Archive for the ‘Uncategorized’ Category

Renting out a room to students? CRA wants to know

As students fan out across the country for another school year, homeowners are finding opportunity in renting out accommodations.

There’s nothing wrong with making a few bucks renting out a room, but the Canada Revenue Agency wants a piece of the action – and how you claim deductions could be costly in the long run.

The name of the game is to preserve your home’s principal residence status. If the CRA considers your home a principal residence, you don’t pay any tax on the amount it appreciates when it is sold. As an example; if you bought your house for $400,000 and sold it for $800,000, you don’t pay any tax on that $400,000 gain.

If your home does not meet the CRA’s principal residence requirement, you must pay tax on half of that $400,000.      

If you are drawing rental income from your home, there are three ways to ensure it remains your principal residence for tax purposes:

  1. The partial use of the residence for income-producing purposes is ancillary to the main use as a residence. In other words, there’s a fine line between renting out a room and renting out a house the owner happens to live in.
  2. There is no structural change to the property. You can put a coat of paint on the walls and make some modifications but you can’t build an addition, for example.
  3. You cannot claim capital cost allowance (CCA), or depreciation on the property.

Of course, the rental income must be claimed (form T776) and filed with your tax return, but there are several deductions available to lower your tax bill. They can include: a portion of mortgage interest, property taxes, insurance, repairs and maintenance, landscaping, utilities, advertising costs, office expenses, professional fees, management fees, salaries or wages, travel costs, and car expenses.

If you’re not sure if you are crossing the line between principal residence and income property, consult your tax professional.

By Dale Jackson 

Dale is Finance Journalist: writer and producer Business News Network, Globe and Mail, Yahoo! Finance.

 

 

What changes come with the revised T1135?

The Revised T1135 – This Could Get Ugly for Taxpayers, Investment Advisors & Accountants

 

The T1135


To provide some symmetry to my return to blogging, I start off where I left off. You may recall that my last blog discussed the revised T1135 Foreign Income Verification Form (“T1135”). In that post I discussed the new reporting requirements, which now includes the following:

  • The name of the specific foreign bank/financial institution holding funds outside Canada
  • For each foreign property identified on the T1135, the maximum funds/cost amount for the property during the year and cost amount at the end of the year (the old form only required the cost amount at the end of the year if at anytime in the year you exceeded the threshold)
  • For each foreign property identified on the T1135, the income and capital gain/loss generated (the old form asked for total income or gains from all foreign property in one lump sum)
  • Specific country where each foreign property is located (the old form had pre-defined groupings based on each continent for all the property on an aggregate basis) 

 

The T3/T5 Exclusion


I concluded my July 2nd post by saying that “There is one important saving grace to these rules. If the income for a foreign property is reported on a T3 or T5, the details do not have to be reported. This will exempt most U.S. or foreign stocks held with Canadian brokerages; but the details for property held outside Canadian institutions will be burdensome”.

While the above statement is essentially correct, the CRA’s administrative position in regard to this exemption may prove problematic. You see, the CRA is saying that even where you hold a foreign stock or bond in an account with a Canadian brokerage firm that issues a T3 or T5 for that account; if that security does not pay income in the form of a dividend or interest and thus is not reported on the T3 or T5, the specific stock or bond will not be excluded and will have to be reported in detail on the T1135. This position was recently confirmed by a CRA representative to one of my tax managers.

 

In addition, it must be noted you will still be required to file the T1135 if the total cost amount of your foreign holdings exceeds $100,000 at anytime during the year, even if dividends or interest is reported on a T3 or T5. See the example discussed in this article by Jamie Golembek, where the CRA representative states you would still need to file the form and check the reporting exclusion box for the stocks reported on a T-slip.

The Tax to English Version

 

So what does this all mean in English? Say you own 25 foreign stocks held at a Canadian brokerage that have a total cost of $150,000, but five of those stocks do not pay dividends or fail to pay a dividend in that year. As we now understand the CRA’s position, even though the 20 dividend paying stocks do not need to be individually listed, the 5 non-dividend paying stocks must be reported. Thus, you will need to tick the box on the T1135 Form to claim the exclusion for the 20 stocks, but you will also have to determine the highest cost amount of each of the five non-excluded stocks during the year (troublesome if you bought and sold) and the cost amount at the end of the year in addition to providing other information such as country location and capital gain or loss.

In the example above, if all 25 stocks pay dividends that will be reported on a T3 or T5, you will still have to file the T1135 and check the exclusion box; however, you do not need to report all the details of each individual stock. Clear as mud.

For people with only a few foreign holdings, this is not much of an issue. However, I have clients who are in private client programs with the large Canadian financial institutions that own 20-50 shares of multiple foreign stocks or have private managers running their money who have upwards of 50 U.S. and foreign stock/bond holdings. This means that the client, the advisor, or their accountant, or probably a combination of all three must review all these stocks to determine which ones are exempt from reporting because they paid a dividend or interest that was reported on a T3 or T5 from those that did not have any income reported on a T3 or T5.

My tax manager said the CRA representative he spoke with, gave him the impression that the CRA’s position has not gone over very well. Let’s hope the CRA simplifies life for many Canadians and just exempts any foreign security held at any Canadian Institution whether income is reported on a T-slip or not.

 

This article is posted on The Blunt Bean Counter website.  It provides information of a general nature and should not be considered specific advice, as each reader’s personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the article.

What is my risk as a director of a corporation?

Director’s liability

Being a director of a corporation carries a lot of responsibility, as well as a certain level of risk. The harshest penalty available in our society — criminal sanction — can befall a director if he or she acts fraudulently or negligently. This reflects Parliament’s view that, under subsection 227.1(3) of the Income Tax Act, directors must “exercise the degree of care and skill that would be exercised by a reasonably prudent person in comparable circumstances.”

At common law, judges had long held that a director was to be judged according to his or her particular knowledge and experience. But that old common law standard of subjective liability was seen as insufficient protection for the public. To protect the public generally and shareholders specifically, Parliament decided to impose a higher standard, holding directors to the standards imposed on comparable professionals. So, Parliament created objective liability through the insertion of subsection 227.1(3) into the Act.

This had the effect of raising the standards of directors to the level of the reasonable, professional director who shares the characteristics (education, experience etc.) of the one under scrutiny.

To avoid liability, then, a director need only show that he or she acted the way a reasonably prudent individual in similar circumstances would have acted. That means a director is justified in trusting his or her officials to execute their duties according to corporate policies — if a reasonable person in that position would not have grounds for suspicion.

Generally, a director will be personally liable only if he or she assists the corporation in committing an offence or is grossly negligent in his or her dealings for the company. So, the director needs to participate actively in the offence.

Even if the corporation is not prosecuted or convicted for an offence, the director can still be held liable. If the corporation has committed an offence under the Act and the director participated with knowledge in some way in the commission of that offence, then the two elements of culpability are established. A director may be convicted, but only if it is established he or she had the mens rea (that is, the “guilty mind”).

Directors may also be liable for gross negligence, which is a greater departure from the errant behaviour associated with regular negligence. In Venne v The Queen (1989), the court stated: “Gross negligence must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.”

Parliament and the courts have made it clear directors have a lot of responsibility and are subject to immense liability if they act fraudulently or negligently. The goal is to ensure shareholders have adequate protection, but it is also a balancing act — no one wants to dissuade professionals and those with business experience from becoming directors.

Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.

Should I transfer my RRSP/RRIF to my Spouse at Death?

RRSP/RRIF Spousal Transfers on Death – Not so Automatic – Be Careful you don’t Create a Family War

 

Most people are aware that upon their death, their RRSP/RRIF can automatically transfer tax-free to their spouse’s RRSP/RRIF if their spouse is the beneficiary of their plan. The advantage of this spousal rollover is that the income tax on the value of the RRSP/RRIF is deferred until the surviving spouse passes away.

However, if the surviving spouse has other ideas and does not transfer the proceeds of the RRSP/RRIF to a plan of their own, the possibility exists that they could end up keeping the proceeds of the plan while leaving the related income tax liability to be paid by the deceased’s estate. While this can be an issue for any family, for blended families, this has the potential to ignite World War 3.

I recently attended the Ontario Tax Conference. The participants were lawyers and accountants, most of whom specialize in income tax. I know a room full of accountants and lawyers talking tax, what could be more torturous. However, there was actually a very outgoing and passionate presenter by the name of Christine Van Cauwenberghe of the Investors Group. 

Christine presented the technical details relating to this issue, from the mechanics of the “refund of premiums” to the administrative withholding requirements for financial institutions. But, in simple terms, this is what you need to understand.

When you designate your spouse as the beneficiary of your RRSP/RRIF, they will receive the proceeds of your RRSP/RRIF directly. It will then be his/her responsibility to transfer the entire proceeds to their RRSP/RRIF. If they do that, the bank issues the tax receipts in their name and there are no income tax consequences, end of story. 

However, your spouse has no legal obligation to transfer these funds to their RRSP/RRIF. In fact, where your spouse rather use the funds immediately, does not get along with your natural children or is from a second or third marriage and has his/her own children and/or does not get along with their step-children, they may decide to take the money themselves and not transfer the funds to their plan. In these circumstances, the tax receipt for the RRSP/RRIF will then be issued to the deceased’s estate. While the spouse may be held jointly and severally liable by the CRA for the related income tax, if the estate has enough assets, the CRA will typically go after the estate for the taxes, not the spouse.

In order to avoid this potential minefield, Christine suggests that you designate your estate as the beneficiary of your RRSP/RRIF, with a clause that provides two alternative options:

Option 1: The beneficiary (your spouse) chooses to elect with the executor(s) to have the RRSP/RRIF amount taxed in their own name as a refund of premiums. Under this option, the spouse receives the entire RRSP/RRIF proceeds and typically transfers the proceeds to their RRSP/RRIF and the estate assists in filing an election. The required election form is Form T2019, however, you would probably not want to name a specific form in the will, only that there is an option to elect.

Option 2: If the spouse does not agree to the joint election, then they are only entitled to an allocation of the RRSP/RRIF funds net of the associated income tax liability to be incurred by the estate.

A disadvantage of designating your estate as the beneficiary of your RRSP/RRIF is that the funds will be subject to probate in most provinces. Some people feel that the probate fees (1.5% of the value of the RRSP/RRIF in Ontario) are a relatively small cost in order to prevent the potentially disastrous result of your spouse taking the entire proceeds of your RRSP/RRIF and leaving the estate to pay the related income tax.

If your spouse and children do not get along, or you have a blended family, you may wish to review this issue with the lawyer who drafted your will.

 

This article was written by The Blunt Bean Counter and posted on Nov 26, 2012 at www.thebluntbeancounter.com

Would a partnership be a useful vehicle?

Changes to the “Bump” Rules for Partnership Interests

Subject: Partnerships

“partnerships are still a useful vehicle”

Number: 12-36

Date: November 16, 2012

A partnership is a useful form of business organization that has tax advantages as a flow-through vehicle.  If you are planning the acquisition of a business, a partnership can be useful as a way of flowing income and losses (especially losses!) to the purchaser.

Income tax rules allow a purchaser to increase, or ”bump”, the tax cost of certain assets (e.g. land that is not inventory, marketable securities and partnership interests) owned by the acquired corporation (the “target” corporation), if the target corporation is merged with the acquiring corporation after the purchase.

These rules are useful where the purchase price for the shares of the target corporation is higher than the underlying tax basis in the assets of the target corporation, such as companies that own substantial amounts of real estate.  Acquisition planning often involves a tax-free transfer of assets that would not be eligible for a bump (such as depreciable assets and goodwill) to a partnership in advance of the acquisition so that, at the time of the acquisition, the target corporation owns a partnership interest (eligible for the bump) as opposed to assets that were not eligible. 

The March 2012 budget, and the October 2012 draft legislation implementing the budget proposals, will effectively eliminate this planning opportunity. These rules also prevent planning that would otherwise restore the ability to bump the partnership interest.

While the ability to bump the partnership interest has been restricted, partnerships are still a useful vehicle for business acquisitions or structuring newly formed businesses.  Your TSG representative would be happy to discuss with you the best way to structure your business.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group  member firms.  The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

How can I avoid an audit?

Seven helpful hints to avoid a tax audit

TIM CESTNICK

Published Wednesday, Apr. 24, 2013 07:31PM EDT

Last updated Wednesday, Apr. 24, 2013 07:31PM EDT

I recall my days working in a public accounting firm. We used to prepare time sheets to record the hours we worked on a client file. We’d classify our time by categories of activities. I can recall one particular activity category that always puzzled me: “Unknown Unproductive Time.” There was one guy I worked with who, in the course of one year, racked up 637 hours of Unknown Unproductive Time. Not exactly a recipe for promotion to partner. This guy was known for wasting huge amounts of time.

Wasting time is also something of a sport for tax auditors. Now, I don’t mean any disrespect to these employees of the taxman, but when we talk about time wasters, very few things sit as high on the list as the hours spent beside a tax auditor digging up information and answering questions. Today, I want to talk about how to avoid a tax audit.

1. Don’t sweat the concept.

You should know that very few individual taxpayers will ever face an audit. If the Canada Revenue Agency contacts you about your tax return it’s most likely going to be a simple request for more information – which is not the same thing as an audit. Audits are more commonly reserved for businesses (sole proprietors, or incorporated businesses). Audits are more involved and can be very time-consuming. A request for information is a normal part of life, particularly since filing a tax return electronically means most people are not sending in all the supporting documents when they file.

2. Assess your risk of an audit.

Over the course of time, the CRA has identified certain industries as being higher risk for tax evasion. Construction businesses, subcontractors, carpet installers, unregistered vehicle salespeople, auto mechanics, independent couriers, direct salespeople, jewellers and restaurant wait staff are all well-known targets for the CRA. If you work in one of these industries, be aware that you have to be extra careful to file properly and have supporting documentation for deductions and credits. Also, be aware that the CRA has set up a “snitch line” for others to call anonymously to report you if you’re cheating.

3. Audit your own return.

I’ve always said that the most common mistakes on tax returns can be easily avoided. Be sure to do the math correctly on your tax return; tax software should make this task easy. Make sure you’ve accurately provided all relevant personal information such as your name, address, social insurance number and province of residence. If you miss the simple things, your tax return could be flagged for closer examination. Compare this year’s return to last year’s before you file, to see whether there are any big changes; this can help to identify errors made this year or last.

4. Have a reasonable expectation of profit.

If you’re going to be reporting losses on your 2012 tax return from business, partnership or rental activities, be aware that showing losses for three or four years in a row will flag your tax return. The CRA will expect you to eventually show profits, or they might just deny your losses. The CRA may send a warning letter if you’ve reported losses too many years running – just to let you know that they are watching.

5. Watch for big changes.

The taxman likes consistency. If you have incurred expenses, particularly business expenses, that are significantly higher this year than in the past, without a corresponding increase in revenue, your tax return could be flagged. Or, if you claim certain types of expenses that you have not claimed in the past, the taxman could take notice. The costs that the taxman will notice most are those with a personal element to them, such as travel and entertainment, meals or even repairs and maintenance. Just make sure you have backup for the costs and can explain why they were incurred, or why they were incurred to earn income (if they are business expenses).

6. Learn from your mistakes.

If the taxman has found errors or omissions in your tax return in the past, you are more likely to be called on again to substantiate your claims. Be sure to avoid the same mistakes twice.

7. Note targeted expenses.

The CRA likes to pick on certain types of expenses. These can vary from year to year, but the following items are more prone to investigation by the taxman: Interest deductions, moving expenses, charitable donations and even clergy residence deductions. Claim these if they are legitimate, but be sure you understand the rules for claiming them and can provide receipts if asked.

Tim Cestnick is president and CEO of WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians. tcestnick@waterstreet.ca

© 2013 The Globe and Mail Inc. All Rights Reserved.

Will the Federal Government crack down on “agressive” tax avoidance?

Income Tax Act’s new anti-avoidance provisions

If the federal government decides to crack down on “aggressive” tax avoidance transactions, does it signal a sea change for advisors or is it really much ado about nothing?

 

In these tough economic times, governments everywhere are struggling to balance their budgets in the face of declining revenues. They have few options to boost revenues: increase taxes or increase scrutiny of perceived aggressive tax planning. In Canada, the federal government is seriously considering the latter.

In draft legislation released recently, proposed section 237.3 of the Income Tax Act contains reporting requirements with respect to certain perceived aggressive tax avoidance transactions that are entered into after 2010.

 

Generally, this new provision will oblige certain persons to report avoidance transactions or series of transactions if the transactions include two of three “hallmarks” provided in the definition of “reportable transaction” in subsection 237.3(1). These hallmarks — confidential protection hallmark, contractual hallmark and fee hallmark — are essentially identifiable circumstances that tend to be present in the context of tax avoidance transactions, with guidance provided by the vast amount of litigation surrounding the general anti-avoidance rule (GAAR) contained in Section 245 of the Act. 

 

The new provision would impose a reporting requirement on the particular person for whom a tax benefit could arise from an avoidance transaction or series of transactions. It aims to catch those who enter into an avoidance transaction for the benefit of a particular person as well as any “advisor” or “promoter” who is entitled to a fee in circumstances described in the definition of reportable transaction.

 

Clients and advisors alike must file a full and accurate information return in respect of each reportable transaction. To allay the concerns of vulnerable parties, the Department of Finance has stated that this is merely an administrative obligation and would not constitute an admission that the transaction violates the GAAR. Often though, taxpayers who are facing a GAAR audit will concede that the transaction was an avoidance transaction but that there was no “misuse and abuse” of the provisions, thereby availing themselves. New section 237.3, however, will also impose increased reporting obligations. These, critics say, are far too broad and pervasive.

 

The failure to report one of these transactions would allow the Canada Revenue Agency (CRA) to impose a late-filing penalty on the person or persons who failed to satisfy the requirements and redetermine the tax consequences of any person for whom a tax benefit could result from the undisclosed reportable transaction.

 

Failing to satisfy these reporting obligations will leave parties in a precarious position: they may be jointly and severally, or solitarily, liable for the penalty. In other words, the CRA may pursue an obligation against any one party to the transaction as if that party was fully liable. It would then become the responsibility of that party to find the other parties and sort out their respective proportions of liability and payment. Subsection 237.3(11) of the proposed provision does offer a due-diligence defence for advisors and promoters.

The due-diligence defence in the draft proposal is very similar to other due-diligence defences currently contained in the Act; it all comes down to the notion of “reasonableness.” A person may avoid prosecution if he or she has made reasonable efforts to determine whether a transaction is a reportable transaction, whether he or she is subject to an information reporting requirement in respect of the reportable transaction, and what information would have to be provided to the CRA. This assessment is very contextual, with reasonableness placed on a spectrum and assessed according to the specific facts and circumstances of each case.

 

The proposed rules are causing some controversy. Some tax professionals believe that their impact will be minimal, while others see a sea change whereby advisors will be hesitant to implement tax planning for what are currently everyday commercial transactions and are not abusive. The truth probably lies somewhere in between.

Like the GAAR provisions, these proposed provisions are very broadly phrased, which could make it difficult to determine exactly when somebody has violated them. This leaves many informed commentators with the impression that these rules may do little more than generate unnecessary paperwork and filings for everyday commercial transactions or arrangements that are perfectly permissible and within acceptable parameters.

 

It is interesting to note that subsection 237.3(14) would expressly exclude transactions involving the acquisition of a tax shelter or the issuance of a flow-through share from being a reportable transaction. Perhaps Finance should consider enhancing the existing tax shelter reporting obligations pertaining to particular transactions. This would achieve the objective of greater clarity in certain perceived “hot beds” of avoidance, instead of increasing the uncertainty around the already-curious GAAR provisions.

 

Greer Jacks is updating jurisprudence in EverGreen Explanatory, an online research library of assistance to tax and financial professionals in working with their clients.

Why should every Parent in Alberta have a Will?

Why Every Parent In Alberta Should Have A Will

Article by Lisa Statt Foy  www.fieldlaw.com

As a young, healthy parent, you may believe that having a Will is the last thing on a long priority list. However, while a Will is important for everyone, those with children should be particularly mindful of the primary importance of having a Will. The following provides just some of the many reasons why having a Will is so important for parents:

Wills and Succession Act

In Alberta, if you do not have a Will, your estate property will be distributed pursuant to the intestacy provisions of the Wills and Succession Act. Other property, such as property held jointly with another person or property that has a designated beneficiary (such as life insurance or RRSPs) will pass directly to the surviving joint owner or the designated beneficiary, and generally not form part of your estate. The Wills and Succession Act prescribes that, after payment of debts, your spouse or “adult interdependent partner” will only receive the whole of your estate if all of your surviving ‘descendants’ are also the ‘descendants’ of your spouse or adult interdependent partner. ‘Descendants’ is given a broad definition under the Wills and Succession Act, and means more than just children. ‘Descendants’ means all lineal descendants of an individual through all generations, and therefore includes grandchildren and great-grandchildren. Therefore, if even one of your children, grandchildren or great-grandchildren are not also the children, grandchildren or great-grandchildren of your surviving spouse or adult interdependent partner – he or she will not receive the entirety of your estate.

Where one or more of your children, grandchildren or great-grandchildren is not also a descendant of your surviving spouse or adult interdependent partner, your spouse or adult interdependent partner only receives the greater of $150,000 or 50% of the net value of your estate, and the balance will be divided in equal shares between your surviving children and your deceased children who left ‘descendants’. This arrangement may seem acceptable (unless you wish your spouse or adult interdependent partner to receive the whole of your property) – but it can have unintended consequences.

As a general rule, all property (including money) in excess of $5,000 which a minor (under 18 years of age) is entitled to receive must be delivered to the Public Trustee. If the surviving parent wishes to manage your child’s property on his or her behalf, they will have to obtain a Court Order appointing them as trustee of the child’s property. Even if they are appointed Trustee, they will likely have to provide a bond or other security, and to formally account to the Court at regular intervals for the way that they are managing your child’s or grandchild`s property. This situation can be avoided with a Will, as payment does not have to be made to the Public Trustee if your child’s or grandchild`s share is given to them through a Will and a Trustee is specifically appointed to manage the property on the minor’s behalf – irrespective of the value of the property granted to the minor in the Will. A Will also allows you to designate who you wish to manage your children’s or grandchildren’s trust accounts, including specifying who you wish to act as trustee if both you and your spouse die while the child or grandchild is a minor.

Of perhaps greater concern is that, without a properly drafted Will, the Public Trustee will release all of your child’s or grandchild`s property to him or her when they reach the age of majority – irrespective of the value of the property or his or her ability to handle money. Therefore, the child could receive a cheque for a huge sum of money when he or she is 18 years old. A properly-drafted Will may prevent this situation by including provisions which specify the timing and value of payments to your child or grandchild from the trust account held for his or her benefit.

It is also worth noting that income earned in “testamentary” trusts (trusts created within a Will) may be taxed at the more favourable individual progressive marginal income tax rates.

Guardians

If you die without a Will, your choice of whom you wish to care for your children may not be communicated or respected. The biological or adoptive parents of a child are presumptively the legal guardians of the child – however, you may have concerns about your child’s other biological parent or want your spouse (who may be a custodial adult through second marriage but not your child’s biological parent) to be the guardian of your child. If such concerns or wishes are not clearly expressed in a Will, they are unlikely to be honoured. Further, a Will provides you with the opportunity to name the person(s) whom you wish to act as guardian in the event both you and your spouse are deceased. If such wishes are not set out in a Will, the Court may appoint a guardian for your children based on who applies to be guardian of your child – and the person that applies may not be the person whom you would have chosen to care for and protect your children.

Communicating your wishes

Do you want a particular child to receive all of your jewellery on your death? Is it your wish that the Guardian of your children not work outside the home? Do you want to be cremated? Do you want to designate the person who is to be the Executor and Trustee? Do you want to leave a gift to a favourite charity? If so, you need a properly drafted Will. A Will is the only way to ensure that your choices regarding support and protection of your children, distribution of property, funeral instructions and any other testamentary wishes are communicated and legally enforceable. Of course, the terms of your Will should always be consistent with an estate plan which takes into consideration the legal, tax and other consequences of your choices. Our Wills, Trusts and Estates department can assist you in creating an individualized estate plan, and drafting a Will which provides your Executor, Trustee and Guardian with your clear instructions. If you have a blended family that includes step-children or step-grandchildren, or you have children outside of your current relationship, you may wish to contact our Wills, Trusts and Estates department to discuss preparing a Will that properly expresses your wishes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Can I opt out of Spousal Rollovers?

OPTING OUT OF SPOUSAL ROLLOVERS

Subject: Opting Out of Spousal Rollovers

“a taxpayer can opt out of this “rollover” rule”

Number: 12-26

Date: September 7, 2012

 When capital property is transferred to a taxpayer’s spouse, the taxpayer normally recognizes no gain or loss for Canadian tax purposes. This rule applies for both inter vivos and testamentary transfers. 

However, a taxpayer can opt out of this “rollover” rule and realize a gain if desired. The election to have the transfer occur at fair market value can be made on a property-by-property basis. For example, if H transfers 100 shares of a company to his wife W, then H can elect to realize a gain on 75 of the shares. (This is done by H electing in his tax return to have subsection 73(1) of the Income Tax Act not apply to those 75 shares). The remaining 25 shares would be subject to the automatic rollover. 

This strategy can be particularly useful in many situations. For example, electing to realize a gain can allow the transferor to use loss carry-forwards. The transferor could eliminate tax and the recipient spouse would have a new adjusted cost base equal to the fair market value of the property. This is also useful where the $750,000 Lifetime Capital Gains Exemption can be used. Similarly creating a gain can make use of otherwise unused charitable donation tax credits or carried-forward alternative minimum tax. 

A similar rollover rule applies to a transfer to a child or grandchild of property that is qualified farm property or shares of a qualified family farm corporation. However, in these cases the transfer of farm property or farm shares can occur at any elected amount between the adjusted cost base of the property and its current fair market value. For transfers of regular property between spouses, the transfer is either at the adjusted cost base or the full fair market value. There is no ability to elect at an amount between the two. 

While tax rollovers are often desirable, there are situations where they are not optimal.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group  member firms.  The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes. For more info, please go to www.taxspecialistgroup.ca.

Do you qualify for the Home Buyers Plan?

Home Buyer’s Plan Withdrawals

Subject: Home Buyer’s Plan Withdrawals

“The ability for a family member to use RRSP funds to assist a relative with a disability to purchase an accessible home is an opportunity that should not be overlooked”

Number: 12-25

Date: August 31, 2012

Normally, withdrawals from an RRSP result in an  income inclusion to the planholder. However, under the Home Buyers’ Plan (“HBP”), an individual is generally permitted to make a tax free withdrawal from his or her RRSP to acquire a “qualifying home” (which generally means a home located in Canada) if the individual or the individual’s spouse is considered a first time home buyer. A first time home buyer is, generally,  someone who has not owned a principal place of residence in the year of making the HBP withdrawal and the 4 previous years. Currently, the eligible withdrawal limit is $25,000 per buyer, which must be repaid on an annual basis during a 15 year period. To the extent a required yearly repayment is not made, the missed payment will be included in income. 

This means that an individual may, essentially,  borrow up to $25,000 from his or her RRSP, tax and interest free, under the HBP (on a 15 year term) to buy a home where they are a first time home buyer.  Where there is a spouse, each spouse must be a first time home buyer.  Spouses can each withdraw up to $25,000 for a total of up to $50,000. 

The HBP allows individuals to make withdrawals from their RRSP’s to buy a home for a related person with a disability (who is entitled to a disability tax credit (see Tax Tip 12-23) or to help that individual buy a home. Related persons are individuals connected by blood, marriage, common-law partnership or adoption. Where funds are withdrawn under the HBP to acquire a home for a related person with a disability, the first time home buyer condition will not have to be met if the purpose is to acquire a home that is more accessible or better suited to the needs of the person with the disability. Similarly, if the individual acquiring the home is the person with a disability, he or she will not need to meet the first time home buyer condition, provided the home is more accessible or better suited to the person’s needs. 

Where an individual makes a withdrawal from his or her RRSP under the HBP to help a related person with a disability to buy a qualifying home, the related person must be the one who enters into the agreement to purchase.  Where the person withdrawing the funds is the one acquiring the home for the related person, the person withdrawing the funds (not the relative with the disability)  must be the one entering into the purchase agreement. 

The ability for a family member to use RRSP funds to assist a relative with a disability to purchase an accessible home is an opportunity that should not be overlooked.


   

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group  member firms.  The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes. For more info, please go to www.taxspecialistgroup.ca.

 

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