Category Personal Tax

5 Things To Ask Your Accountant When Facing a Separation or Divorce

divorce

Separation and divorce are becoming more and more common in our society. It is important to consult and include your accountant in your divorce or separation proceedings since there are important financial and tax considerations that must be considered. Failing to do so may result in either an immediate tax burden or one that will appear a few years later.

Here are important issues to discuss with your accountant:

1. Spousal and Child Support

Spousal and Child Support and two separate forms of support. The first is paid to support the spouse and the other for the children as the wording implies. It is important to itemize your Separation Agreement to distinguish both child and spousal support. This is because spousal support is considered a tax deduction to the payor (the person actually paying the other spouse), and taxable income to the payee (the spouse receiving the support). Child support, however, does not have any tax ramifications.

Also, the tax implications may differ for both parties if an amount is paid on a periodic basis or as one lump-sum.

Your accountant can advise you on how to structure your support.

2.  Canada Child Benefit (CCB)

CCB is calculated based on the adjusted family net income. Therefore, both parents’ income is considered by the Canada Revenue Agency (“CRA”) to calculate the CCB.

In the event of a divorce or a separation of more than 90 days, it will be important to advise CRA as soon as possible of the change in marital status which will change the adjusted family net income and therefore change the CCB payments.

In order to be able to balance your budget post-separation or divorce, you should consult with your accountant to determine what each parent will be receiving in CCB.

3. Capital Gains Tax

When a couple is negotiating a possible sale of their former family residence during their divorce proceedings, they may need to consider capital gains tax following the sale. Different factors must be considered, such as when the home was purchased, and how much equity the parties have accumulated in the property since they have lived there. Your accountant should be able to advise you regarding whether or not you need to be concerned with capital gains tax and what you can do to plan around it.

4. Cashing Out Retirement:

Many times, one spouse intends to cash out their retirement account in order to buy another spouse out of a different asset. There are commonly tax consequences to transactions like these, and the couple should speak to their accountant about how to avoid negative tax ramifications.

5. Trading Assets:

There are often many different types of assets involved in a separation or divorce mediation. People own real estate, investment property, stocks, bonds, retirement and investment accounts, pensions, antiques, and more. Because of how diversified some people’s investments are, it is important to consider that all assets are not created equal. Some retirement accounts, for example, are pre-tax and some are post-tax. Therefore, if someone gets a home with $100,000 in equity and the other gets a retirement account that will be taxed when they take the money out that is currently worth $100,000, these assets may not be worth the same. This depends on the specific tax consequences that flow to each individual asset. It is important to also take into account the hidden tax costs that may be associated with an asset that will be transferred in a divorce proceeding.

Contributed by Valérie Marcil and Carl-Philippe Finn-Côté from Marcil Lavallee. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.

This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North AmericaThese articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.

Valuations for Income Tax Purposes

income-tax

This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.

Valuations for Income Tax Purposes – What Does the Canada Revenue Agency (“CRA”) think?

Tax planning and corporate restructuring have become an integral part of the services provided by professional advisors to their clients. A key component of any plan is establishing the fair market value (“FMV”) as the valuation represents the first step towards assessing the tax consequences of any transaction.

Given the increased level of complexity in many tax plans, “cutting corners” by not obtaining independent valuation advise may lead to unintended consequences such as income tax penalties or failure to achieve the desired after tax results.

In practice, a Chartered Business Valuator (“CBV”) may be engaged to assist you in the following tax related situations:

  • Estate Freezes where the FMV of various classes of shares may need to be determined;
  • Corporate Reorganizations where business assets and related debt are being transferred from one entity to another;
  • Death of a shareholder where FMV of assets is required for the Terminal Tax Return;
  • Emigration, where under certain circumstances a taxpayer is deemed to dispose of their worldwide assets at FMV;
  • Defending a FMV previously filed in a tax return under audit by CRA.

So what is CRA’s position on valuation?

Information Circular 89-3 (“IC 89-3”), Policy Statement on Business Equity Valuations, outlines the general valuation principles and policies adopted by CRA in the valuation of securities and intangible property of closely held corporations for income tax purposes.

There are no formal requirements in IC 89-3 for a valuation by a CBV, however this should not be taken as a recommendation to apply a “do-it-yourself” approach to valuation, as IC 89-3 requires:

  • The standard of value to be used is FMV;
  • All relevant factors of the entity being valued must be considered;
  • The approach to valuation must be justified;
  • Factors used in determining the valuation multiple applied must be disclosed;
  • Reasonable Judgement and Objectivity must be used.

In addition to IC 89-3, IT Folio S4-F3-CI provides CRA’s policy on Price Adjustment Clauses which states:

  • FMV must be determined by a fair and reasonable method;
  • FMV does not have to be determined by a valuation expert, BUT it is not sufficient to rely upon a generally accepted valuation method;
  • It is necessary to perform a complete examination of all relevant facts and valuation methodology must be properly applied.

Finally, there are provisions in the Income Tax Act to apply gross negligence penalties to third parties (preparers) making, or participating in the making of, false statements or omissions in matters of valuation where there is a substantial difference between the FMV as filed and the FMV attributed by CRA. These penalties can be substantial depending on the circumstances.

In light of the above, best practice dictates engaging a CBV or at least having a CBV review a non-valuation practitioner’s valuation to avoid potential pitfalls including a challenge of your FMV by CRA.

A CBV will apply the proper application of generally accepted valuation methods and use their experience and professional judgement essential in any situation where there could be doubt about the value of a private corporation.

If in doubt, consider consulting a CBV for guidance.

Contributed by Michael Frost and Andrew Dey from Mowbrey Gil. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.

Tax Relief for the Cost of Driving

drive

It’s something of an article of faith among Canadians that, as temperatures rise in the spring, gas prices rise along with them. In mid-May, Statistics Canada released its monthly Consumer Price Index, which showed that gasoline prices were up by 14.2%. As of the third week of May, the per-litre cost of gas across the country ranged from 125.2 cents per litre in Manitoba to 148.5 cents per litre in British Columbia. On May 23, the average price across Canada was 135.2 cents per litre, an increase of more than 25 cents per litre from last year’s average on that date.

Unfortunately, for most taxpayers, there’s no relief provided by our tax system to help alleviate the cost of driving as the cost of driving to and from work and back home. That said, there are some (fairly narrow) circumstances in which employees can claim a deduction for the cost of work-related travel.

Those circumstances exist where an employee is required, as part of his or her terms of employment, to use a personal vehicle for work-related travel. For instance, an employee might be required to see clients at their premises for meetings or other work-related activities and be expected to use his or her own vehicle to get there. If the employer is prepared to certify on a Form T2200 that the employee was ordinarily required to work away from his employer’s place of business or in different places, that he or she is required to pay his or her own motor vehicle expenses and that no tax-free allowance was provided, the employee can deduct actual expenses incurred for such work-related travel. Those deductible expenses include:

  • fuel (gasoline, propane, oil);
  • maintenance and repairs;
  • insurance;
  • license and registration fees;
  • interest paid on a loan to purchase the vehicle;
  • eligible leasing costs for the vehicle; and
  • depreciation, in the form of capital cost allowance.

In almost all instances, a taxpayer will use the same vehicle for both personal and work-related driving. Where that’s the case, only the portion of expenses incurred for work-related driving can be deducted and the employee must keep a record of both the total kilometres driven and the kilometres driven for work-related purposes. As well, receipts must be kept to document all expenses incurred and claimed.

While no limits (other than the general limit of reasonableness) are placed on the amount of costs that can be deducted in the first four categories listed above, limits and restrictions do exist with respect to allowable deductions for interest, eligible leasing costs and depreciation claims. The rules governing those claims and the tax treatment of employee automobile allowances and available deductions for employment-related automobile use generally are outlined on the Canada Revenue Agency website.

No amount of tax relief is going to make driving, especially for a lengthy daily commute, an inexpensive proposition. But seeking out and claiming every possible deduction and credit available under our tax rules can at least help to minimize the pain.

Pension Income Splitting — Getting Something for Nothing

pension

Any taxpayer hearing of a tax planning opportunity that offered the possibility of saving hundreds or even thousands of dollars in tax while at the same time increasing his or her eligibility for government benefits, while requiring no advance planning, no expenditure of funds or substantial investment of time could be forgiven for thinking that what was being proposed was an illegal tax scam. In fact, that description applies to pension income splitting which, far from being a tax scam, is a government-sanctioned strategy to allow married taxpayers over the age of 65 (or, in some cases, age 60) to minimize their combined tax bill by dividing their private pension income in a way which creates the best possible tax result.

Many Canadians, even those who can benefit from pension income splitting, have never heard of it. In large part, that’s because the strategy gets very little coverage in the media. While Canadians are inundated during the first two months of the year with advertisements extolling the virtues of making contributions to registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs), pension income splitting is never mentioned. The reason for that is that it is one of the very few tax planning strategies in which only the taxpayer gains a financial benefit.

The information provided with the annual tax return form issued by the Canada Revenue Agency (CRA) also doesn’t highlight the benefits of pension income splitting, and the form needed to carry out a pension income splitting strategy isn’t included in the General Income Tax Return package — it must be ordered from the CRA or downloaded from the Agency’s website. The Income Tax and Benefit Guide issued by the CRA for 2017 returns does flag the pension income splitting option, in the same manner as all other tax tips on deductions and credits which may be claimed.  However, the material on income splitting included in the Guide addresses only the mechanics of filing — which number goes where — with no significant explanation of the tax-saving benefits which can be obtained. Consequently, unless eligible taxpayers are getting good tax planning or tax return preparation advice, it’s likely that they could overlook a significant opportunity to reduce their overall tax burden.

Dividing income between spouses makes for a lower overall tax bill because of the way our tax system is structured. Canada’s tax system is what is known as a “progressive” tax system, in which the rate of tax levied as income rises. In very general terms, for 2017, the first $46,000 of taxable income attracts a combined federal-provincial rate of around 25%. The next $46,000 of such income, however, is taxed at a rate of just under 35%. When taxable income exceeds $142,000, the tax rate imposed can approach 50%. While those percentages and income thresholds will vary by province, provincial and territorial tax rates will, in nearly every province or territory, increase as taxable income goes up. (The one exception to that rule is the province of Alberta, which imposes a flat 10% tax rate on all individual taxable income. However, Alberta taxpayers, like those in other provinces, will still pay increasing federal rates as income rises.) Dividing income allows a greater proportion of that income to be taxed at lower rates. Of course, that means that the total tax payable (and therefore government tax revenues) will be reduced. Consequently, our tax laws include a set of rules known as the “attribution rules” which seek to prevent strategies to divide income in this way. Pension income splitting is a government-sanctioned exception to those attribution rules.

The general rule with respect to pension income splitting is that taxpayers who receive private pension income during the year are entitled to allocate up to half that income with a spouse for tax purposes. In this context, private pension income means a pension received from a former employer and, where the income recipient is over the age of 65, payments from an annuity, an RRSP, or a registered retirement income fund (RRIF). Government source pensions, like payments from the Canada Pension Plan, Quebec Pension Plan, or Old Age Security payments do not qualify for pension income splitting, regardless of the age of the recipient or his or her spouse.

The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension plan administrator.

Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032(E)17, Joint Election to Split Pension Income for 2017, with their annual tax return. If you are filing electronically, retain a copy of the completed form should the CRA request a copy.

On the T1032(E), the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for the tax year. Since the splitting of pension income affects both the income and the tax liability of both spouses, the election must be made and the form filed by both spouses — an election filed by only one spouse or the other won’t suffice. In addition to filing the T1032(E), the spouse who receives the pension income must deduct from income the pension income amount allocated to his or her spouse. That deduction is taken on line 210 of his or her return for the year. And, conversely, the spouse to whom the pension income is being allocated is required to add that amount to his or her income on the return, this time on line 116. Essentially, to benefit from pension income splitting, all that is needed is to for each spouse to file a single form with the CRA and to make a single entry on his or her tax return for the year.

Generally, when taxpayers sit down to complete their income tax returns this spring, it will be too late to take any action which will reduce taxes payable for the 2017 tax year — in most cases, such actions needed to be taken before the end of the 2017 calendar year (or, for RRSP contributions, by March 1, 2018). One of the best attributes of income splitting as a tax planning strategy is that it doesn’t have be addressed until it’s time to file the return for 2017. By the end of February or early March, taxpayers will have received the information slips which summarize their income for the year from various sources. At that time, couples who might benefit from this strategy can review those information slips and calculate the extent to which they can make a dent in their overall tax bill for the year through a little judicious income splitting.

Looking ahead to 2018

2018

For most Canadians, income tax, along with other statutory deductions like Canada Pension Plan contributions and Employment Insurance premiums, are paid periodically throughout the year by means of deductions remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by their employer.

Each taxpayer’s situation is unique and so the employer must have some guidance as to how much to deduct and remit on behalf of each employee. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by each employee, sometimes at the start of each year, but minimally at the time employment commences. Each employee must, complete two TD1 forms – one for federal tax purposes and the other for provincial tax. Federal and provincial TD1 forms for 2018 list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount.

While the TD1 completed by the employee will have accurately reflected the credits claimable, everyone’s life circumstances change. Where a baby is born, or a child starts post-secondary education, a taxpayer turns 65 years of age, or an elderly parent comes to live with their children, the affected taxpayer will be become eligible to claim tax credits not previously available. And, since the employer can only calculate source deductions based on information provided to it by the employee, those new credit claims won’t be reflected in the amounts deducted at source from the employee’s paycheque.

It is a good idea for all employees to review the TD1 form prior to the start of each taxation year and to make any changes needed to ensure that a claim is made for all credit amounts currently available to him or her. Doing so will ensure that the correct amount of tax is deducted at source throughout the year.

Where the taxpayer has available deductions, which cannot be recorded on the TD1, like RRSP contributions, deductible support payments or child care expenses, it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect the employee’s tax liability for 2018. The way to do so is to file Form T1213, Request to Reduce Tax Deductions at Source Once that form is filed with the CRA, the Agency will, after verifying that the claims made are accurate, provide the employer with a Letter of Authority authorizing that employer to reduce the amount of tax being withheld at source.

Of course, as with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes time. Consequently, the sooner a T1213 for 2018 is filed with the CRA, the sooner source deductions can be adjusted, effective for all paycheques subsequently issued in that year. Providing an employer with an updated TD1 for 2018 at the same time will ensure that source deductions made during 2018 will accurately reflect all of the employee’s current circumstances, and consequently his or her actual tax liability for the year.