“Highly skilled scammers are impersonating the Canada Revenue Agency (CRA) through telephone calls, mail, text messages, and emails. If you want to confirm the authenticity of any CRA communication, call your local CRA office. For information on scams or to report deceptive telemarketing, contact the Canadian Anti-Fraud Centre (CAFC) online or call 1-888-495-8501.”
Well, it depends.
The rule of thumb that you only need 70% of your pre-retirement income is too simplistic. For some people, it is sufficient. But for many, it is not.
A good start in determining how much you’ll need in retirement is to break down your budget into two categories of spending –
- necessities (basic food, shelter, clothing, medication, etc.), and
- discretionary (travel, dining out, entertainment, money for a new car every years, etc.)
If your basic needs add up to 50% of your after-tax income, you will have up to another 50% for discretionary spending. So if you choose to spend only 25% on discretionary items, then you will need a total of 75% of your current income in retirement.
And remember to take into account in your calculation that certain expenses will decline or even disappear in retirement. For example, you will no longer have to make CPP or EI contributions, income tax will likely decrease, and the need to buy work clothes will be a thing of the past.
On the other hand, certain costs will likely increase in retirement. Healthcare and hobby related expenses will likely go up. So include these items in your retirement budget.
The last bit of planning is to make sure you will have enough income to take care of your retirement needs when you retire, before you retire.
Canadian tax filings can be daunting. Here are a few articles to help you through the process this season that I think is worth your read. The first two from CBC News and the 3rd from a recent blog post from the Women’s Financial Learning Centre. –
Needless to say, it’s that time of the year again when some of us are scrounging for money and time to invest to our Registered Retirement Savings Plan (RRSP).
If you’re a procrastinator and haven’t got around to contributing yet, here are a few things to keep in mind.
• Deadline for this year is 11:59pm Monday, February 29, 2016.
• If you have high income in 2015 and projected low income for 2016, you may want to use RRSP contributions (2015)/withdrawals (2016) to equalize your income of both years to save on the overall income taxes for the combined two years.
• Contribute to a spousal RRSP if you’re the high income earner in the household. This will enable you the tax deductions and equalize both your retirement income down the road on retirement.
• If you have no or low income in 2015, you probably want to skip the contribution altogether for this year. This is especially applicable if you anticipate higher income years in the near future which can benefit more from your contributions then.
• Do not exceed your RRSP contribution limit. Check your Notice of Assessment for the maximum amount you’re allowed. There’s a maximum over-contribution limit of $2,000 and going over will end up attracting a steep penalty.
• Don’t rush into the wrong investments when you make your RRSP contributions. Temporarily park your contributions into a cash account within your plan. Take your time and make your investment decision later when you’ve done your due diligence.
• Consider appointing a beneficiary.
• Keep in mind any RRSP withdrawals are taxable in the year of withdrawal.
• Keep in mind any spousal RRSP withdrawals may be taxable by the higher income earner if the rules are not followed. Consult with your advisor before making this move.
• You can still make contributions to a spousal RRSP after you turned 71 if you have the room, providing your spouse is not yet 71.
• And remember your RRSP is, first and foremost, savings for your retirement. Do not use it as a short term savings vehicle.
Tax rules are getting more complex and cumbersome. That’s why it is important to spend time and make an effort to legally maximize your personal tax deductions and minimize your taxes.
Prior to year-end is a good time to do just that. It’s your opportunity to take advantage of available deductions before they expire or become unavailable for the current year.
For 2015, here are some common tax saving reminders …
1) Paying tax deductible expenses –
these deductions are only available when they are paid. Tax deductible alimony payments, child care expenses, investment counsel fees and interest on borrowings for investing or business purpose are common deductible expenses.
2) Paying for items that qualify for tax credits –
these payments may give rise to refundable/non-refundable tax credits but only if they are paid within the calendar year. Items include dental and medical expenses, charitable donations, political contributions, children’s fitness and arts program fees, tuition fees, student loan interest and monthly transit passes.
3) Review non registered investment portfolios to crystallize your losses –
here’s an opportunity to rid your unwanted losing investments and lock in their losses to offset your other capital gains. These losses can be applied against 2015 as well as available for carry back to any or all of the previous 3 years. All trades must be settled by Dec 24, 2015 for Canadian exchanges and Dec 28, 2015 for the US exchanges. Check for potentially different trade dates for mutual fund dispositions. (Caution – watch out for superficial loss rule which will nullify your losses for tax purpose.)
4) RRSP contributions –
you have until February 29, 2016 to contribute to your RRSP or spousal RRSP to qualify for 2015 deductions. If you are turning (or have turned) 71 this year, December 31, 2015 is your deadline for one final contribution to your RRSP.
Some 2015 changes in tax rules:
– Indexing of adoption tax credit of $15,000.
– Child care deduction increases to $8,000 for children under 7, $5,000 for children 7 to 16, and $11,000 for children eligible for the disability tax credit
– Child fitness tax credit will be a refundable tax credit starting in 2015.
– A non-refundable Home Accessibility Tax Credit of up to $10,000 will be available in 2016 for expenditures made in 2015. This is available to seniors and persons eligible for the disability tax credit.
– Enhancement of the Universal Childcare Benefit program. The amount has been increased by $60 a month and is taxable to the lower income spouse. At the same time, the children’s credit of $2,255 a year, has been eliminated.
I came across a recent ad with ex-dragon Arlene Dickinson espousing her goal-oriented strategy for saving money and restoring financial well-being. Immediately, the book The Millionaire Next Door came to my mind. This New York Times bestseller was published a number of years ago sharing with readers the surprisingly simple, yet effective secrets to amassing a million dollars or more. Those strategies then still apply today, as they did for many generations before us.
Both messages are literally the same. Slow and steady win the day when it comes to responsible saving and budgeting.
For example, you can save as little as $2.75 a day; and that can add up to $1,000 a year. Think 20 years into the future, that’s $20,000 from just saving the price of a cup of coffee at Starbucks today! This doesn’t even take into account the compounding effect of investing, which can potentially double (*) this total!
So by giving up a coffee at your favourite Tim Horton’s, walking or taking public transit instead of driving to your local store, and packing your lunch instead of fast food out, they can all add up.
There are many ideas to save. Just google budgeting, saving tips, etc. and you will be bombarded with thousands of useful websites and ideas. My book ‘The Personal Budgeting Kit‘ also has many smart saving ideas to help you on your way.
Here are some other strategies to keep in mind. They are simple, basic and logical.
– live below your means
– save your money
– pay down your debt
– have a plan/goal
– seek advice
– read up on saving ideas
As quoted from the Millionaire Next Door – “Whatever your income, always live below your means.”
And as quoted from Arlene Dickinson in the ad – “Keep at it when you can and it will add up.”
(*) assuming a 6% or higher compounding annual return.
This is sad but real. CBC article today reported on the state of some of today’s seniors – they’re going bankrupt and in greater numbers!
Nothing unnerves us more than when Canada Revenue Agency (CRA) comes asking to take a closer look! If you’ve ever wondered about this late at night, Knowledge Bureau wrote a good article on the subject of reviews and audits.
Here’s the link to the article – Audit Proofing: It’s about the Retrieval
Here’s an interesting and informative article from the Chartered Professional Accountants Association – (2015 February)
According to the Canada Revenue Agency (CRA), 28 million people file income tax returns each year and of that number, 50% use tax preparers. Tax preparers can register with the CRA to use EFILE to transmit the completed return through an encryption technology that instantly acknowledges the tax return has been received.
So, what could possibly go wrong for the taxpayer? Unfortunately, not all tax preparers are honest. And, these less-than-honest ones take advantage of the fact that prospective clients believe the tax preparer:
• is an expert and will prepare the return better than they are able to do it themselves
• will find ways to get the maximum refund
• has the taxpayer’s best interest at heart
• is registered to EFILE tax returns and thus the CRA vouches for their integrity
Fraudulent Income Tax Preparers
Most income tax fraud relies upon the ability of the fraudster to:
• gather information about the taxpayer
• promise a refund for the taxpayer
• convince the taxpayer to have the refund sent
to the tax preparer
• convince the taxpayer to pay by cash or debit card
• prevent the taxpayer from understanding how the refund amount was calculated.
Easy Access to Your Information
Information about the taxpayer is easy to obtain. Most taxpayers are asked for their last year’s tax return, which contains all the information required for the current filing. The taxpayer may also be asked for their account number, personal identification numbers and answers to security questions to make it easier for the tax preparer to access and manage a personal tax account.
Electronic filing has many benefits. On the positive side, it is faster and “paperless.” Unfortunately, the negative side means that it is easier for unscrupulous tax preparers to defraud the CRA. As long as the tax return is accepted electronically, the CRA will likely issue a computer-produced refund to the taxpayer. It is only later, after the system has set up audit thresholds and starts requesting information from the taxpayer, that the fraud may be revealed.
The dishonest tax preparer completes and prints the tax return based on the data provided by the taxpayer. The taxpayer assumes the tax preparer submits this return to the CRA. However, the tax preparer actually submits a different return on which the numbers have been changed to provide a refund, whether the taxpayer is entitled to one or not. Tax preparers have a multitude of ways to create a refund to be deposited into the tax preparer’s bank account. The fraudster can claim:
1. higher expenses or lower revenue for sole proprietors who also receive T4 income. A loss from self-employment is applied against the T4 income to produce a reduction of taxable income and thus a refund of T4 income tax remitted by the employer. If the client is also a GST/HST registrant, the tax preparer may be able to obtain a refund in this area as well.
2. a deductible RRSP contribution higher than that made by the taxpayer
3. tuition fees or medical expenses higher than those paid by the taxpayer
4. married or common-law status
5. non-existent dependants
6. excess or non-existent union dues
7. charitable donations the taxpayer never made
8. rental payments or property taxes in excess of the actual amounts.
Where Did the Money Go?
If the CRA refund is deposited into the tax preparer’s bank account, the preparer quickly removes it and disappears to parts unknown. If the refund is not deposited to the tax preparer’s account, the tax preparer may simply base their fee on a percentage of the falsified refundable amount. The taxpayer, elated by the high refund, gladly pays the exorbitant fee unaware of repercussions from the CRA when the fraud is revealed.
The taxpayer, not the tax preparer, is responsible for the accuracy of the information filed.
Recourse against a Fraudulent Tax Preparer
The taxpayer may mistakenly believe the tax preparer is ultimately responsible for the fraudulent tax return. This is not true. The CRA takes the position that the taxpayer is responsible for the accuracy of the personal tax return. On the signature page, just above the taxpayer’s signature line the words: “I certify that the information given on this return and in any documents attached is correct, complete, and fully discloses all my income” provides a reminder of the taxpayer’s responsibility.
Certainly, the taxpayer may have recourse against tax preparers who file fraudulent returns. Realistically, however, it may be impossible for the taxpayer to locate the fraudster and even then, the legal cost and time involved to sue may not be worth the expense.
A CRA Audit
Unfortunately for the taxpayer, the CRA may be tardy in requesting information from the taxpayer about reassessed years. Thus, if fraudulent filing has occurred over more than one tax year, the sudden emergency of having to respond to a reassessment covering several years will come as a shock to the taxpayer.
For the taxpayer the results of a CRA audit will create the following realities:
• Costs will be incurred to review the reassessments and address issues raised by the CRA.
• The new tax preparer will undoubtedly have to process a new tax return using the proper information in order to compare it to the fraudulent submission.
• The taxpayer will have to pay the taxes on the amended amounts and will have to repay the amounts refunded by the CRA based upon the falsified returns.
• Penalties and interest may be assessed.
Check Out the Tax Preparer
The majority of tax preparers are honest, hard-working individuals who strive to provide a service that will meet the requirements of the CRA. But, as in every occupation, there are those who will take advantage of the trust placed in them. In our high-tech world, relying on the Internet or hard copy to validate someone’s credentials is problematic. Anyone can design a home page, create or embellish qualifications and print a certificate establishing them as a qualified tax expert. None of the following individual checkpoints guarantees the honesty of the preparer, but collectively they may provide some assurance of the tax preparer’s credibility:
• Talk to your friends. They may be among the 50% of individuals who use a tax preparer. Find out how long they have used the service and whether there have been any major reassessments.
• Talk to people in business. Most use the same qualified professional to prepare their corporate and personal tax returns.
• Ask the tax preparer for credentials. CPAs are registered with the various provincial institutes and should be able to provide a licence or membership number. Don’t hesitate to contact the various provincial institutes to determine whether an individual is in good standing.
• Your tax preparer should be available year round. You want a firm or individual with a locally established presence. Online businesses allow data to be processed anywhere in the world. But, as a taxpayer, you should consider whether you want a virtual relationship in the Internet hinterland or a flesh-and-blood relationship with someone in your community with whom you can meet one-on-one to discuss tax issues.
• Ensure that you receive a complete and unabridged copy of your tax return, whether the return is hard copy or PDF.
• Review the tax return for reasonableness before you sign the T183, “Information Return for Electronic Filing of An Individual’s Income Tax and Benefit Return” that allows the tax preparer to EFILE your return. If you have qualms about the tax return, do not sign and ask for all data to be returned.
• If you are still uneasy about the tax preparer, but your return appears reasonable, request the tax preparer to EFILE the return while you wait for confirmation the CRA has received it.
• Never sign an unfinished tax return or a blank T183 or T1013 “Authorizing or Cancelling a Representative.”
• Do not provide permission for the funds to be deposited directly into the tax preparer’s account. Carefully read Part C of form T183.
• Always obtain a copy of your signed T183 form if you have doubts about the integrity of the tax preparer. The signed form will not prevent the individual from changing the form before transmitting the tax return but it will provide evidence the tax preparer misappropriated your funds.
Consider Using a CPA
Whether you are going to a tax preparer for the first time or switching to another, carefully vet the tax preparer’s qualifications. Tax time is stressful enough without the added risk of future problems with the CRA. Establishing a long-term relationship with a trusted tax preparer allows them to understand the changes taking place in your life and determine whether tax treatments are available to minimize the taxes payable while at the same time satisfying the requirements of the CRA.
Here are some concrete saving ideas to help you keep more of your money. Read my recent posts on how to save over $42,500 in just 7 years, even with only a 4% rate of return!
1) Do not impulse buy, only shop for what’s on your prepared list;
(Studies have shown that as much as $3,700 a year is wasted on unnecessary purchases.)
2) Lunch in (not out) more often;
(A average savings of at least $5 per meal when not lunching out. Do this twice a week and you will save $520 a year.)
3) Stop food waste, be creative with leftovers;
(Studies have shown that as much as 35% of our food ends up being wasted, or $2,200 year.)
4) Pay your credit card bills on time;
(It’s obvious, many dollars can be saved when you stop those 18% to 20% interest charges levied by your credit card companies.)
5) Look for cheaper phone plans;
(Even a savings of $20 a month in your phone plan will save you $240 a year.)
Add up all your savings and you are well on your way to top up your TFSA for a more secured future!