New Tax Rates: For Once, Good News (top of the page)

Effective January 2001

- Personal Tax Rates

• The lowest and middle Federal rates will drop from 17% and 25% to 16% and 22%, respectively, and the taxable income thresholds at which rates cut in will be increased.
  
  
• The top Federal rate of 29%, now applying to taxable incomes above $60,009, will:
  - drop to 26% on taxable incomes between $61,509 and $100,000;
  but
  - continue to apply to taxable income exceeding $100,000.
  The thresholds at which the rates apply will be subject to ongoing adjustments by virtue of indexation.
  
  
• Top Combined Federal and Provincial Personal Marginal Rates for 2001 in Ontario are as follows:
  
  

  	Capital Gains	Canadian Dividends	Interest & Ordinary Income
  Ontario	23.21%	31.34%	46.41%

  
  
  - Caregivers and Infirm Dependants
  
  Effective 2001, Federal tax credits available to persons with severe and prolonged disabilities will increase to $960 from $730. Federal tax credits for caregivers and infirm dependants as well as the supplement to the disability tax credit will increase to $560 from $406.
  
  - Employee Stock Options
  
  Consistent with the reduction in the capital gains inclusion rate, the deduction available for stock option benefits is increased to one-half for benefits includable in income after October 17, 2000. The net effect is that one-half of the stock option benefit is subject to tax.
  
  - General
  
  Following last February's reduction in the capital gains inclusion rate from three-quarters to two-thirds for gains realized after February 27, 2000. For all gains realized after October 17, 2000, the rate is 50%. These changes are summarized below:
  
  

  		Inclusion rate
  Date of Disposition	Before February 28, 2000 After February 27, 2000 and Before October 18, 2000 After October 17, 2000	75% 66 2/3% 50%

  
  
  The Importance of Keeping Records (top of the page)
  
  We occasionally encounter resistance when we discuss record keeping with clients. The typical discussion goes like these: “Do I really have to keep restaurant or gas receipts?” “Can't the government accept that I have to gas up my truck to drive it?” or, “No, I don't have time to keep those receipts.” The hazard of throwing away your tax receipts goes beyond the risk of facing the tax auditor unarmed. Without receipts, you have to guess the correct expense amount. If you materially over-estimated your claim, you could be imposed with a penalty amounting to 50% of the taxes you did not report.
  
  An entry on a credit card statement is not sufficient proof and the auditor will request the actual support vouchers. There are times when keeping receipts are near impossible. Have you tried to get a receipt from a parking meter? In these instances, should you forego the claim? Of course not. Just use your best estimate and don't go overboard. In an audit, the Canada Customs and Revenue Agency will generally allow a claim, without receipts, if the missing record is not habitual and the expense is plausible, reasonable or necessary.
  
  Taxes on U.S. Holdings (top of the page)
  
  Many Canadians hold U.S. investments directly or through a registered account. The Canada/U.S. tax agreement allows for tax to be withheld by the paying country on dividends and interest paid to residents of the other country. But the parties have agreed that rather than applying the 25% to 30% withholding tax rate imposed for residents of non-tax treaty countries, that lesser withholding tax rates will apply. Where the securities owner has certified that he or she is a Canadian resident, the U.S. disbursing agent will withhold the reduced rate of 10% for interest income and 15% for dividends payable to a Canadian resident or a Canadian resident's account.
  
  Due to foreign tax credits, the aggregate tax is no greater than what the individual would otherwise pay.
  
  If the taxpayer has not certified that he or she is a Canadian resident using the U.S. form W-8, then the paying institution will automatically withhold 30% withholding tax.
  
  To avoid double taxation, on filing the Canadian tax returns, individuals should make sure that the foreign disbursing agent is well aware they are Canadian residents.
  
  When the U.S. security is owned by RRSP or RRIF accounts, no annual Canadian tax returns are filed because the investment income is not taxed until it is received. In addition, no income tax credit can be recovered with respect to U.S. taxes withheld on interest or dividends paid to the Canadian registered RRSP or RRIF accounts.
  
  This makes it even more important that the disbursing agent be made aware that the account is owned by a Canadian resident, to ensure that the lower withholding tax rates of 10% and 15% will apply.
  
  There is no way to avoid these taxes withheld but at least you can keep them to a legal minimum.
  
  The U.S. withholding taxes grind away at your investment income, so it is in your best interest to check the details of investment returns for your registered accounts to ensure that the lower withholding tax is withheld.
  
  You should arrange your investments to avoid a situation where withholding taxes are if at all possible, imposed. This shouldn't stop you from making foreign investments with your registered funds, but should alert you to consider these taxes and to keep them to a minimum.
  
  New Year's Resolutions (top of the page)
  
  1.Try to Live Below Your Means (very difficult)
  
  When you spend less than you earn, there are two benefits. One, you create a surplus that can be invested for your ultimate and possible early retirement. Two, it's likely the restrained financial habits you develop mean you will need less money in retirement than the high spender. Where possible, curtail impulse purchases of luxuries, particularly when they are obtained with high-interest rate credit cards.
  
  2. Get Out of Debt
  
  If you owe money attempt to get out of debt. There's nothing so debilitating as having to continue working just to keep paying for purchases incurred years before. Start with high-interest credit cards. Pay them off, then switch to debit cards. If you're drowning in a sea of cards, car payments, etc., consolidate your loans under a single low-interest loan. When they're under control, get serious about paying down your home mortgage. The interest you save could buy your home twice over.
  
  3. Obtain Good Advice
  
  Seek out the best advice from lawyers, tax advisors, financial planners and accountants. While the Internet and discount brokerages are used by some successful do-it-yourself investors, most people lack the time, training or expertise to navigate the financial markets unassisted. A word of caution, if these advisors knew all the answers, they would not be working for a living. So please remember, at the end you are the best and final judge.
  
  4. Maximize RRSP Contributions
  
  RRSP contributions provide two big benefits: Your taxable income is immediately reduced by the amount of your contributions, plus you have tax-deferred growth until you turn 69. You should make an effort to get an RRSP receipt for the 2000 tax year because tax rates were higher in 2000 than they will be in 2001. However, if you have an unused “contribution room”, utilize contributions against the top marginal rate only.
  
  5. Start a Non-Registered Investment Portfolio
  
  The amount you can invest in an RRSP remains at 18% of annual income, to a maximum of $13,500. If you have a company pension plan, the pension adjustment will reduce your contribution room further. If you could save more and are debt-free, consider creating or significantly adding to a non-registered or “taxable” portfolio. With capital gains inclusion rates down to 50%, the benefits of owning stocks or equity funds outside the RRSP are exciting. Put most of your fixed income investments into your RRSP or registered retirement income fund.
  
  6. Get a RESP for the Kids
  
  If you have kids or grandkids, an annual $2,000 registered education savings plan (RESP) for each child will net an additional $400 grant from the federal government. That's a fast 20% return on your educational investment- no age is too young.
  
  7. Last But Not Least, Minimize Your Taxes
  
  Where possible, arrange your affairs in such ways as to minimize taxes. However, tax saving consideration should come secondary to solid business and investment decisions. Never make a decision solely for tax purposes, consider firstly the investment or business merit of the decision and only then its tax benefits.
  
  Notice to Employers and Payers (top of the page)
  
  Payroll deductions
  
  You may have noticed that for the year 2001:
  
  You will have to look up amounts in two tax deduction tables - a federal table and a provincial table. However, you will continue to report the combined federal and provincial tax deductions on your regular remittance form (Form PD7A, Statement of Account for Current Source Deductions). You will continue to send to the government periodic remittances of federal and provincial tax, as well as Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums.
  
  T4 slips
  
  You will continue to file one T4 slip in February of each year. The T4 slip will show combined federal and provincial taxes.
  
  For more information, see the government's publication called Payroll Deductions Tables for 2001, call our office or visit Baratz Judelman's Web site: www.baratzjudelman.com/links/links_frame.htm
  
  GO TO:
  

1. Canadian Government Agencies
2. Government of Canada
3. Taxation
4. Tax on income (TONI)
   
   Just as a note, you can download the 2001 tax tables from the government's web site.
   
   
   See previous issue
   
   
   Fall 1999
   Summer 2000
   January 2001
   Fall 2001
   December 2003
   February 2004
   December 2004
   December 2005
   June 2006
   December 2006
   August 2007
   December 2007