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How to calculate capital gains tax for an employee share purchase plan

Employee share purchase plans (ESPPs) are common, but they can be further complicated by cross-border issues. When buying company shares from a U.S. based company, you run into tax issues that are unique to U.S. companies. Often for ESPPs you are buying multiple shares over time, and you are subject to the U.S. exchange rate for each share when it was bought and not when you sell it. If your adjusted cost base exceeds $100,000 Canadian, you may also need to file form T1135 Foreign Income Verification Statement.

Key Takeaways:

For Canadian tax purposes, capital gain to be taxed is based on your sale price less your adjusted cost base for the shares sold.
Canadian need to report buying and selling of American stocks on their income taxes in Canadian dollars, which may require exchanging them from U.S. dollars to Canadian dollar amounts.
Employer contributions are recorded as salary on income tax forms.

“For Canadian tax purposes, when you’re buying shares in an ESPP, you need to calculate the adjusted cost base (ACB) for all the shares you have purchased over the years.”

“Should I loan investments or money to my spouse?”

In order to save on taxes, a spouse can legally loan money to their spouse if he or she makes less money. This plan could backfire however if the money loaned is attributed back to the higher income spouse and taxed in their name. If you do a spousal loan, set up the loan in a way that avoids attribution by investing the money in longer term accounts. Income splitting can also be achieved using a family trust to decrease taxes.

“The idea behind a spousal loan is to lend money from a high-income spouse to a low-income spouse. If the subsequent return on the investments exceeds the loan rate prescribed by the Canada Revenue Agency, the general result is that income is effectively moved from one spouse to the other, and the family may pay less tax overall.”

Canada Revenue Agency: 8.1 Million Canadians Are Making This TFSA Mistake

Most investors are warned not to over contribute to their TFSAs but there is another more common mistake many don’t know about. In fact more than 8 million Canadians owning these accounts don’t do it. If you aren’t investing the funds in your account, you won’t make money or benefit from the tax advantage these accounts provide. Holding stocks in your account, such as high yielding ones, allows you to increase your funds while avoiding capital gains and dividend taxes.

“Apart from the fact that not investing your money means you’re missing out on returns, there’s the fact that there’s no tax benefit to holding cash in a TFSA.”

3 Mistakes to Avoid in Your TFSA

A large majority of Canadian investors contribute to TFSAs. Overall, these plans can be a great way to save for retirement, but some investors make costly mistakes when contributing to these accounts. For instance, exceeding your contribution limit will result in a penalty. Carefully track all transactions in your TFSA, including deposits and withdrawals, so you do not exceed the contribution limit. It is also important to choose your investments in these accounts wisely.

Key Takeaways:

Excess contributions are charged a 1 percent per month penalty (for any amount over your total TFSA limit) until you withdraw the funds in excess.
It is best to avoid U.S. stocks that pay a dividend. This is because you cannot claim the non-residents’ withholding tax of 15 percent on these dividends. Instead, it’s better to hold these types of investments in an RRSP where you won’t have to pay a withholding tax on your U.S. dividends.
Rather than holding cash which have very low returns in a TFSA account, invest in stocks to achieve better tax-free returns.

“Be careful not to exceed the contribution limit in your TFSA. Many people go over their TFSA contribution limit without knowing it, and it is very costly.”

Gifting real estate to your adult children

Gifts have real, and often expensive, tax implications when it’s not just a little something that can fit under the tree at Christmas time. Substantial assets, such as houses for example, carry serious ramifications for both your taxes as well as the taxes of the recipient of the gift. If you’re intending to gift assets to someone, you should do some financial planning before going through with the transaction. Speaking with an accountant, can help you determine what taxes are involved, how they can be structured, and whether or not the transaction can be handled in a way that makes the taxes more manageable. And remember, once you gift something, it’s not yours anymore. Giving away a trust fund, or a house, means you have no control over that asset in the future.

“If the tax payable to you today is modest, it may not be that costly to make the transfer. And it means future growth in the property value, which would otherwise trigger more capital gains tax on your death, would instead take place in your daughter’s name.”

Rising insolvency readings in Canada raise red flags — sort of – BNNBloomberg.ca

The number of insolvencies filed in the first September of 2019 has dramatically increased despite a healthy economy. With unemployment as well as interest rates dropping, there is some concern about the rise in numbers of Canadian households that are not able to pay off their debts. Experts however, have pointed out that this rise in insolvency numbers may not be so worrisome as population growth and the decrease in share of insolvencies per 1 billion dollars of household income.

“Normally there’s a story you can tell, like there’s some underlying weakness that shows up with a bit of a lag in personal bankruptcies and insolvencies.It’s just hard to see that now. It’s perplexing.”

Three reasons why RRSPs still matter — and one of them you probably didn’t

For years, an RRSP was the only tax-assisted retirement savings plan. New plans, such as a TFSA, now appear more attractive, especially to younger employees. However, there are still some advantages of RRSPs. First, they are more effective for those in a higher tax bracket. And, RRSPs may also be better for young people based on their “effective” tax rate, which factors in clawbacks of government freebies like the Canada Child Benefit (CCB). Second, RRSPs are better when holding foreign dividends or interest, because TFSAs aren’t recognized as tax-sheltered accounts by foreign nations, so they’re charged a 15 per cent withholding tax. Third, RRSPs can also help for higher education through the $20,000 for the Lifelong Learning Plan, or save for a down payment for a first home with the Home Buyer’s Plan (up to $25,000 for individuals and $50,000 for couples). If you can afford it, then most experts advise having both accounts.

Key Takeaways:

Now that there are other, good options like the Tax-free Savings Accounts (TFSAs), RRSP’s are starting to lose some of their luster.
RRSPs provide a tax deduction, which is often accompanied by a tax refund in the spring. TFSAs don’t, although they will shine in retirement because their withdrawals won’t be taxed, which means they won’t trigger OAS (or even GIS) clawbacks.
For higher-income Canadians, the RRSP is better than a TFSA for retirement savings, as there is a clear advantage of receiving the deduction at a higher marginal tax rate, and paying tax in retirement at a lower marginal tax rate.

“With a looming March 1 deadline for RRSP contributions to defray income taxes for calendar 2018, not to mention the tax-filing crunch looming on April 30, some pundits question whether the RRSP’s time in the sun has passed.”

CRA: If You Make This TFSA Mistake, the IRS Will Tax You, Too!

If you have a TFSA and contribute dividend incomes to the account from any investments that originate in the U.S., be prepared to owe taxes to the IRS. The U.S., among other countries, are allowed to tax foreign dividends. US investors can expect to pay fifteen percent of their dividends to the IRS. Some account holders find that the capital gains after the fifteen percent is taken is still worth the investment. However, if you have the contribution room, it’s best to keep your U.S.-based dividend stocks in your RRSP where the foreign withholding tax is exempt.

“If you make this mistake, you could find yourself paying up to 15% a month on dividends, even in your “tax-free” account.”

Federal poll finds few Canadians believe wealthy and corporations pay fair share of taxes

A recent poll in Canada revealed that a majority of those polled feel that the wealthy and large corporations should be taxed more to support the poor. Most individuals polled said that everyone should pay their fair share. They also agreed that tax evasion causes a worse situation for those who are in fact honest. However, some people felt that a little bit of cheating on tax reporting was all right. Most respondents felt that taxes have improved since they were polled in 2011.

“When asked if it was acceptable to not declare income received under the table on tax returns, more than three-quarters of respondents said they disagreed, and 78 per cent disagreed that tax cheating is not a real crime.”

The challenge of estate planning with blended families

In estate planning, a question raised by many couples with a blended family, is what to do if one dies before the other and what each of their children (from previous marriages) can inherit. The goal is often how to ensure their wishes are followed if they die first, how to protect their beneficiaries, how to support the living spouse, and finally, how to minimize taxes. This situation can sometimes be further complicated by the estate planning process, which may not address all these areas. By getting separate lawyers and the right advice, then you can ensure your estate planning concerns are properly addressed.

Key Takeaways:

Wills are not contracts or estate plans. Some lawyers make wills based on your instructions, and this may satisfy your wishes but not be tax efficient.
An estate plan can include life insurance, registered investment plans, and pension benefits, which may be designated or jointly owned, and would not be controlled by your will or executor.
If a couple uses the same lawyer, then this lawyer cannot take sides in any discussion of your estate plan, and this may prevent your lawyer from commenting on changes to your proposed distribution.

“Planning for blended families is challenging. If you do not meet your spousal support obligations, expect your estate to wind up in court.”