George thought he’d be smart, screw the feds a little and help his married son at the same time. So he sold the family cottage, worth about $400,000, to Jamie and Pat for a mere $30,000. That was about $300,000 more than he’s paid for it 15 years earlier, when it was a beater property.
“You can gift stuff to others before you croak,” he said. “or sell for whatever you want. This was the smart thing to do.”
Hardly. While Canada has no gift tax (George could have given Jamie a pile of money for a house down payment, no consequences), there’s no way the CRA is letting property change hands without its pound of flesh. In this instance both George and Jamie came in for a hard landing.
Dad’s taxable income was reassessed for the year to include a gain of $270,000. Why? Because regardless of what price George and Jamie decided between them, in the feds’ eyes the property was changing hands at fair market value. So, the difference between George’s purchase price and the market price, less the sale proceeds, was subject to capital gains tax.
As for Jamie, equally nailed. He now owns a $400,000 cottage he paid only $30,000 for. If he sold it tomorrow, he’d have a taxable gain of $370,000. Thanks, dad.
Most people, of course, simply don’t understand how they’re taxed or what to do to minimize the impact. They also don’t realize how the tax system is skewed to ensuring the rich stay that way.
Let’s say you earn $100,000 a year working as a proofreader on this blog (about average at the moment). If you live in BC, you’d take home roughly $75,000, with an average tax rate of 25% and a marginal rate of 38%. (The marginal rate means you’ll lose 38% of every additional dollar earned).
Now if you also have a $2,000,000 investment account and earn 5% in capital gains after your stocks or ETFs increased by $100,000 (and you sold enough to realize the profit), the tax bill would be just $6,250. You keep almost $94,000. See what I mean? And the same holds true for investors who own assets that pay them dividends. It’s not that hard to earn $50,000 a year, and pay zero tax.
The worst way to make money is working for it. Most employees have tax deducted at source, and pay a far higher rate than do investors, who just collect income. Most middle-class people lose about a third of their earned income, and with serious coin (above $150,000), the marginal rate soars to more than 40%.
Ditto for interest earned on assets like GICs, bonds or savings accounts. That’s simply added to your employment income and taxed as such. Rent’s the same. Buy a condo and lease it out and (after expenses) the money you receive is treated as if it were earned on the job. Bummer.
A far better way is to receive capital gains. That’s what happens with a stock or an ETF or an apartment building which rises in value, and is liquidated. Then you’re able to keep 50% of the gain absolutely tax-free. The remaining half is added to your income from all other sources, and taxed at the normal personal rate. That means even the highest-earning person pays a capital gains tax rate of less than 25%, keeping three-quarters of the profit.
Dividends are taxed in a more complex way, but with a similar result. The dividend income is ‘grossed up’ and then reduced by the dividend tax credit (but only for Canadian companies). The net effect is to reduce the tax payable by about half, compared to earned income.
Profits made selling your house are free of capital gains tax, but you can’t deduct any expenses incurred in buying, selling or owning it. If you lose money on an investment you can deduct the loss from capital gains, but if you lose money on your house this break is not available to you.
Personal taxes can be reduced by making RRSP contributions, which reduce your taxable income. But remember all you’re really doing is taking after-tax wealth and making it taxable again – and this sucks when you’re retired and have to pay up. TFSA contributions are not tax-deductible, both neither are the proceeds taxable, which means this should be a cornerstone of your retirement planning.
Mutual funds fees are not deductible from your taxable income. Money paid to have your non-registered investments managed can be written off. Bonds are taxed more than most other assets, so you might as well tuck them inside your RRSP. Things that generate dividends or capital gains should be held in an outside investment account. Self-employed people can often pay themselves in dividends instead of salaries, and slash their tax bills (but they earn no RRSP room). Spousal RRSPs can achieve income-splitting between husband and wife, or finance a maternity leave.
A key element of the Canadian tax system is this: The more you have, the less you pay. For example, savers are given $100,000 in deposit insurance in case a bank fails, investors get over $1 million in protection if their broker rolls.
If life were fair, I’d be taller.
171 comments ↓
If I was making $100K as a proofreader for you Garth, I’d point out that the first paragraph tonight is not very clear.
In Kanada tax slaves have two choices in shelters: a $500,000 townhouse in a rural prefecture block, or a $1,000,000 urban SFH (on-street parking, natch).
200km to the south the world’s largest economy ticks along.
Typical wage there $35,000/yr?
(The new communism, employers pretend to pay the employees, who pretend to work?)
http://qz.com/194264/sales-and-related-jobs-account-for-11-american-jobs/
More than one in five US workers is employed in just 10 occupations, a new report from the US government shows.
…
Here’s a look at the top 10 occupations, the number of workers, and their median wage:
1.Retail salespersons, 4.48 million workers earning $25,370
2.Cashiers 3.34 million workers earning $20,420
3.Food prep and serving staff, 3.02 million workers earning $18,880
4.General office clerk, 2.83 million working earning $29,990
5.Registered nurses, 2.66 million workers earning $68,910
6.Waiters and waitresses, 2.40 million workers earning $20,880
7.Customer service representatives, 2.39 million workers earning $33,370
8.Laborers, and freight and material movers, 2.28 million workers earning $26,690
9.Secretaries and admins (not legal or medical), 2.16 million workers earning $34,000
10.Janitors and cleaners (not maids), 2.10 million workers earning, $25,140
First! <3
RE Garth: Now if you also have a $2,000,000 investment account and earn 5% in capital gains after your stocks or ETFs increased by $100,000 (and you sold enough to realize the profit), the tax bill would be just $6,250.
You forgot provincial income tax. The $6250 only covers federal tax.
But your point is well taken about it being a much lower tax rate than working for a living. There is something fundamentally wrong with our tax system when you stop and think about it.
“Profits made selling your house are free of capital gains tax…”
It’s amazing how many virgins screw up this one, however.
I know of several amateur flipper-landlords, who bought properties to rent out. Later when they sold they tried to claim them as principal residences, therefore capital gains exempt. (They would rent or live out of the country in the interim, with no Canadian property they lived in)
But CRA has gotten mighty picky about this, and nails you for full capital gains and penalty costs in such cases, whether it is a SFH or especially these days, condos.
Their test is whether you ordinarily and routinely occupied the premises at any time as your principal residence. Moving in for a few weeks or months won’t do.
In one case I know of, all it took was for an unhappy former tenant to go to CRA to spill the beans. Poof – a $75,000 tax bill on the capital gains of the property that was bought in 1999 and sold ten years later for a huge increase.
(My lawyer friends tell me this is a highly recommended point of leverage for tenants in such cases, by the way, especially those who face evictions from such flipper/investors)
Worse, flipper proceeds are often taxed as income, not cap gains. — Garth
“Now if you also have a $2,000,000 investment account and earn 5% in capital gains after your stocks or ETFs increased by $100,000 (and you sold enough to realize the profit), the tax bill would be just $6,250. You keep almost $94,000. See what I mean? And the same holds true for investors who own assets that pay them dividends. It’s not that hard to earn $50,000 a year, and pay zero tax.”
Garth if you can please expand on this or provide some kind of hint how to google, you lost me here. I had a look and saw that 50% of capital gains are taxable (at the marginal rate?).
“There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: “In the long run we are all dead.” And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.”
– Henry Hazlitt – Economics in One Lesson
http://thehumanecondition.com/2013/06/19/economicsinonelesson/
Ah wrote to soon, read more, get it. Sorry for wasting time you could have spent combing your lovely beard.
Sounds bloody complicated !
The real problem Garth, is that the tax system is too complex for the average individual to comprehend. Heck, half the employees at CRA don’t understand the tax code and they supposedly administer it. Tax credit, tax deductible, tax free, the average person just doesn’t understand.
The reason the wealthy seem to get significantly further ahead is they have the means to employ tax specialists and accountants that help them preserve and grow their wealth within the existing legislation.
Imagine a simple tax system where everyone paid a flat tax, say 10%, on everything from salaries to capital gains. There would be an outcry from the entitled left, politicians would be reluctant as they could now offer little incentives to be re-elected and accountants would be out on the street looking for work.
A flat tax would massively enrich the rich. — Garth
Yes, life is hard. But does it really have to be this hard?
As a self-employed person how much in dividends can I take per year tax free??
Who said tax-free? — Garth
Any Rick Santelli fans out there can find video clips of his appearances on CNBC-TV throughout the business day, at the following link:
(You have to watch a short commercial before the video plays)
http://search.cnbc.com/main.do?target=all&categories=exclude&partnerId=2000&keywords=santelli
‘Let’s say you earn 100,000 a year as a proofreader on this blog…’
Hahaha!!
Nice post. Looks simple. I have always enjoyed managing my own money and going to Business school at night when I was a kid. Managing money the way Garth lays out in his blog, is what works. Over the years I have seen so many mistakes made by people I know, including family members, whose actions go against everything Garth teaches, and with sad results, even bankruptcy. I am a tactful guy, yet, when I could no longer bear to watch a family member or friend making horrific financial mistakes, and tried to help, my input was never well received, to put it mildly. Of course, when things turned out poorly, they said nothing to me, nor did I say anything to them, as even without me saying anything, their resentment towards me was palpable. I see this same behavior towards Garth. Although it is inspiring to also see the people that write in to Garth, who see the light, and thank him for his help, and, equally inspiring to see the humble people who write Garth after making terrible financial choices with dire consequences, see the light, and make the changes to get on the road to having financial stability, and thank Garth for his direction.
I am no financial Guru, and made my mistakes when I was younger for sure, but I am truly blessed and grateful that my life today is devoid of financial worries. As always, Freedom First.
Same applies for pensions. Corporate pensions are taxed the same as earned income. A nicely balanced portfolio of dividend paying investments pays a fraction of that. Also when you croak, your pension croaks with you. Your portfolio can live to fight for someone else.
Sorry Garth buy my lady friend works for the CRA and she told me that if I sold a property that had a MARKET VALUE of $400,000 for only $30,000 then I would simply be taxed at the price I sold it for, not it’s market value.
So if I bought it 40 years ago for $10,000 and sold it for $30,000 (even though it has a market value of $400,000 ), then I would simply be taxed on the capital gain of $20,000 that I realized from the sale.
Now yes, the NEXT person will have to pay a whopping amount of capital gains tax when the sell it at $400,000 because the tax man will have deemed them to have a #370,000 capital gain.
Please remember; the CRA does not tax people twice for a capital gain on the same property, that would be illegal and would be fought in court.
Its when the person DIES and the property goes to the next of kin ; that is when the property has been deemed to have been sold at market value.
I’m amazed that none of the Geniuses here at this site didn’t pick this little trick up?
Go ahead. Try it. — Garth
#10 Bobby
SO TRUE!
How many times have we had our taxes done, didn’t like the answer we got, went somewhere else and got an entirely different answer. One says you can’t claim this or that and someone else says you can…and those are the professionals!
#15 Freedom First.
Making mistakes is part of life,the day you make your last mistake is the day you die.Its all about minimizing your mistakes!
Not only that, but Canadian RE has a P/E ratio, on a nationwide basis, in excess of 35, when calculated on the same basis as stocks. While it is trivial, these days, to buy the TSX index at a P/E ratio of 15, trending downwards (just watch the bank earnings over the next week!!!!).
It is the definition of insanity that anyone magically thinks that an asset class with a P/E of 35, and a historic growth rate of that of inflation, will actually perform well compared to the dirt-cheap stock market.
Yogi Berra, Financial advisor: “You can’t be wealthy, your income is too high.”
Garth, you confirmed Piketty’s thesis, Capital in the 21th Century, that the “main driver of inequality –the tendency of returns on capital to exceed the rate of economic growth — today threatens to generate extreme inequalities that will breed discontent and undermine democracy.”
Due to the fact that income is taxed at marginal rates, high-income taxes are not the answer to the rising economic inequalities. That is why he advocates a “Global Wealth Tax” that considers income and assets.
this may be a silly question: but can’t one “gift” a property without this happening?
or does some sort of “value” have to be ascribed, like 1$, in order to have the property change hands?
No. Fair market value applies. — Garth
Not mentioned in tonight’s post is the fact that any money paid to a tax accountant to figure out all this complicated stuff for you is also fully tax deductible.
This is exactly why I take my salary in dividends from the company.
Why would I go through the hassle of being registered as an employee and pay into EI and all that (so annoying, all that paperwork) when I can just leave my money in my company, withdraw dividends as I need it (and pay as little tax as possible), and basically have a retirement nest egg (my company) with the retained earnings left in my company that have already been taxed?
I’ll just withdraw the cash slowly as I age.
Tonight I’d like to explain HAM.
I’m not going to say that they’re aren’t rich Chinese buying Realestate in Canada. I’m simply going to explain how a Chinese Canadian can afford to drop so much money on a home.
It’s not abnormal in an Asian household for more than one generation to live together. My neighbours are Chinese Canadians, very nice neighbours I might add. 4 generations live in the home. Little children, they’re parents, grand parents and a great grandmother.
Now let’s assume every working person makes $50k a year. The parents make $100k the grandparents make $100k and the great grandmother gets the minimum Cpp and OAS. They’re household income is over $200k.
It’s cultural and nothing is wrong with it.
That is not ‘HAM’. — Garth
“Most people, of course, simply don’t understand how they’re taxed or what to do to minimize the impact.” – HonGT
I thought that’s what TaxAccountants were for, AuldPol?
http://youtu.be/lnjktXtXxfk
“If life were fair, I’d be taller.” – HonGT
Funny thing about those NotSoTallGuyz, AuldPol…
HistorySimplyAdores’Em:
http://youtu.be/TKtCVblxDRc
#1 proofreader — “If I was making $100K as a proofreader for you Garth […]”
You wouldn’t be. Garth’s paying his spouse that much as an income splitting tactic.
“You’re out of touch.
I’m out of time”
– Hall and Oates on Canadian real estate
$2,000,000 in the stock market to only get back 5% sounds like a lot of risk to me. A correction in the daily market could evaporate $30k in a matter of hours even in an ETF.
Example. Jeez. — Garth
RRSPs Rock
A number of us have been over this argument before but let me try again.
Yes, TSFAs Rock. And have zero tax.
And Yes If the marginal tax rate is unchanged then the tax on YOUR share of an RRSP is zero, just like the TSFA .
For example. If I put 100k into RRSP over a period of years then and assume I had a 40% marginal tax rate then the cost to me is $60k. (Got $40k back in RRSP tax refunds) So MY share of the RRSP contributions is 60k the tax man’s share is $40K. As the RRSP grows my share is 60% and the governments share is 40%.
If the thing grows 10 fold to $1 million in 40 years and I start to withdraw and I pay tax at 40% then I net 60% or $600k and the governments gets 40% or $400k.
Now MY $60k growing at the sate rate in a TSFA would also have also grown ten times to $600k.
In both cases the tax is zero and both RRSP and TSFA rock.
It does not matter a whit if the RRSP has capital gains or interest or dividends the government simply gets its 40% in my example and My share my $60k grew to $600k completely tax free.
Now if my marginal tax rate with old age claw back is higher than 40% in retirement then I do pay some tax on MY share of the RRSP say 15%.
If marginal tax rate in retirement is less than 40% then my tax rate on MY share of the RRSP can be negative.
Again a number of us have gone over this math before.
It is real.
People whine about losing the dividend tax credit in t he RRSp or the capital gains 50% rate. They are wrong. They are already paying 0% tax on their share of the RRSP assuming marginal tax rate unchanged.
The apparent tax is just the government taking back its 40% share of the RRSP since it effectively contributed 40%.
Now if people forgot that they only ever owned 60% or so of their RRSP and if they blew the tax refund, that does not really change the math at all.
In summary RRSPs rock.
Another Reason RRSPs Rock
Here is the main reason that RRSPs rock. Not only does your share of the RRSP grow tax free, but the money is considered untouchable by most of us.
What goes into an RRSP stays in an RRSP until retirement (in most cases).
The real key to wealth is leaving money to grow for decades. RRSPs encourage us to do that. (Aside from the home buyers withdrawal which is a dumb idea)
RRSPs rock because they lock up your money and force it to grow for decades.
A flat tax would cut the tax rate for the rich, for sure, however, a flat tax is simple, efficient and far less likely to skew personal and business behaviour. Any economist will tell you that a flat tax is the most efficient tax. “Earn a dollar and pay 15 cents tax” is a very simple concept too. You don’t need legions of bureaucrats and accountants and lawyers to administer it.
Sadly, no politician has the stones to bring in a flat tax.
Actually it’s not about stones, but fairness. The rich would benefit massively and the poor be saddled with far more tax than now. — Garth
RRSP tax whiners
People whine about the tax on the RRSP, oblivious that it was about 40% subsidized on the way in with the RRSP deduction.
They forget too that the reason they are paying a pile of tax (paying back the 40% of the RRSP that always was earmarked for the government) is because the thing grew so much.
Left to their own devices people pull their saving out and spend it. RRPS locked in the money and it grew fat, all as designed. And now people whine about the tax? That was the deal folks. And it is a good deal.
Another benefit of the RRSP
You can buy and sell stocks with impunity realize gains with no tax consequence. Just like RRSP and it is a big benefit.
Did I mention, RRSPs Rock?
So do TSFAs
TSFA and RRSP are both FAR better for retirement saving than are margin accounts.
The best thing about a margin account is it might make you hold a stock forever to avoid triggering a gain and that often can work out well.
The downfall of the TFSA is the money is far too accessible. People will seldom leave it in to grow untouched for decades.
Guess who has all their money in registered assets? — Garth
#17 I’m stupid on 05.19.14 at 7:37 pm
HAM is more correctly when a person of asian decent but still a canadian citizen with ties to their home country makes a couple calls and collects large amounts of investor cash from abroad and then goes house shopping in greater Vancouver on their behalf and puts everyone on the final title after the initial sale has gone through.
This renders the final sale as still being completed by a Canadian and therefore does not skew the stats, but where the money came from and who ultimately owns the property is the question.
You folks are funny. — Garth
Do short term trading profits in equity get taxed at the same rate as longer term gains? (i.e. greater than 1 year). This is the case in the U.S. but not sure on Canada. Does the CRA have any discretion in this treatment?
Time held is not a factor. — Garth
Good post tonight.
People often get confused on how the assets are “held.”
taxable accounts, RRSP’s (US 401K idea), TFSA (US ROTH accounts). I’m sure different tax rates, or no tax rates apply. different deductibility rules apply etc.
If you do NOT know how to set these items up for your long-term advantage, learn, or seek the advice of a competent advisor. “OOPS” is NOT as defense to the tax collectors in either country.
A working guy can have advantages, but first they must SAVE some money to invest -what a novel concept!
14 Headshaking Photos that Show Target Canada is still a Major Problem Link
And guess who's betting on tapped out Canadians since their US store sales are declining? Wal-Mart Stores to invest $500-million in Canada, create 7,500 jobs
What were/are they thinking? That printing money and destroying the savings of Gen-Y wasn't going to have any future consequences? Chart
$100,000 in deposit insurance in case a bank fails, investors get over $1 million in protection if their broker rolls.”
Haha..good luck getting any of that if things go bad!
And if you do end up getting it back..it’ll take 3-5 years and the dollars will be so badly devalued …..well it’ll buy you an Ikea sofa!
“Now let’s assume every working person makes $50k a year. The parents make $100k the grandparents make $100k and the great grandmother gets the minimum Cpp and OAS. They’re household income is over $200k.”
Those sorts of ‘families’ have existed since the dawn of time in Canada, and their existence is calculated in median household income. However, the existence of a few of those households does not justify the nosebleed multiples of house price to median income. Only the widescale availability of, and use of CMHC subprime credit can justify the extreme prices.
“HAM” is nothing but a giant unproven myth. Just the very mention of it usually brings racist/xenophobic overtones. Nearly all people of Asian descent in the GVR, Canadians, pay mortgages in the same proportions as do Caucasian Canadians.
AN RRSP example
Guess who has all their money in registered assets? — Garth
*************************************
Well, since you ask.
Not all, but we did max out two RRSP over the years one has grown just over 10 fold in 25 years, the other 7.4 fold in 25 years.
And the RESP had grown quite fat.
Temporarily have nearly nothing in TFSA account as I took some fat profits and paid off all debt. Will replenish.
Also have a corporate margin account from a side business that has grown fat as well and I leave all earnings in it to avoid income tax. (as some mentioned above that they do as well)
So not all Registered. I simply observe how the math works.
To Joseph R. #21
Stop beating around the bush. Just implement socialism and communism and make everyone globally equally poor.
The money they collect from taxes can be just deleted and burned.
All the global parasites like governments, UN, central banks, banks, corporations, everyone can all be equally poor to live on a certain amount and that is it.
Global solution for global idiots. It was tried before and was and is a huge failure, U.S.S.R, Cuba, Venezuela, Bolivia, Romania, Vietnam, Argentina, Greece etc.
Gee, Garth is demonstrating a point I made yesterday:
And that’s how the Income Tax Act became the proverbial camel – or horse designed by committee – and book with seven seals, because each set of suits pushed its special interests and got them written up by the Finance Ministry, stick-handled through Parliament, and incorporated into the Act.
Good thing coveralls don’t wield political power, or we would have had sections and regulations for each trade and craft, the Act would be even heavier and more incomprehensible, and every lawyer in the country would be a specialist in tax law.
A Financial Plan
Any Boomer who maxed out their RRSPs and RESPs over the years has done more than enough savings.
Sadly it is those with pensions who could afford to max the RESP.
Granted most of the lower middle class and working poor never made enough to save much.
But all boomers with decent jobs who simply maxed the RRSP and RESP have saved enough especially if some went into equities.
I never had any other financial plan than, get an education and a good job, max out RRSP, have a job with pension and max out RESP and now TFSA. Then make as much return as I could on the savings. That was more than enough of a plan.
So by the incentives in the tax code, its a better deal for someone to borrow money like in a HELOC, pay 3%, invest it at 5-6% dividend and thus avoid any tax on the dividends received and even claim the interest expense as a tax deduction.
Or, you can go to work as a stiff, earn your money, pay 38% on it first, save what you can after and then invest it.
Why work?
“HAM is more correctly when a person of asian decent but still a canadian citizen with ties to their home country makes a couple calls and collects large amounts of investor cash from abroad and then goes house shopping in greater Vancouver on their behalf and puts everyone on the final title after the initial sale has gone through.”
If this was actually occurring to any level of statistical significance, then leverage would be dropping as true cash is brought to the table. Yet every time the stats come out, we see that the levels of indebtedness of Canadians, particularly in the GVR, continue to rise.
Selling mortgages to Canadians of Asian descent is such a hot business that there are many bank branches in the GVR that cater specifically to such. But all-cash sales, quite uncommon, no matter what your conflict-of-interest-filled Realtors and housing vendors concoct as a fairy tale.
“So by the incentives in the tax code, its a better deal for someone to borrow money like in a HELOC, pay 3%, invest it at 5-6% dividend and thus avoid any tax on the dividends received and even claim the interest expense as a tax deduction.”
Or 2% at Interactive Brokers. And its a swell deal. Too bad that most Canadians are obsessed with “investing” in overpriced houses instead of stocks so cheap that they pay for themselves.
#42 Dean Mason on 05.19.14 at 8:27 pm
Your comment is uninformed because like it or not, some form of socialism is coming and its not based on idealogy, its based on pragmatics.
The population is going to 9 billion while at the same time automation is taking away jobs at an exponential pace. The people in china won’t be making your stuff much longer, a machine will be and it might be in your basement.
A global liveable wage is coming so get used to it and its mostly to keep the idle hordes from overrunning the system.
Tax code: too hard? Take a course, get yourself a TurboTax program for thirty bucks and do your own for a change. You can always take it to the professional after you have done your best to learn.
Too much beefing about something over which you can absolutely have some control.
TFSA and pension income splitting still bad tax policy…look at the lost revenue from these initiatives, and wonder where the revenue will come from down the road. I see the huge inequality just within my own family.
My wife is a nurse and I am small business owner. She makes about 80k in salary, and I will make about 75k with my business.
My question to you Garth, or the helpful blog dogs, is whether I can pay myself roughly 50k in dividends (leaving the other 30% in the company for investment growth perhaps) and have divide up her salary with spousal income splitting?
Thanks for any suggestions bloggers,
C
Actually it’s not about stones, but fairness. The rich would benefit massively and the poor be saddled with far more tax than now. — Garth
Exactly. Progressive taxation of not only labour income but wealth (unearned income i.e. dividends, profit, capital gains) would be a start to arresting the inequity. Inheritances should be outlawed in truly meritocratic society.
non-registered investments and registred…what is the difference please ?????
Garth: interesting to see your discussion of tax inequality. The Carter Commission back in the 1960’s looked at this issue, as I am sure you are aware. The simple recommendation, if memory serves, is that “a buck is a buck” or all income should be treated equally. The only issue than becomes “what is an appropriate tax rate for the various income brackets?”. Of course the recommendations have been ignored for 40+ years and probably will continue to be ignored for the next 40 years.
As a footnote, I am not sure you are right about Jamie’s capital gains liability in the event of a sale for $400k. I think it would be $100k, the difference between the deemed disposition price $300k (which dinged dad, George, with a $270k taxable gain) and the $400k selling price. Otherwise Jamie and George would be double taxed on the same gain, namely selling price less $30k.
Drop everything and forget about financial asset investments.
I just watched an episode of Income Property . After Scott completed a basement Reno for 30k in a non descript bungalow , the estimated rental income of the basement suite of 1500 a month increased the value of the home by a quarter million dollars according to a RE agent he brought in with comparables in the neighborhood !!
Rinse and repeat a couple of these and you are on easy street brother.!!
#42 Dean Mason
You raised a straw man: Global Wealth Tax isn’t communism. It doesn’t make the Government own the means of production.
As far as your tirade is concern, You will find a much more welcoming crowd at Zerohedge.
What we need a global pension assets tax and a global pension income tax.
This way the massive pensions promised to the public sector can be brought back down to reality and us suckers who don’t have public sector pensions are not paying for them.
Correction, what we need is a global pension assets tax and and a global pension income tax.
And good looking.
By the way, if the dad gets hit with a $370000 reassessed capital gain I do not think the son gets tagged with a 30000 cost base. I think sons cost base would be adjusted to $370000 or so, or whatever the dad’s cg is. The cra won’t hit them twice, at least not after an appeal.
“My question to you Garth, or the helpful blog dogs, is whether I can pay myself roughly 50k in dividends (leaving the other 30% in the company for investment growth perhaps) and have divide up her salary with spousal income splitting? ”
Dividends are generally after-tax payments from a corporation. Obviously if your corporation pays tax on the $75k that it earns, rather than immediately paying it as a salary, there won’t be $75k remaining to pay as a dividend.
However, there can be other reasons, for instance, avoidance of CPP, EI, etc., that you might want to do this. Sit down with an accounting professional and run some numbers.
Garth, thanks for mentioning self-employed people. I am planning on forming a corporation so I can pay myself in dividends but didn’t know that then I lose RRSP contribution room. Good to know.
I’d love if you did a whole day’s post devoted to self-employed people, especially internet entrepreneurs :)
Derek Foster (see http://www.stopworking.ca) had the right idea all along. By saving up as much money as you can, putting into dividend paying investments, and retiring early is a good idea. He said, quite rightly, the same thing as Garth namely that working is the least tax effective way to make money. It seems the benevolent government wants us all to follow his example by creating a strong incentive to save and a disincentive to work. Wow, what a great idea to solve this nagging unemployment problem!
To #48 Not 1st
Why make people work for their money. Just give them free money every month.
You don’t need a liveable wage because everyone will have money they need every month.
Keep living in your dream world socialists, communists.
Once you take away the incentive for people to work, save and invest then the whole system you call wealth distribution=socialism, communism did not work, will not work and will never work.
“Derek Foster (see http://www.stopworking.ca) had the right idea all along. ”
Derek Foster got lucky by investing heavily in the out-of-favour Philip Morris/Altria stock (“MO”) in the 1990s, on margin, when it was out of favour.
But that’s not to say that its a bad idea. Word on the street is that he got burned bad when “F” changed some of the rules concerning income trusts.
To #48 Not 1st
A more likely scenario is war and don’t think it can’t happen.
Be careful for what you protestors wish for.
That is not ‘HAM’. — Garth
I know that Garth. My point is that the majority of “HAM” are actually Canadians of Asian decent.
RE: #50 Hazer on 05.19.14 at 9:04 pm
My question to you Garth, or the helpful blog dogs, is whether I can pay myself roughly 50k in dividend.
You can…. But as Mark mentioned, your company has to pay corporate tax on those earnings first. In addition, since it is a small business, the dividends will not be eligible for the enhanced dividend tax credit but instead will be eligible for the small business dividend tax credit.
One trick small business owners have tried in the past is putting their spouse and children on the company payroll. The CRA has cottoned on to that so be careful.
Thanks Mark!
Well this post was revolting and useful at the same time.
Garth, when the really loooong weekend comes (retirement) and I have to deal with my rrsp, do I have to sell my shares or can I make withdrawals “in kind”? What I want to do is keep the cash gushers I have. I want to transfer them to my cash account. I’ll pay the tax obviously but I want to keep them. I want to keep them gushing cash. I have a feeling I can’t do this but I’m not sure why. Anyone?
Important to note the dividend gross up and tax credit massively favour the poor. 7% marginal tax rate on low income Ontarians.
#28 John Kimbel
So, not only did Halle & Oates have an awesome groove, they were avant-gardiste on Canadian RE!
Today’s economic indicator?
(Well, sort of, maybe…)
I was in the Queensway and High Park areas of Toronto today. Lots of pricey homes, nice hoods. Corner stores and pop up vendors were selling fireworks all over the place for Victoria Day festivities going on right now.
Most were not selling, shelves full, and several had sale prices, including “80% off”. One seller told me this was his worst sales day ever, been doing it for a decade.
Never, ever have I seen that happen before, sale prices on fireworks like that, especially considering people can blow stuff up again in only six weeks for Canada Day.
Hmmm. Fireworks – a frivolously fun, discretionary purchase you make when you have loose coins in your pockets and want to blow them up.
And they’re not moving for quite a few retailers.
Then again, this could all just be a rejection of royalty and Camilla….
http://www.youtube.com/watch?v=ChVrKbA_Pc8
To Mark and others, Garth forgot to mention eligible vs non-eligible dividends. Only eligible dividends from publically traded companies can get the $50k gross up.
If you pay yourself dividends from your own private company, you get taxed.
At a lower rate, which is the point. BTW, there is no ’50K gross up.’ — Garth
#55 Joseph R.
Stealing peoples money called confiscation is a form of being a thief and is communism, socialism, marxism etc.
Steal your own family’s money.
#64 Dean Mason on 05.19.14 at 9:39 pm
Well, 50 million people in the U.S.A would fall into your definition of socialism. That is the estimate of people who are out of the work force, on social assistance such as welfare or food stamps etc.
That is they do not participate in the work force in any statistically meaningful way, yet they receive govt benefits paid for by the rest of the population.
To Bobby #10
They would never allow for a flat tax because it would actually encourage hard work, saving, investing, getting ahead and being successful.
They want people to be dependent, financially illiterate, poor and living paycheck to paycheck.
Getting people into debt and increasing taxes are their greatest tools.
Worse, flipper proceeds are often taxed as income, not cap gains. — Garth
Venture in Trade taxable at full marginal tax rate as it should be.
‘Old men forget; yet all shall be forgot,
But he’ll remember with advantages
What feats he did that day…’
-William Shakespeare
“A soldier must learn to love his profession, must look to it to satisfy all his tastes and his sense of humor. That is why handsome uniforms are useful.”
‘Sentiment rules the world, and he who fails to take that into account can never hope to lead.’
‘You medical people will have more lives to answer for in the other world than even we do.’
‘Get your principles straight; the rest is a matter of detail.’
‘To be defeated is pardonable; to be surprised-never!’
‘I do not believe the proverb that in order to be able to command one must know how to obey…Insubordination may only be the evidence of a strong mind.’
‘In war, everything depends on morale; and morale and public opinion comprise the better part of reality.’
The NotSoTallGuy.
They should have traded a peppercorn for the cottage.
I found this an easy way to see income tax rates (BC & Fed) including grossing up, capital gains ect
http://www.taxtips.ca/taxrates/bc.htm
DELETED
A flat tax would cut the tax rate for the rich, for sure, however, a flat tax is simple, efficient and far less likely to skew personal and business behaviour. Any economist will tell you that a flat tax is the most efficient tax. “Earn a dollar and pay 15 cents tax” is a very simple concept too. You don’t need legions of bureaucrats and accountants and lawyers to administer it.
Sadly, no politician has the stones to bring in a flat tax.
Actually it’s not about stones, but fairness. The rich would benefit massively and the poor be saddled with far more tax than now. — Garth
Fair? Its fair to tax the poor at a higher rate than the rich. The rich contribute far more. Bill Gates/ Henry Ford made our lives far better than any poor person. And poor people are likely to beome a burden needing to be subsidized later in life. Poverty needs to be discouraged.
Fairness is a two edged sword. Whether a policy is fair or not needs to be assessed based on principles from which you can derive your judgements not assert them.
#29 not 1st
“$2,000,000 in the stock market to only get back 5% sounds like a lot of risk to me. A correction in the daily market could evaporate $30k in a matter of hours even in an ETF.”
——-
Yep, $30k on a $2 million portfolio can disappear in in a day – that’s only 1 1/2%. If you’re day trading that’s a bad day.
But if you are a long term investor you should not worry about daily fluctuations, you should be managing it for long-term gains.
Over the long-term that $2 million, if managed conservatively, puts on 6-8% on average annually. That doubles it about every 10 years.
#22 saskatoon
When an asset changes hands or status, it is always deemed a disposition (with a few exceptions), and someone will pay tax on it.
I don’t copy other peoples posts only idiots do that.
If you advocate for taking someone’s money that is not yours then that is socialism, plain and simple.
@51
Exactly. Progressive taxation of not only labour income but wealth (unearned income i.e. dividends, profit, capital gains) would be a start to arresting the inequity. Inheritances should be outlawed in truly meritocratic society.
If you have saved a portion of your labour income to invest, why should it be taxed again? If I took the same amount and spent it on a vacation in Costa Rica the Canadian government would see virtually nothing. But if I invest then it should be taxed again?
A meritocracy?
How about a free society instead?
#39 Randman
If a major Canadian bank fails, you’re gonna need a bunker, not a sofa.
“Now if you also have a $2,000,000 investment account…”
How many people have $2m investment accounts?
Exactly.
Case closed.
And for those of us who’ve ever wondered, “Why renting is a waste of money”, here’s the answer, courtesy of the WA [Western Australian] Housing Centre:
http://www.wahousingcentre.com.au/first-home-buyers/guide/186-building-a-house-in-perth-why-renting-is-a-waste-of-money
Let’s see: Renting is like paying someone to borrow a book from them, only to have them seize if from your nervous hands after you’ve only read halfway.
What else? Oh yes: “There is only one good reason that you would consider renting a house: because buying a house is expensive.”
Note: There is ONLY ONE reason to consider renting a house …; it’s not the fact that you can rent cheaper than buy in most of Australia (which is why most Australian housing speculators are negatively geared, loss-making landlords, see: http://www.macrobusiness.com.au/2014/05/huge-negative-gearing-losses-revealed/); nor is it the fact that you can set aside the money you save as renter, investing it in one of the “liquid, balanced, and diversified” portfolios this pathetic blog keeps on yammering on about; nor is it the fact that, as renter, you’ve got the mobility to easily move to where the jobs are, which is an increasingly important factor now that the end of the Australian mining investment boom is causing unemployment to steadily grind higher.
That’s why buying a house is an investment in your future. And if you buy a new build, it will both suit your lifestyle and help you avoid “wasting your money” – presumably because the price of property only ever goes up. Like in Iceland. Or Ireland. Or Holland. Or Spain, or Portugal, or the US or the UK in 2007, or Greece, or Cyprus, or …
There you have it, explained in language so simple any idiot could understand it. Renting is a waste of money. Buying is an investment in your future.
Seriously man, deleted..
You’re a nazi
DELETED
Simple solution.
Tax capital gains in equities and dividends at the same rate as earned income.
But the sheep have been conditioned to reject that.
Laughable really.
#42 Dean Mason on 05.19.14 at 8:27 pm
=========================
Sure, and right-wing, deregulated casino capitalism worked out so well for the Amercan middle class, didn’t it? (insert sarcasm….)
#17 – – Waterloo Resident
Transactions between related parties are deemed to have occurred at fair market value. If you transact with a related party for less than fair market value, the seller can be re-assessed to have the transaction deemed to have occurred at the higher price. However, the person buying for less than fair market value will not be able to adjust their value.
If you sell to an unrelated party, you can transact for whatever you want. So – it is no surprise that CRA has told you what they did.
Who needs to be taller when you have sexy tax-planning talk like this post?
What a stupid arrogant Boomer! This is just as much an example of how Boomers take more and more rather put in, as much as it is an example of tax code ignorance. This guy took advantage of low real estate prices and tried to weasel even more money out of the system!
Hahaha, George! Good on you CRA for doing yor job! I hope they audit you and your son as well.
https://www.youtube.com/watch?v=ee925OTFBCA
True even over here in socialist Europe. Germany has a flat tax (26.375%) on all capital vs almost 50% on income plus capital doesn’t affect your payroll taxes either (important as healthcare and pension costs are super expensive here for free lancers)
It’s too complicated to explain in a comment but I’ve managed to move all my taxable income into (almost) non taxable income. I sold some of my holdings to pick up two more properties in Frankfurt, both cash flow positive and while I’m still working through the details they should be mostly tax free income
As an incorporate company,
On 175,000 a year, I write off about 34,000.
If working out of town, I write per diem and basically live almost tax free.
On top of that I can control what I pay myself. keeping myself on the low end of the tax system.
The rest can be paid to family members or left in the corp for future dividend payments.
Definately a system made for the rich
Let’s say you earn $100,000 a year working as a proofreader on this blog (about average at the moment). If you live in BC, you’d take home roughly $75,000, with an average tax rate of 25% and a marginal rate of 38%. (The marginal rate means you’ll lose 38% of every additional dollar earned).
I beg to differ unless you live in your house and never come out to buy food.
Gst tax
Pst tax
Gas tax
Bridge tax
MSP tax
Carbon tax
Property tax
Transfer tax
Garbage tax
Water tax
Recycling tax
Composting tax
Environmental tax
Transit tax
Hotel tax
Parking tax
DL tax
School tax
Liquor tax
There’s more but that’s all I can think of now.
If you are a regular working stiff in BC your tax rate is close to 60%
“Dad’s taxable income was reassessed for the year to include a gain of $270,000.”
Wow, this is revolting!
What if I would like to sell a fixer-upper very fast for say, 70% of the FMV? Who is CRA to tell me how much to ask for my own property, fully paid for and legally owned?
#42 Dean Mason on 05.19.14 at 8:27 pm
“Global solution for global idiots. It was tried before and was and is a huge failure, U.S.S.R, Cuba, Venezuela, Bolivia, Romania, Vietnam, Argentina, Greece etc.”
Meanwhile we have a regional solution for regional idiots. Tax the money one never made because he dared to sell his property for less than a number established by a CRA paper pusher and pompously named “fair market value”.
Hey Garth…. you know where to mail that $100,000 proofreading check to.
@ Shawn RRSPS rock
The difference is that you don’t control the future tax rate. In a TFSA you do, since it’s zero.
Hello RRSP Gurus (shaun?),
I am part of a group plan where I can dictate how much to deduct for RRSPs. 48 years old.
I have been doing some rough calculations, and it looks like that if I deduct 20% for RRSP instead of 10%, my net pay will be approximately the same. Am I correct? I am not worried about contribution room as I have plenty of room from previous years ( this my first year buying RRSP and I believe I can carry the room fwd ?)
If this is so can would it be prudent to deduct more from my gross pay?
C’mon, c’mon.. lest you rouse the rabble, and feed the reds their daily misinformation!
We all know that the less you have, the more the gov gives ya.. personal exemptions, handouts, programs… if you are a disabled, minority immigrant, then you’ve really hit the jackpot.
As well, lower taxes on cap gains and divvies is actually “less” than fair! Don’t forget that the gov has raped and pillaged these businesses every step of the way… such that only the few survive to make a profit.. i.e. those companies (of which you are “owner” as stakeholder) have already paid their taxes. The fact that you are “double taxed”, albeit at a lower rate, is not quite as unfair as the basement dwellers will now claim.
But… very good post, and very solid info. Amongst the options that are out there, you are of course bang on as to tax implications.
Just be careful you don’t get elected head of the next Occupy movement, with all this “rich don’t pay their share” talk!
#17 Waterloo Resident on 05.19.14 at 7:20 pm
======
Ummm… I think garth knows what the CRA does… hint: read his bio!
=========
“Please remember; the CRA does not tax people twice for a capital gain on the same property, that would be illegal and would be fought in court.”
=======
Now that’s a funny one, and in fact hits the nail on the head, as far as what CRA does… they basically have their cake and eat it too.. they apply asymmetrical logic in many cases. In this example, if they do in fact deem the Dad’s disposition at fair market value, then symmetry would imply the son had acquired it at fair market value.. But no! CRA wants the Dad to have disposed high, and the son has acquired low. The logical outcome would be a penalty for the infraction, and a reassessment..
Moral of the story, don’t assume CRA will act in a way you find fair or logical..
#99 Tripp — “What if I would like to sell a fixer-upper very fast for say, 70% of the FMV? Who is CRA to tell me how much to ask for my own property, fully paid for and legally owned?”
The CRA doesn’t have a problem with distress sales, or idiots (though you may have to prove the latter to their satisfaction; I don’t know which party the onus is on). They do have a problem with families attempting to delay paying capital gains tax by an entire generation with a non arms length below market transaction. Having to pay capital gains at least once per lifetime at 1/2 the rate on income doesn’t strike me as onerous.
For the advanced class, you can will it in trust to a living grandchild, granting a life interest to your child, and only pay tax every two generations. Just be mindful about the rule of perpetuities.
Anybody else find it odd that Dean Mason has been buying government strip bonds for decades, but gets really grumpy when he finds out how the government gets the money to repay the interest and principal?
#16 Van Isle Renter on 05.19.14 at 7:17 pm
Same applies for pensions…Also when you croak, your pension croaks with you. Your portfolio can live to fight for someone else.
Not totally. Pensions have beneficiaries, so a chunk of that change lives on as well.
I am more confused than ever. CRA double taxing just doesn’t seem right – yet nothing surprises me anymore.
I purchased a resale condo In T.O. Yonge/Bloor area in 2008 for $370k, sold it in 2011 for $405k. I had lived in it as primary residence for about half the time, the other half was rental. CRA questioned the capital gain claimed.
They wanted proof that it was sold at The Market Value. I guess they thought I was lying and sold it for much more since many properties at the time must have appreciated by more. It fell on me to prove the Market Value. They wanted me to get an appraisal done by an official appraiser- An appraisal of what it would have been worth in August 2011 when I sold it.
They will not research any past sales or anything, even though the info is a matter of public record. In retrospect I should have asked my accountant to do a ‘changes in use’ when the property became a rental property and established the value of it at the time. Maybe that would have helped.
After much back and forth, they agreed to accept numerous other unit sale prices in the same building for similar units around the same timeframe. This info had to come from a real-estate person who presented this past data and signed a document for CRA. As it turns out the market value was somewhat lower than what I had sold for.
It is insane we have to go through all this trouble for what is a matter of fact and public record on a sale price between parties who are unrelated.
I did do a ‘changes in use’ for another property I previously lived in for 13 years and when I do sell it one day, I am curious to see of the Value attributed to it in 2006 will be challenged as well. It was based on previous sales, but they had all been mostly FSBO sales so that will be interesting.
#17,#99
Both of you need to look up the “kiddie tax” before you start selling to relatives at discount rate. You can not avoid taxes by giving things away…
#54 – Italians love real estate -” The show Income property…Scott McGillvray ”
Yes, it seems that an investment of 30K into finishing your basement with an apartment, which then yields $1500 a month or $18000 a year does raise the value of a home by $250,000.
After all, a yield of 18k a year would equate to a P/E ratio of approx. 14 times ,which comparative to the S&P or any individual stock, would probably be considered fairly priced.
Looks like Scott and the property pimps are on to something.
#110 Eatin’ Bonbons — “They wanted proof that it was sold at The Market Value. I guess they thought I was lying and sold it for much more since many properties at the time must have appreciated by more. […] It is insane we have to go through all this trouble for what is a matter of fact and public record on a sale price between parties who are unrelated.”
If you want to understand tax law, you have to stop thinking like an honest, inconvenienced citizen. Start thinking like a tax cheat, i.e. how could a dishonest person, or two dishonest people conspiring, evade taxes and each be better off if this rule wasn’t in place. Chances are, the rule is in place because before it was, dishonest people actually DID cheat the tax system that way.
In your case, they were probably worried that you reported selling it for LESS than market value, evading capital gains taxes. If the buyer used it as his principal residence, those unreported capital gains would go untaxed in either of your hands. The buyer could pay you the difference between reported and market price minus half of your tax savings outside the lawyer’s trust account transaction, and you’d both be better off than if you’d done a sale at fair market value.
“I did do a ‘changes in use’ for another property I previously lived in for 13 years and when I do sell it one day, I am curious to see of the Value attributed to it in 2006 will be challenged as well. It was based on previous sales, but they had all been mostly FSBO sales so that will be interesting.”
If they think the value is low in that case, they won’t challenge it, because your taxable capital gains will be on the difference between the change in use date’s price and your eventual selling price. A low valuation because of FSBO comps benefits the taxman, not you.
RRSP
responses to me at 103 and 104…
@ Shawn RRSPS rock
The difference is that you don’t control the future tax rate. In a TFSA you do, since it’s zero.
******************************************
You seem to miss the big picture which is that the tax rate on YOUR net contribution (net of refund) is often zero and can be negative. Instead you focus on the tax rate changing. I did address that the marginal tax rate could be higher in retirement.
My point was not that the RRSP was better than TFSA but that both are actually very similar taxwise in many cases.
Maybe it is mostly because I am in Alberta, but I know my tax rates are down significantly since the 90’s. Corporate tax rates are down by a huge amount atl least a third. Seldom acknowledged.
Big advantage of the RRSP is that people treat the money as untouchable and they leave it for decades to grow.
It’s like Vegas, What happens in an RRSP stays in an RRSP.
I say max out all the government tax subsidies that you can.
RRSP Newie. Yes save 20% if you can. Be a little careful not to get your marginal tax rate too low. No sense contributing to RRSP at a 20% marginal rate only to withdraw at 40%. Consider the TFSA as well, it is certainly the best vehicle for the lowest income group. (Though they will often spend it before retirement of necessity)
#97 Wealth Building Rob on 05.20.14 at 2:37 am
I sold some of my holdings to pick up two more properties in Frankfurt, both cash flow positive and while I’m still working through the details they should be mostly tax free income.
But Rob hasn’t anyone told you that Germans are renters and that is the sole reason everything there is hunky dory.
#112 bigrider — “Yes, it seems that an investment of 30K into finishing your basement with an apartment, which then yields $1500 a month or $18000 a year does raise the value of a home by $250,000.
After all, a yield of 18k a year would equate to a P/E ratio of approx. 14 times ,which comparative to the S&P or any individual stock, would probably be considered fairly priced.”
Obviously I’m not the only guy who saw the numbers and reached for my calculator to do a cap rate.
But the thing is… Before the reno, the owner (or the upstairs tenant) had the use of the whole house, and after, he’s living over a smelly basement dweller. So the true income stream to capitalize is the downstairs NET rent minus the reduction in the upstairs market rent. I say net rent because some or all utilities are usually included in basement apartments (I’ve never seen the man in plaid install separate meters), and vacancy allowance, insurance and maintenance needs to be accounted for.
FURTHER, the cap rate on a rental ought to be higher than on equities, because they’re easier to diversify, more liquid and subject to better tax treatment (or at least easier to figure. I’ve never actually done depreciation calculations for a rental property, and properly accounting for tax when part of your property is owner occupied and part is a rental must be a barrel of monkeys…)
And you can only realize the supposed increased value if you sell to somebody who also wants a basement apartment. If most buyers don’t, it’s going to be worth what other neighbourhood places with finished basements cost, less some renovation costs.
But hey, if everything keeps going uppa, uppa, uppa, it all works out, right?
#23 Mister Obvious: “Not mentioned in tonight’s post is the fact that any money paid to a tax accountant to figure out all this complicated stuff for you is also fully tax deductible.”
********************
‘Deductibles’ are a joke…they amount to a mere fraction of your costs.
@Mark, post #63:
I don’t know if he got burned with income trusts, but Derek Foster is still retired so he’s obviously doing something right. I recall he also sold his house in 2012, pocketed some good capital gains, and was travelling throughout the southern and southwest USA during the winter of 2012-13 and most likely this last cryogenic winter also.
One thing to consider when dealing with the capital gains tax due on a cottage or any other real estate is that if you have had expenses related to capital improvements, you can deduct these expenses. We recently had to deal with the capital gains on a cottage that had been left to my wife and her sister. Fortunately, the previous owner had been meticulous in keeping records about these expenses and so we were able to apply these deductions against the taxes owed.
Examples of this include new windows, foundation work, general renovations, and the like. Operating expenses, however, are not included.
#100 Tripp: “What if I would like to sell a fixer-upper very fast for say, 70% of the FMV? Who is CRA to tell me how much to ask for my own property, fully paid for and legally owned?”
*****************
ALL properties are assessed by provincial governments. Including your hypothetical property. And those assessments hold.
Garth,
If I have $50,000 in cash, should I max out my TFSA first and put the rest in a Non-registered account to invest?
Or should I max out the RRSP and take the proceeds from the tax deduction and then max out the TFSA?
#10 & 117 are spot on, one can either hire a thieving accountant at a cost (in my case) for $6,000+ to wade through the capital gains BS or pay the government twice that in taxes. The deductible on that bill is a sick joke.
No wonder the rich in Canada keep getting richer while the middle class disappears. At least a Flat Tax would save us peons from exorbitant accountants fees making for a leveller playing field!
Garth, can you explain how life insurance policies can be used for investments and the related tax advantages. Perhaps a topic for a future posting.
I have a simple tax question . Let’s say you have investment A that is an equity that will go up by 6% for 40 years, yielding 10x the original value, and you have investment B that pays a 5% Canadian dividend every year.
Is it better to put A in the registered account, and B in the open account, and every year meet the tax obligations on the dividends? Or is it better to put B in the registered account, let A grow in the open account, and then at retirement age slowly draw down the capital gains of the equity?
Garth or anyone else who would care to comment:
if you placed all the relatives concerned, on the house’s title a viable way of avoiding tax?[ as in before the aged parents died]
thanks!
4 days till the IOM TT
No. — Garth
#107 Ralph Cramdown on 05.20.14 at 7:53 am
#120 Daisy Mae on 05.20.14 at 10:46 am
Ralph, Daisy, thanks for your clarifications.
I come from a country with a symbolic inheritance tax, therefore it is hard to comprehend having to pay for leaving your hard earned goods to your successors. Whether we are talking a house, the hand-sewn tablecloths or a beaten Audemars Piguet, those goods have been taxed once at purchase and/or continuously during their lifetime.
Although I will respect this law when it will apply to me or my family, it is my belief this is a ridiculous rip-off.
Thanks Garth.
Garth, we’ve had this discussion before and I still don’t follow your reasoning when you warn people off RRSPs.
If I may ask simply: if a person is in the top marginal income tax bracket, and manages to save 20k in a year, is there a better way to invest this than the 20k in an RRSP, with the tax refund (call it 8k) used to fill up that year’s TFSA space ($5500 currently) and the remaining $2500 unregistered? Because if there is, I need to know. It feels like your implying that doing this is foolish, but what is a better way to invest it than using that RRSP.
Also, and I admit I may not understand as well as you, how is RRSP a way of “making after tax wealth taxable again”. Isn’t it more accurate to say it’s a way of investing PRE-tax money, that remains taxable on withdrawal?
We’re both big boys, may have to just agree to disagree on this one.
Thanks for everything
VP
#32 Paully
A flat tax is simply unfair. Don’t get me wrong, I would love to have a flat tax in Canada. But even I recognize it is not fair to tax a one-percenter, on a percentage basis, the same as the working poor, for example.
And I disagree. Most economists would argue that a progressive tax system is by far preferable to a flat tax system.
#17 Waterloo Resident on 05.19.14 at 7:20 pm
————————————————–
Careful when getting advice over the phone; make sure you’re speaking with someone knowledgeable that has all the information about your situation.
RE: selling a cottage:
http://www.taxtips.ca/personaltax/cottages.htm
When a cottage is sold, tax is payable on any capital gain, less any principal residence exemption. If there is a capital loss, the loss is not deductible, because losses on personal-use property are not deductible except for listed personal property (LPP) losses, which can be deducted from LPP gains.
#120 Daisy Mae on 05.20.14 at 10:46 am
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And here’s the ontario link to those assessments:
http://www.mpac.ca/
123 Larry1 on 05.20.14 at 11:02 am
Garth, can you explain how life insurance policies can be used for investments and the related tax advantages. Perhaps a topic for a future posting.
.
I second these comments.
We need a 100% inheritance tax. Otherwise our society is not merocratic, but rather one of nobility.
#33 shawn on 05.19.14 at 8:04 pm
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That was a good summary, and interesting perspective on money inside an RRSP.
With the tax refund, in your example 40k, if that had also been invested in a TFSA, then ultimately you end up with your million (600k of ‘your’ money inside the RRSP, and 400k inside the TFSA).
So really it comes down to that the RRSP tax refund should be looked at as investable money, rather than “I just won the lottery”.
#110 Eatin’ Bonbons
This should be fine. Whenever a property changes hands or status (ex tax free personal residence to income property, even if it’s just a basement or a room), it needs to have its value assessed. As long as the valuation is done by approved means. In your case, the CRA was probably sticky about the missing valuation at the time it became a rental property, and someone just checked all the boxes carelessly. Maybe they were just having a bad day, like a cop that gives you a ticket for rolling stop. Which means they ignored the valuation established by a sale on the open market. The CRA can do this, because in some cases they want to have the power to question such a valuation, if it seems like a fixed sale and not quite on the up and up.
Bottom line, whenever a property changes taxation status, such as part of it is rented or is used as an office, have a signed appraisal for the CRA to prorate taxes properly.
On the bright side, none of this would be a problem if we had flat taxes and no exemptions to curry political favours, but social engineers will social engineer. It’s what they do.
#129 Vamanos Pest on 05.20.14 at 11:58 am
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I agree the tax system should be simplified, progressive is good, but the working poor shouldn’t have to pay much tax, and the threshold for paying tax should be raised. Something like this:
0% up to 30k
1% 30 to 40k (i.e. a ‘health’ tax)
5% 40 to 60k
10% 60 to 80k
20% 80 to 100k
30% over 100k
Hi Garth,
Can outline your recommendation for reducing taxes when passing a cottage to a family member (let’s say a father is the current owner and wants to pass it to his son).
You, I trust for unbiased opinions on the matter!
Thanks!
#132 Lebowski on 05.20.14 at 12:17 pm
123 Larry1 on 05.20.14 at 11:02 am
You are allowed to overpay your policy. Let’s say it costs $800 a year for your life insurance policy. You put in $10,000, with the implication that that money is used to fund future annual payments. $10,000 won’t pay for the all the annual payments over your lifetime. So you pay $10,000 the following year. You do this for a minimum number of years the insurance company deems required to pay (assuming you live long). Let’s say this is five years. Meanwhile, during this five years, your money, minus the annual $800 premium, is invested (generally how you direct them to, within what they are allowed to do, example, a mutual fund). The gains on those investments are tax free.
After 5 years, you have the option of continuing payments, because now the insurance company has enough money to cover all your future premiums. You don’t have to, but if you have the money, you pay the $10,000 per year. Losses can’t be claimed against taxes, but neither can any gains. I think that you can collapse the policy at any time, to realize tax free gains. Whether you can make partial withdrawals, I do not know.
I think this is also a safe way to keep your money in case of divorce, but am not 100% certain.
#JustForFun
[WaPo] – In dogs’ play, researchers see honesty and deceit, perhaps something like morality
…”Watch a couple of dogs play, and you’ll probably see seemingly random gestures, lots of frenetic activity and a whole lot of energy being expended. But decades of research suggest that beneath this apparently frivolous fun lies a hidden language of honesty and deceit, empathy and perhaps even a humanlike morality…
…Interestingly, dogs even outsmart chimpanzees on some theory-of-mind tests. When a researcher points at one of two cups, for example, dogs almost always run to the cup that is pointed to, a sign that they have intuited what the scientist was thinking — i.e., that the researcher was trying to show the dog something. Chimps, by contrast, have no idea what we mean when we point at something.”…
http://www.washingtonpost.com/national/health-science/in-dogs-play-researchers-see-honesty-and-deceit-perhaps-something-like-morality/2014/05/19/d8367214-ccb3-11e3-95f7-7ecdde72d2ea_story.html?hpid=z1
128 Vamanos Pest on 05.20.14 at 11:51 am
Garth, we’ve had this discussion before and I still don’t follow your reasoning when you warn people off RRSPs.
If I may ask simply: if a person is in the top marginal income tax bracket, and manages to save 20k in a year, is there a better way to invest this than the 20k in an RRSP, with the tax refund (call it 8k) used to fill up that year’s TFSA space ($5500 currently) and the remaining $2500 unregistered? Because if there is, I need to know. It feels like your implying that doing this is foolish, but what is a better way to invest it than using that RRSP.
Also, and I admit I may not understand as well as you, how is RRSP a way of “making after tax wealth taxable again”. Isn’t it more accurate to say it’s a way of investing PRE-tax money, that remains taxable on withdrawal?
We’re both big boys, may have to just agree to disagree on this one.
Thanks for everything
VP
i think GT is saying that once you put in RSP, you lose control somewhat because who knows what the future tax rates will be. i struggle with this as well. i wouldnt want to retire with nothing but registered assets. i would rather have a TFSA and a non-reg account and collect whatever i wanted from the account rather than being told by the government how much i need to retire from the rsp each year.
#117 Daisy Mae
#122 David Hawke
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I don’t get the negativity here. I suppose you can do your own taxes if they’re not too complex. And if they are you can hire a pro.
For years, until recently, I did my own. Then the Feds decided to increase the complexity of the reporting process for foreign investments (Google ‘T1135 tax form’ if you like) and things got ugly.
A pro took care of that hassle for me. It wasn’t my fault and it wasn’t his fault. It just the way it goes. His fee was a bit high I admit but it is fully deductible on next year’s taxes. That’s all I’m saying.
An financial advisor once said to me: “having to pay taxes is good problem to have. It means you’re making money”.
#90 Johan:
Huh?!? I can’t tell from your post if you’re being sarcastic…
@shawn
I understood your argument completely. I’m not disagreeing with you, just making a point about uncertainty. RRSP’s are directly related to your tax rate while a tfsa is not. Since they are equal at current tax rates the first thing someone should do is Max out their tfsa.
taxation is fair, people that have job security should pay more taxes than those gambling on stock market or trying to become enteprenours, where they invest $$$ and pray for a profit against big corporate favoured by govt and cheap consumers alike
#116 Ralph Cramdown- response to bigrider at #112
I agree with your analysis and hope that you could see the sarcasm in my post which was directed at “Italians love real estate” back at post 54. I do not believe that a 30k basement reno for an apartment increases the value of a home by 250k despite it being religion on house porn GTA TV.
By the way, good to see you are allowed to use the Italese word, “uppa” . I get deleted.
#138 sciencemonkey on 05.20.14 at 12:18 pm
We need a 100% inheritance tax. Otherwise our society is not merocratic, but rather one of nobility.
NDP idiot!!
I did a post a few years ago on the flat tax fallacy: http://www.holypotato.net/?p=817
http://www.holypotato.net/?p=818
As Garth says, it’s a major gift to the rich, unless you set the flat part to the current maximum bracket.
And moreover, it does not help the complexity at all. My tax return was ~29 pages. A flat tax would cut out one page of that — maybe ~4 if you also got rid of all incentivizing tax credits (but why would you do that? They’re fairly cheap as far as incentives go because of the public’s irrational hatred of taxes). Most of it is to determine what my income is in the first place, and that’s not going to get any easier.
There are lots of ways to make the tax system simpler and fairer, but a flat tax ain’t it.
@145 Castaway
I don’t think I’m an NDP idiot for being disgusted by useless children of successful people who are born into a life of luxury and/or inheriting a business they never would have had the capability to start and grow themselves. I want a fair playing field for everyone to succeed on their own merit.
I am still waiting to hear how we achieve full employment and get all those socialist bums off the dole.
http://business.financialpost.com/2014/05/20/3d-printers-newfound-appeal-to-everyday-consumers/?__lsa=93ef-d4cc
to 83 – Setting the record straight
A flat income tax is usually accompanied with a large personal exemption. The poor can still pay none.
The “It’s unfair to the poor” argument is just a red herring put forward by the people that benefit from a complicated tax system.
#140 Mr. Obvious: “An financial advisor once said to me: “having to pay taxes is good problem to have. It means you’re making money”.”
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Brilliant. Tell that to the senior paying tax on his/her GIC and/or savings account. LOL
66 Smoking Man on 05.19.14 at 12:50 am
I Do you dogs all remember last Xmas when I told the story of my scathing Facebook post to wifey poos family. I used words like dushbagary, shit stain masked as perfume.
……………………………………………………………………..
So Smoking Man does your brother in-laws shit still stink? Or are you all good with drinks in Vegas? Know what you mean about pussy ass relatives. Have some my self. They are rich as hell but never ever helped my parents out. So the parents did it all on their own.
Go hit Black on Roulette now!
#132 sciencemonkey on 05.20.14 at 12:18 pm
We need a 100% inheritance tax. Otherwise our society is not merocratic, but rather one of nobility.
————————
No. Certainly not for the middle and lower classes.
One should not be penalized for wishing to gift their inheritors.
to 113 Shawn
People with modest incomes and no pension may be best off if they use both RRSP and TFSA.
At 65, you want your CPP, OAS and RRSP withdrawl to add up to the personal exemptions. This way, you pay no income tax on the RRSP withdrawl. The rest can come from your TFSA.
It’s even better if you retire before 65.
Then again, putting all savings in the TFSA, may qualify a person for the GIS.
People can easily throw $1000’s of dollars away each year if they make the wrong choice.
#140 Mr. Obvious: “Then the Feds decided to increase the complexity of the reporting process for foreign investments (Google ‘T1135 tax form’ if you like) and things got ugly.”
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Most taxpayers have become totally intimidated, as taxation becomes needlessly complex. It’s been a great federal job creation scheme with tax preparers, themselves, paying taxes.
Sorry Garth buy my lady friend works for the CRA and she told me that if I sold a property that had a MARKET VALUE of $400,000 for only $30,000 then I would simply be taxed at the price I sold it for, not it’s market value.
So if I bought it 40 years ago for $10,000 and sold it for $30,000 (even though it has a market value of $400,000 ), then I would simply be taxed on the capital gain of $20,000 that I realized from the sale.
Now yes, the NEXT person will have to pay a whopping amount of capital gains tax when the sell it at $400,000 because the tax man will have deemed them to have a #370,000 capital gain.
Please remember; the CRA does not tax people twice for a capital gain on the same property, that would be illegal and would be fought in court.
Its when the person DIES and the property goes to the next of kin ; that is when the property has been deemed to have been sold at market value.
I’m amazed that none of the Geniuses here at this site didn’t pick this little trick up?
Go ahead. Try it. — Garth
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I’m afraid Garth is right. I know it sounds stupid, but I guess it is meant to deter people from playing tricks to avoid tax
#138 sciencemonkey on 05.20.14 at 12:18 pm
We need a 100% inheritance tax. Otherwise our society is not merocratic, but rather one of nobility.
NDP idiot!!
____________________________________________
Most NDP supporters would think idiot as well…..
“Self-employed people can often pay themselves in dividends instead of salaries, and slash their tax bills (but they earn no RRSP room).”
I don’t understand how this is true. If your company earns $100,000 in net income, paying this as a salary will have a higher marginal rate than dividends, but the tax rate on dividends are only lower because you’ve already paid tax at the corporate level. For example, $100,000 in net income will be $75,000 after corporate tax, which will require only a marginal tax bill, making after-tax income about $75,000. Paying yourself a salary of $100,000 will give you an average tax rate of 25%, leaving you $75,000. The amounts may differ slightly, but I always thought declaring a dividend was too cost prohibitive for a small business.
Yowza!!!
http://www.huffingtonpost.ca/2014/05/20/toronto-house-prices-soar_n_5359659.html
As for Jamie, equally nailed. He now owns a $400,000 cottage he paid only $30,000 for. If he sold it tomorrow, he’d have a taxable gain of $370,000. Thanks, dad.
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I will try once more. This is incorrect. If there is a deemed transaction at $400K, there are two parties to this $400K. Dad pays the tax on the gain, junior has a home that cost him $400k. If he turns around and sells it for $400K, there is no tax due. The disposition rules capture the taxes due, and does not create a double tax situation. What you wrote is incorrect, but good for drama.
Having said that, housing will eventually correct. Lots of tears coming at some point.
Not only dramatic, but correct. — Garth
#132 sciencemonkey
if the people inheriting wealth are so inept (and you are super smart)…you shouldn’t have any problem getting some.
also, using government to “level the playing field” isn’t fairness–it’s violence.
#138 sciencemonkey — “We need a 100% inheritance tax. Otherwise our society is not merocratic, but rather one of nobility.”
I see what you’re saying, but something that drastic would just cause the rich to gift their wealth to descendants while still alive. Unless you put a 100% tax on gifts, too, which would be punitive and hard to enforce. People WILL find ways of passing wealth on to their heirs, and making a tax system too out of step with the values of the population breeds widespread evasion and general contempt for government. “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”
If you want a more meritocratic society, I think the first aim should be the school system. Rich kids usually get much better educations than others, and part of the reason for extreme house prices in many areas is the good school/bad school differential — in some neighbourhoods it’s like paying for private school upfront (with a mortgage) just for the right to go to the local public.
#35 not 1st on 05.19.14 at 8:09 pm
#17 I’m stupid on 05.19.14 at 7:37 pm
HAM is more correctly when a person of asian decent but still a canadian citizen with ties to their home country makes a couple calls and collects large amounts of investor cash from abroad and then goes house shopping in greater Vancouver on their behalf and puts everyone on the final title after the initial sale has gone through.
This renders the final sale as still being completed by a Canadian and therefore does not skew the stats, but where the money came from and who ultimately owns the property is the question.
You folks are funny. — Garth
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Might be funny, but I know of a Canadian couple who actually had their house purchased in this way by someone from overseas who was their friend with a LOT of money. They split the cost. They saw it as a win-win because they could not afford the house prices and they were with child (the other person was a single woman who was not a Canadian citizen and at the time didn’t even want to live in the place).
Not sure how it worked out (or the precise details) as I lost touch. . .but it did happen.
Re: #17 Waterloo Resident on 05.19.14 at 7:20 pm
I’ve done it with a lot of rich friends who simply put a house in some bozo’s name without much money to their name. These people are simply paid to hold the house for X amount of years then sell the houses tax free. Free real estate agents and free lawyers are provided making the sale basically free to the house holder. It’s legal and easier than parking money offshore. It’s much the same as selling a used car before the blue book value became law.
More fiction from you. — Garth
sciencemonkey # 147,
“I want a fair playing field for everyone”
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Man is just an animal, with a triple serving of grey matter. Any body expecting fairness, will be sadly disappointed.
#154 Daisy Mae
“Most taxpayers have become totally intimidated, as taxation becomes needlessly complex. It’s been a great federal job creation scheme with tax preparers, themselves, paying taxes.”
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The CRA is not in league with the tax preparers. Rather, the CRA finds them more of a nuisance with their constant whining on the phone trying to track down information on behalf of their clients.
The rationale given by CRA for tighter reporting requirements is to aid the ‘crackdown on tax cheats’ announced by the late ‘F’ last year.
This, of course, will have zero effect. It’s like asking tax cheats to please declare themselves and make life easier for the CRA.
The fines and penalties for incorrect, incomplete and/or late T1135 reports are very severe. If you have any kind of complex tax situation that involves worldwide sources of income you would be very wise to let a professional do the job.
A man who acts as his own tax accountant has a fool for a client. Perhaps even a greater fool.
#143 ozy: “taxation is fair, people that have job security should pay more taxes than those gambling on stock market or trying to become enteprenours, where they invest $$$ and pray for a profit against big corporate favoured by govt and cheap consumers alike…”
**************
People make decisions. And they have to live with the results. It’s not up to taxpayers to bail them out.
“Sorry Garth buy my lady friend works for the CRA and she told me that if I sold a property that had a MARKET VALUE of $400,000 for only $30,000 then I would simply be taxed at the price I sold it for, not it’s market value.”
******************
“Sorry, Garth…”? Such idiocy. And taxpayers are paying wages for these incompetents…
#165 Mr. Obvious: “If you have any kind of complex tax situation that involves worldwide sources of income you would be very wise to let a professional do the job.”
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Of course! That goes without saying. However, the average Joe has a very, very simple income tax situation….and does NOT need a tax preparer.
#168 Daisy Mae
#165 Mr. Obvious: “If you have any kind of complex tax situation that involves worldwide sources of income you would be very wise to let a professional do the job.”
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In cases such as this, you’d be contacting your investment adviser, your accountant, whatever. You wouldn’t necessarily be relying on a ‘tax preparer’. Most of them don’t know any more than you or I.
#159 Caruso on 05.20.14 at 4:01 pm
As for Jamie, equally nailed. He now owns a $400,000 cottage he paid only $30,000 for. If he sold it tomorrow, he’d have a taxable gain of $370,000. Thanks, dad.
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I will try once more. This is incorrect. If there is a deemed transaction at $400K, there are two parties to this $400K. Dad pays the tax on the gain, junior has a home that cost him $400k. If he turns around and sells it for $400K, there is no tax due. The disposition rules capture the taxes due, and does not create a double tax situation. What you wrote is incorrect, but good for drama.
Having said that, housing will eventually correct. Lots of tears coming at some point.
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I used to work at an accounting firm, yes what Garth has stated IS correct. It is because it was a non-arms length transaction.
I would like to point out that if Jamie claims his new property as his primary residence then his capital gain of $370,000 should be tax free. Am I missing something here. It might be worth it to take the hit and spend the winter at the old cabin and make sure your paperwork is impeccable so he can tell Revenue Canada to pound sand. Just my thoughts.