March 2005 Archives

CRA Tax Tip: Missing Slips or Receipts?

The Canada Revenue Agency (CRA) advises you that even if you're missing slips or receipts, you shouldn't hesitate to file your income tax return. Filing on time will help to avoid any disruption of benefits owed to you such as the sales tax credi or Canada Child Tax Benefit.

For whatever reason, if you do not have all necessary information by the filing deadline, the CRA suggests that you use your pay stubs, bank statements, or other records to estimate your income and deductions. If you later determine that the information on your slips is different from your estimates, you can then send the information to the CRA for adjustments to your return. Alternatively, you can also log on to the CRA's My Account feature and use the "Change my return" option to make the changes yourself.

For more information on this tax tip, see:
http://www.cra-arc.gc.ca/newsroom/taxtips/2005/0329ottawa-e.html

CRA Tax Tip: Doing it all online

The Cananda Revenue Agency provides tax tips on its web site. A recent tax tip identifies the convenience and benefit of doing everything tax-related online from your computer.

"My Account is a fast, easy, convenient, and secure way to manage your income tax information, Canada Child Tax Benefit and goods and services tax/harmonized sales tax credit information, and more."

To view this CRA Tax Tip go to:
http://www.cra-arc.gc.ca/newsroom/taxtips/2005/0322ottawa-e.html

To use the My Account feature you can log on via the CRA Web site and clicking on My Account. For more information on My Account, visit the Canada Revenue Agency Web site at: http://www.cra.gc.ca/myaccount/.

There are also numerous tax preparation software packages that are available and approved by CRA for filing your taxes both online and offline. For more information on tax filing software available for your computer, see the Taxes.ca list of tax software and read reviews on our blog. You can even write your own reviews!

CRA Tax Tip: Tax Savings for Learning

The Canada Revenue Agency has released a new tax tip directed at students as well as workers who acquire or improve their work skills. Studens can claim the tuition fees paid to a university or college in Canada for courses takenat the post-secondary school level. Tuition fees paid for courses to acquire or improve skills in an occupation can also be deducted if Human Resources and Skills Development Canada (HRSDC) certified the institution.

For more information on this tax tip including more information on the federal non-refundable tax credits for education amounts, see the CRA web site at:
http://www.cra-arc.gc.ca/newsroom/taxtips/2005/0315-e.html

Excise Tax on jewellery to be phased out

Importers and manufacturers of certain jewellery goods will see the amount of Excise tax paid on those goods reduced from 10 % to 8 % as of February 24, 2005. Budget 2005 proposes that the excise tax on jewellery be phased out through a series of rate reductions over the next four years.

The measure is in response to a study by the House of Commons Standing Committee on Finance relating to federal tax measures to help small businesses in certain sectors, including excise tax and duty relief for jewellers, small brewers and wine-makers, and measures to improve access to capital for agricultural cooperatives.

The list of products includes: jewellery (diamonds and other precious and semi-precious stones for personal use) and gold/silversmiths' products, clocks and watches, as well as articles made (in whole or in part) of natural shells and semi-precious stones. Over the next four years this tax will be phased out completely.

More information is available on the federal budget site:
http://www.fin.gc.ca/budget05/bp/bpc4de.htm

Donations

While we generally donate to charities because we want to help others, there are tax incentives we should be aware of and make use of. In order to do so, we also have certain responsibilities in respect of such donations.

A charitable donation is a "voluntary transfer of money or property without any expectation of return". It may be in the form of cash or a gift in kind such as securities, certified cultural property, life insurance policies, real estate, residual property, etc. Donations may also be made at the time of death via the taxpayer's will. A gift in kind is generally valued based on its fair market value at the time of disposition. There are special rules for donating capital property, in particular the ability to select a value between the cost and the fair market value. Despite the need for and importance of volunteers, volunteering one's time or services does not qualify for tax credits.

The donor is responsible for ensuring the recipient of the donation is a qualified donee. Qualified recipients include:
- Canadian Registered Charities;
- Certain universities outside Canada;
- Registered Canadian amateur athletic associations;
- Tax exempt housing corporations resident in Canada that only provide low-cost housing for seniors;
- Canadian municipalities;
- Certain gifts to Canada, a province or a territory;
- Registered national arts service organizations;
- The United Nations or its agencies; and
- Charitable organizations outside of Canada to which the Government of Canada made a donation in the tax year, or in the previous tax year.

Individuals who make charitable donations are entitled to a federal tax credit at a rate of 16% on the first $200 of donations and 29% for donations in excess of $200. For most provinces and territories, the tax rate that applies to the lowest income bracket will apply to the first $200 of donations and the rate that applies to the top income bracket will apply to donations in excess of $200.

Qualifying donations are generally limited to 75% of an individual's net income for the year, plus 25% of capital gains from gifts and 25% of recapture from depreciable property gifted. The 75% limit is increased to 100% in the year of death.

Each form of donation has different tax implications for both the donor and the donee. Cash is the most commonly-used form; but the donation of securities may be a preferable option for some donors. The federal government has cut in half any capital gains owed on donations of qualifying securities (generally meaning a security listed on a stock exchange and mutual funds). If the donor is already planning to sell such securities and donate cash, it could be beneficial to donate the securities directly. The donor would be taxable on 1/4 of the capital gain (rather than 1/2) and the value of the donation itself would not change.

Tax credits for donations made may be claimed in the year of donation or carried forward up to five years. For some, it may be worthwhile accumulating donations so as to minimize the 16% federal credit (on first $200 of donations) and maximize the higher credit. It is also advisable for spouses to combine their donations and claim them all on one return. If reported separately on their respective tax returns, each must exceed $200 before obtaining the higher tax credit. By claiming together on one return, that $200 at 16% occurs only once.

To obtain general information on donating, including a feature to search the listing of Canadian Registered Charities, check the Canada Revenue Agency's Charities Directorate page.

Caren MacLeod
Scott Rankin & Gardiner
www.srgg.com

CRA Tax Tip: Child care

Canada Revenue Agency has added the following tax tips to its web site.

Canadians are reminded that you may be eligible to claim payments for child-care expenses such as nursery school, day-care, day camps, boarding schools, and sports schools. Expenses can be claimed if you or your spouse incurred the expenses in order to work, carry on a business, or attend school.

Also, if your child is under the age of 18 and works part time or full time, he or she may be entitled to a refund on taxes withheld. There is even a benefit to filing wether tax has been withheld or not. Filing an income tax return to report the income earned will increase your child’s RRSP contribution limit for future years.

For more information, see the CRA web site at the following addresses:

Tax tip: Claim the care for your kids
http://www.cra-arc.gc.ca/newsroom/taxtips/2005/0222kids-e.html

Tax tip: Cheque for your child
http://www.cra-arc.gc.ca/newsroom/taxtips/2005/0308child-e.html

You Could Have US Tax Issues

If you spend a significant amount of time in the United States, own rental property in the US, do business in the US, or are a US citizen or "Green Card" holder, then you need to be sure you’re onside with any required US filings. While compliance often does not result in US taxes owing and may simply consist of filing a single form, penalties for non-compliance are severe.

Are you a snowbird? You must keep track of the number of days you spend in the US (including travel days). The US Internal Revenue Service (IRS) will consider you a US resident if you meet the "substantial presence test", which is a formula calculated based on the number of days you were in the US in the current year, the preceding year and the second preceding year. Unlike the 183-day misnomer, if you spend, on average, 4 months per year or more in the US then you may meet the test and be deemed a US resident.

You can avoid being considered a US resident by claiming the "closer connection exception". This requires the filing of US Form 8840 to establish that your ties to Canada are closer than those to the US. Such ties include permanent home, family, personal belongings, banking, and participation in social, religious or professional organizations. If you spent more than 183 days in the US in the current year or if you have applied for a Green Card (permanent resident status in the US) then you cannot claim the closer connection exception.

It is possible to be a resident of both Canada and the US – a dual resident. Under these circumstances, we must turn to the "tie-breaker" rules in the Canada-US Tax Convention (treaty) to determine who has ultimate jurisdiction to tax you (i.e. which country you are, in fact, a resident of). If the rules result in Canadian residency, then a US tax return must be filed to report US-source income, while a Canadian return must be filed to report world-wide income. If the rules result in US residency, then the opposite is necessary. Foreign tax credits are used to the extent possible to provide relief from double taxation.

Perhaps you own US real property that you rent out. It is important to elect, in a timely manner, to be taxed as though the income is effectively connected with a US trade or business. Without the proper election, the tenants are obliged to withhold 30% of the gross rent and remit it to the IRS. By making the appropriate election, you can file a US return reporting gross income and deducting expenses to end up paying tax at the marginal rate on the net income – a far better scenario than 30% of gross income.

If you are a US citizen or Green Card holder residing in Canada you are still required to file a US tax return to report your world-wide income. As a Canadian resident you are also required to file a Canadian tax return to report your world-wide income. Again, foreign tax credits are used to the extent possible to provide relief from double taxation. It is also imperative to file your US return in order to not lose the right to claim a "foreign earned income exclusion" and to make certain elections.

Regardless of your filing status, it is important to file when required and to claim any and all treaty exemptions that are available to you, such as electing to defer taxation of any income or gains accrued in a retirement plan, such as an RRSP.

The US also has Estate Tax issues that should be considered. US estate tax arises on the death of an individual and is applied at graduated rates to the fair market value of the individual’s taxable estate. If you are a non-resident, then the estate tax applies only to the value of property in the US. A US citizen or US resident must pay estate tax on their world-wide estate.

Currently US estate taxes are being phased out – the tax rate is being reduced while the exemption amounts are being increased. By 2010, there will be no estate tax; however that may change. Under US legislation, there is a "sunset clause" which essentially means these changes will not apply after December 31, 2010. So, unless further steps are taken, the repeal of the estate tax will last for only one year – 2010. In 2011, the system will revert back to the rules that applied before this phase-out started.

In general, US forms and returns are due April 15 (vs. April 30 in Canada). For US citizens residing outside the US, there is an automatic two-month extension. For non-citizens, it may be possible to request a filing extension. For everyone, regardless of extensions, any tax owing is still due April 15 and subject to interest if not paid on time.

The bottom line is that many people don’t realize they have filing obligations with the US. You may be at risk for severe penalties and lose the ability to rely on tax benefits and treaty protection.

Caren MacLeod
Scott Rankin & Gardiner
www.srgg.com

Budget 2005 affects on CRA

If you are wondering how the recent federal budget will affect Canada Revenue Agency and the Canadian tax regime, CRA has published a message from Minister of National Revenue John McCallum and two supporting documents on Expenditure Review Initiatives and Tax Legislation Changes.

Items of note include:
- additional funding to enhance CRA's work on compliance initiatives, including international tax compliance and tobacco enforcement
- additional funding for new jobs at the Agency.

The Agency's Expenditure Review Initiatives identifies where the CRA intends to save money and approximately how much over the next five years. The largest savings will be in reducing the cost of its corporate services operating costs, for a savings of $215 million over five years.

Other areas highlighted for savings including almost $80 million streamlining tax return processing; $20 million phasing-out counter service for cash payments; reducing client services delivery costs through the consolidation of call centres and the rationalization of counter services for enquiries for a savings of $44 million, and more.

For more information, see:
http://www.cra-arc.gc.ca/agency/budget2005/initiatives-04e.html

"My Account" Service

Are you aware of the Canada Revenue Agency's "My Account" service? It's an online service that allows individuals to access and manage such things as personal income tax, GST credit, Registered Retirement Savings Plan room, instalments, Canada Child Tax Benefit and, most recently, change in address. To enhance security, a Government of Canada epass is now required to use this service.

Check out the details at CRA

And the winner is...

If the glitzy Academy Awards ceremony wasn't enough to hold your interest, the Canadian Taxpayers Federation has issued the results of its 7th annual Teddies Waste Awards honouring "the best of the worst in government spending". A humorous look at the way your tax dollars are spent, the Teddies list federal, provincial, and municipal nominees and winners.

"In the spirit of the entertainment awards season, Teddies are awarded annually to a public office holder, civil servant, department or agency that most exemplifies government waste, overspending, over-taxation, excessive regulation, lack of accountability, or any combination of the five."

You can view the Teddies results on the CTF web site at:
http://www.taxpayer.com/main/news.php?type_id=1&news_id=1937

RRSP Pointers

Deadline
A reminder that today, March 1, 2005, is the deadline for making a deductible contribution to your Registered Retirement Savings Plan (RRSP) for the 2004 taxation year.

Reporting
Please note that contributions made in the first 60 days after the calendar year must be reported on your personal tax return for the previous calendar year (i.e. Jan 1 - Mar 1, 2005 contributions must be reported on your 2004 T1). The reason this is more critical then ever is that the Canada Revenue Agency (CRA) is implementing a "matching program" much like the system they use for the various T-slips. If the total contributions you report, in the remainder of the calendar year and in the first 60 days after the calendar year respectively, do not agree with the information CRA has on file (from the various issuing financial institutions), then you can expect an inquiry, and possibly even an audit, by CRA. For example, if you contributed $5,000 on February 28, 2005 and $10,000 between March 2 and December 31, 2005, you cannot report $15,000 of contributions in the remainder of 2005 as this will not agree with the $10,000 CRA has on record.

So, it's very important you report the contributions in the correct taxation year, regardless of whether you can, or want, to take the RRSP deduction in that year.

Key Strategies
I encourage you to read the February 8, 2005 article "RRSPs: Key Strategies" written by Daniel Saikaley of CIBC Wood Gundy. This article, which can be accessed on this website, provides some excellent RRSP tips.

Caren MacLeod
Scott Rankin & Gardiner
www.srgg.com