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Category Archives: Tax Planning

Odette Morin

Highlights to the 2017 Liberal Government 2nd federal budget

Finance Minister Bill Morneau delivered the Liberal Government’s 2nd annual budget today called the “Innovation Budget”. Here are the key budget highlights:
 
  • The biggest and most welcome news for investors is that no changes were made to the capital gains tax, stock options or dividends inclusion. There were fears that the Liberal government was going to increase the taxation of capital investment gains but they decided to hold off on any tax hikes for now.
  • No major new taxes.
  • 2% tax increase on alcohol and tobacco.
  • Public transit tax credit is cancelled. Instead, the government will invest $20 billion over 11 years – to improve transit systems and encourage usage across Canada.
  • Cancellation of Canada Savings Bonds.
 New programs introduced
 
  • The budget follows through on promises to let parents take their Employment Insurance parental leave benefits over 18 months rather than 12, giving them the choice of taking the existing 55 per cent benefit rate over a year or 33 per cent over a year and a half. They also propose letting women start their maternity leave 12 weeks before their due dates rather than eight weeks prior.
  • On assistance for families, the government will be pledging $7 billion for affordable child care over 10 years to create up to 40,000 more spaces.
  • The government also plans to devote $6 billion over 10 years for home care and $5 billion over 10 years for mental health initiatives through individual deals with the provinces and territories.
  • $691.3 milions will be spent over five years to expand the caregiver benefit for Canadians supporting critically ill and injured family members.
  • Military spending will also be bumped at a cost of $8.5 billion in capital spending for nearly two decades down the road.
  • $395.5 millions over three years to expand the youth employment strategy.
  • $279.8 million over five years for the Temporary Foreign Workers Program.
  • $57.8 million for mental health for federal inmates.
  • $50 million over two years for teaching initiatives to help children learn to code.
  • $27.5 million for programs to help newcomers get foreign credentials.
  • The government is committing money for skills, innovation and jobs, with $594 million set aside for this year, rising to $1.4 billion by 2021-22.
  • The most expensive item of this budget is spending on infrastructure and social programs, including $20.1 billion promised over 11 years for public transit.
  • $3.6 million over three years to create an LGBTQ secretariat at the Privy Council Office to advance human rights
  • $523.9 million over five years to prevent tax evasion and improve compliance. The budget forecasts the government will make an additional $2.5 billion over five years from those measures to catch fraud and tax evaders.
The federal deficit is projected to be $28.5 billion for the 2017-18 year, compared to $23 billion this year – both higher than projected in the fall. The budget offers no timeframe of when the government will balance the books. The budget predicts the economy will grow slightly this year, keeping the ratio of federal debt to GDP fairly flat, at 31.6 per cent in this year compared to 31.5 per cent last year.
 
Sources: CTV News, BNN, CBC & Globe & Mail.
Odette Morin

BC Government 2017 Budget Highlights

The BC Government delivered its 2017 budget this week. The biggest change is the Medical Service Premiums which will be reduced by half for families with annual income below $120k.
For your convenience, here are the key measures that may be of interest to your investors:
  • Medical Services Plan premiums will be reduced by 50% for households with an annual net income of up to $120,000. A typical family is expected to save $900 per year;
  • The small business corporate income tax rate will be reduced to 2 per cent from 2.5 percent, and accordingly the dividend tax credit for ineligible dividends decreased. This has a knock-on effect on the combined tax rate for investment income earned by Canadian-controlled private companies and paid out to shareholders;
  • The threshold for first time home buyer’s program exemption from property transfer tax will be increased from $475,000 to $500,000; and
  • A number of tax credits will be introduced or extended, including tax credits for volunteer firefighters and search and rescue volunteers and individuals with school-aged children for back-to-school expenses.
For more on budget highlights, please refer to the BC government’s summary at this link, or the detailed materials here.

 

Odette Morin

Using Public Transit? The monthly passes are tax deductible.

Here is where to get your tax receipt for the BC transit passes and how to get your tax credit on your tax return.

***PLEASE REMEMBER*** that only certain passes count. Unfortunately the BC compass website calculates all the trips you have done and not just the trips you are eligible to claim. You still need to manually go through and subtract all non-eligible trips before using that number on your tax return.

The CRA website list the eligible passes:

These passes must allow unlimited travel within Canada on:

local buses;
streetcars;
subways;
commuter trains;
commuter buses;
local ferries.

You can also claim the cost of Short-term passes if:

Each pass entitles you to unlimited travel for at least 5 consecutive days; and you buy enough of these passes for unlimited travel for at least 20 days in any 28-day period.

Electronic payment cards if the card is used to make at least 32 one-way trips over a maximum of 31 consecutive days; and the card is issued by a public transit authority that records and provides a receipt for the cost and usage of the card.

We will be happy to do your tax return of course.  Here are our tax checklists to get organized and our tax preparation fees.
Terry Broaders

An RRSP Urban Myth

Did you hear that Canada’s new plastic polymer bills contain a special agent that makes them smell like maple syrup?  That’s a great story but that’s all it is; just a story.  It’s another urban myth just like many myths surrounding RRSPs.

One myth we hear often is that RRSPs are a terrible idea because “you lose the lucrative dividend tax credit and the 50% capital gains reduction; that it is always better to invest outside of an RRSP.”   It’s been proven time and time again that investing within an RRSP is more advantageous than investing in a non-registered account.

Let’s consider a simple example.

Assume an individual has saved $10,000 and she’s wondering whether she should invest it inside her RRSP or in a non-registered account. We’ll further assume her marginal tax rate is 40% and that she buys an investment that triples in value over a 20-year period.

Would she be better off investing inside or outside her RRSP?

To answer that question, we need to consider the tax refund.  Assuming she has income tax deducted from her paycheque, a $10,000 contribution to her RRSP will generate a $4,000 tax refund because she’s in a 40% tax bracket.  So, that $10,000 RRSP contribution wouldn’t actually cost her $10,000; it would cost her just $6,000 ($10,000 minus the $4,000 refund).  Stated another way, at a 40% marginal tax rate, $10,000 inside an RRSP (which contains pre-tax dollars) is equivalent to $6,000 in a nonregistered account (which contains after-tax dollars).  This is because if you are paid $10,000 and you are in a 40% marginal tax rate the government would take $4,000 leaving you with $6,000.

Now, let’s return to the example, using these numbers as our starting points. First, investing inside the RRSP: The $10,000 would triple to $30,000 after 20 years; that’s an average annual return of 5.65%. If she then sells the investment and withdraws the money, she’ll pay $12,000 of income tax (40 per cent of $30,000) and be left with a net $18,000.

Now, investing outside the RRSP: The $6,000 would grow to $18,000 after 20 years. If she then sells the investment, she’ll pay capital gains tax of 20 per cent (half of 40 per cent) on the $12,000 difference between her sale and purchase prices. After deducting $2,400 in tax, she’ll be left with just $15,600.

Verdict: The RRSP produces a superior return. Notice that the difference between the RRSP and non-registered totals ($18,000 versus $15,600) is equal to the capital gains tax ($2,400) that applies in the non-registered scenario. Far from “losing the 50% capital gains reduction,” the RRSP avoids capital gains tax entirely.

The RRSP will always come out ahead if you assume a constant marginal tax rate and if you start with amounts that are equivalent on an after-tax basis. That’s because capital gains, dividends and interest are not taxed in an RRSP, but they are taxed in a non-registered account.  With an RRSP, the only tax is on withdrawals. People love to complain about the tax on withdrawals because it looks so large, but it’s really just the original tax they deferred plus the growth of that tax over time. As the example above showed, even after paying tax on withdrawals, the RRSP investor still wins. If an investor’s marginal tax rate is lower in retirement as it nearly always is, the benefit of RRSPs is even stronger.

What if someone’s marginal tax rate is higher in retirement?  This would be extremely unusual as most people simply make less money when retired versus while working, But in this case wouldn’t that make RRSPs a bad choice? Not necessarily says Jamie Golombek, managing director of tax and estate planning with CIBC Wealth Advisory Services. In a research paper available at goo.gl/uaMJr9 he examined various scenarios.  His analysis showed that, even assuming a fairly drastic 10%-percentage-point increase in the marginal effective tax rate, RRSPs would still enjoy an advantage over non-registered accounts given a long enough investing horizon. That’s because the benefits of tax-free compounding would eventually outweigh the impact of a higher METR on withdrawals.

So given the choice between an RRSP and a non-registered investment the RRSP is the superior choice.

Anthony Sabti

Corporate Class Switching Deadline Extended – Will Take Effect January 1, 2017

In March, the 2016 Federal Budget announced that the tax-deferred switching advantage of corporate class funds would be ending this year. Originally, the budget called for the regulation change to take effect on October 1, 2016; however, the regulation change will now take effect on January 1, 2017.

Until this year, an investor was able to use this fund structure in a non-registered account and switch from one corporate class fund to another – within the same fund company – on a tax-deferred basis.  For example, an investor could switch from ABC Canadian Equity Fund Corp. Class to ABC Global Equity Fund Corp. Class without incurring a capital gain. With a regular fund structure, the investor would normally pay capital gains taxes on the profit incurred on the fund being sold.

While this is unfortunate news, corporate class funds will continue to offer the advantage of tax-efficient distributions.  These funds will restructure any income distribution (including interest income) in the form of capital gains or dividends, and are taxed at a lower rate than interest income.

Since the announcement was made, we have reviewed and will continue to review all non-registered portfolios at client meetings for any changes we would like to make before the rule change takes place. If you have a non-registered account with us and would like to see if we should act on your portfolio before the end of the year, please do not hesitate to contact us.

Frank Mueller

Weekly Update – April 8, 2016

TSX REBOUNDS FRIDAY ON STRONG JOBS NUMBERS, OIL SURGE

The S&P/TSX Composite closed the week at 13,396.73, down 0.3% for the week. At a 2.9% gain year-to-date, Toronto’s main index continues to trail only New Zealand’s index – the world’s best 2016 performer.

While down much of the week, a Friday surge, spurred by encouraging jobs numbers and a 6.6% jump in oil, helped the TSX to cut its losses for the week.

Strong Canadian jobs numbers for March posted a stronger-than-expected increase. A potential knock-on effect of this news could be felt on April 13th, if the Bank of Canada decides not to cut rates again. Before the jobs numbers were released, there was speculation of a rate cut happening again with hopes of further economy stimulation.

Oil enjoyed a healthy jump to finish the week, as data from the Energy Information Administration showed a decreasing U.S. production for the 10th time in 11 weeks, as well as decreased crude stockpiles. West Texas Intermediate May futures closed at $39.72USD per barrel, almost a 50% increase from the February lows, while Brent June futures closed at $41.92USD per barrel. A meeting of oil-producing countries, scheduled for April 17th in Doha, is highly anticipated, as an agreement to freeze output would buoy oil’s price further. John Kilduff, partner at New York energy-focused Hedge Fund Again Capital LLC, stated “We’re still hemmed in a range below $40. Breaking through would be very bullish for the market”.

However, many analysts aren’t believers in an extended oil rally, citing Iran’s goal of winning market share, as well as the world total supply surplus as the main reasons not to believe the hype. Without Iran being on board with a supply cut, other producers cutting supply would only lead to a loss in market share to Iran.

 

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SOURCES: Globe Investor