Farewell and Best of Luck with Your Financial Affairs

It is with mixed feelings that I write this post. It will be my last one. I have written this blog for fourteen years starting with my first post on September 20, 2010, appropriately titled “Let’s See Where This Goes”. After 638 posts, I am saying goodbye.

This blog went beyond my wildest expectations. As of today, I have over 6,000,000 page reads. I have been interviewed on TV & video, quoted multiple times in various publications, written articles for newspapers and had multiple media opportunities I had never envisioned. I even used the best of my blogs to form a book, “Let’s Get Blunt About Your Financial Affairs’. When people search Google for tax and financial topics, my posts often show up as one of the top five references. I have met people at parties or business gatherings who tell me they are readers and enjoy my blog.

My readers have been loyal and long standing. Over the years I received multiple unsolicited emails from readers that said they enjoyed reading the blog and encouraging me to keep up the good work. Many took the time to comment on particular topics or to suggest topics I may want to write about. I thank you all for patronage and support of the blog. I will truly miss you.

From the mainstream media I would like to thank Rob Carrick and Roma Luciw of The Globe and Mail and Ellen Roseman and Adam Mayers of the Toronto Star for their support since the blog’s inception. Other supporters include fellow bloggers, many who became friends, in no particular order: The Big Cajun Man, Jim Yih, Robb Engen, Michael James, Mark Seed, Frugal Trader, Canadian Capitalist, Tom Drake & Preet Banerjee to name just a few. I was amazed at how supportive these bloggers and others were to me when I started out. It was always more of a camaraderie than a competition amongst financial bloggers.

I would be remiss if I did not thank Lynda Kremer, my executive assistant for most of the blog’s life, for all her help in editing my weekly posts and for her immense help in putting my book together.

Finally, the most important person has been my wife, Lori. She not only helped edit blog posts but taught me and “cajoled” me into writing in “plain English", which is a topic she teaches often as a professional presenter. It is amazing how many people have told me I have simplified as best as possible, complex topics. That is all Lori’s doing. Finally, she was very tolerant and supportive as I wrote my posts at night and on the weekend, taking away family time.

I may write occasional posts if something catches my attention and post them on LinkedIn, but my blogging career is over.

So, thanks for reading and best of luck with your financial affairs in the future.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

What Income Tax Rate(s) Should You Use in Estimating Your Estate Tax Liability?

In my last blog post, I discussed that for tax and estate planning purposes, you should estimate your current estate tax liability and then plan how your estate will cover off this liability (which in many cases is an ever growing tax liability). Today, I want to discuss what income tax rate(s) you may wish to use in estimating your estate tax liability.

For clarity, this exercise to estimate your estate tax liability is not meant to be definitive calculation (if you wish a definitive calculation, you will need to engage your accountant and possibly a business evaluator). This exercise is intended to provide you with a starting point, so that you have a number to plan with, whether your intention is for your estate to cover off this potential tax liability by a sinking fund, cash on hand, liquidation of your assets, insurance or some combination of all of the above.

One would think the income tax rate(s) to be used in estimating your estate tax liability would be a straightforward calculation, but there is a little more than meets the eye. Please keep in mind, that I am assuming you are the last spouse to pass-away for this estimated calculation, as if you are the first spouse to die and transfer your assets to your surviving spouse, there is no tax at that point in time.

For RRSPs, RRIFs or any other income related items taxable on death, I usually use the highest current marginal rate of 53.53% (in Ontario). This assumes your estate’s income tax rate is mostly high rate in the year of death. While that is typically the case with most of the people I work with, that may not be your case and you may be able to utilize a lower marginal tax rate, but if you want to be conservative, the highest marginal rate builds in a buffer.

As most people like to think/hope personal marginal rates will not increase much in the future (although many of us thought the same when rates were 45%), they are comfortable using the current 53.53% rate for a future rate on income type items.

Things become trickier when determining the appropriate tax rate to use on capital items. The highest current marginal capital gains rate is 26.76% (in Ontario). However, many people assume capital gains rates are going to increase in the future, so the rate to use is not entirely clear. Thus, I typically provide an alternative estimate using 26.76% and another using 40% assuming a higher future capital gains inclusion rate of 3/4 of the capital gain (as opposed to the current inclusion rate of 1/2 of the capital gain) for capital gains rates on personally held assets. If you do not expect your estate to be at the highest marginal rate on your death, you can use the lower marginal rates; but remember, the inclusion of your RRSP/RRIF value on your death will in many cases move you into a much higher income tax bracket. 

The future capital gains rate is even more complicated for shareholders of private corporations, since their shares are potentially subject to double taxation if proper steps are not undertaken to alleviate this liability. Double taxation can occur where the estate pays tax on the deemed disposition reported on the owner’s terminal tax return, and then the estate pays further tax when it removes the assets from the corporation in the form of dividends to the estate. 

There are two tax planning strategies that can generally eliminate any double tax; however, both techniques have some potential restrictions:

(1) The first is known as a subsection 164(6) loss carryback. In simple terms a loss is created on a share redemption by the estate that reduces or eliminates the capital gain that arose as result of the deemed disposition on death.

(2) The second, known as the pipeline strategy allows the estate to remove the corporate funds generally tax-free. This is achieved by transferring the deceased owner’s shares to a new corporation and using share redemptions and a netting of promissory notes to remove those funds tax-free.

However, a pipeline strategy can be problematic in certain circumstances and the strategy relies upon the CRA allowing such a strategy in the future. This makes determining a future capital gains rate potentially problematic. So, when I prepare my estate tax liability, for private corporations I use a 30% rate as a low-end and a 40% rate as a high-end estimate (Note: unlike above, I am not using the 40% rate because of the prospect of a capital gain rate inclusion increase, but as a dividend rate if a pipeline cannot be undertaken or is partially blocked).

If your private company shares qualify for the lifetime capital gains exemption because they are Qualified Small Business Corporation shares, you will need to factor in the fact that $971,190 (as of 2023) of the capital gain will not be taxable. 

Finally, the tax rate on a private corporation share can also be impacted by corporate attributes such as the Capital Dividend Account and refundable income taxes on hand (NERDTOH and ERDTOH), which again makes it more difficult to determine the appropriate income tax rate. Where your corporation has these tax preference items, your accountant needs to undertake more detailed calculations. 

The question of which tax rates should be used for an estate tax liability estimate is somewhat complicated as discussed above and subject to future taxation legislation and government policy. Thus, as noted above, I personally provide clients with two estimates: (1) Using the highest marginal rate for income items and a 30% capital gains rate and (2) a second more conservative estimate using the highest marginal rate for income items and a 40% capital gains rate. This at least provides a range of their potential future estate tax liability. 

For purpose of this blog, I am hoping/ignoring the possibility that a future government implements an Estate Tax like that in the United States (the estate tax can go as high as 40% Federally subject to exemptions) as that would significantly affect any future tax liability planning.

Finally, as the above discussion is premised on estimates, please ensure you consult your accountant or estate planning specialist for specific estate planning advice and the determination of your estate tax liability. This advice should be obtained earlier rather than later and then reviewed every few years thereafter as personal circumstances change and new legislation is introduced.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Your Tax Liability on Death – Planning on how Your Estate will Best Cover the Taxes Owing

Since retiring from public accounting, I am working part-time as a Tax and Estate Consultant for a Wealth Management (“WM”) firm and as a Quarterback/Part-time CFO for a couple of families.

When working with the WM firm's clients, I like to provide them with an estimate of their anticipated income tax liability on death based on their current net worth. I find this is often a very useful exercise for clients, so that they can plan and consider how their estate will cover their tax liability upon their passing (typically the last spouse to die, as the first spouse can transfer their assets tax-free to there surviving spouse). In my experience, an estate tax liability is dealt with in one or some combination of four ways: 

1. Through a self-funding sinking/savings fund

2. Through the estate’s anticipated cash on hand

3. Through the liquidation of the estate’s assets (potentially at the risk of selling at lower or fire-sale price)

4. Through the purchase of life insurance

While clients are typically “glad” to know their anticipated estate tax liability (based on their current net worth), they often have two questions. The first question is if they anticipate their estate to keep growing from this point in time, how do they factor in the future growth and related tax liability?

The second question they ask (or I point out) is what is the proper income tax rate to use to determine an estate’s future tax liability given potential government funding needs and potential future changes in capital gains rates or marginal tax rates?

Today, I will address the first question and the second question will be covered in my next blog post.

How do you Plan to Cover Your (Ever-Growing) Estate Tax Liability?

This is a very complex question. The answer for many people whose wealth comes in large part from a private corporation (usually an active corporation, but it may be applicable to a passive investment holding company) is often an estate freeze. The characteristics of someone who would consider an estate freeze are that they are typically 55 years of age or older and their current assets would provide more than they need to live comfortably for the rest of their life. 

An estate freeze sets, or “freezes” the value of the shares of a corporation(s) at their current value (say $10,000,000 for discussion purposes). You as the shareholder of the corporation receive freeze shares (preference shares) worth $10,000,00 in exchange for your current common shares and your children then subscribe for new, nominally priced commons shares. Any future growth in the company's value above $10,000,000 accrues to the children’s benefit and not your estate and thereby defers income tax on the gain above the $10,000,000 threshold to the next generation. Once the share value is frozen, the business owner will only be taxed on the capital gains on their frozen preferred shares at the time of the death (which may decrease as discussed below). The freeze is set-up so that you maintain control of the company with voting shares, even though your children own the growth shares. 

In many cases, for tax planning purposes the business owner's freeze shares are redeemed over time, such that the $10,000,000 value is decreased over the years by the shares redeemed. So, if you redeemed $200,000 of your preference shares for 10 years, your estate tax liability would now be based on only $8,000,000, not $10,000,000.

While your other assets may continue to grow over time, your major asset (private company shares) will not grow in value and may decrease as shares are redeemed. I have written previously about estate freezes, here is the link.

I have also written on why some succession experts feel an estate freeze may be the wrong solution. Here are two blog posts that provide an alternative viewpoint. Are Estate Freezes the Wrong Solution for Family Business Succession and Part 2 . 

As noted above, an estate freeze will only stop the growth of your private company shares (or possibly investment company shares), so you must now concern yourself with the likelihood the remainder of your estate will continue to grow (including your company shares if you do not implement an estate freeze).

One potential way to cover the estate tax liability is a self-funded sinking fund/savings fund. While this sounds like a reasonable option, I personally have never seen someone cover off their eventual estate liability using this method, due to fluctuations in corporate profitability (for private company owners) and alternative needs at certain times for capital (home renovations, kid's weddings, houses etc.) or other projects. However, a sinking fund could at least partially offset the estate liability, especially if you create a fund in conjunction with the estate's expected cash on hand (for example cash, money market investments and GIC's in your portfolio).

Most people, whether they are very high-net-worth or not, have no objection to their estate just liquidating their assets upon their death to pay any final personal taxes and having any remaining funds (net of income taxes) become their family’s inheritance. Practically, this is the typical manner in which most estate taxes are paid. The main issue with the liquidation of assets is that the estate may not be selling at an opportune time or even be able to sell the assets unless they fire-sale the asset (if the economic conditions are poor at the time of your passing).

Some people explicitly do not wish their estate to liquidate certain assets. For these people, the assets may be legacy or sentimental, such as family land or real estate properties, a cottage or the family business. Alternatively, it is a business reason, such as the parent thinks the assets have large growth potential if kept say 10-20 years.

Based on the discussion above, if you are fine with your estate liquidating your assets, you likely do not have to worry about your estate tax liability. However, as discussed, there could be timing issues raising the cash and a liquidation at the wrong time in an economic cycle, may not maximize your asset value.

If you are able to self-fund and/or leave significant cash in your estate, your estate may only need to sell some of your additional assets to cover your estate liability and the estate may be able to hold certain legacy assets.

If you foresee any gaps in funding your estate tax liability, or don’t wish your estate to liquidate your assets (or are okay with liquidation, but only when market timing allows your estate to receive fair market value for those assets), then you may wish to utilize life insurance (typically permanent insurance) to cover any anticipated shortfall. Alternatively, some people use insurance (which in the correct income tax circumstances can often have an excellent rate of return even after the premiums) to fully-fund their estate liability or even leave a larger estate for their beneficiaries. If insurance is used, you often build in an estimate of future asset growth to cover any additional tax liability that will accrue between today and the date you pass away. While this estimate of additional taxes may be off-target, you can revisit your insurance over the years depending upon your health.

As with an estate freeze, there again is a definite advantage to having a corporation, as corporate insurance is far more tax effective than personal insurance. I have written on this topic a few times including this post on The Basics and Uses of Term and Permanent Life Insurance and discussed insurance on these Podcasts:

The Blunt Bean Counter: Life Insurance for High-Net-Worth Individuals and Corporate Business Owners - Podcast and Blog 

The Blunt Bean Counter: Some of the Tough Questions to ask When Considering a Permanent Life Insurance Policy - Podcast and Blog

I have not discussed gifting assets, since a gift of capital property creates a deemed disposition and triggers any income tax related to that asset. However, depending upon your circumstances, gifts of capital property can "smooth" out your tax liability over our lifetime.

For all the above considerations, you must consult your accountant, tax professional or financial advisor to determine if any of the planning makes sense for you, based on your personal fact situation.

In my next blog post, I will discuss the income tax rate you should use when trying to determine your estate tax liability, which is not as simple as it sounds.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

The Importance of Tracking Your Adjusted Cost Base from an Inheritance

From an income tax perspective (I am obviously ignoring the emotional issues) receiving an inheritance provides two tax related benefits. The receipt of the inheritance is typically tax-free and you may also receive a “bump” (increase) in the adjusted cost base (“ACB”) of any capital property inherited.

However, over the years, I have seen cases where people pay unnecessary income tax and/or have disputes with the CRA because they (1) forget or are not aware of the cost base bump (2) have misplaced documentation or never obtained documentation (3) have switched accountants (or the original work was prepared by their parent’s accountants and is no longer accessible).

Today, I want to remind those of you who have inherited capital property, to ensure you have in place the documents (easily accessible) to support the ACB of any inherited property when you sell the property in the future.

Taxation on Death

I think to provide context for my comments, I first need to explain how the Income Tax Act works when someone passes away.

In Canada, where you receive cash or a cash like inheritance, there are no income tax implications. Where you inherit capital property, such as stocks and real estate, you will have no immediate income tax implications, plus you will inherit the “bumped-up” cost base of the capital property to the deceased.

By “bumped-up” I mean the following. When a person passes away there is a deemed disposition of the deceased persons capital property at the fair market value ("FMV") of the property right before the person's death (this is typically the last spouse or common-law partner to die, as the income tax allows a tax-free transfer of property to a surviving spouse or common-law partner).

For example; say your mother passed away in 2015 and she owned 1,000 shares of Royal Bank (ignoring stock splits) that were worth $80 a share at her passing, that had been purchased for $12,000 in 2001. (Note: The Royal Bank shares could have been transferred to your mother as a tax-free spousal transfer from your father on his passing or the shares could have been purchased directly by your mother, it is the same tax result).

Your mother’s estate would have filed a final (terminal) income tax return reporting a deemed capital gain of $68,000 (FMV at death of $80,000-$12,000 original cost). This deemed capital gain is known as a deemed disposition on death and occurs despite the fact the Royal Bank shares were not sold. This is because your mother was the last surviving spouse and owned the shares at her date of death. Your mother’s deemed disposition FMV of $80,000 becomes the new cost base of your inherited shares. So, if you sell the Royal Bank shares in the future, the gain would be equal to your sales proceeds less your bumped-up cost base of $80,000. 

The same thing would occur if your father/mom owned real estate. The fair market value at your mothers passing would become your new ACB, although there would be an allocation between land and building. The rules relating to the inheritance real estate can get tricky for a non-arm’s length decedent. You should speak to your accountant to get an accurate understanding of your cost base and allocation between land and building.

While I use parents in the above example, the same result occurs if you inherited the capital property from a relative or friend etc.

A totally separate but interrelated ACB tax issue, is the 1994 Capital Gains Election. In 1994, the $100,000 capital gains exemption was phased out. However, individuals were eligible to make an election on their 1994 personal tax return to bump the value of their capital properties by up to $100,000. Where you inherit capital property, if possible, before the accountant files the terminal return of the deceased, you should ask them if they have the 1994 election on file, or if not, see if you can find the deceased's 1994 return to determine if an election was made in 1994. If the election was made, it will likely have no impact on your inherited ACB, but it may reduce the tax on the terminal tax return of your parent or relative etc.

Supporting Your "Bumped- Up" Adjusted Cost Base

Now that I have provided the income tax context, I can discuss the importance of documentation, as without the documentation, you will not know the inherited cost base of your capital property.

The key documents you hopefully already have on hand or can dig up from a box in storage are:

1. The terminal income tax return of your last surviving parent. This return will reflect the deemed disposition of any capital property held on your parent’s passing on Schedule 3 -Dispositions of Capital Gains (or Losses). The proceeds of disposition on this form will form the new ACB of the inherited property to you. Using my prior example, Schedule 3 would reflect proceeds of disposition of $80,000 for the 1000 RBC shares held on death and the $80,000 would become your new ACB.

2. It is possible a parent who pre-deceased their spouse left property directly to you. If that is the case, you would need their terminal tax return to review their schedule 3.

3.  Tax reorganization memos from your parent’s accountants if they undertook any post-mortem tax planning for your parent(s) private corporations. Depending upon the reorganization, there could be ACB increases, although in many cases, the key planning is creating tax-free promissory notes.

An interesting capital asset is the principal residence (“PR”) of your parents or anyone else you inherited property from. If the house was inherited and not sold immediately (say you kept the PR as a rental property), then the FMV of the PR on the death of your parent becomes important. However, prior to 2016, when the sale of a PR had to start being reported on Schedule 3 (and from 2017 onwards when it had to be reported on Schedule T2091) administratively the CRA did not require you to report the sale of your PR if it had always been your PE and the sale was exempt from tax as your PR. 

Thus, you may need to obtain a real estate valuation for the value of the PR at the deceased's passing, since there may be no record of the FMV on death.

If you have inherited capital property from your parent’s or any other person, hopefully you already have the documentation discussed above in place. If not, it would be a very useful project to try and obtain the documents before you decide to sell the asset and are forced to scramble to find information that can be twenty or thirty years old.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

The 2023 Federal Budget

Before I started reading through the federal budget report tabled on March 28th by Deputy Prime Minister and Minister of Finance, Chrystia Freeland, I expected there would be significant personal and corporate tax changes. But this budget is about “clean and green” technology refundable investment tax credits for business owners, changes to the alternative minimum tax (“AMT”) to make it harder for high-income earners to avoid paying income tax, tightening up the rules on intergenerational transfers of businesses and some other smaller changes.  There are no changes to the general personal tax rates or the general corporate tax rate.

Today, most of my comments will relate to how the budget affects high-net-worth ("HNW") individuals and small business owners.

Personal Tax Measures

Alternative Minimum Tax 

In the 2022 budget report, there is a section titled “A Fair Tax System”. Within the section, the report stated “some high-income Canadians still pay relatively little in personal income tax as a share of their income—28 per cent of filers with gross income above $400,000 pay an average federal PIT rate of 15 per cent or less, which is less than some middle-class Canadians pay. These Canadians make significant use of deductions and tax credits, and typically find ways to have large amounts of their income taxed at lower rates”.

This budget follows through on the above “fairness initiative” and proposes to limit the deductions and credits used by high-income Canadians by amending the AMT to "better target" high-income individuals.

Prior to my retirement from public accounting, I worked over 35 years with multi-National firms, mid-sized firms and a smaller firm. I only rarely observed my HNW filers paying tax at a 15% or less rate. My experience in the majority of cases was the opposite. HNW individuals less than thrilled, over how much tax that had to pay, most of it at a 54% tax rate. But I will accept the CRA's statistics as accurate and assume my sample size was not representative.

The AMT was created in 1986, to ensure high income Canadians paid at least a minimum rate of income tax. Conceptually, the AMT prevents high income earners from paying little to no tax by comparing their tax liability as calculated on their "regular" tax return to an alternative method, in which AMT is charged at 15% with adjustments for certain amount less a $40,000 exemption. If the AMT is higher than the regular tax, the taxpayer must pay the higher AMT result.

It should be noted that many of the reasons a taxpayer may pay a low rate of income tax in the first place is due to incentives provided by the Income Tax Act for donations, reduced capital gains rates, the sale of Qualifying Small Business Corporations etc. Thus, as I discuss below, the increase in AMT comes about in part because you will be required to add back a higher percentages of some of the incentives the government provides for charitable organizations etc. on your income tax return, which is counter to public policy in some cases.

The budget proposes for years beginning after 2023, to increase the AMT rate from 15% to 20.5% (plus the provincial component) and to increase the exemption from $40,000 to approximately $173,000 by 2024. The AMT base will be broadened by increasing the capital gains rate for AMT purposes only (the general capital gains inclusion rate of 50% was not changed) from 80% to 100%, by including 100% of stock option benefits, 30% of capital gains on the donation of marketable securities (again, this is only for AMT purposes, not regular income tax purposes where the donation of marketable securities eliminates any taxable gain associated with the stock donated) and will broaden the base by disallowing for AMT purposes, 50% of deductions such as child care, moving expenses, employment expenses (other than to earn commission income), interest and carrying charges, non-capital loss carryovers amongst others.

It is important to note that AMT can be carried forward seven years and thus, with proper planning and the right economic circumstances, the AMT can often be recovered over time to the extent a person’s regular income tax exceeds the AMT in a given year.

If you may have a significant tax event in 2024, whether a large income inclusion, a capital gain or a large donation or deduction, you will want to speak to your accountant. They can review your income tax situation to determine if you should accelerate any of these times to 2023 or whether you pay sufficient regular tax, such that if you wait until 2024 there will be no AMT impact or if you pay the AMT, you will recover it in future years.

 

General Anti-Avoidance Rule (“GAAR”)

The GAAR was introduced in 1988. The intent of the legislation was to prevent abusive tax avoidance transactions or arrangements, while not altering or interfering with legitimate commercial transactions. From the government’s perspective, they felt the GAAR was not achieving their objectives, so they stated they wanted to “modernize and strengthen” the rule. This rule applies to both personal and corporate tax planning.

The proposals will provide stricter rules and lower thresholds for an avoidance transaction. The proposals also include a penalty equal to 25% of the tax benefit, that can be avoided if the transaction is disclosed to the CRA. The government will hold consultations until May 31, 2023, after which they will release the legislation with an effective date.

Other Measures

There are various other personal tax provisions in the budget, including a small increase in RESP educational assistance withdrawals for the first 13 weeks on full or part-time enrollment, fees and premiums related to Retirement Compensation Arrangements and Registered Retirement Disability Savings Plans (extends the ability of a parent, spouse or common law partner to open an RDSP for an adult whose capacity to enter into a RDSP contract is in doubt by three years and broadens the definition of a qualifying family member) that you should discuss with your advisor if they relate to your circumstances.

Corporate Tax Measures

Clean and Green Equipment

The government has proposed a refundable investment tax credit (“RITC”) for clean hydrogen equipment, clean technology equipment (including geothermal equipment), clean technology manufacturing and processing equipment, carbon capture utilization and storage and consultations on RITC’s for certain clean electricity systems and equipment. 

If your business plans to purchase such equipment, I suggest you set-up a meeting with your accountant to discuss and understand the proposed requirements, effective dates and credits (15-40% depending on equipment and various factors) and to review the tax and environmental benefits for your corporation of purchasing such equipment.

From a business take-up perspective, some economic pundits feel the use of subsidies instead of RITC would result in a more effective Clean and Green strategy, but hopefully the RITC’s will prove to be a large enough incentive.

Intergenerational Business Transfers

This is very tax oriented rule, and you will need to consult your tax advisor. In general terms, the government wanted to facilitate intergenerational business transfers within families where a certain technical section of the Income Tax Act (84.1) was restrictive. However, the government felt the original provisions allowed unintended consequences such as parents still controlling the business and children not having sufficient active involvement in the business. Thus, they have proposed to tighten the rules for such transfers, effective January 1, 2024.

The exclusions have been tightened such that taxpayers can now rely on only one of two transfer options:

1. An immediate three-year test based on arm-length sale standards or

2. A five-to-ten-year test based on estate freeze characteristics (see this prior post on estate freezes).

As this provision is very complex, you will need to discuss any potential business transfer to your children with your tax advisor.

Employee Ownership Trusts (“EOTs”)

The budget proposes new rules (effective January 1, 2024) to facilitate the use of EOTs to acquire and hold shares of a business. EOTs are intended to assist private business owners in transitioning their businesses to their employees on a potentialy more efficient tax and financing basis.

If you are considering selling your business to your employees, speak to your advisor about whether an EOT may be a viable selling option for you in the future.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Ensuring you Maximize your 2022 Personal Tax Deductions and Tax Credits

Unfortunately, any tax planning for your 2022 personal tax return needed to be done by December 31^st of 2022 and there is very little, if any, planning you can do in March and April of this year.

However, there is still hope to reduce your 2022 income tax liability, especially if you are not a detailed organizer of information.

Today, I will review a few deductions and tax credits people sometimes leave on the table. None of this is cutting edge information; it is just double checking you have claimed all your deductions and credits. In fact, if you read my last blog post On How to Get on Your Accountants Good Side During Tax Season, you may have already assembled much of that information for your accountant and your double checking and digging for receipts will be limited.

Tax Deductions and Tax Credits to Double-Check Completeness

Carrying Charges

Many people borrow to finance their stock market investments, real estate and rental property investments or capital contributions to their professional firms or other possible investments. In many cases, a summary letter of the interest expense paid on your bank loan or line of credit is not provided by the lender and can be easily overlooked.

If you have not received a summary document, see if you can obtain a summary letter from your financial institution. Failing that, ensure you have summarized each interest charge for January to December 2022.

Capital Losses

If you engage an accountant or use tax software to prepare your return, the software will typically keep track of any capital loss carryforwards you have to apply against any capital gains you incur in the year. However, the carryforward information is predicated on accurate historical information being input in the first place.

I have occasionally seen capital losses missed due to improper carryforward information, especially where T1 Adjustments have been filed in prior years in respect of capital gains and losses. To ensure your information is accurate (your accountant will likely do this if they have access to your CRA information) check your 2021 income tax assessment in the explanation section. This section reflects any capital losses carried forward. Alternatively, if you have registered for My Account with the CRA, check the balance online.

Donation Tax Credits

It is very easy to miss a donation receipt. It can be lost in the mail, caught in your email spam or be misplaced. I suggest you quickly scan your monthly bank statement and/or credit card statement to ensure you are not missing any charitable receipt.

Going forward (if you are not doing this already), best practice would suggest you enter each donation you make during the year on an Excel or other spreadsheet and have an additional column that tracks whether your have received the tax receipt for each donation you made. This allows you to follow-up any missing donation tax receipts. 

Medical Tax Credits

Medical receipts are similar to donation receipts. You should again review your bank statement and credit card statement to ensure you are not missing any medical receipts. For health and medical practitioners you use on a consistent basis such as orthodontists, chiropractors, physiotherapists, dentists etc. ask them to print out a summary of paid expenses for 2022 (or for the twelve month period ending in 2022 if you are using that alternative).

If you have a health insurance plan, you should go online and print out all the insurance statements relating to any reimbursements made by the insurance company in 2022. Under most health and dental plans, you will have incurred some portion of the medical or dental cost and that uncovered portion is deductible as a medical credit.

Going forward (if you are not doing this already), best practice would suggest you enter each medical expense you incur during the year on an Excel or other spreadsheet and have an additional column that tracks whether your have received a receipt marked paid for that expense (ensure your receipts reflect your payment made, this will keep the CRA happy). If you have a Health Insurance Plan, I would have an additional column that reflects insurance reimbursements for your medical expense. This ensures you claim all non-reimbursed medical expenses.  

Pension Splitting 

If you are eligible for pension splitting, this could result in significant tax savings. Most tax programs have a function to maximize the pension splitting, but I would ensure the function has been applied and any eligible pension income has been split to your benefit.

Employment and Business Expenses

Employees may receive a T2200s or T2200 from their employers that allow them to deduct home office expenses and other employment expenses. If you are entitled to claim employment expenses, ensure you have received these forms from your employer or request the form, if you are entitled to claim employment deductions.

Once you have the form, go through your expenses for the year to ensure you have captured all your home office, car or other employment expenses you are entitled to claim. It is best practice to record these expenses throughout the year (monthly or quarterly) so you do not miss any expenses or create a 5 hour receipt sorting project at tax time.

If you are self-employed, you will not need a T2200. However, the same advice holds as for business expenses as for employee expenses. Ensure you have captured all your expenses for the year through diligent tracking.

Ontario Staycation

If you are an Ontario resident, don’t forget to assemble your Staycation receipts. Ontario residents can claim 20% of their eligible 2022 accommodation expenses. For example, for a 2022 stay at a hotel, cottage or campground you can claim eligible expenses of up to $1,000 as an individual or $2,000 if you have a spouse, common-law partner or eligible children, to get back up to $200 as an individual or $400 as a family. For Staycation information, see this link.

 

The above discussion is not tax planning. It is record keeping diligence. As noted above, I suggest you get in the habit of tracking these items throughout the year to avoid missing any deduction or credit at tax-time.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

It’s Personal Tax Time – How to Get on Your Accountant’s Good Side

Many readers of this blog use accountants to prepare their personal income tax returns. You can take three approaches in working with your accountant. You can provide them with:

1. all the detailed information they request
   
   
2. most of the information, without overly exerting yourself
   
   
3. the minimum information, since you pay good fees

From a client perspective, all these approaches are reasonable to some degree. However, as a retired public accountant of 35 or so tax seasons, I suggest you lean towards approach number one, to the greatest extent you can.

I say this for two reasons. The first reason is simply the better organized you are, the more time your accountant can spend dealing with minimizing your taxes. The second reason is that many Canadians invest in mutual funds (T3 slip) and limited partnerships (T5013 slip). Both these investments have March 31st deadlines for issuing the T3’s and T5013’s, so clients often have to wait until late March and early April to receive their slips.

Consequently, your accountant’s workload has likely changed substantially over the last five to seven years, such that 45-60% of the client information comes in after say April 7th. In the good old days, that number was likely only 25-35%.

I am not expecting you to shed too many tears about your accountant’s working conditions given the fees you pay them. I am telling you this because the easier you make it for them to work on your return (rather than chase information), the better it is for you.

So, with the theme of be nice to your accountant, I list below some do's and don'ts for providing your tax season information to your accountant. 

I will start with the things you want to avoid doing.

Tax Season Don'ts

1. Do not hand your accountant all your tax slips in the original envelopes 
   
   
2. Do not send your accountant PDF’s of each tax slip as they arrive. If you prefer to use email or your accountant has a portal (in lieu of paper copies), try to send a first batch of as many initial slips as possible. Then make a list of what you think is missing (such as T3’s, T5013’s, straggler donation slips) and send a second batch all these slips. Once that is done, it is fine to send amended or straggler slips one by one 
   
   
3. Do not provide your prior years tax returns and tax slips to your accountant. All tax programs have prior year information carried forward if required and most accountants have paperless systems of prior years slips if a past tax slip is required for any reason 

Tax Season Do's

1. Provide your accountant any investment, capital gains and foreign reporting information provided by your investment advisor
   
   
2. Have your children download their tuition receipts from their University portal
   
   
3. Ensure your have official donation slips for all your donations. If you only have a confirmation of your payment from the internet, that is not an official receipt and you will need to request an official receipt from the organization. If you want to earn a gold star, summarize the donations for your accountant so they have a total to compare against their total. This is definitely more than expected, but it acts as an excellent check and balance, as I have had many variances over the years and a summary provides a quick way to see if the client’s total was off or the accountants total was off.
     
4. If you made a donation of marketable securities (see this blog for more detail), make a note for your accountant. This is something they will likely pick-up, but it can be missed sometimes as the notation on the donation slip is sometimes small or in a corner somewhere and easy to miss.
   
   
5. For any medical expenses, where possible get one summary receipt, such as for a chiropractor or physio etc. Some pharmacies also provide a yearly summary, so you don’t have to provide 34 individual receipts.  
   
   
6. Still with medical receipts, if you are audited by the CRA, they will want to see a medical receipt that reflects payment. I often received the invoice for medical purchases, but not an invoice reflecting payment. You may need to follow-up with the medical practitioner to request a paid receipt (again, if you have several expenses with the same practitioner, get them to do one summary receipt reflecting the services and reflecting payment for those services)
   
   
7. If you have a line of credit with the bank for investment purposes (especially for professionals to fund their capital entitlement), see if your banker can provide a simple summary letter on the financial institution’s letterhead of the total interest expense for 2022
   
   
8.  If you have rental income, summarize your rental income and expenses for the year. Also provide any invoices for any large repair bills so your accountant can determine whether the expense is currently deductible or must be capitalized.
   
   
9. If you sold your home in 2022, provide your accountant the sale information. Also provide the date you purchased your home and the original cost information (although it may not be needed depending upon the circumstances). The above information must be reported to claim the principal residence exemption, or the exemption may be denied, or a substantial penalty levied.
   
   
10. Let your accountant know if anyone in your family has become a non-resident in the current year.
    
    
11. Review your return before it is filed. You know your affairs better than anyone. Do a quick overview of your return to ensure what you expect to be reported and deducted has been reflected accurately. In most cases everything will check-out, but sometimes things are missed or when reviewing your return, you realize you forgot to inform your accountant about some income or deduction for the year.

The above information will cover off much of your return. Many accountants make this easier by providing a checklist for you to organize your tax information. 

While all this organizing may seem like a lot of work when you are paying someone to prepare your return, you want those dollars spent having your accountant working on minimizing your taxes, not chasing down information.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.