RRSP
Limits (top
of the page)
RRSP
limits are based on 18% of earned income in the prior year, subject
to annual limits. The 2003 contribution limit is increased to $14,500,
$15,500 for 2004, $16,500 for 2005 and $18,000 for 2006.
The
"True" Benefit in Contributing to an RRSP
(top of the page)
In regards to an RRSP, for a younger person the benefits of long-term
tax-free accumulation is obvious. The value of the annual deduction
in terms of tax savings is understandable. For older taxpayers, who
have a shorter horizon for contribution before mandatory withdrawals
(age 69) take place, it is likely that the major benefit of the RRSP
is in the immediate tax deduction they get, not in the ability to generate
income over the long-run. A $14,500 deduction will, for a 46% taxpayer,
produce an immediate "return" of $6,700. It will take several years
for the same approximate amount of money to be generated by investment.
If one puts the funds in an RRSP, the income generated will compound
much faster than if it is invested outside the plan, as income in the
RRSP is tax sheltered.
The basic premise is that for many higher-income taxpayers, especially
those who are older, the deduction is worth more than the long-term
accumulation:
- Assuming that tax rates will continue to fall, contributions should be maximized now.
- Excess contribution room should be used-up.
- Chances are that a retiree will have a lower tax rate after retirement than at present.
- If returns on investments remain low, having those investments in an RRSP will offer more income in the long-run than will having the investments outside the RRSP.
- If investment returns soar (let us hope), the taxpayer will benefit by having the increase sheltered within an RRSP.
In the long-run
the downside of RRSPs is of course that the full return, including the
"capital" and any capital gains, are taxable in full upon withdrawal
Income
Splitting (top
of the page)
Attribution rules apply where one spouse has lent or gifted property
to his/her spouse or minor children for the purpose of splitting or
reducing income. This means that in respect of the transferor, the transferee
will pay the tax on the income.
Income can be split between spouses in the situation where one spouse
has cash of say, $400,000 and lends it to the other spouse. Interest
at the prescribed rate, which is currently 3% must be charged on the
loan. If the borrower then invests the money at a higher rate, he or
she would have net interest income. The interest paid on the loan must
be collected within 30 days of the calendar year end.
Automobile Standby Charges - Revisited
(top of the page)
The standby charge is set at 2% per month on the original cost of the
vehicle, or 2/3 of the leasing costs. The standby charges are a taxable
benefit for employees who use employer-provided automobiles. These benefits
must be reported on the employee's T4 and include the costs of operating
the vehicle such as insurance, repairs and gas and the standby charge
for employer-owned and leased vehicles.
The standby charge on automobiles has been reduced in cases where the
annual personal use does not exceed 20,000 kilometres and the automobile
is used more than 50% for business purposes.
Example:
| Personal
use x Regular Standy Charge 20,000 Km |
||
| Cost
of Car |
$35,000 |
|
| 8,000
x $8,400 20,000 |
$3,360 |
|
Self-Employment
- More Thoughts (top
of the page)
Generally, a self-employed person is usually able to claim more expenses
than an employee.
Based on the above, The Canada Customs and Revenue Agency prefers and
will therefore attempt to classify the individuals as employees rather
than self-employed.
The risk to a taxpayer contracting for services and by not dealing with
the person as an employee, is potential liability for Canada Pension
Plan and Employment Insurance, plus penalties and interest.
The tests to determine the nature of the business relationship are as
follows :
Economic Reality Tests:
The criteria used to determine the nature of a relationship are control,
ownership of the tools, chance of profit/risk of loss and integration.
Who controls the work, and how, when and where is the work done? When
the worker has complete control over the performance of his or her assignment
suggests he or she is an independent contractor. If the payer has control,
or the right to control, the worker is an employee.
Who owns the equipment and tools? A worker who owns or controls his
or her tools and is responsible for maintaining these tools is likely
to be an independent contractor. If the payer owns the tools, this indicates
the worker is an employee.
The chance of profit/risk of loss factor examines the worker's potential
of profit and loss. The existence of a risk of loss will help to prove
that the worker is self-employed.
The worker's dependence on an organization, and his or her proportion
of income derived from the work and job security, including employee
benefits will determine whether the worker is employed or self-employed.
Self-Employed Can Carry Costly Tax Burden:
In many cases the new economy makes the distinction based on the above
criteria somewhat blurry.
It seems that the trend is to look at the situation as a whole rather
than directly at each element.
If a genuine contract for services has been entered into and the intent
of the parties as well as their mutual understanding and the economic
reality is such that a self-employment situation exists chances are
that it will be accepted. However, situations where the intent of the
parties is to reclassify in order to save costs and deduct expenses
may fail if examined closely by the Canada Customs and Revenue Agency
and by the Courts.
Gifts
and Awards (top
of the page)
An employer may give an employee two non-cash gifts per year which would
be considered tax-free. These gifts must be for special occasions such
as birthday, Christmas, marriage or birth of a child. The total of these
gifts cannot exceed $500 per year. The employer is also permitted to
give two non-cash awards as a recognition for special achievements.
The total cannot exceed $500 for the year and can be given for such
achievements as meeting safety standards or recognition for loyal service.
Personal
Tax Rates - Individuals (top
of the page)
| Marginal
Tax Rates - Ontario 2003 |
||||||||||||||||||||
|
Some
Brief Answers to Employment Matters
(top of the
page)
The Employment Standards Act, 2000 (ESA) covers a wide range of employment
standards, including minimum requirements for workplaces. The ESA, or
parts of it, apply to most employers and employees in Ontario, however,
certain employers and employees are not covered by the ESA. A summary
of the main issues are covered below:
Hours of Work and Overtime:
The daily limit is eight hours of work a day, or the number of hours
in a regular work day established by the employer.
The weekly limit is 48 hours.
Under the Employment Standards Act employees can agree, in writing,
to longer daily and weekly work hours (up to 60 hours a week) without
the employer having to get approval from the Ministry of Labour.
Most employees receive overtime pay after 44 hours of work each week.
The overtime rate is 1 1/2 times the regular rate of pay. However, many
employees have jobs that are exempt from the overtime provisions of
the ESA. Others work in jobs where the overtime threshold is more than
44 hours in a work week.
Employees can take time off at the rate of 1 1/2 hours for each hour
of overtime worked, instead of overtime pay, if they and their employers
agree in writing.
Rest Periods:
Minimum daily and weekly rest periods are protected by law. The Employment
Standards Act provides for a daily rest period of at least 11 consecutive
hours off work in a 24-hour period. It also ensures that an employee
must be allowed 24 consecutive hours off in each work week or 48 consecutive
hours off work (two consecutive days) every two consecutive weeks. An
employee must also have eight hours free from work between shifts --
unless the total time worked on successive shifts does not exceed 13
hours, or unless the employee and employer agree otherwise in writing.
Public Holidays:
Most employees will be eligible for public holiday time off with pay.
Public holiday pay will be based on the regular wages and vacation payable
to an employee during the four weeks prior to the holiday divided by
20. There are eight public holidays in each calendar year in Ontario.
They are as follows:
- New Year's Day, Good Friday, Victoria Day, Canada Day, Labour Day,
Thanksgiving Day, Christmas Day, Boxing Day
(top
of the page)
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Last updated: December 2007