Canadian Capitalist » Taxes

Claim the Ontario Children’s Activity Tax Credit

Canadian Capitalist — Mon, 25 Apr 2011 05:21:04 +0000

If you are an Ontario resident and have enrolled your kids in music or dance lessons, you might want to take advantage of the Ontario Children’s Activity Tax Credit (CATC) when preparing your income taxes. The CATC, which was introduced late last year, allows parents to claim up to $500 of eligible expenses per child. The refundable credit is worth $50 per child under 16 years of age and $100 for a child with disability under 18 years of age.

The CATC applies to a wider range of activities than the Federal Children’s Fitness Tax Credit. In addition to sports, arts, music, language and even tutoring expenses qualify for the credit. Check this page for the list of activities eligible for the credit. You have to claim the CATC on Form ON479 “Ontario Credits” in Line 6309.

It is not clear to me if taxpayers can claim the same activity for both the Children’s Fitness Amount as well as under the CATC. As the wording on the Ontario Ministry of Revenue page does not explicitly forbid claiming both tax credits for the same activity, I’m assuming taxpayers are allowed to do so. If you are preparing taxes with software, you may have to manually update Line 6309. While claiming our kids’ music lessons, I found that TurboTax did not automatically include the swimming fees claimed under the Federal fitness amounts for the CATC.

Related Reading:

Claim the Ontario Children’s Activity Tax Credit is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Ways to Reduce the Tax Hit from the Family Cottage

Canadian Capitalist — Wed, 20 Apr 2011 00:38:06 +0000

Mark Goodfield, the accountant behind The Blunt Bean Blog concludes the series on transferring the family cottage by outlining some ways to reduce the tax hit. Thank you for the excellent series, Mark. I sure learned a lot.

In today’s final blog in my three part series (Part 1 of the series is available here and Part 2 here) on transferring the family cottage, I will discuss some of the alternatives available to mitigate and defer the income taxes that may arise on the transfer of a family cottage.

Life Insurance

Life insurance may prevent a forced sale of a family cottage where there is a large income tax liability upon the death of a parent and the estate will not have sufficient liquid assets to cover the income tax liability. The downside to insurance is the cost over the years, which can be substantial. The cost of insurance over decades of potentially increasing premiums, all the while ensuring the insurance policy is large enough to cover the income tax liability, is problematic (alternatively one can wait until later in life to insure and take a chance on whether they can still obtain insurance). I would suggest very few people imagined the quantum of the capital gains they would have on their cottages when they initially purchased them, so guessing at the adequate quantum of life insurance required is difficult at best. Purchasing a large last to die insurance policy may do the trick; however, the ultimate insurance cost over time has to be balanced against taking those funds and investing them to cover off the future income tax liability.

Gift or Sale to Your Children

As discussed in the second blog, this option is challenging as it will create a deemed capital gain and will result in an immediate income tax liability in the year of transfer if there is an inherent capital gain on the cottage. The upside to this strategy is that if the gift or sale is undertaken at a time when there is only a small unrealized capital gain and the cottage increases in value after the transfer, most of the income tax liability is passed on to the second generation. This strategy does not eliminate the income tax issue; rather it defers it, which in turn can create even a larger income tax liability for the next generation.

If you decide to sell the cottage to your children, be advised the Income Tax Act provides for a five year capital gains reserve and thus, consideration should be given to having the terms of repayment spread out over at least over five years.

Transfer to a Trust

A transfer of a cottage to a trust generally results in a deemed capital gain at the time of transfer. An insidious feature of a family trust (check out this post another way to use the family trust to reduce income taxes) is that while the trust may be able to claim the principal residence exemption (“PRE”), in doing so, it can effectively preclude the beneficiaries (typically the children) of the trust from claiming the PRE on their own city homes for the period the trust designates the cottage as a principal residence.

If a parent is 65 years or older, transferring the cottage to an Alter Ego Trust or a Joint Partner Trust is another alternative. These trusts are more effective than a standard trust, since there is no deemed disposition and no capital gain is created on the transfer. The downside is that upon the death of the parent, the cottage is deemed to be sold and any capital gain is taxed at the highest personal income tax rate, which could result in even more income tax owing.

The use of a trust can be an effective means of sheltering the cottage from probate taxes. Caution is advised if you are considering a non-Alter Ego or Joint Partner Trust as on the 21st anniversary date of the creation of the trust, the cottage must either be transferred to a beneficiary (should be tax-free) or the trust must pay income taxes on the property’s accrued gain.

Transfer to a Corporation

A cottage can be transferred to a corporation on a tax-free basis using the rollover provisions of the Income Tax Act. This would avoid the deemed capital gain issue upon transfer. However, subsequent to the transfer the parents would own shares in the corporation that will result in a deemed disposition and most likely a capital gain upon the death of the last surviving parent. An “estate freeze” can be undertaken concurrently which would fix the parents income tax liability at death and allow future growth to accrue to the children; however that is beyond the scope of this blog.

In addition, holding a cottage in a corporation may result in a taxable benefit for personal use and will eliminate any chance of claiming the PRE on the cottage for the parent and children in the future.

In summary, where there is a large unrealized capital gain on a family cottage, there will be no income tax panacea. However, one of the alternatives noted above may assist in mitigating the income tax issue and allow for the orderly transfer of the property.

Readers are strongly encouraged to seek professional advice when dealing with this issue. There are numerous pitfalls and issues as noted above and the advice above is general in nature and should not be relied upon for specific circumstances.

[Note: See Mark's comment in response to Earl about the concept of legal and beneficial ownership in the context of joint ownership with a right of survivorship. As Mark states, this area is a minefield, so please ensure you obtain proper legal advice before attempting to transfer a cottage into joint ownership with a right of survivorship.]

Related Reading:

Ways to Reduce the Tax Hit from the Family Cottage is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Transferring the Family Cottage: Tax Issues

Canadian Capitalist — Tue, 19 Apr 2011 02:11:06 +0000

In today’s post Mark Goodfield, a professional accountant and the writer behind the excellent Blunt Bean Blog, continues the series on estate planning issues surrounding the family cottage. Click here for Part 1 of the series.

In my first blog in this three part series on transferring the family cottage, I discussed the fact you can only designate one property as a principal residence per family after 1981. In order to explore the income tax implications associated with transferring ownership of a cottage, I will assume both a city residence and a cottage have been purchased subsequent to 1981 and I will assume that the principal residence exemption has been fully allocated to your city home and the cottage will be the taxable property.

Many parents want to transfer their cottage to their children while they are alive, however, any gift or sale to their children will result in a deemed capital gain equal to the fair market value (“FMV”) of the cottage less the original cost of the cottage, plus any renovations to the cottage. Consequently, a transfer while the owner-parent(s) is/ are alive will create an income tax liability where there is an unrealized capital gain.

Alternatively, where a cottage is not transferred during one of the parent’s lifetime and the cottage is left to the surviving spouse or common-law partner; there are no income tax issues until the death of the surviving spouse/partner. However, upon the death of the surviving spouse/partner, there will be a deemed capital gain, calculated exactly as noted above. This deemed capital gain must be reported on the terminal (final) tax return of the deceased spouse/partner.

Whether a gift or transfer of the cottage is made during your lifetime, or the property transfers to your children through your will, you will have the same income tax issue, a deemed disposition with a capital gain equal to the FMV of the cottage less its cost.

It is my understanding that all provinces with the exception of Alberta, Saskatchewan and parts of rural Nova Scotia have land transfer taxes that would be applicable on any type of cottage transfer. You should confirm whether land transfer tax is applicable in your province with your real estate lawyer

So, are there any strategies to mitigate or alleviate the income tax issue noted above? In my opinion, other than buying life insurance to cover the income tax liability, most strategies are essentially ineffectual income tax wise as they only defer or partially mitigate the income tax issue. In my final blog installment of this series, I will summarize the income tax planning options available to transfer the family cottage.

Related Reading:

Transferring the Family Cottage: Tax Issues is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Transferring the Family Cottage: There is No Panacea

Canadian Capitalist — Sun, 17 Apr 2011 22:00:56 +0000

Today’s guest post is Part 1 of a 3-part series on estate planning issues surrounding the family cottage, courtesy of Mark Goodfield, a professional accountant who writes the The Blunt Bean Counter Blog. Mark covers accounting, tax and wealth management issues on his blog and if you haven’t checked out his site, please do so. It is excellent. Now, over to Mark…

This is the first blog in a three part series on transferring the family cottage. Today’s blog will deal with the historical nature of the income tax rules, while the second blog will deal with the income tax implications of transferring or gifting a cottage and finally in the third blog, I will discuss alternative income tax planning opportunities that may mitigate or defer income tax upon the transfer of a family cottage.

Canadians love their cottages. They are willing to put up with three hour drives, traffic jams, never ending repairs and maintenance and constant hosting duties for their piece of tranquility by the lake. However, I would suggest the family cottage is one of the most problematic assets for income tax planning purposes, let alone the inherent family politics that are sure to arise.

For purposes of this blog, I will just assume away the family politics issue. I will assume the children will each grab a beer, sit down at a table and work out a cottage sharing schedule to everyone’s satisfaction and while they are at it, agree on how they will share the future ownership of the cottage when their parents transfer the cottage or pass away. I would say a very realistic situation in Canada, not!!!

Let’s also dismiss any illusions some may harbor that they can plan around the taxation issues related to cottages or even avoid them entirely. I can tell you outright, there is no magical solution to solving the income tax issues in regards to a family cottage, just ways to mitigate or defer the issues. Many cottages were purchased years ago and have large unrealized capital gains.

So let’s start by taking a step back in time. Prior to 1981, each spouse could designate their own principal residence (“PR”) which, in most cases, made the income tax implications of disposing or gifting a family cottage a null and void issue. The principal residence exemption (“PRE”) in the Income Tax Act essentially eliminated any capital gain realized when a personal use property was sold or transferred. Families that had a home in the city and a cottage in the country typically did not have to pay tax on any capital gains realized on either property when sold or gifted.

However, for any year after 1981, a family unit (generally considered to be the taxpayer, his or his spouse or common-law partner and unmarried minor children) can only designate one property between them for purposes of the PRE. Although the designation of a property as a PR is a yearly designation, it is only made when there is an actual disposition of a home. For example, if you owned and lived in both a cottage and a house between 2001 and 2011 and sold them both in 2011, you could choose to designate your cottage as your PR for 2001 to 2003 and your house from 2004 to 2011 or any other permutation plus one year (the CRA provides a bonus year because they are just a giving agency ).

In order to decide which property to designate for which years after 1981, it is always necessary to determine whether there is a larger gain per year on your cottage or your home in the city. Once that determination is made, in most cases it makes sense to designate the property with the larger gain per year as your personal residence for purposes of the PRE.

Click here to continue to the next post in the series on income tax issues surrounding the transfer of a cottage.

Related Reading:

Transferring the Family Cottage: There is No Panacea is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Jack Mintz on Family Taxation

Canadian Capitalist — Thu, 31 Mar 2011 04:23:54 +0000

In an article titled Taxing Families: Does the System Need an Overhaul? that appeared in a publication put out by the Institute of Marriage and Family Canada, Prof. Jack Mintz of the University of Calgary argues that our current tax system is unfair to families with one working parent. Prof. Mintz addresses the criticism that one-income families don’t incur some significant expenses that two-income families do such as childcare. He acknowledges that the criticism has some merit but can be addressed by making adjustments to the tax system. One suggestion he makes is to adjust the personal exemption downwards for the stay-at-home spouse and better recognizing the costs incurred in earning a living.

None of the problems associated with family taxation are insurmountable. The basic aim is to achieve efﬁciency and fairness under the tax system. It is impossible to see how limiting taxation to individual taxation supports these principles.

Nine industrial countries apply the family taxation principle. The French and Portuguese systems aggregate family income but explicitly allow for family size to reduce tax payments. The Czech Republic, Germany, Ireland, Luxembourg, Poland, Switzerland and the United States allow family members to ﬁle jointly and split income. Other industrialized countries rely primarily on individual taxation but often allow for family tax principles such as the transferability of deductions and credits or joint ﬁling or splitting of income of some sort.

Prof. Mintz goes on to propose three ideas for implementing a system of taxing families. Income splitting is one of them but Prof. Mintz says that while it may be the simplest, it does not address criticisms about equitable treatment of families.

Related Reading:

Jack Mintz on Family Taxation is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Family Tax Cut: A Tax Cut for the Rich

Canadian Capitalist — Wed, 30 Mar 2011 04:22:21 +0000

The Family Tax Cut that the Conservatives say makes “the tax system fairer” disproportionately benefits one-income families with very high household incomes. I ran some numbers using the excellent Income Tax Estimator available here to find out how much benefit accrues to a one-income household with two children at various income levels. If you look at dollar amounts, families with incomes of $50K or less will save little to nothing under the Tory income-splitting proposal. But, as you can see in the following graphic, families with household income exceeding $100,000 will save substantial amounts on their income taxes.

One could argue that, of course, higher income families would save more because they pay more in taxes. So, let’s look at the percentage of income tax a household could save when the Family Tax Cut is implemented. Ideally, what we’d like to see is lower income households saving a higher percentage on their income taxes than a household with a higher income. But, as the following graphic shows, that’s not the case with the Family Tax Cut. A household earning $50K will save 13% on their federal income taxes, which is less than the 16% that a household earning $200K would save. Single-income households with a household income of $90K will save a stunning 29% on their federal taxes.

Related Reading:

Family Tax Cut: A Tax Cut for the Rich is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Family Tax Cut: Big Tax Savings for Some Families

Canadian Capitalist — Tue, 29 Mar 2011 04:00:15 +0000

There are some pretty big ‘ifs’ attached to the announcement made by the Conservative Party today that they are planning on allowing families with children split up to $50,000 of income for federal income tax purposes. First, the Conservatives will have to get re-elected with a majority because they are proposing to implement the promise in their “next full term of office”. Second, the Family Tax Cut will be implemented when the budget is balanced, which according to the Government’s own projection in the latest budget won’t be any time before 2015-16.

The backgrounder accompanying the announcement provides two examples of families bringing in the same total household income facing significantly different tax burdens. A family with two parents earning $60,000 and $20,000 will pay $1,292 more in taxes than a family with two parents earning $40,000 each. A single-income household with an annual income of $70,000 will pay $1,992 more in taxes than a family with two parents earning $35,000 each. The Family Tax Cut proposes to eliminate the disparity in tax burdens by allowing couples with dependent children under 18 years of age to share up to $50,000 of their household income for federal income-tax purposes.

The Conservatives say that tax cut will save 1.8 million Canadian families an average of $1,300 per year. The biggest winners will be families with a stay-at-home spouse with a household incomes exceeding $100,000. For instance, a single-income family with a stay-at-home spouse and a household income of $200,000 can save roughly $7,000 in federal income taxes by splitting $50,000 of income. Of course, before they can bank these savings, the Conservatives have to win a majority and balance the budget. Both these conditions may never be fulfilled and in any case, 2016 is another five years away.

Related Reading:

Family Tax Cut: Big Tax Savings for Some Families is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

What’s New in TurboTax 2010

Canadian Capitalist — Tue, 08 Feb 2011 03:19:55 +0000

Canada’s leading tax software product, QuickTax has been rebranded as TurboTax this year. Recently, I asked Intuit executives, Geoff Morgan and his colleague Cam Moore, about the name change and to provide us a rundown of what’s new this year. Here’s what I found:

The QuickTax name was changed to reduce confusion with TurboTax and to take advantage of TurboTax advertising spilling over into Canada. The underlying software remains the same and is still being developed in Edmonton and Mississauga.
TurboTax comes in four flavours: Basic (retails for $19.99), Standard (retails for $39.99), Premier (retails for $69.99) and Home & Business (retails for $99.99). All flavours allow users to prepare their taxes with either an interview method or directly using forms or switching back and forth between the two. The main difference between various product flavours lies in the range and sophistication of the interview process. For example, the Premier edition includes extra guidance if you sold stocks, bonds or mutual funds in 2010. But if you are comfortable preparing your taxes directly with the forms and don’t need any guidance, Basic should be sufficient for your purposes.
You can file up to 8 returns with Basic and Standard and up to 12 returns with Premier and Home & Business.
Two new features were introduced in TurboTax 2010: Mapping icons to provide taxpayers with a visual representation of where they are in the tax preparation process and setting flags to remind users of missing charitable donation slips, T-slips yet to receive etc. I can see the utility of the flagging feature because right now, I write down everything I need to double check and manually double check everything before netfiling.
The new solidarity tax credit (an average of $500 tax credit per household available to Quebec taxpayers who have registered for direct deposit) is supported in TurboTax. The software also supports automatic download of Relevés from Revenu Québec.
Features such as Life Changes Profiling, importing tax data from UFile or H&R Block, expanded support options (see What’s new in QuickTax 2009) and Audit defence ($39.99 for individuals and $49.99 for Incorporated, see What’s new in QuickTax 2008) introduced in past years are back again.
Mac users looking for a desktop product are out of luck once again and have to make do with TurboTax Online.
Qualifying tax payers may be able to file their taxes for free with the TurboTax Free or TurboTax Student through turbotax.ca. Military personnel who performed active duty overseas are eligible to file for free.

I haven’t had a chance to test drive TurboTax just yet, so watch for a future post on my impressions of the new features. TurboTax is available at Staples, Future Shop, Best Buy and other fine retailers. It can also be downloaded from turbotax.ca. Wal-Mart is selling TurboTax Standard for $29.97 ($10 off the retail price) until February 10, 2010.

Related Reading:

What’s New in TurboTax 2010 is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

How the HST will affect you

Canadian Capitalist — Wed, 09 Jun 2010 03:41:42 +0000

Starting July 1, 2010, Ontario will replace the Provincial Sales Tax (PST) with a 13 per cent federally administered Harmonized Sales Tax (HST). To ease the transition, Ontario has already cut the tax rate on the lowest income bracket by 1 per cent, will increase transfer payments, will provide an one-time transition benefit payment for most families and will cut corporate income taxes. Though there are some sane voices (see post Not a Tax Grab After All: CCPA report on HST), many in the media insist on depicting the HST as a tax grab. Thankfully, despite the shrill opposition from the Tories and the NDP, Ontarians seem to have no interest in raging against the HST.

Today, the Ontario Government released a report that estimates how much the HST will cost families in various income brackets. The report found that in Year 1, the HST will cost the 16% of families earning between $125,000 and $300,000 an average of $30. Every other income range will see some savings. The 32% of families with an income of between $4,000 and $40,000 will save $510 in Year 1 and $205 in Year 3. The 31% of families earning between $40,000 and $80,000 will save $435 in Year 1 and a more modest $25 in Year 3. The HST will cost an average of $200 for families earning between $80,000 and $125,000 and an average of $405 for those earning $125,000 to $300,000 in Year 3.

The report notes that the analysis uses cautious assumptions on how much savings businesses will pass through to consumers. It also points out that the analysis ignores benefits to Ontarians in terms of higher incomes and more jobs resulting from the HST and corporate income tax cuts.

Related Reading:

How the HST will affect you is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

U.S. Estate Tax changes will affect Canadians

Canadian Capitalist — Wed, 21 Apr 2010 02:26:00 +0000

Investors owning significant U.S. property need to be aware of changes coming to U.S. Estate Taxes (and you thought keeping up with the Canadian tax code was headache enough). With the tax cuts enacted by the Bush administration scheduled to expire at the end of 2010, estate taxes in the U.S. are expected to revert to higher rates that applied in 2001 and a lower estate tax exemption of $1 million. Unfortunately, these changes will impact Canadian citizens living in Canada and owning U.S. assets such as a vacation property, condominiums, securities trading in U.S. exchanges etc.

The US Estate Tax that Canadians might face is based on two factors: (1) The total value of their U.S. located property and (2) The proportion of their U.S. assets compared to their worldwide assets. Let’s take a concrete example. Canadian citizen and resident Peter owned $250,000 worth of US securities and his total estate is valued at $1,500,000. With Peter’s U.S. located property valued at $250,000, his estate will face a tax of $70,800 before exemptions in 2011. Since, 1/6th of Peter’s worldwide assets are located in the U.S., Peter will receive a prorated credit of $57,633 and a net U.S. Estate Tax of $13,166. As you can see in this example, even modest estates might be on hook to pay U.S. Estate taxes.

PS: In my previous post on U.S. Estate Taxes, I incorrectly mentioned that the then exemption of $2 million applied to U.S. property held by Canadians. As pointed out here, the exemption for Canadians will also depend on what proportion of their worldwide assets are located in the U.S.

Related Reading:

U.S. Estate Tax changes will affect Canadians is brought to you by Canadian Capitalist -- Helping you to invest & prosper.