Tax Sheltering – Myth or Fact

TAX SHELTERS The last quarter of the year is when many taxpayers traditionally do much of their income tax planning. For taxpayers who are well into the top marginal tax bracket, typically those with income in excess of $100,000, tax shelters are often a significant method of deferring or saving on potential tax liabilities. For this reason, many tax shelter products are marketed in the last quarter of the year. The other busy period for the sale of tax shelters is in the beginning of the year. Federal budgets are usually released in February and from time to time take aim at specific tax shelters. Therefore taxpayers who require shelter will often purchase it before a Federal budget to ensure that the have the benefit of any grandfathering. Tax shelters typically provide either absolute income tax savings by way of deductions in the year of purchase or deferrals by way of deductions in the year of purchase to be followed by income to be recognized soon after. Mutual fund commissions tax shelters and certain film tax shelters are typical examples of deferral type shelters. They are structured so as to reduce the business risk as much as possible and to produce as foreseeable a stream of revenues as is possible. This revenue stream typically starts one or two years after the year in which the tax shelter was purchased. When this revenue stream is paid to the taxpayer, it is included in income. The taxpayer will typically be left with a positive return on his investment after tax. Accordingly these investments amount to a deferral of income from one year to several others. Of course there is always some element of business risk even in these deferral type of shelters and accordingly the ultimate financial position of the taxpayer will depend to some extent on whether the investment is successful or not. A tax deferral type of tax shelter is extremely attractive to taxpayers who have a one time large income problem and who wish to defer part of this to future years when the income will be lower. The other form of tax shelter typically involves significant business risk and therefore an absolute tax deduction with no predictable income inclusion. Tax shelters of this type include real estate or software, the latter having been popular in the last 2 years. In evaluating tax shelters, particularly those involving a business risk, it is important to evaluate the tax shelter in the same way as a non-tax shelter investment. That is to say legal and accounting advisers should be consulted and the investment should be examined from a business risk and return point of view. For example, with a real estate investment, the real estate market in the target area should be examined. It may not make a lot of sense to acquire real estate, even if tax sheltered, in a market which is declining. It is also very important to fully understand the nature and structure of the investment. Often these investments will have future cash flow requirements. Although these future payments may give rise to income tax deductions, it is essential that an investor have the ability to meet the required payments on an ongoing basis. Consultation with a professional who has experience in evaluating this type of investment is essential to ensure that an investor knows exactly what he is purchasing. It is also important to remember that tax shelters can become a target of Revenue Canada scrutiny or attack.  Revenue Canada issued a press release which adversely affected a number of tax shelters then being marketed by introducing new rules which had to be complied with. That was not the only case of Revenue Canada attempting to “close down” tax shelters through announcing new rules in a press release. Such press releases are indicative of Revenue Canada’s attitude to the type of tax shelter which was targeted and indicate that an investor may very well have a fight on his hands down the road. A potential future fight should not in and of itself be determinative of whether or not to make a tax shelter investment but any potential investor should be certain to factor it into the equation.

Pension Splitting

Pension Income Splitting

Beginning with the 2007 tax year, Canadian residents may split certain pension income with their resident spouse or common-law partner.  This can be done if the following conditions are met:

	the pensioner and spouse or common-law partner were not, because of a breakdown in marriage or common-law partnership, living separate and apart from each other at the end of the year and for a period of 90 days commencing in the year (if living apart at the end of the year for medical, educational, or business reasons, pension income can still be split)
	the pensioner and spouse or common-law partner are residents of Canada on December 31 of the year; or if deceased in the year, resident in Canada on the date of death; or if bankrupt in the year, resident in Canada on December 31 of the calendar year in which the tax year (pre- or post-bankrupcy) ends.
	the pensioner received pension income that is eligible for the pension income amount tax credit

Up to 1/2 of eligible pension income may be allocated to the taxpayer’s spouse when the tax returns are filed.  In some cases this will result in a pension income tax creditfor the transferee.

No funds are actually transferred using pension splitting – it is simply a method for reducing the taxable income of one spouse by allocating income, on the tax return, to the other spouse.  The transfer must be agreed to by both spouses, by filing the Canada Revenue Agency (CRA) form T1032 – Joint election for pension splitting, with the tax return.  The T1032 form refers to the total amount of eligible pension income for the taxpayer, which is calculated on CRA’s Federal Worksheet 5000-D1 for all provinces and territories except Québec, and on Federal Worksheet 5005-D1 for Québec.

Form T1032 also provides an area for input of the total amount of withholding tax deducted from the pension income of the transferor.  The withholding taxes related to the transferred pension income are then transferred to the spouse, on a pro-rata basis.  Thus, if 40% of the pension income is transferred to the spouse, 40% of the withholding taxes will also be transferred.

If both spouses are in the same tax bracket, pension splitting will not provide the benefit of a reduction in the marginal tax rate.  However, it may still be useful, if it creates or increases a pension tax credit for the transferee.  There is a federal pension income tax credit on the first $2,000 of eligible pension income (see Personal Tax Credits Tables for provincial amounts).  Pension splitting will only create a pension income tax credit for a pension transferee (the one to whom the split-pension is transferred) who is under age 65 if the pensioner (pension transferor) has received qualified pension income, which is eligible for the pension income tax credit for a taxpayer of any age.  If this situation applies to you, see Completing Step 4 of the T1032 on the Pension Income Tax Credit page.

5 Tips When Filing Tax Returns (part 1 of 5)

-The Canadian Income Tax Act has “stop loss” rules that limit a taxpayer’s ability to claim losses in certain specific situations.

-A non-arm’s length disposition of capital property such as a rental property, for example a transfer to a child, is deemed to take place at fair market value for Canadian Income Tax purposes. If you transfer property that has appreciated in value you will have to report a capital gain of fair market value less cost.

-If you appeal a Canadian income tax dispute with CCRA (the tax department) to the Tax Court of Canada and lose, a further appeal to the Federal Court of Canada is available.

-The Supreme Court of Canada has just determined that section 232 of the Income Tax Act, which sets out a procedure for potentially privileged client documents to be seized from a lawyer’s office, is unconstitutional

-Canadian residents are required to report worldwide income from all sources for Canadian Income Tax purposes. If you fail to do this, or if you choose an offshore structure that violates the intention or spirit of the Canadian Income Tax Act, you could face a battle with the Canada Customs and Revenue Agency, and if you lose you will be subject to interest and penalties

Protect Yourself From Audit

Contact us to discuss how we can start keeping your books clean and legit. Fend off the Taxman.
Standardbookkeeping09@gmail.com

Contract Out or Not

You have likely heard the saying “If you want to get the job done right, do it yourself!”.

If you operate a small business, you have likely already faced this situation at least once. As the business owner and operator, you have to decide what jobs MUST be completed by you, or are the BEST use of your time.

One of the steps involved in growing your business is to know when to outsource the work, and how to establish a list of duties that can be completed by other qualified staff or contractors.

There are a few basic questions you can ask yourself in order to put the job into perspective and determine whether the work can be outsourced:

Are you the only person who can fo this job?
If your answer is Yes, you can obviously not outsource this job.

Is there an employable person out there who has the skills to do this job?
If your answer is No, you may want to consider training an employee, or automating the task if possible.

Is the cost to outsource this job cost effective or reasonable?
In answering this question, keep in mind the personal effect the job has on your quality of life and how it effects your leisure time.

Do you enjoy this job?
If not, why try to do it? You will likely try to avoid it, or not do it effectively, so why put that part of your business in jeopardy.

Is it possible to measure completion of this job?
It would be extreamly difficult to outsource a job that has no clear definition of completion each day, month, or year for example.There are many ways to outsource your small or large jobs in today’s ‘conected’ world. Examine your options, do your homework, and spend the time now so that you can turn over some of the small jobs in order to make more time for you to grow your business. Here’s wishing the Best of Business to you!

Don’ts in Book keeping

 

 

Do not enter into any cash transactions with friends and relatives, including with spouse.

Generally people deposit cash in accounts which do not belong to them. In common parlance it is known as hand loans. Such transactions could land you in trouble;

Do not mix up transactions by maintaining joint account with wife, brother, son, mother, and so on. Though such system is not against any provisions of the Income Tax Act, yet for the sake of simplicity and transparency, it is better to maintain separate accounts and effect transfer of funds by means of crossed cheques in case of necessity;

Do not keep any papers, documents, blank/signed pro-notes even if they do not belong to you in your custody;

Do not make investments in the names of spouse, minor children without seeking proper advice from your tax consultant. There is a wrong notion that by investing in others’ names, one can avoid tax compliance.

Sometimes it is better to call us to do your books

 

On Site or Off Site?

STANDARD BOOKKEEPING offers either on site or off site book keeping services depending on your needs.

Painless and Reliable Bookkeeping Service

A qualified bookkeeper will work in your office regularly; such as weekly, bi-weekly, monthly or by appointment based on your need.

Regardless of how often you use our service, we send that same bookkeeper to you each time.

We will handle the full set of your book: accounts receivable, accounts payable, bank reconciliation, and tax return filing including GST, PST, Payroll, WSIB, and EHT.

No hiring, no firing, no interruption, no hassle.

Offsite bookkeeping

Step 1: When paperwork comes in, simply put it in a file. All it takes is a few minutes each day.

Step 2: Once a month, we come right to your doorstep to pick up your file.

Step 3: In just a few days, we will deliver to you a complete bookkeeping record, up-to-date reports, complete GST, PST, Payroll and WSIB government filing returns.

Bookkeeping is so easy, it is just a phone call away!