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CRA draft newsletter on annuity purchases from pension plans

A draft newsletter released by The Registered Plans Directorate of the CRA provides guidance on the tax implications of purchasing annuities by both plan administrators and individuals from registered pension plans. Currently, Section 147.4 of the Income Tax Act allows an annuity to be purchased from a pension plan with the condition that the annuinty terms are not “materially different” from the pension plan. If different, then 147.4 doesn’t apply resulting in the individual being seen to receive the full purchase price as a taxable payment. The draft newsletter outlines how their definition of “materially different” will be changing.

Key Takeaways:

Prior to the Draft Newsletter, the CRA has taken a conservative view of the term “materially different”, effectively requiring annuity terms to be substantively identical to the pension plan terms.
Now, the CRA will accept fixed-rate indexation in lieu of CPI indexation.The fixed rate can either be the mid-range of the Bank of Canada’s inflation control range at the date of purchase
The newsletter maintains that where the commuted value of pension plan benefits is more than enough to provide the promised benefits under an annuity, the excess must be paid in cash to the member.

“The main change in the Draft Newsletter is the new guidance respecting the forms of inflation indexing that will not be considered materially different by the CRA from CPI-based indexing. These will be welcome to plan administrators of pension plans who wish to purchase annuities with respect to benefits with CPI-based indexing.”

What retirees need to know if they plan to defer Old Age Security benefits until 70

When retiring, deciding when to start the Old Age Pension Plan and Canada Pension Plan are two considerations. The decision mainly rests on a person’s individual preference and should be dependent on their circumstances. There are factors that may influence when is the right time to begin if deciding to put it off until 70 years old. One must consider their health, and if they have any ailments that would cause them to rethink how soon they need to apply for the retirement programs. Lastly, the lump-sum payment 12 months prior to death payable to their estate as noted in the OAS act may also be something to think about and plan for.

“At 65, the current maximum monthly OAS pension is $600.85 or $7,210.20 per year. Wait until 70 and OAS pays $817.16 per month or $9,805.87 a year, plus any inflation increases.”

These are the eight sources of retirement income you need to know about

When preparing to retire, you need to be aware of your available options to cover your expenses, as well as how much money you will owe in taxes based on these options. There are up to eight different sources of funds. Some people may not have considered all of them, and others may not apply to all retirees. They include: government pensions, investment portfolios, defined pension benefit plan, corporate investment account, annuities, your home, insurance policies, and your kids (or other family). Each of these income sources requires planning to maximize your cash flow without paying out too much in taxes.

“Remember that your retirement income is about much more than simply an RRSP or RRIF. There are hopefully many sources of income for you, but the more sources of income, the more complex some of the tax and planning issues become.”

How to calculate capital gains and losses on rental property

Homeowners may not realize it at the time, but renting out a home they used to live in will change its tax status when you go to sell it later. By making a primary residence a rental property, capital gains taxes will come into effect and be based on the increase in property value when you go to sell it. There are ways to continue to assess the property as a primary residence provided certain conditions are met. If you don’t qualify, then you’ll need to calculate the capital gain or loss using the fair market value when the home was converted from a principal residence to a rental property. This means any acquisition costs such as legal fees and land transfer tax, which would normally be added to the adjusted cost base or tax cost for capital gains purposes wouldn’t apply.

Key Takeaways:

Under subsection 45(2) of the Income Tax Act, it’s possible to treat a rental property (which was your residence) as your principal residence for up to four years provided you meet several conditions.
Selling costs, like legal fees and real estate commission, are deductible expenses, and will reduce the overall capital gain when selling a house.
If depreciation (capital cost allowance) were used as a tax deduction against net rental income in previous years, then these deductions are added to your income in the year or sale.

“When you convert a home that is your principal residence into a rental property, this is considered a change in use. You are deemed to dispose of the property at the fair market value at that time, and immediately reacquire it.”

Tax on cottage rental income never takes a holiday

Renting out a cottage for extra income should be an easy process when claiming the income made on your taxes unless, however, you live in the property part-time. Deductions and expenses can only be applied for the time that you are actually renting out the property and should be carefully recorded. Larger expenses are considered capital costs in many cases. If you decide to make it your full time residence, you don’t have to pay a capital gains tax nut the CRA has to know it’s no longer a rental income. It’s best to seek professional help if you are unsure what to do.

“Things can get complicated when cottage owners use the property for part of the year.”

The real reason people fail to save enough for retirement — and what you can do to limit the damage

Most economists report that you need savings of 10-15 percent to retire comfortably, but most Canadians are saving just over 7 percent. The main reason, according to retirees, is negative shocks while they are working. These unexpected expenditures include unemployment, health problems and divorce. In order to deal with these negative shocks and still save money, you can protect yourself with disability insurance, save money as if you’re planning for earlier retirement, and even insuring your marital union through Marriage Assurance policies. This allows you to “plan for the worst, hope for the best, and insure against the risks that you can.”

“Perhaps as important as how much you need to save to retire is an understanding of the things that prevent people from saving enough in the first place — despite their best intentions.”

Personal Investor: Is your house really an investment?

Some Canadians are looking to purchase a home not only a place to live, but as an investment for when they retire. But, is this an accurate perspective to take on a home? A house can be considered an investment in some ways, but not in other ways. It can be an investment as it appreciates in value, there are tax-free gains when sold (if it is your primary residence and the value has gone up), and it saves you from paying rent and could potentially be used to earn rental income. The equity in your home can also be used as collateral to get a low-interest line of credit. However, a house as an investment can be problematic as it can’t be quickly liquidated for cash and it can depreciate.

Key Takeaways:

According to the Canada Mortgage and Housing Corporation (CMHC), the average Canadian home has grown in value by over 5 percent annually over the past 30 years.
Assuming your property is your principal residence, any appreciation in value is tax free when it is sold.
Real estate investment trusts (REITs), mutual funds, and exchange-traded funds can provide diversified exposure to real estate – especially if you don’t already own a home.

“For most Canadians, a home is their largest single investment, and in many cases a keystone in their retirement plan. But is a house really an investment?”

Feds highlight indexation of Canada Child Benefit

Canadian taxpayers who have children under seventeen years of age are able to take advantage of an increase in the Canada Child Benefit (CCB). As of July, the calculation is being increased to reflect inflation. This means for the 2019-20 benefit year, parents or guardians of a child under age 6 can receive a maximum benefit of $6,639 per child, and a child between 6 and 17 years of age, will receive a maximum benefit of $5,602 per child. The increase from the previous year are $143 and $121, respectively.

“In July, the maximum benefit will increase up to $143 per child for 2019-2020.”

Budget change could offer sizable tax savings on a new car – The Globe and Mail

If you’re interested in purchasing a new car, specifically a zero-emission vehicle, then you may be able to take advantage of proposed tax provisions announced in the 2019 federal budget. To be eligible, the vehicle will need to be used for business purposes, and you can either own the business, be a partner or an employee who uses their own vehicle for work. If you qualify, you can deduct the full cost of the vehicle (up to $55,000 plus sales taxes) in the year of purchase until 2023. The vehicle must be new, and fully electric, a plug-in hybrid (with a batter capacity of at least 15 kWh), or fully powered by hydrogen. Be aware that there is additional criteria and rules, so be sure that you follow all of them in order to get your deduction at tax time.

“The 2019 federal budget proposes to allow an enhanced deduction for capital cost allowance (CCA, which is depreciation for tax purposes) if a zero-emission vehicle is purchased for work purposes.”

If you think the CRA will turn a blind eye to TFSA, RRSP over-contributions, think again

When you decide to contribute to your RRSP or TFSA, it’s important to stay on top of what has been added as well as what your contribution limits are for each year. This includes keeping track of any money from other sources like a company pension plan to ensure you stay within your limit. If a Canadian over-contributes, the CRA will apply a tax penalty at a rate of one percent per month. Additionally, if a Canadian citizen becomes a non-resident, after that they are no longer eligible to contribute to these accounts and will also be penalized. Once a non-resident Canadian moves to another country, their case can be further complicated by not receiving notices mailed by the CRA.

Key Takeaways:

The penalty tax for over-contributions to a TFSA or RRSP is one percent per month for each month (or part of any month) the account has the excess funds in it.
A separate, additional over-contribution tax of one percent per month is applied if a non-resident contributes to a RRSP or TFSA after becoming a non-resident of Canada.
For each year, taxpayers have excess RRSP contributions the CRA will ask for an RRSP over contribution (T1-OVP) to be filed.

“While the tax man does have the ability to waive any over-contribution tax, penalties and arrears interest charged as a result of over-contributions, two cases demonstrate that the CRA shows little mercy when it comes to over-contributions.”