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USMCA’s new duty allowances a heads up for Canadian e-tailers

The new North America trade deals present a challenge (and an opportunity) for Canadian retailers. The recent changes have increased the minimum transaction necessary to pay online duties and sales taxes on imports (“de minimis” rules), which makes online purchases at U.S. sites more attractive to Canadian shoppers. These changes should also serve as a wake-up call to Canadian businesses. Those who are not doing so already can take measures such as retooling websites, upgrading technology, and championing local credentials to consumers who want to buy Canadian.

Key Takeaways:

The US/Mexico/Canada agreement can result in increased profitability for Canadian Retail businesses if they up their game.
Canadians prefer to buy Canadian, so retailers need to make it as easy as possible for them to do so by utilizing new technology and trends, such as mobile commerce.
Brick and mortar stores should provide an enhanced experience to lure customers in and to buy.

“The truth is, Canadian retailers should worry less — and seize the moment to take advantage of change. The de minimis changes can offer new opportunities, particularly for small- and medium-size retailers in Canada.”

Personal Investor: Time for a post-deadline RRSP tax strategy – BNNBloomberg

Canadians often contribute to their RRSP specifically for the purpose of reducing their income to receive a tax refund. However, it’s important to look at the bigger picture to determine whether those contributions would be better placed in a TFSA rather than an RRSP from a retirement tax perspective. Investing too much in an RRSP can cause a greater amount of funds to be paid in taxes depending on if you’re in a higher tax bracket when you retire and may include a reduction in benefits. Diverting some of your funds to a non-taxed TFSA can help you avoid paying too much of your hard-earned retirement income to taxes.

Key Takeaways:

One of the problems of striking the right balance is not knowing how much investments will grow inside an RRSP.
Canadians now have the advantage of diverting some of their retirement savings from an RRSP to a TFSA, where withdrawals are never taxed.
Working with a professional can help you determine the mix of RRSP and TFSA contributions based on your situation.

“As odd as it may seem, there’s a real risk you could be contributing too much. Many senior Canadians regret packing their RRSPs through the years as they face higher tax brackets when they withdraw their money and, in some cases, forced minimum withdrawals that result in Old Age Security clawbacks.”

Canadians love their tax refunds, but it’s blinding them to better tax plan

Most Canadians who receive a tax refund treat it like winning the lottery. However, financial planners point out that you actually overpaid during the year, and your money could have been better utilized instead of simply being returned at tax time. Canadians who file a T1213 form can keep more of their money throughout the year, and can then put it to use in investment accounts such as an RRSP. Canadians need to think differently about taxes, and especially tax refunds, because if done correctly, they can keep even more of their money.

Key Takeaways:

In the CIBC study, 63 percent of the 1,516 randomly selected Canadians didn’t know their tax refund was their own money, and instead believed that their tax refund was a “windfall of unexpected money.”
Filling out a T1213 “Request to Reduce Tax Deductions at Source” can reduce how much tax is withheld from each paycheque, which allows individuals to allocate it to RRSPs or childcare when they are paid, instead of waiting for a refund.
Instead of putting those funds into an everyday savings account, which taxes the interest income earned, choose investments with capital gains and dividends, which will be taxed less.

“The short-term euphoria of getting a tax refund that fades when you realize you’re getting your own money back,” Golombeck said in a release accompanying the poll. “A better plan is to ensure your portfolio operates as tax-efficiently as possible to keep more of your money throughout the year.”

Your cheatin’ heart: why do taxpayers lie?

Overstating deductions, and understating incomes are common ways people cheat on their taxes to the tune of $15 billion a year in Canada. People usually have their own personal reasons for cheating including feeling they owe too much or in anger against the Canada Revenue Agency. The CRA uses a number of ways to correct information such as through whistle blowers, encouraging honest reporting or offering voluntary disclosures. Of those who voluntarily disclose, two-thirds are motivated by external factors such as avoiding a penalty, and one-third did so because of a personal sense of ethics.

Key Takeaways:

Cheating occurs when a taxpayer deliberately overstates a deduction (such as a business expense) or understates income (such as cash tips).
The CRA combats incorrect information on tax returns through: 1) encouraging honest reporting on tax returns; 2) whistleblowers; and 3) voluntary disclosures.
If a taxpayer has cheated in the past, a voluntary disclosure allows them to report the correct amount without fear of penalty or even jail time.

“It’s probably no surprise to you that people cheat and lie on their taxes. And they do this to the tune of $15 billion dollars per year.”

What to expect when the Canada Revenue Agency (CRA) contacts you

Canadian citizens know who the Canada Revenue Agency (CRA) is, so if you’re contacted, be sure that you’re communicating with the real CRA. Scammers impersonating CRA agents are rising in numbers, and for this reason it is critical that Canadians know what a CRA agent would ask and would not ask. For instance, on a phone call, a CRA agent will never demand immediate payment or threaten you with imprisonment, and the same goes for mail. Additionally, CRA agents will never request payment over emails – so be wary.

Key Takeaways:

The CRA will never ask for financial information by email and ask you to click on a link to complete a form.
The CRA won’t demand immediate payment by Interac e-transfer, bitcoin, prepaid credit cards or gift cards.
The CRA may verify your identity by asking for personal information such as your full name, date of birth, and address; or for a business, they may ask for details about your account.

“When in doubt, ask yourself – Why is the caller pressuring me to act immediately? Am I certain the caller is a CRA employee?”

Many Canadian SMEs face taxing problems

Many small businesses can find themselves the subject of a CRA audit, especially if they are in certain industries or take a lot of payments in cash. Even companies that are the most compliant will lose time and money because of an audit. Because of the possibility of an audit, businesses such as restaurants that deal with cash should consider legal expense insurance or work with an accounting firm who know your business and have access to these specialists.

Key Takeaways:

In Canada, there are many mid-sized businesses that get audited by the CRA, but precisely how the CRA determines which businesses will be audited is understandably kept under wraps.
Some sectors are more likely to face an audit than others, especially in industries that are known to be less compliant.
It’s important to have a specialist and accounting professionals to work with you until the conclusion when you’re going through an audit.

“For many business owners, the stress of facing a CRA audit is as much about the additional work as the possibility that auditors might actually find something amiss.”

What you need to know about the tax consequences of employee stock options

Employee stock options are a popular tool companies use to reward existing staff and attract new employees. However, these options have major tax implications. The options – when exercised carry with them taxes. Usually, this is half the amount of shares optioned which goes to the tax authority. In the event of stock decline from when the shares were optioned – the decline is booked as a capital loss and is not deductible and will result in a mismatch on the individual’s yearly tax form.

Key Takeaways:

Stock option benefit is classified as employment income not capital gain.
If an employee decides to sell his/her stock, they become an investor and is no longer considered an employee.
The law was changed in 2010 which now allows the government to collect taxes when certain options are exercised and employees need to be mindful.

“A capital loss can only be used to offset other capital gains and cannot be deducted against the taxable employment benefit that arose upon acquisition of the shares through the option exercise.”

Canada: Indirect Income Verification

The CRA specifically targets small- and medium-sized businesses, because of the perception that their records aren’t maintained as well as other larger companies. One of the ways the CRA looks for tax evasion is through estimating indirect income. The problem is, these estimates are based on assumptions and are not always correct. As a business owner and taxpayer, if you feel you are wrongly being audited you have the right to challenge. Just make sure you have the evidence to back up your challenge and get professional assistance, if needed.

Key Takeaways:

Sections 231.1 and 231.2 of Canada’s Income Tax Act allow the CRA to issue a Requirement for Information, which is essentially a letter demanding that the taxpayer (or any relevant third party) release specified documents or information.
Using indirect income verification is a way for the CRA to estimate a taxpayer’s income when dismal recordkeeping bars the more reliable, regular tax audit techniques.
A taxpayer has two options: to challenge the propriety of the auditor’s use of an indirect income verification method, or to challenge the indirect audit by analyzing and disputing every assumption and calculation of the assessment on a line-by-line and item-by-item basis.

“The CRA invokes its most aggressive tactics when auditing small and medium businesses—groups that the CRA perceives as most likely to retain poor records or lack internal controls. These aggressive tax audit methods fall under a class of techniques known as indirect income verification methods.”

Some unusual tax facts about income, deductions and credits

If you are unsure of what can be a tax credit or deduction, do your research or seek out some professional advice first before you act, or you might face consequences down the road. Illegal activity, medical expenses, employment expenses, pet maintenance and other expenses may or may not be deducted depending on what you are paying for or where you derive your earnings from. Real-life examples are discussed in detail to give you an idea of what you might be able to do come tax time.

Key Takeaways:

Canadians can claim eligible medical expenses incurred in any 12-month period that ends in the calendar year, which means you can pick the period with the highest amount of medical expenses provided they haven’t already been claimed.
Employees are permitted very few deductions other than certain costs they are required to pay for personally, which can be found on CRA’s Guide T4044
Gambling losses cannot be deducted if it is a hobby, but if it qualifies as a commercial activity, then winnings are taxable along with losses being deductible.

“Are you wondering whether that item you just purchased is deductible for tax purposes? Or whether an amount you received is taxable? There’s no shortage of stories to tell about taxpayers who got it wrong – or right, for that matter.”

Income splitting is a dangerous tax game if you don’t know the rules

In Canada, income splitting – the practice of shifting income within a family to avoid high tax rates – is tempting due to steeply graduated tax brackets in many provinces. Anti-avoidance rules make the process tricky; nonetheless, there remain many opportunities to legally use income splitting to lessen one’s tax burden. For example, pension income can be shifted between spouses or partners. Even here, however, taxpayers must be careful, as the CRA will pursue unlawful activity in court.

Key Takeaways:

Our Income Tax Act has a variety of anti-avoidance rules, known as attribution rules, meant to block attempts at income splitting by attributing the transferred income back to the original source.
Here are the outcomes of three different income splitting scenarios: (1) if you give your minor kids money to invest, then any interest or dividends earned on those funds will attribute back to you but not any future capital gains; (2) if you gift funds to your spouse or partner for investment, all future income as well as capital gains will attribute back to you; and (3) if funds are loaned between spouses or partners at a minimum of the CRA’s prescribed rate, then the attribution rules won’t apply, provided the interest on the loan is paid by January 30 of the following year.
The easiest way is to split pension income, which can result in substantial tax savings if one spouse is in a lower tax bracket, and it can also help preserve benefits like Old Age Security.

“If you don’t understand the complex rules surrounding what is and isn’t allowed in income splitting, you could find yourself facing off against the tax man in court.”