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!

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. 

Updated Small Business Tax Reforms

It has certainly been a busy week in terms of announcements regarding financial policies for small businesses. Following the series of proposed tax reforms that the government announced back in July, various tweaks and changes have subsequently been made, owing, perhaps in part, to confusion and frustration expressed among the small business community. This week Finance Minister, Bill Morneau, has made further clarifications and adjustments to his original set of proposals, aiming to bring more of a sense of balance to the plans. Like all policy changes, the detail can be a little overwhelming, so here is a summary of the key points for your reference: 

  • The government intends to honor a commitment made prior to the election, to reduce the small business tax rate from 10.5% to 9% by the year 2019. 
  • Morneau confirmed that the government has scrapped the proposal to limit access to the Lifetime Capital Gains Exemption. 
  • The plans announced earlier in the year to reduce the value of passive investments made by corporations will continue in principle, but with few key changes. There will be a threshold of $50,000 of income per year, which will be excluded from the newly set higher rate of tax. 
  • The government has agreed to “simplify” the rules related to the new plans, to prevent income splitting for family members, who are not active in a business, but the plan will still move ahead in principle. 
  • Morneau has confirmed that the government will still provide good entrepreneurial incentives for venture capitalists and angel investors. The criteria for which still needs to be established. 
  • The proposed rules to limit the conversion of income to capital gains have been abandoned due to the concerns that many related to intergenerational transfers and insurance policies were held inside corporations. 

Of course, this is one area of government policy which is not only constantly changing, but particularly controversial in the current climate, so keep yourself updated regularly on new announcements and news, to ensure your understanding in this area and its potential impact on your family and business. If you have any questions, please talk to us. 

Old Age Security

If you’re in a situation where you could be losing some of your OAS benefit, you may want to consider the following strategies to help minimize your loss. In our most recent blog post, we outline 8 strategies on how to minimize OAS Clawback. Please always consult us prior to implementing any of these strategies to ensure this makes sense in your situation. Before age 65, use some of your RRSPs

  • Income Splitting
  • Defer Old Age Security
  • Tax Efficient Non Registered Investments
  • Tax Free Savings Account
  • Dividend Income
  • Leveraged Investing
  • Capital Gains Dispositions after age 65

Talk to us, we can help. 

A Summary of Proposed Tax Changes in 2017

The month of July saw a set of proposed tax changes announced by the Federal Minister of Canada which are potentially the most impactful and significant amendments since the large-scale tax reform of 1972. We will go on to describe the detail and impact of the proposals, which fall into three main areas, below. In summary, however, the purpose of the changes introduced by the government is broadly to close the potential current perceived tax loopholes that exist for higher earners and owners of private corporations. In response to the proposals, the government is inviting views and opinions on the changes during a consultation period which will last until October 2 2017.

  1. Changes to Income Sprinkling

If a high earning individual moves a proportion of their income to a family member such as children or a spouse who hold a lower tax rate in an attempt to reduce the total amount of tax payable, this is known as income sprinkling. To mitigate this, the government is proposing to include adult children in the eligibility rules in addition to minors, as well as taking a “reasonability” approach to assessing their income and thus which rate the transferred income should be taxed at. This will mark a change to the current TOSI (tax on split income) rules which currently apply.

2.  Minimizing the incentives of keeping passive investments in CCPCs

Currently, it can be advantageous for corporations to keep excess funds in a CCPC due to the fact that the corporate tax rate on the first $500,000 of taxable income is often much lower than the tax that would be payable by an individual. The government is moving to make this option less beneficial by the following two initiatives: firstly, by the removal of the option of crediting the capital dividend account (known as the CDA) equal to the amount of the non-taxable portion of any capital gains and secondly by removing the refundability of passive investment taxes.

3.  Reducing the transfer of corporate surpluses to capital gains

Tax advantages can currently be achieved by the sharing out of corporate surpluses to shareholders through dividends or salaries, which are often taxed at a lower rate than if earned as personal income. This is due to the fact that just 50% of capital gains are taxable.

These are the first significant proposals since 1972, talk to us we can help. If these changes are of concern to you or your client, please send an email to Fin.consultation.fin@canada.ca or send an email to your local member of parliament.

A Summary of Proposed Tax Changes in 2017

The month of July saw a set of proposed tax changes announced by the Federal Minister of Canada which are potentially the most impactful and significant amendments since the large-scale tax reform of 1972. We will go on to describe the detail and impact of the proposals, which fall into three main areas, below. In summary, however, the purpose of the changes introduced by the government is broadly to close the potential current perceived tax loopholes that exist for higher earners and owners of private corporations. In response to the proposals, the government is inviting views and opinions on the changes during a consultation period which will last until October 2 2017.

  1. Changes to Income Sprinkling

If a high earning individual moves a proportion of their income to a family member such as children or a spouse who hold a lower tax rate in an attempt to reduce the total amount of tax payable, this is known as income sprinkling. To mitigate this, the government is proposing to include adult children in the eligibility rules in addition to minors, as well as taking a “reasonability” approach to assessing their income and thus which rate the transferred income should be taxed at. This will mark a change to the current TOSI (tax on split income) rules which currently apply.

 2.  Minimizing the incentives of keeping passive investments in CCPCs

Currently, it can be advantageous for corporations to keep excess funds in a CCPC due to the fact that the corporate tax rate on the first $500,000 of taxable income is often much lower than the tax that would be payable by an individual. The government is moving to make this option less beneficial by the following two initiatives: firstly, by the removal of the option of crediting the capital dividend account (known as the CDA) equal to the amount of the non-taxable portion of any capital gains and secondly by removing the refundability of passive investment taxes.

 3.  Reducing the transfer of corporate surpluses to capital gains

Tax advantages can currently be achieved by the sharing out of corporate surpluses to shareholders through dividends or salaries, which are often taxed at a lower rate than if earned as personal income. This is due to the fact that just 50% of capital gains are taxable.

These are the first significant proposals since 1972, talk to us we can help. If these changes are of concern to you or your client, please send an email to Fin.consultation.fin@canada.ca or send an email to your local member of parliament.

Paying for Education

Post-secondary education can be expensive, however having the opportunity to plan for it helps with making sure that you’re capable to meet the costs of education. In addition, when you have a plan, it’s easer to make financial decisions that align with your goals and provide peace of mind. In the infographic, we outline 7 sources of funds for paying for post-secondary education:

  • Registered Education Savings Plan
  • Tax Free Savings Account
  • Life Insurance
  • Scholarships, grants, bursaries
  • Personal Loans, Lines of Credit
  • Government Student Loan
  • Personal Savings

Revisiting Your Estate Plan

 These 4 reasons will compel you to revisit your estate planning 

For most of the people, a watertight estate planning means finding the best ways to equip themselves for contingencies, reduce the tax liability for their estate, and signing up for investment plans to ensure that their money continues to earn money for them. Undeniably, the components mentioned above underlie at the core of estate planning. However, there are a couple of crucial aspects at the periphery; which, when addressed effectively will provide a layer of protection to your estate planning. Unfortunately, most of the times they either get ignored or else are dealt rather inefficiently.  
 

Here are the four key components that will fortify your estate planning: 

Make a Will 

You never know what tomorrow has in store for you. Therefore, irrespective of your age get a will done first thing first. A survey done by CIBC last year revealed that almost 50% of Canadians do not have a will. It’s a fact that shouts out widespread ignorance prevailing in the arena of estate planning concerning the significance of making a will. Another prominent rationale behind creating a will is that if the deceased one leaves no will behind him/her, the government becomes the ultimate authority to decide how the execution of the estate will take place. In such a scenario, the chances are that your assets never reaches your loved ones for whom you had created it and may go to the wrong people indeed. Creating a will is one of the most emotional decisions of your life. However, they come out best when approached pragmatically. Take some time out of your busy schedule to safeguard the interest of your people. 

Reassess your estate plan when encountered with a sudden life event 

Life is a zigzag graph and never a straight line. Major occurrences might just come across you path in the most unexpected ways and at the most unanticipated times. It could be marriage or divorce. It could be the second marriage. Or else, it could be a sudden financial upheaval or abrupt gains. In such a situation, never forget to reassess your estate plan and make the necessary adjustments that suit your existing situation best. Otherwise also, doing a periodic reassessment of your estate plan keeps you future-ready.

Share your estate plan 

Talk about your estate plan to your loved ones. Share the details of your estate planning with your family. Agreed that managing expectations of one and all and gratifying every member’s desire is a task, which is so hard to accomplish that it never happens. Still, let your kin sneak a peek into your estate planning. You can always reason with your family about your decision and your motive behind it. Besides, they also get a chance to present their opinion to you about your verdict when you are still alive and eating dinner with them.

While planning your estate rather choose your heart than the brains 

However, in your quest to create a mastermind estate plan, do not lose your focus. So many times just to save on paying taxes; you may end up taking decisions that may make you regret later. Let your heart rule when it comes to matters of succession and transfer of your estate. 

Please don’t hesitate to contact us for a review of your estate plan.
 

The Difference between Interest, Dividends and Capital Gains

Usually our concept of income is derived from labor which leads to a fixed or variable wage for a certain time duration. Another type of income is investment income which results from investing in various financial assets. Investment income can take the form of dividends, interest payments, rent, royalties and capital gains. Investment income is basically money or an asset creating more money without any physical effort, per se, by the investor. The nature of such an income makes it attractive but not risk free. The investment portfolio can consist of savings in physical assets like real estate and commodities or in financial assets like stocks, bonds, and segregated funds etc.

Overview of Income

Investment income can be divided into three areas: dividend income, capital gains and interest income. The accrual of these incomes differs by the virtue of their source. By having a diverse investment portfolio the risk of investment can be spread out and an investor can accumulate sizeable profits from these various sources over the course of a defined time period.

Interest Income

The economy functions on the principle of borrowing and lending to perform certain functions. According to the principle a decrease in the value of money over time, the people who lend should be compensated in some way for making their funds available to the borrower. The lenders or investors into different pools such as bonds or GICs will receive an interest income. The interest income is the compensation to the lender. The borrowing company or institution is liable to pay the interest on the defined time to the lender. Interest income is taxable and can accumulate to a sizeable amount overtime depending on one’s initial investment. The individual taxpayer will use the annual accrual method of reporting interest income, in this case the taxpayer has to report the income as it is earned even if it hasn’t been received. The inclusion rate for interest is 100%.

Dividend Income

Companies with shareholders have to pay a certain amount to these investors for putting their money into the business. The shareholders have the option of participating in the company’s affairs or remaining passive, depending on their status. For instance, in private limited companies, shareholders are more involved while in public limited companies there is a divorce between ownership and control and shareholders are more passive. 

Nevertheless, the company as a separate legal entity makes profits or losses on an annual basis. Out of these profits it pays the shareholders their share according to their investment, this payment is known as dividend. Thus the money a shareholder’s capital garners over the course of the year is known as dividend income. The corporation is obligated to pay these dividends to the shareholders and the exact time when these dividends are paid can differ according to the type of shares the shareholder has. 

Dividends are subject to taxation but in order to avoid double taxation investors can get a dividend tax credit. Adjusting income avoids double taxation of dividend income. Therefore dividends receive preferential tax treatment through the dividend tax credit. Dividends from public corporations qualify as ‘eligible dividends’ and have an inclusion rate of 138% where as non-eligible dividends are included at 125%.

Capital Gains

This type of income refers to the earnings from an increase in the value of an asset. It is basically the difference between the purchase price and the selling price of an asset. Capital gains are only realized at the time of sale; it is therefore not classified as property income because it requires certain amount of effort to sell the asset to earn profits.

Contact us to learn how we can help.