. Before age 71 the withdrawals are really quite small. The formula is (Market Value on Jan 1 of x year) x [1/(90-age on Jan 1 of x year)]. At 45 your withdrawal would be 2.2% of portfolio value, at age 65 your withdrawal would be 4% of portfolio value. After 71, you have to draw down 7 - 20% of portfolio value, increasing each year.
If you keep it as an RRSP you can draw as much as you want but you pay 15% withholding tax at the time of withdrawal. This is essentially a downpayment for future income tax. Once you file income taxes you may owe more, or you may get a refund.
With both strategies you pay tax rates at the same rate as regular employment income, but you don't have to pay EI, CPP, etc.
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Thank you again for the excellent advice here. I am 57 and in the process of pulling the plug next spring when I turn 58. Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order, but I still have a few questions about government pension benefits.
1) CPP: According to Service Canada, I should be receiving a monthly CPP payment of $1,000 when I turn 65, or $1,400 if I wait until 70. If I stop contributing to CPP at age 58 when I stop working next year, will the amount of CPP change whether I apply at 65 or 70?
2) OAS: My understanding is that everyone who at 65 has an individual income under $118,055 is eligible to receive a maximum monthly OAS payment of $569.95. The OAS is not tied whatsoever to CPP payments so if I decide to delay CPP until I turn 70, I would still receive the maximum OAS of $569.95. Is this correct?
3) GIS: Regarding the GIS amount (me receiving OAS, my wife not receiving it), the supplement I could receive would be based on our combined income (excluding OAS Pension and GIS). Assuming my income from RRSP withdrawals is $20,000, Service Canada tells me my combined monthly OAS pension and GIS should be $1,016.38. Am I correct that when i start receiving the CPP payment at age 70, the CPP will be treated as income for the calculation of the OAS/GIS? When I convert my RRSP into a RRIF at 71, RRIF payments will be taxable, but will they also count as income for the calculation of pension payments?
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Another question about instalment payments.
I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.
If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?
Eg:
1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay
So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?
Hey Dave
If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.
The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.
For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.
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Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order
You might want to read just above in this thread, there is a discussion about how it can be beneficial for you to deplete your RRSP before you apply for OAS/GIS. So you may want to change your order of withdrawals. TFSA should always be last, as well.
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Thank you again for the excellent advice here. I am 57 and in the process of pulling the plug next spring when I turn 58. Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order, but I still have a few questions about government pension benefits.
1) CPP: According to Service Canada, I should be receiving a monthly CPP payment of $1,000 when I turn 65, or $1,400 if I wait until 70. If I stop contributing to CPP at age 58 when I stop working next year, will the amount of CPP change whether I apply at 65 or 70?
2) OAS: My understanding is that everyone who at 65 has an individual income under $118,055 is eligible to receive a maximum monthly OAS payment of $569.95. The OAS is not tied whatsoever to CPP payments so if I decide to delay CPP until I turn 70, I would still receive the maximum OAS of $569.95. Is this correct?
3) GIS: Regarding the GIS amount (me receiving OAS, my wife not receiving it), the supplement I could receive would be based on our combined income (excluding OAS Pension and GIS). Assuming my income from RRSP withdrawals is $20,000, Service Canada tells me my combined monthly OAS pension and GIS should be $1,016.38. Am I correct that when i start receiving the CPP payment at age 70, the CPP will be treated as income for the calculation of the OAS/GIS? When I convert my RRSP into a RRIF at 71, RRIF payments will be taxable, but will they also count as income for the calculation of pension payments?
Hi YK -
1) Yes, the amount will change. By exactly how much would be impossible for me to know off hand. Technically speaking, for most people it is actually better to commence the pension at Age 60 vs. 65 based on Canadian mortality rates.
2) OAS starts to be clawed back from $72,809, and is effectively $nil at the $118k figure you reference. You're right that the receipt of the payments are not related to one another.
3) Yes, RRSP and RRIF payments both count as income for the purposes of any clawback payments in regard to the OAS and GIS.
Hope this helps!
CPA CB
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Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order
You might want to read just above in this thread, there is a discussion about how it can be beneficial for you to deplete your RRSP before you apply for OAS/GIS. So you may want to change your order of withdrawals. TFSA should always be last, as well.
Very good point - I didn't see that.
This is absolutely correct as the RRSP is really a handcuff as it becomes fixed (and forced) income. Better to get rid of this sooner than your other investments.
Now, where did I put my coffee...
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Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order
You might want to read just above in this thread, there is a discussion about how it can be beneficial for you to deplete your RRSP before you apply for OAS/GIS. So you may want to change your order of withdrawals. TFSA should always be last, as well.
Very good point - I didn't see that.
This is absolutely correct as the RRSP is really a handcuff as it becomes fixed (and forced) income. Better to get rid of this sooner than your other investments.
Now, where did I put my coffee...
Thanks FI40 and CPA CB. Depleting my RRSP before CPP/OAS pension payments kick in makes complete fiscal sense now that you pointed it out. I will revise my strategy accordingly. As for CPP, I take good note of your remark about Canadian mortality rates, and check into receiving it at 60 rather than 65 or even 70.
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Another question about instalment payments.
I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.
If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?
Eg:
1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay
So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?
Hey Dave
If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.
The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.
For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.
THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?
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Another question about instalment payments.
I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.
If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?
Eg:
1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay
So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?
Hey Dave
If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.
The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.
For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.
THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?
Okay,
Let me ignore what CRA is saying and look at this practically.
If you owe $13k - you should pay $13k. Maybe pay a few bits more to ensure you aren't charged interest, but do the due diligence here and make sure you will know what you owe, and pay it as precisely as possible. I suggest TaxTips.ca as this is a good resource that is easy to use for the average person.
Under this scenario, you should owe at the most a very minimal amount of interest, and at best, nothing. Pay what you owe - don't overpay by thousands to ensure otherwise.
Does this clear it up?
CPA CB
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Another question about instalment payments.
I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.
If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?
Eg:
1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay
So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?
Hey Dave
If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.
The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.
For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.
THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?
Okay,
Let me ignore what CRA is saying and look at this practically.
If you owe $13k - you should pay $13k. Maybe pay a few bits more to ensure you aren't charged interest, but do the due diligence here and make sure you will know what you owe, and pay it as precisely as possible. I suggest TaxTips.ca as this is a good resource that is easy to use for the average person.
Under this scenario, you should owe at the most a very minimal amount of interest, and at best, nothing. Pay what you owe - don't overpay by thousands to ensure otherwise.
Does this clear it up?
CPA CB
Ya.. I think. I just don't want to pay 6% interest on some amount because I'm "under" vs the 1st and 2nd quarters. I guess the worst would be 6% on $750 for 6 months plus 6% on $750 for 3 months (as I'm under by $750 for each Q based on 13000/4 = 3250)... which is what, $22.50 + $11.25 = $33.75.
I guess then I've paid extra in the 3rd Q which offsets it ever so slightly. At 6% it seems worth paying a little extra for Q4... but when do they count it to? To when you file, or just to the end of the financial year? IE if I paid $1k over for Q4, I know the 6% offsets any interest - down to zero but no further of course - but does it do it til Dec 31, or to April 31, or when I file?
Bleh. Ok, I get it - for $30 don't worry too much!
Thanks.
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Another question about instalment payments.
I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.
If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?
Eg:
1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay
So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?
Hey Dave
If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.
The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.
For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.
THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?
Okay,
Let me ignore what CRA is saying and look at this practically.
If you owe $13k - you should pay $13k. Maybe pay a few bits more to ensure you aren't charged interest, but do the due diligence here and make sure you will know what you owe, and pay it as precisely as possible. I suggest TaxTips.ca as this is a good resource that is easy to use for the average person.
Under this scenario, you should owe at the most a very minimal amount of interest, and at best, nothing. Pay what you owe - don't overpay by thousands to ensure otherwise.
Does this clear it up?
CPA CB
Ya.. I think. I just don't want to pay 6% interest on some amount because I'm "under" vs the 1st and 2nd quarters. I guess the worst would be 6% on $750 for 6 months plus 6% on $750 for 3 months (as I'm under by $750 for each Q based on 13000/4 = 3250)... which is what, $22.50 + $11.25 = $33.75.
I guess then I've paid extra in the 3rd Q which offsets it ever so slightly. At 6% it seems worth paying a little extra for Q4... but when do they count it to? To when you file, or just to the end of the financial year? IE if I paid $1k over for Q4, I know the 6% offsets any interest - down to zero but no further of course - but does it do it til Dec 31, or to April 31, or when I file?
Bleh. Ok, I get it - for $30 don't worry too much!
Thanks.
It's counted from the later of January 1 or the initial instalment underpayment to the earlier of the due date or April 30.
In this sense - just plan for the worst and be surprised when it's slightly better.
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Hey there Can'eh'dians
I'm seeing a spike in questions regarding upcoming tax reforms that the Trudeau Government is looking to enact.
You've likely noticed I haven't made significant commentary on the subject for a few reasons - 1) Leading up to an election I didn't want to dive into political discussion, and 2) Until things are in black and white, it's hard to comment on what changes to expect.
The important thing is, contribute and top up that TFSA, lest it becomes a retroactive adjustment. A $4,500 dollar loss in room is quite substantial - better to pour the funds in now than learn you've lost the room later.
In addition - should you earn greater than about $200k per annum, be prepared for a significant (i.e. 15% increase) spike in your taxes on eligible (i.e. public corporations, or GRIP dividends from private companies).
In summary - wait and see. I'll be posting a long commentary when we get some solid figures and changes. Until then, if you earn under $200k per year, assume you'll see a few extra dollars (to be taken away by an expanded CPP). If it is more than $200k, expect a bit (lot) more in 2016.
Happy Wednesday!
CPA CB
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I have a question regarding inheritance and estate taxes. My mother passed away earlier this year. She had her monthly income from two different sources, her RRIF which is cashed out by her estate, and an annuity, which was paid out directly to me. My wife and I plan to give some money to charity in honour of my mom and I am just trying to figure out if it makes any difference from a tax perspective if the Estate makes the contribution vs me personally. The estate will have income for the year of ~160K and myself will be ~200k
I maxed out my RRSP contribution room to minimize as much taxes as I can as I don't normally fall into such a high tax bracket, but is there anything else I can do to minimize my taxes for the year? I don't have any losses that I can claim in my investment account as I only opened up a taxable account this year and my investments are slightly up.
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Posting to follow. This thread is very helpful!
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I have a question regarding inheritance and estate taxes. My mother passed away earlier this year. She had her monthly income from two different sources, her RRIF which is cashed out by her estate, and an annuity, which was paid out directly to me. My wife and I plan to give some money to charity in honour of my mom and I am just trying to figure out if it makes any difference from a tax perspective if the Estate makes the contribution vs me personally. The estate will have income for the year of ~160K and myself will be ~200k
I maxed out my RRSP contribution room to minimize as much taxes as I can as I don't normally fall into such a high tax bracket, but is there anything else I can do to minimize my taxes for the year? I don't have any losses that I can claim in my investment account as I only opened up a taxable account this year and my investments are slightly up.
Hi WPG Dude,
Sorry to hear regarding your mother.
I have some follow up questions regarding your inquiry -
For clarity, an inheritance in Canada is non-taxable to you. Technically speaking, the Estate is responsible for the tax bill.
There are two tax returns to file through an estate - the final return, and a rights and things return (which offer graduated tax rates like a regular return). The biggest advantage to a Rights and Things return is bumping accrued income due (but not yet paid) from the highest marginal rate to the lowest - such as her RRIF and Annuity payments forthcoming.
Did you commute the annuity at fair market value? Or is it just a change in beneficiary?
Her investments in the RRIF should be marked to market and either cashed out, or transferred to you. The capital gain is paid through her estate (tax wise) and you're left with the value of the shares on her date of death as your cost base.
In many cases, gifting shares of public corporations as a charitable contribution through her estate can be better than cashing out and paying fees etc.
Have the assets cleared probate at this time?
Are you including the transfer of assets in your income? If so, you shouldn't be.
Hope this helps - give me a bit more detail and I'm sure I can be more helpful
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Thank you for the reply CPA CB.
Here is some more clarity on the situation. My mother upon her retirement a few years earlier chose the buyout option from her employer and chose to purchase two annuities with the funds. The annuities had 15 year guarantees with both myself and my sister as benefactors. One of the annuities was to be paid out in full upon her death, which both my sister and I have received, while the second annuity allowed us to transfer the payments into mine and my sister's names. (Gives me another source of investing income for the next 13 years)
Her RRIF's were cashed out upon the advice of her financial adviser, with the cost basis being the value of her funds on the day of her death. All of these funds have been transferred into an estate account and my sister and I have only used this account to pay for matters with regards to settling my mother's affairs. We don't want to touch it until her 2015 taxes are filed.
Almost all of her estate cleared probate a few months ago. The only thing left is some farm land in Alberta, but it appears that farm land can be passed on tax free from a parent to child as long as the land has only ever been used for farming. The land was appraised for sale in the fall of 2014 so we are using that as our cost basis going forward.
So I know that the estate is responsible for the tax bill of her RRIF and any other investments/possessions etc. I am also positive that I am responsible personally for the income that has and will flow to me from the annuities as they had a 15 year guarantee with myself as one of the benefactors.
I am not familiar with the term "Rights and Things return", but after a quick google search it doesn't sound as if much or any income would fall under this scenario, but we will let a tax professional handle the final return.
I only learned about the gifting of shares after the RRIF was cashed out, so unfortunately this doesn't seem to be an option for us now.
Thank you for your advice so far and any other help that you can give in terms of charitable giving, and which party might be best to give the giving.
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Is there any reason to not have every one of us sign this petition to increase the TFSA limit back to $10k?
https://petitions.parl.gc.ca/en/Petition/Details?Petition=e-3
Petition to the Minister of Finance
Whereas:
About half of adult Canadians currently have Tax Free Savings Accounts (TFSAs), which is a very high level of participation in a program that has only been available since 2009. Of those TFSA holders who have taken advantage of the current $10,000 limit, 60% earn $60,000 per year or less, demonstrating that the current TFSA limit is not a tool only for the "rich";
TFSAs are an excellent retirement savings tool for seniors who can no longer take advantage of Registered Retirement Savings Plans (RRSPS), and also for young Canadians who need a tax-effective means of saving for their future;
Opinion poll data has repeatedly shown that a majority of Canadians support retaining the current TFSA limit, and this support is consistent across age groups, income levels and regions of Canada; and
Canadians currently pay 43% of their income in taxes - more than they pay for food, shelter and clothing combined. Many of these tax dollars go to provide very generous pensions for government employees - pensions that the 80% of Canadians who do not work for government cannot afford for themselves but to which they contribute tens of billions of dollars every year. Retaining the TFSA limit of $10,000 is the least the government can do to help the vast majority of Canadians working in the private sector to save for a decent retirement for themselves and their families.
We, the undersigned, residents of Canada, request (or call upon) the Minister of Finance to leave the Tax Free Savings Account (TFSA) limit at $10,000 annually to ensure fairness for all working Canadians.
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Is there any reason to not have every one of us sign this petition to increase the TFSA limit back to $10k?
https://petitions.parl.gc.ca/en/Petition/Details?Petition=e-3
Petition to the Minister of Finance
Whereas:
About half of adult Canadians currently have Tax Free Savings Accounts (TFSAs), which is a very high level of participation in a program that has only been available since 2009. Of those TFSA holders who have taken advantage of the current $10,000 limit, 60% earn $60,000 per year or less, demonstrating that the current TFSA limit is not a tool only for the "rich";
TFSAs are an excellent retirement savings tool for seniors who can no longer take advantage of Registered Retirement Savings Plans (RRSPS), and also for young Canadians who need a tax-effective means of saving for their future;
Opinion poll data has repeatedly shown that a majority of Canadians support retaining the current TFSA limit, and this support is consistent across age groups, income levels and regions of Canada; and
Canadians currently pay 43% of their income in taxes - more than they pay for food, shelter and clothing combined. Many of these tax dollars go to provide very generous pensions for government employees - pensions that the 80% of Canadians who do not work for government cannot afford for themselves but to which they contribute tens of billions of dollars every year. Retaining the TFSA limit of $10,000 is the least the government can do to help the vast majority of Canadians working in the private sector to save for a decent retirement for themselves and their families.
We, the undersigned, residents of Canada, request (or call upon) the Minister of Finance to leave the Tax Free Savings Account (TFSA) limit at $10,000 annually to ensure fairness for all working Canadians.
From a purely selfish perspective, keeping the TSFA limit where it currently sits would be in my best interests. But I think there are broader interests at stake here, which are well explained in several analysis such as these two below, which both conclude the same thing:
"There is absolutely no case — on either economic or equity grounds — for the doubling of TFSA contribution limits. The great majority of Canadians would enjoy no significant benefits. In fact, they would bear the burdens of an expanded TFSA by enduring reduced public services or bearing the increased taxes needed to offset the lost revenues," economist Rhys Kesselman, wrote in the PBO report.
http://d3n8a8pro7vhmx.cloudfront.net/broadbent/legacy_url/303/tfsa_report-en.pdf?1431294008
http://www.pbo-dpb.gc.ca/web/default/files/files/files/TFSA_2015_EN.pdf
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Is there any reason to not have every one of us sign this petition to increase the TFSA limit back to $10k?
https://petitions.parl.gc.ca/en/Petition/Details?Petition=e-3
Petition to the Minister of Finance
Whereas:
About half of adult Canadians currently have Tax Free Savings Accounts (TFSAs), which is a very high level of participation in a program that has only been available since 2009. Of those TFSA holders who have taken advantage of the current $10,000 limit, 60% earn $60,000 per year or less, demonstrating that the current TFSA limit is not a tool only for the "rich";
TFSAs are an excellent retirement savings tool for seniors who can no longer take advantage of Registered Retirement Savings Plans (RRSPS), and also for young Canadians who need a tax-effective means of saving for their future;
Opinion poll data has repeatedly shown that a majority of Canadians support retaining the current TFSA limit, and this support is consistent across age groups, income levels and regions of Canada; and
Canadians currently pay 43% of their income in taxes - more than they pay for food, shelter and clothing combined. Many of these tax dollars go to provide very generous pensions for government employees - pensions that the 80% of Canadians who do not work for government cannot afford for themselves but to which they contribute tens of billions of dollars every year. Retaining the TFSA limit of $10,000 is the least the government can do to help the vast majority of Canadians working in the private sector to save for a decent retirement for themselves and their families.
We, the undersigned, residents of Canada, request (or call upon) the Minister of Finance to leave the Tax Free Savings Account (TFSA) limit at $10,000 annually to ensure fairness for all working Canadians.
From a purely selfish perspective, keeping the TSFA limit where it currently sits would be in my best interests. But I think there are broader interests at stake here, which are well explained in several analysis such as these two below, which both conclude the same thing:
"There is absolutely no case — on either economic or equity grounds — for the doubling of TFSA contribution limits. The great majority of Canadians would enjoy no significant benefits. In fact, they would bear the burdens of an expanded TFSA by enduring reduced public services or bearing the increased taxes needed to offset the lost revenues," economist Rhys Kesselman, wrote in the PBO report.
http://d3n8a8pro7vhmx.cloudfront.net/broadbent/legacy_url/303/tfsa_report-en.pdf?1431294008
http://www.pbo-dpb.gc.ca/web/default/files/files/files/TFSA_2015_EN.pdf
Paging Dr. Keynes, Paging Dr. Keynes
First, and foremost - the Broadbent Institute, and Mr. Kesselman. Passing this off as anything other than completely biased information is nonsensical. Similarly with the PBO - hey as the government we think we do a great job, so if you give us more we can do even better.
This is no different than emailing CRA (if they even accepted email, they don't.) and saying "gee, what should I pay this year?" Hey, Dr. Suzuki, what kind of SUV should I buy?
The general falsehood here is based on the writings of John Maynard Keynes, who is a notable economist who demonstrated a theoretically correct money multiplier effect of government spending on GDP. I.e. $1 of government spending would show up as $1.25 (hypothetically) in GDP figures.
This theory has never been proven to occur in the real world.
I take issue with appeals to a 'greater good' or a 'common goal' etc. These often evoke a sense of duty (when they shouldn't) and completely ignore rationality. Keynesian economics is oft invoked by the very left leaning Broadbent Institute as a means for 'progressive' change.
Currently (at least in the have not Province of Ontario) income tax rates are about to hit a whopping 53.53% on the highest bracket. Oh, and if you pay CPP/EI add quite a bit to this. Oh, and if you spend your disposable income, add another 13% to this on what's left.
Currently, taxes are higher than housing costs, clothing, and food combined for the average Canadian household.
The TFSA, and a measly $4,500 dollar per annum increase in contribution room provides at least an incentive to save and invest their money for retirement. This is entirely opposite to the current tax cut on the middle class as proposed by Trudeau, as that only applies to the 1/3rd of Canadians who even reach this bracket.
I struggle to find any rationale where making a select group pay for 50% of the taxes collected in Canada beneficial. Similarly, I struggle to find any rationale to find any rationale to cut taxes on a broad group, which excludes both the 'rich' and the 'poor'. Well. Other than votes.
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Can you shed some light on the new "children's tax benefit"?
I just watched a video from Globe and Mail and the math looks incredibly generous. Particularly the tax free part!
My children are 10 + 13, household income of about 85 000.
Thanks!
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Can you shed some light on the new "children's tax benefit"?
I just watched a video from Globe and Mail and the math looks incredibly generous. Particularly the tax free part!
My children are 10 + 13, household income of about 85 000.
Thanks!
Hi there -
I can try! Although the details are a bit clandestine.
The new system is confusing due to this idea of 'means-testing' which isn't directly being disclosed. However, a Mathematics Prof at U of Ottawa came up with a formula which has been used as the back-end for the following website calculator: http://lepinski.net/lib-childcare-calc/
Your circumstances here would dictate a total benefit of $5,150 per annum, tax free.
My understanding is that this is to replace your old UCCB benefits ($1,440 per year), old Childcare Tax Benefit (probably around $1,000 tax free) and additional tax credits available to claim for dependents.
I would suggest it's likely revenue positive for you, as your family is right in that middle-class income tax bracket the Liberals were aiming for so heavily in the election.
The downside is that the plan really is unclear in its formulation, and cuts out everyone with family income over the $190,000 area (who would have at least around 50% of the UCCB previously after tax).
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Hi! Thanks for lending your time and expertise.
I am a single parent with two kids, one with a disability. I finished at university this year. I earn $60,000 per year and thanks to the kids, the disability, and university I have reliably had more nonrefundable credits, provincially and federally, than I can claim for the last... long time. I predict that this will continue for a few more years. at least until my school credits run out.
my question: currently I am ignoring my rrsp's, working on maxxing out my tfsa. I don't need to reduce my tax burden at present, and tax-sheltered growth is awesome. once I run out of contribution room i'll shift to the rrsp space. Is that the best strategy?
Also, I saw that you recommended against equities in an RRSP. so far all my investments are ETFs through Questrade. When I start my RRSP, what do I put in it for optimum tax advantages?
Thanks again!
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snacky, do you have the RDSP for your kid? If not, that first and foremost!! Let me know if you need help with the application.
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@scrubbyfish, I don't, as I have (not unreasonable) expectations that he will be able to have a job and get along ok when he's an adult. I won't really know how he will be until after puberty, so it's a calculated risk.
also I had him quite young, so if he needs support as an adult i'll still be working and able to help him for many years. If I retire at 55 (that's the plan) he'll be in his mid 30's.
So I have considered all this and think it's ok. Hopefully i'm not wrong!
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Hi snacky,
Even if all of those things prove true (as I expect they are for my son, too) he would still benefit from the RDSP in one or more ways. Also, the disability tax credit includes people with disabilities working in adulthood. It doesn't rely on inability to work, is flexible in disbursements permitted, can be rolled into other options, can be invested, and brings a massive grant up front each year, making your dollars many more. I don't mean to push it, though! If ever you decide you would like to pursue it, and need help navigating the language, process, etc, I will welcome your PM :) If you decide not to, no problem!
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New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?
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New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?
Duplex, never lived in by them? No, they can't claim primary residence. If ownership is split 3 ways, AFAIK income should be 'claimed' based on %age ownership. Anything else is tax fraud, unless incorporated with shareholder classes and differing dividends for the different classes.
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Hi snacky,
Even if all of those things prove true (as I expect they are for my son, too) he would still benefit from the RDSP in one or more ways. Also, the disability tax credit includes people with disabilities working in adulthood. It doesn't rely on inability to work, is flexible in disbursements permitted, can be rolled into other options, can be invested, and brings a massive grant up front each year, making your dollars many more. I don't mean to push it, though! If ever you decide you would like to pursue it, and need help navigating the language, process, etc, I will welcome your PM :) If you decide not to, no problem!
Hi Snacky
I absolutely could not agree more with Scrubbyfish's comments. The RDSP is an excellent way to save for your child's future, as disabled persons who are able to work still face a significant reduction in earning capacity in their lifetime, and forced early retirement.
There really is no reason not to!
Cheers,
CPA CB
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New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?
No, she definitely can't claim this as a principal residence if she's never lived here, nor entertained the possibility of living in the property. Strict rental properties are ineligible for this.
In addition, I agree that the income should be split amongst the owners.
A rollover into a company is possible and could be used to crystallize the small business capital gains deduction. But it has to be done very specifically as an active business, rather than just a passive investment.
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New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?
No, she definitely can't claim this as a principal residence if she's never lived here, nor entertained the possibility of living in the property. Strict rental properties are ineligible for this.
In addition, I agree that the income should be split amongst the owners.
A rollover into a company is possible and could be used to crystallize the small business capital gains deduction. But it has to be done very specifically as an active business, rather than just a passive investment.
Do you have more info on the small business stuff? We are - very vaguely - considering purchasing a commercial property with potential to have two rental units above it. The downstairs would be run as a business - at least, that's the plan. How does it work if we just let the downstairs and upstairs out? What entails an 'active' business? If you owned 3-4 rentals...? Commercial, residential?
Thanks!
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New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?
In addition, I agree that the income should be split amongst the owners.
Thanks for the info. DH keeps telling me the principal residence thing is a gray area, which I thought sounded suspicious.
WRT to the income you referred to, do you mean the rental income? Or the income that will result from selling it?
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New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?
In addition, I agree that the income should be split amongst the owners.
Thanks for the info. DH keeps telling me the principal residence thing is a gray area, which I thought sounded suspicious.
WRT to the income you referred to, do you mean the rental income? Or the income that will result from selling it?
Both.
It is a gray area, in the sense that there are few hard and fast rules on the determination. The biggest one though is that it does need to be used at least in part as a personal property.
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New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?
No, she definitely can't claim this as a principal residence if she's never lived here, nor entertained the possibility of living in the property. Strict rental properties are ineligible for this.
In addition, I agree that the income should be split amongst the owners.
A rollover into a company is possible and could be used to crystallize the small business capital gains deduction. But it has to be done very specifically as an active business, rather than just a passive investment.
Do you have more info on the small business stuff? We are - very vaguely - considering purchasing a commercial property with potential to have two rental units above it. The downstairs would be run as a business - at least, that's the plan. How does it work if we just let the downstairs and upstairs out? What entails an 'active' business? If you owned 3-4 rentals...? Commercial, residential?
Thanks!
Broadly speaking,
The best bet is sticking with commercial real estate - as renting out units at a cost which is deductible from another company's 'active business income' slots the rental income into this category for the company.
The other option is employment of more than 5 full-time employees throughout the year. So it would then be a larger enterprise and considered an active business, rather than just passive investment income.
The difference is substantial, as triggering the QSBCD is significant in terms of tax savings ($800k in appreciation of the shares of your company). The caveat here is that the assets of the business need to be used to generate 'active business income' (50% in the preceding two years, and 90% at the time of sale). This can effectively wipe out $200k in taxes on a per partner basis.
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What are the benefits of a taxable investment account holding Canadian equity vs maxing our RSP?
We are long time married, ~40 y.o., and share finances equally, although I make 2.5x her salary. Mortgage is paid off in January, so 2016 will be the first year we can invest heavily (~70% of income planned).
Currently, we plan to max our TFSAs with VCN in the next few years, as that's a no brainer. My RRSP is 4x larger than hers, and I opened a spousal RSP this past year to equalize our taxable retirement income by ending up with equal RSP values of ~400k each in 10 years or less.
We each have ~100k accumulated RSP room because we only saved 5-10% over the past 20 years (but mortgage free on 450k townhouse!), and by my calculations we will not be able to max both our RSPs in addition to our TFSAs in the next ten years.
We plan for combined 50k taxable income in retirement.
Question is - should I be opening a taxable investment account, or continue with my plan to use just our RSP accounts in addition to TFSAs? Taxable just sounds wrong, unless RSPs are maxed already. An unexpected inheritance will likely change that, but we're not planning for one.
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What are the benefits of a taxable investment account holding Canadian equity vs maxing our RSP?
We are long time married, ~40 y.o., and share finances equally, although I make 2.5x her salary. Mortgage is paid off in January, so 2016 will be the first year we can invest heavily (~70% of income planned).
Currently, we plan to max our TFSAs with VCN in the next few years, as that's a no brainer. My RRSP is 4x larger than hers, and I opened a spousal RSP this past year to equalize our taxable retirement income by ending up with equal RSP values of ~400k each in 10 years or less.
We each have ~100k accumulated RSP room because we only saved 5-10% over the past 20 years (but mortgage free on 450k townhouse!), and by my calculations we will not be able to max both our RSPs in addition to our TFSAs in the next ten years.
We plan for combined 50k taxable income in retirement.
Question is - should I be opening a taxable investment account, or continue with my plan to use just our RSP accounts in addition to TFSAs? Taxable just sounds wrong, unless RSPs are maxed already. An unexpected inheritance will likely change that, but we're not planning for one.
It really depends of your actual tax bracket vs retirement tax bracket. If like me, you actual tax rate is higher than expected retirement one, RSP is a no-brainer. Also consider your A.A. as RSP is a better place for US and Int. holdings and taxable account is better for Canadians holdings. I was in a similar situation lately (almost paid-off 350k$ house, RSP maxed out but TFSA with some room available). We are now maxing out TFSA over the next 5 years and keep an A.A. of 30-35%Canadian, 45%US and 20-25%Int.
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Hi there! What do you know of flow through funds? Have you seen them used?
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Hi there! What do you know of flow through funds? Have you seen them used?
Hi Joan,
In what context?
Cheers,
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Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...
My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?
THank you!!! Hope you had a wonderful New Years!
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Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...
My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?
THank you!!! Hope you had a wonderful New Years!
You normaly pay tax on capital gain wich is calculated by today's value minus 2011 value. Let's say "your" half worth 20,000$ back in 2011 and today it worth 30,000$, capital gain is 10,000$ but you will pay taxes on 5,000$ (50% of capital gain is taxable).
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Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...
My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?
THank you!!! Hope you had a wonderful New Years!
Hi Sweetlife -
What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).
The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -
Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.
Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!
Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.
Hope this helps!
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Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...
My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?
THank you!!! Hope you had a wonderful New Years!
Hi Sweetlife -
What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).
The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -
Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.
Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!
Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.
Hope this helps!
Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?
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New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?
No, she definitely can't claim this as a principal residence if she's never lived here, nor entertained the possibility of living in the property. Strict rental properties are ineligible for this.
In addition, I agree that the income should be split amongst the owners.
A rollover into a company is possible and could be used to crystallize the small business capital gains deduction. But it has to be done very specifically as an active business, rather than just a passive investment.
Do you have more info on the small business stuff? We are - very vaguely - considering purchasing a commercial property with potential to have two rental units above it. The downstairs would be run as a business - at least, that's the plan. How does it work if we just let the downstairs and upstairs out? What entails an 'active' business? If you owned 3-4 rentals...? Commercial, residential?
Thanks!
Broadly speaking,
The best bet is sticking with commercial real estate - as renting out units at a cost which is deductible from another company's 'active business income' slots the rental income into this category for the company.
The other option is employment of more than 5 full-time employees throughout the year. So it would then be a larger enterprise and considered an active business, rather than just passive investment income.
The difference is substantial, as triggering the QSBCD is significant in terms of tax savings ($800k in appreciation of the shares of your company). The caveat here is that the assets of the business need to be used to generate 'active business income' (50% in the preceding two years, and 90% at the time of sale). This can effectively wipe out $200k in taxes on a per partner basis.
Just wanted to add my two-cents on this.
The turning of "passive rental income" to "active rental income" only applies to "associated corporations" (too technical to get into, but essentially two corporations owned by the same shareholders). Rental income earned from a non-associated corporation is treated as "passive income", unless the employees test is met. Putting a commercial rental property into a corporation will not qualify one for the capital gains exemption. So please be aware of this.
In addition, as a result of the Canadian tax increases in 2016 there is now an even more significant tax cost on a flow-through basis (income earned and taxed in a corporation then distributed to the shareholder). Creating a corporation to hold passive investments will result in an increase in tax rather than just holding the investment personally. However, when dealing with commercial or residential real estate investments there may be liability exposures that would warrant the introduction of a corporation.
My first post, glad I came across the forum and look forward to a few more.
Cheers
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Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...
My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?
THank you!!! Hope you had a wonderful New Years!
Hi Sweetlife -
What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).
The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -
Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.
Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!
Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.
Hope this helps!
Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?
$3,800 on a $20k capital gain - yes.
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Hi there! What do you know of flow through funds? Have you seen them used?
Hi Joan,
In what context?
Cheers,
It's my understanding that the mining industry and CRA offer flow-through shares where they shareholder benefits from the expenses, in order to reduce taxes. And that if one has and influx of income they could be useful. I'd be really curious to know what you think, not many people talk about this
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Hi there! What do you know of flow through funds? Have you seen them used?
Hi Joan,
In what context?
Cheers,
It's my understanding that the mining industry and CRA offer flow-through shares where they shareholder benefits from the expenses, in order to reduce taxes. And that if one has and influx of income they could be useful. I'd be really curious to know what you think, not many people talk about this
I'll throw another of my 2 cents in here.
Flow through shares were introduced in Canada over a half-century ago to stimulate investment in resource exploration corporations. Essentially these corporations (or more often flow-through limited partnerships) renounce the exploration and development expenses to the investors holding their shares. These corporations often have no need for these expenses due to large taxable losses. The investors can then take these expenses as a reduction in their taxable income in the year.
To provide a simplified example, let's assume an investor in the highest marginal tax bracket of 50% (a hypothetical bracket but in 2016 many provinces will exceed 50%). The investor puts in $10,000 into the investment.
In the year of investment (let's say 2016) the investor can generally expect the full amount of the investment basis to be returned through the renunciation of expenses. As such the investor would receive a deduction from income in the amount of $10,000 from income, and would reduce their taxes payable by $5,000. This potentially reduces their risk in the investment as they have received a refund of half their investment.
The cost base in the investment is reduced to nil in flow through shares as a result of the renunciation. Assuming the shares retain their value of $10,000. When they are sold this would generate a capital gain, which is included at 50%, for a taxable capital gain of $5,000. The taxes payable on this would be $2,500 (50% x $5,000).
An investor in this situation is ahead $2,500. They received a refund of $5,000 and paid only $2,500 in tax. They also received their investment back. Sounds great right? Why isn't everyone doing this?
These products are a favourite for investment brokers, they often come with a very healthy commission to those who sell them. I would strongly recommend that you understand these investments fully before throwing money into them. Many of people I have talked with have only been able to remember the great tax refund they received, but not how they ultimately did on the investment (which may have been at a large loss).
These investments carry significant risk. In our example we assumed that the investor receives their $10,000 back. However, this is often not the case. These entities often post very large losses and their value is often significantly less than the $10,000 after the renunciation of expenses - even with the renunciation they may still have lost money.
A very flashy investment product that promises a large tax refund. But, I am a big fan of the saying "Do not let the tax tail wag the dog". Make sure you understand the risk associated with these investments before entering them. If you take a look at the literature produced by the entities that distribute these investments they almost always assume the investment retains it's value, which is rarely the case.
These investments do work in the right situations but you must look at each situation on it's own facts. (and if you are not in the highest income bracket likely not a consideration).
Hope this helps a little. Let me know if anything above isn't clear.
Cheers.
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Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...
My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?
THank you!!! Hope you had a wonderful New Years!
Hi Sweetlife -
What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).
The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -
Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.
Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!
Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.
Hope this helps!
Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?
$3,800 on a $20k capital gain - yes.
Thank you both!!! I will print this out to show my brother next time it comes up :) He tends to steam roll over me so this way hopefully it won't go south :)
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Hi there! What do you know of flow through funds? Have you seen them used?
Hi Joan,
In what context?
Cheers,
It's my understanding that the mining industry and CRA offer flow-through shares where they shareholder benefits from the expenses, in order to reduce taxes. And that if one has and influx of income they could be useful. I'd be really curious to know what you think, not many people talk about this
I'll throw another of my 2 cents in here.
Flow through shares were introduced in Canada over a half-century ago to stimulate investment in resource exploration corporations. Essentially these corporations (or more often flow-through limited partnerships) renounce the exploration and development expenses to the investors holding their shares. These corporations often have no need for these expenses due to large taxable losses. The investors can then take these expenses as a reduction in their taxable income in the year.
To provide a simplified example, let's assume an investor in the highest marginal tax bracket of 50% (a hypothetical bracket but in 2016 many provinces will exceed 50%). The investor puts in $10,000 into the investment.
In the year of investment (let's say 2016) the investor can generally expect the full amount of the investment basis to be returned through the renunciation of expenses. As such the investor would receive a deduction from income in the amount of $10,000 from income, and would reduce their taxes payable by $5,000. This potentially reduces their risk in the investment as they have received a refund of half their investment.
The cost base in the investment is reduced to nil in flow through shares as a result of the renunciation. Assuming the shares retain their value of $10,000. When they are sold this would generate a capital gain, which is included at 50%, for a taxable capital gain of $5,000. The taxes payable on this would be $2,500 (50% x $5,000).
An investor in this situation is ahead $2,500. They received a refund of $5,000 and paid only $2,500 in tax. They also received their investment back. Sounds great right? Why isn't everyone doing this?
These products are a favourite for investment brokers, they often come with a very healthy commission to those who sell them. I would strongly recommend that you understand these investments fully before throwing money into them. Many of people I have talked with have only been able to remember the great tax refund they received, but not how they ultimately did on the investment (which may have been at a large loss).
These investments carry significant risk. In our example we assumed that the investor receives their $10,000 back. However, this is often not the case. These entities often post very large losses and their value is often significantly less than the $10,000 after the renunciation of expenses - even with the renunciation they may still have lost money.
A very flashy investment product that promises a large tax refund. But, I am a big fan of the saying "Do not let the tax tail wag the dog". Make sure you understand the risk associated with these investments before entering them. If you take a look at the literature produced by the entities that distribute these investments they almost always assume the investment retains it's value, which is rarely the case.
These investments do work in the right situations but you must look at each situation on it's own facts. (and if you are not in the highest income bracket likely not a consideration).
Hope this helps a little. Let me know if anything above isn't clear.
Cheers.
Everything our newest and presumed CA says above is correct.
In addition - the CRA heavily audits FTS as it's been a subject of abuse previously. This can mean an arbitrary change to your tax return that would reverse the expenses and capital flow through and a change to interest or a deemed dividend, etc.
Personally I've never really recommended people get into these vehicles, or mining stocks in general. The Financial Statements are prepared under a specific set of rules which make it all but impossible to compare to other stocks unless you are very financially sophisticated.
CPA CB
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Thank you so much for the details! Do you have first hand experience with increased audits when people use them?
I'm further called to question when it might be worth taking an unpaid leave because of taxes.
I'm in a once in a lifetime situation in which I will hit the 51% tax bracket. (Commuting a pension)
Since the pension is splittable, is the cv amount splittable with hubby in this tax year ?
Can any business expenses be used against the cv amount?
I'm trying to envision what the tax implications, strategies and opportunities are. What sort of "income" is the money treated as?
Any advice?
Just for some preliminary info, how much above the maximum tax-deferred transfer to a locked in plan are you looking at?
Also assuming no RRSP contribution room available?
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Where can I get information about small business tax & structure?
I want to run a few scenarios.
A) Self employed make 60K claim as an individual. (Anticipated situation for 2016, if we have a good year & change nothing)
Or
B) Form a business and pay myself salary of 30K and keep 30k in the business.
Or
C) Form a business and pay myself dividends of 30K and keep 30k in the business.
Or maybe some combo if B&C
I think I would prefer a sol proprietorship but if there are any tax advantages me & my SO may be partners. Currently SO "Volounters" with the "business" a bit. But SO makes salary more than 60K so income splitting doesn't make sense right now.
I know very little about this so if someone can point me to a few reliable sites I'm eager to learn.
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Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...
My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?
THank you!!! Hope you had a wonderful New Years!
Hi Sweetlife -
What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).
The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -
Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.
Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!
Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.
Hope this helps!
Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?
$3,800 on a $20k capital gain - yes.
Ok one more question to this ... is it possible to put the proceeds from the sale directly into RRSP's to avoid capital gains (I have room there )? Is there any way to avoid capital gains? (I have to ask as I just found out (the family) is putting up our jointly owned property (200 acres) for sale this year (two of the 5 of us want their money out - so the way the will was written it gets sold). Which means capital gains on this property as well... ugh I have a headache just thinking of the tax implications.
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CPA CB,
I have a question about child care expense deductions. The deduction limit is currently sitting at $8000 dollars per child. If I have two children under the age of 6 can I only claim $8k per child or are the deductions transferrable between children. For example, if we incur expenses of $10,000 for one child and $6000 for the other can we still claim the full $16,000? Form T778 (http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-15e.pdf) seems to imply that you can based on the way the calculations are presented and I couldn't find anything in the instructions that clarified the situation one way or another.
Thanks.
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Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...
My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?
THank you!!! Hope you had a wonderful New Years!
Hi Sweetlife -
What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).
The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -
Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.
Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!
Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.
Hope this helps!
Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?
$3,800 on a $20k capital gain - yes.
Ok one more question to this ... is it possible to put the proceeds from the sale directly into RRSP's to avoid capital gains (I have room there )? Is there any way to avoid capital gains? (I have to ask as I just found out (the family) is putting up our jointly owned property (200 acres) for sale this year (two of the 5 of us want their money out - so the way the will was written it gets sold). Which means capital gains on this property as well... ugh I have a headache just thinking of the tax implications.
If the property is to be sold there is no way to "avoid" the tax on the capital gains. As you mentioned though, you can put the proceeds into a RRSP contribution to "defer" the taxation on this (the taxation will occur when you withdraw the RRSP amounts in the future).
To determine the availability of this you should first look to see what your contribution room available is from your 2014 Notice of Assessment (be sure to update this to the 2015 amount when you file your tax return this April - as the sale will occur in 2016 at the earliest).
Second you should then look to see what the total capital gains would be on the property. To do this you would need to see what the 200 acres were valued at on your mothers death, and what the estimated property sale would be. The excess of the sale price less the value on death is the capital gain. If you own a 1/5 interest take this capital gain and multiply by 20% to get your portion of the capital gain. Take your capital gain and multiply it by 50%. If your contribution room available is greater than this amount, you can put the full amount of taxable capital gain into your RRSP and will not incur a tax bill in the year of disposition.
Hope this helps a little - sorry I got a little "mathy". Cheers.
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Where can I get information about small business tax & structure?
I want to run a few scenarios.
A) Self employed make 60K claim as an individual. (Anticipated situation for 2016, if we have a good year & change nothing)
Or
B) Form a business and pay myself salary of 30K and keep 30k in the business.
Or
C) Form a business and pay myself dividends of 30K and keep 30k in the business.
Or maybe some combo if B&C
I think I would prefer a sol proprietorship but if there are any tax advantages me & my SO may be partners. Currently SO "Volounters" with the "business" a bit. But SO makes salary more than 60K so income splitting doesn't make sense right now.
I know very little about this so if someone can point me to a few reliable sites I'm eager to learn.
If you google Tax Tips Small Business Canada you should be able to find a lot of information online regarding the incorporation of a business from a sole proprietorship. That being said, at the $60,000 income level I think you are a little premature in looking at incorporation at this time.
One advantage of incorporation is the concept of limited liability, in that the corporation is a separate entity and as a result it is the corporation's assets and not your own that are at risk should things go south. That being said, any lenders will likely request personal guarantees on any corporate financing so the advantage of this protection may be limited. If you are in a litigious area of business, or do not have adequate insurance coverage on operations this may be something to consider. This would be something to speak to your lawyer about however in terms of liability risks of the business.
The second advantage is that of tax deferral. Small businesses receive significant tax incentives in the form of lower corporate tax rates to a certain income threshold ($500,000). This is not a permanent tax savings as when the earnings are paid out to shareholders in the form of dividends they pay higher taxes than those paid from corporations who do not enjoy the lower tax rates. There is a concept of integration in the Canadian tax system that holds that income earned through a sole proprietorship, vs. income earned through a corporation should be taxed at the same rate - at the end of the day the taxpayer should have the same amount of after-tax dollars in their jeans. The theory doesn't work in every province, but for the sake of our discussion today let's just assume that perfect integration exists.
At the $60,000 income amount your effective tax rate is approximately 19.5% in Ontario (assuming just the basic personal tax credits). The corporate tax rate on small business income in Ontario is 15.5%. So at this income level if you leave all the income in the corporation and do not withdraw any of it you have a tax deferral of 4% or $2,400. When you pay this income out to yourself in the form of a dividend this deferral is gone and you pay the $2,400 in tax. The tax rates differ in all provinces, but the concept of integration holds the same in all provinces (more or less).
This is an extreme case where you needed $0 in income, so at a maximum in Ontario you are looking at a 4% tax deferral, and in monetary terms $2,400. When you are drawing income out to live on this deferral shrinks further.
This is my long-winded way of saying at the $60,000 income amount, in my opinion, you are best off sticking with a sole-proprietorship for tax purposes (you may want to visit the concept of legal liability with someone). Assuming you have RRSP contribution room available, by making contributions to an RRSP of the cash that you do not require you will reduce your tax burden further.
The cost to maintain a corporation, incorporation costs, corporate tax returns, annual filings, etc. do not warrant a corporation for tax purposes at this time.
Let me know if this helps. Cheers.
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Where can I get information about small business tax & structure?
I want to run a few scenarios.
A) Self employed make 60K claim as an individual. (Anticipated situation for 2016, if we have a good year & change nothing)
Or
B) Form a business and pay myself salary of 30K and keep 30k in the business.
Or
C) Form a business and pay myself dividends of 30K and keep 30k in the business.
Or maybe some combo if B&C
I think I would prefer a sol proprietorship but if there are any tax advantages me & my SO may be partners. Currently SO "Volounters" with the "business" a bit. But SO makes salary more than 60K so income splitting doesn't make sense right now.
I know very little about this so if someone can point me to a few reliable sites I'm eager to learn.
Hi K-Ice
Thanks for your question.
No Can't in Canada has responded with some of the pros & cons -
To add however, I think it is a more complex and nuanced issue, and is very much circumstantial.
Firstly, it depends on your outlook for the business. If you foresee yourself continuing to churn along at the $60k mark, or if you're investing in growing your business. In this sense, it can make sense to get your ducks in a row early. What type of business is it?
Secondly, family - income splitting opportunities are available, not just with your wife, but also with children in the future. It's certainly worth consideration.
Tax deferral is certainly am important element. It's true, at $60k the quantum of savings from deferral isn't substantial. That being said, the ability to pick and choose income, slot away funds in the corporation and invest on a pre-tax basis, and eventually split income is a real selling point.
Taxtips is a decent resource. I also like to read Entreprenuer.com - it doesn't offer "Canadian" material per say, but often it does address small business issues such as this. In a broad sense, the issues are just as applicable in the US as Canada.
Hope this helps!
CPA CB
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Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...
My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?
THank you!!! Hope you had a wonderful New Years!
Hi Sweetlife -
What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).
The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -
Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.
Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!
Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.
Hope this helps!
Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?
$3,800 on a $20k capital gain - yes.
Ok one more question to this ... is it possible to put the proceeds from the sale directly into RRSP's to avoid capital gains (I have room there )? Is there any way to avoid capital gains? (I have to ask as I just found out (the family) is putting up our jointly owned property (200 acres) for sale this year (two of the 5 of us want their money out - so the way the will was written it gets sold). Which means capital gains on this property as well... ugh I have a headache just thinking of the tax implications.
Hi Sweetlife -
Is this a farm, by chance?
Otherwise there isn't really an opportunity to defer the capital gain.
RRSP's are one way to go. I would recommend paying a portion of this into an RRSP potentially, and focus on maxing out the TFSA.
As stated with the other property, it depends on the valuation on the date of demise for your mother on the property. If this occurred recently, there's a good chance there won't be a significant tax impact on you.
It seems like you've got a lot going on this year - I would definitely recommend getting in touch with a Chartered Accountant prior to the sale to make sure it's planned appropriately (in advance) rather than just dealing with the consequences as they arise.
Hope this helps!
CPA CB
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CPA CB,
I have a question about child care expense deductions. The deduction limit is currently sitting at $8000 dollars per child. If I have two children under the age of 6 can I only claim $8k per child or are the deductions transferrable between children. For example, if we incur expenses of $10,000 for one child and $6000 for the other can we still claim the full $16,000? Form T778 (http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-15e.pdf) seems to imply that you can based on the way the calculations are presented and I couldn't find anything in the instructions that clarified the situation one way or another.
Thanks.
Hi Jam,
It's $8,000 per child, but not 'globally' $16,000.
That being said, many expenses can realistically be split between children in a way that would maximize the utilizable value for you. I wouldn't call this 'by the book' (at least not in CRA's eyes) but I think it's a reasonable interpretation of the Income Tax Act (if your assumptions in split are reasonable).
Cheers
CPA CB
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Good afternoon CPA CB!
This is a fantastic thread, and it's terrific to see someone with your expertise volunteer time and advice to others!
Unfortunately, I think I may have (foolishly) put myself in a precarious tax position, when preparing to use the Home Buyers Plan.
A) In November 2015 I submitted over $25,000 into my RRSP, with the intention of using it for the HBP after the 90 day period.
This home purchase (and use of the funds) will likely occur in 2016.
B) I am concerned about the over contribution penalties, chance for 2015 tax refund, and future tax effects.
My 2015 RRSP deduction limit is only $9,527. I carry forward Tuition/ textbook credits as well.
C) I pay tax on each work paycheque.
D) I only worked about 7/12 months in 2015 as I graduated mid-year.
Do you have any suggestions about how I should approach this tax year, and the Home Buyers Plan? Am I misunderstanding this as an issue?
I will provide more detail, if it is needed as well. :)
Thank you for all of your contributions to the forum!
SC
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Good afternoon CPA CB!
This is a fantastic thread, and it's terrific to see someone with your expertise volunteer time and advice to others!
Unfortunately, I think I may have (foolishly) put myself in a precarious tax position, when preparing to use the Home Buyers Plan.
A) In November 2015 I submitted over $25,000 into my RRSP, with the intention of using it for the HBP after the 90 day period.
This home purchase (and use of the funds) will likely occur in 2016.
B) I am concerned about the over contribution penalties, chance for 2015 tax refund, and future tax effects.
My 2015 RRSP deduction limit is only $9,527. I carry forward Tuition/ textbook credits as well.
C) I pay tax on each work paycheque.
D) I only worked about 7/12 months in 2015 as I graduated mid-year.
Do you have any suggestions about how I should approach this tax year, and the Home Buyers Plan? Am I misunderstanding this as an issue?
I will provide more detail, if it is needed as well. :)
Thank you for all of your contributions to the forum!
SC
Hi SC
It's my pleasure helping out and giving back. I'm glad you're finding this useful.
Regarding the RRSP - eek!
RRSP over-contributions are taxed at 1% per month of the overcontributed amount - so 1% of approximately $15k+ per month overdue from the sounds of it.
Advice is to withdraw this immediately. This will help to minimize the tax impact here as 1% gets expensive quite quickly. You'll pay a whopper of withholding taxes in the meantime (and it will be treated as income in 2016) but you can apply for a deduction using the T746 form.
It sounds like you'll be able to contribute an addition $18k this year based on your contribution level from last year. Once you withdraw, you can re-contribute to offset some of the tax impact here as well. Just be prudent and ensure you're on-side in order to avoid this issue in the future, as it is a bit of a headache to correct (as you can see).
Good luck!
CPA CB
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Good afternoon CPA CB!
This is a fantastic thread, and it's terrific to see someone with your expertise volunteer time and advice to others!
Unfortunately, I think I may have (foolishly) put myself in a precarious tax position, when preparing to use the Home Buyers Plan.
A) In November 2015 I submitted over $25,000 into my RRSP, with the intention of using it for the HBP after the 90 day period.
This home purchase (and use of the funds) will likely occur in 2016.
B) I am concerned about the over contribution penalties, chance for 2015 tax refund, and future tax effects.
My 2015 RRSP deduction limit is only $9,527. I carry forward Tuition/ textbook credits as well.
C) I pay tax on each work paycheque.
D) I only worked about 7/12 months in 2015 as I graduated mid-year.
Do you have any suggestions about how I should approach this tax year, and the Home Buyers Plan? Am I misunderstanding this as an issue?
I will provide more detail, if it is needed as well. :)
Thank you for all of your contributions to the forum!
SC
Don't forget you are allowed a $2,000 one-time over-contribution that is penalty free (but not tax-deductible). Based on your income do you think you will have an RRSP limit for 2016 that exceeds $13473 ($25000 - $9527 - $2000)? Just do some quick math to figure out 18% of earned income in 2015.
CPACB can correct me here, but my understanding is if your 2016 contribution limit exceeds $13473, you could just leave it in the account at this point. You would only pay tax on the over contribution from November - December 31.
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Hi Tuxedo,
First off, thank you very much for taking the time to respond to my dilemma!
My 2016 Contribution room would likely not exceed $13,4673, as I only worked for 7 Months in 2015, after graduating. The $25,000 was actually given to me by my family, to put towards the new house. It was then recommended to me, that I put it in the HBP (which is regrettable). I took the recommendation at face value unfortunately! Lesson learned.
I had Taxable Earnings of $26,263 in 2015, and am set to earn $50,000 before tax in 2016.
Thank you both for your advice,
SC
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Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...
My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?
THank you!!! Hope you had a wonderful New Years!
Hi Sweetlife -
What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).
The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -
Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.
Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!
Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.
Hope this helps!
Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?
$3,800 on a $20k capital gain - yes.
Ok one more question to this ... is it possible to put the proceeds from the sale directly into RRSP's to avoid capital gains (I have room there )? Is there any way to avoid capital gains? (I have to ask as I just found out (the family) is putting up our jointly owned property (200 acres) for sale this year (two of the 5 of us want their money out - so the way the will was written it gets sold). Which means capital gains on this property as well... ugh I have a headache just thinking of the tax implications.
Hi Sweetlife -
Is this a farm, by chance?
Otherwise there isn't really an opportunity to defer the capital gain.
RRSP's are one way to go. I would recommend paying a portion of this into an RRSP potentially, and focus on maxing out the TFSA.
As stated with the other property, it depends on the valuation on the date of demise for your mother on the property. If this occurred recently, there's a good chance there won't be a significant tax impact on you.
It seems like you've got a lot going on this year - I would definitely recommend getting in touch with a Chartered Accountant prior to the sale to make sure it's planned appropriately (in advance) rather than just dealing with the consequences as they arise.
Hope this helps!
CPA CB
Yes CPA CB there is definitely ALOT going on lol...
The 1/2 acre I own with my brother is on a farm (an acre carved out and severed years ago but I think it is still considered farm land)
The 1/5 of the 200 acres is now considered "rental property" (it used to be farm but upon my oldest brother being in charge of it, it was turned into "rental property" - we rent out the available "farmland" to a farmer for $10,000 per year.
The 1 acre was valued at $60,000 at the time of Mom's death. The 200 acre farm was valued at $1.3 million
I really wish this all would have been sold prior to Mom's death and the money spent on her ... you cannot (or maybe you can) imagine the infighting going on over this crap...
Thanks again for the help ... I am in WAYYYYY over my head on this one.
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CPA,
My 40 y.o. wife had a BC LIRA account with ~$5k in it, transferred from a previous employers pension.
I've worked with our banks brokerage to unlock the LIRA and move the funds to her RSP account, using the small account value provision to allow accessing the funds before standard LIRA locked in funds. This allows her to add funds or sell for allocation balancing.
The bank simply asked for a letter asking for direction to unlock the LIRA and transfer the securities in kind, plus a Form 4 for my permission to unlock her LIRA.
Are there any tax or legal implications my bank may not have advised us? (Besides obvious income taxes after we eventually take funds out of her RSP)
Thanks!
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From part 4. http://www.fic.gov.bc.ca/pdf/Pensions/BCLIRAAddendum.pdf
Lump-sum payment of small account balance
9 (l)
On application by the owner of this locked-in retirement account, the locked-in retirement account issuer will pay to the owner the lump-sum amount referred to in section 69 (2) of the Act and section 107 of the Regulation if, on the date of the application,
(a) the balance of the locked-in retirement account does not exceed 20% of the Year's Maximum Pensionable Earnings (YMPE) under the Canada Pension Plan for the calendar year in which the application is made, or
(b) the owner is at least 65 years of age and the balance of this locked-in retirement account does not exceed 40% of the YMPE for the calendar year in which the application is made.
http://www.fic.gov.bc.ca/index.aspx?p=pension_plans/forms
For more if anyone's interested in unlocking their LIRA
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Just want to make sure I've got this whole mess right(ish) now:
I had to pay cap gains tax to the UK for what was Canada FY 2014 - sold a rental property.
I have updated/added lines 431 and 433 (which gets put into 405). With all the other stuff in my returns, it works out that I had to pay the UK about $6000 in CAD; this works out as only giving me back about $4000 from Canada.
What I then missed was putting the difference in as an expense - so $6k - $4k = $2k expense on line 232.
Am I missing anything? I thought under the DTA I'd get nearly everything back...
-
I own some ZCN shares (canadian stocks index ETF) in a taxable account. It pays dividend at the end of the year (ex-div. date Dec. 24th, record-date Dec. 29th) but the pay-date was January 7th 2016. Are these dividends will be taxable for 2015 or 2016?
Samething for interest paid for investment purpose. Does the december's interest are deductibles for 2015 if I paid for on January 5th 2016?
It's the first year I do this, so next year I will just continue with the same method.
-
I have a question regarding business income and expenses. My wife started a small business in our house, to the tune of a few hundred a month in revenue. We had to buy some equipment to get the business started, most of which were purchased in December. She had a couple of clients in Dec but it didn't really start picking up until January, so as a result her expenses in the last year far exceeded her revenue. Can she somehow carry those expenses forward to this year to offset her revenue?
-
I own some ZCN shares (canadian stocks index ETF) in a taxable account. It pays dividend at the end of the year (ex-div. date Dec. 24th, record-date Dec. 29th) but the pay-date was January 7th 2016. Are these dividends will be taxable for 2015 or 2016?
Samething for interest paid for investment purpose. Does the december's interest are deductibles for 2015 if I paid for on January 5th 2016?
It's the first year I do this, so next year I will just continue with the same method.
Should just be the income listed on your T5 form that will be sent by the brokerage. Its been a while since I've got a T5 because of my house purchase a few years back, but I believe it counts for the year in which you actually receive the deposit in your account (pay-date).
-
I own some ZCN shares (canadian stocks index ETF) in a taxable account. It pays dividend at the end of the year (ex-div. date Dec. 24th, record-date Dec. 29th) but the pay-date was January 7th 2016. Are these dividends will be taxable for 2015 or 2016?
Samething for interest paid for investment purpose. Does the december's interest are deductibles for 2015 if I paid for on January 5th 2016?
It's the first year I do this, so next year I will just continue with the same method.
Should just be the income listed on your T5 form that will be sent by the brokerage. Its been a while since I've got a T5 because of my house purchase a few years back, but I believe it counts for the year in which you actually receive the deposit in your account (pay-date).
Thank you Tuxedo, what about the interests then?
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CPA,
My 40 y.o. wife had a BC LIRA account with ~$5k in it, transferred from a previous employers pension.
I've worked with our banks brokerage to unlock the LIRA and move the funds to her RSP account, using the small account value provision to allow accessing the funds before standard LIRA locked in funds. This allows her to add funds or sell for allocation balancing.
The bank simply asked for a letter asking for direction to unlock the LIRA and transfer the securities in kind, plus a Form 4 for my permission to unlock her LIRA.
Are there any tax or legal implications my bank may not have advised us? (Besides obvious income taxes after we eventually take funds out of her RSP)
Thanks!
Hi Heckler,
I think you're covered here as you'll fall under the provisions. Ultimately it's one tax protected account rolling over to the next, so it shouldn't have any impact this year.
Cheers,
CPA CB
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Just want to make sure I've got this whole mess right(ish) now:
I had to pay cap gains tax to the UK for what was Canada FY 2014 - sold a rental property.
I have updated/added lines 431 and 433 (which gets put into 405). With all the other stuff in my returns, it works out that I had to pay the UK about $6000 in CAD; this works out as only giving me back about $4000 from Canada.
What I then missed was putting the difference in as an expense - so $6k - $4k = $2k expense on line 232.
Am I missing anything? I thought under the DTA I'd get nearly everything back...
Hey Dave,
The tricky part with international tax and treaties is that the government here uses an algorithm to 'grind down' the amount of tax credits given.
Essentially, it takes into account the amount of foreign income vs. canada source income, and uses this as a mechanism to derive your foreign income tax credit. The idea (in theory) is that if you pay 6k in the UK, and owe 7k in Canada, the tax credit will work out to cover your taxes payable to around the $1k area... It's rarely perfect in practice, as your foreign vs. canadian source income affects the calculation so heavily...
-
I have a question regarding business income and expenses. My wife started a small business in our house, to the tune of a few hundred a month in revenue. We had to buy some equipment to get the business started, most of which were purchased in December. She had a couple of clients in Dec but it didn't really start picking up until January, so as a result her expenses in the last year far exceeded her revenue. Can she somehow carry those expenses forward to this year to offset her revenue?
What kind of equipment? I assume this is a sole proprietorship?
What I would recommend is 'capitalizing' the equipment (i.e. it is an asset of the business) and depreciating it over the life of the equipment (which is prescribed in the Income Tax Act - Look at Capital Cost Allowance Rates). This will help to defer the expense to 2016 and beyond (depending on the equipment class).
Hope this helps!
-
I own some ZCN shares (canadian stocks index ETF) in a taxable account. It pays dividend at the end of the year (ex-div. date Dec. 24th, record-date Dec. 29th) but the pay-date was January 7th 2016. Are these dividends will be taxable for 2015 or 2016?
Samething for interest paid for investment purpose. Does the december's interest are deductibles for 2015 if I paid for on January 5th 2016?
It's the first year I do this, so next year I will just continue with the same method.
Should just be the income listed on your T5 form that will be sent by the brokerage. Its been a while since I've got a T5 because of my house purchase a few years back, but I believe it counts for the year in which you actually receive the deposit in your account (pay-date).
Thank you Tuxedo, what about the interests then?
Hi LB,
So interest paid on income invested all the way up to December 31st is deductible for tax purposes in your 2015 fiscal year. It's in your Schedule 4 on your tax return.
As far as the ETF - this should be reported either on a T3 or T5, so you will see the amounts total for the year. The way these etfs distribute capital differs based on the investment (ROC, Capital Gain Dist., Dividend, Interest/Investment Income) so it is very specific to the fund in question.
Cheers,
CPA CB
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My 11 year old has received his first tax slip from CRA, "taxable" income of $3000.
At what age is a person required to file a tax return?
If not required at 11, is there an advantage to an 11 year old filing?
-
I have a question regarding business income and expenses. My wife started a small business in our house, to the tune of a few hundred a month in revenue. We had to buy some equipment to get the business started, most of which were purchased in December. She had a couple of clients in Dec but it didn't really start picking up until January, so as a result her expenses in the last year far exceeded her revenue. Can she somehow carry those expenses forward to this year to offset her revenue?
What kind of equipment? I assume this is a sole proprietorship?
What I would recommend is 'capitalizing' the equipment (i.e. it is an asset of the business) and depreciating it over the life of the equipment (which is prescribed in the Income Tax Act - Look at Capital Cost Allowance Rates). This will help to defer the expense to 2016 and beyond (depending on the equipment class).
Hope this helps!
Thanks, this does help. The business is indeed a sole proprietorship. It's a hair styling business and some of the equipment could be considered capital, such as her station and chair, hair sink, standing dryer, etc. I don't think modifications to the house can be as these are more like maintenance expenses (had to modify some water supply and drain lines to accommodate the sink).
-
Just want to make sure I've got this whole mess right(ish) now:
I had to pay cap gains tax to the UK for what was Canada FY 2014 - sold a rental property.
I have updated/added lines 431 and 433 (which gets put into 405). With all the other stuff in my returns, it works out that I had to pay the UK about $6000 in CAD; this works out as only giving me back about $4000 from Canada.
What I then missed was putting the difference in as an expense - so $6k - $4k = $2k expense on line 232.
Am I missing anything? I thought under the DTA I'd get nearly everything back...
Hey Dave,
The tricky part with international tax and treaties is that the government here uses an algorithm to 'grind down' the amount of tax credits given.
Essentially, it takes into account the amount of foreign income vs. canada source income, and uses this as a mechanism to derive your foreign income tax credit. The idea (in theory) is that if you pay 6k in the UK, and owe 7k in Canada, the tax credit will work out to cover your taxes payable to around the $1k area... It's rarely perfect in practice, as your foreign vs. canadian source income affects the calculation so heavily...
Thanks - just want to confirm I'm entering the right stuff on the right lines, though - 431/433 and the un-refunded/credited amount on 232?
-
I have not been able to find any concrete information on whether the controversial 'income splitting' or Family Tax Credit will be allowed to be claimed for 2015. Anyone know for certain if it is on or off the table? I know that it was one of our young, hot PM's election promises, just not certain if it is off the books for 2015 or if it will survive one more tax year and be caput in 2016 tax year. Thanks.
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I have not been able to find any concrete information on whether the controversial 'income splitting' or Family Tax Credit will be allowed to be claimed for 2015. Anyone know for certain if it is on or off the table? I know that it was one of our young, hot PM's election promises, just not certain if it is off the books for 2015 or if it will survive one more tax year and be caput in 2016 tax year. Thanks.
FTC is good for 2015, will be gone for 2016.
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Hi again CPA CB (or other tax savvy people),
I have decided to close my home business for the 2015 tax year. It was a photography business for which I purchased gear for. I therefore have claimed CCA over the life of the business. I sold some equipment in 2015, but decided to keep some for personal use going forward.
I would like to know what my CCA obligations are for closing this business. Rough numbers follow:
UCC Start of Year = $6000
2015 CCA = $1000
2015 Disposition (Sale to others) = $2000
2015 Disposition (Fair Market Value of stuff kept) = $2500
Q - This will have the effect of claiming a $500 loss for the business year, correct?
Q - Is this ok?
Q - Do I have an obligation to "zero" out the amounts (ie - add $500 more to dispositions)?
Thanks!
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I have not been able to find any concrete information on whether the controversial 'income splitting' or Family Tax Credit will be allowed to be claimed for 2015. Anyone know for certain if it is on or off the table? I know that it was one of our young, hot PM's election promises, just not certain if it is off the books for 2015 or if it will survive one more tax year and be caput in 2016 tax year. Thanks.
FTC is good for 2015, will be gone for 2016.
That's correct
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I have a basic question about capital gains. I know that cap gains is based on your marginal tax rate for the year the gain occurred. Does the marginal rate include only your employment income, or is it employment income plus the cap gain?
For example, if the gain is several hundred thousand dollars, will it bump you into the 47.7% bracket?
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I have a basic question about capital gains. I know that cap gains is based on your marginal tax rate for the year the gain occurred. Does the marginal rate include only your employment income, or is it employment income plus the cap gain?
For example, if the gain is several hundred thousand dollars, will it bump you into the 47.7% bracket?
It's a progressive system. You go progressively from one bracket to the next. Yes that much gain will put a portion into the top bracket. But you'll only pay half the tax on cap gains (but it's counted fully in terms of bracket progression, if that makes sense - it gets halved after other calculations).
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Re-posting from just over a week ago, in case anyone knows:
My 11 year old has received his first tax slip from CRA, "taxable" income of $3000.
At what age is a person required to file a tax return?
If not required at 11, is there an advantage (soon or in the distant future) to an 11 year old filing?
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Hi scrubbyfish,
There is no age requirement of when to file...but sometimes it is beneficial to file depending on the circumstances.
As per CRA:
Do you have to file a return?
You must file a return for 2015 if any of the following situations apply:
You have to pay tax for 2015.
We sent you a request to file a return.
You and your spouse or common-law partner elected to split pension income for 2015. See lines 115, 116, 129, and 210.
You received working income tax benefit (WITB) advance payments in 2015.
You disposed of capital property in 2015 (for example, if you sold real estate or shares) or you realized a taxable capital gain (for example, if a mutual fund or trust attributed income to you, or you are reporting a capital gains reserve you claimed on your 2014 return).
You have to repay any of your old age security or employment insurance benefits. See line 235.
You have not repaid all amounts withdrawn from your registered retirement savings plan (RRSP) under the Home Buyers’ Plan or the Lifelong Learning Plan. For more information, go to Home Buyers' Plan (HBP) or see Guide RC4112, Lifelong Learning Plan (LLP).
You have to contribute to the Canada Pension Plan (CPP). This can apply if for 2015 the total of your net self-employment income and pensionable employment income is more than $3,500. See line 222.
You are paying employment insurance premiums on self-employment and other eligible earnings. See lines 317 and 430.
Even if none of these requirements apply, you can file a return if any of the following situations apply:
You want to claim a refund.
You want to claim the WITB for 2015.
You want the GST/HST credit (including any related provincial credits). For example, you may be eligible if you turn 19 before April 2017.
You or your spouse or common-law partner want to begin or continue receiving Canada child tax benefit payments, including related provincial or territorial benefit payments.
You or your spouse or common law partner want to claim the family tax cut. See line 423.
You have incurred a non-capital loss (see line 236) in 2015 that you want to be able to apply in other years.
You want to carry forward or transfer the unused part of your tuition, education, and textbook amounts. See line 323.
You want to report income for which you could contribute to an RRSP and/or a pooled registered pension plan (PRPP) to keep your RRSP/PRPP deduction limit for future years current.
You want to carry forward the unused investment tax credit on expenditures you incurred during the current year See line 412.
You receive the guaranteed income supplement or allowance benefits under the old age security program. You can usually renew your benefit by filing your return by April 30. If you choose not to file a return, you will have to complete a renewal form. This form is available from Service Canada.
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Hi again CPA CB (or other tax savvy people),
I have decided to close my home business for the 2015 tax year. It was a photography business for which I purchased gear for. I therefore have claimed CCA over the life of the business. I sold some equipment in 2015, but decided to keep some for personal use going forward.
I would like to know what my CCA obligations are for closing this business. Rough numbers follow:
UCC Start of Year = $6000
2015 CCA = $1000
2015 Disposition (Sale to others) = $2000
2015 Disposition (Fair Market Value of stuff kept) = $2500
Q - This will have the effect of claiming a $500 loss for the business year, correct?
Q - Is this ok?
Q - Do I have an obligation to "zero" out the amounts (ie - add $500 more to dispositions)?
Thanks!
Hi there,
Yes - you can claim the loss - but in this case it is what is known as a "Terminal Loss", rather than just a disposition.
You can only claim a Terminal Loss when all assets in that class are disposed of. Given that you're closing the business, this will be the case. In theory you're deemed to have disposed all of the assets upon closing the business (and distributing the proceeds).
Cheers,
CPA CB
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Hi again CPA CB (or other tax savvy people),
I have decided to close my home business for the 2015 tax year. It was a photography business for which I purchased gear for. I therefore have claimed CCA over the life of the business. I sold some equipment in 2015, but decided to keep some for personal use going forward.
I would like to know what my CCA obligations are for closing this business. Rough numbers follow:
UCC Start of Year = $6000
2015 CCA = $1000
2015 Disposition (Sale to others) = $2000
2015 Disposition (Fair Market Value of stuff kept) = $2500
Q - This will have the effect of claiming a $500 loss for the business year, correct?
Q - Is this ok?
Q - Do I have an obligation to "zero" out the amounts (ie - add $500 more to dispositions)?
Thanks!
Hi there,
Yes - you can claim the loss - but in this case it is what is known as a "Terminal Loss", rather than just a disposition.
You can only claim a Terminal Loss when all assets in that class are disposed of. Given that you're closing the business, this will be the case. In theory you're deemed to have disposed all of the assets upon closing the business (and distributing the proceeds).
Cheers,
CPA CB
Awesome CPA CB - I did confirm all this with a retired CA (my father).
Thanks for starting this thread so long ago. I'll probably be back :)
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Re-posting from just over a week ago, in case anyone knows:
My 11 year old has received his first tax slip from CRA, "taxable" income of $3000.
At what age is a person required to file a tax return?
If not required at 11, is there an advantage (soon or in the distant future) to an 11 year old filing?
RRSP contribution room can accumulate for the child. I first filed at 15, according to the CRA records (I checked my CRA account, it has my history since 1991). I recommend using Simpletax (free software) and filing electronically.
I also recommend getting a CRA MyAccount to track it. SimpleTax (and others) and the CRA should be linking in the future to autofill the tax return, they have already started.
One last hurrah for the CRA. Last year the CRA used their power to fill in my RRSP contribution for $300 I forgot to claim, that's right the CRA found me an extra deduction (I found it after I filed, was going to just sit on it till this year rather than re-file). Yay Canada.
http://www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/menu-eng.html
The small amounts don't require tax payments, there's no downside to filing that I know of.
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Thanks, Prairie Stash! :)
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Hi again CPA CB (or other tax savvy people),
I have decided to close my home business for the 2015 tax year. It was a photography business for which I purchased gear for. I therefore have claimed CCA over the life of the business. I sold some equipment in 2015, but decided to keep some for personal use going forward.
I would like to know what my CCA obligations are for closing this business. Rough numbers follow:
UCC Start of Year = $6000
2015 CCA = $1000
2015 Disposition (Sale to others) = $2000
2015 Disposition (Fair Market Value of stuff kept) = $2500
Q - This will have the effect of claiming a $500 loss for the business year, correct?
Q - Is this ok?
Q - Do I have an obligation to "zero" out the amounts (ie - add $500 more to dispositions)?
Thanks!
Hi there,
Yes - you can claim the loss - but in this case it is what is known as a "Terminal Loss", rather than just a disposition.
You can only claim a Terminal Loss when all assets in that class are disposed of. Given that you're closing the business, this will be the case. In theory you're deemed to have disposed all of the assets upon closing the business (and distributing the proceeds).
Cheers,
CPA CB
Awesome CPA CB - I did confirm all this with a retired CA (my father).
Thanks for starting this thread so long ago. I'll probably be back :)
My pleasure! Glad to help!
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I own some ZCN shares (canadian stocks index ETF) in a taxable account. It pays dividend at the end of the year (ex-div. date Dec. 24th, record-date Dec. 29th) but the pay-date was January 7th 2016. Are these dividends will be taxable for 2015 or 2016?
Samething for interest paid for investment purpose. Does the december's interest are deductibles for 2015 if I paid for on January 5th 2016?
It's the first year I do this, so next year I will just continue with the same method.
Should just be the income listed on your T5 form that will be sent by the brokerage. Its been a while since I've got a T5 because of my house purchase a few years back, but I believe it counts for the year in which you actually receive the deposit in your account (pay-date).
Thank you Tuxedo, what about the interests then?
Hi LB,
So interest paid on income invested all the way up to December 31st is deductible for tax purposes in your 2015 fiscal year. It's in your Schedule 4 on your tax return.
As far as the ETF - this should be reported either on a T3 or T5, so you will see the amounts total for the year. The way these etfs distribute capital differs based on the investment (ROC, Capital Gain Dist., Dividend, Interest/Investment Income) so it is very specific to the fund in question.
Cheers,
CPA CB
" interest paid on income invested all the way up to December 31st" so, if the december's interests (1st-31st) have been "paid" on january 5th, they dont belong for 2015 (reported to next year)?
Also, the T5 slip report some "Foreign non-business income" (18.06$) and foreign non-business income tax paid (-0.97$)
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Last spring, I had to pay 1,000$ for resigning a buying offer (agreement and fees)
Long story short, asbestos was found at many places in the building and we didn't want to deal with this when DIY renovations. It's dangerous for health and cost a lot of $$ to remove by specialized firm.
Is there a way I can recover something through my 2015 taxes? My point is our goal was to buy this for a rental project. I kept every documents just in case...
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Re-posting from just over a week ago, in case anyone knows:
My 11 year old has received his first tax slip from CRA, "taxable" income of $3000.
At what age is a person required to file a tax return?
If not required at 11, is there an advantage (soon or in the distant future) to an 11 year old filing?
I just finished reading a tax tips book in which it was recommended for minors to file tax returns just so they would get the contribution room for RRSP.
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I have a T5008 statement from my brokerage but it doesn't have any of the box numbers the tax software is asking for. It doesn't have any boxes for that matter, just a summary of what I traded, when and for how much.
The brokerage said they'd be sending out another document mid-March but I take this information with a grain of salt considering how clueless they've been in the past.
Am I missing a document or do I need to somehow infer the boxes numbers from that T5008 statement?
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I live in BC.
If I am going to hold VCN, VUN, VEE, VDU and VAB in my portfolio is there are dividend tax benefit to holding only VCN in my non-registered account vs. US or international ETF dividends?
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I live in BC.
If I am going to hold VCN, VUN, VEE, VDU and VAB in my portfolio is there are dividend tax benefit to holding only VCN in my non-registered account vs. US or international ETF dividends?
Yes there is. For tax purposes, once you're investing in cash (taxable) accounts, it's most efficient to put your Canadian exposure there. With VCN most of your distributions will be in the form of Canadian-eligible dividends which are taxed at a much lower rate. Particularly once you've retired and have less income at the regular tax rates.
http://www.taxtips.ca/taxrates/bc.htm
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Yes there is. For tax purposes, once you're investing in cash (taxable) accounts, it's most efficient to put your Canadian exposure there. With VCN most of your distributions will be in the form of Canadian-eligible dividends which are taxed at a much lower rate. Particularly once you've retired and have less income at the regular tax rates.
http://www.taxtips.ca/taxrates/bc.htm
Thank you. :)
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Hello,
I have a question about the Liberal's new Child Tax Benefit. It is based on the "adjusted
family net income" and I'm wondering how that is calculated? If for example a family makes 100K, but puts 10K into an RRSP and pays 20K in tax, would the benefit be based on 100K or the 70K?
Best,
Carla
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Hello,
I have a question about the Liberal's new Child Tax Benefit. It is based on the "adjusted
family net income" and I'm wondering how that is calculated? If for example a family makes 100K, but puts 10K into an RRSP and pays 20K in tax, would the benefit be based on 100K or the 70K?
Best,
Carla
I think it will be line 236 of your tax return - net income combined with your spouse/partner if you have one.
My family net income is Total - RRSP -$8000 Daycare expenses. $8000 in the 2015 maximum amount you can claim, claimed by lower earner in dual households, if you paid more than that it doesn't matter, if you paid less than use that amount.
Using your example it would be $100,000-$10,000= $90,000.
Please note it hasn't passed yet, March 22, 2016 is the date to watch. The pledge was to start payments in July.
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Can anyone give me an ELI5 explaination on (or link me one) taxes for taxable accounts? Everything I am reading is way over my head.
We will soon run out of RRSP/TFSA space. Thus, we will invest in VCN in a taxable account at Questrade. So far I have figured out that we should not DRIP it because it complicates our ACB (I'm still not clear on what an ACB is). For regular contributions, does it make any difference to the simplicity of our accounting to do a yearly contribution? Quarterly? Monthly?
When dividends are distributed we will reinvest them. But we still must pay tax on them for that tax year, right (same as you'd pay interest on a taxable HISA)? I've never gotten or seen a T5 slip, so is all of the info we need for declaring our dividends on that slip?
What if we eventually sell- what exactly should we be keeping track of ourselves? Or do we just need the T5 slip? If we can't figure out how to do the taxes on this ourselves, what do I need to supply an accountant with?
For the record, I've read this CCP article and the white page associated with it and I have NO CLUE what it is saying. http://canadiancouchpotato.com/2013/04/04/calculating-your-adjusted-cost-base-with-etfs/
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Can anyone give me an ELI5 explaination on (or link me one) taxes for taxable accounts? Everything I am reading is way over my head.
We will soon run out of RRSP/TFSA space. Thus, we will invest in VCN in a taxable account at Questrade. So far I have figured out that we should not DRIP it because it complicates our ACB (I'm still not clear on what an ACB is). For regular contributions, does it make any difference to the simplicity of our accounting to do a yearly contribution? Quarterly? Monthly?
When dividends are distributed we will reinvest them. But we still must pay tax on them for that tax year, right (same as you'd pay interest on a taxable HISA)? I've never gotten or seen a T5 slip, so is all of the info we need for declaring our dividends on that slip?
What if we eventually sell- what exactly should we be keeping track of ourselves? Or do we just need the T5 slip? If we can't figure out how to do the taxes on this ourselves, what do I need to supply an accountant with?
For the record, I've read this CCP article and the white page associated with it and I have NO CLUE what it is saying. http://canadiancouchpotato.com/2013/04/04/calculating-your-adjusted-cost-base-with-etfs/
AFAIK, unless you DRIP *directly* - ie through Computershare or CST - you do not need to keep an ACB record yourself. Your broker will do this all for you.
ACB is adjusted cost basis. If you buy 100 shares of VCN for $5, and 100 more for $10, you have 200 shares which cost you $7.50 each - NOT 100 you can sell for $12 and only pay cap gains on the $2 profit per share. Shares are 'fungible' meaning, like a coin or note, it doesn't matter which share you have - a share is a share. Basically the govt doesn't want you selling only the shares with minimal gains (or most losses!) - they make you average it out.
An ACB sheet is actually not that painful. I have to do it because I DO own shares directly. You just have to log every reinvested dividend and purchase you make. Some of the DRIPs I do have discounts when you reinvest the divis.
For VCN, because it contains Canadian companies, the tax you will have to pay will be little. You are paying tax on the divis, though, yes. You get a weird gross up and credit on your taxes but it's fine. If Canadian divis were your only income, you could receive roughly $40k a year before having to pay a significant amount of tax (though things like the Ontario health premium thing still apply as normal).
For a simple ETF buy you should get all the info you need on a slip. The slip is pretty clear. I believe you'll also get a T5008, statement of activity with the broker. THAT is where you get the buy/sell stuff from - your T5 only deals with distributions (divis).
It's not falling off a log easy, but it's not hard either. Perhaps just do a couple of buys in your first year - but make sure you get over $50 in divis else they are not obliged to do a T5. I have DRIPs I started late in a year that I didn't get slips for (of course, you can work out the numbers, but it's MUCH more of a pain).
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I have a capital gains question.
My father owns a piece of property that he purchased for $12,000 and is now worth $1,500,000. It is a sentimental family property and he wishes to leave it to my brothers and I when he passes. I was learning about capital gains and estate planning and realized there may be a large tax bill that occurs when that happens, unless it is declared as his primary residence.
He says it is his primary residence, however he does not live there. He live a mile away with his girlfriend, and has for many years. He is still legally married to my mother and his girlfriend is also still legally married, so they can not be declared as common law (or rather adult interdependent relationship, in Alberta). It is, to my knowledge, the only piece of property he owns with a house on it (the rest is farmland).
My question, to avoid a quarter million dollar capital gains tax bill in the future, is, how does he legally insure that his property is listed as his primary residence, even though he doesn't live there. His girlfriend's house is HER primary residence, but because they can't be listed as common law, it's not also his primary residence. Correct?
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Hello,
I have a question about the Liberal's new Child Tax Benefit. It is based on the "adjusted
family net income" and I'm wondering how that is calculated? If for example a family makes 100K, but puts 10K into an RRSP and pays 20K in tax, would the benefit be based on 100K or the 70K?
Best,
Carla
I think it will be line 236 of your tax return - net income combined with your spouse/partner if you have one.
My family net income is Total - RRSP -$8000 Daycare expenses. $8000 in the 2015 maximum amount you can claim, claimed by lower earner in dual households, if you paid more than that it doesn't matter, if you paid less than use that amount.
Using your example it would be $100,000-$10,000= $90,000.
Please note it hasn't passed yet, March 22, 2016 is the date to watch. The pledge was to start payments in July.
Thank you!
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Hi there! Great thread here! I have an exciting LIRA question...
I just found out that if i terminated today from my company and decided to have my pension commuted the values breakdown as follows:
-$280,000 goes to a tax sheltered spot (i assume whats left of rrsp room and the rest an LIRA )
-$111,000 in cash (taxable).
So my question is how do I make use of the locked in money (LIRA)? I plan on working until at least age 38 (32 now) so these numbers should be significantly higher. Would I be able to use my LIRA money at such an early age? My personal investments in RRSPs are already maxed and will continue to be. My retirement plan would be to combine the commuted value of the pension with my personal investments as my source of income after I quit.
Everything I read doesn't seem to touch on using the locked up money pre age 55. I did read that there may be a loop hole to unlock the funds at age 47 which is the early retirement age of my plan, but .i would want it even earlier.
Any thoughts??
Max
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Hi there! Great thread here! I have an exciting LIRA question...
I just found out that if i terminated today from my company and decided to have my pension commuted the values breakdown as follows:
-$280,000 goes to a tax sheltered spot (i assume whats left of rrsp room and the rest an LIRA )
-$111,000 in cash (taxable).
So my question is how do I make use of the locked in money (LIRA)? I plan on working until at least age 38 (32 now) so these numbers should be significantly higher. Would I be able to use my LIRA money at such an early age? My personal investments in RRSPs are already maxed and will continue to be. My retirement plan would be to combine the commuted value of the pension with my personal investments as my source of income after I quit.
Everything I read doesn't seem to touch on using the locked up money pre age 55. I did read that there may be a loop hole to unlock the funds at age 47 which is the early retirement age of my plan, but .i would want it even earlier.
Any thoughts??
Max
I went through the same a while ago. The $280,000 would normally all be required to go into the LIRA account. The $111,000 can be put to any remaining personal RRSP room and the balance must be taxed and paid in cash. You can apply to unlock LIRA accounts, but it certainly does not appear to be a straight forward, easy process. It generally covers hardship, special circumstances, or small amounts. I would simply plan to draw down your RRSP first and then apply to unlock the LIRA once the RRSP runs low and you can provide a better case for unlocking that account. The rules do differ a bit based on each province or the federal rules.
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I went through the same a while ago. The $280,000 would normally all be required to go into the LIRA account. The $111,000 can be put to any remaining personal RRSP room and the balance must be taxed and paid in cash. You can apply to unlock LIRA accounts, but it certainly does not appear to be a straight forward, easy process. It generally covers hardship, special circumstances, or small amounts. I would simply plan to draw down your RRSP first and then apply to unlock the LIRA once the RRSP runs low and you can provide a better case for unlocking that account. The rules do differ a bit based on each province or the federal rules.
Thanks for the reply! I did not realize that it was the cash portion that can be allocated to remaining RRSP room, good to know. I kind of figured I would have to plan to just draw down my accessible moneys until I trully needed the locked up money, at which point it may be easier to retrieve. I live in Ontario which I believe has sightly less forgiving regs compared to Alberta as far as locked in accounts go.
Max
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Thanks, Prairie Stash! :)
I am fairly sure that if your child reports his income, you will lose $3,000 worth of eligible dependant tax credits which is worth $750 in Alberta.
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Thanks, lostamonkey! I have an accountant do my (slightly complex) taxes, so I will double-check with him about where to declare my kid's income. There was also a news mention of declaring a kid's UCCB on the kid income line or something. Too confused already, and my brain left me about a week ago so I'll just take it all to the accountant when the final slips come in. I'm grateful to each person's input on this one!
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Max, go to the source for your LIRA question. It's different in each province.
Here's the general area you want to start digging around.
https://www.fsco.gov.on.ca/en/pensions/lockedin/Pages/nonhardshipunlocking.aspx
I just unlocked my wife's BC Lira and moved the ETF to her RSP so we could add funds to it. Mind you, that was $5k moved under the small amounts provision. It was as simple as asking my account provider to take care of it, and we signed one GovBC form. However, you might be stuck with it locked in, being such a high value.
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Hi CPA,
First of all, thank you so much for what you are doing here. Now for "boring" (really interesting) tax questions!
Me: Full time employed. 100K income RRSP: 116 000 (Maxed), Have no TFSAs (45K in room).
Spouse: Full time government employee. 70K income RRSP: 28 000 (15K Contribution Room), Have no TFSAs (45K in room).
Other income: 3 year old, newly incorporated side business for 2016, boomed and earned 100K in 2015, and hoping to maintain that level going forward. Currently have 20K in corporate account.
Notes: Spouse will have a good pension and intends to work until 50-55. 400K owed on mortgage, 1 year old child.
No other debt. Both of us are under 30.
The goal: (Yes this is not near a lean as the true mustachian). Mortgage paid and me FIRE in 12 years with 1.5 million being the target. Not relying on any future business income. Estimated required savings will be 5000 per month to hit this goal, plus making $3300 in mortgage payments.
The question: The business allows us to maintain a nice lifestyle, but still save substantially. Money from the business has been used to pay off all debt but the mortgage and put into our RRSPs. Should we pull money from the company (declare dividends) to max out the TFSAs, or just hold investments in the company, and if so, what kind of investments are better from a tax perspective. I decided against a permanent life insurance policy owned by the company for a few reasons (perhaps you can support/refute that decision). Corporate class funds?
Will not pretend that this is not a great problem to have, but none the less, one that I could use an unbiased opinion on!
Thanks in advance.
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Hi CPA,
First of all, thank you so much for what you are doing here. Now for "boring" (really interesting) tax questions!
Me: Full time employed. 100K income RRSP: 116 000 (Maxed), Have no TFSAs (45K in room).
Spouse: Full time government employee. 70K income RRSP: 28 000 (15K Contribution Room), Have no TFSAs (45K in room).
Other income: 3 year old, newly incorporated side business for 2016, boomed and earned 100K in 2015, and hoping to maintain that level going forward. Currently have 20K in corporate account.
Notes: Spouse will have a good pension and intends to work until 50-55. 400K owed on mortgage, 1 year old child.
No other debt. Both of us are under 30.
The goal: (Yes this is not near a lean as the true mustachian). Mortgage paid and me FIRE in 12 years with 1.5 million being the target. Not relying on any future business income. Estimated required savings will be 5000 per month to hit this goal, plus making $3300 in mortgage payments.
The question: The business allows us to maintain a nice lifestyle, but still save substantially. Money from the business has been used to pay off all debt but the mortgage and put into our RRSPs. Should we pull money from the company (declare dividends) to max out the TFSAs, or just hold investments in the company, and if so, what kind of investments are better from a tax perspective. I decided against a permanent life insurance policy owned by the company for a few reasons (perhaps you can support/refute that decision). Corporate class funds?
Will not pretend that this is not a great problem to have, but none the less, one that I could use an unbiased opinion on!
Thanks in advance.
I would max out RRSPs every single year due to your pretty high salaries and invest all of this into US and International stocks (ex. 65%VTI and 35%VXUS)
Then, top out both TFSA (if you have 0$ now, then room is 46.5k$) and the best investment for TFSA are canadian stocks and/or bonds
A neat, simple and efficient asset allocation I would do in your situation? your RRSP (116k$) ALL into VTI, your spouse RRSP (43k$) ALL into VXUS. Both TFSA into VCN (or if you are fearful, one of your TFSA into VCN and the other one into VSB.
This would be very tax efficient, simple, low cost, low maintenance and the final result would be 100% stock (37% canadian, 46% US and 17% International) or 82%stock (19% canadian, 46% US and 17% International) and 18% canadian bonds.
Did you think about RESP? You can put another 2.5k$/year and grab the grant (20%). The best place to invest this is canadian stock and/or bonds.
Dividends are pretty tax efficient so you could pull few thousands every year (unless your company may need it)
To reach FI, you do not have to be mortgage free. You can reduce your mortgage to a level you are comfortable with (let say 200k$ for example) but investing, even in a taxable account, is a better way to be FI early. In meantime, always get the lowest mortgage rate you can (variable or fixed 1 year) and let roll.
About that insurance thing, I will let someone else help you...
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Thanks for the reply Barbu.
We are not concerned about what funds per se. Perhaps I was not clear enough.
A) Holding investments within the company (having only been taxed at approximately 15%), having for money to invest now, and cashing out later, paying taxes when the money has to be taken out of the company, still through a declared dividend. Not quite as beneficial as an RRSP in the terms of tax deferral, but I'm uncertain how the gains in the company would be treated tax-wise.
B) Taking the money out of the company with dividends now, and investing with less "after-tax" money. Less money invested now, but primarily tax free when it comes time to use it.
To answer your other question, yes RESP is currently maxed for the little one, and would prefer to be mortgage free. Those numbers I used let me hit my savings number and be mortgage free at the same time.
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Thanks for the reply Barbu.
We are not concerned about what funds per se. Perhaps I was not clear enough.
A) Holding investments within the company (having only been taxed at approximately 15%), having for money to invest now, and cashing out later, paying taxes when the money has to be taken out of the company, still through a declared dividend. Not quite as beneficial as an RRSP in the terms of tax deferral, but I'm uncertain how the gains in the company would be treated tax-wise.
B) Taking the money out of the company with dividends now, and investing with less "after-tax" money. Less money invested now, but primarily tax free when it comes time to use it.
To answer your other question, yes RESP is currently maxed for the little one, and would prefer to be mortgage free. Those numbers I used let me hit my savings number and be mortgage free at the same time.
If you decide to leave the money in your company until you sell it, you could benefit of capital gain exemption wich is a lot better than dividends but reduce your personal cashflow meanwhile.
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Thanks for the reply Barbu.
We are not concerned about what funds per se. Perhaps I was not clear enough.
A) Holding investments within the company (having only been taxed at approximately 15%), having for money to invest now, and cashing out later, paying taxes when the money has to be taken out of the company, still through a declared dividend. Not quite as beneficial as an RRSP in the terms of tax deferral, but I'm uncertain how the gains in the company would be treated tax-wise.
B) Taking the money out of the company with dividends now, and investing with less "after-tax" money. Less money invested now, but primarily tax free when it comes time to use it.
To answer your other question, yes RESP is currently maxed for the little one, and would prefer to be mortgage free. Those numbers I used let me hit my savings number and be mortgage free at the same time.
Hi Cowboy -
This is a joint reply here to both messages - but first I want to narrow something down.
This is a very common problem for Entrepreneurs - getting cash out of a successful business can be taxing (ha) but sometimes worthwhile. However - everyone misses this question.
Do you have investments in your own business, which would provide a significant ROI? There is absolutely no point in buying index funds, when you're sitting on the opportunity to invest in the business and double it in the first year.
So - if the answer to the above is yes - just do it.
If no - a few things.
1) Investments held in the company are NOT eligible for the CCPC deduction, as they are not considered active business income. These earnings would be considered "GRIP" (general rate income pool) deductions - so they are eligible for enhanced dividend tax credits when you take it down personally, but it is taxed at the 30% ish rate.
2) Holding cash/investments in the business will exempt you from the capital gains deduction unless you plan ahead. You need 50% of assets used in active business income for the two years prior to sale, and 90% at the time of sale, to qualify for this CCPC deduction. It's not a huge deal with planning - but it can mean taking lots of dividends suddenly down the road.
3) TFSA investments are great - RRSP's are great to some extent - however if your spouse will be earning a significant pension in retirement, it takes away much of the benefits of the RRSP.
4) Take advantage of owning the business. If you have a home office, car needed for the business, etc. etc., take a portion of your 'personal' expenses and transfer them to the business! Charge the business rent for the home office space (based on square footage) and deduct this on the corporate return. These little things can be extraordinarily helpful, and will help pay down that mortgage faster.
Life insurance in the company is a wonderful way to pull out money tax free down the road. The issue is obviously the expense and the necessity to have a valuation performed on the policy prior to pulling the cash out. I wouldn't recommend it at this point for you, but perhaps in a few years.
Hope this is helpful,
CPA CB
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Hi CPA,
The business currently operates entirely online. Expenses are minimal, mainly home office and advertising. Previously they were claimed on our personal returns, now, yes, we will be shifting them to the corporation. As such, it also requires minimal investment to operate. Financial resources of the business will have little to no impact on its growth.
The life insurance things is really weighing on me right now. I'm uncertain of if it is a better option than just pulling the money and investing it personally. I see the tax free aspect of it, and how the cash valuation can grow, but I'm uncertain if that will play into the timeline correctly
Premium would be just under 10K for 20 years, so it's neither cheap, nor short term. I know pulling out early would be a waste, but I also know getting in at a young healthy age is advantageous. The cost isn't a concern in the sense of not having the money or impeding cash flow - it's that it's large sum that would have to be committed long term - and I'm unable to determine if that's a better play or not. Again looking to be FI in 12-13 years, so I don't know if drawing on other investments before that matures would make it work, or if it's not going to work, but I keeping hearing if you can affording it, it's got a lot of pros. Trying to get an unbiased assessment from someone educated enough to speak about it, but not trying to sell it to me!! :D
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Hi CPA,
The business currently operates entirely online. Expenses are minimal, mainly home office and advertising. Previously they were claimed on our personal returns, now, yes, we will be shifting them to the corporation. As such, it also requires minimal investment to operate. Financial resources of the business will have little to no impact on its growth.
The life insurance things is really weighing on me right now. I'm uncertain of if it is a better option than just pulling the money and investing it personally. I see the tax free aspect of it, and how the cash valuation can grow, but I'm uncertain if that will play into the timeline correctly
Premium would be just under 10K for 20 years, so it's neither cheap, nor short term. I know pulling out early would be a waste, but I also know getting in at a young healthy age is advantageous. The cost isn't a concern in the sense of not having the money or impeding cash flow - it's that it's large sum that would have to be committed long term - and I'm unable to determine if that's a better play or not. Again looking to be FI in 12-13 years, so I don't know if drawing on other investments before that matures would make it work, or if it's not going to work, but I keeping hearing if you can affording it, it's got a lot of pros. Trying to get an unbiased assessment from someone educated enough to speak about it, but not trying to sell it to me!! :D
Hi Cowboy -
An unbiased opinion on insurance? What's that??? Haha.
It's a tough question in fairness and is only partially tax oriented but I will give it a go in better detail for you.
Pros
1) You're insured early and at low mortality rates
2) Ability to borrow against the plan value tax free (and repay upon demise through the estate)
3) The life insurance upon demise is tax free
4) It can be highly valuable if the business remains active for decades
Cons
1) Once you're in - you're in
2) It is somewhat expensive
3) Uncertainty regarding future performance of the business
4) Uncertainty that this loophole may be closed in future (possible, but the insurance lobby is quite strong)
The perfect candidate for this plan is a young professional (doctor, lawyer, etc.) who just started their practice. They have decades of practice ahead of them, consistent high earnings, and certainty of cash flow. In addition, they have tremendous job security (as the boss) and will continue to practice until late in life. People always need Doctors and Lawyers and (hopefully) Accountants.
By contrast, you have a one year-old online business with little overhead and high profitability. It could be a flash in the pan one-off business, or it could be a thirty year profit generator. It's harder to say, but with what little information I have, I'm more likely to lean on the former versus the latter.
In this case, committing to a plan two decades out doesn't seem like it is in your best interests. Remember you can always adjust this in a few years after you see more consistency in earning potential, maybe then it would be worthwhile.
The more consistent the business, the longer you plan to operate, the better this insurance "scheme" works.
Hopefully this helps!
Cheers,
CPA CB
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Every year, I think I've got things straight and going forward I'll know all I need to know. Every year, some oddness comes up and leaves me scratching my head...
This year's: I'm using the CRA's auto-download thingy. It's pulled in T5008 info from Questrade.
I closed one account with them. For the things that were in that account, it's showing info in box 21 (proceeds), but nothing in box 20 (cost). WTF do I do with that?! I'm using SimpleTax - if I select "Capital" as the "Type of Income", it then seems to assume a zero cost basis and I get dinged cap gains on the entire proceeds. Can I fill in my own ACB in box 20?! Or do I need to not submit those slips (per Simple Tax's help: if there is nothing in box 20, you may not need to submit...). Does this all get straightened out with a T3 somehow (coming at the end of the month, apparently).
Also for one security, they have the currency as USD, but haven't filled in an exchange rate, just the value in USD. Do I need to work that out myself, too (this one also doesn't have anything in box 20...).
If I look at Questrade's T5008 pdf you can download, it isn't broken down into boxes or anything - it is literally just a summary. Date, amount, security, price, total. In another account, I have the downloaded T5008, but there has been nothing put into SimpleTax - is that because there have, as yet, been no sales from this account?
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It is your responsability to track and report acurate ACB, you can use adjustedcostbase.ca to do so.
I am also waiting some T5 but this use to come late. Are you talking about individual stock, ETF or other kind of investment?
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Every year, I think I've got things straight and going forward I'll know all I need to know. Every year, some oddness comes up and leaves me scratching my head...
This year's: I'm using the CRA's auto-download thingy. It's pulled in T5008 info from Questrade.
I closed one account with them. For the things that were in that account, it's showing info in box 21 (proceeds), but nothing in box 20 (cost). WTF do I do with that?! I'm using SimpleTax - if I select "Capital" as the "Type of Income", it then seems to assume a zero cost basis and I get dinged cap gains on the entire proceeds. Can I fill in my own ACB in box 20?! Or do I need to not submit those slips (per Simple Tax's help: if there is nothing in box 20, you may not need to submit...). Does this all get straightened out with a T3 somehow (coming at the end of the month, apparently).
Also for one security, they have the currency as USD, but haven't filled in an exchange rate, just the value in USD. Do I need to work that out myself, too (this one also doesn't have anything in box 20...).
If I look at Questrade's T5008 pdf you can download, it isn't broken down into boxes or anything - it is literally just a summary. Date, amount, security, price, total. In another account, I have the downloaded T5008, but there has been nothing put into SimpleTax - is that because there have, as yet, been no sales from this account?
Hi daverobev,
Yes the auto fill feature is a great thing...but it does have some flaws! I have noticed if there are multiple T5008's, it is not pulling all of them into the software. You can access them individually via CRA my account under T4s and other tax slips, but none of the ones I have accessed have a cost base listed.
Fill in Box 20 manually, if it is showing as zero. You should receive the T5008's in the mail, and it will have the boxes that each belong to. Proceeds should be Box 21, Adjusted Cost Base Box 20. Your Gain/Loss should also be on the summary and should match what you have entered. If it is in US currency and has not been exchanged, you will have to exchange into Canadian. Box 13 should state if it is in a foreign currency. You can get the exchange rates off the Bank of Canada website.
Have fun!
CPA CB
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Every year, I think I've got things straight and going forward I'll know all I need to know. Every year, some oddness comes up and leaves me scratching my head...
This year's: I'm using the CRA's auto-download thingy. It's pulled in T5008 info from Questrade.
I closed one account with them. For the things that were in that account, it's showing info in box 21 (proceeds), but nothing in box 20 (cost). WTF do I do with that?! I'm using SimpleTax - if I select "Capital" as the "Type of Income", it then seems to assume a zero cost basis and I get dinged cap gains on the entire proceeds. Can I fill in my own ACB in box 20?! Or do I need to not submit those slips (per Simple Tax's help: if there is nothing in box 20, you may not need to submit...). Does this all get straightened out with a T3 somehow (coming at the end of the month, apparently).
Also for one security, they have the currency as USD, but haven't filled in an exchange rate, just the value in USD. Do I need to work that out myself, too (this one also doesn't have anything in box 20...).
If I look at Questrade's T5008 pdf you can download, it isn't broken down into boxes or anything - it is literally just a summary. Date, amount, security, price, total. In another account, I have the downloaded T5008, but there has been nothing put into SimpleTax - is that because there have, as yet, been no sales from this account?
Hi daverobev,
Yes the auto fill feature is a great thing...but it does have some flaws! I have noticed if there are multiple T5008's, it is not pulling all of them into the software. You can access them individually via CRA my account under T4s and other tax slips, but none of the ones I have accessed have a cost base listed.
Fill in Box 20 manually, if it is showing as zero. You should receive the T5008's in the mail, and it will have the boxes that each belong to. Proceeds should be Box 21, Adjusted Cost Base Box 20. Your Gain/Loss should also be on the summary and should match what you have entered. If it is in US currency and has not been exchanged, you will have to exchange into Canadian. Box 13 should state if it is in a foreign currency. You can get the exchange rates off the Bank of Canada website.
Have fun!
CPA CB
Thanks. Questrade doesn't mail out slips, AFAIK, you just get a pdf online. But, the pdf doesn't look like a 'proper' T5008; there are no box numbers.
So - it's ok for me to add info in to the T5008 I submit, even if it isn't there on the CRA/Questrade version? I can correct/update/complete information not provided?
For the US security, it currently says currency: USD; a value in box 21 (the correct value); and nothing in box 20. Of course, the exchange rate when I bought and when I sold are different - can I just correctly convert to CAD, and change currency to CAD? That seems to be what Interactive Brokers have done...
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It is your responsability to track and report acurate ACB, you can use adjustedcostbase.ca to do so.
I am also waiting some T5 but this use to come late. Are you talking about individual stock, ETF or other kind of investment?
T3 deadline is end of this month. T5s should all be done by now. I'm talking about ETFs and an ADR.
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Did you looked at CDS innovation? I got my numbers from there while waiting the slips
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Every year, I think I've got things straight and going forward I'll know all I need to know. Every year, some oddness comes up and leaves me scratching my head...
This year's: I'm using the CRA's auto-download thingy. It's pulled in T5008 info from Questrade.
I closed one account with them. For the things that were in that account, it's showing info in box 21 (proceeds), but nothing in box 20 (cost). WTF do I do with that?! I'm using SimpleTax - if I select "Capital" as the "Type of Income", it then seems to assume a zero cost basis and I get dinged cap gains on the entire proceeds. Can I fill in my own ACB in box 20?! Or do I need to not submit those slips (per Simple Tax's help: if there is nothing in box 20, you may not need to submit...). Does this all get straightened out with a T3 somehow (coming at the end of the month, apparently).
Also for one security, they have the currency as USD, but haven't filled in an exchange rate, just the value in USD. Do I need to work that out myself, too (this one also doesn't have anything in box 20...).
If I look at Questrade's T5008 pdf you can download, it isn't broken down into boxes or anything - it is literally just a summary. Date, amount, security, price, total. In another account, I have the downloaded T5008, but there has been nothing put into SimpleTax - is that because there have, as yet, been no sales from this account?
Hi daverobev,
Yes the auto fill feature is a great thing...but it does have some flaws! I have noticed if there are multiple T5008's, it is not pulling all of them into the software. You can access them individually via CRA my account under T4s and other tax slips, but none of the ones I have accessed have a cost base listed.
Fill in Box 20 manually, if it is showing as zero. You should receive the T5008's in the mail, and it will have the boxes that each belong to. Proceeds should be Box 21, Adjusted Cost Base Box 20. Your Gain/Loss should also be on the summary and should match what you have entered. If it is in US currency and has not been exchanged, you will have to exchange into Canadian. Box 13 should state if it is in a foreign currency. You can get the exchange rates off the Bank of Canada website.
Have fun!
CPA CB
Thanks. Questrade doesn't mail out slips, AFAIK, you just get a pdf online. But, the pdf doesn't look like a 'proper' T5008; there are no box numbers.
So - it's ok for me to add info in to the T5008 I submit, even if it isn't there on the CRA/Questrade version? I can correct/update/complete information not provided?
For the US security, it currently says currency: USD; a value in box 21 (the correct value); and nothing in box 20. Of course, the exchange rate when I bought and when I sold are different - can I just correctly convert to CAD, and change currency to CAD? That seems to be what Interactive Brokers have done...
Yes
Update the amounts to include the ACB most definitely.
Cheers,
CPA CB
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Thanks. Making progress. Just need that T3, and my wife's self-employment stuff. Looks like I'm getting a refund (I know, "not optimal", but seeing as the CRA is sitting on some cash from a previous year I'll happily take it...)
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Thanks. Making progress. Just need that T3, and my wife's self-employment stuff. Looks like I'm getting a refund (I know, "not optimal", but seeing as the CRA is sitting on some cash from a previous year I'll happily take it...)
It could be worse! I took on a new client this year who I had to tell he owes CRA $120k.
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Thanks. Making progress. Just need that T3, and my wife's self-employment stuff. Looks like I'm getting a refund (I know, "not optimal", but seeing as the CRA is sitting on some cash from a previous year I'll happily take it...)
It could be worse! I took on a new client this year who I had to tell he owes CRA $120k.
Ouch!
It's not that I mind paying the damn tax, it's all this messing about to work out what I actually owe. T1135 is a favourite. What was the max value during the year? Well how the hell should I know, there are two variables - exchange rate and value in the foreign currency!
Ah well.
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I went through the same a while ago. The $280,000 would normally all be required to go into the LIRA account. The $111,000 can be put to any remaining personal RRSP room and the balance must be taxed and paid in cash. You can apply to unlock LIRA accounts, but it certainly does not appear to be a straight forward, easy process. It generally covers hardship, special circumstances, or small amounts. I would simply plan to draw down your RRSP first and then apply to unlock the LIRA once the RRSP runs low and you can provide a better case for unlocking that account. The rules do differ a bit based on each province or the federal rules.
Thanks for the reply! I did not realize that it was the cash portion that can be allocated to remaining RRSP room, good to know. I kind of figured I would have to plan to just draw down my accessible moneys until I trully needed the locked up money, at which point it may be easier to retrieve. I live in Ontario which I believe has sightly less forgiving regs compared to Alberta as far as locked in accounts go.
Max
Max,
I'm trying to figure out the value of my own pension if commuted (Canadian Forces), do you mind saying what pension plan it was and how many years of work/service you did to get there?
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Hi,
I am wondering if I borrow money to buy reits that pay out 100 percent tax deferred in an unregistered account whether I can deduct the interest from my income tax on the money borrowed. I have already maxed my TFSA and my RRSP so these are not options.
Thanks
BTW would be nice if the forum had a sub section for Canada.
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Hi,
I am wondering if I borrow money to buy reits that pay out 100 percent tax deferred in an unregistered account whether I can deduct the interest from my income tax on the money borrowed. I have already maxed my TFSA and my RRSP so these are not options.
Thanks
BTW would be nice if the forum had a sub section for Canada.
Hi Captain
You found the Canadian sub section! MMM Taxes' most read and replied to topic.
Yes - interest on investment income is certainly deductible. The caveat is that it needs to be an income producing investment (income, dividends, etc.) so you don't want to invest only in shares which distribute ROC and Capital Gains. Mix it up, and invest in a few other income producing investments.
Happy sailing
CPA CB
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Hey MMM'ers
I'm a Canadian Chartered Accountant with a significant amount of tax experience.
Just throwing this out there - this is the time to reassess your taxes and get questions answered. The holidays is far too late for appropriate tax planning.
If you have questions about Can"eh"dian taxes - I would be more than happy to offer the MMM discount of free advice. I hope this can serve as a reference point for future discussions for those of us who choose to live in Igloo's and drink Maple Syrup, as the tax discussions in the forum tend to revolve around our Southern NeighBOURS.
You ask - I'll do my best to answer based on what you provide.
Let the boring tax discussion begin!
Hi CPA CB,
Thanks for the offer. You're a legend! Our tax situation is relatively straightforward...We live in AB. I earn approx. $75,000 before tax, my wife about $30,000. We have a small house that is not paid off.
I have only been in Canada since 2013, so my RRSP and TFSA are maxed out. Also have another $20k in a non-registered account.
The wife does not have any accounts set up.
My question is...is it necessary for us to hire an accountant to do our taxes or are we still ok to do them online? If you think it's ok for us to do them online, is there a software you recommend?
Thanks again and all the best.
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Q: Is it okay for a Corporation to pay late?
My understanding is that my Corporate return must be filed by June 30th, but that interest on any tax due starts sooner (end of March??).
It will take me a while to do my Corporate return. Maybe $3000 will be due, I don't know. I could pay that and then see what it actually comes to and accept a reimbursement. However, for the first time in my life, I feel comfortable being "late" with something and paying interest, and would rather pay exactly what is due vs create another transaction (reimbursement or tiny additional payment).
Besides interest building, is there any reason to avoid late payment?
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Hey MMM'ers
I'm a Canadian Chartered Accountant with a significant amount of tax experience.
Just throwing this out there - this is the time to reassess your taxes and get questions answered. The holidays is far too late for appropriate tax planning.
If you have questions about Can"eh"dian taxes - I would be more than happy to offer the MMM discount of free advice. I hope this can serve as a reference point for future discussions for those of us who choose to live in Igloo's and drink Maple Syrup, as the tax discussions in the forum tend to revolve around our Southern NeighBOURS.
You ask - I'll do my best to answer based on what you provide.
Let the boring tax discussion begin!
Hi CPA CB,
Thanks for the offer. You're a legend! Our tax situation is relatively straightforward...We live in AB. I earn approx. $75,000 before tax, my wife about $30,000. We have a small house that is not paid off.
I have only been in Canada since 2013, so my RRSP and TFSA are maxed out. Also have another $20k in a non-registered account.
The wife does not have any accounts set up.
My question is...is it necessary for us to hire an accountant to do our taxes or are we still ok to do them online? If you think it's ok for us to do them online, is there a software you recommend?
Thanks again and all the best.
Not a/the CPA, but Simpletax is free and works fine for me (simpletax.ca). And my stuff is complex enough. Needs some reading, though (or asking questions, which is what this thread is for).
If you're new and have over $100k CAD in *foreign* assets, you MUST fill out T1135, which is a pain but whatever.
Having a house makes no difference here, paid off or not - no deduction for interest (unless you use home as an office when self employed, for example).
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Q: Is it okay for a Corporation to pay late?
My understanding is that my Corporate return must be filed by June 30th, but that interest on any tax due starts sooner (end of March??).
It will take me a while to do my Corporate return. Maybe $3000 will be due, I don't know. I could pay that and then see what it actually comes to and accept a reimbursement. However, for the first time in my life, I feel comfortable being "late" with something and paying interest, and would rather pay exactly what is due vs create another transaction (reimbursement or tiny additional payment).
Besides interest building, is there any reason to avoid late payment?
Hi scrubby,
Just interest. If you owe over $3,000, you will be put on instalments for the following tax year, and then interest will start from when the instalment payments are due.
Cheers, CPA CB
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Hey MMM'ers
I'm a Canadian Chartered Accountant with a significant amount of tax experience.
Just throwing this out there - this is the time to reassess your taxes and get questions answered. The holidays is far too late for appropriate tax planning.
If you have questions about Can"eh"dian taxes - I would be more than happy to offer the MMM discount of free advice. I hope this can serve as a reference point for future discussions for those of us who choose to live in Igloo's and drink Maple Syrup, as the tax discussions in the forum tend to revolve around our Southern NeighBOURS.
You ask - I'll do my best to answer based on what you provide.
Let the boring tax discussion begin!
Hi CPA CB,
Thanks for the offer. You're a legend! Our tax situation is relatively straightforward...We live in AB. I earn approx. $75,000 before tax, my wife about $30,000. We have a small house that is not paid off.
I have only been in Canada since 2013, so my RRSP and TFSA are maxed out. Also have another $20k in a non-registered account.
The wife does not have any accounts set up.
My question is...is it necessary for us to hire an accountant to do our taxes or are we still ok to do them online? If you think it's ok for us to do them online, is there a software you recommend?
Thanks again and all the best.
Hi dyson,
It is not necessary, but depending on the situation (complexity) as well as the time/knowledge of the person, an accountant can be helpful.
Sometimes clients miss deductions, take an unreasonable deduction, or mandatory forms, and end up getting penalized or audited/reviewed. You can always have it done by a professional one year, and when they complete it, they will provide you a copy of your return. Then you can use this as a layout for the future returns, pending no major changes.
Cheers,
CPA CB
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Just interest. If you owe over $3,000, you will be put on instalments for the following tax year, and then interest will start from when the instalment payments are due.
Thank you, CPA CB! :) When I think about it, I realize I probably owe far less than that, but neither here nor there, all is well.
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Hi CPA CB, I was told by RBC Direct Investing that there is no T5/R3(Québec) isued for ETFs.
I own shares of ZCN in a taxable account and only need these slips to complete my taxes and get my refund for 2015. I already knew this kind of slips comes later than T4/R1 but now, I am a bit disapointed to learn I will get a T3 slip wich is a "Statement of Trust Income Allocations and Designations". Why would'nt they issue T5 "Statement of Investment Income" for ETFs?
Am I missing something here?
Thanks
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Oh! Le Barbu, you just explained a slip I had received and was very confused by!
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Hi CPA CB, I was told by RBC Direct Investing that there is no T5/R3(Québec) isued for ETFs.
I own shares of ZCN in a taxable account and only need these slips to complete my taxes and get my refund for 2015. I already knew this kind of slips comes later than T4/R1 but now, I am a bit disapointed to learn I will get a T3 slip wich is a "Statement of Trust Income Allocations and Designations". Why would'nt they issue T5 "Statement of Investment Income" for ETFs?
Am I missing something here?
Thanks
I just received T3/R16 and they included the december distribution paid on 16/07/01 wich surprise me a bit! I think I should include my december interest costs paid on 2016/04/01 to be consistent (and keep the same patern next year). Also, on CDS Innovation website, Foreign tax Income paid was a -1.57$ but on T3 form, it looks like a positive number...Should I just enter these slips as they are and stop thinkering about it?
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Hi there CPA CB,
I found your thread through Canadian Money Forum, what a great service you're providing here!
I'd like to throw a scenario at you, if I may. A few years ago, my wife and I jointly purchased some vacant land for what seemed like a bargain with the intention of developing and selling it for profit. As it turned out, the land would be very challenging to develop due to its small size and close proximity to neighbours' wells, etc, so not much of a bargain in the end. In 2015, we realized it wasn't going to be profitable so we sold the land without having built on it. It sold for a slight amount more than we paid for it, however factoring in expenses such as acquisition costs and improvements to the land that we made (driveway, electrical connection, filling and grading, etc.) we lost about $20k.
I believe our endeavor constitutes an "adventure or concern in the nature of trade", as the CRA says, and so I figure we should be able to declare this $20k as a business loss and deduct it against our other income, does that sound right? Neither of us are developers by trade; my wife is a teacher and I am in the military. So I am wondering if the CRA might see this as a "hobby business" and disallow the losses. Also, we never registered a business or declared anything about this in the 3.5 years that we owned the land, so I'm not sure if that would work against us.
Appreciate you having a look at this, cheers!
Tim
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Hi there CPA CB,
I found your thread through Canadian Money Forum, what a great service you're providing here!
I'd like to throw a scenario at you, if I may. A few years ago, my wife and I jointly purchased some vacant land for what seemed like a bargain with the intention of developing and selling it for profit. As it turned out, the land would be very challenging to develop due to its small size and close proximity to neighbours' wells, etc, so not much of a bargain in the end. In 2015, we realized it wasn't going to be profitable so we sold the land without having built on it. It sold for a slight amount more than we paid for it, however factoring in expenses such as acquisition costs and improvements to the land that we made (driveway, electrical connection, filling and grading, etc.) we lost about $20k.
I believe our endeavor constitutes an "adventure or concern in the nature of trade", as the CRA says, and so I figure we should be able to declare this $20k as a business loss and deduct it against our other income, does that sound right? Neither of us are developers by trade; my wife is a teacher and I am in the military. So I am wondering if the CRA might see this as a "hobby business" and disallow the losses. Also, we never registered a business or declared anything about this in the 3.5 years that we owned the land, so I'm not sure if that would work against us.
Appreciate you having a look at this, cheers!
Tim
Your expenses may not be deductible against other incomes but some of them (like improvement) can offset your tinny capital gain.
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Your expenses may not be deductible against other incomes but some of them (like improvement) can offset your tinny capital gain.
Thanks for the reply Le Barbu. Indeed, at least the costs incurred should offset the small increase in property value (about $3k) to avoid a capital gain. And maybe create a capital loss that could be carried over to use against future capital gains. But the best option from my perspective would be declaring it a business loss, and deducting it against income from our day jobs (at least I think that's possible, if I'm reading the rules correctly), so that's what I'm hoping to find out.
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Hi,
I am wondering if I borrow money to buy reits that pay out 100 percent tax deferred in an unregistered account whether I can deduct the interest from my income tax on the money borrowed. I have already maxed my TFSA and my RRSP so these are not options.
Thanks
BTW would be nice if the forum had a sub section for Canada.
Hi Captain
You found the Canadian sub section! MMM Taxes' most read and replied to topic.
Yes - interest on investment income is certainly deductible. The caveat is that it needs to be an income producing investment (income, dividends, etc.) so you don't want to invest only in shares which distribute ROC and Capital Gains. Mix it up, and invest in a few other income producing investments.
Happy sailing
CPA CB
OK I had assumed it was OK thanks for the update
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Hi there CPA CB,
I found your thread through Canadian Money Forum, what a great service you're providing here!
I'd like to throw a scenario at you, if I may. A few years ago, my wife and I jointly purchased some vacant land for what seemed like a bargain with the intention of developing and selling it for profit. As it turned out, the land would be very challenging to develop due to its small size and close proximity to neighbours' wells, etc, so not much of a bargain in the end. In 2015, we realized it wasn't going to be profitable so we sold the land without having built on it. It sold for a slight amount more than we paid for it, however factoring in expenses such as acquisition costs and improvements to the land that we made (driveway, electrical connection, filling and grading, etc.) we lost about $20k.
I believe our endeavor constitutes an "adventure or concern in the nature of trade", as the CRA says, and so I figure we should be able to declare this $20k as a business loss and deduct it against our other income, does that sound right? Neither of us are developers by trade; my wife is a teacher and I am in the military. So I am wondering if the CRA might see this as a "hobby business" and disallow the losses. Also, we never registered a business or declared anything about this in the 3.5 years that we owned the land, so I'm not sure if that would work against us.
Appreciate you having a look at this, cheers!
Tim
Hi Tim,
Canadian Money Forum? Cool! Never heard of it but happy to hear word is spreading.
Sorry it's taken so long to respond - but here goes.
My first question (and I think I know the answer here) is this - did you go and buy another property subsequent to this?
If the answer to this is no - then I think you're best to claim this as a capital loss.
CRA is very aggressive when it comes to attacking this kind of a loss if you attempt to claim it as either an ABIL (allowable business investment loss) or as a CNIL (cumulative net investment loss) as these losses are 100% deductible vs. 50%. Unsurprisingly, when you're making money on this type of investment, suddenly they push to call it a business! Go figure.
It certainly was an adventure into something, I just think based on the circumstances you describe you would be on thin ice to claim this as a business loss vs. capital loss.
Cheers,
CPA CB
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Hi CPA CB, I was told by RBC Direct Investing that there is no T5/R3(Québec) isued for ETFs.
I own shares of ZCN in a taxable account and only need these slips to complete my taxes and get my refund for 2015. I already knew this kind of slips comes later than T4/R1 but now, I am a bit disapointed to learn I will get a T3 slip wich is a "Statement of Trust Income Allocations and Designations". Why would'nt they issue T5 "Statement of Investment Income" for ETFs?
Am I missing something here?
Thanks
I just received T3/R16 and they included the december distribution paid on 16/07/01 wich surprise me a bit! I think I should include my december interest costs paid on 2016/04/01 to be consistent (and keep the same patern next year). Also, on CDS Innovation website, Foreign tax Income paid was a -1.57$ but on T3 form, it looks like a positive number...Should I just enter these slips as they are and stop thinkering about it?
Enter as is on this one. Include your December interest costs. Probably not a material difference, the key is consistency year over year.
Cheers,
CPA CB
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Hi CPA CB, I was told by RBC Direct Investing that there is no T5/R3(Québec) isued for ETFs.
I own shares of ZCN in a taxable account and only need these slips to complete my taxes and get my refund for 2015. I already knew this kind of slips comes later than T4/R1 but now, I am a bit disapointed to learn I will get a T3 slip wich is a "Statement of Trust Income Allocations and Designations". Why would'nt they issue T5 "Statement of Investment Income" for ETFs?
Am I missing something here?
Thanks
I just received T3/R16 and they included the december distribution paid on 16/07/01 wich surprise me a bit! I think I should include my december interest costs paid on 2016/04/01 to be consistent (and keep the same patern next year). Also, on CDS Innovation website, Foreign tax Income paid was a -1.57$ but on T3 form, it looks like a positive number...Should I just enter these slips as they are and stop thinkering about it?
Enter as is on this one. Include your December interest costs. Probably not a material difference, the key is consistency year over year.
Cheers,
CPA CB
Thank you CPA CB, I'll just enter the slips as they are and include my december's interests (paid on Jan. 4th) and then, stay consistent over years.
Our household income for 2015 was in the 110k$ range and average taxes is 13.25%!!! I hope the Morneau's budget wont crank it up to much (because of the income splitting loss)
-
Hi CPA CB, I was told by RBC Direct Investing that there is no T5/R3(Québec) isued for ETFs.
I own shares of ZCN in a taxable account and only need these slips to complete my taxes and get my refund for 2015. I already knew this kind of slips comes later than T4/R1 but now, I am a bit disapointed to learn I will get a T3 slip wich is a "Statement of Trust Income Allocations and Designations". Why would'nt they issue T5 "Statement of Investment Income" for ETFs?
Am I missing something here?
Thanks
I just received T3/R16 and they included the december distribution paid on 16/07/01 wich surprise me a bit! I think I should include my december interest costs paid on 2016/04/01 to be consistent (and keep the same patern next year). Also, on CDS Innovation website, Foreign tax Income paid was a -1.57$ but on T3 form, it looks like a positive number...Should I just enter these slips as they are and stop thinkering about it?
Enter as is on this one. Include your December interest costs. Probably not a material difference, the key is consistency year over year.
Cheers,
CPA CB
Thank you CPA CB, I'll just enter the slips as they are and include my december's interests (paid on Jan. 4th) and then, stay consistent over years.
Our household income for 2015 was in the 110k$ range and average taxes is 13.25%!!! I hope the Morneau's budget wont crank it up to much (because of the income splitting loss)
We keep getting asked for our expectations on today's budget.
Not expecting anything good. I'll be putting up a post tonight or tomorrow on the topic when all comes clear.
MMM principles are as applicable to governments as they are people. Superfluous spending isn't the road to FIRE!
Best,
CPA CB
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We keep getting asked for our expectations on today's budget.
Not expecting anything good. I'll be putting up a post tonight or tomorrow on the topic when all comes clear.
MMM principles are as applicable to governments as they are people. Superfluous spending isn't the road to FIRE!
Best,
CPA CB
[/quote]
A MMM style government would certainly kick asses but will never happen because we keep voting for people with no more than 5th grade level sciences and maths.
Not surprising, just look who is voting. My co-workers, even the ones from the accounting dont get the difference between "paying taxes" and "getting a tax return". If I say something like "Our household paid a total of 15k$ fed-prov. taxes for 2015 and we get a 7k$ return in april". They are just CLUELESS if you say got a return, why do you say you pay taxes? (facepalm)
Another one? We talked about the TFSA, one lady said "TFSA provide crappy returns of about 1%" then I asked in what the funds were invested. The answer was "You must be kidding me, he? I just told you it's in my TFSA" (double-facepalm)
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MMM principles are as applicable to governments as they are people. Superfluous spending isn't the road to FIRE!
Sorry I can't agree with that. Large scale economics and personal finance are not the same thing. Canada isn't looking to retire.
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MMM principles are as applicable to governments as they are people. Superfluous spending isn't the road to FIRE!
Sorry I can't agree with that. Large scale economics and personal finance are not the same thing. Canada isn't looking to retire.
We must have been in different Economics classes then - Haven't seen a single economist ever recommend what they considered superfluous spending.
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Preliminary 2016 Budget Report -
Hi All -
As you know, today was the announcement of the 2016 Federal Budget.
There are significant differences from 2015 - I will be doing a detailed post TOMORROW on these changes and their effects on YOU!
Highlights are a change to the child benefit.
No more income splitting.
No change in the small business deduction rates.
Significant deficit spending! 29.4 Billion this year, 29 next year, 23 the year following. I think about 118.3 or so total over the next four years. The Canadian Labour Force is 18 million people or so - that adds up to around about $6,500 in taxes per working Canadian that will need to be repaid eventually. Ouch.
TFSA has dropped of course. And the top marginal rate for those over $200k per annum has increased substantially.
Details to follow tomorrow. Have a great evening folks.
CPA CB
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MMM principles are as applicable to governments as they are people. Superfluous spending isn't the road to FIRE!
Sorry I can't agree with that. Large scale economics and personal finance are not the same thing. Canada isn't looking to retire.
superfluous spending.
This is where the definition of superfluous comes into play. For me, investing in the environment and aboriginal communities is far from superfluous. For other people, it is a waste of "taxpayers'" money. I think generally, this government is delivering the majority of what they said they would do if elected.
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Hi Tim,
Canadian Money Forum? Cool! Never heard of it but happy to hear word is spreading.
Sorry it's taken so long to respond - but here goes.
My first question (and I think I know the answer here) is this - did you go and buy another property subsequent to this?
If the answer to this is no - then I think you're best to claim this as a capital loss.
CRA is very aggressive when it comes to attacking this kind of a loss if you attempt to claim it as either an ABIL (allowable business investment loss) or as a CNIL (cumulative net investment loss) as these losses are 100% deductible vs. 50%. Unsurprisingly, when you're making money on this type of investment, suddenly they push to call it a business! Go figure.
It certainly was an adventure into something, I just think based on the circumstances you describe you would be on thin ice to claim this as a business loss vs. capital loss.
Cheers,
CPA CB
Hi CPA CB,
You're correct, we didn't purchase any other property after that. Better not be too greedy, and just claim it as a capital loss. Much appreciate you taking the time to offer your opinion.
Tim
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Tax Bulletin 2016
Hello Can'eh'dian MMM'ers!
After some deliberation regarding the 2016 Budget, I've put together brief summary of changes which I think are most applicable to the general readership here.
That being said, there are many specific, and what I would call "boutique" changes to the ITA this year which won't be covered below. If you do have questions regarding these, put them up here or PM me and I will happily give some direction.
Overall, this Budget represents a drastic shift in overall economic policy from the previous decade or so. This is to be expected as clearly we have a new Prime Minister.
Coles Notes - more spending, enhanced benefits, and more tax for some.
Small Business? What's that?
Small Businesses were largely ignored this budget. This is a large change from previous Governments.
Small Business Rate
There was a previously legislated change which was promised to be kept in tact during Election season, which was to keep the small business rate declining from 10.5% (2016) all the way down to 9% come 2019. This has been reversed entirely.
The small business rate will now remain at 10.5% for the foreseeable future.
Other speculated changes
Other than a few changes to break up some tax avoidance using small business rate eligible corporations, there were no other changes here.
It was speculated far and wide that owners of Professional Corporations would no longer be allowed to split income - this didn't happen. It was speculated that even for regular CCPC owners this wouldn't be available, which didn't happen. There were rumours of a wholesale change and the disappearance of the small business rate for CCPC's - this didn't happen. Heavy sigh of relief.
These changes may happen in the future, so we brace for the worst and hope for the best.
Personal Tax
The larger focus here in this budget was Personal Tax. Here are the major changes.
TFSA Limit
Bye bye $10,000 - hello $5,500 and indexing in future years. We all knew this was happening - just reiterating that it did happen.
Bracket Changes
The 2nd bracket rate has been adjusted downwards from 22% to 20.5% effective in the 2016 taxation year. This will help many Canadians (albeit not as big a change as one would think in the grand scheme).
A new bracket has been introduced for the over $200k crowd now, which is 33%. This is a whopping change and leads to marginal tax rates in excess of 50% for many provinces for the top bracket. Ontario is 49.53 percent, but when including the Ontario Health Premium it is around 53%. You can almost hear the Beatles playing in the background.
Income Splitting
Pensions are still yes (and are a sacred cow). The Income Splitting introduced for 2014 and 2015 is gone in 2016. That simple.
Teachers
$1,000 non-refundable tax credit on eligible supplies. This represents a savings of $150 per year.
Northern Resident Deduction
The daily rate has now increased from $8.25 to $11.00 per eligible taxpayer. Same rules regarding 6 months applies.
Child Care Benefit
This is what you've all been waiting for!
The UCCB and CCTB are gone as of June 2016. Commencing July 2016.
Education and Tuition Tax Credits will be gone as at 2017 (50% 2016)
Fitness and Arts Tax Credits will be gone as at 2017 (50% 2016).
It is broken down like this. Sorry if it gets messy.
Family Income Under $30k
Each Child under 6 - $6,400 per annum
Children 6 to 17 - $5,400 per annum.
Family Income from $30k to $65k
1 Child Household - total benefit phaseout of 7% per dollar.
2 Child Household - total benefit phaseout of 13.5% per dollar.
3 Child Household - total benefit phaseout of 19% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 23% per dollar.
Family Income Over $65k
On remaining benefit after above...
1 Child Household - total benefit phaseout of 3.2% per dollar.
2 Child Household - total benefit phaseout of 5.7% per dollar.
3 Child Household - total benefit phaseout of 8% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 9.5% per dollar.
NOTE: THESE AMOUNTS ARE TAX FREE - this is an important distinction.
If you earn over $200,000 as a family net income, you'll receive very little or nothing.
As always I look forward to your questions and commentary - hope you have found this a helpful summary of the most pertinent changes.
All the best,
CPA CB
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Family Income Under $30k
Each Child under 6 - $6,400 per annum
Children 6 to 17 - $5,400 per annum.
Family Income from $30k to $65k
1 Child Household - total benefit phaseout of 7% per dollar.
2 Child Household - total benefit phaseout of 13.5% per dollar.
3 Child Household - total benefit phaseout of 19% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 23% per dollar.
Family Income Over $65k
On remaining benefit after above...
1 Child Household - total benefit phaseout of 3.2% per dollar.
2 Child Household - total benefit phaseout of 5.7% per dollar.
3 Child Household - total benefit phaseout of 8% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 9.5% per dollar.
http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html (http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html)
To figure out how much your specific situation will give you.
-
MMM principles are as applicable to governments as they are people. Superfluous spending isn't the road to FIRE!
Sorry I can't agree with that. Large scale economics and personal finance are not the same thing. Canada isn't looking to retire.
superfluous spending.
This is where the definition of superfluous comes into play. For me, investing in the environment and aboriginal communities is far from superfluous. For other people, it is a waste of "taxpayers'" money. I think generally, this government is delivering the majority of what they said they would do if elected.
Superfluous - spending over and above what is necessary to achieve a desired result or return on investment.
This can as easily be applied to environmental spending as it is to tax cuts - tax cuts where the marginal cost of the cut exceeds the overall benefit to the economy would be something I would call superfluous.
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Super quick and easy question. I gave a presentation for a local group and received an honorarium ($100). My first post-retirement "income" ;-) Is this taxable income? I'm perfectly willing to declare it if it is, but is it?
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Super quick and easy question. I gave a presentation for a local group and received an honorarium ($100). My first post-retirement "income" ;-) Is this taxable income? I'm perfectly willing to declare it if it is, but is it?
Yes it is!
Deduct any expenses to reach the location against this income however. Congrats!
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10 km driving, and some supplies for demo which were minor and will be reused. So no point. Good to know in case I ever do one further from home. Just for interest sake, what if it had been 50 km away, so 100 km round trip. Federal mileage rate?
quote author=CPA CB link=topic=25093.msg1027194#msg1027194 date=1459010937]
Super quick and easy question. I gave a presentation for a local group and received an honorarium ($100). My first post-retirement "income" ;-) Is this taxable income? I'm perfectly willing to declare it if it is, but is it?
Yes it is!
Deduct any expenses to reach the location against this income however. Congrats!
[/quote]
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10 km driving, and some supplies for demo which were minor and will be reused. So no point. Good to know in case I ever do one further from home. Just for interest sake, what if it had been 50 km away, so 100 km round trip. Federal mileage rate?
quote author=CPA CB link=topic=25093.msg1027194#msg1027194 date=1459010937]
Super quick and easy question. I gave a presentation for a local group and received an honorarium ($100). My first post-retirement "income" ;-) Is this taxable income? I'm perfectly willing to declare it if it is, but is it?
Yes it is!
Hi,
Expense the supplies and also the mileage - the rate is $0.54 cents per km for the first 5000 km.
Deduct any expenses to reach the location against this income however. Congrats!
[/quote]
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Family Income from $30k to $65k
1 Child Household - total benefit phaseout of 7% per dollar.
2 Child Household - total benefit phaseout of 13.5% per dollar.
3 Child Household - total benefit phaseout of 19% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 23% per dollar.
Family Income Over $65k
On remaining benefit after above...
1 Child Household - total benefit phaseout of 3.2% per dollar.
2 Child Household - total benefit phaseout of 5.7% per dollar.
3 Child Household - total benefit phaseout of 8% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 9.5% per dollar.
NOTE: THESE AMOUNTS ARE TAX FREE - this is an important distinction.
If you earn over $200,000 as a family net income, you'll receive very little or nothing.
Thanks again for all the info you share here CPA CB.
A couple questions on the above...
First, A phaseout of x% per dollar. How does that calculation work? My literal reading of it would put a family income of $30,200 already phased out to basically $0 in benefits... ($200 above the start point, therefore benefits reduced by a factor of [1-x]^200) So obviously I'm wrong...
Second, I read that the actual calculation of benefits will be based on the 'adjusted family net income'. This takes RRSP contributions into account right? So the more RRSP contributions I make and the lower I get my net income to be, the higher this benefit will be?
You're probably quite busy this time of year, and this doesn't really matter until the June, so I understand if you can't respond any time soon... no worries.
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Family Income from $30k to $65k
1 Child Household - total benefit phaseout of 7% per dollar.
2 Child Household - total benefit phaseout of 13.5% per dollar.
3 Child Household - total benefit phaseout of 19% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 23% per dollar.
Family Income Over $65k
On remaining benefit after above...
1 Child Household - total benefit phaseout of 3.2% per dollar.
2 Child Household - total benefit phaseout of 5.7% per dollar.
3 Child Household - total benefit phaseout of 8% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 9.5% per dollar.
NOTE: THESE AMOUNTS ARE TAX FREE - this is an important distinction.
If you earn over $200,000 as a family net income, you'll receive very little or nothing.
Thanks again for all the info you share here CPA CB.
A couple questions on the above...
First, A phaseout of x% per dollar. How does that calculation work? My literal reading of it would put a family income of $30,200 already phased out to basically $0 in benefits... ($200 above the start point, therefore benefits reduced by a factor of [1-x]^200) So obviously I'm wrong...
Second, I read that the actual calculation of benefits will be based on the 'adjusted family net income'. This takes RRSP contributions into account right? So the more RRSP contributions I make and the lower I get my net income to be, the higher this benefit will be?
You're probably quite busy this time of year, and this doesn't really matter until the June, so I understand if you can't respond any time soon... no worries.
7% per dollar means you lose 7c/dollar. For every $100 net, you lose $7. $10k, $700. $35k, ~$2500. After you hit household $65k, $100 net means $3.20 lost. For $90k, that means you've lost $2500 at the first bracket, and roughly another thousand in the second bracket.
Yes, paying in to an RRSP reduces your net income. It's more-worth bumping your RRSP payments for child benefit if your household net income is under $65k!
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Family Income Under $30k
Each Child under 6 - $6,400 per annum
Children 6 to 17 - $5,400 per annum.
Family Income from $30k to $65k
1 Child Household - total benefit phaseout of 7% per dollar.
2 Child Household - total benefit phaseout of 13.5% per dollar.
3 Child Household - total benefit phaseout of 19% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 23% per dollar.
Family Income Over $65k
On remaining benefit after above...
1 Child Household - total benefit phaseout of 3.2% per dollar.
2 Child Household - total benefit phaseout of 5.7% per dollar.
3 Child Household - total benefit phaseout of 8% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 9.5% per dollar.
http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html (http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html)
To figure out how much your specific situation will give you.
Do you know if that calculator uses net or gross household income? I get wildly different numbers depending on which figure I plug into it.
-
Family Income Under $30k
Each Child under 6 - $6,400 per annum
Children 6 to 17 - $5,400 per annum.
Family Income from $30k to $65k
1 Child Household - total benefit phaseout of 7% per dollar.
2 Child Household - total benefit phaseout of 13.5% per dollar.
3 Child Household - total benefit phaseout of 19% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 23% per dollar.
Family Income Over $65k
On remaining benefit after above...
1 Child Household - total benefit phaseout of 3.2% per dollar.
2 Child Household - total benefit phaseout of 5.7% per dollar.
3 Child Household - total benefit phaseout of 8% per dollar.
4 or More (The Brady Bunch) - total benefit phaseout of 9.5% per dollar.
http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html (http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html)
To figure out how much your specific situation will give you.
Do you know if that calculator uses net or gross household income? I get wildly different numbers depending on which figure I plug into it.
Net - Line 236
-
7% per dollar means you lose 7c/dollar. For every $100 net, you lose $7. $10k, $700. $35k, ~$2500. After you hit household $65k, $100 net means $3.20 lost. For $90k, that means you've lost $2500 at the first bracket, and roughly another thousand in the second bracket.
Yes, paying in to an RRSP reduces your net income. It's more-worth bumping your RRSP payments for child benefit if your household net income is under $65k!
Thanks.
Math I can do.... It's the language of accounting that gets me... So I appreciate the translation!
The RRSP contributions have been made already (and will be again this year) regardless. But it's nice to know that they have the added bonus of increasing the payments we'll receive out of this program!
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Ok, so! I'm doing my T3s. I have values on most of them in box 42, and some in 25 and 34. In the Footnotes - notes box it says:
Box 21 - Enter this amount on line 921 Schedule 9, Taxable Capital Gains
multiplied by 2.
Box 25 - Enter beneficiary’s share of the amount on line 925 of Schedule 9.
Box 26 - Enter the beneficiarys share of the amount on line 926 of Schedule 9,
Other Income.
Box 42 - Enter beneficiary’s share of the amount on line 942 of Schedule 9.
Box 49 - Enter beneficiarys share on line 949 of Schedule 9
AFAIK Schedule 9 is gifts/donations?! Can I just ignore this - the beneficiary is 100% me! Or at least, I assume it is, they are ETFs in my name, this is just ACB stuff right?
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Ok, so! I'm doing my T3s. I have values on most of them in box 42, and some in 25 and 34. In the Footnotes - notes box it says:
Box 21 - Enter this amount on line 921 Schedule 9, Taxable Capital Gains
multiplied by 2.
Box 25 - Enter beneficiary’s share of the amount on line 925 of Schedule 9.
Box 26 - Enter the beneficiarys share of the amount on line 926 of Schedule 9,
Other Income.
Box 42 - Enter beneficiary’s share of the amount on line 942 of Schedule 9.
Box 49 - Enter beneficiarys share on line 949 of Schedule 9
AFAIK Schedule 9 is gifts/donations?! Can I just ignore this - the beneficiary is 100% me! Or at least, I assume it is, they are ETFs in my name, this is just ACB stuff right?
Hi Dave -
I think your googling has led you astray here.
To answer your question - just enter your T-slip information into the corresponding box in whatever tax software that you're using.
There are two meanings to "T3" in Canadian Tax.
The first refers to a T-slip that you receive from an income trust like an ETF.
The second is the Tax Return for the Trust itself. When it says Schedule 9, this is instructions on how to prepare the Trust Return, where Schedule 9 breaks out the income allocations/designations to beneficiaries of the Trust. I very much doubt this is applicable to you.
Hope this clarifies -
CPA CB
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Ok, so! I'm doing my T3s. I have values on most of them in box 42, and some in 25 and 34. In the Footnotes - notes box it says:
Box 21 - Enter this amount on line 921 Schedule 9, Taxable Capital Gains
multiplied by 2.
Box 25 - Enter beneficiary’s share of the amount on line 925 of Schedule 9.
Box 26 - Enter the beneficiarys share of the amount on line 926 of Schedule 9,
Other Income.
Box 42 - Enter beneficiary’s share of the amount on line 942 of Schedule 9.
Box 49 - Enter beneficiarys share on line 949 of Schedule 9
AFAIK Schedule 9 is gifts/donations?! Can I just ignore this - the beneficiary is 100% me! Or at least, I assume it is, they are ETFs in my name, this is just ACB stuff right?
Hi Dave -
I think your googling has led you astray here.
To answer your question - just enter your T-slip information into the corresponding box in whatever tax software that you're using.
There are two meanings to "T3" in Canadian Tax.
The first refers to a T-slip that you receive from an income trust like an ETF.
The second is the Tax Return for the Trust itself. When it says Schedule 9, this is instructions on how to prepare the Trust Return, where Schedule 9 breaks out the income allocations/designations to beneficiaries of the Trust. I very much doubt this is applicable to you.
Hope this clarifies -
CPA CB
Ahhhh that's funny - no googling, this is literally what Interactive Brokers have put onto my T3s for my ETF reporting. The schedule 9 I just looked down through my tax return to see if Simpletax had generated one, and lo and behold, it's there (T1 sched 9 I guess).
I've just filled in the boxes already, as you said. Now just to wait for Questrade to pull their fingers out and send me my final T3 so I can actually file.
Or maybe I should wait a week or two. I always think of something else I should've put on, right after filing.
Thanks!
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Ok, so! I'm doing my T3s. I have values on most of them in box 42, and some in 25 and 34. In the Footnotes - notes box it says:
Box 21 - Enter this amount on line 921 Schedule 9, Taxable Capital Gains
multiplied by 2.
Box 25 - Enter beneficiary’s share of the amount on line 925 of Schedule 9.
Box 26 - Enter the beneficiarys share of the amount on line 926 of Schedule 9,
Other Income.
Box 42 - Enter beneficiary’s share of the amount on line 942 of Schedule 9.
Box 49 - Enter beneficiarys share on line 949 of Schedule 9
AFAIK Schedule 9 is gifts/donations?! Can I just ignore this - the beneficiary is 100% me! Or at least, I assume it is, they are ETFs in my name, this is just ACB stuff right?
Hi Dave -
I think your googling has led you astray here.
To answer your question - just enter your T-slip information into the corresponding box in whatever tax software that you're using.
There are two meanings to "T3" in Canadian Tax.
The first refers to a T-slip that you receive from an income trust like an ETF.
The second is the Tax Return for the Trust itself. When it says Schedule 9, this is instructions on how to prepare the Trust Return, where Schedule 9 breaks out the income allocations/designations to beneficiaries of the Trust. I very much doubt this is applicable to you.
Hope this clarifies -
CPA CB
Ahhhh that's funny - no googling, this is literally what Interactive Brokers have put onto my T3s for my ETF reporting. The schedule 9 I just looked down through my tax return to see if Simpletax had generated one, and lo and behold, it's there (T1 sched 9 I guess).
I've just filled in the boxes already, as you said. Now just to wait for Questrade to pull their fingers out and send me my final T3 so I can actually file.
Or maybe I should wait a week or two. I always think of something else I should've put on, right after filing.
Thanks!
That's unreal - they will be confusing the hell out of people for their taxes.
There will be many people getting re-assessed by CRA!
Cheers,
CPA CB
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Hey CPA CB, I'm hoping you can point me in the right direction here. I am a CPA in states. My mom's husband has dual citizenship b/w US and Canada. He will be selling his business in CA in the near future and he's hoping for a $600k profit. I believe he should be filing US income tax returns since he's a dual citizen. His worldwide income would be taxed in the US and then he would get a credit for taxes paid to CA. I have no int'l experience and do not feel comfortable dealing with his tax situation. Do you know of anyone in either the US or Canada that you can recommend?
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Hey CPA CB, I'm hoping you can point me in the right direction here. I am a CPA in states. My mom's husband has dual citizenship b/w US and Canada. He will be selling his business in CA in the near future and he's hoping for a $600k profit. I believe he should be filing US income tax returns since he's a dual citizen. His worldwide income would be taxed in the US and then he would get a credit for taxes paid to CA. I have no int'l experience and do not feel comfortable dealing with his tax situation. Do you know of anyone in either the US or Canada that you can recommend?
Hi CO Lady,
Absolutely, Me!
I can definitely help here. We deal with business sales constantly and have an established practice in International Tax.
If you want to send me a PM - I'd be happy to discuss this with you further. I'm glad he hasn't sold yet as there are some planning issues which need to be taken care of prior to the sale.
All the best,
CPA CB
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One of my coworker asked me this one because he knows I got a MMM forum acces to that famous CPA CB
His wife is from USA and she is now a permanent resident of Canada since November 2015
She receive a disability payment from the USA government and they are wondering if they have to include this in their Canadian tax report. On the other side of the border, the US governement told her they dont want anything (probably because the ammount is pretty small?)
Any clue?
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On union and professional fees. If my work reimburses me, I assume I can't claim this on my tax return? This is what I have been doing but wanted to double check.
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On union and professional fees. If my work reimburses me, I assume I can't claim this on my tax return? This is what I have been doing but wanted to double check.
Short answer? You are right
If done properly, there is a way to do it that leave very few traces and makes it difficult for CRA to find out. To each his own but its the kind of thing I do and if I got caugth someday, I will just pay back.
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One of my coworker asked me this one because he knows I got a MMM forum acces to that famous CPA CB
His wife is from USA and she is now a permanent resident of Canada since November 2015
She receive a disability payment from the USA government and they are wondering if they have to include this in their Canadian tax report. On the other side of the border, the US governement told her they dont want anything (probably because the ammount is pretty small?)
Any clue?
Hey Le Barbu -
Famous? Haha. I'll take it!
In terms of Canada - Yes, she needs to report this income. She should also receive partial credit for the paid amount under the Canada-US Treaty, and also a credit on foreign tax payable.
In terms of the US - I'm certain she needs to file there as well. I have not once ever heard the IRS say "don't worry about filing your income tax this year". It's a requirement of all US Citizens to file, no matter where they live.
Hope this helps your colleague!
CPA CB
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On union and professional fees. If my work reimburses me, I assume I can't claim this on my tax return? This is what I have been doing but wanted to double check.
Short answer? You are right
If done properly, there is a way to do it that leave very few traces and makes it difficult for CRA to find out. To each his own but its the kind of thing I do and if I got caugth someday, I will just pay back.
It's not deductible - but many people will still claim it (not in practice, just generally).
There's a risk they'll find it, and you'll have to pay it back. This isn't really a significant risk. The bigger problem is that your returns may get flagged for further review and they will go through your last three years with microscope (and likely 2016 and 2017 if that's the case).
Cheers,
CPA CB
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I just saw this other thread about US tax incentives for bike-commuting
http://forum.mrmoneymustache.com/reader-recommendations/how-to-get-a-tax-break-by-biking-to-work/?topicseen
Do we have anything similar in Canada?
I found this PBO review of a proposal to create something similar
http://www.pbo-dpb.gc.ca/web/default/files/files/files/Publications/Costing_C-466_EN.pdf
But couldn't find any confirmation that it ever came into existence.
Thanks!
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On union and professional fees. If my work reimburses me, I assume I can't claim this on my tax return? This is what I have been doing but wanted to double check.
Short answer? You are right
If done properly, there is a way to do it that leave very few traces and makes it difficult for CRA to find out. To each his own but its the kind of thing I do and if I got caugth someday, I will just pay back.
It's not deductible - but many people will still claim it (not in practice, just generally).
There's a risk they'll find it, and you'll have to pay it back. This isn't really a significant risk. The bigger problem is that your returns may get flagged for further review and they will go through your last three years with microscope (and likely 2016 and 2017 if that's the case).
Cheers,
CPA CB
I see, better off just not claiming it as a reduction then. Thanks for your feedback.
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I just saw this other thread about US tax incentives for bike-commuting
http://forum.mrmoneymustache.com/reader-recommendations/how-to-get-a-tax-break-by-biking-to-work/?topicseen
Do we have anything similar in Canada?
I found this PBO review of a proposal to create something similar
http://www.pbo-dpb.gc.ca/web/default/files/files/files/Publications/Costing_C-466_EN.pdf
But couldn't find any confirmation that it ever came into existence.
Thanks!
Correct, there is no deduction of this kind. The only thing "close" is the Public Transit one... For your regular general employee I can't foresee any circumstance where this could apply.
I don't foresee any real circumstance where this would be subsidized by the Gov't Federally as it would open a Pandora's box of other things. For example, I'm a runner, would I be able to deduct my running shoes if I run to the office then?
Just keep biking, saving money, and enjoying the outdoor time watching the rat racers stuck in traffic. That's payment enough!
Cheers
CPA CB
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Thanks a lot for this link.
http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html
So if a single mom cashed out $15K in RRSP last year it now shows up as 2015 income.
Aside from that being one of the worst places to get money, I assume it will also hurt her for the amount of CCB she is eligible for next year, right?
I wish she could hit the UNDO button on the RRSP cash-out.
Agh Face Punch. It's a good friend & I've been trying to give her some tips. I had no idea she cashed these out. At the same time she contributed to her kids RESP because she wants to put her kids "needs" first.
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What would suggest to a 70+year old selling their business for under 100k. RRSP room is pretty maxed out and they want to know what they should do to avoid taxes (well as much as possible). In Alberta.
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Thanks a lot for this link.
http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html
So if a single mom cashed out $15K in RRSP last year it now shows up as 2015 income.
Aside from that being one of the worst places to get money, I assume it will also hurt her for the amount of CCB she is eligible for next year, right?
I wish she could hit the UNDO button on the RRSP cash-out.
Agh Face Punch. It's a good friend & I've been trying to give her some tips. I had no idea she cashed these out. At the same time she contributed to her kids RESP because she wants to put her kids "needs" first.
That's correct, it will impact the CCB credit assuming she's over the initial bracket.
It makes no sense to withdraw RRSPs to contribute to RESPs. That is a real detriment to everyone.
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What would suggest to a 70+year old selling their business for under 100k. RRSP room is pretty maxed out and they want to know what they should do to avoid taxes (well as much as possible). In Alberta.
Depends really on the circumstances. The key here is to plan the sale to hit the qualified small business capital gains exemption so they pay zero tax on the sale of the business. Highly recommended they speak with an accountant as the savings potential here is significant.
Cheers
CPA CB
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Q: How do we know when we have all our investment tax slips?
I have a number of investment accounts, each with 3-4 holdings. But I've received only three T3s (two for CAD index, one for US index). Am I supposed to just wait some more weeks for more pieces of paper to arrive? Or do some accounts not create slips? Am I supposed to come up with the numbers for those? Or do some amounts not get submitted?
Definitely everyone has my correct address, there are no tax slips available in my online accounts, and TD's site says they mail them January through mid-March and that if I don't have them within 3 weeks of that...
And the government sent me a weird slip a while back, with a hodgepodge of names such that I don't know if they meant it for my son. I sent it back with a note, asking that if it was meant for my kid to please correct the name and send a replacement, but nothing to date.
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Q: How do we know when we have all our investment tax slips?
I have a number of investment accounts, each with 3-4 holdings. But I've received only three T3s (two for CAD index, one for US index). Am I supposed to just wait some more weeks for more pieces of paper to arrive? Or do some accounts not create slips? Am I supposed to come up with the numbers for those? Or do some amounts not get submitted?
Definitely everyone has my correct address, there are no tax slips available in my online accounts, and TD's site says they mail them January through mid-March and that if I don't have them within 3 weeks of that...
And the government sent me a weird slip a while back, with a hodgepodge of names such that I don't know if they meant it for my son. I sent it back with a note, asking that if it was meant for my kid to please correct the name and send a replacement, but nothing to date.
Usualy, T3/T5 slips are isued for taxable accounts only (not for RRSP, TFSA nor RDSP). For your registered accounts, you should only receive a contribution receip but if you already know your contributions amount, you will not learn anything new from this. Which account/contribution/holding do you think you miss a slip/receip?
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Q: How do we know when we have all our investment tax slips?
I have a number of investment accounts, each with 3-4 holdings. But I've received only three T3s (two for CAD index, one for US index). Am I supposed to just wait some more weeks for more pieces of paper to arrive? Or do some accounts not create slips? Am I supposed to come up with the numbers for those? Or do some amounts not get submitted?
Definitely everyone has my correct address, there are no tax slips available in my online accounts, and TD's site says they mail them January through mid-March and that if I don't have them within 3 weeks of that...
And the government sent me a weird slip a while back, with a hodgepodge of names such that I don't know if they meant it for my son. I sent it back with a note, asking that if it was meant for my kid to please correct the name and send a replacement, but nothing to date.
Usualy, T3/T5 slips are isued for taxable accounts only (not for RRSP, TFSA nor RDSP). For your registered accounts, you should only receive a contribution receip but if you already know your contributions amount, you will not learn anything new from this. Which account/contribution/holding do you think you miss a slip/receip?
Also, I found out that my bank won't create a tax slip for a taxable account if the amount gained is less than $50. I don't know if this is a common practice across institutions or not.
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Q: How do we know when we have all our investment tax slips?
I have a number of investment accounts, each with 3-4 holdings. But I've received only three T3s (two for CAD index, one for US index). Am I supposed to just wait some more weeks for more pieces of paper to arrive? Or do some accounts not create slips? Am I supposed to come up with the numbers for those? Or do some amounts not get submitted?
Definitely everyone has my correct address, there are no tax slips available in my online accounts, and TD's site says they mail them January through mid-March and that if I don't have them within 3 weeks of that...
And the government sent me a weird slip a while back, with a hodgepodge of names such that I don't know if they meant it for my son. I sent it back with a note, asking that if it was meant for my kid to please correct the name and send a replacement, but nothing to date.
Usualy, T3/T5 slips are isued for taxable accounts only (not for RRSP, TFSA nor RDSP). For your registered accounts, you should only receive a contribution receip but if you already know your contributions amount, you will not learn anything new from this. Which account/contribution/holding do you think you miss a slip/receip?
Also, I found out that my bank won't create a tax slip for a taxable account if the amount gained is less than $50. I don't know if this is a common practice across institutions or not.
I also found that some bank dont send slips by mail but they are available in you account as pdf file or equivalent
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Which account/contribution/holding do you think you miss a slip/receip?
I don't know, that's really my question: Which ones are "missing" and which ones are just not supposed to exist? I just have three slips that say either "Cdn index" or "US index". But I don't know for what account, if those are all taxable Cdn index holdings added up, or just one, or? Are we not reporting gains on rest-of-world index? Etc. Bah. My online accounts say there are no tax slips.
Posthumane: Yes, I have found this to be so. We're apparently supposed to claim the amounts under $50 too, but institutions aren't required to send out slips for that amount so many don't. I find this frustrating in reporting bank interest income. In my case, each of the investments should be over that, though.
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Which account/contribution/holding do you think you miss a slip/receip?
I don't know, that's really my question: Which ones are "missing" and which ones are just not supposed to exist? I just have three slips that say either "Cdn index" or "US index". But I don't know for what account, if those are all taxable Cdn index holdings added up, or just one, or? Are we not reporting gains on rest-of-world index? Etc. Bah. My online accounts say there are no tax slips.
Posthumane: Yes, I have found this to be so. We're apparently supposed to claim the amounts under $50 too, but institutions aren't required to send out slips for that amount so many don't. I find this frustrating in reporting bank interest income. In my case, each of the investments should be over that, though.
You should know wicha account you actually have, wich holding in each and wich transactions occured through 2015. OK, lets say you got a RRSP, then the form you may need is the receip (if you contributed between Jan 1st 2015 and Feb 29th 2016). For a RESP, you dont need anything. For a RDSP, well I dont know...
Do you have a taxable account with some investments in?
You are the best (and only) one person to take care of this paper tracking task.
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Thanks, Le Barbu.
Anyone know if there's a chart or webpage that details what types of investment accounts need what info submitted?
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Thanks, Le Barbu.
Anyone know if there's a chart or webpage that details what types of investment accounts need what info submitted?
Scrubby, you are so sweet!
The only accounts requiring form/slips are the taxable ones
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Scrubby,
You should perhaps take a look at your brokerage/bank of choice and see if they have an all in one solution, such as a target date fund or an index mutual fund basket such as http://www.mawer.com/our-funds/fund-profiles/tax-effective-balanced-fund/ (http://www.mawer.com/our-funds/fund-profiles/tax-effective-balanced-fund/) to reduce the complexity of your tax situation in your taxable accounts. Having multiple accounts, across multiple platforms, in multiple formats can be overwhelming for a large amount of people. Simpler is almost always best for most people.
As stated by other people, no taxable gains forms are coming for the RESP, that gets taxed in the student's hands when withdrawn, the RRSP, full withdrawal amount taxable as income, or the RDSP, uncertain on rules. Once you have your RRSP contribution slips and the t3/t5, that should be it.
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Q: How do we know when we have all our investment tax slips?
I have a number of investment accounts, each with 3-4 holdings. But I've received only three T3s (two for CAD index, one for US index). Am I supposed to just wait some more weeks for more pieces of paper to arrive? Or do some accounts not create slips? Am I supposed to come up with the numbers for those? Or do some amounts not get submitted?
Definitely everyone has my correct address, there are no tax slips available in my online accounts, and TD's site says they mail them January through mid-March and that if I don't have them within 3 weeks of that...
And the government sent me a weird slip a while back, with a hodgepodge of names such that I don't know if they meant it for my son. I sent it back with a note, asking that if it was meant for my kid to please correct the name and send a replacement, but nothing to date.
If you register for "My account" on the CRAs website, you are able to see all your T3s to confirm that you have all of them.
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It is not a legal req to send a T5 if the distribution is less than $50. Some companies do it anyway, some don't. If they don't, you have to fill in the numbers yourself (usually simple).
I'd agree that having a single brokerage makes life easy. And single fund/ETF per category (ie one for emerging, one for developed, etc). Oh, the benefits of hindsight.
This year you should be able to connect your tax software to your 'MyAccount' CRA... account. It'll download and auto-fill a lot of stuff.
In terms of dates, T3s are due 90 days into the year (technically March 30th this year? Whatever.. I got mine on April Fool's day). T5s are due by the end of Feb I think. So you should certainly have everything you're going to get by now!
Filed ours last week. Au revoir, Family Tax Cut. You saved us a bit of cash. Au revoir, UCCB - you cost us some (well, not really, but we had to pay back a bit). Bonjour, CTB! You are much more generous, and while I think it's crazy to throw money at families earning $90k, whatever. The ONLY thing I dislike is that it's a year behind your actual circumstances - we did ok last year, so we get CTB reduced - but this year we are going to do much worse. So NEXT year we'll get a massive increase in CTB.. when we may or may not be earning more.
Well, I guess most people's salaries don't change dramatically - those that get salaries. Neither of us do, so income fluctuates wildly.
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Thank you both!
My tax accountant today, too, said that all R (including RDSP) accounts, as well as TFSA, are not taxable, thus will have no slips. So, that just leaves two. Yeah, my accounts are as few as they can be for optimization. In most, I have just the Canadian Couch Potato four holdings, but one agency requires that I have a second institution, and one account requires two funds in place of the CCP ones. Agency rules for people with disabilities, unfortunately, but worth the extra work. So, all optimized, but my first tax year in them, so I didn't know why so few slips had come and whether I could proceed. Now I do, thank you :)
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This thread is amazing. We are getting close (I think) to FI and I'm trying to get myself up to speed on all things Canadian tax because I've been blissfully (willfully?) ignorant about most of the details until recently. I've been reading through this thread and also reading a lot on taxtips.ca.
So, question for the experts: If I live in AB, and I have an actual eligible dividend income of say, $35,000 per year. If that is my ONLY source of income - is my tax rate 0% (or technically -0.03%)? It seems too good to be true so I feel like I must be missing something. What if I had $30,000 per year of eligible dividend income and my spouse also had $30,000 per year of eligible dividend income, and those were our ONLY sources of income. 0% tax rate?? Or would the combined dividend income put us over the threshold and into the next tax bracket?
Thanks in advance (and sorry if this question is dumb!!)
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This thread is amazing. We are getting close (I think) to FI and I'm trying to get myself up to speed on all things Canadian tax because I've been blissfully (willfully?) ignorant about most of the details until recently. I've been reading through this thread and also reading a lot on taxtips.ca.
So, question for the experts: If I live in AB, and I have an actual eligible dividend income of say, $35,000 per year. If that is my ONLY source of income - is my tax rate 0% (or technically -0.03%)? It seems too good to be true so I feel like I must be missing something. What if I had $30,000 per year of eligible dividend income and my spouse also had $30,000 per year of eligible dividend income, and those were our ONLY sources of income. 0% tax rate?? Or would the combined dividend income put us over the threshold and into the next tax bracket?
Thanks in advance (and sorry if this question is dumb!!)
Hi there & welcome!
You'll go Peanutty for this response then - as long as there is no other income, you and spouse can go up to $50k (each!) in eligible dividends before you're paying personal tax.
Just want to point out that these dividends are 'net' of corporate taxes paid (which are over 30%) so you as a shareholder are not paying 'no tax' - it's just that you don't see this side of the transaction personally.
Glad you like this topic!
CPA CB
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This thread is amazing. We are getting close (I think) to FI and I'm trying to get myself up to speed on all things Canadian tax because I've been blissfully (willfully?) ignorant about most of the details until recently. I've been reading through this thread and also reading a lot on taxtips.ca.
So, question for the experts: If I live in AB, and I have an actual eligible dividend income of say, $35,000 per year. If that is my ONLY source of income - is my tax rate 0% (or technically -0.03%)? It seems too good to be true so I feel like I must be missing something. What if I had $30,000 per year of eligible dividend income and my spouse also had $30,000 per year of eligible dividend income, and those were our ONLY sources of income. 0% tax rate?? Or would the combined dividend income put us over the threshold and into the next tax bracket?
Thanks in advance (and sorry if this question is dumb!!)
This site is good for info on stuff like that: http://www.taxtips.ca/taxrates/ab.htm
Note that you do NOT want to have 100% Canadian equity!!
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This site is good for info on stuff like that: http://www.taxtips.ca/taxrates/ab.htm
Note that you do NOT want to have 100% Canadian equity!!
Yes paying zero tax is attractive for a number of reasons, but if you have to take on a huge amount of portfolio performance and volatility risk to do so it's not a great idea. Canada is a tiny slice of the global economy so holding even 20% - 30% CDN equities is a significant home country bias. Going to 100% to lower your tax rate to zero is a bad trade off.
That said presumably you have investments in your RRSP accounts and likely in a TFSA as well as your non-registered accounts. You'll only have to worry about the tax rate on qualified dividends from the Non-reg accounts. You're going to pay tax on any RRSP withdrawal as income no matter how it was realized within the accounts and any withdrawals from your TFSA will not be taxed no matter what.
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I've got a question I'm curious about. I filed my 2015 tax return early thinking I knew what my dividend situation was in my Non-Reg account. Turns out I was off a bit due to never having had a Non-Reg account prior to 2015. I reported $17 in qualified CDN dividends and actually had $34 once I got my tax slip from my brokerage. I had no other dividends as the rest of my $$ were in RRSP/TFSA accounts.
I have a cogent reason for why I used $17 that I could explain to CRA for the error should they ask.
I've submitted my return and got my Notice of Assessment back.
My income after business deductions [self-employed] was in the $55K - $60K range.
I'm not worried about the legal answer or the perfect answer, but rather from a practical point of view is there any compelling reason to revise my tax return to adjust it by $17 of dividends which is a difference of something like 0.03% of my after deductions income?
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I've got a question I'm curious about. I filled my 2015 tax return early thinking I knew what my dividend situation was in my Non-Reg account. Turns out I was off a bit due to never having had a Non-Reg account prior to 2015. I reported $17 in qualified CDN dividends and actually had $34 once I got my tax slip from my brokerage. I had no other dividends as the rest of my $$ were in RRSP/TFSA accounts.
I have a cogent reason for why I used $17 that I could explain to CRA for the error should they ask.
I've submitted my return and got my Notice of Assessment back.
My income after business deductions [self-employed] was in the $55K - $60K range.
I'm not worried about the legal answer or the perfect answer, but rather from a practical point of view is there any compelling reason to revised my tax return to adjust it by $17 of dividends which is a difference of something like 0.03% of my after deductions income?
Nope - leave it be. Worst case you get re-assessed.
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Nope - leave it be. Worst case you get re-assessed.
Thank you for the reply. That was my thought as well.
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Thinking of having solar panels installed and enrolling in the micro-FIT program. 'Problem" is that I am in a high tax bracket and the government will take 43% of the income I receive through this program. My wife is a SAHM and has no income. Is it illegal to take the income from the panels in her name if the panels are installed in her name? The home is under both of our names. Also, are we able to do a capital depreciation on it over the 20 year life of the contract in order to have less impact to CCB via our family income?
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Wow, if you earn $50K in Alberta, have 4 kids, and have a stay at home spouse your effective tax rate is 53.5% (20.5% federal +10% provincial+23% CTB) which is pretty insane.
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23% CTB? Not sure what you mean. Marginal rate for 90-140 k in Ontario is 43.4% In Alberta the marginal rate up to 125k is 30.5%.
The CTB I'm thinking of is the Child Tax Benefit, which gives money back to you. Our hot young Prime Minister has done away with that for 2nd half of 2016, replacing it with the Canada Child Benefit. That situation you referred to, 50k Income, 4 kids (guessing 2 under 6), would give the family $19,000 tax free from the government. This is actually less than the family would pay in income taxes.
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I meant the Canada child benefit, I just used the wrong abbreviation. At that income level, you lose 23 cents in your next year's benefit payout for every additional dollar of income you earn so you have to add 23% to your effective tax rate.
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I meant the Canada child benefit, I just used the wrong abbreviation. At that income level, you lose 23 cents in your next year's benefit payout for every additional dollar of income you earn so you have to add 23% to your effective tax rate.
A family with four children under six is getting $1750 a month in CTB... $21K a year. Not sure if you're complaining, because $21k seems pretty generous.
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I meant the Canada child benefit, I just used the wrong abbreviation. At that income level, you lose 23 cents in your next year's benefit payout for every additional dollar of income you earn so you have to add 23% to your effective tax rate.
A family with four children under six is getting $1750 a month in CTB... $21K a year. Not sure if you're complaining, because $21k seems pretty generous.
No, I already think the benefits are too generous. I just meant that at that tax rate there is a serious disincentive to work any extra overtime hours.
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I didn't believe you but their online calc says it's true. Still a mustachian would work the OT and place the extra into an RRSP so their marginal wasn't effected by CCB.
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My now wife and I were confused about the common law rules and filed as Single in 2013 when we should have filed as Common Law. I want to correct that now, and it would result in some money being refunded to us. I've called the CRA, but the agent sounded confused, and the advice that he gave just doesn't work. (He suggesting using MyCRA "Change My Marital Status", but it won't let me make a change for 2013). Do you know how I can correct this?
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My now wife and I were confused about the common law rules and filed as Single in 2013 when we should have filed as Common Law. I want to correct that now, and it would result in some money being refunded to us. I've called the CRA, but the agent sounded confused, and the advice that he gave just doesn't work. (He suggesting using MyCRA "Change My Marital Status", but it won't let me make a change for 2013). Do you know how I can correct this?
http://www.cra-arc.gc.ca/changereturn/
You can refile your tax returns. I made a mistake and refilled for previous year to receive an extra refund. The T-1 ADJ form is pretty simple, but I think you'll both need to file the form.
Basically redo your taxes but use common-law. Then the T-1 ADJ gets filled out with the differences and you're done, should take less than an hour.
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I didn't believe you but their online calc says it's true. Still a mustachian would work the OT and place the extra into an RRSP so their marginal wasn't effected by CCB.
I have the same thought, but it's still a disincentive. It depends on whether the OP already maxes out the RRSP. If the RRSP is already maxed the marginal rate is then 48.46% of each additional dollar earned is lost. You can't place a full $1000 of extra earnings into a RRSP that's already maxed just 18%.
By having the high claw back there's serious thought to having a stay at home parent. A low wage second earner might lose more on claw backs and child care than would be gained from wages. Since its based on household income its a unique situation where the second earner loses benefits at a rate of 23% (17.96% if RRSP room is utilized) on top of tax rates. The take away is to plan taxes as a family unit, not just at the individual level.
On a personal level the question becomes is it better to work OT or spend time with the family? An extra hour work, assuming pay of $25/hour, at 1.5 is worth $37.50. After tax and claw back the OP gets $18.23 take home (CPP, EI are maxed out from regular earnings). A normal hour is worth $17.38 before CCB reduction, but you don't have a choice on working those so the clawbacks on CCB aren't optional. I'm in that situation, do I forgo OT or take it? Is it better to work 6 months longer or more OT over the next 4 years? The goal is to work as few hours as possible until FIRE and maximize my hours away from work.
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My now wife and I were confused about the common law rules and filed as Single in 2013 when we should have filed as Common Law. I want to correct that now, and it would result in some money being refunded to us. I've called the CRA, but the agent sounded confused, and the advice that he gave just doesn't work. (He suggesting using MyCRA "Change My Marital Status", but it won't let me make a change for 2013). Do you know how I can correct this?
http://www.cra-arc.gc.ca/changereturn/
You can refile your tax returns. I made a mistake and refilled for previous year to receive an extra refund. The T-1 ADJ form is pretty simple, but I think you'll both need to file the form.
Basically redo your taxes but use common-law. Then the T-1 ADJ gets filled out with the differences and you're done, should take less than an hour.
Thanks Prairie Stash! We will do that this weekend.
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CPA CB, I think you are wonderful!
Can you weigh in on my situation please?
http://forum.mrmoneymustache.com/ask-a-mustachian/er-take-pension-now-or-later/msg1066311/#msg1066311
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CPA CB, I think you are wonderful!
Can you weigh in on my situation please?
http://forum.mrmoneymustache.com/ask-a-mustachian/er-take-pension-now-or-later/msg1066311/#msg1066311
Thank you!
Absolutely - but it will be next week as things are quite busy here in CPA land.
Cheers,
CPA CB
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Hey CPA CB!
I sent you some questions via PM if you have any time to look at them. It's a great help to the community here you're providing, thanks in advance!
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legality question...
DH and I would eventually like to start up a coorporation to hold our (future) rental properties. Could the coorporation own our residence and we rent from them? Is that allowed or are there clauses preventing that?
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legality question...
DH and I would eventually like to start up a coorporation to hold our (future) rental properties. Could the coorporation own our residence and we rent from them? Is that allowed or are there clauses preventing that?
As an aside if that was possible you'd lose the primary residence capital gains exemption which can be a pretty huge tax benefit.
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legality question...
DH and I would eventually like to start up a coorporation to hold our (future) rental properties. Could the coorporation own our residence and we rent from them? Is that allowed or are there clauses preventing that?
I'm not sure that would save money. You have to pay market rent, all rentals must show a reasonable expectation of profit, you can't pay half rent and get tax deductions, that's not a loop hole. All profit would then be subject to corporation taxes and dividend taxes when its returned to you. Market rent means your rent would need to increase at the same rate as your other rentals, from the corporations view your just another renter (no special favours for the owners).
Essentially the question boils down to is it better to rent forever or own a house? What's the benefit for you? As an aside check out the "Smith Maneuver", it discusses leveraging your house for investing.
http://www.theglobeandmail.com/real-estate/mortgages-and-rates/the-smith-maneuver-a-canadian-mortgage-tax-deductible-plan/article12059456/
Retire-Canada already touched upon capital gains tax exemption, that's pretty huge. You would also need to appraise it to sell it to the corporation, you can't sell it at an inflated rate to hide extra capital gains.
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Thanks, yes would definitely have to run the numbers. At the moment we are selling our house, so if we were do it this down the line there would be no selling into the corporation, the corporation would just buy it from the start.
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Thanks, yes would definitely have to run the numbers. At the moment we are selling our house, so if we were do it this down the line there would be no selling into the corporation, the corporation would just buy it from the start.
Hi Maya -
Yes, it certainly is possible to purchase the house through the business and rent it to yourself and husband. If you don't pay rent per se, you would have to take the market value unpaid as a personal taxable benefit on your taxes.
The major downfalls are the loss of the principal residence exemption as was rightly brought up. This is a significant loss, and I wouldn't recommend opting out of this.
The alternative however, is that you rent space in your future home to the corporation, and have the corporations take deductions on a sq ft basis. So, if the business takes up 25% of the space of the home, you can expense 25% of the utilities, interest, maintenance, etc., and also charge a reasonable amount of rent to the corporation. This should lower your overall taxable income and taxes every year.
Hope this helps
CPA CB
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I have a question - that only popped into my head when I saw your post (so thank you for this thread, otherwise I would have signed on the dotted line and been clueless later!)
We are planning to enter into a conservation agreement to rehabilitate a wetland on a property that we own. The program will pay us 500$ per acre for land that is reclaimed as wetland and we are looking at approximately 20 acres. Do you know if this would be taxable or where I can find some information about it? My quick google did not reveal anything, but I am not even sure what I am looking for!
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I have a question - that only popped into my head when I saw your post (so thank you for this thread, otherwise I would have signed on the dotted line and been clueless later!)
We are planning to enter into a conservation agreement to rehabilitate a wetland on a property that we own. The program will pay us 500$ per acre for land that is reclaimed as wetland and we are looking at approximately 20 acres. Do you know if this would be taxable or where I can find some information about it? My quick google did not reveal anything, but I am not even sure what I am looking for!
Its rental land, unless there's some sort of charitable tax break. I'm assuming its for a set time period of 10 years at which point it could revert back to farm land. You can deduct taxes and mortgage interest as well as other expenses. What you're doing sounds a little different than a normal rental agreement though. Do they pay it all up front or make annual payments? If its annual its easier to make tax deductions and if its lump sum then you might owe all the taxes in the year you get the money (now).
http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-15e.pdf
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I have a question - that only popped into my head when I saw your post (so thank you for this thread, otherwise I would have signed on the dotted line and been clueless later!)
We are planning to enter into a conservation agreement to rehabilitate a wetland on a property that we own. The program will pay us 500$ per acre for land that is reclaimed as wetland and we are looking at approximately 20 acres. Do you know if this would be taxable or where I can find some information about it? My quick google did not reveal anything, but I am not even sure what I am looking for!
Its rental land, unless there's some sort of charitable tax break. I'm assuming its for a set time period of 10 years at which point it could revert back to farm land. You can deduct taxes and mortgage interest as well as other expenses. What you're doing sounds a little different than a normal rental agreement though. Do they pay it all up front or make annual payments? If its annual its easier to make tax deductions and if its lump sum then you might owe all the taxes in the year you get the money (now).
http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-15e.pdf
Thank you for the reference and the info. The payment comes in a single lump sum and the agreement lasts for the 10 year period. I am hoping there will be some sort of charitable tax break, it is funded by Environment Canada. At least I know to ask them before we sign!
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Question about asset location
I read on CCP that all asset are taxed differently when you buy stock or EFT but he never talked about mutual fund.
I follow his recommandation using the TD eSeries funds with the assertive balance (25% can, 25% USA, 25 int, 25 bond)
The question is : Is there a different in taxation when you use mutual fund like EFT? If i have maxed my TFSA and RRSP should i try to have bond in TFSA and RRSP, USA in RRSP and CAN in non registred account?
Thx!
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Question about asset location
I read on CCP that all asset are taxed differently when you buy stock or EFT but he never talked about mutual fund.
I follow his recommandation using the TD eSeries funds with the assertive balance (25% can, 25% USA, 25 int, 25 bond)
The question is : Is there a different in taxation when you use mutual fund like EFT? If i have maxed my TFSA and RRSP should i try to have bond in TFSA and RRSP, USA in RRSP and CAN in non registred account?
Thx!
Sometime, thinking to much about taxes is kind of hair splitting. Your saving rate is the most important, by far. You could have a mix in each account if you want. Only remember if you have to invest in taxable account, CAN stocks are the best. Now, if you have any kind of debt, you better pay off your debt instead of investing in bonds (my take). If you think your TFSA will be used for a cash down or as your EF, some bonds are ok.
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I have a question - that only popped into my head when I saw your post (so thank you for this thread, otherwise I would have signed on the dotted line and been clueless later!)
We are planning to enter into a conservation agreement to rehabilitate a wetland on a property that we own. The program will pay us 500$ per acre for land that is reclaimed as wetland and we are looking at approximately 20 acres. Do you know if this would be taxable or where I can find some information about it? My quick google did not reveal anything, but I am not even sure what I am looking for!
Its rental land, unless there's some sort of charitable tax break. I'm assuming its for a set time period of 10 years at which point it could revert back to farm land. You can deduct taxes and mortgage interest as well as other expenses. What you're doing sounds a little different than a normal rental agreement though. Do they pay it all up front or make annual payments? If its annual its easier to make tax deductions and if its lump sum then you might owe all the taxes in the year you get the money (now).
http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-15e.pdf
Thank you for the reference and the info. The payment comes in a single lump sum and the agreement lasts for the 10 year period. I am hoping there will be some sort of charitable tax break, it is funded by Environment Canada. At least I know to ask them before we sign!
Usually any grants or contributions from the government are considered taxable - however generally you recognize the revenue as the expenses are outlaid for the property for your taxable income would be $nil assuming the grant makes up for expenses of holding the land.
I.e. if you incur property taxes of $10,000 - you'd recognize the grant revenue of $10,000 on your tax return to make up for the expense.
Hope this helps!
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Question about asset location
I read on CCP that all asset are taxed differently when you buy stock or EFT but he never talked about mutual fund.
I follow his recommandation using the TD eSeries funds with the assertive balance (25% can, 25% USA, 25 int, 25 bond)
The question is : Is there a different in taxation when you use mutual fund like EFT? If i have maxed my TFSA and RRSP should i try to have bond in TFSA and RRSP, USA in RRSP and CAN in non registred account?
Thx!
Sometime, thinking to much about taxes is kind of hair splitting. Your saving rate is the most important, by far. You could have a mix in each account if you want. Only remember if you have to invest in taxable account, CAN stocks are the best. Now, if you have any kind of debt, you better pay off your debt instead of investing in bonds (my take). If you think your TFSA will be used for a cash down or as your EF, some bonds are ok.
Sorry - do you mean Asset Location? Or Allocation?
Are you a US Citizen?
CPA CB
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Question about asset location
I read on CCP that all asset are taxed differently when you buy stock or EFT but he never talked about mutual fund.
I follow his recommandation using the TD eSeries funds with the assertive balance (25% can, 25% USA, 25 int, 25 bond)
The question is : Is there a different in taxation when you use mutual fund like EFT? If i have maxed my TFSA and RRSP should i try to have bond in TFSA and RRSP, USA in RRSP and CAN in non registred account?
Thx!
Sometime, thinking to much about taxes is kind of hair splitting. Your saving rate is the most important, by far. You could have a mix in each account if you want. Only remember if you have to invest in taxable account, CAN stocks are the best. Now, if you have any kind of debt, you better pay off your debt instead of investing in bonds (my take). If you think your TFSA will be used for a cash down or as your EF, some bonds are ok.
Sorry - do you mean Asset Location? Or Allocation?
Are you a US Citizen?
CPA CB
CCP indeed talked about the assets location. So, after you decided your assets allocation, you should choose wich asset fits best in each account. Taxes are importants to consider but volatility and grow potential are also importants.
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I have a question about the Canadian child tax credit. My husband and I usually get about $533/month for our three kids (4, 8 and 14). We are now separated, and according to the estimator on the gov site, I should be getting $633/month child tax credit (estimated), now that we're sharing custody 50%. Do I have to wait until I do my taxes for 2016 before I can start getting the increased child tax credit, or is it possible to apply to get it changed in advance?
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I have a question about the Canadian child tax credit. My husband and I usually get about $533/month for our three kids (4, 8 and 14). We are now separated, and according to the estimator on the gov site, I should be getting $633/month child tax credit (estimated), now that we're sharing custody 50%. Do I have to wait until I do my taxes for 2016 before I can start getting the increased child tax credit, or is it possible to apply to get it changed in advance?
I can't comment on the amount or custody issue. But I got a very generic notice in the mail that said the new payment will go into direct deposit like the old one.
In my case this should be less money as we are married with only 1 kid about to turn 6.
Oh well, I guess we make enough money the government thinks we don't need more.
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I have a question about the Canadian child tax credit. My husband and I usually get about $533/month for our three kids (4, 8 and 14). We are now separated, and according to the estimator on the gov site, I should be getting $633/month child tax credit (estimated), now that we're sharing custody 50%. Do I have to wait until I do my taxes for 2016 before I can start getting the increased child tax credit, or is it possible to apply to get it changed in advance?
http://www.cra-arc.gc.ca/bnfts/mrtl/menu-eng.html
You need to notify CRA immediately about the separation or any marital changes, separations take 90 days before they become official. You can update it at CRA's "My Account" and the changes will take effect. If you are getting too much, based on the change you will need to pay it back, if its too little then you'll get more. Your husband will also need to update, right now you'll be getting all the money for both (typically females get it, its CRA policy) and when the CRA finds out they will make you repay the money.
http://www.cra-arc.gc.ca/E/pub/tg/t4114/t4114-16e.pdf - this is the long detailed version
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I have a question about the Canadian child tax credit. My husband and I usually get about $533/month for our three kids (4, 8 and 14). We are now separated, and according to the estimator on the gov site, I should be getting $633/month child tax credit (estimated), now that we're sharing custody 50%. Do I have to wait until I do my taxes for 2016 before I can start getting the increased child tax credit, or is it possible to apply to get it changed in advance?
http://www.cra-arc.gc.ca/bnfts/mrtl/menu-eng.html
You need to notify CRA immediately about the separation or any marital changes, separations take 90 days before they become official. You can update it at CRA's "My Account" and the changes will take effect. If you are getting too much, based on the change you will need to pay it back, if its too little then you'll get more. Your husband will also need to update, right now you'll be getting all the money for both (typically females get it, its CRA policy) and when the CRA finds out they will make you repay the money.
http://www.cra-arc.gc.ca/E/pub/tg/t4114/t4114-16e.pdf - this is the long detailed version
Thank you so much! This is exactly the information I was looking for.
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I have a question about the Canadian child tax credit. My husband and I usually get about $533/month for our three kids (4, 8 and 14). We are now separated, and according to the estimator on the gov site, I should be getting $633/month child tax credit (estimated), now that we're sharing custody 50%. Do I have to wait until I do my taxes for 2016 before I can start getting the increased child tax credit, or is it possible to apply to get it changed in advance?
http://www.cra-arc.gc.ca/bnfts/mrtl/menu-eng.html
You need to notify CRA immediately about the separation or any marital changes, separations take 90 days before they become official. You can update it at CRA's "My Account" and the changes will take effect. If you are getting too much, based on the change you will need to pay it back, if its too little then you'll get more. Your husband will also need to update, right now you'll be getting all the money for both (typically females get it, its CRA policy) and when the CRA finds out they will make you repay the money.
http://www.cra-arc.gc.ca/E/pub/tg/t4114/t4114-16e.pdf - this is the long detailed version
Thank you so much! This is exactly the information I was looking for.
I know someone getting a divorce & in the separation agreement it said they could each claim one of two kids for tax reasons. Maybe something like that will work for you.
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(typically females get it, its CRA policy)
typically the lower income earner gets it
FTFY
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(typically females get it, its CRA policy)
typically the lower income earner gets it
FTFY
Hi there - it completely depends on the separation agreement - It's only typical that the lower income earner gets it because that's the person who is applying...
Make sure you spell this out in the agreement who gets to claim what child. Most divorces are vindictive and take the attitude of "I get nothing so you get nothing" which is counter productive. You both can claim a child, just decide on which, and go from there. It's a net positive to you, to your divorcee, and the family as a whole. Don't get into a fight on this.
CPA CB
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I claimed the youngest, so I can claim him longer.
I hope that's how it works anyway!
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(typically females get it, its CRA policy)
typically the lower income earner gets it
FTFY
No, I think it was correct. Its on the CRA website that they assume females (in a male/female house) to be the primary caregiver. Since they're splitting the assumption going in was she was the primary caregiver unless they had already written CRA stating otherwise. Notice how CRA requires the male in the relationship to provide a note along with the application, females aren't required for a note from their male partner (feel free to check it out yourself). It actually has nothing to do with income levels, in the absence of direction from the parents they just make an assumption. They have to assume someone is the primary, in a combined family it really doesn't matter that much.
"For CCB purposes, when a male and a female parent live together in the same household as the child, the female parent is usually considered to be primarily responsible for the child. In this situation, the female parent should apply. If the male parent is primarily responsible, he must attach a note to his application from the female parent. The note must state that he is primarily responsible for all of the children in the household." - CRA
I claimed the youngest, so I can claim him longer.
I hope that's how it works anyway!
Each parent gets 50% of the total in Shared Custody arrangements.
"Both individuals must be primarily responsible for the child's care and upbringing when the child lives with them. Each eligible individual will get 50% of the payment he or she would have received if the child lived with him or her all of the time. If you have just entered into a shared custody situation you have to apply for benefit" - CRA
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Can someone please tell me about the Working Income Tax Benefit and its associated Disability Supplement?
On several sites, it says the calculation includes income from employment, business, or self-employment. On the Govt's calculator site, it tells us to include EVERY source of income, including nonwork, pensions, etc.
1. What income sources are included in the calculation?
2. For the Disability Supplement, is it the basic threshold PLUS the DS threshold? Or does a person eligible for the DS ignore info re: basic threshold and look ONLY at the latter?
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Can someone please tell me about the Working Income Tax Benefit and its associated Disability Supplement?
On several sites, it says the calculation includes income from employment, business, or self-employment. On the Govt's calculator site, it tells us to include EVERY source of income, including nonwork, pensions, etc.
1. What income sources are included in the calculation?
2. For the Disability Supplement, is it the basic threshold PLUS the DS threshold? Or does a person eligible for the DS ignore info re: basic threshold and look ONLY at the latter?
The formula for the working income tax credit takes into account two separate concepts of income -- "working income" and "adjusted net income". See section 122.7(2) (https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-1-5th-supp/latest/rsc-1985-c-1-5th-supp.html#sec122.7subsec2_smooth) of the Income Tax Act, RSC 1985, c 1 (5th Supp) ("ITA"). The disability supplement is an additional provision of the legislation and has its own formula. If the result of the disability supplement calculation is greater than zero, that amount is received in addition to the normal working income tax credit. ITA § 122.7(3). Both formulas have a number of special cases.
The CRA provides a worksheet that can be used to calculate the values of these benefits: Schedule 6 to the Individual Income Tax Return (http://www.cra-arc.gc.ca/E/pbg/tf/5010-s6/5010-s6-15e.pdf).
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Thanks very much, Cathy! (Also, I was just thinking about you the other day, wondering where you'd gone and trying to think how to reach you. Great you're here!) This WITB/DS worksheet seems much more clear than CRA's online calc. I'll work through it.
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Hi,
First, thanks for doing this! You Rock!
I am starting at page one and reading all the posts from this thread as there is so much great advice and clarifications :)
For myself, I have one (hopefully quick) question...
We have a rental property with a mortgage. We have owned it for 10 years. We live and the property is in Ontario. I prepare my own year end to give to the accountant, but I just realize that I have shorted ourselves by not including mortgage interest for the last 10 years. ooopps! my bad ;O.
Also, we are selling it this year, so this will be the last return with it.
Best regards, thank you!
Any recommendation to fix it?
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We have a rental property with a mortgage. We have owned it for 10 years. We live and the property is in Ontario. I prepare my own year end to give to the accountant, but I just realize that I have shorted ourselves by not including mortgage interest for the last 10 years. ooopps! my bad ;O.
Also, we are selling it this year, so this will be the last return with it.
Best regards, thank you!
Any recommendation to fix it?
Refile the past 10 years of returns. Its not a big deal, it will go pretty quick if its the same mistake each year. I attached the link with the adjustment form, its really fast to fill, I think it will take longer to determine the interest amounts (which is also pretty fast).
http://www.cra-arc.gc.ca/changereturn/
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CPA CB,
How much do you know about non-resident tax withheld on dividends from foreign countries? I purchased TOTAL S.A. (ADR) shares several years ago and realized that the dividends were being taxed at source at a rate of 30%. I was able to find out that Canada had a tax treaty with France so I should be able to reduce that tax from 30 to 15%, recuperate what was overtaxed, and rectify it for the future payments. I've read many articles (couchpotatoe, globe and mail) that all say that this will not be possible with a TFSA. I'm about to send a letter plus forms 5000-EN and 5001-EN to my financial institution and get them to send it to the French tax authorities. How likely is it that I will get refunded?
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This thread is awesome, I'm so glad I found it.
I've got a couple wealth management type questions:
Under what circumstances is it worth creating a holding company to hold investments? Tips/caveats about where to incorporate, who should hold shares, assets to hold, and how to get money out of it eventually?
Same as above but for trusts - what are the differences of a domestic trust vs an international trust (all jurisdictions are different; looking for general thoughts)
Also, if one of the CPAs on here could weigh in on all the tax dodging stuff in the press lately that would be really interesting to read about. I'm thinking about Panama Papers and that stuff with KPMG and the Isle of Man.
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A question for you about 'fixing' old tax returns.
The background is that when I was younger I just handed over my tax stuff to my Dad's accountant and let him handle everything. Eventually I took over the job myself and have been sending in my own returns for about 5 years now. For my 2014 return I realized that I had a substantial amount of unclaimed RRSP contributions - contributions I had made but not yet claimed to offset any income tax. I now understand that these were being held so that they could be used against my expected future higher income but didn't realize it then. I claimed all of it which meant about $10k was used to offset lower tax-bracket income.
So the question is: Is it possible to go back and adjust my previous tax return to 'un-claim' those RRSP contributions, and instead spread them out over the next couple years where they can offset the income in my current peak tax bracket? I would end up owing more on my 2014 taxes, but should be able to save even more still on my 2016 and 2017 taxes. If possible, what would the process entail?
Thanks!
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Partners in a rental property, mortgage interest deduction question:
My spouse and I own a rental property. We have always shared the expenses and income 50:50.
It’s worth about $300,000 and has a $200,000 mortgage on it.
My spouse is in the position to pay out their share of the mortgage with savings, I am not, and would rather Vanguard invest. (The pay-off mortgage vs invest is not something we agree on.)
The mortgage now goes down to $100K and will probably still be in both of our names (if that matters).
So, if I take over the mortgage payments for the $100K remaining mortgage from my share of the income can I deduct 100% of the interest from my taxes while my spouse deducts nothing?
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CPA, I'd love to get your input over here. Thanks!
http://forum.mrmoneymustache.com/taxes/canada-fire-with-rrsps/
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VUN vs VTI question for the group
What if any are the implications of owning more than $100k of VTI in an RSP account?
I see T1135 Foriegn Income Verification Statement. Does that mean I just have to report owning > 100k of VTI in RSP, but does it affect my taxes or anything other than filling in the additional form at tax time?
http://www.cra-arc.gc.ca/E/pbg/tf/t1135/README.html
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VUN vs VTI question for the group
What if any are the implications of owning more than $100k of VTI in an RSP account?
I see T1135 Foriegn Income Verification Statement. Does that mean I just have to report owning > 100k of VTI in RSP, but does it affect my taxes or anything other than filling in the additional form at tax time?
http://www.cra-arc.gc.ca/E/pbg/tf/t1135/README.html
You don't need to report if it's registered.
The T1135 is just a sort of "heads up" or tracking mechanism for the government, so large sums of money don't magically appear. IE, you buy a house overseas, you sell it, you MUST declare the cap gain. The T1135 on its own doesn't do this, but it helps. And, if you have to file one, they can basically review your taxes forever.
But yeah, it's only if you have > $100k of foreign stuff outside tax shelters, and not for personal use only.
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CPA ... I was sure I could just take money out of my TFSA and do whatever I wanted with it??? But I read in a post that there was a tax implication :(
Can you tell me for sure one way or the other??? It was a couple thousand I had put in but then decided it would be better used to put it on paying down my Line of Credit.
Thank you!!!
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CPA ... I was sure I could just take money out of my TFSA and do whatever I wanted with it??? But I read in a post that there was a tax implication :(
Can you tell me for sure one way or the other??? It was a couple thousand I had put in but then decided it would be better used to put it on paying down my Line of Credit.
Thank you!!!
You can take your money out of the TFSA and do what you want with it tax free.
https://www.tdcanadatrust.com/products-services/banking/accounts/tax-free-savings-account/tfsa-qa.jsp
Q: When can I withdraw my money?
A: You can withdraw funds from your TFSA any time you want – you don’t have to reach a certain age before you withdraw your money.
Q: Do I have to pay income tax on my withdrawals?
A: No, you don’t have to pay tax on the amounts you withdraw.
Because TFSA withdrawals don’t count as taxable income, they don’t affect Federal income-tested benefits or tax credits you may receive, including the Canada Child Tax Benefit, the Working Income Tax Benefit, the Goods and Services Tax Credit and the Age Credit. TFSA withdrawals also won’t reduce benefits based on your income level, such as Old Age Security, the Guaranteed Income Supplement and Employment Insurance benefits.
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Funny question for you.
My wife and I both got a notice of reassessment from the CRA in the mail today. I have to pay about three grand extra (plus about 100$ for paying late), she gets about three grand back (plus about 40$ for overpaying . . . which is apparently taxable income for next year).
The explanation of changes for my wife's assessment:
- We deleted your universal child care benefit since the spouse or common-law partner with the lower net income has to report this income.
- We gave you a deduction of 8,000$ for child care expenses since you have a lower net income. For more information, see form T778, Child Care Expenses Deduction for 2015.
The explanation of changes for my assessment:
- We included the universal child care benefit since the spouse or common-law partner with the lower net income has to report this income.
- Based on the information we have, we have disallowed your child care expenses. The person with the lower net income must claim these expenses. For more information, see form T778, Child Care Expenses Deduction for 2015.
My wife and I have very close net income amounts for last year when you don't account for the UCCB and child care deduction.
Serious questions:
- Are they just fucking with me?
- Is this worth fighting, or should I just pay the amount?
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Serious questions:
- Are they just fucking with me?
- Is this worth fighting, or should I just pay the amount?
Lol. Their reasons sound soooo contradictory. I don't have a knowledgable answer but my guess is there was an error on your part in the order in which you total your income and then take the deductions.
I would call to discuss a clarification and potentially get the $100 fine waved since it's not like the government didn't have their money. It was just from the wrong person.
And at least you are married. I know a reciently seperated couple who were still married on Dec 31. This exact thing happend so imagine how pleased the paying patent was.
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Well . . . I've called the CRA to ask them what was going on today.
1st phone call - after about five minutes of canned messages was told that call volume is too high and nobody can talk to me.
2nd phone call (made immediately after hanging up from first call) - got put on hold for about ten minutes, got through to an agent, performed all security checks (name, DOB, address, SSN, line 150 and line 350 of last return), explained problem. I was put on hold for twenty minutes, then she came back and said that she couldn't answer my question. I was transferred to another person (15 minute hold wait).
The second person that I talked to (after we performed all security checks again - name, DOB, address, SSN, line 150 and line 350 of last return) said that the calculation of net income for UCCB is made by the CRA before applying the child care expenses deduction. My net income is about a hundred dollars lower than my wife's before the UCCB and child care deductions. The CRA therefore claimed the UCCB as my own expense - which raises my net income above my wife's, which disallows me to claim the child care expenses.
If they had done things in the reverse order (my net income is initially lower/I claim the child care expenses, then my net income is higher/my wife claims the UCCB) then things work out exactly as I originally claimed them.
I asked if there was any information available (online or in the forms) to tax filers that the order the CRA followed is the order that must be followed when filing a return. First the agent told me not to worry, the CRA accountants are much smarter than I am, so they definately did it right. Then she gave me several references to internal CRA documents, and I asked where I could find them online. Then she told me that the documents aren't available to people who don't work for the CRA. So I asked again if there are any documents that are available to tax filers that would explain the correct order to apply things. I was told to look up the Income Tax Act section 56 (6) and 56 (9.1), they would make it all clear.
So, after talking with her I looked up the Income Tax Act online for the sections mentioned:
56(6) - Child care benefit
(6) There shall be included in computing the income of a taxpayer for a taxation year the total of all amounts each of which is a benefit paid under section 4 of the Universal Child Care Benefit Act that is received in the taxation year by
(a) the taxpayer, if
(i) the taxpayer does not have a cohabiting spouse or common-law partner (within the meaning assigned by section 122.6) at the end of the year and the taxpayer does not make a designation under subsection (6.1) for the taxation year, or
(ii) the income, for the taxation year, of the person who is the taxpayer’s cohabiting spouse or common-law partner at the end of the taxation year is equal to or greater than the income of the taxpayer for the taxation year;
(b) the taxpayer’s cohabiting spouse or common-law partner at the end of the taxation year, if the income of the cohabiting spouse or common-law partner for the taxation year is greater than the taxpayer’s income for the taxation year; or
(c) an individual who makes a designation under subsection (6.1) in respect of the taxpayer for the taxation year.
Marginal note:Designation
(6.1) If, at the end of the taxation year, a taxpayer does not have a cohabiting spouse or common-law partner (within the meaning assigned by section 122.6), the taxpayer may designate, in the taxpayer’s return of income for the taxation year, the total of all amounts, each of which is a benefit received in the taxation year by the taxpayer under section 4 of the Universal Child Care Benefit Act, to be income of
(a) if the taxpayer deducts an amount for the taxation year under subsection 118(1) because of paragraph (b) of the description of B in that subsection in respect of an individual, the individual; or
(b) in any other case, a child who is a qualified dependant (as defined in section 2 of the Universal Child Care Benefit Act) of the taxpayer.
56 (9.1) - For the purposes of subsection (6), income of a person for a taxation year means the amount that would, in the absence of that subsection, paragraphs (1)(s) and (u) and 60(v.1), (w) and (y) and section 63, be the income of the person for the taxation year.
. . . since that didn't seem to answer my question:
3rd phone call - waited about ten minutes to get a hold of someone), performed all security checks (name, DOB, address, SSN, line 150 and line 350 of last return), explained situation again. I then explained the problem that the order you apply the deductions matters in this case, and that I'd like to be shown the form or online documentation for how to file the return correctly. Was put on hold for 30 minutes and then was disconnected.
Guess I'll try again tomorrow. At least I've answered my first question - yes, they do appear to just be fucking with me. :P
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Funny question for you.
My wife and I both got a notice of reassessment from the CRA in the mail today. I have to pay about three grand extra (plus about 100$ for paying late), she gets about three grand back (plus about 40$ for overpaying . . . which is apparently taxable income for next year).
The explanation of changes for my wife's assessment:
- We deleted your universal child care benefit since the spouse or common-law partner with the lower net income has to report this income.
- We gave you a deduction of 8,000$ for child care expenses since you have a lower net income. For more information, see form T778, Child Care Expenses Deduction for 2015.
The explanation of changes for my assessment:
- We included the universal child care benefit since the spouse or common-law partner with the lower net income has to report this income.
- Based on the information we have, we have disallowed your child care expenses. The person with the lower net income must claim these expenses. For more information, see form T778, Child Care Expenses Deduction for 2015.
My wife and I have very close net income amounts for last year when you don't account for the UCCB and child care deduction.
Serious questions:
- Are they just fucking with me?
- Is this worth fighting, or should I just pay the amount?
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/117-eng.html
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/214/wh/menu-eng.html
Lower income (GuitarStv) has to claim UCCB - its not based on mother/father or who receives the money.
Then deductions start based on net income; in this case your net is now higher so your partner claims. The order is in the counting system; line 117 comes before line 214 (sorry, its not what you want to hear). The tax form is intended to go front to back (with a handful of related forms to slow it down).
You don't get to choose how to allocate the income/deductions, I wish we could. I use simpletax which auto allocates the household stuff, its helpful to use a check on your filing.
The weird thing about UCCB is it assumes mothers are the primary caregiver (fathers need to get a signed note from the mother if they are the primary caregiver, mothers do not need a note). Yet at tax time the lower income claims it. In your case your wife is assumed to be the primary care, she likely gets the cheque, which is why you probably put it on her taxes. For tax purposes the recipient and the person claiming are not necessarily the same person (like your case). I get why you did it, it probably happens fairly often.
You will end up paying (IMO). You can try to get reduced charges but I have no experience with that so I can only wish you good luck.
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Funny question for you.
My wife and I both got a notice of reassessment from the CRA in the mail today. I have to pay about three grand extra (plus about 100$ for paying late), she gets about three grand back (plus about 40$ for overpaying . . . which is apparently taxable income for next year).
The explanation of changes for my wife's assessment:
- We deleted your universal child care benefit since the spouse or common-law partner with the lower net income has to report this income.
- We gave you a deduction of 8,000$ for child care expenses since you have a lower net income. For more information, see form T778, Child Care Expenses Deduction for 2015.
The explanation of changes for my assessment:
- We included the universal child care benefit since the spouse or common-law partner with the lower net income has to report this income.
- Based on the information we have, we have disallowed your child care expenses. The person with the lower net income must claim these expenses. For more information, see form T778, Child Care Expenses Deduction for 2015.
My wife and I have very close net income amounts for last year when you don't account for the UCCB and child care deduction.
Serious questions:
- Are they just fucking with me?
- Is this worth fighting, or should I just pay the amount?
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/117-eng.html
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/214/wh/menu-eng.html
Lower income (GuitarStv) has to claim UCCB - its not based on mother/father or who receives the money.
Then deductions start based on net income; in this case your net is now higher so your partner claims. The order is in the counting system; line 117 comes before line 214 (sorry, its not what you want to hear). The tax form is intended to go front to back (with a handful of related forms to slow it down).
You don't get to choose how to allocate the income/deductions, I wish we could. I use simpletax which auto allocates the household stuff, its helpful to use a check on your filing.
The weird thing about UCCB is it assumes mothers are the primary caregiver (fathers need to get a signed note from the mother if they are the primary caregiver, mothers do not need a note). Yet at tax time the lower income claims it. In your case your wife is assumed to be the primary care, she likely gets the cheque, which is why you probably put it on her taxes. For tax purposes the recipient and the person claiming are not necessarily the same person (like your case). I get why you did it, it probably happens fairly often.
You will end up paying (IMO). You can try to get reduced charges but I have no experience with that so I can only wish you good luck.
Well, that makes more sense than anything the CRA was able to tell me today over three phone calls.
Yes, my wife does get the cheque. That's probably why I put it on her income tax to begin with.
Sigh.
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Funny question for you.
My wife and I both got a notice of reassessment from the CRA in the mail today. I have to pay about three grand extra (plus about 100$ for paying late), she gets about three grand back (plus about 40$ for overpaying . . . which is apparently taxable income for next year).
The explanation of changes for my wife's assessment:
- We deleted your universal child care benefit since the spouse or common-law partner with the lower net income has to report this income.
- We gave you a deduction of 8,000$ for child care expenses since you have a lower net income. For more information, see form T778, Child Care Expenses Deduction for 2015.
The explanation of changes for my assessment:
- We included the universal child care benefit since the spouse or common-law partner with the lower net income has to report this income.
- Based on the information we have, we have disallowed your child care expenses. The person with the lower net income must claim these expenses. For more information, see form T778, Child Care Expenses Deduction for 2015.
My wife and I have very close net income amounts for last year when you don't account for the UCCB and child care deduction.
Serious questions:
- Are they just fucking with me?
- Is this worth fighting, or should I just pay the amount?
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/117-eng.html
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/214/wh/menu-eng.html
Lower income (GuitarStv) has to claim UCCB - its not based on mother/father or who receives the money.
Then deductions start based on net income; in this case your net is now higher so your partner claims. The order is in the counting system; line 117 comes before line 214 (sorry, its not what you want to hear). The tax form is intended to go front to back (with a handful of related forms to slow it down).
You don't get to choose how to allocate the income/deductions, I wish we could. I use simpletax which auto allocates the household stuff, its helpful to use a check on your filing.
The weird thing about UCCB is it assumes mothers are the primary caregiver (fathers need to get a signed note from the mother if they are the primary caregiver, mothers do not need a note). Yet at tax time the lower income claims it. In your case your wife is assumed to be the primary care, she likely gets the cheque, which is why you probably put it on her taxes. For tax purposes the recipient and the person claiming are not necessarily the same person (like your case). I get why you did it, it probably happens fairly often.
You will end up paying (IMO). You can try to get reduced charges but I have no experience with that so I can only wish you good luck.
Wait a sec. Upon more thinking that doesn't make sense.
My gross income was higher than my wife's last year. I made more RRSP contributions which created deductions that lowered my net income to just slightly below hers. Why are those deductions OK to effect my net income, but the child care rebate deductions not OK to effect my net income when determining who claims the UCCB? That doesn't make sense.
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Wait a sec. Upon more thinking that doesn't make sense.
My gross income was higher than my wife's last year. I made more RRSP contributions which created deductions that lowered my net income to just slightly below hers. Why are those deductions OK to effect my net income, but the child care rebate deductions not OK to effect my net income when determining who claims the UCCB? That doesn't make sense.
wow, you guys really were close, be careful with it this year too! On the back of the childcare form they have the procedure (linked). Childcare deductions go to the lower income after calculating out the net income. To figure it out you would have had to have RRSP, UCCB and all your net income calculated before determining who receives the childcare deduction. Please don't shoot the messenger, direct all anger at the CRA ;)
Congrats on the RRSP contributions. To make it better catch up RRSP were worth the federal 22% between 45-90K bracket, now worth 20.5%. Plus you get a larger UCCB cheque this year for contributing to RRSP's last year. For 2 kids its worth 5.7%, so if you paid an extra $1,000 it would get you $57 (from UUCB) and $15 (higher tax rate in 2015) which covers the penalty (yours-wife was about $60?). So you still did the smart thing, sometimes good intentions don't work out.
http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-15e.pdf
Your net income, and that of the other person, is used to determine
which person can claim child care expenses. This is the amount
from line 236 of your returns. However, do not include amounts
for child care expenses (line 214) and social benefits repayment
(line 235).
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TFSA limit for 2017 is $5,500.
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I've been trying to learn and get more knowledge on the intricacies of our tax code, and I was wondering if there are any free/low cost programs to study more effectively.
I have gone through most of the Tax Tips.ca site, but reading the actual tax code document from the CRA is quite a head-ache.
Thanks!
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Hi, I have a question about some interpretations in the tax code:
I'm a sub-contracted employee in Alberta. For the past year or so, I have been trying to get my payroll department to correct what I believe is an error in my T4. I am given a living allowance due to the location of my worksite, which is far outside the confines of civilization. On my T4, this is separated as a taxable benefit 'Box 40.' However, I believe that allowance should be categorized under the rules of "Remote Work Site," section 6(6) of the Income Tax Act, and IT91.
http://www.cra-arc.gc.ca/E/pub/tp/it91r4/it91r4-e.html
I called the CRA, and for what it is worth, their quick overview with an adjustor seemed to agree with me. They suggested that the easiest way to deal with this is if I ask my employer to issue an amended T4, as it should be done on an employer level. I did so, and then after months of un-returned emails and phone calls, I received a response. Despite all other pre-requisites being met in IT91, they had two objections. The message explained that because my worksite has a medic, that qualifies as "Certain Medical Assistance" and disqualifies it from being "Remote." Furthermore, since the work-camp has a cafeteria, that qualifies it as a "Self-Contained Domestic Establishment."
When I questioned their reasoning behind this response, I was told that they are 'under no obligation to share their accounting practices with me,' and further they had just passed a CRA audit two years prior. I have my doubts about this, as it took almost two months for my company to correctly fill out a T2200, (they listed almost everything, except for my name, wrong on that form). Myself and three other co-workers are the only ones contracted to this particular site, and would probably be very easily overlooked in an audit of a very large company.
My question is: do those explanations of 'remoteness' and the SCDE actually disqualify me from obtaining "Remote Work Site" designation, and also what recourse do I have to challenge a non-cooperative accounting department?
Thanks!
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Our big question to figure out is if we can claim our moving expenses. We quit our jobs and moved and found higher paying ones once here (3 months off between jobs). So we didn't move for jobs but our jobs improved because of the move if that makes any difference.
If you know what can you claim? Movers? Reasonable travel expenses? (We did a trip for 2.5 weeks and would be able to find some hotel receipts and credit card bills) house commissions? Without counting our trip we'd be close to $25k
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Our big question to figure out is if we can claim our moving expenses. We quit our jobs and moved and found higher paying ones once here (3 months off between jobs). So we didn't move for jobs but our jobs improved because of the move if that makes any difference.
If you know what can you claim? Movers? Reasonable travel expenses? (We did a trip for 2.5 weeks and would be able to find some hotel receipts and credit card bills) house commissions? Without counting our trip we'd be close to $25k
Here is a link to the relevant CRA info: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/menu-eng.html
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This might be a silly question, but....
I used to do our taxes on my own, without issue, using TurboTax or an equivalent.
My husband now has a job where he is issued a T2200 for work from home expenses, etc. Since he has had this job, I thought I needed to get an accountant to do our taxes to ensure we were using the deductions properly.
My question is - would this type of employment deductions be easily dealt with on my own using the tax software? I want it done accurately, however when the accountant has increased his rates for the past few years, it makes me wonder if it's worth going to him anymore. It will cost approx $200 for him to do it, or $30 for software.
Thank you for any advice.
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This might be a silly question, but....
I used to do our taxes on my own, without issue, using TurboTax or an equivalent.
My husband now has a job where he is issued a T2200 for work from home expenses, etc. Since he has had this job, I thought I needed to get an accountant to do our taxes to ensure we were using the deductions properly.
My question is - would this type of employment deductions be easily dealt with on my own using the tax software? I want it done accurately, however when the accountant has increased his rates for the past few years, it makes me wonder if it's worth going to him anymore. It will cost approx $200 for him to do it, or $30 for software.
Thank you for any advice.
simpletax.ca
I'd be surprised if what I assume is a straightforward form wasn't there. As it's free, there's no issue checking to see!
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This might be a silly question, but....
I used to do our taxes on my own, without issue, using TurboTax or an equivalent.
My husband now has a job where he is issued a T2200 for work from home expenses, etc. Since he has had this job, I thought I needed to get an accountant to do our taxes to ensure we were using the deductions properly.
My question is - would this type of employment deductions be easily dealt with on my own using the tax software? I want it done accurately, however when the accountant has increased his rates for the past few years, it makes me wonder if it's worth going to him anymore. It will cost approx $200 for him to do it, or $30 for software.
Thank you for any advice.
simpletax.ca
I'd be surprised if what I assume is a straightforward form wasn't there. As it's free, there's no issue checking to see!
And you can double check the results with other free tax softwares. Studio Tax, Taxfreeway, etc..
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This might be a silly question, but....
I used to do our taxes on my own, without issue, using TurboTax or an equivalent.
My husband now has a job where he is issued a T2200 for work from home expenses, etc. Since he has had this job, I thought I needed to get an accountant to do our taxes to ensure we were using the deductions properly.
My question is - would this type of employment deductions be easily dealt with on my own using the tax software? I want it done accurately, however when the accountant has increased his rates for the past few years, it makes me wonder if it's worth going to him anymore. It will cost approx $200 for him to do it, or $30 for software.
Thank you for any advice.
Simpletax and do the 2015 taxes in it. When you get the same results you can confidently do 2016 taxes.
https://simpletax.ca/
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Thank you for the replies, I will try it out using the 2015 and compare.
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Is a UK ISA account owned by a Canadian (former UK) Resident considered a Taxable investment account? Are income and capital gains taxes due annually to CRA?
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That's a tough one, isn't it?
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That's a tough one, isn't it?
I'd call them (CRA). I did try to search but found no info. If it's not in the tax treaty, you're out of luck.
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That's a tough one, isn't it?
You might find this thread on Canadian Money Forum helpful. It is from a Canadian moving to the UK, so sort of backwards, but he and the posters address a lot of CA/UK tax issues. http://canadianmoneyforum.com/showthread.php/65170-Canadian-Moving-to-UK/page3
He seems to indicate that the UK does not recognize the TFSA as a tax free vehicle (much like the US) Likely the reverse is true with an ISA.... you might even ask him.
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Thanks for the link Koogie. I've passed it on to the stranger who asked in another thread of mine.
Love the hive mind!
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Is there a simple formula or rule of thumb to help me figure out whether it's worth claiming medical expenses this year? We have a very unusual, for us, year tax wise with both very high household income and higher than normal medical expenses.
Going forward, we may have more eligible expense, but lower income so I'm interested in this from that angle too.
Gathering the million and one medical receipts and insurance statements from 2016 (some were covered and I think CRA will request proof that the claimed expenses weren't eligible for reimbursement) will be a PITA if it ends up not reducing our tax bill.
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Re: medical exp, my spproach would be
0, start a manila envelope to collect 2017 reciepts. Now.
1, am I eligible to claim?
2, if yes, what is my estimated expense claim - ballpark, from Mint or credit cards reciepts
3, put that number into tax software and compare refund claiming vs not
4, if its "worth it" to you, dig for all your 2016 reciepts
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CPA CB,
I have a question about child care expense deductions. The deduction limit is currently sitting at $8000 dollars per child. If I have two children under the age of 6 can I only claim $8k per child or are the deductions transferrable between children. For example, if we incur expenses of $10,000 for one child and $6000 for the other can we still claim the full $16,000? Form T778 (http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-15e.pdf) seems to imply that you can based on the way the calculations are presented and I couldn't find anything in the instructions that clarified the situation one way or another.
Thanks.
Hi Jam,
It's $8,000 per child, but not 'globally' $16,000.
That being said, many expenses can realistically be split between children in a way that would maximize the utilizable value for you. I wouldn't call this 'by the book' (at least not in CRA's eyes) but I think it's a reasonable interpretation of the Income Tax Act (if your assumptions in split are reasonable).
Cheers
CPA CB
Just to follow up on this question from last year. I was preparing my taxes last night using the online version of TurboTax and the $8000 child care deduction does appear to be transferable between children based on what I saw.
I have two children in daycare at the moment and the younger just started at the end of 2016 so our daycare expenses for 2016 were approximately:
Child 1: $20,000
Child 2: $1,000
I entered that information into TurboTax, making sure to apportion the correct amounts to each child as indicated above, and TurboTax then showed a deduction of $16,000 for me (as opposed to $9,000 if there was no transferability of the deduction between children).
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Jambongris - taxtips runs through the example. They have a case example like yours.
http://www.taxtips.ca/filing/childcarecosts.htm
http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f3/s1-f3-c1-eng.html#N1068E
The CRA website.
Follow the table and you will see the $16,000 is correct. You paid 21,000, max allowed is $16,000, therefore you can clam 16,000. CRA allows a total max, not an individual comparison for each child. Its a global, family amount, not an individual amount listed on the CRA forms.
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Jambongris - taxtips runs through the example. They have a case example like yours.
http://www.taxtips.ca/filing/childcarecosts.htm
http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f3/s1-f3-c1-eng.html#N1068E
The CRA website.
Follow the table and you will see the $16,000 is correct. You paid 21,000, max allowed is $16,000, therefore you can clam 16,000. CRA allows a total max, not an individual comparison for each child. Its a global, family amount, not an individual amount listed on the CRA forms.
That Tax Tips website provides a nice summary. I clearly need to work on my google-fu as I was unable to find it on my own.
I was pretty sure I was correct based on the wording of CRA form T778 but I interpreted CPA CB's response as saying that I was wrong. It was a nice surprise when I saw the numbers in TurboTax and your further confirmation is the cherry on top. Obviously this has a significant effect on our taxes going forward.
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I have a question regarding RRSP deductions that I'm looking for help with. I have 12.3k in unused deductions from previous years, and about another $8500 that I will have contributed this year. I have not used my full deductions for the past several years (since 2013 tax year) due to two maternity/parental leaves that crossed tax years and left me with a significantly lower income than a full working year. I used just enough of my deductions to ensure I was under the approx. $45k boundary for federal tax brackets and to pay off my HBP amount owing ($323 per year). I carried the rest of the deductions forward as I knew that in 2016, I would be back to fully salary for an entire tax year.
This year, my income is about $75k. When I use my RRSP deductions to lower my income, I become the lower income spouse, meaning that I claim both the final 6 months of UCCB income (2k), and also our 2016 child care expenses (12.3k). I do not actually need to use all of the RRSP deductions available - using about 19k gets me down under the $45k boundary. What I am wondering, and hoping for feedback on, is whether this is the best approach. Is there any reason not to do this? Is there a better way to use these deductions that I haven't considered? Unless I change jobs or get a big raise (unlikely in both cases right now), I am not going to be approaching the next tax bracket for at least 5 years or so. My thoughts are get the money back from the government now, and invest it back into our RRSPs/house (fence, landscaping - we built on a bare lot) rather than let that money languish with the government for 5 more years. If we go this route, our return will be in the region of 8.8k, which is a massive amount of money that could be working for us.
I would really appreciate any feedback you all have on this approach. My husband is semi-mustachian, but is much less interested in the small details. He just wants to get the big refund and be done with it. I want to make sure we get as much back as we can. Thank you!
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I have a question regarding RRSP deductions that I'm looking for help with. I have 12.3k in unused deductions from previous years, and about another $8500 that I will have contributed this year. I have not used my full deductions for the past several years (since 2013 tax year) due to two maternity/parental leaves that crossed tax years and left me with a significantly lower income than a full working year. I used just enough of my deductions to ensure I was under the approx. $45k boundary for federal tax brackets and to pay off my HBP amount owing ($323 per year). I carried the rest of the deductions forward as I knew that in 2016, I would be back to fully salary for an entire tax year.
This year, my income is about $75k. When I use my RRSP deductions to lower my income, I become the lower income spouse, meaning that I claim both the final 6 months of UCCB income (2k), and also our 2016 child care expenses (12.3k). I do not actually need to use all of the RRSP deductions available - using about 19k gets me down under the $45k boundary. What I am wondering, and hoping for feedback on, is whether this is the best approach. Is there any reason not to do this? Is there a better way to use these deductions that I haven't considered? Unless I change jobs or get a big raise (unlikely in both cases right now), I am not going to be approaching the next tax bracket for at least 5 years or so. My thoughts are get the money back from the government now, and invest it back into our RRSPs/house (fence, landscaping - we built on a bare lot) rather than let that money languish with the government for 5 more years. If we go this route, our return will be in the region of 8.8k, which is a massive amount of money that could be working for us.
I would really appreciate any feedback you all have on this approach. My husband is semi-mustachian, but is much less interested in the small details. He just wants to get the big refund and be done with it. I want to make sure we get as much back as we can. Thank you!
1. Is your TFSA (both of them) full?
2. RRSP = tax deferral. You are only 'losing' on the growth of the stuff you don't have invested. At 30% tax rate, on say $10k of contributions, that's $3k; but it's the *growth* of that $3k that is relevant. IE, it's not as big a deal as you think - vs investing unregistered, and saving using the RRSP room til you're earning more (if you think that IS likely).
3. More RRSP contribs = lower net income = greater CTB.
If you're not expecting a significant raise for a while I'd probably just catch up with the room gradually. I mean, it depends on your needs in retirement vs how much you already have inside, too - no point putting so much in that you'll struggle to get it out/get OAS clawed back/end up losing vs just doing it unreg.
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I have a question regarding RRSP deductions that I'm looking for help with. I have 12.3k in unused deductions from previous years, and about another $8500 that I will have contributed this year. I have not used my full deductions for the past several years (since 2013 tax year) due to two maternity/parental leaves that crossed tax years and left me with a significantly lower income than a full working year. I used just enough of my deductions to ensure I was under the approx. $45k boundary for federal tax brackets and to pay off my HBP amount owing ($323 per year). I carried the rest of the deductions forward as I knew that in 2016, I would be back to fully salary for an entire tax year.
This year, my income is about $75k. When I use my RRSP deductions to lower my income, I become the lower income spouse, meaning that I claim both the final 6 months of UCCB income (2k), and also our 2016 child care expenses (12.3k). I do not actually need to use all of the RRSP deductions available - using about 19k gets me down under the $45k boundary. What I am wondering, and hoping for feedback on, is whether this is the best approach. Is there any reason not to do this? Is there a better way to use these deductions that I haven't considered? Unless I change jobs or get a big raise (unlikely in both cases right now), I am not going to be approaching the next tax bracket for at least 5 years or so. My thoughts are get the money back from the government now, and invest it back into our RRSPs/house (fence, landscaping - we built on a bare lot) rather than let that money languish with the government for 5 more years. If we go this route, our return will be in the region of 8.8k, which is a massive amount of money that could be working for us.
I would really appreciate any feedback you all have on this approach. My husband is semi-mustachian, but is much less interested in the small details. He just wants to get the big refund and be done with it. I want to make sure we get as much back as we can. Thank you!
I'll expand on a secret, there's another tax bracket that isn't listed. At $65,000 for the combined household income there's additional deductions on the CCB. In my case I have 2 kids under 6, for RRSP contributions I get an additional 5.7%, paid out on the CCB cheques. It might not be called a tax deduction, but having extra money come in for additional RRSP contributions sure feels like it.
You're pondering getting 27.75% now or 33.25% in 5 years. If you take the return now, invest it all, can your investment make up the difference? if its $10K you would get $2775 now, can it grow to $3,325 in 5 years? that's some pretty low returns, I sure hope so.
I agree with daverobev, TFSA should also be full. If they're not take the refund and slide it into the TFSA.
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Where will my principal place of residence be in 2017, for tax purposes?
Seems like an easy question but I am having a hard time finding the correct answer.
For the past 4 years, I have been working full-time and residing in the NWT on a permanent basis. Last year, after my job was unexpectedly downgraded to part-time, I negotiated a remote work arrangement with my employer that allows me to work wherever I want, whenever I want. Under this arrangement, I can chose to work in Yellowknife, or in Japan or Mexico if I want as long as I am physically present in Yellowknife twice a year for a week-long board meetings. DW and I took this as a great opportunity to travel and decided to go on a long and slow road trip to Mexico for the winter. We just came back a few weeks ago: DW is in Calgary and lives in a condo I own, I am now back in Yellowknife to work here until the fall. My plan is to spend a little over 6 months in Yellowknife, a couple of weeks in Calgary, and the rest of the year outside Canada. Wash, rinse, repeat.
Here in Yellowknife, I do not own or rent a dwelling. To reduce my expenses to the minimum, I will be house-sitting as I did in the past 4 years, and will likely camp when it gets warmer. I will not spend any time in Calgary except perhaps a week or so at the end of September to pick DW, pack our stuff in the SUV, lock the condo, and leave the country for the winter, with the plan of returning to Yellowknife in May 2018. Wash, rinse, repeat.
On December 31, 2017, I will not be in the NWT, but I will have spent over 6 consecutive months in that jurisdiction, and at most two weeks in Alberta. Under which jurisdiction will I file my 2017 taxes?
Thanks in advance for shedding some light on my situation.
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Where will my principal place of residence be in 2017, for tax purposes?
Seems like an easy question but I am having a hard time finding the correct answer.
For the past 4 years, I have been working full-time and residing in the NWT on a permanent basis. Last year, after my job was unexpectedly downgraded to part-time, I negotiated a remote work arrangement with my employer that allows me to work wherever I want, whenever I want. Under this arrangement, I can chose to work in Yellowknife, or in Japan or Mexico if I want as long as I am physically present in Yellowknife twice a year for a week-long board meetings. DW and I took this as a great opportunity to travel and decided to go on a long and slow road trip to Mexico for the winter. We just came back a few weeks ago: DW is in Calgary and lives in a condo I own, I am now back in Yellowknife to work here until the fall. My plan is to spend a little over 6 months in Yellowknife, a couple of weeks in Calgary, and the rest of the year outside Canada. Wash, rinse, repeat.
Here in Yellowknife, I do not own or rent a dwelling. To reduce my expenses to the minimum, I will be house-sitting as I did in the past 4 years, and will likely camp when it gets warmer. I will not spend any time in Calgary except perhaps a week or so at the end of September to pick DW, pack our stuff in the SUV, lock the condo, and leave the country for the winter, with the plan of returning to Yellowknife in May 2018. Wash, rinse, repeat.
On December 31, 2017, I will not be in the NWT, but I will have spent over 6 consecutive months in that jurisdiction, and at most two weeks in Alberta. Under which jurisdiction will I file my 2017 taxes?
Thanks in advance for shedding some light on my situation.
Definitely an interesting case. I think that for the 2016 tax year it depends on a few factors. Did your wife live in NWT with you before the Mexico trip? Do you have a NWT address, drivers license, and vehicle registration? If so, these significant and secondary ties would put you there for tax purposes. Otherwise, Alberta would be your province because that is the location of your residence.
For future tax years your province of residence is likely to be Alberta as your wife living there gives you significant ties to that province and you own property there.
Here's the document that deals with this issue. Sections 1.2 throught 1.5, 1.11 through 1.15 are notable. http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s5/f1/s5-f1-c1-eng.html
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Just wanted to pop back in and say thanks to Prairie Stash and daverobev for your feedback. I am pretty new to all of this and haven't maxed out RRSPs or TFSAs yet, so I appreciate the information you've provided for me to ponder!
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Where will my principal place of residence be in 2017, for tax purposes?
Seems like an easy question but I am having a hard time finding the correct answer.
For the past 4 years, I have been working full-time and residing in the NWT on a permanent basis. Last year, after my job was unexpectedly downgraded to part-time, I negotiated a remote work arrangement with my employer that allows me to work wherever I want, whenever I want. Under this arrangement, I can chose to work in Yellowknife, or in Japan or Mexico if I want as long as I am physically present in Yellowknife twice a year for a week-long board meetings. DW and I took this as a great opportunity to travel and decided to go on a long and slow road trip to Mexico for the winter. We just came back a few weeks ago: DW is in Calgary and lives in a condo I own, I am now back in Yellowknife to work here until the fall. My plan is to spend a little over 6 months in Yellowknife, a couple of weeks in Calgary, and the rest of the year outside Canada. Wash, rinse, repeat.
Here in Yellowknife, I do not own or rent a dwelling. To reduce my expenses to the minimum, I will be house-sitting as I did in the past 4 years, and will likely camp when it gets warmer. I will not spend any time in Calgary except perhaps a week or so at the end of September to pick DW, pack our stuff in the SUV, lock the condo, and leave the country for the winter, with the plan of returning to Yellowknife in May 2018. Wash, rinse, repeat.
On December 31, 2017, I will not be in the NWT, but I will have spent over 6 consecutive months in that jurisdiction, and at most two weeks in Alberta. Under which jurisdiction will I file my 2017 taxes?
Thanks in advance for shedding some light on my situation.
Definitely an interesting case. I think that for the 2016 tax year it depends on a few factors. Did your wife live in NWT with you before the Mexico trip? Do you have a NWT address, drivers license, and vehicle registration? If so, these significant and secondary ties would put you there for tax purposes. Otherwise, Alberta would be your province because that is the location of your residence.
For future tax years your province of residence is likely to be Alberta as your wife living there gives you significant ties to that province and you own property there.
Here's the document that deals with this issue. Sections 1.2 throught 1.5, 1.11 through 1.15 are notable. http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s5/f1/s5-f1-c1-eng.html
Thank you so much for pointing me in the right direction, all of a sudden everything is very clear in my normally-confused mind. Cheers :)
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I accidentally over contributed to DH's RRSP. This will be for 2017 taxes. I realized I had probably made an error almost immediately, but now that I have his Notice of Assessment, it is confirmed.
I put the money in about two weeks ago. I will transfer it out tomorrow. What additional forms do I need to fill out to submit with 2017 taxes?
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I accidentally over contributed to DH's RRSP. This will be for 2017 taxes. I realized I had probably made an error almost immediately, but now that I have his Notice of Assessment, it is confirmed.
I put the money in about two weeks ago. I will transfer it out tomorrow. What additional forms do I need to fill out to submit with 2017 taxes?
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/xcss-eng.html over contribution penalty form
If you write a letter you can request to have the penalty waived. If they waive anyone, they'll do yours (2 weeks, first time, innocent mistake).
http://www.mnp.ca/en/posts/rrsp-contributions-have-you-over-contributed easy English article
By withdrawing you get a T4RSP slip, you can file a T746 to make it tax neutral.
http://www.cra-arc.gc.ca/E/pbg/tf/t746/t746-16e.pdf link to form
First off, please confirm you were over by more than $2000. Maybe you don't have to do anything? In any event, you'll likely avoid penalty if you withdraw promptly. The punishment is filling in the extra forms...I say that fits your crime ;)
Congrats on maxing out the RRSP early in the year!
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Does anyone have good cdn tax resources for landlords?
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I accidentally over contributed to DH's RRSP. This will be for 2017 taxes. I realized I had probably made an error almost immediately, but now that I have his Notice of Assessment, it is confirmed.
I put the money in about two weeks ago. I will transfer it out tomorrow. What additional forms do I need to fill out to submit with 2017 taxes?
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/xcss-eng.html over contribution penalty form
If you write a letter you can request to have the penalty waived. If they waive anyone, they'll do yours (2 weeks, first time, innocent mistake).
http://www.mnp.ca/en/posts/rrsp-contributions-have-you-over-contributed easy English article
By withdrawing you get a T4RSP slip, you can file a T746 to make it tax neutral.
http://www.cra-arc.gc.ca/E/pbg/tf/t746/t746-16e.pdf link to form
First off, please confirm you were over by more than $2000. Maybe you don't have to do anything? In any event, you'll likely avoid penalty if you withdraw promptly. The punishment is filling in the extra forms...I say that fits your crime ;)
Congrats on maxing out the RRSP early in the year!
I definitely over contributed by more than $2,000. Essentially I somehow got a year ahead of myself. The bank will not simply transfer the funds. I sold the ETFs I needed to to free up the cash amount, but now they want me to fill out this form first: http://www.cra-arc.gc.ca/E/pbg/tf/t3012a/t3012a-16e.pdf (http://www.cra-arc.gc.ca/E/pbg/tf/t3012a/t3012a-16e.pdf) so they don't have to withhold the taxes.
I hate forms. This is definitely a fitting punishment.
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M GF over-contributed to her RRSP one year. It was a pain and cost her a few $$, but she got it sorted and it's enough of hassle you are unlikely to ever do it again. Good luck dealing with the forms.
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Does anyone have good cdn tax resources for landlords?
I have a bunch of info in my head, but no official resources (short of Googling) to recommend. What did you want to know, specifically?
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Does anyone have good cdn tax resources for landlords?
I have a bunch of info in my head, but no official resources (short of Googling) to recommend. What did you want to know, specifically?
A general intro/ guide. The CRA has a lot of stuff, but I'd like some more practical and reader-friendly info.
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Does anyone have good cdn tax resources for landlords?
I have a bunch of info in my head, but no official resources (short of Googling) to recommend. What did you want to know, specifically?
A general intro/ guide. The CRA has a lot of stuff, but I'd like some more practical and reader-friendly info.
Like these?
https://turbotax.intuit.ca/tips/tax-deductions-on-rental-properties-6382
https://turbotax.intuit.ca/tips/dos-and-donts-cca-for-rental-property-explained-6377
http://www.taxplanningguide.ca/tax-planning-guide/section-3-investors/rental-properties/#what-happens-i-sell
I'd be sure to learn as much as possible about the potential future capital gains you may be subject to when you sell the rental. 2016 was the year I learned about how much cap gains can bite and it doesn't seem to be as talked about as all the deductions you can take to offset the rental income.
Just from reading the links above, I have a gut feeling (you'll want to verify with actual math) that you shouldn't claim the CCA, since your taxable income is likely to be low anyway, in favor of reducing the amount of cap gains you'll pay when you sell.
Furthermore, if you end up getting government payments based on having a lower income (disability, OAS, whatever the child payment is called now) the profit generated by selling the rental can wipe those out in the year after the sale (because your income will spike for that year). It's certainly not the end of the world (having more money never is), but it does take some planning from a cash flow perspective.
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Does anyone have good cdn tax resources for landlords?
I have a bunch of info in my head, but no official resources (short of Googling) to recommend. What did you want to know, specifically?
A general intro/ guide. The CRA has a lot of stuff, but I'd like some more practical and reader-friendly info.
Like these?
https://turbotax.intuit.ca/tips/tax-deductions-on-rental-properties-6382
https://turbotax.intuit.ca/tips/dos-and-donts-cca-for-rental-property-explained-6377
http://www.taxplanningguide.ca/tax-planning-guide/section-3-investors/rental-properties/#what-happens-i-sell
I'd be sure to learn as much as possible about the potential future capital gains you may be subject to when you sell the rental. 2016 was the year I learned about how much cap gains can bite and it doesn't seem to be as talked about as all the deductions you can take to offset the rental income.
Just from reading the links above, I have a gut feeling (you'll want to verify with actual math) that you shouldn't claim the CCA, since your taxable income is likely to be low anyway, in favor of reducing the amount of cap gains you'll pay when you sell.
Furthermore, if you end up getting government payments based on having a lower income (disability, OAS, whatever the child payment is called now) the profit generated by selling the rental can wipe those out in the year after the sale (because your income will spike for that year). It's certainly not the end of the world (having more money never is), but it does take some planning from a cash flow perspective.
Those are great and will be bookmarked. Thanks!
The plan is to not sell any real estate until the kids are adults, so I don't get dinged in my child tax. After that it won't be so bad.
I'm keeping reciepts and records and reading whatever I can find, so hopefully it's all not too hard. I'd like a book to have on my shelf, just for the convenient reference. No matter.
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RRSP / Income tax question!
I'm expecting to receive a severance payment amount of roughly $30K pre-tax sometime in mid-2017. I currently have $18K unused RRSP contribution room. Due to some specifics of the severance, I am unable to directly transfer $18K of this severance into my RRSP account. Therefore I will receive the $30K severance as cash, taxed at my marginal rate.
Upon receiving the taxed severance amount ($17K-ish), I will be contributing $18K into my RRSP account. My assumption is that I will have to wait for my 2017 taxes to be completed for a refund in early 2018.
Question #1 Is there any way to adjust my tax rate with CRA, lowering the amount of taxes paid for the remainder of 2017?
Question #2 Will my severance considered "earned income" in the eyes of the CRA for the 2017 tax year in such that I might be entitled to additional RRSP room in 2018? Eg: 18% of $30K?
Many thanks!
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RRSP / Income tax question!
I'm expecting to receive a severance payment amount of roughly $30K pre-tax sometime in mid-2017. I currently have $18K unused RRSP contribution room. Due to some specifics of the severance, I am unable to directly transfer $18K of this severance into my RRSP account. Therefore I will receive the $30K severance as cash, taxed at my marginal rate.
Upon receiving the taxed severance amount ($17K-ish), I will be contributing $18K into my RRSP account. My assumption is that I will have to wait for my 2017 taxes to be completed for a refund in early 2018.
Question #1 Is there any way to adjust my tax rate with CRA, lowering the amount of taxes paid for the remainder of 2017?
Question #2 Will my severance considered "earned income" in the eyes of the CRA for the 2017 tax year in such that I might be entitled to additional RRSP room in 2018? Eg: 18% of $30K?
Many thanks!
For question #1 : Yes, there is a form you can fill to reduce remaining taxes. 1 fédéral, 1 provincial. I use it every year to reduce my tax return because I always max out RRSP
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RRSP / Income tax question!
I'm expecting to receive a severance payment amount of roughly $30K pre-tax sometime in mid-2017. I currently have $18K unused RRSP contribution room. Due to some specifics of the severance, I am unable to directly transfer $18K of this severance into my RRSP account. Therefore I will receive the $30K severance as cash, taxed at my marginal rate.
Upon receiving the taxed severance amount ($17K-ish), I will be contributing $18K into my RRSP account. My assumption is that I will have to wait for my 2017 taxes to be completed for a refund in early 2018.
Question #1 Is there any way to adjust my tax rate with CRA, lowering the amount of taxes paid for the remainder of 2017?
Question #2 Will my severance considered "earned income" in the eyes of the CRA for the 2017 tax year in such that I might be entitled to additional RRSP room in 2018? Eg: 18% of $30K?
Many thanks!
1: yes you can fill out a T1213
2: my understanding is that payments under Line 130 income are not included in the earned income calculation
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RRSP / Income tax question!
I'm expecting to receive a severance payment amount of roughly $30K pre-tax sometime in mid-2017. I currently have $18K unused RRSP contribution room. Due to some specifics of the severance, I am unable to directly transfer $18K of this severance into my RRSP account. Therefore I will receive the $30K severance as cash, taxed at my marginal rate.
Upon receiving the taxed severance amount ($17K-ish), I will be contributing $18K into my RRSP account. My assumption is that I will have to wait for my 2017 taxes to be completed for a refund in early 2018.
Question #1 Is there any way to adjust my tax rate with CRA, lowering the amount of taxes paid for the remainder of 2017?
Question #2 Will my severance considered "earned income" in the eyes of the CRA for the 2017 tax year in such that I might be entitled to additional RRSP room in 2018? Eg: 18% of $30K?
Many thanks!
1: yes you can fill out a T1213
2: my understanding is that payments under Line 130 income are not included in the earned income calculation
For the T1213, it looks like I have to make the RRSP contribution, then attach proof of the transaction along with the form. Great news.
I sort of assumed #2 would be no. Oh well!
Thanks!
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RRSP / Income tax question!
I'm expecting to receive a severance payment amount of roughly $30K pre-tax sometime in mid-2017. I currently have $18K unused RRSP contribution room. Due to some specifics of the severance, I am unable to directly transfer $18K of this severance into my RRSP account. Therefore I will receive the $30K severance as cash, taxed at my marginal rate.
Upon receiving the taxed severance amount ($17K-ish), I will be contributing $18K into my RRSP account. My assumption is that I will have to wait for my 2017 taxes to be completed for a refund in early 2018.
Question #1 Is there any way to adjust my tax rate with CRA, lowering the amount of taxes paid for the remainder of 2017?
Question #2 Will my severance considered "earned income" in the eyes of the CRA for the 2017 tax year in such that I might be entitled to additional RRSP room in 2018? Eg: 18% of $30K?
Many thanks!
1: yes you can fill out a T1213
2: my understanding is that payments under Line 130 income are not included in the earned income calculation
For the T1213, it looks like I have to make the RRSP contribution, then attach proof of the transaction along with the form. Great news.
I sort of assumed #2 would be no. Oh well!
Thanks!
I always sent T1213 without anything else. Only write down the ammount I intend to contribute. Never had any problems!
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RRSP / Income tax question!
I'm expecting to receive a severance payment amount of roughly $30K pre-tax sometime in mid-2017. I currently have $18K unused RRSP contribution room. Due to some specifics of the severance, I am unable to directly transfer $18K of this severance into my RRSP account. Therefore I will receive the $30K severance as cash, taxed at my marginal rate.
Upon receiving the taxed severance amount ($17K-ish), I will be contributing $18K into my RRSP account. My assumption is that I will have to wait for my 2017 taxes to be completed for a refund in early 2018.
Question #1 Is there any way to adjust my tax rate with CRA, lowering the amount of taxes paid for the remainder of 2017?
Question #2 Will my severance considered "earned income" in the eyes of the CRA for the 2017 tax year in such that I might be entitled to additional RRSP room in 2018? Eg: 18% of $30K?
Many thanks!
1: yes you can fill out a T1213
2: my understanding is that payments under Line 130 income are not included in the earned income calculation
For the T1213, it looks like I have to make the RRSP contribution, then attach proof of the transaction along with the form. Great news.
I sort of assumed #2 would be no. Oh well!
Thanks!
I always sent T1213 without anything else. Only write down the ammount I intend to contribute. Never had any problems!
That's cool. How long did it take after submitting the T1213 before there was a reduction in taxes from your employer?
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RRSP / Income tax question!
I'm expecting to receive a severance payment amount of roughly $30K pre-tax sometime in mid-2017. I currently have $18K unused RRSP contribution room. Due to some specifics of the severance, I am unable to directly transfer $18K of this severance into my RRSP account. Therefore I will receive the $30K severance as cash, taxed at my marginal rate.
Upon receiving the taxed severance amount ($17K-ish), I will be contributing $18K into my RRSP account. My assumption is that I will have to wait for my 2017 taxes to be completed for a refund in early 2018.
Question #1 Is there any way to adjust my tax rate with CRA, lowering the amount of taxes paid for the remainder of 2017?
Question #2 Will my severance considered "earned income" in the eyes of the CRA for the 2017 tax year in such that I might be entitled to additional RRSP room in 2018? Eg: 18% of $30K?
Many thanks!
1: yes you can fill out a T1213
2: my understanding is that payments under Line 130 income are not included in the earned income calculation
For the T1213, it looks like I have to make the RRSP contribution, then attach proof of the transaction along with the form. Great news.
I sort of assumed #2 would be no. Oh well!
Thanks!
I always sent T1213 without anything else. Only write down the ammount I intend to contribute. Never had any problems!
That's cool. How long did it take after submitting the T1213 before there was a reduction in taxes from your employer?
About a few weeks, usualy 3-4 you receive a letter to give to the payroll dep.
Because I am in Quebec, I got to fill another form on top of T1213 and this one takes a bit longer to get
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Firstly I wanted to thank CPA CB and all the other knowledgeable tax gurus on this thread for your help with a variety of questions and situations. What an amazing resource!
I have a couple of questions, and I apologize in advance for my limited grasp on Canadian tax as I am a recent arrival to the country. I only just realised I can open tax-sheltered accounts here so I'm oh-so new to TFSAs and RRSPs.
1. My SO has been a high-ish earner for quite a while now, but only starting maxing out his RRSP contributions after he met me and discovered the concept of FI. He has a ton of contribution room from the previous 17 years and I was wondering if he can ever top that up. I'd always assumed it carried over, but I'm finding it hard to track down a definitive answer that yes, you can make a contribution and have it count towards, say, your 2014 contribution room (plus years 2001-2013). Is it just a matter of making a contribution then amending a previous tax return?
2. My SO (geez what a troublemaker) is also anticipating a large pension payout when he leaves his job in a few years. He has to get more details on exactly how it works, but from what I can gather some of it *has* to go towards RRSPs (or maybe even a LIRA, which would make more sense), but a large chunk of it is taken as cash. Is there any way to reduce the tax burden on getting a lump sum payment of about $100K? My thoughts are limit RRSP contributions until then, then dump it all in RRSPs (only works if you can use leftover room from previous years). Or stop work for a year so it's your only income (eg. going back to school). Or leave the country (I'm Australian and it's very likely we would be moving there after he leaves his job so we could make that timing work). Would any/all of those options work?
Much appreciated everyone!
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Firstly I wanted to thank CPA CB and all the other knowledgeable tax gurus on this thread for your help with a variety of questions and situations. What an amazing resource!
I have a couple of questions, and I apologize in advance for my limited grasp on Canadian tax as I am a recent arrival to the country. I only just realised I can open tax-sheltered accounts here so I'm oh-so new to TFSAs and RRSPs.
1. My SO has been a high-ish earner for quite a while now, but only starting maxing out his RRSP contributions after he met me and discovered the concept of FI. He has a ton of contribution room from the previous 17 years and I was wondering if he can ever top that up. I'd always assumed it carried over, but I'm finding it hard to track down a definitive answer that yes, you can make a contribution and have it count towards, say, your 2014 contribution room (plus years 2001-2013). Is it just a matter of making a contribution then amending a previous tax return?
2. My SO (geez what a troublemaker) is also anticipating a large pension payout when he leaves his job in a few years. He has to get more details on exactly how it works, but from what I can gather some of it *has* to go towards RRSPs (or maybe even a LIRA, which would make more sense), but a large chunk of it is taken as cash. Is there any way to reduce the tax burden on getting a lump sum payment of about $100K? My thoughts are limit RRSP contributions until then, then dump it all in RRSPs (only works if you can use leftover room from previous years). Or stop work for a year so it's your only income (eg. going back to school). Or leave the country (I'm Australian and it's very likely we would be moving there after he leaves his job so we could make that timing work). Would any/all of those options work?
Much appreciated everyone!
1. The RRSP room is cumulative. He can see the max cumulative contribution limit for 2017 on his Notice of Assessment or his online CRA account.
2. The only real way to reduce taxes on the "excess portion" is having a lot of RRSP room saved and using the payout to fill the RRSP. Other ways to minimize are retiring in January so you don't have a very high income year, taking out a massive short term investment loan to get interest expense write offs for a year, or deferring the payout (less ideal). Leaving the country generally won't work due to complex rules on tax residency and disposition rules.
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Hi,
Not sure where to post this question, but here goes. I am a Canadian citizen and worked in Canada up until the end of may this year earning approximately 25-30k. I moved to the states in early June on a spousal visa and am able to work under the TN visa if I am able to find a job. I intend to work, but probably not for at least a few months. I closed down my TFSA and merged most of my bank accounts. I pooled all my money into one account. What I want to do is transfer it over here in the USA and invest it in a vanguard brokerage account so I can earn income off of it to float me for a while. What if any are the tax implications? Is it simple to transfer a large amount of money across borders? Are there any downsides to doing this? Thanks for any help!
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Hi,
Not sure where to post this question, but here goes. I am a Canadian citizen and worked in Canada up until the end of may this year earning approximately 25-30k. I moved to the states in early June on a spousal visa and am able to work under the TN visa if I am able to find a job. I intend to work, but probably not for at least a few months. I closed down my TFSA and merged most of my bank accounts. I pooled all my money into one account. What I want to do is transfer it over here in the USA and invest it in a vanguard brokerage account so I can earn income off of it to float me for a while. What if any are the tax implications? Is it simple to transfer a large amount of money across borders? Are there any downsides to doing this? Thanks for any help!
No tax implication in what you said. Conversion cost about 2-3% usualy...
How much money are you talking about? 5k$? 50k$?
I lately got a Visa from Amazon to pay for my USD expenses (while travelling, online shopping, etc) and then I pay with CAD at no fees, just the convertion rate of the day.
If your plan is to stay in US for many years and need that money, thats one thing. If you plan to stay for few months and work for money (do not need investments) thats something else!
Most big canadian banks (RBC, BMO) give you the opportunity to invest in USD and have branches in US. No need to close your accounts!
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PTF. Lots of good info here.
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Hi,
Not sure where to post this question, but here goes. I am a Canadian citizen and worked in Canada up until the end of may this year earning approximately 25-30k. I moved to the states in early June on a spousal visa and am able to work under the TN visa if I am able to find a job. I intend to work, but probably not for at least a few months. I closed down my TFSA and merged most of my bank accounts. I pooled all my money into one account. What I want to do is transfer it over here in the USA and invest it in a vanguard brokerage account so I can earn income off of it to float me for a while. What if any are the tax implications? Is it simple to transfer a large amount of money across borders? Are there any downsides to doing this? Thanks for any help!
No tax implication in what you said. Conversion cost about 2-3% usualy...
How much money are you talking about? 5k$? 50k$?
I lately got a Visa from Amazon to pay for my USD expenses (while travelling, online shopping, etc) and then I pay with CAD at no fees, just the convertion rate of the day.
If your plan is to stay in US for many years and need that money, thats one thing. If you plan to stay for few months and work for money (do not need investments) thats something else!
Most big canadian banks (RBC, BMO) give you the opportunity to invest in USD and have branches in US. No need to close your accounts!
Thanks for the reply. I have about 160k in my lone canadian savings account currently. The plan is to stay a minimum of 1 year and a max of probably 10.It all depends how well we fair down here. Unfortunately none of the Canadian banks have any footprint in Washington State where we are located. All my investments were sold and pooled because this seemed to be the consensus advice to avoid costly tax preparation for the split residency year. I still have no idea how the taxes will play out, and I'm absolutely dreading paying for a cross border accountant to tidy everything up.
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Hi, excuse my lack of financial knowledge, we are working on it.
My spouse is set to receive a severance package of about $70K in the next few weeks. He has $82k worth of contribution room in his RRSP. Can he put the all the money into his RRSP? Does he need to ask the employer to direct the money directly to the RRSP?
What is the benefit for us in having him do this? If he puts it all into the RRSP does he pay any taxes at all on it? If we don't put it into an RRSP, it is subject to the normal withholding tax, no?
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Hi, excuse my lack of financial knowledge, we are working on it.
My spouse is set to receive a severance package of about $70K in the next few weeks. He has $82k worth of contribution room in his RRSP. Can he put the all the money into his RRSP? Does he need to ask the employer to direct the money directly to the RRSP?
Hey! Yes he can direct it all to the RRSP. In most cases, he should be able to have the employer put it directly to that account if he's got it all set up on time. Some employers might still do the withholding for taxes. If this is the case, fire off a T1213 to the CRA ASAP. They will get back to you in a few weeks and you provide that letter to your employer who will comply with it at that point.
What is the benefit for us in having him do this? If he puts it all into the RRSP does he pay any taxes at all on it? If we don't put it into an RRSP, it is subject to the normal withholding tax, no?
Basically he won't pay taxes now, but will pay taxes when he makes withdrawals later. The point is to defer tax now in a (presumably) high income year to a future lower income year when the tax rate on income will be lower. If this is not the case, don't do it.
If you don't put it in the RRSP it will be subject to regular income tax at your marginal tax rate based on your total income this year (working income + severance + other income, etc).
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Thank you Moose, very helpful. I have been reading your blog for a couple of months now, I really enjoy it. Thank you for writing it.
I imagine that the lump sum amount is still subject to CPP and EI deductions?
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Thank you Moose, very helpful. I have been reading your blog for a couple of months now, I really enjoy it. Thank you for writing it.
I imagine that the lump sum amount is still subject to CPP and EI deductions?
Thanks! I love hearing from readers. :)
Normally not, but it can depend on how it's classified. Check to make sure the payment qualifies and will be paid out as a Retiring Allowance as defined by the CRA.
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Hi,
Not sure where to post this question, but here goes. I am a Canadian citizen and worked in Canada up until the end of may this year earning approximately 25-30k. I moved to the states in early June on a spousal visa and am able to work under the TN visa if I am able to find a job. I intend to work, but probably not for at least a few months. I closed down my TFSA and merged most of my bank accounts. I pooled all my money into one account. What I want to do is transfer it over here in the USA and invest it in a vanguard brokerage account so I can earn income off of it to float me for a while. What if any are the tax implications? Is it simple to transfer a large amount of money across borders? Are there any downsides to doing this? Thanks for any help!
Google "Norberts-gambit"
I have read a lot about this but I have never done it. I heard it is definitely worth it over the 100K mark.
RBC also had a good pdf "how to" but I couldn't find it.
http://www.moneysense.ca/magazine-archive/norberts-gambit-a-better-way-to-buy-u-s-dollars/
Basically purchase a stock that is traded in both US and CAD. Buy it in CAD and immediately sell it into US. You just pay two by and sell fees about $20 and save a lot on exchange costs.
Put all that money into a US$ account. I am not sure how to get it "across" the boarder but you could probably just spend with a US dollar visa and bank card that can access your US funds.
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CPA CB!
Just wanted to check in and say thank you again for your various advice on my inheritance issues...that are now resolved!
Spoke with a CPA and because my capital gains was $200,000 (so pay on $100,000) I am going to basically wipe it out using my RRSP room of $99,000 (as my pension will be under $25,000 when I retire I will be able to take it out at a low bracket so still pay taxes but much less than at $160000 that I would this year).
Had an assessment done on my half acre I own jointly with my brother came out $10,000 more than when my Mom passed so my brother agreed to pay me $30,000 .... and that one will fall under an exemption (farmland) so no capital gains to be paid.
All in all I'm still up after ALL outstanding bills paid off at $160000 (includes the $99,000 going into RRSP) the rest will go into TFSA's for myself and hubby. SOOOOO excited it is all over.
Thanks again!
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Hi MMMers - I am looking for advice/clarification re: capital gains.
Facts:
I purchased 10 shares in a Canadian small business (for sure meets requirements of QSBCS) in May 2014 ($7500 per share).
In March 2017, I sold 2 of these shares shares for $25,000 each, resulting in a $35,000 gain.
I’ve put the info into TurboTax, and it’s calculating tax owed on a $17,500 gain.
I am wondering about the lifetime capital gains exemption. My (perhaps incorrect) understanding is that this whole gain would fall under the LCGE and have no tax payable (as opposed to just 50% of it — I have never had any capital gains or exemptions prior to 2017). I am googling and reading CRA docs (specifically T4037(E) Rev. 17) and I’m getting no closer to understanding.
If someone has a quick and simple answer, I’d be so appreciative! And if I haven’t given enough background info to give me an answer, ask away. This seems like it should be a straightforward enough situation to run through TurboTax; but, if the full exemption does apply, I’m unsure how to enter it. Thanks in advance for any insight.
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Hi MMMers - I am looking for advice/clarification re: capital gains.
Facts:
I purchased 10 shares in a Canadian small business (for sure meets requirements of QSBCS) in May 2014 ($7500 per share).
In March 2017, I sold 2 of these shares shares for $25,000 each, resulting in a $35,000 gain.
I’ve put the info into TurboTax, and it’s calculating tax owed on a $17,500 gain.
I am wondering about the lifetime capital gains exemption. My (perhaps incorrect) understanding is that this whole gain would fall under the LCGE and have no tax payable (as opposed to just 50% of it — I have never had any capital gains or exemptions prior to 2017). I am googling and reading CRA docs (specifically T4037(E) Rev. 17) and I’m getting no closer to understanding.
If someone has a quick and simple answer, I’d be so appreciative! And if I haven’t given enough background info to give me an answer, ask away. This seems like it should be a straightforward enough situation to run through TurboTax; but, if the full exemption does apply, I’m unsure how to enter it. Thanks in advance for any insight.
My notes state that Capital gains exemption only applies to the owner / manager of the qualified business, separate classification from investors. I am not sure what form is filled out to declare yourself an owner/manager, if any, but maybe you can look for that?
ETA: found it... you declare the owner and directors on the incorporation documents for the company.
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Hi MMMers - I am looking for advice/clarification re: capital gains.
Facts:
I purchased 10 shares in a Canadian small business (for sure meets requirements of QSBCS) in May 2014 ($7500 per share).
In March 2017, I sold 2 of these shares shares for $25,000 each, resulting in a $35,000 gain.
I’ve put the info into TurboTax, and it’s calculating tax owed on a $17,500 gain.
I am wondering about the lifetime capital gains exemption. My (perhaps incorrect) understanding is that this whole gain would fall under the LCGE and have no tax payable (as opposed to just 50% of it — I have never had any capital gains or exemptions prior to 2017). I am googling and reading CRA docs (specifically T4037(E) Rev. 17) and I’m getting no closer to understanding.
If someone has a quick and simple answer, I’d be so appreciative! And if I haven’t given enough background info to give me an answer, ask away. This seems like it should be a straightforward enough situation to run through TurboTax; but, if the full exemption does apply, I’m unsure how to enter it. Thanks in advance for any insight.
My notes state that Capital gains exemption only applies to the owner / manager of the qualified business, separate classification from investors. I am not sure what form is filled out to declare yourself an owner/manager, if any, but maybe you can look for that?
ETA: found it... you declare the owner and directors on the incorporation documents for the company.
Thank you, Goldielocks. I bought in for 10% initially, I’m listed as a director, and I work there in a management capacity. I will keep digging (and see if anyone else has insights). If I end up having to pay, it squarely falls under “good problems,” but of course I am hoping that my initial understanding was correct.
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Is there a simple formula or rule of thumb to help me figure out whether it's worth claiming medical expenses this year? We have a very unusual, for us, year tax wise with both very high household income and higher than normal medical expenses.
Going forward, we may have more eligible expense, but lower income so I'm interested in this from that angle too.
Gathering the million and one medical receipts and insurance statements from 2016 (some were covered and I think CRA will request proof that the claimed expenses weren't eligible for reimbursement) will be a PITA if it ends up not reducing our tax bill.
Yes. Medical expenses need to be more than 3% of the income of the lowest earning spouse to get any credit, so if your ballpark comes under that, probably isn't worth it.
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Hi MMMers - I am looking for advice/clarification re: capital gains.
Facts:
I purchased 10 shares in a Canadian small business (for sure meets requirements of QSBCS) in May 2014 ($7500 per share).
In March 2017, I sold 2 of these shares shares for $25,000 each, resulting in a $35,000 gain.
I’ve put the info into TurboTax, and it’s calculating tax owed on a $17,500 gain.
I am wondering about the lifetime capital gains exemption. My (perhaps incorrect) understanding is that this whole gain would fall under the LCGE and have no tax payable (as opposed to just 50% of it — I have never had any capital gains or exemptions prior to 2017). I am googling and reading CRA docs (specifically T4037(E) Rev. 17) and I’m getting no closer to understanding.
If someone has a quick and simple answer, I’d be so appreciative! And if I haven’t given enough background info to give me an answer, ask away. This seems like it should be a straightforward enough situation to run through TurboTax; but, if the full exemption does apply, I’m unsure how to enter it. Thanks in advance for any insight.
My notes state that Capital gains exemption only applies to the owner / manager of the qualified business, separate classification from investors. I am not sure what form is filled out to declare yourself an owner/manager, if any, but maybe you can look for that?
ETA: found it... you declare the owner and directors on the incorporation documents for the company.
Thank you, Goldielocks. I bought in for 10% initially, I’m listed as a director, and I work there in a management capacity. I will keep digging (and see if anyone else has insights). If I end up having to pay, it squarely falls under “good problems,” but of course I am hoping that my initial understanding was correct.
It seems I was just not understanding how the info was being presented, so this question has resolved itself. Someone on TurboTax answered my query, and confirmed that I’d ticked the correct boxes to obtain the LCGE deduction. It was throwing me off that the 17,500 was still showing under income (in hindsight, of course it was... it needs to be tracked). When I scrolled down to credits and deductions, it was also showing as a deduction. So, it was correct all along, I was just not looking at it properly. *facepalm*
Anyway, my taxes are now filed, I owe less than I’d feared, and I learned more about capital gains and LCGE. :)
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Hi CPA CB,
My son and his wife have been living in Mexico for the past three 1/2 years as freelance photographers. They earn their money from Canadian and U.S. newspapers and other publications. They have filed Canadian in previous years, but this year their tax person (not sure of her qualifications) has advised them that they don't need to file Canadian taxes. This doesn't sound right to me, and frankly sounds a little scary. They are both Canadian citizens, and use DIL's parents' address in Ontario as a Canadian address. They travel back to Canada a few times a year. They plan to move back to Canada some time in the next couple of years to hopefully buy a house and start a family.
If they don't pay Canadian taxes, is this going to cause them problems down the road? And if they don't file Canadian taxes, do they have to file Mexico taxes? They got visas based on the fact that they don't work for Mexican companies.
All very confusing to me. Hope you can shed some light.
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Okay. Not a tax expert, but I would suggest if they don't owe taxes, to file the canadian ones anyway and declare canadian residency.
Reason is it will affect their GIS/OAS down the road. You need (I think) 38 years cdn residency after 18 yrs of age to get maximum benefits - less, and they get reduced for every year you didn't live here. You don't even have to be paying taxes, just be part of the system. have a friend who screwed herself royally by spending 20 years out of the country - of course she doesn't get any pensions from the countries she paid into, because she wasn't there long enough.
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Missy is right about the OAS calculation, but to claim residency you need to show signifiant ties to canada, especially if you are not physically present for the minimum number of days each year.
It might be cheaper to not claim residency and just save the difference in taxes and create your own retirement plan.
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"A partial OAS pension is calculated at the rate of 1/40th of the full OAS pension for each complete year of residence in Canada after age 18.
The minimum period of residence in Canada you need to qualify for a partial OAS pension is 10 years after your 18th birthday (as long as you reside in Canada when you receive your OAS pension). For example, if you resided in Canada for 10 years after your 18th birthday, you may qualify to receive 10/40ths or one-quarter of the full OAS pension."
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@Prairie Gal , Canadian tax residency, (or lack there of) can be tricky, and not clear cut. It is possible to get incorrect advice from a tax preparer. The CRA has a semi-decent website (https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/determining-your-residency-status.html) with details on when they may consider you a tax resident. There is also a form (https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/nr73.html) you can fill out with all your details and send to CRA to get their interpretation on whether you are a resident or not. It is iffy, and involves judgement calls.
Some of the things that will come into play also include exact visa and tax status in Mexico, and the appropriate sections of the Mexico/Canada tax treaty and how it considers residency questions. From what you wrote, it seemed that Mexico did not consider them tax residents? Are they paying Mexican taxes on their world wide income? The main difference in tax obligations with being considered a Canadian tax resident is having to pay Canadian taxes on world wide income. My understanding is that the CRA's position is that you have to be paying taxes on worldwide income to someone; if you are a Canadian citizen, and not considered a tax resident anywhere else, CRA will use that as evidence to say that you should be considered a Canadian tax resident.
Be aware, if you are eligible to stop being a Canadian tax resident, it is not simply a matter of stopping to file Canadian taxes. You are also supposed to file your taxes on the year you stopped being a resident and select "ceased to be a resident" (or whatever exact wording). One consequence is that on the date you stop being a Canadian tax resident, you may owe a so called departure tax (https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/leaving-canada-emigrants.html#dptx). It's not an extra tax, but it's any capital gains you haven't paid yet catching up with you. If you have significant appreciated assets, that could be a problem.
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Thank you all for your help. I have advised them to research more about it, and maybe talk to an accountant.
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Random q: deciding between sole prop and incorporating - is it always a case of just looking at home much money you expect to make, and if it's not going to be over the threshold, don't incorporate?
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Random q: deciding between sole prop and incorporating - is it always a case of just looking at home much money you expect to make, and if it's not going to be over the threshold, don't incorporate?
Incorporating also protects your personal assets from business liability.
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You also have the ability to retain earnings and pay them out over time with incorporating... balancing taxes, so different people's income set points for incorporating will be different. You need to look at your total income, too, annually, not just from the business.
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Started our business as a sole p and didn't switch to a Corp early enough way back in the day. Cost us extra money and a taxation hit that would have been avoided by just doing a corporation right off the start.
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Oh? What was the tax hit? I thought sole P had you paying all your taxes as you go... did you buy property or assets that apprecitated and then you had a deemed disposition when you converted to a corp?
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This discussion on incorporation is interesting to me.
I'm hoping to start a business in the next little while through Patreon and also a blog selling digital DnD resources (PDFs and eventually ebooks). Nothing up yet, but would it be worth incorporating before I even start making money?
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At what age can your small business, restaurant, rental properties etc. pay your children or grandchildren for work?
What would be a fair wage?
We have some seriously helpful 7-9 year olds in the family and I see no reason why they can't start helping with snow removal, dishes, and basic maintenance.
I think 2h per week, 50 weeks a year at $15 an hour would be reasonable and the money could go to them and then they could help self fund their RESPs.
Is anyone paying their kids for work, what age did you start?
Are their labor laws to watch out for as well?
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Are their labor laws to watch out for as well?
Definitely. Here is the info for BC. You'll have to look up the rules for your province if you live somewhere else.
https://www2.gov.bc.ca/gov/content/employment-business/employment-standards-advice/employment-standards/specific-industries/employment-of-young-people
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At what age can your small business, restaurant, rental properties etc. pay your children or grandchildren for work?
What would be a fair wage?
We have some seriously helpful 7-9 year olds in the family and I see no reason why they can't start helping with snow removal, dishes, and basic maintenance.
I think 2h per week, 50 weeks a year at $15 an hour would be reasonable and the money could go to them and then they could help self fund their RESPs.
Is anyone paying their kids for work, what age did you start?
Are their labor laws to watch out for as well?
As far as the CRA is concerned, all you need is a SIN and they need to be properly accounted for on payroll like any other employee (or contractor). However, this is definitely a labour code issue and you need to check with your provincial legislation on that. Things like age, the definition of family (your kids only vs. grandkids, cousins, etc.), hours of work, and type of business (agriculture is often the most lax) matters. IF you can hire them, they are likely entitled to a 3 hr minimum like anyone else.
Also, they need to be covered under WCB, so check the requirements on that in your province.
You're right though that its a great opportunity for them. In addition to pocket money and funding their RESP, they can build their RRSP room for more contributions later.
Personally I was able to work as a legal employee in my family's agriculture business when I was 12. I think I generally worked about 10-12 hrs per week and sometimes more in the summer.
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At what age can your small business, restaurant, rental properties etc. pay your children or grandchildren for work?
What would be a fair wage?
We have some seriously helpful 7-9 year olds in the family and I see no reason why they can't start helping with snow removal, dishes, and basic maintenance.
I think 2h per week, 50 weeks a year at $15 an hour would be reasonable and the money could go to them and then they could help self fund their RESPs.
Is anyone paying their kids for work, what age did you start?
Are their labor laws to watch out for as well?
I started my first job at 13, kids can be very useful.
General rules are it has to be an actual job, something you would hire myself to do. This also precludes paying your kids to do household chores, or giving them money to watch TV while you close up the restaurant.
$15 might be high, again it has to be a job that you would pay me (internet stranger) the same rate. If you aren't sure what to pay, what would a competing restaurant pay your kid? Treat it like any other hire and you'll be fine.
So as long as you would hire me for the same role, you can hire your kids (it has to family, otherwise they need to be 14 here). Just remember the rule; if you wouldn't hire Prairie Stash, you can't hire your kid.
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Are their labor laws to watch out for as well?
Definitely. Here is the info for BC. You'll have to look up the rules for your province if you live somewhere else.
https://www2.gov.bc.ca/gov/content/employment-business/employment-standards-advice/employment-standards/specific-industries/employment-of-young-people
Thanks it looks like 12 is the age that they can be hired buy restaurants and retail for doing not dangerous work outside of school hours.
But I thought there were some exceptions for your own children. Like at 8y old you can start stuffing envelopes at month's end or something. (Now it's mainly e-mail bills but that was the most benign example I could think of.)
$15 might be a bit high but minimum wage is getting close to that.
And, I would certainly be making them do real work!
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This discussion on incorporation is interesting to me.
I'm hoping to start a business in the next little while through Patreon and also a blog selling digital DnD resources (PDFs and eventually ebooks). Nothing up yet, but would it be worth incorporating before I even start making money?
Probably not worthwhile. Most accountants would tell you to run it as a sole proprietorship at least until you earn more money than you spend, including the additional costs of running a corporation.
Most lawyers would give you the caveat to that which is if your products/services are likely to carry a significant liability risk, incorporate right away to try add protection for personal assets. Either way, investigate your need for business liability insurance.
I know members of my family that have run their businesses as a sole p for decades. Generally they are either marginally profitable businesses, or they don't save any money personally so they don't really need the legal protection beyond liability insurance. Others just put most family assets (house etc) into their spouses name for additional protection.
Also, the legal protection aspect of incorporating is not nearly as good as many people make it out to be. If your corporation is getting sued, count on the directors also being sued personally. If those directors are actively involved in the daily operation of the corporation, their personally liability exposure can be little better than them operating a sole p.
The nice part about incorporating is you can make things really complex with OpCo and HoldCo structures, trusts, etc. which make suing more costly and reduce the likelihood of success. You can push many financial assets into the HoldCos.
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Can I just confirm with the clever people here:
I'm moving to the UK at the start of January, to take up a job. I'll be UK resident immediately under a split year.
People are telling me that I will remain Canadian resident while my wife and children are still in Canada. They will be following me as my wife's visa and the school year permits, some variation of that anyway. Oh, and our house here selling; they will come even if the house hasn't sold, I assume that an empty house on the market doesn't force us all into being residents.
I had it in my head that I would cease being Canadian resident because 'you can't' be both UK and Canadian resident, but I think I now understand that that is incorrect.
There is no ambiguity about what is happening; we're moving to the UK, for an undefined period of time (forever, in my case, almost certainly... of course, things happen, but my plan is definitely not to come back to stay here). I'm getting a job (offer not yet in hand, if it doesn't materialise then we won't go but I have no reason to believe it won't), etc.
So the date *my wife and family* lands in the UK (with family visa for my wife, not just for a visit, obviously) is the date *we all* cease to be Canadian resident, and that is the date on which I calculate as if I'd sold everything and pay cap gains on.
Right? I think I need to fill some form in declaring I've left, which again I'll do on that same date, NOT the date in January? Anything else I need to worry about?
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Can I just confirm with the clever people here:
I'm moving to the UK at the start of January, to take up a job. I'll be UK resident immediately under a split year.
People are telling me that I will remain Canadian resident while my wife and children are still in Canada. They will be following me as my wife's visa and the school year permits, some variation of that anyway. Oh, and our house here selling; they will come even if the house hasn't sold, I assume that an empty house on the market doesn't force us all into being residents.
I had it in my head that I would cease being Canadian resident because 'you can't' be both UK and Canadian resident, but I think I now understand that that is incorrect.
There is no ambiguity about what is happening; we're moving to the UK, for an undefined period of time (forever, in my case, almost certainly... of course, things happen, but my plan is definitely not to come back to stay here). I'm getting a job (offer not yet in hand, if it doesn't materialise then we won't go but I have no reason to believe it won't), etc.
So the date *my wife and family* lands in the UK (with family visa for my wife, not just for a visit, obviously) is the date *we all* cease to be Canadian resident, and that is the date on which I calculate as if I'd sold everything and pay cap gains on.
Right? I think I need to fill some form in declaring I've left, which again I'll do on that same date, NOT the date in January? Anything else I need to worry about?
You will need to file taxes in Canada as long as you carry "significant ties" to this country, or a few "secondary ties". It's vague (probably intentionally so), but can even include things like active bank accounts, credit cards, clothing, a Canadian passport, etc. This means that until you sever the significant ties and most of the secondary ties, you are likely require to file taxes in the UK and Canada. However, the foreign taxes paid (in the UK) will be deducted from any taxes owing in Canada.
The date that your wife and kids are in the UK with the intent of that being more than just a visit is likely the earliest date you will even be able to sever ties and that is the date the fair market value of your property will be determined.
Make sure you also tick the other boxes on or before that date though. Some assets are exempt, like RRSPs, TFSAs, etc. and the tax treaty with the UK may allow for some benefits in transferring them to a comparable UK account without triggering taxes, or even withdrawing money from a RRSP with very beneficial tax rates. Even though it's exempt from required sales for tax purposes, there are some very negative consequences tax-wise for holding personal dwellings after becoming a non-resident.
You are not required to fill out any applications for tax status other than indicating on your final tax return that you will no longer be a Canadian tax resident (by doing a T1161 for taxes on required property dispositions). Some people may optionally fill out a form NR73 to ask the CRA to determine your residency status, but it isn't necessary. This is usually done by people who still have a few secondary ties, or people moving to a country that could be considered a tax haven.
If you haven't already, take a read: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-5-international-residency/folio-1-residency/income-tax-folio-s5-f1-c1-determining-individual-s-residence-status.html
Also read the Canada-UK tax treaty to figure out your best course of action on exempted assets.
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Can I just confirm with the clever people here:
I'm moving to the UK at the start of January, to take up a job. I'll be UK resident immediately under a split year.
People are telling me that I will remain Canadian resident while my wife and children are still in Canada. They will be following me as my wife's visa and the school year permits, some variation of that anyway. Oh, and our house here selling; they will come even if the house hasn't sold, I assume that an empty house on the market doesn't force us all into being residents.
I had it in my head that I would cease being Canadian resident because 'you can't' be both UK and Canadian resident, but I think I now understand that that is incorrect.
There is no ambiguity about what is happening; we're moving to the UK, for an undefined period of time (forever, in my case, almost certainly... of course, things happen, but my plan is definitely not to come back to stay here). I'm getting a job (offer not yet in hand, if it doesn't materialise then we won't go but I have no reason to believe it won't), etc.
So the date *my wife and family* lands in the UK (with family visa for my wife, not just for a visit, obviously) is the date *we all* cease to be Canadian resident, and that is the date on which I calculate as if I'd sold everything and pay cap gains on.
Right? I think I need to fill some form in declaring I've left, which again I'll do on that same date, NOT the date in January? Anything else I need to worry about?
You will need to file taxes in Canada as long as you carry "significant ties" to this country, or a few "secondary ties". It's vague (probably intentionally so), but can even include things like active bank accounts, credit cards, clothing, a Canadian passport, etc. This means that until you sever the significant ties and most of the secondary ties, you are likely require to file taxes in the UK and Canada. However, the foreign taxes paid (in the UK) will be deducted from any taxes owing in Canada.
The date that your wife and kids are in the UK with the intent of that being more than just a visit is likely the earliest date you will even be able to sever ties and that is the date the fair market value of your property will be determined.
Make sure you also tick the other boxes on or before that date though. Some assets are exempt, like RRSPs, TFSAs, etc. and the tax treaty with the UK may allow for some benefits in transferring them to a comparable UK account without triggering taxes, or even withdrawing money from a RRSP with very beneficial tax rates. Even though it's exempt from required sales for tax purposes, there are some very negative consequences tax-wise for holding personal dwellings after becoming a non-resident.
You are not required to fill out any applications for tax status other than indicating on your final tax return that you will no longer be a Canadian tax resident (by doing a T1161 for taxes on required property dispositions). Some people may optionally fill out a form NR73 to ask the CRA to determine your residency status, but it isn't necessary. This is usually done by people who still have a few secondary ties, or people moving to a country that could be considered a tax haven.
If you haven't already, take a read: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-5-international-residency/folio-1-residency/income-tax-folio-s5-f1-c1-determining-individual-s-residence-status.html
Also read the Canada-UK tax treaty to figure out your best course of action on exempted assets.
Ah! Ahhh! Fuckity fuck!
1.23 An exception to this will occur where the individual was resident in another country prior to entering Canada and is leaving to re-establish his or her residence in that country. In this case, the individual will generally become a non-resident on the date he or she leaves Canada, even if, for example, the individual's spouse or common law partner remains temporarily behind in Canada to dispose of their dwelling place in Canada or so that their dependants may complete a school year already in progress.
That's me! I'm British, going back to the UK; family will be remaining exactly for those reasons!! Does that mean I'm out the second I leave?!
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CPA,
Apologies if this has been covered before, but this is a super-long (but excellent and generous) thread!
I am an American looking at immigrating to Canada ASAP. I would keep my job at an American company, working remotely. My SO is a self-employed author; we have a limited-liability partnership for publishing her work. I own a house in the US and have about $150k in retirement assets and no debt (other than a mortgage). We haven't decided where we're going to move yet (Montreal or one of many places in Ontario are tops on the list).
Can you give some general advice on what to expect the tax implications of moving to Canada from the US might be?
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Probably not worthwhile. Most accountants would tell you to run it as a sole proprietorship at least until you earn more money than you spend, including the additional costs of running a corporation.
Most lawyers would give you the caveat to that which is if your products/services are likely to carry a significant liability risk, incorporate right away to try add protection for personal assets. Either way, investigate your need for business liability insurance.
I know members of my family that have run their businesses as a sole p for decades. Generally they are either marginally profitable businesses, or they don't save any money personally so they don't really need the legal protection beyond liability insurance. Others just put most family assets (house etc) into their spouses name for additional protection.
Also, the legal protection aspect of incorporating is not nearly as good as many people make it out to be. If your corporation is getting sued, count on the directors also being sued personally. If those directors are actively involved in the daily operation of the corporation, their personally liability exposure can be little better than them operating a sole p.
The nice part about incorporating is you can make things really complex with OpCo and HoldCo structures, trusts, etc. which make suing more costly and reduce the likelihood of success. You can push many financial assets into the HoldCos.
Thank you for the insights!
The products I'm looking to provide wouldn't be very risky in themselves. Someone'd have to be pretty dedicated to hurt themselves with a paper print out or a PDF.
I'll keep it Sole Prop for a while, then, and incorporate if it grows big enough. But that simplifies things for me for sure.
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But I thought there were some exceptions for your own children. Like at 8y old you can start stuffing envelopes at month's end or something. (Now it's mainly e-mail bills but that was the most benign example I could think of.)
I still have a question about what age you can hire your own children to work for you?
I found this example where an 11y old was hired...
https://www.fbc.ca/knowledge-centre/pay-family-work-done-help-your-farm-or-small-business
Are any MMMers employing their own kids?
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We have always employed our kids at our retail store, they did actual work though and were paid what the other staff are. Started at roughly 13 for both of them, my son is an adult now and has his own job but our daughter still works for us.
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CPA,
Apologies if this has been covered before, but this is a super-long (but excellent and generous) thread!
I am an American looking at immigrating to Canada ASAP. I would keep my job at an American company, working remotely. My SO is a self-employed author; we have a limited-liability partnership for publishing her work. I own a house in the US and have about $150k in retirement assets and no debt (other than a mortgage). We haven't decided where we're going to move yet (Montreal or one of many places in Ontario are tops on the list).
Can you give some general advice on what to expect the tax implications of moving to Canada from the US might be?
I know I am not the one you are referring to, BUT, when we did the reverse, DH required a US work visa to continue to run his business (mainly drop shipments, out of Canada / China to Canada), now from our home in the USA, which is why he was required to wind it up before becoming a USA resident... because it took 6 months to get the US work visa authorization, a process that could not start until he was already in the USA....
I imagine Canada is the same, so if you are working and resident in canada, even if for your own business or US employer, you need a valid Canadian work permit to do so.
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You can hire kids, but need the letter (permit) approving the work arrangement when your kids are younger than a certain age., here it is 12. The regulator looks at the proposed work and conditions and gives the letter.
It is recommended to get this "permit" if your kids are young, because it adds legitimacy to the family business using the kids income as a deduction, too.
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You also have the ability to retain earnings and pay them out over time with incorporating... balancing taxes, so different people's income set points for incorporating will be different. You need to look at your total income, too, annually, not just from the business.
Yes. You can build up savings in the corp and use it as a kind of retirement account, pay yourself dividends over years until the corp is drained or, if the savings are large enough, leave the corp to your heirs.
you need to look at your tax rates in each scenario to see if it's worth it. Remember that accounting and taxes are substantially more costly for corps than personal, so it makes a big difference if you learn to do them yourself.
The other important factor is CPP. It is not a good deal for self-employed people, and if you do the math on what your accumulated CPP contributions would have made you had they been invested in an index ETF, you will be horrified at the difference. Incorporating allows you to choose ineligible dividends instead of salary, and avoid the 10% (new increases coming soon!) CPP tax.
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Hi,
Somewhere I read that RRSP over-contributions totalling up to $2,000 at any time in the year are allowed without penalty. How long can this condition be maintained?
This leads me to a follow-up question: which tax software is capable of calculating and reporting the earned income for a given/current taxyear as 18% of this is the contribution limit?
Thanks,
TDO
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Hi,
Somewhere I read that RRSP over-contributions totalling up to $2,000 at any time in the year are allowed without penalty. How long can this condition be maintained?
This leads me to a follow-up question: which tax software is capable of calculating and reporting the earned income for a given/current taxyear as 18% of this is the contribution limit?
Thanks,
TDO
A total of $2k over contribution can be carried every year. But you don't get the tax rebate on that portion, it just sits in the tax-deferred account growing for you until you can claim it. There is really not a big $$ win by doing this, just a convenience of not having to extract it if you slightly over contributed one year. Make certain you are maxing out your TFSA, or an RESP (if you have kids) before deliberately doing the RRSP over-contribution, as both are better places for the $2k in money.
All tax software can calculate the 18%, except, that like people, they can only guess or project what your actual end of year income will be, before the actual end of the year. Even with a steady 26x per year paycheque, I have found that that calculating the precise income is hard, because of when the company chooses to pay out your last 1-4 days of the year (in this year or next year?)
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Hey guys,
Am looking for some critique and optimization on my current plans. Any advice would be very recommended. Here goes:
Married, (30y.o./28y.o.) 2 kids (1 y.o./3 y.o), living in Alberta
Our target is to retire in 10 years with house paid off and living on $50,000/yr. Current savings target is $1.25M between RRSP, TFSA and eventually non-registered.
My Income: $200,000 / year
My RRSP (Work): $140,000 - Mix of low income ETFs (Bonds, Foreign and Canadian Capital)
My RRSP (Personal): $90,000
My TFSA: $70,000
Principal Residence: $150,000 of capital (Value $450,000, Remaining Mortgage $300,000) -Variable rate (now 3.15%)
Rental Property: ~$10,000 of capital (Purchased at $420,000, now valued at $300,000, remaining mortgage of $290,000) - Fixed Rate (2.95%)
Spousal Income: Currently $0 as she is staying with kids but in future will be $70,000 once back in workforce
RRSP (Work): $30,000
TFSA: Not eligible as dual US citizen
The savings plan is:
1. Start using my remaining yearly RRSP contribution room to fill my wife's RRSP (I have only 6% remaining after work match each year)
2. Wife to begin contributing to her RRSP once making a salary until its full - target to balance out values or our two RRSPs by the 10 year mark (might be tough)
3. With remaining savings each year, fill both RRSPs, my TFSA, RESPs and pay off principal residence mortgage until gone
4. Sell Rental property for a capital loss (it's been cashflow negative for a while) and save credits for future withdrawals from non-registered accounts
5. Once Wife's RRSP is full, she opens a non-registered account and invests in Canadian dividend paying stocks
6. If I run out of places to put money after mortgage, open a non-registered account with swap based ETFs.
Once we reach our $1.25M target between all accounts we begin withdrawing at 4% rate:
1. Take out equal amounts from each RRSP as low as possible to not trigger major income tax
2. Supplement any spending with withdrawals from our non-registered accounts (Canadian dividends + capital gains). Deferred capital loss should offset most capital gains.
3. Eventually tap TFSA last if needed - continue to transfer money into it each year to maximize contribution room
Final notes:
I follow Canadian Couch Potato model portfolio. Keep all bonds (20% allocation now) in my RRSP and most aggressive Foreign / Canadian Capital ETFs in TFSA.
I hope that's thorough enough. Please let me know if there's anything in my plan that you'd recommend optimizing!
Brad
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One note. I am a big fan of TFSA's... After a company match, they are usually the place where I recommend that you max out first.
I highly recommend that your wife max out the TFSA before her RRSP's when she starts work. The tax difference between $70k and $40k (retirement income) is small, The advantage of an account you can pull large sums from without spiking single year taxes (or OAS clawbacks) is huge in flexibility.
The only exceptions to investing in TFSA first, will be if you are a currently high income, and expect to drop in future (you = yes, wife = maybe).
OR, if you are trying to reduce income for some reason (taxes to a lower bracket?, get another Child benefit? have lots of dividend income in non registered?) then RRSP come first.
RESPs -- definitely fund these before retiring, although you won't need gigantic amounts for the kids, the excess can be returned to you. I recommend that most people plan to max them out in the final 7 years before your child is 18 for the CESG money... then move the excess into your RRSP once your kid starts college and you can withdraw your original contributions without penalty.
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Get on the kids RESP asap, does AB not have a education grant on top of the CESG? I recommend a monthly deposit account with $100 into each account at a minimum per month. You can most likely get a low MER index or mutual fund setup for this for the kids at
Your work RRSP, maximize the crap out of that but recommend only deducting the max amount to get the company match %. Use your remaining yearly RRSP limit to fund your personal RRSP. Also dig into the work RRSP funds available and the MER you are paying on that, I suspect they are high. I let my work RRSP build up and completely withdrew my employee portions once per year and put into my Vanguard index funds as that had a higher ROR. I was with sunlife and they allowed me to withdraw all employee contributions whenever I wanted.
Max that TFSA immediately every year, I agree with this 100%
On the rental property, I have one in a simple boat in a depressed economy oil town. Can you ride out the lost income rental potential each year in hopes you can ride out a return on real estate value. Much like the stock market, a loss isnt an actual loss until you "cash out".
I am in the camp of never paying off Mortgages, interest rates right now are still so ridiculously low that any money is best suited to go into savings first and foremost. You make more money with your cash working in investments than they do decreasing your mortgage payment.
You speak nothing of your debt @Brett S , are you carrying any debt from vehicles and/or consumer loans, credit lines etc?
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Thanks for the responses. A few follow up answers to the questions:
My wife is a dual citizen with the USA who doesn't recognize TFSAs so we have no opportunity to utilize her TFSA space.
We have no debts other than our two mortgages. And yes, my other mortgage is also in a depressed oil town but given the state of the oil industry in the country right now, it's by no means a sure bet that the price will come back up... hence why I'm considering cutting my losses. Right now the rent covers all expenses plus half the principal, leaving me on the hook for ~$600/month on the principal.
Great point on the work RRSP. Fortunately our RRSP provider offers both an active (the default of course) and passive ETF option. I've switched a while back to the passive option which as expected is outperforming their active fund by more or less the difference in MER. Who would have guessed...
I'll need to look into the Alberta education grant. I wasn't aware there was a program. I'm currently planning to put in the maximum $2500/year into each RESP to get the full government CESG match.
@Stasher - I also share the sentiment of not paying off the mortgage but I'm still conflicted as to where the better place to put my money is right now. Considering my RRSP and TFSA contribution is full I'd need to begin opening a taxable investment account. Does anyone have further recommendations on this? I'm worried the taxes won't make the benefit much better than what I'm currently getting on my mortgage.
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@Stasher - I also share the sentiment of not paying off the mortgage but I'm still conflicted as to where the better place to put my money is right now. Considering my RRSP and TFSA contribution is full I'd need to begin opening a taxable investment account. Does anyone have further recommendations on this? I'm worried the taxes won't make the benefit much better than what I'm currently getting on my mortgage.
Hands down start reading @Retire-Canada journal for how to maximize your TFSA RRSP and then plan your Non-Reg investments.
Here is the link and keep in mind this is his new journal as he closed the one that worked through the initial path of FIRE
https://forum.mrmoneymustache.com/journals/retire-canada-downshifting-like-a-boss!/ (https://forum.mrmoneymustache.com/journals/retire-canada-downshifting-like-a-boss!/)
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Or read the Rich Moose blog. quite helpful for details and different options for investments.
Smith maneuver for double effectiveness (Mortgage, tax deductions + investment.)
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No, there's no RESP grant for Alberta.
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No, there's no RESP grant for Alberta.
Just found this with a google search, it looked like an awesome program but the Government cancelled it, thats too bad. This was probably the program I was thinking of.
Alberta Centennial Education Savings Program (ACES) ... With the ACES program families in Alberta are eligible to receive $500 when they first open an RESP for their child, then $100 more when the child turns 8, 11 and 14 years old. You qualify for ACES if: your child was born after December 31, 2004.
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https://www.cbc.ca/news/politics/tax-changes-cra-canada-1.4944505?fbclid=IwAR0m0fkQmHzLgDpY1T4h2dcGZZJnDggMRhykJXTG_BQhDp-LIbzyKQ2zi3g
A roundup of the changes coming in 2019
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Thanks for the round-up post
My wife and I own a small business so will be interesting to see how we are affected with the changes. As for me personally it will also be a year of very little income entering year 2 of FIRE although I started freelance work so being in the low income bracket I wonder what impact the changes will have on my taxation.
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I am getting ready to do my taxes and have some questions. I just started actively investing in January 2018. Info about me:
Province: ON
Income :$40,000
RRSP: invested $9,500 This year (combination of VCN, XAW, ZRE, ZAG)
TFSA: maxed it out in 2018 (combination of VCN, XAW, ZRE, ZAG)
Both accounts are with BMO Investorline.
Normally I use TurboTax Standard to do my taxes. Under tax documents BMO has my annual RRSP contribution receipt and that is it. Questions
1. Do I need to claim any capital gains/losses or dividends for my TFSA for this year?
2. Do I need to claim any capital gains/losses or dividends for my RRSP for this year or only if I stocks/bonds?
3. If I do, will I receive documents from BMO or do I need to go through my statements and figure out the capital g/l and dividends
4. Will I be able to use the standard TurboTax or should I upgrade?
TIA
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I am getting ready to do my taxes and have some questions. I just started actively investing in January 2018. Info about me:
Province: ON
Income :$40,000
RRSP: invested $9,500 This year (combination of VCN, XAW, ZRE, ZAG)
TFSA: maxed it out in 2018 (combination of VCN, XAW, ZRE, ZAG)
Both accounts are with BMO Investorline.
Normally I use TurboTax Standard to do my taxes. Under tax documents BMO has my annual RRSP contribution receipt and that is it. Questions
1. Do I need to claim any capital gains/losses or dividends for my TFSA for this year?
2. Do I need to claim any capital gains/losses or dividends for my RRSP for this year or only if I stocks/bonds?
3. If I do, will I receive documents from BMO or do I need to go through my statements and figure out the capital g/l and dividends
4. Will I be able to use the standard TurboTax or should I upgrade?
TIA
TFSA is completely tax free - anything happening inside is not a taxable event.
RRSP is tax free inside - the only tax events are when money goes in, and when money comes out. Anything inside is not a taxable event.
I would recommend SimpleTax as it is good and free.
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Hi! Thanks for creating this thread, you are so generous to give your time and experience!
My question: should I hire an accountant? I am setting up a small business / sole proprietorship. Selling jewelry. At-home / mobile business. Some online.
Should I hire someone today? Yesterday? Soon? End of fiscal year? Thanks!
I am also choosing between QuickBooks, Wave, and FreshBooks. Any advice you have on my set-up would be greatly appreciated!
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Hi! Thanks for creating this thread, you are so generous to give your time and experience!
My question: should I hire an accountant? I am setting up a small business / sole proprietorship. Selling jewelry. At-home / mobile business. Some online.
Should I hire someone today? Yesterday? Soon? End of fiscal year? Thanks!
I am also choosing between QuickBooks, Wave, and FreshBooks. Any advice you have on my set-up would be greatly appreciated!
Hi Lifejoy,
I have a small business / sole proprietorship, too. You definitely don't need an accountant for these, as long as you do your own book keeping and have your CRA / GST accounts (and local business licenses). The deductions are actually pretty standard and the common tax software explains them pretty well.
An accountant would help to find more unusual tax opportunities, and help with advice on when to incorporate and why. (For me this would be around $60k in income or when a key client requires it, as I have to get business insurance anyway).
One caution about some accountants -- some look for very agressive (aka pretty clear violations, like calling an entire roof replacement an expense not a capital cost item) for items to claim. in order to show their value to their client. This happened to a couple of friends of mine, separately, and they were cautioned / audited by CRA in later years for those deductions.
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I am getting ready to do my taxes and have some questions. I just started actively investing in January 2018. Info about me:
Province: ON
Income :$40,000
RRSP: invested $9,500 This year (combination of VCN, XAW, ZRE, ZAG)
TFSA: maxed it out in 2018 (combination of VCN, XAW, ZRE, ZAG)
Both accounts are with BMO Investorline.
Normally I use TurboTax Standard to do my taxes. Under tax documents BMO has my annual RRSP contribution receipt and that is it. Questions
1. Do I need to claim any capital gains/losses or dividends for my TFSA for this year?
2. Do I need to claim any capital gains/losses or dividends for my RRSP for this year or only if I stocks/bonds?
3. If I do, will I receive documents from BMO or do I need to go through my statements and figure out the capital g/l and dividends
4. Will I be able to use the standard TurboTax or should I upgrade?
TIA
The only thing that you have to track for CRA is what $'s went in, and what $'s came out of the RRSP. This would be money from your bank account to the fund, and back out again. Purchases, repurchases within the accounts are not needed on your tax return because of the special tax status.
Think of these funds like a bubble. You only track the money that goes in and of the bubble. Anything that happens inside, including transfers from one RRSP to another RRSP (in the same holder's name) does not impact your return.
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Think of these funds like a bubble. You only track the money that goes in and of the bubble. Anything that happens inside, including transfers from one RRSP to another RRSP (in the same holder's name) does not impact your return.
Just make sure your banks/financial institutions do the transfers. If you do it manually it came out of the bubble.
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Hi! Thanks for creating this thread, you are so generous to give your time and experience!
My question: should I hire an accountant? I am setting up a small business / sole proprietorship. Selling jewelry. At-home / mobile business. Some online.
Should I hire someone today? Yesterday? Soon? End of fiscal year? Thanks!
I am also choosing between QuickBooks, Wave, and FreshBooks. Any advice you have on my set-up would be greatly appreciated!
I am a big fan of QuickBooks desktop, but if you are just getting started you could probably just use a spreadsheet. You just need a way to track your income and expenses. You need to register for GST once you hit $30,000 in gross income.
One thing that will make your life a lot easier is to set up a separate bank account and credit card for your business. Since you are a proprietorship they can be in your name (not necessarily the business name). Then just transfer money out of your business account to your personal account as needed.
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Hi! Thanks for creating this thread, you are so generous to give your time and experience!
My question: should I hire an accountant? I am setting up a small business / sole proprietorship. Selling jewelry. At-home / mobile business. Some online.
Should I hire someone today? Yesterday? Soon? End of fiscal year? Thanks!
I am also choosing between QuickBooks, Wave, and FreshBooks. Any advice you have on my set-up would be greatly appreciated!
I am a big fan of QuickBooks desktop, but if you are just getting started you could probably just use a spreadsheet. You just need a way to track your income and expenses. You need to register for GST once you hit $30,000 in gross income.
One thing that will make your life a lot easier is to set up a separate bank account and credit card for your business. Since you are a proprietorship they can be in your name (not necessarily the business name). Then just transfer money out of your business account to your personal account as needed.
If you do nothing else, please at a minimum do this. At this point, you do not likely need a "business" account or "business" card (and the fees that come along with them) so just open another chequing account and a separate credit card in your name that will be used for business only.
Use the T2125 https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2125/t2125-17e.pdf (https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2125/t2125-17e.pdf) (parts 3D and 4 will be the portions to pay attention to.) Build a simple spreadsheet with these categories that will allow you to easily categorize your expenses for your annual tax filing.
You may want to look to an accounting/bookkeeping software if things pick up - definitely not necessary, but can be a time saver for some. I used Sage for years, have been using Quickbooks desktop for the last couple of years, and am thinking I will get with the times and switch myself over to QB Online within the next year (many of my clients are heading this way, so I had better stay current!)
PS- If it starts to look likely that you will cross the $30K in sales threshold, please apply for your GST account BEFORE that happens! The invoice that takes you across this threshold should have GST charged on it that you will have to remit to the Gov't (technically.) :)
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Hi! Thanks for creating this thread, you are so generous to give your time and experience!
My question: should I hire an accountant? I am setting up a small business / sole proprietorship. Selling jewelry. At-home / mobile business. Some online.
Should I hire someone today? Yesterday? Soon? End of fiscal year? Thanks!
I am also choosing between QuickBooks, Wave, and FreshBooks. Any advice you have on my set-up would be greatly appreciated!
I am a big fan of QuickBooks desktop, but if you are just getting started you could probably just use a spreadsheet. You just need a way to track your income and expenses. You need to register for GST once you hit $30,000 in gross income.
One thing that will make your life a lot easier is to set up a separate bank account and credit card for your business. Since you are a proprietorship they can be in your name (not necessarily the business name). Then just transfer money out of your business account to your personal account as needed.
Yay- I have already made a business bank account. With freshbooks I can make invoices for free, and with a spreadsheet I can track the in and out of money. Is there anything else I’m missing by going the free route?
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Hi! Thanks for creating this thread, you are so generous to give your time and experience!
My question: should I hire an accountant? I am setting up a small business / sole proprietorship. Selling jewelry. At-home / mobile business. Some online.
Should I hire someone today? Yesterday? Soon? End of fiscal year? Thanks!
I am also choosing between QuickBooks, Wave, and FreshBooks. Any advice you have on my set-up would be greatly appreciated!
I am a big fan of QuickBooks desktop, but if you are just getting started you could probably just use a spreadsheet. You just need a way to track your income and expenses. You need to register for GST once you hit $30,000 in gross income.
One thing that will make your life a lot easier is to set up a separate bank account and credit card for your business. Since you are a proprietorship they can be in your name (not necessarily the business name). Then just transfer money out of your business account to your personal account as needed.
If you do nothing else, please at a minimum do this. At this point, you do not likely need a "business" account or "business" card (and the fees that come along with them) so just open another chequing account and a separate credit card in your name that will be used for business only.
Use the T2125 https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2125/t2125-17e.pdf (https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2125/t2125-17e.pdf) (parts 3D and 4 will be the portions to pay attention to.) Build a simple spreadsheet with these categories that will allow you to easily categorize your expenses for your annual tax filing.
You may want to look to an accounting/bookkeeping software if things pick up - definitely not necessary, but can be a time saver for some. I used Sage for years, have been using Quickbooks desktop for the last couple of years, and am thinking I will get with the times and switch myself over to QB Online within the next year (many of my clients are heading this way, so I had better stay current!)
PS- If it starts to look likely that you will cross the $30K in sales threshold, please apply for your GST account BEFORE that happens! The invoice that takes you across this threshold should have GST charged on it that you will have to remit to the Gov't (technically.) :)
Quickbooks is popular. I’m afraid I’m being penny wise and pound foolish by not using QB. But I like the idea of keeping my overhead expenses VERY low.
Any downside to me trying the free route and going for the software if things get crazy? Should I hire an accountant to make sure my spreadsheet is good? Agh. It’s so much unknown. Definitely not my area of expertise.
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Here is a question for the CPA's / accountants out there. I am baffled by it. @Cpa Cat @ToTheMoon help?
I have a micro-business in FIRE, which includes consulting engineering services, among other services (business advisory and financial planning).
Recently, my prior employer asked me on a call up basis to take on a part time project. It amounts to 150 hours of work over 3-4 months.
In order to pay me as a sub-consultant (like a vendor) I need a huge amount of commercial and professional liability and a sub-consultant agreement. Which is weird because I work from my home office (so what commercial risk do I incur?) and already have $250k of professional liability, more than 10x my fees - but whatever. Their rules. I have a call in to get a quote for this now.
Alternatively, I can be set up as an hourly contractor, (This set up is the most appropriate for this situation), which then falls under their professional and commercial liability but I still cover my own taxes, employer costs, WCB etc. with my own business.
The question:
In order to set me up as an hourly contractor, (not a vendor or sub-consultant) they require that I be "incorporated, because they say that there are less tax implications for them. WHAT?! How does my incorporation vs. sole proprietor status affect my client's tax situation?
I can only see the impact on the "employee versus contractor" test, for employment standards, but even that does not revolve around incorporation directly but on a different set of criteria for my province.
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Here is a question for the CPA's / accountants out there. I am baffled by it. @Cpa Cat @ToTheMoon help?
I have a micro-business in FIRE, which includes consulting engineering services, among other services (business advisory and financial planning).
Recently, my prior employer asked me on a call up basis to take on a part time project. It amounts to 150 hours of work over 3-4 months.
In order to pay me as a sub-consultant (like a vendor) I need a huge amount of commercial and professional liability and a sub-consultant agreement. Which is weird because I work from my home office (so what commercial risk do I incur?) and already have $250k of professional liability, more than 10x my fees - but whatever. Their rules. I have a call in to get a quote for this now.
Alternatively, I can be set up as an hourly contractor, (This set up is the most appropriate for this situation), which then falls under their professional and commercial liability but I still cover my own taxes, employer costs, WCB etc. with my own business.
The question:
In order to set me up as an hourly contractor, (not a vendor or sub-consultant) they require that I be "incorporated, because they say that there are less tax implications for them. WHAT?! How does my incorporation vs. sole proprietor status affect my client's tax situation?
I can only see the impact on the "employee versus contractor" test, for employment standards, but even that does not revolve around incorporation directly but on a different set of criteria for my province.
This sounds very strange to me - can you request clarification from them before you spend too much time going down the rabbit hole?
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Here is a question for the CPA's / accountants out there. I am baffled by it. @Cpa Cat @ToTheMoon help?
I have a micro-business in FIRE, which includes consulting engineering services, among other services (business advisory and financial planning).
Recently, my prior employer asked me on a call up basis to take on a part time project. It amounts to 150 hours of work over 3-4 months.
In order to pay me as a sub-consultant (like a vendor) I need a huge amount of commercial and professional liability and a sub-consultant agreement. Which is weird because I work from my home office (so what commercial risk do I incur?) and already have $250k of professional liability, more than 10x my fees - but whatever. Their rules. I have a call in to get a quote for this now.
Alternatively, I can be set up as an hourly contractor, (This set up is the most appropriate for this situation), which then falls under their professional and commercial liability but I still cover my own taxes, employer costs, WCB etc. with my own business.
The question:
In order to set me up as an hourly contractor, (not a vendor or sub-consultant) they require that I be "incorporated, because they say that there are less tax implications for them. WHAT?! How does my incorporation vs. sole proprietor status affect my client's tax situation?
I can only see the impact on the "employee versus contractor" test, for employment standards, but even that does not revolve around incorporation directly but on a different set of criteria for my province.
This sounds very strange to me - can you request clarification from them before you spend too much time going down the rabbit hole?
Hah. I did. That was the answer.
So I posted it on here and asked another person, from a different area of the company why.
There was one good explanation -- when audited by the government for contractor vs employee set up, if the government finds one person improperly classified, they then do a COMPLETE audit of all the hourly contractors, which costs a lot of time and headache. The incorporated status guarantees that the person is a contractor, quickly. So not really about automatic taxes, more about the cost of audits and penalties that arise if found to be at fault. I still don't like the answer because it is a short cut that does not apply to my situation.
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Is there a link to a good tax tables for Alberta?
I've been maxing out my RRSP for the last couple of years and for 2019 will have $8000 contribution room. I have been debating if I should slow down on my contributions there and focus on my TFSA while we have daycare fees that are bringing down my net income.
Do daycare fees bring down your net income dollar for dollar like RRSPs?
I'm trying to figure out if delaying contributions is worth it to have more space when we have less to pay in daycare.
Trying to plan out the sweet spot for RRSP/TFSA contributions and planning for down the road as daycare fees decrease and it could be useful to have more RRSP space.
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Three questions -
1) I'm on track to max out my personal RRSP and TFSA limits this year, for the first time. (YAY!) Is it the best financial decision to then put my savings into my husband's RRSP? It wouldn't be set up as a spousal RRSP, I would just transfer him the money and he'd deposit it. We're in similar tax brackets but he has more room than I do. I'm just not sure if this is legally allowed or the right thing to do with my money. (And this is purely a financial/tax question, I trust him, we have similar financial goals, I'm not concerned about funding his accounts for the naysayers. ;))
2) I'm also on track to have my first child at the beginning of September. Outside of the $2500 going into an RESP, is there anything else I should open/invest in to maximize the tax benefits there?
3) I will be going on maternity leave for somewhere in the 12-18 month range, but I work for a small company and will remain very involved in the strategic planning of the business. Rather than get paid as a consultant, would I be able to ask for my stock options to be granted at whatever $ amount we agree on, for hours worked? Would that be taxed, or only taxed with a liquidity event like going public, like the rest of my shares?
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Is there a link to a good tax tables for Alberta?
I've been maxing out my RRSP for the last couple of years and for 2019 will have $8000 contribution room. I have been debating if I should slow down on my contributions there and focus on my TFSA while we have daycare fees that are bringing down my net income.
Do daycare fees bring down your net income dollar for dollar like RRSPs?
I'm trying to figure out if delaying contributions is worth it to have more space when we have less to pay in daycare.
Trying to plan out the sweet spot for RRSP/TFSA contributions and planning for down the road as daycare fees decrease and it could be useful to have more RRSP space.
EY tax calculator...
RRSPs ... If you get Child benefits, your RRSP contributions lower your income and your child benefit goes up. It is pretty large with the liberals, so generally worth claiming RRSPs when you have kids at home and qualify for CB payments.
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Three questions -
1) I'm on track to max out my personal RRSP and TFSA limits this year, for the first time. (YAY!) Is it the best financial decision to then put my savings into my husband's RRSP? It wouldn't be set up as a spousal RRSP, I would just transfer him the money and he'd deposit it. We're in similar tax brackets but he has more room than I do. I'm just not sure if this is legally allowed or the right thing to do with my money. (And this is purely a financial/tax question, I trust him, we have similar financial goals, I'm not concerned about funding his accounts for the naysayers. ;))
2) I'm also on track to have my first child at the beginning of September. Outside of the $2500 going into an RESP, is there anything else I should open/invest in to maximize the tax benefits there?
3) I will be going on maternity leave for somewhere in the 12-18 month range, but I work for a small company and will remain very involved in the strategic planning of the business. Rather than get paid as a consultant, would I be able to ask for my stock options to be granted at whatever $ amount we agree on, for hours worked? Would that be taxed, or only taxed with a liquidity event like going public, like the rest of my shares?
With equal incomes, who is to say that you don't pay all your annual expenses and your husband puts his money into RRSP's? It would be different if he wasn't working but had room from a previous job.
For child opportunities... It is better to max out your retirement funds before the RESP until the kid is 11-14. You can catch up then with the RESPs.. the money will grow faster in your retirement fund, it is easier to reduce education spending than retirement costs, you can cash flow some education, and the grant has better financial returns when you receive the money closer to when you pull it. Try to max out RRSP to get the largest child benefit payment possible.
For number three, the way your worded it, it sounds like you are trying to deliberately structure how you receive income so that you can continue to receive more EI than really entitled to. Get legal advice because this could read like fraud. An alternative, you can earn a small weekly amount and still collect full or partial EI. Find out the limits and do that, or just get part time payment from your work, instead of EI. It may be more money, anyway, and maybe benefits, too.
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Great thread. Thank you. Posting to follow and learn!
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@lifejoy I work freelance as a writer and photographer for the last three years since being FI, Taxes are extremely simple and I run it as a sole proprietor, very easy to do. I have been using the QuickBooks self-employed app from day one and is mind blowing how simple it is.
I don't have to hang onto stacks of receipts and paperwork for expenses as it has a photo upload function. It also tracks mileage for year end tax credit on your expenses. It can generate invoices as well but I prefer to make my own invoices via pdf from excel and just make a manual entry into the app.
The app also generates and exports all your year end tax reports, full profit/loss statement, mileage log, transaction log and tax summary into excel files.
I HIGHLY recommend giving this a look, cost me like $5 a month or something like that. All cloud based
https://quickbooks.intuit.com/ca/self-employed/ (https://quickbooks.intuit.com/ca/self-employed/)
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I'm paying (paid) 22% of my income in taxes for 2018. I earn low 100s. Is that considered high or average?
I'm doing my taxes myself. Wondering if I'm missing something.
FYI, I'm maxing out my RRSPs and diligently contributing to TFSA.
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I'm paying (paid) 22% of my income in taxes for 2018. I earn low 100s. Is that considered high or average?
I'm doing my taxes myself. Wondering if I'm missing something.
FYI, I'm maxing out my RRSPs and diligently contributing to TFSA.
It is what it is? How much are you putting into your RRSP - because that comes right off the top.
$110k income say, $20k RRSP, if you have nothing else going on then yeah,
https://www.taxtips.ca/calculators/canadian-tax/canadian-tax-calculator.htm
tells me Average tax rate based on adjusted taxable income (actual income) = 22.5%
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I'm paying (paid) 22% of my income in taxes for 2018. I earn low 100s. Is that considered high or average?
I'm doing my taxes myself. Wondering if I'm missing something.
FYI, I'm maxing out my RRSPs and diligently contributing to TFSA.
That's about right for a single, no children person. If you are salaried or an hourly employee there are not a lot of ways to reduce tax. RRSP contributions, tuition, charitable donations, medical expenses, union/association dues, interest expenses (on investment loans), and the odd provincial credit for certain niche items is as good as it gets. Check to make sure you've applied for the new carbon rebate if you're in Ontario.
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I'm paying (paid) 22% of my income in taxes for 2018. I earn low 100s. Is that considered high or average?
I'm doing my taxes myself. Wondering if I'm missing something.
FYI, I'm maxing out my RRSPs and diligently contributing to TFSA.
That's about right for a single, no children person. If you are salaried or an hourly employee there are not a lot of ways to reduce tax. RRSP contributions, tuition, charitable donations, medical expenses, union/association dues, interest expenses (on investment loans), and the odd provincial credit for certain niche items is as good as it gets. Check to make sure you've applied for the new carbon rebate if you're in Ontario.
Medical expenses... Hah! Sounds good...not worth much... I had over $4k in medical expenses for the 12 month period, even on low income, and when that 3% of your income is taken out... only get back $450 or 10%. It took me almost two hours to compile all the expenses and figure out our most expensive 12 month period. We've only claimed medical 3 times in 25 years. To get back more, you need to have a very serious event happen in your life, so I guess the good news is that we only spent $4k and I am counting our blessings...?
The other one that doesn't give much back, tax wise, is deducting food / meals on your small business expenses. I only get a deduction worth 8-10% of the cost of the meal. Clients think that when you expense something it is free, and it just isn't so. Worth it if business comes out of it, but still pricey.
The other ones listed are pretty good for tax credits or reducing income tax owing.
ETA -- I thought of another one that did not pay much for the effort to track -- business use of home office -- the one that you would get form T2200 from your employer, business use of home for employees. When I calculated it out one year, it was only worth $120 to me. $120 is still something, but a lot of work to get an employer to fill out the form and calc your costs for only $120. It think it would be a better value to people that rent instead of owning their property.
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@lifejoy I work freelance as a writer and photographer for the last three years since being FI, Taxes are extremely simple and I run it as a sole proprietor, very easy to do. I have been using the QuickBooks self-employed app from day one and is mind blowing how simple it is.
I don't have to hang onto stacks of receipts and paperwork for expenses as it has a photo upload function. It also tracks mileage for year end tax credit on your expenses. It can generate invoices as well but I prefer to make my own invoices via pdf from excel and just make a manual entry into the app.
The app also generates and exports all your year end tax reports, full profit/loss statement, mileage log, transaction log and tax summary into excel files.
I HIGHLY recommend giving this a look, cost me like $5 a month or something like that. All cloud based
https://quickbooks.intuit.com/ca/self-employed/ (https://quickbooks.intuit.com/ca/self-employed/)
Well that sounds amazing. I am going to look into it.
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I have a question related to estate taxes. The T3 Trust Guide for 2018 says:
<snip>
Graduated rate estate elections (losses)
For 2016 and subsequent tax years, if you are a legal representative administering the graduated rate estate of a deceased person, you may:
elect under 164(6) to treat certain capital losses and terminal losses, arising in the first tax year of the deceased person’s graduated rate estate, as losses of the deceased person for that person’s final tax year
</snip>
What happens with capital losses in the 2nd year? For example, suppose we have 100K invested in stocks in the second year of the estate, it turns out to be a bad year for the stock market, and the assets are only worth 80K at the end of the second year. There's a 20K capital loss. As an individual, we could carry the loss forward.
If we wind up the estate at the end of the second year, what happens to the capital loss?
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I don't have my books near me, but my fuzzy memory is suggesting that you then refile up to 3 years backwards...? If you can get a tax advantage doing so, anyway. After the final year tax return adjustments, if the deceased is no longer filing a tax return (!) then you lose out on any benfit to a capital loss.
I am struggling to get how you have more than one year of "final tax return of a deceased person", ... because after the final tax return doesn't the residual estate get held in trust / treated like a trust if not distributed / dispersed? (It is no longer a personal tax return but a trust tax filing?)
I am sure someone much more competent than I can answer... These are just some random thoughts.
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I don't have my books near me, but my fuzzy memory is suggesting that you then refile up to 3 years backwards...? If you can get a tax advantage doing so, anyway. After the final year tax return adjustments, if the deceased is no longer filing a tax return (!) then you lose out on any benfit to a capital loss.
I am struggling to get how you have more than one year of "final tax return of a deceased person", ... because after the final tax return doesn't the residual estate get held in trust / treated like a trust if not distributed / dispersed? (It is no longer a personal tax return but a trust tax filing?)
I am sure someone much more competent than I can answer... These are just some random thoughts.
My accountant answered. If you transfer the assets in kind the beneficiary assumes the original cost base. If you sell the assets then the capital loss is not available.
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@scottish
I am not sure what you mean by this "If you transfer the assets in kind the beneficiary assumes the original cost base. " Is this related to the graduated estate, or apply to anyone at any time (not just an estate dispersement).
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Here is a question for the CPA's / accountants out there. I am baffled by it. @Cpa Cat @ToTheMoon help?
I have a micro-business in FIRE, which includes consulting engineering services, among other services (business advisory and financial planning).
Recently, my prior employer asked me on a call up basis to take on a part time project. It amounts to 150 hours of work over 3-4 months.
In order to pay me as a sub-consultant (like a vendor) I need a huge amount of commercial and professional liability and a sub-consultant agreement. Which is weird because I work from my home office (so what commercial risk do I incur?) and already have $250k of professional liability, more than 10x my fees - but whatever. Their rules. I have a call in to get a quote for this now.
Alternatively, I can be set up as an hourly contractor, (This set up is the most appropriate for this situation), which then falls under their professional and commercial liability but I still cover my own taxes, employer costs, WCB etc. with my own business.
The question:
In order to set me up as an hourly contractor, (not a vendor or sub-consultant) they require that I be "incorporated, because they say that there are less tax implications for them. WHAT?! How does my incorporation vs. sole proprietor status affect my client's tax situation?
I can only see the impact on the "employee versus contractor" test, for employment standards, but even that does not revolve around incorporation directly but on a different set of criteria for my province.
This sounds very strange to me - can you request clarification from them before you spend too much time going down the rabbit hole?
Hah. I did. That was the answer.
So I posted it on here and asked another person, from a different area of the company why.
There was one good explanation -- when audited by the government for contractor vs employee set up, if the government finds one person improperly classified, they then do a COMPLETE audit of all the hourly contractors, which costs a lot of time and headache. The incorporated status guarantees that the person is a contractor, quickly. So not really about automatic taxes, more about the cost of audits and penalties that arise if found to be at fault. I still don't like the answer because it is a short cut that does not apply to my situation.
While that makes sense, it also makes me nervous. As an employee who is incorporating to bill your employer, especially if they are paying you most/all of your corporate income, the govt could decide that you are 'personal services' which would mean a massive tax hit. This is in addition to the costs of incorporating and corporate taxes, which are very much more than personal taxes even if they are dead simple.
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Yeah, I agree. Being told to incorporate is a lot less "independent operations" than incorporating for your own business reasons / needs. My contract could not ever be considered "personal services" as it is for well identified "professional services" (engineering).
Anyway, at the end of the day, I did NOT incorporate, but I have to purchase 1 million liability insurance and $500k commercial liability, just for them. I already had $250k liability for other clients... So, like a good contractor, I charged them for it as a business expense. (Transferring the cost of insurance specific to a job to the customer / requester is common in the construction / design industry).
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@scottish
I am not sure what you mean by this "If you transfer the assets in kind the beneficiary assumes the original cost base. " Is this related to the graduated estate, or apply to anyone at any time (not just an estate dispersement).
I was asking in the context of the graduated estate (because that's what I'm working on). I don't know about other trusts...
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My friend has a condo and plans to buy a house and rent the condo.
They have a mortgage on the condo for about half the value. They are pre-approved for a house mortgage without selling the condo based on the expected rent. So I think they have their financing ducks in a row.
Any tax tips?
I thought they should get the condo appraised to have a valuation date as of today when they switch it from their prime residence to a rental.
Can they then remortgage it and use the extra cash towards their new house? (Yes I assume, but what about my next question.)
Would they be able to write off all the rental condo mortgage interest against rental income?
I am not exactly sure when their current condo mortgage is up for renewal. If it is 2 years from now, could they do the remortgage then & slap a lump sum on their personal residence or should it all happen now?
Basically looking for tax saving tips now and in the future if they sell the condo.
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I thought they should get the condo appraised to have a valuation date as of today when they switch it from their prime residence to a rental.
Yes, makes it cleaner. Even just a couple of agents giving a valuation.
Can they then remortgage it and use the extra cash towards their new house? (Yes I assume, but what about my next question.)
Yes.
Would they be able to write off all the rental condo mortgage interest against rental income?
No, the purpose of that money is to buy the new house. So obviously don't repay the condo mortgage with spare cash, repay the mortgage on the new house (should they want to do that).
And similarly, they can borrow against either property to finance a new rental purchase, or renovations. It is what the money is borrowed for that is important.
They could also take a mortgage or HELOC on either property, invest in the stock market in an unregistered account, and deduct the interest (as long as it is kept clean and separate!) - see the Smith Manoeuvre.
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Back to my Condo to house scenario.
What if they sold the condo then bought another rental condo & the house?
In that case you would obviously put the minimum down payment on the rental condo & more on the new home. All of the mortgage on the rental would be tax deductible no doubt.
When you change the usage of a primary residence isn’t it considered a deemed deposition?
So I’m not sure why someone couldn’t refinance it based on fair market value at that time and deduct the interest going forward.
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Back to my Condo to house scenario.
What if they sold the condo then bought another rental condo & the house?
In that case you would obviously put the minimum down payment on the rental condo & more on the new home. All of the mortgage on the rental would be tax deductible no doubt.
When you change the usage of a primary residence isn’t it considered a deemed deposition?
So I’m not sure why someone couldn’t refinance it based on fair market value at that time and deduct the interest going forward.
Because it isn't new money being borrowed for the purposes of investing. They could take the money out of the condo to buy something else that is investing, but if "that" money goes to buying a primary residence it is not deductible. You can't borrow to buy something you already own - I get what you're saying but it just doesn't work like that. That money that you are borrowing is for personal use, not business use. Believe me, Canada is actually pretty generous with this to begin with.
Just say - $500k property for personal use, $100k mortgage; sell and get $400k cash.
Put $100k of that $400k down on a $500k rental = $400k mortgage deductible, and $300k down on a $500k primary residence = $200k not deductible.
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Hey MMM'ers
I'm a Canadian Chartered Accountant with a significant amount of tax experience.
Just throwing this out there - this is the time to reassess your taxes and get questions answered. The holidays is far too late for appropriate tax planning.
If you have questions about Can"eh"dian taxes - I would be more than happy to offer the MMM discount of free advice. I hope this can serve as a reference point for future discussions for those of us who choose to live in Igloo's and drink Maple Syrup, as the tax discussions in the forum tend to revolve around our Southern NeighBOURS.
You ask - I'll do my best to answer based on what you provide.
Let the boring tax discussion begin!
Hi CB,
My wife and I would love if you would take the time to offer us advice on our plan. We are a Canadian couple, ages 32, and 28, with no children, currently living in British Columbia.
We have 600,000 in investments, no debt, and no other assets. Approximately 150,000 in our RRSPs, 100,000 in TFSAs and 350,000 in our joint taxable account. We are 100% in equity ETFs, specifically 80% in XAW (MSCI All-Country World Index Ex- Canada) and 20% in VCN (Canada Total stock market), which we have in the taxable account since Canadian dividends are taxed favourably. We have no other income.
We intend to live a very low cost lifestyle by continuously traveling abroad, staying in low cost countries and doing work exchanges for free food and shelter, such as Workaway.info or WWOOF. By not staying too long in any one country and not working for money, we will remain tax residents of Canada, which we think is favourable with low income.
Our withdrawal strategy is as follows:
We will have a mix between a variable withdrawal strategy at 4%, and a constant withdrawal strategy at 2%. How it will work is we will become comfortable living at 2% of our initial portfolio value; all of our essential expenses will be covered by this. At 600,000 this would be 12,000. Once we are comfortable with this, we can apply the variable withdrawal strategy at 4%, which applies a 4% spending rate to the portfolio value each year, but anything beyond 12,000 will be entirely discretionary expenses and we likely won't use it all. These might seem like very conservative spending rates but we want our money to grow so we have more when we are older or have children.
As for taxes, we intend to stay under the Basic Personal Amount each year, so as of 2019 we would have roughly 24,000 combined, tax-free. Since we estimate we will only require 12,000, our strategy is to calculate our capital gains and dividends every December, subtract the taxable income from the Basic Personal Amount, and then withdraw the rest of the Basic Personal Amount from the RRSP, keeping our average tax rate close to 0%. The money that we don't intend to spend will be reinvested into the taxable account. We will eventually settle in another country. We are thinking in approximately 10 years, so it would be nice to withdraw from the RRSP at 0%, then to pay a flat rate of 25% as a non-existent. On top of this, we imagine that our expenses will increase in the future. Another argument for withdrawing from the RRSP now. Am I missing something?
Another tax strategy we have concerning the Basic Personal Amount is to do capital gains harvesting. Lets say we have successfully depleted our RRSPs for simplicity. In December we will calculate our taxable capital gains and dividends. If the Basic Personal Amount will encompass more taxable income, we will calculate what capital gains we should have and simply sell and buy them again. This will help to minimize the deemed disposition when we eventually expatriate.
Also.. (sorry its getting long) what about provincial residency? I have found certain virtual mailbox services that will collect your mail while your away and look like a home address, for example anytimemailbox.com. Will this be sufficient? I understand that provincial residency is based on ties. So I will tell you our ties. My wife is originally from Poland so she doesn't have any family here. I have a mother in Ontario and don't have much other family. We currently live in BC, and I have a driver's license here. We use an online bank (manicure) and an online brokerage. Other than that we will be selling everything and living out of our backpacks so we don't have many ties. Could we simply choose any province we want??? Would we need to at least get a driver's license in that province as well as the virtual mailbox? I was thinking that Alberta or Nunavut would be the best options for taxes for our low-income strategy. Any thoughts? We really don't want to be in trouble for tax fraud when we really won't be living in Canada and its not really our fault that Canada need a us to establish residency in another country before it will stop taxing us and we need to have a Canadian address in a certain province to do that!
One more question. Earlier I explained our strategy to do work exchanges instead of paid work but I know that many digital nomads do paid work while traveling. What are the tax risks of this? I don't want us to accidentally trigger residency in one of these countries and complicate our tax situation. Am I right to think this way?
Thanks a lot! I hope you will have the time an patience to read all that.
Matt and Sylwia
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Hello,
My apologies if this questions has been asked already.
I'm wondering what the tax implications are of owning and selling US stocks in registered and non-registered accounts?
For example, if I purchase a US stock like BYND (beyond meat) for $100 USD and sell it at $200 USD what are the tax implications for a regular non-registered account, a TFSA or an RRSP? Are there tax implications on an annual basis of just holding a stock that's appreciating in value without selling it? What if the company pays dividends?
My general understanding is there's no real advantage to using a TFSA for US stocks. If you could get into the "why's" a bit more specifically that would be greatly appreciated.
Thanks!
-
Hello,
My apologies if this questions has been asked already.
I'm wondering what the tax implications are of owning and selling US stocks in registered and non-registered accounts?
For example, if I purchase a US stock like BYND (beyond meat) for $100 USD and sell it at $200 USD what are the tax implications for a regular non-registered account, a TFSA or an RRSP? Are there tax implications on an annual basis of just holding a stock that's appreciating in value without selling it? What if the company pays dividends?
My general understanding is there's no real advantage to using a TFSA for US stocks. If you could get into the "why's" a bit more specifically that would be greatly appreciated.
Thanks!
In a registered account (RRSP, TFSA, etc.) there are no capital gains taxes applicable. In a TFSA, there is a tax on dividends that are withheld at the U.S. side (15% of dividend payment when you sign the W-8BEN) and you cannot claim back this foreign tax paid. In an RRSP you are exempted from U.S. withholding taxes on dividends. Withholding taxes are deducted automatically, so not an issue at tax time.
Outside of a registered account you must pay capital gains taxes, taxes on the dividend income, and the withholding tax at 15% (with W-8BEN). The withholding tax is automatically deducted from the dividend payment, but here you can claim back the withholding taxes on your tax return as a foreign tax paid. Dividends must be reported and are taxed as regular income at tax time and you must adjust the dividend amount for Canadian currency on the date it is issued. Capital gains are taxed at the normal capital gains inclusion rate (50%) if you sell during the tax year, but again you must adjust for Canadian currency on the buy date and sell date.
People avoid holding U.S. dividend stocks in a TFSA because you lose the 15% withholding tax and you cannot claim it back. This is not an issue for stocks that don't pay dividends, or where dividends are a tiny part of the overall return.
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My wife and I would love if you would take the time to offer us advice on our plan. We are a Canadian couple, ages 32, and 28, with no children, currently living in British Columbia.
We have 600,000 in investments, no debt, and no other assets. Approximately 150,000 in our RRSPs, 100,000 in TFSAs and 350,000 in our joint taxable account. We are 100% in equity ETFs, specifically 80% in XAW (MSCI All-Country World Index Ex- Canada) and 20% in VCN (Canada Total stock market), which we have in the taxable account since Canadian dividends are taxed favourably. We have no other income.
We intend to live a very low cost lifestyle by continuously traveling abroad, staying in low cost countries and doing work exchanges for free food and shelter, such as Workaway.info or WWOOF. By not staying too long in any one country and not working for money, we will remain tax residents of Canada, which we think is favourable with low income.
Our withdrawal strategy is as follows:
We will have a mix between a variable withdrawal strategy at 4%, and a constant withdrawal strategy at 2%. How it will work is we will become comfortable living at 2% of our initial portfolio value; all of our essential expenses will be covered by this. At 600,000 this would be 12,000. Once we are comfortable with this, we can apply the variable withdrawal strategy at 4%, which applies a 4% spending rate to the portfolio value each year, but anything beyond 12,000 will be entirely discretionary expenses and we likely won't use it all. These might seem like very conservative spending rates but we want our money to grow so we have more when we are older or have children.
As for taxes, we intend to stay under the Basic Personal Amount each year, so as of 2019 we would have roughly 24,000 combined, tax-free. Since we estimate we will only require 12,000, our strategy is to calculate our capital gains and dividends every December, subtract the taxable income from the Basic Personal Amount, and then withdraw the rest of the Basic Personal Amount from the RRSP, keeping our average tax rate close to 0%. The money that we don't intend to spend will be reinvested into the taxable account. We will eventually settle in another country. We are thinking in approximately 10 years, so it would be nice to withdraw from the RRSP at 0%, then to pay a flat rate of 25% as a non-existent. On top of this, we imagine that our expenses will increase in the future. Another argument for withdrawing from the RRSP now. Am I missing something?
Another tax strategy we have concerning the Basic Personal Amount is to do capital gains harvesting. Lets say we have successfully depleted our RRSPs for simplicity. In December we will calculate our taxable capital gains and dividends. If the Basic Personal Amount will encompass more taxable income, we will calculate what capital gains we should have and simply sell and buy them again. This will help to minimize the deemed disposition when we eventually expatriate.
Also.. (sorry its getting long) what about provincial residency? I have found certain virtual mailbox services that will collect your mail while your away and look like a home address, for example anytimemailbox.com. Will this be sufficient? I understand that provincial residency is based on ties. So I will tell you our ties. My wife is originally from Poland so she doesn't have any family here. I have a mother in Ontario and don't have much other family. We currently live in BC, and I have a driver's license here. We use an online bank (manicure) and an online brokerage. Other than that we will be selling everything and living out of our backpacks so we don't have many ties. Could we simply choose any province we want??? Would we need to at least get a driver's license in that province as well as the virtual mailbox? I was thinking that Alberta or Nunavut would be the best options for taxes for our low-income strategy. Any thoughts? We really don't want to be in trouble for tax fraud when we really won't be living in Canada and its not really our fault that Canada need a us to establish residency in another country before it will stop taxing us and we need to have a Canadian address in a certain province to do that!
One more question. Earlier I explained our strategy to do work exchanges instead of paid work but I know that many digital nomads do paid work while traveling. What are the tax risks of this? I don't want us to accidentally trigger residency in one of these countries and complicate our tax situation. Am I right to think this way?
Thanks a lot! I hope you will have the time an patience to read all that.
Matt and Sylwia
I don't think CPA-CB is active on the forum anymore. He hasn't responded to posts for several years. I might be able to offer some help since I have looked at this myself for my move.
You have a lot of the tax and income basics down correctly, so I'll ignore that part. What you need to focus on is residency. Every country has different residency rules so you need to be very mindful of that before going to each country. Most say something like more than 183 days in a 12 month period, but starting from the date of entry. So it could be interpreted as the intention to stay more than 183 days, or back taxes will be owing if you cross that amount. However, some countries (like Canada) have more complex tax residency tests. There are also implications for certain countries that Canada has tax treaties with that could change your residency status from the normal rules.
With Canada, you cannot simply choose a province or territory that is best suited to your income and run with that. You must have residency ties. It sounds like you will have no significant ties to any province (no home, no spouse, no dependents in any province). This means you will need to try make a case based on secondary ties and that could be very difficult. I doubt you could meet this standard for any province, except maybe Ontario if you go back there regularly to visit family, use a mailing address there, have a short-term lease agreement in place when you go back to visit, have an Ontario DL, have Ontario Health Insurance, own a car there, store your belongings there, etc.. Most provinces will consider you not to be a resident if you haven't lived there for 6 months, so that could become an issue, especially for a DL and health insurance.
Provided you don't trigger tax residency in another country based on their standards or based on their tax treaty with Canada, I think it's most likely that you will be considered a "deemed resident", but not a "factual resident" for tax purposes. This means you won't have provincial ties and won't pay provincial tax or get access to provincial tax credits and other programs. But you will need to pay the federal surtax (Sec. 120(1) taxes) which can be higher than taxes in many provinces.
If you earn income in another country you will probably be liable to pay non-resident taxes on that income to the country you are in, and to report it on your Canadian tax return. (You would get credit for foreign taxes paid.) In reality, especially for online digital work, I doubt very many people actually do report it. At least not to the country they are residing in. But it could trigger serious consequences if you don't.
Hope this helps!
-
Hello,
My apologies if this questions has been asked already.
I'm wondering what the tax implications are of owning and selling US stocks in registered and non-registered accounts?
For example, if I purchase a US stock like BYND (beyond meat) for $100 USD and sell it at $200 USD what are the tax implications for a regular non-registered account, a TFSA or an RRSP? Are there tax implications on an annual basis of just holding a stock that's appreciating in value without selling it? What if the company pays dividends?
My general understanding is there's no real advantage to using a TFSA for US stocks. If you could get into the "why's" a bit more specifically that would be greatly appreciated.
Thanks!
In a registered account (RRSP, TFSA, etc.) there are no capital gains taxes applicable. In a TFSA, there is a tax on dividends that are withheld at the U.S. side (15% of dividend payment when you sign the W-8BEN) and you cannot claim back this foreign tax paid. In an RRSP you are exempted from U.S. withholding taxes on dividends. Withholding taxes are deducted automatically, so not an issue at tax time.
Outside of a registered account you must pay capital gains taxes, taxes on the dividend income, and the withholding tax at 15% (with W-8BEN). The withholding tax is automatically deducted from the dividend payment, but here you can claim back the withholding taxes on your tax return as a foreign tax paid. Dividends must be reported and are taxed as regular income at tax time and you must adjust the dividend amount for Canadian currency on the date it is issued. Capital gains are taxed at the normal capital gains inclusion rate (50%) if you sell during the tax year, but again you must adjust for Canadian currency on the buy date and sell date.
People avoid holding U.S. dividend stocks in a TFSA because you lose the 15% withholding tax and you cannot claim it back. This is not an issue for stocks that don't pay dividends, or where dividends are a tiny part of the overall return.
Just a note to add -- if you are not yet maxed out on your TFSA, it is still a great location to hold ANY stock..even US and foreign dividends, rather than putting them into non-registered. You lose the foreign tax credits, but you also don't pay Canadaing taxes on the capital gains growth, dividend income, etc. Over 10 years, this will usually be more important.
If you are already maxed out on your registered investments, carry on...
IMO, The only items not to put in your TFSA (when you have room) is if you have a higher risk strategy where you need your capital losses from some stocks to offset capital gains on the winners. Again, subject to your overall holdings and if you are maxed out on registered investments or not.
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I don't think CPA-CB is active on the forum anymore. He hasn't responded to posts for several years. I might be able to offer some help since I have looked at this myself for my move.
You have a lot of the tax and income basics down correctly, so I'll ignore that part. What you need to focus on is residency. Every country has different residency rules so you need to be very mindful of that before going to each country. Most say something like more than 183 days in a 12 month period, but starting from the date of entry. So it could be interpreted as the intention to stay more than 183 days, or back taxes will be owing if you cross that amount. However, some countries (like Canada) have more complex tax residency tests. There are also implications for certain countries that Canada has tax treaties with that could change your residency status from the normal rules.
With Canada, you cannot simply choose a province or territory that is best suited to your income and run with that. You must have residency ties. It sounds like you will have no significant ties to any province (no home, no spouse, no dependents in any province). This means you will need to try make a case based on secondary ties and that could be very difficult. I doubt you could meet this standard for any province, except maybe Ontario if you go back there regularly to visit family, use a mailing address there, have a short-term lease agreement in place when you go back to visit, have an Ontario DL, have Ontario Health Insurance, own a car there, store your belongings there, etc.. Most provinces will consider you not to be a resident if you haven't lived there for 6 months, so that could become an issue, especially for a DL and health insurance.
Provided you don't trigger tax residency in another country based on their standards or based on their tax treaty with Canada, I think it's most likely that you will be considered a "deemed resident", but not a "factual resident" for tax purposes. This means you won't have provincial ties and won't pay provincial tax or get access to provincial tax credits and other programs. But you will need to pay the federal surtax (Sec. 120(1) taxes) which can be higher than taxes in many provinces.
If you earn income in another country you will probably be liable to pay non-resident taxes on that income to the country you are in, and to report it on your Canadian tax return. (You would get credit for foreign taxes paid.) In reality, especially for online digital work, I doubt very many people actually do report it. At least not to the country they are residing in. But it could trigger serious consequences if you don't.
Hope this helps!
Thanks a lot! That was really useful!
As for the complexity of the residency tests in various countries, do you think it is wise then to do our plan and only do unpaid volunteer work that could provide food/shelter, while ensuring we leave the country within it's normal visitor visa requirements? I feel that this removes the complexity of wondering if I have to file taxes in that country because of foreign income and tax treaties.
I read a lot of information from the CRA and I agree that we will probably be Deemed Residents. We will not have the majority of ties you mentioned. We will not visit often or maintain a rental.
I was concerned about the federal surtax at first but I carefully went through the math on the Schedule 1 form and if I spend less than the federal Basic Personal Amount, my tax rate will be exactly 0%, since the surtax is a percentage of the Basic Federal Tax, which is calculated first. This could actually be better than to be in a province that has a low provincial Basic Personal Amount. I can see how as income increases, this will not be preferred, however.
Do you know of any tax software that will allow me to file as a deemed resident or do I have to do all of this by hand, or worse - hire someone?
Do you know if dividends and capital gains for a deemed resident are taxed the same as an ordinary resident or similarly to a non-resident?
Thanks a lot!
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Hi,
In the near future I will be relocating to the US as a permanent resident (married a US Citizen).
The concept of the Canadian 'Departure Tax' is giving me sleepless nights.
The only assets I will have left in Canada will be my Home (being rented out) and my RRSP.
The house was my principal residence, will this be part of the 'deemed disposition' rule for the departure tax?
Also, I owe approximately $20,000 on my RRSP since I used it back in 2014 as part of the HBP (Home Buyer's Plan). I understand that if you emigrate you have to repay whatever is outstanding within a year or something...is there a way to avoid having to pay this amount in such a short time frame?
Thanks in advance!
Cobb
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Hi,
In the near future I will be relocating to the US as a permanent resident (married a US Citizen).
The concept of the Canadian 'Departure Tax' is giving me sleepless nights.
The only assets I will have left in Canada will be my Home (being rented out) and my RRSP.
The house was my principal residence, will this be part of the 'deemed disposition' rule for the departure tax?
Also, I owe approximately $20,000 on my RRSP since I used it back in 2014 as part of the HBP (Home Buyer's Plan). I understand that if you emigrate you have to repay whatever is outstanding within a year or something...is there a way to avoid having to pay this amount in such a short time frame?
Thanks in advance!
Cobb
You get to use the primary residence exemption + 1 free year. So basically you are deemed to have sold it at FMV the date you become non resident; declare as such; and pay the capital gains owing which will be none.
At that point, you have reset your cost base to that value as if you'd reacquired it. So any gain going forwards is taxable.
A quick google says no, you're fucked re the RRSP HBP.
Sell the house, repay the HBP. Much less hassle in the long run! Canada will take their cut of the rental income, you'll have to keep track in both CAD and USD (you have to depreciate houses in the US).
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Thanks a lot! That was really useful!
As for the complexity of the residency tests in various countries, do you think it is wise then to do our plan and only do unpaid volunteer work that could provide food/shelter, while ensuring we leave the country within it's normal visitor visa requirements? I feel that this removes the complexity of wondering if I have to file taxes in that country because of foreign income and tax treaties.
I read a lot of information from the CRA and I agree that we will probably be Deemed Residents. We will not have the majority of ties you mentioned. We will not visit often or maintain a rental.
I was concerned about the federal surtax at first but I carefully went through the math on the Schedule 1 form and if I spend less than the federal Basic Personal Amount, my tax rate will be exactly 0%, since the surtax is a percentage of the Basic Federal Tax, which is calculated first. This could actually be better than to be in a province that has a low provincial Basic Personal Amount. I can see how as income increases, this will not be preferred, however.
Do you know of any tax software that will allow me to file as a deemed resident or do I have to do all of this by hand, or worse - hire someone?
Do you know if dividends and capital gains for a deemed resident are taxed the same as an ordinary resident or similarly to a non-resident?
Thanks a lot!
Volunteering for some benefits in kind, such as food/shelter, are probably okay in nearly all countries and would very likely not require you to report any income to that country even as a non-resident. Again, getting very technical you would have to look at the rules by country. Some consider benefits in kind to be a form of taxable income. I would assume that often times the letter of the law isn't enforced as such for volunteer situations.
Yes, at low incomes (~$12,000 each), the federal surtax won't matter much. It starts to get quite disappointing at higher income levels because you pay higher tax rates but you get essentially zero benefits for your money.
If you are a deemed, but not factual resident you cannot use NETFILE. This means paper forms. Yay!
Capital gains are normal at 50% inclusion of the gain at disposition. Dividends from Canadian corporations are eligible for the federal dividend tax credit (line 425) and must be grossed up the same way.
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Volunteering for some benefits in kind, such as food/shelter, are probably okay in nearly all countries and would very likely not require you to report any income to that country even as a non-resident. Again, getting very technical you would have to look at the rules by country. Some consider benefits in kind to be a form of taxable income. I would assume that often times the letter of the law isn't enforced as such for volunteer situations.
Yes, at low incomes (~$12,000 each), the federal surtax won't matter much. It starts to get quite disappointing at higher income levels because you pay higher tax rates but you get essentially zero benefits for your money.
If you are a deemed, but not factual resident you cannot use NETFILE. This means paper forms. Yay!
Capital gains are normal at 50% inclusion of the gain at disposition. Dividends from Canadian corporations are eligible for the federal dividend tax credit (line 425) and must be grossed up the same way.
Thank you. That was very clear and helpful.
I actually ran the numbers on federal surtax compared to British Columbia provincial tax and the surtax was preferable up to just over 15,000 per person. Which is actually really unfair since most people will pay more without getting any of the benefits. They should at least allow us to utilize the healthcare system if we become sick and come back to Canada since we are paying for it in taxes.
Okay, so from what you say there's not much change with regards to capital gains and dividends.
Finding the facilities to efficiently print and mail tax forms sounds like it will be a fun challenge in some countries lol.
Do you think we should file an NR73 form after we leave to determine residency or can we just file as deemed residents without announcing it?
Thanks again!
-
Hi,
In the near future I will be relocating to the US as a permanent resident (married a US Citizen).
The concept of the Canadian 'Departure Tax' is giving me sleepless nights.
The only assets I will have left in Canada will be my Home (being rented out) and my RRSP.
The house was my principal residence, will this be part of the 'deemed disposition' rule for the departure tax?
Also, I owe approximately $20,000 on my RRSP since I used it back in 2014 as part of the HBP (Home Buyer's Plan). I understand that if you emigrate you have to repay whatever is outstanding within a year or something...is there a way to avoid having to pay this amount in such a short time frame?
Thanks in advance!
Cobb
You get to use the primary residence exemption + 1 free year. So basically you are deemed to have sold it at FMV the date you become non resident; declare as such; and pay the capital gains owing which will be none.
At that point, you have reset your cost base to that value as if you'd reacquired it. So any gain going forwards is taxable.
A quick google says no, you're fucked re the RRSP HBP.
Sell the house, repay the HBP. Much less hassle in the long run! Canada will take their cut of the rental income, you'll have to keep track in both CAD and USD (you have to depreciate houses in the US).
Thanks a lot! I guess my only choice is to sell the house then. Wish we didn't have to, would have been great to let it appreciate and sell it years down the road for a profit.
-
Hi,
In the near future I will be relocating to the US as a permanent resident (married a US Citizen).
The concept of the Canadian 'Departure Tax' is giving me sleepless nights.
The only assets I will have left in Canada will be my Home (being rented out) and my RRSP.
The house was my principal residence, will this be part of the 'deemed disposition' rule for the departure tax?
Also, I owe approximately $20,000 on my RRSP since I used it back in 2014 as part of the HBP (Home Buyer's Plan). I understand that if you emigrate you have to repay whatever is outstanding within a year or something...is there a way to avoid having to pay this amount in such a short time frame?
Thanks in advance!
Cobb
You get to use the primary residence exemption + 1 free year. So basically you are deemed to have sold it at FMV the date you become non resident; declare as such; and pay the capital gains owing which will be none.
At that point, you have reset your cost base to that value as if you'd reacquired it. So any gain going forwards is taxable.
A quick google says no, you're fucked re the RRSP HBP.
Sell the house, repay the HBP. Much less hassle in the long run! Canada will take their cut of the rental income, you'll have to keep track in both CAD and USD (you have to depreciate houses in the US).
Thanks a lot! I guess my only choice is to sell the house then. Wish we didn't have to, would have been great to let it appreciate and sell it years down the road for a profit.
All the profit (from the year after it stopped being your home) would be taxable first in Canada as capital gains.
Why not just buy a house in the US?
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Thank you. That was very clear and helpful.
I actually ran the numbers on federal surtax compared to British Columbia provincial tax and the surtax was preferable up to just over 15,000 per person. Which is actually really unfair since most people will pay more without getting any of the benefits. They should at least allow us to utilize the healthcare system if we become sick and come back to Canada since we are paying for it in taxes.
Okay, so from what you say there's not much change with regards to capital gains and dividends.
Finding the facilities to efficiently print and mail tax forms sounds like it will be a fun challenge in some countries lol.
Do you think we should file an NR73 form after we leave to determine residency or can we just file as deemed residents without announcing it?
Thanks again!
Most countries will have print shops and internet cafes / co-working places where you can do the printing. Even mailing shouldn't be a problem in most countries when using a private parcel shipping company. If you happen to be in countries in Europe or more developed Asia (Japan, Korea, Taiwan) the postal service is reliable.
I would file a NR73 in your situation just to gain clarity. Normally deemed residents are overseas government employees, so your situation may be a little more unique.
I won't be filing one in my personal situation since I have no plans to return to Canada to live. I will also meet the definitions to become a legal tax resident of Vietnam, including by the terms of the Canada-Vietnam Tax Agreement.
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Most countries will have print shops and internet cafes / co-working places where you can do the printing. Even mailing shouldn't be a problem in most countries when using a private parcel shipping company. If you happen to be in countries in Europe or more developed Asia (Japan, Korea, Taiwan) the postal service is reliable.
I would file a NR73 in your situation just to gain clarity. Normally deemed residents are overseas government employees, so your situation may be a little more unique.
I won't be filing one in my personal situation since I have no plans to return to Canada to live. I will also meet the definitions to become a legal tax resident of Vietnam, including by the terms of the Canada-Vietnam Tax Agreement.
Thank you. We also don't intend to return to Canada so we might be in the same situation. We also plan to eventually emigrate.
I wonder what you think about settling in another country. There always seems to be a trade-off between the following factors:
-Freedom to travel for more than 6 months while retaining residency in that country for tax purposes (I'm sure Canada would win all tie-breakers since its our country of citizenship);
-No/low capital gains tax rates;
-Quick/cheap/efficient emigration process;
-Cheap cost of living;
-Decent living conditions and healthcare
I wonder what made you choose Vietnam or if you know any countries that seem to fit this description.
Thanks for your help
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Posting to follow
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Most countries will have print shops and internet cafes / co-working places where you can do the printing. Even mailing shouldn't be a problem in most countries when using a private parcel shipping company. If you happen to be in countries in Europe or more developed Asia (Japan, Korea, Taiwan) the postal service is reliable.
I would file a NR73 in your situation just to gain clarity. Normally deemed residents are overseas government employees, so your situation may be a little more unique.
I won't be filing one in my personal situation since I have no plans to return to Canada to live. I will also meet the definitions to become a legal tax resident of Vietnam, including by the terms of the Canada-Vietnam Tax Agreement.
Thank you. We also don't intend to return to Canada so we might be in the same situation. We also plan to eventually emigrate.
I wonder what you think about settling in another country. There always seems to be a trade-off between the following factors:
-Freedom to travel for more than 6 months while retaining residency in that country for tax purposes (I'm sure Canada would win all tie-breakers since its our country of citizenship);
-No/low capital gains tax rates;
-Quick/cheap/efficient emigration process;
-Cheap cost of living;
-Decent living conditions and healthcare
I wonder what made you choose Vietnam or if you know any countries that seem to fit this description.
Thanks for your help
My goal was to get out of Canada's tax system legally while setting up our finances for a future where we can be more flexible about where we live without worrying about big tax bills for minimal services.
Vietnam worked for us because they have low cost of living, 0.1% tax on stock transactions, and it was easy for my wife to get a work visa (with a companion visa for me). On top of that it is a safe country, has awesome good, and is a great base to see the rest of eastern Asia.
The biggest issue for us is the tax liability on RRSP and our pensions. On the one hand I look at it as contributing at 39% and taking out at around 25%, a decent spread. But it is still 25% gone. If I managed it very carefully as in your plan, I could probably withdraw from my RRSP/pension at 10% or less. If we stayed in Canada, I could probably engineer even lower taxes using a RRSP self-mortgage, but my wife would pay much more tax on her income. Bottom line though, it will cost around $50,000 for us to get out of our RRSPs & pensions (not including LIRA). That is the same amount of money my wife and I paid in income tax last year. By moving we are going to take a tax hit up front, but we will likely save many times that amount in the long term.
If you are seriously considering a permanent exit from Canada, you should think about this tax trade-off as well. You have a few options:
1. Take the tax hit now (25% of $150,000 + outstanding capital gains tax on NR accounts) and establish in a low/no tax country;
2. Try retain residency status in a province to maximize your RRSP withdrawals and bleed down that account while retaining benefits like health care (but acknowledging your capital gains liability may increase in your NR account); or
3. Become a deemed resident and receive no benefits, but again try maximize your RRSP withdrawals at very low tax rates and bleed down the account (again cap gain tax liability may increase).
Some decent and safer countries to consider are Belize, Costa Rica, Panama, Ecuador, Uruguay, Malaysia, Georgia, Thailand (harder to get a visa) or Malta (also harder to get a visa).
You don't need to worry too much about taxation based on citizenship (unless you are American). Even though you are Canadian, it could be very advantageous to get out of Canada, establish legal tax residency in Panama (or another country above), then start traveling from there. You file your taxes in Panama as required and travel the world as a tourist using your Canadian passport. As long as you don't trigger new tax residency rules in another country, you can even travel to higher tax places like western Europe and live there for less than 6 months without paying a dime in income tax.
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Corporate T2 Tax Question
Hi folks-
I'm doing my own corporate return and snagging on some GST-related things.
I file Quick Method, and claim back the ITC for GST spent on small tools and other capital costs. I'm confused about when to leave the GST in and take it out. (I thought I knew, but my return doesn't reconcile so I'm re-examining my assumptions.)
Those of you with corporations...
Do your tangible assets (line 1740 on Schedule 100) include the GST you paid for them, and are you using Quick Method or not?
For those who are using Quick Method, In your Schedule 8 (Capital Cost Allowance) are you also decreasing the amount to be depreciated by the GST (this would be in row 4, Adjustments).
For Income (line 8000 Sch 125) are you using gross income less net GST paid? For income line 8000 on the T2, I use my gross less net GST paid (3.6% of the gross, less $300 credit and ITC's for GST paid on CCA acquistions).
I thought I was supposed to include GST in the tangible asset costs, but not in the amount that is being calculated for CCA, because I got that GST refunded in ITC's.
Any light any of you can shed on this I'd very much appreciate. It seems like it should be simple, but there aren't clear answers online, and Revenue Canada's agents give conflicting answers and aren't really clear themselves.
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Hello, thank you for offering your advice :)
I have two questions as an incorporated contractor in Ontario.
1. I travel out of town for work often. According to the CRA website, my situation should permit a $51 per day meal "per diem" that is not taxed. I have been afraid to use this, as I wonder if the CRA would consider it "reasonable". My actual meal costs are much less as I usually bring my breakfast and lunch with me. I have been writing off the actual amounts on any receipts (usually Tim Hortons bagels, $2-3) instead. Should I be taking advantage of the $51/day deduction, and pay myself a non-taxable per diem instead of the bagel receipts? This would be ideal as the deduction would be much larger.
2. I have been trying to do most of my corporate taxes myself but still use an accountant to file my corporate return. I input my expenses and bank statements into Quickbooks. She charges me for the return and also insists on charging me for "payroll". I am confused as to what payroll is and what I am actually paying for. I do not pay myself monthly and have no employees. I pay myself one lump sum at the start of the year, from which I deduct income tax and CPP and pay directly to the receiver general the month following the lump sum payment. At year end I pay myself a bonus from which I again deduct income tax and CPP and pay to the receiver general. Does payroll require any further work? Is there something that needs to be filed to the CRA each time I pay myself, or is a payment to the receiver general enough?
My accountant unfortunately won't answer these questions, telling me it is all too complicated to understand...
Your advice is appreciated!
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^^
1. I don't claim a per diem, but I don't usually travel for work and most food is client "entertainment", with 50% rate for claiming against income.
2. Payroll includes filing the payroll form with CRA on gross, tax remitted, CPP, EI, etc. This is done every pay period, or monthly if less often (with a $0 for the months with zero). Then there is year end T4 statement(s). Could you ask to take over "payroll"? It is not a lot of work, and you would still use your accountant's advice on how much to pay yourself each year.... you would just do the forms.
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I’ve been reading through your posts and really appreciate the insight you’ve been giving regarding tax implications for us Canadians. Lots of information out there for our comrades south of the border, so I’ve struggled a bit to make a plan that best suits my situation and would appreciate your feedback.
At 43 (currently 41) I plan to FIRE. Wife and 2 dependent children, Alberta resident, however work in BC.
My expected Portfolio:
RRSP - $250k through Sunlife
TFSA - $100k – invested in XAW
DCPP -$250k value currently with Sunlife. I plan to move this to an LIRA and then LIF at 55.
Taxable investment account with RBC - $100k value, a mix of ETF’s and a few dividend focused stocks.
Total portfolio value of $700k.
Rental Profit of $30k annually (20k per annum from a multifamily in AB and 10k per annum from a condo in Arizona)
With a 4% withdrawal rate I anticipate my income will be roughly $60k per year (taxes notwithstanding).
I would really appreciate any insight or feedback on best way to minimize my tax implications once I pull the trigger and FIRE in 2 years.
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jwhid, you'll have better luck placing this as a case study, as there is a lot of extra information needed to best recommend your withdrawal path.
Maybe take a look at the Sticky ''how to write a case study'' and then put (CAN) in the title, you'll get lots of recommendations and excellent information.
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I’ve been reading through your posts and really appreciate the insight you’ve been giving regarding tax implications for us Canadians. Lots of information out there for our comrades south of the border, so I’ve struggled a bit to make a plan that best suits my situation and would appreciate your feedback.
At 43 (currently 41) I plan to FIRE. Wife and 2 dependent children, Alberta resident, however work in BC.
My expected Portfolio:
RRSP - $250k through Sunlife
TFSA - $100k – invested in XAW
DCPP -$250k value currently with Sunlife. I plan to move this to an LIRA and then LIF at 55.
Taxable investment account with RBC - $100k value, a mix of ETF’s and a few dividend focused stocks.
Total portfolio value of $700k.
Rental Profit of $30k annually (20k per annum from a multifamily in AB and 10k per annum from a condo in Arizona)
With a 4% withdrawal rate I anticipate my income will be roughly $60k per year (taxes notwithstanding).
I would really appreciate any insight or feedback on best way to minimize my tax implications once I pull the trigger and FIRE in 2 years.
Because you are more interested in Tax specific responses, this thread should be fine.
Tax only -- I assume that the $60k is the FAMILY income / needs.
1. Look into more CDN dividends for your non-registered. There is ZERO tax on them up to $47k of income, per person. There is negative tax rate on them at lower amounts. Why? Because the way they work -- the grossed up amount is taxed at your current marginal tax rate and the credit on the gross up is provided at a set rate.
2. Shift money into your TFSA, Draw down your TFSA and Non-registered to keep your family income low, and your child tax benefit is higher. Don't draw down your RRSP in the first few years of retirement, use something that won't contribute (much) to your income until kids are older.
--$60k drawn from RRSP 50/50 with no employment income gets you $7,300/yr in government payments.
--$60k drawn as $20k from TFSA or non-tax portion from selling non-reg stocks, $10k each parent as employment income, $10k each parent from RRSP or taxable growth on non-registered= $12,630/yr in government payments.
Check out the CRA Child Benefit Calculator (google it). And play with the numbers.
3 If going to alberta, with lower family income, try to work to make even $10k each per year. There is an Alberta employment tax credit, worth $1500k, included in the above example.
4. No sales tax.... but 1.5% to 2% higher marginal income tax at your income. AB vs BC.
Also -- Note that I have lived in AB and BC with kids. It is cheaper in the greater vancouver area for kids, because so many of the recreation programs are highly sponsored, and there are lower school September fees in BC. Calgary has bussing (fees for bus and lunch hour) and start of school year fee. I don't know what the high school fees look like in AB, but my BC kids fees were surprisingly low for things like shop class, gym out trips, or band. Calgary relies on community rec centers (Think HOAs for the community) and the YMCA for programs / pools etc. which are privately run with limited funding from the city. BC doesn't and BC removed the parking fees at all BC provincial parks.., the schools and centers don't charge much for room use to the scouts /judo / dance instructors, which is passed on, more free lunch programs at the schools, etc . I just find family activities in BC cost less...
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I am FIRE right now while my wife brings home a very small income from here business, we basically fall under the poverty line if you looked at the Line 150 on both of our tax returns for 2018. I took my very first RRSP withdrawal this week as up to this point over the last 2 years since leaving work I lived off my savings account as I built that up a fair amount prior to pulling the plug. In BC our taxation is basically nothing and the only amount I had to pay this year was into CPP at $900. My work was freelance self employed income so I still qualify to build up more pension.
I look at your numbers and your age and kids, heck it's like a mirror image to me almost right down to the LIRA, TFSA, RRSP and rental property :) It will be interesting to see what other advice you get here, I didn't consider drawing down my TFSA at all and thought if I could keep my annual income low enough I would slide more cash from my RRSP into the TFSA to keep that growing.
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....
I would really appreciate any insight or feedback on best way to minimize my tax implications once I pull the trigger and FIRE in 2 years.
Goldilocks always gives great advice.
You want to google asset location (not allocation) to get a better idea of what to put where.
You probably want to move your RRSPs over to RBC as I assume you are doing self directed investing there. This should minimize your fees.
Allocation & your risk tolerance takes priority over “location” but you should generally follow something like this:
Taxable = Canadian dividend equities (VDY for me)
RRSP = any equities in USD & some say your bonds (VIT & VAB for me)
TFSA = ETFs that you expect to be high earning (VXC for me)
I’m not exactly sure where a LIRA falls into this group, but my guess is to treat it like an RRSP.
For the drawdown I’d focus on taxable & TFSA until you are about 60. Then have a plan to reduce your RRSP & LIRA before you are forced to at 71.
I’m not sure but you might want to get fancy with your TFSA & take out what you need for the next year in December but recontribute from your taxable stash in January.
I also saw something the other day that recommended if you were below or at the 38% tax rate you were best to turn off your drip & cash out your dividends first. If you were above that rate keep the drip on but sell stocks & take the capital gain hit. Of course if you are in the lower rate & your dividends don’t cover your expenses then you will need to sell some stocks as well.
Please double check & do your own research as I am not a financial expert but love all the information I have learned on these forums & I’m happy to share.
Congratulations on being on track for an early retirement & for having mustachian people problems.
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2. I have been trying to do most of my corporate taxes myself but still use an accountant to file my corporate return. I input my expenses and bank statements into Quickbooks. She charges me for the return and also insists on charging me for "payroll". I am confused as to what payroll is and what I am actually paying for. I do not pay myself monthly and have no employees. I pay myself one lump sum at the start of the year, from which I deduct income tax and CPP and pay directly to the receiver general the month following the lump sum payment. At year end I pay myself a bonus from which I again deduct income tax and CPP and pay to the receiver general. Does payroll require any further work? Is there something that needs to be filed to the CRA each time I pay myself, or is a payment to the receiver general enough?
My accountant unfortunately won't answer these questions, telling me it is all too complicated to understand...
I know this is from a week ago, but I wanted to add to what Goldielocks posted. I do the T4s and summary at the end of the year for our small business and we have up to 5 employees. It is not hard and you can definitely do it yourself. Filing monthly/quarterly payroll remittances with CRA is also not hard.
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/remitting-source-deductions/how-when-remit-due-dates.html
If you have an accountant that says "it is all too complicated to understand" you either need to have a serious talk or get a new accountant. Have fun!
(Edit to add: You may also have WCB reporting requirements. That is also something you can learn to do yourself.)
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i just came across this thread, and haven't digested all the pages yet, so forgive me if a similar question has been posed. and, thank you for this effort!
my question is what kind of tax implications there would be for US citizens moving to canada (BC or AB) with the goal of residency. one income is still US-based as a remote contractor (say $100k+ USD). the other income would be in the place we move to and in CAD currency (say $60k). there would also be US-based rental income (say $20k).
is this a nightmare setup in terms of taxation?
thanks for your insight!
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i just came across this thread, and haven't digested all the pages yet, so forgive me if a similar question has been posed. and, thank you for this effort!
my question is what kind of tax implications there would be for US citizens moving to canada (BC or AB) with the goal of residency. one income is still US-based as a remote contractor (say $100k+ USD). the other income would be in the place we move to and in CAD currency (say $60k). there would also be US-based rental income (say $20k).
is this a nightmare setup in terms of taxation?
thanks for your insight!
Double check the "us based income as a remote contractor" part first. My DH had to sell his on-line Canadian business when we moved to the USA. Although it was all over a computer, to the US, running a canadian on-line business from home was considered to be working in the USA and required a work visa. AND it took over 6 months to get that work authorization so the business had to be ended when we moved or put on hold in the meantime.
Usually there are reciprical rules for Canada to what the US does. If your spouse will be getting a remote contractor work visa for Canada, then you are fine.
I don't have any tax info for your situation, other than that you will file full taxes with worldwide income for the US, and then Canadian tax returns with worldwide income because you are resident. Usually you get a tax credit for foreign taxes paid, so it does not double up, but some residency situations vary according to your nationality and marital status as to whether you can still file jointly on your US return when out of the USA. That would be a storm of bad things -- if you can't file US taxes jointly, and you can't claim standard deduction for some reason.
I would get professional input on these questions.... especially on the US tax side, there are so many nuanaces depending on each specific situation.
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I have question about moving out of Canada and departure taxes on investments.
We moved out of Canada in the middle of last year to Switzerland. I know there is a departure tax to pay on our investments as if we had sold them at the date we moved out and instantly bought them back.
How is this calculated, and how to find an accountant that would understand how to file this properly?
Is there anything else I'm overlooking and that we're supposed to pay? We didn't own any house, car, or anything. Only mutual funds with Waterhouse.
And now that we've moved out, do we owe anything else to Canada if we were to sell all our Canadian investments, convert the money, and invest back with our Swiss broker?
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I have question about moving out of Canada and departure taxes on investments.
We moved out of Canada in the middle of last year to Switzerland. I know there is a departure tax to pay on our investments as if we had sold them at the date we moved out and instantly bought them back.
How is this calculated, and how to find an accountant that would understand how to file this properly?
Is there anything else I'm overlooking and that we're supposed to pay? We didn't own any house, car, or anything. Only mutual funds with Waterhouse.
And now that we've moved out, do we owe anything else to Canada if we were to sell all our Canadian investments, convert the money, and invest back with our Swiss broker?
Just use the value of the stock at either opening or closure on the day you left (just be consistent for all your holdings), and deduct your NBV from that. That is your capital gain that you owe tax on. What you are doing is A Deemed Disposition.
You should only do a Deemed Disposition if you are becoming a non-resident for tax purposes, this is the tricky part. Have you severed all ties to Canada? Does Switzerland now consider you a permanent resident and are they taxing you on your world wide income? That is usually the best way to know if you qualify to become a non resident for tax purposes.
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I have question about moving out of Canada and departure taxes on investments.
We moved out of Canada in the middle of last year to Switzerland. I know there is a departure tax to pay on our investments as if we had sold them at the date we moved out and instantly bought them back.
How is this calculated, and how to find an accountant that would understand how to file this properly?
Is there anything else I'm overlooking and that we're supposed to pay? We didn't own any house, car, or anything. Only mutual funds with Waterhouse.
And now that we've moved out, do we owe anything else to Canada if we were to sell all our Canadian investments, convert the money, and invest back with our Swiss broker?
Just use the value of the stock at either opening or closure on the day you left (just be consistent for all your holdings), and deduct your NBV from that. That is your capital gain that you owe tax on. What you are doing is A Deemed Disposition.
You should only do a Deemed Disposition if you are becoming a non-resident for tax purposes, this is the tricky part. Have you severed all ties to Canada? Does Switzerland now consider you a permanent resident and are they taxing you on your world wide income? That is usually the best way to know if you qualify to become a non resident for tax purposes.
So the formula is simply Market Value - Book Value for the day I left?
I am a resident of Switzerland now, I am taxed on my income there, although I still have bank accounts in Canada. But I'm not planning on returning to Canada for the foreseeable future. I guess that makes me a non-resident?
Any other pitfalls to watch out for, or is that really it?
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I have question about moving out of Canada and departure taxes on investments.
We moved out of Canada in the middle of last year to Switzerland. I know there is a departure tax to pay on our investments as if we had sold them at the date we moved out and instantly bought them back.
How is this calculated, and how to find an accountant that would understand how to file this properly?
Is there anything else I'm overlooking and that we're supposed to pay? We didn't own any house, car, or anything. Only mutual funds with Waterhouse.
And now that we've moved out, do we owe anything else to Canada if we were to sell all our Canadian investments, convert the money, and invest back with our Swiss broker?
Just use the value of the stock at either opening or closure on the day you left (just be consistent for all your holdings), and deduct your NBV from that. That is your capital gain that you owe tax on. What you are doing is A Deemed Disposition.
You should only do a Deemed Disposition if you are becoming a non-resident for tax purposes, this is the tricky part. Have you severed all ties to Canada? Does Switzerland now consider you a permanent resident and are they taxing you on your world wide income? That is usually the best way to know if you qualify to become a non resident for tax purposes.
So the formula is simply Market Value - Book Value for the day I left?
I am a resident of Switzerland now, I am taxed on my income there, although I still have bank accounts in Canada. But I'm not planning on returning to Canada for the foreseeable future. I guess that makes me a non-resident?
Any other pitfalls to watch out for, or is that really it?
Yes, that is right about the capital gains, there is a special form on your taxes to do the deemed disposition of all your assets. When I did it I had investments and my townhouse which I switched to a rental property. For the house I just used the city’s assessed value to declare the house value when I left. When I returned to Canada, I sold that property and since I left right before the housing bubble burst, the valuation was at the peak, when I came back 9 years later and sold it, it was at a “loss” so I got to bank some capital loss. I still laugh at that, I sold the house for twice what I paid for it, and got 30K of capital loss to bank from it.
Being a resident of Switzerland is not necessarily enough to become a non tax resident of Canada. The taxing your worldwide income is a huge factor to Canada. I was an expat for many years, and when I lived in the UK, may first posting, I had a visa that allowed me to live and work in the UK, I paid into all their taxes, social security system etc, but the UK still considered me a “not ordinarily resident” person and did not tax me on my Canadian income (from investments, rental property etc). Later on I moved to Indonesia, they DID consider me a full resident and I had to declare and pay taxes on my Canadian income in Indonesia, that is when I could finally become a non resident of Canada for tax purposes.
So, in short, tax residency varies situation by situation, country by country, visa by visa. There is a form you can work through to self assess your residency status. I did this 15 years ago so things might have changed.
I would think that if your living in Switzerland is not tied in any way to your employer, then you may well be good to go, but if you are on a work visa that is tied to a particular employer, or has a time limit, then you need to worry.
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"tied to a time limit" is a key, here. Also, you can't choose to continue to pay into CPP/ EI or other Cdn taxes/ benefits while away. (you can choose to do that if you intend to return).
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I have a questions I was hoping you could answer. My husband has an incorporated company and through that is currently working a govt contract where he goes into the office quite a few days a month. He bought a monthly parking pass. Can we claim his monthly parking as a business expense?
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Yes, you can claim parking at a location that is not your normal place of business. I presume the majority of his time is a home office? This would be similar to paying for parking to have a client meeting downtown, when your office is in the suburbs.
If he needs a car for work, you can include all auto expenses related to mantaining / having the car, including parking near your home, but you must have a detailed accurate log of all trips, personal and work, and pro rate the totals. These types of expenses (car) tend to be audited a low, however, so use prudence in what you expense.
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I created a separate topic but I'm thinking it might fit in this thread instead.
I left Canada last year so my tax return is that of a non resident. I don’t have physical property in Canada but I have my money invested in Canada in iShares with TD.
I hired a professional accountant to prepare my return, but they tell me that I don’t have to pay a departure tax or report anything beyond the T3/T5 about the investments because it’s not physical property.
I think that is wrong. The preparer didn’t even include a T1161 with my tax return which according to the CRA must be completed even if you have nothing to report on it. I also think they’re mistaken and I should pay taxes as if I sold and bought back my investments on the day I left (to trigger a tax event for the profits/loss on the investments market value)
What do you think? Am I mistaken?
And what happens if the tax preparer was wrong and the CRA hits me with penalties (25$ a day for that matter) + interests? Is the tax preparer responsible at all for their mistakes or am I on the hook as if I did it all myself?
Finally, should the bill for the tax preparer services be exempt of sales tax since I’m buying from outside Canada?
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I created a separate topic but I'm thinking it might fit in this thread instead.
I left Canada last year so my tax return is that of a non resident. I don’t have physical property in Canada but I have my money invested in Canada in iShares with TD.
I hired a professional accountant to prepare my return, but they tell me that I don’t have to pay a departure tax or report anything beyond the T3/T5 about the investments because it’s not physical property.
I think that is wrong. The preparer didn’t even include a T1161 with my tax return which according to the CRA must be completed even if you have nothing to report on it. I also think they’re mistaken and I should pay taxes as if I sold and bought back my investments on the day I left (to trigger a tax event for the profits/loss on the investments market value)
What do you think? Am I mistaken?
And what happens if the tax preparer was wrong and the CRA hits me with penalties (25$ a day for that matter) + interests? Is the tax preparer responsible at all for their mistakes or am I on the hook as if I did it all myself?
Finally, should the bill for the tax preparer services be exempt of sales tax since I’m buying from outside Canada?
Hello, fellow non resident.
I'm assuming the TD account is not an RRSP/TFSA? T1163 is pretty explicit at the top there:
https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1161/t1161-18e.pdf
Fill out this form if you ceased to be a resident of Canada in the year and the fair market value of all the properties you owned when you left Canada was more than $25,000, excluding the following properties:
1)cash (including bank deposits)
2)pension plans, annuities, registered retirement savings plans, pooled registered pension plans, registered retirement income funds, registered education savings plans, registered disability savings plans, tax-free savings accounts, deferred profit-sharing plans, employee profit-sharing plans, employee benefit plans, salary deferral arrangements, retirement compensation arrangements, employee life and health trusts, and rights or interests in certain other trusts. For a complete list, refer to the definition of "excluded right or interest" in Subsection 128.1(10) of the Income Tax Act read without reference to paragraphs (c), (j), and (l)
3)property you owned when you last became a resident of Canada, or property you inherited after you last became a resident of Canada, if you were a resident of Canada for 60 months or less during the 10-year period before you emigrated and the property is not taxable Canadian property
4)any item of personal-use property (such as your household effects, clothing, cars, collectibles) that has a fair market value of less than $10,000. See the definition of "personal-use property" in Section 54 of the Income Tax Act
Cap gains is on a different form, T1243. T1161 is just reporting (CRA being nosy, like T1135, bleh).
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I created a separate topic but I'm thinking it might fit in this thread instead.
I left Canada last year so my tax return is that of a non resident. I don’t have physical property in Canada but I have my money invested in Canada in iShares with TD.
I hired a professional accountant to prepare my return, but they tell me that I don’t have to pay a departure tax or report anything beyond the T3/T5 about the investments because it’s not physical property.
I think that is wrong. The preparer didn’t even include a T1161 with my tax return which according to the CRA must be completed even if you have nothing to report on it. I also think they’re mistaken and I should pay taxes as if I sold and bought back my investments on the day I left (to trigger a tax event for the profits/loss on the investments market value)
What do you think? Am I mistaken?
And what happens if the tax preparer was wrong and the CRA hits me with penalties (25$ a day for that matter) + interests? Is the tax preparer responsible at all for their mistakes or am I on the hook as if I did it all myself?
Finally, should the bill for the tax preparer services be exempt of sales tax since I’m buying from outside Canada?
Hello, fellow non resident.
I'm assuming the TD account is not an RRSP/TFSA? T1163 is pretty explicit at the top there:
https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1161/t1161-18e.pdf
Fill out this form if you ceased to be a resident of Canada in the year and the fair market value of all the properties you owned when you left Canada was more than $25,000, excluding the following properties:
1)cash (including bank deposits)
2)pension plans, annuities, registered retirement savings plans, pooled registered pension plans, registered retirement income funds, registered education savings plans, registered disability savings plans, tax-free savings accounts, deferred profit-sharing plans, employee profit-sharing plans, employee benefit plans, salary deferral arrangements, retirement compensation arrangements, employee life and health trusts, and rights or interests in certain other trusts. For a complete list, refer to the definition of "excluded right or interest" in Subsection 128.1(10) of the Income Tax Act read without reference to paragraphs (c), (j), and (l)
3)property you owned when you last became a resident of Canada, or property you inherited after you last became a resident of Canada, if you were a resident of Canada for 60 months or less during the 10-year period before you emigrated and the property is not taxable Canadian property
4)any item of personal-use property (such as your household effects, clothing, cars, collectibles) that has a fair market value of less than $10,000. See the definition of "personal-use property" in Section 54 of the Income Tax Act
Cap gains is on a different form, T1243. T1161 is just reporting (CRA being nosy, like T1135, bleh).
I still don’t get it. I have read the exclusions and to me the iShares is taxable because it’s not in a registered account and it’s not cash. So then I just fill in FMV etc in the T1161 and the CRA will calculate the tax due? Or must I also fill T1243 if there is a gain from the forced sale?
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I created a separate topic but I'm thinking it might fit in this thread instead.
I left Canada last year so my tax return is that of a non resident. I don’t have physical property in Canada but I have my money invested in Canada in iShares with TD.
I hired a professional accountant to prepare my return, but they tell me that I don’t have to pay a departure tax or report anything beyond the T3/T5 about the investments because it’s not physical property.
I think that is wrong. The preparer didn’t even include a T1161 with my tax return which according to the CRA must be completed even if you have nothing to report on it. I also think they’re mistaken and I should pay taxes as if I sold and bought back my investments on the day I left (to trigger a tax event for the profits/loss on the investments market value)
What do you think? Am I mistaken?
And what happens if the tax preparer was wrong and the CRA hits me with penalties (25$ a day for that matter) + interests? Is the tax preparer responsible at all for their mistakes or am I on the hook as if I did it all myself?
Finally, should the bill for the tax preparer services be exempt of sales tax since I’m buying from outside Canada?
Hello, fellow non resident.
I'm assuming the TD account is not an RRSP/TFSA? T1163 is pretty explicit at the top there:
https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1161/t1161-18e.pdf
Fill out this form if you ceased to be a resident of Canada in the year and the fair market value of all the properties you owned when you left Canada was more than $25,000, excluding the following properties:
1)cash (including bank deposits)
2)pension plans, annuities, registered retirement savings plans, pooled registered pension plans, registered retirement income funds, registered education savings plans, registered disability savings plans, tax-free savings accounts, deferred profit-sharing plans, employee profit-sharing plans, employee benefit plans, salary deferral arrangements, retirement compensation arrangements, employee life and health trusts, and rights or interests in certain other trusts. For a complete list, refer to the definition of "excluded right or interest" in Subsection 128.1(10) of the Income Tax Act read without reference to paragraphs (c), (j), and (l)
3)property you owned when you last became a resident of Canada, or property you inherited after you last became a resident of Canada, if you were a resident of Canada for 60 months or less during the 10-year period before you emigrated and the property is not taxable Canadian property
4)any item of personal-use property (such as your household effects, clothing, cars, collectibles) that has a fair market value of less than $10,000. See the definition of "personal-use property" in Section 54 of the Income Tax Act
Cap gains is on a different form, T1243. T1161 is just reporting (CRA being nosy, like T1135, bleh).
I still don’t get it. I have read the exclusions and to me the iShares is taxable because it’s not in a registered account and it’s not cash. So then I just fill in FMV etc in the T1161 and the CRA will calculate the tax due? Or must I also fill T1243 if there is a gain from the forced sale?
T1161 is not about calculating any tax owing. It is just about the CRA wanting you to state numbers to them.
It is on T1243 that you actually tell them what you have to pay in terms of the deemed disposition.
If the value of your relevant stuff is less than the $25k, you don't need T1161 because you're small fry. But you STILL owe any cap gains per form T1243.
It's just the same as T1135. It's a declaration. "Hi, the CRA. This is what I own". It's bullshit.
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I would love to get input on a quandary I am mulling over.
DH has essentially FIREd, but has a small coffee roasting enterprise which nets about $1,500 CDN/year. From my salary we maximize my RRSP and both of our TFSA contributions each year, and are now beginning to grow our taxable accounts.
Ideally the we want the taxable funds to be in his name because of his low earnings and tax rate. So for the last two years I have added $10K/year to his taxable account, thinking that as long as we stayed under the basic personal amount it would be fine, even though it exceeds his declared income. The CRA hasn't raised any raised any alarm bells so perhaps this is fine. But as I prepare to make this years $10K contribution I am a bit worried it could all come back to bite me.
What do you think? Any issues with his investment contributions ($6K TFSA and $10K taxable) exceeding his $1.5K income?
For a bit of background, we have $30K per year that we can add to our taxable savings, so I have been putting $10K in his and $20K in mine. I will FIRE at the end of 2024 at which point our incomes will be similar as we draw down on our investments.
Any input is welcome. Thanks!
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Ideally the we want the taxable funds to be in his name because of his low earnings and tax rate. So for the last two years I have added $10K/year to his taxable account, thinking that as long as we stayed under the basic personal amount it would be fine, even though it exceeds his declared income. The CRA hasn't raised any raised any alarm bells so perhaps this is fine. But as I prepare to make this years $10K contribution I am a bit worried it could all come back to bite me.
The spousal "attribution" rules catch a lot of people. Although not complicated, they are not super intuitive.
You can give money to your spouse to put in their TFSA, as long as they don't pull it out later and invest it in a taxable income-producing place. Spending the money is fine.
You can pay all the household expenses.
You cannot give your spouse money to invest in a taxable account (well, the income is attributed back to you). There are ways to structure it (spousal loan) but at the yearly amounts you are looking at, it probably isn't worth the paperwork.
Will CRA catch you for breaking the rules? I have not heard of any stories, but personally I like to do things the correct way. If CRA audits you for some unrelated issue, it may bite you later.
https://www.taxtips.ca/personaltax/attributionrules.htm
It wasn't clear from your post whether your RRSP contribution was going into a spousal RRSP to be used later in his name? That is worth looking at.
Edit: From some of your previous posts I notice you have quite a high net worth. You can look at doing a one-off larger spousal loan (minimum 100k) if you structure it right. Then you can just put your future yearly amounts into your own taxable account.
https://www.taxtips.ca/personaltax/lend-to-spouse-child.htm
https://www.finiki.org/wiki/Income_splitting
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Ideally the we want the taxable funds to be in his name because of his low earnings and tax rate. So for the last two years I have added $10K/year to his taxable account, thinking that as long as we stayed under the basic personal amount it would be fine, even though it exceeds his declared income. The CRA hasn't raised any raised any alarm bells so perhaps this is fine. But as I prepare to make this years $10K contribution I am a bit worried it could all come back to bite me.
The spousal "attribution" rules catch a lot of people. Although not complicated, they are not super intuitive.
You can give money to your spouse to put in their TFSA, as long as they don't pull it out later and invest it in a taxable income-producing place. Spending the money is fine.
You can pay all the household expenses.
You cannot give your spouse money to invest in a taxable account (well, the income is attributed back to you). There are ways to structure it (spousal loan) but at the yearly amounts you are looking at, it probably isn't worth the paperwork.
Will CRA catch you for breaking the rules? I have not heard of any stories, but personally I like to do things the correct way. If CRA audits you for some unrelated issue, it may bite you later.
https://www.taxtips.ca/personaltax/attributionrules.htm
It wasn't clear from your post whether your RRSP contribution was going into a spousal RRSP to be used later in his name? That is worth looking at.
Edit: From some of your previous posts I notice you have quite a high net worth. You can look at doing a one-off larger spousal loan (minimum 100k) if you structure it right. Then you can just put your future yearly amounts into your own taxable account.
https://www.taxtips.ca/personaltax/lend-to-spouse-child.htm
https://www.finiki.org/wiki/Income_splitting
Thank you Mighty Eyebrows!
That helps a lot. I see that his basic personal amount is entirely irrelevant and I need to limit our contributions to his taxable account to the value of his income.
When my taxable account reaches $100K I'll consider loaning it to him.
Yes, I contribute to a spousal RRSP in his name. My RRSP is larger than his combined regular and spousal RRSP but I am not too concerned as once we reach 65 years old, we can split the RRSP income equally regardless of who's name it is in. Right?
Sure appreciate your help.
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When my taxable account reaches $100K I'll consider loaning it to him.
Yes, I contribute to a spousal RRSP in his name. My RRSP is larger than his combined regular and spousal RRSP but I am not too concerned as once we reach 65 years old, we can split the RRSP income equally regardless of who's name it is in. Right?
i concur with Mighty Eyebrows - TFSA is fine, but the taxable account needs to be related to the income source. the loan prescribed rate is only 1% right now, and you can make that fixed for the duration of the loan, and interest only payments.
For the spousal RRSP question, what I found is that the RRSP splitting only works after age 55 (or later, depending on how you structure it to pension income). It needs to be converted to LRIF or other pension, in order to split.
If you are thinking early retirement, you may want the option to have his RRSP/ spousal RRSP sufficient to draw 50% of the required $$s in the early retirement years.
In addition, if you contribute it at a high rate for a few years, then stop contributing to it entirely (only add to yours) for 3+ years, then he can withdraw from the spousal RRSP at HIS tax rate -- and use it to invest in that taxable account, for example. All while you are still earning a high income, or even if you are part time retired with a solid income / tax rate
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That helps a lot. I see that his basic personal amount is entirely irrelevant and I need to limit our contributions to his taxable account to the value of his income.
Happy to help.
It may seem like a chore, but the best practice is to have two separate bank accounts (even if they are both joint, make one "yours" and one "his") and make sure the amounts don't get mixed between you as they come into your household and then out to your investments. Most sources I have read say it is best to be able to trace exactly where each deposit came from.
CRA may be OK if you give them a convincing story, but I figure people here are careful enough with money to want to know how to do it right. Even if you choose not to bother keeping the money separate, at least you know what CRA will be looking for, if they ever come knocking (and hopefully they won't).
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I have a RRSP over-contribution of $1,900. I am retired and don't have any new room to absolve it. How can I withdraw it without tax/ penalty? Any CRA form to apply for the withdrawal?
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I have a RRSP over-contribution of $1,900. I am retired and don't have any new room to absolve it. How can I withdraw it without tax/ penalty? Any CRA form to apply for the withdrawal?
You can have $2k overcontribution without penalty.... is the $1900 on top of that?
if so...
You should be able to just withdraw it from the RRSP, like any other withdrawal, and as you won't be claiming it at tax time this year, it should wash out on your tax forms.
Sometimes you need a form if it is in an RRSP tied with your employer, in which case, just call the company it is with and ask them (it would be their form). Heck, just call the bank it is sitting with and ask them which form to use.
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I have a question I'd love to get your input on. When my husband lost his job in the private sector three years ago he was offered a government contract. But he had to incorporate in order to accept it, so for the last three years this is what we've done. He just accepted a full time position in the same government department as an employee rather than a contractor. He starts in December. We're thrilled because we have young children and this will provide us with stability and benefits. Also, I find the payroll and taxes for the corporation cumbersome.
He currently has about 2K of income from other sources in the business. He'd like to grow it, but I don't know if that will happen. We'd like to keep the business open, but our accountant charges 4K a year for the corporate taxes, which is more than he'll make now that he won't have the government contract. Should we close the business and switch it to a sole proprietorship, so this way we could just report his 2K of additional income on our personal taxes? If so, how would we make the switch? Or should we keep the corporation open and do our own taxes since they would be quite simple? Or would they still be complicated?
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Should we close the business and switch it to a sole proprietorship, so this way we could just report his 2K of additional income on our personal taxes? If so, how would we make the switch? Or should we keep the corporation open and do our own taxes since they would be quite simple? Or would they still be complicated?
I can't speak to the switching from a corporation, but I do my taxes via a sole prop from contract work and it's about 3hrs of time to do income tax for the year and maybe another 1hr to deal with GST. I just use Turbo Tax business edition which costs something like $130. I've never used an accountant. Everything is pretty simple.
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I concur about the sole proprietorship. It's worth it when your annual gross is around $60k, but under $20k, it's not unless it is a specific strategy for risk or future growth reasons.
I had a hard time with one contract, where they wanted me to incorporate and I outright refused. I provided the WCB, business license, show proof of multiple income sources and then had to buy $2 million business liability insurance... even though I already had $250k business liability in place.. that extra insurance which cost $2k/yr.
The incorporation is their shortcut to "prove" that you are not an employee. If you have all of the above, you may be able to forgoe the incorporation.
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We'd like to keep the business open, but our accountant charges 4K a year for the corporate taxes, which is more than he'll make now that he won't have the government contract.
Holy cow, that is expensive! We have a pretty complex long-running family business (with employees, etc.) and our accountant fees run roughly 2500/yr. I do a lot of the prep (and T4s, GST, WCB, etc.) but our accountant is top-notch and also gives excellent planning advice.
For a one or two-person business, you should be able to do your tax-prep for much less. It really depends on the cost/benefit balance of keeping the corp going.