Category Archives for "Personal Income Tax"

Disasters and Disaster Relief 

By Randall Orser | Personal Income Tax

According to Public Safety Canada, a disaster is a hazard that overwhelms a community’s ability to cope and may cause serious harm to people’s safety, health, welfare, property, or the environment. A disaster can be the result of a naturally occurring phenomenon within the geophysical or biological environment or human action, whether malicious or unintentional, including technological failures, accidents, and terrorist acts.

The Canada Revenue Agency (CRA) understands that disasters can cause great difficulties for taxpayers whose primary concerns during these times are their families, homes, businesses, and communities.

Those giving to charities in times of disasters should remember to give wisely.

Financial assistance payments from your employer or to your employee

Income tax

If an employer makes a financial assistance payment to an employee because of a disaster, is it taxable?

A financial assistance payment that an employer makes to an employee is not taxable if the person received the payment in his or her capacity as an individual and not as an employee. The CRA considers a person to have received a payment in his or her capacity as an individual when all the following conditions are met:

  • The individual was affected by a disaster (for the criteria, go to www.publicsafety.gc.ca/cdd).
  • The payment is philanthropic, to compensate the individual for personal losses or damage he or she suffered during a disaster.
  • The payment is made within a reasonable time after a disaster.
  • The payment is voluntary, reasonable, and bona fide.
  • The payment is made to an individual dealing with the company at arm’s length (for example, the individual does not control the company or is not related to a person who controls the company). See Income Tax Folio S1-F5-C1: Related persons and dealing at arm's length, for more information.
  • The payment is not made to a shareholder, a connected person (for example, a person related to a shareholder or a shareholder of a related corporation), or a person of influence (for example, an executive with power to control company decisions).
  • The payment is not based on employment factors such as performance, position, or years of service.
  • The payment is not made in exchange for past or future employment services or to compensate for loss of income.
  • The payment is not the regular salary paid to an individual who is unable to report to work because of a disaster.
  • The employer has not taken a business expense deduction for the payment.

If an employer makes a financial assistance payment to an employee who is a shareholder or an executive, is it taxable?

When a financial assistance payment is received by a shareholder, a connected person, or a person of influence, the facts must be examined to determine whether the payment was received in his or her capacity as an individual (that is, not as an employee or a shareholder). If so, it is not taxable. If the employee received the payment on the same basis as other employees, the payment is likely to be considered to have been received in his or her capacity as an individual, assuming all the other conditions listed above are met.

If an employer makes a financial assistance payment to an employee, is the payment tax-deductible?

If the financial assistance payment is made to an individual in his or her capacity as an employee, the payment is taxable and the employer can deduct it as a business expense if it is reasonable and was incurred to earn business income. The taxable portion of the payment should be reflected in the employee’s T4 information slip in Boxes 14 and 40.

If the financial assistance payment is made to an employee in his or her capacity as an individual (see above), the payment is not taxable and the employer cannot deduct it as a business expense.

The employer is not entitled to claim a charitable donation tax credit or a deduction for the payment because it is not a gift made to a registered charity or other qualified donee.

Goods and services tax/harmonized sales tax (GST/HST)

GST/HST will not apply to financial assistance payments that an employer makes to an employee, including an employee who is a shareholder, when the conditions, as outlined above for income tax purposes, are met and the payments are not taxable for income tax purposes. If the employer’s financial assistance payment to an employee is taxable for income tax purposes, the GST/HST does not apply to the payment since the GST/HST does not apply to salaries, wages, commissions, and other remuneration. In either case, the employer cannot claim an input tax credit for the payment.

Financial assistance payments from your government

Income tax

Is government assistance paid to an individual taxable?

Generally, a disaster relief payment that an individual receives from a government, municipality, or public authority for personal losses and expenses is not taxable and is not included in the recipient’s income for income tax purposes. This includes payments for temporary housing, clothing, and meals. As well, government compensation for loss of or damage to a personal residence does not ordinarily result in any income tax consequences.

Is government assistance paid to a business taxable?

Generally, government assistance that a business receives to help offset the cost of expenditures incurred because of a disaster can either directly reduce the amount of business expenses incurred or be included in income and the business expenses deducted when incurred in the normal manner. In either case, the business will effectively have no net income related to the assistance.

Government assistance received to help replace destroyed or damaged property will generally reduce the capital cost of that property. To the extent that the government assistance is compensation for property that has been lost or destroyed, the amount of the assistance is treated similarly to insurance proceeds so that the compensation is proceeds of disposition.

Generally, the Income Tax Act allows a business to elect to postpone recognizing a capital gain or a recaptured capital cost allowance when a former property is disposed of involuntarily and a replacement property is acquired. A replacement property must be acquired within a specified time limit (generally within 24 months of the end of the tax year in which the proceeds were receivable). A property is a replacement property for a former property only if specific conditions are met.

To ease the financial burden that might arise when a business elects to postpone recognizing a capital gain or a recaptured capital cost allowance, the CRA may accept security in lieu of payment of taxes owing until the final determination of taxes is made or the period for acquiring the replacement property has expired. For more information on posting security, see paragraph 3 of Interpretation Bulletin IT-259R4, Exchange of Property.

If the business is unable to pay or secure the tax debt arising from such a scenario, it is CRA policy to work with the business to establish a payment arrangement based on the business’s ability to pay.

The business should file its income tax return in the normal manner for the year that the proceeds are received and file its replacement property rules election within the specified time to amend the tax assessment for the year the proceeds were received and reduce the amount payable on the proceeds. In the meantime, to offer security or discuss a payment arrangement, the business can call the CRA at 1-888-863-8657.

Goods and services tax/harmonized sales tax (GST/HST)

In general, the provision of financial assistance by a government (or other grantor) to an individual or a business to subsidize the individual or business for losses or expenses resulting from a disaster will not be considered a supply and, therefore, the GST/HST will not apply to it, if there is no direct link between the financial assistance and a supply by the individual or business to the grantor or a third party specified by the grantor. For more information, see Technical Information Bulletin B-067, Goods and Services Tax Treatment of Grants and Subsidies.

Compensation you receive from your employer or government is, generally, not considered income in most circumstances. Any time you receive compensation for a disaster, including insurance, it’s always wise to talk to an accountant or tax preparer to ensure your non-taxable position.

Refundable vs Non-refundable Tax Credits 

By Randall Orser | Personal Income Tax

Tax credits can greatly decrease the amount of taxes you must pay. If you don’t fully understand them, you could be missing out on large cash opportunities. One aspect that often goes unexplained is the difference between refundable and non-refundable tax credits. What is the difference between the two, and how do they affect the amount of tax you owe to the government?

A tax credit is very different from a tax deduction. A deduction is a reduction in the gross income. For example, if you have a gross income of $50,000 for the year, total itemized deductions of $10,000 would make the adjusted gross income $40,000. You have the option to use the standard deduction or itemize your deductions if your total itemized deductions exceed the standard deduction. By increasing the value of your deductions, you lower your taxable income, therefore lowering the amount of total tax you owe.

Tax credits have a larger advantage. After you have calculated your total taxable income and determined how much you owe in taxes, a tax credit will be deducted from that total amount. For example, if you owe the government $3,000 and you qualify for a $1,000 tax credit, you now only owe $2,000. It is a 100% reduction in taxes owed whereas deductions reduce the taxes owed by a much smaller percentage. Basically, you want to get as many deductions and credits as possible, but credits have a larger impact.

Tax credits have nothing to do with how much money was withheld from your check each month for taxes. Don’t even think about how much money is withheld until the very end. The withheld amount also has nothing to do with whether a tax credit is refundable or not. These are two different aspects; do not confuse them.

Many people don’t know that tax credits can be either refundable or non-refundable. If they aren’t done in the right order, you could be losing money owed to you. Fortunately, the forms are set up so that you will automatically calculate them in the right order. However, understanding the difference between the two is beneficial.

First, calculate non-refundable tax credits. A non-refundable tax credit is a credit that cannot exceed your total tax owed. For example, if you owe $3,000 in taxes and your total non-refundable tax credits equal $4,000, your tax owed is $0. You cannot receive back an extra $1,000. There is no refund to the total tax you owe.

Non-refundable credits include basic personal exemption; education credits; child and dependent care credits, adoption credits, etc. Subtracting non-refundable credits first will minimize your total taxes owed.

Now you will have a new taxes-owed amount. Using the above example, you have $0 owed. Calculate your total refundable credits. These included the earned income tax credit, making work pay credit, first time home buyers credit, etc. Let’s say these come to a total of $2,000. These are refundable credits meaning you will have a result of -$2,000 tax. In other words, the government owes you $2,000.

Once you have calculated your taxes owed after subtracting all qualified credits, calculate your entire refund or taxes owed. If you get $2,000 from the government and $5,000 was withheld from your check, your total refund is $7,000. Notice that the amount withheld from your check is separate from the $2,000 refundable credit. You receive an extra $2,000 in addition to the money returned to you that was withheld for tax purposes throughout the year.

Calculating non-refundable credits before refundable credits maximizes your total credit potential. Non-refundable credits are used first, whether they bring your taxes owed down to zero or just reduce them. Refundable credits are calculated last to ensure that all possible refunds are realized. The above example is exaggerated to make the discussion easier. This amount in tax credits is not typical. It depends on what you qualify for. However, make sure you check out each credit thoroughly to ensure you get your maximum return or minimize your taxes owed as much as possible.

Taxpayer Bill of Rights

By Randall Orser | Personal Income Tax

The Canada Revenue Agency (CRA) operates on the fundamental belief that you are more likely to comply with the law if you have the information and other services that you need to meet your obligations. These obligations may include paying taxes or providing information.

CRA wants to make sure you receive all your entitlements and that you understand and can exercise your rights. They describe and define these rights in the RC17, Taxpayer Bill of Rights Guide: Understanding your rights as a taxpayer.

The Taxpayer Bill of Rights describes and defines 16 rights and builds upon the CRA's corporate values of professionalism, respect, integrity, and cooperation. It describes the treatment you are entitled to when you deal with the CRA. You can expect that the CRA will serve you with high standards of accuracy, professionalism, courteousness, and fairness. The Taxpayer Bill of Rights also sets out the CRA Commitment to Small Business to ensure their interactions with the CRA are conducted as efficiently and effectively as possible.

In addition to the 16 rights that apply to all taxpayers, the Taxpayer Bill of Rights also has a five-part Commitment to Small Business. The five commitments made to small business acknowledge their importance as the engine of growth in the Canadian economy. These commitments also complement the Government's pledge to create a competitive, dynamic, business environment in which Canadian businesses will thrive. They recognize the role the Canada Revenue Agency can play in minimizing the compliance burden, specifically the amount of paperwork involved in complying with the tax system.

The Minister of National Revenue has identified a need for greater awareness among taxpayers (particularly small businesses) about what they can expect when they deal with the CRA. This includes awareness about what their rights are, and what avenues of redress are available to them when they believe they have received inadequate service from the CRA. This was developed through interactions with taxpayers, their representatives, business groups, professional associations, and Members of Parliament, and in consultation with CRA managers and front-line employees.

It’s thought that the Taxpayer Bill of Rights will increase transparency and accountability on the part of the CRA and, as a result, improve the quality of all taxpayers' service experiences with the CRA. The more you know your rights, it’s thought that the more your compliance level will increase, and the less CRA has to check on said compliance.

Here are the 16 rights:

1. You have the right to receive entitlements and to pay no more and no less than what is required by law.

2. You have the right to service in both official languages.

3. You have the right to privacy and confidentiality.

4. You have the right to a formal review and a subsequent appeal.

5. You have the right to be treated professionally, courteously, and fairly

6. You have the right to complete, accurate, clear, and timely information

7. You have the right, unless otherwise provided by law, not to pay income tax amounts in dispute before you have had an impartial review

8. You have the right to have the law applied consistently

9. You have the right to lodge a service complaint and to be provided with an explanation of our findings

10. You have the right to have the costs of compliance taken into account when administering tax legislation

11. You have the right to expect us to be accountable

12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances

13. You have the right to expect us to publish our service standards and report annually

14. You have the right to expect us to warn you about questionable tax schemes in a timely manner

15. You have the right to be represented by a person of your choice

16. You have the right to lodge a service complaint or request a formal review without fear of reprisal

Here are the 5 commitments to business:

1. The CRA is committed to administering the tax system in a way that minimizes the costs of compliance for small businesses

2. The CRA is committed to working with all governments to streamline service, minimize cost, and reduce the compliance burden

3. The CRA is committed to providing service offerings that meet the needs of small businesses

4. The CRA is committed to conducting outreach activities that help small businesses comply with the legislation we administer

5. The CRA is committed to explaining how we conduct our business with small businesses

New Rules for Principal Residence

By Randall Orser | Personal Income Tax

In late 2016, the Liberal government decided to make changes to Canada Revenue Agency’s (CRA) reporting requirements for the sale of your principal residence. Supposedly this will improve compliance and administration of the tax system. Is this the beginning of a new way to tax you, the taxpayer? Well, probably will be though not now. Never underestimate a government to tax its citizens.

When you sell your principal residence or when you are considered to have sold it, usually you do not have to report the sale on your income tax and benefit return and you do not have to pay tax on any gain from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it.

Starting with the 2016 tax year, due by April 30th, 2017, you will be required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption. If you sell your principal residence will have to report the sale on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. Reporting will be required for sales that occur on or after January 1, 2016.

The principal residence exemption is an income tax benefit that generally provides you an exemption from tax on the capital gain realized when you sell the property that is your principal residence. Generally, the exemption applies for each year the property is designated as your principal residence.

For the sale of a principal residence in 2016 or later tax years, CRA will only allow the principal residence exemption if you report the sale and designation of principal residence in your income tax return. If you forget to make a designation of principal residence in the year of the sale, it is very important to ask the CRA to amend your income tax and benefit return for that year. Under proposed changes, the CRA will be able to accept a late designation in certain circumstances, but a penalty may apply.

The penalty is the lesser of the following amounts:

  1. $8,000; or
  2. $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA.

More information on late designations is available on the CRA website under Late, amended, or revoked elections.

The CRA will focus efforts on communicating to taxpayers and the tax community the requirement to report the sale and designation of a principal residence in the income tax return. For dispositions occurring during this communication period, including those that occur in the 2016 taxation year (generally for which the designation would be required to be made in tax filings due by late April 2017) the penalty for late-filing a principal residence designation will only be assessed in the most excessive cases.

Your Home is used for a Business or Rental

If only a part of your home is used as your principal residence and you used the other part to earn or produce income, whether your entire home qualifies as a principal residence will depend on the circumstances.

It remains the CRA’s practice to consider that the entire property retains its nature as a principal residence, where all the following conditions are met:

  • the income-producing use is secondary to the main use of the property as a residence;
  • there is no structural change to the property; and
  • no capital cost allowance (CCA) is claimed on the property.

If your situation does not meet all three of the conditions above, you may have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, if the split is reasonable. Instructions are provided in the guide T4037, Capital Gains 2016, on how to report the sale of your principal residence in this situation.

If you’ve sold your home, and it’s your principal residence, in 2016, then remember to have the information necessary to report said sale on your income tax return. Now, no gain will be attributed to said sale, however, that may change in the future.

If I Have Foreign Income, What Exchange Rate Do I use?

By Randall Orser | Personal Income Tax

Nowadays many people have income from outside Canada, and when it comes to filing their income taxes must include said income. Many businesses are selling outside of Canada, too, and may receive funds in the country from which they sell. The question then becomes, ‘what exchange rate do you use?’

What is the exchange rate? The exchange rate is the price of one national currency, such as the Canadian dollar, expressed in terms of another currency, for example, the U.S. dollar, or a basket of currencies.

Canada Revenue Agency (CRA) used to recommend what exchange rate to use when filing your personal taxes, and, usually, did an average exchange rate for the year. You weren’t required to use this rate; however, it did make it easier to file your taxes. This save you of having to go to the bother of looking up exchange rates for the date you earned the income; if you even remember the date you received the income.

Now, CRA just recommends you use the Bank of Canada exchange rates. At the BOC website, you can get exchange rates for up to 26 currencies, based on a single rate reflecting the daily average exchange rate per currency pair, which will be published each day. If your foreign income is form outside these 26 countries, you will have to either find an exchange rate elsewhere, or check what the rate was on the day you received the income. There was the average exchange rate for the year, however, I can’t see on the site where this will continue nor does it say it will be discontinued, so we’ll just have to wait and see.

Using the Exchange Rate on Your Personal Taxes

When you go to file your personal taxes, look at what foreign income you have and go to the BOC website. Do you remember when you received that income? If yes, use the exchange rate, or find the amount that was deposited into your bank account, and use that rate. If it’s from multiple deposits, such as the British Pension, then you’ll have to calculate the exchange rate each time, or add up the amounts from each month.

If you just received a slip, and have no idea when the money was deposited or what it’s for, then use the average yearly rate, if it’s still available, or the rate at December 31st for that tax year.

Using the Exchange Rate for Business

For business, it’s a bit easier on when to use the exchange rate.

For sales, when you create the invoice for the customer pick the rate for that day, if available, or the previous day. Fortunately, accounting software now can link to the Bank of Canada website and pick the rate, normally it’s for the previous day and that’s okay. You could also just pick an average rate and go with that for a time, until it changes. For example, say the US dollar, you can pick an exchange rate of 1.35 and go with that until you feel it’s changed too much to keep using it.

For customer payments, use the exchange rate the bank gives you when you deposit, if into your Canadian dollar account. Otherwise, use the rate on the day of the deposit, or the previous day. Are you receiving a lot of foreign currency? You may want to setup a bank account in that currency.

For purchases, you can follow the same advice as for sales. One client I have uses an average, and then adjusts that rate up or down depending on how the Canadian dollar is doing compared to the currencies he makes purchases in. However, when he sends the supplier money, he uses the rate from the currency exchange house.

That’s something else to think about for business, if you do a lot of purchasing in foreign currencies, I suggest using a currency exchange house. They usually give better rates than the banks, and can send bank drafts and wires at much cheaper rates than the banks (many banks are charging $40+ for a wire transfer).

Also, think about purchasing forwards when you have a large volume of transactions in a currency. A forward is a contract to buy so much of a foreign currency at a fixed exchange rate. You’re basically hedging your bets about the currency going up. So, you lock in the exchange rate for a certain period, then much purchase the forward at the rate agreed upon at its creation.

For example, you agree to buy a forward on the US dollar at an exchange rate of 1.35 and it expires in three months. At the expiration, you purchase the agreed amount of dollars at the 1.35 rate, or pay a penalty for not doing so. If the exchange rate goes up to 1.40 then you’ve saved 5 points and depending on the amount quite a bit of money. However, if the rate goes down to 1.30 then you’ve paid 5 points more than you needed to. This is the risk you take doing forwards.

Having foreign income can be a great, especially when the Canadian dollar is low compared to that foreign currency. However, when it comes time to reporting that income on your tax return, or in your business, ensure you are using the correct rate.

What Your Tax Accountant Needs to Prepare Your Income Tax

By Randall Orser | Personal Income Tax

When it comes to income tax preparation, there are do-it-yourselfers and 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 totaled. 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!

Are You Moving This Year?

By Randall Orser | Personal Income Tax

Moving is probably one of the most strenuous things we do in our lives, and, sometimes expensive. The government has seen fit to at least let you write-off your moving expenses when it’s for school, a new job, or starting a business. Of course, with anything the government does there are conditions. And, for 2016 tax year they’ve added a new twist, you must state on your tax return that you have sold your principal residence.

Can you claim moving expenses?

You can claim eligible moving expenses if:

  • you moved and established a new home to work or run a business at a new location; or
  • you moved to be a student in full-time attendance in a post-secondary program at a university, college or other educational institution.

To qualify, your new home must be at least 40 kilometres (by the shortest usual public route) closer to your new work or school.

What can you write off as moving expenses?

If you qualify, you can claim reasonable amounts that you paid for moving yourself, your family, and your household items. Not all members of your household have to travel together or at the same time.

Transportation and storage costs (such as packing, hauling, movers, in-transit storage, and insurance) for household items, including boats and trailers.

Travel expenses, including vehicle expenses, meals, and accommodation, to move you and your household members to your new home. You can choose to claim vehicle and/or meal expenses using the detailed or simplified method.

Temporary living expenses for up to a maximum of 15 days for meals and temporary lodging near the old and the new home for you and your household members. You can choose to claim meal expenses using the detailed or simplified method. If you choose the simplified method, although you do not have to submit detailed receipts for actual expenses, we may still ask you to provide documents showing how long you stayed at the temporary lodging.

Cost of cancelling the lease for your old home, except any rental payment for the period during which you occupied the residence. However, you cannot claim rental payments for any period before the cancellation of your lease, whether or not you occupied the home during this period.

Incidental costs related to your move which include the following:

  • changing your address on legal documents;
  • replacing driving licences and non-commercial vehicle permits (not including insurance); and
  • utility hook-ups and disconnections.

Cost to maintain your old home when vacant (maximum of $5,000) after you moved, and during a period when reasonable efforts were made to sell the home. It includes the following:

  • interest;
  • property taxes;
  • insurance premiums; and
  • cost of heating and utilities expenses.

The costs must have been incurred when your old home was not ordinarily occupied by you or any other person who ordinarily resided with you at the old home just before the move. You cannot deduct these costs during a period when the old home was rented.

Cost of selling your old home, including advertising, notary or legal fees, real estate commission, and mortgage penalty when the mortgage is paid off before maturity.

Cost of buying your new home if you or your spouse or common-law partner sold your old home because of your move.

It includes legal or notary fees that you paid for the purchase of your new home, as well as any taxes paid (other than GST/HST) for the transfer or registration of title to the new home.

Calculation methods

Detailed Method

Meal expenses
If you choose to use the detailed method to calculate your meal expenses, you must keep all your receipts and claim the actual amount that you spent.

Vehicle expenses
If you choose to use the detailed method to calculate your vehicle expenses, you must keep all receipts and records for the vehicle expenses. Claim the actual amount that you spent for your moving expenses during the tax year.

Simplified Method

Meal expenses
If you choose to use the simplified method to calculate your meal expenses, you may claim a flat rate per person. For 2016 tax year it’s $17/meal up to a maximum of $51/day (including sales tax), and can be Canadian or US dollars. Although you do not need to keep detailed receipts for actual expenses, we may still ask you to provide some documentation to support your claim.

Vehicle expenses
If you choose to use the simplified method to calculate the amount to claim for vehicle expenses, multiply the number of kilometres by the cents/km rate for the province or territory where the travel began. For 2016 tax year it ranges from 43.5¢ for Alberta to 59¢ for the Yukon. CRA may still ask you to provide some documentation to support your claim. You must keep track of the number of kilometres driven during the tax year for the trips related to your moving expenses.

New for 2016 tax year is Reporting the sale of your principal residence for individuals

On October 3, 2016, the Government announced an administrative change to Canada Revenue Agency's reporting requirements for the sale of a principal residence.

When you sell your principal residence or when you are considered to have sold it, usually you do not have to report the sale on your income tax and benefit return and you do not have to pay tax on any gain from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it.

Starting with the 2016 tax year, generally due by late April 2017, you will be required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption.

This could have a profound effect on anyone who runs a business or rents out part of their principal residence.

If only a part of your home qualifies as your principal residence and you used the other part to earn or produce income, you may have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, as long as the split is reasonable.

In other words, you are going to be taxed on the gain that relates to the business part of your home. For example, if you’re writing off 10% of your home for business then 10% of the gain must be included in income (less expenses for selling the home).

If you moved during the year, remember you may be able to write off your moving expenses, so keep all your receipts, and keep track of your mileage (remember must move over 40km away).

Top Ten Missed Tax Deductions

By Randall Orser | Personal Income Tax

Do you like paying too much income tax? Do you pay more than you should? By not taking full advantage of deductions, you may be paying more income tax than you need. Are you taking advantage of every deduction available to you? Do you file your income tax return on time? Do you pay installments quarterly and on time? The following are some of the more common missed deductions that may be contributing to your high income tax bill.

10. Tuition and Education Credit Not Transferred

You can transfer to a spouse or parent from a student who has income too low to claim the credits themselves. There are some restrictions and forms to sign; however, it is easy to do the transfer.

9. Child Care Expenses

Childcare expenses can be deducted from income by the lower income spouse, subject to certain limitations. These expenses include day-care, baby-sitting, boarding school and day camps. You need to provide a Social Insurance Number for those individuals to whom you paid to get the deduction.

8. Employment Expenses

Employees using their own automobile for work (other than to / from the work place) without reimbursement from the employer can deduct the business portion of their automobile expenses. If you are reimbursed and the amount is not “reasonable”, you can still claim a deduction for the non-reimbursed portion. Your employer needs to complete form T2200 for you to get the deduction.

7. Charitable Deductions

Charitable deductions made by you or your spouse during the year should normally be added together and claimed on the income tax return of one spouse. A higher credit is available for donations over $200, so it makes sense to aggregate the credits and use the low rate only once. Donations totaling less than $200 can be claimed on either return, either jointly or separately.

6. Medical Expenses

You can claim medical expenses for yourself, your spouse, and dependent children. Either spouse can make the claim. You can claim either for the calendar year, or any 12-month period that ends in the taxation year. Dental bills, eyeglasses and private medical insurance (including travel medical insurance) are some of the commonly missed expenses. Payments to a nursing home may qualify as a medical expense for certain seniors. Remember, medical expenses must be greater than 3% of your net income (maximum of $2,237 for 2016) to be claimed.

5. Carrying Charges and Deductible Interest

If you plan properly, you can ensure interest is deductible. Loans must be incurred to purchase investments (with the intent to earn income) to have the interest deductible. Ensure you have the proper documentation for the interest to be eligible. Carrying charges include investment counsel fees, accounting, fees, and safety deposit box charges.

4. Moving Expenses

Moving expenses include moving costs, real estate commissions on the sale of your former home, property purchase tax on your new home, and legal fees. For students, you may be able to deduct moving expenses to start a job (or a summer job) or to start a business. You must either earn income at the new location from the new job or business, or have moved to be at least 40 KMs closer to your present job.

3. GST and PST Credits

To take advantage of the GST and PST tax credits, you need to file an annual income tax return; even if you have no taxable income. The basic GST credit for 2006 is $232, with an additional credit of $232 for your spouse and $122 for each dependent child. The PST credit is $75 each for yourself, your spouse, or your dependent children. The amount of these tax credits is dependent on your annual income.

2. Maximize your RRSP Deduction

To maximize your RRSP deduction, you should start early in your life, contribute the maximum each year and use spousal RRSPs, including common-law spouses; which allows you to take advantage of lower tax rates. From an investment perspective, you should take advantage of foreign content rules and diversify to reduce your investment risk. If you are a first-time home buyer, make use of the RRSP Home Buyer’s Plan. If you are planning to return to school, make use of the RRSP Lifelong Learning Plan. And, if you are going to receive severance payments, put them directly into your RRSP tax-free.

1. Filing Deadlines and Installments

The deadline for filing your previous year income tax return is April 30th. For self-employed individuals, this deadline is June 15th; however, any income taxes payable is still due on April 30th.
If you file a late return, there are late-filing penalties (5% plus 1% per month to a maximum of 17%) on the tax outstanding, plus interest (at the prevailing rate set by Canada Customs and Revenue Agency). Additional penalties can be incurred for failure to make installment payments. If you fail to file for a second time in three years and the Minister issues a formal demand to file, there is a “second occurrence” penalty which is double the amount mentioned above.
Interest and penalties are not tax deductible and can add up quickly at the rates charged by Canada Customs and Revenue Agency. Ensure you file your return on time, even if you cannot pay the taxes due.
The above list is some of the more common deductions that are missed by taxpayers. You should discuss your situation with your tax advisor to ensure that you are minimizing your tax bill.

Death and Taxes

By Randall Orser | Personal Income Tax , Small Business

As the old cliché goes, the only things inevitable in life are death and taxes; and, they can happen at the same time. Today we’re going to talk about what happens when, as a taxpayer, you die. I think the biggest thing is that people are not financially prepared for death. We know it’s coming, maybe not when, but eventually we pass, and our loved ones are left to deal with your estate. It’s best to talk about it before, have your will, and ensure your wishes are met. And, of course, pay as little tax as possible.

Types of Returns

In addition to the final return, you can choose to file up to three optional returns for the year of death: return for rights or things, return for a partner or proprietor, and return for income from a testamentary trust.

Optional returns are returns on which you report some of the income that you would otherwise report on the final return. By filing one or more optional returns, you may reduce or eliminate tax for the deceased. This is possible because you can claim certain amounts more than once, split them between returns, or claim them against specific kinds of income.

Information about the deceased’s income sources will help you determine if you can file any of these optional returns. You do not report the same income on both the final and an optional return but you can claim certain credits and deductions on more than one return. You can check out this chart on CRA’s website.

On each optional return and on the final return, you can claim:

  • the basic personal amount (Line 300);
  • the age amount (Line 301);
  • the spouse or common-law partner amount (Line 303);
  • the amount for an eligible dependent (Line 305);
  • the amount for infirm dependents age 18 or older (Line 306);
  • the family caregiver amount for children under 18 years of age (Line 367); and
  • the caregiver amount (Line 315).

Legal Representative

You are the legal representative of a deceased person if: you are named as the executor in the will; you are appointed as the administrator of the estate by a court; or you are the liquidator for an estate in Quebec.

As the legal representative, you may wish to appoint an authorized representative to deal with CRA for tax matters on your behalf. You may do so by completing and mailing (do not fax) Form T1013, Authorizing or Cancelling a Representative.

As the legal representative, you should provide CRA with the deceased’s date of death as soon as possible. You can advise them by calling 1-800-959-8281, by sending a letter or a completed Request for the Canada Revenue Agency to Update Records form.

Under the Income Tax Act, as the legal representative, it is your responsibility to: file all required returns for the deceased; ensure that all taxes owing is paid; and let the beneficiaries know which of the amounts they receive from the estate are taxable.

As the legal representative, you are responsible for filing a return for the deceased for the year of death. This return is called the final return.

Clearance Certificate

As the legal representative, you may want to get a clearance certificate before you distribute any property under your control. A clearance certificate certifies that all amounts for which the deceased is liable to us have been paid, or that we have accepted security for the payment. If you do not get a clearance certificate, you can be liable for any amount the deceased owes. A clearance certificate covers all tax years to the date of death. It is not a clearance for any amounts a trust owes. If there is a trust, a separate clearance certificate is needed for the trust.

To request a certificate, complete Form TX19, Asking for a Clearance Certificate, and send it to your regional tax services office. The addresses of these offices are listed on Form TX19. Do not include Form TX19 with a return. Send it only after you have received the notices of assessment for all the returns required to be filed and paid or secured all amounts owing.

Deemed disposition of property

When a person dies, CRA considers that the person has disposed of all capital property right before death, this is called a deemed disposition.

Also, right before death, CRA considers that the person has received the deemed proceeds of disposition (referred to as “deemed proceeds”). Even though there was not an actual sale, there can be a capital gain or, except for depreciable property or personal-use property, a capital loss.

For depreciable property, in addition to a capital gain, there can also be a recapture of capital cost allowance. Also, for depreciable property, instead of a capital loss there may be a terminal loss.

The lifetime capital gains exemption has been increased from $800,000 to $813,600 for dispositions in 2015 as the exemption is indexed to inflation starting in 2015. Since the inclusion rate for capital gains and losses is 50%, the lifetime capital gains deduction limit has been increased from $400,000 (50% of $800,000) to $406,800 (50% of $813,600) for dispositions in 2015.

For dispositions of qualified farm or fishing property after April 20, 2015, an additional deduction is available which increases the LCGE limit to $1,000,000. Accordingly, the lifetime capital gains deduction limit is increased to $500,000 (50% of $1,000,000) for those properties. This additional deduction does not apply to dispositions of Qualified Small Business Corporation (QSBC) shares.

All the above relates to RRSPs, TFSAs, non-registered shares, rental or recreational properties, business assets if a partnership or proprietorship.

Tax Credit Payments

GST/HST

Generally, GST/HST credit payments are issued on the fifth day of the month in July, October, January, and April. If the deceased was receiving GST/HST credit payments, CRA may still send out a payment after the date of death because they are not aware of the death. If this happens, you should return the payment to the tax centre that serves your area. CRA also administers provincial programs that are related to the GST/HST credit. If the deceased was receiving payments under one of these programs, you do not have to take any further action. CRA uses that information provided for the GST/HST credit payments to adjust the applicable credit.

Child Tax Benefit

Contact CRA at 1-800-387-1193 and let them know the date of death. If the deceased person was receiving CCTB and/or UCCB payments for a child and the surviving spouse or common-law partner is the child’s parent, CRA will usually transfer the CCTB and/or UCCB payments to that person.

If anyone else, other than the parent, is now primarily responsible for the child, that person should apply for benefit payments for the child by: using the “Apply for child benefits” online service on My Account; or completing and sending Form RC66, Canada Child Benefits Application to CRA.

If the deceased was receiving payments under provincial or territorial child benefit and credit programs administered by the CRA, there is no need to apply separately to qualify. We will use the information from the application to determine the new caregiver’s eligibility for these programs.

Net Capital Losses

Generally, when allowable capital losses are more than taxable capital gains, the difference is a net capital loss. The rate used to determine the taxable part of a capital gain and the allowable part of a capital loss is called an inclusion rate. For 2015, the inclusion rate is one-half. Therefore, an allowable capital loss is one-half of a capital loss and a taxable capital gain is one-half of a capital gain. Net capital losses cannot be carried forward from a T1 return to a T3 return.

There are two methods you can use to deal with net capital losses at the time of death.

Method A – You can carry back a 2015 net capital loss to reduce any taxable capital gains in any of the three tax years before the year of death. If you are applying it against taxable capital gains realized in 2012, 2013, or 2014, you do not need to make any adjustment because the inclusion rate is the same in all three years. The loss you carry back cannot be more than the taxable capital gains in those years. To ask for a loss carryback, complete “Section III − Net capital loss for carryback” on Form T1A, Request for Loss Carryback, and send it to your tax centre. Don’t file an amended return for the year to which you want to apply the loss.

After you carry back the loss, there may be an amount left. You may be able to use some of the remaining amount to reduce other income on the final return, the return for the year before the year of death, or both returns. However, before you do this, you must calculate the amount you can use.

From the net capital loss, you have left, subtract any capital gains deductions the deceased has claimed to date. Use any loss left to reduce other income for the year of death, the year before the year of death, or for both years.

Method B – You can choose not to carry back the net capital loss to reduce taxable capital gains from earlier years. You may prefer to reduce other income on the final return, the return for the year before the year of death, or both returns. However, before you do this, you must calculate the amount you can use.

From the net capital loss, subtract any capital gains deductions the deceased has claimed to date. Use any loss remaining to reduce other income for the year of death, the year before the year of death, or for both years. If you claim any remaining net capital loss in the year of death, you should claim it as a negative amount in brackets at line 127 – Capital Gains of the final return.

Do not use a capital loss claimed against other income at line 127 – Capital Gains in the calculation of net income for the purposes of calculating other amounts such as social benefit repayments, provincial or territorial tax credits, and those non-refundable tax credits requiring the use of net income.

When someone dies, there are a lot of things to deal with, and the taxman is one of those. CRA does recognize that you are going through a tough time after someone’s death, and can be quite helpful at such times. It’s always best to talk to a professional before dealing with the tax side of a taxpayer’s death.

Now Is the Time to Implement A RRSP Strategy

By Randall Orser | Personal Income Tax , Small Business

It’s time to think about your Registered Retirement Savings Plan (RRSP), the deadline is coming up, and you need to strategize what you’re going to do this year. We’re assuming you know what an RRSP is, and either have one, or know what to do to get one started. I will say this, please use an independent financial planner, as they are unaffiliated with any bank or institution and can invest your money how you wish.

The following are what you need to consider when developing an RRSP strategy:

  • What is my risk tolerance level?
  • What is my current income level?
  • What is my contribution room?
  • How much can I afford?

What is my risk tolerance level?

There are factors that can affect your risk tolerance level, time-frame, capital, investment objectives, and experience.

What is your time-frame for investing? What is your age now, and when do you want to retire? If you’re in your twenties, then your risk-tolerance may be high as you have a long time before you retire; however, sometimes at a young age we take too many risks, and you don’t want to be starting over again and again. As we get older we tend to get a more conservative, investing in more stable stocks and bonds, or government bills; however, that doesn’t have to be the case. You want to look at where you are now, and where you want to be when you retire, and figure out the things you need to do to get there.

How much capital do you have to work with? What do you have in RRSPs now? What is your net worth? How much risk capital do you have that won’t affect your lifestyle if you lose it? You need to look at these to determine how much you can risk investing. The more net worth you have, the more risk capital you can work with.

Do you understand your investment objectives? If you’re investing for retirement, are you willing to risk it all? You need to look at investments that fit your objectives. Trading futures in your RRSP is not necessarily the best route. Yes, it’s sheltered from taxes, however, the high level of risk may not be worth damaging your portfolio.

What’s your investing experience? Are you new to investing? Have you been doing this for some time but are going into new areas, such as options? You need to heed caution when going into new areas, and get some experience before risking too much.

What is my current income level?

To determine how much RRSPs to contribute for the year, you need to look at where your income level was, or will be. Generally, if you can you want to lower your income enough to go to the lower tax bracket. For example, if your income is $75,000 and the lower tax bracket is $65,000 then you need to contribute at least $10,000 to get into that bracket.

For the next year, do you know where your gross income will be? If you do, then now is the time to determine what you can contribute either monthly or by the next February. Once you know how much you need to contribute you can come up with a plan on how to afford it.

What is my contribution room?

Your registered retirement savings plan (RRSP) deduction limit, often called your “contribution room” is:

  • the amount that you can contribute to your RRSP.
  • the amount that you can contribute to your spouse or common-law partner’s RRSP.
  • the amount your employer can contribute to your RRSP.
  • the maximum you can deduct on your tax return, reducing your tax for that year.

 

The Canada Revenue Agency generally calculates your RRSP deduction limit as follows: the lesser of 18% of your earned income in the previous year, and the annual RRSP limit, which is $26,010 for 2017.

How much can I afford?

This is the big question you need to ask yourself. If you’ve determined how much you need to contribute to get into the lower tax bracket, you need to figure out how you can contribute that during the year, or save up for it over the year.

I believe that you’re better to contribute throughout the year, at what you can afford monthly. If you have some extra funds come February, then top up what you’ve contributed during the year.

What’s your strategy going to be for your RRSP this year?