Commentary Archives - Page 7 of 13

Divorce and taxes

You may think that your legal issues are done after your divorce is settled, but there is still one thing you have to be concerned about and that is your taxes. The Canada Revenue Agency (CRA) has to consider you legally separated and has to be informed of your change in marital status. If children are involved, then you will need to determine who claims the tax credit for eligible dependents and collects child benefits. Failure to be aware of CRA’s requirements and your changed tax situation can be very costly.

Key Takeaways:

If you’re recently divorced, the CRA expects you to notify them by the end of the month following the month your divorce was finalized.
A change in marital status can affect everything from total household income to your ability to qualify for certain tax credits.
Child support is not taxable income by the person who receives it, and the payer can’t claim the support as a deduction. Whereas, spousal support is fully taxable as income, and the paying spouse can claim it as a deduction on their return.

“Changes in your marital status can have a big implication on your taxes and on your financial situation,” says Boivin. “This might be a good time to sit down with your financial professional and review your overall situation.”

This man’s stocks rocketed. Can he move them to a TFSA at purchase price?

Trying to move shares that have increased in value from a private placement into a TFSA is an enviable problem. Unfortunately, there isn’t a way to transfer them at the lower purchase price, and avoid a capital gains tax because a transfer is considered a disposition of these assets at their fair market value. However, there are still ways to reduce the tax and maximize the financial benefits to investors who find themselves in this position. First, you can account for any expenses you incurred, and these costs can be subtracted from the transfer value to reduce the tax owing. In addition, only 50% of the increase will be taxable because of the way capital gains are taxed.

Key Takeaways:

While you can’t adjust the sale price or what you paid for the shares, you may be able to reduce your taxes.
If you have RRSP contribution room, then the benefit of moving it there instead of a TFSA is that the RRSP tax refund will be larger than the capital gains tax owing.
To further maximize the benefit of moving it into your RRSP, the RRSP tax refund could be used to contribute to your TFSA.

“Buy stocks low in a private placement and you could be lucky enough to face a problem if they have grown into something much bigger by the time you move them into an investment account”

Why incorporation isn’t always a magical tax fix

Planning for a business can be complex. There are many aspects of the business that you need to take into account when incorporating, including your business goals, annual tax implications and selling the business.

If the business plan is for it to be like a hobby, then it may not make sense to incorporate. Incorporation comes with expenses, including yearly licensing and accounting to ensure the books are balanced, but if you plan on growing the business, then it makes good financial sense. Incorporation can instill confidence in the business for your customers, and despite not having tax splitting options like prior to January 1, 2018, there are other tax benefits like the ability to retain unneeded income and when you sell the business. Before you begin, all things need to be taken into account as well as your personal and professional goals before you decide to incorporate or not.

Key Takeaways:

From a tax perspective, an unincorporated business that you run generates personal income that goes on your personal tax return. This is considered a sole proprietorship, or, if you had partners, a partnership.
Incorporation could give you access to the lifetime capital gains exemption of $848,252, and selling shares may result in tax-free income up to this threshold.
The drawback of incorporation is the cost, so make sure the costs and extra work are worth it. Many small businesses, especially in the early stages, are better off not incorporating.

“It’s a common misconception that incorporation somehow gives you access to magical tax deductions that a sole proprietorship does not. That’s not really accurate.”

The smart way to invest for your kids’ inheritance

Alex, a 65-year-old widow, asks what is the best way to give an inheritance to her kids. Her plan is to transfer money annually from a RRIF into an investment brokerage account shared with her kids. By not waiting to transfer her wealth, she hopes to avoid having her kids pay the 30-40% tax on her RRSP/RRIF upon her death. Overall, her plan is a reasonable strategy, but it’s important to consider all the implications. For instance, has she thoroughly considered how much money she may need for herself in the years to come, in addition to the implications for her children. Below are some additional items to consider.

Key Takeaways:

Determine how much to withdraw from a RRIF by factoring in the amount of your pension and any other income you have to ensure the government doesn’t claw back OAS.
Ensure your financial needs planning includes high-cost items like healthcare. You don’t give away so much that you don’t have enough for healthcare at 90.
Giving legal ownership of your money to your kids means exposing the money to the kids’ issues: lawsuits, bankruptcies, stealing, divorces and influential spouses, so it’s best to reflect on any potential risks.

“I plan to convert a portion of my RRSP to a RRIF and withdraw $10,000 annually starting 2019…Is this a good strategy?”

Do You Believe In Magic | RIA

David Robertson asks us if we believe in Magic. What he really means is that stock prices do not always align with underlying fundamentals. This is the lesson of some of the great financial crashes. Despite all the evidence that the fundamentals do not justify the price, people continue to believe in what the price appears to be saying. But these are illusions. Market strength creates the illusion of strong fundamentals, because people wrongly see the former as a product of the latter. But this is not reality.

Key Takeaways:

Stories are conjured about more than just exciting new stocks and industries, and sometimes they define a narrative about the economy or the market as a whole.
A discrepancy between real growth and perceived growth arises, and often the whole story is more complicated and less alluring than the headlines of ‘blockchain’ or ‘cannabis’.
Charlie Munger coined the term ‘febezzle,’ or ‘functionally equivalent bezzle,’ to describe the wealth that exists in the interval between the creation and the destruction of the illusion.

“One of the great lessons of history is that it is not so much periodic downturns that can cause problems for long term investment plans so much as it is specious beliefs about supporting fundamentals that can really wreak havoc. Often, we have decent information in front of us but we get distracted and focus on, and believe, something else.”

The CRA is cracking down on aggressive manipulation of TFSAs and all other registered plans

Registered accounts, and particularly TFSAs, are being scrutinized by the CRA because of abuses in which taxpayers earned tax-free interest as well as tax-free withdrawals from these accounts. Anyone caught violating the recently published “advantage rules” for registered plans could be responsible for up to 100 percent tax penalty. The CRA provided examples of how the anti-avoidance rules in the Income Tax Act work to prevent manipulation, including when they might apply. A recent court case ruled against a taxpayer who fought a tax penalty of $125,000 dollars involving his TFSA account.

Key Takeaways:

There are several anti-avoidance rules in the Income Tax Act to prevent abuse and manipulation of all registered plans, including not only TFSAs, but also RRSPs, RRIFs, RESPs and RDSPs.
The CRA can impose up to 100 percent penalty tax on the fair market value of any ‘advantage’ received.
An example is a deliberate over-contribution to a TFSA where the rate of return outweighs the cost of the regular 1 percent per month TFSA over-contribution tax.

“Registered plans must avoid investments or transactions that are structured so as to “artificially shift value into or out of the plan or result in certain other supplementary advantages.” “

Are there TFSA penalties for holding foreign investments?

Canada’s Tax-Free Savings Account (TFSA), as the name implies, offers tax-free contributions, interest, dividends, and capital gains. It can be withdrawn tax free. But what if it contains foreign investments? Would these be taxed? The answer is that it depends. The TFSA guide list “permitted investments.” Any security not on the list is not qualified. The best way to find out if you are safe is to check this list: https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4466/rc4466-17e.pdf.

Key Takeaways:

If the investments you’re considering are listed on the approved list of designated exchanges, then you’re good as long as they remain listed.
Consider your situation. Would a U.S. dividend-paying investment make more sense in your RRSP, RRIF, or open account, where you can recover the U.S. withholding tax?
There are plenty of qualified investments in Canada, so you don’t need to risk a penalty by accidentally placing a non-qualifying investment in your TFSA.

“If an investment becomes delisted and moved to over-the-counter (OTC) then it no longer qualifies, with the exception being Canadian public companies, which can become OTC and still be considered a qualified TFSA investment.”

Three ways to leave a legacy through charitable giving

Philanthropy is spotlighted during ‘Leave a Legacy Month,’ in Canada. To that end, The Financial Post has a few useful suggestions to make giving a part of one’s financial routine. For the short term, cash is one way to make an impact. There are easy and efficient ways to do this regularly, for instance, by taking advantage of payroll deductions and automatic withdrawals, offered by employers and credit card services. If your goal is for longer-term estate planning after you’re gone, then you can create a personal foundation, with a mandate to disperse monies to various charities over a specified period of time. You can also bequeath assets, such as estate funds and tax shares to those organizations you wish to benefit. Donations also come with both federal and provincial tax credits. With the proper planning and professional advice, there are lots of opportunities to make a difference in our own way.

Key Takeaways:

There are many ways to make a meaningful gift to a cause close to our hearts, either in the near term or after we are gone to those organizations that matter to us.
With estate planning, one can bequeath specific amounts to go to charitable enterprises, or one can transfer stock shares.
A donor advised fund allows one to make what is tantamount to a foundation with a mandate to disperse specified fund amounts to various charities over a given period of time.

“Cash donations are the most common way to make an impact on the communities you care about and it has never been easier. Many employers offer automatic payroll deductions and charitable organizations can set up pre-authorized debit options through your bank account or credit card.”

Trudeau Quietly Approves $10.5 Billion Corporate Tax Cut To Compete With Trump

In their recent fiscal update, the Liberals introduced new corporate tax breaks to help stimulate investment in Canada. The move was largely seen as a response to U.S. tax breaks given to U.S. businesses by the Trump administration. Instead of focusing only on Alberta’s struggling energy sector, the Liberals decided to help improve the competitiveness of Canadian businesses across all industries. Some people are concerned about the rising budget deficit, but even with the cuts, the 2018 budget deficit is expected to be lower than the projected C$18.1 billion. Time will tell if this strategy is the right one.

Key Takeaways:

New corporate tax breaks, which will be worth some C$14 billion over the next six years, were introduced in a fiscal update on November 21, 2018.
By allowing businesses to write off capital investments more quickly (particularly in manufacturing), businesses will be further incentivized to invest in expansion, which in turn should help improve competitiveness.
While the cuts effectively hand more money back to Canadian companies, Trudeau’s Liberal Party has resisted cutting the corporate income tax rate (preferring to sneak its corporate handouts in obscure “budget updates” that will likely go unnoticed by the Canadian public at large).

“According to Bloomberg, the cuts represent the Trudeau government’s biggest gift to Canadian businesses since taking power.”

GICs have a hidden commission

Never assume that an investment comes without fees. GIC commissions are often hidden, and many investors do not even realize they are paying them. If you use a broker, a commission is paid to the broker and is included in the cost of your GIC. These upfront commissions are paid because the broker does not make any on-going money (aka”trailing commissions”) after the initial purchase. Be aware that if your broker charges annual fee based on the value of your portfolio, then they should not be collecting it on a GIC, or else it’s considered double-dipping.

Key Takeaways:

Fees on financial products can be transparent or hidden, but they are always in there somewhere.
GICs commissions are so well hidden that very few investors even know they exist.
Advisors deserve to be paid, but you shouldn’t have to pay them twice.

“If you’ve ever wondered why you get better rates when you buy GICs directly from the issuer, rather than through an advisor or brokerage, that’s because direct-sold GICs don’t include that commission to the middleman.”