This blog entry is about a tax-saving & deferral vehicle that is sometimes overlooked in will planning called testamentary trusts. The topic of today’s discussion is the type of trust that is created after death according to the deceased’s will.
Testamentary trusts are taxed differently than other trusts. All trusts are taxed as individuals, not as corporations, with some exceptions. For example, many refundable tax credits are not available to trusts. Fortunately the dividend tax credit and the donation tax credit are available to trusts.
What’s especially good about testamentary trusts compared to other trusts is that they are taxed at the graduated tax rates. Other trusts are all taxed at the highest tax rate.
So if you establish multiple testamentary trusts then your estate can benefit from the lower tax rates with each trust. Depending on the income the trust earns, tax savings of up to $17,500 per year per trust is possible. You can create a trust for each beneficiary. It might be possible to create trusts for combinations of beneficiaries as well. So if you have two heirs the maximum number of trusts might be two or three: one for each beneficiary; and possibly one trust for both beneficiaries.
Another way that testamentary trusts are different from other trusts is that they can have any year-end, not just December 31st. By having a year-end early in the calendar, tax can be deferred for the better part of a year.
Another tax benefit is that testamentary trusts do not need to make installment payments.
There are many reasons for creating testamentary trusts in addition to the potential tax savings. You might want to preserve capital for your children from an earlier marriage. Or you might want to use trusts if someone is incapable of handling their financial affairs for any number of reasons such as age, illness or addiction. Setting up a trust for charity is another option. Or you might want your capital to be distributed to your heirs gradually.
All of these are good reasons for considering the use of testamentary trusts in estate planning.
Eid Mubarak
GST Paid on Discretionary Investment Management Services
Refunds may be available.
The Federal Court of Appeal recently decided in The Canadian Medical Protective Association (CMPA) vs. The Queen that discretionary investment management services are GST exempt.
It is important to note that this decision applied to discretionary investment management services only and did not apply to brokerage and other transaction-based fees.
There is some uncertainty as to whether or not CRA will pay the refunds as CRA may appeal the decision. However, taxpayers who would like to ensure their right to a refund should file a claim now due to the time limitation on filing rebate claims. Claims for GST paid in error are subject to a time limit of two years from the date of the payment (e.g. if management fees are billed on a quarterly basis, amounts paid on September 30, 2007 must be claimed prior to October 2009).
Any GST on discretionary investment management services paid by a person, corporation, trust, RRSP/RRIF or pension plan, etc. may be eligible for a refund provided that an Input Tax Credit has not already been claimed for this.
To claim a refund, taxpayers should complete form GST 189E and send it to the address listed on the form. Please remember to include copies of any supporting invoices, brokerage statements or letters along with the form. If there isn’t enough room on the form to list all of the details, please use form GST 288E. Copies of these forms are attached.
Note that any GST that is refunded and that was deducted for income tax purposes will need to be included in income in the year the refund is received and will be subject to income tax.
If you require further information or assistance please contact Ross McShane or Khalid Hasan at (613) 726-1010.
IRAP Grants
Grants of $50,000 for up to 100% of internal labour costs plus items like patent application costs
The National Research Council has run the Industrial Research Assistance Program (IRAP) for a number of years. Companies which are eligible for SR&ED credits have also received IRAP funding, but IRAP reduces the amount of the SR&ED credits. However, IRAP’s new Small Project Accelerated Review Process may offer companies the ability to get support from both programs. This program can fund up to $50,000 and covers up to 100% of internal labour costs (with 65% overhead added), 75% of external contractor costs and 75% of total costs. The most important change is that the IRAP covers a wide variety of activities beyond those eligible for SR&ED. These would include patent application costs, financial restructuring, competitive market intelligence studies and many other activities. A company can ask IRAP to fund these activities which complement the SR&ED eligible activities, thus still allowing the full financial advantage of each program.
Principal Residences Tax Exemption
What qualifies for the principal residence tax exemption and how the exemption works
The principal residence tax exemption is an issue that we are frequently asked questions about. Often we’re asked about what qualifies and how the exemption works.
Generally any habitation qualifies. It can be a house, a cottage, a mobile home or even a houseboat. Plus about an acre and a quarter of land. More land might qualify depending on the circumstances.
This is how the exemption works:
If you own only one residence and you’ve ordinarily lived in it at least part of every year since you bought it, a capital gain will be exempt from taxation.
Another common situation is when two residences are owned by a couple, say a condo and a cottage. When they sell the cottage they will need to estimate the capital gain on the other residence as well so that they designate the residence with the higher appreciation in value as their principal residence. If the gain will be higher on the cottage and it was ordinarily inhabited on a regular basis every year then they can deem the cottage as their principal residence and be exempt from paying taxes on its capital gain.
But if they had previously sold a house, say before they bought the condo, and the house had been claimed as the principal residence, then only the increase in value of the cottage since the housewas sold would be exempt.
If a residence was owned prior to 1982 the situation is more complicated because before 1982 both spouses could designate a residence as a principal residence; in effect a couple could have two principal residences at any point in time.
Here are a few more situations where you should obtain some professional advice:
If there will be a change in use, such as converting an income-producing property to a principal residence;
If a couple is separating or divorcing; and
If you are purchasing a residence such a vacation home and you have children over the age of 18 you may wish to explore some tax planning opportunities.
We hope you’ve found this discussion about principal residences useful.
Happy Canada Day!
Tax Free Savings Accounts
You’ve probably been seeing a number of ads and articles about Tax Free Savings Accounts. That’s a good thing because most Canadians should have one.
This blog entry outlines why Tax Free Savings Accounts are beneficial and how they work.
The main reason for putting savings in a TFSA is that they are an easy way to earn tax-free investment income. Once you open a TFSA you can deposit up to $5,000 each year. Any interest, dividend or capital gains you earn can be withdrawn at any time and you won’t have to pay tax on this investment income. That’s why they are called Tax Free Savings Accounts.
When you deposit money to a TFSA you won’t deduct your deposit from your income on your tax return like you do with a RRSP contribution. But when you withdraw money, whether it is the money you deposited or the income it earned, you won’t need to report it on your tax return as taxable income. Also, after you withdraw money you can re-deposit it in the next calendar year (plus the $5,000 for that year).
Some other things you might like to know about TFSA’s:
You don’t need $5,000 to start a TFSA.
You can start it any time after January 1st 2009 if you are 18 years old or older.
You can contribute to your spouse’s TFSA without any tax ramifications to you.
If you deposit less than $5,000 in one year then you can add the amount you didn’t deposit to your $5,000 limit for the next year.
You can use your TFSA to save for whatever you want: a car, a house, a renovation; or a once-in-a-lifetime vacation.
In my opinion, if you're saving any money for any reason at all you should seriously consider opening a TFSA.
Some Quick SR&ED Tips
This blog entry provides two quick tips regarding SR&ED claims.
The first one has to do with broadband lines and access equipment.
Remember to include the leasing costs of broadband lines and access equipment in your SR&ED claim. The amount that can be claimed will depend upon whether it is: used All or Substantially All (ASA; > 90%) for SRED; it is Shared Use Equipment (SUE 50% < x < 90%); or neither.
The second tip has to do with Ontario Investment Tax Credits.
Companies in Ontario should remember to also claim the Ontario Investment Tax Credit while they are claiming their federal SR&ED credits. Failure to do so will be expensive, as CRA will automatically assume that the company has applied for this the previous year and will include this in the next year’s federal SR&ED submission as “Government Assistance”, thus reducing the current year’s claim. McLarty & Co’s SR&ED team provides its clients with documentation templates that assist in the claim and audit process. To learn about the latest administrative changes to the SR&ED program please contact Kevin Goheen.
2009 Federal Budget Highlights
This blog entry highlights a few of the changes that were announced in the 2009 federal budget on January 27th.
First I should note that there were no new corporate rate reductions announced. However our finance minister did confirm that the government plans to make Canada more competitive by becoming the country with the lowest corporate tax rates among the major industrialized economies. As previously announced the general corporate tax rate is still scheduled to decrease from 19% to 15% by 2012.
The good news for small business was a $100,000 increase in the small business tax deduction. The annual business limit for Canadian-controlled private corporations eligible for the reduced small business tax rate increased from $400,000 to $500,000. This change is effective January 1, 2009 and is pro-rated for fiscal years straddling this date.
Consistent with the small business deduction change was the announcement that the phase-out range for investment tax credits for scientific research and experimental development is increasing by $100,000 so that the phase-out range is no longer $400,000 to $700,000 but $500,000 to $800,000.
More good news for manufacturers was that the temporary increase in the capital cost allowance rate for manufacturing and processing equipment to a 50% straight–line rate has been extended for eligible assets acquired in 2010 and 2011.
For eligible new computers and system software acquired in Canada after January 27, 2009 and before February 2011, a CCA rate of 100% applies with no half –year rule. That means that businesses can deduct 100% of most computer costs if they are incurred before February 2011.
There were also some changes on the administrative side. The government has increased the number of companies and situations where returns must be filed electronically (e-filed). Now all corporations with annual gross revenues over $1 million will be required to e-file their income tax returns. Additionally, tax information returns that include over 50 items (instead of 500) must be e-filed after 2009. So if your company has 51 T4’s to file next year you will need to do it electronically. To encourage everyone to follow the new rules, the budget also introduced a penalty for filing in an incorrect format.
There was some good news for individual taxpayers who own a home that is due for a renovation.
For 2009 a new, non-refundable temporary tax credit will be available to homeowners for improvements to a principal residence. The credit will apply to expenditures between $1,000 and $10,000, incurred for work acquired after January 27, 2009 and before February 2010. This credit can generate tax savings of up to $1,300 for homeowners.
Those are some of the 2009 budget highlights for businesses and individuals.
The New SR&ED T661 Form
This blog entry is about the Canada Revenue Agency’s new version of the T661 form.
Every SR&ED claim involving a taxpayer’s fiscal year which ends on or after January 1st, 2009 MUST use this revised T661.
There are two significant changes in the new T661.
CRA has demanded substantive changes from taxpayers with regards to “Evidence…(the taxpayers) have to support (their) claim” which they have generated WHILE the SR&ED was in progress, in that it must be declared to belong to one of 12 categories.
These documents must prove:
the technological advancement sought;
the technological obstacles;
the work done;
the start and end dates; and
the employees or contractors involved.
CRA has indicated which types of documents support which types of filing requirements e.g. records of trial runs cannot substantiate technological obstacles.
As a result, contemporaneous creation of correct project documentation is crucial.
Another major change is the elimination of free format technical descriptions. Instead, projects must be described in two or three text boxes, with severe word limits on each section. In our opinion, this word limit does not allow taxpayers to either describe the business context of their SR&ED projects nor describe the systematic aspects of complicated projects involving manufacturing trials or complicated software development cycles.
We anticipate that as a result, many more technical reviews will be performed, as CRA seeks further information about the projects. As a result, the prudent way for taxpayers to proceed is to write their technical descriptions as was done in previous years, then cut, paste and edit the appropriate material into the new T661, but retain their original technical description, as it will be useful information to give to the CRA technical reviewer.
McLarty & Co’s SR&ED team provides its clients with documentation templates that assist in the claim and audit process. To learn about the latest administrative changes to the SR&ED program, please contact Kevin Goheen.
