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Should You Take Your CPP Early or Late?

Are you thinking about retiring soon? One important consideration in this process is whether you should start your Canada Pension Plan benefits early or late. Now that tax season is over for most people (proprietors have until June 15 to file their returns), this is a question tax specialists and their pre-retiring clients should be discussing sooner rather than later. In fact, anticipating the after-tax consequences of this decision can help spur on broader retirement planning activities.

Planning tips to discuss include the following:

  • First, CPP retirement pension benefits are taxable. Also, it’s possible to split them with a spouse. This is done by applying to Service Canada for an assignment of benefits if both spouses are at least age 60. The object is to try to smooth out the taxes payable between the two for a better overall after-tax result.
  • Taking CPP early will reduce overall benefits. The benefits reduction rate is 0.60% for each month between your start date and your 65th birthday. It’s important to check with a tax specialist to find out exactly what the cost of various timing scenarios would be to your potential pension and what the “break-even” point is.
  • Knowledge Bureau has an excellent professional tax calculator to help with this: The CPP Income Calculator is a critical tool in helping to decide—should I take my CPP early or late? It’s part of the Knowledge Bureau’s Client Relationship toolkit and available for trial at this link: http://www.knowledgebureau.com/index.php/tools-resources/calculators/
  • If you continue to work while receiving the CPP, you’ll have to continue to pay premiums at least to age 65. But you’ll shore up your future benefits with a Post-Retirement Benefit (PRB). This will increase your benefits, but only slightly.
  • Remember you can opt out of paying CPP premiums at age 65 if you’re already receiving your CPP retirement pension. Do so by filing form CPT30 with your employer, the month before you wish to stop. Or if self-employed, complete the opt-out declaration on Schedule 8 of your personal tax return.
  • Some good news: If you choose to delay starting your CPP pension until after you’ve turned 65, you’ll receive a premium of 0.70% for each month you delay until your 70th birthday. If you delay as long as possible, your pension will be increased by 42%. However, if you continue to work during this time, you’ll have to continue to contribute until you start receiving your pension or turn 70.

This important question of whether to start early or delay starting your pension is best planned with the help of an MFA-Retirement and Estate Services Specialist™, who is trained to project retirement income planning options. Professional advisors may also consider taking in the Distinguished Advisor Workshops to discuss retirement planning opportunities prompted by recent federal and provincial tax changes.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


Claim More for Your Child Care Expenses

Post-tax season blues? Not sure if you claimed all the deductions and credits you were entitled to? You’re probably not alone. Many people miss lucrative provisions when filing, but you can request an adjustment to your filed return. One of the most frequently missed deductions for families is the child care expense claim.

Parents who claim child care expenses will be happy to know they can claim qualifying expenditures as a deduction. Also, those claims could, in fact, increase the tax-free Canada Child Benefit. That’s because family net income will be reduced with the claim.

How much you can claim will depend on the age of your children, your income and how much you actually spent. For children under the age of seven, the maximum is $8,000. For those aged seven to 16, and for those in that age group who are infirm, the maximum is $5,000. For those who are severely disabled and eligible for the Disability Tax Credit, the maximum is $11,000. However, these limits are applied on a family basis, not on a child-by-child basis. This means you can make a claim over the limit for one child, provided that the claim for the other child is under the limit.

Child Care Expenses are deducted from the income of the lower-income spouse when the expenses are incurred to earn employment or business income, perform research or pursue an education. The maximum claim is limited to two-thirds of that earned income. Consult Form T778 for the exact eligible amounts.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


Universal Child Care Benefits Are Subject to Tax for The Last Time

There are a number of omissions that can occur in the rush at the end of tax season. One of them is missing the reporting of income benefits received by families in 2016. It’s important to remember that for the first six months of 2016 the UCCB (Universal Child Care Benefits) were received and they are taxable. That’s a double whammy for many upper-middle-income families who also lost the family income-splitting provisions. There are now no child tax supports at all for them.

Here’s what you need to know: Until June 30, 2017, the federal government paid to all families $160 per month for each child under the age of 6, and $60 per month for children aged 6 to 17. There was no income-testing in order to receive the benefits.

The UCCB was discontinued and replaced by the new Canada Child Benefit (CCB) on July 1, 2016, and this new tax-free amount was based on family net income of the 2015 tax year. Likewise, for the benefit year that begins on July 1, 2017, the CCB will be based on net family income that is reported on the 2016 tax return.

Therefore, it’s most important to file that tax return before May 1, and claim all the deductions the taxpayer is otherwise entitled to in order to reduce family net income—things, like child care expenses, investment carrying charges or moving expenses. And, if the taxpayer forgot to report the UCCB on a previously filed tax return, or missed any of these important deductions that determine the size of the CCB for the next benefit year, an adjustment should be made to those tax returns from previous years.

Families particularly affected by these recent tax changes are those with one stay-at-home parent and a high-income working parent. These parents now have no supports for raising minor children starting in 2017, when even the Children’s Arts and Fitness Amounts have been cancelled. In these cases, an RRSP investment strategy can be very helpful, as this deduction reduces net income. Depending on size of family net income, the RRSP deduction may initiate a partial claim under the CCB next year.

Alternatively, taxpayers most affected by these changes can consider saving for their child’s education within an RESP (Registered Education Savings Plan) to take advantage of another form of government support: the Canada Education Savings Grant. It’s 20% of the contribution made to the RESP, up to a maximum contribution of $2500 per year. That sweetener is not income-tested.

Planning to reduce family net income may increase your monthly cash flow from refundable tax credits like the CCB. Check this out with a DFA – Tax Services Specialist as tax season wraps up, especially if you find your tax refund is significantly lower than last year’s, or if you are unsure whether you could qualify for more.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


Manitoba Budget Hints at Tax Reform

Manitobans were spared tax increases in the April 11, 2017, budget, but the breadth of change to its complicated and voluminous tax credit structure hints at more tax reforms to come. In a province where 134,000 top earners pay 58% of all personal income taxes, the best news was that the government did not introduce any high-income surtaxes and appeared to be on track to drop 1% of the sales tax by 2020. The worst news was handed to graduates and caregivers. Here are the changes:

  1. For Graduates: The Tuition Fee Income Tax Rebate will be capped at 10% of eligible tuition fees to a maximum of $500 in 2017 (this was previously $2500). It will be eliminated completely in 2018 and all unclaimed rebates will lapse. It’s therefore important to make the claim in full, if eligible, on the 2016 and 2017 tax returns.
  2. The Tuition Fee Income Tax Rebate Advance was immediately cancelled for terms that begin after April 2017.
  3. The Tuition Fee and Education Amounts will stay untouched in Manitoba, as will the Children’s Arts and Cultural Tax Credit and the Fitness Tax Credit; the federal government eliminated these in the March 22, 2017, budget. Also spared are the Adoption Tax Credit, the Fertility Treatment Tax Credit, the Senior’s School Tax Rebate, the Education Property Tax Rebate and the Farmland School Tax Rebates.
  4. The Primary Caregiver Tax Credit, which is a refundable credit for caregivers who assist disabled spouses, relatives, neighbors or friends in their own homes will be capped at $1400 starting in 2017. Retroactive claims will be disallowed for years prior to 2017.
  5. The Political Contributions Tax Credit will increase starting in the 2018 tax year. The maximum contribution will rise from $1275 to $2325, which computes to a maximum credit of $1000 as follows:
Contribution Tax Credit Maximum Dollar Credit Cumulative Credit
$0 – $400 75% $300 $300
$401 – $750 50% $175 $475
$751 – $2325 33.3% $525 $1000

 

6.  For all Manitobans:  Indexing of personal amounts will affect tax brackets as follows, reflecting indexing factors of 1.5%, 1.8%, 2.0% and 2.0% respectively from 2017 to 2020:

Year Basic Personal Amount Second Bracket Third Bracket
2017 $9271 $31,465 $68,005
2018 $9438 $32,031 $69,229
2019 $9627 $32,672 $70,614
2020 $9819 $33,325 $72,026

 

Under the Business Tax regime, the following changes arose in the budget:

  • Research and Development Tax Credit – this was reduced for expenditures after April 11, 2017, to a rate of 15% from 20%.
  • The Manufacturing Investment Tax Credit – was reduced from 2% to 1% on qualified property acquired after April 11, 2017.
  • The Corporate Capital Tax Deduction on small financial institutions was eliminated for fiscal years ending after April 30, 2017.
  • The Mineral Exploration Tax Credit was extended until December 31, 2020.
  • The Book Publishing Tax Credit was extended to December 31, 2018.
  • The Interactive Digital Media Tax Credit was extended to December 31, 2022.

Tax Credits that were immediately eliminated included the following:

  • Co-operative Development Tax Credit
  • Odour Control Tax Credit
  • Nutrient Management Tax Credit
  • Riparian Tax Credit
  • Neighborhood Alive Tax Credit
  • Date Processing Investment Tax Credit

The changes in spending in the budget position Manitoba towards deficit reduction and debt retirement. The province’s economic growth numbers look good: nominal GDP is expected to increase to 3.6% in 2017 and to 3.8% in 2018. The population has grown steadily over the last 7 years to 1,318,128 people, which represents a 1.7% increase.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


2017 Tax Convictions by CRA Reap Big Penalties and Jail for Some

CRA has been busy announcing new convictions at the start of 2017, a great deterrent for potential tax evaders at the start of tax season. It’s always best to come forward to declare shortfalls in income reporting or overstatements of tax deductions or credits to avoid expensive interest, penalties and potential jail time. Here’s what happened to those who didn’t. . .

Here’s what happened to Canada’s most recent tax evaders, as per CRA’s news releases:

Vancouver, BC, February 28, 2017.   BC resident Michael Spencer Millar, was sentenced in the Supreme Court of British Columbia to 2.5 years in jail and fines of $24,000  as a result of being charged for income tax evasion, GST evasion, and counselling fraud for the 2004 to 2008 tax years as well as failure to collect and remit GST for the 2005 to 2008 tax years.  Mr. Millar was an “educator” with the Paradigm Education Group which counselled people across Canada to evade taxes. The Judge stated that Mr. Millar deliberately encouraged his students to file false income tax returns by not declaring their taxable income.

Edmonton, AB January 5, 2017.   A Grande Prairie Alberta couple who evaded taxes of $486,402 for 2007 and 2008 are spending time in jail.  Robert Dale Steinkey, age 60, was sentenced in the Provincial Court of Alberta to a fine of $322,278 and a conditional jail sentence of 22 months while his wife Terry, age 63, was sentenced to a fine of $164,124 and a conditional jail sentence of 18 months. In addition, both will have to repay the full amount of taxes owing plus interest.  The couple were introduced to the Paradigm Education Group and adopted Paradigm’s beliefs that, as “natural persons,” they were not subject to the Income Tax Act.

Newmarket, ON, January 23, 2017.  Wolfgang John Wilm of Whitby, Ontario was sentenced on January 20, 2017 to 20 months in jail for tax evasion and was fined a total of $552,976 for failing to file returns and pay taxes on over $2 million in income from self-employment from 2007 to 2010. In addition to the fine, he will also have to pay the full amount of tax owing, plus related interest and any penalties assessed by the CRA.

See your tax advisor if you have a guilty conscience.  Further information on convictions can also be found in the Media Room on the CRA website at www.cra.gc.ca/convictions.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning including Family Tax Essentials: How to Build a Wealth Purpose with a Tax Strategy.


CRA Starts Tracking Tax Cheats by Fingerprinting April 1, 2017

It’s no April Fool’s joke: fingerprints of convicted tax cheats will be recorded in the Canadian Police Information Database (CPID), and accessible by Canadian police and border guards as well as some foreign agencies including the US Homeland Security department starting April 1, 2017.

The mandatory fingerprinting policy was first reported by the CBC, which uncovered the directives under the Access to Information Act, and Moneysense Magazine. Both reports refer to an internal CRA memo on the matter as well as a July 7, 2016 directive, which authorizes the policy and begins tracking those tax cheats who want to leave the country on April 1, 2017. Changes were made to the CRA’s internal policy manuals last fall to accommodate the policy changes.

According to the CRA, persons charged with offenses under the Income Tax Act, Sections 239(1), 239.1 (which references definitions in Section 163.3(1) which will apply here) and 239(1.1) are to be fingerprinted. Those sections are worth the read; as they set out the circumstances in which taxpayers can get themselves into this kind of hot water, and the expensive penalties associated with the crimes:

ITA 239 (1) Every person who has

(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation,

(b) to evade payment of a tax imposed by this Act, destroyed, altered, mutilated, secreted or otherwise disposed of the records or books of account of a taxpayer,

(c) made, or assented to or acquiesced in the making of, false or deceptive entries, or omitted, or assented to or acquiesced in the omission, to enter a material particular, in records or books of account of a taxpayer,

(d) willfully, in any manner, evaded or attempted to evade compliance with this Act or payment of taxes imposed by this Act, or

(e) conspired with any person to commit an offence described in paragraphs 239(1)(a) to 239(1)(d),

is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to

(f) a fine of not less than 50%, and not more than 200%, of the amount of the tax that was sought to be evaded, or

(g) both the fine described in paragraph 239(1)(f) and imprisonment for a term not exceeding 2 years.

Offenses re refunds and credits

(1.1) Every person who obtains or claims a refund or credit under this Act to which the person or any other person is not entitled or obtains or claims a refund or credit under this Act in an amount that is greater than the amount to which the person or other person is entitled

(a) by making, or participating in, assenting to or acquiescing in the making of, a false or deceptive statement in a return, certificate, statement or answer filed or made under this Act or a regulation,

(b) by destroying, altering, mutilating, hiding or otherwise disposing of a record or book of account of the person or other person,

(c) by making, or assenting to or acquiescing in the making of, a false or deceptive entry in a record or book of account of the person or other person,

(d) by omitting, or assenting to or acquiescing in an omission to enter a material particular in a record or book of account of the person or other person,

(e) willfully in any manner, or

(f) by conspiring with any person to commit any offence under this subsection,

is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to

(g) a fine of not less than 50% and not more than 200% of the amount by which the amount of the refund or credit obtained or claimed exceeds the amount, if any, of the refund or credit to which the person or other person, as the case may be, is entitled, or

(h) both the fine described in paragraph 239(1.1)(g) and imprisonment for a term not exceeding 2 years.

In addition, those convicted under the Excise Tax Act – under Sections 327(1) and 327.1 (reference to definitions in ITA section 285.01(1) which will apply here) will be finger printed:

ETA 327 (1) Every person who has

(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, application, certificate, statement, document or answer filed or made as required by or under this Part or the regulations made under this Part,

(b) for the purpose of evading payment or remittance of any tax or net tax payable under this Part, or obtaining a refund or rebate to which the person is not entitled under this Part,

  •   (i) destroyed, altered, mutilated, secreted or otherwise disposed of any documents of a person, or
  •   (ii) made, or assented to or acquiesced in the making of, false or deceptive entries, or omitted, or assented to or acquiesced in the omission, to enter a material particular in the documents of a person,

(c) willfully, in any manner, evaded or attempted to evade compliance with this Part or payment or remittance of tax or net tax imposed under this Part,

(d) willfully, in any manner, obtained or attempted to obtain a rebate or refund to which the person is not entitled under this Part, or

(e) conspired with any person to commit an offence described in any of paragraphs (a) to (c),

is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to

(f) a fine of not less than 50%, and not more than 200%, of the amount of the tax or net tax that was sought to be evaded, or of the rebate or refund sought, or, where the amount that was sought to be evaded cannot be ascertained, a fine of not less than $1,000 and not more than $25,000, or

(g) both a fine referred to in paragraph (f) and imprisonment for a term not exceeding two years.

Finally, those convicted under Sections 380 (Fraud), 462.31 (laundering the proceeds of crime) or other indictable offences under the Criminal code that are applicable to a tax evasion prosecution will be fingerprinted.

Tax and financial advisors should apprise their clients of the new developments and encourage voluntary compliance to avoid onerous consequences and expenses.

Additional Information about changes to the ITA and the ETA can be found in EverGreen Explanatory Notes.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


Uber Drivers and Salespeople: Claiming Automobiles is Tricky

What do commissioned sales people and Uber drivers have in common? They each will want to know the difference between an automobile, a passenger vehicle and a motor vehicle, especially if they are keen on claiming all the deductions possible against their income this tax season. Especially when using a car for salaried work, commission sales or self-employment, it pays to file an audit-proof return, as these claims are often audited.

An automobile for tax purposes can be either a “motor vehicle” or a “passenger vehicle”. In general, neither will carry more than 8 passengers and a driver. However, a passenger vehicle is going to have restrictions on the amounts claimed for certain fixed expenses, specifically capital cost allowance (CCA), interest and leasing costs, while a motor vehicle will not.

A passenger vehicle, which for capital cost allowance purposes will be placed in Class 10.1 if its costs are more than $30,000 plus taxes, will not be an ambulance, taxi, bus, funeral vehicle or any other vehicle used primarily (50% of the time or more) for transporting passengers.

This means that “Uber” drivers will need to keep solid track of the use of their vehicles for personal and Uber purposes. It the auto’s use slips over into 51%, the motor vehicle classification can apply, even for autos valued at more than $30,000.

CRA itemized the differences for claiming passenger vehicles compared to motor vehicles on their website. It’s reproduced below, but with some additional clarifications, to enable tax specialists and their clients to have better conversations on what the tax forms mean in the height of tax season:

Claiming Autos on Your T1:  The Difference Between Motor Vehicles and Passenger Vehicles
Class 10Motor Vehicle Class 10.1Passenger Vehicle
CCA rate 30% 30%
Group all vehicles owned in one CCA class yes no
List each vehicle (rather than pooling all cars) in the class no yes
Maximum capital cost restricted to $30,000 plus tax no yes
Half year rule (50% of deduction) in first year of acquisition yes yes
Half-year rule on disposition of automobile no yes
Recapture of overclaimed CCA on disposition or trade-in yes no
Terminal loss on disposition or trade-in no no

It’s also important to have this conversation before an automobile is acquired or disposed of and often that’s at year end. Most important, keep those distance logs. Taxpayers must verify the distance they drive for personal and business purposes if the same vehicle is used for both purposes. See a DFA-Tax Services Specialist now to discuss these claims, which unfortunately are frequently audited.

Evelyn Jacks is President of Knowledge Bureau, a national educational institute for continuing professional development in the tax and financial services.


What Deductions Can Salaried Employees Claim?

Because employers are generally required to pay for the premises, assets and supplies used up by their employees in performing their duties, the employees themselves have few out-of-pocket costs to claim on the tax return. In some cases, the employee will have expenditures, but to claim them, very specific procedures must be followed.

For example, the employer, must verify in writing on Form T2200, Declaration of Conditions of Employment, that no expense reimbursement was provided to the employee and that the out-of-pocket payments were required as a condition of employment. Partial reimbursements must be declared before expenses are claimable.

Provided that step is met, examples of deductible expenses include supplies used up directly in the work (stationery, maps, etc.), salaries paid to an assistant (including spouses or children if Fair Market Value (FMV) is actually paid for work actually performed) and office rent or certain home office expenses. Form T777 Statement of Employment Expenses must be completed.

Certain specific profiles of employees may have special types of expenses, specific to their work, which can be claimed. For example, employed artists are allowed to claim the cost of supplies used up in their employment to a maximum of 20% of net income or $1,000, while and long distance truck drivers may claim the cost of board and lodging according to specific rules while en route – up to 80% of costs in most cases.

Commissioned salespeople may have promotions and entertainment costs as well as travel, auto or home office expenses.

In addition, certain tradespersons may claim the cost of tools purchased (in excess of a threshold amount) if required by their employer for use in their employment ($500 maximum claim). Loggers may claim certain power saw costs.

Employed teachers can claim a new refundable tax credit for the first time in 2016: the Teacher and Early Childhood Educator School Supply Tax Credit is worth a maximum of $150 (15% of $1000) and can include consumable items such as construction paper, art and science supplies, stationary and pens or pencils, containers, posters, games, puzzles, books, software and so on.

For more guidance on the deductible expenses of employees, consult a DFA-Tax Services Specialist™.


Pre-Budget Analysis: Finance Canada Priorities

A Federal budget date is expected soon after Prime Minister Trudeau and Finance Minister Morneau return from this week’s meetings with the new U.S. administration. Two important reports have been issued recently to provide insight into some of the thinking about risks and responses in our financial world: Finance Canada’s 2016-2017 Report on Plans and Priorities and the Bank of Canada’s January 18, 2017 Monetary Policy Report. Taken together, they provide a good crystal ball on the economic matters that may shape some of the government’s thinking as it delivers its second budget this year.

The Finance Department’s Report reflects on the recent stalling of growth in the Canadian economy and puts the blame largely on two factors: crude oil pricing and what it calls the “overall week and fragile global economic situation” in which we have lived and worked since 2014.

At the time this report was produced, Finance Canada particularly has its eye on the weakened economies in Europe, the politically-charged Middle East and slowing growth common to most other countries around the world.

Emerging markets, in particular, the report notes, will be impacted by the “normalization” of U. S. monetary policy. To that end it has outlined its top three risks meeting its priorities and it will be interesting to see if they come up in the US-Canada meetings and the budget:

  1. Strategic planning and policy recommendations will continue to be difficult. The uncertainty and volatility in the global economy will challenge the Department’s ability to provide accurate strategic advice and policy recommendations. It plans to manage those risks by monitoring global indicators, conducting private sector surveys of the Canadian economic outlook and meeting regularly with private sector economists.
  2. Challenges to the integrity and reputation of the Canadian financial system will require infrastructure and resources. This challenge is to be met by ongoing specialized staff training initiatives, monitoring of events and the need to develop new initiatives in response.
  3. Security. This is an ongoing issue for government. The finance department plans to collaborate with Shared Services Canada to implement new departmental approaches to increased security for networks, desktops and their applications.

More recently, however, the Bank of Canada is monitoring five risks that have evolved since October, 2016:

  1. Stronger real GDP growth in the U. S.
  2. The notable shift towards protectionist global trade policies
  3. Higher commodity prices
  4. Sluggish business investment in Canada
  5. Weaker household spending due to a rise in savings rates and a decline in national housing resale activity all the while that household debt continues to rise
  6. Higher global long-term interest rates

At the end of Budget Day, what’s important to taxpayers and their advisors is how Finance Canada will focus its priorities on changes to the tax system. Here the Finance Department’s Report notes its priorities will include the continued advice and analysis on ways to improve the tax system in four key ways: through fairness, neutrality, efficiency and simplicity. Expect the upcoming budget to take aim at “poorly targeted” tax expenditures and “inefficient measures” that erode the tax base.

Finance Canada, which is a department established in 1867 – 150 years ago – plays a critical role in executing on its mandate: helping government “develop and implement strong and sustainable economic, fiscal, tax, social, security, international and financial sector policies and programs. It plays an important central agency role, working with other departments to ensure that the government’s agenda is carried out and that ministers are supported with high-quality analysis and advice.”

Specifically, the report itemizes the Finance Department’s top seven responsibilities:

  1. Preparing the federal Budget and the fall Update of Economic and Fiscal Projections;
  2. Preparing the Annual Financial Report of the Government of Canada and, in cooperation with the Treasury Board of Canada Secretariat and the Receiver General for Canada, the Public Accounts of Canada;
  3. Developing tax and tariff policy and legislation;
  4. Managing federal borrowing on financial markets;
  5. Designing and administering major transfers of federal funds to the provinces and territories;
  6. Developing financial sector policy and legislation; and
  7. Representing Canada in various international financial institutions and organizations.

In an increasingly complex world, this is a tall order. The next crystal ball to the financial future is just around the corner. We’ll look forward to reporting on the Federal Budget measures and soliciting your thoughts on it.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.

Additional Educational Resources: DAC Conference – for a strategic look at the issues that shape tax and economic policy in Canada and what they mean to professional advisors and their clients, please join us Nov 5 to 8 in Kelowna.


Interest Deductibility Varies on Investment Activities

When can you claim the interest on investment loans? It’s a common question but the answer depends on the investment for which you are borrowing money. In order to claim the interest when you borrow money to invest, your loan must meet three criteria.

First, the interest costs must be payable during the taxation year in question. Secondly, those costs must be reasonable. Finally, (and most importantly), the borrowed money must be invested to earn business income (considered to be “active” in nature) or income from property (considered to be “passive” in nature).

The deduction for interest expenses is possible even if the underlying asset has not produced profits yet. There simply needs to be the potential to earn qualifying income like interest, dividends, rents or royalties.

If you dispose of an investment that you borrowed money to invest in and it has lost significant value, you may continue to write off the interest on the loan as if the underlying asset still existed. But the original asset must be traceable to the loan. If you dispose of the asset at a loss, or the asset no longer exists, you may continue to write off the interest costs so long as the proceeds were used to pay down the loan amount.

What expenses can’t be claimed? The government won’t let you deduct the interest on loans used to fund registered investments. So, you’re out of luck if you borrow money to invest in your workplace pension plan, an RRSP (Registered Retirement Savings Plan), a PRPP (Pooled Retirement Pension Plan), an RESP (Registered Education Savings Plan), or a RDSP (Registered Disability Savings Plan).

An exception is interest paid on loans that are used to top up past service contributions to a registered pension plan, such as your workplace defined benefit or defined contribution pension plan. These costs may be deducted as part of the RPP contribution.

Another red flag: don’t deduct interest on loans you took to acquire assets that produce tax-exempt income, such as your TFSA (Tax Free Savings Account) or your principal residence.

Similarly, you generally cannot claim interest on a loan used to make life insurance premium payments. But an exception exists if the policy is used as collateral for a business loan and the beneficiary is the lender. Check this out with a tax services specialist.

Finally, remember this important principle: Investments in assets that produce only capital gains are excluded from the definition of qualifying income for the purpose of interest deductibility. For example, If you acquire common shares from a company that has stated it will not issue dividends, you may not be able to deduct interest on any money you borrow to purchase those shares. That’s a trap for many investors in an audit. If, however, there is a possibility that dividends may be paid in the future, deductibility of the interest costs on the loan is legitimate.

The Bottom Line. If you have borrowed to invest, or paid investment counsel fees, chances are you’ll have a deduction against all other income as a carrying charge on Line 221. But to make it real, you have to make the loan traceable to income-producing investments.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.