Commentary Archives - Page 10 of 13

Making sense of how the tax exemption on your residence works

If you are trying to claim a Principle Residence Exemption (PRE) on your taxes, you need to be sure that you are qualified to claim it because if the CRA notices you don’t qualify, the penalties are high. Often owning multiple properties does not allow you to use this credit, but there are ways to do so, depending on how often you reside in these properties with a one year overlap. If you are unsure about using this credit correctly, be sure to read the CRA regulations.

Key Takeaways:

Our Canadian tax law has strict rules around what properties can qualify for the PRE exemption.
The CRA is looking at about 10,000 transactions a year that involve the PRE.
If you own more than one property at the same time, you could end up paying tax on one or both of the properties eventually, if they’ve gone up in value.

“Each family unit (which includes you, your spouse or common-law partner and any children under the age of 18) is allowed to designate one property as their principal residence for each calendar year.”

Be Smart About The Hidden Costs Of Sending Your Kid To University

Along with the many joys of parenthood comes the financial burden of paying for them, and often that includes paying for them all the way through to completing a university or college degree. There are Registered Educations Savings Plans (RESPs) to help Canadian parents. However, with the soaring costs of post-secondary education, they’re frequently not enough. Along with students taking up a part-time job, there are other ways to make it more manageable and in the process help your child acquire some financial literacy, which will help them well beyond their school days.

Key Takeaways:

Teach your children about money and how to budget. This should include a working knowledge of how a bank account works, credit-card interest rates, credit scoring and a general understanding of how much things cost.
Look into scholarships, bursaries and grants. There are many smaller ones that people don’t know about and don’t apply for.
Consider second hand textbooks, technology, furniture, automobiles and more to stretch those dollars and save during their school years.

“Almost from the minute your baby is born, you might start thinking about the financial implications of this wondrous bundle of joy. Not just the costs associated with having a baby, but throughout their life, culminating in what many parents see as the largest expense they will incur with a child: university or college.”

5 Tips For More Cost-Effective Giving This Year

Ultimately, giving is a way to support a cause that you’re passionate about and that you believe in. And so, it’s important to ensure that your donation makes the biggest impact towards the cause, as opposed to an organization’s overhead or other activities like fundraising. To safeguard your giving and make sure it goes to the right coffers, check to see if who you’re giving to matches the kind of passion you have, and don’t be afraid to audit charities. You should be able to look at what you give to a charity as a step toward building the kind of world you want to live in.

Key Takeaways:

Always do your homework before giving and make sure the charities you consider are legitimate and see how they spend their funds.
When you find a charity that is important to you, that you care about and believe in, consider setting up payments to give regularly.
Charities and non profits are not exactly the same, so be sure it is a registered charity by checking the CRA website if you’re wanting a tax deduction.

“Using your head as much as your heart when giving is important, so ensure you’re giving to a charity/cause that will most effectively manage your contribution.”

Avoiding tax and probate when passing down a rental property

If you own a rental property and you’re trying to reduce taxes and probate upon your death for your heirs, then you’ll need to look at the implications of some of the different options you have available. For instance, gifting a property now would trigger a capital gains tax for you now. The property also can’t be passed to your heirs at a low valuation when you pass and would instead be transferred at fair market value. One solution to avoid probate fees and future capital gains appreciation is to setup a trust. Capital gains taxes would still need to be paid, but there will be no probate fees later on. The downside is that a trust can be $5,000 or more for the initial setup, with $1000/year on-going costs.

Key Takeaways:

If you claimed depreciation on your rental property over the years, all this depreciation is “recaptured” in the year of sale – or in this case, the year of death. This is taxed at your regular tax rate, which could be as high as 54%.
Every province has different probate fees payable to validate a will and allow the executors to distribute the assets.
It’s important to prioritize your main goals. If it’s stopping future capital gains tax from accruing, you may need to incur some tax today. If it’s avoiding probate fees, a trust could work, but you need to figure out whether you want the rental income solely for yourselves or to be available for your heir.

“Consider your own retirement needs first and foremost and then get advice from a professional with strong estate and tax knowledge.”

Willful Neglect: Too many Canadians are dying without a will

If you die without a will you leave your heirs at the mercy of legal proceedings without any consideration for what your intentions might have been. Despite this, more and more Canadians are dying without having a will in place. If you want to make sure your assets go where you intend them to go, minimize tax burdens on your heirs or even make sure your children are taken care of, you need to take the time to create a will.

Key Takeaways:

Most people think they don’t have to write a will until they reach their senior years.
No one has the automatic right to deal with your estate after your death.
Without a will, a court estate administrator will decide how to divide the money and it may not be what you wanted.

“You might be equally surprised that over half of Canadian adults don’t have a signed will.”

If you die owning U.S. property or stock, beware of U.S. estate tax

Canadians, who are considering purchasing a vacation property in the U.S., often ask what is the best way to structure ownership of it. The main reason for their concern is to avoid being caught by U.S. estate tax if they die owning the property. In Canada, we don’t have an estate tax upon death, but instead, we have a tax on the unrealized appreciation of assets other than your primary residence. Due to the Tax Cuts and Jobs Act which came into effect in 2018, a U.S. or dual citizen would have to have a worldwide estate of at least $11.2 million to be subject to estate tax upon death. Non-U.S. citizens are still subject to tax for U.S. property, but there are some exemptions, and it can sometimes be prorated. Higher-value properties may require more complex planning.

Key Takeaways:

For U.S. citizens, including dual Canadian/U.S. citizens living in Canada, the U.S. estate tax applies to the fair market value of their worldwide assets upon death. Rates start at 18 percent and reach 40 percent once assets are more than US$1 million.
Canadians, who are not U.S. citizens, are entitled to a US$60,000 exemption under the U.S. domestic tax code, or to the prorated exemption under the Canada-U.S. tax treaty. The exemption is calculated by dividing your U.S. estate property by the value of your worldwide estate, and if your estate does not exceed US$11.2 million, then your estate will get a full exemption from U.S. estate tax.
The effects of the act are currently active until at least 2025, and unless permanent legislation is enacted, the exemption will return to the pre-2018 regime in 2026.

“Most Canadians can buy a condo or vacation home in the U.S. for personal use, just bear in mind the potential U.S. estate tax if you die owning the property.”

How Much Money In An Emergency Fund Is Enough For Canadians?

An emergency fund is important for you and your family when unexpected expenses happen. Unfortunately, according to a 2016 study, about half of Canadians live without one. While not particularly glamorous, everyone should have one to help out when life events from grave situation to inconveniences occur. A general rule of thumb is that an emergency fund includes enough money for up to six months of expenses. It is to be used if you ever lost your job or to cover costs such as medical expenses, or unplanned necessities like a car breaking down or a home appliance needing to be replaced.

Key Takeaways:

Close to half of Canadians do not have enough money in savings to deal with a minor or major life crisis.
An emergency fund should consist of around 3 to 6 months of a person’s living expenses, and should be based on fixed costs like a mortgage and variable expenses like groceries and utilities.
Putting money aside for an emergency fund doesn’t need to happen all at once, and can instead be built up gradually.

“Regardless of the severity, what all these scenarios have in common is you suddenly shelling out money you didn’t plan to spend. And that can be problematic for nearly half of Canadians.”

What to do about your debt and mortgage after the interest rate hike

Banks and consumers in Canada are having to adjust to the increase in the benchmark lending rates. While the increase does also boost the rate paid out to savings accounts, many Canadians are still carrying high levels of debt. Before you do anything as a result of these changes, it’s important to look at what types of debt you have. Any investment that contributes to progress towards your future, like a student loan or mortgage, is considered good. Anything that doesn’t provide any future returns, like credit card debt, lines of credit or other higher interest debt, is bad.

Key Takeaways:

Pay off any bad debt with a higher interest rate first, but also consider what debt you have that is tax deductible.
As much as paying off debt is important, debt that has tax deductibility may be better to keep. For instance, if you are not able to pay off all your debt by borrowing from a TFSA, then you can at least use the deductibility from it to save on taxes and possibly create an income to pay off the high-interest or bad debt.
Consider switching from a variable mortgage rate to a fixed mortgage rate, especially if you believe that interest rates will continue to increase.

“It’s important to be more careful with spending and what kind of debt we are taking on and how and what the plan for repaying it is.”

Pay debt or invest? How to use your tax refund

Fewer people are spending their tax refund on luxury items, and instead are focusing on smarter ways to use it like investing and paying off debt. This raises the question, which is the better option saving or reducing debt? If you have credit cards that have high-interest balances, the answer is simple: pay these first. If, however, you are carrying low interest debt and have investment opportunities that in the long term can bring you a greater rate of return, then it may make sense to invest.

Key Takeaways:

Any high-interest debt, such as a balance on a credit card, should be the priority.
Compare the interest rate you’re paying on your debt with the expected after-tax rate of return of the investment, and also consider your financial picture if the investment falls short or you end up losing money.
If you can tolerate some risk and have a long enough time horizon before retirement you may benefit by skipping extra payments on low-interest debt and instead making contributions to an RRSP or TFSA account.

“The decision is trickier when it comes to debt with less onerous interest rates. Mortgages, home equity lines of credit or car loans may carry much lower interest charges.”

Who reports capital gains if a stock is owned jointly?

Capital gains can be confusing, due to the way they’re taxed, and if they are a shared asset, e.g. owned jointly by spouses. First, it’s important to determine your capital gains by subtracting the Adjusted Cost Base minus your outlays and expenses from the Proceeds of Disposition. The resulting positive number is a capital gain. However, only half of your capital gains are taxed, and you can also offset those gains with any losses you had in previous years. Second, determine the true owner of the asset in the partnership. For instance, if you put in 50 percent and your partner also contributed 50 percent, then it is fair to claim 50 percent of the capital gains.

Key Takeaways:

Half of that gain is taxable; and added to your other income for the year to be subject to your marginal tax rate.
Capital losses can be carried forward throughout your entire lifetime to offset capital gains in your future. They can also offset capital gains of the immediately preceding three years in any order.
Who reports the income depends on who provided the capital or how much each contributed to the purchase of the stocks.

“When you invest together, you get taxed together.”