Tag: Ask a Tax Expert

Do you have to make quarterly tax remittances in Canada? – MoneySense

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Is there a form to help with the calculations?

Yes, there is a chart that can help; check it out here. However, you’ll still need to calculate any taxes, preferably using tax software to make the math automatic, to get to net federal taxes payable on line 42000 first.

Will CPP and EI premiums make a difference to annual income taxes?

The answer is both yes and no. The self-employed, who are unincorporated and have net business income to report, may be required to make a payment of CPP (Canada Pension Plan) contributions. It may also include EI (Employment Insurance) premiums, if the taxpayer has opted to participate in EI.

CPP and EI are in addition to taxes otherwise payable. If you are required to make quarterly tax installments, these payments are included in the required remittances. But if the balance of income taxes payable, without the CPP/EI premiums, is less than $3,000, those premiums will not be added to the installment remittance threshold.

Top five questions about quarterly tax installments

Here are some common questions Canadians have around tax installments.

What happens if I am late paying a quarterly tax bill?

As mentioned, if you are not using the CRA’s billing method, you’ll be charged interest on late or insufficient installment payments when the T1 return is filed and that can sting. At the current quarterly prescribed rate (9% at the time of writing) that can add up quickly, as that interest is compounded daily.

It is possible to offset the compounding interest accruing when your installments are late or insufficient? Simply make the next payment early or pay more than you calculated the next payment to be.

What are the penalties of not making a quarterly tax payment?

In some cases, late or deficient installments will attract penalties if you will owe a lot of money at tax filing time. What’s a lot? CRA’s interest charge has to exceed $1,000. The penalties are 50% of the interest payable, less the greater of $1,000 and 25% of the installment interest. The penalty is calculated as if no installments had been made for the year.

What if my income changes from year to year?

If you qualify for quarterly tax remittances, you can reduce your income that is subject to tax with an RRSP or first home savings account (FHSA) contribution or by making sure that other larger deductions like child care, moving, or non-refundable tax credits like tuition, medical expenses or donations are all claimed in full.

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Evelyn Jacks, RWM, MFA, MFA-P, FDFS

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October 10, 2024
Adding names to a cottage deed could result in big tax bills

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You mention that the cottage deed is in your name only right now. That suggests that it was either in your name all along or that the cottage was owned jointly with your husband with right of survivorship. I suspect it was held jointly with right of survivorship, meaning that it was transferred directly to you on your husband’s death. That means that it passed outside of his will regardless of his wishes contained therein.

Ask a Planner: Leave your question for Jason Heath »

Are there capital gains on inheriting a cottage?

Sometimes the ownership structure of an asset trumps a will, and this may be a case of that, Jill. When an asset passes to a surviving spouse on death, by default, it is transferred at its adjusted cost base for tax purposes, meaning no capital gains tax is payable at that time. The executor can elect to have some or all of the capital gain taxed on the final tax return of the deceased, if it’s advantageous to do so, but let’s assume this didn’t happen. This means that all the accumulated capital gains have been passed along to you and this is important as it relates to the next steps you take with the cottage.

Do you have to share an inherited cottage?

You may not have a legal obligation to include your three stepchildren in the ownership of the cottage, Jill, since the cottage passed outside the will due to joint ownership. If you are in doubt, you should seek legal advice. It sounds like there is at the very least a moral obligation to include your stepchildren in the ownership, but it will result in a gift to your husband’s children—and therefore has tax implications.

Beneficiary of taxes

Because the accumulated capital gains have all been passed along to you, if you gift three-quarters of the cottage to them, you will personally have a capital gains tax liability in the year of transfer. Some people think they can skirt the capital gains tax by making the gift for $1 or for a value equal to the cost, but that’s not the case in Canada. The transfer in ownership needs to happen at the fair market value, meaning the appraisal you suggested may be relevant, Jill. An appraisal is not mandatory when determining the fair market value for a transfer but may be advisable.

Assuming you have sufficient resources to pay the capital gains tax, you may not be worried. But the capital gains tax bill could be a big one if you’ve owned the cottage for a long time.

Keep in mind there are options. You could treat the cottage as your principal residence, with the transfer to your stepchildren, therefore being tax-free. But this would expose your house in the city to capital gains tax on the sale of it or upon your own death.

You need to weigh the pros and cons of paying tax today versus deferring it to determine, if this is advantageous to use the principal residence exemption for the cottage. You may also be limited in doing so if you had a previous principal residence that you sold during the time you have owned the cottage and you treated it as your principal residence, with no capital gains tax payable. This would negate the years you owned the cottage and claimed another principal residence exemption.

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Jason Heath, CFP

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July 31, 2024
Tax deductible expenses when selling a cottage
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There are a number of expenses that can be claimed to reduce the capital gain on your cottage, Louise. Capital expenses are an example. The Canada Revenue Agency (CRA) defines a capital expense as an expense that:
- Gives a lasting benefit or advantage;
- improves the existing property;
- is a separate asset; or
- is considerable in relation to the value of the property.
Capital gain vs capital expense for the costs of owning and selling a cottage

There’s a distinction between a capital expense—which increases your cost base and reduces your capital gains tax on a property—and a current expense, which is a repair. Repairs are only tax deductible when a property is used for rental or business purposes against the income earned but have no impact on capital gains.

In your case, Louise, a good example of a capital expense would be your expense to change a shingle roof to a metal one. In particular, it provides a lasting benefit, is an improvement to the existing roof, and is considerable in value.

The windows and flooring also provide a lasting benefit. The stove is a separate asset, in its own right. So, these three expenses would also generally be capital expenses that would be added to the cost of the property for capital gains tax purposes.

What is a capital gain?

A capital gain is the increase in value on any asset or security since the time it was purchased, and it is “realized” when the asset or security is sold. (Similarly, a capital loss is realized when you sell an asset that has decreased in value since the time of purchase.) Capital gains (or losses) can happen on stocks, mutual funds and real estate.

Read more about capital gains in the MoneySense Glossary: “What are capital gains?”

Is replacing a cottage deck a capital expense?

The replacement of the old deck and stairs may not be a capital expense, Louise. In fact, the CRA gives a specific example on their website of an expense for wooden steps being a current expense. If you were to replace wooden steps with concrete steps, that would be a capital expense. If you were to repair wooden steps, it would not be a capital expense. It would be a current expense or repair as opposed to a renovation or improvement. So, whether the deck and stair expenses are capital or current would be a matter of fact depending on the exact nature of the work.

Note that the CRA does not give a specific list of capital expenses, but rather, guidelines for determining the nature of the expense.

Cottages for sale: What happens if you have a capital gain?

The calculation of your cost base for tax purposes will then be equal to your original purchase price, closing costs on acquisition, and capital expenses over the years. The proceeds, less the selling costs, less your cost base gives you your capital gain. Half of your capital gain is taxable on your tax return in the year of sale, or two thirds if the capital gain in excess of $250,000 in a given year for a taxpayer. A large capital gain in a high income year could give rise to 25% tax or more depending on your province of residence, income sources, and the magnitude of your capital gains for the year.

Read more about owning a cottage:

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
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Jason Heath, CFP

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July 16, 2024
Can you file multiple years of income taxes together in Canada? – MoneySense

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That’s important in an increasingly digital world. Hard copy does matter. For example, if you’ve closed bank accounts, says Wall, you may not be able to get the statements you need to file past years’ tax returns, especially if you don’t have the receipts or invoices.

If you just have a T4 and no claims for discretionary expenses like childcare, medical, moving expenses, donations or tuition fees, your documentation requirements will be simpler, but if you have those expenses to claim, you’ll need some kind of documented proof.

This is important because the CRA says all documents must be legible and reproducible. Wall says in some cases the documents, like medical expenses or receipts for a small business, don’t have to be original copies. It can be a scan—CRA is increasingly asking for electronic receipts. However, credit card or bank statements are not valid for these claims—you need to keep the receipts.

“You can go ahead and file a return and if you’re never audited, you might be fine,” he says. “But if you file the return and it gets audited, and you can’t produce the receipts, then they will deny those expenses, and could turn a refund into a balance due.” He says that usually, when someone is filing multiple years that are late, your probability of getting audited increases, especially if you’re self-employed. Filing late in those cases will attract those late filing and potentially gross negligence penalties to add to the tax burden.

Can you avoid interest on tax returns owed for multiple years?

Penalties and interest happen when you file late and owe the government money. They can also happen after an audit, when CRA disagrees with your claims.

In some cases, it is possible to plead “hardship” under the Taxpayer Relief Program. For example, if an extraordinary circumstance caused you to miss filing a return, such as a death in the family, serious illness or other serious circumstance. Certain delays in resolving an audit or incorrect information provided by the CRA may have caused you to be unable to fulfill your obligations, and you can apply for relief in those cases too. File the Form RC4288, Request for Taxpayer Relief Cancel or Waive Penalties and Interest to request relief. Sometimes financial hardship can be used as a reason for a relief request, but detailed records must be submitted.

But if you want to get prosecution relief, possible penalty relief and partial interest relief, you can take advantage of the Voluntary Disclosure Program. You have to voluntarily come forward to fix any mistakes in your tax filings before the CRA knows or contacts you about it. The program is open to any taxpayer, from individuals, employers, and corporations to partnerships and trusts.

You will have to pay the taxes owed plus either the full or partial interest, but you may receive some form of relief, based on the discretion of the CRA.

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Renée Sylvestre-Williams

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December 20, 2023
How to fill out a personal tax return for 2023 – MoneySense
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- The basic personal amount
- The age amount
- Amounts for spouse and dependents
- Adoption expenses
- CPP and/or QPP contributions
- Employment insurance premiums
- Home buyers and home accessibility amounts
- Digital news subscription expenses
- Tuition/education/textbook amounts (complete Schedule 11)
- Medical expenses
- Donations and gifts (fill out Schedule 9)
Part C, Net federal tax:

There are more opportunities for tax reductions in this section, including the common dividend tax credit and the less common minimum tax carry forward on split income and political contributions tax credits. The advance received on the Canada Worker’s Benefit by lower income earners is also recorded here.

Step 6: Refund or balance owing

You’ve reached the final stage where you’ll find out whether you will receive a tax refund or if you owe taxes. If you are self-employed, remember to add payable CPP and EI premiums here. The social benefits repayment on EI or OAS also appears here. Finally, provincial taxes computed on provincial tax forms will be added.

Now, onto the top of the last page of the T1 General form. This is where you enter the income tax deducted from your various slips and claim your final set of applicable tax credits, overpayments and rebates. This can include some provisions that really add up to reduce taxes or provide a bigger refund, including overpayments to the CPP and EI, the Canada Workers Benefit, the Canada Training Credit, the eligible educator school supply tax credit, and so on. Seniors, self-employed and other Canadians subject to making quarterly tax installments will also want to record the money paid to reduce their tax bill. Finally, available refundable provincial tax credits are reported.

If your total credits exceed taxes payable, you may receive a tax refund. Specifically, if you have a negative amount, enter it where indicates you have a refund. If you have a positive amount, enter it on the line that indicates you have a balance owing.

Once you file your tax return, if you owe any taxes, you can pay online using online banking, credit card or pre-authorized debit.

If you’re expecting a tax refund, you should receive it within two weeks if you filed online, eight weeks if you filed by paper, or 16 weeks if you live outside of Canada or file a non-resident tax return. If you sign up for direct deposit, you will receive your refund faster than waiting for a cheque in the mail.

Obviously, every Canadian’s tax situation is unique to them and to every year they file. So, if you’re ever in doubt, it’s a good idea to seek out a qualified accountant or a tax professional who can verify that your tax return is completed properly. Tax software can double-check for any missing information and catch many errors. But it can’t always apply for new provisions you haven’t told it about or represent you in case you are audited by the CRA.

Step 7: Review your NOA

It can take up to two weeks to receive a Notice of Assessment (NOA) if you file electronically. However, it can take up to eight weeks to receive your NOA if you file by paper.
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Sandy Yong

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December 13, 2023
Reducing capital gains on a cottage – MoneySense

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Note that the value of the house when the cabin was purchased and its value when the cabin is sold are not relevant. The capital gain would be a pro-ration based on the years of ownership going back to the house’s original purchase price plus any adjustments.

It is also worth noting that Canada did not have a capital gains tax until 1972, so properties owned prior to that year would need to be valued as of Jan. 1, 1972. There was also a capital gains exemption of $100,000 that was eliminated in 1994, but taxpayers could elect to realize a notional capital gain and bump up the adjusted cost base of certain assets, like real estate, at that time. These situations may or may not apply to your in-laws.

When to claim principal residence exemption in Canada

You claim the principal residence exemption on your tax return for the year in which you sold a property. So, it is not something you need to decide ahead of time. In your father-in-law’s case, Cal, if he and your mother-in-law intend to keep both properties forever, we should consider the tax implications upon death.

When you die, if you leave capital property like real estate to a surviving spouse, the default position is that the property passes to the surviving spouse at its original cost, plus any adjustments. So, no capital gain is triggered.

You can elect to have a capital gain or a partial one if it makes sense to do so. Say, for example, the deceased had a low income in the year of death, or other tax deductions or credits that their executor wanted to claim against the income and tax payable.

Capital gains tax would generally only become payable when the second spouse passes or if a property is left to someone other than the surviving spouse.

The claims to make to lower a capital gain

You mention keeping receipts, and given that the values of the two properties are similar, your in-laws may want to have a record of expenses for both. One document to keep might be the lawyer’s statement of account for the purchases, which shows legal fees, land transfer tax and other closing costs. If your in-laws don’t have these statements, the lawyer(s) may be able to provide copies.

Also, receipts related to renovations and capital improvements to the properties are relevant. These costs, as well as the eventual selling costs like the realtor’s commission or legal fees, may reduce the capital gain.

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Jason Heath, CFP

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October 23, 2023