$trategies Newsletter

    
Accountants & Tax Advisors

 V1.1 December, 2010

        

 

 		  
     

Tax $trategies for 2010 

Personal Income Tax

          
                                 
                                 
  Every year, about this time, clients ask, how can I pay less tax?      
                                 
                                 
  Well, there are a few great ways but they take a long time to develop.      
                                 
                                 
   The number one way to pay less tax is to contribute to your RRSP. Sure, you already know about RRSPs ... but I can show you how to realize an average 30% yearly return on an investment that only pays 8% annually. Now that I have your attention ... read on!      
                                     
  In the example below I am assuming that the taxpayer has carefully chosen her investments, decided how much to invest every year and then arranged to contribute 1/12 of that amount monthly ... automatically.  One key to successful RRSP investing is to invest monthly by automatic withdrawal or transfer because it is efficient to have a regular savings plan: you can't try to time the market and ... you won't miss the money.        
           
  The great thing about RRSPs is that you will save 100% of all tax payable on the amount that you contribute. The contribution reduces your income, dollar for dollar and saves the tax at whatever rate you would have otherwise paid.

     For example: you earn $55,000 yearly and pay tax at 32%
          If you do not contribute to your RRSP you will pay $320 on the last $1,000 that you earn.
          If you contribute $1,000 you save $320 in income tax.

     Now, a lesson in RRSP magic!
 

      
      The real magic of RRSPs occurs if you do not spend the refund or tax saved. Instead, contribute it to your RRSP immediately. You will save a further $102.40 in the second year. In fact, if you only reinvest the refund or tax saved each year by contributing that amount and earn an average 8% return each year you will have $3,067.94 after 10 years. That is 300% growth in 10 years or an average of 30% per year ... all legal, low risk and tax sheltered and you have saved a total of $470 income tax along the way.      
                                     
                                     
   The number two way to pay less tax is to acquire assets that gain value over time and where, when you sell them, the capital gain is exempt from income taxes.      
                                     
  This first such strategy I will call "keeping your money under your mattress". Literally. Investing in a home. Historically, over time, homes have been the most reliable and best growth investments available to the average person. Tax wise, generally, when you sell your home the capital gain is not taxable, exempted by the "principal residence" exemption.

The next strategy is to use your Tax Free Savings Account (TFSA) when you strongly believe that a particular investment will create a substantial return and trigger a great deal of tax. Similar in behaviour to an RRSP the TFSA shelters growth within the savings account. Where it differs, though, is that the money that you deposit to the TFSA is not a deduction from on your income tax.

 

     >>>>>>>             interst, dividends, captial gains.

 

      
                                     
                                     
                                     
                                     
        10 Year Performance Table                    
          Contribution Tax Saved Growth RRSP end ot the year                    
        Year 0 1,000.00 320.00 0 1,000.00                    
        Year 1 320.00 102.40 80.00 1,400.00                    
        Year 2 102.40 32.77 112.00 1,614.40                    
        Year 3 32.77 10.49 129.15 1,776.32                    
        Year 4 10.49 3.36 142.11 1,928.91                    
        Year 5 3.36 1.07 154.31 2,086.58                    
        Year 6 1.07 .34 166.93 2,254.58                    
        Year 7 .34 .11 180.37 2,435.29                    
        Year 8 .11 .04 194.82 2,630.22                    
        Year 9 .04 .01 210.42 2,840.68                    
        Year 10 .01 0 227.25 3,067.94                    
                                     
                                     
         
                                     
         
         
   The number three way to pay less tax is to contribute to the new Tax Free Savings Account.      
                                     
         
                                     
                                     
           
                                 
                                 
 

Here's why.

Contributing to your RRSP accomplishes several very good things concurrently:

a) Save taxes at your marginal rate.

 

b) part of a balanced investment portfolio.

 

 

2) The number one way to save future tax is to invest in via a Tax Free Savings Account.

 

 

3) Charitable donations.

4) Buy RRSPs or pay off your mortgage?

1) The number one

 		      
                                 
  Personal - Child Care

- Children's Fitness tax credit

- Home buyer's plan

- Public transit tax credit
- Pension income splitting
.

      
           
    Children's fitness tax credit      
                                 
  Business:    
    Write off 100% of new computers in the year acquired between 27 January 2009 and 31 January, 2011      
           
    Tax credit for apprenticeship job creation (first two years of apprenticeship).      
                                 
                                 
  The recession is receding and you are going to finally get that raise or find a new job.  You realize that your employer has X amount of dollars to spend ... and you may want or need more.

What to do?       

How about have your employer spend the same number of dollars on your position ... but you take more home by reducing your income taxes!

How?

Your employer can pay some of your expenses directly from the remuneration pool that they have allocated to your position and do not have to add the amount to your annual T4.

    
               
    Things that your employer can provide that are not Taxable Benefits:    
               
           
     

═

 Company Automobile: company vehicle used exclusively for business.    
             
     

═

 Non-taxable automobile allowance for business use of employee's automobile.  (up to $0.52 / km)    
             
     

═

 Up to two non-cash gifts per year (birthday, weddings, etc.) of up to $500 each (including taxes).    
             
     

═

 Up to two non-cash awards per year (performance) of up to $500 each (including taxes).    
             
     

═

 A discounted price on goods or services ... as long as cost is covered.             
             
     

═

 Subsidized meals available to all employees ... as long as direct costs are covered.    
             
     

═

 Overtime meal allowance of $17.00 if two or more hours adjacent to regular time if infrequent.    
             
     

═

 Reimbursement of moving expenses upon relocation.    
             
     

═

 Use of the employers' recreational facilities or employee sponsored membership in a social or athletic club where such membership is all or primarily beneficial to the employer.    
             
     

═

 Employer mandated medical examination as a condition of employment.    
             
     

═

 Employer sponsored travel where the trip is undertaken primarily for business purposes.    
             
     

═

 Employer sponsored training costs that are work related    
             
     

═

 Employer sponsored personal counseling services in respect of the mental or physical health of an employee or a person related to an employee, or concerning retirement or reemployment    
             
    Things that your employer can not pay for that are not Taxable Benefits:    
               
    ≠ Company Automobile: if used personally to any extent.    
             
      The employer must report on your T4"    
               
        - A Standfby Charge of 2% per month of the automobiles original cost or two thirds of the lease cost plus GST. If the personal use component is less than 20,000 kms and the business use component is at least 50% the standby charge may be reduced.    
                                 
        - An operating benefit of either $0.24 per km of personal use. It the automobile is used more that 50% for business the "deemed" operating benefit may be 50% of the standby charge. The Operating Benefit may be reduced by any amount reimbursed to the employer within 45 days of the calendar year end.    
                                 
                                 
    Personal Deductions    
                                 
      - Child Care Expenses:
     - May be claimed to allow an individual or their spouse or common law partner to:
          - Earn income from employment or self-employment.
          - To attend school (a variety of restrictions)

- Moving Expenses:
     - If moving more than 40 kilometers closer to employment or school.
     - Travel cost: reasonable meals and accommodations
     - Costs for up to 15 days temporary board and lodging near either residence
     - Storage costs for household goods.
     - Costs to disconnect and connect utilities due to the move.
     - The cost of cancelling a lease or selling the old residence, legal fees and reasonable selling costs.
     - Transfer taxes.
 

- Spousal Support Payments:
     - Deductible if paid paid periodically and under an agreement or court order.

- Child Support Payments
     - Since May, 1997 child support payments are not deductible for the payer or included in the income of the recipient.
          - Legal fees to establish child support and spousal support are deductible.

 

 

    
                                 
                                 
         
         
         
         
         
         
         
         
         
    .    
         
         
         
    - Employer paid cellular phones as long as they are primarily (90% +) used for business.    
         
    - Scholarship awards provided by an employer for the benefit of the employee's spouse or children.    
         
    - Exclusive on-site child care services provided by an employer at minimal or no cost.    
         
    - Internet costs at home where the employer requires at-home internet use.    
         
    - Employee Stock Options    
         - Employees may defer stock options subject to a $100,000 per year vesting limit    
         - If all Employee Stock Option conditions have been met the employee must file a letter by January 15th of the year following with the following information:    
              - a request to have the deferral provisions apply.    
              - the stock option benefit amount related to the deferred shares.    
              - confirmation that the employee was resident in Canada when the shares were acquired.    
              - Confirmation that the $100,000 vesting limit has not been eceeded.    
         
         
         
    - Deferred Compensation Agreement    
         - An agreement to pay wages at a later date for work done now.    
         
         
         
         - Registered Retirement Savings Plan Contributions    
         
         - Attendant care expense necessary for a medically impaired person to earn business or employment income. (Disability Tax Credit Certificate required). (Up to two-thirds of income earned limit).    
         - Union dues and professional fees if required to maintain membership.    
         - Employment related travel expenses, including parking, taxis, bus fare, etc., if required by the terms of employment if not reimbursed.    
         - An assistant's salary and supplies, if required to be paid without reimbursement by the terms of employment.    
         
    Deductions From Employment Income:    
         
    Employment Expenses that may be claimed. Employers must complete form T2200    
         
         - Employees home office expenses if the employer requires work from home    
              - Pro Rata:    
                   - Rent    
                   - Maintenance    
                   - Utilities    
         
         - Commissioned Sales home office expenses if the employer requires work from home    
              - Pro Rata:    
                   - Rent, mortgage interest, property taxes, property insurance.    
         
              - If home office expenses exceed income the remainder is carried forward indefinately.    
         
              - Capital Cost Allowance on office equipment and automobiles.    
         
         - Apprentice Mechanics: expense for tools of the trade.    
         
         
         
         
                           
                           
Non-Taxable Employment Benefits                          
     
     

#1 Strategy

 Prepare and file early if you expect a refund.  
     

#2 Strategy

 Buy RRSPs  
     

#3 Strategy

 Buy RRSPs  
     
     
     
           
  2009 Personal Income Tax change that may affect you:  
           
           
        Employment Insurance: special benefits for the self employed. Jan 2010. Pay employees portion only. Mat leave. 15 wks. Parental adoptive benfits 35 weeks.  Sickness 15 wks Compassionatew care 6 wks  
        Online Income is considered taxable.  
           
  Automobile   Most importantly: when a vehicle is used for business and personal use a trip log must be kept.

 

Tax-free motor vehicle allowances:
     - First 5,000 km     $0.52 per km
     - Over 5,000 kms  $0.46 per km

  
           
        Decrease in the small business dividend tax credit from 4.5% to 3.5%.  
           
        Increase in thed small business deduction threshold to $500,000  
           
        Increase in teh large business dividend tax credit from 9% to 10%.  
           
Employment Taxable Benefits     - Tips and gratuities  
        - employee awards of near-cash merchandise  
        - Include in income disability payments arising from private disability insurance if premiums were paid for by the employer.  
        - any less than fair market value transaciton  
           
Employment non-taxable benefits     - Ordinary discounts on the employer's merchandise, available to all employees on a non-discretionary basis.  
        - Subsidized meals available to all employees  
        - Overtime meal allowance of up to $17 if the overtime is not regular or frequent.  
        - Cost of uniforms and related laundry and dry cleaning expense.  
        - Reimbursement of moving expenses upon relocation for work.  
           
           
2009 Changes       Increase in basic Personal, Spousal and Eligible Dependants Amounts: $10,320 from $10,100  
               
               
               
        Increase tax bracket threshold 25% on 13,000 to 40,726.     
          32% on 40,726 to 81,452    
          36% on 81,452 to $126,264    
          39% on $126,264 ^    
               
        Increase in Age Tax Credit $6,408    
               
        Increase in Home Buyer's Plan limit $25,000    
               
        TFSA Tax Free Savings Account $5,000 a year limit on tax free growth.    
               
        RRSP contribution limit increase $21,000    
               
        Canada Child Tax Benefit Pmnts $2,076 for first child, $1,792 for the second and $1,704 for each subsequent child.    
               
        First Time Home Buyer's Tax Credit up to 15% on amounts exceeding $1,000 up to $10,000    
               
  Home Renovation Tax Credit 15% on up to $10,000 of eligible expenses: - Renovations    
          - New windows, doors, or flooring    
          - Building an addition    
          - New Firnace, woodstove, water heater.    
          - New driveway.    
          - Reshingling    
          - Landscaping    
          - Swimming pools    
          - Fixture: blinds, shades, shutters, awnings, lights, fans.    
          - Permits, professional services, equipment rentals.    
               
               
               
         

INVESTING $trategies

Much has changed since the so-called "2008 market correction", but have we "corrected" the way we think about investing?

What is an investment?
InvestorWorlds.com tells us that an investment is"... the purchase of a financial product or other item of value with the expectation of favourable future returns ... or in general terms, the use of money in the hope of making more money..."  Well, no wonder the portfolio "haircut" occurred last year. Do we simply invest "expecting" or "hoping" to earn favourable returns ... or do we follow rules and qualifiers that help us to earn favourable returns.

What is an investment under post-2008 correction rules?
My experience tells me that successful investors do more than "expect" and "hope" for favourable returns. Successful investors, firstly, have a:

1) BUYING STRATEGY:
    Successful investors don't simply buy everything under the sun ... nor do they attempt to "time" the market. Most successful investors  systematically invest on a fairly regular basis; ex. 10% of their income monthly, yearly, etc. They choose an investment vehicle that they like and understand and go in for the long term: stocks, mutual funds, precious metals and real estate to identify a few common examples.

2) SELLING STRATEGY:
    Successful investors sell when the time is right and minimize income taxes. For example, if a client owns investments in both RRSP  and non-registered accounts she will sell when the cash in needed and when tax is minimized. Invading the RRSP account triggers tax at the person's marginal tax rate ... as "ordinary income". Invading the non-registered account will only trigger tax on the capital gain, if any. Investing in non-registered accounts is not usually recommended for people who are paying tax at a high rate and who have RRSP contribution room available. 

3) REBALANCING STRATEGY:
    Successful investors often balance their portfolio risk between several categories of investments: stocks, bonds, mutual finds, real estate, technology, emerging markets ... to name a few. They will allocate a percentage of their total portfolio to each or some of the various categories and over time keep their portfolio balanced between the categories despite gains or losses. Yes, this strategy will limit gains, but also limit losses.

4) STOPLOSS:
    Lastly, for purposes of developing some generic rules, an investment should have an integral strategy for limiting losses. Simplified, a "stoploss" is a mechanism that kicks in to liquidate an investment if its market price drops below a certain point. Many investors chose a percentage, such as between 15 and 25%. An illustration of the usefulness of a stoploss can be seen in the example of the Nortel roller coaster of the last 14 years.  Once the darling of the TSE (now TSX), Nortel has been a volatile stock that, in my mind, has not qualified as an investment since October of 2000. The stock's price during the period from January 2000 to December, 2009 varied from $122.00 to 19 cents.

Imagine that you acquired this stock in 1995 because you were looking at a promising technology investment ... buying 100 shares in January of 1995 for $2,300. The stock split 2 for 1 in 1998 and again in 1999 and again in early 2000. By August of 2000 Rip Van Winkle would have stock worth $121,900 ... a tidy gain of nearly $119,000 or 5,300 percent. If Mr. Van Winkle had placed a 20% decline stop loss order with his advisor he would have sold his portfolio in mid September 2000 for about $97,000 locking in a 4,200% gain. Truth is though that thousands of his colleagues held the stock through its decline to $0.87 ($87.00 total market value).

Nortel Historical Stock Prices:            $  23.00   in Jan   of  1995 (before 3, 2-for-1 stock splits)
                                                      $122.00   in Sept  of  2000
                                                      $  00.87   in June of  2002
                                                      $  00.19  on June 19, 2009 (after a 1-for10 reverse stock split)

It is true that many of us are struggling to recover the losses of the last few years ... but prudent portfolio management is the solution ... not taking more chances. So, develop an investment strategy ... and leave "playing the stock market" to the independently wealthy and those people with good, solid "defined benefit" pensions.

 

 
         
               
               
               
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