Sunday, April 11, 2010

Tax Planning Strategies

Give me a call for more information about any of these points.

Newly announced changes to CPP, increases to small business deductions, and eco-friendly grants have ushered in fresh opportunities to maximize tax refunds.

Thanks to significant changes in 2008 and 2009, in addition to dependable, long-standing tax planning strategies you now have many approaches to defer taxes and save and for years to come.

Are you green?

EcoEnergy retrofit program
Are you going "green" at home? Cash grants are available to homeowners making eco-friendly renovations to their residences. The annual grant (up to $5,000 with a lifetime maximum of $500,000 is based on the effectiveness the upgrade—not the cost. The home must be assessed by a certified Natural Resources Canada energy advisor in order to be eligible. Check out www.ecoactic for more information.

Public transit passes
A non-refundable, eco-friendly tax credit is available for dedicated public transit riders. Total annual costs for travel passes one week or longer are multiplied by the lowest personal tax rate to calculate the credit.

Thinking about Retirement?

Retirement income

In June 2009, the federal government announced significant changes to how the Canada Pension Plan (CPP) will be paid out to Canadians. Effective January 2012, you will no longer have to prove that they've stopped working in order to receive CPP benefits. This new rule could be beneficial to seniors who ease slowly into retirement through part-time and consulting work.

The collection of CPP benefits will continue to be available as early as age 60 and as late as age 70. But the recommended changes will reduce benefits received prior to age 65 by 6% per year as opposed to the current 5%. They will also increase benefits received after age 65 by 7% versus 5% beginning January 2011 for those selecting later retirement, and starting January 2012 for those selecting earlier retirement.

Until January 2012, though, it’s still a good idea to select earlier retirement whenever possible. After that, the decision to apply for CPP early and accept the lower income should be based on other factors such as whether your client needs the income to cover lifestyle expenses and longevity in their family.

Corporations and income splitting

Small business deduction increase
The 2009 federal budget increased the small business deduction to $500,000 from $400,000. Several provinces have also raised their deduction limit to match. The increased deduction increases the amount of business income earned by Canadian-controlled private corporations that can be taxed at lower rates.

Salary to spouse can increase retirement income
Many corporation owners already take advantage of the ability to split income by paying their spouse a salary. Take further advantage of this opportunity by increasing your spouse's salary to the Yearly Maximum Pensionable Earnings (YMPE), which this year is $47,200. This simple step will increase the spouse's opportunity to earn the maximum available CPP income in retirement as well as the higher RRSP contribution room created by the extra income.

Personal and corporate savings
When the higher-income-earning spouse owns a holding company and makes the majority of the income, they should plan ahead for income splitting in retirement. Maximizing contributions to the lower-income spouse's spousal and personal RRSP while saving the balance to the holding company (owned solely by the higher-income-earning spouse) will allow for tax-deferral and reduced taxation pre-retirement. Retirement income from the corporation will be attributed to one spouse and Registered Retirement Income Fund income can be attributed to the other, allowing for reduced individual taxation.

Loans to family members
The CRA’s prescribed interest rate for family loans fell to 1% in April 2009 and continues to cruise at a low altitude (rates change every quarter, so look these up). Locking in a family loan at this low rate and thereby shifting income earned on the investment of these funds to a spouse or other family member—including a minor child—who has little or no other income could provide significant tax savings for your clients. Ensure that any loan is governed by a written agreement outlining repayment terms as well as the interest rate at the time of the loan to ensure attribution rules do not apply.

Tax credits and grants

First-time Home Buyers’ Tax Credit
Worth up to S750, this credit applies to all homes purchased after Jan. 27, 2009. The credit is calculated by multiplying the lowest personal income tax rate by $5000. The first time home buyer (and spouse) must not have owned a home for any of the four preceding years. If the home buyer qualifies for the Disability Tax Credit (DTC), they do not have to meet this rule to qualify for the credit

Capital losses
The recent economic turmoil may provide a tax-savings opportunity. Capital losses in stock portfolios may allow you to claim back some of the taxes you paid on capital gains in sunnier times.

Transfer of unused tax credits to spouse
Some non-refundable tax credits can be transferred to a spouse if you are unable to claim them. Do not allow those credits to go to waste. Transferring the credits for age amount, pension income amount, disability amount, and tuition and education amounts to a spouse will maximize the tax savings available to the whole family.

Tax-efficient accounts

Open a Registered Disability Savings Plan
The Registered Disability Savings Plan (RDSP) provides individuals with disabilities, and their family members, the opportunity to save in a tax-deferred environment. Like a Registered Education Savings Plan (RESP), the RDSP tax-shelters the invested funds until withdrawal. Anyone eligible for the DTC may establish an RDSP. Parents and guardians can establish RDSPs on behalf of minor children. The maximum lifetime contribution limit is $200,000, but there is no annual contribution limit. The Canada Disability Savings Grant and the Canada Disability Savings Bond provide additional contributions to RDSPs for those who pass the income tests. More information on this useful plan is available at and

RRSPs and Spousal RRSPs
You know them and you love them. The RRSP may be a comparatively old dog, but it's loyal and dependable. Encourage the higher-income-earning spouse with the greatest contribution room to contribute to a spousal RRSP. Whilethe federal government now allows income splitting on RRIF income, one never knows when a tax law could be repealed.

Tax-Free Savings Accounts
Maximum annual contributions are $5,000, with no lifetime limit. While contributions are not tax-deductible, the growth is tax-sheltered and funds from the account can be withdrawn tax-free at any time. What's best is that withdrawals create new contribution room the following year; with an RRSP, if the client's contribution is used, it's gone, regardless of withdrawals. Withdrawals will also not affect eligibility for federal tax credits or income-tested benefits, something seniors who benefit from pension income credits and Old Age Security will want to be aware of.

Adapted from an article published March 2010 in AE Report

Thursday, April 1, 2010

10 Tax Filing tips

Tax-planning should be a year-round activity. There are strategies each of us can employ to make sure we pay no more tax than we need to. Below are the top ten tax filing tips.

1. Report all your income - Don't let a missing tax slip or receipt prevent you from filing on time. The CRA states that if you're unable to provide a slip by the due date, simply attach a note to your return stating the name and address of the payer, type of income involved and what you're doing to get the slip to help avoid any penalties.

2. Pool your donations - Last year's goodwill may result in both federal and provincial donation tax credits. While all donations under $200 are credited at 15% federally plus between 4% to 11% provincially, donations over the $200 threshold are eligible for a 29% federal credit plus 11% to 21% provincially (ignoring additional provincial surtax savings, where applicable). So pool your donations with your spouse or partner when filing a return to receive the higher donation credit.

3. Split that pension - Pension splitting is a tax planning technique that you can only take advantage of come tax filing time and allows Canadians who received eligible pension income to split up to half of that income with their spouse or common-law partner. Aside from benefiting from a spouse or partner's lower rate of taxation, you may also be able to preserve some or all of the age credit and avoid or minimize the Old Age Security benefits claw back.

4. Write off your kids - While you can't actually "deduct" your children for tax purposes, you may be eligible to claim the "child amount" - $2,089 per child - entitling you to a 15% credit against taxes payable. If your minor child worked part time during the year, consider filing a tax return on their behalf which will start to establish RRSP contribution room for use in future years. Be sure to explore the many opportunities for tax savings available to post-secondary students and children with lower incomes.

5. Claim those renovations - As the dust settles on home renovations completed before February 1, 2010, now is your one and only chance to collect your Home Renovation Tax Credit (HRTC), a 15% non-refundable tax credit for eligible renovation expenditures made to your home or vacation property. The credit applies to any eligible expenses over $1,000, up to a maximum of $10,000, producing a maximum credit of $1,350. If you own a condominium, common expenses may be eligible for this tax credit as well.

6. Claim legal fees - If you lost your job in 2009, you may be able to make a claim for legal fees that you paid last year. The Income Tax Act permits employees to deduct legal expenses "to collect or to establish a right to salary or wages owed by an employer or former employer." You can also deduct legal expenses paid to collect or establish a right to a pension benefit or retiring allowance. The term "retiring allowance" is broad enough to include damages or settlements for wrongful dismissal.

7. Defer stock option benefits - If you exercised employee stock options to acquire shares of your publicly traded employer's stock in 2009, this may be your last chance to defer paying any tax liability on the stock option benefit until the year of sale. A stock option benefit deduction equal to 50 per cent is available to tax the stock option at capital gains-type rates, even though it's still classified as taxable employment income. Note that the ability to defer paying tax on future stock option exercises is restricted after March 4, 2010, as a result of the recent 2010 Federal Budget.

8. Report any offshore property investments - If you owned any foreign property investments, outside of a registered plan, totaling more than $100,000 in 2009, be sure to complete the T1135 or the "Foreign Income Verification Statement" as the penalties for failing to disclose are severe: $25 per day, to a maximum of $2,500. While historically the CRA used to waive these harsh penalties for first time, non-filing offences, in recent years it has been assessing them on first time offences.

9. Don't be late! - Those owing tax must pay remaining balances by midnight on Friday, April 30th to avoid a 5% penalty on unpaid balances and an additional 1% each month thereafter to a maximum of 12%. While the majority of Canadians must file by the April 30th deadline, self-employed individuals and their spouses or partners have until June 15th, 2010 to file a return, but any balance owing is still due by April 30th.

10. Avoid that refund! - Last, but not least, if you've already filed your 2009 tax return, chances are it's because you're expecting a refund. To help pay less tax all year round, complete a Form T1213 from the CRA which, once approved, will enable your employer to reduce the amount of tax withheld at source.

Adapted from