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2011 Winter Newsletter


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MacKay LLP 2011 Winter Newsletter

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2011 Winter Newsletter

  1. 1. winter 2011 A publication of MacKay LLP Chartered Accountants and Business AdvisorsYear End PlanningInvestments Spousal LoansIf you have capital loss carry forwards, consider real- If you have spousal loans ensure the interest is paidizing capital gains. If you have realized capital gains by January 30, 2012 by a “documented” method suchin the current year, consider realizing any unrealized as a deposited losses. Both of these strategies will reduceyour tax bill as capital losses can only be offset against Salary to Family Memberscapital gains. If you pay reasonable salaries to family members, make sure payment of net compensation is reason-RRSPs able and is made before December 31, 2011. Again,Make your RRSP contributions. Spousal and regular deposited cheques are an appropriate method ofcontributions may be made up to February 29, 2012. documentation together with payment of withholdingsIf you must repay a portion of your Home Buyers’ by January 15, 2012 or the appropriate payment datePlan or your Lifelong Learning Plan, payments must if it is advanced. An applicable payroll number maybe made by February 29, 2012. Tax savings are great- be appropriate.est for individuals with more than $41,500 of taxableincome. If you are starting to withdraw funds from Charitable or Political Donationsyour RRSP, consider using your RRSPs to purchase If you are planning to give money to a charity or politicalan annuity that will be eligible for the pension credit party make sure the gift is made before December 31,and income splitting. 2011 to ensure you can claim the tax credit on your 2011 return.Family TrustEnsure any distributions from a family trust are made RESPSby December 31, 2011. If distributions are planned, Make any contributions to an RESP before Decemberensure appropriate dividends are paid from a private 31 to qualify for any 2011 grants you may be eligible in advance. Payments by cheques depositedand distributed before the end of the year are required,unless detailed steps are completed. inthisissueShareholder Loans Year End Planning 1If you have a shareholder loan that has been outstand- Important Changes to CPP 2ing since the December 31, 2010 year end, ensure it Principal Residence 2is repaid by December 31, 2011. Consult your MacKayLLP advisor on methods of payment such as dividend Missed Opportunities Mean Extra Taxes 3&4or net wage compensation. Tax Free Savings Account 4Equipment Purchases Make the Most Effective UseIf you have equipment you were planning on pur- of Your Accountant 5chasing early next year, consider purchasing it before Announcements 5December 31, 2011 to get a tax deduction this year.If you have a proprietorship or company, consider this Great News for Canadians! 6prior to your next year winter2011 • Newsletter 1
  2. 2. Important Changes to CPPCPP rules will be changing starting January 1, 2012. with Canada Revenue Agency and provide a copy ofIf you are over 18 and under 65 years of age and are the completed form to your employer. If you do notearning wages, you will have to pay CPP premiums file the Form by December 31, 2011, your employereven if you are collecting CPP. If you are over 65 but will be required to deduct CPP from your wages start-under 70 years of age and earning wages, you may ing January 1, 2012. Once you reach 70 and are earn-choose not to pay CPP premiums and forgo the result- ing wages, you cannot pay CPP premiums. For moreing increased pension. To stop paying CPP premi- details please see our fall newsletter or contact yourums, you must complete and file the CPT30 Form MacKay LLP professional.Principal ResidenceAs a homeowner you are aware that the profit on the cabin in 2005 and sold both in 2011. The gain on thesale of your home is tax free. house was $100,000 and the gain on the cabin wasYou also know tax has its nuances. Just because you $50,000. The initial reaction is to claim the entire gainknow the basic rules does not mean they apply to on the house as tax free. If instead the exemption isyour exact situation. It’s better to be sure than to risk a claimed on the cabin for 2005 to 2011 and the house isswan dive into the Canada Revenue Agency’s penalty claimed from 1990 to 2004 we actually shelter approx-box. Consider this principal residence question. imately $123,000 in capital gains instead of $100,000. The real challenge is time and size of the property and“In early 2011 we bought a house for $400,000. We its use. Did you only live on the property for part of themoved in but ended up selling it a few months later time or is it larger than one half hectare? Direct advicebecause of a work-related move. We sold our place for on these cases is needed as part of the property can$450,000. Is our gain taxable? Also, would we qualify be taxable.for the First-Time Home Buyers’ tax credit even thoughwe only owned the place a few short months?” So far we have only scratched at the basic principal residence exemption rules. For a full blown discussionBefore we address this astute enquiry, here’s how the on the topic, go to the CRA’s website at: principal residence rule works. The principal exemption eliminates the capital gains fromthe sale of a principal residence. So here is the big Back to the reader’s question – the gain is tax freequestion – did you sell a principal residence? because they sold a principal residence – a property they both owned and lived in. The fact they sold theA principal residence is a home you own and live in. property a few months after moving in is irrelevant ifFor example, if you sell your home that you purchased you can prove to the CRA (if asked) that you boughtfor $300,000, for $500,000, the profit of $200,000 is the property to live in. Conversely, if you bought thetax free if you lived in it throughout that period. A prin- property to flip for profit, even though you did movecipal residence includes a house, condo, trailer, house into the property during the short period of ownership,boat or cabin, which you own and you, your spouse the CRA would argue the purchase and sale of theor child lives in it. property was a business activity and assess the profitIf you own a house and a cabin, you could own two as business income.principal residences at the same time. Your cabin can You also qualify for the First-Time Home Buyers’ taxbe your principal residence if you use it occasionally credit as long as either of you hadn’t owned a homeand the main reason for owning the cabin is not for during the year of purchase and the past four calen-rental purposes. dar years. For example, your home purchase duringHowever, you can only claim the principal residence 2011 will qualify for the $750 federal tax savings if youexemption on one property in any one year. An exam- hadn’t owned a home since January 1, 2007. For moreple would be, if you bought your home in 1990 and a info, Google: First-Time Home Buyers’ tax winter2011 • Newsletter 2
  3. 3. Missed Opportunities Mean Extra TaxesIt appears as if thousands of Canadians like to pay 6. Medical Expensesincome tax. In fact, they like to pay so much that they You may claim medical expenses for yourself, yourpay more than they should. By not taking full advan- spouse and dependent children. Either spouse cantage of deductions, you may be one of these generous make the claim. You are not restricted to claiming on aCanadians without even knowing it. Are you taking calendar year basis; you can claim medical expensesadvantage of every deduction available to you? Do for any 12-month period that ends in the year. Theyou file your return on time? Do you pay installments most commonly missed expenses are dental bills,quarterly? eyeglasses and private medical insurance, includingHere is a very subjective look at some of the more travel medical insurance. For certain seniors, somecommon missed opportunities that may be contribut- or all of the payments to a nursing home qualify asing to your tax bill. a medical expense. By carefully checking different alternatives, you can maximize this tax credit.Top 10 Missed Tax Deductions 5. Carrying Charges and(in reverse order) Deductible Interest10. Tuition and Education Credit Not Too many taxpayers do not plan properly to ensure Transferred that interest is deductible. Loans must be incurredTuition and education credits can be transferred to a to purchase an investment (with the intent to earnspouse or parent from a student who has income too income) in order to have the interest deductible. Proper documentation on the loans will ensure that the inter-low to claim the credits themselves. There are some est is eligible. Deduction is dependent on the actualrestrictions and a few forms to sign; however, it is direct use of funds borrowed. Carrying charges mayrelatively easy to do the transfer and accelerate the also include investment counsel fees, accounting feesuse of this deduction. and safety deposit box charges.9. Childcare Expenses 4. Moving ExpensesSubject to certain limitations, childcare expenses Moving costs, real estate commissions on the sale ofcan be deducted from income by the lower income your former home, property purchase tax on your newspouse. These expenses include day-care, babysit- home, and legal fees qualify as moving expenses (withting, boarding school and day camps. You will have to certain restrictions). If you are a student, it is possibleprovide the Social Insurance Number if you paid an to claim the moving expenses to start a job (includingindividual in order to get the deduction a copy of this your summer job) or to start a business. Either way,form is frequently requested by CRA. you must earn income at the new location from a new8. Employment Expenses job or a business and have moved in order to be at least 40 kilometres closer to your present position.Employees using their own automobile for work (otherthan to and from the work place) without reimburse- 3. Make Maximum Use of Your RRSPment by their employer can deduct the business To make maximum use of your RRSP from an incomeportion of their automotive expenses. If you are reim- tax perspective you should start early in your life,bursed and the amount is not “reasonable” you can contribute the maximum each year and consider usestill claim a deduction for the non-reimbursed portion. of spousal RRSPs, including those for common-lawYour employer will have to complete form T2200 in spouses, to take advantage of lower income tax rates.order for you to get the deduction. Other ideas are to use the RRSP Home Buyer’s Plan if you are a first-time homebuyer, to use the RRSP7. Charitable Donations Lifelong Learning Plan if you are returning to schoolCharitable donations made by you or your spouse full time, and to roll the maximum amount of severanceduring the year should normally be added together payments directly into your RRSP tax free.and claimed on the income tax return of one spouse.A higher credit is available for donations over $200, 2. Installmentsso it makes more sense to aggregate the credits Failure to pay quarterly installments results in interestand use the low rate only once. If donations total less charges and possible penalty interest. It is possiblethan $200 they can be claimed on either return, either to pay catch-up payments and reduce or offset theseparately or jointly. interest charges. Continued on page winter2011 • Newsletter 3
  4. 4. 1. Filing Deadlines and can be charged if the taxpayer has failed to fileThe normal deadline for filing an income tax return on time for a second time in three years or if a formalfor the previous year is April 30th. This filing deadline demand for filing has been issued by the extended to June 15th if you are self-employed Interest and penalties are not tax deductible and addor your spouse is self-employed. However, income up quickly at the rates charged by Canada Revenuetaxes payable are still due on April 30th. The filing of Agency. Even if you cannot pay the amount of taxesthe information return for offshore investments with due, ensure you file that return on time.a cost over $100,000 is subject to penalties if not filed The MacKay LLP “Top Ten List” represents some ofby these dates. the more common deductions that are missed by tax-Taxpayers who do not file their tax returns on time face payers. You should discuss your particular situationlate-filing penalties (5% + 1% per month to a maximum with your tax advisor to ensure that you are minimizingof 17%) on the tax outstanding, plus interest. A “sec- your tax bill.ond occurrence” penalty is double the amount aboveTax Free Savings AccountLet’s give your brain a rest and look at a straight- You can contribute up to $5,000 a year into a TFSA.forward topic – the Tax-Free Savings Account or the Because the TFSA program was created in 2009, youTFSA. You may already know lots about this invest- will have $15,000 of TFSA contribution room in 2011,ment program or are totally mystified with whatever if you are aged 20 or older this year and never madethis thing is. No matter, the following TFSA essentials a TFSA contribution. You automatically accumulatewill be a useful refresher or an eye-opener. The TFSA is $5,000 of TFSA contribution room since 2009, pro-all about saving money but with an innovative feature. vided you were aged 18 or older in 2009, regardless if you have opened a TFSA. The Canada RevenueYou know you can save money by leaving it in your Agency tracks your cumulative TFSA contributionsavings account or buying investments such as stock room and conveniently reports it on your Notice ofor mutual funds. You can also invest through the tax- Assessment.assisted Registered Retirement Savings Plan (RRSP);save for future schooling using a Registered Education Another big appeal and potential problem with theSavings Plan (RESP) or provide retirement income for TFSA is the way its contribution room is calculated.a qualifying disabled individual using a Registered In addition to your automatic annual $5,000 room,Disability Saving Plan (RDSP). All the above options any TFSA withdrawal in the previous year is added tohave tax implications. Interest earned in a savings the following year’s contribution room. This amazingaccount is taxable, as is the investment income earned feature allows you to re-contribute every dollar pre-from your stocks or mutual funds. Money that goes viously withdrawn. For example, if you opened yourinto an RRSP is tax-deductible – this is a good thing – first TFSA account today, contributed $15,000 to it,but RRSP withdrawals are fully taxable – not so good. withdraw $15,200 (interest earned = $200) at the endAnd the investment income in an RESP or RDSP is of 2011, your 2012 TFSA contribution room will be $20,200 ($5,000 from the 2012 annual limit + $15,200taxable to the recipients when withdrawn. withdrawn in the previous year). The potential problemThe TFSA is different because of its unique tax free is that a lot of people don’t understand that withdraw-feature. Any investment income, i.e., capital gains, div- als don’t create contribution room until the followingidends or interest earned in a TFSA is completely tax year. If you put $15,000 into a TFSA in June, withdrawfree. For example, the capital gain is totally tax free if it in July and then recontribute it in August, you willyour TFSA were used to purchase a speculative stock have overcontributed from the months of August toand you made a killing because your hunch worked December and will be subject to punitive penalties.out. To get started you go to your bank or investment There are a lot more to the TFSA such as what hap-broker and say the magic words – ‘Open a TFSA’ and pens when you die, get divorced (and have to handit’s done. Or you can set one up online much quicker over your TFSA), become a non-resident and otherthrough your bank or brokerage service. You have to icky stuff like penalties for over-contributing. To stretchbe aged 18 or older, with a Social Insurance Number, your brain, go to the CRA’s website for a comprehen-to open a TFSA. sive review of TFSA rules or contact your MacKay LLP winter2011 • Newsletter 4
  5. 5. Make The Most Effective UseOf Your AccountantYes, we do get “shoe boxes. Sometimes it happens ” 8. Come early. Our goal is to have year ends com-for good reason, like an unexpected change in key pleted within 3 months of the year end. Timelypersonnel. But it always does cost more when you information is useful information. More mistakespresent your records in a disorganized fashion. Here are made by both of us if the work is being done atare some tips on how to utilize your accountant effec- the last minute.tively and to lower your accounting fees. 9. During the year please telephone when things are1. Reconcile your bank. Once instructed this is actu- unusually good or bad. We may be able to do some ally easy to do and yet can be a very time consum- effective tax planning and/or damage control at ing and therefore, very costly procedure. the time rather than after the fact when it may be2. Bring your bank statement and cancelled cheques impossible. for the month of your year end and the month 10. If you wish to have a personal year end checklist, following for your business. let us know. (Often we send this out for company3. Bring in your Accounts Receivable listing, Accounts records.) Payable listing, and an Inventory listing. The Accounts 11. Do not be afraid to ask questions. There are no such Receivable listing should include an indication of things as dumb questions, only dumb mistakes or the doubtful accounts. items we can miss.4. Provide photocopies of the invoices for all fixed 12. Two things happen when you take more responsi- asset additions, such as the vehicle purchase. bility for your own record keeping:5. If you have a new loan or change in your loan, bring a) You learn more about your business. in the loan document. b) You can ask better questions of your accountant.6. Bring in a balanced set of books. Let us show you As a result, you can make better decisions and we can if you do not know how. We can save you money in be more effective. the long run and it is not difficult to learn. If you are using an accounting software package this should not be an issue.7. Whenever you visit our office, come in with a list of prepared questions and comments. Comment on the unusual events that happened during the year, especially those statement of income items that fluctuated more than the norm. Announcements We are pleased to announce the entry of the following Partners and Principals to the MacKay LLP Partnership in January, 2012: Michael Crowley, Associate Principal (Assurance), Kelowna office Brian Sanders, Equity Partner (Tax), Kelowna office Perry Yuen, Associate Partner (Tax), Vancouver office Robert Hussey, Associate Partner (Assurance), Kelowna office We look forward to providing more information on these individuals and all of our partners in future editions of our winter2011 • Newsletter 5
  6. 6. Great News for Canadians!Canadians in the United Statesfor Part of the YearFinally, great news; the latest version of the Retire- way through the US political process to become law.ment Visa for Canadians has returned. Many readers We do expect it to become law within the first quarterof The Border Guide have written letters to their local of 2012, unless a major obstacle is thrown at it and it ispoliticians and Chambers of Commerce to try to get delayed until after the 2012 US elections in November.this Visa. The Retirement Visa will allow Canadians age This is an excerpt from the Border Guide, a newsletter50+ to spend as much as 240 days annually in the US Bob Keats leading.Sunbelt without worrying about immigration issues, New CRA Guide P151 provides information for Cana-plus they will be able to save a great deal of income dians who spend significant time in the US, andtax to boot. Incredibly, we are getting some action in can be viewed on the CRA website ( US Congress and we believe, since it is biparti- This 21 page guide includes information on how USsan being pushed by some senior Senators and with tax laws apply, US Gambling income, US Real prop-there being a Republican House, it has a very good erty, US Individual Tax Numbers, residing factors andchance of passing this time around. The bill, S. 1746, other matters.also proposes a homeownership visa that would allowCanadians of any age to live in the US year-roundand save a bundle in income taxes too. New Pooled RegisteredTo qualify, a Canadian would need to spend at least$500,000 in acquiring a US home and other US res- Pension Plansidential property. Bob Keats believes this will be a In early 2012 we expect to have more detail on thesuperior job creating bill than the current Jobs Bill proposed large-scale, low-cost pension plan for indi-being pushed by President Obama, at a cost to the viduals who do not participate in a pension plan. TheseAmerican taxpayers of over $500 billion. This visa bill plans are based on current federal government pro-will cost virtually nothing, yet it will be an incredible posals that have provincial creator while simultaneously helping Canadiansreduce their taxes and enjoy a lower cost-of-livinglifestyle in a warm climate, without snow!Although Canadians will not be able to work on theretirement or homeownership visas, these visas pro-vide a bridge to a work visa with proper immigrationplanning. We are very optimistic and excited aboutthe Retirement Visa as it has been such a long timecoming. We will keep you informed as the bill works its Prepared by the Taxation Services Section of MacKay LLP Chartered Accountants and Business Advisors for review by our clients and other interested parties Vancouver (604) 687-4511 Yellowknife (867) 920-4404 Surrey (604) 591-6181 Edmonton (780) 420-0626 Kelowna (250) 763-5021 Calgary (403) 294-9292 Whitehorse (867) 667-7651 If you would like to be added to or removed from our mailing list, please contact your local office. MacKay LLP is a Canadian firm of chartered accountants based in Western and Northern Canada and represented by offices in Alberta, British Columbia, Yukon and the Northwest Territories. The firm currently has 43 partners and principals, approximately 220 staff, and offers a full range of accounting, auditing, taxation, insolvency, valuation, computer, and management consulting services to all clients. In other areas of Canada and internationally, the firm is represented by other locally managed independent accounting winter2011 • Newsletter 6