Investment Expense Claims Can Be Lucrative

Investors, be sure to claim your investment expenses on the 2016 tax return. If it’s done properly, you can save hundreds, maybe even thousands, of dollars over the years. But you have to do it correctly, or you could get into hot water.

What are investment expenses and how can you claim them? This can be a lucrative claim because all other income of the year is reduced by these charges. Because of its position on the tax return, this deduction reduces not only taxable income, but net income too, which means you may get more tax benefits from being eligible for more refundable and non-refundable tax credits.

There are two main types of investment expenses that can be claimed. The first is the most obvious: you can claim many of the direct costs associated with investing, such as the fees you pay your investment counsel or accountant for making the required tax calculations, although there are some tax pitfalls to be aware of here.

The second type of claim involves deducting interest paid on investment loans in order to reduce your net and taxable income. Here, too, there are some special rules. Let’s take a closer look at some of the tips and traps.

What kind of direct investing costs can you claim? You can deduct as a carrying charge the fees paid to a financial, investment or wealth advisor or advisory firm, for providing advice on buying or selling securities, custody of the assets, and the account record keeping and administration of those assets, as long as this is the principal business of this individual or firm. Transaction commissions, however, are specifically excluded; commissions on sales are recorded as outlays and expenses used to reduce your capital gains or increase losses on the disposition of your assets, while commissions on purchases are added to the cost base of the asset acquired. Also excluded are the costs of general financial planning services.

There are also specific rules around the claiming of tax preparation fees relating to investors. Only a portion of these fees may be deductible. That is, unless you are in the business of buying and selling securities (an active trader), or have a rental property, only the portion of the tax preparation fees relating to the investment earnings you have as a passive investor will be deductible. Therefore, it’s important to get a separate accounting for the costs of those calculations. However, if you pay your accountant to represent you in justifying your tax filings in a tax audit, those fees will be fully deductible.

Finally, you used to be able to claim the cost of a safety deposit box, but no longer. That deduction was eliminated in 2013. Also not deductible are fees paid for newspaper, newsletter or magazine subscriptions.

Next time: When can you claim interest on investment loans?

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.

First Quarter Tax Filing Milestones

It’s time to take note of the tax filing requirements and investment opportunities that arise in the first quarter of 2017: January, February and March. Investors making TFSA and RRSP contributions, as well as interest payments on inter-spousal loans are affected. So are taxpayers who are making quarterly instalment tax remittances.

JANUARY – TFSAs: Additional TFSA Contribution Room. An additional $5,500 (indexed) in TFSA contribution room became available to Canadian adult residents on January 1, 2017, providing a total of $52,000 of available room since 2009. Contributions to a TFSA are not deductible, however income earned within a TFSA and withdrawals made from it are not subject to tax. TFSA activity does not affect eligibility for federal income tested benefits and tax credits, such as Old Age Security, the Guaranteed Income Supplement, the Canada Child Tax Benefit, the Working Income Tax Benefit and the Goods and Services Tax Credit.

TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. You do not have to set up a TFSA or file a tax return to earn contribution room. If, for example, an individual is 18 or older in 2009 but is not obligated to file a tax return until 2016, they would be considered to have accumulated TFSA contribution room for each year starting in 2009.

JANUARY 30: Interest Payment Due – Inter-Spousal Loans For Investment Purposes. Drawing up inter-spousal investment loans are a legitimate way for the higher-income spouse to transfer taxable investment income to their lower-income spouse to reduce the family tax bill. For several years now, the prescribed rate for spousal loans has been set at an advantageous 1%. This prescribed rate is locked in for the life of the loan, so a loan set up at 1% will continue to shield against income attribution for as long as the loan is outstanding and interest is paid annually before the January 30 of the following year. The terms of the loan should mirror commercial terms to be audit-proof.

FEBRUARY: Make RRSP Contributions; but avoid overcontributions. Here are the annual contribution limits you need to know, although it is possible for taxpayers to have higher contribution room available, depending on prior year contribution levels:

  •  For the 2016 tax year – 18% of earned income to a maximum of $25,370 (this occurs when the prior year earned income was $140,944). This contribution must be made by March 1, 2017.
  •  For the 2017 tax year – 18% of earned income to a maximum of $26,010 (this occurs when prior year earned income was $144,500). This contribution must be made by March 1, 2018.
  •  For the 2018 tax year – 18% of earned income to a maximum of $26,230. (this occurs when 2017 earned income is $145,722). This contribution must be made by March 1, 2019.

MARCH 15: Make First of 4 Instalment Payments For Tax Year 2017. The others due June 15, September 15 and December 15. Note that the remittance date is December 31 for farmers/fishers who are required to make only one instalment in the year). Instalments must be made if the estimated taxes payable (including CPP contributions and EI premiums on self-employment income) in the current and one of the two preceding tax years exceed $3,000 ($1,800 on the federal return for Quebec residents). Three remittance options are available to taxpayers:

  1. No-calculation Option. CRA will provide instalment amounts (first two based on one-quarter of taxes owing in second prior year and last two based on taxes owing in the prior year less first two instalments). Taxpayers who pay using this method will not be subject to interest on deficient instalments.
  2. Prior Year Option. Each instalment is one-quarter of the taxes payable in the prior year. If these are not sufficient to cover the current year taxes, interest on deficient instalments will be payable.
  3. Current Year Option. Each instalment is one-quarter of the estimated taxes for the current year. If these are not sufficient to cover the current year taxes, interest on deficient instalments will be payable.

MARCH 31: T1-OVP Reporting of Penalty On Tax RRSP Excess Contributions. For each month in which, at the end of the month, there is an excess amount in the taxpayer’s RRSP (i.e. more than $2,000 more than the taxpayer’s available contribution room for the year), a penalty tax of 1% of the excess amount is payable. Complete Form T1-OVP and pay the excess within 90 days of the end of the year in which there are unused contributions.

Check in with a DFA-Tax Services Specialist before the deadlines arrive if you are unsure about your filing rights or obligations.

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.

Worried About Tax Troubles? Apply for Relief

New Year’s resolutions often involve the purging of winter weight, weighty closets or weights on the mind, including the guilt of understating income or overstating expenses or credits on the tax return. Personal trainers or friends can help with the first two goals, but when it comes to CRA, your most important ally is a tax specialist – an investment that can save you large amounts of time and money.

If you made an error or omission that the taxman can challenge, the penalties can be severe. Worse, they will mushroom with mach speed as the addition of interest (currently 5%), compounding daily and at four percentage points higher than the prescribed rate of interest, fertilizes the penalty.

Penalties can also be stacked one upon the other: two layers of late filing penalties for repeat offenders, gross negligence penalties of 50% of taxes owing, tax evasion penalties of up to 200% of taxes owing, as well as a series of monthly penalties for overcontributions to RRSPs, RRIFs or TFSAs are possible.

That’s where the investment in an experienced tax specialist comes in. He or she will explain that when taxpayers voluntarily comply with the Income Tax Act (ITA) to correct errors and omissions on previously filed returns or to file omitted returns, enormous savings can result—money that’s much better spent to keep you and your family smartly invested in the marketplace, or paying down post-holiday debt.

However, there is a specific process to be followed for voluntary disclosure. For example, CRA requires that before making such an application (using Form RC199), you must first be sure that relief from penalty provisions is possible. If so, interest relief is possible, too.

Remember, this process will work in your favor only if your request is voluntary. That is, you cannot make post-assessment requests for penalty and interest relief. In certain cases, there is an alternative: a request can be made under fairness provisions, for example, in the case of severe hardship.

In addition, a voluntary disclosure requires that the information is at least one year overdue, a penalty would indeed apply and the disclosure you make has to be complete, containing all relevant information. A voluntary disclosure will allow you to

  • report taxable Canadian or foreign income received
  • claim the right expenses or tax credits on the tax return
  • in the case of employers, or parents paying nannies, remit employees’ payroll deductions
  • report an amount of GST/HST, which may include net tax from a previous reporting period, rebates, unpaid tax, undisclosed liabilities, or improperly claimed refunds

No penalty relief is possible when filing returns with no taxes owing or with refunds expected, returns required in the case of bankruptcy, a claim for elections, advance pricing arrangements or rollover provisions.

From a financial point of view at least, it’s probably best to get the CRA weight off your shoulders before you tackle those hips or gut. This is one New Year’s resolution that can put you back on track for tax-efficient wealth building in 2017. After all, few circumstances can take you off your financial plan faster than trouble with the taxman.

Evelyn Jacks is President of Knowledge Bureau and author of 52 books, including Family Tax Essentials – How to Build a Wealth Purpose with a Tax Strategy.

Taxing the Rich: Will the Desired Results Occur?

President-elect Donald Trump will soon celebrate his inauguration and with his ascent to power, he has promised to reduce marginal tax rates, cut taxes, and allow businesses to expense new investments rather than deducting interest costs. In Canada, meanwhile, we await a new federal budget. What happens in the U.S., however, is relevant and could shape future taxation policies in Canada.

Top criticisms of the Trump plan: the top beneficiaries of the changes will be the 0.1% with incomes over $3.7 million who would save 14% of after tax income, compared to an 8% saving for middle income household; this according to research by the Tax Policy Centre.

For these reasons, a look at what happens when the rich are taxes provides interesting food for thought. According to a 2012 CD Howe Institute study,¹ rich people do indeed pay their fair share here in Canada. The 25,000 families who will be subject to the high-income tax in Ontario, for example, already pay 20% of all taxes. In fact, the top 1% of earners make about 12% of all income from taxable sources in Ontario but pay 27% of all income taxes.

The top 10% of earners are responsible for 66% of all net income taxes, and the top 25% are responsible for 88% of all provincial income taxes. Meanwhile, the bottom 75% of all taxpayers pay only 12% of all taxes.

What happens when we overtax the top 25% of taxpayers? According to the report, “rich” people respond to over-taxation in a variety of different ways, and the outcomes, not surprisingly, have the effect of reducing revenues to governments. In a nutshell, while some people will do nothing, many will do the things that make everything worse: reduce personal productivity by refusing overtime shifts, for example, or move to a jurisdiction with lower taxes.

That’s a particular challenge for indebted provinces. Because wealthier people have the resources to move, they will, especially if they also have skills that are in demand. In Canada, such moves tend to be inter-provincial, so those provinces that tax too aggressively may, in fact, find they will lose their top tax producers to other lower-taxed provincial jurisdictions.²

Other taxpayers will do the wrong things: they will enter the underground economy and become tax evaders, making it difficult for legitimate business owners to compete against those who don’t pay taxes. Everyone else will need to cover the tax gap, and may indeed suffer the consequences of increased audit activities and potential penalties and interest.

Most people don’t want to experience those negative outcomes. A better strategy may well be to work hard at raising the bell curve on wealth accumulation. As Former Finance Minister Michael Wilson controversially quipped in a speech to the Canadian Economics Association in 1985, after introducing the capital gains exemption and a number of other significant tax rate reforms, “Canada has an acute shortage of rich people.”

When tax policy is designed to help more middle income Canadians build more tax-efficient wealth, Canadian households can better weather market volatility, temporary unemployment, health changes, new business starts or economic uncertainty. That appears to be the direction our upcoming federal budget process will take: to champion middle class growth at the expense of top earners.

Whether any tax savings end up in the right investments, however, is up to individual choices. This is a key opportunity for investors and their professional advisors. High-income earners can respond to the possibility of rising taxes by making it their priority diversity income sources, split income within the family, and invest in a diversity of capital assets that will appreciate over time.

This strategy works just as well for the middle class; which has less disposable income to work with. Reducing taxes that are withheld from paycheques is a good place start raising wealth accumulation opportunities.

2017 TOP TAX STRATEGY: The future is now: plan for the creation of new money through tax efficiency; use it for early contributions to TFSAs and RRSPs in 2017.


¹2012 CD How Institute, “The Unexpected Impact of Ontario’s ‘Tax on the Rich’”.
²2004 J. Rhy Kesselman and Ron Cheung, “Tax Incidence, Progressivity and Inequality in Canada,” the Canadian Tax Journal, 52(3):709-789.