TAX QUIZ — THE ANSWERS
Here are the answers to the quiz.
1. One-half of a capital gain is taxable. That is, half of the gain is your “taxable capital gain”, which is included in income for tax purposes. Unless you do so much trading that you’re considered to be carrying on a business of stock trading, the $12,000 gain is a capital gain, and $6,000 will be included in your income and taxable.
However, all commissions you originally paid to buy the stock, as well as those you pay to sell the stock, are deducted when you calculate the gain. So if you paid $200 commission when buying the stock and $400 when selling it, your capital gain is actually $11,400, and the amount to be included in your income for tax purposes will be $5,700.
2. No. You have an allowable capital loss of $6,000 (one-half of the capital loss), or perhaps something like $5,700 if you paid commissions on the purchase and sale as in #1 above. However, you cannot use an allowable capital loss against employment income, or against any other income other than taxable capital gains.
If you had taxable capital gains in any of the previous three years, you can carry back your allowable capital loss and use it against those gains. If not, you can carry forward your allowable capital loss indefinitely, and apply it in any future year, but only against taxable capital gains.
3. No, but your spouse can deduct $8,000. Only the lower-income spouse can deduct child care expenses, and only to a limit of $8,000 per child you have under age 7 at year-end ($5,000 for each child aged 7-15 at year-end; $11,000 per severely disabled child), and only up to 2/3 of the lower-income spouse’s “earned income” (generally, income from employment or business). You yourself cannot deduct the expenses, because you earn more than your spouse.
Note that if you also had a 14-year old child needing no child care, your spouse would be able to deduct the full $11,000 paid to the nanny even though the nanny is caring only for the baby. The limits of $8,000, $5,000 and $11,000 per child apply based on the number of children you have, not based on which child is being cared for by the person(s) you are paying.
4. You can contribute $9,000 for 2019. That’s 18% of your 2018 “earned income” (if your 2018 earned income exceeded $147,222, the 2019 maximum limit of $26,500 would apply). You should find the contribution limit printed on your 2018 Notice of Assessment, which you should have received in spring 2019 after filing your 2018 return.
Note that if you are a member of a pension plan, this contribution limit is reduced by your “Pension Adjustment”, which is an amount that reflects the future value of your pension based on your employer’s current contributions. This appears on the 2018 T4 you received from your employer, and is also printed on your Notice of Assessment and available online from your CRA “My Account”.
Your contribution deadline for deducting an RRSP contribution is 60 days after the end of the year. But if you guessed March 1, 2020, then you’re not quite right. Since 2020 is a leap year, the 60th day is February 29, not March 1. But if you guessed February 29, you’re still not right. Since February 29, 2020 is a Saturday, the deadline is extended to the next business day, Monday, March 2, 2020.
If you do not contribute for 2019, your contribution room accumulates, and you can contribute (and deduct) the $9,000 in any later year, in addition to your contribution room for that year. So, for example, your $60,000 of employment income in 2019 creates a further $10,800 of contribution room for 2020 (18% of $60,000); and in 2020 (or by March 1, 2021) you can contribute and deduct up to $19,800 — the unused $9,000 plus the new $10,800.
5. No. You will be allowed to deduct only $17,500, or more likely nothing at all. If the farm is not operated in a commercial manner, then the CRA will take the position that the farm is just a hobby and not a real “business” (especially since the ongoing losses suggest you are not really trying to make a profit), and no deduction will be allowed.
Even if the farm does qualify as a “business”, the deduction is limited to $2,500 plus half of the next $30,000, total $17,500, as a “restricted farm loss”, unless you can show that farming, or farming plus your other job, is your “chief source of income”. Since you have a full-time job unrelated to farming, it is very unlikely you will be able to show this unless the farm generates significant revenues. Many such cases have gone to the Tax Court of Canada, and the taxpayer usually loses (though not always).
6. You must report the full $8,000 on your Canadian return and pay tax on it. However, you can claim a “foreign tax credit” for the U.S. tax. The foreign tax credit rules are complex, but most likely you can recover the full C$1,200 of U.S. tax as a credit on your Canadian return, since your Canadian tax on the $8,000 will be higher than $1,200.
7. Yes. On these facts, you will remain “resident in Canada” for Canadian tax purposes while you are in France. (The Canada-France tax treaty, like all of Canada’s 92 tax treaties, has rules to determine which of the two countries you will be considered a resident of, for tax purposes.) As a Canadian resident, you must file and pay tax on your worldwide income from all sources. However, you will be able to claim a Canadian foreign tax credit to reduce the “double taxation” effect of being taxed by both countries. (Before 2016, you might also have been able to claim the “Overseas Employment Tax Credit” to reduce your Canadian tax, but that no longer exists.)
8. You will add $3,000 to your income for tax purposes. You do not pay any tax on the gift. (Your aunt, however, will have a $15,000 capital gain, and thus a $7,500 taxable capital gain included in her income, from making the gift to you. When she makes the gift, she is deemed to have sold the shares at their current fair market value.)
When you sell the shares, you have a capital gain. The “cost base” of the shares to you for tax purposes is their value on the date you received them as a gift, of $20,000. So you have sold shares with a cost base of $20,000 for $26,000. This gives you a $6,000 capital gain, and half of that, or $3,000, is included in your income for tax purposes as the “taxable capital gain”. Of course, if you pay commission on selling the shares, that is deducted from the capital gain (as in #1 above) before you calculate the taxable capital gain.
9. Option (c) is the best, and option (b) is the worst.
Option (c) is the best because you effectively get to realize the capital gain on the Apple shares without paying any tax on it. Normally, if you give a gift of property, you are deemed to have sold the property at fair market value (as applied to your aunt in #8 above). But if you donate publicly-traded shares to a charity — including shares listed on most foreign exchanges — you do not have to recognize the capital gain. You get the donation credit for the full $5,000 value you have donated (likely worth about $2,500, depending on the province), without paying tax on the capital gain.
Option (a) is second-best. You get the donation credit for $5,000, but you still have the accrued capital gain on the Apple shares, and one day you will need to pay tax on it (or your estate will, if you pass away without ever selling or giving away those shares).
Option (b) is the worst option. Because you have owned the art for less than three years, its value for purposes of the charitable donation credit cannot exceed your cost (Income Tax Act subsection 248(35)). So you will get the donation credit for only $3,000 instead of $5,000, and the credit will be worth only about $1,500.
10.You can claim the medical expense credit for items (a), (d), (e), (f), (g) and (i). Crutches are an allowable expense. Marijuana is allowable, if you have a “medical document” for medical use of cannabis. Prescription glasses are allowable, even if they are sunglasses. Private health care plans, including travel plans and dental plans, qualify as well. And tutoring services for a person with a learning disability, where the need is certified by a medical practitioner, also qualify.
You cannot claim any amount for items (b), (c) and (h). Over-the-counter Tylenol and vitamins do not qualify even if prescribed or ordered by your doctor; drugs qualify only if they cannot legally be obtained without a prescription from a physician or dentist. And transportation qualifies only in limited circumstances—for example, if it is 40km or more where it is paid to a person carrying on a transportation business (such as a taxi) and equivalent medical treatment is not available locally.
The CRA’s Income Tax Folio S1-F1-C1, available on the CRA’s website, contains a detailed list of qualifying medical expenses.
For all expenses that exceed a threshold for the year, the medical expenses are worth about 22% of what you paid. (You get a 16% federal tax credit plus a separate provincial tax credit which varies by province.) The threshold for 2019 is $2,352 or 3% of your “net income”, whichever is less. (“Net income” is your total reported income minus most allowable expenses, though some deductions come later in calculating “taxable income”.) So you need to have substantial medical expenses before you cross the threshold and can start claiming the credit for additional expenses beyond that point.
Note however that the claim applies to expenses paid in any 12-month period ending in the year. On your 2019 return, for example, you can if you wish claim expenses paid from, say, March 5, 2018 through March 4, 2019. Thus, if you do not have enough expenses in one year to make a claim, you may still be able to combine those expenses with some from the following year to get some tax relief.