This issue:

Indexation of Amounts for 2012

Every year, the federal tax brackets and most personal credit amounts are indexed for inflation.  The Canada Revenue Agency (CRA) recently announced the changes from the 2011 taxation year to the 2012 taxation year, which reflect an increase of 2.8%…

Changes for Eligible Dividends in 2012

Individuals who receive an “eligible dividend” from a Canadian corporation are required to include in income the dividend plus the “gross-up” amount of the dividend.  However, a dividend tax credit is applied, which results in a rate of tax payable on the dividend that is less than the regular rate that applies to other income…

Changes to Employee and Shareholder Benefit Rules

Under the current wording of the Income Tax Act, a benefit received by an employee in respect of, in the course of, or by virtue of an office or employment, is included in the employee’s income.  Technical amendments released by the Department of Finance on October 31, 2011 propose to amend this rule, to “clarify” that employment benefits received by a person who does not deal at arm’s length with the employee are included in the employee’s income…

Shareholder Loans

Similarly, currently rules provide that a benefit conferred upon a shareholder of a corporation by the corporation is included in the shareholder’s income…

Tax Benefits for First-Time Home Buyers

There are certain tax benefits for first-time home buyers, as well as those who have not owned a home in the current year or the previous four years.  The benefits are provided under the RRSP Home Buyers’ Plan, and the first-time home buyer’s credit…

Political Donation Tax Credit

The Income Tax Act provides a generous tax credit for donations to federal political parties.  The credit is allowed in a year in which you make a donation to a registered federal party, a provincial division of a registered party, or a registered association or a candidate…

CRA Warns of “Tax Protester Schemes”

The CRA recently reiterated its warning about individuals who try to convince Canadians that they do not have to pay tax on the income they earn.  The CRA refers to these individuals as “tax protestors”

Around the Courts

The “wholly dependent person” credit (sometimes referred to as the equivalent-to-spouse credit) can be claimed if, among other things, you are single and support your minor child who lives with you.  However, you cannot claim the credit if you are required to pay support for that child to a former spouse and you live separate and apart form your former spouse for the entire year…

To read more, please see the following article Tax Tips – January 2012

This issue:

Crackdown on Personal Services Businesses

If you set up a corporation to provide your employment services, the Income Tax Act imposes severe restrictions on the corporation.  These rules, called personal services business (PSB) rules, apply only where your  services to a third party, and, but for the corporation, you would reasonably be regarded as an employee of the third party…

The Leap Year Bites – Watch Those Deadlines!

Because 2012 is a leap year, some deadlines fall earlier this coming year than normal!  If you will be filing a T3 trust tax return, the deadline (assuming a calendar year-end for the trust) is 90 days after the end of the year.  Normally that is March 31.  This year, because February has 29 days, the 90-day period expires on Friday, March 30…

The 10-Year Limitation on Waiver of Interest

The rules have changed for applications for waiver of interest and penalty.  The CRA has a policy of “Taxpayer Relief” (formerly called “Fairness”), under which it may waive interest and penalty in extraordinary circumstances, such as where a taxpayer was affected by illness, where the CRA provided wrong information, where there have been unreasonable delays on the CRA’s part, and various other circumstances…

Make Money Volunteering for a Charity

If you volunteer for a charity, you may be able to make a little money at no cost to the charity.  The charity cannot give you a donation receipt for the services you provide for free.  A valid donation receipt for tax purpose can only be issued for a donation of property or money.  However, suppose the charity pays you for your services and you donate the money back?

Watch Out for Short Taxation Years

A corporation can be deemed to have a year-end for tax purposes, in the middle of its fiscal year, for a number of reasons.  One common reason is a change in control of the corporation.  If the corporation is sold to new owners, it will be deemed to have a year-end and start a new taxation year…

Do You Make Donations to U.S. Charities?

Do you make donations to charities located in the United States?  They may be eligible for a tax credit on your Canadian tax return in one of several ways…

Around the Courts

Reporting income as partners made the wife liable to third parties…tax return reporting can have unexpected consequences!  Prince Albert Co-operative Association Ltd. v. Paul Rybka and Tina Rybka

To read more, please see the following article: Tax Tips – December 2011

This issue:

Emigration from Canada

If you are considering emigrating from Canada, tax considerations will be extremely important.  The tax implications can be (and are) the subject of a whole book.  A couple of highlights will be looked at in detail below.  It is generally wise to obtain professional advice that is tailored to your specific situation…

U.S. Citizens and Tax-Free Savings Accounts

U.S citizens living in Canada should generally NOT open a Tax-Free Savings Account (TFSA).  Their income will be taxable each year on their U.S. return.  As well, the TFSA must be reported with other foreign financial accounts as a “foreign trust”.  U.S citizens who have opened TFSAs should consider withdrawing the funds (there is no tax cost)…

Some GST/HST Quirks You Might Need to Know

The Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) form a very complex system, with myriad special rules and exceptions.  The rules have changed many timtes, including in May 2010 when the “place of supply rules” changed (for determining when HST applies and at what rate)…

Around the Courts

Lump-sum workers’ compensation payment led to loss of age credit: in recent Sveinson case…

To read more, please see the following article Tax Tips – November 2011

Income Splitting and the Income Attribution Rules
Due to the progressive nature of our income tax system, it can be beneficial to split income with family members who are in a lower tax bracket.  However, the Income Tax Act contains some attribution rules that, if applicable, effectively prevent the splitting of investment income…

The “Kiddie Tax”
The kiddie tax applies to the ‘split income’ of a child for any year in which the child is under 17 years of age.  The tax is a flat tax at the highest marginal rate of tax otherwise applicable to individuals…

Education Tax Credits
There is a federal credit for tuition fees, including certain ancillary fees and charges.  The credit is 15% of the tuition fees paid in respect of the year…

Child Care Expenses
Child care expenses are deductible for income tax purposes if they are incurred to enable you to carry on your employment or business, and generally also to enable you to attend school.  The types of deductible expenses include those paid in the year for baby-sitting, day care, nanny services and similar services…

Prescribed Interest Rates
The following rates are in effect from October 1, 2011 through December 31, 2011:

• The interest rate charged on overdue taxes, Canada Pension Plan contributions, and Employment Insurance premiums is 5%, compounded daily…

Around the Courts
Favourable interpretation of 10-year investment waiver rule:

Under the so-called Taxpayer Relief Provisions, the CRA may, at its discretion, waive interest that you owe because of the late payment of taxes and other amounts…

To read more, please see the following article: Tax Letter – October 2011

The general consequences of section 84.1 are a reduction in paid-up capital (to the extent there was an increase from the transaction) and/or a deemed dividend to the extent non-share consideration, such as cash or promissory notes, received on the transfer exceeds the tax cost of the property.

While the reduction in paid-up capital does not create an immediate tax bill, the receipt of non-share consideration in excess of tax cost creates immediate tax on a deemed dividend. Tax cost, for section 84.1 purposes, differs from the usual definition in the Act. For section 84.1, tax cost is generally cost less any cost base related to capital gains exemption claimed by a related party and/or a V-day (1971 value increment) increment in the shares.

A simple transfer by an individual, of an operating company to a holding company, can cause unexpected tax consequences due to section 84.1.

Consider the following example:

X transfers shares of Opco, with a fair market value of $750,000, a tax cost of $750,000 from a capital gains crystallization (see Tax Tip 10-15) and nominal paid-up capital, to a holding company. X receives a $750,000 note from the holding company, given that the tax cost of the Opco shares is $750,000. In this case, the shares of Opco had a tax cost of $750,000 for all other sections of the Act, but the tax cost for section 84.1 was actually nominal. As a result, section 84.1 will apply to create a deemed dividend of $750,000 to X.

This adjustment would not apply if X had purchased the Opco shares from a third party and the third party had used the capital gains exemption.

The above is a simple example but section 84.1 can apply in less obvious situations. For that very reason, it is no surprise that section 84.1 assessments are a major cause of litigation against tax advisors.

This provision can have dire consequences and should not be overlooked when considering a transfer to a non-arm’s length party. If you have any questions regarding section 84.1 of the Income Tax act, please contact Stephen Sutherland CA.

Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59.  Contributions that are withdrawn are not included in the income of the beneficiary since they were not tax deductible in the first place.   Investment income earned in the plan and government grants to the plan are included in the beneficiary’s income when paid out.

The Canada disability savings grant is the amount the government of Canada contributes to the plan. The government will pay matching grants to the plan depending upon the beneficiary’s family income.

*income thresholds based on 2011 rates

If the beneficiary’s family income is less than $83,088 and a contribution of the $1,500 is made to the plan, the government will contribute $3,500.  While the beneficiary is less than 18 years of age, family net income is that of the parent(s) or legal guardian(s).  From the year in which the beneficiary turns 18, the definition of family net income will generally be the beneficiary and spouse’s (if applicable) combined net income.  The total Canada disability savings grant during the beneficiary’s lifetime cannot exceed $70,000.

The plan can be established from birth, provided the beneficiary meets the criteria. The government of Canada will also pay up to $1,000 a year in a Canada disability savings bond to low-income Canadians with disabilities.  No contributions are required and the lifetime bond limit is $20,000.  The bond can be paid into the RDSP until the year the beneficiary reaches 49.

Beginning in 2011, an individual will be able to carry forward unused grant and bond entitlements to future years.  The carryforward period is ten years and starts after 2007.  Current legislation seems to result in harsh tax and government funding repayment results if a beneficiary loses DTC eligibility.  Since disabilities are intermittent, this issue is being taken up with the Department of Finance.

If you are entitled to the Disability Tax Credit, you should consider an RDSP.  Canada disability savings grants and bonds are available and investment income is not taxed in the plan until it is withdrawn. Contact Stephen Sutherland CA for more details.

Often these bequests arise on the death of the donor and are made pursuant to the donor’s will. This may not always be the best time to make a large gift, as the resulting tax credit may not be fully used if there is insufficient income or deemed capital gains in the year ending at the date of death. In this common scenario, the tax savings related to the gift are lost.

A Charitable Remainder Trust (CRT) set up during the donor’s life is an excellent way to facilitate the gift on death but receive the tax credit now. You can also preserve the income stream earned on the asset during the remaining years of the life of the donor and, if desired, the donor’s spouse.

Here’s how a CRT works

The donor can create a CRT of which his spouse is the income beneficiary and the charity is the residual capital beneficiary. A gift of cash (or perhaps publicly-traded securities) is made to the CRT. The charity can issue a tax receipt for the net present value of the assets donated. The net present value is actuarially determined based on the remaining number of years the CRT is expected to hold the assets (assuming a last-to-die payout). The donor can use the tax receipt to reduce tax payable for the year the property is “gifted” to the CRT and the following five taxation years. Although the receipt will be for an actuarially determined discounted amount, the guaranteed current use of the donation receipt makes the donation to the CRT attractive. Also, income from the assets can continue to be paid to the donor and then to his surviving spouse.

Moreover, the donor may gain more personal satisfaction in knowing that the ultimate gift to charity is established during his lifetime.

On the death of the donor (or spouse, if the CRT is so structured), the assets will be transferred to the charity. There is no tax to the donor as the CRT property rolls to the charity as the residual capital beneficiary.

If you are interested in learning more about CRT’s, please contact Stephen Sutherland CA today.

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Do you contribute regularly to your RRSP’s? Do you run a home based business? Do you make some extra money on weekends or evenings outside of your regular 9 to 5? Do you collect rent from real estate? We can help save you money at tax time!

Here are some pieces of information that we will need when preparing your 2010 tax documents for submission:

• Your Name
• Your Spouse (if applicable)
• Your Marital Status (and if changed, when)
• Your Address
• Your Home Phone Number
• Your Work Phone Number
• Email Address
• Your Children’s Names (if applicable)
• Your Children’s Date of Birth (if applicable)
• Your Children’s S.I.N. (if applicable)
• Your Dependant’s Names (if applicable)
• Your Dependant’s Date of Birth (if applicable)
• Your Dependant’s S.I.N. (if applicable)

As well, here are some considerations to have ready when submitting your tax package:

• T4 from your employer
• RRSP contribution slips
• Additional gross income
• Home business related receipts
• Home office square footage
• Business number (if applicable)
• GST/HST information

When thinking about filing your income tax information this year, think of Stephen J. Sutherland, C.A. and how we can save you tax dollars, and save you the hassle of preparing your tax return yourself.

Contact us today.