Time’s Up: CRA’s 100 Day Mandate for Improvement

After years of frustration on the part of tax professionals and taxpayers alike, the Finance Minister ordered the Canada Revenue Agency to clean up its act in 100 days. Specifically, the improvement plan was to run from September 2 through December 11. Finance Minister and Minister of National Revenue, Francoise-Phillippe Champagne instructed CRA to fix “unacceptable wait times and service delays.” Time’s up this week and CRA has released an update on progress. What gets measured, gets done. Let’s see what CRA’s metrics show. 

As discussed in last week's Breaking Tax and Investment News, it is the time of year that we should begin thinking about Year End Tax Planning, and one area that is often given little thought is the planning for charitable donations. Nnow is a good time to review what tax deductible gifts are and special rules regarding gifts of capital property:   Gifts can be made to:   ¸ A registered charity ¸ Registered Canadian amateur athletic association ¸ Tax exempt housing corporation providing low-cost housing for seniors ¸ Government of Canada, province or territory, municipality ¸ The United Nation and its related agencies ¸ Prescribed university outside Canada ¸ Charitable organization outside Canada to which our government has made a donation in the tax year or previous tax year ¸ Gifts to US charities if you have US income Note: Gifts to Canada include monetary gifts made directly to the federal Debt Servicing and Reduction Account, sent to the Receiver General requesting this. A tax deductible receipt will be issued. Special Rules: Gifts of capital property: ¸ FMV at time of gift can trigger capital gains consequences ¸ Gifts of publicly traded shares should be initiated before December 21 and can be transferred on a tax free rollover basis to registered charities and private foundations (after March 19, 2007). ¸ Zero inclusion rates for purposes of capital gains and losses apply if you donate: Shares, debt obligations or rights listed on a designated stock exchange Shares of a mutual fund corporation Units of a mutual fund trust Interests in related segregated fund trusts Prescribed debt obligations Ecologically sensitive land ¸ Gifts can be made to a registered charity or after March 18, 2007 to certain private foundations. ¸ Gifts of depreciable property can trigger recapture or terminal loss ¸ Gifts of significant movable cultural property to Canadian heritage institutions or public authorities must be certified under the Canadian Cultural Property Export Review Board, which determines its FMV and provides you with a certificate for tax credit purposes (Form T871). In this case no capital gain is required to be recorded. ¸ Artists: to qualified donee, the gift is a disposition from ìinventoryî rather than capital property. The value is calculated as the cost amount or an amount not greater than the FMV and not less than the cost and any advantage received. ¸ Art or Antique dealers: objects donated are considered to be a disposition of inventory, not capital property and must be based on FMV at the time of donation. Non-qualifying gifts: ¸ Shares you control ¸ Obligation or securities issued by yourself So start planning now to meet your charitable donation goals and the receiving the best tax deduction based on your charitable giving. Attend the Knowledge Bureau's November workshop presentation in cities across Canada for more tax planning ideas and information on recent changes to the tax laws.

By Evelyn Jacks, President, The Knowledge Bureau On October 16, 2009, the Department of Finance moved to close several loopholes for TFSA investors including the prohibition of swap transactions between various investment accounts and the earning of income from prohibited and non-qualifying investments. The new rules, which will come into effect after October 16, 2009, contain four main components: Shifts in Value in Swap Transactions. Asset transfer or "swapî transactions between registered or non-registered accounts and Tax Free Savings Accounts, will no longer be possible after this date. That is, transfers between accounts of the same taxpayer or that of the taxpayer and an individual with whom the taxpayer does not deal at arm's length will be prohibited. This will squash any shift value from, for example, an RRSP to a TFSA without paying tax, first. Income from Intentional Overcontribution. Income earned within a TFSA due to an intentional overcontribution will be subject to a tax of 100%. Should a taxpayer have made an overcontribution in error, prompt rectification is required to avoid the penalty; such actions will be seen positively by the Minister, who will have the discretion to waive interest and penalties in those cases. Income from Investment in Non-qualifying and Prohibited Investments. In addition, should the taxpayer invest in non-qualifying investments (land and general partnership units, for example) or prohibited investments ( such as shares of the capital stock of a corporation in which the holder has a significant (10% or greater) interest and investments in entities with which the holder does not deal at arm's length), any income reasonably attributable to those prohibited investments will be considered an "advantage" and taxed at 100%. No New TFSA Room. The proposed amendments will also include rules to ensure that the withdrawal of amounts in respect of deliberate overcontributions, prohibited investments, non-qualified investments, asset transfer transactions and income related to those amounts do not constitute distributions for TFSA purposes and therefore will not create additional TFSA contribution room. A brief review of TFSA Planning Rules: 1. What is a TFSA? Available January 1, 2009, the new Tax-Free Savings Account (TFSA) is a registered account in which investment earning, including capital gains accumulate tax free. Contributions up to an annual maximum of $5000 can be made by/for those who have attained 18 years of age and are residents of Canada. There is no maximum age limit. This amount will be indexed after 2009, with rounding to the nearest $500.   2. Can unused contribution room be carried forward to future years? Unused contribution room can be carried forward on an indefinite carry forward basis. You can take money out, in other words, spend it on whatever you want, and then put it back in when you can because the TFSA contribution room has been preserved. 3. What happens when I make an overcontribution? Taxpayers cannot contribute more than their available TFSA contribution room in a given year, even if they make withdrawals from the account during the year. If they do, a penalty tax of 1% of the highest excess amount in the month, for each month you are in an overcontribution position is charged. Discrepancies in contribution room limit or excess contributions, must be reported to the TFSA issuer. In addition, after October 16, any income earned resulting from an overcontribution, or a contribution to a prohibited or non-qualifying investment will be taxed at 100%. 4. What income sources should be earned from the TFSA account? That largely depends on age and sources of other income. Those sources of income subject to the marginal highest tax rates (such as interest) or dividends, which artificially inflate net income, thereby decreasing social benefits payments, should perhaps be earned within a TFSA. But if you are looking for real growth, the TFSA should contain a diversified set of investments, including equities. Note that losses from investments earned within a TFSA are not deductible from capital gains held outside the account. 5. What are eligible investments for a TFSA? The same eligible investments as allowed within an RRSP apply to the TFSA. A special rule will prohibit a TFSA from making an investment in any entity with which the account holder does not deal at arm's length. Unlike the RRSP, contributions to a TSFA do not result in an income tax deduction and withdrawals from a TFSA are not reported as income nor included in income for any income-tested benefits, such as the Canada Child Tax Benefit or Goods and Services Tax Credit. 6. Do the Attribution Rules affect investments within the TFSA? There is no attribution rule attached to the new TFSA, allowing adults, including parents and grandparents to transfer $5000 per year to each adult child in the familyófor the rest of their lives. In addition, one spouse may transfer property to the TFSA of the other spouse without incurring attribution. 7. Can the TFSA be used for retirement planning? Yes. A 40 year old taxpayer who invests $5,000 each year for 25 years in a TFSA (total capital of $125,000) at a 3% rate of return, would accumulate $185,000 in the account, an increase of $60,000 or 48%. This would be approximately $15,000 more than if the same investment was made outside the TFSA in a taxable account.   Educational Resources:  Now is a good time to look at retirement income plans, family succession and estate plans in an attempt to better understand financial needs for a future, which could certainly include tax increases on both income and capital.  To learn more consider the following Educational Resources available from The Knowledge Bureau: <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" /> Tax Efficient Retirement Income Planning    Master Your Retirement       Master Your Taxes Tax Efficient Investment Income Planning                      Master Your Real Wealth      Master Your Investment in the Family Business

The Department of Finance has once again released the Fiscal Monitor, this time for the four months ending July 2009,announcing a deficit of $18.3 billion for the first quarter of the 2009-10 fiscal year, compared to a surplus of $2.9 billion for the same period a year ago. However, this deficit is on target with updated projections reflecting a weaker fiscal outlook than forecast in the January 2009 Budget. The projected combined deficit spending for the period 2008 ñ 2012 has gone from an estimated balance of $84.9 billion in January 2009 to a staggering $153.8 billion as an estimated deficit in the Update of Economic and Fiscal Projections released in September 2009. The summary of changes table from the report is reproduced below: Department of FinanceSummary of Changes in the Fiscal Outlook Since the January 2009 Budget 2008ñ2009 2009ñ2010 2010ñ2011 2011ñ2012 2012ñ2013 2013ñ2014 2014ñ15 (billions of dollars) January 2009 Budgetary Balance -1.1 -33.7 -29.8 -13.0 -7.3 0.7 n/a Impact of Economic and Fiscal Developments Budgetary revenues -3.3 -8.3 -6.8 -8.5 -7.8 -9.6 Program expenses1 Employment Insurance -0.7 -3.2 -3.1 -2.5 -1.6 -0.6 Policy Measures 0.0 -9.4 -4.4 -2.0 0.0 0.0 Lapse 0.0 0.0 0.0 0.0 0.0 1.5 Economic and other Changes -0.4 -0.2 -0.7 -0.9 -0.7 -0.7 Total program expenses -1.1 -12.8 -8.2 -5.4 -2.3 0.2 Public debt charges -0.3 -1.2 -0.4 -0.5 -2.0 -2.5 Total Economic and Fiscal Developments -4.7 -22.2 -15.4 -14.4 -12.1 -11.9 Revised Budgetary Balance -5.8 -55.9 -45.3 -27.4 -19.4 -11.2 -5.2 1A positive number implies a decrease in spending and an improvement in the budgetary balance. A negative number implies an increase in spending and a deterioration in the budgetary balance.Note: Totals may not add due to rounding. In addition to the increased deficit by the end of the 2012 fiscal year, the projected deficit spending is expected to continue and a surplus balanced budget by 2014 is no longer in the forecast. The continuing budget deficits are in the wake of eleven consecutive years of balanced budgets. The month of July 2009 alone produced a deficit of $5.8 billion, a result of the weakened economy and the tax measures brought in under the Economic Action Plan. $5.1 billion was spent on program expenses due to an increase in Employment Insurance (EI) payments and monetary support for those suffering in the motor vehicle manufacturing areas. What does this mean to the average Canadian? These deficits will require taxpayers to ask hard questions, not only about the financial state of the nation, but about their own ability to fund retirement income and health care costs, if governments are stretched by new financing costs. By the year 2011, the first boomers will reach age 65. According to Infrastructure Canada, those age 65 and over are the most intensive users of the health care system, a financing burden yet to come for Canadian governments. Will today's deficitsócreate by the financial stimulus world leaders have created to avoid further financial disaster--become the taxes of tomorrow?  Likely.   In Canada, where baby boomers make up approximately one-third of our population and just under 50% of the tax filers, these circumstances are serious and require careful planning.  The questions for tax and financial advisors and their clients to ponder are:<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" /> 1.  To what extent will increased taxationóand the potential for inflation--erode future purchasing power of retirement savings? 2.   How can current tax and investment strategies anticipate and plan for these obstacles? Other questions to consider by those planning to retire shortly are: 1.    What effects will deficit spending today have on public pensions and the health care system? 2.    How will deficit spending affect the taxation of wealth transition in the future? 3.    How will incomes of boomer offspring fare in their stewardship of the boomerís wealth on an after-tax basis? Educational Resources:  Now is therefore a good time to revisit retirement income plans, family succession and estate plans in an attempt to better understand financial needs for a future, which could certainly include tax increases on both income and capital.  To learn more consider the following Educational Resources: Tax Efficient Retirement Income Planning    Master Your Retirement       Master Your Taxes Tax Efficient Investment Income Planning                      Master Your Real Wealth      Master Your Investment in the Family Business   Your thoughts on the future outcomes of deficit spending and financial stimulus packages for Canadian taxpayers?

ìToday's leading advisors must understand the interlocking relationship between both risk and return in the 21st Century,î said Robert Ironside, faculty member of The Knowledge Bureau. ìThey must learn to evaluate how this relationship impacts both individual investments as well as the overall portfolio and, importantly, they must communicate this information to the client in a simple fashion.î     At the Distinguished Advisor Conference to be held November 8-11 at the Loews Ventana Canyon Resort in Tucson, Arizona, Mr. Ironside will discuss the three things that every investor wants to know today. These include: whether a clients portfolio will produce the short, and long term returns needed to achieve their objectives and make up for the market meltdown; the level of risk the client will need to take on to achieve the necessary returns; and the alternatives available to the client so they can make the best decisions to grow their wealth. Mr. Ironside will outline how to build efficient portfolios in turbulent times to maximize new opportunities.

Financial advisors have been under a great deal of pressure since the markets imploded in 2008 ñ and investors began losing millions. ìIn many cases, the troubled markets have put the advisor-client relationship in jeopardy,î says Jim Gray, Principal of Media Strategy Inc. ìAdvisors don't help their cause when they carelessly or unknowingly alienate clients and put further pressure on relationships that already run the risk of blowing up.î Mr. Gray, a media and presentation skills coach who works extensively in the financial services industry, will reveal the 10 biggest communication mistakes that advisors make when conversing with prospects and clients at the 6th annual Distinguished Advisor Conference to be held November 8 -11 at the Loews Ventana Canyon Resort in Tucson, Arizona. Gray will demonstrate how advisors can, with more preparation and focus, initiate positive, productive conversations that lead to solid, enduring relationships.

By Evelyn Jacks, Knowledge Bureau President Canada Savings Bonds Rates have been set at 40 basis points, against a backdrop of three consistent months of negative inflation. Further, Canada Premium Bonds are indicating fixed interest rates (1%, 1.4%, 1.8%) which are significantly under the projected rate of CPI inflation over the next three years (1.9%, 2.1% and 2.1% respectively). That sounds like a potential lose-lose proposition for risk-adverse savers, who are attempting to preserve and build wealth while negotiating within this turbulent marketplace. So what's going on with the purchasing power resulting from these extremely low rates of return on the use of your savings? To help us understand, we have consulted with Knowledge Bureau Faculty Member, Robert Ironside, ABD, Ph.D. (Finance), who is also a headlining speaker at the Distinguished Advisor Conference next month. Some definitions to help: Inflation is the rise in prices over time, which erodes your future purchasing power. Negative inflation, or deflation, reflects something different: it happens when costs decrease against increased productivity (that's not necessarily bad). Or it can happen when people stop buying; perhaps in anticipation of lower pricing in the future or simply a lack of demand due to uncertainty, job loss, other personal financial factors (that's not good). Robert Ironside, Knowledge Bureau Faculty member weighs in: Investors should always seek a balance between risk and return. A common mistake made by many investors is to focus only on return, ignoring risk. The current issue of Canada Savings Bonds (CSBs) is a good example, although the risks attached to the CSB are not those we normally think of. As just announced, the current Series 120 CSB pays an annual interest rate of just 40 basis points (or 0.40%). The new Series 70 Canada Premium Bond (CPB) has a slightly higher fixed return of 1%, 1.4% and 1.8% over three years. In a world with zero inflation and zero taxes, the return on these issues of CSBs and CPBs would still be well below the returns normally thought of as "risk-free". Of course, these are not normal times, but what happens to return when we introduce both taxes and inflation? In Canada, we are taxed on the nominal interest earned. Thus as the Table below shows, if we invest $100,000 in CPBs, in year one we earn $1,000 in interest income. The $1,000 of interest income is then fully taxed at our marginal tax rate, assumed to be 40%. After taxes, we end up with $600 of interest income. Our total after-tax investment is now worth $100,600. We now have to include the impact of inflation. The purchasing power of our entire investment goes down by the assumed increase in the CPI each year that we own the instrument. For example, if we have inflation of 1.9% in the first year, the actual purchasing power of our investment falls from $100,600 to $98,724.24. If we were to repeat the exercise with the 0.4% annual yield earned on the CSB, the results would be even worse. Now, the real, after-tax value of the $100,000 investment falls to just $98,335.44. Both of these real, after-tax returns are better than putting the $100,000 "under the mattress", since if we did that, our purchasing power would have declined to $98,135.43. We are approximately $589 better off by buying the CPB and $200 better off with the CSB than from doing absolutely nothing. However, as investors, we are concerned with both preserving and growing our wealth, not watching its purchasing power be confiscated by inflation. By being ultra-conservative in our investing strategy, we are incurring the risk of earning too little in after-tax returns to maintain our purchasing power. Of course, the future path of inflation is uncertain. We could enter into a period of deflation, which is characterized by widespread falling prices, in which case a 1% nominal rate of return would be worth more than 1% in real returns. How likely is it that Canada will slip into a deflationary spiral, given that the total CPI in Canada has declined for three consecutive months, from June through August (the latest figures that are available)? The answer possibly lies in the core CPI, which excludes the eight most volatile components of inflation, including food and energy. Core inflation has shown a very different picture, with annual increases of 1.9%, 1.8% and 1.6% over the last three months (to August, 2009). With Central Banks all over the world pushing strongly on the interest rate string and employing unprecedented levels of monetary easing, it is not likely that we will see a prolonged period of deflation, although it cannot be ruled out, as Japan has shown in its struggle to curb deflation. The greater risk is that at some future date, inflation will quickly rear its ugly head and consume the wealth of the unwary. Taking taxes into account, here's what you can expect from this year's CSB/CPB offering: Example: $100,000 invested in October 2009 in Canada Premium Bonds by a taxpayer whose marginal tax rate is 40%. Inflation rate assumed to be 1.9%, 2.1% and 2.1%.   Current $   Future $ Year Capital Interest Earned Value of investment Income Tax Payable Net value after tax   Net value after tax 2009 $100,000.00             2010 $100,000.00 $1,000.00 $101,000.00 $400.00 $100,600.00   $98,724.24 2011 $100,000.00 $1,414.00 $102,414.00 $565.60 $101,848.40   $97,893.60 2012 $100,000.00 $1,843.45 $104,257.45 $737.38 $103,520.07   $97,453.83 Notes: 1. Each year the taxpayer will have to pay the tax on the accrued interest (November to October) in spite of the fact that the interest has yet to be received and is therefore not available to pay the tax bill. 2. The average interest rate (stated as 1.39%) is reduced by income taxes to approximately 0.834%. 3. After 3 years, in current dollars, the $100,000 investment will have grown to $103,520.07 (after taxes are paid). However, if inflation continues at the projected rates, that $103,520.07 will be worth $97,453.83 in today's dollars. If the $100,000 were not invested, its value in today's dollars would be $94,140.03. EDUCATIONAL RESOURCE: For Advisors: The Economic Policies for Canadian Investors Stemming from The Global Financial Crisis will be discussed at DAC (Distinguished Advisor Conference) hosted by The Knowledge Bureau in Tucson, Arizona November 8-11. Over 15 dynamic experts on the cutting edge of the financial crisis will address leading tax and financial professionals on the technical and soft skills required to embrace Leadership and Opportunity in Turbulent Times. For Advisors and Their Clients: The MASTER YOUR PERSONAL FINANCE Series of Books provide financial education for decision makers. Published by The Knowledge Bureau, they help investors and their advisors have better conversations about their money and the decisions required to accumulate, grow, preserve and transition it to the next generation.