Tax Lines to look out for

It’s that time of year again, when many of us sit down to complete our income tax return and hope that we have done enough preparation to ensure a smooth and speedy process. Unfortunately, there are a number of complexities that can cause us problems – here are a few of the most common issues experienced by individuals when submitting their tax returns:

Medical Expenses

Expenses relating to medical expenses such as prescriptions, dentures and many more can be claimed for a non-refundable tax credit. You should also be aware that you can claim for yourself, your spouse or common law partner and any dependent children under the age of 18. You can also claim for certain other individuals whom you can clearly evidence are dependent on you (and the list of such individuals has recently been widened and can include grandparents, uncles, aunts, nieces and nephews).

Charitable Donations

You can claim tax credits for qualifying charitable donations that you made in 2017, though they are subject to an annual limit at 75% of your net income. You may also be eligible for a provisional donation tax credit. To receive such credits, you must supply a charitable donation receipt as evidence of your donation.

What’s more, there is a new formula for calculating the federal tax credit, depending on the value of donations. This is as follows:

1.    15% of the first $200 of donations

2.    33% of donations equal to the lesser of the amount of taxable income over $202,800 or the amount of donations over $200

3.    29% of total donations not included in the two stages above.

Public Transit Pass

Although this credit ended in the 2017 federal budget, it can still be claimed for the time period of January 1 – June 30, 2017. There are a range of eligible passes, including passes allowing unlimited travel within Canada, short term passes allowing unlimited travel for five days of which at least 20 days’ worth are purchased during a 28 day period and electronic payment cards.

Interest Expense and carrying charges

Interest on money borrowed to earn business or investment income is generally deductible, however interest expenses incurred on money borrowed to generate a capital gain is not tax deductible.

Carry forward information

Take note of the notice of assessment from your previous year’s tax return as it will contain important information that will apply to the submission of your current year’s return, such as your RRSP contribution limit and any carry-forward amounts.

Remember that you may be required to submit receipts alongside your electronic return at a later date, as requested by the CRA.

Child care expenses

Child care expenses include payments made to caregivers, nursery schools, day care centres and camps and other similar institutions. The deduction is usually best claimed by the lower earning spouse.

The deduction is the lesser of the following three:

·      the total qualifying child care expenses which have been incurred

·      $8,000 for each child under the age of 7, as well as $5,000 for each child between 6 and 16 and $11,000 for each child for whom the taxpayer has claimed the disability tax credit.

·      two thirds of the income earned by the individual making the claim.

If you owe money when your income tax return is complete, the only way to delay payment is to delay the filing until the April 30th deadline. Alternatively, if CRA owes you money, then file as early as possible. 

2018 Federal Budget Highlights for Families

Several key changes relating to personal financial arrangements are covered in the Canadian government’s 2018 federal budget, which could affect the finances of you and your family. Below are some of the most significant changes to be aware of:

Parental Leave

The government is creating a new five-week “use-it-or-lose-it” incentive for new fathers to take parental leave. This would increase the EI parental leave to 40 weeks (maximum) when the second parent agrees to take at least 5 weeks off. Effective June 2019, couples who opt for extended parental leave of 18 months, the second parent can take up to 8 additional weeks, at 33% of their income.

Gender Equality

The government aims to reduce the gender wage gap by 2.7% for public servants and 2.6% in the federal private sector. The aim is to ensure that men and women receive the same pay for equal work. They have also announced increased funding for female entrepreneurs.

Trusts

Effective for 2021 tax filings, the government will require reporting for certain trusts to provide information to provide information on identities of all trustees, beneficiaries, settlors of the trust and each person that has the ability to exert control over the trust.

Registered Disability Savings Plan holders

The budget proposes to extend to 2023 the current temporary measure whereby a family member such as a spouse or parent can hold an RDSP plan on behalf of an adult with reduced capacity.

If you would like more information, please don’t hesitate to contact us.

2018 Federal Budget Highlights for Business

The government’s 2018 federal budget focuses on a number of tax tightening measures for business owners. It introduces a new regime for holding passive investments inside a Canadian Controlled Private Corporation (CCPC). (Previously proposed in July 2017.)

 Here are the highlights:

Small Business Tax Rate Reduction Confirmed

Lower small business tax rate from 10% (from 10.5%), effective January 1, 2018 and to 9% effective January 1, 2019.

Limiting Access to the Small Business Tax Rate

A key objective of the budget is to decrease the small business limit for CCPCs with a set threshold of income generated from passive investments. This will apply to CCPCs with between $50,000 and $150,000 of investment income. It reduces the small business deduction by $5 for each $1 of investment income which falls over the threshold of $50,000. This new ­regulation will go hand in hand with the current business limit reduction for taxable capital.

Limiting access to refundable taxes

 Another important feature of the budget is to reduce the tax advantages that CCPCs can gain to access refundable taxes on the distribution of dividends. Currently, a corporation can receive a refundable dividend tax on hand (known as a RDTOH) when they pay a particular dividend, whereas the new proposals aim to permit such a refund only where a private corporation pays non-eligible dividends, though exceptions apply regarding RDTOH deriving from eligible portfolio dividends.

The new RDTOH account referred to “eligible RDTOH” will be tracked under Part IV of the Income Tax Act while the current RDTOH account will be redefined as “non-eligible RDTOH” and will be tracked under Part I of the Income Tax Act. This means when a corporation pays non-eligible dividends, it’s required to obtain a refund from its non-eligible RDTOH account before it obtains a refund from its eligible RDTOH account.

Health and welfare trusts

The budget states that it will end the Health and Welfare Trust tax regime and transition it to Employee Life and Health Trusts. The current tax position of Health and Welfare Trusts are linked to the administrative rules as stated by the CRA, but the income Tax Act includes specific rules relating to the Employee Life and Heath Trusts which are similar. The budget will simplify this arrangement to have one set of rules across both arrangements.

RRSP Deadline is March 1, 2018. How much tax can you save?

RRSP Deadline: March 1, 2018

The deadline for contributing to your Registered Retirement Savings Plan (RRSP) for the 2017 tax filing year is March 1, 2018. You generally have 60 days within the new calendar year to make RRSP contributions that can be applied to lowering your taxes for the previous year.

If you want to see how much tax you can save, enter your details below!

Do you REALLY need life insurance?

You most likely do, but the more important question is, ‘What kind?’ Whether you’re a young professional starting out, a devoted parent or a successful CEO, securing a life insurance policy is probably one of the most important decisions you will have to make in your adult life. Most people would agree that having financial safety nets in place is a good way to make sure that your loved ones will be taken care of when you pass away. Insurance can also help support your financial obligations and even take care of your estate liabilities. The tricky part, however, is figuring out what kind of life insurance best suits your goals and needs. This quick guide will help you decide what life insurance policy is best for you, depending on who needs to benefit from it and how long you’ll need it. 

Permanent or Term? 

Life insurance can be classified into two principal types: permanent or term. Both have different strengths and weaknesses, depending on what you aim to achieve with your life insurance policy. 

Term life insurance provides death benefits for a limited amount of time, usually for a fixed number of years. Let’s say you get a 30-year term. This means you’ll only pay for each year of those 30 years. If you die before the 30-year period, then your beneficiaries shall receive the death benefits they are entitled to. After the period, the insurance shall expire. You will no longer need to pay premiums, and your beneficiaries will no longer be entitled to any benefits.

Term life insurance is right for you if you are: 

  • The family breadwinner. Death benefits will replace your income for the years that you will have been working, in order to support your family’s needs.
  • A stay-at-home parent. You can set your insurance policy term to cover the years that your child will need financial support, especially for things that you would normally provide as a stay-at-home parent, such as childcare services.
  • A divorced parent. Insurance can cover the cost of child support, and the term can be set depending on how long you need to make support payments.
  • A mortgagor. If you are a homeowner with a mortgage, you can set up your term insurance to cover the years that you have to make payments. This way, your family won’t have to worry about losing their home.
  • A debtor with a co-signed debt. If you have credit card debt or student loans, a term life insurance policy can cover your debt payments. The term can be set to run for the duration of the payments. 
  • A business owner. If you’re a business owner, you may need either a term or permanent life insurance, depending on your needs. If you’re primarily concerned with paying off business debts, then a term life insurance may be your best option. 

Unlike term life insurance, a permanent life insurance does not expire. This means that your beneficiaries can receive death benefits no matter when you die. Aside from death benefits, a permanent life insurance policy can also double as a savings plan. A certain portion of your premiums can build cash value, which you may “withdraw” or borrow for future needs. You can do well with a permanent life insurance policy if you: 

  • …Have a special needs child. As a special needs child will most likely need support for health care and other expenses even as they enter adulthood. Your permanent life insurance can provide them with death benefits any time within their lifetime.
  • …Want to leave something for your loved ones. Regardless of your net worth, permanent life insurance will make sure that your beneficiaries receive what they are entitled to. If you have a high net worth, permanent life insurance can take care of estate taxes. Otherwise, they will still get even a small inheritance through death benefits.
  • …Want to make sure that your funeral expenses are covered. Final expense insurance can provide coverage for funeral expenses for smaller premiums.
  • …Have maximized your retirement plans. As permanent life insurance may also come with a savings component, this can also be used to help you out during retirement.
  • …Own a business. As mentioned earlier, business owners may need either permanent or term, depending on their needs.

A permanent insurance policy can help pay off estate taxes, so that the successors can inherit the business worry-free. Different people have different financial needs, so there is no one-sized-fits-all approach to choosing the right insurance policy for you. Talk to us now, and find out how a permanent or term life insurance can best give you security and peace of mind.

 

Families: 2017 Year End Tax Tips

Calculating and figuring out how much tax you have to pay is nobody’s favorite time of the year, but if you plan carefully there are many tactics available at your disposal to make sure that your tax bill is not more than it has to be in 2017. Which tactics make the most sense can be figured out by analyzing your current finances, estimating your tax situations and identifying the financial transaction that might take place either this year or next year. You should get started now, and consider these tax tips before Dec. 31, 2017.

Make a loan to your family member/Family income splitting

You can set yourself for tax savings in 2018 by making a loan to your lower-income spouse, family members or family trust so that he or she can pay the tax on any investment income on these dollars going forward. To avoid the attribution rules, you will need to charge the prescribed rate of interest on the loan. Until Dec. 31 the rate is 1% and can be locked at this rate indefinitely. Your family member will have to pay the interest on the investment by Jan. 30 each year, for the previous year’s interest charge. You will have to report the interest on this investment and your spouse can claim a deduction for it. You can come out ahead as a family, if your family member earns more than 1 percent annually on the investments.

Lend money for a TFSA contribution

In a TFSA account, all dividends, interests and capitals gains your investments make are tax-free. This is a huge advantage because as you continue to reinvest dividends and interest, the compounding income will also be tax-free. So before Dec. 31 consider lending money to your spouse or adult child to contribute towards his or her TFSA. The contribution limit to a TFSA for 2017 is $5,500, and up to $52,000 in total if you have been 18 or older since 2009 when TFSA was introduced, and you haven’t contributed yet. The attribution rules won’t apply to TFSAs since there is no taxable income, as long as the money remains in the plan. 

Tax Loss Selling

If you own investments with unrealized capital losses, consider selling them before year end to realize the loss and apply it against any of the net capital gains you have realized during the year or in the prior three years. If you intend on doing this, consider completing all trades prior to December 22, 2017.

Invest the Canada Child Benefit in your child’s name

Canada Child benefit (CCB) was introduced in 2016 and provides a meaningful payment to many families on a monthly basis. CCB is a tax-free monthly payment made to eligible families to help them with a cost of raising children under the age of 18. The benefit payments are recalculated every year in July based on the income tax and benefit return information of the previous year. Consider investing these dollars in your child’s name, in an in-trust account. The attribution rules will not be applied to the income and growth of these dollars, as they can be reported in the hands of your child, generally facing little or no tax. This strategy can allow the funds to compound at a much faster rate.

Utilize first-time home buyer incentives

If you purchased your first home in 2017, or plan to buy a place before Oct. 1, 2018, You should consider making a withdrawal of up to $25,000 from your registered retirement savings plan (RRSP) before Dec. 31, under the home buyers’ plan. The withdrawals can be made tax-free if you qualify, even though you will have to repay the withdrawal amount over a 15-year period. The withdrawals under Home buyers’ plan must normally be made in a single calendar year. You may also qualify for the first time home buyers’ credit i.e. a maximum of $750 (and if you live in Saskatchewan you may be entitled to an additional provincial credit of up to $1100.)

Utilize the Lifelong Learning Plan

The lifelong learning plan (LLP) allows you to withdraw amounts from your RRSP to finance full-time training or education (or part-time if you have a disability) for yourself and your spouse or common-law partner. Consider making a withdrawal before Dec. 31, you are entitled to withdraw up to $10,000 annually or $20,000 in total from LLP. You will have to repay the withdrawal amount over time.

Have you maximized your RRSP Contributions or is it time to wind-up your RRSP?

Technically, you have until March 1, 2018 to make your RRSP contribution for 2017, however if you turned 71 in 2017 and need to wind up your RRSP, remember you only have until December 31, 2017 to make a contribution to your RRSP for 2017, not March 1, 2018.

Evaluate your estate plans for non-resident children

You should revisit your estate planning if your children are not currently residing in Canada, and particularly if they plan to remain non-residents long term. Consider adjusting your will or other planning for non-resident children and plan it together with your kids.

Consider tax changes south of the border

If you are a U.S. citizen residing in Canada, you should be alert to any proposed taxed changes in U.S which can affect your tax planning heading into next year. President Donald Trump’s tax proposals include reducing the number of tax brackets and increasing the dollar thresholds where the rates apply, increasing the standard deduction, eliminating the deduction for medical costs and state and local taxes, and eliminating the alternative minimum tax, among other things.

Consider talking to us prior to year end if you would like to act on any of these tips.

Payments due by December 31, 2017

●     RESP Contributions

●     Charitable gifts

●     Contribution to your RRSP if you turned 71 during 2017 (you will also have to wind up your RRSP by this date.)

●     Medical Expenses

●     Union and professional membership dues

●     Investment counsel fees, interest and other investment expenses

●     Political contributions

●     Deductible legal fees

●     Interest on student loans

●     Certain child/spousal support payments

Business Owners: 2017 Year End Tax Tips

The end of the year provides a great opportunity for business owners to consider ways to improve their tax position. As a business owner, there’s still time to manage taxes for yourself and your business for 2017 before the end of the year. It is particularly important this year that you consider year-end tax planning keeping in mind the government’s private company tax proposal which may result in increased taxes in 2018 for private companies and their shareholders.

New tax rules for private companies are on their way

While you carry out your review this year, keep in mind that in 2018 the way private companies and their shareholders are taxed will be changing. In the summer of 2017, Finance Minister Bill Morneau released a number of tax proposals for small businesses, which have since been updated in October 2017. The updated reforms include changes to the “reasonable test” for income splitting/sprinkling and passive investments inside of a private corporation,

As a business owner, you should be aware of how these changes will affect your company and your financial situation. Please set up a meeting with us and your tax advisor before the end of the year to review how these changes will affect your situation.

Effective Dividend/Salary Mix

You can receive corporate income as salary or dividends as the owner of an incorporated business. Deciding on what’s best for you this year, you must analyze the optimal mix of salary and dividends for you, which depends on several factors including:

  • Your cash flow needs (current and future)
  • Your income level
  • Payroll taxes on salary
  • The corporation’s income level
  • The possible effects of the private company proposals on you and your company.

You may want to pay yourself enough salary to contribute as much as you possibly can towards an RRSP. The same goes for any family member employed by you. The maximum contribution you can make is 18% of the previous year’s earned income, up to a limit of $26,010 for 2017 and $26,230 for 2018. Keep in mind that the salary paid must be reasonable for your company to get a tax deduction.

The downside to this, is that if your business is in a situation where you can suffer from economic downturn, then paying out a big salary in a profitable year will reduce the likelihood of recovering corporate taxes paid, if a loss materializes.

Family employment – Paying a salary to your family

You may want to consider employing your family members and paying them an appropriate salary if they provide services to your incorporated business. The business will benefit from a tax deduction on the salary paid, as long as it is reasonable in light of the services they provide (Example: administrative work, bookkeeping, acting director). Usually, a salary is considered “reasonable” if the services are genuinely being provided and the salary is similar to arms’ length comparables. Remember to weigh in the costs of payroll taxes and CPP contributions against the potential tax savings.

Family members who hold shares in your company

Consider paying additional dividends in 2017 to your family members who hold shares in your company, before the new tax on split income regime comes into effect in 2018. If the dividends amount these individuals receive is “unreasonable” under the circumstances, they will be taxed at the top marginal tax rate (regardless of their own personal tax rate).

The new proposed rules are targeted at family members aged 18-24. The “reasonableness test” examines labour and capital contributions to the business, risk assumed and previous remuneration.

You should review your tax situation with your tax advisor including your family company’s organizational structure on a go-forward basis to ensure you satisfy the new “reasonableness test”.

Does the small business deduction affect you?

Can your business claim a small business deduction? The current small business deduction is $500,000. The small business tax deduction will be worth more to your company this year than it will be in 2018, because the small business tax rate will be decreasing from 10.5% in 2017 to 10% in 2018 and will be down to 9% in 2019.

If your corporate group claimed more than one small business deduction, the 2016 federal budget introduced several changes which were intended to limit the multiplication of the small business deduction through the use of certain partnerships and corporations. Please review this with your tax advisor.

When to pay dividends: 2017 or 2018?

Deciding if to pay dividends in 2017 or 2018, consider that the income tax rate for non-eligible dividends (generally, dividends that are paid from a company’s income that were taxed at the small business tax rate or as interest income) is increasing slightly in 2018. The federal tax rate is going up 0.34% from 26.30% in 2017 to 26.64% in 2018. A non-eligible dividend of, say, $100,000 out of your company in 2018 can save you at least $340 in absolute tax savings if paid in 2017 instead. These savings can be even higher if the provinces also announce increases to their 2018 tax rates for non-eligible dividends. The following provinces have announced increases: Ontario, New Brunswick and British Columbia.

Please also note that the top personal rate is also increasing.

Are you affected by the new passive income tax regime?

The rules being introduced by the government in 2018 can potentially eliminate the financial advantages of investing passively through a private corporation. As a result of these rules, it will soon become less beneficial to earn investment income in a company and distribute non-eligible dividends, than it will be to earn investment income personally. More details are expected to be announced in the Federal Budget 2018. The government made an announcement on October 18, 2017, that passive investment income below a $50,000 annual would face no tax increase and confirmed that the new rules would apply on a “go-forward basis”. According to the government this $50,000 threshold is intended to allow you to build up passive investments to help cover things like income fluctuations, start-up costs or maternity leave. The government has also stated that passive investments that have already been made by private corporations’ owners will be “protected” (this includes future income earned from these investments). There is still clarification required on when these rules will take effect and how the government intends to implement these new rules.

This is in an imperative year to do a year-end review of your personal and business finances. Talk to us, we can help.

Accessing your Retained Earnings

One of the financial planning issues that business owners face is how to access their corporate earnings in a tax efficient way. 

There are 5 standard methods: 

  • Salary
  • Dividend
  • Shareholder Loans
  • Transfer Personal Assets
  • Income Splitting

There are also unique ways utilizing life insurance and critical illness insurance to access your retained earnings. Please contact us to learn how we can get more money in your pocket.