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Canada: The Do’s And Don’ts Of Interest Deductibility

Under certain circumstances, loans can qualify to have the interest deducted at tax time provided the money borrowed is used towards an income making venture. While mortgage interest doesn’t qualify, homeowners can use restructuring strategies, such as taking out a home-equity line of credit against their home and use the money for investment purposes. In this case, the interest on the line of credit would then be deductible for tax purposes. Businesses can also qualify in different ways. If you are unsure of your eligibility for interest deductions, it’s best to use a tax professional’s help in preparing your taxes.

“When structured or restructured correctly; however, taxpayers, including homeowners and businesses, have opportunities to benefit from the tax sheltering created by an interest deduction.”

Canada: Indirect Income Verification

The CRA specifically targets small- and medium-sized businesses, because of the perception that their records aren’t maintained as well as other larger companies. One of the ways the CRA looks for tax evasion is through estimating indirect income. The problem is, these estimates are based on assumptions and are not always correct. As a business owner and taxpayer, if you feel you are wrongly being audited you have the right to challenge. Just make sure you have the evidence to back up your challenge and get professional assistance, if needed.

Key Takeaways:

Sections 231.1 and 231.2 of Canada’s Income Tax Act allow the CRA to issue a Requirement for Information, which is essentially a letter demanding that the taxpayer (or any relevant third party) release specified documents or information.
Using indirect income verification is a way for the CRA to estimate a taxpayer’s income when dismal recordkeeping bars the more reliable, regular tax audit techniques.
A taxpayer has two options: to challenge the propriety of the auditor’s use of an indirect income verification method, or to challenge the indirect audit by analyzing and disputing every assumption and calculation of the assessment on a line-by-line and item-by-item basis.

“The CRA invokes its most aggressive tactics when auditing small and medium businesses—groups that the CRA perceives as most likely to retain poor records or lack internal controls. These aggressive tax audit methods fall under a class of techniques known as indirect income verification methods.”

Possible tax relief looming for U.S. citizens living in Canada

The Tax Fairness for Americans Abroad Act of 2018, introduced on December 20 by Rep. George Holding of North Carolina, is the first step to try to offer tax relief for Americans working abroad. The implications of the possible changes could impact expatriates living in Canada. The rule would end the country’s current citizen-based taxation and instead only apply tax to income earned in the U.S. The U.S. presently stands alone as the only country to be taxing income that is not earned or repatriated to the United States. This would greatly benefit American citizens abroad.

“A new U.S. bill introduced this month is a first step towards ending the country’s citizenship-based taxation by taxing only those people who live in the U.S.”

Ottawa raised the Home Buyers’ Plan limit to $35,000 — here’s how to take advantage of it

A recent change to the Home Buyers’ Plan (HBP) makes it considerably more favorable to potential homebuyers. The change increased the amount homebuyers can withdraw tax-free from their RRSP from $25,000 to $35,000. HBP requires that this withdrawal be repaid within 15 years, and is available only to first-time homebuyers – although a new rule proposes expanding access in 2020 in cases of divorce or separation. The change in the HBP makes it a strong alternative to Tax Free Savings Accounts (TFSA) as a method of paying for a first home, although TFSAs generally remain a better option for lower income earners.

“The HBP got a new lease on life when the federal budget announced the amount that first-time home buyers can withdraw tax-free from their RRSP to buy a first home will be increased immediately to $35,000 from $25,000.”

Canada’s 2019 tax season: 4 things you need to know

Tax season is fast approaching, which can be a very stressful time for many Canadians. In order to minimize the stress and avoid fees, here are four things that will come in handy. Know your deadlines; most know it is April 30, but they differ if you are self-employed. You can add funds to your RRSP and still get credit provided you do so by March 1st. New tax breaks are available, including a climate action incentive. Some tuition breaks, however, are no longer available. You can also stick with mail filing, and even use an app to pay your taxes. It’s best to review all the changes before you file to ensure your tax return is correct, and you’re not missing out on credits.

“Whether you’re in for a refund or a tax bill this year, simply filing your return can be stressful. There are old receipts to be gathered, deadlines to put on your calendar and a new rules you should know about.”

Some unusual tax facts about income, deductions and credits

If you are unsure of what can be a tax credit or deduction, do your research or seek out some professional advice first before you act, or you might face consequences down the road. Illegal activity, medical expenses, employment expenses, pet maintenance and other expenses may or may not be deducted depending on what you are paying for or where you derive your earnings from. Real-life examples are discussed in detail to give you an idea of what you might be able to do come tax time.

Key Takeaways:

Canadians can claim eligible medical expenses incurred in any 12-month period that ends in the calendar year, which means you can pick the period with the highest amount of medical expenses provided they haven’t already been claimed.
Employees are permitted very few deductions other than certain costs they are required to pay for personally, which can be found on CRA’s Guide T4044
Gambling losses cannot be deducted if it is a hobby, but if it qualifies as a commercial activity, then winnings are taxable along with losses being deductible.

“Are you wondering whether that item you just purchased is deductible for tax purposes? Or whether an amount you received is taxable? There’s no shortage of stories to tell about taxpayers who got it wrong – or right, for that matter.”

CRA deploys new weapons against tax evasion: Freezing assets, seizing property

Canada Revenue Agency will be implementing a new weapon to get suspected tax evaders to pay their portion of the tax bill. The CRA will now be utilizing proceeds-of-crime provisions in the law to seize assets of suspected tax evaders. Previously, the proceeds-of-crime provisions were only used for cases of money laundering or terrorism. This new tool is designed to frighten offending parties – the CRA also indicated it plans to go after overseas assets in such cases.

“I can say that this is indeed the first time, but I can promise you that this is not the last time that we [will use] those provisions of the Criminal Code to restrain or seize assets that tax evaders have acquired through their illegal behaviours.”

Things to know for before filing your 2018 taxes

When filing your 2018 tax return, it’s best not to wait until the last minute. Often, when people wait, they become more disorganized in the scramble to get paperwork together. Before you begin be aware of the changes, and if your return is complicated, you might want to consider hiring a tax accountant. This can include high net worth individuals, people with a side business, own investment property, self-directing retirement, or received an inquiry from Canada Revenue Agency. Overall, it’s best never to wait until just before April, because you could miss out on some deductions and credits.

“The April 30 tax filing deadline may seem a long way off, but leaving it to the last minute could mean rushing and missing out on deductions or making a mistake that could mean a costly audit.”

Income splitting is a dangerous tax game if you don’t know the rules

In Canada, income splitting – the practice of shifting income within a family to avoid high tax rates – is tempting due to steeply graduated tax brackets in many provinces. Anti-avoidance rules make the process tricky; nonetheless, there remain many opportunities to legally use income splitting to lessen one’s tax burden. For example, pension income can be shifted between spouses or partners. Even here, however, taxpayers must be careful, as the CRA will pursue unlawful activity in court.

Key Takeaways:

Our Income Tax Act has a variety of anti-avoidance rules, known as attribution rules, meant to block attempts at income splitting by attributing the transferred income back to the original source.
Here are the outcomes of three different income splitting scenarios: (1) if you give your minor kids money to invest, then any interest or dividends earned on those funds will attribute back to you but not any future capital gains; (2) if you gift funds to your spouse or partner for investment, all future income as well as capital gains will attribute back to you; and (3) if funds are loaned between spouses or partners at a minimum of the CRA’s prescribed rate, then the attribution rules won’t apply, provided the interest on the loan is paid by January 30 of the following year.
The easiest way is to split pension income, which can result in substantial tax savings if one spouse is in a lower tax bracket, and it can also help preserve benefits like Old Age Security.

“If you don’t understand the complex rules surrounding what is and isn’t allowed in income splitting, you could find yourself facing off against the tax man in court.”

These are the potential tax measures federal budget watchers are speculating about this year

This year’s federal budget has important implications because of the upcoming October election. Speculation about what it contains, and especially how personal taxes may change are at the forefront. In the pre-budget process some hints at the different tax options being considered include raising taxes for all or making the very rich pay a much larger tax. Raising the capital gains tax inclusion rate is also an option. There are many conflicting opinions, including making the personal tax rates competitive with the US.

Key Takeaways:

Finance Minister Bill Morneau is expected to table the budget the week of March 18, but some believe it could be postponed until sometime in April.
During the consultation process the recommendation was to expand the tax brackets and raising taxes on high earners.
Reassessment of the capital gains inclusion rate, bringing the tax rate closer to the rate for dividend income.

“Of the 99 recommendations for the upcoming federal budget, less than half a dozen of them involved personal tax changes.”