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Income Tax Tips for Individuals 2004
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Bookkeeping & Tax Solutions For Vancouver Island

General Tips and Advice

The Canadian Income Tax Act has "stop loss" rules that limit a taxpayer's ability to claim losses in certain specific situations.

A non-arm's length disposition of capital property such as a rental property, for example a transfer to a child, is deemed to take place at fair market value for Canadian Income Tax purposes. If you transfer property that has appreciated in value you will have to report a capital gain of fair market value less cost.

If you appeal a Canadian income tax dispute with CCRA (the tax department) to the Tax Court of Canada and lose, a further appeal to the Federal Court of Canada is available.

The Supreme Court of Canada has just determined that section 232 of the Income Tax Act, which sets out a procedure for potentially privileged client documents to be seized from a lawyer's office, is unconstitutional.

Canadian residents are required to report worldwide income from all sources for Canadian Income Tax purposes. If you fail to do this, or if you choose an offshore structure that violates the intention or spirit of the Canadian Income Tax Act, you could face a battle with the Canada Customs and Revenue Agency, and if you lose you will be subject to interest and penalties.

You are generally entitled to receive a tax credit on your Canadian Income tax return for the amount of foreign withholding tax paid on amounts received from other countries. In effect CCRA recognizes the foreign tax that you have paid as a reduction of your Canadian income tax liability.

Disability insurance receipts will be free of Canadian income tax only if an employee has paid the insurance premiums personally, or if the premiums for all employees were paid by the employer, and included as a taxable benefit of each employee. If the employer pays the premiums and they are not treated as a taxable benefit for all employees, then any disability insurance benefits will be taxable to the individual recipient.

If you are leaving the country and want to determine your tax status, the Canada Customs and Revenue Agency provides form NR73 Determination of Residency Status (Leaving Canada) if you want to obtain an official determination. This is essentially a questionnaire in which you provide details of your residential ties or lack of them. To become a non-resident of Canada you must divest yourself of as many residential ties as possible. Proper pre-departure planning is essential.

If separated or divorced parents have joint custody of a child, only one of them may claim the equivalent to married credit under the Canadian Income Tax Act. If they cannot agree on who will claim the exemption, neither may claim it.

The "kiddie tax" applies to certain income received by a trust from a related business where minors are beneficiaries of the trust. If a family trust is established for the benefit of a spouse or children who have reached age 18 in the year, the kiddie tax won't apply on income taxed in the hands of these beneficiaries.

The Home Buyers' Plan allows a first time homebuyer to withdraw up to $20,000 from an RRSP to buy or build a principal residence. The funds can be repaid over 15 years.

If you earn income from your principal residence, for example from renting a room, your principal residence will still be exempt from Canadian income tax on any capital gain rising on disposition provided the income is incidental to your use of the property, you make no structural changes to the property and you don't claim capital cost allowance (depreciation) on the property.

If you owe money to the tax department and can't pay the full amount, file your Canadian income tax return on time to avoid the late filing penalty and be sure to negotiate an acceptable payment arrangement with them so that they don't seize any of your assets.

If you fail to file Canadian income tax returns the tax department may arbitrarily assess you and you have the burden of disproving the arbitrary assessment.

When buying or selling the assets of a business be sure to allocate the purchase price among the different asset types, as this will determine the values for Canadian income tax purposes.

A voluntary disclosure is a method to allow you to deal with unfilled Canadian income tax or GST returns, or unreported income, without incurring penalties.

Starting with the 2001 tax year, same sex couples can make spousal RRSP contributions for Canadian income tax purposes and can make tax free RRSP rollovers in the same way that opposite sex couples can.

In order to become a non-resident of Canada for Canadian income tax purposes you must sever most ties with Canada, including your residence. Proper pre-departure planning is essential to avoid future Canadian taxation.

On death of a Canadian individual there is a deemed disposition of all capital property giving rise to Canadian income taxation on the capital gain. An estate freeze is a way of postponing some of the potential capital gains tax liability.actions, other than RRSP contributions, need to be completed prior to December 31, 2001.

If you own real estate (other than a principal residence) which has gone up in value since purchase, you have an inherent capital gain that will be taxed when you dispose of the property or die. If you plan to leave the property to your children then gifting it to them before death will trigger the tax. As an alternative you can consider an estate freeze.

A testamentary trust is entitled to the benefits of marginal tax rates when computing its Canadian income tax liability while all income of an inter-vivos trust is taxed at the top marginal income tax rate.

Legal fees incurred in respect of a child support application are deductible for Canadian income tax purposes.

If CCRA (the Tax Department) has challenged any Canadian income tax returns that you have filed, be sure that you keep all original documents related to the year being challenged until the matter is finally settled. In order to claim a Canadian income tax deduction for an allowable business investment loss (ABIL) for money lent to a Canadian Controlled Private Corporation (CCPC), the debt must have been established to have gone bad at the end of the year.

Most legal fees incurred in family law situations are not deductible for Canadian income tax purposes. The main exception is for fees incurred to enforce a maintenance order. The status of fees incurred to obtain a spousal support order is less clear.

If you deliberately falsify your Canadian income tax return, or are grossly negligent in preparing it, you may be subject to a penalty of 50% of the additional tax liability.

If moving expenses have been incurred by a student to move from school back home either for the summer or permanently, these expenses can generally be deducted for Canadian income tax purposes by the student against income earned at the moved-to location.

The Canadian income taxation of child support payments changed as of May 1, 1997. If you amend a written support agreement made before that date the tax treatments of payments which were deductible to the payor and taxable to the recipient can change.

If you transfer money to a minor child earns and it earns capital gains instead of interest or dividends, the capital gain would be reported on your child's tax return, not on yours, thereby reducing the family's overall Canadian income tax liability.

The use of spousal RRSPs during working years permits the higher income spouse to get the tax benefit of the RRSP income tax deduction, while incurring tax on a lower income when the amounts are withdrawn on retirement.

If you owe money to CCRA (Revenue Canada) and can't pay the full amount be sure to negotiate an acceptable payment arrangement with them so that they don't seize any of your assets.

A car allowance is taxed as regular income for Canadian income tax purposes. If you require the car for work and your employer gives you a form T2200 you may be able to deduct travel expenses.

Interest, dividend and most other payments made to a non-resident of Canada are subject to withholding tax under the Canadian Income Tax Act.

To make changes to previously filed personal Canadian income tax returns, individuals should not file an amended tax return. Canada Customs and Revenue Agency (CCRA) prefers that individual taxpayers who wish make changes to returns, use form T1-ADJ (Adjustment Request), available at local tax services offices or on the CCRA Web site.

All amounts received as a consequence of termination of employment, even if received as damages, are fully taxable for Canadian income tax purposes in the year received. However, a portion of the payment may be eligible for transfer to an RRSP.

Hair transplant costs paid to a doctor will generally qualify as medical expenses and will give rise to tax credit for Canadian Income Tax purposes. However only medical expenses in excess of 3% of income will be eligible for the tax credit.

If a relative wins a lottery and decides to share the winnings with his family, the person who receives the gift from the family member will not have to pay tax on what he receives since there is no gift tax in Canada. Any amounts arising from any source, including lottery winnings, can be gifted to any person without Canadian tax implications.

Individuals with grown children who own their own homes or with no children should consider donating an interest in a personal residence to a charity. If the donor wishes to continue to have use of the property for the remainder of his or her lifetime, a residual interest in the property could be gifted to the charity currently without the use of a trust. The donor will receive an income tax receipt for the value of the residual interest transferred. Provided that the home is a principal residence, there will be no taxable capital gain

New voluntary disclosure rules have just been announced by the Canada Customs and Revenue Agency. A taxpayer who makes a voluntary disclosure of a Canadian income tax liability will not be charged penalties. The new policies also now allow for a cancellation of interest in some cases.

The increase in Registered Retirement Savings Plan (RRSP) foreign content from 20% to 25% proposed in the February 28, 2000 budget has now been implemented.

If you're immigrating to Canada, it may be to your advantage to sell investments with accrued losses before you become a Canadian resident. Otherwise you will probably not be able to utilize the foreign capital loss to offset other gains after you arrive in Canada and any gains that accrue on the investments after immigration will be taxable in Canada when you dispose of them.

If you own property in the U.S., your estate may have to pay U.S. estate tax on the property after your death. The U.S. imposes its estate tax on all assets owned by Canadians that it considers to be U.S. property, which includes real property such as vacation homes and may include other items such as furniture. In addition, shares in U.S. corporations and U.S. Government Savings Bonds are considered U.S. property even if the certificates are kept in Canada.

If you're thinking of immigrating to Canada you should know that your income earned anywhere in the world would become subject to Canadian income tax once you establish residence in Canada.

From a Canadian income tax perspective, you don't have to make a trip to the altar to be considered married, since the meaning of spouse includes a common law spouse. This could affect the amount of your GST credit and other credits, and restrict your ability to claim the equivalent -to-married credit for a dependent family member.

If you turn 69 this year you'll have to decide what to do with your RRSP before the end of this year. If you wish to have some control over the investments, you should purchase a registered retirement income fund (RRIF). If you'd rather have a steady monthly income, consider purchasing an annuity.

If you earn more than your spouse, one way to transfer funds to him or her for investment without having the investment income subject to Canadian income tax in your hands is to directly pay your spouse's tax liability, including tax installments that come due during the year. Funds that your spouse would otherwise use to pay income taxes can be invested and any income earned would be taxed at your spouse's lower tax rate.

Tuition fees deductible for Canadian income tax purposes include fees paid to attend a Canadian university or college; fees for courses taken to obtain or improve occupational skills at an institution approved by the Minister of Human Resources Development (if you're 16 years or older); fees paid for full-time attendance at most universities outside of Canada if the course is more than 13 consecutive weeks long and leads to a degree; fees paid to post-secondary institutions in the United States if you lived in Canada near the border and commute to the university or college.