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Am I eligible for the disability tax credit?

What is the disability tax credit?

 

The government of Canada offers the disability tax credit (DTC) to someone who meets certain criteria under the Income Tax Act.  The credit may also be transferred to another person in certain circumstances.  As the credit could yield a potential tax savings of approximately $1,700 per year for an adult and $2,500 per year for a child under 18, this article aims to provide some key information to help you determine whether you or someone that you know may qualify for the DTC.

 

If a person was eligible for the DTC some years ago, but did not claim it, it is possible to go back up to ten years to claim it.

 

If the vision in both of a person’s eyes, even after the use of corrective lens, is 20/200 or less or has a field of vision of 20 degrees or less, thenthe personis eligible for the DTC.

 

In addition, there are seven categories of basic daily living activities in which a person may qualify for the DTC.  They are speaking, hearing, walking, eliminating, feeding, dressing and mental functions. The impairment in these activities must be expected to last over one year and is present at least 90% of the time, even with appropriate devices, medication and therapy (except for life-sustaining therapy).

 

Furthermore, ifa personis “markedly restricted” in one of the seven above activities or are “significantly restricted” in two of the seven above activities, thenthe person iseligible for the DTC.  Markedly restricted means a person is unable or takes an inordinate amount of time to complete the activity.  An inordinate amount of time usually means three times the average time needed for a person (of the same age) without the impairment.Significantly restricted means a person takes longer than average time to complete the activities, but not as long as someone who is markedly restricted.

 

For example, a person who has advanced dementia and cannot remember basic things like his/her name and home address is considered markedly restricted.  A person who takes longer time than average to walk and dress due to arthritis (and medicine isn’t helping much) is considered significantly restricted.

 

Life-sustaining therapy is when the therapy is for a vital body function and is needed for at least 3 times per week, totaling a minimum of 14 hours per week.  Such therapies that may qualify for the DTC include kidney dialysis and insulin for diabetes treatment.

 

If the person with the impairment has low income and does not need the DTC, the credit could be transferred to a person who lives under the same property or who provides financial support for basic necessities such as food, shelter or clothing.

 

If you would like to discuss whether your or your loved one’s specific situation qualifies for the disability tax credit, please do not hesitate to contact us for a free consultation.

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Buying a second property?

Buying a second property?

 

Congratulations! You have owned your first home for a while and now you are considering buying a second property – to move in or to rent out.  Here are some tax issues to consider:

 

Loan interest

Suppose you want to move from your first property to live in a second property, and then rent out your first property.  And suppose you want to take out a loan from your first property’s equity to buy a second property.  In this scenario, the loan interest is generally not tax deductible because the loan is used to buy a personal residence property (i.e. the second property), even though the first property will be rented out.  To make the loan interest deductible, it may be possible to create a series of legal transactions to have you sell and repurchase your first property (without triggering any property tax transfer nor any taxable capital gain).  That way, the loan is used for the purpose of repurchasing the first property; hence, the loan interest will be tax deductible.

 

Marginal tax rates

Additional rental income coming from your second property may put you in a higher tax bracket, especially if you are already earning a lot of income.  If you have a spouse or children 18 or over with relatively low income, it may be tax advantageous to share the beneficial ownership (and not necessary the title ownership) with them so that you could split the income and the future capital gain.  Care should be taken to avoid tripping over certain tax regulations such as the attribution rules and the general anti-avoidance rule.

 

Change in use

Change in use rules allow a homeowner to elect the principal residence exemption on a property up to four years during which the property is rented out.  For example, you lived in your home for two years, then you move out and rent out your home for four years, and finally you sell the home.  The capital gains upon the sale of the house may be completely tax free if the appropriate elections are filed with Canada Revenue Agency.  Reverse is also true if you first rented out the property for four years and then you live in it.

 

If you have to relocate to another city as a result of your current employment, you may be able extend the change in use election beyond four years.  Note that you would have to remain a resident of Canada for tax purposes.

 

Principal residence exemption

If you own two properties, the principal residence exemption can only be designated on one property for each year that you live in and for the years covered under the change in use election.  The exemption also applies if it is your spouse or child who lived in it.  Since you may designate year 1 to the first property and year 2 to the second property, it is advisable to contact a Chartered Professional Accountant to help you determine the most tax advantageous selection.

 

If you would like to further discuss whether any of the above tax issues applies to you, please do not hesitate to contact us for a free consultation.

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When should a self-employed individual incorporate?

The purpose of this article is to outlines some factors that will make it favourable for an individual who is self-employed to incorporate his/her business.  (If you own real estate, please note that only some of the information would be relevant.)

 

  • If your business generates a net profit that is significantly more than your personal cash needs, then incorporation would allow for a tax deferral.For example, say your business net profit is $100,000 per year, but you only need $55,000 for personal spending.  You could take out a salary of $75,000 to cover personal cash needs as well as the income and payroll taxes.  The remaining $25,000 is taxed at 13% for BC’s active business corporate rate versus the personal marginal tax rate of 38% in BC (effective 2016).However, you should also take into consideration of RRSP and TFSA, which may reduce the benefit of incorporation.

 

  • As a self-employed individual, you have to pay both employer and employee’s portion of CPP (a payroll tax). The 2017 rate is 9.9% up to $5,128.  Incorporation would allow you to be paid a dividend instead of salary.  A dividend is not subject to CPP, which means you could potentially save up to $5,128 and invest it into something else.  A qualified investment advisor should be consulted in all investment decisions.

 

  • If you have a spouse, children over 18 years old or a close-family member that needs your financial support, then incorporation would allow for income splitting. That is, corporate dividends could be paid to shareholders instead of using your after-tax personal cash to pay them.

 

  • If you want to protect your personal assets from your business operations, then incorporation may limit your legal liability. A lawyer should be consulted for all legal advice.
  • If you want to sell your business eventually, selling the shares of your corporation may qualify you for the Lifetime Capital Gain Exemption, which is at $824,176 as of 2016 (and the amount is indexed for inflation). This means that any gain that is under the exemption would not be subject to income tax.  (It might trigger Alternative Minimum Tax, but you’re still getting a good deal.)

 

Contact us today for a free consultation.

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Entering or Leaving Canada?

Are you entering Canada for the first time and residing here long-term?  Or are you leaving Canada to reside in another country?  Here are some things to take note of.

 

  1. If you are in Canada for 183 days or more in a calendar year (January to December), you are considered a resident of Canada for tax purposes. Make sure to count the days if you are visiting Canada multiple times for long durations

  2. The criteria for determining the residency for tax purposes is different than the immigration or visitor status you have in Canada. You could be a visitor and still be a resident of Canada for tax purposes under certain circumstances. If you are immigrating to Canada, you are considered a resident of Canada for tax purposes on the date of landing.

  3. If you still hold foreign assets upon landing, it will be important to determine the fair market value of your foreign assets.  The fair market values will be used in the calculation of Canadian taxes when you eventually sell the assets.

  4. If you are Canadian taxpayer, you are required to report all of the income – in Canada and overseas. Any taxes you pay overseas may be claimed as a foreign tax credit on the Canadian income tax return. If you own foreign assets over $100,000 CAD, you are also required to make additional disclosure to Canada Revenue Agency.

  5. If you are leaving Canada to reside in another country, there will likely be a deemed disposition on certain assets such as foreign real property and non-registered investment. Any capital gains resulting from the deemed disposition will be subject to tax.  Canadian real property, registered investments and Canadian business property are exempted.

 

The Canadian tax system is complex.  Careful attention is required to ensure you do not run into tax problems.  A Chartered Professional Accountant can help you navigate the tax system.  Contact us today for a free consultation.

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