Ensure you’re in the clear: Tax court decision serves as warning to home buyers
If you are planning on buying property in Canada, be sure to research who you’re buying from, or you could be stuck with a costly tax bill. A recent court case in which property was bought from a non-resident (who claimed that he was a Canadian) left the purchaser with a $92,000 tax bill. This is due to Section 116, which requires 25 percent of the purchase price to be sent to the CRA. The Canadian courts determined that the purchaser did not do enough research on the buyer, despite obtaining a declaration from the seller, and as a result, he was responsible for the tax payment. According to the judge, a “solemn declaration” is required to determine the tax residency of the seller.
“Section 116 requires the buyer to make a “reasonable inquiry” and have “no reason to believe that the seller is a non-resident of Canada.” Without this reasonable inquiry and belief about the seller, the buyer is supposed to withhold 25 per cent of the purchase price and send it to the taxman.”
How portfolio structure can save tax for clients with private corps
Private corps making less than $50,000 per year qualify for the small business tax break. Businesses with passive yearly income more than $50,000, cannot use the small business tax rate and all their business income is subject to the higher general income rate. Keep in mind that it is the taxable passive income that is used rather than all passive income. This distinction means that the passive income deduction can be preserved by using tax reduction portfolio strategies.
Key Takeaways:
- Clients can preserve the small business deduction if taxable passive income is below $50,000/year.
- Clients without the small business deduction (i.e., greater than $150,000 passive income per year or more than $15 million capital) should customize a portfolio to reduce taxable income.
- Tax-efficient asset allocation through good portfolio design may reduce the passive income generated by $2-3 million of capital in order to continue to enjoy the small business tax rate.
“The new rules state that if passive income exceeds $50,000 per year, then access to the small business tax rate (10% to 18%, depending on the province) will drop by $5 for every $1 of passive income above $50,000.”
Four reasons why business owners should consider life insurance
While life insurance may not be top-of-mind for your business, it can be the difference between going through a rough period or keeping your business afloat. Starting your own business or operating one of any size, is a big step, and one full of risk. Some of that risk can be mitigated by taking the proper measures such as using life insurance to cover your business. Many businesses rely heavily on key employees, or even the owner; insuring them against an untimely death can help mitigate the costs incurred should the worst happen and someone new needs to replace them and take over their responsibilities in the business.
“Today, I want to speak to those who are business owners – big or small. There are four situations in which life insurance can provide needed cash to solve some pretty big problems..”
Vehicle allowances and deductions can put you on a collision course with the taxman
The CRA is taking a closer look at Canadian’s automobile deductions to determine if they met the conditions for eligibility. Two cases this summer focused on whether the car allowance being paid by an employer was a reasonable per-kilometre rate to cover the actual operating costs of the “work” portion of usage. In both cases, the judge decided that it wasn’t reasonable because one was a fixed allowance and the other was an estimate, and thus not based on the actual number of kilometres for which the vehicle was driven. Therefore, the allowance could not be used as a deduction and the amount needed to be included in the taxpayer’s income.
“Automobile expenses continue to be an area of scrutiny for the taxman, so you shouldn’t be surprised if the Canada Revenue Agency starts asking you questions about how you may have claimed any vehicle expenses or employer’s travel allowances on your tax return.”
Taxation of Cryptocurrencies in Canada: What Business Leaders Need To Know
Cryptocurrencies, such as Bitcoin, are not viewed by many governments, including Canada, as actual currencies but as commodities. This means that transactions are viewed as “barter” and thus creates a taxable event. The IRS in America has won a landmark case against an agency that deals in investments of these currencies, forcing many of these investors to pay tax. In Canada, the CRA has the ability to hold any similar company or investor responsible for tax payments as well. As more of this type of investing occurs, you can be sure that the government will keep up and get it’s share of taxes.
Key Takeaways:
- Cryptocurrency’s status as a currency is uncertain and the CRA says they should be viewed as a commodity instead.
- Increasing investigations of it’s users has lead to removal of anonymity for regulatory and tax tracking purposes. Additionally, America is an example of what the CRA can follow in terms of regulation and taxation.
- Scrutiny of cryptocurrency from all types of regulators, including tax authorities, will likely lead to structure, transparency and legitimacy, as well as tax implications.
“Accepting Bitcoin as payment does not exempt merchants from recognizing income on a sale. Similarly, those who swap crypto for merchandise would need to report income or a capital gain (or loss) on the disposition of their crypto asset.”
Alberta is still deep in debt, but some say there’s nothing to worry about?
Alberta continues to lead the country when it comes to average consumer debt at $37,278 for non-mortgage debt, and Calgary is even worse at $38,438. Although this isn’t as bad as it may seem according to TransUnion Canada. The higher debt, isn’t necessarily because Albertans are big spenders, but rather, it may be due to coming out of a difficult economic time for the province. In addition, consumers are getting better at paying down their debt loads as indicated by the reduced delinquency rates. As the economy continues to recover, it is expected that we’ll see these debt levels and rates reduce further.
“Albertans continue to rack up their credit card and other debt. But as Globals Tomasia DaSilva explains, one credit reporting agency says consumers are also getting better at paying it back.”
Personal Investor: A hard lesson on student debt is spelled RESP
The cost of post-secondary education can be expensive, especially with the costs constantly rising. If you start saving early for your child’s education, there is an investment plan that will help towards the cost, called a Registered Education Savings Plan (RESP). An RESP is an 18 year investment that matches parent’s contributions with grant money. Taxes are taken only at the time of withdrawal, and the fund can reach up to $50,000, which is a sizable amount of what will be needed for a student’s education.
“It might seem like a glimpse into a grim future for some parents, but there is a federal government program that can help relieve the financial burden of post-secondary school for those who start saving while their kids are still young.”
Why Reviewing Your Tax Strategy Makes Financial Sense
Businesses are regularly rewarded for creating a well-thought out tax plan from the beginning. Business opportunities and rules change can require different strategies in order to minimize taxes at year-end. New entrepreneurs often make the mistake of not counting taxes as an expense. Instead of paying attention to what is inevitable (which is paying taxes), they think they should wait to see if the business is a good or bad entity first. Staying informed and getting professional advice can help business owners make better decisions, which will pay off in the long run.
Key Takeaways:
- Entrepreneurs tend to ignore tax planning in the initial phases of a venture, which can be costly.
- What most of these entrepreneurs don’t realize is that implementing a tax plan usually requires some restructuring resulting in tax consequences that could have been avoided.
- Once entrepreneurs realize that taxes are often a business’s largest expense which doesn’t provide any benefit like equipment, staff or services, then they understand how important tax savings are to the future growth of their business.
“To get the most out of a tax plan, it needs to be implemented before the business generates value and profits — value and profits need to be created within a tax-efficient structure to get the maximum benefit.”
Tips for creating a ‘smart-tax’ portfolio
When dealing with taxes, you need to make sure you are investing in the right way to avoid a heavy tax burden in the long run. In order to create a tax-smart portfolio, it’s important to know what your money manager is making you over what the market is providing (known as your alpha) so that you end up with profit after taxes. Being aware of the tax implicaitons of your investment portfolios, especially what is in it’s make-up as well as turnover, can led to a considerable difference in your returns. Investing wisely will help you keep all your returns at tax time.
Key Takeaways:
- The majority of Canadians now face tax in provinces where the highest marginal tax rates are in excess of 50 percent.
- A key tax factor is portfolio turnover, and ensuring the alpha added by your money manager is high enough to make up for any taxes created when securities are sold.
- Consider your investment mix becaue each type of income is taxed differently and will result in very different portfolio values over time when investing outside of registered plans.
“The good news is that you can take steps to reduce your tax burden without having to cheat.”
Federal Court refuses to authorize abusive “fishing expedition” by Canada Revenue Agency
A recent court case decided that there should be limits to the Canada Revenue Agency’s intrusiveness and powers. The CRA attempted to obtain information from a third-party. In this case, they wanted information from Hydro-Quebec about their business customers, and the company fought back. The court ruling agreed that the CRA shouldn’t be allowed to obtain the information it wanted on these customers as it was determined to have no valid criteria. The ruling is a win for taxpayers, and serves as a reminder that it is the courts, not the CRA, that sets the limits on its powers.
“This case highlights the CRA’s attempt to construe its powers in the broadest possible terms. The Court found the CRA’s request was “a full-fledged fishing expedition”, of “unprecedented magnitude”, of “practically unlimited scope” and “a complete lack of consideration for the invasion of privacy and the consequences for all taxpayers involved in the request.””