Clients will occasionally ask: Why isn’t my investment doing well?
Then I ask which one they’re concerned about, and what they’re basing that determination on.
They say: Well, that’s what the statement says. That’s what I’m looking at!
But statements can be misleading. Let me explain why.
We’ll begin with industry jargon
Let’s first deal with some industry jargon. You may have heard of adjusted cost of your investment, or something called book value. These two terms mean the same thing.
Market value is what your investment is worth today. It is not the same as book value and/or cost.
What typically happens in these cases is that an investor is comparing their adjusted cost to market value, as reported on their statement. They look at the difference between those two, and say that that is the performance they are generating.
In other words, they’re thinking market value, less my book value, is my percentage return.
But! Book value, and what’s called net invested – essentially the money you put in – are not the same thing.
Your percentage return is what you put in, versus your market value.
A deeper look at book value
Let’s figure it out – what is book value? If it isn’t what you invested, then what is it?
This is important because book value, and adjusted cost base, are reported on your statement. Plus market value.
So where is your net invested?
It usually doesn’t show up at all!
Then what is book value all about? Book value, or adjusted cost base, equals net invested plus income distributions. Let’s talk about those income distributions!
Income distributions change everything
The investment that you bought, say a mutual fund, owns a number of types of investments. Those investments generate interest if they’re bonds. They might pay dividend income, if they’re stocks, and if sold at a profit they will generate capital gains. If you own that investment in a taxable account? The CRA says: Give me my tax money.
This income will have to be reported and will show up on one of those lovely T-slips at the end of the year even if you reinvested the income rather than took it in cash. But you don’t want to pay tax on that return twice!
So let’s assume the investment unit value that you bought was $10 per share, and you got an income distribution of $1 per share. If at the end of the year the unit value was $11 dollars per share, you reinvested that $1 – you didn’t take it out. You’re going to pay tax on that $1. So your book value is now your net invested plus this one dollar of income. Now your book value is 11 dollars. It’s not what you originally invested! It’s what you invested plus any income distributions.
Now, one day you might sell this investment.
You invested at 10 dollars, you got a 1 dollar income distribution on which you paid tax, it’s worth 11 dollars and you sell it. You’ve made 10 percent! Pretty good!
But you shouldn’t be made to pay tax on that $1 again, so the CRA calculates your capital gain on this investment as the market value minus the book value, which was 10 dollars plus your income distribution: $11. So you have zero capital gain. Hooray!
Bet you never thought you’d be happy about not having a capital gain on an investment! But you should be happy – you don’t want to pay tax on this income twice.
RRSP and TFSA statements
The next question I hear is: Why does this get reported on my RRSP or TFSA statement, when taxes don’t come into play? The distributions are not taxable.
The fact is, financial institutions usually use one system to report all account information. What’s useful for a tax account may not be as useful for a tax-free account but everything gets reported the same way.
Moral of the story
The next time you’re thinking of judging the quality of your investment return by comparing cost base to market value? Don’t do it – you’ll be missing part of the puzzle!
This information is of a general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed and Queensbury Strategies Inc.assumes no responsibility or liability.
Interest rates are still low. As a result, we are increasingly asked if it makes more sense to invest extra cash rather than pay down debt. The same question comes up when we recommend using non-registered investments to pay down debt.
You might be thinking:
“If my mortgage rate is under 3%, wouldn’t I be better off investing extra cash and pocketing the difference?”
Let’s assume for the moment that leveraged investing is appropriate for you – because that’s what you would be doing. Further on, I’ll give you a checklist to determine if you really are a candidate for leveraged investing.
Let’s try an example
To start, let me challenge your assumption with a little math. We’ll assume you have $100,000 that you now want to invest, and you also have:
$220,000 mortgage or secured line of credit, with a 2.9 guaranteed interest rate
Investment return of 6% (not guaranteed) in a balanced portfolio; 2% interest, 2% dividends, 2% realized capital gains
$105,000 earned income in Ontario (marginal tax rate is therefore approx ... 43%)
Difference in return: pay down mortgage debt or invest (own source)
Difference in cash flow: pay down mortgage debt or invest
In this case, the choice of investing vs paying down the mortgage earns an extra 1.3% per year (4.2% - 2.9%). Note that if the portfolio return had a greater component of interest, taxes paid would be higher, decreasing the 1.3% advantage to investing that this case shows.
Of course, you could achieve a higher return on your investments, but you could also experience a lower, or negative return in the short term. In addition, you’ll want to pay the tax out of your bank account rather than withdrawing from your investment portfolio. Using your portfolio to pay taxes reduces the magical advantages of compound growth over time.
How do you stack the numbers in your favour?
Here are three ways to optimize your choices:
Let the tax act help you. CRA lets you deduct your borrowing costs (interest charged) when you borrow to invest in an income generating investment. Note that the paper trail is important to qualify for the deduction. In our example, you would need to take the $100K cash and pay down your debt first, then borrow it back and invest in the portfolio. You must be able to prove that the borrowed funds were used to make the eligible investment.
Invest tax-efficiently. The less taxable income the portfolio generates the better.
Invest for growth. The higher return the better. Conservative fixed income won’t generate the returns you need to make this work, and is tax-inefficient to boot.
Checklist for leveraged investing
So, is this for you? Here’s the checklist I promised earlier, to decide whether you are a candidate for leveraged investing. See how many you say yes to!
You are investing for the long term.
You have a stable income and can afford to pay the annual loan interest and taxes on portfolio income from your cash flow rather than the portfolio.
You will not have future borrowing needs. The leveraged strategy could impede your ability to borrow additional funds for other purposes.
You have a high risk tolerance. This is necessary for two reasons:
A growth portfolio is necessary to generate the necessary return to compensate for the risk of the overall strategy.
Aborting the strategy during a bear market amplifies your losses. There is a loss on the investment as well as the outstanding debt that cannot be fully repaid when the strategy is unwound.
How did you do?
What can go wrong?
You’re a knowledgeable investor; before you make your choice, you want to review the downside as well. Here are the two eventualities most likely to derail a leveraged investing plan:
Interest rates rise - rising loan interest rates and a stock market correction would be a bad combination. Historically, rising interest rates signal the end of an economic cycle, and precede a recessionary period, which is negative for the stock market.
You need to liquidate the portfolio at an inopportune time. There are lots of reasons why you might need the cash. Job loss, supporting children or parents unexpectedly, and major house repairs are just some of the events that could force you to liquidate your investment at a time that undermines the leveraged strategy.
Is the risk worth it?
I always like to measure the long-term impact of investing versus debt repayment with a detailed financial planning exercise. You might be surprised to find out that paying down debt is the most effective, certain path towards your wealth-building goals.
But if you answered yes to all of the items in the checklist above, that risk of leveraged investing may be worth it for you. Talk to your advisor!
This information of a general nature and should not be considered professional tax advice.The information contained herein was obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and Queensbury Strategies Inc. assumes no responsibility or liability
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.
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.
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.
Whether incorporated or a home based sole proprietor, business owners can deduct many operating expenses from their income. Here is a list of the most common expenses and a tip for effectively keeping track of them.
Advertising – Costs associated with marketing your services may include: Pay per click online campaigns, print and radio ads, direct mail, memberships in business associations and networking groups.
Car and fuel – the proportion of automobile expenses related to business use can be deducted. Make sure to keep an auto expense usage log in the event that you are audited.
Insurance – Business liability, property, trade credit and any other business insurance.
Legal fees – Business legal advice fees typically result from incorporations, lease reviews, shareholder agreements, contract development and unfortunately at times, litigation.
Eligible maintenance and repairs - Upkeep of buildings and equipment including utilities.
Equipment and supplies - Common expenses include office supplies, telephone and cell phone services, computers and related technology and furniture.
Support staff - All staff expenses including contractors are a deductible expense. Make sure to treat employees as such rather than contractors if for all intents and purposes the individual(s) is working exclusively for you on a full time basis.
Taxes – Yes, some taxes are deductible and they include property taxes and HST.
This summary is intended to highlight the aspects of the budget that will affect some or all of our business owner clients. It is not meant to be a comprehensive outline and analysis of the budget.
Corporate income tax rates
There were no changes porposed to any corporate income tax rates.
Hiring credit for small business
The temporary hiring credit for small business will be extended for another year. The credit will be available to employers whose EI premiums were $15,000 or less in 2012.
Scientific research and experimental development tax credit (SR&ED)
More detailed information will be required when taxpayers use third parties to prepare a claim. Business numbers for each third party along with details about billing arrangements including the existence of contingency fees and the amount of fees payable, will be required. The claimant will have to certify if there was no third-party involvement in preparing the claim. There will be a new $1,000 penalty for all claims where the required information is missing.
Leveraged insured annuities
Leveraged insured annuities use a combination of borrowed funds, lifetime annuities and life insurance policies to create a current interest expense deduction, reduced capital gains tax payable on death, receipt of tax –free growth within the policy and an increase to the capital dividend account of the corporation. We have never been comfortable with such a strategy and now this budget has taken steps to eliminate the tax benefits that made the strategy so marketable.
10/8 arrangements use life insurance policies and borrowed funds to create an ongoing interest expense deduction, a tax deduction for a portion of the life insurance premiums paid and an increase to the capital dividend account of the corporation. This is another tax driven insurance strategy that has always made us uncomfortable, and now this budget has taken steps to eliminate the tax benefits that made the strategy so marketable.
To facilitate the windup of existing arrangements before 2014, the budget proposes to alleviate the tax consequences of withdrawing from a policy under this arrangement to repay the borrowing, if the withdrawal is made on or after March 21, 2013 and before January 1, 2014.
Various other tax measures
• Accelerated capital cost allowance provisions for clean energy generation and mining companies.
• Elimination of corporate loss trading with a new provision that restricts the deductibility of losses in cases where there has been an acquisition of control of a corporation.
• Phasing out of the additional deduction available to credit unions over a five year period.
• Extention of the accelerated capital cost allowance for manufacturing and processing machinery and equipment acquired after March 18, 2007 and before 2014.
Please let us know if you have any questions about how the budget affects you.
"This information is general in nature and is not intended to constitute specific tax advice for any individual It is best to speak to your tax professional for specific tax advice.”
This summary is intended to highlight the aspects of the budget that will affect some or all of our clients. It is not meant to be a comprehensive outline and analysis of the budget.
Personal income tax rates
There were no changes made to personal income tax rates, although tax brackets have been indexed by 2% to reflect the impact of inflation.
First-time donor’s super credit.
If you or your spouse or common-law partner have not made a charitable contribution since 2007 you are eligible to receive a one-time super tax credit for contributions up to $1,000. The donation must be made after budget day (March 21, 2013) and before 2018. The resulting benefit would be a 40% tax credit on the first $200 of donations and 54% on the next $800.
Lifetime capital Gains exemption
The budget proposes to increase the $750,000 lifetime exemption by $50,000 to $800,000. The limit will be inflation indexed for 2015 and subsequent years. This exemption is available only for dispositions of qualified small business shares, qualified farm property and qualified fishing property after 2013. If you already claimed the maximum exemption, the incremental new higher limits are available to you going forward.
Deduction for safety deposit boxes.
This deduction has been eliminated.
Dividend tax credit
The highest marginal tax rate on non-eligible dividends (typically paid to shareholders of a qualified small business) will increase from 19.58% to 21.22% after 2013.
Foreign reporting requirements
If you own specified foreign property with a cost that exceeds $100,000, you must file form T1135.
You can see the list of property that must be reported on the second page of the T1135 form.
For the majority of Canadians, property that they will have to report includes:
• Funds in foreign bank accounts
• Shares of Canadian corporations on deposit with a foreign broker; (not including U.S. IRA accounts)
• Shares of non-resident corporations held in certificate form or on deposit with a Canadian or foreign broker; (for example, US stocks like Apple, Coca Cola, etc.)
• Land and buildings located outside Canada, such as a foreign investment property; (this does not include property that is for personal use primarily)
• An interest in or a right to any specified foreign property, such as a foreign Trust
Character conversion transactions and corporate class funds
This refers to financial arrangements that attempt to convert ordinary income into capital gains, through the use of financial derivatives. Many corporate class fixed income mutual funds use such arrangements to minimize the tax burden for investors. As such, as these derivative contracts expire, the tax-efficiency of these funds will be reduced, albeit they will still hold a structural advantage as compared to mutual fund trusts and ownership of individual securities in non-registered accounts.
Taxes in dispute and charitable donation tax shelters
CRA is generally prohibited from initiating collection action in respect of assessed income taxes, penalties and interest in cases where taxpayers have formally objected to the assessment. In order to discourage participation in charitable donation tax shelters deemed offensive by CRA that lead to prolonged litigation and delayed tax collection, the budget proposes to allow CRA to collect up to 50% of the disputed amount pending ultimate determination of the tax liability. This measure will apply to 2013 and subsequent taxation years.
Testamentary trusts and graduated rate taxation
A common estate planning strategy involves the use of testamentary trusts (spousal trusts, for example) created in a deceased person’s will to hold a beneficiary’s inheritance. These trusts can be more tax efficient that receiving an outright inheritance because the trusts are subject to taxation at graduated rates and allow for the splitting of income between the trust and the beneficiaries. The Department of Finance is concerned with the increasing tax-motivated use of testamentary trusts and the impact on the tax base. The budget announced that the government will consult on possible measures to eliminate the tax benefits arising from the use of these trusts.
Please let us know if you have any questions about how the budget affects you.
"This information is general in nature and is not intended to constitute specific tax advice for any individual It is best to speak to your tax professional for specific tax advice.”
Some Canadians have been asking their tax preparer not to file their return electronically because they believe that it increases the chance of an audit.
Whether e-filing increases the odds of an audit or if that is a myth is no matter. Starting in 2013, tax preparers who file more than 10 personal or corporate income tax returns are required by CRA to file them electronically.
What is the repercussion if a taxpayer refuses to file a return electronically? None for the taxpayer. It is the professional preparer who would be exposed to potential penalty for using an incorrect filing method.
So, if you want to file your tax return the old fashioned way, you will need to file it yourself or have a friend or family member help you. The good news is, there is helpful tax return software that is inexpensive and makes it easier than ever.
Being self-employed has many benefits, one of which is that business owners get increased tax planning opportunities.
Self-employment is a great tax-shelter because of the many tax deductions available to entrepreneurs. CRA allows deductions for a multitude of expenses as long as the costs and reasonable and were incurred in order to generate income for the business.
CRA isn’t going to take your word for it though, so recordkeeping is essential. One of the most common mistakes that entrepreneurs make is commingling personal and business expenses.
What does commingling look like?
• Using one credit card for both personal and business expenses.
• Using one chequing account for both personal and business expenses.
• Moving money from personal accounts to business accounts and vice versa without adequate documentation or explanatory notes
The advantages of segregating business and personal finances
• Your accountant (or you) can easily prepare your tax return. Less time spent by the accountant means lower accounting fees.
• You won’t break into a sweat if CRA decides to do a business expense audit.
• It is easier to assess the profitability of the business.
Separating your business and personal income and expenses will result in greater financial clarity, and fewer problems with CRA.
This information is for general information only and is not intended to constitute specific tax advice for any individual.