tax Archives - Cathcart Financial

Prepare in Advance for Next Year’s Tax Filing

December 1, 2023/in Blog, rdsp, Registered Education Savings Plan, retirement, rrsp, tax, Tax Free Savings Account /by Cathcart Financial

Was last year’s filing of your income tax return a satisfying experience for you? Did you have a sense of accomplishment or dismay? For many, the April 30th deadline seems to arrive way too soon. If this is the case with you, starting the process much earlier would seem to be the answer.

The process should include proper record keeping, taking advantage of the tax-saving methods available to you, and, perhaps, finally getting a professional to complete and file your return on your behalf.

The problem with handing your taxes alone is that often people don’t know what they don’t know. This results in paying more in taxes than was necessary. The cost of a professional completing your taxes potentially could be offset by the savings that might be gained.

Even if you earned little to no income, filing your return is a good idea and could prove to be advantageous. This is because there are a number of federal and provincial government programs that you might be eligible for if your declared income is below a certain threshold. You can refer to the Government of Canada website for the child and family benefits that might be available to you.

https://www.canada.ca/en/services/taxes/child-and-family-benefits.html

Here are a few suggestions that you might want to consider to save taxes come next tax season and the years to come:

FILE YOUR TAXES ON TIME

Often lack of proper records and searching for receipts and tax slips results in failing to meet the filing deadline of April 30th. This can prove costly due to the penalties involved. If you owe taxes, there is a 5% penalty of the balance owing, plus 1% per month of the balance owing for each month your return remains outstanding. The interest is compounded daily. Devise a system for filing away all those receipts, tax slips, and tax-related documents. There are computer applications that can help with this. Snap a picture of a receipt on your phone and transfer it to a file on your computer.

REPORT ALL OF YOUR INCOME

Forgetting or omitting to disclose income (such as a missing T4), can result in additional interest and penalties. Those penalties can be quite severe so best to make sure you have everything.
If you sold your principal residence you have to report this transaction on a special form in order to claim the principal residence deduction. Keep this in mind if you are selling your home this year.

FOR SENIORS – CONSIDER SPLITTING YOUR PENSION INCOME

If you are age 65 or older you can split eligible pension income with your spouse. Eligible pension income includes;

Lifetime annuity payments from a Registered Pension Plan (RPP)
Payments from a Registered Retirement Savings Plan (RRSP)
Deferred Profit Sharing Plan (DPSP) and payments from a Registered Retirement Income Fund (RRIF).

In the Canada Pension Plan Act there are provisions that relate to CPP and under certain conditions a portion of CPP income can also be split with a spouse. Depending on your marginal tax brackets, the splitting of pension income with your spouse and both of you claiming the pension income credit, may result in avoiding the Old Age Security clawback.

Another opportunity that may be available is to contribute to your spouse’s RRSP. If an individual in a higher tax bracket contributes to his or her lower income spouse’s RRSP, tax savings could be the result. This is because the resulting income paid to the spouse from his or her RRSP will be taxed at a lower tax rate than that of the contributor.

Consult with a professional advisor to determine if splitting of your pension income is of benefit to you.

WHAT ABOUT OTHER INCOME SPLITTING OPPORTUNITIES?

While prior to 2018, owners of private corporations could avail themselves of strategies to split or “sprinkle” income with certain lower taxed family members, those strategies have been greatly curtailed. However, there does remain one strategy for individual taxpayers that involves using what are referred to as prescribed rate loans. With this arrangement, the higher income spouse lends funds to his or her spouse for investment purposes. The outcome is the investment gain is higher than if it was taxed in the hands of the higher income spouse. Interest must be paid by the receiving spouse at the prescribed rate. The prescribed rate is set quarterly by the CRA and is currently 5%.

TAKE ADVANTAGE OF REGISTERED PLANS

If you are a member of a company Registered Pension Plan, congratulations. If you are not, you have alternatives to save for retirement as well as funding education costs.

Contributing to the following plans will result in a reduction of tax payable, deferral of investment income or both:

Registered Retirement Savings Plans (RRSP’s)

When you receive your latest Notice of Assessment check it to see your RRSP contribution limit. This will include not only the annual contribution limit but also your total contribution room which is the unused portion of the aggregate of your annual RRSP maximum limits.
This year, your maximum contribution is 18% of the income you earned in 2022 to a maximum of $30,780. This would be reduced if you were also a contributor to a Registered Pension Plan at your work.
Contributions to an RRSP are tax deductible. On the flip side, all withdrawals taken are fully taxable at the tax rate in the year withdrawn.
If you want to reduce your tax burden for 2023 and you want to make it easy on yourself, don’t wait until the last minute. Consider setting up a monthly contribution plan. Even if you are unable to contribute the full amount you will appreciate you have some of it funded by next tax season.

Registered Educational Savings Plan

RESP’s are a great way to save for your child’s education. Although there is no immediate tax savings (RESP contributions are not tax deductible) the growth on the investment in the RESP is tax-deferred. In addition, there is a grant paid by the Canadian government into the RESP. The grant amount is 20% on the first $2,500 of annual contribution to a lifetime maximum of $7,200. Lower income families may be eligible for additional grants.
Starting in 2007, there is no longer an annual maximum that can be deposited into an RESP. There is, however, a lifetime maximum of $50,000, which could be deposited all in one year. Keep in mind, however, that the educational grant is only paid on the first $2,500 eligible deposit for each year.

Tax-Free Savings Plans

TFSA’s were introduced in Canada in 2009. Any individual over the age of 18 could contribute to maximum amount ($5,000 in 2009). That amount was increased to $5,500 in 2013 and 2014 and then to $10,000 in 2015. The newly elected Liberal government reduced it back to $5,500 in 2016 but increased it to $6,000 in 2018. With indexing, the maximum contribution for 2023 has increased to $6,500. A big advantage of the TFSA, however, is you never lose your contribution room. If you have never contributed and were 18 in 2009, you are eligible to contribute $88,000 in 2023.
Unlike RRSP’s your contributions are not tax deductible. The plan, however, grows tax free and also unlike an RRSP, there is no tax payable on any withdrawals.
You won’t save any immediate taxes on a TFSA contribution, but you will enjoy tax free growth which will never be taxable and that will save taxes in the future.

Registered Disability Savings Plan

If you are eligible for the Disability Tax Credit, you may want to investigate an RDSP. The same holds true if you are a parent of a disabled child. Contributions are not tax-deductible when made or taxable when paid out, however, the additional government grants and investment earnings paid to the plan are taxable to the beneficiary when withdrawn. Professional advice should be sought when considering an RDSP.

Hopefully, this gives you a checklist of the strategies and vehicles which could result in less tax being paid, not only next year but in years to come. The main message here is that the filing of Income Tax Returns has become very complicated and even though there are computer programs and websites to assist you in this task, the most effective way of filing your returns is to get someone more qualified than you to do it for you.

5 Top Financial Planning Strategies For Small Business Owners

February 1, 2021/in Blog, Debt, tax /by Cathcart Financial

Creating a financial plan for your business is critical not only for your business’ survival but also for its growth. However, many small business owners struggle to create a comprehensive financial plan that considers all of the financial needs of the business – which should include long term growth goals and contingency plans for any unexpected circumstances. Below, we have compiled a list of the strategies business owners should start with when considering a comprehensive financial plan.

Access To Capital And Debt Management

Talk to a professional when your business needs access to capital – especially if you have just opened your doors. Many new companies do not qualify for traditional, low-interest loans, and some new business owners mistakenly turn to loans with high-interest rates. This can turn out to be a problem for the business in the long-run. If sales are slow at the beginning, then the company could struggle with repaying its debt. It is a good idea to explore all loan options with a professional when you are considering options to raise capital to expand your business. Any financial plan should include ways of accessing capital that won’t cripple your business in the long run.

Favourable Tax Strategies For Your Business

We get it. Business owners are often too busy to research the most favourable tax strategies available to them. However, paying more in taxes can be avoided. Examining different tax strategies with a professional could free up cash and allow the business to achieve its maximum growth potential.

Prepare For The Unexpected

As 2020 has taught us, anything can happen. Regardless of the external or internal circumstances, your business should be prepared. It is a solid financial strategy to develop a contingency plan that will allow your business to adapt to new circumstances.

Do you have a key employee or employees that you rely on to run the business? What would happen if they became ill? What if something happened to you? Would your family still receive an income? Luckily, there are insurance policies designed to protect your business and family in the event that any of these possibilities become an unexpected reality.

Prepare For The Expected, Too

Most of us will want to retire at some point. But how do you plan on transitioning out of the business and into retirement? Many successful business owners understand the importance of having a retirement plan for themselves and their spouse independent from the business. Take a moment and jot down some retirement goals to get a general idea of what your retirement will look like for you. Do you plan on passing the business down to your children? At what age would you like to retire? A good financial plan will help you to retire when you want and how you want.

Protect Your Assets From A Lawsuit

Let’s face it. These days lawsuits happen more frequently than business owners like to admit, so it is a good idea to be prepared. When designing a financial plan, investigate what type of liability insurance would be best to protect your small business. Would general liability insurance suit your needs? Or would you be better suited for a professional liability insurance plan?

This is certainly not a complete list of all the main strategies that a financial plan should include, but it is a starting point to work from. Please don’t hesitate to reach out if you think we can help develop a financial plan for you and your business.

As usual, please feel free to share this article with anyone you think might find it of interest.

Government of Canada to allow up to $400 for home office expenses

December 29, 2020/in 2020, Accountants, Blog, Business Owners, tax /by Cathcart Financial

For the 2020 tax year, the Government of Canada introduced a temporary flat rate method to allow Canadians working from home this year due to Covid-19 to claim expenses of up to $400. Taxpayers will still be able to claim under the existing rules if they choose using the detailed method.

Eligibility

From the canada.ca website:

Each employee working from home who meets the eligibility criteria can use the temporary flat rate method to calculate their deduction for home office expenses.

To use this method to claim the home office expenses you paid, you must meet all of the following conditions:

You worked from home in 2020 due to the COVID-19 pandemic
You worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020
You are only claiming home office expenses and are not claiming any other employment expenses
Your employer did not reimburse you for all of your home office expensesWhat if your employer has reimbursed you for some of your home office expenses

You need to meet all of the above conditions to be eligible to use the Temporary flat rate method.

New eligible expenses

For the detailed method, the CRA has expanded the list of eligible expenses that can be claimed as work-space-in-the-home expenses to include reasonable home internet access fees. A comprehensive list of eligible home office expenses has also been created.

Click For Full details and Claim Forms

Highlights of the 2020 Federal Fall Economic Statement | Additional $20,000 CEBA loan available now

December 7, 2020/in Blog, Coronavirus, Coronavirus - Associates, Coronavirus - Practice Owners, corporate, disability, Financial Planning, rdsp, tax /by Cathcart Financial

On November 30, Finance Minister Chrystia Freeland provided the government’s fall economic update. The fall economic update provided information on the government’s strategy both for dealing with the COVID-19 pandemic and its plan to help shape the recovery. We’ve summarized the highlights for you.

Corporate Tax Changes

Information on several subsidy programs was included in the update. These changes apply from December 20, 2020 to March 13, 2021.

The government has provided an increase in the Canada Emergency Wage Subsidy (CEWS) to a maximum of 75% of eligible wages.
If you are eligible for the Canada Emergency Rent Subsidy (eligibility is based on your revenue decline), you can claim up to 65% of qualified expenses.
The Lockdown Support Subsidy has also been extended – if you are eligible, you can receive a 25% subsidy on eligible expenses.

Also, there were two other significant corporate tax changes:

Starting January 1, 2022, the government plans to tax international corporations that provide digital services in Canada if no international consensus on appropriate taxation has been reached.
The tax deferral on eligible shares paid by a qualifying agricultural cooperative to its members has been extended to 2026.

Personal Tax Changes

The following personal tax changes were included in the update:

The update confirmed the government’s plan to impose a $200,000 limit (based on fair market value) on taxing employee stock options granted after June 2021 at a preferential rate. Canadian-controlled private corporations (CCPCs) are not subject to these rules.
If you started working from home due to COVID-19, you could claim up to $400 in expenses.
The Canada Child Benefit (CCB) has temporarily been increased to include four additional payments. Depending on your income, you could receive up to $1200.
Additional modifications were proposed to how the “assistance holdback” amount is calculated for Registered Disability Savings Plans (RDSP). The goal of these modifications is to help RDSP beneficiaries who become ineligible for the Disability Tax Credit after 50 years of age.

Indirect Tax Changes

GST/HST changes impacting digital platforms were included in the update. They will be applicable as of July 1, 2021:

Foreign-based companies that sell digital products or services in Canada must collect and remit GST or HST on their taxable sales. Also, foreign vendors or digital platform operators with goods for sale via Canadian fulfillment warehouses must collect and remit GST/HST.
Short-term rental accommodation booked via a digital platform must charge GST/HST on their booking. The GST/HST rate will be based on the province or territory where the short-term accommodation is located.

And some good news on a GST/HST removal! As of December 6, and until further notice, the government will not charge GST/HST on eligible face masks and face shields.

The Takeaway

A lot of changes came out of the fall update – and you may be feeling overwhelmed. But help is at hand!

Contact us to learn more about how these changes could impact your personal and business finances.

Canada Emergency Business Account (CEBA) $20,000 expansion available now

The Government of Canada website has been updated with the new CEBA requirements and deadlines:

As of December 4, 2020, CEBA loans for eligible businesses will increase from $40,000 to $60,000.
Applicants who have received the $40,000 CEBA loan may apply for the $20,000 expansion, which provides eligible businesses with an additional $20,000 in financing.
All applicants have until March 31, 2021, to apply for $60,000 CEBA loan or the $20,000 expansion.

Apply online at the financial institution your business banks with:

To get the full details:

CEBA Loan Details

A Lifetime Gift for Your Grandchildren

May 15, 2020/in Blog, Family, individuals, life insurance, Retirees, tax /by Cathcart Financial

The Cascading Life Insurance Strategy

If you are a grandparent wishing to provide an asset for your grandchildren without compromising your own financial security, you may want to consider an estate planning application known as Cascading Life Insurance.

How does the Cascading Life Insurance Strategy work?

The grandparent would purchase an insurance policy on his or her grandchild and funds the policy to create significant cash value;
The grandparent would own the policy and name the parent of the grandchild as contingent owner and primary beneficiary;
The cost of life insurance is lowest at younger ages, maximizing the tax deferred growth of the cash value in the policy.

What are the benefits of the Cascading Life Insurance Strategy?

Tax deferred or tax free accumulation of wealth;
Generational transfer of wealth with no income tax consequences;
Avoids probate fees;
Protection against claims of creditors;
Provides a significant legacy;
Access the cash value to pay child’s expenses such as education costs. (Withdrawal of cash value may have tax consequences);
It’s a cost effective way for grandparents to provide a significant legacy.

For the grandchild, he or she ultimately receives a gift that will provide significant benefits:

A growing cash value that can never decline;
Access to borrow from the policy for education, down payment on a home, or to invest in a business;
The policy could also provide an annual income by changing the dividend option to cash;
Life insurance which continues to grow in death benefit to protect his or her future family.

Case Study

Let’s look at an example of this strategy. Grandpa Brian is 65 and has funds put aside for the benefit of his grandson, Ian.

Grandpa Brian purchases a 20 Pay Participating Whole Life policy on Ian, age 11, for an annual deposit of $5,000;
Brian’s daughter, Kelly is named as contingent owner in the event of Grandpa Brian’s death and beneficiary in the event of Ian’s death;
At Ian’s age 31, the policy becomes paid up with no future premiums.

If Grandpa Brian were to die at age 85 the following could happen:

The ownership of the policy now passes to Ian’s mom Kelly;
The cash value of the policy (at current dividend assumptions) would be $ 134,049 and the death benefit of the policy would be $679,634;
Kelly has a choice to remain the owner of the policy or transfer the ownership to her 31-year-old son without any tax consequences.

Because of Grandpa Brian’s legacy planning, Grandchild Ian, now age 31, has a significant insurance estate that will continue to grow with no further premiums! By Ian’s age 45, the death benefit, at current dividend scale, would be $1,030,045 with a cash value of 311,811.

Please call me if you think your family would benefit from this strategy or share this article with a friend or family member you think may find this information of value.

Note – The numbers shown in the Case Study are using Equitable Life’s Estate Builder 20 pay Participating Whole Life policy with maximum Excelerator Deposit Option.