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Learning, Sharing, and Teaching => Taxes => Canada Tax Discussion => Topic started by: CPA CB on October 15, 2014, 03:12:10 PM

Title: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 15, 2014, 03:12:10 PM
Hey MMM'ers

I'm a Canadian Chartered Accountant with a significant amount of tax experience.

Just throwing this out there - this is the time to reassess your taxes and get questions answered. The holidays is far too late for appropriate tax planning.

If you have questions about Can"eh"dian taxes - I would be more than happy to offer the MMM discount of free advice. I hope this can serve as a reference point for future discussions for those of us who choose to live in Igloo's and drink Maple Syrup, as the tax discussions in the forum tend to revolve around our Southern NeighBOURS.

You ask - I'll do my best to answer based on what you provide.

Let the boring tax discussion begin!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Guses on October 15, 2014, 03:41:11 PM
I have a tough one for you:

What is the best province/territory to live in  in order to pay as little taxes as possible.

You may assume the following:
2 adults and 1-2 kids
Around 40,000$ income (your choice of capital gain, eligible dividend, RESP withdrawal, pension income)

Follow up question: Is it possible to pay 0$ taxes (you can adjust the source of income)?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: TrMama on October 15, 2014, 05:19:41 PM
I am a Canadian employed by the Canadian branch of a US company. I participated in their ESPP and now hold several thousand US dollars worth of their stock. There were several purchases made at different price points at quarterly intervals. I will make a profit on the stock.

How do I calculate the amount of tax owed when I sell it and how can I minimize my tax bill beyond dumping all the money into my RSP?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 15, 2014, 06:08:03 PM
Hi Guses,

Interesting question -

The best province to live in from a tax perspective is Alberta, which has the lowest provincial, sales, and other extraneous taxes (fuel, liquor, etc.).

What is the nature of the income? Is it passive (investment) income? Are you operating a business?

Pension income can be split between spouses up to 50%. At $40k this would net relatively little in tax. I would guess around $3,000.

Without knowing a bit more, it would be tricky to give you a relevant answer - as I can't tell if this is earned or passive income, and whether you're working as an employee, operating a business, or are FIRE'd and loving life.

It is ABSOLUTELY possible to pay $0 tax personally on income. A great strategy is to incorporate your business or income stream, and include yourself, your wife, and your children as shareholders in separate classes of shares. After paying 15-18% tax on corporate earnings, you can distribute approximately $100k of dividends to yourself, spouse, and children (above 18), without paying personal income tax.

If you can add a bit more context I could tailor this a bit more to you specifically.

 
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Guses on October 15, 2014, 06:24:52 PM
Thanks for the answer CB.

We are contemplating moving (open to USA or Canada) once we FIRE. We are aiming to receive around 40,000$ in income per year from different sources and are looking at structuring this in the most efficient way possible.

We have a pension lined up when we are 50+ (12-30K$) and will have several hundred thousands in investments split among TFSA, RESP and taxable. A rental could also be part of the question.

For reference, this is in 6 or 7 years so we have time to think this through.

 
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: going2ER on October 16, 2014, 10:36:28 AM
So, if earning in the $60-70K range, how much should I invest in RRSP's to reduce paying income tax? Someone had told me that for every $1000 put into an RRSP I would get a $300 credit, but they didn't know if it was different in each tax bracket, which I would think it would be.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on October 16, 2014, 10:38:23 AM
So, if earning in the $60-70K range, how much should I invest in RRSP's to reduce paying income tax? Someone had told me that for every $1000 put into an RRSP I would get a $300 credit, but they didn't know if it was different in each tax bracket, which I would think it would be.

Which province are you in? It will make a bit of difference.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 16, 2014, 10:38:56 AM
Hi TrMama.

Great question.

Participating in an ESPP is a great way to invest, as typically speaking there is an inherent 'benefit' (in the way of reduced purchase prices, etc) available.

To answer your question - calculating taxes payable is a multi-step procedure.

1) Determine the fair market value of the shares you purchased as of the acquisition date. This will vary based on the date you purchase the shares. Add to reach a total amount of FMV, adjusting by the exchange rate at each purchase date (assuming they are USD shares). I'll assume $100K in this example. This is your adjusted cost base.

2) What did you buy the shares for? Same as above - adjust for the exchange rate on each purchase date to reach your out of pocket cost. I'll assume $50K. This is your purchase price.

Now, let's assume you purchased 100 shares. You paid $0.50 cents a share, for shares work $1.00 at the time (on average). If the value of the shares today is $1.25. If you sell all of them, your proceeds of disposition is $125,000. Assuming a 50% tax rate, it looks something like this.

Gain from $50 to $100K - FULLY Taxable as a "taxable benefit". This means your tax bill will be half of this gain, or $25,000.
Gain from $100 to $125K is a Capital Gain, which is only 'half' taxable. So your taxable capital gain is $12,500, and this is taxed at 50%. Tax bill on this of $6,250.

All in all - you'd end up paying $31,250 in total taxes by triggering the gain.

As far as tax-free transfers go - your best bets are to use any room in your TFSA or RRSP in terms of delaying taxes.

Alternately, if the amount is significant there are better ways to defer taxes, if the funds aren't needed. One way is to roll the shares into something called an 'inter-vivos' trust with your children listed as beneficiaries. This allows for deductions against income earned in the trust for childcare expenses, and also provides a tax efficient method to pay for their University education (as they will take the income, and not you) if you choose to do so.

In any case, I highly recommend discussing your options with your tax accountant before going forward with any transaction. It's far better to plan ahead if the amount is significant to ensure the correct tax minimization strategy is in place.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: TrMama on October 16, 2014, 10:49:02 AM
So, if earning in the $60-70K range, how much should I invest in RRSP's to reduce paying income tax? Someone had told me that for every $1000 put into an RRSP I would get a $300 credit, but they didn't know if it was different in each tax bracket, which I would think it would be.

Which province are you in? It will make a bit of difference.

It also depends on how much RSP room you have available. Check your latest Notice of Assessment to find out how much you're allowed to deduct.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Meggslynn on October 16, 2014, 10:59:27 AM
Hey MMM'ers

I'm a Canadian Chartered Accountant with a significant amount of tax experience.

Just throwing this out there - this is the time to reassess your taxes and get questions answered. The holidays is far too late for appropriate tax planning.

If you have questions about Can"eh"dian taxes - I would be more than happy to offer the MMM discount of free advice. I hope this can serve as a reference point for future discussions for those of us who choose to live in Igloo's and drink Maple Syrup, as the tax discussions in the forum tend to revolve around our Southern NeighBOURS.

You ask - I'll do my best to answer based on what you provide.

Let the boring tax discussion begin!



Love the bolded above! Thanks for offering this service. I don't have any questions at this time but that might change :)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: TrMama on October 16, 2014, 11:00:53 AM

To answer your question - calculating taxes payable is a multi-step procedure.


Thanks very much. You have fully confirmed for me that this particular ESPP has a very high PITA factor and several levels of risk. Once I liquidate my remaining shares, I'm pretty sure I won't participate again. I simply can't afford to buy enough of this stock to make it worth the accounting headache.

There's an 18 month mandatory hold between when I buy the shares (at a discount) and when I can sell them, plus the exchange rate is another wild card. Right now the exchange rate is great but the stock price is average. Shares must also be held in a taxable account.

What is the tax rate for a gain of under $10K?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Koogie on October 16, 2014, 11:57:37 AM
Thanks for the offer.  I live in Ontario and own two CCPC companies (Opco and Holdco).   All the retained earnings are flowed up to the parent - Holdco.   I invest quite a lot in GICs for the business funds and want to take advantage of a special interest rate being offered by a bank that I already have a GIC at (this would put me over the CDIC coverage).

So, question is, are there any tax issues arising from moving money back from Holdco to Opco and having Opco hold the 5 year GIC ?   (in order to increase the CDIC coverage)

I understand the liability issue of Opco holding the GIC.
I also understand (I think) that the loan from Holdco to Opco to purchase the GIC would be considered secured debt in the case of Opco going belly up for some reason.

Cheers.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: grmagne on October 16, 2014, 12:15:54 PM
Hi CPA,

I have a question on behalf of my wife: her small Toronto-based not-for-profit company sometimes receives donations in US dollars. They convert them to Canadian dollars then later pay some of their contractors in US dollars. I told them that they're wasting 3% (1.5% each way) on conversion costs and that they should open a US dollar account with a Canadian bank. But they won't do it because they're worried the IRS can tax them if they hold $US. I say no way the IRS can come after them just for holding US dollars. Who's right?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on October 16, 2014, 12:30:12 PM
CPA CB, thanks for joining the forum and offering this. I would like to share my scenario and see if you have any critiques of my plan from a tax perspective.

Current income: me ~$95,000, wife ~$60,000. My wife just graduated from uni and started this job so she will earn about ~$40,000 this year. We live in AB and no kids and won't be having any for at least 5 years, barring surprises. Cheers for finally getting to a DINK situation! We both have DB pension jobs with similar lucrative pensions and expected retirement pension income. I don't anticipate large future raises for myself. My income should be pretty stable in the $95 - $100 range for the foreseeable future, adjusted 3% annually for inflation.

RRSP room: me $51,000, wife $24,000. Not including this years contributions/accumulation. I received a pension lump sum payment this year due to a career change and received $18,000 excess portion that comes off my RRSP room so I guess I really have $33,000. I accumulate about $8,500 per year in new room after my PA. My wife will accumulate somewhat less than that, I'm guessing ~$6,000 per year after PA.

TFSA room: me $37,000 , wife $25,500. Not including this years contributions/accumulation.

Due to my current higher income, my wife getting substantial raises until she tops out at about $85000, my wife being 3 years younger than I am, and my wife having significant unused tuition credits (Fed $16k AB $32k), I decided to focus on my side of the equation first.

This year I will be contributing $25,000 to my RRSP (above the pension transfer) and at least $11,000 to my TFSA. Next year I plan on contributing about $16,000 to my RRSP and should be "caught up" on my excess RRSP room and will try to contribute at least $20,000 to my TFSA. From that point on, I will be contributing as much to my RRSP and TFSA as I can going forward.

As for my wife, I will contribute $5,000 to her TFSA this year and I will try contribute at least $20,000 to her TFSA next year. From that point on her tuition credits will be used up and I will top up her RRSP to max it out kind of evenly over a two year period (like I am doing) and will max out her TFSA every year.

In the future, we will invest "extra" savings in a taxable account in Canadian dividend growth stocks split evenly between my wife and I, or if King Harper comes through for us and doubles the annual TFSA contribution limit I would invest in that first.

I have a rough 15 year goal to have a paid off mortgage (projected 12.5 years with current payments & interest rate) and be completely FI. At that point, depending on the career and kid situation, we would likely sell our house and move back to our home province of BC where both our parents live. We would maybe start a small business to keep busy and help pay some bills. Due to their lifestyle, I fully anticipate helping our parents out financially and physically to some extent in their old age. We live quite frugally and our monthly living expenses are about $3000 - $3500 including the mortgage.

Sorry for the long post. I know we are doing quite well from a savings perspective, but am I missing anything from a current tax or future tax view?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: going2ER on October 16, 2014, 12:47:19 PM
So, if earning in the $60-70K range, how much should I invest in RRSP's to reduce paying income tax? Someone had told me that for every $1000 put into an RRSP I would get a $300 credit, but they didn't know if it was different in each tax bracket, which I would think it would be.

Which province are you in? It will make a bit of difference.

I am in Nova Scotia.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: totoro on October 16, 2014, 12:50:59 PM
Awesome.

I have a lot of retained earnings in my law corporation.  After some research I determined it was best invested in business expansion, subsequent sale of shares (for capital gains exemption), and then a mixed use building with 60% of the floor space used for active business operations (for capital gains exemption).

What do you think?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on October 16, 2014, 02:17:04 PM
So, if earning in the $60-70K range, how much should I invest in RRSP's to reduce paying income tax? Someone had told me that for every $1000 put into an RRSP I would get a $300 credit, but they didn't know if it was different in each tax bracket, which I would think it would be.

I am in Nova Scotia.

I don't intend to mislead you or steal CPA CB's thunder, but I would say that you could invest the full 18% of your gross income if your expenses are low enough. It still won't get you down to the $43953 income level where you get the big jump. NS does have a tax bracket at $59180, but it jumps only ~1.75% there so not a big difference. You should also try and figure out what your current and expected RE expenses will be. If your annual spending is between $43953 and $59180, you may just want to invest a smaller amount in your RRSP and top your TFSA instead. Play around with some scenarios on this: http://www.taxtips.ca/calculators/canadian-tax/canadian-tax-calculator.htm . You will be able to see exactly how much RRSP contributions will benefit you and how much your RRSP credit will be including %.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 16, 2014, 04:46:52 PM

To answer your question - calculating taxes payable is a multi-step procedure.


Thanks very much. You have fully confirmed for me that this particular ESPP has a very high PITA factor and several levels of risk. Once I liquidate my remaining shares, I'm pretty sure I won't participate again. I simply can't afford to buy enough of this stock to make it worth the accounting headache.

There's an 18 month mandatory hold between when I buy the shares (at a discount) and when I can sell them, plus the exchange rate is another wild card. Right now the exchange rate is great but the stock price is average. Shares must also be held in a taxable account.

What is the tax rate for a gain of under $10K?

Hi there -

The tax rate for a capital gain of $10,000 is your marginal tax rate divided by 2. So if you pay 30% - the rate is 15%. Just remember in your case a portion will be a taxable benefit at the 30% and the remainder at 15%.

You can find your marginal rates by looking at Canada Revenue Agency's website - they break down rates by income bracket for federal, provincial and combined.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 16, 2014, 04:53:32 PM
Thanks for the offer.  I live in Ontario and own two CCPC companies (Opco and Holdco).   All the retained earnings are flowed up to the parent - Holdco.   I invest quite a lot in GICs for the business funds and want to take advantage of a special interest rate being offered by a bank that I already have a GIC at (this would put me over the CDIC coverage).

So, question is, are there any tax issues arising from moving money back from Holdco to Opco and having Opco hold the 5 year GIC ?   (in order to increase the CDIC coverage)

I understand the liability issue of Opco holding the GIC.
I also understand (I think) that the loan from Holdco to Opco to purchase the GIC would be considered secured debt in the case of Opco going belly up for some reason.

Cheers.

Great question

It is possible to transfer funds back to the Opco as a related party transaction with no tax consequences.

That being said - are you so concerned with the CDIC to warrant the risk of holding the GIC's in your operating company? Generally the purpose of a Holdco is to limit your liability in the Opco without triggering a tax liability, so as to avoid the potential of losing the asset in the case of bankruptcy, lawsuits, etc.

This isn't necessarily a secured loan, you would have to draft up paperwork to secure the value of the loan against the investment asset.

Frankly, it sounds like a headache when compared to the relative low risk of losing funds through CDIC, especially considering these are GIC's which already bear the lowest risk.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 16, 2014, 04:54:33 PM
Hi CPA,

I have a question on behalf of my wife: her small Toronto-based not-for-profit company sometimes receives donations in US dollars. They convert them to Canadian dollars then later pay some of their contractors in US dollars. I told them that they're wasting 3% (1.5% each way) on conversion costs and that they should open a US dollar account with a Canadian bank. But they won't do it because they're worried the IRS can tax them if they hold $US. I say no way the IRS can come after them just for holding US dollars. Who's right?

You're correct! Holding US Dollars in a Canadian Bank Account has no implications with the IRS.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 16, 2014, 05:05:15 PM
CPA CB, thanks for joining the forum and offering this. I would like to share my scenario and see if you have any critiques of my plan from a tax perspective.

Current income: me ~$95,000, wife ~$60,000. My wife just graduated from uni and started this job so she will earn about ~$40,000 this year. We live in AB and no kids and won't be having any for at least 5 years, barring surprises. Cheers for finally getting to a DINK situation! We both have DB pension jobs with similar lucrative pensions and expected retirement pension income. I don't anticipate large future raises for myself. My income should be pretty stable in the $95 - $100 range for the foreseeable future, adjusted 3% annually for inflation.

RRSP room: me $51,000, wife $24,000. Not including this years contributions/accumulation. I received a pension lump sum payment this year due to a career change and received $18,000 excess portion that comes off my RRSP room so I guess I really have $33,000. I accumulate about $8,500 per year in new room after my PA. My wife will accumulate somewhat less than that, I'm guessing ~$6,000 per year after PA.

TFSA room: me $37,000 , wife $25,500. Not including this years contributions/accumulation.

Due to my current higher income, my wife getting substantial raises until she tops out at about $85000, my wife being 3 years younger than I am, and my wife having significant unused tuition credits (Fed $16k AB $32k), I decided to focus on my side of the equation first.

This year I will be contributing $25,000 to my RRSP (above the pension transfer) and at least $11,000 to my TFSA. Next year I plan on contributing about $16,000 to my RRSP and should be "caught up" on my excess RRSP room and will try to contribute at least $20,000 to my TFSA. From that point on, I will be contributing as much to my RRSP and TFSA as I can going forward.

As for my wife, I will contribute $5,000 to her TFSA this year and I will try contribute at least $20,000 to her TFSA next year. From that point on her tuition credits will be used up and I will top up her RRSP to max it out kind of evenly over a two year period (like I am doing) and will max out her TFSA every year.

In the future, we will invest "extra" savings in a taxable account in Canadian dividend growth stocks split evenly between my wife and I, or if King Harper comes through for us and doubles the annual TFSA contribution limit I would invest in that first.

I have a rough 15 year goal to have a paid off mortgage (projected 12.5 years with current payments & interest rate) and be completely FI. At that point, depending on the career and kid situation, we would likely sell our house and move back to our home province of BC where both our parents live. We would maybe start a small business to keep busy and help pay some bills. Due to their lifestyle, I fully anticipate helping our parents out financially and physically to some extent in their old age. We live quite frugally and our monthly living expenses are about $3000 - $3500 including the mortgage.

Sorry for the long post. I know we are doing quite well from a savings perspective, but am I missing anything from a current tax or future tax view?

Congratulations! It sounds like you're both on your way to FIRE soon.

With regards to your question, there are two major things I want to point out.

1) Your wife's tuition credits are available to you as well. You can transfer up to $5,000 of credits per year from her, so long as she is claiming $5,000 as well. Ultimately, you can use up these faster by taking advantage of this sooner rather than later.

2) As far as TFSA and RRSP strategy from a dollar value is concerned, it really depends on how you plan to invest the money, rather than the quantum of the investment.

TFSA's offer an excellent investment opportunity for any future capital gains. This means if you're looking to purchase stocks and ETF's - you want to pour capital into the TFSA first, and RRSP second. The reason being that the capital gains are sheltered in a TFSA (as withdrawals are tax free), whereas you will pay 2 times more than necessary on capital gains in an RRSP, by virtue that it is treated strictly as 'income'.

If you're looking for fixed income investments - then RRSP's are a better option as you can take advantage of the tax credit, and suffer no adverse consequences.

When you go to set up your small business in the future, I would recommend listing your parents as preferred shareholders. This will give you the ability to distribute funds to them on a pre-tax basis via dividend (without giving up control of the corporation), and people with no income can receive around $20-$30k tax free in dividends per annum. 

Hope this helps!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 16, 2014, 05:16:08 PM
Awesome.

I have a lot of retained earnings in my law corporation.  After some research I determined it was best invested in business expansion, subsequent sale of shares (for capital gains exemption), and then a mixed use building with 60% of the floor space used for active business operations (for capital gains exemption).

What do you think?

Hi Tortoro

Can you be more specific with regards to this capital gains exemption? Are you talking about the qualified small business corporation exemption (QSBCD)?

If this is the case, my first question is: Are you looking to divest of your practice in the next two years? If not, then worrying about QSBCD should be the furthest thing from your mind.

There are some options available that I think would be better suited to you.

Option 1: The practice (Opco) lends the money to a new corporation (LandCo) which purchases the building. Add your children or spouse if applicable as non-controlling shareholders so you can income split. At this point, LandCo can rent the property to Opco, and reduce the liability by the rental value on a monthly basis.

Option 2: This is a bit unconventional but is becoming more popular, especially with professionals. Do you have a Universal Life Insurance policy in your name?

If so, you can elect for the practice to purchase the policy from you at fair market value, and defer the tax gain until the realization of the plan (i.e. death) at which point the proceeds are taxable under the corporation (at a lesser rate).

It's a great way to pull money out of a corporation and defer the tax consequences into the future.

Hope this helps
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on October 16, 2014, 05:34:34 PM
1) Your wife's tuition credits are available to you as well. You can transfer up to $5,000 of credits per year from her, so long as she is claiming $5,000 as well. Ultimately, you can use up these faster by taking advantage of this sooner rather than later.

When you go to set up your small business in the future, I would recommend listing your parents as preferred shareholders. This will give you the ability to distribute funds to them on a pre-tax basis via dividend (without giving up control of the corporation), and people with no income can receive around $20-$30k tax free in dividends per annum. 

Hope this helps!

Thanks again! On point 1 I wasn't sure how it was going to work; I remember there being a rule about transferring amounts to spouses from previous years. For 2014 I know I can take some of her tuition credits because she was in school from Jan - May. Something to tackle come tax time I guess, but yes I will try claim as much of those as I possibly can due to my higher income.

I really like your suggestion related to the small business shareholder set-up. I know it's a little ways down the road for us yet, but this definitely would be a fantastic way to generate income to help our parents at minimal tax cost. We should have enough money to financially support our own lifestyle at a 3 - 4% withdrawal rate. It does sound a little funny that we would be working for the sole reason of supporting our parents, but a little work keeps us all sane I suppose.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: lifejoy on October 16, 2014, 05:37:46 PM
Let me start off with a BIG thank you, eh?! Awesome thread, and mega appreciation for your starting it.

Question: right now our taxes are pretty straightforward, but in the future they will be more complicated (mo' money, mo' problems). Would you recommend that we learn the ins and outs ourselves (got any resources?) or find a savvy and trustworthy accountant (how? Any tips?)

Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: totoro on October 16, 2014, 09:23:17 PM
Awesome.

I have a lot of retained earnings in my law corporation.  After some research I determined it was best invested in business expansion, subsequent sale of shares (for capital gains exemption), and then a mixed use building with 60% of the floor space used for active business operations (for capital gains exemption).

What do you think?

Hi Tortoro

Can you be more specific with regards to this capital gains exemption? Are you talking about the qualified small business corporation exemption (QSBCD)?

If this is the case, my first question is: Are you looking to divest of your practice in the next two years? If not, then worrying about QSBCD should be the furthest thing from your mind.

There are some options available that I think would be better suited to you.

Option 1: The practice (Opco) lends the money to a new corporation (LandCo) which purchases the building. Add your children or spouse if applicable as non-controlling shareholders so you can income split. At this point, LandCo can rent the property to Opco, and reduce the liability by the rental value on a monthly basis.

Option 2: This is a bit unconventional but is becoming more popular, especially with professionals. Do you have a Universal Life Insurance policy in your name?

If so, you can elect for the practice to purchase the policy from you at fair market value, and defer the tax gain until the realization of the plan (i.e. death) at which point the proceeds are taxable under the corporation (at a lesser rate).

It's a great way to pull money out of a corporation and defer the tax consequences into the future.

Hope this helps

Yes to QSBDC.  I do plan to sell 60% in 10% increments starting next year.

Yes to option one.  That is how I plan to purchase the building.

No to option two.  Why not?  Not sure, I looked into it and thought "no" at the time but now cannot recollect why.  I will review and look get back to you.  Maybe I was incorrect.

Let me know if you have a legal question.  Happy to provide an answer.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Koogie on October 17, 2014, 07:38:45 AM

Great question

It is possible to transfer funds back to the Opco as a related party transaction with no tax consequences.

That being said - are you so concerned with the CDIC to warrant the risk of holding the GIC's in your operating company? Generally the purpose of a Holdco is to limit your liability in the Opco without triggering a tax liability, so as to avoid the potential of losing the asset in the case of bankruptcy, lawsuits, etc.

This isn't necessarily a secured loan, you would have to draft up paperwork to secure the value of the loan against the investment asset.

Frankly, it sounds like a headache when compared to the relative low risk of losing funds through CDIC, especially considering these are GIC's which already bear the lowest risk.
[/quote]

Thanks very much.  Greatly appreciate your input.  Yes, the basic question I suppose is (if there are no other tax implications) trading the liability of putting the funds back into the Opco versus the liability of having no CDIC coverage by keeping the funds in the Holdco.      Something I will have to mull over.

Cheers.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 17, 2014, 08:46:55 AM
Let me start off with a BIG thank you, eh?! Awesome thread, and mega appreciation for your starting it.

Question: right now our taxes are pretty straightforward, but in the future they will be more complicated (mo' money, mo' problems). Would you recommend that we learn the ins and outs ourselves (got any resources?) or find a savvy and trustworthy accountant (how? Any tips?)

Thanks!

Hi LibraryJoy

I'd like to think I'm a savvy and trustworthy accountant!

There are a few things to remember on your quest to learn a bit more

1) There's tax accounting in theory, and tax accounting in practice - generally speaking, these tend to be quite different from one another.

2) The biggest issue with simple tax returns is the preparer. Changing people consistently, or doing it yourself can often lead to inconsistencies - sometimes you take a certain credit, the next year you forget it, etc. The biggest benefit (other than not doing your own taxes) that we offer is consistency, which means that as time goes on you'll have a continuously updated tax return in line with current tax laws.

When you say mo' money mo' problems - can you expand on how you see your situation becoming more complex? Perhaps I can provide some insight, and make it less problems.

Cheers
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 17, 2014, 08:55:37 AM
Awesome.

I have a lot of retained earnings in my law corporation.  After some research I determined it was best invested in business expansion, subsequent sale of shares (for capital gains exemption), and then a mixed use building with 60% of the floor space used for active business operations (for capital gains exemption).

What do you think?

Hi Tortoro

Can you be more specific with regards to this capital gains exemption? Are you talking about the qualified small business corporation exemption (QSBCD)?

If this is the case, my first question is: Are you looking to divest of your practice in the next two years? If not, then worrying about QSBCD should be the furthest thing from your mind.

There are some options available that I think would be better suited to you.

Option 1: The practice (Opco) lends the money to a new corporation (LandCo) which purchases the building. Add your children or spouse if applicable as non-controlling shareholders so you can income split. At this point, LandCo can rent the property to Opco, and reduce the liability by the rental value on a monthly basis.

Option 2: This is a bit unconventional but is becoming more popular, especially with professionals. Do you have a Universal Life Insurance policy in your name?

If so, you can elect for the practice to purchase the policy from you at fair market value, and defer the tax gain until the realization of the plan (i.e. death) at which point the proceeds are taxable under the corporation (at a lesser rate).

It's a great way to pull money out of a corporation and defer the tax consequences into the future.

Hope this helps

Yes to QSBDC.  I do plan to sell 60% in 10% increments starting next year.

Yes to option one.  That is how I plan to purchase the building.

No to option two.  Why not?  Not sure, I looked into it and thought "no" at the time but now cannot recollect why.  I will review and look get back to you.  Maybe I was incorrect.

Let me know if you have a legal question.  Happy to provide an answer.

Sure - please do get back to me with regards to point 2.

As far as the QSBCD is concerned, my one comment with your proposed sale is that what you're proposing will make it difficult to be in line with the exemption.

One qualification is that you need to reach the 90 percent FMV asset test at the time of each disposition, each and every time. While this isn't impossible, it will likely lead to a fair bit of juggling within the P.Corp to ensure you continuously meet this threshold.

Do you know what the Paid-Up Capital of your corporation is? Remember to disburse any of this prior to the sale, otherwise you're basically giving away tax-free capital.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: totoro on October 17, 2014, 10:21:22 AM


Sure - please do get back to me with regards to point 2.

As far as the QSBCD is concerned, my one comment with your proposed sale is that what you're proposing will make it difficult to be in line with the exemption.

One qualification is that you need to reach the 90 percent FMV asset test at the time of each disposition, each and every time. While this isn't impossible, it will likely lead to a fair bit of juggling within the P.Corp to ensure you continuously meet this threshold.

Do you know what the Paid-Up Capital of your corporation is? Remember to disburse any of this prior to the sale, otherwise you're basically giving away tax-free capital.
[/quote]

As far as the QSBCB 90% use of assets rule, I have significant retained earnings and each year of business this is added to as I only take out what I need to meet family expenses, which minimizes income tax.   

My understand had been that I could take retained earnings and dividend them to another corporation (holdco) to use to purchase a building - potentially without tax consequences.  That is something I had planned on taking to my accountant when I was ready to do this, which may be next year or the year after. 

Other than the retained assets, my practice is virtual and assets are limited to a minor amount of computer equipment.  The largest assets are goodwill/reputation and the existing client base. 

As for the universal life, I did look at something like this several years ago and did not do it as I have term insurance that is adequate and my SO had some difficulties with universal life. 

I don't really understand the dis/advantages of this strategy well enough but it immediately makes me concerned that this would impact the QSBCB capital gains tax exemption as the business would then have an asset not used in active business income and I do plan to sell if I can.

Once I've sold 40% I'm not sure why my other shareholders would want to buy my universal life insurance policy.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: lifejoy on October 17, 2014, 10:30:57 AM

Let me start off with a BIG thank you, eh?! Awesome thread, and mega appreciation for your starting it.

Question: right now our taxes are pretty straightforward, but in the future they will be more complicated (mo' money, mo' problems). Would you recommend that we learn the ins and outs ourselves (got any resources?) or find a savvy and trustworthy accountant (how? Any tips?)

Thanks!

Hi LibraryJoy

I'd like to think I'm a savvy and trustworthy accountant!

There are a few things to remember on your quest to learn a bit more

1) There's tax accounting in theory, and tax accounting in practice - generally speaking, these tend to be quite different from one another.

2) The biggest issue with simple tax returns is the preparer. Changing people consistently, or doing it yourself can often lead to inconsistencies - sometimes you take a certain credit, the next year you forget it, etc. The biggest benefit (other than not doing your own taxes) that we offer is consistency, which means that as time goes on you'll have a continuously updated tax return in line with current tax laws.

When you say mo' money mo' problems - can you expand on how you see your situation becoming more complex? Perhaps I can provide some insight, and make it less problems.

Cheers

Right now I make around 30k a year and my husband makes 60k. In the future, we will probably make 60k and 200k... Which I think makes taxes a little more complicated :) He's a doctor and will probably be incorporated (?) but apart from that I feel like we will need either expert advice or expert research to avoid paying crazy taxes.

I know we will also be doing the spousal RRSP thing. Aside from that, I'm clueless.

Good tip on having taxes done the same way continuously. I feel like it's very mustachian to do one's own taxes, but I don't want to be missing out on things due to ignorance.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 17, 2014, 11:03:56 AM


Sure - please do get back to me with regards to point 2.

As far as the QSBCD is concerned, my one comment with your proposed sale is that what you're proposing will make it difficult to be in line with the exemption.

One qualification is that you need to reach the 90 percent FMV asset test at the time of each disposition, each and every time. While this isn't impossible, it will likely lead to a fair bit of juggling within the P.Corp to ensure you continuously meet this threshold.

Do you know what the Paid-Up Capital of your corporation is? Remember to disburse any of this prior to the sale, otherwise you're basically giving away tax-free capital.

As far as the QSBCB 90% use of assets rule, I have significant retained earnings and each year of business this is added to as I only take out what I need to meet family expenses, which minimizes income tax.   

My understand had been that I could take retained earnings and dividend them to another corporation (holdco) to use to purchase a building - potentially without tax consequences.  That is something I had planned on taking to my accountant when I was ready to do this, which may be next year or the year after. 

Other than the retained assets, my practice is virtual and assets are limited to a minor amount of computer equipment.  The largest assets are goodwill/reputation and the existing client base. 

As for the universal life, I did look at something like this several years ago and did not do it as I have term insurance that is adequate and my SO had some difficulties with universal life. 

I don't really understand the dis/advantages of this strategy well enough but it immediately makes me concerned that this would impact the QSBCB capital gains tax exemption as the business would then have an asset not used in active business income and I do plan to sell if I can.

Once I've sold 40% I'm not sure why my other shareholders would want to buy my universal life insurance policy.
[/quote]

You're correct about The Universal Life - generally not worthwhile unless you already have it, as you're looking to sell in the near future. Just a consideration.

The 90% test means that virtually all of the cash (retained earnings) will need to get out of the company as quickly as possible. There is also a 50% requirement in the two years prior to selling, and it sounds like you're sitting on cash/liquidity which will push you under the threshold.

When it comes to dividends to a HoldCo- if you're operating a law practice as a professional corporation there is a very high probability that you can't do this. This is regulated provincially, but generally shareholders of professional corporations are limited to the professional(s), their family(ies) or another professional corporation...

If you find you can dividend up to a HoldCo - but remember that connected corporations (such as this) are subject to Part IV tax. This means that the Holdco will pay tax on this dividend, but it will also generate something called the Refundable Dividend Tax On Hand (RDTOH) which you can access when you dividend funds from the Holdco to yourself in the future.

A simpler route is setting up a LandCo and lending the money which won't have tax consequences.

Otherwise it sounds like you'll meet the tests for the capital gains exemption once you eliminate the cash from the P.Corp and wait for the 24 month period. Remember it's 50% over 2 years, and 90% at time of sale. However if you're going to piece it out, then you'll need to be distributing your retained earnings frequently throughout the entire 6 year period.




Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 17, 2014, 11:38:00 AM

Let me start off with a BIG thank you, eh?! Awesome thread, and mega appreciation for your starting it.

Question: right now our taxes are pretty straightforward, but in the future they will be more complicated (mo' money, mo' problems). Would you recommend that we learn the ins and outs ourselves (got any resources?) or find a savvy and trustworthy accountant (how? Any tips?)

Thanks!

Hi LibraryJoy

I'd like to think I'm a savvy and trustworthy accountant!

There are a few things to remember on your quest to learn a bit more

1) There's tax accounting in theory, and tax accounting in practice - generally speaking, these tend to be quite different from one another.

2) The biggest issue with simple tax returns is the preparer. Changing people consistently, or doing it yourself can often lead to inconsistencies - sometimes you take a certain credit, the next year you forget it, etc. The biggest benefit (other than not doing your own taxes) that we offer is consistency, which means that as time goes on you'll have a continuously updated tax return in line with current tax laws.

When you say mo' money mo' problems - can you expand on how you see your situation becoming more complex? Perhaps I can provide some insight, and make it less problems.

Cheers

Right now I make around 30k a year and my husband makes 60k. In the future, we will probably make 60k and 200k... Which I think makes taxes a little more complicated :) He's a doctor and will probably be incorporated (?) but apart from that I feel like we will need either expert advice or expert research to avoid paying crazy taxes.

I know we will also be doing the spousal RRSP thing. Aside from that, I'm clueless.

Good tip on having taxes done the same way continuously. I feel like it's very mustachian to do one's own taxes, but I don't want to be missing out on things due to ignorance.

Absolutely - your husband wants a Professional Corporation. This gives tax deferral and income splitting opportunities well beyond what he would otherwise be operating as (sole-proprietor). He would be crazy not to incorporate his practice!

I agree and disagree with the statement about your own taxes - if you can do it, it's a simple return, and do it well, then of course having an understanding of the Canadian tax system and filing your return is definitely Mustachian. That being said, I've yet to find a return that has been self prepared (or by another 'tax preparation' provider) that doesn't have at least medium sized errors, and typically speaking I find they are major.

However - your situation will become unique, and there are alternative tax deferral mechanisms available to business owners and professionals. This means recognizing opportunities when they aren't obvious, which is really a matter of experience vs. 'specific' knowledge. I would recommend that with whichever Accountant you choose, you want to make a point of understanding the structure of the business, how the shareholder structure works, and how it impacts your overall tax liability. Any good professional should be able to explain how these are inter-related based on your specific circumstances, as it will help you as the client to self-identify future opportunities to save money.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: totoro on October 17, 2014, 12:09:18 PM


When it comes to dividends to a HoldCo- if you're operating a law practice as a professional corporation there is a very high probability that you can't do this. This is regulated provincially, but generally shareholders of professional corporations are limited to the professional(s), their family(ies) or another professional corporation...

If you find you can dividend up to a HoldCo - but remember that connected corporations (such as this) are subject to Part IV tax. This means that the Holdco will pay tax on this dividend, but it will also generate something called the Refundable Dividend Tax On Hand (RDTOH) which you can access when you dividend funds from the Holdco to yourself in the future.

A simpler route is setting up a LandCo and lending the money which won't have tax consequences.

Wouldn't lending the money create an investment of the funds that might affect the capital gains exemption?

You are correct that only lawyers can hold voting shares in a law corporation. 

I would be creating a second corporation to hold the dividends in which I am a shareholder in conjunction with a family trust.  It is my understanding that the BC Law Society allows lawyers to own shares in a holding company, which in turn holds shares in the Professional Corporation.

B. Law Corporation
The distinguishing features of a law corporation are set out in s.82 of the Legal Profession Act:
....
(c) each voting share is legally and beneficially owned by a practising lawyer or by a
law corporation,
(d) each non-voting share is legally and beneficially owned by
(i) a practising lawyer,
(ii) a law corporation that is a voting shareholder,
(iii) a person who is a relative of or resides with a practising lawyer who is a
shareholder or who is a shareholder in a law corporation that is a
shareholder,
(iv) a corporation, all the shares of which are beneficially owned by one or
more of the individuals referred to in subparagraph (i) or (iii), or
(v) a trust, all the beneficiaries of which are individuals referred to in
subparagraph (i) or (iii),

(e) all of the directors and the president of the corporation are practising lawyers,
and
(f) all of the persons who will be practising law on behalf of the corporation are
persons described in section 81 (1).
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 17, 2014, 04:07:18 PM


When it comes to dividends to a HoldCo- if you're operating a law practice as a professional corporation there is a very high probability that you can't do this. This is regulated provincially, but generally shareholders of professional corporations are limited to the professional(s), their family(ies) or another professional corporation...

If you find you can dividend up to a HoldCo - but remember that connected corporations (such as this) are subject to Part IV tax. This means that the Holdco will pay tax on this dividend, but it will also generate something called the Refundable Dividend Tax On Hand (RDTOH) which you can access when you dividend funds from the Holdco to yourself in the future.

A simpler route is setting up a LandCo and lending the money which won't have tax consequences.

Wouldn't lending the money create an investment of the funds that might affect the capital gains exemption?

You are correct that only lawyers can hold voting shares in a law corporation. 

I would be creating a second corporation to hold the dividends in which I am a shareholder in conjunction with a family trust.  It is my understanding that the BC Law Society allows lawyers to own shares in a holding company, which in turn holds shares in the Professional Corporation.

B. Law Corporation
The distinguishing features of a law corporation are set out in s.82 of the Legal Profession Act:
....
(c) each voting share is legally and beneficially owned by a practising lawyer or by a
law corporation,
(d) each non-voting share is legally and beneficially owned by
(i) a practising lawyer,
(ii) a law corporation that is a voting shareholder,
(iii) a person who is a relative of or resides with a practising lawyer who is a
shareholder or who is a shareholder in a law corporation that is a
shareholder,
(iv) a corporation, all the shares of which are beneficially owned by one or
more of the individuals referred to in subparagraph (i) or (iii), or
(v) a trust, all the beneficiaries of which are individuals referred to in
subparagraph (i) or (iii),

(e) all of the directors and the president of the corporation are practising lawyers,
and
(f) all of the persons who will be practising law on behalf of the corporation are
persons described in section 81 (1).

Hi Totoro,

So this is really a fascinating application here - I'm going to throw a bit of a cog in the wheel here and make a suggestion. I can see the big picture at this point.

There are two issues with the current idea -

1) You're giving away control of 'your' corporation, without protecting your assets
2) A corporation or trust can ONLY be Non-Voting shareholders (i.e. no control). Only another law corporation can hold voting shares.

My recommendation is that you 'crystallize' your capital gains in P.Corp by performing a Section 86 rollover into a New P.Corp ("HoldCo"). When you incorporate HoldCo - you can set up your family/kids with the trust of non-voting shares, and also as preferred shareholders should you choose to do so.

Pay yourself consideration, which you can dump into HoldCo if you choose. The good part here, the purification issue on capital gains is gone if you pay yourself enough consideration for the shares ("boot"), and at this point you trigger the QSBCD by tax deferring into HoldCo. This writes up the value of the shares to their CURRENT value, so when you go to sell the shares of P.Corp to new partners (sold by Holdco) a large component of the capital gain has already been shielded through a higher adjusted cost base.

This allows you to:

1) Dump funds into Holdco for the benefit of purchasing an office
2) Maintain 100% control of said property
3) Maintain control of the operations of P.Corp through Holdco - but also control 100% of funds sent through Holdco to you. This means you maintain better control of the assets of the corporation, and can divest your partnership share and still maintain beneficial tax treatments on a go-forward basis (estate planning etc.)

It's a bit more complex than what you were expecting - but as long as Holdco is a P.Corp then it is onside (so long as the trust is a non-voting shareholder).

If you have any questions shoot me a message and I can walk you through it in better detail as it would take a lot more writing (which people won't want to read) to go through it.



Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: totoro on October 17, 2014, 04:26:43 PM
Yes, we should talk.  I will need some professional help.  I do have a good accountant but if you have experience I'd be willing to talk about this with you.  Wouldn't expect free advice for a complicated transaction.

I believe that your advice below is what had initially been recommended by the accountant.

"My recommendation is that you 'crystallize' your capital gains in P.Corp by performing a Section 86 rollover into a New P.Corp ("HoldCo"). When you incorporate HoldCo - you can set up your family/kids with the trust of non-voting shares, and also as preferred shareholders should you choose to do so."
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Ziggurat on October 18, 2014, 09:14:07 AM
First, a big thank you for this thread and the offer to give advice.

We are looking at downsizing, and I am wondering about "income splitting" opportunities from the freed-up capital (my income is much higher than my wife's).  We are both listed on the title; depending on how far we downsize, we may free up about $100-150K of equity after all costs.  Mortgage remaining is about $70K.

My RRSP is maxed due to pension contributions; she doesn't earn enough part-time to get reduced taxes contributing to hers.  TFSAs are nearly maxed.  I'm assuming the new money would have to be put in non-registered investments, which we have not had yet.  So a possibly very simple question: would the downsizing money be considered split evenly between us, or can the investments be fully in her name so income from them is taxed in her name?  Are there other solutions we should be looking at?  And I'm wondering in all this if we are better off keeping the mortgage rather than paying it off, if it means getting more invested in her name.

Thanks for any comments.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 18, 2014, 11:29:12 AM
First, a big thank you for this thread and the offer to give advice.

We are looking at downsizing, and I am wondering about "income splitting" opportunities from the freed-up capital (my income is much higher than my wife's).  We are both listed on the title; depending on how far we downsize, we may free up about $100-150K of equity after all costs.  Mortgage remaining is about $70K.

My RRSP is maxed due to pension contributions; she doesn't earn enough part-time to get reduced taxes contributing to hers.  TFSAs are nearly maxed.  I'm assuming the new money would have to be put in non-registered investments, which we have not had yet.  So a possibly very simple question: would the downsizing money be considered split evenly between us, or can the investments be fully in her name so income from them is taxed in her name?  Are there other solutions we should be looking at?  And I'm wondering in all this if we are better off keeping the mortgage rather than paying it off, if it means getting more invested in her name.

Thanks for any comments.

Hi,

Is this a home that was purchased when you were together?

You won't be able to put all of the funds to her name, as it falls under the 'attribution' rules that CRA has to avoid income splitting in this manner. That being said - attribution rules are more heavily applied in the case of business owners in practicality, so you may want to put a bit more in your wife's name, depending on your risk tolerance with the tax man.

There are some other opportunities, depending on the age of your children (if you have any) and the nature of your employment - I'd need a bit more detail here to see if the cost would be worthwhile long-term.

Make sure with your non-registered investments that you chase capital gains , rather than fixed income GIC's or even dividends from a tax perspective. Chase the dividends and fixed income in your RRSP. Use non-reg and TFSA for capital gains.

Make sure you deduct any costs associated with investments - fees, accounting costs, interest expenses. Many people miss this.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Ziggurat on October 18, 2014, 12:25:55 PM
Hi,

Is this a home that was purchased when you were together?

Yes.

Quote
There are some other opportunities, depending on the age of your children (if you have any) and the nature of your employment - I'd need a bit more detail here to see if the cost would be worthwhile long-term.

Two dependent children away at university. We are in early 50s.  I'm a salaried hospital employee.  I could have the potential for doing some consulting work on the side, but it would be fairly complex (most options would be several hours away in the U.S.) and I wouldn't have enough time to generate much income from it.  However, we could "retire" in a couple of years with me doing consulting work for the most part after that.

Quote
Make sure with your non-registered investments that you chase capital gains , rather than fixed income GIC's or even dividends from a tax perspective. Chase the dividends and fixed income in your RRSP. Use non-reg and TFSA for capital gains.

I thought dividend income had very little tax up to a certain income, hence for her non-reg I thought dividends could also be a good choice, particularly if we are looking to early retire and delay taking pensions as long as possible. 

Quote
Make sure you deduct any costs associated with investments - fees, accounting costs, interest expenses. Many people miss this.

Yes, I have been missing this. Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 18, 2014, 01:31:56 PM
Hi,

Is this a home that was purchased when you were together?

Yes.

Quote
There are some other opportunities, depending on the age of your children (if you have any) and the nature of your employment - I'd need a bit more detail here to see if the cost would be worthwhile long-term.

Two dependent children away at university. We are in early 50s.  I'm a salaried hospital employee.  I could have the potential for doing some consulting work on the side, but it would be fairly complex (most options would be several hours away in the U.S.) and I wouldn't have enough time to generate much income from it.  However, we could "retire" in a couple of years with me doing consulting work for the most part after that.

Quote
Make sure with your non-registered investments that you chase capital gains , rather than fixed income GIC's or even dividends from a tax perspective. Chase the dividends and fixed income in your RRSP. Use non-reg and TFSA for capital gains.

I thought dividend income had very little tax up to a certain income, hence for her non-reg I thought dividends could also be a good choice, particularly if we are looking to early retire and delay taking pensions as long as possible. 

Quote
Make sure you deduct any costs associated with investments - fees, accounting costs, interest expenses. Many people miss this.

Yes, I have been missing this. Thanks!

Alright this is great -

So for future planning purposes, the consulting work is an excellent vehicle for future tax deferral. Incorporate the company, and name your wife in a separate shareholder class. This will allow you to income split in the future. In fact, I would go so far as to name your children as preferred shareholders (non-voting) as well, so if there is any need to give them money this can be done through a dividend (pre-tax dollars).

If you were able to do this 'now' and generate income on the side - this could be a vehicle to help your kids pay for University (assuming you're paying since you said dependent) rather than pay in your after tax dollars.

Dividends have little to no tax impact, if the individual is not earning money, or earning very little. Assuming you make nothing, you can receive around $25k without a tax impact in eligible dividends.

Dividends are fine in a non-reg account, but just from a taxation standpoint you're better to make 5% in capital gains vs. 5% in dividends. Just don't shelter cap gains in the RRSP, and don't shelter dividends in a TFSA is a very important part tax-wise.

Remember to elect your principal residence when you sell the house to ensure you aren't hit with the tax bill.

If you want to get really savvy with the new house purchase - pay for it out-right, and take a line of credit out for the 70k balance and invest ALL of it. This means you can deduct the mortgage interest incurred against your investment income.

Good luck!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Ziggurat on October 18, 2014, 02:49:42 PM

Good luck!

Thanks, and thanks again for all your advice.  Lots to think about!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: c-kat on October 19, 2014, 09:06:35 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: c-kat on October 21, 2014, 05:47:12 PM
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. :)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 22, 2014, 08:24:39 AM
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







Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 22, 2014, 08:32:52 AM
In addition to my question in the above post, I wanted to ask whether we should be depreciating our rental properties on our income tax?  So far we haven't, instead we've used our RRSP contributions to cancel out any tax we'd owe which kind of sucks because then we don't get any money back. We're just afraid that if we depreciate them we'll owe a lot of money when we sell, although the Canadian housing market is pretty high, so maybe that's not an issue. Do you usually advise depreciating or just paying the taxes? And how does one figure out what the value of the house is without the land?

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

Thanks in advance for the advice. :)

RRSP vs. TFSA

Forgot to respond to this -

No tax implications of holding US equity in a TFSA. Holding US equities in a US located (i.e. Bank of America, for example) would make it subject to withholding taxes, however as it is Canadian held you skip this.

RRSP Contributions are taxed FULLY upon withdrawal, which is why holding equities in RRSP's is not a tax efficient strategy (as capital gains are taxable at 50%, but you'll get taxed at 100% on withdrawal).

As far as TFSA is concerned, remember that the funds you place into this account is after-tax. Therefore, the funds you withdraw from this investment vehicle, regardless of source, are also not taxable, nor is any of the gains/dividends etc. earned yearly.

In short - RRSP is taxed on withdrawal. Any income or gains in a TFSA are not taxable.

Also - for a small real estate property the land and building aren't really severable in value, as the assessment to determine the relative allocations would likely exceed any benefit to CRA (since this expense would be deductible). Once you FIRE and become a real estate magnate, this is a different story...

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Natcat on October 22, 2014, 10:08:52 AM
Mine is a very basic question about the benefits of filing tax returns as a common law couple. And I'm a bit embarrassed of my ignorance on the matter. I've been under the impression from those uneducated in the world of taxes that filing as couple will have a negative impact on the amount refunded. This can't possibly be true, can it?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 23, 2014, 07:55:44 AM
Mine is a very basic question about the benefits of filing tax returns as a common law couple. And I'm a bit embarrassed of my ignorance on the matter. I've been under the impression from those uneducated in the world of taxes that filing as couple will have a negative impact on the amount refunded. This can't possibly be true, can it?
Hi NatCat -

You'd be surprised, this is actually a somewhat common question and misconception.

The question really hinges on your view of your relationship. Do you view your financial picture as a whole (i.e. as a family unit) or as an independent group (i.e. you address your finances, yourself).

If you are just focusing on yourself, and not your partner and relationship, you may end up receiving a better tax 'bill' personally. However, this comes at the expense of your SO. From a holistic standpoint, you're better to file jointly (it never ever works against the joint filer) than separately.

You and your SO will do better or equal by filing (overall) than filing separately from a dollars perspective, every time. However, if you're worried the SO is going to go and buy a pool table with a refund, well, you're on your own with that one.

Hope this helps!


Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on October 31, 2014, 07:13:36 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!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 31, 2014, 10:54:18 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!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on October 31, 2014, 11:38:02 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?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: yyc-phil on October 31, 2014, 11:59:45 AM
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?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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!



Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: frugal_c 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?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: frugal_c 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu 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
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: panthalassa 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.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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



Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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.


Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu 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 !
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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!


Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: panthalassa 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?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev 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?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish 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?]
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu 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 !
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: MrsPotato 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu 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
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: MrsPotato 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
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu 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
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: ms 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!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish 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!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: c-kat 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!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: ms 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!!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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...)

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish 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!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish 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?
Title: Principal residence exemptions
Post by: Joan-eh? 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!!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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.

Title: Re: Principal residence exemptions
Post by: CPA CB 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!!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish 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?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB 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.

 


 

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu 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 ;)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: c-kat 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.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 26, 2014, 07:37:40 PM
Hello I have two rental related questions that I couldn't find answers to on CRA's site:

We only put 5% down when buying a new investment property last year so had to pay $8,000 CMHC fees.  Can these be deducted during taxes or do they become part of the cost of the property that we factor in when we sell?

Also, we paid land transfer fees and closing costs and didn't deduct them. Are they deductible or do they also become part of the cost of the property.

Hi again C-Kat.

These are what I would call 'grey' area issues, so I'm going to go into a bit of tax theory before answering here...

These fees & costs have been incurred as a result of purchasing the rental property.

The rules regarding capitalizing (i.e. adding to your cost base) versus expensing are somewhat vague, and purely situation based.

Capitalizing an item requires that the cost is necessary to prepare the asset (in this case, the house) to produce income. Were these costs necessary to prepare the property for this income? Sure, but ultimately, they are really one time expenditures which are NOT capital in nature. If you needed to add a roof, this is capital (as an example).

That being said - the CRA will allow you to treat these costs either way. However, the correct treatment is expensing in the year incurred for your situation (in my opinion). These aren't true assets - they have no 'value' to add to your property as they are not transferrable, and really don't reflect the nature of your transaction.

In short, expense it!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: c-kat on November 26, 2014, 08:22:49 PM
Hello I have two rental related questions that I couldn't find answers to on CRA's site:

We only put 5% down when buying a new investment property last year so had to pay $8,000 CMHC fees.  Can these be deducted during taxes or do they become part of the cost of the property that we factor in when we sell?

Also, we paid land transfer fees and closing costs and didn't deduct them. Are they deductible or do they also become part of the cost of the property.


Hi again C-Kat.

These are what I would call 'grey' area issues, so I'm going to go into a bit of tax theory before answering here...

These fees & costs have been incurred as a result of purchasing the rental property.

The rules regarding capitalizing (i.e. adding to your cost base) versus expensing are somewhat vague, and purely situation based.

Capitalizing an item requires that the cost is necessary to prepare the asset (in this case, the house) to produce income. Were these costs necessary to prepare the property for this income? Sure, but ultimately, they are really one time expenditures which are NOT capital in nature. If you needed to add a roof, this is capital (as an example).

That being said - the CRA will allow you to treat these costs either way. However, the correct treatment is expensing in the year incurred for your situation (in my opinion). These aren't true assets - they have no 'value' to add to your property as they are not transferrable, and really don't reflect the nature of your transaction.

In short, expense it!

Thank you very much!  But since we incurred the costs in 2013 and didn't expense them on our 2013 taxes is it too late? can we just resubmit our taxes?  And we only had one months rent as income, as we close don the house in November, so will CRA have a problem with 8K CMHC and 5 K closing/land transfer as deductions?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 27, 2014, 08:14:39 AM
Hello I have two rental related questions that I couldn't find answers to on CRA's site:

We only put 5% down when buying a new investment property last year so had to pay $8,000 CMHC fees.  Can these be deducted during taxes or do they become part of the cost of the property that we factor in when we sell?

Also, we paid land transfer fees and closing costs and didn't deduct them. Are they deductible or do they also become part of the cost of the property.


Hi again C-Kat.

These are what I would call 'grey' area issues, so I'm going to go into a bit of tax theory before answering here...

These fees & costs have been incurred as a result of purchasing the rental property.

The rules regarding capitalizing (i.e. adding to your cost base) versus expensing are somewhat vague, and purely situation based.

Capitalizing an item requires that the cost is necessary to prepare the asset (in this case, the house) to produce income. Were these costs necessary to prepare the property for this income? Sure, but ultimately, they are really one time expenditures which are NOT capital in nature. If you needed to add a roof, this is capital (as an example).

That being said - the CRA will allow you to treat these costs either way. However, the correct treatment is expensing in the year incurred for your situation (in my opinion). These aren't true assets - they have no 'value' to add to your property as they are not transferrable, and really don't reflect the nature of your transaction.

In short, expense it!

Thank you very much!  But since we incurred the costs in 2013 and didn't expense them on our 2013 taxes is it too late? can we just resubmit our taxes?  And we only had one months rent as income, as we close don the house in November, so will CRA have a problem with 8K CMHC and 5 K closing/land transfer as deductions?

Hi C-Kat - you can amend your return either online, or by filing a T1-Adj through the mail with CRA - you can find the link here http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/chngrtrn-eng.html

CRA will have no issue with regards to this, even given a shortened year, so to speak.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cookie78 on November 27, 2014, 09:39:30 AM
Wow, thank you for this thread!

I have so much to learn that I don't even know how to formulate my questions properly. But what I've read so far is very helpful! So thanks!

I'll be back when I go gather some numbers and come back with specific questions. :D

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on November 27, 2014, 12:32:49 PM
New question! 

To be eligible for some income sources, I am required to put my assets into a trust, with me and my son as the beneficiaries. My mum is willing to act as my Trustee. However, I am newly understanding that this may make her the legal owner of the assets. That's fine by me, but if she becomes legal owner of assets held in trust for me and my son, does this impact (appear on) her tax return?

She is a senior with low income, and cannot afford to have additional income or assets attributed to her, as then she may lose the few subsidies she receives.

In terms of taxes (capital gains, growth, dividends, interest, etc), who does CRA view as "benefiting" from assets held by Person A in trust for Person B? Can only wealthy people afford to be Trustees?

In case it makes any difference, this will be what is called a discretionary trust or a Henson trust.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Hummer on November 27, 2014, 03:07:43 PM
Am I ever glad I found this thread. Thanks for offering assistance. I have several questions.
I live and work in BC.
Please correct me if I'm wrong anywhere. I may be making incorrect assumptions.

2 years ago I pulled $10k out of my RRSP to use under the homebuyers plan. I was planning on paying that back either this year or next year. Do I have to contribute that money back to my own RRSP or can I contribute that money to a spousal RRSP and fill out the form as paid back?

I am also contributing money to my wife's RRSP. Can I defer these RRSP contributions to next year? Meaning, can I contribute the money this year and claim the money next year?
Can I defer any or all of my personal RRSP contribution this year to next? Meaning, can I contribute the money this year and claim the money next year?

The reason I'm asking about the above is, I am starting a new job in January and the pay will be $22k more than I make this year.
Have you done any rough calculations on this before?

For example, see below. I used Federal income tax rates only. I understand there are provincial as well but I didn't want to do more math.
These situations do not take into account the $10k I need to pay back under the homebuyers plan. I understand that is a repayment and is not able to be claimed.

Situation A
2014 earn $68k, contribute $10k to RRSP (claim this year)
2015 earn $90k, contribute $10k to RRSP (claim this year)

Income tax savings are $10k * 22% = $2,200 in 2014
Income tax savings are $3k * 26% + $7k * 22% = $2320 in 2015
Total tax savings of $4,520 combined.

Situation B
2014 earn $68k, contribute $10k to RRSP (defer to next year and claim in 2015)
2015 earn $90k, contribute $10k to RRSP (claim $20k in 2015)

Income tax savings are $0 in 2014
Income tax savings are $3k * 26% + $17k * 22% = $4520 in 2015

Is this legal?
Is my math correct? It results in no savings. The tax savings are identical.


Thanks! :)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on November 27, 2014, 05:33:11 PM
You can contribute the yearly contribution as soon as jan 1st and even exceed by 2k$ with no penalty. You dont have to claim refunds right away, it's your call.

Your calculations looks good "federalwise" but double check with the BC marginal tax rates to be sure. When there is no real saving to delay refund, claim it right away do whatever you want with $$ (repay mortgage, invest).

As for the homebuyers plan, you can repay over 15 years but since there is no refund, it's about the same as contributing TFSA. I would better do this because it gives you more options down the road and all growth (cap + div + int) wont be taxed went you pull it out.

My 2 cents
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 28, 2014, 01:39:15 PM
New question! 

To be eligible for some income sources, I am required to put my assets into a trust, with me and my son as the beneficiaries. My mum is willing to act as my Trustee. However, I am newly understanding that this may make her the legal owner of the assets. That's fine by me, but if she becomes legal owner of assets held in trust for me and my son, does this impact (appear on) her tax return?

She is a senior with low income, and cannot afford to have additional income or assets attributed to her, as then she may lose the few subsidies she receives.

In terms of taxes (capital gains, growth, dividends, interest, etc), who does CRA view as "benefiting" from assets held by Person A in trust for Person B? Can only wealthy people afford to be Trustees?

In case it makes any difference, this will be what is called a discretionary trust or a Henson trust.

Hi there -

Any undistributed income will be attributable to the trust, not to your mother most certainly. She ultimately will have control on what to disburse to you, and when, however she does not retain control over the assets for personal use (i.e. nothing is attributable to her, and she can't take anything from the trust personally.)

Trusts are subject to their own set of rules - this means that you'll need to file a Trust Income Tax Return, in addition to your own personal income tax returns, which means that you'll likely be hiring someone like me to do this to you at a cost. I imagine your benefits will greatly out-pace said cost, but I just want you to be aware of this ahead of time.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 28, 2014, 01:57:25 PM
Am I ever glad I found this thread. Thanks for offering assistance. I have several questions.
I live and work in BC.
Please correct me if I'm wrong anywhere. I may be making incorrect assumptions.

2 years ago I pulled $10k out of my RRSP to use under the homebuyers plan. I was planning on paying that back either this year or next year. Do I have to contribute that money back to my own RRSP or can I contribute that money to a spousal RRSP and fill out the form as paid back?

I am also contributing money to my wife's RRSP. Can I defer these RRSP contributions to next year? Meaning, can I contribute the money this year and claim the money next year?
Can I defer any or all of my personal RRSP contribution this year to next? Meaning, can I contribute the money this year and claim the money next year?

The reason I'm asking about the above is, I am starting a new job in January and the pay will be $22k more than I make this year.
Have you done any rough calculations on this before?

For example, see below. I used Federal income tax rates only. I understand there are provincial as well but I didn't want to do more math.
These situations do not take into account the $10k I need to pay back under the homebuyers plan. I understand that is a repayment and is not able to be claimed.

Situation A
2014 earn $68k, contribute $10k to RRSP (claim this year)
2015 earn $90k, contribute $10k to RRSP (claim this year)

Income tax savings are $10k * 22% = $2,200 in 2014
Income tax savings are $3k * 26% + $7k * 22% = $2320 in 2015
Total tax savings of $4,520 combined.

Situation B
2014 earn $68k, contribute $10k to RRSP (defer to next year and claim in 2015)
2015 earn $90k, contribute $10k to RRSP (claim $20k in 2015)

Income tax savings are $0 in 2014
Income tax savings are $3k * 26% + $17k * 22% = $4520 in 2015

Is this legal?
Is my math correct? It results in no savings. The tax savings are identical.


Thanks! :)

Hi Hummer

You can only contribute to your own RRSP to repay the HBP (assuming it was pulled out of this account in the first place). Unfortunately you can't contribute to spousal in this regard.

You can absolutely choose to defer your RRSP deductions to a later year. This isn't typically on option on your standard run of the mill personal tax programs, so it may be something you want to engage an accountant to help you with. You'll have to file an additional Schedule (Sch. 7) in the future, to make use of these deductions.

Your math is essentially correct, but it negates the affect of "bracket creep" where the tax brackets associated with the 22% and 26% income levels will increase with indexing between 2014 and 2015.

The Canadian system favours a concept called integration, whereby it tries to (within reason) eliminate the need for aggressive tax planning solutions such as this. The idea being that the difference in these would be so minor, that it shouldn't impact your investment planning and capital decisions.

As Le Barbu correctly states, you'll want to cross check to BC taxes (and look at next years budget re: rates) to ensure you aren't missing anything in your assumptions.

Hope this clarifies!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on November 28, 2014, 02:37:28 PM
Thanks again, CPA CB! That's a relief.

Trusts are subject to their own set of rules - this means that you'll need to file a Trust Income Tax Return, in addition to your own personal income tax returns...

Oh! I didn't know that!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: FSL on November 29, 2014, 10:27:13 AM
CPA CB, thanks so much for the help!

I am American, but my husband is Canadian. We live and work in the US (he is on a visa). However, he travels to Canada frequently, and when there, he has done some sports betting and earned a good amount of profit ($10k-20k). No taxes were withheld. Does he need to pay Canadian taxes on that income? Is there any type of paperwork we should be saving? I know from a US perspective, we'll have to pay income taxes on the winnings.

Separately, seeing the potential in this, we'd like to set this up as a legit side business. He is developing a software algorithm to analyze sports data that would be developed solely in the US. We're considering establishing an LLC in the US as a software development company. Is there a way to set up a company in Canada that does the betting, but then pays the betting profits as a fee to the US business? We'd love to hear any other suggestions.

Thanks for your help!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 29, 2014, 06:14:03 PM
CPA CB, thanks so much for the help!

I am American, but my husband is Canadian. We live and work in the US (he is on a visa). However, he travels to Canada frequently, and when there, he has done some sports betting and earned a good amount of profit ($10k-20k). No taxes were withheld. Does he need to pay Canadian taxes on that income? Is there any type of paperwork we should be saving? I know from a US perspective, we'll have to pay income taxes on the winnings.

Separately, seeing the potential in this, we'd like to set this up as a legit side business. He is developing a software algorithm to analyze sports data that would be developed solely in the US. We're considering establishing an LLC in the US as a software development company. Is there a way to set up a company in Canada that does the betting, but then pays the betting profits as a fee to the US business? We'd love to hear any other suggestions.

Thanks for your help!

Hi NYC

You're right! He won't have to pay Canadian Tax in this sense, as it doesn't constitute "earned income". Earned income meaning it becomes a method to work to earn a living, rather than a windfall.

Let me circle back after doing some research on your corporate question here. It is either a) not possible, or b) somewhat complex, so I'd prefer to point you in the right direction after doing more research (as this is certainly unusual).

The one thing I will say - if you're going to bother with a foreign corporation, this may be more practical offshore, rather than Canada (where you will inevitably be taxed, in what is a highly regulated industry).

Will let you know! Great question.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: FSL on November 30, 2014, 08:14:51 PM
thank you very much! Would be very interested in any materials you can point us to. unfortunately, gambling is very tricky in the US, which is why we would be interested in a canadian company, but we hadn't thought offshore. if you have any materials on how to establish an offshore corporation, would be interested in that too! Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on December 02, 2014, 10:37:56 AM
New Question - Disability Tax Credit

I was recently approved for the DTC, retroactive to 2005. Two years within that period, my income was slightly higher than would allow for the full bond amount for my son and I (they don't seem to adjust for how many family members there are served by that income).

1. For calculation of RDSP bonds, what line on the tax return reflects the "family income"?

2. What Schedule and Line on a tax return shows the Disability Tax Credit for a dependent (and DTC for self, if different)?

3. When the DTC credit is applied retroactively to a given tax year, is the "family income" then reduced (for purposes of bond)?

4. If yes to #3, how do I get the DTC applied to retroactive tax years? Do I just write a letter to CRA to ask them to, or do I fill out an Adjustment paper for each year?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 02, 2014, 06:34:27 PM
thank you very much! Would be very interested in any materials you can point us to. unfortunately, gambling is very tricky in the US, which is why we would be interested in a canadian company, but we hadn't thought offshore. if you have any materials on how to establish an offshore corporation, would be interested in that too! Thanks!

Hi NYC,

Alright - so upon a bit more examination, here's what I've come up with.

Insofar as incorporating in Canada - I wouldn't want to say it's "impossible" but it most certainly is nearly so. The regulations here are equivalent to the United States in many regards, and are actually higher in others. In addition, these funds would be taxed, which is to say that you're not getting an advantage here vs. the US.

I'm going to add a quick disclaimer in here - I know next to nothing about US tax law, especially when it comes to what I'm about to say. Please consult a tax lawyer and/or tax accountant if you're serious here..

The other suggestion here is an offshore corporation, which makes these restrictions "go away" in a sense.

I'll be frank here - the costs are high, and you could end up spending more in fees than it's worth. If you're looking to really go for it, offshore is the way to go. Don't repatriate the funds if you can help it. All of the gambling websites etc. are done through offshore corporations, you'd be wise to take this route.

That being said - this is not a traditional business model. Gambling is a highly risky "business". Your husband has enjoyed some great success, but you really want to take a step back here and evaluate your options. Is this a viable business? He may have devised a system, but what happens when this system stops working?

If you're going through with it - I'm not trying to be negative, but I am trying to highlight some risks that you'll want to mitigate. Like any investment, you need to have an absolute strategy, to control the urge to double-down on a loss. You want to develop a plan for risk exposure - how much capital will you place on a bet? What is the risk tolerance? The problem with gambling, is that you can work your way up, and lose everything in a flash. This risk should be understood, and evaluated on a continuing basis.

Hope you find this helpful - not meaning to rain on the parade above, but if this is a serious entity then you want to make sure you protect yourself!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 02, 2014, 06:41:24 PM
New Question - Disability Tax Credit

I was recently approved for the DTC, retroactive to 2005. Two years within that period, my income was slightly higher than would allow for the full bond amount for my son and I (they don't seem to adjust for how many family members there are served by that income).

1. For calculation of RDSP bonds, what line on the tax return reflects the "family income"?

2. What Schedule and Line on a tax return shows the Disability Tax Credit for a dependent (and DTC for self, if different)?

3. When the DTC credit is applied retroactively to a given tax year, is the "family income" then reduced (for purposes of bond)?

4. If yes to #3, how do I get the DTC applied to retroactive tax years? Do I just write a letter to CRA to ask them to, or do I fill out an Adjustment paper for each year?

Hi there,

You're right - family income is just your and your spouses income - no adjustment for family members.

I'd suggest discussing this with someone who knows the RDSP process a bit better than I - as you know, this is a new program, and I'm thinking someone at the Canada Revenue Agency may know the answers a bit better. As far as questions 1 and 2 are concerned, I assume it is the total Line 120 income for you plus a spouse - but please verify.

As far as question 3 is concerned.. I believe the DTC would be applied retroactively.

I'll point you to this website, which may help a bit. http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rdsp-reei/cdsg-eng.html

Otherwise, give CRA a call and ask them your questions. It can't hurt!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on December 02, 2014, 07:17:13 PM
Otherwise, give CRA a call and ask them your questions. It can't hurt!

Oh, it hurts ;)  Dealing with CRA phone reps is like dealing with TD Bank! However, the RDSP has a dedicated line which gives excellent info re: contributions, optimizing, etc.  I haven't had to ask them about tax return lines and schedules, return adjustments, etc, before -not sure if they'll know about those- but I'll definitely give that a shot. The bad news is I have to call them at 7am while I'm getting my kid ready for school.

Yeah, I was hoping they would determine "low/medium/high income" by how many family members are living on that income. The RDSP program seems to be set up that whether you're free and single, or a single parent with eleven kids, the income cut-offs for the bond are exactly the same. Seems odd.

Yes, the DTC is applied retroactively when the disability designation is, but I don't know if the application of DTC actively reduces "family income" on the bond-determinant line. Hopefully I will know this, and the other things tomorrow!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Hummer on December 03, 2014, 10:51:30 AM
What form do I need to fill out to complete paying back the money I that I took out of my RRSP for the HBP?
Is there anything in particular that I need to have my bank do, where my RRSP is registered?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Spudd on December 03, 2014, 11:13:41 AM
What form do I need to fill out to complete paying back the money I that I took out of my RRSP for the HBP?
Is there anything in particular that I need to have my bank do, where my RRSP is registered?

On your tax return there's a place to specify how much of your RRSP contributions you're designating as HBP repayments. You don't need to do anything with your bank for this.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Koogie on December 03, 2014, 02:18:20 PM

Can I get greedy and ask another question ?   ;o)

The DW and I plan to ER next year and buy a house in a cheaper area to live (GTA > Georgian bay area).   
We have half the funds we need in cash(equiv.) and are going to take the other half as a "mortgage" from our Holdco.

I know the loan has to be properly documented like a real mortgage with terms of payment, interest rate, etc..   Questions are:
- what interest rate has to apply ?  the current CRA mandated rate or the lowest documentable "commercially available" rate at the time ?
- do we have to structure it like a normal mortgage (5 yr terms, prepayment terms, etc..) or can we have flexibility to say pay it off in 2 years (somehow!) if we want (as long as the full principle/interest due was paid) or otherwise give ourselves whatever terms we want ?
- i assume that the Holdco has to pay full rate tax on the mortgage interest we pay it back because it is just that, interest income ?

I've done some reading on this and come across some different opinions and poorly worded government policy so anything you could do to shed light would be appreciated.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 03, 2014, 02:46:14 PM

Can I get greedy and ask another question ?   ;o)

The DW and I plan to ER next year and buy a house in a cheaper area to live (GTA > Georgian bay area).   
We have half the funds we need in cash(equiv.) and are going to take the other half as a "mortgage" from our Holdco.

I know the loan has to be properly documented like a real mortgage with terms of payment, interest rate, etc..   Questions are:
- what interest rate has to apply ?  the current CRA mandated rate or the lowest documentable "commercially available" rate at the time ?
- do we have to structure it like a normal mortgage (5 yr terms, prepayment terms, etc..) or can we have flexibility to say pay it off in 2 years (somehow!) if we want (as long as the full principle/interest due was paid) or otherwise give ourselves whatever terms we want ?
- i assume that the Holdco has to pay full rate tax on the mortgage interest we pay it back because it is just that, interest income ?

I've done some reading on this and come across some different opinions and poorly worded government policy so anything you could do to shed light would be appreciated.

Hi Koogie,

Of course, asking multiple questions is appreciated - especially when we are dealing with topics such as this. To quote Gordon Gekko - Greed is good!

The prescribed rate of lending between a corporation and shareholders has remained constant at 1% for the past few quarters.

However, there is a specific section in the Income Tax Act that penalizes here (s 15.2) if the interest amount is not equivalent to an 'arms length' transaction. If CRA were to say you received a benefit from the loan (beyond that of a traditional mortgage) they can re-assess your return (in the year the loan was made) for the total loan amount... Sound unfair? It is.

You're right - this needs to be what the CRA calls a "bona fide" (hello 1930's) agreement. You need a set repayment plan, and at an interest rate that would be a fair market rate. What would the banks give you? 2.5%? I suggest you charge this rate through, to cover your back in this regard.

You can be flexible - but you need to operate on behalf of the corporation in good faith - what repayment terms are reasonable? 5 years? 10? You can go longer and pay in advance without issue.

The ultimate test here is if it would be in the ordinary course of business. Would your corporation extend the same or similar terms to John and Jane Doe under the circumstances? If so, you're onside, if not - you'll want to reconsider the terms. CRA has no issue with loaning money from a holdco - so long as it is in the same good faith - they expect the holdco to make money on this, and be taxed accordingly.

So - in short, make the loan on the (low end of) fair market terms - make the period reasonable and ensure this is signed as such. You don't want to get caught offside here - so you're better to pay a few thousand extra in interest (to yourself - which is taxed and distributed back to you) than to find yourself being re-assessed for the loan value.



Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Posthumane on December 03, 2014, 04:48:33 PM
Hi CPA CB,

First off, thank you for offering your knowledge, I'm sure all the Canadians here appreciate it. I will probably have some specific tax question for you soon enough, but right now I would like to get some clarification regarding your earlier discussion of equities/capital gains in RRSPs.

Currently my marginal rate is 36% (Alberta resident, ~90k gross) and I'm maxing out TFSA contributions. So, if I buy growth equities in taxable accounts, I would be paying tax on capital gains at a rate of 18% when it comes time to sell (assuming the same tax bracket). If instead I contribute that money to an RRSP and buy the same equities I get a tax deduction and don't pay capital gains tax when selling but instead pay income tax when withdrawing the funds. If my living expenses remain roughly the same as they are now, I plan to need about 20k/year in ER with a paid off house. This can be accomplished by withdrawing 11k from RRSP and making up the 9k from a TFSA (0 income tax), or by withdrawing 20k from RRSP (about 7.8% income tax), or somewhere in between. Either way, the tax paid on the growth is less than the 18% I would be paying in capital gains tax, assuming all growth is from cap gains. Is this correct? Alternatively, if I ER and show no income, do I pay capital gains tax at a rate of 0% up to 11k on equities sold at that time?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 03, 2014, 05:28:20 PM
Hi CPA CB,

First off, thank you for offering your knowledge, I'm sure all the Canadians here appreciate it. I will probably have some specific tax question for you soon enough, but right now I would like to get some clarification regarding your earlier discussion of equities/capital gains in RRSPs.

Currently my marginal rate is 36% (Alberta resident, ~90k gross) and I'm maxing out TFSA contributions. So, if I buy growth equities in taxable accounts, I would be paying tax on capital gains at a rate of 18% when it comes time to sell (assuming the same tax bracket). If instead I contribute that money to an RRSP and buy the same equities I get a tax deduction and don't pay capital gains tax when selling but instead pay income tax when withdrawing the funds. If my living expenses remain roughly the same as they are now, I plan to need about 20k/year in ER with a paid off house. This can be accomplished by withdrawing 11k from RRSP and making up the 9k from a TFSA (0 income tax), or by withdrawing 20k from RRSP (about 7.8% income tax), or somewhere in between. Either way, the tax paid on the growth is less than the 18% I would be paying in capital gains tax, assuming all growth is from cap gains. Is this correct? Alternatively, if I ER and show no income, do I pay capital gains tax at a rate of 0% up to 11k on equities sold at that time?

Hi Posthumane -

Thanks for posting - I appreciate the opportunity to clarify for everyone here.

Capital gains are 50% taxable in Canada, as you know - RRSP's on the other hand, you receive a 100% deduction today, but you'll be taxed at 100% in the future, on the total amount, INCLUDING the initial investment.

For argument's sake - I will ignore the impact of triggering gains in a taxable account over the life of your investment (it screws up present valuing), but the result is largely the same.

Comparing % rates here ignores the reality of your situation - comparing percentages tends to skew things away from what will happen logistically.

So, in that light, I'm going to re-phrase how I've discussed this issue in the past.

If you invest $100,000 into your RRSP (at 39%) - let's assume you'll receive a tax refund of $40,000 (rounding).

Put otherwise - your tax savings in a taxable account needs to be over $40,000 to break even.

Assuming the lowest rate to expect here in Canada at 10% (which is generously low), your tax savings upon withdrawal are 5% from a taxable account (half of the 10% you'd be charged from an RRSP).

Now, $20,000 seems very low in Canadian terms - we have a high cost of living, and as you age this will increase with pharmaceuticals, insurance, etc.

Let's take this $20k though as an example - at 10% you'll pay $2,000 in tax per year. I'll pay $1,000 per year on my gains. In this scenario, it will take about 40 years to break even between the two. This is assuming a ludicrously low marginal rate, and a low cost of living. The current average mortality age of Men in Canada is 80.78, and Women is about 84.3 This means that if you're between 40 and 45, based on the above assumptions, I'll have made up the difference in the period.

To be a bit more reasonable here - let's assume you'll be withdrawing $30k per year, and let's say that the average taxes are 15%. You'll end up paying $4,500, and I'll be half that, at $2,250. I'm going to make up this $40,000 initial savings in under 18 years... So based on mortality rates that would mean you plan to retire at 62 or 63 (which I would posit is not ER).

The other point here is that the Canadian Government has not historically been known to be in the business of charity - if they're giving you $40,000 today, they'll be expecting a return on this investment down the road. If you need more proof in how uncharitable they are, you can research how aggressively the CRA is pursuing taxing TFSA accounts where the holders have seen significant gains since inception.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on December 03, 2014, 05:33:45 PM
...research how aggressively the CRA is pursuing taxing TFSA accounts where the holders have seen significant gains since inception.

Wha? I'm not grasping much of this discussion, so may have missed something about this. What are they taxing in a tax-free account?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on December 03, 2014, 07:21:54 PM
...research how aggressively the CRA is pursuing taxing TFSA accounts where the holders have seen significant gains since inception.

Wha? I'm not grasping much of this discussion, so may have missed something about this. What are they taxing in a tax-free account?

Hope the latest paragraph mean they can run an inquire if they think some "investments" are not clean (legal) ?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Koogie on December 04, 2014, 07:25:37 AM
Hi Koogie,
Of course, asking multiple questions is appreciated - especially when we are dealing with topics such as this. To quote Gordon Gekko - Greed is good!
The prescribed rate of lending between a corporation and shareholders has remained constant at 1% for the past few quarters.
However, there is a specific section in the Income Tax Act that penalizes here (s 15.2) if the interest amount is not equivalent to an 'arms length' transaction. If CRA were to say you received a benefit from the loan (beyond that of a traditional mortgage) they can re-assess your return (in the year the loan was made) for the total loan amount... Sound unfair? It is.
You're right - this needs to be what the CRA calls a "bona fide" (hello 1930's) agreement. You need a set repayment plan, and at an interest rate that would be a fair market rate. What would the banks give you? 2.5%? I suggest you charge this rate through, to cover your back in this regard.
You can be flexible - but you need to operate on behalf of the corporation in good faith - what repayment terms are reasonable? 5 years? 10? You can go longer and pay in advance without issue.
The ultimate test here is if it would be in the ordinary course of business. Would your corporation extend the same or similar terms to John and Jane Doe under the circumstances? If so, you're onside, if not - you'll want to reconsider the terms. CRA has no issue with loaning money from a holdco - so long as it is in the same good faith - they expect the holdco to make money on this, and be taxed accordingly.
So - in short, make the loan on the (low end of) fair market terms - make the period reasonable and ensure this is signed as such. You don't want to get caught offside here - so you're better to pay a few thousand extra in interest (to yourself - which is taxed and distributed back to you) than to find yourself being re-assessed for the loan value.

Thank you very much.  Clear and concise and thorough.    It is pretty much as I expected and honestly it makes sense from the arms length point of view.  I was of course trying to think of a way to minimize the income flow from us back to the Holdco and the resultant "sticky" taxation that occurs as we move money from one "pile" to the other.    CRA get their pound of flesh in the end, no matter what, as usual.

It is good to know about the terms.   We'll probably calculate a near standard 20 year mortgage for ourselves, with very generous prepayment terms (mind you, including the full principal/calculated interest due).

Cheers.


Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 04, 2014, 07:33:47 AM
...research how aggressively the CRA is pursuing taxing TFSA accounts where the holders have seen significant gains since inception.

Wha? I'm not grasping much of this discussion, so may have missed something about this. What are they taxing in a tax-free account?

Hope the latest paragraph mean they can run an inquire if they think some "investments" are not clean (legal) ?

They're cracking down on day-traders and overall winners. See articles below for more information.

http://business.financialpost.com/2014/12/04/tfsa-holders-under-audit-banned-from-withdrawals-as-dealers-fear-getting-stuck-with-tax-bills/?__lsa=1546-22c6
http://business.financialpost.com/2014/12/02/canadians-with-too-many-wins-in-their-tfsa-being-targetted-by-cra/?__lsa=1546-22c6
http://business.financialpost.com/2014/12/02/heres-what-will-get-your-tfsa-audited-by-the-canada-revenue-agency/?__lsa=1546-22c6

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on December 04, 2014, 04:59:33 PM
They're cracking down on day-traders and overall winners. See articles below for more information.

http://business.financialpost.com/2014/12/04/tfsa-holders-under-audit-banned-from-withdrawals-as-dealers-fear-getting-stuck-with-tax-bills/?__lsa=1546-22c6
http://business.financialpost.com/2014/12/02/canadians-with-too-many-wins-in-their-tfsa-being-targetted-by-cra/?__lsa=1546-22c6
http://business.financialpost.com/2014/12/02/heres-what-will-get-your-tfsa-audited-by-the-canada-revenue-agency/?__lsa=1546-22c6

Stunning. Not surprising, given case law I've read in other aspects of CRA stuff (defining "married-like", etc), but stunning nonetheless.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Posthumane on December 04, 2014, 09:59:32 PM
Hi CPA CB,

First off, thank you for offering your knowledge, I'm sure all the Canadians here appreciate it. I will probably have some specific tax question for you soon enough, but right now I would like to get some clarification regarding your earlier discussion of equities/capital gains in RRSPs.

Currently my marginal rate is 36% (Alberta resident, ~90k gross) and I'm maxing out TFSA contributions. So, if I buy growth equities in taxable accounts, I would be paying tax on capital gains at a rate of 18% when it comes time to sell (assuming the same tax bracket). If instead I contribute that money to an RRSP and buy the same equities I get a tax deduction and don't pay capital gains tax when selling but instead pay income tax when withdrawing the funds. If my living expenses remain roughly the same as they are now, I plan to need about 20k/year in ER with a paid off house. This can be accomplished by withdrawing 11k from RRSP and making up the 9k from a TFSA (0 income tax), or by withdrawing 20k from RRSP (about 7.8% income tax), or somewhere in between. Either way, the tax paid on the growth is less than the 18% I would be paying in capital gains tax, assuming all growth is from cap gains. Is this correct? Alternatively, if I ER and show no income, do I pay capital gains tax at a rate of 0% up to 11k on equities sold at that time?

Hi Posthumane -

Thanks for posting - I appreciate the opportunity to clarify for everyone here.

Capital gains are 50% taxable in Canada, as you know - RRSP's on the other hand, you receive a 100% deduction today, but you'll be taxed at 100% in the future, on the total amount, INCLUDING the initial investment.

For argument's sake - I will ignore the impact of triggering gains in a taxable account over the life of your investment (it screws up present valuing), but the result is largely the same.

Comparing % rates here ignores the reality of your situation - comparing percentages tends to skew things away from what will happen logistically.

So, in that light, I'm going to re-phrase how I've discussed this issue in the past.

If you invest $100,000 into your RRSP (at 39%) - let's assume you'll receive a tax refund of $40,000 (rounding).

Put otherwise - your tax savings in a taxable account needs to be over $40,000 to break even.

Assuming the lowest rate to expect here in Canada at 10% (which is generously low), your tax savings upon withdrawal are 5% from a taxable account (half of the 10% you'd be charged from an RRSP).

Now, $20,000 seems very low in Canadian terms - we have a high cost of living, and as you age this will increase with pharmaceuticals, insurance, etc.

Let's take this $20k though as an example - at 10% you'll pay $2,000 in tax per year. I'll pay $1,000 per year on my gains. In this scenario, it will take about 40 years to break even between the two. This is assuming a ludicrously low marginal rate, and a low cost of living. The current average mortality age of Men in Canada is 80.78, and Women is about 84.3 This means that if you're between 40 and 45, based on the above assumptions, I'll have made up the difference in the period.

To be a bit more reasonable here - let's assume you'll be withdrawing $30k per year, and let's say that the average taxes are 15%. You'll end up paying $4,500, and I'll be half that, at $2,250. I'm going to make up this $40,000 initial savings in under 18 years... So based on mortality rates that would mean you plan to retire at 62 or 63 (which I would posit is not ER).

The other point here is that the Canadian Government has not historically been known to be in the business of charity - if they're giving you $40,000 today, they'll be expecting a return on this investment down the road. If you need more proof in how uncharitable they are, you can research how aggressively the CRA is pursuing taxing TFSA accounts where the holders have seen significant gains since inception.
Thanks for the reply CPA CB, that's a pretty thorough comparison. It seems that my at my ER plan scenario (at 45 with 20k/year expenses) it's almost a wash either way, with a slight advantage to taxable accounts. I know the 20k/person can work in Canada (though probably not in Toronto, Ottawa, Calgary, or Vancouver) since I currently spend about $35k/year including 17k of mortgage payments, and I will have the house paid off before ER time.
Are dividend paying bond funds treated the same as dividend paying equity or the same as individual bonds for tax purposes?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on December 05, 2014, 07:39:20 AM
Bonds funds ? Hope you mean bonds ETF. Anyway, bonds does not usualy pay "dividends", but more likely "interests". You can get the "split" from the funds provider, wait for T3 slip (issued only for taxables accounts) or if it is an ETF, take a look at a site like CDS Innovation to get it.

If your assets are all in RRSP or TFSA,  dont botther with this, its sheltered anyway
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: MorningCoffee on December 05, 2014, 08:45:29 AM
This thread makes me uneasy. Everyone, please remember to speak to a professional and double check the information that is given to you. I hope CPA CB is really who he says he is, but all we know is some anonymous person on the internet is giving accounting and tax advice. And to be fair, yes, CPA CB has also recommended this to readers a few times.

A few comments just don't sit right.

Let's take this $20k though as an example - at 10% you'll pay $2,000 in tax per year. I'll pay $1,000 per year on my gains. In this scenario, it will take about 40 years to break even between the two. This is assuming a ludicrously low marginal rate, and a low cost of living. The current average mortality age of Men in Canada is 80.78, and Women is about 84.3 This means that if you're between 40 and 45, based on the above assumptions, I'll have made up the difference in the period.

If 100k is invested in an RRSP (and 39% marginal tax as above) and 20K is pulled out per year in retirement, it can't take 40 years to break even - you run out of money long before that. Less taxes would be paid if money was sheltered. RRSPs are a good option for many Canadians, especially at a 39% marginal rate. In many situations, sheltered is better than unsheltered.

Also

Hello I have two rental related questions that I couldn't find answers to on CRA's site:

We only put 5% down when buying a new investment property last year so had to pay $8,000 CMHC fees.  Can these be deducted during taxes or do they become part of the cost of the property that we factor in when we sell?

Also, we paid land transfer fees and closing costs and didn't deduct them. Are they deductible or do they also become part of the cost of the property.

Hi again C-Kat.

These are what I would call 'grey' area issues, so I'm going to go into a bit of tax theory before answering here...

These fees & costs have been incurred as a result of purchasing the rental property.

The rules regarding capitalizing (i.e. adding to your cost base) versus expensing are somewhat vague, and purely situation based.

Capitalizing an item requires that the cost is necessary to prepare the asset (in this case, the house) to produce income. Were these costs necessary to prepare the property for this income? Sure, but ultimately, they are really one time expenditures which are NOT capital in nature. If you needed to add a roof, this is capital (as an example).

That being said - the CRA will allow you to treat these costs either way. However, the correct treatment is expensing in the year incurred for your situation (in my opinion). These aren't true assets - they have no 'value' to add to your property as they are not transferrable, and really don't reflect the nature of your transaction.

In short, expense it!

According to the CRA:
“Line 8860 – Legal, acc
ounting, and other
professional fees
You can deduct fees for legal services to prepare leases or
collect overdue rents. If you
incur legal fees to buy your
rental property, you cannot deduct them from your gross
rental income. Instead, allocate the fees between land and
building and add them to their respective cost. For
example, you buy a property worth $200,000 ($50,000 for
the land and $150,000 for the building) and incur legal fees
of $10,000. Split the $10,000 proportionately between the
land and building. In this case, $2,500 is added to the cost of
the land (for a total of $52,500) and $7,500 is added to the
cost of the building (for a total of $157,500). For more
information, see “Land” on page 20.

Expenses you cannot deduct
Land transfer taxes
You cannot deduct land transfer taxes you paid when you
bought your property. Add thes
e amounts to the cost of the
property.”

 http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-13e.pdf
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 05, 2014, 09:38:55 AM
This thread makes me uneasy. Everyone, please remember to speak to a professional and double check the information that is given to you. I hope CPA CB is really who he says he is, but all we know is some anonymous person on the internet is giving accounting and tax advice. And to be fair, yes, CPA CB has also recommended this to readers a few times.

A few comments just don't sit right.

Let's take this $20k though as an example - at 10% you'll pay $2,000 in tax per year. I'll pay $1,000 per year on my gains. In this scenario, it will take about 40 years to break even between the two. This is assuming a ludicrously low marginal rate, and a low cost of living. The current average mortality age of Men in Canada is 80.78, and Women is about 84.3 This means that if you're between 40 and 45, based on the above assumptions, I'll have made up the difference in the period.

If 100k is invested in an RRSP (and 39% marginal tax as above) and 20K is pulled out per year in retirement, it can't take 40 years to break even - you run out of money long before that. Less taxes would be paid if money was sheltered. RRSPs are a good option for many Canadians, especially at a 39% marginal rate. In many situations, sheltered is better than unsheltered.

Also

Hello I have two rental related questions that I couldn't find answers to on CRA's site:

We only put 5% down when buying a new investment property last year so had to pay $8,000 CMHC fees.  Can these be deducted during taxes or do they become part of the cost of the property that we factor in when we sell?

Also, we paid land transfer fees and closing costs and didn't deduct them. Are they deductible or do they also become part of the cost of the property.

Hi again C-Kat.

These are what I would call 'grey' area issues, so I'm going to go into a bit of tax theory before answering here...

These fees & costs have been incurred as a result of purchasing the rental property.

The rules regarding capitalizing (i.e. adding to your cost base) versus expensing are somewhat vague, and purely situation based.

Capitalizing an item requires that the cost is necessary to prepare the asset (in this case, the house) to produce income. Were these costs necessary to prepare the property for this income? Sure, but ultimately, they are really one time expenditures which are NOT capital in nature. If you needed to add a roof, this is capital (as an example).

That being said - the CRA will allow you to treat these costs either way. However, the correct treatment is expensing in the year incurred for your situation (in my opinion). These aren't true assets - they have no 'value' to add to your property as they are not transferrable, and really don't reflect the nature of your transaction.

In short, expense it!

According to the CRA:
“Line 8860 – Legal, acc
ounting, and other
professional fees
You can deduct fees for legal services to prepare leases or
collect overdue rents. If you
incur legal fees to buy your
rental property, you cannot deduct them from your gross
rental income. Instead, allocate the fees between land and
building and add them to their respective cost. For
example, you buy a property worth $200,000 ($50,000 for
the land and $150,000 for the building) and incur legal fees
of $10,000. Split the $10,000 proportionately between the
land and building. In this case, $2,500 is added to the cost of
the land (for a total of $52,500) and $7,500 is added to the
cost of the building (for a total of $157,500). For more
information, see “Land” on page 20.

Expenses you cannot deduct
Land transfer taxes
You cannot deduct land transfer taxes you paid when you
bought your property. Add thes
e amounts to the cost of the
property.”

 http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-13e.pdf

Hello,

Looks like someone took their coffee strong this morning!

Indeed, I am an anonymous person online - if I hadn't said it explicitly before, this is really for informational purposes. I highly recommend anyone using this information vet it with either your accountant or tax lawyer, especially given the complexity of some of the questions.

Engage a CPA in your area, or a tax lawyer (or both if necessary) - as an aside to this, I happen to be a fully qualified CPA, CA, so if anyone wants to use me, you're welcome to send me a message (apologies for the personal plug). Some people have done this on the forum already.

In short - if you're going to used complex tax laws to your advantage, you should hire someone to help you with the process.

Morning Coffee has erred in his/her assessment of my RRSP vs. Taxable account analysis, by forgetting the impact of growth over time. If you invested the 100k today, at rates of 7% you'd expect to have 200k in 10 years, 400k in 20 years, and 800k in 30 years. This is approximate, but you get my drift.

As far as the land transfer tax question is concerned, you're absolutely correct - based on what you've audited here, land transfer fees must be added to the cost of the property (which can then be deducted as CCA, but I digress).

If this is the only over-step I've made thus far, I think I'm doing a pretty good job.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Posthumane on December 05, 2014, 10:09:38 AM
It\s true that CPA CB  is an anonymous person on the internet, but the beauty of tax discussions is that anyone reading them can personally go and verify the facts since the information is freely available to all. In fact, everybody should do so before making decisions based on such information. That being said, it is still good to have someone knowledgeable about the topic point out things you may have missed by virtue of not knowing the tax code in and out.

Bonds funds ? Hope you mean bonds ETF. Anyway, bonds does not usualy pay "dividends", but more likely "interests". You can get the "split" from the funds provider, wait for T3 slip (issued only for taxables accounts) or if it is an ETF, take a look at a site like CDS Innovation to get it.

If your assets are all in RRSP or TFSA,  dont botther with this, its sheltered anyway
Keeping everything in sheltered accounts has worked for me up to this point but as of next year I will likely have both maxed out and I need to start thinking of the best way to allocate between taxable and sheltered accounts. Bonds, being an interest paying investment, are obviously best kept in sheltered accounts, canadian dividend paying equities can be in taxable due to favourable treatment, etc. ETFs and non-ET funds which hold REITs and various bond/equity combinations can be more tricky though, as some of their monthly/quarterly payouts may be interests, dividends, return of contributions, etc, or some combination thereof. I guess there probably isn't a very useful "general" answer to that as each one should be looked at individually.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on December 05, 2014, 10:49:21 AM
look at Canadian Couch Potato "Put Your Assets in Their Places"

RRSP ; US and Intenational stocks, Bonds
TFSA ; GIC's and REITs
Taxable accounts ; Canadian stock (common or preffered shares)

Make a big spread sheet to get the desired AA over many accounts and keep it simple

ex. I got only 11 holdings over 5 accounts
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on December 05, 2014, 11:32:22 AM
Thanks for that tip/lead, Le Barbu! I will be checking out that CCP page, too.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on December 07, 2014, 10:20:42 AM
In an attempt to eliminate the confusing variables I don't need to concern myself with, I'm asking a different aspect of this question on another thread, and bring the Canadian tax part here.

Canadian Couch Potato says:

Quote
All the [CCP model] portfolios are suitable for tax-sheltered accounts. However, investors managing multiple accounts (RRSPs, TFSAs and non-registered accounts) need to consider proper asset location to maximize tax-efficiency. For example, if you have no choice but to hold fixed income in a non-registered account, you should avoid bond ETFs altogether and consider substituting a ladder of GICs.

I am a person "managing multiple accounts (RRSPs, TFSAs and non-registered accounts)", so apparently am supposed to "consider proper asset location to maximize tax-efficiency." And I may be a person that has "no choice but to hold fixed income in a non-registered account".

Questions:

1. If I am a person who does not earn enough from any source to owe any taxes, do I need to be concerned with maximizing tax-efficiency? Or am I an odd duck that can set this variable aside, and put things where I want and be no more or less tax efficient?

2. Is income from investments treated exactly the same as income from employment, etc? As an only-parent, kid with disability tax credit, and me with disability tax credit, the room for (employment) income is much higher than what I bring in. If investment income is taxed exactly the same as employment income is, I have oodles of room before I need to think about this, yes?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on December 08, 2014, 07:14:36 AM
Hi scrubbyfish, reading your last post, I think you're getting close from a good plan.

From what I understand of your situation, you have to consider the disability tax advantage when running your calculations. Interests are taxed exactly like an income, dividends and capital gain are slightly differents.

Feel free to give more details, but I would be very surprised if your RSSP and TFSA accounts cannot hold enough fixed income to get an appropriate AA??

Ex.: You want 40% fixed (bonds, GIC, cash), RSSP room is 50k and TFSA is 36,500$ (on 2015-01-01) meaning you have 86,500$ "sheltered". If all this is "fixed assets", you still want to get  130k in taxable account! Thats some dought, even for a Mustachian...

Do you have any debt? (even a mortgage). If not, you can consider you need less "fixed assets" than average investor. Is your job safe enough? Do you have a pension plan with your job? Are you close to retirement? Do you invest for a while or you are new at it? etc...

Take few minutes to read CCP article : Why Use a Strip Bond ETF? CCP suggest to replace the "bonds" portion with BXF in taxable account. MER are 0.2% and there it is tax advantaged (explained in the article).

Remember that fixed assets like bonds usualy match inflation on the long run and are usefull to smooth the ride. They are not intended to give any real return most of the time. Thats why I am 100% equities and intend to introduce bonds only when I will be 50+ with over 1M invested. I plan to get 15-25% maximum VSB (short gov. bonds) at this time.

If you come back with a bit more info, I can tell you what I would do with the investment plan.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on December 08, 2014, 10:47:01 AM
Thanks, Le Barbu! I have just now posted to you the more investment-related stuff over on the Investor Alley thread. See you there :)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CostcoSamples on December 08, 2014, 10:57:33 AM
 CPA CB, you sir, are awesome!

I am wondering if you have any suggestions for a budding mustachian.  My mustache is very tiny at the moment, as my wife and I are in "my hair is on fire, emergency-pay-off-debt" mode!

What is the best way to minimize my taxes?  This is my situation:

married with 3 very young children (ages 2,4, 6).
I Work full time earning $75k/year.  I also own a new business that earns an additional $40k to $60k/year gross revenue.  My wife is a stay at home mom, but does help with my business.
We live in Alberta.  We have basically zero savings (we recently cashed out our meager RRSP to pay off some debts).  We purchased our first house 2 years ago, and own one vehicle.

Expenses for my business are minimal (cell phones, computer/office supplies, maybe $100/month in gas for travel, insurance) totaling around $600/month.  At the moment, our family vehicle is used for business work, but I am planning to purchase a second vehicle in early 2015 for business travel.  Business travel is mainly driving around town, totaling between 150 km and 300 km per month.  The nature of the work requires that I have a vehicle.  I will also use the vehicle to drive to my other job, and occasionally use it for work at my job, as well as personal use.  Can I claim the vehicle purchase entirely as business expense? 

Should I incorporate my business? If I do, could I claim my second vehicle as a business expense?  Any other tips to reduce taxes?

Thanks so much!  You rock!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on December 08, 2014, 11:39:50 AM
Don't forget, these conventional rules of asset allocation / tax efficient investing might not apply to a Mustachian. Probably the biggest example is the RRSP, which is the best savings account for most Mustachians that earn an above average income and have low spending. Here's a clear, simplified example of why you should not ignore the RRSP, or follow tax-wise thinking that RRSP's should be used primarily for lower interest returns.

Scenario A: I live in Alberta (the easiest province for tax calculations because of the flat 10% income tax), I'm 30 years old, I earn $100,000 a year (36% bracket). My wife, also 30, earns $70,000 per year (32% bracket). Our spending is $40,000 per year, a lot of money for me if my mortgage was paid off. For simplicity sake let's say inflation, bracket adjustments, and salary increases don't exist. On my RRSP contributions, I only have to contribute $11,500 net income to max my $18,000 RRSP room because of course the RRSP is pre-tax. My wife only has to contribute $8,500 net to get to her $12,600 annual increase in RRSP room. After investing for 15 years, at 6% "real" return (remember inflation doesn't exist) the combined value of our RRSP's is $800,000, $470,000 for me, $330,000 for wifey. I want to slowly draw down the value of my RRSP before I hit 71, so let's say I move to a safer asset allocation and withdraw 5.5% a year for a gross income of $44,000. We file together, as we should, so on my $23,500 income, I pay a whopping $3,000 in tax for a rate of 11.6%. On wife's $18,150 income, she pays $1,100 tax for a rate of 6%. Our net income is a hair under $40,000.

Scenario B: Let's say I heard some things online that I interpreted to mean RRSP's shouldn't be used for stock investing and I choose to invest in a taxable account instead because I know stock returns are better than bond/GIC returns over a long period of time. Using the after-tax investment amounts ($11,500 for me and $8,500 for wifey), in 15 years at 6% I have $300,000 and wife has $220,000 for a total of $520,000. Now we know that capital gains are tax efficient so let's save ourselves the headache of calculating adjusted cost base and just say that at our spending levels our tax rates are 0%. We now have to draw 7.7% of our investment to get our $40,000 spending cash. Don't forget this 6% real return may be harder to achieve in a taxable account because if I'm panicky and buy and sell stocks throughout my buildup period I will have to pay taxes on the capital gains that exceed the capital losses.

In scenario A, retirement is definitely a reality. We retire at 45 years old and draw 5.5% a year for 15 years, by the time we hit 60 we can collect CPP, then OAS at 67, so our drawdown's will decrease according. I kept it very simple for this illustration, but we also have some easy tricks up our sleeve that can make our RRSP income more even, thereby reducing my tax rate and marginally increasing the wife's to make the scenario even more tax efficient. In fact, I bet we could make our true drawdown more like 5% instead of 5.5% because we could pay virtually no tax.

There are of course a few things to remember.
First, if you vision your retirement to include 2 homes, a large diesel guzzling hotel on wheels, 2 luxury vehicles, luxury vacations spanning the globe, and so on you will need much more than $40,000 per year so RRSP may not be as suitable from a tax perspective.
Second, if you earn money in the lowest tax bracket (generally less than $42-$44,000 per year), don't even bother with RRSP's because your savings will be marginal anyways.
Third, don't let your RRSP value run up to high; if you're say 55 years old and have over $1 million in RRSP accounts and spend only $30,000 a year you will start to hate the CRA when you turn 71 and they force you to withdraw amounts that double or triple your spending needs and pay exorbitant amounts of taxes... time to spoil your favorite charity or political party, or maybe consider a vow of perpetual poverty and join a convent or monastery. :)
Fourth, don't ignore the benefits of having NO DEBT (aside from qualifying investment loans I suppose) in retirement. You pay income taxes on the dollars it takes you to pay your debts off, so a mortgage and car payment or two might bump your gross income needs from $44,000 a year to $65,000 a year in a real hurry.
And finally, the no inflation, constant rate of return world where a couple earns $170,000 a year but only saves $30,600 of that with spending of $40,000 I used in my scenario isn't real, but hopefully it paints a somewhat accurate picture.

My point is not to get too tax sensitive and to know your own personal numbers. Holding GIC's in a TFSA (CCP advice) is not very smart from a simple view because the biggest benefit of the TFSA is the "no more taxes" part. GIC's real return is less than 1% on average, so if you invest $5,500 a year for 15 years in GIC you end up with $94,000. Of which $82,500 is your contributions. Very tax efficient indeed, but you wouldn't have paid much tax on that pitiful gain anyways. So try and max the return on the TFSA as much as you can (ie. invest in stocks!). Don't over think the Canadian dividend thing in taxable accounts because even with a DRIP you will be paying taxes on those payouts at a high rate throughout your saving period. For the $100,000 income dude in Alberta, you will pay over 25% tax on those dividends every year even though you won't be spending them. If I invest in a taxable account, I would much rather have my return in the form of capital gains that I can easily defer until retirement.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 09, 2014, 05:14:51 PM
CPA CB, you sir, are awesome!

I am wondering if you have any suggestions for a budding mustachian.  My mustache is very tiny at the moment, as my wife and I are in "my hair is on fire, emergency-pay-off-debt" mode!

What is the best way to minimize my taxes?  This is my situation:

married with 3 very young children (ages 2,4, 6).
I Work full time earning $75k/year.  I also own a new business that earns an additional $40k to $60k/year gross revenue.  My wife is a stay at home mom, but does help with my business.
We live in Alberta.  We have basically zero savings (we recently cashed out our meager RRSP to pay off some debts).  We purchased our first house 2 years ago, and own one vehicle.

Expenses for my business are minimal (cell phones, computer/office supplies, maybe $100/month in gas for travel, insurance) totaling around $600/month.  At the moment, our family vehicle is used for business work, but I am planning to purchase a second vehicle in early 2015 for business travel.  Business travel is mainly driving around town, totaling between 150 km and 300 km per month.  The nature of the work requires that I have a vehicle.  I will also use the vehicle to drive to my other job, and occasionally use it for work at my job, as well as personal use.  Can I claim the vehicle purchase entirely as business expense? 

Should I incorporate my business? If I do, could I claim my second vehicle as a business expense?  Any other tips to reduce taxes?

Thanks so much!  You rock!

Hi everyone - sorry for the delay in responding.

Scrubbyfish - I think your questions have been more than answered by Le Barbu and Tuxedo Eagle, who clearly know more about the investment end of these things than I do. I'll defer to their expertise in this regard.

Costco -

Congrats on getting started on the path to wealth here. It looks like you have a good sense of where you want to go.

With regards to incorporation, this is really an 'it depends' kind of question. There are tremendous upsides given your circumstances, and a few downsides to be aware of.

The downsides are in costs. Incorporating properly is expensive, and the yearly tax returns will cost an absolute bare minimum of $750-$1,000. This is minimum, many (including myself) would charge more. I can't emphasize enough the importance of hiring someone professionally to do this, and not using one of the online providers. You want to ensure this is done correctly the first time, as amending things can be a huge pain (and be a huge bill).

The upsides can be huge - firstly it provides an opportunity to income split with your wife via paying her a salary or dividends. Secondly, you'll be able to 'defer' your taxes by 'choosing' when to take income personally (via salary or dividends) and just pay the corporate rate (much lower) versus now where you have to take the income personally at a higher rate. I'd say you'll save a fair bit in taxes over the years, which will make it worthwhile.

In addition, include your children as preferred shareholders, so when they reach 18+ you can get money to them on a tax advantaged basis (dividend) instead of giving them money in after-tax dollars.

You will be able to claim the automobile purchase as a business expense - but the caveat will be that a portion of this expense will be added as a taxable benefit to your tax return, or your wife's, whomever uses the car. It's still better than the alternative (no expense). You'll want to keep an accurate log of miles used for business vs. personal as it is a multi-use vehicle.

In addition - home office expense! Write off some of your home utilities, and charge the corporation rent on a square footage basis. This is a great way to save money come tax time.

Hope this helps to clarify a bit!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on December 09, 2014, 05:24:32 PM
Scrubbyfish - I think your questions have been more than answered by Le Barbu and Tuxedo Eagle, who clearly know more about the investment end of these things than I do. I'll defer to their expertise in this regard.

Yes, thank you very much, Tuxedo Eagle and Le Barbu!

I continue my larger exploration over at: http://forum.mrmoneymustache.com/investor-alley/one-%28investing%29-question-at-a-time/
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: trout14 on December 09, 2014, 06:20:58 PM
Do you have any experience with the many complexities of Canadian residents with dual US/Canada citiizenship? I have family in Calgary and Vancouver and it sounds like a nightmare to figure taxes in both countries, what investments are subject to tax or not, and when investing in canada, the US IRS saying that is basically offshore accounts and subject to further taxing. The fines and fees are outrageous, and subject to 50% of assets each year. YIKES!!!! I would like to forward them to you if you have any experience in this type of taxes. It appears few do though.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 10, 2014, 07:05:44 AM
Do you have any experience with the many complexities of Canadian residents with dual US/Canada citiizenship? I have family in Calgary and Vancouver and it sounds like a nightmare to figure taxes in both countries, what investments are subject to tax or not, and when investing in canada, the US IRS saying that is basically offshore accounts and subject to further taxing. The fines and fees are outrageous, and subject to 50% of assets each year. YIKES!!!! I would like to forward them to you if you have any experience in this type of taxes. It appears few do though.
Hi Trout,

First I want to let you know that it things aren't as dire as they seem. Canada and the United States share what's called a tax treaty - in that they agree to collect tax together in order to avoid double taxation (at least, holistically). This means that your family is only supposed to pay the higher of the US or Canadian tax. Without knowing more, I couldn't comment on the fines you speak of, but these seem unusually punitive for the circumstances and I doubt they will apply.

Unfortunately, I understand the US Tax system only at a very high level, and therefore wouldn't be the appropriate fit for your family in this case. I've filed the odd US return, but really this is something outside of my area of expertise from a nitty gritty filing perspective.

However - Luckily, I actually receive this question a fair bit!

If you're interested, I know a certain group that excels in this area, and has CPAs north and south of the border, which means you'd be getting someone qualified in Canadian, and someone qualified in US, that deal with Expat (i.e. US citizens living abroad) issues. If you message me, I'd be more than happy to give out my contact information, and help to correspond with your family to guide them through this process.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: queenie on December 10, 2014, 07:13:51 AM
Would you be able to give me any information about the income-splitting option for families?  This is something new that I don't know anything about but I think would benefit our family.  My husband grossed over $100,000 this year and I am a stay at home mom.

I do have some income that I can claim this year (roughly $2,500) that I earned doing photography.  I have never earned or claimed income that was not through a standard job with a T4 before.  Can you give me any information about claiming this amount?  Would I be able to write off my photography equipment as a business expense?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: HopefulMustachian on December 10, 2014, 01:02:19 PM
Hello CPA!

My boyfriend and I are planning on moving to Canada in 6 months (June 2015). He is an American citizen (I sponsored him for permanent residency in Canada as a Common Law Partner) and I am a Canadian citizen. We have started looking into the tax complications of our situation and it seems very....well...complicated! My boyfriend and I have been living in NYC together for 3 years. We both have 401ks, and checking accounts with good amounts of money in them ($60,000 and $20,000). From what we understand my boyfriend will still always be taxed by the IRS even when we move to Canada.

We also have the issue of trying to move our 401ks from the US to Canada, which we may not be able to do until we find jobs and make a good income so as to offset the IRS taxing us for moving the money (from what I understand revenue Canada will give you a tax break if you get taxed by the IRS for brining your 401k into Canada).

I am also receiving $60,000 from my grandparents before we move. Will I be taxed in Canada if I start investing this money before I move? II have been filing as a non-resident of Canada. Would I still be able to file as a non-resident if I invest the money before I move? Also, will the IRS be able to tax the money earned off of the investment while I'm still in the US?

Any help would be greatly appreciated!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on December 10, 2014, 01:35:38 PM
Would you be able to give me any information about the income-splitting option for families?  This is something new that I don't know anything about but I think would benefit our family.  My husband grossed over $100,000 this year and I am a stay at home mom.

I do have some income that I can claim this year (roughly $2,500) that I earned doing photography.  I have never earned or claimed income that was not through a standard job with a T4 before.  Can you give me any information about claiming this amount?  Would I be able to write off my photography equipment as a business expense?

If your husband earn 100k, and you 0$, your taxes use to be around 30k. Now, with the income-splitting, you will pay about 25k (like two 50k earners). Could be different from a province to another, this exemple is for Quebec. Just in case you don't know, here in Québekistan, the provincial gov. usualy offset (wash) everything the federal release. For my family, the Tories announcement makes us 2,500$ richer and 2 weeks later, the Liberals shaved 1,800$ from our pockets. Net = 700$ I just consider myself lucky it's not the PQ because the final result would have been -XXX$
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 15, 2014, 07:16:14 AM
Hello CPA!

My boyfriend and I are planning on moving to Canada in 6 months (June 2015). He is an American citizen (I sponsored him for permanent residency in Canada as a Common Law Partner) and I am a Canadian citizen. We have started looking into the tax complications of our situation and it seems very....well...complicated! My boyfriend and I have been living in NYC together for 3 years. We both have 401ks, and checking accounts with good amounts of money in them ($60,000 and $20,000). From what we understand my boyfriend will still always be taxed by the IRS even when we move to Canada.

We also have the issue of trying to move our 401ks from the US to Canada, which we may not be able to do until we find jobs and make a good income so as to offset the IRS taxing us for moving the money (from what I understand revenue Canada will give you a tax break if you get taxed by the IRS for brining your 401k into Canada).

I am also receiving $60,000 from my grandparents before we move. Will I be taxed in Canada if I start investing this money before I move? II have been filing as a non-resident of Canada. Would I still be able to file as a non-resident if I invest the money before I move? Also, will the IRS be able to tax the money earned off of the investment while I'm still in the US?

Any help would be greatly appreciated!

Hello there,

Congratulations on the move!

You are correct that this is indeed a complex situation, as moving tax deferred accounts across the border (either way) tends to be a bit tricky.

You're right that the hubby will continue to be taxed by Uncle Sam - unless he renounces citizenship like many Americans have been doing recently to avoid US taxes. I've dubbed this manoeuvre as the "Burger King" - but it hasn't caught on just yet.

I'm not exactly a US tax expert here, however I do know someone at a firm that is specifically focused on US Expatriate taxes. If you send me a message directly I would be happy to put you in touch.

That being said - I am aware of something called the "Gift Tax" in the United States. Not entirely certain how this affects someone like yourself (i.e. are you a non-citizen spouse?) etc., you may want to look into this further before your grandparents give you the money. If it is taxable, just hold off until you officially return to Canada before they give it to you.

Hope this is helpful!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: lostamonkey on December 19, 2014, 12:03:20 AM
I think I understand the concept of superficial losses but I was wondering if superficial gains also existed?

For example, lets say you decided to not work for a year and will be reporting little to no income on your next return. Could you sell a portion of your shares to realize a desired gain to report on your return, and then immediatly rebuy the shares and adjust their cost base? Since we have a progressive tax system and everyone gets the basic personal tax credit, this seems like a decent way to realize gains and have limited tax concequences.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Shooter_D on December 19, 2014, 07:54:00 AM

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

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

Good luck opening up the accounts!

That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.

Sadly it's true - I'm just going to take a sidebar here on semantics...

Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).

The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.

Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.

As a case study - Note, this is ONLY for capital gains purposes.

You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!

Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...

If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.

In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...

The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).

Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again

Can I jump in here and ask about foreign withholding taxes? I see the benefit of a TFSA as a never-get-taxed-again vehicle, but doesn't holding US stocks in a TFSA kind of cancel this out because of the need to pay withholding taxes on any dividends gained? And do US withholding taxes apply to capital gains as well? I currently hold VUN (which causes me to have to pay withholding tax regardless), but eventually I am hoping to hold VTI and will be faced with whether to hold it in my RRSP or TFSA. From your perspective above it seems it should be held in the TFSA, but then do I lose 15% to withholding tax? If VTI were in a RRSP I wouldn't have to worry about this extra tax. This seems to be why Canadian Couch Potato places US stock ETFs in either the RRSP or a taxable account (which allows you to get your withholding tax back, correct?) instead of a TFSA. Would you say the benefits of holding a US stock ETF in a TFSA and not being able to recover any withholding tax is outweighed by the benefit of never paying tax again on the capital gains?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 22, 2014, 07:31:35 AM
I think I understand the concept of superficial losses but I was wondering if superficial gains also existed?

For example, lets say you decided to not work for a year and will be reporting little to no income on your next return. Could you sell a portion of your shares to realize a desired gain to report on your return, and then immediatly rebuy the shares and adjust their cost base? Since we have a progressive tax system and everyone gets the basic personal tax credit, this seems like a decent way to realize gains and have limited tax concequences.

Harvesting gains like this works, and will benefit you if you do it in a year when you have low income, as it will allow you to get the gains at a lower rate, possibly with zero tax, compared to if you liquidated in a later year when you had higher income.

Harvesting gains offers no benefit if it will be taxed the same now as it would be in future years when you eventually close the position for real.

I agree here - I haven't seen any rulings regarding this, and it is typical of Investors to do this.

If you want to be on the safe side, wait 30 days before re-purchasing the shares.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 22, 2014, 07:42:46 AM

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

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

Good luck opening up the accounts!

That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.

Sadly it's true - I'm just going to take a sidebar here on semantics...

Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).

The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.

Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.

As a case study - Note, this is ONLY for capital gains purposes.

You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!

Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...

If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.

In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...

The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).

Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again

Can I jump in here and ask about foreign withholding taxes? I see the benefit of a TFSA as a never-get-taxed-again vehicle, but doesn't holding US stocks in a TFSA kind of cancel this out because of the need to pay withholding taxes on any dividends gained? And do US withholding taxes apply to capital gains as well? I currently hold VUN (which causes me to have to pay withholding tax regardless), but eventually I am hoping to hold VTI and will be faced with whether to hold it in my RRSP or TFSA. From your perspective above it seems it should be held in the TFSA, but then do I lose 15% to withholding tax? If VTI were in a RRSP I wouldn't have to worry about this extra tax. This seems to be why Canadian Couch Potato places US stock ETFs in either the RRSP or a taxable account (which allows you to get your withholding tax back, correct?) instead of a TFSA. Would you say the benefits of holding a US stock ETF in a TFSA and not being able to recover any withholding tax is outweighed by the benefit of never paying tax again on the capital gains?

With-holding taxes shouldn't be happening on Non-taxable accounts (i.e. RRSP and TFSA) per the US/Canada income tax treaty. However, should they decide to be a pain, you can claim a tax credit in this amount on your income tax return and 'get it back' or pay less in Canadian taxes...

I actually haven't seen withholding taxes in a TFSA in any of my clients at this point - so I'm surprised you've run into it.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on December 22, 2014, 01:33:18 PM
Wut? TFSA is not recognised as a retirement vehicle by the US and gets no special treatment. US stocks are subject to 30 or 15% withholding, depending on if you've filed a W-8BEN.

This is not recoverable from Canada, so it is lost. It is invisible as it is never seen inside the TFSA.

http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on December 22, 2014, 01:40:08 PM
Wut? TFSA is not recognised as a retirement vehicle by the US and gets no special treatment. US stocks are subject to 30 or 15% withholding, depending on if you've filed a W-8BEN.

This is not recoverable from Canada, so it is lost. It is invisible as it is never seen inside the TFSA.

http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/

This is why TFSA should hold some Canadian stuff like REITs or GICs unless your target AA is out of range
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on December 22, 2014, 01:47:05 PM
Wut? TFSA is not recognised as a retirement vehicle by the US and gets no special treatment. US stocks are subject to 30 or 15% withholding, depending on if you've filed a W-8BEN.

This is not recoverable from Canada, so it is lost. It is invisible as it is never seen inside the TFSA.

http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/

This is why TFSA should hold some Canadian stuff like REITs or GICs unless your target AA is out of range

Or eligible, dividend paying ADRs - British ones, for example, do not withhold tax. BP, Unilever, Vodafone, etc, etc.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 22, 2014, 03:19:35 PM
Wut? TFSA is not recognised as a retirement vehicle by the US and gets no special treatment. US stocks are subject to 30 or 15% withholding, depending on if you've filed a W-8BEN.

This is not recoverable from Canada, so it is lost. It is invisible as it is never seen inside the TFSA.

http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/

This is why TFSA should hold some Canadian stuff like REITs or GICs unless your target AA is out of range

Or eligible, dividend paying ADRs - British ones, for example, do not withhold tax. BP, Unilever, Vodafone, etc, etc.

Ooops.

I read capital gains.

Dividends are 15% if you file that W8. I expect this to change in the future - to get in line with the RRSP vs 401k ie TFSA vs Roth IRA.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on December 23, 2014, 05:50:16 PM
Note that if more than 15% is withheld, you can still recover the amount above 15% by filing Form 1040NR with the IRS. (However, you cannot recover the portion above 15% as a Canadian foreign tax credit no matter what kind of account it is withheld in, because it is a voluntary payment, not a tax.)

In order to file 1040NR, you need an ITIN and then that is a proper tax return - no? I do one already as I have rentals.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on December 27, 2014, 09:28:44 AM
Note that if more than 15% is withheld, you can still recover the amount above 15% by filing Form 1040NR with the IRS. (However, you cannot recover the portion above 15% as a Canadian foreign tax credit no matter what kind of account it is withheld in, because it is a voluntary payment, not a tax.)

In order to file 1040NR, you need an ITIN and then that is a proper tax return - no? I do one already as I have rentals.

If you have an SSN, you have to use your SSN. Otherwise, you would use your ITIN. If you don't have an ITIN, you just include Form W-7 with Form 1040NR. I'm not sure what you are trying to ask about a "proper tax return". A Form 1040NR is indeed a tax return (for nonresident aliens). If you are a US citizen or resident alien you would use Form 1040 instead, but given that this is the Canadian tax thread, I assume most people would use Form 1040NR.

Moreover, if you are already filing Form 1040NR for some other reason, such as US-source rental income, then you must report your US dividend income on Form 1040NR as well, on line 10. The amount withheld by your Canadian broker is reportable on line 61(d) and the broker should have issued you a Form 1042-S showing the amount to report on that line.

Furthermore, if you have a SSN or ITIN, you are required to give it to anybody paying you US-source dividends so that they can issue you the Form 1042-S. If you have failed to provide your ITIN to your broker(s), you have actually violated both US law and Canadian law (in particular, section 162(6) of the Canadian Income Tax Act, which requires you to furnish your ITIN when it is required for an information return, which includes Form 1042-S).

If you are already filing Form 1040NR and failing to include your US dividends, perhaps because you thought they were already taken care of, you have unfortunately been completing the forms incorrectly, which can have serious consequences. You will want to look into filing amended US returns for those years.

Even if you have a W-8BEN on file?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Roots&Wings on January 11, 2015, 02:41:56 PM
Hi, can anyone point me in the right direction about the tax implications for an American who sells a second home (not primary residence) in Canada? 

I've only found this site to date, http://www.bcheritagelaw.com/blog/estate-planning/us-residents-owning-canadian-property-implications-and-solutions/, which states:

One-half of the capital gains is included in the calculation of income for Canadian tax purposes.  US-resident individuals would pay Canadian federal tax on taxable capital gains at marginal rates ranging from 20.5% (on the portion of taxable capital gains below $300,000) and 43.7% (on the portion of the taxable capital gain exceeding $100,000).  At top marginal rate, the effective rate of tax imposed by Canada on the capital gain would be 21.85% (43.7% times ½).

As an example, if the property was purchased (Canadian $) for $100k and sells for $350k, the capital gain is $250k.  One-half of the capital gain is 125k.  If I'm understanding the basic math, the tax would be $125k x 20.5% = 25.6k and the portion of the taxable capital gain exceeding $100k would be $25k x 43.7% = $10.9k for a total Canadian tax amount of ~$36.5k.  Is that correct? 

Is the capital gain also taxed at the provincial level (PEI)?

Does it matter if the property was used as a vacation rental during part of the ownership term rather than for exclusive personal use?

Will be calling Revenue Canada and trying to find a tax person who can address this, but appreciate any insight or resources!  Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on January 14, 2015, 04:42:30 PM
Hi, can anyone point me in the right direction about the tax implications for an American who sells a second home (not primary residence) in Canada? 

I've only found this site to date, http://www.bcheritagelaw.com/blog/estate-planning/us-residents-owning-canadian-property-implications-and-solutions/, which states:

One-half of the capital gains is included in the calculation of income for Canadian tax purposes.  US-resident individuals would pay Canadian federal tax on taxable capital gains at marginal rates ranging from 20.5% (on the portion of taxable capital gains below $300,000) and 43.7% (on the portion of the taxable capital gain exceeding $100,000).  At top marginal rate, the effective rate of tax imposed by Canada on the capital gain would be 21.85% (43.7% times ½).

As an example, if the property was purchased (Canadian $) for $100k and sells for $350k, the capital gain is $250k.  One-half of the capital gain is 125k.  If I'm understanding the basic math, the tax would be $125k x 20.5% = 25.6k and the portion of the taxable capital gain exceeding $100k would be $25k x 43.7% = $10.9k for a total Canadian tax amount of ~$36.5k.  Is that correct? 

Is the capital gain also taxed at the provincial level (PEI)?

Does it matter if the property was used as a vacation rental during part of the ownership term rather than for exclusive personal use?

Will be calling Revenue Canada and trying to find a tax person who can address this, but appreciate any insight or resources!  Thanks!

Hi there -

This is a bit complex, as you note, and definitely requires someone who understands the ins and outs of the Canada/US Tax Treaty, for US Citizens. I've recommended people to Greenback Expat Tax Services for circumstances similar to this in the past, the obvious bonus with them is that you work with two CPA's (in this case, Canada and the US), instead of a just a Canadian CPA or US CPA, who knows a bit about tax in either circumstances.

Is this a dramatic capital gain, or minimal?

All the Best,

CPA CA
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Roots&Wings on January 15, 2015, 09:05:50 AM
Thank you CPA CB and Cathy!  I'll check out the Greenback Tax service and really appreciate the specific tax form numbers...I was not having much luck on the Revenue Canada website. 

The ultimate sale event won't happen immediately (just doing due diligence and researching the rental issue).  It will make a difference if the tax rates are more favorable if the house is used for personal use for a certain time frame rather than as a rental.  Thanks again!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cowtown2011 on February 23, 2015, 08:46:29 AM
Question: Under the new Family tax cut (income splitting for families), if you have one of the spouses who makes all the income and the other none, would it make sense to contribute to RRSP's in the person with no income (with savings from prior earnings) in order to allocate more income under the splitting rules? for example, you can allocated up to $50,000, if you combine that with an RRSP contribution, could you in theory allocate more total income?

Any thoughts?

Thanks
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Posthumane on February 26, 2015, 03:52:23 PM
Question: Under the new Family tax cut (income splitting for families), if you have one of the spouses who makes all the income and the other none, would it make sense to contribute to RRSP's in the person with no income (with savings from prior earnings) in order to allocate more income under the splitting rules? for example, you can allocated up to $50,000, if you combine that with an RRSP contribution, could you in theory allocate more total income?

Any thoughts?

Thanks
You have to remember that the maximum benefit that can be gained form the family tax credit is $2k. If you had a > 100k income and your spouse had zero, moving 50k to the spouse would already bump up against that limit (difference of moving from 25k taxes paid for single 100k income to 2 x 9.4k for dual 50k incomes is greater than 2k).

EDIT: Also, and someone correct me if I'm mistaken on this, if your spouse's income is actually zero, you can claim the spouse as a dependent. The dependent amount is somewhere around 11k, so if you're in the 36% bracket this will actually gain you more than income splitting.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: lostamonkey on February 28, 2015, 06:10:15 AM
I made a fairly large contribution to my RRSP recently that I plan to probably deduct in 2015. If I fill out T1213, get a letter of authority from the CRA, have my employer reduce my payroll withholdings, then I change my mind and want to use the deduction in 2016, will I or my employer face interest or penalties from the CRA. I realize this will result in a bigger tax bill at the end of 2015.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on February 28, 2015, 10:30:19 AM
I made a fairly large contribution to my RRSP recently that I plan to probably deduct in 2015. If I fill out T1213, get a letter of authority from the CRA, have my employer reduce my payroll withholdings, then I change my mind and want to use the deduction in 2016, will I or my employer face interest or penalties from the CRA. I realize this will result in a bigger tax bill at the end of 2015.

The response from the CRA will specify which year(s) you can use for the deduction. In both of my responses for two T1213 applications last year the CRA allowed me to make the deduction in either 2014 or 2015. You will not have any penalties unless you do not pay your taxes due. This is actually noted on the response letter from the CRA as well.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on February 28, 2015, 11:44:51 AM
Question: Under the new Family tax cut (income splitting for families), if you have one of the spouses who makes all the income and the other none, would it make sense to contribute to RRSP's in the person with no income (with savings from prior earnings) in order to allocate more income under the splitting rules? for example, you can allocated up to $50,000, if you combine that with an RRSP contribution, could you in theory allocate more total income?

Any thoughts?

Thanks
You have to remember that the maximum benefit that can be gained form the family tax credit is $2k. If you had a > 100k income and your spouse had zero, moving 50k to the spouse would already bump up against that limit (difference of moving from 25k taxes paid for single 100k income to 2 x 9.4k for dual 50k incomes is greater than 2k).

EDIT: Also, and someone correct me if I'm mistaken on this, if your spouse's income is actually zero, you can claim the spouse as a dependent. The dependent amount is somewhere around 11k, so if you're in the 36% bracket this will actually gain you more than income splitting.

Hi There,

You're right - if the income is zero for the spouse you can claim his/her Basic Personal Amount - Federally this is $11,138 for the 2014 Taxation Year. Just to be careful with terminology, this is not the same as an eligible dependant, where the rules differ significantly.

You can claim the basic amount AND income split however, so keep this in mind.

Also - you cannot contribute as the non-earner spouse to your own RRSP without running into issues with Attribution. This states that the income is coming from the earning spouse (and therefore is included in the earning spouse's income upon withdrawal) and also disallows the tax credit in the contribution year (effectively making this a double-tax). To the extent possible, it's better to minimize this risk.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Posthumane on March 02, 2015, 09:43:55 AM

You're right - if the income is zero for the spouse you can claim his/her Basic Personal Amount - Federally this is $11,138 for the 2014 Taxation Year. Just to be careful with terminology, this is not the same as an eligible dependant, where the rules differ significantly.

You can claim the basic amount AND income split however, so keep this in mind.
You're right regarding the terminology, I just lump them together in my mind since the amounts are similar and neither apply to me at the moment.

I didn't know that the income splitting wouldn't affect the basic amount for a spouse though. Does it affect any other parts of the non-earning spouse's return such as GST credits, or does it only apply to the family tax credit in isolation?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Getting there! on March 02, 2015, 08:13:41 PM
I am a Canadian currently considering selling a US vacation home.  I got some information about what the IRS would take off the sale price (10% if under $300,000, and then I understand I could recover the withheld amount next year if home sold this year.  Then I imagine I would have to report the capital gain on my Canadian return? 
I appreciate any advice you could provide.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on March 02, 2015, 08:39:14 PM
I am a Canadian currently considering selling a US vacation home.  I got some information about what the IRS would take off the sale price (10% if under $300,000, and then I understand I could recover the withheld amount next year if home sold this year.  Then I imagine I would have to report the capital gain on my Canadian return? 
I appreciate any advice you could provide.

First of all, you should understand that any amount that may be withheld from the sale proceeds is not necessarily the same as the amount you owe the US in tax on the sale proceeds.

On the topic of withholding, here is a summary of the law. Pursuant to 26 USC § 1445, when a nonresident alien sells property in the USA, the buyer must withhold 10% of the proceeds and remit it to the IRS, unless 10% is more than the amount of tax that will be finally owed on the sale, in which case the buyer should only withhold the actual tax liability (but the seller has to obtain from the IRS an advance calculation of the actual tax owed to benefit from this).

The general rule on withholding is subject to a number of exceptions. One exception is that if the buyer purchases the property to use a residence and the cost is less than $300,000, then the buyer is not required to withhold any tax from the proceeds (although they can if they want to). You can receive the entire proceeds in this case. Note that you may still owe tax to the IRS. We are only concerned at this juncture with withholding, not actual tax liability. In practice, the buyer may still withhold in this case because pursuant to 26 CFR 1.1445-2(d)(1), if the buyer does not withhold and then the IRS determines that they are not using the property as a residence, then the buyer is liable for the tax. I am guessing buyers may not want to take that risk.

Now that I have summarised withholding, let's discuss final tax liability.

Pursuant to 26 USC § 897, the disposition of property by a nonresident alien is subject to tax as if the gain were income effectively connected with a US trade or business. This means that the gain is taxed at graduated income tax rates. Alternative minimum tax may possibly also apply. You will need to file Form 1040NR to report the sale, figure the tax owed, and pay it and/or receive a refund of any amount withheld.

Note that withholding is based on the proceeds but the actual tax is only based on the gain. The actual tax rate may be more than 10% of the gain, but that could be less than 10% of the proceeds. However, if no tax was withheld because of the exception I mentioned, you may well have tax owing when you file Form 1040NR.

So that deals with your final tax liability to the USA.

As for Canada, you would indeed have a taxable capital gain. Half of your net capital gains are taxable at ordinary income rates in Canada. You can claim a foreign tax credit for your final tax liability to the USA. Note that you cannot claim a foreign tax credit based on the withholding, if any, that was remitted to the IRS. The credit is based on the actual final tax liability as figured on Form 1040NR. The CRA may require you to submit your Form 1040NR as proof that you are claiming the actual final liability and not the withholding amount.

You may also have a filing requirement and tax owing to the US state where the property is located.


That all said, this is just a summary of the laws. There are many exceptions and special cases. From your post, it seems you are very confused about the various requirements here. For that reason, you may want to pay for the services of an accountant or lawyer to help you.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: guerilla1977 on March 02, 2015, 09:59:10 PM

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

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

Good luck opening up the accounts!

That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.

Sadly it's true - I'm just going to take a sidebar here on semantics...

Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).

The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.

Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.

As a case study - Note, this is ONLY for capital gains purposes.

You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!

Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...

If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.

In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...

The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).

Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again

The comparison between RRSP and TFSA for sheltering dividends doesn't appear to be fair because you're not taking into account pre vs after tax money.  What am I missing here?

Using your example:

RRSP: the $100,000 in pre-tax money grows by $1,000,000 and the entire balance of 1.1 mil is taxed at 25% upon withdrawal, leaving you with $825,000.

TFSA: the $70,000 in after tax money (30% income tax) grows by only $700,000 and the entire balance of $770,000 is not taxed at all because it is sheltered, leaving you with $770,000. 

There is more money left in the RRSP!!

Where did my math go wrong?

(turning $100k into $1 mil requires 12.2% growth over 20 years, so I used that same growth rate for the TFSA comparison, to be fair)

Thanks,
Greg
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on March 02, 2015, 10:10:42 PM

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

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

Good luck opening up the accounts!

That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.

Sadly it's true - I'm just going to take a sidebar here on semantics...

Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).

The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.

Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.

As a case study - Note, this is ONLY for capital gains purposes.

You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!

Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...

If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.

In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...

The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).

Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again

The comparison between RRSP and TFSA for sheltering dividends doesn't appear to be fair because you're not taking into account pre vs after tax money.  What am I missing here?

Using your example:

RRSP: the $100,000 in pre-tax money grows by $1,000,000 and the entire balance of 1.1 mil is taxed at 25% upon withdrawal, leaving you with $825,000.

TFSA: the $70,000 in after tax money (30% income tax) grows by only $700,000 and the entire balance of $770,000 is not taxed at all because it is sheltered, leaving you with $770,000. 

There is more money left in the RRSP!!

Where did my math go wrong?

(turning $100k into $1 mil requires 12.2% growth over 20 years, so I used that same growth rate for the TFSA comparison, to be fair)

Thanks,
Greg

Your math is pretty much right, but its the tax rates that make it go wacky. You're calculating 30% tax going in and 25% tax going out. Of course the RRSP will win in this situation, if you reinvest all of your tax refund back into the RRSP.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: guerilla1977 on March 02, 2015, 10:18:30 PM

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

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

Good luck opening up the accounts!

That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.

Sadly it's true - I'm just going to take a sidebar here on semantics...

Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).

The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.

Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.

As a case study - Note, this is ONLY for capital gains purposes.

You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!

Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...

If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.

In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...

The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).

Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again

The comparison between RRSP and TFSA for sheltering dividends doesn't appear to be fair because you're not taking into account pre vs after tax money.  What am I missing here?

Using your example:

RRSP: the $100,000 in pre-tax money grows by $1,000,000 and the entire balance of 1.1 mil is taxed at 25% upon withdrawal, leaving you with $825,000.

TFSA: the $70,000 in after tax money (30% income tax) grows by only $700,000 and the entire balance of $770,000 is not taxed at all because it is sheltered, leaving you with $770,000. 

There is more money left in the RRSP!!

Where did my math go wrong?

(turning $100k into $1 mil requires 12.2% growth over 20 years, so I used that same growth rate for the TFSA comparison, to be fair)

Thanks,
Greg

Your math is pretty much right, but its the tax rates that make it go wacky. You're calculating 30% tax going in and 25% tax going out. Of course the RRSP will win in this situation, if you reinvest all of your tax refund back into the RRSP.

Well, I was using CPA CB's numbers.  He says "The TFSA is clearly best" but the math doesn't support that conclusion.  And this being the MMM forum, let's assume that the tax refund is always invested ;)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Getting there! on March 02, 2015, 10:35:24 PM
Thanks Cathy,
The information you provided helps me understand a bit more about what's involved with actual selling of the property.  Our realtor was saying 20% would need to be held, but I was able to find a publication on the IRS website that discussed 10% if the buyer was using the home as a principal residence and the home was under $300,000.  It looks like I would need to use the services of a US/Canadian accountant when the time comes to be sure everything is looked after that needs to be.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on March 02, 2015, 11:06:53 PM
@guerilla1977: The argument made by CPA CB is a common one made by accountants and some financial planners. However, in my opinion, there are huge flaws with this reasoning for Mustachians particularly in relation to the taxable investment account.

RRSP vs TFSA is simple. If you reinvest your full refund (as you should) and your current marginal tax rate is higher than your retirement average tax rate the RRSP will win hands down every time. This means that for the majority of Canadians the RRSP will win. Problem is the majority of Canadians aren't Mustachian and they blow their tax refunds on flat screen TV's and chrome rims for their F150. So if you are not Mustachian and like shiny things, then the TFSA will win in the end.

Here's the round numbers math to prove it for someone with marginal tax rate when working of 40% and retirement average tax rate of 25%. Withdrawal rates are based on 5% per year. Lets pretend Harper doubled the TFSA limit for us to make this easy.

Scenario A blows his $4000 refund on an all-inclusive to Mexico every year: RRSP $10,000/yr for 30 yrs @ 6% = $875,000. Retirement income $43750 - 25% tax = $32800 spending money.

Scenario B skips the RRSP and is TFSA only (doesn't get that vacation either): TFSA $10,000/yr for 30 yrs @ 6% = $875,000. Retirement income $43750 - 0% tax = $43750 spending money. Yippee!

Scenario C is a Mustachian who reinvests his refund (and doesn't go to Mexico): RRSP $14,000/yr for 30 yrs @ 6% = $1,225,000. Retirement income $61250 - 25% tax = $45900 spending money. But wait, he's making more money so his tax rates go up right? Sure but he still only needs a max of $43750 to live so he can make some charitable donations or pay for his kids education and claim the tuition and he's still further ahead and his living standard during his earning years was the same as it would be with TFSA only. The extra money comes thanks to the government.

To tout taxable account benefits over an RRSP is just plain ridiculous unless you already have waaaayyyy tooo much money and find yourself in the awful position of earning too much income in retirement (ie. you dummy, you should have retired earlier). First, it is based on the presumption that you never, ever sell any of your investments during the whole 30 years and never end up owing any capital gains tax during this time. It is possible if you balance with equal capital losses, but even for the smarter than average investor this is difficult to achieve. Second, it assumes that your investments will never pay a dividend for that whole 30 years. Don't forget, even dividends reinvested are taxed first which cuts into your overall rate of return (an expense not realized in a tax advantaged account).

Scenario D is nothing but taxable who follows all the preceding caveats to a T (and no vacation): Taxable $10000/yr for 30 yrs @ 6% = $875,000. Retirement income $43750 - 12.5% tax = $38280 spending money.

Scenario E is only taxable, but he breaks a few rules and earns just 5% return (and no vacation): Taxable $10000/yr for 30 yrs @ 5% = $722,000. Retirement income $36100 - 12.5% tax = $31580 spending money.

I don't want to knock taxable too much because it still works decently well if you're disciplined. However it should come behind the RRSP and TFSA for the Mustachian, who by definition earns much more than they spend. Based on my spending, I am sure my retirement average tax rate is going to be 10% tops. I pay a hell of a lot more than that right now and I'm in the lowest tax province in the country.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: guerilla1977 on March 02, 2015, 11:27:40 PM
@Tuxedo
Thanks for taking the time to write such a long post!  Very interesting. 

I don't pretend to be an expert, but my impression is that many professionals don't totally understand how the RRSP works.  The truth is that, assuming the same income tax rate at the point of contribution and withdrawal with your RRSP, the RRSP and the TFSA give you the EXACT SAME amount of money in the end.   

So I hear people say "you pay marginal rate on dividends & cap gains inside an RRSP when you cash out.  Why would you give up that tax advantage?"   That is just not true.  You do not pay any tax on those gains inside an RRSP, even when you cash out.  The government is simply taking back all the money that they refunded you at the time of contribution, PLUS all the growth of that money.  Your after tax contributions and ALL its growth is yours to keep, tax free!

To prove that point, if you assume a 30% rate (instead of the stated 25%) at the time of withdrawal in CPA CB's example (so it is now the same as the contribution rate), you end up with the same amount of money with the RRSP and the TFSA.

Here is a great video explaining the myth that RRSPs are worse than taxable accounts for dividend and cap gains growth: https://www.youtube.com/watch?v=Gf04BbqzJVc   
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on March 02, 2015, 11:33:34 PM
There is a situation where taxable accounts are superior to the registered ones. Specifically, at low income, the tax rate on eligible dividends can be negative. In Alberta, eligible dividends at low income are taxed at negative 0.03%. However, Ontario offers a far more generous negative 6.86% on eligible dividends at low income. This is a nonrefundable negative rate, but it can still offset taxes you might otherwise have to pay on your RRSP distributions.

The tax rate on distributions from an RRSP can never go below zero, so, in some cases, taxable eligible dividends could be an aspect of your Mustachian Canadian tax planning.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on March 03, 2015, 09:39:45 AM
Is there a place I can find the real (net) tax rate for elegible-dividends in Québec (or the way to calculate the gross-up and tax) in taxable account?

My marginal tax rate is 38% actually...
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on March 03, 2015, 10:41:00 AM
Is there a place I can find the real (net) tax rate for elegible-dividends in Québec (or the way to calculate the gross-up and tax) in taxable account?

My marginal tax rate is 38% actually...

One of my favorite websites for tax info. www.taxtips.ca  They have a great tax calculator there as well which calculates the gross up. I think its 38%.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on March 03, 2015, 11:55:37 AM
So, my tax rate for eligible dividends is 19.22% (combined fed+prov)

Thank you Tuxedo!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: queenie on March 03, 2015, 01:21:50 PM
I just want to say thank you to everyone who is participating in this discussion.  It has been a very interesting read!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: powersuitrecall on March 03, 2015, 01:42:37 PM
A Home Business tax question for you ...

For the past 6 years, I've run a small photography side business.  I've kept up to date claiming my income / capital expenses, etc.  My average annual income over the years has been about $10K.

For 2013, I claimed a small loss (about $500) as I chose to take very few jobs.

For 2014, I did not bring any income in at all with the business.  I will be claiming a loss of ~$1000 due to capital depreciation.  I will not be claiming any home/vehicle/other expenses as, well, none were used.

Will this be a problem with CRA?  How long can one do this before it's seen as abusive?  Shall I close the business now and sell my gear, knowing that I might want to open shop again in a year or two?

Many thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Posthumane on March 03, 2015, 02:24:33 PM
Tuxedo, I agree with you regarding RRSP investments coming out ahead of TFSA and taxable accounts if your retirement average tax rate is lower than your working marginal rate (which I imagine is the case for almost everyone). The case of someone blowing their return is basically like getting zero tax advantage on contribution and a tax hit on withdrawal.

However, the question of where to put different types of investments may still be relevant, since many MMM followers will have maxed out their RRSP and TFSA contributions. If you have maxed RRSP and TFSA contributions and are contributing the left overs to a taxable account, having the lowest taxed allocation in the taxable account makes sense.

All that being said, Alberta is not the lowest taxed province. I've calculated that at my income and spending levels (36% bracket in Alberta) I would actually be better off in Ontario or BC since the progressive provincial income tax results in an income tax payment which would be low enough to offset the higher sales tax.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on March 03, 2015, 03:43:37 PM
I am a Canadian currently considering selling a US vacation home.  I got some information about what the IRS would take off the sale price (10% if under $300,000, and then I understand I could recover the withheld amount next year if home sold this year.  Then I imagine I would have to report the capital gain on my Canadian return? 
I appreciate any advice you could provide.

First of all, you should understand that any amount that may be withheld from the sale proceeds is not necessarily the same as the amount you owe the US in tax on the sale proceeds.

On the topic of withholding, here is a summary of the law. Pursuant to 26 USC § 1445, when a nonresident alien sells property in the USA, the buyer must withhold 10% of the proceeds and remit it to the IRS, unless 10% is more than the amount of tax that will be finally owed on the sale, in which case the buyer should only withhold the actual tax liability (but the seller has to obtain from the IRS an advance calculation of the actual tax owed to benefit from this).

The general rule on withholding is subject to a number of exceptions. One exception is that if the buyer purchases the property to use a residence and the cost is less than $300,000, then the buyer is not required to withhold any tax from the proceeds (although they can if they want to). You can receive the entire proceeds in this case. Note that you may still owe tax to the IRS. We are only concerned at this juncture with withholding, not actual tax liability. In practice, the buyer may still withhold in this case because pursuant to 26 CFR 1.1445-2(d)(1), if the buyer does not withhold and then the IRS determines that they are not using the property as a residence, then the buyer is liable for the tax. I am guessing buyers may not want to take that risk.

Now that I have summarised withholding, let's discuss final tax liability.

Pursuant to 26 USC § 897, the disposition of property by a nonresident alien is subject to tax as if the gain were income effectively connected with a US trade or business. This means that the gain is taxed at graduated income tax rates. Alternative minimum tax may possibly also apply. You will need to file Form 1040NR to report the sale, figure the tax owed, and pay it and/or receive a refund of any amount withheld.

Note that withholding is based on the proceeds but the actual tax is only based on the gain. The actual tax rate may be more than 10% of the gain, but that could be less than 10% of the proceeds. However, if no tax was withheld because of the exception I mentioned, you may well have tax owing when you file Form 1040NR.

So that deals with your final tax liability to the USA.

As for Canada, you would indeed have a taxable capital gain. Half of your net capital gains are taxable at ordinary income rates in Canada. You can claim a foreign tax credit for your final tax liability to the USA. Note that you cannot claim a foreign tax credit based on the withholding, if any, that was remitted to the IRS. The credit is based on the actual final tax liability as figured on Form 1040NR. The CRA may require you to submit your Form 1040NR as proof that you are claiming the actual final liability and not the withholding amount.

You may also have a filing requirement and tax owing to the US state where the property is located.


That all said, this is just a summary of the laws. There are many exceptions and special cases. From your post, it seems you are very confused about the various requirements here. For that reason, you may want to pay for the services of an accountant or lawyer to help you.

I agree with Cathy here. I just finished an engagement like this, and there are complex rules to adhere by.

Pay special attention to the foreign tax credits from non-business income, as it gets ground down by the capital gain you claim in Canada v. the US.

Good luck!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on March 03, 2015, 03:47:03 PM

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

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

Good luck opening up the accounts!

That's not true, is it? Growth is growth, you'll be taxed on it just the same. I mean, if you could choose, you'd have your TFSA have all the growth and the RRSP none. The point of the shelter is that there is NO tax on the money while sheltered.

Sadly it's true - I'm just going to take a sidebar here on semantics...

Registered Accounts, such as RRSP's and RDSP's are called tax 'deferral' mechanisms. It's not a true 'shelter' - you get a tax 'benefit' now, but the tax 'output' later is generally higher (thanks to growth, income, etc.) The point being, you get a deduction at your marginal rate today, but you will pay your marginal rate on withdrawal (hopefully it's lower).

The TFSA is a half-measured tax shelter (a true shelter has you invest pre-tax income, at very low rates of taxes in the future)... The caveat with a TFSA is that it is after-tax income.

Capital gains (or growth, as you say) are taxed at 50%. When invested in a registered account and deferred, will be taxed at 100%.

As a case study - Note, this is ONLY for capital gains purposes.

You invest $100,000 in your RRSP in all growth stocks, and receive a sizable refund of $30,000 (i.e. 30% rate) this year. This grows over time, and let's assume you're Warren Buffett and it appreciates by $1 million by retirement. You'll now pay your marginal rate on the entire $1.1 million dollar balance. Assuming this is at 25%, this is $275,000 in tax!

Total offset is plus 30k today, minus 275 in the future... Let's call it $245k and ignore present valuing...

If you invested it all in just a regular investment account - only the gain is taxable... 1 million gain, 500k taxable capital gain... At the same marginal rate (25%), that's $125,000 in TOTAL tax. You're investing "after-tax" dollars here however... So we'll add back the 30% on the original investment, and say you've paid an additional 30K in taxes. So... $155,000.

In a TFSA (assuming the same scenario... which is impossible at the moment...) you'd just have paid the initial tax on your employment income (i.e.. the 30k) and nothing thereafter...

The TFSA is clearly best... But note that the present value of the current tax refund would need to be 90k higher to break even... Quadrupling is not out of the question, but it is challenging, and would likely take at least 15-20 years to get there. (see: rule of 72 http://en.wikipedia.org/wiki/Rule_of_72).

Hope this helps to de-mystify a bit! Le Barbu is 100% correct - TFSA is a shelter, once it's in, never taxed again

The comparison between RRSP and TFSA for sheltering dividends doesn't appear to be fair because you're not taking into account pre vs after tax money.  What am I missing here?

Using your example:

RRSP: the $100,000 in pre-tax money grows by $1,000,000 and the entire balance of 1.1 mil is taxed at 25% upon withdrawal, leaving you with $825,000.

TFSA: the $70,000 in after tax money (30% income tax) grows by only $700,000 and the entire balance of $770,000 is not taxed at all because it is sheltered, leaving you with $770,000. 

There is more money left in the RRSP!!

Where did my math go wrong?

(turning $100k into $1 mil requires 12.2% growth over 20 years, so I used that same growth rate for the TFSA comparison, to be fair)

Thanks,
Greg

Your math is pretty much right, but its the tax rates that make it go wacky. You're calculating 30% tax going in and 25% tax going out. Of course the RRSP will win in this situation, if you reinvest all of your tax refund back into the RRSP.

Well, I was using CPA CB's numbers.  He says "The TFSA is clearly best" but the math doesn't support that conclusion.  And this being the MMM forum, let's assume that the tax refund is always invested ;)

Fair enough - but this being the MMM forum I also assume that the contribution maxes out the RRSP (haha). The issue with RRSP's are that capital gains are taxed at 100% upon withdrawal, versus the statute amount of 50%. 

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Retire-Canada on March 03, 2015, 03:56:19 PM
RRSP vs TFSA is simple.

If you are a professional and a mustachian max both and put the rest into non-reg accounts. With a professional's income and a MMM saving rate neither the RRSP or the TFSA or both combined can handle all your badassness! ;)

The only tricky part I've noticed during my planning is that you don't want a massive RRSP when you turn 71 and have to start mandatory withdrawals.

If you are doing the ER thing you can start drawing down your RRSPs any time your marginal tax rate is less than when you contributed and still be ahead. Projecting ahead so that your RRSP when you are 71 is aligned with your annual COL factoring in CPP+OAS.

-- Vik
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on March 03, 2015, 03:57:35 PM
Tuxedo, I agree with you regarding RRSP investments coming out ahead of TFSA and taxable accounts if your retirement average tax rate is lower than your working marginal rate (which I imagine is the case for almost everyone). The case of someone blowing their return is basically like getting zero tax advantage on contribution and a tax hit on withdrawal.

However, the question of where to put different types of investments may still be relevant, since many MMM followers will have maxed out their RRSP and TFSA contributions. If you have maxed RRSP and TFSA contributions and are contributing the left overs to a taxable account, having the lowest taxed allocation in the taxable account makes sense.

All that being said, Alberta is not the lowest taxed province. I've calculated that at my income and spending levels (36% bracket in Alberta) I would actually be better off in Ontario or BC since the progressive provincial income tax results in an income tax payment which would be low enough to offset the higher sales tax.

I'm just going to chime in here on this discussion.

To say this is a myth is a bit misleading - it is correct to say that in terms of money in money out, ceteris peribus, RRSP's and TFSA's approximately equal out.

The biggest flaw in some people's perspective here is that taxable income in retirement is lower than pre-retirement, and why this isn't necessarily true for the vast majority of individuals.

Us MMM's are an unusual lot, in that many of us are looking to pull the plug (so to speak) on the rat race, and FIRE at the earliest/most conservative time possible. This isn't true of the general population. Many people work work work, then retire with, lets say $2 million in their RRSP, and still have pensionable income on top of this. I've dealt with quite a few scenarios now where taxable income is actually higher in retirement than pre-retirement. Go figure.

I'm glad this conversation has raised such a discussion - the most prudent advice here is to utilize the registered vehicles available to you, keeping in mind that RRSP's tax cap gains at 100%, versus 50% non-reg, and at your average tax rate for TFSA (in that it is after tax dollars).

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on March 03, 2015, 03:58:34 PM
RRSP vs TFSA is simple.

If you are a professional and a mustachian max both and put the rest into non-reg accounts. With a professional's income and a MMM saving rate neither the RRSP or the TFSA or both combined can handle all your badassness! ;)

The only tricky part I've noticed during my planning is that you don't want a massive RRSP when you turn 71 and have to start mandatory withdrawals.

If you are doing the ER thing you can start drawing down your RRSPs any time your marginal tax rate is less than when you contributed and still be ahead. Projecting ahead so that your RRSP when you are 71 is aligned with your annual COL factoring in CPP+OAS.

-- Vik

Exactly - folks forget the RRIF conversion at 71 (and get killed subsequently in unavoidable tax.)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on March 03, 2015, 04:01:22 PM
A Home Business tax question for you ...

For the past 6 years, I've run a small photography side business.  I've kept up to date claiming my income / capital expenses, etc.  My average annual income over the years has been about $10K.

For 2013, I claimed a small loss (about $500) as I chose to take very few jobs.

For 2014, I did not bring any income in at all with the business.  I will be claiming a loss of ~$1000 due to capital depreciation.  I will not be claiming any home/vehicle/other expenses as, well, none were used.

Will this be a problem with CRA?  How long can one do this before it's seen as abusive?  Shall I close the business now and sell my gear, knowing that I might want to open shop again in a year or two?

Many thanks!

I would suggest holding off on depreciating the asset (a choice) until you start earning income to claim against.

The test is a "reasonable expectation of profit" in wonk speak - which means you want to show at least some income to claim the deduction. Just hold off on claiming and then go for it when the business re-opened.

Good luck!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on March 03, 2015, 04:05:13 PM
Just as a note to everyone

You'll note my average response times are lagging these days as things have gotten positively CRAZY with tax returns and other matters. My apologies for this.

I'm checking in about once or twice a week and will make every effort to reply - but frankly there are quite a few people going through here and posting some good advice - I'll chime in eventually, but overall thanks for the help everyone!

Good luck for Tax Season 2015!

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on March 03, 2015, 07:26:01 PM
I'm just going to chime in here on this discussion.

To say this is a myth is a bit misleading - it is correct to say that in terms of money in money out, ceteris peribus, RRSP's and TFSA's approximately equal out.

The biggest flaw in some people's perspective here is that taxable income in retirement is lower than pre-retirement, and why this isn't necessarily true for the vast majority of individuals.

Us MMM's are an unusual lot, in that many of us are looking to pull the plug (so to speak) on the rat race, and FIRE at the earliest/most conservative time possible. This isn't true of the general population. Many people work work work, then retire with, lets say $2 million in their RRSP, and still have pensionable income on top of this. I've dealt with quite a few scenarios now where taxable income is actually higher in retirement than pre-retirement. Go figure.

I'm glad this conversation has raised such a discussion - the most prudent advice here is to utilize the registered vehicles available to you, keeping in mind that RRSP's tax cap gains at 100%, versus 50% non-reg, and at your average tax rate for TFSA (in that it is after tax dollars).

This is a very good point. I know several people that have worked 30 years in a pensionable career. Then they retire (at age 55 or so) and take another job with a pension for  5-10 years, all the while earning their first pension as well and making huge amounts of money. They try to reduce their taxes, so they invest in an RRSP thinking it will help them out. Problem is they turn 65, retire, and start collecting CPP/OAS, plus their first pension, and now their second pension. Now they make so much in retirement that they get their OAS clawed back (effectively giving them an extremely high marginal tax rate). They also don't withdraw from their RRSP because they don't need the spending money. Then they turn 71 and the RRIF withdrawals start to kick in on top of this all, making their income even higher and they pay taxes through the nose.

For a person in this unfortunate situation, a TFSA and taxable investment account would have been much better options for sure. But then again, any true-blood Mustachian would have retired at 55 with the first pension...
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on March 03, 2015, 09:39:28 PM
All that being said, Alberta is not the lowest taxed province. I've calculated that at my income and spending levels (36% bracket in Alberta) I would actually be better off in Ontario or BC since the progressive provincial income tax results in an income tax payment which would be low enough to offset the higher sales tax.

The correct statement would be: For sufficiently high income, Alberta has the lowest income tax of any jurisdiction in US or Canada, even lower than the US states with no income tax. The highest combined federal and provincial rate that you can pay in Alberta is 39%, consisting of 29% federal and 10% Alberta. By contrast, the highest federal marginal rate in the USA is 39.6%.

You do need to have a fairly large income for Alberta to be the lowest taxed jurisdiction. For less high incomes, other provinces can have lower taxes.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: guerilla1977 on March 03, 2015, 09:47:19 PM
To say this is a myth is a bit misleading - it is correct to say that in terms of money in money out, ceteris peribus, RRSP's and TFSA's approximately equal out.

Why are they approximate and not exactly equal?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on March 04, 2015, 07:52:33 AM
I have a T5 with foreign income and withholding on it.

The broker uses immediate date forex rates, but I use the yearly average.

This year it's only out $10 between their and my calcs (only one quarter of income), but how do I reconcile these numbers?

Getting there with my return... ugh.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on March 04, 2015, 12:58:43 PM
I have a T5 with foreign income and withholding on it.

The broker uses immediate date forex rates, but I use the yearly average.

This year it's only out $10 between their and my calcs (only one quarter of income), but how do I reconcile these numbers?

Getting there with my return... ugh.

According to s 261(2) of the Income Tax Act, RSC 1985, c 1 (5th Supp), in computing your Canadian tax return, the exchange rate to be used for an amount denominated in foreign currency is "the relevant spot rate for the day on which the particular amount arose". The "relevant spot rate" is further defined to mean "the rate quoted by the Bank of Canada for noon on the particular day" or from another source of information acceptable to the Minister.

So in terms of the law, your use of yearly average exchange rates may not be allowed (unless "acceptable to the Minister"). However, as a practical matter, the CRA may not care very much if the difference is as small as you say. You can either do nothing and hope they don't challenge it (which they probably won't), or you can attach a statement explaining the difference to your paper return.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Patty on March 04, 2015, 03:29:55 PM
I have read most of the posts here with great interest and am now wondering if someone might have some advice for me?
I am a 54 year old married teacher who has decided to retire in the next few weeks. I have not taught for long and as a result will have a very modest pension.Spouse is also a teacher who will retire in 3 more years.
 I can take a lump sum instead (prior to turning 55) but of course there are risks with investing that I wouldn't have with the monthly pension. I think I could do better by investing the lump sum, risks notwithstanding. But I will get dinged tax-wise. Here are the numbers:
Monthly pension $600 (indexed to inflation);
Lump sum: $100,000 half of which will be locked in (Lira) the other half unlocked and into an RRSP (so not taxed). The remaining amount is in cash: $93,000, taxed at the source. (approx $30,000 in taxes I'm assuming).Leaving me with about $60,000 to put into additional RRSP's and/or TFSA's. I have 30,000 room in TFSA's (spouse has 36,000)and $20,000 room in RRSP's (spouse has $20,000 also)
My questions are: 1) how to offset the big tax hit, other than doing RRSPs next year
2) Is taking the lump sum wise financially? I have done a comparison chart with my bank which showed the gains I would make  over time if my investments made 5% (which would be greater than the inflation rate of approx. 3.85% for my pension)
I have looked at this from many angles and I am wondering if there is something I am missing, other than the risk I may be taking?
Advice appreciated!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on March 04, 2015, 06:35:30 PM
I have a T5 with foreign income and withholding on it.

The broker uses immediate date forex rates, but I use the yearly average.

This year it's only out $10 between their and my calcs (only one quarter of income), but how do I reconcile these numbers?

Getting there with my return... ugh.

According to s 261(2) of the Income Tax Act, RSC 1985, c 1 (5th Supp), in computing your Canadian tax return, the exchange rate to be used for an amount denominated in foreign currency is "the relevant spot rate for the day on which the particular amount arose". The "relevant spot rate" is further defined to mean "the rate quoted by the Bank of Canada for noon on the particular day" or from another source of information acceptable to the Minister.

So in terms of the law, your use of yearly average exchange rates may not be allowed (unless "acceptable to the Minister"). However, as a practical matter, the CRA may not care very much if the difference is as small as you say. You can either do nothing and hope they don't challenge it (which they probably won't), or you can attach a statement explaining the difference to your paper return.

I've read in several places that you can either do as you say, use the rate on the date, or if you receive income throughout the year you can use the annual rate.

Eg,

http://www.taxtips.ca/personaltax/investing/taxtreatment/shares.htm

The dividend income must be converted to Canadian dollars to determine the amount to include in your income.  You can convert using the exchange rates on the dates your foreign dividend income is received, or you can use the average annual exchange rate, as published by the Bank of Canada, for all the dividends received in the year.  See our Links page for links to foreign exchange rates.  Whichever method you use should be used consistently.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on March 04, 2015, 06:46:30 PM
I think even the CRA website mentions using average rates in places. However, the actual law is as I described above (with citation). The rule dictated in the law is that the CRA can accept alternative rates if it wants but it is not obligated to do so when processing your return.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on March 04, 2015, 08:42:41 PM
I think even the CRA website mentions using average rates in places. However, the actual law is as I described above (with citation). The rule dictated in the law is that the CRA can accept alternative rates if it wants but it is not obligated to do so when processing your return.

Well, if nothing else, going and looking at stuff made me realise that while it's (probably) ok to use the yearly average for income (and I'm sticking to that), I can't do it for capital gains. Which is helpful - it just saved me some money because I thought I had to use the same method for 'everything', but it is only for income that it's (probably) permitted.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on March 05, 2015, 08:41:02 AM
I have read most of the posts here with great interest and am now wondering if someone might have some advice for me?
I am a 54 year old married teacher who has decided to retire in the next few weeks. I have not taught for long and as a result will have a very modest pension.Spouse is also a teacher who will retire in 3 more years.
 I can take a lump sum instead (prior to turning 55) but of course there are risks with investing that I wouldn't have with the monthly pension. I think I could do better by investing the lump sum, risks notwithstanding. But I will get dinged tax-wise. Here are the numbers:
Monthly pension $600 (indexed to inflation);
Lump sum: $100,000 half of which will be locked in (Lira) the other half unlocked and into an RRSP (so not taxed). The remaining amount is in cash: $93,000, taxed at the source. (approx $30,000 in taxes I'm assuming).Leaving me with about $60,000 to put into additional RRSP's and/or TFSA's. I have 30,000 room in TFSA's (spouse has 36,000)and $20,000 room in RRSP's (spouse has $20,000 also)
My questions are: 1) how to offset the big tax hit, other than doing RRSPs next year
2) Is taking the lump sum wise financially? I have done a comparison chart with my bank which showed the gains I would make  over time if my investments made 5% (which would be greater than the inflation rate of approx. 3.85% for my pension)
I have looked at this from many angles and I am wondering if there is something I am missing, other than the risk I may be taking?
Advice appreciated!

There are a few things to consider here, making this not an easy choice.

- How important is your earning income to your family income mix, especially in retirement. Can you easily get by with just your husbands income / pension?
- Do you guys have a very stable relationship?
- Do you have much for savings outside the pension?
- Are you comfortable with losing up to 40% of your investments?
- Are you sure you are calculating for inflation when running your own numbers?
- Does that $600 get rolled back once CPP kicks in?

My view: you are already close to 55 so you don't have a lot of free compounding time where you would not take withdrawals. For a total commuted value of $193,000, earning $7,200 in buying power for life is pretty darn good (works out to a return of 3.73 PLUS inflation which could be 1-3% or more). Your pension is guaranteed till death, so you can count on a check coming through every two weeks. That's important, especially if you live until well in your 90's.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Patty on March 05, 2015, 09:26:02 AM
Tuxedo thank you very much for your reply. You have asked some good questions.
This is definitely not an easy decision and I have been tossing it around for over a year as I approached my 55th birthday.
Being an avid reader of MMM for several years now has given me the courage to look outside the financial box and to take some risks. Yes there are always risks in the market, risks I won't have if I take the pension, but is that risk not the same for anyone who invests in their rrsp's or TFSA's? Is that the line I draw, the actual possible risk I am taking with my pension?
With regard to your questions:
How important is your earning income to your family income mix, especially in retirement. Can you easily get by with just your husbands income / pension? It will be more important in 3 years when my husband retires and begins his pension (approx $3200/month) but we have learned to live on less and we have no debts (house paid for etc).
- Do you guys have a very stable relationship? Yes
- Do you have much for savings outside the pension? We have approx. $75,000 in RRSPs and $24,000 in RESPs (one child still at home in Grade 10; one graduating from post secondary this year;one going into 2nd and final year of post secondary)

- Are you comfortable with losing up to 40% of your investments? Not really! Is anyone? Is it not possible to go moderate risk and still do pretty well (i.e. better than 3.85%)?
- Are you sure you are calculating for inflation when running your own numbers? My bank did a comparison of 2 scenarios: the first assuming a 3.85% inflation rate until I'm 90. The 2nd assuming a 5% return, after fees etc. The numbers showed a good $70,000 difference over time.
- Does that $600 get rolled back once CPP kicks in? I don't think so but I will check on that.
I guess I want the chance to do a little better than the monthly amount, to have the flexibility, to be able to leave it to my kids when I and my husband are gone.
Any further feedback is most welcome!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: GuitarStv on March 05, 2015, 09:34:29 AM
Funny question for you:

I'm part of Ontario's MicroFIT program where we sell what we generate from our solar panels to Ontario Hydro and they pay us for the power and HST.  They screwed up our HST payments last year and paid us a fraction of the amount we should have received.  I caught it this month and have made them pay back the missing money.

For my taxes for 2014 do I report the HST that they paid us, or the HST that they owed us (and paid back in 2015)?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: GuitarStv on March 05, 2015, 12:36:46 PM
This is my second year in the program.  Last year I reported income received during the year, so this would be 'cash reporting' then?

In my case the problem was caught, cheque was issued and I received the missing money all in 2015.  The actual amount for energy generated was correctly paid out to me as per contract, just the HST wasn't paid properly on top of that.

I caught the underpayment error after filing my taxes and am wondering if I'll get in trouble over this.  From the above, it sounds like I should have reported the missing amount on my taxes.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Posthumane on March 05, 2015, 12:50:55 PM
Tuxedo thank you very much for your reply. You have asked some good questions.
This is definitely not an easy decision and I have been tossing it around for over a year as I approached my 55th birthday.
Being an avid reader of MMM for several years now has given me the courage to look outside the financial box and to take some risks. Yes there are always risks in the market, risks I won't have if I take the pension, but is that risk not the same for anyone who invests in their rrsp's or TFSA's? Is that the line I draw, the actual possible risk I am taking with my pension?
With regard to your questions:
How important is your earning income to your family income mix, especially in retirement. Can you easily get by with just your husbands income / pension? It will be more important in 3 years when my husband retires and begins his pension (approx $3200/month) but we have learned to live on less and we have no debts (house paid for etc).
- Do you guys have a very stable relationship? Yes
- Do you have much for savings outside the pension? We have approx. $75,000 in RRSPs and $24,000 in RESPs (one child still at home in Grade 10; one graduating from post secondary this year;one going into 2nd and final year of post secondary)

- Are you comfortable with losing up to 40% of your investments? Not really! Is anyone? Is it not possible to go moderate risk and still do pretty well (i.e. better than 3.85%)?
- Are you sure you are calculating for inflation when running your own numbers? My bank did a comparison of 2 scenarios: the first assuming a 3.85% inflation rate until I'm 90. The 2nd assuming a 5% return, after fees etc. The numbers showed a good $70,000 difference over time.
- Does that $600 get rolled back once CPP kicks in? I don't think so but I will check on that.
I guess I want the chance to do a little better than the monthly amount, to have the flexibility, to be able to leave it to my kids when I and my husband are gone.
Any further feedback is most welcome!
Typically gov't pensions don't get rolled back due to CPP/OAS - they are fixed, though I'm not familiar with the specifics of your teachers' pension.

Depending on how much pension contribution room you have, you could avoid paying tax on that 93K. The first part of your pension (50k LIRA and 50k unlocked) is presumably the transfer amount within tax limits - you would have already lost this contribution room through your pensions amount on your T4s. If you have 93k contribution room then there is no problem. If you end up having the entire 93k taxed with no other income that year then you'll be left with 170k or so. With a 4% withdrawal rate that would leave you with $6800 per year of sustainable income (4% is based on 7% nominal returns from investments minus 3% inflation).

I put in a starting balance of $170k at firecalc.com with a spending rate of $7200/year adjusted to inflation (same as your pension amount) and over a 30 year period it resulted in a failure rate of 8%. Over a 40 year period the failure rate was 24%. Conversely with a 193k starting balance the failure rates for 30 and 40 year periods were 1.8 and 6.7% respectively.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: sky_northern on March 05, 2015, 01:50:33 PM
Typically gov't pensions don't get rolled back due to CPP/OAS - they are fixed, though I'm not familiar with the specifics of your teachers' pension.
My government pension does.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Kaspian on March 05, 2015, 02:16:41 PM
I used UFile the way I always did, filed my taxes no problemo, but then realized looking over the printouts there was no Schedule 3 attached or included in the return and there probably should have been.  This is the first time I've ever rebalanced from one fund to another in my non-registered account and I know I have capital gains there to account for.  But the friggin' program never asked me about it. (So much for trust!) I know money shows up from the T3 on "Interest and other investment income" area because it totals correctly for dividends but why didn't the program ask me about capital gains?  Last year I had a T3 as well, but there wouldn't have been gains because I didn't rebalance in the non-reg account.  So maybe when UFile carries forward last year's info it assumed I'd have a T5 but not be declaring a capital gain?

So, my question is:  There should be a Schedule 3 because I transferred from a fund which was valued higher than the "Adjusted Cost Base", right?  This is a TD mutual fund in a non-registered account.  I transferred units from a bond e-series into a US e-series and from the foreign e-series into the Canadian one.  Both of the funds I transferred out of were worth more than their book value.

It sucks, but I'm not too worried about having already filed the return.  I had to make a correction based on dividend income of a T3 a few years ago, did it very easily on the CRA site, and they quickly sent me a new assessment of what I owed.

After note!:  Now I'm really confused because the T3 has a blank Box 21 "Capital Gains".  It's also blank under the "Capital Gains" column of transactions.  Is there another form coming to me from the bank?  Or do maybe the December transactions show up on next years' statements?  Box 30 is what the CRA's guide says you should use for reporting capital gains from a T3 but it's also blank.  WTF?  :(
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Posthumane on March 05, 2015, 02:35:20 PM
Typically gov't pensions don't get rolled back due to CPP/OAS - they are fixed, though I'm not familiar with the specifics of your teachers' pension.
My government pension does.
Interesting, I stand corrected. Would you mind sharing which gov't/dept?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on March 05, 2015, 03:44:12 PM
After note!:  Now I'm really confused because the T3 has a blank Box 21 "Capital Gains".  It's also blank under the "Capital Gains" column of transactions.  Is there another form coming to me from the bank?  Or do maybe the December transactions show up on next years' statements?  Box 30 is what the CRA's guide says you should use for reporting capital gains from a T3 but it's also blank.  WTF?  :(

The T3 slip only reports capital gains received as distributions from trusts.
The T5 slip only reports capital gains received as distributions from other securities.

For capital gains from the disposition of securities, you will need to compute it yourself from the records provided to you by your broker. Your broker should have provided you with a Form T5008 or equivalent statement listing your securities transactions for the year. You use that to calculate your capital gains.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Kaspian on March 05, 2015, 04:23:33 PM
Many thanks!  No 'Form T5008' yet--hopeully it just hasn't arrived yet?  It would be nice if somewhere in the CRA's guide or the T3 itself it made a distinction between a capital gain distribution (as opposed to dividend?) and sell/disposition. The T3 boxes as they are and the funds/headings listed in the middle is all pretty confusing.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on March 05, 2015, 04:29:06 PM
"Capital gain dividend" is just another term for capital gains received as a distribution from something other than a trust.

The reason I said "Form T5008 or equivalent statement" is that the broker is not required to issue you a Form T5008. However, they are required to issue you something with the same information (namely, a list of your securities transactions that settled during the year). I believe Questrade calls theirs an "annual statement".
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: sky_northern on March 05, 2015, 04:48:14 PM
Typically gov't pensions don't get rolled back due to CPP/OAS - they are fixed, though I'm not familiar with the specifics of your teachers' pension.
My government pension does.
Interesting, I stand corrected. Would you mind sharing which gov't/dept?
It's the Canadian Government pension plan, I don't work for the Can. Gov. but they manage our plan. You get the same set income, including CPP and Pension, the pension just pays more if you retire before eligible for CPP, then they reduce their pay out once you are pulling CPP.  Of course, OP's might be different, and her CPP could be larger than her pension amount, assuming she had other employment before becoming a teacher.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on March 05, 2015, 05:12:03 PM
Just completed my NETFILE tax return today and sent it in. My overall fed+prov tax rate for 2014 was 10.8%. This means I will have a nice refund coming back even on top of my two T1213 Deduction at Source forms I was approved for.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Kaspian on March 05, 2015, 10:36:02 PM
"Capital gain dividend" is just another term for capital gains received as a distribution from something other than a trust.

The reason I said "Form T5008 or equivalent statement" is that the broker is not required to issue you a Form T5008. However, they are required to issue you something with the same information (namely, a list of your securities transactions that settled during the year). I believe Questrade calls theirs an "annual statement".

If I don't get one in the mail from TD, do you think (because I made these switches in December) that I should be using information from the online "TD Mutual Funds Account Statement:  Statement period: October 01,2014 to December 31,2014" ?

It shows the unit and prices of the transfers, but doesn't show the adjusted cost base at the time.

THANKS AGAIN--I REALLY APPRECIATE IT!!!  :)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on March 05, 2015, 10:41:29 PM
It shows the unit and prices of the transfers, but doesn't show the adjusted cost base at the time.

Brokers are under no obligation to calculate your adjusted cost base. You have to calculate that yourself.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Kaspian on March 05, 2015, 11:01:24 PM
One more, please?  I've read this:  "The adjusted cost base is calculated by of adding in the cost you paid to purchase all of your investments into a certain stock or mutual fund. Includign dividends."  That is basically what a bank shows as "book value" right?  What I paid for them overall verus "market value"--which they're worth at a given point in time.

I know exactly how many and how much I sold them for (at market value) on the 14th of December.  But what I don't know is what the "book value" was on the 14th.  I assume now I was supposed to write that down at that time?  How the heck can I find it out now?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on March 05, 2015, 11:07:14 PM
"Book value" is an accounting term equal to the purchase price of the item minus some offsetting factors. For the purpose of your brokerage website, the book value is probably the price you paid for the security. That is not going to change over the period you hold it, since the price you paid is fixed when you first bought it (although the average price you paid can change if you buy more of them).

For a mutual fund, in general, the adjusted cost base is the price you paid to purchase the security including any commissions and exchange fees plus any return of capital distributions.

So let's assume you are dealing with security Q. You bought 5 shares of security Q at $5 per share and paid a $1 commission. Then later you bought 3 more shares of security Q at $10 per share and paid another $1 commission.

Your adjusted cost base in Q is $7.125 per share. If you later sell 2 shares of Q at $8 each, you have a capital gain of $0.875 per share, or a total capital gain of $1.75.

Your brokerage records should show what you originally paid for the security. You'll just have to go back in the records to the month or months where you bought the security.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Kaspian on March 05, 2015, 11:51:23 PM
Your brokerage records should show what you originally paid for the security. You'll just have to go back in the records to the month or months where you bought the security.

Ersh... Yeah, dollar cost averaged bi-weekly for two years with extra money thrown in whenever I had it.  Mint says 127 buy or reinvested dividend transactions in the non-registered bond fund since May 2012. TD's eDocument online statements only go back to April 2014.   Guess I have some work to do, huh? 

I never would have guessed one rebalance could be such a nightmare.  ...Going to try to do all rebalancing in the tax sheltered accounts from now on. 

Again--you've been great!  Cheers!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on March 09, 2015, 08:02:43 AM
Just completed my NETFILE tax return today and sent it in. My overall fed+prov tax rate for 2014 was 10.8%. This means I will have a nice refund coming back even on top of my two T1213 Deduction at Source forms I was approved for.

I also fill that T1213 form every year and still get a huge refund. Last year, combined refund was 5k$ and this year it's 6,5k$. I don't really like the idea of lending money to the Gov @ 0% especially because I manage it in a better way...
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Ottawa on April 02, 2015, 07:16:54 AM
Capital loss question!

While married to my spouse, I suffered a large capital loss in my individual brokerage account which is now carried forward in my name.  We now have a (solely) joint brokerage account. 

Question:  This year we have capital gains.  I am unable to apply my past capital loss against the full 1/2 measure of our total capital gains. I can, of course apply it against my '50%' of the gain since we hold and contributed jointly to our joint brokerage.  Does that make sense?

At any rate, is there any method by which I can maximize use of my carryforward capital losses against my spouse's (50% share) of any future capital gains?

Thanks in advance and good luck with your hectic end of year tax business CPA CB!!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 02, 2015, 02:38:57 PM
Capital loss question!

While married to my spouse, I suffered a large capital loss in my individual brokerage account which is now carried forward in my name.  We now have a (solely) joint brokerage account. 

Question:  This year we have capital gains.  I am unable to apply my past capital loss against the full 1/2 measure of our total capital gains. I can, of course apply it against my '50%' of the gain since we hold and contributed jointly to our joint brokerage.  Does that make sense?

At any rate, is there any method by which I can maximize use of my carryforward capital losses against my spouse's (50% share) of any future capital gains?

Thanks in advance and good luck with your hectic end of year tax business CPA CB!!

Hi Ottawa,

Is it truly a jointly held and contributed account? What % of the ACB was purchased by you versus your spouse? You may be able to claim a higher percentage here, if many of the investments were purchased with your funds/earnings.

Can I ask why you have a joint brokerage account? Is it just a trust (legal trust, that is) reason?  When did you incur these losses? Have you had any gains in the past 7 years? If so, you can file a T1-ADJ and apply these capital losses backwards. The good news is that you have 20 years from the year of the loss to carryforward, so they are usable eventually....

From a usability perspective - it's easier if held in your account solely for gains, but it seems like you've changed to joint holdings for a reason.

Cheers,

CPA CB

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Ottawa on April 02, 2015, 08:35:35 PM

Is it truly a jointly held and contributed account?

Yes

What % of the ACB was purchased by you versus your spouse? You may be able to claim a higher percentage here, if many of the investments were purchased with your funds/earnings

Good question...but our paycheques are effectively the same.  So, 50%.


Can I ask why you have a joint brokerage account? Is it just a trust (legal trust, that is) reason? 

Mainly for estate planning.  The fact that we each contribute 50% helps with the simplicity.  However, as we plan for ER, it is likely that my spouse will retire at least a year before me.  At that time I will continue to contribute.  I suppose that could potentially complicate things or does it really matter much? 

When did you incur these losses?

Just a few years ago...

Have you had any gains in the past 7 years? If so, you can file a T1-ADJ and apply these capital losses backwards.

Yes, have carried back.

The good news is that you have 20 years from the year of the loss to carryforward, so they are usable eventually....

From a usability perspective - it's easier if held in your account solely for gains, but it seems like you've changed to joint holdings for a reason.


This is what I figure, and am not too worried in the end...The triggered capital gains have been pretty minor on purpose.  However, at some stage in the future we will probably realise a larger cap gain.  Is there a way to plan for this now, or will only 1/2 the capital gain be put up against a carryforward loss?  Of course, if the capital gain is large enough the loss will be used up!  :-)

Thanks!
Ottawa 
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 06, 2015, 01:06:53 PM

Is it truly a jointly held and contributed account?

Yes

What % of the ACB was purchased by you versus your spouse? You may be able to claim a higher percentage here, if many of the investments were purchased with your funds/earnings

Good question...but our paycheques are effectively the same.  So, 50%.


Can I ask why you have a joint brokerage account? Is it just a trust (legal trust, that is) reason? 

Mainly for estate planning.  The fact that we each contribute 50% helps with the simplicity.  However, as we plan for ER, it is likely that my spouse will retire at least a year before me.  At that time I will continue to contribute.  I suppose that could potentially complicate things or does it really matter much? 

When did you incur these losses?

Just a few years ago...

Have you had any gains in the past 7 years? If so, you can file a T1-ADJ and apply these capital losses backwards.

Yes, have carried back.

The good news is that you have 20 years from the year of the loss to carryforward, so they are usable eventually....

From a usability perspective - it's easier if held in your account solely for gains, but it seems like you've changed to joint holdings for a reason.


This is what I figure, and am not too worried in the end...The triggered capital gains have been pretty minor on purpose.  However, at some stage in the future we will probably realise a larger cap gain.  Is there a way to plan for this now, or will only 1/2 the capital gain be put up against a carryforward loss?  Of course, if the capital gain is large enough the loss will be used up!  :-)

Thanks!
Ottawa

Hey Ottawa,

If you're keen on utilizing the gains sooner, I recommend transferring a portion of your funds to a personal brokerage account - this would be the cleanest way to do so, and ultimately transfer back after the fact.

Remember that for estate planning, the only thing you need to do is have your wife as a joint signatory, to avoid the issues with reaching the funds before probate. Beyond that, there are no estate issues, unless specified in your will.

Good luck!

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 06, 2015, 03:26:53 PM
Your brokerage records should show what you originally paid for the security. You'll just have to go back in the records to the month or months where you bought the security.

Ersh... Yeah, dollar cost averaged bi-weekly for two years with extra money thrown in whenever I had it.  Mint says 127 buy or reinvested dividend transactions in the non-registered bond fund since May 2012. TD's eDocument online statements only go back to April 2014.   Guess I have some work to do, huh? 

I never would have guessed one rebalance could be such a nightmare.  ...Going to try to do all rebalancing in the tax sheltered accounts from now on. 

Again--you've been great!  Cheers!

Agreed with what Cathy is saying here  - though in simpler terms, what did you pay, and what costs were incurred to purchase? When you sell, the gain is calculated on the 'average' purchase price including costs - and if you trade frequently this can be a logistical nightmare.

Cheers,

CPA CB

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: drstarter33 on April 06, 2015, 03:55:31 PM
Guys, I have a rather straightforward question!
Can someone recommend an accountancy firm or individual CAs who can advise on UK/Canada tax affairs for a British expat moving to London, Ontario?
Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 07, 2015, 03:00:31 PM
Guys, I have a rather straightforward question!
Can someone recommend an accountancy firm or individual CAs who can advise on UK/Canada tax affairs for a British expat moving to London, Ontario?
Thanks!

Happy to deal with you, if you want to message me directly we can chat about the issues. I've dealt with UK expats in the past, but we can discuss the complexities at this point.

Cheers,

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on April 12, 2015, 09:54:27 AM
Am I required to report a bank account's interest income if under $50?

I think yes, but...
Bank doesn't provide slips if less than $50 of interest in account. (I had two accounts.)
Bank won't provide any other documentation unless I drive 500 kms to a branch and pay them $10.
Bank accidentally closed my account, such that I have no online access to last year's statements.
Accountant won't put in the estimate I gave him.

I can insist the accountant enter my best estimate, and I would overestimate to $60 to be safe. Is that the way to go?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on April 12, 2015, 10:54:06 AM
You need to report and pay tax on all "income for the year ... from a source inside or outside Canada" within the meaning of s 3 of the Income Tax Act, RSC 1985, c 1, unless otherwise exempted by an exception in the law.

Income tax is computed based on the law, not based on the forms or other documentation you may or may not have received. Let's suppose you earned $10 in interest in 2014. If the bank issued you a form saying you had earned $100,000 in interest, you would not need to pay tax on $100,000. You'd still only need to pay tax on $10. The numbers on the tax slips are, as a general rule, irrelevant to computing your income tax, in the sense that the taxation is based on the income, not the slips. So after you understand that, you know that of course it's irrelevant whether the bank issued you a form for the interest: the taxability of the income will depend on whether that income is taxable under the law, not on whether it appeared on a tax slip. (Obviously a discrepancy between the forms and your return will increase your chance of an audit, so in the case of a significant discrepancy, you would want to be armed with evidence that the forms are wrong.)

As for your actual question, you could try looking at mint.com or something like that, but if you don't know how much interest you were paid and it is small, I would just put an arbitrary value into the tax return and attach a statement explaining that I am unable to determine the correct value, but it's sufficiently small that it does not have a significant effect on the tax owing. There's no legal authority for this procedure but as a practical matter it is unlikely to be challenged by the CRA.

That said, you can probably come up with a better estimate than $60. Prevailing interest rates in Canada are around 1% for online banks and 0.3% for physical banks. You mention driving to a branch so we'll assume the interest rate was 0.3%. Do not have any idea of how much cash was in the account? To get $60 at 0.3% interest, you would have needed $20,000 in the account for the entire year. I'm sure you have some idea of how much cash was in the account and at what point during the year it was closed to allow you to determine a better estimate.

Also, if the account was really closed by the bank without your permission, then I would insist they provide you an annual statement without fee, since the problem is entirely their fault. You don't really need to do this for tax purposes, but if you want the documentation, you shouldn't have to pay $10 when the problem was caused by the bank.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on April 12, 2015, 02:22:12 PM
...you can probably come up with a better estimate than $60. Prevailing interest rates in Canada are around 1% for online banks and 0.3% for physical banks. You mention driving to a branch so we'll assume the interest rate was 0.3%. Do not have any idea of how much cash was in the account? To get $60 at 0.3% interest, you would have needed $20,000 in the account for the entire year. I'm sure you have some idea of how much cash was in the account and at what point during the year it was closed to allow you to determine a better estimate.

Money moved in and out in big slabs, so I can't do the math on a reasonably consistent figure for the year. I do, though, have 11/12 months of one account printed out from before they accidentally closed it -that's where I got my estimate from- and the bank was willing to tell me over the phone their calculation of total interest for one of the accounts (but not the other). I thought I'd add a few dollars for the missing month. (I use YNAB now, so won't have this problem in future, but I didn't have that for the first several months of 2104.)

Anyway, it seems the short answer is, "Yes, despite what the tax accountant says and the bank rep says, you do indeed need to declare the $50ish dollars." All good. And I like the idea of including a note. I will do that!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: MMMdude on April 12, 2015, 04:15:56 PM
Dumb question

I had capital losses this year and i'm worried i will forget about them in the future.  Will my NOA show how much I have in unclaimed capital losses each year?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: c-kat on April 12, 2015, 05:31:32 PM
In the paper and an BBN they've mentioned that CRA might start taxing people who are doing too well in their TFSAs.  Do you know what the rules are surrounding this?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 13, 2015, 03:57:17 PM
Dumb question

I had capital losses this year and i'm worried i will forget about them in the future.  Will my NOA show how much I have in unclaimed capital losses each year?

Yes it will - Also, if you have a CRA My Account you can look up any carryforward amounts online (very useful).
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 13, 2015, 04:09:51 PM
In the paper and an BBN they've mentioned that CRA might start taxing people who are doing too well in their TFSAs.  Do you know what the rules are surrounding this?

Hi C-Kat

First off, there are no "rules" here, but the CRA is attempting to apply a notional portion of the Income Tax Act (unfairly, in my opinion). Note this issue hasn't hit the Tax Court of Canada yet - so the jury is still out, so to speak.

It all stems from the difference between "earned income" and "unearned income" in the Act. Earned income being employment income, business income, really any activity where you directly attempt to earn a living (or part thereof) in the activity. This differs from unearned income, i.e. passive income such as dividends and capital gains, where yes - you make money, but it isn't what you do for a living. Then there is money, like gambling winnings, inheritances, etc. which are tax-free (unless you're a professional gambler, for example...)

This is where they're attempting to drive a wedge - if you've been overly successful in your portfolio, how actively are you pursuing gains? Are you trading frequently? Many times a day? The more successful and higher trade volume, this (to the CRA) begins to look like business income... Which is why they're going after the TFSA so aggressively.

So - if you trade very frequently and dedicate significant time to trading your TFSA portfolio, there is a risk they will attempt to convert this into Business Income which is 100% taxable.

As stated, there is currently no jurisprudence in the matter, and I wouldn't expect clarity for at least another year, if not further, as eventually it will trickle up to Court. If you are truly concerned, keep any receipts and statements including trading costs/management fees etc., as one would surmise that if the income is taxable, the expenses are deductible.

Hope this answers the question!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: c-kat on April 13, 2015, 07:00:08 PM
In the paper and an BBN they've mentioned that CRA might start taxing people who are doing too well in their TFSAs.  Do you know what the rules are surrounding this?

Hi C-Kat

First off, there are no "rules" here, but the CRA is attempting to apply a notional portion of the Income Tax Act (unfairly, in my opinion). Note this issue hasn't hit the Tax Court of Canada yet - so the jury is still out, so to speak.

It all stems from the difference between "earned income" and "unearned income" in the Act. Earned income being employment income, business income, really any activity where you directly attempt to earn a living (or part thereof) in the activity. This differs from unearned income, i.e. passive income such as dividends and capital gains, where yes - you make money, but it isn't what you do for a living. Then there is money, like gambling winnings, inheritances, etc. which are tax-free (unless you're a professional gambler, for example...)

This is where they're attempting to drive a wedge - if you've been overly successful in your portfolio, how actively are you pursuing gains? Are you trading frequently? Many times a day? The more successful and higher trade volume, this (to the CRA) begins to look like business income... Which is why they're going after the TFSA so aggressively.

So - if you trade very frequently and dedicate significant time to trading your TFSA portfolio, there is a risk they will attempt to convert this into Business Income which is 100% taxable.

As stated, there is currently no jurisprudence in the matter, and I wouldn't expect clarity for at least another year, if not further, as eventually it will trickle up to Court. If you are truly concerned, keep any receipts and statements including trading costs/management fees etc., as one would surmise that if the income is taxable, the expenses are deductible.

Hope this answers the question!

Thanks. I don't trade daily, but I do trade a few times a month. Often its just picking up more shares in an existing position. But I do also buy higher risk investments in my TFSA so if they do well I will sell and buy something else.  I don't think 3 or 4 trades a month would qualify as a business, would it? Especially where I have a day job.

I assume CRA would love large gains in an RRSP, and not be opposed to frequent trading because it means more tax at withdrawl time.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 14, 2015, 08:16:52 AM
In the paper and an BBN they've mentioned that CRA might start taxing people who are doing too well in their TFSAs.  Do you know what the rules are surrounding this?

Hi C-Kat

First off, there are no "rules" here, but the CRA is attempting to apply a notional portion of the Income Tax Act (unfairly, in my opinion). Note this issue hasn't hit the Tax Court of Canada yet - so the jury is still out, so to speak.

It all stems from the difference between "earned income" and "unearned income" in the Act. Earned income being employment income, business income, really any activity where you directly attempt to earn a living (or part thereof) in the activity. This differs from unearned income, i.e. passive income such as dividends and capital gains, where yes - you make money, but it isn't what you do for a living. Then there is money, like gambling winnings, inheritances, etc. which are tax-free (unless you're a professional gambler, for example...)

This is where they're attempting to drive a wedge - if you've been overly successful in your portfolio, how actively are you pursuing gains? Are you trading frequently? Many times a day? The more successful and higher trade volume, this (to the CRA) begins to look like business income... Which is why they're going after the TFSA so aggressively.

So - if you trade very frequently and dedicate significant time to trading your TFSA portfolio, there is a risk they will attempt to convert this into Business Income which is 100% taxable.

As stated, there is currently no jurisprudence in the matter, and I wouldn't expect clarity for at least another year, if not further, as eventually it will trickle up to Court. If you are truly concerned, keep any receipts and statements including trading costs/management fees etc., as one would surmise that if the income is taxable, the expenses are deductible.

Hope this answers the question!

Thanks. I don't trade daily, but I do trade a few times a month. Often its just picking up more shares in an existing position. But I do also buy higher risk investments in my TFSA so if they do well I will sell and buy something else.  I don't think 3 or 4 trades a month would qualify as a business, would it? Especially where I have a day job.

I assume CRA would love large gains in an RRSP, and not be opposed to frequent trading because it means more tax at withdrawl time.

Correct - sounds like you're fine.

They don't attack the RRSP at all because it is all earned income on withdrawal. You're spot on there.

Cheers.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: lostamonkey on April 21, 2015, 06:05:50 PM
I have a few question about today's budget:
-The TFSA increase aparently begins in 2015. Does this means that those of us who have already maxed out our TFSAs can add another $4,500 tommorow?
-I read that the small business tax rate will decrease to 9% by 2019. Will this be in increments? What will the small business rate be in 2016?
-Since the small business tax rate is decreasing, will the tax rates on ordinary dividends change? If not, won't integration no longer apply?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on April 21, 2015, 06:25:24 PM
I have a few question about today's budget:
-The TFSA increase aparently begins in 2015. Does this means that those of us who have already maxed out our TFSAs can add another $4,500 tommorow?
-I read that the small business tax rate will decrease to 9% by 2019. Will this be in increments? What will the small business rate be in 2016?
-Since the small business tax rate is decreasing, will the tax rates on ordinary dividends change? If not, won't integration no longer apply?

From what's being said at reddit's PersonalFinanceCanada sub, you can contribute the $4.5k now. CRA 'respects' the budget until it *fails*, which means voted down, which won't happen because there is a Con majority.

It is retroactive to Jan 1st.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on April 21, 2015, 06:36:39 PM
1. Is the tax rate for Corporations graduated, like the one for personal? Or is it a flat rate, and applicable to even the first dollar?

2. I know there is free, CRA-approved software for submitting personal tax returns. Is there also this for Corporations? (I'm getting ready for next year!) What about for a Trust?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on April 22, 2015, 05:22:19 AM
My Dad bought bbd.b shares (employer match) over almost 10 years

These shares are in a taxable account, DRIP was in place. He never tracked anything (read ACB here). From 1996 to 2003 (where most purchases occured), bbd.b average price was at least 10$. Today, it’s 2.66$ and he wants to sell to harvest the lost and offset a big capital gain from a plot of land sale.

Could he sell all of his bbd.b and wait for the slips to come in to do his taxes next year? Why he should try to get the ACB by himself? Do I miss something here?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 22, 2015, 11:39:06 AM
I have a few question about today's budget:
-The TFSA increase aparently begins in 2015. Does this means that those of us who have already maxed out our TFSAs can add another $4,500 tommorow?
-I read that the small business tax rate will decrease to 9% by 2019. Will this be in increments? What will the small business rate be in 2016?
-Since the small business tax rate is decreasing, will the tax rates on ordinary dividends change? If not, won't integration no longer apply?

From what's being said at reddit's PersonalFinanceCanada sub, you can contribute the $4.5k now. CRA 'respects' the budget until it *fails*, which means voted down, which won't happen because there is a Con majority.

It is retroactive to Jan 1st.

That's correct - It's $10,000 for the years 2015 and beyond.

Decrease to the Small Business Tax Rate and Corresponding Adjustment to Gross-Up and Dividend Tax Credit Rates

Budget 2015 proposes a 2 percentage point decrease in the small business tax rate from 11 per cent in 2015 to 9 per cent in 2019.  The reduction will be implemented as follows:
•10.5 per cent effective January 1, 2016
•10 per cent effective January 1, 2017
•9.5 per cent effective January 1, 2018
•9 per cent effective January 1, 2019

 

In conjunction with such reductions, Budget 2015 also proposes to adjust the gross-up factor and dividend tax credit rate applicable to non-eligible dividends (basically, dividends sourced from corporate income that is taxed at the small business rate).  The gross-up percentage will be decreased from 18 per cent in 2015 to 17 per cent in 2016 and 2017, 16 per cent in 2018 and 15 per cent in 2019 and thereafter. The corresponding dividend tax credit rate will be changed from 13/18 of the gross-up amount to 21/29 effective January 1, 2016, 20/29 effective January 1, 2017 and 9/13 of such amount effective January 1, 2019. The budget indicates that such adjustments are necessary in order to maintain (or at least attempt to achieve) the integration of the corporate and personal tax systems. However, there will not be appropriate integration for non-eligible dividends paid after 2015 from retained earnings that arose in previous taxation years...

Hopefully this helps to address some of your questions here - a you see, the reduction is graduated over the next few years, and the dividend gross-up and credits are being adjusted to try and keep integration intact.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 22, 2015, 11:44:22 AM
1. Is the tax rate for Corporations graduated, like the one for personal? Or is it a flat rate, and applicable to even the first dollar?

2. I know there is free, CRA-approved software for submitting personal tax returns. Is there also this for Corporations? (I'm getting ready for next year!) What about for a Trust?

Hi SF -

It is a flat rate - applicable to each dollar of PROFIT (not revenue) so in this regard it is somewhat different than personal taxes.

As far as free software - I'm not aware of any in terms of Corporate and Trust Returns. The level of diligence required for T2 (Corp) and T3 (Trust) returns is far higher than that of a personal return, and as such I would be surprised if there was a free package available.

There is a pay as you go software available - "Profile" by Intuit, which is reasonable for single returns... However, as I'm stating above, given the level of diligence required I would very much recommend you retain a professional in these matters to ensure your returns are filed appropriately.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 22, 2015, 11:50:56 AM
My Dad bought bbd.b shares (employer match) over almost 10 years

These shares are in a taxable account, DRIP was in place. He never tracked anything (read ACB here). From 1996 to 2003 (where most purchases occured), bbd.b average price was at least 10$. Today, it’s 2.66$ and he wants to sell to harvest the lost and offset a big capital gain from a plot of land sale.

Could he sell all of his bbd.b and wait for the slips to come in to do his taxes next year? Why he should try to get the ACB by himself? Do I miss something here?

Hi there -

He needs to calculate the ACB by himself, or if his investment brokerage account has a carried amount this will likely do. Make sure any transaction fees and carrying costs have been included as well. For many (read - most) brokerage accounts, they don't file slips for capital gains/losses and the burden of reporting falls on the taxpayer. He'll need to get this information together for next year's return if he chooses to sell. I assume the matching value of shares were reported as income in the years 1996-2003?

Just as a red flag - he'll want to look at the whole picture here, and by that I mean the use of the principal residence exemption.

It seems, based on what you've said, this exemption is available to this property. If so, you want to claim AT LEAST 1 year of the exemption (as this will shield two years of ownership). The loss of the year has no impact on the use for his house (as you get the number of years claimed plus one) as the exempted amount.

Calculate the yearly capital gain of this property and his house to determine which is better to use the exemption on for the remaining years.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 22, 2015, 11:56:44 AM
Funny question for you:

I'm part of Ontario's MicroFIT program where we sell what we generate from our solar panels to Ontario Hydro and they pay us for the power and HST.  They screwed up our HST payments last year and paid us a fraction of the amount we should have received.  I caught it this month and have made them pay back the missing money.

For my taxes for 2014 do I report the HST that they paid us, or the HST that they owed us (and paid back in 2015)?

I responded to a similar question in the American context yesterday: http://forum.mrmoneymustache.com/ask-a-mustachian/question-for-tax-peoples-2015-income-attributable-to-2014/msg578159/#msg578159

Obviously, this thread is Canadian, but the American principles are similar so you may want to read that post first.

The first question is: what accounting method do you use for income from this project?

If you use the cash method of accounting, then the question becomes: when did you receive the income?

Receipt of income is not necessarily when you can spend the cash; it can be earlier. In Canada, this topic is not explicitly addressed in any legislative instrument, but it's often referred to in the court cases. I can't find an appellate citation at the moment, but in Mintzer v. Canada, [1998] TCJ No 325, a judge of the Tax Court says, "Certain dictionary definitions of 'receive' or 'receipt' might leave one with the impression that something is not received unless it is actually taken into one's hands or possession. However the case law is clear that an amount may be included in income even where it is only notionally or constructively received". Unfortunately, that case is not available on CanLII (I read it through LexisNexis), so I can't provide a link.

If you were using the cash method of accounting, it would come down to whether you received the income in 2014 or in 2015, keeping in mind that the legal definition of "received" may be different from your intuition.

However, in your case, things may be simpler, because the CRA guidance says that you should use the accrual method of accounting for income received from the Ontario MicroFIT program. As explained by the CRA (http://www.cra-arc.gc.ca/tx/bsnss/thrtpcs/nt-ft/q1-eng.html#a2), "Generally, the Participant should report income using the accrual method of accounting. With this method, the Participant will report the income in the taxation year that the amount is earned under the Contract, regardless of when the amount is received."

If this is your first year dealing with this program, you can use the accrual method as the CRA says and then the issue is very simple. If it's not your first year, then you need to remain consistent with the same accounting method, so then the issue of when you "received" the income may come into play if you were using the cash method before.

I wish I had caught this earlier - but alas I will do so now.

Contrary to Cathy's response here - these issues are not one and the same: When you say, they screwed up the HST payments, I assume this means purely HST, and not income taxes (as HST is not income, in any way shape or form).

Given this is the case - it depends on how you filed your HST returns with the CRA - did you already report this HST as received? If so, you've paid up the correct amount. If this missing HST has not yet been reported, you can either file amendments for the given periods, or just include the amount on your next HST return and remit this to CRA accordingly.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 22, 2015, 02:40:48 PM
A Quick Budget Overview

Hi All -

Alright alright alright - after some prodding, please find my MMM birds-eye overview of the 2015 budget.

Just as a quick briefing, the 2015 budget is now released, which means your friendly neighbourhood tax accountants are scurrying around trying to make heads from tails, a mere week before the end of the 2014 tax season! As such. this is an abridged version, but hopefully I cover most of everyone's concerns...

If you're looking for commentary on synthetic equity dividends and subsection 55(2) capital gains stripping rules (I'm assuming Le Barbu, since you love asking technical questions here...haha) - you've come to the wrong place!

As such, here is a very quick overview of the budget - I've taken the liberty to include non-political satirical remarks to make this subject a bit more interesting.

First and foremost - It's balanced! Finally. Well, sort of... Apparently we took some money out of an emergency fund, and sold some GM shares. Let's just say it's close enough.

TFSA's - starting in 2015, the room is up to $10,000 per annum. This is an increase of $4,500 per year, however... The room will not be inflation indexed going forward.

Author's Note - Please. Please! Recognize that Tax Free Savings Account does not mean the money has to be in a Savings Account at the bank. This is a Tax Free Investment Account (bank lobbies be damned) so treat this accordingly, and make more than the currently offered whopping 1.05% interest rate offered at Tangerine.

Small Business (i.e. Corporations with under $500,000 profit per annum) - Expect your taxes to fall over the next few years. As posted earlier, the CCPC rate is dropping from 11% to 9% between now and the 2019 fiscal year for Federal taxes. This should mean a fair bit of savings for Entrepreneurs far and wide.

Manufacturing - If you happen to be in manufacturing, good news, you're getting a handout! A new rate of 50% depreciation on certain capital assets acquired between 2015 and 2026 will now be available... However, given how many manufacturers in Ontario are going belly-up, one wonders who will be using this one.

Home Accessibility Tax Credit - $10,000 tax credit (15% thereof) to improve accessibility of homes for "seniors" (65 and up) who are eligible for the disability tax credit. Not 65 and disabled but helping a loved one? Good news - you can claim this credit on your return (if you're paying for it) if you're a spouse, parent, grandparent, niece, nephew, or other qualifying individual. This is a maximum of $10,000 per residence, so if you're paying for upgrades to your parents' home, it's a maximum of $10,000 (assuming they're married and cohabiting.)

Lifetime Capital Gains Exemption for Farmers - Increase from $813,600 in capital gains to $1,000,000 on qualified farm or fishing properties. This is, give or take, a savings of about $25,000-$45,000 for our farmers and fishermen. If you were thinking of becoming a farmer, or selling your farm - this may help!

Donations and your Estate - The 2015 Budget now allows you to exempt gains on donations of cash from the sale of private company shares or real estate, if the proceeds are donated within 30 days of closing. This goes further than previous budgets, and does not extend to public companies at the moment, but it's a step in the right direction.

Universal Child Care Benefit - Those with little 'staches will rejoice at receiving an additional $60 per month, per child under the age of 6. You'll also get an additional $1,000 increase in room to claim childcare expenses.

Teenager stealing your booze and racking up your cell-phone bill? Good news - you'll now be entitled to $60 per month for children from ages 6 to 17. That should cover the unlimited data plan and some make your own brew... Right?

There are other more technical issues - but this will likely cover most of what you're looking for.

Overall

Much of this is information we've all known for some time, but are now a reality in black and white. Is it a game changer? Not particularly, but much of this is a step towards saving taxes for those prudent enough to take advantage.

The only game changer, and this will be interesting, is the impact of the TFSA on the once firmly held ground of the RRSP. With $10,000 per year in room going forward, this is very likely to become the investment vehicle of choice, especially since withdrawals are NOT INCOME. This means you can withdraw from the TFSA, and these funds will not have any affect on those pesky OAS and CPP claw-back rates.

Hope everyone has a happy and healthy 2015 - and can take advantage of these savings both now and going forward.

CPA CB


Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on April 22, 2015, 05:25:50 PM
It is a flat rate - applicable to each dollar of PROFIT (not revenue) so in this regard it is somewhat different than personal taxes.

As far as free software - I'm not aware of any in terms of Corporate and Trust Returns. The level of diligence required for T2 (Corp) and T3 (Trust) returns is far higher than that of a personal return, and as such I would be surprised if there was a free package available.

There is a pay as you go software available - "Profile" by Intuit, which is reasonable for single returns... However, as I'm stating above, given the level of diligence required I would very much recommend you retain a professional in these matters to ensure your returns are filed appropriately.

Thank you very much, CPA CB. With the time of year, I didn't think we'd be hearing from you for some time yet!

I thought the feedback might indeed be to go with a tax accountant for the Corp and Trust returns. Thanks.

My Corporate return (still recovering from massive losses two years ago) showed $11,000 taxable, $0 owing. I'm sure this is because of loss carry-forwards of way more than $11,000 but was confused to see only the $11,000 and $0 display on the "owing" page, rather than the "taxable minus losses = $0". Is that how it normally displays? (The application of the loss carry-forward is clearly shown in other pages.)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RetiredAt63 on April 22, 2015, 05:45:44 PM
Question for all these tax-smart people, especially CPA CB.  I asked in another thread whether it is more advantageous to invest or pay down mortgage, given that my mortgage interest is an investment expense.  That thread has sunk like the proverbial stone, lots of views, but not much discussion.  Anyone here care to take a look and comment?  Or maybe it is so obvious that no-one has bothered to add in anything.  ;-(  If it is the obvious thing to do, it would be nice to hear a few people say they think my reasoning is sound.
http://forum.mrmoneymustache.com/ask-a-mustachian/costbenefit-analysis-of-not-paying-down-my-mortgage-%28canada%29/ (http://forum.mrmoneymustache.com/ask-a-mustachian/costbenefit-analysis-of-not-paying-down-my-mortgage-%28canada%29/).
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 23, 2015, 09:09:30 AM
It is a flat rate - applicable to each dollar of PROFIT (not revenue) so in this regard it is somewhat different than personal taxes.

As far as free software - I'm not aware of any in terms of Corporate and Trust Returns. The level of diligence required for T2 (Corp) and T3 (Trust) returns is far higher than that of a personal return, and as such I would be surprised if there was a free package available.

There is a pay as you go software available - "Profile" by Intuit, which is reasonable for single returns... However, as I'm stating above, given the level of diligence required I would very much recommend you retain a professional in these matters to ensure your returns are filed appropriately.

Thank you very much, CPA CB. With the time of year, I didn't think we'd be hearing from you for some time yet!

I thought the feedback might indeed be to go with a tax accountant for the Corp and Trust returns. Thanks.

My Corporate return (still recovering from massive losses two years ago) showed $11,000 taxable, $0 owing. I'm sure this is because of loss carry-forwards of way more than $11,000 but was confused to see only the $11,000 and $0 display on the "owing" page, rather than the "taxable minus losses = $0". Is that how it normally displays? (The application of the loss carry-forward is clearly shown in other pages.)

Yes, it is!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 23, 2015, 09:34:12 AM
Question for all these tax-smart people, especially CPA CB.  I asked in another thread whether it is more advantageous to invest or pay down mortgage, given that my mortgage interest is an investment expense.  That thread has sunk like the proverbial stone, lots of views, but not much discussion.  Anyone here care to take a look and comment?  Or maybe it is so obvious that no-one has bothered to add in anything.  ;-(  If it is the obvious thing to do, it would be nice to hear a few people say they think my reasoning is sound.
http://forum.mrmoneymustache.com/ask-a-mustachian/costbenefit-analysis-of-not-paying-down-my-mortgage-%28canada%29/ (http://forum.mrmoneymustache.com/ask-a-mustachian/costbenefit-analysis-of-not-paying-down-my-mortgage-%28canada%29/).

Hi Retired,

This is a multi-faceted question, and one which raises a few additional questions... It isn't technically a tax one, but I'll just throw some thoughts out here to help.

First and foremost - you aren't giving concrete figures here. From what I gather you're in a 15% marginal tax rate ($150 savings per $1,000) is this something you expect to continue into retirement? If you're paying $12k per year, and gaining 9K equity, one would assume you're saving about $450 per year with this strategy?

Risk and Rewards - At 63, you've got plenty of years ahead of you, but in terms of compounding income for the future, the years are much more limited than if you were, say, 40. At a 3.65% rate of interest on your mortgage (call it 3% after savings on taxes) - after inflation you need to clear about 5-6% per annum to break even. This isn't to say it's impossible, or even that challenging to beat - but it's a consideration nonetheless. Are you liquid enough to wait out a timing issue (i.e. you need money now, but your portfolio just dumped 10% of its value?)

Future Plans - You're somewhat newly divorced, and luckily from what I can tell you've escaped relatively in tact in terms of financial consequences. What are the rough plans now and into the future? Is this girlfriend a serious relationship? Are you looking to settle down with someone younger? Same age? Earning potential plays a role here - but someone a bit younger and still working will provide security on the home in terms of income. Not to make relationships about money - but it seems like 30% of the threads here are about relationships and money, so may as well start to address expectations in your head for your future plan.

Last but not least - How much is left on the house? How quickly can you pay off the mortgage with the matrimonial funds dumped into investments to grow? Ultimately, if you can treat these investments as a nest egg, but if find part-time fun work that keeps your flexibility and helps to pay down the mortgage end of things in the meantime, this may be your best option.

Contrary to what you've said, this is neither an obvious or easy decision to make. The fact that you've retired, are recently divorced, amongst other things - complicates the decision further. Sinking the money into the mortgage is theoretically less risky (fewer unknowns) but you can help to mitigate this risk quite easily by finding something to do, part time, that is fun, and pays. Maybe it's walking the neighbour's dog, or refinishing antique watches, or woodworking - who knows! You've retired, if you can find a way to monetize your hobby, this will help!

Good luck, I haven't really answered this question but hopefully have provided some points to think about.

Cheers,

CPA CB







Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RetiredAt63 on April 23, 2015, 01:30:29 PM
Quote from: CPA CB link=topic=25093.msg637827#msg637827
[i
Hi Retired,[/i]

This is a multi-faceted question, and one which raises a few additional questions... It isn't technically a tax one, but I'll just throw some thoughts out here to help.

First and foremost - you aren't giving concrete figures here. From what I gather you're in a 15% marginal tax rate ($150 savings per $1,000) is this something you expect to continue into retirement? If you're paying $12k per year, and gaining 9K equity, one would assume you're saving about $450 per year with this strategy?

I am at the higher end of the federal "$44,701 up to $89,401" income category.

Risk and Rewards - At 63, you've got plenty of years ahead of you, but in terms of compounding income for the future, the years are much more limited than if you were, say, 40. At a 3.65% rate of interest on your mortgage (call it 3% after savings on taxes) - after inflation you need to clear about 5-6% per annum to break even. This isn't to say it's impossible, or even that challenging to beat - but it's a consideration nonetheless. Are you liquid enough to wait out a timing issue (i.e. you need money now, but your portfolio just dumped 10% of its value?)

Pension, RRIF, CPP and investment income are fine, no immediate need for big chunks of money, or need to get out of mortgage debt.  Now that the lawyers are paid for, I am actually in the position of having more money coming in than my regular life expenses need.  This is good since I have house projects that will soak up some of that money, that have been deferred for a few years.  But I am not having to liquidate any investments, and don't expect to need to for quite some time.
 
Future Plans - You're somewhat newly divorced, and luckily from what I can tell you've escaped relatively in tact in terms of financial consequences. What are the rough plans now and into the future? Is this girlfriend a serious relationship? Are you looking to settle down with someone younger? Same age? Earning potential plays a role here - but someone a bit younger and still working will provide security on the home in terms of income. Not to make relationships about money - but it seems like 30% of the threads here are about relationships and money, so may as well start to address expectations in your head for your future plan.

Oh, the "girlfriend" is a friend, not a relationship.  I am hetero female. The number of single, available men anything close to my age and interests in this small rural area is effectively zero, so no romantic prospects are in sight.

Last but not least - How much is left on the house? How quickly can you pay off the mortgage with the matrimonial funds dumped into investments to grow? Ultimately, if you can treat these investments as a nest egg, but if find part-time fun work that keeps your flexibility and helps to pay down the mortgage end of things in the meantime, this may be your best option.

Roughly $150,000 on the house, might realise $100,000 - $120,000 on the sale of the matrimonial home after all obligations are paid.  There are projects on this house that have been waiting, plus I have nothing in TFSAs and I would like to maximize those.  So realistically $50,000 to $60,000 available for the mortgage.  Right now the projected finish is 18 years away, but with the open mortgage I can easily shorten that even without putting the lump sum on it.

Contrary to what you've said, this is neither an obvious or easy decision to make. The fact that you've retired, are recently divorced, amongst other things - complicates the decision further. Sinking the money into the mortgage is theoretically less risky (fewer unknowns) but you can help to mitigate this risk quite easily by finding something to do, part time, that is fun, and pays. Maybe it's walking the neighbour's dog, or refinishing antique watches, or woodworking - who knows! You've retired, if you can find a way to monetize your hobby, this will help!

My basic plan is to never work for money again - partly because I did not do an early retirement (I am on this forum for the lifestyle, not the early retirement), partly because jobs are few and far between in this area and we lose too many young people because of that, and partly because I am super busy with all the things in the community that are done by volunteers.

Good luck, I haven't really answered this question but hopefully have provided some points to think about.

Yes, you did, thank you, and I'm glad you think that it isn't that simplistic.  I hope the added information here will give you and others the appropriate information for analysis.   For the last 5+ years it has been an effort to keep afloat financially.  I came out of the divorce financially OK, but I did definitely take a hit.  Now I can actually do some planning (or at least I can once the matrimonial home sells).  Given that my family history means I can easily make it to 90+, I do need to plan long-term as much as is possible. 
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: danzabar on April 24, 2015, 08:36:20 AM
First of all thanks for all your great information!
I have a simple question for you,
my wife has a defined benefit pension but has 8500 in rrsp room. I have all of my savings in an rrsp at the moment. She has a higher income than I do and I would like to have her contribute to a spousal rrsp to claim the deduction and to try and even out our retirement incomes. What I'm finding confusing is 'how to actually do this'.
We share a bank account and every two weeks I invest in my e-series rrsp from our shared account. Would we continue to invest in the same way to add the extra 8500 and then when we submit our taxes next year, she claims 8500 of the deposit as a spousal rrsp? Or does a new rrsp need to be setup...
Many thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cowtown2011 on April 24, 2015, 08:49:21 AM
I've got a couple questions.

I'm looking make an investment through www.slicedinvesting.com, a new service which allows investors to invest in Hedge Funds. Due to the structure, I have a couple tax related questions:

  - Likely any distributions from the fund would be subjest to withholding taxes, can the withholding be included in my tax return and thus reduce the chance of double taxation?
  - Would any distributed capital gains also be subject to withholding taxes?
  - Does an investor need to remit these taxes on their own?
  - Any other US tax reporting requirements become required under this type of setup?

I believe I would be consider a limited partner of any investment made.

Appreciate any help before I commit any capital.

Everyone should checkout their platform. Great setup and allows average joe investors to access investments which are not correlated to equity markets in most instances.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: c-kat on April 25, 2015, 06:50:52 PM
Hello and thank you so much for answering my questions. I have one more that I'd like to ask, concerning retirement tax planning.

I'm trying to decide whether my DH and I should be contributing to RRSPS or TFSAs.  We both have RRSPs but because I will have a pension I stopped contributing to my RRSP and switched to a TFSA. I know pension income can be split between spouses but what about RRSP income?

Our details are as follows. At age 55 we plan to retire. I will receive a pension of $60,000 in today's dollars. My husband's work retirement plan is an RRSP with a company match, which projections show will be worth $700,000 at that time. We would withdraw 4% per year.

Ten years after we retire, we will get CPP and my pension will be clawed back somewhat.  At 67 we will get OAS.

How would we be taxed on this combo?  We both have additional RRSPs and TFSAs outside of this and are wondering which we should max out first? It is nice to get tax back on RRSP contributions, but I'm starting to think TFSAs would be better for retirement, so that we wouldn't end up in a higher tax bracket.

Thanks!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RetiredAt63 on April 26, 2015, 06:22:19 AM
Are you planning to take money out of an RRSP (one set of rules) or transfer it to a RRIF and take from that (another set of rules)?
Also, people tend to assume that they will turn their RRSP into a RRIF the year they turn 71, because that is when they have to do it.  But you can put some or all of your RRSP into a RRIF earlier if that is more advantageous overall for you.  For example, when I retired for real I put most of my RRSP into a RRIF and am taking out the minimum.  I still had RRSP contribution room and used it, so I also have an RRSP that is going to sit there and grow until I need to shift it.

My husband's work retirement plan is an RRSP with a company match, which projections show will be worth $700,000 at that time. We would withdraw 4% per year.

Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: c-kat on April 26, 2015, 10:35:42 AM
Are you planning to take money out of an RRSP (one set of rules) or transfer it to a RRIF and take from that (another set of rules)?
Also, people tend to assume that they will turn their RRSP into a RRIF the year they turn 71, because that is when they have to do it.  But you can put some or all of your RRSP into a RRIF earlier if that is more advantageous overall for you.  For example, when I retired for real I put most of my RRSP into a RRIF and am taking out the minimum.  I still had RRSP contribution room and used it, so I also have an RRSP that is going to sit there and grow until I need to shift it.

My husband's work retirement plan is an RRSP with a company match, which projections show will be worth $700,000 at that time. We would withdraw 4% per year.

Thanks!

Good point. I hadn't thought about that distinction.  We would do whatever worked best from a tax standpoint. What would you suggest?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RetiredAt63 on April 26, 2015, 08:41:55 PM
Good point. I hadn't thought about that distinction.  We would do whatever worked best from a tax standpoint. What would you suggest?

Money out of an RRSP versus a RRIF, hmm.  I don't have enough information and I am not an expert on this - I only know more than the average bear because I am in the middle of the RRSP thing.  Most people here are too young  ;-)

Any decent financial planner can work out various scenarios for you - the one I use at my bank did it for me.  I can tell you how we did it, which might help.

First, you (I am using the generic "you" here) have to convert an RRSP to a RRIF (or use it to buy an annuity) by the time you hit 71, or your spouse does.  If you do not need the income, this is a common choice - but what happens is that at 71 the required minimum withdrawal is high enough that people notice a big tax hit.  Whereas if you start withdrawing earlier, the minimum withdrawal is much smaller, and for several years your RRIF should continue to grow.  At some point your withdrawals (% withdrawn having to increase each year) will be greater than the growth and the total value will start to shrink.  Each year the % coming out is higher, as the thinking behind the RRIF is that you should end up with zero in it if you live long enough, just as you would with a regular pension (when you hit your 90s the withdrawal rate is huge).  Anyway, if you don't need the money you can invest it in something that is more under your control, a TFSA is the obvious choice if you have room.  Income from a RRIF counts as taxable income, and affects OAS, which is another reason starting it at 71 has a big impact, the sudden large increase in income can trigger OAS clawback if it wasn't already happening.

When you take money out of an RRSP, there is with-holding tax.  You lose that contribution room.  And there are probably all sorts of other implications that I do not know about, because this is an area I haven't researched.  I know there are ways to get it out for a house or education, but other than that, RRSPs are set up to really discourage people from taking money out of them.

TFSAs are wonderful, in that they are just what the name says, tax free when you take the money out.  Of course they are done with after-tax dollars.  But they don't count as taxable income, so if you are at the point of seeing OAS being affected by income, money from a TFSA is better.  If OAS is irrelevant (you have so much money it is all clawed back, or so little you can't get to clawback position) then it isn't part of the calculations.

I don't think it matters where the RRSPs and TFSAs are, the tax rules are the same.

Re pension and CPP, I am in the same boat, my pension will drop when I hit 65 and am eligible for full CPP.  I started CPP a bit early (divorce debt to pay) so my pension will drop more than my reduced CPP payment - the drop in pension will be roughly made up for by OAS.

Gordon Pape's book on TFSAs is really good, well worth a read.

So really, my advice to you is run a bunch of different scenarios and see which works out best in the long term.  But check out the tax rules for each.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 27, 2015, 09:44:42 AM
First of all thanks for all your great information!
I have a simple question for you,
my wife has a defined benefit pension but has 8500 in rrsp room. I have all of my savings in an rrsp at the moment. She has a higher income than I do and I would like to have her contribute to a spousal rrsp to claim the deduction and to try and even out our retirement incomes. What I'm finding confusing is 'how to actually do this'.
We share a bank account and every two weeks I invest in my e-series rrsp from our shared account. Would we continue to invest in the same way to add the extra 8500 and then when we submit our taxes next year, she claims 8500 of the deposit as a spousal rrsp? Or does a new rrsp need to be setup...
Many thanks!
She should be able to put money directly into your RRSP - speak with your bank on logistics, but this doesn't need to be separate.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 28, 2015, 07:38:21 AM
Are you planning to take money out of an RRSP (one set of rules) or transfer it to a RRIF and take from that (another set of rules)?
Also, people tend to assume that they will turn their RRSP into a RRIF the year they turn 71, because that is when they have to do it.  But you can put some or all of your RRSP into a RRIF earlier if that is more advantageous overall for you.  For example, when I retired for real I put most of my RRSP into a RRIF and am taking out the minimum.  I still had RRSP contribution room and used it, so I also have an RRSP that is going to sit there and grow until I need to shift it.

My husband's work retirement plan is an RRSP with a company match, which projections show will be worth $700,000 at that time. We would withdraw 4% per year.

Thanks!

Good point. I hadn't thought about that distinction.  We would do whatever worked best from a tax standpoint. What would you suggest?

Hi there,

In terms of minimizing impact on future investments, the TFSA is a great way to shield future earnings as withdrawals are not considered "income". Retired @ 63 has good points here in terms of differences between the plans. Personally my view is that TFSA's are a better investment vehicle, as the savings are back-loaded in the sense that the taxes have been paid, and from here on out it is tax-shielded earnings with no impact on future benefits (at this point in any case.)

The RRIF rules have been loosened in this year's budget - from about 7% minimum to around 5% minimum withdrawal rates per year.

Hope this helps!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on April 29, 2015, 07:20:07 AM
Folks,

Going to take a brief moment to comment on an article which came across my desk yesterday.

http://news.nationalpost.com/news/canada/canadian-politics/ottawa-man-gives-1500-back-to-the-government-in-taxes-after-refusing-to-take-income-splitting-credit

The gist of this is simple - it's a publicity stunt... The article is misleading - he didn't "give back" the $1,500 - he just elected to not take the family tax credit, and receive as big of a refund. His line of reasoning is that, sure, he could have spent the money, but why not just let the government keep it?

I'd be curious to know what people are doing with their refunds - spending it is the assumed presumption of most, but I sincerely hope the MMM'ers are squirreling the funds away for the future, or at least a portion thereof.

I can't help but think how selfish this person is - clearly he has children and a family... But has opted to pay $1,500 (closer to $6-10k by the time his kids go to University, with interest), instead of investing in his family's future - children's education, TFSA account, RRSP, etc.

Or, should he feel so generous, why not donate directly to a cause his family believes in? Charity is a wonderful thing - as someone who serves on a few not-for-profit boards, I can safely say many great institutions out there are desperate for money, knowledge, and expertise.

This isn't a political commentary - but I find it troublesome that 1) the assumption that refunds are blown of frivolous items still exists, and 2) someone's need for attention extends beyond the well-being of their family - surely the CRA didn't leak this story, but it's clear he has systematically exploited the news system for recognition.

In that note - I ask, what are people doing with their refunds or tax savings this year? Are you spending, saving, or investing in the future (education, increasing property value, whatever the case may be.)

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Retire-Canada on April 29, 2015, 08:21:53 AM

In that note - I ask, what are people doing with their refunds or tax savings this year? Are you spending, saving, or investing in the future (education, increasing property value, whatever the case may be.)

I'm self-employed and pay my taxes in instalments. I have a pretty good handle on the taxes I owe so I tend to owe/get a refund of less than $500/yr. This year I owed ~$400.

I don't really see my tax savings as a separate item from my "general revenue" stream.

My typical monthly process is:

- total income for month from invoices
- set aside GST owing
- set aside my income tax estimate
- put aside mortgage payments for next month
- pay bills and VISA
- invest surplus in my RRSP/TFSA & Non-reg accounts
- repeat

If I did get an extra $500 in a particular year due to a tax credit or rate reduction it would get invested.

-- Vik
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Ottawa on April 29, 2015, 09:39:57 AM

In that note - I ask, what are people doing with their refunds or tax savings this year? Are you spending, saving, or investing in the future (education, increasing property value, whatever the case may be.)

Yeah, I thought that guy was a total dick.  As you point out, he really only robbed his own family/humanity.  That article would have actually kicked ass if he said that he donated the $1,500 to say Nepal earthquake fund (which the Canadian gov't is matching).  Boom.  $3,000 to charity.

Anyway, I took my $6,000 refund and rebalanced the portfolio by purchasing XEC (emerging markets etf). 
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on April 29, 2015, 11:27:30 AM
Took my 6,650$ refund to get the max subsidies out of RESP for the year (5k$) and 1,150$ to pay for a mistake I did in april (landlording attempt that turned bad). Still thinking what I should do with the 500$ remaining...

What about 48 bottles of red wine?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on April 29, 2015, 11:59:56 AM
In that note - I ask, what are people doing with their refunds or tax savings this year? Are you spending, saving, or investing in the future (education, increasing property value, whatever the case may be.)

I'm the sole provider for me and my son, and both of us are recognized federally as people with disabilities. I take every penny I can get, keep my spending as low as possible while maintaining quality of life and, yep, squirrel away everything else. I've maxed both our RDSPs to date, contributed to his RESP, invest the rest outside of those, and am working on finding a bank that will allow me to set up a TFSA Trust (we're not allowed this unless it's a Trust). I also make sure to share some of our money (as well as knowledge, time, energy, etc), and always look to put the Sharing money into approaches that I believe will help marginalized people near and far improve their financial footing.

So, I agree it's weird that this guy couldn't think of anything more productive to do with the credit.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on April 29, 2015, 12:02:23 PM
Took my $13,000 refund and added it to my TFSA!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on April 29, 2015, 05:57:02 PM
Took my $13,000 refund and added it to my TFSA!

You know about the T1213 form Tuxedo?

I know you can manage that money better than any government. That why I hate huge refund. I feel like I lend money @ 0%
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on April 29, 2015, 06:03:25 PM
I received a large Canadian refund for tax year 2014 (~10,000 CAD).

I tried to avoid it during the year by filing Form T1213, but it was rejected for a meritless reason by the CRA. I actually filed two more times, each time responding to their meritless contentions, but they refused to approve it. The full story is too frustrating to describe in detail, so you'll just have to trust me that I was right and the CRA's position was devoid of merit.

I considered using the appeal process, but I decided I would just wait and eventually receive the refund. This turned out to be a serious mistake because between the money being withheld and me receiving the refund, it lost 10-20% of its value in USD.

Despite the loss of value, I still converted the refund to USD immediately, transferred it to the US banking system, and contributed it to one of my investment accounts.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Maya on April 29, 2015, 06:46:00 PM
Can you help us get an idea of how capital gains will work on the sale of our rental property?

difference between evaluated price when we left and sale price is $80k.

How much taxes are we likely to pay on this? We're in Quebec.

We have 70 k RRSP contribution space (50 for DH, 20 for me) which we'll be fully topping up this year. Also need to get our net income down as low as possible because increase in income means increase in daycare costs with new law.

Thanks for your help! Sale goes through in June, so want to have an idea how much we keep back from investments to make sure we can pay the tax bill.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on April 29, 2015, 07:18:00 PM
Can you help us get an idea of how capital gains will work on the sale of our rental property?

difference between evaluated price when we left and sale price is $80k.

How much taxes are we likely to pay on this? We're in Quebec.

We have 70 k RRSP contribution space (50 for DH, 20 for me) which we'll be fully topping up this year. Also need to get our net income down as low as possible because increase in income means increase in daycare costs with new law.

Thanks for your help! Sale goes through in June, so want to have an idea how much we keep back from investments to make sure we can pay the tax bill.

Tax on capital gain is about 20% (but really depend on you income). You sold for 80k$ more than you paid for but you can reduce capital gain by deducting some improvement expenses. Fortunatly, you got almost 1 year to make your homework. Run different plans before to fill RRSPs, it may worth to keep some room for next years.

How come you got 70k$ room?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on April 29, 2015, 11:02:51 PM
Took my $13,000 refund and added it to my TFSA!

You know about the T1213 form Tuxedo?

I know you can manage that money better than any government. That why I hate huge refund. I feel like I lend money @ 0%

You bet! I used the T1213 twice last year for a total of $10,000. I made huge contributions to my RRSP at the end of January and February and filed my taxes early so I didn't feel it would be worthwhile to fuss with T1213 forms knowing my refund was going to come a few weeks later anyways.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on May 04, 2015, 10:27:38 PM
Happy Cinco de Mayo - IE Tax Filing day this year!

Best to those who have filed, a subtle "uh oh" to those who haven't - and anywhere in between.

As seen in the poll, there are more than a few of us saving and investing our resources, and no Apple Watches purchased to date. Mazel Tov!

To those of you considering an Apple Watch (even with a refund). Please don't. $700 plus for a timepiece is expensive (especially when the iPhone 7 or 8 comes out, rendering your iPhone and Watch useless) in a few years. If you're so inclined, go to a reputable dealer, buy a Patek Phillipe, and watch (get it?) the value grow.

A very happy, prosperous, and joyful 2015 tax year to the (suckers) people who file in Canada!

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Maya on May 12, 2015, 08:19:44 AM
Can you help us get an idea of how capital gains will work on the sale of our rental property?

difference between evaluated price when we left and sale price is $80k.

How much taxes are we likely to pay on this? We're in Quebec.

We have 70 k RRSP contribution space (50 for DH, 20 for me) which we'll be fully topping up this year. Also need to get our net income down as low as possible because increase in income means increase in daycare costs with new law.

Thanks for your help! Sale goes through in June, so want to have an idea how much we keep back from investments to make sure we can pay the tax bill.

Tax on capital gain is about 20% (but really depend on you income). You sold for 80k$ more than you paid for but you can reduce capital gain by deducting some improvement expenses. Fortunatly, you got almost 1 year to make your homework. Run different plans before to fill RRSPs, it may worth to keep some room for next years.

How come you got 70k$ room?

We'd been focused on paying off the HELOC we took out on the condo to buy our house. Paid it off just in time to sell the condo LOL. In the end it'll likely save us some taxes as well. So not planned likely helped us a little.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on May 13, 2015, 08:22:07 PM
Can you help us get an idea of how capital gains will work on the sale of our rental property?

difference between evaluated price when we left and sale price is $80k.

How much taxes are we likely to pay on this? We're in Quebec.

We have 70 k RRSP contribution space (50 for DH, 20 for me) which we'll be fully topping up this year. Also need to get our net income down as low as possible because increase in income means increase in daycare costs with new law.

Thanks for your help! Sale goes through in June, so want to have an idea how much we keep back from investments to make sure we can pay the tax bill.

Tax on capital gain is about 20% (but really depend on you income). You sold for 80k$ more than you paid for but you can reduce capital gain by deducting some improvement expenses. Fortunatly, you got almost 1 year to make your homework. Run different plans before to fill RRSPs, it may worth to keep some room for next years.

How come you got 70k$ room?

We'd been focused on paying off the HELOC we took out on the condo to buy our house. Paid it off just in time to sell the condo LOL. In the end it'll likely save us some taxes as well. So not planned likely helped us a little.

Sorry but you lost me here. The sale of the condo should be enough to repay the HELOC when you sold it? Since it's a HELOC, you have no penalty doing so. Because it was a rental, interests from HELOC were deductibles. ???

I would never skip the opportunity to save 38% income taxes to repay a 3% HELOC

I hope I missunderstand your story or you really need some advices

*Actually, I do both
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Maya on May 15, 2015, 06:26:41 PM
We took out the HELOC to use it to get our down payment on our primary residence to avoid paying mortgage insurance. We'd saved up 5% but then realized we could save the insurance if we got the HELOC so we did. No interest deduction because it was used to buy our primary residence and not a rental.

The interest rate ended up being variable at 4.5% so I wanted to get it down as quick as possible. Perhaps investments could have done slightly better, but we liked the security of paying down the debt first. And now it will serve us well to have the extra space in our rrsp to reduce our capital gains (I hope) as well as the increase in daycare fees this year that are now tied to income.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on May 15, 2015, 09:25:03 PM
We took out the HELOC to use it to get our down payment on our primary residence to avoid paying mortgage insurance. We'd saved up 5% but then realized we could save the insurance if we got the HELOC so we did. No interest deduction because it was used to buy our primary residence and not a rental.

The interest rate ended up being variable at 4.5% so I wanted to get it down as quick as possible. Perhaps investments could have done slightly better, but we liked the security of paying down the debt first. And now it will serve us well to have the extra space in our rrsp to reduce our capital gains (I hope) as well as the increase in daycare fees this year that are now tied to income.

I understand now! Run some numbers to make sure to stay in the 38% refund bracket with RRSP contributions. You may be better to spread it over 2-3 years.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: SweetLife on July 01, 2015, 07:20:27 AM
I'd be curious to know what people are doing with their refunds - spending it is the assumed presumption of most, but I sincerely hope the MMM'ers are squirreling the funds away for the future, or at least a portion thereof.

My hair is still on fire so I put the entire $680 towards paying off debt... and it felt GREAT!!!!

CPA CB I want to REALLY thank you for putting up this thread! I did my own taxes this year for the first time and it was hairy ... I mean scary lol... I am Canadian as well (Happy Canada day!!!) and just returned from maternity leave (loved the year off lol) ... but had a few issues not sure if you could advise me for next year...

I have been doing minimum RRSP's (until I get all my bills paid off) under $1000

I make just under $75,000 per year and my husband is not working outside the home. (He will be staying home to take care of our baby - bless him!).

My Mom passed away and left my 4 siblings and I a 200-acre farm near Toronto that we rent out to a farmer - rent for this year will be $10,000 - split 5 ways. (The way my brother set it up it is a rental and no longer a farm per se)

So this year I decided to do my own taxes to save some $$$ (and be a little more Mushtachian lol) ... I used an online program and everything was fine ... I think lol....

My question is: this rental - has a small house on it - I went up with my husband and did some repairs - doors/mosquito netting/rat poison/grass cutting/trimming etc ... is it acceptable to put these in as expenses? (for the materials??) and can I claim gas to get there?

In truth I think this property will be sold as 5 people making decisions is no fun at all ... and though we all get along we all have different ideas of what should/needs to be done with the property (hunting/no hunting in bush etc) ... and in fact for my little family selling would be the best bet as the revenue (less capital gains, I am told) ... will be enough to wipe out all of our bills, pay off my mortgage and likely have enough left to have a chunk to invest and really start our snowballing ... but that won't be done this year.

Anyways :) Thank you for any advice!!! :) 





Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 02, 2015, 02:00:36 PM
I'd be curious to know what people are doing with their refunds - spending it is the assumed presumption of most, but I sincerely hope the MMM'ers are squirreling the funds away for the future, or at least a portion thereof.

My hair is still on fire so I put the entire $680 towards paying off debt... and it felt GREAT!!!!

CPA CB I want to REALLY thank you for putting up this thread! I did my own taxes this year for the first time and it was hairy ... I mean scary lol... I am Canadian as well (Happy Canada day!!!) and just returned from maternity leave (loved the year off lol) ... but had a few issues not sure if you could advise me for next year...

I have been doing minimum RRSP's (until I get all my bills paid off) under $1000

I make just under $75,000 per year and my husband is not working outside the home. (He will be staying home to take care of our baby - bless him!).

My Mom passed away and left my 4 siblings and I a 200-acre farm near Toronto that we rent out to a farmer - rent for this year will be $10,000 - split 5 ways. (The way my brother set it up it is a rental and no longer a farm per se)

So this year I decided to do my own taxes to save some $$$ (and be a little more Mushtachian lol) ... I used an online program and everything was fine ... I think lol....

My question is: this rental - has a small house on it - I went up with my husband and did some repairs - doors/mosquito netting/rat poison/grass cutting/trimming etc ... is it acceptable to put these in as expenses? (for the materials??) and can I claim gas to get there?

In truth I think this property will be sold as 5 people making decisions is no fun at all ... and though we all get along we all have different ideas of what should/needs to be done with the property (hunting/no hunting in bush etc) ... and in fact for my little family selling would be the best bet as the revenue (less capital gains, I am told) ... will be enough to wipe out all of our bills, pay off my mortgage and likely have enough left to have a chunk to invest and really start our snowballing ... but that won't be done this year.

Anyways :) Thank you for any advice!!! :)

Hi Sweet Life - it is my pleasure!

I'm sorry to hear about your mother.

My first question is - what was the disposal value of the property in your mother's final tax return? Farms have very specific and tax-advantageous rules. I hope this was taken care of appropriately on her 'deemed' disposition to you and your family.

As for the expenses - yes these are reasonable and in line with allowable expenses for rental properties. You should claim km rather than gas , which is $0.55 for the first 5000 km and $0.49 per km thereafter in 2015.

I suggest you either research the capital gains rules for farms (on CRA's website and CanLii if more advanced) or speak with a CPA who can guide you through the disposal process. Without knowing more, you could save many thousands of dollars on disposition by doing it 'correctly' versus just claiming it as a sale of property - farm property has weird rules, and you want to make sure you dot the I's and cross the T's.

Also - congrats on doing your own taxes! It can be a scary proposition, but a rewarding one.

Best of luck!

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: McBuck on July 03, 2015, 07:58:10 AM
I just graduated and started a job so I'll only be working 6 months this year making ~34k gross (65k salary).

Can I file a T1213 to reduce my taxes taken off my paycheck since I won't be making my full salary in 2015? The CRA website doesn't seem to mention a partial working year as a valid reason.

I'm in Ontario btw.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on July 03, 2015, 08:23:39 AM
@McBuck

You can fill the T1213 and see how they handle it. Is it your first "real big cash cow job"? I mean, do you have RRSP contributions historical datas?

I fill that kind of form every year since 1999 and some years they just send me the approval letter right away and some other years, they ask some questions to confirm everything is ok.

The good news is that you are "only" 6-8 months away now form filling taxes and get a refund...

Worst case scenario, you'll get a big refund and buy a chunk of Vanguard ETF in march 2016!

From my viewing, there is 2 different levels for someone who want to fill T1213. First level, liquidity shortage (to make weekly/monthly contributions). This level can be solved by contribuing a lump sum near the limit date (usually march 1st) and get a large refund few weeks after (if you fill your taxes fast and properly). Level 2 needs the T1213 to be solved because it's your money and the goverment is keeping it away from your bank account. Mentally, you feel like you lend money @ 0% and "lose" the return you should be making in the market.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: lostamonkey on July 03, 2015, 09:07:17 AM
I just graduated and started a job so I'll only be working 6 months this year making ~34k gross (65k salary).

Can I file a T1213 to reduce my taxes taken off my paycheck since I won't be making my full salary in 2015? The CRA website doesn't seem to mention a partial working year as a valid reason.

I'm in Ontario btw.

Don't you have a ton of federal tuition/provincial tuition carryforwards that you can put on your TD1 so your employer will withhold almost no tax anyway?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: McBuck on July 03, 2015, 12:16:52 PM
@McBuck

You can fill the T1213 and see how they handle it. Is it your first "real big cash cow job"? I mean, do you have RRSP contributions historical datas?

I fill that kind of form every year since 1999 and some years they just send me the approval letter right away and some other years, they ask some questions to confirm everything is ok.

The good news is that you are "only" 6-8 months away now form filling taxes and get a refund...

Worst case scenario, you'll get a big refund and buy a chunk of Vanguard ETF in march 2016!

From my viewing, there is 2 different levels for someone who want to fill T1213. First level, liquidity shortage (to make weekly/monthly contributions). This level can be solved by contribuing a lump sum near the limit date (usually march 1st) and get a large refund few weeks after (if you fill your taxes fast and properly). Level 2 needs the T1213 to be solved because it's your money and the goverment is keeping it away from your bank account. Mentally, you feel like you lend money @ 0% and "lose" the return you should be making in the market.
I had an internship which spanned 8 months in 2013 and 8 months in 2014. I claimed most of my tuition credits for those years but I have roughly $6k left. My RRSP contribution limit for 2015 is $19k and just started contributing with this job. I suppose I'll fill it out under "other" and if they reject it I'll get a few grand refund.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on July 03, 2015, 02:30:50 PM
Don't you have a ton of federal tuition/provincial tuition carryforwards that you can put on your TD1 so your employer will withhold almost no tax anyway?

The answer is "probably not".

In this post, "ITA" refers to the Income Tax Act, RSC 1985, c 1 (5th Supp). "Reg" refers to the Income Tax Regulations, CRC, c 945.

ITA § 153(1)(a) provides in relevant part that any person paying wages to any other person "shall deduct or withhold from the payment the amount determined in accordance with prescribed rules".

ITA § 221(1)(a) provides that the Governor in Council may may regulations "prescribing anything that, by this Act, is to be prescribed".

Reg § 107(2) provides that an employee may "elect[] to file a prescribed form for the year". Cryptically, the provision does not say what the form contains or what it is for.

Reg § 102(2) provides that when an employee files the prescribed form alluded to in Reg § 107(2), then the employer shall compute the employee's "estimated annual taxable income" for withholding purposes by subtracting the "the amount of that employee’s expenses in respect of the year as recorded by that employee on that form". The regulation does not say or limit what kind of expenses can be claimed on the form, but it the form does need to be the "prescribed form".

As far I can tell, no legal instrument actually tells us what this mysterious "prescribed form" is, but it's probably intended to be Form TD1 (http://www.cra-arc.gc.ca/E/pbg/tf/td1/td1-15e.pdf). Form TD1 does not appear to contain anywhere to claim carry forward education amounts. Section 5 of Form TD1 instructs the reader to enter an amount computed based on the present year only. Modifying the form to include carry forward amounts would probably cause it not to be the "prescribed form" anymore, meaning it would not reduce the amount of tax withheld from your wages.

Including the carry forward amounts in Form TD1 might also be a criminal offense contrary to ITA § 239(1)(a), which provides that anybody who has "made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation" is guilty of a criminal offense. However, the document contemplated by Reg § 107(2) is referred to as a "prescribed form", not a "return", "certificate", "statement", or "answer", so it's arguable whether this criminal offense applies.

The main weakness in the limitations of Form TD1 is that Form TD1 may not be authorised by law. There does not appear to be any instrument that says that Form TD1 is the "prescribed form" contemplated by Reg § 107(2). A related issue is that the general rule in administrative law is that a person authorised to make regulations must be the person who makes the regulations; he cannot further delegate that power. ITA § 221(1)(a) authorises the Governor in Council to make regulations; it does not authorise the CRA to do so. Parliament was aware of this principle of law, so it enacted ITA § 221(4) which provides that a regulation made by the Governor in Council may "incorporate by reference material as amended from time to time". This is arguably exactly what Reg § 107(2) does.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: McBuck on July 03, 2015, 03:45:26 PM
Cathy - my tuition amounts are actually for Jan-Apr of this year, but my University doesn't release the t2202a until fall.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on July 03, 2015, 04:00:05 PM
Cathy - my tuition amounts are actually for Jan-Apr of this year, but my University doesn't release the t2202a until fall.

I was (and am) expressing no view on your situation.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: fb132 on July 03, 2015, 05:55:59 PM
Not sure if someone can answer me here, should I get a will if I have no kids or wife. I mean if I die, all my assets (RRSP and TFSA) would go to my parents, but I figure if I am dead, it would automatically go to them, so mayb a will would be a waste of money, right??? Btw, I have no brothers or sisters.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: AllTheMarshmallows on July 03, 2015, 08:32:32 PM
When you die and leave registered investments like RRSP's and name your parents as beneficiaries your estate will owe a chunk of change in taxes to the CRA. It is considered a deemed disposition on the date of your death.

The executor is the person appointed in a will to administer an estate. If you have no Will, someone, perhaps your family would have to apply to court for Letters of Administration to act essentially as an executor. Lawyers will be happy to guide your estate through this process, most likely at a cost way beyond what a simple Will would have cost in the first place. Why would you want to put your family through this court process in the first place?

 The Executor/Administrator of your Will is responsible to identify the debts owed by the deceased at the time of his or her death, and to pay them, if there are sufficient assets to do so. This includes your taxes owing. The Executor will file your Terminal T1 return as well as T3 returns etc. Just because you died your debt does not. No funds can be distributed to beneficiaries until all debts have been dealt with.

I would suggest you seek legal council at once and get something drawn up that you will most likely change a few times over the years when life changes i.e get married, have kids, get divorced, and the likes but not having an estate plan at all is not a great idea...
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on July 03, 2015, 08:36:22 PM
@fb132, even in your situation, a will is a good idea. It makes things a lot simpler and faster for your beloved. Your Mustachian? You'll find few hundred bucks for estate planning. Hope this help!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: fb132 on July 04, 2015, 05:48:33 AM
@fb132, even in your situation, a will is a good idea. It makes things a lot simpler and faster for your beloved. Your Mustachian? You'll find few hundred bucks for estate planning. Hope this help!
I see you are from Quebec like I am. How much should I put aside to pay a notary for my will considering my only assets are my investments? I get alot of different numbers from different people. i figure 400$ should be enough, I mean, my stuff is not complicated, it's not like I own a home or a buisness. It will be simply rolling over my investments and whatever cash I have left to someone else.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on July 04, 2015, 09:09:55 PM
400$ is good, for 100$ more, you can get a mandatory as well. I got both 15 years ago.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: lostamonkey on July 05, 2015, 11:13:49 AM
I just graduated and started a job so I'll only be working 6 months this year making ~34k gross (65k salary).

Can I file a T1213 to reduce my taxes taken off my paycheck since I won't be making my full salary in 2015? The CRA website doesn't seem to mention a partial working year as a valid reason.

I'm in Ontario btw.

I would recommend that you use your RRSP deduction in 2016 instead of 2015. Your marginal tax rate in 2015 is about 20% and your rate in 2015 will be 31%. By delaying the deduction by one year your risk free rate of return will be 55% (31%-20%/20%).
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: K-ice on July 05, 2015, 11:33:23 AM
Thanks for this great post.

I found the following and want to crunch some of my own numbers so I get better asset allocation and location.

http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/

I'll get some # in a few days. I just wanted to say "hi" so I can easily find you later. :)

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on July 05, 2015, 01:01:17 PM
Don't think I've already asked this...

I sold a house in the UK last year. UK tax year is April 6th-April 5th. I've paid Canadian cap gains on the sale. Now I have to pay UK cap gains.

I'm right in thinking the cap gains get deducted from *last year's* Cdn return (under DTA etc, UK gets dibs because house is in UK), because the sale date is when the liability occurs - not when the tax year ends?

So I file an amendment to 2014 Cdn tax return showing all I pay to the UK, Canada gives me that money back.

Rite?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: dess1313 on July 06, 2015, 09:41:34 PM
Couple questions for you.  Maybe this has been covered before but one is RRSP and one is TFSA

RRSP
I have a pension coming if i spend enough years at work.  I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes.  Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years?  Then after using up my RRSP i would take my pension and get a higher amount then.  This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points.  are there any other withdrawl problems like age requirements?  Current income is ~$80k depending on OT and such

TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit.  For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000.  And then i got a magical amount of $2000 in interest later that year before the new year's increase.  I'm now officially over my limit am i not?  Would i have to withdraw money so i would stay under the limit?  How do i account for interest gained?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Kaspian on July 06, 2015, 10:01:36 PM
Couple questions for you.  Maybe this has been covered before but one is RRSP and one is TFSA

RRSP
I have a pension coming if i spend enough years at work.  I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes.  Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years?  Then after using up my RRSP i would take my pension and get a higher amount then.  This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points.  are there any other withdrawl problems like age requirements?  Current income is ~$80k depending on OT and such

TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit.  For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000.  And then i got a magical amount of $2000 in interest later that year before the new year's increase.  I'm now officially over my limit am i not?  Would i have to withdraw money so i would stay under the limit?  How do i account for interest gained?

I have sort of the same question about RRSPs and early withdrawals.

As for the TFSA, any growth (interest, dividends, etc.) which occurs inside the TFSA is (obviously) tax-free and does not count toward your contribution limit.  There are people who have done frightening well with their TFSA and have close to $100K in there.  If your $19,000 grows to $25,000 or more, it doesn't matter--you still get to put in $10K next year anyway.  So, the TFSA doesn't count growth, it only counts your actual contributions into it.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 08, 2015, 04:25:31 PM
I just graduated and started a job so I'll only be working 6 months this year making ~34k gross (65k salary).

Can I file a T1213 to reduce my taxes taken off my paycheck since I won't be making my full salary in 2015? The CRA website doesn't seem to mention a partial working year as a valid reason.

I'm in Ontario btw.

You can try! But as others have stated, it's an uphill battle. Include your tuition amounts on your TD1 though - this will help to reduce the with-holding.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 08, 2015, 04:30:03 PM
400$ is good, for 100$ more, you can get a mandatory as well. I got both 15 years ago.

If the assets are significant, I would recommend looking into a "Testamentary" Trust - or a Trust that is triggered on your demise for the assets. You'll avoid probate and can designate the beneficiaries.

Again - significant assets though - a few hundred thousand at a minimum...
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 08, 2015, 04:37:21 PM
Don't think I've already asked this...

I sold a house in the UK last year. UK tax year is April 6th-April 5th. I've paid Canadian cap gains on the sale. Now I have to pay UK cap gains.

I'm right in thinking the cap gains get deducted from *last year's* Cdn return (under DTA etc, UK gets dibs because house is in UK), because the sale date is when the liability occurs - not when the tax year ends?

So I file an amendment to 2014 Cdn tax return showing all I pay to the UK, Canada gives me that money back.

Rite?

So - you sold the house in Calendar year 2014?

You're correct in asserting that the UK has the first 'right' on taxation in terms of the capital gains. Did you declare the gains in Canada in 2014?

Now, when you file your amendment, you'll effectively receive a tax credit which is more or less a pro-rata amount of your UK taxes paid. I don't want to get into the logistics of the calculation, but suffice it to say, it isn't a flat rate deduction, it's ground down.

Also, there are a variety of circumstances in which you could claim the principal residence deduction here. Principal residences do not need to be located in Canada, so there's the opportunity here to offset the gains. If you can, you want to claim at least 1 year of PR (so you get 2 years overall due to the 'plus one' rule), and your house in Alberta will be fully covered as well.

Hope this helps!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 08, 2015, 04:44:56 PM
Couple questions for you.  Maybe this has been covered before but one is RRSP and one is TFSA

RRSP
I have a pension coming if i spend enough years at work.  I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes.  Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years?  Then after using up my RRSP i would take my pension and get a higher amount then.  This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points.  are there any other withdrawl problems like age requirements?  Current income is ~$80k depending on OT and such

TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit.  For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000.  And then i got a magical amount of $2000 in interest later that year before the new year's increase.  I'm now officially over my limit am i not?  Would i have to withdraw money so i would stay under the limit?  How do i account for interest gained?

Hi,

TFSA - the limit is on money deposited (principal), rather than total amount. So in your case, you'd be fine.

As for the RRSP - no issues in terms of age requirements, my only concern in your case is delaying the pension.

Pensions are hard to value - but you want to consider your options here. By deferring your pension, this likely means you'll have to keep contributing to it, and you also 'lose' those years of cash flow in terms of collecting the funds. In this sense, there is rarely a 'loss' if you take your pension early, unless you live past at least about 80 years of age. If you give me more details - year of birth, pension contributions per annum, and your pension amount at 52 and another age, I can roughly give you an idea in terms of present value of the pension in both scenarios.

Good luck!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 08, 2015, 04:46:26 PM
Couple questions for you.  Maybe this has been covered before but one is RRSP and one is TFSA

RRSP
I have a pension coming if i spend enough years at work.  I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes.  Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years?  Then after using up my RRSP i would take my pension and get a higher amount then.  This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points.  are there any other withdrawl problems like age requirements?  Current income is ~$80k depending on OT and such

TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit.  For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000.  And then i got a magical amount of $2000 in interest later that year before the new year's increase.  I'm now officially over my limit am i not?  Would i have to withdraw money so i would stay under the limit?  How do i account for interest gained?

I have sort of the same question about RRSPs and early withdrawals.

As for the TFSA, any growth (interest, dividends, etc.) which occurs inside the TFSA is (obviously) tax-free and does not count toward your contribution limit.  There are people who have done frightening well with their TFSA and have close to $100K in there.  If your $19,000 grows to $25,000 or more, it doesn't matter--you still get to put in $10K next year anyway.  So, the TFSA doesn't count growth, it only counts your actual contributions into it.

Same as answered below - but for RRSPs remember if you're withdrawing significant funds you're looking of a withholding tax of 15-25%.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 08, 2015, 05:32:19 PM
Hello my Can"EH"dians!

Just wanted to thank everyone for the great questions, comments, and helping me out (when I run out of time).

I wanted to point out that we are Royalty in terms of a tax topic here - 305 responses, which is first in terms of responses by a long-shot. Apparently Hockey, Taxes, and complaining about the weather are our national pastimes.

Also, a quick shout-out to Cathy "The Citation" for managing to fit eleven, that's right, ELEVEN, "§" into one response last Friday.

Keep the questions coming! I'm delighted that something I started on a whim has turned out so useful to you folks.

Hope everyone is enjoying the two weeks of summer! It'll be time to start re-building that Igloo before you know it.

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: dess1313 on July 08, 2015, 08:47:50 PM
Couple questions for you.  Maybe this has been covered before but one is RRSP and one is TFSA

RRSP
I have a pension coming if i spend enough years at work.  I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes.  Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years?  Then after using up my RRSP i would take my pension and get a higher amount then.  This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points.  are there any other withdrawl problems like age requirements?  Current income is ~$80k depending on OT and such

TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit.  For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000.  And then i got a magical amount of $2000 in interest later that year before the new year's increase.  I'm now officially over my limit am i not?  Would i have to withdraw money so i would stay under the limit?  How do i account for interest gained?

Hi,

TFSA - the limit is on money deposited (principal), rather than total amount. So in your case, you'd be fine.

As for the RRSP - no issues in terms of age requirements, my only concern in your case is delaying the pension.

Pensions are hard to value - but you want to consider your options here. By deferring your pension, this likely means you'll have to keep contributing to it, and you also 'lose' those years of cash flow in terms of collecting the funds. In this sense, there is rarely a 'loss' if you take your pension early, unless you live past at least about 80 years of age. If you give me more details - year of birth, pension contributions per annum, and your pension amount at 52 and another age, I can roughly give you an idea in terms of present value of the pension in both scenarios.

Good luck!

Okay i would have to look into that for sure then.  I thought you would be able to delay a year or three with out penalty.  I figured a good way to pull RRSPs without a lot of taxes paid.  Pension contributions was 5500, now up to about 6000 per year matched 1:1 by employer.  Full time right now, age 30/1984, been working 7 years.  Have 21-22 years to go(age 52).  Would like to do the last 10 years at part time maybe .7eft if possible or less, depends on where i am by that point.  Let them pay for my fun at that point.  Work's pension estimators show a income of $3000/month before taxes depending on a bunch of variables by the end of my career and i think it assumes full time throughout.  Current income is ~80k depending on OT    At age 55 i would have estimates of $3600 monthly.  both of those estimates are bound to drop a tiny bit if i go down in eft.

I love the idea of using RRSPs to reduce taxes, but if i have a solid pension, and not able to do a few years of low income, its not such a great option.  I'd have to be very careful how i handled it down the road and would be easy to mess up especially if taxes go up
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: SweetLife on July 09, 2015, 07:33:01 AM
Hello my Can"EH"dians!

Just wanted to thank everyone for the great questions, comments, and helping me out (when I run out of time).

I wanted to point out that we are Royalty in terms of a tax topic here - 305 responses, which is first in terms of responses by a long-shot. Apparently Hockey, Taxes, and complaining about the weather are our national pastimes.

Also, a quick shout-out to Cathy "The Citation" for managing to fit eleven, that's right, ELEVEN, "§" into one response last Friday.

Keep the questions coming! I'm delighted that something I started on a whim has turned out so useful to you folks.

Hope everyone is enjoying the two weeks of summer! It'll be time to start re-building that Igloo before you know it.

CPA CB


Thank you for the response CPA CB!! And as for the igloo building ... boo .... I am not looking forward to colder weather anytime soon lol... :) keep the info coming I am trying to soak it all up lol...
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on July 09, 2015, 07:54:10 AM
400$ is good, for 100$ more, you can get a mandatory as well. I got both 15 years ago.

If the assets are significant, I would recommend looking into a "Testamentary" Trust - or a Trust that is triggered on your demise for the assets. You'll avoid probate and can designate the beneficiaries.

Again - significant assets though - a few hundred thousand at a minimum...

How much would be enough to think about that?
Our family NW is 850k$ actualy (RRSPs, TFSAs, RESP, taxable account and house minus mortgage). We also got a life insurance for 500k$/each. This mean if we both pass out, beneficiaries would get over 1,5M$...
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on July 09, 2015, 09:29:35 AM
Don't think I've already asked this...

I sold a house in the UK last year. UK tax year is April 6th-April 5th. I've paid Canadian cap gains on the sale. Now I have to pay UK cap gains.

I'm right in thinking the cap gains get deducted from *last year's* Cdn return (under DTA etc, UK gets dibs because house is in UK), because the sale date is when the liability occurs - not when the tax year ends?

So I file an amendment to 2014 Cdn tax return showing all I pay to the UK, Canada gives me that money back.

Rite?

So - you sold the house in Calendar year 2014?

You're correct in asserting that the UK has the first 'right' on taxation in terms of the capital gains. Did you declare the gains in Canada in 2014?

Now, when you file your amendment, you'll effectively receive a tax credit which is more or less a pro-rata amount of your UK taxes paid. I don't want to get into the logistics of the calculation, but suffice it to say, it isn't a flat rate deduction, it's ground down.

Also, there are a variety of circumstances in which you could claim the principal residence deduction here. Principal residences do not need to be located in Canada, so there's the opportunity here to offset the gains. If you can, you want to claim at least 1 year of PR (so you get 2 years overall due to the 'plus one' rule), and your house in Alberta will be fully covered as well.

Hope this helps!

House sold in Nov I think it was, so Cdn 2014, UK 14-15; yes, tax paid to Canada. Principal res ded - no point AFAIK as it's been a rental since '07 or '08, and the amount paid to the UK is more than that deduction.. I think... I'm happy with what I've paid so far so don't want to get more complex, bad enough with all the currency changes. If it ends up that I get reassessed (likely?) and they want mucho mucho $$$ then I guess I'll go and see a professional and get them to redo the last 5 years, and probably find I'm owed rather than owe ;)

Thanks anyway. I think it's line 450 I need to amend online once I've paid the UK (or at least, when I get the bill).

Oh - one more - can I use the current exchange rate for when I pay the bill, or does that have to be the exchange rate from when the liability arose to the UK (what with the CAD weakening against the GBP, it'll be better to pay 2500 "now" pounds rather than 2500 "8 months ago" pounds - and it seems fair as in theory I have to transfer CAD to GBP NOW to pay the bill!).
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: K-ice on July 09, 2015, 03:49:58 PM
As I mentioned I found the following and want to crunch some of my own numbers so I get better asset allocation and “location” for DearWife and DearHusband.

http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/

Current situation 95K TOTAL:
15K cash
80K in two (yes only 2) Canadian stocks in an un-registered (face punch) joint account owned DW & DH (let’s assume book value 20K so lots of capital gains to pay.) One pays dividends the other doesn’t, both about 40K. Both are low right now but who knows when they will go up or down more.

20K TFSA room each  DW & DH
20K RRSP room  for DW 
80K RRSP room for DH
 
Objective: Create a more balanced portfolio (Vanguard ~couch potato) and transfer into tax advantage accounts. 

http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-Vanguard.pdf

Vanguards I am interested in:
25% VAB (Canadian bond mix)
25% VCN (Canadian stock mix)
25% VXC (Global stock mix)
25% VDY (Canadian dividend stock mix)

Steps:
Sell 20K of the stocks and add to 10K cash
OK now we each have 15K to invest

DW puts 15K into an RRSP:  10K VDY, 5K VAB
DH puts 15K into an RRSP:  10K VXC,  5K VAB

60K remaining in Stocks.

At the end of the year:
Sell another 20K stocks, bundle with new savings ~10K
Again we each have 15K to invest

DW puts 5K into and RRSP: 5K  VXC  (RRSP now full for her)
DW puts 10K into TFSA:  10K VCN 
DH puts 15K into RRSP:  5K VAB,  5K VDY, 5K VCN

New picture January 2016
5K cash
40K 2 Canadian stocks
60K in Vanguard (All in registered accounts!)

Split: 
15K VAB (Canadian bond mix)
15K VCN (Canadian stock mix)
15K VXC (Global stock mix)
15K VDY (Canadian dividend stock mix)

Do the tax rules on ETF work the same as stocks and bonds? I guess what I am asking is are there any general rules that VAB should be RRSP and VDY should be unregistered provided the others are full? Where is the best place to build up VXC (global)?

I believe the total 2015 capital gains tax from the 40K stocks that we sell is roughly = ((40-10)/2 )*40% = 6000
But this will be more than offset by reinvesting  20K+30K = 50K in an RRSP.

Should we be putting more into our TFSA? DH’s parents have him convinced RRSPs are a waste of time because you still pay the tax later.  I see them as a beautiful way of offsetting the capital gains at this point in time.  My guess/hope is that our retirement income is about the same as today.

Thanks for looking into this. I am sure there are many opinions on my allocation. I am still Canadian stock heavy. I can tweek 5K here or there, it's not that I don't care but I feel selling a bit of the risky stocks and the LOCATION is really the most important thing I need to optomise right now.

Thanks Again!!


Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: sammy on July 12, 2015, 09:36:33 PM
CPA CB,

First I would like to thank you for taking the time to help us navigate around the Canadian tax system to realize it`s benefits.

I have a question around the LCGE exemption for qualified farm property, and I`ll explain my situation:

Currently I have (3) farm properties that I have held for over (2) years solely in my personal name and ran as a sole proprietorship. I will be able to realize about $500k of capital gains upon the sale of these properties, but I want to make sure I fully qualify for the exemption in the eyes of the CRA. The one hang-up I think I`ll have is that I currently am employed with a company that allows me to generate more income from the employer than what I can from my farming proprietorship. What are your thoughts on how I can take advantage of selling these properties and taking advantage of the LCGE, what I see is now up to $1 million as per the 2015 budget.

Thanks in advance.

Cheers,

Sammy
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on July 13, 2015, 07:27:02 AM
As I mentioned I found the following and want to crunch some of my own numbers so I get better asset allocation and “location” for DearWife and DearHusband.

http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/

Current situation 95K TOTAL:
15K cash
80K in two (yes only 2) Canadian stocks in an un-registered (face punch) joint account owned DW & DH (let’s assume book value 20K so lots of capital gains to pay.) One pays dividends the other doesn’t, both about 40K. Both are low right now but who knows when they will go up or down more.

20K TFSA room each  DW & DH
20K RRSP room  for DW 
80K RRSP room for DH
 
Objective: Create a more balanced portfolio (Vanguard ~couch potato) and transfer into tax advantage accounts. 

http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-Vanguard.pdf

Vanguards I am interested in:
25% VAB (Canadian bond mix)
25% VCN (Canadian stock mix)
25% VXC (Global stock mix)
25% VDY (Canadian dividend stock mix)

Steps:
Sell 20K of the stocks and add to 10K cash
OK now we each have 15K to invest

DW puts 15K into an RRSP:  10K VDY, 5K VAB
DH puts 15K into an RRSP:  10K VXC,  5K VAB

60K remaining in Stocks.

At the end of the year:
Sell another 20K stocks, bundle with new savings ~10K
Again we each have 15K to invest

DW puts 5K into and RRSP: 5K  VXC  (RRSP now full for her)
DW puts 10K into TFSA:  10K VCN 
DH puts 15K into RRSP:  5K VAB,  5K VDY, 5K VCN

New picture January 2016
5K cash
40K 2 Canadian stocks
60K in Vanguard (All in registered accounts!)

Split: 
15K VAB (Canadian bond mix)
15K VCN (Canadian stock mix)
15K VXC (Global stock mix)
15K VDY (Canadian dividend stock mix)

Do the tax rules on ETF work the same as stocks and bonds? I guess what I am asking is are there any general rules that VAB should be RRSP and VDY should be unregistered provided the others are full? Where is the best place to build up VXC (global)?

I believe the total 2015 capital gains tax from the 40K stocks that we sell is roughly = ((40-10)/2 )*40% = 6000
But this will be more than offset by reinvesting  20K+30K = 50K in an RRSP.

Should we be putting more into our TFSA? DH’s parents have him convinced RRSPs are a waste of time because you still pay the tax later.  I see them as a beautiful way of offsetting the capital gains at this point in time.  My guess/hope is that our retirement income is about the same as today.

Thanks for looking into this. I am sure there are many opinions on my allocation. I am still Canadian stock heavy. I can tweek 5K here or there, it's not that I don't care but I feel selling a bit of the risky stocks and the LOCATION is really the most important thing I need to optomise right now.

Thanks Again!!

@ K-ice my personal toughts:

Open an account on adjustedcostbase.ca and fill the information about your 2 Canadian stocks. If they are not crappy stocks, you may sell just a bit of each to get no capital gain. Run some simulations on the calculator using actual price of your stocks. Canadians stocks are tax advantaged in taxables accounts. Dont pay capital gain taxes now just for the purpose of not paying dividends taxes!

I dont know you age, salaries or Mustachian level but this is what I would do to keep it simple. I will assume you are between 25 and 35 and familial salary is 75-100k$. Fill your RRSP every year with available cashflow to get the 40% tax return. Let alone TFSA for now if you cannot take enough RRSP to lower your taxable income under +/-30k$ (each). Buy VXC (or XAW) ONLY until you reach 50k$ each in your RRSP. Then, you may perform a Norberts-Gambits and buy VTI and VXUS to be more tax efficient and lower your MER. Don't bother with VAB, especialy if you carry some debt (car, mortage), I do not believe it worth to be a lender AND a borrower at the same time.

Within 3-5 years from now, your AA will be like 35% canadian (2 stocks), 35%US and 30% international (according to VXC and XAW split). RRSP is the best place to hold some US and international holdings and taxable is pretty much efficient for canadian stocks. You will only suffer from diversification in Canada but it will be trivial in few years from now. If you go through a year with low salary (or early retirement!) then you can sell taxable holdings and take a smaller hit because of the lower tax bracket.

Indexing is not a religion!! If you look at the chart of you 2 stocks, they may go up and down with the VCN chart (use XIC for comparison over many years because it follows the TSX index for a lot longer than VCN). You'll be surprised how they act together most of the time.

Simplicity worth the peace of mind and will gives you the time to learn a lot without making big mistakes. You would end up with only 2 holding for each of you, 1 Canadian stock in taxable account and VXC in RRSP.

Hope this help!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Heckler on July 13, 2015, 09:28:14 AM
. Still thinking what I should do with the 500$ remaining...

What about 48 bottles of red wine?

For $500, you can make 120 bottles using homebrew kits.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 13, 2015, 12:22:16 PM
Don't think I've already asked this...

I sold a house in the UK last year. UK tax year is April 6th-April 5th. I've paid Canadian cap gains on the sale. Now I have to pay UK cap gains.

I'm right in thinking the cap gains get deducted from *last year's* Cdn return (under DTA etc, UK gets dibs because house is in UK), because the sale date is when the liability occurs - not when the tax year ends?

So I file an amendment to 2014 Cdn tax return showing all I pay to the UK, Canada gives me that money back.

Rite?

So - you sold the house in Calendar year 2014?

You're correct in asserting that the UK has the first 'right' on taxation in terms of the capital gains. Did you declare the gains in Canada in 2014?

Now, when you file your amendment, you'll effectively receive a tax credit which is more or less a pro-rata amount of your UK taxes paid. I don't want to get into the logistics of the calculation, but suffice it to say, it isn't a flat rate deduction, it's ground down.

Also, there are a variety of circumstances in which you could claim the principal residence deduction here. Principal residences do not need to be located in Canada, so there's the opportunity here to offset the gains. If you can, you want to claim at least 1 year of PR (so you get 2 years overall due to the 'plus one' rule), and your house in Alberta will be fully covered as well.

Hope this helps!

House sold in Nov I think it was, so Cdn 2014, UK 14-15; yes, tax paid to Canada. Principal res ded - no point AFAIK as it's been a rental since '07 or '08, and the amount paid to the UK is more than that deduction.. I think... I'm happy with what I've paid so far so don't want to get more complex, bad enough with all the currency changes. If it ends up that I get reassessed (likely?) and they want mucho mucho $$$ then I guess I'll go and see a professional and get them to redo the last 5 years, and probably find I'm owed rather than owe ;)

Thanks anyway. I think it's line 450 I need to amend online once I've paid the UK (or at least, when I get the bill).

Oh - one more - can I use the current exchange rate for when I pay the bill, or does that have to be the exchange rate from when the liability arose to the UK (what with the CAD weakening against the GBP, it'll be better to pay 2500 "now" pounds rather than 2500 "8 months ago" pounds - and it seems fair as in theory I have to transfer CAD to GBP NOW to pay the bill!).

Include the out of pocket cost - or cost as of when you pay it.

Cheers
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 13, 2015, 12:39:58 PM
As I mentioned I found the following and want to crunch some of my own numbers so I get better asset allocation and “location” for DearWife and DearHusband.

http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/

Current situation 95K TOTAL:
15K cash
80K in two (yes only 2) Canadian stocks in an un-registered (face punch) joint account owned DW & DH (let’s assume book value 20K so lots of capital gains to pay.) One pays dividends the other doesn’t, both about 40K. Both are low right now but who knows when they will go up or down more.

20K TFSA room each  DW & DH
20K RRSP room  for DW 
80K RRSP room for DH
 
Objective: Create a more balanced portfolio (Vanguard ~couch potato) and transfer into tax advantage accounts. 

http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-Vanguard.pdf

Vanguards I am interested in:
25% VAB (Canadian bond mix)
25% VCN (Canadian stock mix)
25% VXC (Global stock mix)
25% VDY (Canadian dividend stock mix)

Steps:
Sell 20K of the stocks and add to 10K cash
OK now we each have 15K to invest

DW puts 15K into an RRSP:  10K VDY, 5K VAB
DH puts 15K into an RRSP:  10K VXC,  5K VAB

60K remaining in Stocks.

At the end of the year:
Sell another 20K stocks, bundle with new savings ~10K
Again we each have 15K to invest

DW puts 5K into and RRSP: 5K  VXC  (RRSP now full for her)
DW puts 10K into TFSA:  10K VCN 
DH puts 15K into RRSP:  5K VAB,  5K VDY, 5K VCN

New picture January 2016
5K cash
40K 2 Canadian stocks
60K in Vanguard (All in registered accounts!)

Split: 
15K VAB (Canadian bond mix)
15K VCN (Canadian stock mix)
15K VXC (Global stock mix)
15K VDY (Canadian dividend stock mix)

Do the tax rules on ETF work the same as stocks and bonds? I guess what I am asking is are there any general rules that VAB should be RRSP and VDY should be unregistered provided the others are full? Where is the best place to build up VXC (global)?

I believe the total 2015 capital gains tax from the 40K stocks that we sell is roughly = ((40-10)/2 )*40% = 6000
But this will be more than offset by reinvesting  20K+30K = 50K in an RRSP.

Should we be putting more into our TFSA? DH’s parents have him convinced RRSPs are a waste of time because you still pay the tax later.  I see them as a beautiful way of offsetting the capital gains at this point in time.  My guess/hope is that our retirement income is about the same as today.

Thanks for looking into this. I am sure there are many opinions on my allocation. I am still Canadian stock heavy. I can tweek 5K here or there, it's not that I don't care but I feel selling a bit of the risky stocks and the LOCATION is really the most important thing I need to optomise right now.

Thanks Again!!

Hi there,

Alright - very detailed!

I don't want to dive into investment allocation - beyond investing personally and earning above 'market' returns on certain picks of mine, I don't have the experience nor expertise to help you out in terms of the validity of Couch Potato and Vanguard Investments.

RRSP vs. TFSA - you'll note a fair bit of debate here in terms of which is better. I think they're complimentary - put the income earning stocks in your RRSP, and capital gains earning stocks into your TFSA. If you have room in both, this is certainly my recommendation. This means for non-dividend earning stocks, the TFSA is great (as re-investing dividends as a company implies a higher implicit growth rate, and thus capital gain).

I happen to agree with Le Barbu when he states that indexing is not a religion. Modern Portfolio Theory holds that you're mostly 'diversified' from specific risk (i.e. invest in Berkshire Hathaway and WB dies) at or around 7-15 individual stock holdings. Investing in multiple indices by this virtue means that you're really only exposed to broader market risk. To me - you want at least an index fund or two (generally one that goes with, and against, the broad market) and some individual stock picks based on fundamental analysis.

The benefit is to use the TFSA and RRSP together if you're looking to lower your marginal tax rate on investments in the long run!

Good luck

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RetiredAt63 on July 14, 2015, 07:49:19 PM
Hi CPA CB

I generally have a good handle on my taxes, but a situation specific to my divorce agreement may end up being a tax issue.  I hope you can provide some clarification.

As a couple we owned a house, the "matrimonial home".  When we split I moved out and bought another house, "my house".  We are putting the matrimonial home on the market in August, and since we are so late in the summer it may very well not sell until spring of 2016.  In the divorce agreement we agreed to do nothing that would change the status of the matrimonial home as our principal residence, for tax purposes.

I would also like to sell my house, since I am seriously thinking of moving from Ontario to BC.  If both the matrimonial home and my house sell in 2016, is the matrimonial home my "principle residence" for tax purposes?  I am assuming it is.  In that case I am guessing that I would have to declare capital gains (if any) on my house?  And if I have to declare capital gains on it, what expenses are deductible?  I am assuming any fees to sell it would be, but house improvements?  Is there a good web site for this?

And if my house sold in 2016 and the matrimonial home didn't sell until 2017 (unlikely but always possible) what is the tax situation then?

This is such a mess, I wish we had always rented.  One argument for renting that I haven't seen on the forums yet!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: fb132 on July 15, 2015, 05:32:17 AM
To CPA CB,
back to the TFSA vs RRSP debate, right now I am investing 100% in the TFSA since my gross income is 35K$ per year. Should I continue doing what I am doing or should I put some towards the RRSP. FYI, I get a 2-3% raise every year, so i don't expect a huge bump in my salary in the near future.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: K-ice on July 15, 2015, 06:48:08 AM
Thanks CPA CB and Le Barbu.

I think I'll set my goal to have 60k invested in in VXC by the end of the year. I think that is the best single ETF to balance my current Canadian stocks.

That will probably be split evenly RRSP TFSA.

I hope over  half will come from new savings but I will need to top it up by selling some stocks.

I'll keep you posted.

Does anyone else has advice on where they put their Vanguard ETFs?

I would love to hear a personal example.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on July 15, 2015, 07:03:46 AM
To CPA CB,
back to the TFSA vs RRSP debate, right now I am investing 100% in the TFSA since my gross income is 35K$ per year. Should I continue doing what I am doing or should I put some towards the RRSP. FYI, I get a 2-3% raise every year, so i don't expect a huge bump in my salary in the near future.

@fb132, TFSA is the way to go till your gross is below 42-45k$ in Québec. You can top it up to 41k$ now.

The RRSP would give a 28,5% tax return wich looks good but this tax bracket starts at 14k$ gross (I expect you aim for at least 14k$/year for retirement, even if you are Black Belt Mustachian!). In other words, the tax return you'll get is like money you then owe as future taxes. The return on this money when invested will offset the taxes, it's about a toss game. TFSA is also a lot easier to pull out if you need money.

If you are just begening (carreer, job, family etc) I would suggest the following priorities: Repay all debt over 5% FIRST!!! Keep 1-3 months of expenses in cash in you account. Top-up your TFSA and invest in stocks* index Funds with low MER or ETFs.

*Invest in bonds only if your plan is to use TFSA for a down payment on a house or annother short term project or if you cannot stomach a market dowturn. I dont recomend bonds if you carry a debt.

Hope this help!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on July 15, 2015, 07:21:00 AM
@K-ice

I hold my ETFs at RBC Direst Investing. Why wouldn't you hold VXC at the same place you hold your Canadian Stocks

VXC is a good pick, XAW is a tad better but it's trivial. Dont forget you can switch to VTI and VXUS when you reach 50-100k$/account to be more tax efficient and lower your MER

Which Canadian stocks do you own? just curious...

Did you calculated ACB? Can you sell a bit without being taxed?

If you feel the urge to hold some bonds (VAB or VSB) they are more tax efficients in TFSA compared to US and Int holdings

Exemple for a fictive, simple, tax efficent portfolio (for someone who started with 1 Canadian stock in taxable account)

Taxable: 40k$ 1 Canadian stock
TFSA: 30k$ VXC and/or VAB
RRSP: 30k$ VXC (over 100k$ in RRSP, VTI and VXUS)

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: K-ice on July 15, 2015, 09:30:01 AM
Thanks Le Barbu

Sorry I wasn't clear. By "where" I ment RRSP vs TFSA.

So you did provide a useful example.

I read

http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/

Which recommends more bonds in RRSP if given a choice.

Do you know if VAB and individual bonds are treated the same tax wise?

As for my stocks they are BNE.TO and SPE.TO. They are both taking a beating but still above what I paid. I hate to sell low but I'm worried they could fall more.

Thanks for the VTI tip once +50K
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on July 15, 2015, 09:50:10 AM
Thanks Le Barbu

Sorry I wasn't clear. By "where" I ment RRSP vs TFSA. So, just buy VXC as much as you can!

So you did provide a useful example.

I read

http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/

Which recommends more bonds in RRSP if given a choice. Bonds are best held in RRSP but you have to choose between bonds and non-canadian holdings in TFSA, I would definetly put bonds in TFSA and US+Int holdings in RRSP (because of the witholding taxes etc)

Do you know if VAB and individual bonds are treated the same tax wise? Yes

As for my stocks they are BNE.TO and SPE.TO. They are both taking a beating but still above what I paid. I hate to sell low but I'm worried they could fall more. You should read "as easy as ACB" from Dan Bartolotti (CCP) maybe some share could be sold without tax over capital gain. Depends of how many shares, price when you bought, split etc

Thanks for the VTI tip once +50K
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on July 15, 2015, 09:56:39 AM

As for my stocks they are BNE.TO and SPE.TO. They are both taking a beating but still above what I paid. I hate to sell low but I'm worried they could fall more.

Over the last 10 years, BNE and SPE returned the same as XIC but with a lot more volatility. Over the last 5 years, BNE drags but SPE is flying, on average, you achieve good returns.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on July 15, 2015, 10:04:46 AM
Thanks Le Barbu

Sorry I wasn't clear. By "where" I ment RRSP vs TFSA.

So you did provide a useful example.

I read

http://www.moneysense.ca/taxes/making-smarter-asset-location-decisions/

Which recommends more bonds in RRSP if given a choice.

Do you know if VAB and individual bonds are treated the same tax wise?

As for my stocks they are BNE.TO and SPE.TO. They are both taking a beating but still above what I paid. I hate to sell low but I'm worried they could fall more.

Thanks for the VTI tip once +50K

I believe it's best to hold your highest growth potential assets in your TFSA to maximize the complete "tax-free" benefits that this account gives.

This means your bond holdings should be in your RRSP first. Yes, it is advantageous to put your US allocation in an RRSP for future possibilities to invest in US listed ETF's like VTI, but I believe the 15% withholding tax on dividends doesn't outweigh the lost potential of putting low growth assets like bonds in a TFSA.

Yes VAB is taxed the same as the most common individual bonds.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on July 15, 2015, 10:50:26 AM
@Tuxedo, valid arguments but at the end, it depends on individual situation. If someone use his TFSA for short term savings (down payment, emergency fund), VSB could be the way to go...
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: fb132 on July 15, 2015, 11:02:29 AM
To CPA CB,
back to the TFSA vs RRSP debate, right now I am investing 100% in the TFSA since my gross income is 35K$ per year. Should I continue doing what I am doing or should I put some towards the RRSP. FYI, I get a 2-3% raise every year, so i don't expect a huge bump in my salary in the near future.

@fb132, TFSA is the way to go till your gross is below 42-45k$ in Québec. You can top it up to 41k$ now.

The RRSP would give a 28,5% tax return wich looks good but this tax bracket starts at 14k$ gross (I expect you aim for at least 14k$/year for retirement, even if you are Black Belt Mustachian!). In other words, the tax return you'll get is like money you then owe as future taxes. The return on this money when invested will offset the taxes, it's about a toss game. TFSA is also a lot easier to pull out if you need money.

If you are just begening (carreer, job, family etc) I would suggest the following priorities: Repay all debt over 5% FIRST!!! Keep 1-3 months of expenses in cash in you account. Top-up your TFSA and invest in stocks* index Funds with low MER or ETFs.

*Invest in bonds only if your plan is to use TFSA for a down payment on a house or annother short term project or if you cannot stomach a market dowturn. I dont recomend bonds if you carry a debt.

Hope this help!

I use the Canadian Couch Potato guideline of 60% in VXC, 30% in VCN and 10% on VAB...I have no debts and I save minimum 50% of my income, so around 15-16K$ per year :)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: K-ice on July 15, 2015, 11:19:38 AM

@fb132 Thanks but are those in RRSP or TFSA? And what is where?

@ Le Barbu & Tux

Ok. I think I got it.

VAB in TFSA for shorter term holdings.
VAB in RRSP for set it & forget it.


VIT in RRSP for the U.S. tax advantage

VXC and VCN will probably be in TFSA since they should be higher growth.
But putting those in an RRSP is not a bad idea if I want the tax refund today.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: fb132 on July 15, 2015, 11:31:03 AM

@fb132 Thanks but are those in RRSP or TFSA? And what is where?

@ Le Barbu & Tux

Ok. I think I got it.

VAB in TFSA for shorter term holdings.
VAB in RRSP for set it & forget it.


VIT in RRSP for the U.S. tax advantage

VXC and VCN will probably be in TFSA since they should be higher growth.
But putting those in an RRSP is not a bad idea if I want the tax refund today.
Well I know I am in the lower tax bracket, so I put all three (VXC, VCN and VAB) in my TFSA simply because I have alot of room in there. I don't use the RRSP at all for now...well not until the TFSA is maxed.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 16, 2015, 02:55:31 PM
Hi CPA CB

I generally have a good handle on my taxes, but a situation specific to my divorce agreement may end up being a tax issue.  I hope you can provide some clarification.

As a couple we owned a house, the "matrimonial home".  When we split I moved out and bought another house, "my house".  We are putting the matrimonial home on the market in August, and since we are so late in the summer it may very well not sell until spring of 2016.  In the divorce agreement we agreed to do nothing that would change the status of the matrimonial home as our principal residence, for tax purposes.

I would also like to sell my house, since I am seriously thinking of moving from Ontario to BC.  If both the matrimonial home and my house sell in 2016, is the matrimonial home my "principle residence" for tax purposes?  I am assuming it is.  In that case I am guessing that I would have to declare capital gains (if any) on my house?  And if I have to declare capital gains on it, what expenses are deductible?  I am assuming any fees to sell it would be, but house improvements?  Is there a good web site for this?

And if my house sold in 2016 and the matrimonial home didn't sell until 2017 (unlikely but always possible) what is the tax situation then?

This is such a mess, I wish we had always rented.  One argument for renting that I haven't seen on the forums yet!

Hello,

The way this works is quite simple, but I do have a few questions:

What is the official separation date? Is there a formal separation agreement signed (if so, when?)

Up until the date of formal separation (i.e. through agreement or divorce decree) the ITA regards yourself and your ex to be a 'family unit', which in this case means that you receive one PR deduction per annum, for both of you.

Now, I'm sure as you've read in the forum, I've mentioned the 'plus one' rule a few times here, which in essence means you receive an additional year of exemption 'free' upon claiming PR on any property. So, if the goal is to eliminate all capital gains on the marital home, you declare principal residence for all but one year, leaving the most recent year, say 2015, available to claim on your current home.

In doing so, you fully cover the marital home - and cover 2 years of PR on your current home, which I imagine will fully cover it as well from the sounds of it.

One thing that is often missed in divorce proceedings is a strategy to maximize 'after tax' dollars for both parties. You want to look at the marginal capital gain on BOTH properties on a per year basis to determine which property to use the PR shield on entirely. If it so happens your current home appreciated $20,000 per year, and the marital home $10,000, why not use the PR on the current home, and split the tax savings with your ex? If you're both better off, why not!

Best of luck - matrimonial proceedings are always difficult, just don't fall into the trap that usually happens in terms of costs. A family lawyer friend of mine told me once - "The only time family cases settle is when there's no money left for the lawyers to take". Beware!

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 16, 2015, 03:08:22 PM
CPA CB,

First I would like to thank you for taking the time to help us navigate around the Canadian tax system to realize it`s benefits.

I have a question around the LCGE exemption for qualified farm property, and I`ll explain my situation:

Currently I have (3) farm properties that I have held for over (2) years solely in my personal name and ran as a sole proprietorship. I will be able to realize about $500k of capital gains upon the sale of these properties, but I want to make sure I fully qualify for the exemption in the eyes of the CRA. The one hang-up I think I`ll have is that I currently am employed with a company that allows me to generate more income from the employer than what I can from my farming proprietorship. What are your thoughts on how I can take advantage of selling these properties and taking advantage of the LCGE, what I see is now up to $1 million as per the 2015 budget.

Thanks in advance.

Cheers,

Sammy

Hi Sammy,

Thanks for your question - sorry I've just seen it now.

Okay - you're right that the biggest issue here is in the definition of 'principally' - in that the gross income from the farming business must exceed that of your employment income (in this case) for the two years prior to the sale.

The question is - how much does each individual farm make, and how does this compare to your employment income? Is it possible to expand the gross income from farming to beat employment income?

If you could give a bit more background I could be more specific here -

Thanks

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: sammy on July 16, 2015, 07:11:57 PM
CPA CB,

Thanks for the response.

All farm properties operate as one farm, they are just (3) seperate titles. Income is not broken down on a per title basis.

There is not a good chance that I could have my gross farm income exceed income from my other employment source, but I do have an option I would like to run past you. Currently I am employed with a company, but I do have the option to contract and get paid into my corporation (holdco and opco). If I could get a wage paid into my corporation, and not draw any personal income from it, then my farming income would be the higher income personally (which could support my living). Would doing this for two years allow me to take advantage of the exemption? Also, just to confirm the exempion is now $1 MCAD?


Appreciate the help!

Sammy
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: PharmaStache on July 17, 2015, 08:13:06 PM
Couple questions for you.  Maybe this has been covered before but one is RRSP and one is TFSA

RRSP
I have a pension coming if i spend enough years at work.  I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes.  Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years?  Then after using up my RRSP i would take my pension and get a higher amount then.  This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points.  are there any other withdrawl problems like age requirements?  Current income is ~$80k depending on OT and such

TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit.  For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000.  And then i got a magical amount of $2000 in interest later that year before the new year's increase.  I'm now officially over my limit am i not?  Would i have to withdraw money so i would stay under the limit?  How do i account for interest gained?

Hi,

TFSA - the limit is on money deposited (principal), rather than total amount. So in your case, you'd be fine.

As for the RRSP - no issues in terms of age requirements, my only concern in your case is delaying the pension.

Pensions are hard to value - but you want to consider your options here. By deferring your pension, this likely means you'll have to keep contributing to it, and you also 'lose' those years of cash flow in terms of collecting the funds. In this sense, there is rarely a 'loss' if you take your pension early, unless you live past at least about 80 years of age. If you give me more details - year of birth, pension contributions per annum, and your pension amount at 52 and another age, I can roughly give you an idea in terms of present value of the pension in both scenarios.

Good luck!

If you're open to more pension questions, I'd love to get your thoughts on a thread I started : http://forum.mrmoneymustache.com/ask-a-mustachian/pension-question-(canada)-what-is-the-value-of-my-pension/
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 18, 2015, 02:54:37 PM
CPA CB,

Thanks for the response.

All farm properties operate as one farm, they are just (3) seperate titles. Income is not broken down on a per title basis.

There is not a good chance that I could have my gross farm income exceed income from my other employment source, but I do have an option I would like to run past you. Currently I am employed with a company, but I do have the option to contract and get paid into my corporation (holdco and opco). If I could get a wage paid into my corporation, and not draw any personal income from it, then my farming income would be the higher income personally (which could support my living). Would doing this for two years allow me to take advantage of the exemption? Also, just to confirm the exempion is now $1 MCAD?


Appreciate the help!

Sammy

Hi Sammy -

Yes, it's $1,000,000 in capital gains, so $500,000 taxable capital gains are exempt.

It is possible to run through a business, certainly, but you want to ensure the relationship is truly that of a contractor/contractee rather than an employee. This means you need to ensure you cover the following:

Control - over when you work and how the work is performed.
You own your own tools/equipment
You have the risks/rewards of ownership - this means you control your profitability
You're not limited to the one contractor - the more external clients you have, the easier it is to prove this is not an employee/employer relationship.

Good luck!


Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 18, 2015, 02:59:32 PM
Couple questions for you.  Maybe this has been covered before but one is RRSP and one is TFSA

RRSP
I have a pension coming if i spend enough years at work.  I was hoping to delay taking my pension after retirement and planned on contributing to a RRSP in the mean time to reduce taxes.  Would there be any complications with my in the future for example if i stop part time work at age 52, and then pull from my RRSP for the next 3-10 years?  Then after using up my RRSP i would take my pension and get a higher amount then.  This would let me claim my RRSP (probably at 30-40k per year withdrawn) at some of the lowest possible tax brackets if had had little or no other income if i am not missing any other points.  are there any other withdrawl problems like age requirements?  Current income is ~$80k depending on OT and such

TFSA
I understand the limits of the TFSA, but i have a question on how compound interest will affect my limit.  For a simplified question, Say i had $19,000 dollars in my TFSA in february and the limit was $20,000.  And then i got a magical amount of $2000 in interest later that year before the new year's increase.  I'm now officially over my limit am i not?  Would i have to withdraw money so i would stay under the limit?  How do i account for interest gained?

Hi,

TFSA - the limit is on money deposited (principal), rather than total amount. So in your case, you'd be fine.

As for the RRSP - no issues in terms of age requirements, my only concern in your case is delaying the pension.

Pensions are hard to value - but you want to consider your options here. By deferring your pension, this likely means you'll have to keep contributing to it, and you also 'lose' those years of cash flow in terms of collecting the funds. In this sense, there is rarely a 'loss' if you take your pension early, unless you live past at least about 80 years of age. If you give me more details - year of birth, pension contributions per annum, and your pension amount at 52 and another age, I can roughly give you an idea in terms of present value of the pension in both scenarios.

Good luck!

If you're open to more pension questions, I'd love to get your thoughts on a thread I started : http://forum.mrmoneymustache.com/ask-a-mustachian/pension-question-(canada)-what-is-the-value-of-my-pension/

Hi Pharmastache

I'm happy to give you a rough idea of net present value - if you want to provide your age, gender, planned time of retirement, pension contributions per annum (yours), and pension income upon retirement/quitting I can at least give you a rough idea.

Mind you - this isn't necessarily the same as what you'll receive in 'commuting' your pension - but at least you'll know what it's worth to you!

You should have a pension book available to you, which shows how the pension is calculated etc. If you require another copy, you can obtain one through your employer or through the financial regulatory body in Manitoba (in your case.) In Ontario it is FSCO - in Manitoba, not sure what the acronym would be.

Hope this helps,

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on July 18, 2015, 03:09:25 PM
Hello Fellow MMM'ers

Just starting up a quick poll here - how many of you want to see this topic 'stuck' at the top of the Tax Forum?

I figure if we round up enough Yay's someone from the powers that be will notice! It'd be helpful I'm sure to many of you who keep returning.

Looks like I can't actually change the poll now that it's locked out. So, just say yes in a reply!

Cheers,

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Heckler on July 19, 2015, 06:05:37 PM
I'd love to see the Canadian version of the tax guide as a sticky, but find threads that keep themselves at the top of the page like this one has been far more relevant.  Stickies tend to die.  If you were to write up The Mustache Tax Guide (CAD version) and include a link to this thread for discussion, I can see that as far more useful.

http://forum.mrmoneymustache.com/taxes/the-mustache-tax-guide-(u-s-version)/

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: MMMdude on July 20, 2015, 11:53:22 PM
Wife started business this year. Initially did not think she would be over $30,000 in sales as i understand GST is to be charged at $30k annually in sales or in the last four quarters.

So, should we register for GST and start charging, or wait until end of year and start charging Jan 1, 2016? What if her sales were say $35K this year....do we then owe 5% on the entire amount or just $5K?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on July 21, 2015, 09:56:31 AM
I don't know about ^, specifically, but I did learn to check the other pieces first, i.e. which businesses/income sources are required to charge GST. Some aren't.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on July 21, 2015, 08:49:58 PM
Wife started business this year. Initially did not think she would be over $30,000 in sales as i understand GST is to be charged at $30k annually in sales or in the last four quarters.

So, should we register for GST and start charging, or wait until end of year and start charging Jan 1, 2016? What if her sales were say $35K this year....do we then owe 5% on the entire amount or just $5K?

You register as soon as you are going to hit the 30k.

You're thinking of it 'wrong'. HST/GST/PST is just (for business to business) a pass through. You charge the same amount, but add on the tax and remit it to the government quarterly or yearly.

IF you are buying stuff and paying GST on it, you'll be better off registering sooner. If your clients are end-users (ie they don't claim back and GST paid) then yeah you'd want - for their sake/the look of your prices - to delay as long as possible.

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/rgstrng/menu-eng.html
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/rgstrng/smllspplrclc-eng.html
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Koogie on July 31, 2015, 07:44:35 AM
Question re: taxation year ends.

I own and run a mid sized CCPC.  It is two tier.  Opco is 100% owned by Holdco and my wife and I each own half of Holdco.  Due to an upcoming ownership change in my OPCO, I am going to move from paying myself (and spouse) salaries from the Opco as employees to an all dividend remuneration as shareholders (from Holdco).

My question is, does the timing of the change matter ? The ownership change will occur in Sept/Oct (I am taking on an OPCO partner) but I have full control over when I do the remuneration change. Our corporate year end (both companies) is August 31.

I am thinking of making the change come January 01 for the simple reason that our CA does the corporate returns and I do our personal tax returns. Therefore, less of a headache for me in 2015 and a clean start to 2016.

Right or wrong ?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on August 04, 2015, 12:23:58 PM
Question re: taxation year ends.

I own and run a mid sized CCPC.  It is two tier.  Opco is 100% owned by Holdco and my wife and I each own half of Holdco.  Due to an upcoming ownership change in my OPCO, I am going to move from paying myself (and spouse) salaries from the Opco as employees to an all dividend remuneration as shareholders (from Holdco).

My question is, does the timing of the change matter ? The ownership change will occur in Sept/Oct (I am taking on an OPCO partner) but I have full control over when I do the remuneration change. Our corporate year end (both companies) is August 31.

I am thinking of making the change come January 01 for the simple reason that our CA does the corporate returns and I do our personal tax returns. Therefore, less of a headache for me in 2015 and a clean start to 2016.

Right or wrong ?

Hi Koogie,

I take it you sold a portion of your business then? Remember to ensure you triggered the QSBCD credits appropriately -

In terms of your accountant - making the transition is a relative no-brainer. If you opt to do dividends in 2015 however, remember that you'll need to file a T5 in addition to your regular T4 income.

The other consideration is Part IV tax here - Going forward, your Holdco will pay 33 1/3rd percent tax on the taxable dividends paid through Opco, but this is utilized as a tax credit when the income flows through to you personally in the Holdco. Just remember to keep this in mind for your planning purposes.

Hope this helps!

CPA CB

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Koogie on August 05, 2015, 07:50:49 AM
Hi Koogie,
I take it you sold a portion of your business then? Remember to ensure you triggered the QSBCD credits appropriately -
In terms of your accountant - making the transition is a relative no-brainer. If you opt to do dividends in 2015 however, remember that you'll need to file a T5 in addition to your regular T4 income.
The other consideration is Part IV tax here - Going forward, your Holdco will pay 33 1/3rd percent tax on the taxable dividends paid through Opco, but this is utilized as a tax credit when the income flows through to you personally in the Holdco. Just remember to keep this in mind for your planning purposes.
Hope this helps!
CPA CB

Thanks.   Yes, I am selling a minority share in the business.  Unfortunately I can't crystalize any of the LCGE due to the nature of the setup of the business and the dormant funds it holds (so says my CA).
I do believe I will switch to a dividend remuneration come 2016.   So, therefore, no need for a T5 until the end of next year but thanks for the reminder.
I am confused about the Part IV statement though.  Are you assuming due to the sale that Opco and Holdco would no longer qualify as "connected companies" ?  Or that outside dividends are earned by Opco ?   All investments are actually held by Holdco.

Cheers.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on August 17, 2015, 07:59:06 AM
Hi Koogie,
I take it you sold a portion of your business then? Remember to ensure you triggered the QSBCD credits appropriately -
In terms of your accountant - making the transition is a relative no-brainer. If you opt to do dividends in 2015 however, remember that you'll need to file a T5 in addition to your regular T4 income.
The other consideration is Part IV tax here - Going forward, your Holdco will pay 33 1/3rd percent tax on the taxable dividends paid through Opco, but this is utilized as a tax credit when the income flows through to you personally in the Holdco. Just remember to keep this in mind for your planning purposes.
Hope this helps!
CPA CB

Thanks.   Yes, I am selling a minority share in the business.  Unfortunately I can't crystalize any of the LCGE due to the nature of the setup of the business and the dormant funds it holds (so says my CA).
I do believe I will switch to a dividend remuneration come 2016.   So, therefore, no need for a T5 until the end of next year but thanks for the reminder.
I am confused about the Part IV statement though.  Are you assuming due to the sale that Opco and Holdco would no longer qualify as "connected companies" ?  Or that outside dividends are earned by Opco ?   All investments are actually held by Holdco.

Cheers.

Hi Koogie,

It should still be a connected company - you've likely (hopefully if dividends are flowing to HoldCo) been paying Part IV Tax as is - so this won't necessarily change. The point was that if you're taking more remuneration in dividends, this will be a consideration for tax planning and timing purposes.

You end up getting this back as the money flows up to you personally (through Refundable dividend tax on hand).

Hope this clarifies a bit
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Koogie on August 17, 2015, 10:37:44 AM
Hi Koogie,
It should still be a connected company - you've likely (hopefully if dividends are flowing to HoldCo) been paying Part IV Tax as is - so this won't necessarily change. The point was that if you're taking more remuneration in dividends, this will be a consideration for tax planning and timing purposes.
You end up getting this back as the money flows up to you personally (through Refundable dividend tax on hand).
Hope this clarifies a bit

Understood. I've been reading up about RDTOH and "think" I have a handle on it.    I have a meeting this week with my CA so will get him to clarify everything.   

Thanks again.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on August 17, 2015, 10:41:07 AM
Hi Koogie,
It should still be a connected company - you've likely (hopefully if dividends are flowing to HoldCo) been paying Part IV Tax as is - so this won't necessarily change. The point was that if you're taking more remuneration in dividends, this will be a consideration for tax planning and timing purposes.
You end up getting this back as the money flows up to you personally (through Refundable dividend tax on hand).
Hope this clarifies a bit

Understood. I've been reading up about RDTOH and "think" I have a handle on it.    I have a meeting this week with my CA so will get him to clarify everything.   

Thanks again.

No problem -

It's and odd concept - really it is the CRA's way of ensuring you pay personal tax on dividends when owned through a holding company, sooner rather than later. The 33 1/3rd percent tax is meant to roughly act as a 'deposit' on your future taxes, if you will.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on August 17, 2015, 10:57:26 AM
I'd love to see the Canadian version of the tax guide as a sticky, but find threads that keep themselves at the top of the page like this one has been far more relevant.  Stickies tend to die.  If you were to write up The Mustache Tax Guide (CAD version) and include a link to this thread for discussion, I can see that as far more useful.

http://forum.mrmoneymustache.com/taxes/the-mustache-tax-guide-(u-s-version)/

Great point -  I'm doing this for the Employed and Self-Employed.

Stay tuned!

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on August 20, 2015, 02:08:51 PM
Silly question about instalment payments.

I paid more than the "box 2" amount in March and June. Because of cap gains last year, my "box 2" amounts for September and December are massive. However, the "box 2" amounts I paid already were assuming I wasn't going to have much work in the second half of the year. But I've ended up being signed up for 3 days a week for the rest of the year.

So, the amount I will actually owe is more than double what I have already paid, but will probably be less than the sum of 4 "box 2" amounts. I honestly didn't anticipate the extra work at the end of the year.

Presumably I can pay the September "box 2" amount LESS THE OVERPAYMENT made in Mar-Jun and still "meet" the requirement to not have penalties?

Say:

box 2 Mar-Jun = 2k each, I paid 2.5k twice because that is what I thought 1/4 of the year's tax would be;

box 2 Sep-Dec = 5k each, can I pay 5k - (2 x 500 overpayment) = 4k in Sept and not get penalised?

Guessing with these fictional numbers my total for the year will be 12k not the 14k "box 2" suggests. But I can't go back in time and pay (1/4 of 12k = 3k) for March and June.

Make any sense? Any other options for paying less now? I don't mind paying the tax, it's just a lot next month when I didn't actually earn anything in July and won't necessarily have been paid for August's work by the Sept 15 deadline!

*Edit* got an answer elsewhere that I'm ok doing that, as the 'overpayments' are just listed as extra pre-credit and I can pay that much less to still be on track.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on August 28, 2015, 12:07:17 PM
Q. What is the tax rate on a Trust (personal)?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on September 03, 2015, 11:47:07 AM
Q. What is the tax rate on a Trust (personal)?

In a living trust, the tax rate is the highest marginal tax rate applicable to a person. However, you can make deductions on income and flow through to the beneficiary to pass this from high marginal rates to low marginal rates.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on September 03, 2015, 12:01:56 PM
Thanks, CPA CB.

I don't understand yet. I made a Trust for myself and my kid, such that I am both the settlor and one of the beneficiaries. How is the tax rate determined? i.e., For my individual taxes, outside of the Trust, my tax rate is 15%. Is that what CRA uses to determine tax rates on income generated inside the Trust?

I'm inclined to move a Corporate-owned asset into the Trust, but I keep being told Corporate tax rates are better than Trust tax rates. But it seems to me that in my case, they are both 15%.

Also, what deductions can be claimed against income in a Trust?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Mr. Tony on September 03, 2015, 07:36:30 PM
Hey there Eh!

I have been slack in the RRSP investment game and am working to catch up.  I don't know the exact amount but I probably have over $30k in available as per my last assessment.  Would you recommend getting an RRSP loan and then apply the refund against the loan?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on September 03, 2015, 08:00:22 PM
Hey there Eh!

I have been slack in the RRSP investment game and am working to catch up.  I don't know the exact amount but I probably have over $30k in available as per my last assessment.  Would you recommend getting an RRSP loan and then apply the refund against the loan?

Make a contribution to reduce your taxable income to arround 30k$ (lower than that is not really worth). You got until march 1st 2016 to contribute. If you intend to get a loan, make it managable so you can repay with the refund 1-2 month later. Focus on maxing it out every year.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: lostamonkey on September 03, 2015, 08:13:27 PM
Hi Koogie,
I take it you sold a portion of your business then? Remember to ensure you triggered the QSBCD credits appropriately -
In terms of your accountant - making the transition is a relative no-brainer. If you opt to do dividends in 2015 however, remember that you'll need to file a T5 in addition to your regular T4 income.
The other consideration is Part IV tax here - Going forward, your Holdco will pay 33 1/3rd percent tax on the taxable dividends paid through Opco, but this is utilized as a tax credit when the income flows through to you personally in the Holdco. Just remember to keep this in mind for your planning purposes.
Hope this helps!
CPA CB

Thanks.   Yes, I am selling a minority share in the business.  Unfortunately I can't crystalize any of the LCGE due to the nature of the setup of the business and the dormant funds it holds (so says my CA).
I do believe I will switch to a dividend remuneration come 2016.   So, therefore, no need for a T5 until the end of next year but thanks for the reminder.
I am confused about the Part IV statement though.  Are you assuming due to the sale that Opco and Holdco would no longer qualify as "connected companies" ?  Or that outside dividends are earned by Opco ?   All investments are actually held by Holdco.

Cheers.

Hi Koogie,

It should still be a connected company - you've likely (hopefully if dividends are flowing to HoldCo) been paying Part IV Tax as is - so this won't necessarily change. The point was that if you're taking more remuneration in dividends, this will be a consideration for tax planning and timing purposes.

You end up getting this back as the money flows up to you personally (through Refundable dividend tax on hand).

Hope this clarifies a bit

I thought connected corps were exempt from part 4 tax? Am I wrong?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on September 03, 2015, 08:50:04 PM
Q. What is the tax rate on a Trust (personal)?

In a living trust, the tax rate is the highest marginal tax rate applicable to a person. However, you can make deductions on income and flow through to the beneficiary to pass this from high marginal rates to low marginal rates.
Thanks, CPA CB.

I don't understand yet. I made a Trust for myself and my kid, such that I am both the settlor and one of the beneficiaries. How is the tax rate determined? i.e., For my individual taxes, outside of the Trust, my tax rate is 15%. Is that what CRA uses to determine tax rates on income generated inside the Trust?

I'm inclined to move a Corporate-owned asset into the Trust, but I keep being told Corporate tax rates are better than Trust tax rates. But it seems to me that in my case, they are both 15%.

Also, what deductions can be claimed against income in a Trust?

I think you may have misunderstood what CPA CB meant. Under the Canadian federal tax regime, the general rule is that the tax payable by a trust is 29% of its taxable income for the year. Income Tax Act, RSC 1985, c 1 (5th Supp), § 122(1)(a). The rate of 29% is also the highest marginal tax rate applicable to individuals, although that is technically just a coincidence since the structure of the legislation does not make those the same value. In other words, the general rule is that trusts do not pay graduated income tax, but rather a flat rate of 29%. However, the general rule is subject to a large number of exceptions, which I'll let CPA CB discuss if he wants to.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: K-ice on September 04, 2015, 04:29:37 PM
In a taxable account of Canadian equities I currently have some "loser stocks" with a capital loss of about $7000. 

First question:
If I sell the “loser stocks” in a year when I have no capital loss can I claim this loss in a future year?
I found this that scared me  “Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.” (http://www.moneysense.ca/taxes/capital-gains-explained/)

At the same time I have "winner stocks" with a gain of $20,000.


Currently, I have not sold any stocks so this has not been realised.


But I have room in my registered accounts and I was thinking that I would transfer the  "winner stocks" "in kind" into my TFSA.  Even though they gained a lot, they are the lowest they have been in a while so now is a good time to “in kind” them over. 

I understand that this will trigger a deemed deposition and I have calculated the tax at about ($20,000/2)*35% = $3500.

I wanted to offset this tax and I thought I could do that in two ways.

A)   I could sell the “loser stocks”.  Now my gain is only (13,000/2)*35% = $2275
(Not that much of an offset)
Or
B)   I could purchase some RRSP with other cash, I think I need about $10,000 to offset the gain. 
$10,000*35% = $3500 cash back

I am quite sure I can save the cash for the RRSP by the year end.
I also hope the “looser stocks” climb out, I am a buy and hold investor, and why sell low if I don’t need to. 

Second & third Question:
Does my math and logic seam correct on how to offset  the capital gain?  Are there any pros and cons to A vs B I am missing?

Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on September 04, 2015, 05:08:50 PM
I think you may have misunderstood what CPA CB meant. Under the Canadian federal tax regime, the general rule is that the tax payable by a trust is 29% of its taxable income for the year. Income Tax Act, RSC 1985, c 1 (5th Supp), § 122(1)(a). The rate of 29% is also the highest marginal tax rate applicable to individuals, although that is technically just a coincidence since the structure of the legislation does not make those the same value. In other words, the general rule is that trusts do not pay graduated income tax, but rather a flat rate of 29%. However, the general rule is subject to a large number of exceptions, which I'll let CPA CB discuss if he wants to.

Thanks, Cathy! Yes, I didn't understand even that little bit, so was aiming for clarification. Okay, so 29% but exceptions. Will wait to hear from CPA CB on those.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RidinTheAsama on September 04, 2015, 05:10:44 PM
My first question here:

I was wondering if the CCTB and/or UCCB benefits we receive every month would count towards our income when calculating our RRSP contribution room.

My guess was that since CCTB is a non-taxable benefit it does not count, and maybe since UCCB is a taxable benefit it does count.  Is this correct?

Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: GettingThere on September 24, 2015, 07:38:17 AM
My first question here:

I was wondering if the CCTB and/or UCCB benefits we receive every month would count towards our income when calculating our RRSP contribution room.

My guess was that since CCTB is a non-taxable benefit it does not count, and maybe since UCCB is a taxable benefit it does count.  Is this correct?

Thanks!

Hi

Your maximum annual RRSP contribution is based on your earned income in the previous year. Earned income includes salaries, employee profit sharing income, business income, disability pensions (issued under the Canada and Quebec pension plans), taxable alimony or maintenance, and rental income.

Neither CCTB or UCCB count towards calculating your RRSP room.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: GettingThere on September 24, 2015, 07:52:04 AM
In a taxable account of Canadian equities I currently have some "loser stocks" with a capital loss of about $7000. 

First question:
If I sell the “loser stocks” in a year when I have no capital loss can I claim this loss in a future year?
I found this that scared me  “Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.” (http://www.moneysense.ca/taxes/capital-gains-explained/)

At the same time I have "winner stocks" with a gain of $20,000.


Currently, I have not sold any stocks so this has not been realised.


But I have room in my registered accounts and I was thinking that I would transfer the  "winner stocks" "in kind" into my TFSA.  Even though they gained a lot, they are the lowest they have been in a while so now is a good time to “in kind” them over. 

I understand that this will trigger a deemed deposition and I have calculated the tax at about ($20,000/2)*35% = $3500.

I wanted to offset this tax and I thought I could do that in two ways.

A)   I could sell the “loser stocks”.  Now my gain is only (13,000/2)*35% = $2275
(Not that much of an offset)
Or
B)   I could purchase some RRSP with other cash, I think I need about $10,000 to offset the gain. 
$10,000*35% = $3500 cash back

I am quite sure I can save the cash for the RRSP by the year end.
I also hope the “looser stocks” climb out, I am a buy and hold investor, and why sell low if I don’t need to. 

Second & third Question:
Does my math and logic seam correct on how to offset  the capital gain?  Are there any pros and cons to A vs B I am missing?

Thanks!

Hi

I am also a tax accountant (based in Quebec) so I guess I can pitch in to the great service CPA CB has been providing in this post.

1)  If you have a capital loss in current year, you can use it to reduce any capital gains you had in the year, to a balance of zero. If your capital losses are more than your capital gains, you may have a net capital loss for the year. Generally, you can apply your net capital losses to taxable capital gains of the three preceding years and to taxable capital gains of any future years. So yes, you keep the losses until they are used.

2) Your logic re : offsetting capital gains of 20K. A capital gain of 20K will add 10K to your taxable income as you know. If you want to completely offset this, you need to contribute 10K to your RRSP, or have 20K in capital losses.

In my opinion what people miss the most when deciding on a tax issue, is considering all the other variables other than direct income tax. There is so much more to consider : impact on child care benefits,  GST\PST refunds, reimbursement of daycare costs, Guaranteed income supplement,  health tax (in Quebec) and the list goes on....
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RidinTheAsama on September 24, 2015, 10:43:08 AM
My first question here:

I was wondering if the CCTB and/or UCCB benefits we receive every month would count towards our income when calculating our RRSP contribution room.

My guess was that since CCTB is a non-taxable benefit it does not count, and maybe since UCCB is a taxable benefit it does count.  Is this correct?

Thanks!

Hi

Your maximum annual RRSP contribution is based on your earned income in the previous year. Earned income includes salaries, employee profit sharing income, business income, disability pensions (issued under the Canada and Quebec pension plans), taxable alimony or maintenance, and rental income.

Neither CCTB or UCCB count towards calculating your RRSP room.

Well, not the answer I was hoping for but I'm glad to know.  Thanks!
I guess that means a little less tax-deferred saving than hoped for this year, and a little more in the TFSA... life is rough eh?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: K-ice on September 24, 2015, 07:22:30 PM
Thanks GettingThere.

I've held on to the looser stocks, they are slowly climbing.

I did do the in-kind transfer so I will have a capital gain.

I have put about half of what I need in an RRSP to offset.

The other half should be doable by the February deadline if not sooner.

Thanks!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: GettingThere on September 25, 2015, 05:48:52 AM
K-Ice,

I forgot to mention one important thing in your case, for in kind transfers. If you transfer shares from a taxable account to a RRSP or TFSA, you must declare the capital gain as if you sold it at the price you transferred the shares. But if the result of the transfer  is a capital LOSS, you can not claim the loss on your taxes. You must sell the shares first, incur the loss, transfer the money to your tax advantaged account, and rebuy the same shares 30 days later  (if that's whatt you want). A bit stupid in my opinion, but that's how it works.




Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: K-ice on September 25, 2015, 07:28:48 AM
Thanks for the tip.

I had read about the loss 30day thing but kind of forgot.

Anyway, I didn't touch the looser stock, it is a Canadian dividend stock so I will probably just let it sit outside of the TFSA or RRSP.

I still have some TFSA RRSP room but I will just fill it with new savings.

So many little rules to optimize these things.

Thanks
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: FI40 on October 03, 2015, 01:28:03 PM
I have a complicated tax question. My in-laws are canadian citizens, but my FIL used to work in the US, and has a 401k there. Unfortunately he passed away last week at 56, and now my MIL (age 52) needs to figure out what to do with it. I assume she is named as the beneficiary on it, assuming it works the same way as RRSPs, and once she provides the company with his death certificate she'll have ownership of it I suppose.

My question is how should she proceed in order to minimize the tax impact? What are the options?  I found some information here  (https://www.sunnet.sunlife.com/files/advisor/english/PDF/IRA_401k_to_RRSP.pdf) but I'm not sure I am interpreting it correctly. I think if she just took it all out now, she would pay 10% penalty plus 15% withholding tax, so that's likely not a good option. If she keeps it invested in the 401k until age 59.5, does that effectively avoid the 10% penalty (she may retire at around that time too, so maybe would avoid the 15% tax as well).

Thanks in advance!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cathy on October 03, 2015, 05:30:46 PM
FI40, you are correct that your question is complicated, and it doesn't help that most of the existing literature on this topic is incorrect in some way or another. As I just noted in another post (http://forum.mrmoneymustache.com/taxes/living-trusts-estate-planning/msg826332/#msg826332), secondary sources do not have the force of law and are mainly useful as a starting point for research. You need to verify the claims in secondary sources by reading the primary sources (e.g. treaties, statutes, and case law). My posts here are, of course, also secondary sources of information and you similarly cannot rely on them.

The publication you linked to (https://www.sunnet.sunlife.com/files/advisor/english/PDF/IRA_401k_to_RRSP.pdf) ("Sunlife Publication") contains serious errors.

A plan commonly referred to as a 401(k) plan must hold assets in "a trust created or organized in the United States". 26 USC § 401(a). For the purpose of this post, the operative phrase there is "in the United States". In the case of a distribution from such a trust "in the United States" to a nonresident alien, the distribution is generally subject to a 30% tax "to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States". 26 USC § 871(a)(1). If the payee is "at no time during the taxable year ... engaged in trade or business in the United States", then the amount is not "effectively connected with the conduct of a trade or business within the United States" and the 30% tax applies. 26 CFR 1.871-7.

In furtherance of the above, when the distribution is made to a nonresident alien not engaged in a US trade or business, the payor is generally required to withhold 30% of the proceeds and remit them to the IRS. 26 USC § 1441(a). However, the provisions of the Internal Revenue Code are applied "with due regard to any treaty obligation of the United States which applies to such taxpayer". 26 USC § 894(a)(1). Assuming that the payee is a resident of Canada, the relevant treaty provides that the tax withheld is reduced to 15% if (and only if) the recipient of the distribution(s) is "the beneficial owner of a periodic pension payment". Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital (http://www.fin.gc.ca/treaties-conventions/usa_-eng.asp), Article XVIII, § 2(a).

The Sunlife Publication at page 2 claims that in the case of a distribution from a 401(k) plan to a nonresident alien who is a resident of Canada not engaged in a US trade or business, the withholding rate is always reduced to 15%. Unfortunately, this claim has no basis in law. The only authority cited by the Sunlife Publication for this proposition is 26 CFR 1.1441-2(b)(ii), but this regulation merely defines the term "fixed or determinable annual or periodical" for the purpose of "chapter 3 of the Internal Revenue Code and the regulations thereunder". This regulation has nothing to do with the meaning of "the beneficial owner of a periodic pension payment" as used in the treaty provision above. To be clear then, the withholding rate on the distribution, assuming that the payee is a nonresident alien who is a resident of Canada and not engaged in a US trade or business, will be 30% unless the payee is "the beneficial owner of a periodic pension payment", in which case it will be reduced to 15%. There is no precedential authority on the meaning of "the beneficial owner of a periodic pension payment" and certainly no authority suggesting that all recipients of the distributions from a 401(k) plan fall within the meaning of this phrase. In conclusion, the payee may have to pay a 30% tax to the US on the distribution, not necessarily the 15% claimed by the Sunlife Publication.

In addition to the above, and assuming that the payee is a resident is Canada, the 401(k) distribution will also have to be included in the payee's income for Canadian tax purposes. Income Tax Act, RSC 1985, c 1 (5th Supp) (https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-1-5th-supp/latest/rsc-1985-c-1-5th-supp.html) ("ITA"), § 56(1)(a)(i).

Fortunately, there are a few pieces of good news.

First, the 10% additional tax that you mention for distributions from a qualified retirement plan (you call it a "penalty") does not apply to a distribution made to a beneficiary after the death of the employee whose account it was. 26 USC § 72(t)(2)(A)(ii).

Second, the payee may be able to claim a tax credit in Canada for all or part of the 30% (or possibly 15%) tax that was paid to the US, depending on the overall Canadian tax profile of the payee and subject to all relevant statutory requirements. ITA § 126.

Third, the payee may be able to contribute the 401(k) proceeds to an RRSP and claim a deduction for same. Subject to various conditions, there is a Canadian deduction available for income that is "a superannuation or pension benefit ... payable out of or under a pension plan ... attributable to services rendered by the taxpayer or a spouse or common-law partner or former spouse or common-law partner of the taxpayer in a period throughout which that person was not resident in Canada". ITA § 60(j)(i). I bolded some of the most salient requirements, but there are also many other conditions not discussed here.

I hope this information is helpful, but as you surmised, this is a complicated topic, and this post is only a secondary source of general information intended to help with your research and is not a substitute for familiarising yourself with the primary sources, which contain other requirements not described here. The payee may benefit from retaining counsel to assist with this matter.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: FI40 on October 04, 2015, 01:21:08 PM
Thank you so much Cathy for the detailed response! This is very helpful. I will look into the "periodic pension payment" issue and the Canadian tax credit and RRSP contribution options. Great to see all those primary sources referenced which I didn't know enough to even look for!

Thanks again!!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: MMMdude on October 04, 2015, 01:26:49 PM
Hi

On T2125 can one include GST on expenses if they are not registered for GST (ie still considered small supplier).  I would think so since it's a cost of business and not able to claim ITC on it.

Also for CCA of items owned before start of business, I assume one can "transfer" them to the sole proprietorship at a deemed fair market value.  Obviously if it was a Corporation this would be via s.85 rollover, however I assume on sole prop no form is needed?

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Slideguy on October 05, 2015, 08:47:40 AM
Hi all,
New to MMM and am sorting through "my house" and slowly getting things in order and an understanding of good things to be doing. My question is in regards to a second job. I have gotten one and am wondering what to set that at for deductions so that I don't get hit by the evil dreaded empire more than I am now. The second job I work at is saying that I have to give them a % rate that I would like to withhold for tax purposes.
I have searched and cannot find a somewhat easy way to calculate this.
The ultimate goal of the second job is to actually make some extra money to help get the "house" in order.

Thanks for any help. LOVE this site.
-a fellow Canadian-
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: FI40 on October 05, 2015, 09:08:59 AM
Hi all,
New to MMM and am sorting through "my house" and slowly getting things in order and an understanding of good things to be doing. My question is in regards to a second job. I have gotten one and am wondering what to set that at for deductions so that I don't get hit by the evil dreaded empire more than I am now. The second job I work at is saying that I have to give them a % rate that I would like to withhold for tax purposes.
I have searched and cannot find a somewhat easy way to calculate this.
The ultimate goal of the second job is to actually make some extra money to help get the "house" in order.

Thanks for any help. LOVE this site.
-a fellow Canadian-

Not sure what province you're from, but I think you can just use the tables here (for Ontario): http://www.taxtips.ca/taxrates/on.htm

You want to look at Marginal tax rates, for Other Income. Just choose the bracket that your primary job income is in (or combine brackets depending how much you'll be making at the side gig).
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Slideguy on October 05, 2015, 11:41:25 AM
Thanks for the info! Sorry,  I forgot to include my home Province of Ontario.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on October 19, 2015, 03:22:43 PM
Hello all,

I'm back!

I will be getting to people's unanswered questions, in the meantime, thanks to everyone who has helped out their fellow MMM'er. I will state names - but don't have the time presently.

Everyone, I do want to take a quick moment to comment on the importance of voting (apolitically as possible). For what it's worth, I'm a moderate Libertarian - take it or leave it.

As a relatively young guy (30's), I'm proud that my grandfather, and all of his brothers fought, and survived D-Day. After 70 years, this does lose some meaning to us, but many of our descendants put their lives on the line (and their family's for that matter) to protect a notion of freedom, democracy, and the right to vote.

In this sense, I urge everyone to do the following.

1) Ignore the noise - there are a bountiful number of partisans on either side of this election. Ignore them entirely. I don't want to call them scumbags - so let's call them sheep.

2) Look at what the leaders have said, and the odds of this coming to fulfillment. Currently, the Conservatives have a really great record of making promises they keep - the other two haven't yet had the opportunity.

3) Weigh your options carefully, and considerably. What are your values, what's most important, and how does one affect the other? I.e. if you're passionate about X, but the accomplishment of Y and Z are necessary for X to succeed, you're likely better to vote for the party who will deliver with Y and Z, versus the one who says X will happen.

I'm keeping this as non-descript as possible, unlike Mike Myers and John Oliver... Sub in your values as necessary please.

Take the responsibility seriously, as if buying a car or a house. Test your assumptions, vote with who you think is going to do the best job, and be happy to fulfill your right and duty as a real Can'eh'dian. After all, it is guaranteed 2/3rds of the country will be complaining of the result - why not make sure you can too (winner or loser)?

We're all in it for the best of one another. Remember that, vote for whomever you think is best for you, and be proud. 

All the best, and happy voting MMM'ers,

CPA CB


Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: sierrafire on October 24, 2015, 07:05:15 AM
This year I started a small business doing some landscaping and construction.  I don't need the money but I enjoy the work and it keeps me busy in my spare time.  I am operating the business as a sole proprietorship, not a corporation.  Currently it earns about $20,000 in profit that I can't expense.  I am looking for suggestions on options to minimize taxes by structuring the business differently or doing something with profits other than regular income. 

I am a single guy working in a full-time, permanent job that pays $65,000 and will increase to $100,000 over the next few years.  it provides full benefits as well as a good pension.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: ChrisInAmerica on October 24, 2015, 09:09:05 PM
Hey! Ok I have a weird situation that maybe MMM could have related to that I'm having a very tough time reconciling.

I was born in BC and worked there for one company right out of college until the age of 29 when I was internally
transferred to Los Angeles (31 now).  Queue the big raise and woo hoo the beaches are nice!

In the 20ish months that I've lived here so far I have discovered mustachianism and  have adapted it to a really neat beach bumish life. 
I get my work done, live on the beach and save about 50% of my take home which amounts to about 40,000$ a year (spend 40k$ save 40k$ - luxurious - I should probably cut back).

But here is the problem I have that I can't seem to figure out.  My Canadian 20s were not so fiscally sound and the only shining light was
an old boss who told me to cap my company sponsored retirement plan to get their max contribution.  I have managed to consolidate an old motorbike loan
and a few large credit card balances into a line of credit @ 7.8% to the amount of 23,000$ CDN currently.  I have been paying just above the minimum ~200$
each month and ignoring it (great debt strategy right?).  I also have 72,000$ in a locked in retirement account and 18,000$ in an RRSP.

As a non-resident of Canada (I have filed the paperwork) I am entitled to withdraw both the RRSP and the Locked-In Retirement Account (LIRA) at a one time 25% penalty after
two years out of the country. (Right? I think? Sunlife confirmed it for me?)

So my thinking is - I paid more than 25% tax on the contributions to the LIRA and the RRSP.  Shouldn't I take advantage of this situation and take my 72,000 + 18,000 -25% = 67,500$
and pay off my 23,000$ line of credit leaving me with 44,500$ Canadian cash to invest or move over the border at some point (the exchange rate hasn't helped my calculations)?  Or do I slash
 my US savings rate of 40,000$ to pay it off with a US to CDN transfer?  Even if I were to do that should I not take the chance to unlock the ~90,000$ now?  Both the LIRA and the RRSP are at
about 1.5-2.0% expense ratios which hurt now that I understand what that means.

Is my thinking sound?  Any advice?

Thanks in advance for your time!
Chris
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 04, 2015, 07:51:55 AM
This year I started a small business doing some landscaping and construction.  I don't need the money but I enjoy the work and it keeps me busy in my spare time.  I am operating the business as a sole proprietorship, not a corporation.  Currently it earns about $20,000 in profit that I can't expense.  I am looking for suggestions on options to minimize taxes by structuring the business differently or doing something with profits other than regular income. 

I am a single guy working in a full-time, permanent job that pays $65,000 and will increase to $100,000 over the next few years.  it provides full benefits as well as a good pension.

Hi Sierra,

Are you taking any expenses? Presumably so, and you've maximized the number of expenses you take.

The problem with sole-proprietorships are two-fold, which you rightly point out.

1) No tax deferral mechanism - profit earned now, is fully taxed now
2) No ability to income split.

With you take home earnings increasing I would ask, are you married, with children? If so, incorporating is a great way to income split dividends with your spouse, and even with children after they reach 18 years of age. You can leave the funds in the company, and only pay the corporate tax rate, and defer the personal component to when it is best, instead of being forced into it.

That being said - incorporating and filing corporate returns comes at a cost. $1k per year likely or more. Is it worthwhile? Maybe - it depends on your circumstances, and whether the business continues to grow.

Hope this helps!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: sierrafire on November 04, 2015, 08:17:17 AM
Thanks for your advice. Much appreciated.

I'm taking as many expenses as possible. Unfortunately some jobs have no expense other than travel.

As well I'm not married and no children. So it sounds like I don't have many options other than trying to include more expenses.

Thanks again for your help.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 04, 2015, 08:19:02 AM
Hey! Ok I have a weird situation that maybe MMM could have related to that I'm having a very tough time reconciling.

I was born in BC and worked there for one company right out of college until the age of 29 when I was internally
transferred to Los Angeles (31 now).  Queue the big raise and woo hoo the beaches are nice!

In the 20ish months that I've lived here so far I have discovered mustachianism and  have adapted it to a really neat beach bumish life. 
I get my work done, live on the beach and save about 50% of my take home which amounts to about 40,000$ a year (spend 40k$ save 40k$ - luxurious - I should probably cut back).

But here is the problem I have that I can't seem to figure out.  My Canadian 20s were not so fiscally sound and the only shining light was
an old boss who told me to cap my company sponsored retirement plan to get their max contribution.  I have managed to consolidate an old motorbike loan
and a few large credit card balances into a line of credit @ 7.8% to the amount of 23,000$ CDN currently.  I have been paying just above the minimum ~200$
each month and ignoring it (great debt strategy right?).  I also have 72,000$ in a locked in retirement account and 18,000$ in an RRSP.

As a non-resident of Canada (I have filed the paperwork) I am entitled to withdraw both the RRSP and the Locked-In Retirement Account (LIRA) at a one time 25% penalty after
two years out of the country. (Right? I think? Sunlife confirmed it for me?)

So my thinking is - I paid more than 25% tax on the contributions to the LIRA and the RRSP.  Shouldn't I take advantage of this situation and take my 72,000 + 18,000 -25% = 67,500$
and pay off my 23,000$ line of credit leaving me with 44,500$ Canadian cash to invest or move over the border at some point (the exchange rate hasn't helped my calculations)?  Or do I slash
 my US savings rate of 40,000$ to pay it off with a US to CDN transfer?  Even if I were to do that should I not take the chance to unlock the ~90,000$ now?  Both the LIRA and the RRSP are at
about 1.5-2.0% expense ratios which hurt now that I understand what that means.

Is my thinking sound?  Any advice?

Thanks in advance for your time!
Chris

Hi Chris,

You're right in that you're getting dinged on the expense ratios. Unfortunately the exchange rate won't be swinging dramatically in your favour in terms of converting to USD any time soon (as far as I can tell), and as such I'd recommend keeping the funds in loonies for now.

That being said - transferring out of Sunlife and into a traditional RRSP/LIRA direct investing account would be highly recommended. You can avoid the expenses, and invest in what you want more actively.

8% is crazy for a line of credit - earning money in USD however means you're only looking at about $14-16k US to knock out this debt entirely, less than half a year. I would definitely do this as quickly as possible, as 8% is hard to beat in terms of investing.

As far as the 25% is concerned - if you keep the funds in Canadian dollars I wouldn't recommend it. In terms of compounding your investment, you're better to invest the 90k and earn on this (and pay the 25% flat tax later), rather than take the hit up front and crawl back up to 90k.

That being said, from a tax planning perspective, remember that RRSP's and LIRA's need to be reported specifically in your US tax return. Take a look at this article for a bit more detail - http://www.greenbacktaxservices.com/blog/canadian-retirement-tfsa-rrsp-treatment/

Hope this helps!

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 04, 2015, 08:21:47 AM
Thanks for your advice. Much appreciated.

I'm taking as many expenses as possible. Unfortunately some jobs have no expense other than travel.

As well I'm not married and no children. So it sounds like I don't have many options other than trying to include more expenses.

Thanks again for your help.

Gotcha,

From there - look to your RRSP's and TFSA and contribute to at least attempt to offset current and future taxes. Purchase any equipment you may need prior to this year end so you can expense at least a portion of it up front as well.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: K-ice on November 04, 2015, 09:46:34 AM
I have a question about spousal RRSP.

My marginal tax rate is about 36%
My SO’s tax rate is 31%

I have very little room in my RSP $10K  and very little saved $20K. I barely accumulated any room since I spent years in school but now I should have a pension one day.
My self-employed SO has much more room $100K, and more saved $75K

I think our situation is odd since the higher income earner actually has less savings and less contribution room.  None of the spousal RSP samples I found on the internet are like us.

SO is 3 years older and early 40’s

When retired, I think we would both be in about the 31% tax rate but no one has a crystal ball.

I plan on topping up my RSP this year.  After that, can I make a spousal contribution?  I don’t think so since I am at MY limit.  So should I just put my extra cash into my spouse’s RRSP so it can grow tax free?

We are close to having our TFSA maxed as well.

My gut says it makes more sense to invest in a tax sheltered manner before unregistered regardless of whose name it is under.

Thanks
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 05, 2015, 09:51:26 AM
I have a question about spousal RRSP.

My marginal tax rate is about 36%
My SO’s tax rate is 31%

I have very little room in my RSP $10K  and very little saved $20K. I barely accumulated any room since I spent years in school but now I should have a pension one day.
My self-employed SO has much more room $100K, and more saved $75K

I think our situation is odd since the higher income earner actually has less savings and less contribution room.  None of the spousal RSP samples I found on the internet are like us.

SO is 3 years older and early 40’s

When retired, I think we would both be in about the 31% tax rate but no one has a crystal ball.

I plan on topping up my RSP this year.  After that, can I make a spousal contribution?  I don’t think so since I am at MY limit.  So should I just put my extra cash into my spouse’s RRSP so it can grow tax free?

We are close to having our TFSA maxed as well.

My gut says it makes more sense to invest in a tax sheltered manner before unregistered regardless of whose name it is under.

Thanks

Hi K,

It's a conundrum, certainly.

You're correct that contributing to a Spousal RRSP goes against YOUR RRSP limit - so your ability in this sense is restricted.

I don't necessarily agree with the statement that one should max out registered accounts prior to looking at unregistered. If this were all TFSA I would agree (there is literally no reason to not top out the TFSA), but an RRSP vs. Unregistered account discussion is warranted.

I've posted at length in this forum on the benefits of the RRSP, and cons of the RRSP, when comparing to an unregistered account. The RRSP is a good tax deferral mechanism - BUT if you're deferring Capital Gains you end up behind as your gains are now 100% taxable vs. 50% taxable.

People with pensions like yourself usually get hosed on RRSP's in retirement, as CPP+Pension+RRSP usually sticks you in a very high bracket.

Therefore you're best to invest in non-dividend paying stocks in an unregistered account (Berkshire Hathaway, for example) and dividend paying stocks (Banks, etc) in your RRSP.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: K-ice on November 05, 2015, 11:27:06 AM


It's a conundrum, certainly.

...... but an RRSP vs. Unregistered account discussion is warranted.

 The RRSP is a good tax deferral mechanism - BUT if you're deferring Capital Gains you end up behind as your gains are now 100% taxable vs. 50% taxable.

....

Therefore you're best to invest in non-dividend paying stocks in an unregistered account (Berkshire Hathaway, for example) and dividend paying stocks (Banks, etc) in your RRSP.


Thanks.  I will do some more reading. 
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: FI40 on November 06, 2015, 08:42:18 AM
I don't necessarily agree with the statement that one should max out registered accounts prior to looking at unregistered. If this were all TFSA I would agree (there is literally no reason to not top out the TFSA), but an RRSP vs. Unregistered account discussion is warranted.

I've posted at length in this forum on the benefits of the RRSP, and cons of the RRSP, when comparing to an unregistered account. The RRSP is a good tax deferral mechanism - BUT if you're deferring Capital Gains you end up behind as your gains are now 100% taxable vs. 50% taxable.

Sorry to jump in and derail you a bit, but I'm not sure I understand your position here regarding capital gains in the RRSP. Can we do a simple example?

Let's assume tax rate is the same now and in the future when the RRSP is withdrawn - that is a conservative assumption, since if it's lower in the future that favours the RRSP. Say 50%. We have $1000 pre-tax to invest, and will have 100% capital gains over time.

Taxable:
Start with $500 (1000*.5). End with 875 (extra 500 is taxed at 25%).

RRSP:
Start with $1000. End with 2000, which comes down to $1000 when you take it out. RRSP wins.

If I make the tax rate 30%, I get Taxable 700->1295, RRSP 1000->1400. RRSP wins again.

And this is assuming an equal tax rate at the end as at the start. It gets better for the RRSP for mustachians I believe, who tend to have a high income and then retire with a lower one. The one argument I can think of against what I'm saying is that for older folks the RRSP method might hurt their OAS payments. Again for mustachians retiring at like 40-50, there's time to manage this. There are probably other things I'm not thinking of. Just wanted to get your perspective on it! I'll go check your post history now, maybe I should have done that first.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: FI40 on November 06, 2015, 09:07:44 AM
Having read some of the history, I think I might just be beating a dead horse. I believe my opinions are accurate for people in my situation.

Generally, as you have mentioned, tax rates are not always lower during retirement. Also age 71 is annoying. Also, future governments may mess with how RRSPs are taxed or put more rules on how they can be used, which would suck. Then again they could make cap gains tax 100% of your marginal rate or something so taxable stuff could get nerfed too.

By the way, thanks so much for starting this thread! Tons of great advice.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 06, 2015, 10:54:27 AM
Having read some of the history, I think I might just be beating a dead horse. I believe my opinions are accurate for people in my situation.

Generally, as you have mentioned, tax rates are not always lower during retirement. Also age 71 is annoying. Also, future governments may mess with how RRSPs are taxed or put more rules on how they can be used, which would suck. Then again they could make cap gains tax 100% of your marginal rate or something so taxable stuff could get nerfed too.

By the way, thanks so much for starting this thread! Tons of great advice.

Hey FI40 -

I think I have a proof somewhere in the forum here that you can see - it's hard to follow your example but let me try...

Let's assume in both cases you double your investment.

And also, we can assume a 30% marginal tax rate now and in retirement. Now, we could launch into a diatribe about this, but I find people are surprised to find out that after 65/67 with OAS, CPP, and RRSP income their yearly income is over 50-60k per year, and they were previously earning about the same.

Un-registered you're left with $1,850 after tax.

Registered is a bit trickier but here goes -

After you re-invest your refund you're at $1,300 as an initial investment.

Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.

Therefore your net after tax is $1,820.

In this example, the unregistered account wins by $30.

Yes, it ignores time value of money and incremental taxes on trading activity, but on the flip side it also ignores the fact that the vast majority of our clients do not re-invest 100% of their RRSP refunds. Po-tay-to, po-tah-to.

Also cap gains only count 50% towards your clawback ratios for OAS and CPP - RRSP are 100%. There are benefits and downfalls of both, but from a pure tax perspective you're better to save RRSP room for dividend/interest income, and capital gains unregistered. And have both in general, as has been recommended.

Hope this clarifies a tad.







Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: FI40 on November 09, 2015, 12:27:52 PM
Un-registered you're left with $1,850 after tax.

I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.

Registered is a bit trickier but here goes -

After you re-invest your refund you're at $1,300 as an initial investment.


Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.

Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.

Therefore your net after tax is $1,820.

In this example, the unregistered account wins by $30.

So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.

Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 10, 2015, 11:44:23 AM
Un-registered you're left with $1,850 after tax.

I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.

Registered is a bit trickier but here goes -

After you re-invest your refund you're at $1,300 as an initial investment.


Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.

Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.

Therefore your net after tax is $1,820.

In this example, the unregistered account wins by $30.

So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.

Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?

Hi there,

You're putting the cart before the horse here -

The question is - I have $1,000 sitting in my bank account. Should I invest in an RRSP, or unregistered, given all gains will be capital gains. My tax rate is 30%, and I will re-invest the RRSP tax credit I receive in the future in the plan.

It's an apples to oranges comparison if you say I have $1,000 to contribute to non-registered, but $1,428 to registered because of future tax events. It has to start at the beginning, i.e. if I put $1,000 into Plan A vs. Plan B, which nets better?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: FI40 on November 10, 2015, 11:54:44 AM
Un-registered you're left with $1,850 after tax.

I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.

Registered is a bit trickier but here goes -

After you re-invest your refund you're at $1,300 as an initial investment.


Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.

Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.

Therefore your net after tax is $1,820.

In this example, the unregistered account wins by $30.

So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.

Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?

Hi there,

You're putting the cart before the horse here -

The question is - I have $1,000 sitting in my bank account. Should I invest in an RRSP, or unregistered, given all gains will be capital gains. My tax rate is 30%, and I will re-invest the RRSP tax credit I receive in the future in the plan.

It's an apples to oranges comparison if you say I have $1,000 to contribute to non-registered, but $1,428 to registered because of future tax events. It has to start at the beginning, i.e. if I put $1,000 into Plan A vs. Plan B, which nets better?

If you do it that way, you are not accounting for the fact that when you re-invest the tax credit back into the RRSP, you get a refund for that too. I'm accounting for that effect in advance.

I agree there is a timing difference doing it the way I suggested, but if you just frame the question as "the contribution part happens within a year" then it's fine. We're talking about a long term investment here. To achieve what I'm talking about, someone could take out a loan for the $428 from the time they contribute to the RRSP until the time they get their tax refund. The cost of doing this is pretty small. Alternatively they can set up a plan with their employer to just not pay the tax in the first place! I forget the form that is used for that, but you know what I mean. Right?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 11, 2015, 06:53:20 AM
Un-registered you're left with $1,850 after tax.

I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.

Registered is a bit trickier but here goes -

After you re-invest your refund you're at $1,300 as an initial investment.


Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.

Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.

Therefore your net after tax is $1,820.

In this example, the unregistered account wins by $30.

So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.

Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?

Hi there,

You're putting the cart before the horse here -

The question is - I have $1,000 sitting in my bank account. Should I invest in an RRSP, or unregistered, given all gains will be capital gains. My tax rate is 30%, and I will re-invest the RRSP tax credit I receive in the future in the plan.

It's an apples to oranges comparison if you say I have $1,000 to contribute to non-registered, but $1,428 to registered because of future tax events. It has to start at the beginning, i.e. if I put $1,000 into Plan A vs. Plan B, which nets better?

If you do it that way, you are not accounting for the fact that when you re-invest the tax credit back into the RRSP, you get a refund for that too. I'm accounting for that effect in advance.

I agree there is a timing difference doing it the way I suggested, but if you just frame the question as "the contribution part happens within a year" then it's fine. We're talking about a long term investment here. To achieve what I'm talking about, someone could take out a loan for the $428 from the time they contribute to the RRSP until the time they get their tax refund. The cost of doing this is pretty small. Alternatively they can set up a plan with their employer to just not pay the tax in the first place! I forget the form that is used for that, but you know what I mean. Right?

Definitely!

I was keeping the scenario limited to the RRSP return from the first year, rather than counting years 2-4 as the return diminishes.

The issue is really more one of what we see in our practice. When it comes down to it, people aren't as efficient with their investments and reinvesting their refunds from an RRSP back into the product.

People may reinvest their tax refunds - but this is likely not close to their RRSP portion of the refund if they 'technically' owed tax at the end of the year. Too often we see someone who would have owed $1,000 in tax receive a $1,000 refund (so 2k back from the RRSP contribution) and they'll invest the $1,000 refund (or worse).

In addition, people generally have their RRSP and an unregistered account - and in this circumstance you're better to invest your fully taxable investment income in the RRSP, and capital gains earning investments in your unregistered account.

Point being - you're best to 'save' the RRSP room for dividend or interest income given the chance, where the difference is substantial. That being said, given how the vast majority treat refunds as lottery-esque windfalls, if people save at all it's a good thing!



Title: Will incorporating be beneficial?
Post by: marcus199 on November 14, 2015, 05:34:35 AM
Hi, I am wondering if I would be able to save significant taxes by incorporating in my situation or what the best tax-saving strategy would be, especially given the tax increase expected with the new government:

Salary: $240,000, with usual payroll deductions for EI, CPP, income tax.  RRSP gets max yearly contribution from payroll from salary income (but still have $80,000 room from previous years).

Self employment income: $260,000 +/- $20,000.  Currently filing taxes as sole proprietor on my personal return.

(Total annual income around $500,000)

Spouse: $30,000/yr salary

Dependent: 5 yr old

Student Debt: $180,000 at 2.8%
Student Debt: $10,000 at 6% (interest tax deductible)

Mortgage: $380,000 at 2.6%, 5 yr term, amortized over 30yr to maximize cash flow in case of emergency, but I am setting aside enough each month for lump sum payments of $50,000 every year and enough to pay off the mortgage at the end of the term so I wouldn't need to renew.

From what I understand, if you can't leave money in the corporation, there isn't really a tax benefit to incorporating because of the costs and fees but I'm wondering about saving by income splitting with my spouse and if I would save by getting paid in dividends versus salary.

At this point, I basically need all of my income for expenses and debt because I just started working.  I'm not sure what other strategies would be available to save.

Thank you.


Title: Re: Will incorporating be beneficial?
Post by: CPA CB on November 14, 2015, 09:52:29 AM
Hi, I am wondering if I would be able to save significant taxes by incorporating in my situation or what the best tax-saving strategy would be, especially given the tax increase expected with the new government:

Salary: $240,000, with usual payroll deductions for EI, CPP, income tax.  RRSP gets max yearly contribution from payroll from salary income (but still have $80,000 room from previous years).

Self employment income: $260,000 +/- $20,000.  Currently filing taxes as sole proprietor on my personal return.

(Total annual income around $500,000)

Spouse: $30,000/yr salary

Dependent: 5 yr old

Student Debt: $180,000 at 2.8%
Student Debt: $10,000 at 6% (interest tax deductible)

Mortgage: $380,000 at 2.6%, 5 yr term, amortized over 30yr to maximize cash flow in case of emergency, but I am setting aside enough each month for lump sum payments of $50,000 every year and enough to pay off the mortgage at the end of the term so I wouldn't need to renew.

From what I understand, if you can't leave money in the corporation, there isn't really a tax benefit to incorporating because of the costs and fees but I'm wondering about saving by income splitting with my spouse and if I would save by getting paid in dividends versus salary.

At this point, I basically need all of my income for expenses and debt because I just started working.  I'm not sure what other strategies would be available to save.

Thank you.

Hi Marcus,

In a word, yes. Incorporating your business will definitely save you money if done correctly. In fact, I would say you're crazy not to in your circumstances.

You're absolutely correct in stating that the benefits of incorporation generally tend to stem from income splitting and tax deferral if you leave the funds in the company. There is some tax arbitrage in terms of dividend vs. salary, especially if you save on the payroll taxes as you would in your wife's case.

In addition - including your 5 year old as a shareholder is prudent - just don't bother with dividends or salary until they reach 18 (as the money will just be attributed as income back to you).

There are also benefits in terms of limited liability - but in the grand scheme of things you would save about 10% in taxes or potentially more.

Cheers,

CPA CB

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Heckler on November 16, 2015, 11:33:51 PM
We are on the verge of mortgage free at 41, and ready to kick investing into high gear next year. However, I'm still tryin to figure out the TFSA vs RSP question.

Vik had a great post that helped.

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Quote
Vik February 9, 2015, 10:16 am
Older post, but I thought I would add to the Canadian content.

I put $$ into my RRSP at 22% – 29% Federal Tax rate [I’ll ignore the Provincial Tax rates as I contributed in 3 Provinces so it gets messy].

At 60 I’ll be getting ~$8400 CPP [2015$] and 67 I’ll get a total of ~$15,100 [2015$] CPP + OAS.

Currently the lowest Federal Tax bracket is 15% at $44.7K and below.

At 71 I’ll have to convert the RRSP to a RRIF at take out ~7% minimum which grows to ~16% over time. If my RRSP is too large I’ll end up being bumped up to a higher marginal rate tax bracket and potentially get some OAS benefits clawed back increasing my effective tax rate two ways.

It would be most advantageous to keep total income below ~$44.7K to get the biggest tax deferral benefit. At 71 that means $44.7K – $15.1 = $29.6K would be the maximum mandatory withdrawal. That corresponds to a RSSP worth $422K at 2015 $. Although keep in mind each year after 71 I’ll have to take out more $$ and that extra $$ will get taxed at the higher marginal tax rate. So it would be preferable to have shifted to even less RRSP income by this point and more TFSA or non-registered income.

My RRSP is already projected to exceed that adjusted for inflation so contributing more now will provide a much smaller deferred tax benefit than it did earlier in the program. If I am earning some unexpected income in my older years and/or tax rates go up I could quite possibly pay more tax then I would have if I had simply used the same $ for a non-registered investment.

There are a couple ways to deal with this:

1. analyze your income needs over time factoring in all sources of income. Identify any opportunities to harvest deferred tax benefits as you go along and withdraw from your RRSP at that time.

2. Stop RRSP contributions and max out TFSA accounts and then invest in non-registered accounts.

For example any year where my taxable income is less than $44.7K it makes sense to withdraw the difference from my RRSP and invest it in my TFSA or non-registered accounts. Say when I am 40 I have one year I travel a lot and only earn $15K from my consulting business [after deductions] I would take $29.7K out of my RRSP that year and see it taxed at 15% which is much lower than the 22%-29% I would have paid when I put the $$ in the RRSP and when I get to 71 I’ll have less $$ in the RRSP and reach a lower mandatory withdrawal rate.

If my projections for the later years of retirement indicate that mandatory RRSP withdrawals will be in a higher rate than what when I put them even if I jumped up to the 22% marginal rate bracket which is triggered between $44.7K and $89.4K. I might start withdrawing more from my RRSP earlier to optimize the actual taxes I pay.

Some important RRSP/TFSA tax facts

– RRSP is a tax deferral account it works best if you are making less $$ when you take the money out vs. when you put it in. If you are in a low tax bracket when you are saving you might be better off to max out your TFSA or invest in a non-registered account paying the tax owed now at the low rate and enjoying tax free income later in life.

– your RRSP only really works if you put the principal amount [say $1K] AND the tax credit [say $300] into the account. You are going to have to pay that tax later so if you spend the credit now you don’t get the full benefit of the plan.

– RRSP withdrawals become mandatory ay 71 so check the current rates and model your unavoidable income $$ in the later years to see what will happen.

– There is no penalty for early withdrawal from a RRSP. There is a witholding tax, but that is just a payment of tax owing to the Gov’t. When you file your return you will use that as tax already paid against the year’s burden. If you take your year’s RRSP withdrawal out in Dec and then file that year’s tax return as quickly as possible the next year you can minimize the amount of time the Gov’t has your money and you do not.

– you accrue TFSA contribution room every year regardless of income so you can [today 2015] put $5.5K/yr of any RRSP withdrawals into your TFSA to shelter its growth. This money is never taxed again and does not impact any income tested old age benefits.

– you will pay capital gains tax on income generated from non-registered accounts, but this is at a lower rate than the same gains inside a RRSP get taxed when you take them out [assuming you are earning the same base income at both times.

Sorry for the long comment, but it’s a topic worth thinking about.

My summary is:

– evaluate the income needs for your whole retirement [including CPP + OAS]

– project your RRSP value throughout your retirement and calculate the mandatory withdrawal income combined with CPP + OAS

– assess the likely input tax rate vs. output tax rate and use this to identify when it makes sense to put $$ in your RRSP and when to take it out.

– don’t miss out on opportunities to withdraw from your RRSP early at low tax rates if you have low income year.

– when you start using your investments to fund your lifestyle consider using RRSP $$ first until your RRSP is projected to provide a tax favourable income stream in your later years combined with CPP + OAS.

– don’t forget to max out your TFSA account every year to shelter your capital gains

– Canada has some pretty great retirement savings plans, but they take some analysis of your specific situation to get the most out of them.

— Vik

reply

Lori March 21, 2015, 8:54 am
Just remember that when you withdraw from an RRSP you don’t get that contribution room back, so you are permanently reducing your contribution limit.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on November 17, 2015, 04:43:02 PM
If you are making a higher income, especially over that $90,000 mark, and project low expenses in retirement, the RRSP is a great tool. But yeah, you need to be careful not to run your RRSP value too high because you don't want to get hit with high taxes and especially benefit clawbacks. So your RRSP number ultimately depends on your individual circumstances. Some important factors would be retirement age, working income, retirement expenses, and other income (dividends in taxable accounts, part time jobs, your own business, etc).

Aside from this, if you are married it would generally be smart to make sure you and your spouse end up with roughly equal RRSP account valuations so you can maximize the income and minimize the taxes when you retire (assuming you don't convert to RRIF immediately).

Personally, my goal is to build a relatively substantial RRSP account for the following reasons.
1) I make a good salary and I "re-invest" my tax refund immediately because I send in T1213 forms which reduces my taxes withheld on my paycheques
2) We plan to retire early (before 45 for sure), so I plan to withdraw lots of money for retirement expenses between 45 and 65. In fact, I aim to have virtually no RRSP money left by the time I turn 71. This means the RRSP is essentially a bridge for income. During this time my TFSA will compound nicely for 20 years making for fat tax free retirement savings when I'm 65.
3) Once I retire, I aim to withdraw about $20,000 a year each ($40,000 total) in today's dollars. The blended tax rates for this will be less than 7% once I add a few deductions. Not bad considering I'm getting about 35% back for RRSP contributions in my tax bracket.

All this said, I won't run up the value of my RRSP over somewhere around $250,000 each. If I have more to save, than I'm certainly best off to fill first the TFSA, then taxable accounts (again balanced between my wife and I for even dividend income in retirement).

I know many accountants will disagree because they see RRSP horror stories when their clients turn 71. But the value of the RRSP should not be dismissed for someone with low retirement expenses.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 18, 2015, 07:33:49 AM
If you are making a higher income, especially over that $90,000 mark, and project low expenses in retirement, the RRSP is a great tool. But yeah, you need to be careful not to run your RRSP value too high because you don't want to get hit with high taxes and especially benefit clawbacks. So your RRSP number ultimately depends on your individual circumstances. Some important factors would be retirement age, working income, retirement expenses, and other income (dividends in taxable accounts, part time jobs, your own business, etc).

Aside from this, if you are married it would generally be smart to make sure you and your spouse end up with roughly equal RRSP account valuations so you can maximize the income and minimize the taxes when you retire (assuming you don't convert to RRIF immediately).

Personally, my goal is to build a relatively substantial RRSP account for the following reasons.
1) I make a good salary and I "re-invest" my tax refund immediately because I send in T1213 forms which reduces my taxes withheld on my paycheques
2) We plan to retire early (before 45 for sure), so I plan to withdraw lots of money for retirement expenses between 45 and 65. In fact, I aim to have virtually no RRSP money left by the time I turn 71. This means the RRSP is essentially a bridge for income. During this time my TFSA will compound nicely for 20 years making for fat tax free retirement savings when I'm 65.
3) Once I retire, I aim to withdraw about $20,000 a year each ($40,000 total) in today's dollars. The blended tax rates for this will be less than 7% once I add a few deductions. Not bad considering I'm getting about 35% back for RRSP contributions in my tax bracket.

All this said, I won't run up the value of my RRSP over somewhere around $250,000 each. If I have more to save, than I'm certainly best off to fill first the TFSA, then taxable accounts (again balanced between my wife and I for even dividend income in retirement).

I know many accountants will disagree because they see RRSP horror stories when their clients turn 71. But the value of the RRSP should not be dismissed for someone with low retirement expenses.

It's absolutely valuable.

I tend to push the TFSA a bit more as truly the only drawback to this account is the cap limit presently. It's the all-purpose screwdriver of investment accounts, good for many things, just limited in terms of size.

The RRSP is a great tool - but it's more of a hammer. People need to be careful with it, or you end up hitting yourself with it.

To be clear, the MMM crowd is different from the 'average' Canadian.

RRSP refunds aren't really 'refunds', it is a tax deferral to re-invest. What we see is that people end up buying a new TV instead of reinvesting, which destroys the purpose of the RRSP in the first place. This, paired with restrictions and income related issues in retirement can lead people off a financial cliff and actually be a detriment.

In short, make sure you use the RRSP and plan it ahead of time like you Tuxedo - It's important to know how/when to use it.

Cheers

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: FI40 on November 18, 2015, 07:44:47 AM
If you are making a higher income, especially over that $90,000 mark, and project low expenses in retirement, the RRSP is a great tool. But yeah, you need to be careful not to run your RRSP value too high because you don't want to get hit with high taxes and especially benefit clawbacks. So your RRSP number ultimately depends on your individual circumstances. Some important factors would be retirement age, working income, retirement expenses, and other income (dividends in taxable accounts, part time jobs, your own business, etc).

Aside from this, if you are married it would generally be smart to make sure you and your spouse end up with roughly equal RRSP account valuations so you can maximize the income and minimize the taxes when you retire (assuming you don't convert to RRIF immediately).

Personally, my goal is to build a relatively substantial RRSP account for the following reasons.
1) I make a good salary and I "re-invest" my tax refund immediately because I send in T1213 forms which reduces my taxes withheld on my paycheques
2) We plan to retire early (before 45 for sure), so I plan to withdraw lots of money for retirement expenses between 45 and 65. In fact, I aim to have virtually no RRSP money left by the time I turn 71. This means the RRSP is essentially a bridge for income. During this time my TFSA will compound nicely for 20 years making for fat tax free retirement savings when I'm 65.
3) Once I retire, I aim to withdraw about $20,000 a year each ($40,000 total) in today's dollars. The blended tax rates for this will be less than 7% once I add a few deductions. Not bad considering I'm getting about 35% back for RRSP contributions in my tax bracket.

All this said, I won't run up the value of my RRSP over somewhere around $250,000 each. If I have more to save, than I'm certainly best off to fill first the TFSA, then taxable accounts (again balanced between my wife and I for even dividend income in retirement).

I know many accountants will disagree because they see RRSP horror stories when their clients turn 71. But the value of the RRSP should not be dismissed for someone with low retirement expenses.

Very smart and I'm planning the same thing. For me it's even more of a no-brainer as I'm at a 43.41% marginal tax rate. Probably though, my RRSP won't be large enough to get me from FI to 65, so I'll only start withdrawing from it once I'm 50-55 or so. Might as well keep it growing tax-deferred as long as possible.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on November 18, 2015, 09:15:53 AM
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Heckler on November 18, 2015, 12:37:39 PM
So whats the difference between an RRSP and RRIF?   What are the implications for someone wanting income from thier RRSP at age 50?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on November 18, 2015, 01:17:58 PM
So whats the difference between an RRSP and RRIF?   What are the implications for someone wanting income from thier RRSP at age 50?

RRIF= you have to take money out of it. RRSP has no such restrictions.

The amount (which is a percentage) varies based on your age

http://www.cra-arc.gc.ca/E/pub/tp/ic78-18r6/ic78-18r6-e.html

IOW: Don't convert til you have to!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on November 18, 2015, 01:27:16 PM
So whats the difference between an RRSP and RRIF?   What are the implications for someone wanting income from thier RRSP at age 50?

You can convert an RRSP to an RRIF at any time. However once you convert, you can no longer make contributions and you have to make minimum withdrawals. Before age 71 the withdrawals are really quite small. The formula is (Market Value on Jan 1 of x year) x [1/(90-age on Jan 1 of x year)]. At 45 your withdrawal would be 2.2% of portfolio value, at age 65 your withdrawal would be 4% of portfolio value. After 71, you have to draw down 7 - 20% of portfolio value, increasing each year.

If you keep it as an RRSP you can draw as much as you want but you pay 15% withholding tax at the time of withdrawal. This is essentially a downpayment for future income tax. Once you file income taxes you may owe more, or you may get a refund.

With both strategies you pay tax rates at the same rate as regular employment income, but you don't have to pay EI, CPP, etc.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: yyc-phil on November 18, 2015, 02:31:32 PM
Thank you again for the excellent advice here. I am 57 and in the process of pulling the plug next spring when I turn 58. Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order, but I still have a few questions about government pension benefits.

1) CPP: According to Service Canada, I should be receiving a monthly CPP payment of $1,000 when I turn 65, or $1,400 if I wait until 70. If I stop contributing to CPP at age 58 when I stop working next year, will the amount of CPP change whether I apply at 65 or 70?

2) OAS: My understanding is that everyone who at 65 has an individual income under $118,055 is eligible to receive a maximum monthly OAS payment of $569.95. The OAS is not tied whatsoever to CPP payments so if I decide to delay CPP until I turn 70, I would still receive the maximum OAS of $569.95. Is this correct?

3) GIS: Regarding the GIS amount (me receiving OAS, my wife not receiving it), the supplement I could receive would be based on our combined income (excluding OAS Pension and GIS). Assuming my income from RRSP withdrawals is $20,000, Service Canada tells me my combined monthly OAS pension and GIS should be $1,016.38. Am I correct that when i start receiving the CPP payment at age 70, the CPP will be treated as income for the calculation of the OAS/GIS? When I convert my RRSP into a RRIF at 71, RRIF payments will be taxable, but will they also count as income for the calculation of pension payments?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 19, 2015, 07:18:28 AM
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?

Hey Dave

If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.

The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.

For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: FI40 on November 19, 2015, 07:24:58 AM
Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order

You might want to read just above in this thread, there is a discussion about how it can be beneficial for you to deplete your RRSP before you apply for OAS/GIS. So you may want to change your order of withdrawals. TFSA should always be last, as well.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 19, 2015, 07:25:18 AM
Thank you again for the excellent advice here. I am 57 and in the process of pulling the plug next spring when I turn 58. Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order, but I still have a few questions about government pension benefits.

1) CPP: According to Service Canada, I should be receiving a monthly CPP payment of $1,000 when I turn 65, or $1,400 if I wait until 70. If I stop contributing to CPP at age 58 when I stop working next year, will the amount of CPP change whether I apply at 65 or 70?

2) OAS: My understanding is that everyone who at 65 has an individual income under $118,055 is eligible to receive a maximum monthly OAS payment of $569.95. The OAS is not tied whatsoever to CPP payments so if I decide to delay CPP until I turn 70, I would still receive the maximum OAS of $569.95. Is this correct?

3) GIS: Regarding the GIS amount (me receiving OAS, my wife not receiving it), the supplement I could receive would be based on our combined income (excluding OAS Pension and GIS). Assuming my income from RRSP withdrawals is $20,000, Service Canada tells me my combined monthly OAS pension and GIS should be $1,016.38. Am I correct that when i start receiving the CPP payment at age 70, the CPP will be treated as income for the calculation of the OAS/GIS? When I convert my RRSP into a RRIF at 71, RRIF payments will be taxable, but will they also count as income for the calculation of pension payments?

Hi YK -

1) Yes, the amount will change. By exactly how much would be impossible for me to know off hand. Technically speaking, for most people it is actually better to commence the pension at Age 60 vs. 65 based on Canadian mortality rates.

2) OAS starts to be clawed back from $72,809, and is effectively $nil at the $118k figure you reference. You're right that the receipt of the payments are not related to one another.

3) Yes, RRSP and RRIF payments both count as income for the purposes of any clawback payments in regard to the OAS and GIS.

Hope this helps!

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 19, 2015, 07:33:37 AM
Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order

You might want to read just above in this thread, there is a discussion about how it can be beneficial for you to deplete your RRSP before you apply for OAS/GIS. So you may want to change your order of withdrawals. TFSA should always be last, as well.

Very good point - I didn't see that.

This is absolutely correct as the RRSP is really a handcuff as it becomes fixed (and forced) income. Better to get rid of this sooner than your other investments.

Now, where did I put my coffee...

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: yyc-phil on November 19, 2015, 09:48:47 AM
Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order

You might want to read just above in this thread, there is a discussion about how it can be beneficial for you to deplete your RRSP before you apply for OAS/GIS. So you may want to change your order of withdrawals. TFSA should always be last, as well.

Very good point - I didn't see that.

This is absolutely correct as the RRSP is really a handcuff as it becomes fixed (and forced) income. Better to get rid of this sooner than your other investments.

Now, where did I put my coffee...

Thanks FI40 and CPA CB. Depleting my RRSP before CPP/OAS pension payments kick in makes complete fiscal sense now that you pointed it out. I will revise my strategy accordingly. As for CPP, I take good note of your remark about Canadian mortality rates, and check into receiving it at 60 rather than 65 or even 70.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on November 19, 2015, 10:51:25 AM
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?

Hey Dave

If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.

The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.

For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.

THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 19, 2015, 01:04:26 PM
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?

Hey Dave

If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.

The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.

For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.

THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?


Okay,

Let me ignore what CRA is saying and look at this practically.

If you owe $13k - you should pay $13k. Maybe pay a few bits more to ensure you aren't charged interest, but do the due diligence here and make sure you will know what you owe, and pay it as precisely as possible. I suggest TaxTips.ca as this is a good resource that is easy to use for the average person.

Under this scenario, you should owe at the most a very minimal amount of interest, and at best, nothing. Pay what you owe - don't overpay by thousands to ensure otherwise.

Does this clear it up?

CPA CB

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on November 19, 2015, 04:21:58 PM
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?

Hey Dave

If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.

The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.

For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.

THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?


Okay,

Let me ignore what CRA is saying and look at this practically.

If you owe $13k - you should pay $13k. Maybe pay a few bits more to ensure you aren't charged interest, but do the due diligence here and make sure you will know what you owe, and pay it as precisely as possible. I suggest TaxTips.ca as this is a good resource that is easy to use for the average person.

Under this scenario, you should owe at the most a very minimal amount of interest, and at best, nothing. Pay what you owe - don't overpay by thousands to ensure otherwise.

Does this clear it up?

CPA CB

Ya.. I think. I just don't want to pay 6% interest on some amount because I'm "under" vs the 1st and 2nd quarters. I guess the worst would be 6% on $750 for 6 months plus 6% on $750 for 3 months (as I'm under by $750 for each Q based on 13000/4 = 3250)... which is what, $22.50 + $11.25 = $33.75.

I guess then I've paid extra in the 3rd Q which offsets it ever so slightly. At 6% it seems worth paying a little extra for Q4... but when do they count it to? To when you file, or just to the end of the financial year? IE if I paid $1k over for Q4, I know the 6% offsets any interest - down to zero but no further of course - but does it do it til Dec 31, or to April 31, or when I file?

Bleh. Ok, I get it - for $30 don't worry too much!

Thanks.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on November 25, 2015, 12:17:42 PM
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?

Hey Dave

If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.

The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.

For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.

THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?


Okay,

Let me ignore what CRA is saying and look at this practically.

If you owe $13k - you should pay $13k. Maybe pay a few bits more to ensure you aren't charged interest, but do the due diligence here and make sure you will know what you owe, and pay it as precisely as possible. I suggest TaxTips.ca as this is a good resource that is easy to use for the average person.

Under this scenario, you should owe at the most a very minimal amount of interest, and at best, nothing. Pay what you owe - don't overpay by thousands to ensure otherwise.

Does this clear it up?

CPA CB

Ya.. I think. I just don't want to pay 6% interest on some amount because I'm "under" vs the 1st and 2nd quarters. I guess the worst would be 6% on $750 for 6 months plus 6% on $750 for 3 months (as I'm under by $750 for each Q based on 13000/4 = 3250)... which is what, $22.50 + $11.25 = $33.75.

I guess then I've paid extra in the 3rd Q which offsets it ever so slightly. At 6% it seems worth paying a little extra for Q4... but when do they count it to? To when you file, or just to the end of the financial year? IE if I paid $1k over for Q4, I know the 6% offsets any interest - down to zero but no further of course - but does it do it til Dec 31, or to April 31, or when I file?

Bleh. Ok, I get it - for $30 don't worry too much!

Thanks.

It's counted from the later of January 1 or the initial instalment underpayment to the earlier of the due date or April 30.

In this sense - just plan for the worst and be surprised when it's slightly better.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 02, 2015, 10:18:23 AM
Hey there Can'eh'dians

I'm seeing a spike in questions regarding upcoming tax reforms that the Trudeau Government is looking to enact.

You've likely noticed I haven't made significant commentary on the subject for a few reasons - 1) Leading up to an election I didn't want to dive into political discussion, and 2) Until things are in black and white, it's hard to comment on what changes to expect.

The important thing is, contribute and top up that TFSA, lest it becomes a retroactive adjustment. A $4,500 dollar loss in room is quite substantial - better to pour the funds in now than learn you've lost the room later.

In addition - should you earn greater than about $200k per annum, be prepared for a significant (i.e. 15% increase) spike in your taxes on eligible (i.e. public corporations, or GRIP dividends from private companies).

In summary - wait and see. I'll be posting a long commentary when we get some solid figures and changes. Until then, if you earn under $200k per year, assume you'll see a few extra dollars (to be taken away by an expanded CPP). If it is more than $200k, expect a bit (lot) more in 2016.

Happy Wednesday!

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: wpgdude on December 02, 2015, 08:47:02 PM
I have a question regarding inheritance and estate taxes.  My mother passed away earlier this year.  She had her monthly income from two different sources, her RRIF which is cashed out by her estate, and an annuity, which was paid out directly to me.  My wife and I plan to give some money to charity in honour of my mom and I am just trying to figure out if it makes any difference from a tax perspective if the Estate makes the contribution vs me personally. The estate will have income for the year of ~160K and myself will be ~200k

I maxed out my RRSP contribution room to minimize as much taxes as I can as I don't normally fall into such a high tax bracket, but is there anything else I can do to minimize my taxes for the year?  I don't have any losses that I can claim in my investment account as I only opened up a taxable account this year and my investments are slightly up. 
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Freedomin5 on December 03, 2015, 04:55:56 AM
Posting to follow. This thread is very helpful!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 08, 2015, 02:19:49 PM
I have a question regarding inheritance and estate taxes.  My mother passed away earlier this year.  She had her monthly income from two different sources, her RRIF which is cashed out by her estate, and an annuity, which was paid out directly to me.  My wife and I plan to give some money to charity in honour of my mom and I am just trying to figure out if it makes any difference from a tax perspective if the Estate makes the contribution vs me personally. The estate will have income for the year of ~160K and myself will be ~200k

I maxed out my RRSP contribution room to minimize as much taxes as I can as I don't normally fall into such a high tax bracket, but is there anything else I can do to minimize my taxes for the year?  I don't have any losses that I can claim in my investment account as I only opened up a taxable account this year and my investments are slightly up.

Hi WPG Dude,

Sorry to hear regarding your mother.

I have some follow up questions regarding your inquiry -

For clarity, an inheritance in Canada is non-taxable to you. Technically speaking, the Estate is responsible for the tax bill.

There are two tax returns to file through an estate - the final return, and a rights and things return (which offer graduated tax rates like a regular return). The biggest advantage to a Rights and Things return is bumping accrued income due (but not yet paid) from the highest marginal rate to the lowest - such as her RRIF and Annuity payments forthcoming.

Did you commute the annuity at fair market value? Or is it just a change in beneficiary?

Her investments in the RRIF should be marked to market and either cashed out, or transferred to you. The capital gain is paid through her estate (tax wise) and you're left with the value of the shares on her date of death as your cost base.

In many cases, gifting shares of public corporations as a charitable contribution through her estate can be better than cashing out and paying fees etc.

Have the assets cleared probate at this time?

Are you including the transfer of assets in your income? If so, you shouldn't be.

Hope this helps - give me a bit more detail and I'm sure I can be more helpful


Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: wpgdude on December 09, 2015, 04:03:30 PM
Thank you for the reply CPA CB. 
Here is some more clarity on the situation.  My mother upon her retirement a few years earlier chose the buyout option from her employer and chose to purchase two annuities with the funds.  The annuities had 15 year guarantees with both myself and my sister as benefactors.  One of the annuities was to be paid out in full upon her death, which both my sister and I have received, while the second annuity allowed us to transfer the payments into mine and my sister's names.  (Gives me another source of investing income for the next 13 years)

Her RRIF's were cashed out upon the advice of her financial adviser, with the cost basis being the value of her funds on the day of her death.  All of these funds have been transferred into an estate account and my sister and I have only used this account to pay for matters with regards to settling my mother's affairs.  We don't want to touch it until her 2015 taxes are filed.

Almost all of her estate cleared probate a few months ago.  The only thing left is some farm land in Alberta, but it appears that farm land can be passed on tax free from a parent to child as long as the land has only ever been used for farming.  The land was appraised for sale in the fall of 2014 so we are using that as our cost basis going forward.

So I know that the estate is responsible for the tax bill of her RRIF and any other investments/possessions etc.  I am also positive that I am responsible personally for the income that has and will flow to me from the annuities as they had a 15 year guarantee with myself as one of the benefactors. 

I am not familiar with the term "Rights and Things return", but after a quick google search it doesn't sound as if much or any income would fall under this scenario, but we will let a tax professional handle the final return.

I only learned about the gifting of shares after the RRIF was cashed out, so unfortunately this doesn't seem to be an option for us now.

Thank you for your advice so far and any other help that you can give in terms of charitable giving, and which party might be best to give the giving. 
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Heckler on December 10, 2015, 01:50:06 AM
Is there any reason to not have every one of us sign this petition to increase the TFSA limit back to $10k?

https://petitions.parl.gc.ca/en/Petition/Details?Petition=e-3


Quote
Petition to the Minister of Finance
Whereas:
About half of adult Canadians currently have Tax Free Savings Accounts (TFSAs), which is a very high level of participation in a program that has only been available since 2009. Of those TFSA holders who have taken advantage of the current $10,000 limit, 60% earn $60,000 per year or less, demonstrating that the current TFSA limit is not a tool only for the "rich";

TFSAs are an excellent retirement savings tool for seniors who can no longer take advantage of Registered Retirement Savings Plans (RRSPS), and also for young Canadians who need a tax-effective means of saving for their future;

Opinion poll data has repeatedly shown that a majority of Canadians support retaining the current TFSA limit, and this support is consistent across age groups, income levels and regions of Canada; and
Canadians currently pay 43% of their income in taxes - more than they pay for food, shelter and clothing combined. Many of these tax dollars go to provide very generous pensions for government employees - pensions that the 80% of Canadians who do not work for government cannot afford for themselves but to which they contribute tens of billions of dollars every year. Retaining the TFSA limit of $10,000 is the least the government can do to help the vast majority of Canadians working in the private sector to save for a decent retirement for themselves and their families.

We, the undersigned, residents of Canada, request (or call upon) the Minister of Finance to leave the Tax Free Savings Account (TFSA) limit at $10,000 annually to ensure fairness for all working Canadians.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: yyc-phil on December 10, 2015, 09:11:34 AM
Is there any reason to not have every one of us sign this petition to increase the TFSA limit back to $10k?

https://petitions.parl.gc.ca/en/Petition/Details?Petition=e-3


Quote
Petition to the Minister of Finance
Whereas:
About half of adult Canadians currently have Tax Free Savings Accounts (TFSAs), which is a very high level of participation in a program that has only been available since 2009. Of those TFSA holders who have taken advantage of the current $10,000 limit, 60% earn $60,000 per year or less, demonstrating that the current TFSA limit is not a tool only for the "rich";

TFSAs are an excellent retirement savings tool for seniors who can no longer take advantage of Registered Retirement Savings Plans (RRSPS), and also for young Canadians who need a tax-effective means of saving for their future;

Opinion poll data has repeatedly shown that a majority of Canadians support retaining the current TFSA limit, and this support is consistent across age groups, income levels and regions of Canada; and
Canadians currently pay 43% of their income in taxes - more than they pay for food, shelter and clothing combined. Many of these tax dollars go to provide very generous pensions for government employees - pensions that the 80% of Canadians who do not work for government cannot afford for themselves but to which they contribute tens of billions of dollars every year. Retaining the TFSA limit of $10,000 is the least the government can do to help the vast majority of Canadians working in the private sector to save for a decent retirement for themselves and their families.

We, the undersigned, residents of Canada, request (or call upon) the Minister of Finance to leave the Tax Free Savings Account (TFSA) limit at $10,000 annually to ensure fairness for all working Canadians.

From a purely selfish perspective, keeping the TSFA limit where it currently sits would be in my best interests. But I think there are broader interests at stake here, which are well explained in several analysis such as these two below, which both conclude the same thing:

"There is absolutely no case — on either economic or equity grounds — for the doubling of TFSA contribution limits. The great majority of Canadians would enjoy no significant benefits. In fact, they would bear the burdens of an expanded TFSA by enduring reduced public services or bearing the increased taxes needed to offset the lost revenues," economist Rhys Kesselman, wrote in the PBO report.

http://d3n8a8pro7vhmx.cloudfront.net/broadbent/legacy_url/303/tfsa_report-en.pdf?1431294008

http://www.pbo-dpb.gc.ca/web/default/files/files/files/TFSA_2015_EN.pdf
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 10, 2015, 02:54:37 PM
Is there any reason to not have every one of us sign this petition to increase the TFSA limit back to $10k?

https://petitions.parl.gc.ca/en/Petition/Details?Petition=e-3


Quote
Petition to the Minister of Finance
Whereas:
About half of adult Canadians currently have Tax Free Savings Accounts (TFSAs), which is a very high level of participation in a program that has only been available since 2009. Of those TFSA holders who have taken advantage of the current $10,000 limit, 60% earn $60,000 per year or less, demonstrating that the current TFSA limit is not a tool only for the "rich";

TFSAs are an excellent retirement savings tool for seniors who can no longer take advantage of Registered Retirement Savings Plans (RRSPS), and also for young Canadians who need a tax-effective means of saving for their future;

Opinion poll data has repeatedly shown that a majority of Canadians support retaining the current TFSA limit, and this support is consistent across age groups, income levels and regions of Canada; and
Canadians currently pay 43% of their income in taxes - more than they pay for food, shelter and clothing combined. Many of these tax dollars go to provide very generous pensions for government employees - pensions that the 80% of Canadians who do not work for government cannot afford for themselves but to which they contribute tens of billions of dollars every year. Retaining the TFSA limit of $10,000 is the least the government can do to help the vast majority of Canadians working in the private sector to save for a decent retirement for themselves and their families.

We, the undersigned, residents of Canada, request (or call upon) the Minister of Finance to leave the Tax Free Savings Account (TFSA) limit at $10,000 annually to ensure fairness for all working Canadians.

From a purely selfish perspective, keeping the TSFA limit where it currently sits would be in my best interests. But I think there are broader interests at stake here, which are well explained in several analysis such as these two below, which both conclude the same thing:

"There is absolutely no case — on either economic or equity grounds — for the doubling of TFSA contribution limits. The great majority of Canadians would enjoy no significant benefits. In fact, they would bear the burdens of an expanded TFSA by enduring reduced public services or bearing the increased taxes needed to offset the lost revenues," economist Rhys Kesselman, wrote in the PBO report.

http://d3n8a8pro7vhmx.cloudfront.net/broadbent/legacy_url/303/tfsa_report-en.pdf?1431294008

http://www.pbo-dpb.gc.ca/web/default/files/files/files/TFSA_2015_EN.pdf

Paging Dr. Keynes, Paging Dr. Keynes

First, and foremost - the Broadbent Institute, and Mr. Kesselman. Passing this off as anything other than completely biased information is nonsensical. Similarly with the PBO - hey as the government we think we do a great job, so if you give us more we can do even better.

This is no different than emailing CRA (if they even accepted email, they don't.) and saying "gee, what should I pay this year?" Hey, Dr. Suzuki, what kind of SUV should I buy?

The general falsehood here is based on the writings of John Maynard Keynes, who is a notable economist who demonstrated a theoretically correct money multiplier effect of government spending on GDP. I.e. $1 of government spending would show up as $1.25 (hypothetically) in GDP figures.

This theory has never been proven to occur in the real world.

I take issue with appeals to a 'greater good' or a 'common goal' etc. These often evoke a sense of duty (when they shouldn't) and completely ignore rationality. Keynesian economics is oft invoked by the very left leaning Broadbent Institute as a means for 'progressive' change.

Currently (at least in the have not Province of Ontario) income tax rates are about to hit a whopping 53.53% on the highest bracket. Oh, and if you pay CPP/EI add quite a bit to this. Oh, and if you spend your disposable income, add another 13% to this on what's left.

Currently, taxes are higher than housing costs, clothing, and food combined for the average Canadian household.

The TFSA, and a measly $4,500 dollar per annum increase in contribution room provides at least an incentive to save and invest their money for retirement. This is entirely opposite to the current tax cut on the middle class as proposed by Trudeau, as that only applies to the 1/3rd of Canadians who even reach this bracket.

I struggle to find any rationale where making a select group pay for 50% of the taxes collected in Canada beneficial. Similarly, I struggle to find any rationale to find any rationale to cut taxes on a broad group, which excludes both the 'rich' and the 'poor'. Well. Other than votes.


 






Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Margie on December 10, 2015, 03:02:00 PM
Can you shed some light on the new "children's tax benefit"?

I just watched a video from Globe and Mail and the math looks incredibly generous.  Particularly the tax free part! 
My children are 10 + 13, household income of about 85 000.
Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 15, 2015, 09:27:22 AM
Can you shed some light on the new "children's tax benefit"?

I just watched a video from Globe and Mail and the math looks incredibly generous.  Particularly the tax free part! 
My children are 10 + 13, household income of about 85 000.
Thanks!

Hi there -

I can try! Although the details are a bit clandestine.

The new system is confusing due to this idea of 'means-testing' which isn't directly being disclosed. However, a Mathematics Prof at U of Ottawa came up with a formula which has been used as the back-end for the following website calculator: http://lepinski.net/lib-childcare-calc/

Your circumstances here would dictate a total benefit of $5,150 per annum, tax free.

My understanding is that this is to replace your old UCCB benefits ($1,440 per year), old Childcare Tax Benefit (probably around $1,000 tax free) and additional tax credits available to claim for dependents.

I would suggest it's likely revenue positive for you, as your family is right in that middle-class income tax bracket the Liberals were aiming for so heavily in the election.

The downside is that the plan really is unclear in its formulation, and cuts out everyone with family income over the $190,000 area (who would have at least around 50% of the UCCB previously after tax).









Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: snacky on December 15, 2015, 10:46:07 AM
Hi! Thanks for lending your time and expertise.

I am a single parent with two kids, one with a disability. I finished at university this year. I earn $60,000 per year and thanks to the kids, the disability, and university I have reliably had more nonrefundable credits, provincially and federally, than I can claim for the last... long time. I predict that this will continue for a few more years. at least until my school credits run out.

my question: currently I am ignoring my rrsp's, working on maxxing out my tfsa. I don't need to reduce my tax burden at present, and tax-sheltered growth is awesome. once I run out of contribution room i'll shift to the rrsp space. Is that the best strategy?

Also, I saw that you recommended against equities in an RRSP. so far all my investments are ETFs through Questrade. When I start my RRSP, what do I put in it for optimum tax advantages?

Thanks again!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on December 16, 2015, 12:46:58 AM
snacky, do you have the RDSP for your kid? If not, that first and foremost!! Let me know if you need help with the application.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: snacky on December 16, 2015, 08:43:35 AM
@scrubbyfish, I don't, as I have (not unreasonable) expectations that he will be able to have a job and get along ok when he's an adult. I won't really know how he will be until after puberty, so it's a calculated risk.

also I had him quite young, so if he needs support as an adult i'll still be working and able to help him for many years. If I retire at 55 (that's the plan) he'll be in his mid 30's.

So I have considered all this and think it's ok. Hopefully i'm not wrong!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on December 16, 2015, 10:28:55 AM
Hi snacky,

Even if all of those things prove true (as I expect they are for my son, too) he would still benefit from the RDSP in one or more ways. Also, the disability tax credit includes people with disabilities working in adulthood. It doesn't rely on inability to work, is flexible in disbursements permitted, can be rolled into other options, can be invested, and brings a massive grant up front each year, making your dollars many more. I don't mean to push it, though! If ever you decide you would like to pursue it, and need help navigating the language, process, etc, I will welcome your PM :)  If you decide not to, no problem!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: TrMama on December 16, 2015, 12:34:13 PM
New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on December 16, 2015, 01:23:05 PM
New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?

Duplex, never lived in by them? No, they can't claim primary residence. If ownership is split 3 ways, AFAIK income should be 'claimed' based on %age ownership. Anything else is tax fraud, unless incorporated with shareholder classes and differing dividends for the different classes.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 17, 2015, 07:41:36 AM
Hi snacky,

Even if all of those things prove true (as I expect they are for my son, too) he would still benefit from the RDSP in one or more ways. Also, the disability tax credit includes people with disabilities working in adulthood. It doesn't rely on inability to work, is flexible in disbursements permitted, can be rolled into other options, can be invested, and brings a massive grant up front each year, making your dollars many more. I don't mean to push it, though! If ever you decide you would like to pursue it, and need help navigating the language, process, etc, I will welcome your PM :)  If you decide not to, no problem!

Hi Snacky

I absolutely could not agree more with Scrubbyfish's comments. The RDSP is an excellent way to save for your child's future, as disabled persons who are able to work still face a significant reduction in earning capacity in their lifetime, and forced early retirement.

There really is no reason not to!

Cheers,

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 17, 2015, 07:49:55 AM
New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?

No, she definitely can't claim this as a principal residence if she's never lived here, nor entertained the possibility of living in the property. Strict rental properties are ineligible for this.

In addition, I agree that the income should be split amongst the owners.

A rollover into a company is possible and could be used to crystallize the small business capital gains deduction. But it has to be done very specifically as an active business, rather than just a passive investment.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on December 17, 2015, 11:49:18 AM
New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?

No, she definitely can't claim this as a principal residence if she's never lived here, nor entertained the possibility of living in the property. Strict rental properties are ineligible for this.

In addition, I agree that the income should be split amongst the owners.

A rollover into a company is possible and could be used to crystallize the small business capital gains deduction. But it has to be done very specifically as an active business, rather than just a passive investment.

Do you have more info on the small business stuff? We are - very vaguely - considering purchasing a commercial property with potential to have two rental units above it. The downstairs would be run as a business - at least, that's the plan. How does it work if we just let the downstairs and upstairs out? What entails an 'active' business? If you owned 3-4 rentals...? Commercial, residential?

Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: TrMama on December 17, 2015, 12:25:35 PM
New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?

In addition, I agree that the income should be split amongst the owners.


Thanks for the info. DH keeps telling me the principal residence thing is a gray area, which I thought sounded suspicious.

WRT to the income you referred to, do you mean the rental income? Or the income that will result from selling it?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 18, 2015, 07:12:16 AM
New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?

In addition, I agree that the income should be split amongst the owners.


Thanks for the info. DH keeps telling me the principal residence thing is a gray area, which I thought sounded suspicious.

WRT to the income you referred to, do you mean the rental income? Or the income that will result from selling it?

Both.

It is a gray area, in the sense that there are few hard and fast rules on the determination. The biggest one though is that it does need to be used at least in part as a personal property.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on December 18, 2015, 09:05:48 AM
New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?

No, she definitely can't claim this as a principal residence if she's never lived here, nor entertained the possibility of living in the property. Strict rental properties are ineligible for this.

In addition, I agree that the income should be split amongst the owners.

A rollover into a company is possible and could be used to crystallize the small business capital gains deduction. But it has to be done very specifically as an active business, rather than just a passive investment.

Do you have more info on the small business stuff? We are - very vaguely - considering purchasing a commercial property with potential to have two rental units above it. The downstairs would be run as a business - at least, that's the plan. How does it work if we just let the downstairs and upstairs out? What entails an 'active' business? If you owned 3-4 rentals...? Commercial, residential?

Thanks!

Broadly speaking,

The best bet is sticking with commercial real estate - as renting out units at a cost which is deductible from another company's 'active business income' slots the rental income into this category for the company.

The other option is employment of more than 5 full-time employees throughout the year. So it would then be a larger enterprise and considered an active business, rather than just passive investment income.

The difference is substantial, as triggering the QSBCD is significant in terms of tax savings ($800k in appreciation of the shares of your company). The caveat here is that the assets of the business need to be used to generate 'active business income' (50% in the preceding two years, and 90% at the time of sale). This can effectively wipe out $200k in taxes on a per partner basis.

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Heckler on December 22, 2015, 06:05:21 AM
What are the benefits of a taxable investment account holding Canadian equity vs maxing our RSP? 

We are long time married, ~40 y.o., and share finances equally, although I make 2.5x her salary. Mortgage is paid off in January, so 2016 will be the first year we can invest heavily (~70% of income planned).

Currently, we plan to max our TFSAs with VCN in the next few years, as that's a no brainer. My RRSP is 4x larger than hers, and I opened a spousal RSP this past year to equalize our taxable retirement income by ending up with equal RSP values of ~400k each in 10 years or less. 

We each have ~100k accumulated RSP room because we only saved 5-10% over the past 20 years (but mortgage free on 450k townhouse!), and by my calculations we will not be able to max both our RSPs in addition to our TFSAs in the next ten years.

We plan for combined 50k taxable income in retirement.


Question is - should I be opening a taxable investment account, or continue with my plan to use just our RSP accounts in addition to TFSAs?   Taxable just sounds wrong, unless RSPs are maxed already.  An unexpected inheritance will likely change that, but we're not planning for one.
 
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on December 22, 2015, 07:34:48 AM
What are the benefits of a taxable investment account holding Canadian equity vs maxing our RSP? 

We are long time married, ~40 y.o., and share finances equally, although I make 2.5x her salary. Mortgage is paid off in January, so 2016 will be the first year we can invest heavily (~70% of income planned).

Currently, we plan to max our TFSAs with VCN in the next few years, as that's a no brainer. My RRSP is 4x larger than hers, and I opened a spousal RSP this past year to equalize our taxable retirement income by ending up with equal RSP values of ~400k each in 10 years or less. 

We each have ~100k accumulated RSP room because we only saved 5-10% over the past 20 years (but mortgage free on 450k townhouse!), and by my calculations we will not be able to max both our RSPs in addition to our TFSAs in the next ten years.

We plan for combined 50k taxable income in retirement.


Question is - should I be opening a taxable investment account, or continue with my plan to use just our RSP accounts in addition to TFSAs?   Taxable just sounds wrong, unless RSPs are maxed already.  An unexpected inheritance will likely change that, but we're not planning for one.

It really depends of your actual tax bracket vs retirement tax bracket. If like me, you actual tax rate is higher than expected retirement one, RSP is a no-brainer. Also consider your A.A. as RSP is a better place for US and Int. holdings and taxable account is better for Canadians holdings. I was in a similar situation lately (almost paid-off 350k$ house, RSP maxed out but TFSA with some room available).  We are now maxing out TFSA over the next 5 years and keep an A.A. of 30-35%Canadian, 45%US and 20-25%Int.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Joan-eh? on December 28, 2015, 06:52:01 PM
Hi there! What do you know of flow through funds? Have you seen them used?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on January 04, 2016, 02:51:03 PM
Hi there! What do you know of flow through funds? Have you seen them used?
Hi Joan,

In what context?

Cheers,
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: SweetLife on January 05, 2016, 01:15:37 PM
Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...

My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?

THank you!!! Hope you had a wonderful New Years! 
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on January 05, 2016, 01:34:52 PM
Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...

My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?

THank you!!! Hope you had a wonderful New Years!

You normaly pay tax on capital gain wich is calculated by today's value minus 2011 value. Let's say "your" half worth 20,000$ back in 2011 and today it worth 30,000$, capital gain is 10,000$ but you will pay taxes on 5,000$ (50% of capital gain is taxable).
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on January 07, 2016, 07:46:33 AM
Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...

My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?

THank you!!! Hope you had a wonderful New Years!

Hi Sweetlife -

What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).

The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -

Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.

Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!

Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.

Hope this helps!



Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on January 07, 2016, 09:12:15 AM
Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...

My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?

THank you!!! Hope you had a wonderful New Years!

Hi Sweetlife -

What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).

The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -

Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.

Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!

Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.

Hope this helps!

Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: NoCantInCanada on January 07, 2016, 10:57:06 AM
New question. What is the best strategy to minimize tax burden after selling an income property? The property is a duplex in BC and has no mortgage. Property is owned between 3 family members (3 different households). The lowest income owner claims, and lives off the current rental income. She is also a senior on disability and does not own any other property. She lives with owner #2. Her income is <$40K/yr. Can she claim this was her "primary residence" and pay no tax, since she owns no other property?

No, she definitely can't claim this as a principal residence if she's never lived here, nor entertained the possibility of living in the property. Strict rental properties are ineligible for this.

In addition, I agree that the income should be split amongst the owners.

A rollover into a company is possible and could be used to crystallize the small business capital gains deduction. But it has to be done very specifically as an active business, rather than just a passive investment.

Do you have more info on the small business stuff? We are - very vaguely - considering purchasing a commercial property with potential to have two rental units above it. The downstairs would be run as a business - at least, that's the plan. How does it work if we just let the downstairs and upstairs out? What entails an 'active' business? If you owned 3-4 rentals...? Commercial, residential?

Thanks!

Broadly speaking,

The best bet is sticking with commercial real estate - as renting out units at a cost which is deductible from another company's 'active business income' slots the rental income into this category for the company.

The other option is employment of more than 5 full-time employees throughout the year. So it would then be a larger enterprise and considered an active business, rather than just passive investment income.

The difference is substantial, as triggering the QSBCD is significant in terms of tax savings ($800k in appreciation of the shares of your company). The caveat here is that the assets of the business need to be used to generate 'active business income' (50% in the preceding two years, and 90% at the time of sale). This can effectively wipe out $200k in taxes on a per partner basis.

Just wanted to add my two-cents on this.

The turning of "passive rental income" to "active rental income" only applies to "associated corporations" (too technical to get into, but essentially two corporations owned by the same shareholders).  Rental income earned from a non-associated corporation is treated as "passive income", unless the employees test is met.  Putting a commercial rental property into a corporation will not qualify one for the capital gains exemption.  So please be aware of this.

In addition, as a result of the Canadian tax increases in 2016 there is now an even more significant tax cost on a flow-through basis (income earned and taxed in a corporation then distributed to the shareholder).  Creating a corporation to hold passive investments will result in an increase in tax rather than just holding the investment personally.  However, when dealing with commercial or residential real estate investments there may be liability exposures that would warrant the introduction of a corporation.

My first post, glad I came across the forum and look forward to a few more.

Cheers
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on January 07, 2016, 12:33:02 PM
Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...

My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?

THank you!!! Hope you had a wonderful New Years!

Hi Sweetlife -

What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).

The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -

Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.

Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!

Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.

Hope this helps!

Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?

$3,800 on a $20k capital gain - yes.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Joan-eh? on January 07, 2016, 07:07:39 PM
Hi there! What do you know of flow through funds? Have you seen them used?
Hi Joan,

In what context?

Cheers,

It's my understanding that the mining industry and CRA offer flow-through shares where they shareholder benefits from the expenses, in order to reduce taxes. And that if one has and influx of income they could be useful. I'd be really curious to know what you think, not many people talk about this
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: NoCantInCanada on January 07, 2016, 08:36:34 PM
Hi there! What do you know of flow through funds? Have you seen them used?
Hi Joan,

In what context?

Cheers,

It's my understanding that the mining industry and CRA offer flow-through shares where they shareholder benefits from the expenses, in order to reduce taxes. And that if one has and influx of income they could be useful. I'd be really curious to know what you think, not many people talk about this


I'll throw another of my 2 cents in here. 

Flow through shares were introduced in Canada over a half-century ago to stimulate investment in resource exploration corporations.  Essentially these corporations (or more often flow-through limited partnerships) renounce the exploration and development expenses to the investors holding their shares.  These corporations often have no need for these expenses due to large taxable losses.  The investors can then take these expenses as a reduction in their taxable income in the year.

To provide a simplified example, let's assume an investor in the highest marginal tax bracket of 50% (a hypothetical bracket but in 2016 many provinces will exceed 50%).  The investor puts in $10,000 into the investment. 

In the year of investment (let's say 2016) the investor can generally expect the full amount of the investment basis to be returned through the renunciation of expenses.  As such the investor would receive a deduction from income in the amount of $10,000 from income, and would reduce their taxes payable by $5,000.  This potentially reduces their risk in the investment as they have received a refund of half their investment.

The cost base in the investment is reduced to nil in flow through shares as a result of the renunciation.  Assuming the shares retain their value of $10,000.  When they are sold this would generate a capital gain, which is included at 50%, for a taxable capital gain of $5,000.  The taxes payable on this would be $2,500 (50% x $5,000). 

An investor in this situation is ahead $2,500.  They received a refund of $5,000 and paid only $2,500 in tax.  They also received their investment back.  Sounds great right?  Why isn't everyone doing this?

These products are a favourite for investment brokers, they often come with a very healthy commission to those who sell them.  I would strongly recommend that you understand these investments fully before throwing money into them.  Many of people I have talked with have only been able to remember the great tax refund they received, but not how they ultimately did on the investment (which may have been at a large loss).

These investments carry significant risk.  In our example we assumed that the investor receives their $10,000 back.  However, this is often not the case.  These entities often post very large losses and their value is often significantly less than the $10,000 after the renunciation of expenses - even with the renunciation they may still have lost money.   

A very flashy investment product that promises a large tax refund.  But, I am a big fan of the saying "Do not let the tax tail wag the dog".  Make sure you understand the risk associated with these investments before entering them.  If you take a look at the literature produced by the entities that distribute these investments they almost always assume the investment retains it's value, which is rarely the case. 

These investments do work in the right situations but you must look at each situation on it's own facts.  (and if you are not in the highest income bracket likely not a consideration).

Hope this helps a little.  Let me know if anything above isn't clear.

Cheers.   
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: SweetLife on January 08, 2016, 04:46:36 PM
Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...

My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?

THank you!!! Hope you had a wonderful New Years!

Hi Sweetlife -

What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).

The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -

Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.

Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!

Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.

Hope this helps!

Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?

$3,800 on a $20k capital gain - yes.



Thank you both!!! I will print this out to show my brother next time it comes up :) He tends to steam roll over me so this way hopefully it won't go south :)





Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on January 09, 2016, 07:07:05 AM
Hi there! What do you know of flow through funds? Have you seen them used?
Hi Joan,

In what context?

Cheers,

It's my understanding that the mining industry and CRA offer flow-through shares where they shareholder benefits from the expenses, in order to reduce taxes. And that if one has and influx of income they could be useful. I'd be really curious to know what you think, not many people talk about this


I'll throw another of my 2 cents in here. 

Flow through shares were introduced in Canada over a half-century ago to stimulate investment in resource exploration corporations.  Essentially these corporations (or more often flow-through limited partnerships) renounce the exploration and development expenses to the investors holding their shares.  These corporations often have no need for these expenses due to large taxable losses.  The investors can then take these expenses as a reduction in their taxable income in the year.

To provide a simplified example, let's assume an investor in the highest marginal tax bracket of 50% (a hypothetical bracket but in 2016 many provinces will exceed 50%).  The investor puts in $10,000 into the investment. 

In the year of investment (let's say 2016) the investor can generally expect the full amount of the investment basis to be returned through the renunciation of expenses.  As such the investor would receive a deduction from income in the amount of $10,000 from income, and would reduce their taxes payable by $5,000.  This potentially reduces their risk in the investment as they have received a refund of half their investment.

The cost base in the investment is reduced to nil in flow through shares as a result of the renunciation.  Assuming the shares retain their value of $10,000.  When they are sold this would generate a capital gain, which is included at 50%, for a taxable capital gain of $5,000.  The taxes payable on this would be $2,500 (50% x $5,000). 

An investor in this situation is ahead $2,500.  They received a refund of $5,000 and paid only $2,500 in tax.  They also received their investment back.  Sounds great right?  Why isn't everyone doing this?

These products are a favourite for investment brokers, they often come with a very healthy commission to those who sell them.  I would strongly recommend that you understand these investments fully before throwing money into them.  Many of people I have talked with have only been able to remember the great tax refund they received, but not how they ultimately did on the investment (which may have been at a large loss).

These investments carry significant risk.  In our example we assumed that the investor receives their $10,000 back.  However, this is often not the case.  These entities often post very large losses and their value is often significantly less than the $10,000 after the renunciation of expenses - even with the renunciation they may still have lost money.   

A very flashy investment product that promises a large tax refund.  But, I am a big fan of the saying "Do not let the tax tail wag the dog".  Make sure you understand the risk associated with these investments before entering them.  If you take a look at the literature produced by the entities that distribute these investments they almost always assume the investment retains it's value, which is rarely the case. 

These investments do work in the right situations but you must look at each situation on it's own facts.  (and if you are not in the highest income bracket likely not a consideration).

Hope this helps a little.  Let me know if anything above isn't clear.

Cheers.

Everything our newest and presumed CA says above is correct.

In addition - the CRA heavily audits FTS as it's been a subject of abuse previously. This can mean an arbitrary change to your tax return that would reverse the expenses and capital flow through and a change to interest or a deemed dividend, etc.

Personally I've never really recommended people get into these vehicles, or mining stocks in general. The Financial Statements are prepared under a specific set of rules which make it all but impossible to compare to other stocks unless you are very financially sophisticated.

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Joan-eh? on January 09, 2016, 05:52:38 PM
Thank you so much for the details! Do you have first hand experience with increased audits when people use them?

I'm further called to question when it might be worth taking an unpaid leave because of taxes.
I'm in a once in a lifetime situation in which I will hit the 51% tax bracket. (Commuting a pension)

Since the pension is splittable, is the cv amount splittable with hubby in this tax year ?
Can any business expenses be used against the cv amount?

I'm trying to envision what the tax implications,  strategies and opportunities are. What sort of "income" is the money treated as?

Any advice?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: NoCantInCanada on January 09, 2016, 09:23:38 PM
Thank you so much for the details! Do you have first hand experience with increased audits when people use them?

I'm further called to question when it might be worth taking an unpaid leave because of taxes.
I'm in a once in a lifetime situation in which I will hit the 51% tax bracket. (Commuting a pension)

Since the pension is splittable, is the cv amount splittable with hubby in this tax year ?
Can any business expenses be used against the cv amount?

I'm trying to envision what the tax implications,  strategies and opportunities are. What sort of "income" is the money treated as?

Any advice?

Just for some preliminary info, how much above the maximum tax-deferred transfer to a locked in plan are you looking at?

Also assuming no RRSP contribution room available?

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: K-ice on January 09, 2016, 09:39:34 PM
Where can I get information about small business tax & structure?

I want to run a few scenarios.

A) Self employed make 60K claim as an individual.  (Anticipated situation for 2016, if we have a good year & change nothing)

Or

B) Form a business and pay myself salary of 30K and keep 30k in the business.

Or

C) Form a business and pay myself dividends of 30K and keep 30k in the business.

Or maybe some combo if B&C

I think I would prefer a sol proprietorship but if there are any tax advantages me & my SO may be partners. Currently SO "Volounters" with the "business" a bit. But SO makes salary more than 60K so income splitting doesn't make sense right now.

I know very little about this so if someone can point me to a few reliable sites I'm eager to learn.







 
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: SweetLife on January 10, 2016, 08:26:29 AM
Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...

My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?

THank you!!! Hope you had a wonderful New Years!

Hi Sweetlife -

What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).

The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -

Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.

Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!

Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.

Hope this helps!

Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?

$3,800 on a $20k capital gain - yes.

Ok one more question to this ... is it possible to put the proceeds from the sale directly into RRSP's to avoid capital gains (I have room there )? Is there any way to avoid capital gains? (I have to ask as I just found out (the family) is putting up our jointly owned property (200 acres) for sale this year (two of the 5 of us want their money out - so the way the will was written it gets sold). Which means capital gains on this property as well... ugh I have a headache just thinking of the tax implications.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: jambongris on January 10, 2016, 09:53:45 AM
CPA CB,

I have a question about child care expense deductions. The deduction limit is currently sitting at $8000 dollars per child. If I have two children under the age of 6 can I only claim $8k per child or are the deductions transferrable between children. For example, if we incur expenses of $10,000 for one child and $6000 for the other can we still claim the full $16,000? Form T778 (http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-15e.pdf) seems to imply that you can based on the way the calculations are presented and I couldn't find anything in the instructions that clarified the situation one way or another.

Thanks.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: NoCantInCanada on January 10, 2016, 10:01:22 AM
Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...

My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?

THank you!!! Hope you had a wonderful New Years!

Hi Sweetlife -

What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).

The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -

Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.

Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!

Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.

Hope this helps!

Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?

$3,800 on a $20k capital gain - yes.

Ok one more question to this ... is it possible to put the proceeds from the sale directly into RRSP's to avoid capital gains (I have room there )? Is there any way to avoid capital gains? (I have to ask as I just found out (the family) is putting up our jointly owned property (200 acres) for sale this year (two of the 5 of us want their money out - so the way the will was written it gets sold). Which means capital gains on this property as well... ugh I have a headache just thinking of the tax implications.

If the property is to be sold there is no way to "avoid" the tax on the capital gains.  As you mentioned though, you can put the proceeds into a RRSP contribution to "defer" the taxation on this (the taxation will occur when you withdraw the RRSP amounts in the future). 

To determine the availability of this you should first look to see what your contribution room available is from your 2014 Notice of Assessment (be sure to update this to the 2015 amount when you file your tax return this April - as the sale will occur in 2016 at the earliest).

Second you should then look to see what the total capital gains would be on the property.  To do this you would need to see what the 200 acres were valued at on your mothers death, and what the estimated property sale would be.  The excess of the sale price less the value on death is the capital gain.   If you own a 1/5 interest take this capital gain and multiply by 20% to get your portion of the capital gain.  Take your capital gain and multiply it by 50%.   If your contribution room available is greater than this amount, you can put the full amount of taxable capital gain into your RRSP and will not incur a tax bill in the year of disposition. 

Hope this helps a little - sorry I got a little "mathy".  Cheers.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: NoCantInCanada on January 10, 2016, 10:54:34 AM
Where can I get information about small business tax & structure?

I want to run a few scenarios.

A) Self employed make 60K claim as an individual.  (Anticipated situation for 2016, if we have a good year & change nothing)

Or

B) Form a business and pay myself salary of 30K and keep 30k in the business.

Or

C) Form a business and pay myself dividends of 30K and keep 30k in the business.

Or maybe some combo if B&C

I think I would prefer a sol proprietorship but if there are any tax advantages me & my SO may be partners. Currently SO "Volounters" with the "business" a bit. But SO makes salary more than 60K so income splitting doesn't make sense right now.

I know very little about this so if someone can point me to a few reliable sites I'm eager to learn.







 

If you google Tax Tips Small Business Canada you should be able to find a lot of information online regarding the incorporation of a business from a sole proprietorship.  That being said, at the $60,000 income level I think you are a little premature in looking at incorporation at this time.

One advantage of incorporation is the concept of limited liability, in that the corporation is a separate entity and as a result it is the corporation's assets and not your own that are at risk should things go south.  That being said, any lenders will likely request personal guarantees on any corporate financing so the advantage of this protection may be limited.  If you are in a litigious area of business, or do not have adequate insurance coverage on operations this may be something to consider.  This would be something to speak to your lawyer about however in terms of liability risks of the business.

The second advantage is that of tax deferral.  Small businesses receive significant tax incentives in the form of lower corporate tax rates to a certain income threshold ($500,000).  This is not a permanent tax savings as when the earnings are paid out to shareholders in the form of dividends they pay higher taxes than those paid from corporations who do not enjoy the lower tax rates.  There is a concept of integration in the Canadian tax system that holds that income earned through a sole proprietorship, vs. income earned through a corporation should be taxed at the same rate - at the end of the day the taxpayer should have the same amount of after-tax dollars in their jeans.  The theory doesn't work in every province, but for the sake of our discussion today let's just assume that perfect integration exists.

At the $60,000 income amount your effective tax rate is approximately 19.5% in Ontario (assuming just the basic personal tax credits).  The corporate tax rate on small business income in Ontario is 15.5%.  So at this income level if you leave all the income in the corporation and do not withdraw any of it you have a tax deferral of 4% or $2,400.  When you pay this income out to yourself in the form of a dividend this deferral is gone and you pay the $2,400 in tax.  The tax rates differ in all provinces, but the concept of integration holds the same in all provinces (more or less).   

This is an extreme case where you needed $0 in income, so at a maximum in Ontario you are looking at a 4% tax deferral, and in monetary terms $2,400.  When you are drawing income out to live on this deferral shrinks further.

This is my long-winded way of saying at the $60,000 income amount, in my opinion, you are best off sticking with a sole-proprietorship for tax purposes (you may want to visit the concept of legal liability with someone).  Assuming you have RRSP contribution room available, by making contributions to an RRSP of the cash that you do not require you will reduce your tax burden further. 

The cost to maintain a corporation, incorporation costs, corporate tax returns, annual filings, etc. do not warrant a corporation for tax purposes at this time. 

Let me know if this helps.  Cheers.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Joan-eh? on January 10, 2016, 03:51:31 PM


Just for some preliminary info, how much above the maximum tax-deferred transfer to a locked in plan are you looking at?

Also assuming no RRSP contribution room available?

200k above locked in.
No RRSP room
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on January 10, 2016, 05:19:29 PM
Where can I get information about small business tax & structure?

I want to run a few scenarios.

A) Self employed make 60K claim as an individual.  (Anticipated situation for 2016, if we have a good year & change nothing)

Or

B) Form a business and pay myself salary of 30K and keep 30k in the business.

Or

C) Form a business and pay myself dividends of 30K and keep 30k in the business.

Or maybe some combo if B&C

I think I would prefer a sol proprietorship but if there are any tax advantages me & my SO may be partners. Currently SO "Volounters" with the "business" a bit. But SO makes salary more than 60K so income splitting doesn't make sense right now.

I know very little about this so if someone can point me to a few reliable sites I'm eager to learn.







 

Hi K-Ice

Thanks for your question.

No Can't in Canada has responded with some of the pros & cons -

To add however, I think it is a more complex and nuanced issue, and is very much circumstantial.

Firstly, it depends on your outlook for the business. If you foresee yourself continuing to churn along at the $60k mark, or if you're investing in growing your business. In this sense, it can make sense to get your ducks in a row early. What type of business is it?

Secondly, family - income splitting opportunities are available, not just with your wife, but also with children in the future. It's certainly worth consideration.

Tax deferral is certainly am important element. It's true, at $60k the quantum of savings from deferral isn't substantial. That being said, the ability to pick and choose income, slot away funds in the corporation and invest on a pre-tax basis, and eventually split income is a real selling point.

Taxtips is a decent resource. I also like to read Entreprenuer.com - it doesn't offer "Canadian" material per say, but often it does address small business issues such as this. In a broad sense, the issues are just as applicable in the US as Canada.

Hope this helps!

CPA CB




Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on January 10, 2016, 05:25:54 PM
Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...

My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?

THank you!!! Hope you had a wonderful New Years!

Hi Sweetlife -

What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).

The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -

Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.

Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!

Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.

Hope this helps!

Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?

$3,800 on a $20k capital gain - yes.

Ok one more question to this ... is it possible to put the proceeds from the sale directly into RRSP's to avoid capital gains (I have room there )? Is there any way to avoid capital gains? (I have to ask as I just found out (the family) is putting up our jointly owned property (200 acres) for sale this year (two of the 5 of us want their money out - so the way the will was written it gets sold). Which means capital gains on this property as well... ugh I have a headache just thinking of the tax implications.

Hi Sweetlife -

Is this a farm, by chance?

Otherwise there isn't really an opportunity to defer the capital gain.

RRSP's are one way to go. I would recommend paying a portion of this into an RRSP potentially, and focus on maxing out the TFSA.

As stated with the other property, it depends on the valuation on the date of demise for your mother on the property. If this occurred recently, there's a good chance there won't be a significant tax impact on you.

It seems like you've got a lot going on this year - I would definitely recommend getting in touch with a Chartered Accountant prior to the sale to make sure it's planned appropriately (in advance) rather than just dealing with the consequences as they arise.

Hope this helps!

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on January 10, 2016, 05:34:58 PM
CPA CB,

I have a question about child care expense deductions. The deduction limit is currently sitting at $8000 dollars per child. If I have two children under the age of 6 can I only claim $8k per child or are the deductions transferrable between children. For example, if we incur expenses of $10,000 for one child and $6000 for the other can we still claim the full $16,000? Form T778 (http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-15e.pdf) seems to imply that you can based on the way the calculations are presented and I couldn't find anything in the instructions that clarified the situation one way or another.

Thanks.

Hi Jam,

It's $8,000 per child, but not 'globally' $16,000.

That being said, many expenses can realistically be split between children in a way that would maximize the utilizable value for you. I wouldn't call this 'by the book' (at least not in CRA's eyes) but I think it's a reasonable interpretation of the Income Tax Act (if your assumptions in split are reasonable).

Cheers

CPA CB

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: sorrycanook on January 18, 2016, 12:59:20 PM
Good afternoon CPA CB!

This is a fantastic thread, and it's terrific to see someone with your expertise volunteer time and advice to others!

Unfortunately, I think I may have (foolishly) put myself in a precarious tax position, when preparing to use the Home Buyers Plan.

A) In November 2015 I submitted over $25,000 into my RRSP, with the intention of using it for the HBP after the 90 day period.
This home purchase (and use of the funds) will likely occur in 2016.

B) I am concerned about the over contribution penalties, chance for 2015 tax refund, and future tax effects.
My 2015 RRSP deduction limit is only $9,527. I carry forward Tuition/ textbook credits as well.

C) I pay tax on each work paycheque.

D) I only worked about 7/12 months in 2015 as I graduated mid-year.

Do you have any suggestions about how I should approach this tax year, and the Home Buyers Plan? Am I misunderstanding this as an issue?

I will provide more detail, if it is needed as well. :)

Thank you for all of your contributions to the forum!

SC
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on January 18, 2016, 02:49:01 PM
Good afternoon CPA CB!

This is a fantastic thread, and it's terrific to see someone with your expertise volunteer time and advice to others!

Unfortunately, I think I may have (foolishly) put myself in a precarious tax position, when preparing to use the Home Buyers Plan.

A) In November 2015 I submitted over $25,000 into my RRSP, with the intention of using it for the HBP after the 90 day period.
This home purchase (and use of the funds) will likely occur in 2016.

B) I am concerned about the over contribution penalties, chance for 2015 tax refund, and future tax effects.
My 2015 RRSP deduction limit is only $9,527. I carry forward Tuition/ textbook credits as well.

C) I pay tax on each work paycheque.

D) I only worked about 7/12 months in 2015 as I graduated mid-year.

Do you have any suggestions about how I should approach this tax year, and the Home Buyers Plan? Am I misunderstanding this as an issue?

I will provide more detail, if it is needed as well. :)

Thank you for all of your contributions to the forum!

SC

Hi SC

It's my pleasure helping out and giving back. I'm glad you're finding this useful.

Regarding the RRSP - eek!

RRSP over-contributions are taxed at 1% per month of the overcontributed amount - so 1% of approximately $15k+ per month overdue from the sounds of it.

Advice is to withdraw this immediately. This will help to minimize the tax impact here as 1% gets expensive quite quickly. You'll pay a whopper of withholding taxes in the meantime (and it will be treated as income in 2016) but you can apply for a deduction using the T746 form.

It sounds like you'll be able to contribute an addition $18k this year based on your contribution level from last year. Once you withdraw, you can re-contribute to offset some of the tax impact here as well. Just be prudent and ensure you're on-side in order to avoid this issue in the future, as it is a bit of a headache to correct (as you can see).

Good luck!

CPA CB


Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on January 19, 2016, 09:09:39 AM
Good afternoon CPA CB!

This is a fantastic thread, and it's terrific to see someone with your expertise volunteer time and advice to others!

Unfortunately, I think I may have (foolishly) put myself in a precarious tax position, when preparing to use the Home Buyers Plan.

A) In November 2015 I submitted over $25,000 into my RRSP, with the intention of using it for the HBP after the 90 day period.
This home purchase (and use of the funds) will likely occur in 2016.

B) I am concerned about the over contribution penalties, chance for 2015 tax refund, and future tax effects.
My 2015 RRSP deduction limit is only $9,527. I carry forward Tuition/ textbook credits as well.

C) I pay tax on each work paycheque.

D) I only worked about 7/12 months in 2015 as I graduated mid-year.

Do you have any suggestions about how I should approach this tax year, and the Home Buyers Plan? Am I misunderstanding this as an issue?

I will provide more detail, if it is needed as well. :)

Thank you for all of your contributions to the forum!

SC

Don't forget you are allowed a $2,000 one-time over-contribution that is penalty free (but not tax-deductible). Based on your income do you think you will have an RRSP limit for 2016 that exceeds $13473 ($25000 - $9527 - $2000)? Just do some quick math to figure out 18% of earned income in 2015.

CPACB can correct me here, but my understanding is if your 2016 contribution limit exceeds $13473, you could just leave it in the account at this point. You would only pay tax on the over contribution from November - December 31.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: sorrycanook on January 19, 2016, 10:16:39 AM
Hi Tuxedo,

First off, thank you very much for taking the time to respond to my dilemma!

My 2016 Contribution room would likely not exceed $13,4673, as I only worked for 7 Months in 2015, after graduating. The $25,000 was actually given to me by my family, to put towards the new house. It was then recommended to me, that I put it in the HBP (which is regrettable). I took the recommendation at face value unfortunately! Lesson learned.

I had Taxable Earnings of $26,263 in 2015, and am set to earn $50,000 before tax in 2016.

Thank you both for your advice,

SC
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: SweetLife on January 21, 2016, 01:49:27 PM
Hi there CPA CB!!! So glad to see you are still posting :)
Here is my question - I inherited 1/2 acre of land (my brother inherited the other half) - from my Mom's estate. There is no house on the land it is on a piece of property that my brother inherited. This is a severed "lot" ...

My brother would like to buy my half (in fact I want him to buy it too!) - when my Mom died in 2011 the land was priced at $60,000 - if I sell my half to him will I have to pay taxes on what he gives me? (Likely $20,000)?

THank you!!! Hope you had a wonderful New Years!

Hi Sweetlife -

What happens in an estate is that assets such as this are 'marked to market' on the date of death, and therefore your effective cost base would be your portion of the $60,000 (so, $30,000).

The issue is - you need to make sure you receive the fair market value today as payment for the land. Otherwise, you open yourself and your brother up to double taxation. Here's what I mean -

Let's say, the property is worth $100,000 today, so your portion is worth $50k. If he only pays you $20,000, it becomes an issue in terms of taxes. CRA will come in and change what you receive from the $20k to the $50k (so you'll pay taxes), but keep his cost base at the $20k, so he'll have to pay taxes on this amount as well.

Just get an assessment done to ensure you receive a value similar to fair market value and you'll be good!

Any taxes will be at 50% of your marginal rate on any funds received over $30,000. So if you get $50k - then you'll pay taxes on half the gain, or $10,000.

Hope this helps!

Intersting, lets say Sweetlife is in the 38% marginal tax bracket (10,000$ @38%) the taxes to be paid will be 3,800$?

$3,800 on a $20k capital gain - yes.

Ok one more question to this ... is it possible to put the proceeds from the sale directly into RRSP's to avoid capital gains (I have room there )? Is there any way to avoid capital gains? (I have to ask as I just found out (the family) is putting up our jointly owned property (200 acres) for sale this year (two of the 5 of us want their money out - so the way the will was written it gets sold). Which means capital gains on this property as well... ugh I have a headache just thinking of the tax implications.

Hi Sweetlife -

Is this a farm, by chance?

Otherwise there isn't really an opportunity to defer the capital gain.

RRSP's are one way to go. I would recommend paying a portion of this into an RRSP potentially, and focus on maxing out the TFSA.

As stated with the other property, it depends on the valuation on the date of demise for your mother on the property. If this occurred recently, there's a good chance there won't be a significant tax impact on you.

It seems like you've got a lot going on this year - I would definitely recommend getting in touch with a Chartered Accountant prior to the sale to make sure it's planned appropriately (in advance) rather than just dealing with the consequences as they arise.

Hope this helps!

CPA CB


Yes CPA CB there is definitely ALOT going on lol...
The 1/2 acre I own with my brother is on a farm (an acre carved out and severed years ago but I think it is still considered farm land)
The 1/5 of the 200 acres is now considered "rental property" (it used to be farm but upon my oldest brother being in charge of it, it was turned into "rental property" - we rent out the available "farmland" to a farmer for $10,000 per year.

The 1 acre was valued at $60,000 at the time of Mom's death. The 200 acre farm was valued at $1.3 million

I really wish this all would have been sold prior to Mom's death and the money spent on her ... you cannot (or maybe you can) imagine the infighting going on over this crap...


Thanks again for the help ... I am in WAYYYYY over my head on this one.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Heckler on January 21, 2016, 08:41:10 PM
CPA,

My 40 y.o. wife had a BC LIRA account with ~$5k in it, transferred from a previous employers pension. 

I've worked with our banks brokerage to unlock the LIRA and move the funds to her RSP account, using the small account value provision to allow accessing the funds before standard LIRA locked in funds.  This allows her to add funds or sell for allocation balancing. 

The bank simply asked for a letter asking for direction to unlock the LIRA and transfer the securities in kind, plus a Form 4 for my permission to unlock her LIRA. 

Are there any tax or legal implications my bank may not have advised us?   (Besides obvious income taxes after we eventually take funds out of her RSP) 

Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Heckler on January 21, 2016, 08:49:36 PM
From part 4.  http://www.fic.gov.bc.ca/pdf/Pensions/BCLIRAAddendum.pdf

Lump-sum payment of small account balance
9 (l)
On application by the owner of this locked-in retirement account, the locked-in retirement account issuer will pay to the owner the lump-sum amount referred to in section 69 (2) of the Act and section 107 of the Regulation if, on the date of the application,
(a) the balance of the locked-in retirement account does not exceed 20% of the Year's Maximum Pensionable Earnings (YMPE) under the Canada Pension Plan for the calendar year in which the application is made, or
(b) the owner is at least 65 years of age and the balance of this locked-in retirement account does not exceed 40% of the YMPE for the calendar year in which the application is made.

http://www.fic.gov.bc.ca/index.aspx?p=pension_plans/forms

For more if anyone's interested in unlocking their LIRA
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on February 01, 2016, 12:36:29 PM
Just want to make sure I've got this whole mess right(ish) now:

I had to pay cap gains tax to the UK for what was Canada FY 2014 - sold a rental property.

I have updated/added lines 431 and 433 (which gets put into 405). With all the other stuff in my returns, it works out that I had to pay the UK about $6000 in CAD; this works out as only giving me back about $4000 from Canada.

What I then missed was putting the difference in as an expense - so $6k - $4k = $2k expense on line 232.

Am I missing anything? I thought under the DTA I'd get nearly everything back...
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on February 01, 2016, 02:23:48 PM
I own some ZCN shares (canadian stocks index ETF) in a taxable account. It pays dividend at the end of the year (ex-div. date  Dec. 24th, record-date Dec. 29th) but the pay-date was January 7th 2016. Are these dividends will be taxable for 2015 or 2016?

Samething for interest paid for investment purpose. Does the december's interest are deductibles for 2015 if I paid for on January 5th 2016?

It's the first year I do this, so next year I will just continue with the same method.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Posthumane on February 06, 2016, 01:16:39 PM
I have a question regarding business income and expenses. My wife started a small business in our house, to the tune of a few hundred a month in revenue. We had to buy some equipment to get the business started, most of which were purchased in December. She had a couple of clients in Dec but it didn't really start picking up until January, so as a result her expenses in the last year far exceeded her revenue. Can she somehow carry those expenses forward to this year to offset her revenue?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on February 06, 2016, 04:30:01 PM
I own some ZCN shares (canadian stocks index ETF) in a taxable account. It pays dividend at the end of the year (ex-div. date  Dec. 24th, record-date Dec. 29th) but the pay-date was January 7th 2016. Are these dividends will be taxable for 2015 or 2016?

Samething for interest paid for investment purpose. Does the december's interest are deductibles for 2015 if I paid for on January 5th 2016?

It's the first year I do this, so next year I will just continue with the same method.

Should just be the income listed on your T5 form that will be sent by the brokerage. Its been a while since I've got a T5 because of my house purchase a few years back, but I believe it counts for the year in which you actually receive the deposit in your account (pay-date).
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on February 06, 2016, 06:45:10 PM
I own some ZCN shares (canadian stocks index ETF) in a taxable account. It pays dividend at the end of the year (ex-div. date  Dec. 24th, record-date Dec. 29th) but the pay-date was January 7th 2016. Are these dividends will be taxable for 2015 or 2016?

Samething for interest paid for investment purpose. Does the december's interest are deductibles for 2015 if I paid for on January 5th 2016?

It's the first year I do this, so next year I will just continue with the same method.

Should just be the income listed on your T5 form that will be sent by the brokerage. Its been a while since I've got a T5 because of my house purchase a few years back, but I believe it counts for the year in which you actually receive the deposit in your account (pay-date).

Thank you Tuxedo, what about the interests then?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on February 11, 2016, 07:18:18 AM
CPA,

My 40 y.o. wife had a BC LIRA account with ~$5k in it, transferred from a previous employers pension. 

I've worked with our banks brokerage to unlock the LIRA and move the funds to her RSP account, using the small account value provision to allow accessing the funds before standard LIRA locked in funds.  This allows her to add funds or sell for allocation balancing. 

The bank simply asked for a letter asking for direction to unlock the LIRA and transfer the securities in kind, plus a Form 4 for my permission to unlock her LIRA. 

Are there any tax or legal implications my bank may not have advised us?   (Besides obvious income taxes after we eventually take funds out of her RSP) 

Thanks!

Hi Heckler,

I think you're covered here as you'll fall under the provisions. Ultimately it's one tax protected account rolling over to the next, so it shouldn't have any impact this year.

Cheers,

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on February 11, 2016, 07:24:30 AM
Just want to make sure I've got this whole mess right(ish) now:

I had to pay cap gains tax to the UK for what was Canada FY 2014 - sold a rental property.

I have updated/added lines 431 and 433 (which gets put into 405). With all the other stuff in my returns, it works out that I had to pay the UK about $6000 in CAD; this works out as only giving me back about $4000 from Canada.

What I then missed was putting the difference in as an expense - so $6k - $4k = $2k expense on line 232.

Am I missing anything? I thought under the DTA I'd get nearly everything back...

Hey Dave,

The tricky part with international tax and treaties is that the government here uses an algorithm to 'grind down' the amount of tax credits given.

Essentially, it takes into account the amount of foreign income vs. canada source income, and uses this as a mechanism to derive your foreign income tax credit. The idea (in theory) is that if you pay 6k in the UK, and owe 7k in Canada, the tax credit will work out to cover your taxes payable to around the $1k area... It's rarely perfect in practice, as your foreign vs. canadian source income affects the calculation so heavily...

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on February 11, 2016, 07:27:44 AM
I have a question regarding business income and expenses. My wife started a small business in our house, to the tune of a few hundred a month in revenue. We had to buy some equipment to get the business started, most of which were purchased in December. She had a couple of clients in Dec but it didn't really start picking up until January, so as a result her expenses in the last year far exceeded her revenue. Can she somehow carry those expenses forward to this year to offset her revenue?

What kind of equipment? I assume this is a sole proprietorship?

What I would recommend is 'capitalizing' the equipment (i.e. it is an asset of the business) and depreciating it over the life of the equipment (which is prescribed in the Income Tax Act - Look at Capital Cost Allowance Rates). This will help to defer the expense to 2016 and beyond (depending on the equipment class).

Hope this helps!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on February 11, 2016, 07:32:08 AM
I own some ZCN shares (canadian stocks index ETF) in a taxable account. It pays dividend at the end of the year (ex-div. date  Dec. 24th, record-date Dec. 29th) but the pay-date was January 7th 2016. Are these dividends will be taxable for 2015 or 2016?

Samething for interest paid for investment purpose. Does the december's interest are deductibles for 2015 if I paid for on January 5th 2016?

It's the first year I do this, so next year I will just continue with the same method.

Should just be the income listed on your T5 form that will be sent by the brokerage. Its been a while since I've got a T5 because of my house purchase a few years back, but I believe it counts for the year in which you actually receive the deposit in your account (pay-date).

Thank you Tuxedo, what about the interests then?

Hi LB,

So interest paid on income invested all the way up to December 31st is deductible for tax purposes in your 2015 fiscal year. It's in your Schedule 4 on your tax return.

As far as the ETF - this should be reported either on a T3 or T5, so you will see the amounts total for the year. The way these etfs distribute capital differs based on the investment (ROC, Capital Gain Dist., Dividend, Interest/Investment Income) so it is very specific to the fund in question.

Cheers,

CPA CB
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on February 11, 2016, 08:58:23 AM
My 11 year old has received his first tax slip from CRA, "taxable" income of $3000.

At what age is a person required to file a tax return?

If not required at 11, is there an advantage to an 11 year old filing?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Posthumane on February 11, 2016, 10:07:13 AM
I have a question regarding business income and expenses. My wife started a small business in our house, to the tune of a few hundred a month in revenue. We had to buy some equipment to get the business started, most of which were purchased in December. She had a couple of clients in Dec but it didn't really start picking up until January, so as a result her expenses in the last year far exceeded her revenue. Can she somehow carry those expenses forward to this year to offset her revenue?

What kind of equipment? I assume this is a sole proprietorship?

What I would recommend is 'capitalizing' the equipment (i.e. it is an asset of the business) and depreciating it over the life of the equipment (which is prescribed in the Income Tax Act - Look at Capital Cost Allowance Rates). This will help to defer the expense to 2016 and beyond (depending on the equipment class).

Hope this helps!
Thanks, this does help. The business is indeed a sole proprietorship. It's a hair styling business and some of the equipment could be considered capital, such as her station and chair, hair sink, standing dryer, etc. I don't think modifications to the house can be as these are more like maintenance expenses (had to modify some water supply and drain lines to accommodate the sink).
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on February 12, 2016, 03:56:54 AM
Just want to make sure I've got this whole mess right(ish) now:

I had to pay cap gains tax to the UK for what was Canada FY 2014 - sold a rental property.

I have updated/added lines 431 and 433 (which gets put into 405). With all the other stuff in my returns, it works out that I had to pay the UK about $6000 in CAD; this works out as only giving me back about $4000 from Canada.

What I then missed was putting the difference in as an expense - so $6k - $4k = $2k expense on line 232.

Am I missing anything? I thought under the DTA I'd get nearly everything back...

Hey Dave,

The tricky part with international tax and treaties is that the government here uses an algorithm to 'grind down' the amount of tax credits given.

Essentially, it takes into account the amount of foreign income vs. canada source income, and uses this as a mechanism to derive your foreign income tax credit. The idea (in theory) is that if you pay 6k in the UK, and owe 7k in Canada, the tax credit will work out to cover your taxes payable to around the $1k area... It's rarely perfect in practice, as your foreign vs. canadian source income affects the calculation so heavily...

Thanks - just want to confirm I'm entering the right stuff on the right lines, though - 431/433 and the un-refunded/credited amount on 232?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Sarnia Saver on February 13, 2016, 02:04:25 PM
I have not been able to find any concrete information on whether the controversial 'income splitting' or Family Tax Credit will be allowed to be claimed for 2015.  Anyone know for certain if it is on or off the table?  I know that it was one of our young, hot PM's election promises, just not certain if it is off the books for 2015 or if it will survive one more tax year and be caput in 2016 tax year.  Thanks.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on February 14, 2016, 07:33:10 AM
I have not been able to find any concrete information on whether the controversial 'income splitting' or Family Tax Credit will be allowed to be claimed for 2015.  Anyone know for certain if it is on or off the table?  I know that it was one of our young, hot PM's election promises, just not certain if it is off the books for 2015 or if it will survive one more tax year and be caput in 2016 tax year.  Thanks.

FTC is good for 2015, will be gone for 2016.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: powersuitrecall on February 16, 2016, 10:16:11 AM
Hi again CPA CB (or other tax savvy people),

I have decided to close my home business for the 2015 tax year.  It was a photography business for which I purchased gear for.  I therefore have claimed CCA over the life of the business.  I sold some equipment in 2015, but decided to keep some for personal use going forward. 

I would like to know what my CCA obligations are for closing this business.  Rough numbers follow:

UCC Start of Year                                  = $6000
2015 CCA                                           = $1000
2015 Disposition (Sale to others)                  = $2000
2015 Disposition (Fair Market Value of stuff kept) = $2500


Q - This will have the effect of claiming a $500 loss for the business year, correct?

Q - Is this ok?

Q - Do I have an obligation to "zero" out the amounts (ie - add $500 more to dispositions)?

Thanks!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on February 16, 2016, 10:44:08 AM
I have not been able to find any concrete information on whether the controversial 'income splitting' or Family Tax Credit will be allowed to be claimed for 2015.  Anyone know for certain if it is on or off the table?  I know that it was one of our young, hot PM's election promises, just not certain if it is off the books for 2015 or if it will survive one more tax year and be caput in 2016 tax year.  Thanks.

FTC is good for 2015, will be gone for 2016.

That's correct
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: TrMama on February 19, 2016, 01:06:19 PM
I have a basic question about capital gains. I know that cap gains is based on your marginal tax rate for the year the gain occurred. Does the marginal rate include only your employment income, or is it employment income plus the cap gain?

For example, if the gain is several hundred thousand dollars, will it bump you into  the 47.7% bracket?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on February 19, 2016, 03:40:51 PM
I have a basic question about capital gains. I know that cap gains is based on your marginal tax rate for the year the gain occurred. Does the marginal rate include only your employment income, or is it employment income plus the cap gain?

For example, if the gain is several hundred thousand dollars, will it bump you into  the 47.7% bracket?

It's a progressive system. You go progressively from one bracket to the next. Yes that much gain will put a portion into the top bracket. But you'll only pay half the tax on cap gains (but it's counted fully in terms of bracket progression, if that makes sense - it gets halved after other calculations).
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on February 19, 2016, 03:42:21 PM
Re-posting from just over a week ago, in case anyone knows:

My 11 year old has received his first tax slip from CRA, "taxable" income of $3000.

At what age is a person required to file a tax return?

If not required at 11, is there an advantage (soon or in the distant future) to an 11 year old filing?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on February 19, 2016, 04:47:11 PM
Hi scrubbyfish,

There is no age requirement of when to file...but sometimes it is beneficial to file depending on the circumstances.

As per CRA:

Do you have to file a return?
You must file a return for 2015 if any of the following situations apply:

You have to pay tax for 2015.
We sent you a request to file a return.
You and your spouse or common-law partner elected to split pension income for 2015. See lines 115, 116, 129, and 210.
You received working income tax benefit (WITB) advance payments in 2015.
You disposed of capital property in 2015 (for example, if you sold real estate or shares) or you realized a taxable capital gain (for example, if a mutual fund or trust attributed income to you, or you are reporting a capital gains reserve you claimed on your 2014 return).
You have to repay any of your old age security or employment insurance benefits. See line 235.
You have not repaid all amounts withdrawn from your registered retirement savings plan (RRSP) under the Home Buyers’ Plan or the Lifelong Learning Plan. For more information, go to Home Buyers' Plan (HBP) or see Guide RC4112, Lifelong Learning Plan (LLP).
You have to contribute to the Canada Pension Plan (CPP). This can apply if for 2015 the total of your net self-employment income and pensionable employment income is more than $3,500. See line 222.
You are paying employment insurance premiums on self-employment and other eligible earnings. See lines 317 and 430.
Even if none of these requirements apply, you can file a return if any of the following situations apply:

You want to claim a refund.
You want to claim the WITB for 2015.
You want the GST/HST credit (including any related provincial credits). For example, you may be eligible if you turn 19 before April 2017.
You or your spouse or common-law partner want to begin or continue receiving Canada child tax benefit payments, including related provincial or territorial benefit payments.

You or your spouse or common law partner want to claim the family tax cut. See line 423.

You have incurred a non-capital loss (see line 236) in 2015 that you want to be able to apply in other years.
You want to carry forward or transfer the unused part of your tuition, education, and textbook amounts. See line 323.
You want to report income for which you could contribute to an RRSP and/or a pooled registered pension plan (PRPP) to keep your RRSP/PRPP deduction limit for future years current.
You want to carry forward the unused investment tax credit on expenditures you incurred during the current year See line 412.
You receive the guaranteed income supplement or allowance benefits under the old age security program. You can usually renew your benefit by filing your return by April 30. If you choose not to file a return, you will have to complete a renewal form. This form is available from Service Canada.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on February 19, 2016, 04:53:49 PM
Hi again CPA CB (or other tax savvy people),

I have decided to close my home business for the 2015 tax year.  It was a photography business for which I purchased gear for.  I therefore have claimed CCA over the life of the business.  I sold some equipment in 2015, but decided to keep some for personal use going forward. 

I would like to know what my CCA obligations are for closing this business.  Rough numbers follow:

UCC Start of Year                                  = $6000
2015 CCA                                           = $1000
2015 Disposition (Sale to others)                  = $2000
2015 Disposition (Fair Market Value of stuff kept) = $2500


Q - This will have the effect of claiming a $500 loss for the business year, correct?

Q - Is this ok?

Q - Do I have an obligation to "zero" out the amounts (ie - add $500 more to dispositions)?

Thanks!

Hi there,

Yes - you can claim the loss - but in this case it is what is known as a "Terminal Loss", rather than just a disposition.

You can only claim a Terminal Loss when all assets in that class are disposed of. Given that you're closing the business, this will be the case. In theory you're deemed to have disposed all of the assets upon closing the business (and distributing the proceeds).

Cheers,

CPA CB

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: powersuitrecall on February 20, 2016, 02:34:20 PM
Hi again CPA CB (or other tax savvy people),

I have decided to close my home business for the 2015 tax year.  It was a photography business for which I purchased gear for.  I therefore have claimed CCA over the life of the business.  I sold some equipment in 2015, but decided to keep some for personal use going forward. 

I would like to know what my CCA obligations are for closing this business.  Rough numbers follow:

UCC Start of Year                                  = $6000
2015 CCA                                           = $1000
2015 Disposition (Sale to others)                  = $2000
2015 Disposition (Fair Market Value of stuff kept) = $2500


Q - This will have the effect of claiming a $500 loss for the business year, correct?

Q - Is this ok?

Q - Do I have an obligation to "zero" out the amounts (ie - add $500 more to dispositions)?

Thanks!

Hi there,

Yes - you can claim the loss - but in this case it is what is known as a "Terminal Loss", rather than just a disposition.

You can only claim a Terminal Loss when all assets in that class are disposed of. Given that you're closing the business, this will be the case. In theory you're deemed to have disposed all of the assets upon closing the business (and distributing the proceeds).

Cheers,

CPA CB

Awesome CPA CB - I did confirm all this with a retired CA (my father).

Thanks for starting this thread so long ago.  I'll probably be back :)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Prairie Stash on February 21, 2016, 05:03:33 PM
Re-posting from just over a week ago, in case anyone knows:

My 11 year old has received his first tax slip from CRA, "taxable" income of $3000.

At what age is a person required to file a tax return?

If not required at 11, is there an advantage (soon or in the distant future) to an 11 year old filing?
RRSP contribution room can accumulate for the child. I first filed at 15, according to the CRA records (I checked my CRA account, it has my history since 1991). I recommend using Simpletax (free software) and filing electronically.

I also recommend getting a CRA MyAccount to track it. SimpleTax (and others) and the CRA should be linking in the future to autofill the tax return, they have already started.

One last hurrah for the CRA. Last year the CRA used their power to fill in my RRSP contribution for $300 I forgot to claim, that's right the CRA found me an extra deduction (I found it after I filed, was going to just sit on it till this year rather than re-file). Yay Canada.
http://www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/menu-eng.html
 
The small amounts don't require tax payments, there's no downside to filing that I know of.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: scrubbyfish on February 21, 2016, 05:19:41 PM
Thanks, Prairie Stash! :)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: CPA CB on February 22, 2016, 09:12:52 AM
Hi again CPA CB (or other tax savvy people),

I have decided to close my home business for the 2015 tax year.  It was a photography business for which I purchased gear for.  I therefore have claimed CCA over the life of the business.  I sold some equipment in 2015, but decided to keep some for personal use going forward. 

I would like to know what my CCA obligations are for closing this business.  Rough numbers follow:

UCC Start of Year                                  = $6000
2015 CCA                                           = $1000
2015 Disposition (Sale to others)                  = $2000
2015 Disposition (Fair Market Value of stuff kept) = $2500


Q - This will have the effect of claiming a $500 loss for the business year, correct?

Q - Is this ok?

Q - Do I have an obligation to "zero" out the amounts (ie - add $500 more to dispositions)?

Thanks!

Hi there,

Yes - you can claim the loss - but in this case it is what is known as a "Terminal Loss", rather than just a disposition.

You can only claim a Terminal Loss when all assets in that class are disposed of. Given that you're closing the business, this will be the case. In theory you're deemed to have disposed all of the assets upon closing the business (and distributing the proceeds).

Cheers,

CPA CB

Awesome CPA CB - I did confirm all this with a retired CA (my father).

Thanks for starting this thread so long ago.  I'll probably be back :)

My pleasure! Glad to help!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on February 22, 2016, 09:26:23 AM
I own some ZCN shares (canadian stocks index ETF) in a taxable account. It pays dividend at the end of the year (ex-div. date  Dec. 24th, record-date Dec. 29th) but the pay-date was January 7th 2016. Are these dividends will be taxable for 2015 or 2016?

Samething for interest paid for investment purpose. Does the december's interest are deductibles for 2015 if I paid for on January 5th 2016?

It's the first year I do this, so next year I will just continue with the same method.

Should just be the income listed on your T5 form that will be sent by the brokerage. Its been a while since I've got a T5 because of my house purchase a few years back, but I believe it counts for the year in which you actually receive the deposit in your account (pay-date).

Thank you Tuxedo, what about the interests then?

Hi LB,

So interest paid on income invested all the way up to December 31st is deductible for tax purposes in your 2015 fiscal year. It's in your Schedule 4 on your tax return.

As far as the ETF - this should be reported either on a T3 or T5, so you will see the amounts total for the year. The way these etfs distribute capital differs based on the investment (ROC, Capital Gain Dist., Dividend, Interest/Investment Income) so it is very specific to the fund in question.

Cheers,

CPA CB

" interest paid on income invested all the way up to December 31st" so, if the december's interests (1st-31st) have been "paid" on january 5th, they dont belong for 2015 (reported to next year)?

Also, the T5 slip report some "Foreign non-business income" (18.06$)  and foreign non-business income tax paid (-0.97$)

Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Le Barbu on February 22, 2016, 10:03:23 AM
Last spring, I had to pay 1,000$ for resigning a buying offer (agreement and fees)

Long story short, asbestos was found at many places in the building and we didn't want to deal with this when DIY renovations. It's dangerous for health and cost a lot of $$ to remove by specialized firm.

Is there a way I can recover something through my 2015 taxes? My point is our goal was to buy this for a rental project. I kept every documents just in case...
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cookie78 on February 22, 2016, 11:29:01 AM
Re-posting from just over a week ago, in case anyone knows:

My 11 year old has received his first tax slip from CRA, "taxable" income of $3000.

At what age is a person required to file a tax return?

If not required at 11, is there an advantage (soon or in the distant future) to an 11 year old filing?

I just finished reading a tax tips book in which it was recommended for minors to file tax returns just so they would get the contribution room for RRSP.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: moustacheverte on February 24, 2016, 01:26:16 PM
I have a T5008 statement from my brokerage but it doesn't have any of the box numbers the tax software is asking for. It doesn't have any boxes for that matter, just a summary of what I traded, when and for how much.

The brokerage said they'd be sending out another document mid-March but I take this information with a grain of salt considering how clueless they've been in the past.

Am I missing a document or do I need to somehow infer the boxes numbers from that T5008 statement?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Retire-Canada on February 25, 2016, 08:49:01 AM
I live in BC.

If I am going to hold VCN, VUN, VEE, VDU and VAB in my portfolio is there are dividend tax benefit to holding only VCN in my non-registered account vs. US or international ETF dividends?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: RichMoose on February 25, 2016, 09:06:06 AM
I live in BC.

If I am going to hold VCN, VUN, VEE, VDU and VAB in my portfolio is there are dividend tax benefit to holding only VCN in my non-registered account vs. US or international ETF dividends?

Yes there is. For tax purposes, once you're investing in cash (taxable) accounts, it's most efficient to put your Canadian exposure there. With VCN most of your distributions will be in the form of Canadian-eligible dividends which are taxed at a much lower rate. Particularly once you've retired and have less income at the regular tax rates.

http://www.taxtips.ca/taxrates/bc.htm
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Retire-Canada on February 25, 2016, 01:49:14 PM
Yes there is. For tax purposes, once you're investing in cash (taxable) accounts, it's most efficient to put your Canadian exposure there. With VCN most of your distributions will be in the form of Canadian-eligible dividends which are taxed at a much lower rate. Particularly once you've retired and have less income at the regular tax rates.

http://www.taxtips.ca/taxrates/bc.htm

Thank you. :)
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: c-kat on February 27, 2016, 06:50:02 PM
Hello,

I have a question about the Liberal's new Child Tax Benefit. It is based on the "adjusted
family net income" and I'm wondering how that is calculated?  If for example a family makes 100K, but puts 10K into an RRSP and pays 20K in tax, would the benefit be based on 100K or the 70K?

Best,

Carla
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Prairie Stash on February 28, 2016, 08:07:26 PM
Hello,

I have a question about the Liberal's new Child Tax Benefit. It is based on the "adjusted
family net income" and I'm wondering how that is calculated?  If for example a family makes 100K, but puts 10K into an RRSP and pays 20K in tax, would the benefit be based on 100K or the 70K?

Best,

Carla
I think it will be line 236 of your tax return - net income combined with your spouse/partner if you have one.

My family net income is Total - RRSP -$8000 Daycare expenses. $8000 in the 2015 maximum amount you can claim, claimed by lower earner in dual households, if you paid more than that it doesn't matter, if you paid less than use that amount.

Using your example it would be $100,000-$10,000= $90,000.

Please note it hasn't passed yet, March 22, 2016 is the date to watch. The pledge was to start payments in July.
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: PharmaStache on March 02, 2016, 12:19:21 PM
Can anyone give me an ELI5 explaination on (or link me one) taxes for taxable accounts?  Everything I am reading is way over my head.

We will soon run out of RRSP/TFSA space.  Thus, we will invest in VCN in a taxable account at Questrade.  So far I have figured out that we should not DRIP it because it complicates our ACB (I'm still not clear on what an ACB is).  For regular contributions, does it make any difference to the simplicity of our accounting to do a yearly contribution?  Quarterly?  Monthly?

When dividends are distributed we will reinvest them.  But we still must pay tax on them for that tax year, right (same as you'd pay interest on a taxable HISA)?  I've never gotten or seen a T5 slip, so is all of the info we need for declaring our dividends on that slip? 

What if we eventually sell- what exactly should we be keeping track of ourselves?  Or do we just need the T5 slip?  If we can't figure out how to do the taxes on this ourselves, what do I need to supply an accountant with? 

For the record, I've read this CCP article and the white page associated with it and I have NO CLUE what it is saying.  http://canadiancouchpotato.com/2013/04/04/calculating-your-adjusted-cost-base-with-etfs/
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: daverobev on March 02, 2016, 01:01:32 PM
Can anyone give me an ELI5 explaination on (or link me one) taxes for taxable accounts?  Everything I am reading is way over my head.

We will soon run out of RRSP/TFSA space.  Thus, we will invest in VCN in a taxable account at Questrade.  So far I have figured out that we should not DRIP it because it complicates our ACB (I'm still not clear on what an ACB is).  For regular contributions, does it make any difference to the simplicity of our accounting to do a yearly contribution?  Quarterly?  Monthly?

When dividends are distributed we will reinvest them.  But we still must pay tax on them for that tax year, right (same as you'd pay interest on a taxable HISA)?  I've never gotten or seen a T5 slip, so is all of the info we need for declaring our dividends on that slip? 

What if we eventually sell- what exactly should we be keeping track of ourselves?  Or do we just need the T5 slip?  If we can't figure out how to do the taxes on this ourselves, what do I need to supply an accountant with? 

For the record, I've read this CCP article and the white page associated with it and I have NO CLUE what it is saying.  http://canadiancouchpotato.com/2013/04/04/calculating-your-adjusted-cost-base-with-etfs/

AFAIK, unless you DRIP *directly* - ie through Computershare or CST - you do not need to keep an ACB record yourself. Your broker will do this all for you.

ACB is adjusted cost basis. If you buy 100 shares of VCN for $5, and 100 more for $10, you have 200 shares which cost you $7.50 each - NOT 100 you can sell for $12 and only pay cap gains on the $2 profit per share. Shares are 'fungible' meaning, like a coin or note, it doesn't matter which share you have - a share is a share. Basically the govt doesn't want you selling only the shares with minimal gains (or most losses!) - they make you average it out.

An ACB sheet is actually not that painful. I have to do it because I DO own shares directly. You just have to log every reinvested dividend and purchase you make. Some of the DRIPs I do have discounts when you reinvest the divis.

For VCN, because it contains Canadian companies, the tax you will have to pay will be little. You are paying tax on the divis, though, yes. You get a weird gross up and credit on your taxes but it's fine. If Canadian divis were your only income, you could receive roughly $40k a year before having to pay a significant amount of tax (though things like the Ontario health premium thing still apply as normal).

For a simple ETF buy you should get all the info you need on a slip. The slip is pretty clear. I believe you'll also get a T5008, statement of activity with the broker. THAT is where you get the buy/sell stuff from - your T5 only deals with distributions (divis).

It's not falling off a log easy, but it's not hard either. Perhaps just do a couple of buys in your first year - but make sure you get over $50 in divis else they are not obliged to do a T5. I have DRIPs I started late in a year that I didn't get slips for (of course, you can work out the numbers, but it's MUCH more of a pain).
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: Cookie78 on March 02, 2016, 03:16:37 PM
I have a capital gains question.

My father owns a piece of property that he purchased for $12,000 and is now worth $1,500,000. It is a sentimental family property and he wishes to leave it to my brothers and I when he passes. I was learning about capital gains and estate planning and realized there may be a large tax bill that occurs when that happens, unless it is declared as his primary residence.

He says it is his primary residence, however he does not live there. He live a mile away with his girlfriend, and has for many years. He is still legally married to my mother and his girlfriend is also still legally married, so they can not be declared as common law (or rather adult interdependent relationship, in Alberta). It is, to my knowledge, the only piece of property he owns with a house on it (the rest is farmland).

My question, to avoid a quarter million dollar capital gains tax bill in the future, is, how does he legally insure that his property is listed as his primary residence, even though he doesn't live there. His girlfriend's house is HER primary residence, but because they can't be listed as common law, it's not also his primary residence. Correct?
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: c-kat on March 02, 2016, 06:32:14 PM
Hello,

I have a question about the Liberal's new Child Tax Benefit. It is based on the "adjusted
family net income" and I'm wondering how that is calculated?  If for example a family makes 100K, but puts 10K into an RRSP and pays 20K in tax, would the benefit be based on 100K or the 70K?

Best,

Carla
I think it will be line 236 of your tax return - net income combined with your spouse/partner if you have one.

My family net income is Total - RRSP -$8000 Daycare expenses. $8000 in the 2015 maximum amount you can claim, claimed by lower earner in dual households, if you paid more than that it doesn't matter, if you paid less than use that amount.

Using your example it would be $100,000-$10,000= $90,000.

Please note it hasn't passed yet, March 22, 2016 is the date to watch. The pledge was to start payments in July.

Thank you!
Title: Re: Can"EH"dian Tax - You have questions, I have answers
Post by: max924 on March 02, 2016, 06:47:36 PM
Hi there! Great thread here! I have an exciting LIRA question...

 I just found out that if i terminated today from my company and decided to have my pension commuted the values breakdown as follows:

-$280,000 goes to a tax sheltered spot (i assume whats left of rrsp room and the rest an LIRA )
-$111,000 in cash (taxable).

So my question is how do I make use of the locked in money (LIRA)? I plan on working until at least age 38 (32 now) so these numbers should be significantly higher. Would I be able to use my LIRA money at such an early age? My personal investments in RRSPs are already maxed and will continue to be. My retirement plan would be to combine the commuted value of the pension with my personal investments as my source of income after I quit.

Everything I read doesn't seem to touch on using the locked up money pre age 55. I did read that there may be a loop hole to unlock the funds at age 47 which is the early retirement age of my plan, but .i would want it even earlier.

Any thoughts??

Max

Title: Re: Can"EH"dian Tax - You have quest