Canada Revenue Agency (CRA) Payment Options Become Easy

As we all know, when we owe the taxes on the Individual tax return we have time up to April 30 to pay this amount.

Couple of options are there to pay to CRA

1)      Pay online to CRA by visiting CRA website and clicking on the Online Services Option or

2)      Pay to CRA in the codified payment form which we get upon filing our Income Tax Option or

3)      Send the cheque in favour of Canada Revenue Agency.

Starting this year, CRA has started another convenient option of payment when you go to registered E-filer for filing your Income Tax Return. You can provide the details of your bank account, Institution Number and Branch Number to E-filers so that the same can be included on your Income Tax Return. You can mention any desired date of payment on or before April 30to avoid any late payment charges. However, the date that you mention for taking out the funds from your bank account has to be at least five business days forward to be honoured by CRA.

This is a great facility especially, when you file your income tax return in the last date and April 30 is nearing.

Please remember that this facility is only for Individual Income Tax Return as of now.

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.

Sale of Principal Residence-Changes In Tax Rule, Disclosure And its Tax Treatment

Under the current rules of Income Tax in Canada, if you dispose of your principal residence, the capital gains that you earn is tax free. Your principal residence could be your detached, semi-detached home, town house, condominium, bungalow, trailer boat or any other mobile home where you ordinarily live. You can choose only one home as your principal residence per year. In case if you own more than one residential property as your residence, you will have to make your choice of principal residence per year.

In case of a married taxpayer, you and your spouse have to choose only one home as a principal residence.

Let us illustrate with the help of one example, you have bought your principal residence in the year 2005 and you lived there until tax year 2013 in which you buy another residential property and lived there for some time before you disposed off the second property in 2016.

Choosing your first residence as your Principal Residence for all the tax years:

Under the circumstances, you have a choice of either treating the first residential property (which was bought in the year 2005) as your principal residence for the tax year 2005 to 2016 and pay the capital gains tax on the second residential property that you disposed off

Or

Choosing your second residence as your Principal Residence for all the tax years:

Consider your second residential property (bought in 2013) as your principal residence and not pay any capital gains tax at the time of its disposition. However, it should be noted that your first residence will not be considered as principal residence for the years 2014, 2015 and 2016.The capital gains tax will be payable at the time of disposition of your first residence.

Change in the Tax Rules:

1)      Until now there is no requirement to disclose if you sale your principal residence during the year. Now, if you sale such a residence, it will have to be disclosed along with the exemption on Schedule 3. This applies after sale of your principal residence on or after October 02, 2016

2)      Also, you should note that if you use part of your principal residence for producing income e.g. when you rent out your basement or whole residence or when you use if to claim home office expenses, you may have to pay capital gains tax on the part of your home that was utilized for claim of home office expenses or income producing.

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.

New Home Accessibility Tax Credit (Schedule 12)

New Non-refundable Credit

For 2016 and subsequent years, a qualifying individual or an eligible individual can claim a non-refundable tax credit for eligible expenses incurred for work performed or goods acquired for a qualifying renovation.

The Maximum Amount of Credit:

The maximum amount of eligible expenses that can be claimed for an eligible dwelling is $10,000 ($20,000 in the case of involuntary separation) per year for a qualifying individual resulting in a non-refundable tax credit of $1,500 ($10,000X15%).

Where there is more than one qualifying individual for an eligible dwelling, the total expenses claimed by a qualifying and all eligible individuals for a year cannot be more than $10,000.

The claim can be split between the qualifying individuals and eligible individuals. If they cannot agree on what amount each person can claim, the CRA will determine the amounts.

Who is Qualifying Individual?

A qualifying individual is someone who is eligible to claim the disability tax credit at any time in the year or and individual who is 65 years of age or older at the end of the year.

An eligible individual includes the spouse, common law partner and supporting relatives of a qualifying individual. A supporting relative is an individual that has claimed the amount for an eligible dependant (Line 305), credit for an infirm dependant (line 306) or caregiver amount (line 315).

What is Eligible Dwelling?

An eligible dwelling is a housing unit located in Canada and it must be a principal residence of the qualifying individual at any time in the tax year. In cases, where a qualifying individual has more than one principal residence, the total of all the eligible expenses cannot exceed $10,000 for the purpose of this credit.

What is Qualifying Renovation?

A qualifying renovation is a renovation or alteration that is of an enduring nature and an integral part of eligible dwelling.

The renovation must allow the qualifying individual to gain access to or to be mobile or functional within the dwelling or reduce the risk of harm to the qualifying individual within the dwelling or gaining access to the dwelling.

Generally, the item that is bought and that becomes a permanent part of your dwelling house is not eligible for this credit.

The eligible renovation can be either done by the outside professionals like electricians, plumbers, fitters, carpenters, architects and can qualify for the purpose of this credit or it can be done by the taxpayer himself. If this is the case then value of all the materials and items bought for the purpose shall qualify for the credit but not the notional value of the labour.

Separate Schedule 12:

A separate Schedule 12 has been prescribed for its calculation.  

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.

Year-end tax planning – some steps to take before December 31 (December 2016)

While tax planning is best approached as an ongoing, year-round activity, the fact is that for most Canadians the subject of taxes becomes top of mind only a few times a year. Typically, that happens when the annual tax return is due, when the annual RRSP contribution deadline is looming, and for some, at the end of the calendar year.

There is, in fact, good reason to spend some time considering one’s tax situation as the end of the calendar year approaches. With the notable exception of (in most cases) contributing to one’s RRSP, any steps taken in order to reduce one’s income tax bill for 2016 must be finalized before December 31^st of this year.

What follows is a list of the most common tax considerations that arise as the end of the calendar year approaches.

Timing of medical expenses

Where Canadians incur medical expenses which aren’t covered by government health insurance or by a private medical insurance plan, they can often claim a tax credit to help offset those expenses. Unfortunately, the computation of such expenses and, in particular, the timing of making a claim for the credit, can be confusing. The basic rule is that qualifying medical expenses (a list of which can be found on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/medical/#mdcl_xpns) in excess of 3% of the taxpayer’s net income, or $2,237, whichever is less, can be claimed for purposes of the medical expense tax credit.

Put in practical terms, the rule for 2016 is that any taxpayer whose net income is less than $74,600 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $74,600 will be limited to claiming qualifying expenses which exceed the $2,237 threshold.

The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2016 will produce the greatest amount eligible for the credit. That determination will obviously depend on when medical expenses were incurred, so there is, unfortunately, no universal rule of thumb which can be used.

Medical expenses incurred by family members – the taxpayer, his or her spouse, dependent children who were born in 1999 or later, and certain other dependent relatives – can be added together and claimed by one member of the family. In most cases, it is best, in order to maximize the amount claimable, to make that claim on the tax return of the lower-income spouse, where that spouse has tax payable for the year.

As December 31 approaches, it is a good idea to add up the medical expenses which have been incurred during 2016, as well as those paid during 2015 and not claimed on the 2015 return. Once those totals are known, it will be easier to determine whether to make a claim for 2016 or to wait and claim 2016 expenses on the return for 2017. And, if the decision is to make a claim for 2016, knowing what and when medical expenses were paid will enable the taxpayer to determine the optimal 12-month waiting period for the claim.

Finally, it is a good idea to look into the timing of medical expenses which will have to be paid early in 2017. It may make sense, where possible, to accelerate the payment of those expenses to December 2016, where that means they can be included in 2016 totals and claimed on the 2016 return.   

Year End Tax Planning Steps for Individual Taxes.

There are so many tax planning steps that you can take to be better prepared for your taxes of 2016.Few of the common steps are suggested as below:

Donation/Charity Tax Credit:

In case if you want to avail of the donation/charity tax credit, please ensure that you donate on or before December 31 to take a tax credit on your taxes. Donation tax credit is allowed @ 15% on the first $200 amount donated and thereafter the same is at the highest federal tax rate which is 29%.Few things should be noted with regard to the donation credit:

1)      Donation given by both the spouse are clubbed together for tax credit at the higher rate

2)      Donation made to the Registered Charity in Canada, Canadian Municipality, United Nations or an agency thereof or A Registered Canadian Amateur Athletic association qualifies for the tax credit.

3)      Donations can be claimed for any five years from the date of the donation. Obviously, it cannot be claimed twice.

4)      Please remember that the donations made to the Provincial police, lottery tickets or charity tournaments tickets purchased will not qualify you for this credit.

5)      In case if you are donating for the first time in last five years, you could be entitled to an additional tax credit @25% on the first $1,000 donation.

6)      You must obtain the proper receipt for its claim. You can also check from CRA’s website whether a particular charity is a registered one or not.

Medical Expenses:

You can claim medical expenses for any 52 weeks period ending in the current taxation year. However, the medical expenses that can be claimed have to be for the prescribed medicines. Also, the claim has to be reduced by the amount of reimbursement received by you either from your employer or insurance company or others. Vitamins and other health supplements are not entitled for the credit medical expenses.

Pl. make sure that you have the adequate supporting for the expenses claimed. Medical expenses that can be claimed are not necessarily the drugs tablets in the traditional sense but it also includes things like crutches, voice recognition software, travel and meal expenses necessary for medical treatment, note taking devices, voice recognition software and real time captioning for individuals with speech or hearing impairment, cost of rehabilitative therapy etc. 

You can claim the entire family’s medical expenses i.e. for you, your spouse and under 18 years of age children living with you (if any). Generally, it is beneficial for the lower income earning spouse to claim the medical expenses for larger tax credit since expenses over 3% of the net income can only be claimed on your tax return.

Child Care Expenses:

You can claim the child care expenses incurred for the purpose of earning income or for carrying out self-employment or for full time study. There are some criteria for computing the deduction. However, please make sure that you have the proper receipt to substantiate your claim of deduction and you should obtain the same immediately after the year end from the child care provider. You need the Social Insurance Number of the person if the child care provider is an Individual.

Public Transit Amount Credit:

Federal Government of Canada gives you the tax break for a monthly or weekly public transit passes (allowing unlimited ride on the week end).Tokens are not entitled for this tax credit. Hence, this includes train, bus and other forms of public transportation rides for the purposes of this tax credit. In case if travel by Presto Transit, you can print out the monthly journey reports from its website and you are entitled to the credit if you have more than 32 rides in a month.

Pl. make sure that you preserve all the monthly passes or print out the statements for the purposes of the tax credit.

Rent Credit In Ontario:

Ontario Province provides monthly benefit to you in case if you paid rent on Ontario and your family income is lower than the prescribed amount.

Therefore, it is advisable to obtain your rent receipt after the calendar year end. The rent receipt should contain the name, address and the contact number of the landlord, period of renting, and the address of the place rented, amount paid for the calendar 2016 and the name of the tenant among other details.

One consolidated letter can also be sufficient for the above purpose.

RRSP Investment:

In order to reduce the tax owing or increase the tax refund, you can make your investment in Registered Retirement Savings Plan (RRSP).However, this investment is subject to the limit and that can be found on CRA’s Notice of Assessment of last year. In case if you make investment over the limit, you are subjected to 1% per month penalty and interest on it.

You have time up to February 28, 2017 to make RRSP investment and deduct it on your 2016 tax return.

Make sure that you obtain the tax receipt for such a RRSP investment.

Superficial Loss:

In case if you incur the loss on the disposition of any asset and within a 30 days period (before or after the disposition), you buy back the same or identical asset then the capital loss is not allowed to be deducted on your tax return. Therefore, please make sure that you buy back the asset after a period of 30 days in order not to attract this provision. This mostly happens in the case of buy back of shares or securities.

Another round of Tax planning measures will be sent later.

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.

Tax Free Savings Account and its Tax Implications

Nature of Tax Free Savings Account (TFSA):

As we all know, investment in TFSA is a great way of tax planning. As the name implies, income earned in TFSA is tax free not only at the time of earning but even at the time of withdrawal from it. Any contribution made to TFSA is not tax deductible and at the same time not taxable upon its withdrawal.

However, investment made in TFSA is subject to the limit laid down by CRA. Each Canadian Resident who is 18 years or more is eligible to contribute to TFSA. If you did not invest anything in TFSA so far, you can contribute up to $46,500 in TFSA. However, in case if you invested in TFSA, the amount of investment will be reduced to arrive at the remaining limit of TFSA.

What happens when you withdraw from TFSA?

When you withdraw from TFSA, of course the withdrawal is not taxable but more importantly the fresh room is crested not in the year of withdrawal but only in the next year (after the year of withdrawal). This is very important because it is unlike Registered Retirement Savings Plan (RRSP) where the additional limit is created immediately (in the same year) upon the withdrawal from RRSP. Many taxpayers had been served with the notice of excess contribution in TFSA by Canada Revenue Agency (CRA) in the past years. Please note that excess contribution in TFSA (over the limit) is penalized by 1% p.m. for the period for which the investment exceeds TFSA limit.

TFSA and Designation of Beneficiaries:

When an investment in TFSA is made, beneficiary of this fund can be designated and this beneficiary will receive the funds in the event of the death of the tax payer. When such beneficiary is designated, beneficiary can contribute any amount he receives in his own TFSA subject to his unused contribution limit in his TFSA. Of course, inheritance is all tax-free.

A survivor who is a beneficiary has the option to contribute and designate all or a portion of a survivor payment as an exempt contribution to their own TFSA, without affecting their own unused TFSA contribution room, as long as they meet certain conditions and limits. For more information, see Designation of an exempt contribution by a survivor.

If, at the time of death, there was an excess TFSA amount in the deceased holder's TFSA account, a tax of 1% per month is applicable on the highest excess amount for each month in which the excess remained, up to and including the month of death.

Nominating a Successor Holder:

As against the nomination of Designated Beneficiary, what seems better tax planning is nomination of a Successor Holder. In this situation, the TFSA continues to exist and the successor holder assumes ownership of the TFSA contract and all of its contents. However, where the TFSA contract is a trust arrangement, the trust continues to be the legal owner of the property held in the TFSA.

Successor Holder can either separately and independently manage the Deceased Taxpayer’s TFSA and his own TFSA or the two TFSA accounts can be merged as well.

The TFSA continues to exist and both its value at the date of the original holder's death and any income earned after that date continue to be sheltered from tax under the new successor holder.

Except in cases where an excess TFSA amount existed in the deceased holder's TFSA at the time of their death, the successor holder's unused TFSA contribution room is unaffected by their having assumed ownership of the deceased holder's account.

The issuer will notify the CRA of this change in ownership.

The successor holder, after taking over ownership of the deceased holder's TFSA, can make tax-free withdrawals from that account. The successor holder can also make new contributions to that account, subject to their own unused TFSA contribution room.

If the successor holder already had their own TFSA, then they would be considered as the holder of two separate accounts. If they wish, they can directly transfer part or all of the value from one to the other (for example, to consolidate accounts). This would be considered as a qualifying transfer and would not affect available TFSA contribution room.

In certain cases, a survivor, designated as the successor holder of a TFSA, may not have a valid Canadian social insurance number (SIN), which is one of the eligibility requirements for opening a TFSA. If the survivor is a Canadian resident, they should apply to Service Canada to obtain a valid Canadian SIN.

If the survivor is a non-resident, they should request an individual tax number from the CRA by filling out Form T1261, Application for a Canada Revenue Agency Individual Tax Number (ITN) for Non-Residents.

Hope this helps clarifying some of the aspects of TFSA.

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.

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.