Year-End Tax Planning There are a few things to optimize taxes for 2015. RRSPs, charitable donations, and tax-loss selling will be discussed here. Registered Retirement Savings Programs (RRSPs) can be contributed to in 2015, and in the first sixty days of 2016 for the 2015 tax year. RRSPs are used to save for retirement. Contributions to your RRSP are tax-deductible (meaning it lowers your taxable income). It is limited to 18% of income, net of pension. More on RRSPs in a later blog. Charitable donations are also good for year-end tax planning. There is a 15% tax […]
The New Family Tax Credit is just as it is written: a credit for families. There are a few limitations on it, including a cap in the dollar amount. It works best when the couple make different amounts. It also requires that the couple have a child under 18 years of age. It gets a little more complicated in some situations, so contact your tax professional for more information. Update: This credit was removed by the new government, so is only good for some previous years.
If a landlord gives a discount on rent for services provided by the tenant, the full amounts must be reported. The normal rent must be reported, the discount may be claimed as an expense by the landlord and business income by the tenant. For example, say rent is $900 and the landlord offers $100 to shovel the walk to a tenant. The full $900 must be claimed as rent revenue, $100 as an expense by the landlord, and $100 business income by the tenant.
A Marginal Tax Rate (MTR) is the tax rate (%) paid on each additional dollar earned. It is called ‘Marginal’ as it refers to the next incremental dollar earned. The tax rates change with higher income. The more income, the likely the tax rate is higher. Federally, there are currently (2014 tax year) four tax brackets: Pay 15% on the first $43,953. Pay 22% on every extra dollar between $43,953 and $87,907, and so on for two higher brackets. Provincially, there are many more tax brackets. This means a smaller increase in income is more likely to lead to an increase in […]
RESPs are an excellent low-tax means of saving for a child’s education. Parents and grandparents may put money into an RESP. The money in an RESP grows tax-free. In addition, the government often puts funds into the RESP. Be careful from whom you purchase an RESP. This is an important business decision. What happens if your child decides not to pursue postsecondary education? Do you get the money back? What happens to the government’s contribution? These and other questions must be asked of the provider.
If you look at a T5, one sees that taxable dividend amounts are greater than the actual dividend amounts. So, the government considers the actual dividends paid out to you less than what should be taxed. Why is that? The reason is that there should be only one level of taxes. In other words, you shouldn’t tax the same loonie multiple times. When a company makes money, it pays taxes on that income. Then, when it pays out a dividend with this after-tax income the shareholder has to pay taxes on it. That means two levels of taxation on the […]
Many items may be included on a T4. Employment income, taxable benefits, income eligible for EI and CPP, payroll deductions paid by the employer (i.e. EI and CPP), tax deducted, pensions, etc. In most cases, T4s are prepared correctly. However, be careful and review them. Is there something you would expect but not there? Your tax preparer may not be able to catch T4 mistakes as the preparer may not have all the information concerning your employment. Some mistakes include missing CPP-eligible income, EI-eligible income, and missing car allowances.
Income splitting for pensioners is an excellent means of lowering total family tax. It works when there are two people of different income levels. Pension income that may be split comprises employment pension and RRIF, but not OAS or CPP. A key benefit is that the higher-income spouse whose pension income is split now pays tax at a lower marginal tax rate. Another benefit is that the overall family tax payable is reduced. There are some challenges. The lower-income spouse technically has to pay more tax in the individual sense, so a family plan to pay any outstanding taxes should […]
Transferring assets from a person to a corporation is complex but very important. If the transfer is done correctly, the value of the assets may be extracted tax-free (‘boot’). Or, the value of the assets become ‘Paid Up Capital’ (PUC) attached to shares which may be extracted tax-free from the corporation at a later date. As tax is your relationship with the government, the government is saying ‘you paid tax on your earnings, then invested it. If you invest your earnings, then take the same amount out of your investment, we won’t tax you on it.’ Fair enough. However, there […]
In Canada, there are two tax brackets for incorporated business income. The lower one, Small Business Deduction (SBD) rate is about 15%. The SBD is on the first $500,000 of income (up until a few years ago it was $400,000). Above $500,000 of income, the second ‘tax bracket’, the corporate rate is 26.5%. To illustrate: between $400K and $500K of income, $15,000 is tax payable. Between $500K and $600K of income, $26,500 is tax payable. This is a huge jump of 76.67%! However, due to the system of integration, the taxation activity flows down to the individual level when cash […]