What’s new for your 2009 tax returns
TaxBreaks March 2010 (10-01)
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Tax slips from employers, financial institutions and others are starting to accumulate. Do you have all the information that you need to file your tax return? As a result of the global financial challenges of 2008, a number of unique stimuli for 2009 were introduced that may impact your tax return and change how you gather and report your information. In addition to these changes, some topics are worth revisiting as Canadians had some different choices for 2009 than for prior years – all with different tax implications. Below is a snapshot of the most relevant changes and tips for the compilation and filing of your income tax return.
With the continued rebound of the financial markets, there are also considerations that could shape your 2010 tax position. The time for tax effective planning for 2010 is now. Are you ready?
The renovations are done – now what?
The deadline for incurring qualifying expenses for the federal home renovation tax credit (HRTC) has now passed. All eligible expenses, under an agreement entered into and incurred after January 27, 2009 but before February 1, 2010, can be claimed on your 2009 personal income tax return. The maximum credit available is $1,350 (15% of eligible expenses exceeding $1,000 but capped at $10,000) per household. This means that you can share the credit between eligible family members but the maximum credit cannot be exceeded. Qualifying properties, including your personal residence and your cottage, must have been owned by you at the time that the renovations were undertaken.
The HRTC is computed on Schedule 12 of your tax return. The required details should be available from your receipts and/or contracts with the parties that performed your eligible renovations and include:
- date of purchase or contract;
- name of supplier and GST/HST number if available;
- description of the renovation performed; and
- amount paid, including all related taxes.
Note that the receipts do not have to be filed with your tax return. However, they should be retained for possible review by the Canada Revenue Agency (CRA). As well, depending on the nature of your renovation, qualifying HRTC expenditures might also be eligible for other credits or incentives, such as the medical expense credit or an energy efficiency grant, so be sure to review your expenses with your professional advisor.
In Quebec, a provincial refundable tax credit for home improvement and renovation is also available. The maximum credit is $2,500 (20% of eligible expenses exceeding $7,500 but capped at $20,000). The Quebec credit may be claimed for expenses incurred during 2009 and paid no later than June 30, 2010. The main differences between the HRTC and the Quebec credit are that for the Quebec credit, the improvements or renovations must be performed by a qualified contractor and they must be in respect of the taxpayer’s principal place of residence. To claim the Quebec credit, form TP-1029.RR-V must be filed with your tax return. As with the federal credit, supporting documentation is not required to be filed, but should be retained for possible review by Revenue Quebec.
Tax-free savings accounts – making sense of it all
As part of the 2008 federal budget, the government provided individuals over the age of 18 with a new investment strategy – the tax-free savings account (TFSA). Designed to encourage personal savings, the TFSA allows for the tax-free accumulation of income from qualifying investments. While neither the annual contribution nor any interest paid on money borrowed to invest in a TFSA is tax deductible, the tax advantage to investing in a TFSA is clear: Any income earned inside a TFSA is not required to be reported in your personal income tax return, and amounts can be withdrawn from the TFSA at any time without attracting tax.
But is everything about TFSAs good? An individual who invested in a TFSA with a contribution “in kind” rather than with cash may be caught off guard. Such contribution is considered to be a disposition of the property (followed by an acquisition of the property inside the TFSA). Gains on this deemed disposition are required to be reported as capital gains; losses are denied.
The death of income trusts
The new distributions tax, scheduled to apply to all income trusts for taxation years ending in or after 2011, has resulted in the conversion of many income trusts into other legal structures that are not subject to the new tax. Generally, trust conversions have been structured so that investors are able to defer any tax consequences. However, there may still be reporting requirements and, in some instances, election forms may have to be filed with your income tax return.
Whether or not a deferral was available on the trust conversion, you must report the disposition on Schedule 3 of your tax return (Schedule G of your Quebec return). Where deferral is available, the deemed proceeds of disposition will be equal to the adjusted cost base. Note that the adjusted cost base may not necessarily equal the amount that you paid for the income trust units, as any returns of capital that you received from the trust would reduce that amount.
Stock options and other executive compensation
Most individuals didn’t have to worry about the taxation of stock options in 2008. Thankfully, this has changed for 2009 as the markets have rebounded and continue to strengthen. Stock-based compensation is gaining favour once again. It is therefore useful to review the tax treatment of the most common form of such remuneration – the stock option. It should be borne in mind, however, that while many arrangements are subject to the rules noted below, not all arrangements are considered stock options and different tax consequences may therefore arise. It is important to obtain professional advice in this regard.
Generally, a stock option benefit is included in income in the year in which stock options are exercised. The benefit is equal to the value of the shares less the amount paid for the shares (the exercise price). If the exercise price is equal to or greater than the fair market value of the shares at the time that the stock options were granted, an offsetting deduction equal to one-half of the stock option benefit is generally available, thereby achieving the same net effect as the taxation of capital gains. (For Quebec tax purposes, the deduction is generally limited to one quarter of the benefit.)
If your stock option are for shares of a Canadian-controlled private corporation, and you deal at arm’s length with the company, the stock option benefit income inclusion can be deferred until the year in which you dispose of the shares. In this situation, a deduction equal to one-half of the stock option benefit (one quarter of the benefit for Quebec tax purposes) is available if you owned the shares for more than two years.
The rules relating to the taxation of stock option benefits and other forms of equity-based executive compensation have many complexities that are not reflected in this short summary. Professional advice should be sought in order to fully understand and properly plan for the tax consequences applicable to your personal circumstances.
Donations, donations, donations – some are better than others
Canadians should remember that the tax impact of making charitable donations varies depending on the nature of the donation. A cash donation results in a tax credit that is determined by the amount of the donation. A donation of a capital asset also results in a tax credit that is determined by the fair market value of the capital asset at the time of the donation. However, a donation of a capital asset is considered to be a disposition, and may give rise to a taxable capital gain. This gain may be offset by any unclaimed capital losses carried forward from prior years.
Perhaps the most tax effective method of charitable giving is the donation of certain types of publicly traded securities and mutual funds. The donation of these types of securities will result in a credit calculable based on the fair market value of the stock but, due to special treatment under the tax rules, will not result in a taxable capital gain on disposition.
Canadians have shown their global stewardship and generosity by donating to the disaster relief efforts for Haiti. The Government of Canada has matched these donations to well in excess of $100 million. If you made a charitable donation to a registered charity to help with the Haiti relief efforts, will you be able to claim your 2010 Haiti donation on your 2009 income tax return? The answer is “it depends”. For federal tax purposes, unlike during the Tsunami crisis of several years ago, 2010 donations in support of Haiti are not permitted to be claimed on your 2009 tax return. Be sure to keep your charitable donation tax receipts for your 2010 tax return. For Quebec purposes, however, qualifying donations made from January 12 to February 28, 2010 may be claimed for 2009.
If you are subject to income tax in the United States, your donations for Haiti relief may also be eligible donations on your 2009 U.S. income tax return.
Foreign property – do you have any?
The fallout of the 2008 sub-prime mortgage crisis saw the plummeting of real estate prices in various “hot spots” in the United States. Buttressed by the strength of the Canadian dollar, many Canadians have taken advantage of this opportunity to acquire U.S. real estate or other foreign property or investments. Many Canadians may not realize that simply owning certain foreign property can subject them to foreign property reporting requirements. Generally, a taxpayer resident in Canada who holds certain foreign property with a total cost amount of over $100,000 CDN must annually report his/her holdings on form T1135. This form is due at the same time as the individual’s tax return – either April 30 or June 15. Failure to file this return may result in the assessment of penalties.
Property subject to this disclosure requirement includes, but is not limited to:
- real estate located outside Canada,
- funds held on deposit outside Canada,
- shares of corporations not resident in Canada, even if they are held in a Canadian brokerage account, and
- debt held by a non-resident person.
Two major exceptions to this disclosure requirement are property used exclusively in the course of carrying on an active business and property that is used solely for personal use. A vacation home which generates rental revenue for part of the year would be reportable property, whereas one that is held strictly for personal use would not.
Canadian residents who own U.S. or other foreign real estate that is held exclusively for personal use should note that while the foreign reporting requirements may not apply, there may be other unanticipated tax consequences to their investment. Professional advice should be sought to ensure that appropriate planning is put in place to avoid potentially large exposure to U.S. or other foreign estate taxes.
Looking ahead to 2010: The time to reduce your tax bill is now
Even though in Canada income tax returns are filed on an individual basis (unlike in the United States where there is an option for spouses to file jointly), and the tax laws contain a number of attribution rules that prevent certain transactions that shift income from a higher income earning family member to a lower income earning family member in order to reduce the overall family tax bill, there still remain opportunities to split income between spouses and other family members.
One income splitting technique is the “spousal loan”. Where a high income spouse makes a loan (documented by a legally effected interest bearing debt instrument) to the low income spouse, and the interest is charged at a rate that is considered to be reasonable (i.e., is equal to or greater than the prescribed rate of interest) and is actually paid within 30 days after the end of the year, the spousal attribution rules will not apply. As such, any income earned by the low income spouse is not attributed back to the high income spouse.
Another income splitting opportunity that may be available involves the use of a “professional corporation”, whereby, for example, certain family members and/or family trusts of a professional individual hold non-voting shares of the professional corporation. Depending on the circumstances, it may be possible to use a professional corporation to allocate income to a lower income earning family member or trust. It is noteworthy that Alberta has recently revised its professional corporation legislation, applicable to doctors, dentists, chiropractors, optometrists, lawyers and regulated accountants, and the opportunities in Alberta are now similar to those in other Canadian jurisdictions.
As is the case with many tax planning opportunities, tax effective income splitting is dependent on a number of conditions. All of the relevant facts and circumstances should be discussed, and regularly reviewed, with your professional tax advisor.
Michelle Chan, Calgary
Carolyne Corbeil, Montreal
Martin LeBlanc, Montreal
Donald Murray, Calgary
Yves Rusi, Calgary
Brett Sawchuk, Calgary
This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.