Who Must File You must file an income tax return for a taxation year? 

♦ You have earned income

♦ You have taxes payable

♦ You have CPP payable

♦ You, or your spouse, are entitled to receive the Child Tax Benefit

♦ You disposed of capital property

♦ You have a taxable capital gain

♦ You exceed OAS, EI thresholds

♦ You have not repaid amounts withdrawn from your RRSP under your Home Buyers’ Plan or Life-Long Learning Plan

♦ You ceased to be a Canadian Resident and have deemed dispositions to report, or

♦ You received a Request to File or Demand to File from CRA.

Benefits of Filing If you are not required to file a return under the above rules, you will want to file for the following reasons:

♦ To receive a refund of taxes withheld at source

♦ To receive refundable tax credits: Child Tax Benefit GST Credit Provincial Tax Credit BC Family Bonus

♦ To report a non-capital loss (CRA will maintain a record of your losses available for carry forward)

♦ To report income eligible for RRSP contributions (CRA will maintain a record of your contribution room), or

♦ To report tuition and education credits (CRA will maintain a record of the unused federal and provincial amounts).

Income Splitting

♦ Make sure both spouses will have same annual income when they retire.

Use spousal RRSP's to help achieve this goal. If neither spouse will have a pension from their employment when they retire, then both spouses should try to have the same amount in RRSP's. If one spouse will have a pension, then the other spouse should have a greater amount in RRSP's. The spouse making the contribution gets the deduction from income when the contribution is made. However, if the funds are withdrawn within 3 years of the contribution, the withdrawn amount will be taxed as income to the spouse who made the contribution

♦ Split income by employing your spouse.

If you are self-employed, you can employ your spouse. The spouse must be paid a reasonable wage for services performed.

Try to earn your investment income (outside of RRSP's) at the lowest tax rate possible.

All capital gains and Canadian dividends are taxed at lower rates than other income such as interest and foreign dividends. For the 2002 tax year, the tax paid by BC taxpayers is lower for Canadian dividends than for capital gains, up to approximately $53,000. Keep in mind that interest income and dividend income are received each year (or accrued, in the case of some bond interest), and are taxable in the year you receive the income. You are not taxed on your capital gains until your investment is sold, so you have some control over which year you receive the income, because you can choose when to sell your investments.

If you have only Canadian dividend income, you can earn approximately $29,000 before any federal or BC tax is payable. For every $100 of Canadian dividends, $125 is included as taxable income (the extra $25 is called the dividend "gross-up"). However, there is a dividend tax credit (for 2002, it is 21.77% of the gross-up amount, for BC taxpayers) which reduces the tax payable, resulting in a low tax rate.

If you have only capital gains income, you can earn approximately $15,500 before any federal or BC tax is payable. The tax paid on capital gains is low, because only 50% of capital gains are taxed, and the gains are not taxed until the investments are sold, except in situations where there is a deemed disposal. A deemed disposal can occur, for example, upon the death of a taxpayer, or when an investment is transferred into an RRSP, or if the investment is given as a gift.

If you have a capital loss, it can be used to reduce capital gains. Capital losses cannot usually be used to reduce other income. However, capital losses can be carried back up to 3 years to be offset against prior capital gains, and can be carried forward indefinitely. The only time they can be used to reduce other income is in the year of a taxpayer's death, or the immediately preceding year. At this time, 50% of the capital loss would be used to reduce other income.

If you have only investment income such as interest and foreign dividends, you can earn only about $7,700 before any federal or BC tax is payable. This is because 100% of the income is taxed, and there is no tax credit related to this income. Thus, an amount approximately equal to the personal tax credit can be earned before tax is paid.

If you have only employment income, you can also earn about $7,700 before any federal or BC tax is payable. However, even on this small amount you will be paying over $350 of CPP and EI premiums.

Pay the premiums on your disability insurance.

If you receive disability insurance, it will be tax-free if you have paid the insurance premiums, or if the premiums for all employees was paid by the employer, and included in the taxable income of each employee. If the employer pays the premiums and they are not treated as taxable income for all employees, then any disability insurance received will be taxable.

Claim medical expenses on the tax return of the spouse with the lowest income.

To determine the allowable deduction for medical expenses, you have to deduct from your total medical expenses (for 2002) the lesser of $1,728 or 3% of net income. Thus, if net income is $20,000, you could deduct all medical expenses exceeding $600.

You can claim medical expenses for any 12-month period ending in the tax year, and not claimed in a previous tax year. Thus, if you had insufficient medical expenses for a claim for the prior year, you may be able to combine some of them with the current year's expenses to make a claim.

Make use of your investment losses.

If you have a capital loss on an investment outside of an RRSP, you can sell the investment and utilize the capital loss to offset it against capital gains. You can offset the capital losses against current year capital gains (not against other types of income), or you can carry back the losses to offset them against capital gains in any of the previous three years. You can also carry the capital losses forward indefinitely, to be offset against future capital gains.

If desired, after you sell shares to utilize the loss, you can then repurchase them, but you must ensure that you avoid having your loss disallowed as a "superficial loss". A capital loss on an investment is considered a superficial loss if the investment sold is:

(a) acquired by the taxpayer, the taxpayer's spouse or a corporation controlled by the taxpayer within the period beginning 30 days before and ending 30 days after the disposition, and

(b) owned 30 days after the disposition by the person who acquired the property.

Thus, if you wish to repurchase the shares, you should wait at least 30 days to do so, or your losses will not be deductible.

Defer tax on severance or retiring allowance.

A portion of amounts received as severance pay or retiring allowance can be transferred directly to an RRSP, so that tax need not be deducted. The allowed transfer amounts, which cannot exceed the severance or retiring allowance received, include:

♦ $2,000 for each year or part year of service with the employer before 1996, and

♦ an additional $1,500 for years of service which occurred before 1989, in which the employer's contributions to a company pension plan had not vested in the employee. Thus, up to $3,500 per year can be transferred for years of service prior to 1989.

Years of part time employment also qualify as years of service. Even if only one day is worked in the year this qualifies as a year of service.

If the severance or retiring allowance is not transferred directly into an RRSP, the qualifying amount can still be contributed to the RRSP in order to be allowed as a deduction on the tax return for the year it was received. To qualify, the contribution must be made within 60 days of the end of the calendar year in which it was received.

Transfer shares to your RRSP, but not at a loss!

If you hold shares of corporations outside of your RRSP, you can use them as your RRSP contribution by transferring them to your RRSP. Your contribution amount is the market value at the time of the transfer. For tax purposes, you have effectively disposed of the shares, so any gain will be taxable to you. However, if you have a loss on shares transferred to an RRSP, this loss is considered to be a "superficial" loss, and is not deductible. In most cases, unless the loss is very small, it would be best to sell the shares and contribute the cash to the RRSP. If you wish to repurchase the same shares in your RRSP, wait 30 days to do so, because the loss may be considered a superficial loss if they are repurchased before that.

Make sure you deduct your safety deposit box fees.

One of the deductions that is often missed is the fee for your safety deposit box. These fees can be deducted at line 221 of the personal tax return, "carrying charges and interest expense".

How tax is calculated?

Start by totaling your various sources of income (eg. Employment, Business, Pensions, Investment) which results in total income. From this figure you may deduct certain expenditures (eg. Employment expenses, RRSP deductions, Child Care, Investment expenses) to reach net income. Lastly, you may deduct “other” specified expenditures (eg. Non-capital and Net-capital losses of other years carried forward) to result in taxable income.

This may be a bit confusing but notice there are three distinct types of income calculated – total, net, and taxable. Tax is then calculated at the federal and provincial rates as applicable on your taxable income. The rate(s) applied depends on your tax bracket and the province in which you live at December 31. A tax deduction reduces your taxable income on which tax is calculated. The actual amount of tax saved depends on your personal tax rate. For example, if you earned $60,000 in 2006 and contributed $6,000 to your RRSP, you would save 31.15% where as if you earned $100,000 and contributed the same amount to your RRSP, you would save 39.7%.

Tax Credits?

A tax credit is a direct reduction of tax. Provided the credit can be used, each taxpayer receives the same tax relief from a tax credit regardless of their tax bracket. Tax credits vary depending on the province in which you live. There is a distinction between refundable and non-refundable credits. Non-refundable credits are worthless once you reach the point of paying no tax in the year. For a summary of the common personal tax credits federal and BC rates please refer to the CGA/BC publication noted below. Various tax credits are provided for age, pension income, and other programs.

Donation Credit

Donations to a registered charity in Canada are eligible for a tax credit. This two-tiered tax credit is calculated as follows:

• The first $200 donated in a year (to all charities combined) entitles you to a tax credit at the lowest marginal tax rate worth 21.3% (Combined Federal and BC rate for 06) of your contribution. This translates to a refund of about $42 on a $200 donation.

• For donations in excess of $200 a tax credit at the highest marginal tax rate is available worth a total of 43.7% (Combined Federal and BC rate for 06) of your excess contribution. For reported contributions totaling $500 this translates to a refund of about $173 of total contribution.

Ensure that you have an official receipt for your charitable donation which includes the following details:  

• Name of the Charity

• Charitable Registration Number (this may be checked on the CRA website)

• Name of contributor

• Date of contribution

• Amount of contribution

Who May Claim The Credit... To receive the maximum benefit of the two-tiered credit it may be beneficial to combine the contributions of one spouse with the other. CRA’s administrative policy is to allow either spouse to claim the donation regardless of whose name is on the receipt. It is most beneficial to claim the donations on the higher-income spouse’s return. Contribution Limits The most you may claim in a year is 75%* of your net income. If you have receipts which exceed this amount, you may save the receipts and carry forward the contributions for up to five years. *There are special rules which relate to this limit in the year of death. Contribution Carry forward To benefit from the two-tiered credit, you may choose to save your receipts until they exceed $200. CRA allows you to claim the last five years of donations not previously claimed.

Types of Contributions Donations to charities make take several forms. Cash is always welcome but gifts of property (such as publicly traded stocks, artwork, real estate), life insurance and annuities may be donated. Gifts may be made in your lifetime or through your will. The benefits of the contribution depends on the type of gift, the timing of the donation and the nature of the charitable organization.

To make the most of your donation dollars in excess of $200 you may want to double up your contributions in one year then skip the next. This type of planned giving maximizes your tax refund; the reduced tax rate on the first $200 of contributions is applied to your tax return every other year.

Registered Retirement Savings Plans (RRSP's)

♦ Deadline is 60 days after the end of each Calendar year. Typically this is March 1 of each year but is February 29 in any leap year..

♦ Annual contribution limit is 18 per cent of earnings to a maximum of $16,500 for 2005 and $18,000 for 2006.

♦ Ways to get around the foreign content restriction include clone funds, labour-sponsored investment funds, and foreign index funds.

♦ In the 50 per cent bracket, putting $10,000 into an RRSP, and leaving the money for 25 years at an annual compound rate of 10 per cent equals $108,347.

♦ The same amount left outside an RRSP (and taxed) would equal only $33,863.

♦ Investing $2,500 per year from age 20 through age 35 (and making no further contributions from 35 onwards) will accumulate $1.5 million at 10 per cent compounded annually!

♦ Investing the same $2,500 from age 35 for 30 more years equals less than $500,000.

RRSP Tips

♦ DO IT! Only about 1/2 of Canadians who are eligible have taken advantage of RRSP's to reduce taxes and secure their own retirement.

♦ Don't rely on carry-forward rules. Maximize your RRSP each year even if you have to borrow to do it, especially if you can repay the loan within one year.

♦ Maximize your RRSP before paying down your mortgage unless the mortgage rate is at least 3% higher than your average RRSP return (ROI).

♦ Contribute to a spousal RRSP if your spouse will have a lower income at retirement.

♦ Put most of your high-tax investments inside your RRSP.

♦ Deduct your RRSP trustee fees by paying them outside your RRSP.

The Cost Of Your Children's Education (Registered Education Savings Plans / RESP's)

Are you hoping your children will go to university or a technical institute someday? The total cost for a diploma/degree can be terrifying and in the 1995/96 student budget prepared by the Canadian Federation of Students it allocates $8,890 for tuition, books, rent and food. Assuming inflation continues at 3% per year, a four year undergraduate degree in 2015 will cost more than $67,000.

Moreover, the potential for government cutbacks and tuition costs constantly rising means fewer loans available. Should this trend continue, many students will not be able to afford a post secondary education. Only the wealthy, those on scholarships and children whose parents planned ahead will be able to afford the costs of getting a degree.

A student attending university and living away from home spent $17,000 in 1977 for a four year degree. That same education cost $33,000 in 1987, and costs $49,000 in 1998. Forecasts are for those costs to rise to $62,000 in 2007, and will be $75,000 in 2016, which is 18 years from now!

How To Pay For Schooling

How will you pay for your kids' education? You have three choices: you can pay before, during or after they are in school. By taking out loans, you will have to repay the loan after - an expensive proposition. If you pay during, you will have to cope over a few years - not easy when you have normal living expenses to pay. This leaves one sensible option: Begin saving now.

The best option is a Registered Education Savings Plan (RESP). An RESP is a government approved plan that permits earnings to compound on a tax deferred basis. You do not gain tax deductions for your contributions like an RRSP. However, the earnings (capital gains, interest and dividends) grow tax-free. When the earnings are withdrawn, the student pays the taxes, usually at a much lower rate. The non-taxable contributions can be returned to you at any time.

An RESP also offers the potential to build a larger pool of savings over the long term through a variety of investment vehicles. In the event that the beneficiary does not go to college, university, or other qualifying institutions, you can generally transfer the fund to another eligible full-time student or your RRSP (if you have available contribution allowance).

Government Grants

You can contribute up to $4,000 each year to an RESP with a lifetime limit of $42,000 for each beneficiary. As of January 1, 1998, the government will give you a grant of 20% ($400) on the first $2,000!!!

If you make only a $95 contribution to an RESP each month and receive an annual compounding rate of return of 10% for 18 years, you will earn about enough money to cover one child's education (including the government's 20% grant). In addition, it will have cost you only $20,520 (with a total government grant of $4,100). So start now and invest regularly - it is a much cheaper way to pay for your kids' education.

Three Reasons Why RESP's Make Sense

1. - Through Canada Education Savings Grants, the government pumps up your contribution by 20% per year, to a yearly maximum of an extra $400.

2. - Your investment grows tax-free until it's withdrawn.

3. - Income from the plan eventually is taxable in your child's hands, at a time when his or her tax rate is likely to be low - income splitting.

How Would an RESP Work For You?

The Canada Education Savings Grant (CESG) provides RESP holders with a grant of 20% on the first $2,000 contributed to an RESP each year for beneficiaries under the age of 18. Grant recipients will be eligible to accumulate a lifetime grant of $7,200, or a maximum of $400 per beneficiary per year on contributions effective January 1, 1998. Your children must have their own social insurance number (SIN)

For beneficiaries aged 16 and 17, the CESG is only applicable if there have been RESP contributions for at least 4 years in the past, or if total previous contributions for the children have reached $4,000.

The Government will provide the CESG directly to the plan trustee to be invested in the same plan chosen by the contributor. The grant itself is not included in calculating the annual and lifetime contribution limits.

The grant is allowed to grow as part of your RESP, and is paid to the student upon enrollment in an eligible full-time post-secondary education or training program. If the beneficiary does not pursue education or training, the grant (s) must be returned to the Federal Government. Under certain conditions, however, income generated by the grant may be transferred to the contributor's RRSP.

Grant eligible contributions may be carried forward to future years up to a maximum of $4,000 per year, translating into a maximum grant in any year of $800. The CESG room accumulates from 1998 to the year in which the beneficiary turns 17.

As for the actual monetary results, $2,000 invested each year for 15 years equals an investment of $30,000, with a CESG grant of $6,000 ($400 per year), and assuming an annual return of 9%, will grow to $76,250--which should cover the costs of an education at that time, 15 years down the road!

Rental Income (losses)

Who Must Report...

You must report rental income and losses if you own a rental property (in proportion to your ownership). Co-owners cannot change the percentage of their rental income or loss unless the percentage of ownership changes.

What Expenses are Deductible...

Current expenses are deductible from rental income in the year incurred; they include:

♦ Advertising

♦ Insurance

♦ Mortgage interest (not the principal portion) and refinance fees must be amortized over the term of the new mortgage

♦ Maintenance and repairs (includes strata fees)

♦ Motor vehicle and travel expenses (limited circumstances)

♦ Office expenses

♦ Legal and accounting fees

♦ Property taxes

♦ Utilities

What Expenses are Not Deductible...

Capital expenses are considered to be of a lasting nature; you cannot deduct the full amount in the year incurred. These amounts are added to the capital cost of the building and may be deductible over a period of several years; they include:

♦ The purchase price of the property

♦ Legal fees connected with the purchase

♦ Cost of furniture and equipment rented with the property

♦ Renovation costs to put the rental unit in a condition for rental or resale

♦ Land transfer taxes

Personal Portion of Rental Property...

If you rent a portion of the building in which you live, you can claim expenses that pertain to the rental portion of the building.

What Qualifies as a Rental Loss...

When rental expenses exceed rental income, a rental loss is created that may be deductible against other income. However, if rental revenue consistently does not cover expenses, then a reasonable expectation of profit does not exist and rental losses are deemed non-deductible. If you rent your property to a relative or other 'related' party, and you lose money because you are renting at a lower rate than you would rent to other tenants, you cannot claim the loss.

Other Considerations Special situations may arise that affect the property owner; they include:

♦ Change in use

♦ Sale of rental property

♦ Principal residence designation

♦ Recapture of capital cost allowance

♦ Replacement property

Deceased Taxpayers, What Must Be Done...

The legal representative of the deceased (usually the executor) is required to:

♦ File the final return of the deceased

♦ Ensure that all the taxes owing are paid

♦ File any returns for previous years that have not been filed

♦ Cancel the deceased’s Social Insurance Number

Tax Tip: If the deceased person was paying tax installments, you do not have to continue paying them after death – provided the necessary installments were paid up to date.

When This Must Be Done...

The final tax return and taxes payable are due on or before:

♦ Date of Death January 1 to October 31 - April 30 of the following year

♦ Date of Death November 1 to December 31 - Six months after the date of death

What Documents Are Required...

♦ Certified Copy of the death certificate

♦ Certified Copy of the will (or other document that names the legal representative)

♦ Certified Copy of the letter of probate List of all the assets and liabilities of the deceased

♦ Copy of the last tax return filed and the notice of assessment

♦ Documents supporting all income earned in the year (T3, T4, T4A(P), T4A(OAS) and T5 slips, investment statements, capital gain and rental income details, etc.)

What Income Is Taxable On the final (terminal) return, report all of the income from January 1 to and including the date of death; taxable income includes:

♦ All employment, business, investment and property income earned in the year

♦ All RRSP's and RRIF's at fair market value (spousal transfers are generally tax deferred)

♦ Gains/Losses resulting from the Deemed Dispositions of all property owned by the deceased

What Income Is Non-Taxable...

♦ Gains on principal residence (provided there has not been a change in use)

♦ Qualifying death benefits up to $10,000 (excluding CPP death benefits)

 Tax Tip: CPP Death Benefits are not reported on the deceased’s final return. They are reported either by the recipient or by the deceased’s trust.

What Expenses Are Not Deductible...

Personal expenses are not deductible; they include:

♦ Funeral expenses

♦ Probate fees Fees paid to administer the estate

Other Considerations

On the final return, special rules apply to the following:

♦ Medical expenses

♦ Charitable donations

♦ Loss carry backs

Tax Tip: If a person dies early in the year and before filing the previous year’s return, the due date of that return and the balance owing is extended from April 30th to six months after the date of death. 

Why A Clearance Certificate Is Beneficial...

A clearance certificate certifies that all amounts for which the deceased is liable have been paid; it covers all taxation years up to the date of death. If a clearance certificate is not issued, the executor can be held liable for any amounts that the deceased owes. Note: A separate clearance certificate is required to cover any taxes owing by a trust.

Probate Fees: