Tag Archives: tax

Where to invest 2021 RRSP contributions

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By Graham Priest

Special to the Financial Independence Hub

In today’s low interest rates environment, investors are looking beyond GICs and equities to generate greater returns over the long term. The economic recovery has surpassed expectations, and individuals are looking beyond COVID-19 and a return to some normalcy by the end of the year. With this in mind, there are several different kinds of investments that Canadians could consider making from their RRSP contributions in 2021.

For example, technology stocks and other “work from home” related stocks that performed well in 2020 might take a breather in 2021 if more of us start heading back to the office.  Areas of the market that underperformed in 2020 may exceed expectations this year. For example, recently energy stocks have started to display strength. Emerging markets is another area that will likely perform well in the next year. If the USD declines in value, it will be an added benefit for emerging markets, as a large portion of their debt is denominated in USD.

Additionally, after a rough 2020, Real Estate Investment Trusts (REITs) are gaining a leadership role within the market. Many REITs have strong yields that provide income that exceeds the interest paid on government and corporate bonds. However, REITs are a good investment inside a TFSA. The income distribution from a REIT is generally taxable income, and in a TFSA, there is no tax on that income.

Put high-growth investments outside RRSP

Investments that have the potential for exponential growth may be better suited outside of an RRSP, as withdrawals from an RRSP are taxed as income. Withdrawing large capital gains tax-free from a TFSA is a better option for investors who have RRSP and TFSA accounts. Continue Reading…

What the CRA already knows or may learn about your crypto portfolio

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Image via Unsplash: Bermix Studio

By Anna Malazhavaya

Special to the Financial Independence Hub

For better or for worse, cryptocurrencies have gained popularity, at least in part, due to their anonymity. As the industry develops and tries to shake the “crypto-is-for-criminals” reputation from its early days, the anonymity in certain areas fades.

Know Your Client requirements at crypto exchanges have become quite sophisticated. News reports keep appearing about popular crypto exchanges, such as Coinsquare in Canada and Coinbase in the United States, handing information about their account holders to local tax authorities.

The price of Bitcoin has more than tripled in the last four months. As lucky crypto investors consider whether to HODL (Hold On for Dear Life) or sell, they can be certain the taxman is watching. When can information about your crypto investments and earnings become available to the Canada Revenue Agency? Here are a few examples.

1.) If you are audited, the CRA auditor can get access to your crypto exchange account

 If you are audited by the CRA for any reason, the auditor may come across a crypto exchange purchase on your bank or credit card statement. If so,  expect follow-up questions from the auditor. If the auditor asks about your assets, you must disclose all your assets, including your crypto portfolio. Lying to the CRA is never a good idea and can lead to criminal charges.

The CRA has the power to compel third parties, including currency exchanges, to disclose information related to your crypto account activity through a so-called Requirement for Information (“RFI”). If a crypto exchange receives such RFI, they must either comply with it, dispute it at the Federal Court, or face criminal charges. Most Canadian-based exchanges will promptly release your information to the CRA.

2.) Even if you are not currently audited, the CRA may get access to your crypto exchange account as part of a so-called “unnamed persons” RFI

In some cases, the CRA can ask the Federal Court for an order to compel third parties to disclose information on a group of “unnamed persons” if the group is “ascertainable” and the purpose of the request is to verify the tax compliance of these taxpayers. A recent example of the CRA successfully exercising this power was a Federal Court order compelling Home Depot to disclose information about the accounts of its commercial customers. It appears that the CRA won’t hesitate to use this power when dealing with crypto exchanges.

In September of last year the CRA filed an application in Federal Court seeking an order to compel Coinsquare Ltd., a popular Toronto-based digital asset exchange, to disclose activity of  its clients. All its clients. And all the way back to 2013, no less. Coinsquare disputed the application arguing that the group was not “ascertainable” and that the CRA engaged in a “fishing expedition” invading the taxpayers’ privacy.

On March 23, 2021, in its blog post, Coinsquare announced that it reached an agreement with the CRA for an order, whereby only a portion of accounts would be disclosed to the CRA on or before April 6, 2021. Coinsquare would produce to the CRA information on accounts valued at  $20,000 CDN or more on December 31 in the years 2014 through 2020, along with 16,500 of the largest client accounts by trading volume during those periods.

3.) Proceeds of Sale of Cryptocurrency can be visible to the CRA

Whether or not you used a popular crypto exchange platform to sell or spend your cryptocurrency, the CRA may question the source of proceeds (traditional currency or assets purchased with cryptocurrency) you received in exchange. If you are audited, your reported taxable income should be consistent with that large deposit in your bank account or that late-model Tesla parked in your driveway. If the CRA finds a discrepancy, the consequences can be very serious.

4.) Crypto investments are only anonymous while your crypto address is not linked to your name. But if the CRA makes the connection, look out

Using the same crypto address for sending and receiving some types of cryptocurrency is like writing under the same pseudonym. If anyone ever connects your real identity to the pseudonym, all you ever published under the pseudonym will then be linked to you. Continue Reading…

Study: Coronavirus Pandemic creating Tax Problems that could get worse in 2021

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By Mike Brown, LendEDU

Special to the Financial Independence Hub

Americans struggling to repay their 2019 taxes in the midst of a recession has been just another issue to deal with during the coronavirus pandemic.

Recognizing this, the Internal Revenue Service (IRS) actually extended the filing and payment deadline for 2019 tax obligations from April 15, 2020, to July 15, 2020.

The extension may have temporarily stopped the bleeding, yet there’s a looming tax debt crisis that has the potential to boil over in 2021 when 2020 taxes are due.

That’s because millions of Americans took to relying on unemployment benefits, retirement funds, or stock sales to stay afloat amidst the pandemic recession.

All of those things could lead to a heavier tax obligation in 2021, and with many people still out of work and struggling to get by, the country could be looking at staggering tax debt numbers next year.

The U.S. tax gap (total outstanding tax debt) currently hovers around $400 billion, but that figure could approach crisis levels after next year’s tax season.

To capture the struggles from the 2020 tax season and also the fears regarding the 2021 tax season, LendEDU surveyed 1,000 adult Americans to better understand what the average taxpayer has been dealing with during these unprecedented times.

Observations & Analysis

All data is based on an online survey of 1,000 adult Americans commissioned by LendEDU and conducted by research firm Pollfish. The survey was conducted on December 1, 2020. For some questions, the answer percentages may not add up to 100% exactly due to rounding.

17% of Americans laid off because of Pandemic unable to pay all 2019 Taxes

As mentioned above, the IRS extended the deadline to pay 2019 taxes by three months given the financial hardships experienced by many as a result of the coronavirus pandemic and recession.

However, paying all taxes owed by the July 15th deadline was still impossible for many Americans, especially those who have lost jobs due to the pandemic.

Amongst respondents who have lost their jobs during the coronavirus pandemic, 17% were not able to pay their 2019 taxes on time and in full.

Many still haven’t filed Tax Returns

Even if you are unable to fully pay all tax obligations by the filing deadline during any given year, you should always file your tax returns on time.

When dealing with the IRS, a failure-to-file penalty is much worse (5% of unpaid taxes for each month your tax return is late, up to 25%) then a failure-to-pay penalty (.5% of unpaid taxes for each month you don’t pay, up to 25%).

Yet still, data from our survey found many Americans that couldn’t pay all their taxes on time also didn’t file on time.

32% of taxpayers who couldn’t pay all 2019 taxes on time didn’t file their taxes by July 15th either. Even worse, 72% of these taxpayers who missed the July 15th filing deadline still have yet to file their tax returns for 2019, which could lead to serious financial and legal troubles.

Amongst respondents who at least have filed their 2019 tax returns despite not being able to fully pay all taxes by July 15th, here’s how many have been able to finally repay all 2019 taxes owed…

 

 

 

 

 

With 53% of applicable taxpayers still having tax debt from 2019, we wanted to see how much they have left…

For American taxpayers that still have some amount of tax debt from the 2019 tax year, the average amount remaining is $3,662.

If you are someone that is currently repaying tax debt, you may want to learn more about tax relief as a possible way to settle or reduce your tax bill.

The data from our survey makes it clear that repaying 2019 taxes has been unusually tough, and mass unemployment brought on by the coronavirus pandemic has been a big reason for the struggles.

But the coronavirus pandemic’s impact on the tax system won’t end in 2020 and likely will be more damaging in 2021 as taxes from this unprecedented year will be owed.

Over half worried about next year’s Tax Debt

The 2021 tax season is shaping up to be a brutal one as the full financial ramifications of the coronavirus pandemic and recession develop. Continue Reading…

Educating your Canadian children in the United States (Part 1)

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Princeton University

By Elena Hanson

Special to the Financial Independence Hub

Congratulations! You are sending your son or daughter to college in the United States to further their education and help put them on the road to a great career. But have you as the parent done your due diligence to make sure this doesn’t end badly with a big chunk of money ending up in the hands of the IRS? It could happen.

The IRS has long arms and extensive resources, and once it starts examining the earnings and assets of your child who is attending a U.S. school, well, as the saying goes all is fair in love and war. What’s more, the IRS might even wind up investigating the finances and assets of the whole family!

How do you avoid a muddle with the IRS? Good, sound, cross-border tax planning. That’s how. It will protect the income and assets of your child, and of you, and ensure full compliance in Canada and the U.S.

Start with the Visa

Let’s go to the beginning. Your son or daughter has been accepted for admission to the U.S. university or college of their choice, which means they have an F-1 Student Visa or a J-1 Exchange Visitor Visa. All the necessary documentation is complete and there is nothing to worry about.

Well, not exactly. As Canadians you better be up to snuff on all the rules for your child to attend school south of the border or Uncle Sam might have the last laugh, and here’s why. The moment Bobby or Jennifer sets foot in the U.S. the IRS day-counter gets rolling. They keep tabs on the number of days your child is in the country and this is why you, the parent, must do everything to make sure your Canadian child retains their status as a non-resident alien.

Tax residency in the U.S. is based on citizenship/lawful permanent residence (i.e., Green Card) and/or the Substantial Presence test (i.e., days present in the U.S.). This means that if your son or daughter is not a U.S. citizen or a Green Card holder, they will likely meet the criteria for the Substantial Presence test, which is calculated based on the number of days spent in the country over a three-year period. So, if your child’s magic number is 183 days or more, they are considered a U.S. tax resident.

Key is avoiding U.S. residency status

Thus, avoiding U.S. residency status is key and you can do that by filling out a form: Form 8843, which is called ‘Statement for Exempt Individuals.’ It allows students to exclude the number of days they are present in the U.S. for purposes of the Substantial Presence test. But the student must avoid any activities that disqualify this exemption. That could be looking for a job or buying a home in the U.S., or marrying a U.S. person.

If the student has a home in Canada and actively maintains it, but they do not qualify for the exemption as per Form 8843, they can still avoid U.S. taxation on their worldwide income and those IRS filings because of the Canada-US Income Tax Convention (the Treaty). And even if your child is not able to maintain their non-resident status, being aware of a few important things can be a big help.

It all has to do with good tax planning. Here are some examples: Continue Reading…

Top 7 things to know about Social Security

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By Michael Morelli

Special to the Financial Independence Hub

When you are thinking about early retirement to fully enjoy retirement living, or thinking of postponing retirement, you need to know how and when it is best to take your Social Security benefits. When dealing with something as important as Social Security, you must make sure that you are receiving as much as possible. Comprehending the program will help to secure your future to a great extent. In this article, we have mentioned several essential things regarding Social Security that you ought to know.

What is Social Security?

Social Security happens to be the foundation of numerous Americans’ financial security, including disabled individuals, retirees, and families of the retired. Approximately 170 million Americans pay Social Security taxes at present, while 61 million individuals collect monthly benefits. Approximately one household in every 4 gets income from Social Security.

One can consider Social Security to be a pay-as-you-go scheme. This implies that today’s workers pay Social Security taxes into the program, and cash flows back out to the beneficiaries as monthly income. Social Security is not the same as company pensions, which happen to be “pre-funded” out there. The money will be accumulated beforehand in pre-funded programs such that it can be paid out to the workers of today once they retire. It is essential to fund the private plans beforehand to safeguard the employees provided the company shuts down or becomes bankrupt.

1.) Full Retirement Age (FRA)

The following paragraph mentions the full retirement age when you might be eligible to get full Social Security retirement benefits.

Here we have mentioned the year in which you were born and what will be the Full Retirement Age in that case.

1937 or before – 65

1938 – 65 + 2 months

1939 – 65 + 4 months

1940 – 65 + 6 months

1941 – 65 + 8 months

1942 – 65 + 10 months

1943 – 1954 – 66

1955 – 66 + 2 months

1956 – 66 + 4 months

1957 – 66 + 6 months

1958 – 66 + 8 months

1959 – 66 + 10 months

1960 or later – 67

2.) You can work while getting Social Security

You will have the option of taking Social Security so long as you happen to be 62 years of age. Yearly earning limitations have been set by the SSA – in case you have been getting Social Security benefits prior to your full retirement age, and you are earning in excess of the limit, there will be a reduction in your benefit payments temporarily depending on how much you are earning. Suppose you are earning $8,000 over the limit, your benefits will be minimized by $4,000. In case you can earn $12,000 over the limit, it will be reduced by $6,000.

However, the good thing is that you will not lose your benefits permanently in case they are reduced. On the other hand, your payment account will be calculated once again, such that you will get the withheld cash as soon as you reach your full retirement age)

3.) Social Security benefits may be Taxable

As per the SSA, several Social Security beneficiaries are going to pay taxes on their Social Security benefits. It will depend on how much you make listed on the income tax return. In case you file with an excess of $25,000 as an individual (or $32,000 jointly), it will be imperative for you to pay the federal income taxes on the benefits. However, the regulations for state income taxes differ from one state to another.

4.) Your payments can help your family

Let us suppose the monthly benefits, according to your Social Security card, happen to be more than that of your spouse. Continue Reading…