Jamie Golombek, Tax Expert, National Post
Published: 3/18/2010
Tax Expert Jamie Golombek outlines how you can pay the least amount of tax legally possible

While most tax planning should be done on an ongoing basis for maximum benefit, there are still some things that you can do to ensure that when you file your 2009 return, you pay the least amount of tax legally possible. Following are my top 10 tips to save money on your 2009 return:

1. Split that pension (Lines 116 + 210)

Pension splitting is a tax-planning technique that you can only take advantage of at tax-filing time and, unlike the Home Renovation Tax Credit, requires no prior action.

Pension splitting allows Canadians who received eligible pension income to split up to half of that income with their spouse or common-law partner. It will save you tax if your spouse or partner is in a lower tax bracket and may prevent some Old Age Security benefits from being clawed back. Use Form T1032 for your split.

2. Claim legal fees (Lines 229 or 232)

If you lost your job in 2009, consider whether you can make a claim for legal fees that you paid last year. The Tax Act permits employees to deduct legal expenses “to collect or to establish a right to salary or wages owed by an employer or former employer.” You may also be able to deduct legal expenses paid to collect or establish a right to a pension benefit or retiring allowance. The term “retiring allowance” is broad enough to include damages or settlements for wrongful dismissal.

3. Pool your donations (Line 349)

The amount you donate is eligible for both federal and provincial donation tax credits. For the first $200 of donations you make in a calendar year, the federal donation credit is equal to 15% of the amount given. The provincial/territorial credit varies from 4% to 11% of the amount donated. Once you’ve made at least $200 of donations in any year, the donation credit jumps to 29% federally, and between 11% and 21% provincially (ignoring any additional provincial surtax savings). If you’re married or have a common-law partner, you can pool your donations when you file your return. This allows you take advantage of the higher donation credit faster.

4. Claim the Canada Employment Amount (Line 363)

The Canada employment amount was introduced in 2006 to give Canadians a break on what it costs to work, including expenses such as home computers, uniforms and supplies. No receipts are required to justify any actual employment-related expenses. For 2009, the employment amount is equal to the lesser of $1,044 and the total employment income reported on lines 101 and 104.

5. Write off your kids (Lines 365 + 367)

If you have children who were under 16 in 2009, consider whether you can claim the children’s fitness tax credit, which allows parents to generally claim up to $500 per year for eligible fitness expenses paid for each child. And don’t’ forget to claim the “child amount” of $2,089 for each child under the age of 18 in 2009.

6. Claim those renos (Line 368)

As the dust settles on those home renovations you undertook to complete before Feb. 1, of this year, now is the time to collect your Home Renovation Tax Credit. Still have supplies lying around? You’re in luck as eligible expenses for renovation supplies, such as lumber, flooring, etc., that were purchased before midnight on Jan. 31 will qualify, even if they are installed afterwards. Make your claim on new Schedule 12.

7. Report any offshore stash (Form T1135)

At the top of page two of your return, it asks whether you owned any foreign property at any time in 2009. If the total cost of all your foreign investments was over $100,000, you must complete a special form, the T1135 or the “Foreign Income Verification Statement.”

8. Report all your income

Still missing a tax slip or a receipt? Don’t let that hold you up from filing on time. Canada Revenue Agency advises that if you know you won’t be able to get a slip by the due date, simply attach a note to your paper return stating the payer’s name and address, the type of income involved and what you are doing to get the slip. Use pay stubs or statements to estimate the amount of income to report and/or any deductions or credits.

9. File on time

Most Canadians must file their tax returns by midnight April 30. If you or your spouse or common-law partner were self-employed in 2009, your returns are due on June 15. In both cases, any taxes owing for 2009 must still be paid by April 30. If you file your return late, there is an automatic 5% penalty on the amount of tax unpaid, plus an additional 1% per month penalty on the amount due each month the return is late, up to a maximum of 12%. Late filers are also subject to non-deductible arrears interest.

10. Avoid that refund! (Line 484)

If you have already filed by the time you read this, chances are it’s because you’re expecting a refund. Getting a tax refund is a sign of poor tax planning as it means you’ve loaned your money to the government at no interest. By taking advantage of the “undue hardship provision” under the Tax Act, it is possible to get your tax refund throughout the year, on every paycheque, instead of waiting until your return is filed the following spring. Apply using CRA Form T1213, “Request to Reduce Tax Deductions at Source.”

Financial Post

• Jamie Golombek, CA, CPA, CFP, CLU, TEP is the managing director, tax and estate planning, with CIBC Private Wealth Management in Toronto.

If you’re married or living common law, you’ve just been given an extra three months to take advantage of the best income-splitting opportunity of all time.

The Canada Revenue Agency recently confirmed that its prescribed interest rate for loans will remain at its all-time low of 1% until at least Dec. 31. The prescribed interest rate is calculated based on the average yield of 90-day T-bills sold during the first month of the previous quarter.

Lending funds to a spouse at the prescribed rate for the purpose of investing takes advantage of the exception to the attribution rules in the Income Tax Act. The Act generally blocks most attempts at income splitting.

Income splitting is the practice of transferring income from a high-income spouse to a lower-income spouse to reduce the overall tax burden of the family.

Under the attribution rules, any income or gains earned on money transferred or gifted to a spouse is attributed back to the original spouse.

If, however, the funds are loaned rather than gifted at the prescribed rate and the interest paid annually by Jan. 30 of the following year, the resultant income or gains may be taxed in the recipient’s hands and won’t be attributed back.

To illustrate, if Adam is in a tax bracket of 45% and purchased a $200,000 GIC that pays 2.5% interest annually, he will earn $5,000 of interest income and pay tax of about $2,250. If Adam loaned the funds to his wife, Eve, at 1%, Eve would buy the GIC and earn $5,000 in interest income. She would then pay Adam $2,000 of deductible interest expense on the 1% loan and net $3,000.

If Eve was in the lowest tax bracket of about 20%, she would pay tax of $600. Of course, Adam would have to pay tax on the $2,000 of interest income received from Eve, which amounts to $900 at his 45% rate. But the total tax burden for this couple has been reduced to $1,500 from $2,250 –an annual savings of $750.

The beauty of acting now, of course, is that even though the prescribed rate is recalculated quarterly, you need only use the rate in effect at the time the loan was originally extended. That rate holds up for the duration of the entire loan, which could be 10, 20 years, even indefinitely.

While not a technical requirement under the Act, it’s probably a good idea to get a lawyer to draft a promissory note or loan agreement between spouses to evidence both the terms of the loan and the fact that the loan was properly extended and dated during a 1% prescribed rate calendar quarter.

Finally, while you can also use this strategy to income split with children, it’s wise to use a formal family trust to hold such investments. This will avoid myriad legal issues associated with minors signing potentially voidable contracts.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is the managing director, tax and estate planning, with CIBC Private Wealth Management in Toronto.

In my last column, I discussed the two most basic elements of estate planning — wills and powers of attorney — and how they affect the intergenerational transfer of wealth that your clients must eventually deal with. Now let’s look at one of the more common intergenerational asset transfers — the family cottage.

Many of your existing clients probably own cottage properties and the numbers are likely to grow. These clients, particularly older baby boomer clients, will want to be informed about the basic tax issues affecting the transfer of these assets.

Consider the example of a well-to-do family that has owned an extensive cottage property since the late 19th century. The vast old stone cottage — a mansion really — that once dominated this storied property was torn down long ago. The property has since been subdivided into four smaller lots with more modest cottages. These are currently owned by two brothers and two sisters, each with children who are starting families themselves. Further subdivision of the property is not possible. Nor does the family want to see any or all of the properties sold to outsiders.

What will this family need to know to engineer a tax-cost-effective transfer of their property to the next generation? I’ll focus on the basic tax questions they’ll need to answer.

When property is transferred to succeeding generations, there are two primary tax issues to resolve: the calculation of capital gains as the property changes hands; and the potential for probate costs.

Coping with capital gains

When a cottage property is transferred to someone other than a spouse, it generally has a deemed disposition at its fair market value. When this creates a capital gain, a tax liability is usually created as well. (When a transfer of a cottage property creates a capital loss, for tax purposes, the loss cannot be deducted or used to offset capital gains, since there are special tax rules that apply to ‘personal use properties’ which include cottages and vacation properties.)

Like any other investment, we calculate the capital gain by taking the deemed proceeds (or fair market value) of the property and subtracting the adjusted cost base (ACB). The resulting number is the capital gain, 50% of which is taxable.

Your client will want to document the fair market value of the property. This can be a bigger challenge than first anticipated, since even on the same lake, cottage values can vary dramatically. It is usually worth the effort and cost of obtaining a formal valuation from a real estate expert in the area.

Simply put, the ACB is the original price paid for the property, plus the cost of capital improvements that have been made since. Remember that boathouse that was built in the summer of ’74? What about the deck that was put in back in ’88? Are the bills for those improvements still around? Immediately, you can see how complicated this calculation can become for a property with years, possibly decades of renovations and upgrades put into it.

There are some other important factors that could help reduce the capital gains burden:

•The cottage’s value on V-Day: Before 1972, there was no capital gains tax in Canada. For tax purposes, December 31, 1971, was fixed as the Valuation Day for previously acquired assets that might eventually be sold or transferred, creating tax consequences in the process.
•The capital gains exemption on a principal residence: This applies regardless of a designated property’s appreciation in value or if the property is only used on a seasonal basis. An important date to remember on this point is January 1, 1982. Prior to that time, each family member was allowed to designate an eligible property as a principal residence. Afterwards, the designation was limited to each family unit. Nevertheless, it is still possible to eliminate capital gains made prior to 1982 so long as one spouse is able to designate the property as a principal residence.
•The special election under the old $100,000 lifetime capital gains exemption: Ottawa eliminated the lifetime capital gains exemption in February 1994, but in doing so, it gave individuals an opportunity to make a special election in their 1994 tax filings to “crystallize” unrealized gains on capital property such as a cottage. Individuals who did so would be able to increase the ACB or tax cost of a cottage by the amount elected at that time, thereby reducing the ultimate capital gain on the property.

Reducing probate costs

Probate is the process by which a court legitimizes a will, thereby allowing the executors the legal right to distribute an estate’s assets. Probate fees, also known as administration taxes, vary from province to province, ranging from a flat fee $65 in Quebec to open-ended fees that are based on a percentage value of an estate’s assets. Ontario is the most expensive, imposing fees of $5 per $1,000 for the first $50,000 of an estate’s value and $15 per $1,000 above this amount. An estate worth $1 million in Ontario would generate probate fees of $14,500.

Naturally, cottage owners like the extended family mentioned above will want to avoid paying probate fees if possible. There are ways to do that, but each has complications that can cause tax or other complications:

•Gifting a cottage: Cottage owners can gift their property to relatives or others. This will eliminate probate fees upon death since ownership has been transferred. However, when the gift is made to someone other than a spouse, a disposition is triggered at market value, possibly resulting in a capital gain for tax purposes. The change in ownership could also generate a land transfer tax liability, not to mention legal and other professional fees. Before deciding to make a gift of the family cottage, it’s best to do a cost benefit analysis to see if the effort will be worthwhile.

•Changing title: Cottage owners can also avoid future probate fees by changing title on the property to joint tenancy with right of survivorship (JTWRS). When the original owner dies, the property will pass to the other owners who were added to the title. The deceased’s estate would no longer have any interest in the property. So if original owner A added B and C to the title, once A dies B and C will own the property while A’s beneficiaries are left with nothing. The drawback to changing title to JTWRS is that it triggers a disposition at market value at the time of title transfer. However, the gain realized on transfer is pro-rated to reflect the portion of the property that was actually transferred. This may be preferable to gifting, which triggers a disposition of the entire property.

•Establishing a living trust: A living trust is another popular way to avoid probate fees (i.e. since the original owner does not possess the cottage on death, there’s no probate). However, if the trust is set up for the benefit of someone other than a spouse, the transfer will trigger a deemed disposition with capital gain implications. Also, every 21 years, a trust is deemed to have disposed of its assets, including cottages, at fair market value. Tax would then be owed on any capital gains accrued in the period. If the cottage owner is over 65, then an alter ego or joint partner trust could be used to avoid triggering a capital gain until the original owner’s death. Trusts also have to be well structured to allow flexibility. They can, and should, include guidelines on the use of a cottage, the terms of funding and doing maintenance, and the ways beneficiaries’ interests will be treated in the event of death. Professional advice is essential when setting one up.

Next time, I’ll discuss some useful strategies for extended families sharing a cottage property.

Michelle Munro is director, tax planning, for Fidelity Investments Canada.

(08/05/09)
Filed by Michelle Munro, Michelle.munro@fmr.com
Originally published on Advisor.ca

Tax-shelter season may be months away, but a series of ongoing battles are surfacing based on prior years’ tax shelters gone awry.

In April, the Canada Revenue Agency again warned Canadians about the dangers of investing in schemes that provide “inflated or unsubstantiated” tax losses or deductions.

The CRA warned investors that participating in these shelters puts taxpayers at risk of losing their entire investment. In addition, investors could be forced to repay any related tax refunds they may have received, plus possibly interest and penalties, which can amount to 50% of the taxes payable.

Meanwhile, the CRA continues to audit all tax shelter gifting arrangements. As of last fall, more than 65,000 taxpayers who participated in these donation deals have been, or will be, reassessed, to the tune of $2.5-billion in total denied donation claims. In most of these cases the CRA is denying the donation completely.

In June, the CRA de-registered more charities associated with tax shelters, revoking the charitable status of Ottawa-based Healing and Assistance Not Dependence Canada, as well as London, Ont.-based Living Waters Ministry Trust. Living Waters issued more than $41-million in donation receipts for cash received through a tax-shelter arrangement.

As the CRA cautions, it’s very important to get independent financial, tax and legal advice before investing in a tax shelter – and not from someone connected to the scheme or to the promoter.

In separate cases now before the courts, two Canadian law firms are being sued over tax opinions given on two donation tax shelters. Investors in these shelters are now facing tax reassessments from the CRA.

The first lawsuit, a proposed class-action claim for $55-million in damages, was over a tax opinion in connection with the Banyan Tree Foundation tax shelter. The foundation was de-registered by the CRA last October.

Motions seeking class-action certification were heard before a judge over three days in late June. The judge reserved her decision, which could take weeks or even months, due to the complexity of the case.

The other proposed class- action lawsuit, also for $55-million, is over a tax opinion it gave in connection with the Athletic Trust of Canada’s tax-shelter program, involving the donation of timeshare units to charity.

Lawsuits are also surfacing south of the border. Last month, the courts upheld a U.S. lawyer’s liability to an investor for an opinion given in connection with an investment in a U.S. tax shelter designed to generate artificial losses.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is the managing director, tax and estate planning, with CIBC Private Wealth Management in Toronto.

Jamie Golombek, Tax Expert, Financial Post
Published: Friday, July 03, 2009

Any tax-planning strategy has but a simple goal: to increase the amount of money left in one’s pocket. In the case of couples, whether they are married or living in a common-law arrangement (including same-sex couples), this could mean increasing the combined after-tax income of the couple. When the spouses are in different marginal tax brackets, there is an opportunity to increase the after-tax income of the couple. This exercise boils down to reducing the income taxed in the higher income earner’s hands while increasing the amount taxed in the lower earner’s hands. This is the essence of income splitting.

The problem for your clients is that Canada’s Income Tax Act is somewhat ambivalent on the subject. While income splitting is allowed for specific purposes, such as spousal registered retirement savings plans and pension income splitting, it’s discouraged under what are commonly known as the attribution rules. These are rules whereby investment income or capital gains arising from gifts or loans to spouses are taxed in the hands of the person doing the giving or lending rather than the recipient.

For example, money given to a spouse either as a gift or interest-free loan is then used to make investments. Under the attribution rules, the partner who provided the money in the first place must report any income, capital gains and/or losses from the investments. These attribution rules also apply to trusts set up for the benefit of a spouse. In addition, there are attribution rules that apply to gifts or interest-free loans made to minor children, as well as to trusts set up for their benefit. There is an important exception when dealing with attribution and minor children when capital gains and/or losses are not attributed back to the donor.

Below are some of the ways you can help your clients navigate the legal ambiguity around income splitting. I’m going to start with the best-known ways couples can do this and then suggest a couple of less obvious methods that can also produce tax savings. In the interest of focus, I will leave other strategies, such as splitting income with minor children, for another column.

Pension income splitting

Since 2007, married and common-law couples living in Canada have been able to transfer up to 50% of one spouse’s annual pension income to the other. No money actually changes hands, of course. It’s a question of doing a paper allocation on a tax return using Form T1032. The object is to reduce the taxable income of the partner in the higher marginal bracket and increase the taxable income of the spouse in the lower bracket. The benefit to the couple is lower overall taxes, and both may also receive a pension income tax credit.

Form T1032 also allows the withholding taxes deducted from the transferred pension income to be split on a pro rata basis. So, for example, if 40% of the pension income is transferred, 40% of the withholding taxes will also be transferred. The result is that one spouse avoids getting a large refund while the other has substantial taxes owing.

Spousal RRSPs

Although the benefits of a spousal RRSP have been diminished now that pension income splitting is on the scene, it remains a sound income splitting strategy. The way it works is fairly well known. The partner with the higher income makes contributions to an RRSP owned by a spouse — the beneficiary — and receives a tax deduction. Any withdrawals from the RRSP are usually taxed in the hands of the beneficiary, a tax-saving advantage because the partner who made the contributions in the first place will likely have a higher income at retirement.

Another advantage of the spousal RRSP is that it can effectively extend the amount of time a person can make contributions. While RRSP contributions are not allowed after the end of the year in which a holder turns 71, the partner who’s over 71 can still contribute to a spousal RRSP if the spouse is 71 or less.

Tax-free savings accounts

In previous columns, I’ve discussed how TFSAs can affect tax planning and how they compare with RRSPs and non-registered accounts. In this context, however, it’s worth noting that TFSAs are an effective way to transfer income and potential tax liability. For example, a spouse with higher income gives money to a partner for investment in a TFSA. Since the returns from the account are tax-free, the attribution rules do not apply. The only caveat with this new instrument is the fact that annual contributions to an individual account are capped at $5,000. Of course, over time, the TFSA’s effectiveness as a tax-planning tool will grow substantially.

Now, here are some less obvious strategies.

Market rate loans to spouses

If a higher income spouse lends money to a partner to purchase investments and charges interest on the loan that’s at least equal to the rate prescribed by the Canada Revenue Agency — currently 2% and set to reduce to a very low 1% effective April 1, 2009 — the attribution rules will not apply to the investment income or capital gains. And, obviously, it helps if the partner receiving the money earns a rate of return greater than the interest rate on the loan.

There are a few technicalities to observe, however. As noted, the interest rate on the loan must at least equal the prescribed rate that applies when the loan is made. What’s more, the rate can stay at this level even if the CRA’s prescribed rate subsequently increases. So if your clients are considering this strategy, they should wait until after April 1, 2009, to lock in the loan at 1%. This rate will stay in effect until June 30, 2009. The prescribed rate for the third quarter is unknown and will not be posted until June 2009. Finally, interest on the loan must be paid by January 30 of the year following the one in which it was made.

Couples should be careful to meet that interest payment target date. And to ensure that the loan passes scrutiny, they should put the arrangement in writing, complete with terms and conditions, and ensure that there’s a paper trail verifying interest payments.

Funding normal expenses

This is the final variation I’m going to suggest on the income splitting theme, and it has to do with how a couple divides its financial responsibilities. It makes sense for the higher income earner to pay for family expenses while the other partner invests most of his or her income. In this way, income from non-registered investments will be taxed in the hands of the lower income earner, reducing the couple’s overall tax burden.

Again, however, it’s important that the couple be able to support the arrangement. Ideally, the lower income spouse would have a separate account where income is deposited and then invested in his or her non-registered account. This should provide a thorough paper trail to support the fact that investments have been made using the lower income spouse’s money.

Finally, there is no need for these strategies to be used in isolation. For instance, if the higher income earning spouse expects to remain in a high income bracket, it may make sense for this spouse to contribute to both an individual and spousal RRSP, both spouses’ TFSAs and fund all of the family expenses, while the lower income earning spouse contributes to his/or her own RRSP (to the extent possible) and saves the rest in a non-registered plan. The objective of this strategy is to spend and save the same amounts as before but to allocate these expenditures in a more tax-efficient manner for both current and future tax savings.

Particularly in these recessionary times, people are going to want to retain as much of their income as possible. Any advice or reminders you can provide to clients on accepted forms of income splitting will undoubtedly be welcomed. As we’ve seen, there are several options. Your clients should be aware of them and take advantage of them if possible.

Michelle Munro is director, tax planning, for Fidelity Investments Canada.
Originally published on Advisor.ca

We read all of the time about tax tips and strategies that high income earners should follow each year, but in my financial planning practice, I also have the pleasure of dealing with families and young couples, who are not what we would label as having a high net worth. Interestingly though, there are some cool strategies for these folks that can generate bigger tax refunds as a percentage than even the wealthy are able to attain.

Consider this scenario. An example is a couple with a single family income of $35,000.00/year, with 2 children between the ages of 7 and 11, living in Alberta. Some might ask whether or not this couple should even consider contributing to an RRSP, their income is low and money is probably very tight but my advice would be an absolute yes to contributing. If they do not have the funds themselves but have parents or grandparents that would be willing to contribute to an RRSP on their behalf, this could be one of the most helpful ways of passing a gift along.

Why? In Alberta, those who earn under $40,000.00 are in a 25% tax rate, so for every $1,000.00 that is put into an RRSP they will receive $250.00 back. A $2,000.00 RRSP contribution for this couple, would net them a $500.00 refund for them on their taxes.

What most people don’t know is that by making an RRSP contribution, they also lower their income that is used to determine child tax benefit. If this couple put a $2,000.00 RRSP contribution in a year, it would increase their child tax benefits each month by $42.08 or $504.96 per year. That’s right! A $2,000.00 RRSP contribution would generate between a child tax benefit and tax savings, the amount of $1,004.96. That is a 50% refund!

It is also interesting to note, the person earning $150,000.00/year, making a RRSP contribution, at most, will only receive back 39%. So those people receiving child tax benefit, it is in your very best interest, to make a RRSP contribution as much as you can in the years that your children are at home. Try to do whatever you can and if possible start it at $100.00/month. You will reap the rewards!

Jamie Golombek, Financial Post Published: Thursday, April 01, 2010

Seniors have a number of unique tax planning opportunities that, if applicable, could save significant amounts of tax, both when filing their 2009 return and for years to come.

First of all, they need to claim all non-refundable tax credits. The basic personal amount, available to every Canadian of any age, is $10,320 in 2009. Those 65 years old or older on Dec. 31 last year, with a net income under $75,032, may also claim the age amount.

Note, however, that the age amount, which begins at $6,408, is reduced when net income is more than $32,312. To find out exactly how much seniors can claim, they can use the chart on the CRA’s Federal Worksheet.

If seniors received pension income in 2009, they can claim the federal pension income amount on up to $2,000 of pension income.

What qualifies as pension income? Any regular pension received from a formal pension plan qualifies, no matter the age of the recipient. Once over 65, however, annuitized RRSPs and RRIF withdrawals also qualify. In all cases, Old Age Security (OAS) payments and Canada/Quebec Pension Plan benefits do not qualify for the pension credit.

Seniors may also wish to investigate whether they qualify for the disability amount of $7,196. This credit can’t be claimed without prior qualification. That is done in advance by completing CRA Form T2201 “Disability Tax Credit Certificate,” which must be certified by a qualified medical practitioner and approved by the CRA.

A credit is also available for medical expenses paid in any 12-month period that ended in 2009, provided they haven’t already been claimed in 2008. For the 2009 tax year, medical expenses can only be claimed if they are more than 3% of net income or $2,011, whichever is less. As a result, for married or common-law seniors, the lower-income senior should generally claim all of the couple’s medical expenses.

Married or common-law couples might want to consider pension-income splitting by completing CRA Form T1032, “Joint Election to Split Pension Income.” This has the primary benefit of saving income tax by moving up to 50% of a spouse’s pension income into the hands of the spouse in a lower tax bracket. It may also result in secondary benefits by preserving some of the income-tested age credit, even allowing the return of OAS benefits that may have been clawed back if net income was over $66,335 in 2009.

And finally, while we’re on the subject of OAS, if readers find their OAS clawed back in 2009 because their income was high due to a one-time occurrence such as a large capital gain or a severance package, consider filing Form T1213 OAS “Request to Reduce Old Age Security Recovery Tax at Source.” Once approved by the CRA, this will improve cash flow by ensuring that 2010 OAS payments are not reduced based on an unusually high, non-recurring 2009 income.

– Jamie Golombek, CA, CPA, CFP, CLU, TEP is the managing director, tax and estate planning, with CIBC Private Wealth Management in Toronto.

Financial Post

Jamie.Golombek@cibc.com

Here is a recent article from the National Post I thought you might find interesting.  This article was written by Jamie Golombek, CA, CPA, CFP, CLU, TEP, he is the managing director, tax and estate planning, with CIBC Private Wealth Management in Toronto.

Pension splitting continues to be one of the hottest items on many Canadians’ minds.

First introduced for the 2007 tax year, pension splitting allows Canadians who received “eligible” pension income to split up to half of that income with their spouse or common-law partner.

Naturally, pension splitting will save you tax if your spouse or partner is in a lower tax bracket. But it can even work to your advantage if you are both in the same tax bracket, but one of you is losing some of your Old Age Security (OAS) benefits due to the dreaded “clawback.”

OAS payments are clawed back or reduced by 15% once your 2008 income is over $64,718; and are fully clawed back once income hits $105,266.

Consider Tony and Tina, who each had $80,000 of income in 2008. Tony, who is 68 and who had eligible pension income of $10,000, would still benefit by transferring 50% of his pension income to his wife, Tina, who is only 62. That’s because even though Tina may pay tax at the same rate as Tony on the split pension income, Tony will preserve $750 of OAS otherwise clawed back. Tina, being under 65, isn’t yet eligible for OAS and consequently suffers no similar clawback.

In addition, depending on the type of pension income Tony received, Tina may now be eligible to claim both federal and provincial pension income credits. Annuity-type pension payments received from an employer’s pension plan will always qualify for the pension credit — and thus pension income splitting — regardless of your age.

RRIF withdrawals, including from locked-in plans, only qualify once you are at least age 65. Note that while a RRIF withdrawal by someone who is at least 65, such as Tony, qualifies for both the pension credit and pension splitting, Tina, the “transferee” spouse, could not claim the pension credit on the RRIF income transferred unless she was also at least 65.

On a related note, RRIF holders should keep in mind that April 14, 2009, is the deadline to re-contribute an amount to an RRSP or RRIF.

Readers will recall that last fall, Finance Minister Jim Flaherty lowered the mandatory minimum RRIF withdrawal for 2008 by 25%. This means that if you received your full RRIF minimum payment last year, you have the ability to re-contribute up to 25% of your 2008 minimum amount and claim a deduction for that amount on your 2008 tax return. The deadline is 30 days after Royal Assent, which falls on Tuesday, after adjusting for the weekend and Easter Monday.

One other note, if you re-contribute 25% of your RRIF withdrawal to an RRSP or RRIF, it’s only the net amount that’s eligible for the 2008 pension split.

Business owners with their own in-house accounting managers and individual tax filers alike have the opportunity this month, and throughout the year, to double-check and make sure they’ve made use of all available credits and strategies at their disposal.

Experts at Ernst & Young, and CIBC’s Jamie Golombek are both involved in the client education effort, putting out checklists that clients and professionals can use to maximize returns this year and next.

Ernst & Young experts point out that kids, new homes and capital losses are all good opportunities to save money when filing tax returns. On its list of tips, the firm suggests double-checking the following areas to get the most out of this year’s session with Canada Revenue:

1. Turn losses into gains. Net capital losses for 2008 can be carried back three years and applied to net gains in 2005, 2006 and 2007. Business investment losses can be claimed against any income earned during the year.

2. Up to 50% of eligible pension income received in 2008 can be reported on a spouse or common-law partner’s tax return.

3. Know the new registered retirement income fund rules. New tax rules allow minimum RRIF withdrawals for 2008 to be reduced by 25% to give portfolios a chance to recover some value as markets stabilize.

4. Collect federal tax credits for charitable donations made during the year and decide if you should accumulate donations made over a few years to claim at once for the higher-rate credit.

5. Claim the whole family’s medical expenses in the lower-income spouse’s return. The individual who is making the claim should have sufficient income to absorb the entire credit. Dependent relatives’ expenses can also sometimes be included.

6. Look into collecting other family-related credits — child tax credits for children under 18, adoption expenses and the child fitness credit are all available for those eligible.

7. If self-employed, clients can claim a number of business-related expenses from a long list of possibilities, including car and parking, business association fees, convention costs, home office expenses and salaries paid to assistants including family members.

8. Check your files — twice. Some old receipts may still have value, especially those for charitable donations and medical expenses.

9. If you moved in 2008 to start a new job, business or post-secondary education, you may be able to claim certain expenses, including the cost of moving, travel, meals and lodging while en route.

10. File tax returns for children who had part-time jobs or have been paid for various small jobs (lawn care, babysitting) to collect certain credits (GST, for example) and to establish room for future RRSP contributions.

11. Check your prior year return and Notice of Assessment to see if you have any carry-forward balances that may be used as deductions or credits for 2008.

12. Go high tech. Using income-tax software to prepare your tax return is generally quicker, easier and less open to mechanical errors. If clients are planning to file electronically, remind them to keep their receipts.

At CIBC, Jamie Golombek, managing director of tax and estate planning, points out “changes to the tax rules each year make it important to double-check what new saving opportunities you may be eligible for. Each individual’s situation is different, (but) there are some tax-effective strategies everyone should consider using.”

Golombek’s recommendations include tips for making the most of tax returns being prepared right now for 2008, and tips for those interested in making the most out of their 2009 returns as well.

Tips for 2008 tax returns

1. File on time. Most individuals have until April 30, while self-employed business owners and their spouses or partners have until June 15. Those owing tax must pay their balances by April 30 to avoid paying a 5% penalty on unpaid balances and an additional 1% each month thereafter, to a maximum of 12%.

2. Report all capital losses, even if you can’t use them in 2008 — these can be carried back three years or carried forward indefinitely.

3. Claim charitable donations. Consider pooling all donation receipts in one spouse or partner’s return to take advantage of higher credit rates.

4. Split pension income with a lower-income spouse to benefit from lower income tax rates. It can also be possible to preserve some or all of the age credit and avoid Old Age Security benefit clawbacks.

5. File tax returns for minors to begin establishing RRSP contribution room for use in future years.

Tips for 2009

1. Avoid getting a refund. Form T1213 will enable employers to reduce the amount of tax withheld at source — large refunds mean you have loaned your own money to the government, interest-free.

2. Consider renovating your home — in 2009 only, a new 15%, non-refundable tax credit, the Home Renovation Tax Credit (HRTC) is available for renovations “of an enduring nature,” made before February 1, 2010, which cost between $1,000 and $10,000.

3. Contribute to registered savings plans — RRSP, RESP, TFSA and RDSP all offer unique benefits and tax-savings opportunities.

4. Convert non-deductible debt to deductible debt. Make your interest expense tax-deductible by paying off non-deductible debt with non registered funds, then borrowing back for investment purposes.

5. Examine spousal loan strategies. Income splitting via a spousal loan lets a spouse loan funds at the prescribed interest rate, which drops to an all-time low of 1% on April 1.

(04/08/09)

Filed by Kate McCaffery

Originally published on Advisor.ca