Tax implications of Buying a new Home

All of us know the surge that we are going through in the housing market in Provinces like Ontario and British Columbia. I just want to analyse the tax implications of buying a new home.

New home that you may buy could either fall in the category of Principal Residence or not. Principal Residence could be any dwelling unit such as Detached home, Semi-detached home, townhouse, condominium etc. When you use the new home for your personal residence purposes, it is regarded as Principal Residence. Between two spouses, there is only one Principal Residence Exemption.

Tax implications:

1)      If you buy a new home that is your Principal Residence, you are entitled to a Federal tax credit break called “Home Buyers Amount” of $5,000 giving a tax break of $750 from the Federal tax liability.

2)      If you were renting before buying your new home, now you can no longer claim your rent for Ontario Trillium Benefits or any other rent based credit in other Provinces. However, you can claim the property tax paid during the year for the above credit in the province in which it is allowed. Of course, these benefits are income dependant. In the year of buying new home, you can claim both, the rent for the period of renting and property taxes paid during the year. This can be found from lawyer’s Statement of Adjustment Statement”.

3)      If and When you dispose off this Principal Residence, there will be no Capital Gains Tax liability under current rules.

4)      You may be able to claim proportionate Home Office Expenses as a deduction if you are running your self-employed business from this home. If you are employed and want to claim proportionate share of home office expenses, your employer must certify this for you in Form T2200. Depending on the tax situations, you may be able to claim the proportionate share of rent, utilities, insurance on home, property tax, interest on mortgage. Principal payment of mortgage is never allowed as a deduction since it only increases the value of your home.

5)      Please be careful that in trying to claim the above expenses, never claim proportionate share of Capital Cost Allowance (CCA) since claiming the same would amount to forgoing the Principal Residence status as per tax rule and at the time of disposition of your Principal Residence you may be asked to pay the proportionate tax on the Capital Gains earned.

6)      If the new home bought does not represent your Principal Residence and if you let it out for a rental income, you will be taxed on the net rental income earned from that home. In arriving at net rental income you can deduct, the rental expenses as described above for the area rented.

7)      Capital Gains earned at the time of disposition of home described in 6) above will be included at 50% of the amount of capital gains and you will be liable to be taxed at your marginal rate of taxation.

8)      If the new home that you bought is not your Principal Residence (and you already have another home as your Principal Residence), you can file an election to treat your new home as Principal Residence provided you have stayed in your new home for some time at least. This Election will be valid for 4 years. This Election is important in calculating your Principal Residence Exemption.     

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

Federal Disability Tax Credit

What Is Disability Tax Credit?

If you think you are suffering from any kind of disability as laid down in the Income Tax Rules you should avail of this tax credit. This is a tax credit for tax payers who are disabled. Disability is defined as severe and prolonged physical or mental impairment. You could be entitled to a huge Federal tax credit of $7,899 which means a tax savings of 15% of $7,899=$1,184.85.

Disability Defined:

Severe and prolonged is defined as disability which is expected to last for at least for 12 months from the date of its onset. It requires you to obtain the certificate of disability in the prescribed Form T2201-Disability Tax Credit Certificate from the registered Doctor or any other professional who is authorized to certify the disability. Some of the other professionals who could certify your disability are Optometrist for vision, speech language pathologist for speaking, Audiologist for hearing, Occupational therapist or physiotherapist for walking etc. Disability definition requires that your ability to perform the “Basic Daily Living Activity” should be markedly restricted. People who are undergoing the therapy (e.g. Dialysis) for an average of 14 hours or more per week to keep the vital body functions intact are eligible for this tax credit.

How to Claim it For the First time:

When you want to claim your disability for the very first time, the rules require that a paper tax return needs to be sent while claiming the Disability tax Credit for the first time. This means that such tax returns cannot be efiled or Netfiled for the first time. It takes around 8 to 12 weeks’ time for Canada Revenue Agency (CRA) to ascertain whether the disability tax credit should be allowed or not. CRA reserves its right to ask further questions to determine your disability credit.

Can Disability Tax Credit be transferred?

Yes, if your disability tax credit is not fully utilized, the same can be transferred to your parents, grandparents, child, grand child, spouse, sibling, uncle, aunt, niece or nephew.

How far back can you claim the Disability tax Credit?

The year for which this tax credit can be claimed depends on the year mentioned in T2201 Certificate. Ideally, you can go back to last 10 years and revise the tax returns for those years. When this tax credit is claimed, lots of tax refund comes back to the taxpayers.

Additional Supplement for a Disabled Child under 18 years of Age:

When the child under 18 years of age is disabled, an additional supplemental tax credit of $4,607 is allowed and the same can be transferred if the disabled child does not have the enough income to fully utilize this tax credit.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable under individual cases. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

What is RRSP?

What is RRSP?

RRSP stands for Registered Retirement Savings Plan. It is essentially savings for future and your retirement. It is a saving plan that is registered with Canada Revenue Agency.

What are the tax consequences of saving in RRSP? :

When you save money into your RRSP, you get the tax break and the year in which you withdraw the money from it, is the year of its taxability. You can withdraw from your RRSP after a minimum period of 90 days. The growth inside the RRSP plan is tax free. You can invest in either fixed income securities or variable securities as per your risk tolerance ability. Earlier you invest into your RRSP, better it is from its growth perspective.

You can invest into your RRSP up to the end of 60 days from the year end and still entitled to a tax break for the same year e.g. if you invest into your RRSP either in January 2017 or February 2017 and  will still be counted as tax break for the year 2016. Of course, you cannot invest into RRSP over the limit of RRSP. RRSP limit is determined in a particular way as laid down in the Income Tax Rules but the simplest thing to find out your RRSP limit for the year 2016 will be to see the Notice of Assessment for the year 2015 sent to you by CRA. If you invest into RRSP over your limit plus $2,000, you could be liable to a penalty of 1% per month on the excess amount invested.

Types of RRSP:

Investment into your RRSP could be either regular or spousal. Spousal RRSP means that the annuitant     (beneficiary) of the fund is your spouse. Of course, the contributing spouse is entitled to a tax break and it is counted against the limit of contributing spouse. If the spouse withdraws this RRSP before the end of three years from the date of investment, it is treated as an income of the contributing spouse.  

Can you withdraw from your RRSP tax free?

Yes, you can withdraw from your RRSP on a tax free basis if such a withdrawal is qualified one. There are two qualified withdrawal from RRSP, 1) First Time Home Buyer Plan Withdrawal and 2) Life Long Learning Plan withdrawal. Both the withdrawals have its own conditions to qualify.

Up to what age you can contribute to your RRSP?

You can contribute to your RRSP up to the age of 71 years. If you are contributing to spousal RRSP then spouse age of 71 years is regarded for contribution.

What happens after the age of 71?

After 71 years of age you can either withdraw all the money and pay tax on such withdrawal which is an unwise move since half of the RRSP withdrawal will be lost into the payment of taxes. Second option for you is to convert it to RRIF (Registered Retirement Income Fund) which will continue to invest your money and at the same time allow you to make steady withdrawal each year for your living and pay minimum taxes. Another option for you is to purchase an annuity for you. There are different types of annuities available on the market place.   

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable under individual cases. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

Where Should You Invest Your Savings?

As we all know, there are many options for us to invest our savings. You have options to invest in RRSP (Registered Retirement Savings Plan), TFSA (Tax-Free Savings Account), RESP (Registered Education Plan), paying down our mortgage etc.

Investment in RRSP Vs. Tax Free Savings Account:

Investment in RRSPs is subject to limits mentioned by Canada Revenue Agency in the Notice of Assessment. The way an RRSP works is, you get tax benefits in the year in which you invest in RRSP and you pay tax in the year of withdrawal. You derive benefits on an overall basis if the tax benefit exceeds the potential tax liability in future.

If you are looking to buy your first home (you have to qualify as a first time home buyer) in Canada, it could be tax advantageous for you to invest in RRSP because your withdrawal under “First Time Home Buyers’ Plan” is not taxable.

However, if you anticipate your future earnings in a higher tax bracket, RRSP investments may not be tax advantageous and you may want to consider investments in a TFSA. TFSA investments do not qualify for any tax benefit when invested and is not taxable when withdrawn (i.e. no gain, no loss). Keep in mind that investments within TFSAs must be within the prescribed limits (by CRA).

RESP VS. TFSA:

Investment in RESPs provide you an annual guaranteed return in the form of Federal Government Grant of 20% on you contribution (20% on $2,500). This investment is for your children’s post-secondary education and it should be supplemented with your other savings. The RESP savings are tax deferred in the sense that the growth inside the plan grows tax free and is taxable in the hands of the child when it is withdrawn.

Paying Down Mortgage vs. TFSA:

If you are considering to invest in a TFSA vs. paying down your mortgage, it probably makes sense in most cases to reduce your non-deductible interest as soon as possible.

In case of any specific question, please feel free to write at piyushmody64@gmail.com.

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable under individual cases. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.

Tax dates to keep in mind in June 2016

Please note following dates in June 2016.

June 15:

Individual Business Tax Return:

The last date to file the income tax return for individuals having business income is June 15. However, the tax due if any, should have been paid in full by May 02,2016 (since April 30, was a weekend and the next working day was May 02,2016).

If the tax return is not filed by June 15, there will be penalty consequences of 5% Flat penalty on the amount of tax owing plus 1% per month recurring penalty.

If tax in full was not paid by April 30, 2016, interest on the amount of owing will be charged by Canada Revenue Agency (CRA) as per quarterly interest rates declared by them ahead of the quarter. Currently, for the second quarter it is @5% per annum.

Advance Installment of Tax:

June 15 is the last date for payment of advance Income tax installment for individual taxpayers in case if you estimate that your tax liability for the year 2016 is likely to exceed $3,000. This is the second payment date after March 15 being the first installment date for the year 2016. The next installment dates for the year 2016 will be September 15 and December 15, 25% of the total tax due at the end of the year is due on each installment.

Interest for deferment of tax will be payable at the relevant rates declared by CRA for each quarter.

Payroll Tax Payment:

June 15 will also be the deadline for payment of payroll tax in case you own your own corporation and have taken out salary in the month of May from your corporation. Delay in payment of payroll tax by more than 10 days will attract 10% of the payroll tax as penalty.

Corporate owners who have deducted in their taxes management salary as a matter of tax planning have to remember to take out their salary within 180 days of the close of the corporate tax year. By that standard if your corporation has a December 31^st year end, you should remember to take out each month a salary and pay payroll tax to avoid the disallowance.

Non-Resident Tax Return(June 30):

In case if you are a non-resident, deriving income from property and having income by way of interest, rent, royalty, dividend etc. you have to pay 25% tax on the amount of such income each month. 25% tax needs to be remitted on the gross amount of income by way of rent, interest, dividend etc. each month. However, it can be remitted on the net amount of income (after deducting the expenses) each month provided CRA’s permission is sought in advance. CRA grants such permission and prescribes the condition of filing the tax return by June 30.   

For such non-resident tax returns, the deadline for filing is June 30.

Should you have any questions or want to more, feel free to call 647-988-9591 or write to us at piyushmody64@gmail.com

Disclaimer: Any discussion on this blog relating to the tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there could be a different tax strategy in a particular case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situation or a problem, you are advised to seek the professional advice.

Post Assessment Scrutiny of Rent, Tuition and Education Amount

Canada Revenue Agency (CRA) as indicated in my earlier blog carries out Post Assessment Scrutiny in Spring-Summer after most of the tax returns have been filed with them.

CRA carries out post assessment scrutiny for many items of income, credits and deductions claimed on the taxpayer’s return of income. Rent paid in Ontario and Tuition and education amount is very common and therefore discussed below:

Rent Paid in Ontario:

If you lived in Ontario during and at the end of the year 2015, you can claim rent payments made during 2015 on your tax return for Ontario Trillium Benefit payments. Ontario Trillium Benefit payments are made by the Ontario Government by way of Direct Deposit payments from July to June each year. If the total benefit amount is below $300, Ontario Government usually pays it in one shot.

Rent payment is one of the parameters for deciding the amount of Ontario Trillium Benefits and when audited by CRA, it looks for verification of the following aspects:

1)      The Rent payment should be confirmed by the landlord who received the rent during 2015 either by way of a letter or monthly receipts issued by the landlord. In the absence of both, copies of cancelled cheques or bank drafts are acceptable as evidence.

2)      Monthly receipts should show the relevant details such as the name of the taxpayer who paid the rent, amount of rent paid, month for which the rent was paid, address for which the rent was paid.

3)      The rent payment should be for a principal residence which means that you should be living in the place for which the rent is claimed.

4)      If the you changed your residence during the year, separate receipts/letter should be provided for each residence.

5)      Lease agreements cannot be provided in the place of rent receipts since CRA looks for proof of payment and legality of tenancy.

Tuition and Education Credit Claimed:  

CRA Looks for following details when the Tuition and Education Amount is claimed on the Tax Return:

1)      The amount of Tuition fees paid.

2)      The education months for which tuition fee paid.

3)      The name of the course/program for which it is claimed.

4)      The name of the Institution who issued the receipt.

5)      The name of the taxpayer who claimed it.

6)      The tuition fees receipt should be printed and not handwritten.

If the above proofs are not submitted within a period of 30 days normally, CRA will disallow the same and can allow the claim when the proof is submitted after 30 days.

What is Post Assessment Scrutiny of CRA?

What is the Process?

After you file your Income Tax and Benefit Return for the year 2015, the Canada Revenue Agency would assess your Income Tax Return within its specified time limit and release an Income tax refund, if any.

Why Post Assessment?

After issuing Notice of Assessments to tax payers, Canada Revenue Agency (CRA) undertakes the program of conducting Post Assessment scrutiny of the tax returns filed by the tax payers. This is done in order to have faith in the self- assessment system of filing tax returns. A self-assessment tax system means you assess your own tax owing or tax refund.

Time Period Allowed:

As a part of conducting this program, CRA requests various tax documents and tax slips, in support of the tax payer’s claim on his income tax return already filed. CRA normally provides 30 days’ time period to taxpayers to submit the documents to them. In case if the tax return is e-filed, they may ask e-filers to submit the tax documents in addition to asking the tax payer for the same.

In case if no response is received either from the e-filer or the tax payer, CRA will disallow the claim made on the income tax return and ask for the tax owing. E-filers are registered with CRA and therefore CRA is able to track them and communicate with them.

Not all the returns are selected for the post assessment scrutiny but only a small percentage of the tax returns are selected for it.

Selection Criteria:

The selection for the post assessment scrutiny is very objective and not subjective. CRA selects income tax returns based on objective criteria determined each year (e.g. a claim made on the particular line of the income tax return, unusually large amounts of claim made or apparent mistake claims).

Tax Documents submitted after the Time Limit:

If the documents asked by CRA are not submitted within the specified time limit, they may be admitted by CRA later on when the documents are submitted after the time limit as well. However, in the meantime CRA will ask for the tax owing due to the disallowance of the claim.

Therefore, it is extremely important to make the claim on your income tax return when you have the adequate documents in support of your claim (e.g. rent claim made in Ontario for claiming Ontario Trillium Benefit). The taxpayer must ensure that he has a rent receipt before such claim is made on his income tax return.

 What happens If you disagree with the reassessment of CRA?  

 In case if you disagree with the reassessment of CRA, you can formally object to their reassessment within 90 days from the date of reassessment.