Author Topic: Help needed to INCREASE taxable income (on paper)  (Read 1984 times)

elaine amj

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Help needed to INCREASE taxable income (on paper)
« on: August 21, 2018, 10:16:27 AM »
I need to pick some Mustachian brains - not to decrease taxes, but the other way around this time.

I live in Ontario and am hoping to sponsor my mother to come to Canada to live with me. The Cdn govt requires that all sponsors prove enough income to support my immediate family + my mother. Long story short, I need to prove an income of ~$68,000 this year (and similar levels consistently until our application goes through - which can take a few years). They use our Notice of Assessment to assess income.

However, my husband is currently on long term disability from the insurance company and none of that is taxable,  which means it does not get reported on our taxes and doesn't show up on our NOA.

If we FIRE (I would like to FIRE next year), I am not sure how to go about ensuring we have enough reportable income.

More urgently, this year (in 2018), I only have EI income myself (off on leave to care for my husband) so my income will only be about $30k or so this year.

We did just sell our rental property and capital gains was about $35k so we should be able to report that for this year's income (anyone know if that will show up as $35k or just $17.5k?).

We do have our various investments, etc - I just have no clue how to go about ensuring I have enough income showing on our 2018 NOA. I don't even care if we have to pay more taxes for a little while.

Any suggestions? I'm not even sure what to Google lol. I tried but am only finding strategies on how to reduce taxable income. So frustrated that husband’s disability income cannot be included in these calculations as that would help considerably.

Thanks!!

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Prairie Stash

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #1 on: August 21, 2018, 12:16:46 PM »
Interesting. I'm assuming Net income, not total income. So no RRSP contributons.

On my assesssment it shows capital gains at 50% - $17.5K

Back to RRSP, you can pull from them to inflate your income. Put the extra cash into the TFSA, pay the taxes. It will hurt, its not optimal, but its the simplest way to artificially inflate income that I can think of.

Or, get dividends from stocks in an investment account. Pull all your TFSA money out and buy investments. Those dividends are taxable, which sucks, but thats what you want...I have to check but you may want US dividends, if you buy Canadian I think the Eligible Tax redit might kic=k in and cause a lower Net income.

RichMoose

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #2 on: August 21, 2018, 06:16:36 PM »
Which line on the tax return do they use to calculate your income level? It is important to find out if they use the line before or after deductions are made.

Also, how close are you with your employment income? Is your husband able and permitted to do some work (up to a certain dollar amount)?

elaine amj

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #3 on: August 21, 2018, 08:18:47 PM »
Thanks so much. You both gave me a start in figuring out what questions to ask.

Interesting. I'm assuming Net income, not total income. So no RRSP contributons.

On my assesssment it shows capital gains at 50% - $17.5K

Back to RRSP, you can pull from them to inflate your income. Put the extra cash into the TFSA, pay the taxes. It will hurt, its not optimal, but its the simplest way to artificially inflate income that I can think of.

Or, get dividends from stocks in an investment account. Pull all your TFSA money out and buy investments. Those dividends are taxable, which sucks, but thats what you want...I have to check but you may want US dividends, if you buy Canadian I think the Eligible Tax redit might kic=k in and cause a lower Net income.

Yes, it looks like I can only report taxable capital gains - so just $17.5k instead of $35k. Ugh. (Haha...funny grumbling about wanting to pay more taxes!)

So you think I should pull out some of my RRSP investments? If I do, that will be considered taxable income right? Do I have to actually sell the stocks or just transfer to a non-registered account? My TFSA is full but certainly can set aside money to add to it in January. I can also invest in dividend stocks - but will need enough to provide quite a lot of money in dividends. I need $67k a year in total income!


Which line on the tax return do they use to calculate your income level? It is important to find out if they use the line before or after deductions are made.

Also, how close are you with your employment income? Is your husband able and permitted to do some work (up to a certain dollar amount)?

Right now I expect to have about $25k in income this year. My husband is not capable of working at all. He gets about $48k/yr in disability - if it counted, we wouldn't have a problem.

I found that the income required is based on Line 150 (my taxable income):

Your total income includes:

- Employment income (box 14 of all T4 slips)
- Other employment income (such as tips, gratuities, and occasional earnings)
- Old age security pension (box 18 of the T4A(OAS) slip)
-CPP or QPP benefits (box 20 of the T4A(P)slip)
- Other pensions and superannuation
- Elected split-pension amount
- Universal child care benefit (UCCB)
- Employment insurance and other benefits (box 14 of the T4E slip)
- Taxable amount of dividends (eligible and other than eligible) from taxable corporations
- Interest and other investment income
- Net partnership income: limited or non-active partners only
- Registered disability savings plan income
- Net rental income
- Taxable capital gains
- Taxable portion of support payments you received
- RRSP income (from all T4RSP slips)
- Other income
- Net self-employment income (business or professional activities, commission income, farming, and fishing)
- Worker’s compensation benefits (box 10 of the T5007 slip)
- Social assistance payments and
- Net federal supplements (box 21 of the T4A(OAS) slip)

For 2018, we will likely have about $50-60k in taxable income (especially with the capital gains). So I only have to figure out a plan to show an additional $10k in income.

But if I want to FIRE in 2019 or 2020 - I have no idea how I would show close to $70k in income if neither of us are working. The application process could take years - so I must be able to keep proving income for the next 2-5 years. Kinda wish we hadn't just sold our rental property. It didn't bring in much, but it would have helped a little.

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Linea_Norway

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #4 on: August 22, 2018, 04:49:54 AM »
Can't you send in copies of your husband's disability money to show your income? You see that it doesn't automatically show up, because it is not taxable. But can't you report it separately?

ontheway2

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #5 on: August 22, 2018, 07:25:05 AM »
Are you sure there is no where to report nontaxable income on your taxes? In the states, we can report nontaxable income, but it is not then taxed.

Prairie Stash

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #6 on: August 22, 2018, 09:24:05 AM »
$70k in income in FIRE. $20K from your RRSP, 20K from your husbands, thats $40k. That leaves $30k from your margin account, so you would have to sell a lot of stock there (capital gains).

You can also transfer both your TFSA accounts (husbands and yours) to a margin account. Then as the accounts grow you can sell the stocks to produce taxable capital gains. RRSP transfers also go there as well as the $35 from the house sale. Conceivably, with te TFSA and the house proceeds you should be over $150k in the account, thats a lot of potential for gains to produce incoe (and dividends).

Do you have a margin account?

Your best bet is to continue working, this is scary.

Retire-Canada

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #7 on: August 22, 2018, 10:32:27 AM »
Your best bet is to continue working, this is scary.

Yes. Most of the ways of increasing your income through moving money around come at a significant tax hit. So unless your FIRE savings are way more than you actually need that will hurt right at the time when an early sequence of returns risk is a concern. I'd probably look for the least awful work you can get that meets this income target. Maybe you can work 4 days a week or some other downshifted schedule that is a better lifestyle fit than FT.

If you can I would also talk to a human at the relevant department that handles these applications and run your scenario by them. Websites and documentation are only going to cover the most applicable cases. Your situation is not so far out of the norm that there might not be a way to show financial resources aside from the annual notice of assessment. I'd want to run that down and be sure before I postponed my FIRE half a decade or more.

elaine amj

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #8 on: August 22, 2018, 04:58:31 PM »
Ugh ugh ugh.

Been doing more research and sounds like they are pretty strict on using just the Notice of Assessment. And on the forms, they specifically make you subtract any social assistance, GIS, or unemployment that you receive.

I'm OK paying an extra few thousand dollars in taxes (I can stretch my FIRE budget a little). But you're right - not tens of thousands of dollars.

I was thinking - my FIRE budget is about $60k a year. Wouldn't most of this money be taxable income somehow?

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Retire-Canada

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #9 on: August 22, 2018, 06:03:47 PM »
I was thinking - my FIRE budget is about $60k a year. Wouldn't most of this money be taxable income somehow?

If it's from your RRSP yes. But, I would assume that would be $30K from your RRSP and $30K from DH's RRSP to lower taxes. Are you able to combine incomes for the purposes of your immigration application or does it all have to be on just your NOA?

Spending from your TFSA won't count at all and only a small portion of spending from a Non-Registered account will count [dividends and cap gains].

On the bright side older folks like us typically have massive RRSPs and tiny TFSA accounts so drawing down the RRSP more than needed at investing the excess into the TFSA/NR accounts at least mitigates your potential for large mandatory withdrawals at 71.

RichMoose

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #10 on: August 22, 2018, 07:53:29 PM »
One of the first options that comes to mind is taking a margin loan and buying dividend stocks and/or high interest bond ETF like HYI.TO in your non-registered account.
The dividends should be the grossed up amount at Line 150 giving you an extra taxable income boost on paper.
You may need to adjust your portfolio in your other accounts to reflect your new increased risk.
Of course the taxes on dividends should be low (can't say the same for interest) while your margin interest expenses will be completely tax deductible.
If you're worried about margin calls, a HELOC is another good borrowing option.

elaine amj

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #11 on: August 22, 2018, 08:49:25 PM »
Yes, income from the both of us would count as my husband will co-sign for this. We do have about $350k in RRSPs at present so if we each withdraw $30k/year, will that give us $60k taxable income?

This is a possibility then. I was starting to think there was no other option other than to keep working. My FIRE budget isn't padded well enough to sustain paying tens of thousands in extra taxes.

Really kinda sucks that we will have to do this just when we are at the stage where we could dream of very low taxes. Or maybe I should just keep working.

@RichMoose I understood about 1 word in 10 but your suggestion bears further investigation.

Starting to think of wild scenarios like buying a multiunit rental or something haha.

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RichMoose

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #12 on: August 23, 2018, 06:01:01 PM »
@RichMoose I understood about 1 word in 10 but your suggestion bears further investigation.
Sorry, I should try clarify.

Regarding the dividends, eligible Canadian dividends are grossed up 38% before the tax credit applies. For example, lets say you have $300,000 in your non-registered investment account invested in Canadian dividend payers that yield an average of 4% per year. That would be an income of $12,000/yr for you. However, on Line 150 of your tax return, it would actually show as an income of $16,560. Later on, at Line 425 the dividend tax credit applies which could lower your effective tax rate on that $16,560 to as low as -6.86%.

This makes eligible Canadian dividend income the best method to increase your taxable Line 150 income. It is MUCH better than realizing capital gains because they are actually included at just 50% of the gain at line 150.

However, if you have lots of capital gains that you can realize, it could be a wise decision to harvest those gains to fictionally increase your income while at the same time increase your adjusted cost base of your investments. That could significantly lower your tax liability down the road. I'm not trying to pump my blog here, but to give you a better idea of understanding this process I talk a bit about that with an example in this post: http://therichmoose.com/post20171219/
The important thing to remember is you can sell a profitable position, realize gains and repurchase the same investment immediately if you sell the position for a gain. Do not sell a position that is at a loss and repurchase the position within 31 days as it would be considered a superficial loss and the tax loss would be denied.

I would probably disregard my suggestion about margin loans or HELOC loans for investing. It is an advanced strategy and could go very wrong if not done carefully.

Finally, withdrawing from RRSPs to realize income is another decent strategy. Just remember, you can only apply the income to the person that holds the RRSP account. Ie. If it is your RRSP, you can only apply the withdrawal to your taxable income. You cannot split the income. (If you are over 65 there are some other options, but not sure you fit into that category).
If you and your DH both have RRSP accounts, or if you have a Spousal RRSP where your DH is the recipient, then you can split the income $30,000 each or similar.

Other than that... buying a multi-unit rental to try pump up income temporarily is probably a bad idea! ;)

elaine amj

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #13 on: August 23, 2018, 06:14:51 PM »
Lots of good stuff! Especially since I will definitely have to use a strategy or two this year since I will likely be short about $10-20k this year.

With RRSP withdrawal, does it count as income if I put it straight into non-registered investments? I imagine if I am just moving it over, I won't have to actually sell those funds?

The realizing capital gains just playing around a bit with selling and immediately repurchasing is not a bad idea either. Bonus points for lowering taxes in the future.

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« Last Edit: August 23, 2018, 06:18:46 PM by elaine amj »

Retire-Canada

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #14 on: August 23, 2018, 06:35:18 PM »
With RRSP withdrawal, does it count as income if I put it straight into non-registered investments? I imagine if I am just moving it over, I won't have to actually sell those funds?

The realizing capital gains just playing around a bit with selling and immediately repurchasing is not a bad idea either. Bonus points for lowering taxes in the future.

You are "selling" funds in you RRSP whether or not you get cash and then move the cash over to a TFSA/NR account or if you transfer the funds in kind. In the latter case you'd pay taxes on the full value at the time of transfer and that counts as income.

If you sell investments in your Non-Registered accounts and want to buy essentially the exact same investments again you need to wait 30 days to do so. If you sold Canadian equities on day 1 to claim capital gains income you can't buy them again for 30 days.**  OTOH you could buy US equities or international equities and then later sell those after 30 days and buy Canadian equities again.

The other thing to consider is that if you have $300K in a fund in your Non-Registered account and you paid $200K for those shares. When you sell it your capital gains income is $300K - $200K = $100K x 50% = $50K. So selling all $300K nets you an income bump of $50K in this case. You'll have to look at your specific details to see how much capital gains you have available to harvest in this way.

** - if you can find a different Canadian equities fund that tracks a different index or something you can show is clearly "not superficially the same" you can invest the money back into Canadian equities right away.
« Last Edit: August 23, 2018, 06:55:06 PM by Retire-Canada »

Retire-Canada

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #15 on: August 23, 2018, 06:35:33 PM »
Regarding the dividends, eligible Canadian dividends are grossed up 38% before the tax credit applies. For example, lets say you have $300,000 in your non-registered investment account invested in Canadian dividend payers that yield an average of 4% per year. That would be an income of $12,000/yr for you. However, on Line 150 of your tax return, it would actually show as an income of $16,560. Later on, at Line 425 the dividend tax credit applies which could lower your effective tax rate on that $16,560 to as low as -6.86%.

Is there a dividend heavy Canadian equities fund you'd recommend that kicks out 4%?

RichMoose

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Re: Help needed to INCREASE taxable income (on paper)
« Reply #16 on: August 23, 2018, 06:52:07 PM »
Regarding the dividends, eligible Canadian dividends are grossed up 38% before the tax credit applies. For example, lets say you have $300,000 in your non-registered investment account invested in Canadian dividend payers that yield an average of 4% per year. That would be an income of $12,000/yr for you. However, on Line 150 of your tax return, it would actually show as an income of $16,560. Later on, at Line 425 the dividend tax credit applies which could lower your effective tax rate on that $16,560 to as low as -6.86%.

Is there a dividend heavy Canadian equities fund you'd recommend that kicks out 4%?
XDIV.TO or ZDV.TO could be good choices.

If it was me personally and I had over $300,000 I would tilt to buying a custom portfolio with around 20 stocks.