Faizal Valli’s Tax Tips and Traps
If you haven’t yet filed your 2015 taxes, or if you’re looking for a summary of the recently announced federal budget, check out this 30 minute podcast featuring Faizal Valli, CPA, CA.
Have a tax question that wasn’t covered here? Let us know in the comments or connect with Faizal directly on LinkedIn. If you’d rather read than watch the video, you’ll find the transcript below.
Hello and welcome to ModernAdvisor’s first webinar. My name is Faizal Valli and I’m your guest speaker today. I’m an independent tax advisor with 13 years experience in tax planning and I’ve previously worked with small accounting firms as well as an international tax firm and a boutique practice in taxes over a wide variety of experience. I’ve presented as well and written on various tax topics in the past for more details about me please feel free to check out my LinkedIn profile referenced at the end of this presentation.
So today we’re talking about the timely topic of tax. Specifically we will discuss the top 10 changes introduced in the federal budget which was presented on Tuesday, March 22nd I’ll review what you need to know about these tax changes that will affect you in 2016 and going forward. Next we’ll switch gears and talk about some tax tips and traps to be aware of for the 2015 filing season as well as generally.
So the first two changes here you can see on this slide are the tax brackets. As you probably already know, the budget introduced two tax bracket changes.
1. New Federal Personal Tax Bracket
First was a new federal personal tax bracket for taxable income over $200,000 and the new bracket is 33% and that’s the federal tax. This tax bracket takes effect in 2016.
2. Tax Bracket Reduction
And second there is a reduction in the federal personal tax bracket for middle income earners so if you have income of between about $45,000 and $90,000 of income there was a reduction in the middle tax bracket for federal personal tax from 22 percent down to 20 and a half percent.
3. Canada Child Benefit
Next is the new Canada Child Benefit which is a benefit that’s replacing the previous Canada Child Tax Benefit and the Universal Childcare Benefit. So the budget has introduced the new Canada Child Benefit to be non taxable just like the old CCTB and it’s intended to assist lower-income families. So as a quick example: for a family, or a couple with family income of $150,000 and one child under the age of six the new Canada Child Benefit will be $102 per month.
For more information about the Canada Child Benefit and the CCB calculator which is provided by the government check out the link on this slide and you can see how much your family might be eligible for with the new Canada Child Benefit.
4. Family Tax Cut
Number four is the elimination of the Family Tax Cut. This was the tax credit that was announced by the Conservative government which allows families with kids under 18 years of age to effectively split income. The Family Tax Cut was effectively calculated by way of a tax credit. It was also known as a family income splitting tax credit. The 2016 federal budget announced that this Family Tax Cut will be repealed effective 2016 so it still available for your 2015 tax filing year but will be repealed this year.
5. Northern Residents Deduction
Number five is the Northern Residents Deduction. As you may or may not know, the Northern Residents Deduction is a broad tax deduction that is available to individuals living in prescribed zones in northern Canada. The amount of this deduction has now increased actually significantly starting in 2016, so a welcome benefit for those living in the northern prescribed zones in Canada.
6. Early Childhood Educator School Supply Credit
Next is a new tax credit that was introduced in this year’s budget. It’s the Teacher and Early Childhood Educator School Supply Credit. This is a 15% refundable federal credit on up to $1,000 in expenditures that are made by a teacher or an early childhood educator. So the new tax credit gives the teachers and early childhood educators a little bit of a benefit. Often times these individuals spend their own money and don’t get reimbursed by employers. This tax credit is meant to provide a refundable tax credit of a 15% on these types of expenditures: might be arts and crafts materials or similar type of supplies. Eligible supplies is defined in the 2016 budget in case you do need more information.
7. Mineral Exploration Tax Credit for Flow-Through Share Investors
Number seven is a Mineral Exploration Tax Credit for Flow-Through Share Investors. So the Mineral Exploration Tax Credit is provided for investments in mineral exploration companies. The government has extended this credit to December 31 2017, so as you may or may not know this is a tax credit that’s in addition to the flow-through share deductions that are also available when investors invest in eligible mining corporations.
8. Education and Textbook Tax Credit
Number eight which was changed in the 2016 budget is the Education and Textbook Tax Credit. This is a fixed tax credit that’s available and is based on the number of full-time and part-time months that a student attends school. So this credit is being eliminated after 2016. 2016 will be the last year or this tax credit if there are existing unused tax credits for the education and textbook amounts these will still be available to be carried forward.
9. Children’s Fitness and Arts Credits
Number nine is the children’s fitness and arts credits. The 2016 budget made the announcement that these two tax credits are actually being phased out. So for 2016 the tax credits are being housed such that the fitness credit will only be for up to five hundred dollars worth of eligible fitness expenses for your children and the arts tax credit will only be up to $250 for eligible arts expenses. And in 2016 these two credits will be eliminated altogether.
10. Mutual Fund Corporation Switches
Number ten, last but not least, is mutual fund corporation switches. As you may know, currently when an investor switches between mutual fund corporation investments such as which is actually tax-free since the investor is just exchanging shares of one corporation or another and such an exchange is allowed to occur on a tax-free basis for income tax purposes.
Well now the 2016 budget has introduced that after September 2016 any switches that occur between mutual fund corporations will now be considered dispositions at market value so this means there will no longer be tax deferrals for switches between mutual fund corporations. So that brings us to the end of our top 10 things to know about the 2016 budget. Let’s now switch gears to some tips and traps that are applicable for not only your 2015 filing year but may also be applicable in other circumstances.
Personal Tax Tips and Traps
The first tip and trap that we’re going to talk about are related to foreign reporting. So you’ve probably
heard of form T1135 which is an information reporting form which is used to report foreign property also known as specified foreign property and this form is used when you’re reporting specified foreign property which has a cost at any time in the year of greater than $100,000 Canadian.
So as a quick background you probably already know that specified foreign property includes things such as shares of non-resident corporations which are held in non-registered accounts and they could be either private or public entities. So ignore your registered incomes to your RRSPs TFSAs RESP since such those do not need to be reported on the T1135 but certainly investments or specified foreign property held in non-registered accounts do need to be reported on this form if you’re above the reporting threshold of course.
So an example of shares of non-resident corporations would be shares listed on public stock markets in other countries so your shares of Microsoft or Apple or Google that you own or non-registered account. Another example is real estate property, so as long as it’s not personal property.
Your foreign real estate property that is in a rental pool or that is being rented out also has to be reported on Form T1135 and another example would be debts such as bonds. So any bond investments or even private debt investments that you have with non-residents those also need to be reported on the T1135. So you may already know that in 2014 there was a significantly expanded detailed reporting required Form T1135 which required individuals to report significantly more details with regards to not only the investments that they owned but the details of the income that they were generating from these types of investments.
Again, just an information reporting form, typically everything is already being subject to tax and reported correctly on your tax return but nonetheless has to be disclosed on Form T1135 while effective. 2015 the government changed the rules for reporting on the forms T1135 they introduced a new simplified reporting method for taxpayers who had specially asked for a specified foreign property less than $250,000 at any time throughout it all year.
So effective 2015 if you’re filing and are subject to reporting reporting on Form T1135 you will now be subject to more simplified reporting if the cost of your foreign property that is less than $250,000. So this is a welcome change for many of us who don’t fit the higher cost of assets that are owned – it’s a little bit more of a break. Now keep in mind that if you have brokerage accounts, especially with ModernAdvisor, your brokerage accounts or your advisors are also capable of providing reports of information for your non-registered accounts which can simply be inputted into your T1135 so contact your advisor if you’re unsure. Next we’ll talk about the concept of return of capital. Return of capital is often missed by investors so it warrants further discussion here. As you probably already know return of capital will reduce to the original cost of your investment.
This is typical in limited partnerships or income trusts or even REITs (real estate investment trusts) who often pay dividends or pay distributions which include return of capital. So remember that the return of capital will reduce the original cost of the investment otherwise known as the adjusted cost base, which would result in higher capital gains when these investments are eventually sold.
It’s my understanding as well that investment advisors such as ModernAdvisor will provide this information to you on your T3 and T5 slips. You’re typically looking for box 42 on these slips, which provide information about your return of capital so make sure to carefully track the return of capital to record the appropriate amount of capital gains when you eventually sell these types of investments. If not then your capital gains would potentially be understated so beware of that trap.
Next let’s talk about TFSAs. These are a common investment and savings vehicle and often these types of accounts are treated like a checking account where individuals are often withdrawing and depositing withdrawing and depositing numerous times throughout the year.
You have to be very careful when contributions are made in a TFSA account within the same calendar year. If you withdraw funds from a TFSA in a particular year the amount withdrawn increases your contribution room it doesn’t increase your contribution room until next year so be careful when you are withdrawing from your TFSA in a year and re-contributing in the same year. You must make sure that you have enough TFSA contribution room available.
If not, significant over contribution penalties could apply to your TFSA account and practically speaking I have seen the CRA assess over-contribution penalties to taxpayers so beware about that one.
Here’s another tip for TFSA accounts: did you know that you could contribute to your spouse’s TFSA account? So if your account is already fully contributed, then you could use your after-tax funds to contribute into your spouse’s TFSA account and the income that is tax free and that account would not attribute back to you. So a common planning technique in order to double up on TFSA contribution room to maximize both spouses TFSA accounts and then finally with TFSA is a trap to be aware of.
More recently the Canada Revenue Agency has been coming after investors who are using their TFSA accounts for more frequent trading, so day traders in this case in situations like this you want to be very careful because the CRA is asserting that individuals who are day traders who are using their TFSA accounts to shelter income will get taxed on the income generated in that TFSA account as if it’s regular income this year the CRA in these situations is asserting that the TFSA accounts are actually a business activity for day traders – so be very careful of frequent trading in TFSA accounts.
RRSPs and TFSAs
And finally, RRSPs and TFSAs are both valuable investment and savings tools – RRSPs are typically used for savings which you’re not planning to access in the short or medium term, whereas the TFSAs can be used for savings which would need to be accessed potentially on an emergency basis. Depending on your age your income needs, your tax brackets and your family situation, RRSPs and TFSAs can provide different benefits for different circumstances it’s always best to speak to your advisor about what’s best for you.
Lesser-known Tax Credits
Now let’s talk about some lesser-known tax credits. The first time home buyers credit is a tax credit that’s available to individuals and/or their spouses who have not owned a home in any of the last five years. The credit is actually a fixed amount and it’s calculated at 15% which is the lowest tax bracket federally times $5,000 so this provides a fixed $750 benefit to first-time homebuyers.
Volunteer Firefighter Credit
Here’s a fun fact: if you’re a volunteer firefighter you may be eligible for a tax credit – for more information on the volunteer firefighter tax credit, check out the CRA’s website and type in ‘volunteer firefighter’.
Children’s Fitness Tax Credit
We already spoke about the changes from the 2016 federal budget but the full children’s fitness tax credit is still available for 2015. This tax credit is refundable, so that means it’s money in your pocket. And with the BC tax rate and the federal tax rate, it works out to 20 cents on the dollar so if you spend $500 you’ll get $100 back. Now remember of course for 2016 the tax credit is halved to $500 for fitness and $250 for arts and of course it’s going to be eliminated in 2017.
Registered Retirement Income Fund Withdrawals
Finally there was some tweaking to the Registered Retirement Income Fund withdrawal rules in 2015. Effective 2015 the minimum withdrawal rates have been reduced by approximately 2% for individuals between the ages of 71 to 94.
So as you may know, once you turn 71 in a particular year your RRSP must be converted into a RRIF account and once it’s converted into a RRIF account and the following years, from age of 71 to 94 there are prescribed withdrawal percentages which basically means that you’re required to withdraw amounts out of your account at a prescribed minimum amount.
So these withdrawal rates have been reduced by about 2% the first year, I believe is just under five and a half percent withdrawal so five and a half percent of your account balance would have to be withdrawn in the year that you turn 71. So the reduction of these withdrawal rates is a welcome announcement for seniors who may not otherwise need income from their RRIF accounts, now they’re able to withdraw less than what was previously legislated.
CRA My Account for Business and Individuals
Next I want to share with you an important valuable tool actually from CRA’s website on how you can keep up with the latest changes. On CRA’s website, if you search the 2015 T1 guide at the beginning of the guide in the ‘What’s New’ section you’ll find all of the changes that are relevant to the 2015 filing year. You’ll find that each year the CRA puts out a T1 guide and for whichever relevant year you are looking at, the what’s new section provides valuable information about new items that have been introduced or changes that have been made to personal taxes in the particular filing year.
Also it may be worthwhile looking CRA’s ‘My Account’ as pictured on this slide for individuals as well as for businesses and self-employed people. CRA’s ‘My Account’ service provides a lot of valuable information about your tax account, including your tax return assessments, your contribution rules for RRSP and TFSA, copies of your slips, some of your slips are only available online, but not all of them.
Statements of account if you have a balance owing and such as well you’re able to make changes online through the CRA so if you need to adjust the tax return you can now, if you have an account with CRA online, you can now access that account and file that change online – so a very valuable tool and I would encourage you to take a look at CRA’s ‘My Account’ service.
Real Estate – Change in Use
Next is a common trap that is often missed by individuals. It involves the circumstance of change in use. Whenever there is specifically a change in use from a principal residence to a rental property or a change in use from a rental property to a principal residence for tax purposes, a deemed disposition has occurred.
Now deemed disposition isn’t an actual disposition it’s just that the tax rules state that you are deemed to have disposed of your property at the time of change in use or in the particular year (the taxation year) that there is a change in use. The deemed disposition occurs at fair market value.
So that begs the question: what is fair market value? Well if you wanna residential property either a condo or single family home and you’re in a high-density neighborhood, fair market value can be easily obtained.Usually you can ask your realtor to pull comparative information from the Multiple Listing Service to determine what the fair market value is around the time that you have a change in use. So when you have a principal residence and turn it into a rental property or vice versa.
In addition if there’s a change in use from a rental property to a principal residence there may be a capital gain and resulting tax payable at the time of the change in use the deemed disposition however there may be an opportunity to defer this capital gain until the property is actually disposed of so consider that tip and beware of the trap of change in use.
Lifetime Capital Gains Exemption
This is an exemption that is available to every individual who was a resident of Canada but it’s an exemption that’s only available on the sale of certain types of property and those properties are listed on this final slide. They are shares of a qualified small business corporation so a small business operating company which carries on business in Canada, qualified farm or fishing property or shares of a qualified farming business or fishing business corporation. The rules are fairly complex to qualify for this.
Specific types of properties and definitely tax advice is required if you think there may be an opportunity to utilize your lifetime capital gains exemption. If you do have an opportunity to utilize your lifetime capital gains exemption it can be very valuable in sheltering capital gains on these types of properties. The lifetime capital gains exemption is often confused with the principal residence exemption. The principal residence exemption is completely different and applies to individuals resident in Canada who live in a home which they ordinarily inhabit.
So your principal residence as the name says would be the home that you typically live in. But another tip to be aware of is if you have a secondary home, a vacation property such as a cottage, you may also be able to claim the secondary home for the vacation property as your principal residence or allow to offset any capital gains on the sale of your property by claiming the principal residence exemption on the sale of this type of property. The lifetime capital gains exemption is often confused with the principal residence exemption.
The principal residence exemption is different this one applies for individuals who are resident in Canada who live in a home that is considered their residence it can apply on the residents that they ordinarily inhabit, or ordinarily live in, as well as a vacation property so for example if you have a second home a second vacation property which is a cottage which is your residence and not a rental property, you may choose to claim the principal residence exemption on the sale of such a property so be aware that the principal residence exemption is different from the lifetime capital gains exemption.
So that brings us to the end of our webinar on behalf of ModernAdvisor and myself I’d like to say thanks for taking the time to listen to our webinar. I hope that you learned a thing or two from the tidbits that I was presenting today. I look forward to hearing from you so please feel free to reach out to me you can connect with me on LinkedIn my profile is provided on the final slide here so I look forward to hearing from you. Thank you very much.