Home office expense against employment income

Some employees are allowed to deduct home office expenses on their tax returns if employers allowed and complete T2200 form, declaration of condition of employment expenses. You can include a portion of the rent, utilities bills in proportion to your office space. In some cases office supplies and cell phone bills are also allowed. Your deductible home office expense cannot exceed your income from the employment.

Keeping track of vacation property cost

When selling a vacation home, the gain on that property may be taxable in the future. It is important to keep track of the cost to acquire the property; the higher the documented cost, the lower the gain when the property is sold. It is also important to keep track of capital costs to the property, as they further increase the cost of the property. A capital cost is for a lasting improvement to the original condition of the property,
for example, replacing carpets with hardwood floors.

First-Time Donor’s Super Credit

The budget proposes to introduce a temporary supplement to the existing non-refundable tax credit for charitable donations by individuals. The new credit can be claimed once from the 2013 to 2017 taxation years.

Here is how it works - if you have donated $500 in 2013 to a registered charity, under the normal calculation you can claim NRTC ($200 x 15%) + ($300x29%) = $117, and the first time donor can claim an additional 25% of $500 = $125; a total of $242. For the 2013 taxation year, an individual will be considered a first-time donor if neither the individual nor the individual’s spouse or common-law partner has claimed the CDTC in any of the five preceding tax years.

Rental Income as ABI

Can rental income be claimed as Active Business Income (ABI)?

In most cases, income from the property will be considered as passive income and would not qualify for a small business deduction. For example, rental income is considered a passive income (income from property) unless the company has 5 full-time employees. However, in a rare circumstance it can be treated as ABI and eligible for small business deduction limit without hiring more than five full-time employees as described below:

A corporation may derive income from holding property in Canada (e.g., income in the form of real estate rentals, interest, or royalties). If such income is received or receivable from an associated company and the amount is or may be deductible in determining the associated company's income from an active business carried on by it in Canada, then paragraph 129(6)(b) deems the income in the recipient's hands to be income from an active business carried on by it in Canada.

If subsection 129(6) deems rental income to be active business income and capital cost allowance on the rented building was deducted in calculating active business income, any recapture of capital cost allowance on the disposition of the building would also be considered to be active business income.

Federal Budget 2013

How will the new federal budget affect individuals and businesses?

Impact on individuals –

• Non-eligible dividends tax increase: the federal effective tax rate on non-eligible dividends will be 21.22% (from 19.58%)
• Lifetime capital gains exemption has increased to $800,000 (from $750,000) on dispositions of qualified property
• Creation of the First-Time Donor’s Super Credit – supplements existing charitable tax credit to give new donors an additional 25% tax credit, up to $1,000 of donations
• Safety deposit box fees will no longer be tax deductible
• The elimination of import tariffs on sporting goods and baby clothes will mean reduced prices on sporting equipment and baby clothes

Impact of businesses –

• Hiring credit for small business is extended for an additional year. This tax credit allows businesses to receive a credit of upto $1,000 against a small company’s increases in its 2013 EI premiums
• Establishing a Canada Job Grant, a training fun, by 2014 which provides $5,000 for an individual’s training, requiring matching fund from provincial governments and the individual’s employer
• Manufactures will see tax relief of $1.4 billion over four years for buying new machinery and equipment

Hiring Credit for Small Business

What is the Hiring Credit for Small Business?

In 2011, the federal government created the Hiring Credit for Small Business (HCSB) to stimulate new employment and support small businesses.

The HCSB is designed to give small businesses relief from the employer’s share of EI premiums. Small businesses can be eligible to receive a credit of up to $1,000 on their payroll deductions account.

Does your business qualify for the HCSB?

As per the CRA website, you are eligible for the HCSB credit if you meet all of the following conditions:

• you deducted EI premiums from the remuneration you paid to your employees, or paid the worker's share of EI premiums for barbers, hairdressers, fishers, or drivers of taxis and other passenger-carrying vehicles and you remitted these premiums (along with your share of EI premiums) to your payroll (RP) account;
• you reported the income and deductions on a T4 slip and filed this information on your RP account for 2011 (see Note below) and 2012;
• the total of employer EI premiums you paid for 2011 (see Note below) was $10,000 or less; and
• your total employer EI premiums increased in 2012

How is the HCSB credit calculated?

CRA will automatically calculate the credit amount for all businesses that are eligible. You do not need to apply for this credit.

CRA will use the EI information from the T4 slips you filed to determine the credit amount your business is eligible for. As per CRA, “the amount of credit is the difference between the employer’s portion of the EI premiums you paid in 2011 and 2012.”

New businesses started in 2012 are also eligible for the HCSB. CRA will use a zero value for the 2011 EI premiums when calculating the HCSB for 2012.

Note: self-employed individuals who pay EI premiums on their earnings are not eligible for the HCSB

Does your child qualify for the Children’s Fitness and Arts Tax Credit?

The following rules apply to be eligible up to $500 non-refundable tax credit for both the Fitness and Arts Tax Credit –

• Child must be under 16 at the beginning of the year to be eligible
• Programs must be ongoing –

o   Weekly program involving a minimum of 8 consecutive weeks’ duration

o   Programs of 5 consecutive days (summer/day camps)

• Children eligible for a disability tax credit are eligible for the fitness and arts tax credit up to the age of 18 and qualify for an addition $500, for a total fitness / arts credit of $1000

In 2012, the taxable benefit for a $500 credit at 15% is $75

Fitness Tax Credit –

This credit requires that the program must include “significant physical activity that contributes to cardio-respiratory enducare plus one or more of: muscular strength, muscular endurance, flexibility, or balance.” (CRA)

Some activities eligible for the fitness tax credit are: basketball, football, hockey, swimming, hiking, horseback riding, karate and sailing

Arts Tax Credit –

This credit requires that the program must meet one of the following criteria, as per the CRA website:

• it contributes to the development of creative skills or expertise in an artistic or cultural activity;
• it provides a substantial focus on wilderness and the natural environment;
• it helps children develop and use particular intellectual skills;
• it includes structured interaction among children where supervisors teach or help children develop interpersonal skills; or
• it provides enrichment or tutoring in academic subjects.

Note: Activities that are part of a regular school program or sports-academics programs do not qualify for either the Fitness or the Arts tax credit.

RRSP vs. TFSA - Which one is right for you?

First, let's determine the difference between the two - 

RRSPs – intended specifically as a retirement savings plan

·         Contributions are tax deductible
·         Maximum contribution: 18% of earned income or $22,970
·         Cashed RRSPs treated as earned income and taxed
·         Age limit for making contributions – 71 years of age

   

TFSAs – can be used to save for anything (retirement, home, car, vacation etc.)

·         Contributions are not tax deductible
·         Maximum contribution: $5,500/year, regardless of your income
·         Withdrawals are not taxed
·         No age limit to making contributions 

      Which option is better for you?

Higher marginal rate today – invest in RRSP first. Generally speaking, RRSPs are better for high-income earners ($70,000+).

Higher marginal rate in retirement than today, then invest in TFSA. TFSAs are better suited for lower-income earners.