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Straight answers to common questions on Canadian tax
Questions? Just go to Questions and blast away. I'll try to answer you within a week. Unless I'm real busy or whatever.
Now, I've got to tell you I'm no tax expert. I just answer by a) what I seem to recall from experience; b) what I can easily look up ; and, c) by gut feel. I'm sort of a fly by the seat of my pants type of guy. This works for my clients. But, it may not work for you.
Anyway, you know whatever I say is definitely not authoritative. So, you should always check with a professional to see what works for your specific case.
Note: I only answer easy questions. So, please don't ask me anything about US or other foreign taxes, complex corporate questions etc.
Disclaimer: I take no responsibility whatever for any consequences that may occur from acting on information you find here or anywhere else.
B.C. Chastkofsky C.A.
death tax avoidance strategies
interest income tax rates-estates
Death tax avoidance strategies
Questions:
In consideration of potential tax avoidance strategies concerning death and estate taxation: (This question applies to Ontario if there are any distinctions.)
a) Would a pre-death gifting of money to siblings avoid an after after-death taxation?
b) In the case of property, I understand either pre-death disposition or leaving the property in the estate yields the same capital gains taxation and I believe the rates are calculated on the estate taxation rate as opposed to
those receiving the proceeds who may have varying taxation rates. Is this understanding correct and/or are there any tax advantages to pre-death disposition versus letting it go to the estate? If there are additional estates that
come to bear can you please list them and try to quantify?
Thank you
Answer
First, on cash or simple interest bearing term deposits, there is usually no concern. The reason is that the rule says that upon death a taxpayer is deemed to have disposed of his capital assets at fair value. The tax kicks in
only when the fair value of the asset in question exceeds its cost. In the case of cash its fair value always equals its cost. Also, in the case of short term interest bearing deposits, there is usually no gain because the fair
value usually equals its cost.
In the case of other property, it depends what kind of property is at issue. Let me just illustrate with one example. If it's a rental property, then very often the fair value far exceeds the cost of the property. So, without any
planning, if the taxpayer dies whilst owning such a property, he is deemed to have disposed of it at fair market value. On his terminal return, the trustees of his estate would report a taxable capital gain ( which is one-half the
capital gain) on the deemed disposal of that rental property. The taxable capital gain is added to his taxable income which in turns adds to the tax the estate must pay on the deceased's behalf.
Now, if we're talking about a taxpayer with a low income but who now generates a very large capital gain-- say $200,000-- because of the deemed disposition, then he'll be paying some tax at the lower rates. But, as his taxable
income climbs to $71,000 and higher, he'll be paying tax on some of the taxable gain at the 43% rate and maybe even the 46% rate if his taxable income climb to even higher than $115,000.
Now, getting back to the question of a pre-death disposition. Yes. It could make a difference if he parcels out small portions of ownership of the property each year, so that his taxable capital gain still keeps him in the lower
tax brackets. For example, he could gift 1/10 of the property each year to one or more beneficiaries. He would report the gain as taxable income on his return for each year. But, at least, not all the gain is brought into income
at once which would catapult his income to the higher tax brackets.
That's all for now. It's rather sketchy, but I hope at least a bit informative.
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Estate- division of assets
Questions:
my mother is selling her home and dividing the money between my brother and myself, do we have to pay inheritance tax on this money?
Dear
Thanks for visiting my website and posting your inquiry.
If it's the home she's resided in since she bought it, there should be no tax on the sale of it because it should qualify for the principal residence exemption. When you and your brother eventually get the money, there should be
no tax consequences at all.
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car allowance
Questions:
I receive $0.44 per kilometre rate from my employer for gas expense, can I still claim the lease payment of my car and the motor expenses??
Answer
The CRA's policy is that if you receive a non-taxable car allowance , then you can't claim car expenses. The only exception would be if the car allowance was 'woefully inadequate' which doesn't seem to apply in your case.
mortgage interest
Q
If I refinance my home, i.e., increase the mortgage and use the funds to invest in a business. Is the interest on that portion of the mortgage deductible?
A
Yes. But, let me just tell you that it's always safer if the business generates a profit because the government may enact rules to tie interest deductibility to reasonableness of profit in what the funds are used for.
moving expenses
Question
For the past 5years, I've lived in Mississauga, and worked in downtown Toronto. This year, I'm moving to be closer to work. If the move is greater than 50 km, are the moving expenses deductible?
Answer
Yes. As, I understand the term 'eligible relocation' as defined in income tax law, you don't have to relocate your place of employment in the year you move. In fact, as in your case, even if you've worked 5 years in the same
place, if your new residence is more than 40 km closer to work than your old residence
was, the costs of the move are eligible a a moving deduction.
Question
What are the rates of tax on an inherited estate?
Answer
I think you're asking one question that is two.-- or two questions that are four-- two before death and two post-death.
That is, 1) what is the tax to the deceased upon death, and, 2) what is taxed to the heirs of the property
Let me answer by illustrating with a simple example.
Say, an elderly gent-- Mr E passes on leaving a house, some cash, and a rental property.
On his passing there's a rule that deems him to have disposed of his capital property on death. (I'm not going to discuss what the definition of capital property is because it would only increase the already tedious nature of the
topic).
This poses no problem for cash. Also, it's usually no problem for the house because of the principal residence exemption which means the house can pass on to the kids tax free.
The problem lies with the rental property. This is usually considered capital property. So Mr E is deemed to have disposed of the rental property at death. This makes this a bit complicated .
So,when Mr E's heirs get around to preparing his final tax return, they should use an accountant.
The accountant would report the disposal of the rental property at its fair market value at the time of Mr E's passing. This fair market value less the cost of the property is the capital gain . The taxable portion of the capital
gain is 50% of the capital gain.
( By the way, the cost isn't necessarily the cost. It could be something called V day value if the property was owned since before 1972. No time to get into it now.)
Now, getting back to the question, What is the tax rate on the what is deemed disposed of upon death?
The answer is : For the cash- zero; for the house- zero if it was his principal residence all the years he owned it; for the rental property- on the calculated taxed capital gain he is taxed at his marginal tax rate. For 2007 it's
about 21.5% for the first $37,000 in taxable income , the it jumps to about 30% and keeps creeping up till it hits about 43% at a taxable income of $74,000.
So, say he left $1oo,ooo in cash , a house worth $600,000 and a rental property worth $500,000 that cost him $200,000.
On the cash, tax is zero. Same for the house if it's always been his principal residence.
On the rental property his capital gain is $300,000 ( I'm assuming he bought it after 1971). His taxable capital gain is $150,000. It looks like $30,000 of the gain will be taxed at 46% ( the top tax bracket that kicks in at
$120,000 of taxable income); the rest of the gain is taxed at rates of between 21% and 43%.
By the way, there's a probate tax that could be levied that I'm not even going to discuss
Tax after death
Here is depends who inherits the estate. Is it one individual or is it an estate?
If it's just one heir, all he need do is include the income from the estate on his personal return. In the example, the income would be the rent from the property and the rent from the house if it's being rented and the income
from the cash if it's earning interest. He's taxed at his marginal tax rate.
If there's more than one heir, then that's an estate. The estate should file T3 returns including the income in the estate. The estate, being a testamentary one (i.e., formed as result of the death of a person) is taxed at the
same rates that an individual personal taxpayer is taxed except that an estate gets no personal exemptions.
By the way, the estate's trustees can allocate the income of the estate to its beneficiaries-- but check with your accountant about this.
Hope some of this makes sense.
Inheritance tax in Ontario
Question
Is inheritance taxed in ontario, and if you inherit a house, and you sell it is the money yours.
Answer
If the deceased person lived in the house, it is presumably his or her principal residence and therefore not taxed upon her passing. If you inherit a house and you sell it, the money is yours usually because usually it either a)
qualifies as a principal residence if you lived in the house after the passing of the parent, or b) the increase in value in the house since the passing of the parent is negligible.
That's a short and somewhat vague answer. There may be issues about probate fees and clearance certificates and maybe even capital gains to the heirs or the estate that I won't get into right now, but may do so at a more opportune
occasion.
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Capital gains
Five years ago I bought a triplex for $450,000. I occupy one of the three rental units.
Recently, I've received an offer to sell the building for $800,000. How much tax will I pay on it?
Answer
If all 3 units are of equal sq footage, you're exempt from 1/3 of the capital gain . So, you're gain will be 2/3 of $350,000 or $233,310 less legal and commision costs on sale.
The max tax you'd pay on the gain is about $53,000 because only half the gain is taxable and the max marginal tax rate is 46%
Dividends to spouse
Question
I have one other question I forgot to ask, I read somewhere that the government expects you to pay yourself a reasonable amount for the time you've worked, is this anything to be concerned about if doing the dividend route?
Answer
As far as dividends are concerned, you are entitled to declare and pay a shareholder dividends-- even in substantial amounts-- even if the shareholder does no work for the company. This is now an established principle that is
due to the decision and reasons given in the Neuman case that you can read here:
http://scc.lexum.umontreal.ca/en/1998/1998rcs1-770/1998rcs1-770.html
As for salaries, what you say is correct in that the salary has to be commensurate with the value of the work performed. But, this only applies for an employee who is not the owner. The owner of the company can have his company
pay him a salary in any amount he chooses. If , for example, your company, down the road, earns $1 million per year. Then, even if you work only 10 hrs per year in the company, you're entitled to have the company pay you a wage of
$1 million.
Hope what I wrote makes sense.
Transfer of property
Question
My wife, her sister, and their father owned recreational property together. This year, the property was put into one person's name. Is the property deemed to have been sold, and as it is recreational property, do the other two
owners now claim the value of the appreciated property as taxable income?
Answer
Note: The answer below is necessarily sketchy pending a better knowledge of the details of the events and property in question.
The answer depends on what you want to achieve by transferring it from three persons' names to one person.
If your intention is for all three to retain beneficial ownership in the property, but you find it easier to do certain things if the property is in one name rather than three, then the property is not deemed to have been sold.
If , for example, you want to rent out the property and for admin purposes, you only want to disclose the name of one of the owners, then it's possible that there is no transfer of ownership in the first place ( when transferring
the property from three people to one). All you're doing, in effect, is appointing one person as a nominee-- or trustee-- to hold the property in trust for all three persons. This would not constitute a transfer of beneficial
ownership; hence no sale need be reported on any one's tax return.
However, you should have a trust agreement in place to avoid problems with CRA.
If, one the other hand you intend to effect a transfer of beneficial ownership from the three to the one, the the two transferors must report a sale of property on their tax returns. It's not the value of the appreciated property
that is reported as taxable income. Rather, it's the taxable capital gain that is included in taxable income. The taxable capital gain is one half of the capital gain which is usually-- but not always-- the share of the fair value
of the transferred property minus the share of cost.
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asked Dec 07
q
I have owned my home (principle residence) since 1978. Upon my death, for what taxes would my daughter (the inheritor of this property) be liable?
A.
There should be no tax at all payable upon the passing of your home from you to your daughter because it's been your principal residence all the years that you owned it. There may however be probate fees on the estate depending on
which province you reside in.
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Tax rate on estate's interest income
asked Dec 07
Q
I am an executor for my dad's estate. He died in Jan. 2007. A GIC in his estate comes due in Dec. 2007 and the interest from this GIC will be subject to tax. What is the approximate rate of tax that Revenue Canada will charge the
estate? This interest from the GIC will be the only source of income for the estate in 2007.
A
If the estate is in Ontario, for 2007, the first $35,000 of taxable income is subject to tax at the rate of about 21%. You should file and report the income on a T3 trust return.
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asked Dec 07
Q.
Are wills tax deductible on income tax return?
Answer
As far as I know, neither the cost of preparing a will nor the cost of funerals is tax deductible
Do you need a Toronto area CA firm? If you're looking for an affordable Toronto CA firm, you may find the way I do business right up your alley. Check out my site at http://www.torontotaxhelp.com