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.

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.