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Anyone selling real estate during the year has to report such sales on their tax returns, even if any gain is 100-per-cent tax-free due to the principal residence exemption. Yet it appears Canadians still run afoul of the law when it comes to the appropriate tax reporting of those sales.

In a release last week, the Canada Revenue Agency provided an update on its ongoing project to address “non-compliance in real estate transactions.” The CRA said there continues to be “tax compliance risks in the real estate sector, particularly in the Vancouver and Toronto markets. In response to these risks, the CRA is continuing to take concrete action to crack down on those who fail to follow the law.”

During the past three years, CRA auditors have reviewed more than 30,000 files in Ontario and British Columbia and identified nearly $600 million in additional taxes related to the real estate sector, which resulted in over $43 million in penalties. In 2017-2018, the CRA assessed $103 million more in additional taxes than the prior year and penalties increased by $19 million.

The CRA is particularly taking a close look at “pre-construction assignment sales,” whereby a condo is purchased from a developer and sold to another buyer before the unit is completed. The CRA has issued what’s known as “unnamed persons requirements” to property developers and builders, requesting information about the buyers involved in such sales. This information is then used by the CRA to identify taxpayers who may not be correctly reporting for both income tax and GST/HST purposes.

The CRA is also examining property flipping, which it goes out of its way to point out “is not illegal … Canadians have the right to purchase and sell property for a profit.” But the agency cautions that income resulting from these transactions is considered business income and must be reported as such to the CRA. Failure to do so can result in a reassessment of tax owing, with non-deductible arrears interest to boot. Even worse, you could also find yourself facing a gross negligence penalty equal to 50 per cent of the tax you sought to avoid.

That’s exactly what happened recently in Tax Court in a case involving a taxpayer and her then-17-year-old granddaughter, who each signed contracts to acquire condos in a building being constructed in Toronto. In 2006, the taxpayer, who was also a real estate agent, entered into a contract to buy Unit 6 of the project while her granddaughter bought Unit 5. Both purchases closed in June 2010. Unit 5 was sold that same month and Unit 6 was sold a month later.

Neither the taxpayer nor her granddaughter reported any income relating to the condos on their 2010 tax returns. The CRA reassessed the taxpayer’s 2010 tax year on the basis that she had failed to report business income of $103,206, that total being the gain on the sale of Unit 6. Similarly, the CRA reassessed the granddaughter’s 2010 tax year, adding $106,025 of business income to her return, representing the gain on the sale of Unit 5. The CRA then charged them both with gross negligence penalties.

In court, the taxpayer and her granddaughter took the position that the profits on the sales of the condos should only be half-taxable as capital gains since they maintained it was their original intent to hold the condos on a long-term basis. They explained the condos were next to Seneca College, which the granddaughter was planning to attend after graduating high school; she would live in her condo while the taxpayer would rent her own condo out to third parties.

The judge was not persuaded by this explanation. As it turns out, neither the taxpayer nor her granddaughter had the financial resources to complete the purchases. The taxpayer’s credit rating was too poor for any conventional lender and her granddaughter was earning less than $7,000 annually. The taxpayer had to borrow money from friends on short-term loans just to bridge the time between the closing of the purchases and the subsequent sales. She then used the proceeds from the sale of Unit 5 to help close the purchase of Unit 6. It also turned out that Unit 6 was listed for sale before the taxpayer even took ownership of it.

Based on this, the judge concluded that the taxpayer’s “primary intention was always to try to sell the condos at a profit,” which is a polite way of saying flip. As a result, the judge found the gains on each condo were properly characterized by the CRA as business income and not as capital gains eligible to be taxed at 50 per cent.

The judge also noted the CRA assessed harsh gross negligence penalties “not because the (taxpayers) failed to report their profits on income account, but rather because they failed to report them at all.”

In court, the taxpayer claimed she was not aware she had to report that profit. The judge found this explanation incredulous, saying, “When she filed her 2010 tax return, she would have been a real estate agent for approximately 23 years. I do not believe that she was unaware that profits made selling real estate that is not one’s principal residence are taxable.” The judge, therefore, concluded the taxpayer was grossly negligent in not reporting her profit from selling Unit 6.

By contrast, the judge found that her granddaughter was not grossly negligent: “I think it is reasonable for a 21-year-old whose tax experience consists of reporting relatively small amounts of T4 income on her tax return each year to rely on her own father and grandmother, both of whom are real estate agents intimately familiar with the details of a sale, to tell her if she needed to report income on her tax return.”

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning, at CIBC Financial Planning & Advice in Toronto.

Jamie.Golombek@cibc.com

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Situation: Couple at 40 with two young children wants a sabbatical soon, then retirement at 55

Solution: High savings rate plus a solid track record in stocks fund education savings and retirement

A couple we’ll call Vince and Linda, both 40, make their home in Ontario with their two children ages 3 and 6. A financial systems manager and a civil servant, respectively, they bring home $12,730 per month. They have a home with a $900,000 price tag and about $1.56 million in financial assets. Their debts are a mortgage and a car loan that add up to $158,000. Their net worth, an impressive $2.3 million, is exceptional for their stage in life. Vince, an accomplished investor, has provided the family with substantial financial security. Yet they are prepared to risk it with a plan to retire in as little as a decade and a half.

“Could we retire in our early or mid-50s with an after-tax income of $80,000 a year to do non-profit work?” Vince asks.

Quitting their jobs well before 60 year would stress their retirement. Their issue, therefore, is whether another 15 years of work backed up by diligent investing can support what might be four decades of retirement.

(E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.)

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Vince and Linda. “The family has an impressive ability to save, invest and pay off debt, but quitting so early will take a lot of careful planning. They can’t afford to make big mistakes with such a long-range plan.”

Allocations now and then

The couple’s spending is modest and will be even more modest in future. Present monthly allocations include $1,559 for RRSPs, $417 for RESPs, $917 for TFSAs and $1,450 for child care and activities. If they begin retirement in, say, 10 years at age 55, the kids would still be dependent. But 15 years from now, when the kids are 18 and 21, the family’s finances will be quite different.

If their retirement starts at their age 55, they could spend $6,246 per month and be pretty well within their after-tax budget. Their $867 per month interest-free car loan would be paid and their mortgage, $1,274 a month with a 15 year amortization, would be history, as would child care at $1,450 per month. They would end RRSP and RESP savings, a total of $1,976 per month. Cash savings at $1,200 per month would end.

Vince and Linda are well diversified. Their house has a modest mortgage of $132,000. They could easily pay down the mortgage, but at its present rate, 2.02 per cent and affordable payments of $1,274 per month, it’s no problem to carry it and use nearly $60,000 cash they hold for investments that would return several per cent more.

Educating the kids

The family RESPs total $46,153. If the parents maximize contributions to achieve the Canada Education Savings Grant limit of $7,200 per child, which would happen when each is about 14.4 years old, they would have 8.4 years and 11.4 years to invest $2,500 per beneficiary plus $500 from the CESG, total $3,000 per year per child, and with growth at 3 per cent over inflation, the kids would have $59,000 and $74,000, respectively for post-secondary education. The parents could average the sums to $66,500 to provide four years of tuition and books at any post-secondary institution in Ontario.

Retirement projections

To achieve their retirement goal, $80,000 per year after tax, should not be hard. Linda can expect an unreduced pension at age 55. It would be about 60 per cent of her present $91,000 salary or about $54,600 per year. That’s their retirement foundation.

The couple’s RRSPs currently total $481,123. If they add $18,708 per year for the next 15 years and achieve a rate of growth of 6 per cent less 3 per cent for inflation, the RRSPs would grow to $1,097,500 and the annuitized payouts for 35 years would rise to $51,100 per year in 2018 dollars using the same 3 per cent annual real return for the calculation.

Their TFSAs, $148,834 with the addition of $11,000 per year for the next 15 years to their age 55 with 3 per cent annual growth after inflation would become $442,680. Annuitized for the next 35 years to age 90, that sum would generate $20,600 per year with the same return and inflation assumptions.

Their taxable account with a present value of $819,528 with no further contributions would grow to $1,277,000 and support payments of $59,430 for the next 35 years, again with the same assumptions.

CPP would pay each an estimated $11,600 per year at 65. Each could receive Old Age Security at $7,040 per year using 2018 rates less the clawback which begins when income rises over about $75,000 and takes 15 per cent of each dollar thereafter. We’ll assume that the clawback takes all of their income and thus leave OAS at zero for each partner.

Adding up components of future income assuming that Vince and Linda work to age 55 and then retire, they would have about $186,000 before tax to age 65 and then, with the addition of CPP benefits, $208,930 before tax. Removing TFSA income, $20,600 per year, the sums decrease to $165,130 and $188,330. After splits of eligible pension income and other income from shared investments, they would pay tax at an average 30 per cent rate and have $11,370 to spend before 65 and $12,700 per month after 65.

The figures for retirement income are large in this case, but they make sense. Vince has transferred his skills in financial management to his family investments and, backing his results, Linda has a nearly bulletproof pension from a local government. Even if Vince’s investments were to lose half their value at retirement, they could sustain their expenses.

“There is no doubt that Vince and Linda can retire at 55 and meet their retirement income targets and a good deal more,” Moran concludes. “With their demonstrated skill in investing, they could add perhaps one per cent to their rate of growth in all portfolios other than the RESP, which should be conservatively invested.”

“Financial management skills and one solid job pension have given this couple the ability to retire as early as 55 and then to exceed their retirement income expectations,” Moran says. “They can shift their work to good causes and even provide a legacy for their children.”

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

Financial Post

Retirement stars: Five retirement stars ***** out of five

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Millennials have earned a reputation for being slow to leave their parents’ basements, but as the generation begins to grow older, things may be about to change.

A recent report revealed that in the Greater Toronto and Hamilton Area (GTHA), a conurbation of seven million persons, as many as 700,000 millennials could leave their parents’ homes in the next 10 years, creating nearly 500,000 new millennial-led households.

Without changes to the pace of home construction, the region could as a result be faced with a shortfall of 70,000 low-rise dwelling units.

The report, by Ryerson University’s Centre for Urban Research and Land Development, pegged the number of millennials in the region at 1.9 million — meaning they outnumbered the baby boomers and constituted the largest source of housing demand.

But are millennials really that different from the generations that preceded them? Research from the U.S., for instance, suggests that millennials are ditching car purchases and instead prefer public transit and ridesharing alternatives.

A closer look at consumption patterns, however, revealed that millennials were not necessarily abandoning car ownership, but were rather delaying it.

The same is pretty much true for millennials’ homeownership in Canada: They are not necessarily abandoning it, they are simply delaying it.

According to census data, in 2016, 50.2 per cent of those in their thirties owned their homes. In comparison, 55.5 per cent of baby boomers owned a home at age 30.

In 1981, 44.4 per cent of the then young baby boomers lived in single detached homes. That share dropped to 35 per cent for the millennials in 2016.

This, however, does not suggest a shift in preferences, but in timing.

Consider that the 2016 Census reported that whereas 43.6 per cent of 20- to 34-year-olds owned homes, homeownership jumped to 76.3 per cent for 35- to 54-year-olds. Similarly, the Royal Lepage Peak Millennial survey in 2017 revealed that 61 per cent of those aged 25 to 30 (peak millennials) would prefer owning a detached home, though only 36 per cent believed they would be able to afford one.

Housing affordability remains a formidable challenge for millennials. An analysis of housing markets by Brookfield RPS revealed that even during a relatively short period between 2012 and 2017, the amount of shelter space you could buy for $350,000 declined across all major urban markets in Canada. Toronto and Vancouver reported the steepest decline.

The millennials though face a host of additional challenges. In addition to the steep rise in home prices, stagnant wages, precarious employment brought about by the sharing economy, and the expected shifts in labour markets resulting from automation and AI are some of the factors that have influenced their lifecycle decisions.

At the same time, millennials are the most educated cohort and the largest segment of the labour force. Though they make up only 27 per cent of the population, they represent 37 per cent of the labour force. More than 75 per cent of the young women and 65 per cent of the men have received post-secondary education. Still, millennial wages are no better than the relatively less-educated cohorts that precede them.

A lack of full-time employment opportunities that pay wages sufficient to save for home ownership is perhaps keeping the millennials longer in the education system. Currently, nearly two million millennials are pursuing post-secondary education in Canada. This is twice as many Gen Xers when they were at a similar stage in their development.

The millennials are certainly not without help. Analysis of First Time Home Buyer’s finances reported by the Ontario Securities Commission revealed that the millennials are indeed a ‘gifted’ generation as they received large amounts as gifts from family to help them with home purchases. Whereas 31 per cent of the baby boomers and 37 per cent of the Gen Xers received gifts to assist with first home purchase, 45 per cent of millennials received a hand.

Cheap and plentiful mortgage credit also helped. For households under the age of 35, mortgage debt jumped from $141 billion in 2005 to $240 billion in 2012. The non-mortgage debt for the same cohort increased by a mere $10 billion to $60 billion during the same time.

Over time and at a slower rate, the millennials are conforming to lifestyles and preferences of cohorts that preceded them. Millennials are not much different, just delayed.

Murtaza Haider is an associate professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at www.hmbulletin.com.

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TORONTO — Ontario Real Estate Association President Tim Hudak skirted questions about the organization’s feud with the Toronto Real Estate Board on Tuesday and instead stuck to the lack of affordable housing in Toronto, an issue which has previously irked the city’s board.

“We want to make sure that great Canadian dream of homeownership doesn’t slip away from the next generation,” said Hudak, at an event OREA to unveil a Ryerson University report it sponsored.

The report said millennials — those aged 15 to 34 — in the Greater Toronto and Hamilton area are living with their parents longer as they struggle to find affordable houses.

The findings support OREA’s recent campaign, which aims to address the dearth of moderately priced housing, but has also upset the province’s largest real estate board enough to voice concerns that it could “have psychological consequences for consumers and could provoke further unwarranted negative government intervention.”

Earlier this month, TREB sent a letter to OREA, saying it has “serious trepidations” about the message and its focus on Toronto and wants OREA to stick to its mandate to promote the province’s housing market as a whole.

“It is naive to suggest the dream of home-ownership is dead or dying. It’s alive and well in every Canadian city and beyond. To state otherwise is misleading to the consumer,” TREB president Tim Syrianos wrote in a letter obtained by The Canadian Press to OREA President David Reid.

OREA and TREB have said little about their skirmish, but released a joint statement saying the letter is “not reflective of the long standing and positive relationship” between the organizations, and that they hope to resolve the discussions “amicably and internally.”

When asked about why OREA was continuing to focus on the Toronto market, Hudak said: “I think there is going to be universal support across Ontario, when I talk to our local 38 realtor boards, to tell you why everywhere I go they say inventory is a major issue.”

“There are not enough starter homes in the marketplace and baby boomers are a very healthy generation that are holding onto family homes longer,” he continued. “The big lesson on this today is we need to increase housing supply particularly around starter homes and the missing middle.”

The missing middle refers to affordable so-called mid-rise homes such as townhouses, triplexes and duplexes that experts have identified as often lacking in the GTA.

Homes for sale in Toronto.

Hudak said he feels the opportunity to own a home is slipping away from many young people and now, the Ryerson report from Diana Petramala and Frank Clayton, researchers at the university’s Centre for Urban Research and Land Development, puts the “academic weight” behind his feelings.

“They’ve demonstrated clearly that millennials, unlike what some so-called experts say, do want to own a home someday and secondly, this will have a massive effect on the marketplace when 500,000 new millennial-led households come into play in the next 10 years, he said. ”We simply don’t have the supply to keep up.“

The report said there will be almost 700,000 millennials looking for their own home in the next decade, despite a limited supply, and a high number of baby boomers that are not expected to downsize “in a meaningful way” until mid-2040.

Those market forces, the report predicted, will cause many to take on high debt loads and abandon the region’s urban core in search of affordable housing, leading to longer commutes and more traffic congestion.

That phenomenon coupled with high housing costs and lacklustre income prospects for millennials could make it difficult for the GTHA to retain talent, the study said.

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The biggest tax bill upon death for many Canadians arises from the mandatory inclusion of any remaining RRSP or RRIF funds as income on their final tax return.

The tax law states that, absent a qualifying rollover to a surviving spouse or partner (or, in very limited situations, a dependent child), the fair market value of your RRSP or RRIF is included in income in your terminal year. With top personal marginal tax rates exceeding 50 per cent in more than half of Canada, your heirs could see a large chunk of your RRSP or RRIF lost to the taxman prior to receiving their inheritance.

But if you inherit your relative’s foreign pension plan, must that also be included in your income? That issue arose in a tax case decided earlier in May.

The taxpayer’s father had lived in the United States and died in 2011. Among the various assets he owned upon death was a U.S. individual retirement account (IRA) on which the taxpayer and his siblings were named as beneficiaries.

An IRA is similar to a Canadian RRSP in that contributions are tax deductible, the funds grow tax sheltered while invested inside the account, and after age 70.5, there is an annual “required minimum distribution” in which funds are required to be withdrawn and are taxable as income.

In the recent case, the taxpayer’s inherited portion of his father’s IRA was rolled over to an “inherited IRA” in his own name and, in 2012, the funds were ultimately distributed to him in Canada, net of U.S. withholding tax.

The taxpayer did not report the IRA payment on his 2012 Canadian tax return. The Canada Revenue Agency reassessed him, adding the amount he received to his 2012 income, but also allowing a foreign tax credit for the Canadian dollar equivalent of the amount of U.S. tax withheld.

The taxpayer objected and went to Tax Court arguing that the amount received from his IRA should not be subject to tax because it is an inheritance. Generally, inheritances, whether from a Canadian or foreign estate, can be received tax-free.

The judge acknowledged that while the taxpayer did, indeed, receive the funds “as a result of his father’s death and while generally the receipt of an amount distributed from an estate does not in itself trigger tax, there are two important considerations here.”

The first is the taxpayer received the amount as a distribution from an IRA and not from his father’s estate.

Secondly, there is a specific rule in the Canadian Income Tax Act covering such distributions that states a taxpayer must include in income any pension benefit “payment out of … a foreign retirement arrangement established under the laws of a country.” Our tax regulations state that an IRA is a prescribed plan for the purposes of this rule.

As a result, the judge concluded the IRA payment to the taxpayer “is clearly a ‘payment out of’ a ‘foreign retirement arrangement’ within the meaning of (the Act),” and must be included in the taxpayer’s Canadian income.

“The result of this legislation is to treat the IRA distribution in much the same way as if it were a distribution from an RRSP of his father,” the judge said. “However, because U.S. tax was withheld the (taxpayer) benefited from a foreign tax credit.”

Could the taxpayer have done anything differently? We are often asked whether an IRA can be transferred, tax-free, to a Canadian RRSP. The short answer is yes, but it’s complicated and not always worthwhile.

Let’s consider the example of Rob, who used to work in the U.S. but has moved back to Canada. Rob is not a U.S. person for tax purposes. He has $100,000 (Canadian dollar equivalent) in an IRA and wants to move it to his Canadian RRSP. He has no unused RRSP room.

Under U.S. rules, it would be a withdrawal and subject to a withholding tax of 30 per cent. If Rob was under 59.5 years old, there would also be a 10-per-cent penalty tax for an early IRA distribution.

For Canadian tax purposes, Rob would include the $100,000 in his Canadian tax return as foreign pension income (as illustrated by the mechanics in the case above), but he would get an offsetting deduction for a $100,000 RRSP contribution since there is a special rule that allows you to contribute IRA funds to an RRSP without needing unused RRSP room.

The first issue is that to get the full, offsetting deduction, Rob will need to come up with $30,000 (or $40,000, if he is younger than 59.5) in cash to make the full $100,000 RRSP contribution, given the amount lost to U.S. taxes.

But the bigger issue is whether Rob can use the $30,000 (or $40,000, if under 59.5) in foreign tax credits against other income in the year of transfer. If his income in that year was sufficiently high, there should be no problem and he will be able to successfully move his IRA to his RRSP on a tax-deferred basis.

But if Rob is already retired and has very little income in the year of transfer, the foreign tax credit may be permanently lost since it can’t be carried forward. This means the IRA funds transferred to an RRSP may be subjected to double taxation: once at 30 per cent (or 40 per cent if under 59.5) in the year of transfer and again when the RRSP (or, ultimately, RRIF) funds are withdrawn and taxed on his Canadian return.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Financial Planning & Advice in Toronto. Jamie.Golombek@cibc.com

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Situation: Woman, 60, with no company pension and low six-figure savings worries about future income

Solution: Reducing spending alone will support retirement and more working years add security

A divorced Ontario woman we’ll call Nancy, 60, is approaching retirement in five years with trepidation. Her company, a small business providing subsidized housing, does not offer a defined benefit pension. She will be on her own.

“I want a retirement income of $35,000 per year after taxes,” Nancy said. “How long will I have to work to reach that goal? Should I continue contributing to my RRSP or open a TFSA?”

(E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.)

Family Finance asked Derek Moran, a fee-only financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Nancy. “On the good side of this case is that Nancy has no debts. However, her resources for making large changes to her financial reserves are quite limited. Still, there is a good deal we can do to increase potential retirement income,” he said.

Nancy raised four children, now adults, with little financial help from her former husband. She continues to help the children with modest gifts. She gets tax relief via annual refunds of about $1,000, but her cash flow is tight and fully allocated.

One daughter and her husband live with her, but have no money to contribute to her expenses.

Retirement income

Assuming that Nancy works to age 65, she will have modest financial security, based on current savings and benefits from the Canada Pension Plan and Old Age Security, Moran said.

Her present RRSP balance is about $200,000, and is growing at $8,360 per year with her own contributions of $5,496 and contributions from her employer of $2,864. That should grow to $276,200 in 2018 dollars in five years, assuming a 3 per cent return after inflation.

RRSP contributions in her low income bracket are not tax efficient, but since the employer matches half of her contributions, it’s worth adding to the plan.

If her RRSP is fully paid out over the following 25 years to age 90, it would support an indexed taxable income of $15,864 per year. Canada Pension Plan benefits will add $11,840 and Old Age Security will contribute $7,075 for total annual income of $34,779.

Assuming an average tax rate of 12 per cent, Nancy will have $30,600 per year to spend, below her $35,000 target.

There is a good deal Nancy can do to boost her income, Moran said. The least risky move would be to downsize her house, with a current estimated price of $600,000, to something in the $400,000 range. The $175,000 left after a few repairs and estimated selling expenses could support a $5,250 annual payout with a 3 per cent after inflation return and no capital expenditure indefinitely, leaving the capital intact for late life needs or gifts to her children.

Working longer

Another option is for Nancy to work five more years, retiring at age 70 and deferring the start of her Canada Pension Plan benefits. Even without further contributions, should she shift to contract work for her company, payouts would rise by 42 per cent over the age 65 benefit, to $16,800 per year.

Her annual Old Age Security benefit, with the start date delayed to age 70, would rise to $9,622. Her $200,000 RRSP savings, with ten more years of annual $8,360 contributions, would rise to $367,500 and support 20 years of payouts of $24,700 before all capital and income are exhausted.

Those moves would push her total income up to $51,122 before tax, or about $43,450 per year after 15 per cent average tax. Income would be $5,250 more with the investment return from house downsizing: $56,370 before tax and $47,920 per year after 15 per cent average income tax.

While working five more years would boost retirement savings and reduce the time for drawdowns of capital, it is not absolutely necessary if she downsizes her house. 

Investments

Nancy could also move to raise the return on her RRSP. Currently, it is invested with a respected manager and carries a relatively moderate management expense ratio of just over 1.0 per cent per year.

Nancy has $20,000 cash in a savings account as an emergency fund. The account pays virtually no interest and there is thus no tax on her income from it. 

She could open a Tax-Free Savings Account. If she were to put half of her cash into the account, she could invest it in a low-fee mutual fund or an income generating exchange traded fund. They money would be liquid and its income is tax-advantaged at withdrawal.

Finally, as a matter of tying up loose ends, Nancy should reconcile her spending with her income. At present, her take-home income is about $3,256 per month. However, her daughter and son in law may eventually move out and that would lower fuel bills for her car.

If Nancy cuts $200 out of monthly driving costs, as she will in the normal course of retirement, eliminates $458 RRSP contributions, and $500 non-registered savings, her monthly living cost would drop to $2,098, for a total of $25,176 per year.

Those adjustments would make her expenses supportable on $30,600 per year after tax, which she can manage without downsizing her house. “If Nancy chooses to work longer and to invest her substantial cash, she will be even better off,” Moran said. “Her frugality ensures a secure retirement.”

Retirement stars: 3 retirement stars *** out of 5

Financial Post

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

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TORONTO — Many Canadians are watching their mailboxes and inboxes for a personal income tax refund, now that the filing deadline has passed. But instead of a welcome influx of cash, some may receive a dreaded notice that their file is under review or audit.

When the Canada Revenue Agency starts looking your way, it can be anxiety-inducing, but it doesn’t need to be, tax experts say.

The best thing to do is respond and co-operate, said Jason Safar, a partner in the tax services practice of PwC.

“The worst thing you can do is play the ostrich, put your head in the sand and pretend that nothing is going on,” he said.

The federal government in recent years has ramped up its efforts to crack down on tax evasion, particularly by big international companies and wealthy individuals using offshore tax havens. In the 2016 Federal Budget, Ottawa earmarked $444.4 million over five years to help the CRA track down tax cheats, with the aim of raking in an additional $2.6 billion in tax over that period.

There has been an increase in audit activity, in all facets, but less so for personal income taxes, said Safar. And the vast majority of Canadians will never face a personal tax audit, he added. However, more Canadians will face the less serious option called a review.

“For the ‘lucky’ 0.1 per cent that does, it’s probably that there is something that is very unusual about their filings or history of filings that causes Canada Revenue Agency to want to take a closer look,” Safar said.

A review, however, happens fairly often, said H&R Block senior tax professional Valorie Elgar.

A CRA review is simply a request for additional information, rather than an audit which involves deeper scrutiny of your tax file.

Your income tax file may be selected for review randomly, or for reasons such as a discrepancy between the figures you cited and those of a third-party, such as your employer. An unusual change in your activities, such as an increase in medical expenses or child care costs, may also trigger a closer look from the tax collector.

Often, once the taxpayer submits the required information to clear up confusion, that’s the end of the process, said Elgar.

“Send in the documentation that they request, and then that’s usually it,” she said. “But some people do get worried.”

If you do not co-operate, the CRA will likely make adjustments based on the information they have. This could lead to unwanted outcomes, such as a large tax bill plus interest charges, she said.

There are several types of review, such as a pre-assessment review program that takes place before a notice of assessment is issued. A processing review happens after the notice of assessment is issued, usually between August and December.

Your information could also be reviewed in a matching program after the tax assessment is issued that compares the information in your tax return to a third party, such as a financial institution.

Just in case you ever find yourself in the CRA’s crosshairs, it’s important to preempt any headaches by keeping all relevant receipts used to file your tax return on hand for at least six years, said Elgar.

Some documents may need to be kept on file even longer, said Safar. For example, documents in connection with a property owned by the taxpayer will need to be kept until the property is sold, in order to quantify the capital gains.

If you do find yourself under audit or review by the CRA, it is important to read the letter carefully and make sure to understand what they are asking for, he added. After submitting the requested information, the CRA will commonly send the taxpayer a letter outlining their concerns and reassessment details, and the recipient has 30 days to respond before the new tax assessment is processed, said Safar.

If you disagree with their conclusions at this point, let them know before that reassessment is processed, he added.

If the dispute is not resolved, there is still recourse. After the reassessment comes you have the option to file a notice of objection, which will go to an appeals officer who is different from the original auditor, said Safar.

If you plead your case and it falls on deaf ears, you can take the government to the Tax Court of Canada, he added. The issue can be further escalated to the Federal Court of Appeal, and if need be, you can seek leave to take your battle to the Supreme Court.

“You have lots of opportunities to plead your case,” he said.

However, that can take a long time and a lot of money. Depending on how much you owe the government, you will have to make a call on whether the effort and expense for this battle is worth it, Safar added.

“It depends how much you’re arguing about, and how much of a person of principle you are if the amount is not significant enough to justify the cost.”

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It is not unusual for one spouse to move out during a separation, leaving the other spouse in the home. The one staying in the home might even live there for several years until the property issues are settled.

But how are the proceeds divided if the house went up in value over the years or if the occupying spouse paid down the mortgage? Is it fair the non-resident partner has to pay rent, while the spouse in the house enjoys free accommodation and ties up the other’s equity?

These are just some of the common issues that courts must deal with when sorting out a separated couple’s property issues. A couple can ask a court to order the sale of a jointly held property, but that still leaves the question of how to divide the proceeds if only one spouse has been living on the property.

Ontario’s Family Law Act allows the court to order exclusive possession (the right of one spouse to live in a matrimonial home and require the other spouse to live elsewhere). It can also order which payments both the resident and non-resident spouse must make. Often, however, separated partners are not in court and simply deal with these expenses on an ad hoc basis. A dispute may then arise when the house is sold.

In the 2017 case of O’Brien v. O’Brien, Justice Meredith Donaghue had to decide whether the husband, who stayed in the jointly held matrimonial home, owed occupation rent to the wife who had moved out.

Donaghue reviewed the case law and confirmed occupation rent is a discretionary remedy, and that the non-occupying spouse (in this case, the wife) had the onus of proving whether the resident husband should pay occupation rent.

The non-resident partner is also required to provide evidence of the property’s rental value during the period for which he or she is seeking such rent.

When considering whether occupation rent should be ordered, Donaghue relied on a 2001 case from the Ontario Court of Appeal, which set out a number of factors to consider, including when the claim was first made, how long the occupying spouse had been in the home, the fact that the non-resident spouse was unable to use the equity in the home while it was occupied, and the reasonable credits for payments made that each spouse was entitled to receive.

In addition, the Court of Appeal stated that occupation rent had to be considered in the context of the other competing claims in the litigation.

In weighing these factors, prompt notice of the intention to seek occupation rent is important. If the occupation lasted for a lengthy period, this, too, increases the likelihood occupation rent will be granted, provided the claim was raised early.

A non-resident spouse is not allowed to sit back and bank a claim, only to bring up it up at the last moment to try to get a greater share of the house proceeds.

In deciding what credits each spouse should get for payments made, it is assumed that each spouse, as a joint owner of the property, has an obligation to pay one-half of the home’s mortgage, taxes and property insurance, as well as any major repairs. These are expenses traditionally borne by the landlord in arms’ length third-party rental arrangements.

Conversely, the resident spouse, like any tenant, is usually responsible for paying utilities, internet, cable, phone and day-to-day expenses for the home. The property’s expenses are usually allocated and then debited and credited on this basis when assessing each party’s payments.

There are other non-monetary issues to consider as well. Although conduct is usually thought to be irrelevant in deciding a family law case, the behaviour of both spouses is a factor here, including whether a spouse was obliged to leave the home because of domestic violence, if children lived with the occupying spouse in the home and, if so, whether the non-resident spouse paid child support.

The court also considers whether the non-resident spouse asked the other spouse to sell the home or brought a motion in court for the sale, and if not, why not.

In O’Brien, the wife sought occupation rent from the husband. She moved out after the separation, because she did not like the home. The parties’ daughter lived about half time with each parent. The resident husband had a much lower income than the wife, yet did not claim child support from the wife until more than six years had passed after separation.

The husband paid the home’s mortgage, taxes and insurance for the home, and also put his own labour and money into renovations. It was not until it was clear the house would be sold and it had appreciated in value that the husband claimed for the improvements he had made to the home. In response, shortly before trial, the wife responded with her claim for occupation rent.

Donaghue took all these factors into account, and decided the husband did not owe occupation rent to the wife, even though he had lived in the home for nearly seven years before trial.

The lesson from O’Brien is clear: conduct matters.

Laurie H. Pawlitza is a senior partner in the family law group at Torkin Manes LLP in Toronto.

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More than half of Canadians under 35 years old said they are spending less because of recent interest rate increases, according to a survey by Nanos Research.

Some 30 per cent of respondents in that bracket report higher rates are having a negative impact on their personal spending, with another 23 per cent saying the effect is somewhat negative. Among respondents of all ages, 41 per cent reported at least a somewhat negative effect from higher rates. Nanos conducted the polling on behalf of Bloomberg between April 28 and May 4.

The survey suggests that higher borrowing costs are already beginning to curb demand in the economy. It also underscores how the impacts will reverberate well beyond real estate as households offset rising interest payments by cutting back on other things. A slowdown in consumer spending is the primary reason why most economists — including those at the Bank of Canada — are anticipating the economy is poised to drop off in coming years.

“Research suggests that age is a significant determinant of the possible impact of rate hikes on the personal spending of Canadians,” said Nik Nanos, chairman at Nanos Research. “The spending of younger Canadians, under 35 years of age, will likely be squeezed the most.”

The situation is particularly acute for younger Canadians borrowing to buy into a housing market that has seen prices double in cities such as Vancouver and Toronto over the past decade.

Because households have amassed record levels of debt during the recent period of extremely low borrowing costs, the Bank of Canada predicts the economy is as much as 50 percent more sensitive than before to rate hikes. Canada’s central bank has raised borrowing costs three times since July, and investors are anticipating two more increases later this year.

Here are some of the other highlights of the poll:

Close to one in 10 of the respondents say rate increases are having a positive effect on personal spending, while 47 per cent report no impact. Of those between 35 and 54 years old, 41 per cent report higher rates are having a negative effect. Those over the age of 55 report the least negative effects, with about one third saying higher rates harmed personal spending Quebec had the highest share of negative responses, at 47.9 per cent. Ontario had the lowest, at 33.5 per cent Females, at 42.9 per cent, were more negatively affected than males at 39.8 per cent.

The results of the hybrid telephone and online survey of 1,000 Canadians at least 18 years old are accurate to within 3.1 percentage points, 19 times out of 20.

Bloomberg.com

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A new cohort is joining young Canadians and others frustrated by sky-high rents and soaring housing costs: seniors.

A looming affordability crisis is poised to hit seniors across the country as the baby boom generation makes its long-predicted shift into its golden years, squeezing the supply of retirement home places and pushing up rents, according to a new report from the rating agency DBRS Ltd.

“For seniors who live on a fixed income or a government pension, they are facing the affordability issue even more,” said Karen Gu, senior vice-president at DBRS and a co-author of the report. “The younger generation at least has the possibility of a regular job and a pay cheque.”

The average rents for seniors’ homes varied across the country in 2017, with Ontario holding the highest at $3,526 per month and Quebec the lowest at $1,678 per month. Should rents continue to grow at the current rate of 4.7 per cent year, the national average could reach just over $4,000 a month by 2025, the report cautions.

The problem comes down to a failure of supply to keep up with demand. By 2026, more than 2.4 million Canadians aged 65 and older will need the “supportive care” offered by retirement homes, including monitoring of medication, regular housekeeping, meal preparation and other services. As more baby boomers turn 65, the number requiring such care is expected to reach “a staggering” 3.3 million by 2046, DBRS found.

More senior housing units are being developed every year, but not enough to meet the anticipated demand. The rate of increase for Canada’s senior population swelled by 21.7 per cent between 2006 and 2016 — more than double the rate of the supply increase.

“It’s not like we didn’t know the baby boomer bulge was coming, we just didn’t do anything about it,” said Laura Tamblyn Watts, national director of law, policy and research at CARP (formerly the Canadian Association of Retired Persons). “There has been a failure across the entire system to prepare.”

Just as rent levels differ across the country, a patchwork of provincial policies means seniors’ ability to absorb them will also diverge, depending on where they live, she said. While British Columbia and Alberta offer subsidies for retirement home costs, Ontario’s retirement homes rely entirely on private payments.

Meanwhile, a shortage of long-term care beds has exacerbated demand for retirement homes, Tamblyn Watts added, as those seniors unable to secure a place in publicly funded facilities choose the next best option.

“The reality is, we need to make investments now.”

Responding to a CARP election questionnaire on seniors’ issues, the Ontario Liberals said that, if elected, they would create 5,000 new long-term care beds by 2022 and more than 30,000 over the next decade. NDP leader Andrea Horwath promised to launch a full public inquiry into long-term care within 100 days of being elected, while the Progressive Conservatives have pledged to build an unspecified number of long-term care facilities.

Boosting funding for long-term care addresses only part of the problem, said Isobel Mackenzie, seniors’ advocate for the B.C. government.

“From the perspective of the taxpayer, it makes more sense to subsidize home care and assisted living,” she said.

The boom in the housing markets has provided a rare cushion for many seniors preparing for the cost of senior care, Mackenzie noted. The rising value of assets, particularly home values, pushed the median net worth of families led by Canadians between 55 and 64 to $669,500 in 2016, up 18.9 per cent since 2012, according to Statistics Canada.

“This is a phenomenon, particularly in places like Toronto and Vancouver, that the value of the house doubled or tripled while the cost of assisted living has not increased by as much,” Mackenzie said. “That’s not a phenomenon that will last forever, though, and you have to remember that a house doesn’t produce any income as an asset. So the bigger challenge is how to produce the income seniors need without private pension funds.”

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