Brought to you by the Institute of Chartered Accountants of Ontario.
By Institute of Chartered Accountants of Ontario —
Tax Tip 1 of 20
Are extra payroll deductions the answer to taxes?
Are you savings-challenged? If so, you might think that asking your company’s payroll department to increase your regular income tax deductions is a good strategy to avoid the possibility of extra taxes at year-end.
“Not necessarily,” says Chartered Accountant James Kraft, a Certified Financial Planner and Taxation Specialist with PlanningWise Inc. in Toronto. “I first recommend that people seriously assess their own abilities to manage money as well as their goals with respect to savings.”
On the “pro” side, Kraft says that increasing payroll deductions can be a forced savings plan. Some may prefer it, because the money never comes into the house and they can’t get their hands on it.
But there are significant “cons”. “You’re lending the government money, interest-free,” he explains. “And, you sacrifice flexibility, because you can’t get at your ‘savings’ if you need them.
“It’s a matter of will power,” he continues. “Can you set aside funds and save? Can you make a budget and work within it?”
If you can answer yes to either of these questions, even to a very limited extent, then there are other – and often better – alternatives.
“Why not ask your employer to increase contributions to the group pension or the group RRSP?” Kraft suggests. ”Other good options would be to set up a monthly savings plan into a Tax-Free Savings Account or increase your mortgage payment. Both of these can be done automatically, pulling the money out of your bank account on the day your pay is deposited. You won’t have a chance to spend it.”
As time goes by, you – and not the Canada Revenue Agency – will have the benefit of that money and the interest it makes for you…in your home, your children’s education or your own income at retirement time.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 2 of 20
Taxes and RRSPs depend on each other
Capital gains refer to increases in wealth that can result from a number of sources, in a number of different ways. At the personal level, for example, the sale of assets like stocks or bonds can trigger capital gains that the Canada Revenue Agency considers to be a form of income. Fifty per cent of a capital gain is subject to tax at whatever your personal rate of taxation might be.
Depending on your income level and the amount of capital gains incurred during a taxation year, those taxes can become substantial. But with proper planning, you can postpone and/or reduce the amount of taxes you have to pay.
“Stocks, bonds, mutual funds and other investments can be held in your RRSP, which can allow you to effectively defer capital gains,” Parkinson says. “There, they can continue to increase in value and not be subject to tax until they’re withdrawn. The strategy is that when you do withdraw them, it will be after you retire or at another time when your marginal tax rate is considerably lower than when you first purchased the investment. Remember, however, unlike a capital gain, gains on RRSP assets are 100 per cent taxable when that appreciation is received as an RRSP withdrawal. So, this planning may not be appropriate where your marginal tax rate in retirement won’t decline substantially.
“Another good reason to hold these assets in your RRSP is that upon death, they can be transferred to your spouse or common-law partner’s RRSP without diminishing his or her own contribution room,” Parkinson adds.
There are restrictions and conditions that apply, so it’s best to consult a Chartered Accountant or qualified financial planner to make sure you meet the eligibility requirements.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 3 of 20
Monthly public transit passes get you tax credits
Riding the rails may be a little easier to take knowing that you can deduct the costs.
“If either you, your spouse/common-law partner, or your child who was under age 19 on December 31, 2009, commutes on buses, streetcars, subways, commuter trains or ferries, you can claim a non-refundable federal tax credit for eligible public transit costs,” advises Chartered Accountant Gary Kopstick, Senior Tax Partner, Soberman LLP, Toronto.
“This credit applies to monthly passes and weekly passes, as long as four consecutive weekly passes are purchased. Certain electronic payment cards also qualify for the credit. The passes or cards must be purchased for use by you, your spouse/common-law partner or any of your children under the age of 19. If you are entitled to this credit, keep your receipts and passes.”
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 4 of 20
Canada’s most under-used business tax incentive
Ironically, one of Canada’s largest tax-incentive programs is also one of the most under-used. Make sure that you look into it to determine if your business qualifies.
“To be eligible for the Scientific Research and Experimental Development (SR&ED) program, business owners do not have to be in a high-tech industry,” notes Chartered Accountant Jeff Nightingale, Partner, Lipton Wiseman Altbaum & Partners LLP in Toronto.
Various changes enacted in 2009 make this program even more accessible for businesses. There are also new filing requirements. Specific details are available on the Canada Revenue Agency (CRA) website at http://www.cra-arc.gc.ca/sred/.
Ask yourself the following questions: Do you develop new products? Are you in the process of developing one, or even improving existing products? Are you improving methods by which you produce an existing product? Are you spending money on improvements that will have an environmental impact on your manufacturing process? Are you developing techniques to reduce waste? Do you write computer software?
“If you answer ‘yes’ to any of these questions, you could qualify for a very generous cash refund and/or tax credit at a rate of up to 35 per cent,” explains Nightingale.
To qualify, the SR&ED activity must be approved from a scientific perspective. It’s important to be aware that the tax legislation surrounding this program is complicated and those seeking the credit may require expert advice.
For further information about the SR&ED program, contact a Chartered Accountant.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 5 of 20
How much should you save for taxes?
When you withdraw savings from an RRSP or RRIF, the amount becomes part of your taxable income that year. So is it wise to put a certain amount aside to pay the taxes?
“Many things can affect the amount of income tax you’ll have to pay when you withdraw RRSPs or RRIFs,” says Chartered Accountant Gordon Jessup, a Partner with Fuller Landau LLP in Toronto.
“With RRSPs, there is a withholding tax on withdrawals. But it may not be enough to offset the taxes you’ll have to pay,” he explains. “On a lump sum of $5,000 or less, it’s 10 percent; from $5,000 up to and including $15,000, it’s 20 percent; and over $15,000 it’s 30 percent.
“You may have to pay quarterly tax instalments, and people can be surprised at the amounts the first time,” he continues. “Especially when you add in other sources of income, like CPP and Old Age Security, which can even be clawed-back if your total income exceeds a certain level.”
But there are ways to cut the amount of taxes you owe.
“If you’re retired and taking the minimum amount from an RRIF, there may be little or no withholdings,” Jessup explains. “And, under the right circumstances, as much as half your pension income can be split with your spouse. Depending on how much he or she earned during the year, doing so can significantly reduce the taxes you’d otherwise have to pay.”
Each individual situation is unique, Jessup cautions. To be sure you’re aware of all your options and opportunities, it’s wise to consult a Chartered Accountant who will help evaluate your personal circumstances and come up with a plan that’s right for you.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 6 of 20
Tax benefits for the self-employed
“‘If you are self-employed, make sure you know about limitations to available tax benefits,” says Chartered Accountant Gary Kopstick, Senior Tax Partner, Soberman LLP, Toronto.
“For example, if you operate out of two offices, including one in the home, the costs related to the home office may not be deductible. In addition, generally only 50 per cent of meals and entertainment expenses you incur for the business are deductible (although there are exceptions to allow for a larger deduction in some cases).
“You may also deduct a portion of Canada Pension Plan (CPP) contributions that represent the employer’s share to a maximum of $2,118.60 for 2009.”
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 7 of 20
The Home Renovation Tax Credit
There’s a one-time-only bonus this year for many taxpayers bitten by the home-improvement bug.
“The Home Renovation Tax Credit (HRTC) came into effect on January 27, 2009,” says Chartered Accountant Ken Bell of Kenneth Bell CA Professional Corporation in Brampton. “It applies to work performed or goods acquired before February 1, 2010. Even materials purchased by January 31, 2010 but not yet installed are eligible. But if you’ve hired a contractor or third party and the job is not quite finished, only the work completed by the 31st of January 2010 can be claimed, even if you paid in advance.”
Apart from that, the eligibility requirements are exceptionally broad.
“If you’re Canadian and own any real estate for personal use – including a vacation home or cottage – you can claim the HRTC on a huge variety of upgrades,” Bell continues. Renters and landlords are out of luck, but even condo owners can get in on the program if the corporation does the work and allocates a certain amount of the cost to each owner in the complex.
“For the first $1,000, you get nothing. But for every additional dollar up to $10,000, you can claim a maximum of 15 per cent,” he continues. “And, if you own the property jointly with other family members who are not your spouse or partner, (like brothers and sisters sharing a cottage) you can each claim up to that $10,000 maximum.”
What the Canada Revenue Agency is prepared to call a “home renovation expense” is extensive. Bell explains it this way. “If what you buy, fix or add is attached to land or a building, for the most part, you can claim it, but no furniture or other things that can be taken with you when you move.”
Furthermore, the CRA is allowing the tax credit to be combined with other home upgrade programs, like the ecoENERGY Retrofit-Homes grant provided by Natural Resources Canada. You can claim expenses associated with the audit itself, and double-, even triple-dipping – claiming expenses under two or three different programs at any level of government – is encouraged.
“The government doesn’t want to see receipts, although it’s important that you keep them,” Bell explains. “To claim the HRTC, you’ll need to enter the following information on Line 368 of Schedule 1 of your tax return: the date of the work or the purchase; the name of the contractor, if any; the GST number; a description of the work and the total amount, including all taxes; and you must also complete Schedule 12.”
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 8 of 20
Split pension income to save taxes
Even in this difficult economy, there is good news for retirees – you can realize significant potential tax savings by splitting eligible pension income with your spouse.
“Income splitting is a way for families to reduce their total tax liability by shifting income to the lower income earner from the higher earner,” explains Chartered Accountant Sunita Arora, Partner, Lipton Wiseman Altbaum & Partners LLP in Toronto. “A pensioner can transfer up to 50 per cent of eligible pension income to his/her resident spouse or common-law partner.”
However, there are some specific eligibility rules, according to Arora. “Income from a registered pension plan can be split, regardless of the recipient’s age. Income from a RRSP (Registered Retirement Savings Plan) annuity, RRIF (Registered Retirement Income Fund) or deferred profit-sharing plan annuity is also eligible if the recipient is 65 years of age or older.”
The RRIF and RRSP annuity payments are also eligible for splitting before the age of 65 if they are received due to the death of a spouse.
Pension splitting is an important part of the retirement-planning process. It lowers the taxable income of the spouse with the higher marginal tax rate and raises the taxable income for the lower-income spouse – a transfer that produces a combined tax saving.
“Just be careful in determining the amount of pension to be split. If too much income is transferred to the lower-earning spouse, it could trigger a clawback of some Old Age Security (OAS) benefits and also affect the couple’s ability to claim certain personal tax credits,” advises Arora.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 9 of 20
Claim tuition fees and more!
Are you thinking of returning to school now that you’ve retired? Or do you have a student pursuing post-secondary studies in your family?
Chartered Accountant Gary Katz, Partner, Logan Katz LLP Chartered Accountants in Ottawa, advises you to take advantage of tax savings while you burn the midnight oil.
“You can claim a tax credit for tuition and related expenses, including library, lab and computer fees paid during the school year. Full-time students can also claim an education amount of $400 federally ($478 for Ontario taxes) per month, and part-time students can claim $120 ($143 for Ontario taxes) per month for each full- or part-month in attendance.”
Is a family member helping you financially? Any unused portion of education, tuition and textbook amounts are transferable to a supporting spouse, parent or grandparent up to a maximum of $6,141 per person for Ontario taxes. (The federal limit is $5,000.) Any remaining unused amounts can be carried forward and claimed by the student in a subsequent year.
“While books, student fees, parking and equipment can’t be deducted,” says Katz, “a federal textbook credit of $65 per month can be claimed by full-time students, and $20 can be claimed by part-time students, eligible for the education tax credit.”
Other potential tax-saving opportunities also exist – including a tax credit for interest on student loans, child-care expenses, transit passes, rent/accommodations and moving expenses.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 10 of 20
Special tax treatment for bankrupt business
Are you part of a small business that is facing insolvency or bankruptcy? Tax breaks may offer some welcome relief at a very difficult time.
“Dispositions of small business shares or debt may be deductible,” says Chartered Accountant Karen Slezak, Tax Partner, Soberman LLP, Toronto.
“When a small business corporation becomes insolvent or goes bankrupt, creditors and investors in the business may suffer significant losses. In many cases, 50 per cent of these losses will qualify for special tax treatment as Allowable Business Investment Losses (ABILs).
“Unlike capital losses that can only be deducted against capital gains, ABILs can offset income from any source. Unused portions of an ABIL can be carried back three years, with the balance carried forward for 10 years. After 10 years, any remaining ABIL balance becomes a net capital loss, which carries forward indefinitely to be used against capital gains.”
Several requirements must be met for the loss on a small business share or debt to be considered an ABIL.
“If there is an arm’s length sale of shares or a qualifying debt, the corporation must be a small business corporation. That is, a Canadian-controlled private corporation where all or substantially all (interpreted to be 90 per cent) of the fair market value of the assets are used principally (50 per cent or more) in an active business carried on primarily in Canada,” explains Slezak.
Obviously, it is difficult to sell worthless shares or debts, so typically a special tax election is filed by the taxpayer with his/her tax return to trigger recognition of the loss. The election deems that the shares or debt were disposed of for nil proceeds and immediately reacquired after the end of the year for nil cost, as long as:
· In the case of shares, the small business corporation has become bankrupt or insolvent during the year, and neither it, nor a corporation controlled by it, carries on business.
· In the case of a debt, it can be established that the debt is uncollectible, and the debt was incurred for the purpose of gaining or producing income.
Are there any other considerations when claiming an ABIL? “Yes,” says Slezak. “Any previously claimed capital gains deduction may reduce the amount qualifying as an ABIL. Also, there may be adverse tax implications to the corporation that should be considered as a result of the debt-forgiveness rules.”
For further information about Allowable Business Investment Losses, contact a Chartered Accountant.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 11 of 20
Employee or independent contractor – it makes a difference at tax time!
Are you self-employed? Make sure you understand the requirements set by the Canada Revenue Agency (CRA) if you want to take full advantage of the tax benefits.
“These criteria are very specific and spell out who is an employee and who qualifies as an independent contractor,” explains Toronto-based Chartered Accountant Leonard Goldberg.
“To claim deductions as an independent contractor, you should generally meet the following criteria: you should have full control over how you conduct work for clients, provide all of your own equipment to complete the job, and deliver these services as a registered business. You should also have income from other clients, and sub-contract to other suppliers. The final determination is always a question of fact,” explains Goldberg.
For more information on self-employment and to determine if you meet the criteria used to define an independent contractor, visit the CRA website at
http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-08e.pdf
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 12 of 20
Moving Expenses
If you recently moved to another part of Canada for work or school, you can recoup at least some of the costs by claiming them on your 2009 tax return.
“You can deduct your moving expenses against taxable research grants and employment income as long as you moved at least 40 kilometres closer to the new educational institution or place of work,” says Chartered Accountant Gary Katz, Partner, Logan Katz LLP Chartered Accountants in Ottawa. “You can also claim any direct travel expenses such as gas, meals and lodging, lease-cancellation charges and some costs related to the sale or purchase of a home.
“Just be aware that your deduction for expenses must not exceed any income you earn in your new location, including the taxable portion of any grant or scholarship you may have received. Any excess expenses can be carried forward and deducted in the following year,” advises Katz. “And, if you moved outside Canada but still retained Canadian residency, you may also claim moving expenses.”
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 13 of 20
Tax tips for expats-to-be
If you’re thinking of leaving the country to live or work for an extended period of time, don’t sever all ties with Canada until you’ve done the math.
“It can be tempting for expats or retirees to think about moving permanently to another country where the tax rates are lower, but if you give up your Canadian residency, it could amount to a deemed disposition of all your assets,” says Walter Benzinger, a Chartered Accountant in Windsor.
“If you cease being a Canadian resident and file a final tax return, you could be liable to pay capital gains tax on the deemed proceeds you receive from liquidating many of your assets,” Benzinger explains. “The sale of a house that is – or was – your principal residence will likely be tax-exempt, and you can choose to keep your Canadian RRSPs, or cash them out after you emigrate and pay a withholding tax. But that might be where it ends.”
It is common practice for expats to rent out their homes while they are living in other countries, creating a deemed disposition of the house due to a change in use to an income-producing purpose
“You need to really look at the tax rates and tax laws in the country where you’re planning to live. Should you move somewhere where tax rates are about the same as ours, severing ties here might not be to your advantage. As a Canadian resident, any income tax you pay in another country can usually be credited against what you owe here. And, because Canada doesn’t tax us on the value of our estates as the United States does, it can be a distinct advantage to maintain your Canadian residency, especially as your income and estate increases.”
But clearly, a life-decision like this calls for careful examination on a number of levels. “Don’t let the tail wag the dog and allow a very personal decision to be unduly influenced by a desire to save on taxes,” Benzinger advises.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 14 of 20
Tax-Free Savings Accounts – a Canadian product
Beginning in 2009, residents of Canada were given a fantastic new savings tool courtesy of the federal government: the ability to put up to $5,000 each year into a Tax-Free Savings Account (TFSA).
“For Canadian tax purposes, the income earned in a TFSA is tax-free to the
recipient following normal Canadian tax rules, “says Chartered Accountant Mark Feigenbaum in Thornhill, who is also a U.S. Attorney and Certified Public Accountant.
But this is one made-in-Canada product that can’t necessarily be exported south of the border.
“If the TFSA holder is a U.S. citizen, it’s possible that the income earned in the account won’t grow on a tax-free basis for U.S. tax purposes,” he cautions.
“Therefore, if you happen to be a U.S. citizen who has earned some income in a TFSA, you may need to include this amount on a U.S. tax return. And, of course, you must consider that there may not be any, or at least sufficient, Canadian foreign-tax credit available to offset this U.S. tax payable.”
To determine what rules and parameters apply to your own personal situation, Feigenbaum recommends you consult a Chartered Accountant who is well versed in both U.S. and Canadian tax rules and issues.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 15 of 20
Childcare costs can be deducted
“If you pay childcare expenses, you may be entitled to some welcome tax relief,” explains Chartered Accountant Sam Zuk, Partner, Soberman LLP, Toronto.
The maximum amounts deductible for childcare expenses are $10,000 for a disabled child; $7,000 for children under age seven, and up to $4,000 for other eligible children (generally age 16 and under). In most cases, the spouse with the lower earned income must claim the childcare expenses.
“To claim these expenses, it’s important to pay for them by the end of the year. Remember to obtain a receipt in the event that the Canada Revenue Agency (CRA) asks for evidence of payment in the future,” advises Zuk.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 16 of 20
Pay taxes on instalment plan
“If you’re required to pay your taxes in instalments, don’t put off making the payments or sending in your return,” advises Chartered Accountant Byron Beswick, Senior Tax Manager, Soberman LLP, Toronto.
If you fail to pay the required amounts on time, the Canada Revenue Agency (CRA) could charge you substantial interest and penalties.
Not all taxpayers are required to pay tax instalments. Individuals may need to pay instalments in 2010 if their net taxes payable (plus Canada Pension Plan contributions payable) exceed $3,000 in 2009 and either 2007 or 2008.
“CRA determines who is required to pay instalments and mails those taxpayers instalment reminders. If you don’t receive notification of your instalment amounts from CRA, you may not have to make the instalments, even if your tax liability exceeds the $3,000 threshold in the relevant years,” says Beswick.
“If you do receive notification of your instalment amounts from CRA, remember that it’s based on past information. If you’re certain that your current year’s unpaid liability when you file your return will be less than your total instalments as determined by the CRA, you can consider reducing your instalment payments.”
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 17 of 20
Your home could be a tax write-off
Does your home do double duty as your office?
“If so, you may qualify to deduct the maintenance costs, provided you meet one of two tests set by the government,” says Chartered Accountant John Wonfor, Partner, National Tax, BDO in Toronto.
“Your home office must be your principal place of business, or it must be used exclusively for business purposes on a regular and continuous basis for meeting clients, customers or patients.
“As long as you work primarily out of your home office (defined as more than 50 per cent of the time), you don’t have to use your home office exclusively for business purposes to qualify for home-office expense deductions,” continues Wonfor. “The office can be combined with personal living space. When this is the case, you would pro-rate the expenses related to your home office according to how much it’s used for business and how much for personal needs.”
A business loss cannot be created by claiming home-office expenses. The undeducted amount of expenses can be carried forward indefinitely and can be subtracted from future income that is made from that same business.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 18 of 20
Use payroll deductions to save money
If you look at how much tax you’re paying now and think ahead, you could save some extra dollars down the line.
“If you will have excess tax deductions or non-refundable tax credits in 2010, request reductions in your payroll income tax withholdings early in 2010,” says Chartered Accountant Ruby Lim, Senior Manager at PricewaterhouseCoopers LLP in Toronto.
Employees claiming tax deductions or non-refundable tax credits (that will result in a refund of income tax) can complete Form T1213 to request reduced payroll tax deductions. This may apply to employees claiming deductions for registered retirement savings plan (RRSP) contributions, childcare expenses, support payments, employment expenses and/or carrying charges and interest expense on investment loans. It may also apply to employees with non-refundable credits for charitable donations and tuition fees.
“Alternatively, employees with non-employment income can request to increase the amount of payroll income tax withheld. This will avoid tax owing for the year that may trigger interest expense and/or penalties,” advises Lim.
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 19 of 20
Financial help for families with the universal childcare benefit
Financial help and income-splitting opportunities are on the way to families who apply for the Universal Child Care Benefit (UCCB) program.
According to Chartered Accountant Karen Slezak, Tax Partner, Soberman LLP, Toronto, this program allows families to receive up to $1,200 per year for each child under the age of six, paid in instalments of $100 per month, per child.
The application form is available on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/E/pbg/tf/rc66/README.html.
Slezak notes that the UCCB payments that your family receives will be taxable to the lower income spouse.
“There is an income-splitting opportunity. If you decide to invest the UCCB payments in the name of your child, any income earned on the investment will be taxable to the child – not you. If the child’s taxable income (the federal personal amount) is below $10,320 in 2009, the income will not be subject to federal or Ontario tax.”
Brought to you by the Institute of Chartered Accountants of Ontario.
Tax Tip 20 of 20
Tax incentives for employed tradespeople
“If you are an employed tradesperson, you may be eligible for federal tax incentives,” says Chartered Accountant Giancarlo Di Maio, Partner, PricewaterhouseCoopers LLP in Windsor.
According to Di Maio, the Apprenticeship Grant is a taxable, $1,000 federal cash grant (maximum $2,000 per apprentice) offered to registered apprentices who have successfully completed their first or second year/level of a qualifying apprenticeship program in one of the Red Seal Trades – an interprovincial standard of excellence for industry.
In addition, a taxable $2,000 federal cash Apprenticeship Completion Grant is available to apprentices who complete their apprenticeship program and receive their journeyperson certification in a designated Red Seal trade.
“Further, tradespeople who acquire eligible tools for employment can claim a deduction to a maximum of $500 per year if the total cost of the tools exceeds $1,000. To qualify for the tools’ deduction, an employer must certify that the employee is required to have the tools as a condition of, and for use in, the employment,” says Di Maio. “As an additional benefit, the employee will be eligible for a rebate of the GST paid on the portion of the purchase price of the tools that qualify for the deduction.
“Apprentice vehicle mechanics can claim both the tradespeople’s tools deduction and the apprentice vehicle mechanics’ tools deduction, which allows a deduction for the cost of eligible new tools acquired in a year that exceeds a threshold.”
Brought to you by the Institute of Chartered Accountants of Ontario.