Charitable Surprises

As you’re preparing your income tax return, have you considered your charitable donations? You might be surprised at what you’ve forgotten about, or expenses you have missed. Check out this great article featured on WiseBread, called Surprising Charitable Tax Deductions, by Julie Rains.

Surprising Charitable Tax Deductions

Are you generous? If so, you probably document major gifts to claim charitable contributions when itemizing tax deductions. It’s easy to grab pay stubs that show donations made through payroll deductions or put your hands on an annual statement from your church.

But there are many more ways to save on taxes if you stop and consider all of your charitable acts and do some planning. Start reaping tax benefits by accounting for these everyday gifts. (See also: 16 Great Tax Deductions You May Have Overlooked)

Everyday Donations That Add Up

You have probably given money to a friend’s cause or donated things in the past year. Consider these forms of monetary donations and charitable scenarios, which can add to your overall giving.

Sponsoring a Friend or Yourself in a Charity Athletic Event

Charity runs, walks, and bike rides are increasingly popular and many involve sponsoring a participant. According to Philanthropy.com, charities raised $1.69 billion through such events in 2011.

It’s likely that you have sponsored a friend or yourself in the past year. If you gave online, check your credit card or bank statements and/or thank-you emails (especially if you have not deleted any emails) for a record of your donations. If you gave cash, find a receipt acknowledging the donation.

Driving to Volunteer Sites

If you drive to volunteer sites, like the homeless shelter, soup kitchen, or Habitat for Humanity job site, then you can take a mileage deduction as long as you don’t receive reimbursement for travel expenses. Charitable mileage is one of the most overlooked deductions, Don R. Anderson, CPA tells me.

Keep records of your mileage to deduct 14 cents per mile. Though much lower than the business mileage deduction of 55.5 cents per mile, it’s better than nothing. Other out-of-pocket costs relating to traveling to volunteer sites (such as lodging) may also be deductible according to Howard M. Rosen, CPA, JD, AEP.

Preparing Meals for the Homeless

My dad prepares food for the homeless shelter once every few weeks. He makes what shelter organizers request (typically meatloaf and rolls) and takes the items to his church, which coordinates delivery and distribution at a central site. You may participate in a similar program or you may prepare items for a bake sale, chili cook-off, etc. to raise funds for a charitable organization.

Track your expenses for the ingredients and keep receipts from your grocery store or market. Note that you can deduct “out-of-pocket costs” only, not the value of your labor, Howard advises. Plus, you need to give the food to an organization that serves the homeless, not a homeless individual, to get the tax benefit.

Texting

If you give money to a charity by texting a specific message, then your mobile carrier should provide you with documentation of the gift.

Donating Purchased Items

Many schools, social service agencies, and other groups collect personal items for their clients. Because many people are reluctant to give money, charitable organizations make appeals for things, such as school supplies for children in families that can not afford them, toiletries for victims of domestic violence or indigent senior adults, or toys and toiletries for Operation Christmas Child.

The cost of purchased items given to charities can be deducted. Keep purchase receipts and information about the charity for your records.

Giving Used Items

You may give used items to Goodwill or other agencies in an effort to declutter your home or office. Or you may donate these things for yard sales benefiting charities, schools, etc.

To figure out the amount of the donation, Gail Rosen, CPA says to determine “the lower of cost or fair market value and provide more details if your deduction is over $500.”

Donating Money to Small Groups

If you donate to smaller groups associated with churches, synagogues, mosques, etc., then generally you can deduct these amounts just as you can the gifts to the larger institution. For example, if you give money (or things) to the youth group, women’s ministry, or healthcare ministry that are part of the larger organization, then you can include those funds in your charitable giving for tax purposes.

Take note of how the small group and larger organization reports your giving. The small group may not issue a year-end statement but expects you to keep up with your giving through canceled checks and bank statements. The larger organization is likely to provide you with a detailed accounting of your regular giving, but these details may not include gifts to the smaller group. Your job, then, is to make sure that all your giving is accounted for completely but not double-counted.

Giving to Schools and School Groups

Giving to schools, athletic boosters, band boosters, etc. may be less altruistic than donating to other organizations if you have a child who attends the school, plays a sport, or plays an instrument in the band. That is, you and your family may enjoy improvements to the school’s technology that your donations fund, or a better athletic field, etc. Nevertheless, unless you receive a direct benefit (such as tickets to a fund-raising dinner or band concert), this type of giving is deductible.

Even if you do receive a benefit, you may be able to take a deduction. For example, the booster club may sell dinner tickets at $100 for a meal valued at $25. In such a situation, Howard says that the charity should tell you how much of the donation is deductible (in this case, $75).

Source: http://www.wisebread.com/surprising-charitable-tax-deductions

Helpful Tips for Tax Refund Planning

A good way to think about the tax money that you may get back, is that it is not ‘free money’ or a ‘gift’ – rather it is your money that you put away in a forced savings plan throughout the course of the year. Framing it like this can sometimes help one to more rationally plan what to do with the cash once it reaches your bank account. Will you spend every last penny on a new wardrobe, invest it, or save it?

I came across an article by Alan Schram, an author with The Canadian Finance Blog, about this very topic! Alan’s article outlines 6 areas you can consider applying your saved funds to:

• Firstly, it may be wise to consider allotting a small amount to some ‘wants’. Putting 5-10% of your refund into an account for splurge shopping may mitigate the urge to blow larger amounts later on if you’re feeling down or having an ‘off’ day or week.
• Emergency Fund: either start one, or add to your existing fund. You never know what life will throw your way, so keeping some money in line will help you face unexpected financial hardships.
• Debt Repayment: putting your tax refund money towards a debt you have (a car loan, student loan, line of credit, etc), will substantially decrease the amount of interest you will pay on that debt in the long term.
• Savings: reach your savings goals faster with a little boost from your tax refund.
• Retirement: don’t just care for your present, care for your future by putting money aside for retirement.
• Vacation: this option is the last on the list. If you’ve taken care of all other aspects covered above, consider investing in a vacation!

You can read Alan’s full article here: What to do With Your Tax Refund

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Tax Tips and more from TaxTips.ca

Do you want to be retired at 50? Or financially independent at 40? Are you trying to make your money work for you instead of you working for it? It’s not always the amount of your income that is the “make it or break it” factor of financial independence, but rather it’s the type of financial decisions you make and the way in which you make them. TaxTips.ca offers lots of great articles, resources, tips, and calculators that allow you to increase your financial literacy and see what kind of impact small money management changes can make on your financial future. Click here to check out the TaxTips website.

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Be Prepared … For the CRA

You never know when you might get audited. In Canada, we have what is known as a ‘self-reporting’ system which means at any time all taxpayers are subject to a random review. The best rule of thumb is to be squeaky clean – report all your income and tax credits and deductions and keep an organized paper trail and receipts for everything. If you’re looking for some help in the organization area, check out our guest blog post by Professional Organizer Shelley Davies on Orderliness = Wealth.

However, be aware that tax collectors are always looking for ways to increase the government’s share of the pie.

Understand that tax evasion ie. Not reporting income, claiming deductions or credits that are fictitious and unsupported by receipts, etc. is illegal, but that you are perfectly within your rights to practice tax avoidance and tax minimization as long as you follow the rules of the Income Tax Act (ITA). It is worthwhile to invest the time to speak to an accountant and/or review the CRA website to get an understanding of what you can use as a legitimate deduction or credit. You can also check out this excellent post – Preparing for the Income Tax Deadline.

Why are they auditing me? In general, you will be audited if the revenue department automated computers “flag” your return for some reason. The system may have noticed, for example, that your childcare expense claims are above $5000, so this will trigger an audit letter to be mailed to you. All an audit of this nature means it that CRA wants substantiation of your claim – ie. To have you send in your receipt(s) for your expenses. (Note: Always make sure you photocopy all documentation you send to CRA, and using registered mail is a good idea too to keep your paper-trail covered in case your receipts are lost in the mail.)

An audit does not mean that you have done anything wrong; it simply means the computer has noticed an area where, if you don’t have receipts to back up your claim, the CRA collection department will be justified in requiring that you pay the adjusted amount back to them. Always keep your receipts dating back for at least three years to be prepared for this!

What happens next? As mentioned, the CRA will usually start by sending you a letter requesting more information from you or your accountant for the substantiating evidence for your deduction or credit. Sometimes they won’t – they will simply send a Notice of Reassessment (NOR) for a previous tax year (Note: CRA only can file a NOR for up to three years prior for personal income tax – after that time period (unless there is evidence of fraud) they are Statute Barred from revisiting beyond the three year window), usually citing a reason for why they are requesting you pay an adjustment. Occasionally NOR’s are issued where CRA has noticed an error and they send you a cheque if you have paid too much – the door has been known to swing both ways here!

It is important to note that up to 90% of the time, Canadian tax payers simply write a cheque to CRA when they receive a NOR. Never do this!!!! What is interesting is that of the 10% of Canadian’s who take the time to find their receipts (or have one re-created if it was lost, etc) or provide the auditor a reasonable explanation, that 90% of the time, the amount being reassessed is dropped or substantially reduced. Yes, it may be inconvenient or frightening to stand up to CRA, but if 9 out of 10 times the end result is in your favour, it is worth the time and effort. As well, remember that CRA is simply a department of government employees, who are usually very polite, professional and nice to deal with – don’t be intimidated!

As well, if you are unable to successfully object to CRA’s NOR and still believe you have strong evidence to support your position, you also have the right to appeal the amount in dispute by filing a Notice of Objection (NOO) within 90 days of receiving your NOR. You are not required to pay any amount in dispute until the matter is settled or ruled on by a tax court judge (and even then it can be appealed).

A tax lawyer can help you settle the case, if it comes to that, but normally taxpayers are able to successfully negotiate with CRA on their own regarding amounts in question. Many report having any associated interest or penalties reduced or waived entirely. Others who agree they are in the wrong have arranged to have an agreed upon re- payment plan set up instead of a lump sum.

Getting audited or reassessed by CRA can be a frightening, intimidating experience. Remember that if you haven’t done anything wrong, you will be fine.

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Should Students File a Tax Return?

I’m often asked if students should file a tax return, and my answer is always ‘yes’! It’s never too soon to learn about tax time and how you’re able to get the most out of your money. In this blog, I’m answering several questions that I receive regularly. Here are some basic concepts to remember about taxes if you’re a student:

Anyone who answers ‘yes’ to the following questions should file a tax return, including students:

• Have you worked during the past year or paid tax for any reason?
• Have you received your Working Income Tax advance credit last year and want to apply it this year?
• Do you owe money from a Lifelong Learning Plan withdrawal?
• Do you think you’re entitled to a refund?
• Will you be or turn 19 years old before April 2011?
• Do you still have tuition credits that you want to use in the future?

What about GST/HST credits? Canadians with lower incomes receive payments to help with the taxes they pay on goods and services throughout the year. These payments are given out quarterly. You may be eligible for these payments even if you didn’t work last year, but the Government will not know until you file a tax return.

What if I make below the personal exemption? The personal exemption amount for 2009 is $10,320. If you earned this amount or less last year, you will get a refund of all the taxes your employer deducted from your pay cheque. That’s why it’s important to file even if you didn’t make much money. You are most likely eligible for a refund!

Why would a student need an RRSP? An RRSP, or Registered Retirement Savings Plan, is designed to help you put away money for when you retire, admittedly it may be a while if you’re a student. But, the sooner you start contributing, the more your money will grow. Also, contributing now allows you to be able to make full contributions as soon as you begin your full-time career. Even better, your RRSP contributions receive credits that will add to your tax return! To learn about some different RRSP vehicles that will give you a safe and high-growth rate, consider attending a webinar or email me if you have any questions.

If you have any more questions about filing a tax return, please ask!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Taxes on Your Investments – Part II

Are you wondering how your investments will be taxed? Depending on the type of investment, they may all be different. On Tuesday, we discussed Capital Gains Tax and Dividend Tax, today we’ll look at tax on interest income and RRSPs.

Tax on Interest Income
Interest earned on bonds, interest-bearing savings accounts, GICs, and private loans is included in interest income. Interestingly, interest income and income earned from employment are taxed at the same rate and they have the highest tax consequences of all forms of income. This interest income is taxed 100%; if you earn $2,000 in interest this year, then $2,000 is added to your income and will be taxed at your marginal tax rate. It may be wisest to keep your interest income inside an RRSP or a Tax Free Savings Account (TFSA) because of its high tax consequences.

RRSPs
Registered Retirement Savings Plans (RRSP) contributions, along with investment growth in RRSPs, are taxable upon withdrawal after the plan is converted into a Registered Retirement Income Fund (RRIF). When you withdraw money from your RRIF, the amount withdrawn will be taxed as earned income and taxed at your marginal tax rate. The word on the street is that the best way to save money for retirement is to invest in RRSPs and let your investment grow tax free, and then withdraw your money when you are in a lower tax bracket. However, there are things to be aware of – because RRIF income carries the highest tax consequences, it may not make sense to put ‘tax-friendlier’ investments that create capital gains, dividends or return of capital distributions in this type of vehicle.

If you are in a position where you are an employee and your company is matching your RRSP contributions by 50-100%, it makes sense to utilize this vehicle. However, the RRSP may not be as suitable for you otherwise as a wealth-building tool especially if you like to invest in vehicles that create dividends or capital gains.

I hope these tax tips help you understand the key differences in types of taxable income, and make you want to continue to build your financial literacy. For more information, please email us at info@sharethewealth.ca

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Taxes on Your Investments – Part I

Are you wondering how your investments will be taxed? Depending on the type of investment, they may all be different. As tax time becomes closer, we should all be aware of and understand how our investments are going to be taxed.

Capital Gains Tax
A capital gain is the difference between a higher selling price over a lower purchase price, giving you a financial gain on your original investment. For example, if you originally bought stock for $700 and then sold the stock for $1000, you would have a capital gain of $300. Or, if you bought investment real estate for $100K, then sold it later for $150K, you would have a capital gain of $50K. On the contrary, if you have a lower selling price than your purchase price, you have experienced a capital loss. The capital gains tax states that your capital gains are subject to a 50% inclusion rate, making 50% of your profit included in your taxable income. If instead of gains, you have losses, then you are able to claim your losses against your gains, which will reduce your tax amount.

There are several reasons why it is best to keep your investments for capital gains outside of your RRSP. First, if you were to keep your capital gains inside of an RRSP, your gains would be taxed 100% when you redeem it and it starts paying out as earned income in a Registered Retirement Income Fund, or RRIF. Second, you can not claim your losses against your gains.

Dividend Taxes
A dividend is a portion of a company’s earnings that is paid out to shareholders, and are often paid out quarterly. Dividends often act as incentives to investors to purchase stock in stable companies even if the company is not experiencing great amounts of growth. They are also a tax effective way to pay yourself if you are a business owner or are self employed.

If you receive a dividend payment from a Canadian public company, then you are able to receive the enhanced dividend tax credit. Dividends are distributed to share holders after all the taxes are paid on the money, making this an attractive income option for you. The lowest tax bracket for eligible dividends is $35,859, and you are entitled to a tax credit (the government now owes you money, in the form of a tax credit, of 14.36% or $5149.00). Another way to earn dividend income is by owing a small business or corporation, and paying yourself in dividends from the profits or retained earnings after corporate taxes have been paid. The lowest tax bracket for dividend income is $35,859 in 2010 and the marginal tax rate for small business dividends is 3.16%. The corporate tax rate in BC is currently 25%; however, this is after all other business expenses have been paid. As the tax credit amount is subject to change in 2010, it is best to check your enhanced dividend tax credit on an on-line calculator, such as the one on Tax Tips.

Stay tuned for Friday’s blog about tax on interest income and RRSPs.

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Separating Your Business and Personal Finances – Part I

One of the best ways to make money and preserve it from high tax rates is to start your own business. Although many business owners use their own money as the start-up capital for their companies, many entrepreneurs often do not separate their personal finances from that of their business. As a business owner the lines between your personal and business finances shouldn’t be blurred. You should always treat your business as a functioning unit and at tax time you will realize that auditors are more comfortable with business records that are clearly demarcated.

By keeping both accounts separate you can keep your auditor from doing a tax audit or going on “a fishing expedition”.  Let’s say that you are audited for your personal medical expenses, and you are asked to show your chequebook receipts. If you only have one account for your business and personal expenses, both your personal and business records will be open to your auditor who may question other receipts not related to health while going over your records. This can create an opportunity for your auditor to question whether or not other deductions you made are valid. The same goes for your business accounts, therefore it is best to keep your business account clear of any unrelated income and expenses. Otherwise, your auditor may view them as undeclared income, and require more receipts and explanations, which can prove costly in terms of stress, time and/or your accountant’s hourly rate in providing assistance to you. Better to set it up properly to begin with and avoid the headache.

For more information about starting a small business in Canada, please click here.

As well, getting the advice of a good accountant before you set up your business can be worth its weight in gold. Interview several, as all professionals have different ideologies and levels of expertise in supporting entrepreneurs achieve their goals. Please feel free to contact us at info@SharetheWealth.ca for referrals to solid financial professionals who provide free initial consultations.

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Become Tax Savvy

Tax is the average Canadian’s biggest expense and the more informed one is, the better. When looking at investments and other income sources, understanding how they will be taxed is essential for strategizing, as well as preventing surprises at tax-time. Here is an overview of the most common types of tax:

1. Capital Gains Tax: A capital gain is the difference between a higher selling price over a lower purchase price, giving you a gain on your original investment. The capital gains tax states that your capital gains are subject to a 50% inclusion rate, making 50% of your profit included in your taxable income. That means that the other 50% is tax exempt. If instead of gains, you have losses, then you are able to claim your losses against your gains, which will reduce your total tax amount payable. Capital gains is considered to be an attractive income option.

2. Dividend Taxes: A dividend is a portion of a company’s earnings that is paid out to shareholders, often paid out quarterly. If you receive a dividend payment from a Canadian public company, then you are able to receive the enhanced dividend tax credit. Dividends are distributed to share holders after the company has paid its taxes, making dividends an attractive income option. The lowest tax bracket for eligible dividends is $35,859; in this bracket one would be entitled to a tax credit of 14.36% or $5149.00.

3. Tax on Interest Income: Interest earned on bonds, interest-bearing savings accounts, GICs, and private loans is included in interest income. This interest income is taxed 100%; if you earn $2,000 in interest this year, then $2,000 is added to your income and will be taxed at your marginal tax rate. It may be wisest to keep your interest income inside an RRSP or a Tax Free Savings Account (TFSA) because of its high tax consequences. *Tax on earned income or employment income is the same rate as interest income. These types of income are considered to be the least attractive, tax-wise.

4. RRSPs: Registered Retirement Savings Plans (RRSP) contributions are a common way that Canadians earning employment income can receive a tax deduction for the tax year that they contribute. What that means is that if you earn $50,000 per year, and make a $6000.00 RRSP contribution, you will pay tax on $44,000, instead of on $50,000. Funds sheltered within an RRSP are able to grow tax free, until the plan is converted into a Registered Retirement Income Fund (RRIF) and withdrawn in set amounts over time. The amount withdrawn will be taxed as earned income and taxed at your marginal tax rate, as if it were employment income.

This blog is part of our 10-day series “10 Days to Kick Start Your Financial Resolutions!” To read all the posts in this series, please click here. Enjoy!

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Put Your Tax Free Savings Account to Work for You!

The Tax Free Savings Account (TFSA) was introduced by the Government of Canada in the 2008 Budget, and was available to invest in beginning on January 2, 2009. This TFSA allows Canadians, 18 and older, to invest up to $5,000 annually of their after tax dollars, and to grow tax-free.

Given the financial crisis and subsequent economic crisis of 2008, the creation of the TFSA was a smart move from the perspective of the federal government. Whenever the government wants to influence consumer behaviour, it does so by creating tax incentives or penalties, depending on the result it wants to create. The creation of the TFSA provided encouragement to everyday Canadians to save their money and put it in their new TFSA bank accounts, at a time when banks were losing capital and tightening up lending. By encouraging everyday Canadians to re-capitalize the banks, there is more cash available to lend back to us, and thus keep the economy from falling into a further recession or even a depression. For an interesting overview of how money, banking, and debt really works, please watch this video.

The TFSA does have many possibilities and a lot of perks:

• Withdrawals from your TFSA are tax-free, unlike an RRSP account, and you are able to withdraw your funds at any time

• Investment income earned in your TFSA is tax-free

• Full amounts of withdrawals from your TFSA can be put back into your TFSA in future years

• Any unused TFSA contribution room you have is carried forward and accumulates in future years

• Money can be given to a spouse or common-law partner for them to invest in their TFSA

You have many different options when investing with your $5,000 TFSA:

• You can invest up to $5000 per year in foreign dividend companies and withdraw your dividends tax-free. If you were to currently do the same strategy in an RRSP, your dividends would grow tax free, but you would be taxed on withdrawals.

• You can invest your $5,000 in a savings account and watch your money grow tax-free.

• Many people have turned their TFSA into an emergency fund. As it is important to have an emergency fund, having the luxury to withdraw money from your emergency fund tax-free is always a bonus.

• For many Canadians, investing in a TFSA for retirement is ideal, although because you can only invest $5,000 annually, it will be difficult for most Canadians to have enough money in their TFSA alone to live off of during retirement.

Along with any great thing, there are always a few downsides:

• You cannot claim your capital losses

• Your contributions are not tax deductible

• Depending on the vehicle you are putting your money in, it may not be worth it. For example: even high interest savings accounts right now are only paying between .75% and 1.25% per year. On $5000.00, at 0.75% interest (assuming you opened your account and deposited $5000 on January 2nd 2009) you would have earned $37.50.

The median taxable income of Canadian’s is $50,000.00 per year. In BC, at that marginal tax bracket, if you earn $50,000.00 per year in employment income, you pay $9,065.50 in taxes. If you add the $37.50 income you earn from putting $5,000.00 in a TFSA all year, you increase your tax burden to $9,076.64. Which means that you keep the $11.14 additional you would have had to pay in tax in 2009. If your ‘high-interest’ savings account pays 1.25%, then your interest income would be $62.50 and you would save $18.57 in tax for 2009. Is it worth it to tie up your money all year for such a low rate of return, tax and otherwise?

All in all, the TFSA is a move in the right direction as it allows you to invest $5000 tax-free and withdraw your capital and interest, dividends or capital gains tax-free! Be sure to look into various investment vehicles that will make it worth your while to participate. Please contact us at Share the Wealth for more information on TFSA-eligible opportunities.

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.