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TAX PLANNING STRATEGIES
Transcript of TAX PLANNING STRATEGIES
Child care expenses
Jiayun Ye PRESENTERS:
An RRSP can be used to reduce your annual taxes but can also DEFER your tax to future years. RRSP DEFER
is where you set up to abuse a loophole so you can claim large tax deductions or take advantage of some benefit that was never intended to be used in such a way.
is where you deliberately try to hide income from the Tax Office, by various methods including secret bank accounts, not recording cash transactions, “cooking the books” etc. REMEMBER:
Legitimate methods of increasing your tax efficiency are called “tax planning” PLANNING STRATEGIES HOPE YOU ENJOYED IT... $10,823 - $17,282 Tax planning has to include strategies to deduct, divide and defer. The concept of effective tax planning can have a different meaning and emphasis depending on your personal circumstances. THINK 3D:
Deduct, Divide & Defer $43,708 - $85,414 $85,415 - $132,407 2002 March (cc) image by jantik on Flickr 0 - $10,822 $17,283 - $43,707 2002 March (cc) image by jantik on Flickr 2002 March (cc) image by jantik on Flickr OVER $132,408 0 % 15% 25% 32% 39% 36% YOUR TAX PLANNING GUIDE TAX EVASION TAX AVOIDANCE GOAL TAX STRATEGY PLANNING FINANCIAL FREEDOM got questions? Thanks for listening! WHY USE A TRUST AS A TAX STRATEGY? TWO TYPES
OF TRUSTS: PROTECTING
CHILDREN SUCCESSION PLANNING ESTATE
PLANNING Inter Vivos Trust Testamentary Trust TRUST? (cc) photo by theaucitron on Flickr (cc) photo by theaucitron on Flickr PLAN EARLY TRUST HELP TREE This could be YOU if you use these strategies... MOVING EXPENSES Taxpayers are permitted to deduct the moving expenses because of relocation. There are two categories of taxpayers:
•Taxpayers who move to new business or employment location in Canada
•Students who move to attend a post-secondary institution on a full-time basis
Moving Expenses Include:
• Reasonable traveling cost to move family to new residence
• Transporting and storing household effects
• Meals and accommodation for a period not exceeding 15 days
• Lease cancellation cost in respect of old residence
• Selling cost of old residence
• For old residence which has not yet been sold $5,000 maximum for mortgage
interest, property taxes, insurance and heat and power.
• Cost of legal documents for new residence replacing driver’s license and
There are several specific limitations. The most important:
The taxpayer must move 40 kilometers closer to his new work location or postsecondary institution;
Moving expenses, which exceed the income from the new work location in the
year of move, can be deducted, but only in the following year LET'S LOOK AT A SITUATION: In October of last year, Kenzo moved from his rented Vancouver townhouse to his new home in Halifax to commerce a sale position with a life insurance company. After training and client development time, his earnings from this new position were $3,000 for the year, but they were expected to increase as he developed his client base. As a result of his move, Kenzo incurred the following expenses:
Lease cancellation payment on his Vancouver townhouse $1,000
Commissions and legal fees to acquire a new home $6,000
Moving van $3,800
Flight and five day’s accommodation in Halifax $2,400
Shipping his car $850
What is the income tax result of the move for Kenzo? SOLUTION: Kenzo can claim all of the moving costs, except for the $6,000 pertaining to the acquisition of his Halifax home. Those costs do not qualify, because he did not own his Vancouver townhouse.
While Kenzo can only claim $3,000 in moving expenses for last year, the excess can be carried forward to the next year. CHILDCARE EXPENSES Child care expenses are permitted to be deducted in the same year that the taxpayer incurs these expenses.
The deduction for the lower-income spouse is he least of:
a)The amount of expenses paid
b)$4,000 for a child 7 years or older and $7,000 for a child under 7 and $10,000 for a child with a mental or physical impairment
c)2/3 of Earned Income
If the lower income spouse is impaired because of:
i.Full-time post-secondary education
ii.Infirm and incapable for at least two weeks
iii.Imprisoned for at least 2 weeks
iv.Living apart from higher income spouse for at least 90 days in year
due to a marital relationship breakdown.
The deduction for the higher-income spouse is the lesser of:
(1)the least of a), b) and c) described above; and
(2)the sum of:
$250/ per week for each child with severe prolonged mental or physical impairment
$175/per week for child under 7
$100/per week for child over 7
Times the number of weeks when the lower-income spouse was: i, ii, iii, and iv. DIVIDE Often called income splitting, dividing taxes implies the ability to take an income and spread it among a number of different taxpayers.
For example, if you have one person paying tax on$70,000 vs. having 2 people ( say husband and wife) paying tax on $35,000 each, you would rather have the second scenario.
Unfortunately, you cannot arbitrarily decide who is going to claim what amounts for income. However, there are strategies to divide income.
Spousal RRSPs help split income in retirement
Investing the child tax benefit in your children’s name
Pay family wages SPOUSAL RRSPs Let's look at Mary and Bob. Mary has an income of $65,000 and Bob $35,000.
If Mary continues to contribute the maximum to her RRSP and contributes the maximum to his RRSP, Bob will have significantly more RRSPs down the road at retirement. For Tax Purposes, Mary will get a deduction at year end and will pay less taxes, Bob will have additional RRSP contributions for retirement.
After 20 years, Mary will have almost twice as much in her RRSP ($815,000) as Bob will have in his RRSP ($439,000). IMPORTANT ISSUES:
The maximum contribution allowed to a spousal RRSP is based on the maximum contribution limit of the contributor. In the example, the most Mary could put into Bob’s spousal RRSP is her limit $11,700
The contributor will be taxed on the withdrawal if there has been a spousal contribution made in the year of the withdrawal or the two preceding years. In Example, if Bob takes money out of the spousal RRSP, this year (2001) Mary would get taxed if ANY contributions were made to ANY spousal plan in 2001, 2000 or 1999 Investing the child tax benefit in your children’s name
– if you invest assets in the name of an adult child than any income will be taxed in your child’s hands- not yours. In case of minor children, capital gains (not interest or dividends) can be taxed in the hands of your child when investing in his or her name.
Pay family wages
– if you own a small business you can family members reasonable wages for work performed. For example, a father pays $10,000 his son for help in his business during the summer. Since son has no other income, he won’t pay any tax on this amount.
Transfer capital losses to your spouse
– this idea doesn’t transfer income, it does transfer losses, which can also save tax. If you have unrealized capital losses and no capital gains to apply the losses against, it’s possible to transfer those capital losses to your spouse if he or she has gains that can be sheltered with the losses. Defer – a deferral strategy is to try to push having to pay tax now into future years. PRINCIPAL RESIDENCE
EXEMPTION any personal use property are subject to tax on capital gains.
Capital gains will eventually be taxed whether triggered by an actual sale of the property or a deemed disposition (when a Canadian resident dies, they are deemed to have disposed of everything they own at fair market value). It is only through specific exemptions, such as the principal residence exemption, that taxes can be eliminated on such property.
The principal residence exemption ("PRE") can shelter the gain on a principal residence from capital gains tax.
Its provides a generous tax break. RRSP As a business owner, you contribute $10,000 to an RRSP in 2011, and withdraw it in 2012
The tax consequence is earned income in 2011 is lowered by contribution.
A valuable tool for self-employed individuals or contractors
Assuming in 2011 income earned is $150,000, but only $50,000 in 2012
Can lower taxes, and average income stream
Using an RRSP contribution to defer some 2011 tax until 2012 A Tax deferral tool
Used to defer tax from one year to the next
Withdraw money from RRSP when retire
Tax rate in retirement is usually lower than the tax rate during working years Sole Proprietorship Individual: RRSP vs. TFSA TAX FREE SAVINGS ACCOUNT
(TFSA) A flexible, registered general-purpose saving vehicle
Withdrawals from a TFSA are tax-free LET'S COMPARE... Withdrawals, interest, dividends, and return of capital are taxed
All capital gains earned in an RRSP and RRIF are taxed. Capital losses cannot be claimed with an RRSP
Contributions to an RRSP are tax-deductible
The tax of 1% per month on excess RRSP contributions RRSP Withdrawals, interest, dividends, and return of capital are NOT taxed
Equities earning gains get a benefit of being only 50% exposed to taxation. Any gains can be offset by capital losses
Contributions to a TFSA are NOT tax-deductible
The tax of 1% on an excess from the first $1 of excess contributions. TFSA Calculation:
1. determining the gain otherwise realized on the sale (or deemed disposition)
2. multiplying that gain by the number of years plus one that the property is designated as the principal residence over the total number of years that the property was held.
In essence, the greater the number of years designated as a principal residence, the greater the tax free portion of the gain. If a taxpayer owns multiple homes, three rules should be followed to produce the maximum principal residence exemption:
Designate the residence with the highest capital gain per year of ownership
The maximum number of years a property should be designated equals # years owned -1, because the numerator cannot exceed the denominator
Even if a residence has a low capital gain per year of ownership, consider designating it for one year because the value of the exemption for the first year designated is double the capital gain per year of ownership due to the "+1" rule. Inter Vivos VS. Testamentary Created During the LIFETIME of the settlor Created Upon your death under the terms of your will CHARITY
DONATIONS TRUSTS ARE AN EFFECTIVE TAX TOOL FOR LONG TERM WEALTH MANAGEMENT PLANNING ASSETS TO CHILDREN Income Splitting with Adult Children Keep Attribution in mind FAMILY TRUSTS
Assuming contribute $10,000 to an RRSP, there is no tax in the first year.
The first year interest earned : $1000
The second year interest earned : $1100
After the second year, total money in an RRSP is $12100
If you earn a $100 bonus and put it into the RRSP, you pay no tax up front on salary income.
Tax is deferred and you earn TAX-FREE income on what's inside MOVING EXPENSES STRATEGIES: (Tax prepared at year end) (Tax prepared 90 days after date of death) Revocable Trust:
Can alter the conditions or withdraw
No changes can be made SPLIT AMONGST FAMILY
Both parents are high income earners
High income parent transfers income generating asset to a Family Trust. What happens? The income of the trust is passed through the trust and taxed in the hands of the low income beneficiary.
(TAX FREE due to BASIC PERSONAL TAX EXEMPTION) Situation: Why is this GREAT?
Since 50% of capital gains are taxable, up to $18,0000 of capital gains can be earned TAX-FREE every year by a child with no income Alternatively,
$37500 of ineligible dividends ($48 275 of eligible dividends) REMEMBER... For tax purposes, A TRANSFER to a FAMILY TRUST is treated as a sale of the assets at their FMV at the time of the transfer.
As a result, the transferring individual bears ACCUMULATED GAINS and is TAXED in the year the transfer was made IMPORTANT FOR PERSONAL AND BUSINESS OWNERS Control ownership of family business
Able to structure the ownership strategically Owners own the voting shares
Trust controls the non-voting shares and growth shares
TRUST DETERMINES BEST TIME TO DELIVER THE SHARES TO THE CHILDREN AND ALLOCATION Succession Planning: Charitable Remainder Trust Allows you to designate Cash, Securities, or Real Estate for a charity
Continue to recieve all income from assets until death where it is transferred to the charity Why this strategy? At time of setup, actuary estimates the value of the charity's residual interest and the donor recieves a tax reciept for that amount DONATE TO A CHARITY
& GET THE TAX BENEFITS NOW! EXAMPLE: Transfer $500, 000 of cash
Charity determines discount rate of 5% $500,000 / (1 + 0.05)9.6 = $312,500 (donation receipt)*
* approximate based on prevailing rates and actuarial tables This strategy can provide CURRENT tax savings of up to $145,000. (CONTROL AND MANAGES ASSET) EXAMPLE OF CHILDCARE EXPENSES: Evan and Mary are married. The cost of child care expenses for three eligible children ( ages 4, 5, and 9) was $175 per week for 52 weeks.
Evan’s earned income -----------------------$45,000
Mary’s earned income -------------------------12000
Mary was determined to be physically infirm by a qualified medical practitioner and she was confined to bed for a period of 10 weeks.
Compute the child care expense deduction. EXAMPLE:
Interest income – no tax on all interest earned once invested
Dividend income – holding by preferred equities, dividend paying common stocks, preferred investment funds
Capital gains – only half of capital gains, net of any losses are taxable . If they are “unrealized”, no tax is paid Investment income earned is
TAX-FREE Transfer Business to a family member Selling your business for $1.00 to a family member ESTATE FREEZE TRANSFERRING A BUSINESS CRA FMV Assessment Wrong way = Re-adjust sale price due to Future Growth potential, Tangible Assets, Revenues, Reputation in the market Transfer family business from one generation to the next and defer the taxes
FUTURE GROWTH is accrue and TAXED at beneficiaries hands RIGHT WAY! Steps for an Estate Freeze 1) Through a Family Trust
2) Cancel old shares in your company for PREFERRED SHARES fixed in value @ FMV (don't increase in value)
3) Company issues COMMON SHARES to Trust which grow in value and this is attributed to beneficiaries What happens? WHAT WHY IMPORTANT for a business that has lost value BUT is transferred to family because it has a positive future growth potential