Author Topic: Can"EH"dian Tax - You have questions, I have answers  (Read 90424 times)

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #100 on: November 26, 2014, 07:37:40 PM »
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!

c-kat

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #101 on: November 26, 2014, 08:22:49 PM »
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?

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #102 on: November 27, 2014, 08:14:39 AM »
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.


Cookie78

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #103 on: November 27, 2014, 09:39:30 AM »
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


scrubbyfish

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #104 on: November 27, 2014, 12:32:49 PM »
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.

Hummer

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #105 on: November 27, 2014, 03:07:43 PM »
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! :)
Canada seems expensive. Is 20k American MMM spending equivalent to 30k Canadian?

If anybody has a converter that takes into account the cost of living, please PM me so I can set some realistic goals for myself.

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #106 on: November 27, 2014, 05:33:11 PM »
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
« Last Edit: November 28, 2014, 07:19:34 AM by Le Barbu »
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CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #107 on: November 28, 2014, 01:39:15 PM »
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.

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #108 on: November 28, 2014, 01:57:25 PM »
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!

scrubbyfish

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #109 on: November 28, 2014, 02:37:28 PM »
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!

FSL

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #110 on: November 29, 2014, 10:27:13 AM »
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!

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #111 on: November 29, 2014, 06:14:03 PM »
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.

FSL

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #112 on: November 30, 2014, 08:14:51 PM »
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!

scrubbyfish

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #113 on: December 02, 2014, 10:37:56 AM »
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?
« Last Edit: December 02, 2014, 05:07:33 PM by scrubbyfish »

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #114 on: December 02, 2014, 06:34:27 PM »
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!


CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #115 on: December 02, 2014, 06:41:24 PM »
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!

scrubbyfish

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #116 on: December 02, 2014, 07:17:13 PM »
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!

Hummer

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #117 on: December 03, 2014, 10:51:30 AM »
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?
Canada seems expensive. Is 20k American MMM spending equivalent to 30k Canadian?

If anybody has a converter that takes into account the cost of living, please PM me so I can set some realistic goals for myself.

Spudd

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #118 on: December 03, 2014, 11:13:41 AM »
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.

Koogie

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #119 on: December 03, 2014, 02:18:20 PM »

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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #120 on: December 03, 2014, 02:46:14 PM »

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.




Posthumane

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #121 on: December 03, 2014, 04:48:33 PM »
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?

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #122 on: December 03, 2014, 05:28:20 PM »
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.


scrubbyfish

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #123 on: December 03, 2014, 05:33:45 PM »
...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?

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #124 on: December 03, 2014, 07:21:54 PM »
...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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Koogie

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #125 on: December 04, 2014, 07:25:37 AM »
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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CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #126 on: December 04, 2014, 07:33:47 AM »
...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



Posthumane

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #128 on: December 04, 2014, 09:59:32 PM »
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?
« Last Edit: December 04, 2014, 10:03:14 PM by Posthumane »

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #129 on: December 05, 2014, 07:39:20 AM »
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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MorningCoffee

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #130 on: December 05, 2014, 08:45:29 AM »
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

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #131 on: December 05, 2014, 09:38:55 AM »
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.

Posthumane

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #132 on: December 05, 2014, 10:09:38 AM »
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.

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #133 on: December 05, 2014, 10:49:21 AM »
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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scrubbyfish

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #134 on: December 05, 2014, 11:32:22 AM »
Thanks for that tip/lead, Le Barbu! I will be checking out that CCP page, too.

scrubbyfish

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #135 on: December 07, 2014, 10:20:42 AM »
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:

Quote
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?

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #136 on: December 08, 2014, 07:14:36 AM »
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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scrubbyfish

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #137 on: December 08, 2014, 10:47:01 AM »
Thanks, Le Barbu! I have just now posted to you the more investment-related stuff over on the Investor Alley thread. See you there :)

CostcoSamples

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #138 on: December 08, 2014, 10:57:33 AM »
 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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #139 on: December 08, 2014, 11:39:50 AM »
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

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #140 on: December 09, 2014, 05:14:51 PM »
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!


scrubbyfish

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #141 on: December 09, 2014, 05:24:32 PM »
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/

trout14

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #142 on: December 09, 2014, 06:20:58 PM »
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.

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #143 on: December 10, 2014, 07:05:44 AM »
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.


queenie

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #144 on: December 10, 2014, 07:13:51 AM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #145 on: December 10, 2014, 01:02:19 PM »
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!

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #146 on: December 10, 2014, 01:35:38 PM »
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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CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #147 on: December 15, 2014, 07:16:14 AM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #148 on: December 19, 2014, 12:03:20 AM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #149 on: December 19, 2014, 07:54:00 AM »

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?