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Life in the Tax Lane– February 2018

 

Income Tax planning always start early. It's time to plan it for 2018

This New Year’s long weekend is the perfect time to review your tax minimization strategies for the year ahead. Here are five things to consider as we head into 2018.

Tax-smart portfolio rebalancing

If you’ve got global equities in your non-registered portfolio, chances are you fared quite well in 2017 with some financial markets hitting all-time record levels. What a great opportunity to rebalance your non-registered portfolio and defer the capital gains tax hit by up to sixteen months.

For example, let’s say your target portfolio allocation is 70 per cent equities and 30 per cent bonds or fixed income. This weekend, you go online and see that your portfolio, due to the success of your U.S. equity position, at the close of business on Friday Dec. 29 is actually skewed 80 per cent equities and 20 per cent fixed income. To rebalance back to your target 70/30 mix, you may wish to sell some equities and replace them with fixed income. The good news is that if you put in your sell order on Tuesday Jan. 2, 2018, once financial markets re-open for the new year, the taxes owing on that capital gain won’t be due until April 30, 2019.

Tax-gain donating

In 2018, be strategic in your charitable giving by making a budget for your annual donations. Ideally, if you’re holding significant appreciated securities in your non-registered portfolio (as discussed above), consider donating them “in-kind” to charity. Not only will you get a receipt equal to the fair market value of the securities donated, but you won’t pay any capital gains tax on the accrued appreciation, saving you up to 27 per cent tax, depending on your province of residence.

To make things even easier, if you give to multiple charities but would rather not deal with the process involved in transferring securities in-kind to each individual charity, consider establishing a “donor advised fund” at the beginning of 2018. This allows you to effectively create a mini-foundation for a fraction of the cost of setting up a private foundation. You get the tax receipt up-front at the time of donation and can then allocate the funds to any of Canada’s over 86,400 registered charities. It’s an easy way to make one, in-kind gift, save the capital gains tax on the appreciation and then reallocate to the causes you care about.

Maximize all registered plans

The numbers are in for 2018: you can contribute 18 per cent of your 2017 earned income to your RRSP (less any pension adjustment) up to a maximum of $26,230. This maximum is reached if your 2017 income was $145,722 or higher.

The 2018 TFSA limit is stuck, once again, at $5,500. (Yup — inflation wasn’t high enough to bring us up to the next $500 rounded increment.) If you’ve never opened up a TFSA, beginning Jan. 1, you can immediately contribute a cumulative $57,500 to your TFSA provided you were at least 18 in 2009 and resident in Canada throughout those years.

If you’ve got kids, and there’s any remote chance they will head off to pursue some post-secondary education, consider contributing at least $2,500/annually for each kid to their Registered Education Savings Plan (RESP) to get the maximum Canada Education Savings Grant of 20 per cent or $500. If you’ve missed a prior year, consider doubling up to get $1,000 of CESGs all at once.

And if someone in your family has a severe disability and qualifies for the disability tax credit, don’t forget the Registered Disability Savings Plan (RDSP), where just $1,500 of annual contributions can yield $3,500 of annual Canada Disability Savings Grants and $1,000 of annual Canada Disability Savings Bonds, depending on the age of the individual and their family income.

Make your interest tax deductible

Interest you pay on money borrowed to earn business or investment income is generally tax deductible whereas interest on consumer debt and your home mortgage is not deductible. But there may be a way to do a debt-swap whereby you convert non-deductible interest into tax deductible interest in a move I like to refer to as the “Singleton Shuffle.”

The shuffle was named after Vancouver lawyer John Singleton’s 2001 Supreme Court victory, which upheld the notion that you can rearrange your financial affairs in a tax-efficient manner so as to make your interest on investment loans tax-deductible.

It’s often quite simple to do, provided you don’t have to pay a penalty to extinguish your mortgage early. For example, let’s say you have some non-registered investments. You may wish to consider selling them to pay off your mortgage (non-deductible debt) and then borrowing back the funds, perhaps by getting a secured line of credit on your now fully-paid off home, for investment purposes (tax-deductible debt). This allows you to effectively write off what otherwise would have been non-deductible personal mortgage interest.

Students may also be entitled to a tax break on interest payments. Under the tax rules, student loan interest may qualify for a 15 per cent non-refundable federal tax credit provided the loan was taken out under the Canada Student Loans Act, the Canada Student Financial Assistance Act, the Apprentice Loans Act, or a similar provincial/territorial act.

A quick word of caution, however, for students looking to refinance those government-authorized student loans — the interest on a renegotiated loan from a financial institution does not qualify for the tax credit. So, before refinancing, be sure that the lower interest rate you’re hopefully getting on your new loan more than compensates you for the loss of that tax credit.

Get organized, now, for tax season

Finally, while tax return preparation season may still be a few months away, why not take advantage of some downtime this long weekend to organize your 2017 tax receipts into categories: medical receipts, donations, business expenses, etc. This also includes going through your e-mail in-box and either printing or setting up a special electronic folder for any donation e-receipts you received in 2017 so you’re not scrambling come tax time this spring.

And, if you’re a real tax keener like me, why not start your new 2018 tax folder today, so you can kick off the tax year on the right foot.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice in Toronto.

Getting the Most From Your Accountant Means More Than Just Doing Your Taxes

Great accountants don't just take care of tax-prep and compliance issues. Numbers really do tell a story and today's entrepreneurs are turning to qualified small business accountants to help drive success and business.

With the right accountant as a thought partner, you can get insights that deliver benefits to your business by analyzing company data and providing strategic advice in support of a wide range of business decisions. How? The major technology engines of the era -- cloud computing, social, mobile and big data -- are fueling a wave of consulting-based and advisory accounting services.

Sound too fancy for your small business? It isn’t. As the world becomes more connected, more data becomes available and accountants can access more through the cloud -- the power of what that can do for you as a business owner will only continue to grow. 

Tech-savvy Gen Y and Gen X business owners increasingly expect to interact with their accounting professionals the same way they run their businesses -- from the smartphone in their pockets. And they expect fast responses to their requests. The good news is that accountants no longer have to spend most of their time doing manual data entry. As a result, they can instead focus on business strategy, value-add consulting and services.

Following are just some of the ways accountants can help you understand what drives profit for your business, and help put you at the wheel to make essential changes.

Breaking it down.
Ever wonder why that high-dollar customer isn’t delivering more to your bottom line? Your accountant can help you see that it’s because you and your staff are spending a disproportionate amount of time on them -- wasting precious resources.

That same kind of analysis can be applied to products and services, too.

Related: 10 Questions to Ask When Working With an Accountant

Say you're a contractor who does a great job of winning large contracts -- but you consistently underbid them, shriveling your profit margin. Your accountant can come to the rescue, analyzing how much you’re underbidding and allowing you to comfortably increase future bids to hit the right level of profitability.

Working with an accountant can also help you figure out which of your products and services you want to really lean into and push to grow. 

One small business I recently worked with discovered they were consistently underbidding and losing money on one type of job and making a lot of money on a slightly different type of job. 

Overall, the company was doing fine. But once their accountant pulled apart the pieces, one side of the business was flying and another was not doing as well. Once their accountant figured it out and shared it with them, the owners were able to make changes which meant a significant uptick in their overall business.

A trusted partner, powered by the cloud.
Understanding the strength of your business should be core to what you expect in an accountant. Your accountant should be a trusted partner, constantly brainstorming how to build on strengths or shore up what's going poorly.

Related: 10 Questions to Ask Before Hiring a Tax Accountant

With the advent of cloud-based accounting software, accountants can tap into your business information in a more granular way. Gone are the days where they need to “manage the books” on an hourly basis. Instead, accountants can save you time by ensuring your data is up-to-date by accessing your books anytime, anywhere and quickly moving between the books and offering strategic advice that really matters. Cloud-based accounting software develops key insights from data that accountants can serve up to you with detailed recommendations, and they don’t have to actually come to your place of business to do it.

Comparative aspects such as year-over-year trends can be actionable if you know what you’re seeing. If you know that your January revenue is down this year, how can you know whether that's a bad thing? Your accountant can and should tell you whether it’s just a blip or something you really need to work on.

The truth is that some small businesses engage their accountant as a real thought partner and have exactly these kind of rich conversations. Others view the relationship as more transactional. As a small business owner, it’s incumbent that you ask the right questions, have high expectations of what your accountant can do for you and find the right partner because every small business deserves a trusted adviser. 

Related: How to Hire an Accountant

In my own life, my husband is an entrepreneur. When he started his business, one of the things we talked about was finding the right accountant. For him, it took a hard-won lesson to get there. He initially did the basic work himself -- quickly realizing that it was taking too much time and that he needed outside help.

At Intuit, our QuickBooks ProAdvisor Program has an online community of more than 150,000 ProAdvisors worldwide that allows you to search for local accounting professionals, so I pointed him there -- but you can also look on Yelp or other referral outlets. It's worth talking to at least two or three candidates to figure out where you have the right chemistry and how you can partner together to both succeed.

For my husband, at first it was about getting help on bookkeeping and compliance. As sales grew, his accountant helped him create a consistent policy for when his company should recognize (or book) revenue and then leverage it to build a financial plan. That’s important for all entrepreneurs who are looking to drive growth and need investment along the way. Putting thought into your revenue build will pay off because it’s something you’ll show potential investors.

My husband found someone who was the right fit in terms of skills and expertise for his business. It’s inspired him and freed him to concentrate on growing his company. It can, and should, do the same for you.

 

Source: https://www.entrepreneur.com/article/279588

How to invest in your 30s

If there’s one decade where life changes most dramatically, it’s in your 30s; you might get married, buy a home and have children. You may need to upgrade your car to a pricey minivan and then there are after school extracurriculars to pay for, birthday parties to throw, trips to take and so on. Simply put, your 30s are busy–and expensive. Fortunately, it’s also the decade when most people settle into their careers and start making some money.

Still, saving can be difficult when there are so many competing priorities for your dollars. That’s why it’s important to create specific goals, says Norman Raschkowan, president and portfolio manager at Toronto’s TenSquared Investments. And he doesn’t necessarily mean retirement goals. For most early 30-somethings it’s short-term goals, like buying a house or planning a wedding, that are the big concerns.

A cheat sheet for investing in your 20s »
If you are saving for a home, then your portfolio mix should be determined by your timeframe. Need a down payment within five years? Then consider putting your money in guaranteed income certificates (GIC) and dividend-paying stocks or exchange-traded funds (ETFs), says Raschkowan. The trick here is timing your GIC to when you’ll need money. If you know you’ll want to buy in about a year, purchase a six- to 12-month GIC. If you’re not sure, and feel you have some time, a three-year GIC will give you income and stability while you decide your next move. Avoid bond funds: if rates rise, which is what has been happening, the value of those assets could fall.

On the equity side, dividend-paying stocks and ETFs are better than growth securities for short-term needs. They tend to be in more stable sectors, like consumer staples and utilities, and dividend-paying stocks provide payouts that can help increase your down payment. For stock pickers, stick to more established payers, though, like banks or telecoms, Raschkowan says. A tech company like Cisco for example is established, generates strong revenues and has a 3.5% yield, he says. “You want to see a record of earnings and dividend growth and attractive cash flows.” Also, take the cash instead of reinvesting, Raschkowan says, since you’ll need to use the money. Before buying any stock however, make sure its situation hasn’t changed in an important way and that it’s right for your portfolio.

Also consider keeping investments in a TFSA instead of an RRSP. Many 30-somethings still aren’t making enough money to warrant putting cash in an RRSP, explains Raschkowan. An RRSP works best if you’re in a high tax bracket and you know that you’ll be in a lower bracket in retirement. “The best strategy is to put any surplus capital into your TFSA and then remove it when you’re ready to buy your home,” Raschkowan says. “Generally, someone in their 30s will better off using a TFSA.”

As you accomplish your big life goals, you can start increasing your investments. Once you do start earmarking money for retirement, you can take more risk and buy growth-oriented stocks or increase your weighting to equities. Usually, if you need the money within five years, you’ll want to be more heavily weighted in GICs, says Raschkowan. If you have more than five years, you could put 70% of your assets into equities.

One of the aims for 30-somethings should also be to get comfortable with investing. Scott Plaskett, CEO of Etobicoke-based Ironshield Financial Planning, suggests taking some money, even if it’s $100 a month, and investing it in a long-term equity-focused portfolio.

The point is to better understand your risk tolerance. At 30, you have plenty of time to recover from a setback. Still, if you feel queasy after the market falls by 10% you can adjust down our risk tolerance. But you won’t know how much risk you can really stomach if you’re not testing the market waters. “You need to get experience,” Plaskett says. “Learn what it means to have risk in a portfolio.”

As you get more comfortable you can increase those monthly investments. By the time you’re exiting the decade, you should feel comfortable with investing and market swings. You might also start branching out into different types of investments, like alternative asset funds. When you hit 40, you should be well on your way to investment success. “The volume should be turned to 11 and you should know exactly what you’re on track for,” says Plaskett.

 

Source: http://www.moneysense.ca/save/investing/how-to-invest-30s/

One way to avoid tax – leave money in the business

Justin Trudeau has vowed to increase taxes on the wealthiest of Canadians – many of whom have achieved their status by building businesses. These business owners could one day find themselves facing a tax-strategy dilemma: Should they leave money in the business, take it as income, or do something completely different?

Those are common questions for tax and financial advisers, who say that a little planning goes a long way.

Incorporating a business offers benefits that help soften the blow, says Ross McShane, director of financial planning services at McLarty & Co. Wealth Management, based in Ottawa. Those advantages are tax deferral (retaining funds inside the corporation and paying tax at the personal level later) and income splitting (paying dividends to family members who are in lower personal tax brackets).

While tax rates vary by province, they can take a serious toll on a business's bottom line. As of this year, for example, the marginal tax rate in Ontario for salary or other income higher than $220,000 is a staggering 53.5 per cent – a 4-percentage-point increase over 2015 rates. For non-eligible dividends, the rate is 45.3 per cent, more than 5 points higher than last year.

Mr. McShane says he's urging clients to think twice about withdrawing funds from their corporations if it means pushing their personal income above the $220,000 mark.

"They might have a mortgage or a line of credit held at the personal level, which carries a low rate of interest given today's low-rate environment," he says. "It might be more beneficial to avoid accelerating the paydown of debt through corporate withdrawals and, instead, carry the debt, and retain the funds in the corporation."

Instead, he says, the funds can be retained in the business and invested and withdrawn at a later date – retirement – when the taxpayer is likely in a lower tax bracket.

If the taxpayer is fortunate to have RRSPs or non-registered capital held outside of the corporation, he adds, these funds can be drawn on to augment cash-flow needs rather than corporate funds.

"The message we've been giving business owners is, if they're earning income in their corporations and they don't need it to live on, it's best to leave it in the business," says Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management.

"Either reinvest it in the business or, if the business doesn't need the capital, invest it in a portfolio of securities inside the business, or alternatively in something like a corporate-owned life insurance policy."

Mr. Golombek says that this approach is especially logical for small-business owners, who continue to benefit from a low tax rate in their corporations because of the small-business deduction. Even though Mr. Trudeau has vowed to tax the rich, this deduction was spared in the most recent Liberal budget.

"Initially you pay a very small rate of tax on the first $500,000 of active income of 10.5 per cent," Mr. Golombek explains. "The rest of the money can sit in there forever until you need it, and you don't pay tax until later on, until you withdraw it as a dividend.

"That's why we're not surprised to see many companies and small business owners with huge pools of cash or investments sitting inside their private companies," he adds. "The question is, how do you get it out?"

One tax-savvy approach is the purchase of a corporate-owned universal life-insurance policy. Jennifer Black, senior financial adviser and certified financial planner at Dedicated Financial Solutions in Mississauga, Ont., says that when the business owner dies, money is paid out through the capital dividend account (CDA). "That's usually tax-free to beneficiaries," Ms. Black says.

She notes, however, that business owners should consider this strategy before the end of the year. Regulatory changes will take effect in 2017. "That's going to lower the amount of the tax-free portion that can come from an insurance policy and flow to beneficiaries through that CDA. ... If you purchase policies this year, then they are grandfathered to the old rules."

Another approach for business owners to consider, Ms. Black says, is setting up a personal pension plan (PPP). "When you make contributions to a PPP, it's a contribution from the company and it's deductible.

"Essentially, if the business owner is taking a salary, then they're able to contribute more to a pension than they would an RRSP," she explains. "So it gives them additional deductions, and the deductions are at the business level so they can save tax."

Another advantage here is that business owners can move their RRSPs into the pension so that they can be fully credit-protected. Another bonus? If they're paying a fee to a financial adviser to manage that RRSP, that fee can be deducted as a business expense, something that can't happen with a personal RRSP, Mr. Black says. And the ability to do income splitting with the pension starts at age 55, unlike with a registered retirement income fund, which starts at age 65.

No matter which options business owners choose to mitigate their taxes, Mr. McShane says that it's worth having or revisiting a comprehensive financial plan, which should be able to project what an individual's tax bracket would likely be at retirement.

"The plan should also determine what the dependency is on the corporate assets," he says. "For instance, the individual or couple might have a surplus of funds in the corporation that will eventually go to their beneficiaries. Increasing dividend payments to adult children could very well result in a lower tax hit than if the individual made the withdrawal today."

 

 

 

source: https://www.theglobeandmail.com/report-on-business/small-business/sb-growth/one-way-to-avoid-tax-leave-money-in-the-business/article29979718/#_=_

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