Category: Domestic Tax

The Tax Free Savings Account

Posted on by Edixon

In 2009, the federal government introduced the Tax Free Savings Account (TFSA) to give Canadians another means to save for their financial goals.  The TFSA is similar to the Registered Retirement Savings Plan (RRSP) in some ways, but different in others.

TFSA Quick facts:

  • Investments grow and compound on a completely tax-free basis within the TFSA.
  • Contributions to the TFSA are not tax-deductible, but withdrawals are tax-free and can be made at any time.
  • Unused contribution amounts accrue and can be used in future years.
  • The current annual contribution limit is $7,000 per person, increasing in $500 increments based on inflation.
  • Anyone who was 18 years of age in 2009 and resident in Canada during the period between 2009-2024 and has never contributed to a TFSA has a contribution limit of $95,000.
  • Withdrawals from the TFSA do not impact Old Age Security (OAS) benefits.

Things to consider when deciding to use a TFSA:

  • Consider how the TFSA fits within your overall financial plan –it may be better to maximize RRSPs, RESPs, or pay down personal debt first.
  • The TFSA can complement other retirement savings and since withdrawals are tax-free, they could help you avoid potential Old Age Security (OAS) claw-back.
  • Since contributions can be made at any age over 18, a TFSA can be a powerful estate planning tool in building a sizable tax-free asset for an estate or heirs – a benefit similar to using permanent life insurance.  If a specific beneficiary is named in a TFSA, the estate administration tax (probate fees) can be avoided on the value of the plan.
  • Consider using existing personal non-registered savings to maximize TFSA contribution limits in order to shelter future investment income from tax.
  • Investors owning a corporation may want to consider withdrawing additional dividends to fund a TFSA.  Although the additional income from the corporation would be taxable, future investment earnings on those contributions would be tax-free.
  • Both capital and growth can be withdrawn on a tax-free basis.  The total amount withdrawn can then be re-contributed in the next calendar year, or any time afterwards, with no impact on annual contribution limits.

A DJB Wealth Management Advisor can help you make the right choice.

New Trust Reporting: Unexpected Exposure

Posted on by Edixon
Breaking news! The CRA will not require bare trusts to file a T3 Income Tax and Information Return (T3 return), including Schedule 15 (Beneficial Ownership Information of a Trust), for the 2023 tax year, unless the CRA makes a direct request.

Changes requiring more trusts (and estates) to file tax returns and more information to be disclosed, first proposed in the 2018 Federal Budget, were delayed several times in the legislative process. As such, many trusts and estates (including many arrangements not commonly considered “trusts”) will be required to file for the first time.

Required reporting has been expanded to include situations where a trust acts as an agent for its beneficiaries (often referred to as a bare trust). This occurs when the person on title or holding the asset is not the true beneficial owner but rather holds the asset for the benefit of another party. There are many common situations that may constitute reportable bare trusts in which no lawyer or written agreement may have ever been involved or drafted. Many parties involved in a bare trust arrangement may not realize that they are, much less that there may be a filing requirement with CRA.

The following lists some examples of potential bare trust arrangements; CRA has not commented on several of the examples below. It is uncertain how they will interpret and enforce the law.

  • a child on title of a parent’s home (without the child having beneficial ownership) for probate or estate planning purposes only;
  • a parent on title of a child’s property (without the parent having beneficial ownership) to assist the child in obtaining a mortgage;
  • one spouse being on title of a house or asset although the other spouse is at least a partial beneficial owner;
  • a parent or grandparent holding an investment or bank account in trust for a child or grandchild;
  • a corporate bank account opened by the shareholders with the corporation being the beneficial owner of the funds;
  • a corporation being on title of an individual’s real estate, vehicle, or other asset, and vice-versa;
  • assets registered to one corporation but beneficially owned by a related corporation;
  • use of a nominee corporation for real estate development purposes;
  • a property management company holding operational bank accounts in trust for their clients, or individuals managing properties for other corporations holding bank accounts for those other corporations; • a lawyer’s specific trust account (while a lawyer’s general trust account would largely be carved out of the filing requirements, a specific trust account would not); and
  • a partner of a partnership holding a bank account or asset for the benefit of all the other partners of a partnership.

In addition to bare trust arrangements, other trusts that have not had to file in the past may have a filing obligation under these expanded rules.

Exceptions from filing a return for trusts and bare trust arrangements are available in limited cases. If filing is required, the identity and residency of all the trustees, beneficiaries, settlors, and anyone with the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the income or capital of the trust must be disclosed.

Failure to make the required filings and disclosures on time attracts penalties of $25 per day, to a maximum of $2,500, as well as further penalties on any unpaid taxes. New gross negligence penalties may also apply, being the greater of $2,500 and 5% of the highest total fair market value of the trust’s property at any time in the year. These will apply to any person or partnership subject to the new regime.

ACTION ITEM: Consider whether you may have a bare trust arrangement. If so, or if you are unsure, contact us to discuss.

Have you Considered the Scientific Research and Experimental Development Tax Credit?

Posted on by Edixon

Is your corporation involved in such activities as agricultural and food processing, information and/or communication technology, life sciences, advanced manufacturing, or independent research to name a few. If so, you may be eligible to claim a Scientific Research and Experimental Development Tax Credit (SRED).  When we think of scientific research, we often think of the scientist in the lab wearing a white coat.  This isn’t always the case as many claims are a result of development or improvements to a product or process on the shop floor.

In order to qualify, the work must be conducted for the advancement of scientific knowledge or for the purpose of achieving a technological advancement.  It is important to note that you do not have to achieve your goal in order to gain new knowledge. For example, if your work allowed you to understand that the idea you tested is not a solution for your situation, this can be considered new knowledge.  What’s important is that the knowledge gained advances the understanding of science or technology, not how the work advanced your corporation or business practices.

The work must be a systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis.  A systematic investigation or search refers to how SRED work is carried out. It is more than just having a systematic approach to your work or using established techniques or protocols.  A systematic investigation or search must include the following steps:

  1. Defining a problem.
  2. Advancing a hypothesis towards resolving that problem.
  3. Planning and testing the hypothesis by experiment or analysis.
  4. Developing logical conclusions based on the results.

The federal government will allow corporations to claim an Investment Tax Credit (ITC) of 15% on eligible expenditures.  This ITC can be applied against the current year’s income tax or in some cases carried back to a previous tax year or forward to a future tax year.  However, some small business corporations may earn an ITC of 35% on eligible expenditures which may be fully refundable in the year.

Eligible expenditures include:

  • Canadian wages and salaries.
  • An overhead calculation.
  • Canadian R&D-related contracts.
  • Materials.
  • Payments made to eligible research institutions.

The province of Ontario also provides additional incentives to corporations carrying out SRED activities in the province.  Certain small business corporations can earn a refundable Ontario Innovation Tax Credit (OITC) of 8% on eligible expenditures.  In addition, the Ontario Research and Development Tax Credit (ORDTC) is available. It is a 3.5% non-refundable tax credit based on eligible expenditures incurred by a corporation in a tax year.

It is important to note that the deadline to file a SRED claim on your tax return is eighteen months after your taxation year.

So If you haven’t considered SRED, it may be worthwhile to do so.