only search The Silverpages

Tax and Financial Planning

Twelve Tips on Personal Income Tax Planning

  1. Your House
  2. Inheritances
  3. Lottery and Gambling Winnings
  4. Dividends
  5. Capital Gains (and Losses)
  6. Rental Properties
  7. Cottage Life
  8. Your Retirement
  9. Medical Items
  10. Charity
  11. Current Issues
  12. Three Things to Remember

Reverse Mortages

Retirement Home Residents May Be Eligible to Claim Disability Tax Credits and Attendant Care Expenses

Taxable Income

Twelve Tips on Personal Income Tax Planning

  1. Your House

    First, a piece of good news. Your principle residence is always tax free. So buy low, keep up the payments, keep up the maintenance, do some comfort renovations if desired, and you will always have a tax free asset. Many people sell the house and retire in a condo or other low maintenance accommodation and use their house proceeds for retirement cash. The low maintenance aspect enablesretirees to travel and experience other benefits of their golden years.

  2. Inheritances

    Another piece of good news! Inheritances are also tax free. The estate may be liable for some income taxes, but by the time you receive the money, it's usually all tax free. Again, it's much more complicated than that, but be relieved that by the time you get the money, usually all the tax has been paid on it.

  3. Lottery and Gambling Winnings

    Yes, lottery and gambling winnings are still tax free in Ontario. The provincial government, I'm sure, is looking into this area, but so far nothing has happened. The belief is that the money spent on lotteries and gambling has already been taxed once and any change would make it double taxation, a no-no in financial and economic circles. It also brings many Americans into Canada to visit casinos, and the tax-free nature of the winnings perhaps compensates them for the lower Canadian dollar.

  4. Dividends

    There are basically two types of non-active income in Canada: interest and dividends. Bank accounts pay interest; company shares pay dividends. The government of Canada was kind enough to give us taxpayers an incentive to invest in Canadian companies by giving us a reduced rate of tax on dividends. The actual tax calculation is a little more complex but to keep it simple, it is cheaper tax-wise to receive dividends rather than interest so consider investing in Canadian companies. There is an exception to seniors receiving the Guaranteed Income Supplement (GIS) as divi dends will actually reduce this supplement. So be careful here and consult a tax professional before changing yourasset mix.

  5. Capital Gains (and Losses)

    Capital gains in Canada are taxed at preferred rates. Actually, only one half of the gain is added to taxable income. This makes them attract much less tax than regular earned income. Prime examples are the gains on the sale of shares on the stock market, mutual funds and real estate. The actual capital gain is calculated by taking the proceeds of the sale less the cost and less the costs of selling. This ìnetî capital gain is divided by 2 to get the taxable capital gain, and this is the amount added to your income for the year.

    When you have sold some assets at a gain, and you have some accumulated losses in other assets, be sure to sell them too before the end of the year. That way these losses can be applied to the gains and defer tax. Be sure that you don't buy these losers back for at least 30 days or the sale of the losers will be denied under a ìtrapî called the ìsuperficial lossî rules.

  6. Rental Properties

    Rental properties are great. The tenants help pay the mortgage and some day the rental unit can be sold and the cash gets into your hands.

    But, this sale also may trigger some income tax under the capital gains rules. The calculation is the same as for any other assets. But, there is also another trap. As you go merrily along from year to year and claim depreciation on the building against the rental profits, this depreciation comes back in as income when the property is sold. Now, again, it just isn't that easy, and there are lots of items that can come into play in this calculation, but be aware of the possibility. As you claimed the depreciation annually against income, and you sold the property for more than its cost, the property really didn't depreciate. All these depreciation amounts that were claimed then come back into income. It's not double taxation, but it's taking a small write off each year and paying it all back in one lump in the year the property is sold. Sometimes, it's easier not to make the depreciation claims and pay a little more tax while you are working and can afford it, rather than all at the end.

    Also be aware of the brackets discussed in the overview, as any jump in brackets will create more tax than what was originally saved. Now, this also works the other way, where perhaps you are making more money when you own the property than in the year you sold it.

  7. Cottage Life

    Principle Residence

    Boy, I wish that my cottage was my principle residence! But society's 'catastrophe' of mortgages, cars, kids' educations and food, all force us to actually work. For those readers who can live in their cottage, great, we envy you. But for those who live in another home near work, we have to make a choice as to which building we will claim as our principle residence. Since 1982, we are allowed only one per couple. We must make that decision when the first place gets sold. Usually, the property with the most gains is treated as principle residence and we pay tax on the other. But there are many options available, so you will have to make a few calculations before you know which property to claim as your principle residence and for what years.

    Averting Estate Problems?

    I know what you're thinking! But kids under the age of 18 are not allowed to own real estate. And any transfer from a parent to child must happen at fair market value. Even so, transferring the cottage to the oldest son or daughter may have some merit.

    For example, if the cottage has the potential to increase in value substantially over the next few years, or next generation for that matter, any children who do not own their own home, could treat the cottage as their principle residence and therefore not attract any tax on the increased value.

  8. Your Retirement

    RRSP's While You Work

    While you are working, money set aside in RRSP's are not taxed until you pull them out. This can amount to a large tax saving if your income drops down a bracket or two from the time you contribute to the time you pull them out. Contributing to RRSP's while you are in the lowest bracket really doesn't save anything, so you want to make sure you don't claim more than what it takes to get into that lowest bracket.

    Company Pensions

    While you're working, it's much easier to save money than when you retire and get on a fixed income stream. So make sure you contribute as much as you can to company pensions, as in many cases the employer also contributes. In addition, the pension fund has a team of managers that are professional investors, much better most times than the occasional investor. Also, the pension fund is highly regulated by the governments to minimize risk to the employees.

    After Age 69

    Once you turn 69, you must empty all your RRSP funds by the end of that calendar year. You can take it all in cash, or roll them into an annuity or RRIF (Registered Retirement Income Fund). These two alternatives spread the cash flows over a number of years, and you can structure them to keep you in the lowest tax bracket possible. The plans change often, so consult your plan manager when the time comes.

    Old Age Pension Clawback and More!

    A fitting term for a nasty tax law. Once your income goes over $60,806 (2005), the government wants some of your old age pension back. Try and keep it below this number if you can. And on top of that, if you are over 64 and if your income exceeds $29,619 (2005) you start losing the seniors age credit. How's that for treatment of our seniors!

  9. Medical Items

    Medical Expenses and Mileage

    All prescribed medicines qualify for a credit given certain minimums and maximums. You must subtract 3% of your net income from the total medical expenses to a maximum reduction of $1,844 (for 2005). Also included in this category are physiotherapy, registered massage therapists, dentists and orthodontists, and various medical appliances that may help you throughout the day. In addition, you can claim 47 cents per kilometer for mileage (in 2005) to a specialist whose office or clinic is more than 40 kilometers away and meals if the trip takes more than 4 hours, as long as your local doctor referred you there. Another allowable expense is your medical insurance premiums, especially when traveling outside Canada. There is a multitude of allowable expenses so it's best to consult a professional tax preparer or the Canada Revenue Agency for details.

    Disability Deduction

    Don't ever forget that if you become disabled, you have a large credit you may claim. It's called the Disability Tax Credit. The disability must affect you in your activities of daily living and you must get a T2201 form completed and signed by your doctor. You can save tax on $6,596 (2005) each year of the disability. And what's nice about this deduction is you only have to file the form once. A spouse, parent or child, among others, can transfer any unused deduction to you so the full benefit isn't lost. And if you're disabled, you may transfer the unused deduction to one of the kids so they can save some tax.

    Care Giver Credits

    The income tax act allows for a credit for an elderly parent or grandparent (over 65) who lives with you. The credit is $3,848 in 2005 for dependants whose income is below $13,141 and reduces to zero when their income reaches $16,989.

  10. Charity

    Bonus Over $200

    There is a credit of 22% for the year's first $200 in donations, but once we reach that mark, the credit increases to 43% for the amount over $200. Quite a good deal for those of us who donate to our church and other charitable organizations. Just make sure the charity is registered with Canada Revenue Agency ñ Charities Division by contacting them, or visit www.cra.gc.ca/charities.

    Watch for the ìFlipsî

    The Canada Revenue Agency is keeping a close eye on so called ìart flipsî and other charity scams. These are basically cases where a taxpayer purchases a piece for a low amount and then donates it to charity at a much larger value. This results in a charitable tax credit of much more than the artwork originally cost. But the rules have changed so that now the taxpayer must own the piece for at least two years before the flip is allowed. It's still best to hang on to your money or donate it to a cause you feel worthwhile.

  11. Current Issues

    The New Ontario Health Tax

    When the McGuinty government was elected and they found that the cupboard was bare, one of the first jobs they did was to introduce an Ontario Health Premium and added it to the provincial tax. This health premium amounts to another $300 to $900 per year in taxes collected by the province. If your income is less than $20,000 you are exempt, but the amounts increase to $750 when your income reaches $72,600 and hits maximum of $900 when your income is over $200,600.

  12. Three Things to Remember

    Receipts, receipts, receipts.

    Yep, the onus of proof is always up to the taxpayer. It's our job as taxpayers to pay only the tax required, and no more. But often, the dividing line between a deduction or not is the receipt. Keep them all. If required to send some in, keep a copy. It's all you have in case something gets lost.

My Conclusions

Now, this was a very simplified condensed version of some of the income tax implications for individuals. There are a multitude of tax rules, incentives and schemes out there, so if you want some advice from me, see a qualified tax professional such as a Certified General Accountant (CGA).

The Benefits of Reverse Mortgages

Did you know that 77% of a senior's net worth is home equity? Did you know that 1.4 million seniors own their home and are mortgage free?

Eighty-four percent of seniors don't want to move. They wish to live independently for as long as they can in the home that is the anchor of their lives. Sometimes, to do that requires changes to their financial portfolios.

A reverse mortgage is a loan secured against the client's home. Interest is added to the balance on a monthly basis. However, no monthly payments are due unless the client chooses to pay. The amount owed is not due until the client moves, passes away or sells the home. The client maintains full ownership of the home. There is no income or credit checks and there is no medical qualification.

Some of the reasons that seniors (you must be 60 years of age to qualify) take out a reverse mortgage are to help finance the education of grandchildren. Many use it to travel. Some use it for home health care. Most re-invest it to create a larger monthly income.

Reverse mortgages are not counted as income on your tax returns. They do not affect Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits. The interest paid on a reverse mortgage can be used to minimize taxes on income generated from your investments, that you may have bought with the funds you received from the reverse mortgage. You can use the funds to top up RRSPs or reduce the need for RRIF withdrawals and investment redemptions.

Retirement Home Residents May Be Eligible to Claim Disability Tax Credit and Attendant Care Expenses

In March 2003, tax officials in Ottawa made a policy change that permits residents of retirement homes in Canada, who are eligible, to claim the care they receive in retirement homes under the attendant care tax credit. This tax credit if available for 2002 and subsequent years (see Canada Customs and Revenue Agency fact sheet web address at the end of this article.)

The Ontario Retirement Communities Association (ORCA) has prepared some questions and answers to better understand this program.

Who Is Eligible To Apply?

Retirement homes residents who qualify for the Disability Tax Credit (T2201) can make an additional claim for the part-time attendant care they receive.

How Do I Know If I Qualify for The Disability Amount?

You or a loved one may qualify if a doctor or other qualified health professional certifies any of the following:

  • Prolonged blindness all or almost all of the time
  • Prolonged and severe mental or physical impairment which causes marked restriction to basic activities of daily living
  • Need and dedicate time specifically for life-sustaining therapy to support a vital function

The Canada Customs and Revenue Agency defines impairment as “prolonged” if it lasts or is expected to last for a continuous period of at least 12 months.

Basic activities of daily living include: walking, speaking, perceiving, thinking and remembering, hearing, feeding and dressing, and eliminating bodily waste. Basic activities of daily living do not include general activities like working, housekeeping, recreation or socializing.

To be considered “markedly restricted” you or your loved one must be unable, or takes an extremely long time, to perform a basic activity of daily living even with therapy and the use of appropriate devices and medication.

Life sustaining therapy includes breathing therapy and kidney dialysis, but does not include implanted devices like a pacemaker or special programs of diet, exercise or medication. A medical doctor must certify that you or your loved one needs life-sustaining therapy at least three times per week, to an average of at least 14 hours per week.

What are “Attendant Care” Services?

Generally, attendant care covers the salaries and wages paid to employees of a retirement home who provide the following:

  • Nursing services
  • Meal preparation
  • Housekeeping for the resident's personal living space
  • Salon services (hairdresser, barber, manicurist, pedicurist)
  • Laundry services for the resident's personal items
  • Activities (social programming)
  • Security
  • Transportation driver
  • Security (in secured units)

The claim for attendant care is the portion of the salary and wages of all such attendants that can reasonably be applied to your service requirements, and is limited to a maximum of $10,000 annually or $20,000 in the year of death.

What Must I Do To Make a Claim?

For a claim to be allowed, the following is required:

  1. Proof of payment (receipt), that shows the specific amount paid you pay for attendant care (does not include rent). Your retirement residence administrator will determine the amount paid specifically for attendant care services; and
  2. You must qualify and be approved by the Canada Customs and Revenue Agency (CCRA) for the Disability Tax Credit Certificate (T2201) outlined above.

Retirement home residents are encouraged to use a professional accountant to help them submit their tax returns, to ensure that all the appropriate documentation is completed.

Where Can I Get More Information?

For more information, please review the Canada Customs and Revenue Agency “Attendant Care Expense” fact sheet available at CCRA-ADRC.

It is always at the discretion of the CCRA to make the final determination to accept a claim. For general tax inquiries, call 1-800-959-8281.

Taxable Income

Retirement usually means your finances will change. This could mean that extra tax rules apply to you. For example, after you retire, some of your income may not have tax withheld from the payer. Public pensions such as Old Age Security (OAS) and Canada and Quebec pension plans (CPP / QPP) benefits are taxable. However, the Guaranteed Income Supplement (GIS) and Allowance / Allowance for the Survivor are not.

Private pensions are taxable. However, up to $1,000 of pension benefits may be eligible for a tax credit. An annuity funded by a Registered Retirement Savings Plan (RRSP) is also eligible for that same credit. All bond interest, bank interest, mortgage or other interest, and dividends from shares are taxable.

Income is normally taxed in the year you get it. In the year you retire, you could have income from several different sources. You may be worried about the amount of tax you have to pay that year. There are ways to help reduce or defer your tax on some kinds of income. You may transfer the eligible part of retiring allowances tax free into your Registered Retirement Savings Plan (RRSP) or Registered Pension Plan (RPP), either directly of indirectly, with some limits. But you may only transfer RPP or Deferred profit-sharing Plan lump-sum pension payments on a direct basis and in lump-sum amounts. You cannot transfer periodic pension payments from on registered plan to another.

For more information , you can get the tax guide called RRSPs and Other Registered Plans for Retirement at the www.ccra.gc.ca website or call your local tax services office. You can find the number in the government section of your telephone book

Income Tax and Benefit Return (TIS-A)

The Canada Customs and Revenue Agency sends the TIS-A package to retired seniors with simple tax situations whose taxable income was $50,000 or less. The TIS-A is easy to complete, has larger print and it includes the most common types of retirement income and credits for seniors.

The TIS-A makes it easy to figure out your refund or balance owing. It is personalized and is not available at your income tax office or post office. For more information, please contact your local tax services office, which is listed in you telephone directory.

Installment Payments

After you retire, you may receive income that has no tax or not enough tax withheld, and you may have to pay a large amount of tax when you file your return. How you pay the tax you owe will depend on the type of income you receive. For example, if your main source of income is from a pension, you can have enough tax withheld at source to pay the tax you owe.

However, if you only receive investment, rental, or self-employment income, you may need to pay your income tax by installments. Installments are periodic payments of income tax that individuals pay to the Canada Customs and Revenue Agency to cover tax they world otherwise have t o pay on April 30 of the following year.

You may have to pay your income tax by installments for the year if, in the current year, and in either of the two previous years, your net tax owing is more that $2,000. ($1,200 for residents of Quebec). For more information read the pamphlet called Paying Your Income Tax by Installments, which you can get by calling 1-800-959-2221 or from the CCRA website at: www.ccra.gc.ca/forms.

Non-Refundable Tax Credits

Non-refundable tax credits reduce the amount of income tax you owe. However, if the total of these credits is more than the amount you owe, you will not get a refund for the difference.

As a senior, you can claim the same non-refundable tax credits that you could before you turned 65. Now, you may be able to claim part of all of the age amount and, if you receive pension or annuity income, the pension income amount. For more information about non-refundable tax credits, see your tax guide.

Goods and Services Tax Credit

You may be able to claim the Goods and Services Tax (GST) credit or Harmonized Sales Tax (HST) credit if you filed a tax return. These credits help to return all or part of the GST or HST for low and modest income families and individuals. Generally, those who qualify will have their credit paid in four parts, one every three months. If your total credit for the year is less that $100, you will receive the full amount in one payment.

You can receive the credit this year if, at the end of last year:

  1. You were a resident in Canada
  2. You were 19 years of age or older or you had a spouse or were a patient.
  3. You also meet certain income and family criteria.

If you think you may qualify, you should complete the GST/HST credit area on page 1 of your tax return. The Canada Customs and Revenue Agency (CCRA - formerly Revenue Canada) will see if you qualify. They will send you a notice to tell you if you do and explain how they figured out your credit.

If you filed a return last year, CCRA will send you the type of return you need to claim the GST/HST.

Repayment of OAS Benefits

Higher-income seniors may have to pay back part or all of their basic Old Age Security (OAS) benefits. If your annual income is more that $55,309 (2001 rate), one twelfth of your total estimated repayment for the year is deducted from your monthly payment. This estimate is based on your previous year’s income tax return, as processed by the Canada Customs and Revenue Agency (CCRA). The total amount of your OAS repayment is equal to 15% of the total amount by which your net income (including OAS) exceeds $55,309. However, your repayment cannot be more than the total OAS benefit you get.

Caregiver Amount

Do you live with your or your spouse’s parent or grandparent? If they are 65 or older, dependent on you, and their net income is less that $14,453, you may be able to claim the caregiver amount. The amount is not applicable for care between spouses. For more information, see line 315 in the General Income Tax and Benefit Guide.

Help with Taxes

The Community Volunteer Income Tax Program provides free help to low-income individuals who need help with simple tax situations. This program is operated by the Canada Customs and Revenue Agency. Almost 15,000 Canadians volunteer their time each year to help those who need help completing their tax returns.

If you need help filing your tax return or if you would like to become a volunteer yourself, call 1-800-959-8281 toll free.


Find an error or need help navigating the site? Email webmaster@thesilverpages.ca