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Anthony Layton MBA, CIM

Chairman & CEO, Portfolio Manager

Peter Guay MBA, CFA

Portfolio Manager
Contact
  • T514.875.7566 x 224
  • 1.800.875.7566
  • F514.875.9611
  • Place Alexis Nihon
  • 3400 de Maisonneuve Ouest,
    Suite 1501
  • Montreal, Quebec H3Z 3B8
August-29-17

The tax implications of hiring a nanny

Welcome back to “Do It Together” financial planning. My last video looked at how to find and hire a great nanny for your kids. In part two of this two-part series, I take a look at the tax implications and what happens between you and the government when you hire a nanny.

There’s quite a bit. I’ll talk about the monthly remittances and tax reporting to Canada Revenue Agency and Revenu Quebéc and what tax credits you may get on your return. It’s a little complicated but I’ll walk you through it.

By: Peter Guay | 0 comments
August-20-17

Understanding capital gains when passing on your family cottage

If you’re like me, your cottage is at the heart of your family life. It’s a place where everyone can get together, share good times and make memories.

But all too often, a cottage becomes a burden when it comes time to pass it along to the next generation. There are difficult decisions to be made about who is going to own it, and how it’s going to be managed and shared.

And there are expenses. Those expenses start with the capital gains tax. In fact, tax is often one of the biggest stumbling blocks when it comes passing on a cottage.

Real estate almost always rises in value over the years. When a property is sold or transferred upon the death of the owner, half of the increase in value is subject to capital gains tax.

An exception is made when the property is left to the owner’s spouse. In that case, it’s transferred tax free. Capital gains tax is ultimately payable when the surviving spouse sells the property, or transfers it upon his or her death—typically to the children.

No capital gains tax on principal residence

Now, there is no capital gains tax to be paid on a property that is designated as your principal residence. Most people designate their house in the city as their principal residence. However, in some situations, it may make sense to designate the cottage as your principal residence.

It’s fairly easy to meet the tax man’s definition of what qualifies as a principal residence. The dwelling must have been inhabited by the family during any part of a year for which the exemption is being claimed.

The decision of whether to designate the city home or cottage will depend on their relative increase in value in the years they were owned. And you may want to split the exemption – using it to reduce taxes on the city home in some years, and the cottage in others.

Before we talk about calculating the capital gains tax, let’s take a look at a bit of history.

The tax was first introduced in 1972. Until the end of 1981, each spouse could designate a separate property as a principal residence – so one could take the city home and the other could take the cottage. As of 1982, a couple can designate only one home as their principal residence.

An example of how the tax applies

Now, let’s look at the case of a Montreal couple that purchased house in the city for $22,000 in 1955. In 1964, our couple bought a cottage on a lake in the Laurentians for $20,000.

By the end of 1981, when they could designate only one property as their principal residence, the value of the house and cottage had leaped to $180,000 and $80,000.

In 2017, they decided to transfer ownership of the property to their children. The couple got a professional appraisal of both properties and learned the city house was worth $800,000 and the cottage was worth $500,000.

There is no capital gains tax applicable between 1972 and 1981 with the husband designating the city house as his principal residence and the wife designating the cottage as her principal residence.

So, in 2017, the capital gain on the city house is $620,000, while on the cottage it is $420,000. In this case, it makes sense to designate the city house as the couple’s principal residence from 1982 onward.

One half of the $420,000 gain on the cottage is taxable.  Given that the property is jointly owned by spouses, the $210,000 taxable gain will be split evenly between them. This gain is taxed at the couple’s respective marginal tax rates. The highest combined tax liability would be about $105,000.  And decrease depending on the couple’s taxation rates.

Points to remember about capital gains

There are a few important points to remember about the capital gains tax. The first is you can’t avoid it by gifting the cottage to your children. And you can’t reduce it by selling it to them at a low price. Ottawa charges the tax on the fair market value of the property, regardless of what price you and your children agree upon.

Another thing to remember is that renovations or improvements such as an addition, a deck or a boathouse can decrease the capital gain. So, it’s a good practice to keep records of all improvements to your cottage.

Finally, the capital gains tax can become a critical issue if one or more of your children decides to opt out of owning the cottage. At that point, the siblings who want to keep the property will typically buy out those who are opting out. But if they can’t afford to pay them their share, plus the tax liability, then the cottage may have to be sold.

This unfortunate outcome almost certainly will produce bitterness between the would-be owners and the opted-out siblings.

Many other issues to consider

Beyond this and other capital gains considerations, there are many other issues to think about when it comes to passing on your cottage.

That’s why it’s so important to have a frank family discussion and come up with a plan as early as possible. You should then make sure your wishes are accurately reflected in your will.

As you go through the process, you should get financial planning and tax advice from experienced professionals.

To get you started, I’ve prepared a free guide that provides a lot of great details and examples. I encourage you to contact me to get your copy.

More articles regarding this topic:

 

By: Anthony Layton | 0 comments
August-15-17

How to hire a nanny

Welcome back to “Do It Together” financial planning. Here’s a fact, daycare is expensive, even here in Quebec where we’re fortunate to have a subsidized program. But if you have two or more children, hiring a nanny can be less expensive than putting them in daycare.

Hiring a nanny can be a bit intimidating if you’re doing it for the first time but don’t worry. In today’s “Do It Together” video, I’ll take you through the pros and cons of hiring a nanny including how to find one, how to create a fair and equitable job description for both of you, and what you need to know your role as an employer when it comes to salaries, vacation time and payroll deductions

 

By: Peter Guay | 0 comments
August-06-17

Charitable donations: How to do well by doing good

It’s better to give than receive, or so the saying goes. But when it comes to managing your wealth, the good news is you can do both.

That’s because our governments offer generous tax incentives to encourage you to make charitable donations. So you can make the world a better place by supporting your favorite charity and get some help with your tax planning.

It’s a great way to share your good fortune with others and leave a legacy for future generations.

It costs Canadian taxpayers about $5 billion a year for federal and provincial tax incentives to encourage giving to registered charities, including humanitarian, religious and educational organizations.

Canadians are giving less

And Canadians need the encouragement. A recent study by the Fraser Institute found that giving dropped to a 10-year low in 2014, the most recent year that complete data was available.

Just 21 per cent of Canadians claimed charitable donations on their tax returns, down from 25 per cent in 2004. The size of the average donation also dropped. By comparison, American givers were two and a half times more generous than Canadians.

At PWL, we encourage philanthropy not just because of the tax benefits but because we believe it’s important to give back.

Governments offer generous charitable tax credits

Of course, each person decides for themselves whether they want to give, how much and to which charitable cause. But charitable donation tax credits are available to everyone as long as you’re giving to a charity recognized by the Canadian Revenue Agency.

The tax credit calculation is a bit complicated, but for every dollar you give, you get back around 50 cents -- depending on your province of residence and marginal tax rate. In other words, your favourite charity gets every penny you donate and you get tax savings that add up to half of what you give.

But it gets better. You don’t have to donate cash. You can also give other assets to registered charities, including publicly traded securities such as individual stocks and bonds as well as exchange traded funds and mutual funds.

Can give securities to charities

When you give these type of securities, you can get even more tax relief for your buck. First, you get the charitable donation tax credit based on the fair market value of the securities. Second, any capital gains accrued on those securities is eliminated.

And that’s why donating shares with large capital gains is one of the preferred methods of giving for our clients at PWL.

And it doesn’t end at shares. You can also get a tax credit and the elimination of the capital gain on a donation of ecologically sensitive land to a qualified organization.

Special tax incentives in Quebec

In Quebec, there are also tax incentives for donations to registered art and cultural organizations.

Wherever, you decide to give, it makes sense to take the time to consider how your giving can do the most good and produce the most tax savings, so you can give even more next year.

 

By: Anthony Layton | 0 comments
August-01-17

Creating a Trust Sandwich

Sandwiches are a great invention. You can hold them in one hand, there’s no end of ingredients you can use and when it comes to your business, a trust sandwich is a great way to protect your assets. Welcome back to my “Do It Together” series and the four episode of the whys, hows and advantages of incorporating your business.

Food jokes aside, a trust sandwich is when you use different financial strategies for estate planning and the protection your assets. This includes trusts and wills, which I talked about in previous videos.

I’ll take you through what ingredients make up a trust sandwich (sorry, food puns are hard to resist) and what options are out there that you can use.

That’s it for the business incorporation, for now Join me for the next topic in my “Do It Together” series where I’ll discuss the tax implications of hiring a nanny.

 

By: Peter Guay | 0 comments