Some people will do anything for a large inheritance. Take Iowa lawyer Robert Allan Wright Jr., for example. Mr. Wright jumped at the chance to help a client collect an inheritance of $18-million (U.S.) in exchange for 10 per cent of the inherited amount. The problem? The inheritance was being offered up by a Nigerian Prince by way of a form letter sent to probably millions of people around the world. As it turns out, Mr. Wright borrowed money from several clients to pay the fees required to free-up the $18-million. The Nigerian letter was, of course, a scam. His clients never did get their money back. Mr. Wright was suspended from practising law, but honestly believed a truckload of cash was going to show up at his office some time soon.
There are easier ways than dealing with a Nigerian Prince to leave your heirs with a larger inheritance. Look no further than the recent federal budget, which increased the contribution limits to Tax-Free Savings Accounts (TFSAs), and an idea courtesy of Gerry Ramos, an adviser at Scotiabank. Let me explain.
If you expect to leave investment assets to your heirs upon your death, there may be steps you can take today to increase the amount of the inheritance they will one day receive. There are a few ways to accomplish this – some less palatable than others. You could, for example, live a more frugal lifestyle today so your kids inherit more later, but I suspect finding people willing to do this will be about as rare as finding teeth on patrons in the front row of a Willie Nelson concert (I had teeth, but I was the exception).
There’s another way to increase the inheritance you leave behind. The concept involves making withdrawals from your registered retirement income fund (RRIF) to fund contributions to your TFSA today. With the contribution limit for TFSAs increased to $10,000 annually thanks to the recent federal budget, there may be a greater opportunity to benefit from this idea. It’s not for everyone, but when it works, it works well.
Consider twin sisters, Samantha and Ruth, both widows. Both women turned 72 this year and have RRIFs that provide income annually. Both are expected to live to age 90. Both women can earn 5 per cent on their investment assets going forward and both have a marginal tax rate today of 30 per cent. Finally, both Samantha and Ruth expect to face tax at a marginal rate of 45 per cent in the year of death since they each have sufficient registered plan assets to be taxed on death that they will be in the top tax bracket in that year.
Samantha has decided to follow the advice of her financial adviser who has recommended that she withdraw extra funds each year from her RRIF and contribute those funds to her TFSA. At a marginal tax rate of 30 per cent, she’ll have to withdraw $14,286 from her RRIF to be left with $10,000 after taxes to contribute to her TFSA. Samantha is expected to have $305,390 in her TFSA at the time of her death at age 90, based on contributions of $10,000 starting this year and earning a 5-per-cent return annually. The after-tax value to her estate will be $305,390 since there is no tax on TFSA withdrawals at that time.
Ruth, on the other hand, decided not to follow the same advice. Ruth will keep the $14,286 inside her RRIF each year, growing it at the same 5 per cent rate. In the year of her death at age 90, those dollars will have grown to be worth $436,280 in her RRIF. Upon her death, taxes at her marginal tax rate will amount to $196,326 on those dollars, leaving her estate with $239,954 after taxes.
Did you catch that? Samantha, who chose to withdraw from her RRIF and contribute to her TFSA will end up with $65,436 ($305,390 less $239,954) or 27 per cent more after taxes in her estate than Ruth.
When your marginal tax rate today is significantly lower than what you expect in the year of your death (a 15-per-cent difference in my example above), it can make sense to withdraw extra funds from your RRIF each year to contribute to your TFSA over time. This can make sense even if you have other assets outside your RRIF that you can use to make a TFSA contribution since you’ll be minimizing the RRIF dollars subject to your high marginal tax rate in your year of death.
Article: The Globe & Mail
Receiving a tax refund can be a bit like finding money – the temptation to blow it on an Apple Watch or some other indulgence may be strong.
But before you let your tax refund burn a hole in your pocket, financial advisers urge you to take a step back and look at your financial plan.
Tim Cestnick, managing director for advanced wealth planning at Scotiabank, says paying down debt that carries a high interest rate and is not tax-deductible should be a top priority. “It is hard to argue with paying debt.”
Paying off that high-interest debt is like getting an after-tax investment return equal to the interest rate on the amount of debt you’re carrying, he added.
Jane Duchscher, a senior vice-president at TD Bank, says if you’re not saddled with credit-card debt, the case for making extra payments to pay down lower-interest borrowing such as mortgages and home equity lines of credit is a little more complicated.
“On the flip side of that, you want to weigh out ‘what can I get as a possible return,’ whether it’s on an RRSP, RESP or that tax-free savings account,” she said.
According to a survey by TD, 56 per cent of Canadians expect to receive a tax refund this year and 44 per cent of those see it as a boon to both saving and spending.
The survey also suggested the Top 3 ways that Canadians plan to use their tax refund included paying off credit-card debt, contributing to a retirement savings plan or tax-free savings account and adding money to an emergency fund.
For those who have already contributed the $5,500 to their TFSA before last week’s federal budget, Ottawa has also given them even more room by increasing the limit to $10,000.
If you have the contribution room, putting your tax refund into your RRSP could also help give your tax refund an extra boost next year, depending on your financial situation.
Other options could include topping up your children’s registered education savings plan to ensure you maximize the government’s matching grant or making a donation to your favourite charity, Cestnick said.
“If you donate $1,500 or $2,000 to a registered charity, unlike spending the money on yourself, you’ll actually get some tax money back from that, so you’ll end up with some money in your pocket next year when you file your tax return,” he said.
Duchscher, meantime, tells Canadians to make an informed and responsible choice about their tax refund before spending it on a quick trip to Vegas or a new iPad.
“It is about saying: ‘What can I do with this money?’ and being very thoughtful when you receive it,” she said.
Cestnick notes that while receiving a tax refund may feel like a gift from the government, in actual fact it simply means you overpaid your taxes for the year and Ottawa is only just now getting around to returning your money.
“In a perfect world, you’d file your tax return in April and you wouldn’t owe anything and you wouldn’t receive anything,” he said.
Article: The Globe and Mail
I remember when I was a kid, I broke a window at home with a baseball that I had hit. My father made me pay for the window which, as I recall, cost quite a few weeks of my allowance. Imagine if your employer made you do the same thing if you cost the company money. Then imagine a scenario where you cost the company millions. That’s a lot of overtime you’d have to put in to pay it all back.
Last Friday, April 24, an employee at the Canada Revenue Agency (CRA) may have cost the agency big bucks when he or she sent out a communication suggesting that the tax-filing deadline for 2014 is actually May 5, 2015, not the usual April 30 deadline. To be more accurate, it was Revenue Minister Kerry-Lynne Findlay that cost the government potentially millions when she announced that the CRA would give Canadians five extra days, until 3 a.m. on May 5, 2015, to file personal tax returns to avoid any confusion that was created by the April 24 announcement.
Don’t get me wrong. I’m not complaining that I’ve got extra time to file my tax return, but you have to question what’s going on at the CRA when there have been more than just a couple of incidents that point to questionable competence at the agency.
So, this is a recurring theme with the CRA. You might recall that last year there was a technology security breach, which caused the CRA to announced that taxpayers would have until May 5, 2014, to file their 2013 personal tax returns. Before that, there was 2008 when the CRA had an issue with its website and also extended the deadline to May 6 that year.
Is there really a cost to delaying tax filings by five days? Sure. When you’re talking about collecting billions of dollars of tax revenue on April 30, but you don’t collect it until May 5, the interest on those billions for even a five-day period can add up. Consider this: Statistics released by the CRA in 2013 show that the total taxes owing by individual Canadian taxpayers in 2011 (the most recent stats available) was $169.2-billion.
For fun, let’s assume that two-thirds of Canadians remit their taxes throughout the year in the form of payroll deductions or instalments. Suppose that one-third have to make a payment when they file their tax returns. Using my back-of-the-napkin math, the government can expect to collect, perhaps, $56.4-billion at the tax deadline. Using short-term government of Canada bond yields as a proxy, with a rate of 0.64 per cent, the lost revenue to the government for the five days extra time given to taxpayers would be in the neighbourhood of $4.9-million. Pocket change for the government, perhaps, but not for the many organizations or purposes that might have benefited from those dollars.
In talking with taxpayers, the true procrastinators are quite happy about the extended deadline. And who wouldn’t be if they would otherwise face penalties for filing late? Our tax law says that you’ll face a 5-per-cent penalty immediately on any taxes owing at the filing deadline if you fail to file your tax return on time. Further, you’ll face an additional 1 per cent a month for each month you have failed to file while owing taxes – to a maximum penalty of 12 per cent.
As for accountants and tax preparers, many may be crying the blues this morning – particularly those who had booked their all-inclusive vacations to the Caribbean with flights leaving May 1.
All of this comes at a time when the CRA is regularly criticized for being less than helpful when providing tax information to taxpayers. The Canadian Federation of Independent Business (CFIB) regularly issues a report card for the CRA. Based on the CFIB’s last survey, 73 per cent of respondents said they feel the CRA is not accountable for the mistakes they make, 60 per cent said the CRA treats taxpayers as though they’ve done something wrong, and the overall grade for the CRA was a “C” (up from “C-minus” in 2012).
You’ll never please all of the people all of the time, but the CRA’s track record is dismal. Sure, some things have improved over the past couple of years, but many things have become worse with the CRA trying to do more with less. These are our taxpayer dollars at work, and Canadians deserve more.
Article: The Globe & Mail
My father was telling me that he’s enjoying his retirement years. He gets discounts at the theatre, speed limits are no longer a challenge for him, his joints are pretty good at predicting the weather and his secrets are safe with his friends because none of them can remember what he’s told them. It’s all good.
As a senior, he’ll stand to benefit from some changes that were introduced in the 2015 federal budget this week.
If the truth be known, the budget included two specific changes that could meaningfully impact your retirement – for the better.
The challenge is to figure out how these changes should impact your saving for retirement. Let me explain.
The budget introduced changes to both tax-free savings accounts (TFSAs) and registered retirement income funds (RRIFs). Specifically, the contribution limit for TFSAs was increased from $5,500 to $10,000 for 2015 and future years (as an aside, this limit is no longer indexed to inflation as it was in the past). It means you’ll be able to set aside more inside a TFSA over time.
In fact, under the new limit the value of your TFSA over a 20-year period of time could be as much as 82 per cent higher. For example, if you were to invest $5,500 in your TFSA for the next 20 years and were to earn 7 per cent on your money, you’d end up with $241,258 at the end of that time. By contributing $10,000 annually instead, your TFSA jumps to $438,652 in value at that same rate of return.
As for RRIFs, there’s a minimum withdrawal you must make each year, but that amount has been reduced, which can allow you to leave more in your plan for longer. This will allow a deferral of tax in cases where you have other sources of income as well and don’t need to withdraw more than the minimum from your RRIF.
Take an example where, at the end of the year in which you turn 71, you have $300,000 in your RRIF. Under the old rules, you would have $132,633 left at the end of the year in which you turn 90, if you make the minimum withdrawal every year, assuming a 5 per cent return annually. Under the new minimum withdrawal requirement, you’d have $193,434 left at the end of that same time. That’s 46 per cent more in your RRIF in this example.
You have a task at hand here. It’s important that you take the time to figure out how much money you’ll need waiting for you on the day you retire (and from what sources), and how much you need to save or invest annually to accumulate that amount. If you’re not able to do this math, make sure you visit a professional who can. Maybe you’re already on course to have sufficient resources in retirement – but do you know for sure?
Your needs in retirement could be met by different sources of income in those years. These most commonly include: (1) employment or self-employment earnings, (2) non-registered investments (which can include securities, rental properties, and more), (3) RRSP or RRIF investments, (4) TFSA investments, (5) employer pensions, (6) government pension and benefits (Canada Pension Plan and Old Age Security benefits come to mind), (7) lifestyle assets you’re willing to sell to make ends meet (a home or cottage, for example) and (8) inheritances you know you’ll receive (unfortunately the timing and amount of inheritances is not often known, so relying on these may be a bad idea).
When I helped my father figure out his own retirement plan, we took a five-step approach: First, we figured out how much after-tax income he needed to make ends meet annually in retirement. Second, we determined how much after-tax income he could expect from his various sources (see the list above). Third, we then figured out how much additional after-tax income he would need annually (it’s simply the difference between the figures from steps one and two). Fourth, we figured out what pool of money he would need at the time of his retirement, to provide that additional after-tax income. Lastly, we figured out how much he needed to save annually to create that pool of money.
The tricky part is that income from different sources are taxed differently. RRIF withdrawals are fully taxable, while TFSA withdrawals are tax-free, giving rise to different amounts of after-tax income. Still, there’s good news this week; the 2015 federal budget created more flexibility now in how you can structure your sources of income for retirement. More on this in the weeks to come.
Article: The Globe & Mail
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