November 14, 2014 National Philanthropy Day in Canada: Highlighting Tax Breaks for Charitable Donations

November 14th, 2014 is National Philanthropy Day here in Canada, and the Honourable Kerry-Lynne D. Findlay, P.C., Q.C., M.P., Minister of National Revenue, was in Vancouver to applaud those Canadians who donate to charities and to remind Canadians to take advantage of the tax credits available for eligible charitable donations.

Receiving special attention was the new temporary donor super tax credit which provides an extra 25% federal tax credit on top of the original charitable donation tax credit which means that eligible first-time donors can get a 40% federal tax credit for monetary donations of $200 or less, and a 54% federal tax credit for the portion of donations that are over $200 up to a maximum of $1,000.

The donor super credit applies to donations made after March 20, 2013, and can only be claimed once between 2013 and 2017.

This is in addition to the provincial credits available.donation

Those who have donated before can still be eligible for the charitable donation tax credit, a non-refundable tax credit which allows taxpayers to claim eligible amounts of gifts to a limit of 75% of their net income.

For a quick estimate of your charitable tax credit for the current tax year, try the charitable donation tax credit calculator, which can be found here.

Minister Findlay also reminded Canadians that only Canadian registered charities and other qualified donees can issue official donation tax receipts.  This is extremely important because if you make a donation to a charity which is not eligible to issue donation tax receipts but they provide one anyways, the CRA will re-assess you for that donation deduction with penalties and interest.  A little due diligence up front goes a very long way.

If it seems too good to be true, it should give you reason for concern…

To find out if an organization is registered, go to the Canada Revenue Agency’s (CRA) website and search their complete list of registered charities in their Charities Listings.

For more information about donating, such as how to calculate and claim the charitable tax credit, go to the CRA’s site for making donations, which is here.

 

Some Quick Facts

  • Two years ago, Canada became the first country in the world to officially recognize November 15 as National Philanthropy Day.
  • There are more than 85,000 registered charities in Canada.
  • The benefit to charities of being a registered charity? Registration provides charities with exemption from income tax.
  • According to Statistics Canada, in 2010 almost half of all Canadians volunteered, giving more than two billion hours of their time. In addition, in 2012, 5.6 million tax filers reported charitable donations for a total of $8.3 billion in donations reported.
  • According to Statistics Canada, in 2012 the average age of charitable donors across the provinces and territories is 53 years old.
  • Follow the CRA on Twitter – @CanRevAgency
  • Follow inTAXicating on Twitter @intaxicating

 

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A Lesson in POWER: How to ALWAYS Level the Playing Field with the CRA.

Power is a funny thing.

Pretty much everyone wants it at some point in their life.

Most of the people who have it do not know how to use it properly.

To be honest, few will ever get it.

The most important thing to know about power is that it is most successful when used in two ways; either by declaring yourself King and having your cronies keep everyone else at bay by whatever means possible, or secondly by taking the time to get key players on your side and using your network to help you maintain power but all along helping those around you learn and grow, and they help everyone else under them do the same.

Which model do you think is most often associated with government tax collections agencies?

Having spent a lot of time working at the Canada Revenue Agency (CRA) in the collections and enforcement division and being responsible for training collections, enforcement and audit staff there I can honestly say not as many staff there who feel you have to do what they say no matter the consequences as you would think.

It is true that there are employees of the CRA who feel that being in a position of power allows them to do things, say things and act in a manner which is improper or unjustified.  There are also staff there who take their positions of power to a whole new level and they let their egos control their decision-making process which means they wield power in order to realize an outcome in their best interest, not yours.

I have seen how power corrupts and the result is never easy to correct.

The CRA has a lot of power.

Throughout my decade of employment at the Canada Revenue Agency I was surprised with how much power the Agency has and how many taxpayers feared this power.  I could hear collection officers tell taxpayers that they could clean out their bank accounts like “this!” (Insert snapping of fingers sound here), which is true, but also not true.  I learned to be subtle in my use of my apparent super-powers and the way I used my power was to visit my clients and by always making sure that when sitting with a taxpayer / representative that my chair was at its highest so that I would be looking down at them.  It was all I needed when dealing with the career tax evaders because it worked, but it was a tactic not necessary when dealing with 99% of the people I met with.

However, we already know that the CRA has a lot of power and in most cases before they use it, they are going to let you know first by phone, letter or a visit to your home or place of employment.  Once the CRA has decided they need to use their powers they are bound by the guidelines set out in the Income Tax Act and Excise Tax Act and by policies and procedures set out in their tax office.  The extent to which they use their powers is either their decision or it is influenced by their team leader or manager.

Once the CRA starts using their powers, your ability to control the outcome diminishes greatly. What you can control, is how much power you will ALLOW the CRA to use against you.

This is done by being proactive – reading notices, asking questions and keeping all your paperwork in one spot where you can access it once it is asked for.  But if you are past that point, or if it is just not possible, then you can take power back by enlisting the help of people who know the CRA policies, procedures and most importantly, their techniques and tactics.

If the CRA knew they were dealing with someone who knew more about their job, more about their techniques and more about how quickly they need to take an action which they claim is urgent, then the playing field is changed forever.

Having someone there to look after your best interests, who will tell you what the best plan of action for you, and you only, then taking that plan to the CRA and telling them the same is the best way to always level the playing field.  Negotiating is always easier when you know more than your opponent.

So please, if you have a tax problem, old or new, and you have been spinning your wheels with the CRA, the IRS, the MRQ, WSIB or the CRTC, don’t let it continue any longer.  Come visit inTAXicating.ca, or send us an email at info@intaxicating.ca and take advantage of our free consultation to leave how to put these issues behind you once and for all.

Have you ever been put in a position where you accepted something which was not in your best interests because the other side had all the power?

Happy to read your comments below.

Claiming Gas or Mileage? How to avoid having this expense denied by the Canada Revenue Agency.

Many taxpayers here in Canada are advised to “keep their receipts” when they claim mileage and / or gas on their tax returns.  The thought here is that the Canada Revenue Agency (CRA) might audit your tax return and will deny your claim if you cannot show proof, but what are you allowed to deduct?  Does it matter if you are self-employed or if you are a salaried employee?  Did you know that just keeping your receipts is not enough and there might be deductions you are entitled to that you are not claiming?

It all matters.

If you are claiming vehicle expenses and you are a salaried T4 employee working for someone else, then you need to know this;

Or, if you are self employed, you need to know this;

So if you rely on your accountant to take care of this for you, or if you wish to use the services of Intaxicating Tax Services, at the very least, you need to be aware of this important fact;

The CRA regularly rejects gas receipts from taxpayers who pay for their gas with debit cards.  Why?  Because they are not sure if you are getting cash back on the transaction – that does not show on the debit slip.

Example: I go to fill up my car 3 times a week, and each time I put in $20.00 worth of gasoline, but get cash back of $80.00 each time.  My debit slip reads $100.00, and I claim $300.00 worth of gasoline expenses for that week on my tax return when in actual fact I was only entitled to receive a deduction in the amount of $60.00.

In addition, if you are required to travel a lot for work, make sure that you have a calendar at home and at the office (on the office computers) which show the location of the meeting, the name of the organization and / or people that you are meeting, as well as the purpose of the meeting (ie/ sales, cold call, delivery).  Make sure that you track the mileage as well.  This way when the CRA questions the high claims, you can show them with 100% certainty that your travel claims are for work purposes.

It also helps to keep all the gas transactions on the same credit card for organizational purposes.

It takes a little effort and organization but it’s worth it.

Intaxicating Tax Services can be found @ http://www.intaxicating.ca and make sure to drop by our helpful blog here.

CRA Tightening the ship and tightening their grip…

Income tax
Income tax (Photo credit: Alan Cleaver)

I’m sure you have heard that the Canada Revenue Agency (CRA)is tightening the ship and cracking down on tax evasion, tax shelters and finding new ways to collect more tax dollars.  Well you can thank the IRS for that.  With the IRS predicting that there are billions and billions of dollars of offshore tax revenue that they expect to bring in through FATCA it’s no wonder revenue agencies throughout the world are looking at better ways to collect tax revenues from their citizens here and abroad.

Riding the wave of FATCA, the CRA has been making public information on ways they can collect tax revenues and highlight some techniques they have been using as far back as when I worked in the CRA but may not have been so widely known to the general public.  The point is that if you know all the powers the CRA has, and know they are cracking down, then you can conclude pretty quickly that you will get caught doing whatever you may be doing that is illegal; not remitting or reporting GST/HST, accepting cash for work and not reporting it, paying an employee under the table, not declaring all your income or just not filing and hoping to stay under the radar.

The CRA’s Snitch line / Informant Leads line has been a fantastic resource for the CRA and has brought in more leads than they ever could have anticipated when creating this line.

So what is the CRA doing that you might not know about?

Data Mining

The CRA can, and have been data mining publicly available property tax information to confirm that sales or transfers of real property have been properly reported by taxpayers and they are using this information to identify taxpayers who are incorrectly reporting property sales at the preferential capital gains tax rate, or who have been flipping properties for quick gain and should be reporting them as sale of inventory, or they have been aggressively claiming properties as their principal residences and avoiding paying taxes altogether.

Tax slip matching

Advances in technology now allow the CRA to quickly determine whether a taxpayer has reported all income listed on all tax slips. Every entity, whether it as a corporation, trust, financial institution or employer is required to issue a tax information slip to all its income recipients. Typically, the area where the CRA reassesses a tax return is on unreported employment income and interest and dividends. The CRA also focuses on sales of marketable securities reported to them on the T5008 information slip. If you’ve mis-reported income multiple times, you are subject to penalties which in some cases are as high as 20% of the omitted amount. For low income earners, this can add up to more than the tax itself.

The Construction Industry

The CRA has always been concerned about construction workers not reporting all of their income which is why they piloted and maintain “Construction Teams” in the Tax Services Offices.  The new information reporting requirement on form T5018, provides the CRA the ability to ensure the proper amount of tax is being paid by construction workers and frequent audits ensure payments to workers and amounts they reported fall in line as well.

Tax shelters / Off-shore Accounts

What was once considered a safe haven where wealthy investors could put monies out of reach of their governments has now become a bone of contention as investors want to pay as little tax as possible, governments want as much tax as possible – especially from these high net-worth people and the general public want the wealthy to pay more taxes!  FATCA got the ball rolling and now the CRA has followed suit, seeking information of the investors before then taxing them back on their offshore accounts.

Tax shelters, while shielding investors from paying tax on current income, likely will have to pay taxes at some point in time down the road as the CRA tightens the regulations on these investment tools to ensure they are not tax evading schemes.

Illegal activity / Informant Leads (Snitch) Line

The CRA has its ears on the ground more than ever and the Canadian Border Services Agency (who used to be part of the Canada Customs and Revenue Agency) are locating and turning up illegal activity and the CRA is following up that criminal activity with assessments and re-assessments.  Combine that with the Informant Leads line and you can quickly conclude that to the CRA crime does not pay, but criminals should pay taxes too.

Charitable donations

The CRA’s reach extends to the charitable sector as well.  Both donors and registered charities are heavily scrutinized for potential fraud especially around those donating non-cash gifts.  The CRA is looking to ensure that the amount reported on the donation receipt (and the corresponding credit claimed by the donor) accurately corresponds to the value of the donated item, and that the value is as close to fair market value as possible.

The CRA has been using these techniques for years to ensure taxpayers are paying their fair share on all sources of income and are doing so without increasing the number of employees dramatically which means a few things;  First, it may be worthwhile to review your previous filings and – if errors are identified as a result of that review – take advantage of the voluntary disclosure program.  Second, in the voluntary tax system we have in Canada, the onus is on you, the taxpayer to prove to the CRA that you are operating in line with CRA regulations which means keeping great records, having professional help and keeping receipts.  Thirdly, if you are off-side with CRA regulations and want to know what may happen to you if you get caught, you should give us a call.

Tax Season in Canada… When can you expect to see your slips, receipts and returns?

Tax time in Canada.

April 30th for most Canadians and June 15th for self-employed Canadians.

So much fun… Really.  Organizations who issue tax slips, tax returns or contribution receipts have been working hard perfecting their processes since the end of the last tax reporting season and have been working through the summer putting any necessary changes in place and gearing up for the next tax season – which all begins next month in November for many top organizations.

Since issuing organizations are gearing up, so should you, the investor, start getting ready to file your income tax returns and to do that, it really helps if you have an idea as to which slips your investment(s) will generate and when you can expect them.

Of course, even if you do get all your slips, as expected, there could always be amended slips sent to you as well resulting from an error or late directional change from the company / fund.  Even the CRA sometimes are required to make changes to their tax forms, or to the calculations contained therein and there is nothing you, nor your tax preparer can do, let alone the poor folks issuing your tax slips.  You have a slip, assume it to be correct and file to the CRA with it only to find out it’s incorrect when another version comes, with a letter, to be used instead.

Take 2010, for example… The CRA changed the dividend tax rate by something like 0.0007% and they did that 5 days before they expected T5 slips to have been received by holders and in actual fact, most of the T5’s were already issued with the incorrect rate before the CRA realized what they had done.

Since the CRA determined that the rate change would be adjusted internally, there was a communication fired out industry-wide notifying those who received T5’s that no further actions would be taken on the holder side and that they should not need to go back to their bank, financial institution or transfer agent to have it amended.  I remember a few individuals demanding their slips being amended for a total change of $7.00.  But this is what you do – with a smile when you’re in that industry.

Back to the topic.

One of the most common frustrations during tax preparation time comes from those holders who are eager to file but are unsure of what they are getting and when, roughly, it should arrive.

Due Dates

Keeping tabs on due dates can be quite difficult, especially if you’re getting them from an organization which has not fully embraced social media and are unable to provide you with a timeline, or expected dates per slip depending on what you should be receiving.

For example, T4 and T5 tax slips must be mailed out by February 28th whereas, tax slips for mutual funds, flow-through shares, limited partnerships and income trusts are not due until March 31st.

When there are late deadlines, like March 31st, a lot of pressure is then placed on your accountant as it creates a heavy backlog in April, when accountants must rush through the preparation of personal tax returns for their clients – sadly unable to give each return the care and oversight that they deserve.

I just don’t understand why all slips are not made available on the web or by email all by say March 10th in order to allow time for issuing organizations to prepare better their processes to allow for additional oversight and for time to correct errors.  This way organizations preparing the slips will have to begin auditing the slips traditionally due in February for errors and get the March ones completed – have them all merged together in the same file and made available sooner rather than later for the holder.  In addition, with a fixed deadline, the CRA or MRQ would then know when they can or cannot change slips or information on slips.

Let’s look a little closer at some issues and potential solutions;

Year-end trading summaries

Banks and brokerages use year-end trade summaries to report proceeds and commissions on each sale. However, the proceeds reported are sometimes net of commissions, which can lead investors to erroneously deduct the reported commission number a second time.  In addition, many banks issue multiple slips for each investment account, but send a consolidated summary of the slips to the CRA, which causes havoc when there is a missing slip or a question regarding one of them.

By keeping track of the totals or having them all come in March would allow the issuing organization time to audit and compare the slips to the summary before issuing to ensure they balance.

Another solution is for the issuing organization to make the slips available on their investor website and then holders can wait for the year-end summary to post – which of course would balance – and then before a holder does anything with their slips they can be comfortable that they balance.

An additional bonus would be for the issuing organization to also provide the calculations behind the slips on the website so that if there is a discrepancy, the holder can look to see how the slips were calculated and they can also learn more about how taxes are calculated.  It’s a win-win situation.  Accurate reporting and teaching the holder more about taxes.

Gain and loss reports

Many privately managed bank funds prepare gain and loss reports for clients. However, where there are US stock sales, often the cost reflects the US dollar purchase amount at the current year’s exchange rate, rather than at the time of purchase.

Traditionally, the onus is on the holder to figure out the historic exchange rate and the issuing organizations can and should assist by making this information available on their website for ease of balancing.  They should also make sure that there is accurate and complete documentation on their website and on all reports indicating the rate used and the rate needed for reporting.

T3 and T5013 tax slips

These are the two main slips which have a mailing deadline of March 31st because the trust/partnership has to finalize their books and prepare their tax returns in order to know the breakdown of the distributions so that the individual holders can then have their tax returns rushed to them – a high risk process indeed.  So once the T5’s have been received and accounted for, issuing organizations like transfer agents have only a month or less to then prepare the T3 and T5013 slips.

Let’s be honest here, it’s more like 2-3 days, due to the complexity of the partnership returns and one way around this is to ensure that any issuing organization is capable to preparing T5013’s by themselves, or that they have an organization capable of preparing them in an expedited manner.  In addition, the partnership should be contacted to let them know that the quicker they get their books in order, the quicker the rest of the slips can be prepared.  If enough people come forward, I guarantee it will get done faster.

Final Review:

When reviewing your slips before filing your tax return, keep in mind a few small differences;

T4’s vs. T4A’s – A T4 is issued by your employer and reflects the income you earned during the year, as well as showing the amount of deductions you had removed from your pay, such as; CPP, Employment Insurance (EI) and tax.  A T4A, on the other hand, is issued by a pension plan administrator and reflects the pension income you received from a pension source. T4As will not have figures listed for CPP or EI contributions since these are not deducted from pension income.

The T5 investment income slip – identifies the various types of investment income that residents of Canada have to report on their income tax and benefit returns.  T5’s are NOT issued to report income paid to non-residents of Canada, however, if you earned US interest on your investments, it will show up on your T5, with a note at the bottom saying that the interest is in US dollars.

It’s not always clear to the holder that this figure needs to be converted at the average exchange rate for the year, as set out by the CRA.   T5 slips also have both eligible and ineligible dividend boxes, which holders can accidentally reverse on their returns.

Investment loan interest

Most banks do not issue receipts for interest on investment loans unless specifically requested, resulting in a missed deduction for the client.  Borrowers should request receipts well in advance of the tax-filing deadline to ensure they arrive in time.

All in all, it’s best to keep track of investments you have and to check off when they are expected and when they are received in order to ensure you can file at your earliest convenience or reach out and ask your issuing organization / bank / transfer agency to step up and find a solution.

It’s never to early.

Even in October.

FATCA Fallout: This was NOT what the IRS intended with the upcoming FATCA Regulations

This image depicts the total tax revenue (not ...
This image depicts the total tax revenue (not adjusted for inflation) for the U.S. federal government from 1980 to 2009 compared to the amount of revenue coming from individual income taxes. The data comes from the Office of Management and Budget’s record of the ‘Budget of the US Government FY 2011’, specifically the ‘Historical Tables, Table 2.1.’ The information is also here. (Photo credit: Wikipedia)

I have been all over FATCA since March 18th, 2010 when President Obama passed the Hires Act through Congress, aimed at getting Americans working and taxing the wealthy (isn’t that what all socialist and democratic governments do?)  Out of this Act comes FATCA, the Foreign Account Tax Compliance Act which is set to become law January 1st, 2013 and unlike most new taxes, FATCA changes the way taxation is administered globally.I’m going to outline why FATCA was brought in, what the US government is trying to do, and why there have been a couple of events in the past 2 weeks which have come to light which leads me to believe that this was not what the US government was thinking when they pushed the Hires Act through Congress.

So FATCA, in case you are unaware, is on its way to becoming the world’s first global tax on Americans, administered by financials institutions and non-financial entities around the world… OR else.  Can the IRS do this, you ask?  Apparently yes they can.  Why do they need to do this you are wondering?  Because US investors have been evading taxes by hiding their identities from the IRS or they have created offshore companies to hold their investments out of sight and out of reach of the IRS.  The net result here is that the IRS needed to find a way to track down all these US persons who should be filing US tax returns disclosing all their worldwide income but are either not filing, nor including these items.

The estimated lost tax revenues from these US taxpayers using offshore schemes to evade US income taxes is in excess of $100 billion dollars per year.  Think the US could use these funds?  Yeah, I thought so too.  Say hello to FATCA.
So how can the US crack down on these US persons who are hiding their funds?  Well first they tried asking some foreign banks for a list of Americans who they had on their registry.  That did not go over well at all.  The banks said, you have a specific person you want information on, we will give you details, however the IRS didn’t know, they wanted everyone and the foreign banks we not going to give us their revenue sources.  So the US government sued beginning with  Switzerland.  Not the best way to win friends, globally, by suing them, so the US government and the IRS them began pushing FATCA on everyone.
In a nutshell, it requires all foreign banks and foreign institutions to provide information to the IRS as soon as they find a US person on their system / in their bank.  The IRS intends on using this information to locate, audit and potentially prosecute US persons who are evading the paying of their fair share of taxes.  The scope of FATCA is global.  The complexity of FATCA is massive.
The IRS figures through FATCA that every organization globally will opt in to FATCA and will become agents of the IRS and within 5 years will have flushed out every US person to the IRS – both those who are complying and those and those who are not (those who are not have a catchy new name: recalcitrant).
The IRS even offers a way out of FATCA if you are an US person… Just give the IRS 1/3rd of your worldwide income and renounce your US citizenship and you’re out.  For good.
Recently, however, I came across two fantastic articles through my FATCA research which clearly shows me that the IRS and the US government may not have thought through the full implications of FATCA.
So here is problem number 1, in a great article from Bloomberg;

http://www.bloomberg.com/news/2012-05-08/u-s-millionaires-told-go-away-as-tax-evasion-rule-looms.html.  This article outlines the international response to FATCA as the deadline to sign up with the IRS gets closer and closer.  Instead of gearing up systems to flush out these US investors who have been hiding millions and millions of dollars (the FATCATs), these foreign financial institutions (FFI’s) and non-financial foreign entities (NFFE’s) are going through their foreign policies to find ways to instead remove Americans from their business.  The costs associated with complying with FATCA outweighs the benefit of US monies.  Oh oh.

Does the IRS and US government really want to prohibit US persons from investing outside of the US?

Problem number 2 came recently when Brazilian-born Eduardo Saverin, the billionaire Facebook co-founder, renounced his US citizenship he gained as a teenager in advance of the company’s impending IPO and moved to Singapore to avoid paying capital gains taxes on his approximately $3 billion stake in Facebook.

This is FATCA response #2.  Renounce your citizenship and you’re out.  So instead of staying in the US and paying taxes, the very rich do not appreciate carrying the taxation burden for a tax and spend government and they take their wealth to another country where it will be appreciated.

Caught red-faced the US government needed to respond so they looked to do to Saverin what they did to the foreign banks who had US persons on their registry.  They threatened to sue.  Then they changed the law.  The US senate introduced a bill under which any expatriate with either a net worth of $2 million, or an average income tax liability of at least $148,000, will be automatically presumed to be leaving the country for tax purposes — enabling the IRS to impose a tax on any investment gains that person makes in the future.  Crazy.  Greedy.

Apparently Saverin filed to give up his US citizenship in January of 2011, but the news didn’t surface until the federal government released the information in a routine report. Saverin may be barred from re-entering the US if authorities decide he left the country for tax reasons because you don’t want a super-rich guy coming into your country and buying things!  That will show him.

Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income.”  Saverin won’t escape all US taxes because Americans who give up their citizenship owe what is effectively an exit tax on the capital gains from stock holdings.

Saverin maintains that his renunciation of American citizenship, which actually took place last September, wasn’t a ploy to skip out on American taxes, but rather an attempt to free himself from FATCA, which he described as a burdensome restrictions on American investors abroad. US citizens are severely restricted as to what they can invest in and where they can maintain accounts.  Many foreign funds and banks won’t accept Americans so it was for financial reasons and not tax related.

It’s true that FATCA is making life more difficult for US persons, including the IRS’ global reach (many countries tax based on residency); foreign bank account reporting rules; and FATCA.  As a result of all the regulations, some foreign banks are dumping more U.S. customers.

Saverin is hardly the only one taking this particular route to big tax savings. The number of those renouncing US citizenship stands at around 1,800 last year.

While I cannot see the US government pulling back on FATCA I think they need to look again at what they are trying to accomplish and how they plan on getting there before all their high-income earners not in the US disappear from the radar within 5-10 years of FATCA being in force.  So the tax pool will grow, then diminish and the IRS will be looking for newer ways to increase tax revenues.

Some basics of Canadian Investing; Mutual Funds, Eligible Dividends and Deferred Tax

Here is a brief introduction to the absolute basics of investing Canada. If you know this, you really just know the basics.  If you do not know much about Mutual funds, Eligible dividends, income trusts, and deferring taxes owing then trust me, this is the tip of the iceberg.  The Investment Fund Institute of Canada (IFIC) has a mutual fund course as probably does the Canadian Securities Institute (CSI).  Both are sought after for entry into the financial sector.

At the very basic, here are the 2 main types of tax-sheltered investments you probably have heard about – RRSP or RRIF.  In both cases, you put money away into these investments which are NOT taxed at year-end.  you pay taxes when you withdraw or remove the funds after certain milestones, such as age 65. 

Investments that generate capital gains or Canadian source dividends are taxed more favourable than interest income because interest income earned from investments such as T-Bills, bonds, and GIC’s are generally taxed at the highest marginal tax rate.
• Dividends earned from a Canadian Corporation are taxed at a lower rate than interest income.  This is because dividends are eligible for a dividend tax credit, which recognizes that the corporation has already paid tax on the income that is being distributed to shareholders.
o This only applies to dividends from a Canadian corporation.
o Dividends paid from a foreign corporation are not eligible for the dividend tax credit.

As of 2006 there are now two types of dividends, eligible and non-eligible dividends, and they are treated differently from a tax perspective.
• Eligible dividends include those received from a public Canadian corporation and certain private, resident corporations that must pay Canadian tax at the general corporation rate. As a result, they have a federal tax credit of 18.97% and are grossed up by 145%.
• Non-eligible dividends include those received from Canadian-controlled private corporations not subject to the general corporate tax rate.  They have federal tax credit of 13.33% and are grossed up by 125%.

This change was introduced by the government of Canada in order to present a more balanced tax treatment between corporations and income trusts as Canadians were investing more and more in income trusts and less and less in corporations and why wouldn’t they, since prior to 2006 income trusts were not taxed on any income allocated to unit holders, whereas dividends paid by a Canadian corporation are paid out of after tax earnings. 

To combat this, many corporations began to restructure their operations to become income trusts.  Something had to be done.

In a typical income trust structure, the income paid to an income trust by the operating entity may take the form of interest, royalty or lease payments, which are normally deductible in computing the operating entity’s income for tax purposes.  These deductions reduce the operating entity’s tax to nil.   

The trust “flows” all of its income received from the operating entity out to unitholders.  The distributions paid or payable to unitholders reduces a trust’s taxable income, so the net result is that a trust would also pay little to no income tax, which is never a good thing in the government’s eyes.

So who then gets hit with the tax bill??  The net effect is that the interest, royalty or lease payments are taxed at the unitholder level;
1. A flow-through entity whose income is redirected to unitholders, the trust structure avoids any possible double taxation that comes from combining corporate (T2) income taxation with shareholders’ dividend taxation
2. Where there is no double taxation, there can be the advantage of deferring the payment of tax.  When the distributions are received by a non-taxed entity, like a pension fund, all the tax due on corporate earnings is deferred until the eventual receipt of pension income by participants of the pension fund.
3. Where the distributions are received by foreigners, the tax applied to the distributions may be at a lower rate determined by tax treaties, that had not considered the forfeiture of tax at the corporate level.
4. The effective tax an income trust owner could pay on earnings could actually be increased because trusts typically distribute all of their cashflow as distributions, rather than employing leverage and other tax management techniques to reduce effective corporate tax rates.  It’s easier to distribute all the funds out and show nothing being retained that it is to implement strategies to reduce corporate tax owing which is the path most often taken. 

Where can a holder find their dividends reports?  Dividends are usually shown on the following CRA slips:
• T5, Statement of Investment Income
• T4PS, Statement of Employees Profit Sharing Plan Allocations and Payments
• T3, Statement of Trust Income Allocations and Designations
• T5013, Statement of Partnership Income
• T5013A, Statement of Partnership Income for Tax Shelters and Renounced Resource Expenses

When completing a Canadian tax return, where should a holder enter their dividend information?

Enter on Line 180 the taxable amount of dividends (other than eligible dividends) as follows:
• box 11 on T5 slips
• box 25 on T4PS slips
• box 32 on T3 slips
• box 51-1 on your T5013 or T5013A slips.

Enter on Line 120 the taxable amount of all dividends from taxable Canadian corporations, as follows:
• boxes 11 and 25 on T5 slips
• boxes 25 and 31 on T4PS slips
• boxes 32 and 50 on T3 slips
• boxes 51-1 and 52-1 on your T5013 or T5013A slips.

What do I do if I did not receive an information slips?

Ignore it and the CRA will let me off the hook?  No chance.  If you did not receive an information slip, you must calculate the taxable amount of other than eligible dividends by multiplying the actual amount of dividends (other than eligible) you received by 125% and reporting the result on line 180.  You must also calculate the taxable amount of eligible dividends by multiplying the actual amount of eligible dividends you received by 141%. Report the combined total of eligible and other than eligible dividends on line 120.

So what exactly is a capital gain?

Capital gains occur when you sell an asset for more than you paid for it. This gain is offset by any losses and can be further reduced by any expenses that are incurred by the purchase or sale of the asset – resulting in net capital gain.
Taxation of capital gains: 50% of a net gain is taxable at the appropriate federal and provincial rates.

My accountant advised me I need more “Tax deferral”.  What does she mean?   She means contributing the maximum amount to your RRSP which provides an immediate tax deduction and tax sheltered growth as long as the investment(s) remain in the plan.

Other less commonly used strategies include:
• Universal Life Insurance is a policy that combines life insurance coverage with a tax deferred investment component. Premiums paid are first used to ensure life coverage and the balance accumulates in an investment account where it grows tax deferred.
• Registered Educations Savings Plan (RESP) is a plan where contributions are used to fund a child or grandchild’s post secondary education costs.
o initial contributions are not tax-deductible
o any income earned within the plan is only taxable in the hands of the student at the time of withdrawal.

More is coming in the next few days, weeks and months…