“We believe your retirement should be enjoyed because you’ve earned it”
American lawmakers are considering further opening the border to Canadian snowbirds, by extending the amount of time vacationers can stay each year.
Two U.S. bills propose to allow certain Canadians to visit for up to eight months, rather than six. Thousands of Canadians head south during winter each year, with some carefully counting each allotted day to avoid trouble with U.S. immigration officials and Canadian health-care programs. If passed, the new laws could give some of them breathing room, though much work remains.
The federal government applauded the proposed changes, but said it had nothing to do with them. Instead, a non-profit group – the Canadian Snowbird Association (CSA) – says it met with more than 100 American senators, members of Congress and staff to press for the changes.
The campaign, though, is far from over. The bills haven’t passed, and a previous version did not pass. Meanwhile, in Canada, many provinces still require six months of residency for health-care coverage. Advocates nonetheless call the proposals a first step.
“Our approach is that once the law passes, we’ll be in a better position to further our efforts in Canada,” said Evan Rachkovsky, a research officer at the CSA.
Canada’s Department of Foreign Affairs and International Trade said it does not, and has not, lobbied for the changes. The department nonetheless said “we support any efforts to increase trade and tourism between our two countries.”
The two proposed American bills, introduced this year, overlap – a sign of the difficult path U.S. bills take to being enacted. If one does manage to pass, the other likely won’t, according to a spokesman for Congressman Mike Quigley, who co-sponsored one of the two bills with Congressman Joe Heck. The other was tabled by prominent Democratic Senator Charles Schumer as part of immigration changes.
“The bill is about bringing more travellers and tourists to the U.S. by streamlining the visa processing system,” Greg Lemon, a spokesman for Mr. Heck, said in an e-mail. Canadians spent $16.5-billion in the U.S. in 2011, according to the Canadian government.
The CSA also hopes for changes to tax regulations, Mr. Rachkovsky said. Currently, Canadians who spend more than six months in the U.S. are not eligible to claim an exemption from being taxed in the U.S. Mr. Rachkovsky’s group is lobbying to extend that to eight months as well.
“They recognize these obstacles,” Mr. Rachkovsky said of the U.S. lawmakers working with his group. “And they have assured us that they will change the formula if the act were to pass.”
The two proposed laws are different. For instance, Mr. Schumer’s bill applies to Canadians 55 and older, while the other bill applies to those age 50 and older. The age is “not set in stone at this point,” Mr. Lemon said. Both allow for a spouse to stay under the same rules.
Both bills would require vacationers to maintain a residence in Canada, and either own a home in the U.S. or sign a rental agreement for the duration of their stay. The visitors would be forbidden from working in the U.S. or claiming welfare. The CSA also hopes to see the changes included in a third U.S. bill, which hasn’t yet been tabled.
Federally, Canadian citizens have no rules governing how often they are in the country, though permanent residents must spend at least two years in the country within a five-year period.
Health-care rules would need to be changed to allow travellers eight months’ leave. In Ontario, B.C. and Manitoba, for example, Canadians can spend a maximum of seven months outside the country each year if they wish to maintain their health coverage. Other provinces set the limit at six months. Some provinces grant exemptions, including New Brunswick, where residents can apply to leave for of up to 18 months every three years. The snowbirds’ group is pushing for all provinces to extend health coverage for eight-month absences.
Source: Globe and Mail
Finally, it feels as though spring has arrived. This means two things around our home: It’s time to pull out the golf clubs and time to open the summer home. The worms at the course where I play are pretty crafty. When they see me coming they hide under my ball; it’s the only safe place for them. So I promise not to give any golfing advice today. As for vacation properties, though, I’d like to talk about a common ownership structure: the family trust.
The trust A trust can be a useful estate planning tool for vacation property owners. Basically, a trust is a relationship among three parties: the settlor, trustee and beneficiary. The trust is created when the settlor transfers certain assets to one or more trustees, who hold and manage those assets for the benefit of the beneficiary (or beneficiaries). The beneficiaries enjoy the use of the assets but do not legally own them. If, for example, you transferred your cottage to your sister in trust for your children, your sister would legally own the property, but your children – not your sister – would be entitled to use the property.
A trust set up during the lifetime of the settlor is called an “inter vivos” trust, while a trust set up upon the death of the settlor through his or her will is a “testamentary” trust. Currently, inter vivos trusts are taxed at the highest marginal tax rate while testamentary trusts are subject to graduated rates of tax, like individuals (although the March 21 federal budget announced the government is considering a change that could see testamentary trusts taxed at higher rates).
The benefits Holding your family cottage in a trust can provide some benefits, including: protection from creditors (assets held in certain trusts can be difficult for creditors to reach), proper governance (in cases where multiple individuals share a cottage, having one or more trustees manage the property can minimize disputes), tax minimization (the future growth of the cottage’s value will not accrue in the settlor’s hands, which can reduce or defer taxes), maintaining control (the settlor can be named one of the trustees, who manage the property), and minimizing probate fees.
The nuances In deciding whether to set up a trust to hold your cottage, there are a few issues to consider:
• There is a deemed disposition every 21 years. On the 21st anniversary of the trust there will be a deemed disposition of its assets, which could trigger taxable capital gains at that time. There are ways to deal with this potential tax hit, including distribution of the trust to beneficiaries before that date, or the trust’s use of the principal residence exemption (PRE) on the property, among other ideas. A tax pro should be consulted to plan for this.
• The principal residence exemption becomes finicky. A trust can use the PRE to shelter a sale of the cottage from tax as long as one or more of the beneficiaries stay at the cottage regularly. But it may make more sense to distribute the cottage to a beneficiary before the property is sold. If the trust designates the cottage as a principal residence for a given year then, generally, none of the beneficiaries will be able to also designate their own homes as a principal residence for the same time period. I’ve simplified things here, so speak to a tax pro for more details.
• Transferring assets to a trust can be a taxable event. In the case of a vacation property, it simplifies things if you set up a trust to acquire it from the outset. If you already own the cottage and it has appreciated in value, transferring it to a trust can trigger a taxable capital gain. It may be possible to shelter this gain with the PRE, but whether this is possible, or sensible, will depend on what other properties you own, how those have appreciated in value, and what plans you have for those other properties in the future.
• You must have a properly drafted trust agreement. In order for a valid trust to exist, certain conditions must be met. A written trust agreement will generally ensure a trust is valid. This will cost a little money, but is an important part of the process.Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.
Original Article: Globe and Mail
If you filed your taxes on time, you might be familiar with the new Canada Revenue Agency tax form. “Line 1” reads: Total income. “Line 2” says: Send it in.
Kidding. The forms haven’t been simplified quite that much.
Now, if you sent more to the taxman during 2012 than you should have, you might be expecting a tax refund some time soon. A friend once told me that getting a tax refund made him feel as though he had been shot at, and missed. It’s a relief for some.
So, what are you going to do with your tax refund this year? There is no shortage of ideas. Here are 10 smart ways to use that refund.
H&R Block’s Cleo Hamel shares some ideas for elderly Canadians, and their children, to minimize taxes.
As Canadians head through tax filing season, professionals say missed deductions and a fear of making mistakes are among the biggest obstacles for many people.
Tax software removes mistakes in arithmetic, but people need to be aware of how any changes in their lives will affect their taxes, said tax guru Evelyn Jacks.
“The errors of omission are going to come from you,” said Jacks, who has written more than 45 books on taxes and wealth management.
She said the goal should be to pay the least tax allowed by law.
“What you want to strive to do is pay the correct amount of tax and no more.”
But Canadians commonly fail to make all their eligible claims for medical expenses as well as moving expenses such as such as real estate commissions, Jacks said from Winnipeg.
“People just don’t know what’s claimable,” she added.
Examples of claimable expenses include: the cost of widening a doorway to accommodate someone in a wheel chair, hearing aids and hearing aid batteries.
“People don’t understand that they can adjust their tax returns if they miss something and you can basically go back 10 years on most federal provisions. So if you become aware of something, maybe a pro can help you recover taxes from the past.”
Nazima Rayani of tax software maker Intuit said fear of mistakes also looms large.
A recent survey by Intuit found that 38 per cent of respondents thought they would miss deductions due to a lack of awareness.
Twenty-five per cent surveyed said they have never done their own taxes and a majority of those said it was because they were afraid to make a mistake, Rayani said.
As for tech savvy young people born between 1980 and 1995, the survey found that only about a third planned to do their own taxes using software while 26 per cent said they would go to a professional accountant.
“We know that they’re very comfortable using technology, but for some reason the issue is really a mis-perception that filing your taxes using software is somehow difficult or scary,” said Rayani, who’s based in Edmonton.
How to deal with investment income can also be challenging for Canadians.
“While many Canadians are familiar with the basics of tax preparation, there appears to be a knowledge gap particularly on investment income,” said John Waters, head of tax and estate planning at BMO Nesbitt Burns.
A study by BMO Nesbitt Burns found that 58 per cent of Canadians weren’t sure about how capital gains are taxed and 33 per cent lacked knowledge on how charitable donations are taxed.
Jacks said Canadians also need to be aware of the family caregiver tax credit if applicable and changes to the Canada Pension Plan and Old Age Security.
Beginning in 2023, the federal government is gradually shifting the age of eligibility for old age security and guaranteed income supplement payments from 65 to 67.
“You really need to inform yourself so that you can set up your affairs to benefit from the tax system.”
Most tax software packages optimize expenses that can be transferred between family members, Jacks said.
“The family economic unit is going to do better when you file your tax returns together because we can transfer things back and forth.”
Jacks noted that the average tax refund for 2011 was just under $1,700.
“A refund is not necessarily a good thing because that’s just the money you have overpaid.”
The deadline for filing 2012 income tax returns without late penalties is April 30.
5 common tax mistakes:
According to tax experts, these are five common problems that can cause mistakes when people file their tax returns:
1. Miss deductions such as medical, transit pass and caregiver credits.
2. Lose or misplace receipts.
3. Unaware of changes to tax laws.
4. Don’t understand how investments are taxed.
5. Don’t understand how to transfer tuition or medical expenses between family members.
Article: Globe and Mail
A few years ago some Australian scientists found a male Lavarack’s turtle, which was thought to have been extinct. And although I could be mistaken, I’m sure I saw a dodo bird in my backyard last summer (although it could have been my neighbour’s cat, which doesn’t move very quickly and is probably 30 pounds overweight).
Investors are hopeful that, after last week’s federal budget rendered certain investment funds extinct, there might still be life in the world of tax-efficient investing. Let me explain.
The federal budget on Mar. 21 put an end to something called “character conversion transactions.”
These are financial arrangements where the investor is seeking to convert highly taxed interest (or “ordinary”) income into capital gains, which are taxed at half the rate. In recent years there have been many mutual funds that have adopted this strategy to provide yield-starved investors higher after-tax returns on their fixed income investments.
The funds would accomplish this through forward agreements to buy or sell certain capital property at a specified future date.
The purchase or sale price of the capital property under a derivative forward agreement is not based on the performance of that property between the date of the agreement and the future date, but is instead fully or partly based on the performance of some underlying portfolio of investments – called a reference portfolio.
The reference portfolio typically contains investments that produce fully taxable interest income. As the future date under the forward agreement would draw near, the fund would realize capital gains, effectively converting interest into capital gains for the investor.
The budget proposed to render this type of structure extinct by treating the returns realized under the forward agreement in these cases as ordinary income rather than capital gains where the forward agreement has a duration of more than 180 days. So much for the tax benefit.
As artists, Lucy and Joseph feel they are “on very volatile grounds” financially because their income is so unstable.
It is also modest. They brought in less than $62,000 between them from their artistic endeavours last year. They also had some income from their basement flat and the occasional rental of their cottage.
So when Joseph learned he was about to inherit a substantial sum of money, he knew he needed a plan.
Joseph is 53, Lucy 51. Their goal is to build a more solid financial base over the next 10 to 15 years for their and their children’s security. Their sons, ages 15 and 20, live with their parents in their downtown Vancouver home.
“We grew up where family values were to save and invest in real estate as best we could for our future and our children,” Joseph writes in an e-mail. “I have just received my first $100,000 and immediately paid off our mortgage so we are officially DEBT FREE!!!” he writes. Altogether, Joseph will receive about $900,000 over three years.
“How should our money be invested so that we can live off our investments from retirement age onward, yet leave a comfortable amount for our children and grandchildren when we die?”
We asked Matthew Ardrey, manager of financial planning at T.E. Wealth in Toronto, to look at Lucy and Joseph’s situation.
Most Canadian parents know about RESPs (which doesn’t necessarily mean they have them) but few are aware of alternative ways of saving for their child’s post-secondary education, says a new report.
The report, released Wednesday by the Bank of Montreal, says a study conducted last year found that 83 per cent of parents expect to pay for their child’s college or university costs, while 44 per cent expect their child will also chip in.
It’s no surprise that parents want to help. With tuition costs soaring and the job market looking bleak, today’s young adults are more likely than ever to finish post-secondary school burdened with significant amounts of debt. Spending years repaying that student debt will in turn hurt their ability to save for things like getting married, buying their first home, and starting a family.
According to one estimate, Canadians leave school with an average student debt of $27,000. “Currently, a four-year university degree can be expected to cost upwards of $60,000,” the BMO report said. “That sum could rise to more than $140,000 for a child born this year.”
RESPs (registered education savings plans), which have been around in their current form since 1998, are the most popular way for parents to save for their kid’s higher education. Money placed into these investment accounts can grow tax-free. Through the Canada Education Savings Grant, the federal government provides a 20-per-cent grant on RESP contributions of up to $2,500 a year.
However, the BMO report says that while half of Canadian parents use RESPs, only 34 per cent are taking full advantage of this government grant. It also found that parents wait too long to start saving, do not save consistently enough, and are not familiar enough with the legal and tax implications of using these accounts.
Rona Birenbaum, an independent financial planner at Caring for Clients in Toronto, says the parents she talks to are “most definitely” concerned about saving for their children’s higher education. She encourages parents to maximize their RESPs and get the 20 per cent government grant. “This is free money the government is giving parents to help fund their kids’ school.”
However, most of the parents she meets are too financially strapped with repaying debt, paying off their mortgages, saving for retirement and covering everyday expenses to be able to do much else. “I don’t see that many that have the capacity to save beyond that annual RESP maximum, which is $2,500 per child per year,” Ms. Birenbaum says. “The five alternatives offered below are for people who have spare money lying around and are looking for tax-efficient ways to save for this.”
Even parents who contribute the maximum amount to an RESP for the required 17 years are going to find that they need extra money to cover the costs of a higher education, especially if the child goes away to school, Ms. Birenbaum says. She encourages parents to get kids involved in saving for their own education through summer and part-time jobs.
For parents who are maximizing their RESP contributions and looking for other ways to save, the BMO report offered these five options:
1) Open a non-registered account The benefits of opening a non-registered account specifically for the purpose of saving for your kid’s schooling is that it is easy to set up, simple to understand and offers flexibility, the BMO report says. You can withdraw the funds for whatever reason at any time, and retain control of them after your child reaches the age of majority. The downsides are the temptation to use these funds for something other than your child’s education, as well as that the parents will be taxed on all the income and any capital gains.
2) Use a Tax-Free Savings Account (TFSA) By putting money into a TFSA, parents’ savings will grow tax-free and the money can be easily withdrawn in the future to help finance a child’s education, without having to pay taxes, the BMO report says.
3) Set up a trust A trust, a legal agreement where money is transferred from one person to another according to specific terms, is a good way to “manage, control and protect funds” because it gives a parent – or grandparent – the peace of mind of knowing that the money will be used for its intended purpose, the BMO report says. It is important to set up the trust properly with a written agreement that outlines terms and conditions, it added, noting that there are also tax consequences to consider, depending on how the trust is funded.
4) Pay out corporate dividends If you are incorporated or have an incorporated family business, you could build up savings in your corporate account and pay them out in the form of a corporate dividend at a later date to pay for your child’s education, the BMO report says. Your child would need to own shares of your company. The benefit of this is that the dividends will be taxed in the hands of your child, who will presumably have a low income, it added.
5) Get life insurance Parents or grandparents can use life insurance to fund their child’s or grandchild’s post-secondary education by building up and then tapping into the excess cash value within an insurance policy, the BMO report says. The benefit of this strategy is that the growth would be tax-deferred inside the policy, it says, while it is building while the downside is that the parents or grandparents will lose control over the money put into the policy and the coverage offered by the contract.
Mike Holman, the author of The RESP Book and the Money Smarts blog, dismissed the idea of saving for a child’s education through life insurance. “That’s a really expensive way to save for anything,” he says, pointing to the high fees and commissions associated with this method.
He was also critical of the trust option, noting that the child could choose to use their education money for other purposes. “At age 18, one might be tempted to buy a new corvette rather than go to school. I know I would have,” he joked.
Article: Globe and Mail
Last weeks Federal Budget proposed no major tax rate changes but did contain some important proposals designed to close perceived tax “loopholes” and to improve fairness in the tax system. The following is a summary of the proposals which have the greatest impact on individuals (note: the full memo can be accessed at KNV Chartered Accountants website, including measures concerning businesses and corporations).
Dividend Tax Credit
Budget 2013 proposes to adjust the gross-up factor and dividend tax credit for non-eligible dividends (dividends paid from corporate earnings taxed at the small business rate). The change is in an attempt to close the gap between the tax rates experienced by individuals that receive dividend income from a corporation and those that earn income directly. As a result, the tax rates on dividends paid from small business income in BC in 2014 will be as follows:
|$11,038 to $37,567||$37,569 to $43,561||$43,562 to $75,138||$75,139 to $86,268||$86,269 to $87,123||$87,124 to $104,754||$104,755 to $135,054||over $135,055|
|*Effective for 2014 and 2015 for income in excess of 150,000|
Lifetime Capital Gains Exemption
Budget 2013 proposes to increase the lifetime capital gains exemption from $750,000 to $800,000 effective for the 2014 taxation year. The LGCE will also be indexed to inflation for taxation years beginning after 2014.
The new rules will apply to all taxpayers, so those individuals who have used their $750,000 exemption will have an additional $50,000 exemption beginning in 2014.
T1135 – Foreign Income Verification Statement
The T1135 information return requires taxpayers to disclose their foreign investments and income therefrom to the Canada Revenue Agency (“CRA”). In connection with Form T1135, the normal assessment period for a taxation year of a taxpayer is to be extended by three years if the taxpayer fails to report income from a specified foreign property and a Form T1135 for the year was not filed on time or a specified foreign property was not, or not properly, identified on the form. There are already monetary penalties for failing to file this form on time, so with this new potential penalty taxpayers will need to take extra care that these filings are complete and filed on a timely basis. This measure will apply to the 2013 and subsequent taxation years. The CRA is also in the process of developing a system that will allow Form T1135 to be filed electronically and it will announce when electronic filing becomes available.
Safety Deposit Box Deduction
Effective for the 2013 taxation year, safety deposit boxes will no longer be a deductible item on a personal tax return on the basis that because of modern technologies, safety deposit boxes are more so being used to safeguard personal valuables, instead of for storing and protecting investment portfolio information and are therefore no longer considered an expense related to earning investment income.
Consultation on Graduated Rate of Taxation of Trusts and Estates
Currently, it may be beneficial for an individual to establish a trust in their will for their beneficiaries, as such a trust can access the low personal marginal tax brackets. The federal budget announces the Government’s intention to consult on the possible elimination of the graduated tax rates for grandfathered inter vivos trusts and testamentary trusts.