Archive for September, 2014

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How to Postpone Your OAS

As of July 2013, OAS recipients can elect to defer taking their OAS pension for up to five years. This would provide for a larger pension then.

For those who have already started to receive their Old Age Security, you must make the decision to defer within 6 months of your start date. After this, you can’t change your mind and decide to defer your pension.

But if you have already started receiving your OAS and are in the first six months of receipt, you can change your mind and decide to defer starting until a later date. You will have to send back any OAS you’ve already received, however.

For high-income earners who would have that income clawed back anyway, the repayment is equivalent to the OAS clawback.

Here’s how to do it:

  • Shortly after your 64th birthday, you’ll receive a letter from Service Canada indicating that you will be eligible for OAS as of your 65th birthday. If you do nothing, your OAS will start automatically. If you wish to defer receipt of OAS, tick the box “I declare that I do not wish to receive OAS at this time” at the end of the letter, sign it and return it to Service Canada.
  • If you have already received your first OAS cheque and wish to defer, your can send a written request to Service Canada to cancel your OAS, so long as you have received it for less than six months. Within six months of the grant of your cancellation request, you’ll have to repay the full OAS amount that you have already received.

The postponement might also work to your advantage to reduce taxes on other income, particularly if you are single and can’t split income with a spouse. By creating this “untaxed retirement income room” you could generate tax on other sources, such as RRSP or RRIF savings, that would otherwise attract higher tax rates at death or if OAS were taken at the same time.

It’s Your Money. Your Life. Retirement income planning can be complex, but it’s fun to get the results you need on an after-tax basis. Investing some time in the process can help you fund wants instead of needs.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of the 2014 three day think tank in Horseshoe Bay, Texas Nov 9-12 will be “Think BIG: Find the Sweet Spots in Wealth Management”  Follow Evelyn on Twitter at @EvelynJacks.


Retirees Need Help Understanding Public Pensions

People can retire at any age, but it is increasingly rare for people to simply go from earning income from employment or self-employment directly to withdrawing income from investments and other sources including pensions.

After the financial crisis, and as a result of changing demographics, most people will continue to work well into their 60s and possibly 70s, if they can maintain their health.

Close to five million Canadians are reporting Old Age Security (OAS) income today, and over six million tax filers are reporting Canada Pension Plan (CPP) benefits. But recent pension reforms are providing important new planning opportunities that started in 2012. This has been bewildering to some, who confuse the “universal” OAS benefits (everyone who is age 65 may qualify for OAS so long as they’ve been resident in Canada 10 years) with benefit payments from the CPP, which come from contributions by the individual and their employer throughout a working life.

You need to know the difference: one plan is contributory (CPP), the other is universal (OAS), but the amounts you’ll receive monthly will depend on when you choose to start receiving the money. In the case of the OAS, what your income level is makes a difference, too.

As of July 2013, OAS recipients can elect to defer taking their OAS pension for up to five years – this would provide for a larger pension then. Tune in next time for instructions on how to postpone the OAS.

However, keep in mind that those five years will represent 22% of the life expectancy of a male after 65 and 20.5% of the life expectancy of a female. Therefore, for the average man, the bump in the OAS needs to be at least 28.9% to make up for the lost earnings in postponement. For the average woman, the bump needs to be at least 25.8%. The maximum OAS deferral of five years will result in a 36% increase in benefits received at that time, so you will normally benefit from deferral if you live beyond your 79th birthday. That is, you will receive a larger lifetime OAS benefit if you have deferred one year for each year you live beyond age 79.

For high-income earners who are subject to the OAS clawback, the deferral will not result in a current year loss of income and could increase future cash flows. In short, for these individuals there is nothing to lose in choosing the postponement.

It’s Your Money. Your Life. Take the time to check out the changes to CPP and OAS and ask your tax or financial advisor how these changes will impact your retirement plans. A highly qualified MFA-Retirement Income Specialist can help develop tax efficient projections to help you make those decisions.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of the 2014 three day think tank in Horseshoe Bay, Texas Nov 9-12 will be “Think BIG: Find the Sweet Spots in Wealth Management”  Follow Evelyn on Twitter at @EvelynJacks.


When Are You In The Business Of Buying and Selling Land?

Lots of people like to dabble in real estate when markets are hot. But there could be an unintended tax issue which could significantly erode wealth.

The issue is this: do you hold the property for personal use, or are you in fact in the business of buying and selling real estate?

When real estate is held for investment purposes, any income it earns will be “income from property,” generally in the form of rent. Upon disposition of the property, any increase in value will usually be taxed as a capital gain. However, if you are continuously flipping your properties, it’s possible you’re in business.

The Income Tax Act does not prescribe specifically when gains from the sales of real estate will be considered income rather than capital. However, the courts have considered factors such as the following:

  • geographical location and zoned use of the real estate acquired;
  • the taxpayer’s intention with respect to the real estate at the time of its purchase; and the extent to which the intention was carried out;
  • the nature of the business, profession, calling or trade of the taxpayer and associates;
  • the extent to which borrowed money was used to finance the real estate acquisition and the terms of the financing, if any, arranged;
  • the length of time throughout which the real estate was held by the taxpayer,
  • the existence of persons other than the taxpayer who share interests in the real estate;
  • the nature of the occupation of the other persons who share interest as well as their stated intentions and courses of conduct;
  • factors which motivated the sale of the real estate; and
  • evidence that the taxpayer and/or associates had dealt extensively in real estate.

The more closely a taxpayer’s business or occupation is related to real estate transactions, the more likely it is that any gain realized by the taxpayer from such a transaction will be considered to be business income (100% income inclusion on a business statement) rather than a capital gain (report on Schedule 3 as a capital gain—50% income inclusion).

It’s Your Money. Your Life. Consider how closely your intentions and subsequent financial actions affect your after-tax return on investment. You may be missing important considerations a tax auditor will zero in on, to your surprise and financial detriment.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of the 2014 three day think tank in Horseshoe Bay, Texas Nov 9-12 will be “Think BIG: Find the Sweet Spots in Wealth Management”  Follow Evelyn on Twitter at @EvelynJacks.


Be a Hero – Be a Tax Pro

If you have ever wanted to be a hero, consider the gratitude that comes from helping business owners understand how to steer clear of trouble on a tax audit or making sure seniors don’t overpay their September 15 or December 15 quarterly tax instalment.

This is the happy role of a certified professional tax practitioner – one that features highly valued work that builds clients for life.

The most successful tax practitioners are people who love helping people, love learning new things, and expanding their knowledge as time goes by. While eyes tend to initially glaze over at the thought of preparing tax returns for a living, the reality is, it’s not that difficult, especially with the sophisticated tax software that does the math in the background.

It all begins with learning about the six main types of tax filing profiles most taxpayers fall into, depending on their primary source of income:

  1. Credit Filers (these are income-tested; software will automatically calculate allowable sums)
  2. Employees
  3. Investors
  4. Pensioners
  5. Self-Employed
  6. A recipient of income supplements (Worker’s compensation, social assistance, spouse’s allowance, and Guaranteed Income supplement)

The opportunity is to understand what deductions and credits link to each income profile, so you can file the very best returns for your client and their family. Understanding these profiles will also help to quickly identify any tax changes that may apply year over year.

September is an excellent time to learn professional tax preparation. There is enough time to earn certification in a basic tax course and even a designation as a specialist before tax season. It’s a great pathway to earning a second or independent income. But it’s also a great way to save money on your relationship with CRA and help many people.

It’s Your Money. Your Life. Income tax preparation is an essential financial skill everyone should learn because, let’s face it, paying income taxes is not going to disappear any time soon. But taken a step further, learning professional income tax preparation is a great way to enhance a financial services career, start on the road to entrepreneurship or fill a gap between jobs, or when home care of children or elders is a priority. Consider enrolling in a tax course this fall.

 


THINK BIG at DAC 2014 in Horseshoe Bay, TX!

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For more information, visit www.knowledgebureau.com/dac.