Author Topic: Can"EH"dian Tax - You have questions, I have answers  (Read 129224 times)

CPA CB

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Can"EH"dian Tax - You have questions, I have answers
« 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!


Guses

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #1 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)?

TrMama

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #2 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?

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #3 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.

 

Guses

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #4 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.

 

going2ER

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #5 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.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #6 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.
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CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #7 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.


TrMama

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #8 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.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #9 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 :)

TrMama

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #10 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?

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #11 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.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #12 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?

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #13 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?
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going2ER

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #14 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.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #15 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?

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #16 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 %.
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CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #17 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.

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #18 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.

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #19 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.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #20 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!


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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #21 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

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #22 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.
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #23 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!

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #24 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.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #25 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.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #26 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

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #27 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.

totoro

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #28 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.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #29 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.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #30 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.





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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #31 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.

totoro

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #32 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).

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #33 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.




totoro

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #34 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."

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #35 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.


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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #36 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.

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #37 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!

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #38 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!


Ziggurat

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #39 on: October 18, 2014, 02:49:42 PM »

Good luck!

Thanks, and thanks again for all your advice.  Lots to think about!

c-kat

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #40 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 canít deduct it.  Is there any tax reason we canít 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 Ė 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.

c-kat

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #41 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. :)

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #42 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








CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #43 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...


Natcat

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #44 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?

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #45 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!



daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #46 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!
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CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #47 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!


daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #48 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?
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yyc-phil

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #49 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?
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