Year End Tax Considerations

Now that 2012 is drawing to a close, like me you are probably looking forward to enjoying the upcoming festive season.  Here are a few things that you may want to consider to insure that your financial affairs are properly structured as we enter into 2013.

Deferring a Bonus

If you are expecting a year-end bonus, your employer may agree to postpone the actual payment of the bonus to 2013.  This means that the bonus income will be taxed in the 2013 tax year.  However, by lowering the income in 2012, the amount of RRSP/DPSP/Registered Pension contribution room may also be lowered for 2013.

Charitable Donations

To be eligible for the 2012 Charitable Donation tax credit, the donation needs to be made by December 31, 2012.  When donating publicly traded securities, it is advised to donate those with implied capital gains since the donation will be for the Fair Market Value of the securities and the capital gain will be exempt from tax.  It is important to make the donation ‘in-kind’ because if the securities are sold and the cash is donated, then 50% of the capital gain realized will be taxed.

RRSPs for those Turning 71

A taxpayer cannot hold an RRSP beyond the end of the year in which they turn 71.  Therefore if you have turned or are turning 71 before the end of the year, you must do something with your RRSPs by December 31.  The two most common options are to establish a Registered Retirement Income Fund (RRIF) or to purchase an annuity. 

Home Buyers’ Plan

If you are planning to make a withdrawal from your RRSP under the Home Buyers Plan, you should consider delaying the withdrawal until 2013 if practicable.  By doing this, you will be able to defer the initial repayment of the withdrawal by one year, until 2016.

RESP Contributions

To receive the Canada Education Savings Grant (CESG) for 2012, contributions must be made to the plan by December 31, 2012.

Tax-Free Savings Accounts (TFSAs)

One of the advantages of the TFSA is that when withdrawals are made from the account, the ongoing contribution room will be increased by the amount of the withdrawal.  It is very important to note, however, that the increased contribution room does not come into effect until January 1 of the following year.  If you have therefore made withdrawals in 2012 and want to take advantage of the increased contribution room, you should wait until 2013 or you may face over-contribution penalties.

Tax Selling for Non-Registered Accounts

A popular strategy at this time of year is to sell investments that have dropped in value and trigger capital losses.  Capital losses can be used to offset capital gains.  Any capital gains realized this year can be reduced or eliminated, thereby reducing payable taxes.  If the capital losses triggered exceed this year’s capital gains, the excess amount can be taken back three years and used to reduce any capital gains realized in those years.  As an alternative, the capital losses can be carried forward to reduce capital gains in the future.

Transfers to RRSPs

A transfer of an investment to an RRSP is a deemed disposition or ‘sale’ of that investment for tax purposes.  If the deemed disposition results in a capital loss, that loss will be disallowed and cannot be used to offset capital gains. 

As an alternative, you could sell the investment, claim the capital loss, contribute the cash to your RRSP, and then purchase the investment within the plan.  The purchase however should be deferred at least 30 days to avoid a Superficial Loss.  The Superficial Loss rule prevents the taxpayer to use the capital loss if he (or his spouse) buys back the same investment within a 30 day time period.

Please don’t hesitate to contact me if you have any questions on these tax saving strategies.

Have a Great Weekend!

Tracey

Source:  Dynamic Funds

Avoiding the OAS Clawback through Income Splitting

As boomers move into their 60s and think about retiring, the question of OAS clawbacks always come into the conversation.

The OAS program is an important component of many Canadians’ retirement income and includes the basic OAS pension, the Guaranteed Income Supplement (GIS), the Allowance, and the Allowance for the Survivor.

The program which is fully funded by the Canadian Government’s tax revenues came into force in 1952 and has been amended several times since.

The current 2012 maximum OAS monthly benefit is about $540, this translates to just over $6,480 per year of income.  Pensioners with an income of over $69,562 will start to have their pension reduced by $.15 per $1.00 of income above this threshold.  When the pensioner’s net income rises above $112,772 the whole OAS pension will be totally eliminated.

However, if you look closely at the numbers, 95% of all eligible seniors receive their full OAS pension.  A further 98% receive a portion of it, while only 2% of eligible seniors have their full OAS pension clawed back.

The two biggest sources of the Clawback headache seem to be the required minimum Registered Retirement Income Fund (RIFF) withdrawals; and the grossed-up amounts of Canadian dividends.

Income splitting with your spouse or common-law partner is one what to reduce or eliminate the clawback.   Pension income splitting was first introduced in 2007; this allows Canadian couples who receive ‘eligible’ pension income to split up to 50% of their income with their spouse or common-law partner.  So if your spouse or partner is in a lower tax bracket; income splitting should be a no-brainer. 

For example, take the case of Ontario retirees John (65) and Suzan (60).  John’s pension income that is eligible for splitting is $110,000 and he has an additional $5000 in investment income.  At this income level he would be above the OAS clawback threshold; and therefore would have to repay all his benefits.

However, let’s say Suzan only has $10,000 of investment income.  If John and Suzan jointly elect to split Jack’s pension income 50/50, not only will John’s income taxes be reduced by moving from a higher tax bracket to a lower tax bracket, it will have a cascading effect.  Jack will be allowed to claim some of his age credit (which would be clawed back), and Suzan can now claim both the federal and Ontario pension income credits.

Between taxes, credits and John’s full entitlement to his OAS the couple will save just over $10,000. 

So is 50-50 income splitting for everyone?  Not necessarily, but it is worth finding out.  Make sure to ask your accountant or talk to me, because finding the ideal split could mean more money in your pocket.

Have a great weekend,

Tracey

Source:  Jamie Golombek at welcometojamiegolombek.com and Service Canada

It’s About Protecting Your Family

It is not a topic most people like to talk about; but how well is your family protected if something were to happen to you?

Life insurance provides the financial support your family will need if you are no longer around to provide for them.  Your insurance needs will change as you go through the different stages of life so here are a few pointers to help you determine if it’s time to review and update your policy.

Young and Single

The best time to buy life insurance is when you are young and healthy.  The younger you are the lower your premiums will be.  Furthermore if you put off buying life insurance you run the risk of not qualifying for insurance due to an unexpected health issue that may arise.  When buying life insurance for the first time, remember it is like buying cloths for a young child; a little bigger is better because as life goes on you will eventually grow into your policy.

If something does happen, the money your family will receive can be used to pay off your debts, like a car loan or student loan.  If you are lucky enough not to have any debt you can leave the money to your siblings, nieces or nephews. 

The Family Years

Young parents with growing children are especially vulnerable because most young families are heavily burdened with debt.   Mortgage payments, car loans, day care and educational expenses are only a few of the financial responsibilities people carry in their thirties and forties.  At this expensive time of your life using Term Insurance is probably the most economical way to get the amount of coverage you really need to protect your family.  The general rule of thumb would be to have 7 -10 times your annual income in the event something where to happen to you or your spouse.

Pre-Retirement

Life insurance can provide financial security for you or your spouse should something happen to one of you heading into retirement.  It is also an easy way to provide your family with an inheritance if you decide to spend it all.

Life insurance can be used to pay the taxes on your estate once you are both gone, leaving everything else to the ones you love.  It would be a shame to give a large portion of your estate to the tax man instead of your family if you didn’t plan properly.  You should also take note that upon retirement most group policies expire; if that is where your policy is held, it may be time to replace it.

As you move through life your insurance needs will change, make sure you review your policy at least every 5 years to ensure your family is always protected.  I know life insurance can be confusing and the amount of coverage can be hard to determine, so if you need help give me a call, as a fully licensed insurance agent I can answer all your questions.

Have a great weekend,

Tracey

Source:  Original article published in the November/December issue of The Costco Connection, other information provided by Manulife Insurance.

Slow but Steady Economy for Obama

Getting back into the White House this week was only the first challenge President Obama faces over the next four years.  The U.S. economy is burdened by high unemployment, stagnant pay for those who are working, the European financial crisis, slowing global growth and many American companies still too nervous to reinvest and expand.  Furthermore, the economy could sink into another recession if Congress can’t agree on a budget deal to avoid tax increases and spending cuts by January; aka ‘The Fiscal Cliff’.

But the outlook isn’t all grim; many indicators suggest the next four year will bring a vastly healthier economy than the previous four.  The jobs picture has been steadily improving.  Hiring in August and September was stronger than first thought and employers added a solid 171,000 jobs in October.   In addition, cheaper gas and rising home prices have boosted confidence and Americans are starting to spend a little more.  Retailers, auto dealers and manufacturers have all been benefiting.

Although economists surveyed by The Associated Press expect the U.S. economy to grow by 2.3% next year; it is still a little slow to generate strong job growth.  Many U.S. employers are wary of expanding or hiring until the fiscal cliff crisis is behind us.  That is why many analysts agree resolving or at least delaying the fiscal cliff should be at the top of the priority list for the White House.

In the long run, analysts are more optimistic about the U.S. economy.  The American people are feeling better and consumer confidence is almost at a five year high.

This brighter outlook by consumers may be due to the steadily increasing home prices after what has been a painful six-year slump.  Higher home prices help create the feeling of wealth which in affect makes homeowners feel richer and therefore spend more.

In addition, the low interest rates have reduced the cost of debt, this has enabled many Americans to shrink their debt and start to save.   Household debt as a percentage of after-tax income dropped from 125% before the financial crisis to 103% by the end of June.  The same ratio was approximately 90% back in the 1990s, according to the Federal Reserve’s data.   Carrying less debt frees up money for people to spend on cars, appliances and other goods. 

Banks have also been boosting their lending for the past 18 months; according to Paul Ashworth, an economist at Capital Economics, another sign that the passage of time is helping the economy rebound.

Economic recoveries always seem to be painfully slow; however we can see from the numbers that our neighbors south of the boarder are headed in the right direction.

So not all is bad for Obama in his second term, “he is going to have an easier time of it…because we’re further along the road to recovery” Ashworth says.

Have a great weekend,

Tracey

 

Source:  original article by Associated Press, posted on Advisor.ca, November 7, 2012.

Tax Changes for Americans Living in Canada

Currently there is an estimated one million U.S. Citizens living in Canada, for them; there has been a number of tax-related developments they should be paying attention to.

For one, Americans must file U.S. tax returns every year reporting their worldwide income.  In addition; if they own more than $10,000 of foreign assets they must file the Foreign Bank Account Reporting (FBAR) form.  This includes Canadian RRSPs, TFSAs, RESPs and non-registered accounts.

In January, The Offshore Voluntary Disclosure Program was announced; it obliges non-resident Americans to file eight years of tax returns, eight years of FBAR, and all kinds of other returns. 

“Obviously not all Americans living in Canada have been compliant with this for the last four years,” says Jamie Golombek of CIBC Private Wealth Management.  However, the U.S. government has launched some new programs to help people get started.

In September the IRS released its ‘New Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers’; meant to encourage those who have not being filing their U.S. returns to get on board and come clean.

The new system is for ‘Low-risk tax payers’; these are non-resident U.S. tax payers who have lived outside the U.S. and have not filed tax returns since January 1, 2009.  They also owe less than $1500 of U.S. tax per year.  “If this applies to you, you have to file three years of returns, six years of FBARs, pay any related taxes and interest – and the IRS says ‘no penalties or follow-up actions” (will be taken) says Golombek.

There will always be those who will ignore the new rules under the belief the IRS will never find out.  This would be a mistake, as these people will now have to deal with the U.S. Foreign Account Tax and Compliance Act, or FATCA.

Starting in 2014, FATCA obligates Canadian financial institutions to disclose information about U.S. persons directly to the IRS; and will impose severe penalties for noncompliance.

FATCA, which was formed as a direct result of the U.S. revamping their withholding tax code, proposes a 30% withholding tax on certain payments made to foreign financial institutions and non-financial foreign entities that refuse to identify U.S. account holders and investors.

Starting next year Golombek believes Canadian financial institutions will probably start providing the U.S. government with information on Canadian accounts held by U.S. persons.

Penalties can be as high as 27.5% of the highest balance of foreign accounts.  So if you or someone you know is an American living in Canada; and you haven’t filed your U.S. returns, it is time to come clean.   Talk to your accountant, or if you don’t have one; talk to me and I will point you in the right direction.   Avoid the penalties, it’s not worth it.

Have a great weekend,

Tracey

 

Source:  Jamie Golombek, Renaissance Investments Live and Interactive and Vikram Barhat, Advisor.ca article published Nov. 1, 2012.