commentary Archives - Page 7 of 11

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 It can be withdrawn tax free.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.”

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.”

Five ways to prepare to sell your small business to reap the biggest reward

Even if your plans to sell you small business are several years away, you need to start planning now in order to get a great price when the time comes. Begin by documenting all business deals to show business connections. Also, ensure that any deals on paper are reviewed every year or so for accuracy. Risk in your businesses’ operations means a reduced price so it’s important to diversify and plan for long-term growth even if it means slightly reduced near term profits. Someone buying your business will perform due diligence, so make it easy for them to see the value in your business by cleaning up your accounting records and books. Family members may be great potential employees, but not hiring will make it easier to sell your business. Finally, a little goodwill at the end by offering to stay around and help during the transition will go a long way.

Key Takeaways:

Make sure to have things written out and organized, this includes current business deals and clients, and keeping your financial books in order.
Important to selling a business is minimizing the risk involved for the buyer by creating a stable, reliable business which insures that the buyer is confident of their purchase.
Family businesses are common, but having the business revolve around the family too much makes it difficult to transfer or sell the business to a new owner.

“A lower-profit, lower-risk business can be more valuable than a more profitable, all-eggs-in-one-basket shop. So, focus not just on maximizing profit, but also on managing risk.”

Snowbirds be warned: Spending too much time in the U.S. can trigger double tax

If you spend your winters in the United States, you might be subject to paying U.S. taxes to the IRS. The common belief that spending 182 days or less makes you safe is wrong. The reality is that the IRS applies the Substantial Presence Test, which looks at a three-year period. If you overstay, you can apply for an exemption provided you meet the “closer connection” to Canada criteria and file the correct forms with the IRS before the deadline. Either way, you’ll want to watch your days spent in the U.S., or you might get hit with a hefty fine.

Key Takeaways:

The Substantial Presence Test calculates the number of days over a three-year period that an individual spends in the U.S.
To claim the closer connection exemption for 2017, Canadians must file IRS Form 8840 provided no exceptions apply.
Planning to exit Canda for tax purposes should begin at least a year in advance to as it involves immigration, tax, estate, health care and other financial issues.

“It is important to understand the U.S. tax rules – and the actions snowbirds need to take to avoid being taxed south of the border.”

Personal Investor: Tax perks for home offices

You might call your home your workplace if you’re one of the nearly 3 million self-employed Canadians or those working for larger companies from home. Like any business-related expense, your home office will work in the same way on your annual tax returns with these expenses being deductible. Expenses that are exclusively used for business-purposes are fully deductible. Only a portion of shared expenses, like utilities, repairs and insurance, can be claimed.

Key Takeaways:

The portion you can claim on shared expenses is based on what portion of your home is used for your business in terms of its square feet relative to your home’s total square footage.
If self-employed, you can add mortgage interest and property taxes to your deductions, which employees cannot claim.
One note of caution: If you deduct expenses related to permanent changes, such as renovations or an addition, you could lose the principal residence status on your part of your home and lose a portion of your principal residence capital gains exemption.

“Many deductions are a portion of expenses homeowners typically incur anyway, but claiming the right portion is critical if you don’t want to run afoul of the Canada Revenue Agency.”

Nearly three million Canadians are self-employed. Others work for larger companies from home. In many cases, their homes are their workplaces.

How portfolio structure can save tax for clients with private corps

Private corps making less than $50,000 per year qualify for the small business tax break. Businesses with passive yearly income more than $50,000, cannot use the small business tax rate and all their business income is subject to the higher general income rate. Keep in mind that it is the taxable passive income that is used rather than all passive income. This distinction means that the passive income deduction can be preserved by using tax reduction portfolio strategies.

Key Takeaways:

Clients can preserve the small business deduction if taxable passive income is below $50,000/year.
Clients without the small business deduction (i.e., greater than $150,000 passive income per year or more than $15 million capital) should customize a portfolio to reduce taxable income.
Tax-efficient asset allocation through good portfolio design may reduce the passive income generated by $2-3 million of capital in order to continue to enjoy the small business tax rate.

“The new rules state that if passive income exceeds $50,000 per year, then access to the small business tax rate (10% to 18%, depending on the province) will drop by $5 for every $1 of passive income above $50,000.”

Taxation of Cryptocurrencies in Canada: What Business Leaders Need To Know

Cryptocurrencies, such as Bitcoin, are not viewed by many governments, including Canada, as actual currencies but as commodities. This means that transactions are viewed as “barter” and thus creates a taxable event. The IRS in America has won a landmark case against an agency that deals in investments of these currencies, forcing many of these investors to pay tax. In Canada, the CRA has the ability to hold any similar company or investor responsible for tax payments as well. As more of this type of investing occurs, you can be sure that the government will keep up and get it’s share of taxes.

Key Takeaways:

Cryptocurrency’s status as a currency is uncertain and the CRA says they should be viewed as a commodity instead.
Increasing investigations of it’s users has lead to removal of anonymity for regulatory and tax tracking purposes. Additionally, America is an example of what the CRA can follow in terms of regulation and taxation.
Scrutiny of cryptocurrency from all types of regulators, including tax authorities, will likely lead to structure, transparency and legitimacy, as well as tax implications.

“Accepting Bitcoin as payment does not exempt merchants from recognizing income on a sale. Similarly, those who swap crypto for merchandise would need to report income or a capital gain (or loss) on the disposition of their crypto asset.”

Why Reviewing Your Tax Strategy Makes Financial Sense

Businesses are regularly rewarded for creating a well-thought out tax plan from the beginning. Business opportunities and rules change can require different strategies in order to minimize taxes at year-end. New entrepreneurs often make the mistake of not counting taxes as an expense. Instead of paying attention to what is inevitable (which is paying taxes), they think they should wait to see if the business is a good or bad entity first. Staying informed and getting professional advice can help business owners make better decisions, which will pay off in the long run.

Key Takeaways:

Entrepreneurs tend to ignore tax planning in the initial phases of a venture, which can be costly.
What most of these entrepreneurs don’t realize is that implementing a tax plan usually requires some restructuring resulting in tax consequences that could have been avoided.
Once entrepreneurs realize that taxes are often a business’s largest expense which doesn’t provide any benefit like equipment, staff or services, then they understand how important tax savings are to the future growth of their business.

“To get the most out of a tax plan, it needs to be implemented before the business generates value and profits — value and profits need to be created within a tax-efficient structure to get the maximum benefit.”

Tips for creating a ‘smart-tax’ portfolio

When dealing with taxes, you need to make sure you are investing in the right way to avoid a heavy tax burden in the long run. In order to create a tax-smart portfolio, it’s important to know what your money manager is making you over what the market is providing (known as your alpha) so that you end up with profit after taxes. Being aware of the tax implicaitons of your investment portfolios, especially what is in it’s make-up as well as turnover, can led to a considerable difference in your returns. Investing wisely will help you keep all your returns at tax time.

Key Takeaways:

The majority of Canadians now face tax in provinces where the highest marginal tax rates are in excess of 50 percent.
A key tax factor is portfolio turnover, and ensuring the alpha added by your money manager is high enough to make up for any taxes created when securities are sold.
Consider your investment mix becaue each type of income is taxed differently and will result in very different portfolio values over time when investing outside of registered plans.

“The good news is that you can take steps to reduce your tax burden without having to cheat.”