File Proprietorship Returns by June 17

Do you run an unincorporated small business from your home or office?

If you haven’t filed your tax return yet, you must do so before June 17 to avoid a late filing penalty; if you owe money, however, do so as soon as possible because the interest clock started to tick on May 1.

If you are serious about running a for-profit business, (that is, know that losses on hobby ventures cannot be deducted – there must be a reasonable expectation of profit), be aware that a business can be formed in a variety of organizational structures.

For most people who begin an owner-operated business, an unincorporated structure is best at the start. Also known as a proprietorship, the income, expenses and capital transactions are reported on the T1 Tax and Benefit Return, generally using form T2125. Net income is then added to other income of the year and in most cases, Canada Pension Plan (CPP) premiums will be remitted if income exceeds contribution exemptions.

Losses from the unincorporated business, also known as non-capital losses, offset other income of the current year, or if excess losses exist after this, the previous three years or income in the next 20 years. They can, therefore, be lucrative.

The incorporated company, on the other hand, is a separate legal entity.  Under this scenario, legal liability is limited, and earnings may be retained in the company, or distributed on an after-tax basis to shareholders; losses, however, stay within the corporate structure. The shareholder, who is generally also the owner-manager, can earn salary, dividends, or other income from the business. A third form of business organization is the partnership, which may be incorporated or not.

It’s Your Money. Your Life. Understanding the best form of business organization is important, as your tax filing outcomes can significantly enhance your after-tax position. If you are unsure about whether your enterprise is a hobby or business, or whether it should be incorporated or not, do see a tax professional. And, it should go without saying, always file your tax returns on time.

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.

Financial Literacy Matters More Now

If there was one insight I gained as I worked on the Federal Task Force for Financial Literacy is that more than any other single issue, challenges of financial literacy affect every Canadian and bind us together in our mutual need for financial education.

No matter the age, sex, color, culture, religion or socio-economic status represented, financial illiteracy is one issue that everyone can agree on: in a constantly changing financial world, improving here will help secure uncertain futures.

According to the OECD[1], since the unfolding of the financial crisis, financial literacy has been globally acknowledged as a key life skill. This is particularly true today because increasingly, more responsibility for financial well-being and financial decision-making is shifting from governments and the private sector onto the individual. Fostering an environment of financial self-reliance is a critical need by mass markets in such a post-financial crisis environment.

Yet, it is not easy to implement financial education programs. Reaching children is easier than reaching adults – they are a captive audience at least in a K to 12 environment. The involvement of individuals and families in financial literacy solutions is critical, as financial behaviours are taught in the home.

Yet, many parents and teachers alike feel unprepared to teach financial values. In fact, adults who are making random financial decisions as life events occur need financial education at “teachable moments”. It would be a waste to deliver knowledge or skills-based solutions in the absence of behavioral coaching. That’s where a relationship with a team of tax, legal and financial advisors dedicated to helping families understand financial literacy as it relates to their financial decision-making is important.

At Knowledge Bureau, we are proud to be co-founders, with the Manitoba Securities Commission, of the Manitoba Financial Literacy Forum, which has brought together an Advisory Council of stakeholders from all walks of life, all interested in helping to improve financial literacy in Manitoba.

We are pleased to be providing our second annual financial literacy calendar for 2014. It contains 12 key financial literacy messages for families. We hope you’ll want to support this small effort in financial literacy education, by ordering the calendar for your family, your clients, or your non-profit organization.

It’s Your Money. Your Life. It doesn’t cost much to make a difference in the financial literacy in your community. It just takes a little insight to see how much it can help improve lives.

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.

[1] OECD/INFE High Level Principles on National Strategies for Financial Education, August 2012


Families that Save Together are Powerful

Comedian Ray Romano once said, “Having children is a lot like living in a frat house – nobody sleeps, everything’s broken, and there’s a lot of throwing up.”  But aside from being highly amusing calamities at times, families are also powerful economic unions which are subject to fairly complicated tax rules.

Those that master the art of saving together become powerful economic units. There is no better time than post tax-filing season to review your opportunities and become important savings role models for your kids. Here are three teaching tips to help:

Four family members each earning $11,000 would pay no federal tax but if one parent earned the full $44,000 then their federal tax would be $2,070. This example illustrates the progressivity of our tax system well: no tax on the first $11,038; income above this is taxed at 15%. Now add the provincial tax to this to fully understand the tax picture.

Families that encourage each family member to be productive and earn to the top of their tax free zone, and/or the top of their current tax bracket, get a more powerful economic result. Income splitting, mindful of the Attribution Rules, can help, too. If these terms are unfamiliar to you, take a basic tax course. . .it can help you become wealthier over time. Not for you? Then use the “offseason” to visit with a tax professional for the purposes of tax planning for investment, retirement and estate purposes.

  1. Maximize Your Tax Free Zones. Canadians are taxed as individuals on worldwide income using progressive tax rates. Each individual is entitled to a “tax free zone” or “Federal Basis Personal Amount” of $11,038 in 2013, and the federal tax brackets and rates are the following:
    2013 Federal Brackets 2013 Federal Tax Rates
    Up to $11,038 0
    $11,039 to $43,561 15%
    $43,562 to $87,123 22%
    $87,124 to $135,054 26%
    Over $135,034 29%
  2. Minimize Family Net Income. The exception to the “individual taxation” rule is that “family net income” is used for the purposes of claiming many refundable tax credits. This includes the net income of both spouses, which includes those who live common law, as well as same-sex couples. At stake is the size of the Canada Child Tax Benefit and GST/HST Tax Credit.
  3. Invest for Family Net Worth: Today, it’s also not unusual for everyone in the family to participate in the economy in a significant way: the money the kids earn at babysitting, doing lawn care, or working at the local hamburger joint; mom and dad at employment or self-employment activities; in the case of stay-at-home parents, the raising of children; caring for the vulnerable; studying for self-improvement; or the home-based entrepreneurial activities which all grow into enormous economic contributions.It’s important to teach your children to save 18% of their earned income for retirement purposes within an RRSP as a solid savings habit. This is a great family investing rule as the deposit can increase tax refunds, earn deferred investment income, and be withdrawn tax free to buy a home or fund education as well as to bridge income gap periods during maternity, illness, or retirement. In fact, net family assets will grow exponentially because of the tax sheltering in the plan. Once your child turns 18, the TFSA is a “must-do” as well, and is a great way to split family capital on a tax-efficient basis.

Here’s the tax secret: families that are focused on reducing taxes on income and increasing  access to refundable tax credits, need to reduce family “net income” first. One of the best ways to do that is with an RRSP contribution for each eligible member of the family. This is someone who has unused contribution room, is age-eligible and expects to be taxable in 2013. After this, shore up everyone’s TFSA contribution to maximize the growth of family net worth.

It’s Your Money, Your Life. Look carefully at your Notice of Assessment from CRA to find every family member’s unused RRSP contribution room. Then, discuss a monthly savings plan to increase the economic power of your family unit by making tax-efficient investments. Like going on a diet, making the decision to sock away money systematically will have more impact when you have a defined financial plan, and save as a family.

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.

Tax Efficiency: Sometimes, It Takes a Village

Tax filing season is over for close to 20 million Canadians whose tax returns have already been assessed this year. Of those, 14%, or just under 3 million taxpayers, had a balance due. On average, they owed $3700 upon filing; the rest got refunds (65%) or filed a nil return (21%) to receive refundable tax credits.

Did you miss claiming something? Now is the time—out of the fray—to double check.  Here are some common mistakes taxpayers make in claiming their non-refundable tax credits (found on Schedule 1). You can easily correct by filing an adjustment to your return:

  • Spousal amount – gross rather than net income used
    Example > Your spouse has a small business. The business took in $10,000 last year but expenses totaled $6,000. Your claim for the spousal amount must only be reduced by the $4,000 net income, not the $10,000 income the business grossed.
  • Amount for eligible dependants – file when marital status changes
    Example > Last year you and your spouse separated and each of you was granted custody of one of your children. Although your marital status was married at the beginning of the year, you can claim the amount for ‘eligible dependant’ for the child that lived with you after the separation.
  • Caregiver amount – missed claiming for parent or other infirm dependant
    Example > Your mother moved in with you last year and you supported her. If her income is low enough, you may claim the caregiver amount for her.
  • Disability amount – missed claim for sick child
    Example > Your child was born with a severe disability. You are eligible to claim the disability amount for the child once you get a doctor to sign a disability certificate for the child.
  • Tuition, education and textbook credits – missed transfer to parents
    Example > Your son is a student at university. His income is not high enough to use up his claim for the tuition, education and textbook amount. By having him complete the back of the T2202A form, a portion of the unused tuition, education and textbook amount can be transferred to your return, to a maximum of $5000.
  • Amounts transferred from spouse – missed transfer of age credit
    Example > Your spouse is over age 65 but does not have enough income to use the age amount. By completing Schedule 2, you can transfer the amount that is not needed to your return.
  • Medical expenses – missed multiple expenses
    Example > In addition to the normal doctor’s fees and prescriptions, there are a number of other medical expenses that are often missed, such as private health care insurance premiums, including medical travel insurance and the costs of transportation to receive medical care not available locally.
  • Donations – claim on return of one spouse
    Example > Both you and your spouse make charitable donations. Each of you claims your own donations. By combining the claim on one return, the amount of the claim is bigger because the rate applicable to the first $200 of each claim is less than the rate applicable to claims over $200.
  • Instalment payment reduction request missed
    Example > You received an instalment payment notice from CRA based on your income last year. This year your income will be substantially less. You should not continue to make the instalments based on the prior year income but should recalculate the amount based on this year’s estimated income.

It’s Your Money, Your Life. Filing an accurate tax return is about what you keep. There are many ways to do a tax return mathematically correctly. Your opportunity is to do the best return for the benefit of your whole family. But if you are not sure you claimed every credit or deduction you are entitled to, turn to your professional advisory team for help without delay. Sometimes, as the saying goes, it takes a village to get the best results. . . .

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.

Average Tax Refund $1600 – Invest It Wisely to Win in 2013

There are lots of ways to do better for yourself at tax time; starting with the filing of your tax return as soon as possible if you missed the April 30 deadline.

You’ll be subject to a late filing penalty if you have a balance due, plus interest, so do get it done this week to avoid possible gross negligence penalties of 50% more. Working together with your tax and financial advisory team is critical to maximize your opportunities—especially if you find you have a tax refund coming. The odds are very good in fact, that you do.

As of April 25, CRA had processed 43% or 15.7 million personal tax returns out of the over 27 million that are expected to be filed. Two thirds of them resulted in a tax refund, with the average refund amounting to about $1600. That’s just over $133 per month that Canadians fork over in advance to the government without earning any interest on the prepayment. That’s a big number. You can turn that around by working with tax and financial advisors who take on the role of financial educator.

Here are six ideas on how to get ahead with your tax refund and making yourself aware of new tax changes from the most recent federal budget:

  1. Pay yourself first. If you take Canadians’ average tax refund of $1600 and multiply that lump sum by 40 years in an average working lifetime, that’s $64,000 – new found money you can invest to buy yourself some financial freedom.  For example, if you could invest that $133 a month in a Tax Free Savings Account (TFSA) at a 2.5% rate of return, you would in fact have $109,743 in savings, based on Finance Canada’s TFSA calculator. So, it’s very important to invest more of the first dollar you earn. Start now by contributing your tax refund into a TFSA. Then if you have RRSP contribution room and are age-eligible, ask your employer to transfer $133 a month to your RRSP instead of to the government in source remittances. This will reduce your taxes for 2013, but on every paycheque instead of waiting until the end of the year.

  3. Invest your Refundable Tax Credits. Leveraging your tax refund into an RRSP can also increase your monthly Canada Child Tax Benefits. Those benefits are based on net family income, so you want to find ways to reduce that number to increase your benefits. Then, once you receive the benefits, try to save them in an account in the name of the child. Resulting earnings will be taxed in the hands of the child. This is a great way to avoid taxation legitimately and save for university. Consider making an RESP contribution to benefit from the Canada Education Savings Grant as well.

  5. Split retirement income. It’s important for seniors to keep their eyes on their net income as well. If you are in danger of losing part of your Old Age Security to a clawback because your income is too high, it’s important to find ways to split or equalize pension income sources. You can, for example, assign some of your CPP Benefits to your spouse, if you are both at least 60, to split this income evenly. You can also elect to split up to 50% of private pension income, depending on type and age. And you can invest in a spousal RRSP to create future income splitting opportunities. Your tax advisor can do some “what if” scenarios for you and optimize prior filings in some cases.

  7. Give to Charity in 2013. There is a new First Time Donors Tax Credit for taxpayers who have never claimed a donation tax credit or whose last donation was in 2007. You will get a non-refundable tax credit of 40% of donations under $200 (that’s a real return of up to $80) and 54% for donations between $200 and $1,000. In the case of a $500 donation, for example, you’ll get back $242 dollars on your tax return (40% x $200 = $80) plus (54% x $300 = $162) for a total of $242. That’s a 48% return for helping your community.

  9. Small Business Dividends will attract more tax in the future (about 2% at top rates), so managing your tax refund is important if you are a small business owner. Be sure to offset your increased taxes with an increase in your RRSP contributions, if you have the contribution room. Your tax advisor can help you with the determinations.

  11. Hobby Farmers will get a tax break in 2013 – deductible restricted farm losses will increase to $17,500 ($2,500 plus 50% of the next $30,000). It’s already May, so doing a preliminary tax calculation for 2013 is important so that you get your quarterly tax instalments right. The next one is due on June 15 and if it’s based on last year’s income, you will want to adjust the amounts payable downward in these cases. That’s new money for investment purposes, too.

It’s Your Money. Your Life. Make the time value of money work for you, instead of the government. Managing your tax refund and applying tax changes to your cash flow calculations will make a big difference to your ultimate wealth.

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.