Helping First Nations, Inuit and Metis with Tax Filing

The Canada Revenue Agency is trying to reach out to Canada’s First Nations, Inuit and Metis to encourage them to file their tax forms on time and could use your help to make sure these communities get all the tax benefits they are entitled to. But filing tax returns are not always easy, especially when there is income on and off the reserve.

For several years now, CRA and Elections Canada have been cooperating and asking taxpayers for permission to update the National Register of Electors based on the information provided on their income tax returns. For 2007, a new question has been added to the T1: ìAre you a Canadian citizen?î. With the addition of this question, CRA can now, with the taxpayerís permission, have the taxpayer's name added to the voterís list if it was not already registered. In prior years, this section of the return was used only to update addresses of those taxpayers who were already on the list. In addition, this year if the return is for a deceased person, the CRA will notify Elections Canada to remove the taxpayerís name from the voting list.

By Evelyn Jacks, PresidentThe Knowledge Bureau If happiness is a by-product of achievement, then planning for one of lifeís most important transitionsófrom economic activity in the workplace to ìeconomic inactivityî in retirementócan provide tremendous peace of mind. It can also result in the satisfaction of knowing your lifetime of work will not only fund your lifestyle, but provide an opportunity to transfer your lifeís workóboth wealth and wisdomófrom one generation to the next. This is, in large part, the key to opening the discussion around retirement income planning for many boomers. Often the soft issuesóthe difference between wants and needsóare the most difficult to approach in the discussion around finances in the last third of life. Busy, full lives are not often conducive to discussions about how to tap into the capital thatís been accumulated or what we leave behind. That of course has always been the reason behind financial planning: to ensure there are enough resources available to meet personal needs and goalsóno matter what lifecycle you find yourself inóand then, if possible, to preserve and pass on a legacy. When you add tax efficiency to that planning mix (which very few do, by the way) you have the recipe for a ìgourmetî retirement. At the beginning of a retirement period clients are more concerned about the former issueówill I have enough to retire? However, as people move through this lifecycle towards the end of retirementódeathóthe legacy issue becomes more important. Legacy planning requires gazing beyond the grave, culminating with an understanding of how existing wealth will crystallize, on an after-tax basis for the use of survivors and more importantly, the family wealth stewards. Therefore a process that helps to identify the structure of stewardship for the transition of wealth from one generation to another is the starting point in a discussion about estate planning. Only then can the right roadmap be crafted for the completion of the journey from a life of work, to lifeís work, to a lifeís legacy. Simply put, there are three prerequisites for successful tax and financial planning that transitions underlying capital from a retirement income plan to an effective estate plan: A structure for identifying issues of concern A formal strategic plan for financial results A process for real wealth management: after tax, inflation-adjusted, cost-controlled Such a process should also deliver, as required, in regular and pre-defined time periods: Ongoing evaluation of the structure by the stewards of the plan Annual measurement and evaluation of net worth In short, for boomers, itís really not about retirement. . .itís all about transitioning from economic activity to a healthy and active lifestyle and an intact financial legacy. Tax and financial advisors need to understand this. For these reasons, we are focusing The Knowledge Bureauís annual Distinguished Advisor Conference on how to tap into this most important planning period for the most affluent, highly educated and socially-engaged generation of pre-retirees in our history. Transitioning: The Path to Reciprocity is the issue; a deep understanding of the triggers that motivate boomers to come to the table for planning will enable the tax and financial advisor to quarterback the successful transition of both wealth and wisdom. The Knowledge Bureau is also pleased to present the Retirement Income Specialist Designation Program by self study which provides designated training in real wealth management focused on tax efficient retirement income planning.

For the first time in history seniors who receive eligible pension income can elect to have their spouse or common-law partner report up to half of that income. Should all taxpayers transfer as much as they can? Is pension splitting good for everyone? The answer to the last question is easy ñ no, not everyone will benefit from splitting pension income. For example, where both spouses have eligible pension income and both are in the highest tax bracket. Likewise when income is low enough that neither spouse is taxable, transferring pension will be of no benefit. The answer to the first question is not so simple. Reducing income for a high-income senior can have several benefits. Along with the obvious reduction in taxes payable at the taxpayerís marginal tax rate, reducing income may also reduce the clawback of Old Age Security and may increase the taxpayerís age amount. However transferring income to a spouse may have the exact opposite effect. So, no simple rule will work for all taxpayers. However, here are some guidelines that will help you to optimize the transfers for most taxpayers. Higher Income Spouse with PensionWhere the spouse who has the pension income is the higher-income spouse, transfer just enough to equalize their taxable incomes. If there is not enough income eligible for transfer, transfer all that is available. This is true even if the other spouse has eligible pension income By equalizing taxable income, the couple will generally pay the minimum amount of tax. td.boxed {border:1px solid black;} Example 1 John Mary Age 66 65 Eligible Pension Income $40,000 Nil Taxable Income $80,000 $46,000 Taxes before splitting* $22,018 $8,564 Proposed pension split -$17,000 $17,000 Taxes after splitting $14,138 $14,138 Tax savings $2,307 ñ in this case, the savings are due mostly to the elimination of the OAS clawback although the age amount is now clawed by for both spouses. * all tax calculations based on 2007 Ontario residents. In fact there is a lot of leeway in the amount selected for transfer with little or no tax effect, so long as both taxpayers are in the same tax bracket (both federally and provincially) and the transfer takes the higher income spouse out of a clawback zone. One Spouse Under 65In cases where the spouse is under 65, it may be beneficial to increase the lower spouseís income even more where the transfer will decrease the older spouseís clawbacks. Example 2 Bill Jessie Age 66 60 Eligible Pension Income $40,000 Nil Taxable Income $80,000 $46,000 Taxes before splitting $22,018 $9,119 Proposed pension split -$20,000 $20,000 Taxes after splitting $13,136 $15,177 Tax savings $2,824 ñ in this case, the savings are due to the elimination of both the OAS and age amount clawbacks. Lower Income Spouse with Pension IncomeWhere the pension income amount claimed by the couple is less than $4,000 it will generally be beneficial to transfer pension income to maximize the pension income amount claimed by the couple, even if you are transferring the income to a spouse who has a higher taxable income. Example 3 Edward Ellen Age 66 60 Eligible Pension Income $10,000 Nil Taxable Income $24,000 $76,000 Taxes before splitting $1,934 $19,294 Proposed pension split -$2,000 $2.000 Taxes after splitting $1,393 $19,750 Tax savings $85 ñ in this case, the savings are due to the increasing the family pension income amount (mitigated by the fact that Ellen pays tax on the income at a higher rate). If your income tax software does not optimize pension income splitting, be sure to look carefully at each return where pension income and spouses are involved. Apply these general rules and answer these questions: Can transfer of pension income equalize the spouseís income tax brackets? Can transfer of pension income reduce the clawback of the age amount or OAS on one return without increasing them on the other? Can transfer of pension income increase the total pension income amount available to the couple?

In our last issue of Breaking Tax and Investment News we covered tax treatment of various foreign pensions. The taxation of German pensions are featured today, as the rules have changed recently and it may be helpful to discuss this with your clients from a retirement income planning point of view. Retirement Pensions [Corrected]Under Canada's tax treaty with the Federal Republic of Germany, retirement pensions form Germany that are received by a Canadian resident are taxable in Canada, and taxable in Germany. The full amount of such pensions, in Canadian dollars, should be included in income. A foreign tax credit is available for any tax withheld at source. War PensionsLikewise, periodic or non-periodic payments received by a resident of Canada from Germany as compensation for an injury or damage as a result of hostilities are taxable only in Germany. Social SecurityAs a result of recent pension reform in Germany, for social security pensions which began in 2005 or earlier, 50% of the pension is non-taxable in Canada 2005 and 2006. After 2006, the dollar amount which was non-taxable in 2006 remains non-taxable in each subsequent year until the year the taxpayer dies. For pensions which begin after 2005, the percentage that is non-taxable in Canada is set in the year the pension starts, see the chart below. The 50% rate for 2005 increases by 2% each year for the period 2006 to 2020 and then increases by 1% each year until the taxable percentage reaches 100% for pensions which begin in 2040 or later. The non-taxable amount determined in the second year remains constant for all subsequent years. Year Pension Starts Taxable Portion Year Pension Starts Taxable Portion Year Pension Starts Taxable Portion 2005 or before 50% 2017 74% 2029 89% 2006 52% 2018 76% 2030 90% 2007 54% 2019 78% 2031 91% 2008 56% 2020 80% 2032 92% 2009 58% 2021 81% 2033 93% 2010 60% 2022 82% 2034 94% 2011 62% 2023 83% 2035 95% 2012 64% 2024 84% 2036 96% 2013 66% 2025 85% 2037 97% 2014 68% 2026 86% 2038 98% 2015 70% 2027 87% 2039 99% 2016 72% 2028 88% 2040 or later 100%  Example: Pensions which begin after 2005 John is a Canadian resident who began receiving monthly payments under the social security legislation of Germany in the amount of $1,000 on July 1, 2006. This pension is taxed as follows: 2006: Total pension received during the year (line 115) = $6,000   Taxable portion = 0.52 x $6,000 = $3,120   Non-taxable amount (line 256) = $6,000 - $3,120 = $2,880 2007: Total pension received during the year (line 115) = $12,000   Taxable portion = 0.52 x $12,000 = $6,240   Non-taxable amount (line 256) = $12,000 - $6,240= $5,760 2008 and later: Non-taxable amount (line 256) remains at $5,760 each year regardless of the amount of pension received (except in the year of death). Proration: Death of Pensioner. In the year the taxpayer dies, the non-taxable portion is prorated for the number of days the person was alive in the year. Audit-proofing. These German pensions and their exempt portions are often audited. The taxpayer must provide the notice issued by the German social security administration, which states when the pension was started. Look for the sentence that reads: "Die Rente beginnt am [xxx date]." (The pension starts on [xxx date].) Survivor s Pensions. If a survivor pension is paid to a surviving spouse, the pension is considered to have started when the original pension started. In the first year of the pension, the applicable percentage is applied to determine the taxable portion. In the second year (the first year that the pension is received for the full year), that percentage is once again applied and the non-taxable portion determined is the non-taxable portion for all subsequent years, until the year of death of the survivor.This topic and over 800 others are discussed in The Knowledge Bureau s EverGreen Explanatory Notes, now available at introductory prices for professionals in the Tax and Financial Services Industry. For more information, click here.

Tax and financial advisors will be interested in CRA s new handbook on securities transactions. The handbook discusses who has to file a T5008 information return to report securities transactions, including some interesting situations like: What are the reporting rules for a hot topic in today s marketótraders in precious metals? (did you know, pawnbrokers who buy gold rings don t have to file a T5008 slip) What are the tax reporting rules for investment counsellors? (they usually use the services of a broker or agent in serving clients but must file form T5008 if they act as agents for their clients in buying and selling securities) The guide goes on to explain the T5008 is not required to report the exchange of old shares for new shares occurring in the course of a reorganization of the capital structure of a corporation as long as the exchange meets the requirements of section 86 of the Income Tax Act, and no consideration other than new shares is receivable. Among other topics, reporting rules for the dissolution and continuation rules for partnerships are also discussed. For more information click here.

It appears CRA is auditing taxpayers who have excess contributions in their RRSPs these days, this can be a nightmare for those who find form T1-OVP daunting. Updated by the agency on February 9, it is worth taking a look at the new simplified version, which hopefully will make life a bit easier for tax practitioners and financial advisors alike. Check out the following links: T1-OVP Individual Tax Return for RRSP Excess Contributions T1-OVP-S Simplified Individual Tax Return for RRSP Excess Contributions In addition, a new guide was posted providing instructions for the reporting of Retirement Compensation Arrangements. The guide covers employer responsibilities relating to application for an RCA Account Number (Form T733), how to withhold and remit the refundable tax, how to report contributions made (Form T737-RCA), how to complete the T737-RCA slip and summary, and how to report the deductible RCA contributions to the employee. In addition the responsibilities of the custodian are outlined and penalties and interest costs described for those who fail to comply with withholding, remitting or filing requirements. For more information see T4041 Retirement Compensation Arrangements Guide 2007 The Knowledge Bureau is pleased to offer a new designation program for those consulting with clients in retirement income planning. The Retirement Income Specialist Program under the MFA Designation is now available. Please click here for more information.