Taxperts Newsletter 2008

The Harper government got elected at the end of an economic boom that is ending in 2008. The February 26, 2008 Jim Flaherty federal budget is the weakest and least thoughtful budget since Mulroney was elected in 1983 and will accelerate an economic downturn. Being ideologues, the Tories believe reducing the national debt and tax rates and minimizing federal government involvement in the economy are a panacea for all economic ills. There is a policy vacuum in the Harper government - - no ideas. Flaherty used almost 90% of the federal surplus for debt reduction and continues to show hostility and indifference to the concerns of urban voters by offering only minor budgetary assistance to cities.
Flaherty renounced the 2007 budget provision for a maximum $2,000 rebate for fuel-efficient cars and AGAIN reneged on the brilliant initiative in their first election platform of deferring capital gains tax with a ‘substitute’ provision - - that is, buy a property identical to the one sold within 6 months and capital gains tax is deferred. That would have been a huge economic stimulus. Instead they gave up billions in taxes to reduce the GST to 6% then 5% on January 1, 2008. Decreases in value-added-taxes like GST are recognized as providing minimal economic incentives.

2008 FEDERAL BUDGET HIGHLIGHTS

1      In 2007, $9.2 billion of national debt was paid down. The 2008 budget will pay down $10.2 billion of national debt from the surplus leaving only about $1.5 billion for policy initiatives. So, at the onset of an economic downturn, Flaherty left himself no room for an economic stimulus.
2      Of $500 million dollars announced for urban public transit, Flaherty diverted $80 million to a rapid-transit train line from Toronto through his riding to Peterborough where a Conservative holds the seat. Later announcements took that figure to
$118 million due to unforeseen costs. Flaherty admits that daily usage will be only
900 riders. For $118 million. Disgraceful!! Pure political pork-barreling.
3      The one commendable new policy is the creation of the Tax-Free Savings Account (TFSA) for 2009. There is a non-deductible annual cap of $5,000 into a TFSA account but all growth is untaxed. Unused contribution room can be carried forward indefinitely. The amount of withdrawals from the account will be added to the contribution room for the following year. Unlike RRSPs, you can use a TFSA as collateral for a loan but, the same as RRSPs, interest on money borrowed to contribute to the account will be non-deductible. An initiative with some intelligence!! That’s it. There is nothing else worth saying about this nothing budget. In a speech, Flaherty attacked the McGuinty Liberal government as having the highest provincial corporate tax rates and that Ontario was the worst place for new business investment. Ontario has suffered the loss of 200,000 manufacturing and forestry jobs under the Harper government. Cheap foreign labour and Mulroney’s free trade deal are the more likely culprits but 2 do-nothing federal budgets in a row has been damaging. Despite Flaherty’s remarks, Ontario is at about the middle of all provinces in terms
of provincial corporate tax rates and it is moving towards having combined federal/provincial corporate tax rates lower than all 50 states in the U.S. Also, McGuinty is eliminating the hated tax on corporate capital assets. Flaherty is outright lying about Ontario tax rates. He is trying to set up the Tories to win more seats in the next federal election by blaming the provincial Liberals for the downturn
in the Ontario economy. Tawdry. This weak budget is what you get when you have an angry - - twice loser for the Ontario P.C. leadership - - third-rate politician as your Minister of Finance.

2007 PERSONAL TAX RETURN AND TAX CHANGES

1. The pension credit is $2,000 for 2007. It can be used by those under 65 drawing a private pension and, at 65 years of age, on RRIF payments and even foreign pensions. In 2007, the recipient of a private pension should split $2,000 to a spouse who has no pension qualifying for the credit so the spouse can make use of the $2,000 pension credit.

2 The 15% non-refundable federal tax credit for public transit passes remains in place for 2007 as does the public transit credit.

3 Taxpayers can claim the same 15% credit on up to $500 for a “Child Fitness Amount” for non-school activities for children under 16 at January 1, 2007 for a “prescribed program of activity”. The program must be for at least 8 consecutive weeks or at least 5 consecutive days where at least 50% is physical activity such as soccer or tennis school.

4 The biggest change for 2007 is the ability to split up to 50% of a taxpayer’s private pension to their spouse. All tax planning focuses on the combined Federal and Ontario tax brackets. (See Box Below). For 2007, the rates are 21.05% on the first
$37,178; about 33% up to $74,357; about 43.16% from $74,357 to $120,887; and 46.4% on taxable income over $120,887. Very top-heavy. Pensioners 65 and older collecting the standard Old Age Security of $5,952 for 2007, must focus their attention on the ‘claw-back zone’ on OAS, damn you Brian Mulroney. OAS benefits are clawed back at a rate of 15% on net income between $63,511 and $103,191 at which point there is a full claw-back. Splitting up to a half of a private pension to a spouse can:

a) drop the income down to the lower tax brackets;
b) drop part or all of it out of the ‘claw-back zone’ if taxable income is $103,191 or less and save a further 15% on the transferred amount; and,

c) set up the spouse for the $2,000 non-refundable pension credit where they have no RRIF income or foreign pensions which qualify for that credit. This 2007 budget initiative is generous.

5. Do not file late if you are required to complete a Form T1135 Foreign Asset Declaration if you have an aggregate of $100,000 of foreign cash, pensions, stocks, mutual funds or rental properties and thus need to file this form. Note that foreign personal-usage homes are not caught. Late-filed returns where a T1135 Form is required are subject to penalties of $25 a day for up to 100 days for a maximum penalty of $2,500.

6 Buy rental properties jointly with your spouse to split net rental income and the gain on sale. In your rental statement, deduct appliance depreciation first THEN brick depreciation IF you are in one of the two top tax brackets at 43.16% or 46.4% to defer tax on net rental income. Claiming brick depreciation is a pure deferral and you will pay tax on recaptured depreciation on sale with devalued dollars due to inflation. This is smart and a great deal for investors. You can only claim depreciation on rental properties to get net rental income down to NIL.

7 First-time home buyers can still pull $20,000 out of their RRSP towards a purchase under the Home Buyers Plan and they get a rebate on the first $2,000 of Ontario Land Transfer Tax which has been broadened to include the purchase of resale homes. It was originally limited to the purchase of new homes. On the new Toronto or Municipal Land Transfer Tax introduced as of February 1, 2008, first-time buyers are exempt on the first $3,725 of this tax which covers cost up to $400,000 but will pay 2% on the excess cost above $400,000.

PENALTIES AND INTEREST
See our box at the bottom for installment dates. Interest is charged on deficient installment payments and on personal tax and GST balances unpaid at April 30th. For tax returns, late-filing penalties are 5% if 1 day late plus 1 per month for 12 months to a maximum of 17% penalties. If filing late again within 3 years, the penalty is 10% if 1 day late plus 2% per month for 20 months to a maximum of 50%. Self-employed taxpayers and their spouses have until June 15th each year to file as do annual GST filers. Taxpayers who file late can approximate taxes and make ‘top up’ payments to the Canada Revenue Agency by April 30th to reduce interest charged. Penalties levied on late filings will be eliminated on the amount of such payments. It is critical to remember that you must pay the full balance of GST owning by the filing deadline or you will be subjected to penalties on the shortfall. ALWAYS pay GST first.

CANADA REVENUE AGENCY (CRA) TAX AUDITS

1. CRA auditors are targeting rental statements and self-employed real estate agents. With rental properties, the CRA will try and move fully deductible repairs to Class 1 Brick at 4% - - only half that or 2% in the year of an “Addition” - - by characterizing the expense as a capital improvement rather than a repair cost.

2. Note that late-filed returns are much more likely to be audited.

3. Real estate agents must submit receipts and vouchers for expenses categorized by type and totalled on tapes or spreadsheets.

4. Self-employed agents using their spouse as assistants MUST have the spouse on payroll, pay them on a fair market-value-basis and withhold taxes and CPP premiums but not EI premiums. Children providing services to self- employed parents should bill by way of an invoice detailing the service provided, be paid on an FMV-basis, invoice on at least a monthly basis and be paid by cheque.

5. Expenses are disallowed if the CRA concludes that they are “insufficiently documented”, “not connected to business”, “personal in nature”, excessive in the sense of proportion and thus “unreasonable”.

6. Agents can claim 90% or higher as business driving if they can give a detailed description of driving habits such as no cottage, no sports activities, no hobbies, minimal social activity, multiple cars in the family, 7-day work weeks etc. In the 1991 Qureshi decision, the Federal Tax Court of Canada said that in terms of people in business being required to keep accurate books and records, that the Court felt that it would be too onerous a burden to require that an automobile logbook be kept. In the 2005 Watts decision, the same Court said that it was NOT too onerous a task “…to keep a record of his business trips, the mileage travelled, separate receipts and/or a logbook.” (Our emphasis) In the Watts case, annual revenues were only $2,500 and he provided no evidence of actual driving. Balancing the two cases, it is highly recommended that, at a minimum, you keep a detailed appointment book with the names and addresses of clients or places where money is spent. Then go 90% business.

7. Realty agents get a home-office expense if their home is their “primary place of business” under s. 18(1)(a)(i) of the Income Tax Act. They qualify if they perform the majority of self-employed activities in the home. In the GTA, agents became home-based once they subscribed for the MLS service and set up for MLS from their homes.

8 Agents should have a separate business bank account and deposit ALL commissions into the account and pay ALL expenses from the account including house expenses if claiming a home/office expense. You can then refuse to provide your personal banking records on the basis there is no connection to business.

9 Business dinners and events including travel dinners and the cost
of attending events are limited to 50% deductibility and this applies even to gift certificates for dinners or events.

SPREADSHEET FOR SELF-EMPLOYED AGENTS

It tracks commission expenses and is FREE at taxperts.on.ca. Points:

1. In business there are those expenses with GST and those without such as with banks, insurance, government, medical etc.

2. The blacked-out boxes on the globalized sheet which pops up on the screen highlight expenses which do not include GST.

3. All expense entries are made in the columns to the right of the globalized sheet. GST is extracted from GST-included expenses.

4. Box 20 commissions in T4A slips should reflect only the agent’s split of commissions and should NOT include GST. Most brokers issue an “Annualized Summary of Commissions and Agent Expenses” - - some in lieu of a T4A slip. If the T4A includes the broker’s split of commissions, enter the Box 20 amount in the T2124 Business Statement in your T1 personal tax return and, under expenses, make an entry for “Broker Split of Commissions” with a second entry for “Broker Administrative Fees” for expenses ‘passed through’ to the agent by the broker. Claim the related GST on each.

5. DO NOT break out the figures for the ‘pass-through’ expenses to headings 3 through 27 of our spreadsheet. Enter the TOTAL of the these expenses under heading 2 for “Broker Administrative Fees” from the broker annualized statement which serves as proof of the expense.

6. Enter 100% of the figure for business meals, event expenses, groceries for open houses and gift certificates to restaurants and events. The spreadsheet will break out 1/2 of the GST as an Input-Tax Credit. The amount will be halved to the 50% deductibility limit in your tax return.

7. “Travel - - 100% of Meals” are your own dinners when out of town and are also only 50% deductible.

8. At Line 20, note that private health premiums - - for the entire family - - have been fully deductible since 1998.

9. If paying salary to a spouse or other assistant, a T4 Slip and T4 Summary must be prepared by the end of February each year by the agent.

10. In the columns for capital purchases such as computers, software, equipment/furniture and car purchases, enter purchases exceeding $500 including taxes. Purchases under $500 can be entered at Line 10 under “Office Supplies” as fully deductible.

11. The business portion of vehicle and home office expenses should be discussed and an allocation determined at the interview to prepare GST and tax returns.