The January 27, 2009 Harper Conservative federal budget commits only $35 billion (Cdn.) to stimulate the Canadian economy vs. more than $800 billion (US) in the U.S. budget. The total U.S. budget is for $3.55 trillion (US), bold and focused. Harper’s budget offers a fraction of the U.S. stimulus amounts. Harper’s provisions for auto subsidies and debt rate relief signal that he will copycat the U.S. budget initiatives. The February U.S. budget introduced a `cap and trade’ policy on carbon emissions. Harper will be compelled to follow down this U.S. path. The Conservatives still show an ideological aversion to `intervening’ in the economy. They want to ride on the coat-tails of the massive U.S. spending hoping for a recovery in the Canadian economy. This is a failure of leadership. The Canadian Federal budget required a strong `Liberal’ flavour to buy Michael Ignatieff’s support and avoid defeat on a budget non-confidence vote. The budget focuses on `shovel-ready’ projects and offers a mishmash of subsidies while giving little in tax incentives. It is partisan in undercutting women’s pay equity rights and federal union rights and it reneges on a previous splitting of oil revenues with Newfoundland. Harper is punishing Premier Danny Williams for his successful “Anybody but Harper” platform in the 2008 federal election. Federal transfers to the provinces have been juggled to appease Premier McGuinty and to win more Conservative seats in Ontario in the next federal election. Harper needs the Ontario seats as his mistaken 2008 federal campaign policies on arts cuts and tougher youth crime legislation resulted in a plunge in Conservative support in Quebec. In total, policy is mixed with partisanship giving us a budget lacking in boldness and direction which risks committing a lot less money a lot less quickly than might be needed.

JANUARY 2009 FEDERAL BUDGET HIGHLIGHTS

1. In 2009, $500,000 of pre-tax income will qualify for the Small Business Deduction (SBD) for Canadian-Controlled Private Companies (CCPCs) as is the case with Ontario corporate taxes. Thus a combined rate of about 16%.

2. Computers and software purchases will be fully deductible if made after January 27, 2009 up to January 31, 2011.

3. Personal, spousal and eligible dependant tax credits will rise to $10.320 in 2009 from $9,600 in 2008. The threshold for the lowest two tax brackets will jump to $40,726 and $81,542 for 2009. These are increases of $2,841 and $5,683 respectively. These are sizeable jumps. The top bracket thresholds will inch up on an indexed basis.

4. The age credit at age 65 is rising by $1,000 to $6,408 in 2009.

5. Home-owners spending over $1,000 and up to $10,000 on renovations to their principal residence paid between January 28, 2009 and January 31, 2010 will get a 15% federal tax credit on a maximum of $9,000 saving up to $1,350 of federal taxes. This covers labour, materials, professional fees and related costs. It covers internal and external renovations and repairs including painting, light and fan fixtures; flooring including carpeting; building additions including garages, sheds and fencing; roofing, driveways and paving; windows including covering attached to window frames; new sod and landscaping; in-ground and above-ground pools; security systems and associated costs for permits, professional fees, equipment rentals and “incidental costs”. It does not cover furniture, appliances and electronics, tools, cleaning, maintenance contracts and financing costs. Get going.

6. First-time home buyers - - defined as not having owned a home in the 4 prior years - - are getting 2 breaks. There will be a “First-Time Buyer’s Credit” of $5,000 saving $750 at the 15% federal rate on the purchase of a home after January 27, 2009. Only one credit may be claimed per spousal couple. Secondly, after January 27, 2009, the Home Buyers Plan (HBP) maximum RRSP tax-free withdrawal for first-time buyers is rising from $20,000 to $25,000 or $50,000 cash for a couple. HBP withdrawals equal interest-free loans from your RRSP repaid over 15 years starting 2 years after withdrawing. Another break is a $2,000 rebate of Ontario Land Transfer Tax on the purchase of both new homes and resale homes. A fourth break is a $3,725 exemption on the new Toronto Land Transfer Tax started on February 1, 2008. First-time buyers will pay only 2% on the cost over $400,000. With low interest rates, there will be a LOT of first-time buyers in 2009. A somewhat unimpressive budget.

2008 PERSONAL TAX RETURN AND TAX ISSUES

1. The 2008 budget created the Tax-Free Savings Account (TFSA) for 2009. The non-deductible annual cap is $5,000 contributed to TFSA with tax-free growth. Unused contribution room can be carried forward indefinitely. The amount of withdrawals from TFSAs will be added to the contribution room for the following year. TFSAs are really only suitable for seniors, those in mortgage-free homes who have used up all their RRSP eligibility and those who have $25,000 in their RRSPs and have used up all their RRSP eligibility and are saving to buy a home. Get advice from a professional money manger and buy under-valued stocks. `Bottom feed’.   

3..The MOST GENEROUS TAX PROVISION in the last many years was the 2007 introduction of pension-splitting of up to 50% of a taxpayer’s private pension to their spouse. A recipient of a private pension under 65 years of age can split only $2,000 to a spouse who has no pension qualifying for the credit so that spouse could use the $2,000 pension credit. If over 65 years of age, up to 50% of pension amounts and RRIF withdrawals can be split over to a spouse, whether formally married, common-law, same-sex etc.

5. 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. Late filers can approximate taxes GST balances and make `top up’ payments to the CRA by their respective filing deadlines. Late filing penalties applied only to any balances after such payments.

TAX PLANNING AND TAX ISSUES     

1. The summer and fall of 2009 and will be a good time to buy rental properties. Buy jointly with your spouse to split net rental income and the gain on sale. Deduct appliance depreciation first then, IF you are in one of the two top tax brackets at 43.16% or 46.4%, claim brick depreciation to reduce your net rental income to NIL. Claiming brick depreciation is a pure deferral and despite recapturing depreciation on sale, you will pay the taxes with devalued dollars due to inflation. Low interest rates will continue to drive the purchase of new homes and of rental properties. Cash is king.

3. In 2009, a big issue will be terminal losses on the sale of rental properties especially in the case of condominiums. The slump in real estate in values will result in deals signed in 2006 and 2007 for rental condominiums closing in 2009 at a purchase price way under current values. The “terminal loss” treatment on sale cushions the blow from a sale at a substantial loss. Each brick asset over $50,000 must be put in its own Class 1 depreciation class. A terminal loss results when a class is emptied out for net proceeds at less than the “Undepreciated Cost”. If your condominium turns into a vacant ‘lemon’ of an investment, you can do a `tax-driven sale’, cut your losses and get big tax savings. You can claim a loss on operating revenues AND a fully-deductible terminal loss on the difference between your cost and proceeds of sale less real estate commissions and legal costs. The total rental loss `washes through’ the T776 “Rental Statement” and is fully deductible against all other income in the year of sale. Those in the top tax brackets above $75,769 and $123,184 in 2008 will save 43.16% and 46.4% respectively on the loss. Thus, the CRA is funding 43.16% and 46.4% of the loss. Some small comfort if caught in a plunging market.

4. Self-employed agents or “Independent contractors” are governed by Section 18(1) of the Income Tax Act (ITA) and may deduct any expense "incurred for the purpose of earning or producing income". This is called making the “business connection” and explains why names of clients are needed on all gift receipts and those for dinners and events. Many commercial real estate agents remain on employee status. Employees are covered by section 8 of the ITA. This section is punitive. Deductions denied to employees include: 1) driving to and from the broker’s office; 2) no home-office expense unless they work more hours at home than the broker’s place of business. They cannot include mortgage interest if they qualify for the deduction; 3) all bank and interest charges; 4) accounting and tax preparation fees; 4) family private health premiums which are fully deductible to self-employed taxpayers; and 6) any computer, furniture and equipment depreciation. Section 8 of the Income Tax Act is punitive to the point of being unfair.

CANADA REVENUE AGENCY (CRA) TAX AUDITS 

1. All Toronto area Canada Revenue Agency (CRA) District Taxation Offices have set up “real estate agent audit teams’. Audits could double or triple. Note that late-filed returns are much more likely to be audited. All taxpayers must submit receipts and vouchers for expenses claimed as employees or self-employed categorized by type and totalled on tapes or spreadsheets.

2. The CRA disallows expenses if they are deemed to be: “insufficiently documented”; “not clearly connected to business”; “personal in nature”; “excessive” in proportion and thus “unreasonable”. The target is to disallow 25% to 40% of expenses.

3. CRA auditors will request an automobile logbook and attempt to disallow 20-25% of business driving if a self-employed taxpayer does not provide one. The 1991 Qureshi decision of the Federal Tax Court of Canada said that the record-keeping provision of the ITA, section 230(1), was never intended to create the “onerous burden” of maintaining an automobile log book. Agents can claim 90% or higher as business driving if they can give a detailed description of driving habits such as no cottage, no golf, no skiing, minimal social activity, multiple cars in the family, 7-day work weeks etc. Go 90% and higher and don’t blink.

4. 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. This is true even if the have segregated space at their broker’s office. They qualify if the majority of business activity is conducted in the home. It is a “usage test”. In the GTA, agents became home-based once they began being billed for and set up the MLS service in their home. If agents use their home for MLS access, keeping their sales records, doing their banking, drafting offers, booking appointments, doing correspondence, to keep their computers, desks, filing cabinets etc. at home then their home is “their primary place of business”. You can deduct for areas used exclusively for business and do the calculation the most favorable basis of either a square-footage basis or room-by-room basis not counting bathrooms. We have a discussion of all expense headings in our free spreadsheets on our website. 

5. Business dinners and events including travel dinners and the cost of attending events are limited to 50% deductibility and the 2006 Stapley decision brought gift certificates for dinners or events under this limitation. Enter all grocery and wine expenses for open houses under this heading. They are subject to the 50% deductibility rule.

6. in our columns for capital purchases such as computers, software, equipment and furniture, enter purchases exceeding $500 including taxes. Purchases under $500 including taxes can be entered under "Office Supplies" as fully deductible.

7. Private health premiums - - for the entire family -- have been fully deductible in a self-employed business statement since 1998.

8. Self-employed taxpayers using their spouse as assistants MUST have the spouse on payroll and withhold taxes and CPP premiums but not EI premiums. This is a product of a section of the Canada Pension Plan Act. You must pay the spouse on a fair-market-value basis and pay them by cheque on such as a monthly basis, and remit the taxes and CPP premiums using your Business Number to the CRA by the 15th of the next month. You must also submit a T4 slip and “T4 Slip Summary” to the CRA by the end of February of the next year, You may pay your children for services rendered on an FMV basis but the CRA will want to see detailed invoices describing the service(s) rendered and that payment was made by cheque. The children will get their first $9,600 of income in 2008 tax-free. Enter it as “Casual Labour” at Line 104 of their T1 personal return.

9. The CRA can only reassess within 3 years of the date of an assessment. The practice is to audit the most recent filing and one year back. Expect a big increase in audits for 2009. Check our website for tips on better record-keeping to track expenses and keep better records to assure better results on an audit. The CRA has adopted an unfair new practice of demanding bank records for both business and personal accounts. The CRA is adding any large deposits into personal accounts to taxable income unless the taxpayer can PROVE the amount was NOT income. Lunacy and unfair!!!! The answer is to deposit all commissions into a business account and pay all expenses from the business account. Our firm is refusing to provide personal accounts of real estate agents on the basis that all commissions in real estate are paid from broker trust accounts. The CRA drops the demand with this explanation.

William Howse B.A., LL.B. Barrister & Solicitor (President of Taxperts Corp.) Mr. Howse offers a 3-hour seminar on “Taxation and Residential Real Estate” for 3 RECO Continuing-Education-Credits. Our firm prepares personal tax returns and handles audits and appeals. Free expense spreadsheets are available on our website. Taxperts Property Services Ltd. is taking clients for Toronto residential property tax appeals. Condominiums and more expensive homes are often over-assessed. There is a full discussion on our website.

Tel: (416) 493-0444

Fax: (416) 493-5929

E-mail: taxperts@pathcom.com Website; taxperts.on.ca