2023 Tax Season: What You Need to Know

The 2023 tax season will bring some changes that taxpayers need to be aware of to make sure they are compliant with their filing obligations. You can file your 2022 tax return starting on February 20, 2023. The deadline for most Canadians to file their 2022 income tax and benefit returns is April 30, 2023 but you have until May 1 this year as April 30 falls on a Sunday. If you or your spouse or common-law partner had self-employment income in 2022, you have until June 15, 2023 to file your return(s). In either case, any taxes owing must be paid on or before May 1, 2023. Here are some key changes for the 2023 tax season that may have an impact on your situation, including new credits and deductions that you may be eligible for. We have summarized the most important changes for you below.

COVID-19 benefits

If you received COVID-19 benefits from the CRA in 2022, such as the Canada Recovery Sickness Benefit (CSRB), Canada Recovery Caregiving Benefit (CRCB), Canada Recovery Benefit (CRB) or Canada Worker Lockdown Benefit, you will receive a T4A slip with the information you need to fill out for your tax return.

In certain situations, you may end up owing additional tax on the COVID-19 benefits that were received as taxes withheld on the benefits may not have been enough. In addition, some benefits may need to be repaid if your net income is above a certain threshold. For example, if you received the CRB and your net income after certain adjustments is more than $38,000, then you may have to repay all or part of the benefits you received in 2022.

Work from home expenses

Similar to 2021, if you worked from home in 2022 due to COVID-19, you may be eligible to claim a deduction of up to $500 using the flat rate method, provided you worked more than 50% of the time from home for a period of at least four consecutive weeks due to Covid-19. If you have been keeping track of your expenses, you may be able to claim your actual expenses using the detailed method. To do this, you employer will need to provide you with a completed Form T2200 or Form T2200S.

Eligible expenses include utilities, home internet, rent, and maintenance and repair costs. Commission employees can also claim home insurance, property taxes, and the lease of electronics such as cellphone, laptop, tablet, etc.

Digital news subscription tax credit

For 2020 to 2024, if you paid for a digital newspaper app or website, you may be able to claim the digital news subscription tax credit which is worth 15 per cent on qualifying expenses up to $500. The amounts must have been paid to a qualified Canadian journalism organization for a digital news subscription with content that is primarily written news. A list of qualifying digital news subscriptions can be found here.

Rates and limits

To keep up with inflation and maintain the buying power of Canadians, several tax rates and limits have been changed in 2022.

Changes in Tax Credits

Below are some of the Federal and provincial (Ontario) tax credit changes for the 2022 tax year:

FederalOntario

Automobile Income Tax Deduction Limits: There is an increase in the Capital Cost Allowance (CCA) ceiling limits for zero-emission and passenger vehicles. The deductible monthly leasing costs have also increased by $100. In addition, the per kilometer rate paid by employers to employees who use their personal vehicle for work has increased by 2 cents per km from last year.
Ontario Staycation Credit: This is a one time tax credit for Ontarians who are able to claim 20% of their stay in an Ontario hotel, cottage or campground, during 2022 up to $1,000 individually or $2,000 as a family.  
Home Accessibility Tax Credit (HATC): The HATC is a non-refundable tax credit that is available for expenses incurred in connection with alteration of a home to make it more accessible for a qualifying individual, which includes an individual who is over 65 years old or one who is entitled to the disability tax credit. Starting in 2022 and subsequent taxation years, this credit has been increased to $20,000. This means that eligible individuals can receive a tax credit of up to $3,000 (previously $1,500).Ontario Seniors Care at Home Tax Credit: This is a refundable personal income tax credit to help low-income seniors with eligible medical expenses, including expenses that support aging at home. The credit is equal to 25% of your eligible medical expenses up to $6,000, for a maximum credit of $1,500. The credit is reduced when family net income is over $35,000 and eliminated at $65,000
Labor Mobility Deduction (LMD): For 2022 and subsequent years, a new deduction is available for certain tradespersons or apprentices (Eligible Workers (EW) who work in temporary work locations. This credit allows eligible workers to deduct certain travel and relocation expenses incurred  to earn income at a temporary work relocations.Seniors’ Home Safety Tax Credit: This is a new credit that supports seniors in making their homes safer and more accessible, with a credit of 25% up to a maximum of $10,000 in eligible expenses. The maximum credit is equal to $2,500 per year.
Air Quality Improvement Tax Credit: This is a refundable credit, where eligible entities that incurred expenditures between September 1, 2021 and December 31, 2022,  can claim up to 25% of their qualifying ventilation and air filtration system upgrades to a maximum of $10,000 per qualifying location and a maximum of $50,000 across all qualifying locations. The tax credit is available to sole-proprietors and Canadian-controlled private corporations(but not trusts), and members of a partnership that are qualifying corporations or individuals (other than trusts).   
Medical Expense Tax Credit for Surrogacy and Other Expenses: For 2022 and subsequent taxation years, medical expense credit has expanded to include a variety of expenses related to the areas of surrogacy, sperm, ova or embryo donations.   
Home Buyers’ Tax Credit: For 2022 and subsequent tax year, the non-refundable tax credit of $5,000 for first -time home buyers has been increased to $10,000. The enhanced credit will provide up to $1,500 in tax relief to eligible first-time home buyers. This measure will apply to homes purchased on or after January 1, 2022.   

The 2023 tax season is quickly approaching and it's important to be prepared for the changes that may come with filing your 2022 tax return. Reach out to our tax experts for help if you need assistance with filing your taxes this 2023 tax season. We will ensure that we maximize your refund or minimize your tax liability through utilization of all applicable tax credits and deductions. If you require further information about any of the above credits or you would like to know whether you meet the eligibility criteria, please contact us.


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Toronto’s New Vacant Home Tax

Ensuring housing affordability has become a critical issue of concern for Federal, Provincial and Municipal governments in Canada. In an effort to address this issue, the City of Toronto implemented a new Vacant Home Tax. Under this new tax, Toronto homeowners with vacant properties will have to pay an additional Vacant Home Tax on their home, effective January 1, 2022.

This new policy is the result of Consultation on the Underused Housing Tax with interested members of the public from August 2021 to December 2021, alongside the Department of Finance, and was announced in Budget 2021 by the Government of Canada. During the December 2021 meeting, City Council amended the City of Toronto Municipal Code and added Chapter 778, Taxation, Vacant Home Tax.

What is the Vacant Home Tax?

The Vacant Home Tax (VHT) is intended to incentivize owners to rent or sell their empty homes, and thereby increase the supply of affordable housing in Toronto. It will be levied at 1% of the property's current value assessment for the year the home is vacant. The tax is based on the property's occupancy status for the previous year. For example, if a vacant home is assessed at $1,200,000 in 2022, the owner will be subject to a $12,000 annual tax that will become payable in 2023. The City will use the funds from the Vacant Home Tax to fund initiatives that will help alleviate the housing shortage in Toronto, such as providing additional affordable housing.

What is considered a vacant home?

A vacant home is defined as a residential property that has been unoccupied and not used as a principal residence for more than six months in the previous calendar year. If a home is left unoccupied for more than six months after January 1, 2022, the owner will be subject to the vacant home tax the following year. The Vacant Home Tax also applies to non-residents and non-Canadian property or real estate owners. Owners who rent out their vacant homes are exempt from this tax. This provides an incentive for owners to find tenants and helps ensure more homes are available for people in need.​ ​

What are the exemptions for the Vacant Home Tax?

There are a few eligible exemptions for the Vacant Home Tax, which must be noted on the declaration and supported by documentation. If you meet the following criteria, you will be exempt from Vacant Home Tax:

How to make the declaration?

To ensure compliance with the Vacant Home Tax, all residential property owners must make a declaration of occupancy status. The City of Toronto has set up an online declaration portal that will open in mid-December 2022. The deadline to submit the declaration is February 2023 for the 2022 taxation year. Owners of residential properties that have remained unoccupied for six consecutive months or more during the taxation year, and without an eligible exemption, will be required to pay the Vacant Home Tax. A Vacant Home Tax Notice will be issued to the property owners in March/April, with payment due on May 1.

If the owner fails to make the annual declaration and/or provide supporting documentation by the deadline, the residential properties will be deemed vacant. A fine of $250 to $10,000 may be imposed for failure to declare or making a false declaration. In addition, any overdue Vacant Home Tax amount will be subject to interest until the amount is paid.

It is essential that all property owners in Toronto comply with the Vacant Home Tax and make their declarations on time. This tax will help ensure that more homes are available for people in need, as well as generate revenue to fund important initiatives such as providing additional affordable housing. If you have any questions or concerns about the new Vacant Home Tax, and eligible exemptions, please contact us. We are here to help!

 


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Year-End Tax Planning Tips - 2022

While it is important to take care of tax-planning throughout the year, a strategic approach at the end of the year can help you make sure that you’re making the most of your tax situation and taking advantage of any year end tax planning opportunities available before the December 31st deadline. As we enter the final weeks of 2022, here are some tips to consider for your year end tax planning.

Personal Tax Tips

1) Accrued Capital Losses/Capital Gains

If you have investments that have decreased in value over the course of the year, ensure you trigger the disposition to create a capital loss before year end. This loss can then be used to offset any capital gains realized during the same calendar year, carried back three years or carried forward indefinitely to reduce capital gains in future years. In order for the loss to be available for 2022, ensure that the transaction settles before December 31st, which means that the last trade date should be no later than December 28, 2022.

If you purchased investments in a foreign currency, be mindful of the impact of the currency fluctuations on your capital gain or loss. In certain cases, the gain or loss may be larger or smaller than you anticipated.

Similarly, if you have accrued capital gains on your investments, consider delaying the sale until 2023 and thus deferring the capital gain. This could be advantageous if you anticipate your tax rate to be lower in 2023.

2) Set up a prescribed rate loan

A prescribed rate loan is a tax-effective strategy for transferring income from a person in a higher tax bracket to one in a lower tax bracket, such as your spouse, common-law partner, children or even a family trust. This type of loan involves lending funds to the recipient and charging interest at the rate of interest that is set every quarter by the Canada Revenue Agency (“CRA”), currently 3%. This is an excellent way for anyone with investment funds earning more than 3% and whose spouse is in a lower tax bracket than them to save tax.

Due to the latest interest rate increases, the prescribed interest rate will increase from 3% to 4% on January 1, 2023. As a result, if a loan agreement is entered into before December 31, 2022, the lower 3% prescribed interest rate will apply as long as the loan remains in good standing. To avoid attribution of income, interest on the loan must be paid each year at the prescribed rate by January 30th of the following year, and interest payment should be recorded.

If you want to read an in-depth analysis of how prescribed rate loans work, see our article, "Benefits of Using Prescribed Rate Loans to Save Tax".

3) Registered Retirement Savings Plan (RRSP) Contributions

Contributing to a RRSP can help reduce your taxable income, as well as provide tax-sheltered growth for the future. Contributions made by December 31st are eligible for deductions on your 2022 tax return. You also have the option to defer your RRSP contribution deduction if you expect to be in a higher tax bracket in the near future.

It is important to note that the deadline for making RRSP contributions for the 2022 tax year is March 1, 2023 and your maximum 2022 deduction is limited to 18% of income earned in 2021, to a maximum of $29,210 less pension adjustment.

If you turned 71 in 2022, you must make your final RRSP contribution by December 31, 2022, before your RRSP is converted into a RRIF or registered annuity. If you still have unused RRSP contribution room even after making the contribution to your RRSP in 2022, you have the option to use your contribution room after 2022 to make contributions to a spousal RRSP until the end of the year your spouse or partner turns 71. This will not work if your spouse has already turned 71.

4) Make Registered Education Savings Plan (RESP) Contributions

The deadline for making RESP contributions for the 2022 tax year is December 31, 2022. Contributions made before December 31st are eligible for the Canada Education Savings Grant (CESG). The CESG is an additional grant from the Government of Canada, equal to 20% of annual RESP contributions of $2,500 or maximum annual grant of $500 per child.

Hence, before December 31, take a few minutes to check your RESPs to make sure that you are on track to receiving the full CESG for the year. If not, consider making a catch-up contribution to ensure that you don't miss out on any free grant money. For more information on how you can maximize your RESPs, read our article, "How to Maximize your RESP?".

5) Pay tax-deductible expenses in 2022

Plan ahead to pay any deductible expenses before December 31st in order to reduce your taxable income for 2022 and claim these deductions and credits on your return. These include but are not limited to the following:

6) Plan your move to a different province or territory

For tax purposes, individuals are taxed on their income based on where they live on December 31st. If you are planning to move between provinces, consider:

Note that if you moved to be closer to work, your moving expenses may be deductible.

7) Pay your tax installments

If you are an individual and are required to make quarterly installments, make sure to review your 2022 tax liability and make your final tax installment on or before December 15th to avoid late interest charges.

If you have missed an earlier payment and need to catch up, make sure you do so before December 15th as the CRA will apply a late interest charge on any unpaid tax installments.

8) Review your income tax deductions at source

If you anticipate your taxable income to be lower in 2023 or will have excess tax deductions or non-refundable tax credits, you can request your employer to deduct less by filing federal Form 1213.

9) Income timing

You may want to consider deferring certain employment income from 2022, to 2023 if you anticipate your taxable earnings to be lower in 2023. This could include deferring bonus or commission income (if allowed by your employer).

Business Tax Tips

1) Pay your salaries and/or dividends

As a business owner, you should consider paying reasonable salaries to yourself and family members who work in your business before December 31, 2022. This will help to reduce your corporate income tax bill while providing your family members and yourself RRSP contribution room for 2022.

Before paying dividends to any other family members, speak with your tax advisor to review the possible application of the Tax on Split Income (TOSI) rules.

2) Declare your bonuses

Consider declaring your year-end bonuses before December 31st to take advantage of the corporate tax deduction in 2022. A bonus is generally deductible to the corporation in the year it is accrued, if it is paid within 179 days of the corporation's year-end and appropriate source deductions and payroll taxes are remitted on time following payment of the remuneration.

Also, it is generally taxable to the individual as employment income when it is received. Hence, since you will receive the bonus in 2023, the taxes on that bonus will be deferred by a year.

3) Repay your shareholder loans

If you have a shareholder loan from your corporation, ensure that you pay back the loan within one year following the end of the taxation year of the corporation in which the loan was made to avoid having a personal tax income inclusion. There are exceptions to these rules. For more information on the tax rules with respect to shareholder loans, read our article, "Shareholder Loans and Their Tax Implications".

4) Purchase capital assets for your business before December 31st

If your business needs new capital equipment, consider making those purchases before December 31st, so you can claim depreciation on the asset for tax purposes in 2022, provided that the assets are available for use in 2022.

5) Pay your final corporate tax balances

The deadline to pay your final corporate income tax balances is two months after year end for most corporations (three months for certain CCPCs). Please ensure you are caught up on your payments to avoid non-deductible interest charges.

It is important to review your strategies from year-to-year in order to keep up with changing regulations and understand how they may impact your specific tax situation. Be sure to consult a qualified tax professional before making any major financial decisions in order to ensure that you are getting the best advice tailored to your personal situation.  


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

The New Luxury Tax in Effect Now

As part of the 2021 Federal Budget, the Government of Canada proposed the introduction of a tax on the sale of certain new luxury cars, aircraft, and boats. On September 1, 2022, the Select Luxury Items Tax Act (the Luxury Tax Act), a part of Bill C-19, came into force.

What items are subject to Luxury Tax?

The Luxury Tax Act now imposes a new "Luxury Tax" on the sale, lease or import of certain vehicles and aircraft worth more than $100,000, as well as certain vessels or boats that are worth more than $250,000. The items subject to tax are discussed in more detail below:

Vehicles

Aircraft

Vessels

How is the Luxury Tax calculated?

The Luxury Tax is generally calculated using the taxable amount of the subject items. This means that luxury tax is applicable on the following when retail value is over:

*Please note that retail value includes the fair market value of the item, freight fees, and any amount paid for the improvements (excluding accessibility modifications). When the item is imported, the retail value includes the sum of any taxes, duties, or fees (other than GST/HST) levied on importation or as assessed by the seller (for example environmental levies).

The Luxury Tax is calculated at the lesser of:

  1. 10 percent of the full retail value of the item; and
  2. 20 percent of the amount exceeding the set threshold (($100,000 for vehicles and aircraft, and $250,000 for vessels).

For purposes of calculating GST/HST, Luxury Tax is added to the cost of the item. As a result, the Luxury Tax is subject to GST/HST.

Let's look at an example:

An Ontario resident is purchasing a $155,000 vehicle. The taxpayer has incurred $8,000 in delivery charges and improvements. The applicable Luxury Tax is calculated as:

Luxury Item (Vehicle)Retail valueLuxury Tax
Retail price of vehicle$163,000
Calculation of luxury tax

Lesser of :

a) 10 percent of the full retail value of the item;

b) 20 percent of the amount exceeding the set threshold






$16,300

$12,600
Luxury tax amount (lesser of a and b)$12,600
Subtotal$175,600
HST$22,828
Total cost of vehicle$198,428

If you have any questions or concerns about the new Luxury Tax, and how it could impact your purchases of certain items, please contact us.  We are here to help!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Leaving Canada: Know the Tax Implications

The move to another country always entails some degree of complexity. You need a plan before you even start thinking about moving, and one major component is tax planning—especially if you expect your relocation will be permanent. This article will provide an overview of the most relevant emigration tax issues for the average individual taxpayer. We will also provide some tips on how to minimize the impact of taxes on your departure. However, as each situation is unique and there are many factors to consider, it's important to consult with a tax professional to determine the tax implications prior to leaving Canada.

Determine your residency status

As a Canadian resident, you are required to file a tax return on your worldwide income. Even if you are no longer considered a resident of Canada, you may still be required to pay taxes on certain types of income from Canadian sources. The first step towards understanding the implications of leaving Canada is to look towards the residency rules to determine whether you will continue to be considered a resident of Canada for Canadian tax purposes, even after you leave Canada. Please note that the concept of tax residency is wholly separate from residence for other purposes, such as immigration. Tax residency is a question of fact and is determined based on residential ties. Canada Revenue Agency ("CRA") has summarized these into two categories: significant and secondary residential ties.

Significant ties include owning a house or having a spouse/common-law partner and/or dependents who reside in Canada. Secondary ties include personal property, bank accounts, Canadian passport, driver’s licenses, medical insurance coverage with a province etc. 

The CRA will also consider other factors when determining your residency status, on a case-by-case basis. These include:

Generally, CRA will not consider that you have left Canada if you continue to maintain significant residential ties with Canada. In that case, you will remain a tax resident of Canada and be subject to tax, in Canada, on your worldwide income. CRA sets forth its views on the residency status of an individual in Income Tax Folio S5-F1-C1: Determining an Individual's Residence Status.

Tax Implications of Leaving Canada

Once it has been determined that you will be a non-resident of Canada, the following tax implications will need to be considered.

Departure Tax

One of the most significant implications of leaving Canada is the departure tax. When you leave Canada, you are deemed to have disposed of almost all your assets and re-acquired it at fair market value immediately before you cease to be a resident in Canada. The deemed disposition creates a "capital gain" or "capital loss" on departure, which may be taxable on your departure tax return If you owned the property before you came to Canada, the acquisition price will be the value of the property on the date of your immigration. The departure tax is payable regardless of whether you have sold the assets or not.

Exceptions to departure tax

There are some exceptions to departure tax. The most common ones are:

1. Real Property and resource property situated in Canada

 If the disposition occurs after you leave Canada, you will need to apply for a  certificate of compliance pursuant to section 116 of the Income Tax Act (" the Act"). The purpose of obtaining the certificate is to have the non-resident withholding tax at a rate of 25% apply only on the net gain amount instead of the gross proceeds. In addition, you will have to file a T1 return for the year of disposition.

 If you rent your principal resident upon leaving Canada, there may be a deemed disposition due to a "change in use" rules and other issues may arise, such as withholding tax on rental income and additional filings may be required such as a Section 216 return.

Actions to consider

2. Canadian business property (including inventory) used in a business carried on by the taxpayer through a permanent establishment in Canada.

3. “Excluded right or interest” including RRSPs, RRIFs, RESPs, pension plans, life insurance, employee stock options, etc. (see complete list here).

Actions to consider

Planning Considerations

4. Assets that are subject to the “short-term resident” rule.

  1.  

What do I need to do before leaving Canada?

Create a list of properties

If the fair market value (FMV) of all "reportable properties" you owned on your date of departure is more than $25,000, you will need to complete Form T1161, List of Properties by an Emigrant of Canada, and attach it to your departure tax return.

Reportable properties” include any property other than:

Repay Home Buyers' Plan (HBP), and Lifelong Learning Plan (LLP)

Withdrawals from your RRSP for either the Home Buyers Plan and Lifelong Learning Plan that have not been repaid must be paid within 60 days of departure or the amount will be included as income in the year of the departure tax return.

Notify Canadian payers and CRA of your change in residency

If you continue to have financial accounts in Canada that could generate passive income after you leave Canada, ensure that you notify any Canadian payers and your financial institutions of your departure status, so appropriate non-resident withholding taxes can be withheld from amounts paid or credited to you.

It's also important that you tell the CRA the date you are leaving Canada so that certain credits or payments that you may be receiving as a resident can be stopped (i.e GST/HST credits, Canada Child Benefit, etc).

File departure tax return

A resident individual in Canada will be taxed on their worldwide income earned up to the date of departure from Canadian residency. The applicable departure date is determined on a case-by-case basis. Generally, this will be the latest of when the taxpayer leaves Canada, when the spouse or dependents of the taxpayer leave Canada or when the taxpayer becomes a resident of another country.

Income earned after the date of departure will be taxed in Canada to the extent that it was earned in Canada or attributable to a Canadian source. The tax return for the departure year is due on April 30 of the subsequent year.

Individuals could face a challenge with departure tax if they are deemed to have sold assets but do not receive any sale proceeds in connection with those assets. In this situation, taxpayers can elect to defer the payment of tax by providing adequate security that is acceptable to the CRA, allowing one to defer payment of departure tax until the property is actually disposed of.

What if you continue receiving Canadian source income?

If you receive certain types of income from Canada after you leave, the Canadian payer has to withhold non‑resident tax on the income and send it to the CRA. The tax treaty between Canada and your new country of residence may reduce the withholding tax rate on some sources of income. The tax withheld is usually your final tax obligation to Canada on the income. In certain circumstances, it will be beneficial for you to elect to file a special return (i.e section 217) to recover some of the Part XIII tax withheld or to eliminate your Canadian non-resident tax owing. For more information on what types of income are subject to the withholding tax and elective returns available for filing to non-residents, see our blog article, "Tax Obligations as a Non-Resident of Canada".

Summary

It is important to understand the tax implications when you leave Canada to ensure you don't have unpleasant tax surprises. A qualified tax professional can help you review everything in advance before the departure tax return is filed. If you have any questions about your specific tax situation, please contact us and we can help guide you through your emigration process.


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

How to Maximize your RESP?

As we approach the end of the year, there are a few things to keep in mind when it comes to your RESP. The Registered Education Savings Plan (RESP) is a government-sponsored savings plan that helps parents save for their children's post-secondary education. The RESP allows parents to save money in a tax-sheltered account and receive government grants to help grow their savings.

One of the main benefits of the RESP is that it offers tax-sheltered growth on investment earnings. This means that any money you make from investing your RESP savings will not be taxed. In addition to offering tax-deferred investment growth, RESPs have another benefit that can be leveraged. Through the Canada Education Savings Grant (CESG), RESP also offers government grants to help boost your savings.

However, the RESP has a few important rules to keep in mind, such as:

What

What is the ideal RESP contribution strategy for maximizing CESG?

Now that we know the rules, the ideal RESP contribution strategy for maximizing CESG is one where you are making annual contributions of $2,500 starting the year your child is born. Parents who have delayed starting an RESP or haven't been able to contribute enough each year to receive the maximum grant amount might be able to use their carry-forward option to take advantage of that "free" government grant money. Hence the carry-forward option effectively allows you to double up on contributions to help you catch up on missed grant money.

However, even though the carry forward deadline is available until the child reaches 17, it can be very difficult to catch up on utilizing any unused grants. This is primarily due to the carry-forward rule noted above, which only allows one to go back one year at a time to make up for missed contributions. This means that the maximum grant available in a given year is $1,000, which is based on a $5,000 contribution.

If you begin catching up when your child is young, it may still be possible to play catch up. However, if you wait until your child is much older to start saving, you may never be able to receive the maximum annual grant of $500 per child or a lifetime grant amount of $7,200 per child. Let's look at two examples.

Example 1

You decide to wait until your child is nine years old to start an RESP. In this scenario, you can contribute $4,500 annually until the child turns 16 years old and still receive the full $7,200 of lifetime grant money within the eligible timeframe.

Example 2

You decide to open an RESP in the calendar year your child turns 12. In this situation, you could have six years to contribute and you can play catch up on your CESG by doubling up on the grant amount every year through the carry forward option. Thus, a contribution of $5,000 annually would allow you to receive $1,000 of grant money each year ($500 for the current year and $500 for unused room from a previous year). This would mean a total grant amount of $6,000, which is less than the lifetime grant of $7,200.

As

As you can see in "Example 2", the longer you wait to contribute to an RESP, the harder it’ll get to play ‘CESG catch up’ and in certain situations, you may be giving up free grant money. As a general rule, if you are starting later, but still want to get the maximum amount in CESG, you’ll have to start making RESP contributions no later than the time your child turns 10.

The Canada Education Savings Grant is a great way to save for your child's future education. By understanding the rules and contribution limits, you can ensure that you are making the most of your RESP and maximizing your benefits. Before December 31, take a few minutes to check your RESPs to make sure that you are on track to receiving the full CESG for the year. If not, consider making a catch-up contribution to ensure that you don't miss out on any free grant money.


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.


					

Benefits of Using Prescribed Rate Loans to Save Tax

If you are looking for ways to lower your family’s income tax bill, you may want to consider using prescribed rate loans. Prescribed rate loans are loans made at a rate of interest that is set every quarter by the Canada Revenue Agency (“CRA”). Generally, the prescribed rates are lower than those rates offered by banks or other financial institutions. As such, they can be a great tax planning tool to income split and transferring income from high-income family members to lower-income family members to reduce total income taxes for the family unit.

Attribution Rules

Before we go further into how this type of tax planning can work in your situation, taxpayers should first be aware of the attribution rules under the Income Tax Act (“ITA”) that limit or prevent income splitting among family members in lower tax brackets. Attribution rules apply whenever a property is transferred or loaned at less than the prescribed rate by:

Where such gifts or loans are made, any income or capital gains arising from the gifted or loaned property will be attributed back to the taxpayer who transferred the property and then taxed at the higher marginal tax rates of the taxpayer. However, in the case of a transfer to a minor child, the income will be attributed back to the taxpayer but any capital gains arising from the property will be taxed in the hand of the child. The following rules do not apply to gifts intended for adult family members who aren’t your spouse or common-law partner.

Prescribed rate loans

A simple approach to avoid these attribution rules is to use a prescribed rate loan.  If a taxpayer makes an investment loan to a spouse, adult family member, minor child or family trust, and charges interest on the loan at the prescribed interest rate, then any income they earn on the funds will be taxable to the recipient family member and not to the taxpayer.

When an appropriate strategy is used, these plans can be successful. When the investment rate of return generated is greater than or equal to the prescribed interest rate charged on the loan, they function effectively. Because the income earned on the rate difference will be taxed at a lower marginal tax rate for family members in such circumstances, a net benefit will be realized. It is also vital to note that, once a loan has been granted, the initial rate stated at the time of the loan remains in force for the duration of the loan, even if subsequent rates are increased or decreased.

Due to the latest interest rate increases, the prescribed interest rate will increase from 1% to 2% on July 1, 2022. As a result, if a loan agreement is entered into before July 1, 2022, the lower 1% prescribed interest rate will apply as long as the loan remains in good standing.

How can I use prescribed loans for income splitting and tax planning?

Prescribed rate loans can be beneficial for lowering your family’s income tax bill because it allows income splitting and avoids the income and capital gains attribution rules. One way to do this is by giving loans to a spouse or a trust for the benefit of a spouse at the prescribed interest rate. This allows the higher income spouse to split income with a lower-earning spouse (married or common law), resulting in tax savings based on the difference in marginal tax rates between spouses. This is an excellent way for anyone with investment funds earning more than 1% and whose spouse is in a lower tax bracket than them to save tax.

Another common way prescribed loans are used is for inter vivos family trust planning, where a family member who is the high-income earner, makes a loan to the trust. It is advantageous to provide a loan to a trust with minor children or grandchildren beneficiaries, who usually have a significantly lower marginal tax rate than the person loaning the funds. The trust income can be distributed to these minor beneficiaries and used for expenses like school tuition, education expenditures, and camp fees. Each minor beneficiary will be taxed at their lower marginal rate on the income used for their benefit.

Essentially, this type of trust and loan planning benefits anyone in a high tax bracket whose spouse is in a lower tax bracket or who has children or grandchildren at school and extracurricular expenses and who would like to decrease their overall family income tax burden.

Please note that the tax on split income (TOSI) rules will also have to be considered if a trust, partnership, or private corporation is part of the strategy. These rules are highly complex and may result in no advantage if they apply.

How do I set up a prescribed rate loan?

The critical thing to remember with prescribed rate loans is that they must be structured correctly to be considered a prescribed rate loan by the CRA. In addition, there are a few things you’ll need to do to set up a prescribed rate loan:

If you are looking for ways to reduce your family’s income tax bill, prescribed rate loans can be an effective tool. However, the prescribed rate rules can be complex and should be reviewed carefully before implementing any tax planning strategies. If you have any questions about prescribed rate loans and how you can take advantage in your specific situation, please contact us.


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

Tax Obligations as a Non-Resident of Canada

Non-residents of Canada are subject to different tax rules than residents. Generally, Canadian tax residents pay tax on worldwide sources of income. By contrast, if you are a non-resident of Canada, you are only liable to pay tax on income or gains from Canadian sources. The amount of tax you owe will depend on your residency status and the type of income you receive.

There are two types of taxes that non-residents may be subject to: Part XIII tax and Part I tax. Part XIII tax is a withholding tax that is deducted from certain types of income, such as interest and dividends, rental payments and pension. Part I tax is a general income tax that applies to all forms of income, including employment income, business income, and capital gains.

This article will go over the basics of when you are considered  a non-resident for Canadian income tax purposes, as well as outline your tax obligations as a non-resident. Furthermore, we will provide a brief overview of when and how a non-resident  can elect to file a return in Canada.

What does residency status mean?

Residency status is used to determine whether an individual is considered a resident or non-resident of Canada for tax purposes. An individual’s residency status is determined by a number of factors, including the length of time they have been in the country, their ties to Canada, and their intention to live in the country permanently.

Who is a Non-Resident of Canada for tax purposes?

An individual may be considered a Non-Resident for income tax purposes if they:

The most important thing to consider when determining your residency status for income tax purposes is whether or not you have, or are establishing, significant residential ties with Canada.

Significant residential ties to Canada include:

Secondary residential ties that may be relevant include:

If you are unsure of your residency status, or if you require assistance in determining your tax obligations as a non-resident of Canada, we recommend that you consult with a qualified tax professional. Alternatively, it is also a good idea to contact CRA prior to filing your return to ensure you are declaring the proper status. You can visit the CRA website or complete the NR74 Determination of Residency Status (entering Canada) form or the NR73 Determination of Residency Status (leaving Canada) form and send it to the International tax and non-resident enquiries office to get an opinion from the CRA about your residency status.

Do Non-Residents need to pay taxes in Canada?

Non Resident Taxes
Tax Obligations As A Non-Resident Of Canada 2

As a non-resident, you are subject to Canadian income tax on most Canadian-source income paid or credited to you during the year unless all or part of it is exempt under a tax treaty. Tax calculated on the income of a non-resident of Canada is known as non-resident tax.

In general, non-resident income is subject to Part XIII tax or Part I tax in Canada. If you own a business in Canada or earn employment income in Canada, your income is subject to Part I tax. Part XIII tax applies to dividends, rental payments, old-age pensions, retirement income payments, and annuity payments as well as other types of investment income.

Part XIII tax

Part XIII is a non-resident withholding tax charged at a rate of 25% and is deducted from the type of incomes listed below. However, if there is a tax treaty between Canada and your country or region of residence, the terms of the treaty may reduce the rate of non-resident withholding tax.  Hence, to ensure that the correct Part XIII tax is deducted at source, it is important to tell Canadian payers from which you receive the following income that you are a non-resident of Canada, and also inform them of your country of residence.

If the correct amount of Part XIII tax has been deducted from your income by your Canadian payer, you are not required to submit an annual Canadian income tax return. In that case, the Part XIII tax withheld would be considered your final tax obligation to Canada on that income.

If the correct Part XIII tax has not been withheld, you may choose to voluntarily disclose this information and make the necessary tax payment. In certain circumstances, it will be beneficial for you to file a elect to file a special return to recover some of the Part XIII tax withheld or to eliminate your Canadian non-resident tax owing. Refer to Elective Returns below for more information.

The most common types of income subject to Part XIII are:

Part I tax

Part I tax is a general income tax that applies to all forms of income, including employment income, business income, and capital gains. The most common types of income that may be subject to Part I tax are:

This type of tax is generally deducted at source by the payer. You may be entitled to claim certain deductions from income to arrive at the taxable amount when you file your Canadian tax return. You can also claim a credit for any tax withheld at source or paid on this income. Similar to Part XIII tax, if there is a tax treaty between Canada and your country or region of residence, the terms of the treaty may reduce or eliminate the tax on certain types of income.

Do Non-Residents need to file a tax return in Canada?

Once you have determined that you are in fact a non-resident of Canada, either through assessment by CRA or consultation by a tax accountant, you may be required to file a Canadian income tax return to calculate your final tax obligation to Canada on:

As a result of filing the return, you can either receive a refund of some or all of the tax withheld or have a balance of tax owing for the year.

The following are some examples where individuals or corporations will require non-resident tax services:

When can I elect to file a Non-Resident tax return?

In addition to the instances when you must file a non-resident tax return, there are times when you can elect to file a non-resident tax return.

Elective returns can be filed under sections 216, 216.1, 217, and 218.3 of the Act. When you file under these sections, you have the option of paying tax on certain types of Canadian-source income using an alternative tax method. This means that you may receive a refund for some or all of the non-resident tax withheld.

The most common situations where you might choose to file an Elective Non-Resident tax return would include where Part XIII tax was deducted on:

Summary

In summary, as a non-resident of Canada, you are still required to comply with Canadian tax law. This includes filing a Non-Resident tax return and paying any taxes owing. Non-compliance can result in significant penalties, so it is important to ensure that you are up-to-date on your tax obligations.

If you have any questions about your specific tax situation, we recommend speaking with a qualified tax professional. You can also contact us  and we can help guide you through the complexities of non-resident tax.


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

What is Non-Taxable Income in Canada?

In general, any income you earn is taxable in Canada. There are, however, a few types of income that are exempt from tax. This article will explore the few income sources that the Canada Revenue Agency (CRA) and Income Tax Act (“ITA”) have defined as non-taxable income in Canada.

Amounts paid by the government

Certain types of government benefits are considered non-taxable income in Canada and do not need to be reported on a personal tax return. These include:

However, even though certain types of income are not taxed, they must be recorded on the tax return and included in the taxable income for tax purposes before being deducted later. Because of this, these amounts may affect some tax credits, income-tested benefits, and clawbacks. The types of income include the following:

Gifts and inheritance

In general, gifts and inheritances are not considered non-taxable income in Canada. There are, however, some exceptions to this rule. One of the exceptions is when the gift is received from your employer in your capacity of being an employee. In those cases, the gifts will likely be considered a taxable benefit to the employee.

Another exception is when you receive gifts that are a capital property (e.g. real estate, investments). In such cases. the person who has given the gift will be deemed to have sold the capital property at fair market value (FMV). As a result, they will have to pay tax on any resulting capital gain, despite having transferred the beneficial interest in the asset to another party.

In addition to the above, gift received in the form of cash or other property from someone that is in debt to CRA will not be tax exempt. In this situation, the recipient of the cash or other property can be held responsible to pay any outstanding tax liabilities of the transferor up to the FMV of the property transferred, less the FMV of anything that was given in return. This could apply, for example, if one spouse transfers his or her stake in the family home to the other. It might also be relevant if a private company pays dividends while there is still an outstanding tax obligation. In the case of death, all tax debt owed to the government at the time of the testators death must be paid before any property can be distributed to the beneficiaries.

Also, most amounts received by the beneficiary of a life insurance policy are also not taxable.

Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs)

The tax-free savings program began in 2009. The purpose of the program is to encourage Canadians to save money by providing them with a tax-sheltered account to invest. The TFSA is available to any Canadian resident aged 18 and over. All investment income (including capital gains and dividends) earned in a TFSA is tax-free. Withdrawals from a TFSA are also not subject to taxation while contributions are not tax deductible.

The registered retirement savings plan is a long-term saving program that offers tax benefits to encourage Canadians to save for their retirement. Investment income earned in an RRSP is not taxed until it is withdrawn. However, any contributions that you have made to these accounts may be deducted from your taxable income.

There are annual limits on the amount that you can contribute to your TFSA and RRSP. For 2019 to 2022, the annual contribution limit for a TFSA is $6,000. The contribution limit for an RRSP is 18% of your previous year’s earned income, to a maximum limit of $29,210 for 2022.

Other non-taxable payments

There are also other types of payments that are considered non-taxable income in Canada. These include:

A list of income that is not taxed can be found in the ITA in s. 81, amounts not included in computing income. For more information, also refer to CRA’s summary on Amounts that are not taxed.

If you’re concerned about unreported income or want to know whether a source is taxable or non-taxable, contact us, so we can help answer all your questions.


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

How to Withdraw Funds From Your Business

If you’re running a business, there may come a time when you need to withdraw funds from your business. Many business owners put their salaries, dividends, or other compensation on hold during the early phases of their business in order to reinvest the gains in the company to help it expand. At some point though, the business owner would want to take some cash out for personal needs as the business becomes more established.

However, withdrawing funds from your business is not as simple as it sounds and can have tax consequences. Though there are tax efficient ways to take money out of your business, but it will differ for each business owner depending on their specific situation. Several factors may influence which method is better, including the tax rates where you reside, the tax rates where your business operates, and whether the corporation has certain tax attributes that can be utilized to minimize tax. In addition, while some methods of withdrawing cash from your corporation are taxable, some could be tax-free. Each option, however, has its own advantages and disadvantages which we will explore below.

Salaries and bonuses

Generally, the most common method owners will use to withdraw funds from their business is via a salary which is similar to an employee being remunerated. In addition, other family members that are working for the business can also be paid a salary as long as the amount is reasonable.

From a tax perspective, at the corporate level, the business is able to deduct the salary expense from its taxable income and lower the corporate tax rate. However, for a salary or bonus payments to be deductible for the corporation, the amount paid must be reasonable. Based on Canada Revenue Agency (“CRA”). a reasonable salary would be equivalent to the amount the business would pay a third party for the same work activities. Note that there is an exception for salary paid to owner-managers. The CRA would not question the amount of salary paid by a Canadian Controlled Private Corporation to its Canadian resident owner who actively participates in the operations of their company. Another thing to consider at the corporate level is the additional employer cost associated with payroll taxes such as CPP/QPP contributions and employment insurance (EI) premiums.

At the individual level, the taxpayer or business owner will be fully taxed on the salary amount at their personal marginal tax rates that are applicable based on the jurisdiction in which they live. In addition, payment of salary or bonus is considered earned income for the purpose of generating Registered Retirement Savings Plan (RRSP) contributions room for the individual.

Taxable dividend

Taxable dividends can also be used to withdraw funds from your business. Dividends are the profits a company keeps after paying off taxes from its net profits. They’re paid out to shareholders of the company, thus you, your spouse, and your children must own shares of your corporation directly or indirectly (i.e., through a trust or a holding company).

At the individual level, dividends are taxed more efficiently than a salary since the tax rate depends on the characteristics of the dividend (i.e., eligible or non-eligible). However, in contrast to salary, dividends can result in a larger reduction to Old Age Security benefits because of the dividend gross-up mechanism. At the corporate level, the payment of dividends will not be deductible to the corporation. In addition, payroll taxes such as CPP/QPP contributions and employment insurance (EI) premiums will not be an added cost to the corporation or the shareholder.

Under this option, consideration should also be given to both the tax on split income (TOSI) rules and corporate attribution rules before any distribution is made. Generally, taxable dividends from a private corporation to family members who don’t contribute to the business will be taxed at the top marginal rate under the TOSI rules. Similarly, corporate attribution rules under the Income Tax Act (“ITA”) can also apply when an individual tries to income split with family members  in lower tax brackets by transferring or lending property to a corporation. For corporate attribution to apply, the main purpose of the transfer or loan would be to reduce the income of the transferor or to benefit a designated person such as spouse or minor child, thus resulting in the income being attributed back to the transferor.

Capital dividend

Another tax-efficient way to withdraw funds from your business is to pay yourself a dividend through the corporation’s capital dividend account (CDA). The CDA is a notional account that tracks the non-taxable portion of the capital gains and the non-allowable portion of capital losses that is earned by a private corporation. In addition, other amounts such as capital dividends received or paid by the corporation and certain life insurance proceeds received in excess of the policy’s adjusted cost base are also included in the CDA calculation.

A positive balance in a corporation’s CDA is usually a result of net capital gains and can be distributed to Canadian resident shareholders as a tax-free dividend. However, because the CDA is calculated on a cumulative basis, a capital dividend must be paid as soon as capital gains incur to avoid the realization of capital losses. Capital losses incurred after paying a capital dividend will not retroactively affect the tax-free distribution previously received, even if the loss is carried back. Accordingly, it is advisable to pay out the balance of the CDA as soon as it becomes available.

Having said that, calculating the CDA can be complex. In addition to rules regarding what is allowed and what is not allowed in the CDA, timing considerations must also be taken into account when calculating the CDA balance. For these reasons, it is imperative that you speak to a tax professional in advance of paying a dividend from your corporation’s CDA.

Paid-up-capital

The paid-up capital (PUC) of your shares represents the consideration your corporation received in return for the shares it issued. In some cases, your corporation can return the PUC to you tax-free as return of capital . This may be a good strategy if you have a high PUC on your shares and the corporation no longer requires the funds.  In this case, you can take out a tax free distribution by reducing the PUC on your shares.

Obtaining shareholder loans

Another option to withdraw funds from your business is by obtaining a shareholder loan from your corporation. Shareholder loans can be a useful way to manage short-term personal cash needs. However, the ITA contains very specific rules limiting the ability of a shareholder to borrow funds from their corporation. The general rule is that if you borrow funds from your corporation and the loan is not repaid, the amount borrowed is included in your personal income in the year you borrowed the money, unless the loan meets certain exceptions.

The most common exception is if the loan is repaid within one year after the end of the taxation year of the corporation in which the loan was made. However, this exception will not apply if the repayment was part of series of loans and repayments.

Generally, if the business owner needs a short-term loan for less than a year, a shareholder loan could be an easy way to obtain the funds. If used properly, shareholder loans are a great tool for tax planning and cash management.  However, the shareholder rules under the ITA are complex, so speak to a tax professional to avoid negative tax consequences. For more details on shareholder loans, read our article titled “Shareholder loans and their tax implications.”

Repaying shareholder loans

Unlike the option above, if the shareholder has loaned funds to their company, there would be no tax consequences if they want the corporation to repay a portion or all of this loan.  Any amount the shareholder receives as settlement for the shareholder loan will be considered a tax-free distribution.

­­­The most important thing when withdrawing funds from your business is to take the time to properly plan how you are going to withdraw the funds to ensure you are paying the minimum amount of tax. The most tax efficient way to extract funds depends on your unique situation and various factors can influence the end result. The above-mentioned options are available as a general guideline but the best possible solution can be determined with the help of a tax professional as different options can have different tax consequences. If you need help to create a strategy that works best for you, please contact us.


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.