Penny Hound

Can I Deduct My Home Office Expenses

2010-08-24T18:12:00.001-07:00

This is perhaps one of the most frequent questions people who have a home office have.

The answer isn't quite simple but I'll try my best to answer it.

The first criteria in determining whether you can deduct your home office expense is if you are:

an employee with a workspace in your home, or
if you are run a business and have a workspace in your home.

Employee

I'll first discuss the first situation where you are an employee and have a home office. In order to deduct your home office expenses you must meet one of the following criteria:

The work space is where you mainly (more than 50% of the time) do your work.
You use the workspace only to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients or customers.

Do note that you will need to get a T2200 that has been signed by your employer.

What can I deduct?

You can deduct a reasonable proportion of your home expenses that relate to your work space (i.e. square footage of space used for work over total square footage). Home expenses that can be deducted include electricity, heating, maintenance, property taxes, and home insurance. However, you cannot deduct mortgage interest or capital cost allowance (depreciation on your home). If you rent, simply deduct the portion of your rent.

How much can you deduct?

The amount you can deduct is limited to the amount of employment income remaining after all other employment expenses have been deducted. This means that you cannot use work space expenses to create or increase a loss from employment.

Run a Home Business

I'll now discuss the second situation where you run a business and have a home office. You will need to meet the following criteria if to deduct home business expenses

the principal place of the business of the individual, or
used exclusively to earn business income and on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business.

What can you deduct?

You can deduct the same expenses discussed above for an employee with one exception. You can also deduct your Mortgage Interest and Capital Cost Allowance. A word of caution. If you deduct CCA, you may be subject to recapture (income inclusion) when you sell your house in the future.

How much can you deduct?

Similar to the situation if you are an employee, you cannot create a loss as a result of your home office expenses.

Bank of Canada increases rates Overnight Rates to 0.75%

2010-07-20T19:15:00.000-07:00

As many economist have expected, the Bank of Canada has announced that it will increase its Overnight rate by 25 basis points to 0.75%. The Banks in Canada are expected to follow suit by increasing their Prime rate of lending.

Here's the news release:

The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.

The global economic recovery is proceeding but is not yet self-sustaining. Greater emphasis on balance sheet repair by households, banks, and governments in a number of advanced economies is expected to temper the pace of global growth relative to the Bank's outlook in its April Monetary Policy Report (MPR). While the policy response to the European sovereign debt crisis has reduced the risk of an adverse outcome and increased the prospect of sustainable long term growth, it is expected to slow the global recovery over the projection horizon. In the United States, private demand is picking up but remains uneven.

Economic activity in Canada is unfolding largely as expected, led by government and consumer spending. Housing activity is declining markedly from high levels, consistent with the Bank's view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010. While employment growth has resumed, business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession.

The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April MPR, with growth of 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.

Inflation in Canada has been broadly in line with the Bank's April projection. While the Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April, the underlying dynamics for inflation are little changed. Both total CPI and core inflation are expected to remain near 2 per cent throughout the projection period. The Bank will look through the transitory effects on inflation of changes to provincial indirect taxes.

Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

What is a TFSA and How You Can Make the Most of it

2010-07-13T08:49:00.000-07:00

In this article, I will explain the basics of what a Tax Free Savings Account ("TFSA") is. I will also explain some TFSA Strategies as well as some pitfalls that one should avoid.

Basics of a TFSA

A TFSA is essentially a speical type of "Tax Free" account which can be used to earn tax free income (such as interest, dividends, and capital gains). Beginning in 2009, all Canadian Residents aged 18 and over can contribute $5,000 annually into a TFSA. Any income earned on the contributions to the TFSA is tax free.

Contributions and Withdrawals

Contributions into a TFSA are not tax deductible and withdrawals are not subject to tax. Unlike an Registered Savings Plan ("RSP"), where your contributions are tax deductible and withdrawals are subject to tax. Once a withdrawal has been made, the contribution room equivalent to the amount of the withdrawal will be made available in the next year. Contribution room not used in one year will be carried forward to the next year.

Types of TFSA

The name Tax Free Savings Account can be quite misleading. A TFSA does not solely have to be a traditional savings account. In fact, it could be a Mutual Fund account, Self Directed brokerage account or a regular brokerage account.

How to make full use of your TFSA

Many accountants and financial planners recommend contributing the full $5,000 or as much as you can as early as you can. The reason being, the longer income gets tax sheltered, the greater the benefit to you.

What types of investments should you put into a TFSA

As a first rule, you should put your highest yielding investments into a TFSA. This will allow you to shelter most of your income as possible. However, if its a toss up between say Interest and Dividends from a Canadian Corporation, then one would choose to put the Interest into a TFSA. Reason being, under the Canadian tax legislation, Dividends from a Canadian Corporation get preferential tax treatment with the Dividend Tax Credit. However, no such relief is made available to interest income.

What should you look out for?

Many TFSA users are aware that you can withdraw funds from a TFSA without having to report it as income. However, many are unaware that the contribution room that is made available by the withdrawal will only be effective in the subsequent year.

Take for example, Judy contributes $5,000 into her TFSA on Jan 1 of Year 1. On Feb 28 of the same her she withdraws $2,000 intending to put it back into the TFSA at a later date. Since her TFSA contribution is at its limit, she will have to wait until Year 2 before she can contribute again into a TFSA. If Judy contributes the $2,000 on April 1 of Year 1, the CRA will impose a overcontribution tax equal to 1% of the excess per month.

Get Free Groceries

2009-03-22T16:55:00.000-07:00

Have you ever been to the grocery store and took something off the shelf only to find the item get scanned at a different price than you first expected? Under a little known commitment taken by most major chains, you can actually get the item for free or get $10 off the item.

What is the Scanning Code of Practice
Back in the olden days, the price on the tag was the price of the item. However, in the modern day where most stores no longer price individual items but instead place an item on the shelf, the scanning code of practice was developed to ensure accuracy at the checkout counter.

What can you get under the Scanning Code of Practice
If an item that you took off the shelf has a different price at the checkout counter, you are entitled to have the item free or if it is greater than $10, $10 taken off the price. Statistically, approximately 2% of items are scanned incorrectly and by being vigilant at the checkout, you can get substantial savings in your everyday shopping.

Who are part of the scanning code of practice?
You can generally find out if the store you are at adopts the scanning code of practice, by looking for a sign at the checkout counter. The following companies have voluntarily adopted the scanning code of practice:

Shoppers Drug Mart
The Groupe Jean Coutu (NB and Ont only)
Lawton Drug Stores
London Drugs
Lovell Drugs
Pharma-save (BC and Sask)
Pharma Plus
Canada Safeway Limited
The Great Atlantic and Pacific Tea Company of Canada Limited
Loblaw Companies Limited
Sobeys Inc.
Metro Inc.
Thrifty Foods
Costco Wholesale Canada Ltd.
Co-op Atlantic
Federated Co-operatives Limited
Costco Wholesale Canada Ltd.
The Home Depot Canada
Canadian Tire Corporation Ltd.
Toys r Us
Rona
Wal*Mart Canada Corp.
Giant Tiger Stores Ltd.
The North West Company
Best Buy/Future Shop
2 Home Hardware franchisees
Thrifty Foods
Overwaitea Food Group
The Harry Watson Group
Longos Brothers Fruit Markets
+ 1374 independent locations

Basics of an RRSP

2009-03-07T19:02:00.000-08:00

A Registered Retirement Savings Plan (or RRSP) is an tax deferral program that encourages saving for retirement for Residents of Canada.

How does a RRSP work?

Contributions to RRSPs (within limits) may be deducted from income before calculating one’s income tax due.
Income earned within the account (interest, dividends, trust distributions, capital gains) is not taxed.
Withdrawals from an RRSP are taxed as regular income.

Tax Issues

Registered retirement savings plans provide a form of deferred taxation to individuals. For the most part, contributions to RRSPs are deductible from taxable income, reducing income tax liability. The impact of such a deduction will be at one’s marginal tax rate. Increases in the value of the plan assets (whether capital gains, interest income or other) are not subject to income or other taxes in Canada until funds are removed from the RRSP.

Disbursements from a RRSP are taxable as income at the time of withdrawal. For maximum tax benefit, withdrawals should occur when one’s marginal tax rate is lowest; such as during periods of unemployment or retirement.

Withdrawals from a RRSP are taxed as regular income. This means that capital gains will lose their 50% exemption and any losses within the RRSP cannot be used to offset against income earned outside the RRSP.

There are maximum contribution limits that one can contribute to an RRSP. In addition, once a taxpayer reaches a certain age, minimum withdrawals are required.

Spousal RRSP

A Spousal RRSP allows a higher income earner, termed a spousal contributor, to contribute to an RRSP in the lower income spouse’s name and deduct the contribution from the higher income earner.

Contributing to an RRSP

A RRSP contribution limit is the maximum amount of RRSP contributions that can be claimed on a tax return for a given tax year.

A contribution limit is calculated as 18% of a person’s earned income from the previous tax year, minus any “pension adjustment”, up to a specified maximum. This specified maximum is as follows.

Year Contribution Limit

2007 $19,000

2008 $20,000

2009 $21,000

2010 $22,000

After 2010 the RRSP contribution limit will be indexed to the annual increase in the average wage. Any RRSP deductions not taken in a tax year are carried forward indefinitely to future tax years. However, once a withdrawal from an RRSP is made, the contribution room is lost.

If a an annual contribution exceeds $2,000 of the limit, a penalty of 1% of the excess per month will be applied.

RRSP contributions within the first 60 days of the tax year may be deducted on the previous year’s return.

A taxpayer may contribute to an RRSP but not necessarily deduct the contribution to the RRSP. This may happen specifically when a taxpayer expects to earn more income in a future period.

Withdrawals from an RRSP

An account holder is able to cash out an amount from an RRSP at any age. However, any amount withdrawn is taxable as income. Financial institutions are required to impose a withholding tax on any withdrawals.

Before the end of the year the account holder turns 71, the RRSP must either be cashed out or transferred to a Registered Retirement Income Fund (RRIF).

Investments held in an RRIF can continue to grow tax-free indefinitely. However, a minimum RRIF withdrawal amount is required each year.

Special withdrawal programs

Home Buyer’s Plan (HBP)

It is possible to use RRSP funds to help purchase one’s first home under what is known as the Home Buyer’s Plan. Canadian Residents can withdraw, tax-free, up to $25,000 from their RRSP (and another $25,000 from a spousal RRSP) towards buying a home. This withdrawal has to be repaid within 15 years after two years of grace. Contrary to popular belief, this plan can be used more than once per lifetime, as long as the borrower did not own a residence in the previous five years.

Lifelong Learning Plan (LLP)

Similarly to the Home Buyer’s Plan, the Life-Long Learning Plan allows for temporary withdrawal of funds from an RRSP tax free. This program allows individuals to borrow from an RRSP to go or return to post-secondary school. The user may withdraw up to $10,000 per year to a maximum of $20,000. The first repayment under the LLP will be due at the earlier of the following 2 dates:

1. 60 days after the 5th year following the 1st withdrawal

2. The 2nd year after the last year the student was enrolled in full-time studies

Use Low Rate Credit Card Cheques Intelligently

2009-02-25T17:51:00.000-08:00

So have you received a low interest rate credit card cheque from your Credit Card company. Well, for mine - RBC - sends me cheques a couple of times a year, where I can draw funds at various “teaser” rates - at one point being as low as 0.9%. But with these “teaser” rates, comes the truth to the facts behind using these cheques or balance transfer offers.

What are teaser rate cheques? These are cheques that allow you to advance funds at a low rate for a specified period of time. Instead of teaser rate cheques, this article would be applicable to low-rate balance transfer offers too.

The truth is that once you use these cheques, any payment you make towards your credit card gets applied to the low interest items first before it gets applied to the higher interest items. In the event you made a purchase on your card, while the teaser rate advance was on your card, such payment would be applied to the teaser rate first before the high interest rate purchase.

Take for example, you already have a balance on your card of $500 from previous purchases you made and for example’s sake, your credit card’s regular interest rate is 18%. You then write a cheque at a teaser rate 1.9% for $500. When you make a payment to your credit card for say $500, the payment gets applied to the teaser rate cheque you wrote as opposed to the higher rate balance that is accruing interest at 18%.

Knowing exactly what you are getting into, you can intelligently use these balance transfers or teaser rate cheques to maximize the savings! To really get funds from your credit card at the teaser rate for the entire offer period, you just have to remember the following:

Pay off the entire balance of your credit card + any accrued interest, if any.
Write a cheque/use the balance transfer feature. Note: Some credit card companies don’t allow you to use teaser rate cheques to advance cash to yourself and will charge you interest at the regular cash advance rate if. If this is the case, simply write a cheque to a friend and get your friend to write a cheque back to you.
Pay the entire balance off before the teaser rate period ends.

Investing Quote

2009-02-21T11:18:00.000-08:00

Here’s a quote I came across that everyone has to remember before investing in anything.

“The return on your money is less important than the return of your money”

Renting Out a Room

2009-02-21T10:56:00.000-08:00

One concept that many students are familiar with is to share a house with other unrelated persons. While for many people out of school, this may seem either like an alien concept or something that one would want to avoid. However, renting out your room can be an easy way of getting some extra cash especially if you have a spare room or an unused basement. In addition to supplementing your income, living with a boarder can add a warm body to the house to hang out with.

Who is this for?

If you have a spare room or basement
Don’t mind others sharing your space (i.e. living room, bathroom, kitchen)
Parents who have grown kids and find the house too big

How do you find someone to rent a room?
There are quite a few ways to find a boarder in your house. Here are some ideas:

Word of mouth
Internet classifieds sites such as Craig’s List or Kijiji
Roomate connection sites such as Roomster
Your local newspaper
Your local college or university

What too look out for?
There are a few things that you should do before renting out a room to someone:

Make sure that there are no local ordinances or by-laws that prohibit you from doing so. Some cities prohibit one from renting out their basement as separate dwelling units.
Make sure you are compatible with the prospective boarder. If you don’t share the same living conditions or have opposite interests, that could lead to trouble down the road.
Some insurance companies will not insure your home if you have boarders in your home. Check to make sure this won’t invalidate your insurance coverage.
Do your due diligence on the prospective tenant. Perform a credit check, and ask for references!