Taxation Tools

Tradespersons can enjoy a tax deduction for new tools while anyone wanting to build a nest egg outside an RRSP needs to know about the Tax Free Savings Account.

For the Tradesperson…Tools of the Trade

Tradespersons earning income from the use of their tools may be entitled to deduct the cost of eligible tools plus the GST, PST, or HST included in the invoiced price. Just what is deductible depends on the trade; however, tools will generally be considered deductible if:

a) the tool is new and for use in your trade; and

b) your employer provided the appropriate signed form T2200, Declaration of Conditions of Employment, indicating that supplying the tool was a condition of employment and necessary for your job. Electronic equipment for measuring, locating or calculating are included but cell phones and other communications devices are not.

It is recommended that tradespersons save a list of all new tools and attach the invoices to the listing. In the event the Canada Revenue Agency wishes to confirm the deduction, the data will be readily available.

The maximum deduction in 2009 is the lesser of $500 or the amount paid for the tools minus $1,044. Thus, if the tradesperson spends $3,000 on tools, the maximum deductible allowable would be the lesser of $500 or the amount resulting from application of the formula, i.e. $3,000 – $1,044 = $1,956. In this case the maximum deduction would be only $500. To claim your tool expense, enter the claim on Form T777.

If the tradesperson is employed and reported employment income for 2009, like all other employees, an additional $1,044 may be claimed as a credit on line 363 of schedule 1. This credit, known as the Canada Employment Amount, need not be justified. It recognizes work-related expenses including such items as home computers, uniforms, and supplies. Self-employed persons are not eligible to claim this amount. For the Nest Egg…TFSAs Tax Free Savings Accounts are a great idea for those who expect to earn investment income on excess funds. It may be a better alternative than an RRSP in certain cases. TFSAs are a great alternative to those who have maximized their RRSP contributions and wish to earn income without the threat of additional income tax on investment returns. Whereas an RRSP investment permits an immediate tax savings in the year of investment and is taxed only when withdrawn, the TFSA operates in reverse; the funds you place in a TFSA are after-tax dollars but any growth through capital gains, dividends or interest can be removed tax free. For individuals whose RRSP withdrawals, combined with other sources of income, will place them in a higher individual tax bracket in later years, a TFSA may be a viable alternative to ensure additional future income without the accompanying higher tax cost.

As with all government initiatives rules and regulations are the norm. Here are some pointers about TFSAs:

1. They can be set up through a bank, credit union or other financial-service provider eligible to issue a TFSA. An eligible institution is referred to as the issuer of the plan.

2. You will need to provide your social insurance number and date of birth in order to register.

3. Failure to provide correct information or the provision of incorrect information may cause deregistration of the TFSA and subsequent tax consequences.

4. You may have more than one TFSA but total contributions cannot exceed the TFSA contribution room for the year.

5. Contributors must be residents of Canada.

6. Contributors must be at least 18 years of age. However, unlike RRSPs, there is no requirement to collapse a TFSA at the end of one’s 71st year.

7. Only the TFSA holder can contribute to the plan.

8. Accumulated contribution room occurs whether or not a TFSA is opened.

9. It is not necessary to have employment income to contribute, nor do you need to have employment income to accumulate TFSA room.

10. Attribution rules do not apply. For example, if your spouse or common-law partner receives funds from you to place in his or her TFSA you need not be concerned that the funds provided may end up taxable in your hands.

11. Self-directed TFSAs are permissible.

12. Investments that qualify for a TFSA are generally the same as those permitted in an RRSP. Although certain shares of small business corporations are permissible, it is best to speak to your chartered accountant or issuer to ensure that you do not invest in ineligible investments. One major difference compared to RRSPs is that investments in a TFSA must continue to remain eligible after acquisition.

13. Should you decide to contribute to a TFSA in foreign currency the currency would be converted to the Canadian equivalent. Naturally the amount of contribution cannot exceed the annual contribution limit in Canadian dollars.

14. “In kind” contributions are permissible as long as they meet the qualified investment criteria. The valuation will be the fair market value at the time of contribution. If the fair market value exceeds the cost, the difference will be considered a capital gain and must be considered in your personal tax return in the year of disposal. Capital losses on the transfer of “in kind” assets to a TFSA are not deductible as a capital loss in your personal tax filing.

15. The TFSA contribution room is made up of the annual TFSA dollar limit (initially $5,000 in 2009, indexed thereafter for inflation) plus unused TFSA contribution room from previous years less previous years’ withdrawals excluding qualified transfers.

16. The CRA will determine your contribution room based on the information provided by the issuer and will indicate the annual contribution room on your Notice of Assessment.

17. If you do not file a tax return you may still contribute to a TFSA. However, the CRA will not provide information about your contribution room. As such, maintain records of the contributions and withdrawals to avoid overcontributions.

18. You cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year. (Remember that withdrawals in a year increase next year’s contribution room.) If you do so, you will be subject to a tax equal to 1% of the highest excess amount in the month, for each month you are in an overcontribution position.

19. For those who may be concerned as to whether withdrawing funds from their TFSA may cause eligibility problems for the federal income test for benefits and credits, don’t worry; withdrawals will not impact your eligibility requirements.

20. Your Old Age Security (OAS) benefits, Guaranteed Income Supplement (GIS) or Employment Insurance (EI) benefits will not be reduced as a result of amounts withdrawn from a TFSA.

21. For those on Old Age Security (OAS) or for those receiving Guaranteed Income Supplements (GIS) or Employment Insurance (EI), the aforementioned benefits will not be reduced as a result of income earned in a TFSA

22. Taxpayers receiving the Canada Child Tax Benefit (CCTB), Goods and Services Tax Credit (GSTC), the Working Income Tax Benefit (WITB), or the age credit will not have these benefits impacted by income earned in the TFSA vehicle.

23. Transfers between TFSAs owned by the same individual are not subject to tax or penalty as long as the appropriate forms and procedures are adhered to.

24. Unlike assets in an RRSP, the assets in a TFSA can be used as collateral for a loan outside of the TFSA.

25. Unlike RRSPs, there are no tax implications at death.

Marital or Common-law Breakdowns and TFSAs

In the event of marital or common-law breakdown, amounts can be transferred directly from the account of a former spouse to the other if:

a) you and your current or former spouse, or current or former common-law partner are living separate and apart at the time of the transfer and you are entitled to receive the amount:

• under a decree, order, or judgment of a court, or under a written separation agreement;

• to settle rights arising out of your relationship on or after the breakdown of the relationship.

b) transferred amounts will not reduce the recipient’s eligible contribution room. Since this transfer is not considered a withdrawal, the transferred amount will not be added back to the transferor’s contribution room at the beginning of the following year.

c) the transfer will not eliminate any excess amount in the TFSA.

Tax Savings are Always Worth the Effort

The incentive to save combined with the ability to make tax-free withdrawals suggests the TFSA is a worthwhile vehicle. Should you need more information, give your chartered accountant or financial manager a call.