Commentary Archives - Page 2 of 13

Out from behind the eight ball: Top tips on how to save your small business its much-needed money

Small businesses can keep more of their money by taking advantage of a number of ways to save. For instance, try co-sponsoring an event with a complementary business in order to share the expenses as well as the networking benefits. Join a professional organization that offers discounts and other beneficial perks that will help you to grow your business. If you can’t pay off your credit card debt each month, at least make sure your card has a low interest rate and a solid rewards program. Trying any number of these can lead to surprising savings.

Key Takeaways:

Partnering with a complimentary business can provide you with opportunities to co-organize events and engage in cross-promotional marketing.
Open-source office productivity software can get you out of some expensive recurring licensing deals.
Once or twice a year, do a vendor audit to examine what you spend money on and if there are ways to save.

“There is strength and safety in numbers. Find and partner with companies to take advantage of bulk-buying discounts by purchasing and sharing larger orders of the same product.”

Personal Investor: Sometimes a TFSA is better than an RRSP

With the March first deadline, many are ready to contribute to their RRSP accounts, but you might want to put your money elsewhere. While RRSP investments grow and can be bought and sold with no tax consequences, they are taxed at withdrawal. TFSA has the benefit of growing tax-free and funds not being taxed at time of withdrawal. Those in the workforce might benefit from one account over the other depending on their personal financial situation, or they may choose to have both.

Key Takeaways:

The amount you contribute to your RRSP can be deducted from your taxable income. However, they are fully taxed at the individual’s current rate when funds are withdrawn from the RRSP.
An RRSP generally has a larger contribution (18 per cent of your previous year’s income to $26,500 for 2019), while the TFSA only allows up to $6,000 for 2019.
TFSA contributions cannot be deducted from your income, but withdrawals are never taxed including gains on any investments, and they can be withdrawn at any time.

“Before making a contribution, you might want to consider the relatively new kid on the block: the tax-free savings account (TFSA).”

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.”

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.”

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.”

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.”

The clearance certificate: what it is, and why it matters

When someone passes away, estate executors are responsible to keep seven years of the deceased tax receipts, unless a clearance certificate is obtained. Appropriate documentation is needed, and a TX19 form has to be filled out and filed. Executors, after obtaining the certificate, can distribute the assets of the deceased’s estate without worrying about owing taxes down the road. Once the beneficiaries have approved, the certificate can be used to close the estate allowing everyone to move on.

Key Takeaways:

Obtaining a clearance certificate is not required by law, but an executor risks incurring tax liability without one.
Requesting a clearance certificate requires filing Form TX19 along with all required estate documents and may take about 6 months for processing.
If estate assets are to be distributed before obtaining a clearance certificate, executors should reserve assets valued at two to three times any expected tax liability.

“One of an executor’s most important jobs is to obtain the clearance certificate: written confirmation from the Canada Revenue Agency that the deceased (and the deceased’s estate) has paid all taxes and associated interest and penalties up to the date the certificate is issued. “

Can I reclaim the withholding tax on my U.S. stocks?

Claiming U.S. withholding tax is only possible in recognized tax-deferred registered accounts and non-registered accounts. The U.S. only recognizes an RRSP and not an RESP or TFSA. Therefore, for a registered account, it is only possible for RRSP account and any foreign taxes in an RESP and TFSA cannot be recovered. Outside a registered account, you can claim withholding taxes on your Schedule 1 or Form W8 for U.S. dividends, which ensures you don’t pay tax on the same income in both Canada and the foreign jurisdiction.

Key Takeaways:

Inside an RRSP there is no need to report anything for foreign taxes paid, and there is no immediate recovery of the tax, either.
Foreign taxes paid in an RRSP will reduce the amounts of money available for distribution to you on retirement.
Foreign investments in RPPs, PRPPs, RRSPs, RRIFs, RESPs, RDSPs, or TFSAs do not have to be reported on a T1135 Foreign Income Verification Statement.

“RRSPs are exempt from U.S. withholding taxes but RESPs and TFSAs are not. This is because the U.S. does not recognize them as tax-deferred registered accounts.”

Are you self-employed? Know your tax obligations

Canadians who are self-employed have slightly different tax obligations that they need to be aware of to ensure that they stay on the right side of the CRA. For instance, one difference is that while their tax return can be submitted later (e.g. their 2018 tax return was due on June 17, 2019), but any money owing on their 2018 return needed to be paid by April 30, 2019 or be subject to a late-filing penalty. Income earned from self-employment also requires you to keep good records of your business activities as they may be needed to support any tax claims you made on your return, if the CRA asks you to provide proof. It’s important to retain these records for six years.

Key Takeaways:

Individuals need to report their income from any business they run themselves or with a partner in that year’s tax return.
Any earned income that has no tax withheld or does not have enough tax withheld during the year, may require payment of tax by instalments throughout the year.
Sources of income can be from rental, investment, or self-employment income, if you receive certain pension payments, or if you have income from more than one job.

“If you own a business or carry out a commercial activity, keep complete and detailed records.”

How will a pension buyback impact your income tax return?

Public sector pensions use formulas based on the length of service made by an employee to determine that employee’s pension when he or she retires. A pension buyback allows an employee to buy an amount of service, or time, that increases the pension’s value. This buyback amount can be tax deductible, but usually, it will need to be planned carefully to maximize the benefits. For example, a large buyback can result in it being greater than your income for that year. Since you can’t deduct more than your income nor can you carry forward non-deducted amounts to a following year, it might be better for it to be structured over several years. Another option is to pay for some or all of it with registered in contrast to non-registered funds.

Key Takeaways:

In the federal government’s defined-benefit pension plan, a pension buyback is a legally-binding agreement “to purchase a period of prior service to increase your pensionable service under the federal public service pension plan.”
When using a transfer from your Registered Retirement Savings Plan (RRSP), you won’t get a tax deduction for the past service you purchase.
The right solution will depend on the availability of funds to use for the buyback, the source of your funds, and the size of the buyback amount relative to your taxable income.

“Even if you can deduct the cost in one year, it’s usually better, from a tax standpoint, to take the deductions over several years, if you have that option.”