MacKay LLP 2011 Winter Newsletter

1. winter
2011 mackay.news
A publication of MacKay LLP Chartered Accountants and Business Advisors
Year End Planning
Investments Spousal Loans
If you have capital loss carry forwards, consider real- If you have spousal loans ensure the interest is paid
izing capital gains. If you have realized capital gains by January 30, 2012 by a “documented” method such
in the current year, consider realizing any unrealized as a deposited cheque.
capital losses. Both of these strategies will reduce
your tax bill as capital losses can only be offset against Salary to Family Members
capital 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 of
contributions may be made up to February 29, 2012. documentation together with payment of withholdings
If you must repay a portion of your Home Buyers’ by January 15, 2012 or the appropriate payment date
Plan or your Lifelong Learning Plan, payments must if it is advanced. An applicable payroll number may
be made by February 29, 2012. Tax savings are great- be appropriate.
est for individuals with more than $41,500 of taxable
income. If you are starting to withdraw funds from Charitable or Political Donations
your RRSP, consider using your RRSPs to purchase If you are planning to give money to a charity or political
an 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 Trust
Ensure any distributions from a family trust are made RESPS
by December 31, 2011. If distributions are planned, Make any contributions to an RESP before December
ensure appropriate dividends are paid from a private 31 to qualify for any 2011 grants you may be eligible for.
company in advance. Payments by cheques deposited
and distributed before the end of the year are required,
unless detailed steps are completed. inthisissue
Shareholder Loans Year End Planning 1
If you have a shareholder loan that has been outstand- Important Changes to CPP 2
ing since the December 31, 2010 year end, ensure it Principal Residence 2
is repaid by December 31, 2011. Consult your MacKay
LLP advisor on methods of payment such as dividend Missed Opportunities Mean Extra Taxes 3&4
or net wage compensation.
Tax Free Savings Account 4
Equipment Purchases Make the Most Effective Use
If you have equipment you were planning on pur- of Your Accountant 5
chasing early next year, consider purchasing it before
Announcements 5
December 31, 2011 to get a tax deduction this year.
If you have a proprietorship or company, consider this Great News for Canadians! 6
prior to your next year end.
mackay.news winter2011 • Newsletter 1

2. Important Changes to CPP
CPP rules will be changing starting January 1, 2012. with Canada Revenue Agency and provide a copy of
If you are over 18 and under 65 years of age and are the completed form to your employer. If you do not
earning wages, you will have to pay CPP premiums file the Form by December 31, 2011, your employer
even 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 more
ing increased pension. To stop paying CPP premi- details please see our fall newsletter or contact your
ums, you must complete and file the CPT30 Form MacKay LLP professional.
Principal Residence
As a homeowner you are aware that the profit on the cabin in 2005 and sold both in 2011. The gain on the
sale of your home is tax free. house was $100,000 and the gain on the cabin was
You also know tax has its nuances. Just because you $50,000. The initial reaction is to claim the entire gain
know the basic rules does not mean they apply to on the house as tax free. If instead the exemption is
your exact situation. It’s better to be sure than to risk a claimed on the cabin for 2005 to 2011 and the house is
swan 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 the
moved in but ended up selling it a few months later time or is it larger than one half hectare? Direct advice
because 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 though
we 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 discussion
Before we address this astute enquiry, here’s how the on the topic, go to the CRA’s website at: http://www.
tax-free principal residence rule works. The principal cra-arc.gc.ca/E/pub/tp/it120r6/it120r6-e.pdf
residence exemption eliminates the capital gains from
the sale of a principal residence. So here is the big Back to the reader’s question – the gain is tax free
question – did you sell a principal residence? because they sold a principal residence – a property
they both owned and lived in. The fact they sold the
A principal residence is a home you own and live in. property a few months after moving in is irrelevant if
For example, if you sell your home that you purchased you can prove to the CRA (if asked) that you bought
for $300,000, for $500,000, the profit of $200,000 is the property to live in. Conversely, if you bought the
tax free if you lived in it throughout that period. A prin- property to flip for profit, even though you did move
cipal 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 the
or child lives in it. property was a business activity and assess the profit
If 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’ tax
be your principal residence if you use it occasionally credit as long as either of you hadn’t owned a home
and 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 during
However, you can only claim the principal residence 2011 will qualify for the $750 federal tax savings if you
exemption on one property in any one year. An exam- hadn’t owned a home since January 1, 2007. For more
ple would be, if you bought your home in 1990 and a info, Google: First-Time Home Buyers’ tax credit.
mackay.news winter2011 • Newsletter 2

3. Missed Opportunities Mean Extra Taxes
It appears as if thousands of Canadians like to pay 6. Medical Expenses
income tax. In fact, they like to pay so much that they You may claim medical expenses for yourself, your
pay more than they should. By not taking full advan- spouse and dependent children. Either spouse can
tage of deductions, you may be one of these generous make the claim. You are not restricted to claiming on a
Canadians without even knowing it. Are you taking calendar year basis; you can claim medical expenses
advantage of every deduction available to you? Do for any 12-month period that ends in the year. The
you file your return on time? Do you pay installments most commonly missed expenses are dental bills,
quarterly? eyeglasses and private medical insurance, including
Here is a very subjective look at some of the more travel medical insurance. For certain seniors, some
common missed opportunities that may be contribut- or all of the payments to a nursing home qualify as
ing 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 Interest
10. Tuition and Education Credit Not Too many taxpayers do not plan properly to ensure
Transferred that interest is deductible. Loans must be incurred
Tuition and education credits can be transferred to a to purchase an investment (with the intent to earn
spouse 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 actual
restrictions and a few forms to sign; however, it is
direct use of funds borrowed. Carrying charges may
relatively easy to do the transfer and accelerate the
also include investment counsel fees, accounting fees
use of this deduction.
and safety deposit box charges.
9. Childcare Expenses 4. Moving Expenses
Subject to certain limitations, childcare expenses
Moving costs, real estate commissions on the sale of
can be deducted from income by the lower income
your former home, property purchase tax on your new
spouse. These expenses include day-care, babysit-
home, and legal fees qualify as moving expenses (with
ting, boarding school and day camps. You will have to certain restrictions). If you are a student, it is possible
provide the Social Insurance Number if you paid an to claim the moving expenses to start a job (including
individual 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 new
8. 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 (other
than to and from the work place) without reimburse- 3. Make Maximum Use of Your RRSP
ment by their employer can deduct the business To make maximum use of your RRSP from an income
portion 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 use
still claim a deduction for the non-reimbursed portion. of spousal RRSPs, including those for common-law
Your 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 RRSP
7. Charitable Donations
Lifelong Learning Plan if you are returning to school
Charitable donations made by you or your spouse full time, and to roll the maximum amount of severance
during 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. Installments
so it makes more sense to aggregate the credits Failure to pay quarterly installments results in interest
and use the low rate only once. If donations total less charges and possible penalty interest. It is possible
than $200 they can be claimed on either return, either to pay catch-up payments and reduce or offset the
separately or jointly. interest charges.
Continued on page 4
mackay.news winter2011 • Newsletter 3

4. 1. Filing Deadlines and can be charged if the taxpayer has failed to file
The normal deadline for filing an income tax return on time for a second time in three years or if a formal
for the previous year is April 30th. This filing deadline demand for filing has been issued by the Minister.
is extended to June 15th if you are self-employed Interest and penalties are not tax deductible and add
or your spouse is self-employed. However, income up quickly at the rates charged by Canada Revenue
taxes payable are still due on April 30th. The filing of Agency. Even if you cannot pay the amount of taxes
the 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 of
by 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 situation
late-filing penalties (5% + 1% per month to a maximum with your tax advisor to ensure that you are minimizing
of 17%) on the tax outstanding, plus interest. A “sec- your tax bill.
ond occurrence” penalty is double the amount above
Tax Free Savings Account
Let’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, you
TFSA. 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 made
this thing is. No matter, the following TFSA essentials a TFSA contribution. You automatically accumulate
will 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 Revenue
You know you can save money by leaving it in your
Agency tracks your cumulative TFSA contribution
savings account or buying investments such as stock
room and conveniently reports it on your Notice of
or 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 the
Savings 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 to
have tax implications. Interest earned in a savings the following year’s contribution room. This amazing
account 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 your
into 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 end
And 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 + $15,200
taxable to the recipients when withdrawn.
withdrawn in the previous year). The potential problem
The 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 following
idends or interest earned in a TFSA is completely tax year. If you put $15,000 into a TFSA in June, withdraw
free. For example, the capital gain is totally tax free if it in July and then recontribute it in August, you will
your TFSA were used to purchase a speculative stock have overcontributed from the months of August to
and 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 hand
it’s done. Or you can set one up online much quicker over your TFSA), become a non-resident and other
through your bank or brokerage service. You have to icky stuff like penalties for over-contributing. To stretch
be 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
professional.
mackay.news winter2011 • Newsletter 4

5. Make The Most Effective Use
Of Your Accountant
Yes, 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. Timely
personnel. But it always does cost more when you information is useful information. More mistakes
present your records in a disorganized fashion. Here are made by both of us if the work is being done at
are 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 are
1. 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 be
2. 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 company
3. 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 newsletter.
mackay.news winter2011 • Newsletter 5

6. Great News for Canadians!
Canadians in the United States
for Part of the Year
Finally, 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 quarter
of The Border Guide have written letters to their local of 2012, unless a major obstacle is thrown at it and it is
politicians 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 newsletter
50+ 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, and
tax to boot. Incredibly, we are getting some action in can be viewed on the CRA website (www.cra.gc.ca).
the US Congress and we believe, since it is biparti- This 21 page guide includes information on how US
san 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 and
chance of passing this time around. The bill, S. 1746, other matters.
also proposes a homeownership visa that would allow
Canadians of any age to live in the US year-round
and save a bundle in income taxes too. New Pooled Registered
To qualify, a Canadian would need to spend at least
$500,000 in acquiring a US home and other US res-
Pension Plans
idential property. Bob Keats believes this will be a In early 2012 we expect to have more detail on the
superior 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. These
American 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 support.
jobs creator while simultaneously helping Canadians
reduce their taxes and enjoy a lower cost-of-living
lifestyle in a warm climate, without snow!
Although Canadians will not be able to work on the
retirement or homeownership visas, these visas pro-
vide a bridge to a work visa with proper immigration
planning. We are very optimistic and excited about
the Retirement Visa as it has been such a long time
coming. 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 firms.
mackay.news winter2011 • Newsletter 6