Posts Tagged ‘tax’

Do You Need a Financial Advisor?

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Costco, Superstore and Wal-Mart have got us used to the efficiency and convenience of one stop shopping. However, should this same concept be applied to your financial needs? Not necessarily.

At Scarrow Yurman & Co. we do our best to attend to the tax needs of our clients. We go beyond simply fulfilling their legal obligations and are proud to provide advice for buying and selling businesses, corporate restructuring, estate and succession planning and even retirement planning.

However, depending on the complexity of the situation or the scope of business, we feel that a “one-size-fits-all” approach is not always in the best interest of our clients. That’s why there are situations where we encourage our clients to expand their financial team to include a Financial Advisor. Having a broader support group with complementary financial services can help move a client in the right direction and give them peace of mind.

Types of Financial Advisors
Bank Financial Advisors
Financial Coaches
Financial Planners
Insurance Advisors
Investment Advisors
Mutual Fund Representatives
Stock Brokers (Investment Representatives)

Recently, we have become aware that some of our clients would like to know more about financial planning strategies including portfolio management, stocks and life insurance. We also realize that there is a sea of financial advisors out there and we want to ensure that our clients find the right fit for their unique personal and business needs. Therefore, if you are not sure you require a Financial Advisor, or would like us to recommend one, please contact us today.

Let’s get your questions answered together.

Tax Credits vs Tax Deductions – What’s the Difference?

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Although these two terms are used interchangeably, when you’re discussing tax credits and tax deductions you’re not comparing apples to apples. They are very different and knowing the differences is helpful.

Tax we owe in any given year is not based solely on our income but is also affected by the various tax dedications and tax credits we are entitled to for that year.

Tax Deductions – Reduce Taxable Income

Tax deductions reduce taxes differently depending on the marginal tax bracket you’re in. For example, if you are in the bottom marginal tax bracket and your marginal tax rate is 15%, then a $100 tax deduction will save you $15. However, let’s say you were in a higher marginal tax bracket and your marginal tax rate is 20%, then that same $100 tax deduction will save you $20 instead. Although tax deductions will generally benefit everyone, tax deductions are more effective in saving tax for those that make a higher income and are subject to higher tax rates.

Common tax deductions include:

  • RRSP Contributions
  • Childcare Expenses
  • Moving Expenses

Tax Credits – Directly Reduce Tax Liability Otherwise Calculated

Once your marginal tax rate is applied to your taxable income and the taxes owing is calculated, tax credits are applied in the final stage of this calculation to lower taxes owing even further. Tax credits differ from tax deductions because they reduce taxes independent of the marginal tax bracket you belong in. Tax credits are calculated using the bottom marginal tax rate. In other words, whether you have a taxable income of $30,000 or $200,000, a $100 tax credit will save you the same amount in taxes. Tax credits might bring your final tax owing to $Nil but are generally not going to create a tax refund.

Common tax credits include:

  • Medical Expenses
  • Charitable Donations
  • Post-secondary Tuition

Bottom line is, tax deductions will save more taxes than tax credits if you are in the higher marginal tax brackets. So remember, you aren’t deducting that medical expense, you’re claiming a non-refundable tax credit.

We hope this brief explanation of the differences between tax deductions and tax credits will help you better understand what’s going on inside your tax return. Please call us if you have any other questions or comments.

Disability Tax Credit – Are You Eligible?

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How do you know if you are eligible for the disability tax credit (DTC)?

CRA’s website has a tool available where you can review some questions in order to figure out whether you are eligible to apply for the Disability Tax Credit Certificate. If you want to go through the questionnaire yourself, click on this link.

We have also prepared a Disability Tax Credit Eligibility Decision Tree to help you determine whether you are eligible for the disability tax credit or not. Check it out!

Tax Free Savings Accounts (TFSA)

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The Tax Free Savings Account (TFSA) is a savings account that allows any individual over the age of 18 and who has a valid Canadian SIN to invest in assets and earn tax-free investment income.

 

Contribution limit, accumulation, and penalties

There is a limit to the amount you can contribute to the account. In previous years from 2009 to 2012, the contribution limit was $5,000 per year. In 2013 and 2014, the limit has increased to $5,500 per year. Then in 2015, the limit increased again to $10,000. However, starting Jan 1, 2016, the limit was decreased to $5,500.

Investment income earned and changes in the value of TFSA investments will not affect your TFSA contribution room for the current or future years.

You can have more than one TFSA at any given time, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room for that year. Any amounts that exceed the contribution room will be subject to a monthly penalty tax of 1% of the excess amount, until the excess is withdrawn.

On the other hand, if your contribution for the year did not meet the limit, the unused portion is carried forward to future years. This increases your contribution limit for next year.

 

Withdrawals

Withdrawals from your TFSA are tax-free, regardless of the amount. These can generally be done any time you want, depending on your investments. Withdrawals will be added to your TFSA contribution room at the beginning of the following year. For example, if you withdraw $2,000 from you TFSA in 2015, your 2016 contribution room will be $7,500 ($5,500+$2,000).

Re-contributing your withdrawals is also allowed – however this will not change your contribution room for the year. For example, in 2016 taxpayer opened his/her TFSA and contributed maximum amount allowed of $46,500. Later in 2016, the taxpayer withdrew $8,000. The date that a taxpayer can re-contribute the $8,000 without incurring penalties is Jan 1, 2017. Therefore any re-contribution should be done carefully to avoid penalties from over-contributing.

 

Transfers

Funds given to your spouse or common law partner to contribute to their own TFSA is permitted, without any restrictions or tax consequences.

Fund transfers between your own accounts or to ex-spouse/ex-common law partner are considered qualifying transfers. These can be done without any tax consequences, as long as they are directly transferred by your financial institution.

 

Death of a TFSA holder

 

A TFSA holder may:

  • Name a successor holder for the account-the survivor automatically becomes the holder of the account at the time of the former holder’s death.
  • Designate a beneficiary for the account – the account will cease to exist and the funds will be distributed to the beneficiary.

 

 Tax implications

 

Successor holder

The TFSA holder may only appointed his/ her survivor (i.e., the holder’s spouse or common-law partner at the time of death) as the successor holder for the account. Any income earned after the death of the holder will continue to accrue on a tax-free basis in the TFSA and the deceased’s spouse of common-law partner may make withdrawals from the TFSA free from tax.

Where the success holder has their own TFSA, they may choose to consolidate the two plans by the direct transfer of all or part of the assets of the holder’s plan to their own plan. In general, the direct transfer will not affect the successor holder’s TFSA contribution room.

Going forward, the successor holder may make additional contributions to the combined TFSA based only on their own unused contributing room.

 

Beneficiary

In general, the fair market value at the date of death may be viewed as a non-taxable capital receipt to the designed beneficiary and maybe withdrawn free of tax. Any accretion in value after death will be subject to tax in the hands of the designated beneficiary.

If the TFSA holder’s spouse or common-law partner was designated as beneficiary, the situation is more complicated. When the estate is settled, the full value of the TFSA will be paid to his/her spouse. Deceased’s spouse or common-law partner has option to contribute all or portion of the funds received from the former holder’s TFSA to their own TFSA as an exempt contribution without affecting their own unused contribution room.

In order to do this, the exempt contribution payment must be made before the end of the calendar year following the year of death, the payment may not excessed the fair value of the holder’s TFSA at the date of death and the prescribed designation election from must be filed within 30 days after the contribution is made. In addition to the above requirements, any income or growth earned by the TFSA after the former TFSA holder dies is fully taxable to his/her spouse.

TFSA is a great tool to take advantage of, to save for the future. In order to make sure that the TFSA passes to your spouse of common-law partner as simply and as tax-effectively as possible, the successor holder method will allow for it in a less complicated manner.

T1135 New Simplified Reporting Method

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Commencing in 2015, the Canada Revenue Agency has implemented changes to reporting foreign property on Form T1135. The changes include a simplified method for reporting foreign property rather than having to provide the detail of each property. A taxpayer qualifies to use the new simplified reporting method if they own specified foreign property with an adjusted cost base of more than $100,000 and less than $250,000 at any time during the year. This simplified reporting can be found on Part A of Form T1135. You are required to report on only the top three countries based on cost during the year. However, if a taxpayer owns specified foreign property with an adjusted cost base of more than $250,000 at any time in the year, Part B of T1135 must be filled out in more detail.

A caution for the 2015 taxation year is that, due to the appreciation of the US$, some properties that were under CDN$100,000 in 2014 might be worth over CDN$100,000 due to the exchange rate increase.

More good news is that you can still EFILE or NETFILE for the 2014 and subsequent taxation years. Also, the period for reassessing the return has been extended by three years if you have failed to report income from a specified foreign property and form T1135 was either not filed, not filed on time, or was filed inaccurately.

If you would like more information on filing the T1135, please visit the CRA website http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/frgn/1135_fq-eng.html.

Tax Rates Effective March 2016

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On February 15, 2016, Finance Minister Charles Sousa delivered the 2016 Ontario Budget. Please find below some highlights from that release that we thought would be beneficial for you to review. If you would like more detailed information, please visit the Government of Ontario’s web site: http://www.fin.gov.on.ca/en/budget/ontariobudgets/2016.

 

PERSONAL TAX RATES AND BRACKETS

Federal Ontario
15.00% 5.05%
45,282 20.50% 41,536 9.15%
90,563 26.00% 83,075 11.16%
140,388 29.00% 150,000 12.16%
200,000 33.00% 220,000 13.16%

Surtax of 20.00% on Ontario tax over 4,484

Surtax of 36.00% on Ontario tax over 5,739

 

MAXIMUM COMBINED PERSONAL RATES AND TAX FREE DIVIDENDS

  Eligible Dividends Other than eligible dividends Capital gains Other income
FEDERAL / ONTARIO RATES 39.34% 45.30% 26.76% 53.53%
TAX FREE DIVIDENDS* 51,474 32,847

*This table assumes that only the dividend is earned, and includes federal and provincial taxes and surtaxes – reflecting basic personal amounts, dividend tax credits, and provincial tax rate reductions.

Ontario Health Premium of $600 on eligible dividends, and $446 on other than eligible dividend applies.

 

CORPORATE TAXES – COMBINED FEDERAL AND PROVINCIAL TAX RATES

  SBD limit UP to SBD limit M&P rate General rate CCPC investment income rate Personal services business rate
FEDERAL / ONTARIO 500,000 13.50% 12.00% – 17.50% 30.00% 53.67% 48.00%

For a CCPC with a tax year of January 1 to December 31. Rates may vary for non-calendar tax years.

Per proposed section 123.5 of the Income Tax Act, there will be an additional 5% tax on personal services business income.

Adoption Tax Credit

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For individuals considering adoption or currently involved in the adoption process CRA offers an Adoption Tax Credit.

Adoption period:

  • begins at the earlier of :
    • the time the eligible child’s adoption file is opened with a provincial or territorial ministry responsible for adoption (or an adoption agency licensed by  a provincial or territorial government); and
    • the time, if any, that an application related to the adoption is made to a Canadian court; and
  • ends at the later of :
    • the time an adoption order is issued by, or recognized by, a government in Canada in respect to the child; and
    • the time that the child first begins to reside permanently with you

Eligible adoption expenses are:

  • fees paid to an adoption agency licensed by a provincial or territorial government
  • court costs and legal and administrative expenses related to an adoption order in respect of the child
  • reasonable and necessary travel and living expenses of the child and the adoptive parents
  • document translation fees
  • mandatory fees paid to a foreign institution
  • mandatory expenses paid in respect of the immigration of the child
  • any other reasonable expenses related to the adoption that are required by a provincial or territorial government or adoption agency

Completing your tax return:

  • the maximum claim per child is $11,128 – the two adoptive parents can split eligible expenses as long as the total combinedclaim is not more than the amount before the split
  • parents can claim these incurred expenses in the tax year including the end of the adoption period in respect of the child
  • you must reduce your eligible expenses for any reimbursements or other forms of assistance you received.
  • keep all your documents in case CRA asks to see them
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