Category Archives for "Investments"

Thinking of Renting Out Your Mortgage Helper? – Here are Some Things You Should Know

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


Before You Rent Out That Mortgage Helper, here are Some Tips

You’ve been able to buy that new home you want, and it came with an income suite, which can be financially fruitful. To be a good property manager, you should manage your rental as you would a business, which means you need to be an able planner and keep good records (especially for the taxman).
For a first-time landlord, renting out your house to an outsider can be quite the challenge. The following three items are things you should know before renting out that mortgage helper.


Keep Your Property Presentable
You must keep up the property in a tidy manner, no one wants to rent a messy place. You may also get a higher rent if you maintain the property, and keep it looking nice. Your renters will feel more confidence that you are a professional landlord when the residence is maintained. If something needs repairs, fix it, clean up the floors and walls and keep up the landscaping; this makes your rental much more attractive to potential tenants. 
Rental properties will need periodic repairs. If you’re not handy yourself, it is a good idea to find a local handyman you can rely on when needed. Your job as a landlord will be much easier if you can find reliable professionals you can call on when needed. Yes, it’s going to cost you money to maintain the property, however, it could cost you more in lost tenants. Plus, you get to write off minor repairs off the rental income.


Always Get it in Writing
That old adage is never truer than when being a landlord. You need to have a tenancy agreement, though there is no standard agreement you must use. You can look at one of those online law documents services and grab one from there, or chat with a lawyer that specializes in rentals. If you decide to just create your own, it is advisable to have a lawyer check it over for its legality. 
You should include the following details in any tenancy agreement:

  • Start and end date of the rental term
  • Security deposit amount
  • Monthly rental amount
  • The date of the month the rent is due
  • Acceptable methods of payment
  • How rent should be paid
  • If you are allowing direct payments into your bank account, you need to note on the form your bank details.
  • The number of keys you are giving the tenant
  • Who is responsible for utilities and maintenance
  • Any additional fees and disclosures

Depending on your particular circumstances, you may want to incorporate other terms you deem appropriate.

  • Pre-tenancy application form
  • Security deposit receipt for

It may be a good idea to contact a property law specialist to help create the tenancy agreement to your particular needs. The lawyer will be over legal disclosure requirements and explain how insurance can curb your liability.

Acquiring Great Tenants

At the beginning of a successful landlord-tenant relationship you need to get the right tenants. To find financially suitable applicants for your property seek the help of a credit check agency and ask for references from previous landlords.   After that, there are tools that can help you locate good tenants. Look for a local property investment association, as this can be a great resource for networking with other landlords. You’ll be able to get tips, and share yours, that you and they have learned over the years.

Starting Your Own Business – Sole Proprietorship, Partnership or Corporation?

By Randall Orser | Business Income Taxes , Investments , Small Business

Once you have decided to take the plunge and start your own business, the next step is to decide upon the structure of your business.  In Canada, there are three kinds of business structure. Sole Proprietorship (one owner), Partnership (2 or more owners), and Corporation.  

With a sole proprietorship, you would be fully responsible for all debts and obligations related to your business and all profits would be yours alone to keep. As a sole owner of the business, a creditor can make a claim against your personal or business assets to pay off any debt. 

A partnership is a good business structure if you want to carry on a business with a partner and you do not wish to incorporate your business. With a partnership, financial resources are combined and put into the business. You can establish the terms of your business with your partner and protect yourself in case of a disagreement or dissolution by drawing up a specific business agreement. As partners, you would share in the profits of your business according to the terms of your agreement. If you wish to share profits or losses with your spouse, then you must form a partnership; CRA will not allow a split of profit or losses otherwise.

Another type of business structure is incorporation. Incorporation can be done at the federal or provincial/territorial level. When you incorporate your business, it is considered to be a legal entity that is separate from the shareholders. As a shareholder of a corporation, you may not be personally liable for the debts, obligations or acts of the corporation. When making such decisions, it is always wise to seek legal advice before incorporating.

Should I Teach my Kids About Taxes?

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

I think that one of the inevitabilities of life, taxes, is something that we should learn about early in life. From why we need to levy taxes, how they affect your life, from your job, business, to what you buy, it’s a good thing to know about taxes. Sadly, school doesn’t do this as well as it should, or at all, so it’s up to you parents to teach your kids about taxes. 

Working Teens

Do you have a teen with a part-time job? This is a good time to show them how taxes work and helping them prepare their tax return come the following tax season. With online resources, it would be easy for them, let’s face it their more tech savvy than their parents, to file online. Better yet, get them to find a tax preparer on their own, so they can see what it’s like when they’re an adult and have to deal with their taxes.

The younger we teach them to do something, the better they can handle it as an adult. You’d be surprised how many young adults (early to mid-twenties) come to us, and have absolutely no clue what to do, or even what they need to provide to us.

The good thing about filing a tax return each year the teen has a T4 is that this accumulates his RRSP contribution room, so when they turn 19, they can start to contribute to an RRSP. Or, for later in life the monies they earned as a teen are contributing to that future contribution limit.

Of course, when they turn 19, it’s time to register for the GST/HST tax credit too. If your child has the confidence to figure that on their own, then the better. Get them reading about taxes, and what they need to do for filing their taxes.

Purchases

When your kid, no matter the age, wishes to buy something this is a good time to teach them about consumption taxes (GST/HST and PST). It’s fun to save for something they want, they know how much that toy will cost; however, they go to buy it and now don’t have enough money as they didn’t know about the taxes (from 5% to 15% depending on the Province). They’re now sadly disappointed and have to save more for the taxes.

If you teach that whatever they want to buy they need to think about the consumption taxes, then they know they need to add more to their savings to cover such taxes. Here in British Columbia you need to add 12% onto most purchases, food is mostly an exception except for pets. For example, if your kid wants to buy a toy that’s $39.99 then they need to add $4.80 for GST/HST ($2.00) and PST ($2.80). The kid needs to save $44.79. 

As a parent, you should think about teaching your kids about taxes as early as they would be able to understand. This way the kids won’t be disappointed when buying something, nor, later in life, will they get in trouble with Canada Revenue Agency because they didn’t file their taxes for five years. Ideally, the schools would teach such things too, maybe parents need to start demanding that schools start teaching kids about real life. As Crosby, Stills & Nash sang, “Teach Your Children Well”. 

Resources

Where Your Tax Dollars Go (Department of Finance Canada)

https://www.fin.gc.ca/taxdollar/text/fanfold/pamphlete.pdf

CBC News report, Feb 2018

https://www.cbc.ca/news/business/tax-dollars-1.4545415

Doing Your Taxes (Canada Revenue Agency)

https://www.canada.ca/en/services/taxes/income-tax/personal-income-tax/doing-your-taxes.html

Get ready to do your 2017 income tax and benefit return (Canada Revenue Agency)

https://www.canada.ca/en/revenue-agency/campaigns/taxes-get-ready.html

PESTLE Analysis for Your Business

By Randall Orser | Business Income Taxes , Investments , Small Business

Politics, economics, sociology, technology, legal, and environmental (PESTLE) is an analysis framework the allows businesses to determine the health and potential of their business. These six factors of the PESTLE method contribute contextual information that expedites more targeted and informed business decisions. You can gain a better understanding of your business and industry by doing your due diligence of these six areas. In the end, you’re much better placed to make proactive decisions that promote growth and stability.

Politics

What is the government on the federal, provincial and local level up to as it relates to your industry? Whatever the government does can have an impact on your industry and the economy. Tax laws and trade restrictions (think the trade war happening now) can greatly influence your operational procedures and sooner or later your profit margins. You need to stay informed of any pertinent changes to political policies or legislation.

Political changes often reflect the attitudes of your target market, so it’s smart to stay on top of local and national political sentiment. The political environment can be a positive as well as a negative influence on your day-to-day business, however, knowing about any changes in advance helps you to be proactive in your preparations so you can at least try to take advantage of any situation that occurs.

Currently, the housing market is one area right now (2018) that the government is sticking its nose into thinking it can make housing affordable, not realizing that by doing so many owners may end up in financial ruin.

Economics

The success of any business is fundamentally related to the wider economic climate. You need to look at how present and anticipated economic factors, such as inflation and interest rates, are affecting your business. Stay informed about the economic outlook for your industry and community and make decisions based upon what’s right for your business.

The timing of major financial decisions can have a great impact on your financial prosperity. An example would be getting a loan when interest rates are low would save a large amount of capital that could be better spent in other areas. The key to using various economic changes to your advantage is keeping abreast of what’s happening so dedicate sufficient time and resources to collecting economic data.

Sociology

Your market demographics should be a foundational component of your sociological research. Take the time to determine the descriptive characteristics of your market such as their age, location, and disposable income. The more you know about your potential customers, the more strongly you can direct your product and marketing to them.

Knowledge of all cultural and demographic aspects of a market can help you develop your service. All businesses need to fulfill a role in society and only through detailed sociological analysis can you clearly define yours.

Technology

Technology is often a critical driver of innovation and market growth. Keep apprised of technological advances that could improve your efficiency and profitability. Technology is changing faster than ever, but you still need quickly figure out which ones will have a tangible and positive impact on your business.

Whether you commit to your own research and development or just keep your finger on the pulse of innovation, technological research is an important aspect of business development. Determine your current setup and identify any areas that could be improved by a change in technology. Executing technological changes in your business will prove to be a wise investment if it increases efficiency and widens profit margins.

Legal

You need to assess the legal landscape of your industry and business as they may directly affect the operation of your business. You need to be aware of the basics all businesses must follow, such as consumer and employment laws, but you also need to know of any legislation that may specifically relate to your business.

There may be industry specific laws that your business is subject to, however you may find that you’re actually exempt from others. Governments will regularly encourage certain industries via individualized legislation and tax breaks, so it pays to be aware of the law as it applies to your business.

Environmental

Some industries can more keenly benefit from environmental research, however, it’s definitely advantageous for all businesses to have a base knowledge of how environmental factors may impact business. For example, the climate and ecology of a specific area are certainly relevant to the tourism, insurance and farming industries. The environmental impact of your business may also be driving potential customers away, so apart from the ethical side of things, it can be undeniably more favourable to lessen your environmental impact of your operation.

An analysis of the strengths and weaknesses of your business, in relation to your industry and market, will increase your understanding of the operational health of your business. Using a mix of the factors in the PESTLE framework is a simple and dynamic approach to assessing your business and its potential for growth and sustainability.

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Is Now a Good Time to Review Your Tax Situation?

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

As summer is upon us, business slows down a bit, and we take time to relax.  It may also be a good time to think about your taxes. Yeah, I know. It’s summer, I don’t want to think about that yet. But, hear me out. The first half of the year is gone, and you have a good idea how it went, so from this you can project what the rest of the year is going to be. With this projection, you can estimate what your tax bill will be. Why? So, you’re not shocked come April of the next year with how much you owe. Instead, you’ll be like, yeah that’s what we thought and you have the funds to pay the bills. 

When we’re talking about taxes, we’re including the Canada Pension Plan (CPP) in these calculations, because as a self-employed person you pay your taxes and CPP at the same time.

Are your books up-to-date?

In order to be able to do any tax projections, you have to have your books up-to-date for the end of June. Are your expenses entered, banks reconciled, credit cards reconciled, and payables entered too? Once you have June completely finished then you are able to look at what your taxes could be. If you’re working with a bookkeeper, let them know what you want to do, and they should get you financials as soon as June is completed. They may even be able to help you with the projections.

The big question now is, how much do you set aside for taxes? 

Canada Revenue Agency (CRA) may have already done this for you based on a prior tax filing year. If you owed more than $3,000 in a prior tax year, CRA will send you a notice in August that you must make instalment payments in September or December. In February you’ll get a notice for the March and June payments. Usually CRA splits the amount into 4 equal payments. If you’re going to owe at least the same amount last year, then you must make these instalments or you will suffer penalties and interest for not paying them.

You’ve looked at your profit and loss statement (P&L), and realize that you’re doing much better this year compared to last year at the half way mark. You need to decide if you should increase your instalments for September and December, or keep them the same. As long as you paid the amounts in your instalment reminder, you should be okay even if your tax owing is more when you file the next year. Now, if you haven’t made any instalments this year, then now is the time to estimate and pay those in September and December.

The simplest way to estimate taxes owing is to take 25% of your estimate net income (revenue minus expenses) times the 25%. The 25% would be approximately 10% for CPP and 15% for taxes. Now this doesn’t take into account the home office deduction, depreciation, or other deductions, such as RRSPs. This isn’t perfect, however, it does give you something in order to pay instalments. If you’re net income is below $15,000, in many cases you’ll owe CPP, and very little to no tax, depending on your province of residence. In this case, you could use 15% and be pretty accurate.

You can take the net income from your P&L for the end of June, and double that and take the 25% the net income for what your potential tax liability will be for the year. If you don’t think the last half of the year is going to be as good as the first half, then estimate what you think it’ll be, add that to June’s net income and times that figure by the 25%. And, of course, if you think the last half is going to be much better then increase your net income estimate. The simplest way to estimate the last half of the year is to just take a percentage of the first half. What percentage? Well, that depends on what you think you’re sales are going to be in the last half. 

Estimating your taxes can be difficult, however, sometimes you just have to take the easy approach and give it a good ole guess. It’s better to pay too much rather than too little. Plus, remitting instalments relieves that shock come April, and you’re much more relaxed at tax time because you’ve already paid the bill.

 

Automate Your Business to Grow!

By Randall Orser | Business Income Taxes , Investments , Small Business , Technology

Mention "business process automation" and for most people, it’s the complex IT systems of the bigger business establishments that first come to mind. Yet the smaller businesses, even the start-ups and home-based enterprises, can make use of and benefit from business process automation.

What is Business Process Automation?

Business process automation refers to the use of technology and software applications in operating a business. It is the complete or partial automation of repetitive tasks and regular business processes so that labour is better utilized and costs are contained.

Tools to automate a business are aplenty: tools for accounting, inventory tracking, email marketing, order taking, customer relations, and many more. A good example is the automation of inbound calls to a company. Do you remember years ago when a telephone operator was a must for most firms? These days, callers interact with a voice response system that takes care of standard calls or inquiries and routes specific calls to the right person or department.

Benefits of Automating Your Home Business

Automation has become necessary for businesses of all types and sizes. Consider the following benefits you are bound to gain by automating your business processes:

1. Business process automation will save you time.

If you are a one-person operation, you can be freed from handling the everyday routine tasks and devote your time instead towards marketing and growing your home business.

2. Business process automation will cut down your costs.

By automating many of your processes, you can streamline your operations so you will not need to hire as many employees as you would if your operations were run manually.

3. Business process automation will minimize errors.

Human errors can be costly and can lead to financial losses or poor customer service. Automated accounting systems, for instance, guarantee accuracy in computations, ensure timeliness of sending billing statements and improve the efficiency of your inventory management.

4. Business process automation will help you manage information better.

As business owner, you need to be informed about all aspects of your business operation. With automation, information is sorted, classified, and ready for your retrieval anytime you need it.

5. Business process automation will facilitate communication.

With correct and timely information, you get to know exactly what your customers want. You can communicate directly with your customers to address their needs or resolve their problem with your product or service.

How You Can Automate Your Home Business

If you are not yet sure which of your business processes to automate and what automation tools to use, you may want to take stock of your various business processes and learn which can be automated. Make sure to break them down where needed so you can decide on the appropriate software or application.

Take for example your marketing process. You can break it down to the following tasks: generating leads, distributing marketing materials, sending out sales letters, following up on leads, conducting surveys, and gathering feedback. For lead generation, you can design your website to include a subscription form or an opt-in box where visitors can submit their contact information. The pooled data go to your mailing list, which you then feed to your email auto responder that will in turn generate automatic responses to the email inquiries or send out pre-scheduled messages, newsletters, or sales pitches to those in your customers’ list.

With the right apps on your website, you can engage in e-commerce and run your online store where everything is automated from the order taking to receipt of payment and processing of shipment. If you have affiliates or if you advertise on other websites, you can also monitor their performance using a tracking system. Your accounting system can incorporate bookkeeping, invoicing, inventory management, payroll, voucher preparation, and so forth.

In the end, it is a matter of identifying the unique needs of your business and choosing the appropriate business process automation tools. Depending on your budget and the degree of automation that you want, you can hire an IT professional to develop an automated system for you or you can purchase one of the many canned programs that are readily available. A few solutions that you can download for free are available if your needs are simple and your volume is low.

When to Hire an Accountant to do your Taxes

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

Do you fill out your own tax forms, use a software program to file your taxes, or have a tax service do it for you? Each of these methods is a good option, but sometimes it is better to work with a tax preparer. A tax preparer has specialized expertise and knowledge of tax rules making them the perfect candidate to accurately complete tax forms.  The more complicated your taxes are, the more likely you will need the help of an experienced preparer. 

If expense is not a concern for you, having a tax preparer file your taxes for you may be the best decision. You shouldn’t have to worry about your taxes being filed correctly if you are working with an experienced tax preparer. You also don’t have to spend any time calculating details and filing tax forms yourself. Whether you fill out a one-page form or you have a stack of forms to fill out, a preparer will be able and willing to do it for you. However, if you don’t want to throw away your money, simple forms can be done with software programs, through a tax service, or on your own much less expensively.

If you have several sources of income, such as a side business, stock investments, income properties, and other income sources, it is a good idea to have a preparer do your taxes for you. These types of income sources can be very complicated and require several extra forms to be filled out. A good preparer will have experience with it and can ensure that it will be done correctly and efficiently. Filling out a mountain of different forms can be tedious and confusing. One mistake can carry problems throughout the forms. Have someone who knows what they are doing complete it for you. On the other hand, if you only have one W2 form, you should be able to do it yourself.

Whether or not you should have a preparer do your taxes depends on what forms you need to file and how confident you feel doing them yourself. If you like to speed through things and don’t like looking over your work, you could miss important deductions and make costly mistakes. A preparer will ensure things are done right. Precision and detail are important when filing taxes to avoid mistakes and penalties. The more complicated the forms are, the more precise you need to be. If you feel uneasy about it, hire a preparer to do it for you. With a preparer, you are paying for expertise, precision, and accuracy.

Should I Invest in my RRSPs now?

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

Now is the perfect time to check where you RRSP contributions have been for the year, and where they’ll be in by the end of February. Do you have the room to put more in? Do you have some extra funds lying around? You may want to put the funds in now, and earn some income on them rather than wait until February; plus, you’re beating the rush and not scrambling to get them in by March 1st.

I’m going to assume you know what is an RRSP, and have hopefully checked what your contribution limit is for the year. Does your work have a pension plan? If so, how much have you contributed so far, as that comes your contribution limit.  If you’ve reached your contribution limit, then what about your spouse? You can always put money into their RRSP, up to their contribution limit (they would need to be the contributor and annuitant).

Planning Opportunities

Contribute early in the year. This helps shelter income for a longer period and increases the compounding of the income in the plan. A monthly plan can also be used to help with cash flow.

Use the spousal plan (including common-law spouse) as much as possible to split the income tax upon withdrawal. Remember not to withdraw from any spousal plan until 3 years after the last contribution was made or it will be added to the income of the contributor. Note that it is the timing of the payment of contributions to a spousal RRSP that governs this recapture rule, not when (or whether) you claimed a deduction.

Make your money work for you. Consider other investments within your RRSP, such as mutual funds. Carefully consider what you invest in to maximize your return. (See schedule on page 3)

Utilize “rollovers” (special RRSP contributions). You may find yourself in a situation where you receive a payment which qualifies for special contribution treatment.

These special situations include:

  • Special payments you receive on leaving employment, either in recognition of long service or as damages for loss of office. Note that years of service after 1995 no longer qualify;
  • Lump-sum payments received from foreign pension plans for services performed outside Canada;
  • Lump-sum payments received from a United States IRA and taxable in Canada;
  • Amounts received from the RRSP or RRIF of a spouse, or in some cases, a parent or grandparent, who has died; and • The “cost amount” of shares you receive, directly or through a trust, in a special lump-sum distribution from a DPSP.

The magic of compound interest! Annual contributions of $13,500 at an average interest rate of 8% per annum made at the beginning of each year accumulate over $15,000 more interest in the first 10 years than contributions made at the end of the year. After 25 years, the difference is over $75,000!

The compounding effect of interest earned on the RRSP is clearly demonstrated above by the difference in interest rates. An investment of $13,500 per year at 6% interest per annum grows to $785,111 at the end of 25 years, while the same amount invested at 8% grows to $1,065,885.


Should You Borrow to Finance an RRSP

Interest on money borrowed to make RRSP contributions is not a deductible expense for tax purposes. If you have a choice between borrowing to make an RRSP contribution or borrowing to make another investment, you should always borrow to make the other investment. The interest paid on the investment loan may well qualify for tax deduction and thus offset the cost of borrowing.

Spousal RRSP

A spousal RRSP is an RRSP which names your spouse rather than yourself as the “annuitant” but you have made the contribution. Any amount, which you could have contributed to your own plan under your current contribution limit, can instead be contributed to your spouse’s plan. Contributions made by you to your spouse’s RRSP can be deducted from your income. Your spouse will be taxed when the funds are withdrawn subject to the 3-year rule described in Planning Opportunities above.

Once a cohabitation relationship achieves the status of a common-law marriage under the 12-month or child rule, that marriage is considered to continue until there is a marital breakdown marked by a separation of at least 90 days.

Common-law spouses are included in the definition of spouse and are, therefore, eligible for the spousal plan, although there are still some questions as to how Canada Customs and Revenue Agency will monitor the common-law relationships.

The special rules on spousal RRSPs are very beneficial. Ideally, you and your spouse should have the same amount in your RRSPs at retirement. However, when using a spousal RRSP, you should note that the contributing spouse would be taxed on any withdrawals within 3 years of the last contribution to any spousal plan.

Are You Leaving Canada?

If you leave Canada for an extended period, you must determine whether you are going to become a non-resident for income tax purposes.

If you have withdrawn funds from an RRSP under the Home Buyers’ Plan (you qualify as “first-time home buyers” could borrow up to $20,000 from an RRSP to purchase a “principal place of residence”), and become a non-resident before acquiring your Canadian home, your withdrawals will be disqualified and added to your income in the year of withdrawal. You may cure the disqualification by refunding the withdrawal and cancelling your participation in the plan.

If you have withdrawn funds from an RRSP under the Home Buyers’ Plan and become a non-resident after acquiring your Canadian home, you must repay the entire withdrawal within 60 days of becoming a non-resident. To the extent that you do not repay the amount within 60 days, the unrepaid balance will be included in your income for the period of the year in which you were still a resident of Canada and taxed accordingly.

Now is a great time to review your RRSP, and what you want to accomplish with it this year. Think about all that money you’re missing out on by not investing now, and waiting until January or February of next year. That’s a missed opportunity, and that’s just sad.

Your TFSA and Ten Things You Should Know

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

In 2009, the government of the day created the Tax Free Savings Account (TFSA) as a means to efficiently invest more. Surprisingly, eight years in to the TFSA’s existence, some Canadians are still confused about how they actually work. And, no it’s not another way for the rich to save on taxes, it can benefit the ordinary Canadian too. We’re going to talk about 10 things you should know about the TFSA.

You Can Have More Than One TFSA Account

You can have multiple TFSA accounts at different institutions, however, they all share the same contribution limit. As of 2017, that limit is $5,500 per year. Good records are a must when you have multiple accounts, as you need to track your contributions and withdrawals as it’s much easier to over contribute by accident.

Over Contributions Incur Penalties

Whenever you go over your contribution limit, you will incur a penalty of 1% per month on that excess amount. This over contributing is a simple mistake because many people don’t under understand how the contribution limit works. This gets more complicated when you have multiple TFSAs, and you have several transactions happening throughout the year. Your best method of determining your contribution limit is to keep track of it yourself, or chat with Canada Revenue Agency (CRA). They can let you know what your limit is for the year.

Successor Holder vs. Beneficiary

You can name a beneficiary to your TFSA, however, you may not realize you can name someone a ‘success holder’. Your beneficiary can be anyone you choose, such as a child, parent, or sibling; a successor holder can only be your spouse or common-law partner. Your beneficiary receives the proceeds of your TFSA upon your death, and the TFSA is closed. With a successor holder, your account is rolled into their TFSA which doesn’t affect their contribution room. If you have a spouse or common-law partner and want them to inherit your TFSA, it makes sense to name them successor holder as they can continue to grow your investments tax free; and, avoid taxes payable on any income on the account from your time of death to when the account is closed.

Contributions in Kind

Are you thinking about transferring from your non-registered account to your TFSA? You need to ensure there are no unrealized capital gains or losses. Once you transfer in-kind to a TFSA, it’s considered a deemed disposition for tax purposes; however, there’s a catch, unrealized gains are realized immediately upon disposition, but unrealized losses are not claimed. You should never ever transfer an investment in a loss position to your TFSA. What you should do is sell the security in your non-registered account so you can claim the loss, transfer the cash into your TFSA, then wait at least thirty days before repurchasing so you avert prompting a superficial loss.

Non-qualified Investments

While most investments can be help in your TFSA, there are some that are considered non-qualified. The non-qualified investments are:

  • Any personal debt in your name;
  • Any debt or share of a corporation in that you hold a significant interest;
  • Any debt or share of a corporation that you don’t deal with at arm’s length.

Any time you have a non-qualified investment in your TFSA, there is a one-time tax equal to 50% of the fair market value at the time it’s acquired or became non-qualified.

Foreign Withholding Tax

If you have foreign investments and receive dividends, they’ll be subject to a non-resident withholding tax. Usually on your foreign investments in non-registered accounts you can claim the foreign dividend tax credit against that foreign tax withheld; however, that is not the case with TFSAs.

Non-resident contributions

If you are considered a non-resident and you make a contribution to your TFSA, you are taxed at a rate of 1% per month on said contributions. This generally applies to someone who is a dual citizen of Canada and the United States. Unlike RRSPs, there is no tax treaty between Canada and the United States that recognizes the TFSA as an exempt foreign trust. As far as the Internal Revenue Service is concerned, you need to disclose and pay tax on income generated by your TFSA. If you are a US citizen, you’re better off keeping your investments in an RRSP or non-registered accounts rather than a TFSA.

Social Security Benefits

Your TFSA withdrawals are not considered taxable income. As such, and a major advantage, is that withdrawals won’t count against you for the purpose of determining your social security benefits, such as Old Age Security (OAS) or Guaranteed Income Supplement (GIS), which get clawed back based on your income level for the tax year.

Loan Interest Tax-deductibility

Any time you borrow money to invest in a non-registered investment account, the interest is tax deductible. However, this doesn’t apply with your TFSA or any other registered accounts. Of course, this makes total sense, as with TFSAs there are no tax ramifications for contributions or withdrawals, so you shouldn’t be able to claim a deduction for the interest paid. You can’t have your cake and eat it too.

Retroactive Contribution Room

The beauty of the TFSA is that you have accumulated contribution room that depends on how long you’ve been a Canadian resident, and not when you first opened your TFSA. If you open your TFSA today, you still have contribution room retroactive back to when TFSAs were first introduced in 2009, as long as you were 18 or older at the time. If you weren’t 18 in 2009, then you have no accumulated contribution room for those years. If you turned 18 in 2013, then you would have no accumulated contribution room for 2009 to 2012.

The TFSA is an excellent investment vehicle for all Canadians. As the contribution limit continues to accumulate, and, hopefully, the government increases the yearly amount, in the future, you’ll need to ensure you know everything about your TFSA.

Now’s the Time to Check Your RRSP

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

I know, I know, it’s only July, I don’t want to think about tax stuff. However, now is the perfect time to check where you RRSP contributions have been for the year, and where they’ll be in 6 months. Do you have the room to put more in? Do you have some extra funds lying around? It’s not too late to think about a monthly RRSP contribution rather than that lump sum you do in January or February.

I’m going to assume you know what is an RRSP, and have hopefully checked what your contribution limit is for the year. Does your work have a pension plan? If so, how much have you contributed so far, as that comes your contribution limit. If you’ve reached your contribution limit, then what about your spouse? You can always put money into their RRSP, up to their contribution limit (they would need to be the contributor and annuitant).

Planning Opportunities

Contribute early in the year. This helps shelter income for a longer period and increases the compounding of the income in the plan. A monthly plan can also be used to help with cash flow.

Use the spousal plan (including common-law spouse) as much as possible to split the income tax upon withdrawal. Remember not to withdraw from any spousal plan until 3 years after the last contribution was made or it will be added to the income of the contributor. Note that it is the timing of the payment of contributions to a spousal RRSP that governs this recapture rule, not when (or whether) you claimed a deduction.

Make your money work for you. Consider other investments within your RRSP, such as mutual funds. Carefully consider what you invest in to maximize your return. (See schedule on page 3)

Utilize “rollovers” (special RRSP contributions). You may find yourself in a situation where you receive a payment which qualifies for special contribution treatment.

These special situations include:

· Special payments you receive on leaving employment, either in recognition of long service or as damages for loss of office. Note that years of service after 1995 no longer qualify;

· Lump-sum payments received from foreign pension plans for services performed outside Canada;

· Lump-sum payments received from a United States IRA and taxable in Canada;

· Amounts received from the RRSP or RRIF of a spouse, or in some cases, a parent or grandparent, who has died; and • The “cost amount” of shares you receive, directly or through a trust, in a special lump-sum distribution from a DPSP.

The magic of compound interest! Annual contributions of $13,500 at an average interest rate of 8% per annum made at the beginning of each year accumulate over $15,000 more interest in the first 10 years than contributions made at the end of the year. After 25 years, the difference is over $75,000!

The compounding effect of interest earned on the RRSP is clearly demonstrated above by the difference in interest rates. An investment of $13,500 per year at 6% interest per annum grows to $785,111 at the end of 25 years, while the same amount invested at 8% grows to $1,065,885.

Should You Borrow to Finance an RRSP

Interest on money borrowed to make RRSP contributions is not a deductible expense for tax purposes. If you have a choice between borrowing to make an RRSP contribution or borrowing to make another investment, you should always borrow to make the other investment. The interest paid on the investment loan may well qualify for tax deduction and thus offset the cost of borrowing.

Spousal RRSP

A spousal RRSP is an RRSP which names your spouse rather than yourself as the “annuitant” but you have made the contribution. Any amount, which you could have contributed to your own plan under your current contribution limit, can instead be contributed to your spouse’s plan. Contributions made by you to your spouse’s RRSP can be deducted from your income. Your spouse will be taxed when the funds are withdrawn subject to the 3-year rule described in Planning Opportunities above.

Once a cohabitation relationship achieves the status of a common-law marriage under the 12-month or child rule, that marriage is considered to continue until there is a marital breakdown marked by a separation of at least 90 days.

Common-law spouses are included in the definition of spouse and are, therefore, eligible for the spousal plan, although there are still some questions as to how Canada Customs and Revenue Agency will monitor the common-law relationships.

The special rules on spousal RRSPs are very beneficial. Ideally, you and your spouse should have the same amount in your RRSPs at retirement. However, when using a spousal RRSP, you should note that the contributing spouse would be taxed on any withdrawals within 3 years of the last contribution to any spousal plan.

Are You Leaving Canada?

If you leave Canada for an extended period, you must determine whether you are going to become a non-resident for income tax purposes.

If you have withdrawn funds from an RRSP under the Home Buyers’ Plan (you qualify as “first-time home buyers” could borrow up to $20,000 from an RRSP to purchase a “principal place of residence”), and become a non-resident before acquiring your Canadian home, your withdrawals will be disqualified and added to your income in the year of withdrawal. You may cure the disqualification by refunding the withdrawal and cancelling your participation in the plan.

If you have withdrawn funds from an RRSP under the Home Buyers’ Plan and become a non-resident after acquiring your Canadian home, you must repay the entire withdrawal within 60 days of becoming a non-resident. To the extent that you do not repay the amount within 60 days, the unrepaid balance will be included in your income for the period of the year in which you were still a resident of Canada and taxed accordingly.

Now is a great time to review your RRSP, and what you want to accomplish with it this year. Think about all that money you’re missing out on by not investing now, and waiting until January or February of next year. That’s a missed opportunity, and that’s just sad.