My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, February 11, 2019

Exploding 19 Common RRSP Myths

It’s that time of year again. We have just a few weeks left until the Registered Retirement Savings Plan (RRSP) deadline, and despite its almost 60 years in existence, there are still plenty of myths and misconceptions surrounding this popular retirement savings plan.

Today, Sarah Rahme, CFP, a wealth advisor with BDO Canada LLP, gets us ready for the 2019 RRSP deadline by demystifying 19 common RRSP myths.
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Myth #1: RRSPs are for everyone


The reality is that every Canadian needs to evaluate their own fit for an RRSP. We generally say that Canadians earning a lower income (under $50,000 yearly) should use a Tax Free Savings Account (TFSA) instead. Moderate earners have to weigh the pros and cons before deciding which option will work better for them in the long run. This typically entails weighing the tax savings you would gain today versus the tax cost when you withdraw your RRSP or Registered Retirement Income Fund (RRIF) in the future and how quickly you may need to access the funds in your TFSA.

Myth #2: RRSPs aren’t worth it, since you need to pay tax on withdrawals


Some of you may wonder: what is the point of sheltering tax now since you will be paying it back at some point? Needless to say, should your tax bracket be lower in retirement, you will benefit from significant tax savings and tax-free compounded returns.

But what if your tax rate ends up being higher during retirement? We believe depending upon your specific situation, you may still be ahead based on the long-term tax-free compounding effect.

Myth #3: RRSPs have one use — retirement


An RRSP can also be used for two other key purposes:
  • purchase your first property through the Home Buyer's Plan (HBP) (up to $25,000 to purchase your first home)
  • finance your or your spouse’s training or education with the Lifelong Learning Plan (LLP) ($10,000 per year up to $20,000 in total to finance your education at a qualifying institution).

Myth #4: I should pay off my mortgage and other debt first


Let’s distinguish between two types of debt: high-interest and low-interest. For high-interest debt – the best example is credit cards, which can carry rates of up to 29.99% – absolutely, paying off debt should take precedence. But when it comes to low-interest debt, such as a mortgage, be careful not to scrimp on retirement savings. As long as you can generate a return on your investments that is higher than your cost of borrowing, it may make more sense to invest rather than pay down that low-interest debt.

Myth #5: I cannot make a withdrawal from my RRSP until I retire


Technically, funds in an RRSP are available to the plan holder at any time, even if there is a withholding tax on the funds withdrawn. (The exception, of course, is withdrawals under the Home Buyer's Plan or Lifelong Learning Plan, which are tax-free.) That being said, unless you really need the money, try to withdraw RRSP money at a time when your tax bracket is the same or lower than it was at the time of the contribution. Be aware that the statutory tax withholding may be significantly less than the actual income tax you owe in April, so plan for this shortfall.

Myth #6: It doesn’t matter when I make my spousal RRSP contribution


This may be the case if you don’t intend to make a withdrawal from the plan in the next three years, but if you do, the contribution timing matters.

As a reminder, spousal RRSPs allow one spouse to contribute to the other’s RRSP. This can often be a sound tax strategy when one spouse earns significantly more money than the other. However, spousal RRSPs come with conditions. One big one is that funds withdrawn within three years are attributed as income to the contributor and taxed accordingly.

Withdrawal rules are based on calendar years, which means that if you make a contribution for 2019 by December 2019, you’ll be able to withdraw money attributed to the plan holder as soon as January 2022. If you make that same contribution sometime in the first 60 days of 2020, you’ll have to wait until January 2023 before withdrawals are taxed in the plan holder’s hands.

Myth #7: I’ll have more money to contribute when I’m older


This is not always the case. It’s true that your student loans will be paid off, and you’ll most likely generate more income. But you may also have new obligations, such as a mortgage or the financial responsibilities of child-rearing.

Myth #8: If I die, the proceeds of my RRSP are subject to taxation


Not always – there are two scenarios:
  • If the beneficiary of the deceased is a surviving spouse or common-law partner, the funds will roll over tax-free into their RRSP or RRIF.
  • If you have a child or grandchild who was dependent on you due to physical or mental infirmity, the funds will roll over tax-free into their RRSP or RRIF.

Myth #9: I don’t have enough money to start investing


Like with all investing, the secret formula is compounding. If you begin your investment journey, even with small sums, a long-term strategy will build those initial amounts into greater wealth.

Myth #10: I have to take my deduction in the year I contribute


Well, you can definitely claim your RRSP deduction every year – and benefit from the tax deduction immediately. But remember: If you think your tax bracket will be higher in subsequent years, you may want keep the deduction in your back pocket and maximize your tax savings.

Myth #11: I can only convert my RRSP to a RRIF when I turn 71


It is true that you must convert your holdings by the end of the year in which you turn 71. You can, however, convert a portion, or the entire amount, at any earlier age. In fact, it may make sense to withdraw $2,000 per year from your RRSP to utilize your pension tax credit to offset the taxes on the RRIF income once you turn 65.

Myth #12: Converting my RRSP to a RRIF is my only option when I turn 71


You also have two other options:
  • take out the account value as a lump sum cash payment. In this case, you’d need to pay tax on the whole payment.
  • buy a life annuity that would pay income at regular intervals for the rest of your life.

Myth #13: A Spousal RRSP doubles my contributing room


Your personal RRSP contribution limit doesn’t change just because you have two accounts at your disposal. You have a choice to use your own RRSP, your spousal RRSP or a combination of both, but only up to your personal RRSP limit.

Myth #14: I have to use cash to make my RRSP contribution


RRSP contribution rules offer you more ways to contribute than just cash. You can also use stocks and bonds and make what is known as a contribution-in-kind. However, if you transfer stocks or bonds with an unrealized gain, you will trigger a capital gain, and if the stocks or bonds are in a loss position, your capital loss will be denied.

Myth #15: I should borrow money to contribute


Sure, that’s an option. But it’s probably better to make contributions to your RRSP throughout the year. Many people do this via a regular payroll deduction. This both helps your long-term savings and decreases your debt obligations.

Myth #16: I should contribute a lump sum just before the Feb. 28 deadline


Many Canadians do follow that strategy, but it’s suboptimal. First of all, you lose out on a year of tax-free growth for your funds. Besides that, are you convinced you’ll have access to the necessary funds in the waning days of February?

Myth #17: I have to wait until I turn 18 to open an RRSP


This is a common source of confusion. In reality, an RRSP can be opened at any age. A TFSA, on the other hand, can only be opened by someone 18 years or older. That being said, typically it will not make income tax sense to contribute before you are earning substantial income.

Myth #18: I can hold any types of investments in my RRSP


The RRSP rules do restrict some investment vehicles, such as precious metals and land. Some other vehicles are permitted but can be problematic and complex. These include mortgages and shares of a private corporation. Speak with your financial advisor to learn more about holding these vehicles in your RRSP.

Myth #19: My employer sponsored pension plan does not affect my RRSP contributions


Registered pension plans and deferred profit-sharing plans affect your RRSP contribution limit in the same way. Your annual T4 information slip from your employer includes a pension adjustment amount which reduces your RRSP contribution room.

The general formula is as follows: Your RRSP deduction limit for a tax year starts with contribution room carried forward plus your current year’s contribution room, minus any Pension Adjustment or Past Service Pension Adjustment and plus any Pension Adjustment Reversal.

Sarah Rahme, CFP, is a wealth advisor with BDO Canada LLP and covers Eastern Canada. If you would like help structuring a customized comprehensive financial plan for you and your family, contact Sarah at SRahme@bdo.ca or 613 739-8221, ext. 4520. For other parts of Canada, contact Sarah and she will direct you to the BDO contact person in your region.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 




Monday, January 28, 2019

How to Use the BDO Estate Organizer

Two weeks ago, I posted the BDO estate organizer. In that post I emphasized the importance of writing your financial story and ensuring your financial information and wishes are documented.

Not to be morbid, but since Roma Luciw of The Globe and Mail has called me “morbid Mark,” I reiterate once again: if you do not communicate and document your financial affairs for your family or executors, you at best leave your family a messy estate at a time of distress and at worst cost your estate and family thousands of dollars.

Today I will walk you through completing the Organizer and some of the important issues that arise in completing the document.

Key Tips in Using the Organizer


Family Information (p.2)

The most important item in this section is citizenship. Many Canadian don’t realize this, but parts of your estate can trigger tax consequences if you are a citizen of another country. This typically applies to U.S. citizens, since the U.S. taxes based on citizenship; while most other countries tax based on residency.

Perhaps the biggest issue for U.S. citizens is home ownership. As discussed in this blog post, the U.S. has a $250,000 or $500,000 principal residence exemption, depending upon your marital and citizenship status. The fact that a tax-free home sale in Canada can result in taxes in the U.S. is often very shocking to Canadians filing U.S. tax returns.

Your U.S. citizenship can trigger many other tax consequences — such as U.S. estate tax —based on differing laws south of the border. And of course, U.S. tax compliance should begin well before estate planning makes an appearance in your life. If you are a U.S. citizen or green card holder, you should be filing U.S. tax returns. If you are not filing, you should seek U.S. tax advice.

If you are a citizen of another country, you may want to determine if citizenship in that country would have any income tax consequences upon your passing.

In addition, depending upon the politics of your home country and your children’s familiarity with that country, you may wish to sell your foreign assets as you age to simplify your estate.

Important Documents (p.5)

My Will 

If you do not have a will, it's time to have one drafted. As discussed in this blog post, 65% of Canadians do not even have a will and 12% of wills are outdated. Yes, your read that correctly: only 3 of 10 Canadians have an up-to-date will. 

If you already have a will, you should review it to determine if there have been any significant life events since you last updated it. In addition, you will want to ensure all your beneficiary designations (RRSP and TFSA, for example) agree to your will and are up to date. Many people have inadvertently left significant assets to ex-spouses by not updating their designations.

There have been substantial changes to the tax laws in the last few years, which can affect the tax treatment of trusts created by will and provisions for disabled children. If you have created trusts in your will or have a disabled child, you may want to contact your accountant or lawyer to see if these changes necessitate any change to your will.

Some provinces allow for dual wills, one for assets subject to probate and one for assets not subject to probate. If you live in Ontario and have two wills, a recent case (Milne Estate, 2018 ONSC 4174) may have nullified the benefit of your will that is not subject to probate. If your lawyer has not contacted you to discuss the impact this case has on your wills, contact them yourself immediately.

News Flash: the Milne decision was overturned last Thursday.

Powers of Attorney

You should have two powers of attorney (POAs), one for your financial affairs and one for your health care.

POA’s for health care have evolved over the last few years for such matters as heroic measures and even assisted-death provisions. You may want to consider updating this document depending upon your personal and religious views on these issues.

Financial Information (p.6)

As noted earlier, you will want to ensure that the beneficiary designations for pension plans and registered plans are in line with your will and your intentions. Often these designations are out of date.

After completing the Financial Information: Liabilities section of the organizer, review and ensure you have enough insurance (see discussion below) or liquid assets to pay off any of these liabilities should you pass away. You may also wish to assess whether this is a good time to have a financial or retirement plan prepared or updated.

Insurance Information (p.11)

After completing this section, sit back and consider these three things: 

1. Do you have any unnecessary insurance policies you purchased long ago and never cancelled?

2. Do you have enough insurance based on how much you spend annually, the debt you hold and significant funding expenses you still need to incur, such as tuition for your children? 

3. If you have significant funds in your corporation (especially if you will have excess funds in your corporation you will not need in retirement), have you considered purchasing a corporate-funded insurance policy?

Employment Information(p.13)

Some issues to consider is this section are:

Ensure that you detail any stock options, deferred stock units, deferred profit-sharing plans or any other of these more complex plans. Heirs often face confusion with these plans when someone passes away, so the more clarity you can provide (e.g., dates, units, tax cost basis, purchase price), the easier it will be for your family to deal with these plans.

Most employers are very good at assisting the family after the death of a loved one, but you will put your family in the best position possible by providing as many details as you can.

Income Details (p.14)

Some issues to consider in this section are: 

1. Are you taking advantage of all income splitting opportunities? You should review this with your accountant, especially given the implementation of the Tax on Split Income (TOSI) rules.

2. Consider if your investment returns are in line with your expectations and whether you even know what your returns are. See this blog post for a discussion of this topic and some useful links.

Real Estate (p.15)

Prepare a free-form schedule that should include the following at a minimum: 

1. A notation of the year you last claimed the principal residence exemption (PRE) on the sale of your home. This will allow your executor and estate to tax plan upon death or going forward in respect of future PRE claims if you have, say, a house and cottage. See this blog post for the new reporting rules on PRE claims.

2. If you elected in 1994 to crystalize $100,000 of capital gains on property you still hold, attach a copy of your 1994 form T664 to this document. The government allowed one final election to utilize your capital gains exemption before phasing out the exemption on real estate and marketable securities in 1994.

Note: Qualified small business corporations (QSBCs) continue to be eligible for the capital gains exemption — see this blog post for details.

Financial Advisors (p.16)

Ensure you have introduced your spouse or significant other to all your financial advisors. It is much easier for a surviving spouse to deal with the aftermath of a passing when they already have a level of comfort with the advisors they will have to deal with. 

Executors (p.17)

You should review your executor appointments to ensure they are the correct people for the job.

If you have not informed your executors they have been named, you should inform them. You may want to inform the executor that you have completed the organizer so that they will know it exists and where they can find it.

If you do not have someone you can name as an executor or there is possible family conflict, consider naming an institution as an executor. 

Digital Information (p.18)

If you have digital assets of value (e.g., cryptocurrency, websites), ensure you have obtained tax and legal advice and have considered them in your will. See this blog post on the topic from estate lawyer Katy Basi.

Katy also guest posted this excellent piece on a 21st century issue: how to deal with reproductive assets in your will.

Funeral Arrangements (p.19)

This is truly a morbid topic, but ensure someone is aware of any pre-paid or funeral wishes.

Final Comments


This estate organizer is one heck of a homework assignment. But it is one of the most selfless things you can do for your family, especially if you have significant assets or complex financial affairs.
The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 

Monday, January 14, 2019

This Simple Tool Can Help Organize Your Estate


I have written numerous times over the years urging you, my readers, to get your financial affairs in order, by stress testing your finances should you pass away suddenly. While clearly a morbid topic, the rationale for the discussion is this: if you do not get your affairs in order and you pass away suddenly, you leave your family a financial mess at a time of emotional distress, anxiety and confusion.

I have had many readers personally write to thank me for urging them to undertake this task, since it provided them with financial peace of mind. They told me that in many cases, this undertaking was the catalyst for them to sit down with their spouse or significant other, review their finances, and communicate and document what financial assets they have and where they can go to find them. In addition, other non-financial issues surrounding their passing were discussed, such as funeral arrangements.

In my professional practice, I have practiced what I preached and have urged my clients to write their financial story and organize their affairs. As clients, I was able to provide them a fillable estate organizer to make their task somewhat easier.

You can link to the estate organizer and download the document here.

If you have not already taken the time to write your financial story and organize your estate, you now have no reason to procrastinate — you have a simple, fillable document to make the task much simpler.

In my next post two weeks from today, I will walk you through the organizer and what you can accomplish in completing each section of the document.
The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 

Monday, January 7, 2019

Scratching the Eight-Year Itch — The Blunt Bean Counter Gets a Facelift

It’s been eight years for The Blunt Bean Counter. Sometimes I can’t believe it myself, but there you have it: we’re nearing a decade of blog posts (535 to be exact). It’s an opportunity to sit back, reflect and consider how the popularity of this blog exceeded my wildest expectations.

I’ve been fortunate to have an audience that keeps tuning in and has grown over the years. You are what makes the blog a success. Based on your comments and feedback, I try to include your interests and needs when deciding on topics and writing the posts. Your positive reinforcement has been an essential source of inspiration.

When I first took baby steps into the blogosphere, my career focused on tax, so the vast majority of my posts drilled down on tax topics. I loved — and still love — clarifying complicated topics, eschewing the technical jargon that we accountants hold dear. Or, as my wife keeps telling me, “write in plain English.”

Over the last few years, my interests have changed. My focus has shifted to wealth advisory, and helping Canadians get their financial affairs in order. Sure, tax will always inform the wealth advisory journey — and you’ve heard me go on about the perils of ignoring the tax piece. No financial plan is complete without tax considerations baked in at all stages of the process, from beginning to end, as long as the tax tail does not wag the dog. But it’s a matter of emphasis, and now my emphasis is certainly on the wealth and financial side of the equation.

My professional situation has also changed since I first began blogging. When I started the blog on essentially a dare from a social media consultant, I was the managing partner of Cunningham LLP, a seven-partner firm. Now I count myself as part of a great national firm, BDO Canada LLP. To reflect my status as a partner at the firm, I’ve decided to include the BDO logo in the top left-hand corner of the blog along with a bit of a re-design and freshening up of the blog.

Along similar lines, I’ve decided to open up The Blunt Bean Counter tent to more of my BDO colleagues. I will still be writing and editing, but I will now be including more posts from the professionals I work with, who also have important viewpoints and knowledge to contribute. I think the blog — and you — will benefit from their take on various topics. I joined a large firm in part because of the top-quality people I work with every day. Now you can gain the same benefits that I have been enjoying.

Here’s what won’t change: my commitment to bringing you clear, unvarnished financial insight on topics that make a difference to your bottom line, in your business or personal life. And I'll continue whether as writer or editor, to bring you this insight in the plain-spoken tone that gives The Blunt Bean Counter its name and part of its appeal.

Watch out for my next post, which will unveil something I call the “My Financial Story and Estate Organizer.” It’s a tracking form that can help you store important personal information — to help you organize your financial story and estate. Many of my clients and colleagues have found it extremely useful and tell me it has given them peace of mind. I hope it can help you summarize your financial affairs in one spot.
The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 

Monday, December 17, 2018

Year-End Financial Clean-up

This is my last post for 2018 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year.

In prior years, my last post of the year would often be on undertaking a "financial clean-up" over the holiday season. I thought I would revisit this topic again this year, with some comparative assistance to review your portfolio's 2018 performance.

So, what is a financial cleanup? In the Blunt Bean Counter’s household, it entails the following in between eating and the 2019 IHF World Junior Championship.

Yearly Spending Summary


I use Quicken to reconcile my bank and track my spending during the year. If I am not too hazy on New Year’s Day, I print out a summary of my spending by category for the year. This exercise usually provides some eye opening and sometimes depressing data, and often is the catalyst for me to dip back into the spiked eggnog :)

But seriously, the information is invaluable. It provides the basis for yearly budgeting, income tax information (see below), and amongst other uses, provides a starting point for determining your cash requirements in retirement.

Portfolio Review


The holidays or early in the New Year is a great time to review your investment portfolio, annual rates of return (also 3,5 and 10 year returns if you have the information) asset allocation, and to re-balance to your desired allocation and risk tolerance. The $64,000 question is how your portfolio or advisor/investment manager did in comparison to appropriate benchmarks such as the S&P 500, TSX Composite, an International index and a Bond Index. This exercise is not necessarily easy (although some advisors and most investment managers provide benchmarks, they measure their returns against). I hope to write something in more detail on this topic next year.

PWL Capital on their resource page has market statistics and model portfolio's that you can use as guidelines or to create your own benchmarks which I find useful.

Rob Carrick of The Globe and Mail in an article (it is behind a firewall) last year, pointed me to this Suggestus site which offers a no cost comparison against thousands of portfolios'. This is a good test check, but since no two portfolios are exactly alike, you need to understand the limitations of this site as an exact bench-marker.

Tax Items


As noted above, I use my yearly Quicken report for tax purposes. I print out the details of donations and medical receipts (acts as checklist of the receipts I should have or will receive) and summaries of expenses that may be deductible for tax purposes such as auto expenses. If you use your home office for business or employment purposes (remember you need a T2200 from your employer), you should print out a summary of your home related expenses.

Where you claim auto expenses, you should get in the habit of checking your odometer reading on the first day of January each year. This allows you to quantify how many kilometres you drive in any given year, which is often helpful in determining the percentage of employment or business use of your car (since, if you are like most people, you probably do not keep the detailed daily mileage log the CRA requires).

Medical/Dental Insurance Claims


As I have a health insurance plan at work, I also start to assemble the receipts for my final insurance claim for the calendar year. I find if I don’t deal with this early in the year, I tend to get busy and forget about it.

To facilitate the claim, I ask certain health providers to issue yearly payment summaries. This ensures I have not missed any receipts and assists in claiming my medical expenses on my income tax return. You can do this for physiotherapy, massage, chiropractors, orthodontists, and even some drug stores provide yearly prescription summaries.

Year-end financial clean-ups are not much fun and somewhat time consuming. But they ensure you get all the money owing back to you from your insurer and ensure you pay the least amount of taxes to the CRA. In addition, a critical review of your portfolio and/or investment advisor could be the most important thing you do financially in 2019.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, December 10, 2018

Tax on Split Income (“TOSI”) Update

I have written several times on the Tax on Split Income ("TOSI") legislation and the impact these rules will have on small business owners and their families. However, the last time I wrote on this topic was in early January of this year when I discussed the December 13, 2017 update of the rules.

While the December 2017 update provided much clarity, the actual application of the rules is far from simple and further clarity is still required from the CRA on several fronts. I had hoped to have an update post on these rules several weeks ago, but for various reasons I could not provide the blog post until today.

As I have transitioned from tax to Wealth Advisory over the last couple years, I felt I should have a tax expert write this post. Thankfully, Howard Kazdan, a Senior Tax Manager with BDO Canada LLP, agreed to write an update on the TOSI rules; although, with this legislation, the devil is in the details, so you must review with your professional advisor.

Many of you will be familiar with Howard's writing as he has provided guest posts in the last couple years on such topics as What Small Business Owners Need to Know - Management Fees - The Importance of Having Proper Support and how 2016 tax changes Made Reviewing Your Will a Must.

I thank Howard for his excellent TOSI update posted below.

Tax on Split Income (“TOSI”) Update

By Howard Kazdan

If you own a Canadian private corporation, and wish to split income with your family members, you now have to deal the Tax on Split Income (“TOSI”) rules, which are complicated and full of uncertainty.

These rules were effective January 1, 2018, but since this is the transition year, taxpayers have the opportunity to rearrange their affairs by December 31, 2018, to avoid the application of these rules in 2018.

Prior to the introduction of the TOSI rules, there were restrictions in place to prevent income splitting on certain types of income with family members under the age of 18. The TOSI rules extend and expand those restrictions to adult family members who are not actively involved in the business. Generally, where family members can demonstrate that they have made legitimate and meaningful contributions to the business, the TOSI rules should not apply.

Any income caught under the TOSI rules will be subject to tax at the highest personal marginal tax rates, eliminating any advantage of income splitting.

In some cases, structuring put in place many years ago may no longer meet all of the original objectives, unless a further reorganization is undertaken.

What type of income is subject to TOSI?


The TOSI rules will apply to many types of income earned from a private corporation, including:

  •  Dividends and shareholder benefits;
  • Income received from a partnership or trust where the income was derived from a related business, or the rental of property in certain cases;
  • Income on certain debt obligations (e.g., interest); and
  • Income or gains from the disposition of certain property disposed of after 2017. However, if the shares of a corporation qualify for the capital gains exemption ("they are qualified small business corporation shares”), then taxable capital gains on the disposition of those shares will not be included in TOSI.

TOSI does not apply to:

  • wages paid for work performed which are subject to a separate reasonableness test.
  • capital dividends
  • second generation income earned on a distribution previously subject to TOSI.

Is there any way out of TOSI?


If certain exceptions are met, TOSI may not apply to distributions from a private corporation:

Excluded shares


The “excluded shares” exception can apply where corporate distributions are paid to individuals who are 25 years of age or older. This will exempt distributions from TOSI where the individual owns shares with at least 10% of the votes and value of the company; where less than 90% of business income of the company is from services, and where less than 10% of the company’s gross income is earned from a related business.

Since there is a requirement for the individuals to hold shares directly under this exception, if an individual owns shares through a beneficial interest in a family trust, they will not be able to rely on this test to escape TOSI. Professionals will also not be able to rely on this test to be exempt from TOSI.

There is lack of clarity on exactly what is considered to be a service – for example, if goods are sold, they could potentially be considered to be service income, if they are incidental to providing a service. 

At a conference held in October 2018, the CRA shed some light on their views with respect to whether shares of a holding company may qualify under the excluded shares exception. In general, if its income is from carrying on a business, the purpose of which is to earn investment income, then it may qualify if the ownership and related business tests are met. This may be the case even if the capital used to buy portfolio dividends was originally derived from dividends previously received from a related operating company. Note that the distribution of the original capital may be subject to TOSI, therefore, only the income earned from the original capital would escape TOSI.

Due to all of the conditions that need to be met and many other technical requirements not discussed in this blog, this is considered one of the hardest tests to meet and you need to discuss and review this with your accountant.

Excluded Business


The “excluded business” exception can apply to any family member who is 18 years of age or older. To qualify for this exclusion, the family member must be engaged on a “regular, continuous and substantial basis” in the business in the year or for any five previous years. A bright line test has been established by the CRA so that an individual is considered to be actively engaged in the business if the person works at least an average of 20 hours per week in the business during the portion of the year in which the business operates in the taxation year or for any five previous years. However, there
is still some subjectivity to this test.

Also, in some cases, record keeping of time spent in the business by owners may not have been perfect, so there could be an issue of proving that the test has been met. It will be key to maintain proper file documentation to support any filing position taken in filing tax returns.

Reasonable Return


The reasonable return exception can apply for adult family members who are 25 years of age or older. In this case, a reasonable amount of dividends can be paid to these individuals and not be subject to TOSI if the amount paid represents a reasonable return on their contribution to the business (e.g. work performed, property contributed, risks assumed). This is an extremely subjective test, so your files will need to be adequately documented in order to support your position in case the CRA comes knocking.

There is also a reasonable return exception for family members between 18 to 24 years of age, however, the amount representing a reasonable return is limited to the prescribed rate of interest (currently 2%) on any investment made by that individual, into the business.

Other Exceptions


  • There are certain exclusions from TOSI where the spouse who contributed to the business is aged 65 or over.
  • Special rules will apply to ensure that individuals who inherit property will benefit from the same tax treatment realized by the deceased individual, had the deceased continued to own the property:
  • An amount will be deemed to be excluded from TOSI for a surviving spouse if that income would have been excluded from TOSI if it was earned by the deceased in their last taxation year.
  • Similarly, if income would have not been considered to be TOSI if it was earned by the deceased individual from whom the property was inherited, then such income will generally be excluded from TOSI for other individuals over 17 years of age.
  •  TOSI should not apply in the case of marriage breakdown or on deemed capital gains on death.

Next Steps:


If these rules sound complicated, that’s because they are! Each corporate situation is unique with respect to every shareholder.

Before making any further distributions, or undertaking any reorganizations, it is suggested that you consult with your tax advisor on how the TOSI rules may impact you and your family for 2018 and onwards.

Note from Mark: 

1. As noted above, the rules are complex and unique to each situation. Thus, I nor Howard will answer any questions on this blog post.

2. If you have not already met with your professional advisor, you only have a couple weeks to rearrange your affairs for 2018. Thus, time is now of the essence and you may need to act immediately. 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, December 3, 2018

Renting Your Property as an Airbnb - Beware of the Income Tax Issues

In the last few years, more and more people have begun to rent out all or part of their residence through
online services such as Airbnb or other rental vacation sites such as Tripping.com or FlipKey. Some will say it is for the unique opportunity to host people from a variety of backgrounds, others that it helps to cover the cost of the skyrocketing real estate/rental market.

Regardless of the reason, there are potentially detrimental tax consequences that can impact you in both the short- and long-term that I would suggest are unexpected to those renting.

Today, I discuss some of these tax consequences. Before I start, I would like to acknowledge the substantial assistance of Christopher Bell CPA, a senior tax accountant with BDO Canada LLP, in writing this post.

Sales Tax


The first thing that you will want to consider (which most laypeople would not) is whether your rental income is subject to GST/HST. You are required to register your business for GST/HST when your gross revenues from all of your commercial activities surpass $30,000 in revenue in a 12-month period. As a result, even if you only make $5,000 from renting your residence, if other commercial activities total $25,000 or more, you will be required to register to collect and remit sales tax. There is an important distinction to keep in mind when considering rentals. Long-term rentals (think of the rent you pay to your landlord) are exempt from GST/HST, while short-term housing rentals for periods of less than 30 continuous days are taxable for GST/HST purposes. There is a clear distinction here and Airbnb rentals, like hotels, are generally considered taxable for GST/HST purposes once you surpass $30,000 in a year.

You can claim back portions of the GST/HST you pay on expenses that are incurred related to the rental of the space in your home. Some items you might be able to recover GST/HST on are:
  •  Housekeeping expenses
  •  Professional/accounting fees
  •  Advertising expenses
Note that there are some potentially significant impacts of improper planning when it comes to GST/HST. If you rent out your property for 90% of the time for rental periods of under 60 days, the property could lose its “residential complex” status, which would result in any future sale of the property to becoming subject to GST/HST. Good luck trying to explain that to any potential buyers!

If you decide to reduce or eliminate the rental of the property in the future, it may change status again, to either an exempt long-term rental or back to a personal residence. When this change occurs, you would need to pay GST/HST on the fair market value of the house at the time of this change. In some cases, you may be eligible to apply for a rebate on these taxes.

As you can see, the GST/HST issues of renting as an Airbnb are very complex. I strongly urge you to seek professional advice before you start renting. Note: I will not answer any questions on GST/HST as I am not an expert in this area. I am just making you aware of the issues you must consider.

Income Tax


Any income you earn from renting your home needs to be reported on your tax return and can be classified in one of two ways: rental income or business income. It is very important to always consider the impact renting can have on your Principal Residence Exemption. This is discussed in greater detail below. The characterization of your rental income is largely determined by the number and kinds of services that you provide to your customers. If you rent your home to someone and they only receive the “bare-minimum,” such as light, heat, parking, laundry, etc., this income would typically be deemed as rental income. If, however, you are offering additional services, such as meals, cleaning, or entertainment, you are more likely to be deemed to be carrying on business activities. As Chris told me, "if you want to keep the green, keep it lean".

You can deduct related expenses from the income earned on your tax return. Some of those items include the following:

1. Utilities (light, heat, water, etc.)
2. Maintenance (painting, small repairs, cleaning*)
3. Property taxes and condo fees
4. Internet and cable
5. Home insurance
6. Mortgage interest

*Note: you cannot clean or do repairs yourself and pay yourself $50 an hour for your hard work. Cleaning and repairs are typically only deductible if done by external service providers.

These expenses will need to be prorated based on the number of days of the year in which you hosted guests in the year against the total amount of time you’ve owned the home. Similarly, if you only rent out a portion of your home, you would need to prorate the expenses further to account for the proportion of the home that is used for rental purposes. The space can be prorated based on either the square metres/feet of the home you are renting or based on the number of rooms you rent out. I suggest you base the pro-ration on the square area to avoid any conflict with CRA, so get the measuring tape out!

Impact of renting as Airbnb on your Principal Residence


There are sometimes more significant amounts that you want to claim, such as large repairs or maintenance costs. Given the capital nature of these expenses, you may want to claim Capital Cost Allowance ("CCA"- you may know CCA as depreciation) on these repairs, or maybe on the property itself. While it is tempting to reduce your annual income by making a CCA claim, there are some long-term implications of doing so.

First of all, renting out your property regularly may result in you being considered to have changed the use of the property, which could result in some significant tax consequences. There is a deemed disposition of the property upon the change in use at the fair market value, and the property is no longer considered a principle residence.

Furthermore, claiming CCA against your income will potentially limit or outright prevent you from claiming the principle residence exemption on your home when you decide to sell it. Something to note would be that if you make significant structural changes and there is a significant change in use, CRA will deem the property as income generating.

Final Comments


It is vital that you understand the various complex income tax implications discussed above. I strongly urge you to obtain professional advice before you start renting in order to avoid some costly pitfalls.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.