Author Topic: Can"EH"dian Tax - You have questions, I have answers  (Read 90421 times)

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #150 on: December 22, 2014, 07:31:35 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.

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.

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #151 on: December 22, 2014, 07:42:46 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?

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.


daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #152 on: December 22, 2014, 01:33:18 PM »
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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Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #153 on: December 22, 2014, 01:40:08 PM »
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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daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #154 on: December 22, 2014, 01:47:05 PM »
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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CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #155 on: December 22, 2014, 03:19:35 PM »
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.


daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #156 on: December 23, 2014, 05:50:16 PM »
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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daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #157 on: December 27, 2014, 09:28:44 AM »
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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step-in-time

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #158 on: January 11, 2015, 02:41:56 PM »
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!

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #159 on: January 14, 2015, 04:42:30 PM »
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

step-in-time

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #160 on: January 15, 2015, 09:05:50 AM »
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!

Cowtown2011

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #161 on: February 23, 2015, 08:46:29 AM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #162 on: February 26, 2015, 03:52:23 PM »
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.
« Last Edit: February 26, 2015, 03:59:02 PM by Posthumane »

lostamonkey

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #163 on: February 28, 2015, 06:10:15 AM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #164 on: February 28, 2015, 10:30:19 AM »
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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CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #165 on: February 28, 2015, 11:44:51 AM »
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.


Posthumane

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #166 on: March 02, 2015, 09:43:55 AM »

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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #167 on: March 02, 2015, 08:13:41 PM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #168 on: March 02, 2015, 08:39:14 PM »
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.
« Last Edit: March 02, 2015, 08:50:56 PM by Cathy »
This post contains only general information on the issues raised by this topic. This post does not provide help tailored to your specific situation. There are many facts that could be relevant to your specific situation and I am not in possession of those facts. If you need help tailored to your specific situation, you should retain an appropriate professional and not rely on this post.

guerilla1977

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #169 on: March 02, 2015, 09:59:10 PM »

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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #170 on: March 02, 2015, 10:10:42 PM »

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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #171 on: March 02, 2015, 10:18:30 PM »

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 ;)

Getting there!

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #172 on: March 02, 2015, 10:35:24 PM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #173 on: March 02, 2015, 11:06:53 PM »
@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.
« Last Edit: March 02, 2015, 11:10:21 PM by Tuxedo »
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guerilla1977

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #174 on: March 02, 2015, 11:27:40 PM »
@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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #175 on: March 02, 2015, 11:33:34 PM »
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.
« Last Edit: December 30, 2015, 11:56:06 AM by Cathy »
This post contains only general information on the issues raised by this topic. This post does not provide help tailored to your specific situation. There are many facts that could be relevant to your specific situation and I am not in possession of those facts. If you need help tailored to your specific situation, you should retain an appropriate professional and not rely on this post.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #176 on: March 03, 2015, 09:39:45 AM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #177 on: March 03, 2015, 10:41:00 AM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #178 on: March 03, 2015, 11:55:37 AM »
So, my tax rate for eligible dividends is 19.22% (combined fed+prov)

Thank you Tuxedo!
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #179 on: March 03, 2015, 01:21:50 PM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #180 on: March 03, 2015, 01:42:37 PM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #181 on: March 03, 2015, 02:24:33 PM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #182 on: March 03, 2015, 03:43:37 PM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #183 on: March 03, 2015, 03:47:03 PM »

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%. 


Retire-Canada

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #184 on: March 03, 2015, 03:56:19 PM »
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.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #185 on: March 03, 2015, 03:57:35 PM »
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).


CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #186 on: March 03, 2015, 03:58:34 PM »
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.)

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #187 on: March 03, 2015, 04:01:22 PM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #188 on: March 03, 2015, 04:05:13 PM »
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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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #189 on: March 03, 2015, 07:26:01 PM »
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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Cathy

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #190 on: March 03, 2015, 09:39:28 PM »
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.
« Last Edit: March 03, 2015, 09:45:28 PM by Cathy »
This post contains only general information on the issues raised by this topic. This post does not provide help tailored to your specific situation. There are many facts that could be relevant to your specific situation and I am not in possession of those facts. If you need help tailored to your specific situation, you should retain an appropriate professional and not rely on this post.

guerilla1977

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #191 on: March 03, 2015, 09:47:19 PM »
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?
« Last Edit: March 04, 2015, 09:45:31 AM by guerilla1977 »

daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #192 on: March 04, 2015, 07:52:33 AM »
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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Cathy

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #193 on: March 04, 2015, 12:58:43 PM »
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.
« Last Edit: March 04, 2015, 01:13:14 PM by Cathy »
This post contains only general information on the issues raised by this topic. This post does not provide help tailored to your specific situation. There are many facts that could be relevant to your specific situation and I am not in possession of those facts. If you need help tailored to your specific situation, you should retain an appropriate professional and not rely on this post.

Patty

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #194 on: March 04, 2015, 03:29:55 PM »
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!

daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #195 on: March 04, 2015, 06:35:30 PM »
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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Cathy

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #196 on: March 04, 2015, 06:46:30 PM »
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.
« Last Edit: March 04, 2015, 07:05:51 PM by Cathy »
This post contains only general information on the issues raised by this topic. This post does not provide help tailored to your specific situation. There are many facts that could be relevant to your specific situation and I am not in possession of those facts. If you need help tailored to your specific situation, you should retain an appropriate professional and not rely on this post.

daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #197 on: March 04, 2015, 08:42:41 PM »
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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Mr. Rich Moose

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #198 on: March 05, 2015, 08:41:02 AM »
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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Patty

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #199 on: March 05, 2015, 09:26:02 AM »
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!