Tax Tips 2013 (Part 2)

Tax Tips 2013 (Part 2)

1. Split pension income, save taxes

All’s fair in love…and taxes. At least, that’s the way the Canada Revenue Agency seems to see it when it comes to pension income.

“Up to 50 per cent of eligible pension income can be transferred between tax returns for spouses or common-law partners,” says Joseph A. Truscott, CPA, CA, in Hamilton. “So the spouse with the higher income may want to transfer pension income to the lower-income spouse, which can often significantly lower the taxes they pay on pension income as a couple.”

You can transfer the taxable part of life-annuity payments from a superannuation or pension fund or plan, RRSP annuity payments, and income from registered retirement income funds.

“But you cannot not transfer portions of your Old Age Security, any foreign-source pension income, or income from a U.S. individual retirement account (IRA),” cautions Truscott.

You’re not permitted to transfer Canada Pension Plan payments, either. But spouses and common-law partners can elect to share the benefits at the source, which can yield tax savings, too. To set this up, you must file an Application for Pension Sharing of Retirement Pension(s) Canada Pension Plan, which can be found on the Service Canada website.

“To set up a transfer, you both must complete and sign Form T1032, Joint Election to Split Income, and retain it if you’re filing your return electronically. If you’re filing a paper return, the form must be completed, signed and attached to both your and your spouse’s or common-law partner’s returns. Most professional accountancy firms and tax software packages will do this for you automatically, and will usually calculate the exact amount you should transfer for the maximum tax advantage.”

Consult a professional if you’re not sure about setting this up, because the recipient could face a clawback of their Old Age Security benefits if the amount transferred exceeds certain limits.

“If you’re 65 or older at the end of the year, you may also be eligible for a $2,000 pension income credit, and your spouse/partner may be able to claim it, too,” Truscott adds. “In some cases, the savings from splitting your pension income could be significant, so it a strategy that’s well worth investigating.”

2. To save on taxes, business owners need a plan

When it comes to reducing the income tax they have to pay, private business owners can have a real edge on the rest of us.

“If the business is incorporated, private owners usually have some discretion as to the amount of compensation they receive,” says Chartered Accountant Jason Safar, National Private Company Services Tax Leader of PwC in Toronto. “So instead of meeting with your accountant at the end of the year to fix what you’ve done over the last 12 months, go now and get on track for the year ahead.”

If you’ve been in business for a few years, you probably have a good idea of how it will perform, Safar says. “Don’t get bogged down trying to get every detail just right. Instead, think about the big things. Know what you can expect in a good, an average, or a less-than-average year.

“Your accountant should know what the situation is in both your business and your personal life: your business losses, RRSP room, capital losses, medical expenses and whether you’re putting kids through university. So the question becomes, what’s the best way to fund everything? Salary? Dividends? Bonuses? Think about it before the year starts and plan the best way to manage everything.”

Tax rates vary widely, depending on who or what is paying them. “Taxes are just 15.5 per cent on the first $500,000 of active business income earned in a private Canadian corporation, inside the corporation,” Safar explains. “So, is it better to take more salary and lower the company taxes, or take your compensation as dividends and pay the lower taxes on your personal income? Are there opportunities to income-split, by paying your spouse or children a salary? If you help your parents financially, would it be better if they had shares in your company to use for income instead of you writing them a personal cheque?”

Safar cautions that there’s no silver bullet, and that you need to put all those pieces together and look ahead to what’s likely to happen. But he’s resolute that you’ll get a much better result if you do. “The idea is not to lock you in, but to give you a framework for making it happen and a sense of control. It just puts you in a better place overall.”

3. Share your investments, cut your tax bill

It’s all in the family. At least, that’s the way the Government of Canada seems to see it when it comes to taxes on investment income.

“If someone earning income from their non-RRSP investments is in a higher marginal tax bracket than their spouse or partner, they might consider transferring the underlying investments—or lending the funds to invest—to the other,” says Chartered Accountant Richard C. Weber, a tax and accounting specialist in Oakville. “This way, the couple will reduce their tax burden on that investment income by effectively accessing the lower marginal tax rates of the lower-income spouse.”

But be careful. It’s important that the loan is structured in a particular way. “An equivalent-value promissory note must be exchanged that bears interest at the applicable rate prescribed by the Canada Revenue Agency,” Weber explains.

There are other considerations and requirements that must be diligently met, such as ensuring that the interest is actually paid each year, or by January 30 of the following year.

“There are adverse tax attribution rules that don’t allow property to simply be transferred between spouses for income-splitting purposes. The one who receives the benefit must pay fair-market-value consideration,” Weber continues. “But you can lend your lower-income spouse the funds to invest, and charge them the same applicable interest rate that the CRA prescribes (currently 1 per cent annually) on the amount of the loan. If those investments should yield, for example, a 5 per cent annual return, the spouse would repay the 1 per cent annual interest on the loan, and then include the net 4 per cent annual return as part of their taxable income. That 4 per cent would then be taxed at their lower marginal rate.”

Different types of investments produce different types of income for tax purposes, and these are subject to different tax rates. So consult a Chartered Accountant in your community to help you find the most effective tax-saving strategy for you and your family.

4. The self-employed can net big savings at income tax time

When it comes to saving money on income taxes, you can’t beat self-employment for the range of opportunities it provides.

“There are many more options for the self-employed than for people who get a T4 from their employer,” says Edward J. Barker, CPA, CA, in Owen Sound, Ontario. “If you are self-employed and work from home, you can usually deduct expenses relating to your home office, including some of your property taxes and part of the interest on your mortgage.”
Of course, any expenses you incur in the operation of your business are also tax-deductible, so don’t forget to add in the cost of your office supplies, telephone, and heat and electricity for the part of your home that is used as your office.

“You can also employ family members to help you in the business. This allows you to split income and save on taxes that way,” Barker explains. “If, for instance, your year’s profit was $80,000, you can pay your spouse $40,000 for keeping your books or packaging your shipments for the courier. You’ll each be taxed at a much lower rate than if just one of you earned $80,000. Even children can help in simple ways and be paid a salary that lets you reduce the taxes that the family collectively pays.”

Of course, the amounts you pay family members must be reasonable for the work performed, and in line with what you would otherwise pay an outside party for those same services. Children must be of a reasonable working age, and truly doing things that add material value to the business. It’s important that records are kept about the hours worked, duties performed, and any other details that would normally be documented about a regular employee’s work.

If you use your vehicle in the business, those expenses are also tax deductible to the extent they relate to the work itself. “Keep a log of business mileage and all expenses such as gas, repairs, insurance, etc., and be sure to factor in tax depreciation, referred to as capital cost allowance,” Barker advises. “Consider, too, that business losses can be used to offset taxes that you owe. You can carry these losses back three years, and forward as far as 20 years to get the tax advantage when you need it most.”

Travel for legitimate business purposes is usually deductible. But when you’re entertaining clients, only 50 per cent of your meal costs can be claimed. For help identifying other costs that may offer tax savings, consult a Chartered Accountant in your community.

5. How the Government of Canada helps us give back

Canadians are among the most ardent givers in the world. According to Statistics Canada, our total financial donations to charitable or non-profit organizations were about $10.6 billion in 2010.

“You can claim a federal tax credit of 15 per cent of the donation amount on the first $200 you give,” says Chartered Accountant Geoff Fisher, Partner, KPMG LLP in Sudbury. “This is worth a little over 20 per cent when the Ontario provincial tax credit is factored in. For any amounts over $200, the federal tax credit increases to 29 per cent. And when the Ontario provincial tax credit is considered too, the combined amount can be anywhere from about 40 to nearly 47 per cent.”

In a single year, the maximum amount of charitable donations you can claim is limited to 75 per cent of your net income. But any unclaimed amount can be carried forward for up to five years.

You can also make charitable gifts of certified cultural property or ecologically sensitive land, in which case the amounts you may claim are not limited by a certain percentage of your net income. “And, special beneficial tax rules also exist if you donate publicly traded shares,” Fisher adds. “But it can be complicated. So if you’re considering this strategy, consult with your tax advisor.”

You need official receipts to claim the tax credits on your income tax return. Be sure to request them, as some charitable organizations don’t provide them automatically unless your donation exceeds a certain amount.

“Check that the organization you donate to is a registered charity,” Fisher advises. “If there’s any question, you can confirm the registration on the CRA website at http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html.”

6. Move closer to work and save on taxes, too

Is the two-hour commute keeping you from accepting that job offer with a new company? Would you consider moving closer if you knew that many of the costs of relocating may be tax-deductible?

“Providing you move at least 40 kilometres closer to start a new job or go to school, some of the biggest costs of relocating can be deducted for income tax purposes,” explains Edward J. Barker, CPA, CA, in Owen Sound, Ontario.

“The realtor’s commission, legal fees, mortgage fees, temporary living quarters and even the cost of hooking up your utilities in the new place are all valid deductions that many people overlook,” says Barker. “What you can’t deduct are the expenses you incurred to get the old house ready for sale, like a new roof or windows. Nor can you deduct the upgrades you must leave behind, like draperies or a tool shed.”

But if you have to leave the old house vacant for a period of time while you’re trying to sell it, the maintenance costs—from heat and insurance to clearing the driveway or cutting the lawn—are all tax-deductible.

If you received a reimbursement or an allowance from your employer for your eligible moving expenses, you can only claim your moving expenses on your tax return if you include the amount you received in your income, or if you reduce the moving expenses you claim by the amount already received.

“Much of the same applies to students moving for school,” Barker says. “Deductions must be at least $100, and can be applied to those parts of scholarships, bursaries and grants that are taxable. Or, use them to reduce other kinds of income, such as that from part-time employment. You can even deduct the costs of moving back home for a summer job.”

If you don’t have enough scholarship or work-related income to claim the expenses in the current year, you can carry them forward to a future year when you do have enough taxable income to make them worthwhile.

7. Should you be a “working beneficiary” of the CPP?

The Canada Pension Plan is changing the rules that define who qualifies for benefits, and just how much of a payout can be had. If you haven’t yet started collecting CPP and were counting the days until you could, there’s good news…and no-so-good news.

“Some of the most important changes to the CPP involve people who continue to work and earn pensionable earnings while they collect CPP benefits,” says Richard C. Weber, CPA, CA, in Oakville. “We’ve always had the option to start collecting CPP at age 60, although at reduced rates. People who were collecting CPP and still working no longer had to contribute to the CPP plan, regardless of their age.”

That’s no longer the case. Starting in 2012, if you are under age 65, collecting CPP and continuing to work, both you and your employer have to continue contributing to the plan.

There’s more. “The other change affects people aged 65 to 70 who draw CPP and still work,” Weber continues. “As of last year, they can either opt out of making CPP contributions, or they can choose to continue contributing to the plan, and have their employers do the same—a maximum contribution of $2,306.70 each in 2012. The employer will get a tax deduction for their contribution; the employee a tax credit, again based on their contribution, of approximately 20 per cent when the federal and Ontario amounts are combined.”

In either case, the employee’s CPP benefit calculation will take these additional contributions into account.

Those who choose to contribute past age 65 can opt out at any time by completing Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election.

The good news? By waiting until age 65 or longer to collect, your monthly CPP pension amount will increase by a larger percentage than it would previously. And, by keeping up your contributions as you continue to work between ages 65 and 70, you will increase your retirement benefits even more when you ultimately start to take them.

There are other changes to the Canada Pension Plan rules that may affect you. For more information, go to the Service Canada website at www.servicecanada.gc.ca, or consult a Chartered Accountant in your community.

8. Save enough to pay your taxes

Most of us count on our employers to deduct the income tax we owe and remit it to the government. We hope—hope!—we won’t have to write a cheque when we file our tax return the following April….and maybe even get a little money back.

But it can be different for the self-employed, certain people who may have other sources of income, retirees or others who withdraw funds from their RRSPs or RRIFs. They can be responsible for making their own income tax payments on those amounts, often in instalments.

In 2013, you must pay income tax by instalments if your net tax owing is more than $3,000 in 2013 and in the preceding two years. Should you fail to make the appropriate amount of instalments, you can expect interest charges.

So all in, how much should you put aside to pay income taxes?

“There’s a long list of things that go into determining the amount of taxes we each have to pay,” says Chartered Accountant Gary Katz of Logan Katz LLP in Ottawa. “For instance, when you withdraw from an RRSP, some money is withheld to pay the taxes. But depending on the amount you take out, the other kinds of income you have and how much that is, the withholding tax may not be enough.”

Each year, the Canada Revenue Agency sets and publishes the standard income tax rates for individuals. It’s a good idea to be aware of what those rates are, just in case some extra earnings come along and bring an additional tax bill with them.

For specific advice about taxes and what rates might apply in your own situation, consult a Chartered Accountant in your community.
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