1 Tax Tips from the Alberta Accountants Unification Agency 2013 Contents Employment Income, Deductions, and Credits Reducing Payroll Deductions Regular Income from Tips and Gratuities Union Dues are Deductible Deductions When You Move for Work Employment Benefits Stock Option Benefits Automobile Expenses Home Office Expenses Employment Expenses Canada Employment Tax Credit Tradesperson s Tools Deduction Volunteer Firefighters Tax Credit Carry-forward Amounts Tax Credit for Public Transit Passes Working Income Tax Benefit Family Matters Children s Fitness Amount Child Care Expenses Transferring Income Tax Credits to Your Spouse or Common-law Partner Individuals with Disabilities Adoption Expense Tax Credit Children s Arts Tax Credit Family Caregiver Tax Credit Caregiver Credit Child Tax Credit Child Tax Benefits Filing Matters Penalties for Repeated Failures to Report Income Taxpayer Relief Measures Records Retention Why File a Personal Income Return? Deadlines for Filing Your Personal Income Tax Returns Your Assessment Notice T1 ADJ: Making Changes to Your Return How to File Your Return Foreign Income Matters Foreign Property Reporting Requirements Foreign Source Income
2 Investment Income, Gains, and Losses Attribution of Investment Income Taxation of Capital Gains Capital Losses Lifetime Capital Gains Exemption Claiming a Capital Loss on Shares of a Bankrupt or Insolvent Corporation Writing off Loans Made to a Business Non-deductible RRSP Fees Paid Capital Dividend Non-Arm s Length Transfers and Gifts Medical, Donation, and Other Tax Credits Medical Expenses Refundable Medical Expense Supplement Charitable Donations Donation of Publicly Traded Securities Real Estate Matters Retirement Rental Income Change in Use Rules Principal Residence Exemption First-Time Home Buyers Tax Credit Foreign Pension Income Old Age Security Clawback Managing Your Retirement Tax Credits for Those Over 65 Pension Income Credit Special Savings Plans Tax Free Savings Accounts Students and Education Student Bursary and Scholarship Income The Canada Education Savings Grant Post-Secondary Education Expenses Tax Matters for the Incorporated and Self-Employed Work in Progress for Professionals Record Keeping for the Self-Employed Self-Employed Status When Your Children Work for Your Business Buying Capital Assets Information for RRSP and Tax Tips is provided as a public service by the Alberta Accountants Unification Agency. NOTE TO EDITORS: These tips are useful for preparing RRSP and tax article leading up to the contribution deadline of March 3, 2014 and April the 30, 2014 filing deadline, respectively. The organization provides RRSP and Tax Tips as a free service to the public, but appreciates an acknowledgment for the Alberta Accountants Unification Agency when information is used. For media inquiries, contact: Oscar Lamers, Acting Manager of Communications Planning Tel: (780)
3 Employment income, deductions, and credits Reducing Payroll Deductions If you are making RRSP contributions, you might be able to reduce the income tax deducted from your pay cheque. Ask your employer to make the contribution(s) to your RRSP directly and deduct the payments from your salary. The employer calculates the required income tax withholdings based on the portion of your salary remaining after the RRSP contributions. Be prepared to provide evidence to your employer that the RRSP contributions will be deductible by you. If you pay amounts for spousal support, childcare expenses, charitable donations, employment expenses, rental losses, and interest and carrying charges on investment loans, complete Form T1213, Request to Reduce Tax Deductions at Source, and file it with the Client Services Division of your Tax Services Office. If accepted, your employer will be authorized to reduce your payroll withholdings. Payroll withholdings may not be reduced for amounts related to child support. Support for the deductions that reduce payroll withholdings must accompany Form T1213. Regular Income from Tips and Gratuities Income received from tips and gratuities is considered taxable income for income tax purposes. Individuals who receive such income should keep a record of the amount they receive in each year and should report this amount on their income tax return for the year. These records do not have to be submitted with the income tax return but they should be available if the Canada Revenue Agency (CRA) requests to see them. If you receive lower-than-average tips, keeping records might prevent an unfair assessment by the CRA. Union Dues are Deductible If you were required to pay trade union or professional organization dues, keep your receipts or proof of payment because the expenses may be deductible. You do not have to submit the receipts with your personal income tax return; however, you should keep them for 6 years in case the Canada Revenue Agency asks to see them. Look into deductions associated with your union and professional memberships for your 2013 return. Deductions When You Move for Work If you moved in 2013 to work or carry on business in a new location, or to attend a university or other post-secondary educational institution, you may claim a deduction for certain moving expenses. To be eligible, your new residence must be at least 40 kilometres closer to your new work place or educational institution. You may not claim a deduction for any expenses paid by your employer on your behalf. Expenses your employer has reimbursed or expenses for which you have received an allowance are not deductible unless the reimbursement or the allowance is included in calculating your income. You may claim a deduction for eligible moving expenses up to the amount of your income from your new work location. If you moved to study courses as a full-time student at a post-secondary educational institution, you can only claim a deduction for eligible moving expenses from the part of your scholarships, fellowships, bursaries, certain prizes, and research grants that is required to be included in your income. You may claim mover s transportation costs, storage charges, personal transportation costs for you and your family, and lodging and meals for up to 15 days near your former or new residence. If you sold your old residence, you can claim the costs of selling that residence as well as legal fees and property transfer taxes in connection with the purchase of your new residence. The Canada Revenue Agency (CRA) allows you to estimate your meal expenses during your days of travel at $17 per person per meal, up to a maximum of $51 per person per day. As well, if you drive to your new home, in lieu of calculating your proportionate motor vehicle expenses for the trip, you can claim a flat rate deduction per kilometre, depending on where you start. A list of per kilometre rates is available on CRA s website at It should be noted that CRA commonly requests receipts and other supporting documents for many moving expense claims.
4 Employment Benefits In general, when employers provide employees with benefits in addition to their regular salary, the amount of such benefits must be included in their income as a taxable benefit. However, an employee may receive certain benefits taxfree. For example, premiums for the basic provincial medical services plan are considered a taxable benefit, but premiums for private extended health and dental plans are not. If your employer pays the premiums to certain sickness, accident, or disability insurance plans, you will be taxed on any benefits received from the insurance. If you pay the premiums yourself, you will receive the benefits tax-free. Therefore, careful consideration should be paid to who pays the premiums as this could result in a cash flow problem for a person relying on disability insurance payments. Contact a professional accountant if you have any questions about the advantages of paying for group insurance premiums yourself. Stock Option Benefits Many employers grant stock options to their employees as a form of compensation. In general, when a qualifying employer grants a stock option to an employee, the employee is taxed in the year in which he or she exercises the option and acquires the securities. If an employee decides to exercise an option and acquire securities at less than their fair market value, in the year of acquisition, the employee is deemed to receive a taxable benefit from employment equal to the fair market value of the securities at the time of the acquisition minus the amount paid by the employee to acquire the securities (typically, the option price) and the amount paid to acquire the option (if any). Payroll withholding tax applies on the taxable benefit at the time of the exercise. If an employee is granted a stock option for shares of an entity other than a Canadian-controlled private corporation (CCPC), the employee can claim a deduction equal to one-half of the taxable benefit if all of the following conditions are met: The employee s employer is a qualifying person who agreed to sell to the employee shares of its capital stock; The employee dealt at arm s length with his or her employer right after the agreement was made; The securities are prescribed shares as defined in the Income Tax Regulations; and The price of the shares is not less than the fair market value when the agreement was made. For eligible securities under stock option agreements exercised before March 4, 2010 that were not granted by a CCPC, an income deferral of the taxable benefit may have been allowable subject to an annual limit on the fair market value of the eligible securities. Where an employee made this deferral and there was a loss in the value of the stock, such loss was characterized as a capital loss which could not be applied to offset the taxable benefit. To provide relief in these circumstances, the 2010 Federal Budget introduced a special elective tax treatment for securities sold before 2015 which were subject to the income deferral. Note, however, that the relief is restricted to only certain types of stock options. If an employee is granted a stock option for shares of a CCPC and such employee deals at arm s length with the employer, he or she receives a taxable benefit in the year that he or she disposes of the shares and not in the year of acquiring them. In the year the employee disposes of the shares, he or she can claim a deduction equal to one-half of the taxable benefit if the employee has not disposed of the shares within two years after the date that he or she acquired them. The rules related to stock options are complex. You should consult a professional accountant to see how these rules and elections may apply to you. Automobile Expenses If you are required to use your motor vehicle for business or employment purposes, you are allowed to deduct reasonable expenses for operation and ownership of the vehicle such as fuel, oil, licence fees, insurance, repairs and maintenance, depreciation (called capital cost allowance for income tax purposes), finance charges, and lease payments. Your employer must certify the conditions of your employment on form T2200 Declaration of Conditions of Employment to verify your eligibility for a deduction. Administratively, the Canada Revenue Agency (CRA) does not require you to file the form with your tax return; however you must retain it in case they wish to see it. It is advisable that you obtain this form in each year that you claim automobile expenses. If the CRA requests the form at a later date and you are no longer with the particular employer for whom you incurred the automobile expenses, it could be difficult to obtain the form at that later time.
5 The amount you are allowed to deduct is normally based on the proportion of your total kilometres for the year that you drive for business or employment purposes. Note that driving between your home and your normal place of business or employment is generally considered a personal trip unless you make a stop for business or employment purposes. To support your deduction, you should maintain a careful record of your business and employment kilometres driven for the year, including the date, destination, and distance driven for each business trip. If you receive a reasonable per-kilometre allowance from your employer for the use of a motor vehicle, the allowance is not included in your income, and you are not permitted to deduct your actual motor vehicle expenses. The CRA s reasonable per-kilometer allowance rates for 2013 and 2014 are $0.54 per kilometer for the first 5000 kilometers driven and $0.48 per kilometer driven after that. Where you receive both a reasonable per-kilometre allowance and a flat allowance, the entire amount must be included in your income, but you may deduct your actual expenses. There are specific limits placed on the amount of depreciation, finance charges and lease payments you are allowed to deduct, and these limits change from year to year. If you believe you might be eligible to claim automobile expenses on your personal income tax return, consult a professional accountant to help you calculate your allowable deduction. Home Office Expenses The income tax rules related to home office expenses are similar for self-employed individuals and employed and commissioned sales individuals, however, there are certain differences to note. You qualify for in-home office deductions for your self-employed business if you meet one of the following tests: (1) the home office is your principal place of business; or (2) the home office is used exclusively for business purposes and is used on a regular and continuous basis for meeting clients, customers, or patients in the ordinary course of performing the duties of the business. A proportionate share of expenses relating to the home office (normally based on the square footage of the office as a percentage of the total home) including rent, repairs and maintenance, insurance, property taxes, mortgage interest, heat, light and other expenses, are eligible for deduction if you qualify. You cannot deduct any mortgage principal payments. You may claim depreciation (called capital cost allowance for income tax purposes) but doing so could affect the status of your home for the principal residence exemption. The total home office expense deduction cannot exceed your business income before the deduction, but the excess, if any, may be carried forward and deducted against such business income of the following year. For employees and commissioned sales persons, similar tests apply, and work-space in the home expenses are allowed up to the amount of income from the employment or business for which the office is used. A Form T2200 Declaration of Employment Conditions is required to be completed and signed by your employer. Employees may claim only proportionate rent, heat, light, water, and maintenance costs. Commissioned salespersons may claim proportionate insurance and property taxes as well. However, neither can deduct mortgage interest or capital cost allowance. Expenses in excess of the related income may be carried forward and deducted against such income of the following year. Should you have any questions on your ability to claim home office expenses, contact a professional accountant. Employment Expenses Where you earn income from employment and are required by the terms of your employment to incur certain expenses, you might be able to claim a deduction in respect of these expenses on your tax return. Such expenses might include sales expenses for commission employees, travel expenses, motor vehicle expenses, professional or union dues, office rent (including home office expenses), assistant s salary, and consumable supplies. In general, with the exception of depreciation (capital cost allowance) in respect of an automobile or aircraft, employees are not permitted to claim any deductions in respect of capital expenditures. Your employer must certify the conditions of your employment on Form T2200 Declaration of Conditions of Employment to verify your eligibility to claim employment expenses. The Canada Revenue Agency does not require you to file the form with your tax return; however you must retain it in case they wish to see it.
6 In addition to the restriction on capital expenditures, there are other specific restrictions and limits on the expenses you may deduct. CRA indicates that these expenses have a high level of adjustment when they review the claims. It is likely that support for such claims will be requested. Consult a professional accountant to determine what employment expenses you might be able to claim. Canada Employment Tax Credit The Canada Employment Credit was introduced in recognition of work-related expenses incurred by employees and is indexed for inflation. For 2013, the tax credit provides tax relief on the lesser of $1,117 and the individual s employment income for the year. The tax credit for a particular taxation year is calculated at the lowest personal tax rate for the year. For 2013 this rate is 15 per cent, yielding a maximum tax savings of $168. Remember to take advantage of this and all other tax credits available to you. Consult a professional accountant for more information. Tradesperson s Tools Deduction Many employed trades people must provide their own tools as a condition of employment. In recognition of this, an employed tradesperson is entitled to deduct the cost of eligible new tools acquired in a taxation year with a cost in excess of $1,117, including GST/HST. The maximum deduction for eligible tools is $500 for the year. An eligible tool is a tool that is acquired by the taxpayer for use in connection with the taxpayer's employment as a tradesperson that has not been used for any purpose before it is acquired by the taxpayer. Electronic communication devices and electronic data processing equipment will not qualify as eligible tools (unless the device or equipment can be used only for the purpose of measuring, locating or calculating). Your employer must certify the conditions of your employment on Form T2200 Declaration of Conditions of Employment to verify your eligibility to claim the cost of tools. The Canada Revenue Agency does not require you to file the form with your tax return; however you must retain it in case they wish to see it. The tradesperson will also be eligible for a rebate of the goods and services tax/harmonized sales tax paid on the portion of the purchase price of the new tools that is deducted in computing employment income. Consult a professional accountant for more information. Volunteer Firefighters Tax Credit The volunteer firefighters tax credit is available to volunteer firefighters who perform at least 200 hours of volunteer firefighting services for their communities during the year. Volunteer firefighting services may consist primarily of responding to and being on call for, firefighting and related emergency calls, attending meetings held by the fire department, and participating in required training for the prevention or suppression of fires. Volunteer service hours performed by a firefighter for a fire department will be ineligible if the firefighter also provides firefighting services, other than as a volunteer, to that fire department. The credit is calculated by multiplying the lowest personal income tax rate for the year (15% in 2013) by $3,000. For 2013, the non-refundable credit is $450. Eligible volunteer firefighters who currently receive honoraria from a government, municipal, or another public authority in respect of their duties as an emergency volunteer will be able to choose between the new tax credit and continuing to be entitled to the existing tax exemption of up to $1,000 for honoraria. An individual claiming the credit will be required to provide written certification from the chief, or a delegated official, of the fire department, confirming the number of eligible volunteer firefighting hours performed. Consult a professional accountant for more information.
7 Carry-forward Amounts If you are unable to use certain deductions or tax credits in a particular tax year, you might be able to use them in a future year. Common carry-forward items include: Non-capital losses business losses arising in taxation years ending after 2005 may be carried forward 20 years (previously ten years for losses arising in taxation years ending from March 22, 2004 to December 31, 2005, and seven years for losses arising in earlier years) Net-capital losses losses on the disposition of capital property may be carried forward indefinitely and applied against capital gains realized in the future. Foreign business tax credits unused foreign business tax credits arising in taxation years ending after March 22, 2004 may be carried forward 10 years (previously seven years) and applied against Canadian income taxes arising on business income from the country in which the foreign income taxes arose Charitable donations unused charitable donations may be carried forward five years Tuition, Education, and Textbook credits unused tuition, education, and textbook amounts may be carried forward indefinitely Interest on student loans unused student loan interest expenses may be carried forward five years Home office expenses excess un-deducted home office expenses of an employee or a self-employed individual may be carried forward indefinitely and applied against income from the same office or employment or from the same business. Tax Credit for Public Transit Passes Do you or your family members regularly use public transit? If so, then you might be eligible to claim a special tax credit for transit passes purchased in 2013 on your 2013 personal income tax return. This tax credit is available for transit passes used in There is no limit to the amount you may claim. Claims may be made in respect of passes that provide unlimited use of public transit for at least 20 days in any 28-day period. A claim is also available for weekly passes provided they are for at least four consecutive weeks and each pass provides at least 5 consecutive days of unlimited public transit use. Eligible cost-per-trip electronic payment cards may also qualify in 2013 provided they are used for at least 32 one-way trips during an uninterrupted period of no more than 31 days. Check with your public transit authority to ensure the card they issue is eligible. You may claim the eligible cost for yourself, your spouse or common-law partner, and your children under the age of nineteen at the end of the year. Save those old transit passes and receipts. They could be worth 15 cents on the dollar when you file your tax return. Reference: Income Tax Act Working Income Tax Benefit Low income individuals will be eligible for a refundable Working Income Tax Benefit (WITB) tax credit in You must be a Canadian resident for income tax purposes throughout 2013 and be at least 19 years of age at the end of 2013 to qualify. The refundable tax credit for Alberta residents is available on earned income exceeding $2,760 to a maximum tax credit of $1,080 (with net income of $7,080) for individuals, and $1,620 for families (with net income of $9,240). The credit is reduced where the income of the Alberta resident is in excess of $11,766 for individuals ($16,044 for families), and declines to zero at an income level of $18,966 for individuals ($26,844 for families). The credit is not available to students who are enrolled as a full-time student for more than 13 weeks in the year and do not have an eligible dependent.
8 You might be eligible to apply for an advance of up to 50 per cent of the WITB you expect to receive for You should apply for the advance using Form RC201 between January 1 and August 31, Only calculated advance amounts totaling at least $100 will be paid out. Please refer to the CRA website listed below for the scheduled advanced payment dates. See for more information. Reference: 1. Income Tax Act
9 Family Matters Children s Fitness Amount If you have a child who was, at the beginning of 2013, under 16 years of age (or under 18 years of age and eligible for the disability tax credit), you might be eligible to claim the Children s Fitness Tax Credit. This credit allows parents to claim up to $500 of eligible fitness expenses paid per year for each qualifying child. If a child qualifies for the disability tax credit and at least $100 in eligible fitness expenses have been paid for the child, an additional bonus amount of $500 can be added to the eligible fitness expenses actually incurred. The tax savings to you is calculated by multiplying the total eligible expenses paid by the lowest Federal marginal tax rate (15% federal rate for 2013). No additional credit is provided against Alberta provincial taxes. To qualify, activities must be either a minimum of eight consecutive weeks long, or in the case of camps, five consecutive days in duration. In addition, the activity must be supervised, suitable for children and require a significant amount of physical activity. For further information on what activities are eligible please refer to the Canada Revenue Agency (CRA) website at To claim the tax credit you should request a receipt when registering your children for qualifying activities. The receipts do not need to be submitted with your tax return but should be retained for six years in case the CRA asks to see them. Note that qualifying expenses are to be claimed in the year the amount was paid, regardless of when the activity takes place. If your child has attended an activity that qualifies as both a childcare expense and a fitness activity you must first claim the amount as a child care expense. Any portion that cannot be used as a childcare expense can be then claimed as a children s fitness amount. Child Care Expenses You might be able to deduct your childcare expenses if they were incurred to enable you or a supporting person to earn employment or business income, attend a designated educational institution or a secondary school, or engage in grant research. Attendance at a designated educational institution or secondary school means attendance of at least one course that is at least three weeks long, for at least 10 hours per week (full time program) or 12 hours per month (part time program). A supporting person includes your spouse, the parent of the child, or the person who claimed the child as a dependant. The supporting person must have lived with you at any time in the taxation year as well as at any time in the first 60 days of the following taxation year. An eligible child is defined as a child of the taxpayer or the taxpayer s spouse, or a child dependent on the taxpayer or the taxpayer s spouse and whose income for the year does not exceed the basic personal amount for the year. The child has to be under 16 years of age at some time in the year. However, the age limit does not apply if, during the year, the child is dependent on the taxpayer or the taxpayer s spouse and has a mental or physical infirmity. The maximum deduction is $10,000 for each child qualifying for the disability tax credit, $7,000 for each other child age six or under at the end of the year, and $4,000 for each other child age seven to fifteen at any time in the year. The maximum total deduction may not exceed two-thirds of your earned income and the actual amount paid in the year for child care. The deduction can be claimed only by the lower income person unless the lower income spouse attends secondary or post-secondary school, is mentally or physically infirm, or for a period of at least two weeks was in a prison, hospital, or asylum. Childcare expenses can include day care, nursery school, day sports camp, lodging at a boarding school or camp, and certain babysitters. Complete Form T778, Calculation of Child Care Expenses Deduction, and file it with your income tax return. If you would like more information about claiming child care expenses, seek the advice of a professional accountant.
10 Transferring Income Tax Credits to Your Spouse or Common-law Partner You can transfer some income tax credits to your spouse or common-law partner. The transferable credits are the age credit, disability credit, pension income credit, your own education and tuition fee credits, and the textbook tax credit. If you are able to reduce your taxes payable to zero without using all of your available credits, you may and should transfer some of these unused credits to your spouse s return. Don t let your credits go to waste. Consult the advice of a professional accountant for more information. Individuals with Disabilities In addition to the disability tax credit, parents and others will be able to establish Registered Disability Savings Plans (RDSP) to provide for the long-term security of a child who is eligible for the disability tax credit. RDSP contributions will not be tax deductible, but investment income can be earned within the plan on a tax-free basis. Upon withdrawal only the accumulated investment income will be taxable to the beneficiary. The contributions to the RDSP will be paid to the beneficiary tax-free. Anyone can contribute to the RDSP and there is no annual limit on the contributions; however, contributions on behalf of any one beneficiary are capped at a lifetime maximum of $200,000. Contributions can continue until the end of the year in which the beneficiary reaches age 59. The beneficiary must begin receiving payments from the plan by the end of the year he reaches age 60, subject to maximum annual limits based upon life expectancy and the value of the RDSPs assets. A Canada Disability Savings Grant (CDSG) is an amount that is contributed by the federal government to the RDSP. RDSP contributions will earn CDSGs at matching rates of 100 per cent, 200 per cent, and 300 per cent depending on family income and the amount contributed. The annual maximum CDSG is $3,500 where family income is less than $87,123 and $1,000 otherwise. An RDSP beneficiary can accrue up to $70,000 of CDSGs in their RDSP over their lifetime. No CDSGs will be paid to an RDSP after the year in which the beneficiary reaches the age of 49. Lower income families might also be entitled to receive Canada Disability Savings Bonds (CDSBs) of up to $1,000 per year (to a maximum of $20,000 over the beneficiary s lifetime). Eligibility for CDSBs will be linked to family net income, rather than amounts contributed. RDSP beneficiaries who have shortened life expectancies will be provided with greater flexibility to access and withdraw more of their RDSP savings by permitting the RDSP plan holder to request higher annual withdrawals for the RDSP beneficiary without triggering the 10-year repayment rule for previously received CDSGs and CDSBs, subject to specified limits and certain conditions. In general, these rules require a medical doctor to certify in writing that the beneficiary's state of health is such that, in the doctor's opinion, the beneficiary is not likely to survive more than five years. Consult a professional accountant for more information. Adoption Expense Tax Credit The adoption expense credit is a non-refundable credit in respect of an eligible adoption expense incurred in the adoption of a child under the age of 18 years. The maximum credit claimable is $11,669 for The credit is reduced to the extent that the adoptive parent has been otherwise reimbursed, or is entitled to reimbursement, in respect of eligible adoption expenses. Individuals may include eligible adoption expenses incurred during the adoption period, generally defined as the period that begins at the earlier of the time the child's adoption file is opened with the provincial or territorial ministry responsible for adoption or a licensed adoption agency, and the time, if any, that an application related to an adoption is made to a Canadian court and that ends at the later of the time the adoption is finalized and the time the adopted child begins to live with the adoptive parent.
11 To be eligible for the credit, a parent must submit proof of an adoption in the form of a Canadian or foreign adoption order, or otherwise demonstrate that all of the legal requirements of the jurisdiction in which the parent resides have been met in completing the adoption. Individuals must claim the credit in the taxation year in which the adoption period ends. Eligible adoption expenses include fees paid to licensed adoption agencies, court and legal expenses, reasonable travel and living expenses, document translation expenses, and mandatory fees paid to a foreign institution. Consult a professional accountant for more information. Children s Arts Tax Credit The children s arts credit allows parents with children under 16 years of age who participate in paid artistic, cultural, recreational and developmental programs to claim a new non-refundable tax credit based on eligible expenses of up to $500 per year per eligible child. Some examples of eligible programs or activities include those in the fields that contribute to the development of creative skills or expertise in an artistic or cultural activity, or where a child acquires and applies knowledge in the pursuit of artistic and cultural activities. Artistic and cultural activities include the literary arts, visual arts, performing arts, music, media, languages, customs, and heritage. An eligible program must be either a weekly program that is a minimum of eight consecutive weeks or a children's specialty camp that lasts a minimum of five consecutive days. The full cost of a child's membership in an organization will be eligible for this new credit if more than 50% of the activities offered by the organization include a significant amount of eligible activities. An additional $500 disability supplement amount may be claimed for a child who is under 18 years at the beginning of the year and is eligible for the Disability Tax Credit. Either parent may claim the credit or the credit can be shared. To prevent duplication, expenses already claimed under other credits (e.g. the Medical Expense Tax Credit) will not qualify. To substantiate your claim come tax time, request a receipt from the organization that provides the Arts program. As with many other credits, you are not required to actually submit the receipts with your return but you should retain any supporting documentation in case the CRA asks for copies at a later date to verify your claim. Consult a professional accountant for more information. Family Caregiver Tax Credit The Family Caregiver Tax Credit will allow people taking care of infirm, dependent relatives to claim a non-refundable tax credit based on an amount of up to $2,040 in 2013, resulting in Federal tax savings of up to $306 a year for qualifying individuals. Only one family caregiver tax credit may be claimed per eligible dependant. A dependant who is a minor will be considered to be infirm only if the dependant is likely to be, for a long, continuous and indefinite time period, dependent on others for significantly more assistance in attending to the dependant's personal needs and care than is generally the case for a person of the same age. Caregivers will be able to claim the Family Caregiver Tax Credit for an infirm dependant as a supplement to their existing dependency-related credit (such as the Spousal or Common-Law Partner Credit, the Child Tax Credit, the Eligible Dependant Credit, the Caregiver Credit, and the Infirm Dependant Credit). The dependant's income level at which the credit amounts are phased out will be increased to reflect the amount of the Family Caregiver Tax Credit. Consult a professional accountant if you currently support and provide care for dependent relatives and would like more information. Caregiver Credit You might be eligible for the caregiver credit if you provide in-home care for a relative who resides with you, and the relative is your or your spouse s: parent or grandparent age 65 or older; or
12 dependent aged 18 or older who is dependent on you because of mental or physical impairment. Generally, if you claim the caregiver credit for your relative, no individual will be allowed to claim the equivalent-to-spouse credit or the infirm dependent credit for the same relative. You can claim the caregiver credit for more than one person. For example, if both parents qualify, you can claim the credit for both of them. The combined Federal and Alberta caregiver credit will reduce your taxes payable by up to $1,692 (for each relative claimed). However, the tax credit will be reduced where the relative s income for 2013 exceeds $15,334 for federal tax purposes and $16,192 for Alberta tax purposes. The credit is completely eliminated when the relative s income reaches $19,824 (for federal tax purposes) and $ (for Alberta tax purposes). Check to see if you qualify for the Caregiver Credit. Consult with a professional accountant for more information. Child Tax Credit This credit is available to the parents of children who are under 18 at the end of Where the child lives with both parents, the child tax credit may be claimed by either spouse. In 2013 the tax credit could reduce your taxes payable by as much as $335 per child. Any unused portion can be shared with a spouse or common-law partner. Reference: Income Tax Act 118(1)B(b.1) Child Tax Benefits The Canada Child Tax Benefit (CCTB) is a non-taxable amount paid monthly to help eligible families with the cost of raising children under 18 years of age. The CCTB may also include the Child Disability benefit (CDB) and the National Child Benefit Supplement (NCBS). To qualify for the CCTB, you must meet all of the following conditions: You must live with the child and the child must be under the age of 18; You must be the person who is primarily responsible for the care and upbringing of the child; You must be a resident of Canada; and You or your spouse or common-law partner must be a Canadian citizen, a permanent resident, a protected person, or a temporary resident who has lived in Canada for the previous 18 months and who has a valid permit in the 19 th month. In addition, you might be eligible even if your child lives with you on a shared or temporary basis (for example, over summer break). Temporary eligibility is established when your child lives with you for a period of 4 weeks or more, including the first day of any month and the last day of the previous month. Shared eligibility exists where a child lives more or less equally with two separate individuals and each individual is primarily responsible for the child s care and upbringing when the child resides with them. The CCTB legislation provides for the benefit for a child to be split between parents who are neither married nor living common-law where custody of the child is shared. Once the CCTB has been applied for, both you and your spouse or common-law partner must file an income tax return each year even if you have no income to report in order to continue receiving the CCTB. The Universal Child Care Benefit (UCCB) is a taxable benefit for taxpayers with children under the age of 6, and is paid in installments of $100 per month per eligible child. For taxpayers with a spouse or common-law partner, the UCCB income must be reported by the spouse with the lower net income. For a taxpayer who is a single parent there are 2 options for reporting the income: 1. Report all the UCCB income in the taxpayer s income, or 2. Report all the UCCB income in the income of the dependent child for whom the UCCB was received. The UCCB amount can be split between parents in the same manner as the CCTB. References: 1. Income Tax Act
13 Filing Matters Penalties for Repeated Failures to Report Income If you missed or forgot to report any income on your 2010, 2011, or 2012 returns, and you again miss or forget to report any income on your 2013 return, you may be subject to a penalty for the repeat offense. This penalty applies whether the missing amounts are large or small, and even where they don t actually increase your taxes owing. The potential penalty is 10% of the unreported amount federally on your 2013 return, plus another 10% of the unreported amount in Alberta on your 2013 return. So a missed slip can lead to a 20% penalty. With the myriad of T-slips issued these days (T3 s, T4 s, T5 s, etc.), it s easy to miss or forget one or two, especially when the slips are issued at different times during the year. The Canada Revenue Agency receives copies of all such slips, and, through a matching system, it does match the T-slips to tax returns to make sure the income is reported. The best defense is to be vigilant about reporting your income, making sure to follow-up on any T-slips that you think may be outstanding. You can even call the Canada Revenue Agency or log in to their My Account service ( to verify certain types of T-slips. There are other potential penalties for failing to report income that may apply, and there are also Voluntary Disclosure and Taxpayer Relief measures in place that can potentially avoid or reverse such penalties. For assistance, contact a professional accountant. Taxpayer Relief Measures In certain circumstances, there are Taxpayer Relief measures in place for taxpayers who have been unable to comply with a particular income tax requirement. One of the things you can request under the Taxpayer Relief measures is a waiver or cancellation of penalties and interest. Under the Canada Revenue Agency s guidelines ( relief may be granted from penalties and interest where the following types of situations exist and led to your inability to satisfy the tax obligation or requirement: extraordinary circumstances (natural or man-made disasters, civil disturbances or disruptions in services such as postal services, a serious illness or accident, a death in the immediate family, etc.); actions of the CRA; or an inability to pay or financial hardship. The Canada Revenue Agency will consider factors such as: whether you have a history of compliance with tax obligations (i.e., whether you have filed tax returns on time); whether you have exercised a reasonable amount of care and have not been negligent or careless; and whether you acted quickly to remedy the delay or omission Your request for taxpayer relief has to be made within 10 years. For example, a request for taxpayer relief filed during the 2013 year can only deal with an issue related to 2003 or later years. While powerful, the Taxpayer Relief measures are inherently subjective, and policies and guidelines may change from time to time. If you believe you have a basis for making a claim under the Taxpayer Relief measures, contact a professional accountant for assistance. Records Retention If you run your own business, you are required to retain books and records that relate to a specific taxation year for a minimum of six years after the end of that year. If a particular year is under appeal, books and records for that year should be kept until the appeal is resolved, and the time for any further appeal has expired. If a return has been filed late, the records must be kept for six years from the actual filing date. It s also important to note that some documents may be relevant to multiple years; for example, asset purchase documents should be retained for six years after the sale not the purchase of the asset.
14 Records include minutes of meetings, accounting records, and source documents such as invoices, receipts, cheques, bank statements, etc. The books and records must be sufficient for the Canada Revenue Agency (CRA) to confirm revenue, expenses and taxes paid. They must also be stored at a Canadian location available for audit. If you use a computerized record-keeping system, there is a requirement to maintain an electronic backup and there are penalties for failure to do so. In addition, any paper records that you retain must be legible in the future were they to be examined. This means that you may need to copy certain receipts and invoices on paper that will not fade. Also, it is important to keep the detailed original invoices, not just the credit card slip and the monthly credit card statement, to document the nature and amount of the expenses. As records over six years old might contain information that is still relevant for tax purposes, you might wish to consult a professional accountant or the CRA prior to destroying your records. As well, you might need permission from other government departments before you may destroy records related to those departments activities. For more information, refer to the CRA Information Circular 78-10R5, which you can find on the CRA website at: Why File a Personal Income Return? Why fill out a tax return if you have no taxable income for 2013? You might be eligible for the Federal GST/HST Credit. An individual is required to apply for the GST / HST Credit annually by filing a personal income tax return. Low-income seniors can also re-apply for the Guaranteed Income Supplement by filing an annual personal income tax return. In addition, you will be able to recover any money owing to you for the year, such as an overpayment of income taxes, Canada Pension Plan contributions (CPP), or Employment Insurance premiums. Even if you have no taxable income, you might still be required to file a tax return and pay CPP if your net self-employed income is in excess of $3,500. You might also want to report your taxable income on a tax return in order to build your RRSP contribution room, and become eligible for greater RRSP deductions in a future year. If you are a student with excess tuition and education amounts in the year, you will want to file a tax return so that you can carry them forward to another year. Also, if you have a business loss, you must file a return in order to establish your right to claim the loss in other years. If you are a non-resident and your tax return was filed more than three years after the end of the taxation year, the Canada Revenue Agency might not issue a tax refund related to that return. Lastly, by filing a tax return, and if you are 18 years or older, you will accrue yearly Tax Free Savings Account (TFSA) contribution room of $5,500 (for the 2014 tax year the TFSA limit is $5,500 as indexed for inflation). The TFSA accounts were introduced in 2009, and the Canada Revenue Agency tracks contribution room only for those eligible individuals who file personal tax returns. Tax credits, money owing it s yours for the asking. Simply fill out a tax return. References: Deadlines for Filing Your Personal Income Tax Returns The general deadline for filing personal income tax returns and paying any taxes owing is April 30 th of the following year. However, if you are self-employed, the filing deadline for you (and your spouse or common-law partner) is extended to June15 th of the following year. If you are a non-resident filing a non-resident tax return in respect of rents received in Canada, the filing deadline is June 30 where a Form NR6 was filed; otherwise the return is due within 2 years from the end of the year in which the rental income is received. [Note: this June 30 deadline is for avoiding a flat 25% penalty of gross rents tax, but the overall return, if filed late, can still attract a late filing penalty.]
15 Just remember, any taxes you owe are still due by April 30 th, so make sure you pay your taxes by that date to avoid arrears interest charges. If you owe taxes and your return is late, you will be assessed a penalty and interest on the unpaid balance of tax due. If you find the deadline is fast approaching and you still haven t received receipts or information slips for some items, file your return anyway with a cheque for the estimated tax owing and an explanation. You are responsible for making any necessary adjustment to your tax return promptly when the documents become available. Failure to do so might result in additional penalties for filing your tax return with incomplete and incorrect information. Your Assessment Notice When you are sent an assessment notice showing additional taxes payable, review it carefully: your arithmetic might have been wrong or you might have claimed a deduction to which you weren t entitled; on the flipside, the Canada Revenue Agency (CRA) might have incorrectly denied a deduction to which you were entitled. If your return was prepared for you, advise the preparer of any changes, upward or downward. If you prepared your own return and don t understand the information on your notice, contact your local tax services office immediately for a full explanation. If the assessment is not in your favour and you aren t satisfied with the CRA s explanation, you might want to consult a professional advisor and consider filing a Notice of Objection with the CRA to ensure that your rights are protected. Keep in mind individuals have until the later of (i) one year after the date of the filing deadline for the return, or (ii) 90 days after the date the CRA sent the Notice of Assessment, to file the objection. Even if there are no additional taxes payable on your Notice of Assessment, you should still review it to ensure the information on it is correct on information such as RRSP deduction limits, unused RRSP contributions, Home Buyers' Plan and Lifelong Learning Plan repayment requirements, taxable refund interest, or losses available for carry forward. Reference: T1 ADJ: Making Changes to Your Return If you realize you made a mistake on your income tax return after filing, it is easy to make a change(s) to your income tax return without having to re-file another return for that year. You may file form T1 ADJ to request a change to your income tax return for any of the 10 previous calendar years. For example, a request made in 2013 must relate to the 2003 or later taxation years. However before you file the adjustment request you will first need to wait to receive your Notice of Assessment from the CRA. The T1 adjustment request can be made by internet by logging on to My Account (electronic service offered by the CRA) or by mail. CRA processes adjustment requests made electronically within 2 weeks compared to 8 weeks if made by mail. In some situations, adjustment requests can be quite complex so you might wish to consult a professional accountant before submitting the adjustment request to the CRA. How to File Your Return There are a number of convenient ways to file your personal income tax and benefit return with the Canada Revenue Agency (CRA). Please note that Telefile has been discontinued as of September 29, 2012: 1. By Internet NETFILE allows you to file your personal income tax return directly with the CRA using the Internet. The tax return must be prepared using a commercial tax preparation software package or a Web application certified by the CRA to meet their system requirements. EFILE is an automated system that lets registered electronic filing service providers complete and send your tax return to the CRA electronically. To use this service, you must take your documents to a tax preparation service.
16 2. By Mail You can mail a paper tax return to your tax centre using the envelope included in the income tax package mailed to you by the CRA. Use the mail-in label if you have one, and make note of the tax centre address for future reference. For more information, see
17 Foreign Property Reporting Requirements Foreign Income Matters Canadian residents are required to report their income on a worldwide basis. In addition, every individual must indicate on their personal income tax return whether they own Specified Foreign Properties with an aggregate cost of $100,000 or more. To determine the cost of foreign properties acquired in a currency other than Canadian dollars, use the exchange rate in effect at the time the property was purchased. If you own Specified Foreign Properties with an aggregate cost more than $100,000 you must complete and file Form T1135 by your tax return due date (April 30 of the following year for many individuals, otherwise June 15 for self-employed individuals). You must include the income earned in the year from foreign property, specified or otherwise, on your Canadian tax return, irrespective of the property s cost. Individuals do not need to complete this statement for the year in which they first became a resident of Canada, but they still need to report on their Canadian income tax return for that year the foreign property income earned after becoming a resident of Canada. On June 25, 2013, the Canada Revenue Agency ( CRA ) released the revised version of Form T1135 which will apply to taxation years ending after June 30, The revised Form T1135 now requires taxpayers to disclose detailed information regarding foreign property such as the name of the foreign institution or other entity holding funds outside Canada, the country to which each foreign property relates, the maximum and year-end cost amounts of each foreign property, and the income generated from each foreign property. However, the CRA has indicated that where the taxpayer has received a T3 or T5 slip from a Canadian issuer in respect of a specified foreign property, the details of that particular specified foreign property is excluded from the T1135 reporting requirement listed above. It is important to note that foreign securities held in Canadian accountants are specified foreign property. Specified Foreign Property does not include property that is purely for personal use and generates no income. If the foreign property (for example, a vacation home) is not used to generate income, then it does not have to be reported as foreign property. Foreign property used exclusively in an active business, foreign property held through a Canadian mutual fund, and foreign property held through an RRSP are also exempt from the reporting requirement. Other foreign property reporting may be required where you own foreign corporations, have transferred or loaned funds to a non-resident trust, or received distributions from or borrowed funds from a non-resident trust. The foreign property reporting requirements are complex, and failure to comply with the reporting requirements can result in significant penalties. Contact a professional accountant to help you understand the reporting requirements and identify tax-planning opportunities for foreign tax credits. Reference: Foreign Source Income If you are a Canadian resident and have received income from foreign sources, you must report this income in Canadian dollars on your tax return. To convert the foreign source income, you must use the rate of exchange that was in effect at the time the income was received or the average exchange rate for the year as published by the Bank of Canada ( if the amount was received at various times throughout the year. You must report the amount of foreign income before deducting any tax that was withheld at the source. However, if you have paid tax on that same income in a foreign country, the amount of foreign tax paid might be eligible for a foreign tax credit or deduction on your Canadian income tax return. Some foreign source income might also be exempt under international tax treaties. There might be several tax planning opportunities, depending on the source and type of foreign income you received. To help you identify these opportunities, consult a professional accountant.
18 Attribution of Investment Income Investment, Income, Gains, and Losses Complex attribution rules prevent spouses from simply splitting joint investment income between them to equalize their tax brackets. Joint investment income includes things such as interest on joint bank accounts, investment income from joint brokerage accounts, rental income from jointly owned real estate, and capital gains from the disposition of jointly owned investments. The attribution rules require that joint investment income be allocated between spouses based on each individual's contribution of funds to acquire the investment. Spouses with joint investments should be prepared to support their allocation of investment income by keeping track of the source of the funds used to acquire the joint investments. There are opportunities to split investment income between spouses while not being subject to the attribution rules discussed above. Contact a professional accountant to help you review your tax planning strategies to potentially take advantage of income splitting with your spouse. Taxation of Capital Gains The phrase capital gains is one that should be understood thoroughly. In broad terms, capital gains is appreciation realized from the sale of assets that are capital property. What constitutes capital property can be quite complex. For example, if you acquire a property for the express purpose of reselling it, it will generally not be considered capital property. That said, for most individuals, things like bonds, shares, mortgages, and similar investments are typically considered capital property. Under current rules, 50% of capital gains are taxable, and the other 50% are tax exempt. However, if you directly donate securities listed on a designated stock exchange, mutual funds, prescribed debt obligations, and/or segregated funds of life insurance companies to a Canadian registered charity, the taxable capital gain, if any from such disposition is deemed to be nil. Unlisted exchangeable shares may also qualify for the same treatment if publicly-traded shares received on an exchange are donated within 30 days to a Canadian registered charity. However, limitations exist for donations of shares issued pursuant to a flow-through share agreement entered into after March 21, If capital gains are realized on a disposition of shares of a Canadian-controlled private corporation engaged in an active business, Canadian farm property, or Canadian fishing property, provided the shares or properties meet certain requirements, up to $750,000 (increasing to $800,000 in 2014 and to be indexed thereafter) of the capital gains may be eligible for a lifetime cumulative exemption from tax. In addition, a capital gain on an investment in an eligible Canadiancontrolled private corporation engaged in an active business may be deferred if the sale proceeds are re-invested in another eligible corporation within a specified time. Given this favourable treatment, it might be more tax effective to hold properties that will yield capital gains outside of your RRSP, and other assets (such as interest-bearing securities) inside your RRSP. Contact a professional accountant to help you revise your tax planning strategies to take advantage of the generally lower tax rates for capital gains. Capital Losses There are four types of capital losses: Listed personal property losses Personal use property losses Losses on shares or debt of a small business corporation Losses on other capital properties Losses from listed personal property (such as artwork, jewelry, stamps, and coins) are only deductible from similar gains. Losses from the sale of personal use properties (such as a car or a boat) are generally not deductible. Losses from the sale of certain small business corporation shares or debt may be considered Allowable Business Investment Losses (ABIL) which are deductible against other sources of income (albeit at a 50 per cent inclusion rate). The ability to claim an ABIL may be limited by previous years capital gains exemption claims.
19 Losses on the sale of other capital properties must first be netted against capital gains in the year, but may then be carried back three years (use Form T1-A) or forward indefinitely to offset capital gains realized in other years. Generally, a superficial loss can occur when you dispose of capital property for a loss and you, or a person affiliated with you, buys the same or identical property (called substituted property ) during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale, and you or such affiliated person still owns the substituted property 30 calendar days after the sale. If you have a superficial loss, you cannot deduct it when you calculate your income for the year. However, if you are the person who acquires the substituted property, you can usually add the amount of the superficial loss to the adjusted cost base of the substituted property. This will either decrease your capital gain or increase your capital loss when you sell the substituted property. If you have unrealized losses on your investments, you might consider triggering those losses to save taxes on your capital gains. Be aware that there are stop-loss rules designed to negate losses triggered on superficial transactions, so contact a professional accountant to help you devise a loss-selling strategy. Lifetime Capital Gains Exemption Individuals resident in Canada throughout the year have available to them effective on or after March 19, 2007 a lifetime capital gains exemption totaling $750,000 ($375,000 lifetime capital gains deduction that can be claimed against taxable capital gains). Prior to March 19, 2007 and from its date of introduction in 1985 this lifetime exemption was $500,000. This lifetime capital gains exemption will be increasing to $800,000 ($400,000 lifetime capital gains deduction that can be claimed against taxable capital gains) in 2014 and will be indexed thereafter. Certain part time residents may be deemed to be a resident throughout the year if they meet certain conditions. Dispositions eligible for this exemption include shares of Canadian-controlled small business corporations, qualified farm property or qualified fishing property. On Form T657 this lifetime limitation is used in conjunction with other information to determine whether you are eligible for a capital gains deduction or not. The claim for using the lifetime capital gains exemption will be reduced by previous years claim of the capital gains exemption, by the individual s existing cumulative net investment loss balance and by any previous claims of allowable business investment losses. Should you have any such dispositions or are planning such a disposition you should consult a professional accountant to see if you have any unused capital gains exemption limit and could benefit from this exemption. Claiming a Capital Loss on Shares of a Bankrupt or Insolvent Corporation If at the end of a year, you own shares of a bankrupt or insolvent corporation (as defined in the Bankruptcy Act or the Winding-up Act), you might be able to realize a capital loss on those shares. The capital loss, calculated as a notional disposition of your shares for nil proceeds, is realized at the end of the year if you elect to do so in your tax return for the year. To qualify for this election, the corporation must generally be bankrupt or otherwise insolvent and expected to be wound up or dissolved and the fair market value of your shares should be nil. Where the loss is on shares of a Canadian-controlled private corporation engaged in an active business, under certain circumstances, the loss might also be an allowable business investment loss that can be deducted not only against capital gains but against other income. Contact a professional accountant to see whether you might be able to write off an investment in shares, and whether the resulting loss might qualify as an allowable business investment loss. Writing-off Loans Made to a Business If at the end of a year, you are owed a loan amount that is no longer collectible, you might be able to realize a capital loss on the loan. You may claim this capital loss but only to the extent you have realized capital gains on other property. This capital loss may be carried back three years (use Form T1-A) or forward indefinitely to offset capital gains realized in other years. The capital loss, calculated as a disposition of the loan for nil proceeds, is realized at the end of the year if you elect to do so on your income tax return and you establish that the loan has become a bad debt in the year.
20 For the loss to be permitted, the loan must have been made for the purpose of earning income from a business or property, or received as consideration for the disposition of capital property to a person with whom you were dealing at arm s length. If the loan was to a Canadian-controlled private corporation engaged in an active business, this loss might also qualify as an allowable business investment loss that is deductible not only against capital gains but against other income. Contact a professional accountant to see whether you might be able to write off a loan, and whether the resulting loss might qualify as an allowable business investment loss. Non-deductible RRSP Fees Paid If you pay an administration fee or management fee for your registered retirement savings plan ( RRSP ), retirement income fund ( RIF ) or tax-free savings account ( TFSA ), the fees are not deductible for income tax purposes. You should talk to your financial advisors to see if they can make a reasonable allocation of these fees to a non-registered account. By doing so, a portion of these fees may be tax deductible. If you do pay a fee within your registered plan, pay the fee yourself each year. Do not have the money paid from the registered account. This will allow your RRSP to grow unhindered. Your payment of the RRSP fee will not be considered a contribution to your RRSP. Capital Dividend The non-taxable portion of a capital gain realized by a private corporation can be distributed by means of a special dividend referred to as a "capital dividend". Capital dividends received by a Canadian resident shareholder are fully exempt from tax. The amount of tax-free capital dividends available for distribution is accumulated in a corporate tax account referred to as the capital dividend account. The capital dividend account is a running balance that includes the non-taxable portion of capital gains less the non-allowable portion of capital losses and prior payments of capital dividends. To ensure that the amount paid out is maximized, pay out capital dividends when capital gains are realized and before any capital losses are realized. The corporation paying the capital dividend must file an election with the Canada Revenue Agency on or before the earlier of the day the dividend becomes payable, or the day any part of the dividend is paid. Other receipts can also add to a corporation s capital dividend account, such as certain life insurance proceeds, capital dividends received from other corporations, and the net non-taxable portion of income inclusions arising from dispositions of eligible capital property. If you would like more information about paying a capital dividend, seek the advice of a professional accountant. Non-Arm s Length Transfers and Gifts If you gift an asset to someone, you are deemed to dispose of the asset at fair market value, triggering any unrealized gains or losses that might have accrued on the asset. The recipient of the gift, in turn, is deemed to acquire the asset at that fair market value. There are some exceptions, most notably transfers of property to a spouse or a spousal trust, an alter ego trust, or a joint spousal trust are generally deemed to be disposed of at the particular property s adjusted cost base unless the taxpayer elects otherwise. There are also special rules for losses on transfers between affiliated parties, which may suspend any losses or embed them into the cost base of the assets transferred. If you sell an asset to a non-arm s length person, you are required to set the sale price equal to the fair market value of the asset. If the sale price is less than fair market value, you are deemed to have sold the asset for fair market value, without a compensating increase in the cost base for the purchaser. If the sale price is greater than fair market value, the purchaser s cost base is reduced to fair market value, without a compensating reduction in your proceeds of disposition. In both cases, the one-sided adjustment can be quite punitive, so it pays to carefully consider and document fair market value in all non-arm s length sales. If you plan to gift, sell, or transfer an asset to a non-arm s length person, contact a professional accountant to help you assess the income tax implications and planning options.
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