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Is there a better way? Call a Chartered Accountant in Mississauga!
Tough Taxes? Do you need Income Tax Accountants who will get you Best Professional Results? Call 905-270-1581, or text/email Charles or Peter (peter@charlesrussellca.com) see other Contacts now!

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Personal Tax - 2010 Questionnaire

Print the full text below and utilize it to organize your income tax data before visiting the office of Charles Russell

!!!!!100 Great Tax Tips Absolutely Free!!!!!

This newsletter contains some information that is very valuable. Check out the different sections as follows: Part I - 12 vital tips that are easily done, that if avoided, may beat you up later Part II – RRSP’s – 11 bona fide considerations for your RRSP savings -absolutely essential Part III – Capital Gains – Don’t fail to understand these important tax matters Part IV – Owner-Managed Businesses – Proper planning makes all the difference! Part V – International Part VI - Assets Part VII – Estate and trusts Part VIII - Employees Part IX - Long Term Employee benefits in a Canadian small business corporation Part X – Other Part XI – CRA pronouncements, briefly

100 Free Income Tax Tips – Updated January 2011

We are happy to help readers expand their knowledge by providing, at no cost, tax tips taken from Charles Russell’s personal library. The information provided below is general in nature. They are, simply, sample problems and matters of interest covering a wide range of common topics. Please contact Charles Russell to discuss any specific transactions prior to implementation. We are happy to assist you in these and other areas of your business as your advisor. If you are pleased with what you learn from these tips, I would appreciate your letting me know! You can do so via the Firm Profile page of this website, by clicking on the Guestbook button in the bottom right corner of that page and send me an email. If there is sufficient interest in the content, we will add additional tips in the near future……Charles Russell, CA

Part I - 12 vital tips that are easily done, that if avoided, may beat you up later

1. Often, individuals act first, without considering about the income tax consequences, and almost as frequently, without considering a professional’s point of view. Always consult with a Chartered Accountant where you do not clearly understand the correct tax situation. You will get full value for what you will pay in fees!

2. Never fail to file your income tax return when you know (or suspect) you owe the Income Tax Man.

3. Save $$$ by intelligently organizing your tax paperwork before taking it to your Chartered Accountant. Organize material during year. Hold back until you have all slips, or most significant income items.

4. Promote a healthy dialogue with your Chartered Accountant when you pickup your tax return. Do not sign unless your taxes make sense to you. Ask, it’s that simple! You are responsible for what your tax return includes.

5. Make sure you give your Chartered Accountant essential changes in your new data: marital status; current address and telephone number; dependants and sin#; and last year’s Assessment Notice.

6. Speak to your Chartered Accountant to determine whether you have a business and when it commenced. One thing inevitably jump-starts the business. What jump-started your business?

7. If you or your spouse is self-employed, your tax filing date is June 15 of the following year. However you need to pay your taxes by April 30 to avoid penalties.

8. Income Tax Filing - If you expect a large refund on your income taxes, file your return early, if possible, making the refund available for your use. Do not shortcut the preparation of the income tax return, however.

9. Income tax Instalments - Do not overpay your instalments! Recalculate your taxes during the year and step-down payments based on new information. Why leave $$$ with CRA which does not earn interest?

10. SIN # (Social Insurance number) - Be careful with joint investments, and be sure to understand who should be taxed on the income earned. For instance, if your aged parent gives you consent over his (her) funds, and, if by mistake the investment dealer records your sin on the T4 slips, you need fix that! Have the T-slips reissued to get rid of the disparity. It is possible CRA will enquire why your tax return didn’t include the slips. You want to avoid this happening!

11. Amended Tax returns - If you discover an error on your tax return, either write a letter, or prepare a T1-ADJ form to the regional/district Tax Centre as soon as possible. CRA permits adjustments back 3 years, the period of time CRA may reassess.

12. Income Tax Assessments - If your assessment indicates payment is owed, it is often best to pay the balance to avoid interest charges, then resolve the difference noted from the return you filed. Consider filing a Notice of Objection within 90 days, for protection, if material differences occur and CRA has not reassessed you adequately and timely.

Part II – RRSP’s – 11 bona fide considerations for your RRSP savings

13. Put money into RRSP’s when you can afford to do so. Remember you need to know the tax dollars saved by contributing – that is, your marginal tax rate!

14. Watch your RRSP contribution limit. Overcontribute lifetime of $2,000 is permitted. Beyond that there is a 12% p.a. penalty which is time-consuming and expensive to calculate.

15. Don’t waste your contribution by putting money into an RRSP, then withdrawing the amount again the next year.

16. If your spouse is a lower wage-earner, consider contributing to a spousal RRSP. This will create a pension for your spouse in the long-run. Do not withdraw the contributions within three years as they attribute to you.

17. You can not make a contribution to your RRSP after Decmber 31, in the year of your 69th birthday. Make sure this deadline is not overlooked. However you can contribute to your spouses RRSP until his (her) 69th birthday, and you take the deduction. But, be sure you have the Room and the income against which the contribution can be deducted.

18. The Home-Buyer’s Plan - Both partners in a marriage can borrow from their RRSP, up to $20,000, for down-payment on a first-time home. Additionally, after 5 years of a legal separation, each are eligible for a similar loan (to cover all bases).

19. RRSP’s paid directly by Company- The Company can contribute directly to an RRSP on behalf of an employee. The employee receives a taxable benefit on the T4; the Company gets a writeoff for the RRSP contribution; and the employee has his RRSP investment. From a personal tax viewpoint the employee is whole: the taxable benefit is offset by the RRSP deduction slip.

20. RRSP Qualified beneficiary - On death an RRSP is taxed on the taxpayer’s final tax return unless the beneficary is a spouse or financially dependent child or grandchild. It is not enough that the child is dependent. The child must be a named beneficiary.

21. Timing of RRSP contributions - Contributions to your RRSP, earlier in the year, are effective in that they afford the opportunity to earn returns during the year, thus place you investment ahead of where it would otherwise be.

22. Timing of RRSP withdrawals - Withdrawals, if required, can be made in the early months of a new year and in amounts of $5,000 or less. As a result the investment dealer will withhold 10% “at source”, and the final tax thereon will be calculated up to a year from then when you file the tax return for that year. This allows you use of the highest amount of the withdrawal for the longest period of time.

23. Timing of RRSP withdrawals – Non resident: If you become a non-resident as a result of a move, RRSP’s may be withdrawn while a non-resident at a 25% withholding rate without further tax implications.

Part III – Capital Gains – Don’t fail to understand these important tax matters:

24. A capital disposition (of stocks, of a house investment) occurs very frequently. It is your obligation to report these on your tax return. You are also obliged to calculate the capital gain using adjusted cost base. Serious penalties may arise on substantial omissions.

25. The calculations in the above may be very substantial if the investment has grown over several years, if there are trust units, or where the reporting from the investment dealer does not show ACB. This is a good time to enlist a Chartered Accountant to resolve matters.

26. Capital losses, if not fully applied against gains in the same year, can be carried back three years or forward indefinitely. The decision to carry forward or back may depend on your earnings level in the year to which you carry the loss.

27. If an investment is a loser, consider selling by yearend and taking a capital loss to offset capital gains you will realize in the year. Moreso, if taxable capital gains arose in the prior three years, take dispositions in the current year which are losers to offset.

28. If you are in “an adventure in the nature of trade”, dispositions, such as stocks, may be fully taxable, rather than taxed as capital gains. There may be a clear or unclear differences in your case.

29. In a marriage breakdown involving a settlement of assets, ensure there is agreement on the value to be use for tax purposes, cost or market value. If the value you agree upon is market value, you must file an election.

30. If you sell a T-bill before its maturity, there may be a capital loss or gain in addition to the interest to be reported.

31. Assets held at February 23, 1994 may have bumped-up ACB due to your election reflected on your 1994 tax return. On mutual funds, capital gains since 1994 may have been shielded by this elected amount until 2004. Consult your Chartered Accountant if you are wondering about your unapplied elected amounts.

32. If you move into an owned rental property with an inherent capital gain, having sold your principal residence (say you move to your cottage), you may elect to defer the capital gain on the rental property.

33. Capital Gains Exemption on shares of a Qualified Small Business Corporation - If you are the shareholder of a small business corporation, this exemption, on the sale of your shares, is one of the most tax-favorable entitlements a taxpayer has. However, there are several conditions which must be in place to identify your Company as a Qualified SBC, particularly, that at the point of the sale, 90% of the company’s assets must be used in active business operations. To ensure all conditions are met, including AMT (Alternate Minimum Tax) and other considerations, ask a Chartered Accountant to check out your company’s status.

34. Qualified Small Business Corporation – Passive Investments - Consider keeping passive investments, such as Life Insurance, or residual cash, in a Company separate from the active company. Thus, in the ultimate event of selling the shares of the active company, your Company can more easily meet the qualification test of 90% active assets, and the 50% test over 24 months. There are other tests, too.

35. CNIL Cumulative Net Investment Losses - Where CNIL (net investment losses) exists, this amount will directly cancel, or rather delay, an equal amount of capital gains exemption on Small Business Corporation shares.

Part IV – Owner-Managed Businesses – Proper planning makes all the difference!

36. I recommend clients be reasonable about expenses that they wish deducted. One may find CRA to be reasonable with you, when you, too, are reasonable.

37. Recapture may occur when you dispose of a business asset (eg. an automobile). Consider replacing the asset before yearend to avoid recapture.

38. If you receive advances for work to be done at a future date, you may deduct, at yearend, a reserve for these services you will earn at the future date.

39. You may pay your spouse a salary so long is it is reasonable dependant on the work your spouse performs for you. Remember, generally a T4 is required if your spouse receives more than $500 per year, and Deductions at Source are necessary. See also 46. below.

40. Don’t incorporate a Company to receive salary or wages from your employer. Consider whether personal services business rules apply. Be sure to consult your Chartered Accountant.

41. If you consider yourself self-employed, consider that it is necessary that you are able to display business risk and other factors to support your self-employed status filing position.

42. Employer treating employees as independent contractors – It can be advantageous for employers to consider their workers as independent contractors (avoiding CPP; EI, and Labour laws). However, CRA requires specific criteria to be in place to qualify for independent contractor status (see 40. above). CRA may never audit your Company, however if it does and encounters a problem in this area, it may assess the employer for years of unpaid source remittances (including the both Company and employee portion).

43. Sole proprietors selling a business should consider rolling the business into a corporation, then sell the corporate shares and claim a capital gains exemption. Check with your Chartered Accountant to ensure you are eligible.

44. Business Investment Loss (BIL) - If you have invested in a corporation and your investment was lost because of the company’s failure, you should be entitled to Business Investment Loss deduction in the year the company ceases its business. This deduction is claimable against other sources of income. In addition, where you have provided a guarantee of your company’s debt and have had to pay under the guarantee, you should be able to claim the Business Investment Loss. Review these scenarios as soon as possible with a Chartered Accountant.

45. Shareholder loans - Borrow for business, not for Investment, where possible. However, where the Company taxable income is above the threshhold level, consider this idea: the Company may pay the shareholder an interest amount on the loan, which payment is a deductible expense, to reduce the excess taxable income.

46. Dividends declared on Corporation shares - Whereas income splitting rules provide barriers or limits to employment income-splitting within families, the same does not apply to dividends. Since shareholders are taxable on dividends paid on their shareholdings, have your spouse and/or children own shares of the corporation. However, be aware that if the shareholder is a minor, the dividend is taxable at the highest income tax rate (consult a Chartered Accountant).

47. Salaries - Consider paying sufficient salary to max out your CPP contribution and your RRSP contribution limit.

48. Paying reasonable salaries to family members will allow them to contribute to their own RRSP’s, to take full deduction for tuition credits (students), and perhaps pay tax individually at less than top marginal rates.

49. Directors’ fees - In addition to your employment income you may seek a Director’s fee from related companies. Such fees are part of employment income and may raise your RRSP limit.

50. Directors are responsible for Trust funds (GST, Source deductions, and Health Taxes), so take care that you, as a director, are not part of a failure to pay trust funds. CRA charges heavy penalties for failure to pay these amounts, and can be very aggressive in their collection procedures.

51. Late payment of employee source deductions - For source remittances, the penalty for late payment is 10% of the amount withheld. Subsequent late payments in the same calendar are assessed a 20% penalty. GST late payments are assessed a 6% penalty, and interest is also applied from the due date until payment. Remember once assessed, CRA will go to great lengths to collect late payements, interest and penalties.

52. Investment interest expense – Interest paid will not be deductible to the extent of the proceeds if you sell the investment and use the proceeds for personal purposes. Interest will not be deductible to some extent if the investment is into a fixed rate security earning less than the borrowing rate.

53. Failure to notice offside shareholder balances – Often business owners “borrow”, or advance, funds from their Company to pay personal expenses, resulting in a net balance owed to the Company at yearend. CRA.specifies that if a shareholder owes money on two consecutive year-end balance sheets, the principal portion of the loan must be included in the shareholder’s net income for tax.

54. Are you a Doctor? Consider whether you qualify to form a professional corporation, and become an employee of the corporation. A professional corporation will permit you to defer tax on first threshhold income level of $300,000. You may also be able to organize the shareholdings of the corporation to permit income-splitting.

Part V – International

55. Thin Capitalization – If your corporation has debt owing to a foreign lender, who is a significant shareholder, consider the thin capitalization rules before proceeding. If the corporation is under capitalized, you currently only 50% of interest expense may be deductible.

56. Canadian non-resident - In emigating from Canada, it is important to understand in advance your residency status for both Canadian purposes, and for taxation within the destination country. For Canadian domestic taxation purposes you may be a non-resident if you are a resident of the destination country. There are several areas of concern whether you have effectively severed Canadian residency, and frequently, if in doubt, the tax treaty status is the tiebreaker in determination. Speak to a qualified Chartered Accountant in respect to these matters.

57. Foreign Reporting requirements - personal or corporate: Review with your Chartered Accountant your foreign holdings. You may be required to file form T1135 should specified property exceeding $100,000 at cost exist at any time in the year.

58. Foreign Source income - If your received foreign source income that was subject to withholding tax (for instance gambling winnings from certain specified games), determine whether this income needs to be reported in the foreign country. Also determine whether the foreign tax may be claimed as a foreign tax credit.

59. Foreign Investment income and Foreign Exchange - income received from foreign sources is part of taxable income. You can choose an exchange rate preferable: an average annual rate or a more frequent basis, even daily, whichever is more beneficial. Foreign exchange fluctuations are not realized until the underlying security is disposed.

VI - Assets

60. Purchases of Depreciable property - Generally it is advisable to buy assets before December 31, or in the case of a Corporation, before the yearend date, since ½ year’s capital cost allowance is permitted. It is advisable to claim the first year’s capital cost allowance even if this adds to the startup year’s loss. The reason for this is the assumption that the entity will be profitable in the next one or two years, in which case the loss carried-forward may be applied.

61. In the case of an automobile, class 10 or 10.1 ½ year’s capital cost allowance is 15%. For computers, class 10.45, the ½ year’s capital cost allowance is 22.5%, very substantial!

VII – Estate and trusts

62. At death an individual is taxed on gains implicit in assets held, be they real property, RRSP’s or stocks. The exception to this rule is that bequests to a spouse or spousal trust, ordinarily, are made at cost, thus postponing the inherent taxable event. It must be clear to the estate that the spouse is the beneficiary of each such assets.

63. A spousal trust is utilised as a beneficiary, with the children of the deceased as the ultimate beneficiaries of the trust, namely to ensure that the children receive the shares even in the event the surviving spouse remarries. The spousal trust is commonly used when there are family holding or operating company shares.

64. Consider holding some bank and brokerage accounts in joint tenancy with rights of survivorship in order to ensure that your heirs have access to money immediately.

65. Keep detailed records of your assets and liabilities, including location, so that the heirs are not in the dark.

66. Estate Administration Tax (Probate Fee) – Probate fees, which approximate 1 ½ % of the value of an estate, may add up to significant dollars. You may be able to reduce this tax by structuring effectively and ensuring beneficiaries are named, however this may not be entirely effective where there are income tax issues! Consult a chartered accountant.

67. Alter-Ego Trusts and Joint Partner Trusts and multiple wills– Two types of trusts are popular to minimize probate fees if you are 65 years or older. Basically an individual will gifting the assets to an inter-vivos trust while he is alive. Additionally the use of multiple wills has been upheld in Ontario. One needs consider the legal and accountant costs of such structure vs the probate fees saved.

VIII - Employees

68.Employment income, source deductions - If because of extraordinary deductions in a year, such as a BIL (business investment loss), a taxpayers net income is expected to be lower than his (her) employement income, the employee should write the district taxation centre for employer authorization to reduce the income taxes withheld at source.

69. Home office – If you work out of your home, negotiate your employment terms to enable you to deduct household expenses related to your home office. Your employer must sign form T2200 as evidence of this requirement.

70. Deductible Expenses – If you are paid at least in part by commissions, consider leasing your cell phone, computer, of fax machine. Should you purchase these items, you are not entitled to capital cost allowance.

IX - Long Term Employee benefits in a Canadian small business corporation

71. IPP’s - Individual Pension Plans - A Company may fund an individual’s IPP and take a deduction for the contribution. The IPP falls under the pension plan rules of the Income Tax Act! The advantages of an IPP are: contributions by the Company are not immediately taxable to the employee; pension contributions may include past-service contributions; and the IPP is portable between employers. In a family concern, IPP’s may be grouped. That permits unused pensions, in respect of the founders, to be later rolled into those of their children-successors. You will need to consult a Chartered Accountant and an Insurance Consultant.

72. RCA-Retirement Compensation Arrangement - A Company may fund an RCA and take a deduction for the contribution. There is no limit on the amount of contribution, however 50% of the contribution is immediately given to the Receiver General as Refundable Tax. An RCA accommodates pensions to founders and successors together. Though the 50% tax seems a hazard, it is really narrowed to be an interest cost on the 50%, while the 50% invested in the RCA is allowed to earn a return.

73. Life Insurance - Life Insurance is normally (exempt) non-deductible, non-taxable and internal gains are not subject to tax. However, if a company expends the funds, there is a taxable benefit to the employee who is insured if the Company is not the beneficary of the policy. There are variations, such as “split dollar” policies. If the beneficiary is changed from the Company to the family, the change gives rise to a taxable benefit, often a deemed dividend on the cash surrender value. However on death of the insured, often the shareholder, the life insurance proceeds to the Company enrich the CDA account which may be paid out tax-free to the beneficial shareholder.

74. Cash surrender value may be utilized, perhaps as a draw against the policy, by the insured, or as collateral against a loan.

75. There are also tax implications to the Company if the policy has increased in value significantly. Consult a Chartered Accountant.

76. Disability Insurance policies - Diabaility insurance is normally non-deductible, non-taxable and the employee arranges to pay the premium on a source deduction basis. However if the Company is incurring the cost of the premium, there is an annual taxable benefit to the employee. In this situation if the disability policy is called on to pay the disability insurance to a disabled emplyee, the payments are non-taxable. Critical Accident policies are similar in tax policy as Disability policies. 77. Gifts to employees - Gifts in cash or by means of a credit to loan or advance accounts are taxable. Gifts to each individual up to a total value of $500 in merchandise (wedding, birth, Xmas party, draw) are not taxable.

78. Frequent Flyer Points - If you accumulate frequent flyer points while travelling at your Company’s expense, and you use the points for a family holiday, Revenue Canada requires you to include the fair market value of the holiday in your income, even if your employer does not do the calculation!

79. Golf Course memberships - Though a company is not allowed a deduction for golf course membership, it is still a valid outlay of Company funds if the membership is advantageous as the employer. Such fees in this instance would not be taxable to the employee utilising the membership.

80. Employee Housing relocation costs - Company outlays to move an employee to a new company location is a valid company expense. Additional non taxable amounts include company compensation of the employee for economic loss of the house sold, and for mortgage rate differential on an existing mortgage between the old and new homes (limited to the existing amount of present mortgage). However, a taxable amount occurs when the Company compensates the employee for the price differential in moving to a higher-priced housing market.

81. Moving costs incurred by employee (not reimbursed by employer) - These are tax deductible in the year of the move or the following year when the employee moves his principal residence 40 kilometres (as-the-crow-flies) closer to his new work location. Valid costs deductible are legal costs, physical moving costs, lease cancellation costs and real estate sales fees.

82. Retiring Allowances - These normally include amounts paid upon retirement from an employement, or from a loss of office or employment, and includes amounts awarded due to Damages, and are generally taxable amounts. However, amounts awarded by the Court for damages due to pain and suffering, or being wronged, may not be taxable. In addition amounts transferred to an RRSP within 60 days of the end of the year under section 60(j), retiring allowances provision, and as permitted by regulation, is a deductible amount.

83. Personal Use of Automobile – Be sure to assess a reasonable taxable benefit to employees, including shareholders, for personal use of Company-owned or leased vehicles. Often people are satisfied with the calculation they can do using the CRA website; however this area of taxable benefit involves very complex calculations, consequently a Chartered Accountant is often your best bet!

84. Note that if an employee fails to keep a log book, CRA, in the eventuality of an audit, could assess the employee a taxable benefit equal to the full standby amount and a significant share of operating expenses.

Part X – Other

85. Lower income recipients of OAS may be eligible for GIS (Guaranteed Income Supplement, and between 60-65, may be eligible for a survivor allowance if a Canadian resident;

86. Canada Pension Plan - There are alternatives to your taking a CPP pension at 65 years. A “rule of thumb” is to take it sooner than later, if you are doubtful of being around at age 78. Similarly if you expect higher earnings between 65-70 and your pension contributions earlier in life have been eroded (marital split), or were lower due to periods of low employment, it may be preferable to delay your pension while topping it up.

87. Gifts - Gifts of capital from a person to an adult child do not create taxable events. The investment of the capital by an adult child may well be taxed at a lower tax rate than that of the giftor.

88. Tax Credits - Unused tax credits of a lower income spouse may be transfered to the higher income spouse.

89. Common Law Spouse - One must file as having a Common Law Spouse if there is a child in common, living with them, or the two have lived together in a conjugal relationship for a year, and at the time they have not been separated for 90 days.

90. Canada Child Tax Benefit - Regulations require that family income include that of Common Law Spouse, and benefits are reduced at a family level of $35,595, at a rate of 2% where there is 1 child; 4% for 2 or more children;

91. OAS Old Age Security - Since 1996 OAS is reduced where your other income is $60,000 or greater, and eliminated at approxamately $95,000.

92. Legal fees paid in Divorce etc. - The legal cost of getting a separation or divorce is not tax deductible. However, the legal cost in taking measures to obtain spousal support under a pre-existing right, or to ensure payment of alimony or spousal maintenance are deductible. Spousal support is only tax deductible under a court-ordered document.

93. Similarly legal costs to obtain child support, an increase in child support or to make child support “not-taxable” are also deductible

Part XI – CRA pronouncements, briefly

94. A CRA technical interpretation note: An employer holding Company is able to purchase shares from an arm’s length employee using pre-personal tax dollars, while the employee would receive capital gains treatment, including hypothetically, the capital gains exemption.

95. A CRA technical interpretation note: CRA reviewed a situation where an individual owns an investment portfolio with a market value of $200,000 and has a mortgage of $100,000 on his personal residence. The individual will sell $100,000 of his investments and use the proceeds to pay off the mortgage. The individual would then re-borrow the $100,000 and acquire the same or other interests, thereby converting non-deductible interest to deductible interest. The implication seems to be that the taxpayer has taken certain legal steps, to re-form his affairs and documented accordingly. Note there are tax implications on the sale of the portfolio, and various fees (such as trading commissions) may apply.

96. Wilful Neglect charges –CRA pressed wilful neglect charges against a taxpayer respecting unreported capital gains, which information was available to CRA on T5008’s. The taxpayer, not sophisticated, evidently was unaware of the situation, a calculation never having been performed for him; in addition, there was evidence taxpayer relied on investment dealer and latter’s tax preparation software. Finally, there appeared to be none of the following: concealment, falsification, ulterior motive, or use of funds for another purpose. Crown was unable to prove guilt beyond a reasonable doubt. This is included in my “free tips”, only with the intent of enlightening interested readers as to what is happening out there. This brief not does not fully describe the case, but is general in nature only and there is no intention to mislead. Let me know if you have further questions in similar matters.

97. Health and dental premiums for the self-employed - Individuals will be allowed to deduct amounts payable in respect of the year for Private Health Service Plan coverage in computing business income provided they are actively engaged alone, or as a partner, in their business, and either self-employment is their primary source of income or their income from other sources does not exceed $10,000.

98. In a 2002 Technical Interpretation, CRA notes that where additional child care expenses are incurred because an employee is required to travel out of town on employment, a reimbursement of these costs by the employer would be a non-taxable benefit.

99. Meal and entertainment Expenses - In a recent Technical Interpretation, CRA notes that the 50% add-back rule does not apply, “in respect of one of six or fewer special events held in a calendar year at which the food, beverages or entertainment is generally available to all individuals employed by the person at a particular place of business and consumed or enjoyed by those individuals”. CRA notes that an annual Christmas party which is open to all employees is eligible for this exemption. However, an “Over-Twenty-Five Years of Service Club” party would not qualify unless the event was available to all employees.

And last, but not least

100. Gross Negligence pernalties - CRA appears to be applying the 25% gross negligence penalty under the Excise Tax Act if, after making a mistake and being warned, the taxpayer makes the same mistake again. Even though the Court may throw out the penalties on an appeal by the taxpayer, there is still a time and money cost involved. Therefore, it is usually best to be diligent to avoid making the same HST mistake twice.

C.Russell, Janaury 30, 2011

New Quarterly Newsletters (February 2012)

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues.

The tax benefits of working from home (February 2012)

A number of circumstances and developments have come together over the past few years to make working from a home office—once almost unheard of—a common fact of business life. First and foremost, of course, is the technology (particularly communications technology) which enables the home-based worker to have access to all of the information and services available to his or her in-office counterpart. Given the right technology, it’s nearly as easy for an employee working from home to send and receive e-mails through the employer’s communications network and access the people, information, and services needed to do his or her job in the same way as it would be if he or she was at the office.

While technology has made it possible to work from home on a regular basis, other developments have made the daily commute to the office, and the maintenance of large offices in major urban centres less and less appealing. The ever increasing price of gasoline has made the cost of that daily commute prohibitively expensive in some cases. As well, there is an increased awareness of the environmental cost of having most major highways clogged each morning and evening with hundreds of thousands of cars sitting in traffic gridlock. And finally, the cost of renting office space in most major Canadian cities means that most employers are at least willing to consider the cost savings which might be realized from work-at-home or telecommuting arrangements for their employees.

Along with the greater availability of work-at-home arrangements for employees, there has been a significant increase in the number of self-employed Canadians. And while not all of the self-employed work from home, it’s fairly common for those venturing into the world of self-employment for the first time to save costs by operating their business, at least initially, out of a home office.

One of the things which makes a telecommuting or work-at-home arrangement attractive, aside from avoiding the daily commute, is the tax deductions which can be claimed. While those benefits, especially for employees, are not necessarily as generous as is popularly believed, it is the case that working from home can make costs which would be incurred in any event deductible for tax purposes.

As is usually the case in tax matters, the rules differ for employed taxpayers and for the self-employed, as the latter enjoy a greater degree of latitude in the deductions which may be claimed. That said, both the employed and the self-employed must meet the same basic two-part test in order to be eligible to deduct home office expenses, and that test is as follows:

• the home office must be the place at which the taxpayer principally (defined by the Canada Revenue Agency as more than 50% of the time) performs the duties of employment or must be the taxpayer’s principal place of business: or

• the home office must be both used exclusively for the purpose of earning income from employment or from the business and must be used on a regular and continuing basis for meeting customers or clients of the employer or the business.

A self-employed taxpayer who meets these criteria is entitled to claim (on Form T2124(E) (Statement of Business Activities)) expenses such as property taxes, rent, or mortgage interest (but not mortgage principal amounts), insurance, utilities costs etc. However, such expenses are not deductible in their entirety: rather, the taxpayer must apportion the expenses based on the percentage of the total space which is used as a home office. For example, a self-employed taxpayer whose home office takes up 15% of available floor space and who incurs $2000 each year in qualifying expenses would be entitled to deduct $300 ($2,000 times 15%) in home office expenses for that year. There is one further caveat, in that the amount of home office expenses claimed in a year cannot be greater than the amount of income from the business. It’s not, in other words, possible to run a business which produces $5,000 in income for the year and to then claim $10,000 in home office expenses relating to that business. However, where home office expenses exceed business income in any given year, the excess expenses can be carried over and claimed in a subsequent year in which there is sufficient business income to offset those expenses.

Employed taxpayers who meet the two-part test set out above must meet a further condition before being eligible to claim home office expenses, as follows:

the employer must provide the employee with a Form T2200, which indicates that the employee is required by his or her contract of employment to provide and pay for the expenses related to the home office;
the employee must not have been reimbursed by the employer for such expenses; and
the expenses must have been used directly in the employee’s work at home.

Once the T2200 has been issued, and the other conditions are met, an employee who is a tenant can claim a proportionate part of his or her rent. An employee who owns his or her own home can claim a proportionate percentage of utilities and maintenance costs. An employee is not, however, entitled to claim any portion of mortgage interest, property taxes, or home insurance costs paid, and cannot claim capital cost allowance.

As is the case with self-employed taxpayers, an employee’s deduction for home office expenses cannot be greater than the income from employment income for the year to which the expenses relate. And, once again, carryover to a subsequent taxation year is allowed.

One of the tax benefits which is commonly supposed to exist for the home office workers is the right to claim depreciation (or capital cost allowance (CCA), in tax parlance) on one’s home for tax purposes. For employees, however, such a claim is simply not allowed. And, while the self-employed may be entitled to claim CCA on a home, making such a claim can create a short-term benefit with long-term costs. Making a CCA claim on one’s home is likely to erode the principal residence exemption from capital gains tax which is claimable when a home is sold, and that exemption is almost always more valuable, in monetary and tax terms, than any CCA claim which might have been made.

Being able to claim home office expenses doesn’t result in the huge tax benefits that some popular tax myths claim. However, it can and does permit qualifying taxpayers to claim a portion of home ownership (or rental) expenses which would have been incurred in any case while also avoiding the dreaded daily commute, making it a win-win scenario.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

How to handle an Instalment Reminder from the CRA (February 2012)

As if dealing with bills from the recent holiday season and trying to come up with the funds for an RRSP contribution weren’t enough, February is also the month in which millions of Canadian taxpayers receive an Instalment Reminder from the Canada Revenue Agency (CRA). For many of those taxpayers, who have received many such notices in the past, the reminder and the tax instalment process are familiar, although not necessarily welcome. For those who are receiving one for the first time, however, both the reminder itself and figuring out how to deal with it can be baffling.

Most Canadians, certainly those who are employed, have income tax deducted “at source”, meaning that their employer deducts an amount for income tax from their paycheques and remits it to the CRA on their behalf. However, for those who are self-employed or, frequently, those who are retired, no such deduction is automatically made from their income, and the issuance of an Instalment Reminder by the CRA may be the result.

The receipt of such a Reminder may be particularly puzzling to the newly retired, who have been accustomed to having tax deducted at source from their paycheques throughout their entire working life. However, no matter what the source of one’s income or the reason that tax has not been deducted at source, the options available to a taxpayer who receives such a reminder are the same.

Canadian federal tax rules provide that a taxpayer may be required to pay income tax by instalments where the amount of tax owing on filing is more than $3,000 in the current year (2012) and either of the two previous years (2010 or 2011). Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income is at least $3,000 less than their total tax liability for the current and either of the two previous years. Such instalment payments of tax are due on March 15, June 15, September 15, and December 15 of each year.

An Instalment Reminder issued by the CRA in February 2012 will specify two amounts, one to be paid by March 15 and the other due by June 15. Those amounts represent the CRA’s best estimate, based on the taxpayer’s return filed for the 2010 taxation year, of the net tax will which be payable by the taxpayer for 2012. The taxpayer then has the following three options.

First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of March 15 and June 15. A taxpayer who does so can be certain that he or she will not face any interest or penalty charges, even if the amount paid turns out to be less than the taxes actually payable for the 2012 tax year. (If the instalments paid turn out to be more than the taxpayer’s net tax liability for 2012, he or she will of course receive a refund on filing.)

Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2011 tax year. Where a taxpayer’s income has not changed between 2011 and 2012 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2012 will be slightly less than it was in 2011, owing to the indexation of tax brackets and personal tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2012 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease from 2011 to 2012 and there will consequently be a reduction in tax payable, this option may be worth considering.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2012 tax year is filed in the spring of 2013. However, should instalments paid be late or insufficient, the CRA can impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2012—until March 31, 2012—is 5%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It’s also possible for the CRA to impose penalties, but this is done only where the amount of instalment interest charged for the year is more than $1,000.

Most Canadian taxpayers are understandably disinclined to pay their taxes any sooner than absolutely necessary. However, ignoring an Instalment Reminder is never in the taxpayer’s best interests. Those who don’t wish to have to involve themselves in the intricacies of tax calculations can simply pay the amounts specified in the reminder. The more technical-minded (or those who want to ensure that they are paying no more than absolutely required, and are willing to take the risk of having to pay interest on any shortfall) can avail themselves of the second or third options outlined above.

RRSPs and TFSAs—making the annual choice (February 2012)

It’s that time of year again, when advertisements about the wisdom of contributing to your registered retirement savings plan (RRSP) fills the airwaves and Web sites. And, since the introduction of tax-free savings accounts (TFSAs) in 2009, February is now also the month in which Canadians wrestle with the question of whether to put any available funds into an RRSP before the contribution deadline of February 29, 2012, or whether to deposit those funds instead in a TFSA.

It’s important to be clear, at the outset, that it’s not an either/or choice. Taxpayers can (and probably should) utilize both the RRSP and TFSA options in planning their financial affairs. Realistically, however, for most taxpayers the limitation is one of resources and cash flow, and it’s often not possible to fund contributions to both an RRSP and a TFSA in the same year, let alone in the same month. That said, what are the considerations which apply in determining which savings/investment vehicle is preferable for 2012?

There are some similarities between TFSAs and RRSPs. Both allow savings to grow and compound free of current tax, and for both, contributions not made in a year can be carried forward and made in any subsequent year. As well, the types of investments which can be made with RRSP or TFSA contributions are, for all intents and purposes, the same, meaning that one’s choice of investment (i.e., guaranteed investment certificates (GICs), mutual funds, bonds, etc.) should be irrelevant to the choice of RRSP vs. TFSA. However, the differences between the two savings vehicles are at least as significant as their similarities.

Perhaps most important to taxpayers, contributions made to an RRSP are deductible from income, resulting in a lower tax bill for the year of contribution and, for many taxpayers, a tax refund. Contributions to a TFSA are, on the other hand, made with after-tax funds, meaning that tax will already have been paid on the income used to make that contribution. Many taxpayers, when presented with an option which will reduce current year taxes, find that the most attractive choice. However, over the long-term, the tax consequences of choosing an RRSP over a TFSA can erode that benefit. When funds contributed (along with investment income earned on those funds) are withdrawn from a TFSA or an RRSP, the tax consequences are very different. Funds withdrawn from an RRSP (or a registered retirement income fund (RRIF) into which the RRSP has been converted) are fully taxable, without exception, at whatever tax rate applies to the taxpayer at the time of withdrawal. TFSA funds (including accumulated investment income) are withdrawn from the plan free of tax, regardless of when the withdrawal is made or the purpose to which the funds are put. And for taxpayers who are receiving Old Age Security benefits (or any other means-tested benefits) from the federal government, it is important to note that RRSP or RRIF funds withdrawn will be included in income for the purpose of determining eligibility for such benefits, while TFSA funds will not. Finally, while RRSP contributions for 2011 must be made by February 29, 2012, there is no similar deadline for TFSA contributions—they can be made at any time during the calendar year. Finally, when funds are withdrawn from a TFSA, the plan holder can “top up” the TFSA in any subsequent year by the amount of that withdrawal. Funds withdrawn from an RRSP cannot be re-contributed, unless the withdrawal was made as part of government-sanctioned withdrawal plans, like the Home Buyers’ Plan or the Lifelong Learning Plan.

The minority of working taxpayers who are members of registered pension plans will likely find the TFSA option particularly attractive. The maximum amount which can be contributed to an RRSP for the 2011 tax year is calculated as 18% of earned income for 2010, to a maximum contribution of $22,450. However, that maximum contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under the pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, and a TFSA contribution the logical alternative.

In a similar way, for taxpayers over the age of 71, the RRSP v. TFSA question is simply irrelevant. Taxpayers over that age are not eligible to make contributions to an RRSP, making TFSAs the only tax-free savings vehicle to which they can make contributions. The benefit is greatest for older taxpayers whose required RRIF withdrawals are greater than their current needs. While such RRIF withdrawals must be included in income and taxed in the year of withdrawal, transferring the funds to a TFSA will allow them to continue compounding free of tax and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or for the federal age credit.

For younger taxpayers, where the savings goal is short-term (e.g., a down payment on a home or paying for next year’s vacation), the TFSA is clearly the better choice. While choosing to save through an RRSP will provide a deduction on that year’s return and probably a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced. While the amounts involved may seem small, the loss of compounding on even a small amount over 25 or 30 years can make a significant dent in one’s ability to save for retirement.

Taxpayers who are expecting their income to rise significantly within a few years (e.g., students in post-secondary or professional education or training programs) can save some tax by contributing to a TFSA while they are in school and their income (and therefore their tax rate) is low, and then withdrawing the funds tax-free once they’re working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted against income which would be taxed at the much higher rate, generating a tax savings. And, if a need for the funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Financial planners and tax advisers are accustomed to being asked by clients at this time of year whether it makes more sense to pay down the mortgage (or other debt) or to contribute to an RRSP. That question has become more complicated now that the TFSA option has been added to the mix. There is, however, a solution which allows you to do both. Assuming a marginal tax rate of 45%, an RRSP contribution of $10,000 will generate a tax refund of $4,500. Contribute that $10,000 (or as much as you can) to your RRSP and, when the resulting tax refund lands in your bank account, move it to a TFSA or use it to pay down the mortgage or other debt, or split it between the two.

The Canada Revenue Agency has dedicated sections of its Web site to addressing the need of taxpayers for information about TFSAs and RRSPs, and those sections can be found at http://www.cra-arc.gc.ca/tx/tfsa-celi/menu-eng.html and http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/menu-eng.html, respectively.

Debt reduction offers: too good to be true? (February 2012)

It’s almost impossible not to have heard that the amount of debt carried by Canadian households is at an all-time high—reaching, on average, just over 150% of household income. Carrying so much debt can be relatively painless when interest rates are at historic lows, but it’s clear that rates cannot and will not remain at such levels indefinitely.

Whether it’s because of the warnings issued by financial professionals and government officials, or just the sight of ever-increasing balances on the monthly credit card or line of credit statements, it seems that Canadians are starting to recognize that their debt loads have to be reduced. And—right on cue—a number of debt reduction companies have begun advertising their services, promising to do just that.

Typically, debt reduction companies promise to work or negotiate with an individual’s creditors in order to have the amount of outstanding debt reduced—a service for which the debtor will of course pay a fee. The claims made by some such companies can seem like a lifeline to debt-burdened families. For those dealing with calls from irate creditors and struggling to make minimum monthly payments on outstanding debts, the prospect of having those debts reduced by up to 70% is very compelling. When a promise to restore a good credit rating by removing past credit mistakes from the debtor’s credit history is added to the sales pitch, it can seem almost too good to be true. And that, in fact, is the title of a recent consumer alert issued by the Financial Consumer Agency of Canada (FCAC): “Debt Reduction Companies: Beware of “Too Good to be True” Offers. That alert is available on the Agency’s Web site at http://www.fcac-acfc.gc.ca/eng/resources/consumerAlerts/alerts_posting-eng.asp?postingId=393.

The alert issued by the FCAC examines some of the claims made by many debt reduction companies, and compares these claims to the reality of the situation. The first unrealistic claim is often the one made about the percentage by which an individual’s debt can be reduced. The FCAC notes that no creditor is required to negotiate with or speak to a debt reduction company, even if the debtor has paid a fee to have such a company negotiate on its behalf. And, even if the creditor is willing to deal with the debt reduction company, it is in no way obliged to reduce debt by any amount. In other words, it’s perfectly possible for the debtor to pay a fee but get nothing for it.

Another claim sometimes made by debt reduction companies is that they will protect the debtor’s credit rating or even “clean up” that rating by having information on past defaults or late payments eliminated. The reality is that, unless the information contained in a person’s credit rating is demonstrably inaccurate, there is no way to have it removed from the credit report. Listings of past transactions, like late payments or defaults, do eventually disappear from a credit report, but that happens after a specific period of time has elapsed, not because the removal of such information is requested or demanded by a third party. The FCAC alert also reviews claims made that working with a debt reduction agency won’t have any negative effect on the individual’s credit rating or score. It warns that some such companies delay making payments to creditors for a few months in the hope of getting better results from negotiations to reduce the debt amount and that, where that happens, those late payments are likely to be reported to the credit reporting agencies, further damaging the individual’s credit rating. In some cases, debt reduction companies encourage debtors to stop all direct contact with creditors, or even to sign a power of attorney, giving the company authority to make agreements by which the debtor will be bound, even if he or she had no knowledge of them at the time.

Perhaps the most egregious claim made by debt reduction companies is the strong impression given that they are approved by the Canadian government or even that they are operating as part of a federal government program. Neither is true. Neither the federal nor the provincial or territorial governments operate debt reduction companies, and there are no government sponsored programs offering this type of debt reduction. While it is the case a debt reduction company will usually need to be registered and/or licensed by its provincial or territorial government in order to operate as a business, that is simply an administrative requirement which applies to all companies operating in a particular province or territory. Licensing or registration does not in any way mean that the provincial or federal government has approved of or endorsed the company or its way of doing business, and any claims to the contrary are simply false.

Sometimes, debtors avail themselves of the services of debt reduction companies because they are under the incorrect impression that there is no other choice open to them to deal with their debts. There are, in fact, several options. Where a debtor intends to and is able to discharge existing debts, he or she could obtain a debt consolidation loan from a financial institution. The rate of interest charged on such a loan will almost certainly be lower than that being levied on outstanding credit card or payday loan company debts, and the debtor will be able to make a single payment instead of juggling the demands of multiple creditors. Where it’s not possible to obtain such a loan, or the debtor doesn’t feel able to manage the debt repayment process alone, the best course of action is to obtain the services of a reputable credit counseling agency, which can set up a debt management program for the debtor. As part of that program, the agency will contact the individual’s creditors to arrange a manageable payment plan which might include a reduction in interest rates charged. Once a program is in place, the individual makes payments to the credit counseling agency which, in turn, forwards payments to the individual’s creditors as agreed. As well, credit counseling agencies work with clients to help with budgeting and financial management skills, with the goal of avoiding a recurrence of the individual’s financial problems. Reputable credit counseling agencies exist in both the private and the not-for-profit sectors, and information on the latter can be found on the Credit Counselling Canada Web site at http://www.creditcounsellingcanada.ca/Home.aspx.

In many ways, getting out of debt has a lot in common with that perennial New Year’s resolution of many Canadians—losing some weight and getting in shape. With both, it’s human nature to want to believe that there is an easy, painless way of accomplishing the goal without a need to change existing habits, and so it’s easy to fall for persuasive sales pitches that claim to have a quick fix for the problem. In both cases, however, the reality is the opposite—results can only be obtained through some effort, but where that effort is made and existing habits altered, successful long-term results are possible.