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A thorough analysis of today’s financial news—delivered weekly to your inbox or via social media. As part of Knowledge Bureau’s interactive network, the Report covers current issues on the tax and financial services landscape and provides a wide range of professional benefits, including access to peer-to-peer blogs, opinion polls, online lessons, and vital industry information from Canada’s only multi-disciplinary financial educator.

This Week’s Edition of KBR:

August Poll

In your view, have recent federal tax changes contributed to economic resilience and powerful competition in Canada?
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No: 167 votes

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March 25 is Manitoba Budget Day

Stay tuned for budget commentary from The Knowledge Bureau. Manitoba needs to take a close look at personal taxation as it contemplates a future within a financial crisis. Some thoughts for the Finance Minister: Financial strength comes from what you own. Tax systems must make it possible for people in all income brackets to accumulate and keep capital while they are financially productive, and then stop stripping it away when they are not. That way their assets can sustain them, when they can no longer work, taking a strain off social support requirements. It is important to note that different income sources are subject to different marginal rates of tax. Further, risk and reward plays into the tax systemóbusiness and capital losses offsetting income and capital gains over time will show different income results for tax purposes. Particularly in these difficult times, we need to understand whether we agree as a society that it is important to reward those who are brave enough to invest their money within highly volatile marketplaces, at least with the ability to offset taxable income with losses, particularly when those losses often result from the employment of workforces, which creates taxpayers. The unfairness in the system comes in large part from the taxing of non-discretionary incomesóincreasing non-refundable tax credits like the basic personal amount can help here. Other culprits are bracket creepówhich Manitoba notoriously keeps in place year over year--and for the low and middle classes in particular, high marginal tax rates in clawback zones. . .which generally occur with incomes under the top brackets. Tax rates, brackets and clawback zones need urgent review in this province. Taxing one time lump sums from unexpected sources like severance packages is also problematic. Governments need to consider income averaging as a solution to spiking marginal tax rates leading to unfairness in certain situations like these. Farmers could also benefit greatly from a return to averaging over 5 years. High user fees also transfer taxes disproportionately to the low and middle classes. This needs to be added to the discussion. Finally a global economy requires that volatility associated with currency fluctuations and future inflationary pressures are better addressed in the tax mix. It's tough to be a finance minister these days. . .we wish the Minister luck in his deliberations and recommendations for stimulus and change.

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Preparing Taxpayers Not to Pay

Many people are preparing to pay their March 15 quarterly instalment and worrying about their April 30 tax liabilities, while they watch their portfolios languish in turbulent times. You should be preparing not to pay, especially if it hurts the portfolio further by generating withdrawals that are not required. Check out Tax Tips 1 and 2, the first in a new ongoing series of information tips now forming part of Your News. Add your own tips too, as you make it through tax season 2008. Two things to know before you overpay instalments or avoid your obligations on April 30: You can avoid the March 15 and June 15 quarterly instalments if your income is expected to drop in 2009. Simply request that instalments be based on an estimate of 2009 taxable income by writing a letter to CRA. However, note that interest will be charged if instalments are deficient when you file your 2009 tax return. You can avoid late filing, gross negligence and tax evasion penalties if you file on time, but then make arrangements with the collections department at CRA to pay over time. Interest will be charged as CRA waits for its money, but that's a much better wayóand ultimately less expensive way--to handle the issue than the Ostrich Approach.

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Deadline Reminders

A summary of upcoming deadlines:   Monday, March 2, 2009 - RRSP, RDSP and Labor sponsored fund donation deadlines   Monday, March 16, 2009 - Instalment payment deadline   Tuesday, March 31, 2009 - T3 receipts to be received   Later of March 2, 2009 or thirty days after legislation passes (which has not occurred yet)- Recontributions to an RRIF   For more tax tips, purchase a copy of Essential Tax Facts written by The Knowledge Bureau's President, Evelyn Jacks, to learn how to ace your 2008 tax return and save money all year long.  

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Pension Splitting - A Review of The Rules

With tax season upon us once again, it is time to take a look at some of the changes regarding personal income tax filings.  One area that prompts many questions is the pension splitting rules which were introduced for the 2007 tax year.  Let's review some of the rules for splitting pensions: Pension Income Amount Claim. A taxpayer who is over 65 at the end of the year and receiving pension income or who is under 65 but receives qualified pension income may claim the lesser of the pension income or qualified pension income, as the case may be, and $2,000 Claimants Over Age 65. Pension income includes amounts included in the taxpayer's income for the year that are: payments in respect of a life annuity from a superannuation or pension plan, RRSP annuity, RRIF payment, DPSP annuity, the interest portion of annuity payments, and amounts accrued under certain life insurance policies and annuities. Claimants Under Age 65: Qualified pension income includes amounts included in the taxpayer's income for the year that are: payments in respect of a life annuity from a superannuation or pension plan, and amounts received from the following because of the death of the taxpayer's spouse: RRSP annuity, RRIF payment, DPSP annuity, amounts accrued under certain life insurance policies and annuities. Excluded: Specifically excluded from the definitions of pension and qualified pension income are: Old Age Security, Canada or Quebec Pension Plan Benefits, a death benefit an amount that is included in income but for whom a deduction is taken (such as exempt foreign pension or the deducted portion of US Social Security) a payment received out of or under a salary deferral arrangement, a retirement compensation arrangement, an employee benefit plan, an employee trust or the Saskatchewan Pension Plan. Claim the pension income amount on line 314 of Schedule 1 Federal Tax. No separate form is provided by CRA for calculating the Pension Income Amount but an area is provided on the Federal Worksheet to calculate the amount. If the taxpayer has a spouse or common-law partner and the taxpayer's income is low enough that the pension income amount is of no benefit, then the unused amount may be transferred to the spouse or common-law partner using Schedule 2 Federal Amounts Transferred From Your Spouse or Common-law Partner. As the provincial pension amount varies by province, the transfer of the provincial amount will differ from the federal amount and must be performed on a special Schedule 2 for the province of residence. In some provinces, the Pension Income Amount is indexed. Note: As 2007 was the first year of the provision and many software optimizations were not perfected or available on time, it is recommended that last year's choices be reviewed. T1ADJ adjustment requests will be allowed on the election.  

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Tax Treatment - Patronage Dividends

With the recent issuance of refund cheques from certain gasoline cooperatives, it is timely to review the tax treatment of such "refunds" or patronage dividends.    Patronage is the amount of business conducted with the particular customer. More specifically, "allocation in proportion to patronage" for a taxation year means an amount credited by a taxpayer to a customer of that year on terms that the customer is entitled to or will receive payment thereof, computed at a rate in relation to the quantity, quality or value of the goods or products acquired, marketed, handled, dealt in or sold, or services rendered by the taxpayer from, on behalf of or to the customer, whether as principal or as agent of the customer or otherwise, with appropriate differences in the rate for different classes, grades or qualities of goods, products or services. The amounts so computed are to be credited to the customer in the taxation year or within the 12 month period following the end of the taxation year. Tax Consequences A payment to a customer includes the issuance of a certificate of indebtedness or a share of the corporation to the customer. The amount actually paid to the taxpayer, and received by the taxpayer, must be included in the income of the taxpayer under S. 135(7) unless the patronage dividend relates to consumer purchases. These are not taxable. Tax withheld on patronage dividend payments should be claimed as a credit. This is true whether or not the patronage dividend is taken into income. Example: Patronage Dividend Issue: Joan is a farmer. She buys her groceries and her fuel at the local co-operative. She has received a T4A representing her patronage dividend for the prior year. Her dividend was $1,000, against which $250 of tax was withheld. Joan's records show that 40% of her expenditures at the Co-op related to groceries, with the balance to fuel. How does she report the income? Answer: $600 of the patronage dividend should be reported on her statement of farming income. This portion of the dividend, which relates to her farm fuel purchases, is taxable. The other $400, which relates to her consumer purchases, is not taxable. Joan should report the full $250 withheld as tax withheld at source on her T1 return. The full amount is creditable.   Excerpted from EverGreen.  With a subscription to EverGreen Explanatory Notes you will have access to more than 800 files containing all the relative links, examples, tips, and interview checklists you need. Internet-based, and just a couple of mouse clicks awayóEverGreen brings the information to you. TRY THE EverGreen Explanatory Notes DEMO TODAY!

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