I was looking through my spam file today and came across an obvious phishing scam from customers@cra-arc.gc.ca with the subject Reminder: Please Submit Your Refund Payment.

The content of the message was as follows:

This Is A Scam

The CRA does not initiate communications with taxpayers by e-mail and does not ask for credit or debit card information.

If you have received one of these or similar e-mails, discard and ignore it. If you have questions or concerns about an e-mail or communication you have received, please contact the CRA directly via telephone.

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Does your employer provide you a car? Do they reimburse you for using your own car or provide an allowance or per diem for using your own car? If so, you may have a taxable automobile benefit to report on your income tax return.

The Income Tax Act provides that all remuneration of any kind is taxable employment income. Any you may have a taxable automobile benefit if your employer:

• Provides you with a company car that can be used for both personal and business use.
• Reimburses you all of the operating costs of your own personal vehicle or a company supplied vehicle.
• Provides an allowance to compensate you for use of the your or their vehicle.

If you are an employee or salesperson of an automobile dealership, you may also incur a taxable automobile benefit.

Your individual circumstances will determine the amount and types of taxable benefits related to automobiles.  By understanding these circumstances you can work with your employer to determine to structure your benefit and ensure you have the best after-tax result.

There are three taxable automobile benefits that may arise:

1. Standby Charge: The standby charge is a taxable benefit that occurs when your employer provides you with a vehicle and makes it available for your personal use.
2. Operating Cost Benefit: The operating cost benefit arises when your employer provides you with a vehicle and pays all of the operating costs of that vehicle (i.e. fuel and maintenance).
3. Automobile Allowance Benefit:  The automobile allowance results in a taxable benefit only if the amount of the allowance is unreasonable.  An allowance is considered reasonable when it is based on the number of kilometres driven for employment and a reasonable rate per kilometre.  The maximum rate per kilometre is set by the Finance department annually in December.

The amount of the taxable benefit to you can be reduced in certain circumstances. For example, if your use of your employer supplied vehicle was more than 50%, the standby charge may be reduced.

See Also

• If Your Employer Provides an Automobile
• If You Use Your Own Automobile
• Automobile Rates & Limits Tables

Related Articles

• Automobile Operating Expenses
• Taxable Employment Benefits
• Deductions From Employment Income

I have been keeping an informal record of topics of discussion I’ve had with financial advisors, friends and colleagues over the last couple of years. The following is a list of rules of thumb or misconceptions about investments, tax, and product allocation.

Some items in this list may seem straightforward while other, may be an enlightenment. It highlights the lack of real training and understanding of financial products and concepts by financial advisors.

Yellow Pages Income Fund Does Not Pay Dividends

Yellow Pages distributes income earned by the business inside a trust. While the distributions have contained some eligible dividend income, most of the distributions are straight income (which is taxed just like interest). A look at 2008 distributions shows that 88% of the distributions were investment income, 9% was eligible dividend income and 8% was a return of capital.

Income Trusts Distribute Income (Not Dividends)

Like Yellow Pages, the distributions of any income trust, including REITS, can be a mix of straight business income (which is taxed like interest), a return of capital and may include some eligible and ineligible dividends. Always check the distribution history of any income trust.

Make Decision on After Tax Income

If you are looking at two different investment alternatives, not all are treated equally for tax purposes. For example, for an Ontario resident in the top marginal bracket, a 4% interest receipt, 2.8% eligible dividend and a 2.79% capital gain all have the same after-tax return of 2.14%.

Don’t Put An ADR In An RRSP or RRIF

An ADR is an American Depository Receipt and represents an ownership of the underlying shares of a foreign corporation. They are a derivative product that are offered on U.S. stock exchanges that allow you to buy shares of foreign corporations. The U.S. withholds the maximum foreign withholding tax regardless of the fact it is in an RRSP or RRIF. The withholding is not covered under treaty and is not recoverable.

If you want to buy foreign shares for your RRSP or RRIF, ask your broker to purchase the shares directly on the foreign exchange.

Learn How TFSA Contributions Work

The TFSA contribution room increased by another $5,000 this year. If you never contributed to a TFSA before and were over the age of 18 and were a resident of Canada, you will have $10,000 of room in 2010. I find that many financial advisors have no idea how TFSA contributions work.

A GMWB Is A Segregated Fund With Another Type of Guarantee

If you cash out your GMWB you will lose the reset values. Many financial advisors do not understand this product and promote the GMWB guarantee as a guaranteed rate of return: Which it is not. Take a read through GMWB Case Study And A Suitability Nightmare.

Capital Gains and Losses

The adjusted cost base (ACB) is based on total ownership of a security, not what is held in an individual account. The cost base of an individual stock is it’s average adjusted cost base. This means that if the same stock is held in two brokerage accounts, the ACB is the total amount paid in all accounts, plus all commissions, divided by the total number of shares.

Bonds Can Have Capital Gains & Losses

I was speaking with a financial advisor about how accrued interest worked for tax purposes: It seems he was confusing the concept of bond yield and the actual interest paid. In the course of our conversation, I mention that if the bond were sold or held to maturity that there could be a capital gain or loss depending on whether the bond was bought at a premium or discount. This was shocking news to him.

Strip Bonds Should Only Be In Registered Accounts

If you have ever held a strip bond in your regular open account and have had to calculate the interest income for tax purposes, you know it is not a simple calculation. To save you the headache, hold strips in your RRSP, RRIF or TFSA.

Spousal RRSPs Are Still A Good Idea

If you plan to retire before age 65, the spousal RRSP is an excellent way to split income (pension splitting is not generally available until after age 65). I think the benefit of the spousal RRSP has been lost in light of the new pension splitting rules.

Not Every Defined Benefit Pension Should Be Rolled Over

I have come across financial advisors who seem to think all pensions must be rolled over to a locked in type of account. If fact an assessment of all relevant facts needs to be done to determine if its right for each client.

Your Structured Settlement May Be Really Good

Many financial advisors fail to do a proper analysis of the facts and simply tell their clients to take the insurance payout rather than a structured settlement. I have done many analyses of personal injury structured settlements and have yet to find one where the payout is better. This is not to say, the settlement is always better, but that an analysis must be done in each case.

A Diversified Portfolio Includes Fixed Income

Periodically I have conversations around client portfolio’s and proper diversification. I have come across situations where the equity and fixed income portfolios are constructed independent of one another. Often I find that when the total portfolio is analyzed there tends to be overweighting in a sector or of a particular company. The lesson here is to be aware that holding the shares and bonds of the same company is compromises diversification.

The above is just a brief summary. If you have ideas or would like to ask a question, consider leaving a comment.

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The question of whether you are an employee or self-employed is a very important question to answer. As an employee, you have a limited number of tax deductions available to you.

On the other hand, self-employed people are businesses and have access to a greater range of tax deductions and are better able to engage in tax planning.

Becoming self-employed or an independent contractor is not a simple matter of changing your relationship with your employer. And whether you are an employee or self-employed may not be clear particularly if you receive the bulk of your income from a single source.

If you are considering entering to an arrangement where you are uncertain if you are an employee or self-employed, you can request the CRA to provide a ruling to have your status determined. Use the CRA form CPT1 to request the CRA to look at your situation. It is also strongly suggested that you obtain independent professional advice.

Factors to Consider

There are four interrelated factors that must be considered is determining your status.

1. Control: If you are in control over when and how the work is done and work independently to get the job done, then you may be considered self-employed. Indicators that you may be self-employed are:

• You work independently.

• No one is overseeing your work.

• You choose when and for whom you work. You could work for multiple simultaneously.

• You choose to accept or reject work from the client.

2. Integration: Is the work you perform part of the organizations composition? Typically, self-employed persons are less integrated into businesses operations.

3. Risk: Self-employed individuals will have a grater degree of business and financial risk, a higher degree of legal liability, and are responsible for their own expenses.

4. Tools & Equipment: Self-employed individuals will normally be responsible for providing the tools of employment and will also be responsible for the maintenance and upkeep of the equipment as well as retaining title and ownership of the equipment.

Risks of Self-Employment

From a tax planning perspective it is always better to arrange your affairs so that you are self-employed. However, there are a number of risks that you should take into account before hand:

• You will not normally participate in company benefit programs,
• There is no employment insurance if you do not work,
• Your Canada Pension Plan premium is double,
• You will not normally have a severance package,
• You will have legal liability for your work and require appropriate insurance,
• You are not eligible for holiday pay, and
• You will not have any job security.

If you decide to become self-employed consider these additional costs as well as any added costs for tools and supplied that you would normally be responsible for.

CRA Resources

• CRA’s RC4110 – Employee or Self Employed?

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• EI For The Self-Employed
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If you receive a T4 slip and most of your income is from employment, there are few deductions available beyond RRSP’s.

Businesses are allowed more deductions than employees. This is because businesses incur their expenses to earn income. Few employees are required to incur expenses directly in order to earn employment income and the income tax act places limits on the types of deduction available. However, under certain conditions, some expenses may be deducted from employment income.

Salesperson Expenses

Salespeople who are paid on commission may deduct certain expenses paid to earn commission income, including travel, automobile, and other types of expenses. The expenses claimed must be reasonable but there are no deductions available for capital purchases (equipment or property) with the exception of aircraft and automobiles.

To deduct salesperson expenses you must meet all of the following criteria:

1. You are required by your employer to pay your own expenses.
2. You are normally required to work away from your employer’s place of business.
3. You are paid fully or partially by commission.
4. You did not receive an expense allowance that was included in your income.
5. You retain a copy of Form T2200, Declaration of Conditions of Employment, which has been completed and signed by your employer.

Other Limits on Salesperson Expenses

Meals may only be deducted if you were away from your home community or metropolitan area for a period of 12 hours or more.

The Canadian income tax act only allows you claim deductions against commission income and as such a non-capital loss is not allowed and any loss incurred cannot be used to reduce other income. However, there is an alternative if commission expenses exceed commission income: Claim only for automobile expenses and travel under separate provisions of the Canadian income tax act which permit non-capital losses to be deducted against other forms of income.

Expenses Permitted as Salesperson Expenses

• Advertising & promotion
• Meals & entertainment (50% limit)
• Lodging
• Accounting & legal fees. You may claim a reasonable deduction for accounting fees paid to help you complete your tax return. You may also deduct legal fees incurred to collect or establish a right to an amount that would have been included as part of your employment income. You must reduce the amount by any amount awarded or any reimbursement received for your legal expenses.
• Motor vehicle costs
• CCA an interest expenses are not limited by commission income and can be deducted against other income.
• Parking
• Workspace in home
• Supplies used directly in your work. This includes office supplies, cellular phone airtime, and long distance (your normal monthly charge for cellular or telephone cannot be deducted).
• Licences
• Bonding & liability insurance premiums
• Medical underwriting fees.
• Salary for an assistant. You are required to withhold taxes and other deductions from the salary paid.
• Office rent
• Training costs
• Courier and transportation costs
• Leased computers & office equipment. Equipment purchased cannot be deducted nor can capital cost allowance (CCA) be claimed.

Expenses Excluded as Salesperson Expenses

• Special clothing required to be worn while working.
• Certain tools for employed trades people.
• Except for automobiles, aircraft, or musical instruments, CCA cannot be deducted.

Travel & Meal Expenses

If you are required by your employment contract to travel for business and did not receive a reimbursement from your employer for travel, you can make a claim for travel and meal expenses under this provision of the Canadian income tax act.

If you do receive an allowance that does not cover your travel expenses, you have the option of including the allowance in your income for the year and making a subsequent claim for actual expenses. It is advisable that you contact a financial professional to help you determine the best alternative in your case.

Automobile and Aircraft Expenses

If you are required to work away from your employers place of business, were required to pay your own motor vehicle expenses related to your work, and did not receive a reimbursement or allowance, you may claim these expenses under a separate provision of the Canadian income tax act.

Allowable expenses under this provision of the Canadian income tax act include operating expenses, capital cost allowance (an annual percentage of the vehicle cost with limits), and interest paid on funds borrowed to acquire the automobile.

As with travel and meal expenses, if you do receive an allowance that does not cover your automobile or aircraft expenses, you have the option of including the allowance in your income for the year and making a subsequent claim for actual expenses. It is advisable that you contact a financial professional to help you determine the best alternative in your case.

Home Office Expenses

If you are required by your employer to work from home and cover all of the costs associated with maintaining an office at home, then you may be able to deduct your home office expenses. To claim work at home expenses, the space must be either be:

• the principal place of employment, or
• be used exclusively for earning employment income and be used on a regular basis to meet customers or other employees.

The total amount of expenses that you can deduct is limited to your employment income. You should also complete a T2200, Declaration of Conditions of Employment and have it signed by your employer.

The expenses allowed under this provision include the proportional cost of utilities, household sundries (i.e. light bulbs & cleaning supplies), rent if the property is rented, mortgage interest, property insurance and property tax. However, capital cost allowance may not be deducted.

You will need to complete a T777, Statement of Employment Expenses to calculate your employment proportion of your home office expenses.

Other Employment Expenses

The Canadian income tax act allows a number of other expenses to be deducted from employment income:

• Professional membership dues such as law society, doctors associations, engineers, or accounting associations.
• Office rent or the salary (including EI and CPP premiums) of a substitute if you were required to pay these costs yourself by your employer.
• Supplies used directly in your employment but excluding uniforms and books.
• Union or association dues.
• Legal expenses paid to collect salary or wages. The fees may be paid to establish a right to salary and wages in addition to collecting the amounts owed.
• Clergy residence may deduct a portion of their residence (rent and utilities).
• Contributions to registered pension plans and teachers pension plans.
• Salary or disability reimbursements.
• Amounts forfeited under a salary deferral arrangement.
• Musical instruments and artists supplies are deductible if you are employed as either a musician or artist respectively and required to supply your own instruments and materials.
  • For musicians, maintenance may be claimed as well as capital cost allowance on the instruments themselves.
  • For artists, the amount of the deduction is limited to the lower of $1,000 20% of employment from being an artist.
• Apprentice mechanics may claim a deduction for eligible tools and is limited to the greater of $1,000 or 5% of employment income from being an apprentice.
• Goods and Serves Tax (GST). GST and provincial sales tax (PST) can be included in the expenses deducted from employment income. In addition, you may claim a rebate of the GST paid as a rebate unless you were employed by a financial institution.

Uniforms & Footwear

These costs are not deductible from employment income. If your employer supplied or reimbursed you for the costs of a special uniform, the cost will not be a taxable benefit if the clothing and footwear is designed to protect you from workplace hazards.

If you were given an allowance to acquire special uniforms and footwear the allowance is not taxable if:

• You are required to provide receipts to your employer, or
• If no receipts are required then all of the following conditions are required:
  • The law requires protective clothing at the worksite,
  • You purchased the clothing, and
  • The amount was reasonable.

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Well not exactly. Generally speaking if you are a resident in Canada for income tax purposes do not have to file a return with the Canada Revenue Agency (CRA) unless you owe taxes or the CRA asks you to file a return.

Note that if you are new to Canada you are required to pay tax on your worldwide income but only on income from point you became a Canadian resident for tax purposes.

There are benefits to filing a return even if you are not required to do so. You should file a tax return if:

• You want to claim a refund
• You would like to claim the GST credit
• You have unused tuition and education credits to carry forward
• If you had earned income for the purposes of your RRSP
• If you have non-capital losses to carry backOr if you are a senior and want to receive GIS or OAS payments

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The Minister of Finance released the annual federal budget on March 4^th, 2010. While the budget did not contain any major programs as it had in the past, there were some important changes that will affect individuals across Canada.

Federal Tax Brackets

The federal tax brackets have changed for 2010 as has the basic personal amount. The basic personal amount increased to $10,382 and there has been no talk of indexing the tax brackets.

• 15% on the first $40,970 of taxable income
• 22% on the next $40,970 of taxable income
• 26% on the next $45,081 of taxable income
• 29% of taxable income over $127,021.

Registered Disability Savings Plans (RDSP’s)

The government is proposing changes that would allow the rollover of a deceased individuals RRSP or RRIF into an RDSP for an infirm financially dependent child or grandchild of the deceased. The rollover rules are similar to the existing rules with RRSP’s and RRIF’s and the RDSP beneficiary will be required to make an election.

The rolled over amount cannot exceed the existing RDSP limit of $200,000.

Carrying Forward RDSP Grants

RDSP contributions attract Canada Disability Savings Grants and Canada Disability Savings Bonds. The amount that may be granted is limited by family income. Recognizing that families with disabled persons may not be able to contribute regularly to RDSP’s, the government will allow the carry forward of these amounts starting in 2011.

Child Tax Benefits (CTB) & Universal Child Care Benefit (UCCB)

Proposed changes will allow both eligible parents in a shared custody situation to share these benefits equally. These will take effect in July 2011.

Single parents will have the option of splitting their UCCB with their dependent child. The UCCB is a taxable receipt and the allocation to the minor child will allow single parents a higher after tax income.

Medial Expense Tax Credit

The government will limit the ability to claim cosmetic procedures as medical expenses. Unless the claim is required for medical or reconstructive purposes, these may no longer be claimed.

Scholarship Exemption and Education Tax Credit

In 2006, the government introduced a full tax exemption for post-secondary scholarships, fellowships and bursaries.

The current budget proposes that post-secondary programs that consist primarily of research will be eligible for the Education Tax Credit and the scholarship exemption, only if it leads to a specified diploma or degree. Under these rules, however, post-doctoral fellowships will be taxable.

If a scholarship, fellowship or bursary provided is in connection with a part-time program, the exemption will be limited to the amount of tuition paid for the program (plus the costs of program-related materials).

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Real Return Bonds are Government of Canada bonds that pay interest based on changes in the Consumer Price Index (CPI). In other words, the interest you receive on these bonds changes with the rate of inflation. However, the income tax is not straightforward!

The Mechanics of Real Return Bonds

With a regular bond, the redemption value, or value you receive at maturity is known. For example, a $10,000 5% bond will pay you annual payments of 5% and you will get the principal of $10,000 back at maturity.

Real return bonds are issued at par and the redemption value changes with annual changes in CPI. For example, a real return bond is issued at $1,000 with a 5% coupon paid semi-annually. At the end of the first 6 months, CPI has increased 1.5%. Therefore, the base value of the bond is now $1,015 and the semi-annual interest payment will be 2.5% of $1,015.

The annual interest (coupon) payments received change with CPI and the value of the bond at redemption increases with the general rate of inflation.

Tax Issues With Real Return Bonds

The actual cash interest you receive semi-annually is taxable in the year received (or receivable depending on your method of accounting). The annual change in the base value of the bond is considered interest income and taxed annually.

A real return bond issued and purchased on January 1st at $1,000 with a 5% coupon rate paid semi-annually. The bond paid interest of $25.38 after the first 6 months and $25.50 after the second 6 months. The ending value of the bond with the CPI adjustment is $1,020.

The tax payer reports interest income of $70.88 which is comprised of:

• The 2 cash payments of interest of $50.88 ($25.38 + $25.50), and
• The change in the CPI adjustment of the bond of $20.00.

Where To Hold Real Return Bonds

If you want to avoid the headache of reporting the annual interest on real return bonds, consider holding them inside your RRSP, RRIF, or your TFSA. Interest income is not as tax efficient as other forms of investment income and is best held in tax-deferred accounts.

Questions?

Do you have a question about real return bonds? Feel free to ask a question or leave a comment.

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Now that the RRSP deadline has passed, many Canadians will start preparing their individual income tax returns.

The filing deadline for 2010 is April 30th for individuals and June 15, 2010 for those with self-employment income.

Tax Deductions & Credits Other Than RRSP’s

For most individuals, RRSP’s are their biggest single tax deduction. And while there are strict limits to what an individual with employment income can deduct, you should look carefully for other opportunities to reduce you tax bill.

Other Tax Deductions

Here are some tax deductions that you might want to consider for 2010:

1. Union & Professional Dues – If you are a member of a professional organization such as an accounting or engineering body or if you are a member of a trade union, you can deduct your membership dues on line 212.

2. Childcare Expenses – If you pay to have your child in daycare, after school care or incur other childcare expenses so you can work or go to school, then these may be deducted. There are certain limits to the amount claimed and if you are married, the lower income spouse must claim the expenses .

3. Disability Support Deduction – If you have an impairment in physical or mental functions, you may be able to deduct the expenses on line 215 that you incurred in the year in order to work, go to school, or do research for which you received a grant.

4. Moving Expenses – If you moved more than 40 km from your current location to be closer to your employer, you may be able to deduct your moving expenses on line 219 of your tax return.

5. Alimony Support – If you have to pay your spouse alimony, you generally can deduct this amount from your income. On the other hand, you cannot deduct child support.

If you are making both payments, you might want to check your separation agreement to ensure the two amounts are clearly specified.

6. Interest & Carrying Charges – Did you borrow to invest? If so, you may be able to deduct the interest you pay on your investment loan or margin loan. Make sure that the loan was used to purchase stocks that pay (or may pay) dividends, bonds and other debt, or other types of securities (mutual funds & +ETF’s).

7. Employment Expenses – If your employer required to you pay some of your own expenses, you may be able to deduct these expenses. The rules can be a little complicated so take a look at my article on employment expenses and employee automobile expenses.

Top Tax Credits For 2010

1. The Home Renovation Tax Credit – If you did some renovations in 2009, you may be able to deduct these on your tax return. Take a look at Eligible Tax Deductions For Home Improvements as well as the comments and What You need To Know About The Home Renovation Tax Credit.

2. Pension Income Credit – If you earned eligible pension income in 2009, you are entitled to an additional tax credit of $2,000 (worth $300 of tax!). Find out if you have eligible pension income and then claim this amount on line 314.

3. Tuition & Education Amounts – If you child is attending a post secondary institution and has no or little taxable income, ask them to transfer their unused tuition and education amounts to you.

4. Home Buyer’s Tax Credit – Did you purchase an eligible home in 2009? You may be able to claim the First Time Home Buyers tax credit.

5. Medical Expenses – If you paid for medical expenses for yourself, your spouse, or your children you may be entitled to a tax credit. Claim this credit on the lower income spouse’s return to maximize this credit.

6. Charitable Donations – You get a credit of 15% of the first $200 of your charitable donation and 29% on anything above $200. Combine your donations with your spouse’s and claim them on one return!

QuickTax Platinum Giveaway

I have a single copy of QuickTax Platinum that I will give away on Saturday March 6, 2010.

Rules:

1. You have to leave a comment to be entered in the draw.
2. Tell me if you use tax software and if it has ever found you a deduction or tax credit you didn’t know you could claim.
3. If you’ve never used tax software, then tell us why.

Comments left up to the end of the day March 5th will be entered and the draw will be done March 6th.

Maximize your refund with QuickTax. Get Your QuickTax Now.

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One of the problems publishing a tax website is keeping the rates and calculators up-to-date. Up to now, I have linked to other websites on the internet that offered tax calculators, tools, and rate cards. However, I am finally able to create and deliver my own set of tax calculators and rate cards (and keep them current … which is the real challenge!).

The first two additions to the Canadian Tax Resource Tax Rates and Tools section is a 2009 personal income tax calculator and the second is an RRSP savings calculator.

Personal Income Tax Calculator

The personal income tax calculator is a simple to use tool that will quickly calculate your tax payable, after tax income, average tax rate and your marginal tax rates on regular income, eligible dividends, ineligible dividends, and capital gains.

The personal income tax calculator can help you quickly estimate the amount of tax you will pay at a given income level and then determine which investments will deliver the best after tax return.

RRSP Savings Calculator

How much tax will I save by making an RRSP contribution? This simple to use tool will help you quickly and easily estimate how much you can save by making an RRSP contribution today!

Other Rate Cards

Check out the Rates and Tools tab at the top of the page and the drop down menue for other tools and rate cards.

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