Filing a tax return by paper can be complicated nowadays. My brother-in-law has a friend living in Chimacum, Wash., who contacted the U.S. Internal Revenue Service to request a single blank copy of the U.S. personal tax forms from a prior year so that he could revise an old tax return.
Three weeks later he received the forms in the mail. They were for the wrong year. Even worse, the forms came in two shipments totalling 48,000 copies of the tax forms with instructions. The Canada Revenue Agency could have just as easily made this mistake.
Tax-filing tip No. 1: Don’t request paper tax forms. File your return electronically. Now, consider these additional six tips to make sure your tax season is not a costly one:
Compare your tax return with prior years
Once you’re done preparing your tax return, compare it – line by line – with your tax return from last year and the year before. Income, deductions and credits don’t change much from year to year for most people. If you notice big differences between your return this year and your prior returns, ask yourself why. You might just find a mistake made on your return this year, or in a prior year. If you made a mistake in the past, you may be able to recover taxes paid by filing an adjustment for the prior year, using Form T1-ADJ.
Avoid penalties for filing late
The filing deadline for tax returns is generally April 30. Be sure to file by this date if you owe taxes. Failing to file on time will result in a penalty of 5 per cent of your taxes owing, plus 1 per cent for each month your return is not filed, to a maximum of 12 per cent. The penalties could be double this amount if it’s your second time failing to file on time in the past three years. Even if you haven’t got the cash to pay your taxes owing, file your return to avoid these penalties. By the way, your filing deadline is extended to June 15, 2015, if you or your spouse or common-law partner reports any self-employment activity on either return (if you owe tax, the balance is still due by April 30 if you want to avoid interest).
Remember less common forms
Some forms are due on the same date as your tax return and shouldn’t be forgotten. If you had net capital losses in 2014 and hope to carry back those losses to one of the three prior years, file Form T1A by the due date for your return. Likewise, if you have foreign assets with a total cost of $100,000 or more, Form T1135 is due, and Forms T1141 and T1142 may be due if you made transfers or loans to, or received distributions from, a non-resident trust. Finally, if you sold a property designated as your principal residence in 2014 you might have to file Form T2091 (see my article dated April 12, 2012).
File a tax return for your kids
If your kids earned any income in 2014, file a tax return for them, regardless of their ages. Although they may not be required to file if they aren’t going to owe tax, reporting earned income will create valuable contribution room for a registered retirement savings plan, which will help them save tax later when they are in a position to contribute. Further, once a child has reached age 19, he may be entitled to cash back in the form of a GST or HST credit just for filing a tax return.
File in the U.S. if you must
If you’re a U.S. citizen living in Canada you’re required to file a tax return in the United States each year. The good news? You may be entitled to the “foreign earned income exclusion,” which, for 2014, will shelter from tax the first $99,200 (U.S.) of income earned outside the U.S. The bad news? You won’t be entitled to the exclusion unless you file a U.S. tax return. U.S. citizens living abroad have an automatic extension to June 15 to file a tax return.
Pay your taxes as soon as possible
If you haven’t got the cash to pay your taxes owing, the CRA will charge you interest on any unpaid balance. The current rate on overdue taxes is 5 per cent, which is historically low, but if you can borrow at less than 5 per cent, you may be better off borrowing to pay your tax bill.
Article: The Globe and Mail
Carrying on a business comes with certain risks. Just ask Shelley Rosenfeld, owner of the Plants & Planters store in Richardson, Tex. Her store was robbed after business hours more than once, so she installed a surveillance camera to catch the culprits. It worked. She captured on video a monkey scaling her fence, grabbing plants, flowers and accessories, and handing them to an accomplice.
A gentleman by the name of Mr. Smith (not his real name) carried on three “businesses” over the course of 2005 through 2007. He wrote articles for a local newspaper, rented tools and equipment, and operated a rental property.
Mr. Smith also served as a town councillor, and his articles in the paper were largely around political issues related to that work. The Canada Revenue Agency disallowed business losses of about $37,000 during 2006 and 2007. His business losses arose primarily because of legal fees he deducted (he was sued for articles he had written). Mr. Smith claimed that he was to be paid $100 for each article he wrote, but he never did collect any revenue.
Mr. Smith also claimed to be operating a tools rental business. He used the tools primarily in his own rental property operation, but did rent them out to friends. He didn’t advertise the business, had no signage and made no effort to find more customers.
Mr. Smith reported his business activities on his personal tax return but didn’t separate the writing, tool-rental and rental-property activities. He simply combined everything on one business income statement, which made things confusing for the CRA and the court.
In the end, the CRA disallowed his business losses and certain expenses. He went to court and the judge sided with the taxman, for the most part. Although he was allowed to claim some property taxes, telephone costs, insurance and certain repairs, the judge concluded that Mr. Smith’s writing and tool-rental activities were not commercial activities and therefore his losses were denied and certain deductions were not allowed. Further, when it came to his rental property, he was not allowed to claim GST input tax credits on certain expenses since he didn’t have a reasonable expectation of profit.
As you file your tax return, remember four key lessons to be learned from Mr. Smith:
Report different activities separately
Our tax law requires that each source of income, or business activity, be accounted for separately. Mr. Smith looked very unorganized to the court. He didn’t keep proper records and reported all activities on one statement. This didn’t help his cause.
Carry on activities in a commercial manner
The judge concluded that Mr. Smith’s writing activities were undertaken to provide a vehicle for sharing his political views, not to earn income. He made conflicting comments: He once said that he had donated the articles to the paper, and then backtracked later and said he was expecting to be paid $100 per article at some point (which never happened). As for his tool-rental activities: He rented them periodically only to his friends, and didn’t seek to find other customers. Prior court cases (see Stewart v. The Queen, 2002 S.C.C. 46) have established that, where an activity is truly commercial in nature, the taxman cannot disallow losses under an argument that there is no reasonable expectation of profit (REOP). But where an activity is not commercial in nature, then a source of income does not exist and losses can be denied if there is no REOP.
Connect expenses to earning income
The judge said that, even if Mr. Smith had been carrying on a commercial activity, his legal fees and certain costs related to his rental property would not have been allowed because they were not, in the judge’s view, incurred for the purpose of earning income from those activities.
Know your story ahead of time
If there are any grey areas in your tax filings, make sure you have thought through the rationale for your filing position. Make sure you have a well-reasoned and consistent story to justify your deductions and losses. A tax pro can help formulate this with you.
Article: The Globe & Mail
Kids these days aren’t the only ones texting each other. Many seniors are tech-savvy today, too. Seniors even have their own texting lingo. For example, BFF means “best friend fainted.” BYOT means “bring your own teeth,” LMDO means “laughing my dentures out” and SMPI means “splitting my pension income.” It’s this last concept that I want to talk about today.
In 2007, our government introduced the opportunity for older Canadians to shift certain pension income from one spouse to the other – known as pension income splitting, and the idea could save you tax dollars.
The rules allow a pensioner to transfer up to one half of his or her eligible pension income to a spouse or common-law partner. You can accomplish this by filing a joint election using Form T1032, the Joint Election To Split Pension Income, by the deadline for your tax return. (By the way, it may be possible to file a late or amended election, or to revoke a previously filed election; speak to a tax pro for more details).
To do this, it’s important that you and your spouse or common-law partner were not – because of a breakdown in your relationship – living separate and apart at the end of the year and for a period of at least 90 days that began during the year.
On top of this, you both had to be residents of Canada on Dec. 31 of the year for which you want to make a transfer, and you had to have received eligible pension income. If you’re under age 65, this income includes payments from a registered pension plan, or certain amounts received as a result of a partner’s death. If you’re over 65, you can add payments from a registered retirement income fund or annuity payments from a registered retirement savings plan. Sorry, but Old Age Security (OAS) and Canada Pension Plan (CPP) benefits won’t qualify.
Conventional wisdom suggests that a higher-income spouse should transfer part of his or her eligible pension income to a lower-income spouse or common-law partner until their incomes are equal. Not so fast. While it’s true that splitting pension income can allow those transferred dollars to be taxed at your spouse’s lower marginal tax rate, and will create the opportunity for an additional pension income credit, there are potential costs, too.
Specifically, transferring pension income could cause you or your spouse to give up all of some of the following benefits and credits: OAS benefits (these benefits might have to be repaid as income increases), the age amount, spousal amount, the medical expense tax credit (you can only claim expenses that are in excess of $2,171 or 3 per cent of net income, whichever is less), and any other credits that are income-tested – which means they’re affected by your level of income.
Let’s consider John and Jane, a married couple. Suppose that John has eligible pension income of $50,000, OAS benefits of $6,677 and other income of $20,000, for a total income of $76,677. As for Jane, her total income is less, at $46,677, made up of OAS benefits of $6,677 and other income (not pensions) of $40,000.
You might assume that transferring some of John’s pension income to Jane to make their incomes equal would be optimal for them. That is, if John were to transfer $15,000 of his pension income to Jane, they would both have incomes of $61,677. Would this save them tax dollars? Yes, it would result in exactly equal tax liabilities and would save them $882 over all.
Yet, this isn’t the optimal scenario. As curious as it may seem, their taxes are minimized when John transfers just $5,500 to Jane. In this case, they will save $917 as a couple. Now, the difference between $917 and $882 in tax savings may not be significant, but the actual dollars saved can be very different depending on the level of income of each spouse and the disparity between incomes.
The total tax savings from transferring income from one spouse to the next will depend on how the transfer affects your other income-tested amounts – some of which I mentioned above. The moral of the story is this: There is good news here. You can save taxes by transferring pension income. The bad news is that doing the math in your head, or on the back of a napkin, is nearly impossible. To determine the optimal amount of pension income to transfer to your spouse you need to use tax software, or have a professional with tax software do the math for you.
Article: The Globe & Mail
With her oldest son, Jaeden, about to turn 12, Rebecca Flynn is feeling the pressure to start squirreling away money. “I don’t know what it is about this age, but it’s hitting me that he’s creeping closer and closer to adulthood, and that we need to start setting money aside to help him for college/university,” says the Omemee, Ont. resident. The problem is, she and her husband aren’t sure how. Living on one income for years has proven difficult, especially with Rebecca currently in university and raising four children.
Their situation isn’t unusual. Whether it’s because of financial strains or simply getting a late start at saving, 55 percent of Canadian parents say they will require government support to help with their child’s post-secondary education, while just 46 percent were currently in savings mode, according to a 2011 Ipsos Reid poll.
Thankfully, the news isn’t all bad. Experts agree it’s never too late to start investing and cite numerous options for setting funds aside. “Ideally the time to start saving is as soon as your child is born, but putting away money for their education can be done at any point,” says Bryan Sommer, financial planner at Interconnect Financial Services in Surrey, B.C. The first step to getting the investment ball rolling is to understand the options available.
That said, restrictions apply based on the age of the child. For example, if your child turns 15 this year and has never had an RESP, you must invest at least $2,000 before December 31, 2015 to qualify for the CESG. For teens older than 15, Bryan suggests putting money into another tax-sheltered vehicle like Tax Free Savings Account (TFSA) since it can grow and compound tax free.
You can open a self-directed RESP at your financial institution or with a financial planner. Group funds are another option. Also known as a scholarship plan, investors pool money together, and how much each child qualifies for depends on a) the plan’s account total and b) the number of students of the same age in school that year. Another benefit of this type of plan? It allows for greater choices and flexibility in terms of fund withdrawal and the type of post-secondary studies pursued.
Bryan says having your child contribute to their investment is another way to increase its value while encouraging fiscal responsibility (see below). “It gives them a sense of ownership over their future,” he says. “It’s like anything you work for; once you put in the time, effort and thought toward paying for something, you’re much more likely to take care of and value it.”
Don’t have enough money to get started?
If you receive the National Child Benefit Supplement for low income families, your child may be eligible to receive a Canada Learning Bond (CLB) for as much as $2,000. This money gets deposited directly into your child’s RESP. The CLB will provide an initial $500 for children born after January 1, 2004. Employment and Social Development Canada also kicks in $25 to cover set up fees with the first $500 bond. Then the CLB pays $100 a year for up to 15 years, or as long as you are entitled to the NCBS.
Children who are in care of a public primary caregiver who receive a special allowance under the Children’s Special Allowance Act, are also entitled to the CLB. (If the child ends up not doing any post-secondary education, the CLB is returned to the government.)
Teaching your teen to save can be an exercise in determination, but it’s worth it. Try these tips.
- Get your teen involved in your household budget. Show them how you track incoming funds and where these funds are allocated each month. “Involving them in the process and teaching them how to track finances won’t necessarily be the most exciting thing they’ve ever done, but helping them understand the value of saving early on will only benefit their future,” Bryan says.
- Instead of just forking out money the next time your teen asks for it, have her work for it. Doing special jobs around the house to earn commission/allowance is a great way to teach monetary cause and effect. (see Touchy Subjects on opposite page).
- Offer to match or at least contribute to their saving efforts according to what you can afford. Teens crave parental praise and support, and showing your willingness to invest in their success is a great way to encourage responsible habits.
Fairness is in the eyes of the beholder. You might recall the story of Jérôme Kerviel, who was the “rogue” derivatives trader who worked at the Société Générale SA bank in Paris. Mr. Kerviel was convicted in 2008 for breach of trust, forgery and unauthorized use of the bank’s computers, which resulted in losses to the bank of about $7.5-billion. Mr. Kerviel was fired, but he claimed the bank was being unfair.
When it comes to fairness, Canadian taxpayers have made it such a big issue that our government introduced “fairness rules” to give relief to taxpayers in certain situations. There is one situation that has come up over and over again, however, where Canadian taxpayers have cried foul but the taxman has refused to call the tax system unfair. A recent court decision sided with the taxman once again over the issue, and Canadians need to take heed. Let me explain.
Picture this. You’re employed by a company that offers a stock option plan. Under the plan, you’re able to buy shares in your employer at $10 per share. Over the course of time, the value of the shares on the open market rises to be worth $200 per share. So, you exercise your options and buy 1,000 shares for $10 each. Your cost, then, is $10,000. The shares are worth $200,000 (1,000 shares at $200 each). You make a nice profit of $190,000 in the process.
The fact is, this exercise of your options is going to trigger some tax. You have just realized a benefit of $190 per share ($200 less $10), for a total benefit of $190,000. This will be taxable to you, not as a capital gain, but as employment income. The good news? Most stock option plans in Canada are structured to take advantage of a stock option deduction equal to 50 per cent of the taxable benefit. In this example, then, we’ll assume that just $95,000 of the benefit (one half of $190,000) will be taxable. This will give rise to a tax bill of $44,090 for someone in a high tax bracket in Ontario in 2015.
But the story isn’t over. Suppose that you hold onto your shares, and the shares drop to just $10 over a short time. You still owe the taxman $44,090 in taxes but your shares are now worth just $10,000 (1,000 shares at $10 each). Where are you going to get the money to pay your tax bill? If you sell your shares for $10,000, you’ll realize a loss of $190,000 (your adjusted cost base is $200,000 – the value on the date you exercised your options – but you sell them for $10,000).
You might expect that your taxable stock option benefit could be offset by your $190,000 loss on the sale of your shares. Not so. The loss is considered to be a capital loss, whereas the taxable income was considered to be employment income. Capital losses can be applied against capital gains, but not generally other types of income. The result? You’ll face tax on the stock options with no immediate relief from the loss.
There have been a few court cases in the past on this issue. On Jan. 20, Mr. Bing Zhu, a Canadian taxpayer, was the most recent casualty of the courts (see Bing Zhu v. The Queen, 2015 TCC 16). Mr. Zhu had acquired 116,000 shares in his employer, Canadian Solar Inc. (CSI) and in September, 2008, exercised his options and acquired 53,150 shares in his employer. He had to report employment income of $1,667,070 (half of which was taxable due to the 50-per-cent stock option deduction) as a result of his stock options in 2008, but sold his shares in November, 2008, for a loss of $1,247,657. He tried to argue that his losses were not capital losses, but regular business losses, in an attempt to have his losses applied against his employment income. Didn’t work. The court ruled against him. Even though it may not be fair to Mr. Zhu, the court had no authority to give relief based on an argument of fairness.
To avoid the fate of Mr. Zhu and so many others, consider selling any shares acquired under a stock option plan as soon as possible. Otherwise, you run the risk of those shares dropping in value and leaving you with a tax hit and a capital loss that won’t offset your taxable employment income. As a minimum, sell enough shares to raise the cash to pay your taxes.
Article: The Globe & Mail
My kids can drive me nuts. I often wonder if it’s me with the problem. I was speaking to my neighbour, who’s a psychiatrist, about it. “John, I think I’m being reasonable. I think my kids are just being defiant,” I said. “Tim,” John replied, “your kids are fine and normal; you’re the one who’s crazy.”
“I want a second opinion,” I told him. Then he said, “Okay, you’re ugly too.”
Regardless of how my kids behave, I’m still glad I’ve got them. They’ve saved me thousands in tax over the years (among other benefits). Child-care expenses are just one of those costs that we’ve been able to deduct, and there were changes to this deduction announced last fall, so I think it’s time to revisit how child-care expenses work.
Let’s start with who can claim child-care expenses (CCEs). If you’re someone who has incurred CCEs to allow you to earn income from your employment or self-employment, obtain certain occupational training, carry on grant-funded research, or attend school under certain conditions, then you can deduct CCEs.
In order to claim these costs, you have to be living with the child and you must have personally paid the child-care costs, unless there’s more than one supporting person, in which case the supporting person with the lower income must claim the expenses. A “supporting person” is generally anyone who lived with you at any time during the year, and at any time within 60 days following the year, who is a parent of the child or is your spouse or common-law partner. Clear as mud?
By the way, there’s an exception to the “lower income” rule: The higher income supporting person can claim the CCEs during a time when the lower income person was attending a designated educational institution, was in prison or a similar institution for at least two weeks, was incapable of caring for your child due to a mental or physical infirmity, or was living apart from you for at least 90 days due to a breakdown in your relationship.
How much can you deduct? Here’s where the rules have changed recently.
For 2014, the maximum you can deduct is the least of three amounts: (1) the total amount spent on child care expenses, (2) two-thirds of the lower-income taxpayer’s earned income, and (3) the maximum dollar limit for your children ($7,000 for each child under age 7 at the end of the year; $4,000 for each child aged 7 years or older at the end of the year and under age 16 at any time in the year, and for infirm dependent children over age 16; and $10,000 for children who are eligible for the disability tax credit, regardless of their age).
On Oct. 30, 2014, the government announced that these dollar limits would be increased for 2015 by $1,000 – to $8,000, $5,000, and $11,000 respectively.
The types of expenses you can claim include babysitting, day nursery schools, daycare centre fees, fees to schools (the portion that relates to child-care services), day camps and day sports schools and attendance at a boarding school or camp. As for overnight camps and boarding schools, the maximum claim is $175 a week for each child under age 7 or children with mental or physical disabilities, and $100 a week for other kids (these limits don’t apply to day camps or schools).
It’s a good idea to ensure that the lower-income supporting person has sufficient income to allow that person to fully deduct all the CCEs incurred. Otherwise, you’re wasting good deductions. This could mean paying a salary to that person if you’re self-employed, or perhaps he or she can work elsewhere.
If you’re thinking of deducting CCEs as a business expense, don’t bother. It’s been tried. Court decisions have ruled against taxpayers in these cases.
You’re able to pay your child who is 18 or older to look after those who are 16 or younger, and you’ll be entitled to claim a deduction if you otherwise meet the criteria. The child earning the income will have to report it, but might not pay any tax if he or she has little other income.
Finally, be sure to list all of your children who were 16 or younger in the year on your tax return, even if you didn’t incur CCEs for them. The taxman won’t trace specific expenses to specific children, so listing all eligible children can increase the total costs you’re entitled to claim. And don’t forget to file Form T778 with your tax return to deduct your CCEs.
Article: The Globe & Mail
A friend of mine lives in Massachusetts and made an offer on a home that seemed unusually low in price. As it turns out, the home is next to an infamous property that was condemned by city officials in the recent past because it reeked of garbage and was infested with cockroaches.
My friend decided to buy the place, figuring that time will work in his favour. Buy low and sell high, as they say. The truth is, home ownership is one of the cornerstones of financial security, and if you’re thinking of buying a place don’t forget to consider your registered retirement savings plan (RRSP) as a source of some funds for a downpayment. The Home Buyer’s Plan (HBP) in our tax law makes it easy to use RRSP assets to help with a home purchase. Here’s a primer.
In order to use funds from your RRSP to help in a home purchase, you’ll have to be a first-time home buyer. This means that you may not have owned a home in the past five calendar years. More specifically, you’ll be out of luck if you owned a home during the window of time that starts Jan. 1 of the fourth calendar year before the year in which you make a withdrawal under the HPB, and ending 31 days before the date of the withdrawal. (If you have a disability or are buying a home for a related person with a disability, or are helping such a person to buy a home, the five-year condition may not apply)
If you’re married, each spouse can make a withdrawal under the HPB provided that neither of you has owned a home in the five-year period I’ve described, and you’re buying the home jointly. Even if your spouse has owned a home in the last five years, you can still make a withdrawal under the HBP as long as your spouse’s home was not your principal residence while you’ve been married or living common-law.
By the way, simply being pre-approved for a mortgage isn’t enough; you’ll have to actually enter into a purchase agreement to be eligible for a withdrawal under the HBP, and it has to be your intention to move into the home as your principal residence no later than one year after buying or building it. So, you can’t use the HPB to buy a rental property.
You, and your spouse if he’s eligible, can each withdraw up to $25,000 from your RRSPs under the HBP. You have to be resident in Canada at the time you make the withdrawal, and you have to withdraw all the funds in the same calendar year. You can only make withdrawals from your own RRSP (that is, an RRSP under which you’re the annuitant), and not a plan under which your spouse is the annuitant.
Also, you can’t generally make withdrawals from a locked-in RRSP or a group RRSP under the HBP, and any RRSP contributions that you make must stay in your RRSP for at least 90 days before you can withdraw those funds under the HBP, otherwise you won’t get a tax deduction for those contributions.
You’ll have to close your home purchase by Oct. 1 of the year following the year of withdrawal (the taxman calls this the “completion date”). For example, if you make a withdrawal under the HBP in 2015, you’ll have to take possession of your new home no later than Oct. 1, 2016. Be aware that you can extend the completion date by one year if certain conditions are met.
Finally, you or your spouse cannot own the home for more than 30 days before you make a withdrawal under the HBP. So it’s best to make the withdrawal before the closing date if you can.
You’ll have to repay the amounts borrowed from your RRSP under the HBP in equal instalments over 15 years, and your repayments will have to start in the second calendar year after the year of withdrawal (that is, in 2017 for withdrawals made in 2015). If you fail to repay the amounts, the shortfall is taxable to you in the year you missed the repayment. Also, be aware that you can’t claim a deduction for amounts repaid to your RRSP under the HBP. If you want more information on the HBP, check out the taxman’s booklet RC4135, Home Buyer’s Plan, which you’ll find at www.cra.gc.ca.
Article: The Globe & Mail
I told my son this week that if there’s one career to avoid, it’s that of a referee. I’ve got three kids in hockey, so I know the verbal abuse that refs absorb. And it happens in any sport. Even the most respectable fans can find themselves harassing referees. Take Robert Kasmir, for example. He was an accounting professor at George Washington University and, in 2011, was honoured at halftime at a university basketball game for being one of most significant financial donors to the school. On that particular night he didn’t end up seeing the full game. Why not? Because he was ejected from the stands in the second half for screaming at the referee.
Now, if you can put up with the verbal abuse, and you happen to make it to the ranks of an NHL referee while being a Canadian resident, you’d be entitled to enjoy a little-known privilege found in our tax law. It’s called a deferred salary leave plan (DSLP). But DSLPs are not just for NHL refs. Any employer can set up a similar plan – so speak to yours.
How it works
A DSLP is simply a formal plan set up by your employer for employees. The plan must be in writing. The plan allows you to set aside a portion of your pay each year for a certain period of time and to then take a leave of absence. The money you set aside under the plan is used to pay you during your time off. If the DSLP is set up properly, you won’t face tax on the amounts you set aside until you make withdrawals later during your leave.
There are some specifics to be aware of, which can be found in Income Tax Regulation 6801 in our tax law (for those who care). First, for the DSLP to work, the main purpose of the plan must be to allow you to fund a leave of absence by deferring some of your salary, and not to provide money to you after retirement.
Further, the plan should not allow you to withdraw from the plan early (to access your deferred salary) except in special circumstances such as financial hardship. The plan can allow you to defer a specified percentage of your salary each year, up to a maximum of one third of your pay annually. As for your leave of absence, it must be for a period of at least six months (three months if your leave is to allow you to attend a designated educational institution full-time), and your leave of absence must begin no later than six years after the date on which you begin to set aside part of your pay in the DSLP.
What about payments out of the plan? During your leave, no compensation other than your deferred salary out of the DSLP can be paid to you by your employer, with the exception of reasonable fringe benefits. Any investment income that’s earned on the amounts in the plan over the years must be paid to you annually, and are taxable to you. And the deferral can’t go on forever. The amounts in the plan must be paid to you no later than Dec. 31 of the year following the year in which your leave of absence begins. Make sense?
After your leave of absence, you’ll have to return to work for a period at least as long as the leave. If you don’t, the CRA will turn around and tax you on that deferred salary as though you should have been taxed in each of the prior years when you were setting aside those salary dollars.
The plan will have to specify how those dollars you set aside will be held. Normally, the amounts would be paid into a trust (called an “employee benefit plan”) but could simply be held by your employer directly. I prefer the trust option, so that you know for certain those funds will be there for you later (funds not held in trust could be subject to creditors of your employer).
There’s no maximum length of time for your leave of absence, but you’ll still have to pay tax on the full deferred amount by Dec. 31 of the year following the start of your leave. Finally, if you decide to accept an early retirement package while setting aside salary for a future leave, any deferred amounts in the DSLP would be taxable to you in the year you accept the package.
Article: The Globe & Mail
No matter what age I am, I look forward to continually learning. I’m reminded of the snowbirds who were travelling in Florida and were receiving a lesson in geography along the way. The man and his wife were on the way to their Florida home for the winter and were driving through the town of Kissimmee, Fla. They were trying to figure out how to pronounce the town’s name, and couldn’t agree on it: KISS-a-me, Kiss-A-me, Kiss-a-ME? Since they were hungry, they decided to stop for a bite to eat in town. While they were at the counter, the woman asked the young lad taking their order: “Excuse me, my husband and I can’t agree on how to pronounce the name of this place. Can you tell me where we are, and say it slowly?” The lad looked at her and said “Buurrgger Kiinngg.”
Geography isn’t the only subject snowbirds have the opportunity to learn about. Taxes are another subject. Today, I want to share the stories of some snowbirds who learned something about Canada’s foreign reporting requirements recently.
Not since 1917, when the first income-tax forms had to be filed by Canadians, has there been so much ruckus around the filing of a tax form. Yet, Form T1135, which has been revised recently, has created just such a stir. Form T1135, Foreign Income Verification Statement, is a form that you must file if you’re a Canadian resident and the total cost of your foreign investments, including stocks, bonds, real estate and many other assets is more than $100,000 at any time in the year. Filing Form T1135 has become much more onerous over the past year since the taxman announced that he’d like to collect more detailed information than ever before about the foreign investments you might hold.
The types of foreign assets that will trigger a requirement to file Form T1135 is broad. These assets are called specified foreign property, and the instructions for Form T1135 (found at cra.gc.ca) do a good job of explaining what specified foreign property includes. Most notably, the assets that escape a requirement to report on the form include Canadian mutual funds (even if the funds invest in foreign securities), property used in an active business, and personal-use property (such as a vacation property). As an aside, the form is due on the same date as your personal tax return, and there are nasty penalties for filing Form T1135 late, so you’ll want to avoid this. As of Feb. 9, 2015, you’ll be able to file Form T1135 electronically for the 2014 tax year.
George and Ruth have been spending part of their winters in their Florida condominium for years. They had paid $90,000 for the place a number of years ago, and rent the condo to others for most of the year. They also own shares of Scotiabank, which cost them $20,000, which they hold in a U.S. brokerage account with an investment dealer in Florida.
George and Ruth didn’t think that they were required to file Form T1135 because their condo is used for their personal vacations (personal-use properties escape the reporting requirement), and their shares in Scotiabank are shares in a Canadian, not a foreign, corporation. They were mistaken.
Their Florida condo is primarily a rental property – not a personal-use property – since it’s used most of time for renting to others. As for the Scotiabank shares, they’re held in a foreign (U.S.) brokerage account, and so they are required to report the shares even though Scotiabank is a Canadian corporation.
Since the total cost of their “foreign assets” is more than $100,000, they must report both the condo and Scotiabank shares on Form T1135.
Now, consider Joan’s story. Joan and her husband have owned an Arizona home for many years. The cost of the property was $95,000. Today, it’s worth $275,000.
Joan’s husband passed away last year, and Joan doesn’t have a desire to spend as much time in Arizona now, so she has begun renting the property for most of the year.
Joan didn’t think she’d have to report the property on Form T1135 because her cost is less than $100,000. Not so. When converting a property to an income-producing property, there are rules in Canadian tax law which deem Joan to have sold and reacquired the property at its fair market value on the date of the change in use.
So, Joan’s cost amount for tax purposes is now the $275,000 current value. Since her cost is now over $100,000, she’ll have to file Form T1135.
Article: The Globe & Mail
When you’ve been hanging around the financial services world as long as I have, you inevitably come to understand the many ways that people can make money. Some stories are as improbable as, say, an adult accidentally swallowing a toothbrush (it’s rare but it happens; just ask British student Georgie Smith, now 21, who, to the best of my knowledge, is the latest person to do this).
Take, for example, the improbability that your tax-free savings account (TFSA) today might be worth many hundreds of thousands of dollars – perhaps even millions. The fact is, there are more Canadians in this boat than you might think. And the Canada Revenue Agency (CRA) isn’t happy about it.
In my recent discussions with the CRA, it’s clear that rumours of a tax-audit project focusing on TFSAs are true. The CRA seems to be focusing on TFSAs that have a very significant value. And perhaps this should be no surprise, because those dollars will one day be withdrawn tax-free. It’s not clear what dollar value in a TFSA might create a red flag for the taxman.
A big area of concern for the CRA is where investors are actively trading – often called day trading – in their TFSAs. In these cases, when certain criteria are met, the CRA may come to the conclusion that an individual is actually carrying on a business when trading in securities – sometimes referred to as an “adventure in the nature of trade” – in which case the profit could be taxed as business income. The CRA’s argument is that business income earned inside a TFSA should be taxable (unlike capital gains, which would be tax-free inside the plan). There have been no court cases yet on this issue, but I expect we’ll see a case or two in the next couple of years.
The RRSP comparison
Let’s think about registered retirement savings plans for a minute. RRSPs, to my knowledge, have never been attacked when a taxpayer is successfully day-trading in his account. And no wonder, because those assets are taxed when they’re withdrawn. Why should the CRA take offence? In fact, the CRA will collect more tax if the taxpayer is successful in his or her RRSP investing.
So, to attack TFSAs is to suggest that profitable active trading is offensive only to the extent that the profit can be withdrawn tax-free. Perhaps the CRA has forgotten that, unlike RRSPs, there was no tax deduction available to the taxpayer when money was contributed to the TFSA. In fact, a TFSA doesn’t leave a taxpayer better off than an RRSP if his marginal tax rate stays the same or falls between the time of the contribution and the time of withdrawal (see the table below for a comparison). This is true even if the rate of return in the plan is very high. So, why should the CRA take offence to active trading in a TFSA when they aren’t concerned about it in RRSPs? It makes no sense mathematically.
The CRA’s approach to this issue makes no sense. It seems that if you’re trading actively inside your TFSA, and you’re successful at it, the taxman will take offence. But what if you’re not successful? Will the CRA then allow you to claim the losses that are inside your TFSA? The fact is, there are many more investors who make little or no money – or even lose money – at the day-trading game. If the CRA wants to go down this path of taxing profit realized inside a TFSA, then it had better be prepared to allow losses to be claimed on the flip side.
From my experience, there are many more Canadians who could arguably claim business losses from their trading activities than actually do. Most of these people simply report their losses as capital losses because they aren’t aware of the issue and don’t think about reporting any differently. You can bet that if the CRA starts to tax profits inside TFSAs, there will be a groundswell of information-sharing, these very same taxpayers will start thinking about the issue, and they’ll become more diligent about documenting their arguments for claiming business losses rather than capital losses. Imagine the look on the finance minister’s face when he learns that attacking TFSAs has actually resulted in a net revenue loss to the government.
It’s also clear that the taxman has lost sight of the fact that investors who realize large profits also take on large risks. Forcing them to pay tax on profits when taking on more risk, while others who take on less risk receive tax-free growth inside their TFSAs, is nonsensical.
Article: The Globe & Mail