Tag Archives: taxes

5 ways Real Estate boosts Financial Independence

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By Sia Hasan

Special to the Financial Independence Hub

Gaining financial independence is one of the most difficult propositions. Life is expensive, particularly if you live in a metro area, which is where most of the higher paying jobs are located. As a result, most people save only small amounts of their paychecks or none at all. Clearly, this is not the path to financial independence (aka “Findependence.”).

Thankfully, you don’t have to make a massive salary to become financially independent. There are several methods for building wealth, including starting a business, investing in securities, and investing in real estate. Even if you do the first two already, you need to consider these five ways of increasing your financial independence through real estate.

Real estate investment offers the highest returns for the lowest risk when compared to starting a business or investing in stocks. The reason is that real estate offers five surefire ways to grow your money, known by the acronym IDEAL. By setting a long-term plan to benefit from these five methods of making money in real estate, you are on your way to financial independence.

The IDEAL investment

IDEAL stands for income, depreciation, equity growth, appreciation, and leverage. To succeed in making real estate work as an investment, you need to look beyond your principal residence. Though owning your own home provides appreciation and tax benefits, most people can’t produce income from their principal residence, owners of duplexes and people who rent out spare rooms aside.

1.) Income

When you purchase a rental property, you generate income, provided that you collect enough rent to exceed expenses. With a cash purchase, this is easy. If you finance the purchase, you need to analyze the numbers carefully. Provided you finance the right rental property, you earn a much higher rate of return on the financed property than if you purchased it with cash.

2.) Depreciation

To increase your rental income profits, you need to bone up on the IRS depreciation rules. Because the property is a business investment, you get to deduct all depreciation off of your profits. This saves thousands of dollars in income taxes every year. Continue Reading…

Forget the Trade War, already: China is cutting Taxes

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By Jeff Weniger, WisdomTree Investments

Special to the Financial Independence Hub

The market’s obsession with trade wars may finally be exhausted and priced in. Move on to the next market mover: massive Chinese tax cuts, which should aid the WisdomTree ICBCCS S&P China 500 Index ETF (CHNA.B), our tracker exchange-traded fund for the country.

Sure, China exported US$457 billion (C$597 billion) of goods and services to the U.S. in the year through June, and some fraction of those exports is at risk from a deterioration in Sino-U.S. relations. But engage a drastic scenario: lop off US$200 billion or US$300 billion from that figure. Even if that happened, most of that sum wouldn’t even disappear; it would be sold elsewhere, maybe inside China, at concessionary prices. But even suspending logic and having it all vanish, is it really doomsday for China’s US$14.1 trillion economy (US$25.2 trillion at purchasing power parity)? We don’t want to minimize the importance of trade conflicts, but the airtime given this topic is hysterical.

When Obama was in office, many conservatives and free market acolytes convinced themselves he would destroy the U.S. economy, so they ignored massive fiscal and monetary stimulus — the data — and missed the equity bull market. Emotions ruled; logic lost.

Now it’s happening with Trump. Among some investors, emotions are defeating data. The recent Bank of America Merrill Lynch fund manager survey pointed to a trade war as the market’s biggest risk. Some investors so badly wish Trump to fail that, like conservatives during the Obama years, positive news is simply ignored. Forget Japan’s major trade deal with the EU, ink still wet. Forget Trump’s meeting with Jean-Claude Juncker, European Commission president, where they agreed to work toward zero tariffs. The end is near!

Astute investors need a sober, facts-based thesis.

A Thesis without Emotion

A more realistic take on matters is that China finds itself isolated, unable to pair with Moscow in a two-country geostrategic counterbalance to the West. This forces Beijing to backtrack on intellectual property theft, inordinately high tariff levels, state subsidies and dumping because of its weak bargaining hand.

The pain must be offset, so Beijing gives the market that for which it aches: trillions of dollars in tax cuts at the business, product and personal income tax levels. Yes, Trump’s ability to stir the pot is important, but mathematics matters.

Chinese equities are the play here.

Bold actions

We calculate that many Chinese will see their personal income tax liability fall by half or more, effective January 1, 2019. Add to this our estimate of nearly US$500 billion in value-added tax cuts over the next decade, with still-in-the-works business tax relief on top, which would be another US$132 billion to $138 billion if activity grows at a pace of 6% to 7%. For perspective, Beijing’s Lehman-era US$586 billion spending package, hypothesized by some to be the reason the Global Financial Crisis ended, is smaller than 2018’s total announced tax cuts, if we calculate them over several years. This is this year’s big story.

Income Tax Scenarios: Implications for everyday Chinese

The proposed personal income tax code changes are staggering (figure 1). Exemptions and the minimum bounds for the 10%, 20% and 25% brackets are set to gap higher, while tuition, medical and mortgage deductions add to the savings.

Figure 1: China Personal Income Tax Code 

If these become law in October and are implemented in January, someone making CNY15,000 per month (C$2,906), a wage that is common in a city like Shanghai, where 2017 median monthly income is $2,048, would see their monthly taxes cut by CNY1,080 (C$209).1The person making half that amount, or CNY7,500 per month, which is short of the metropolitan median, would save about C$500 per year on an income of C$17,437. This is serious.

Chinese Equity Valuations

With many Chinese equity markets hammered this year, the S&P China 500 Index’s forward P/E multiple has fallen to 11.7, a sharp discount to the S&P/TSX Composite Index of Canadian equities (P/E of 15.8).2  Continue Reading…

Are you prepared for the new Income Tax rules for Private Corporations?

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By John Fisher

Special to the Financial Independence Hub

As many of you are aware, the Canadian government announced new rules in February concerning the taxation of passive income in Canadian controlled private corporations (CCPCs).

The Liberals’ original draft legislation proposed to target tax strategies that have been used by small businesses and professionals since the early 1970s, so naturally the initial announcement in July 2017 drew widespread condemnation.

The government’s concern with the accumulation of passive income-generating investments in private companies stems from the fact that CCPCs pay a blended federal and provincial small business tax rate of 13.5% (in Ontario) on active business income up to the small business deduction (SBD) limit of $500,000 in 2018. This compares favorably to the tax rates on income earned by individuals. On a combined federal and provincial basis, the differential between the highest marginal tax rate on personal income and the small business tax rate ranges between about 36% and 41%, depending on the province in which a CCPC resides.

As a result of this tax rate differential, owners of a CCPC are almost always better off retaining corporate earnings and investing within their corporation. While a similar amount of combined corporate and personal tax is ultimately paid by business owners when monies are withdrawn through dividends, taxes can be deferred until such time as the money is required personally. This effectively allows business owners to temporarily obtain the benefit of investing a larger amount of money than would otherwise be available if they earned the money personally or immediately withdrew profits from their corporation.

One side note worth highlighting here: it is a common misconception that passive investment income earned within a corporation can be taxed at the lower small business tax rate. This is incorrect, as passive income is generally taxed at about the same rate (over 50%), whether earned inside or outside a corporation; so there is no real benefit, per se, from earning investment income in a corporation. Rather, the advantage is that the corporate entrepreneur is able to temporarily invest the amount of taxes deferred by delaying the withdrawal of funds from his/her company.

So what are the new rules governing passive income?

The government has announced its intention to introduce legislation that will reduce the SBD limit by $5 for every $1 of investment income above a $50,000 threshold, beginning in 2019. Once passive investment income exceeds $150,000, the SBD limit will be reduced to zero and the CCPC will pay tax at the general corporate tax rate of 26.5% as opposed to the 13.5% SBD Rate (for Ontario CCPCs).

The $50,000 threshold applies to passive income earned on both legacy and new investments which is important to note given the government’s original promise to “grandfather” any passive income earned from investments previously accumulated

How will the rules affect you as an owner of a CCPC?

Many entrepreneurs are asking if the new rules will result in them paying additional taxes if their corporations generate passive income in excess of $50,000. In most circumstances, the answer is that they will pay more corporate taxes, thereby reducing the size of their tax deferral advantage (from 40% down to 27% on their 2019 corporate income earned in Ontario).

The loss of the entire SBD limit would cost an Ontario CCPC about $65,000 in additional annual corporate taxes ($500,000 x 13% increase in the corporate tax rate). However, once income is paid out by way of dividends from the CCPC, the analysis we have reviewed suggests that the combined personal and corporate tax burden will increase by only about 1% as compared to the current tax regime.

What can you do in light of the proposed changes? Continue Reading…

End the year with your taxes in order

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By Lisa Gittens, H&R Block

Special to the Financial Independence Hub

At this time of year, you’re likely occupied with decorating for the holidays, cooking an abundance of food for family, and selecting gifts for your Secret Santa exchange. Amidst the placing of ornaments, stringing of lights and baking of cookies, taxes are probably the last thing on your mind: they’re something you’ll think about next year, when you’re reminded it’s officially tax season.

But, believe it or not, the end of a calendar year is the perfect time to review the current state of your filing and get your taxes in order before flipping the page to 2018. To help you do just that, H&R Block offers these tips:

Agendas make great friends

Treat yourself to the gift that keeps on giving: an agenda. With this new friend in tow, you can take advantage of sporadic free time and update it with all relevant tax-related dates so they don’t sneak up on you in 2018. Examples of entries you’d want to include are: February 26, 2018, which marks the day the Canadian Revenue Agency officially opens.

(As a side note, this is actually the latest opening in Canadian history and means Canadians will have a shorter window to file taxes.) April 30, 2018 is another date to keep in mind: it’s the deadline for filing 2017 personal tax returns. (If you’re self-employed, the deadline is June 15, 2018.)

Organization is in style

Hopefully you’ve been saving bills, tuition receipts, transit passes, charitable contribution receipts, health expenses, and other key tax documents this year. When it comes to your tax return, it literally pays (in the form of a tax return!) to retain and organize these documents. Like agendas, accordion-style folders with tabs to separate by category are great gifts to yourself. Just ensure you keep it in reach — and out of harm’s way — so you’ll be more motivated to use it throughout the year. Continue Reading…

How the CRA and IRS cooperate in taxing dual citizens

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By Peter Muto

Special to the Financial Independence Hub

Canada and the United States have very different tax regimes, and if you live and work in Canada but happen to be an American citizen, you better pay attention. It is estimated that up to two million Americans currently reside in Canada either as full-time or part-time residents. Full-timers who hold jobs in this country, effectively U.S. citizens and green card holders, sometimes start thinking of themselves as being Canadian. But as far as the IRS is concerned, that is a big mistake.

Unbeknownst to many, the IRS in the U.S. and the Canada Revenue Agency (CRA) in Canada can assist each other in collecting taxes from their respective citizens, and this also goes for those with dual citizenship. The fact is tax debts can be enforceable in a foreign jurisdiction. Canada currently has collection-assistance provisions in treaties with such countries as Germany, the Netherlands, Norway, New Zealand, the United Kingdom and Spain. And the United States.

A recent case concerning an American who was ordered to pay a big penalty in U.S. district court demonstrates this all too well.

How one Canadian resident fell afoul of the IRS

The man, Donald Dewees, teaches at the University of Toronto. He lives and works in Canada, and dutifully pays his Canadian income tax. But, as mentioned at the outset, Canada and the U.S. have very different tax regimes. The biggest difference is that in this country the federal government taxes people based on residency, but the U.S. imposes tax obligations on all its citizens regardless where they live, even if they have no U.S. income.

According to the rules, Dewees is supposed to file with the IRS a document called an FBAR: the Report of Foreign Bank and Financial Accounts, which is known as Form FinCEN 114. He has to do that annually. What is this for? One situation it applies in is when an American citizen or green card holder has financial interest in, or signature authority over, one or more foreign accounts as long as the aggregate value is more than US$10,000 at any time during the reporting period. So, even though the person may not hold an American bank account and may not even earn American source income, they still have to file this report with the IRS every year.

Voluntary Disclosure Programs

In this case, back in 2009 Dewees entered what is known as the Offshore Voluntary Disclosure Program (OVDP). He did that so he would be compliant with his U.S. tax obligations. So far, so good. This program is similar to Canada’s Voluntary Disclosure Program, which allows a taxpayer to pay fixed penalties. In this way you know right away how much you owe. Also, when you are in the U.S. OVDP, criminal charges will never be laid against you.

However, here is where DeWees veered off course. After entering the OVDP program, he wanted to know how much he owed in penalties and the amount was about US$185,000. So he withdrew from the OVDP program.

After that the IRS got involved. The IRS assessed a penalty for failing to file form 5471, which is required when you own a controlling interest in a foreign company; in this case a non-U.S. company. The minimum penalty is US$10,000 and that is for every year of non-compliance. For Dewees, that meant 12 years and 12 X $10,000 is US$120,000. That is the total for which he was assessed.

Continue Reading…

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