Archive for the ‘Tax’ Category

WITHDRAWING FROM FAMILY RESPs

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Flexible Planning Possibilities

A July 21, 2021 Money Sense article (My three kids chose different educational paths. How do I withdraw RESP funds in a way that’s fair to them and avoids unnecessary taxes?, Allan Norman) considered some possibilities and strategies to discuss when withdrawing funds from a single RESP when children have different financial needs for their education. Some of the key points included the following:

  • There is likely a minimum educational assistance payment (EAP) withdrawal that should be taken, even by the child that needs it least.
  • The EAP includes government grants (up to $7,200) and accumulated investment earnings on both the grants and taxpayer contributions.
  • The grants can be shared, but only up to $7,200 can be received per child, with unused amounts required to be returned to the government.
  • Only $5,000 in EAPs can be withdrawn in the first 13 weeks of consecutive enrollment.
  • The withdrawal amount is not restricted by school costs.
  • The children are taxed on EAP withdrawals.
  • It is generally best to start withdrawing the EAP amounts as early in the child’s enrollment as possible, when the child’s taxable income is lowest. If the child is expected to experience lower income in later years, there is flexibility to withdraw EAP amounts in those later years instead.
  • The level of EAP withdrawn for each child can be adjusted. As individuals are taxed on the EAP withdrawals, planning should consider the children’s other expected income (e.g. targeting less EAPs for years in which they will be working, perhaps due to co-op programs or graduation). Consider having the EAP completely withdrawn before the year of the last spring semester as the child will likely have a higher income as they start to work later in the year.
  • To the extent that investment earnings remain after all EAP withdrawals for the children are complete, the excess can be received by the subscriber. However, these amounts are not only taxable, but are subject to an additional 20% tax. Alternatively, up to $50,000 in withdrawals can also be transferred to the RESP subscriber’s RRSP (if sufficient RRSP contribution room is available), thus eliminating the additional 20% tax. An immediate decision is not necessary as the funds can be retained in the RESP until the 36th year after it was opened.

ACTION ITEM: The type, timing, and amount of RESP withdrawals can significantly impact overall levels of taxation. Where an RESP is held for multiple children, greater flexibility exists.

WILL AND BENEFICIARY DESIGNATIONS: Are they current?

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RRSP designations

A May 10, 2021 CBC article demonstrated the importance of reviewing RRSP beneficiary designations. The article discussed the unfortunate cascade of events where, in 2018, a 50-year-old individual went to the hospital for stomach pain and was diagnosed with cancer. He passed away three weeks later, leaving a spouse and a child. It appeared as if the deceased had not reviewed the designated beneficiary on his $685,000 RRSP, which remained his mother from the time when he had originally set it up while single. Not only did this mean that the surviving spouse and child would not receive these savings, but also that they were effectively liable for the tax on the RRSP funds. Although the will included a clause making the spouse the 100% beneficiary of the estate, this did not override the RRSP beneficiary designation. While the spouse and mother were able to settle and cover the tax bill with the proceeds of a life insurance policy, the case serves as a good reminder to review whether insurance and registered account beneficiary designations match the current intent of the parties.

Wills

In a March 16, 2021 Ontario Court of Appeal case, a dispute arose over the interpretation of a will regarding how proceeds from the sale of a cottage were to be distributed. As the deceased’s daughters held a life interest in the cottage, the cottage was not sold until more than 40 years after the original owner’s death. The proceeds from the sale of the cottage were to go to the grandchildren. However, within the 40-year period, one of the grandchildren passed away. At issue was whether the proceeds should be split among the four surviving grandchildren, or in five parts, with the deceased grandchild’s estate and beneficiaries receiving a fifth. The court used the “armchair rule,” which seeks to interpret the will using the same knowledge that the testator had when making the will, and determined that it should be divided into four.

CRA COLLECTIONS: Potential Impact on Business

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As some businesses struggle with cash flow, they may be motivated to prioritize suppliers and other creditors ahead of CRA.

A recent court case demonstrates CRA’s power to collect tax arrears and the impact of CRA exercising this power on a business. In a June 11, 2021 Court of Queen’s Bench of Alberta case, the taxpayer had fallen into arrears in respect of both GST/HST and payroll remittances. Payment arrangements were entered into with CRA to assist in meeting the obligations. However, after failing to meet the agreed-upon terms, requirements to pay (RTPs) were issued to several of the taxpayer’s clients. RTPs are legal documents that require recipients (the taxpayer’s clients in this case) to submit payment to CRA rather than the taxpayer. The RTP gives priority to CRA over most other creditors. After the taxpayer had renegotiated a new payment plan, all RTPs were cancelled except for the one to its largest client. After struggling to meet the new payment plan and facing a new withholding liability, CRA once again issued RTPs. Shortly after, the taxpayer lost its largest client (the one that the sole RTP had been issued to previously). The taxpayer advised CRA that it was considering receivership, which led to the seizure of assets and issuance of more RTPs. One client sent a letter to the taxpayer that noted that CRA had visited them personally to serve the RTP and implied that the taxpayer could be out of business or shut down. Further, the client noted that they were asked by CRA whether they could get their parts from alternate suppliers, and the client indicated that they were now considering doing so.

Taxpayer loses.

The court found that CRA and its agents did not owe a duty of care to the taxpayer, that there was no negligence, and that the government’s actions did not unlawfully interfere with the economic relations of the taxpayer.

ACTION ITEM:

CRA can collect your tax liability by requiring your clients to pay them rather than you. To limit the business and operational issues arising from an RTP, steps should be taken proactively to communicate with CRA collections.

COVID-19 Interest Relief for Personal Taxpayers – But Penalties Still Apply!

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Under normal circumstances, CRA will be begin charging compound daily interest starting May 1st, 2021 on unpaid taxes owing for the 2020 tax year. However, due to COVID-19, CRA introduced temporary interest relief if all eligibility criteria listed below are met.  If eligible, you will not have to pay interest on any taxes owing from your 2020 taxes until April 30, 2022 – essentially a deferral of tax payment by one year without cost.  Please note that you still need to file your taxes by April 30th, 2021 to avoid paying late filing penalties.

Interest relief will automatically be applied on 2020 taxes owing if all of the following conditions are met:

  • Your total 2020 taxable income is $75,000 or less
  • You have received at least one of the following COVID-19 benefits in 2020:
    • Canada Emergency Response Benefit (CERB)
    • Canada Emergency Student Benefit (CESB)
    • Canada Recovery Benefit (CRB)
    • Canada Recovery Caregiving Benefit (CRCB)
    • Employee Insurance (EI) benefit
    • Provincial or territorial emergency benefits
  • You filed your 2020 income tax and benefit return

It is important to note that this interest relief will only apply to your taxes owing on your 2020 tax return and not on previous or other amounts outstanding with the CRA.  Penalty charges (such as false statement, omission or late filing) are not included as part of this interest relief. Therefore, it is crucial to file your personal tax by April 30, 2021.

If you file your return late, the CRA will impose a penalty of 5% of your taxes owing and unpaid on May 1, 2021.  This penalty will increase by 1% for each month filed late, up to a maximum of 12 months, i.e. an additional 17% maximum penalty on your 2020 balance owing.

For individuals with business income, you have until June 15 to file your tax return and late filing penalty will not start until June 16, 2021.

Filing taxes on time will save you unnecessary penalties and will ensure any benefits and credit payments that you are entitled will not be disrupted.

Canada Emergency Wage Subsidy “CEWS” more updates…

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You need to know how this important subsidy program works for March 14th, 2021 to June 5th, 2021:

This is how the revenue declines and the subsidy rates tie together:

Revenue DeclineCEWS Subsidy Rate
70% and over75%
50-69%40% + (revenue decline – 50%) X 1.75
1-49%Revenue decline X 0.8

The Reference Periods starting March 14th to June 5th are called Periods 14 to 16.

The revenue declines are calculated in relation to the following chart.  Remember if you were using the General Method in periods 5 to 13, you must continue with that method.  Same for those that were using the Alternative Method – you must stick to the method you were using before.

MethodPeriod 14 (March 14 – April 10, 2021)Period 15 (April 11 – May 8, 2021)Period 16 (May 9 – June 5, 2021)
General ApproachMarch 2021 over March 2019 or February 2021 over February 2020April 2021 over April 2019 or March 2021 over March 2019May 2021 over May 2019 or April 2021 over April 2019
Alternative ApproachMarch 2021 or February 2021 over the average of January and February 2020April 2021 or March 2021 over the average of January and February 2020May 2021 or April 2021 over the average of January and February 2020

Baseline remuneration – an update here too!

  • By default, baseline remuneration is the average weekly remuneration paid to eligible employees by the eligible employer during the period January 1, 2020 through March 15, 2020.
  • For CEWS Periods 14 through 16, eligible employers can elect to use the period of March 1, 2019 through June 30, 2019 or July 1, 2019 through December 31, 2019 to calculate the baseline remuneration.

Personal Tax Filing Again! What’s NEW!

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For many of us, it seems like yesterday that we just filed our 2019 tax returns due to the extended filing and tax payment deadline last year.  Although, we do not know if CRA will extend the 2020 tax return filing deadline, we are prepared for a back to normal filing deadline of April 30th.

There are no earth-shattering changes in the rules for your 2020 personal tax filings. But here are some of the highlighted changes that may affect some of us:

Home Office expenses

As many Canadians worked from home for most or part of 2020 due to COVID-19, CRA has relented to allow that some home office expenses can be claimed against employment income.  Please see our previous blog for details of this deduction.  In addition, CRA has an online  CRA Home Workspace Calculator, you can use this calculator to determine the amount that you can claim in your 2020 and 2021 tax returns.

Home Buyers’ Plan (HBP)

This program was set up in 1992 to assist first time home buyers to withdraw/borrow from their Registered Retirement Savings Plan (RRSP) on a tax-free basis to buy their first home. Any withdrawal amount must be repaid to their RRSP within 15 years.

As of March 19, 2019, the withdrawal limit was increased from $25,000 to $35,000.  Normally, the home to be purchased under the HPP cannot be the home that you and your spouse or common-law partner owned in the previous four-year period.  One exception to this rule is in the event of a relationship breakdown, this four-year limit will be waived for both ex-partners if they have been living apart for a minimum 90 days.  This new rule came into effect in 2020.

Digital news subscription tax credits (2020 to 2024)

This is a new credit for 2020 to support journalism and to encourage digital news subscriptions. Online subscription costs incurred up to $500 for digital news fees paid to Qualified Canadian Journalism Organization (QCJO) can be claimed as a non-refundable tax credit.  QCJO must be primarily engaged in the production of original news content with a focus on matters of general interest and reports of current events.  Currently, there is only one QCJO approved on CRA website.  Check back frequently to see if your digital subscription is on the list.

Other Tax changes announced but not yet implemented:

  1. Child Care Expenses – In normal circumstances, parents can only claim child care expenses they incurred to allow the parents to earn employment or self-employed business income.  Employment Insurance (EI) benefits is not considered eligible earned income, against which child care expenses can be claimed.  However, as a temporary tax relief measure due to COVID-19, Finance proposed allowing parents to claim child care expenses while receiving EI benefits for years 2020 and 2021.  For additional information, see Child care expense and EI for 2020 and 2021 on CRA website.
  2. Additional Benefits for Seniors – Back in September 2019, Liberals made two promises for senior if they were re-elected:
    • increase Old Age Security (OAS) by 10% for seniors older than 75 with earnings less than $77,580, resulting in additional $729 annually starting July 2020.
    • increase in CPP survivor’s benefits by 25% for survivors 65 and older, resulting in additional benefits up to $2,080 annually.

Although these benefits have not been implemented, the government is committed to these promises as addressed in the September 23, 2020 Throne Speech. Keep your eyes out for future developments. 

If you have any questions, we are here to assist.  We are ready for a smoothed personal tax season!

2020 – The Best Tax Loss Selling Opportunity In Years

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What is tax loss selling anyway?

Tax loss selling is a strategy to reduce tax by triggering capital losses now and using them against capital gains. If you have realized capital gains this year, in any of the past 3 tax years or expect to realize gains in the near future, this strategy can help reduce your tax.  In a best-case scenario, it can mean triggering a refund cheque from the CRA!

To take advantage of this strategy you must sell a capital property at a loss. The most popular target for this is the proverbial “stock I never should have bought”. The target stock is trading well below the price you paid, and you see no upside in the near future. While it might be a tough thing to let go, the tax savings might be the push you need to finally dump that loser.  Let’s illustrate an example below.

This is how it works in practice

You own two securities, Charlie and Romeo.  Charlie has been a loser since you took an interest in it (you are down $15,000 from where you bought), but you have hung on to it in the hopes it will come back up. Romeo has done well (it is up $20,000 from where you bought), and you have sold Romeo at a gain to lock in the profits. The following shows the tax outcomes of selling just Romeo or taking it a step further and doing the tax loss sale of Charlie as well.

Realized Capital Gain RomeoRealized Capital Loss CharlieNet Capital GainTax Owing*
Sell Romeo only20,000020,0005,356
Sell Charlie and Romeo20,000(15,000)5,0001,339
*assuming highest tax bracket (Taxable income above 220,000) and Ontario residency.

As you can see tax-loss selling can result in significantly reduced capital gains taxes – about $4,000 in this illustration.

With all the market volatility this past year, there may be positions that you hold in your portfolio that will make good candidates for tax loss selling.  But read on – you need to BE CAREFUL.

Important considerations

  • You cannot purchase the loss shares (or a right to acquire the loss shares) during the period that begins 30 days prior to the sale or repurchase the loss shares for 30 days after the sale. If you break this rule, the CRA will deny the loss as a “superficial loss” (no tax savings for you!) and the loss will be added to the ACB of the shares purchased and no immediate benefit will be obtained.
  • Tax loss selling only works on non-registered portfolios, capital gains and losses in registered portfolios are not relevant to your tax return.
  • In order to take advantage of this tax strategy, the tax loss sale must settle in the current tax year –check with your investment advisor to ensure trades are settled on or before December 31, 2020.
  • Take a look now at your portfolios and see if there is any potential to take advantage of this great tax strategy!

Wills & Estates – What’s Your Legacy Plan?

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It’s been said that nothing is as certain as death and taxes. As CPA’s we might add another certainty – tax implications after your death. However, being aware of the inevitable does not automatically prepare us for the inevitable.

Our experience has taught us that the legacy people leave for their loved ones can either be fair, sensible, and considerate; or one that results in confusion, confrontation, and chaos. What makes the difference? A desirable legacy plan starts with being accurately informed of your options and then taking the necessary steps to prepare a legally binding arrangement – before the unavoidable happens.

Being accurately informed first involves understanding the “lingo”. Many of us have heard terms like “Wills, Executors, Trustees and Estates”, but what do they all mean exactly? Here is a brief breakdown.

Wills

A Will sets out your wishes regarding all your belongings after your demise. There are many reasons why people hesitate to write their Wills. If something has been holding you back, think of what a Will accomplishes:

  • Safeguards guardianship for your beneficiaries of your most valuable belongings
  • Outlines your wishes, which takes some pressure off your already grieving family
  • Ensures specific people receive what you choose from your assets
  • Protects your business interests
  • Makes sure donations go to charities dear to your heart
  • And a lot more (Consulting a lawyer is also a MUST DO step)

It’s good to review your Will every 3-5 years. That said, while a Will is valuable, it works in harmony with many other important legal documents. However, a Will only controls what happens to assets that flow into your estate (i.e. assets not held jointly with another person who has rights of survivorship; insurance policies, registered accounts, and pension plan benefits without named beneficiaries, etc.).

Estates

Your Estate is the collection of assets and liabilities that legally flow under the terms of your Will into what amounts to a newly created separate entity.  That separate entity, called your Estate, is a separate taxpayer under our tax laws and has the obligation to follow the instructions contained in your Will, as carried out by your “Executor/Executrix”.  The Estate can be in existence for many years, or a short time depending on the instructions in your Will.  Choosing an Executor of your Will (who becomes the Trustee of your Estate) is likely one of the most important decisions you make in drawing up your Will.  Picking your best friend is often a first-choice, but it may not be the best idea. Think about this, if you pass at the ripe old age of 93 and your best friend is also older, leaving them this important and demanding job could be very stressful for them. It’s good to think carefully and discuss the implications frankly with the individual you are thinking of selecting.

Estate Plans

A common misconception is that Estate Plans are only for the extremely wealthy. If you own a car, a house, and have bank accounts – then you could benefit from an Estate Plan. It’s especially important to have an Estate Plan if you own a business, have minor children, have assets in foreign countries, or have any concerns that your Will may be contested by a relative, business associate, or a previous life partner.

An Estate Plan not only assures your assets are distributed with maximum tax benefits to the beneficiaries after your death but can also outline how to deal with your needs while you are still alive. For example, if because of health conditions you are unable to speak for yourself or make sound decisions, your Estate Plan can include a Power of Attorney or Living Will which speak for you or designate others to make decisions on your behalf.

An Estate Plan includes (among other things):

  • Your Last Will and Testament
  • Beneficiary designations – registered accounts
  • Transfers of property or financial assets (before death or under the terms of your Will)
  • Power of Attorney for Property (designated individual to take care of your finances)
  • Power of Attorney for Personal Care (designated individual to make medical decisions on your behalf)
  •  A “Living Will” (your written request regarding life-prolonging treatments)

This blog is meant clarify things, but this is not the entire story.  The easy part is understanding the “lingo”. The challenging part is implementing a plan as there are lots of critical decisions to be made. That’s where the professionals at SYC can help. We have used our knowledge and experience to help clients with Estate Plans for decades. We can work with you and your legal counsel to create a legacy plan that will give you peace of mind now and enable those you care about to remember you with fondness for years to come.

Retirement Planning – Be Future Ready!

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Contrary to popular belief, retirement planning should begin as soon as you start working. However, even if you are middle-aged or older, it’s never too late to start taking control of this important planning.

2020 is a sobering reminder of how unsettling not being prepared can feel. While we cannot prepare for everything life throws at us, there is much that is in our control. Retirement planning is a good example.

Here are some simple, yet important, questions to think about now as you plan for your retirement:

What is your retirement vision? Have you set goals?

  • What will you do with your new freedom?  Have you thought of short-term or long-term goals? Do you have a dream list? 
  • If you want to semi-retire, what part-time work makes sense for you? How much extra income would you like, or need, to make?
  • What post-retirement responsibilities will you have? Will you be supporting children, aging parents, or other family members?

Now for the elephant in the room: “How much money will you need?”

  • Consider your current lifestyle. What are your ACTUAL expenses monthly and annually? If you’re uncertain, start tracking them now – you may be surprised.
  • When budgeting, don’t forget the details – everything from vacations, to car purchases, to clothing.
  • Factor in inflation. 2020 is a good example of how prices rise each year.
  • Scope out big family events – upcoming weddings, anniversaries, etc.
  • Plan for unexpected costs, such as dental work, home and car repair, etc.
  • How is your present health? How long do you expect to live?

What will be your sources of income?

  • Consider whether you will be eligible for CPP, OAS, or employer-sponsored pension.
  • Review your existing investment portfolio such as RRSP/RRIF, TFSA, non-registered investment accounts and personal savings. Maximize savings now by investing early to take advantage of compound earnings.
  • If you are a business owner, how long will you be able to draw salaries or dividends from your corporation?

Tax planning questions

  • How can you minimize taxes during your retirement? Are your investments and other sources of income structured in the most tax-efficient manner?
  • Do you understand the differences between an RRSP, RRIF and TFSA, as well as their tax treatment in retirement?
  • When should you apply for benefits under CPP and OAS? Keep in mind, the age you start to receive CPP benefits will impact the amount of payment you will receive.
  • Are there specialized tax credits or tax planning available upon retirement?  For example, depending on your situation, you may be able to share CPP and split pension income with your spouse.

Wondering where to start, or how to move forward?

Feeling confused is totally understandable! During this COVID crisis investment portfolios were severely impacted, but then bounced back strongly. Many who had plans to retire may have decided to postpone their plan, while others were forced into retirement due to layoffs. Other Canadians are simply not ready because of large debts, or insufficient savings. Even Canadians who have been diligent savers simply don’t know where to begin when it comes to retirement planning.

Have no fear – SYC is here! We have been providing retirement planning services for years. So if your goal is to be “future ready”, don’t delay! Call one of our team members and take the first step.

HEADS UP – CEWS Eligibility Has Been Expanded!

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As we mentioned in our July blog, the Canadian government recently extended the CEWS subsidy program until December 19, 2020. Along with the extension, they have dramatically expanded the eligibility requirement for the subsidy. Employers who have not qualified in the past may now be eligible under the new requirements.

Eligibility Update

The latest eligibility rules remove the 30% revenue reduction threshold requirement. This means that any employer that is experiencing a revenue reduction may now qualify for the subsidy even if the reduction is less than 30%. Before you begin calculating, please remember:

  • The CEWS subsidy application is done separately each month and the revenue reduction must be determined each time.
  • Revenue reduction is determined by comparing the monthly revenue for the subsidy period to a number of other data points and this is what provides more complexity, but more opportunity as well.

If you think you may qualify for the CEWS subsidy program under the new requirements, please contact us and we will be happy to assist you.

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