Issues Relating to Capital gains

1)      Meaning:

Capital Gains as the name suggests implies gain realized upon disposition of the capital asset. Capital asset could be an asset of any kind such as shares, securities, residential house or commercial offices, boat, trailer, car, any right in capital asset, debentures, bonds etc.

For Example, if the you buy shares at a cost of $9,970 and pay the buying commission of $30 and sell the same after some time at $15,030 and the selling commission is of $30, the capital gains will be worked out as follows:

            Sales Proceeds      -  $15,030

            Less: Buying Cost - $10,000

            Less: Selling Cost - $30

            Capital Gains=         $5,000

2)      Inclusion Rate:

Currently, only 50% of the amount of capital gains is taxed. Capital gains are taxed at the marginal rate of taxation. Marginal rate of taxes is the rate at which you pay the taxes for the current year. Another issues relating to the capital gains is that it arises upon the disposition of the capital asset. The word disposition means and includes sale, exchange, transfer, gift, extinguishment or relinquishment of an asset.

3)      Proceeds of Disposition:

When the asset is sold the proceeds realized from its disposition is called “Proceeds of Disposition”.

4)      Adjusted Cost Base:

The cost of buying the capital assets is referred to as “Adjusted Cost Base”. It also includes the cost of buying the asset

5)      When can you deduct Capital Gains and right to carry forward:

Another issue relating to capital gains is capital losses can be deducted only against capital gains and if there are no capital gains in the year in which the capital losses are incurred, it can be carried back three years and carried forward in future for an indefinite period.

6)      Meaning of Sale Proceeds:

Sales Proceeds could be either the sale price received upon sale of a capital asset or the compensation received upon the destruction or loss of insured assets or in case if the assets are compulsorily acquired by the government, the compensation received upon surrender of such a capital asset.

7)      Deemed Disposition:

The word deemed disposition is actually a fiction of law whereby it will be treated as if the capital asset is sold even if legal sale does not take place. Capital gains also include “Deemed Dispositions” which means that if you become a non-resident of Canada or if you throw your business assets from non-corporate form to a newly formed corporation, it will trigger the capital gains/losses implications. Likewise, the capital gains implications also arise upon the death of the tax payer. In all the cases of “Deemed Disposition” the proceeds of disposition will be the market value of the capital asset.

  

   

Home Office Expenses – What Costs are tax Deductible?

When you work from home, there is a possibility that you can deduct the home office cost on your individual taxes. Before we begin to explore as to what costs can be deducted for your taxes, let us understand under which situation the home office cost can be deducted.

The home office cost can be deducted when you have either employment income or income from business or profession. Of course the elements of deductible cost differs.

Let us discuss the deduction in case of self-employed individuals

There are two situations under which this cost can become deductible.

1)      When the Home Office is your principal place of business and

2)      When the Home Office is not your principal place of business

When Home Office is your principal place of business, it does not have to be used exclusively for business purposes. If, for example, a dining room table is used to run a mail order business and that room qualifies as principal place of business for the operation, the home office cost can be deducted for the dining room space.

If your home office is not the principal place of business, it must be used exclusively for the purposes of earning income. This requires that some part of home must be designated as home office for work and for no other purposes. Also, another condition in such a case will require that home office must be used to meet on a regular and continuous basis for meeting clients, patients and customers. You may want to refer to CRA (Canada Revenue Agency) circular IT-514 to get more details on this deduction

For your self-employed income, you can deduct rent, utilities,insurance on home,property tax and interest on mortgage proportional to you total home area.It is never advisable to deduct the CCA (Capital Cost Allowance) if it is your principal residence since claiming CCA will amount to losing of principal residence exemption and you may be asked to pay tax at the time of selling your principal residence.At the moment, there is no capital gains tax when you sell your principal residence 

In case if you are not self-employed and employed with any employer, the deduction for home office cost is granted provided if the same is used on a regular and continuous basis to meet customers or other persons in the course of carrying out the employments duties.

The following costs can be deducted for home office cost in an employment scenario:

If you earn regular salary income and no commission, then only rent and utilities are deductible and allocated to the home office portion. However, in case if your employment income includes commission income, in addition to the above two cost elements, you can also deduct the insurance on home and property tax allocated to the home office area.

Home Office cost is deducted generally in proportion of Home office square feet area to Total Home area and if the home office cost cannot be deducted fully against the employment income or business income, the same can be carried forward to the future year to offset against such income.

Tax Consequences of Late filing Of Individual Taxes,Late Payment of Taxes and Time Limit for Back Filing of Taxes

What are the consequences for late filing of individual tax returns and late payment of taxes and what is the time limit for filing the back taxes?

Consequences for Late Filing (Invites Penalty):

As you may be aware, the last day to file the Individual taxes in Canada is April 30. There is no provision under Canadian Income Tax Act for applying for an extension of time unless in the year of death of the taxpayer (minimum 6 months of time from the date of death is granted).

Self-employed taxpayers file their taxes latest by June 15 of the subsequent year.

Whatever may be the last date of filing the taxes, if there is any owing on the tax return, must be paid by April 30.

If the Individual tax return is filed late, there is a Flat penalty of 5% on the amount of owing and a recurring penalty of 1% pm penalty on the amount of owing. The penalty is levied for maximum 12 months’ delay. If this default is repeated twice in a period of three years, then the penalty doubles. For example, if the amount of tax owing is $1,000 on the Tax return and if it is delayed by 3 months, the amount of penalty for late filing will be 5% Flat + 3% delay penalty = 8% on $1,000 will be $80.

Late Payment of Taxes (Invites Interest):

Late payment of Taxes invite interest consequences and the interest is levied ay the CRA at the prevailing interest rate which is declared by CRA ahead of the next quarter. The current rate of interest is 5% per annum.

Back Filing of Taxes:

If you have missed filing taxes for previous years, there is nothing to worry. Current Income Tax Rules allow filing for last 10 years of taxes. The same rule applies for amending the tax returns for the previous years which are already filed with the CRA

What Are the Advantages of Filing Income Tax And Benefit Return When You have NIL Income or No Tax payable?

Even if you do not have any income during the year or it is less than the basic personal amount, it is still advantageous to file your Income Tax and Benefit Return due to the reasons mentioned below. Basic personal amount refers to the amount of income that a tax payer can make without paying any tax and it keeps on changing from year to year

Following are the benefits that one can expect to receive from tax return filing:

1.      Canada Child Tax Benefit is a Federally run program which allows tax free payments to parents who have children under 18 years living with them. It is allowed only in case if both parents file their taxes each year despite having NIL Income in the year. This benefit depends on the income of the parents, number of children and the provinces in which the taxpayer lives.

2.      You will be entitled to Universal Child Care benefit per child when you are in receipt of Canada Child Tax Benefits and you have children under 18 years of age living with you. This benefit is taxable in the hands of the lower income earning spouse.

3.      GST Credit is again a federal program, which grants tax free payments on a quarterly basis to the taxpayers who have filed their taxes each year. It is based on income and the rule is that the higher the income, the lower the amount of entitlement and vice-versa.

4.      You may be entitled to provincial benefits like Ontario Child Care Supplements when you file your tax returns each year. These are again tax free payments.

5.      There are certain other provincial tax free benefits that you may be entitled to when you file tax return such as Ontario Trillium Benefits which depends on the amount of rent or property tax paid during the year. Ontario Trillium Benefit payments are for taxpayers living in Ontario and depend on the income of the taxpayer.

6.      If you have small salary income or income from business, you must file your tax return since filing of the tax return will create an RRSP (Registered Retirement Savings Plan) limit in the following year and creating an opportunity to save money in RRSP and get a tax rebate.

7.      In case if you are claimed as a dependant on someone’s tax return (e.g. son or daughter claiming you), filing of your own taxes will make it easier for CRA to verify the dependant claim made by your near and dear ones.   

What Do You Do When You Have A T5 Slip in the Joint Name?

Many a times we have the T5 Slip (Statement of Investment Income) in joint or more than one name and the question arises as to how do we divide the income mentioned on the T5.

The answer is to divide the income on the slip in the ratio of original contribution of deposit by each joint holder.

Also, please be careful if the income is mentioned in foreign currency since such income needs to be converted in to Canadian Dollars before the split is affected.  

Be Aware of Fraudsters Purporting to Be Calling from CRA

Please be aware that during the tax season many a times you receive a call from someone who purports himself to be calling from CRA and says that an arrest warrant has been issued because there are outstanding tax dues that you have not paid

Please be aware of the following:

·         Canada Revenue Agency (CRA) would never phone to intimate you that an arrest warrant has been issued for non-payment of tax

·         CRA would never advise you to meet in person to compromise your outstanding dues

·         Before CRA initiates the enforcement actions, it will send your file to Collection Department and it will make several calls before any drastic actions are taken

·         Before your file is handed over to Collection Department, there will be a series of reminder letters that will be issued to you if you owe any tax dues

·         Please make sure that your address is updated with CRA so that you receive all the correspondences from them

·         If you receive such a call, notice the incoming telephone number and report it to Crime Stoppers

·         If you want to verify whether you owe any tax dues, please call up CRA on 1-800-959-8281 or log in to “My Account” and verify it yourself