An Update in These Taxing Times

By Scott Beckett

Sometime in February or early March, when our Minister of Finance introduces his new budget, we can expect tax increases and spending cuts. What this means is that the more time we spend planning and preparing for filing our upcoming 1994 Tax Returns, the greater the rewards.

WHAT’S NEW THIS YEAR?
Probably the greatest change is the elimination of the $100,000 capital gains exemption for all gains occurring after February 22, 1994. However, for those who have not used the exemption, there is still one more chance to lock in any gains and avoid some taxation, which we will explore. First, keep in mind that the rules surrounding the exemption are frighteningly complex and that this year, in particular, it is extremely important to make use of a good tax preparer.

Generally, a capital gain is any positive difference between what you paid for something and what it is worth today. For example, if you bought 100 shares in a company 10 years ago and they are worth more today, you have a capital gain. Previously, you would pay taxes on any gain beyond the $100,000 exemption. The exemption is gone; however, the new rules allow taxpayers to effectively increase the cost of selected assets and take an immediate exemption of gains without actually selling the assets. The asset will now have an increased cost. If the value goes up later, your future capital gain will be smaller, along with the resulting tax.

If you have any assets that are subject to capital gains, you should start collecting the required information right away. There are many types of assets that qualify, like real estate, investments, farm property and personal property. Form T664 (Election to Report a Capital Gain on Property Owned at the End of February 11, 1994) must be filed with your 1994 return.

Once again, the information contained in this article only very briefly describes what is happening. The "how" behind all this includes some very complex and detailed rules. Use of a trusted and competent tax preparer is absolutely essential.

For your year-end tax checklist, here are some other areas you should look at now, in preparation for filing your 1994 tax return:

RRSP’S
The maximum RRSP contribution for 1994, excluding any carry forwards, is $13,500 or 18 per cent of earned income in 1993, whichever is less. If you check your 1993 Notice of Assessment, it should contain your 1994 contribution limit. Check Revenue Canada’s calculation to see if you agree. The deadline of 1994 contributions is March 1, 1995.

If you have a spouse and there is a large difference in your incomes, you should consider a spousal RRSP. With a spousal RRSP, a deduction is claimed by the higher-income spouse, who puts the money into the plan. The plan belongs to the lower-income spouse. If the funds are withdrawn from the plan within three years of the most recent contribution, the withdrawal is taxed in the hands of the contributor. Otherwise, it is taxed in the hands of the lower-income spouse. A spousal RRSP evens out the spouses’ registered retirement savings plans. Upon retirement, total income is more equal and the total tax should be less.

Excess RRSP contributions can be made and carried forward to a maximum of $8,000. If you are in a position to make an excess contribution, the advice of a good tax preparer is probably warranted.

First-time home buyers are allowed to take up to $20,000 from their RRSPs to purchase a home. Once again, if you are planning to take advantage of this, you should seek professional advice before you jump into withdrawing your money.

RECEIPTS
Many deductions and credits require official tax receipts. Begin collecting and organizing your receipts now. This includes -- but certainly is not limited to -- medical, dental and charitable donation receipts and post-secondary tuition receipts.

INVESTMENT EXPENSES
If you borrow to invest, the interest expense on loans may be deductible. Documentation of these expenses can usually be obtained from the institution from which the money was borrowed.

You can also claim expenses on safety deposit box fees, investment counselling fees and the administration fees on self-directed RRSPs.

EMPLOYMENT EXPENSES
Certain employment expenses can be deducted from your employment income if you earn all or a portion of your income by commission or if you are required by your employment contract to use your own car for business. If you would like to claim these expenses, you must file a T2200 form signed by your employer.

BUSINESS EXPENSES
If you run a full- or part-time business, you may be entitled to deduct some expenses. If the business is run from your home, you can claim a portion of utilities, property taxes, mortgage interest and maintenance. A loss from the business cannot be created or increased by a home office. However, any unused amount from home expenses can be carried forward to later years.

INCOME SPLITTING
In families where one spouse earns a large part of the total family income, taxes will be higher than if both earn a more equal share. Income splitting is a method of levelling the two incomes, resulting in a reduction of total taxes paid. If you have a business, you can pay family members a reasonable salary based on their contribution.

Another method is to have the higher-income earner pay all personal expenses. This lowers his or her income and reduces taxation. The lower income earner should make all the investments. The earnings won’t be attributed to the higher-income earner. Total taxes paid will be lower.

CHILD SUPPORT PAYMENTS
Probably the most confusing area right now is that of child support payments. Are child support payments considered taxable to the custodial parent receiving the payments? In May of 1994, the Federal Court of Appeal ruled that Suzanne Thibaudeau, a single mother, was not required to include her child support payments as taxable income. The court held that the Income Tax Act was discriminatory because other groups, e.g. married couples, were not taxed the same way on money used for child support. The court was asked not to rule on whether or not the non-custodial parent could deduct payments for child support.

Based on the appeal by the federal government, the Supreme Court heard the case in October and a decision is expected early in 1995. The government is preparing legislation which it hopes will deal with all the issues prior to the court’s decision.

If your situation is similar to that of Ms. Thibaudeau, you should file a Notice of Objection prior to April 30, 1995 for the 1993 income tax year. If you do not, and the Supreme Court upholds the earlier ruling, you will lose claim to any taxes paid on child support payments.

Canadian tax laws are extremely complex. For all but the most simple situations, preparing your own return is full of pitfalls. If you can afford it, make use of a trusted and competent tax preparer. He or she will make sure you don’t pay more than you should and, in most cases, their services will pay for themselves.

SERVICES FOR PEOPLE WITH DISABILITIES
Once again, Revenue Canada has a long list of excellent services for people with disabilities. The Community Volunteer Program trains volunteers who in turn help people to complete their tax returns. Volunteers offer their assistance free of charge. To use the service, call Revenue Canada.

Revenue Canada also offers TTY service for people who are deaf. If you have a TTY machine attached to your telephone, you can call 1-800-665-0354 year-round, Monday to Friday (except holidays), 8:15 a.m. to 5:00 p.m., Eastern Time and, from late February through April 28, Monday to Thursday from 5:00 to 9:00 p.m.

Revenue Canada also offers information on services for people with visual disabilities as well as publications in audio, Braille, large-print and computer-diskette format. These publications are available at any time during the year. Taxpayers who have difficulty completing a regular-print return can file a large-print return.

More details on Revenue Canada’s many services are available by calling 1-800-267-1267, Monday to Friday (except holidays) from 8:15 a.m. to 5:00 p.m., Eastern Time.

In addition to the above, Revenue Canada is working toward reducing barriers for people who visit their offices. They have provided ramps and improved seating areas, and they will escort people with obvious disabilities to a place where they can sit down comfortably with an Enquiries Officer.

MEDICAL EXPENSE CREDIT
Don’t forget that medical expenses in excess of a specified amount qualify for a tax credit. An individual can claim medical expenses on themselves, their spouse or anyone who is defined as a dependent. Expenses claimed are those paid within any 12-month period ending in the year. Your tax return must include receipts for all expenses.

The formula for determining how your medical expenses translate into a tax credit is complicated and each individual’s situation will be different. In general, the federal tax credit for 1994 is 17 per cent of an amount calculated by subtracting from your total qualifying medical expenses the lesser of $1,614 and 3 per cent of your net income for the year.

THE DISABILITY TAX CREDIT
The disability tax credit is a non-refundable tax credit. It is used to reduce the amount of tax you pay but will not decrease taxes below zero. However, if any of the credit is left over, it may be transferred to the spouse of the person with a disability, or another supporting person.

If you have any questions as to whether you or someone under your care can qualify, call, write or visit the General Enquiries service of your local Revenue Canada income tax office. There is also the pamphlet titled "Tax Information for People with Disabilities."

To claim the disability tax credit, use form T2201 (Disability Tax Credit Certificate). You don’t have to complete a new T2201 unless the period stated in the original form ended last year or your situation has changed -- or if Revenue Canada asks for a new form.

(Scott Beckett is the Associate Director of Disability Market Development, PPI Financial Group in Toronto.)