Taxing Misconceptions

The emphasis on investing for future security and minimizing income tax is crammed into the first third of the year. During the remaining two-thirds of the year, consumers are encouraged to spend, especially during December. Is there any wonder that debt tops savings for most consumers?

From January to April, finance is king in the media, but is the right message getting through? The media, online and off, offer tax-bites that arouse curiosity, but rarely is there a "mental meal" that leaves the reader or listener full of actionable knowledge.

• Accountants and other financial professionals are forced to compress a year’s worth of financial advising into the weeks before the February 29 RRSP deadline and the April 30 income tax deadline.
• Consumers are deluged with "buy me" financial messages embedded with multimedia marketing finesse that makes comparison shopping for products and services exhausting.
• The phone lines at the Canada Revenue Agency (CRA is responsible for Registered Retirement Savings Plans (RRSP) and income tax) are so busy that even getting through to wait on-hold is an accomplishment.
• The federal Task Force on Financial Literacy declared November Financial Literacy Month, but has that changed the way you think about saving or tackling income tax forms?

What keeps the "money rut" approach to finance going for you? Do you think there is little you can do because you don’t have millions to invest? Are you overwhelmed by what you don’t know about finances? Do the stresses of life and career leave little room for clarity about what exactly you can do that will make a financial difference?

How many of the following five key misconceptions about RRSPs and income tax—all of which contribute to undermining year-round commitment to keeping more of earnings and building savings into financial security—resonate with you?

1. RRSPs are the ultimate retirement savings vehicle.

That may have been true in the last century when retirement was a handful of quiet, low-income years before death, but lifestyles have changed. The 21st-Century version covers decades of extended living during which income may increase, or at least stay the same as during traditional working years. RRSPs were designed to defer payment of income tax on saved income until retirement when incomes were usually 40 per cent or more lower than in working years. If you expect to continue earning over your extended-living years, RRSPs may eat up savings. Losses suffered in an RRSP do not count as a capital gains loss, so you’re out on two levels. Enter the Tax-Free Savings Account (TFSA), which entitles individuals to deposit up to C$5,000 each year in a savings-style or investment-portfolio style account where profit is not taxed. To learn the TFSA advantages, start with the basic introduction provided by CRA. You can deposit up to $20,000 if you start this year. Then spend your time growing this principal and re-investing tax-free profit. Withdrawals are not taxed or held-back like RRSP withdrawals.

2. You can make tax-free withdrawals from your self-directed RRSP.

CRA calls this a myth and makes the following clarification: "If you use your registered retirement savings plan (RRSP) as security for a loan, the value of the RRSP will be added to your taxable income. Similarly, if you use your RRSP to purchase shares of a private corporation, and the shares are not a qualified investment under the rules, then the value of the shares will be added to your taxable income. Some promoters of financing schemes may promise you that they can make tax-free withdrawals from your RRSPs. Typically, the arrangement involves using your self-directed RRSP to purchase shares of a private company. The funds used to purchase the shares are then loaned back to you at low or no interest... If you respond to these kinds of [arrangements], you risk losing your retirement savings and the tax benefits of the RRSP." This is one of many examples of consumers looking for fast-track solutions to longterm projects, and making their money vulnerable to scams and fraud in the process.

3. If you claim expenses for your homebased business when you file your income tax, you’ll lose the tax-free principal residence status of your home.

Although claiming loss of value for your real estate, or depreciation, can jeopardize this status, the solution is simple, don’t claim depreciation on the building unless you are positive there won’t be any increase in value over the years ahead. There are enough deductions, including apportionments of mortgage interest, property insurance, heating/cooling, and maintenance costs, to reduce income tax paid, so depreciation should not be missed. Depreciation on equipment and vehicles is another allowable expense. There are many other benefits and some other cautions, so search out CRA CRA events and seminars, or contact your financial advisor for details.

4. Setting up a budget and receipt-logging system is only useful for businesses.

This misconception is usually linked to the misguided belief that filing an income tax form is simple enough to leave to the last minute. Knowing where your money goes each week, month, and year is vitally important for spending wisely each day. This bookkeeping system also makes preparing your income tax faster and easier. Cheaper, too, if you’re hiring an accountant or tax service. Organizing your accounts reduces stress and leaves you free to investigate annual changes to The Income Tax Act. For instance, are you one of up to 85,000 volunteer fire fighters who stand to benefit from the C$3,000 non-refundable tax credit?

5. There are people who are exempt from paying GST/HST or income tax.

CRA lists this and variations on this theme of legitimate non-payment as myths and provides explanations of why everyone, except lottery or sweepstake winners, must pay tax on income. The CRA prosecuted 1,124 individuals for failing to file a tax return and successfully prosecuted 323 cases involving income tax evasion or fraud in the 2008-2009 fiscal year. If you hesitate to file because you cannot pay what you owe, contact CRA to arrange payment, but file by midnight April 30 or face late filing charges. Self-employed individuals have until June 15, but, if money is owed, those funds should be paid by April 30 to avoid interest charges.



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