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.

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.