Reporting Dividends? Check Out These Tax Tips

Dividends of taxable Canadian corporations enjoy preferred tax rates, but some complexities in reporting can plague unsuspecting filers. Here are some tips for last-minute filers:

1. What are dividends? Dividends are earned as a result of an investment by an individual in a corporation and are distributed after taxes have been paid on the earnings of the company.

2. How are they reported? The actual dividends received by shareholders are “grossed up” so the taxpayer reports an amount higher than that received. Offsetting the tax on this grossed-up amount is a “dividend tax credit” (DTC), which is computed on Schedule 1 Detailed Tax Calculation as a reduction of federal taxes payable. A provincial credit is also calculated on the tax calculation schedule for your province of residence. The process may sound overly complicated, but the objective with these calculations is to integrate the corporate and personal tax systems to avoid double taxation.

3. What is the amount of the gross-up? The amount of the gross-up and DTC will depend on whether the corporation is a public or private company and, as a result, there are two specific terms for the dividends earned:

  • Other Than Eligible or “Ineligible” Dividends. These are dividends by Canadian Controlled Private Corporations (CCPCs), whose income falls within the limits for the Small Business Deduction (SBD) and are, therefore, subject to a lower rate of corporate tax. Any CCPC with income up to $500,000 qualifies for the SBD federally and in most provinces. For ineligible dividends, as they are known, the taxable amount for 2015 is 118% of the actual dividends with an offsetting dividend tax credit of 11% of that taxable amount. As a result of reductions in the corporate tax rate paid by these corporations in 2016, the gross up and credit are reduced in 2016.
  • Eligible Dividends: Eligible dividends are those paid after 2005 by Canadian resident public corporations, and by CCPCs whose income is subject to tax at the higher “general” corporate rate because it exceeds the small business deduction. The taxable amount for eligible dividends is 138% of the actual dividends paid, with an offsetting dividend tax credit of 15.02% of that taxable amount.

4. What are the tax planning issues you should be aware of when earning dividends? There are several planning issues:

  • Tax Efficiencies. Canadian dividends can produce very tax-efficient income for taxpayers because dividends are subject to lower marginal tax rates than ordinary income sources, such as interest or pensions. This may even result in a “negative marginal tax rate” on dividend income; that is, the dividend tax credit may help to offset taxes owing on other types of income earned in the year. To illustrate, the marginal tax rates for 2016 for the province of BC, appear below:
Taxable Income Range Ordinary Income Capital Gains Small Bus. Corp. Div. Eligible Div.
BC Up to $10,027 0% 0% 0% 0%
$10,028 to $11,474 5.06% 2.53% 3.08% -6.82%
$11,479 to $38,210 20.06% 10.03% 8.27% -6.84%
$38,211 to $45,282 22.70% 11.35% 11.36% -3.20%
$45,283 to $76,421 28.20% 14.10% 17.79% 4.39%
$76,422 to $87,741 31.00% 15.50% 21.07% 8.25%
$87,742 to $90,563 32.79% 16.40% 23.16% 10.72%
$90,564 to $106,543 38.29% 19.15% 29.60% 18.31%
$106,544 to $140,388 40.70% 20.35% 32.72% 21.64%
$140,389 to $200,000 43.70% 21.85% 35.93% 25.78%
Over $200,000 47.70% 23.85% 40.61% 31.30%
  • Increased Net Income. The gross-up may be problematic for taxpayers who are in a clawback zone for non-refundable tax credits, refundable tax credits, or the OAS or EI Benefits. In fact, the grossed-up amount may reduce or eliminate these provisions, and so you’ll want to plan your investment income sources with this in mind. An RRSP contribution will reduce net income to protect your benefits.

Be sure to talk to a Tax Services Specialist to maximize your access to tax credits and minimize taxes using the tax-preferred dividend income from Canadian public and private corporations.

How to Claim Business Expenses Properly

Be sure to visit with a Tax Services Specialist to properly set up the accounts for the income and expenses you’ll be claiming in your small business. Your business expenditures, assuming you have a reasonable expectation of profit from a viable commercial activity, fall into six types:

  1. Current
  2. Capital
  3. Prepaid
  4. Restricted
  5. Not allowable
  6. Mixed use expenses

Current Expenses: These are used up in the course of earning income from the business. Examples are office supplies, wages, rent and other overhead costs. These costs are usually fully deductible against revenues.

Capital Expenses: These expenditures are for the acquisition of income-producing assets with a useful life of more than one year. This includes cars, buildings, equipment and machinery. These expenses are subject to capital cost allowance rates and classes, which allow for a declining-balance method of accounting for the cost of wear and tear.

Prepaid Costs: Most businesses must report income and expenses on the accrual method of accounting. In that case, the prepaid expense is prorated and deductible in the year the benefit is received. A good example is insurance, paid in advance for a 12-month period that may span a fiscal year end. Only those on the cash method of accounting may claim the full costs in the year paid. This is generally only farmers, fishers and very small businesses.

Non-Allowable Expenses: Fines or penalties imposed after March 22, 2004, by any level of government (including foreign governments) will not be tax deductible. However, this will not apply to penalty interest imposed under the Excise Tax Act, the Air Travellers Security Charge Act and the GST/HST portions of the Excise Tax Act. Also not allowable, the cost of golf club memberships. Be sure to cover these and other expenses that fall into each category with your tax advisor.

Restricted Expenses: This category includes the costs of meals and entertainment (50% deductible), and the costs of attending conventions (only two per year). Home workspace expenses are restricted to net income from the business.

Also remember that barter transactions are reportable although there is no exchange of cash. When your business trades goods or services for other goods or services, the fair market value of the goods or services you accept is income for your business; if the accepted items are used in your business to generate income their value may also be a business expense. Be sure to account for these transactions in your records.

It is critical not only to be aware of all the various categories of business expenses, but also to track and handle them properly throughout the year so that you can defend any “grey areas” that could be open to interpretation in the case of a tax audit. You do not have to give up legitimate claims to subjective decision-making by a tax auditor who doesn’t know your business or your business plans as well as you do, yet may challenge your business loss deductibility if your business plans and documentation records are sketchy.

Help the auditor understand your business. You can and should be able to show the “reasonable expectation of profit” in your venture; you know the future—the potential income earning capacity of your business—because you made an up-front investment in assets, business relationships and the making of the products or services you sell. Don’t give up your edge – and your legitimate tax deductions – by keeping poor records during the year.

May 2 Tax Deadline: Four Big Reasons to File On Time

April 30 falls on a Saturday this year, so midnight May 2 is the deadline for filing the T1 General Tax and Benefits Return. It’s important to comply with that date to avoid late-filing penalties if you owe CRA money on your personal taxes, and to avoid interest charges if you owe taxes on your proprietorship (although you have until June 15 to file in that case). But May 2 is an important filing deadline for three other reasons.

First, for low earners, the first of the advance payments of Working Income Tax Benefits (WITB) is in April. Next up are seniors: be sure to look back and optimize your pension income splitting on form T1032, Joint Election to Split Pension Income, if you think you didn’t do it well in 2012, 2013 or 2014. Finally, for those of you with offshore properties worth more than $100,000 Canadian, this is the month to file the T1135 Foreign Income Verification Statement.

The WITB is available to taxpayers who earn a relatively small amount from employment or self-employment. Taxpayers must have been resident in Canada for the whole year and not a full-time student for 13 weeks or more and not in prison for 90 days or more in the year. In most provinces, taxpayers must earn at least $3,000 (thresholds vary in AB, BC, QC, and NU) but less than $18,292 if single and less than $28,209 if they have a spouse or dependent child. The maximum credit for a single taxpayer is $1,007 and $1,829 for a family. An additional credit is available for taxpayers who are disabled.

Taxpayers who anticipate qualifying for the 2016 Working Income Tax Benefit may apply for a pre-payment of 50% of their anticipated credit by completing and filing Form RC201 Working Income Tax Benefit Advance Payments Application before September 1, 2016. Any advances received will be added to taxes payable on their 2016 tax return.

If you qualified to claim the pension income amount on Line 314 and you have a spouse, it is possible to split pension income. However, optimizing all the transferrable deductions and credits after pension income splitting is elected is as important as the election itself. For those reasons, taxpayers should take advantage of the opportunity to correct or adjust returns filed in prior years.

Dig out form T1032 from the previous three years if you think you may have messed up your pension income splitting. You have until May 2 this year to correct filings from 2012, and you might as well look at 2013 and 2014 too while you are at it.

Finally, be sure to get your foreign income verification filings right. That’s especially important if you own a vacation property for which the use is primarily (more than 50%) for rental purposes with a reasonable expectation of profit. For 2013 and subsequent tax years, the reassessment period for CRA to audit errors and omissions was extended from three years to six years. CRA will reassess taxes payable if the taxpayer failed to report income from a specified foreign property and Form T1135 was not filed on time, or if a specified foreign property was not identified properly on the form. The penalties for non-compliance are extremely expensive.

Filing your T1 return by the May 2 deadline is important to avoid costly penalties and interest on any taxes due, but remember to take care of these other forms as well if they apply to you; missing the May 2 due date could mean a huge missed opportunity to save money on your taxes or to avoid the sting of penalties from CRA. Your local DFA-Tax Services Specialist™ can help you with filing your return, correcting past mistakes or properly reporting your foreign assets.

A Five-Step Process For Managing Tax-Efficient Wealth

As government budgets close one tax advantage after another, it pays to do some tax planning now as you complete your 2015 tax return. Tax time is a great time to prepare a financial assessment through a sound interview process with your advisors. That’s because it’s a great opportunity to review financial affairs of the family as a whole.

Consider discussing with your advisors the five steps below, to develop a strategic process for planning a more tax-efficient wealth management approach to your financial decisions:


Step 1: A Thorough Interview: Discuss life events, financial events and economic events that will cause you to make decisions about your money in 2016 and 2017; don’t make your advisors guess. Volunteer the information about changes you are anticipating: births, moves, marriages, divorces, illnesses, severance, retirement, capital acquisitions or dispositions, for example.

Step 2: Do a Deep Dive: Prepare three financial documents to position your financial accountabilities properly: the tax return (and perhaps an estimation of 2016 taxes payable), the personal net worth statement and financial plans for your investment activities in the short and medium term.

Step 3: Do The Analysis: Will you need to pay more tax in 2016? Increase or decrease quarterly tax instalment payments? Should a new budget be prepared? Have you done some pre- and post-retirement income projections—after tax? Exactly how much capital should you be encroaching upon to maximize income to the top of your income tax brackets? Are you subject to any clawbacks in 2016?

Step 4: Invoke the Real Wealth Management™ Plan: What are the principles, rules and recommendations you will follow to close the gaps in the four key categories of your wealth plan—Accumulation, Growth, Preservation and Transition? What should you do first? How tax efficient are your plans? Will you be splitting income, transferring assets or managing your cash flow better to accumulate and grow more wealth?

Step 5: Joint Decision Making: Now execute your plan. A collaborative, inter-advisory approach following the same strategic wealth management plan means that all your family members and all the advisors on the team—accountants, investment advisors, legal advisors, business consultants—are on the same page with your financial goals and how to get there.

Allow your professional advisors to complete, update and review three important financial documents at tax time:

  • The PNW—Personal Net Worth statement
  • The T1 Tax Returns in the tax compliance period
  • The Financial Plans—for the near term (2016), medium term (5 years out to 2021) and long term (10 to 20 years out—2026 to 2046)

Together, these documents are consistent tools for your tax and financial advisors to use in implementing a Real Wealth Management™ strategy that can keep everyone accountable. This approach focuses on the accumulation, growth, preservation and transition of your wealth, while taking your purchasing power into account throughout the life of the plan (that is, after taxes, inflation and fees).

Your advisors will want to be client-centric in this collaborative process, which means they will need to ask specific and in-depth questions about the life events, financial and economic triggers that will affect your decisions about your money over the tax compliance period, which comprises the following timeframes:

  1. The current tax year
  2. Up to 10 years back to tax year 2006
  3. The next tax year, 2016

That’s why tax and financial planning make such good partners; they take into account your complete financial situation. Also be sure to include young people in your tax compliance activities this year so that you are taking a multigenerational approach to your wealth planning. Done well, The Real Wealth Management™ process is about planning for the best possible returns in the entire family’s lifecycle.