Blog

By: Shawn Todd, CFP

Most of us have golfed at one point or another during our lives. It may have been once, or it may have been many times throughout the summer. No matter how often you have golfed you will always remember the feeling of a firing a shot into a bunker [when you were going for the green], or just firing a ball into the water on a par 3. It’s tough, and it really starts to take the fun out of the game.

Most of the people reading this will have also invested at one point. Your home is one of your largest investments, and you may have several other investments in your portfolio. If you’ve been doing it as long as I have, then you also will have memories of the tech wreck, the financial crisis, and the market correction during Covid.

What does golf and investing during these market corrections have in common?

A well thought out gameplan.

If we approached golf without any consideration for the inherit risks of the game, well we would just feel the consequences. We’d lose a ball here, bogey there, it would be a miserable experience.  Some of us all can feel that pain. Playing the game more smartly, hitting more fairways, staying out of the bunkers, well of these efforts make for far better results.

Investing needs to be focused, and well thought out. Ensuring you understand the risks of the portfolio you are in, the timelines you have, the goals of each portfolio, and the risk of each investment in your portfolio; is incredibly important. There needs to be a well thought out plan for taxation, capital gains [this is the topic of the day – thanks to the recent budget], and a discussion of the solutions that make the most sense for each investor. Often what works for you, may not be what works for your neighbour or colleague. Like golf, we all have different risk tolerances, capability, and performance needs. You need to play your own game, and your own pace.

Unlike golf – there are some great opportunities that will enhance your experience. Portfolio management, risk management, diversification, and a deep understanding of your needs – will all allow for an exceptionally smooth ride.

Imagine golf is someone could just tap your shoulder right before you started your ill-fated swing and said – “I just wouldn’t take that shot”.

It might make the game a lot more fun.

Consider helping your investing experience by adding a professional wealth management team to help you understand your own gameplan.

My thoughts for the day.

Executive Summary

Tax season is hardly anyone’s favourite time of year.  What can make it even worse is seeing a negative balance on your tax account and having to pay extra income tax to the CRA.  Simply being aware of a few tax planning strategies can help ensure that you don’t get hit hard when tax season rolls around.

What You Need to Know

1. RRSP Contributions – Contributions to an RRSP are deductible against your income tax, which can result in either a deduction in your taxes or even a refund.   RRSP contributions are reported on line 208 of your T1 General Tax Return. The financial institution that holds your investment will issue your tax receipts.  Contributions from March-December 2023 will be taxed on your 2023 return, but any contributions made between Jan 1, 2024- Feb 29, 2024 can be taxed on either your 2023 or 2024 return.  Taxpayers can contribute up to 18% of their income every year to their RRSP.

2. Capital Gains/Losses – Many people are aware that any capital gains on their investments must be reported on their tax return; however, you can also report your capital losses.  Capital losses can offset capital gains on your tax return, therefore lowering your tax bill.   While there are a few exceptions, capital losses can generally be carried forward indefinitely and carried back three years.

3. Carrying Charges – If you earned investment income last year, the CRA would allow you to claim carrying charges against certain types of income.  There can be some gray areas with carrying charges, it is always best to check with a tax professional regarding what can and cannot be claimed. Types of charges can include:

• • Investment fees and fees for looking after your investments.
  • You may be able to claim fees involved with obtaining financial advice.
  • Fees paid to an accountant.
  • Any interest paid for a policy loan that was used to earn income.
  • Legal fees involved in getting support payments that your current or ex-spouse will have to pay to you.

4. Changing Tax Rules – Last but not least, the best way to make the most of your taxes is to keep up with the ever-changing tax rules.  New deductions and credits are being added all the time though they may not be widely advertised.  Taking some time to find out what’s new this year might present you with a tax-saving opportunity you may not have otherwise known about.

A capital gain can be defined as an increase in the value of an asset (stocks, shares, etc.) from its original cost price.

There are two forms of capital gain:

Realized capital gain: You have a realized gain when you sell an asset for a higher price than you bought it.

Unrealized capital gain: This occurs when there is an increment in the value of your asset, but you haven’t sold it.

Therefore, you only ‘realize’ a capital gain once you sell that particular asset that has increased in value. However, you must know that a realized capital gain isn’t just yours to possess, and the government takes a cut from it by way of tax.

How is Capital Gain Taxed in Canada?

Capital gain gets taxed at a rate of 50% in Canada. Once you realize a capital gain, you’ll need to add 50% of the capital gain to your revenue. This means the portion of extra tax you pay will differ depending on how much you’re earning and what other sources of earnings you possess.

The only way you can have a capital gain without being taxed on it by the government is if your investments are registered in tax-sheltered plans like Registered Retirement Savings Plan (RRSP), Registered Retirement Plan (RPP) or Registered Education Savings Plan (RESP).

Apart from these plans, your capital gain will be taxed. You must know how to calculate said capital gain tax.

How To Calculate Capital Gain Tax?

Before effectively calculating your capital gain tax, you must know some significant amounts. They are:

Adjusted Cost Base (ACB): The price of an investment, including any costs related to obtaining the capital property.

Dividends of Disposition: This refers to the amount you have profited by selling your capital asset. This is the amount gotten when you deduct any outlay or expense you may have incurred by selling.

Expenses Required to Sell:  These are any outlays you may have to make when selling your capital property.

Capital gain subject to tax = Selling price – the Adjusted Cost Base

Bottom Line

Ultimately, you possess a capital gain when you sell a capital asset for a higher amount than the total of its ACB and the outlays and expenses incurred to trade the property.

By: Louai Bibi, Advisor Associate

Tax time is approaching quickly, which leaves many of us scrambling between now & the RRSP deadline of March 1st to figure out how to minimize our taxes owing for 2022. The objective of this blog is to equip you with the ammunition required to make an informed decision as to how much you may want to contribute.

A quick reminder as to how the RRSP works:

• The amount you are allowed to put in per year is based on your earned income for the year. You accrue 18% of your salary in the form of deduction room, up to a CRA prescribed dollar maximum which sits at roughly $30,000 for 2023.
• Unused contribution room carries forward. This means that if you haven’t made lots of contributions over the years, the deduction room that you earned in each of those calendar years would accrue with leave you with a healthy cumulative RRSP deduction limit for you to use as needed. Best place to check this limit is your MyCRA online account!

• As you read in the first sentence of this blog, the RRSP deadline for 2022 is on March 1st. This means that if you wanted to make a deposit in 2022 and were slammed with all the holiday festivities leading up to 2023, you are not out of luck!

• The amount you contribute (up to your respective limit) gets deducted from your taxable income. For example, if you made $70,000 in 2022 but made a $20,000 RRSP contribution, the CRA treats you as if you’ve made $50,000 at tax time.

So, in this example, someone earning $70,000 in salary should be paying close to $13,000 in federal/provincial taxes if you live in Ontario. Since our employers withhold taxes on our paycheque, let’s assume they have only withheld $10,000 for all of 2022. This results in a tax bill of almost $3,000 at tax time, which represents the difference between what should be paid versus what was paid over the course of the year. Assuming this person contributed $20,000 to their RRSP & deducted this from their taxable income in 2022, a tax refund of roughly $3,000 is created.

We have a graduated tax system in Canada. This means that the more you make, the higher your tax rate can be. So, since your employer has been withholding taxes as if you made $70,000 but the CRA taxes you as if you made $50,000, you are refunded your over-payment.

I’ve attached a great calculator that Wealthsimple has put together that helps you estimate your tax liability in advance. All you have to do is choose your province & fill in the respective prompts to get your estimate, which you can generally get the answers to from a year-end earnings statement if you have a straightforward tax situation. Click HERE to view this calculator.

Our standard disclaimer would be to discuss a potential RRSP contribution with your advisory team, in conjunction with your tax advisor. The tax calculator I’ve shared offers a great estimate, but sometimes there are implications or considerations that are not visible to the naked eye that need to be discussed before making your contribution. The intention with this calculator is for a curious individual to be able to plug in their details & model a few RRSP contributions (within their allowable limit), so that they can be prepared for a discussion with their advisory team! As always, Shawn, Corey, Mike & I are happy to be service & you can click HERE to book yourself into our calendar to discuss this further.

Happy RRSP season!

Investments can represent a major source of income for some individuals and with that income comes a wide variety of tax implications. The good news is that some types of investment incomes are subject to special tax treatment. Understanding how your investments are taxed is an important part of your financial plan. The most common types of investment income most investors will have to deal with are interest, dividends, and capital gains.

What You Need to Know

Interest Income

Interest income refers to the compensation an individual receives from making funds available to another party. Interest income is earned most commonly on fixed income securities, such as bonds and GIC’s. It is taxed at your marginal tax rate without any preferential tax treatment and is taxed annually whether or not it has been withdrawn from the investment.

Example: An investor buys a 10-year GIC that has agreed to pay him 4% annually. If the investor bought the GIC for $100, he can expect to earn $4.00 in interest every year for the next 10 years. The investor must report the $4.00 of interest income on his income taxes and will be taxed at the marginal tax rate. 

Due to the fact that interest income is reported as regular income, it is the least favorable way to earn investment income.

Dividend Income

Dividend income is considered to be property income. A dividend is generally a distribution of corporate profit that has been divided among the corporation’s shareholders. The Canadian government gives preferential tax treatment to Canadian Controlled Public Corporations (CCPC) in the form of a dividend income gross up and Dividend Tax Credit (DTC). The two types of Canadian dividends are usually referred to eligible or non-eligible. It is possible to receive dividends from a foreign corporation, but these dividends are not subject to any special tax treatments and are to be reported in Canadian dollars as regular income.

Tax payers who receive eligible dividends are subject to a 38% dividend income gross up, which is then offset by a federal DTC worth 15.02% of the total grossed up amount. Non-eligible dividends are subject to a gross up of 17% and 10.5% DTC.

Example: A shareholder of a Canadian Controlled Public Corporation is paid out a dividend of $100. This income is considered to be an eligible dividend and is subject to the gross up and the DTC. His dividend would be gross up 38%, so he would now have an income of $138.00.  The DTC would be 15.02% of the grossed-up amount, equaling $20.73. Therefore, the shareholder would report a dividend income of $138.00, but would have his federal taxes owing reduced by $20.73. 

The rationale for the gross up and DTC is related to the fact that dividends are paid in after-tax corporate earnings. If there were no adjustment to the dividend, it would result in the dollars being double taxed.  This tax treatment makes dividends the most tax efficient way to receive income. Tax is payable when the dividends are paid out. It is, however, important to note that the gross up and DTC rates are influenced heavily by legislation and could change at any time.

Capital Gains

Capital gains are realized on equity investments (such as stocks) that appreciate in value. For example, if an investor bought a stock at $5.00 per share and sold them at $10.00 per share, they would have a capital gain of $5.00. What makes capital gains different from other types of investment income is that you only are required to pay tax on 50% of the gain. Another desirable trait of capital gain income is that you do not have to pay tax until the investment is disposed of, giving the investor some control over when they trigger the gain and pay the tax. Whether or not they are the most tax efficient income depends on your province of residence and subsequent tax rates.

The Bottom Line

It is important to ensure that investors understand how their investments are being taxed and the implications that different types of investment income can have on your taxes owing. A great first step is meeting with an advisor who can help you put together the most tax efficient investing strategy, making sure your money is reaching its full potential…not going to the tax man!

A financial plan is a strategy you set in order to be able to attain your goals. With a financial plan, you can effectively manage your cash inflow and outflow and other recurring financial responsibilities with the aim of putting you in a better financial position to attain your set financial goals. A good financial plan should include provisions for your debts, income, insurance, savings, investments, and other things that make up your financial life.

Mistakes You Should Avoid When Selecting a Financial Planner

Hiring A Financial Planner Based on Referral Only

In this case, what is good for the goose may not be good for the gander, and in that case, you should base your hiring a financial planner solely on the fact that your friend has good things to say about him. For one, financial situations are peculiar situations, and a financial planner may not be well equipped to handle all kinds of financial situations. Make sure you do your vetting using your criteria and not what your friend tells you.

Hiring A Financial Planner on Sentiment

When you hire a financial planner because of an existing relationship with them, then you might be making a big mistake. You should hire a financial planner based on your current and future financial needs. Also, you must ensure that such a person is absolutely qualified to handle your financial needs.

Using Past Performances

When you only consider the past achievement of a financial planner as a criterion of hiring such a person, then you may be making a mistake. The past performance of a financial planner does not guarantee future success or a better plan going forward. Once you notice your financial planner is not adapting your finances to your current financial situations for a better long-term financial position, then it may be time to make a change.

Not Conducting a Thorough Research

When hiring a financial planner, there are a lot of things you must consider. Such a person must tick as many boxes as possible of what you want in a financial planner. You should vet the credentials of the financial planner, if possible, interview his clients to know how he handles different financial situations that may be similar to your financial situation. Also, try and interview multiple financial advisors to know the different personalities and investment styles to be able to pick the best.

Getting Carried Away by Promises

Yes, we want the best financial planner but that does not mean a financial planner that promises heaven and earth is the best. Most of the time, a sweet talker is not the best at what they do. The same goes for financial planners. You should ensure that your financial planner is not only concerned about choosing the most profitable investment and exploring the market. These are usually for their ego. Go for a financial planner that has your long-term financial position at heart. They usually make the best decisions at every turn.

Tips On Having an Effective Financial Plan

Set Your Goals

A financial plan is mostly about having something for a rainy day and how to manage your current financial situation to be able to achieve that. Therefore, it is good to outline what you are saving for. You should be exact on why you have a plan and why you are saving for it.

Have A Budget

This is for you to better manage your cash inflow. You should outline your bills, debts, and other necessary financial obligations. Yes, you can spoil yourself once in a while, but that should not get in the way of what you are setting aside for your goals.

Sort Your Taxes

Taxes are inevitable but there are better ways to go about it that will ensure you save as much as you can on your taxes and enjoy tax deductions. This will give you a better cushion for your financial plan.

Be Ready for Emergencies

Life has a way of throwing us a curveball. Of course, things won’t always go according to plan, which is why it is important to include an emergency fund in your financial plan to enable you to deal with unforeseen circumstances and expenses. This is where insurance also comes in handy. Have a good insurance plan to help you deal with emergencies.

Don’t Swim in Debt

Achieving your financial goals doesn’t mean you should go committing yourself to every financial aid that will drown you in debt. Debt is one of the banes to an effective financial plan. Ensure that you manage your debt effectively so you can achieve your goals.

Be Ready for Retirement Taxes

Most financial plans get you ready for when you are no longer active. So, your retirement goals and plans should take the forefront of your financial plan.

Multiple Investments

The only way to multiply your savings is to invest in different portfolios that will bring you both short-term and long-term profit.

Have An Estate Plan

Lastly, have an estate plan that will help you make important financial decisions when you can no longer make them yourself. Having an estate plan is not only for the rich.

Book and appointment with us today – Click Here

When it comes to financial advisors, less is more! There are many benefits to having only one advisor that you trust to work with to execute your financial plan and work toward your financial goals. Below are a few ways having one advisor can benefit you.

What You Need to Know

1.   Consolidation

Having multiple advisors means you have multiple accounts, possibly with multiple different companies. This can become confusing for you and eventually your beneficiaries. Consolidating will not only make your investments easier to keep track of, but it will ensure that your investments are working together instead of potentially working against one another.

For example: If you hold a clean energy fund with Advisor A and also hold a clean energy fund with Advisor B, then you may be over invested in an asset class. If the investments were all being managed by one advisor, they would be able to create an asset allocation for all your money that would manage risk appropriately.

2.   Taxes

Registered contributions, income planning, and estate planning are just a few of the decisions that you will make with an advisor that can significantly impact your income taxes. Having two or more advisors can pose a significant risk when it comes to tax planning.  One advisor can’t know what another is doing.

For example: If your RRSP contribution for a given year is $20,000, your advisor may advise you to contribute to your RRSP. However, if you have another advisor who is unaware that you have already used up that contribution room, they may advise you to contribute to your RRSP as well. This can result in stiff penalties for overcontribution. Having one trusted advisor can eliminate this problem. 

3.   Fees

Many advisors operate with a fee-based compensation structure that is dictated by account size. Having all your investments in one place may offer you the opportunity to save on fees.

For example: If you have three $100,000 accounts with three different advisors and are paying 1% on each account then you are paying $3,000 total in fees. However, if you consolidated your portfolio with one advisor who may be able to offer you a lower fee due to account size (let’s say .75%), you could be saving big time in annual fees!

The Bottom Line

Having one advisor that you trust is a smart financial move. Your portfolio will be simplified, better allocated, and benefit from someone having knowledge of your entire financial picture. If you do choose too have more than one advisor it prudent to ensure that the advisors are in contact to make sure that their decisions aligned and make sense for your financial plan.

Book an appointment with us today – Click Here

With a new year comes new tax numbers!  Below is a quick reference of important tax numbers for three years, including 2022.  CRA has utilized a 1% indexing (inflation) for those numbers subject to that condition.

What You Need to Know

Taxable income brackets: 

RRSP Contribution Limit: 

• 2020: $27,230
• 2021: $27,830
• 2022: $29,210

TFSA Limit

• 2020: $6,000
• 2021: $6,000
• 2022: $6,000

Maximum Pensionable Earnings

• 2020: $58,700
• 2021: $61,600
• 2022: $64,900

OAS Income Recovery Threshold (claw-back begins)

• 2020: $79,054
• 2021: $79,845
• 2022: $81,761

OAS Maximum Recovery Threshold (claw-back recovers all OAS payments)

• July 2021 to June 2022: $128,149
• July 2022 to June 2023: $129,757
• July 2023 to June 2024: $133,141

Lifetime Capital Gains Exemption

• 2020: $883,384
• 2021: $892,218
• 2022: $913,630

Maximum EI Insurable Earnings

• 2020: $54,200
• 2021: $56,300
• 2022: $60,300

Medical Expense Threshold

• 2020: 3% of net income or $2,397, whichever is less
• 2021: 3% of net income or $2,421, whichever is less
• 2022: 3% of net income or $2,479, whichever is less

Basic Personal Amount for individuals whose net income is less than the beginning of the 29% tax bracket

• 2020: $13,229
• 2021: $13,808
• 2022: $14,398

Age Amount and Net income threshold amount

• 2020: $7,637  $38,508
• 2021: $7,713  $38,893
• 2022: $7,898  $39,826

Canada Caregiver amount for children under age 18

• 2020: $2,273
• 2021: $2,295
• 2022: $2,350

Child Disability Benefit and Family Net income phase out

• 2020: $2,886  $68,798
• 2021: $2,915  $69,395
• 2022: $2,985  $71,060

Canada Child Benefit

• 2020: $6,765 per child under six, $5,708 per child age 6-17
• 2021: $6,833 per child under six, $5,765 per child age 6-17
• 2022: #6,997 per child under six, $5,903 per child age 6-17

The Bottom Line

These are the current numbers released as of January 2022, but could change without notice, and be superseded by other stimulus measures.

Source: https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/adjustment-personal-income-tax-benefit-amounts.html

If you have been a good saver and contributed religiously to your RRSP, you should be rewarded with a sizeable six or seven figure RRSP that would make your retirement that much more enjoyable. The only issue now is – how do you get the money out of the RRSP without paying more tax than you should? Typically, it is advised that investors leave their RRSPs alone for as long as possible to take advantage of the tax-free growth. While this can be true for many people, it is important to crunch the numbers before you retire to make sure this makes the most sense for your unique retirement situation. Many retirees, especially those with a high net worth, may find there could be a more efficient way to withdraw retirement income.

What You Need to Know

The intended use of a RRSP is to defer taxes from the time you are in a high tax bracket until you get into a lower tax bracket, thereby saving some tax on your contributions and allowing the money to grow tax free for many years. At some point, however, you must take that money out. The government mandates that Canadians must convert their RRSP to a RRIF, or an annuity, at age 71. The government also mandates that a minimum amount be taken. The issue with waiting until you are required to convert to a RRIF and take income is that you have little flexibility as to what you can withdraw. If your RRSP is large, the mandatory withdrawal amount may push you into higher tax brackets

Let us look at an example of how this could play out. In this situation below, the retiree has waited until age 71 to start drawing down their RRSP:

Joe has a RRIF worth $600,000 and his minimum withdrawal at age 71 will be $31,680 (5.28% x $600,000 = $31,680) for the year. He receives the maximum CPP benefit of $14,445 annually and an OAS benefit of $7380. These three income sources alone will total $53,505. The lowest tax bracket for the year 2021 is $49,020. This means Joe has been pushed into a higher tax bracket! This is before the income from his rental properties, defined benefit pension plan, and income from his non-registered investments are calculated.

As you can see from the example above, waiting until the last minute to start taking an income from your registered investments can have unintended consequences. Aside from simply paying higher taxes, there are income tax implications that need to be considered as you move to higher tax brackets as well. At age 65, you gain two tax advantages: the Age Amount non-refundable credit ($7635 for 2021) and the Pension Income credit ($2000 for 2021). The Age Amounts is income-tested and it reduces by 15% of the amount your net income exceeds $38,893 for 2021. This claw back also applies to your OAS, which begins if your income exceeds $79,054. Both credits could be affected by RRIF minimums that become mandatory at age 71, therefore:

1. Pushing you into a higher tax bracket
2. Cause a partial or total loss of your Age Amount tax credit
3. Cause a partial or total claw back of your OAS income

And since the minimum withdrawal rate gets larger as you get older, this issue will only worsen as you age.

Here are some strategies that could help you pay lower taxes on your RRSP withdrawals:

1. Consider deferring your CPP and OAS. Both Canadian pensions allow you to defer until age 70 to start receiving them, and you get rewarded for the deferral by receiving higher amounts. You can then use RRSP withdrawals to fill the income gap that the CPP and OAS would have provided, so you can draw down your RRSP at a lower tax bracket.
2. When you stop working, you normally fall into a lower tax bracket, so top up your income to your existing tax bracket with RRSP withdrawals.
3. Start a RRIF at age 65 to take advantage of $2,000 pension income credit. No matter how much income you have. This pension credit will allow you to withdraw $2,000 tax free from your RRIF, if you do not have any other pension income. So, fund the RRIF with your RRSP money to take $2,000 out tax-free each year.
4. If your spouse’s RRSP value does not equal yours, you can start to equalize the amounts by withdrawing from yours to put into a spousal RRSP, if you have contribution room. The tax on your withdrawal is eliminated by your equivalent contribution into the spousal RRSP.

The Bottom Line

Always take to a financial advisor before starting RRIF payments. There is no one-size-fits-all when it comes to planning for retirement income. Everyone must consider their own financial situation when deciding how and when to start taking an income from your RRSP. Some things to talk to your advisor about: a) the amount of your minimum RRIF withdrawals at 71 b) how secondary income (rental income, side business etc.) will affect your tax bracket c) the best time for you to start OAS and CPP. It is important to ensure all your income sources are working as tax efficiently as possible so that you can get the most out of your hard-earned retirement savings!

Book an Appointment with us to discuss your RRSP – click HERE

Tax season is upon us and unfortunately that means paying any taxes that may be outstanding. Taxes should be carefully planned each year to ensure they do not become overwhelming, but what happens if you are faced with an unexpectedly large bill?

The most important thing to do if you have a large tax bill coming your way is to file your taxes on time.  Avoidance does not work with the CRA and it is best to face tax debt head one.  Delaying will only end up with additional penalties. There are a number of strategies available to help you deal with your tax debt.

What You Need to Know

1. Get a Personal Loan: This is the first step the CRA will expect you to take to pay off your debt.  Personal loans, borrowing against the value of your home, or borrowing from an individual are all options here. This will be the path of least resistance for most people. A personal loan will wipe out your debt to the CRA and allow you to create a reasonable payment plan for your situation that gives you flexibility to defer if necessary.

2. Access the Value in Your Home: Your home is often the biggest asset you own. Therefore, there are usually options to borrow against the value of the home. This can be done is a few ways:

• Home Equity Line of Credit: The first options are looking into lending products such as a Home Equity Line of Credit (HELOC). HELOC’s work by allowing a homeowner to take out of large line of credit on their home.  Many people use these products as a mortgage alternative, but they also work to access the value of your home without selling the property.
• Refinancing your Home: Refinancing is essentially taking a new mortgage out on your house. If you currently have a mortgage, this may mean replacing that mortgage with a new one that has a higher principal amount. If you are currently living mortgage free, this means picking a mortgage on the house as you normally would if you were buying a new house.
• Use Your House as Collateral for a Loan: Many loans, especially those of large amounts, require collateral before they are issued. This means the lending institution wants something of value put up against the loan in case the loan is not repaid.
• Sell Your Property: A last resort but selling a property may be the only way to gain access to its value if you are unable to secure financing.

3. Request for Taxpayer Relief: Individuals with outstanding debts to the CRA may be able to request “Taxpayer Relief”. Taxpayer Relief can reduce your amount owing by offering relief from penalties and interest charges.  Typically, taxpayer relief is only granted under extraordinary circumstances such as job loss, serious illness, and a clear inability to pay. Taxpayers must submit a formal request to the CRA using form RC4288 and submitting complete and accurate documentation of their circumstances.

4. Request a Payment Plan: Taxpayers may request a payment plan from the CRA but only after they have exhausted all other reasonable options to pay their balance i.e. Personal loan, refinancing house etc. Payment plans are typically not available for large amounts that can’t be repaid in a year. When negotiating a payment plan with the CRA it is always best to involve a tax professional who can make the negotiation for you.  CRA negotiators are experienced and their main concern is getting the balance owing as quickly as possible. It isn’t uncommon for taxpayers to enter a payment plan that is unrealistic for their financial situation.  CRA’s priority will always be the debt owed to them.

5. Declare Bankruptcy: Declaring bankruptcy has devastating short- and long-term financial effects and should only be utilized as an absolute last resort. Assets could be ceased and you will be unable to obtain credit for many years.  All options should be exhausted before resorting to bankruptcy. Hiring a debt counselor to help you decide if bankruptcy is indeed your only option would be prudent.

The Bottom Line

Tax debt can be overwhelming but realize there are options available to you.  It is always recommended that a professional tax consultant be hired if debt becomes unmanageable. They can help you consolidate debt, make payment plans, and negotiate with the CRA on your behalf.

Capital Gains tax occurs when you sell capital property for more than you paid for it. In Canada, you are only taxed on 50% of your capital gain. For example, if you bought an investment for $25,000 and sold it for $75,000 you would have a capital gain of $50,000.  You would then be taxed on 50% of the gain. In this instance, you would pay tax on $25,000.  In Canada, there are some legitimate ways to avoid paying this tax: Tax shelters, Lifetime Capital Gains Exemption, Capital Losses, Deferring, and Charitable Giving. *

What You Need to Know

1.   Tax Shelters

RRSPs and TFSAs are investment vehicles that are available to Canadians that allow investments to be bought and sold with no immediate tax implications:

• RRSPs – Registered Retirement Savings Plans are popular tax sheltering accounts.  Investments in these accounts grow tax free and you are not subject to capital gains on profits.  When you withdraw your funds, you will be taxed at your marginal tax rate.
• TFSAs – Tax Free Savings Accounts are like RRSPs in that they allow investments to grow tax free and you are not subject to capital gains tax on the profits you make. The key difference between TFSAs and RRSPs is that TFSAs hold after tax dollars. This means you can withdraw from the account without incurring tax penalties.

2.   Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption is available to some small business owners in Canada. It is allowing them to avoid capital gains when they sell shares of their business, a farming property, or fishing property. The CRA determines the exemption amount annually.  The Lifetime Capital Gains Exemption amount is cumulative over your lifetime and can be used until the entire amount has been applied.

3.   Offset Capital Losses

Generally, if you have had an allowable capital loss for the year, you can use it offset any capital gain tax you have owing. This can reduce or eliminate the taxes you will owe. There are a few considerations for employing this strategy:

• Losses have to a real loss in the eyes of the CRA. Superficial losses will not be allowed to offset gains.
• You can carry your losses forward or backward to apply them to different tax years. Losses can be carried back 3 years and carried forward indefinitely. This means you can accumulate losses that can be used to offset gains in future years.

4.   Defer Your Earnings

A possible strategy is to defer your earnings on the sale of an asset because you only will owe tax on the earnings that you have received.  For example, if you sell a property for $200,000 you could ask the buyer to stagger their payments over 4 years. Then you would receive $50,000 a year. This would allow you to spread out your capital gain tax.

This strategy is known as the Capital Gain Reserve.  There are a few things you need to keep in mind before using this strategy:

• The Capital Gains Reserve can be claimed up to 5 years.
• There is a 20% inclusion rate for each year. This means you must include at least 20% of the proceeds in your income each year for up to 5 years.
• There are some instances that the 5-year period can be extended to 10 years.

5.   Charity

Consider donating shares of property to charities instead of cash. This method allows you to make a charitable donation, receive a tax credit based on the donation, and avoid tax on any profit. Win-win!

* Avoiding or deferring Capital Gain Taxes should always be done with the guidance of a professional financial advisor and accountant to ensure all CRA guidelines are being carefully followed.

Book an appointment to meet with us! Click Here