Author Segal LLP

Raising a Family? Take Every Available Tax Break

There’s no doubt that raising a child is expensive. Although there is obviously no fixed price tag, some studies show that the cost of raising a child to the age of 18 is approximately more than $200,000, or nearly 13,000 for each child each year, or about $1,100 a month. And that is before you send them off to university.

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A Little Comic Relief

James Weber, a Calgary inventor, received notice from Canada Revenue Agency that he owed $110,000 in income tax.

Being inventive by nature, the man noticed that the bill showed a dollar sign with only one line through it — the symbol denoting the Colombian peso. So he thought he’d just pay those taxes in pesos, which amounted to the equivalent of about $75.

The tax agency didn’t buy the argument and seized the man’s motorbike, helmet, jacket and pants.

The taxpayer then filed 50 documents in Federal Court to back up his claim, including banking and other dictionaries, and the British North America Act.

While agreeing that Mr. Weber’s “type-face analysis of our currency shows a certain inventiveness” the court did not accept the argument. It noted that one of the dictionaries the taxpayer submitted as evidence showed the Canadian dollar sign also to be a one-bar dollar sign.(Weber v. Canada (Minister of National Revenue) Docket: ITA-6261-99)

Compounding the expenses are taxes. According to the Fraser Institute Canadian Consumer Tax Index, which has measured the tax bills of Canadian families since 1976, all taxes paid on the federal, provincial and municipal levels account for more of a family’s budget than shelter, food and clothing combined.

That makes it even more important to claim every tax break you can. Here’s a rundown of the tax relief Canada Revenue Agency (CRA) offers:

Childcare expenses: If you, your spouse, or common-law partner, pay for childcare so you can earn employment income, carry on a business, attend an eligible program at a designated educational institution for at least three consecutive weeks, or carry on research or similar work for which a grant has been received.

Some examples of eligible child care expenses include;

  • Day-care centres and day nursery schools;
  • Child care services provided by some individuals;
  • Day camps and day sports schools;
  • Educational institutions such as private schools (the portion of tuition costs relating to child care services), and
  • Boarding schools, and overnight sports schools and camps.

Generally, expenses have to be deducted from the lower-income earner, although there are exceptions.

Amount for Eligible Dependant:
 Most taxpayers are familiar with the spousal credit, but there is a similar credit for single, separated and divorced people who support a child, elderly parent or grandparent. Two or more supporting relatives cannot split this tax credit. Children must be under 18 at some time during the tax year, unless they are mentally or physically impaired.

Age Amount: This tax credit is available if you are aged 65 or older at the end of the taxation year. The credit is calculated using the lowest tax rate and each province calculates the credit in the same manner except Quebec. In that province you use family income in the calculation and combine the credits for you and your spouse or common-law partner.

Pension Income Amount:
 You can claim the lesser of $2,000 and the actual pension amount received. Don’t forget that this amount is available to both spouses if you are splitting pension income. You do not have to be older than 65 years of age to claim this amount.

Disability Amount: You can claim a tax credit if you are disabled and have a certificate signed by your doctor or medical practitioner stating that the disability is severe and prolonged and markedly restricts your daily living activities. Individuals younger than 18 years of age may claim a supplemental credit. 

Caregiver Credit: You may claim this credit if you provide in-home care for a related individual who is older than 17, is dependant because of mental or physical infirmity, or is your parent or grandparent AND over the age of 65. The infirm person doesn’t have to qualify for the disability tax credit. However, this credit isn’t available if you have taken the amount for eligible dependant for that person.

Adoption Expenses Credit: You may claim certain eligible expenses for each child you adopt in the year the adoption is finalized.

Public Transit Pass Credit: You may claim amounts spent on public transit passes for yourself, your spouse and any children under the age of 19 at year end.

Child Fitness and Arts Credit: You may claim a tax credit on each child on the fees you pay to register the child in a prescribed program of eligible activities. At the beginning of the year in which the expenses are paid the child must be under 16 years of age (or under 18 if eligible for the disability credit). Both credits will be eliminated for taxation years after 2016. 

Canada Employment Amount: If you are employed, you can the lesser of a credit indexed for inflation each year and the total employment income on your tax return.

Interest on Student Loans: You may claim interest paid on student loans in the year or the preceding five years for post secondary education. The loans must have been received under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or a similar provincial of territorial government law.

Tuition and Education: If you do not need all your tuition and education tax breaks for the year, you can transfer all or part of the amount to your spouse or common-law partner, parents and grandparents, including those of the your spouse or partner.

Medical: You might be able to claim expenses for a dependent. The list of deductibles is long, so make sure you understand what you can and cannot claim. If medical treatment is not available locally, you might be able to claim the cost of travelling to get the treatment somewhere else. You don’t have to file your claims on a calendar-year basis. You can sort out your receipts on a month-by-month basis and choose the period that results in the highest yield.

Consult with your accountant to help ensure you take all the credits available to you and the proper amounts.

Sell Your Farm Tax-Free

thmb_farm_silo_green_meadow_bzYou can realize a tax-free gain on the sale of your qualified farm property by applying the lifetime capital gains exemption to the proceeds, if you meet certain stringent criteria.

Combining Two Tax Breaks

Each individual with a stake in a farm has access to the lifetime capital gains exemption, so a common technique is to evaluate whether more than one exemption can be used in the same family.If so, you may be able to maximize the tax benefits of a property transfer within the family by combining rollover rules with the capital gains exemption. Ask your accountant for details.

The rules are complicated so we’ll first describe the basic qualifications. Qualified farm property includes:

  • A share of the capital stock of a family-farm corporation, or an interest in a family-farm partnership owned by you, your spouse or your common law partner;
  • Real property, such as land and buildings that was used in the course of carrying on a farming business; and
  • Eligible capital property used by a person, in the course of carrying on a farming business in Canada, such as milk and egg quotas.

Real or eligible capital property purchased after June 18, 1987, qualifies if the farm is run by you or:

  • Your spouse or common law partner;
  • Your parents, children, grandparents or grandchildren, as well as those of your spouse or common law partner;
  • The beneficiary of a personal trust that holds the property, or the spouse or common law partner, parent, or child of that beneficiary; or
  • A family farm corporation or partnership in which any of the above hold a share or own an interest. (However, a family farm corporation owning an interest in the partnership does not qualify.)

In addition, one of the above parties must have owned the property for the 24 months preceding the sale. In addition, the property must have been used 50 per cent or more in a farming business for at least 24 months, and meet one of the following requirements:

  • One of the people listed above was regularly and continuously active in the business, and that person’s gross income from farming exceeded all other income in the year.
  • The business was run by a family farm corporation or partnership in which you, your spouse or common law partner, child, or parent was actively engaged on a regular and ongoing basis.

Special rules apply if you bought or entered into an agreement to buy the real or eligible capital property before June 18, 1987. In that case, the property qualifies if any of the eligible people listed above, or a family farm partnership or corporation, or a personal trust that sold the property in the first place:

  • Used the property 50 per cent or more in a farming business in the year you sell it, or
  • Used the property principally in a farming business for at least five years.

If you own farm property, consult with your accountant to see if you can use the lifetime capital gains exemption to get the best tax results.

Tax Shelters: The Pros and Cons

Tax shelters are perfectly legal mechanisms for lowering your tax burden. And while there are a limited number of legitimate shelters left, those that are available pose no problem to the Canada Revenue Agency (CRA).

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Flow-Through Shares

Flow-through shares are tax shelters aimed at encouraging investment in Canadian resource industries and allow investors to benefit from deductions and tax credits that are ordinarily restricted to corporations.

These shares are purchased from an oil or mining company that is raising money for exploration and development projects. The shares allow exploration and development costs to be passed on to the investor by transferring the company’s Exploration Expenses and Earned Depletion Allowances.

When investors file their income tax returns, they claim those deductions or credits and cut their tax bills. Moreover, the cost base of the shares is also reduced. When the shares are sold, only 50 per cent of any capital gain is taxed.

The end result is an acceptable reduction in an investor’s tax bill.

However, the CRA is concerned about abusive tax schemes and aggressively audits tax returns with them. The agency has joined an international task force aimed at identifying and cracking down on promoters who develop and sell abusive tax shelters.

In addition, Canadian legislators are getting in on the action by passing laws that restrict limited partnership deductions to the amount of the investment. Formerly, limited partnerships were used to create investments in which the potential tax deductions exceeded the amount invested.

Legislation has also limited the donation tax credit. Donors can now take a credit only for the cost of the donation, not the fair market value listed on the donation receipt. Some scheme promoters were valuing donations far above the actual purchase price, generating huge tax credits.

As a result, there are very few tax-assisted investments still available to investors in Canada. Those that do remain have had their benefits restricted.

Basically, there are two main types of legal tax shelter investments:

Tax-deferral shelters that postpone taxes to a later time by generating a cash flow, but no taxable income. For example, a real estate investment can generate rental income that is mostly or entirely offset in the first few years by such noncash expenses as Capital Cost Allowance.

Tax-reduction shelters that flow through losses or certain types of expenses that can be applied against other income. Flow-through shares (see right-hand box above), limited partnerships, film tax credits, some donation strategies and Labour Sponsored Funds fall into this category.

Labour Sponsored Funds are a particularly attractive investment in some provinces, as they can offer both federal and provincial tax credits.

If you are considering a tax shelter, consult with your financial adviser first – promoters seldom point out all the tax implications of these investments. Among the points to consider are that tax shelters can:

Be risky. Tax credits, deductions and government incentives are offered for a reason – often to spark investment in unpopular products. A bad investment is not converted to a good investment simply by granting tax breaks.

Treat income as capital gains, so it’s up to the investor to make sure that this treatment of income is appropriate.

Create an Alternative Minimum Tax liability if the investor has significant amounts of other income but has used shelters to reduce ordinary taxes to a very low level.

Boost the investor’s Cumulative Net Investment Loss balance, which reduces the availability of the lifetime capital gains deduction.

Limit your interest deductions because interest on sheltered investments is deductible only if the tax shelter earns business or property income. Interest expense on an investment yielding only capital gains is not deductible.

Also, shelters can boost the cost of having tax returns prepared because the filing requirements become more complex. Labour Sponsored Funds are an exception, as the reporting requirements are relatively simple.

When evaluating a tax shelter, use the same common sense and guidelines as you do with any investment. A guarantee of cash flow is only as good as whoever is making the guarantee. If there aren’t enough resources to make good on the promise, the guarantee is worthless. View the shelter from a business risk and return perspective. For example, you may not want to make a tax-sheltered real estate investment in a declining market.

Final caution: Tax shelters must be registered with the CRA and have an identification number. If you buy one with no number, you cannot claim deductions. And once the CRA identifies a tax shelter for audit, every investor can expect a tax re-assessment and may face penalties.

This Year is Your Last Chance to Take Two Child-Related Tax Credits

kidsThe kids are home for the next couple of months.

They’ll be running through sprinklers and getting brain freeze from ice cream cones. Or they’ll be glued to their mobile phones or gaming stations and generally underfoot. What to do, then, to keep them otherwise occupied, healthy, fit and out of trouble? Send them off to fitness activities or arts programs of course!

But that can be expensive. And this year, you can’t claim as much of the costs on your 2016 tax return as you did in previous years. Next year, you’ll get nothing.

Budget 2016 slashed by half the federal refundable children’s fitness tax credit and eliminates it in 2017. The amount has been cut to $500 from $1,000. The nonrefundable children’s arts credit has been cut to $250 from $500. However, both credits are still eligible for the additional $500 tax credit for a child with a disability (that additional amount also disappears in 2017). Here are the details:

Children’s Fitness Amount.

This refundable tax credit lets you claim eligible fees paid for registration or membership for a child in a prescribed program of physical activity, up to a maximum of $1,000 for each child of your own, your spouse or your common-law partner. The child must be under 16 years of age — or younger than 18 if eligible for the disability amount — at the beginning of 2016.

If the child does qualify for the disability amount, an additional $500 can be claimed provided at least $100 is paid in eligible fees in the year.

You calculate the maximum credit of $75 ($150 for a child eligible for the disability tax credit) by multiplying the lowest personal income tax rate (15% in 2016) by the eligible amount for each child.

Supervised and Suitable

Qualifying fitness programs must be supervised and suitable for children and they must last a minimum of eight consecutive weeks or, in the case of children’s camps, five consecutive days, if more than 50% of the daily activities include a significant amount of physical activity. They also must require action that contributes to significant cardiorespiratory endurance and one or more of:

  • Muscular strength,
  • Muscular endurance,
  • Flexibility, and/or
  • Balance.

Included among the many programs eligible for the credit are hockey and soccer camps, golf lessons, horseback riding, sailing, and bowling. For children qualifying for the disability amount, the requirement for significant physical activity is met when there is movement that requires an observable use of energy in a recreational context.

The following aren’t eligible:

  • Programs where riding in, or on, a motorized vehicle is an essential part of the activity,
  • Unsupervised activities,
  • Regular school programs (fees charged for extracurricular programs that take place in school are eligible),
  • Sports-academics programs, and
  • Fees paid for accommodation, travel, food or beverages (room and board at a fitness camp doesn’t qualify).

Keep in mind that costs eligible for the fitness amount can’t be used for the children’s arts credit.

Children’s Arts Credit.

You might send your kids to programs aimed at improving their minds. For this you may receive a nonrefundable tax credit that allows you to claim eligible fees paid in the year up to a maximum of $500 for the cost of registration or membership of a child in a prescribed program of artistic, cultural, recreational or developmental activity. An additional $500 is available if the child is eligible for the disability tax credit and a minimum of $100 has been paid in eligible fees in the year.

The maximum tax credit is calculated in the same way as the fitness credit.

You may claim a credit of as much as $500 for each child for all of their arts-related activities. The general requirements are the same as for the fitness credit in terms of age, program length and increases for children with disabilities.

A Broad Range of Activities

In general, eligible activities:

  • Contribute to the development of creative skills or expertise in artistic or cultural activities,
  • Provide a substantial focus on wilderness and the natural environment,
  • Help children develop and use particular intellectual skills,
  • Include structured interaction among children where supervisors teach or help children develop interpersonal skills, or
  • Provide enrichment or tutoring in academic subjects.

This covers a broad range of activities ranging from painting, music classes, languages and drama, to Scouts, Girl Guides and academic tutoring.

Eligible expenses include fees paid for the cost of registration or membership, which cover the costs of administration, instruction, and the rental of facilities or equipment. When the equipment or uniforms have little resale value after the program, the amount of the cost related to those items is eligible.

Ineligible expenses include:

  • Amounts in addition to fees and registration that are used to purchase uniforms or equipment,
  • Fees related to travel, meals and accommodation,
  • Fees paid to a program run by a person younger than 18 or by the spouse or common-law partner of the individual claiming the credit, or
  • Amounts claimed as a deduction, or as the Children’s Fitness Tax Credit or any other tax credit.

Hang on to Receipts

When you send your kids off to a program that qualifies for a tax credit, be sure you keep your receipts. You don’t submit the receipts with your income tax return, but you should keep them in case Canada Revenue Agency (CRA) asks for verification.

Receipts should include the:

1. Name and address of the organization and the program.

2. Amount received, date received, and amount eligible for the tax credit.

3. Full name of the person paying.

4. Full name and year of birth of the child.

5. Signature of an authorized person (not required for electronically generated receipts).

Talk to Your Advisor

Determining what qualifies for tax deductions or credits may be complex. And keep in mind, the provinces and territories may offer similar tax credits. Consult with your adviser who can help ensure you take all the tax breaks available to you.

Business Owners: Hire Your Kids This Summer for a Win-Win Situation

teensSchool’s out for summer and if you run your own business, you may have decided to hire your kids.

The decision makes business sense: You’ll get tax and financial benefits. Consider that by hiring the children, you can:

  • Redistribute company income to lower taxes,
  • Form a type of partnership with your kids, working together toward paying education costs and avoiding heavy student debt loads, and
  • Teach them money-management lessons.

Redistributing Income

Income splitting by redistributing company income may be the greatest tax break in this situation. You (a high earner) transfer money to the kids (low earners). This strategy not only shifts income from your business tax returns, your company also gets business deductions for the salaries it pays them.

And there’s an added bonus: If your children use their earnings to pay for college or university, their tuition and other tax credits will help offset any taxable earnings. If they don’t use all their credits, they can:

  • Carry them forward indefinitely to use when they’re working full time, earning more money and confronting larger tax bills,
  • Transfer them to their spouses, or
  • Transfer them to you.

Income splitting works with any business organization. It doesn’t matter whether you operate as a sole proprietor, a corporation or a spousal partnership. All three business forms can pay wages to children. There are, however, a few catches including:

  • The kids actually must perform work,
  • Their jobs must be legitimate, and
  • Their salary must be reasonable for the type of work done and their ages.

Caution: Red Flags

“Reasonable” is a crucial concept here. The Income Tax Act contains a rule that states expenses can’t be deducted unless they’re reasonable. When an employee is a relative, red flags may go up at Canada Revenue Agency (CRA) and auditors are likely to examine whether or not the salaries meet the test of reasonableness. If the pay cheques are considered unreasonable, the salary deductions will be disallowed. This will increase the income of the business and create additional tax. And if it can be shown that the excessive salaries were knowingly paid, penalties may be applied.

Unfortunately, there’s no hard-and-fast test to help determine what’s reasonable. A rule of thumb: Pay your children (or your spouse or common-law partner) the same amount you’d pay other employees for the same jobs with the same level of experience. If you pay more, be prepared for the CRA to request justification. Don’t forget to withhold income tax, pension plan contributions and provincial payroll taxes, if they apply.

You may also want to pay a bonus. In that case, if it’s eligible, the money is a deductible business expense that reduces your company’s taxable income and is taxed at the recipient’s lower rate. If your child is a shareholder, year-end bonuses can be paid out in the holder’s next tax year, deferring taxes.

Bonuses still need to be reasonable, given the amount and type of work done, or the CRA may deny them as corporate expenses. The tax agency generally won’t question bonuses paid to shareholders who actively work in the business, but it may question payments to inactive shareholders.

The All-Important Paper Trail

Hiring your kids does require some additional expenses and paperwork. Make sure your company keeps good records of both the services performed and the time worked. While it may seem like a nuisance to track everything, it is critical that you leave a paper trail.

Each child must be listed on the payroll, with salary deductions. Keep attendance records to prove they were on the job when you say they were. Among the critical elements of the paper trail are:

  • A work contract specifying the job to be done, the salary, hours to work, conditions of employment and benefits.
  • Social Insurance Numbers for each child.
  • Tax credit returns for each child.
  • Canada/Quebec Pension Plan and Employment Insurance premiums paid for children over the age of 18. Those children may also contribute to pension plans.

Pay your kids by cheques deposited directly into their bank accounts to indicate that they have control over the money. If you pay “in kind,” with items other than money, the amounts are considered taxable “non-cash benefits.” The fair market value of the payment is considered a benefit to the child and must be reported to the CRA.

You would need to report the value as part of your company’s gross sales, so you include it in income. But you get to deduct the amount as a business expense. Effectively, you’re selling the in-kind item and paying your child in cash.

If you’re in doubt about the child’s status for EI or pension purposes, consult with your tax adviser.

Lessons in Money Management

Once your kids file a tax return, even if they don’t owe taxes, they can open a Registered Retirement Savings Plan and start building contribution room. If they start putting money into the plan, they’ll eventually be eligible for the Home Buyers’ Plan that allows them to withdraw as much as $25,000 from their RRSP to purchase a house when they’re ready.

Those under 18 can also contribute to a Registered Education Savings Plan, assuming you open one for them. Of course, you and others may also contribute to the plan. The kids will receive a federal grant equal to 20% of annual contributions made to a maximum of $500 ($1,000 if there is unused grant room from a previous year). The lifetime grant limit is $7,200.

If you’re taking care of all the RESP contributions, the children can put earnings aside for their education to help avoid graduating from college or university with massive amounts of student debt. And to add to their money-management education, it won’t hurt to teach them how to budget and let them start paying for their own haircuts, clothes, smartphones and other discretionary items.

Consult with your accountant if you’ve hired your child or want to. Income splitting can be complex and some techniques may be restricted by corporate attribution rules.