Commentary Archives - Page 12 of 13

Is it better to hold U.S. stocks in a TFSA or RRSP?

Withholding taxes can come into play when you’re considering whether to hold U.S. stocks in a TFSA or RRSP. Knowing where your U.S. stock should be held will help you get the maximum benefit from your investment. For instance, if you have a blue-chip U.S. stock, then you need to consider if your return, even after the 15% IRS withholding tax, will leave you with a better return than Canadian investments. The timing of your retirement can also help determine where you should hold your investments. An RRSP is a better account to keep U.S. stocks, unless you plan on retiring soon in which a TFSA makes more sense.

Key Takeaways:

If you own U.S. stocks, the IRS requires that taxes are withheld regardless of the fact that the stocks are held in a tax-free TFSA account.
The IRS does not levy withholding taxes on U.S. investments held in an RRSP.
If you are unsure about the tax implications, including how provincial taxes will affect your investments, always seek professional advice.

“If you are intending to hold for a long time, then moving your stocks to your RRSP account and holding Canadian investments in your TFSA may be a good strategy.”

When two people are on the title to a condo, who pays capital gains?

When Kurt purchased a condo, his father co-signed for the mortgage. Now that he wants to sell the condo and his dad is on the title, he wants to know who will be subject to the capital gains tax? The answer is that regardless of who is the named owner of a piece of property, the person subject to a capital gain tax will be the beneficial owner of the property. The beneficial owner is considered to be the person who maintains possession of the property along with it’s use and risk, often evidenced by things such as maintaining insurance on the property or any entitlement to income.

Key Takeaways:

For tax purposes, capital gains are reported on the tax return of the beneficial owner of the property.
In Interpretation Bulletin 170R, the CRA describes beneficial ownership as having possession, use and risk as its primary attributes.
In this case, the beneficial owner is Kurt and not the co-signer.

“Figuring out who “owns” a property is key.”

Should Pete sell mutual fund to pay down the mortgage?

Pete has a low fixed-rate mortgage, and although he pays the required bi-weekly payments, he is able to pay an annual lump sum with no fees attached. He can get the money by selling his mutual fund, but he is questioning if this is a good idea. After evaluating the positives and negatives, the answer is no, because the interest rate in the mutual fund is higher than the mortgage interest rate. Another reason not to do this is that there could also be hidden fees and tax consequences (if held within an RRSP) of selling a mutual fund.

Key Takeaways:

Withdrawing from investments to pay off your mortgage could have hidden fees associated with it, and is generally not a good idea.
Increasing your payments on the mortgage if you have surplus cash could be helpful for the future.
If you increase payments on your mortgage, make sure to choose an amount that will not cause you financial hardships in the future.

“People want to know where their money will be most effective. [But] selling high returns for low-rate debt doesn’t add up.”

Should I contribute to an RRSP even though I’m retired?

Bruce has $15,000 in unused RRSP contribution room and wonders if it makes sense to top up his RRSP. Making an RRSP contribution is a useful way for Canadians to defer taxes and reduce their income to get into a lower bracket. It is also an excellent way of saving for retirement. Up to 18% of gross income can be contributed into an RRSP. However, it is only worthwhile to contribute if it will lower your tax bracket. So, if you are retired and your contribution and withdrawal years will be in the same tax bracket, then contributing to a RRSP is not necessary.

Key Takeaways:

Continuing to contribute to your RRSP works in your favour if you are taxed in a higher-income bracket than when you are withdrawing the taxable RRSP/RRIF for income.
If you do not use up the 18% annually, the remainder accumulates as unused RRSP contribution room and can be used in future years when you can contribute.
It’s most effective if there is a difference in the tax bracket between contribution year and withdrawal year.

“I’m 70 years old, retired on a fixed income, and my tax bracket is not forecasted to change going forward. My question is, I have $15,000 in unused RRSP room. Should I contribute prior to converting to a RRIF?”

Here are your income splitting options now that the private corporation avenue is dead

Income splitting, the practice of small business owners giving dividend income to family members, regardless of their employment status within the company, has been curtailed due to new tax regulations that went into place the first of the year. This increases the tax burden on small businesses. There are however, some ways to continue doing this. If you do it correctly you can income split on your personal income or to spouses and children without breaking the new tax laws.

Key Takeaways:

Income splitting is where someone with more money in the family transfers some to someone with less money to help with taxation burdens and make everyone a bit more level.
Seniors can still split eligible pension income with a spouse or partner through annuity-type payments from an employer-sponsored registered pension plan, RRIF or Life Income Fund, or by contributing to a spousal RRSP.
Spousal income splitting can be done through a prescribed rate loan strategy whereby the funds are loaned to your spouse or partner to invest and excess returns are then split. A modified version of this will work to income split interest or dividend income with your kids.

“There are still a bunch of perfectly legal income-splitting strategies you may want to consider for this tax year.”

What’s An Average Credit Score For Canadians And Why Does It Matter?

Credit scores say a lot about you and your financial health. This three-digit number represents how good someone is at paying back debt borrowed through credit cards, student loans, a line of credit and other similar debt instruments. People with numbers above 700 are deemed very good at paying off these loans. Lower scores may be a result of maxing out credit, missing payments or carrying a balance from one month to the next.

Key Takeaways:

Credit scores can go up and down depending on your financial situation.
Keeping this number high is especially beneficial if you want to make a big purchase like buying a home or a car.
Depending on the job you’re applying for, some companies may even look into it to see how responsible you are with spending and managing their money.

“Credit scores are three-digit numbers with far-reaching consequences. The average Canadian scores around 600, with numbers in the 700 and above considered “very good.””

Essential Stuff To Know Before You Start A Business

Owning a business can be very rewarding, and when you’re starting a business, proper preparation and organization can go a long way to setting you up for success. An area of business often overlooked by entrepreneurs is the new task of managing finances and taxes, which can be complicated. Even decisions you make before you begin can affect your business. For instance, while a business owner may need to invest a sizable amount of money upfront, that amount can be claimed as a business expense on your tax return – provided it was incurred after you actually started the business. Therefore, it’s wise to minimize any business expenses until you are up and running.

Key Takeaways:

One of the very first decisions to make is what type of business structure you want to create – sole proprietorship, partnership or corporation. The type you choose will be the main deciding factor for how you will be taxed by the Canada Revenue Agency (CRA).
Right away, you’ll want to signup for a business number (BN) with the government, and CRA program accounts like GST/HST, payroll program and import-export program accounts.
It’s wise to surround yourself with experts who can help, from seasoned mentors, to other entrepreneurs to tax experts.

“Running a successful business takes drive, innovation, passion and … wait for it … organized bookkeeping! That wasn’t what came to mind, was it? Most Canadians don’t dream of owning their own business so they can handle payroll and complicate their income tax return.”

How to tell the taxman you’re selling your home

When selling a home, your taxes are impacted too. The Canada Revenue Agency (CRA) considers a profit on the sale of property to be a capital gain. But, CRA allows for a primary residence, or family home, to be sold at a profit without having to pay capital gains tax. There are caveats of course. There can be only one family home sold per year and the owner must be legal age and documented. Also, there is a list of acceptable domiciles that are considered home. Check with your accountant or CRA to make sure you qualify.

Key Takeaways:

When you sell your property, any increase in value is known as a capital gain and subject to tax. The amount is based on your marginal tax rate and is charged on only half of the profit earned from selling the property.
There is a exemption on a family’s primary residence, which means you don’t have to pay any tax (even if you end up earning a profit) on the sale of your family home.
Whenever you sell your primary residence, CRA requires that you report this sale on your income tax return even though the sale isn’t taxable.

“Canada Revenue Agency (CRA) provides Canadian homeowners with an exemption from taxes owed on the profit made from the sale of your principal residence.”

How the federal tax-reform proposals miss their target

In principle, a government proposing tax changes to bring fairness and neutrality to our tax system is welcome. The present federal tax-reform proposals aim to target three key areas: (1) limit the spreading of income as capital-gains, (2) investment in passive assets using corporate after-tax earnings, and (3) corporate earnings paid out as capital gains instead of taxable dividends. However, the current reform proposals appear to have missed their intended target of wealthy, big businesses that try to avoid their taxes. In addition, these changes overlook the principles in the current system for small-business tax treatment, that were a result of balance and compromise over decades, and recognize the considerable financial risk they take when starting, operating or expanding their businesses.

Key Takeaways:

Even though these reforms are aimed towards big businesses and high-income individuals, smaller businesses are the unfortunate casualty.
While having a relatively little impact on revenue for the federal government, the new rules on income splitting will have the consequence of complicating tax compliance for family enterprises.
Small-business owners seeking to retire with a modest amount of savings could see themselves hit with a giant tax bill.

“Expediency should not come at the cost of complexity, inequity, double taxation and retroactivity.”

Meaningful Questions That Must Be Answered Before Tax Reform For Private Corporations Is Implemented

On July 18, 2017, the Department of Finance released tax proposals and draft legislation that obliterates the current system that has been used in Canada for decades. Rather than targeting the flaws, the government’s proposals amount to tax reform. By saying they are “closing loopholes” and ensuring payment of “fair share of tax,” it is the opinion of this tax lawyer that this language being used to describe these changes is purposely meant to persuade the public into believing that these changes are in their best interest and to keep critical thought about their implications to a minimum. Small- and medium-sized business are vital to our economy, and thus changes require at the very least adequate consideration and discussion before implementation.

Key Takeaways:

Questions that should be answered during tax reform efforts include but are not limited to: who will benefit, how should Canada’s small and medium-sized businesses be taxed, and how should private corporations be taxed?
In Canada, our tax systems aim to achieve integration. This means the tax rate of income, which travels through a business first, should be no more or no less than the rate that would apply if the individual had earned it directly.
Tax law and policy are too vital to the health of the country, to be tampered with in a hurried manner for unknown reasons and with unconsidered consequences.

“So far, the only answers our government has provided us with are those of the sort that mute public discourse and create unnecessary tension between members of the “middle class”. So far, the government has provided so little time for consultation that the “consultation” can only be inferred to be superficial. The public at large and our entrepreneurs deserve better.”