Just finished school! Got a loan? Is it tax deductible?
Congratulations, recent college graduates! You’ve finished your last final exam and will finally sleep late during the holidays. The job search—or perhaps grad school—can wait until January.
Unfortunately, not far behind is the repayment of any student loans you took out to fund your education.
If you’re looking for a silver lining from the cash impact of what paying back your loans might do for your lifestyle, look no further than your tax return. That’s because interest paid on student loans may be tax deductible if you were enrolled at least half-time in a degree program.
Is My Student Loan Interest Tax Deductible?
Interest on your student loan may be tax deductible if:
• Your student loan is qualified—basically, that the money was used to pay tuition or very closely related expenses.
• It’s your loan. You signed up for it and you (not Mom, Dad, or Grandma) are obligated to pay it back and your parents are not claiming an exemption for you.
• Your filing status is not married, filing separately.
• Your Modified Adjusted Gross Income (MAGI) is less than $80,000 (or $160,000 if you file jointly with your spouse).
How Much Student Loan Interest Can I Deduct?
Each year, you can deduct up to $2,500 of student loan interest, provided you have paid that much. As a result, new graduates who have not made any payments on their student loans during 2014 will not be able to deduct any student loan interest on their 2014 tax returns due on April 15, 2015. You must pay it to deduct it.
What About the (My) Parents?
Parents can deduct the interest paid on the student loan – instead of the student – if they took out the loan, they are liable to pay it back, and they are claiming the student as a dependent. In such a case, student loan interest is not tax deductible by the student.
Where do I Deduct Student Loan Interest? Do I Have to Itemize to Take Advantage of This Deduction?
The student loan interest deduction is known as a deduction for Adjusted Gross Income (AGI). As a result, you do not need to itemize to take advantage of this deduction.
How Do I Determine How Much Student Loan Interest I Paid?
You can find the total amount you paid in student loan interest on Form 1098-E, which you should receive from your lender by mail in early 2015.
Courtesy - Turbo Tax
Too many Canadians are being forced to use unacceptable vehicles as many banks have turned to extremely stringent approval qualifications. In a country with winters as harsh as Canada’s it is increasingly important that Canadians are able to get a quality vehicle without being strapped with high payments and unmanageable debt loads.
1. Rent to Own Programs This is an option, but typically only with older vehicles and at higher interest rates. You must be sure that these places will report the positive repayment history to the credit bureaus (Transunion / Equifax) or there’s a chance your credit score may not improve even after full repayment.
2. Buy a Vehicle with Cash Although this is not an option for a lot of Canadians, the one way to beat the bank is to avoid them all together. The downside is if your cash savings don't allow for a very good vehicle purchase.
3. Online Car Loan Service There are services like Canada Drives that allow customers to apply for a vehicle and financing (even with bad credit) online.
4. Large down payment Again, this is only possible if you have a sizable savings account.
5. Credit Rebuild Programs There are programs available that allow Canadians to slowly improve their credit score by making payments on time (sometimes with secured credit cards). This is only a good option if you have time to wait to get a vehicle and don’t need one right away as it may take a while for your credit to improve to a point where you can get an auto loan through your local bank.
6. Dealership with Non-Prime Departments Some dealerships have special departments that can assist customers with low credit scores (or new to credit) in getting a vehicle. These dealerships can be hard to find as many will advertise this service, but few will be effective at helping hard-to-finance customers.
CRA TARGETING CANADIANS WHO TRADE EXCESSIVELY IN TFSA
Tax-free savings accounts, created just five years ago by the Harper government as a tool that would allow Canadians to grow retirement investments while sheltered from capital gains taxes, are increasingly being challenged by Canada Revenue Agency auditors targeting investors that show large gains in their account. Here's what will get your TFSA audited by the CRA Canada’s Taxman has an audit project targeting Canadians it feels are in the business of trading securities and using their tax free savings accounts to shelter the proceeds. Here are the eight factors it looks at click here.
The CRA is also hitting invesors with audits if they trade too frequently for the agency’s comfort. The CRA has argued that investors who use their TFSAs for frequent trading and earn large gains are effectively running a trading business, and should be taxed on income.
The sudden growth in CRA scrutiny has triggered concern from the Investment Industry Association of Canada, which recently complained of “insufficient guidelines” for TFSA investors to determine whether they’ve run afoul of tax rules, in a letter to the Finance Department and the director general of the Canada Revenue Agency (CRA).
In addition, a Calgary law firm says it is readying to fight Ottawa over the growing use of the “business” interpretation.
Sources from the tax and legal sectors confirmed to the Financial Post that the CRA has rolled out a TFSA audit project that has become increasingly active in the past couple of years. However, the amount of activity or balance that will trigger an audit remains unclear and the CRA was unable to offer comment to the Financial Post on Monday.
Now a Calgary law firm says it is readying for a legal fight with Ottawa.
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“There are a lot of people, day traders, with online brokerage accounts and they sit and buy and sell securities. Maybe 10 to 15 trades a day,” says Tim Clarke, a lawyer with Calgary’s Moodys Gartner Tax Law LLP, which is preparing to challenge the tax agency’s interpretation. “The CRA says that means you are trader in securities and you are carrying on a business.”
In the past, the CRA had targeted investors who were undervaluing closely held shares in their TFSA, exploiting the lack of liquidity to understate the equity’s likely value. Few people in the industry had argued against that crackdown.
But targeting vigorous — and successful — traders is a different approach by the CRA.
“They have no sense of humour about this. They assume since the maximum contribution you could make [as of 2013 was $31,000], if you’ve got $10-million in your TFSA something is wrong,” said Mr. Clarke. But often big TFSAs are held by high-risk investors who are simply enjoying their appropriate reward, he maintained.
If you’ve got $10-million in your TFSA something is wrong
“If you buy penny stocks and you’re an initial investor, you are taking a huge risk,” he said.
The TFSA, introduced in the 2009 tax year, is widely seen as a place to better take risks with investments, since all income including windfall gains, are tax-free forever, whereas in a registered retirement savings plan the money is taxed on withdrawal.
“There is a no case law on this business of carrying on a business in a TFSA,” said Lauchlin MacEachern, another lawyer with Moodys Gartner, who says he can’t comment on specific cases. “In the next year or two we expect there to be a case that goes to court and we’ll know whether carrying on a business in your TFSA means trading securities actively. We say that’s a question of fact and we also disagree with their legal interpretation.”
In all of these cases, the CRA has only to declare a “balance of probabilities” burden of proof has been met, leaving the onus on the taxpayer to prove that he or she should not be taxed as a business.
FotoliaSome taxpayers report that the CRA has offered them a deal where, if they agree to pay taxes on income within a TFSA, it will not demand additional penalties. The Investment Industry Association of Canada seems to agree there needs to be some clear-cut rules and is also concerned about liability its members may have if a taxpayer were to withdraw all their money out of a TFSA before the tax bill arrives.
“The IIAC requests comfort that TFSA trustees will not be liable for any shortfall in taxes should funds within a TFSA be insufficient to cover off any liability arising by virtue of a TFSA being found to have carried on as a business,” the group wrote, in its submission to Ottawa.
Some taxpayers report that the CRA has offered them a deal where, if they agree to pay taxes on income within a TFSA, it will not demand additional penalties. That tactic has resulted in settlements, according to sources.
That’s what happened to one Quebec investment advisor, who says he was called a “pirate” by a CRA auditor. The advisor — who did not want to be identified due to his clash with the tax agency — was told he must pay income tax on all the gains inside his TFSA or face his wages being garnished along with interest penalties. The CRA says someone operating a “business” pays income tax on earnings, which is an even higher rate than the capital gains tax usually charged on investment income.
The Quebec investment advisor says he was flagged after making about 200 trades in his TFSA, manoeuvring his account to a value of about $180,000. He has since taken all the money out and paid taxes on it.
The accountants and lawyers have told me to shut up
“I’ve already paid the $35,000 and now I’m sure the province is going to come after me for their money,” he said, referring to provincial taxes he’ll owe based on the federal assessment. “The accountants and lawyers have told me to shut up.”
He claims he was able to make all this money because he has some expertise in resource stocks. “I could have lost that money,” he says, adding when he filled out forms for his TFSA under the know-your-client rule he said his profile was “100% risk and 100% speculation.”
He said the idea that he is a “professional trader” makes no sense because he’s never taken any specific trading courses and doesn’t execute trades for clients. “I can tell you what caught their eye. It was the amount. The [auditor] told me ‘you’re not allowed to make $180,000 in there.’ You know what? I think they’re jealous.”
Mr. Clarke thinks this would not be happening if not for some of the high balances seen from a bullish stock market.
“To have a portfolio that increases in value, you need a run up in shares and the value of the stock market, which is what we’ve had, and you need the CRA to be scrutinizing it,” said the lawyer. “In my view, what we need is a black line test, if you put a qualified investment into a TFSA, as long as it’s within the categories of qualified investment, it shouldn’t matter how you earn or lose money. The income should not be taxable and the losses not deducted.”
Courtesy- Garry Marr Financial Post
Author - Atul Prakash
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