Author Archives: Gerald_Silver

Both the Ontario and federal governments’ recent budgets had the same focus: attack the huge—and growing—deficits that have been a problem since the 2008 economic meltdown.  Most of the income tax terms were very technical, but today we’ll look at those that could affect you.

Important off the bat: both budgets propose no changes to personal income tax rates.

Let’s start with Registered Disability Savings Plans. The federal budget is shifting the rules to let certain family members be temporary plan holders. This helps adults who may not be able to enter into a contract. The budget also suggests a proportional repayment rule for Canada Disability Savings Grants and Canada Disability Savings Bonds, in situations where repayment arises because of RDSP withdrawals.

The budget will also allow you to roll over investment income earned in a RESP to a RDSP. This gives you a tax-free rollover of RESP investment income to a RDSP while the initial RESP contributions can be returned to the RESP subscriber tax-free.

There are also new rules about terminating an RDSP when the beneficiary becomes ineligible for the tax credit. Now, an election can extend the length of time the RDSP can stay open.

The provincial budget confirmed some things we already knew about. The Ontario Clean Energy Benefit (effective January 1, 2011) provides a 10% benefit on hydro bills to help with rising energy costs. The Healthy Homes Renovation Tax Credit will offer a refundable tax credit of up to $1500 each year for permanent home modifications that improve accessibility or functionality for seniors. This applies to payments made after September 2011 and will be effective for the 2012 and subsequent tax years.

The budget also proposes an Ontario Child benefit payment increase from $1100-$1210 per child, but not until July 2013.

A small shake-up for the Ontario drug benefit program, which pays for prescription drugs for seniors. Right now the annual deductible is $100 per person, with a co-pay requirement of $6.11 per prescription. For low-income seniors, the deductible will be waived and the co-payment reduced to $2.

The budget also introduces an income-based deductible effective August 2014. The deductible will now be $100 +3% of net income in excess of $100,000, and for senior couples the deductible will become $200 +3% of combined net income in excess of $160,000.

News for students, too. A grant was confirmed that offers up to $800 per term (maximum of two terms per year) for full-time undergraduate study, and up to $365 under the same terms for college students.

The major change for corporations is Ottawa’s new approach to supporting Canadian innovation. The current SR&ED tax incentive program will be tailored to significantly reduce available tax benefits, and we’ll see a new, more direct approach to supporting innovation.

Those changes include reducing the general tax credit rate from 20% to 15%, removing the ability to claim capital expenditures, reducing the currently prescribed “proxy rate” from 65% to 60% and reducing the claim for arm’s length contractors from 100% to 80%.

The feds will instead offer a program with significant new funding over the next five years for direct R&D support and for capital venture initiatives. It looks like the government wants a more direct hand in determining the type and nature of R&D performed in Canada. It seems highly doubtful this type of direct intervention into research decisions will actually improve Canada’s future ability to compete.

So in the end, this year’s budgets don’t have a lot of changes that affect personal and small business accounting. But they’re worth having a look at to be sure – because appropriate planning and organization is still the key to ensuring maximum benefits from your year-end tax planning efforts.

Tuition fees keep rising and for many those costs play a growing role in the family budget.  Luckily there’s help. Today we’ll look at the different kinds of education tax relief, and whether or not you’re eligible to save when it comes time to year end tax planning.

If you paid tuition fees yourself, in Ontario in 2011 you qualify for a non-refundable, combined 20.05% federal and provincial tax credit. If you paid fees for your children or other dependents, you may be able to transfer part of this credit to your own return.

For this to work, the fees must be paid to a Canadian university, college or other post-secondary educational institution certified by Human Resources and Skills Development Canada. If the student studies abroad, foreign postsecondary fees may be covered too. A change in the 2011 budget lets someone studying at a foreign university claim the tuition credit if they’re enrolled in classes for three consecutive weeks, instead of 13.

Another beneficial change in the most recent budget: if you pay a fee for an exam necessary to obtain professional status or to be licensed to practice a profession in Canada, you can now claim it for tuition.

If you send your children to private school, unfortunately you won’t get a tax credit. But – and an important but – if there’s a religious component to that school, the institution may be able to give you a charitable donation tax receipt, for the part of tuition paid towards religious instruction.

Let’s get back to all the post secondary stuff. You’re entitled to an extra $80 credit for each month you attend a post-secondary educational institution full-time. Part-timers receive a $24 monthly credit as long as they attend an eligible program that’s at least three consecutive weeks long with at least 12 hours of instruction per month. Students with disabilities qualify for the full $80 credit, even if they’re part-time.

If you’re eligible for those education credits, you can also claim a non-refundable textbook credit. It’s worth $87 a month for full-timers, and $27 monthly for part-timers.

If you receive scholarship, fellowship or bursary income, that’s tax-free, as long as you’re eligible for the full-time education tax credit. This applies to courses up to and including doctoral degrees, but not post-doctoral fellowships.

If you earned a scholarship, fellowship or bursary in connection with a part-time program, the tax-free exemption is limited to the cost of tuition and course materials (unless you qualify for the disability tax credit).

For many students, loans are a big part of their financial picture. You can claim a credit for interest paid on student loans under the Canada Student Loans Act or equivalent provincial programs.

What happens when the parent is the student? Single parents and two-parent families where both parents attend school full-time can deduct extra child care expenses. Normally there’s a limit on how much you can claim – no more than two thirds of your net income. For single parents or two-parent families where both parents are full-time students, the weekly limit is $175 per child under age 7 and $100 per child ages 7 to 16. For part-time students, the dollar figure is the same, but it’s monthly, not weekly.

Once all the tax numbers are crunched, pay attention, parents: if your child or dependent can’t use the entire amount of their tuition, education and textbook credits because their income is too low, up to $1,002 of combined federal and Ontario credits can be transferred to you for your own use.

If there are still credits left over, they can be carried forward and claimed against the student’s taxable income in future years. But you can’t transfer them then – only students themselves can claim them later. If you plan well, this can come in handy when the student starts working and has a bigger income.

The list of education tax credits (and the list of rules) is a long one. But it’s one that can earn you big savings —–if you plan ahead and organize carefully.

It’s full blown tax season for us! Last week we looked at organization tips to lighten your year-end tax planning burden, and hopefully make the job more effective. We’re here to help all season long…we’ve got lots more ideas and suggestions up our sleeves.

This week we’ll look at medical expenses—something every person and family deals with.

Medical expenses that go over a minimum threshold give you a non-refundable tax credit. The threshold is 3% of your net income, and it maxes out at $68,400 or a flat $2,052. All qualifying medical expenses above this threshold will make you eligible for a 20.05% tax credit in Ontario.

There are a lot of qualifying medical expenses. If you’re not sure, you can look at this CRA bulletin: IT – 519R2 which provides all the details you could ever want about allowable expenses.

If you’re self-employed, premiums paid to drug or dental plans are deductible as a business expense. Business tax planning suggest that this is far better than claiming a tax credit, because the tax savings will be at your highest marginal tax rate rather than 20.05%.

Medical expenses can be claimed for yourself, your spouse and any of your close relatives dependent on you for support such as children, grandchildren, parents and siblings resident in Canada.

Medical expenses made on behalf of yourself, your spouse and dependent minor children can be pooled for purposes of the 3% expense threshold, or $2052—whichever is less.

If you paid for medical expenses for other dependent relatives, you can claim those that exceed the dependent’s 3% threshold. A new tax rule this year: there’s no limitation on the amount you can claim for each relative. In prior years the limitation was $10,000 per dependent.

Another recent tax change: money spent on purely cosmetic medical procedures is no longer claimable.

Here’s an interesting clause. When you claim medical expenses, you can pick any 12 month period as long as it ends in the current tax year. For example, if you had expenses you couldn’t claim in 2010 because your total was below the threshold, you can add them to expenses incurred in the early part of 2011 to make a bigger claim for 2011.

Because of the 3% threshold rule, it’s usually smartest to combine the whole family’s medical expenses on the return of the lower income spouse, who might have a lower threshold.

You can also affect your claim amount by playing with when you make medical payments. If you think you’ll have a big medical expense, you may want time the payments so it can be grouped with other costs in one particular tax year.

With careful planning and enough forethought, you can substantially impact and reduce the amount of taxes you might otherwise have to pay.

We’re chartered accountants. We’re probably the only people in the universe allowed to use an exclamation mark after the phrase “tax time.” But we do – because this is our time to shine, and to help you get the most from your income whether personal or business tax services are needed.

March is here…you can feel that spring is just around the corner. Warmer temperatures, longer days, fewer layers of down…the nice signs that winter is on its way out.

And tax season…is on its way in. Now is the time to start getting ready to organize and prepare your income taxes. We’re here to help.

By now, you should have already received most of your employer and investment slips. To make sure your returns are prepared as efficiently as possible, you need to organize your information now. This will let us minimize your 2011 income taxes as much as possible.

Here are a few things to start thinking about:

• Personal life. Were there changes in your personal situation in 2011? That could be an address or phone number change…or a new job, new business or investment. The same goes for anyone in your family. Did they get married, start university, have or adopt a child, start a new business or acquire new investments? Did you turn 71 in 2011?
• Slips. Little pieces of paper with big importance. Make sure you have all the necessary information slips from your various sources of income: employment, interest and dividends, pensions, employment insurance, registered retirement savings plans and tax shelters.
• Deductible expenses. If you’re self-employed, own rental properties or are required to incur expenses as part of your employment have you started assembling your deductible expenses and summarizing all your income?
• Other income. If you received income with no information slips, such as tips, business income, partnership income, rental income, taxable alimony or child support, interest or directors fees, you need to summarize it for the year.
• Capital gains/losses. If you sold any assets in 2011 that may give rise to capital gains or losses (ie. stocks and other investments, real estate, businesses) you need to have information available about the original costs, any additional costs you incurred while you owned it, and what you received for the asset when it was sold.
• Other deductibles. There are a whole lot of deductible expenses out there – make sure you keep track of things like: RRSPs, professional or union dues, employment expenses, interest on money borrowed for investment purposes, investment counsel fees, moving expenses, childcare expenses, business investment loss and deductible alimony or support payments.
• Tax credits. Have you made payments that make you eligible for a tax credit? These include rental property taxes, student loan interest, adoption, tuition fees, charitable donations, medical expenses, political contributions, children’s fitness programs, children’s recreation programs, monthly transit passes and more.
• Foreign property. If you own any foreign property that has total original costs greater than $100,000, it needs to be disclosed annually to the CRA.

But wait…there’s more. You need to make yourself aware of changes to the income tax act since last year. To help you with this, we have a summary of recent tax changes in the 2011 budget on our website.

Once you have assembled and organized all this information you can start preparing your returns. To help you with your year-end challenges, we also have a complete income tax organizer on our website that we hope will help make the process a little less daunting and stressful.

Oh…and we thought of one other group that’s allowed to say “Tax Time!” so excitedly…the CRA. So make sure you’re ready for them.

If you read my blog last week, “How to Reduce Probate Fees in Ontario”, you’re basically an expert in probate. At least, you know why you should care about minimizing probate fees. One of the ways we discussed involved setting up an “alter ego” or “joint partner” trust. It’s not as exciting as a Dr. Jeckyll/Mr. Hyde scenario, but it has some great benefits (as well as lowering those expensive fees).

Any Canadian resident 65 or older can transfer assets into an Alter Ego Trust or a Joint Spousal or Common-Law Partner Trust without triggering any immediate gain for tax purposes. Assets held by such trusts don’t count as part of your estate planning, so they’re not subject to probate fees, therefore it minimizes probate fees overall.

Other benefits of this type of trust include:

• avoid power of attorney problems for mental capacity issues if they arise
• reduce wills variation exposure
• confidentiality for assets held in the trust at the time of death, since they don’t form part of the estate
• creditor proofing
• avoid claims under dependant’s relief legislation
• protects elderly persons’ assets from unscrupulous acts of others

To be eligible to use the trust the contributor or settlor(s) must be:

• over 65 years of age
• the only people entitled to any income from the trust up to the date of death
• no other person can receive income or capital from the trust during the settlors’ lifetime

There are always some cons to go with a list of pros. When using a trust like this, there are complicated income tax consequences. All the trust’s assets will be disposed of by the trust, for tax purposes, at their fair market value when the settlor dies (or the later death of the settlor and their spouse or common-law partner). Any gains or losses accrued in the trust assets are triggered at this time and taxed in the trust.

Those triggered gains will be taxed at top marginal rates, rather than at personal marginal rates, since a non-testamentary trust pays federal tax at the highest rate on all of its income. Any loss carry forward balances available to the individual can’t be used to shelter capital gains realized by the trust.

Assets held in the trust aren’t eligible for the capital gains exemption, even though they might otherwise qualify.  Donations made through the trust can’t be carried back to the year before death, as they could if the donations were made by the individual.

If the trust holds a property that qualifies for principal residence exemption, it may be difficult to use this exemption. Making this claim in the trust impacts not only the settlor and their spouse, but also the ultimate beneficiaries of the trust.

Don’t try this at home…given the complexity and implications here, tax planning and minimization probate fees technique like this should only be done with appropriate professional advice.

We’ve all heard the saying – nothing’s certain in life except death and taxes. In the accounting business, we have lots of experience with both. When we meet with clients to talk about estate planning, we hear one issue all the time: when there’s a death, how do we pay the lowest amount of probate fees in Ontario?

If it sounds Greek to you, here’s a little more on why you should be interested. Probate is a procedure. A court will approve a will, and officially confirm the person named in the will as the estate trustee. It’s not mandatory, but you need probate when the estate owns certain types of assets such as real estate, publicly traded shares or funds held in a financial institution.

Where you need third party help to deal with a particular asset, you’ll need probate. The third-party institution will want official confirmation as to who has legal authority to deal with that asset.

Now that you understand probate better –here’s why you need to care. There’s a fee attached to the process, and it often carries sticker shock. In Ontario, probate fees are currently one half of 1% for the first $50,000, and 1.5% for the total estate value over $50,000. For an estate worth $1 million (including the value of the personal residence), you’re looking at fees of almost $15,000.

There are a number of techniques that can help reduce probate fees in Ontario. They include:

• Place the asset in joint names with the person who will ultimately be the beneficiary upon death. On your death, the property will automatically pass to the other person—and won’t be part of your estate. A warning: there can be immediate (and adverse) tax consequences if you transfer some types of property to a joint tenant who is someone other than your spouse.
• For certain assets, such as life insurance proceeds and RRSPs, you can designate the beneficiary as someone other than your estate.
• You can transfer property to the ultimate beneficiary during your lifetime either directly or to a trust on the beneficiary’s behalf.  Again, this could have immediate adverse tax consequences.
• You may have assets that can be transferred to beneficiaries without probate, like shares in a private company. You can reduce fees by making a secondary will just for these assets. Your executor will only need to apply for probate on the primary will.
• If you’re over 65 you can create an “alter ego” or “joint partner” trust to keep assets outside your estate, and reduce its value for probate purposes. You won’t give up your right to those assets during your lifetime. This type of planning offers a number of other benefits in addition to lowering fees. Next week I will offer more detail on this type of planning.

Sure, trying to minimize probate costs is an important part of estate planning. But at Silver+Goren we believe it shouldn’t be the primary driver of the will. Probate fees in Ontaro represent a one-time cost of 1.5% of your estate’s value. Setting up an estate with long-term tax savings for your beneficiaries is usually a much more important consideration than reducing fees in the short term.

As usual, we’ve given you a simple summary of some big ideas. Don’t forget the implications are extremely broad. Estate planning is a complex area for an accountant – and best done with professional help.

You want to make sure your financial future is bright, secure and comfortable. Knowing that is the easy part. Getting there can be challenging. At Silver + Goren, we believe you need to start financial planning as early as possible in your working life. This lets you meet day-to-day family obligations and build assets for the future, at the same time.

It sounds simple. But every day, we see people struggling to get started and follow through on the right steps. Let’s take a look at some of the most common roadblocks so you can avoid them, and stay on the smart money track.

The first and biggest issue crops up when people don’t define their financial goals.  The easiest thing you can do is document them on paper. By taking the time to detail what you want to achieve and then writing those objectives down, it’s much easier to focus and set up an appropriate strategy to accomplish your objectives.

Procrastination is a mortal enemy to effective financial planning. Sometimes, not making important financial and life decisions is worse than making bad decisions. Waiting for the perfect time for everything to be in place to start your financial plan usually means nothing gets done—that perfect time never arrives. You’re almost always better off taking actions and making decisions, for better or worse, than doing nothing at all.

Another big drain is when people don’t take the right steps to minimize taxes payable on income and investments. Failing to take advantage of things such as Registered Retirement Savings Plans, Registered Education Savings Plans, Tax-Free Savings Plans, Income Splitting and incorporating your business can significantly increase your overall tax burden. By properly planning your income taxes, you can dramatically increase the amount of assets you accumulate over time.

Inflation is another big problem. Ignoring the impact it has on your future purchasing power can have a very dramatic negative impact on your financial plans. This is especially an issue for people who invest assets with the sole objective of protecting the dollar amount of that investment, such as with term deposits. They’re so focused on protecting capital they fail to see that when you take into account inflation and income taxes, the actual investment value deteriorates over time.

Taking unnecessary risks with your investments can also result in major losses. Many people decide to enter the stock market only when it’s close to its peak. Usually this is because they’ve read in the papers and heard from their friends how easy it is to make money in the market….then they panic, and decide to get out after there’s been a significant decline. This will invariably maximize your losses. What you want is a long-term, value driven approach that diversifies your investments among different types of asset classes, geographical areas and industries so you can most effectively minimize risk.

Making financial decisions ad hoc without having an overall financial plan increases your risks. It’s a mistake because there’s no context to guide your decisions. If you react to specific events in your life or the economy without being clearly focused on your goals, you tend to make bad decisions.

Failure to get appropriate advice from professionals such as financial planners, accountants and lawyers can also increase your risk of loss and make it harder to achieve financial success.

Effective financial planning requires a mix of planning, implementation, consistency and…sometimes most challenging…patience.

In case you didn’t notice, February has crept up on us. That means the deadline to buy RRSPs, and, most importantly, to get a tax deduction for 2011, is February 29^th.  A lot of Canadians leave these decisions to the last minute – and in the end, only about a quarter of us will contribute to RRSPs at all.

In this season, we’re often asked: “Are we better off buying an RRSP, paying down our mortgage or contributing to a tax-free savings account?” Of course, there’s no easy answer. Each investment vehicle offers different advantages.

Putting money in an RRSP creates a tax deduction that can save you in Ontario up to 46% in taxes of the amount of your contribution. It also allows your funds to accumulate income on a tax-deferred basis. You only pay tax on your RRSP when the monies are withdrawn. And you don’t need to withdraw money from the plan until you turn 71. This tax-deferred feature allows your investments to compound much faster than if they were held outside the plan.

For most people, interest on home mortgages isn’t tax-deductible. Let’s look at an example  If you pay 4% interest on your mortgage, you would need an investment that pays 7.4% pre-tax, which would then net you 4% after-tax. That gives you an equivalent return as the payments on your house mortgage. In today’s market, it’s very hard to find a low-risk investment with a 7.4% return. By paying off your mortgage at a rapid rate, you can generate a return on your investment equal to 7.4% per year in this example.

Also, if you pay down your mortgage quickly, the amount of non-deductible interest you’ll pay in the future will shrink. If you’re paying 4% on your loan, you’ll pay almost $58,000 in interest on a $100,000, 25-year mortgage. Paying it down quickly will substantially reduce your total interest payments—leaving extra cash for RRSPs and other investments.

Tax-free savings accounts don’t offer any tax deductibility when you make a contribution. But, any income you make in the plans is tax-free. This is attractive when you have an opportunity to make an investment you think will generate substantial returns.

So how do you choose what to do before this February 29^th? The best way is to look carefully at your circumstances. For example, if you’re young and you want to be able to retire debt-free, you may want to maximize your RRSP contributions and be content to make your regular monthly mortgage payments. Since most mortgages are amortized over 25 years, you would be debt-free after that period of time while also having built up substantial monies in your RRSP for retirement.

One option we recommend is to maximize your RRSP contributions annually and then take whatever taxes you save there and make a lump sum pay-down of your mortgage. If you are in the top tax bracket in Ontario, for every $1000 you contribute to your RRSP, you can pay down your mortgage by $460. This solution gives you the best of both world and  helps you maximise your year end tax planning opportunities.

Whichever path you choose, the most important part is to consider your future and design an appropriate financial plan to get where you want to go. Getting that plan off the ground early in your career is very important to build enough money for a comfortable and debt-free retirement.

Real estate investments can be an important part of your financial plan. They’re considered a viable alternative to investing in the stock market, and can also diversify your investment mix. Toronto is a great example of a real estate hot spot – the market has climbed steadily over the last few decades. Combine that with very low vacancy rates and you can see why, over time, the potential for serious capital appreciation is high.

Generally speaking, the net income earned from real estate is taxed at your marginal tax rate for the particular year. But what happens when you sell? Most people expect gains to be taxed as a capital gain, and taxes to be payable at your marginal tax rate, times one half the gain amount.

But there are situations where gain from a real estate sale can be taxed as regular business income (and not a capital gain). This will put you on the hook for double the tax.

If you have a proposed sale on the table, you want to know how you’ll be taxed. To figure it out, you have to go back to the beginning – the key criteria here is your intent when you bought the property. The distinction is in whether you bought to earn rental income through leasing, or if you were just renting it out in the short-term to eventually sell the property at a profit.

That divide may sound straightforward. There have actually been many court cases litigating this issue trying to determine whether gain from a real estate sale was on account of income or capital. Over the years the courts have looked at a number of factors to figure it out. They include:

• The original intention of the taxpayer when they bought
• How feasible the taxpayer’s original intent was, and how far he got in accomplishing this
• The probability of success in accomplishing the objective
• The particular zoning of the property
• How much borrowing was needed to buy, and what were the borrowing terms
• How much work was done to the property
• Was the property actually able to earn income
• How long was the property owned by the taxpayer
• How frequently does the taxpayer engage in this type of activity
• How experienced was the taxpayer in real estate matters

No single factor on the list is a specific determinant. Courts look at the big picture around the acquisition and sale of the property when they make decisions.

If you’re in a situation where there could be any doubt as to whether a transaction is considered income or capital gain, make sure you have all your paperwork in line to support whichever position you take.

Appropriate tax planning for the acquisition and disposition of real estate involves not only understanding but documenting your intent when you buy, to make sure you can justify the outcome you’d like to achieve. If you are contemplating a sale and think you may run into a roadblock, please contact us at Silver + Goren and we will happily provide you a free consultation.

Sometimes the biggest problem with being a small business is that…you’re small. You’re the David, fighting to gain foothold in industries with lots of competition and dominated by a few Goliaths. It’s tough to find a way to stand out to customers and differentiate your work from everyone else’s.

Any course in Marketing 101 will talk about setting yourself apart from competitors, so you can gain market share and support premium pricing. If you can do it right, differentiation can add significant value to your business, especially if starting your own business.

Sounds simple, right? In theory it is, however in practice it’s no easy task.

Fortune Magazine occasionally runs a piece on Best Practices called David vs. Goliath. It looks at several small businesses successfully competing against dominant companies. I enjoy reading it – it’s reassuring to see this type of differentiation is possible, and successfully achieved by creative entrepreneurs. You can pick up insights from their strategies.

Here are a few of my favourite examples.

Kayos Productions vs. Rogers and Cowan (December 6, 2010): Rogers and Cowan is a dominant publicity firm with offices around the world. By offering a personal touch together with a full line of services, Carol Kaye was able to generate a client roster including some very high-profile musicians.

Ace Hardware vs. Lowe’s: The same piece also looks at how the local Ace Hardware franchise can compete with Lowe’s—a national big box competitor. By focusing on niche products not sold at the big box stores, and providing more in-depth service and support than the competition, Ace was able to create a different space for themselves.

The Gelato Fiasco vs. Haagen Dazs (November 7, 2011): This piece shows competition is possible even in consumer products. Fiasco produces about 32 limited-edition flavors a season, compared to 5 or 6 from its competitors. They partner with independent shops including Whole Foods to distribute their product rather than developing their own stores.

Jack Black vs. L’Oreal: A small local manufacturer competes in another consumer product area with the cosmetics giants. It developed a macadamia-nut-oil-infused shaving cream and skin treatment that retails for about $16 for a six ounce bottle, and is distributed through premium retailers such as Neiman Marcus and Nordstroms.

In all these cases, it’s all about effective strategies. That can mean more personal attention, better product education and support, higher quality ingredients and products, or targeted distribution channels. Whatever the strategy, the goal is to create space between small businesses and multinational competitors—and as you can see, it can work. These are inspiring examples of how new businesses can create effective strategies for differentiating their business in cluttered marketplaces.