A colleague of mine ran out last week and purchased tax preparation software so he could get a head start on his taxes!

Filing your taxes is often in the same category as visiting the dentist to have your teeth drilled. You know you need to do it, but would rather put is off until the pain is so unbearable, that you just can’t avoid it any longer. Filing your taxes does not have to be that difficult. Getting prepared takes very little time and can help you feel better about filing your return on time before April 30th (or June 15th if you are self-employed).

What Is Involved?

There are four simple things you can do to get ready for tax season: (1) Figure out how you are going to file, (2) Know the deadline dates, (3) Get organized, and (4) File on time or before the deadline.

How Are You Going To File Your Taxes?

The options to consider are to do your taxes yourself by hand, take it to a tax preparer or accountant, or use software.

If your situation is complex or you are simply not comfortable doing your taxes yourself, there is no shame in using a tax preparation service or local accountant to do them for you. Look at my article on How To Hire The Right Accountant.

Know The Important Dates

After you figure out how you are going to file, you need to find out when your taxes are due and when you should expect to receive your tax slips.

• For most Canadians, the personal tax return must be filed by April 30th. If you or your spouse is self-employed, your tax return is not due until June 15th although your taxes must still be paid by April 30th.
• Your employer must mail or provide you your T4 slip that shows your employment earnings no later than February 29, 2012 .
• The RRSP contribution deadline is February 29, 2012. You will probably receive a contribution receipt immediately or it will be mailed within a few days.
• If you receive income from a mutual fund or receive dividends or interest, you will receive a T3 or T5. These will normally arrive during March.

Get Organized

If you start your filing system now, you’ll save time during the year preparing for next year’s filing deadline. For my personal taxes, I have use single file folder marked “Income Tax”. During the year I place any important tax documents such as my T3, T4, T5 slips, my Notice of Assessment and other important documents such a medical receipts.

File On Time

Don’t wait until the last minute. If you owe the CRA money and do not file and pay on time, you will be assessed interest and penalties. The penalty for not filing on time is 5% of the amount owed plus 1% for each month the payment is late. Don’t Delay – April 30th Is Looming explains this pretty well.

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The end of 2011 is near! If you have not considered your tax options, now is the time to consider the year end tax planning strategies that must take place before the end of 2011.

Be mindful of the timing of investment transactions. Many stock and mutual fund transactions must happen before the end of the tax to take effect in 2011!

Investment Planning

1. Take Advantage of Any Losses – Take the opportunity to review your investment portfolio. If you have some stocks or other investments that have decreased in value, you may consider selling them to realize any losses for income tax purposes. If you intend to re-purchase the investment again in the near term, be aware of the superficial loss rules.

Remember that timing is important and the trades should be entered by December 23rd to settle by December 30th.

2. Consider The Timing of New Mutual Fund Purchases – Many mutual funds distribute their income and capital gains annually in December. If you purchase a mutual fund prior to the allocation, you will be allocated a full share of the income for the entire year. By delaying your purchase until after the distribution ensures you will not be allocated this income for 2011.

3. Consider The Timing of GIC Or Other Debt Purchases – If you are considering purchasing a GIC, or rolling a maturing GIC over, you may want to delay the purchase until January 3rd.

Interest on investments purchased after 1990 must be accrued annually on the anniversary date of the purchase (unless you receive the interest more frequently). If you purchase a 3-year GIC on November 1, 2010, you must include the interest accrued from November 1, 2010 to October 31, 2011 on your 2011 income tax return. By delaying the purchase until January 2012, you can defer the tax until the 2013 tax year.

4. Review Debt To Ensure Its Deductible – Generally speaking, interest paid on your mortgage, car, or other consumer debt is not deductible. Review your available cash and consider paying off non-deductible debt and then use borrowed funds to invest and make the interest deductible.

5. Take Advantage of The TFSA – Every Canadian resident over age 18 received $5,000 of contribution room annually. While the contributions are not tax deductible, the income earned in the account is tax-free.

You may want to consider lending or gifting funds to your spouse to contribute to their TFSA. Since the TFSA is exempt from income, there is no attribution.

Take Advantage of Tax Credits And Deductions

May tax credits and deductions are only available if paid during the calendar year.

1. If you Turned 71 in 2011, Convert Your RRSP Before December 31st – You must convert your RRSP to a RRIF or purchase a registered annuity before December 31st. Before you make the conversion, consider making a final contribution. You may make a one-time over contribution $2,000 to your RRSP without attracting the 1% penalty tax.

If you have earned income in 2011, you may also consider making an additional over-contribution in 2011. While this will attract the 1% penalty tax, the penalty will only be applied for one month and does not carryover to the RRIF or registered annuity.

2. If you are over age 65 Create Pension Income – If you are over the age of 65, you are entitled to a tax credit for your first $2,000 of pension income. If you are not receiving a pension, and do not intend to mature your RRSP, you should consider transferring $2,000 from your RRSP to a RRIF and immediately withdraw it. The application of the tax credit makes the withdrawal effectively tax-free.

4. Make Donations of Publically Traded Stocks To Charities Before December 31st – Gifts of publically traded securities to a registered charity are not subject to the tax on capital gains. In addition, you will receive a tax credit for the market value of the stocks. If you wish to make a gift, ensure the gift is completed before the end of the year to apply to 2011.

Other Tax Planning Strategies

1. Make Spouse Contributions before December 31 To Shorten The Attribution Period – Any withdrawals from a spousal RRSP in the year or preceding two years will be subject to attribution. By making your spousal RRSP contributions before December 31st, you will shorten the attribution period by a full year.

2. Sell Any Non-Qualified Investments In Your RRSP Before December 31st – If you have non-qualified investments in your RRSP, the purchase price of the investments will be added to your income for the year. If the non-qualified investments are sold in the same year, you can deduct the amount of the proceeds which may reduce or eliminate the income inclusion.

3. Consider Delaying Home Buyers Plan Withdrawals Until After December 31^st – If you are considering a home purchase near the end of the year and can delay the withdrawal until the new year, you will extend the time period to purchase the home and the repayment date by a full year.

Related Articles

• 2010 RRSP Contribution Limits
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It seems that there is some confusion around the 2012 RRSP deadline and a lot of websites are proclaiming the wrong RRSP deadline for 2012.

Contributions made in the current tax year or within the first 60 days of the following year can be deducted on your tax return [s.146(5)].

The deadline for contributing to an RRSP and claiming the contribution on your 2011 income tax return is February 29th, 2012 (not March 1st because 2012 is a leap year).

If you want to most up-to-date dates check out the CRA site.

Make sure you don’t miss the deadline!

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• RRSP Over Contribution & Decline In Market Value
• The RRSP Deadline Is Approaching
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You started your business from scratch and built it into a successful enterprise.

Perhaps you want to retire and spend time with your family or maybe you want to move on to something different.

Either way the value built up in your business will result in a tax a tax bill.

Luckily the Income Tax Act provides you the opportunity to save on taxes when you sell your business through the capital gains exemption.

$750,000 Capital Gains Exemption

If you are the owner of a small business corporation, you may be able to take advantage of the capital gains exemption on the sale of your business.

The exemption is $750,000 of the gross capital gain (or $375,000 of the taxable capital gain – only 1/2 of capital gains are taxable in Canada) which is the proceeds you receive from selling your business minus what you paid for it.

Like many things in the Income Tax Act, there are conditions that have to be met to qualify for the capital gains exemption.

Qualified Small Business Corporation

To claim the capital gains exemption, the business must be a qualified small business corporation. This means that certain conditions must be met in the 2 years before the sale and at the time of the sale:

• During the 24 months before the shares are sold, you or your spouse (or common law partner) must have owned the shares for the entire period, and
• During the 24 months before the sale that at least 50% of the assets of the business must be used in an active business in Canada.
  • This means that if more than 50% of the assets are investments in stocks or bonds or in a foreign business, the business does not meet the conditions.
  • At the time of the sale 90% or more of the assets must be used in an active business in Canada.

If you are thinking of selling your business you might want to call on your accountant to figure out if you’ll qualify!

Not A Corporation?

What if you run a sole proprietorship? Only the sale business corporation shares qualify for the capital gains exemption. However, there are special rules that allow you to convert your business to a corporation in order for you to take advantage of the exemption.

This involves setting up a corporation and moving the assets into it.

The rules can get complex, but with proper planning you can benefit from the $750,000 lifetime exemption.

Multiply The Capital Gains Exemption

Every Canadian resident is entitled to the lifetime exemption. If you have a business corporation and have issued shares to your spouse and children, you may be able to grow beyond the $750,000 exemption and save even more income tax.

Planning for the multiplication is best done well in advance of the sale since the shares must be held long enough to appreciate beyond their original cost.

Final Thoughts

If you’re considering selling your business, you do need to prepare in advance. A properly prepared plan that addresses the tax implications of the sale can help you save thousands of dollars in taxes.

Contact me to find out how we can help you with your business sale.

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Savvy investors who feel the value of a stock will go down can use a strategy know as a short sale.

Short sales have their own unique tax profiles and anyone considering a short sale should be aware of the tax consequences.

A visitor to The Canadian Tax Resource Blog asked about how dividends were handled from a tax perspective in a short sale:

What is the tax treatment of money paid on short sales of a stock that pays a dividend? For example – stock XYZ pays a dividend of $1.50/share. If you had shorted 100 shares, what happens to the $150 that gets taken from your account? Would this be considered to be ordinary income, or would this payment be added to the adjusted cost base of the security?

What is a Short Sale?

A short sale is where an you borrow a stock from an stock broker (like Questrade) and then turn around and sell it on the stock market. The term short position indicates that you have sold something that your didn’t own and must return to the broker at some future point or if the broker demands it.

Making Money With Short Sales

If you sell a borrowed stock and the price of that stock falls, then you can buy back the stock for less than you paid for it and return it to the broker.

However, the gain, which is the difference between what you sold it for and what you repurchased it at is NOT a capital gain but is taxed just like regular income.

You can sign up and get $50 in free trades with Questrade!

The Risk Of Short Selling

If you take a short position in a stock and the price increases, you will be forced to buy back the stock for more than you paid for it. In this scenario the amount of the loss can be unlimited.

Obviously, short selling carries significantly more risk than purchasing a stock and holding it.

Income Tax and Short Selling

As mentioned above,gains and losses from short selling stocks will be treated as straight income as opposed to capital gains or losses.

The CRA has two interpretation bulletins that cover the various issues with short sales here and here.

Dividends

When you borrow stocks from your brokerage firm, the broker will not receive any dividends during the period the stock has been lent to you. Therefore, you you must then pay the brokerage firm that dividend.

Many brokerage firms simply deduct the dividend amount directly from your account during the period you have borrowed the stock. For the individual, this amount cannot be deducted from computing income.

Related Articles

• Trading Stocks And Income Tax
• Buy Stocks When The Market Is Down
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If you have a defined benefit pension plan and are retiring or leaving your employment, you may be presented with different pension options.

Depending on the terms of your pension plan, you will be offered any or all of the following choices: Lifetime pension from the pension plan, lump-sum transfer to a locked-in RRSP, or a transfer to life income fund (LIF) or locked-in retirement income fund (LRIF).

Depending on how long you worked for your employer, the lump-sum payments may be substantial and may have a taxable component.

Consider The Variables

Making the decision to remain with your pension plan or take a lump-sum payout is not straight forward and a number of factors must be considered before you make a decision.

These factors can be both financial and non-financial. Financial considerations include:

• The impact taxes will have on any lump-sum payments,
• Your RRSP contribution limit and any pension adjustment reversal,
• You anticipated tax rate during retirement,
• Your current age,
• Your health and projected life expectancy,
• Your spouses age and life expectancy,
• Survivor benefits,
• Bridging benefits available from the plan if you are retiring early,
• Federal or provincial pension legislation, and
• Your tolerance for risk and desire for control.

Any of these factors can have a significant impact on your decision.

For non-financial considerations, please see our article Job Loss And Your Retirement Pension Options.

Know The Present Value

Comparing the pension payments to the lump-sum is not as simple as adding up all of the payments.

Financial professionals will consider a reasonable rate of return you might expect and calculate the value of your pension in today’s dollars to make an accurate comparison of the lump-sum and annuity options. However, there are minimum and maximum amount hat can be drawn during retirement that can further complicate the comparison.

Getting Help: Beware Of Quick Advice

When you look for independent help with your decision, beware of any advisor who has a quick answer or uses a general rule. Many financial advisors are commissioned salespeople who receive the bulk of their compensation from selling investment products and may be motivated to encourage you to take a lump-sum.

Consider paying for advice when making the decision. A fee-only planner or other fee-only financial professional is in a better position to provide an objective evaluation of your personal situation. Since you are paying only for their advice, you can be assured that the answer is not motivated by a desire to sell you an investment product.

If you are looking for looking for an objective opinion on your pension, please feel free to contact me for a quote.

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If you have a spousal RRSP, be aware of the special spousal RRSP rules that may apply when your spouse withdraws from the plan.

If you have withdrawn from a spousal RRSP, you may have experienced the way these rules are applied.

When you consider the tax withheld on the RRSP withdrawal the results can be even more perplexing.

You could end up spending your tax refund on your own tax bill!

Spousal Attribution Rules

If you contribute to a spousal RRSP (i.e. to your spouse’s RRSP) in the current or prior two tax years and your spouse withdraws from the RRSP, you may be responsible for some of the tax.

The amount added to your own income is limited to the contributions you made in the current or prior two years. To find out more about how these rules work, read Withdrawing From A Spousal RRSP.

How The Rules Apply To Your Tax Returns

You contributed to your spouse’s RRSP and your spouse withdrew the funds. Here is what happens:

On Your Spouse’s Tax Return

Since the RRSP belongs to your spouse, the full amount of the withdrawal is added to his or her income on Line 129.

Yes. The full amount of the withdrawal is added.

On Your Tax Return

Since the attribution rules apply, you are also required to put an amount on Line 129 of your tax return.

The amount you report is the lesser of the amount your spouse withdrew or the total of your contributions to the spousal RRSP in the current or prior two tax years.

I know what your thinking. We just added the withdrawal to my spouse’s income and now you’re saying I add it to mine as well?

That’s right but read on…

The Fix

If the situation was left as is, Canadians would be screaming about fairness and double taxation. The good news is that the Income Tax Act fixes this situation.

Your spouse is allowed to take a deduction that is equal to the amount that was attributed to you.

But there is a catch.

The Catch Is…

When your spouse withdrew from his or her RRSP, there was an RRSP withholding tax applied.

This withholding tax can only be claimed as pre-payment of your spouse’s income tax (not yours). The result is that your spouse will get a refund in four to six weeks but you will have a tax bill due April 30th!

Here is an example:

Assume you contributed $50,000 to your spouse’s RRSP last year and this year $10,000 is withdrawn. Your tax rate is 33% and your spouse’s is 22%.

Related Articles

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• Why Pension Splitting Does Not Kill Spousal RRSPs
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Each week, I share articles and stories from other blogs and websites I’ve come across.

The most popular articles and commenter’s are also be mentioned. I encourage you to take a look at these articles and visit their sites.

If you have an idea for an article on CTR or would like me to cover a specific topic, please let me know by sending me your thoughts through my contact page.

Interesting Reading

• Canadian Financial DIY tells us that in Canada, the rich pay more than their fair share of income taxes. According to an OECD report, we are right at the top of the list of countries that tax high income earners the most. We are above average but the US is at the top of the list!
• Squawk Fox wants you to know about 5 investing fees that devour your savings. Three of the fees are mutual fund fees! Mutual funds are OK if you have small amounts to invest or want managed money. But you much better options once you have over $100,000.
• Larry MacDonald (Canadian Business) tells us about the 5 most overlooked tax tips.
• Money Sense Managing writes about the perils and pitfalls of joint accounts. If you’ve been reading CTR for any time you’ll know joint accounts are the bane of my existence.
• Boomer & Echo want you to know yourself before you invest. Go beyond the BS, cover your butt documents provided to you by your broker.
• Canadian Couch Potato explains where (investment) returns come from.
• Canadian Finance Blog had a guest blogger tell us what we need to know about tax benefits. The article is a little misleading because it “tax benefits” really means “social benefits.” Nonetheless it is still worth a mention.
• Hull & Hull provide an interesting discussion on appointing a trustee during estate litigation.

Top 5 Articles From last Week

• How Shareholder Loans Affect Your Income Tax
• Cash Out Your RRSP And Pay Down Debt?
• Studio Tax – Electronic Tax Return at the Right Price
• Business Telephone Services: Ring Central Canada
• Renting Your Home Can Be Taxing

Top Commenter’s

• George V.
• drvajra
• Saba
• Claire
• Vicki

Have a great weekend.

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If you sell stuff on eBay, Craigslist, Kijiji, or in yard sales the taxman may be calling on you.

Income tax is not a concern for most Canadians selling unwanted items. However, income tax may apply based on the use of the property you are selling or how often you sell items.

Knowing the tax rules can help you avoid interest and penalties.

If you are selling unwanted household goods and the selling price is less than what you paid, then there is no capital gain to tax! (Note that you cannot claim a capital loss either – see below).

Personal Use Property

There is a special category of personal property known as personal use property (PUP).

Personal use property includes most items you own and hold for your own personal use (hence the name!).

allancleaver_2000 (CC 2.0) Via FlickR

The category includes items such as furniture, cars, boats, art, and coin collections. Personal use property also includes your principal residence and any vacation property you own.

The use of the property, rather than the property itself, determines whether it is personal use property.

Most personal use property sold will not have a capital gain because the selling price is less than its cost. However, some types of property increase in value (vacation property for example).

If you sell personal property for more than you paid for it, you are required to report and claim the gain as income on Schedule 3 (any loss on the sale is not allowed under Canadian tax law – See the exceptions under Listed Personal Property below).

$1,000 Exemption

Even if you sell personal property for more than you paid, there is general exemption on the first $1,000 of the gain. These rules work as follows:

• If you paid less than $1,000 for the item, the cost is deemed to be $1,000, and
• If you sold the item for less than $1,000 the price is deemed to be $1,000.

There are special rules that exempt the sale of your principal residence from income tax.

Special Rules For Listed Personal Property

There is a special type of personal use property called Listed Personal Property (LPP).

Listed personal property includes the following:

• Jewellery,
• Stamp & coin collections, and
• Artwork and rare manuscripts.

You also report any gains on the sale of these items Schedule 3 of your tax return.

What makes listed personal property unique? If you have a capital loss on the sale of listed personal property, the loss can be used to offset other capital gains.

Always remember to keep the receipts for any capital property!

eBay Power Sellers & Frequent Sellers

If you frequently garage “sail” and then flip sell the goods at another garage sale or on-line, you could be considered a business.

The difference between a business and an individual selling some personal property is the intent. If you frequently flip goods you purchase, you may be a business.

The bad news about being a business is that 100% of all gains are included in your income. The good news is that losses are 100% claimable and you can deduct other expenses incurred to run your business.

If you’re not sure if you would be considered a business, it’s best to get some help. Check out our Directory for a listing of accounting and tax professionals.

Related Articles

• Is There Tax When I Sell Personal Property?
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My wife and I value our family time and have traditionally spent weekends (and the odd week) at her family’s cottage. However, in the last few years we have decided that we should make an effort to take vacations to different destinations. We feel that family vacations are an opportunity to spend time together and build important and lasting memories.

Since my wife cannot fly, we decided to buy a small RV travel trailer.

When we made the decision to buy the RV, it was always clear that we didn’t need the trailer, but rather we wanted to spend family time together on vacation and the RV was the most reasonable way for us to do that.

What Are Needs?

How many times have you said to yourself “I really need those designer jeans” or “I need to get a new snowboard.” But what does the word mean?

Needs are things that we truly cannot live without.

By scaredy_kat (cc 2.0) via FlickR

Needs are the things that are required for us to exist. As humans we need food and water to nourish us, clothing and basic shelter to protect us from the elements, and some means of transportation.

My mother grew up in a two bedroom house with her parents and her two brothers. My grandparents shared one room and my mother and her two brothers shared the other. The kid’s room was 12×10, had 1 dresser and 1 queen sized bed. The house had heat and running water and did exactly what it was supposed to: Protect them from the cold Saskatchewan winter and hot summers.

In my family’s case, clearly we don’t need the RV to survive unless we intend to sell out home and live in it full time!

What Are Wants?

Wants are the thing in life we’d like to have. This includes a larger house, a brand new or exotic car, video games, the snow board … the list goes on. These are the things in life that make us feel better or comfort us.

We purchased an RV to spend family time together. This is something we value and want. But an RV is not something we need.

The risk many of us make is that we tend to justify wants by turning them into a need. And sometimes I hear people justifying a want by claiming it is an investment.

But It’s An investment?

An investment is something that pays you back or increases in value. Purchasing stocks, bonds, GIC’s and other financial investments are classic examples of investments.

Other purchases can bring you income and qualify as an investment. For example, I purchased a computer to be able to run this website and pay regular fees to host the site. The advertising revenue I receive in return is sufficient to cover those costs and return even more value to me.

Don’t get caught using the term investment to justify a want. One thing I hear frequently is, I need to invest in a new car. Do you? Why? Will it pay you back? How much? What does it cost you to maintain this new car? What if you had something more modest and invested the difference?

Don’t kid yourself, you may need transportation to get to your job and provide food and shelter, but you don’t need one and it is certainly not an investment.

While our RV may hold its value over time, but I seriously doubt I’d get more than I paid for it in the future. It’s not an investment in a financial sense.

Making A Choice?

When your making a purchase consider whether it’s a need or a want. If you are satisfying a want, ask yourself if you have satisfied all of your needs first and avoid the trap of justifying it as an investment.

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