Most retirees have several sources of retirement income. The largest contributor to this income is typically a portfolio of investments. Retirees spend decades savings for the future and trying to maximize returns to build the largest possible nest egg. When investors shift from the accumulation phase (saving for the future) to the decumulation phase (spending the nest egg) different investment objectives emerge.
The number one worry becomes, “will I outlive my money”? Secondary, but no less important concerns are how to reduce income tax and how to generate steady, guaranteed returns. Risk tolerance plummets in the decumulation phase of an investor’s life.
The insured annuity concept addresses all of these considerations. The strategy maximizes after-tax income from non-registered savings and preserves capital for heirs and/or charitable bequests. An insured annuity involves the purchase of two contracts from insurance companies, a life annuity and a life insurance policy. The objective is to provide a better return on investment than traditional, conservative, taxable fixed income investments like GICs. Additional benefits can include creditor protection and avoidance of probate fees that come with life insurance products that name the appropriate beneficiaries.
Here is how it works
A specified amount of non-registered savings is used to purchase a prescribed life annuity. The annuity pays a regular stream of tax efficient income for the life of the investor. A portion of that income stream is used to purchase a life insurance policy that is paid to the estate (or named beneficiary) upon the passing of the investor. The end result is higher retirement cash flow than alternative fixed-income investments while still leaving an estate for heirs.
The preferred tax treatment of prescribed annuities and the tax free nature of life insurance death benefits drive the higher after tax returns. Payments from prescribed annuities are considered a combination of interest and capital, therefore, only a portion of the income is taxable.
There are risks to consider though
An insured annuity is a strategy that cannot be undone with the exception of cancelling the life insurance.As such, it is prudent for a retiree to have other sources of capital that they can draw on in the event of an emergency or change of circumstances that requires a lump sum withdrawal of assets.Annuities are like pensions in that you cannot request more than the monthly guaranteed income that the contract guarantees.
Returns on alternative guaranteed investments may increase.If interest rates on GICs increased dramatically in the relatively near future, the relative advantage of the insured annuity begins to erode from a financial standpoint.The advantages of simplicity and tax efficiency remain however.
Poor health – You must be in sufficiently good health to obtain the life insurance.Before committing to the annuity purchase, it makes sense to apply for the life insurance first and ensure that the policy is approved at the expected premium level.
Both the annuity and life insurance contracts should be purchased from different insurance companies.If purchased from the same insurer, CRA could consider them “one contract” and that would have negative tax implications.
The insured annuity strategy is not well understood and consequently underutilized. Speak with us or your financial planner to assess if it makes sense for you.
This information is general in nature and is not intended to constitute specific financial or tax advice for any individual. It is best to speak to your tax professionals for specific advice. Photo source
It used to be enough for an estate trustee (executor) to provide the Ontario government with their own calculation of the value of an estate when filing for letters probate. Provincial probate fees are assessed on the estate value and equal $250 for the first $50,000 ($5 for each $1000, up to $50,000), and 1.5% on the excess value.
Now, to ensure that estate values are not underestimated, estate trustees in Ontario must file an Estate Information Return (AIF). This form must be filed within 90 days of the estate trustee being issued a probate certificate by the provincial government. The report requires disclosure of much more detailed information regarding the value of estate assets than was required in the past The return must be filed even if the value of the estate is less than $1,000 and no probate fees are payable.
No return is required where an executor applied for the Estate Certificate (letters probate) prior to January 1, 2015.
Here are a few interesting highlights regarding the return:
You are on the hook for four years – If, within four years of the issuance of the Estate Certificate by the Ontario Government, an estate trustee becomes aware than any information given to the Ministry of Finance on an Information Return is incorrect or incomplete, an amended Information Return must be received by the Ministry of Finance within 30 calendar days of the estate representative becoming aware that the information is incomplete or inaccurate.
Discovering more property – If, after receiving the Estate Certificate, an estate trustee discovers additional property owned by the deceased, a statement disclosing the subsequently discovered property must be filed with the court within six months of the discovery.
Non filing penalties are stiff – Estate trustees who fail to file the Information Return as required, or who make false or misleading statements ono the return, are guilty of an offence and, on conviction, are liable to a fine of at least $1,000 and up to twice the tax payable by the estate, or imprisonment of not more than two years, or both. Yikes!
You have to prove values – Estate trustees should be able to substantiate valuations. Depending on the asset, valuations can be complicated, (private business for example) and a professional valuator with the necessary expertise may be necessary. Because professional valuations can be expensive, sufficient estate residue be held back from distribution until such costs are paid. Records relevant to the valuation of estate assets must be retained, and seven years appears to be the period that satisfies the Ministry of Finance.
You can obtain the full Guide by contacting us or by doing an internet search using the term, “Estate Information Return Ontario”.
I am one of those people that believes that once our basic needs are met (food and shelter), happiness is derived more naturally from things that don’t necessarily have a large price tag attached. This message was hammered home for me and my daughter this weekend when we attended Soulpepper Theatre’s wonderful staging of Spoon River Anthology. You can certainly Google for the reviews, but suffice to say the characters are all long deceased citizens of a small town. They describe their lives and deaths through the poetry of Edgar Lee Masters.
One of the final lines delivered the most powerful message of all. A young women, clearly having passed before her time says, “Oh life, oh life, oh beauty, oh life. To leave you knowing that you were never loved enough…” Nowhere in her lament is there regret for not having had the fanciest designer clothes, flashiest car, or not having travelled the world.
So before you spend the big bucks on the typical gifts, consider spending less money on each gift, and more time on making it something truly meaningful.
The gift of time
If you like children - Offer to babysit the children of a close friend or family member while they enjoy a night or afternoon out.
If you are tech savvy – Set up or improve someone’s Linked In profile, or help them organize their online files and/or photographs.
If you live close by – Offer to water their plants, walk their dog or feed their cats next time they are travelling.
The gift of your talent
Love to party? Offer to help bartend, cater or decorate a party that someone on your list is planning.
Love to cook/bake? Homemade goodies from your kitchen (include the recipe!) is thoughtful and who doesn’t love food? If you want to add a little to the cost of the gift, include a utensil like a mixing spoon or teacloth.
Handy? You know which friend or family member is stressed at the thought of hanging pictures, changing lightbulbs and organizing closets/storage facilities. Give them a DIY day. Make sure they help you so that next time they have the skills when they need them!
Great with makeup? Give a friend a makeover and recommendations for inexpensive products that would work well for them.
Have a green thumb? Provide a list of perennial plans that would thrive in their garden and include a small gift certificate for a local garden centre, or perhaps a gardening book.
The gift of giving
Tell someone that you love them. Better yet, get some nice paper and write a letter to them. Tell them what they mean to you and why you are glad they are in your life. Guaranteed, this gift will never be forgotten.
Make a donation in lieu of a gift. Give them some information on the cause that you are supporting with them in mind, along with an example of the difference the giving makes.
Perhaps you can re-visit your annual gift budget with these ideas in mind. You will be spending less, but giving more.
There was a time (the early 1980’s) when 5-year GICs and government bonds were paying 12% yields. Investors think fondly of those days even though the inflation rate was also in double digits at this time, making the real rate of return (interest rate less inflation) on conservative fixed income investments similar to those today.
The difference between being a fixed income investor then and now is the direction of interest rates.
Since rates peaked in 1981 when a November issued Canada Savings Bond yielded 19%, rates have been steadily declining to the point where the April Canada Savings Bond was issued at a 1% rate and “high interest” savings accounts hover in the 1.5% range. The inflation rate is commensurately lower now as well, however, there is no denying that investing in cash and GICs results in steadily eroding purchasing power.
Furthermore, the tailwind that falling interest rates has had on fixed income returns is likely at an end. In a recent commentary, PH&N Investments made the following comments:
“It is likely that the era of ultra-low interest rates is now in the rear-view mirror. The U.S., which remains a very important influence on global interest rates, seems determined to follow through on its commitment to end its quantitative easing program. Barring any economic or political disruptions, that is scheduled to end in December of this year. Developed markets have, for the most part, recovered from the 2008 crisis and are entering a new, perhaps more modest, stage of growth. And even with last year’s rise, interest rates are still marginally below what we consider to be longer-term fair value. As such, we should expect a continued upward grind in yields over time. It almost certainly will not happen in a straight line, and fluctuations – such as those just witnessed this quarter – are to be expected. But in the long term, a return to a higher interest rate environment, where investors can earn a decent yield on their savings, is a welcome development.”
Until then, staying short-term makes good sense. There is a greater likelihood that interest rates will go sideways and then increase modestly over the next few years. That would be a positive event given that interest rates would likely be rising in response to economic growth. That is better than deflation.
So why own GICs or fixed income funds at all?
The fact that investors ask this question partially explains the strong equity markets in the face of so much global economic and political uncertainty. Investors needing income are purchasing the dividend equity funds that have handily outperformed the returns offered by fixed income funds. There is a new owner of dividend yielding equity funds, the retiree.
What should not be ignored is the role that fixed income investments should play in a portfolio, that is, income and capital preservation.
As frustrating as it can be to own (and for us to recommend) investments that offer a paltry 1.5%, investments that protect capital are low yielding right now. If capital preservation and/or low/moderate portfolio volatility is important to an investor, high quality fixed income investments must play a role. Our job is to determine how much is appropriate for each individual client and provide a rationale to support our view.
This information is general in nature and is not intended to constitute specific investment for any individual. It is best to speak to your investment professionals for specific advice.
In August 2011, Mark posted a blog titled “The Income Tax implications of Purchasing a Rental Property”. There are 300 comments and answers on that post (so many that he added a note at the end of the blog a while back, that he would stop answering questions on this specific post). He recently read through the comments and realized there were several excellent questions that have probably been “lost” in the morass of questions. Today, he decided to highlight some of the better questions.
Questions and Answers Related to Rental Properties
Q: With respect to rental income being considered passive and therefore taxed at the high rate - is there are certain point or threshold when a real estate company's rental income is considered active and therefore eligible for the small business deduction? Is it still considered passive when you grow to a certain number of properties or employees?
A: Great question, the answer is yes. A real estate company would be considered a specified investment business and not eligible for the small business deduction. However, if the corporation employs greater than 5 full time employees, the income is deemed active and eligible for the small business rate of 15.5% or so depending upon your province. I have clients with multiple corporations, each owning a single rental property. If one of the corporations has more than five employees, who really are also employees of the other corporations, it may be problematic to claim the active tax rate in that corporation. You may be able to utilize a management company, however, where the rental properties are residential, they cannot claim back the HST they pay, so a management company may not work.
Q: My question is about net loss and the government. My husband and I make over $300K in combined income. We own a 1.3 Million dollar home and it has no mortgage. We are looking at purchasing a property which is close to 2 million dollars and finance the whole amount (based on LOC and new mortgage). It will clearly generate a net loss even if we get the maximum rental income. We have done the math and the savings on taxes and a moderate appreciation of the property is well worth it. We currently have a condo rental which has generated a modest profit for the past 5 years. Does the government care if you generate a loss for an extended period of time (over 10 years)? Thank You!
A: Here is a link to a useful Torys LLP newsletter on the subject. Although the link is dated, it should answer your question.This is really a question on the "reasonable expectation of profit" doctrine.
The key comment in the Tory's newsletter is the following: “Essentially the court have held that where an activity is a commercial activity – that is, it does not have a personal element-there should not be judicial or CRA scrutiny of the taxpayers business judgment for the purpose of determining whether or not the activity is a source of income".
As per the comment above, commercial activities are problematic for the CRA to attack, so they have been going after taxpayers who claim losses with any kind of personal element.
Q: My husband and I have a duplex in both our names. Both units are rented out at this time. My husband is the sole provider for the family and I stay at home with the kids. My question is how do we claim the rental? Do we claim it 50/50 or does my husband claim 100% since he is responsible for the expenses etc.
A: Legally if ownership is 50/50, you must report the income 50/50. However, for income tax, there is the issue of income attribution. i.e.: whose money was used to purchase the property or was it a Line of Credit with both names. If your husband used his money and put the property in both your names, then technically all the rental income or losses should be reported by him. Although technically incorrect, many spouses seem to ignore the attribution rules and report income/losses on a 50/50 basis.
Q: I have a very old house that I have been renting for five years now. The roof has to be repaired or it will soon start to leak. We want to replace the roof with life-time guaranteed shingles. Is this kind of expense a current expense since it's required to maintain the current quality of the house or a capital expense since it also increases the value of the property?
A: Great question. Technically the CRA may say you have improved your roof by purchasing shingles that are better than the prior shingles or the lifetime guarantee makes them better than the prior shingles and thus the cost should be capitalized. However, I would suggest that the majority of accountants would likely expense the cost and argue this is purely a repair, but it is not 100% clear.
Q: I purchased a revenue property in Quebec 5 years ago and I am planning on possibly selling it this year. Can I amortize the capital gains from the sale over 5 years? I am considering possibly selling it and buying another revenue property immediately afterwards. I.e. during the same year. I was told that if did do this then the capital gains from the sale of the property would not need to be declared since I am using the profit to buy another property. Is this true?
A: For capital gains there is typically a five year reserve available where all the proceeds have not been received on sale, see this example. In respect of the second part of this question, you are asking about the replacement property rules. These rules would not typically apply to rental property purchases and re-purchases, but relate to business properties replaced. This paper from CGA Magazine discusses the issue.
Q: I have a couple of rental houses and currently considering incorporating them to credit proof my personal assets. I understand that the rental income is treated as passive income so no benefit, but is there a difference if the rental property was sold through a corporation or held personally - i.e. can the capital gain be reduced capital gains exemption?
A: The capital gains exemption is not available on the sale of shares where the underlying asset is a rental property not used in an active business. The benefit of incorporation is pretty much creditor proofing and maybe some income splitting with your spouse depending upon the circumstances.
Q: I purchased a 2 floor office condo (525k, 2800 soft) and its part of a 6 unit block of 2 floor office condos. One floor I rent out and one floor I use for my business. I can't find anything to indicate the value of the land for tax allocation. Do you think using the 10% rule of thumb would be appropriate in this situation and would a rule of thumb satisfy CRA?
A: Where there is no hard evidence to determine the allocation between land and the building, it would not be unusual for many accountants to use 10% for land related to a condo. That does not mean it is correct and that the CRA would not challenge the allocation, however, I have not seen the CRA challenge this.
Q: What are the tax implications of purchasing a home for myself and family to live in as our primary residence and renting out the basement. Would it be the same implication if we put an addition on the house but we still occupied more than 50%. Thanks.
A: This is what the CRA says, I think their response answers both your questions.
"It is the CRA’s practice not to apply the deemed disposition rule, but rather to consider that the entire property retains its nature as a principal residence, where all of the following conditions are met:
a) the income–producing use is ancillary to the main use of the property as a residence;
b) there is no structural change to the property; and
c) no CCA is claimed on the property.
These conditions can be met, for example, where a taxpayer carries on a business of caring for children in the home, rents one or more rooms in the home, or has an office or other work space in the home which is used in connection with business or employment. In these and similar cases, the taxpayer reports the income and may claim the expenses (other than CCA) pertaining to the portion of the property used for income–producing purposes".
Q: I have a question about % used for business on my tax return. We have a cottage rental property. We open it in the spring and close it in the fall. Out of the 16 available weeks, it was rented 12 weeks, vacant 1 week, and personal use for 3 weeks. The 1 vacant week was advertised for rent but we did not get a booking. The remaining 36 weeks a year, the cottage is not accessible, the roads are not maintained and the cottage is not heated.
How do I calculate percentage used for business? Is it just the rented weeks (12) or available for rent weeks (13)? And in the denominator, can I use 16 weeks or do I have to use the whole year.
The paper says this. “In the Morris case, the decided that the portion of the operating losses to be written off against income was the percentage that is was available for rent during the operating season. Since the cottage was frozen for a portion of the year and therefore not rentable, the expenses for that period of time were not deductible.
As a result of these decisions and others, the Canada Revenue Agency is taking the position that if you use the property personally and rent it out the rest of the time, your business use is only the period when you can "Reasonably expect to rent out the property.”
Keep in mind that this is the CRA’s view, I am sure lots of people do not necessarily agree with their position, but if you take an alternative position, you may be challenged.
As you will have observed from the above Q&A, some of the income tax issues that arise in respect of owing a rental property are complicated or fall into a murky grey area. I would suggest that if you own a rental property, you should probably have an accountant assist with your income tax return.
Mark Goodfield is a tax partner and the managing partner of Cunningham LLP in Toronto. He writes about income tax, business, the psychology of money and investing topics and is meant for taxpayers no matter their income bracket, but in particular for high net worth individuals and entrepreneurs who own private corporations. The views and opinions expressed in his blog, The Blunt Bean Counter, do not reflect the position of Cunningham LLP
This information of a general nature and should not be considered specific advice, as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained herein. The above information, comments and opinions are not necessarily the opinions of Queensbury Strategies Inc. Its accuracy or completeness is not guaranteed and Queensbury Strategies assumes no responsibility or liability.
Canada Mortgage and Housing Corporation (CMHC) is a Crown Corporation which administers the National Housing Act and provides mortgage insurance for high ratio mortgages. Mortgage loan insurance is typically required...
Canada Mortgage and Housing Corporation (CMHC) is a Crown Corporation which administers the National Housing Act and provides mortgage insurance for high ratio mortgages. Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a minimum down payment of 5% — with interest rates comparable to those with a 20% down payment.
Change #1 Elimination of second home mortgage insurance
CMHC now limits the availability of homeowner mortgage loan insurance to only one property (1 – 4 units) per borrower/co-borrower at any given time.
In the past, when some condo or homeowners decided to move to a larger or different property they would retain the current property as an investment, rent it out and purchase a new property to live in. Many of these individuals could not raise a 20% down payment on the new property given that they have equity tied up in the current property. Being able to obtain CMHC insured mortgage supported a smaller down payment making the strategy doable. No longer. Owning a second property will require saving up a much larger down payment.
In the past, when lenders required a mortgage applicant to provide a co-borrower to approve the mortgage, the co-borrower could already have a CMHC insured mortgage of their own. No longer. There will be some (mostly young, first time buyers), who will have to save more, or earn more in order to qualify on their own merits.
Change #2 Elimination of Self-Employed without 3rd Party Validation mortgage insurance
Going forward, to validate your income, you will have to provide copies of your Notice of Assessment, audited financial statements or unaudited financial statements prepared by an independent third party, for the previous two years. Most self-employed individuals maximize business expenses with the aim of reducing income tax. This approach may result in a reduction of the business owner’s mortgage financing ability.
It is clear that the federal government is working to ensure that a Canadian version of the recent US housing crisis does not occur. In our view, there is merit to such an approach. That being said, alternate high ratio mortgage insurance companies, Genworth Financial and Canada Guarantee have not introduced similar restrictions yet.
All mortgage insurers increased their insurance rates this year.
This information of a general nature and should not be considered specific advice, as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained herein.
This special issue is designed to highlight the budget changes that will have the greatest impact on our clients. It is not meant to be an exhaustive list of the new budget measures. If you have questions about any of the budget announcements, please let us know.
GST/HST Credit – Positive change
Beginning with your 2014 tax return, you will no longer have to check the box on your T1 General personal tax return asking whether you want to apply for the GST/HST Credit. CRA will automatically determine whether or not you are eligible to receive the credit. The Credit will be paid to the spouse or common-law partner whose tax return is assessed first.
Medical Expense Tax Credit (METC)
Two new eligible expenses are being added to the list of expenses for which an individual is entitled to the METC. These are:
The design and subsequent adjustment of an individualized therapy plan provided that the cost of the therapy itself would be eligible for the METC, such as applied behavior analysis therapy for children with autism, assuming certain conditions are met.
The cost, care and maintenance expenses related to service animals specially trained to assist an individual in managing their severe disabilities. This would also include reasonable travel expenses to obtain the necessary training.
Donations Made by Will/Beneficiary
Budget 2014 will provide additional flexibility in how donations by will or beneficiary designation will be treated for tax purposes for deaths after 2015. Under the new rule, beginning in 2016, donations made by will and designation will no longer be deemed to be made by an individual immediately before the individual’s death, but rather will be deemed to have been made by the estate at the time the property is donated to the registered charity. That means that the estate would then have the option to allocate the donation to the taxation year in which the donation is made, an earlier taxation year of the estate, or the last two taxation years of the individual who died.
Pension Transfer Limits when Commuting a Pension Plan
If you leave a defined benefit pension plan, there are rules in the Income Tax Act that determine how much of your commuted value can be transferred tax-free into an RRSP. If the pension plan is underfunded, that reduces the amount of the commuted value that can remain tax sheltered.
In 2011, the government introduced a special rule to cover these situations, but only where an underfunded pension plan of an insolvent employer is being wound up. Budget 2014 proposes to extend this rule to any commuted value paid to a departing employee under the following conditions: the payment has been reduced due to plan underfunding and the reduction in the estimated pension benefit that results in the reduced commuted value payment is approved pursuant to the applicable pension benefits standards legislation. This will apply to commuted value payments made after 2012.
We await details for how individuals who transferred the commuted value of their pension plan in 2013 can take advantage of this new rule retroactively.
Elimination of Graduated Tax Rates of Testamentary Trusts
The graduated rate taxation for testamentary trusts (trusts created by a Will) will be significantly curtailed.
Starting in 2016, flat top-rate taxation would apply to testamentary trusts created by wills as well as to estates “after a reasonable period of administration” of 36 months. The benefits of graduated rate taxation is now limited to the first three years of an estate.
Thankfully, graduated rates will continue to be available indefinitely for testamentary trusts whose beneficiaries are individuals who are eligible for the federal disability tax credit.
Thanks go to Renaissance Investments and Jamie Golombek, Managing Director Tax and Estate Planning where much of this information was sourced. This information is general in nature and is not intended to constitute specific tax or legal advice for any individual. It is best to speak to your tax and legal professionals for specific advice.
I’ll admit it, when I picked up a copy of Preet Banerjee’s new book, Stop Over-Thinking Your Money, The Five Simple Rules of Financial Success, I immediately flipped to chapter seven. This is the chapter on Financial Advisors and I was very interested in what Preet would say about financial advice. I have a lot of respect for Preet and his efforts to improve financial literacy in Canada, so I was expecting that he would present the subject in an objective, informative manner.
I wasn’t disappointed. His plain language, common sense advice regarding the financial services industry is in line with the plain language, common sense advice in the rest of the book.
Why is this book essential reading for those who desire grounding in the basics of financial planning? As the great philosopher, Voltaire, once said, “common sense is not so common”.
Preet delves into the fundamental rules of financial planning, helping the reader understand the importance of each. He dispels some common misconceptions and presents each rule in a relatable manner. The rules are:
Disaster-Proof Your Life
Spend Less than You Earn
Aggressively Pay Down High-Interest Debt
Read the Fine Print
Preet also includes a great primer on investing and insurance, both subjects that the financial industry often over-complicates.
Does this book replace the need for Financial Planners like me? Both Preet and I don’t think so. What it does do is empower Canadians with information on the critical aspects of financial decision making that, when implemented with or without an advisor, leads to greater financial security.
I consider it essential reading for young professionals entering the workforce. The sooner one embraces the 5 rules, the fewer regrets in the future.
Guest post by Jason Allan, Barrister and Solicitor
Yes. The executor has the right to charge a fee or “compensation” for managing an estate. The Trustee Act states: “A trustee, guardian or personal representative is entitled to such fair and reasonable allowance for the care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge of the Superior Court of Justice.” While there is no set fee in the Trustee Act or elsewhere, the courts have developed “guidelines” for calculating the executor’s compensation as follows:
2 ½ % of the capital receipts
2 ½ % on capital disbursements
2 ½ % on revenue receipts
2 ½ % on revenue disbursements
2/5 of 1 % per year management fee on the gross value of the estate
It is important to note that the “guidelines” are just that, guidelines, and may be varied from in certain circumstances. For instance, the courts recognize that in some cases it may be appropriate for an executor to charge more compensation and in other cases, the guidelines may be too much. In this regard, the courts have historically considered the following five factors in determining the appropriate amount to compensate an executor if the “guidelines” are deemed inappropriate:
The size of the estate
The care, responsibility and risks undertaken by the executor
The time spent by the executor managing the estate
The skill and ability demonstrated by the executor in managing the estate
The results obtained by the executor in managing the estate; i.e., the extent to which the estate was successfully administered
Of course, if the Will sets out the executor’s compensation, this amount will be followed and the guidelines and the above factors need not be considered. There is also a legal presumption which states that if the executor is left a specific bequest in the Will, this amount is intended to be his or her compensation (this “presumption” can be rebutted by the executor).
The funds paid to the executor as compensation are deducted from the “residue” of the estate. The term “residue” refers to the funds that are left over after all the estate debts, general legacies and other specific bequests have been paid. In many instances, the executor elects not to charge compensation because he or she is either the only residuary beneficiary or one of a few residuary beneficiaries (i.e., one sibling acting as the estate trustee on behalf of his or her siblings). The compensation is taxable income whereas the inheritance is not so it may be more tax-advantageous for an executor to forego compensation, depending on the number of beneficiaries.
Jason Allan is a Barrister and Solicitor with Allan Law in Aurora, Ontario. www.allanlaw.ca
Believe it or not you can be charged a 20% penalty for missing information that the CRA already has on hand.
In the next month or two, the CRA’s matching program will begin kicking out notices of reassessment to Canadians whose reported income on their 2012 income tax returns does not match the CRA's records. Some of these income tax filers will be assessed penalties of 20% on income not reported. Yes, that is income not reported, not tax underpaid! This penalty applies to income tax information your employer or financial institution provided to the CRA which was not reported on your return. In most cases, the omission of income was purely unintentional.
How can one be considered to not have reported income that the CRA has in its database? Is this not a penalty for failing to confirm income, as opposed to not reporting income? This is how the matching program works.
The Matching Program
The CRA’s matching program catches the non-reporting of income every fall. Each year the CRA checks the T-slip information in its database against Canadian taxpayer’s income tax returns to ensure the T-slip income reported matches. Where the income filed by a taxpayer does not match the CRA's database records, an income tax reassessment is mailed to the taxpayer asking for the income tax due. If the taxpayer is a first time offender, they are just assessed the actual income tax owing and possibly some interest. If this is the second occurrence in the last four years, a 20% penalty of the unreported income is assessed.
The Penalty Provision
Under Subsection 163(1) of the Income Tax Act, where a taxpayer has failed to report income twice within a four-year period, he/she will be subject to a penalty. The penalty is calculated as 10% of the amount you failed to report the second time. A corresponding provincial penalty is also applied, so the total penalty is 20% of the unreported income.
Ouch! Is this Fair?
I find this penalty unfair for the following reasons:
1. It is excessive. I can accept a penalty of 5%, maybe 10%, but 20%?
2. The penalty can be levied even if you owe no income tax. I.e.: If someone in Ontario fails to report a T4 slip with $5,000 of employment income and the slip also reported $2,325 of income tax deducted, they would owe no income tax, as the maximum marginal income tax rate of 46.41% was applied (ignoring Ontario supertax). However, if you had failed to report income in any of the three prior years, the penalty under subsection 163(1) would be $1,000 (20% x $5,000), even though you owed no income tax and the CRA was provided this information by your employer.
3. The penalty can vary wildly on the exact same total of non-reported income. If you fail to report $2,000 two years ago and fail to report $100 this year, your penalty is $20. However, if you failed to report $100 two years ago and failed to report $2,000 this year, the penalty is $400! That is a huge difference in penalties for the exact same total of unreported income.
4. Most penalties relate to T-slips taxpayers did not knowingly ignore or evade. In most cases, the missing income relates to T-slips lost in the mail or sent to the wrong address. Also, many T-slips are now issued online and are easy to miss.
According to an article by Tom McFeat of CBC News, the number of Canadians penalized for this repeated failure to report income totaled over 81,000 in 2011 with an income tax cost of slightly over $78,000,000.
To be clear, my issue with this penalty is that taxpayers in most cases are being penalized where there is no intent to hide income and the CRA receives that information. However, I am not as forgiving with the non-reporting of rental income, capital gains or self-employment which relies on taxpayer honesty.
Tax Tip for T-slips Received after You Filed Your Return
If you receive (or discover) a T-slip after filing your tax return and ignored the slip since it was a small amount, dig it out tonight and file a T1 adjustment as soon as possible before the matching program gets you. Even a small $10 missed slip will start your clock ticking for a potentially larger penalty if you miss reporting income again in the subsequent three years.