Overcontributing to your RRSP

Contributing to your RRSP is a good idea.  Over-contributing (in excess of $2,000) is not.  Over-contributing leads to a penalty tax and subsequent interest charges.  When the CRA issues you your Notice of Assessment after filing your personal tax return, it will show you what your next year’s RRSP contribution limit is.  It will also note if you have potentially over-contributed to your RRSP.  If ignored, this may go on for years, with the CRA not acting, in spite of knowing about it. Then one day you get a letter in the mail stating that you have been over-contributed for the last 10 years and substantial penalty and interest charges are applicable.  The penalty tax amounts to 1% per month for the amount over-contributed, plus interest.  If for instance you were $20,000 over contributed for 10 years, the penalty tax would be $24,000 which is more than the amount you put into the RRSP in the first place.  You now have to add interest to this.  The result is a huge tax liability.
My suggestion is to review your Notice of Assessment.  If it looks like you may have over-contributed to your RRSP, don’t ignore it.  It is best to deal with the matter as quickly as possible, before you feel like you’re holding a tiger by the tail.

Capital gains deduction and the CNIL balance

When it comes time to sell your incorporated business, you may be able to take advantage of a tax free gain on the sale of your shares.  In fact, if you were to sell the shares of your business in 2015, and qualified for the capital gains deduction, the tax free portion of your gain would be up to a maximum of $813,600.  However, what is not commonly known is that if you have been incurring investment losses over the years, these can negatively impact the amount of the tax free gain you can access.  These losses are known as cumulative net investment losses, better known as the CNIL (pronounced “senile”) balance.   The CNIL balance is the excess of your investment losses (such as rental losses, interest expense and other carrying charges) over your investment income (such as rental income, interest income and dividends).  The tax free portion of the gain will be reduced by the CNIL balance, thus turning an otherwise tax free gain into a taxable gain.
Tax Tip:  If you are a business owner and have a balance in your CNIL account and wish to eliminate it, instead of taking a salary, consider remunerating yourself with dividends.  Since dividends are considered investment income, they can be applied to reduce and eventually eliminate your CNIL balance.

Selecting a Business Year end

I am often asked by clients who are starting up a new business what year-end they should choose.
Most businesses generally have a business year than operates on a natural 12 month cycle, with peaks and valleys of business activity occurring within this time frame.  For instance, retailers will build up inventory levels leading into the Christmas season.  Once Christmas is over, sales will take place in January and February to clear out merchandise, inventory levels will drop and trade suppliers will be paid.  The ideal time for a business year end is when the activities of a company have reached the lowest point in their annual cycle.
Advantages to having a year-end at the lowest point in the annual cycle include:
  • Financial statements will reflect the outcome of a complete business cycle. If any other year end is chosen, financial statements show the results partly of one business season and partly of another.
  • Financial statements prepared at the low point in the operating cycle show the ability of management to bring the affairs of the business into a liquid financial position.
  • As the normal activities of a business enterprise have substantially decreased, the inventory may be counted with less interference in day to day operations than at a busy time of year.
  • Inventory levels are greatly reduced and may be counted with greater ease an in less time than at a busy time of year.
  • Staff have more free time to assist in counting inventory
  • The risk of inventory counting errors is reduced with less inventory on hand
  • Costing the year-end inventory will take less time with reduced inventory levels
As can be seen, choosing a year end is an important first step in setting up your business.  Some thought should be given to what year-end best suits the nature of your business in order to save you time and money.

Canada Small Business Financing Program

The Canada Small Business Financing Program offered by the Government of Canada makes it easier for small businesses to get loans from financial institutions by sharing the risk with the lenders.  The program was designed to help new businesses get started and help established companies make improvements and expand as well as improve access to loans that would otherwise not be available to small businesses.
The program is available to small businesses or start-ups operating in the for profit sector in Canada with gross annual revenues of $5,000,000 or less.
Loans of up to a maximum of $500,000 for any one borrower are available and can be used for the purchase of land, buildings, new and used equipment and leasehold improvements.  Specific examples include commercial vehicles, hotel or restaurant equipment, computer equipment and software, and manufacturing equipment.
The loan cannot be used to finance goodwill, working capital, inventories, franchise fees and R&D.

Depreciating Rental Properties

If you own rental property, you can claim depreciation for tax purposes (known as CCA) to reduce your net rental profit and therefore reduce the amount of income tax you pay.  However, you cannot use  CCA to (i) create a rental loss or (ii) increase an existing rental loss. 
If you own more than one rental building, you must determine the net rental income after all expenses on a “combined” basis prior to claiming CCA.  You can then claim CCA to bring your combined profit down, subject to the limitations noted above.
Since real estate generally appreciates in value of over time, it is likely that you will ultimately sell it for a profit.  Part of the profit will be taxed as a capital gain and part will be taxed as a recapture of the CCA you have been claiming over time.  This recapture often comes as a surprise to many of my clients.  They don’t realize that all those taxes they saved over the years by depreciating their rental properties all gets taxed when they sell.   
Tax Tip:
If you own more than one rental property and you are restricted as to how much CCA you can claim because of the limitations noted above, you can choose which property to claim CCA on.  If you are likely to sell one property before the other, you can defer tax by claiming CCA on the property you know you are going to keep for the long run and not on the one you are going to sell.   When it comes time to sell the first property, there will be no CCA to recapture because none has been claimed along the way.