Whether you are Employed or Independent Contractor (Self-Employed)?

Many a times the question arises whether you are employed or self-employed. The reason behind this distinction is because of the difference in its tax treatment. Employed person have limited scope and ability to claim the expenses against employment income. Self-employed has a wider scope in claiming the expenses deduction.

Difference in the tax treatment between employed and self-employed:

Payroll Tax Deduction:

If you are employed, deduction of Canada Pension plan (CPP) and Employment Insurance (EI) premium are made and there are no such deductions for the self-employed.

Payroll deductions are made with reference to the gross income for salaried tax payers and self-employed pay CPP only on the net income from business (i.e. Gross Revenue-expenses).Also, Self –employed pay double the CPP deduction i.e. employee and employer part.

EI Deduction:

Salaried employees have the advantage of claiming EI benefit when they are willing and able to do the job but cannot find the same due to being laid off from their current jobs.

Self-employed do not enjoy this advantage.

How to determine whether you are employed or self-employed:

Canada Revenue Agency has outlined following factors to in their publication (RC 4110- “Employee or Self-Employed?) in determining the above distinction.

Tools and Equipment:

Normally, an employee is supplied by his employer the tools of the trade required to perform the necessary job function. In case of self-employed contractors tools and equipment are brought by themselves to discharge their function/tasks.

Control and Direction:

If you are an employee, you have a control and direction from your employer with regard to the manner and the time limit within which the task needs to be performed.

Self-employed contractors determine, by and large their own methodology and completing the assigned task. A deadline or the time limit is specified upon the contractors with little control on the manner in which the task needs to be performed. Besides this, self-employed can appoint their own employee without the employer’s permission. In case of employment, employee needs to obtain prior permission before appointing anyone.

Chance of Profit or Risk of Loss:

If you are self-employed you are your own boss and solely responsible for any loss and likewise share the profit that you make out of your own activity. Employee although many a times will share profit of the employer to a limited extent are never called upon to share the loss made by the employer.

There are some other factors such as Integration of your activity with that of the employer’s etc.in deciding the above distinction.

In case where there a very thin line of difference, following factors must be looked into in deciding whether you are an employee or self-employed.

Ø  Whether you work the sets numbers of hours per day

Ø  Manner in which you can finish the given task or assignment

Ø  Whether you are a member of the group life, drug and dental plan of the employer

Ø  Whether you carry your own insurance in completing the assigned task

Ø  Whether you are paid without submitting the time sheet and whether you are having an outstanding receivables

Ø  Whether you bring in your own tools and equipment to finish the work

Ø  Manner of direction and control provided by the employer

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 Planning Through Corporate Owned Life Insurance

Corporate owned life insurance policy as the name suggest, is a policy owned by the corporation. Corporate owned life insurance policy is a measure of tax planning mostly by the private family owned corporation.

Normally, under a life insurance policy there could be three different people/entity. The first one is the owner of the Life insurance policy who owns the policy. Second one is the life insured whose life is insured under a policy and third one is the beneficiary of the policy nominated. Beneficiary is the one who is designated to receive the proceeds upon death of the life insured.

Treatment of Life Insurance Policy Premiums Paid:

Life insurance premiums paid by life insured or the corporation for that matter is not tax deductible except under the following three circumstances:

1)      When the life insurance policy is placed as a collateral.

2)      When the Life insurance policy is donated to the Registered Charity.

3)      When the Life insurance premiums paid are under a registered plan.

However, there is a wonderful tax planning available through corporate owned life policy as under:

What is involved?

Private Corporation can take out the life insurance policy on the life of the owner-shareholder or the key person of the company and the beneficiary nominated should be the corporation. This is because if the corporation is not designated to be the beneficiary of the policy, but instead the beneficiary is the family member of the owner of the corporation, it will be treated as the taxable benefit to the shareholder and taxed accordingly in the hands of the owner-shareholder. When the beneficiary is the corporation, it does not give rise to any benefit in the hands of the owner-shareholder. However, the premiums paid by the corporation is not tax deductible.

Although the premiums paid by the corporation are not tax deductible, it has a tax advantage compared to individual shareholder paying the premiums in his individual capacity.

Let us take an example, if the corporation is paying every month, $100 per month on the life policy of its owner-shareholder, the total pre-taxed annual cost of the insurance premiums will be $100 X 12=$1,200/0.85=$1,411.76, considering 15% tax rate for the small business corporation on its first $500,000 of taxable income. However, if the same premiums are paid by the owner-shareholder in his individual capacity, then the pre-taxed cost of the premiums will be much higher depending upon the marginal tax bracket of the owner-shareholder. Assuming that the tax rate for owner-shareholder is 40%, the effective cost of the premiums on the pre-taxed basis will be $100 X 12=$1200/0.60=$2,000.

As you observe it could be more beneficial to take out the insurance policy through privately owned corporation.

Death Benefits- its Tax Treatment and Capital Dividend Account:

As regards the payment of proceeds of the life insurance policy upon death is absolutely tax free, which is considered a great advantage.

Now the death benefits paid will be paid out to the corporation upon the death of the owner-shareholder and it will be tax free.

The death benefit paid out to the corporation minus the Adjusted Cost Base (ACB) under the tax rules forms part of a Capital Dividend Account from where the money can be distributed tax-free to its shareholder.

This way, the ultimately the proceeds payable upon the death can be drawn tax free by the family members of the owner of the corporation and effective cost of the premiums paid could be much lower without creating any tax disadvantage to its shareholder.

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.

Spousal RRSP and Its Withdrawal-Tax Treatment

As we all know, we can make contribution to a Spousal RRSP and take a deduction on our tax return. Spousal RRSP is the one where contributor is the tax payer and the annuitant (i.e.one who receives the benefit of the funds) is the spouse of the contributor. Contribution to the Spousal RRSP uses up contributor’s RRSP limit.

However, it is important to note the tax implications of the withdrawal from Spousal RRSP. If there

Is a withdrawal made by the spouse of the contributor within first three years of its contribution, it is treated as an income of the contributor and the withdrawal made after three years is treated as an income of the income of the spouse. This provides us with an excellent tax planning opportunity in the sense that contributor can avail of the higher tax break due to his higher marginal tax rate and spouse can pay lower taxes due to her low marginal tax break.

However, here is the caution note for such withdrawal. When there is a withdrawal from Spousal RRSP,

the question that arises is how to ascertain as to out of which funds the spousal RRSP withdrawal is made. Canada Revenue Agency will treat the withdrawal being made from the latest Spousal RRSP contribution.

As a result, if you made any contribution to the spousal RRSP three years before its withdrawal, it will be 

added as an income of the contributor and not the spouse and can have significant tax liability on your tax return.

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.

Principal Residence Sale

If you sold any of your Principal Residence in the year 2016, you need to report the same on the tax return for the year 2016. The Capital Gains arising on the sale of your Principal Residence is of course not taxable but however, a disclosure is required on the Income Tax Return for the year 2016.

If you fail to comply with the new disclosure requirements of Canada Revenue Agency rule there could be a penalty up to $8,000

The rules are not that very simple at times and therefore it is best to see a tax professional in this regards

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.

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.