Last year we sent a letter to many of our personal tax clients who had reported capital gains in the previous three years. In our letter we recommended realizing capital losses to “carry back” against the capital gains to generate tax refunds.
This year we are sending the reminder by e-mail. If you have had capital gains in the last three years that have not been “wiped out” by carrying back capital losses please consider selling some of your stocks if they are in loss positions. You can use these losses to obtain refunds of taxes paid on the capital gains of the previous three years.
Please remember to realize capital losses equal to twice the amount of the reported taxable capital gains.
Also note that you should sell the shares before December 25th if they are listed in Canada and before December 30th if they are listed on a US exchange. You should not re-purchase them within 30 days of selling them.
Please give us a call or send us an e-mail if you have any questions.
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.
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.
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.
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.
