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Personal Income Tax Basics

January 31, 2022

With personal tax season quickly approaching, it may be beneficial to review some basic tax concepts to help individuals understand how they are taxed.

In general terms, in Canada, you are taxed on your worldwide income. Deductions, such as RRSPs or childcare expenses can be used to reduce that income prior to taxation. The taxes you owe for a given year will depend on your net income after considering deductions. Finally, credits, such as donations, taxes withheld from your paycheques, tax installments that you made throughout the year, or other credits, can be used to reduce the tax you might owe. If you have already had enough tax withheld from your paycheques or from other tax credits, it is possible you could receive a refund of the taxes you had overpaid during the year. If the taxes withheld from your cheques or other tax credits, is insufficient to cover your taxes, you may end up with a balance owing.

Types of Income

Taxable income in Canada can be summarized into three categories, all of which are taxed differently:

General income
- This includes income from employment, self-employment, interest income, rental income, government benefits, pensions, etc.
- This income is taxed at the determined marginal rate based on an individual’s income.
Dividend income
- Split into two types: eligible and ineligible.
  - Eligible dividends are those dividends paid from large corporations that do not qualify for the small business deduction. These dividends are taxed at lower rates to an individual as the corporation that paid them paid a higher rate of tax.
  - Ineligible dividends are those dividends paid from small corporations that qualify for the small business deduction. These dividends are taxed lower than general income, as the corporation paying the dividend already paid tax before paying these dividends; however, ineligible dividends are taxed higher than eligible dividends as the corporation paying them paid a lower rate of tax.
Capital gains
- This is the income you make by selling investments or other property for more than you originally paid for it.
- If you realize a capital gain, only half of the gain is taxed as a way to encourage investment.

Tax Rates

Canada’s tax system is graduated, which means tax rates increase the higher your income is. Do not let this scare you if you have higher earnings. Your first portion of income is taxed at the low rate, then any additional income above the first tax bracket is taxed at the next rate.

For example, someone that gets a $2,000 raise from $48,000 to $50,000 does not go from paying 25% on the $48,000 to paying 30.5% on the entire $$50,000. Instead, you would pay 25% on the first $49,020 and then 30.5% on the $980 that is above the first bracket.

Below is a table of tax rates in Alberta, courtesy of EY Canada.

The table above only accounts for the basic personal tax credit. Other credits may be available depending on the individual’s income tax situation.

The table above can be useful to determine tax savings on deductions. It also gives an easy visual of the preferred taxation rates available on dividends and capital gains income.

Credits vs. Deductions

Credits and deductions reduce taxes owing for individuals in different ways.

Tax credits reduce the tax you owe on your taxable income. Tax credits are added up and multiplied by the lowest rate of tax (15% Federal and 10% provincial for Alberta) to calculate the amount of taxes that will be reduced. For example, $5,000 of tax credits will reduce the taxes you owe by $1,250 ($5,000*25%). One exception is donation credits over $200, which can reduce taxes owing up to 50%.

There are two types of tax credits: non-refundable and refundable.

Non-refundable tax credits can only be used to reduce the taxes you owe in the current year. If you have taxes owing of $5,000, but tax credits available of $6,000, the extra $1,000 of tax credits provide no additional benefit and cannot be carried forward. Donations are one exception to this rule that can be carried forward to future years.
Refundable tax credits can be paid to you even if you have no tax payable. It is rare for tax credits to be refundable. The most common types of refundable tax credits taxpayers qualify for are the GST/HST credit and the Working Income Tax Credit.

Deductions reduce the taxable income of a taxpayer. Deductions benefit high-income earners more because it reduces their income that would be taxed at higher rates. The most common tax deduction is RRSP contributions.

Conclusion

The income tax act is a very large document and tax situations can get complicated quickly. For assistance preparing your personal taxes or questions about what might be required, contact our office.

2021 RRSP Contributions

January 12, 2022

What you need to know about your RRSP contributions for your 2021 personal tax return.

If you have earned income like employment income and filed an income tax return in Canada, you are eligible to contribute to an RRSP until December 31 of the year you turn 71. RRSP’s are a type of financial account similar to a savings account or investment account but they have the added tax advantages if used strategically.

How much you can contribute to your RRSP is determined as 18% of earned income in the previous taxation year up to the maximum annual contribution limit each year. Below is a breakdown of the maximum RRSP contribution limit since 2015, keeping in mind that your own limit may vary each year depending on your earned income:

2015 – $24,930

2016 – $25,370

2017 – $26,010

2018 – $26,230

2019 – $26,500

2020 – $27,230

If you do not contribute your maximum each year, you can carry forward unused contributions and make additional contributions in future years. If you are unsure what your 2021 RRSP contribution limit may be, you can find it on your 2020 notice of assessment from CRA or contact our office for assistance. You have until March 1, 2022, to contribute to an RRSP in order to be eligible for an RRSP deduction on your 2021 personal tax return.

Funds contributed to an RRSP are deductible in the year they are contributed and only taxed when they are withdrawn. This means that if you contribute $1,000 to your RRSP in 2021, the $1,000 is a deduction from your total income, reducing your net income for tax purposes. This can be useful if you have higher income in a given year which results in paying taxes at a higher rate. By contributing to your RRSPs, you can reduce your net income, potentially saving in high rate tax and deferring the total tax to future years. The main benefit is realized when you later withdraw your RRPSs at a time when your income is lower. At that time, you are taxed on that withdrawal at a lower rate resulting in not only a tax deferral at the time of contributing but overall tax savings because you are later taxed on those funds at a lower rate. When withdrawing your RRSPs at a later date, withholding tax must be held back by your RRSP provider and sent to CRA at the following rates:

Up to and including $5,000 – 10%

$5,000 to $15,000 – 20%

More than $15,000 – 30%

You will receive a slip (T4RSP) for the withdrawal and the amount must be reported on your personal tax return.

If you contribute more to your RRSP than your RRSP contribution limit you will have an excess contribution which is taxed at 1% per month if it exceeds your contribution limit by more than $2,000. If you exceed your contribution limit for the year you have 3 options:

Withdraw the overcontribution. You can complete for T3012A to remove the over-contribution without upfront withholding tax. Penalties on over contributed amounts may still apply.
Complete a Schedule 7. Designate the amount of contribution you want to carry forward to a subsequent tax year. This amount will be reported on your Notice of Assessment and will reduce your contribution room for the next tax year.
Complete Schedule 7 if you have participated in the Homebuyers’ Plan or the Life Long Learning Plan and these contributions are a repayment.

For more information or advice on how you can take advantage of the potential savings with RRSPs, please contact our office.

3 Ways to Save Personal Tax

January 3, 2022

One of the most common questions we receive regarding personal taxes is, ‘How can I save taxes?”.

With tax season just around the corner, it is time to start considering what you need to file your personal taxes and ways in which you might be able to reduce your personal tax burden.

Registered Retirement Savings Plans (RRSP’s)

Contributions to a Registered Retirement Savings Program are deductible in the year purchased or if purchased within 60 days into the following year. If you purchase an RRSP on or before March 1, 2022, it can be a deduction on your 2021 tax return. It is important to note that, it can only be purchased within the first 60 days to be eligible for the current year. Although this is not the case this year, it is important to be careful on leap years because the deadline in a leap year will be February 29th.

When you contribute to an RRSP either during the year or within the first 60 days of the new year, you can expect to receive an RRSP deduction slip from your financial institution. You will need to provide a copy of this slip to your tax provider so that they can claim the appropriate deduction on your tax return. RRSP contributions can be deducted against most other types of personal income including employment income, dividend income, interest income, business income, farming income, and rental income. The RRSP deduces your taxable income dollar for dollar and is the most helpful at reducing taxes with taxpayers in the higher tax brackets. The highest federal tax bracket of taxable income over $216,511 will see a tax reduction of 47 cents for every dollar they contribute, while the lowest tax bracket of income under $49,020 will see a tax reduction of 15 cents for every dollar they contribute.

The amount you can contribute to your RRSP’s for a given year is limited to your unused RRSP contribution limit which is available on the bottom of the prior year’s Notice of assessment or on CRA’s My Account.

In contrast, if you withdraw money from your RRSP’s during a calendar year, it will be considered income in the year it is withdrawn. You will receive a T4RSP slip from your financial institution and you must include this income on your personal tax return. Your financial institution will withhold tax when you make the withdrawal which will go towards the taxes owing on that income, but it is important to note that, depending on your other income and deductions, the tax withheld may not be sufficient to cover the taxes generated on the RRSP withdrawal and you may end up with taxes owing for the year.

While contributing to your RRSP’s can help you to defer tax by deducting it against your current income and not being taxed on it until a later when you withdraw it again, it can also help you to permanently minimize taxes too. If you are contributing to RRSP’s while your taxable income is higher such as during your working years, you are getting the deduction at a higher tax rate. Later, if you withdraw the RRSP’s out when your income is lower such as when you are in retirement and paying taxes at a lower rate, you can save on the total amount of tax on that income.

Tax Free Savings Accounts (TFSA’s)

TFSA’s were introduced in 2009 to allow extra savings to be invested without paying tax on the income earned by those investments. Funds can be invested in GIC’s, stocks, and mutual funds, among other things. Any income earned on funds invested in TFSA’s, including interest, dividends, capital gains, etc. is not taxable.

While contributions to your TFSA’s are not deductible against other income in the year they are contributed, they can be used to reduce taxable income from investments in future years. You will not receive any slips for contributions to your TFSA’s in a given year, but should receive statements from your financial institution indicating any income earned on those funds. These are not needed for preparing your personal taxes.

Contributions to your TFSA’s are also limited to a specific amount and grow each year. You can find your TFSA contribution room on your Notice of Assessment and in CRA’s My Account. Similar to RRSP’s, CRA will apply penalties for over-contributing to your TFSA. If you were 18 or older in 2009 and have never contributed to your TFSA, your limit should be $69,500.

When funds are withdrawn from a TFSA, they are not considered taxable income and are received tax-free. Also, the amount withdrawn will increase the contribution room in the account. CRA recalculates the contribution room on an annual basis and it is up to the taxpayer to keep track of changes during the year.

Donations

Donations can also help to reduce your taxes in a given year while simultaneously helping charities and community groups. All donation receipts must have the name of the organization, date, location of the organization, unique serial number, CRA registration number, name of the donor, amount of gift, and CRA website. Donation slips are required to deduct donations on your tax return.

All the donations made in the current year plus any unclaimed donations for the previous 5 years can be added to your return. The total amount donated, less $200, up to 75% of your net income, are eligible for a tax credit. If large donations are made in a year, this can save significant taxes.

Any unused donations can be carried forward, and there are no penalties for over-contribution.

For more information please contact our office or visit the following CRA sites:

RRSP: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/registered-retirement-savings-plan-rrsp.html

TFSA: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466/tax-free-savings-account-tfsa-guide-individuals.html#P44_1115

Donations: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-34900-donations-gifts.html

Taxation of Cryptocurrencies

December 23, 2021

Basic Concepts

There are many questions when it comes to how cryptocurrencies are taxed and what you are required to report for tax purposes. CRA has taken the stance on cryptocurrency that they tend to have on a multitude of income tax subjects, which is “it depends on the fact and circumstances.” This can cause confusion for taxpayers and difficulties for advisors as well. Below is some information to help identify when you may have income tax reporting obligations from cryptocurrency transactions.

Cryptocurrency may contain the word “currency”, but it is taxed as a commodity for purposes of the Income Tax Act. Gains or losses can be treated as either business income or capital, depending on the circumstances of the transaction. If you hold multiple types of currency through an exchange or wallet, they are treated as separate assets and must be valued separately.

Reporting Income

Income or losses must be reported on dispositions of cryptocurrency. Dispositions arise when you do any of the following:

Sell or make a gift
Trade or exchange, including converting one type of cryptocurrency to another (such as converting Bitcoin to Etherium)
Convert cryptocurrency to cash
Use cryptocurrency to purchase goods or services

Dispositions do not include buying cryptocurrency and holding it, transferring between wallets, or transferring cryptocurrency between an external wallet to a brokerage account.

Income or Capital?

Reporting income appropriately is very important as business income is fully taxable, but capital income has an income inclusion rate of 50%. There are a number of factors that CRA uses for determining business income such as:

you carry on the activity for commercial reasons and in a commercially viable way
you undertake activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory
you promote a product or service
you show that you intend to make a profit, even if you are unlikely to do so in the short term

Business activities normally involve some regularity or repetitive process over time. Single transactions can be considered a business when it is an adventure or concern in the nature of trade. Cryptocurrency businesses include mining, active trading, or exchanges (including ATMs).

Most cryptocurrency users hold for capital appreciation and transact irregularly, so they would not be considered a business. In this case, income can be reported as capital.

GST/HST Considerations

Where a taxable property or service is exchanged for cryptocurrency, the GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange.

If your business accepts cryptocurrency as payment for taxable property or services, the value of the cryptocurrency for GST/HST purposes is calculated based on its fair market value at the time of the transaction.

Keep all records that show how you calculated the fair market value.

Keeping Books and Records

If you acquire or dispose of cryptocurrency, you have to keep records of your transactions. When valuing cryptocurrency, you can choose the exchange rate from your broker or an average of midday values from high-volume brokers. However, you must be consistent with the method you choose.

The easiest method is likely to use the rate at the date of the transaction provided by your broker. However, brokers have different standards for records and how long they keep them. It is best practice to export your records regularly, so you always have a copy. You are required to keep supporting documents for at least six years from the end of the last tax year they relate to.

CRA recommends maintaining the following records on cryptocurrency transactions:

the date of the transactions
the receipts of purchase or transfer of cryptocurrency
the value of the cryptocurrency in Canadian dollars at the time of the transaction
the digital wallet records and cryptocurrency addresses
a description of the transaction and the other party (even if it is just their cryptocurrency address)
the exchange records
accounting and legal costs
the software costs related to managing your tax affairs.

If you are mining cryptocurrencies, also keep the following records:

receipts for the purchase of cryptocurrency mining hardware
receipts to support your expenses and other records associated with the mining operation (such as power costs, mining pool fees, hardware specifications, maintenance costs, and hardware operation time)
the mining pool details and records
receipts for the purchase of cryptocurrency mining hardware
receipts to support your expenses and other records associated with the mining operation (such as power costs, mining pool fees, hardware specifications, maintenance costs, and hardware operation time)
the mining pool details and records

Relief for Unreported Income

If you have already filed your tax return and missed reporting income from cryptocurrency transactions, you can correct the error using CRA’s voluntary disclosures program. This program may provide interest and penalty relief for voluntary correcting unreported income.

Foreign Reporting

If the total cost amount of specified foreign property you own is over $100,000 CDN, CRA requires a T1135 – Foreign Income Verification Statement be filed with your tax return. CRA takes the position that the foreign reporting requirements extend to cryptocurrencies that are situated, deposited, or held outside of Canada. If you hold your cryptocurrency outside of Canada it could be subject to foreign reporting requirements if it exceeds a cost of $100,000, or if the cost of cryptocurrency held outside of Canada and all other foreign assets exceeds $100,000.

For more information, contact our office or view CRA’s cryptocurrency guide at:

https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html

Rental Properties – Things to Consider

December 21, 2021

Are you considering purchasing a rental property or converting your existing property into a rental property?

Considerations:

You should always have a signed rental agreement in place with your tenants outlining the terms of the lease including but not limited to:

- the cost of the lease,
- the amount of deposit required,
- factors that impact the return of the deposit at the end of the lease term,
- length of the lease term,
- and any other factors that may be important to you, such as pet rules, etc.

When setting the rental price, consider the additional costs that you may have with the property and who is responsible for these costs (these should all be outlined in the rental/lease agreement discussed above) to ensure that your monthly rent is sufficient to meet your costs. Things to consider include:

- The amount and frequency of your mortgage payment,
- Monthly or annual property taxes,
- Potential repairs,
- Monthly utility costs

Another consideration is whether to require your tenants to get renters insurance and provide proof of insurance to you to ensure all parties are covered in case of any issues

It is important that you keep good records of all income and expenses related to your rental property as you will need these when it comes time to file your taxes in the spring. For tax purposes, any income that you receive from your rental property is considered to be taxable income. You are able to reduce this amount by any eligible expenses that you incur on the property. Expenses include things like:

- Property taxes
- Utilities
- Repairs & Maintenance
- Property manager fees (If one is used)
- Mortgage interest
- Property insurance
- Advertising costs
- Professional fees (accounting/legal)
- Motor vehicle costs when driving to the property to perform repairs, etc.

GST is not required to be recorded on any income or expenses in relation to Residential property rental income. It is required for commercial property rental; however.

Change in Use

Another thing to consider is the treatment of the home before or after it is a rental property.

Every time you change the use of a property, you are considered to have sold the property at its fair market value and have immediately reacquired the property for the same amount. This is could mean a deemed disposition of a principal residence if you had previously lived in the home yourself. If it was your principal residence prior to converting it to a rental, it is possible that you will have no immediate tax consequences, depending on your situation.

If you are considering renting the property out for only a short time and then living in it again at a later date, there is a tax election that can be filed to reduce any tax consequences later. If you find yourself in this scenario, contact our office for more information and steps to take to ensure that you are in the best tax position possible.

Medical Expense Tax Credit

November 9, 2021

While personal tax season is still a few months away, it is never too early to start organizing your records and making sure that you are hanging onto anything you may need when it comes time to file your taxes in the spring.

Medical expenses are eligible for a tax credit on your personal tax return, HOWEVER, only the amounts in excess of the lesser of 3% of your net income OR $2,421 (2021 limit) can be claimed.

If you plan to claim medical expenses on your personal tax return, please ensure you keep receipts for out-of-pocket expenses. On the receipts, CRA wants to see the name of the patient, description of services or devices provided, date of payment, who made the payment, and DIN for prescriptions. Many pharmacies will print off a detailed record of all prescriptions a patient purchased during the year including all information required by CRA, such as the DIN. This can simplify the process and save you from having to organize and total up all of your individual prescription receipts for the year.

Travel expenses are deductible if you must travel more than 40 km to attend a medical appointment or procedure AND only if the service is not available in your area. In addition to mileage, if you must travel more than 80km for a medical appointment or procedure you can claim your meals. You can even use CRA’s simplified method to claim the meals which allows you to claim $23 per meal (2021 rates) instead of saving and totaling up each meal receipt. If you travel over 200km for a medical appointment or procedure, you can also claim the costs of accommodation. It is not uncommon for CRA to still require proof of the appointment in order to claim these costs. Many doctor’s offices will provide you with a letter or statement confirming your attendance at the appointment that can be used to support the claim.

Please keep a “proof of appointment attendance,” number of km traveled (round trip), number of travel days needed to attend the medical appointment or procedure (these days can be used to determine the number of meals under the simplified method) OR actual meal expenses can be deducted so keep receipts, hotel or accommodation receipts and parking receipts.

This link will take you to CRA guide RC4065 https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4065.html which will give you a comprehensive list of eligible expenses and more detail on what can be claimed.

For more information on the types of things you can claim and what you are required to keep to support your claim, contact our office.

Tax Instalments

October 26, 2021

If you earn income for more than one year that doesn’t have tax withheld, or perhaps not enough tax withheld, then you may have to make tax instalments.

Generally, this happens if you have business income, rental property income, or investment income on your personal tax return. You must make instalments if your taxes owing is greater than $3,000.

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Proposed Accelerated CCA for Depreciable Property

October 26, 2021

The federal government recently proposed an accelerated deduction on eligible capital purchases for Canadian Controlled Private Corporations (CCPC’s). This accelerated deduction will be available for the years 2021 through 2023. When this measure is passed, it will allow for the immediate expenditure of new asset additions with a cost of up to $1.5 million each year. The rules apply to most depreciable property purchased after April 19, 2021, but excludes certain assets, such as buildings and intangible assets.

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fulcrum group corporation sole proprietorship

Corporations Vs. Sole Proprietorships

October 5, 2021

Looking to start up a new business? Unsure as to whether you should incorporate or simply operate as a sole proprietor? There are several factors to consider before you decide what you would like to do.

Sole Proprietor:

Advantages:

Simple to set up and set up costs are relatively low
Any business losses can be offset against other personal income, including employment income
Proprietor receives all net profits of the business

Disadvantages:

The proprietor is liable for all debts and liabilities of the company. (Personal assets at risk)
All net profits will be taxed at the personal tax rate individual is subject to based on the total combined income when combined with all other sources of personal income
Personal tax rates are generally higher than corporate tax rates (ranging from 25% up to 48%)

Incorporation:

Advantages:

Lower tax rates – corporations eligible for the small business deduction with net income under $500,000 pay tax at about 11% in Alberta
Limited liability (with exception of personal guarantees that may be required for financing)
Capital gains exemption on the sale of shares of a qualified small business corporation (up to $892,218 for 2021)
Flexibility paying shareholders (I.e. Dividends or wages)

Disadvantages

Higher cost more to set up and maintain (Incorporation fees, name registration, annual returns, etc.)
Business losses cannot be written off against shareholder’s personal income (some exceptions)
Additional filing requirements including monthly, quarterly, or annual reports depending on set up and corporate tax returns (in addition to Personal Tax Returns)

The final decision on whether to incorporate or operate as a sole proprietorship ultimately lies in what your goals are. If you have questions about incorporating and what is best for your business, reach out to our office for more information.

fulcrum group accountant old age security oas

Old Age Security (OAS) Increases and One-Time Additional Payment

July 22, 2021

CRA announced that older seniors will receive a one-time $500 Old Age Security Pension (OAS) payment during the week of August 16, 2021. It is meant to help support seniors’ higher expenses and will apply to any seniors that are eligible for the OAS pension in June of 2021.

No action is required by seniors as they will automatically receive the additional payment as long as they are eligible for OAS.

In addition to the one-time payment, OAS benefits will also increase for all eligible seniors in July of 2021 by 1.3% bringing the maximum monthly benefit from $618.45 to $626.49.

CRA also announced that the Guaranteed Income Supplement (GIS) and the Allowances will also be adjusted for inflation.

Seniors over 75 can expect OAS pension to increase again in July of 2022 by about 10% based on Budget 2021.

For more information, visit https://www.canada.ca/en/employment-social-development/news/2021/07/date-announced-for-500-one-time-payment-and-old-age-security-to-be-automatically-increased-by-almost-100-over-the-coming-year.html.

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