Talking Taxes

This podcast was recorded before the release of the 2024 federal budget and does not cover any details within it.

Sonya Dolguina, Manager, Tax Consulting joins the podcast to talk tax, including new tax accounts and laws, cross border tax implications as well some general tax planning topics:

New account and laws

• First Home Savings Account (FHSA), what is it and who can open one?
• What if someone previously owned a home, can they open the FHSA account?
• How can a FHSA help with supporting your adult children with purchasing their first home?
• New tax law – federal anti-flipping rule for selling real estate held for less than a year?
• New tax law – multi-generational home renovation tax credit

Cross Border

• Tax implications of moving to Canada, including with investments and US retirement accounts from previous employer
• Tax implications of moving out of Canada

General Tax Planning

• Income splitting with a spouse
• Maximizing tax benefits of donations by donating stocks rather than cash

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This podcast was recorded before the release of the 2024 federal budget and does not cover any details within it.

Transcript

Chris Cooksey: Hello and welcome to the advantaged investor, a Raymond James limited podcast, a podcast that provides perspective for Canadian investors who want to remain knowledgeable, informed, and focused on a long-term success. We are recording this on April 11, 2024. I'm Chris Cooksey from the Raymond James Corporate Communication and Marketing Department, and today, Sonia Dolguina, Manager Tax Consulting, joins the podcast to talk tax, including new tax accounts and laws, cross border tax implications, as well as some general tax planning tips. Sonia, no shock to you, but it's tax season. So welcome to the podcast. I hope you're doing well today.

Sonya Dolguina: Thank you so much for having me, I’m doing great.

Chris Cooksey: Excellent to hear. Obviously a lot to get to when it comes to tax and we'll jump right in then. When it comes to new tax accounts and laws, the big new account I think would be the first home savings account and we do have an episode in the archive on first home savings account from a financial planning perspective, so it'll be great to get your information on the tax side of this. So maybe just a quick overview on what it is and how it can be opened, etc.

Sonya Dolguina: Absolutely. The first home savings account or FHSA it's a great account. Essentially the way it works is you make contributions to the account of a maximum of $8,000 per year and then you get a deduction on your tax return for the amount of the contribution, and any investments that you have within the account essentially grow tax free. And the great thing is, as long as you make a withdrawal from the account to buy a qualifying home, your first home, then it's a tax-free withdrawal. So it really is the best of both worlds of a TFSA and an RRSP because you get the deduction, but you don't get taxed when you take it out as long as it's for a qualifying withdrawal.

Chris Cooksey: Okay. Now, I think the first in first home savings account is a little bit of a misnomer. I don't think it has to be technically your first home but it's the government, so I'm sure there's rules and maybe we can just go over those.

Sonya Dolguina: Absolutely. So we get a lot of questions about individuals saying, “Hey, this is their situation. Can they open an FHSA?” So a lot of what we see are rental properties, technically, the rules say in order to be considered a first time homeowner for the purposes of opening this FHSA account, you could not have owned the home that you lived in as your principal residence for the current or previous four years. Someone who perhaps still owns a home that they rent out, but they haven't lived in it as their principal residence for the last four years, they could still open an FHSA account and make contributions. Or maybe they used to own a home and they owned it, you know, five years ago and then they haven't owned a home since that they've lived in as their principal residence, they could still open an FHSA.

Chris Cooksey: All right. Now just say I'm a really nice guy and I want to, you know, provide a down payment for my children. How can I support an adult child with the FHSA, is that even possible?

Sonya Dolguina: Yes, absolutely. This is a great tool. You know, you're in Toronto, I'm in Vancouver homes aren’t very accessible. It's almost impossible to buy a home if you're a young individual without a bit of help from mom and dad. So definitely I would suggest that individuals can gift funds to their children up to $8,000 per year in order to contribute to the FHSA and the child will get a tax benefit/deduction and none of that income within the account is going to be attributed back to the parent. Now some tips, perhaps your child won't you get much use out of a tax deduction right now? Maybe they're still in university, they in a high tax bracket. They could actually defer the deduction until a future year. They could still make a contribution, but take that deduction, carry it forward indefinitely and they can take that deduction when they'll be in a higher tax bracket and we'll get more use out of it.

Chris Cooksey: Okay, that makes sense. Now in terms of tax planning, we have the TFSA, I think probably more than one person has used to save for a home, but now we have the first home savings account as you know. Can they work together or does it make sense to withdraw from the TFSA? Maybe just a little bit of your expertise here, please.

Sonya Dolguina: Absolutely. The great thing about withdrawing from a TFSA is any funds that you withdraw, you get that contribution room back the following year and any withdrawals are, of course, tax free. When it might make sense to take money out of a TFSA to contribute to an FHSA is if you perhaps have limited funds for investing and you don't have funds contribute to the FHSA, you could take money out of the TFSA. Just be careful not to over contribute and you may have to wait until the following year to put money back into the TFSA. A few other tips with the FHSA include, so you actually have to open the account in order to start contribute building contribution room. And you can carry forward contribution room up to $8,000 per year. It's not like the TFSA or RRSP where you don't need to open an account in order to build contribution room, with the FHSA you do. Some other tips are you can only have an FHSA account open for a maximum of 15 years, so you kind of want to be a bit careful there that you plan to purchase a home within 15 years. But if you don't, then there's actually no concern, because you can roll that FHSA into an RRSP as long as it's a direct transfer, it'll be tax free. It's essentially a bonus RRSP room and you don't need to have RRSP contribution room to do so. So really, even if you don't plan to purchase a home it still can make sense to use this FHSA. It's like a bonus RRSP essentially.

Chris Cooksey: That's very interesting. Actually, I hadn't heard that one yet. That’s nice when the government allows these little loopholes here and there, I guess. There's been some new tax laws in the last year or so and last budgets and whatnot, and at the federal side, you mentioned the cost of homes, and I think one of the ways they are trying to prevent the flipping of real estate and that sort of thing. So maybe you can just discuss some of the laws around flipping your assets that way.

Sonya Dolguina: Yes, absolutely. So essentially kind of going back before these anti-flipping rules were in place if you purchased a home and you lived in it as your principal residence, even if it was your principal residence for a few months, you could sell it and any capital gain could be taxable. You know, it's a little bit more expensive, but it's free as long as it was your principal residence for that year. The homes in Vancouver, Toronto, in a few months, you can get some very big gain. The government's really trying to discourage this sort of speculative behaviour and flipping of homes. There is a new rule, and this is for any property dispositions after January 1, 2023. Essentially, any gain from a disposition of a housing unit that you held for less than a year is deemed to be business income. And with business income, 100 percent of gains are taxable. It's not a capital gain, where only 50 percent of gains are taxable and the principal residence exemption is not allowed. Essentially, let's say I buy a home for $500,000, and then I sell it within nine months for $600,000. That's $100,000 added to income, taxed at my top marginal rate. There's no benefit of the principal residence exemption, even if I lived in it. Now there are a few exceptions such as in the case of death, disability, separation, work relocation. And then on top of that, if I sell a home and maybe I made a loss and it was a flipped property, I held it for less than a year, the losses are disallowed. So really they are trying to discourage. property flipping. The government wants you to purchase a home to live in it for the long term.

Chris Cooksey: All right. Now, in terms of new laws, there's a multi generational home renovation tax credit which I'm sure you're very familiar with the details, so if you could share those, that would be fantastic.

Sonya Dolguina: Absolutely. In order to help alleviate the Issues with housing the government announced this new home new tax credit. So essentially if you use funds to renovate your home to build a secondary unit so that a relative of yours, who is aged 65 or older or if they're 18 or older, but they qualify for the disability tax credit, you're essentially going to get a tax credit of 15 percent of qualifying expenditures up to $50,000 of costs that you incurred in order to build a secondary suite in your home. A secondary suite does need to have a separate entrance and kitchen, it really needs to be a separate second suite. A few questions that we've got last time I've talked about this credit are, what if I just build a basement suite? Does that individual really have to move in? What if they didn't end up moving into the unit? The rules do say that the qualifying individual does need to reside or intend to reside in that secondary suite within 12 months after the renovation period ends in order to qualify for the credit, again, that's up to $50,000 of costs qualify for 15 percent federal tax credit to build that secondary suite.

Chris Cooksey: Okay. Now let's move, literally I guess, when we're coming to cross border situations. Obviously, a lot of North Americans work either in Canada or from Canada, work in the U.S., work in the U. S., move to Canada, whatever. So let's talk about the tax implications of moving to Canada, obviously with 401ks and the other U.S. type retirement accounts, for instance from a previous employer. What are those implications?

Sonya Dolguina: Absolutely. When it comes to U.S. retirement accounts, generally speaking, the Canadian rules will mirror the U.S. rules when it comes to traditional IRAs and 401Ks, where it's tax deferred within that account from a U.S. perspective, and Canada will mirror that same tax treatment. So you don't have to worry about any income that's within the traditional IRA or 401K being taxable in Canada. It's really when there's withdrawals from the account that it's considered taxable from both the U.S. and Canadian perspective as long as you're a tax resident in Canada, and then you would claim a foreign tax credit to alleviate from double taxation. Now some individuals have a Roth IRA, which you could say is a bit equivalent to our TFSA, so that's treated a bit differently. You can make that account tax free from a Canadian perspective, but individuals need to know that they have to file an election with the CRA in the with the tax return of the first year they become Canadian tax residents to get that account also tax free, which you'd want to do. Some individuals will move to Canada and then the financial institution where their 401k or traditional IRA is held in will say, hey, you know, we can't help you anymore. We can't hold your account because you're no longer in the U S. As you know, that's where Raymond James can come in and help with our platform and roll those accounts into a IRA held with Raymond James. And that should be a tax-free transaction as well. You definitely have to get some tax advice on that, but we could definitely help. Otherwise, some things to consider are investments that are held in nonregistered accounts, so just regular investments. When someone moves to Canada. they get a bump up in their cost basis.

Sometimes you get individuals to say, Hey, I have a bunch of investments. Should I sell them all before I moved to Canada? Generally if they're in a gain position, there really necessarily isn't a requirement to do so because from a Canadian perspective, your cost basis is going to be the fair market value of those investments at the time you became a Canadian tax resident. If you sell those investments, afterwards, as a Canadian tax resident, Canada only has the right to tax you on the gain that accrued during your Canadian tax residency. Not the gain that accrued, you know, for the entire period that you held that investment.

Chris Cooksey: Okay. Now, if we play the Uno switch card and we go back the other way, what happens if you're moving out of Canada? What are some of those concerns?

Sonya Dolguina: A few things to consider. One is a departure tax or the deemed disposition of assets. ESo, essentially certain assets that you held, you're deemed to have sold those based on their fair market value as of the day that you ceased Canadian tax residency. But there's a number of exceptions. One, are the registered accounts. T things like RRSP, RRIF, TFSA, RESP, also Canadian real estate, you're not deemed to have sold that. Generally the logic behind that is, even though you're going to be a non resident, Canada will still have the right to tax you on those accounts going forward. If you make withdrawals from RRSP or RRIF as a non-resident, Canada will still have a withholding tax on that. And if you sell your Canadian home after being after ceasing Canadian residency, they could still tax those gains. Whereas investments that are in non-registered accounts. Essentially, this departure tax is going to be a capital gain based on the unrealized gain at the time you cease Canadian tax residency, and a 50 percent of capital gains are taxable, and then that's kind of your final tax to Canada, that's your final goodbyes. You're paying that tax, and then going forward when you sell those nonregistered investments when you're a resident of the home country. Canada should no longer have a right to tax those capital gains. They kind of already wrapped up the taxation based on whatever gain happened before you ceased residency. Now what I would definitely recommend is to talk to a cross border tax accountant and really understand how your new home country will tax your nonregistered accounts and your retirement accounts.

For example, let's say you move to a country where you, if you sell your investments that are in nonregistered accounts when you're a resident of that new country, that country will tax the entire gain. Now, that would be a, not a great situation because that would result in double taxation. In that situation, it may make sense to just liquidate your accounts and nonregistered assets before you cease Canadian tax residency just to avoid the double taxation and then just invest in accounts in that new country.

Chris Cooksey: Okay. That makes sense. Now let's just talk a couple of general tax planning things and then I'll let you get on with your day. I really appreciate your time. Income splitting with a spouse. What do people need to be aware? Obviously, people are in situations where one spouse makes more than the other and this is might be a great way to reduce your tax bill. So how can people go about that?

Sonya Dolguina: A misconception that we see is, hey, I'm in the highest tax bracket, my spouse isn't working or they're not working much. I'm just going to split my investment income with them, for capital gains, dividends, interest, just put them on the title of the joint account. Lots of people do that, but they need to be aware of something called the spousal attribution rules, where you need to look at who originally earned the money to fund that investment. And any income that's generated from that investment is generally attributed back to that original spouse. So just by adding a spouse to a joint account and perhaps having both names on the T5 slips, that doesn't necessarily mean that the proper tax rules say that you could split the income 50-50. Now there are some income splitting techniques that you could still employ. One is having a spousal loan. You can set up a loan where you could loan your spouse money so they can invest and then any investments will from that loan capital will be taxed in that spouse's name. But in order to actually do this, then you need to charge interest on that loan. And right now, the CRA prescribed rate on those interests as of the day we're recording this podcast is 6%. So really, unless your investments are going to generate a return that's higher than 6%, it may or may not be worth doing this spousal loan.

Back when prescribed rates were 1 percent a couple of years ago, the spousal loan would have been great, but maybe hold off until the rates come down a little bit in order to see if a spousal loan might make sense. Other techniques are spousal RRSPs, where if you believe at retirement, your spouse is going to be in a lower tax bracket than you then you can contribute to your spouse's RRSP and use your own contribution room and you get the deductions. You get the deduction at the higher marginal rate and then when it turns into a spousal RRIF, generally speaking, the income will be taxed in the spouse's name. And lastly, another income splitting technique is gifting funds to your spouse so they can contribute to a TFSA.

Many Canadians have not maxed out their TFSA. So definitely a good idea kind of a simple income splitting technique is to just gift them funds so they invest in their TFSA and then it'll all just be tax free for everyone.

Chris Cooksey: And let's just finish off with a popular thing to do to help charities and whatnot is to donate stocks rather than cash. So how do you maximize those benefits?

Sonya Dolguina: Yeah, exactly. Generally speaking if I were to sell some investments and donate cash and donate the cash proceeds, then the way it would work is I would have a capital gain and 50 percent of capital gains are taxable at my top marginal rate. And then whatever cash I donate to the charity, I'll get a charitable donation tax credit. Now a way to actually get a better tax result is to donate the stocks directly to the charity. You may have to work together with the charity to see if they could do that, or you could work and talk to your advisor about the Raymond James Canada Foundation. Generally speaking, if you donate stocks directly, then there is a 0 percent inclusion on the capital gains. If you have gains, if you have stocks that have increased in value quite a bit, then there's 0 percent inclusion and you get the donation tax credit based on the total fair market value of the stocks that you donated. So it generally can result in a much better result in terms of tax savings when you donate stocks in a gain position rather than donating cash.

Chris Cooksey: All right. I'd like to, again, thank you for taking the time today, Sonia, a lot of great information for people to digest there, and I hope you will come back and join us again when we have more Tax Talk to go over.

Sonya Dolguina: Absolutely. The federal budget is coming out in about a week, so I'm sure there'll be lots to digest and talk about. Well, thank you so much for having me, Chris. It was great.

Chris Cooksey: Reach out to us at AdvantagedInvestorPod@RaymondJames.ca. Subscribe to The Advantaged Investor on Apple, Spotify, or wherever you get your podcasts. Please contact your advisor with any questions you have. On behalf of Raymond James and The Advantaged Investor, thank you for taking the time to listen today. Until next time, stay well.

This podcast is for informational purposes only. Statistics and factual data and other information are from sources Raymond James Limited believes to be reliable, but their accuracy cannot be guaranteed. Information is furnished on the basis and understanding that Raymond James Limited is to be under no liability whatsoever in respect thereof. It is provided as a general source of information and should not be construed as an offer or solicitation for the sale or purchase of any product and should not be considered tax advice. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax related matters. Securities related products and services are offered through Raymond James Limited. Member of the Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd, which is not a member of Canadian Investor Protection Fund.