By Fin MacDonald, Fin Tax Service

Fin MacDonald has over 20 years’ experience providing retirement and Income tax planning advise. Readers are however cautioned that responsibility falls on the taxpayer to ensure that all information is adequate and correct.

Tax Scams, Again

Before I look at Tax Planning this month, here’s another reminder on the scams out there. The Canada Revenue Agency (CRA) will NEVER do any of the following: 1/ Send you an email saying that there is an Interac E-Transfer of a refund for you. These emails will ask you to click on a link. NEVER CLICK! 2/ Phone you and tell you that you must give them your personal information such as Date of Birth or Social Insurance Number. The scammers will spoof your call display to make it seem like they are calling from the CRA. NEVER GIVE any caller your personal information! 3/ Phone you and tell you to go and buy pre-paid VISA cards and give the caller the numbers on the cards and their PINs. The CRA does not do this. 4/ A caller, claiming to be from the CRA, will threaten you and say if you don’t send money immediately that the police will come and arrest you. Again, the CRA does not do this. Scammers are trying to fool you into paying them money, or opening your computer to them, or giving your personal identification so that they can steal your identity. If you have any doubt about a caller, call the CRA or your Tax Advisor; don’t let the scammers fool you. Some of the scammers are so lazy/incompetent or stupid that they spoof foreign phone numbers. An example, I had four phone calls from a number that showed up on my call display as from Florida. The messages they left said they were calling from the CRA!

Tax Planning

First question is: what stage in life are you in.

Young families

For a young family, three areas of planning are: 1/Buying a home, 2/Education for you or your spouse, and 3/Education for your children. The federal government provides a number of programs that might help with these three goals. Registered Retirement Savings Plans (RRSP) are a multi-purpose tool that provides for more than tax refunds for putting money into an RRSP. RRSPs allow withdrawls for Home Buyers Plan (HBP) and Lifelong Learning Plan (LLP).

HBPs allow each person who is contributing to the purchase of a dwelling unit to withdraw up to $25,000. For example: you and your partner and your sister are buying a house together; each of you may withdraw up to $25,000 from your individual RRSPs. No one person can withdraw more than the $25,000. You all must qualify as ‘first time home buyers’; this means you have not owned a house in the previous four years. HBPs are repaid starting the second year after you made the withdrawal and are spread over 15 years. In any of those years if you chose not to make the repayment, the amount of the required repayment is added to your income. No repayments are allowed after age 71 however; those repayment amounts are added to your income.

LLPs allow you to withdraw up to $20,000 to further your education. If you use the money to go to college or university, the repayments start the fifth year after your first withdrawal. You have ten years to make the repayments, and like the RRSP repayments, if you do not make a yearly repayment, it is added to your income.

To help prepare for your children’s post-secondary education there is the Registered Education Savings Plan (RESP). Various companies sell these plans. There are also income-tested grants such as the Canada Education Savings Grants and Canada Learning Bonds. Provincially there is the BC Training and Education Savings Grant, which is not income tested. These plans do not provide a tax deduction going in, but only the grant portion is taxable coming out.

Children have left home

At this stage in life people often begin to focus on their retirement planning. If the family income is large enough to enable RRSP contributions in the early years, that is great. The longer the time for RRSPs to grow tax-free within the plan equals the larger the amount available at retirement age. If RRSP contributions can’t start until later in life, it is best to maximize them and use all your contribution room. Down-sizing may also become an option; see next month’s Principal Residence Exemption (PRE) discussion.

RRSP vs Tax Free Savings Account (TFSA)

RRSPs provide a tax deduction going in, but are taxable coming out. The year a person turns 71 they must do one of three things with the money in their RRSP: 1/ Take as cash. This might make sense if the amount is quite small. 2/ Place in an annuity. If you do not have income that will provide the Pension Income Amount non-refundable tax credit this may make sense. It would enable you to lock-in a certain level of income, but with interest rates quite low this may not be the right choice. 3/ Transfer the proceeds to a Retirement Income Fund (RIF). The year after a RIF is established a minimum amount must be withdrawn; this amount goes up each year: At 72 the amount is 5.4%, increasing to 20%  at 90 years of age.

TFSAs do not provide a tax deduction going in but are neither taxable, nor considered income, coming out. Maximizing the amount you contribute to your TFSA is important. It is very important in two cases: 1/ You have an employer pension plan and therefore to do not have very much RRSP contribution room, or have maxed-out your RRSP contributions. 2/ You will have access to income-tested income (such as Guaranteed Income Supplement) or income-tested programs such as Shelter Aid for Elderly Residents (SAFER) or the Medical Services Plan (MSP). In retirement being able to access income or principal from your TFSA without losing access to SAFER or MSP premium subsidy can be most beneficial.

Self-Employed Tax Planning

As the year draws to a close here are a number of tax planning ideas for self-employed people. How is your accounts receivable (AR)? Is it time to write off some of your AR as bad debts? Is it time to make that investment in new equipment or vehicle for your business? With Capital Cost Allowance (CCA), also known as ‘depreciation’ only allowing a 50% of normal deduction in the first year, does it make sense to go ahead before 2016 ends? Is extended health for you or an employee something you want to set up? Donations to your favourite cause can also be on your late year agenda. Booking an appointment to talk with your tax advisor can also be a wise year-end move.

Next month I’m going to look at the changes announced October 3rd dealing with the Principal Residence Exemption (PRE). As I write this (October 16th) much is still unknown. Questions arising include: Did Federal Finance Minister Bill Morneau go too far by requiring ALL principal residence dispositions to be reported?

As always, dear readers, using my lens of Helping You to Keep More of YOUR Money, I hope you have found my article helpful and informative.