Personal Income Tax Tables

When reviewing your income taxes and looking for ways to reduce your annual tax bill, the first step is determining what tax bracket you currently fit in.

Federal Tax Rates for 2021

Under the current tax on income method, provincial tax for all provinces (except Quebec) and territories is calculated the same way as federal tax. The rate below applies to Ontario only.

Ontario Tax Rates for 2021

The next step is to calculate your marginal tax rate. That’s the rate at which the last dollar you earned in any year was taxed. Refer to the Marginal Tax Rate section below for more details.

Your Marginal Tax Rate

If you were to add up all your expenses, you may discover that your largest annual expense is your total tax bill. Depressingly, this is the reality for the average Canadian family.

But the good news is there are ways to reduce your taxes, such as taking advantage of your available deductions and credits and implementing smart tax-planning strategies, like income splitting. With the right approach, you may be able to slash significant dollars off your annual payments. At the same time, understanding the tax system can save you money by helping you avoid penalties and interest charges.

One of the key concepts you’ll need to get your head around in order to understand our tax system – as well as to find ways to cut your tax bill – is that of the marginal tax rate. Each taxpayer’s marginal tax rate refers to the rate at which the last dollar he or she earned in any year was taxed.

Here’s an example

Suppose you lived in Ontario and made $75,000 in 2017. Your marginal tax rate would have been 32.98%. In other words, if you made an extra $1,000, you’d have to give the government $330.

But suppose your income was $6,000 lower, or $69,000 per year.

Then your marginal tax rate would be only 31.15%. So if you made that extra $1,000, you’d only have to pay $311 in tax.

Your effective tax rate

In addition to the marginal tax rate, you will also need to be familiar with what’s known as your effective tax rate. When you pay your income tax (whether it’s deducted from your pay, you submit it for a business or you send the Canada Revenue Agency a personal cheque at tax time), the numbers are added up and presented to you as if you were paying the same rate for every dollar you earned.

That’s your effective tax rate. It’s the average rate you must pay on all the money you make in any year.

The reason the two rates are different has to do with the progressive nature of our federal income tax system. Instead of applying the same tax rate to everybody, the system uses a tiered approach. Your income up to a certain level is taxed at one rate and income between that level and a higher specified level is taxed at a higher rate.

From here, a still higher rate is applied, and so on. As explained earlier, the top rate at which anyone is taxed is considered his or her marginal tax rate. Meanwhile, the average rate the taxpayer pays across all that income is considered his or her effective tax rate.

Top Federal/Provincial Marginal Tax Rates for 2021

(current to January 1, 2021)

The above rates are the combined federal and provincial marginal rates, including all surtaxes. It is assumed that the only credits claimed are the basic personal amount and the low income tax reduction (where applicable).

These rates are correct as at January 1, 2021, and do not reflect changes resulting from federal or provincial announcements after that date.

Important Note

Note: The information provided here is not intended to replace personalized tax advice from a qualified tax professional.

Tax Deductions

The more money you make, the higher your tax bracket – and the more you pay in income tax. Thus, when it comes to tax deductions, the higher your tax bracket, the more a deduction is worth to you. (Deductions are expenditures that can be used to reduce your overall taxable income for tax-saving purposes.

Examples include RRSP contributions, alimony, child care expenses and union and professional dues.)

For example

If you were in a lower marginal tax bracket of 21% and had a $2,000 deduction for moving expenses, you could deduct that amount from your income before your taxes were calculated. The savings to you would be the tax you would otherwise have had to pay on that $2,000, which amounts to $420.

Now let’s imagine that you’re in a much higher 50% marginal tax bracket. That same $2,000 deduction would be worth $1,000 in tax savings.

In short, a deduction saves you exactly the amount of the deduction multiplied by your marginal tax rate.

Tax Credits

Unlike a tax deduction, a tax credit does not reduce your taxable income. Instead, it comes into effect once the amount of tax you owe has been determined.

For example

Let’s say you owed $10,000 in federal tax. If you had a $1,000 tax credit, you would simply deduct this amount from your federal tax payable, reducing it to $9,000.

With tax credits, your marginal tax rate doesn’t come into play at all. Rather, a tax credit is worth the same in real dollars to everybody, regardless of their income level and tax bracket. As part of an effort to make the tax system fairer, the government has been converting many deductions into tax credits.

Here are two examples of working with tax credits and their associated benefits:

The value of Refundable and Non-Refundable Tax Credits

Refundable credits are always worth in real dollars what they’re worth on paper. They’re treated as if the money was actually paid to the government, just as when income tax is deducted from your paycheque.

If you didn’t have to pay that money into the system, you get it back. Non-refundable tax credits, however, may be worth a lot less than the number you fill in on your tax return, right down to zero.

This can happen if a minimal income – or lots of deductions – means you’ll have little, if any, federal tax to pay. The most non-refundable tax credits can do for you is to eliminate federal tax (and the associated provincial taxes and federal surtax). What they can’t do is get you a refund worth more than the tax you paid.

Say you had a basic federal tax payable of $2,000, and you had $3,500 of non-refundable credits. Your tax payable will be zero, but you would not get a cheque from the government for $1,500.

When a $1,000 Tax Credit is worth $1,500 or more!

Most tax credits are subtracted from the amount of basic federal tax you are required to pay. Since your provincial taxes and federal surtaxes are calculated on your basic federal tax, this means each dollar of credit can actually save you upwards of $1.50 in taxes!

(Your provincial taxes are calculated as a percentage of your basic federal tax, so the less tax you owe Ottawa, the less you’ll have to pay your province. Provincial tax rates range from around 45 to 70 percent of your federal tax bill. In addition, tax credits are subtracted from your basic federal tax before assessing your federal surtax, making your credits worth even more.)

Attribution Rules

Finding ways to lower taxes

Income splitting is a strategy for decreasing the tax burden of a family. Here’s how it works: Money or property is loaned or transferred to a lower-income family member so that gains are taxed at a lower rate.

It can be a great way to minimize taxes, but attribution rules can block many of these opportunities. The first thing you need to know about attribution rules is that they are very complicated. The rules were designed to prevent attempts to shift income to another person by attributing it back to the person who transferred the money or property. In other words, if a wife transfers investments to her lower-income husband, any income realized on the investments could be assigned back to the wife.

Though the husband receives the income, the wife still pays tax on it at her marginal rate, and the family is no further ahead.

The rules governing attribution

There are a lot of rules in the Income Tax Act pertaining to attribution, and many of them are intended to foil circumvention of the general rules.

One of the most misunderstood attribution rules is significant because of its scope. The rule states that trust income is attributed to the person who transfers property to a trust when that person reserves the right to take back the property or retain some control over it. This rule applies to certain specific circumstances, and professional guidance is advised. However, in spite of the numerous attribution rules, some income-splitting opportunities do exist.

For example, a higher-income family member can pay all of the family’s living expenses, leaving the lower-income person with more to invest. Also, the new Canada Child Benefit (CCB), like its predecessor, the Canada child tax benefit (CCTB), may be invested in a child’s name without any attribution of income back to the parents.

As in all matters related to tax planning, it’s important to understand the rules and how they affect your specific situation.

Taxes and Your Investments

The only real number that matters in investing is what you make after the Canada Revenue Agency takes its share. This is known as your after-tax rate of return.

A fixed-income investment paying 7% sounds good but consider your after-tax return. If you were in the top income-tax bracket of around 50 percent, you would take home only about 3.5%, which is quite a difference (assuming the investment is outside of your RRSP).

What is more, the amount of tax you pay varies with the type of investment and how you arrange your portfolio. These factors can have a great impact on your after-tax return. (Note that you don’t have to pay any tax on gains earned by money in a tax-sheltered account such as an RRSP or a RRIF until you make a withdrawal.)

The most heavily taxed types of investments are those such as GICs and CSBs that earn you interest income. Stocks, real estate and other investments that entail more risk but have the potential for higher returns in the form of capital gains are taxed less.

Dividends from Canadian corporations have the lowest effective tax rate.

After-tax return of $1,000.00 investment

Minimize Taxes Through RRSPs

Recognize a tax break when you see one! Registered Retirement Savings Plans (RRSPs) are the most effective way for you to save money for your retirement. That’s because the contributions you make into your RRSP are tax-deductible.

Also, within your RRSP, you can tailor your investments to fit your particular goals and style. And if you’re married to a lower-earning spouse, you can contribute to a spousal RRSP, reducing your own retirement income and the tax bite it incurs.

A Tax Savings Idea!

A labour-sponsored venture capital corporation (LSVCC) is a form of mutual fund corporation, sponsored by an eligible labour body. LSVCCs are mandated, under their enabling legislation, to provide venture capital to small and medium-sized businesses. Investing in a Labour Sponsored Fund (LSF) can save you up to $750 in taxes.

Here’s how it works: If you invest $5,000 in a provincially-registered LSF, the federal government will give you a 15% tax credit on the $5,000. Therefore, your $5,000 investment will actually save you $750 in taxes.

In addition, if you buy a LSF inside your RRSP, you will also get the RRSP deduction. Depending on your tax bracket, you could get back close to $3,250 as a tax refund (if you’re in the highest tax bracket).

Important Note

In Budget 2016, the federal government announced that the federal LSVCC tax credit for federally registered LSVCCs will remain at five percent for the 2016 taxation year and be eliminated for the 2017 and subsequent taxation years.

The prohibition on new federal LSVCC registrations and the transition rules for federally registered LSVCCs will be maintained. Labour Sponsored Funds can be a good option for some investors, but beware they’re considered aggressive and high risk. This is because the funds invest in smaller Canadian companies.

Plus, you must hold onto the fund for eight years in order to maintain the tax credits.

Tax Loopholes

Here’s a little-known tax fact: most tax loopholes are intentional, created by the Ministry of Finance to stimulate certain sectors of the economy. For example, if your employer buys a $30,000 car on Dec. 31, you can write off half a year’s depreciation, or $4,500, even though this new asset was held for only one day.

This is no oversight. More likely, it’s an incentive for businesses to purchase cars. In contrast, true tax loopholes are unintentional benefits you find only by reading between the lines of the Income Tax Act.

For example, consider the tax-saving opportunity that presents itself if your spouse has losses on investments and you have gains:

Shifting Capital Loss From One Spouse to Another

Imagine Susan is sitting on a capital loss this year, while her husband, Tim, realized a capital gain. According to the letter of the law, Tim cannot use Susan’s loss to offset his gain. He will have to pay tax on his gain, while Susan’s loss remains unused until she can apply it to a future capital gain of her own.

By reading the Income Tax Act closely, there is a solution. To share a capital loss with her husband, all Susan has to do is sell her losing shares to Tim, allowing him to claim the loss as his own. Let’s explain. We’ll assume that Susan’s shares originally cost $10,000, but are now worth $1,000 – a potential loss of $9,000. She sells the shares to Tim at the fair market value of $1,000, then elects on her income tax return not to have the transaction occur at cost.

This allows her husband, as the purchaser of the shares, to add the $9,000 capital loss to his adjusted cost base for tax calculation purposes. Now Tim owns shares with a fair market value of $1,000 and an adjusted cost base of $10,000.

The final step is for Tim to simply sell the shares. The $9,000 loss goes on his books, not Susan’s, because he bought the shares from her at fair market value. While this may sound complicated, it really isn’t in practice.

Keep in mind, however, that this loophole applies only to spousal transfers of capital property. In other words, it won’t work if you sell losing shares to another family member or a friend.

What is the Canada Child Benefit (CCB)?

The Canada Child Benefit (CCB) is a payment from the Canadian Government that helps families with the cost of raising their children up to the age of 18. The CCB came into effect on July 1, 2016. It replaces the Canada Child Tax Benefit (CCTB), the National Child Benefit Supplement (NCBS) and the Universal Child Care Benefit (UCCB), as well as the Family Tax Cut, also known as income splitting.

Administered by the Canada Revenue Agency (CRA), the CCB is a non-taxable benefit paid on a monthly basis.

How much do families get?

The amount depends on how many children you have and your net family income. Families with children younger than age six will receive an annual tax-free benefit of up to $6,400 per child. Those with children between the ages of six and 17 will receive up to $5,400 annually.

Households with children with annual income below $30,000 will receive the maximum payment. The CCB might include the child disability benefit and any related provincial and territorial programs. Families whose children qualify for the Disability Tax Credit can receive an additional amount as part of their Canada Child Benefit, up to a maximum annual benefit of $2,730 per eligible child.

You can estimate the amount you may receive by using the Canada Child Benefit Calculator, available on the CRA website.

CANADA CHILD BENEFIT CALCULATOR

Who is eligible?

Eligibility is limited to parents who are Canadian citizens, permanent residents or refugees. Recipients must also be residents of Canada for tax purposes. An application for the CCB can be made through the Canada Child Benefits Application, available on the Canada Revenue Agency website.

RRSP Contribution vs. Mortgage Paydown

Some people feel that it is more important to pay down the mortgage rather than contribute into RRSPs. While reducing your mortgage quickly makes sense, you should recognize that you’ll need a significant nest egg to retire comfortably.

There is a way to accomplish both goals, however. Contribute to your RRSP and use your tax refund to pay down your mortgage. You’ll be building your nest egg and reducing your mortgage at the same time!

Example:

Here’s an example that asks the question: Is it better to pay down the mortgage or contribute to an RRSP?

Certainly, every situation is different and mortgage rates change over the years, but let’s consider this example: Assume a 42% marginal tax bracket and a maximum RRSP contribution room of $12,000. Tax savings from the contribution are approximately $5,040 in this case. This equates to $420 a month of new money that can be applied to the mortgage.

Now let’s assume the $125,000 mortgage is amortized over 25 years and an average interest rate in that period of 6%. Monthly payments are $799.76.

If this is bumped up by the $420 a month in tax savings from the RRSP, the taxpayer cuts the amortization period by 13 years.

The results are the following: Accumulated tax-sheltered earnings on growth of annual $12,000 contributions for 12 years, compounding at a before-tax rate of return of 6% amounts to about $214,600. Interest savings on the reduced amortization period of 12 years rather than 25 years equals approximately $65,300.

Total accumulated principal and earnings in the period will produce net worth of $214,600 in the RRSP and $125,000 in home equity and a further $65,300 in interest savings for a total of $404,900 all from an investment of just $144,000 ($12,000 x 12 years).

7 Key Tax Planning Tips

While tax preparation software can catch most credits and deductions, it’s easy to
overlook them. Here are some of the key reminders for you:

1. Pension splitting
   Your spouse can benefit from pension splitting by using Form T1032-Joint Election to Split Pension Income. Up to 50% of income can be allocated to a spouse or common-law partner, producing a lower overall tax bill and either avoiding or reducing the clawback of Old Age Security (OAS) benefits for one or both spouses. In addition, both spouses may be able to claim the pension tax credit.
2. Expenses
   Some expenses only qualify as tax deductions or tax credits if you pay them before the end of the tax year. Examples include interest costs on investment loans, medical expenses and spousal support payments.
3. Donations
   Charitable donations should also be used to create the greatest possible tax benefit. If a couple has donated more than $200 in the tax year, the receipts should be combined and claimed by the partner with the highest income, thereby maximizing the allowable credit. Don’t forget, you can claim as many as five years’ worth of donation receipts on the same tax return.
4. Tax credits for kids
   Tax credits aimed at children can help parents reduce or eliminate the amount of tax they owe. Child-oriented tax credits you may benefit from include the federal government’s children’s fitness and arts tax credits (both of which will be eliminated for 2017). You may also benefit from the adoption expense tax credit.
5. Child care
   Deductions are available for child care expenses such as daycare and after-school care costs. Costs for boarding school and camp fees may also qualify. Generally, the younger the child, the greater the allowable expense claim limit.
6. Students
   Non-refundable tax credits for tuition, education and textbook costs can also be claimed by a student or their parents or grandparents. Certain types of examination fees will also be considered as part of tuition expenses when claiming the credit.
7. Kiddie tax
   Budget 2014 expanded the so-called “kiddie tax,” making it more challenging to split business income with minor children. The new rules apply to the 2014 taxation year onward. Also known as the tax on split income, these rules tax income at the highest federal tax rate (29%), even if a minor child or spouse is in a lower bracket.

Additional considerations

Finally, if you have a spouse or child with little or no income, there are some good reasons why they should still file a tax return. First, earned income determines eligibility for government programs such as the Canada Child Tax Benefit (CCTB) or the GST/HST credit. Students, especially, should make sure they file a return in order to claim the GST/HST credit. And even a small
amount of reported income will add to future registered retirement savings plan contribution room.

Deadline exceptions

The April 30 deadline has exceptions, including for individuals or their spouses who are self-employed or ran a business, or if a spouse died during the tax year. In these examples, the individual has until June 15 to file returns. The Canada Revenue Agency (CRA) allows the extension in these cases because it may take longer to gather the necessary filing information. However, the extended deadline in these instances doesn’t cover the actual taxes owed. They still have to be paid by April 30.

Need Advice?

Reviewing your Tax Plans? We encourage you to talk to us. Speak to your Financial Advisor or contact investor services at 1 800 608 7707.

Download the PDF version of this article

7 Key Tips to Tax Planning

10 Tips to Avoid a CRA Audit

Are you actively seeking an audit? Probably not. But if you were, Canada Revenue Agency (CRA) helpfully publishes alerts on its website that identify areas of concern for auditors and warn about actions and investments the agency is likely to investigate. Here are 10 red-flagged practices that could contribute to a CRA decision to audit your tax return.

1. Employment Expenses
   The CRA is paying closer attention to employees who attempt to deduct employment expenses from their employment income. Employees are very limited in the types of expenses they can deduct. Those employees who choose to make a claim can expect questions from CRA.
2. Large Charitable Donations
   The CRA seems to draw the line at cash donations in excess of $25,000, asking for additional information to substantiate the donor’s claims.
3. Allowable Business Investment Loss (ABIL)
   An ABIL occurs when a person disposes of debt or a share of a small business corporation. The advantage of realizing an ABIL over an ordinary capital loss is while capital losses may only be deducted against capital gains, an ABIL may be deducted against all sources of income, including employment income. In order for a loss on debt or equity to qualify as an ABIL, it must meet certain complex and strict rules. When claiming an ABIL, make sure to keep all relevant information that may be required by CRA.
4. Tuition/Education Expenses
   The CRA continues to ask for backup for any post-secondary tuition and/or education expenses claimed on a student’s tax return. Ensure your children keep copies of all tuition slips, especially if the amounts are being transferred to you, the paying parent.
5. Carrying Charges
   While expenses incurred for the purpose of earning investment income (such as interest expense on borrowed money) are typically tax-deductible, it’s essential to keep the necessary supporting documentation and to ensure personal expenses are not being claimed. This is particularly important when interest is being claimed on leveraged investing. If a line of credit (LOC) is used for investing, you must ensure that funds drawn from the LOC are being recorded in detail and not mixed with any personal expenses.
6. Foreign Tax Credits
   If you earn foreign-source income, you must claim any foreign tax withheld as a credit on your Canadian personal tax return. This foreign tax credit can be used to offset any Canadian tax payable and will directly reduce Canadian tax dollar-for-dollar. That said, Deloitte reported that in 2004, the CRA has become much more active in questioning entitlement to foreign tax credits and reviewing taxpayer claims. We can’t emphasize enough the importance of keeping good records, especially foreign tax documents, bank or investment statements that may
   substantiate any foreign income earned and foreign taxes paid.
7. Child-Care Expenses
   Many organizations provide receipts to parents for services that may not actually qualify for tax relief because their main purpose is not the provision of child care. Examples cited by Deloitte include athletic coaching, music lessons and tutoring. For expenses to be deductible, they “must relate to the overwhelming component of guardianship, protection and child care. Recreational activities were never intended to be included as such an expense by Parliament…” Perhaps the reason for the confusion among some taxpayers is that these organizations often print “for tax purposes” on their receipts, potentially misleading parents into thinking such fees are tax-deductible as child-care expenses.
8. Verification of Capital Gains and Losses
   When you purchase non-traditional investments, such as income trusts or investments in foreign currencies, the calculation of your capital gains and losses can attract unwanted attention. Income trusts pose a unique problem because they often distribute a “return of capital” (ROC), which is tax- advantageous since it’s not currently taxable but rather reduces your adjusted cost base (ACB). You need to keep a record of your ACB adjustments so the correct capital gain or loss can be reported when the income trust is ultimately sold. The other item to watch for when calculating a capital gain or loss is investments denominated in foreign currencies. When these are sold, you must calculate not only your economic gain but also the foreign exchange component of any gain or loss. The foreign exchange gain or loss calculation should be done by comparing the foreign exchange rate on the date of purchase with the rate on the date of sale, as opposed to the average rate for the year.
9. Province of Residence
   As the debate about interprovincial tax planning continues to grow, provincial residency is increasingly an item of scrutiny for the CRA. For example, if you live in a province with a high marginal tax rate, it would be very attractive to take advantage of a lower marginal tax rate in another province. This could be done by acquiring a recreational property in the province with the lower rate, or even by merely establishing a mailing address in the province. Under our tax law, Canadians must pay provincial tax on their worldwide income based on the taxpayer’s residence in a particular province on December 31.
10. Mining and Oil & Gas Investments 
    There are specialized tax rules governing investments in resource properties. If you choose to invest in such flow-through shares and other resource-based limited partnerships, you may wish to seek professional help come tax time. The CRA often requests additional information on amounts reported on the return when flow-through amounts and tax credits are claimed.

Need Advice?

Reviewing your Tax Plans? We encourage you to talk to us. Speak to your Financial Advisor or contact investor services at 1 800 608 7707.

Download the PDF version of this article

10 Tips to Avoid a CRA Audit

Taxes and the Self-Employed

Canadians have heard the lure of self-employment–and they’ve responded. Some three million tax filers now call themselves boss, and the number is growing annually.

If you’re self-employed and your business is not incorporated,
you are responsible for filing an individual tax return each year. Your income must be reported as business or professional income, and you can deduct, or “write off,” your business expenses.

The Canada Revenue Agency (CRA) gives self-employed workers a bit longer to submit their returns each year–the deadline is June 15. But remember, if you owe taxes, interest begins accumulating as of April 30, which is the deadline for individuals who are not self-employed.

Claiming expenses

The CRA allows you to deduct a reasonable amount of the expenses you incur to earn business income. Just be sure to keep your receipts in case you’re audited.

Here are the main deductions you may be eligible to claim.

Business operating costs

Any money spent in the operation of your business–including interest on borrowed money, fees for professional services like accounting, and the cost of office supplies and utilities–is considered a business expense.

For some expenses, like meals and entertainment, you can claim only half the amount spent, or a reasonable portion under the circumstances, whichever is less.

For items with both a personal and a business component, you can claim only the business portion of these costs.

Capital property costs

Capital property covers things you buy in the course of running your business, like office furniture, computer equipment or a building. Over time, you can write them off in the form of depreciation. This is called a capital cost allowance (CCA).

Home office and automobile costs

The cost of having an office workspace in your home can be deducted. To calculate the deductible, start by determining the size of the office space as a percentage of your home’s total size. For example, if your office is 10 square feet and your home is 100 square feet, your office is 10% the size of your home. This means you can deduct 10% of your home expenses, including mortgage interest or rent, utilities, insurance, security monitoring and repairs.

Similarly, if you use your vehicle for both business and personal use, you can deduct a percentage of the costs based on how often you use the vehicle for business.

Should You Incorporate?

As your income grows, you may reach the point where it makes sense to incorporate your business. A rule of thumb is to consider incorporating once your business is profitable enough that you’re covering all your living expenses and have money left over to save and invest.

There are costs to setting up and maintaining a corporation, but these costs can be more than offset by the fact that corporate profits are taxed at a much lower rate than personal income.

By incorporating, you’re also protecting yourself from personal liabilities, which is an important part of creating a sound financial plan for you and your family.

The Benefits of Investing Your Tax Refund

Around two-thirds of Canadian tax filers will receive a refund this year.

Certainly, there’s no shortage of options for what to do with a tax refund. But if your priority is preparing for retirement, the best course of action for most people, hands down, is to invest it in an RRSP.

Do this every year and your savings will benefit from two dependable investment strategies for growing money faster:

1) Tax Savings:

In essence, the money you invest in your RRSP represents an immediate tax deduction. This deduction reduces your taxable income and, thus, your taxes payable. The actual amount of tax savings is equal to your marginal tax rate.

2) Tax-Deferred Compounding:

The term “tax-deferred ” refers to the fact that all income earned within an RRSP through the compounding of interest, dividends and capital gains accumulates tax-free until withdrawn. It pays to start early. The sooner you begin saving, the more time your investments will have to grow through compounding.

Two other great options for investing your tax refund are a TFSA and an RESP. Both allow your investment earnings to accumulate tax-free until withdrawn.

Contributing to your child’s RESP has the additional benefit of providing access to education tax credits.

CRA Confirms Paying RRSP, TFSA Fees from Outside the Accounts Not an Advantage

After nearly three years, the uncertainty has ended for investors who pay the management fees on registered accounts like RRSPs and TFSAs from outside those accounts.

The Department of Finance has released a so-called “comfort letter” to commercial tax information
providers saying the department will recommend an amendment to the Income Tax Act’s definition of “advantage” to exclude the practice of paying for investment management fees from funds outside of registered plans.

In 2016, the CRA said it viewed this practice as creating an unfair advantage because it was equivalent to a tax-free increase in the value of the registered plan. In other words, paying fees from outside registered accounts would preserve registered capital.

Ever since, industry groups such as the Investment Funds Institute of Canada and the Canadian Life and Health Insurance Association have been consulting with the CRA to halt the proposed implementation, saying that clients who pay fees outside registered accounts aren’t usually tax-motivated.

If you have questions about the payment of fees on your registered accounts, contact your GP Wealth financial advisor.

Year-End Tax Planning

April 2020

Come tax time, the goal is to pay yourself… not the CRA.

Year-end means the return of winter, the arrival of the holiday season and, like it or not, a certain amount of financial planning.

And that means taking advantage of every deduction and tax credit available to you. Leaving funds on the table for the government just doesn’t make sense. As we enter the final weeks of 2017, here for your consideration are a few year-end tax tips that could help you keep more money in your pocket: Repay any money withdrawn from your Registered Retirement Savings Plan (RRSP) under the RSP Home Buyers’ Plan.

Repayments must be made no later than March 1, 2018, to avoid taxation. Make any charitable donations you want to claim in 2017. If you have business-related purchases to make, consider doing so before year-end. These may include professional dues and membership fees.

Capitalize on the new $5,500 TFSA contribution limit.

10 Tax Planning Strategies

Here are 10 strategies to consider now – before the end of the year – in order to reap the greatest benefit.

1. Tax-Loss Selling

In times like these, when markets are volatile and investors sustain more than the usual capital losses, tax-loss selling can be a silver-lining strategy. There are several ways to approach this strategy:

• Transfer unrealized capital losses from a spouse or common-law partner.
• Donate securities to a registered charity by year-end to receive a tax credit.
• If you have investments with unrealized capital losses, you can sell them before year-end to realize the loss; then use the loss to offset realized capital gains in the current year (which will minimize taxes).
• Or, you can offset any capital gains you may have incurred in the past three years, or carry the loss forward indefinitely to offset future capital gains.

IMPORTANT NOTE

One of the most commonly suggested loss-realization strategies for clients who still want to hold an underlying fund is to transfer the fund with the accrued loss to an RRSP. This idea, however, comes with an important caveat – if a fund with an accrued loss is transferred to an RRSP, the loss is denied.

Instead, the fund should first be switched into a money-market fund outside the RRSP.

Next, the money-market fund should be contributed in-kind to the RRSP. The RRSP can then redeem the money-market fund and repurchase the original fund.

In the past, there was no need to worry about the 30-day superficial loss rule because the individual isn’t buying back the same fund – their RRSP is. The 2004 federal budget, however, amended the definition of affiliated, such that a person is now considered to be affiliated with a trust if the person is a majority interest beneficiary of the trust, which would be the case with RRSPs.

As a result, the investor should either wait the 30 days before switching back from the money-market fund to the original fund or consider transferring to another version of the fund inside the RRSP, such as a corporate class fund, if available.

If you want your loss to be immediately available for 2017 (or one of the prior three years), the settlement must occur in 2017, meaning the trade date can be no later than December 27, 2017.

Talk to your financial advisor about these strategies and whether selling or transferring equities is right for you.

2. Estate Planning

Is your will up to date? End-of-year financial housekeeping is a good time to review your will and make sure it represents your current situation and intentions regarding your estate.

3. Registered Plans

If you have any unused contribution room in your RRSP, consider topping it up. (The deadline for 2017 RRSP contributions is March 1, 2018.) If you turned 71 in 2017, you have only until December 30, 2017, to make a contribution to your RRSP for 2017 (but you can include 2017 contributions if you were paid a salary or wage in 2017).

4. Personal Payments

The final tax installment payment for 2017 is December 15th. Parents of children under 16 can claim a non-refundable tax credit of up to $500 for each child registered in an eligible physical activity program.

5. Transit Pass Tax Credit

Provided certain conditions are met, public transit users can claim a non-refundable tax credit.

6. Mutual Fund Purchases

To avoid having to report year-end distributions, consider postponing the purchase of non-registered mutual funds until the new year.

7. Non-deductible Interest on Your Loans

Consider paying off your debt by selling some of your non-registered investments, and then borrowing to replace the investment.

8. Allocating Pension Income to your Spouse

You may be able to increase your after-tax income from your retirement plans by allocating up to one-half of eligible income that qualifies for the existing pension income tax credit to your resident spouse or common-law partner.

9. Stock Option Deferral

Stocks acquired through stock option plans can have the benefit deferred on amounts up to $100,000 in total fair market value (at the time the options were granted).

10. Tax Shelters

Seek professional advice and consult with your financial advisor before investing your money in a tax shelter. The quality of the product is more important than the immediate tax savings.

Important Tax Changes for 2021

Here’s a summary of changes you should be aware of to help you in planning your personal tax return for 2021. You can also find useful information and ideas on creating a more effective tax plan in this section.

If you require assistance in developing or managing your tax plan — including implementing a sound tax-minimization strategy — contact us today or send us an email. We would be pleased to help!

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RRSP Limit Rises to $27,830 for 2021

Retirement savings limits

For the most up-to-date limits, visit the Canada Revenue Agency Canada Revenue Agency website.

Payments due by December 30, 2021

• Alimony payments
• Charitable donations
• Child-care expenses
• Interest expenses on money borrowed to earn investment income
• Medical expenses
• Union and professional membership dues
• Investment counsel fees, interest and other investment expenses
• Political contributions
• Deductible legal fees
• Interest on student loans
• Payments eligible for the fitness tax credit
• Loan interest
• Safety deposit box fees
• Tax-shelter payments
• Professional fees
• Interest on family loans (generally at the prescribed rate) must be paid within 30 days of the end of each calendar year to avoid income attribution. Consider new arrangements while the prescribed rate is low – currently 1%
• Review family trusts for any action that’s required by December 30, 2021

Personal Tax Credits

Non-refundable tax credits can only be used to reduce federal or provincial/territorial taxes payable to zero. They cannot be carried forward to future years. However, unclaimed donations can be carried forward for up to five years, and sometimes unclaimed medical expenses can be claimed in the next year, depending on the timing. Unclaimed tuition, education and textbook amounts can either be transferred to someone else or carried forward.

The chart below summarizes the minimum proposed levels of these amounts, ignoring any additional inflation increases:

Proposed personal, spousal and threshold amounts (ignoring inflation)

What to do with your Tax Refund

A tax refund can seem like “free money”, but that doesn’t mean you should spend it carelessly. Instead, think about your personal financial situation, determine your priorities and give your money a purpose. Here are some ideas to get your wheels turning.

Pay off debt

If you have high-interest-rate debt, like credit card debt, it should be an easy decision to use your tax refund to pay it down. If your only outstanding debt is your mortgage, the decision may not be so simple. You could be better off putting the money to use elsewhere.

Boost your retirement nest egg

Do you have contribution room in your RRSP? If so, you could add to your retirement savings. This will result in a bigger refund the following year. Or you could contribute to your TFSA and grow your refund tax-free. Apart from paying off bad debt, boosting your retirement nest egg could be your best option if you haven’t yet reached your saving goal.

Create or add to your emergency fund

Many experts say you should keep six to eight months’ worth of savings in an easily accessible interest-bearing account in case of emergency. If you don’t have an emergency fund, any surprise event could throw you into a debt spiral.

Invest in your children’s education

If you’re a parent (or grandparent, aunt, uncle, etc.) a great way to use your refund is to contribute to your child’s RESP. Each year, courtesy of the Canada Education Savings Grant, you’ll get an extra 20% added to your account on the first $2,500 you save.

Invest in yourself through continuing education or training for a new career

Professional development can make the difference in your career. If you invest in continuing education or take that training course that will allow you to switch careers, you could see a big payoff, both in how you view your job and in your earnings.

Give money to your heirs

If you plan to leave money to a relative or close friend in your will and can afford to part with some of the funds now, consider turning your tax refund into a cash gift. By gifting the money in advance of your death, you can reduce the size of your estate at the time of your death, thereby reducing taxes and probate fees at that time. If you give a sum of money to your kids, they could pay down their mortgage, which would lower the amount of non-deductible mortgage interest they must pay each year.

Invest in homeownership

Thanks to the principal-residence deduction, your home is not subject to capital-gains tax when you sell it. Thus, it could make sense for you to put the money towards your mortgage, home improvements that will boost the value of your home or a down payment on a new home.

Invest in life insurance

If you don’t currently have coverage, your tax refund could help defray the cost of premiums on a life insurance policy. In addition to peace of mind, life insurance can offer key tax benefits, including tax-sheltered investment growth, tax-free payout on death of the insured and an increase in the capital dividend account (CDA) of a corporation.

Lend the money

If your spouse, partner or kids are in a lower tax bracket than you, consider lending money to them at the prescribed rate of interest, which is 1%. When the recipient then invests the cash, any income earned will be taxable in his or her hands. This is known as income splitting. As long as the recipient earns more than 1% on the investments, your tax bill will be lower overall.

Donate to a charitable cause

Use your tax refund to do good now and reduce your tax bill in the future. When you donate to a registered charity, you can receive a tax savings equal to almost half your donation, depending on your income and the province you live in.

Getting Advice

If you require assistance in developing or managing your tax plan — including implementing a sound tax-minimization strategy — contact us today or send us an email. We would be pleased to help!

Leverage Your Income Tax Refund as an Investment

What you do with your tax refund can have a major impact on the amount of money you accumulate for retirement. To illustrate, consider if you were an investor in a 50% tax bracket and you decide to invest $1,000 in an RRSP. Let’s look at the outcomes of three different options for investing the $500 tax refund you would receive from your $1,000 RRSP contribution.

Option # 1: Don’t invest; spend the money instead

Here, you’re basically increasing your current standard of living at the expense of your retirement.

Option # 2: Invest your refund in your RRSP

By contributing the $500 refund, your total contribution for the year is now $1,500 instead of $1,000 – an increase of 50%.

Option # 3: Gross up

In this case, you borrow an extra $1,000 to “gross-up” your RRSP contribution to $2,000. The $1,000 refund is used to immediately repay the $1,000 loan, so you pay little, if any, interest.

By “grossing-up,” you get the maximum RRSP dollars working for each dollar you invest. For someone in the 50% tax bracket, this approach grosses-up $1,000 into a $2,000 RRSP contribution.

Get Started

We encourage you to explore the links in the right sidebar. They’ll take you to articles with answers to many common tax questions. You’ll also find information and ideas that will help you plan a more effective tax strategy for you and your family. If you have any questions, send us an email and we would be pleased to help.

How Budget 2018 Will Affect the Small-Business Tax Rate and Passive Income

In Budget 2018, the federal government has proposed two changes to the tax rules governing the income generated by investments held in a Canadian-controlled private corporation (CCPP).

Last July, the government’s initial tax reform proposals were met with an uproar by the small-business sector. After further consultation with stakeholder groups, the government has put forward a new plan that it says will target only the wealthiest 3% of private corporations.

The proposed new measures represent a balancing act in which the government continues to help small business owners invest in their firms, while not giving them a tax advantage over other taxpayers.

Small-Business Tax Rate

The first proposal addresses the ability of small businesses to benefit from the small-business deduction if they earn significant income from passive investments. The basic rule is that a private corporation can generate up to $50,000 each year in passive income and still qualify for the small-business tax rate.

The $50,000 threshold is equivalent to $1 million in passive investment assets at a 5% return. If a private corporation exceeds the $50,000 threshold, the amount of income eligible for the small business tax rate is reduced and more of its active income is taxed at the general corporate rate of 15%.

Once your annual passive income reaches $150,000, you will no longer qualify for the small business tax rate. According to Budget 2018, this change to the small business tax rate ensures small businesses “reinvest in their active business, not accumulate a large amount of passive savings.”

Refunds Through Distribution of Dividends

The second proposal limits the refundable taxes that private corporations receive on the payment of certain dividends. As it stands now, investment income earned in a private corporation is taxed at a higher rate, a portion of which is refunded when investment income is paid out to shareholders in dividends.

In practice, though, taxable dividends can allow for a refund of taxes on investment income no matter if the dividend comes from investment income or active business income, which is taxed at a lower rate.

This loophole allows private corporations to pay out lower-taxed dividends from their active income and claim a refund on taxes paid on their investment income. Budget 2018 calls this “a significant tax advantage.” By reforming the rules governing refunds through distribution of dividends, the government will prevent private corporations from obtaining refunds of taxes paid on investment income while distributing dividends from income taxed at the general corporate rate.

A refund of the refundable dividend tax on hand (RDTOH) will only be available “in cases where a private corporation pays non-eligible dividends,” the accompanying Tax Measures document explains.

The Bottom Line

So how will these changes affect you as a small-business owner? Budget 2018 has cleared the air, providing certainty for investors on how passive income will be treated going forward. These measures will apply to taxation years that begin after 2018.

An anti-avoidance rule will apply to prevent the deferral of the application of this measure through the creation of a short taxation year. In our view, investing in your business remains a good strategy, but now you have to anticipate future passive income to determine your best course of action. Based on these changes to the small-business tax rules, you many need to review your current investment approach.

Call me if I can be of any assistance – I would be pleased to help.

Tax Tip:

While the government has proposed adding a business limit reduction measure when income from passive investments exceeds $50,000, your tax planning could include corporate class funds and individual pension plans to help reduce or eliminate passive income.

Get Started

We encourage you to explore the links in the right sidebar. They’ll take you to articles with answers to many common tax questions. You’ll also find information and ideas that will help you plan a more effective tax strategy for you and your family. If you have any questions, send us an email and we would be pleased to help.

Tax-Loss Selling Can Cut Your Tax Bill Today

The end of each year is a good time to review your portfolio and identify under-performing securities for tax-loss selling to help with year-end tax planning and savings.

What is Tax-Loss Selling?

• Tax-loss selling is a year-end strategy an investor can use to reduce their tax liability. By selling securities with accrued capital losses, an investor can help offset taxes otherwise payable in respect of other securities that have been sold at a capital gain. The proceeds from the sale of these securities can then be reinvested in different securities with similar exposures to the securities that were sold, to maintain market exposure.
• Even if capital gains are not available in the current year, the realized losses may be carried back for three years to shelter gains realized in those years or carried forward to reduce capital gains in upcoming years.
• The ability to recognize a capital loss for tax purposes may be restricted in certain circumstances, including where the acquired security is identical to the security that is sold. You should not repurchase the loss security within 30 days of the loss sale. You should consult with your advisor to ensure that restrictions do not apply.

Tax-Loss Selling Example

• Realized capital gains from previous transactions or capital gains distributions from mutual funds can be offset by selling securities, which are trading at a lower price than their adjusted cost base.
• An Investor can then use the proceeds from the security that was sold to invest in a different security.
• In addition to common shares, tax-loss selling can also be applied in respect of other financial instruments that are on capital account, such as bonds, preferred shares, ETFs, mutual funds, etc.

Important Date to Remember

Every year, the last day for tax-loss selling in Canada and the United States is December 29.

Childcare Tax Planning

If you have children under the age of 16, the back-to-school season is a good time to assess your projected child-care costs and find out about all the tax deductions that are available to you. Keep in mind that child-care expenses cannot be carried forward – that is, they must be deducted the year they are incurred.

So there is some urgency to your tax planning.

Key child-care deduction limits

• $8,000 per year maximum for children under the age of 7
• $55,000 per year maximum for children between 7 and 16
• $11,000 per year maximum for children who are disabled*

*Only children who qualify for the Disability Tax Credit are eligible. To maximize your child-care expense deductions, report all of your children under the age of 16 on your tax return, whether or not they incurred any child-care costs.

You can then take advantage of the cumulative maximum deductions allowed by the Canada Revenue Agency (CRA). For example, if you have three children under the age of seven, you are allowed a cumulative maximum deduction of $24,000 annually. As long as you have spent this amount of money on legitimate child-care expenses, it doesn’t matter if more than $8,000 was spent on one child and less was spent on another.

The government just wants to make sure parents stay within their deduction limits. While child-care expense deductions can be substantial, there are specific rules that limit their use.

For example, they are most beneficial for parents who each have a reasonable income, as the deductions must come from the parent who earns less, and the amount cannot exceed two-thirds of his or her income.

CRA Updates Principal Residence Folio

The ability to claim the principal residence exemption (PRE) on the sale of a home is one of the most valuable tax-reduction strategies many Canadians will ever use. The PRE relieves you from paying capital gains when you sell a property you’ve designated as your principal residence.

Beginning in the 2016 tax year, changes to the Income Tax Act tightened the regulations that allow you to qualify for the PRE. Most significantly, you’re now required to report the sale of your principal residence on your tax return, but there are other new rules that must be followed as well.

Recognizing that Canadians are finding the process difficult to navigate, Canada Revenue Agency, in July 2019, issued a technical publication, Tax Folio S1-F3-C2, Principal Residence, that provides a comprehensive explanation of how the rules work. It also includes information about additional changes made to the PRE since 2016.

For many homeowners, particularly those owning multiple properties, the CRA’s PRE overhaul has created tax complications that may require professional tax advice. It’s clear that homeowners must be more vigilant in the future about the tax consequences of selling real estate.

Get Started

If you want to learn more about common tax questions, we encourage you to read the posted articles. You’ll also find information and ideas that will help you plan a more effective tax strategy for you and your family. If you have any questions, send us an email and we would be pleased to help.

Taxes are inevitable, but there are steps you can take to lower your tax burden.

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The Ontario “Staycation” Tax Credit and How to Use It

January 2022

Ontario’s provincial government has introduced a temporary tax measure to stimulate tourism in the wake of the pandemic lockdowns.

The Ontario Staycation Tax Credit is also a nice holiday gift for the province’s taxpayers, applicable on vacations taken between January 1 and December 31, 2022.

The refundable credit will give residents back 20 percent of the money they spend on accommodations on amounts up to $1,000 for an individual and $2,000 for a family — for a maximum credit of $200 and $400, respectively.

According to the conditions of the Staycation credit, the spending must be for a stay of less than a month in Ontario establishments like motels, hotels, lodges, cottages, campgrounds and bed-and-breakfasts.

Additionally, the money must be paid by the Ontario tax filer, their spouse or common-law partner, or their eligible child, as set out on a detailed receipt.

The Staycation initiative was announced as part of the government’s Fall Economic Statement, tabled in November 2021.

From Tax Refund to Investment Savings

April 2022

Sometimes a tax refund seems like free money from the government. Hello big-screen TV or luxury getaway. That refund, however, was your own money all along. You’re just getting it back.

By resisting the urge to splurge, you can use it to enhance your future finances. An effective way is to invest the refund in a registered plan.

Make an RRSP contribution

You can magnify the effect of the refund by investing it in your RRSP – because you also receive a tax deduction to lower your taxable income.

Supplement your TFSA

By contributing your refund to your TFSA, you’ll benefit from both compound growth in a tax-free environment.

Contribute to an RESP

Applying the amount to an RESP for your children or grandchildren is another way you can stretch your refund dollars. The first $2,500 of an annual contribution can trigger up to $500 in a Canada Education Savings Grant (CESG) that will be deposited into your RESP.

Here are a couple more ideas to benefit financially in a big way:

Pay off debt

If you have any high-interest debt, you can use the refund to reduce the balance and lower or, perhaps, eliminate the ongoing interest costs.

Add to an emergency fund

Your tax refund can enhance an existing emergency fund or present a great opportunity to get one started.

Get Started

Learn how compound interest makes your investments grow faster because interest is calculated on the accumulated interest over time as well as on your original principal.

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Medical Expenses – One of the Most Underused Tax Credits

April 2022

According to Canadian tax preparation firms, the medical expense tax credit is among the most underused tax credits or deductions. One reason is that many taxpayers aren’t aware of what expenses are allowable.

For example, you can claim the costs of eyeglasses, contact lenses, laser eye surgery and orthodontics, and fees paid to a physiotherapist, chiropractor or psychologist. If you have a group insurance plan through your employer, your out-of-pocket portion of dental costs is allowable and so is the portion of the premiums you pay for dental, medical and vision benefits.

For a complete list of eligible expenses, see the Medical Expenses publication RC4065 at canada.ca.

You can combine the expenses for you, your spouse and children for a 12-month period – and either spouse can make the claim.

But note that this credit isn’t for everyone. Expenses can only be claimed when they exceed either $2,421 (for the 2021 tax year) or 3% of your or your spouse’s net income. Usually, the lower-income spouse claims the credit.

Make a list and check it twice

Don’t forget to use our helpful tax checklist to ensure you have all the documentation required to complete your tax return.

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