The holiday season is a popular time to reflect on the past year and donate to the causes you care about. These types of donations don’t just help people and organizations in need; they confer a potential tax benefit on the giver.
Here’s a look at the tax benefits of charitable giving and how to qualify for a charitable tax credit to lower your taxable income.
Credits for charitable donations
Taxpayers who donate to qualified organizations can claim a tax credit of up to 75% of their net income. In most cases, these credits fall within a range of 20% to 49% of the amount you donated and can only be used to reduce the amount of taxes you pay and not as a tax refund.
You are eligible for a tax credit no matter how much you donate. Exactly how much you are eligible for depends on where you live, how much you gave, and your income. You’ll unlock much higher tax credit rates for any portion of a contribution that exceeds $200. On the federal level, your credit is 15% on the first $200 in donations and 29% for anything more than $200. Provinces have similar credits, which are between 4% and 24%, so what you qualify for may vary depending on which part of the country you live in.
How to claim a charitable tax credit
To claim the tax credit, you will need to report it on your federal and provincial tax return. To be eligible, donations must be made to qualified Canadian organizations, including registered charities and certain public organizations, such as an amateur athletic organization or a housing corporation providing low-cost housing.
You can claim these donations only once, but you do not necessarily need to claim them in the same year you contributed. You can carry them forward for up to five years (or 10 for a gift of ecologically sensitive land made after February 10, 2014).
This means you can essentially “bunch” your charitable contributions for up to five years for a significant tax credit one year, instead of smaller ones where you make your claims year by year. However, you do have to claim tax credits for the gifts you carried forward from a previous year before you can claim credits for gifts you give in the current year.
You’ll need an official receipt for all donations to claim them on your taxes. Most organizations will issue this to you at the time of your contribution. If you decide to carry forward contributions, make sure to keep a record of the eligible amount you are claiming this year and the amount you are carrying forward.
Another strategy to optimize your charitable tax credits is to combine your eligible donations with a spouse or common-law partner into one tax return. By pooling your donations together, you’re more likely to receive higher tax credit rates beyond the $200 threshold.
Keep in mind that charitable tax credits can only be used to reduce your taxable income and will not produce or increase your refund. For example, if you try to use your charitable tax credits during a year in which the amount of tax you owe is less than what your credits are worth, then you won’t receive the full possible benefit. In this case, it would make more sense to hang onto those credits and carry them over to a year when you have a higher tax bill.
Any charitable contribution to an organization in need is an act you can feel good about, and with a bit of planning and the right strategy, you can give to the causes that are important to you while also easing your tax burden.
Contact us today at email@example.com or 647.349.7070 to get the conversation started.
Getting the most out of your registered retirement savings plan (RRSP) isn’t just about maxing out your contribution limit every year. It’s also about carefully planning when to withdraw your savings. As a rule of thumb, the longer you can leave your money in the account, the better, allowing your savings to continue growing. When you make withdrawals early, before you retire, your money is no longer able to work toward securing your financial future.
On the other hand, sometimes financial necessity or early retirement plans require you to withdraw your funds early. To decide when to dip into your RRSP and when to hold off, you need to consider several factors: the tax consequences of the withdrawal, the potential tax-advantaged growth you’re giving up, and your individual financial needs.
RRSP withdrawal rules
You can withdraw money from an RRSP at any time for any reason, but be mindful that withdrawals are taxable as income. If you withdraw money while you’re still working, you could inadvertently bump yourself up into a higher tax bracket. Be aware, as well, that a portion of your withdrawal — up to 30% — will be withheld to be put toward taxes, and you may owe additional money come tax time.
There are two exceptions to this rule: The Home Buyer’s Plan allows you to withdraw up to $35,000 from your RRSP tax-free to pay for a qualifying home for yourself or a relative with a disability. The Lifelong Learning Plan allows you to make a tax-free withdrawal of up to $10,000 per year from your RRSP to pay for full-time training or education for yourself or a spouse. (You cannot use the money to pay for education or training for your child or the child of a spouse.) The funds you withdraw for these programs must be repaid, and repayments are subject to a strict schedule.
It’s also important to note that withdrawals from your RRSP do not increase the amount that you can contribute in a given year. For example, if you have $5,000 of contribution room and withdraw $1,000, you will not have $6,000 of contribution room.
The benefit of leaving your money in the markets
Opportunity cost is one of the biggest issues with early withdrawals from RRSPs. Whatever money you take out of your account is no longer there working for you. In general, you get the most out of a tax-advantaged retirement account when you leave your money in the account over the long term, giving it a chance to benefit from tax-advantaged compounding growth.
Let’s take a look at a simple example. Say you withdraw $10,000 from an RRSP at age 50 to help you buy a new car. That amount is subject to 20% withholding, so you’ll only receive $8,000 to help you make your purchase. If you left that $10,000 in your retirement account until you retired at age 65, it would have had 15 years of tax-advantaged compounding growth. At a 6% interest rate compounding annually, that $10,000 would have grown to about $23,965 by the end of the period. That’s nearly an extra $14,000 you could have put toward retirement income.
Generally speaking, if you can avoid using your RRSP savings for anything but retirement income, you should. In some circumstances, early withdrawals may be necessary. A financial advisor can help you determine your options and come up with a plan to make sure you are still on track to retire.
Contact us today at firstname.lastname@example.org or 647.349.7070 to get the conversation started.
If you’re raising children younger than 18, you may be entitled to monthly support
Of all the challenges that come with parenting, the financial challenge can be the hardest to overcome. Fortunately, if you’re raising children in Canada, the government may offer you monetary assistance in the form of the Canada Child Benefit.
Canada Child Benefit Basics
The Canada Child Benefit (CCB) is a tax-free monthly payment from the Canada Revenue Agency (CRA) meant to help low- to moderate-income families defray the costs of raising children. The CCB began in July 2016 as a replacement for the Canada Child Tax Benefit, the National Child Benefit Supplement, and the Universal Child Care Benefit. It is the most recent and generous incarnation of a program launched in the early 1990s to end child poverty in Canada.
Since July 2018, the CCB has been indexed to the cost of living, meaning that an increase in the cost of living automatically triggers an increase in the CCB amount.
To be eligible for the CCB you must live with a child under the age of 18 whose care and upbringing you are primarily responsible for, and you must be taxed as a resident of Canada. Additionally, either you or your partner must be a Canadian citizen, an Indigenous person, a permanent resident, a protected person, or a temporary resident who meets certain criteria.
If you share custody of your child, and your child spends roughly equal amounts of time at both households, each parent may be entitled to half the CCB payment. In this case, payment will be calculated based on each parent’s own adjusted family net income (AFNI).
How Much Do You Receive?
The amount of your CCB is based on last year’s income and is recalculated every July. For example, your AFNI from 2020 determines how much you’ll get in CCB from July 2021 to June 2022. If your income changes in 2021, it won’t affect your CCB payments until at least July 2022.
The maximum benefit per child is:
- $6,833 per year ($569.41 per month) for children under 6.
- $5,765 per year ($480.41 per month) for children between 6 and 17.
If your 2020 AFNI is:
- less than $32,028, you will receive the maximum benefit.
- between $32,028 and $69,395, your benefit will be reduced by 7% of your income over $32,028
- more than $69,395, your benefit will be reduced by $2,616 plus 3.2% of your income over $69,395.
To find out exactly how much you should receive, use the Child and family benefits calculator at Canada.ca. You can find the Canada Child Benefit application form online.
CCB Young Child Supplement
To provide extra support during the COVID-19 pandemic, the Canadian government introduced the CCB young child supplement (CCBYCS) in 2021. A family’s net income must be $120,000 or less to qualify for the full 2021 CCBYCS. Families who qualify will receive four additional payments of up to $300 per child younger than 6 over the course of the year. Families with a net income of more than $120,000 will receive half that amount, or $150, for each child under age 6. Families do not have to apply for the CCBYCS separately, but they must have filed their 2019 and 2020 tax returns.
The CCB is tax-free money with no strings attached for parents raising children in Canada. If you think you might be eligible, it’s worth applying. In addition, some provinces and territories may offer additional resources to help you raise your family. The benefits may be added to the CCB or paid out separately. Visit the CRA website to find out more.
Contact us today at email@example.com or 647.349.7070 to get the conversation started.
A divorce is one of the most difficult transitions you can go through. When you add uncertainty about money, that transition can get even more stressful. Here are six steps to help keep your finances intact during—and after—a divorce:
Step 1. Assess your finances and make a budget
As divorce proceedings get underway, take stock of your finances. Start by reviewing your income, retirement accounts, investment portfolio, and insurance policies. Next, make a budget that reflects your income and projected monthly expenses. Include both your personal debts and debts you share with your soon-to-be ex-spouse. Make sure to factor in expenses such as finding new housing or buying a car on a single income. Identify gaps in your budget where you come up short and see where you can make cuts to cover the difference.
Step 2. Target shared debts first
Debt on joint accounts can be problematic. Whatever your divorce agreement says, creditors will continue to consider both of you liable for the shared debt. Keeping those accounts open may pose problems later if your former spouse falls behind on payments. Paying off those debts pre-divorce can help avoid those issues.
Step 3. Divide assets thoughtfully
You and your former spouse may agree about dividing shared assets equally. But if you’re trying to protect your finances, there’s more to consider than the relative size of each party’s share—namely, tax implications and liquidity needs.
If the two of you will be in different income brackets post-divorce, consider the tax implications of holding on to various shared assets. For example, some retirement funds are after-tax accounts, meaning taxes were paid on contributions, and eligible withdrawals will be tax-free. Others are pre-tax accounts, meaning you will owe taxes on withdrawals. For assets that come with tax obligations, the higher-earning spouse will likely take the greater tax hit from keeping them. On the other hand, the lower-earning spouse may have a harder time paying the taxes. Weigh factors like these carefully.
You may also find that you and your ex have different liquidity needs. If you own a house together, for example, carefully consider liquidity when deciding whether either of you will keep it. If one of you needs access to the equity tied up in the house, it may make sense to sell it. Alternatively, you could decide one person will get the house while the other takes a larger share of liquid assets.
Step 4. Review your retirement goals
The costs and financial changes that come with divorce can set back your retirement plan. Check to see how the terms of your divorce may alter your path toward your retirement goals. For instance, you may find that pushing retirement back by a few years gives you more financial flexibility. Also, consider upping your contributions to retirement plans such as 401(k)s and IRAs. If you’re age 50 or older, the IRS allows you to make additional “catch up” contributions to save even more toward retirement.
Step 5. Revise your will and other documents
In general, a divorce won’t automatically remove a former spouse as the primary beneficiary of your estate and other assets. Designate new beneficiaries for your estate, life insurance, annuities, and retirement accounts. Depending on your state’s laws, you may have to wait until the divorce is finalized to make these changes. You will also likely need to make changes to your health care proxy and financial power of attorney.
Step 6. Make a Plan B
If your divorce agreement states your former spouse must make alimony or child support payments to you, prepare for the possibility that they will fail to pay or pay late. Keep money in an emergency fund to cover expenses, such as childcare, in the event your ex-spouse fails to pay. Also, ask your lawyer about ways to guard against nonpayment in the divorce agreement.
 Source: Consumer Financial Protection Bureau: https://www.consumerfinance.gov/ask-cfpb/i-am-divorced-and-getting-calls-about-a-debt-that-is-no-longer-my-responsibility-under-the-divorce-decree-or-property-settlement-agreement-can-a-debt-collector-try-to-collect-this-debt-from-me-en-1413/
 Source: Internal Revenue Service: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions
 Source: CNBC: https://www.cnbc.com/2018/04/16/out-of-date-beneficiary-designations-are-a-common-and-costly-mistake.html
The Unique Advantages of Health Care Spending Accounts
These accounts can pay you back for qualified health care expenses
A health care spending account (HCSA), also known as a health spending account (HSA), is an employee benefit that offers reimbursement for eligible health care expenses. These accounts can help supplement existing coverage and fill in the gaps where public health insurance falls short.
What is a Health Care Spending Account and how do I qualify?
The public health care system in Canada offers coverage for most medical expenses but not everything. Many health care services, like dental or vision care, are not covered by the system, and some Canadians opt for private insurance to cover these costs. This type of private insurance is rarely a benefit an employer can offer, especially if they are a small business.
Instead, many Canadian employers offer health care spending accounts that reimburse employees for health care expenses not covered under the provincial health insurance plans. HCSAs allow employers to offer employees money to pay for out-of-pocket health care expenses, like dental services, eyeglasses, or hearing aids. Eligibility is generally determined by the employer, but an employee must work at least 20 hours a week to qualify.
How do HCSAs work?
HCSAs are typically offered by employers as either part of a benefits package or on a stand-alone basis. They also offer certain financial advantages. Employers fund HCSAs on a monthly basis, and the money they contribute to the account is tax-deductible. Withdrawals are tax-free for employees as long as they spend them on eligible medical expenses.
An employee’s access to the money left over in the account at the end of the year depends on the plan their employer offers. Employers typically have three options for handling unused balances, including:
- Balance carry forward. With this plan design, unused balances at the end of the first year can be carried over, but unused funds left in the account for more than two years go back to the employer. This option allows employees to plan for large medical expenses over a two-year period, giving them ample time to use their HCSA funds.
- Expense carry forward. This option allows for expenses that remain unclaimed at the end of the benefit year to carry forward and be reimbursed with the next year’s funds. Unused funds, however, are returned to the employer at the end of the benefit year. This option offers employees flexibility, especially if they incur a large unexpected medical expense.
- No carry forward. This is essentially a “use it or lose it” design that does not allow unused balances or expenses to be carried over into the next benefit year. For employers, this plan design is straightforward and simple and works well as a one-time benefit or reward for employees.
What medical expenses are eligible for a HCSA?
Employees do not have to pay taxes on withdrawals for eligible medical expenses. The Canada Revenue Agency (CRA) determines what is considered an eligible expense, such as:
- Vision care, like eyeglasses, contact lenses, or laser eye surgery
- Prescription drugs not usually covered by Extended Health Care plans, such as fertility treatments
- Massage therapy
- Adult orthodontics
There are some medical-related expenses that aren’t covered, such as:
- Premiums for public health services
- Services from nonqualified medical practitioners
For a complete list of eligible expenses, visit the CRA website.
A HCSA offers tax benefits to employers and flexibility and freedom to employees, allowing them to pay for medical expenses not covered under their provincial health insurance plan. If you have any questions about your plan, contact your employer.
Learn how to get the most out of your own health insurance and contact us today at firstname.lastname@example.org or 647.349.7070 to get the conversation started.
Where there’s a will, there’s usually at least one executor – a critical role whose mandate is, as the title suggests, to execute your instructions on the distribution of your property after you die. This blog post is by no means intended to be legal advice but merely a call to use common sense when deciding on the future of your assets.
To be an executor is a serious and time-consuming undertaking that comes with fiduciary responsibilities and legal liabilities. Yet many people don’t take the time to truly consider if the person –or persons – they’ve chosen has what it takes to take on the consequential demands of the role. Is the person willing and able to perform the duties you are asking for?
Making the wrong choice for an executor may be a mistake you won’t live to regret. But the beneficiaries of your estate – and perhaps even your appointed executors – will most certainly wish you had made a better selection.
It starts with understanding
Most people know the general definition of the executor role and those who don’t have Google to help fill in the blanks. Few people really know what it takes to be an executor. What a lot of people don’t realize is the number of tasks and moving parts associated with being an executor. For example, there will be paperwork – a lot of it – because your executor is responsible for submitting your will for probate, accounting for your assets and debts, and filing your outstanding taxes. Your executor will also need to consult and coordinate with your accountant, lawyer and other advisors. Your executor may even be called upon to resolve disputes between your heirs.
Educate yourself (and the family) then identify the best candidates
Your eldest child may have done a great job of organizing family dinners and smoothing over sibling rivalries. Then there’s your business partner – an upstanding colleague with smarts and integrity. But before you start naming them as executors, ask your lawyer for an executor job description that details every possible task under this role. Then identify the skills, knowledge and character traits needed to carry out each task. You’ll find that many of the tasks require a level of financial literacy while others require careful attention to detail. Qualities such as good reasoning, sound judgment and fairness are also critical in this role, as is the ability to communicate and mediate between parties. As you match desired qualifications to your executor’s job description, you’ll likely start to make a shortlist of suitable candidates and perhaps scratch off a few of the names you originally had in mind.
Make sure you’ve got the right mix
If you’re appointing more than one executor, make sure you’ve got the right mix of people. This means ensuring your executor team will have the ability to talk through disagreements and bring a fair and united approach to ensuring your wishes are carried out. It’s also a good idea to set down some rules of engagement and decision-making. For example, will decisions have to be made unanimously, or will majority rule? Will one executor have veto powers? As you consider these points, you should also think about potential candidates for back-up executors in case the ones on your top list decline or are simply not available to take on this responsibility.
It can take years – and potentially a lot of stress – to carry out the duties of an executor. While your appointees may consider it an honour to be entrusted with such an important responsibility, they’ll likely also appreciate some financial compensation for their time and effort. Talk to your lawyer about paying your executors, keeping in mind that compensation typically ranges within 2.5 per cent to five percent of your estate’s total value. This is especially critical if the size and makeup of your assets, or your family structure and dynamic, could make the distribution of your property complicated and challenging.
No matter what, have the talk
Yes, talking about your impending death can seem morbid and might cause pain for you and your family. But not discussing your estate plans today can bring even more pain for your heirs tomorrow. So have the talk with the people who stand to inherit your property, as well as with those you’d like to entrust with the responsibility of executing the terms of your will. This will give you a chance to explain why you’re making certain decisions for your estate, and to hear any concerns your family and appointed executors may have. You may be surprised by what you learn from these conversations and how these new insights can help ensure you’re taking care of the people you love, in exactly the way you want.
It’s taken you a long time to build your assets, and you may still have many years left to keep growing your wealth. Don’t let all your hard work go to waste when you’re gone. Don’t risk the harmony in your family. Take the time to ensure your estate plan is built on a solid framework that includes the right executor and all the required conversations. Not talking about the problem, will definitely not make the problem go away.
Let’s start the conversation. Contact us today at email@example.com or 647.349.7070 to get the conversation started.