Dollar Printing: Global Macro Shifts; Franklin Templeton Investments Licensed from Gettyimages
By David Cieslowski, CPA, CA, CFP, CIMA
(Sponsor Content)
As Benjamin Franklin famously wrote, “… in this world, nothing is certain except death and taxes.”For US citizens, as well as some Canadians who own US assets, the first may be swiftly followed by the second.
In the United States, an estate tax is applied to the transfer of the taxable estate of every deceased American citizen, resident or non-resident, including green card holders or others with dual US-Canadian citizenship. Even Canadian citizens who have never stepped foot in the United States, but hold US securities or other US assets, could find their estates subject to a tax on situs assets, which are defined as assets with a tangible or intangible direct US connection or location.
The low-down on US estate tax
Estate tax falls into the category of transfer taxes, as opposed to income tax. It can be substantial; those in the top marginal tax bracket may pay up to 40% on estates with assets of more than US$1 million. Moreover, for US citizens and residents this tax applies to assets held worldwide. Real estate ownership alone can easily exceed those limits.
Fortunately, the reality is somewhat more encouraging. Only around 2% of the US population actually pays estate tax, largely because of exclusions that effectively spare all but the largest estates.
The two most common exclusions are:
Annual exclusion of US$15,000 per person
Lifetime credit of US$11.7 million for 2021 and indexed annually. Something of a political football, this credit can rise or fall along with changes in government[1]. The current credit limit is set to expire at the end of January, 2025.
These annual exclusions are portable, meaning they can be used by any descendant of the deceased.
The gift that keeps on giving: to the IRS
In the battle of wills between those determined to transfer all of their wealth to succeeding generations and those determined to “tax to the max,” many strategies have been tried and failed. Gifting assets to relatives while the owner is still alive has been one of the more popular tactics. Not surprisingly, the IRS employs two additional taxes to thwart such attempts at tax-free wealth transfer.
The first is a garden-variety gift tax. For non-spouses, annual exclusions are the same as for estate taxes. For spouses they are more generous: unlimited for spouses who are US citizens and $159,000 for 2021 (indexed annually) for spouses who are not. Continue Reading…
This year is going to be one of the strangest and (potentially) most complicated years for tax filing. Jobs were lost and hours cut during the pandemic. The federal government responded by introducing the Canada Emergency Response Benefit (CERB) and the Canada Emergency Wage Subsidy (CEWS), among a host of other measures to protect workers and the economy. Furthermore, many entrepreneurial-minded Canadians turned to side hustles and the gig economy to earn more income.
CERB payments are taxable, but taxes were not withheld at the source. Eligibility for self-employed individuals was not clear from the onset, and the CRA has sent out letters asking to confirm eligibility or risk having to pay back benefits.
All of this to say that many Canadians are nervous about filing taxes for the 2020 year. Self-employed individuals, in particular, need assurance to help understand all of the tax deductions and credits that are available to them.
Think of the deduction for home office expenses. Many of us found ourselves unexpectedly working from home, setting up shop in our kitchen, living room, or bedroom. Because of this, the CRA announced it had simplified the way employees can claim home office expenses on their tax return for the 2020 tax year.
Navigating your way through all of the eligible tax credits and deductions can be painful on your own. That’s why tax services like TurboTax are essential for tax filers – especially the self-employed – to find every available deduction and maximize your return, giving you a little lift when you need it most.
I’m amazed at how intuitive these programs have become. Not just the service, but TurboTax has an entire team of tax experts with an average of 10 years of experience at the ready to answer your questions in real time and can even fill and file your return for you.
TurboTax is NETFILE certified and can guarantee you’ll get your biggest refund. NETFILE is the CRA’s online filing service and it allows you to electronically submit your tax return directly to the CRA from your computer.
Before I get into the features of the TurboTax Full Service Self-Employed product, I have a confession to make. Ten years ago, I hired an accountant to incorporate our online business and to figure out the most tax efficient way to treat our business income, retained earnings, and how to withdraw money from the corporation when needed.
I figured once the corporation was set up and we were pointed in the right direction, I would go back to filing my own taxes, both personal and small business.
What I (surprisingly) discovered was that I found great value in paying for tax advice and having a professional take care of our tax filings. That’s right, a personal finance expert pays someone else to do his taxes! Here’s why:
Our situation is more complicated than most. When I worked a full-time job, we were able to stream dividends to my stay-at-home wife to help accelerate our savings goals. Since then, we created a meaningful role for my wife which helped grow the business and stay on-side of the new TOSI (tax on split income) rules. I opened a corporate investment account to invest our retained earnings. Finally, after I quit my day job, we needed advice on whether to pay ourselves a salary or continue to pay dividends.
Your situation might not be overly complicated, but you can still benefit from having sound advice from a tax expert to help make this year’s tax season less stressful than it has to be.
This speaks to the need to have a tax expert on your side. Thankfully, TurboTax continues to make tax filing easy for all Canadians, even self-employed individuals, with their Self-Employed suite of products.
I got to test-drive TurboTax Live Full Service Self-Employed earlier this month to see how TurboTax gives a little lift to self-employed tax filers.
TurboTax Self Employed
I empathize with small business owners and self-employed Canadians who have more complicated tax situations than simply submitting a T4 along with an RRSP contribution. It’s not easy to file your own taxes and know (with confidence) that you’re claiming all of the expenses and getting all of the deductions that apply to you.
And I get it. Not everyone can afford to (or will even have the desire to) pay an accountant to file their tax return and get tax advice every year. But you’re not alone.
TurboTax Self-Employed offers three ways for self-employed individuals to file their taxes.
Self-Employed (do it yourself) – You complete your own return, and TurboTax will guide you through the process.
Assist & Review Self-Employed – Get tax advice and a final review of your return from an expert.
Full Service Self-Employed – TurboTax Live Experts can prepare, optimize, and file your taxes for you.
Seasoned self-employed individuals with a good understanding of their expenses and deductions can file confidently on their own with TurboTax Self-Employed.
Newly self-employed individuals, or those with more complicated situations, might want the assurance of TurboTax Assist & Review Self-Employed. You’ll get access to a team of experts who will listen to and understand your unique situation, answer your questions, give you unlimited tax advice, and, of course, give you the little lift of the best possible tax outcome when you file. Continue Reading…
If there is one thing COVID-19 has not impacted, it’s RRSP season. March 1, 2021 is the deadline for contributing to an RRSP for the 2020 tax year. The question is, should you?
The basics: Anyone who files an income tax return can contribute 18% of earned income to a maximum of $27,230 for the 2020 tax year. If you have an employer-sponsored pension plan, your RRSP contribution limit is reduced by the Pension Adjustment (PA). Unused contribution room can be carried forward to use in the future.
Generally speaking, RRSPs make sense for anyone who wants and can afford to invest for the long term. Here’s why:
Pros
Contributions are tax deductible.
Earnings grow tax-sheltered within the plan.
You can defer tax on investment earnings and contributions to the future. This is particularly useful if you are a high-income earner and your marginal tax rate is likely to be lower in the coming years.
RRSPs can hold a wide range of qualified investments. For example, you can hold GICs, savings bonds, Treasury bills, bonds, mutual funds, Exchange Traded Funds (ETFs), equities (both Canadian and foreign), and income trusts in an RRSP.
Deciding what to hold in your RRSP really comes down to the same factors you have to consider when making any type of investment: your comfort level with risk, your investment objectives and your time horizon. For example, if your goal is to grow your wealth over time and market volatility doesn’t keep you up at night, then you may want to consider growth investments such ETFs, mutual funds and stocks. If you want income, then income-generating and interest-paying investments are worth looking into.
All of this said, RRSPs do have their drawbacks.
Cons
While you can withdraw funds from an RRSP before you retire, you will have to pay a withholding tax and you also have to report that money as taxable income to the Canada Revenue Agency.
The Government of Canada controls the amount of money that must be withdrawn annually once the RRSP matures. When you convert the RRSP to an Registered Retirement Income Fund, which must be done when you turn 71, you are required to withdraw a minimum amount each year starting at age 72 even if you don’t need the money.
RRSPs work best for people who can use a tax deduction and can afford to put money away for the future. Another consideration: Is your income in retirement (and therefore the marginal tax rate you’ll have to pay) going to be equal to or greater than it is during the years you can contribute to an RRSP? If this is the case, you won’t be achieving any tax savings by contributing to an RRSP. However, you could still benefit from deferring tax. The question then becomes, do you pay the income tax now or later? Continue Reading…
It’s the new year and you may have a couple of questions on how to use your TFSA account. The Tax Free Savings Account is one of the greatest additions to your investor tool kit. It is true to its name in that the monies grow completely tax free. When you take the monies out for spending there are no tax implications. We need only keep track of our contribution limits.
Out of the gate it’s important to know the contribution allowances. The program was launched in 2009 (the brainchild of then federal Finance Minister Jim Flaherty). The initial contribution limit was $5,000. There is also an inflation adjustment mechanism and that is why you will see the TFSA limits increase over time.
TFFA Limits History
The annual TFSA dollar limit for the years 2009 to 2012 was $5,000.
The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
The annual TFSA dollar limit for the year 2015 was $10,000.
The annual TFSA dollar limit for the year 2016 and 2018 was $5,500.
The annual TFSA dollar limit for the year 2019 was $6,000.
The annual TFSA dollar limit for the year 2020 was $6,000.
The annual TFSA dollar limit for the year 2021 is $6,000.
The total contribution allowance to date is $75,500 for 2021. You can carry forward any unused contribution space. Keep in mind that the eligibility for TFSA is based on age of majority. You would have had to have been 18 years of age or older in 2009 to qualify for that full amount. You would also have to be in possession of a Social Insurance card/number.
If you reached age of majority in 2018, that would be your first year of eligibility. To date your contribution limit would be …
Starting the TFSA in 2018
2018 – $5,500, 2019 – $6000, 2020 – $6,000, 2021 – $6,000 for a total of $23,500.
Of course we have to wait for January 1 or later to use that $6,000 for 2021.
Remember if you go over, you will be penalized by 1% per month, for the amount that you have overcontributed. Check with CRA for your contribution eligibility.
Reader question on over contribution
“Ooops, I over contributed in December of 2020.” If you recently jumped the gun and overcontributed by $6000 you would be charged 1% per month, meaning a $60 penalty. Thing is you earned another $6,000 in contribution space on January 1, 2021. You would only face one month of over contribution. You might as well sit tight. You would not be able to have that contribution reversed, even if you quickly move that money out of the TFSA account. If you move the monies in and out there will be no benefit, but you could created fees if it is stocks or ETFs.
If you ever make a more costly (but honest) mistake on over contribution, you can take that up with CRA and your financial institution. It’s possible that you might get some help from your institution or from the CRA. Good luck.
Calculating your TFSA after removing amounts
The formula or rule is quite simple. If you remove $12,000 in one year, you would add that full amount to next year’s contribution allowance. And of course that contribution allowance would also include that calendar year’s new room. For example if you took out $12,000 in calendar year 2020, you would add that $12,000 to the $6,000 allowance for 2021. Your 2021 contribution allowance would be $18,000.
Yes, you get to keep any contribution room gains you made in your TFSA if you sell. You lock in that space. Those investment gains can boost your total TFSA contribution room above the calendar year totals.
This event may be considered if you were looking to use or gift some monies next year. You might sell now and lock in that TFSA space. Obviously, if you’ve been investing those monies, your account is likely or should be at an all-time high.
Please note that if it is a stock or bond or ETF or mutual fund, the trade has to settle within the calendar year. Check with your discount brokerage or advisor on timing and settlement details.
Saving or Investing for your TFSA?
I am a big fan of using your TFSA for investing. There’s the potential or likelihood of much greater gains and hence much greater tax savings when you invest your TFSA dollars.
Also consider that interest rates are sooooo low you might have very modest ‘gains’ with any savings account. The benefit of the TFSA for savings is more muted in a low interest rate environment.
But of course, 2020 proved to many the importance of that emergency fund. You might hold an emergency fund that is 6 months of total spending needs as a starting point. Here’s my personal finance book, OK it’s a blog post …
And it can make sense to hold some cash as a portfolio asset. After all it’s an obvious hedge for any deflationary environment. The spending power of cash will increase in any deflationary period.
On that cash front you might consider EQ Bank where you can earn 1.5% in a savings account and 2.3% in registered account such as that TFSA. You may choose to hold some TFSA amounts in savings and some in higher growth investments.
On the mutual fund front you might have a read of this post from Jonathan Chevreau on the top mutual funds in Canada. I am a big fan of those funds from Mawer.
Beneficiary form – successor holder
Ensure that you fill out a beneficiary form for all of your registered accounts. For taxable accounts you might consider joint accounts. Continue Reading…
Canadians often consider tax-saving strategies on an individual basis but don’t consider how their families can also contribute to lowering the tax bill. While often overlooked, family tax-saving strategies are effective and legitimate ways for households to save big on tax dollars each year.
The Canadian government recently announced the reduction of its prescribed interest rate from 2% to 1% starting on July 1, 2020 – the first time the prescribed interest rate has been this low since April 2018. For Canadian families, this represents a significant opportunity to make a loan directly to family members or where minors are involved, to a family trust, and use this income-splitting strategy to their advantage.
How does it work?
If you loan your spouse money for the purpose of income-splitting, the prescribed rate (the rate of interest you charge your spouse) remains fixed for the term of the loan. Through this tax-saving strategy, that many may not be aware of, transferring income from a high-income earner to a family member in a lower tax bracket allows Canadian families to pay less taxes overall, potentially saving hundreds or even thousands of dollars per year.
Although the Canada Revenue Agency (CRA) restricts most forms of income-splitting, there are legitimate ways to split taxable income with a spouse or minor child such as this strategy. Provided the loan is properly structured, the loan proceeds can be invested by the spouse receiving the loan, with the income taxed at their lower marginal rate.
Of course, one of the keys to a successful income-splitting strategy is to ensure that investment returns are higher than the interest rate charged on the loan: so keep that in mind when choosing your investment.
A real-life example
Let’s suppose spouses Jack and Jill are looking for ways to lower their family tax bill. They are in different tax brackets, Jack at 48% and Jill at 20%. Jack loans Jill $100,000 at a prescribed rate of 1%. Jill invests the money and earns 4% – or a total of $4,000. She then pays Jack the $1,000 loan interest and deducts the same amount as “loan interest expense.” Jill pays $600 in tax on the remaining $3,000, and Jack pays $480 on his interest income. Continue Reading…
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