Taxes

Filing Taxes is a Snap with SnapTax

February 29, 2012

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[Screenshot of SnapTax App]

Intuit has just launched a new tax filing product in Canada that literally makes filing taxes a snap. If you have an iPhone and a very simple tax situation (just T4 slips), you can download an app from Apple’s iTunes store that will allow you to take a photo of a T4 slip with iPhone’s built-in camera, walk you through a couple of questions such as Name, Date of birth, Province of residence etc. and generate a tax file. You can then pay $9.99 and NETFILE your tax return right from your iPhone. If the app determines that your tax situation is a more complicated than it can handle, it will offer to transfer your data to TurboTax Online and you’ll be able to complete your taxes through the website.

I saw a demo of the product last week and one of the questions I had was around security. What happens when you lose your phone? Intuit says that since it stores data on its servers and the data is password protected, a loss of the phone will not compromise important personal information such as your SIN number.

Currently, SnapTax is only available on the iPhone. It is not available on the iPad or on phones running Android. I was told that the app works on the iPod Touch but though I was able to download, install and run the app, it wouldn’t let me progress beyond the first couple of screens.

I have a much more complicated tax situation, so I won’t be filing with SnapTax anytime soon. However, as SnapTax adds more capability and starts to cover more tax situations in future years (tuition slips, charitable receipts, RRSP contribution statements etc.), it will make tax filing a breeze for a very large number of Canadians.

Claim the Ontario Children’s Activity Tax Credit

April 25, 2011

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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.

Ways to Reduce the Tax Hit from the Family Cottage

April 19, 2011

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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.]