Welcome to the Personal Tax Filing Season!
This issue of the Lohn Caulder Advisor is a big one, as it contains a number of topical tax-related articles and our the tax checklists that have proven to be very handy aids for preparing your tax return material.
We look forward to contacting you at some point during this busy time of year !
The checklists can be found at the end of this newsletter.
The Lohn Caulder Tax Team
This issue of the newsletter has the following articles:
- Federal Government Budget - March 4, 2010- BC Budget Highlights - March 2, 2010
- Mandatory electronic filing of GST returns
- My Payment - a new service for businesses and individuals
- Real Estate and the HST
- Tighter financing regulations for housing
- Voluntary Employment Insurance Coverage
- HST "Place of Supply" Rules Released
Personal Tax Season Checklists:
1. Our standard, more comprehensive T1 Checklist for 20092. Our new, abbreviated, 'One-Page' T1 checklist
3. Our T1 engagement letter
Federal Government Budget - March 4, 2010
Federal Finance Minister Jim Flaherty introduced several new measures in his Budget of March 4, 2010.
Firstly, we note that tax rates remain unchanged, both personal and corporate, and that's a good thing, since Canada is on track to become one of the lowest-tax-rate nations in the G20.
It was a fairly big Budget, as these things go, but here are the items of likely interest to most of our readers:
Reporting Avoidance Transactions
It appears the Government's frustration at the continuing efforts of some consultants (some of which, we hesitate to suggest, include some of our largest national C.A. firms) to devise schemes to avoid tax has grown to the point that they are taking rather dramatic action.
Now, there will be "mandatory reporting" of all transactions that constitute an "avoidance transaction" (as defined in the Income Tax Act) in any case where a promoter is entitled to fees the depend on the realization of, of the amount of, a tax benefit resulting from the proposed transaction, or that such promoter requires a confidentiality or non-disclosure agreement, or "contractual protection" with regard to the transaction
Obviously, CRA wants desperately to be able to detect these deals (which tend to have very large price tags attached) as they occur, rather than years later, as they are uncovered, usually haphazardly, by their regular audit process.
Employee Stock Options
Generally speaking, stock options (in which an employee of a public company is rewarded with the opportunity of purchasing shares in his employer at a discount to the current market price) is treated as employment income, subject to a 50% deduction under certain circumstances.
It has evolved that some individuals have taken cash directly from their employers, in lieu of going through the actual share acquisition process, as a "cash out" (equivalent to the gain on the share value existing at the time), and claiming stock option treatment for the transaction. Now, that will not be possible, and "cash outs" will be purely taxable employment income, without offsetting deduction. Also, any employer making such cash-out payments will no longer be able to deduct that expense.
It has also been re-emphasized that employers are required to remit tax to the CRA in respect of all stock option benefits.
Readers should note that the important exemptions to these rules for persons acquiring shares of private Canadian corporations are not affected by these changes.
Child Benefit Entitlements - Shared Custody
Up until now, it has been difficult dealing with the child benefit payments to individuals who have shared custody of their children, arising out of a breakdown of a marriage or common law relationship. These benefits would be the tax-free "Canada Child Tax Benefit" (income-tested), or the taxable "Universal Child Care Benefit" (not income-tested).
As of July, 2011, these benefits can be split equally between the former spouses, so long as custody and responsibility for the child(ren) is equal, or near equal.
Rollover of RRSPs to RDSP on Death
Taxpayers with an infirm dependent will now be able, upon their demise, to transfer funds from their RRSP (that might otherwise be fully taxable to their estate) to their infirm child's "Registered Disability Savings Plan", to the limit of the available RDSP contribution ($200,000 lifetime limit, per disabled person).
This seems quite fair, and undoubtedly welcome to those who need it.
Charities
The Government proposes eliminating the 80% disbursement quota for fiscal years ending after March 4, 2010. Also, the penalty tax based on accumulated capital in charities in excess of $25,000 not otherwise used in charitable programs or administration will have its ceiling raised to $100,000.
This, then, should allow charities to do things such as accumulate funds for a building project.
CRA retains the right, as always, to revoke the registration of a charity where they consider an undue private benefit is being enjoyed, or the charity uses its funds in an "inappropriate" manner.
Purely Cosmetic Medical Procedures
Did we wait too long to get something done?
This Budget includes a provision to specifically deny, as a qualified medical expense, various cosmetic procedures purely aimed at enhancing a taxpayer's appearance, unless required for medical or reconstructive purposes.
Fortunately for both us here at Lohn Caulder, and all of our clients, such procedures are completely unnecessary !
BC Budget Highlights - March 2, 2010
Perhaps too soon to have tallied the cost of the Winter Olympics, the BC Government released its 2010 Budget on March 2nd. Not much worthy of note in this newsletter, save for this:
Property tax deferral will be available for homeowners with children under the age of 18, in recognition of the high cost of raising a family. To be eligible, you must have at least 15% equity in your home. Of course, interest will accrue on the unpaid taxes at the bank prime rate, and will be secured against title to the house ! Thus, the entire amount of the deferred debt will be payable when the house is sold, or becomes part of an estate. You have to maintain fire insurance, and live in the house for which the property tax is to be deferred.
No income tax changes at all were announced. A welcome relief !
Mandatory electronic filing of GST returns
On January 4, 2010, the Minister of National Revenue announced proposed mandatory electronic filing requirements for certain GST/HST registrants, effective July 1, 2010 (just as BC joins the HST system) !
Who has to figure out how to do this?
GST/HST registrants with annual taxable supplies in excess of $1.5 million;
Large corporations (revenues over $10 million), generally; and
Builders impacted the BC's or Ontario's transitional housing measures.
At this time, there are 4 ways to electronically file:
Via an "electronic data interchange" facility that your bank will have set up (part of the "payments and transfers" section of your web banking site).
Another way is to file over the Internet, by keying into the CRA website directly.
A third way is to use the "GST/HST Telefile" system, which you can access by touch-tone telephone, via a toll-free number.
And a fourth (new) way is via your accountants ( ! ), whose software either is already, or soon will be, capable of e-filing GST returns, in the same manner that we can already file tax returns, T4s and T5s on behalf of clients.
Of course, we are ready to assist any and all who will need some help with this new system.
Those clients who already use their bank website to pay their GST and other taxes will be aware that they are charged $2.00 for the privilege, for each and every discrete payment ! Seems ridiculous, in light of the efficiency and huge paperwork reduction that this system is designed to achieve. However, there you have it - and that little fee probably won't go away.
My Payment - a new service for businesses and individuals
My Payment is an electronic payment service, accessed through the CRA website, that allows individuals and businesses to send payments directly to the Canada Revenue Agency (CRA) from an account at a participating financial institution.
The following institutions are currently participating in My Payment:
BMO Bank of Montreal (Personal accounts only)
Scotiabank
RBC Royal Bank
TD Canada Trust
My Payment is fast and easy to use. The service is provided through Interac® Online and its many benefits include:
Immediate payment - no accounting for the time it takes to mail a cheque.
Safety and security - the payment is completed through your existing online banking service.
Privacy - no personal information is exchanged between the CRA and your financial institution.
Simplicity - payments to several CRA accounts can be made in a single transaction.
The following CRA remittance types can be made using this service:
individual income tax
child and family benefits repayments
goods and services tax/harmonized sales tax
payroll deductions
corporation income tax
excise duty
excise tax
Air Travellers Security Charge
softwood lumber products export charge
Workers' Compensation Board of Nova Scotia payroll remittances
non-resident withholding tax (Part XIII)
For more information, visit www.cra.gc.ca/mypayment.
Real Estate and the HST
We read that a new condominium in downtown Vancouver just sold (during the Winter Olympics) for $22 million.
GST (5%) and property transfer tax (2%) on that would be $1,540,000.
The buyer was clever - by buying now, instead of waiting to July 1, 2010, he avoided paying double that amount - $3,080,000 (on that day, HST kicks in - adding 7% to the price of new housing in BC . . . 8% in Ontario).
What else can one say ?
Tighter financing regulations for housing
Boom or bubble? Many people have been wondering, as BC real estate values continue to climb, opposite to the recent experience in most other parts of the world, particularly the United States. It seems U.S. consumers made a habit of borrowing against their houses to finance consumption, and the recent general decline in property values there has had a consequent severe impact on consumer spending.
To avoid a similar phenomenon here, the Department of Finance has instructed all Canadian financial institutions to tighten up their lending rules by April 15th, 2010. Here are the main elements:
Re-financings will be limited to 90% of the house value (down from 95%). However, note that this applies to re-financings only - it will still be possible to borrow up to 95% of a house's value when making the initial purchase.
Financial institutions must use their 5-year term interest rate to qualify applicants for mortgages. Those rates are, we understand, approximately 0.50% higher than the 3-year term rates in common use today. As an example, we understand that a person earning $80,000 without any debts would have qualified for a $439,000 mortgage amortized over 35 years. Now, the most they could get would be $410,500 - $28,500 less.
Rental properties could generally be mortgaged up to 90% of value. Now, the limit has been reduced to 80%.
It of course will be interesting to see if this has much effect. These rules, along with impact of the 12% (BC) HST on new housing, will certainly make new houses less affordable.
We should note that new houses costing less than $350,000 entitle the purchaser to a rebate of 36% of the GST/HST paid on the house. This rebate is pro-rated if the house is more expensive than $350,000, and disappears completely at $450,000. GST/HST is not applicable on used housing.
Voluntary Employment Insurance Coverage
Generally speaking, until now it has not been possible for the self-employed proprietor, or the owner of more than 40% of a private corporation (we've simplified that part . . .) to pay into, and collect, employment insurance.
And, still, with respect to the ordinary type of EI, that remains the case.
However, as many readers will be aware but perhaps the majority not so, the EI system contains "special benefits", being:
Maternity benefits (maximum 15 weeks)
Parental benefits (maximum 35 weeks - but adds to maternity, so total can be 50 weeks)
Sickness benefits (maximum 15 weeks - can also add to maternity and parental, for a total duration of 65 weeks)
Compassionate care benefits (maximum 6 weeks)
Starting January 31, 2010, it is now possible for virtually anyone to get these benefits (except for barbers, hairdressers, taxi drivers, and drivers of any other passenger-carrying vehicles - why these poor souls are being discriminated against, we have no idea).
To join, you would have to start paying EI premiums. At today's rates for self-employed people, the rate is $1.73 per $100 of earnings, up to an annual earnings limit of $43,200 per year. So, the maximum EI premium you would pay for the year would be $747.36 (and you don't have to pay the extra, 140% "employer's portion, which is normally part of the EI system).
The weekly benefit amount is 55% of the average weekly earnings for the calendar year prior to submitting your claim, up to a yearly maximum. As noted above, in 2010, that income amount is $43,200 - so any claim you make would pay a maximum of $457 per week ($43,200 x 55%, divided by 52 weeks).
WARNING: Once you start on this program, and actually receive any of the special benefits noted above, you will have to continue to pay EI premiums on your self-employment income for the entire duration of your self-employment career. There is also no guarantee that the contribution rate might not go up over time, as it certainly has in the past.
If you apply to join this system between now and April 1, 2010, you can apply to start receiving EI special benefits as early as January 1, 2011. Otherwise, you won't be able to draw any EI benefits until 12 months after signing up.
However, if you continue to operate the business, and it earns a profit, this can reduce your EI payout.
Perhaps that's why everyone will have a 60-day period to reconsider the decision to do this, and cancel your voluntary participation. It also ought to be possible to escape the system by simply incorporating your business. But that's beyond the scope of this article.
So is it worth doing? Well, your approximate maximum cost is $750 per year. Let's say you draw maternity benefits, and then parental benefits, for a total of 50 weeks. You would get $457 x 50 = $22,850 in EI benefits.
$22,850 divided by $750/year in premiums = 30.47 years.
Therefore, if you are, say, over 30 but intending to have one child, then this voluntary program is about a break-even, assuming you work to 65 or so. However, if you plan on 2 or more children, there would be a net benefit.
So has the Government now made having children a money-making proposition ? Ask any parent you know ! !
HST "Place of Supply" Rules Released
As readers will be aware, B.C. and Ontario are abandoning their provincial sales taxes and joining the "HST" (harmonized sales tax) system on July 1, 2010. That created considerable uncertainty as to what rate of tax to charge for goods shipped or services rendered out of province, because the HST combines a Federal component (5%, nationwide) with a Provincial component (the particular Province's sales tax rate, which varies across the country).
New rules released on February 25, 2010 from the Department of Finance in Ottawa have laid out these rules in excruciating detail. However, in a nutshell, basically the relevant rate of tax to charge is the rate where the "supply" (the goods or services being taxed) is consumed or destined.
Therefore, if something is shipped from BC to an Ontario-resident customer, the HST rate to charge that customer will be 13% (the Ontario rate). BC customers would be charged 12% HST - the BC rate.
5% GST must continue to be charged to customers in Alberta, Manitoba, Saskatchewan and Prince Edward Island (because, except for Alberta, those are the provinces that are keeping their own sales taxes, for now at least).
Does this sound like fun ? Let's wait for it all to begin July 1st !
Personal Tax Season Checklists:
1. Standard Checklist for Your 2009 Personal Income Tax Return
To download a printable 2009 Personal Income Tax Return T1 Checklist: Click Here
2. 'One Page' Checklist for Your 2009 Personal Income Tax Return
To download a printable 'One Page' Tax Return T1 Checklist: Click Here
3. Engagement Letter for Preparing Personal Tax Returns
To download the printable T1 Engagement Letter: Click Here
We ask that you sign and include the T1 Engagement Letter with the material you send us. For simplicity, we ask that one person sign as the responsible person for the entire family.
Extra copies of these checklists can be obtained at our website - www.lohncaulder.com - under the caption "tax information - client checklists".
Please do not hesitate to contact us if you have any questions regarding these forms.
We look forward to speaking with you in the near future.
The Lohn Caulder tax team.
Lohn Caulder LLP
3rd Floor - 1500 West Georgia St.
Vancouver BC V6G 2Z6
Telephone: (604) 687-5444
Fax: (604) 688-7228
Email: info@lohncaulder.com
Web: www.lohncaulder.com