Commentary Archives

What every parent needs to know about deducting child-care expenses come tax time

If you need to pay for childcare in order to work or go to school, you can deduct what you pay for child care provided you meet certain conditions. Deductions can range from $5,000-11,000 per child and must be claimed by the parent with the lower income earned in the past year and is limited to two thirds of the lower-income spouse’s “earned income.”

Key Takeaways:

The expense must be specifically incurred to allow the parent to work (or go to school). An exception was recently made to the work and school rule for when a child is disabled, and in this case, you can deduct babysitting costs to be able to perform weekend tasks allowing you to work during the week.
The child-care expense deduction is limited to $8,000 annually for a child under the age of seven, $5,000 for other eligible children aged seven to 16, and $11,000 for a child who qualifies for the disability tax credit.
Child-care expenses incurred does not need to be paid for each eligible child. You can claim based on the ages of your kids and the respective limits.

“If you spend money on child care to enable you to work, carry on a business, or to attend school, you may be able to get a tax deduction on your return for the cost of child-care expenses.”

How to Find the Best C.P.A. or Tax Accountant Near You

Take the time to hire a reputable tax pro and review their work carefully to help ease your worries this tax season. Be careful to select the most qualified tax professional for your own particular situation. Unfortunately, there are some advertised providers who may be out to scam you. Some ways to find the best provider for you is to ask friends and relatives who they recommend, search professional directories and look at national CPA organizations. It is a good idea to be thorough and interview a number of people before you make your final decision.

Key Takeaways:

Step 1: Compile a list of potential C.P.A.s and tax accountants by asking friends, family, and co-workers for referrals.
Step 2: Narrow down your options by verifying their credentials, reading online reviews and making an appointment.
Step 3: Interview a prospective C.P.A. by asking key questions, like how long they’ve been an accountant, if they have any specialities and who will work on your return.

“C.P.A.s and accountants tend to focus on particular niches or specialties, such as small-business owners, high-net-worth individuals, or clients who work in certain industries. If you have specific needs — maybe you own a small business or rental property, or you hold foreign investments — you should work with someone who specializes in working with clients like you.”

How to calculate capital gains on the sale of an income property

Capital gains sales carry tax implications, and the calculation be tricky if you’ve used your home as both a primary residence and a rental property. The catch to exclude the time it was your home from your capital gains calculation is that there’s paperwork involved. Typically, you need to document the original cost, as well as the current sale price, of the house. The difference between these would be the capital gains if the asset, the house, has appreciated. Since it was also your primary residence, you can deduct this and this will help you determine if, or how much of the house sale can be excluded from capital gains tax.

Key Takeaways:

To calculate the capital gains, you will need three things: the original cost of your house when you purchased it, the fair market value (FMV) of your house when you started renting it, and the selling price of the house.
Because your principal residence is exempt from capital gains tax, you will need to determine the fair market value when it changed from being your residence to an income property.
In this case the calculation is: Taxable capital gain = Capital gain – Principal residence exemption

“The tricky part of this exercise is determining the 2016 Fair Market Value (FMV) of your house. You could look at what similar houses were selling for in your neighbourhood, or look at the yearly assessed value for property taxes.”

How does income from a rental property create RRSP contribution room?

A retiree has rental income both here and abroad. He is responsible for reporting profit made on those incomes both here in Canada and abroad. Foreign and domestic incomes from rental properties are eligible to increase your earned income, which is used to calculate your RRSP contributions room. If you have property in other countries and are experiencing difficulty reporting the net rental income from these properties to add to your RRSP room, you are likely not doing the appropriate reporting for tax purposes.

Key Takeaways:

Canadian residents are taxed on their worldwide income. Therefore, foreign rental income is taxable in Canada but not everyone knows or reports this income.
Income may also be taxable in the country in which it is earned, and may require filing of a foreign tax return as well. To avoid double taxation, foreign taxes paid are generally eligible to claim for a foreign tax credit in Canada.
Domestic and foreign net rental income is considered earned income for RRSP purposes. Net rental income is gross rental income minus deductions like mortgage interest, property tax, insurance, and maintenance. Net rental losses, when expenses exceed income, reduce earned income when calculating RRSP room.

“If you are looking for tax deductions, you can deduct depreciation on your rental property. CCA can be used to reduce your net rental income to zero, but not to create a net rental loss. Reducing your net rental income will reduce your earned income and resulting RRSP room.”

Is an RRSP loan a good idea?

Should you borrow money via a loan offered by Canadian banks to make contributions to your Registered Retirement Savings Plan (RRSP). According to a recent MoneySense article, that depends. Currently RRSP loans are at a bank prime rate of 3.95%, which Heath says is advantageous. Further, most Canadian banks will lend up to $50,000 with a repayment period of up to ten years.
RRSPs are most beneficial if you had a high income year, perhaps with bonuses, in 2019, but expect to withdraw funds in a future low-income year. Low-income earners are more likely to benefit from a tax-free savings account (TFSA) as opposed to an RRSP.

Key Takeaways:

Since stock markets go up 67% of the time, you may do better making a monthly lump sum payment into a RRSP rather than taking out a loan.
A lump sum payment is likely to outperform dollar-cost averages over a 5-year period of time.
Canadians considering RRSP loans should carefully examine their monthly cash flow, current debt and tax bracket before taking on more debt than they can really afford..

“RRSPs are generally a beneficial tool if you can contribute in a high-income year and withdraw in the future in a low-income year.”

Avoid CRA scrutiny

Every taxpayer fears the day when they get a letter saying they are being audited. While some audits are random, the CRA has discovered that targeted audits are better at identifying non-compliance. Therefore, they tend to focus their audits on high-risk areas. Knowing this, taxpayers can reduce the risk of an audit by avoiding red flags. For instance, one red flag is filing an adjustment (T1-ADJ Form). Other types of activities are listed below. Due to the time and hassle involved with an audit, the best advice is to ensure your return is completed properly the first time.

Key Takeaways:

Failing to respond to the CRA if they reach out to you will significantly increase your risk of being audited.
It is important to take care when reporting net losses in a business or rental property for multiple years.
Notable changes in income, your reported income doesn’t match your home’s value or if you sold real estate in the last year might cause the CRA to take a closer look at you and investigate further.

“While some audits are still random, a new approach by the CRA was undertaken following a study that found that random audits detected far fewer cases of significant non-compliance versus targeted ones.”

Investing tips for dual citizens of Canada and the U.S.

If you have a dual Canadian/U.S. citizen citizenship, be prepared to be fully taxed like a U.S. citizen by the American government, regardless of whether you’ve lived there or not. Therefore, to stay on the IRS’s good side, you need to be careful about where you’re holding what type of investments. For instance, TFSA accounts will be taxed and should be avoided. In general, a good strategy is to hold for Canadian stocks and bonds in an RRSP, with foreign equities with U.S.-listed ETFs being held in a non-registered account to minimize the taxes. It is also wise to seek professional advice.

Key Takeaways:

The rules affecting U.S. citizens in Canada are complex, and the consequences of non-compliance can be high.
Most experts agree that dual citizens should not open a TFSA at all, because while Canada and the U.S. have a tax treaty to harmonize the way pensions and retirement accounts are taxed, this does not cover Tax-Free Savings Accounts.
A U.S. persons living in Canada needs to be careful when investing in non-registered accounts, as income from most Canadian-domiciled mutual funds and ETFs to be Passive Foreign Investment Companies, or PFICs, may be subject to higher taxes.

“More than any other country, the U.S. keeps its expatriates on a short leash. If you’re a U.S. citizen, you’re generally considered a U.S. person for tax purposes.”

What you need to know about the costs of appealing a tax decision

Disagreeing with how the Canada Revenue Agency has assessed your return is a right of every Canadian. Everyone is allowed their day in court. Depending on the complexity of your case and whether you take the general or informal procedure will affect how expensive going to court can be. The general route will require a lawyer and formal court procedures are followed.The informal route can be beneficial when the amount involved isn’t cost-effective to hire a lawyer, but be aware that hidden costs like your time and the amount you’re awarded may be significantly less than you were expecting.

Key Takeaways:

There are two options when appealing to the Tax Court of Canada: the “general procedure” or the “informal procedure.”
The informal procedure is limited to cases where the amount of federal tax and penalties in dispute for each taxation year, excluding interest, is $25,000 or less or $50,000 for a loss.
Costs can quickly add up regardless of which route, and in the end, even if you’re successful the awarded costs are often significantly less than what you’ve spent on a lawyer or the perceived value of your time.

“The costs, both out-of-pocket and your time, quickly add up.”

Personal Investor: 4 money-saving tax tools for the average investor – BNNBloomberg.ca

If you have investments, expect to pay taxes. Fortunately, there are four ways – almost anyone can use – to can save at tax time. First, as many people know having an RRSP allows you to defer taxes on your contribution, so you can withdraw the money at a future time in retirement at a lower rate. Unlike an RRSP, investments to Tax-Free Savings Accounts Accounts (TFSA) are not deductable, but future returns from investments in a TFSA are not taxed – ever.

Key Takeaways:

Other options for saving money on your taxes (outside an RRSP or TFSA) include choosing tax saving investments that allow you to use the dividend tax credit, or will return capital gains, which are taxed at 50 percent in the year you sell it versus 100 percent from fixed income.
The dividend tax credit is a non-refundable tax credit which applies when Canadian dividends are included in income.
Taxpayers can even benefit from a capital loss by deducting it their capital gains going back three years or forward indefinitely.

“Tax breaks aren’t easy to come by for the average investor. That’s why it’s important to take advantage of whatever is available.”

The facts of life (insurance)

One-third of Canadians don’t have life insurance. The main reason is that death is hard to talk about; so many people avoid it and thus don’t buy life insurance or adequately plan for what will happen when they’re gone. For instance, one myth is that an employer’s life insurance program is adequate. Generally, it’s a good start, but you may also need individual insurance not tied to an employer to fully cover all your sources of income such as commissions, bonuses and second jobs. About 80% of consumers overestimate the cost of life insurance. Premiums are based on age, overall health, whether you smoke, family history, etc. so depending on these factors it can be quite affordable. Canadians need to be aware that there are lots of options, which can help people plan for and help families through a devastating loss.

Key Takeaways:

The majority of Canadians don’t have life insurance because it is hard to talk about.
Life insurance is important for the primary wage earner, but also for a partner who doesn’t work because of all the household tasks that may need to be hired out.
Life insurance allows people to keep together what they’ve put together, which makes not having life insurance more expensive than any policy.

“Canadians believe that life insurance is important but they put off the buying decision and so it’s not usually top of people’s priorities. It should be.”