Amending the Excise Tax Act part 1

The federal government's plan to amend the Excise Tax Act, which includes the definition of "financial services," should be stirring people up everywhere! The proposed changes could cause people to pay extra fees for managing investments, broker fees for stocks, bank fees and more. As the majority of Canadians do not have enough for retirement already, this change would make it even harder to obtain retirement for many Canadians. This plan to amend the act would also cause many people in the financial industry to have to make drastic changes in all their reporting and cash flow activity. The Investment Counsel Association of Canada (ICAC) is urging the government to reverse its plan, saying that the modification would impose a "burden of paying more tax for professional investment management services on Canadians at a time most cannot afford it.” This change could also affect people’s Pensions, Retirement Savings, and more!

Making your Mortgage Interest Tax Deductible

Introducing a powerful way for you to turn the largest debt of your lifetime into annual tax refunds, knock years off your mortgage, and build a larger retirement portfolio at the same time, using legal tools from the CRA. Because you are able to deduct interest paid on money borrowed to invest it is all about paper trail. To be able to claim this deduction you must be able to show that the borrowed money did get placed into a qualified investment. The first step to making your mortgage interest tax deductible is to get a re-advanceable mortgage, such as a home equity line of credit. Next you must get as much liquid cash as you can from assets and investments. Use this liquid cash to pay down your mortgage, and then reborrow the same amount that you paid down. Use this newly borrowed money to purchase new qualified investments and you now have a legitimate tax deduction on that portion of your mortgage interest. Now with any tax savings or other lump sums of money you get, continue to pay down your mortgage, reborrow and invest. Use this method to continue to increase your tax deduction and build your retirement portfolio!

Interest and Carrying Charges Deduction

If you borrowed money to invest you may be able to deduct the interest and charges associated with the borrowed funds. The main exception to this is if the borrowed funds were put into an RRSP, TFSA or your personal residence. However, if it is a qualified investment and you are claiming investment income, you may be able to deduct the interest and fees paid on the borrowed funds, fees for managing the investment, safety deposit box fees, associated accounting fees, brokerage fees and investment counsel fees. If you have a mortgage on your personal residence and you have other assets or investments that can be turned into cash you may be able to begin transitioning your personal residence mortgage so that you are able to deduct some or all of the interest paid. Considering personal mortgages are one of many peoples’ biggest expenses why not make the interest a tax deduction. To learn more on this see our blog “Making your Mortgage Interest Tax Deductible.”

Allowable Business Investment Losses (ABIL)

A business investment loss results from the actual or deemed disposition of certain capital properties, including a share of a small business corporation or a debt owed to you by a small business corporation.

You may also have such a loss if you are deemed to have disposed of, for nil proceeds of disposition, a debt or a share of a small business corporation. For a loss to be claimed in this situation a small business corporation must owe you a debt (other than debt from the sale of personal-use property) that is considered to be bad debt at the end of the year. Also, if at the end of the year you own a share of a small business corporation that has gone bankrupt, is insolvent, or the individual that you do not deal with at arm’s length will be deemed to have realized an offsetting capital gain, then you may also qualify for an Allowable Business Investment Loss. The majority of ABIL claims are from people who had an outstanding shareholder loan in their corporation when it closed. If you think you may have an ABIL from prior years or have one coming up please do come and speak with us!

Tips on Tax Carry Forwards

Some tax credits and tax deductions can be carried forward. If you or your spouse are unable to use specific tax credits and tax deductions during a year, and your unable to split them with your spouse then do check to see if you are able to carry them forward. Some tax credits that can be carried forward include tuition and education amounts, student loan interest and charitable donations. Some tax deductions that can be carried forward include moving expenses, employment expenses and losses. Losses are very powerful and not only are you able to carry most losses forward, but some losses can even be carried back to get taxes back from prior years. Remember that Capital Losses need to be applied against Capital Gains, however Non Capital losses can typically be applied against any income. To Carry a Loss back you must complete a T1A – Request for Loss Carry Back. Remember also that if you have missed something on a prior year’s tax return you can complete a T1 adjustment to amend that prior year’s tax return and receive a refund from tax you paid in prior years

Employment Expenses

Are you or someone you know employed and paying for expenses that are not reimbursed by your employer? Many people do not know that employment expenses can be deducted. For example if you had to carry tools for work, needed to drive your vehicle or needed a computer for work and you had to pay for the items you may be able to deduct them on your taxes. If you were reimbursed for these expenses you would not claim them on your taxes, however if you were reimbursed for them, but your employer included the reimbursement in your T4 income, then you would claim the expenses. The key to claiming these expenses is getting a T2200 (Declaration of Conditions of Employment) signed by your employer. CRA typically requires this for each year you are claiming expenses. Business Owners deduct all kinds of expenses, why can’t employees deduct some as well!

Moving Anyone?

Did you move recently or are you planning on moving. As long as you moved at least 40 kilometers and you are now closer to where you work or go to school you can claim moving expenses. Eligible expenses include transportation, storage costs, traveling expenses (including vehicle, food & lodging), cost for up to 15 days of temporary accommodation and food, and any lease cancellation fees if you rented your old residence. If you owned your residence and sold it you can deduct the costs associated with selling the residence, including real estate commissions, legal fees, advertising and mortgage payout penalties. If the residence you are moving from is still vacant you may claim up to $5,000 of overhead costs. If you are purchasing the new residence you are moving to you may also deduct any of the associate costs with the purchase. You may also deduct incidental costs associated with moving, such as new licenses and address changes. The amount of moving expenses you can claim in a year is directly proportionate to your employment or self employment income. If your moving expenses are higher than this income, then you will only claim moving expenses up to the amount of your income and then carry forward the amount that is over your income to future years. As you can see moving expenses can be a quite large tax deduction, so if you move ensure you deduct all your expenses!

Using a Private Health Service Plan (PHSP)

A Private Health Service Plan, also referred to as a PHSP or Cost Plus Plan, is a legal plan within CRA’s guidelines whereby a company can legally deduct medical, dental and vision expenses. For some people with larger medical or dental bills this turns out to be a substantial savings. Typically a person who is the owner or shareholder of their company must take out money from their business to pay for these expenses, thus they are typically taxed on that money personally and they don’t get any tax deductions. You may be asking, “Well, don’t I get a tax credit for medical expenses?” You may receive a small tax credit for medical expenses, but it is only a small percentage of what you can save with a PHSP. For example let’s say you have a Corporation and you, as an employee, want a $2,500 laser eye surgery. With a PHSP the after tax cost is $2,375, derived from the 2,500 cost plus a 10% admin fee less corporate tax savings (14% in Alberta) However, the after tax cost to you as an individual could be close to $4,100, derived from the $2,500 cost plus the taxes paid on the money you took out of your corporation to pay for the eye surgery. The more the medical, dental and vision expenses…the more the savings!

Utilizing Shareholder Loans

Shareholder Loans are a powerful tool when you have a private corporation. You may loan your Corporation excess funds that you have and receive it back at anytime tax free. You may also take short term loans out during a fiscal year as long as you pay it back within the year. Another way to use a shareholder loan is to put assets into your corporation. This works similar to selling an asset to the corporation. When an asset is sold to the Corporation, you do not have to take the money right away. In fact the Corporation may need the asset now, but not have the money to purchase it outright. You many sell the asset to the corporation without the corporation paying now, but instead owing you the money later down the road, when it has the money and/or when you need the money. Many people take Shareholder “Draws” out of their Corporation throughout the year and then at the end of the year determine if this shareholder draws are in fact dividends or wages.

Utilizing Dividends

If you were a shareholder of your private Corporation then you may be able to receive Dividends from your Corporation. Canadian Dividends are a very tax advantageous type of income due to the large Dividend Tax Credit that comes with them. The Corporation can only issue dividends in the amount of positive retained earnings. Retained Earnings is simply the sum of profits and losses, less dividends, throughout the life of the Corporation. Dividends are paid out after the Corporation pays its Corporate Tax, which is currently 14% for Private Corporations making under $500,000 active net income in Alberta. If Dividends are your only source of income you may be able to make up to $35,000 without paying any personal tax. If you have other tax credits and tax deductions, then this number continues to get larger, paying no personal tax. You also pay no CPP or EI on dividends. Dividends are issued to Shareholders 18 or older, and may be issued to Holding Companies tax free, and to Trusts that are Shareholders.

Using your Personal Exemptions

Every tax paying Canadian has a Personal Exemption, called the Basic Personal Amount on the Tax Return. The Federal Personal Exemption for 2009 is $10,320 and the Provincial Personal Exemption for 2009 is $16,775. This means you can make up to $10,320 without paying any Federal Tax and $16,775 without paying any Provincial Tax. If one spouse makes less than either personal exemption then the higher income earning spouse can claim the other spouses’ unused portions of the exemptions. In the case where one spouse has no income, the other spouse may claim the full exemptions of the other spouse. Also for single parents, you may claim your child as an “equivalent to spouse” and claim double exemptions both provincially and federally. Using the Personal Exemption is key in tax savings, and if the couple has a corporation that is the main source of income then there is flexibility on how much income and what type of income each spouse is given.

2009 special tax incentives

Make sure you get every last deduction and credit available to you. In 2009 the government announced some temporary tax incentives for individuals and businesses. Some of the key ones include 100% deduction for computers purchased during the year for businesses, First Time Home Buyer’s Tax Credit, and the Home Renovation Tax Credit. A First Time Home Buyer can also be someone who has not owned a property for at least five years. If the person is common law or married, then the other spouse also must not have owned a property for at least five years. The Home Renovation Tax Credit was also new to 2009, and now it’s possible that we’ll never see it again. Ensure that you have receipts for the work that you’ve had done, and that it is not just some money paid to a family member that has helped you out. It should be legitimate work done by an actual company, preferably with a GST number as you are required to put all this information into the tax return. If you have less than $1,000 in renovations to claim you will not receive any tax credit, and remember that the maximum is $10,000. Therefore you are only claiming the portion between $1,000 and $10,000 ($9,000 total claim) at a 15% rate, thus the maximum Home Renovation Tax Credit for 2009 is $1,350.

What about tax credits?

Many tax credits can be split between spouses, and occasionally with parents and even grandparents. Splitting tax credits is especially beneficial when one spouse has little or no income. Every person in Canada is entitled to a personal exemption, where you can make up to an set amount of income without paying any tax on it. (currently $10,320 Federally and $16,775 Provincially) If one spouse is not using the personal exemption the other spouse may claim any unused portion. Some tuition and education amounts may be transferred to spouse, parents or grandparents. Disability amounts can be transferred to spouse or to parents. Age and Pension amounts can also be split between spouses, as well as transit and children’s fitness credits. The bottom line when you are splitting income, deductions and credits you want to pay the least amount of total family tax!

Tax Deductions

Many Tax Deductions can be split between spouses. For example moving expenses can typically be split between spouses, as long as it is a family move and a legitimate moving expense claim. Child Care expenses are typically claimed under the lower income earner except for in specific circumstances. The RRSP deduction is claimable by the contributor, but the other spouse (the Annuitant) may receive the income when you withdraw the RRSP. This is very beneficial when the spouse in the higher tax bracket has large RRSP contribution room and can “Shift” income to the lower income spouse. Interest and Carrying Charges is another example of a tax deduction that can be split. To do this you must structure your transactions compliantly from the loan to the investment.

Income Splitting

Many types of income can be split, only a few of them can be split at the time of filing the tax return if you have not yet done what is required prior. Business income can be split in many ways, by paying wages, dividends, bonuses and more. Wages can be paid for work the spouse has done, dividends can be utilized if the spouse is a shareholder, and bonuses can also be paid to spouses. Capital Gains income can be split by either purchasing the asset jointly, or flowing the Capital Gain through a Family Trust. Dividends can also be split easily using the family trust. CPP and Pension income may also be split. With CPP you must apply with Service Canada to split the income, however with other pensions you can typically just split it right on the Tax return. RRSP income may be attributed to the other spouse if they are made the Annuitant. Some RIFF income can also be split between spouses. So as you can see much of the income from investments, businesses and Pensions are able to be split between spouses. Don’t forget to include your kids in income splitting where possible.

Tips on Tax Planning

The problem with most people’s tax planning is that they do it last minute or try to do it when it is too late. Although you are currently completing your taxes for 2009 there is not much you can do to save taxes for 2009 now! Planning happens early, that’s why it’s called planning. Planning for 2010 should be happening as you complete and file your 2009 tax return, and followed through right until December 31^st. That being said, what can we do to still save taxes for last year? There are still some things you can do now, such as income splitting, deduction splitting and credit splitting. In the next blogs I will briefly discuss each.

Core Consumer Price Index Inflation Vs. True Inflation

http://www.statcan.gc.ca/subjects-sujets/cpi-ipc/cpi-ipc-eng.htm

On this latest release from Statistics Canada it is stated that “Overall, energy prices went up 8.2% between January 2009 and January 2010, following a 5.9% increase in the 12 months to December 2009.” Yet at the same time the Media continually states that Inflation never seems to be more than 2-3%? That’s because they are going by the Core Consumer Price Index which is a complicated calculation that does not seem to give us a clear picture of true inflation in Canada. How much have fuel, groceries and taxes gone up over the last 10 years, 2% per year? When I ask many people the question of how much they think true inflation is, they reply that they believe true inflation has to be at least 6%, and I’ve even had some reply that they think actual inflation is closer to as high as 9%. What do you think True Inflation is?

Canada is Golden!

The Olympics is a great example to us of what we can accomplish in Canada. Leading the Gold Podium at 14 Gold Medals in the 2010 Winter Olympics, Canada has set the new record! We’ve all been given gifts and talents, but many never exercise them regularly or fail to stay the course when things get tough. Keep in mind that an athlete practices and competes for 4 years before they get to the Main Event: The Olympics. With Canada’s hockey teams winning Gold again, it goes to show us that not only do we breed the best hockey players in the world, but we also have the heart needed to accomplish anything we put our minds to, and as a TEAM everyone achieves more! No matter what our calling is in life we must do it with Excellence, and NEVER, NEVER, NEVER GIVE UP!

Increasing Interest Rates in Canada

http://www.financialpost.com/news-sectors/economy/story.html?id=2631601

This article in the Financial Post eluded to the possibility of Interest Rates increasing in Canada as early as July 2010. Originally the projection for the beginning of the increase was to be in October, then retracted to possibly September, now maybe July? Canada went beyond the projections for 2010. Over the last 2 quarters of 2010 output was increased in Canada and it was announced that inflation was increasing at a faster rate than expected. As demand in the economy increases so does interest rates typically rise. Is the economy coming back or will there be another major downturn? In many of the financial downturns in history there was a big down swing, followed by a short up swing and then a bigger down swing! Because much of the East Coast in Canada is still suffering from the recession we need to still keep the cost of living low. People cannot get caught up in the media hype that states the economy is rebounding at a fast rate. As we’ve seen in the past when economies rise at a fast rate it is not sustainable. Even though core inflation is stated to remain under 2%, that does not mean that true inflation is not rising at a rapid rate.

For more information on the Core Consumer Price Index Inflation vs. True inflation, please check back here in the next few days for my new blog entries.

Tips on the Closed Circle

How you can you ensure an effective and successful Closed Circle? Here are a few important points to remember:

• It is very important for married couples to agree on their Closed Circle. One of the main causes for divorce is division over finances. When a couple agrees on “How Much is Enough”, finances are much less of an issue.
• Be diligent and consistent with your Closed Circle, enter your receipts daily or weekly.
• Your Closed Circle should be reviewed and adjusted annually and upon any major life changes.
• Accountability is important. If you are married, your spouse is your accountability partner. If you are single, you need to appoint a family member, friend or mentor to be your accountability partner.

I hope you have more of an understanding about the Closed Circle budget by this time. If you need my help in clarifying some points, let me know. I will be glad to help!

Steps to creating a Closed Circle

These are the steps to creating a Closed Circle Budget:

1. Track your expenditures. You must track your expenses on a regular basis – daily, weekly, monthly, annually.
2. Total your expenditures. When starting your Closed Circle, it is good to have at least 3 months worth of expenditures so you can get an accurate picture of what you are spending monthly. Separate your obligations from your necessities.
3. Capture sources of income. It is important to know where your income is coming from and how much.
4. Determine your wants. Make a full list of your wants and if you are married, have your spouse do the same and agree on all wants.