Author Topic: Can"EH"dian Tax - You have questions, I have answers  (Read 90753 times)

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #50 on: November 01, 2014, 11:57:14 AM »
If I sell an asset in a foreign currency (house, stocks) I pay cap gain on the difference between sale price and purchase price converted to CAD on the day of the transaction.

If I convert the foreign money to CAD on a different day, or over several days, how exactly do I report the exchange gain or loss?

How do I get credit for any difference in exchange rate in real life vs the BoC's posted rate (ie with a forex company there is going to be some drag, 0.5-1%, which on large transfers is not nothing!).

Also - I'm doing odd small online bits of... 'freelance microwork' or whatever, and getting paid either in gift cards or to paypal. I know I havento report this to the CRA, but I don't have to talk to the IRS - right? The work is being done here in Canada, the US has no right to anything (unlike selling a product in the US - like self publishing - where you have to have an ITIN).

I do have an ITIN for rental properties - still makes no difference to the above - right?

Cheers!

Hi Dave

As far as Forex is concerned, it makes things a bit more complex from a tracking perspective but overall it is manageable.

I understand based on what you've said that you're trading in foreign assets, and converting to CAD at a later date - unfortunately you only have two options in this regard (irrespective of conversion to CAD).

1) Pick the day's rate of the purchase and subsequent sale.
2) Use the average yearly rate.

This has to be done CONSISTENTLY however - which is key. You can't elect both, it's one or the other for all transactions in the year.

As far as the cost of exchange - use this as a cost of trading on your tax return. You're better to include these as costs, versus a step up in ACB, as capital gains are 50% taxable.

For the online work - it is taxable where the work is performed. Sounds like it's all in Canada, so the IRS really has no jurisdiction or ability to tax. Occasionally they will unfairly apply a withholding tax - however there are online forms to submit to the IRS should this not be appropriate (i.e. what you're doing).

Hope this helps!

Thanks.

Ok, so I'm self employed. I'm also selling my old house in the UK. In previous years it's been a no brainer - average CAD:GBP for the year. Are you saying I can still use the average if my selling of my house falls on one day, and the cap gains dwarfs everything else I've done this year? Like, the cap gains will be 3x my self employed income for the year.

I can just use the average for everything?

Hi Dave,

That's correct - you can use the average, so long as this is done consistently.

You can't elect a 'new' way of doing things, unless it is reasonable to believe this is a more accurate way of reporting your income. In the case of a capital asset such as your old house, one could argue that the value fluctuates significantly based on Forex, and therefore an average for the year is more appropriate.

I can point you to the CRA's bulletin on this - it's old, but not out of date. http://www.cra-arc.gc.ca/E/pub/tp/it95r/it95r-e.txt

There's a fair bit of jargon, but it's a good reference point if you can decrypt it. Really the key is consistency - pick the day (settlement date) or the average for the month or year.

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #51 on: November 01, 2014, 12:27:35 PM »
This thread, and your responses, are really great. So far, as a newbie with little to no knowledge of tax and investment, I learned so many useful things.

I have a quick question related to income tax and residency. I work full time in the NWT and spend three weeks there, followed by two weeks in Calgary where my wife is. This is where our house is as well. In the NWT, I live a mustachian lifestyle and found ways to avoid having to rent an apartment, by combining house-sitting and couchsurfing, and the occasional night or two on my office couch. As far as I understand, I will be deemed a resident of the NWT in 2014 because that's where I will be on December 31. What do you think of this? If I can establish my residence in either jurisdiction, which one would legally be the most advantageous from an income tax perspective?

Hi ykphil.

Thanks for your review! Happy to help out fellow MMM'ers as best as I can. Glad to hear you're learning things - it's ultimately the point of the blog, and this topic as well.

It's interesting that you've stumbled onto what is a more oblique topic inside of a major issue - namely, that of establishing Residency. Typically this is approached from a Canada vs. Non-Canada perspective, but in your case this is Provincial.

As far as the rules go - it's determined by the extent of 'residential' ties in a given province. Given that you don't have any residential ties in NWT beyond employment, I would posit that you're a resident of Alberta. You have your house there, your spouse continues to reside in Alberta, and you also reside there on a frequent basis. The December 31st thing really doesn't play a role - if this were the case there would be many Canadians taking flights to tax havens for New Years (myself included).

If you're interested in reading more about this topic - http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s5/f1/s5-f1-c1-eng.html

To answer your second question, Alberta is considered the 'best' tax province in Canada - by having no PST and a flat 10% provincial rate, it is generally better for most taxpayers.

That being said - NWT has graduated rates (5.9% to 14.05%) which means that for anyone earning under about $100 to $120K you'll pay less tax in NWT vs. Alberta. In addition, NWT has an aggressive tax credit of up to $942 per taxpayer (depending on income - called a "PIT" Credit) - and the Federal Government also offers some deductions for Northern Residents.

http://www.cra-arc.gc.ca/E/pub/tp/it91r4/it91r4-e.html

Take a look at the link here as it will describe some credits which you may actually qualify for regardless of residency.

If you receive travel benefits between Alberta and NWT for work, and have to claim these as taxable income, you may be able to deduct these for income tax purposes. In addition, there may be some items you can deduct due to the nature of your employment in NWT.

In Conclusion

You're definitely an Alberta resident - but this 'may' not be a bad thing. Alberta is a low tax environment compared with other provinces (cough cough, Ontario) so in that sense you're better off. That being said, depending on your employment income, you could be better off as a NWT resident from a tax perspective.

Because of the Northern tax credits, the question of which is 'better' is largely dependent on your income. Under $100-$120k, NWT is technically better - but you may actually be able to access some of these credits regardless of your permanent residence in Alberta.

Hope this is helpful! You've got some research to see if your circumstances are applicable to get the federal credits, but you may save some money as a result.

Good luck!




daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #52 on: November 01, 2014, 12:57:36 PM »
Thank you - very helpful. Just gotta hope I 'get' the average, or better, on settlement day then.

Or rather, when I bring money over, I guess. Hmmm.
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frugal_c

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #53 on: November 02, 2014, 06:29:42 AM »
Thanks for this post, it's very kind of you.

Do you know what the impact to an early retiree is to withdrawing from their RRSP's?   I have looked around and all I can see is that their will be a withholding-tax if you withdraw early but that you also have the option to convert to an RRIF.  I think with the RRIF you can just withdraw funds and it's just regular income but I haven't been able to figure out if there is an age limitation to when the conversion can be done.   So for someone in say their 40's who wants to take income from an RRSP do you know if it's possible without paying extra penalties beyond standard income tax?

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #54 on: November 02, 2014, 07:34:00 AM »
Thanks for this post, it's very kind of you.

Do you know what the impact to an early retiree is to withdrawing from their RRSP's?   I have looked around and all I can see is that their will be a withholding-tax if you withdraw early but that you also have the option to convert to an RRIF.  I think with the RRIF you can just withdraw funds and it's just regular income but I haven't been able to figure out if there is an age limitation to when the conversion can be done.   So for someone in say their 40's who wants to take income from an RRSP do you know if it's possible without paying extra penalties beyond standard income tax?
Hi Frugal-

Great question!

There really is not a low-age limit on transferring your un-matured RRSP to a RRIF, however I wouldn't recommend this.

The RRIF is a fixed income package, which is to say you'll receive a flat yearly amount all of which is taxable. This takes 'control' of your 'earnings' (i.e. payout) out of your hands.

The RRSP is a better option in this regard. They're largely the same thing, except with the RRSP you have control over withdrawals.

There is no penalty to withdrawing from an RRSP at any time, except for tax consequences. You'll end up paying tax at whatever your marginal rate is. The withholding tax is standard - it isn't an additional tax, it's merely a pre-payment of the expected tax bill.

Are you planning to move in retirement, or stay in Canada?

I bring this up as an additional point, it may not be applicable to you, but it could be to others. If you're retiring early and moving abroad, RRSP's can be transferred at significantly more advantageous rates.

For instance, you could transfer your RRSP out of Canada and pay 0-10% tax (depending on the country) period... Tax bill done, and if you're in a low cost of living country you'll have more money, and the purchasing power of this cash also increases.

Food for thought, if you're ever looking to escape the cold!

Hope this helps

frugal_c

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #55 on: November 02, 2014, 08:31:21 AM »
Thanks CPA CB!

This is great news.  If it's at the marginal tax rate then we will be paying very low income rates.  I suspected the withholding tax wasn't an additional tax but the way the articles on line state things it's hard to tell.  They always use the word penalty when it's really not at all.

Don't plan to move countries but will keep that in mind.  Always good to know all of the options.

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #56 on: November 11, 2014, 01:00:59 PM »
Hi CPA CB, TuxedoEagle suggest to come here and bring some questions we got about using ETF for Smith Manoeuvre . In the Investor Alley, I started a thread "Canadian ETF for Smith Manoeuvre". I did not want to bring all the thread here but only the remaining questions.

I want to buy 100K of ZCN with HELOC on January 5th (or later if needed)

Do the CRA would mind if interests are not completely covered by revenue (dividends)?

If I get ZCN quarterly distributions from CDSinnovations.ca and adjust my ACB with help from AdjustedCostBase.ca, can I manage to keep my loan deductible and fill my tax report properly?

thanks
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panthalassa

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #57 on: November 12, 2014, 03:17:26 AM »
Hi OP,

Thanks for answering these tax questions.

I have one of my own that I really would like answered so I'll try to provide as much info as possible.

I have no dependents and I'm single.  I'm considering taking a job in a country that does not collect income tax and which does not have any tax agreement with Canada.  I would be making approximately CAN$65000 per year and being able to save CAN$60000 of it due to my potential employer paying for living expenses/utilities/transportation.  I would have nearly 8 weeks of vacation per year, of which I would spend most of it in Canada, living with my family in Alberta (where I live now).

From my understanding, I would need to sever residential ties with Canada so as not to have to pay income tax to the CRA.

My question is two-parts.  First, based on my actions, can I choose whether or not I am a Canadian resident or resident of this foreign country?  The guidelines surrounding this, from what I have been able to gather, are not very clear. To sever ties, I believe I would need to sell my car (I have no other property), close bank accounts, let my driver's license and insurance lapse, cancel all Canadian memberships, and establish these kinds of things in my new country. 

Second, if I am able to choose whether or not to be a Canadian resident, which is more financially smart?  I plan to work in this country for 2-5 years, max.  I have ~$40000 of RRSP room to fill and ~$25000 of TFSA room to fill.  If I continued to be a Canadian resident, I could put nearly all of my earnings into my RRSP and only have to pay ~$2000ish in tax.  The rest could go into my TFSA.  By the second year, I'd be able to fill my TFSA as well.  By doing this, I don't lose making more TFSA and RRSP contribution room by being an expat non-resident.  Or is it financially savvier to be a non-resident, and save all this money instead?

The second question, of course, is moot if the answer to the first question is that I can't control whether I'm seen as a Canadian resident or not because of how long I'll be out of the country every year.


CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #58 on: November 12, 2014, 08:11:37 AM »
Hi CPA CB, TuxedoEagle suggest to come here and bring some questions we got about using ETF for Smith Manoeuvre . In the Investor Alley, I started a thread "Canadian ETF for Smith Manoeuvre". I did not want to bring all the thread here but only the remaining questions.

I want to buy 100K of ZCN with HELOC on January 5th (or later if needed)

Do the CRA would mind if interests are not completely covered by revenue (dividends)?

If I get ZCN quarterly distributions from CDSinnovations.ca and adjust my ACB with help from AdjustedCostBase.ca, can I manage to keep my loan deductible and fill my tax report properly?

thanks

Bonjour Le Barbu,

Great question. I've actually never heard this being referred to as the "Smith Manoeuvre" but nonetheless it is a legitimate way to pay less tax.

The key for this to work is that you're using the funds to generate what is known as "Investment Income" - which is interest or dividend income. Note that investments for capital gains purposes ONLY aren't eligible for this deduction.

Since you're investing in a dividend yielding ETF - the entirety of the interest is technically deductible, however there is a caveat. The Tax Act implies that these actions are undertaken with the reasonable expectation of earning a profit - if your interest payments are consistently outpacing your investment income, there is a chance they will deem a portion of this non-deductible. It's a grey area, but for now I would recommend deducting it all.

The other point I do have is that ZCN yields 2.59%, which isn't a heck of a lot. There are other Real Estate Investment Trusts out there that yield between 5-10%, so you may actually obtain a positive spread on yield vs. interest on the HELOC. Plus they distribute monthly!

Hope this helps




CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #59 on: November 12, 2014, 08:26:57 AM »
Hi OP,

Thanks for answering these tax questions.

I have one of my own that I really would like answered so I'll try to provide as much info as possible.

I have no dependents and I'm single.  I'm considering taking a job in a country that does not collect income tax and which does not have any tax agreement with Canada.  I would be making approximately CAN$65000 per year and being able to save CAN$60000 of it due to my potential employer paying for living expenses/utilities/transportation.  I would have nearly 8 weeks of vacation per year, of which I would spend most of it in Canada, living with my family in Alberta (where I live now).

From my understanding, I would need to sever residential ties with Canada so as not to have to pay income tax to the CRA.

My question is two-parts.  First, based on my actions, can I choose whether or not I am a Canadian resident or resident of this foreign country?  The guidelines surrounding this, from what I have been able to gather, are not very clear. To sever ties, I believe I would need to sell my car (I have no other property), close bank accounts, let my driver's license and insurance lapse, cancel all Canadian memberships, and establish these kinds of things in my new country. 

Second, if I am able to choose whether or not to be a Canadian resident, which is more financially smart?  I plan to work in this country for 2-5 years, max.  I have ~$40000 of RRSP room to fill and ~$25000 of TFSA room to fill.  If I continued to be a Canadian resident, I could put nearly all of my earnings into my RRSP and only have to pay ~$2000ish in tax.  The rest could go into my TFSA.  By the second year, I'd be able to fill my TFSA as well.  By doing this, I don't lose making more TFSA and RRSP contribution room by being an expat non-resident.  Or is it financially savvier to be a non-resident, and save all this money instead?

The second question, of course, is moot if the answer to the first question is that I can't control whether I'm seen as a Canadian resident or not because of how long I'll be out of the country every year.

Hi Panthalassa,

Congratulations on the job offer.

My first comment would be to eliminate the "plan to work in this country for 2-5 years, max" from your vocabulary entirely. If you're breaking residency, the intention is that it is a "permanent" break, the second this intention is temporary, you're a resident of Canada. This doesn't mean it is actually permanent - but really you want to make sure you emphasize this as your intention.

To answer your initial question - you're moving (permanently) to a tax haven. You want to do everything in your power to ensure you break residency with Canada.

The good news is, you really do not have any of what CRA calls "Significant Residential Ties". These are listed below for your reference -  but no house, no spouse, no dependents. That's great news (for tax reasons, anyway).

There are also "Secondary" ties, to which you refer, which can be used to 'deem' you a resident of Canada. These are bank accounts, memberships, clothing/furniture, etc. None of these individually will tip the balance. Maybe you want to keep the Canadian bank account and transfer the money over for security purposes while you're abroad, and keep your driver's licence etc. These are all okay.

The one thing that I recommend you do is to complete the NR73 form, and submit to the CRA for an official determination of residency status. This way they will mail you their determination (should be a non-resident based on your description) and you have it in writing in case they unilaterally decide to change their mind later (something they like to do frequently.)

Good luck and have fun not paying taxes! Most of us on the forum envy you.

Significant residential ties

1.11 The residential ties of an individual that will almost always be significant residential ties for the purpose of determining residence status are the individual's:
•dwelling place (or places);
•spouse or common-law partner; and
•dependants.

1.12 Where an individual who leaves Canada keeps a dwelling place in Canada (whether owned or leased), available for his or her occupation, that dwelling place will be considered to be a significant residential tie with Canada during the individual's stay abroad. However, if an individual leases a dwelling place located in Canada to a third party on arm's-length  terms and conditions, the CRA will take into account all of the circumstances of the situation (including the relationship between the individual and the third party, the real estate market at the time of the individual's departure from Canada, and the purpose of the stay abroad), and may consider the dwelling place not to be a significant residential tie with Canada except when taken together with other residential ties (see ¶  1.26  for an example of this situation and see ¶ 1.15  for a discussion of the significance of secondary residential ties).

1.13 If an individual who is married or cohabiting with a common-law  partner leaves Canada, but his or her spouse or common-law  partner remains in Canada, then that spouse or common-law  partner will usually be a significant residential tie with Canada during the individual's absence from Canada. Similarly, if an individual with dependants leaves Canada, but his or her dependants remain behind, then those dependants will usually be considered to be a significant residential tie with Canada while the individual is abroad. Where an individual was living separate and apart from his or her spouse or common-law  partner prior to leaving Canada, by reason of a breakdown of their marriage or common-law  partnership, that spouse or common-law partner will not be considered to be a significant tie with Canada.



Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #60 on: November 12, 2014, 08:37:06 AM »
Thank you to stop by CPA CB

REITs are realy not suited for Smith Manoeuvre because ROC is a big % of their distributions. If I do not reinvest all of it and pull it out to increase my cashflow, I have to reduce loan of that same amount (ROC) and over time it's counter-productive.

Also, Canadian REIT MER are to high (0.35% to 0.6%). Many suggest XDV but here again, MER is 0.5%. FYI, Canadian broad market index ETF are only 0.05%

Don't forget the interest on the loan are tax-deductible: 3% x 62% = 1.9%. It's lower than the 2.59% yield of ZCN

Ed Rempel (on Million Dollar Journey's forum): -"Income is not required for deductibility of an investment loan. A mutual fund or stock that has never paid a distribution and is not specifically prevented in their prospectus from ever paying a dividend is find, based on IT-533. All that is required is a reasonable assumption that it could pay out income someday."

I will keep reading for more info before I pull the trigger !
« Last Edit: November 12, 2014, 08:40:00 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 #61 on: November 12, 2014, 09:37:52 AM »
Thank you to stop by CPA CB

REITs are realy not suited for Smith Manoeuvre because ROC is a big % of their distributions. If I do not reinvest all of it and pull it out to increase my cashflow, I have to reduce loan of that same amount (ROC) and over time it's counter-productive.

Also, Canadian REIT MER are to high (0.35% to 0.6%). Many suggest XDV but here again, MER is 0.5%. FYI, Canadian broad market index ETF are only 0.05%

Don't forget the interest on the loan are tax-deductible: 3% x 62% = 1.9%. It's lower than the 2.59% yield of ZCN

Ed Rempel (on Million Dollar Journey's forum): -"Income is not required for deductibility of an investment loan. A mutual fund or stock that has never paid a distribution and is not specifically prevented in their prospectus from ever paying a dividend is find, based on IT-533. All that is required is a reasonable assumption that it could pay out income someday."

I will keep reading for more info before I pull the trigger !

Hi Le Barbu -

Sorry - I didn't mean REIT ETF's, I just meant directly.

In any case it sounds like you're onside with regards to ZCN.

As far as IT-533 is concerned - the exact wording is as follows, with examples provided:

Borrowing for investments including common shares

¶ 31. Where an investment (e.g., interest-bearing instrument or preferred shares) carries a stated interest or dividend rate, the purpose of earning income test will be met "absent a sham or window dressing or similar vitiating circumstances" (Ludco). Further, assuming all of the other requisite tests are met, interest will neither be denied in full nor restricted to the amount of income from the investment where the income does not exceed the interest expense, given the meaning of the term income as discussed in ¶ 10.

Where an investment does not carry a stated interest or dividend rate such as some common shares, the determination of the reasonable expectation of income at the time the investment is made is less clear. Normally, however, the CCRA considers interest costs in respect of funds borrowed to purchase common shares to be deductible on the basis that there is a reasonable expectation, at the time the shares are acquired, that the common shareholder will receive dividends. Nonetheless, each situation must be dealt with on the basis of the particular facts involved.

These comments are also generally applicable to investments in mutual fund trusts and mutual fund corporations.

Example 8 

R Corp. is an investment vehicle designed to provide a capital return only to the investors in its common shares. The corporate policy with respect to R Corp. is that dividends will not be paid, that corporate earnings will be reinvested to increase the value of the shares and that shareholders are required to sell their shares to a third-party purchaser in a fixed number of years in order to realize their value. In this situation, it is not reasonable to expect income from such shareholdings and any interest expense on money borrowed to acquire R Corp. shares would not be deductible.

Example 9 

S Corp. is raising capital by selling common shares. Its business plans indicate that its cash flow will be required to be reinvested for the foreseeable future and S Corp. discloses to shareholders that dividends will only be paid when operational circumstances permit (i.e., when cash flow exceeds requirements) or when it believes that shareholders could make better use of the cash. In this situation, the purpose of earning income test will generally be met and any interest on borrowed money to acquired S Corp. shares would be deductible.


So - if it is explicit in reinvesting capital in the company then it is not deductible. But if it isn't explicit then it could be deductible based on their interpretation.

Modification

Also for the others looking at this - In the case of Le Barbu this appears to be completely fine from a tax perspective, however... The CRA is notoriously inconsistent in their treatment of relative grey areas such as this. You should ensure that you consult with your accountant to make sure it's applicable in your specific circumstances.

Thanks to Le Barbu for the question!


« Last Edit: November 12, 2014, 09:45:01 AM by CPA CB »

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #62 on: November 12, 2014, 10:03:26 AM »
Interesting, so it's not black or white but black or grey then!

You're right, I'm onside with regards to ZCN! I'm long for 150K with this one already. I picked that ETF because it's broad, dirt cheap and indexed. Management fees of 0.05% mean 50$/year to manage 100k. XIC and VCN are aggresive competitors and MER are lower than ever because of that.

I'll sit on this until I get accountant aproval for my specific situation.
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panthalassa

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #63 on: November 12, 2014, 11:23:52 PM »

To answer your initial question - you're moving (permanently) to a tax haven. You want to do everything in your power to ensure you break residency with Canada.

The good news is, you really do not have any of what CRA calls "Significant Residential Ties". These are listed below for your reference -  but no house, no spouse, no dependents. That's great news (for tax reasons, anyway).

(...)

Good luck and have fun not paying taxes! Most of us on the forum envy you.


Hey CPA CB, 

Thanks for the very quick reply!  You didn't answer it directly but should I assume from your answer that there is no benefit to staying a resident of Canada for the purposes of creating new TFSA and RRSP contribution room (I have read on the CRA's website that as a non-resident you stop accumulating this room) and keeping up with CPP payments? 

An additional question - do you think I will still qualify as a non-resident if I transfer my foreign earnings to my Canadian bank account and brokerage for investing?  Right now I am buying TD e-series funds and would like to continue doing that (or possibly transferring to Questrade once I amass $100k.  Would I be able to continue doing that as a non-resident?  Also, does the fact that I would be paid in US dollars make any difference?

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #64 on: November 13, 2014, 07:35:49 AM »

To answer your initial question - you're moving (permanently) to a tax haven. You want to do everything in your power to ensure you break residency with Canada.

The good news is, you really do not have any of what CRA calls "Significant Residential Ties". These are listed below for your reference -  but no house, no spouse, no dependents. That's great news (for tax reasons, anyway).

(...)

Good luck and have fun not paying taxes! Most of us on the forum envy you.


Hey CPA CB, 

Thanks for the very quick reply!  You didn't answer it directly but should I assume from your answer that there is no benefit to staying a resident of Canada for the purposes of creating new TFSA and RRSP contribution room (I have read on the CRA's website that as a non-resident you stop accumulating this room) and keeping up with CPP payments? 

An additional question - do you think I will still qualify as a non-resident if I transfer my foreign earnings to my Canadian bank account and brokerage for investing?  Right now I am buying TD e-series funds and would like to continue doing that (or possibly transferring to Questrade once I amass $100k.  Would I be able to continue doing that as a non-resident?  Also, does the fact that I would be paid in US dollars make any difference?

Hi,

There is absolutely no benefit whatsoever to maintaining residency for the purpose of RRSP and TFSA room. You'll be living in a country where capital gains and investment income are not even taxable, whereas the RRSP is taxable on withdrawal, and the TFSA is using after tax funds. CPP pays out half of your contributions if you contribute 100% over your lifespan, so you'll be foregoing a 50% tax by opting out of it.

To be more clear. Make sure that you are NOT a resident of Canada. There is no benefit whatsoever. You can keep your passport and bank account and that should be no issue, but make sure you break residency.

Being paid in USD will only affect you if you convert to Canadian, which would just be exchange rate... Beyond that, no difference whatsoever.

Good luck!


daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #65 on: November 13, 2014, 12:34:00 PM »
Another Q: This new (psuedo) income splitting thing for families. I can't make out if it'll effect THIS tax year or just from next?

How does it interact with the RRSP - if money goes in to an RRSP, does that make 'more room' at the lower contribution bracket or is it on pre-deduction earnings (ie say partner earned $35k, I earned $50, and $40k is where the brackets change - if they put $5k into their RRSP do we move $10k of my income to them, or still just $5k?).

How does it effect things like child benefit eligibility?
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scrubbyfish

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #66 on: November 14, 2014, 09:54:09 PM »
(Wow, really? Awesome!)

Mine aren't really tax questions, but they overlap a bit, and who knows?

Background

I am the only financial support for myself and one young child, both designated disabled.
Both designated for the Disability Tax Credit, thus RDSP.
Very low income, but have some savings.
Have just gotten set up with TD and TD Waterhouse.
If we use RDSPs, RESP, and a (disability) trust, and severely limit dividends and interest, we can also access some subsidies while our income is low. RRSPs are not allowed for some of the subsidy programs, and with my low earnings and the two Disability Tax Credits, I think a TFSA is moot in my case.
I am out-of-pocket a good $5000/yr for "biggie" disability-related items.

My Idea So Far:

Set up the trust, but leave it empty until we need the subsidies again (if ever)
Maximize child's RDSP for 2015 (already maximized to 2014)
Maximize my (brand new) RDSP to 2014, then again for 2015
Maximize child's RESP for 2015 (already maximized to 2014)
Leave $10,000 in a chequing account
Leave the rest in a non-registered account, invested via Waterhouse. (If we need the subsidies again at some point in the future, move this amount into the trust.)

Questions:

1. Is this a good plan? Am I missing anything?

2. What to invest the RDSPs, RESP, and remainder in? I was going to follow the Canadian Couch Potato model, but it says:

-"...investors managing multiple accounts (RRSPs, TFSAs and non-registered accounts) need to consider proper asset location to maximize tax-efficiency. For example, if you have no choice but to hold fixed income in a non-registered account, you should avoid bond ETFs altogether and consider substituting a ladder of GICs."

-"These have lower MERs than their Canadian counterparts and are exempt from US withholding taxes when held in an RRSP." [Again, mine can't be held in an RRSP. So where do I go?]

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #67 on: November 15, 2014, 04:52:14 AM »
Another Q: This new (psuedo) income splitting thing for families. I can't make out if it'll effect THIS tax year or just from next?

How does it interact with the RRSP - if money goes in to an RRSP, does that make 'more room' at the lower contribution bracket or is it on pre-deduction earnings (ie say partner earned $35k, I earned $50, and $40k is where the brackets change - if they put $5k into their RRSP do we move $10k of my income to them, or still just $5k?).

How does it effect things like child benefit eligibility?

Split is for tax % calculations. It does not change RRSP room of each spousal but your tax rate. You will get a lower tax on income (taxed on 40 instead of 50). Your return is now marginal rate from 40k also (lower % since your taxes are lower). Same for spousal. Not sure it´s for 2014 but I hope so !
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MrsPotato

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #68 on: November 16, 2014, 07:48:55 PM »
Hi CPA BP,

I have question about RRSPs. My husband and I are confused about whether or not he should open an RRSP even though he has a pension plan through Canadian Forces (he's in the Navy). Is it necessary for him to have an RRSP even though he has a pension plan through the government?  How would an RRSP affect his pension pay out or vice versa?

Thank you.

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #69 on: November 17, 2014, 07:03:58 AM »
You can open a RRSP even if you have a pension plan, the contribition limit will be lower especialy if the pension plan is generous. Then seak for your marginal tax rate and you will know the refund a RRSP contribution will be. Most of the time, if individual gross income is more than 44k$, RRSP is a pretty good idea.

You can find your RRSP deduction limit on line (A) of the RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment (the 2-3 pages blue form you receive 1 month after tax filling).

hope this help
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MrsPotato

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #70 on: November 17, 2014, 07:20:37 AM »
This is very helpful! Thank you!!

You can open a RRSP even if you have a pension plan, the contribition limit will be lower especialy if the pension plan is generous. Then seak for your marginal tax rate and you will know the refund a RRSP contribution will be. Most of the time, if individual gross income is more than 44k$, RRSP is a pretty good idea.

You can find your RRSP deduction limit on line (A) of the RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment (the 2-3 pages blue form you receive 1 month after tax filling).

hope this help

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #71 on: November 17, 2014, 10:27:34 AM »
Hi CPA BP,

I have question about RRSPs. My husband and I are confused about whether or not he should open an RRSP even though he has a pension plan through Canadian Forces (he's in the Navy). Is it necessary for him to have an RRSP even though he has a pension plan through the government?  How would an RRSP affect his pension pay out or vice versa?

Thank you.

Hi MrsPotato

The truth about this is that it really depends.

Do you have an estimate regarding your husband's future pension income? This is the key to understanding whether an RRSP is right for your situation is the level of this pension income.

If it's significant, contrary to what LeBarbu has said, this is not advantageous as the offset of your tax savings today will be eaten up by paying significantly higher taxes upon retirement.

A better option for the time being would certainly be a TFSA account. This has no tax impact in the future, and is therefore more predictable. Once this is filled, then considering alternate options such as RRSP's could be worthwhile - but again, beware that RRSP's don't "save" tax - they defer it to a later date, when you hope your marginal rate will be lower. With a generous pension and CPP, will it truly be lower than today?

Hope this helps


CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #72 on: November 17, 2014, 10:33:03 AM »
Another Q: This new (psuedo) income splitting thing for families. I can't make out if it'll effect THIS tax year or just from next?

How does it interact with the RRSP - if money goes in to an RRSP, does that make 'more room' at the lower contribution bracket or is it on pre-deduction earnings (ie say partner earned $35k, I earned $50, and $40k is where the brackets change - if they put $5k into their RRSP do we move $10k of my income to them, or still just $5k?).

How does it effect things like child benefit eligibility?

Hi Daverobev,

At the moment, the logistics regarding the RRSP contributions and income splitting haven't been announced officially. When it is, I'll be sure to post this up for you.

For the record it is 2015 forward - so this isn't an issue in the current taxation year.


CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #73 on: November 17, 2014, 10:46:46 AM »
(Wow, really? Awesome!)

Mine aren't really tax questions, but they overlap a bit, and who knows?

Background

I am the only financial support for myself and one young child, both designated disabled.
Both designated for the Disability Tax Credit, thus RDSP.
Very low income, but have some savings.
Have just gotten set up with TD and TD Waterhouse.
If we use RDSPs, RESP, and a (disability) trust, and severely limit dividends and interest, we can also access some subsidies while our income is low. RRSPs are not allowed for some of the subsidy programs, and with my low earnings and the two Disability Tax Credits, I think a TFSA is moot in my case.
I am out-of-pocket a good $5000/yr for "biggie" disability-related items.

My Idea So Far:

Set up the trust, but leave it empty until we need the subsidies again (if ever)
Maximize child's RDSP for 2015 (already maximized to 2014)
Maximize my (brand new) RDSP to 2014, then again for 2015
Maximize child's RESP for 2015 (already maximized to 2014)
Leave $10,000 in a chequing account
Leave the rest in a non-registered account, invested via Waterhouse. (If we need the subsidies again at some point in the future, move this amount into the trust.)

Questions:

1. Is this a good plan? Am I missing anything?

2. What to invest the RDSPs, RESP, and remainder in? I was going to follow the Canadian Couch Potato model, but it says:

-"...investors managing multiple accounts (RRSPs, TFSAs and non-registered accounts) need to consider proper asset location to maximize tax-efficiency. For example, if you have no choice but to hold fixed income in a non-registered account, you should avoid bond ETFs altogether and consider substituting a ladder of GICs."

-"These have lower MERs than their Canadian counterparts and are exempt from US withholding taxes when held in an RRSP." [Again, mine can't be held in an RRSP. So where do I go?]

Hi Scrubbyfish -

I'm glad to hear that you're taking advantage of the RDSP system, which is a truly great program.

As far as I can tell, this plan seems good. Make sure you apply for the Canadian Disability Savings Grant and Bond as well, as these can help to accumulate funds in the RDSP.

As far as trusts are concerned - remember that they operate on a fixed life. Any 'inter vivos' trust such as this has a 21 year maximum lifespan. You may be better to hold off a few years in establishing said trust, and therefore save time later, and also save on the accounting/legal fees associated with running a trust while you don't really need it at this point.

In terms of investment advice, this tends to fall outside of my area of expertise as a Chartered Accountant, however, I can say that you want to hold passive investment income (i.e. capital gains and generally dividends) outside of registered accounts, and active investment income (interest income) in registered accounts. GIC's are 'stable' but come at a price - I would never recommend purchasing GIC's, as the interest offered in today's environment means you will approximately break-even with inflation, and may lose.

Hope this helps!

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #74 on: November 17, 2014, 11:35:51 AM »
-"For the record it is 2015 forward - so this isn't an issue in the current taxation year."

What about this ?

"The new Family Tax Cut would apply for the 2014 and subsequent taxation years. Couples would be able to claim the credit when they file their 2014 tax returns. To benefit from the credit, each spouse must file a tax return.  Either spouse may claim the credit"

http://www.fin.gc.ca/n14/data/14-155_1-eng.asp
"The real reason this blog exists, is simply to save the entire human race from destroying itself through overconsumption of its own habitat"

-MMM

ms

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #75 on: November 17, 2014, 02:41:08 PM »
I have a question about taxes for students.

My daughter will turn 18 just before the end of the year and she just started university.  She has earned $2770 gross over the summer and I took out $5000 from her RESP which is the taxed portion (growth/grants).

I still need to make one withdrawal of RESP to pay for second semester but I'm thinking to make the taxed portion be $1900 in order to minimize her taxes.  The rest will be a withdrawal from my contributions.

Is this is the right track?  I plan to use her tuition receipt on my taxes.  Should I be withdrawing more from the taxed RESP portion? 

My tax bracket is much higher but with RRSP contributions I'm hoping to get it under the 87k.

Thanks in advance!

scrubbyfish

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #76 on: November 17, 2014, 05:53:40 PM »
Thanks so much, CPA CB!

Yes, we are set up for the RDSP's grants and bonds.
I didn't know that about the trust, but it's only relevant until I'm 65 anyway, which is only 22 years from now.
Thanks again!

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #77 on: November 17, 2014, 07:34:43 PM »
-"For the record it is 2015 forward - so this isn't an issue in the current taxation year."

What about this ?

"The new Family Tax Cut would apply for the 2014 and subsequent taxation years. Couples would be able to claim the credit when they file their 2014 tax returns. To benefit from the credit, each spouse must file a tax return.  Either spouse may claim the credit"

http://www.fin.gc.ca/n14/data/14-155_1-eng.asp

Oops!

That's correct - I was thinking the payments for Child Care. My mistake.

In either case, the details regarding roll-out are still in question with regards to how this affects the calculation of "earned income" i.e. what your RRSP contribution limit is calculated on. Best guess is that you will keep the room and this will only be a 'credit' with no impact on your taxes otherwise - but again, we will see when it is passed how that works out.

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #78 on: November 17, 2014, 07:47:13 PM »
I have a question about taxes for students.

My daughter will turn 18 just before the end of the year and she just started university.  She has earned $2770 gross over the summer and I took out $5000 from her RESP which is the taxed portion (growth/grants).

I still need to make one withdrawal of RESP to pay for second semester but I'm thinking to make the taxed portion be $1900 in order to minimize her taxes.  The rest will be a withdrawal from my contributions.

Is this is the right track?  I plan to use her tuition receipt on my taxes.  Should I be withdrawing more from the taxed RESP portion? 

My tax bracket is much higher but with RRSP contributions I'm hoping to get it under the 87k.

Thanks in advance!

Hi MS

Currently your daughter has earned only about $8,000 in taxable income this year, which is far below the minimum personal and working tax credits available. ($10-$13k, province dependent).

My suggestion would be to utilize taxable withdrawals under your daughter while you have the 'room' in her return to accommodate this additional income without tax consequences, or with minor consequences. You're better to cover her taxes than pay yourself, clearly.

Cheers


c-kat

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #79 on: November 17, 2014, 08:07:35 PM »
Thanks so much for answering these questions. I have a real estate investment tax question.

Two years ago, we converted our townhouse, which was our principal residence at the time, into an investment property and I want to make sure we handled it properly. We did this because we moved to a new house. We took some equity from the townhouse for the 20% downpayment on the new property, and it was our understanding that we could not deduct the interest on this portion on our income taxes.  So this is how we handled it on our income taxes:

-   The Mortgage on townhouse before we moved to our new house was $185,000. This was on a variable LOC mortgage.
-   We borrowed an additional $83,000 for the downpayment on the new house, bringing the mortgage LOC up to $268,000.
-   Our mortgage allows you to create sub accounts so that you can track different different debts at various rates, amortizations etc. and allows you to label each account.  We immediately separated the two into sub accounts. We labeled the $185,000 "mortgage on rental property (with the address)" and the $83,000 as "downpayment on principal residence".
-   The rent is used to pay both mortgages, but when we do our taxes, we have only been deducting the interest that is on the $185,000 sub account.
-   We just replaced the furnace and also borrowed from the property to do so, we opened a third sub account for the furnace and labeled it furnace for rental property. We plan to deduct the interest on this portion as well.

Have we been reporting this properly?

Also, we would like to pay off the non-deductible $83,000 as soon as possible, because we can’t deduct it.  Is there any tax reason we can’t do this? For example, would we be told we also had to pay the tax deductible portion down as well?  I ask because a friend of mine owned a duplex and lived in one side – his single mortgage was for both units and he could only deduct half the mortgage interest, but if he paid down extra, he was told half had to go towards the tax deductible portion, and half to the non-deductible portion, however, his was one mortgage, so he couldn't really differentiate which part of his property it was applied to where as mine is clearly separated.

Thanks so much for the advice.

In addition to my question in the above post, I wanted to ask whether we should be depreciating our rental properties on our income tax?  So far we haven't, instead we've used our RRSP contributions to cancel out any tax we'd owe which kind of sucks because then we don't get any money back. We're just afraid that if we depreciate them we'll owe a lot of money when we sell, although the Canadian housing market is pretty high, so maybe that's not an issue. Do you usually advise depreciating or just paying the taxes? And how does one figure out what the value of the house is without the land?

Also, what are the tax implications of holding US equities in a TFSA? I know an RRSP is better and right now that's where our US stocks are, but we have little contribution room in our RRSP and lots in our TFSA.  Would we only be taxed on dividends in the TFSA, or capital gains too?

Thanks in advance for the advice. :)

Hi C-Kat

Sorry for not replying sooner.

For the rental property - you are correct in assuming that the interest on the $185,000 IS deductible on your rental return, and therefore you should continue to do so.
The additional mortgage payment regarding the furnace is also deductible from an interest perspective.

As far as the furnace is concerned, one can make an argument whether to capitalize and amortize this as an asset, or to expense in the year it is installed. This is a judgment call - if it is a SUBSTANTIAL improvement in efficiency over the previous furnace, then you can lean towards capitalizing - if not, then better to expense. Ultimately you can lean to either side, but if you're looking to save taxes this year then I would expense it.

There are no implications as to which account to pay first. You should pay your mortgage first as it is non-deductible, and pay the other components thereafter.

Depreciation - this is a tricky question which is better discussed from an overall perspective.

It seems that you're familiar with the principal residence exemption for properties, and the rental property is no exception. You can elect this as your principal residence for the years inhabited, plus one year. This means that if you owned the property for ten years, and lived in it for two - 30% of the capital gain is covered by principal residence (2+1 years).

That being said - depreciating the property will lead to limited savings in taxes now (depreciation can't trigger a loss on rental income) but will lead to an increased tax bill when you go to sell the property. Considering you're depreciating at your purchase price, but selling on fair market value in the future, this can work against you if the value increases significantly.

For example - the purchase price is $200,000 - you depreciate $20,000 over time, or 10% of the house. This will save, for arguments sake, $6,000 in tax.

The biggest variables to consider is how much you will depreciate (as a % of the house), how long you will hold the house outside of principal residence, and your expected gain on sale. For any amount depreciated today, this % will be added back to the sale at full tax (called recapture), versus a capital gain which is only 50% taxable.

I generally advise clients to avoid depreciating rental properties. The upside is known in terms of tax savings, but the potential downsides are significant and unknown. With a high capital appreciation in value, you could end up paying 3 to 4 times more in tax than what was saved. It becomes a much safer bet as time progresses and real estate prices increase.

Hope this clarifies all of your questions

Thank you so much for the advice. I've been thinking more about your response and have another question. Will revenue Canada say that I wasn't allowed to borrow the 83K from my house for another purpose?  I'm not deducting the interest, so I assume they don't care and that I can use the equity in my rental for any purpose as long as I don't deduct the interest for it?

Also, you made some interesting points about the principal residence exemption for one year. When we moved to the new house, we immediately rented the townhouse out and we did file a return including the rental income for that year. Was that a mistake?  We just assumed our new house had become our principal residence, but we didn't fill out any change of residence forms. I see them on the CRA site now, but didn't know about them before. Is this a problem?  We've been renting the place out for two years now so its probably too late to submit it now.

Thanks!


CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #80 on: November 18, 2014, 08:27:38 AM »
Thanks so much for answering these questions. I have a real estate investment tax question.

Two years ago, we converted our townhouse, which was our principal residence at the time, into an investment property and I want to make sure we handled it properly. We did this because we moved to a new house. We took some equity from the townhouse for the 20% downpayment on the new property, and it was our understanding that we could not deduct the interest on this portion on our income taxes.  So this is how we handled it on our income taxes:

-   The Mortgage on townhouse before we moved to our new house was $185,000. This was on a variable LOC mortgage.
-   We borrowed an additional $83,000 for the downpayment on the new house, bringing the mortgage LOC up to $268,000.
-   Our mortgage allows you to create sub accounts so that you can track different different debts at various rates, amortizations etc. and allows you to label each account.  We immediately separated the two into sub accounts. We labeled the $185,000 "mortgage on rental property (with the address)" and the $83,000 as "downpayment on principal residence".
-   The rent is used to pay both mortgages, but when we do our taxes, we have only been deducting the interest that is on the $185,000 sub account.
-   We just replaced the furnace and also borrowed from the property to do so, we opened a third sub account for the furnace and labeled it furnace for rental property. We plan to deduct the interest on this portion as well.

Have we been reporting this properly?

Also, we would like to pay off the non-deductible $83,000 as soon as possible, because we can’t deduct it.  Is there any tax reason we can’t do this? For example, would we be told we also had to pay the tax deductible portion down as well?  I ask because a friend of mine owned a duplex and lived in one side – his single mortgage was for both units and he could only deduct half the mortgage interest, but if he paid down extra, he was told half had to go towards the tax deductible portion, and half to the non-deductible portion, however, his was one mortgage, so he couldn't really differentiate which part of his property it was applied to where as mine is clearly separated.

Thanks so much for the advice.

In addition to my question in the above post, I wanted to ask whether we should be depreciating our rental properties on our income tax?  So far we haven't, instead we've used our RRSP contributions to cancel out any tax we'd owe which kind of sucks because then we don't get any money back. We're just afraid that if we depreciate them we'll owe a lot of money when we sell, although the Canadian housing market is pretty high, so maybe that's not an issue. Do you usually advise depreciating or just paying the taxes? And how does one figure out what the value of the house is without the land?

Also, what are the tax implications of holding US equities in a TFSA? I know an RRSP is better and right now that's where our US stocks are, but we have little contribution room in our RRSP and lots in our TFSA.  Would we only be taxed on dividends in the TFSA, or capital gains too?

Thanks in advance for the advice. :)

Hi C-Kat

Sorry for not replying sooner.

For the rental property - you are correct in assuming that the interest on the $185,000 IS deductible on your rental return, and therefore you should continue to do so.
The additional mortgage payment regarding the furnace is also deductible from an interest perspective.

As far as the furnace is concerned, one can make an argument whether to capitalize and amortize this as an asset, or to expense in the year it is installed. This is a judgment call - if it is a SUBSTANTIAL improvement in efficiency over the previous furnace, then you can lean towards capitalizing - if not, then better to expense. Ultimately you can lean to either side, but if you're looking to save taxes this year then I would expense it.

There are no implications as to which account to pay first. You should pay your mortgage first as it is non-deductible, and pay the other components thereafter.

Depreciation - this is a tricky question which is better discussed from an overall perspective.

It seems that you're familiar with the principal residence exemption for properties, and the rental property is no exception. You can elect this as your principal residence for the years inhabited, plus one year. This means that if you owned the property for ten years, and lived in it for two - 30% of the capital gain is covered by principal residence (2+1 years).

That being said - depreciating the property will lead to limited savings in taxes now (depreciation can't trigger a loss on rental income) but will lead to an increased tax bill when you go to sell the property. Considering you're depreciating at your purchase price, but selling on fair market value in the future, this can work against you if the value increases significantly.

For example - the purchase price is $200,000 - you depreciate $20,000 over time, or 10% of the house. This will save, for arguments sake, $6,000 in tax.

The biggest variables to consider is how much you will depreciate (as a % of the house), how long you will hold the house outside of principal residence, and your expected gain on sale. For any amount depreciated today, this % will be added back to the sale at full tax (called recapture), versus a capital gain which is only 50% taxable.

I generally advise clients to avoid depreciating rental properties. The upside is known in terms of tax savings, but the potential downsides are significant and unknown. With a high capital appreciation in value, you could end up paying 3 to 4 times more in tax than what was saved. It becomes a much safer bet as time progresses and real estate prices increase.

Hope this clarifies all of your questions

Thank you so much for the advice. I've been thinking more about your response and have another question. Will revenue Canada say that I wasn't allowed to borrow the 83K from my house for another purpose?  I'm not deducting the interest, so I assume they don't care and that I can use the equity in my rental for any purpose as long as I don't deduct the interest for it?

Also, you made some interesting points about the principal residence exemption for one year. When we moved to the new house, we immediately rented the townhouse out and we did file a return including the rental income for that year. Was that a mistake?  We just assumed our new house had become our principal residence, but we didn't fill out any change of residence forms. I see them on the CRA site now, but didn't know about them before. Is this a problem?  We've been renting the place out for two years now so its probably too late to submit it now.

Thanks!

Hello,

The interest on the mortgage of the rental property is definitely a deductible expense. You're incurring this expense to obtain active income (through rental) and therefore this is a perfectly legitimate and deductible expense. Logistically speaking, it doesn't really matter where the money comes from, so long as the expense is reasonable and serves to create income for you. So any portion of the mortgage allocated to the rental home is deductible, the portion on your new house is not.

As far as principal residence is concerned, you don't need to file paperwork with CRA in this regard, until selling one of the two households in which case you will specify the years elected as your principal residence. As you're renting out the old home, it's clear when you moved, and will be able to claim the total number of calendar years owned (when you were living in the house) PLUS an additional year. So If you lived in the house for 10 years, you can claim 11 years of the PR exemption.

Good luck!

ms

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #81 on: November 18, 2014, 08:48:34 AM »
Currently your daughter has earned only about $8,000 in taxable income this year, which is far below the minimum personal and working tax credits available. ($10-$13k, province dependent).

My suggestion would be to utilize taxable withdrawals under your daughter while you have the 'room' in her return to accommodate this additional income without tax consequences, or with minor consequences. You're better to cover her taxes than pay yourself, clearly.

We're in Ontario. So are we looking at $11,138 as the federal basic personal amount or is it a different number?

Or is your suggestion that I just take out another $5000 taxable from her RESP and then when she does her taxes and has an amount owing, that I'd just pay that amount owing as it's less tax than I would pay?

Thanks!!

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #82 on: November 18, 2014, 03:41:37 PM »
Currently your daughter has earned only about $8,000 in taxable income this year, which is far below the minimum personal and working tax credits available. ($10-$13k, province dependent).

My suggestion would be to utilize taxable withdrawals under your daughter while you have the 'room' in her return to accommodate this additional income without tax consequences, or with minor consequences. You're better to cover her taxes than pay yourself, clearly.

We're in Ontario. So are we looking at $11,138 as the federal basic personal amount or is it a different number?

Or is your suggestion that I just take out another $5000 taxable from her RESP and then when she does her taxes and has an amount owing, that I'd just pay that amount owing as it's less tax than I would pay?

Thanks!!

The tax impact above the $11,138 in total income to around $14-15k would be so negligible that I would recommend putting your cash flow needs from a logistics perspective ahead of tax planning. Plus she'll have some tuition credits which she can use to reduce her balance (doesn't matter you vs. her as they are refundable at 15% only...)


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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #83 on: November 18, 2014, 06:44:24 PM »
I just have to say again: CPA CB, it is SO NICE of you to do this for us all! A lovely Christmas gift :)   Thanks again!

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #84 on: November 19, 2014, 08:07:44 AM »
Currently your daughter has earned only about $8,000 in taxable income this year, which is far below the minimum personal and working tax credits available. ($10-$13k, province dependent).

My suggestion would be to utilize taxable withdrawals under your daughter while you have the 'room' in her return to accommodate this additional income without tax consequences, or with minor consequences. You're better to cover her taxes than pay yourself, clearly.

We're in Ontario. So are we looking at $11,138 as the federal basic personal amount or is it a different number?

Or is your suggestion that I just take out another $5000 taxable from her RESP and then when she does her taxes and has an amount owing, that I'd just pay that amount owing as it's less tax than I would pay?

Thanks!!

The tax impact above the $11,138 in total income to around $14-15k would be so negligible that I would recommend putting your cash flow needs from a logistics perspective ahead of tax planning. Plus she'll have some tuition credits which she can use to reduce her balance (doesn't matter you vs. her as they are refundable at 15% only...)

Increasing the daughter's net income from $11k to $15k will result in her receiving around $80 more in GST credit over the course of the next year. That may actually more than offset the income tax, depending on what nonrefundable credits are available to the daughter, resulting in a tax decrease by earning more income! (Indeed, $15k is quite possibly low enough to completely offset without using the tuition credit, depending on what your daughter has been up to.) I benefited from a similar thing myself when I was a student.

Awesome! I generally don't discuss the credits but this is an excellent point - in some cases a slightly higher 'income' can actually end up being advantageous in this sense.

Thanks Cathy!

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #85 on: November 19, 2014, 08:10:46 AM »
I just have to say again: CPA CB, it is SO NICE of you to do this for us all! A lovely Christmas gift :)   Thanks again!

It's my pleasure! Merry Christmas!

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #86 on: November 24, 2014, 11:58:18 AM »
On investments, what dividends and interest are listed on tax documents? All of them? That is, does it depend on what the source of dividends/interest is invested in?

For example, are dividends and interest created through RRSPs, RESPs, RDSPs, and TFSAs listed on tax slips, and must thus be listed on Schedule 4, Line 120, Line 121, T3 (Statement of Trust Income)? Or are dividends and interest earned in these exempt from being listed there?

Also, dividends that are automatically reinvested, are those listed on the above statements/lines, or are they exempt from being listed on those?

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Principal residence exemptions
« Reply #87 on: November 24, 2014, 03:49:31 PM »
Thank you thank you for your generosity!  I would love to ask you about principal residence exemption. We own a house in toronto (bought 2007) and a cottage (bought 1993/4.) (I realize this matters!)

The toronto home has appreciated by 3-400,000$ and cottage as appreciated 200,000.

What are the rules of the principal residence exemption?

If we sold the toronto house, and used the exemption. Then lived at the cottage for 2-3 years, it would be come our principal residence. If we sold the cottage after living there a while, could it be subject to the exemption too?


MERCI!!

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #88 on: November 24, 2014, 06:04:04 PM »
On investments, what dividends and interest are listed on tax documents? All of them? That is, does it depend on what the source of dividends/interest is invested in?

For example, are dividends and interest created through RRSPs, RESPs, RDSPs, and TFSAs listed on tax slips, and must thus be listed on Schedule 4, Line 120, Line 121, T3 (Statement of Trust Income)? Or are dividends and interest earned in these exempt from being listed there?

Also, dividends that are automatically reinvested, are those listed on the above statements/lines, or are they exempt from being listed on those?

Hi Scrubbyfish

Only the taxable amount is listed on your forms for your tax return... So income earned in the RRSP or TFSA (for example) are not taxable, and therefore wouldn't be listed on any T-slips for your personal tax return... However, if you were to withdraw money from your RRSP, then you would receive a T4-RRSP slip.


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Re: Principal residence exemptions
« Reply #89 on: November 24, 2014, 06:10:39 PM »
Thank you thank you for your generosity!  I would love to ask you about principal residence exemption. We own a house in toronto (bought 2007) and a cottage (bought 1993/4.) (I realize this matters!)

The toronto home has appreciated by 3-400,000$ and cottage as appreciated 200,000.

What are the rules of the principal residence exemption?

If we sold the toronto house, and used the exemption. Then lived at the cottage for 2-3 years, it would be come our principal residence. If we sold the cottage after living there a while, could it be subject to the exemption too?

Hi there -

You can claim both as a principal residence, but not in the same years...

Roughly speaking -

Your house has appreciated by, let's say, $350,000 in the seven years you've been there. This is a gain of $50,000 per year.
Your cottage has appreciated by $200,000 in 20 years - a gain of $10,000 per year.

Elsewhere you'll note I've discussed the "plus one" rule - in that you 'add' a year of eligibility to your principal residence on any property.

So. Your house has the 'highest' marginal gain of $50k per year, so you would claim PR for SIX (that's right, six, not seven) as the plus one rule will top you up to cover the entire gain. I.e. no tax (yay)!

On the cottage, with six years claimed per above, you have 14 remaining years of eligibility. This means that 14+1 years (15) of your 20 years are covered by PR, or 75% of your gain.

Assuming you were selling both at the same time, this means only $50,000 of the gain on your cottage is eligible, and only half of this is taxable. So, you'll pay tax on the $25,000 of taxable capital gains. Obviously by owning the cottage longer, a higher proportion of this gain will be covered by this exemption, but inevitably you'll end up paying some tax when you go to sell it, since the years are better utilized on your home.

Hope this clarifies the process!





MERCI!!

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #90 on: November 24, 2014, 06:30:00 PM »
Only the taxable amount is listed on your forms for your tax return... So income earned in the RRSP or TFSA (for example) are not taxable, and therefore wouldn't be listed on any T-slips for your personal tax return...

Oh! Is income (dividends, interest) earned on money inside any registered program non-taxable? i.e., I only knew that interest earned in the TFSA is not taxable. Is this true of dividends earned in the TFSA, too, and interest and dividends in all registered programs?

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #91 on: November 24, 2014, 08:47:44 PM »
Only the taxable amount is listed on your forms for your tax return... So income earned in the RRSP or TFSA (for example) are not taxable, and therefore wouldn't be listed on any T-slips for your personal tax return...

Oh! Is income (dividends, interest) earned on money inside any registered program non-taxable? i.e., I only knew that interest earned in the TFSA is not taxable. Is this true of dividends earned in the TFSA, too, and interest and dividends in all registered programs?

Any growth inside a registered plan is 'outside' taxation. Anything in a TFSA will NEVER be taxed. Anything you withdraw from an RRSP will be taxed as income (the reverse of the decrease in taxable income when you put the money in), but no growth within the RRSP is taxed. Return of capital, interest, divis - all the same - no tax, nada.

You only get slips for what goes in and what comes out of an RRSP. And nothing at all for the TFSA.
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #92 on: November 24, 2014, 08:59:32 PM »
Thanks, daverobev!

I find this fascinating. I never knew. The impact of even $100 in dividends displaying on a slip/Schedule/Line 120/Line 121 is significant for me, and yet no accountant in four years mentioned this simple solution. Wow.

Wait, this also means I can use the Canadian Couch Potato model portfolios. i.e., I didn't actually need to avoid dividends/interest, only specific amounts on specific lines on my tax return. I thought it was one and the same, and now I understand that it's not.

I'm off to set up my own RDSP tomorrow, which will bring my son and I to a total of three registered accounts between us.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #93 on: November 25, 2014, 03:44:21 PM »
Thanks, daverobev!

I find this fascinating. I never knew. The impact of even $100 in dividends displaying on a slip/Schedule/Line 120/Line 121 is significant for me, and yet no accountant in four years mentioned this simple solution. Wow.

Wait, this also means I can use the Canadian Couch Potato model portfolios. i.e., I didn't actually need to avoid dividends/interest, only specific amounts on specific lines on my tax return. I thought it was one and the same, and now I understand that it's not.

I'm off to set up my own RDSP tomorrow, which will bring my son and I to a total of three registered accounts between us.

That's correct -

The only thing to remember is that you want capital gains in your TFSA, and interest in your RRSP/RDSP.

The reason being that only 50% of capital gains are taxable in Canada, but if they are in your RRSP they are 100% taxable (when you withdraw them).

Good luck opening up the accounts!


daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #94 on: November 25, 2014, 04:45:43 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.
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Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #95 on: November 25, 2014, 05:09:06 PM »
CPA CB is right, and yes, you should put "growth" assets in TFSA. RRSP is sheltered, ´till you pull the money out. Bigger the ammount, bigger the taxes. TFSA will never ever be taxed again.
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #96 on: November 25, 2014, 07:17:14 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


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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #97 on: November 26, 2014, 07:13:16 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

This is not a fair way to compare the TFSA and RRSP. The correct way to compare them is to assume that the 30% "refund" you received from investing into the RRSP was also itself invested into the RRSP. If you model it that way, you will discover that the TFSA and RRSP are exactly equivalent iff your initial and final marginal rate is the same. The only difference is that the TFSA is the superior instrument if your terminal marginal rate will be higher. The RRSP is the superior instrument if your terminal marginal rate will be lower.

The only other thing that's not equivalent is the contribution room rules, which could matter for some people, but ignoring that, the instruments are basically mirror images of each other when correctly compared.

Here's the formal proof:

Using the notation as follows:
x : amount of after-tax dollars to be invested
t : years until retirement
r : rate of return per year, assume annual compounding without loss of generality
a : marginal rate for any additional income now
b : marginal rate for any additional income at retirement

If you invest x into a TFSA, the value of the TFSA at retirement is x*(1+r)**t.

If you invest x/(1-a) into an RRSP (equivalent to x after-tax dollars), the value of the RRSP at retirement after taxes is (1-b)*(x/(1-a))*(1+r)**t.

So the value of the RRSP will exceed the value of the TFSA if and only if (1-b)/(1-a)>1 which is equivalent to a>b, or the original claim stated above, namely that the marginal rate for any additional income now exceeds the marginal rate for any additional income at retirement.


Long story short, for most people on these forums, the RRSP is better than the TFSA if you have room in both, regardless of what you intend to put inside the accounts.

If you intend to retire MMM-style early, RRSP will beat taxable accounts as well, because you will be paying approximately 0% tax at withdrawal (keeping in mind that some of the 4% rule can just be return of principal while you are extracting the contents of the RRSP), so the recharacterisation of capital gains as ordinary income does not hurt you. (If you intend for a more princely retirement, taxable accounts can beat RRSPs in some cases.)

US readers will recognise this is very similar to the situation in the USA except in Canada, you don't need workarounds like the "roth pipeline" because the RRSP allows withdrawing at any time. Indeed, moving to Canada is another way to extract the contents of your US 401(k) or IRA (known in Canada respectively as a "foreign pension plan" and a "foreign retirement arrangement") before the defined ages, because the Income Tax Act allows the contents of those plans to be rolled over into a Canadian RRSP without using any of your RRSP room (subject to some conditions). I may end up benefiting from this if I move back to Canada in the future.

Hello Cathy

Thanks for your response here. It brings up some interesting points.

I wish tax were as simple as your formula presented here - if it were the case I'd be writing this from a beach in the Caribbean (after I patented the equation), rather than the frigid and cloudy land of Canada.

You're correct - my case study was not an accurate reflection of RRSP vs. TFSA - however, it was perfectly accurate in the case of RRSP vs. TFSA in the case of Capital Gains, which was stated up front.

Rather than going through everything - I would like to point out a few errors in your calculation here -

The first being that, if you're withdrawing from an RRSP, you will most certainly be taxed. Returns of Capital in an RRSP are taxable, at your full marginal rate.

Secondly, the comment regarding Mustachianism and withdrawing from an RRSP are patently false - namely the comment that you can live on this income and be taxed at zero percent. If you plan to retire early (as many of us do) and withdraw from your RRSP, you have around $10,000 in withdrawals from an RRSP before getting taxed. If you think $10,000 is enough to live on for a year in Canada (or $20K as two people), I've got some great land to sell you up north that will make you rich... $10k a year in retirement does not a prince make. Plus - this discussion becomes moot once CPP and OAS kick in, which will eat up this room, meaning that your RRSP will now be taxed at a minimum of approximately 20% (not that different from my example, as you'll note).

The last, and biggest logical flaw here I think extends from the fact that my example was purely a capital gains one (for demonstration purposes) rather than a pure RRSP vs. TFSA comparison.

In your example - you state that so long as the marginal rate at retirement is less than the marginal rate today, the RRSP is a better option (in that, when a > b, the RRSP is better). This is a big over-simplification and skews the original question, which was regarding capital gains in these accounts.

In Canada, capital gains are only half-taxable... meaning that you're dealing with a marginal rate on capital gains that is half of what you'd deal with in an RRSP (ceteris paribus). Your equation doesn't factor this in, and treats all income as equally taxable (when they are not. Capital gains, dividends, and interest are all taxed at different rates - outside of RRSP's, where you are taxed at 100% for everything).

This means that your marginal rate today, needs to be significantly higher than in retirement.

To demonstrate, I'll change the figures - same gain, registered vs. non registered. You invest $100k, plus, since you're a high income earner, let's say 50% of that is a tax refund - so you get $150k in total investment.

I'll do the same - but in after-tax dollars... So I effectively "lose" 50k in this example from the start.

Even at the LOWEST possible brackets - you'll be taxed $200,000 (oops. $220,000 - you're taxed on the total amount... this is the only edit...)on your withdrawals (20% up to around 55k per year... accounting for the personal credit etc.). I'll be taxed at 10% - so $100,000. You got $50k up front, but I get $50k more (nominally speaking... not going to deal with PV, as stated, on this one).

There is no example here, where you don't lose in a nominal sense, other than around zero percent (which is fictitious in Canada - see part regarding land for sale above). The only time this breaks even is when the marginal rate is around 10%, ignoring time value of money. The marginal rate in retirement with CPP and OAS will be twice as high, i.e. 20%.

In short - the RRSP is a loser when it comes to capital gains.

Cathy isn't necessarily incorrect in her formula for interest, but with dividends it is more complex, and capital gains is even further. The story here is that in an RRSP you defer income until withdrawal, in a normal account they're triggered upon receipt (i.e. buy/sell stocks, receive dividends etc.) and in a TFSA any gains are not taxable. To say they are the same is to say dogs and fish are the same because they are both animals - in real life, they are entirely different, and very much depend on your situation.

I encourage specificity here, because in tax you need to know everything (age, marital status, expected retirement age, etc etc etc) to figure out what's right for YOU. Generalities are great to demonstrate a point, but are ultimately unrealistic in life. The point being - if you have $10,000 to invest in stocks and bonds, you're better to put the stocks in a TFSA, and the bonds in an RRSP. Growth is great - but you want to avoid double taxation in the case of capital gains in RRSPs.

Also - I wanted to add a caveat to your statement regarding US transfers to Canada. The US-Canada tax treaty is a complicated one - the US taxes on citizenship, and Canada of residency. (i.e. you always file in the US if you're a citizen - which is not the case in Canada. We can retain citizenship, move to the Cayman Islands, and say 'neener neener' to the CRA)

. If you're looking to transfer a 401k or IRA to Canada (RRSP and TFSA, respectively) I would HIGHLY recommend you speak with a qualified CPA (in Canada) who is experienced in these international tax issues - The rules are weird, residency based (in Canada), and definitely ones you want someone who deals with these issues constantly to look at (i.e. not me, who gets a snapshot on a blog... but someone who will go into much more detail). You want to ensure you do it right the first time.

 


 

« Last Edit: November 26, 2014, 07:25:14 AM by CPA CB »

Le Barbu

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #98 on: November 26, 2014, 12:43:56 PM »
Well said, but I would add, dont take chaces, fill both and your "Futur Self" will enjoy ;)
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #99 on: November 26, 2014, 06:56:41 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.