Category: Tax and Financial

Blogging can be considered a relatively new type of business industry as the government wants to tax online businesses. When a blogger creates a blog in order to gain business income, figuring out what can and cannot be deducted from your taxable earnings can be a daunting experience. Since the industry is fairly new, the rules can be pretty confusing for someone who is claiming this type of income for the first time. Please see the following list of expenses that can be claimed on your return (if they make sense in your situation of course) along with a few items that probably should not be claimed unless it makes sense in your particular case. In order to achieve the maximum legitimate tax savings, is of course, to hire an expert to help analyze your individual scenario. Here are some examples that may apply to most bloggers.

The following are claimable:

Hosting fees, internet access fees, blog template and design fees are all part of running an internet-based business and can be deducted. There may be times that design fees should be capitalized such as if the templates designed are going to be used for many years to come (though this is hard to determine so most people probably just expense it).

Domain name registration fees, trademarks and patents are considered eligible capital property but they depreciate yearly. I would make the argument that yearly domain fees are charged on a subscription basis rather than being an asset.

Computer software such as Adobe Photoshop can be considered capital in nature. The depreciation rate is 100% and is subject to the half-year rule, which means you can only claim half the cost in the year of purchase. Please note that some software changes year after year and as a result an argument can be made for expensing it as opposed to capitalizing it.

Ads purchased to promote the blog (such as facebook ads for example) or money spent on SEO services, can be deducted from earned revenues. You can also deduct items that you buy for prizes to give away on the blog as part of contests and promotional giveaways.

If you use your home as your principal place of business, you can claim a portion of home expenses (insurance, property taxes, mortgage interest). The amount you can claim depends on the percentage of the total square footage of your home that you use for business. If you aren’t exclusively using the space for business, the amount you claim must also be prorated based on the amount of time you use it for business. This rule applies to any home based business – common sense applies.

Blogging equipment such as smartphones, laptops, or cameras are capital assets that you can be claimed on your return. However, you will have to deduct the cost of those items over a period of several years as the value of the asset depreciates.

Things that should not be claimed (unless they can be justified):

Outfits you photographed for the blog can seem like something you may be able to write-off, but this is not the case. It may be able to be claimed if it a uniform or a costume and is only used for business purposes, such as promoting the blog itself. Most clothes and accessories you buy and wear in everyday life cannot be deducted as an expense. People should take caution when making these types of claims although I have seen some fly such as the Remax Realtor who has the Remax logo embroidered in a few of his suits but again this may be a one off.

Unless you are a fitness blogger and can prove that your gym membership is a business expense, gym and other fitness fees are not tax-deductible. I would tend to be careful with this one as a fitness blogger may use the membership for personal purposes as well.

You may feature your pet on the blog or other mediums such as Instagram, but any animal-related expenses such as doggy daycare fees and pet insurance cannot be claimed.

While professional association memberships are tax-deductible, you cannot deduct club membership dues (including initiation fees) if the main purpose of the club is dining, recreation, or sporting activities. Please note that this applies to all other business types as well.

When saving receipts for your blogging business, you should consider it a business first and foremost which means applying the rules the same way and asking yourself if the expenditures make sense. Common sense needs to be applied to what is claimed.

Like any other business it is important to keep track of all revenues and all expenses and bookkeeping is very important.

Many Canadians come back to Canada after a prolonged stay in the US for their own reasons but when they do, many simply let their Green Cards expire if they have one thinking that their American tax obligations will just expire along with the card. This, in itself is not true.

The process to surrender your green card, also known as Lawful Permanent Resident (LPR status) is actually straight forward. A LPR must contact a local U.S. embassy or consulate and make an appointment. The embassy or consular official will provide USCIS Form I-407, Abandonment of Lawful Permanent Resident Status. Upon receiving the form, it must be filled out and submitted.

An I-407 form allows a legal permanent resident to officially abandon their status. You would need to submit it to a U.S. embassy or consulate in your area, as well as your actual green card, there is no fee for this.

A consular officer will conduct an interview to make sure that you fully understand the consequences of giving up U.S. residency, and that you are doing so voluntarily. You will get a copy of your form I-407, this will help you in the future if you’re applying for a U.S. visa or entry, to avoid confusion about your earlier status.

There is actually another way that one is able to relinquish his or her green card. A person can actually file Form 8833 “Treaty claim of residency in another country” – Under the Canada-U.S. Tax Treaty, one can take a treaty – based position that they are a nonresident of the U.S. for tax purposes. In order to dispose of the green card in this manner, the tax payer must file Form 1040NR with the Form 8833 attached to inform the IRS that he or she is making a treaty election to be taxed as a nonresident alien as a result of becoming a resident in the named treaty country. A side note: Technically Form 8833 is not required if payment or income items on the tax return are $100,000 or less, but in order to eliminate questions or concerns during a review, the Form 8833 should be filed.

Although it sounds simple to relinquish your green card – it might have some other undesirable consequences, so it is probably a good idea to seek out competent legal and tax advice before making the decision.

There are many unscrupulous companies in Canada that act like the Disability Tax Credit (DTC), is a huge unknown secret and they can secure you extra money on your taxes if you qualify. In truth they are partially correct – in the way that if you qualify for the DTC you do qualify for additional money when filing a tax return (conditions apply) and that they can secure you money. Here is an even bigger secret – you can actually apply for the DTC yourself and not have to give one of these companies a cut of the money you may be entitled to. Most of these companies actually take a cut of 25 – 35% once you have been approved and Canada Revenue Agency (CRA) refunds your money. When talking to them they actually try to justify their “cut” by saying that they have to collect all of the information. In short, fill out the first page of the Disability Tax Credit application form (T2201) and send the rest of it to your doctor (once you tell them who your doctor is) to fill out the rest and send it back to them (by fax, email, or mail) so that they can submit it to the CRA on your behalf.

I am sure that you may have seen some of the ads on social media websites saying that you may qualify for up to $35 000 or up to $50 000 etc. Please note that this is not necessarily a scam but a lucrative business since the application can be applied up to ten years back. I have seen a few cases where some of my clients have gotten $10 000 to $15 000 refunded but please keep in mind that each case is unique. The point is when using the $10 000 example is why should you pay someone between $2500 and $3500 give or take when you can do it for yourself. It is kind of heartbreaking when many of the people who take advantage of this offer is low income seniors and people who are of lower income in general. While I agree with the fact that people should get paid something for their time – some of the cuts being requested are very high for what is truly being done. It is also a known fact that many more people will qualify for this “credit” as time goes on due to our aging population.

Some people try to justify their own laziness (after they learn about what is involved) by saying to themselves – if I didn’t go to them I wouldn’t be entitled to this money anyways. Stop doing that – stop supporting companies that pray some of the most vulnerable members of our society. If you are one of these people for any reason and you paid in to the system you should apply to get your money back. All of it.

Important Disclaimer: Regardless of whether you apply for it yourself or through one of those third party services the result will, in nearly every case be the same; if you qualify, you qualify, and if you don’t you don’t. These third parties do not work directly for CRA in most cases. As a result, there services offer no additional benefit or credibility aside from the convenience of not having to do it yourself.

Here are the steps to follow to apply for the Disability Tax Credit if you feel that 25 to 35 percent of your own money is too much to give up.

1. Get a copy of the Disability Tax Credit Application – this is as simple as going on google and searching T2201 and printing it off.
2. Filling out the first page with your personal information and answering the questions. There is even a box that says ”
   Yes, I want the CRA to adjust my returns, if possible” – sometimes they will actually refund you previous years without having to do the adjustment. (Section 3)
3. Take the application to your doctor and have them fill it out. Have them provide as much information as possible, even if it is sending additional reports. A doctor may charge $100.00 for this – it can be claimed as a medical expense.
4. Mail it to the address given in the application or have the doctor mail it.
5. Wait for a response which can take a few weeks or a few months – if the CRA rejects it you can appeal the decision or they just may want more information.

Chances are that if you read the post to the end and believe that you qualify, you are perfectly capable of applying for the DTC yourself, and dependent on your situation it may very well be worth it.

In my next post about the Disability Tax Credit – I will explain why some people do NOT get money even if they have the claim on file.

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A question that may come to mind when one is debating on what is the better registered investment vehicle, the RRSP (Registered Retirement Savings Plan) or the TFSA (Tax Free Savings Account) is “would you rather pay tax on the harvest or the seed?”. When looking at the tax deferral aspect of the RRSP, some may say that what good are RRSP’s you pay tax on them when they come out – that’s true but if used properly they come out at a lower tax than when you contributed to them.

For example using today’s numbers. (Assume a taxpayer in Alberta with $120 000.00 in gross income, rate being used is 26% Federal Tax and 10% Provincial Tax).

Joe Albertan contributes $1000.00 when he is in the 36% tax bracket, he would reduce his taxes by $360.00. When he draws it out years later, let’s say a $1000.00 withdrawal in the 25% tax bracket, he would pay $250.00 on this $1000.00 – in this example, he comes out ahead by $110.00 – we are not even factoring in the deferred growth on investments held within the RRSP (the harvest).

On the flip side of the coin using the same numbers.

Joe Albertan decides to contribute the $1000.00 into his TFSA instead. He would pay the 36% tax or the $360.00 and would contribute $640.00 to the TFSA in after tax dollars (the seed). The growth on the $640.00 would never be taxed again (under today’s laws).

It is hard to argue definitively on which vehicle is better because it all depends on the individual’s current tax situation – it is not a one size fits all position. The RRSP would not be of any use to an individual if he or she is in a lower tax bracket now and a higher one when the money is needed, and the TFSA does not offer any tax deferral in the present to those that are in a higher bracket now than they will be in the future. In my personal opinion, if you are in a higher income bracket, it may be best to use both vehicles as the RRSP allows you to save from the first dollar earned (dollars before tax) and move the refund – if any to the TFSA as it is funded with after tax dollars. It is also important to know that each registered vehicle comes with it’s ups and downs which will be summed up in a different post, but based on tax alone “Would you rather pay tax on the harvest or the seed?”

It is a known fact that many people do not like the RRSP and some even go as far as to say that they hate the things. Even accountants hate them – they always say that a dollar today is better than a dollar tomorrow yet when the question “how can I reduce my tax bill comes up” the default answer is often “contribute more to your RRSP”. A dollar today is often better than a dollar tomorrow but you also want to have a dollar tomorrow for retirement and everyone knows deep down that the Canada Pension Plan (CPP) and Old Age Security (OAS) will not necessarily provide you with a good retirement, if they exist when it is your turn to retire.

The RRSP does have its place in your tool box – it creates a deduction against your net income, a deduction not a credit. For people in a higher tax bracket this makes a difference – please refer to my previous post “Deductions and Credits: The Difference” for clarification if necessary. I will emphasize on what I believe to be the key point by using an example of an individual in the 30.5% tax bracket living in Alberta who has invested $1000.00 (The rate is 10% in Alberta and 20.5% Federal) versus the lowest rate in Alberta of 25% (10% Alberta, 15% Federal).

If you are in the 30.5% tax bracket the $1000.00 deduction will reduce your tax payable by $305.00

If you are in the 25.0% tax bracket the $1000.00 deduction will reduce your tax payable by $250.00

A $1000.00 non-refundable tax credit on the other had will reduce your tax payable by $250.00

That is why the RRSP really has no effect in the lowest tax bracket. Although it may be beneficial in two unique cases. Please note that these two programs are like a loan from yourself and that the tax bracket argument down below applies to this as well.

The home buyer’s Plan – You can borrow up to $35 000.00 from your RRSP to put down on a first home. You have two ways to pay it back, by contributing to the RRSP or by adding 1/15 of the amount withdrawn into income (You have 15 years to pay it back). If you are in the lowest bracket it isn’t a bad thing to take it into income.

The Lifelong Learning Plan – You can borrow up to $20 000.00 from your RRSP towards your education. You have the two same ways to pay it back as above – the only difference is you have 10 years to pay it back.

One neat thing that people may or may not know is that you can carry your RRSP contributions forward until you want to use them, some accountants I know of will apply them yearly regardless. As a result, if you run into that banker who says you should set up a pre-authorized checking (PAC) plan for $25.00 per month – you can accrue your yearly $300.00 RRSP contributions until you are in a higher tax bracket when they will save you a minimum of an extra $55.00 per thousand. Another important thing to consider about the RRSP is that you save from the first dollar earned (dollars before tax).

It is important to know that despite the fact that the RRSP does create a deduction against income, it is to be used as a tax deferral – they are NOT tax free. Some people I speak to say, why would I put into the RRSP – I am double taxed. When looking closer at the picture, you are not double taxed at all – remember the RRSP is a tax deferral – NOT tax free. You get the deduction and savings when you contribute to and apply the RRSP contribution to your tax return (You saved from the first dollar earned). It is correct that you pay tax when you go to withdraw because, in practice you were not taxed yet. One of the biggest problems I often see, is people will withdraw the RRSP when they are in a higher tax bracket or will withdraw and the income inclusion will put them into a higher tax bracket. If you withdraw the money at a higher tax bracket than when you contributed, it defeats the purpose. I’ll illustrate by using the example above.

If you are in the 30.5% tax bracket the $1000.00 deduction will reduce your tax payable by $305.00

If you are in the 25.0% tax bracket the $1000.00 deduction will reduce your tax payable by $250.00

If you contributed in the 30.5% bracket and withdraw in the 25.0% bracket, you will have saved tax at $55.00 per thousand. However, if you contributed at the 25.0% bracket and applied the deduction and withdraw in the 30.5% tax bracket, you will have paid $55.00 per thousand more in tax. Please note that this example holds true for both the Home Buyer’s Plan and the Lifelong Learning Plan.

The RRSP is not for everyone; it is a strategy that should not be used as a bank account, sometimes the Tax Free Savings Account (TFSA) may be better. I will explain the tax differences in an upcoming post titled “Would You Rather Pay Tax on the Harvest or the Seed?”. When looking at these strategies – it is always good to review your unique situation with an independent tax advisor or planner, sometimes it is good to get a second opinion as well because no one person knows everything.

REAL ESTATE: IS IT REALLY THE BEST INVESTMENT?

One of the greatest investments of all time has appeared to be real estate development and other activities in real estate. It can be argued, however that real estate is just like any other investment such as stocks and mutual funds. When looking at the idea of investing in real estate – people often like to do it as they collect passive income and it requires very little work – or it does on the surface anyways.

For a passive investment – real estate does not appear to be so passive as one must find renters, maintain the property or find people to maintain the property and collect the rent or have a management company do it. Yes someone else is paying for your investment so the gain is on the value of the property itself once it’s disposed of. It does have a tax advantage when you go to sell the property as it falls under capital gains (assuming that you are not in the business of buying, fixing, and than selling properties). The rent collected over the long term is treated the same as interest or employment income and is taxed at your marginal tax rate – the one exception is you do not have to pay CPP on it. Rental properties are also good as they are considered income for RRSP purposes.

I have heard from may sources that real estate can be a massive headache, especially when it comes to the apartment style condo. In the current economy, people are holding on to them as they cannot get their money out and are forced to pay for special assessments where they often have to come up with extra money out of the blue – on top of the condo fees which may or may not be covered by the tenant. Yes, the special assessments can be deducted but is it really worth it to pay for example $3 000.00 to get $750.00 back assuming a 25% tax bracket or would you have been better of to let the $2250.00 grow in a tax free savings account or let the full $3000.00 grow in an RRSP since RRSP’s are bought with whole dollars, not after tax dollars. I guess that it depends on how much the property value is going to grow versus the additional money that may have to be put into it.

One of the tales that I often hear about is what I refer to as the “Devil Tenant”, the tenant that does not take good care of your investment and at times even destroys it. For example, I know of a poor soul who bought an apartment style condo for around $70 000.00 and it was good in the beginning as real estate was booming at the time and the value grew to around $140 000.00 – this can be considered a good investment as it looks like the gentleman doubled his money -who wouldn’t like that. Enter the “Devil Tenant”, he took a hammer to the sink and toilet and flooded the entire unit and the unit underneath it. The individual had to pay around $40 000.00 to make the unit available for rent or saleable once again. Now, this is an extreme case but it is just one example of why real estate isn’t risk free either. Yes, this individual got to expense $40 000.00 on his tax return as it was accepted by the CRA that there was no betterment since a flooded property is rendered uninhabitable and as a result could not be rented – or sold in that state.

While real estate can look like a promising investment, I believe it is like everything else – you must do your due diligence and research to see if there is an opportunity for long term growth. I believe, ultimately there could be good growth if you are able to get a tenant to pay your mortgage without having to put too much personal money in as you get your money out of it once the property is sold plus the growth – the more money you have to put in, the less growth.

I am always amazed by the people who tell me that real estate is good for your taxes and that you can get excellent money out of it with very little risk. I’m sure it’s true sometimes but there are so many factors that must be considered when getting involved such as the economy, market conditions, liquidity, mortgage rates just to name a few – along with an ultimate factor that can be somewhat controlled, whether or not you get the “devil tenant”, in my opinion the number one obstacle to the creation of wealth using real estate.

What are your thoughts? is real estate still the be all and end all of investments or is it just like investing in everything else.

In my next post, I’ll talk about another investment – starting the small business.

There is a great misconception when it comes to tax deductions versus tax credits and I find this to be true whether one is dealing with a Canadian taxpayer or an American taxpayer. Every year, without fail, I will meet someone who expects to get money back because they donated for example or the person who thinks that his or her donations will reduce taxable income altogether.

In general, a deduction is used to lower income before it is taxed (deductions are applied before arriving at taxable income). A credit is applied to the taxable income. Often, a credit gets applied at the lowest tax rate. The credit that gets applied at the highest tax rate regardless of income is the donation. In Canada, donations worth more than $200.00 will earn a higher tax credit – generally the second highest tax bracket – unless you are in Trudeau’s 33% bracket.

Politicians of all stripes like to excite Canadians by announcing the dollar value of the starting point of a particular credit, not the real dollar value of the credit. For example, I will use the “Home Buyer’s Amount” that was announced as $5000.00 for the purchase of your first home. The way it truly works is $5000.00 x15% = $750.00 – please note that 15% is the lowest federal tax bracket.

If the Home Buyer’s Amount were a deduction instead of a credit (which it is not), an example could be this. If you are in the 26% bracket federally than you would save $5000x 26% = $1300 – please note that this would be the exact same result if the credit percentage were tied to the taxpayer’s bracket given in the example. In this case it would not matter if it were a deduction or a credit. It is important to emphasize here, however that most credits are based on the Lowest tax bracket which is currently 15%.

When politicians talk, they like to announce credits that they call often call tax breaks – but remember you have to spend the money first and than you get rebated a percentage back, as stated before, and this cannot be emphasized enough – at the lowest bracket, regardless of which bracket, you actually fall in, with a few exceptions. They have gotten away with this for a very long time. They take advantage of the situation, and sadly the situation is that most people do not understand the difference between a deduction and a credit, and they like it like that.

To add to it all – most credits are non-refundable which basically means that you do not get a credit out of the tax system unless you actually put into the tax system. We do have a few refundable credits where one can get a refund, even without putting into the system in the first place – these are few and far between such as the “Refundable Medical Supplement”. I will speak about these two types of credits in a different post using the classic tale of a welfare recipient who believes that donations do more than provide a warm feeling that you are contributing to society – the recipient who thinks he gets money back as a result of the donations.

If you are in the lowest tax bracket, this does not make a difference to you, but, if you are in any other tax bracket it should.