Useful Tips in Tax & Finance

Staff Gifts as Perks

CRA has announced new policies in this area, which are effective January 1, 2010. The changes are:

  • The previous limit of two instances per year for each of “gifts” and “awards” is removed
  • If the aggregate value exceeds $500, then only the excess amount is now taxable. Previously, exceeding the limit would cause the whole amount to be taxable
  • A new category entitled “long service award” is added, with the same rules and limits as above. However, such awards can only be given on a five yearly basis
  • The new category causes the two old categories of “gifts” and “awards” to be merged into one annual $500 limit, down from $500 each before

Heightened Monitoring

When the RRSP rules were redrafted in the early Nineties, the new system allowed for excess contributions up to $2,000 beyond one’s contribution room. Larger amounts attract a 1% per month self-assessed penalty. I guess not enough “self-assessing” was going on, so CRA has indicated an increased interest in flushing out these offside excess contributions and will assess them themselves.

Several years ago, CRA also instituted self-complying “Foreign Income” verification, the purpose of this being to flush out Canadian earnings in foreign jurisdictions. CRA is emphasizing their interest in this area and will more actively enforce assessing per diem penalties for non-compliance.

Estate Matters

It is misunderstood what a tax clearance certificate grants in a deceased estate. In fact, it absolves the executor from any subsequent tax re-assessments after the estate has been redistributed. However, CRA may have leave to pursue the beneficiaries if it subsequently decides to re-assess some tax liability.

Tax Planning for Entrepreneurs

The new dividend rules aimed at income trusts will create a positive spillover in tax planning for extremely profitable small businesses. It is no longer necessary to “bonus down” the profits in excess of the small business limit to the owner.

Tax Relief for Ebenezer Scrooge

Tax law now permits employers to make tax-deductible gifts to employees which are not taxable to the recipient. Two gifts can be given per year with an aggregate cost less than $500. An additional two gifts, less than $500 aggregate, can be given for special achievement awards. Cash and gift certificates are not eligible! Entrepreneurs need to be circumspect in giving themselves gifts!

Planned Lifetime Advocacy Network (PLAN)

PLAN was created in 1989 by and for families who have a relative with a disability. The not-for-profit organization helps create a plan for the future that provides for the safety, security and well-being of the person with the disability. PLAN’s vision is “the vision of a good life for all people with disabilities and their families”. Their definition of a good life is the same for both people with and those without disabilities: friends and family, a place of one’s own, financial security, choice, and the ability to make a contribution to society.

One can join PLAN as an annual “associate” for $60 per year or join as a lifetime member.

PLAN sponsors a series of workshops on various relevant topics, including tax planning for the disabled, will and estate planning, representation agreements and trust formation. These courses are available to members for a nominal fee. PLAN also has a resource library and periodic newsletter of relevant articles.

Individual consultations with PLAN consultants can help with reviewing wills, establishing a strategic pathway for the disabled person and the family and availing you of the host of government assistance programs and housing alternatives. Telephone coaching is also available, which is particularly useful for out-of-town families. PLAN also coordinates the establishment of networking groups. Lastly, PLAN participates in lobbying and advocacy for disabled persons.

More information about PLAN, its programs and services can be found at their web site: www.plan.ca or by contacting them at 604.439.9566.

Home Adaptations for Seniors

A federal government program may rebate of up to $3,500 to low-income seniors for one-time minor renovations to allow them to adapt their home to meet their evolving needs for independent living. Qualification is age-tested (over age 65) and income-tested (using “net income” on the most recent tax return) and the maximum income varies by region; for instance, it is $31,000 in the Lower Mainland. The rebate must be repaid if the senior sells the home within six months of the renovation.

The reno projects are intended to make the home more senior-friendly, for instance by installing handrails, lever door handles and bathtub bars, as well as making stairs safer.

An application must be approved before the work is undertaken and competitive quotes must be submitted along with a description of the project. The senior must bear any costs in excess of the rebate amount.

You can contact 1-800-639-3938 for an application and more information or visit http://www.cmhc-schl.gc.ca/en/inpr/prfias/index.cfm.

R&D Claims

It appears that CRA will no longer apply administrative flexibility in accepting late filed R&D claims. Every bona fide claim must be complete and without omissions and filed within 18 months of the fiscal year end. The 2006 BC budget paralleled this new approach.

 

 

Dependent Medical Costs

For 2005, both the feds and the province have increased from $5,000 to $10,000 per annum the amount that may be claimed by a taxpayer as a medical credit for medical expenditures incurred on behalf of various defined “dependents”.

 

 

Interest & Penalties

Interest and penalties incurred pertaining to GST assessments are deductible. Interest and penalties pertaining to corporate taxes owing are not deductible. Penalties on payroll and PST remittances are not deductible but interest is deductible.

 

Employee Gifts

CRA recently has softened its position related to the tax treatment of staff gifts and awards. They will now permit the employer to deduct the expenditure but the employee does not need to bear a taxable benefit.

However, the restriction is less than two gifts per year totaling less than $500 as well as two awards per year totaling less than $500. In a strange turn, if the cost exceeds $500, the entire amount must be taxable (not just the excess)!! Lastly, shareholders and related parties are excluded from this opportunity.

Medical Expenses
  • Various home renovations may qualify as a medical expense for people with medical conditions. There have been several court cases on the subject of home hot tubs that have been successfully allowed.
  • The medical credit can apply to costs incurred for treatments in the US from a qualified medical practitioner, including travel costs and, where certified, the accompaniment of a supporting party. The treatment must be unavailable in the local area to qualify the travel costs.
  • For 2003 onwards, people with celiac disease may claim as a medical expense the incremental costs of purchasing gluten-free products. However, they no longer may claim the disability credit.
  • A person who experiences seizures may qualify for the disability credit and related tax breaks, which can be transferred to a supporting person
Education Deductions
  • Tuition paid to a special school for children with certain disabilities may qualify as a medical credit.
  • The education credit is unavailable for tuition paid for an internet course of study outside of Canada. However, the living allowance credit is permitted.
Income Sharing – Divorced Couples
  • The federal government is looking at releasing guidelines for negotiating income-sharing agreements for spousal support between divorced couples. They will not have the force of law but may facilitate negotiation in place of protracted legal battles. This follows the earlier model of defining scales for child support.
Splitting Income – Children
  • Splitting business income with minor children must be reasonable for the services performed and properly executed with cheques deposited into the children’s accounts. The amounts also should be reported properly on the child’s tax return.
Child Care Expenses
  • A recent Court case denied dance school tuition as a child care cost, claiming that it was a “recreational” expense.
BC Medical Services Plan
A Tax-free Death Benefit

A death benefit is the amount paid by an employer to either the Estate of a deceased employee or to a beneficiary of the deceased employee, in recognition of that employee’s service.

If the employee dies while still employed and was contractually entitled to receive a retiring allowance upon retirement, the severance pay paid to the deceased’s beneficiary also is considered to be a death benefit. Lastly, payment of accumulated sick-leave credits to which such an employee was entitled are also considered part of the death benefit.

The first $10,000 of such a benefit is tax-free to the recipient.

If the benefit is paid to the testamentary trust, and subsequently paid to the beneficiary of the trust, the amount is deemed to have been received by the beneficiary and not by the trust, therefore the beneficiary receives the tax break on the first $10,000.

A Tax-free Widow(er)’s Pension

Tax law permits $1,000 annually of certain kinds of pension income to be earned tax-free. Normally, a RRIF can be the source of this upon attaining age 65. However, the age requirement is waived if the RRIF is created pursuant to the death of a spouse, who owned a RRIF.

When a surviving spouse has not yet converted his/her RRSP to a RRIF, the normal procedure is to transfer the deceased’s RRIF into the survivor’s RRSP. This would not permit the $1,000 tax-free amount described above.

Instead, the survivor should transfer sufficient assets from the deceased’s RRIF into a new RRIF to sustain annual payments of $1,000 until at least age 65, and perhaps even age 69. The remainder of the deceased’s RRIF assets should be transferred to the survivor’s RRSP.

The younger the survivor is, the more valuable will be this strategy.

The Dreaded Clawback

Several years ago, the Tax Act was amended to giveth and taketh away the universal Old Age Security (OAS) pension from “high income” Canadians over age 65. The clawback commences at a net income above approximately $55,000 and reclaims all of the OAS at a net income of approximately $90,000.

There is a one-time planning possibility that could be worth $3,000-$4,000 in the right circumstance.

Occasionally, prudent tax planning is about doing the unobvious. Imagine a prospective retiree aged 65 who makes a good income from work. Routinely, this person would apply for OAS and commence to receive it from the month following the 65th birthday. However, with a high income in the last year of working, the clawback may apply to reclaim the entire OAS: thus, it wouldn’t even be worth bothering to claim it!

Instead, it may be prudent to delay claiming the OAS until the calender year after you retire. The rules permit receiving up to one year’s payments in arrears, and those arrears are taxed in the year received. If your income drops substantially in the year after cessation of work, you may not be caught by the Clawback at all! Thus, the retroactive payments are yours to keep! The time value of money lost for deferring the OAS is far outweighed by the ability to keep it from being clawed back fully.

Capilano Community Services Society offers a Red Cross Medical Equipment Lending Service

The equipment is loaned to you for up to three months, free-of-charge. The equipment includes anything to assist the patient in daily living, e.g. wheelchairs, canes, rails, walkers, crutches. Any equipment related to mobility requires a note from a doctor.

Donations are gratefully accepted.

You should call ahead to see if equipment is available: 604-988-7115.

Turning 65?
  • You may now qualify for the annual $1,000 pension income credit, if you didn’t before. If you don’t have a work pension, but have an RRSP, it may be wise to take a proactive step to enjoy $1,000 tax-free for each of the next five years. Here’s how…..
  • Money drawn from a RRIF qualifies for this tax-free treatment. Money drawn from an RRSP does not. You could convert your RRSP to a RRIF at age 65 to receive the tax-free amount; however, the “minimum withdrawal” rules for a RRIF likely would force you to take more than $1,000 out and this would be counter-productive to your long term plan.
  • So, you set up your RRIF now (you would be doing so at age 69 anyway) and transfer $5,000 of assets from your RRSP to your RRIF. You immediately withdraw $1,000 tax-free and invest the remaining $4,000 in a simple fashion (perhaps a bond mutual fund), so that you can draw out $1,000 in each of the next four years.
  • Alternately, you could go through the process of transferring $1,000 annually from your RRSP to your RRIF and drawing this cash out to enjoy the pension income credit.
  • At age 69, you would transfer the rest of your RRSP assets to the RRIF.
  • If you receive a foreign pension, either government or private, then this would qualify for the pension income credit as long as the pension is in fact taxable in Canada. Some foreign pensions are exempt from Canadian tax thanks to international tax treaties and these obviously would not qualify for further tax preferred treatment.
  • Be careful when your income is sufficiently low that triggering the pension income credit doesn’t actually do you any good! However, in this case, you can transfer the credit to your spouse in order to receive some tax benefit.
  • Note that people under age 65 can enjoy the pension income credit if they are receiving a private work pension.
  • Lastly, if you are under age 65 and inherit an RRSP or RRIF from your deceased spouse, you should seek professional advice to enact steps to trigger the pension income credit.
Recreational Property

If you own recreational property, the future sale of it likely will be taxable. To minimize the tax burden, it is important to keep track of all of the improvements done there over the years. These expenditures are added to your original purchase price and, thus, reduce the gain.

Disability Credit

Remember that a disability credit is available which is worth an annual tax break of approx $1,500. It can be transferred across a fairly broad list of related parties. You need to keep us apprised of your health situation if we don’t see you regularly or we are otherwise unaware of your health problems.

Disability Insurance

If you carry disability insurance as income protection, review carefully the need to have a 30 day elimination period. If you can weather income stoppage from health problems for, say, 90 days, you can lower your annual premiums by almost one third!

RRIF – Younger Spouce

If you regret not opting for your younger spouse’s age when you converted to a RRIF, transfer the old RRIF to a new one and re-elect under the new application.

G.I.S. (Guaranteed Income Supplement)

Guaranteed Income Supplement is a monthly federal subsidy program for low-income Canadians. Individuals earning under $12,000 (couples under $15,648) qualify, based upon their annual tax filing. Old Age Security payments are excluded in the qualifying calculation. The maximum monthly supplement is $499 for a single person.

We recently learned an interesting “exception” to the rules, that applies in “involuntary separation”. This occurs most commonly when ill-health requires one spouse to seek full time health care in a nursing setting, eg Alzheimer patients. The other spouse is now left alone in the family home. The special exception allows the remaining spouse to file for GIS as a single, thus increasing the chance of qualifying.

RETIRING SOON?

If you soon will be retiring from your work career, you will be faced with understanding a myriad of important issues that will affect your financial comfort for the rest of your life.

If you participated in a company pension plan, your employer will require you to choose what form of monthly pension cheque you will receive. At the heart of the matter is the difficult and unpleasant question: when will you die? The pension option you pick will have an impact on how much you receive each month and, also, how much your surviving spouse/estate will receive after you die.

In the extreme, a life annuity pension ceases completely upon your death, leaving nothing for your survivor. At the other extreme, a last-survivor pension will continue to pay until the last spouse’s death. If you die first, your spouse may receive a full or partial pension for the duration of his/her life.

In between these extremes, “term certain” pensions guarantee monthly payouts after your death for a period of time. The duration is measured from the commencement of your retirement and typically is five or ten years. After this, your survivor receives nothing.

The longer the guarantee period, the lesser the payments will be from the outset. The enticement of higher payouts from a short guarantee period must be weighed against insuring security for the longer term at the cost of smaller payouts.

To make this decision wisely, you will need to calculate all of your retirement cash flows from day one of retirement through to the commencement of your RRIF and, perhaps, sale of your home. Remember to factor in CPP to commence sometime between age 60 and 70, as well as OAS at age 65. Finally, your RRIF payouts and outside investment income will complete the analysis. Your spouse’s cash flows must be determined, too.

Pension law now requires survivor benefits. We have seen particular plans which have required the spouse to sign an understanding of what choice was made, particularly when the survivor benefit is small. There also may exist a “sober second thought” period during which you can reverse your earlier decision.

In conclusion, don’t make these decisions without “doing your homework” and, possibly, getting some advice.

Tax Free Savings Account Contribution Room, Gone After Death

After death, TFSA’s can no longer be contributed to, so any unused contribution room is permanently lost. So if a spouse is near-death, it is wise to take the time to ensure their contribution room has been fully used. Missing out on this can be very costly from a long term wealth management perspective. This differs from RRSPs, which allow an individual to contribute to their deceased spouse’s RRSP up to the end of the following February, which is the normal deadline for RRSPs contributions.

Keep in mind that a TFSA’s contribution room may be more than the $5,500 standard per year amount. If you had withdrawn any amount in a previous year, this is added to the following years contribution room. For example, if I had withdrawn $10,000 from my TFSA, and withdrew it to buy a car, the following year I would have $15,500 of contribution room (the $10k I withdrew, plus the $5.5k room for the new year).

 

Article updated October 2016