Some great things to consider as tax season gets going.
Contact us this week to get some tax planning underway
Some great things to consider as tax season gets going.
Contact us this week to get some tax planning underway
Terrance S. Carter B.A., LL.B., TEP, Trade-mark Agent and Ryan M. Prendergast B.A., LL.B.
On October 25, 2018, the Department of Finance Canada tabled in the House of Commons a Notice of Ways and Means Motion, which contained a number of amendments to the Income Tax Act ("ITA") and other legislation to implement certain provisions previously announced in Budget 2018 and other measures, including amendments to the ITA to modify the rules governing political activities (now referred to as "public policy dialogue and development activities") by charities in Canada. The proposed amendments were introduced as Bill C-86, Budget Implementation Act, 2018, No. 2, ("Bill C-86"), which received first reading on October 29, 2018, and is included as an appendix to this Charity & NFP Law Bulletin for ease of reference. Bill C-86 significantly improves upon the draft legislation released on September 14, 2018 by the Department of Finance Canada ("September Draft Legislation"), discussed in last month's Charity & NFP Law Bulletin No. 428
Looking ahead to 2018 (December 2017)
Planning for – or even thinking about – 2018 taxes when it’s not even mid-December 2017 may seem more than a little premature. However, most Canadians will start paying their taxes for 2018 with the first paycheque they receive in January, and it’s worth taking a bit of time to make sure that things start off – and stay – on the right foot.
For most Canadians, (certainly for the vast majority who earn their income from employment), income tax, along with other statutory deductions like Canada Pension Plan contributions and Employment Insurance premiums, are paid periodically throughout the year by means of deductions taken from each paycheque received, with those deductions then remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by his or her employer.
Quick Download for Federal Form TD1 & respective Provincial Forms
Of course, each taxpayer’s situation is unique and so the employer has to have some guidance as to how much to deduct and remit on behalf of each employee. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by each employee, sometimes at the start of each year, but certainly at the time employment commences. Each employee must, in fact, complete two TD1 forms – one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer lives. Federal and provincial TD1 forms for 2018 (which were recently posted on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms.html) list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial) which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the federal government.
While the TD1 completed by the employee at the time his or her employment commenced will have accurately reflected the credits claimable by the employee at that time, everyone’s life circumstances change. Where a baby is born, or a son or daughter starts post-secondary education, a taxpayer turns 65 years of age, or an elderly parent comes to live with his or her children, the affected taxpayer will be become eligible to claim tax credits not previously available. And, since the employer can only calculate source deductions based on information provided to it by the employee, those new credit claims won’t be reflected in the amounts deducted at source from the employee’s paycheque.
Consequently, it’s a good idea for all employees to review the TD1 form prior to the start of each taxation year and to make any changes needed to ensure that a claim is made for any and all credit amounts currently available to him or her. Doing so will ensure that the correct amount of tax is deducted at source throughout the year.
Where the taxpayer has available deductions which cannot be recorded on the TD1, like RRSP contributions, deductible support payments or child care expenses, it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect the employee’s tax liability for 2018. The way to do so is to file Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1213.html) with the CRA. Once that form is filed with the CRA, the Agency will, after verifying that the claims made are accurate, provide the employer with a Letter of Authority authorizing that employer to reduce the amount of tax being withheld at source.
Of course, as with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes time. Consequently, the sooner a T1213 for 2018 is filed with the CRA, the sooner source deductions can be adjusted, effective for all paycheques subsequently issued in that year. Providing an employer with an updated TD1 for 2018 at the same time will ensure that source deductions made during 2018 will accurately reflect all of the employee’s current circumstances, and consequently his or her actual tax liability for the year.
Year-end tax planning – some steps to take before December 31st (December 2017)
As the 2017 calendar year winds down, the window of opportunity to take steps to reduce one’s tax bill for the 2017 tax year is closing. As a general rule, tax planning or tax saving strategies must be undertaken and completed by December 31st, in order to make a difference to one’s tax liability for 2017. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan contributions. Such contributions can be made any time up to and including March 1, 2018, and claimed on the return for 2017.)
While the remaining time frame in which tax planning strategies for 2017 can be implemented is only a few weeks, the good news is that the most readily available of those strategies don’t involve a lot of planning or complicated financial structures – in many cases, it’s just a question of considering the timing of expenditures which would have been made in any case. Below is a list of the most common such opportunities available to individual Canadians.
The federal government and all of the provincial and territorial governments provide a tax credit for donations made to registered charities during the year. In all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year – there are no exceptions.
There is, however, another reason to ensure donations are made by December 31st. The credit provided by each of the federal, provincial, and territorial governments is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. Where the taxpayer making the donation has taxable income (for 2017) over $202,800, charitable donations above the $200 threshold can receive a federal tax credit of 33%.
As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2017 will receive a federal credit of $88 ($200 × 15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2017 and January 2018, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2018 donation can’t be claimed until the 2018 return is filed in April 2019. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.
It’s also possible to carry forward, for up to 5 years, donations which were made in a particular tax year. So, if donations made in 2017 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2012, 2013, 2014, 2015, or 2016 tax years can be carried forward and added to the total donations made in 2017, and the aggregate then claimed on the 2017 tax return.
When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high-income surtax – currently, Ontario and Prince Edward Island – it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.
This year, there is an additional last-chance incentive for Canadians who have not been in the habit of making charitable donations to make a cash donation to a registered charity. In the 2013 Budget, the federal government introduced a temporary charitable donations super-credit. That super-credit (which can be claimed only once) allows individuals who have not claimed a charitable donations tax credit in any tax year since 2007 to claim a super-credit on up to $1,000 in cash donations made during the year. The super-credit works by providing an additional 25% credit for cash donations. Consequently, when the super-credit is combined with the regular charitable donations tax credit, the total credit claimable is equal to 40% (15% + 25%) of donations under $200 and 54% (29% + 25%) of donations over the $200 threshold. This year (2017) is the last year for which the super-credit can be claimed, and only in respect of qualifying donations made before the end of the year.
There are an increasing number of medical expenses which are not covered by provincial health care plans, and an increasing number of Canadians who do not have private coverage for such costs through their employer. In those situations, Canadians have to pay for such unavoidable expenditures – including dental care, prescription drugs, ambulance trips, and many other para-medical services, like physiotherapy, on an out-of-pocket basis. Fortunately, where such costs must be paid for partially or entirely by the taxpayer, the medical expense tax credit is available to help offset those costs. Unfortunately, the computation of such expenses and, in particular, the timing of making a claim for the credit, can be confusing. In addition, the determination of which expenses qualify for the credit and which expenses do not isn’t necessarily intuitive, nor is the determination of when it’s necessary to obtain prior authorization from a medical professional in order to ensure that the contemplated expenditure will qualify for the credit.
The basic rule is that qualifying medical expenses (a lengthy list of which can be found on the Canada Revenue Agency (CRA) website at http://www.cra-arc.gc.ca/medical/#mdcl_xpns) over 3% of the taxpayer’s net income, or $2,268, whichever is less, can be claimed for purposes of the medical expense tax credit on the taxpayer’s return for 2017.
Put in more practical terms, the rule for 2017 is that any taxpayer whose net income is less than $75,500 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $75,500 will be limited to claiming qualifying expenses which exceed the $2,268 threshold.
The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2017 will produce the greatest amount eligible for the credit. That determination will obviously depend on when medical expenses were incurred so there is, unfortunately, no universal rule of thumb which can be used.
Medical expenses incurred by family members – the taxpayer, his or her spouse, dependent children who were born in 2000 or later, and certain other dependent relatives – can be added together and claimed by one member of the family. In most cases, it’s best, in order to maximize the amount claimable, to make that claim on the tax return of the lower income spouse, where that spouse has tax payable for the year.
As December 31st approaches, it’s a good idea to add up the medical expenses which have been incurred during 2017, as well as those paid during 2016 and not claimed on the 2016 return. Once those totals are known, it will be easier to determine whether to make a claim for 2017 or to wait and claim 2017 expenses on the return for 2018. And, if the decision is to make a claim for 2017, knowing what medical expenses were paid and when, will enable the taxpayer to determine the optimal 12-month waiting period for the claim.
Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2018. Where those are significant expenses (for instance, a particularly costly medication which must be taken on an ongoing basis) it may make sense, where possible, to accelerate the payment of those expenses to December 2017, where that means they can be included in 2017 totals and claimed on the 2017 return.
Millions of Canadian taxpayers (particularly the self-employed and retired Canadians) pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total liability for the year.
The final quarterly instalment for this year will be due on Friday December 15, 2017. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2017 and so will be in a position to estimate what the final tax bill for the year will be, taking into account any tax planning strategies already put in place, as well as any RRSP contributions which will be made before March 2, 2018. While the tax return forms to be used for the 2017 year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2016 form. Increases in tax credit amounts and tax brackets from 2016 to 2017 will mean that using the 2016 form will likely result in a slight over-estimate of tax liability for 2017.
Once one’s tax bill for 2017 has been calculated, that figure should be compared to the total of tax instalments already made during 2017 (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281). Depending on the result, it may then be possible to reduce the amount of the tax instalment to be paid on December 15 – and thereby free up some funds for the inevitable holiday spending!
Every once in awhile we get the request about investing offshore. It's a complicated matter and I know there is a number of considerations.
First, you wish to change your residence , this link will give you some perspective of what might be required, investment in a property or business
For business's wishing to get their income taxed at lower rates, you will need to do some strategic planning if you are desiring to have a legal tax saving structure. Will add some tips on this as we develop this resource. Some firms specialize in this and will search these out. At first glance, you will need to have a significant taxable income to make this a practical course of action, fees and complexity will screen out many and most people will not be in such a place to utilize such structures. Implementing this stuff is typically kept pretty secretive as CRA is always on the hunt for people doing it wrong. Reflecting on the last one we got help with, the fees started at $7500 for the idea of the plan and then there would be the implementation costs. The whole process was under a shadow of secrecy. That was a few years ago, but I suspect the principals remain the same. You would want a very strong desire to go through the hoops to save tax.
Dealing with your RSP's should you leave Canada
"If you retire abroad, RRIF withdrawals and annuity income are subject to Canadian withholding tax. That tax rate depends on your country of residence in retirement and the withholding tax rate is generally 15-25% depending on the tax treaty (or lack thereof) between Canada and the country you live in at that time.
Lump-sum RRSP withdrawals are generally subject to 25% tax.
Most countries have a foreign tax credit mechanism whereby your Canadian tax withheld at source is credited against your foreign tax payable on the income in your country of residence. This prevents double taxation."
Off Shore Investment Warning
Because of the shroud of secrecy that is common practice and the complexity of the structures, there is high risk of scamming. One would have to be super diligent in the matter. We don't endorse this, but write about it as a way to help understand it better and hopefully protect one from it.
These sites have a number of contacts and articles on the topic
Some of the history of these tax havens is interesting , take Liechtenstein as an example https://en.wikipedia.org/wiki/Liechtenstein
Liechtenstein is situated in the Upper Rhine valley of the European Alps and is bordered to the east by Austria and to the south and west by Switzerland. The entire western border of Liechtenstein is formed by the Rhine. Measured south to north the country is about 24 km (15 mi) long. Its highest point, the Grauspitz, is 2,599 m (8,527 ft).
Belize , one hears lots about Belize, here is an example of one company that provides the services, similar to incorporating in Canada, but the ongoing maintenance fees are substantial in my humble opinion. If you have any substantial assets one would have to weigh the tax benefits against the fees to maintain.
|FIRST YEAR - from date incorporated to 31st of December|
IBC Incorporation Fee ( Inclusive of Government Fees)
Registered Agent / Office Fee
|SECOND & SUBSEQUENT YEARS - from January 1st following the year of incorporation|
|Annual Renewal Fee (Inclusive of Government Fees)
(A) IBC's with Standard Authorized Capital of USD$50,000 or Less
(B) IBC's with Authorized Capital over USD$50,000
(C) IBC's having shares with no par value (and Authorized Capital of USD50,000 or less)
|OTHER SERVICES (optional)|
Power of Attorney
Some insight as to why Belize might be useful
( I keep reminding everyone, that I am not endorsing any of this, pure information purposes only)
Why Offshore Would Be Considered
1. Tax Minimization
- A Belize Offshore Company is not subject to any taxes in Belize regardless of where its income is earned.
2. Asset Protection
- A Belize IBC can provide insulation against frivolous lawsuits separating ownership from personal individual liability.
4. Special Features
- No information pertaining to the identity of directors &/or shareholders need be filed on public record. An Offshore Company’s Register of Shareholders is available for inspection only by shareholders or by order of the Belize Courts at the request of any shareholder.
- No public filing requirements except Memorandum & Articles of Association.
- No need for annual returns or audited accounts thereby saving fees.
- Bearer shares may be issued.
5. Great Flexibilities & Easy Maintenance
- An offshore company can hold and maintain accounts with banks in Belize or anywhere else in the world.
- An offshore company can hold shares in other offshore company and act as a director as well.
- An Belize Offshore Company can be used for numerous purposes such as:
- Maintaining offshore bank accounts
- General commercial trading
- Financial management
- Holding investment securities offshore
- Leasing of assets
- Corporate trustee
- Share ownership in other companies
- Ownership of intellectual property
- Real estate ownership
- Transfer pricing
- Ship ownership
- No exchange control restrictions.
- Efficient and simple incorporation for fast reaction to instant planning needs.
- Minimal capital requirement.
- A offshore company may have only one director and one shareholder. Corporate director(s) are allowed. Directors need not be resident in Belize.
- No requirements for a local director or secretary.
- No requirements for an annual general meeting.
- Meetings of directors &/or shareholders may be held in any country, at any time. Directors &/or shareholders may attend meeting by their proxy.
Pro & Cons Article
Advisor.ca is a good publication that I have some confidence in
This is the first installment, I will add more as I continue research on this topic, please add your comments that can help us better understand the challenges and advantages , it's not all about taxes
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