McIntosh Norton Williams CGA

HST – Point of Sale Rebates

Jason Moore — Thu, 17 Jun 2010 21:27:47 +0000

We take a look at how the point of sale rebates work.

If you sell motor fuel, books, feminine hygiene products, or children’s sized clothing, shoes, or car seats then you will want to look at this: Point of Sale Rebates.[PDF]

The Harmonized Sales Tax – Part Deux

Jason Moore — Wed, 09 Jun 2010 21:09:22 +0000

With HST implementation less than a month away now may be a good time to review some of the details of this tax.

Our latest newsletter [HST Spring-Summer 2010] is all about the HST: with links to more information, a list of what’s going to increase, stay the same, or even decrease thanks to the HST, and some facts that businesses and charities/not-for-profits should know.

Also, don’t forget that we took a look at HST in our previous newsletter last year.

Deducting Interest

Cory McIntosh — Wed, 21 Apr 2010 02:27:21 +0000

The average debt of Canadians has increased dramatically in recent years fuelled partially by the increasing real estate prices and partially by low interest rates. So it probably isn’t a surprise to hear that we are asked regularly how to make the interest tax deductible. According to the Income Tax Act, interest on money borrowed to earn investment income is deductible. A prime example is interest on money borrowed to purchase a rental property. Many situations can arise in which an taxpayer may have personal debt but not debt related to investment. To illustrate, let’s look at an example:

John and Sue own a condominium in Vancouver which they rent out. They carry a mortgage on the condo with a balance of $50,000. They recently built a new house for themselves and took out a mortgage for $200,000. The condo has an appraised value of $375,000 and the house is appraised at $600,000. Based on the income tax rules, they can deduct the interest on the condo mortgage against the rental income. However, the interest that they are paying on the house mortgage is much higher and not deductible. Many people falsely believe that John and Sue could remortgage the condo for $250,000 and pay off their house mortgage making all of the interest deductible against the rental income. However, it isn’t the source of the security (ie the condo) that determines the interest deductibility. But rather, it is the use of the cash borrowed (ie to pay off the house mortgage). In this case, remortgaging the condo to pay off the house mortgage would not make the interest deductible. It is important to trace the funds to an investment. In this case the extra $200,000 can only be traced back to the house.

One solution that will help create more interest deductibility is for John and Sue to convert the condo mortgage to a line of credit in which the required payment is interest only. They could then redirect the savings in the monthly payment toward the house mortgage. The goal would be to payoff the house mortgage faster and eventually eliminating the non-deductible debt and leaving only the condo mortgage.

Another, but less practical solution, would be for John and Sue sell the condo and use the proceeds to completely payoff the house mortgage. Now they would be debt free. They could then purchase a new rental property using a new mortgage making the interest completely deductible from the rental income. Obviously there are many other tax and investment related considerations to this solution but it is described here to demonstrate a point.

It should be noted that the debt does not have to be secured by the investment in order to make it tax deductible. John and Sue could mortgage their house and use the proceeds to purchase a rental property. The interest on that mortgage would be tax deductible since the funds borrowed can be traced to the use of purchasing a rental property.

Many financial institutions today have lines of credit that can be registered against a single property but can be divided into several parts for various uses. For example, a couple may have a $300,000 line of credit segregated into $50,000 for a renovation to their personal residence, $25,000 for a vehicle, and $225,000 for investments. The segregation of the account allows them to direct payments toward the non-deductible renovation and vehicle paying these balances off sooner and leaving the deductible debt to be paid off last.

There are many different examples and possibilities for improving the deductibility of interest, however, it is never as easy as it may seem. It is a deduction that is commonly misunderstood and every financing or refinancing scenario should be closely reviewed prior to taking action. For professional advice on how you can take advantage of deducting interest on your income tax return, call us today.

According to the Income Tax Act, interest on money borrowed to earn investment income is deductible. A prime example is interest on money borrowed to purchase a rental property. Many situations can arise in which an taxpayer may have personal debt but not debt related to investment. To illustrate, let’s look at an example: John and Sue own a condominium in Vancouver which they rent out. They carry a mortgage on the condo with a balance of $50,000. They recently built a new house for themselves and took out a mortgage for $200,000. The condo has an appraised value of $375,000 and the house is appraised at $600,000.

Based on the income tax rules, they can deduct the interest on the condo mortgage against the rental income. However, the interest that they are paying on the house mortgage is much higher and not deductible.

Many people falsely believe that John and Sue could remortgage the condo for $250,000 and pay off their house mortgage making all of the interest deductible against the rental income.

However, it is not the source of the security (ie the condo) that determines the interest deductibility, but, rather, it is the use of the cash borrowed (ie to pay off the house mortgage). In this case, remortgaging the condo to pay off the house mortgage would not make the interest deductible.

It is important to trace the funds to an investment. In this case the extra $200,000 can only be traced back to the house.

Many financial institutions today have lines of credit that can be registered against a single property but can be divided into several parts for various uses.

For example, a couple may have a $300,000 line of credit segregated into $50,000 for a renovation to their personal residence, $25,000 for a vehicle, and $225,000 for investments. The segregation of the account allows them to direct payments toward the non-deductible renovation and vehicle paying these balances off sooner and leaving the deductible debt to be paid off last.

For professional advice on how you can take advantage of deducting interest on your income tax return, call us today.

EI benefits for the Self-employed

Jason Moore — Fri, 06 Nov 2009 16:24:55 +0000

On November 3, 2009 the Government of Canada introduced Bill C-56 which is proposing to extend EI special benefits to the self-employed on an voluntary, “opt in” basis. (Announcement)

If passed, this legislation could become effective as soon as January, 2010 which would allow the self-employed to claim EI special benefits starting January, 2011.

First you should know what EI special benefits are: maternity leave (up to 15 weeks of benefits), parental (35 weeks), sickness (15 weeks) and compassionate care (6 weeks) are included as special benefits.

The self-employed will continue to be ineligible for regular EI benefits so, as a self-employed individual you cannot simply lay yourself off to collect regular benefits.

Since the benefits from the program are limited the government has limited the cost.

Unlike CPP where the self-employed pay both the employee and employer portion, under this system the self-employed are only expected to come up with the employee portion of the cost which would be around $750 for 2010.

A further requirement is that the self-employed person will have earned at least $6,000 in net income in the previous year (so, to be eligible in 2011 one will have had to earn at least $6,000 net in 2010).

Remember, this is an optional program.

A self-employed individual would opt-in presumably because he or she is planning for maternity leave/parental benefits or is concerned about getting sick or having to care for a family member.

The downside is that once the self-employed person opts into the program and receives an EI benefit, he or she cannot opt out of the program.

One has to weigh the possibility of getting up to 35 weeks of benefits that max out around $447 per week versus paying $750 per year for as long as you continue to be self-employed.

If the self-employed person has a working spouse who is an employee then they will have to carefully consider the cost/benefits of this new program, particularly since the 35 weeks of parental leave can be shared between spouses.

It is hard to justify opting into EI only for the compassionate care benefits. Six weeks of benefits may earn you up to $2,682 but if you are going to continue to be self employed for more than four years then you are paying more over the long run to get those short term benefits.

Even opting in for the sickness benefits should be carefully considered – 15 weeks of benefits may be worth up to $6,700. However, at the cost of $750 per year one may be better off buying disability and/or critical illness insurance for better coverage and better benefits.

Regardless of the cost/benefit calculations, this legislation certainly provides more flexibility to the self-employed whether they choose to opt in or not.

Holding your mortgage in your RRSP

Cory McIntosh — Thu, 05 Nov 2009 22:21:14 +0000

A client came to me the other day with the proverbial question regarding “advice they received from a friend”. He told me that a co-worker of his had told him that he could transfer his mortgage into his RRSP. Being smart like all of our clients, he came to me to confirm this advice. The question isn’t really about whether you can hold your mortgage inside your RRSP, but rather, should you?

The idea of holding your mortgage as an investment in your RRSP sounds inviting at first . The thought of paying interest to your RRSP account instead of to the bank is attractive. However, if you or someone you are related to, own the property that is being mortgaged (ie your house), the mortgage is a “non-arm’s length” mortgage. As a result, it must be administered by an approved lender and the interest rate and other terms must be similar to a regular mortgage. In other words, you cannot choose an unusually low rate of interest on the mortgage to save yourself some money. Nor can you set the interest rate unusually high in order to transfer more money into your RRSP.

In addition, the mortgage must be insured by CMHC or by a private insurer of mortgages. This requirement ensures that if you default on your mortgage, your RRSP savings are protected. This insurance typically is between 0.5% and 3.25% of the amount of the mortgage.

Besides the insurance premiums, certain fees will apply: annual administration fees charged by the financial institution that will monitor the mortgage; annual self-directed RRSP fees; one time appraisal and legal fees to setup the mortgage; and one time mortgage setup fees.

Similar to other mortgages, the financial institution will act in the best interest of the lender (your RRSP). In doing so, they will monitor the mortgage payments and if you miss them or default, they have the option of forcing a power of sale of your own house in order to protect your RRSP. In short, holding your own mortgage in your RRSP is not an excuse to skip payments.

So when does this strategy make sense?

For those individuals that have large RRSP investments that are considerably higher than the amount of their mortgage, this may make sense. Let’s look at an example:

John Smith has RRSP investments valued at $100,000 and a mortgage of $75,000. In order to hold his mortgage inside his RRSP, he would have to sell $75,000 of investments in his RRSP and use the proceeds to purchase or invest in his mortgage. In effect, he is converting 75% of his RRSP to fixed income.

In your RRSP, where diversity is key, this is not a smart move. However, if the mortgage only represented a smaller percentage of his RRSP investments (say 15-20%), the case may be different since a well diversified portfolio may include 15-20% fixed income anyway.

Harmonized Sales Tax

Jason Moore — Fri, 02 Oct 2009 02:36:59 +0000

Our latest newsletter takes a look at the introduction of the Harmonized Sales Tax which is expected to become law July 1, 2010: MNW Newsletter Fall/Winter 2009 (updated) [PDF]

For a larger list of items that will be exempt see this link provided by the provincial government.

Personal Real Estate Corporations

Jason Moore — Thu, 20 Nov 2008 21:30:53 +0000

With new rules allowing realtors to incorporate their businesses effective January 1, 2009, we have looked at the costs and benefits from an accounting and tax point of view.

You can see our summary sheet with an example of how a realtor could benefit from incorporation (PREC Info).

As always, please seek professional advice before incorporating.

For the details on all the rules, please visit the Real Estate Council of British Columbia’s website.

October 2007 Mini-Budget, or what goes up must go down and vice versa

Jason Moore — Thu, 01 Nov 2007 03:55:43 +0000

On October 30, 2007 Minister of Finance, the honourable Jim Flaherty, gave his 2007 Economic Statement.

The announcement is meaningful in that the following taxes are being cut:

GST will be lowered from 6% to 5% effective January 1, 2008, so book your local “cash register guru” now to be ready for business next year!

There will be no changes to the GST tax credit nor to the GST rebate on new housing. However, you may want to watch the transition rules, especially for real property.

Corporate taxes are declining, too. Not only are they declining a little bit sooner but they are being reduced over all.

For small business Canadian Controlled Private Corporations (CCPC’s) the federal rate will be lowered to 11.0% from the originally scheduled 11.5%.

Don’t be fooled by any claims about this rate dropping from 13.12% – the 1.12% surtax was already scheduled to be dropped in 2008 along with a 0.50% point drop that was going to happen in 2009 anyway – nevertheless, sooner is always better than later.

For CCPC’s with taxable income that is more than $400,000, or for other corporations, the federal general corporate rate is being reduced sooner and by more than previously announced. For 2008 the rate, after abatement, will be 19.5% and by 2012 it will be 15.0%.

Finally, there are the personal income tax cuts.

The basic exemption (as well as the spousal amount) is being increased to $9,600 retroactive to January 1, 2007. This alone will reduce personal income taxes by about $56 for 2007 for anyone earning $9,600 or more.

Which brings us to the lowest federal income tax rate. The one that started 2005 at 16% only to be retroactively changed to 15% in November 2005. And then it was increased to 15.5% effective July 1, 2006.

Well, it is back to 15%!

This rate will apply to taxable income between $9,600 and $37,178 in 2007 and will reduce taxes by about $167 for anyone earning $37,178 or more in taxable income.

So, why do governments like to give retroactive tax breaks in October or November?

Simple, so they don’t have to pay us interest while we get a warm fuzzy feeling from that refund we get in April and May of the next year!

It’s enough to warm an accountants’ heart over the holiday season.