Transcript: Personal Tax Tips with Jamie Golombek


Personal Tax Tips with Jamie Golombek

March 22, 2018

[Host:]
Hello everyone, thank you for taking the time to join us today. On behalf of CIBC Investor's Edge, I would like to welcome everyone to our webinar. My name is Ammar, and I will be your host for this event. Now just a few things to note before we get started.

[Disclaimer]
CIBC Investor Services, Inc. does not provide investment or tax advice or recommendation. So everything we share today is for education purpose only. We are recording today's session, and a link to the replay will be emailed to anyone that registered. Also, if you wish to view this full-screen, you may do so by clicking on the expander arrows located on the top right hand corner of your screen. And should you have any questions during the presentation, please take note, you will have the opportunity to submit your question after the presentation.

Our topic for today is 2018 budget and tax tips for investors. In this webinar, we will cover changes in the 2018 federal budget, tax and filing tips for 2017 tax returns, income splitting, and RRSP myths.

We are very excited to have Jamie Golombek join us once again as our speaker. Jamie is Managing Director, Tax and Estate Planning, at CIBC. Jamie works closely with advisers from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. Jamie also writes a weekly column called "Tax Expert" in the National Post. With great pleasure, please join me in welcoming Jamie Golombek.

[Speaker:]
Well thanks very much and welcome everyone joining us live and watching the archive as well afterwards.

[Agenda]
I've divided the presentation into four, notice there's not a lot there on the budget. There's not a lot to say, to be honest with you, on federal budget. So, obviously I'll touch on it briefly, but most of the focus I really want to focus on is in terms of tax planning for your investments and what's new for this tax season, what's gone, some tax filing tips, just as a reminder when you're in that process in March of filing your 2017 return. Talk a little about income splitting, some of it was eliminated, but some of it is still available.

We'll talk a little bit about those tips, especially a special deadline coming up at the end of March. And finally, just a reminder that RRSP's, despite some popular myths, remain for most Canadians the number one way to save for retirement, and I'll explain why. And I'll compare that with TFSA's and even paying down debt.

[Personal Taxes: What's new? What's gone?]
So let's begin. What's new, what's gone on personal taxes.

[Federal Income Tax Rates in 2018]
I'd like to begin all discussions of personal taxes with the rates. So federally right now, we have five federal tax brackets. On the first $46,000, we have 15% and it goes up incrementally until we hit the top federal rate of 33%, and that occurs once your personal income is over about $205,000 a year. Now of course these rates are before we add provincial rates.

[2018 Top Federal/Provincial Marginal Tax Rates]
Provincial rates vary by province, but just to give you a general idea we're looking here at a chart of the top marginal rates for different types of investment income. So for example, if you earn interest income and you live in New Brunswick, your top rate is 53.3%. Your capital gains rate, which is 50% inclusion of your interest income rate, is 26.65%. And your eligible dividends, eligible dividends come from publicly traded Canadian companies or mutual funds or other ETFs that produce Canadian dividend income, that rate for New Brunswick is 33.5%.

Non-eligible dividends would not apply to most listeners unless you have a private company that taxes income at the small business rate. So you can see that depending on your province, your tax rate, your top rate, really does vary. Interest income being the highest form of taxation investment income, capital gains being half that, and then dividends, for most provinces, somewhere in the middle.

["Boutique" Tax Credits and Other Tax Inefficiencies]
One of the things we thought was going to be in the budget is the whole issue of tax reform and tax credits. We often call these tax expenditures. And there's really a variety of these in the income tax system, and there's been a debate over the years among academics of how efficient these are, and the administrative cost of dealing with a lot of these credits.

[Too Many "Tax Expenditures"]
And in fact, if you sort of break this down a little bit, we have numerous tax credits, deductions, and various preferences, and in fact, we've increased that number to about 128 as of the end of 2014, that's the most recent data that we have. That's an increase of about 30% in 18 years. And again, this information comes courtesy of the Fraser Institute, which really said that Canada's tax code is just far too complicated, in fact even for CRA officials in some cases.

The cost of compliance is overwhelming, Canadians spending nearly $7 billion complying with the personal income tax system every year. And anyone's tried to complete their own return knows that there's obviously intangible costs, a lot of time and frustration trying to submit a return. And you've got to keep receipts and fill out forms. A lot of them simply to demonstrate eligibility for these credits. So in the last couple of years, we did see the elimination of some credits.

[Previously Eliminated Tax Credits]
So for example, for post-secondary education, we saw the elimination of the education amount, the textbook amount. For kids, we saw the elimination of the children's fitness arts amount. And then most recently, we saw the elimination of the public transit amount. And I'll come back to that in a second. We had thought that the 2018 budget would actually introduce the elimination of further credits, but that was not to be the case.

[2018 Medical Expense Tax Credit]
The only mention of credits at all in the 2018 budget was a small addition to the medical expense credit. Now just as a reminder, the medical expense credit is a 15% non-refundable credit. And that's available for medical expenses exceeding the lower of 3% of your net income or $2,268. So if your income is $100,000, 3% of that is $3,000, the lower amount is $2,268. If your income is $30,000, 3% of that is $900, and therefore expenses above $900 qualify. That's the federal credit, and of course there's a provincial credit as well.

And there is a provincial threshold which is similar to the federal. So the only change we saw in the 2018 federal budget was the inclusion of psychiatric service dogs.

[Psychiatric Service Dogs: New FOE 2018]
This is an animal specially trained to assist a patient in coping with disabilities, and in particular these dogs would be for post-traumatic stress disorder. So it was a slight modification to the medical expense credit rules, which of course always allowed someone to deduct the cost, care, animal maintenance including food and veterinary care and training of a specialized animal.

In the past, of course, blindness, deafness, as well as severe autism, diabetes, and epilepsy qualified. And they've increased that to now post-traumatic stress disorder. And that was the only thing we saw.

[Mendoza v The Queen (2016 TTC 112)]

And the problem with many of these credits, it goes back to this example I've been using for a few years now. There was a tax case that came out in 2016 where CRA denied an individual the transit credit, because they said they didn't have the proper proof of transit usage. And he had his credit card history for all the purchases and PRESTO is the card that's used in the greater Toronto area, southwestern Ontario to travel around public transit systems. But when he was audited, he could no longer get his usage records. Yet the judge said he took 400 trips in 2013 and told the CRA "look guys, there has to be some reasonable basis here to allow him to claim the credit" and actually forced them to reassess, and he was allowed his transit credit. But it just shows you the administrative complexity of trying to deal with these complex credits that provide in the end very little benefit to people.

In other words, the government still wants to support public transit, but now they'll put their money directly into public transit rather than finding this roundabout way to subsidize people for taking it. After all, at the end of the day, the tax credit system is being used by people that are probably going to take transit anyway, and we're not seeing an overall increase simply because of this credit.

So we thought there would be other things in the budget, there was not. And there's really not a lot of things to say other than that on the 2018 budget.

[Auditor General Report on CRA Call Centres]
Now the tax system itself is getting very complicated, and this is a picture of the Auditor General. You can see he doesn't look very happy. He doesn't look happy because he had just released a report back in the fall on the CRA call centre. If anyone's tried to phone the CRA call centre, you know that it's not an easy thing to get through. Now CRA says that 90% of all calls are answered by a CRA agent or by their self-service system. But the audit that was done by the Auditor General found that of the 53.5 million calls received by the CRA call centre, over 50% of them were blocked, so the caller either got a busy signal, a message to see the internet or told to call back later.

And only about one third of the calls were answered by an agent or by the self-service system. But even more disturbing in the report, they found that the agents gave inaccurate information almost one-third of the time.

[Budget 2018: Enhancing CRA Support]
So the budget tried to address this by announcing a comprehensive departmental review of the entire CRA service model, spending about $200 million over five years, $33 million per year on an ongoing basis. Additional funding to enhance its telephone technology, hiring more agents, and finally providing additional training to ensure that Canadians do actually get the correct information when they contact the CRA.

And really that forms a background for what I want to talk about next. And I want to talk about making sure that you have a good understanding of your own return, because it is complicated. And there are some basic, fundamental principles that we like to review every year to make sure that you are paying the least amount of tax legally possible.

[Tax Filing Tips for 2017 Returns]
So let's move to the main part of the presentation, which is tax filing tips for your 2017 return. We wrote a report, available online, called "Doing It Right the First Time: Avoiding the Most Common Tax Return Errors." I'll sort of go through some of the highlights of this report.

[Tax Returns Are Complex And Errors Are Common]
So in fact we find that almost 70% of taxpayers are engaging tax preparers, yet CRA continues to find errors in people's returns. So in recent years, the CRA announced that they've assessed over $1 billion of additional tax. And what they do is they compare your tax return info to the info provided by financial institutions, by your employer, etc. And they've disallowed almost one in five tax deductions or credit.

[Tax Return Errors Are Costly]
Now the problem with errors on your return is that they are quite costly. In other words, if you have unreported income in the current year and any one of the previous three years, the penalty is 10% of your unreported income. If you have a balance outstanding on the day your return is due. Let's say it's due on April the 30th of 2018, your interest rate is actually 6%, and that interest is non-tax-deductible. And plus if you're late filing your return, the penalty is 5% of any balance owing on April 30th, and another 1% for every month you're overdue for a maximum of 12%. So you do want to make sure, especially if you owe money, that your tax return is going to be filed on time.

[Ensure All Income Is Reported]
The other thing that's important to take into consideration is making sure that all your income is reported. And the best way to do that is to check for any missing income by comparing the current year's tax slips to prior years' slips, and also comparing the amount on the slips to your investment statements or online.

You can take a look also at your income from the current year and see how that compared with income from prior years. That way you know that you've got all the receipts that you're waiting for and you're good to go in terms of filing your return.

Another feature if you file your own return, or you hire a professional, is using the auto-fill feature from the CRA, which allows you to download with accuracy all the slips that are available online that are sent to the CRA. T3s, T4s, T5s, things like that, can be automatically downloaded into the software to make sure that you're accurate and have all the information you need.

But again, be sure to double-check, because if the CRA has not received electronic copy yet from your financial institution, although most should have by now, you're still on the hook, so you need to make sure you are reporting all of your income.

Now if you haven't received your tax slips, the advice from the CRA is just make an estimate. Estimate the amount of income using your source documents, whether that's your investment statements or online transaction summary to finalize what the number should be for now, and file the return. Later on if it turns out that your estimate is incorrect, then you can simply adjust it, either by filing a form called the T1 Adjustment Request or simply going online under the My Account feature of the CRA website and clicking on Change My Return.

[Repeated Failure To Report All Income Is Costly]
Now and I can tell you that these things do go to court. There was a case I wrote about in a previous article dating back to 2012 where the taxpayer didn't report his T5 income in two years, 2006 and 2008. And the judge says that when the taxpayer took her documents to her accountant to have her return prepared, she should have realized that she hadn't received the T5 with the interest income on it. And the judge actually found that she had not taken the reasonable measures to report all of her income and hit her with a 10% federal and 10% provincial penalties for unreported income.

So in other words, even though the CRA has a copy of the receipt electronically, if you don't report it on your own on your tax return, you can face a 20% penalty on the amount of the income. If that income is $10,000, that's a 20% penalty in addition to any tax that you would owe on that income and any interest you would owe on the penalty or for late filing. So again, very important to make sure you have all of your slips properly reported, even if you haven't received them.

[Value Of A Federal Tax Deduction In 2018]
Now let's talk a little bit about tax deductions and tax credits. And the best way to explain that is really to walk through a numerical example of the difference between a tax deduction and a tax credit. So let's say your income is $50,000 and we calculate tax, so let's say the first

$46,000 federally is 15% and the next bit of income up to $50,000, so that other $3,400 is taxed at 20%. So the total tax payable here is about $7,687.

Let's say you have a $1,000 tax deduction. This could be, for example, an RRSP contribution. We're lowering our taxable income by $1,000. And what that's doing is that's coming off our last dollar of income. So our marginal tax rate here is 20.5%, so on a $1,000 deduction, we're effectively saving $205. So our tax saving is coming at the marginal rate of 20.5%. Now let's compare that to a federal tax credit.

[Value Of A Federal Tax Credit In 2018]
Same example. This time we have an individual with $50,000 of income who pays the same $7,687 of tax but has no credits. If we assume they now have $1,000 of medical expenses, and these of course would be expenses that are above the 3% threshold that we discussed earlier, so these are $1,000 of valid medical expenses. So you would get a credit.

All credits other than the donation credit are at the lowest rate of 15% federally. So here you get a credit of $150, and you reduce your tax payable to $7,537. that is a difference of $150. So very simply, a $1,000 amount that's eligible for a credit at 15% will produce a savings of $150. And that's sort of a fundamental difference between a credit and a deduction.

[Some Credits Are Worth More: Charital Donations Credit]
Now be careful when you're looking at other donations other than the regular set, because there are special rules for charitable giving. So charitable giving, which includes gifts to registered charities or foundations, will actually give you a higher credit on amounts over $200 in a year.

So for example, on the first $200, you get 15%, and on the remaining $800, most people would get 29%. If you're in the highest bracket and your income is over $205,000 a year, you actually get a 33% credit on amounts over the $200. So our general rule of thumb we would say, is that you would try to pool all of your donations. Let's say there's a husband and wife or two partners, common-law partners, common-law living together, you'd put them all on one return so you don't get that low donation credit on the $200 twice.

Another strategy might be to pool the donations and carry them forward to a year when you've got over $200. You have a five-year carry forward for a donation to be claimed. So that might allow you to get over that $200 threshold and get the higher credit both federally and of course in all the provinces.

[Don't Try This At Home...]
Now every year we read stories about people taking questionable deductions, and there have been cases on this. And CRA has actually given us a list of questionable deductions that people have tried to deduct that actually haven't turned out very well.

[Disallowed Deductions And Credits Can Be Costly]
So specifically disallowed by CRA, these are common deductions that are cited as disallowed, legal fees for separation, divorce, or to fight child custody, funeral expenses, wedding expenses, making a loan to a family member. You can't deduct that even if they don't pay you back. Loss on the sale of your home. That's a personal residence. That loss is not deductible.

If your deduction is disallowed, not only would you be facing additional tax, because the amount is not deductible from income, but also they could charge you interest, which is currently at 5%, going up to 6%, on additional tax outstanding.

[Make Sure It's Deductible Before Making A Claim]
And if you're not sure whether something's deductible, go online. There's a website on the Government of Canada site under the heading of Personal Taxes, and you can see it's under the Deductions, Credits, and Expenses. You can type in the type of expense, and find out whether a particular item is tax deductible or not.

So if you're unsure, or you're looking for additional deductions that you might have missed, go online and you can take a look through almost 100 different deductions, credits, and expenses that you might be entitled to when you file your return.

[Foreign Transactions]
And then, finally, an issue when it comes to tax reporting, which might be of interest to many of our listeners and viewers today, deals with buying securities or investments in a foreign currency. Now there are two issues that come up. First of all, you may receive U.S. income paid into your Canadian account. And if so, there may be taxes withheld. So for example, on U.S. income paid to Canada, there's no taxes on interest income on a U.S. bond, but there typically would be a 15% withholding tax on U.S. dividends paid to your non-registered account. And again, if it's a non-registered account, you may be able and in most cases you will be able to claim the foreign tax credit on your Canadian return.

Now there are exceptions for things like RRSPs, RRIFs, TFSAs, and stuff like that. You have to be a little bit careful, specifically, for example, on U.S. dividends. U.S. dividends, there are no withholding taxes when those are paid to an RRSP or RRIF, but if you've ever done this incorrectly in your TFSA, you'll know that in fact there is a 15% withholding on U.S. dividends into a TFSA, which is one reason not necessarily to hold U.S. dividend paying stocks in your TFSA.

Remember the U.S. does not recognize the tax-free nature of the TFSA, it's not covered off by the treaty as a retirement account. And therefore there's actually no way to get back that 15% withholding tax, because it's in a TFSA it's not eligible for the foreign tax credit. So what people often ask at the end of the year when doing their returns is well, I've got some foreign transactions in my account, what foreign exchange rate should I be using? Well, if you earned income evenly throughout the year, the CRA is fine if you use an average rate. So let's say you've got a T5. It's reporting your U.S. dividends and your non-registered account. You can use the average Canada-U.S. exchange rate for 2017. It's available, of course, online. And you can use that to calculate the Canadian equivalent on your return.

When it comes to capital gains. Let's say you sold a foreign-denominated stock or bond, you have to actually calculate your gain or loss, which could include a foreign-exchange gain or loss using the rates on the date of purchase and the date of sale. And in some cases, this can actually convert what looks like a loss into a gain. So let me show you a simple example.

[Foreign Transactions: When Is Capital Loss Really Capital Gain?]
Let's take the example of Jake. Jake bought some shares for $10,000. These are U.S. dollars and in a U.S. non-registered trading account. And at the time he bought this, let's say maybe it was five or six years ago, the U.S. dollar was at par, so one U.S. dollar equals one Canadian. But when he sold them in 2017, the stocks have gone down in value, it's worth only $9,000. So it appears that we have a capital loss, but now of course the U.S. dollar has appreciated against the Canadian. When he sold it, the rate was 1.25. But when you actually use those conversion rates to convert the currency, you can see that what looked like a capital loss is actually a capital gain. And that's where investors need to be very careful when reporting foreign currency transactions on a Canadian return.

[Income Splitting: What's Left?]
The next section we're going to look at is called Income Splitting. We're going to talk a little about what's left.

[The Great Divide: Common Ways To Split Income]
We've actually written a report, it's available online, easily available by searching, called "The Great Divide," and we looked at a number of income-splitting strategies that can lower your family's taxes. I'll want to go over a few of them with you today. So first of all, why are people splitting income?

[Why Split Income? Lowest And Highest Marginal Tax Rates By Province]
Number one reason, difference in family-member tax rates. On this chart, what you'll see, based on your province of residence, is the highest marginal rate in red, and the lowest marginal rate in yellow. So for example, in Ontario, an investor who earns investment income at the highest rate, tax rate would be 53.5%. The lowest rate by contrast is 20.1%. So that is a spread of about 33%.

In other words, if you can find a legal way to split income with other family members. We'll come back to legal way in just a moment. The opportunity for saving in a province like Ontario is about 33, almost 33.5%.

So what are some of the ways that we might consider income splitting? And I'm going to show you three different things you can think about to do income splitting in your particular family.

[Higher-Income Spouse Pays Household Expenses]
First of all, something as simple as having household expenses paid by the higher-income spouse. So for example, here we have a high-income spouse and a low-income spouse, and the total after-tax income is $100,000, and currently they're splitting all their household expenses evenly. These expenses are not deductible, these are just personal living expenses.

So at the end of the day, the higher-income spouse has $40,000 left, the low-income has nothing left, and we've got $40,000 available for investing. Problem is, the high-income spouse is in the top bracket and in a province like Ontario the interest rate would be 53.5%.

If, however, we do things a little bit differently, and we take the same after-tax income of $100,000, and we say let's have the high-income spouse pay all of the family's expenses from his or her account. They'll have only $10,000 to invest, while the low-income spouse will have $30,000. If that $30, 000 is then invested in an investment account, and the low-income spouse's bracket in Ontario is only 20%, you're looking at a savings opportunity of over 33% in Ontario, and in many of the provinces of around 30%. So again, it's just a simple way to preserve more of the income of a lower-income family member for non-registered investment purposes.

[Pension Income Splitting]
Another easy way to do income splitting in a family if it applies to you is with pension income splitting. This is a joint-election, it must be re-filed every year with both spouse or partners' tax returns. The T1032. It's in all the software packages. It allows you to transfer up to 50% of your pension income, typically to a lower-income spouse or partner.

Four main benefits. Number one, tax savings, again depending on the tax brackets, could be up to 15%. Doubling of the pension income credit is available on the first $2,000. Reducing the age credit net income grind. The age credit if you're 65 or over is reduced based on net income. If you can bring your net income down, you may get more of the age credit. And in very few cases, if you are subject to the OAS, the Old Age Security clawback, to the extent that you could reduce your income through a pension deduction for income splitting, you might be able to preserve your Old Age Security.

[Pension Income Splitting: What Income Can You Split?]
We actually ran an example for pension income splitting in the current year. Sorry, before I go through the example, just a reminder what type of pension income. So depending on your age, it does vary, but if you're any age and you get what we call annuity payments from a registered pension plan.

In other words, once you start to annuitize your defined benefit or defined contribution plan, you get regular payments usually on a monthly basis, those automatically qualify no matter what age you are. If you're looking at a RRIF, you've got to be at least age 65 to get pension splitting amounts. And if you're looking at an RRSP, you must formally convert the RRSP to a registered annuity at age 65 to be able to be eligible for pension income splitting. Is this age discrimination? I would say yes it is, but so far any attempts that we've tried to lobby on this have remained unsuccessful.

[Pension Splitting Example: On 2018]
So here's my example, we've got a couple, Barb and Hal. Barb is 66, Hal is 64. Barb has $100,000 of pension income, so it's a very high pension case, and is getting some CPP and OAS of about $20,000 and has $120,000 of total income. Hal has no income at all, about $10,000 of investment income is the only source of income that Hal has. How much can they actually save through pension income splitting? What's interesting is that what happens when you go through the calculations is that there is some tax savings of about $4,700.

But what we're moving is we're moving $50,000 of income from Barb over to Hal. So now we're getting an extra pension credit for Hal, we're restoring the age credit for Barb, which was clawed back, and Barb was actually losing her OAS, because she was in that grind area, her income was above the upper threshold. She wasn't getting any of the OAS. We're now able to bring her income to below the OAS clawback level where she gets $6,700 of full OAS. A savings here for this couple of about $12,300 simply by clicking off a box on the tax return software, and filing the jointly signed election. So it has to be done on an annual basis. The third idea for pension, remember the first one was higher income spouse pays expenses, second was pension splitting.

[Attribution: Expectations]
Third idea has to do with the attribution rules. The attribution rules say that if you give money to your spouse, partner, or kids to invest, then in some cases, the income it gains and in other cases only the income attributes back to the parent or spouse that made that gift. The exception is number one if you pay for a market value for the property and number two if you do what's called a prescribed rate loan. As long as the interest is paid within 30 days of the end of the calendar year, then you can do a prescribed rate loan and be able to save money. Let me show you a little bit about how this strategy works, because we're coming up to a very important deadline.

[Prescribed Rate Set To Double April 1st]
We've actually written an article available online "Act Now for Income-Splitting Loans," because the rate is about to double next week on April 1st. Currently the prescribed rate is 1%, the lowest possible rate, can't get lower than one, because it's the nearest whole percentage point, so 1%. It's based on the T Bill yield, the 90-day T Bills. And that rate's going to double on 2%, if you lock in a loan, I'll just show you an example in just a second.

But if you lock in a loan by March 31st you can actually use the 1% prescribed rate forever, even though rates are going up 2% on April 1st and could go up higher in the months and years ahead.

[Income Splitting - AB 2018]
So let's take an example of an Alberta couple.

[Example of Spousal Loan at 1% (Before April 1)]
We got a couple here, Jack and Dianne. Dianne is in the high-income bracket, Jack is in the low income bracket, and they want to do some income splitting. So we're going to have Dianne loan half a million dollars over to Jack and charge the current prescribed rate of 1%. Now for this webinar we're going to assume a 5% rate of return. Again this is not a realistic example if it was all interest income, because typically this would be a mix of interest, Canadian dividends, some foreign dividends, some capital gains both realized and unrealized in a diversified balanced portfolio that over the long term we hope could get a 5% return. We want to keep the math very very simple.

So we're going to show you the theoretical example of what if the 5% was just fully taxable income. Clearly it's very difficult to get a 5% rate on any type of fixed-income with a guarantee. But let's assume that we're getting the 5% on a half a million, which again normally would be dividends, capital gains realized, unrealized, and some interest. So $25,000 of income. Jack does have to pay 1% interest expense to Dianne. That 1% interest or $5,000 is tax deductible to Jack. But you can see on the left, it's also taxable to Diane. So our income spending opportunity is the difference between the 25 and the 5, or $20,000. Now remember if Dianne's in the top Alberta bracket of 48 . and Jack is in the bottom Alberta bracket of 25, it's a 23% spread That's a tax savings on $20,000 of $4,600 every single year. Again, you can do this with spouses and partners. You can even do it with your children.

[Income Splitting: Kids Action Plan]
I wouldn't want to loan my kids, who are under 18 any money, because they may not pay me back. So what I might do instead is if the kids are under 18, I would go to a lawyer, set up a family trust, make a loan to the family trust at the prescribed rate of 1%, get a legally valid promissory note to the trustee, and I would have all the investment income in that trust paid out to the kids or use for their benefit if the kids are in private school, if they're in summer camp, if they've got any expenses, it can be used to buy their clothing, a portion of the family vacation.

And in most cases, the kids don't have any income, they'll pay zero or very minimal tax. One strategy we've been using here at CIBC is public company dividends. In many cases these are Canadian dividends from Blue Chip companies, sometimes have yields of 4% or 5%. These could be directly through a mutual fund or an ETF, and in many cases a child, depending on the province, can receive up to about $52,000 tax-free.

[Tax Free Dividends That May Be Earned By An Individual In 2018]
And that's because of the basic credit and the dividend tax credit. In the other provinces, even though the dollar amount is lower, the marginal rate on the extra dividends up to about $50,000 is in the single-digits, very very low.

So this is an opportunity to structure your portfolio if you have non-registered investments, you want to do some income splitting, any tax-free dividends by the kids, by the family trust, or even by a non-working spouse or partner, could be part of your investment strategy for 2018. You want to act before March 31st. And if you want more information it's in the bulletin that we showed you earlier.

[RRSPs: Dispelling Popular Myths]
Our final topic, and the last few minutes of our webinar today before we get to your questions is RRSPs, dispelling popular myths.

[In Defense Of RRSPs]
We just wrote a couple of months ago a whole bulletin on the defense of RRSPs trying to dispel some of those popular myths.

[RRSP Myths]
You might have seen it in the media. Again, you can get a copy online, but very briefly these are some of the myths that investors have told us. They say you know what, no point investing in an RRSP. After all your pay all the savings back in taxes when you retire. Obviously we disagree with that. In most cases you've enjoyed 10, 20, 30, or 40 years of tax deferral, earning tax-free investment return inside of the RRSP. Number two TFSAs are always better. After all TFSAs are tax-free and RRSPs I'll have to pay tax. Not really, when you go through the math as we'll do it a moment, TFSAs are equal to RRSPs from a tax deferral perspective, however the difference is when you want to pay the tax. High-bracket now, low-bracket later favours RRSPs. Lower bracket now, high bracket later favors TFSAs. We'll come back to that. It's better to pay off debt. Well again, we'll come back to that, but it does depend.

Certainly if you got credit card debt at 20% yes I'd pay that off before doing an RRSP. On the other hand, if your mortgage rate is 3%, you'd probably be probably better off putting some of your extra money towards a long-term RRSP strategy. I don't have enough money to save in an RRSP, well you can start an RRSP with $25 so I don't buy that one. I don't need an RRSP, I have other sources of income. I think it's important to look at your sources of income whether it's Canada Pension Plan, OAS pension income, and see really what you do have to live on in retirement and then determine how much you need to save in RRSP or even TFSA. Finally if I save too much in my RRSP or RRIF, it's going to be a big tax bill when I die. I'd say yes, good, let that be a problem for you.

In other words, what was the alternative? We've proved mathematically in a number of our reports that you're far better off having this big tax bill at the end of the day than having to have paid tax and in a non-registered account in almost all scenarios, because if you have a multiple-year scenario where you're investing in an RRSP, 10, 20, 30, or 40 years, the tax advantages of the tax-free compounding inside that registered account can actually outweigh a higher marginal tax rate when you end up taking the money out either later in retirement at a high rate or at death when the whole thing is cashable if there's no rollover available to a surviving spouse or partner. All of this is discussed in our various tax bulletins, which I'll show you in just a moment.

[RRSPs Can Effectively Provide Tax Free* Investment Income]
This is the example that I often get. People say to me "okay RRSP versus TFSA, would I have not been better off with a non-registered account where only 50% of my gains are taxable?" And I walk through an example and I say, look let's say you made $3,000 of income. Your tax rate today is 33%. If you put it into an RRSP, you pay no tax out of your income. If you grow it at 5%, at the end of the year the RRSP's worth $3,150. We're in the first column here. You cash in at 33%, you have $2,100. TFSA, second column, same thing in reverse.

If you earn $3,000 of income, you're going to have to pay tax on that income before you put it into a TFSA. $2,000 into the TFSA at 5% grows to $2,100. At the end of the year you take it out. No tax, $2,100. But if you say to me, well, I don't want to pay tax when I take money out of an RRSP, I would have been better off with a non-registered account, we would disagree, because to put money in a non-registered account you have to pay tax first. So on $3,000 of income, you pay $1,000 of tax. You have $2,000. So that grows by 5%, you have $2,100, your cost base is $2,000. You got $100 capital gain. You're looking again potentially at a tax rate at 33%, half that 16.5%, is 17 bucks. In other words, you're going to net only $2,083 after one year using a non-registered account. Which is why we believe that RRSPs and TFSAs will always beat out a non-registered investment.

[Reports On Tax-Free Income]
If you want to see more of the math behind RRSPs, TFSAs, and even paying down debt, take a look online for any of our reports . They're widely available, we'll give you the website at the end. And it all comes down to this example.

[Benefits After One Year Of Investment In RRSP, TFSA, Or Mortgage With Constant Tax Rates]
I showed you the first two columns RRSPs and TFSAs are equal. People will say, what about paying down debt? Debt is really the same thing in my view as a TFSA. If I have $1,500 of income, and I'm in a 33% tax rate, to pay down my mortgage, I've got to pay tax on my income first. I have $1,000 left for debt repayment and if my debt is also at a 5% rate, I save $50 of interest, $1,000 of capital, repayment on the mortgage principal, and I've saved $1,050. So RRSPs equal TFSAs equal paying down debt.

[Benefits Of Over 30 Years From Investment In RRSP, TFSA Or Mortgage With Constant Tax Rates]
And finally, I would add that if your debt rate is not 5%, but it’s at 3%, you probably shouldn't pay down debt at all unless you can't sleep at night. In other words, if you have an example where over a long period of time you have an opportunity to save for retirement in an RRSP or TFSA, which is completely tax-sheltered from investment income during that period of time, or pay down debt.

In our report called "Mortgages or Margaritas", which is available online, we found that clearly, if you have a low rate on your debt, and we're talking a mortgage rate in the 3% neighborhood, you're probably better off putting that money for the next number of decades into an RRSP or TFSA during tax reinvestment returns. Here we used a 6% balance return average over a 40-year period, but again you could use the return that you want. Chances are, historically, you'll probably beat 3% with the proper portfolio.

So let me summarize where we've been today. We've talked about a number of topics. We've talked initially about tax season. what's there, what to know, what to understand. We've then moved a little bit to talk about some tips, the importance of filing on time, making sure that everything is accurate.

[Q&A]

[www.cibc.com]; [www.investorsedge.cibc.com]; [www.jamiegolombek.com]; [Twitter: @jamiegolombek]

We went through a number of income-splitting ideas, whether it's pension income splitting, whether it's higher-income household member paying expenses, or the prescribed rate loan strategy directly into a family trust. In the end we talked a little about RRSPs, TFSAs, and paying down debt. We're now going to have an opportunity for the next ten minutes or so to take your questions. I turn it back to you to tell everyone how they can ask a question.

[Host:]
Thank you Jamie, that was a very insightful presentation. So as Jamie mentioned, we would like to answer questions from the audience, so if you have them ready now, you can type them into the Q&A panel. It's located on the right hand side of your screen. And while we wait for questions to come in, I just wanted to point out that CIBC Investor's Edge clients they have access to our Knowledge Bank and you will find this after logging into your Investor's Edge account, and then clicking on Education Centre.

In our Knowledge Bank, we have videos and articles, and also past webinar replays. We also have videos by Jamie on tax and financial planning and we also have videos on other subjects such as economy and markets. So now that we are receiving questions slowly, I will pass it back to you, Jamie, so we can go through some of the questions now.

[Speaker:]
Sure so we've got our first question here. How do I report a return of capital on my tax return? That's a great question. So a return of capital comes from certain type of funds. It's reported typically on a T slip that you received from the fund company. You actually don't report it on your return. What you do is it lowers your adjusted cost base, so your ACB is reduced and later on you have a capital gain, hopefully. Or potentially a different capital loss when you make that calculation. Do I have to report income from foreign investments if they total less than $100,000? Well that's also an interesting question.

So there's a special form that you have to fill out if you have more than $100,000 of foreign investments. However, you still need to report your income from your foreign investments even if they total under $100,000, so don't get confused by the form, because after all you're still responsible as a Canadian tax filer to report worldwide income. We got a question that just came in about autofill, which I talked a little bit about, the CRA software that downloads your receipts. Autofill does not capture all documents.

Who is responsible if any document is missed when calculating tax? Well that's a great question, and we answered that I think through the tax court decision that I showed everybody. You are responsible. So even if autofill is not there, you're supposed to know what income you received in the year even if you never received the slip, even if the slip was mailed to the wrong address, you are responsible. So very very important to make sure that you've got all your income, great question.

This question, we got a lot. I received both a T3 and a statement of transactions for a non-registered monthly income fund, how do I complete Schedule 3 of the tax form? So, good question. So T3s only report the distributions you received from a mutual fund in the year, and those would report income, foreign income, dividend income, and capital gains, distributed from the fund manager when the fund manager sells certain positions at a capital gain or loss. So that's going to be on the T3 slip. In terms of a statement of transactions, if you have a redemption of the mutual fund units during the year, then those have to be reported separately on the schedule 3. So they're not the same thing. A statement of transaction is where you've sold a particular position in a year, is reported on the disposition section under a shares or mutual funds, and there is also room at the very bottom for gains that you received through a T3 slip that were reported to you.

So we have a question now, could a high-income spouse give money to a low-income spouse to put into their TFSA with no loan required, and no attribution? The answer is yes, so you are allowed to give money to another spouse to put into a TFSA. There is actually an exception from the attribution rules while the money is in the TFSA earning income. It's all tax free, and there's no attribution. There are anti-avoidance rules that if you're then putting it through a TFSA and then take it out, and then use the money for investment, you can run into problems, but in most cases that's not going to be a concern at all.

Question from Edwin, did I omit to say that if there is a beneficiary for an RRSP, there's no tax to be paid when one passes away. Well that's correct. If you have a beneficiary and that beneficiary is your spouse or partner, there is no tax on death. If that beneficiary is anyone other than your spouse or partner, except in very limited situations, where you've got a dependent child suffering from a disability of a certain type, then even with the beneficiary, there would be tax payable on death. Now, beneficiary designations are helpful in some provinces to avoid things called provincial probate taxes and state administration fees, but RRSPs and RRIFs are typically subject to taxation on death, other than passing to a spouse or partner and other very limited situations. Going through some of the questions we've answered already.

Here's a great question. If we have a joint account, a joint account is a non-registered account, then can we split it any way we want or should it be 50-50? This question comes up regularly. The official CRA response to this is is that you're supposed to split it proportionate to the contributions into the account. So from a practical perspective, I'd say let's say we have a couple, husband and wife, they're both working they're both contributing to the same account in more or less equal proportions. Most people split it 50-50. If on the other hand, you got a couple of people living together their living common-law. One person doesn't work, but yet the account is made joint for estate planning, for probate purposes, for whatever reason. Then really only the individual that has contributed the investment money to fund that account should actually reporting 100% of the incoming gains from the account, notwithstanding that the account is registered 50-50. If I earn $20,000 in the U.S., and I have this money transferred to my Canadian bank account, what will be my tax rate. Well again, the $20,000 is taxable in the year that you earn it, so typically if it's earned throughout the year, we use an average rate, regardless of whether or not we convert it or bring the money into Canada. If you earn $20,000 in the U.S., you take the average rate for the year if it's earned throughout the year, and you convert that into a Canadian return at whatever the FX rate would be, you would pay tax on that at your Canadian tax rate. If you also paid U.S. tax, we don't know what type of income it is, but if it was for example employment income, you would get a foreign tax credit for that type of income.

Can I comment on the tax-effective asset location within a TFSA, RRSP, and non-registered accounts. Well in most cases we advise that in your non-registered account you want things like equities, where you going to have only 50% taxable gains, and also you have Canadian dividends, where you get the dividend tax credit. RRSPs and TFSAs allow you to earn tax reinvestment income. If you're going to have any fixed income at all, in most cases we recommend in a non-taxable account so that you do not pay tax at full marginal rates on that investment income.

We got a question from Tim, what is a lifetime capital gain currently allowed? I think the question is the lifetime capital gains exemption. I would say for most people, the answer is zero. There is no lifetime exemption anymore. There used to be $100,000. There is for a small business owner, that owns shares of a private company called a QSBC, a qualified small business corporation. It's about $835,000 per person. You sell shares of an active business corporation. There's a million-dollar exemption for fishing and farming property for 2018. Just going through some questions here, some are a bit technical, we're going to skip those, try to find ones that are of widespread interest.

A question from Maria. Mom's earning $20,000 a year, dad's earning $100,000. Should dad loan money, $40,000 to mom to reduce tax. Well, again, if you're only looking at $40,000, it's probably not worthwhile doing, because what rate of return can you get on the $40,000. If you're looking at, you know, 3 or 4%, you're talking about saving a few hundred dollars and may not be worth it. On the other hand, if that number was $400,000 or some larger amount, then yes it does make sense, because Dad's in a high-rate, Mom's in a low-rate and therefore there is substantial opportunity there for income splitting.

Got a question here on child support payments, do you have to report it? Again child support is received tax-free, doesn't go on the tax return. There may be an information requirement somewhere, but it's certainly not income. Spousal support is of course fully taxable.

Great question here from Andrew. In choosing between a TFSA and RRSP, I lean towards TFSA as my gains are tax-free, whereas my RRSP, gains will be taxed at withdrawl. Am I correct with this interpretation? Andrew, no, you're not, and in fact that's exactly why we wrote our bulletin. I would encourage you to get a copy of our bulletin, the website is on the left, www.jamiegolombek.com, "CIBC on Dispelling RRSP Myths," or Google it. We'll actually take you through a mathematical example to show you in fact that the gains are just as tax-free in an RRSP as they are in a TFSA. Great question, that's why we wrote it.

Lots of questions coming in here, just give us a second. Question from Reid, how many years does CRA have to go back to audit errors you may have made on your return and charge penalties and interest? Typically they go back three years. That being said, if there is gross negligence, they actually can go back an unlimited period of time. But as long as you been honest in the stuff that you're doing and you're doing everything appropriately, then usually they can go back three years in most situations, otherwise pretty much you got away with it, if I can use that term.

Question here. Great question from Donna, are proceeds from a life insurance policy, a critical illness insurance policy, taxable? I would say in most cases, the answer is no. So there are some permanent life insurance policies that would have an adjusted cost basis to the policy. There may be a taxable amount there, but in most cases on death, the death benefit of a life insurance policy pays out tax-free, and I would argue that in most cases again, even with critical illness, in most people's view, would be tax-free.

Here's a great question from Dana. Now we didn't really cover a private company taxation today, however can there be some comments made between paying yourself dividends versus salary for self-employed out of your personal corporation. Well, the integration is pretty much perfect. In other words, there's really not a lot of tax-rate advantage anymore for doing dividends versus salary. A typical rule of thumb is pay salary out to about $150,000 to maximize RRSP contributions, and for many people who are interested in getting CPP, they'll also allow you to get your CPP by having pensionable earnings. That being said, once you're over $150,000, we would move to a dividend strategy, but we would try to retain the income in the corporation to enjoy the tax deferral advantage. Now there is some limitation of that going forward as a result of recent budget changes, but that would only apply to very few companies that have built up significant retained earnings, let's say in the million-dollar range inside the corporation.

One last question, from Vijay. How do you report moving expenses on the tax form? There's actually a line for it if you look at the page for deductions on the federal tax form there's a line for moving expenses. Again, these have to be qualified expenses that you incurred, if you move over 40 kilometres for employment purposes, and that moving expense can only be deductible against income from that new source of employment. Thanks very much.

[Thank you]

[Host:]
Thanks again Jamie, it looks like that's all the time we have. Jamie, that was a very informative presentation. It was easy to understand the 2018 budget changes, and the tax tips will be very helpful for effective tax planning, so thank you for a great presentation.

[Speaker:]
Thank you.

[Host:]
A reminder to the audience that if you wish to listen to this webinar again, a link will be emailed to anyone that registered. I would like to thank the audience, we really appreciate you being here. Should you have any questions or comments, please visit Investor's Edge website, or get in touch with us by phone, chat, or email. Thank you for joining us today. We will see you next time.

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