Category Archives for "Personal Income Tax"

Will Covid-19 Relief Measures Affect my Taxes?

By Randall Orser | Business Income Taxes , Employees , Personal Finances , Personal Income Tax , Small Business

Accountants are not completely certain how the various government benefits being received by individuals and businesses during the pandemic will affect their tax bill next year.  However what will be certain is that if the benefit is a taxable benefit then you need to be prepared to pay tax on it in 2021 when you file your 2020 tax return.

As of April 2020 here is the information available from the CRA website and current legislation.

1. For Individuals

  • Any CERB payments are taxable, any payments that you have received will have to entered onto your tax return and an information slip will be available to you next year in MyAccount under Information slips so that you can enter your income in the correct boxes on your tax return.
  • One time additional payments for the Canada Child Benefit and the GST/HST tax credit are tax free and it is not expected that this will change in 2020.  The GST payment is also tax free and it is not expected that this will change.
  • If your student loan payments have been suspended then you will probably not have as much allowable student loan interest to claim on your income tax return as long as it is a qualifying student loan per CRA guidelines.
  • Deferred payments under mortgage support are added to the outstanding principal balance and are repaid over the life of the mortgage.  The mortgage support system is managed specifically by your lender and any deferral of payments is an arrangement between you and them.  The only impact on your taxes might be experienced by those who are self-employed who are able to claim business use or use of home expenses on their tax return.
  • The minimum withdrawal limit under the RRIF has been reduced by 25% for 2020 which means that if you take out less money you will pay less tax as money in your RRIF is only taxable when it is withdrawn.  

2. For Businesses

  • Tax credits and other benefits provided by the government still apply so any money received as a wage subsidy is considered government assistance and is included in the employers taxable income.  If you apply for the CEWS benefit you need to understand the tax implications of receiving this benefit.  The subsidy must be noted in your bookkeeping records and will become part of your business income that you report on your T2125.  
  • The TEWS or Temporary Wage Subsidy will be recorded in the same way.  The subsidies are a reduction in the amount that you send to the government for income taxes that you withheld from your employees and it becomes income for your business.  

It is paramount that you keep accurate accounting records throughout 2020 as they will be very important when you do your tax return in 2021.

From an article by Susan Watkin

Covid-19 Now is the Time to get Serious About Your Financial Wellness

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

A survey done for the MNP Consumer Debt Index when the Covid-19 pandemic started showed that 49% of Canadians asked were $200 or less away from being able to settle their bills and 25% of these people said they were already behind on their payments. In this uncertain economic environment are many are unable to realize their life goals and some even face bankruptcy.  

Lack of financial security is a big cause of stress, lack of sleep and tension in relationships as people and couples are unsure about what their future will look like.  In fact 41% of Canadians say that money concerns are the biggest cause of stress in their life  The fear of the financial impact of the pandemic is a greater contributor to mental health than getting sick or losing a loved one.

This information begs the question "Why are people finding themselves in this financial predicament? There are a number of answers to this question including costs rising faster than wages which has caused many to incur debt, but the big reason has to be ignoring the necessity of financial planning.  Financial planning includes saving for the future, retirement and making informed financial decisions and living within one's means and building a emergency fund. The pandemic brings to the forefront this long avoided issue, it is time to become responsible for your financial health. 

Many use the lack of financial knowledge as a reason for not planning. This is no excuse for avoiding the issue as financial literacy can be gained from books, seminars, blogs, websites and from working with a financial planner, there is lots of help out there.  Here are some tips that may help your immediate financial situation:

  • Make a new financial plan, your income may have been reduced and you need to revise your budget and priorities accordingly.  If you are not able to pay your bills, you should not be contributing to your child's college fund making contributions to your RRSP.   
  • Don't worry about paying down debts quickly, make minimum payments and put the rest into an emergency fund.  Your emergency fund should be enough to cover three to six months of  expenses should your income be severely reduced.
  • Take advantage of the help that your bank may be offering such as reduced interest rates on credit cards, deferred mortgage payments and low interest loans or lines of credit to pay off higher interest debts.
  • Instead of making plans for the next 10 or 20 years make your financial plans cover a shorter period of time. 

Making the decision to start taking control of your finances or making your financial goals more realistic will help you to deal with the stress that the pandemic is causing.

See our previous articles for more information:

​Financial Skills you Should Have Learned in High School

Reasons why you Should Budget your Money

What does your CRA Notice of Assessment Mean?

By Randall Orser | Personal Finances , Personal Income Tax

You can look at your CRA Notice of Assessment as a receipt for filing your tax return and an annual statement that tells you how much income tax you owe, how much you can expect for a tax refund, what income tax you already paid and any tax credits that you are eligible for. 

The NOA is calculated from the information that you submit on your tax return and contains a lot of information that you may need to make future financial decisions.  If you have a RRSP then the NOA is particularly helpful as it tells you the maximum contribution that you can make to your RRSP in the following year.  It is important to know how much room you have so that you do not over contribute and have to pay penalties.  If you participated in the Home Buyer's Plan or the Lifelong Learning Plan and withdrew from your RRSP for those purposes then your NOA will tell you when future payments are due and how much you need to pay. 

You should always keep your notice of assessment in a file along with your receipts for that tax year.  If you see anything in your Notice of Assessment that does not seem correct to you, you have 90 days to formally object or make amendments to any of the information on the document.  A NOA will also inform you if you happen to be the subject of an audit from the CRA.  If you do not agree with the reasons for an audit you have 90 days to make a formal objection.

You can get your NOA in two ways, in the mail from the CRA or when the CRA notifies you that your assessment is available for you to view via CRA Online Mail.  You can register for CRA Online Mail through your CRA MyAccount.  If you lose your paper copy you can use MyAccount to view and print your notices of assessment or reassessment, this includes any notices issued since Feb 9th 2015, and summaries of notices issued after 2004.  If you filed your taxes using NETFILE it can take up two weeks to see your Notice of Assessment. 

From an article by Wealth Simple

What you Should do with your 2019 Tax Refund

By Randall Orser | Personal Finances , Personal Income Tax

Around 19 million Canadians can expect a tax refund in 2020, the average refund is $1400.  In a normal year you might be tempted to go out and splurge with your refund but this year during the pandemic you might want to consider doing something else with your refund.

  • Spend some of it – this might be the last thing that many people might be thinking of doing with their refund as they are out of work or struggling financially.  If this is the case with you, you might consider spending part of it especially in small businesses which are struggling to survive. If you are still working, have a stable income, your debt load is under control and your retirement savings are on track then you might consider spending some or all of your refund.  Consumer spending is necessary to help businesses get back on their feet and help us to get out of the current recession.
  • Use your refund to pay down your debt – especially on those high interest credit cards.  If your bank is allowing you to defer your mortgage payments take advantage of that if you can and redirect your payments to your credit cards or other high interest debt along with your tax refund.
  • Invest for the future – some good financial planning advice is to have at least three months of spending available as an emergency fund.  If you have done this in the past you are probably very thankful for that nest egg right now.  If you have never done this, now might be the time to start your emergency fund, start saving for retirement or add some extra money to your RRSP.  If you are not at your limit investing extra this year should help your tax situation for 2020.  As the investment market has taken a hit this year, you might consider saving your refund to invest in the market when securities may be “on-sale”.
  • Give some away – Charities are hurting as much as if not more than businesses at this time.  Canadians are not donating their money or time as much to help with the important services that charities provide.  If you don’t need all your refund, consider giving some to your favorite charity.
  • Upgrade your skills – if you have lost your job due to Covid-19, think about upgrading your skills to make yourself more marketable when looking for a new job.  This is a good time to consider how you can upgrade your skills and you can use your tax refund to help pay for that training.
  • Finally, many things have changed in 2020 due to Covid-19.  Millions of people have received government support most of which is taxable, but no tax has been withheld from payments such as the Canada Emergency Response Benefit.   You might be surprised next year to find that you owe taxes on your 2020 return so it would be a good idea to put your refund in a savings account so that you have some money set aside if instead of getting a refund you have to pay. 
  • From an article by Tim Cestnick in the Globe and Mail 

When can you Expect your Tax Refund this year?

By Randall Orser | Personal Income Tax

Are you wondering when you will get your tax refund this year?  We are all hoping that it will not take much longer than usual. The CRA is still processing returns during the Covid-19 pandemic and they are encouraging Canadians to file their returns as early as possible before June 1st.  This is particularly important if you receive income tested benefits such as the GST/HST Credit or the Canada Child Benefit as the payments for 2020/21 are based upon your return for the prior year and are set to begin in July.

The CRA website says that their goal this year is to send refunds within 2 weeks if you filed online and 8 weeks if you file a paper return.  These timelines are only valid for the returns that they receive on or before their due dates. If you live outside of Canada you can expect to wait up to 16 weeks to receive your refund.  

The CRA is encouraging taxpayers to file their returns electronically using professional tax preparation software.  If your return is selected for a more detailed review than it will take longer to process.  The CRA also encourages taxpayer to use direct deposit to get their refunds quicker.

If you haven't received your refund within the timelines above it may be for any of the following reasons:

  1. You owe or are about to owe a balance
  2. You have a garnishment order 
  3. You have other outstanding debts such as student loans, employment insurance, and over payments of social assistance benefits, or immigration loans and training allowance overpayments.
  4. You have any outstanding GST/HST returns from a sole proprietorship or partnership.
  5. You have a refund of less than $2 due.

New this year due to Covid-19 the CRA is recognizing electronic signatures for forms such as the T183 which is signed in-person by millions of Canadians every year to authorize tax preparers to e-file their returns, even though this is only a temporary administrative measure this year.

If you owe money on your 2019 return you have until September 1st to pay which is four months later than the usual April 1st deadline, and you will not be assessed any penalties or interest on your balance due until September 1st, 2020.  if you pay by instalments you now have until September 1st to pay your June 2020 quarterly personal tax instalment with no accumulation of penalties or interest from March 18th to September 1st, 2020.

From an article by Jamie Golombek Financial Post

Are you one of the Almost 50% of Canadians Taking Advantage of the Tax Deadline Extension?

By Randall Orser | Personal Income Tax

A new survey commissioned by H&R Block Canada has revealed that 45% of Canadians still have to file their tax returns.  Millions of Canadians are taking advantage of the extended deadline to file their personal tax returns. As a result of the Covid -19 pandemic the usual April 30th deadline was extended to June 1st.  Self employed taxpayers and their spouses still have until June 15th to file.

This result is consistent with the CRA filing statistics which show that as of April 27th, 2020 they had received 15.5 million personal tax returns for the 2019 season, way less than the 28.4 total returns filed for the 2018 tax year.

The H&R Block survey also found that 10% of Canadians were not aware that the deadline had changed and 1 in 3 of this group had not yet filed.  Of those still to file 50% plan to do so after the original deadline but before the new one.  These people will avoid penalties for late filing, but you should still file as soon as possible especially those who need their refund, credits and benefits, the sooner they file the sooner they will receive these supports. 

The CRA data shows that up to May 1st,  92.1% of returns were filed electronically and almost 85% of the 14.1 million returns processed so far had either no balance owing or a refund due.  The average refund was $1800.

From an article by Jamie Golombek Financial Times May 1, 2020



How to Minimize Taxes on Your Small Business

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

If you own an unincorporated small business then the you must prepare an income statement each year showing all the income and expenses of the business and the resulting net profit or loss is then transferred to your tax return and taxed along with your income from all other sources.  

As a small business owner,  you are entitled to deduct the ongoing costs of doing business, as long as the expenses are reasonable and your motive for being in business is to make a profit.  You must have a good record keeping system such as Quickbooks Essentials  otherwise there is a good chance that you will forget about expenses that you have incurred and lose some receipts for expenses that you could claim.   Some of the most common deductible expenses include advertising, promotions, rent, salaries, legal and accounting fees and auto expenses.

Deductions Available to your Small Business

  • Advertising including flyers, brochures and other promotional activities.  You can deduct 50% of the cost of entertainment and business lunches as long as they are used to promote your business to current or prospective clients.
  • Office Rent is deductible, however if you own your business premises or work out of your home you cannot deduct the rental value of these premises.  However you can deduct any related expenses such as mortgage interest, property taxes and insurance.  If part of the premises is used for personal purposes then these expenses must be pro-rated.
  • Salaries and Wages are deductible in full as are the employer paid premiums for the Canada Pension Plan, Employment Insurance, Worker's Compensation as well as sickness, accident, disability or income insurance plans. If your spouse or child works for you their wages are also fully deductible as long as the payments are reasonable and the same as you would pay someone else to do the same work.  As the owner,  your wages are not deductible and should not be included on your income statement.
  • Fees for Outside Professional Services such as bookkeeping, accounting, consulting and tax preparation are deductible.  Legal fees are also deductible as long as they are not incurred to buy capital property, instead they have to be added to the capital cost of the property.
  • Business Taxes annual business licenses are deductible.  Fines and penalties for infractions of public laws are generally not deductible.
  • Automobile Expenses related to earning business income are tax deductible.  If you use your vehicle only partly for business then the expenses must be pro-rated between business and personal use based on the amount of kilometres driven for each.  Expenses include gas, oil, repairs, insurance and maintenance.  For more information log into the CRA website.
  • Capital Expenditures which are expenses relating to the acquisition or improvement of a property used by the business may not be deducted in the year acquired.  Tax law requires that their entire costs be claimed slowly over a period of years through a mechanism called capital cost allowances which allows a certain percentage of the costs to be claimed each year.   The rules of capital cost allowances are quite complicated so it is a good idea to hire a professional accountant or bookkeeper to make sure that you are claiming correctly.  For more information see the CRA website Capital Cost Allowances.  

When your business enjoys a profit you must share part of that with the CRA in the form of income tax.  However when your business shows a loss then the CRA shares in that loss as you are usually allowed to deduct the loss against other income thereby lowering the taxes you would normally pay.  However, you must meet the CRA "reasonable expectation of profit test" as the CRA will only share your loss if there is a reasonable expectation of profit in future years, otherwise your losses will be disallowed as simple personal losses.   

What you Need to Know About Filing Coupled Tax Returns

By Randall Orser | Personal Finances , Personal Income Tax

The Canada Revenue Agency has specific requirements in place for married and common-law Canadians as they file their personal tax returns.

Married and common-law spouses do not file "joint" tax returns as is an option in the USA.  Each Canadian files their own return and indicates their marital status on it, and the identity of that person.  You do not get to decide whether not you claim your marital status on your tax return.  Once you are married you must include your spouse.  Once you are common-law which means you have been living together in a conjugal relationship for 12 months or immediately if you have a child then you must file as common-law you do not have a choice.

The CRA knows your true marital status based on information that you file, credits and deductions that you apply for and other information sent to them which relates to you. Since your marital status has a significant impact on your return - family incomes are combined for calculating income-tested benefits  such as the GST/HST credit or the Canada Child Benefit.  Couples also benefit from combining charitable donations and medical expenses.   If you have received benefits that you are not entitled to you will be asked to repay them with a penalty and interest and failing to indicate your correct marital status is fraud.

If you were married in the tax for which you are filing, you must note your status as married in the "information about you" section of your return, including information about your spouse including their name, social insurance number, net income and employment status.  If your spouse claims credits such as the CCB or GST/HST or if they owe any payments you must report that as well.  This is the same for common-law couples.  

Advantages and Disadvantages of Filing as Married

1.  If you both sold homes to buy tone together only one of the sold properties may be immune from taxes.  You may have to pay capital gains on one of the sales.

2.  If you are a married student with extra tuition to deduct, you may transfer your unused deductions to your spouse.  If your partner's income is below a certain threshold you may be able to claim an additional tax credit.  You can pool your medical expenses and apply the deduction to the partner who can use it best to pay down their taxes similarly with donations.

Filing Coupled Returns

Filing your spouse or partner's information on your return is pretty simple, however when it comes to deciding which expenses or credits to claim on each return it is more difficult and confusing.  It might be in the best interest of both you to have your returns done by a professional who knows all the ins and outs of filing tax returns for couples, so as to avoid mistakes resulting in extra charges and penalties.

Breaking Up

You also need to inform the CRA if your relationship ends as it may change the benefits due to you or the payments that you owe.  If you receive the CCB or GST/HST benefit payments, notify the CRA the month after your relationship has ended.  If you separate, you do not have to inform the CRA until the separation has lasted 90 days.   You can inform the CRA by logging into your MyAccount and completing CRA form RC65, Marital Status Change, or by contacting the CRA directly by phone.

If you live apart for reasons other than the ending of your relationship you still have to file as married for example if you live apart for work, education or medical reasons you are still considered to be married by the CRA.  Once you are married or divorced you will never be able to file again as single.

From an article by Turbo Tax November 2019

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

Reasons why you Should (or Shouldn’t) do your own Taxes

By Randall Orser | Personal Finances , Personal Income Tax

For many people their tax situation changes every year, marriage, children, buying a house, starting a business are examples of life changes that affect your tax return.  So every year people have to solve the dilemma of doing their own taxes or hiring a professional to prepare their return.  As things change, the question is are you sure that you have all the knowledge to complete your return to your best advantage?

When you might be able to file your own taxes

1.  If you have confidence in your abilities as a numbers person, you keep track of all your receipts and transactions and you know all the ins and outs of your situation.

2.  If your tax situation is simple, you only have one T4, no dependants, no other investments or sources of income then you can easily file your tax return yourself.  

3.  If you don't own property or investments - once you acquire property, investments or retirement accounts then it can become difficult for you to up to date on all the deductions and credits that can be beneficial to your taxes.  In this case then it is probably best to let a professional do your return.

4.  Though the Canada Revenue Agency has a website it can sometimes be difficult to understand their jargon and the changing tax laws.

When it is best to hire a professional

1.  If you are not very good of keeping a track on your money, doing the books and tracking all the numbers is not for you then you should get in above your head and risk making a costly mistake.  You should hire a tax professional who can do the job correctly from the start and can save you the headache and even save you money in the long run.

2. If you have started a new business during the year hiring a tax expert will help you find deductions and prevent you from getting into trouble with the CRA so it is good idea to pay for their guidance, it will be worth it.

3. If your circumstances have changed during the year, you got married or divorced, had a child, or lost your spouse you may need help to file your return correctly.  This can also apply as your children get older and the tax credits and deduction that you usually claim expire.  If your child goes to college then  you can probably still claim them and their education expenses but a tax professional is the best person to know what is the best way to go in your situation.  

Benefits of doing your own taxes 

  • Less expensive
  • Takes less time
  • You know all the details of your situation

Benefits of hiring a professional to do your taxes

  • They are knowledgeable and up to date on the latest tax laws
  • You will get expert and experienced advice
  • They are an extra set of eyes that can catch mistakes
  • They become your advocate
  • They can find little known tax deductions for you
  • They can give you tax guidance throughout the year

So the bottom line is that it is up to you to decide what to do when it is tax time.  If you are not able to keep up then having a trustworthy tax professional to help you will make all the difference.

From an article in Careful Cents





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