CRA Advantage Tax Tips - for the 2010 Tax Season

The following are some tax tips that have been submitted by our staff for you to consider as you are getting ready to file your taxes in 2011.

As always, we strongly recommend that you speak with a tax professional.  The following information is presented for information purposes only.  CRA Advantage does not take any responsibility whatsoever for any action you may or may not follow below:.

Tip # 1 – Payment of Dividends vs. Salary

You should check with your financial professional who can help you evaluate whether dividends or salary are better for you given your situation.  Generally speaking, dividends have a lower tax rate than salary, are not subject to social security tax (CPP) and the first $38,000 of dividends can be received tax free.

Tip # 2 – Tax Free Shareholder Loan Repayments

Shareholder loans can be repaid tax free.  Therefore, before you pay yourself a salary you should repay any shareholder loans owing to you.  You should discuss this strategy with your financial professional .

Tip #3 – Loan to Spouse

Are you tired of paying too much tax on the profits generated from you investments?  If yes, then consider lending money to your lower-income spouse, so that he/she can purchase investments that you would have otherwise purchased yourself.  By doing so, the profits generated from the investments will be included in your spouse’s taxable income, instead of yours, thereby reducing the amount of tax paid.  However, you must charge interest on the loan to your spouse at the CRA’s prescribed rate, which is presently only 1%.  Therefore, as the higher income spouse, you will have to include a nominal amount of loan interest in your income.

Tips #4 – Gift to Children

Consider gifting property to your children that will appreciate in value, such as stocks.  While income from the property gifted to your children will be include in your taxable income, any capital gains realized will be taxed in the hands of your children.  Since your children are in a low income tax bracket, they shouldn't pay much in tax on those gains.

Tip # 5 – Minimize Tax by Incorporating

Corporations pay a low rate of tax of only 16.5% (example:  combined Federal and Ontario rate) on the first $500,000 of profits, as compared to individuals who at the highest tax bracket pay income tax at a rate of 46.4%.  Therefore, by incorporating your business, you could potentially save almost 30% in tax.  If you are already incorporated, then you should consider deferring tax by leaving as much of the profits as you can inside the corporation.  The reason being is that when profits from the corporation are paid to you personally, you must pay tax on the amount received at a rate of tax which is normally higher than the corporate tax rate.  For example, if you are in the highest income tax bracket of 46.4%, then you would save almost 30% in tax on the funds that are retained inside the corporation and not paid to you.

Tip #6 – Employee Home Loan

There are special provisions in the Income Tax Act that allow your corporation to make a loan to you, so that you can purchase a home.  This is a great way of financing your new home purchase by using the funds in your corporation, and without paying any tax.   However, you must repay the loan to your corporation over a specified period of time and your corporation must charge a specified rate of interest to you on the loan.

Tip #7 – Dividend Sprinkling

If you are a business owner and are tired of paying too much in tax, then this strategy may be for you.  Dividend Sprinkling is a form of income splitting, in which profits from your business are paid as dividends to yourself and your spouse, instead of only being paid to you.  By splitting the income of the business between yourself and your spouse, the overall tax paid is minimized.  In order for your company to pay your spouse dividends, he/she must be a shareholder.  

Tip # 8 – Pay Salaries to Spouse and Family Members

If you are a business owner, you can pay a salary to your spouse or family members for the work that they perform in respect of your business.  The salaries paid must be reasonable, otherwise they may be challenged by the CRA.  You should also consider documenting the job responsibilities and rate of pay (e.g. $X per hour) of your spouse and/or family members, so that you can justify the salaries paid, in case they are challenged by the CRA.

Tip # 9 – Tax Free Automobile Allowance

Your corporation can pay you a tax deductible automobile allowance of 52 cents per KM for the first 5,000KM and 46 cents thereafter, for the kilometers that you drove your vehicle for business purposes.  The allowance that you receive is not taxable to you and is tax deductible to your corporation.  You should discuss this strategy with your current Accountant to see if it’s appropriate for you.

Tip #10 – Interest Deduction

Interest that your business paid on a loan or line of credit is tax deductible by your business, if the proceeds of the loan or line of credit were used for business purposes.

Where you personally borrow money from a bank or other institution and in turn lend that money to your corporation, consider charging interest on the loan to your corporation.  The reason being is that your corporation would be allowed to deduct the interest paid to you.  The interest income received by you from your corporation would be offset against the interest that you paid to the bank, therefore resulting in no tax consequences to you. 

Do you have overdue or late personal tax returns that still need to be filed with the CRA?  

Below you will find our "TOP 5 Reasons" to file your past-due or late tax returns:

1.  Tax refunds by filing personal tax return -  

In many cases, you may be eligible for a tax refund, which you can only receive by filing your tax return.  A tax refund may result because of RRSP contributions made, child care expenses incurred, large amounts of taxes withheld from your pay cheque, and many other reasons.  For example in the 2009 year, many families are receiving a one-time payment for the Ontario Transition Sales Tax Credit, which is an Ontario tax give-away to compensate tax payers for the increase in sales taxes to 13% as of July 1, 2010 (HST).  So make sure you file your late, past due tax returns to collect your tax refund cheque.

2.  Canada Child Care Benefit and Universal Child Care Benefit -

The Universal Child Care Benefit ($100 per month per child) and the Canada Child Tax Benefit are only paid to those individuals have filed their tax returns.  Therefore, if you have children and haven’t received any UCCB or CCTB payments thus far, make sure you file your overdue tax returns.  Likewise, CCTB payments may stop being paid to you if you have past due tax returns.

3.  Minimize interest and penalties by filing late tax return -

If you owe money to the Canada Revenue Agency, procrastination won’t help to reduce the amount you owe.  In fact, interest will accrue at an annual rate of 5% and penalties can amount to 17% or more.  Therefore, if you owe money, please make sure that you file your past due tax returns to minimize any interest or penalties.

4.  Applying for a mortgage or loan –

Late tax returns hurt When applying for a mortgage or loan, the bank will want to see your latest Notice of Assessment to verify your income.  If you don’t have that available, because of overdue tax returns, you may be out of luck for your next home purchase or loan.

5.  Demand notice from the CRA for late, past due tax returns -

The CRA will send a demand notice to file your returns, followed by an “Arbitrary Assessment”, if the returns aren’t filed.  An arbitrary assessment means that the CRA will assess your return based on the information they have received, and will not provide for any deductions that you may be entitled to.  In other words, an arbitrary assessment is the worst-case-scenario and results in an overstated tax balance. 

Additionally, the Canada Revenue Agency has the power to garnish your wages for overdue tax balances, seize your bank accounts and even seize your property.  To make sure you don’t end up in a situation where the CRA is confiscating your property you should send in your tax information every year.  If you have not sent in your tax information to the Federal Government every year - for any reason then you need to contact our office right away.  If this is happening to you, or if the Canada Revenue Agency has threatened to garnish or seize your bank accounts or property (even if if any agent casually mentioned this over the telephone!) you need to speak to us at CRA Advantage.com  as soon as possible.

Your initial consultation is always free.  Please don't think about it any longer and call us today.

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