News
My mission, to inform you!
“Money, if it doesn’t bring you happiness, it will at least help you to be miserable in comfort.”
– Helen Gurley Brown
Their first job: What should we do with their “cash”?
From the outset, the labor shortage is hitting Canadian businesses “hard.” As a result, small businesses are forced to open their doors to a new class of employees, Generation Z. Indeed, many of our “teens” will join the ranks of the corporate workforce this summer. Consequently, how should they go about accumulating wealth and growing their capital?
At first glance, the question seems straightforward. However, it is more complex than one can anticipate. First, we are parents, and guardians of their fortune; we want to establish goals and a personalized vision, which will depend on their current and future quality of life.
Of course, upon receipt of their first paycheck, some may insist on an immediate evacuation of cash from their checking account: the beneficiaries being Amazon, Xbox, PlayStation, eBay, etc….… To remedy this situation, it is helpful for a parent to temporarily turn into a stingy, grumpy person and refuse to let themself get enthralled by the spirit of the Christmas celebration!
Truce of jokes, after some checks within our income tax law, you would be surprised to learn and find that our options are significantly limited. First, the legislator imposes a minimum age on some programs that could help us. Then, account openings at some financial institutions can be “tricky,” to say the least. Indeed, here is a short list of strategies to consider before and after the age of 18:
Non-registered investment account
Before 18: You can drive a vehicle, enlist in the Canadian Armed Forces (die for your country), and have significant responsibilities within your current employment, but it is impossible to open a non-registered account and seek growth strategies that will enable a higher rate of return than GIC’s. Find the error?
I understand that the legislator’s objective at the time was to avoid income splitting among the wealthiest individuals & families in our society. However, the minimum age of 18 is a penalizing measure for young, middle-class “teens” who hope and demand better returns than the Bank of Canada’s prime rate.
TFSA/FSHA
According to Olivier Brabant, Tax Director at HNA LLP: “In the past, it was important to establish a minimum age for the TFSA. If the TFSA had been available to those under 18, it would have favored wealthier families. We would have witnessed a proliferation of “tax-free family trusts.”
The age limit of 18 years, explained in the context of the law at the time, allows us to understand the purpose of the law. Indeed, today, the economic situation has changed. On the other hand, we must adapt to the newest financial situation to enhance and optimize wealth creation.
According to Alexis Paquin, a student at UQO and author of the column “CELIAPP & les jeunes”: “the housing crisis is likely to last for some time, and we must continue to look for solutions to help young people.” Considering that the average price of homes in Canada is $535,000, I think they will need a little “nudge,” right?
I invite the legislator to review the age limit of 18 years and, consequently, allow “teens” who work to choose a hybrid formula, allowing them to contribute to the TFSA or the new FHSA, as of 2023
RRSP
There is no age limit for the RRSP. So, a minor can contribute up to 18% of their earned income from last year. We must not forget that there is a basic credit with an enhancement, so when we apply for the 15% credit, your teen must have paid more than $ 2,071 in tax to be able to receive a refund when contributing to his RRSP.
Notwithstanding the above passage, a minor can contribute to an RRSP without deducting the amount on their tax return. He can defer his RRSP deductions until his marginal tax rate is higher. This measure will allow him to pocket a more interesting reimbursement in the future.
RESP
The new measures are exciting: you can make contributions of up to $50,000 per child. There is no limit per year to contributing to the RESP. Unfortunately, the only taxpayers who can contribute are policyholders and the government through RESP grants and education bonds. According to a prescribed formula, allowing an individual or plan’s beneficiary(ies) to contribute to their RESP would be logical.
Self-employed: don’t forget to « pass GO » and collect your exemption!
The Canadian legislator gives small business owners several benefits, including a gift, which could reach up to $237,865 in tax savings. Therefore, the question I was asking myself was, can self-employed individuals also benefit from this tax savings as well?
Undeniably, the answer to this question is yes. Indeed, if you are a self-employed worker, you can benefit from a tax break – capital gains exemption – when selling your business. However, you must meet several criteria and conditions, including those related to share eligibility. That is, you must be in possession of the shares of your company, so incorporation is necessary, to be able to use this deduction.
According to Olivier Brabant, Director of Taxation, at HNA LLP.: « Many self-employed workers believe that it is necessary to incorporate 2-3 years before selling their professional practice to benefit from the capital gains deduction. This is completely false; you can incorporate it immediately before selling and still benefit from this deduction. »
To better understand the mechanics, here is an example: Michael is an IT consultant, and he has been running his business as a self-employed worker for 20 years. Unfortunately, he has health problems and is thinking of retiring immediately. Michel, president of the association of IT consultants, met a young, professional & dynamic person, who would be interested in acquiring Michael’s company. The latter seeks to reduce his tax burden and according to his online readings, he would like to take advantage of this so-called capital gains deduction.
In this example, the first step is to incorporate a company for Michael’s benefit. Indeed, he will receive shares in his new company, a necessary condition for access to this deduction. Next, we will roll over/transfer his assets, which are under his personal name, to his new company. The transfer of assets is only a change in book value, so there is no tax to pay now.
Michael does not have to wait two to three years before taking his deduction and by extension, his retirement. Embedded within the Income Tax Act (ITA), there are provisions that allow Michael to comply with the share detention criteria thereby enabling him to circumvent any waiting periods.
Tsunami on the financial coast of Bank St.
From the outset, the fabric of our economic decisions does not escape Antoine Lavoisier’s iconic quote: « nothing is lost, nothing is created, everything is transformed ». The economic malaise felt in the form of runaway inflation is by no means transitory. Sooner or later, we all must « pay the piper ».
On the other hand, it is imperative and judicious to analyze our own financial and fiscal situation to adapt to a new economic situation that will persist for several years.
We all have a mortgage and it’s one of our biggest monthly expenses. This expense has an interest rate that can either increase or decrease depending on several factors. With a term of 5 years, the variable rate mortgage is by far the most marketed by our banking industry. Admittedly, it remains the mortgage most sensitive to an increase by policymakers at the Bank of Canada.
Historically, inflation control is strongly correlated with interest rate increases. On the other hand, if the Governor of the Bank of Canada raises the policy interest rate by 50 basis points, the impact of this increase will at some point materialize on your mortgage. Undeniably, there will be a revaluation of your monthly payment.
Here is an example to better understand. A 5-year variable rate mortgage with an adjustable interest rate of 2.2%, i.e. the prime rate minus a discretionary percentage. Therefore, if you have a $250,000 mortgage, with a 25-year amortization, your monthly payment will be about $1083.
Consequently, you will be subject to a new interest rate when you renew your mortgage, which will reflect our current monetary policy. Considering that the average interest rate for variables, over the last 25 years has been 4.47%, do you have the budgetary scope to pay 1,380 $ instead of 1083 $ per month? Unfortunately, for many Canadians, the answer is no.
In addition, according to Tim Smith article in Bloomberg market, Wall Street leaders are pushing and calling for aggressive interest rate increases from central bankers, saying it would lower the risk of high long-term rates.
Pershing Square founder Bill Ackman was quoted as saying: « By raising rates aggressively now, the Fed can protect and enhance equity markets and the strength of the economy for all while stymieing inflation that destroys livelihoods, particularly that of the least fortunate ».
In short, some believe that it is impossible to raise interest rates because the impact on our economy would be irretrievable. I would just like to add: if policy managers at the bank of Canada must choose between the health and financial security of our businesses versus that of an industry or even that of your family unit, guess what the order of collocation will be?
“Interest paid on a loan”? There’s no problem…
First, these opinions are purely academic. I encourage you to consult either a financial or tax professional. Ideally, a combination of the two professionals mentioned. If you need a reference, please contact me directly.
The amount of interest paid pursuant to a legal obligation on borrowed money may be deductible. Consequently, if the purpose of the loan is earning income from property, such as and not limited to, stock or real estate, you should be able to expense the interest on the loan.
First, it would be advantageous for you to analyze your current financial situation to assess the possibility of deducting your interest rate from an admissible loan. Tax authorities from both CRA and Revenu Quebec, do allow you to restructure and organize your existing loans in hope of reducing your taxes paid.
There is also an additional gateway for business owners. Their benefit is two folds: first, they can deduct interest from property acquired for the purpose of gaining or producing income, second, they can also use the same mechanism for the purpose of gaining or producing income from a business. In theory, a business owner can withdraw from their capital account, use the cash to purchase a home and replace the capital account with borrowed money. « Et Voila », make sure to add Mister Singleton on your Christmas card list this year!
In addition, you would be interested in knowing that there is a practice called « cash damming ». For you to expense interest from borrowed money, you need to be able to either link or trace the eligible funds. Therefore, this technique requires keeping separate loan agreements, one for personal use and another for business use. Your Business Expenditures will be centralized in one loan while personal expenditures will be added onto another loan.
A classic example is a medical student who just finished her studies with a personal debt of $150,000. Because financial institutions have a love affair with doctors, they should have no issues underwriting a corporate line of credit for her. First and foremost, she progressively uses her earned income to vacate her personal debt. In turn, all her business expenditures will be added exclusively to her corporate line of credit. And that’s it, you just transform ineligible money, eligible and deductible.
“Rénos” on your rental property? Pay attention to your expenses
Two weeks ago, a practicing accountant asked me for help with a case. His client owns several rental properties and major renovations have been made to his depreciable rental assets. Immediately, a feeling of excitement invaded me, because this request is the ideal opportunity to analyze the concept of an expense, that of an operating or capitalizable expense.
“Oh boy, pig latin!”
“Yea”, let me explain. Expenses are made to improve your rental properties. The goal of the improvements is to generate a higher revenue base. The people who wrote the laws have no problem with that. Of course, they are wanting you to contribute to our society by ways of paying some taxes. Case-in-point, if you have a gross income of $50,000 a year and you do renovations of $100,000, you will not be paying taxes anytime soon. Therefore, that goes against the intention of the people that wrote the laws.
As a result, many of your expenses will be added to the purchase cost of your building. Certainly, your tax deductions are not lost, in fact, they are only deferred in time. On the other hand, considering your intentions, this may not be such a “bad deal”. Let me clarify my comment: if your ulterior motive is to sell your rental property in a few years, your renovations will be added to your purchase cost and as a result, you will pay less tax when it is resold.
First, you need to analyze your expenses based on several factors specific to Tax law. Therefore, you’re going to need help, believe me. Unless you want to analyze whether your new door handles, screws, nuts and bolts are operating or capital expenses! Joking aside, it is an exercise in patience, even for the most seasoned professional.
In turn, this body of work demonstrates compliance with our tax laws and, therefore, it may protect you in the event of an audit. In short, go ahead with your renovations and do not forget to keep your receipts. The use of an Excel spreadsheet is a relatively important tool to transmit the necessary information to your professionals.
“Yikes, another year working from home!?”
Don’t leave money “on the table”
You’ve had the pleasure and happiness, once again, of being able to work from home in 2020. “Congratulations!”, however, your employer can’t wait to see you back in the office. As they say in French : “Bon voyage et bye bye”. Nevertheless, you’ll be sipping that latte next to your boss in no time. Sorry, trying to bring a little sense of humour here …
Last year I wrote a column entitled: the impacts of teleworking on your taxes. This was a collaboration with Brigitte Alepin and UQO’s accounting department. The column was published in the newspaper Acces du Nord. Small regional newspaper outside of Montreal.
The question I was asking myself, what should you do this year with your office expenses? According to our tax law, there are two options: the detailed method and the new simplified method.
The detailed method will potentially allow you to put more “cash” in your pockets. There are conditions to be met. First, you must have worked from home more than 50% of the time for a period of at least four consecutive weeks. Second, you must have completed and signed a form called T2200S (or Form T2200). Equivalent forms must be used for Quebec tax purposes.
I encourage you to have a closer look at the detailed method, as you will be able to deduct a variety of expenses. Examples include the cost of rent, electricity, heating, internet and water. In addition, maintenance and minor repair costs may be accepted. Employees, unlike the self-employed individuals, have far fewer options when it comes to deducting expenses. Unfortunately, you can’t deduct your “Lazy boy” as well as your 60-inch flat screen TV !
The other method is the simplified method. Indeed, it will save you time and you do not have to follow and keep supporting documents . However, be aware that if you chose the simplified method, you may be leaving money “on the table.”
Under the simplified method, you can claim $2 for each day, up to a maximum of $400 (i.e. $2 per day for up to 200 business days) per person.
Interestingly, unless working from home has “pushed you to divorce,” a couple in the same household can use the simplified method individually. Therefore, you can claim $400 per person.
Take your time, gather your receipts, and ask your employer for the T2200S. Qualify and quantify which method is more appropriate and make a choice. Generally speaking, for most people living in a city, the detailed method will save you more money this year.