WSIB MANDATORY COVERAGE 2013!

Are you ready for WSIB MANDATORY COVERAGE under the new Bill 119?

As you probably know, there are major changes occurring January 1, 2013 with respect to Bill 119 – WSIB coverage for construction industry.

All workers, including independent operators and corporate owners must be registered and will be subject to WSIB.  There is exemption for one corporate owner if they do NO construction related work - no supervision, never on a job site not even to deliver a screwdriver!  The exempted owner is required to register as such with WSIB to qualify.

This comes into effect January 1, 2013 and all penalties, interest etc will apply for non-compliance effective then.  They allow one year grace before any prosecution occurs – and

that will be done through the Provincial Court systems!

So in short – no worker on a job site EVER, without first getting a clearance certificate for that worker.  NO exceptions.

Those workers who are presently independent operators will now be required to register as such with WSIB before January 2013.

Coming Clean with CRA - Voluntary Disclosure Program

While it’s obviously preferable, when it comes to taxes, to file on time and to make sure the information provided to the Canada Revenue Agency (CRA) is complete and accurate (as each taxpayer certifies on the last page of his or her return), things don’t always happen that way. Taxpayers who are in financial difficulty and unable to pay their taxes may simply put off filing. More commonly, a taxpayer may discover, after filing a return for the year (or previous years), that an information slip was overlooked and a portion of income consequently not reported. Or, the taxpayer may receive an amended T4 after filing his or her return, necessitating a change in the return filed and, sometimes, an increase in tax payable. And, of course, some Canadians just put off doing what everyone agrees is an unpleasant task, and eventually can find themselves several years in arrears with respect to filing. The dilemma which arises, of course, is whether to come clean with the tax authorities, or “lie low” and hope the failure to file or error or omission is never discovered.

Where a failure to report income, or to file, or the erroneous claiming of a deduction or credit which is discovered by the taxpayer relates to a previous taxation year, the CRA provides taxpayers with another option, in the form of the Agency’s Voluntary Disclosures Program. As the name implies, the Program allows taxpayers to voluntarily disclose to the CRA any past errors or omissions or failures to file when required. Where the requirements of the program are met, the CRA is authorized to cancel (or “waive”) any penalties which might otherwise be assessed against the taxpayer. It’s important to note that only penalties may be forgiven, and that the taxpayer will, notwithstanding any voluntary disclosure, continue to be “on the hook” for any outstanding taxes, plus interest charges.

The CRA imposes four conditions which must be met before a disclosure will qualify under the program. They are as follows.

• The disclosure must be truly voluntary in nature – that is, it must be initiated by the taxpayer and, in particular, must not be the result of the taxpayer’s knowledge of enforcement action about to be taken by the CRA. In other words, a taxpayer who “voluntarily” discloses past transgressions after finding out that he or she is about to be audited will not qualify under the Program.
• Any disclosure made by the taxpayer must be “complete”, as that term is understood by the CRA. The taxpayer is expected to provide full and accurate reporting of all previously inaccurate, incomplete or unreported information. It’s not possible to make selective disclosure of, for instance, one tax year but not others. As well, the CRA will request documentation to verify the amounts to be disclosed. If that documentation shows that the initial disclosure contained significant errors or omissions, the disclosure will not qualify under the VDP. In such a case, the disclosed information will be processed by the CRA and the Agency will be able to apply interest and penalties to the entire outstanding amount.
• The voluntary disclosure by the taxpayer must involve at least one penalty. Since the point of the VDP is to forgive penalties while collecting outstanding taxes and interest, there would be no point to seeking penalty relief where no penalties are involved. In such cases, the relevant information should simply be disclosed to the CRA, which will process it and assess any taxes and interest owed.
• Finally, the taxpayer’s disclosure must generally include information which is at least one year past due. In other words, a disclosure could not normally be made in respect of a 2011 income tax return (which was due April 30, 2012) until May of 2013. The CRA will, in some circumstances, accept a disclosure of information which is less than one year past due, but such disclosure cannot be used by the taxpayer simply to avoid penalties. For instance, a taxpayer who fails to get his return in and his taxes paid by April 30 cannot make a “voluntary disclosure” a few days or weeks later simply in order to avoid the late-filing penalty which would otherwise be assessed.

Finally, a taxpayer who is considering making a voluntary disclosure (and whose situation meets the four criteria required by the CRA, as outlined above) can “test the waters”, to a degree, before deciding to make full disclosure. The CRA will accept a “no-name” disclosure from a taxpayer and will discuss the taxpayer’s situation with him or her on a hypothetical basis, providing the taxpayer with information on how an actual disclosure would be handled. The CRA’s policy with respect to such no-name disclosures requires the taxpayer who makes a no-name disclosure to provide identifying information within 90 calendar days from the effective date of disclosure, in order to “complete” the disclosure. During the 90-day period, the taxpayer is protected from prosecution and from the application of penalties. However if, at the end of the 90 day period the identity of the taxpayer remains unknown, the voluntary disclosure file will be closed without further contact from the CRA, and no extension of the 90-day period will be allowed to identify the taxpayer.

No one really likes paying taxes, and paying back taxes, plus interest, is even more unpalatable. However, for taxpayers who find themselves in a position where an investigation or audit by the CRA into their affairs would likely result in the payment of taxes, plus interest, plus penalties, or even a prosecution, the Voluntary Disclosure Program offers a way to “come clean” without the risk or prosecution, and without the often onerous penalties which can be levied by the tax authorities.

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The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

TIME TO ENJOY YOUR SUMMER!

If you have too much work and not enough play, we can do the work for you.

At Cope, Barrett and company, Certified General Accountants, we do your bookkeeping, data entry, HST reporting, financial statements and tax returns.

Summer is short, enjoy it while it lasts

Let us take the heat, while you enjoy a cool one.

Call us today at 613-476-2150

Cope Barrett and company Certified General Accountants

Your one- stop business solution.  Your County Accountants! 

Get a tax break for summer child care costs (July 2012)

As July arrives and the school year has ended, families that do not have a stay-at-home parent have to make plans for keeping the kids busy and supervised over the school summer vacation. There is no shortage of options—at this time of year, advertisements for summer camps and summer activities abound—but nearly all the available options have one thing in common, and that’s a price tag. Some choices, like day camps provided by the local recreation authority can be relatively inexpensive, while the cost of others, like summer-long residential camps or elite-level sports or arts camps, can run into the thousands of dollars.

Whatever the cost, all parents would welcome some assistance with meeting those costs.

Until 2007, the only tax “break” which could be claimed to help offset such costs was the general child care expense deduction. In that year, however, the federal government introduced the Children’s Fitness Tax Credit. While the child care deduction is available (within set parameters) for most child care arrangements, the Children’s Fitness Tax Credit may be claimed only for activities or camps which involve a minimum degree of physical activity. Specifically, when claiming the credit, parents are entitled to claim a non-refundable credit equal to 15% of the first $500 in qualifying costs per child per year. So, in other words, a camp which would have cost parents $500 per child will instead have a net cost of $425 ($500 minus 15%, or $75.), after the credit is claimed on the parent’s tax return for the year.

Parents whose children’s interests run to less active pursuits, like art, music, theatre, or writing may have felt, with some justification, that such activities were getting short shrift from our tax system. Perhaps in response to the perceived inequity, the federal government introduced the Children’s Arts Tax Credit. Very similar in structure to the Children’s Fitness Tax Credit, this credit provides a non-refundable 15% tax credit on up to $500 in eligible expenses per child per year. Claiming either credit requires a minimum expenditure of $100 per child per year on qualifying activities.

Given the enormous range of activities available for children, it’s not surprising that the federal government has found it necessary to provide detailed rules on what types of activities will and won’t qualify for the two credits. And, while the possibility of a tax benefit should never drive the decision on which program or activity a child should be enrolled in, the availability of the credit might tip the balance between similar programs, or might make a program, camp, or activity that seemed financially out of reach more feasible.
In assessing whether a particular camp or program might qualify for either of the two credits, the first thing to note is that both credits are available only in respect of fees paid for children who are under the age of 16 at the beginning of the year. In other words, the last year for which the credit can be claimed is the year in which the child turns 16, assuming that all other criteria are met. Those criteria are as follows:

• the program must last for a minimum of 8 weeks, with at least one session per week or, in the case of children’s camps, must run for 5 consecutive days;
• the program or activity must be supervised;
• the program or activity must be suitable for children; and
• more than 50% of activities offered must include a significant amount of qualifying activities or, in the case of a program, camp, or membership in which participants can choose from a variety of activities, more than 50% of those activities must include a significant amount of eligible activities or more than 50% of the available program time must be devoted to eligible activities.

It’s clear from the foregoing that the concept of “eligible activities” looms large in the determination of whether a particular cost may be claimed under either of the credits. For both credits, the rules provide a specific definition of eligible activities, as follows:

For purposes of the Children’s Fitness Tax Credit, eligible activities are limited to those that require a significant amount of physical activity that contributes to cardiorespiratory endurance, plus one or more of: muscular strength, muscular endurance, flexibility, and/or balance.
Information provided on the Canada Revenue Agency (CRA) Web site indicates that “physical activity includes strenuous games like hockey or soccer, activities such as golf lessons, horse-back riding, sailing and bowling as well as others that require a similar level of physical activity.”
Similar rules are provided for the purpose of defining eligibility for the Children’s Arts Tax Credit. Those rules are quite broad and extend to activities like academic tutoring or the development of interpersonal skills. To be eligible for the credit, such activities must:

• contribute to the development of creative skills or expertise in an artistic or cultural discipline, including the literary arts, visual arts, performing arts, music, media, languages, customs, and heritage;
• provide a substantial focus on wilderness and the natural environment;
• help children develop and use particular intellectual skills;
• include structured interaction among children where supervisors teach or help children develop interpersonal skills; or
• provide enrichment or tutoring in academic subjects. 

Often, particularly in the case of residential camps or sports or arts camps, charges are levied for such costs as accommodation, travel, or food, or parents must incur costs to outfit the child with required equipment to use at camps. Costs paid by parents for non-activity related charges, like food, travel, and accommodation do not qualify for either of the credits and must be subtracted from the total fee paid. As well, the cost of equipment purchased by parents from third-party suppliers is not a qualifying cost for purposes of the credits.

Qualifying child care expenses are claimed as a deduction from income, rather than a credit, meaning that the entire amount of qualifying expenses is effectively not taxed as income in the hands of the parents. There are limits imposed on the maximum weekly cost of a residential camp (ranging from $100 to $250), as well as restrictions on the total amount of child care expenses which may be deducted in a year. However, the overall annual limits, which range from $4,000 to $10,000, depending on the age and health of the child, with an overall cap of two-thirds of the parent’s income for the year, are much higher than the allowable amount for the Children’s Fitness or Arts Tax Credit. It’s not, however, possible to double or triple dip when it comes to expenses related to children’s activities. Expenses which are claimed under any of the three possible categories (child care expenses, Children’s Fitness Tax Credit, and Children’s Arts Tax Credit) can be claimed only once, even if they might, by definition, qualify under more than one provision.

5 ways to spend your tax refunds...

The average income tax refund last year was $1,500, according to the Canada Revenue Agency, and it's likely many of those lucky recipients are hard pressed to remember where it went.
If you're one of the three in four Canadians to get one this year here are five ways to make your tax refund — or any windfall for that matter - the seed that blossoms:
Pay down debt
Imagine an investment that is guaranteed to return thirty per cent, compounding annually, with no risk and no tax consequences. That's basically what you're getting if you pay down the balance owing on retail credit cards like those offered by The Bay, which can charge as much as 29.9 percent. Any investor would drool at that sort of return yet thousands of consumers carry balances at those rates.
Even basic credit cards like Visa and MasterCard charge rates on balances in the upper teens.
Putting your tax refund against debt, even consumer loans nearing ten per cent, can prevent a lifetime of financial stagnation. You won't have much to show for it right away but you'll thank yourself down the road.
Paying down low interest car loans, secured lines of credit or mortgages may be less fruitful but there are more effective ways to invest your tax refund.
Open up a TFSA
At the start of 2012 over eight million Tax Free Savings Accounts had been opened up since the Federal government introduced them four years ago.
The TFSA provides a unique opportunity for savers to grow their money tax free. All gains made from a long list of eligible investment stay in your pocket and not the government's.
For many Canadians on a tight budget finding extra cash to start a TFSA is elusive but it only takes a few hundred dollars to get the ball rolling. Afterward a hundred here and a hundred there can turn into significant savings.
Even if you're one of the eight million plus TFSA holders it wouldn't hurt to top it up. The total contribution limit will increase by $5,000 (plus inflation) each year in addition to the current $20,000 maximum built up over the past four years.
Make an early RRSP contribution
While you're topping up your savings consider putting your tax return in a Registered Retirement Savings Plan. An RRSP contribution allows the investor to deduct the full contribution amount from his or her taxable income.
It's the contribution that keeps on giving. By contributing your tax return to an RRSP you avoid the last-minute rush before next year's March deadline and get an early start building next year's tax refund.
It's important to know that while contributions are tax deductable, the contributions and any gains from investments in an RRSP are fully taxed when they are withdrawn - but that usually occurs in retirement when the plan holder is in a lower tax bracket.
Buy more of what you like
If you're a prudent investor you probably hold a few good stocks in your TFSA or RRSP that pay dividends, or you feel are poised to rise when the broader markets turn up.
Good stocks are good stocks and the more you own, the better. Using your tax return to buy more can bulk up your holdings.
Even better, good stocks that are down from your original purchase price provide an opportunity to buy more at a better price — lowering your average cost per share and your break-even point.
Roll the dice
Why do investment advisors go on and on about diversification? Because a diversified portfolio opens up a wide range of growth opportunities while spreading out overall risk.
Diversification most commonly applies to sectors and geographic regions, but it should also apply to risk itself.
A well diversified portfolio includes low-return potential/low-risk investments at one end of the risk spectrum and high-return potential/high risk investments at the other end. As a result, losses at the high-risk end will be cushioned by the low risk investments, and gains will pull up the low risk investments.
If you have a good low-risk anchor you owe it to yourself to take on more risk at the opposite end — and that's where you can have some fun with your tax refund.
Do your homework and shop for a high risk stock with strong growth potential. A great starting point is the TSX Venture Exchange, which is packed full of what are considered penny stocks - small companies that trade on low volume.
Good examples are start-up resource firms sitting on huge reserves that are poised to either strike it rich or get bought up at a premium from bigger resource companies.
http://www.copebarrett.ca/

Tax deduction often missed...the First Time Home Buyer Tax Credit

A qualifying home must be registered in your and/or your spouse's or common-law partner's name in accordance with the applicable land registration system, and must be located in Canada. It includes existing homes and homes under construction.
The following are considered qualifying homes:

• single-family houses;
• semi-detached houses;
• townhouses;
• mobile homes;
• condominium units; and
• apartments in duplexes, triplexes, fourplexes, or apartment buildings.

Note
To qualify you must be a First Time homebuyer only. 

You can claim an amount of $5,000 for the purchase of a qualifying home made in 2011, if both of the following apply:

• You or your spouse or common-law partner acquired a qualifying home.
• You did not live in another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years (first-time home buyer).

questions?  Contact us today!

Tax tips for getting the full benefit of childcare claims

What payments can you claim?
You can claim payments for child care expenses made to:

• caregivers providing child care services;
• day nursery schools and daycare centres;
• educational institutions, for the part of the fees that relate to child care services;
• day camps and day sports schools where the primary goal of the camp is to care for children (an institution offering a sports study program is not a sports school); or
• boarding schools, overnight sports schools, or camps where lodging is involved (read the note in Part A of Form T778, Child Care Expenses Deduction).

Advertising expenses and placement agency fees paid to locate a child care provider may also qualify as child care expenses. For more details, see Interpretation Bulletin IT-495, Child Care Expenses.
When the child care services are provided by an individual, the individual cannot be:

• the child's father or mother;
• another person;
• a person for whom you or another person claimed an amount on line 305, 306, 315, or 367 of your Schedule 1; or
• a person under 18 who is related to you. A person is related to you if he or she is connected to you by a blood relationship, marriage or common-law partnership, or adoption. For example, your brother, sister, brother-in-law, sister-in-law, and your or your spouse's or common-law partner's child are related to you. However, your niece, nephew, aunt, and uncle are not.
  Notes
  You may have paid an amount that would qualify for the child care expenses deduction and the children's fitness amount or the children's arts amount (lines 365 and 370 of your Schedule 1). If this is the case, you must first claim this amount as child care expenses. Any unused part can be claimed for the children's fitness amount or the children's arts amount as long as the requirements are met.
  
  If you paid an individual to provide child care in your home, you may have some responsibilities as an employer. If you are not sure of your situation, contact us.
  
  You can claim payments for child care expenses that you paid for the parental contribution set ($7.00 per day) by the government of Québec.

The individual or organization who received the payments must give you a receipt showing information about the services provided. When the child care services are provided by an individual, you will need the social insurance number of the individual. The receipt can be in your name or that of your spouse or common-law partner.

Note
You cannot carry forward unclaimed expenses to a subsequent taxation year.

Pension Income Splitting

Each January and February, there is a flurry of television, radio, and online advertisements and phone calls and e-mails from financial advisers and financial institutions encouraging Canadians to contribute to a registered retirement savings plan (RRSP) or a tax free savings account (TFSA). One thing you won’t see in all that activity is promotions or incentives to split pension income. In fact, the mention of such a tax-planning strategy will likely draw a blank look from most Canadians.

The reason that nobody is promoting pension income splitting is that it’s one of those rare tax-planning strategies which benefits absolutely no one but the taxpayer who uses it. In some cases, like RRSP or TFSA contributions (and likely soon, the benefits of pooled registered pension plans, or PRPPs), financial institutions explain and promote the benefits of such plans because it represents increased business for them. In other cases, the government advertises or promotes programs which advance economic policy objectives, like investments in lagging sectors of the economy or depressed areas, or which further social policy goals. But pension income splitting remains a relatively unknown tax planning strategy.

That’s unfortunate for a couple of reasons. First, the splitting of pension income can provide significant tax savings to those able to utilize it—those people generally being older taxpayers who in many cases are living on a fixed income and can really benefit from the tax savings received, especially in the current low interest rate environment. Second, unless you’re getting good tax planning advice, it’s very easy to overlook pension income splitting as a way of reducing your tax burden. The only references to pension income splitting on the annual return are two entries, one on line 116 and the other on line 210 and, unless you are already aware of the significance of those entries, there’s really nothing to alert you to it. The Income Tax and Benefit Guide provides very little in the way of explanation and no indication at all of the benefits which may be obtained. In addition, the form which must be filed with the return to effect a pension income splitting strategy (Form T1032) isn’t part of the standard tax return package provided to taxpayers by the Canada Revenue Agency (CRA); taxpayers must obtain it separately.

The general rule is that taxpayers receiving private pension income (including a pension received from a former employer and, where the recipient taxpayer is over the age of 65, payments from an RRSP or a registered retirement income fund) are entitled to split up to half that income with a spouse for tax purposes. (Government source pension income, like payments from the Canada Pension Plan or Old Age Security payments do not qualify for pension income splitting). A number of the provinces have also indicated that they will adopt the federal rules for provincial tax purposes.

The mechanics of pension income splitting are relatively simple. There is no need transfer any funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify the pension plan administrator. In addition, the decision of whether and to what extent to split pension income for tax purposes does not have to be made until the return for the year is being completed. Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032, Joint Election to Split Pension Income, with their annual tax return.

For help with your tax return and pension income splitting call us in Bancroft, Belleville or Picton
613-332-2150 or 613-962-2151 or 613-476-2150

Commonly missed tax deductions 2012...

We are well into our tax season and keeping quite busy at that!
Still we're not too busy to bring some important reminders about your tax deductions for 2012.
To keep the list concise I want to bring to your attention some most commonly missed tax deductions, so here is a list.  Take a look and if you have so much as an inkling that you may qualify, call us right away.  We have the knowledge and experience to help you determine your eligibility for any credits you may be missing out on...

1. Always first on my list is the disability tax credit as I have helped many, many taxpayers recieve this credit and claim back up to ten years - resulting in many thousands of dollars of tax savings.  This to me is the single most misunderstood tax credit, and unfortunately those who miss out are also usually those who need these benefits the most!
2. Caregiver tax credit - goes hand in hand with the above.  A dependant child over 18 who qualifies for the disability tax credit and lives at home... means caregivers (often parents) can benefit from this tax credit. 
3. Carryforward credits from Canada Revenue Agency Notice of Assesment in prior year.... are far too often missed.  When I meet with a client, I always ask them to bring their prior tax year notice of assesment.  Often there are "goodies" there which we can use to reduce their tax payable or increase a refund amount.   Too often I see unused RSP contributions which could have provided valuable tax relief!
4. Last for this blog - but surely very important is the pension income splitting opportunity.  Too often I meet new clients who in the past have been "do-it-yourself" tax preparers or used out of the box tax software and did NOT get the maximum benefit of the pension split.  Maximum allowable does not equal maximum tax benefit...so misunderstood!  Our sophisticated software is designed to run through all the variables and determine the absolute maximum benefit in terms of taxes payable when determing amounts for income split.  This is another of those times when we refile tax returns from prior years to help new clients get their correct tax benefits.

So that does it for another blog...keep watching for more valuable tax news and tax tips...I'll try to get some in before April 30 filing deadline!  Always, you are welcome to phone me with questions...www.copebarrett.ca  for contact information, Belleville, Picton and Bancroft

Start saving now!

Tired of the same old revolving door approach to income tax preparation? Do you wonder if you are receiving all the tax benefits that are available to you? Our professional staff is trained and up-dated constantly to assure they know the latest in government tax credits and programs. You may be pleased with how that adds up for your next tax filing. Honest, reliable and efficient service makes your next tax return filing a pleasant event.
Send your tax information via email, post, courier or visit our Belleville, Picton or Bancroft office today. Contact us jfbarrett@copebarrett.ca

Don't miss out on those income tax deductions any more!

Income tax season is upon us and we are ready to assist you in getting the maximum tax benefits that you are entitled to. Below are two most commonly missed tax deductions to watch for. Keep your eye on my blog to see the remaining 8 of then top ten for 2012.

We all pay our fair share of tax and never should we pay more than our fair share. When deductions that we are entitled to claim are missed - then we are paying more than our fair share. Cope, Barrett & co, Certified General Accountants can help you to achieve the best and most fair tax filing. We think our income tax services are different than many - simply put WE CARE! It matters to us enough to take the time to really consider all the options available to our clients. We compare prior year claims, consider changes in your financial or personal position. We are often told by our clients that what makes us different from tax and accountants they have used in the past is that we actually TALK with them! Seems odd to me because talking with my client has always been the logical choice. Talking with clients has helped us notice things they may benefit from or changes that need to be adjusted for. Talking with clients helps me realize tax benefits they may be missing and that is very important to both of us.
Well back to the subject of this post - ten tax deductions you don't want to miss!...
1. Medical expenses...some are obvious like prescriptions, eyeglasses or dental fees. Often however people miss things like naturopath, massage, chiropractic, physiotherapy, medical travel and meals deduction, tutors, renovations for medical needs, costs of a van for wheelchair use, attendant care...oh this list is endless. When in doubt keep the reciept - and call me!

2. Disability Tax Credit... so misunderstood. This tax credit is available to those persons who struggle with day to day activity such as walking slowly, or extremely poor eyesight. Others may have chronic depression or need attendant care to assist with daily living. You do not have to be on a disability income to qualify, nor does receiving a disability income automatically qualify one for the tax credit! I have seen clients recieve thousands of dollars in tax refunds as they didn't realize this existed. Let's talk!
Reasons 3 and 4 coming in our next chat. Questions? Call me at 613-962-2151 or 613-476-2150

RRSPs and TFSAs—making the annual choice (February 2012)

It’s that time of year again, when advertisements about the wisdom of contributing to your registered retirement savings plan (RRSP) fills the airwaves and Web sites. And, since the introduction of tax-free savings accounts (TFSAs) in 2009, February is now also the month in which Canadians wrestle with the question of whether to put any available funds into an RRSP before the contribution deadline of February 29, 2012, or whether to deposit those funds instead in a TFSA.

It’s important to be clear, at the outset, that it’s not an either/or choice. Taxpayers can (and probably should) utilize both the RRSP and TFSA options in planning their financial affairs. Realistically, however, for most taxpayers the limitation is one of resources and cash flow, and it’s often not possible to fund contributions to both an RRSP and a TFSA in the same year, let alone in the same month. That said, what are the considerations which apply in determining which savings/investment vehicle is preferable for 2012?

There are some similarities between TFSAs and RRSPs. Both allow savings to grow and compound free of current tax, and for both, contributions not made in a year can be carried forward and made in any subsequent year. As well, the types of investments which can be made with RRSP or TFSA contributions are, for all intents and purposes, the same, meaning that one’s choice of investment (i.e., guaranteed investment certificates (GICs), mutual funds, bonds, etc.) should be irrelevant to the choice of RRSP vs. TFSA. However, the differences between the two savings vehicles are at least as significant as their similarities.

Perhaps most important to taxpayers, contributions made to an RRSP are deductible from income, resulting in a lower tax bill for the year of contribution and, for many taxpayers, a tax refund. Contributions to a TFSA are, on the other hand, made with after-tax funds, meaning that tax will already have been paid on the income used to make that contribution. Many taxpayers, when presented with an option which will reduce current year taxes, find that the most attractive choice. However, over the long-term, the tax consequences of choosing an RRSP over a TFSA can erode that benefit. When funds contributed (along with investment income earned on those funds) are withdrawn from a TFSA or an RRSP, the tax consequences are very different. Funds withdrawn from an RRSP (or a registered retirement income fund (RRIF) into which the RRSP has been converted) are fully taxable, without exception, at whatever tax rate applies to the taxpayer at the time of withdrawal. TFSA funds (including accumulated investment income) are withdrawn from the plan free of tax, regardless of when the withdrawal is made or the purpose to which the funds are put. And for taxpayers who are receiving Old Age Security benefits (or any other means-tested benefits) from the federal government, it is important to note that RRSP or RRIF funds withdrawn will be included in income for the purpose of determining eligibility for such benefits, while TFSA funds will not. Finally, while RRSP contributions for 2011 must be made by February 29, 2012, there is no similar deadline for TFSA contributions—they can be made at any time during the calendar year. Finally, when funds are withdrawn from a TFSA, the plan holder can “top up” the TFSA in any subsequent year by the amount of that withdrawal. Funds withdrawn from an RRSP cannot be re-contributed, unless the withdrawal was made as part of government-sanctioned withdrawal plans, like the Home Buyers’ Plan or the Lifelong Learning Plan.
The minority of working taxpayers who are members of registered pension plans will likely find the TFSA option particularly attractive. The maximum amount which can be contributed to an RRSP for the 2011 tax year is calculated as 18% of earned income for 2010, to a maximum contribution of $22,450. However, that maximum contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under the pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, and a TFSA contribution the logical alternative.

In a similar way, for taxpayers over the age of 71, the RRSP v. TFSA question is simply irrelevant. Taxpayers over that age are not eligible to make contributions to an RRSP, making TFSAs the only tax-free savings vehicle to which they can make contributions. The benefit is greatest for older taxpayers whose required RRIF withdrawals are greater than their current needs. While such RRIF withdrawals must be included in income and taxed in the year of withdrawal, transferring the funds to a TFSA will allow them to continue compounding free of tax and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or for the federal age credit.

For younger taxpayers, where the savings goal is short-term (e.g., a down payment on a home or paying for next year’s vacation), the TFSA is clearly the better choice. While choosing to save through an RRSP will provide a deduction on that year’s return and probably a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced. While the amounts involved may seem small, the loss of compounding on even a small amount over 25 or 30 years can make a significant dent in one’s ability to save for retirement.

Taxpayers who are expecting their income to rise significantly within a few years (e.g., students in post-secondary or professional education or training programs) can save some tax by contributing to a TFSA while they are in school and their income (and therefore their tax rate) is low, and then withdrawing the funds tax-free once they’re working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted against income which would be taxed at the much higher rate, generating a tax savings. And, if a need for the funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Financial planners and tax advisers are accustomed to being asked by clients at this time of year whether it makes more sense to pay down the mortgage (or other debt) or to contribute to an RRSP. That question has become more complicated now that the TFSA option has been added to the mix. There is, however, a solution which allows you to do both. Assuming a marginal tax rate of 45%, an RRSP contribution of $10,000 will generate a tax refund of $4,500. Contribute that $10,000 (or as much as you can) to your RRSP and, when the resulting tax refund lands in your bank account, move it to a TFSA or use it to pay down the mortgage or other debt, or split it between the two.

The Canada Revenue Agency has dedicated sections of its Web site to addressing the need of taxpayers for information about TFSAs and RRSPs, and those sections can be found at http://www.cra-arc.gc.ca/tx/tfsa-celi/menu-eng.html and http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/menu-eng.html, respectively.

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The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Canada Pension Plan changes for individuals aged 60 to 70 — January 2012

Did you know…?
Significant changes to the Canada Pension Plan (CPP) will occur in January 2012 to reflect the way Canadians are living, working, and retiring. The changes will affect both employees and self-employed workers aged 60 to 70. The changes will not affect you if you are already receiving a CPP or Quebec Pension Plan (QPP) retirement pension and you remain out of the workforce. Employees working in Quebec and other workers not subject to the CPP will also not be affected by these changes.
What’s new?
Contribution changes (what you will pay):

• All workers aged 60 to 65 will be required to make CPP contributions—even if they are receiving a CPP or QPP retirement pension.
• Workers who are 65 to 70 years of age and who are receiving a CPP or QPP retirement pension will be required to contribute unless they have elected to stop their CPP contributions. To elect to stop contributing to the CPP, workers will have to be at least 65 years of age and do the following:
  • Employees (who may also have self-employment income) will have to complete Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election and give a copy to their employer. In addition, employees should send the original to the Canada Revenue Agency (CRA). The election will take effect on the first day of the month after the employee gives the form to their employer.
    • Note: The CRA has been accepting Form CPT30 since December 1, 2011, but only from those employees who as of December 31, 2011 are at least 65 years of age and in receipt of a CPP or QPP retirement pension.
  • Self-employed workers will have to complete Schedule 8, CPP Contributions on Self-Employment and Other Earnings, when they file their income tax and benefit return for 2012 or any subsequent year. The election will be effective on the first day of the month referred to in Schedule 8.