taxes

It’s RRSP and TFSA season again

Registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) are always topical at the beginning of the year. And, for anyone considering these options, there are two primary considerations right now: what new available contribution room you may have for your TFSA, and that you have the first 60 days of the year to make an RRSP contribution against your previous year’s income.

To help you understand the differences between the two tax-sheltered investment vehicles, we put together a general FAQ. However, before going over the mechanics, we want to stress how important it is to use these programs in your financial plan. There is almost no circumstance where it would make sense to hold investments that generate growth or income in a non-registered account rather than in a TFSA.

As an example of the power of the RRSP, we ran some numbers to consider. This is based on a high-income earner, age 30, and compares saving within an RRSP and investing the resulting tax savings as well, for 41 years, until age 71, and then cashing it all in and paying tax thereon, versus simply saving in a non-registered account.

In the example, the individual invested $24,000 per year in a portfolio that generated an income of 5% per year. We used a tax rate of 50%. At age 71, the after-tax cash savings in the hands of the individual, having used the RRSP program, is $808,000 greater than the traditional non-registered plan.

As you can see, the advantage of the RRSP is extremely significant and cannot be overstated.

TFSA basics

The tax-free savings account program began in 2009 to provide Canadians with an account to contribute and invest money tax-free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed, as well as any income earned in the account (investment income and capital gains) are tax-free, even when it is withdrawn.

The allowable contribution room for a TFSA has changed over the years, and can be seen in Table 1.

TFSA has many important features:

to have one, you must be 18 years of age or older with a valid social insurance number,
there is a tax-free accumulation of income and gains,
you have tax-free withdrawals – at any time, for any reason,
they have no impact on income-tested benefits such as child tax benefits and guaranteed income supplement,
you can invest in any RRSP-qualified investment, such as mutual funds, ETFs, stocks, GICs, etc.,
the interest on money borrowed to contribute is not tax-deductible,
no attribution rules apply – it’s good for income splitting between spouses and can be transferred to the surviving spouse’s TFSA if they are the designated beneficiary,
to avoid penalties, you must be careful to not over-contribute, and
you can recontribute amounts withdrawn in previous years, and there is a 1% penalty per month if recontributed in the same calendar year.

RRSP basics

The registered retirement savings plan program was introduced by the Canadian government in 1957 to help Canadians save for retirement. All income accumulates on a tax-deferred basis and contributions are deducted against your taxable income in that particular tax year. As of 2020, the RRSP deduction limit is 18% of your earned income, to a maximum of $27,230. You should always check this amount with your accountant and/or CRA.

The important features of an RRSP include the contribution period, which is from Jan. 1 to the 60th day of the following year, and that the maximum age to contribute is 71. There is no minimum age for contributing, but, starting in the year after the year you turn 71, you must start making specified annual withdrawals from your RRSP, which now becomes a registered retirement income fund (RRIF).

The Home Buyers’ Plan (HBP) allows you to withdraw from your RRSP to buy or build your first home. In this case, the money must be in the RRSP for 90 days before withdrawal is permitted, and you can withdraw up to $35,000. Regarding repayment of the withdrawal, participants must repay 1/15th per year (starting in year 2), with the total amount paid off in 15 years.

The Lifelong Learning Plan (LLP) allows you to withdraw funds from your RRSP to finance full-time training or education expenses for you or your spouse or common-law partner. You can participate in the LLP for yourself, while your spouse or common-law partner participates in the LLP for him or herself; you can both participate in the LLP for either of you; or you can participate in the LLP for each other. Withdrawals of up to $10,000 in a calendar year and up to total of $20,000 are permitted, and participants must repay 1/10th of the amount withdrawn per year, with the total amount paid off in 10 years.

Philip Levinson, CPA, CA, and Brent Davis are associates at ZLC Financial, a boutique financial services firm that has served the Vancouver community for more than 70 years. Each individual’s needs are unique and warrant a customized solution. Should you have any questions about the information in this article, visit zlc.net or call 604-688-7208.

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Disclaimer: This information is not to be construed as investment, legal, taxation or account advice, nor as an offer to sell or the solicitation of an offer to buy any securities. It is designed only to educate and inform you of strategies and products currently available. The views expressed in this commentary are those of the authors alone and are not necessarily those of ZLC Financial or Monarch Wealth Corp. As each situation is different, please seek advice based on your specific circumstance.

Transferring our assets

(photo from Alpha Stock Images, photographer Nick Youngson)

After a lifetime of work, most of us would like to know that our assets and legacy are transferred to the next generations, children and grandchildren, in the amounts and percentages we chose while alive. Our hope is that this would happen as painlessly, securely and quickly as possible.

It is a subject I am quite passionate about. I have seen loving families, with the best intentions, fail to adequately plan this transfer of assets and they are faced with disappointing financial and emotional consequences. There is the very real risk that your assets will not land in the hands of the people you intended. In addition, even when your wishes are met, without the proper planning and communication, feelings can be hurt, with long-lasting negative, albeit unintended, consequences.

What is probate

Probate is a legal procedure that validates a deceased’s will and confirms the executor’s authority to carry out the testator’s wishes.

There is no requirement that every will must be probated. Proper planning can eliminate the need for probate, and the type of asset involved will generally dictate whether or not probate is required.

The cost of probate varies by province. British Columbia has fees of $14 per thousand on estates over $50,000, plus a filing fee. Property owned in another province may attract fees based on that province’s fee schedule.

Advantages/disadvantages

When letters of probate are obtained, financial institutions, transfer agents, land registry offices and other third parties can safely transfer the assets to the intended recipients. The time frame for any court challenges to the will or estate is usually measured from when the probate is granted. This limits the period when legal action may be taken.

However, the process can be very expensive, time-consuming and complex, and is open to public scrutiny. This loss of privacy can be very important to the ongoing harmony of the family when assets aren’t divided equally among the beneficiaries.

Avoiding or reducing probate

Make sure you have a will. Probate fees will be applied automatically if you die intestate (without a will).
Gifting prior to death can reduce the value of the estate subject to probate but must be done with care. There are important legal and income tax considerations and possibly property transfer taxes.
Use named beneficiaries whenever possible. Moving assets to vehicles such as life insurance, annuities and segregated funds is a great way to avoid probate. What’s important is that proceeds are paid quickly, typically in a few weeks, and directly to the beneficiary. This avoids lawsuits from family members who may feel they didn’t receive what they felt they deserved from the estate.
Holding assets in joint tenancy with a spouse, child or other family member will avoid probate, as the asset passes automatically upon death to the other individual. Using joint tenancy to avoid probate fees should involve careful consideration: there will be a loss of control once it is jointly held and the asset will be exposed to the joint tenant’s creditors. There are also certain complicated tax issues and other risks associated with this strategy.
Transferring assets to a trust will remove the asset from the estate. Be careful of appreciable assets that may attract a taxable disposition upon transfer. The use of an alter-ego or joint spousal trust can be very effective for this purpose. There are many cases where trusts are necessary to achieve more complicated wishes but they can be expensive to set up and require annual maintenance.
Transfer assets to a corporation. Except for outstanding mortgages on real estate, which are deductible, probate fees are generally charged against the gross value of an estate asset. If an estate asset was purchased with borrowed money, it may be beneficial to transfer that asset to a company. This will reduce the value of the estate and the company share value will be the asset, less the debt used to acquire it.
Have multiple wills. Not all assets are subject to probate. It is becoming popular to have two wills – one for assets that are probatable and one for those that are not. This strategy is not available in all provinces and the use of multiple wills may create problems with the new graduated-rate estate tax with respect to testamentary trusts. It is important to seek professional advice when considering these strategies.
Keep it simple. There are often cases where we can plan to quite easily avoid probate entirely. All assets can be invested within segregated funds (GICs, stocks and bonds are available) with named beneficiaries and others gifted. This can be done where income is still guaranteed for the rest of one’s life, but ownership has been transferred while alive, or will pass straight to beneficiaries later, thus avoiding probate.

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Finally, I like to stress the gifting of assets while one is alive, be it to your family or a charity. There are many advantages, whether it’s the personal satisfaction of supporting your favourite charity, or the love shared with your children and grandchildren. After all, isn’t estate planning really intergenerational legacy planning?

Philip Levinson, CPA, CA, is an associate at ZLC Financial, a boutique financial services firm that has served the Vancouver community for more than 70 years. Each individual’s needs are unique and warrant a customized solution. Should you have any questions about the information in this article, he can be reached at 604-688-7208 or [email protected].

*** Disclaimer: The views (including any recommendations) expressed in this commentary are those of the author alone, and are not necessarily those of ZLC Financial. This information is not to be construed as investment advice. It is for educational or information purposes only. It is not intended to provide legal, taxation or account advice; as each situation is different, please seek advice based on your specific circumstance. This commentary is not in any respect to be construed as an offer to sell or the solicitation of an offer to buy any securities. ***

בית עולות איבד את מעמדו כגוף צדקה

(Michel Rathwell) .משרדי הרשות המיסוי הקנדית באוטווה

רשות המיסוי הקנדית (הסי.אר.איי) הודיעה במהלך החודש שעבר לארגון היהודי-חרדי “בית עולות” מטורונטו, כי הוא יאבד את מעמדו כגוף צדקה לצורכי מס. זאת כיוון שהארגון העביר תרומות למכינות קדם-צבאיות בישראל ולגופים הנמצאים מעבר לקו הירוק. לפי תקנות המיסוי בקנדה “בית עולות” עבר על כללי החוק הקנדי למתן תרומות מצד קרנות צדקה. “בית עולות” כך התברר תרם כספים לפרוייקטים הקשורים לצה”ל בניגוד לכללי המס בקנדה. במקרה כזה הארגון לא זכאי לפטור במס. כן גם התורמים שלו עצמם לא זכאים לפטורים במס. על פי רשות המיסוי הקנדית תרומות הכספים למכינות הצבאיות על ידי הארגון שיפרו את היעילות של הצבא הישראלי. המידע בעניין “בית עולות” פורסם לאחרונה ברשת החדשות המקומית גלובל ניוז.

הארגון “בית עולות” הוא גוף צדקה יהודי-קנדי שמגייס מדי שנה עשרות מיליוני דולרים למטרות יהודיות, שחלקם הגדול מיועדים לישראל. הארגון פועל מאז אלף תשע מאות ושמונים והוא ממקום במקום השישים ושניים, בקרב רשימת העמותות לצדקה הפועלות בקנדה. בשנת אלפיים ושבעה עשרה “בית עולות” גייס תרומות בהיקף שישים ואחד מיליון דולר קנדי. שנה קודם לכן הוא גייס תרומות בהיקף ארבעים וחמישה מיליון דולר. ואילו באלפיים וחמש עשרה גוייסו ארבעים ושניים מיליון דולר. מרבית הכספים מועברים כתרומות לפרוייקטים מחוץ לקנדה. ולכן “בית עולות” נמצא במקום החמישה עשר בקרב רשימת העומותות הקנדיות לצדקה שמעבירות כספים לחו”ל.

רשות המס הקנדית שביצעה בדיקה בנושא “בית עולות” הודיעה לראשיו כי תרומותיו של הארגון למכינות קדם-צבאיות מהוות בפועל תמיכה בצה”ל. בנוסף נטען כי מדובר בהפרה של התנאים המחייבים גופי צדקה שפועלים שלא למטרות רווח, לא לתרום לפרוייקטים צבאים זרים. אז כספים שנתרמו על ידי תורמים שונים לא יוכרו כהוצאה מוכרת לצורכי מס. לא ברור בשלב זה כמה בדיוק כסף העביר “בית עולות” למכינות הצבאיות בישראל, ולאן בדיוק הכסף יועד.

“בית עולות” דחה את הפרשנות של ממשלת קנדה. בארגון אומרים כי התרומות נועדו לתמוך בפעילות חינוכית ודתית במכינות הצבאיות ולא לסיוע ישיר לצבא הישראל.

במקביל לתלונה בנוגע להעברת תרומות למכינות הצבאיות טוענת רשות המיסוי הקנדית, כי “בית עולות” תרם מיליון ומאתיים אלף דולר קנדי לגופים בשטחים הכבושים. בממשלת קנדה אומרים: סיוע להתנחלויות הישראליות בשטחים הכבושים עומד בניגוד למדיניות הציבורית של קנדה, וכן בניגוד לחוק הבינלאומי. ב”בית עולות” אמרו בתגובה לכך כי התרומות היו מיועדות לתמיכה במשפחות חלשות, בעיקר מהמגזר החרדי הגרות בשטחים. ברשות המיסוי הקנדית לא מקבלים את הסברי הארגון היהודי.

כפי שפרסמנו לאחרונה רשות המיסוי הקנדית בודקת מזה מספר שנים את פעילותה של קרן קיימת קנדה, לאור מידע שהתקבל לידיה כי הארגון עבר על כללי החוק הקנדי למתן תרומות מצד קרנות צדקה, ותרמה כספים לפרוייקטים הקשורים לצה”ל.

בקרן קיימת קנדה הגיבו לדבר החקירה בעניינם: “קרן קיימת קנדה תמשיך לעבוד במשותף עם רשות המיסוי לבדיקת הפעילויות שלנו. בעבר היינו מעורבים בפעילויות צדקה הקשורות בעקיפין בצה”ל. רבים מהפרוייקטים היו לטובת בין היתר איכות החיים של החילים ובני משפחותיהם. כל הפרוייקטים האלה נמצאים על שטחים השייכים לצה”ל והכסף לא הועבר לצבא. אנו לא ידענו שהפרוייקטים שלנו יהיו מטרה לחקירה של רשות המיסוי הקנדית, כיוון שהם נמצאים על אדמה בבעלות צה”ל. מייד שקיבלנו מידע על כך הפסקנו את התמיכה בפרוייקטים אלה. מזה מספר שנים אנו לא תורמים כספים לפרוייקטים על אדמת בצה”ל”.

JNF Canada explains position

On behalf of JNF Canada (JNF), I wish to respond to allegations made by Independent Jewish Voices Canada, longstanding opponents of JNF Canada, as well as the opinion piece you published [“Tax troubles start year,” Jewish Independent, Jan. 11].

With regard to the substantive issues that have been raised about our projects in Israel we wish to reiterate our position.

• JNF has in the past carried out projects mainly of a charitable nature, such as parks, playgrounds and recreational facilities on land owned by the Israel Defence Forces. Our charitable funds never flowed to the IDF. The charitable funds were directed toward the hiring of indigent labourers to construct these projects. These expenditures represent under one percent of our expenditures over the past decade.

In your coverage, you suggest that we took action based upon an alert from the CRA. This, in fact, is not the case. Rather, it was our legal counsel who advised us several years ago that the indirect association with the IDF may be misconstrued or criticized by the CRA, so we ended our participation at that time. We have not for several years carried out projects located on IDF land, and we continue to operate in accordance with CRA regulations governing our status as a charitable organization. We stopped these projects on the advice of counsel well before this issue was brought to the public’s attention by a group trying to sensationalize it.

• With regard to projects located in disputed territory, JNF is committed to continuing to work with CRA to ensure we are in full compliance.

• Finally, in terms of governance and reporting, JNF operates in compliance with the Canada Income Tax Act. We have Israeli staff on site to direct our projects in Israel and regularly report on our activities.

Thank you for highlighting our work and for acknowledging that “Israel is Israel, is large part, thanks to JNF.” We take pride in having supported the building of water reservoirs, collaborated with dozens of educational institutions, built numerous recreational/educational facilities, planted millions of trees and supported pioneering research in green technology. Key projects for this year include supporting a trauma centre in Sderot, a project to feed Israel’s hungry, the rehabilitation of the Be’eri and Kissufim forests, and more.

JNF’s management and lay leadership are committed to improving our operations. For the past number of years, we have been making changes to strengthen our governance and controls. What will not change, however, is our commitment to helping build the foundations of Israel’s future. We will always stand shoulder to shoulder with the people of Israel to benefit the social service and environmental fabric of the state of Israel.

Lance Davis is chief executive officer of Jewish National Fund Canada.

NDPer sponsors anti-JNF bid

Ayalon Canada Park in the Ayalon Valley is one of the projects JNF supports. (photo by Guy Asiag, KKL-JNF photo archive)

A member of Parliament has agreed to sponsor an e-petition that calls on the government to revoke the charitable status of the Jewish National Fund of Canada (JNF).

This is the first time an MP has lent support to an effort to rescind JNF’s tax-exempt charitable status in Canada and marks the latest development in a long-running battle by those opposed to the JNF’s charitable status.

Quebec NDP MP and national revenue critic Pierre-Luc Dusseault has agreed to sponsor petition E-1999, which, as of this writing [Jan. 21], had garnered more than 1,400 signatures. It went online on Jan. 9 and will close for signatures on May 9.

E-petitions are an official system whereby petitions that are sponsored by an MP and receive 500 signatures will be tabled in the House of Commons. The government must then respond within 45 days.

It was submitted by Independent Jewish Voices of Canada (IJV), which is considered an outlier within the Jewish community, due to its support for the boycott, divestment and sanctions movement against Israel.

On its website, IJV calls itself “a grassroots organization grounded in Jewish tradition that opposes all forms of racism and advocates for justice and peace for all in Israel-Palestine.”

The JNF was recently the subject of a scathing story by the CBC, which reported that the charity was under a Canada Revenue Agency audit for using charitable donations to build infrastructure for the Israel Defence Forces, “in violation of Canada’s tax rules.”

The JNF responded by saying that it stopped funding projects on Israeli military bases in 2016 and that the projects only “indirectly” involved the IDF, because they were for children and youth on land owned by the IDF.

In a subsequent interview with the CJN, JNF Canada’s chief executive officer, Lance Davis, said the charity is working with the CRA on its review and issued staunch defences of JNF’s financial transparency and donor accountability.

The e-petition, which is addressed to the minister of national revenue, says JNF Canada “engages in discriminatory practices, as its landholdings are chartered for exclusively Jewish ownership, lease and benefit, as noted by the United Nations, the U.S. State Department, a former attorney general of Israel and the JNF itself.”

It says evidence “strongly indicates” that JNF Canada violates the Income Tax Act, common law and Canada Revenue Agency policy over its IDF-related projects.

As well, it claims the charity violates Canadian and international law “by enabling physical changes within occupied territory, thereby helping Israel effectively annex land within occupied territory, and, in the case of east Jerusalem, deepen control over land already annexed illegally.”

“Notably,” it adds, “the JNF Canada-funded Canada Park was built on the lands of three Palestinian villages destroyed following the 1967 war in direct violation of the Fourth Geneva Convention.”

It also accuses JNF Canada materials of depicting “occupied territory as part of Israel, a representation that runs contrary to Canadian foreign policy and international law.”

It calls on the minister of national revenue to revoke JNF’s charitable status, if the charity is found to violate the Income Tax Act, or CRA guidelines and policies.

It was initiated by Rabbi David Mivasair, a longtime IJV activist now based in Hamilton, Ont. He called the e-petition “part of an ongoing process” to hold public officials accountable.

“It’s incontrovertibly factual that JNF Canada is in violation of Canada’s tax laws,” Mivasair claimed. “It has been for decades. It’s been reported for decades.”

This latest campaign “is not something that I take any pleasure in doing, but feel is morally necessary to be done,” he added.

According to guidelines for MPs, no debate is permitted when a member presents a petition. An MP “may make a brief factual statement (referring to the petition being duly certified, to its source, to the subject matter of the petition and its request, and to the number of signatures it carries), but members are not allowed to read petitions nor are they to indicate their agreement or disagreement with them.”

In 2017, IJV submitted an 85-page complaint about JNF Canada to the CRA and the national revenue minister. That followed many other campaigns designed to pressure federal officials.

This is the first time IJV has submitted a parliamentary petition and it’s “just one way of drawing public attention to this,” said the group’s national coordinator, Corey Balsam. “We’re assuming [officials] will look into it and not much more than that. [But] it’s definitely a big step for our campaign.”

He said Dusseault is “not someone who’s very engaged [in the issue], but he heard the concerns and saw the evidence.”

Dusseault did not reply to the CJN’s requests for comment.

In a statement posted to its website, JNF called the e-petition “as empty and scurrilous as earlier efforts to delegitimize the outstanding work of the JNF and, by extension, the existence of the state of Israel.”

JNF said its outreach suggests “that those who are applying any degree of critical thinking see the petition for what it is and are dismissing it as not worthy of engagement.”

For Jewish National Fund of Canada’s response to the Jan. 11 Jewish Independent editorial, click here.

Tax troubles start year

In a perfect world, no country would need a military. Countries and people would live in peace; the kingdom of heaven, as promised by almost every religion, at last realized.

As ideal as that wish might be for the first editorial of a new secular year, it remains true that countries need militaries. Places like Canada, which have not been forced to wage war on home turf in 205 years, nevertheless maintain a military, with our soldiers serving various roles around the globe.

In Israel, on the other hand, the military is the one thing standing between the country’s citizens and oblivion. Like the militaries of every country, the Israel Defence Forces protects the country’s borders and citizens from external and internal threats. More controversially, as a result of Israel’s complicated history, the IDF also controls parts of the West Bank under a military rule that is the cause of much international criticism.

Some of this criticism comes from Canada, including from a Palestinian-Canadian, Ismail Zayid, who has been complaining for years to the Canada Revenue Agency (CRA) over his assertions that the Jewish National Fund of Canada has been in contravention of Canadian tax law for providing material support to the IDF.

Well, it’s more than assertions, actually. In stories splashed across Canadian media last weekend, there is plenty of evidence that JNF Canada was, until 2016, openly fundraising for projects that support infrastructure projects on Israeli army, air and naval bases. These include a “new planned IDF Training Base City in the Negev,” “helping the development of the Bat Galim training base complex area” and new mess hall-type facilities at two air bases. Funds raised at Edmonton’s Negev Dinner in 2014 were explicitly and openly allocated to developing parts of the largest military training facility in Israel.

In October 2017, according to the CBC, Zayid filed another complaint to CRA “in concert with an Ottawa professor, a Vancouver rabbi and a retired nurse.” The complaint is that JNF was ignoring rules that forbid Canadian charities from issuing tax receipts for contributions that go toward foreign militaries. CRA would not confirm details of the investigation to the CBC and JNF said only that they are engaged in confidential negotiations with CRA.

There is nothing stopping any Canadian from sending a cheque to Israel’s Ministry of Defence, news reports noted, but rules forbid doing so via a charity that provides tax receipts for it. This is admirable policy. Even if some Canadians would be perfectly happy seeing our tax policy support the IDF, would we be as pleased to see tax receipts issued for funds directed to the militaries of other countries with whom we don’t have as good a relationship?

Whatever one thinks about the morality of the IDF or its presence in the West Bank, the JNF appears to have made a naive or foolish mistake – not once but apparently about a dozen times. The head of JNF Canada said they stopped funding IDF projects after CRA alerted them to the issue in 2016. But how could an organization of this calibre have done so for so long, especially when it knew there were a series of complaints being lodged regularly around this very topic?

Since 1948, countless Jewish Canadians have supported Israel, including its military, in myriad ways. For four generations, young Jewish Canadians have enlisted, even in times of war, to serve in the IDF. Canadians of all ages have volunteered in the various roles the IDF offers to overseas friends of Israel. Most Jewish Canadians recognize the life-and-death necessity of a strong Israel, supported by a strong IDF.

The Jewish National Fund is the reason Israel is the only country on the planet that ended the 20th century with more trees than when the century started. Beyond reforestation, the number of extraordinary initiatives JNF carries out all over Israel makes it an integral part of the Zionist project. Israel is Israel, in large part, thanks to JNF.

Because of JNF’s critical importance, Canadian supporters must be confident that our support is going to an organization that is transparent and scrupulously adhering to relevant regulations. To ensure that the irreplaceable work the JNF does in Israel does not waver, JNF Canada must ensure that Canadians trust the decisions and leadership of the national organization.

How to avoid tax trap

(photo from pxhere.com)

One of the last problems you’d expect in creating a power of attorney is to find your company losing a bunch of tax advantages because the Canada Revenue Agency (CRA) decides you and the person you appointed in the power of attorney have related companies.

If your company is small and Canadian-controlled, it gets certain tax advantages; however, CRA doesn’t want you to break a large company into a bunch of small pieces to multiply those tax advantages. If you give each of those pieces to a different person, but maintain control through powers of attorney, CRA will still consider all those pieces to be one company.

Unfortunately, CRA doesn’t recognize the difference between a general power of attorney used to control a company and an enduring power of attorney used to help someone when they’re incapacitated. Here’s an example of the trap that can happen if you’re not careful with a power of attorney.

(Disclaimer: this is not tax advice; it is a simplified illustration of the small business tax rules and how they’re applied with respect to control and powers of attorney.)

I’ll give you two scenarios. The first one illustrates what CRA is trying to avoid, and the second one illustrates what it catches by accident.

First scenario: avoiding multiplication of the small business deduction

Patricia Hindenburg has three adult children: Roberta, Paulina and Bradley. She runs a clothing company, Whole Lotta Cashmere Fashions Inc., with stores in the Kitsilano, Yaletown, Commercial Drive and Marpole neighbourhoods.

Whole Lotta Cashmere Fashions is doing very well. Last year, it earned $2.4 million before tax. The company is a Canadian-controlled private corporation and is eligible for the small business deduction. The deduction means that, instead of paying about 35% income tax on $2.4 million, Whole Lotta Cashmere Fashions only pays that on $1.9 million. The first $500,000 is taxed at about 10%. (Again, these are not the real tax rates and I’m simplifying the calculations.)

Patricia realizes that, if she split the company into four companies, each owned by a different person, the companies would together pay 10% on $2 million and only $400,000 would be caught by the higher tax rate. So, she splits the company into four, giving one to each of her children and keeping one for herself. This way, each of the four companies will be eligible for the small business deduction – each will only pay 10% on its first $500,000 of earnings.

To make sure that the companies remain successful and operating just the way she likes, Patricia asks her kids each to grant her power of attorney over their voting shares in their companies.

She now has control over all four companies. Their combined income is still around $2.4 million, but she believes the collection of companies has a small business deduction of $2 million instead of $500,000. She expects to pay 10% on $2 million and 35% on $400,000.

CRA does not allow this, however. Because of the powers of attorney that give Patricia control over all of the companies, CRA taxes them as one big company the same way it did before the split.

This seems fair. If the companies are truly independent, they should each get the small business deduction but, if you split a big company into a bunch of smaller ones and you maintain control over them, you don’t get a bunch of small business deductions.

Second scenario: getting tax-trapped in incapacity planning

Stephanie Edwards has a metalworks shop, Icarus Metalworks Inc., that is doing very well. She has apprenticed each of her five children, Adriana, Murray, Nicole, Dickens and Jan, in the art and trade of blacksmithing.

A few years ago, Adriana and Dickens decided they prefer ceramics, and they opened their own company, Can I Play With Porcelain Ltd.

Last year, Icarus earned $700,000. Can I Play With Porcelain did pretty well too; it earned about $450,000.

Icarus should pay 10% on the first $500,000 and 35% on the remaining $200,000. Can I Play With Porcelain is under the limit for the small business deduction, and should only pay 10% on all $450,000 of its earnings.

Unfortunately, after all these years of literally bending iron and steel to her will, Stephanie has serious joint problems. She is finding it hard to write. This has her thinking about making sure her kids can take care of things for her if (and when) she’s unable.

Stephanie thinks carefully about her kids, and who would be in the best position to help her. She decides to grant an enduring power of attorney to her eldest, Adriana. The power of attorney is, as is the case with most enduring powers of attorney, unrestricted and it is effective from the moment it is signed. Stephanie wants to make sure that Adriana can help her even while she is still capable, because she doesn’t know for how much longer she’ll be able to sign cheques, etc., given her joint problems.

Here’s the trap: the CRA determines that the power of attorney allows Adriana to use Stephanie’s shares to control Icarus. This is true – Adriana can do anything on behalf of Stephanie that has to do with finances (including business, real estate and legal matters). Therefore, Icarus Metalworks Inc. and Can I Play With Porcelain Ltd. are now considered related companies. Can I Play With Porcelain Ltd. loses its small business deduction. Between the two companies, the first $500,000 is taxed at 10% and the remaining $650,000 is taxed at 35%.

Is there a way around this? Yes.

Two powers of attorney are prepared, both enduring, both restricted – in exactly opposite ways – and one is made “springing.”

In the first instance, Stephanie grants an enduring power of attorney to Adriana, effective immediately and without any limits or restrictions except that Adriana may not use it to vote or in any other way act on Stephanie’s shares of her company, Icarus Metalworks Inc.

This will probably cover about 95% of what Stephanie needs Adriana to do.

Eventually, Stephanie may lose capacity and need Adriana to take control of her company. At that point, the benefit of Adriana controlling Stephanie’s shares will outweigh the tax consequences. There’s also the slim hope that by then, the Income Tax Act will be amended so as not to catch enduring powers of attorney anymore.

Stephanie grants a second enduring power of attorney to Adriana, but this one has two limitations in it. It only applies to Stephanie’s shares of her company, to avoid any confusion regarding which power of attorney applies in any given situation. Also, it is not effective until Stephanie loses capacity – this is called a “springing” power of attorney. It springs into effect only when Stephanie is no longer capable of managing her affairs. This prevents CRA from considering the companies to be related until it’s absolutely necessary, and this is a recognized technique among lawyers who practise regularly in the areas of estate and incapacity planning.

Jeremy R. Costin, JD, is a business, estates and ecommerce lawyer at Costin Law. He can be reached at 604-742-0717 or [email protected].

Tax reminders for students

Canada Revenue Agency has tax credits, deductions and benefits to help students. (photo from CRA)

The Canada Revenue Agency (CRA) has tax credits, deductions and benefits to help students, and here are some tips to ensure students get them. First, of course, is to file on time.

Most Canadian income tax and benefit returns for 2015 are due on April 30. However, since this date is a Saturday, CRA will consider your return as filed on time and your payment made on time if it receives your submission or it is postmarked by midnight on May 2, 2016. Self-employed individuals and their spouses or common-law partners have until June 15, 2016, to file their income tax and benefit returns, but any balance owing is still due no later than May 2, 2016.

Claim eligible tuition fees. You should have received an official tax receipt or a Tuition, Education and Textbook Amounts certificate from your educational institution with the total eligible fees paid for the tax year.

Claim the education amount. If you are a full-time student (or a part-time student who can claim the disability amount or has a certified mental or physical impairment), you can claim $400 for each month you were enrolled in an educational institution. If you are a part-time student, you can claim $120 for each month you were enrolled.

Claim the textbook amount. If you are entitled to claim the education amount, you can claim $65 for each month you qualify for the full-time education amount or $20 for each month you qualify for the part-time education amount.

Claim the interest paid on student loans. You may be able to claim an amount for the interest paid on your loan in 2015 for post-secondary education. You can also claim interest paid over the last five years if you haven’t already claimed it. Only interest paid on loans received under the Canada Student Loans Act, the Canada Student Financial Assistance Act, the Canada Apprentice Loans Act or similar provincial or territorial legislation for post-secondary education can be claimed.

Claim the public transit amount. If you use public transit, you may be able to reduce your taxes owing by claiming the cost of your transit passes (cra.gc.ca/transitpass). Keep your transit passes for local buses, streetcars, subways, commuter trains or buses and local ferries, and enter your total public transit amount on line 364 of Schedule 1, Federal Tax.

Claim eligible moving expenses. If you moved for your post-secondary studies and you are a full-time student, you may be able to claim moving expenses. However, you can only deduct these expenses from the part of your scholarships, fellowships, bursaries, certain prizes and research grants that has to be included in your income. If you moved to work (including summer employment) or to run a business, you can also claim moving expenses. However, you can only deduct these expenses from the net income you earned at the new work location. To qualify, your new home must be at least 40 kilometres closer to your new school or work location.

Claim the GST/HST credit. If you have low or modest income, you are a resident of Canada and 19 years of age or older, you may be eligible for the goods and services tax/harmonized sales tax credit. You do not have to apply for this credit – the CRA will determine your eligibility when you file your return and send you a credit notice if you qualify for it.

Claim child-care expenses. If you have to pay someone to look after your child so you can go to school, you may be able to deduct child-care expenses.

If you need help filing your return, and you have a modest income and a simple tax situation, volunteers from the Community Volunteer Income Tax Program may be able to prepare and submit your return for you. To find a free volunteer tax preparation clinic near you, go to cra.gc.ca/volunteer.

CRA’s secure My Account service is a one-stop shop for managing your tax and benefit information. Using My Account, you can track your return status, change your address, check your RRSP and TFSA limits, register for online mail, print proof of income, and so much more. When you register for online mail, CRA will no longer print and mail you eligible correspondence. Instead, CRA will send you an email when you have mail to view in My Account. You can also securely access your information with the MyCRA app (cra.gc.ca/mobileapps), which uses the same login information as My Account.

You can get your income tax refund and your credit and benefit payments directly paid into your account at a financial institution in Canada (cra.gc.ca/directdeposit). And, new this year, the CRA’s Auto-fill My Return service (cra.gc.ca/auto-fill) is available through some certified tax preparation software. This secure service automatically fills in certain parts of your income tax and benefit return.

If you are an international student studying in Canada, you first have to determine your residency status at cra.gc.ca/internationalstudents. You may owe taxes to the Canadian government and may qualify for GST/HST credit payments. If you have questions, call the CRA’s international tax and non-resident enquiries line at 1-800-959-8281.

For more information, go to cra.gc.ca/students.

מריחואנה מייצרת הרבה כסף

(צילום: Evan-Amos)

ההכנסות ממיסוי מכירת מריחואנה באופן חוקי בקנדה צפויות להגיע לכחמישה מיליארד דולר בשנה. כך מעריכים האנליסטים של בנק סי.איי.בי.סי. עד כה גם הדוחות האופטימיים ביותר לא העריכו הכנסות כה גבוהות ממיסוי הסם. ההכנסות שיועברו לקופות הממשלה הפדרלית ולממשלות המחוזות השונים שוות לכרבע אחוז מהתוצר הגולמי של קנדה.

הממשלה הליברלית בראשות ראש הממשלה, ג’סטין טרודו, הכריזה עם בחירתה לפני כארבעה חודשים, כי בתוך שנה היא תאשר את לגיליזציית הקנאביס. מפקד משטרת טורונטו לשעבר שנבחר לחבר פרלמנט מטעם הליברלים, ביל בלייר, הוא זה שאחראי על בניית המודל הרגולטורי להסדרת חוקיות ובקרת השימוש בסם. בפני בלייר ניצב אתר לא פשוט והוא מתכוון לעמוד בו, ולסיים את עבודתו כמה שיותר מהר.

טרודו הצהיר בצורה חד שמשמעית כי לגיליזציית המריחואנה לא נובעת מהרצון להגדיל את הכנסות המדינה, וכי כל הכספים יוקצו לטיפול במכורים ולאלה שיש להם בעיות נפשיות.

יצויין כי מאז הכרזת ממשלת טרודו כי עישון המריחאונה יהפוך להליך חוקי במדינה, עלו מניות החברות שעוסקות בגידול הקנאביס בצורה ניכרת.

סקס אנד דה סי: הרצאות באקווריום של ונקובר על חיי המין של בעלי החיים בים

הנהלת האקווריום שנמצא בסנטלי פארק של ונקובר חיפשה גימיק תקשורתי שימשוך מבקרים רבים יותר לאתר. היא מצאה כי הרצאות על חיי המין של בעלי החיים הימיים יעשו את המלאכה על הצד הטוב ביותר. ואכן ביקוש גבוה נרשם להרצאות היוצאות דופן שמתקיימנה בשעות הערב (בין שש לעשר). ההרצאות מטבע הדברים מיועדות למבוגרים בלבד.

ההרצאות מתקיימות באקווריום בזמן שהוא סגור לקהל הרחב. עלות הכניסה ליחיד עשרים ותשעה דולר. המוזמנים להרצאות יכולים לרכוש משקאות אלכוהוליים ולשבת בניחותה על הכיסאות שנמצאים סביב האקווריום הגדול, ולצפות להנהתם בבעלי החיים הימיים עושים אהבה לילית. בין בעלי החיים הנצפים: דגים מסוגים שונים כולל כרישים, צפרדעים וסוסוני ים. ההרצאות כוללות גם דברי הסבר מצד המדריכים של האקווריום בצרוף מצגת ווידאו מעניינת. דוברת האקווריום מציינת כי ההרצאות דומות בעצם או מזכירות את ערוץ הדיסקברי בפעולה.

יצויין כי האקווריום של ונקובר נחשב לאחד האקווריומים הגדולים והחשובים בעולם. גרים בו כיום כשבעים אלף בעלי חיים ימיים.

יוגה לארנבים: שיעורי ספורט להגברת המודעות על מצבם הקשה של בעלי החיים

“נא לשכב בבקשה על הגב. יש להניח את רגל שמאל על המזרון ואת רגל ימין ישרה קרובה לחזה. לא לשכוח שיש לשמור על כתפיים שיהיו צמודות למזרון כל הזמן. הזהרו שלא לפגוע בטעות בארנבים ששוכבים לידכם על המזרנים”. אלה פחות או יותר הוראות של מדריכי היוגה בקורס חדש שנקרא “יוגה ארנבים”. הקורס היוצא דופן בניהול עמותה שלא למטרות רווח, מיועד להגברת המודעות לאור מצבם הקשה של הארנבים במחוז בריטיש קולומביה שמספרם הולך וגדל, ויש לצורך במציאת בית חם עבורם.

ההשתתפות בשיעורי היוגה עם הארנבים עולה עשרים דולר. כל הכיתות לשיעורי הספורט עם הארנבים מלאות ורשימת הממתינים לשיעורים נוספים ארוכה מאוד. כעשרה ארנבים מסתובבים חופשי בסטודיו לספורט בכל שיעור, בו משתתפים בין עשרים לעשרים ושבעה מתרגלים. הארנבים שוכבים על המזרנים ואוכלים בנננות וירקות. בעמותה מדווחים על כך שחלק מהמשתתפים בקורס החליטו כבר לאמץ ארנבים שנחשבים לבעלי חיים שקטים וחמודים.

בעוד בקנדה מנסים לעזור לארנבים מתברר שבישראל יש חנויות שעדיין מוכרות פרוות שעשויות מעורם של ארנבים.

Better ways to invest RRSPs

This RRSP season, you can give your portfolio a gift – the potential for better returns and reduced risk. (photo from 401kcalculator.org via Wikimedia Commons)

Many RRSP portfolios struggled in 2015 to produce returns sufficient for the goals of retirement building and wealth preservation. An over-reliance on equities, and particularly Canadian equities, left many RRSPs in negative territory and, so far in 2016, the stock market has continued to erode savings. But, this RRSP season, you can give your portfolio a gift – the potential for better returns and reduced risk.

The concept of what we call a registered retirement savings plan (RRSP) was introduced by the federal government in 1957 to encourage Canadians to save for their retirement. Although the rules have changed over the years, the basic benefits are every bit as valuable today as they were at inception: the ability to contribute pre-tax dollars and thereby reduce income for taxation, and the ability to compound gains within an RRSP while deferring taxes on the gains.

Many of us are good about setting up our RRSPs when we’re young, and dutifully contribute the maximum allowable each year. Typically, our RRSP accounts start out as just another brokerage account with an emphasis on long-only stock investing. But, by the time we reach our 40s, those RRSP dollars can start to add up. For top-earning Canadians contributing the maximum allowable, an RRSP account can hit $500,000 by middle age and keep going from there.

In addition, our risk tolerance changes as we age and our runway of remaining working years shortens. Conventional wisdom is that longer-term investment vehicles like RRSPs can take on more risk, as greater volatility over the long term often yields greater return. Unfortunately, this notion fails to anticipate how long it can take to overcome the drag of a negative year, and the fact that when a major loss occurs late in a life, there may not be enough time for wealth to catch up to needs. Consider, for instance, the unfortunate plight of anyone who had to rely on their RRSP in late 2008, before the Federal Reserve and its counterparts stepped in and refloated stock markets.

The collapse of stock markets in 2008 and 2009 prompted many to take their RRSP money out of the market and rethink their risk tolerance. The disappointment of 2015’s performance will likely reinforce that wariness of the equity markets. An RRSP that closely tracks the TSX would have been down 8.32% last year. That account will have to appreciate by 9.08% just to get back to the values at the beginning of last year. Given average return expectations of 8% per year, it will take 13 months just to recover, let alone get ahead. (And the numbers get worse if you go back further – the TSX is still below the high it reached in 2008.)

Even after our inauspicious start, 2016 may be a great year for equities, or it could be a repeat of 2015 (or worse). Either way, the safer, more reliable route to a more secure portfolio is to decrease downside volatility by employing two of the touchstones of risk mitigation: diversification and non-correlation. Both allow portfolios to absorb and offset downdraft periods, while benefiting from the correlation between return and risk (most assets with a higher-return profile also carry a higher-risk profile).

One of the greatest sources of volatility for a portfolio is the particular market or strategy it’s primarily invested in. The TSX, as an example, has historical volatility of more than 15%, which is quite high. To offset this inherent risk, it’s necessary to incorporate additional components that are both uncorrelated to the TSX and to each other.

Finding diversified, uncorrelated components is easier than you may think. There is a range of non-equity investment options available for RRSPs. Real estate, infrastructure and lower-risk funds of alternative funds can all be beneficial components of a balanced RRSP portfolio. Even the traditional RRSP component of Canadian equities can be turbocharged by replacing a long-only mandate with a long-short manager. And all of the above are available to accredited investors in bite-size pieces appropriate to an RRSP.

As with all portfolios, when constructing an RRSP portfolio, it’s important to distinguish the particular characteristics of each component so the portfolio achieves the greatest possible appreciation with the least possible risk. Real estate and infrastructure both have valued histories as long-term wealth generators with lower volatility, but they usually come with liquidity restrictions, and each is subject to cyclical trends. Funds of alternative funds can combine lower risk and reasonable liquidity while offering access to a range of investment themes far beyond the Canadian economy, an important way to break out of the limitations of living in a country that constitutes less than 3% of the world’s GDP. Long-short equity can achieve market neutrality and have great liquidity, but even some of the better Canadian funds can be highly volatile.

Your investment advisor should be able to suggest suitable choices for each component, and you can evaluate those recommendations (and come up with alternatives) by doing some internet research of your own. When assessing providers for each component, you and your advisor should consider the usual metrics such as beta, volatility, standard deviation, Sharpe Ratio and correlation to the TSX. While the names may be new to you, the concepts are easy to grasp and very useful when comparing performance over time. When it comes to choosing a fund of alternative funds, identify a manager with a proven record of nimbleness, as he or she will have to keep updating the mix of exposures to benefit from evolving market conditions.

Many pundits agree we are likely in the final innings of history’s longest equity bull market. Additional headwinds may result from bonds and credit, beginning a long overdue tightening cycle, which many are expecting will increase volatility. Now is the time for investors to rethink portfolio construction and embrace asset classes that are less influenced by the equity markets. Sophisticated investors like family offices and institutions embraced non-correlated alternatives decades ago. It’s time for the rest of us to catch up.

Ari Shiff is president and chief strategist of Inflection Management Inc. (inflectionmanagement.com), and manager of the Inflection Strategic Opportunities Fund. He has more than 20 years experience in hedge funds and can be reached at [email protected] or at 604-730-9147.