On June 1st 2010 the CRA mailed out Tax-Free Savings Account (TFSA) over-contribution letters to many Canadians. Although the program is still relatively new, it has already resulted in confusion for many investors.
Contribution to the account is limited to $5,000 a year. Any income or gain earned on the investment is tax-free. Any unused amount will carry forward to the following year for future contribution. However, withdrawn amounts do not result in excess contribution room until the following year.
For example, if you are to contribute $5,000 in February and withdraw it in September, you cannot put $5,000 in your TFSA again until the subsequent calendar year. By contributing $5,000 to your account again in the same year, you are inadvertently over-contributing to your TFSA.
In order to deter investors from over-contributing, and therefore earning additional tax-free capital gains and income, the government has put penalties in place for these over-contributions.
For minor, likely accidental over-contributions the penalty stands at 1% per month of the over-contribution for each month that the TFSA is in an over-contribution position. Unlike the RRSP, there is no ‘grace amount’ that allows for excess contribution to remain in the account without penalty tax.
The CRA realized that investors were deliberately over-contributing as they were able to earn returns on their investments that exceeded the 1% penalty. Therefore, when an investor deliberately over-contributes to his or her TFSA, the penalty increases to 100% of the capital gain or income earned.
If you have accidentally over-contributed to your TFSA, options exist for you to take action against the CRA and potentially avoid paying the over-contribution penalty as the CRA can waive the 1% penalty on a case-by-case basis. If you are in this situation, contact Mark Feldstein & Associates Chartered Accountants to help you resolve your TFSA penalty tax.
Sara Feldstein shares information and tips on taxes, accounting and more...
Monday, June 21, 2010
Capital Gains Tax on Real Estate
Owning a rental property is a common real estate investment. Many times, people convert their home into a rental property or a rental property into a primary residence. The change of a property from a primary residence to a rental property, or the other way around, is considered a change in use of property. You are deemed by the government to have sold your property at the fair market value and immediately re-acquire it for the same price. This means that you are required to report the capital gain or loss on the sale that year.
While primary residences are exempt from paying tax on the capital gains relating to the sale of the residence, the years a property was used for rental purposes are not exempt. It is a common mistake for many property owners to not realize the importance of their decision to convert a property’s use. Failure to report a capital gain that arises from the change of use of property is equivalent to failing to report income.
When the CRA realizes that you have failed to report the capital gain on your property, you will be subject to daily compound interest on the unpaid tax from the time the transaction occurred until the present. You may also be responsible for penalties of 10% each for provincial and federal for the unreported amount. The greater value your home has increased from the date of purchase to the date of change in use, the greater the taxes, interest and penalties that will result.
If no enforcement action has currently been taken against you, there is still an opportunity for you to come clean with the government and avoid paying the penalties on the unreported capital gain with the CRA’s Voluntary Disclosure Program. At Mark Feldstein & Associates Chartered Accountants, we help our clients through this process on a regular basis and we can help you too.
For more information visit http://www.fightbacktoday.ca.
While primary residences are exempt from paying tax on the capital gains relating to the sale of the residence, the years a property was used for rental purposes are not exempt. It is a common mistake for many property owners to not realize the importance of their decision to convert a property’s use. Failure to report a capital gain that arises from the change of use of property is equivalent to failing to report income.
When the CRA realizes that you have failed to report the capital gain on your property, you will be subject to daily compound interest on the unpaid tax from the time the transaction occurred until the present. You may also be responsible for penalties of 10% each for provincial and federal for the unreported amount. The greater value your home has increased from the date of purchase to the date of change in use, the greater the taxes, interest and penalties that will result.
If no enforcement action has currently been taken against you, there is still an opportunity for you to come clean with the government and avoid paying the penalties on the unreported capital gain with the CRA’s Voluntary Disclosure Program. At Mark Feldstein & Associates Chartered Accountants, we help our clients through this process on a regular basis and we can help you too.
For more information visit http://www.fightbacktoday.ca.
Sunday, June 20, 2010
Is a Hobby Business a Real Business?
The answer to this question in most cases is yes.
Many people have hobbies such as selling homemade desserts or teaching piano to neighbourhood kids. However, people may not realize that they may actually be running a small business. The CRA considers a business to be an activity that was undertaken with the intention to earn a profit. This means that the income earned from selling your goods or providing your service is taxable business income.
For example, if someone starts selling jewellery they have been making at home to their co-workers, friends, etc, to earn a little extra income, that money collected is taxable. Just because it may not be a primary source of income, doesn’t mean that you didn’t earn it and don’t need to pay tax on it.
However, having your hobby be considered a business is not necessarily a bad thing. Although you are declaring the income you earned, you can also deduct the expenses incurred in order to collect that income. For the jewellery seller, any costs to purchase the beads and strings become business expenses and can be deducted on your tax return.
There are several other advantages to having your hobby become a small business besides just deducting the materials that went into producing your inventory. If you have a room in your home as your ‘home office’ that is your primarily place to do business or you are regularly meeting customers there, then you are also able to deduct some home maintenance costs such as utilities, property tax, home insurance and mortgage interest based on the percentage of space that the home office occupies of the entire home.
If the space is used for both business and personal use, the CRA asks you to make a reasonable estimate using hours of the day. So if you are using that space for business four hours a day, then the percentage of expenses that you could claim would be 4/24, which is 16.67%.
A small catch regarding the home office expenses is that you cannot use the home office expenses to create or increase a loss. This means that your use-of-home expenses cannot exceed your business income. The government does not want everyone to create losses with their home office expenses and then use the losses up in future tax years.
The CRA is also alert to people who want to falsely report a business in order to claim personal expenses; an isolated transaction does not count as a business. A person cannot sell a pet rock, for example, to a friend, and then consider it a business and deduct a ton of expenses. In order to ensure that the small businesses are legitimate, evidence of intention is required. This means there is evidence that you are intending to earn a profit.
So if you are frequently selling items on e-bay or making corporate gift baskets you need to consider whether your hobby is a business. By neglecting to report this money on your tax return, you are guilty of failing to report all of your income and can end up in serious trouble with the government. This can result in a penalty of 10% of the unreported amount and interest due on any taxes owing.
Or, if you have claimed personal expenses until the pretence that you are operating a business, you have filed a false statement and will be sentenced with a penalty of 50% of the tax related to your false statement.
Be proactive and determine if your hobby is a business (or not) and if think you have unreported income or have falsely claimed expenses, talk to your accountant to discuss your options.
Many people have hobbies such as selling homemade desserts or teaching piano to neighbourhood kids. However, people may not realize that they may actually be running a small business. The CRA considers a business to be an activity that was undertaken with the intention to earn a profit. This means that the income earned from selling your goods or providing your service is taxable business income.
For example, if someone starts selling jewellery they have been making at home to their co-workers, friends, etc, to earn a little extra income, that money collected is taxable. Just because it may not be a primary source of income, doesn’t mean that you didn’t earn it and don’t need to pay tax on it.
However, having your hobby be considered a business is not necessarily a bad thing. Although you are declaring the income you earned, you can also deduct the expenses incurred in order to collect that income. For the jewellery seller, any costs to purchase the beads and strings become business expenses and can be deducted on your tax return.
There are several other advantages to having your hobby become a small business besides just deducting the materials that went into producing your inventory. If you have a room in your home as your ‘home office’ that is your primarily place to do business or you are regularly meeting customers there, then you are also able to deduct some home maintenance costs such as utilities, property tax, home insurance and mortgage interest based on the percentage of space that the home office occupies of the entire home.
If the space is used for both business and personal use, the CRA asks you to make a reasonable estimate using hours of the day. So if you are using that space for business four hours a day, then the percentage of expenses that you could claim would be 4/24, which is 16.67%.
A small catch regarding the home office expenses is that you cannot use the home office expenses to create or increase a loss. This means that your use-of-home expenses cannot exceed your business income. The government does not want everyone to create losses with their home office expenses and then use the losses up in future tax years.
The CRA is also alert to people who want to falsely report a business in order to claim personal expenses; an isolated transaction does not count as a business. A person cannot sell a pet rock, for example, to a friend, and then consider it a business and deduct a ton of expenses. In order to ensure that the small businesses are legitimate, evidence of intention is required. This means there is evidence that you are intending to earn a profit.
So if you are frequently selling items on e-bay or making corporate gift baskets you need to consider whether your hobby is a business. By neglecting to report this money on your tax return, you are guilty of failing to report all of your income and can end up in serious trouble with the government. This can result in a penalty of 10% of the unreported amount and interest due on any taxes owing.
Or, if you have claimed personal expenses until the pretence that you are operating a business, you have filed a false statement and will be sentenced with a penalty of 50% of the tax related to your false statement.
Be proactive and determine if your hobby is a business (or not) and if think you have unreported income or have falsely claimed expenses, talk to your accountant to discuss your options.
Tuesday, June 1, 2010
What Tax Credits Are Students Eligible For?
Students are eligible for so many different tax credits. If you are a post-secondary student and you live in residence there is a $25 tax credit you can claim. Once you move off campus, have your landlord write a memo or provide you with a lease confirming your rental address and that your rent has been paid. You have also prove your rental payment by requesting a receipt or by paying by cheque and keeping a copy of the cancelled cheque, you will be able to claim your student housing rent.
There is also a credit available for both part-time and full-time students for tuition, education and textbooks. Your institution should provide you with a T2202A or a receipt that should be provided to your accountant in order to apply this credit. If you do not have enough taxable income to fully utilize the credit, it can be transferred to a parent or carried forward for a future tax year.
If you are a student in debt, you may be able to claim the interest on your student loan. Only you as a student can make this claim, although someone else may have paid the interest on the loan. In order to qualify, the loan must come from a legitimate source such as the Canada Student Loans Program and cannot be a personal loan (e.g. from a family member) or a line of credit. Keep in mind, if you fail to pay back the loan, you CANNOT claim the interest paid!
One last tax option is to claim moving expenses if you are relocating over 40 kilometers for work or to pursue post-secondary education. So, if you are graduating university in London, Ontario and manage to find yourself with a new job in Ottawa, you are able to claim some of the expenses related to the move. Deductible expenses include transportation and storage costs, cancelling a lease at your old residence, meals and accommodations for up to 15 days at $51 a day, and travel costs such as for your vehicle.
Moral of the story: If you are a student looking to add a little to your tax refund, keep your receipts for the topics mentioned above and ask your accountant if you are eligible for them.
For more information on these credits visit http://www.markfeldstein.ca
There is also a credit available for both part-time and full-time students for tuition, education and textbooks. Your institution should provide you with a T2202A or a receipt that should be provided to your accountant in order to apply this credit. If you do not have enough taxable income to fully utilize the credit, it can be transferred to a parent or carried forward for a future tax year.
If you are a student in debt, you may be able to claim the interest on your student loan. Only you as a student can make this claim, although someone else may have paid the interest on the loan. In order to qualify, the loan must come from a legitimate source such as the Canada Student Loans Program and cannot be a personal loan (e.g. from a family member) or a line of credit. Keep in mind, if you fail to pay back the loan, you CANNOT claim the interest paid!
One last tax option is to claim moving expenses if you are relocating over 40 kilometers for work or to pursue post-secondary education. So, if you are graduating university in London, Ontario and manage to find yourself with a new job in Ottawa, you are able to claim some of the expenses related to the move. Deductible expenses include transportation and storage costs, cancelling a lease at your old residence, meals and accommodations for up to 15 days at $51 a day, and travel costs such as for your vehicle.
Moral of the story: If you are a student looking to add a little to your tax refund, keep your receipts for the topics mentioned above and ask your accountant if you are eligible for them.
For more information on these credits visit http://www.markfeldstein.ca