Category Archives for "Investments"

Who is Required by the CRA to File a Tax Return in Canada?

By Randall Orser | Investments , Personal Finances , Personal Income Tax , Retirement

The Canadian government requires most citizens to file an income tax return annually. Even if you are new to Canada or just starting your first job you still need to file a return especially if any of the following applies to you:

  1. You owe tax to the CRA
  2. If you and your spouse want to split your pension income
  3. You participated in the Home Buyer's Plan or Lifelong Learning Plan and have repayments owing.
  4. You sold your home thereby disposing of capital property in this case you must file a return even you don't have to pay capital gains tax on the sale due to the principle residence exemption.
  5. You are self-employed and you have to pay your CPP premiums or your EI premiums on your self employment earnings.
  6. You have to repay any of your Old Age Security or Employment Insurance Benefits.
  7. You have received Canada Workers Benefit advanced payments in the tax year.
  8. CRA has sent you a Request to File or a Demand to File because you have not filed recently.

Whether or not you live in Canada does you will still have to file a Canadian Income Tax return, but it will affect how you file, what income you need to report and which credits or deductions apply to you. If you come under any of the criteria above you have to file a tax return.  Also if you live abroad but you receive income from your business or investments in Canada you will need to file a return.  

Your age has not bearing on your requirement to file a tax return as long as you fit one of the criteria above. Students are also not exempt, they must file a return if they have earnings from a summer job even if they are still in school and all must file a return as soon as they start earning income.

Sometimes it is in your best interest to file a return even if you are not required to. Some examples where this would be the case are;

  • You want to claim a refund
  • Even if you have no income you may still qualify for GST credits or provincial benefits.
  • If you want to claim the Canada Workers Benefit or Canada Child Benefit.
  • If you are a student and have eligible tuition fees, they must be declared on your return even if you are not using the credits this year.  In order to transfer or carry them forward they need to be reported on your current tax return.
  • If you or your spouse want to claim the Guaranteed Income Supplement on your Old Age Security payments.

What Your Tax Accountant Needs to Prepare Your Income Tax Return

By Randall Orser | Business Income Taxes , Freelancing , Home Based Business , Investments , Personal Income Tax , Small Business

A reminder for our business clients

When it comes to income tax preparation, there are do-it-yourselfers and there are those who have their income tax prepared by professionals.

For many businesses, having a professional such as a tax accountant prepare their income tax returns is the most sensible option. We don’t all have time to become income tax experts and income tax mistakes can be costly. So why not hire an expert to get the job done right and cut down on tax time anxiety?

To do the job right, though, your tax accountant or other income tax preparer will need to have all the right tax records at hand – preferably organized. Use this checklist to get your records together for your tax accountant.

Business Records Your Accountant Needs

· Revenue and business expenses for the year

· Business use of auto

· Auto operating expenses

· Vehicle driving log with business kilometres driven

· Asset additions

· Business use-of-home details

Your tax accountant will also need any tax records such as:

· Last year’s Notice of Assessment

· Amounts paid by installments

· A copy of your income tax return filed last year (if you’re a new client)

Other records your tax accountant will need will depend on whether you’re asking him or her to prepare a T2 (corporate) or T1 (personal) income tax return.

If the latter, your tax accountant will need all the relevant information slips and tax-related documents. Here are some of the most common:

· T4 slips (if you have employment/business income)

· T4A commissions & self-employed

· T5013 Partnership Income

· T3 Income from Trusts

· T5 Investment Income

· RRSP contribution slips

· Charitable donations

· Medical and dental receipts

· Child care information

Save Money on Your Tax Accountant’s Fee

Accountants generally charge by the hour, so the harder you make their job, the more it will cost you.

Summarize and tally records wherever possible. Cheques, invoices, business expenses - all should be categorized and totalled. Sort all your information slips by type. Having your tax accountant do the organizing and tallying is the expensive way to go.

If you have several businesses, remember that you will have to have separate revenue and business expenses figures for each business, as business income should be listed by individual business on the T1 form.

Be as organized as you possibly can. For example, clip groups of receipts together by type and put a post-it-note stating what the category is on the top. The less your accountant needs to figure out, the less time she’ll be spending on your file.

And remember, having a tax professional prepare your income tax return(s) isn’t costing you as much as you think when you see the bill – it’s a legitimate business expense.

How to Prepare for your Taxes in 2021

By Randall Orser | Covid-19 , Investments , Personal Finances , Personal Income Tax , Retirement

For Canadians preparation for our 2020 tax return is going to look a little different this year.  Many of us take a closer look at our financial situations at the beginning of a new year with a view to reducing our tax bill and boosting our tax refund.  However this new year the two biggest changes we have to take into account are any emergency benefits and relief measures we may have received due to the pandemic and the amount that we can claim if we worked from home in 2020 due to Covid. 

Covid-19 Benefits

The CERB benefits you received are taxable - when you first received these benefits the government did not withhold the tax at source so you will have to include 100% of this money in your income for the year and you will have to pay tax on it.  The government will send you a T4A tax reporting slip for 2020 showing the amount that you will have to report.

The amount of tax that you will have to pay will depend on your total income for the year.  For example if your work income was $27,000 and you received $8000 in CERB benefits your taxable income for the year will be $35,000 and both your earnings and the CERB amount will be taxed the same way.  If your income is less than $12,000 for the year you will not have to pay any tax on your income. 

If you received the Canada Recovery Benefit, Canada Recovery Sickness Benefit or Canada Recovery Caregiving Benefit that became available in September the government withheld 10% in taxes at source.  However this may be insufficient to cover your tax due for 2020.  In addition if your additional income for 2020 is more than $38,000 then you may have to pay back the CRB at a rate of $0.50 for each dollar you received, so you should set aside some funds to cover the tax you may owe.  

If you received Covid-19 benefits that you were not entitled to, you were asked to return the funds by the end of 2020.  You were not obligated to do so but it would have been the best scenario for most people.  If you did not pay the money back then the amount will show up on your T4A for 2020 and you may have to pay taxes on it.  Any repayments will be shown on a T4A slip for 2021 which will allow you to claim a deduction on your 2021 income and benefit return.  This process is based on general rules in the Income Tax Act that apply to repayment of taxable income.  

The Simplified Home Office Deduction

2.4 million Canadians worked from home because of Covid-19 this year and may be able to claim some home office costs on their 2020 tax return without providing receipts or asking employers to fill out a T2200 form.  If you have been working from home for more than 50% of the time over at least four consecutive weeks in 2020 due to Covid-19 you will be able to claim a deduction of $2 for every day up to a maximum of $400.  The CRA calls this a temporary flat rate method of calculating the home office deduction.

For those who have more significant home expenses you will need to use the more detailed method to calculate the home office break.  You need to gather together all your home expenses including utilities, internet, heating, hydro etc to decide which method you want to use to claim your home office expenses.  For more help use the CRA's new online calculator.  

From an article by Erica Alini

When Should you Start Contributing to an RRSP?

By Randall Orser | Investments , Personal Finances , Retirement

The annual deadline for contributing to your RRSP is coming up soon, this year the deadline falls on March 1st.  This is the time of year when many Canadians consider if they should start to contribute to an RRSP, or if they already contribute, should they add to their plan, how much and when.

When you contribute to your RRSP that amount is deductible from your total income for that year which means that you can reduce your taxes due.  In addition income earned in your RRSP such as interest, dividends and capital gains grows tax free until it is withdrawn.  So if you contribute to an RRSP early in life when you retire you will benefit from the compound growth accumulated over time.  Funds in your RRSP can also be used to buy a home through the Home Buyers Plan, or to further your education using the Lifelong Learning Plan.

If you are wondering whether to contribute to your RRSP or your Tax Free Savings Account experts say that if you are in a higher income bracket should pick a RRSP over a TFSA so you can take advantage of the tax deduction today and withdraw retirement funds at a lower interest rate in the future.  If you are in a lower income bracket and you are unsure if can keep the money invested long term it is probably better to contribute to your TFSA.  

If you are wondering when you should contribute to your RRSP experts recommend contributing small amounts regularly throughout the year instead of a lump sum at the deadline, it can sit in a savings account until you are ready to invest it.  Once you do invest it leave it there to grow tax free, it is out of sight and out of mind.  As long as you do not go over your contribution room allowed (as shown on your Notice of Assessment) you can put money in and claim the deduction that year or in a future year, this is a good strategy for people who are currently have a lower income but expect it to rise in a future year.  

If you are married or common-law you can also consider contributing to a spousal RRSP.  In this instance the higher earning spouse will contribute to the spousal RRSP and will receive the tax break which will reduce the overall taxes the couple has to pay.

If you are unsure about the best way to save for your retirement it is a good idea to consult a financial advisor.

From an article by Brenda Bouw

What can we do to Revive the Economy?

By Randall Orser | Business , Covid-19 , Investments , Personal Finances

Canada's financial experts are looking into their crystal balls and predicting what the future might hold for the Canadian economy and how it could rebound post-covid.  Until March 2020 our economy seemed stable and secure despite other world events and trade wars we had reliable growth, strong employment, steady interest rates and cities were booming.  Then the pandemic hit and the world closed down.  

The government issued massive wage and unemployment subsidies and our deficit ballooned.  One million jobs were lost resulting in 13.7% unemployment the highest that Canada has seen since the Great Depression.  The pandemic also brought to light many problems in our society that we had been largely ignoring such as massive inequality, gaps in social assistance and vulnerable supply chains.  

Vaccinations have now arrived and we can see some light at the end of the tunnel and the question is now, what will our economy look like when the dust has settled?  Here are some predictions from financial experts.

1.  "Wage subsidies will help to save retail businesses" - until most people are vaccinated there will be sporadic shut downs so continuing with wage subsidies will help to keep businesses from going under. Pedro Antunes - chief economist, Conference Board of Canada

2.  "Small businesses will need more than government loans to survive and workers will need more support." Werner Antweiler - associate professor, Sauder School of Business

3.  "Businesses will need better access to rent relief, the current government has been a failure so more help is needed."  Laura Jones - executive vice president and chief strategic officer, Canadian Federation of Independent Business

4.  "Employers need to adopt flexibility for their workers to encourage them to grow resulting in better productivity and morale."  Jean McClellan, national consulting people and organization leader, PwC Canada

5.  "Automation will replace millions of jobs - and that's not necessarily a bad thing".  Companies investing in training for their existing workforces will help to sustain livelihoods without major disruption. Linda Nazareth, senior fellow for economics and population change, the Macdonald-Laurier Institute.

6.  " Business travel will come back safer though it will probably take three years or more to return to normal levels of business travel."  Nancy Tudorache, regional vice-president, Canada, at the Global Business Travel Association.

From an article by Ali Amad

Personal Finance Resolutions for 2021

By Randall Orser | Budget , Happy New Year , Investments , Personal Finances , Personal Income Tax , Retirement

As 2020 disappears into our rear view mirror and 2021 is upon us once again it is time to think about  our financial New Year's Resolutions.  As always it is best not to be too ambitious with your financial plans for the new year or you might be unable to stick to them.  Instead take a realistic look at your current financial situation and focus on quick and easy ways to manage personal finance tasks that will help you this year and in the future.  Here are some things to consider:

Top up your Emergency Fund - Financial experts recommend setting money aside for emergencies but even so most of us do not have an emergency fund.  Many people will have dipped into their emergency fund during 2020 so now is a good time to start rebuilding it if you are able to.  You should aim to have enough to cover your expenses for 3 to 6 months should you lose your job, enough to cover unexpected vehicle repairs, house repairs or medical expenses.

Contribute to your RRSP - This is a good time to open a RRSP if you don't yet have one.  If you regularly contribute perhaps you can increase your contribution in 2021 if you have enough room without over contributing.  

Sign up for Automatic Bill Payments - This will help you to not miss payments on your bills.  Include a minimum payment on your credit card which will avoid late payment fees.  Consider an automatic payment to your savings account from each pay check, what you don't have you don't miss!  It is usually easy to set up automatic payments on your bank's website.

Switch from a Bank that Charges Monthly fees to one with no Monthly Fees - There are many banks and credit unions out there that do not charge monthly fees for regular personal banking transactions.  Switching your account could save you at least $100 a year and maybe more.  If you don't want to change banks ask if your current one will waive your monthly fees.

Make Calls and Lower your Payments - It could be worth spending time calling your service providers especially for internet and cable to see if there is a way to reduce your monthly rates.   You should also look into the interest rates that you are paying on your credit cards and think about changing to a card with lower fees or cash back.  As most of us are not travelling at present it might be a good idea to get rid of your travel points credit card with it's high fees and change it to a regular card with a lower rate.  You could also try and negotiate a lower rate with your credit card company.

Update your Beneficiaries - Have you reviewed your will lately? This is a good time to make updates to your beneficiaries or any other information as your circumstances may have changed.

Check your Credit Report - Make sure that your credit report does not contain any errors or charges relating to identity theft as your credit score will affect your ability to get loans or lower rates on your credit cards.

Change your Passwords - It's a new year and time to change those passwords especially for your bank account and credit cards.  You should be doing this every three months but at least once a year will help to avoid identity theft.

Do a Subscription Audit - Take a look at your monthly subscriptions for streaming tv services, apps, news providers etc.  How many of these do you actually use?  If you have not used it for a while and don't intend to use it in the foreseeable future then deactivate it.  You can always reactivate it later if you need to.

Tweak your Budget - Though setting a budget can be intimidating it will help you to keep track of your spending.  If you are working from home and not spending money on Starbucks and lunches perhaps you could put that money into your savings account?

From an article by Mike Winters

Financial Literacy Lessons Should Begin Early in Life

By Randall Orser | Budget , Investments , Personal Finances , Personal Income Tax

For most of us money management was not a subject taught in our schools.  Today it is recognized that financial literacy should start at an early age and should be taught in schools.  The Ontario government recently announced that this would be a subject that would be included in the 2020 curriculum which would be a win-win situation for both children and their parents enabling children to achieve a more stable financial future.  Other provinces across the country are now also making financial literacy a priority in schools. 

According to Doretta Thompson CPA Canada's financial literacy leader, "financial wellness is a continuum from knowledge, to competency to confidence in making sound financial decisions". "Kids who learn the basics of budgeting, saving, credit and wants versus needs are better prepared to make good financial decisions through post secondary education and beyond." In BC a new provincial curriculum was introduced in 2019 after it was shown that a number of students were graduating with a lack of financial skills.

Experts believe that talking about money and financial management goes beyond dollars and cents, it is also about making choices and being aware of the trade-offs those choices require.  The classroom setting gives children the opportunity to ask questions about money such as creating a budget to allow them to save up for a toy.  It is important that teachers are comfortable teaching financial literacy especially if they are struggling in their own financial situation.

Teaching money management in school is a good foundation for kids to learn but it is important that parents engage with their children about what they are learning.  Other strategies for parents including giving kids an allowance and teach kids about spending and saving, involving them in family financial decisions where appropriate for their age and reviewing the kid's first pay stub to make sure that they understand about deductions and taxes.

Although it can be difficult for parents to discuss money with their kids it is a good idea to use every day examples to teach about money in a way that make it relevant to them.  Examples can pop up all the time such as when grocery shopping or getting gas. 

From an article by Ethan Rotberg

Over-contributed to your TFSA or RRSP? Here’s what you should do.

By Randall Orser | Investments , Personal Finances , Personal Income Tax , Retirement

It can be an easy mistake to over contribute to your TFSA or RRSP especially if you have an amount automatically contributed each month. If you find that has happened to you there are some basics that you should know to remedy this situation.

RRSP Contributions

The penalty for RRSP over contributions is 1% per month for each month that you are over the limit.  The CRA  does allow you a $2000 grace amount for over contributions but that amount is not tax deductible.  The best way for you to correct an overpayment is to withdraw the amount, though it will be subject to taxes.  You will be able to claim an offsetting deduction if you meet certain conditions (link to CRA Website).  The main condition is that you make sure the the over contribution is withdrawn in the year that it was made, the year in which you receive an assessment for the year of contribution, or in the year following each of these years.

If you meet the conditions for offsetting deduction you can have withholding tax waived on the withdrawal by filing form T3012A.  If you don't do this then the tax withheld at source can be claimed as tax paid on your tax return.  It is very important to keep track of your RRSP contributions and make sure that you withdraw any over contribution so as to penalties that may arise.

TFSA Contributions

Over contributions to TFSA's happens often especially when people have multiple accounts in different banks and they lose track of those accounts over time.  As the limits allowable have varied depending on the year it can become really confusing to contributors.  Two common mistakes are:

  • Replacing a TFSA withdrawal in the same year - if your contribution limit has already been reached you have to wait to replace a withdrawal until January in the next calendar year.  This often happens when the TFSA account is used in the same way as a savings account with repeated withdrawals and contributions which can create an over-contribution as withdrawals do not lower the contribution limit.
  • When a TFSA balance is transferred to another institution, if this is not done as a direct transfer it will be counted as a second contribution and the withdrawal amount will not be added to your  TFSA room until the following year.

TFSA over contributions are 1% per month over the term of the over-contribution until the year end based on the highest excess amount for the month.  There is no $2000 grace amount as with a RRSP and penalties for over contribution must be paid by June 30th.

For more information on TFSA contributions see the CRA's TFSA Guide (RC4466) which also provides you with a RC343 worksheet  for you to keep track of your contributions and withdrawals.  It is also important to review your notice of assessment that you receive from the CRA which states how much contribution room that you have in your TFSA and RRSP for the current year.  It is a good idea to compare the CRA amounts with your own records.   In addition you can get a copy of your contribution history from the CRA's My Account service.

From an article by Denise Deveau

Financial Considerations for First Time Home Buyers

By Randall Orser | Investments , Personal Finances , Personal Income Tax

The Covid-19 pandemic has not stopped people from wanting to buy a home for the first time.  However it is necessary to do some long term planning including preparation for the unknown before taking the plunge into the housing market.

Canadian house sales rebounded by 63% month over month in June showing that the real estate market seems to be holding steady despite the financial problems that the pandemic has caused.  However the Canada Mortgage and Housing Corporation (CMHC) predicts that home prices will fall up to 18% due to job losses, declining income, stalling construction and it has now tightened lending restrictions.  Despite this, Canadians are still feeling optimistic about the real estate market mostly due to the all time historic low interest rates.

If you are thinking about purchasing your first home you should consider the following:

1.  Adjusting your expectations - even if you are relatively unscathed by the pandemic and still have stable employment it is a good idea to weigh your needs against what you want to own and adjusting your expectations.  For example do you really need a single detached home?  If you are working remotely would living outside of the city where property is usually cheaper to buy be an option?  Do you really need a backyard? if not would a condo work for you?  Making adjustments to your expectations will help you to better assess what you can comfortably afford while maybe retaining some of your savings.

2.  What you can afford should be based on your lifestyle not low interest rates. You should not be stretching yourself beyond the limits of what you can really afford while still retaining your lifestyle.  Though low interest rates are a plus for many the CMHC says it is important to consider the losses that you may suffer should house prices decline. Making a bigger downpayment will help to protect you against these possible future losses. 

3.  Align your budget - make sure your budget is realistic and something that you can stick to. Use it to determine the down payment that you can make while accounting for your expenses and leaving some money for savings.  You should consider your cash flow and liquidity and make contingency plans preparing for a worst case scenario such as job loss or unexpected costs.   It is important to maintain your savings rather than relying on credit to help you pull through difficult times.  

4.  Plan for hidden costs - purchasing a home involves a lot more than just your down payment, mortgage payments and the interest rate and you need to be prepared for these extra costs.  These include:

  • Closing costs - legal and administration fees which can account for 1.5 to 4% of the purchase price, land transfer tax, and title insurance.
  • Upfront costs - such as property inspections, condominium fees and mortgage default insurance if required.
  • Less obvious expenses that may vary depending on where you live but for new developments can include infrastructure, planning approval and zoning fees.  It is advisable to seek legal advice to review this type of purchase agreements as the fees can mount up and it is important to set some preset limits on what they are going to be.
  • Additional expenses - besides property taxes, utilities and insurance homeowners should also have a fund to cover repairs and other unexpected costs that pop up.

From an article by Sophie Nicholls Jones

4 Tricks Wealthy People use to Reduce Taxes – you can try them too!

By Randall Orser | Investments , Personal Finances , Personal Income Tax

The more money you have the more tax planning you can do with it, but you don’t have to be in the top 1% of income earners to incorporate these tried and true tax strategies into your own planning.  

You might think that the wealthy have all the answers to making more money while reducing their tax bill.  From using offshore tax shelters to trust funds it seems the opportunities for them dodge the tax man are endless.  Tax lawyer Dale Barrett says  "There are numerous legal ways for the average tax payer to reduce their taxes depending upon the amount of money that they have to work with and their present and future employment status.  If you are a wealthy person or corporation you can take advantage of different tax structures and levels, but even if you are not part of the 1% you can still incorporate some of the tried and true tax strategies in to your own planning."

Sheltering Investment Income

For any Canadian with the ability to save money, the government makes available two main ways to shelter income - Registered Retirement Savings Plans (RRSP's) and Tax Free Savings Plans (TFSA's).

Contributions to a RRSP are tax free so that you don't have to pay any tax on them in the year that you contributed so it is a good idea to put away the maximum that you can into your RRSP.  There is no tax on your gains until the age of 71, at which point the taxpayer must start to withdraw their funds, which is treated as taxable income, but for many people their income will be much lower than when they were working meaning that they will pay less tax.

The money that you contribute to your TFSA is post-tax income and any interest, dividends or capital gains in it are tax free for life so you do not have to pay tax not your withdrawals.  Wealthy Canadians also use these ways to shelter money but they usually max out the amounts that they contribute every year.  However they go further by using TFSA's to fund for their children once they reach the age of 18 for them to put into their own TFSA's thereby transferring wealth intergenerational and keeping all the investment income tax free.

Incorporating

Many wealthy Canadians run a business to take advantage of lower tax rates, business write-offs and tax deductible individual pension plans.  If you are self employed or doing freelance or contract work it is worth considering incorporation depending upon your income.  If you are using all the money that you are bringing in then incorporation is not ideal for you.   However if that income even from a small side business is extra for you then incorporation is worth thinking about for the benefits.  In 2019 the small business tax deduction rate was 9% after the federal tax abatement meaning that you would have been taxed at the lower corporate  rate on your income.  The downside to incorporation is the amount of money that it costs to incorporate, and the accounting costs to do financial statements and tax returns which can run into the thousands of dollars.  So you have to decide if spending that is worth it for the tax benefits you will receive.

Income Splitting 

This is a an effective strategy for wealthier Canadians in the highest tax bracket, but there are benefits for the average Canadian.  If one spouse is in a higher tax bracket they can transfer some of that taxable income to another family member including children in a lower tax bracket.  

Permanent Life Insurance

Most people are familiar with term life insurance which covers you for a set time.  Permanent life insurance, on the other hand, lasts for life. This life insurance comes with an investment component that grows free of annual taxation.  Unfortunately most people are not able to afford this as it is sometimes 6 to 10 times the cost of term life insurance.  It is however an additional investment option for those who have already maxed out their RRSP's and TFSA's.  

Whatever your income if you have done a good job of your tax planning you will acquire some savings that will be beneficial to you even if it is not the thousands and millions that the wealthy have earned from their investments.

From an article by Julia Mastroianni Financial Post

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