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Jamie Golombek: The restaurant didn’t include electronic tips in its CPP and and EI liabilities

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If you’re an employee who gets a regular paycheque, you’ll be very familiar with the concept of source withholdings, which reduces your take-home pay.

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Put simply, your employer is legally required to withhold and remit federal and provincial income tax to the Canada Revenue Agency, as well as Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums.

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Failure to withhold any of these can land an employer in hot water with the CRA, as one Nova Scotia restaurant recently found out. But before delving into details of the case, let’s review the basic rules governing CPP and EI deductions.

Under the CPP, the employer’s contribution is determined by applying a contribution rate to the “contributory salary and wages of the employee … paid by the employer,” less certain deductions. For 2022, employee CPP/QPP contributions are 5.7 per cent of earnings between $3,500 and $64,900, so the maximum amount of contributions for this year is $3,500. Employers are required to match employee contributions.

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For 2022, an employee’s EI premiums are 1.58 per cent of “insurable earnings” up to $60,300, so the maximum EI premium you may pay is $953. Insurable earnings are defined as “the total of all amounts, received or enjoyed by the insured person (i.e., employee) that are paid to the (employee) by the … employer in respect of that (insurable) employment.”

Under the EI Act, employers must contribute 1.4 times the employee premiums, or 2.21 per cent of insurable earnings, with a 2022 maximum premium of $1,334 per employee.

The recent case involved a popular, seaside restaurant in downtown Halifax that didn’t remit CPP and EI on part of its servers’ tips. Customers sometimes leave a tip in cash, which the servers are free to keep without advising their employer. Most customers, however, choose to pay their restaurant bills using a debit, credit or gift card, and include a tip in their electronic payment. The restaurant, in turn, shares these tips with its servers in a formalized, daily procedure.

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At the end of each shift, each server prints a “summary of sales” from the restaurant’s point-of-sale system. That summary shows each server’s food sales, beverage sales, cash received from patrons who paid in cash, electronic payments received and electronic tips. This info is used to prepare a “cash out sheet.”

On that sheet, the server records their electronic tips, the cash received, a kitchen staff “tip-out” (equal to one per cent of food sales), and an amount equal to two per cent of the electronic tips (the processing charge). The restaurant retains the tip-out to pass along to its kitchen staff and the processing charge to cover its credit-card fees. The net amount is the server’s “net electronic tip.”

If none of the server’s customers happened to pay their restaurant bills in cash that day, the restaurant simply transfers an amount equal to the server’s net electronic tip to the server, typically the next business day, via direct bank deposit. This is known as the “due-back.”

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In some circumstances, a server’s due-back is less than the server’s net electronic tip. This happens when a restaurant customer pays in cash, which the server retains and is taken into account in calculating the due-back. In these cases, the server’s net electronic tip is partially received in cash (from customers’ payment of their restaurant bills), and partly from the due-back received from the restaurant itself.

At the end of each shift, each server also prepares two envelopes in which they place cash to “tip out” the onsite restaurant manager and assistant manager — two per cent — and the support staff (bussers, hosts/hostesses and bartenders) at one per cent per support staff person (to a maximum of three per cent).

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Each server delivers their summary of sales, their cash out sheet, and the two envelopes to the onsite manager at the end of their shift who later distributes the cash tip-outs to the restaurant managers and support staff. The sales summary and cash out sheet were set aside and picked up the next morning by someone from accounting to facilitate payment of the servers’ due-backs.

The restaurant took the general position that due-backs received by servers were not considered to be “pensionable salary and wages” for purposes of CPP rules, nor “insurable earnings” for purposes of the EI Act. As a result, when it calculated its CPP and EI liabilities for 2015, 2016 and 2017, it did not consider any portion of the electronic tips.

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Needless to say, the CRA took a different view and assessed the restaurant on the basis that a portion of the servers’ electronic tips for 2015, 2016 and 2017 should have been considered. The taxpayer took the matter to Tax Court in 2020 and lost. It then appealed the decision to the Federal Court of Appeal (FCA), which heard the case earlier this year.

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The key question the court had to decide was whether the due-backs were properly considered to be amounts paid by an employer to employees “in respect of” their employment. The restaurant argued the due-backs are not paid in respect of a server’s employment and are not insurable earnings because a server’s due-back bears “little or no relation to the server’s net tip. It is simply the difference between cash payments for meals and electronic tips owing.”

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The three-judge appellate panel disagreed, citing a seminal 1983 decision of the Supreme Court of Canada, which stated that the words “in respect of” have “wide scope and import such meanings as ‘in relation to,’ ‘with reference to’ and ‘in connection with.’ In other words, “but for” their employment as servers by the restaurant, the servers would not receive any tips paid to them in the form of due-backs.

The FCA, in a written decision released last month, concurred with the lower court’s decision, and concluded the due-backs were “contributory salary and wages of the employee paid by the employer” for purposes of the CPP and “insurable earnings” for purposes of the EI Act.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Jason Heath: There are ways to pay less tax during your working years and in retirement

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Canadians file individual tax returns and pay tax at progressively higher rates as income increases. Some countries, such as the United States, allow couples who are married and who file jointly to save tax if one spouse earns significantly more than the other and their incomes are combined. While Canada’s laws on income splitting are not as generous, there are a few strategies that taxpayers here who are single, married or have children can pursue to split income and lower their tax bills.

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Self-employment strategies

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Taxpayers who work for themselves have unique opportunities to split income that are not available to employees. For one, they can employ family members and pay them a tax-deductible salary. This can be advantageous when they have family members whose incomes and tax rates are lower. A taxpayer can deduct the salary from taxable income just like other business expenses.

A salary paid to a spouse or child is deductible if it meets three conditions. First, the salary is actually paid to them. The work they do must also be necessary for earning the business income. Lastly, it must be reasonable given their age, and in line with what you might pay someone else. The salary should be reported on a T4 slip just as you would for another employee.

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Business owners can split income with a corporation by incorporating their business. When a corporation earns income, you only pay personal tax on the income that is paid out personally as either a salary (as an employee) or as a dividend (as a shareholder). Business income that is left in a corporation and not withdrawn from personal use is only subject to corporate tax.

Small business income tax rates for a corporation range from 10 per cent to 12.2 per cent depending on the province or territory. By comparison, the top personal tax rate in Canada is as high as 54.3 per cent. This means when you split income with a corporation, you can defer up to about 40 per cent tax on that income. This higher after-tax income can be used to reinvest in the business or to invest in stocks, bonds, mutual funds, exchange traded funds, real estate, or other investments in a corporate investment account.

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Until 2018, it was possible for business owners to split income with adult family members by paying them dividends on shares they owned of a corporation. Beginning that year, tax on split income (TOSI) rules came into effect and made it more difficult to pay dividends to family members. Split income paid from a corporation is taxed at the highest tax rate unless certain criteria are met. One of the most common exceptions is when a family member who owns shares of the corporation works at least 20 hours per week on average for the company. In this case, dividends can be paid to them and taxed to them without the punitive TOSI rules applying.

Pension planning

Workers with pensions can split their eligible pension income with their spouse or common-law partner in retirement. However, there is a difference between defined-benefit (DB) and defined-contribution (DC) pension plans.

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Workers with DB pensions that receive a calculated monthly benefit in retirement can split up to 50 per cent of their pension with their spouse or common-law partner on their tax return. The amount can change from year to year and the ability to split income can help a couple to pay the least amount of combined tax.

Workers with DC pensions that invest in mutual funds to provide a future retirement income have restrictions on their ability to income split. If the DC pension is used to buy an annuity or provide another lifetime retirement benefit, the income may be eligible to split with a spouse or common-law partner without restriction. Otherwise, a DC pension must be converted to a life income fund (LIF) or locked-in retirement income fund (LRIF) depending on the federal or provincial pension legislation for the plan. Although withdrawals can generally be taken from a LIF/LRIF at 55, the income cannot be split with a spouse or common-law partner until the accountholder’s age 65.

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Workers who contribute to the Canada Pension Plan (CPP) can apply for a retirement pension as early as age 60. CPP allows a recipient and their spouse or common-law partner to apply to split their pensions by completing a CPP pension sharing form. The CPP earned by the couple based on contributions made during the years they lived together will be divided equally between them. This may result in tax savings if there is an income differential.

RRSPs and RRIFs

Like DC pensions that are converted to LIF/LRIF accounts, registered retirement savings plans (RRSPs) that are converted to registered retirement income funds (RRIFs) do not qualify for pension income splitting until the year the accountholder turns 65. RRSP withdrawals do not qualify for pension income splitting unless the account is converted to a RRIF either.

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RRSP contributions provide a method to split income today and in the future. If spouses have a significant difference in incomes, RRSP contributions should be made by the higher income spouse. RRSP deductions will reduce the higher income spouse’s income and leave the other spouse’s income to be taxed at a lower tax rate. One exception to this rule could be if the lower income spouse has a matching contribution for a group retirement plan with their employer. The benefit of the match may exceed the tax differential between the spouses.

If a couple is concerned about having all the RRSP assets in one spouse’s name, the higher-income spouse can contribute to a spousal RRSP for the other. A spousal RRSP is an RRSP that one spouse contributes to but is owned by the other spouse. The spousal RRSP owner can take withdrawals in the future that are taxable to them, subject to a three-year time limit that may cause withdrawals to be taxable to the contributor.

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Non-registered investments

If someone has maxed out their RRSP and tax-free savings account (TFSA), there may still be income-splitting options to consider. If married, the higher-income spouse’s income can be used to fund living expenses while the lower-income spouse saves some or all of their income. By having the lower-income spouse build non-registered assets, the investment income will be taxable to them at their lower tax rate.

A higher-income spouse cannot just give money to a lower-income spouse to invest to save tax. The income and capital gains would be subject to attribution and taxable back to the gifting spouse.

Money can be loaned to the lower-income spouse to invest as long as the loan is made at the Canada Revenue Agency (CRA) prescribed rate in place at the time of the loan. That rate is currently two per cent, but is set to rise to three per cent in the fourth quarter of 2022.

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Money can be gifted to a minor child to invest and only the income (interest and dividends) is taxable back to the parent. The capital gains, however, are not taxable to the parent and can be realized in the child’s name. If a child has no other income, capital gains between $16,962 and $28,796 can be triggered tax free each year.

Taxpayers with significant non-registered assets into the hundreds of thousands of dollars could consider establishing a discretionary family trust. By loaning money at the CRA prescribed rate to a family trust with children, grandchildren or other family members as beneficiaries, income can be shifted to those with lower incomes, some of whom may have little to no income or tax to pay.

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Summary

There are ways to pay less tax during your working years and in retirement. It may be easier to split income for those with a spouse or children, but even single people with no kids of their own may have options to consider.

You can only spend or save what you keep after tax, so by considering ways to legitimately lower your tax payable, you can become more financially independent or have more money to provide for your family.

Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. He can be reached at jheath@objectivecfp.com.

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Clearly articulating your gifting and estate-planning goals may improve your retirement journey

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Retirement is complex because it represents a big change. In contrast to working years, a common goal is to make the most of time — a resource we don’t know how to use when we retire, because we are not used to having it in abundance — versus maximizing wealth. To further complicate matters, retirement isn’t just a single phase. It’s often thought of as three self-explanatory stages: the go-go years, the slow-go years and the no-go years.

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In the go-go years, you will be active, healthy and your engagement with hobbies, friends and family will be paramount. The slow-go years start as your health begins declining and you find growing comfort in predictability and routines. This is where estate planning is typically cemented. In the no-go years, we rely on support, either from the community, the health-care system, family or all three.

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Fortunate baby boomers will find themselves navigating these stages with more wealth than they will consume in their lifetimes. This means supporting family and charities enters the goal set in a meaningful way.

A common decision retired parents may face at this time is finding a balance between supporting children while keeping peace in the family. Many of my retired clients want to help their children get established in our unaffordable housing market and they find it surprising how carefully we have to navigate such discussions because children will view whatever you do subjectively. In my experience, what is equal isn’t always fair and what is fair isn’t always equal.

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By the very nature of children being different — in age, interests, career choice — you have to consider treating them differently to provide bespoke support. However, that’s also the reason why they may feel they weren’t given the same advantages as their siblings.

A classic hypothetical example is a household with two children: the eldest child is a lawyer and the youngest child is an aspiring artist. Supporting the lawyer might entail contributing to expensive post-secondary schooling followed by down-payment gifting. For the aspiring artist, support might be allowing them time to get professional traction before they are ready to take on the commitment of a mortgage (the more time they take, the less affordable the housing market may get).

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It could be argued that it can be balanced out in the will, but they likely won’t see it that way. The subjective view of being treated unfairly can brew resentment. Even though it might even out in the end, the fact that one child received their support many years later is enough for the other to see it as unfair.

How do you diffuse this? Dialogue. Retired parents can be well served by explaining to their children that their intention is to support them equally and fairly. Simply acknowledging this is your goal and intention can go a long way in preserving family unity.

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Another good approach is to consider including children in charitable-giving decisions. By empowering children with a voice and a vote in decisions that relate to family wealth, the playing field can be levelled in their otherwise subjective minds.

It can also help you get a better sense of the power dynamic between children and how they will arrive at decisions — by consensus, majority or divide and conquer. It may also give you a glimpse into how the debate might go over your estate.

The role of your wealth adviser is to guide you through this process and help navigate these uncharted stages of retirement so that you may benefit from the experience of approaches that work well. By clearly articulating your gifting and estate-planning goals, you may improve your journey and, hopefully, increase your odds of a legacy of family unity.

Ethan Astaneh is a wealth adviser and client relationship manager at Nicola Wealth Management Ltd. Nicola Wealth is registered as a portfolio manager, exempt market dealer, and investment fund manager with the required securities commissions.

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Adding a child’s name to your assets won’t accomplish your goal of reducing capital gains tax

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By Julie Cazzin with Andrew Dobson

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Q: My wife Ava and I are in the process of gifting some money to our only child, Marlena. I know that in Canada I can do this tax free. But what are the consequences of adding Marlena’s name to the title on our principal residence, small rental property and cottage, as well as all our bank accounts? All three properties were purchased in the 1970s so there’s a hefty capital gains tax to be paid when we sell or die. We’d like to avoid this if possible. Marlena is 60, single and has one child, our grandson Henry. Is this a good way to save on paying capital gains tax? If not, what are some other ways we can avoid a big capital gains tax bill when we die? — Henry

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FP Answers: There are several factors to consider when determining potential strategies to minimize tax. First, the principal residence exemption may allow you and Ava to avoid paying capital gains tax on some of the real-estate appreciation. The principal residence exemption allows a tax-free capital gain on a property you ordinarily inhabit. It does not need to be your primary home. It can be claimed for your cottage. But since most people’s homes are more expensive than their cottage, it is uncommon to claim it on a secondary property.

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A couple can only have one principal residence between them, and one principal residence exemption claim in a given year. Since all three properties were purchased in the 1970s, claiming the exemption on your home will likely cause your cottage to be fully taxable.

The capital gains tax was not introduced in Canada until 1972, so only appreciation from 1972 onwards would be taxable. There used to be a $100,000 lifetime capital gains election, and, in 1994, many cottage and rental property owners bumped up the adjusted cost base of their properties to use some or all of that exemption. If you did, that may reduce some of the capital gain on your other properties.

The principal residence exemption is claimed when a property is sold. If you transfer a property to a family member, that is considered a deemed disposition, as if you sold the property. The same disposition occurs at death when you are deemed to have sold all your assets. Transferring an asset to a family member takes place at fair market value, so you cannot gift it or use an artificially low value to avoid taxes.

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You may be able to get creative and transfer partial ownership each year for a number of years to your daughter to have small capital gains and keep your income in a lower tax bracket. But if you add Marlena to the title on your properties, there could be other issues related to the principal residence exemption.

For example, if you add Marlena to the title on your principal residence today and the value increases from now until you die, there may be tax to pay on the accrual of her share of the value from when she was registered on the title to when the property is sold.

If you live in a province where probate fees are high, joint ownership with your daughter may help avoid some probate costs by virtue of your share of the asset passing on to Marlena by rights of survivorship.

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With real estate, there may not be much logistical advantage to owning them jointly. If Marlena is the executor for your estates, she may still be able to enter the home, gather an inventory of items, and even list the property for sale without owning the property. Though it could take several months for the probate process to be finalized, she may not necessarily have that much more flexibility by inheriting the home through rights of survivorship than being the beneficiary of the will.

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With bank accounts, you may be susceptible to several risks if you add Marlena to these accounts. She would have full access to these funds as a joint account holder. Also, just like other assets such as your real estate, if Marlena is subject to a lawsuit or gets into a relationship and has a family law dispute, these joint assets could be subject to claims. If you have non-registered investment accounts and add your daughter’s name to them, it could result in a deemed disposition and capital gain on a portion of the investments.

Before adding Marlena’s name to any of your assets, please consider that the risks may outweigh the benefits. Talk to your accountant and estate lawyer to get their input. Given your primary motivation seems to be avoiding capital gains tax, adding your daughter’s name to your assets will unfortunately not accomplish that goal.

Andrew Dobson is a fee-only/advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc.

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Jamie Golombek: Judge reminds CRA it can’t second-guess a business’s marketing strategy in this case that involved a boat

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If you’re a business owner who has incorporated your business or an incorporated professional who operates their practice through a professional corporation, it can be quite tempting to have your corporation pay for all kinds of personal expenses.

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But if those expenses aren’t legitimately incurred for the purpose of earning income, they could be non-deductible to the corporation and you could get personally assessed a shareholder benefit by the Canada Revenue Agency (CRA) for appropriating corporate funds for personal use, rather than extracting them first on a taxable basis as either a salary, bonus or dividend.

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Similarly, you can also be assessed a taxable shareholder benefit for the personal use of a corporate-owned asset. That’s exactly what happened in a recent tax case involving a Vancouver Island couple, their corporation and the use of a boat.

The sole issue in the case was the value of the personal shareholder benefit, in the 2013 and 2014 taxation years, for their personal use of a boat owned by their corporation. The boat was primarily used by the company to market its marina, fuel and provisions to boaters in the region.

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Over the course of five decades, the couple, through their corporation, developed a “successful, substantial” marina business on the island that provided a diversified range of goods and services to a large, but remote group of small communities, mostly near the water’s edge, on the islands north of Vancouver Island.

“It might not be hard to picture their region, community and commercial activities appearing in a Canadian TV documentary on a documentary channel, providing the context for a Canadian reality TV show on History channel, or providing a locale for a sequel to Corner Gas or a remake of The Beachcombers,” the judge said.

The couple operated their business together. The husband did all the steering of the boat, and his wife acted as a bookkeeper, paying suppliers and balancing bank statements. Today, the business is mostly run by the couple’s children and their families.

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The tax authority has no business telling a businessperson how to run that person’s business

Tax Court Judge

The boat at the centre of the tax dispute is a 36-foot pleasure craft. Its primary business use was to market the marina directly to boaters visiting, residing or working in the region. This was done by taking the boat out to meet boaters at all the other smaller marinas in the region, or in the bays where they were moored.

It was also used to engage with other local marinas, and their owners and operators, as well as their clients. This was typical direct personal marketing. Many of these other boaters were already users of their marina given its size and location, and those who weren’t were bona fide potential clients.

The boat was also used to travel to, attend and entertain at boat shows in British Columbia and Washington, which the couple considered key to their business and at which they rented booths for their marina.

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The couple did not own a boat before they bought the marina, have never taken the boat on any excursions, “not even short ones,” as they could not leave their daily business responsibilities during the boating season. When they did their marketing travels in the boat to other marinas and moorings, they did so mostly in the evenings, after their normal workday responsibilities.

Their marketing trips proved very successful as the marina’s mooring and fuel revenues increased each year. Their marketing was described as “creating opportunities to socialize with clients and potential clients, dining at other marinas with them, entertaining them on the … (boat), and generally chatting up boating in the region and their marina and facilities.”

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The boat was also used in other aspects of the business for incidental transportation, such as delivering parts to commercial entities in the region. Personal use of the boat was “very occasional, less than a half-dozen times.” For example, they occasionally took friends or family out for whale watching in the harbour immediately in front of the marina.

In each of the two tax years under review, the couple recorded and paid $18,000 to their corporation for their personal use of the boat. This was done in consultation with their accountant, and the couple thought that this amount was “a conservatively high amount in the circumstances.”

The court found that the personal use of the boat was minimal and in the range of five per cent. In other words, substantially all of its use as a boat was for bona fide business purposes. Even though a benefit was enjoyed by the couple’s limited personal use of the boat, it was accounted for and this amount was within range of a reasonable fair market value.

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The CRA had questioned the “marketing” activities of the couple, suggesting there was a personal element to the marketing that needed to be taken into account when valuing the personal shareholder benefit.

The judge disagreed, saying the “CRA has not been allowed by the courts to simply second-guess a business’s marketing strategy or efforts.” Citing prior jurisprudence, “The tax authority has no business telling a businessperson how to run that person’s business … A business may opt to advertise an activity in which its owner … has a keen interest or a degree of personal satisfaction. There is no reason why the expense of a particular form of advertising should be disallowed by the (CRA) solely because of the owner’s interest, satisfaction.”

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The judge said the couple’s marketing activities on the boat were “bona fide and primarily undertaken for business purposes,” and that the expenses were reasonable. The only thing left to decide was whether the couple’s personal use was properly accounted for. The judge concluded that given their personal use of the boat was in the five-per-cent range, the $18,000 they annually paid to the corporation for personal use was reasonable and no shareholder benefit ought to be assessed.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Jamie Golombek: A Federal Court of Appeal decision in June dealt with the tuition carryforward rules under some interesting circumstances

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Students are preparing to head back to school so it’s a good time to walk through the basics of the federal tuition tax credit for postsecondary education and look at an unusual recent tax case involving the tuition carryforward rules.

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The tuition tax credit for post-secondary education is a federal non-refundable credit for the cost of tuition fees (tax credits for education and textbook amounts were discontinued as of 2017). Since the credit is non-refundable, some students may find they don’t need to claim all of it to reduce their income tax to zero since their taxes owing on minimal income from part-time or summer employment may be fully offset by the enhanced basic federal tax credit ($14,398 for 2022).

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Students who don’t use their full tuition credit have a couple of options. They can either transfer the unused amounts to a spouse or partner or (grand)parent, or carry forward unclaimed amounts (including any education and textbook amounts prior to 2017) indefinitely. The individual claiming the transferred credit, such as a parent (which includes a natural parent, step-parent, adoptive parent or even a spouse’s or partner’s parent), need not be the one who paid the tuition.

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The maximum amount that can be transferred is $5,000 less the amount of tuition for the current year that is claimed on the student’s return. In addition, amounts carried forward from previous years must be used by the student before the current year’s amounts, and any carried-forward amounts that are not completely used by the student in the current year can only be claimed by the student in a subsequent year and cannot be transferred.

The case

A Federal Court of Appeal decision in June dealt with the tuition carryforward rules, albeit in a very unique set of circumstances. A former student was appealing a 2020 decision of the Tax Court that denied him the tuition carryforward credit.

The person is now a tax lawyer who lives in Calgary, having immigrated to Canada from the United States in 2012. From 2002 to 2011, he attended university on a full-time basis in the U.S., starting at the University of Pittsburgh, followed by law school at Duquesne University, and then earning his master’s degree in tax at the University of Florida.

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He paid tuition totalling a little more than US$159,000 during this period, which, using historical Canada-U.S. exchange rates, amounted to $179,000 of tuition in Canadian dollars. The universities provided him with signed copies of Canada Revenue Agency Form TL11A Tuition and Enrolment Certificate – University Outside Canada, which is used to certify eligibility for claiming tuition fees of a student attending a university outside Canada.

After immigrating to Canada, he filed Canadian income tax returns for the 2002 to 2011 tax years. All these tax returns were filed after he became a resident of Canada even though he was neither a resident of Canada nor a deemed resident of Canada from 2002 through 2011. These returns were assessed (and reassessed) by the CRA on the basis that he had no tax payable in Canada.

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When filing his 2012 Canadian tax return, which was the first year he was considered a tax resident of Canada, he claimed his unused tuition tax credits carried forward based on the tuition paid to the U.S. universities from 2002 to 2011 when he was not a Canadian resident and had no source of income in Canada.

The CRA reassessed him for his 2012 taxation year to disallow the claimed tuition tax credits and to reduce his tuition tax credit carryforward amount to zero. He appealed this reassessment to the Tax Court of Canada, which heard the case in 2020.

The issue before the court was whether he should be entitled to a tuition tax credit in each of the tax years from 2002 through 2011 because of tuition paid to universities in the U.S. in those years. These credits, he believed, resulted in him having an unused tuition tax credit balance at the end of 2011 that he could then deduct in computing his tax payable in 2012 and subsequent tax years once he became a resident in Canada.

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The question came down to whether the tax rules governing tuition and tuition carryforward credits apply to all non-residents (as he argued) or only to those non-residents who are considered taxpayers in the years for which tuition is paid and for whom that year is a taxation year (the CRA’s position).

The CRA argued that when a non-resident individual is not required to file an income tax return for a particular year, because that individual was not employed in Canada, did not carry on business in Canada and did not dispose of taxable Canadian property, that individual is simply not considered a taxpayer for purposes of the Income Tax Act, and, therefore, that year is not a taxation year of that individual.

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Consequently, the individual is neither required, nor even able, to compute their tax payable the same way a Canadian resident taxpayer would. As a result, even when a non-resident pays tuition to an eligible education institution for that year, that individual has no tuition tax credit for that year and no unused tuition tax credits at the end of that year to carry forward.

After a detailed and lengthy legal analysis, the Tax Court judge agreed, concluding that because the tuition credit rules require an individual to be a student during a taxation year to claim a tuition credit, a student is not entitled to a tuition tax credit in any year that is not a taxation year.

Put another way, because the person in question here was not considered to be a taxpayer in any of the years from 2002 to 2011, none of those years was a taxation year for him. Accordingly, he had no tuition tax credits in any of those years, and had nothing to carry forward to deduct against his tax payable in 2012.

In June 2022, a three-judge panel of the Federal Court of Appeal, in a short, three-page decision delivered from the bench, dismissed the former student’s appeal, finding the Tax Court’s 2020 decision to be correct.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Lifestyle planning should be the first step in your overall plan so you can have a good life both now and in the future

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By Julie Cazzin and Allan Norman

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Q: My spouse and I are doing some retirement planning and running some projections on future income in retirement. But we’re wondering what happens to Canada Pension Plan (CPP) and Old Age Security (OAS) payments in retirement when a spouse dies? Any info would help. — Thanks, Fernando

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FP Answers: Retirement planning often revolves around a couple living a healthy active lifestyle and then dying around age 90 or 95. But what happens when a spouse dies early or becomes disabled? Dreams die and finances change.

I’ll share two personal experiences with the hope that you can use them in your own life and planning so you never get to a point where you look back and think, “Rats! If I had only known, I would have travelled to … or retired earlier or …”

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Four years ago, my wife Caroline went out for a morning run and returned home with a brain injury and now, among other things, she can no longer drive or comfortably travel in a moving vehicle for more than 10 minutes. She can’t travel. As long as I’ve known my wife, she has always wanted to follow in her mother’s footsteps and spend her winters in Florida. She may never get to Florida again.

We could have taken more trips to Florida when she was fit and able, but we didn’t. There was always a reason to put it off until next year, or someday down the road. We lived like we had all the time in the world.

But time doesn’t stand still and the older we get, the faster time flies by. There are no do-overs, and there comes a time when we can’t do what we used to do and, eventually, we die. It’s a fact that shouldn’t be forgotten when thinking about the things you want to have and do. What’s your reason for not doing them today?

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Your planner should be helping you identify, achieve and maintain your desired lifestyle without the risk of you ever running out of money, or dying with too much money. You want to have a good life now as well as a good life in the future. This is lifestyle planning, the first step in an overall plan.

Here’s another personal example. Six years ago, I lost my mom. I asked my dad what the financial consequences were for him when mom passed. Mom’s OAS benefits stopped. There are no survivor benefits associated with OAS. My dad also lost his OAS due to the clawback tax rules.

As a couple, mom and dad were able to split their pension income. Once mom passed, dad wasn’t able to split his pension income anymore, resulting in 100 per cent of his OAS being clawed back. Mom was a stay-at-home mom and had a small CPP pension. Dad didn’t get any of her CPP pension.

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I find a lot of people are under the impression that if their spouse passes, they’ll receive 60 per cent of the other’s CPP benefits. But CPP is not like a traditional defined-benefit plan. A CPP recipient can only receive the maximum CPP. My dad was already getting the maximum CPP, so he wasn’t eligible to receive any of my mom’s CPP. He did, however, receive the one-time $2,500 CPP survivor death benefit.

The other thing dad pointed out was that the company he worked for provided a defined-benefit plan. He took a reduced pension when he retired so that if he died first, mom would continue to receive a portion of his pension. Well, mom died first and he’s still taking a reduced pension for a benefit mom will never receive.

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    FP Answers: How should I make up the $1,278 a month that I need to live comfortably in retirement?

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As for dad’s expenses, he didn’t find they dropped much. Grocery costs are a bit lower and now there is one car in the driveway rather than two. My dad’s suggestion to anyone who has lost a loved one is to stay active and continue doing things. Instead of dad taking mom to a play or an Ontario Hockey League game, he would call a friend or acquaintance to go with him.

And how’s dad doing now? About two years after my mom’s passing, he met a wonderful life companion and, at age 84, he just arrived home from a river barge cruise in Southern France. He’s staying active, and he’s back travelling again. He is living a full life and making the best use of the time he has left.

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I know most people are busy, routines are hard to change and very few people know what they want. Start by thinking about your current lifestyle. What would you like more of?  What would you like less of? Remember that life is not a rehearsal. What are you waiting for?

Allan Norman, M.Sc., CFP, CIM, RWM, provides fee-only certified financial planning services through Atlantis Financial Inc. Allan is also registered as an investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is provided as a general source of information and is not intended to be personalized investment advice.

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It’s possible that you may qualify for a minimal amount from the Guaranteed Income Supplement

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By Julie Cazzin with Brenda Hiscock

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Q: I’m a 68-year-old retired teacher with a small pension. My assets include $69,000 in registered retirement savings plans (RRSPs) and $34,000 in a tax-free savings account (TFSA), and it’s mostly in cash. I also have $150,000 to invest right now from the recent sale of a property. It’s sitting in cash in an unregistered investment account. My monthly income includes $800 from my teacher’s pension, $780 from Canada Pension Plan (CPP) and $642 from Old Age Security (OAS).

I need about $3,500 monthly to live comfortably. I own half a condo with my daughter, Madeleine, and we are mortgage free. The condo is worth $450,000 (my half is $225,000) and we plan to live here together throughout my retirement years. How should I make up the extra $1,278 monthly that I need to live comfortably? And how should I invest my RRSP, TFSA and other money so I can draw the needed money without running out? — Thanks, Cali

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FP Answers: Cali, right now, you’re earning $26,664 annually in taxable income including OAS. I’m not sure what province you are in, but you are paying the lowest possible tax rate at that level of income.

Based on these figures, it’s possible that you may qualify for a minimal amount from the Guaranteed Income Supplement (GIS) now or in the future. To qualify for the GIS, your income excluding OAS must be below $20,208 if you’re single, widowed or divorced. This benefit is proportional to your income, non-taxable and paid monthly to low-income seniors. You should check your eligibility each year.

Given that you are so close to the maximum income, the amount you may receive, if any, would be very small, and won’t change the outcomes of my calculations below in a material way.

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Cali, you have $69,000 in RRSPs as well as some unused RRSP contribution room. Unfortunately, there wouldn’t be any tax benefits for you in making RRSP contributions since they cannot be deducted against your current income sources.

If you qualify for GIS benefits at your current income level, you may consider delaying your RRIFs until age 72. Otherwise, it may be prudent to convert the RRSP to a registered retirement income fund (RRIF) this year and begin taking minimum payments. That would provide about $3,000 of annual income, topping out at about $4,000 annually for life. Some people like the comfort of a predictable income for life.

Alternatively, given the RRIF is relatively small, you may consider drawing it down over the course of the next few years, ensuring that the amount you take each year keeps your total income within the lowest tax bracket, which is $50,197 in 2022.

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You indicate that you recently sold a property and have $150,000 to invest. You should top up your TFSA to the maximum to shelter funds from tax. I’m unsure of your TFSA contribution room, as I don’t know the value of your original contribution(s) and withdrawals. But for someone who has never invested in a TFSA before, the 2022 limit is $81,500. If you are uncertain as to how much TFSA contribution room you have, you can check your “My Account” on the Canada Revenue Agency’s website or you can call 1-800-267-6999.

The remaining funds of around $100,000 can go into non-registered investments.

Your remaining monthly cash needs should be drawn from your non-registered investments until those funds are depleted, and then you can draw down the TFSA account. It is advisable to draw down your taxable account to zero while still funding the TFSA each year, because the TFSA funds grow tax free.

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I have run some numbers, and based on the information provided, using a four-per-cent rate of return and two-per-cent rate of inflation, which is the Bank of Canada’s target, your liquid funds may be depleted in your early-to-mid 80s, with a spending rate of $42,000 annually.

If you were to reduce spending to $34,000 annually, you would likely have enough liquid assets to sustain you without borrowing against your home. But at your current level of spending and using the assumptions above, you may need to begin borrowing against the home in your early 80s to sustain your lifestyle. This would also depend on your risk tolerance and investment returns. If returns were higher, your money would last longer.


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Cali, you should also prioritize an investment strategy for your cash. Consulting a good fee-for-service planner can help you come up with a portfolio and investment strategy that will suit your risk tolerance. The two of you could go through the different options available, everything from mutual funds and exchange-traded funds (ETFs) to individual stocks and bonds.

A good investment strategy to consider would be a simple, passive, low-cost approach that involves buying a solid all-in-one ETF that holds a variety of equity and fixed-income ETFs. These can be bought through a discount broker and don’t require any rebalancing, so you can invest this way yourself without an adviser for the long term. A robo-adviser is another low-fee way to passively invest with a bit more customer support than a brokerage.

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If you feel more comfortable having an adviser in charge of your investments, then the fees would range from 1.25 per cent to three per cent annually at your level of assets. It’s up to you which approach you prefer. In the end, fully understanding your investment options and your portfolio strategy will help you to have peace of mind about your future.

Brenda Hiscock is a fee-only, advice-only certified financial planner at Objective Financial Partners Inc. in Toronto.

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Jamie Golombek: Lack of appropriate records can prove problematic, as these two tax cases show

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It’s perhaps no secret that nearly all casual babysitting services are paid in cash. After all, it’s fast, easy and convenient. But the main reason a sitter may request cash for their services is that there’s no record of them having received the income, making the amounts nearly impossible to trace should the Canada Revenue Agency question the sitter’s reported income under our self-assessment, “honour” tax system.

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But the lack of appropriate records can prove problematic for some taxpayers. For example, a parent who incurs babysitting costs to enable them to earn income from employment, carry on a business or attend school may be able to claim those costs as tax-deductible child care. It would be wise for them to hang on to proof of payment should the CRA question the deductibility of those expenses.

The receipt of cash, even if reported on a return, can also be problematic for the sitter. Two recent cases dealt with babysitter claims for COVID-19-related benefits, each of which hinged on whether they could prove they earned at least $5,000 in income to qualify. Let’s take a brief look at each case.

The Alberta grandmother

The first case involved an Alberta taxpayer who immigrated to Canada from Bangladesh following the death of her husband in 2001. She lives with her son and his family, and provided babysitting services for her son’s children, for which she was paid in cash. In 2020, she applied for benefits under the Canada Recovery Benefit (CRB) program, and collected benefits for two periods in the fall of 2020.

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Subsequently, the CRA conducted a validation review for CRB eligibility and asked the taxpayer to submit documents to support her claim that she met the criteria of having a minimum earned income of $5,000 in 2019, 2020 or in the 12 months preceding the date of her benefit application.

The taxpayer submitted a letter dated Nov. 27, 2020, enclosing babysitting receipts for 2019 and 2020, as well as a partnership income statement for the 2019 tax year relative to a business in Bangladesh. The CRA, after reviewing the documents, concluded she didn’t meet the criteria. The taxpayer asked for a second review, which was conducted in February 2021, but the CRA reached the same conclusion.

The taxpayer then appealed to Federal Court, asking it to determine whether the CRA’s decision to deny her the CRB was “reasonable.” As with prior decisions, the court must decide whether the decision under review “bears the hallmarks of reasonableness — justification, transparency and intelligibility — and whether it is justified in relation to the relevant factual and legal constraints that bear on that decision.”

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The taxpayer claimed she was paid $3,500 in babysitting income in 2019, and $1,600 in 2020, which, when combined with her Bangladesh income, would exceed the $5,000 required threshold. But all payments were made in cash, and the evidence that was submitted — a combination of invoices and bank statements — “did not add up,” according to the CRA.

The CRA concluded there was insufficient documentary evidence to support the taxpayer’s claim of babysitting income. As a result, the judge found “no reviewable error” in the CRA’s decision, and thus no basis for judicial intervention.

The Quebec babysitter

The second case, which was decided last week, involved a babysitter who claimed the Canada Emergency Response Benefit (CERB) for the seven four-week periods from March 15, 2020, to Sept. 26, 2020, receiving a total of $14,000 in government benefits.

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In October 2020, the taxpayer’s file was selected for a first review of CERB eligibility. In order to be eligible, a taxpayer had to meet two criteria: income of at least $5,000 from (self)employment in 2019 or in the 12 months preceding the first CERB application, and have stopped working due to COVID-19.

The taxpayer stated he worked in 2019 as a babysitter in a private home. That year, his employer lost his job and the sitter found himself unemployed. He looked for new work, but was unsuccessful.

The reviewing CRA officer requested proof of income for the amount of self-employment income claimed, noting that the taxpayer had “no documentation supporting the invoices submitted, and no bank statement, since he was paid in cash and did not deposit the amounts paid” in a bank account.

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The CRA also had trouble with the second criterion. Although the taxpayer was working in 2019, he was terminated in 2019 after his employer lost his job. Since “there was no talk of COVID-19 in 2019,” the taxpayer cannot have lost his job due to COVID-19. The CRA agent, therefore, concluded the taxpayer was ineligible for the CERB based on the information submitted.

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The taxpayer requested a second-level review, which was conducted by a different CRA officer in December 2020. That officer also concluded he was ineligible for the CERB.

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In November 2021, the taxpayer asked the Federal Court to determine whether the CRA’s decision to deny him the CERB was reasonable. The judge, after reviewing all the evidence, concluded that “the reasons given by the (CRA) agent for rejecting the CERB application are intelligible and justified in light of the evidence and the CERB legislative regime.”

As the judge cautioned, “A taxpayer who wishes payment in cash must be all the more concerned to be able to prove the payment in order to obtain a benefit under the act. It was up to the officer to assess the sufficiency of the evidence and, in this case, she was not satisfied with the evidence filed by the (taxpayer).”

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Small, seemingly insignificant purchases can be the difference between a budget that works and one that doesn’t

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We tend to put less importance on purchases that are only a few dollars: $2 here, $5 there, $20 for this fee or that and so on. However, those small purchases add up to big numbers in the big scheme of things, and can be the difference between a budget that works and one that doesn’t.

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Whether we have a monthly spending plan or not, many of our spending decisions are not actually decisions at all. Quite often, we don’t consciously think about how every individual purchase affects our bottom line. We run on autopilot with our spending, and tend to keep it running until we hit a certain dollar threshold.

That threshold looks different for everyone. It may be $10 for some, and $100 for others, but there is usually a point at which we turn off the autopilot and think a bit more intentionally about the money we are about to spend.

For example, we may think nothing of grabbing a snack when we hit the checkout at the grocery store, or even subscribing to a new streaming service with a cheap monthly fee. But when it comes to spending $150 on something, we may double check our account before tapping or clicking.

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Alternately, we may note and be very aware of these small expenses or purchases, but rationalize them: “It’s only $2,” or, “I don’t spend a lot, so this small amount is OK,” or, “I owe so much anyway, what’s a little more?” Sound familiar?

These small, seemingly insignificant purchases are what we like to call financial death by a thousand cuts. Any one small purchase or expense in and of itself won’t be enough to make or break a budget or hinder your financial goals. But add up all these small, individual spends from all areas of your life throughout the year, and they can become very significant when you consider what the money could have done for you.

Given the choice, would you rather spend $1,000 on drive-thru coffee or put $1,000 in a registered education savings plan that has government contributions and will earn, at the very least, interest?

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If you’ve ever wondered where your money goes and how those little financial cuts are injuring your budget, tracking your expenses is a great exercise. The numbers don’t lie. Tracking your expenses, even for a short time, — say, a month — will reveal your spending habits and make you aware of what you’re spending your money on, where you’re spending it and how much you’re spending.

Once you know this, you can make more informed decisions about where you want your money to go and what you want your money to do for you.

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As the saying goes, knowing is half the battle. Knowing your spending patterns and habits can go a long way toward making changes to those behaviours. Impulse, emotional or convenience buying can be some of the biggest challenges in the war against needless spending.

A great defence against impulse or emotional purchases, whether online or in person, is to leave items in your cart (or at the store if you are shopping in person). For small online purchases, leave it in the cart for 24 to 48 hours, and even longer for bigger purchases. Delaying the gratification of the impulse buy allows you to pause and intentionally determine if your purchase is a want or a need and whether you can afford it or not right now.

A little planning goes a long way when it comes to being aware and choosing how we want to consciously spend our money. Convenience isn’t just next-day delivery. Convenience costs occur when, for example, we don’t plan for dinner and end up going through the drive-thru or ordering in. It’s when we opt for pre-cut, pre-packaged foods instead of make-your-own options.

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Planning and leaving time in your schedule, even just once in a while, can ultimately boost your cost savings.

Portioning your own snacks, cutting your own veggies, sticking to a meal plan, shopping with a list and bringing lunch to work can help address those extra costs associated with convenience food purchases.

Remember these tips as you work on your spending plan:

  1. Tracking expenses shows you where you might be overspending or what areas you may be spending more on than you thought.
  2. Planning ahead, especially around drinks, meals and snacks, helps avoid convenience costs.
  3. Creating a plan, and giving every dollar coming into the household a job to do, allows you to align your spending with your financial goals.
  4. Being aware of your emotions as they relate to your spending habits can help you curb emotional and impulsive spending.

The cost of essential items is still rising, but the reality for most of us is that our incomes are not rising at the same rate. The little things do matter when it comes to our finances. And they most certainly add up.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 25 years.

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