DAVID WILKENFELD, CA, canadian tax CONSULTANT

Archive for the ‘Personal Tax’ Category

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Support Payments Redux

In Canadian Income Tax, Personal Tax on February 13, 2012 at 1:46 pm

So you’ve split up with your significant other, and you’re forced to make support payments. The first thing you’ll be asking me is, “are they deductible?” Well, just like your relationship, it’s complicated. That’s what The Tax Issue is here for.

There are two basic requirements before you even consider taking a deduction. First, the payments must be based on a written agreement or a court order. Second, they must be periodic payments. Lump sums or payments based on a mutual, non written understanding are not deductible.

Once you’ve passed these hurdles the rules are different depending on when your agreement or court order was signed. We’ll tackle them one at a time, but before we do, you should be aware of one more thing: any amount that is deductible to the payer is also taxable to recipient.

Written Agreement or Court Order After April 1997

If your document is dated after April, 1997, only payments made in support of your spouse (or common law partner) are deductible. Child support is not.

Your agreement must clearly specify which payments are exclusively for spousal support. If no mention is made of the purpose of the payments, they are deemed to be for child support and are not deductible.

Payments made to a third party qualify as long as they are for the benefit of your spouse and he or she has control over them. For example, if a court order specifies that payments are to be made to a landlord for your spouse’s rent, it must also be made clear that your spouse may at any time have those payments made to her instead if he or she so desires.

If you qualify for a deduction under the above rules, you must register your agreement or court order with the CRA by filing form T1158.

Written Agreement or Court Order After April 1997

If your document is dated prior to May, 1997, then payments for spousal support and child support are deductible.

However, if the agreement was amended after April, 1997 and the amount of child support payments is modified, then you fall into the new rules, and they will no longer be deductible.

You can also choose, if your spouse agrees, to have the new rules apply to make the payments non-deductible (and non-taxable to the recipient) by filing an election on Form T1157.

Those are the basic rules. If you need more information, try the CRA guide P102. That should answer most of your questions.

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Introducing The Tax Issue Tax Organizer for 2011!!

In Canadian Income Tax, Personal Tax, Uncategorized on January 17, 2012 at 2:06 pm

Organizing tax information for your tax preparer can be a daunting task. Do you use a shoebox? a shopping bag? Despite your best intentions, you may not have the time or the knowledge necessary to provide a complete and organized dossier.

Those of use who prepare your taxes just don’t have the time or energy to instruct their clients on how to properly prepare their income tax papers.

And so, as a public service to those beleaguered tax preparers, and to those of you who want your accountant to love you at tax time, The Tax Issue introduces the Tax Issue Tax Organizer.

The Tax Issue Tax Organizer is a free PDF file that you can download and use as an accountant, to give to your client, or as a client to use yourself to help organize the information you give to your tax preparer and make his or her life a little easier.

How to use the Tax Issue Tax Organizer

Simply download and print the Organizer. Each page represents a section that will let you organize the information for that topic. It starts with a list of the relevant documents you should submit to your tax preparer. Attach each page to a separate envelope or file folder containing the documents for that section.

Each page has a list of Do’s and Don’ts to help ensure that you help your tax preparer by including all the necessary documents and receipts he needs to efficiently prepare your taxes.

Finally, each page contains a few tax tips to help guide you through the process.

Even if you prepare your own tax returns, The Tax Issue Tax Organizer is a great tool to help you prepare.

Have a great tax season and enjoy using the Tax Issue Tax Organizer!

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What’s Your Tax Issue? Residence in a Trust

In Canadian Income Tax, Personal Tax, Principal Residence on January 7, 2012 at 8:19 pm

Our House is a very very very fine house

                  –Crosby, Stills, Nash & Young

The Tax Issue

I am a member (beneficiary) of a family trust that was set up years ago by my Dad. The trust currently owns two houses. I live in one, and my sister, who is also a member of the trust, is married and lives in the other. We were told that we will have taxes to pay we sell our homes. Can this be true? Please help, as no one seems to know the answer.

The Answer

The principal residence rules that apply to personal trusts are surprisingly restrictive and can be a trap for the unwary.

A trust is treated as a person for tax purposes. As such, it does have access to the principal residence exemption on the sale of a home. But here’s the kicker: if a trust designates a home as a principal residence for a given year, then every beneficiary of that trust who lived in a home owned by the trust is deemed to have made the designation. And remember, a person can only designate one property as her principal residence. This applies to a trust as well. This means that if you sell the home you are living in and the trust claims it as a principal residence, then when the trust sells your sister’s home, the trust is precluded from making the designation on the second home. Her home becomes ineligible for the exemption for those years even though it may be the only home she’s lived. This might come as a shock, and it seems unfair, but that is the way the law works.

So, let’s look at an example. Say the trust owned your home since 2000 and it is sold in 2012 at a gain of $500,000. Furthermore, let’s assume the trust owned your sister’s home since 1996, and sells in 2012 at a gain of $400,000. If the trust claims the full principal residence exemption on your home, then it will be precluded from claiming the exemption for the years 2000 – 2012 on your sister’s home. In fact, for the 16 years the trust owned your sister’s home, only 4 will qualify, so only 4/16 of the gain will be exempt. (Actually, the formula generously adds 1 year to numerator, so technically 5/16, or $125,000 of the total gain will be exempt).

Taxpayers thinking about placing personal homes in a family trust should always seek professional tax advise.

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Moving Expenses – Stay In Canada

In Canadian Income Tax, Personal Tax on April 12, 2011 at 3:15 pm

One of the big misconceptions out there is that moving expenses are deductible. Yes of course that’s true, but there are restrictions and rules.

It is widely known that moving expenses are only deductible when moving from one job to another. Students may also, under certain circumstances claim moving expenses.

One major restriction that slips people’s minds is that generally the move must be within Canada. If you move to Canada from another country (or vise versa) for employment (or self-employment) your moving costs are not deductible.

However, if you are away from Canada but are still considered a resident of Canada for tax purposes throughout the year (perhaps because you haven’t cut your residential ties or you are a deemed resident), then the  “in Canada” restriction is not applied. A move to and from a foreign location will qualify and the new location need not be in Canada.

Your move must result in you being at least 40km closer to your new place of employment (or self-employment).

You must cease your business or employment and your moving expenses are only deductible to the extent of your income from the new location in the year or the following year.

Students

If you have been in full-time attendance at a post-secondary institution in Canada and move to start a job within Canada, you may claim moving expenses.

If you move to attend school full-time at an institution  you may deduct moving expenses, but only against income from scholarships, fellowships, research grants and similar awards.

Foreign students coming into Canada to study at a post-secondary institution are also entitled to deduct moving expenses against income from scholarships, fellowships, research grants and similar awards.

As with employment moves, you must be at least 40km closer to your new school.

You are considered a full-time student for the purpose of claiming moving expenses if you regularly attend a post-secondary school and you take, during a semester, 60% or more of the usual course load for the program in which you are enrolled.

For more info on moving expenses, check out Interpretation Bulletin IT-178R3.

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Establishing Disability

In Disability, Personal Tax on March 29, 2011 at 5:00 pm

The Income Tax Act contains many provisions dealing with disabled persons. Such things as the disability tax credit, certain medical expense deductions, the registered disability savings plan and other provisions are currently available. What’s more, the federal budget has proposed new rules for disabled persons (but we’ll have to wait until after the election to see if they become law)

But before taking advantage of any of these rules, the first step is to establish that you have a disability that qualifies. To be more precise, you must be a person with a “severe and prolonged mental or physical impairment”.

An impairment is considered “severe and prolonged” if it is expected to last continuously for more than 12 months and markedly restricts your ability to perform a basic activity of daily living.

Activities of daily living include:

  • Mental functions of daily life, such as memory or problem-solving
  • Blindness
  • Feeding or dressing oneself
  • Speaking
  • Hearing
  • Eliminating (bowel or bladder functions); or
  • Walking

You would also qualify if you require life-sustaining therapy administered at least 3 times a week for a total time of at least 14 hours per week. This includes time spent by parents of children to administer life-sustaining medication such as insulin.

You can read more details explaining what constitutes a marked restriction for each of the above impairments by consulting form T2201.

If you believe you have an impairment that qualifies under the above criteria, then you must obtain form T2201 (and if you live in Quebec form TP-752.0.14) and have it completed and signed by a doctor or other qualified medical practitioner. A qualified medical practitioner other than a doctor must be a medical professional that is recognized as such in the province where you reside. Optometrists, audiologists, psychologists, or physiotherapists are examples of medical practitioners that would be authorized to sign the form. Examples of practitioners who have been denied the authority to sign the form are massage therapists, acupuncturists and naturopaths (depending on their status in the province where they practice).

Once the form is completed and signed, it must be submitted to the CRA for assessment and approval. This process can take several weeks. You can either attached the form to your income tax return or send it in alone prior to filing your return, to avoid delays in processing your claims.

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What’s Your Tax Issue?

In Canadian Income Tax, Non-residents, Personal Tax, Principal Residence on March 15, 2011 at 4:10 pm

Tax season is upon us, and here at The Tax Issue, the questions are streaming in at a furious pace. I had a few free minutes this afternoon, so I thought I’d tackle some of the backlog.

The Tax Issue:

My partner and I each have holding companies that have joint ownership of our operating company.  If we wanted to sell a 1/3rd share in the operating company is there a mechanism to utilize our personal capital gains exemption?

The Answer:

The capital gains exemption is a $750,000 lifetime limit available to all Canadian resident individuals. It can be used to shelter capital gains on the sale of either qualified farm property or qualified shares of a small business corporation.

Since the shares of your operating company are held through a holding company, the exemption would not be available in the situation you describe. Your holding company would be the vendor of the shares and the exemption is available to individuals only.

Having said that, there may be some “reorganization” of shares you could perform to get you into a better position. Such planning would go beyond what I could explain here, so I would explore these options with a tax professional.

The Tax Issue:

I am a Canadian living/working in the US and considered non-resident of Canada for tax purposes. I do have a rental property in Canada and looking for an easy way to file my income tax on the rental property. What I have read so far makes me believe that I must file my taxes through an agent in Canada. I am wondering if I can file my taxes without using an agent and what is the process to do that.

The Answer:

The short answer is that you do not need to file a tax return through an agent.

Since you are a non-resident of Canada, the Canadian person who pays you rent must withhold taxes and remit them to the CRA on a regular basis. This person could be your tenant directly, or a Canadian agent who manages the property and collects rent on your behalf. Either way, there has to be a Canadian responsible for withholding and remitting these taxes.

You then have the option of filing a tax return under section 216 of the Income Tax Act. The taxes previously withheld would be treated as a credit against your taxes payable. There are two options for withholding and filing under section 216. I have discussed this mechanism in a previous post. Check it out. Also, the CRA has an extensive section on their web site dealing with the issue.

The Tax Issue:

My mother passed away in 1995 and my father gifted her 50% portion of a house to me, however kept himself on title for the other 50%.   He had another house that he resided in.   He kept his name on solely to protect my interest in case of divorce.    He passed away in May 2010 and now I’m told that I may have to pay capital gains.   I don’t understand why I have to pay capital gains if I’m not selling the property and the property has been my principal residence.   He had nothing to do with the house.   Is there anything I can do to avoid paying this capital gains tax?

The Answer:

Unfortunately, it sounds like your father was the owner of more than one principal residence. Upon the death of an individual, he is deemed to have disposed of all his capital property at fair market value. That includes any real estate he owned. There is an exemption for a principal residence. The definition of “principal residence” includes, not only the house he lived in, but can also include a house occupied by his child. The downside is that his estate can only claim one property as a principal residence.

Your father’s executor will have to determine which of the properties he should claim as his principal residence in order to minimize the taxes on his death. I would call in the help of a good tax accountant to crunch those numbers.

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What’s Your Tax Issue? Province of Residence

In Canadian Income Tax, Personal Tax, Residency on February 11, 2011 at 10:25 am

The Tax Issue:

I recently accepted a job position with my current employer which will transfer  me from Toronto to Montreal. Now I love Montreal however I hate Quebec income tax and I was looking for a way to physically work in Montreal (Quebec) however keep paying taxes as a resident of Ontario.  Any advice would help.

The Answer:

Welcome to the club! We Montreal-lovers and Quebec tax-haters have been struggling with this question for years. Some of have moved away never to return. Unfortunately, loving Montreal comes with a price (and I don’t mean Carey :-) ).

Individuals are subject to Canadian income taxes in the province where they reside on December 31 of any given year. Residency for income tax purposes is not a choice one makes by ticking a box on a tax return. It is a question of fact, based on your residential ties.

The most important residential ties are where your home (owned or rented) is, and where your spouse or common-law partner or dependants reside. Other ties that may be relevant include social ties, bank accounts, driver’s licence and medicare.

So, unless you’re move is temporary or you plan to commute from Toronto each day, you’re pretty much going to have to set up residential ties in Montreal and pay Quebec taxes.

If you really feel very strongly about staying out of the Quebec tax system (as a resident of Ontario you’d be saving less than 2 per cent in income tax if you’re at the top marginal bracket), you could make your home in nearby Cornwall, Ontario, which is only about a 45 minute commute from Montreal (on a Sunday Morning :-) ).

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What’s Your Tax Issue? More Personal Property Issues

In Canadian Income Tax, Personal Tax on February 2, 2011 at 3:30 pm

The Tax Issue:

In 2002, my parents put their principal residence in joint tenancy with my husband and myself. We lived on the property for a period of time. We have, since 2002, contributed to repairs and upkeep. In 2005, my father died. In 2010, my mother died. We currently use the home as a seasonal property but we plan to rent it out a few weeks of the year in order to have it pay for its upkeep. What I am wondering about is Capital Gains Tax. I am sure our portion (or maybe all of it minus the costs incurred and that step-up thing?)is subject to it, however, is it only payable if the property is sold? Also, is the step-up determined from when we received our interests in the property in 2002 or when it was no longer my mom’s principal residence (because she died) in 2010?

 
Hey, as an aside…do you recommend claiming rental income from a seasonal vacation rental as “rental income” on a personal tax return or as “business income” on a personal tax return (I did register my husband and myself as a general partnership – if that matters)…you probably recommend that the time has come to hire an accountant, right? ;-)

The Answer:

OK, let’s tackle the easy question first. You will only pay capital gains tax on the property when it’s sold.

Now, when your parents transferred the property to you in 2002, they had a deemed disposition at fair market value, so that your cost is equal to the value of the property at that time. If you have made any capital improvements since that time, you may add those to your cost.

When you sell the property, a portion of the gain may be exempt if you claim the property as your principal residence. That’s not such an easy decision to make. You can designate only one property as a principal residence in any given year, so if you owned any other residence, you may want to save those years for the property with the higher accrued gain.

Next, rental income must be reported as “rental income” not “business income”. There is no choice in the matter. Registering as a partnership doesn’t really change a thing, other than you’ve protected your partnership’s name, if any.

And finally, nothing beats a good accountant. They’re cute, warm and cuddly and yes, I do recommend you use one.

Good luck!!

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What’s Your Tax Issue? Using RRSP Funds for Private Company Investment

In Canadian Income Tax, Personal Tax, RRSP's and RRIF's on January 25, 2011 at 1:10 pm

The Tax Issue:

Can I use the funds in my RRSP to invest in shares of a private company?

The Answer:

Let’s get one thing out of the way from the top: you cannot use your RRSP funds to invest in a corporation which you control. Now, for those of you that are still with us, the following explains the rules involved.

Small Business Corporation (“SBC”) Test

Generally, an SBC is a corporation that meets the following conditions:

(a)    the corporation must use all or substantially all (i.e. 90%) of its assets principally in an active business carried on primarily in Canada. Shares or debt of connected qualifying corporations are also eligible assets.

(b)    The corporation must be a Canadian corporation that is not controlled any manner by non-residents. This control test includes control in fact, as well as legal voting control.

Any investment in an SBC will qualify as long as investor is not connected with the corporation

A shareholder is considered connected if he or any related person owns, directly or indirectly, at least 10% of the shares of any class of the corporation or a related corporation.

A connected shareholder could still invest in a SBC as long as the total investment (including investments by related persons) is less than $25,000, and the investor deals at arm’s length with the corporation.

Eligible Corporation (“EC”) Test

Most RRSP investments in private companies will fall within the rules described in the SBC test above. The EC test is an older rule that still applies. It is similar to the SBC test, but more restrictive, so let’s not bore you with the details.

Suffice to say that anyone contemplating an investment in a private company with RRSP funds should not do so without first consulting a tax professional.

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What’s Your Tax Issue? Inter-Provincial Employment

In Canadian Income Tax, Personal Tax on January 10, 2011 at 4:11 pm

“We’re workin’ our jobs, collect our pay, believe we’re gliding down the highway, when in fact…..”

The Tax Issue:

I have recently been hired as an employee by a firm from Ontario. I live in Quebec and I will be working exclusively from my home. My employer’s accountant tells me I am subject to Ontario payroll deductions. Is this correct?

The Answer:

The short answer is, yes.

Generally, it is not the province where the employee is resident that determines the jurisdiction for payroll deductions at source, but rather, the place of employment.

The place of employment is the employer’s place of business where the employee is required to report to work. This is true, regardless of where the employee lives or where the employer’s head office is.

If, as in your case, an employee does not report to work at the employer’s place of business, the CRA says that the province of employment is determined to be the place where the employer’s business is located and from where he pays the salary.

Based on the above, you will be subject to Ontario deductions at source. When you file your tax returns, however, you will still file as a Quebec resident taxpayer. As a result, you will probably have a large refund for federal purposes and taxes due on your Quebec return.

In this case, when you file your tax returns, you may apply a portion of your total tax withheld against your Quebec tax liability. The rules allow for you to transfer to Quebec any amount up to a maximum of 45% of the total tax withheld in another province. Simply slip the amount you wish to transfer on to the appropriate lines on both your federal and Quebec tax returns.