Archive for October, 2013

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Minimize Tax on Severance

Retirement planning may begin for you–quite unexpectedly–with the receipt of a retiring allowance or severance package from your employer.

Aside from the shock of such an unexpected life event, for some people this is the largest lump sum of money they will receive in their remaining lifetime, so it needs to be carefully managed. Retiring allowances may also be paid in instalments over a period of years. Both these payment options are important considerations in planning at year end.

For example, you may wish to ask whether your employer will consider paying your severance in two lump sums: part in the current tax year and the balance early in the new year. That will help you defer the tax to April 2015 and could save you several percentage points in your marginal tax rate, too, if income will be lower in 2014.

If you have unused RRSP contribution room, consider contributing as much of your severance as possible to fill up that room within 60 days of the end of 2013 so that the offsetting tax deduction can reduce your taxes owing on the severance and preserve refundable and non-refundable tax credits you may be entitled to in the new year. In some cases, an RRSP rollover may be allowed over and above your contribution room.

It’s Your Money. Your Life. Make a point of seeing a tax professional before you make plans for your severance. You may be shocked at the size of an unexpected tax bill, something you will want to know about earlier rather than later so you can plan appropriately. If you dispute your settlement, you may be able to claim some of your legal fees, too.

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.

 


Looking Back – and Forward on Innovation in Tax

I am excited about our upcoming national workshop tours with Cameron Peters, President of  Trilogy Software, Larry Frostiak, FCA, who has written a new course being unveiled on the tour especially for those advisors working to build family wealth with small business corporations, and Alan Rowell, MFA, DFA-Tax Services Specialist, who has prepared practical quizzes and case studies to help you understand how to prepare T2 returns for micro corporations and plan tax efficient income and capital accumulation by understanding the rules.

I first met Cameron back in the ’80s when I was working on a project with CRA to pilot electronic filing in Canada and he was developing his first tax software package as a young man out of high school. What we were doing back then was cutting edge and it changed the industry and the way Canadians file their tax returns—over 6 million returns are now NETFILED and close to 12 million taxpayers filed through professionals using EFILE. Today, Cameron has created a third round of innovative software solutions for tax professionals to integrate the paperless environment in a more intuitive way. He will unveil TaxCycle for T1 and T2 returns on these tours.

We at the Knowledge Bureau, meanwhile, have pioneered the application of tax competencies to a wealth management framework that includes a multi-stakeholder environment. Why? Because tax and financial advisors must work together to get the best results for their clients. Consider the national headlines blaring this week: a needless $35,000 tax bill charged to a widow because of an RRSP rollover fiasco at a local bank. This underscores that deeper knowledge and multi-disciplinary relationships are required to serve clients well throughout their life events. In a low-return, high risk economic climate, the strategic collaboration between tax and financial advisors to build and sustain wealth for their clients’ families is a winning solution.

The tax industry of the ’80s has since long disappeared. Together, Larry and Alan look forward to helping you achieve the educational credentials you need to grow a collaborative practice for the future. We believe thought leaders will embrace family filing as their number one business mantra and position themselves to be the go-to firms to help new family businesses—150,000 new ones expected to sprout in Canada over the next decade, according to recent reports. Cameron’s intuitive new software will help with the technology.

It’s Your Money. Your Life. Join us as we help you unveil a new value proposition—tax efficiency for the Canadian family businesses—through expert planning and preparation of tax returns for their micro corporations and each individual involved. Cameron, Larry, Alan, and myself, together with regional Knowledge Bureau instructors, look forward to meeting you.

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.


Donate Securities: Review Portfolios for Winners and Losers before December

An effective year-end tax strategy is to donate to charity. Investors can do so by transferring qualifying shares to their favorite charity and avoid capital gains taxes by doing so. But in addition, this year there is the opportunity to donate under the First Time Donor’s Super Credit. In this case though, you’ll need to contribute cash.

If you qualify as a first-time donor, do that first, perhaps by selling your losing securities and generating a capital loss. You’ll get a donation receipt for making the charitable donation and you’ll be able to use the capital loss to reduce capital gains of the current year first; if excess losses are available, carry them back to offset capital gains in the prior three years or the future.

The Super Credit is lucrative: it add 25% to the normal 15% and 29% federal rates applied to the donations for cash donations up to $1,000. To qualify, neither you nor your spouse may have made a claim for the donation tax credit since 2007.

Now, consider a gift in kind—if you want to give more as a first time donor, or if you are a regular donor. If you sell a winning asset that is held in a non-registered account then take the cash and give it to charity, you must report the capital gain on Schedule 3 of the tax return; it is then either offset by capital losses or 50% of the gain is added into income and taxes are increased as a result.

However, the more tax effective strategy is to gift the securities that have accrued gains in kind to a registered charity, by way of a direct transfer. You will receive a donation receipt for the fair market value of the securities and at the same time, avoid paying tax on the capital gains.

Review your portfolios well before mid-December to ensure your transactions can be made before the Christmas hiatus.

It’s Your Money. Your Life. Making sure you understand the tax consequences of your charitable giving will help to embellish your gift. Doing so before year end will accelerate the tax benefits so you can give more next year.

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.


Year End Planning – Plan to Give to Charity

Winston Churchill once said: we make a living by what we get, but we make a life by what we give. It does feel good to do good. . .and doing good often attracts rewards as well.

One of the rewards is the charitable donation credit, which this year has a new “sister credit” you’ll want to know more about before year end.

Top tax rewards are received when gifts to your favorite registered charity are over $200. This results in a 29% federal tax credit. On gifts under $200, a 15% federal tax credit applies. In both cases, provincial tax credits are added to the federal tax credit. Spouses and common law partners are allowed to combine their individual charitable donations and report them on one tax return. This should be done on your 2013 tax return to ensure the maximum available tax credit for the family. But you may be tempted to give more this year, if you are a first time donor, as described below:

The New First Time Donor Tax Credit will be available in tax years 2013 to 2017. For taxpayers who have never claimed the donation tax credit or for those who have not done so for years after 2007, the donation tax credit will be increased from 15% to 40% for cash donations under $200 and from 29% to 54% for cash donations between $200 and $1,000. Note however, that where the spouse of the taxpayer made a claim after 2007, the taxpayer is not considered to be a first-time donor. The tax credit may otherwise be shared between spouses, but the maximum total donation eligible for the enhanced credit is $1,000.

But be cautious: receipts are required to make this claim. (See Distinguished Practices article in this issue of Knowledge Bureau Report.)

It’s Your Money. Your Life. Sharing both your money and your time can enrich your life. Giving the gift of money can produce for you a generous tax credit; the gift of time is equally valuable, though not tax deductible. Giving both can move mountains for those who are less fortunate. . .so give both generously.

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.


It’s time to Assess Your Net Worth

It’s official: October 1 marks “year end tax planning season” and if you want to make it count, the best place to start making plans is to assess your personal and family net worth.

This is important because when you better understand how financially stable you are, you’ll be less likely to act irrationally when faced with fluctuations in the financial marketplace. You can also make tax-efficient decisions about tax loss selling, retirement and education savings, when to sell the cottage, or how philanthropic you wish to be in 2013.

Statistics Canada’s Survey of Financial Security uses the following simple definition to describe net worth:

Net worth is the value of all assets less all debt. It’s what you have left if you liquidated all your assets and paid off all your debt.[1]

Canadians are indeed very well off these days—our net worth is over $400,000, according to recent reports (see Wealthscapes, by Environics Analytics, a Toronto-based firm which uses information from Statistics Canada, the Bank of Canada, and other sources to assess financial well-being in Canada.)

Pensions and real estate are a big reason for this according to James Davies of the economics department of the University of Western Ontario, who noted in his 2009 paper entitled “Efficiency and Effectiveness of Savings Instruments Design:”[2]

The most important category is pension and tax-sheltered savings ($174,000 per household) although disposals of these assets are fully subject to taxes. The principal residence category is $152,000 per household but disposals are not taxed. Other financial, business and real estate assets at retirement are $170,000 per household of which the income and capital gains from disposals are taxed. Retired Canadians have relatively low debt ($11,000 per household), about one-sixth of the level when working.[3]

So, to build up your future net worth, it likely makes sense to shore up contributions in your company pension plan and your RRSP and TFSA as a year end tax planning strategy. To increase your tax refund, remember a tax free capital gain may result by contributing qualifying shares to your favorite charity before year end—and that’s in addition to your savings from the donation credit.

Should you buy a big new principal residence instead? While real estate appears to be a great way to strengthen your balance sheet and generate a tax exempt capital gain in the future should your real estate values increase, rising interest rates in the future could dampened your net worth and add some real risk to it if you are overly-indebted.

Knowledge Bureau has a great calculator to help you measure net worth: Financial Assessment Calculator. You may wish to give it free trial to better understand your financial affairs for 2013, or have a professional do this for you.

It’s Your Money. Your Life. Refresh your personal and family net worth statements this month to monitor changes and consider investment options. Can taxes be saved before year end with astute investments? Consult with your tax and financial professional well before year end. You may even be in better shape than you think.

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 “The Wealth of Canadians,” Statistics Canada, 2006

2 James Davies, “Efficiency and Effectiveness of Savings Instruments Design,” prepared for the Research Working Group on Retirement Income Adequacy, Department of Finance Canada, 3 December 2009, found at: http://www.fin.gc.ca/activty/pubs/pension/ref-bib/davies-eng.asp, accessed 3 November 2011.

3 Mintz, Summary Report on Retirement Income Adequacy Research.