Once again, our (least) favorite time of the year is approaching. Yes, it’s tax season. But tax time doesn’t have to bring tension, stress and tax bills. As a matter of fact, in many cases, the government owes YOU money. And the best kept secret is that they will pay out tax refunds much earlier than you would expect! All you have to do is file earlier than the deadline.
I often suggest filing tax returns early, but I am often told that the there is no way to file since income slips don’t come in until early March. That may be true, but it’s helpful to compute all the available calculations such that the tax return can be completed almost immediately upon arrival of the missing information. Many filers don’t file early, so early filers in refund positions are more likely to receive their refunds more quickly than those who delay until some time in April.
Here are just a few common calculations which are most likely available now:
1) Schedule of rental income and expenses
2) Schedule of business income and expenses
3) Schedule of employment expenses
4) Child care amounts
5) Donation amounts
6) Medical expense amounts
7) Gains and losses on investment trading
8) Amounts paid for rent or property taxes
9) RRSP contribution and withdrawals amounts
10) Amounts paid for fitness and arts programs for children
Of course I offer free initial consultations and encourage questions and comments at any time by email – firstname.lastname@example.org
Major media outlets just released a somewhat shocking statistic that revealed that 45% of Canadian taxpayers expected to file personal tax returns still have not filed!
It is important to remember that all taxes due in respect of 2011 tax returns are due by the end of April 30th. Although self-employed taxpayers have an extended filing to June 15, even their taxes are fully due at April 30. Failure to pay the taxes on time will result in hefty penalties and interest. It is therefore imperative that all taxes are paid on time. For self-employed taxpayers who will not be filing until June 15th and who therefore do not know the precise amount of the taxes due, installments and estimated taxes should be remitted.
Once taxes are filed, the Canada Revenue Agency (CRA) will issue its first round of tax correspondence termed “notices of assessment” to all taxpayers. These notices set out whether all filed tax amounts have been accepted (in which case all amounts paid or received will be accepted) or whether there has been an error or need for further clarification or support for amounts. In the case of a clerical error, the tax amounts will be changed and CRA will provide the adjusted amount of tax due or receivable. In the case of a need for support, CRA will outline which items it does not yet agree with and it then becomes the burden of the taxpayer to provide specific supporting documentation to CRA within 30 days. Failure to respond to the request will result in an absolute denial of all amounts in question.
For some lucky taxpayers, a second round of correspondence termed “notices of reassessment” will be received. This round is essentially the same as the first round. It takes place because CRA does not have the resources to review all tax returns as they are filed and instead reviews some immediately and reviews others through the rest of the year. It is therefore common to receive notices of assessment in shortly after filing and notices of reassessment subsequently.
It is also worth noting that it is never to early to begin planning for the 2012 tax year, which is already 4 months old!
As always, questions and comments are welcome here or by email – email@example.com
By now, you’ve resigned yourself to gathering your tax information for filing in time for the April 30th deadline. This is the time that people start to ask about various potential tax deductions, so I figured I would provide some answers to some common questions…
1) Home Office – Employees may deduct work-space-in-home expenses if their contract of employment requires them to pay the expenses, and the expenses are not reimbursable by the employer. Canada Revenue Agency (CRA) form T2200, Declaration of Conditions of Employment, should be completed by the employee and employer in order to claim these expenses. These expenses are entered as a deduction from income on line 229 of the personal income tax return.
In order for any expenses to be deductible, the work space must be either the place where the individual mainly does their work, or used exclusively for earning employment income, and used on a regular and continuous basis for meeting customers or other persons in the course of performing the job.
Allowed expenses include heat, electricity, light bulbs, cleaning materials, maintenance, etc. If the home is rented, a reasonable portion of the rent may be deducted. Mortgage interest and capital cost allowance may not be deducted.
Sales commission employees eligible to deduct work-space-in-home expenses may also deduct a reasonable portion of property taxes and home insurance.
2) Vehicle – Vehicle expenses may be deducted if the employee was normally required to carry on the duties of employment away from the employer’s place of business and was required under the contract of employment to pay motor vehicle expenses and did not receive any allowance or reimbursement from the employer for motor vehicle expenses.
Form T2200, Declaration of Conditions of Employment, must be completed in order to claim these expenses.
3) Clothing – The cost of special clothing or footwear required for your job is not deductible.
4) Clergy – certain clergy residence rent and utility costs can be deducted, but you must truly meet the CRA definition of “clergy.” See the CRA interpretation bulletin IT-141R Clergy residence deduction, and CRA web page Line 231 Clergy residence deduction.
5) Dues and annual professional membership dues paid to maintain a professional status recognized by statute are deductible.
I will be happy to discuss these issues and any othersin greater detail. I can be reached at firstname.lastname@example.org or at 416 222 5555 ext 315.
Now that it is “tax season”, people begin to think of their tax information from the prior year. For some, it is buried away in a closet. For others, is is buried in the shoe-box – never to be opened again…. until it is speedily delivered to your beleaguered accountant on April 29th…
With the personal tax filing deadline of April 30th only two short months away, there is still time to properly plan and execute a proper filing to ensure that you benefit from all available tax relief measures, including deductions and tax credits. Proper organization and planning can increase your refund and can reduce the filing cost associated with your tax return by reducing the amount of time your accountant takes to gather, organize and tally your information.
For most people, a small investment of time to collect all of your tax forms and to prepare a summary of income and expenses will significantly reduce the time it takes the accountant to file the return. With CRA’s adoption of electronic filing over the past few years, physical slips are usually not required to be filed along with your return (but must be kept in case of audit requests from the CRA). Since only the totals of income, deductions and credits are filed, client-produced summaries go a long way toward cutting the time and cost involved with filing. Further, the time that had been previously spent gathering data can now be spent analyzing areas that can yield the greatest benefit to you, ie, discussing the eligibility of various employment related deductions.
Within the next month, all tax slips should be received and taxpayers should be in a position to file their tax returns. However, most people wait until the deadline is looking before they file. It is important to remember that the CRA will accept filings at any time (even as early as today) and that any refund that may be due to you will not produce interest by leaving it unclaimed until April 30th. An early filing should reduce the stress associated with filing and could result in an early windfall for those who are due to receive refunds.
Another point to remember – while most people are thrilled to find out that the government owes them money, the real truth is that they had actually overpaid their taxes throughout the year. In doing so, these people have actually given the CRA an interest-free loan, which they will now recover. Suddenly, people may not be so happy. In certain cases, taxpayers have the ability to reduce their tax withholdings in the coming year (if they will have the deductions and credits to support the tax reduction through the year).
So don’t be afraid to scrap the proverbial “shoe-box” and bring an organized listing of your tax items to your accountant. I guarantee that you’ll be happier this year than ever before.
There are many kinds of investments accounts. These accounts are designed to help with various stages of life. I’ll explain four major types of accounts:
1) Tax-Free Savings Account (TFSA)
2) Registered Retirement Savings Plan (RRSP)
3) Registered Education Savings Plan (RESP)
4) Registered Retirement Income Fund (RRIF)
1) Tax-Free Savings Account (TFSA)
The TFSA was introduced in 2009 to Canadians 18 and over. This flexible account will enable you to accumulate tax-sheltered investment income and capital gains. Depending on your needs, a TFSA can be used to save for your retirement, to finance your short- or medium-term projects (e.g., buying a house or car, renovating or taking a sabbatical) or simply to build up your savings.
Here’s how it works:
– Individuals can contribute up to $5,000 per year to a TFSA
– Contributions are not deductible for tax purposes (ie, contributing to a TFSA does not reduce your taxes like an RRSP – discussed below)
– Investment income earned in a TFSA is not taxed, even when withdrawn (investment income is typically taxable when generated outside special accounts)
– Unused contribution room can be carried forward to future years (you don’t have to contribute, but your maximum contribution space will grow)
– Funds can be withdrawn from a TFSA at any time for any purpose (again, not like an RRSP)
– Withdrawn funds can be re-contributed without reducing the contribution room (however, re-contributions must be made no earlier than the beginning of the next calendar year to avoid penalties on over-contributions)
2) Registered retirement savings plan account (RRSP)
An RRSP is the best tool to help you reduce your taxes during your high earning years, as it allows you to defer taxes until your retirement when your income and tax rates are generally lower. An RRSP is the best and most efficient way to build your retirement nest egg. Here’s how it works:
– You can contribute a certain amount to your RRSP based on prior year earned income. If you don’t earn income, you will not be able to contribute. Be sure not to over-contribute to avoid penalties on over-contributions.
– Contributions are fully deductible for tax purposes (ie, contributing to an RRSP will reduce your taxes)
– Investment income earned in an RRSP is not taxed, even when withdrawn (investment income is typically taxable when generated outside special accounts)
– Unused contribution room can be carried forward to future years (you don’t have to contribute, but your maximum contribution space will grow)
– Funds cannot be withdrawn from an RRSP without penalty except for the purchase of your first home and prescribed higher education. Even in these cases, the money must be repaid to avoid unwanted tax implications
– You can contribute to your RRSP until you turn 71 years of age, at which time you will need to convert your RRSP into an RRIF (see below) or other retirement account
3) Registered education savings plan (RESP)
The increase in the cost of getting an education makes it increasingly imperative to save for post-secondary studies and to start as early as possible through a self-directed RESP. The Canada Education Savings Grant (CESG) is deposited in the plan on top of your own annual contribution. The grant represents 20% of the first $2,500 of contributions, up to a maximum of $500 per year, per beneficiary. Additional grants can be received depending on the net family income. Here’s how it works:
– Your Canada Education Savings Grant (CESG) will be deposited in your account at the end of the month following the date when you contributed to the RESP. In addition, if eligible, you could benefit immediately from the $500 Canada Learning Bond (CLB), plus an additional $100 grant per year over a maximum of 15 years.
– You can opt for an individual or a family plan. With the individual plan, parents, grandparents, aunts, uncles and friends can contribute to a child’s RESP. With the family plan, the subscriber must be related by blood (parents, grandparents, great-grandparents, brothers and sisters) or by adoption to the beneficiary.
– You can invest up to a maximum lifetime contribution of $50,000 per year, per beneficiary.
– The maximum grant under the CESG program is $500 per year for a total lifetime amount of $7,200 per beneficiary.
– Contributions are not tax-deductible.
– Capital remains accessible at all times (CESG refund may be required).
– Capital and investment income remain tax-sheltered until the beneficiary begins post-secondary studies.
4) Registered retirement income fund (RRIF)
Like every other investor, you will need to convert your RRSP the year you turn 71. A natural continuation of the RRSP, the RRIF is one of the most sensible choices you can make. Besides allowing you to keep deferring taxes on your principal and interest until funds are withdrawn, it also lets you make monthly, quarterly, semi-annual or annual withdrawals of retirement income. It’s up to you to choose the amount you want to withdraw, as long as you meet the government-required minimum payout. Here’s how it works:
– There is no age limit to open a RRIF account.
– You can reduce the annual payout by basing the calculations on the age of the younger spouse.
– You are entitled to make lump sum withdrawals from your RRIF account, which are then taxed as income in the year of their withdrawal.
– The RRIF offers spousal protection under which the amounts invested in the plan are rolled over to the surviving spouse’s RRSP or RRIF at the subscriber’s death.
– Transferring an RRSP to a RRIF does not change your investments, your interest rates or your maturities.
The above accounts can be effectively utilized as part of your tax plan. Please note that the above discussion is not meant to be relied upon and that a discussion of your individual circumstances is strongly urged. I welcome any questions or comments on this or any other topic of interest.
416 222 5555
I’m here to tell you that there might be a way to reduce the taxes you pay by incorporating your small business or practice. As a matter of fact, there are many reasons to incorporate. The main reasons are as follows:
1) Limited liability – when a business is incorporated, a separate legal entity is created. This new entity is considered to be distinctly separate from the owners/shareholders. The main result is that the owners/shareholders can only be held liable for the liabilities and wrongdoings of the corporation to the extent of the money invested. For example, if the corporation is sued for a large amount but the corporation can only afford a portion, the plaintiff can NOT go after the owner’s personal home or car. Note that in absence of legal incorporation, the owner would stand to lose personal assets since the business is considered to be a legal extension of the owner. This is a major reason for incorporation.
2) Raising capital is easier – without incorporation, owners raise money mainly from lenders like banks. Incorporation allows owners to more easily sell partial ownership to others in exchange for funds. Sale of partial ownership does not usually involve interest and is therefore more cost-effective relative to traditional debt.
3) Income control – in an incorporated entity, there is potential for reinvesting profits back into the business and not paying a salary or dividend to the owner. Since the owner may choose to reinvest the profits without taking a full salary or dividend, no taxes are due on the owner’s personal tax return in respect of the income since there is none. The result is that the owner can defer payment of income from the business and defer the taxes since they are not payable until the income is earned.
4) Income splitting – a corporation can be owned by family members even when they are not active in the business. A corporation can then choose to pay reasonable salaries to active owners and can choose to pay dividends to passive owners. Thus, an owner can redistribute income that would otherwise have been paid to him or her as salary or dividends to a spouse or children. Since the spouse or children would generally pay lower tax rates than the owner, the net family tax burden is lower resulting in a significant tax saving!
5) Small business limit – the taxes due on incorporated profits are generally lower than un-incorporated profits due to the preferred corporate tax rates levied on the first $500,000 of active income (in Ontario). The result could be a net savings of up to 30% on $500,000 or $150,000 of taxes! Note that the actual savings depend on many factors…
Incorporation is a simple and inexpensive process. It does involve annual tax return filing which leads to a slightly higher compliance cost relative to an un-incorporated business, but the above benefits are understood to outweigh the cost in many cases.
CRA will not permit the incorporation of “personal service businesses.”. These usually arise when there is no BUSINESS being incorporated but rather an EMPLOYMENT scenario is being incorporated whereby a regular employee decides to incorporate. There are enough punitive measures in place to ensure that it is more worthwhile to remain as an employee than to incorporate.
However, the CRA has specifically provided exclusions for the following individuals WHO MAY incorporate:
1) Lawyers and paralegals under the Law Society Act
3) Chiropodists including podiatrists,
5) Dental hygienists,
6) Dental surgeons,
7) Dental technologists,
10) Massage therapists,
11) Medical laboratory technologists,
12) Medical radiation technologists,
15) Occcupational therapists,
19) Physicians and surgeons,
22) Speech language pathologists,
23) Respiratory therapists
#2 to #22 are under the Regulated Health Professions Act
24) Social workers and social service workers under the Social Work and Social Service Work Act
25) Veterinarians under the Veterinarians Act
Please let me know if there are questions or comments. I would be more than happy to discuss these matters in detail.
I can be reached at email@example.com or in the office at 416 222 5555.
So you want to pay less tax. So do most people. It is possible to accomplish and not very complicated. Here’s a few things that you can do:
1) Contribute to an RRSP. An RRSP (Registered Retirement Savings Plan) is a special account that is set up to fund your retirement. The government does not want to have a bunch of poor old people that will require government support, so it decided to create incentives to ensure old people have their own money. In a nutshell, CRA (Canada Revenue Agency) allows people who earn income to contribute up to $22,500 (or 18% of the prior year’s earned income – whichever is lower) to the plan. The money can be invested in virtually any investment vehicle. There are two benefits. The first is that the investment income (interest, dividends, capital gains) in the plan is not taxed at all. The second is that the taxpayer can deduct all contributions from the taxes owed in the year. However, once contributions are made to the plan, they cannot be removed without facing penalties, except for the purchase of your first home and for certain higher education needs. Make sure to contribute to your RRSP by no later than March 1, 2012 in order to get the benefit this year.
2) Crystallize unrealized capital losses. When you have investments that are worth less than you paid for them, you have an “unrealized capital loss”. Selling the investment crystallizes the capital loss and turns it into a “realized” capital loss. All realized capital losses are offset against realized capital gains thus reducing the tax that would otherwise be owed on the capital gains. Note that in Canada, capital gains are only taxable at 50% of the actual gain, so capital gain income is much preferred over other kinds of investment income such as interest and dividends. One caveat – capital losses in an RRSP cannot be crystallized. Make sure to crystallize your unrealized capital losses by December 31, 2011 in order to get the benefit this year.
3) Donate to charity. You might tell me that giving money away is not a good tax plan. I would agree, unless you plan to donate, anyway. If you were already planning to donate, make sure to do so by no later than December 31, 2011. Donations to registered charities are eligible for “tax receipts” which are used to reduce your taxes.
4) Pay your expenses. In many cases, valid expenses can reduce your taxes IF PAID BY DECEMBER 31, 2011. These can include vehicle expenses, home office expenses, meals and entertainment, supplies, phone charges, safety deposit box fees, broker fees and others. These can only reduce your taxes if they are paid by December 31, 2011.
These things tend to get a little complicated, so if you plan to utilize them, please contact me first (firstname.lastname@example.org).
As always, questions and comments (on this or any other issue) are welcome.