Canadian Taxes A to Z (2018): "M" is for Marginal Tax Rate

In the continuing Canadian Taxes A to Z 2018 odyssey, I'm like the marathon runner who is past the half way point on the course. 14 letters down, 12 to go! I promise to keep up the pace, and finish prior to tax deadline time. Today, M is for Marginal Tax Rate. 

MARGINAL TAX RATES LEAD TO TAKE HOME INCOME

To know your marginal tax rate is to know how many cents of every dollar you make will stay in your pocket if you continue to earn more income throughout the year. The reason we don't just use the term "tax rate" without the word "marginal" is because we don't use a flat tax system in Canada (nor does any country with a "progressive" tax system).

Marginal tax rate is the percentage rate that will be applied to the next dollar you earn. To take Ontario as an example, your combined federal and provincial tax rate on the first $42,960 you earn is 20.05%. That doesn't mean you'll necessarily lose that much of your income, since you'll be entitled to various deductions, but the "margin" bump up to the next tax bracket (24.15%) happens when you earn more than $42,960.

The top bracket in Ontario of 53.53% kicks in at over $220,000 in net income (there are several in between brackets). Meaning you get to keep just slightly more than 46 cents of every dollar you earn.

A lot of countries now try to keep their top marginal rates under 50%, since they saw that income tax rates which used to range up to about 80% at the top end simply encouraged a flight of the wealthy (and their capital) to lower tax jurisdictions.

TOP PROVINCIAL TAX BRACKETS SIMILAR BUT KICK IN AT DIFFERENT TIMES

Other provinces have different rates at different marginal brackets. The finishing top marginal tax rates tend to be somewhat similar among the provinces, but may kick in much sooner (or later) than in Ontario.

In Quebec, on the first $43,055 of income you pay at a rate of 27.53% (almost 50% higher than in Ontario). The top marginal rate of 53.31% is very similar to Ontario's top rate, but kicks in at $205,842 in income, sooner than Ontario's top marginal rate.

By comparison, in Alberta, on the first $46,605 you pay at a rate of 25%, meaning for lower income earners Alberta actually taxes you more than in Ontario! But the high end tax bracket for Alberta doesn't max out until you hit $307,547 in income, and then at a rate of only 48%. Meaning Alberta taxes the poor more, and the rich less than in Ontario. 

HOW TAX POLICY FAVOURS PASSIVE OVER ACTIVE INCOME

The other thing to know about marginal tax rates in Canada is that you only pay tax on capital gains at 50% of the normal rate. So even if you're in the top tax bracket in Ontario, your marginal tax rate for capital gains would only be 26.76%. You'll also get a bit of a tax break on marginal rates for Canadian dividend income.

Some think it unfair that those with active income (from employment or self-employment) pay taxes at a higher rate than those with passive investment gains. But like a lot of things tax, that's just the way it is. Not unlike it being potentially unfair that those whose primary owned residence goes up massively in value pay no tax at all on those capital gains, whereas those who rent get no similar tax break.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "L" is for Listed Personal Property

Today, L is for Listed Personal Property (LPP). Most Canadians, even those who run businesses, will never have heard of LPP. But if you're a "collector" you're probably all too familiar with its taxing limitations.

LPP IS AN INCOME TAX ACT INVENTION

Like Capital Cost Allowance (CCA), LPP is a term unique to the Income Tax Act, rather than one in common accounting use. LPP includes personal chattels (meaning not real estate) that usually appreciate in value over time. Most chattels depreciate, and thus you can claim CCA on them. You can't claim CCA on LPP.

LPP includes:

1. prints, etchings, drawings, paintings, sculptures and other similar works of art;
2. jewellery;
3. rare folios, manuscripts and books;
4. stamps;
5. coins. 

LPP GIVES YOU A BREAK ON CAPITAL GAINS

Profits on the sale of LPP are reportable capital gains. However, the base value of LPP for capital gains purposes is $1000. So if you buy stamps for $700, and sell them for $1200, you only have a $200 capital gain to report (the increase from the $1000 deemed based value). 

LPP losses can only be used to offset other LPP gains, not other income. 

LPP LIMITS THE DEDUCTIBILITY OF HIGH VALUE ART

What this all means is that you can't invest crazy sums in art, hoping that it will create all sorts of losses for you when you go to sell it that you can deduct against other income. Likewise, you can't spread high end art all over your office, hoping to depreciate its value as regular CCA. Though less expensive pieces should be deductible as regular office expenses. 

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "K" is for Know Your Income

Today, the letter K is for Know Your Income. Eleven letters down, 15 to go!

Okay, so I needed to stretch a bit today to find a "K" word. In the U.S., Tax Girl @taxgirl has a huge advantage for some of these tricky letters in writing her [American] Taxes A to Z for Forbes because the I.R.S. seems to love appending letters to the end of its endless list of forms and instruments.

Like 401K fund. I mean, really, how easy is it to find a "K" tax word to write about in Canada? I concede she has to come up with new letters for the many years she's been running the series. Personally, I don't know how she does it, but still.

In Canada, I can't even find an appropriate "K" word to talk about in a dictionary of accounting, far less in the Income Tax Act. But K does stand for knowledge. And as we all know, knowledge is power. In the tax context, and otherwise.

WHY KNOWING YOUR INCOME IS THE GRUNDNORM OF THE CANADIAN TAX UNIVERSE

While for those who are self-employed, "know your expenses" is also an important point, for ALL Canadians "know your income" is the fundamental principle for getting your taxes right and avoiding hassles from the CRA. In Canada's self-reporting, self-assessment system, you tell the government how much you made and how much tax you owe, rather than the government telling you.

It's easy to forget about all your sources of income. Many Canadians have several jobs in the course of a taxation year. Maybe a series of consecutive full time jobs that are seasonal. Maybe several concurrent part time jobs that equal a full time income. Perhaps a little bit of independent contractor work. Plus some interest income from investments. And a capital gain from an empty lot that you inherited years ago, and just never got around to selling until this year. All those income numbers need to be added up if you're to know your true income.

KNOW YOUR EMPLOYMENT INCOME EVEN WITHOUT A T4

You're supposed to get T4 slips from employers telling you how much you made, and what kind of deductions (like taxes paid in advance) that they took off. But sometimes employers might forget to send you a T4, or the T4 might get lost in the mail because you moved. It's your job to track down all the T4s you need to complete your taxes. The CRA won't like the excuse that you never reported that $25,000 of tree planting income because you never received a T4 for it.

KNOW YOUR SELF-EMPLOYMENT INCOME

Same with self-employment. It's your job to keep track of how much you made. Don't guess. You might overreport income just as easily as under report it. With overreporting, you'll pay more tax than you deserve to pay. Whereas with underreporting, you'll be hit with all sorts of interest and penalties by the CRA.

KNOW YOUR CAPITAL GAINS

Lastly, with capital gains or investment income, you likewise can't just "forget" to report it. You need to know how much you made.

When I was practicing as a Federal Crown tax prosecutor in the Toronto area I prosecuted a family who had jointly pooled their savings to buy some vacant investment farm land that had future development potential. They sold the property ten years later for a six million dollar profit. Smart and prudent, right?  Not if all of the family investors then "forget" to report the capital gains as income on their respective tax return. That's a lot of tax evasion.

So know your gross income from all sources. That's the starting point for completing your tax return. Only once you know your gross income, can you do your damnedest to take advantage of all legally available deductions to make your net income (and thus your tax burden) as small as possible.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "J" is for Journal Entry

Now under two weeks left until T-Day in Canada. Ten letters down (including today), with still 16 to go! I might need to squeeze in a couple of letters on the same day at the end. 

I'm discovering that the deeper one goes into the alphabet forest, the tricker it is to come up with good lettered tax terms. But today I do have an important one for anyone who has self-employment income. Today, J is for Journal Entry.

No, not as in travel journal, or dear diary kind of journal. But the kind of bookkeeping journal entry that will save you if you're ever challenged about your income or expenses by the CRA, because it presents a complete roadmap of your business financial transactions over the relevant taxation year(s).

WHAT IS A JOURNAL ENTRY

A journal entry is a fundamental accounting concept, but one which most of the general public won't have heard of. The reason you need to know about it if you run your own business is that through it you can prove when, why, and how much money was received or paid out from your business.

A journal based on the double entry bookkeeping system requires that the dollars of debits always equals the dollars of credits. This balancing out is the double check we all need. It'll save you from both missed transactions and transposed numbers.

Usually, each journal entry will contain the date, account name, and amount to be debited or credited. I also recommend a brief explanation of the transaction. Journals can be maintained by hand, on an electronic spreadsheet (like Excel), or in bookkeeping software like Quickbooks or Simply Accounting. If you don't have journals, you don't have bookkeeping records.

SHOEBOXES AREN'T BOOKS

Some small business people believe what accountants pejoratively call the Shoebox Method to be perfectly adequate for tax time. Into one shoebox, you toss over a 12 month period all the receipts for things you bought for the business. Into another shoebox, you toss all your sales receipts for the money you've collected from your customers. Then, at tax time, you toss both those boxes at your accountant, and hope for the best.

With the Shoebox Method, there are no journals. In fact, there aren't really any "books." Just some scraps of disorganized paper. They're a big pain to add up, and can lead to inaccurate tax filings that don't withstanding later CRA audit scrutiny.

WHY YOU NEED JOURNAL ENTRIES

With journal entries, you can figure out almost instantly how much money you netted in a given month or year, because your debits and credit are all summarized in front of you.

What this means for tax time is that you'll know how much tax you owe by plugging your journal summary numbers into tax preparation software (or turning them over to your accountant). You still need those individual receipts as back up documents, but the journals tell the real tale.

I'm not suggesting that journals are super easy to keep up to date by spending 30 minutes on a Sunday afternoon doing a little data entry while watching the game. It's definitely possible to keep your own books, but my suggestion is to turn them over to an external bookkeeper.

No need to hire someone full or part-time. Quality bookkeepers can be had in Ontario from about $35 to $90 an hour, depending on where you live (bookkeepers cost more in big cities) and whether you employ an independent bookkeeper (cheaper, but less supervision) or use one who is an employee of the accounting firm you use (more expensive, but more supervision). Regardless of how you do it, just make sure that you keep some official journals.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Les conséquences de la violence conjugale sur les droits de garde, d’accès et de visite

Le divorce ou la séparation entraîne souvent une vague d’émotions chez chacun les époux : tristesse, solitude, jalousie, frustration et parfois, la colère. Ces sentiments haineux peuvent malheureusement pousser certains parents à commettre des actes violents. En 2016, le gouvernement fédéral estimait que parmi les homicides perpétués au Canada, près de 20% étaient reliés à des crimes de violence familiale. Il n’est donc pas étonnant qu’une personne faisant l’objet de violence conjugale sera souvent détenue à moins qu’un juge de paix estime qu’elle puisse être mise en liberté sous caution.

Impact des accusations criminelles sur le droit familial

Les poursuites criminelles sont, en principe, indépendantes des procédures de droit familial. Cela dit, lorsque des accusations criminelles sont portées contre un parent en processus de divorce ou de séparation, ces accusations peuvent indirectement affecter les droits de garde, de visite et d’accès du parent en question. En effet, les conditions de mise en liberté comprennent presque toujours une interdiction de communiquer avec la victime et de rester à certaine distance de celle-ci. Il s’avère que, dans un cas de violence familiale, la victime est souvent l’autre parent. L’accusé se voit donc privé du droit de retourner à sa résidence principale si l’autre parent et les enfants s’y trouvent toujours. Si les enfants de l’accusé sont très jeunes, il peut être compliqué pour lui de communiquer directement avec eux. Il peut donc être très difficile pour le parent accusé de faire des arrangements pour continuer à voir ses enfants.

Intervention de la Société de l’aide à l’enfance

Dans les cas de violence extrême, il est possible que les droits d’accès de l’accusé soient suspendus. Si l’accusé a porté atteinte à la vie ou la sécurité de l’enfant directement, le juge de paix peut même interdire l’accusé de communiquer avec l’enfant jusqu’à la fin des procédures criminelles. Dans ces cas, un organisme public tel que la Société de l’aide à l’enfance va souvent intervenir pour offrir des mécanismes de sécurité pour la victime et pour assurer la réintégration de l’accusé dans la vie de ses enfants en temps et lieu.

Suspension des droits de garde, d’accès et de visite

Si l’accusé est mis en liberté, il revient à la victime d’entamer les étapes nécessaires en devant la cour de droit de la famille pour apporter des modifications aux droits de garde, d’accès ou de visite de l’accusé. Pour ce faire, la victime doit prouver qu’elle serait exposée à un réel danger si l’accusé pouvait continuer à exercer ses droits d’accès. La victime peut avoir recours à :

• Des photos montrant les blessures infligées par l’accusé;
• Des messages exposant le comportement abusif de l’accusé; et
• Des notes énonçant le changement de comportement des enfants depuis l’arrestation du parent accusé (nervosité, crainte, remord, etc.)

Le parent accusé doit alors réfuter ces éléments de preuve et convaincre le tribunal que ses droits d’accès devraient être maintenus. L’accusé peut soulever les arguments suivants :

• Il a été mis en liberté par un tribunal pénal compétent;
• Il n’y a aucune interdiction de communication à l’égard de ses enfants;
• Les accusations portées contre lui ne sont pas reliées aux enfants;
• Il n’a pas encore été reconnu coupable des accusations portées contre lui; et
• La suspension de l’accès aurait un effet trop néfaste sur la relation entre l’accusé et ses enfants.

Visite et échange dans un centre de supervision

En principe, l’interdiction de communiquer avec un parent n’empêche pas l’accusé d’exercer ses droits d’accès vis-à-vis ses enfants. Par mesure de précaution, il est mieux de mettre en place un accord ou d’obtenir une ordonnance imposant un lieu et une méthode d’échange permettant à l’accusé de voir ses enfants sans violer ses conditions de mise en liberté.

À cet effet, il peut être utile de communiquer avec un centre local offrant des services de supervision pour permettre à l’accusé de continuer à exercer ses droits d’accès. Très souvent, ces centres sont aussi des endroits adéquats pour effectuer l’échange des enfants entre parents.

Les meilleurs intérêts de l’enfant

Dans tous les cas, le droit du parent accusé de violence familiale de continuer à voir son enfant est assujetti au principe du meilleur intérêt de l’enfant. Même si l’incident qui a déclenché les poursuites judiciaires au tribunal pénal était de nature mineure, les juges de la cour familial maintiendront le droit d’accès à un enfant uniquement s’il est dans l’intérêt de cet enfant de continuer à voir le parent accusé. Puisqu’il s’agit d’une mesure avec des conséquences plutôt draconiennes, la suspension du droit d’accès est souvent temporaire. En effet, il est possible pour le parent accusé de violence familiale de réintégrer la vie familiale au fur et à mesure, tant que cette réintégration est dans l’intérêt de l’enfant et que le parent réussi à convaincre le tribunal que la vie et la sécurité de l’enfant ne seront pas en danger.

Dans les cas d’une arrestation d’un parent, il est préférable pour chaque conjoint d’obtenir des conseils juridiques afin de déterminer la meilleure solution relativement aux droits de garde, d’accès et de visite et pour assurer la stabilité du foyer familial.

Karen Kernisant est avocate à Aubry Campbell MacLean et pratique dans le domaine du droit de la famille, du droit pénal et du contentieux civil.

Canadian Taxes A to Z (2018): "I" is for Input Tax Credit

Today, I is for Input Tax Credit (ITC). Nine down, 17 to go!

Input tax credits are what makes GST/HST so good for business. You only need to remit to government the amount of GST/HST you collected from clients, minus the amount you paid out for inputs into your business.

Assuming you're in a business where you sell more than you purchase (always the preferred economic situation), you wind up effectively getting your supplies tax free! And who doesn't like that.

WHY ITC CALCULATION IS A PAIN & WHAT TO DO ABOUT IT

The thing that I find most confuses businesses about ITCs is how to calculate them, since the government gives you three main optional ways. Plus there are some special rules on ITCs for vehicles, aircraft, and capital property.

a. Special Rules on Planes & Automobiles, But Not Trains

For passenger vehicles, you are limited to claiming an ITC on the first $30,000 of the vehicle cost, and the vehicle needs to be used 90% or more for business purposes. Otherwise, the ITC claim is proportionate to the business use (down to a low of 10%). Aircraft aren't limited to the $30,000 cap (fortunately, unless you're in the market for a kite), but are still subject to the business/personal use ITC percentage rules.

b. Special Rules on Real Estate

For capital real property, if you're a GST/HST registrant buying property (like an office building) from a GST/HST registrant, no tax money usually needs to change hands. Instead, the purchaser will self-assess, provide a certificate to the vendor of the registration and self-assessment so that the vendor doesn't need to demand the tax at the time of closing, and then it all becomes "a wash" since the purchaser can at the end of year claim an ITC equal to the tax payable (but not actually paid) on the purchase.

The trick here is to make sure you register for the GST/HST if you're planning to buy real property subject to GST/HST. If you don't, you'll get stuck forking over the tax to the vendor, because you won't be able to claim an ITC.

WHICH OF THE THREE ITC METHODS IS BEST FOR YOUR BUSINESS

As for methods of calculation, you may have three choices: the quick method, the simple method, and the neither quick nor simple method (boringly called the regular method). 

1. The Quick Method. This is the only method which let's you actually make a profit on ITCs (though you need to report the profit as income). There are quite a few limitations as to who can use this method according to type of business and total sales, so consult your accountant.

I can't use it, for instance, because lawyers (and some other professionals) are explicitly excluded. It works best for those who collect lots of GST/HST, but don't buy many inputs (and thus don't generate many ITCs).

It's a percentage method based on your total sales rather than the actual GST/HST paid on supplies, and could lead to you having an extra $1000 in your pocket at the end of the year. The accountants at Grant Thornton have prepared a useful summary for considering whether to use the Quick Method: https://www.grantthornton.ca/resources/insights/articles/Election_to_use_Quick_Method.pdf

2. The Simple Method. This is the method that I and a lot of other businesses of moderate size use. There are yet again eligibility limitations on the size of revenues and total cost of supplies.

The advantage is that instead of separately reflecting the tax paid on every purchase in your bookkeeping records, you simply add up all ITC eligible business expenses (including GST/HST paid) and multiply the total by a particular fraction factor (depending on the rate of tax in your jurisdiction), which will give you an average of ITCs available to be claimed.

Regular limiting rules on things like being only able to claim 50% GST/HST on restaurant meals (because they are only 50% tax deductible) still apply.

3. The Regular Method. This method is the most painful of all, as it requires you to add up all the GST/HST you paid out, and deduct it from the GST/HST you collected. Subject, as usual, to various exceptions and qualifications.

This could lead to your bookkeeper trolling through thousands or tens of thousands of receipts to extract the tax paid. But it's still worth doing so, because every dollar in GST/HST you pay out, is usually one less dollar you need to remit to the CRA.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.