If you're employed as a musician and required to supply your own instrument, make sure you claim all the deductions you're entitled to. Check out tomorrowís KPMG Tax Tip.

Play It, Sam ó Itís Deductible

Artists ó Brush Up on Your Deductible Expenses

Unlike most employees, if youíre employed as a painter, author, actor dancer or other artist, you may deduct your expenses laid out to earn income from your craft. The deduction is capped at the lesser of 20% of your income from artistic employment or $1,000 less any auto expenses and musical instrument costs. If you have friends or relatives visiting from outside Canada, theyíll appreciate knowing that theyíre entitled to a full refund of GST paid on most goods they take back home with them. Find out more in tomorrowís KPMG Tax Tip.

Visitorsí GST Refund ó A Holiday Bonus

If you have friends or relatives visiting from outside Canada, theyíll appreciate knowing that theyíre entitled to a full refund of GST paid on most goods they take back home with them, as well as hotel accommodation while in Canada. Tell them to keep receipts and apply for their refunds at duty-free stores at many land border points (but not at airports) or once they get home. You should also point out that the rebate isnít available for alcohol or tobacco. Check out tomorrowís KPMG Tax Tip for an easy income-splitting technique.

Can Paying Taxes Help You Invest? KPMG Tax Tip
1997Oct27

Severance Pay?ó Itís Not All Bad News

If you lose your job, any severance pay, court award or settlement for wrongful dismissal you receive is treated as a ìretiring allowanceî for tax purposes ó and part or all of it can be transferred to an RRSP to shelter it from immediate tax. Up to $2,000 for each pre-1996 year of service can be rolled into your RRSP (plus $1,500 for each year before 1989 for which employer contributions to your pension plan have not vested). Because of a 1995 budget change, years of service after 1995 wonít count. If you are a member of a company pension plan, it is important to know how long it takes for your contributions to be ìvested.î Find out why in tomorrowís KPMG Tax Tip.

Pension Benefits ó Close to Your Vest?

If you are a member of a company pension plan, it is important to know how long it takes for your contributions to be ìvested.î Once they are vested, the pension you have earned becomes your own, and almost all employers will allow you to take the full pension benefits with you if you change jobs. On the other hand, if they are not vested, you get your own contributions back in cash when you leave ó but no pension down the road. The vesting of your pension benefits can be a major factor in career change decisions. Looking for Revenue Canada publications? Now theyíre at your finger tips. Check out tomorrowís KPMG Tax Tip.

Looking For Tax Info? ó Surf into Revenue Canadaís Net

Looking for a Revenue Canada form, guide or publication? Many of them are available on-line at Revenue Canadaís World Wide Web site: http://www.revcan.ca. Note that Revenue Canada wonít accept or send taxpayer communications over the Internet because of confidentiality and security concerns. If your company does business in QuÈbec and is subject to the provinceís required spending on manpower training of 1% of payroll, youíll want to be sure that your training costs are eligible ones. Find out more in tomorrowís KPMG Tax Tip.

Training Spotting for QuÈbec Employers

If your company does business in QuÈbec and is subject to the provinceís required spending on manpower training of 1% of payroll, watch out ó for some types of training expenses, you may need to take certain steps to make sure that they qualify as eligible expenses. For instance, certain training programs must be developed in consultation with an in-house training committee and in accordance with a company training plan approved by the committee. Since you wonít be able to fulfill these requirements after the fact, you should check to make sure your companyís training expenditures qualify now to avoid the denial of expenses and the need to pay further amounts into QuÈbecís special manpower fund. If your company is interested in providing its employees with a stock option or stock purchase plan, but is concerned about diluting the interests of the companyís existing shareholders, donít give up the ghost. Check out tomorrowís KPMG Tax Tip.

Decrypting Phantom Stock Plans

If your company is interested in providing its employees with a stock option or stock purchase plan, but is concerned about diluting the interests of the companyís existing shareholders, consider setting up a ìphantom stock planî instead. Under such a plan, instead of acquiring shares in the company, employees may receive bonuses based on the increase in value of the companyís shares. These bonuses are taxed as employment income as long as they are paid on an ongoing basis. Professional advice should be sought in designing such a plan to ensure that it does not constitute a ìsalary deferral arrangementî. If you receive a loan from a corporation of which you are a shareholder, donít forget that you can reverse the negative tax consequences when you pay it back. Check out Mondayís KPMG Tax Tip.

Self-Employed in Ontario? -- Hereís to Your Health

If youíre self-employed in Ontario, remember that Ontarioís Employer Health Tax exemption for self- employment income increased to $200,000 from $40,000 for 1997. You should reduce your semi-annual SEHT instalment due on November 15, 1997 based on the increased exemption. The exemption will increase to $300,000 in 1998, and in 1999 the SEHT will be phased out and replaced by the Fair Share Health Care Levy income surtax, which was incorporated into the existing surtax starting in 1996. If you own securities, you may be able to deduct some of your investment-related costs. Learn more in tomorrowís KPMG Tax Tip.

Deductible Carrying Charges Lighten the Load

If you own securities, you may be able to claim some of your investment-related costs as tax deductions known as carrying charges. Potentially deductible costs are fees paid for advice on buying and selling specific securities and fees paid for the management of the securities themselves. To qualify for the deduction, you must pay the fees to a person or corporation whose principal business is advising others on whether to buy or sell securities. Fees you pay for general financial counselling or planning advice or subscriptions to financial magazines and newspapers are not deductible. To deduct eligible investment counsel fees, you must own investments yourself. For example, the investments must not be in an RRSP or owned by your spouse. If you own a corporation and have children in university or college, thereís a way to finance your childrenís education that you may not have thought of. Learn more in tomorrowís KPMG Tax Tip.

Home-Made Student Loan

If you own a corporation and you want to lend money to your child for his or her education, you can arrange a loan from the corporation to the child. If the child does not repay the loan right away, it will be included in the childís income for that year, assuming you can show the loan was made by virtue of your stockholder status and not employee status. If the childís income is low, the loan amount will be taxed at a low marginal rate. If your child repays the loan later, the child can claim a deduction in the year he or she repays the loan. The repayment should be made in a year when the child has a high income to get the most benefit from higher marginal tax rates. If you have relatives who plan to give money to your children under 18 for investment, it make a difference where they live. Find out more in tomorrowís KPMG Tax Tip.

Gifts from Abroad Give More

If you or other members of your family give money to your children under 18 so they can invest it and earn income, the income from the invested money will be taxed in the hands of the person who gave it to the child, not in the childís hands. But if your children receive money from relatives who are not resident in Canada, investment income from that money is not subject to the same rules. Any gifts your child receives from relatives who are not residents of Canada should be kept in a separate account specifically for the child and invested for his or her benefit. Income earned from these investments will be taxed in the childís hands. If you realize you were entitled to a deduction or credit you didnít claim on a previous yearís tax return, is there anything you can do? Find out in Mondayís KPMG Tax Tip.

Forgot to Claim It? -- All is Not Lost

If you find a receipt for something you didnít claim on your tax return in the past, or you realize you were entitled to a deduction or a credit you didnít claim, it may not be too late. If you are entitled to a refund for a prior yearís taxes, submit your return if you didnít file one, or send your additional information to Revenue Canada. Generally, you can request a refund for the previous three years and you may be able to go back further under the provisions of the ìFairnessî package, which gives Revenue the discretion to open statute-barred returns in certain circumstances. Does your corporation have unused losses from previous years that are about to expire? Donít let them go to waste. Check out tomorrowís KPMG Tax Tip.

Canít Lose for Winning?

If your corporation has loss carry forwards which would otherwise expire this year, consider the use of loss utilization planning techniques to accelerate recognition of taxable income or to delay claims for expenses. This could involve something as simple as delaying claims for discretionary reserves until a later year to more sophisticated techniques such as moving up sales of inventory or assets to trigger capital gains and recapture. If you are a resident of Quebec and you adopt a child, be sure to take advantage of a special tax credit thatís available for your adoption expenses. Check out tomorrowís KPMG Tax Tip.

If you are a resident of Quebec and you adopt a child, be sure to claim the tax credit for court and legal fees, traveling costs and other adoption expenses on your Quebec tax return. The credit is 20% of up to $10,000, or about $2,000. Since the credit is refundable, itís available even if you have no tax to pay for the year. If you earn more than your spouse, itís probably more tax-effective for you to pay all the bills. Find out why in tomorrowís KPMG Tax Tip.

If you are a resident of Quebec and you adopt a child, be sure to claim the tax credit for court and legal fees, traveling costs and other adoption expenses on your Quebec tax return. The credit is 20% of up to $10,000, or about $2,000. Since the credit is refundable, itís available even if you have no tax to pay for the year. If you earn more than your spouse, itís probably more tax-effective for you to pay all the bills. Find out why in tomorrowís KPMG Tax Tip.

For More Investment Income, Donít Split the Tab

One of the simplest ìincome splittingî techniques for married and common-law couples is to make sure that groceries, mortgage or rent payments, credit card bills and all other daily living expenses are paid by the higher income-earning spouse. This will allow the lower-income spouse to maintain a larger investment base for earning future income that is taxed at a lower rate. If you use this technique, you and your spouse should have separate bank accounts into which you deposit your income. Using separate accounts will allow you to keep records to show that the earnings of the higher income spouse were used to pay the expenses. For cross-border shoppers and other travelers, tomorrowís KPMG Tax Tip will be of special note.

Cross-border Shoppers -- Come Home GST-Free

Cross-border shoppers and other travelers, take note: Although GST generally applies on goods imported from other countries, there is an exemption from GST that parallels the exemption for customs duties for returning residents after a period outside Canada - $50 of goods after 24 hours, $200 after 48 hours, and $500 after any 7-day absence. Do you spend a large portion of the year in the U.S.? Donít stay too long, or you might have to pay U.S. tax. Check out Mondayís KPMG Tax Tip.

Snowbirds - Fly Away Home

Snowbirds and others who sojourn in the U.S., beware: If you spend a large portion of the year in the U.S. (generally, 183 or more days in the current year, with a proportion of your time in the U.S. in the previous 2 years also counting toward this total), you may become a U.S. resident for tax purposes, although there are some exceptions to this rule. If you become an accidental U.S. resident, youíll be required to file a U.S. tax return and pay U.S. tax on your income from all sources, including Canada (except to the extent that you can claim foreign tax credits). The tax cost can be substantial. In limited circumstances, you can pay your older child to take care of your younger one(s), and deduct the cost. When? Check out tomorrowís KPMG Tax Tip.

Do-It-Yourself Job Creation Plan

If you have a child over 18 and one or more children under 18, consider paying the older child for looking after the younger ones. If youíre the lower-income spouse and if the baby-sitting and child care services permit you to earn income, the payments should be deductible as child- care expenses. Your adult child will have to provide you with a receipt and report the income for tax purposes. If youíre interested in ways to split income with your spouse or child, donít miss tomorrowís KPMG Tax Tip.

Invest Secondary Income For First-Rate Yields

If youíre in a higher tax bracket than your spouse or child, any plans you may have to ìsplit incomeî with your spouse or child by loaning or giving cash or other assets to them so they can invest probably wonít work - the tax rules will tax any income earned on any funds in your hands at your higher tax rate. After that, however, any income from that income (secondary income) will be taxed in your spouseís or childís hands at the lower rate since it is not income from the property that was originally transferred. Over time, a significant amount of such income can be built up. If you adopt this technique, be sure to maintain separate bank accounts and accurate records. If you receive Child Tax Benefit payments, think about depositing them to an account in your childís name. Find out why in tomorrowís KPMG Tax Tip.

If you receive Child Tax Benefit payments, think about depositing them to an account in your childís name. These deposits may add up to a significant investment over time and, since the anti-income splitting rules donít apply, any investment income earned on the funds will be taxed in your childís hands. You may wish to withdraw the balance from the account annually and purchase higher-yielding investments on your childrenís behalf. Changing your employment arrangement could boost your after-tax income. Check out tomorrowís KPMG Tax Tip.

Celebrate Your Own Independence Day

If youíre currently employed in a job where you have a fair amount of independence from your employer, see if you can change your relationship so that you become an independent consultant rather than an employee. Even though youíll lose some advantages (like the right to Employment Insurance benefits and probably your pension and drug plans), youíll enjoy a much wider scope for tax planning if you earn self-employment income. If youíll be celebrating your 69th , 70th or 71st birthday in 1997, youíll have to decide what to do with your RRSP before the end of this year. Whatís your best option? Find out in Mondayís KPMG Tax Tip.

Maturing Your RRSP -- Welcome to the New Age

If youíll be celebrating your 69th , 70th or 71st birthday in 1997, remember that youíll have to decide what to do with your RRSP before the end of this year. Thatís because the 1996 federal budget lowered the age limit for maturing RRSPs, registered pension plans and deferred profit sharing plans from 71 to 69 (with a yearís grace allowed for those who turned 69 last year). A straight withdrawal will rarely be your best option for maturing your plan, since you will have to pay tax on the total amount. Instead, if you wish to have some control over the investments, you should purchase a registered retirement income fund (RRIF). If youíd rather have a steady monthly income that you donít have to worry about, consider purchasing an annuity (being careful to arrange that the amounts paid out of the annuity do not put you into the high tax bracket). If you turn 69, 70 or 71 in 1997, and you have earned income in 1997 you can still use your RRSP to shelter some of it. Find out how in tomorrowís KPMG Tax Tip.

$100,000 Capital Gains Election ó Last Call

The $100,000 capital gains exemption for taxable capital gains was repealed in the 1994 federal budget. An election was available to claim an exemption against capital gains accruing to February 22, 1994, which could be filed up until the end of April 1997. If you filed an election and you want to change it, you have until the end of 1997 to do so. Penalties may apply if you increase the amount of the capital gain. Before doing so, you should conduct a cost-benefit analysis to assess whether the electionís future benefits outweigh the immediate penalty. If you receive Old Age Security benefits, you should be aware of a special tax that could reduce your benefits. See tomorrowís KPMG Tax Tip.

Seniors - Beware of the Claw

If you receive Old Age Security (OAS) benefits, do what you can to ensure that your 1997 income does not reduce your future OAS cheques. As a result of a special tax called the OAS clawback, a portion of your OAS benefits will be withheld from your OAS payments if your net income exceeds $53,215, and, if your net income exceeds about $85,000, the clawback will apply to 100% of your OAS benefits. To minimize the clawbackís potential effect, try to delay or defer recognition of income until 1998 where possible. For example, you may have Canada Savings Bonds that matured in 1997 and that have accrued a large amount of interest that has not yet been required to be reported. If so, consider waiting until 1998 to cash them in æ preservation of your OAS benefits may well outweigh the returns youíll forego by waiting a few months to reinvest the CSB funds. If you have large tax deductions to claim for 1997, such as RRSP contributions, tax shelter or limited partnership deductions, you could face alternative minimum tax. Find out more in tomorrowís KPMG Tax Tip.

Large Deductions? Watch Out for Alternative Minimum Tax

Did you make a large RRSP contribution this year, perhaps because of a severance pay rollover or a catch-up contribution? Did you realize a substantial capital gain? Do you have large tax shelter or limited partnership deductions in 1997? If so, watch out for alternative minimum tax (AMT). The AMT is an alternative tax calculation under which you must add back certain deductions and the untaxed one- quarter of capital gains. You then take a $40,000 exemption ($25,000 for QuÈbec purposes) and calculate your federal tax at 17% (20% in 1997 for QuÈbec purposes). You must pay the AMT if your AMT is higher than your regular tax. If you think you might face an AMT bill, you still have time to take steps to reduce the tax. If you have a retiring allowance you will be rolling over into your RRSP, you may be able to arrange to receive part of it this year and part next year, to split your deduction between two years. You may be able to split a capital gain in the same way between 1997 and 1998. Where possible, it could make sense in some situations to increase your income so your regular tax is at least as much as the AMT. Contact your KPMG advisor for more details. If youíre self-employed or you earn income from investments and youíre required to pay 1997 personal tax instalments, donít forget your final due date for 1997 payments. See Mondayís KPMG Tax Tip.