Find out how the 2016 tax changes impact you in minutes

One of my posts last year focused on the tax changes the federal government introduced for 2016. The changes impact almost everyone especially high earners with children.
But what do all these changes mean for your bottom line?
You can find out in a matter of minutes. The Office of Parliamentary Budget Officer has introduced a tool that lets taxpayers know not just their net tax difference compared to 2015 but also the exact measures that affect your overall taxes.
Take a minute to answers a few questions and find out whether you are better or worse off with 2016 tax changes:

Budget 2016: Tax Tool Calculator

 

Deductibility of business Expenses and

Generally any expenses incurred in order to generate business income can be deducted for tax purposes unless it is specifically prohibited in the income tax act. However there are some exceptions. For example major expenditures on and repair of property for the purpose of prolonging its useful life or increasing its value above its initial state are not deductible and should be added to the cost of the property in which case they will be deductible as CCA. In general, purchases whose useful life is over a year and cost more than $ 500 are considered assets and should be amortized according to their CCA class and rate.

 

So what happens if a business’ expenses exceed its revenues?

Business losses can be deducted against any other type of income and may be carried back 3 years or forward 10 years (if the loss was incurred after Dec 31, 2005). It is recommended that you use all of your non-refundable credits first before claiming your business losses in any given tax year. Also you can carry back only a portion of your current losses. By doing so you can carry back a business loss against multiple years of income that was taxed at a higher marginal rate since higher rates apply to higher incomes.

RRSP vs. TFSA

As a rule of thumb taxpayers earning approximately $35,000 or less should favour the TFSA, while higher-income earners are likely to benefit more from contributing to an RRSP.

Other factors to consider are years remaining to retirement, income level before retirement, expected reliance on the different programs in retirement, level of expected income in retirement, and of course life expectancy.

But keep in mind that this rule of thumb only applies to the first $ 5,500 contribution.  For taxpayers who can save more than $ 5,500 and who are in the middle-income bracket the differences between the two accounts are modest but benefit slightly by maxing out their TFSA and putting the rest in their RRSP. For high income earners, the reverse is true, max out your RRSPs contributions and use a TFSA for additional savings.

The table below provides a comparison between the two accounts:

TFSA vs. RRSP
TFSA RRSP
Age minimum No minimum though you must have earned income 18 years old or older
Contriution limit The lesser of 18 per cent of your earned income or $25,370 for the 2016 tax year A maximum of $5,500 for the 2016 tax year (see above for other tax years)
Carry forward Until plan is wound up Indefinitely
Tax deductibility of contributions Yes No
Consequence of withdrawal Taxed at marginal rate No tax
Tax implications in retirement withdrawals are considered income regardless of how the income was earned (in the form of interest, dividends, or capital gains) and taxed at your marginal tax rate at the time of withdrawal. This may result in clawback from other programs such as Old Age Security Withdrawals are not considered income and do not result in clawbacks from other programs.
Spousal contributions If you contribute to your spouses plan, your contribution room will be affected. If you contribute to your spouses plan, their contribution room will be affected.
Year-End End of Feb or March 1 Dec 31
Eligible investment Stocks, Bonds, Mutual Funds, GICs, ETFs Same as RRSP

What you need to know about TFSA

Since its introduction in 2009, Tax Free Savings Account has been getting a lot of attention and for good reason too.  When earned in a TFSA investment income (including capital gains and dividends) are not taxed even when withdrawn. The downside is that unlike Registered Retirement Savings Plans (RRSP), contributions made to a TFSA are not deductible for income tax purposes.
Moreover, the name is slightly misleading as it suggests that contributions must be cash in a savings account. Just like RRSPs, TFSA may contain other investments such as mutual funds, stocks (with some restrictions), bonds, or even Guaranteed Investment Certificates (GICs).

The table below captures the many changes to the TFSA contribution room since 2009:

TFSA Contribution limits
Years TFSA Annual Cumulative
2009-2012 $5,000 $20,000
2013 5,500 25,500
2014 5,500 31,000
2015 10,000 41,000
2016 5,500 46,500
2017 5,500 52,000

 

When is TFSA more advantageous than RRSP?

  • You expect to be a high earner in retirement
  • You expect to earn a considerable pension. In such a case the income from your pensions and your RRSP or RRIF withdrawals in retirement can place you in a higher tax bracket than when you were working.
  • You earn less than approximately $ 35,000 a year. If you are a low-earner, you benefit from forgoing RRSPs altogether. In retirement, withdrawals from RRSPs and RRIFs can result in Old Age Security and Guaranteed Income Supplement clawbacks.

 

 

What You Need To Know About Vehicle Expenses

The CRA has stipulated numerous and convoluted regulations on vehicle expenses. Whether you’re an employer or an employee an in-depth understanding of vehicle expenses is crucial when filling out your tax returns.

In this article we try to simplify this by using a number of examples to better inform you when it’s a good idea to make the company car available to your employees and when it’s not.

If you’re an employee, you should know which vehicle expenses are deductible when you use your own personal vehicle to meet your employment obligations.

Taxable Benefits

An employee qualifies for a taxable benefit when the employer or someone related to the employer makes a company car available to them or someone related to them for personal use.

Note that the CRA considers the use of a company car to travel from home to work and vice versa as personal use and taxable benefits are treated as income.

There are two primary taxable benefits you need to be aware of;

  1. Standby Charge Benefit
  2. Operating Cost Benefit

Both these taxable benefits will have to be added to the employee’s income in order to determine the total amount of income that will be subject to source deductions.

Standby Charge Benefit

Simply put a standby charge is a recognition that the employer has made an automobile (primarily meant for business) available to the employee for personal use.

There are two special formulas that are used to determine how much standby charge benefit should be added to the employee’s income.

Only one of the formulas is used to determine the standby charge benefit.

To determine which formula to use, you have to consider two factors:

  • Is the car fully owned and paid for by the employer?
  • Is the car leased by the employer?

Calculating the Standby Charge Benefit When The Car Is Fully Paid For and Owned By The Employer

Here’s the formula:

2% x total cost of the car (including fees, HST/GST) x No. of months the automobile has been made available to the employee

Calculating the Standby Charge Benefit When The Car Is Leased By The Employer

Here’s the formula:

2/3 x monthly lease costs (excluding insurance) x No. of months the automobile has been made available to the employee by the employer

Getting confused?

Fine, let’s use some real numbers.

Jane owns ABC, a company that sells maple syrup. Jane has decided to make one of the company cars available to Peter to help ferry him between home and work throughout the year. There are two company cars that she could make available to him; a Nissan sedan ($34,000) which has been bought and fully paid for by the company or a Toyota sedan which has been leased to the company for $516 a month. Jane asks Peter to decide which of the two automobiles he prefers.

Standby Charge Benefit for the Nissan:

2% x 34,000 x 12 = $8,160

Standby Charge Benefit for the Toyota:

2/3 x 516 x 12 = $4,128

Assuming that Peter loves himself more than the Canadian Government, he’ll pick the Toyota since it has the lower standby charge benefit of the two. Remember that a standby charge will increase Peter’s total taxable income, so it’s prudent to keep it as low as possible.

Speaking of low as possible.

It’s also possible to reduce the standby charge even further.

Here’s how.

After 1 whole year of use the trip log shows that Peter has logged a total of 40,000km. 30,000km travelled was business related and the other 10,000km was for Peter’s personal use.

According to the CRA if:

  • More than 50% of the logged distance is business related or
  • Personal mileage does not exceed 20,004km or an average of 1,667km a month

These can be factored into the formula to reduce the standby charge even further. So in Peter’s case since he meets both requirements let’s go ahead and see how much standby charge benefit he’ll receive from Jane.

The formula changes a little bit:

2% x total vehicle cost x No. of months automobile has been made available x (total kms used for personal use/20,004)

So,

2% x 34,000 x 12 x 10,000/20,004 = 4,079 (for the Nissan Sedan)

Or

2/3 x 516 x 12 x 10,000/20,004 = 2,063 (for the Toyota Sedan)

You notice that this reduced standby charge is certainly less than what we had before.

Operating Cost Benefit

The operating cost benefit is the other taxable benefit you need to think about when considering personal vs business use of the vehicle.

The CRA considers all automobile associated expenses as operating expenses. We’ve listed some of them below:

  • Gasoline
  • Maintenance and Repairs
  • Tires
  • License and Insurance
  • Oil

Note that parking charges are not seen as operating costs.

Like with the standby charges, there are two ways to calculate operating costs:

Assuming that the automobile was used more than 50% of the kms logged for personal use, the formula to use is:

No. of km travelled x $0.27 per km (this rate is determined by CRA and changes every year)

The other formula is much simpler and is only used when 50% or more of the kms logged were for business purposes:

50% x Standby Charge Benefit = Operating Cost Benefit

Peter certainly qualifies for the second formula since he only logged 10,000km for personal use which is less than 50% of the total kms travelled (40,000km).

So Peter’s operating cost benefit will be 50% of his standby charge benefit of $2,063.

50% x $2,063 = $1,031.50

 

Remember the total taxable benefit is calculated like this:

Standby Charge Benefit + Operating Costs Benefit = Total Taxable Benefit

Therefore;

$2,063 + $1,031.50 = $3094.5 = Total Taxable Benefit

Deductible Vehicle Expenses

The example above does not address a situation where the employee owns a vehicle and uses it for business purposes.

So, if you’re using your own car to run business related errands do you qualify for deductible vehicle expenses?

Well, you do. But you’ll need to meet some contingencies first:

  • You had to work away from your employer’s business premises.
  • You met your own vehicle expenses and didn’t get reimbursed by the employer. You can read more about this here.
  • You have a copy of Declaration of Conditions of Employment.
  • You never received a non-taxable allowance for motor vehicles expenses.

Some of the deductible vehicle expenses include:

  • Insurance
  • Fuel
  • License and registration fees
  • Capital Cost Allowance (also known as depreciation)

Disclaimer

All information provided on this page is intended for general purposes and we will not be held liable for any loss that may arise from the use of the information thus provided. If you’d like we can schedule a free consultation with us here.

Teachers, keep your receipts

Starting from Jan 1, 2016 teachers and early childhood educators will receive a refundable tax credit that applies to the purchase of up to $1,000 of school supplies each year, for a maximum credit of $150 per year.
In order for the cost of supplies to qualify, schools will be required to certify that the supplies were purchased for the purpose of teaching or enhancing learning in a classroom. Teachers making claims are required to keep their receipts for verification.