Randall J. Ladell, MBA, CFP Chartered Accountant

9030 Leslie Street, Suite 302 Richmond Hill, Ontario, L4B 1G2 Email: randall@rjladell.ca

Business: (905) 370-0055 Mobile: (647) 280-4248

Fax: (905) 370-9920

This seminar is presented as a source of general information only and has been prepared based on information from various sources. Every effort has been made to ensure the accuracy of the information but this seminar is not intended as a substitute for competent professional advice tailored to the individual’s particular circumstance.

©2005 – Randall J. Ladell, Chartered Accountant

All rates are rounded. All brackets are included but rates change within tax brackets due to surtaxes. From approximately $33,500 to $35,000 the marginal tax rate is 25.1%, from $69,700 to $69,200 the marginal tax rate is 35.4% and from $69,200 to $70,000 the marginal tax rate is 39.4%.

Highlighted items are discussed further. Other items are either self explanatory or unusual and beyond a simple discussion of basic personal tax.

Exception: Registered pension plan deduction is the amount of your contribution to your company pension plan. Besides being tax deductible, your contribution combined with your employers contribution (or the calculated benefit for a defined benefit plan) give rise to the pension adjustment which is the amount by which your RRSP limit is reduced based on your company pension benefit.

Investment note: As shown previously interest income attracts tax at full rates while dividends and capital gains are taxable at low rates. All RRSP withdrawals are taxed at full rates. By putting interest bearing investments in your RRSP you defer high tax rate income and you pay an equal amount later when you withdraw the funds. If you place equities in your RRSP you defer tax advantaged capital gains and dividend income and pay a penalty when you withdraw the funds because tax is then paid at full rates. (All income earned in an RRSP regardless of source becomes “pension income” that is fully taxable when withdrawn)

Caregiver can also be an adult child. It should be noted that paying cash for child care usually cost you more than you save. The care giver in these situations is often not taxable while you are losing the ability to claim an expense that will reduce your tax burden. You must get the SIN for any individual care giver in order to ensure the payments are deductible.

Again, the seminar does not discuss the items that are not highlighted as overly complex or not applicable for most taxpayers.

Almost all of the above except other employment income and support payments are supported by slips from the payer. Other employment income is other casual labour amounts for which no deductions were taken or T4 issued. It should be noted that the taxpayer should optionally pay CPP on these amounts. The Canada Pension Plan is one of the best run government pensions in the world and benefits are available to the contributor in the event of disability or his or her survivors in the event of death.

As previously noted, support payments received are only included in income to the extent that they are deductible by the payer.

The gross up and tax credits are intended to give the individual recipient credit for taxes already paid by the corporation. Our tax system attempts to ensure that all income is only taxed once. For dividends received the total tax is intended to be the amount of the total personal tax that would have been paid if the individual rather than the corporation had earned the income directly.

The currency does not matter. The Canadian government issues bonds in US$ but these are still taxable as Canadian source income. A US government bond payable in Canadian funds would still be foreign income which is discussed later.

Bonds often trade at a premium or discount as interest rates change from the rate at the date of issue. The premium or discount is earned over the life of the bond and is really interest income but it is not treated that way for tax purposes. If interest rates have declined, you will pay a premium for a bond with a coupon rate higher than the going rate. You are then effectively penalized as a portion of that interest is the amortization of the premium paid but you are still taxed at high rates based on the bond rate and not what you really earned. The reverse is also true and buying bonds at a discount can save taxes.

The important consideration in segregating foreign income is to ensure you receive full credit for any taxes paid in the country of origin. Credits are provided for foreign taxes paid essentially up to the amount of the Canadian taxes payable on the income to avoid double taxation.

The CRA is focussing its attention on interest expense claims and I have had two clients audited in the past year. It is very important that there be a direct paper trail from the loan proceeds to the investment. It is not good enough to have a $100,000 in investments and claim interest expense on $100,000 of your home mortgage because; “If you did not have the investments you would be paying down your mortgage.”

This is a highly complex area of taxation and again subject to much litigation. If you are in doubt whether a gain is capital in nature or income from “an adventure in the nature of trade” consult a qualified tax professional. Remember capital gains attract tax at only 50% of the amount for comparable business income. The following is a simple example to try to illustrate the basic rules.

Beyond these simple guidelines the rules governing “deemed dispositions” or dispositions to a spouse or a charitable bequest can be complex and the taxpayer should consult a qualified professional.

An adjusted business investment loss (ABIL) may arise when a taxpayer makes and investment in or loan to a qualifying small business and the investment or loan is lost. An ABIL is treated exactly the same as any other capital gain (50% deductible) except that it can be deducted against any other income not just capital gains. AN ABIL can be carried forward for 7 years after which it simply becomes an ordinary capital loss deductible only against capital gains.

Rental properties are simply another form of business for personal tax purposes except that each property is a separate business and the limitation on capital cost allowance (CCA). If you have five properties and four of them lost $8,000 before depreciation and the fifth earned $10,000 before depreciation then subject to the maximum allowable claim you can choose to take depreciation of up to $2,000 from any one property or any combination of properties but you cannot claim more than $2,000 (the amount required to reduce income to nil).

Partnership versus joint venture. This is usually most important when a husband or wife own more than one property. If they own the properties as joint ventures then each owns a portion of the property and each can claim depreciation on a pooled basis as discussed above.

BUT if a rental property is owned in a partnership then the spouses own an interest in the partnership and not the property. The partnership can only claim depreciation on the property based on the income earned on that property not on a pooled basis. Using the above example where you have five properties and four of them are individually owned and earned $10,000 after depreciation and the last one is a partnership with $0 income before depreciation. No CCA claim is allowed for the 5th property despite the other rental income.

It is very important when spouses acquire rental properties that they be properly set up as co-ownerships or joint ventures at the date of acquisition. This is not a formal process. Rather it is a matter of properly splitting the purchase on the first tax return on which the rental income or loss is reported.

There is no short form summary that can be given for these rules. They are complex and income splitting strategies are very often reviewed by the CRA.

The following slide deals with items that are specifically excluded as not deductible. Essentially all expenses not specifically excluded are deductible form business income but the onus is on the taxpayer to prove that an expense had a business purpose if the claim is challenged by the CRA.

What can be said except that the government keeps increasing the CRA’s compliance budget and an audit should simply be considered to be an inevitable occurrence if you have a business.

More importantly, in my experience, businesses that do not keep proper record often pay more taxes than they need to because more often than not properly expenses are forgotten and not claimed.

The slide notes that besides personal tax credits, a taxpayer may be entitled to the dividend and foreign tax credits we previously discussed or may be entitled to a special credit for investments in Labour Sponsored Funds a special type of mutual fund designed to invest in higher risk small and start up businesses.

The government also encourage political contributions by providing a political tax credit of 75% on the first $100.00 of contributions. This percentage declines as the amount of the donation is increased.

The reverse is true for donations to charities where the first $200.00 provides tax credits of 22% and amounts in excess of this amount reduce taxes by approximately 46%