What tax write-offs should every midwife take advantage of to minimize taxes?

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Questions

Tags: Benefits Budgets Debt Financial Planning Investing Life Events Retirement Saving Taxes

What tax write-offs should every midwife take advantage of to minimize taxes?

Tagged: Benefits Taxes

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Writing off something on your taxes simply means deducting an amount -- permitted by the Canada Revenue Agency -- to reduce your taxable income. You can write off numerous items on your taxes, ranging from RRSP contributions to self-employment expenses.

Some tax write-offs also come in the form of nonrefundable credits, which reduce the amount of tax you owe directly. Tax write-offs are beneficial to you as a taxpayer because they can save you money on your tax bill.  The most common write-offs for midwives are as follows:

1. RRSP Contributions: Deductible RRSP contributions can be used to reduce your tax. Generally, any income you earn in the RRSP is exempt from tax as long as the funds remain in the plan; that said, you usually have to pay tax when you receive payments (withdrawals) from your RRSP.

Midwives can determine their RRSP contribution amounts for tax purposes from the receipts mailed to them by Morneau Shepell (for contributions prior to January 1st, 2015) and Desjardins (for contributions on or after January 1st, 2015). You should receive 2 receipts for each calendar year; one for the first 60 days and another for the remainder of the year. Contact the AOMBT if you are missing any receipts.

2. Medical Expenses and Health Premiums: Married or common-law couples are allowed to pool their medical expense claims together. Taxpayers claiming medical expenses should be sure to keep all receipts related to their returns. The expenses eligible for the medical expense credit are quite lengthy. Refer to IT519R2 (CRA website) for a complete list.

You can deduct the premiums you paid for health coverage. Midwives receive a receipt with premiums paid for the previous year every March.

3. Donations: The CRA allows a tax credit on charitable donations of approximately 21% for the 1st $200 (in Ontario) and 40% on amounts over $200, up to a maximum of 75% of net income.

Spouses can pool their contributions to maximize the tax break. Furthermore, contributions need to be included but not be claimed in the tax year they were made, but can be carried forward for up to five years. Donations under the $200 limit can be accumulated and claimed in later years to qualify for the higher credit allowance.

CRA offers a searchable database (http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html) of registered charities permitted to issue tax receipts.

4. Out of pocket expenses not reimbursed by the midwifery practice: According to the CRA, you can write off any reasonable expense you incur to earn business income (on the self-employment statement called T2125). This includes expenses such as:

  • Telephone
  • Internet
  • Courses/development
  • Accounting fees
  • Vehicle
  • Professional fees and memberships

If you are going to write off expenses on your taxes, it is a good idea to hold onto receipts for 7 years as the CRA may request them. The CRA also sets the requirements for each type of deduction and credit, which can be reviewed on their website: www.cra-arc.gc.ca. -S.M.

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I have heard I can access a first-time home buyer’s program. Can you tell me more about this?

Tagged: Benefits Life Events Taxes

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The Home Buyers’ Plan (HBP) allows you to withdraw up to $25,000 from your Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home if you have not owned a home in the past four years.

If, for example, in December 2007, you sold your home and moved into a rental property, you would be considered a first time home buyer eligible for the HBP as of January 2012, because you have not owned property for four years (January 1, 2008 to December 31, 2011). If you have a disability and are purchasing a home that is more accessible, you do not have to meet the first time buyer condition.   

If you are married or common-law, each partner is eligible separately for the HBP, allowing for a total withdrawal of up to $50,000.  

It is important to review your RRSP to determine the amount of funds available. The funds must be in an RRSP for at least 90 days prior to the withdrawal; therefore you need to plan your contributions to ensure you meet the time requirement. In other words, contributions made within the last 90 days are not eligible for withdrawal for the HBP.

You can withdraw from more than one RRSP, however funds cannot be withdrawn from a “locked in” RRSP. If you are a member of a group RRSP, you will need to check to see if withdrawals are permitted under that specific plan. 

Once you have signed your contract to build or purchase a home, you have one year to withdraw the funds and move into your home. Canada Revenue Agency form T1036 – Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP needs to be completed for each RRSP you are withdrawing from and needs to be approved and submitted to your RRSP provider.  It is very important to ensure you are eligible and meet all the conditions prior to making any withdrawals, otherwise the withdrawal from your RRSP could be considered ineligible and you may be penalized by CRA by being required to claim this withdrawal as personal income on your tax return. 

The amount of money that withdrawn must be repaid to your RRSP over a 15 year period, so if you took the maximum ($25,000) it will need to be repaid, at a minimum of $1,667 each year for 15 years.  Repayments begin the second year. If a payment is missed in a year, then the amount of the yearly repayment will be included in your income for the following year and will impact your RRSP contribution limit.

For complete details, see Canada Revenue Agency (CRA) Guide RC4135 – Home Buyer’s Plan (HBP).  You can access this guide from the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/rc4135/README.html www.cra.gc.ca.

There is also a First-Time Home Buyers’ Tax Credit of $750 for qualified home purchase and the conditions are similar to the HBP.  More details can be obtained from CRA website.

It is always recommended that you speak with a qualified accountant to review your situation to ensure you have considered all the facts and take advantage of any potential tax savings or deferral. - JR

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I am now 65 and I am not claiming CPP yet, am I paying more into CPP than the return I will receive when I do start claiming CPP?

Tagged: Benefits Retirement

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Working Canadians between the ages of 18 and 70 are required to contribute to the Canada Pension Plan (CPP) whether they are employees or self-employed. 

 

Some basic facts about CPP:

  • You can apply for and receive the full CPP retirement pension at age 65. Alternatively, you can receive it as early as age 60 with a reduction, or as late as age 70 with an increase.
  • If you become disabled and cannot perform the essential duties of any occupation, you and your children may receive a monthly benefit.
  • When you die, survivor benefits are paid to your estate, surviving spouse/partner and children.
  • Married or common-law spouses/partners may voluntarily share their CPP retirement pensions.
  • The CPP contributions you and your spouse/partner made while living together can be equally divided after divorce or separation.
  • If you continue to work while receiving the CPP pension, your contributions will go toward post-retirement benefits (see below), which will increase your retirement income.

Determining how much you will receive depends on the details of your situation. You can access the Service Canada calculator here: http://www.servicecanada.gc.ca/eng/services/pensions/cric.shtml

To understand the basic calculation, consider;

  • The maximum CPP received is 25% of the annual maximum pensionable earnings averaged over the past 5 years (for 2014 that is 25% of $49,840 = $12,460/year)
  • To calculate your rate of collection, it must be determined what % of the maximum you paid on average since you were 18
  • The average calculation allows for some ‘dropout’ periods (between 15-17% of the months you worked) to allow for under-employment or illness, for example.  A dropout of 7 years per child born is also allowed.

The most accurate method to find out your entitlement is to simply request a copy of your CPP Statement of Contributions that states your retirement pension estimate based on your past contributions. You can obtain this by:

  • Checking your online ‘My Service Canada Account’ OR
  • Mailing a request to Contributor Client Services, Canada Pension Plan, Service Canada, PO Box 9750 Postal Stn T, Ottawa, On K1G 3Z4  OR
  • Calling 1-800-277-9914.

When you are between the ages of 65 and 70, you can choose to opt out of paying CPP by completing form CPT30 with respect to employment income and by completing schedule 8 with respect to self-employed income.

If you continue to pay into CPP while a recipient, you are entitled to receive the ‘post-retirement benefit’  (PRB), which can help you estimate how much PRB is available the year following the year you make contributions..  Service Canada has an explanation of the PRB calculator at http://www.servicecanada.gc.ca/eng/services/pensions/cpp/prb/index.shtml.

For example, if you are an employee, with pensionable earnings greater than the annual maximum ($51,100 for 2013) for a deduction of $2,356.20, your increase in CPP received begins in 2014 and would break even at age 74.  That means that if you live to collect beyond the age of 74, you are better off to have continued to pay into CPP.  If you are self-employed and paying both sides of CPP, the break-even point goes up to over age 80 before you receive more than the extra you had paid in. - SM

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What is a Registered Disability Savings Plan?

Tagged: Benefits Saving

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A registered disability savings plan (RDSP) is a long-term savings plan intended to help parents and others save for the financial security of a person who is eligible for the disability tax credit.  The plan first became available to Canadians in 2008.

How it works:

Eligibility – the person who is eligible for the disability tax credit must be a Canadian resident, under 60 years of age and have a social insurance number. 

Establishment – A parent or legal representative may establish the plan on behalf of a minor. A disabled adult with mental capacity must establish the plan themselves.  A qualifying person can only establish and administer an RDSP on behalf of the beneficiary if they lack the mental capacity to do so themselves.

Tax Deferral – Income earned in the fund grows on a tax-deferred basis (similar to RESPs) so the tax on income earned is charged when the funds are withdrawn. The initial contributions to the RDSP are not tax-deductible, and as such are not included in income when paid out of an RDSP.

Contribution Limit – Contributions can be up to a lifetime limit of $200,000 but there is no annual contribution limit. Contributions can be made by anyone with the written permission of the plan holder as long as they are made before the end of the year the beneficiary turns 59.

Benefits – The government of Canada assists people to save in two ways;

  1. The Canada Disability Savings Grant, which matches personal contributions. The maximum grant of $3,500 annually is available to a maximum of $70,000 per plan.  For the first $500 contributed annually to the RDSP, the government will deposit $1,500.  For the next $1,000, the government will deposit $2,000. To qualify for the maximum match, the beneficiary must file personal tax returns and their family income (if over 19, theirs and their spouse’s) must be under the income threshold ($87,123 in 2013)
  2. The Canada Disability Savings Bond provides funding for people with low and moderate income levels, updated annually for inflation.  For 2013, if the beneficiary’s family income is less than $25,356, the government deposits $1,000 each year to the RDSP to a lifetime maximum of $20,000.  If income is between $25,356 and $43,561, then the government deposits a portion of the $1,000 into the RDSP.

Withdrawals – Payments to the beneficiary must begin when the beneficiary turns 60.  RDSP income will not affect entitlement to Old Age Security and GST credits.  In the event of the RDSP beneficiary’s death, the plan’s value is paid out to the beneficiary’s estate. If the RDSP has received government funding (through the Canada Disability Savings Grant and/or Canada Disability Savings Bond), some or all of the government funding may need to be paid back if withdrawals (either voluntary or due to death) are made within 10 years of the grant or bond received. 

RDSPs should not be considered an alternative to setting up a trust. To build a secure financial plan if you or someone you care about has a disability and qualifies, the RDSP is one vehicle to be added to a comprehensive plan including insurance products and trusts. - SM

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 As a midwife, what benefits will I be eligible for from the government after I retire?

Tagged: Benefits Financial Planning Retirement

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The government provides three potential sources of retirement income for the government - Canada Pension Plan (CPP), Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).  

If you have grown up in Canada, you are probably aware that the retirement age is 65 and this is the age when most people start to collect their CPP.  If you retire early, you have the option of taking a reduced amount at age 60. The reduction is up to approximately 32.5% depending on the number of years you choose to opt drawing CPP early. A newer option now available is the ability to defer taking your pension until you are 70, and you can increase your CPP by up to 42%.  In 2014, if you started receiving your CPP, the maximum is $12,459.96.  This is calculated on the average annual maximum pensionable earnings for the last five years.  Most midwives, for instance, if they have a full case load, would receive the maximum.  

Service Canada keeps a record of your CPP contributions and you can contact them to obtain a “statement of contributions” which will allow you to determine what income you will be from CPP.  You can either contact using “My Service Canada Account” or by calling 1-800-277-9914.  Be sure to have your social insurance number available when you call.  Obtaining a copy of this statement is good planning to ensure that Service Canada’s records accurately reflect your employment history.

The OAS is available to all Canadians who have lived in Canada for a minimum of 10 year since turning 18 and are over the age of 65.  Starting in April 2023, the age of eligibility will change from 65 to 67 over a six year period.  So if you were born in 1958 or later, this will impact you.  As with CPP, you have the option of delaying your OAS for up to 60 months after the age of 65, (there is no option to take it before turning 65). The benefit is up to 36% if you delay until age 70. The OAS in 2014 is $6,618.48.

The GIS is geared to lower income retirees and there is a maximum annual income qualification.  Most midwives would not likely qualify for this as there income would be too high.  

What factors do you need to consider when deciding when to take retirement pension income?  Some considerations include:

  • Am I planning to continue to work while receiving the pensions?
  • What my other sources of income are (RRSP, TFSA, investments, etc.)
  • What lifestyle do I want?
  • What is my current health status?
  • What are my income tax levels? 

If you want to start receiving your retirement income at age 65, you need to apply the month after you turn 64 as it takes approximately 11 months to process.  

The Government is making changes to the CPP, OAS retirement programs and if you are nearing retirement over the next 10 years, I recommend that you get advice early from an accountant or financial advisor to ensure you’re getting the maximum benefits and minimizing the income taxes you will pay. The total of OAS and CPP government payments in 2014 is $19,078.44. - JR

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