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A lot of Canadians seem to have stopped investing to pay down their debts – The Globe and Mail

Based on the flow of money, Strategic Insight Canada believes Canadians are making the decision to switch from investing to paying down debt. The theory is based on the drastic drop in money going into investment products of all types in late 2018 and early 2019. Strategic Insight ruled out a worsening economy because of the lack of money going into deposits such as savings accounts and guaranteed investment certificates. Currently, this trend has resulted in total debt levels being lower than they were during the recession of 2008.

“The conclusion drawn by Mr. Cardone from these money trends is that people are paying down debt with money they would otherwise have invested.”

Will you blow your tax refund on something fun? Blame it on mental accounting – The Globe and Mail

People often treat money differently depending on where it comes from. This is known as mental accounting. Even though a dollar is a dollar regardless of where it comes from, to many of us, how we label it plays a strong role in how we plan to spend it. This is particularly true for tax refunds, which people often think of as “free” money, when in actuality, it is a tax-free loan to the government. It would be better to reduce the amount of tax withheld on our paycheques by filing paperwork with our employer. Although one reason for why we may not do this is because of Prospect Theory, whereby we magnify the pain of owing $5 versus the pleasure of receiving a $5 refund.

“Every year around this time, someone chastises the masses over being happy about getting an income tax refund when, in effect, they’ve given the government an interest-free loan for the year. “

Is Income Splitting Dead?

Despite the Department of Finance changing the “income splitting” rules in 2018, there are no shortages of income splitting plans. Some of them take advantage of various provisions of the Income Tax Act while others are a little more complicated. The average business owner can become permanently trapped in the tax on split income (TOSI) legislation. Splitting income with family members to avoid the attribution rules using prescribed rate loans has become common, and can still work with the new TOSI rules. The TOSI rules do not apply to salaries to family members.

Key Takeaways:

The new tax law makes it nearly impossible for the average business owner to navigate, which means a tax professional is highly recommended.
It is very important that you keep the income from the PR Loan as passive income which then can be reported.
Salaries paid to family members must prove that they are income producing and be sure to only make reasonable deductions.

“No matter what the Department of Finance dreams up to stop perceived mischief, income splitting plans will survive, especially if the affected parties feel targeted, attacked and their overall tax situation is not fair.”

CRA asks Canadians to air grievances in online consultation

The federal institution Canadians interact most often with is the Canada Revenue Agency for annual tax filings. Being fully aware of this, the CRA has recently put out an online questionnaire that it hopes will give Canadians a chance to provide feedback to the agency on how they feel about it, and how well they think the agency is doing its job. The consultation closes June 18, so go here to add your voice: https://www.cra-engage-arc.ca/en/collections/serving-canadians-better. This is one component of the CRA’s attempts to stay more citizen-oriented, and connected to the people it serves.

“Canadians can fill out a three-part online questionnaire starting today that asks them how well the agency has performed in providing services, including whether they have ever had any bad experiences dealing with it.”

46% of Canadians $200 or less away from financial insolvency

Due to increased interest rates, many Canadians are struggling with paying their bills. People who have been increasing what they owe have been hurt by the Bank of Canada’s five rate hikes that began in 2017. Almost half of residents surveyed claim as little as 200 dollars stands between them and financial insolvency at the end of each month after paying their bills. Most worrisome, many of those surveyed believe they will not be able to keep up if rates increase again.

“The number of Canadians who are $200 or less away from financial insolvency at month-end has jumped to 46 per cent, up from 40 per cent in the previous quarter, as interest rates rise according to a new poll.”

Do you need to make income tax instalment payments?

If you owe more than $3,000 in taxes from the previous tax year, then you may be asked by the CRA to pay your next year’s taxes in installments. Employees typically do not need to worry about instalments because their employer will withhold tax throughout the year. However, individuals with more than one source of income may be required to pay installments. Since installments are based on the previous year’s income, a one-time event that causes a spike can trigger an installment notice. If you’re unsure, check with a certified accountant to help you through the process.

Key Takeaways:

Installments are required when your net tax owing income is greater than $3,000 for the previous tax year.
The letter the CRA sends in February 2019 is based on your 2017 income and outlines the required payments on, or before, March 15 and June 15. The August letter is based on your actual 2018 net tax owing and outlines the required payments on, or before, Sept. 15 and Dec. 15.
If installments are late or less than the requested amount, taxpayers may have to pay interest and penalty charges, which cannot be deducted on their tax return.

“Twice a year, Canada Revenue Agency sends out instalment reminder letters to those taxpayers who are required to make payments.”

The swap scheme that led to a forty-fold increase in one woman’s TFSA

Almost as soon as the Canadian government set up rules for TFSAs (tax-free savings accounts) a decade ago, Canadian citizens have been looking for ways to exploit the rules to their advantage. In one instance, a woman used a series of swaps to turn an initial $5,000 contribution into more than $200K. The government took the woman to court, with the judge ruling that much (although not all) of her gains were subject to an “advantage tax,” which was passed to punish such gaming of the system.

“While most of us simply use our TFSA to save for retirement or, perhaps for shorter-term goals such as a down payment on a home, the opportunity for abuse of the tax-free nature of the TFSA has been there from Day One.”

Cutting down capital gains tax on real estate sales

Real estate investors often dread paying capital gains. Unlike the stock market, real estate is seen as a long-term investment with larger capital gains. For real estate, capital gains are taxed at your marginal tax rate. Other forms of income like employment, interest and foreign dividends are taxed at twice the tax rate and taxable annually, whereas capital gains for real estate are deferred until the sale of the property. There are exceptions for qualified small business corporation (QSBC) shares and farm properties, which are subject to certain conditions. Losses from other non-registered investments can be used against your capital gains to lower your tax burden. You can even avoid paying capital gains yourself by freezing it and passing it along to the next generation, but eventually it will be triggered, so, how you set up a transfer matter.

Key Takeaways:

In the year of its sale, all past depreciation, also known as capital cost allowance (CCA), gets “recaptured” and taxed in addition to capital gains tax.
One good way to mitigate tax on a real estate sale is to defer RRSP contributions or deductions in anticipation of a large income inclusion from the sale of real estate.
In Canada, there is a capital gains tax exemption for real estate used by a taxpayer to earn income from a business, but rental real estate does not qualify as a “business.”

“One of the biggest deterrents I’ve observed with real estate investors is the dreaded capital gains tax hit.”

Canada’s housing market headed for weakest year in almost decade, warns CREA in updated outlook

The number of homes sold in Canada was down 4.4 percent in February with prices down 5.2 percent, which is a 10-year low. If the expected pull back of 1.6 percent occurs in 2019, then that would mark the weakest annual sales since 2010. The year-over-year drop in sales was heavily concentrated in British Columbia and Alberta. Part of the blame can be attributed to a bad winter, but also the mortgage stress test, which came into effect in January 2018. We’ll have to wait to see if the housing market picks up as the weather gets better but the projections are not as robust as they have been in previous years.

“Only time will tell whether successive changes to mortgage regulations went too far, since the impact of policy decisions becomes apparent only well after the fact.”

Cheaper gas and home heating? Here’s what happens when Alberta ditches the carbon tax

Alberta’s carbon tax is coming to an end this month. Although despite Premier Jason Kenney’s promise to end it, we’ll likely see it return due to the federal government having a “backstop” carbon tax for provinces who don’t have one of their own. In the meantime, Albertans can enjoy a reprieve dependent on how long it takes Ottawa to implement their tax. One of the immediate places, where Albertans will see a price drop is gasoline, and as of May 31st, motorists in Alberta may be able to fill up for 6.7 cents less because of the elimination of the tax.

“A carbon tax-free period of indeterminate length will begin on May 30, the day the United Conservatives promise the $30/tonne levy will end.”