Newsletters

Two quarterly newsletters have beed—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues. They can be accessed below.

Corporate:

Issue #41 Corporate

Personal:

Issue #41 Personal

Sometime around the middle of August, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA), and that mail will contain unfamiliar and unwelcome news. Specifically, the enclosed form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15^th of this year – and will helpfully identify the amounts which should be paid on each date.

Sometime around the middle of August, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA), and that mail will contain unfamiliar and unwelcome news. Specifically, the enclosed form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15^th of this year – and will helpfully identify the amounts which should be paid on each date.

No one particularly likes receiving unexpected mail from the tax authorities, and correspondence which suggests that the recipient should be making payments of tax to the CRA during the year (instead of when he or she files the return for the year next April) is likely to be both perplexing and somewhat alarming. It’s fair to say that most Canadians aren’t familiar with the payment of income tax by instalments, and are therefore at a loss to know how to proceed the first time they receive an Instalment Reminder.

The reason the instalment payment system is unfamiliar to most Canadians is that most of us pay income taxes during our working lives through a different system. Every Canadian employee has tax automatically deducted from his or her paycheque (“at source”), before that paycheque is issued, and that tax is remitted, by the employer to the CRA, on the employee’s behalf. Such deductions and remittances accrue to the employee’s behalf, and they are credited with those remittances when filing the annual tax return for that year. It’s an efficient system, but it’s also one largely invisible to the employee, and certainly one which operates without the need for the employee to take any steps on his or her own. When someone’s working life ends and retirement begins, it’s consequently not surprising that the individual wouldn’t know that it is now his or her responsibility to make specific arrangements for the payment of income tax. 

Adding to the potential confusion, most employees who are now moving into retirement have had only a single source of income throughout their working lives. Once in retirement, however, there are likely multiple such sources of income, including Canada Pension Plan benefits and Old Age Security payments, and perhaps monthly amounts received from an employer-sponsored registered pension plan (RPP) or a registered retirement income fund (RRIF). Unless the individual so directs, none of the payors of those kinds of income will deduct income tax from the payments and remit them to the federal government on the individual’s behalf. 

Canadian tax rules provide that, where the amount of tax owed when a return is filed by the taxpayer is more than $3,000 ($1,800 for Quebec residents) in the current (2017) year and either of the two previous (2015 and 2016) years, that taxpayer may be required to pay income tax by instalments.

The reason that first instalment reminders are issued in August has to do with the schedule on which Canadians file their tax returns. The amount of tax payable on filing for the immediately preceding year can’t be known until the tax return for that year has been filed and assessed, and the tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer should receive a first instalment reminder for the current year. In many cases, a first instalment reminder is triggered where an individual who has retired within the past two years, as in the following example.

An individual retires at the end of 2015 from employment in which tax deductions were automatically taken from his or her paycheque. Beginning in January 2016, that individual’s sources of income change from a single paycheque from their employer to Canada Pension Plan and Old Age Security benefits, as well as a monthly withdrawal from a RRIF. In order for the individual to have the appropriate amounts of tax withheld from those income sources during 2016, the individual taxpayer would have to have calculated the amount of total tax liability for the year and made arrangements for the appropriate amount to be withheld from one or more of those three sources of income. For most taxpayers, especially those who are making all the various adjustments needed to move from working life into retirement, and who have never before needed to make such a calculation, that’s not a very likely scenario. Consequently, it would be very unlikely that withholdings in the correct amount (or any withholdings at all) would be made from those sources of retirement income, and very likely that more than $3,000 in tax will be owed when the return for 2016 is filed. Where the taxpayer’s income levels and withholding amounts are unchanged for 2017 and it can be expected that, once again, more than $3,000 will be owed on filing, the criteria for the instalment requirement would be met and a tax instalment reminder would be issued in August 2017, after the return for 2016 is assessed.

Taxpayers who receive that first Instalment Reminder in August may also be puzzled by the fact that it is a “Reminder” and not a “Requirement” to pay. The reason for that is that those who receive it are not actually required by law to make instalment payments of tax. There are, in fact, three options open to the taxpayer who receives an Instalment Reminder.

First, the taxpayer can pay the amounts specified on the reminder, by the respective due dates of September 15 and December 15. A taxpayer who does so can be certain that he or she will not have to pay any interest or penalty charges even if he or she does have to pay an additional amount on filing in the spring of 2018. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2017, he or she will of course receive a refund on filing.

Second, the taxpayer can make instalment payments based on the total amount of tax which was owed and paid for the 2016 tax year. Where a taxpayer’s income has not changed between 2016 and 2017 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2017 will be the same or slightly less than it was in 2016, owing to the indexation of tax brackets and tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will actually owe for  2017 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2016 to 2017 and there will consequently be a reduction in tax payable, this option may be worth considering. Taxpayers who wish to pursue this approach can obtain the information needed to estimate current year taxes (federal and provincial tax brackets and rates) on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html#federal.

All of this may seem like a lot of research and calculation effort, especially when one considers that many Canadians don’t even prepare their own tax returns. And those who don’t want to be bothered with the intricacies of tax calculations can pay the amounts set out in the Instalment Reminder, secure in the knowledge that they will not incur any penalty or interest charges and that, should those amounts ultimately represent an overpayment of taxes, that overpayment will be recovered and refunded when the 2017 return is filed next spring.

Once they have resigned themselves to the reality of the tax instalment system, the remaining question that most taxpayers have is how such payments can be made. The options open to taxpayers in that regard are helpfully outlined on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/making-payments-individuals/paying-your-income-tax-instalments/you-pay-your-instalments.html.

The traditional idea of retirement – working full-time until age 65 and then leaving the workforce completely to live on government-sponsored and private sources of retirement income – has undergone a lot of changes over the past couple of decades, and Canada’s government-sponsored retirement income system has evolved in response. Generally, the changes to the Canada Pension Plan (CPP) and Old Age Security (OAS) programs have increased the flexibility of those programs and, in particular, have given individuals a greater range of choices with respect to, especially, the timing of their receipt of CPP and OAS.

The traditional idea of retirement – working full-time until age 65 and then leaving the workforce completely to live on government-sponsored and private sources of retirement income – has undergone a lot of changes over the past couple of decades, and Canada’s government-sponsored retirement income system has evolved in response. Generally, the changes to the Canada Pension Plan (CPP) and Old Age Security (OAS) programs have increased the flexibility of those programs and, in particular, have given individuals a greater range of choices with respect to, especially, the timing of their receipt of CPP and OAS.

The downside of that increased flexibility has been to make the system — and therefore the choices available to Canadians — more complex. One aspect of that complexity is the (relatively) new CPP post-retirement benefit, or PRB.

The CPP system is a contributory one, in which both the individual and his or her employer make annual contributions, with the amount of those contributions based on the employee’s income for that year. The total of contributions made between the time the individual is age 18 and the time he or she begins receiving CPP retirement benefits is used to calculate the amount of the monthly CPP retirement benefit to which that individual is entitled. An individual can begin receiving his or her CPP retirement benefit at the age of 60 or can defer receipt anytime until he or she turns 70 years of age. With each month that receipt of the benefit is deferred, the amount of that benefit increases.

It was once the case that an individual who had decided to begin receiving the CPP retirement benefit was not required (or allowed) to continue contributing to the CPP (even if he or she continued to work) and therefore had no means of increasing the benefit amount. A change made in 2012 altered that rule, such that individuals who continued to work while receiving the CPP retirement benefit could also continue to contribute to the CPP and, as a result, increase the amount of CPP retirement benefit they received each month. That benefit is the CPP post-retirement benefit or PRB.

The rules governing the PRB differ, depending on the age of the taxpayer. In a nutshell, an individual who has chosen to begin receiving the CPP retirement benefit but who continues to work will be subject to the following rules:

• Individuals who are 60 to 65 years of age and continue to work are required to continue making CPP contributions.
• Individuals who are 65 to 70 years of age and continue to work can choose not to make CPP contributions. To stop contributing, such an individual must fill out Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election. A copy of that form must be given to the individual’s employer and the original sent to the Canada Revenue Agency (CRA). An individual who has more than one employer must make the same choice (to continue to contribute or to cease contributions) for all employers and must provide a copy of Form CPT30 to each.

A decision to stop contributing can be changed, and contributions resumed, but only one change can be made per calendar year. To make that change, the individual must complete section D of Form CPT30, give one copy of the form to his or her employer, and send the original to the CRA.

• Individuals over the age of 70 and are still working cannot contribute to the CPP.

Overall, the effect of these new rules is that CPP retirement benefit recipients who are still working and under age 65, as well as those who are between 65 and 70 and choose not to opt out, will continue to make contributions to the CPP system and continue therefore to earn new credits under that system. As a result, the amount of retirement benefits which they are entitled to will increase with each year’s contributions.

Where an individual makes CPP contributions while working and receiving CPP retirement benefits, the amount of any CPP post-retirement benefit earned will automatically be calculated by the federal government, and the individual will be advised of any increase in that monthly CPP retirement benefit each year. The PRB will be paid to that individual automatically the year after the contributions are made, effective January 1st of every year. Since the federal government needs information about employer contributions made, the first annual payment of the PRB is usually issued in early April and will include a lump sum payment back to January. Thereafter, the PRB is paid monthly and the PRB amount is added to the individual’s CPP retirement pension and issued as a single payment.

While the rules governing the PRB can seem complex (and certainly the actuarial calculations are), the individual doesn’t have to be concerned with those technical details. For CPP retirement benefit recipients who are under age 65 or over 70, there is no decision to be made. For the former, CPP contributions will be automatically deducted from their paycheques and for the latter, no such contributions are allowed.

Individuals in the middle group — those aged 65 to 70 — will need to decide whether it makes sense, in their individual circumstances, to continue making contributions to the CPP. Some assistance in making that decision is provided on the federal government website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-post-retirement/benefit-amount.html, which shows the calculations which would apply for individuals of different ages and income levels. 

More information on the PRB generally is also available on that website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-post-retirement.html.

While Canadians typically think of taxes only in the spring when the annual return must be filed, taxes are a year-round business for the Canada Revenue Agency (CRA). The CRA is busy processing and issuing Notices of Assessment for individual tax returns during the February to June filing season. To date, in 2017, the CRA has received and processed just under 28 million individual income tax returns. That volume of returns and the CRA’s self-imposed processing turnaround goals (two to six weeks, depending on the filing method) mean that the CRA cannot possibly do an in-depth review of each return filed prior to issuing the Notice of Assessment.

While Canadians typically think of taxes only in the spring when the annual return must be filed, taxes are a year-round business for the Canada Revenue Agency (CRA). The CRA is busy processing and issuing Notices of Assessment for individual tax returns during the February to June filing season. To date, in 2017, the CRA has received and processed just under 28 million individual income tax returns. That volume of returns and the CRA’s self-imposed processing turnaround goals (two to six weeks, depending on the filing method) mean that the CRA cannot possibly do an in-depth review of each return filed prior to issuing the Notice of Assessment.

As well, for many years the CRA has been encouraging taxpayers to fulfill their filing obligations online, through one of the Agency’s e-filing services. Canadians are clearly listening, as just over 24 million (or 86%) of the returns filed this year were filed by electronic means. While e-filing means that the turnaround for processing of returns is much quicker, there is, by definition, no paper involved. The Canadian tax system has always been what is termed a “self-assessing” system, in which taxpayers report income earned and claim deductions and credits to which they believe they are entitled. Prior to the advent of e-filing there were means by which the CRA could easily verify claims made by taxpayers. Where returns were paper-filed, taxpayers were usually required to include receipts or other documentation to prove their claims, whatever those claims were for. For the 86% of returns which were filed this year by electronic means, no such paper trail exists. Consequently, the potential exists for misrepresentation of such claims (or simple reporting errors) on a large scale. The CRA’s response to that risk is to carry out a post-assessment review process, in which the Agency asks taxpayers to back up or verify claims for credits or deductions which were made on the return filed this past spring.

That post-assessment review process starts in the month of August. There are two components to the review process — the Processing Review Program and the Matching Program. The former is a review of various deductions or credits claimed on returns, while the latter compares information included on the taxpayer’s return with information provided to the CRA by third-party sources, like T4s filed by employers or T5s filed by banks or other financial institutions.

Being selected for review under either program means, for the individual taxpayer, the possibility of receiving unexpected correspondence from the CRA. Receiving such correspondence from the tax authorities is almost guaranteed to unsettle the recipient taxpayer, even where there’s no reason to believe that anything is wrong. But, it’s an experience which will be shared this summer and fall by millions of Canadian taxpayers.

While the two programs are carried out more or less concurrently, they are quite different. The Processing Review Program asks the taxpayer to provide verification or proof of deductions or credits claimed on the return, while the Matching Program deals with discrepancies between the information on the taxpayer’s return and information filed by third parties with respect to the taxpayer’s income or deductions for the year.

Of course, most taxpayers are not concerned so much with the kind or program or programs under which they are contacted as they are with why their return was singled out for review. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is a precursor to an audit, but that’s not necessarily the case. Returns are selected by the CRA for post-assessment review for a number of reasons. Under the Matching Program, where a taxpayer has filed a return containing information which does not agree with the corresponding information filed by, for instance, his or her employer, it’s likely that the CRA will want to follow up to find out the reason for the discrepancy. As well, Canada’s tax laws are complex and, over the years, the CRA has determined that there are areas in which taxpayers are more likely to make errors on their returns. Consequently, a return which includes claims in those areas (like medical expenses, support payments, and legal fees) may have an increased chance of being reviewed. Where there are deductions or credits claimed by the taxpayer which are significantly different or greater than those claimed in previous returns, that may attract the CRA’s attention. And, if the taxpayer’s return has been reviewed in previous years and, especially, if an adjustment was made following that review, subsequent reviews may be more likely. Finally, many returns are picked for post-assessment review simply on a random basis.  

Regardless of the reason for the follow-up, the process is the same. Taxpayers whose returns are selected for review will receive a letter from the CRA, identifying the deduction or credit for which the CRA wants documentation or the income or deduction amount about which a discrepancy seems to exist. The taxpayer will be given a reasonable period of time — usually a few weeks from the date of the letter — in which to respond to the CRA’s request. That response should be in writing, attaching the receipts or other documentation (if needed) which the CRA has requested. All correspondence from the CRA under its review programs will include a reference number, which is usually found in the top right hand corner of the CRA’s letter. That number is the means by which the CRA tracks the particular inquiry, and should be included in the response sent to the Agency. It’s important to remember, as well, that it’s the taxpayer’s responsibility to provide proof, where requested, of any claims made on a return. Where a taxpayer does not respond to a CRA request and does not provide such proof, the Agency will proceed on the basis that the requested verification or proof does not exist, and will reassess accordingly.

Taxpayers who have registered for the CRA’s online tax program My Account (or whose representative is similarly registered for the CRA’s Represent a Client online service) can submit required documentation electronically. More information on how to do so can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/sbmttng-eng.html.

Regardless of how requested documents are submitted, it’s possible that the CRA will send a follow-up letter, or the taxpayer may be contacted by telephone, with a request from the CRA for more information.

One word of caution — as most Canadians have heard by now, there is a persistent tax scam operating in which taxpayers are contacted by telephone by someone falsely claiming to be from the CRA (or, more recently, from the “Federal Tax Court”, which does not exist). Such fraudulent callers generally indicate that a review of the taxpayer’s return shows that additional taxes are owed, and insist that immediate payment is required, by wire transfer of funds or pre-paid credit card. Taxpayers should be aware that payment of taxes is never requested in this way, or by either of those methods. While the CRA can and does contact taxpayers by phone, any CRA representative will have the reference number which appeared in the CRA’s initial letter and should be prepared to quote that number to the taxpayer in order to establish that the call is an authentic one. As well, the CRA does not correspond with taxpayers on confidential tax matters by e-mail. The only legitimate e-mail which a taxpayer might receive from the CRA is one which advises that there is a new message for that taxpayer in his or her online account with the CRA — and only taxpayers who have previously registered for the CRA’s My Account service would receive such an e-mail. Any other type of e-mail claiming to be from the CRA is not legitimate and should be deleted without opening.

Whatever the reason a particular return was selected for post-assessment review by the CRA, one thing is certain. A prompt response to the CRA’s enquiry, providing them with the information or documentation requested will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the Agency and the taxpayer.

The Bank of Canada’s recent decision to raise interest rates generated a lot of media attention, for the most part because while the increase itself was only one quarter of a percentage point, it was the first move made by the Bank of Canada to increase rates in the past seven years. Much of the media coverage of the rate change centered around the effect that change might or might not have on the current real estate market. One of the issues under discussion was whether this or future increases in interest rates (and therefore mortgage rates) would act as a barrier to those seeking to get into the housing market. And a phrase that was prominent in that discussion — the mortgage financing “stress test” — is likely one that is unfamiliar to most Canadians, even those who are affected by it.

The Bank of Canada’s recent decision to raise interest rates generated a lot of media attention, for the most part because while the increase itself was only one quarter of a percentage point, it was the first move made by the Bank of Canada to increase rates in the past seven years. Much of the media coverage of the rate change centered around the effect that change might or might not have on the current real estate market. One of the issues under discussion was whether this or future increases in interest rates (and therefore mortgage rates) would act as a barrier to those seeking to get into the housing market. And a phrase that was prominent in that discussion — the mortgage financing “stress test” — is likely one that is unfamiliar to most Canadians, even those who are affected by it.

When anyone seeks to borrow money, for whatever purpose, a key factor in whether they will be able to obtain a loan is, of course, their ability to repay the loan on the terms set, including the interest rate to be levied. That same consideration applies when an individual or a couple apply for approval or pre-approval of a mortgage. However, a mortgage differs from other kinds of consumer debt in a few significant ways. First, a mortgage is likely to be the largest debt any Canadian takes on in his or her lifetime. Second, a mortgage is paid off over a much longer period of time — typically 25 years — than any other type of debt. And, finally, because of that lengthy repayment period, a mortgage is the only kind of significant consumer debt in which the interest rate which will be payable over the entire life of the loan can’t be determined prior to the time the initial financing is approved.

When mortgage financing is provided to a home buyer, there are two factors, besides the amount of the loan, which determine how much the monthly mortgage payments will be. The first is the amortization period, or the length of time over which the mortgage loan will be repaid. The second is the mortgage term, which is the time period for which the interest rate for the mortgage is fixed. That term is always shorter than the amortization period – for most mortgage financing in Canada, the longest term which can be obtained is 10 years, although most mortgage terms are shorter than that. Since the interest rate for that term is fixed, both the borrower and the lender know how much the mortgage payments will be for the entire length of that term and what percentage of the borrower’s current income will be required to make those payments.

In determining whether a borrower will be able to repay the mortgage loan as required, mortgage lenders rely on two debt-to-income ratios, known as Gross Debt Service (GDS) and Total Debt Service (TDS). The two are similar, but not the same.

The GDS ratio measures how much of the would-be borrower’s income will be needed to meet his or her housing costs. For any particular mortgage borrower, GDS represents the total of mortgage payments, property taxes, heating costs, and — where applicable — one-half of condo fees. Optimally, that total figure will represent less than 35% of the would-be borrower’s income.   

Of course, most Canadians carry one or more kinds of consumer debt besides their mortgages, and so it’s necessary to determine their cost of servicing that total debt as a percentage of income. That figure is their TDS, which is the total of housing expenses (as calculated for purposes of GDS) plus any other debt repayment, including car loans, credit cards, lines of credit, and student loans. Optimally, the total amount of housing costs plus other repayment will be less than 42% of the would-be borrower’s income.

Where a would-be borrower is particularly credit-worthy (e.g., he or she has a reliable source of income and a good credit history), lenders will provide mortgage financing even where the optimal debt ratios indicated above are exceeded. However, the maximum GDS and TDS ratios allowed are, respectively, 39% and 44%.

While the GDS and TDS ratios do provide a reasonable measure of the ability of a prospective borrower to repay funds advanced to him or her, the weakness of those ratios are that they provide only a “snapshot” of the individual’s housing costs and debt repayment costs at a particular point in time and, more significantly, at current interest rates. As everyone knows, interest rates in Canada are, and have been for several years, at or near records lows and that many Canadians have taken advantage of those low rates. Specifically, as of the first quarter of 2017, the average debt load of Canadian households (including mortgage debt) stood at 167.3% of disposable income.

The combination of those two factors means that Canadian households are, on average, carrying much higher levels of debt (as a percentage of disposable income) and that the cost of carrying such debt is at or near record lows. When, as has recently proven the case, those interest rates begin to rise, such increase has the potential to put Canadian households on financial thin ice. And that possibility is what gave rise to the introduction by the federal government of the “stress test” which might equally well be called the “what-if?” test.

It’s possible to purchase a home in Canada with a down payment of 5%, where the cost of the home is $500,000 or less. Where the purchase price of the home is over $500,000, the minimum down payment is 5% for the first $500,000, and 10% for the remaining portion. However, regardless of the cost of the home, where the total down payment to be made is less than 20% of the purchase price, mortgage loan insurance is required, and such insurance is provided by a federal government agency, the Canada Mortgage and Housing Corporation (CMHC). As of the fall of 2016, all new prospective mortgage loans which must obtain mortgage loan insurance through CMHC (i.e., all those with less than 20% down payment) are subject to the new “stress test” requirement.

Basically, the stress test requires that lenders assess a would-be mortgage borrower’s ability to manage their debt, not only at current interest rates, but at the higher rates which those borrowers will certainly face sometime during the life of their mortgage. Carrying out a stress test is, in fact, something which financial planners advise clients to do as part of financial planning whenever taking on debt is contemplated. It’s simply prudent (especially where debt is longer term in nature and consequently higher payments resulting from an increase in interest rates is inevitable) to consider, not just whether the debt is manageable at current interest rates, but whether it will remain manageable where those interest rates rise by 1, 2, or 3% — or more. The “stress test” simply creates a requirement out of something that was always a good idea.

Under the stress test, for borrowers to qualify for mortgage insurance through CMHC, their GDS and TDS debt-servicing ratios must be no higher than the maximum allowable levels when calculated using the greater of the rate provided to them by their lender or the Bank of Canada’s conventional five-year posted rate. That Bank of Canada rate is typically higher than the rate that mortgage borrowers actually pay. For instance, the lowest five-year fixed rate mortgage interest rate offered by a major Canadian bank as of the end of July was 2.59%. At the same time, the Bank of Canada five-year posted rate was 4.84%.

It’s true that the application of the “stress test” as interest rates rise will cause more borrowers to be unable to qualify for a mortgage, or will require them to reduce their expectations in terms of the amount of mortgage financing for which they can qualify. But, it’s also the case that would-be borrowers who cannot “pass” a stress test are the very borrowers who would be put most at risk by an increase in interest rates. Where interest rates will be a year or two from now is something that no one — including the Bank of Canada — knows. It is undoubtedly disappointing for would-be borrowers to have to reduce their expectations with respect to the amount of mortgage financing (and therefore the “amount” of house) they can obtain. That scenario is, however, infinitely preferable to one in which they discover down the road that they can no longer afford to carry their mortgage at the higher interest rates then in effect, and are at risk of defaulting on that mortgage and potentially losing their home.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues. They can be accessed below.

Corporate:

Issue #39 Corporate

Personal:

Issue #39 Personal

Many Canadians are called upon to act as a caregiver for a family member who either cannot live independently or who requires varying degrees of assistance in order to be able to continue to live on their own. Sometimes that family member is a disabled adult child, while in other cases it’s an aging parent who needs help.

Many Canadians are called upon to act as a caregiver for a family member who either cannot live independently or who requires varying degrees of assistance in order to be able to continue to live on their own. Sometimes that family member is a disabled adult child, while in other cases it’s an aging parent who needs help.

Whatever the circumstances, caregiving is a demanding and often stressful role. And, while such caregiving imposes demands on caregivers in a number of areas, one of those demands is almost always financial. Sometimes that takes the form of financial support, or disability-related costs incurred for the dependent relative, while in other cases a caregiver’s income is reduced because of the need to re-allocate time from paid employment to unpaid caregiving.

The Canadian tax system recognizes the financial costs which are borne by caregivers and has, for many years, provided those caregivers with the opportunity to claim tax credits which seek to mitigate those financial costs. Unfortunately that system of credits has grown over a number of years into an often confusing patchwork system. Particularly for the taxpayer who encounters that system only once a year, at tax filing time, it can be difficult to understand which credits are available in which circumstances, and how the credits interact.

For this reason, the federal government has announced, as part of the 2017 federal Budget, that the current system of multiple caregiver credits is being eliminated, effective as of the 2017 tax year, with those multiple credits replaced by a single consolidated Canada Caregiver Credit.

The basic rule for the new credit is that it will be claimable by individual Canadians who provide care for infirm dependants who are parents/grandparents, brothers/sisters, aunts/uncles, nieces/nephews, or adult children of the taxpayer making the claim, or that taxpayer’s spouse or common law partner. The credit amount claimable for infirm dependants who fall into any of those categories is $6,883 per year.

A smaller credit amount will be claimable by individual Canadians who provide care for:

• an infirm dependant spouse or common law partner for whom the caregiver has claimed the spousal/common-law partner amount;
• an infirm dependant for whom the caregiver has claimed the eligible dependent credit; and
• an infirm child who is under the age of 18 at the end of the tax year.

The Canada Caregiver Credit amount for individuals who fall into any of these categories is $2,150 per year.

As is the case under current rules, the credit will be reduced dollar-for-dollar where the dependant’s net income exceeds a prescribed amount. For 2017, that prescribed income amount is $16,163, which represents a significant increase in some cases from the prescribed income limit set under current rules.

In all cases, regardless of the family relationship, the new Canada Caregiver Credit can be claimed only in respect of an individual who is infirm. Under pre-budget rules, adult children who provided in-home care for parents or grandparents who were over the age of 65 could claim a caregiver credit with respect to those relatives. Beginning with the 2017 tax year, however, no credit will be claimable in respect of non-infirm senior relatives who are dependent upon their adult children or grandchildren.

While it is necessary, in order to claim the new credit, that the dependant be infirm, there is no requirement that the infirm individual actually reside with the person making the Canada Caregiver Credit claim. As long as the infirm individual is dependent on the caregiver (and assuming that the other relationship and income criteria outlined above are met) that caregiver can claim the Canada Caregiver Credit.

While only one Canada Caregiver Credit can be claimed in respect of a single infirm dependant, that credit can be shared among multiple caregivers who support the same dependant. So, for instance, a married couple on whom an infirm parent is dependent could divide the credit between them, in whatever proportion they wish.

It should be emphasized that the changes announced in the Budget will have no effect on tax returns for the 2016 taxation year which are now being filed. The Budget measures affecting caregiver tax credits took effect as of January 1, 2017 and will be reflected for the first time on the 2017 tax return which will be filed a year from now.

That said, those taxpayers who are affected (for better or for worse) by the changes may want to take a look at how their tax situation for 2017 has changed as a result. For instance, an individual who provided in-home care to a non-infirm parent or grandparent and who claimed a caregiver tax credit in respect of that parent or grandparent should realize that no such claim will be available for the 2017 tax year. And, for each such claim not made, the individual’s federal tax payable for 2017 will increase by about $700.

Conversely, taxpayers who have not been able to claim a caregiver tax credit because the income of an infirm adult family member who was dependent on them was too high should reexamine their eligibility under the new rules. The dependant income threshold for full eligibility for the (former) infirm dependent credit was $6,902. The dependant income threshold for full eligibility for the new Canada Caregiver Credit is (for 2017) $16,163. Consequently, in many cases, claims for a caregiver tax credit may become available for the first time. In addition, it will be possible for dependants to receive higher income amounts (for instance, by making higher withdrawals from an RRSP or RRIF), without eroding their caregiver’s ability to claim the new Canada Caregiver Credit.

More information on the changes creating the new Canada Caregiver Credit can be found in the 2017-18 federal Budget papers, available on the Finance Canada website at www.budget.gc.ca/2017/docs/tm-mf/si-rs-en.html#_Toc476839165.

For several years, the Canada Revenue Agency (CRA) has been encouraging taxpayers to manage their taxes and benefits online, through the CRA website, and has been largely successful in that effort. More recently, the Agency has taken the next step, by creating mobile apps which taxpayers can use to obtain most of the same information, and carry out many of the same tasks, as can already be done online.

For several years, the Canada Revenue Agency (CRA) has been encouraging taxpayers to manage their taxes and benefits online, through the CRA website, and has been largely successful in that effort. More recently, the Agency has taken the next step, by creating mobile apps which taxpayers can use to obtain most of the same information, and carry out many of the same tasks, as can already be done online.

For individuals, there are currently two such apps – MyCRA and MyBenefits CRA. The former gives users access to a range of information about their own tax affairs, as well as more general information about the CRA’s services, as follows:

• personal tax information, including the following:
• view return status and notices of assessment,
• view benefit and credit payment amounts and dates,
• view TFSA and RRSP contribution limits,
• sign up for email notification of correspondence,
• update address and phone numbers,
• add or update direct deposit information,
• request a proof of income statement (option C print),
• view or update marital status, and
• view or adjust the list of children in the individual’s care;
• making a payment to the CRA (opens in new browser window);
• a list of certified EFILE tax professionals (opens in new browser window);
• a list of CRA-certified software (opens in new browser window);
• a list of community volunteer income tax clinics (opens in new browser window);
• a charitable donation tax credit calculator (opens in new browser window); and
• a list of registered charities (opens in new browser window).

As the name implies, MyBenefits CRA allows users to obtain both general and taxpayer-specific information about federal and provincial refundable tax credits which they are receiving or may be eligible to receive. Those credits include the harmonized sales tax (HST) credit and the Child Tax Benefit (CTB), and the specific services provided are as follows:

• non-personalized benefit dates;
• benefits calculator;
• the following secure services
• view next benefit/credit payments,
• view last benefit/credit payments,
• view or update marital status,
• view or adjust the list of children in the individual’s care, and
• check application status (if applicable) for Canada child benefits.

Because both mobile apps allow access to confidential taxpayer information, it is necessary to register in advance in order to use them. The process involved is essentially the same as is required in order to use the CRA’s online services through its website. And, while the process for doing so can seem a bit detailed and lengthy, once registration is effected, signing in to use the apps is relatively simple thereafter. The initial process of registration is as follows.

The starting place is the CRA’s registration page for online services at www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/pss_fq/cnd-eng.html#hlp1b. Once there, click on the link to MyCRA mobile app or MyBenefits CRA mobile app, where the following instructions will appear.

Step 1 – Provide personal information

• Enter your social insurance number.
• Enter your date of birth.
• Enter your current postal code.
• Enter an amount you entered on one of your income tax and benefit returns. (Please note: You should have a copy of your returns handy. The line amount requested will vary. It could be from the current tax year or the previous one. To register, a return for one of these two years must have been filed and assessed.)
• Create a CRA user ID and password.
• Create a series of security questions and answers.

After the taxpayer completes Step 1 of the registration process, he or she will have access to some information in MyCRA. A CRA security code will then be sent by regular mail and should arrive within 5-10 days. That CRA security code has an expiry date, which will be indicated in the letter. The taxpayer can then return to MyCRA mobile app, select "Log in", and enter his or her CRA user ID and password. When prompted, the user should enter his or her ID and the CRA security code. Once that is done, the user will have access to all of the available services in MyCRA.

The wide availability of information and services online has meant that most Canadians have a large and ever-increasing number of user ids and passwords to remember. The CRA has made using its online services (and mobile apps) somewhat easier in this regard, as it is possible to register for and access those services and apps by using an ID and password already set up with a Canadian financial institution. More information on the how the “sign-in partner” process works is available at www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/snp_fq/menu-eng.html.

Whether it’s done using a CRA ID and password or using the sign-in partner option, once registration is completed, that registration is effective for both mobile apps – MyCRA and MyBenefits, as well as for the CRA’s online service MyAccount. The services provided are, however, different.

My Benefits CRA provides taxpayers with quick access to personalized benefit and credit information in a format specifically designed for mobile devices. MyCRA allows mobile users to view their recent tax information, and update contact information, direct deposit, and more. My Account, the online service, provides taxpayers with a more extensive list of options, and that list can be found at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/bt-eng.html.

For most Canadian taxpayers, income tax is an “out-of-sight, out-of-mind” subject, with most taxpayers giving serious thought to their tax situation only when it’s time to file the annual tax return. And, too often, that approach leads to an unexpected (or higher than expected) tax amount owing when the return is filed – and seemingly no way to fix that problem.

For most Canadian taxpayers, income tax is an “out-of-sight, out-of-mind” subject, with most taxpayers giving serious thought to their tax situation only when it’s time to file the annual tax return. And, too often, that approach leads to an unexpected (or higher than expected) tax amount owing when the return is filed – and seemingly no way to fix that problem.

While it is true that nearly all tax planning and tax saving strategies need to be implemented before the end of the calendar year in order to be effective for that year (the RRSP contribution deadline of 60 days after year-end being the only major exception), it’s not the case that nothing can be done at tax filing time to minimize the tax bill payable.

The available strategies are better characterized as tax filing rather than tax planning techniques. While it’s not possible, after the RRSP contribution deadline has passed, to create any expenditure-based deductions or credits for 2016, the taxpayer can realize some tax savings through the strategic use of deductions and credits for expenditures already made, either in 2016 or in previous years. And, many of those expenditures are ones which are incurred by millions of Canadian taxpayers every year.

Medical expense tax credit

While many medical expenses incurred by Canadians (like doctor’s visits and hospital care) are covered by public health care plans, there is a very long list of such expenses (like prescription drugs and dental care) which must be incurred on a regular basis and which must be paid out-of-pocket. Some individuals, of course, have such costs covered by an employer-sponsored benefits plan, but they are a diminishing group – for many Canadians, there is no private or public coverage for such costs.

Taxpayers who must pay out of pocket without reimbursement for medical costs do, however, have the option of claiming a federal credit equal to 15% of qualifying medical expenses. Each of the provinces and territories also offers a medical expense tax credit, with the percentage amount varying by jurisdiction.

In all cases, the credit for medical expenses can be claimed only on such expenses which exceed 3% of the taxpayer’s net income, or $2,237 (for 2016), whichever is less. It is possible, however, for all medical expenses of both spouses and all children who were born in 1999 or later, to be combined and claimed by either spouse. So, while the medical expenses incurred by a single family member might not be enough to allow him or her to make a claim, aggregating those expenses may well mean that total expenses are enough to get over the 3% of net income/$2,237 threshold.

Similarly, it’s also possible to claim, on the 2016 return, expenses which were incurred prior to 2016. Taxpayers are entitled to claim all qualifying expenses incurred in any 12-month period which ends during the taxation year for which the return is being filed. So, if the taxpayer and his or her family incurred medical expenses during 2015 which did not exceed the 3% of net income threshold, they can combine such expenses with qualifying expenses incurred in 2016 in making their claim on the 2016 return. The only restrictions on doing so are that all such expenses must have been incurred within a single 12-month period ending in 2016 and, of course, any expense claimed can only be claimed once.

In determining who will make the medical tax credit claim for a family, there are two points to remember. Since total medical expenses claimable are those which exceed 3% of net income or $2,237, whichever is less, the greatest benefit will be obtained if the spouse with the lower net income makes the claim for total family medical expenses. However, the medical expense credit is a non-refundable one, meaning that it can reduce tax payable, but cannot create or increase a refund. Therefore, it’s necessary that the spouse making the claim have tax payable for the year of at least as much as the credit to be obtained, in order to make full use of that credit.

There are a huge number and variety of medical expenses which can be incurred. Some of those will qualify for the medical expense tax credit whenever a qualifying expenditure is made, while in other cases, it is necessary to have a doctor’s prescription certifying that the particular product, service, or equipment are necessary. A listing of medical expenses eligible for the credit, and any requirements (such as a doctor’s prescription) which must be obtained, can be found on the Canada Revenue Agency website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330-331/menu-eng.html#mdcl_xpns.

Charitable donation tax credit

Canadians who make donations to registered charities are entitled to claim a non-refundable charitable donations tax credit for those donations, for both federal and provincial/territorial tax purposes. The amount of the provincial/territorial credit will vary by jurisdiction: the federal credit is calculated as 15% of donations up to $200 and 29% of donations over that amount.

Taxpayers are entitled to make a claim on the annual tax return for charitable donations made in the current (2016) year, or in any of the previous five years. While it may seem counter-intuitive not to claim a contribution made during the year, in some cases a better tax result may be obtained by waiting.

For taxpayers whose total charitable donations made during 2016 are more than $200, the full claim should be made on the 2016 return – there is no benefit to such taxpayers in delaying the claim. Where, however, total charitable donations made during the year do not exceed that $200 threshold, it may be better to wait. For example a taxpayer who contributes $150 to a charity in a year and claims that amount on the return will receive a 15% federal credit. Where the same taxpayer makes a similar $150 donation in the next year and claims the entire $300 in donations on that year’s return, he or she will receive a credit of 15% on the first $200 and 29% on the balance of $100 in donations.

Pension income splitting

Each of the tax filing strategies outlined above require that the taxpayer make some kind of expenditure in order to claim the related credit. That’s not the case for pension income splitting, which can provide eligible taxpayers with significant tax benefits.

Pension income splitting effectively allows spouses to split private pension income (generally, income from an employer-sponsored pension plan, from a registered retirement savings plan or a registered retirement income fund) between them for tax purposes. So, a taxpayer who receives $40,000 a year in qualifying pension income can report $20,000 of that income on his or her return, with the remaining $20,000 reported by his or her spouse. There’s no need for any actual transfer of funds – the “transfer” is simply a notional one done for tax reporting purposes only.

The mechanics of pension income splitting are relatively simple. Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032E(12), Joint Election to Split Pension Income, with their annual tax return. That form, which is unfortunately not included in the general tax return package issued by the CRA, can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1032/README.html. There is relatively little information in the General Income Tax Guide on pension income splitting; much more extensive and detailed information on qualifying income, mechanics, benefits, and tax results of the strategy can be found on the CRA website at www.cra-arc.gc.ca/pensionsplitting/.

The Canada Pension Plan (CPP), together with the Old Age Security (OAS) program, forms the cornerstone of Canada’s retirement income system. There are other retirement savings options available to Canadians, but the CPP is unique in that it is Canada’s only compulsory retirement savings program.

The Canada Pension Plan (CPP), together with the Old Age Security (OAS) program, forms the cornerstone of Canada’s retirement income system. There are other retirement savings options available to Canadians, but the CPP is unique in that it is Canada’s only compulsory retirement savings program.

Canadians can, of course, contribute to registered retirement savings plans (RRSPs) and individuals who were residents of Canada for at least 20 years of their adult lives will be able to receive OAS benefits after age 65. And, an ever-decreasing minority of Canadians can look forward to receiving payments from an employer-sponsored registered pension plan (RPP). However, despite the availability of these options, the hard fact is that many Canadians now in the work force will not have enough income from all sources, public and private, to ensure a financially comfortable retirement – or even, in some cases, to provide a reasonable standard of living. While most Canadians will receive Old Age Security payments, even the maximum benefit receivable (currently less than $7,000 per year) isn’t enough to live on. Most Canadians will not be receiving benefits from an RPP. And, while changes have been made in recent years to encourage taxpayers to accumulate private retirement savings through an RRSP, the fact is that many working Canadians do not make RRSP contributions each year and those who do usually contribute much less than the allowable maximum.

The Department of Finance estimates that one-third of Canadian families who are nearing retirement and do not have workplace pension plans are at risk of having their current after-tax family income drop by more than 40% following retirement. Faced with that reality, the federal and provincial governments have moved to make changes which would increase the amount of retirement income received by Canadians. Those changes will come about through enhancements to the CPP, which will mean higher CPP retirement benefits for the next generation of Canadian workers.

The benefit of increasing Canadians’ retirement income through changes to the CPP is that, unlike contributions made to an RRSP, saving for retirement through the CPP isn’t voluntary. Working Canadians are required by law to make contributions, with the contribution amount set by the CPP, deducted from the employee’s gross pay and remitted to the federal government on their behalf. And, all contributions made by an individual Canadian worker are matched by his or her employer and similarly remitted to the federal government on his or her behalf. Once the employee chooses to begin receiving CPP retirement benefits (anytime between age 60 and age 70), the amount of monthly benefit received will depend, for the most part, on the amount of contributions made over the individual’s working life.

The changes to be made to the CPP, which will be implemented over a seven year period beginning in 2019, are significant. The goal of increasing the amount of CPP benefits which can be received by retired Canadians will be achieved through both an increase in the percentage of income contributed by Canadians each year and in the maximum amount of income on which those percentage contributions are based.

Right now, Canadian workers are required to contribute 4.95% of their gross income, to a maximum income (known as the “year’s maximum pensionable earnings”, or YMPE) of $55,300. In calculating CPP premiums, the first $3,500 of income is excluded. Consequently, the maximum premium payable by an employee is $51,800 ($55,300 minus $3,500), times the contribution rate of 4.95%, or $2,564.10. With the employer’s matching contribution, the maximum total contribution amount credited to the employee’s CPP “account” for the year is $5,128.20. (Self-employed taxpayers are required to pay both the employer and employee portions of CPP contributions for the year.)

The current goal of the CPP program is to provide a retirement benefit equal to a maximum of 25% of earnings up to the YMPE, which is itself intended to approximate the average Canadian wage. However, given that contribution amounts are limited by the YMPE, individuals earning more than that amount will not be contributing at a rate which will provide the desired income replacement of 25% of average lifetime earnings. As well, although the maximum annual CPP retirement benefit in 2016 was $13,110, most individuals do not receive that amount. The average annual CPP retirement benefit received in 2016 was about $7,500.

The changes to the CPP intended to address these concerns will be implemented over a seven-year period starting in 2019. Percentage contribution rates will be increased, with the goal of raising the income replacement level to one-third of earnings. As well, a new, separate contribution will be payable in respect of earnings above the YMPE.

The changes will be implemented over the following time frame.

• Increased contribution rates for the CPP will be phased in, starting in 2019. Figures released by the federal government indicate that an individual who earns at least the YMPE will pay about $6 per month in additional premiums in 2019. By 2025, that individual will be paying an additional $43 per month in premiums. Expressed as a percentage, the CPP contribution rate will increase by 1% for both employers and employees between 2019 and 2023.

• Beginning in 2024, a separate contribution rate, which is projected to be 4% each for employers and employees, will be payable for earnings above the YMPE, to an upper earnings limit. The federal government expects that, upon full implementation in 2025, that upper income limit will be about $82,700. Both employers and employees who are required to make this additional contribution will both be able to claim a deduction for such contribution made when calculating taxable income.

Other, consequential, changes will also be made to the tax system. To help mitigate the impact of increased CPP contribution rates on lower-income Canadians, increased benefits will be provided under the Working Income Tax Benefit, a refundable tax credit that supplements the income of individual Canadians earning less than about $20,000 annually.

More details of the upcoming changes to the CPP can be found in a Backgrounder issued by Finance Canada, which is available on their website at www.fin.gc.ca/n16/data/16-113_3-eng.asp.

Costs incurred for child care expenses are among the most frequent deductions claimed by Canadian taxpayers on their annual tax returns. And, for many Canadian families, especially those with more than one child, or those who live in large urban centres, the cost of child care can consume a significant percentage of their annual budget.

Costs incurred for child care expenses are among the most frequent deductions claimed by Canadian taxpayers on their annual tax returns. And, for many Canadian families, especially those with more than one child, or those who live in large urban centres, the cost of child care can consume a significant percentage of their annual budget.

For all families who incur child care expenses, the good news is that most such costs can be claimed as a deduction (as opposed to a refundable or non-refundable credit) on the annual return, meaning that those costs reduce taxable income on a dollar-for-dollar basis. The tax treatment of expenses related to child care can, however, vary, depending on the kinds of expenses incurred and their purpose.

The basic rule is that child care expenses will be deductible when they are incurred in to order to allow a parent to earn income from either employment or self-employment, or to attend school. However, while those criteria for claiming the expense are broad, there are limitations on the amounts which may be claimed, no matter how large the actual expenditure.

For 2016, those dollar figure limitations are as follows:

• up to $8,000 in child care expenses incurred for a child or children who are 6 years of age or under at the end of 2016; and
• up to $5,000 in child care expenses incurred for a child or children who are between 7 and 16 years of age at the end of 2016.

Where a child is disabled, higher limits apply, and up to $10,000 in child care expenses can be claimed for 2016.

The total amount claimed for child care expenses, regardless of the age of the children or the number of children for whom such claims are made, is also subject to an overall limit of two-thirds of the income for the year of the parent making the claim. As well, in a two-parent family, any claim for child care expenses must generally be made by the spouse with the lower net income.

While amounts paid for day care or after-school care comprise the majority of child care expenses incurred by families, those aren’t the only costs. Where family finances allow, children may attend an overnight summer camp or a sports school, and a portion of the costs incurred for such camps may also be claimed as child care expenses. As is the case with the basic child care expense claim, there are limitations on the amounts which can be claimed and deducted, as follows:

• up to $200 per week in such costs incurred for a child or children who were 6 years of age or under at the end of 2016; and
• up to $125 per week in such costs incurred for a child or children who are between 7 and 16 years of age at the end of 2016.

And, as with the basic child care expense deduction, higher limits apply in the case of a disabled child, for whom up to $275 per week in such costs may be claimed.

There is a third category of expenses which many families incur for children, and those expenses are subject to different tax treatment. That category includes costs incurred to enroll children in extracurricular athletic or arts-focused activities.

While other child care costs are deductible from income, costs incurred for extracurricular activities are eligible for a non-refundable tax credit. Essentially, the federal income tax payable for the year by the parent who claims the credit is reduced by 15% of the amount paid to enroll a child or children in those activities.

Once again, there is a limit on the amount of eligible costs for which a credit can be claimed, and those limits have been reduced for 2016. The 2016 limits are as follows:

• where a child is engaged in athletic or sports activities, a parent can claim a non-refundable credit on up to $500 of costs incurred for such activities;
• where a child is enrolled in arts or cultural-related activities, a parent can claim a non-refundable credit on up to $250 of costs incurred for such activities.

It’s readily apparent that costs which are eligible for either of these credits could also qualify, in the right circumstances, for the child care expense deduction. The rule in such circumstances is that where an amount would qualify for both, such amount must first be claimed as a child care expense, with a tax credit then claimable on any unused remainder.

The number and variety of extracurricular activities available for children is, of course, enormous, and so the Canada Revenue Agency (CRA) has prescribed rules which apply to determine whether a particular activity qualifies for either of these credits. Information on those rules, and on the credit generally, can be found on the CRA website at www.cra-arc.gc.ca/fitness/ and www.cra-arc.gc.ca/artscredit/.

A deduction for child care expenses is claimed on line 214 of the annual tax return, but details of child care expenses incurred, and the computation of the available deduction, is done on Form T778, and that form also includes a useful summary of the applicable rules. The T778 is not included in the General Income Tax Return and Guide Package, but is available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t778/README.html.

It’s not news that the Canadian tax system is complex and that most Canadians, especially those who only encounter it once a year at tax-filing time, would rather not have to deal with that complexity. Consequently, over the next couple of months, it’s likely that more than 16 million Canadian taxpayers will seek out the services of professional tax return preparers and tax discounters, in order to get their 2016 returns completed and EFILED on time.

It’s not news that the Canadian tax system is complex and that most Canadians, especially those who only encounter it once a year at tax-filing time, would rather not have to deal with that complexity. Consequently, over the next couple of months, it’s likely that more than 16 million Canadian taxpayers will seek out the services of professional tax return preparers and tax discounters, in order to get their 2016 returns completed and EFILED on time.

Of course, information about anyone’s tax affairs is confidential and is protected, by law, from disclosure to any third party – even to a spouse, parent or child of the taxpayer. Consequently, any taxpayer who wants someone else to deal with the Canada Revenue Agency (CRA) on their behalf – whether it’s a family member, a friend, or a commercial tax return preparation service or tax discounter – must provide the Agency with permission to provide such access. And, although taxpayers are not required to provide such permission in order to have a third party prepare and EFILE their tax return, it’s not unusual for tax return preparers or tax discounters to ask their clients for such an authorization. In many cases, having that authorization will give the tax return preparer access to information – like the amount of available carryforward amounts of tuition or education credits, or the amount of RRSP contribution room – which is needed to complete the return.

That said, the vast majority of taxpayers who are asked to sign a form granting such permission to the person or firm preparing their tax return will likely do so without hesitation, and in most cases without reviewing that form carefully. That’s not the best approach, as a decision to grant anyone access to one’s confidential tax information is a significant step, and the consequences can be more far-reaching than might be apparent at first glance.

The CRA provides a prescribed form – the T1013(E), Authorizing or Cancelling a Representative (available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1013/README.hml), which can be used by anyone to name any other person or company as their representative. It is also possible, for those who are already registered for the CRA’s My Account service, to authorize a representative online.

No matter how the authorization is given, the first question for the taxpayer who is granting authorization is to consider the purpose for which such authorization is being provided.

The CRA’s T1013(E) form provides for two levels of access to an individual’s tax accounts and tax information. Broadly speaking the first, Level 1, provides the named representative with the right to receive information, while the higher Level 2 access enables that representative to make changes to the individual’s tax accounts.

The specific rights granted to a representative at each level are as follows.

Where a representative has been provided by the taxpayer with Level 1 access, the CRA can disclose information about the following to that representative:

• information included on the taxpayer’s income tax return;
• adjustments made to the taxpayer’s income tax return;
• information about the taxpayer’s registered retirement savings plan (RRSP), Home Buyers’ Plan, Tax-Free Savings Account (TFSA), and Lifelong Learning Plan (LLP);
• accounting information with respect to the taxpayer’s tax account, including balances, payments on filing, and instalment payments or transfers;
• information about the taxpayer’s benefits and credits, including the Canada child benefit (CCB), goods and services/harmonized sales tax (GST/HST) tax credit, and the working income tax benefit (WITB); and
• the taxpayer’s marital status (but not information related to the taxpayer’s spouse or common-law partner).

A representative who has been provided by the taxpayer with Level 2 access has all the powers of a Level 1 as well as the right to request adjustments to the taxpayer’s income, deductions, and non-refundable credits, and to effect accounting transfers. A Level 2 representative is also able to obtain personalized tax remittance forms in the taxpayer’s name, submit a request for relief from interest or penalty charges under the Taxpayer Relief Program, and to file a Notice of Objection from an assessment or a Notice of Appeal from a decision of the Minister.

There are some actions which cannot be taken by either a Level 1 or a Level 2 representative who has been authorized to act under a Form T1013(E). Such representatives are not allowed to change the taxpayer’s address, marital status, or direct deposit information, to authorize, view, or cancel other representatives on the taxpayer’s file, to get information about the children who are in the taxpayer’s care, or to apply for child benefits.

Where another person is engaged in preparing a taxpayer’s return or otherwise dealing with tax matters on their behalf, it can obviously be useful for that person to be able to obtain relevant tax-related information about that taxpayer. Taxpayers who are contemplating providing authorization to another person or company should, however, consider the following potential issues and potential pitfalls when deciding how much access to grant and, consequently, how to complete the T1013(E).

First, it’s possible to deal with the CRA through a number of avenues – by telephone, in writing, in person, and online. A taxpayer who is authorizing a representative has to decide, specifically, whether to grant that representative the ability to deal with his or her tax affairs online (through the CRA website) or to limit that access to contacts with the CRA by telephone, in writing, or in person. It is an important decision for this reason. Where the taxpayer completes Part II, Section B of the T1013(E), he or she is granting the representative access only by telephone, writing, or in-person (and not including online access), and the taxpayer can, on the same form, specify the tax years for which access is being authorized, and the level of authorization (Level 1 or 2) being granted for each year. Where, however, the taxpayer completes Part II, Section A, he or she is also providing his or her representative with online access through the CRA website, and such access must be provided for all taxation years, without limit, although the taxpayer can still specify whether such access is at Level 1 or 2.

Second, where a taxpayer engages the services of a tax return preparation service or a tax discounter, it is frequently the case that the business itself, rather than an individual, is named as the taxpayer’s representative on the T1013. Taxpayers should be aware, however, that where a business is named as the representative, everyone employed by that business will, as a result, have access to the taxpayer’s confidential tax information. If the taxpayer wants to limit such access solely to the person with whom they are dealing in relation to their tax return preparation or other tax matter, it is necessary to specify, on the T1013, the name of both the business and the specific individual for whom such authorization is being provided.

Third, when a taxpayer signs a T1013(E) appointing a representative, that T1013(E) does not expire, unless the taxpayer specifies a termination date, or subsequently cancels the appointment, or the CRA is notified of the taxpayer’s death. Taxpayers who have been asked to sign an authorization when engaging a tax return preparation firm or a tax discounter often assume that such authorization will be in effect only until the return is done. Unless a termination date is specified in the authorization, that is not the case.  A representative named in a T1013(E) in which no termination date is specified will have the continuing right to obtain information from the CRA about that taxpayer, even after the taxpayer has finished his or her dealings with the representative. (The CRA does provide a measure of protection for the taxpayer by cancelling inactive authorized representatives after a period of two years.) The good news is that cancelling the representative’s authorization can be done quite easily over the phone. The taxpayer need only call the CRA’s Individual Income Tax Enquiries Line. In order to satisfy the CRA’s information security requirements, the taxpayer will be asked to provide identifying information – at a minimum, his or her name, social insurance number, address, and data from a recently filed tax return. The T1013(E) authorization can then be cancelled.

It’s readily apparent that naming someone as your representative with the CRA, even at the lowest level of authorization for a limited period of time gives that person access to an enormous amount of personal tax and financial information. Taxpayers should be aware, when providing an authorization, exactly what they are agreeing to and for what length of time. When it is determined that providing such access is necessary, careful consideration should be given to the level of access the representative will need, the tax year or years for which such access is required and, possibly most important, providing a date on which that authorization will expire.

The time is fast approaching when the annual chore of gathering together the various pieces of information needed to complete one’s annual tax return, and getting that return completed and filed can’t be delayed any longer. For those wishing to put that chore off as long as possible, there is one (very small) bit of good news. Individual Canadians (other than the self-employed and their spouses) are required to file the annual return by April 30 of the following year, and to pay any tax amount owed by the same deadline. This year, since April 30 falls on a Sunday, the Canada Revenue Agency (CRA) has extended that filing and payment deadline to the following day, Monday May 1, 2017. Self-employed taxpayers have until Thursday June 15, 2017 to file their returns for 2016, but they too must pay any outstanding tax amounts owed for that year by Monday May 1, 2017.

The time is fast approaching when the annual chore of gathering together the various pieces of information needed to complete one’s annual tax return, and getting that return completed and filed can’t be delayed any longer. For those wishing to put that chore off as long as possible, there is one (very small) bit of good news. Individual Canadians (other than the self-employed and their spouses) are required to file the annual return by April 30 of the following year, and to pay any tax amount owed by the same deadline. This year, since April 30 falls on a Sunday, the Canada Revenue Agency (CRA) has extended that filing and payment deadline to the following day, Monday May 1, 2017. Self-employed taxpayers have until Thursday June 15, 2017 to file their returns for 2016, but they too must pay any outstanding tax amounts owed for that year by Monday May 1, 2017.

Aside from that administrative concession, there aren’t a lot of changes this year to the process of completing and filing the annual return. If the trend of the past several years continues, as it likely will, the vast majority of taxpayers will file their returns electronically, either by paying someone else to prepare and file the return, or by doing it themselves through the CRA website.

The CRA has for several years been encouraging taxpayers to move away from paper-filing of returns to online filing, and those efforts have been overwhelmingly successful. Last year, 84% of returns filed were filed online, while only 16% of taxpayers continued to paper-file.

Taxpayers who want to paper-file their returns have found it more difficult in recent years, as the CRA has discontinued its practice of mailing personalized returns to Canadians who had used the paper-filing option in the past. However, it is still possible to obtain and use a paper return. Tax return forms and guides (including a return envelope for mailing) are available from Service Canada offices and post offices across the country. If those sources run out of return packages (as has happened in previous years), taxpayers can have a return package mailed to them, by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281 and making a request. As well, a printable version of the return can be found on the CRA’s website at www.cra-arc.gc.ca/formspubs/t1gnrl/menu-eng.html.

The majority of taxpayers who choose to file online have two options – NETFILE and E-FILE. The first of those – NETFILE – involves preparing one’s return using software approved by the CRA and filing that return on the Agency’s website, using the NETFILE service. The second method – E-FILE – involves having a third party file one’s return online, and the group of service providers which are authorized by the CRA to E-FILE individual income tax returns include both tax return preparation services and tax discounters.

It seems that most Canadians prefer to have someone else prepare and file their tax returns. Last year, 56% of individual income tax returns filed came in by E-FILE, while exactly half that number, or 28% of returns were filed using NETFILE, and the balance of 16% were paper-filed. (A fourth option – TELEFILE – which allowed Canadians to file using a touch-tone phone was discontinued by the CRA several years ago and is no longer available.)

The majority of Canadians who would rather have someone else deal with the intricacies of the Canadian tax system on their behalf can find information about E-FILE on the CRA website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/fl-nd/menu-eng.html. That site will also provide a listing (searchable by postal code) of authorized E-FILE service providers across Canada.

Those who are more comfortable preparing their own tax returns and filing online can use the CRA’s NETFILE service, and information on that service can be found at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/netfile-impotnet/menu-eng.html. While there are some kinds of returns which cannot be NETFILED (for instance, a return for a taxpayer who died in 2016), the vast majority of Canadians who wish to do so will be able to NETFILE their return. As well, while it was once necessary to obtain an access code in order to NETFILE, that is no longer the case. The CRA’s NETFILE security procedures can be satisfied by providing specific personal identifying information, including social insurance number and date of birth.

NETFILE can only be used where a return is prepared using tax return preparation software which has been approved by the CRA. While such software can be found for sale just about everywhere this time of year, approved software which can be used free of charge is also available. A listing of both free and commercial software approved for use in preparing individual returns for 2016 can be found on the CRA website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/netfile-impotnet/crtfdsftwr/menu-eng.html.

Finally, taxpayers who are not comfortable preparing their own returns, but for whom the cost of engaging a third party to do so is a financial hardship have another option. During tax filing season, the CRA runs a number of Community Volunteer Tax Preparation Clinics where taxpayers can have their returns prepared free of charge by volunteers. A listing of such clinics (which is regularly updated during tax filing season) can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/vlntr/clncs/menu-eng.html.

Although individual Canadians file the same T1 Income Tax Return form each year, the rules governing the information to be provided on that return form and the tax consequences flowing from that information is in a constant state of change. And, it’s a safe bet that very few taxpayers read the annual Income Tax Guide carefully to find out what’s changed on this year’s return.

Although individual Canadians file the same T1 Income Tax Return form each year, the rules governing the information to be provided on that return form and the tax consequences flowing from that information is in a constant state of change. And, it’s a safe bet that very few taxpayers read the annual Income Tax Guide carefully to find out what’s changed on this year’s return.

As a result, it’s easy for a situation to arise in which taxpayers to fail to report income received, or in which they miss out on newly available deductions or credits, both due to a lack of knowledge. And, it’s worth noting that while the Canada Revenue Agency (CRA) will almost certainly pick up on a taxpayer’s failure to report income as required, the CRA does not (and, in fact, cannot) provide the taxpayer with deductions or tax credits to which he or she is entitled, but has failed to claim on the return.

There were a significant number of tax changes which took effect during the 2016 tax year which affected individuals, and which are reflected on the 2016 return to be filed this spring. Some of the more important of those changes are outlined below.

Changes to child and family benefits

As of July 1, 2016, the child and family benefits paid to Canadian families underwent a significant change. Prior to July 1, the federal child and family benefit program consisted of the Canada Child Tax Benefit (which was not taxable), the National Child Benefit Supplement (which was not taxable) and the Universal Child Care Benefit (which was taxable). All of those benefits were replaced, effective July 1, with the Canada Child Benefit, which is not taxable.

What all of that means from the perspective of a family which received child and family benefits from the federal government during 2016 is that the only amount which must be reported on a return for 2016 (generally, on the return of the parent with the lower net income) is any Universal Child Care Benefit which was received between January and June 2016. Any and all other child and family benefits received during the year are not taxable and so do not need to be included in income on the return for 2016.  

Changes to children’s fitness and arts credits

For several years, parents have been able to claim a non-refundable tax credit to help offset the cost of enrolling their children in fitness or arts-related activities.

Those credits may still be claimed on the return for 2016, but they have been reduced. For 2016, the maximum eligible fees per child for purposes of the children’s fitness tax credit has been reduced to $500. Eligible fees per child for purposes of the children’s arts credit have been reduced even further, to $250.

Looking ahead, it’s worth noting that both credits have been entirely eliminated as of 2017, so parents should not plan on claiming either credit when they file their returns for the current taxation year in the spring of 2018.

Elimination of Family Tax Cut

In 2014 and 2015, families with children under age 18 were able to engage in income splitting, through the notional reallocation of income from a higher earning spouse to the spouse with the lower income. That strategy, known as the “Family Tax Cut”, generally allowed up to $50,000 in taxable income to be notionally reallocated to the lower earning spouse, and taxed (at a lower rate) in his or her hands. The maximum tax savings which could be claimed was $2,000.

However, taxpayers who search the 2016 return form for a place to claim the Family Tax Cut won’t find it, as it has been eliminated for 2016 and subsequent taxation years. 

New home accessibility expense tax credit claim

Beginning with the 2016 taxation year, taxpayers can claim a non-refundable tax credit for changes made to a home in order to make it safer or more accessible for a senior or for someone who is disabled. The credit is equal to 15% of qualifying costs incurred, to a maximum of $10,000 in such costs.

The home accessibility tax credit is claimable, not just by the person for whom the qualifying renovations are made but, generally, by family members who support that individual.

In order to be claimed on the return for 2016, any eligible renovations must of course have been done before the end of that year, so the deadline for making such renovations claimable on the 2016 has passed. However, as many common home “renovation” projects do qualify for the credit (for example, installing a grab bar in a bath or shower), it’s worth checking to see whether any such expenditures were made during 2016.

And, of course, such qualifying expenditures made during 2017 will be claimable on the return next spring. More information on the kinds of home renovation expenses that will or won’t qualify for the credit is available on the Canada Revenue Agency website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/398/398-eng.html#R_lgbl_HATC.

Reporting the sale of a principal residence

For many years, Canadian taxpayers have received a tax exemption (the “principal residence exemption”) on any profit (or “gain”) they make on the sale their home, as such amounts are not included in taxable income. Until now, it hasn’t even been necessary to report the sale of one’s home on the annual tax return. As of the 2016 tax year, that has changed.

An individual taxpayer who sells his or her home must now report the sale on Schedule 3 to the annual return. On that Schedule 3, the taxpayer is required to certify the year the property was acquired, the number of years during which the property was his or her principal residence during the period of ownership and the amount for which the property was sold.

There is a related change with respect to the CRA’s ability to enforce the new reporting requirement. Also effective as of 2016, the Agency can at any time (meaning that the usual time limits for reassessments don’t apply) reassess your income tax return if you fail to report a sale of real estate.

Claiming a labour-sponsored funds tax credit

Taxpayers who invest in the shares of federally or provincially (or territorially) registered labour-sponsored venture capital corporations (LSVCCs) can claim a federal tax credit for that investment. Changes have been made, effective for the 2016 tax year, to the percentage claims which can be made.

For 2016 and subsequent years, the federal credit rate percentage for investments in provincially or territorially registered LSVCCs has been restored to 15%.

Conversely, the federal tax credit for the purchase of shares of federally registered LSVCCs has decreased to 5% for 2016. As well, 2016 is the last year for which a credit can be claimed for investments in federally registered LSVCCs, as the federal credit is eliminated for 2017 and later tax years.

For retired Canadians (and almost certainly for those who are no longer paying a mortgage) the annual income tax bill can represent the single largest expenditure in their budgets. The Canadian tax system provides a number of tax deductions and credits available only to those over the age of 65 (like the age credit) or only to those receiving the kinds of income usually received by retirees (like the pension income credit) to help minimize that tax burden. One of the most valuable of those strategies —  pension income splitting — isn’t particularly familiar to many taxpayers who could benefit from it, especially those who do not receive professional tax planning or tax return preparation advice.

For retired Canadians (and almost certainly for those who are no longer paying a mortgage) the annual income tax bill can represent the single largest expenditure in their budgets. The Canadian tax system provides a number of tax deductions and credits available only to those over the age of 65 (like the age credit) or only to those receiving the kinds of income usually received by retirees (like the pension income credit) to help minimize that tax burden. One of the most valuable of those strategies —  pension income splitting — isn’t particularly familiar to many taxpayers who could benefit from it, especially those who do not receive professional tax planning or tax return preparation advice.

That’s a particularly unfortunate reality because pension income splitting has the potential to generate more tax savings among taxpayers over the age of 65 (and certainly those over the age of 71, for whom RRSP contributions are no longer possible) than just about any other tax planning strategy available to retirees. In addition, it’s one of the very few tax planning strategies which require no expenditure of funds on the part of the taxpayer and which can be implemented after the end of the tax year, at the time the return for that tax year is filed.

Those attributes can make pension income splitting sound like a “too good to be true” tax scam, but that’s not the case. Essentially, what pension income splitting offers is a government-sanctioned opportunity for married taxpayers over the age of 65 to make a notional reallocation of private pension income between them on their annual tax returns, and to benefit from a lower overall family tax bill as a result.

Pension income splitting, like all forms of income splitting, works because Canada has what is called a “progressive” tax system, in which the applicable tax rate goes up as income rises. For 2016, the federal tax rate applied to about the first $45,000 of taxable income is 15%, while the federal rate applied to the next $45,000 of such income is 20.5%. So, an individual who has $90,000 in taxable income will pay federal tax of about $16,000; if that $90,000 was divided equally between said individual and his or her spouse, the total federal family tax bill would be $13,500.

The general rule with respect to pension income splitting is that taxpayers who receive private pension income during the year are entitled to allocate up to half that income (without limit) with a spouse for tax purposes. In this context, private pension income means a pension received from a former employer and, where the income recipient is over the age of 65, payments from an annuity, a registered retirement savings plan (RRSP), or a registered retirement income fund (RRIF). Government source pensions, like the Canada Pension Plan or Old Age Security payments, do not qualify for pension income splitting, regardless of the age of the recipient.

The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension administrator. Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032, Joint Election to Split Pension Income for 2016, with their annual tax return. That form, which is not included in the annual tax return package, can be found on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/E/pbg/tf/t1032/README.html, or can be ordered by calling 1-800-959 8281.

On the T1032, the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for 2016. Since the splitting of pension income affects the income and therefore the tax liability of both spouses, the election must be made and the form filed by both spouses – an election filed by only one spouse or the other won’t suffice. In addition to filing the T1032, the spouse who is the actual recipient of the pension income to be split must deduct from income the pension income amount allocated to his or her spouse. That deduction is taken on Line 210 of his or her 2016 return. And, conversely, the spouse to whom the pension income amount is being allocated is required to add that amount to his or her income on the return, this time on Line 116. Essentially, to benefit from pension income splitting, all that’s needed is for each spouse to file a single form with the CRA and to make a single entry on his her 2016 tax return.

By the end of February or early March, taxpayers will have received (or downloaded) the information slips which summarize the income received from various sources during 2016. At that time, couples who might benefit from this strategy can review those information slips and calculate the extent to which they can make a dent in their overall tax bill for the year through a little judicious income splitting.

Those wishing to obtain more information on pension income splitting than is available in the 2016 General Income Tax and Benefit Guide should refer to the CRA website at www.cra-arc.gc.ca/pensionsplitting/, where more detailed information is available.

As everyone knows, the Canadian tax system is a complex one, and that complexity is reflected on the annual tax return filed by individual Canadian taxpayers. The T1 Individual Income Tax Return itself is only four pages long, but the information on those four pages is supported by 13 supplementary federal schedules, dealing with everything from the calculation of capital gains to determining required Canada Pension Plan contributions by self-employed taxpayers.

As everyone knows, the Canadian tax system is a complex one, and that complexity is reflected on the annual tax return filed by individual Canadian taxpayers. The T1 Individual Income Tax Return itself is only four pages long, but the information on those four pages is supported by 13 supplementary federal schedules, dealing with everything from the calculation of capital gains to determining required Canada Pension Plan contributions by self-employed taxpayers.

All of this complexity makes it easy for the majority of individuals who only deal with our tax system once each year to overlook valuable deduction and credit claims which may be available to them. One such deduction is that available for payments made during the taxation year for annual union, professional, or similar dues.

It’s particularly easy to overlook an available claim for that deduction because of where it appears on the annual return. Although there are forms used by self-employed taxpayers to claim business-related costs and forms used by employees to claim allowable employment expenses, the deduction for union or professional dues doesn’t appear on either type of form. Rather, it shows up as a single line (Line 212) on page 3 of the T1 annual return.

The general rule for claiming such a deduction is described in the annual income tax return guide as follows:

Line 212 - Claim the total of the following amounts related to your employment that you paid (or that were paid for you and reported as income) in the year:

• annual dues for membership in a trade union or an association of public servants;
• professional board dues required under provincial or territorial law;
• professional or malpractice liability insurance premiums or professional membership dues required to keep a professional status recognized by law; and
• parity or advisory committee (or similar body) dues required under provincial or territorial law.

There are, of course, limitations on the kinds of expenses which may be claimed and the circumstances in which a taxpayer is entitled to claim those expenses. The most important such restriction is that amounts paid must be those which are necessary in order for the taxpayer to obtain or maintain his or her professional standing. Every profession and trade has licensing and similar requirements which mandate that an individual maintain membership in a professional or similar association in order to practice his or her profession or trade. The costs of maintaining required membership in those organizations is deductible. The cost of maintaining membership in other, voluntary associations, even if related to one’s trade or profession, is not. So, for example, if membership in a given association does not affect professional status, dues for it are not deductible even if they entitle the individual to a designation of letters after his or her name. If, on the other hand, membership is necessary to maintain professional status, the dues for it are deductible.

As well, invoices received for annual membership costs can cover a number of different charges and levies, and not all of those costs will be deductible. The Canada Revenue Agency’s (CRA) policy is that annual membership dues do not include initiation fees, licences, special assessments, or charges for anything other than the organization’s ordinary operating costs. A taxpayer cannot claim charges for pension plans as membership dues, even if receipts received show them as dues.

Where a claim for a deduction for professional membership or union dues is made by an employee, some other considerations arise. Generally, while it’s not necessary that having a particular professional designation be a requirement of the employee’s position in order for that employee to claim a deduction for related professional dues, the CRA does require that there be some connection between the employment and the professional association in question. The CRA provides the following example.

A chemical engineer who is employed by a company to sell chemical products or who is the president of a company that processes chemicals satisfies this requirement in respect of engineering dues. On the other hand, an architect, who is working full-time as president of a clothing manufacturing business and who is not a practising architect does not satisfy the requirement and, accordingly, is not entitled to deduct dues paid to maintain professional status as an architect.  

In some cases, an employer is willing to cover the cost of an employee’s professional dues as part of the employee’s benefit package. Where that’s the case, and the employer’s payment of those dues does not appear on the employee’s T4 as a taxable benefit, no deduction for those costs can be claimed by the employee. Where, however, there is a taxable benefit which accrues to the employee, he or she can claim an offsetting deduction for eligible dues or fees paid, on Line 212 of the return.

General information on the deduction of professional membership fees or union dues is available in the 2016 General Income Tax and Benefit Guide. More detailed information, for both the self-employed and employees, can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/212/menu-eng.html.

For most Canadians – certainly most Canadians who earn their income through employment – the payment of income tax throughout the year is an automatic and largely invisible process, requiring no particular action on the part of the employee. Federal and provincial income taxes, along with Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, are deducted from each employee’s income and the amount deposited to an employee’s bank account is the net amount remaining after such taxes, contributions, and premiums are deducted and remitted on the employee’s behalf to the Canada Revenue Agency (CRA). While no one likes having to pay taxes, having those taxes paid “off the top” in such an automatic way is, relatively speaking, painless.

For most Canadians – certainly most Canadians who earn their income through employment – the payment of income tax throughout the year is an automatic and largely invisible process, requiring no particular action on the part of the employee. Federal and provincial income taxes, along with Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, are deducted from each employee’s income and the amount deposited to an employee’s bank account is the net amount remaining after such taxes, contributions, and premiums are deducted and remitted on the employee’s behalf to the Canada Revenue Agency (CRA). While no one likes having to pay taxes, having those taxes paid “off the top” in such an automatic way is, relatively speaking, painless.

Such is not, however, the case for the sizeable minority of Canadians who pay their income taxes by way of tax instalments, and February is the month in which they are reminded of that obligation by the arrival of the first tax instalment reminder for 2017 from the CRA. A reminder received this month will identify the amounts for two instalments payments of tax to be made — the first on March 15, 2017, and the second on June 15, 2017.

Generally, a taxpayer will receive a tax instalment reminder when sufficient income tax has not been deducted from payments made to that taxpayer throughout the year. Put more technically, an instalment reminder will usually be issued by the CRA where the amount of tax which was or will be owed when filing the annual tax return is more than $3,000 in the current (2017) tax year and either of the two previous (2015 or 2016) tax years. Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income is at least $3,000 less than their total tax owed for 2017 and either 2015 or 2016.

Such obligation arises on a regular basis for those who are self-employed, or course, and generally for those whose income is largely derived from investments. The group of recipients of a tax instalment reminder often also includes retired Canadians, especially the newly retired, who have not arranged to have tax deducted “at source” from either their government source income (like CPP or Old Age Security payments) or private retirement income like pensions or registered retirement income fund withdrawals. It is that group of individuals, who may be surprised and puzzled by the arrival of an unfamiliar “Instalment Reminder” from the CRA. However, no matter what kind of income a taxpayer has received, or why sufficient tax has not been deducted at source, the options open to a taxpayer who receives such an Instalment Reminder are the same.

First, the taxpayer can pay the amounts specified on the Reminder, by the March and June payment due dates. Choosing this option will mean that the taxpayer will not face any interest or penalty charges, even if the amount paid by instalments throughout the year turns out to be less than the taxes actually payable for 2017. If the total of instalment payments made during 2017 turn out to more than the taxpayer’s total tax liability for the year, he or she will of course receive a refund when the annual tax return is filed in the spring of 2018.

Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2016 tax year. Where a taxpayer’s income has not changed significantly between 2016 and 2017 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2017 will be slightly less than it was in 2016, as the result of the indexation of both income tax brackets and tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2017 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease significantly from 2016 to 2017, such that his or her tax bill will also be substantially reduced, this option can make the most sense.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges if there is no tax payable when the return for the 2017 tax year is filed in the spring of 2018. However, should instalments paid have been late or insufficient, the CRA will impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2017 – until March 31, 2017 – is 5%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It’s also possible for the CRA to levy penalties for overdue or insufficient instalments, but that is done only where the amount of instalment interest charged for the year is more than $1,000.

Most Canadian taxpayers are understandably disinclined to pay their taxes any sooner than absolutely necessary. However, ignoring an Instalment Reminder is never in the taxpayer’s best interests. Those who don’t wish to involve themselves in the intricacies of tax calculations can simply pay the amounts specified in the Reminder. The more technical-minded (or those who want to ensure that they are paying no more than absolutely required, and are willing to take the risk of having to pay interest on any shortfall) can avail themselves of the second or third options outlined above.

There’s little likelihood that the average Canadian taxpayer can fail to notice that it is, once again, registered retirement savings plan (RRSP) season, given the number of television, radio, and online RRSP-related advertisements and reminders which invariably appear at this time of year. This year taxpayers must, in order to deduct an RRSP contribution on their income tax return for 2016, make that contribution on or before Wednesday, March 1, 2017. The maximum allowable current year contribution which can be made by any individual taxpayer for 2016 is 18% of that taxpayer’s earned income for the 2015 year, to a statutory maximum of $25,370.

There’s little likelihood that the average Canadian taxpayer can fail to notice that it is, once again, registered retirement savings plan (RRSP) season, given the number of television, radio, and online RRSP-related advertisements and reminders which invariably appear at this time of year. This year taxpayers must, in order to deduct an RRSP contribution on their income tax return for 2016, make that contribution on or before Wednesday, March 1, 2017. The maximum allowable current year contribution which can be made by any individual taxpayer for 2016 is 18% of that taxpayer’s earned income for the 2015 year, to a statutory maximum of $25,370.

Those are the basic rules governing RRSP contributions for the 2016 tax year. For most Canadians, however, those rules are just the starting point of the calculation, as millions of Canadian taxpayers have what is termed “additional contribution room” carried forward from previous taxation years. That additional contribution room arises because the taxpayer either did not make an RRSP contribution in each previous year, or made one which was less that his or her maximum allowable contribution for the year. For many taxpayers, that additional contribution room can amount to tens of thousands of dollars, and the taxpayer is entitled to use as much or as little of that additional contribution room as he or she wishes for the current tax year.

It’s apparent from the forgoing that determining one’s maximum allowable contribution for 2016 will take a bit of research. The first step in determining one’s total (current year and carryforward) contribution room for 2016 is to consult the last Notice of Assessment which was received from the Canada Revenue Agency (CRA). Every taxpayer who filed a return for the 2015 taxation year will have received a Notice of Assessment from the CRA, and the amount of that taxpayer’s allowable RRSP contribution room for 2016 will be summarized on page 2 of that Notice. Taxpayers who have discarded (or can’t find) their Notice of Assessment can obtain the same information by calling the CRA’s Individual Income Tax Enquiries toll-free telephone line at 1-800-959-8281. An automated service at that line will provide the required information, once the taxpayer has provided his or her social insurance number, month and year of birth, and the amount of income from his or her 2015 tax return. Those who don’t wish to use an automated service can speak to a client services agent, who will also request such identifying information before providing any taxpayer-specific data. Finally, for those who have registered for the CRA’s My Account service, the needed information will be available online.

One question that doesn’t often get asked by taxpayers is whether it actually makes sense to make an RRSP contribution. The wisdom of making annual contributions to one’s RRSP has become an almost unquestioned tenet of tax and retirement planning, but there are situations in which other savings vehicles — particularly the Tax-Free Savings Account, or TFSA — may be the better short or long-term option or even, in some cases, the only one available.

Determining which savings vehicle is the better option for a particular taxpayer will depend, for the most part, on the purpose for which the funds are being saved, and on the taxpayer’s current and future tax situation, as well as their particular sources of retirement income.

Taxpayers who are expecting their income to rise significantly within a few years (e.g., students in post-secondary or professional education or training programs) can save some tax by contributing to a TFSA while they are in school and their income (and, therefore, their tax rate) is low, allowing the funds to compound on a tax-free basis, and then withdrawing the funds tax-free once they’re working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted from income which would be taxed at that higher tax rate. And, in a need for funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Taxpayers who are saving toward a shorter-term goal, like next year’s vacation or even a down payment on a home should direct those savings into a TFSA. While choosing to save through an RRSP will provide a tax deduction on that year’s return and, possibly, a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP in a year or two. And, more significantly from a long-term point of view, repeatedly using an RRSP as a short-term savings vehicle will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn cannot be replaced. While the amounts involved may seem small, the loss of contribution room and the compounding of invested amounts over 25 or 30 years or more can make a significant dent in one’s ability to save for retirement.

Taxpayers who are currently in the workforce and who are members of a registered pension plan (RPP) may find that saving through a TFSA is their only practical option. As outlined above, the starting point for calculating one’s current year contribution limit maximum amount which can be contributed to an RRSP is calculated as 18% of earned income for 2015. However, the maximum allowable contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under that pension plan. Where the RPP is a particularly generous one, RRSP contribution room may, as a result, be minimal, and a TFSA contribution the logical savings alternative.

Canadians aged 71 and older will find the RRSP vs. TFSA question irrelevant, as the last date on which taxpayers can make RRSP contributions is December 31^st of the year in which they turn 71. Many of those taxpayers will, however, have converted their RRSP savings to a registered retirement income fund (RRIF) and anyone who has done so is required to withdraw (and be taxed on) a specified percentage of those RRIF funds every year. Particularly where required RRIF withdrawals exceed the RRIF holder’s current cash flow needs, that income can be contributed to a TFSA. Although the RRIF withdrawals made must still be included in income for the year and taxed as such, transferring the funds to a TFSA will allow them to continue compounding free of tax, and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn in the future from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or for the federal age credit.

RRSPs and TFSAs are the most significant savings vehicles available to Canadian taxpayers, and both have a place in most financial and retirement plans. To help taxpayers to make informed choices about their savings options, the CRA provides a number of dedicated webpages about both RRSPs and TFSAs, and those can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/menu-eng.html and www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html.

The Employment Insurance premium rate for 2017 is 1.63%.

The Employment Insurance premium rate for 2017 is 1.63%.

Yearly maximum insurable earnings are set at $51,300, making the maximum employee premium $836.19.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for the year is therefore $1170.67.

The Canada Pension Plan (CPP) contribution rate for 2017 is unchanged at 4.95% of pensionable earnings for the year.

The Canada Pension Plan (CPP) contribution rate for 2017 is unchanged at 4.95% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $55,300, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2017 will be $2564.10 each, and the maximum self-employed contribution will be $5128.20.

Dollar amounts on which individual non-refundable federal tax credits for 2017 are based, and the actual tax credit claimable, will be as follows:

Dollar amounts on which individual non-refundable federal tax credits for 2017 are based, and the actual tax credit claimable, will be as follows:

The indexing factor for federal tax credits and brackets for 2017 is 1.4%.  The following federal tax rates and brackets will be in effect for individuals for the 2017 tax year.

The indexing factor for federal tax credits and brackets for 2017 is 1.4%.  The following federal tax rates and brackets will be in effect for individuals for the 2017 tax year.

Income level                                Federal tax rate

$11,635 - $45,916                               15%

$45,917 - $91,831                              20.5%

$91,832 - $142,353                             26%

$142,354 - $202,800                           29%

Over $202,800                                    33%

Each new tax year brings with it a new list of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies. Some of the more significant dates and changes for individual taxpayers for 2017 are listed below.

Each new tax year brings with it a new list of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies. Some of the more significant dates and changes for individual taxpayers for 2017 are listed below.

RRSP deduction limit increases to $25,370

The RRSP contribution limit for the 2016 tax year (for which the contribution deadline is Wednesday March 1, 2017) will increase to $25,370. In order to make the maximum contribution for 2016, it is necessary to have had income of $140,950 in 2015.

TFSA contribution limit for 2017

The TFSA contribution limit for 2017 is unchanged at $5,500. The actual amount which can be contributed by a particular individual includes both the current year limit and any carryover or re-contribution amounts from previous taxation years.

Individual tax instalment deadlines for 2017

Millions of individual taxpayers pay income tax by quarterly instalments, which will be due on the following dates in 2017:

Wednesday March 15;

Thursday June 15;

Monday October 16; and

Friday December 15.

Individual tax filing and payment deadlines for 2017

For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2016 tax year is Monday May 1, 2017. Taxpayers (other than the self-employed and their spouses) must also file a tax return for the 2016 tax year on or before Monday May 1, 2017. Self-employed taxpayers and their spouses must file their tax returns for 2016 on or before Thursday June 15, 2017.

Planning for – or even thinking about – 2017 taxes before the New Year has even been rung in may seem more than a little premature. However, most Canadians will start paying their taxes for 2017 with the first paycheque they receive in January, and it is worth taking a bit of time to make sure that things start off – and stay – on the right foot.

Planning for – or even thinking about – 2017 taxes before the New Year has even been rung in may seem more than a little premature. However, most Canadians will start paying their taxes for 2017 with the first paycheque they receive in January, and it is worth taking a bit of time to make sure that things start off – and stay – on the right foot.

For most Canadians, (certainly for the vast majority who earn their income from employment), income tax, along with other statutory deductions like Canada Pension Plan contributions and Employment Insurance premiums, are paid periodically throughout the year by means of deductions taken from each paycheque received, with those deductions then remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by his or her employer.

Of course, each taxpayer’s situation is unique and so the employer has to have some guidance as to how much to deduct and remit on behalf of each employee. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by each employee, sometimes at the start of each year, but certainly at the time employment commences. Each employee must, in fact, complete two TD1 forms – one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer lives. Federal and provincial TD1 forms for 2017 (which will be released before the end of the year and will be available on the Forms and Publications page of the CRA’s website at www.cra-arc.gc.ca/formspubs/menu-eng.html) list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial) which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the government.

While the TD1 completed by the employee at the time employment will have accurately reflected the credits claimable by the employee at that time, everyone’s circumstances change. Where a baby is born, or a son or daughter starts post-secondary education, or an elderly parent comes to live with his or her children, the affected taxpayer will be become eligible to claim tax credits not previously available. And, since the employer can only calculate source deductions based on information provided to it by the employee, those new credit claims won’t be reflected in the amounts deducted at source from the employee’s paycheque.

Consequently, it is a good idea for all employees to review the TD1 form prior to the start of each taxation year and to make any changes needed to ensure that a claim is made for any and all credit amounts currently available to him or her. Doing so will ensure that the correct amount of tax is deducted at source throughout the year.

Where the taxpayer has available deductions which cannot be recorded on the TD1 (e.g., RRSP contributions, deductible support payments, or child care expenses), it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect the employee’s tax liability for 2017. The way to do so is to file Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1213/t1213-16e.pdf) with the Agency. Once that form is filed with the CRA, the Agency will, after verifying that the claims made are accurate, provide the employer with a Letter of Authority authorizing that employer to reduce the amount of tax being withheld at source.

Of course, as with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes time. Consequently, the sooner a T1213 for 2017 is filed with the CRA, the sooner source deductions can be adjusted, effective for all paycheques subsequently issued in that year. Providing an employer with an updated TD1 for 2017 at the same time will ensure that source deductions made during 2017 will accurately reflect all of the employee’s current circumstances, and consequently his or her actual tax liability for the year.

During the month of December, it is customary for employers to provide something “extra” for their employees, by way of a holiday gift, a year-end bonus or an employer-sponsored social event. And it’s certainly the case that employers who provide such extras don’t intend to create a tax liability for their employees. Unfortunately, it is the case that a failure to properly structure such gifts or other extras can result in unintended and unwelcome tax consequences to those employees.

During the month of December, it is customary for employers to provide something “extra” for their employees, by way of a holiday gift, a year-end bonus or an employer-sponsored social event. And it’s certainly the case that employers who provide such extras don’t intend to create a tax liability for their employees. Unfortunately, it is the case that a failure to properly structure such gifts or other extras can result in unintended and unwelcome tax consequences to those employees.

For the tax authorities, dealing with the tax treatment of employer-provided holiday gifts is something of a no-win situation. On an individual or even a company level, the amounts involved are usually nominal, and the range of situations which must be addressed by the related tax rules are virtually limitless. As a result, the cost of drafting and administering those rules can outweigh the revenue generated by the enforcement of such rules, to say nothing of the potential ill-will generated by imposing tax on holiday gifts and celebrations. Notwithstanding, the potential exists for employers to disguise what would otherwise be taxable remuneration as such holiday gifts, and it’s the responsibility of the Canada Revenue Agency (CRA) to ensure that such situations are caught by the tax net.

There is, as a consequence, a detailed set of rules which outline the tax consequences of gifts and awards provided by the employer, and even in relation to annual holiday celebrations sponsored (and paid for) by an employer.

The starting point for the rules is that any gift (cash or non-cash) received by an employee from his or her employer at any time of the year is considered to constitute a taxable benefit, to be included in the employee’s income for that year. However, the CRA makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) to be received tax-free by employees, as long as such gifts are given on religious holidays such as Christmas or Hanukkah, or on the occasion of a significant life event, like a birthday, marriage, or the birth of a child.

In sum, the CRA’s administrative policy is simply that non-cash gifts to an arm’s length employee, regardless of the number of such gifts, will not be taxable if the total fair market value of all such  gifts to that employee is $500 or less annually. The total value over $500 annually will be a taxable benefit to the employee, and must be included on the employee’s T4 for the year, and on which income tax must be paid.

It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500 per year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of amount. For this purpose, the CRA considers anything which could be easily converted to cash as a “near-cash” gift. Even a gift or award which cannot be converted to cash will be considered to be a near-cash gift if, in the CRA’s words, it “functions in the same way as cash”. So, a gift card or gift certificate which can be used by the employee to purchase his or her choice of merchandise or services would be considered a near-cash gift, and taxable as such.

This time of year, the tax treatment of the annual employee holiday party also must be considered. The CRA’s current policy in this area is that no taxable benefit will be assessed in respect of employee attendance at an employer-provided social event, where attendance at the party was open to all employees, and the cost per employee was $100 or less. The $100 cost is meant to cover the party itself, not including any ancillary costs, such as transportation home, taxi fare, or overnight accommodation. Where the total cost of the event itself exceeds the $100 per person threshold, the CRA will assess the employee as having received a taxable benefit equal to the entire per person cost (i.e., not just that portion of the cost that exceeds $100.)

It may seem nearly impossible to plan for employee holiday gifts and other benefits without running afoul of one or more of the detailed rules surrounding the taxation of such gifts and benefits. However, designing a tax-effective plan is possible, if a few basic principles are kept in mind.

• If the employer is planning to hold a holiday party, dinner, or other social event, it is imperative that such an event is open to all employees. Restricting attendance in any way will mean that the CRA’s concession with respect to the non-taxable status of such events does not apply. The cost of the event must, as well, be kept below $100 per person. While the CRA’s policy does not specify, it seems reasonable to calculate that amount based on the number of employees invited to attend the event, rather than on the actual attendance, which cannot be accurately predicted in advance.

• Any cash or near-cash gifts should be avoided, as they will, no matter how large or small the amount, create a taxable benefit to the employee. Although gift certificates or pre-paid credit cards are a popular choice, they aren’t a tax-effective one, as they will invariably be considered by the CRA to create a taxable benefit to the employee.

• Where non-cash holiday gifts are provided to employees, gifts with a value of up to $500 can be received free of tax. The employer must be mindful of the fact that the $500 limit is a per-year and not a per-occasion limit. Where the employee receives non-cash gifts with a total value of more than $500 in any one taxation year, the portion over $500 is a taxable benefit to the employee.

Most Canadians are aware that the deadline for contributing to one’s registered retirement savings plan (RRSP) is 60 days after the calendar year end – in order to be claimed on the return for 2016, such contributions must be made before March 2, 2017. Many also know that contributions to a tax-free savings account (TFSA) can be made at any time during the year. Consequently, when Canadians start thinking about year-end tax planning or saving strategies, RRSPs and TFSAs aren’t often top of mind. The fact is, however, that there are some situations in which planning strategies involving TFSAs and RRSPs must be put in place by the end of the calendar year. In other situations, acting before the end of the calendar year, while not required, will produce a better tax result. Some of those situations are outlined below.

Most Canadians are aware that the deadline for contributing to one’s registered retirement savings plan (RRSP) is 60 days after the calendar year end – in order to be claimed on the return for 2016, such contributions must be made before March 2, 2017. Many also know that contributions to a tax-free savings account (TFSA) can be made at any time during the year. Consequently, when Canadians start thinking about year-end tax planning or saving strategies, RRSPs and TFSAs aren’t often top of mind. The fact is, however, that there are some situations in which planning strategies involving TFSAs and RRSPs must be put in place by the end of the calendar year. In other situations, acting before the end of the calendar year, while not required, will produce a better tax result. Some of those situations are outlined below.

Accelerate any planned TFSA withdrawals into 2016

Each Canadian aged 18 and over can make an annual contribution to a Tax-Free Savings Account (TFSA) – the maximum contribution for 2016 is $5,500. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.

Consequently, it makes sense, where a TFSA withdrawal is planned within the next few months, perhaps to pay for a winter vacation or to make an RRSP contribution, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA before December 31, 2016 will have the amount withdrawn added to his or her TFSA contribution limit for 2017, which means it can be re-contributed as of January 1, 2017. If the same taxpayer waits until January of 2017 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2018.

Make spousal RRSP contributions before December 31

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plans (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2016, the contributor can claim a deduction for that contribution on his or her return for 2016. The spouse can then withdraw that amount as of January 1, 2019 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2017, the contributor can still claim a deduction for it on the 2016 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2019. It’s an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively new future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should an unanticipated withdrawal become necessary.

When you need to make your RRSP contribution on or before December 31

While most RRSP contributions to be deducted on the return for 2016 can be made anytime up to an including March 1, 2017, there is one important exception to that rule. Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71 years of age – usually by converting the RRSP into a registered retirement income fund (RRIF) or purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31 is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31^st of that year.

While tax planning is best approached as an ongoing, year-round activity, the fact is that for most Canadians the subject of taxes becomes top of mind only a few times a year. Typically, that happens when the annual tax return is due, when the annual RRSP contribution deadline is looming, and for some, at the end of the calendar year.

There is, in fact, good reason to spend some time considering one’s tax situation as the end of the calendar year approaches. With the notable exception of (in most cases) contributing to one’s RRSP, any steps taken in order to reduce one’s income tax bill for 2016 must be finalized by December 31^st of this year.

While tax planning is best approached as an ongoing, year-round activity, the fact is that for most Canadians the subject of taxes becomes top of mind only a few times a year. Typically, that happens when the annual tax return is due, when the annual RRSP contribution deadline is looming, and for some, at the end of the calendar year.

There is, in fact, good reason to spend some time considering one’s tax situation as the end of the calendar year approaches. With the notable exception of (in most cases) contributing to one’s RRSP, any steps taken in order to reduce one’s income tax bill for 2016 must be finalized by December 31^st of this year.

What follows is a list of the most common tax considerations that arise as the end of the calendar year approaches.

Timing of medical expenses

Where Canadians incur medical expenses which aren’t covered by government health insurance or by a private medical insurance plan, they can often claim a tax credit to help offset those expenses. Unfortunately, the computation of such expenses and, in particular, the timing of making a claim for the credit, can be confusing. The basic rule is that qualifying medical expenses (a list of which can be found on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/medical/#mdcl_xpns) in excess of 3% of the taxpayer’s net income, or $2,237, whichever is less, can be claimed for purposes of the medical expense tax credit.

Put in practical terms, the rule for 2016 is that any taxpayer whose net income is less than $74,600 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $74,600 will be limited to claiming qualifying expenses which exceed the $2,237 threshold.

The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2016 will produce the greatest amount eligible for the credit. That determination will obviously depend on when medical expenses were incurred, so there is, unfortunately, no universal rule of thumb which can be used.

Medical expenses incurred by family members – the taxpayer, his or her spouse, dependent children who were born in 1999 or later, and certain other dependent relatives – can be added together and claimed by one member of the family. In most cases, it is best, in order to maximize the amount claimable, to make that claim on the tax return of the lower-income spouse, where that spouse has tax payable for the year.

As December 31 approaches, it is a good idea to add up the medical expenses which have been incurred during 2016, as well as those paid during 2015 and not claimed on the 2015 return. Once those totals are known, it will be easier to determine whether to make a claim for 2016 or to wait and claim 2016 expenses on the return for 2017. And, if the decision is to make a claim for 2016, knowing what and when medical expenses were paid will enable the taxpayer to determine the optimal 12-month waiting period for the claim.

Finally, it is a good idea to look into the timing of medical expenses which will have to be paid early in 2017. It may make sense, where possible, to accelerate the payment of those expenses to December 2016, where that means they can be included in 2016 totals and claimed on the 2016 return.   

Charitable donations

The federal and all provincial governments provide a two-level tax credit for donations made to registered charities during the year. To claim a credit in a particular tax year, donations must be made by the end of that calendar year. There is, however, another reason to ensure donations are made by December 31. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess.

As a result of the two-level credit structure, it makes sense to aggregate donations in a single calendar year where possible. A qualifying charitable donation of $400 made in December 2016 will receive a federal credit of $88 ($200 ×15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2016 and January 2017, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2017 donation can’t be claimed until the 2017 return is filed in April 2018. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.

It’s also possible to carry forward, for up to five years, donations which were made in a particular tax year. So, if donations made in 2016 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2011, 2012, 2013, 2014, or 2015 tax years can be carried forward and added to the total donations made in 2016, and then the aggregate claimed on the 2016 tax return.

When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high income surtax – currently, Ontario and Prince Edward Island – it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses.

For Canadians who have not been in the habit of making charitable donations, there is now an additional incentive to make a cash donation to charity. In the 2013 Budget, the federal government introduced a temporary (before 2018) charitable donations super-credit. That super-credit (which can be claimed only once) allows individuals who have not claimed a charitable donations tax credit in any tax year since 2007 to claim a super-credit on up to $1,000 in cash donations made during the year. The super-credit works by providing an additional 25% credit for cash donations. Consequently, when the super-credit is combined with the regular charitable donations tax credit, the total credit claimable is equal to 40% (15% + 25%) of donations under $200 and 54% (29% + 25%) of donations over the $200 threshold.

Reviewing tax instalments for 2016

Millions of Canadian taxpayers (particularly the self-employed and retired Canadians) pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total liability for the year.

The final quarterly instalment for this year will be due on Thursday December 15, 2016. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2016 and so will be in a position to estimate what the final tax bill for the year will be, taking into account any tax planning strategies already put in place, as well as any RRSP contributions which will be made before March 2, 2017. While the tax return forms to be used for the 2016 year haven’t yet been released by the CRA, it is possible to arrive at an estimate by using the 2015 form. Increases in tax credit amounts and tax brackets from 2015 to 2016 will mean that using the 2015 form will likely result in a slight over-estimate of tax liability for 2016.

Once one’s tax bill for 2016 has been calculated, it is possible to compare that figure with the total of tax instalments already made for 2016, (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281) and to determine whether the tax instalment to be paid on December 15 can be adjusted downward.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues. They can be accessed below.

Corporate:

Issue #38 Corporate

Personal:

Issue #38 Personal

The budgetary cycle of the federal government follows a regular schedule. The Budget for the upcoming fiscal year (which runs from April 1 to March 31) is brought down by the Minister of Finance in late winter or early spring. About six months later, or half way through the fiscal year, the revenue, expenditure, and deficit/surplus numbers announced and projected in the budget (for both the current and future fiscal years) are updated by the Minister in the Fall Fiscal and Economic Update. On occasion, the federal government will use the Fiscal and Economic Update to announce new taxation and expenditure measures.

The budgetary cycle of the federal government follows a regular schedule. The Budget for the upcoming fiscal year (which runs from April 1 to March 31) is brought down by the Minister of Finance in late winter or early spring. About six months later, or half way through the fiscal year, the revenue, expenditure, and deficit/surplus numbers announced and projected in the budget (for both the current and future fiscal years) are updated by the Minister in the Fall Fiscal and Economic Update. On occasion, the federal government will use the Fiscal and Economic Update to announce new taxation and expenditure measures.

The first such Fall Economic Update issued by the current federal government was announced on November 1 by Minister of Finance Bill Morneau. There were no taxation measures included in the Update, but some plans for future government expenditures, generally related to economic growth, were announced.

The news with respect to current year revenue and expenditure figures and the resulting deficit was not especially positive. While better than expected results were recorded for the 2015-16 fiscal year, those results were not sufficient to outweigh the effect of lower projections for 2016-17.

Both income tax and sales tax revenue are now expected to be lower than forecast. The government attributed the higher personal income tax revenues for 2015-16 to “tax planning behavior of individuals to recognize income in the 2015 tax year before the new 33% tax rate came into effect in 2016”, and noted that that such behavior will impact personal income tax revenues in both 2016-17 and future years. The reasons for the drop in sales tax revenue were more broad-based, and were attributed by the Minister to a weaker outlook for nominal GDP. 

On the expenditure side of the equation, major transfers to persons (which include Old Age Security, the Canada Child Benefit and Employment Insurance) are now projected to be lower in 2016-17 than was originally stated in this year’s Budget, once again as the result of the carryforward of better-than-expected 2015-16 results. However, the government expects the amount of such expenditures to be higher over the remainder of its forecast period, as the weaker economic outlook leads to projected increases in such costs.

Little change is expected in the cost of major transfers to other levels of government over the short term, but those costs are expect to decline over the longer term. A similar short-term pattern is forecast for direct program expenses, which are projected to remain largely unchanged in 2016-17, but the government expects those costs to increase over the remainder of its forecast horizon.

The numbers which Canadians are most interested in are the deficit or surplus figures for the current and upcoming fiscal years. That news, at least over the short and medium term is not positive, as the government is projecting deficits from now through the 2021-22 fiscal year. Specifically, the government anticipates a deficit of $25.1 billion for the current (2016-17) fiscal year, $27.8 billion for 2017-18, $25.9 billion for 2018-19, $19.3 billion for 2019-20, $16.8 billion for 2020-21, and $14.6 billion for 2021-22.

The full Fall Economic Statement papers can be found on the Finance Canada website at www.budget.gc.ca/fes-eea/2016/docs/statement-enonce/toc-tdm-en.html.

Changes in technology and the Canadian workplace over the past quarter century have made the option of working from one’s home, at least on an occasional or part-time basis, almost the norm among Canadian employees. For most, the opportunity to take a break from sitting in traffic gridlock or rushing to catch the commuter train is a valued employment perk.

Changes in technology and the Canadian workplace over the past quarter century have made the option of working from one’s home, at least on an occasional or part-time basis, almost the norm among Canadian employees. For most, the opportunity to take a break from sitting in traffic gridlock or rushing to catch the commuter train is a valued employment perk.

While such advantages would likely, even on their own, be enough to make working from home an attractive option, there is another even more compelling benefit. That benefit is in the form of tax deductions claimable for home-related expenses by qualifying individuals who work from home.

Of course, as with any tax deduction, there are conditions which must be met in order to qualify. Employees, regardless of whether they earn a salary or are paid by commission, must meet one of the following conditions in order to claim any home office deduction:

• the home work space is where the individual mainly (more than 50% of the time) does their work; or
• the individual uses the workspace only to earn his or her employment income. He or she must also use it on a regular and continuous basis for meeting clients, customers, or other people in the course of their employment duties.

Once that threshold criterion is met, a broad range of costs become deductible by the employee. Specifically, a salaried employee can claim and deduct the part of specified costs that relate to his or her work space, including the cost of electricity, heating, and home maintenance.

Where an individual who qualifies under the criteria outlined above is a commission employee, an even broader range of costs become deductible. In addition to costs for electricity, heating, and home maintenance, a commission employee can also deduct a proportionate share of costs incurred for property taxes and home insurance.

Generally, the percentage of costs which can be deducted is based on square footage, and the employee can determine that percentage by calculating the square footage of the workspace as a percentage of the overall square footage of the home.  Whatever the percentage claimed, the Canada Revenue Agency can ask the taxpayer to provide documentation and support for claims made.

For example, an employee who lives in a 2000 square foot house and uses a 200 square foot room as a home office can (assuming the basic criteria outlined above are satisfied) claim 10% of his or her costs for electricity, heat, and home maintenance incurred during the tax year.  If that employee works on commission, he or she can also deduct 10% of costs incurred for property taxes and home insurance.

There is one further requirement for employees who seek to deduct costs incurred in relation to a home office, in that each such employee must have a Form T2200 completed by his or her employer. On that form, the employer must certify that the employee was required to use a portion of his or her home for work-related purposes, indicate what percentage of the employee’s duties were carried out at that home office and, finally, indicate whether the employee is or is not being reimbursed for any home office expenses incurred. Where there is some degree of reimbursement, the employer must specify the type of expense reimbursed, and the amount of reimbursement. And, of course, the employee cannot claim a deduction for any expenses for which reimbursement was received.

In order to make a claim for home office expenses, there is clearly some paperwork involved. All employees seeking to make such a claim must total the amount of bills paid over the course of the year for electricity, heat and any of the inevitable home maintenance costs. Those working on commission must also verify amounts paid for property taxes and home insurance. However, given that such efforts will produce a deduction from income for tax purposes for costs which would have been incurred in any case, it’s likely that most employees would consider the return on that investment of time well worth it.

Once daily weather reports begin to include wind chill factors or frost warnings, the thoughts of many Canadian turn to the idea of spending part of the Canadian winter somewhere much warmer – most often, in one of the southern U.S. states. And, while the anemic state of the Canadian dollar has required Canadians to downsize some of those plans, it is still the case that thousands of Canadian “snowbirds” fly south every winter.

Once daily weather reports begin to include wind chill factors or frost warnings, the thoughts of many Canadian turn to the idea of spending part of the Canadian winter somewhere much warmer – most often, in one of the southern U.S. states. And, while the anemic state of the Canadian dollar has required Canadians to downsize some of those plans, it is still the case that thousands of Canadian “snowbirds” fly south every winter.

Wherever they are going, and however long they are staying, it’s safe to say that none of those snowbirds are thinking of any possible income tax ramifications to their travel plans. And, for the vast majority of them, there are no such issues to consider. However, it’s never a bad idea to make sure that all contingencies are considered – no one wants a pleasant winter vacation to create tax or financial headaches down the road.

All Canadians who spend time out of Canada must address the need to obtain travel medical insurance, as there are no circumstances in which it makes sense to leave Canada without such insurance in place. A lucky few may already have the needed coverage through their employer or, for retirees, their former employers. For those who don’t (and those who do but wish to augment such coverage), there is a need to obtain a travel medical insurance plan. There is no shortage of companies which offer such plans and the terms and conditions of different plans vary greatly. Consequently, it’s not really possible to provide one-size-fits-all advice with respect to obtaining such policies, with two exceptions. First, it is critical to determine the extent of the coverage provided, particularly when it comes to pre-existing medical conditions. Coverage exclusions in travel medical insurance policies almost always relate to conditions from which the applicant already has – and, of course, those are the conditions which are most likely to give rise to the need for out-of-country medical treatment. Second, anyone applying for travel medical insurance should be clear on whether the issuer of a particular policy will pay out-of-country medical expenses directly, as they are incurred, or will require the insured to make payment upfront, and seek reimbursement after the fact. While the cost of a trip to an emergency department for a few stitches may be within the financial reach of most snowbirds, the cost of medical care for more serious events – like a heart attack – can quickly run into the tens or even hundreds of thousands of dollars. Few individuals have the financial means to cover such costs out-of-pocket, even by using available sources of credit.

For snowbirds who are seeking the sun for only a few weeks, obtaining travel medical insurance is the biggest item on their to-do list before leaving. For those who are planning extended stays down south for a few months, or even the whole winter, other considerations can come into play.

On a very practical level, such snowbirds need to think about how they will access funds needed to live out of the country for an extended period. Many snowbirds are eligible to receive monthly payments from both the Canada Pension Plan (CPP) and the Old Age Security (OAS). Fortunately, it’s relatively easy to arrange for payment of both while down south, as payments of both CPP and OAS benefits can be made by direct deposit to an account at a US bank where the Canadian recipient is located. Funds deposited in this way are converted to U.S. dollars prior to deposit, and the exchange rate used by the Canadian government will typically be better than most which can be obtained locally.

The other issue which snowbirds who are planning extended stays down south must consider is that of Canadian residency. Canada, unlike the United States, taxes individuals on the basis of residency, and individuals who spend a significant amount of time out of Canada during the year need to consider the effect that might have on their status as Canadian residents.

Fortunately, most snowbirds, even those who spend the whole winter down south, won’t have a problem since most of them will continue to be what’s called “factual residents of Canada”. There is no single test for whether an individual is a factual resident of Canada – rather, the determination is made based on a number of factors which measure the extent to which an individual has continued to maintain “residential ties” to Canada. The most significant of those factors include keeping a residence (whether owned or rented) in Canada, and having a spouse or dependents here. Where any of those three such ties are in place, that’s usually enough for the Canadian tax authorities to conclude that an individual remains a factual resident of Canada. So, for example, in a typical scenario in which a retired couple spends three or four months each winter in Florida, leaving their Canadian home to be looked after by their children, there’s no question but that the retirees are factual residents of Canada, and their annual stay down south has no effect on their Canadian tax rights and obligations.

The vast majority of snowbirds who winter out of the country do maintain sufficient residential ties to Canada to be considered factual residents. Consequently, when they file their tax returns for the year, they follow all the same rules as year-round Canadian residents, reporting all income received during the year from both inside and outside Canada and claiming all available deductions. And, as an added “perk”, travel medical insurance premiums paid to allow the snowbird to winter down south without worry are deductible from income for Canadian tax purposes.

During the financial crisis that took place in 2008 and 2009, the Canadian mortgage and real estate market didn’t experience the kind of meltdown which occurred south of the border. That result was attributable, in many respects, to the fact that Canadian lending practices, and the rules governing those practices, were much more conservative and stringent than the corresponding rules in place in the United States.

During the financial crisis that took place in 2008 and 2009, the Canadian mortgage and real estate market didn’t experience the kind of meltdown which occurred south of the border. That result was attributable, in many respects, to the fact that Canadian lending practices, and the rules governing those practices, were much more conservative and stringent than the corresponding rules in place in the United States.

Even though mortgage lending in Canada never reached the excesses which characterized the U.S. market at that time, the previous federal government made five separate sets of changes to the rules governing Canada’s mortgage lending practices, as a further safeguard against such an eventuality. The current federal government has followed in that practice, and the latest such tightening of those rules took effect on October 17, 2016.

To understand how the latest changes work, a bit of background is necessary. Anyone who buys a home in Canada must make a down payment of at least 5%. Where that down payment is less than 20%, however, the purchaser must obtain (and pay the premiums on) mortgage default insurance from the Canada Mortgage and Housing Corporation. Once such insurance is in place, the mortgage lender is effectively protected, ultimately by the federal government, from any default by those purchasers on the mortgage loan.

It’s also the case that, when an individual or couple apply for mortgage financing (no matter what the size of their down payment), the lender uses two debt-servicing ratios to determine the credit-worthiness of those prospective borrowers. Those metrics, known as the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio, represent the following:

• Gross Debt Service (GDS) ratio—the carrying costs of the home, including the mortgage payment and taxes and heating costs, relative to the homebuyer’s income;
• Total Debt Service (TDS) ratio—the carrying costs of the home and all other debt payments relative to the homebuyer’s income.

To qualify for mortgage insurance, a homebuyer must have a GDS ratio no greater than 39% (meaning that the carrying costs of the home would be no more than 39% of the applicant’s income) and a TDS ratio no greater than 44% (meaning that the total carrying costs of all debts were no more than 44% of the applicant’s income). 

Canada’s interest rates, including mortgage lending rates are, of course, at historic lows. And, under the former rules, a mortgage loan applicant’s GDS and TDS ratios were determined using only the interest rate which would be levied for the kind of mortgage for which he or she had applied. While that practice ensured that the prospective borrowers could handle their new mortgage at current interest rates, it didn’t necessarily mean that they could manage their debt obligations in the event of an increase in such interest rates. Consequently, the federal government decided to implement a “stress test” for such prospective borrowers, and it is that change which took effect as of October 17.

Under the new rules, all insured homebuyers must qualify for mortgage insurance at an interest rate which is the greater of their contract mortgage rate (i.e., the rate of the mortgage for which they are applying) or the Bank of Canada's conventional five-year fixed posted rate.  Typically, that five-year rate is higher than the rate most buyers currently pay. Specifically, as of September 28, 2016, the Bank of Canada’s conventional five-year fixed posted mortgage rate was 4.64%. In effect, prospective buyers will have to “prove” that their financial means are such that their GDS and TDS ratios will still fall within acceptable limits if their mortgage financing rate was increased to the five-year posted mortgage rate that was in effect at the time they applied for such financing.

It is important to note that the new rules will have no effect whatsoever on homeowners who have an existing mortgage, even when it comes time to renew that mortgage. That is the case even for homeowners with an existing high-ratio mortgage, including those renewing or transferring an existing high-ratio insured mortgage to another lender, as high-ratio mortgage insurance spans the entire life of the mortgage.

The change to the mortgage lending rules which took effect on October 17 was announced only two weeks before the implementation date of that change. Consequently, many mortgage applications made in connection with home purchases to take effect after that date would already have been in process. The federal government has announced a number of transitional rules which will apply in such circumstances. Those transitional rules, and a detailed explanation of the changes, can be found in three federal government press releases or backgrounders, which are available on the Finance Canada website at www.fin.gc.ca/n16/16-117-eng.asp, www.fin.gc.ca/n16/data/16-117_1-eng.asp, and www.fin.gc.ca/n16/data/16-117_2-eng.asp.

Canada Pension Plan (CPP) retirement benefits are available to virtually any Canadian who has participated in the work force and made contributions to the CPP and for most retirees, that monthly CPP benefit represents a substantial percentage of their income. Consequently, knowing what to expect in the way of CPP retirement benefits is crucial to an individual’s retirement income planning.

Canada Pension Plan (CPP) retirement benefits are available to virtually any Canadian who has participated in the work force and made contributions to the CPP and for most retirees, that monthly CPP benefit represents a substantial percentage of their income. Consequently, knowing what to expect in the way of CPP retirement benefits is crucial to an individual’s retirement income planning.

Unfortunately, it’s also a safe bet that most Canadians don’t know much they can expect to receive each month from the CPP – or even how to find out that amount. The relevant information is available on each individual’s Statement of Contributions, a document prepared annually by the federal government. However, while the federal government used to mail a Statement of Contributions to each contributor to the CPP annually, such statements are now automatically sent only to Canadians who are aged 59 to 65. Anyone else who wants to obtain a copy of their Statement of Contributions must take the initiative to obtain it from the federal government by making a specific request.

Such a request can be made by telephone, mail, or online, in the following ways:

• A telephone request for a Statement of Contributions is made by calling Service Canada at 1-800-277-9914;
• A paper copy of an Application for Statement of Contributions to Canada Pension Plan can be obtained online at hrsdc.gc.ca/cgi-bin/search/eforms/index.cgi?app=profile&form=isp2000&lang=e; or
• to view and print an individual’s Statement of Contributions online, from the Service Canada website, it is necessary to first request a Service Canada access code at servicecanada.gc.ca/eng/online/pac/pacinfo.shtml. That access code, which is sent to the individual by mail, can then be used to obtain online access to information about a number of federal government benefits, including CPP benefits.

It’s apparent that, whatever the method used, it takes a few weeks before a Statement is obtained.

Once the Statement of Contributions is obtained, however, the recipient will have all the information needed to determine his or her CPP entitlement. 

A hard copy of the Statement of Contributions has three sections. The first outlines the individual’s name, the address that Service Canada has on file for that individual, the individual’s date of birth and the date that the Statement of Contributions was prepared. That last date is important because, as additional contributions are made in successive years by the individual to the CPP, the amount of benefits receivable will change.

The second section of the Statement outlines the contributions made by the individual to the CPP and pensionable earnings received each year since the age of 18, which is the first year that contributions can be made.  There is generally a lag time before contributions made show up on the Statement of Contributions – for instance, a Statement of Contributions issued during 2016 will likely show contributions made up until the end of 2015.

The third section of the Statement of Contributions is the one in which the amount of CPP benefits which may be received are summarized. And, while the CPP is generally thought of primarily as a source of retirement income, there are in fact three types of CPP benefits:

• retirement benefits;
• disability benefits (payable, as the name implies, to individuals who have contributed to the CPP but are no longer able to work because they have a severe and prolonged disability); and
• survivor benefits (payable to surviving relatives of a CPP contributor who has died).

The summary of retirement benefits shows, firstly, the amount of CPP benefits which would be payable to the individual if he or she were 65 years old at the time the statement was prepared (remembering that that amount can change, depending on the amount of CPP contributions made in future years).  That figure is followed by two figures. Where the individual is under age of 60, the statement will show the amount of benefit which would be receivable by the same individual if he or she chose to receive the CPP retirement benefit at the ages of 60, 65, or 70. Where the individual is already over the age of 60, the statement will show how much benefit would be receivable if payment were to start immediately, and also the amount of monthly benefit which would be receivable at age 65 and at age 70. The earlier the CPP retirement benefit is received, the lower the monthly benefit amount payable. For example, a person who is 62 years of age in 2016 and could receive a monthly CPP retirement benefit of $744 if benefits were started the following month would be eligible for a monthly benefit of $964 if receipt was deferred to the age of 65. Changes announced in recent years will increase the “gap” between those figures, as those who elect to begin receiving CPP retirement benefits before the age of 65 will see their benefits reduced to a greater degree than is currently the case.

Where an individual who has contributed to the CPP dies, his or her surviving spouse or common law partner is generally entitled to receive CPP survivor benefits. The amount of the survivor’s benefit payable is determined by both the amount of contributions made by the deceased contributor and by the age and circumstances of the surviving spouse or common-law partner. Continuing with the individual example above, a surviving spouse or partner of that individual who is aged 65 or over could receive a survivor’s pension of $578 per month. Where the surviving spouse or partner is aged 45 to 65, or is under the age of 45 but has dependent children, or is disabled, the monthly survivor benefit amount is reduced slightly to $545. Further reductions in the survivor benefit are taken where the surviving spouse or partner is under the age of 45 but does not have dependent children and is not disabled. Finally, dependent children of a CPP contributor are entitled to receive a monthly survivor’s benefit until the age of 18, or up to age 25 if they remain full-time students.

The amounts contributed by an individual to the CPP throughout his or her working life determine the amount of CPP benefits which will be payable to that individual later in life. Consequently, it is important to ensure that the contribution information on file with the federal government, as well as the personal information like birth date, address, and the like, is accurate and up-to-date. The birth date information on the CPP Statement of Contributions is the one registered on the individual’s Social Insurance Number record. If that information is incorrect, the individual should contact the Social Insurance Registration Office at 1-800-206-7218 to determine how to correct it. Where there is an error on the Statement of Contributions with respect to CPP contributions made or the amount of pensionable earnings received, it is necessary to write to the CPP, providing supporting documentation for the needed correction. The address to which such correspondence is sent can be found on the back of the Statement of Contributions form.

Finally, the federal government provides a great deal of information on its website with respect to the CPP and Canada’s retirement income system generally. A good starting point is the Service Canada website at www.esdc.gc.ca/en/cpp/index.page.

The start of fall marks a lot of things, among them a number of runs, walks, and other similar events held to raise money for a broad range of Canadian charities. And, in a few months, as the holiday season approaches, charities will launch their year-end marketing campaigns.

The start of fall marks a lot of things, among them a number of runs, walks, and other similar events held to raise money for a broad range of Canadian charities. And, in a few months, as the holiday season approaches, charities will launch their year-end marketing campaigns.

Canadians have a well-deserved reputation for supporting charitable causes, through donations of both money and goods. Our tax system supports that generosity by providing a tax credit, at both the federal and provincial/territorial levels, for qualifying  donations made. Federally, taxpayers can claim a credit of 15% of the first $200 in donations plus 29% of donations over the $200 threshold. The tax credit provided by the provinces and territories works in much the same way, in that a tax credit is provided on the first $200 in donations at the lowest tax rate imposed by that province or territory, and a credit on donations above the $200 level at the province or territory’s highest tax rate. The only exceptions are the provinces of Alberta and Quebec. Alberta provides a credit of 10% on the first $200 in donations, and an enhanced credit of 21% on the balance. Quebec provides a charitable donations tax credit on the first $200 of donations at the 20% rate applicable to its middle income bracket. Donations above the $200 threshold are eligible for credit at the province’s top tax rate of 24%.

As is the case with most expenditures that benefit from favourable tax treatment, in order to make a claim for the charitable donations tax credit in a year, a donation must be made by the end of that calendar year. And, this year and next, there is an additional incentive to maximize donations made, in the form of a “First-Time Donors Super Credit”.

The name of the program is somewhat misleading, as the credit is not available just to first-time donors, but to anyone who has not claimed a charitable donations tax credit in recent years. Specifically, where neither a taxpayer nor his or her spouse has claimed a charitable donations tax credit for any year after 2007, either will be able to claim the “super credit” for donations made in 2016 or 2017.

The name “super credit”, however, is not a misnomer. While the usual federal tax credit rate for donations under and above the $200 threshold is 15% and 29% respectively, the super credit supplements the value of such credit by 25%, as shown in the following example provided on the CRA website:

An eligible first-time donor claims $700 of charitable donations in 2016, of which $300 are donations of money. The charitable donations tax credit (CDTC) and the first-time donor's super credit (FDSC) would be calculated as follows:

• On the first $200 of charitable donations claimed, the CDTC is ($200 x 15%) = $30.
• On the donations claimed in excess of $200, the CDTC is [($700 − $200) x 29%] = $145.
• On the donations that are gifts of money, the FDSC is ($300 x 25%) = $75.
• The total of the CDTC and FDSC is $250.

There are a couple of restrictions on donations which qualify for the super credit. Only donations of money (not goods) will qualify for the super credit. As is the usual rule for charitable donations tax credit claims, the super credit can be claimed by one spouse for donations made by either, or can be shared between spouses. However the super credit is divided, it can be claimed on only $1,000 in total donations. As well, the super credit can be claimed only once.

Since the charitable donations tax credit is a two-level credit, in which the credit percentage increases once donations made in a year exceed $200, it always makes sense to aggregate donations in a single year, so as to maximize the amount of credit claimable. That advice applies especially to taxpayers who are eligible to claim the super credit, which can only be claimed once.

The super credit will be claimable only for donations made to registered charities. Any charity seeking or receiving a donation should be able to provide a registered charitable number, and a searchable current listing of registered charities can be found on the Canada Revenue Agency website at www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html, and information on the charitable donations tax credit and the super credit is available on the same website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/349/menu-eng.html.

It has become something of a dreary chorus over the past decade, as financial advisers, central bankers and even Ministers of Finance remind, warn, and even scold Canadians about the risks associated with their ever-increasing levels of household debt.

That chorus was renewed this month, as statistics issued for the second quarter (April to June) of 2016 showed that the amount of household debt held by Canadians, expressed as a percentage of disposable income, had set yet another record. At the end of that quarter, as reported by Statistics Canada, Canadians households held $1.68 in credit market debt for every dollar of disposable income.

It has become something of a dreary chorus over the past decade, as financial advisers, central bankers and even Ministers of Finance remind, warn, and even scold Canadians about the risks associated with their ever-increasing levels of household debt.

That chorus was renewed this month, as statistics issued for the second quarter (April to June) of 2016 showed that the amount of household debt held by Canadians, expressed as a percentage of disposable income, had set yet another record. At the end of that quarter, as reported by Statistics Canada, Canadians households held $1.68 in credit market debt for every dollar of disposable income.

Credit comes in many forms, of course, and it’s important to make a distinction between, in particular, secured and unsecured credit. In the first type – secured debt – the lender “secures” the debt against an asset owned by the borrower, meaning that if the debt is not repaid as agreed, the lender has the right to seize and sell the underlying asset in order to be repaid. Although any asset can serve as security for money loaned (car loans being one example), the kind of secured debt most familiar to Canadians is, of course, a mortgage. Unsecured debt, by contrast, is money provided to a borrower on no more than the strength of the borrower’s promise to repay – and the best example of that type of debt familiar to most Canadians is a credit card.

The figures released by StatsCan for the second quarter of 2016 with respect to household debt figures includes all “credit market debt”, which includes consumer credit and mortgage and non-mortgage loans. In virtually every Canadian household that has outstanding debt, the largest such debt is their mortgage, and much of the borrowing which has place in recent years has been in the form of mortgage or home equity line of credit (HELOC) borrowing, both of which are secured against the value of the home. A household which has a mortgage or a home equity line of credit therefore also has an asset – their home – which is worth more than the amount of the mortgage or HELOC and which, if necessary, be sold to pay off that mortgage or HELOC debt. There are, however, two risks to such borrowing. The first is that a downturn in the residential real estate market could mean that the value of the home drops below the amount of the mortgage or HELOC.  The second is that while the increased mortgage or HELOC debt of such households is manageable at current interest rates, those rates are at historic lows and will inevitably increase at some (unknown) point in the future.  

Canadians who are carrying significant amounts of debt secured against their home do at least have the security of an asset which could be sold to pay that debt. That’s not the case for those carrying unsecured debt, and the amount of such debt is, in almost all categories, on the increase.

The credit reporting agency TransUnion recently issued a report summarizing non-mortgage debt held by Canadians during the second quarter of 2016. That report, which is available at https://www.transunion.ca/, indicated that Canadians had reached a non-mortgage debt balance of $21,580 in the second quarter of 2016, up by just under 3% from the balance amount recorded in the second quarter of 2015.

The non-mortgage debt held by Canadians was broken down in the TransUnion report into four categories: bankcard (credit card) debt; auto loans, lines of credit, and installment loans, and the average balances held in each category were as follows:

Bankcard …………………  $3,925 (up by 2.03% year-over-year)

Auto …………………………   $19,896 (up by 3.20% year-over-year)

Lines of credit …………… $29,649 (down by 0.03% year-over-year)

Installment loans ………  $24,021 (up by 6.31% year-over-year)

It’s easy to become complacent, perhaps, when the amount of Canadian household debt, both in dollar terms and as a percentage of household net income, has increased in a series of small quarterly and annual increments, none of which may seem particularly remarkable on their own. However, a look at the longer-term trend paints a different picture.

 In 1990, the amount of debt held by Canadian households as a percentage of disposable income stood at 93%. Over the next 15 years, that percentage rose by an average of 1% per year, until it stood at 108% in 2005. Five years later, in 2010, debt held by Canadian households was, on average, equal to 150% of their disposable income, meaning that such debt had risen by an average of just over 8% per year between 2005 and 2010. And, of course, as of the second quarter of 2016, that debt to disposable income percentage has reached a new high of 168%.

And, one final number which may help to put the amount of debt held by Canadian households in context: a country’s gross domestic product, or GDP, is the total value of all of the goods and services produced by that country in a given time period; for the second quarter of 2016, the amount of household debt held by Canadians exceeded, for the first time, Canada’s total GDP.

At the Canada Revenue Agency (CRA), taxes are a year-round business. During the spring and early summer, the CRA is busy processing the millions of individual tax returns filed by Canadians for the previous tax year. The volume of returns filed and the Agency’s self-imposed processing turnaround goals mean that the CRA cannot possibly do an in-depth review of each return filed. Once the season of processing and assessing tax returns is for the most part complete, however, the CRA moves to the next phase of its activities – specifically, the start of its annual post-assessment tax return review process.

At the Canada Revenue Agency (CRA), taxes are a year-round business. During the spring and early summer, the CRA is busy processing the millions of individual tax returns filed by Canadians for the previous tax year. The volume of returns filed and the Agency’s self-imposed processing turnaround goals mean that the CRA cannot possibly do an in-depth review of each return filed. Once the season of processing and assessing tax returns is for the most part complete, however, the CRA moves to the next phase of its activities – specifically, the start of its annual post-assessment tax return review process.

What that means for the individual taxpayer is the possibility of receiving unexpected correspondence from the CRA. Receiving such correspondence from the tax authorities is almost guaranteed to unsettle the recipient taxpayer, even where there’s no reason to believe that anything is wrong. But, it’s an experience which will be shared this fall by millions of Canadian taxpayers.

In 2016, Canadians filed over 28 million individual income tax returns with the CRA. The vast majority of those returns – about 24 million – were filed by electronic means (either EFILE or NETFILE), while only just over 4 million paper returns were filed. For several years, the CRA has encouraged taxpayers to take advantage of its electronic filing options, and its efforts have clearly been a success.  As the CRA has always noted, filing electronically means faster turnaround (and quicker refunds!) but, when returns are filed by electronic methods there is, by definition, no paper involved. The Canadian tax system has always been what is termed a “self-assessing” system, in which taxpayers report income earned and claim deductions and credits to which they believe they are entitled. There have, however, always been means by which the CRA can verify claims made by taxpayers. Where returns are paper-filed, taxpayers must usually include receipts or other documentation to prove their claims, whether those claims are for dependent tax credits, charitable donations, medical expenses, or other similar deductions and credits. For the 85% of returns which were filed this year by electronic means, no such paper trail exists. Consequently, the potential exists for misrepresentation of such claims (or simple reporting errors) on a large scale. The CRA’s response to that risk is to carry out a post-assessment review process, in which the Agency asks taxpayers to back up or verify claims for credits or deductions which were made on the return filed this past spring.

That post-assessment review process starts in the month of August. There are two components to the review process – the Processing Review Program and the Matching Program. The former is a review of various deductions or credits claimed on returns, while the latter compares information included on the taxpayer’s return with information provided to the CRA by third-party sources, like T4s filed by employers or T5s filed by banks or other financial institutions. The time periods during which the two programs are carried out overlap, as the peak time for the Processing Review Program is between August and December, while the Matching Program is carried out from October to March.

While the two programs are carried out more or less concurrently, they are quite different. The Processing Review Program asks the taxpayer to provide verification or proof of deductions or credits claimed on the return, while the Matching Program deals with discrepancies between the information on the taxpayer’s return and information filed by third parties with respect to the taxpayer’s income for the year.

Of course, most taxpayers are not concerned so much with the kind or program or programs under which they are contacted as they are with why their return was singled out for review. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is a precursor to an audit, but that’s not usually the case. Returns are selected by the CRA for post-assessment review for a number of reasons. Under the Matching Program, where a taxpayer has filed a return containing information which does not agree with the corresponding information filed by, for instance, his or her employer, it’s likely that the CRA will want to follow that up to find out the reason for the discrepancy. Canada’s tax laws are complex and, over the years, the CRA has determined that there are areas in which taxpayers are more likely to make errors on their return, so a return which includes claims in those areas may have an increased chance of being reviewed. Where there are deductions or credits claimed by the taxpayer which are significantly different or greater than those claimed in previous returns that may attract the CRA’s attention. And, if the taxpayer’s return has been reviewed in previous years and, especially, if an adjustment was made following that review, subsequent reviews may be more likely. Finally, many returns are picked for post-assessment review simply on a random basis.  

Regardless of the reason for the follow-up, the process is the same. Taxpayers whose returns are selected for review will receive a letter from the CRA, identifying the deduction or credit for which the CRA wants documentation or the income amount about which a discrepancy seems to exist. The taxpayer will be given a reasonable period of time – usually a few weeks from the date of the letter – in which to respond to the CRA’s request. That response should be in writing, attaching, if needed, the receipts or other documentation which the CRA has requested. All correspondence from the CRA under its review programs will include a reference number, which is usually found in the top right hand corner of the CRA’s letter. That number is the means by which the CRA tracks the particular inquiry, and should be included in the response sent to the Agency.

Taxpayers who have registered for the CRA’s online tax program My Account (or whose representative is similarly registered for the Agency’s Represent a Client online service) can submit required documentation electronically. More information on how to do so can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/sbmttng-eng.html.

Regardless of the means by which requested documents are submitted, it is possible that the CRA will send a follow-up letter, or the taxpayer may be contacted by telephone, with a request from the Agency for more information.

One word of caution – as most Canadians have heard by now, there is a persistent tax scam operating in which taxpayers are contacted by telephone by someone falsely claiming to be from the CRA (or, more recently, from the “Federal Tax Court”, which does not exist). Such fraudulent callers generally indicate that a review of the taxpayer’s return shows that additional taxes are owed, and insist that immediate payment is required, by wire transfer of funds or pre-paid credit card. Taxpayers should be aware that payment of taxes is never requested in this way, or by either of those methods. While the CRA can and does contact taxpayers by phone, any CRA representative will have the reference number which appeared in the CRA’s initial letter and should be prepared to quote that number to the taxpayer in order to establish that the call is an authentic one. As well, the CRA does not correspond with taxpayers on confidential tax matters by e-mail. The only legitimate e-mail which a taxpayer might receive from the CRA is one which advises that there is a new message for that taxpayer in his or her online account with the CRA – and only taxpayers who have previously registered for the CRA’s My Account service would receive such an e-mail. Any other type of e-mail claiming to be from the CRA is not authentic and should be deleted without opening.

Whatever the reason a particular return was selected for post-assessment review by the CRA, one thing is certain: a prompt response to the CRA’s enquiry, providing the Agency with the information or documentation requested will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the Agency and the taxpayer.

Having access to mobile communication is useful and practical for any number of reasons and Canadians who don’t have a cell or smart phone are likely now the exception rather than the rule. It’s also the case, however, that cell phone rates payable by Canadians are among the highest in the world, and so having an employer provide that cell phone (and pay the associated costs) is consequently a valued employment benefit. That said, Canadians who enjoy such an employment benefit should be aware that, while they may not have to pay a monthly cell phone bill, there still can be a cost in the form of a taxable benefit which must be reported on the annual return. 

Having access to mobile communication is useful and practical for any number of reasons and Canadians who don’t have a cell or smart phone are likely now the exception rather than the rule. It’s also the case, however, that cell phone rates payable by Canadians are among the highest in the world, and so having an employer provide that cell phone (and pay the associated costs) is consequently a valued employment benefit. That said, Canadians who enjoy such an employment benefit should be aware that, while they may not have to pay a monthly cell phone bill, there still can be a cost in the form of a taxable benefit which must be reported on the annual return.  

The general rule set out by the Canada Revenue Agency (CRA) is that where an employer provides his or her employee with a cell phone to be used in the course of their employment duties, the business use of that phone is not a taxable benefit to the employee. Where part of the use of the phone is personal (as it inevitably is), the value of that personal use must be included in the employee’s income as a taxable employment benefit. The employer is required to calculate the amount of that taxable benefit, based on the fair market value of the service (basically, the employer’s cost, assuming that cost reflects current market value of the service), minus any amounts reimbursed to the employer by the employee. 

While such an approach may be theoretically correct, it’s not particularly practical for every employer to make such a calculation for each and every employee to whom a cell phone is provided. The CRA’s assessing policy is therefore that an employee’s personal use of an employer-provided cell phone will not be a taxable benefit if all of the following apply:

•   the plan’s cost is reasonable;
•   the plan is a basic plan with a fixed cost; and
•   the employee’s personal use of the service does not result in charges that are more than the basic plan cost.

When an employer wants to provide cell phone service as a benefit of employment, the alternative to providing the cell phone itself is to give the employee an allowance which he or she can then use to acquire a phone and plan. While that approach gives the employee more flexibility, it’s not a great option from a tax perspective. The CRA’s assessing policy with respect to that approach is that any such allowance provided by an employer must be included on the employee’s T4 for the year and taxed as income. 

Based on the CRA’s assessing policies and criteria, it seems that the most tax-effective option for employees when it comes to employer-provided cell phones is for the employer to buy the fixed-cost plan which provides the most generous terms that can be reasonably justified by the employee’s business-related use of the phone, and for the employee to avoid running up any additional charges related to personal use (for example, for excess minutes, long distance or roaming charges) which will result in charges in excess of the basic monthly bill for that plan.

When it comes to questions around personal finance, two issues tend to dominate current discussions. The first is whether and to what extent Canadians are financially prepared for retirement, and the second is the seemingly inexorable increase in the value of residential real estate. For many retired Canadians, those two issues are very much interlinked.

When it comes to questions around personal finance, two issues tend to dominate current discussions. The first is whether and to what extent Canadians are financially prepared for retirement, and the second is the seemingly inexorable increase in the value of residential real estate. For many retired Canadians, those two issues are very much interlinked. 

Most Canadians are eligible to receive Canada Pension Plan and Old Age Security payments in retirement. While those two programs provide the “backbone” of retirement income in Canada, they are almost never enough on their own to provide for a comfortable standard of living in retirement. A generation ago, retirees could often count on income from an employer-sponsored pension plan, but now only a minority of retirees and those approaching retirement have that option. Private retirement savings, usually through registered retirement savings plans (RRSPs) are the third “leg” of Canada’s retirement income system, but once again, the amount saved by many Canadians through RRSPs falls short of what will be needed, especially where a retirement can last for twenty or more years, and when inflation over that time period is taken into account. The reality for many Canadians who are retired or approaching retirement is that their single most valuable asset is their home – or more specifically, the equity which they have built up in that home. 

In many cases, those approaching retirement opt to sell their current home – sometimes in order to move to a smaller, easier to maintain dwelling, and sometimes simply to free up the capital represented by their built-up equity. However, while selling and downsizing is the option chose by many retirees, not everyone wants to leave the family home at retirement. There are many situations in which moving and downsizing isn’t desirable or even possible. Especially for those living in smaller centres, where the types of available housing may be limited, downsizing or choosing to rent could mean having to move to another community. Moving and leaving behind friends and other social supports is difficult at any age, and especially difficult when it coincides with a major life change like retirement. As well, it’s increasingly the case that adult children “boomerang” back to the family home after finishing their education. In many cases, such adult children are unable to find long-term employment or remuneration from available employment isn’t sufficient, or sufficiently secure, for them to take on the financial obligations of their own home, even as a tenant. For a variety of reasons, then, it may be that retirees need to stay, or choose to stay, in the current family home. Where that is their choice, and the only factor creating pressure for them to sell that home is the need to free up equity to create or increase cash flow during retirement, there are other options available. 

One of those options which is currently receiving a lot of attention is the reverse mortgage. Reverse mortgages are better known, more widely used and have a much longer history in the U.S. than they do in Canada. However, such financial vehicles are now being advertised and promoted on a regular basis in the Canadian media, and it’s likely that by now most Canadians have at least heard of them.

Simply put, taking out a reverse mortgage allows individuals to obtain a sum of money based on the value of their home and the equity which they have accumulated in that home. It’s also possible, using a reverse mortgage, to structure the receipt of funds in different ways. The homeowner can choose to receive a lump sum amount, or can opt to receive a series of payments which will provide a regular income stream, or some combination of the two. And, with a reverse mortgage, no repayment of the funds advanced is required until the homeowner leaves or sells the home.

When described in those terms, a reverse mortgage can sound like the perfect solution to a cash-strapped retiree. The ability to ease cash flow worries while remaining in one’s own home with no requirement to make any payments at all can sound like the best of all possible worlds. And it’s certainly true that taking out a reverse mortgage can make sense for retirees who are house rich but cash or cash-flow poor. But, as with all financial tools, it is necessary to understand both the benefits and the potential costs and risks of getting a reverse mortgage.

The potential downsides of a reverse mortgage start with the basic costs of obtaining one. Setting up a reverse mortgage involves a number of costs for the homeowner, including the need to have one’s property appraised. There will also be closing costs, and the homeowner will be required to obtain independent legal advice, and to pay the cost of obtaining such advice.

Once the reverse mortgage is taken out, interest will, of course, be levied on all amounts provided, and will accumulate from the time the funds are first advanced. Total interest costs can add up very quickly and reach significant amounts by the time the debt is eventually to be repaid, usually out of the proceeds from the sale of the house. And, of course, every dollar of funds advanced and interest levied eats away at the amount of equity which the homeowner has built up, on a dollar-for-dollar basis.

The amount which can be obtained through a reverse mortgage is also limited to 55% of the current value of the home. And, where there is already a mortgage or other form of loan secured by the home (as is increasingly the case for retirees), the reverse mortgage lender will require that any such indebtedness must first be paid off with the funds received under the reverse mortgage.

The major benefit of a reverse mortgage for many retirees is that they are not required to make payments while living in the home, putting much less of a strain on cash flow. Offsetting that benefit, however, is the fact that the interest rate charged on a reverse mortgage is usually higher than that which would be levied under a traditional mortgage or other similar financial products. As well, under the terms of many such arrangements, a repayment penalty is levied where the homeowner moves or sells the house within three years of obtaining the reverse mortgage.

Many retirees who obtain a reverse mortgage do so with the thought that the debt will not need to be repaid until after their death, when the house will be sold. However, it’s necessary to consider the possibility that the homeowner/retiree will need to move from his or her home at some point in the future to an assisted living facility. Care in such facilities does not come cheap, and if the retiree is counting on his or her home equity to pay for such care, it’s necessary to consider the extent to which the reverse mortgage will reduce that accumulated home equity and consequently the funds available to pay for needed care.

For those who are considering whether a reverse mortgage is the right solution for them in retirement, Canada’s Financial Consumer Agency suggests getting answers from prospective lenders to the following questions:

• What are all the fees?
• Are there any penalties if you sell your home within a certain period of time?
• If you move or die, how much time will you or your estate have to pay off the loan’s balance?
• When you die, what happens if it takes your estate longer than the stated time period to fully repay the loan?
• What happens if the amount of the loan ends up being higher than your home’s value when it is time to pay the loan back?

More information on reverse mortgages in general can be found on the FCAC website at www.fcac-acfc.gc.ca/Eng/forConsumers/manage/mortgages/Pages/reverse-mortgages.aspx.

While our health care system is not without its problems, Canadians are fortunate to benefit from a publicly funded system in which individuals are not required to pay personally for the cost of necessary medical care. Generally speaking, acute care provided in a hospital setting is covered by that system, as is more routine care provided by physicians in their offices.

Canadians who, as the result of illness or accident, require care in our medical system are nonetheless often surprised to find that there is a long and ever-increasing list of expenses which are not covered by government-sponsored health care, or for which the individual is required to make at least a partial payment. In some cases, individuals will have private health care coverage to help offset those costs but for most, such costs must be paid on an out-of-pocket basis. For those who must bear such costs personally, some recovery of costs incurred is possible by claiming a medical expense tax credit on the annual return. The federal medical expense tax credit is equal to 15% of the cost of qualifying medical expenses claimed, and each of the provinces and territories also provide for a medical expense tax credit, at varying rates.

While our health care system is not without its problems, Canadians are fortunate to benefit from a publicly funded system in which individuals are not required to pay personally for the cost of necessary medical care. Generally speaking, acute care provided in a hospital setting is covered by that system, as is more routine care provided by physicians in their offices. 

Canadians who, as the result of illness or accident, require care in our medical system are nonetheless often surprised to find that there is a long and ever-increasing list of expenses which are not covered by government-sponsored health care, or for which the individual is required to make at least a partial payment. In some cases, individuals will have private health care coverage to help offset those costs but for most, such costs must be paid on an out-of-pocket basis. For those who must bear such costs personally, some recovery of costs incurred is possible by claiming a medical expense tax credit on the annual return. The federal medical expense tax credit is equal to 15% of the cost of qualifying medical expenses claimed, and each of the provinces and territories also provide for a medical expense tax credit, at varying rates. 

There are an almost limitless number and variety of such expenses and it’s not, unfortunately, possible to provide a general rule as to which such expenses qualify for the credit and which do not. As well, the rules governing the credit for qualifying expenses can seem illogical and baffling, in that some expenses require a doctor’s prescription, while others do not and seemingly similar expenses can receive very different tax treatment. For instance, in order to claim a medical expense tax credit for the cost of a “walking aid”, a prescription is required: however, no prescription is needed in order to claim the cost of a wheelchair. The list of expenses eligible for the credit provided by the Canada Revenue Agency (CRA) on its website includes 134 categories of such expenses, each with its own qualification criteria. 

That said, it is possible to outline in a general way the categories or kinds of expenses which will qualify for the medical expense tax credit. Some of the most frequently incurred out-of-pocket medical expense for which a credit can be claimed are as follows:

• payments made to a medical doctor, dentist, nurse, or certain other medical professionals or to a public or licensed private hospital (while most medical services provided by doctors are covered by public health plans, others must be paid for out-of-pocket and a credit can generally claimed for such costs);
• the cost of obtaining non-cosmetic care from a dentist or a denturist, including the cost of dentures;
• the cost of medical devices including pacemakers, hearing aids and artificial limbs;
• the cost of assistive mobility equipment and devices, including crutches, wheelchairs and walkers;
• the cost of prescription medications;
• the cost of obtaining eye care, including the cost of prescription eyeglasses or contact lenses; and
• payments made for ambulance services for transport to or from a public hospital.

Individuals who find it advisable to obtain coverage under a private health services plan in order to help with the cost of necessary medical expense will similarly be able to claim a medical expense tax credit for premiums paid for that coverage. 

Given the frequency with which Canadians claim the medical expense tax credit, it’s unfortunate that the rules governing that credit can be somewhat confusing. The first thing to note is that the credit is a non-refundable one (i.e., any medical expense tax credit claims made can reduce tax otherwise payable, but cannot create or increase a refund). For 2016, the general rule for the credit is that is that a taxpayer may claim medical expenses paid that were more than 3% of the taxpayer’s net income (the amount that appears on line 236 of the taxpayer’s tax return), or $2,237, whichever is less. That’s not a formula which is easily understood, but there is a rule of thumb. If the taxpayer’s 2016 income is more than $74,575, then that taxpayer can claim medical expenses paid which were over the $2,237 threshold. If his or her net income for 2016 is less than $74,575, then it’s necessary to calculate 3% of that net income number, and claim medical expenses which were over the 3% figure. 

As well, there is some strategy involved in structuring the medical expense claim for a particular year. Qualifying medical expenses incurred can be claimed for any 12-month period ending in the taxation year for which the claim is being made. There is, unfortunately no hard and fast rule, or even a rule of thumb, which can be used to determine just which 12-month period will produce the best tax result, as each case is different, depending on the income of the taxpayer claiming the credit, the amount of medical expenses incurred, and just when those bills were paid. The optimal claim period must be worked out each year when filing the annual tax return. 

Out-of-pocket medical expenses are a fact of life for most Canadians, and an increasingly costly one. While claiming the available tax credit for such expenses can take a bit of calculation and effort, getting at least some relief from those out-of-pocket expenses is worth that effort. The CRA provides a great deal of information on its website to help taxpayers make such claims (including a lengthy list of qualifying medical expenses), and that information can be found at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330-331/menu-eng.html#mdcl_xpn and www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f1/s1-f1-c1-eng.html.

Each spring, Canadians are required to fulfill two tax obligations. The first is the requirement to file an individual income tax return providing details of income earned, deductions and credits claimed, and the amount of income tax payable for the previous calendar year. The second such obligation is to pay any amount of income tax owed for that year which is still outstanding. And although the Canadian tax system is for the most part a voluntary self-reporting and self-assessing one, most Canadians do comply with those two obligations in a timely way.

Each spring, Canadians are required to fulfill two tax obligations. The first is the requirement to file an individual income tax return providing details of income earned, deductions and credits claimed, and the amount of income tax payable for the previous calendar year. The second such obligation is to pay any amount of income tax owed for that year which is still outstanding. And although the Canadian tax system is for the most part a voluntary self-reporting and self-assessing one, most Canadians do comply with those two obligations in a timely way.

According to Canada Revenue Agency (CRA) statistics, nearly 28 million individual income tax returns for 2015 had been filed by the end of August 2016. Despite those figures, there nonetheless remains a significant minority of taxpayers who have not yet filed a return for 2015, either out of procrastination or because they believe they owe taxes and don’t have sufficient funds available to pay those taxes. Whatever the reason, there is a financial cost attached to that non-compliance. 

For those who have still not filed for 2015, the best strategy is to file as soon as possible. No matter what one’s tax or financial situation is, it won’t be helped by not filing a return. In fact, where taxes are owed, there is an automatic penalty imposed for failure to file on time – even if the return is only one day late. The tax filing deadline for most individuals for 2015 tax returns was May 2, 2016, while self-employed taxpayers and their spouses were required to file on or before June 15, 2016. No matter which filing deadline applied, a taxpayer who failed to file by that deadline was assessed an immediate penalty of 5% of the tax amount owing. So a taxpayer who owed $1000 in taxes and didn’t file on time will have had a penalty of $50 added to his or her bill the day after the filing deadline. As well, an ongoing penalty of 1% of the taxes owed is assessed for each full month the return is late, to a maximum of 12 months. A taxpayer who doesn’t get his or her return is during that 12 month period will therefore be assessed a penalty of 17% of the amount of tax owed (in this case, $170). 

The news is worse for taxpayers who have a recent history of not filing on time. Where the CRA has assessed a late-filing penalty within the past three years, and the taxpayer fails to file on time for 2015, the failure to file penalty is increased to 10% of any taxes owed for 2015, plus 2% of that amount for each full month the return is late, to a maximum of 20 months. A bit of arithmetic will show that in a worst-case scenario, the late-filing penalty imposed can be as much as 50% of the taxes owed (in this case, $500). Clearly, any taxpayer who hasn’t yet filed his or her tax return for 2015 and owes taxes for that year should file as soon as possible, to stop the accumulation of late-filing penalties. 

While paying tax penalties isn’t anyone’s idea of a good use of their money, it’s not the end of the story. The CRA charges interest on any taxes owed, starting the day after payment was due, which was April 30, 2016 for all individual taxpayers. (Although self-employed individuals and their spouses did not have to file a return until June 15, all taxes owing for 2015 were nonetheless due and payable no later than April 30, 2016.) It also charges interest on any penalty amounts levied. And, although interest rates remain near historic lows, the CRA, by law, charges interest at levels higher than normal commercial rates. The interest rate charged by the CRA on overdue or insufficient tax payments is set quarterly. For the third quarter of 2016, covering the months of July, August, and September, the interest rate charged on taxes owing is 5%. 

While that 5% rate is still lower by far than, for instance, the interest rate charged on most credit card balances or even lines of credit, it is the interest calculation method used by the CRA which can really inflate the interest cost of incurring tax debts or penalties. Where an amount is owed to the CRA, interest charged on that amount is compounded daily, meaning that on each successive day, interest is being levied on the interest charged the day before. Not surprisingly, interest costs calculated in that way can add up quickly. 

Contrary, perhaps, to popular belief, the CRA is prepared to be flexible with respect to tax payments. When the amount of taxes owing can’t be paid, or can’t be paid in full, it’s in the taxpayer’s best interests to contact the CRA and let them know of that fact. Not surprisingly, the CRA tries to make it easy for taxpayers who owe the Agency money to enter into a payment arrangement. Such taxpayers have two options. The first is a call to the CRA’s TeleArrangement service at 1-866-256-1147. To use this service, a taxpayer will need to provide his or her social insurance number and date of birth, and the amount he or she entered on line 150 from the last return for which a notice of assessment was received. TeleArrangement is available Monday to Friday, from 7 a.m. to 10 p.m., Eastern Standard Time. Alternatively, the taxpayer can call the CRA’s debt management call centre at 1-888-863-8657 to speak to an agent. That service is available Monday to Friday (except holidays) from 7 a.m. to 11 p.m., Eastern Standard Time. 

The taxpayer can propose a payment schedule based on his or her ability to pay, and the CRA, if it is satisfied that the inability to pay is genuine, will generally be amenable to entering into some type of payment arrangement. Entering into such a payment arrangement does not, of course, stop the interest clock from running, as interest will continue to be assessed at the current rate, and compounded daily. And, one additional blow: neither interest paid on tax debts nor penalties paid to the CRA are deductible.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues. They can be accessed below.

Corporate:

Issue #37 Corporate

Personal:

Issue #37 Personal

Home renovations are big business right now in Canada, as many homeowners opt to make changes and/or additions to their current residences rather than try to find a new home in the current real estate market. And, while the cost of renovating one’s home is usually considered a personal expense which doesn’t qualify for any tax credit or deduction, starting this year there is an exception to that rule.

Home renovations are big business right now in Canada, as many homeowners opt to make changes and/or additions to their current residences rather than try to find a new home in the current real estate market. And, while the cost of renovating one’s home is usually considered a personal expense which doesn’t qualify for any tax credit or deduction, starting this year there is an exception to that rule.

For 2016 and subsequent taxation years, a non-refundable tax credit can be claimed for home renovation work done to make it easier and/or safer for a senior or disabled individual to live in their home. In most cases, such renovations are done to enable such individuals to continue to live in their existing homes, but claims for the new credit – the Home Accessibility Tax Credit, or HATC – are not limited to those individuals. Eligible family members (generally, a spouse, common-law partner or supporting relatives) of a senior or disabled person can similarly claim the HATC for qualifying renovations made.

In practical terms, those rules mean that any person who can claim the federal disability tax credit or who is over the age of 65 and who makes eligible renovations to his or her home can claim the credit. In addition, where such a person moves in with a family member because that person can no longer live on their own, eligible renovations made by the family member to their own home will similarly qualify for the credit.

The HATC can be claimed, at a rate of 15%, on up to $10,000 in qualifying renovations carried out in a year. Consequently, a taxpayer who spends the maximum amount on qualifying renovations in a year will have his or her tax bill for that year reduced by $1,500.

A number of other provisions governing the HATC program are particularly generous in nature. Where financial assistance by way of grants, forgiveable loans, or other tax credits is available from the federal or provincial governments, the HATC rules provide that such assistance, of any kind, does not reduce the amount which can be claimed for purposes of the HATC. In addition, where a homeowner receives a rebate or incentive from the vendor providing goods or services in connection with the home renovation, eligible expenses for purposes of the HATC are not reduced by the amount of such incentive or rebate. Finally, it’s almost always the case in our tax system that a particular expense can only be claimed once. The HATC is a rare exception to that rule, in that expenses which qualify for both the HATC and the medical expense tax credit can be claimed for both, in the same year.

There are, of course, rules setting out the kinds of expenses which will be eligible for the HATC. Generally, in order to qualify, home renovation expenses must be of a nature that increases a qualifying individual’s access, mobility or functioning within the home, or increases that individual’s safety within that home. As well, any changes made must be of a permanent nature, in the sense that they become a permanent part of the home. Consequently, the purchase of a portable shower seat would not qualify for the credit, but the installation of a permanent shower seat affixed to the wall or floor of a tub or shower would. On a larger scale, the cost of renovations done to add a ground floor bedroom for a senior who can no longer climb stairs (or do so safely) should also qualify for the HATC.

While the Canada Revenue Agency (CRA) website does not provide much detail on the specific types of expenses which will qualify for the HATC, it does list examples of ineligible expenses, are some of those are as follows:

• amounts paid to acquire a property that can be used independently of the qualifying renovation;
• the cost of annual, recurring, or routine repair or maintenance;
• household appliances;
• electronic home-entertainment devices;
• the cost of housekeeping, security monitoring, gardening, outdoor maintenance, or similar services;
• financing costs for the qualifying renovation; and
• renovations made primarily for the purpose of increasing or maintaining the value of the dwelling.

The HATC rules also address the question of who can carry out qualifying renovations. Such renovations performed by qualified tradespeople — electricians, plumbers, carpenters etc. — will qualify for the credit. Where an individual claiming the credit does the work himself or herself, a credit will be available for the cost of building materials, fixtures, equipment rentals etc., but no credit is claimable for the cost of labour. Finally, neither labour nor materials expenses are eligible for the HATC where otherwise eligible renovations are done by a family member.

In all cases, any expenses claimed must be supported by agreements or contracts, invoices and receipts, and such documents must include the following information:

• information that clearly identifies the vendor/contractor, their business address, and, if applicable, the GST/HST registration number;
• a description of the goods and the date when the goods were purchased;
• the date when the goods were delivered (keep your delivery slip as proof) and/or when the work or services were performed;
• a description of the work performed, including the address where the work was performed;
• the amount of the invoice; and
• proof of payment, including receipts or invoices that show that they are paid in full or are accompanied by other proof of payment, such as a credit card slip or cancelled cheque.

In order to be eligible for a claim for the HATC on the 2016 tax return, qualifying renovations must be contracted for, carried out, and paid for before the end of this calendar year. Since 2016 is the first year for which the HATC can be claimed, the forms used to make that claim are not yet available, but more information on the credit itself can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/398/398-eng.html#hwtclm.

The fact that the cost of residential real estate in Canada’s largest cities has reached unaffordable levels for most Canadians, especially young families, isn’t really news any more. What’s relatively new, however, is that significant price increases are now being seen in cities which are within daily driving range of those major cities, presumably as individuals and families move further and further out in search of affordable housing. The trade-off for moving further from work in order to be able to purchase an affordable home is, of course, the daily commute. And, while gas prices aren’t currently at the levels seen a year or two ago, commuting is never inexpensive, leading many to wonder whether our tax system provides any relief for unavoidable commuting costs incurred.

The fact that the cost of residential real estate in Canada’s largest cities has reached unaffordable levels for most Canadians, especially young families, isn’t really news any more. What’s relatively new, however, is that significant price increases are now being seen in cities which are within daily driving range of those major cities, presumably as individuals and families move further and further out in search of affordable housing. The trade-off for moving further from work in order to be able to purchase an affordable home is, of course, the daily commute. And, while gas prices aren’t currently at the levels seen a year or two ago, commuting is never inexpensive, leading many to wonder whether our tax system provides any relief for unavoidable commuting costs incurred.

The bad news for most taxpayers is that the cost of driving to work and back home, as well as the cost of most non-work driving is considered a personal expense, for which no tax deduction or credit is allowed, no matter how great the cost. The news is not, however, uniformly bad. The self-employed, of whom there are an increasing number, can claim a deduction for business-related driving expenses. There are some circumstances (outlined below) in which employees can claim driving-related costs. And, finally, for those who decide that the daily drive has just become too costly or too stressful and turn to available public transit (which includes everything from subways to suburban commuter trains to ferries) as an alternative, a tax credit is available to help offset the cost of taking that transit.

The one circumstance in which an employee can claim a deduction for driving costs incurred is where that employee is required, as part of his or her terms of employment, to use a personal vehicle for work-related travel. For instance, an employee might, as part of his or her job, be required to see clients at their own premises for the purpose of meetings or other work-related activities, and be expected to use their own vehicle to get to such meetings. If the employer is prepared to certify on a Form T2200 that the employee was ordinarily required to work away from his or her employer’s place of business or in different places, that he or she is required to pay his or her own motor vehicle expenses and that no tax-free allowance is provided by the employer for such expenses, the employee can deduct actual expenses incurred for such work-related travel, including the following:

• fuel (gasoline, propane, oil);
• maintenance and repairs;
• insurance;
• licence and registration fees;
• depreciation, in the form of capital cost allowance
• eligible interest costs paid on a loan used to buy the motor vehicle; and
• eligibleleasing costs.

In the majority of cases, a taxpayer will use the same vehicle for both personal and work-related driving. Where that’s the case, only the percentage of expenses incurred for work-related driving can be deducted and the employee must keep a record of both the total kilometres driven and the kilometres driven for work-related purposes. And, of course, receipts must be kept to document the expenses claimed.

The rules governing the taxation of employee automobile allowances and available deductions for employment-related automobile use are outlined on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/slry/mtrvhcl-eng.html.

In other circumstances, where a taxpayer has the option of taking public transit, the after-tax cost of getting to and from work each day can be reduced by claiming the public transit tax credit. That credit is offered by the federal government and by several of the provinces, and there is no limit on the amount which may be claimed. The federal credit is calculated as 15% of the cost of public transit, and while provincial credit amounts vary, an average would be around 7%. A taxpayer would therefore be able to claim a credit (and reduce taxes which would otherwise be payable for the year) by 22% of eligible public transit costs incurred during that year.

As well, the public transit tax credit isn’t limited to costs incurred for transit use to and from work. Costs incurred by either spouse and by any dependent children under the age of 19 who regularly purchase a weekly or monthly transit pass which provides for unlimited travel – for example high school or university students who use transit to get to and from school – can be aggregated and claimed on the return filed by either parent for the year. So, a family of four which incurs an average of $700 a month in transit costs (not difficult to do where an inter-city commuter pass can cost up to $400 a month and city transit passes, even for students, can cost over $100) can claim $8,400 in eligible transit costs per year, for which they would be able to reduce their tax bill for the year by just under $1,850. Details of the costs which qualify for the public transit tax credit are summarized on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/364/menu-eng.html.

No amount of tax relief is going to make driving, especially for a lengthy daily commute, an inexpensive proposition. But, that said, seeking out and claiming every possible deduction and credit available under our tax rules can at least help to minimize the pain.

By the time this summer reached the halfway mark, most Canadian taxpayers had filed a tax return for 2015, received a Notice of Assessment with respect to that return, and considered that their income tax obligations for this year were complete. For a significant number of those taxpayers, however, the filing of that return will trigger the issuance of a 2016 Tax Instalment Reminder from the Canada Revenue Agency (CRA), and that reminder will show up in their mailboxes sometime during the month of August. On that form, the CRA will suggest to the recipient that he or she should make instalment payments of income tax on September 15 and December 15, 2016, and will identify the amount which should be paid on each date.

By the time this summer reached the halfway mark, most Canadian taxpayers had filed a tax return for 2015, received a Notice of Assessment with respect to that return, and considered that their income tax obligations for this year were complete. For a significant number of those taxpayers, however, the filing of that return will trigger the issuance of a 2016 Tax Instalment Reminder from the Canada Revenue Agency (CRA), and that reminder will show up in their mailboxes sometime during the month of August. On that form, the CRA will suggest to the recipient that he or she should make instalment payments of income tax on September 15 and December 15, 2016, and will identify the amount which should be paid on each date.

Unexpected correspondence from the tax authorities is always unsettling and where a first instalment reminder is issued in August, it is almost certainly being sent to someone who has never before received an instalment reminder and, quite possibly, doesn’t even know what a tax instalment is. And, in any case, for someone who thought their tax obligations for the year were already met, receiving mail from the CRA suggesting that tax amounts are owed is likely to evoke both surprise and worry. The fact is, however, tax instalments are just another way of paying tax throughout the year, rather than when the tax return for that year is filed.

The reason that most Canadians are unfamiliar with instalment payments of tax is that most of them work as employees throughout their working lives and income tax is automatically deducted from their pay “at source”. Their employer deducts an amount for income tax from their gross pay, before any paycheque is issued, and remits that amount to the CRA on their behalf. When the individual files a tax return the following spring, he or she is credited with those tax payments which were remitted to the CRA on his or her behalf throughout the year. However, for those who are self-employed or, frequently, those who are retired (especially recently retired), no such deduction is automatically made from their income, and the issuance of an instalment reminder by the CRA may be the result.

Canadian tax rules provide that where the amount of tax owed when a return is filed by a taxpayer is more than $3,000 ($1,800 for Quebec residents) in the current year and either of the two previous years, that taxpayer may be required to pay income tax by instalments.

The reason that first instalment reminders are issued in August has to do with the schedule on which Canadians file their tax returns. Any tax amount payable on filing for the immediate prior year can’t be known until the tax return for that year has been received and assessed by the CRA. The tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer owed taxes on filing for 2015 or 2014 and, if so, the amount that was payable on filing for each year.

In many cases, a first instalment reminder is triggered where an individual has retired within the past two years Take, for instance, the example of an individual who retired at the end of 2014 from employment in which tax deductions were automatically taken from his or her paycheque. Beginning January 1, 2015, that individual’s sources of income changed from employment income to Canada Pension Plan and Old Age Security benefits, and monthly withdrawals from an RRSP or RRIF, or pension payments from the former employer. In order for the amounts withheld from such income to match the taxpayer’s actual tax liability for the year, the taxpayer would have to have calculated the amount of that tax liability and made arrangements for withholdings to be made from one or more of the three or four income sources, to total that overall tax liability amount. For most taxpayers, that’s not a very likely scenario. Consequently, it would be almost inevitable that correct withholdings would not be made and that tax of more than $3,000 would be owed when the 2015 tax return was filed. Where the taxpayer’s income levels and withholding amounts are unchanged for 2016, and it is expected that once again, more than $3,000 will be owed on filing the tax return for 2016, the criteria for the instalment requirement would be met, and a first tax instalment reminder would be issued for the taxpayer this month.

There is a reason that the form received by taxpayers is entitled Instalment Reminder, as those who receive it are not actually required to make instalment payments of tax. There are, in fact, three options open to the taxpayer who receives an Instalment Reminder, each with its own benefits and risks.

First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of September 15 and December 15. A taxpayer who does so can be certain that he or she will not face any interest or penalty charges. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2016, he or she will of course receive a refund on filing.

Second, the taxpayer can make instalment payments based on the total amount of tax which was paid for the 2015 tax year. Where a taxpayer’s financial and living situation is relatively unchanged, and there hasn’t been any significant change in income or available deductions and credits, the likelihood is that total tax liability for 2016 will be the same or slightly less than it was in 2015, owing to the indexation of tax brackets and tax credit amounts. A taxpayer who chooses this option should pay 75% of the total amount owed in September 2016 and the remaining 25% in December 2016.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2016 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2015 to 2016 and there will consequently be a reduction in tax payable, this option may be worth considering. Taxpayers who wish to pursue this approach can use the tax instalment calculation tool available on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/pymnts/nstlmnts/Instalment_chart_fill-16e.pdf, or can obtain information on federal and provincial tax rates and brackets for 2016 on the CRA  website at www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html. And, once again, taxpayers who choose this option should pay 75% of the total amount owed in September 2016 and the remaining 25% in December 2016.

Many taxpayers who receive an Instalment Reminder are less than pleased about the fact that they are being asked to, as they see it, pay their taxes “early”. However, the reality is that most of them have been paying income taxes “early” throughout their working lives, by means of source deductions. Source deductions are, however, more or less invisible to the taxpayer, as they are taken before any paycheque is issued, and actually writing a cheque or making an online payment to the CRA for taxes owing feels much different.

While no one actually likes paying taxes, by any method, making tax payments by instalments can actually help taxpayers, particularly those who are juggling multiple income sources for the first time, with budgeting and managing cash flow. Because most Canadians don’t have to think about setting money aside for income taxes during their working lives, they don’t always include them (or include them in sufficient amounts) when planning a budget when they first retire. As well, for those retirees who receive Canada Pension Plan or Old Age Security income and want to have their taxes paid “automatically”, as they were during their working years, there is another option. The federal government will deduct income tax amounts from CPP and OAS benefits and remit them to the CRA, in the same way that an employer does for employees. It is relatively simple to set up such withholdings and remittances, and the taxpayer can specify the amount to be withheld for income tax from each type (CPP or OAS) of payment. To do so, he or she completes Form ISP3520, which is available on the CRA website at www.servicecanada.gc.ca/fi-if/index.jsp?app=prfl&frm=isp3520cpp&dept=sc&lang=e, and files that form with Service Canada. A listing of Service Canada offices can also be found on the CRA website at www.servicecanada.gc.ca/tbsc-fsco/sc-hme.jsp?lang=eng.

There are few financial surprises more unwelcome than finding out that there is a balance owing when the tax return for the year is filed. For most, it’s an annoyance and an aggravation. For those who live on a fixed income, however, being faced with an unexpected bill for taxes owed on filing can create a significant financial crisis. Receiving an Instalment Reminder serves to give notice that taxes are not being withheld (or not being withheld in sufficient amounts) from income amounts paid to the taxpayer throughout the year and that it is necessary to make some provision for those taxes — whether by paying instalments or arranging for withholdings at source. Doing either will avoid the scenario in which a taxpayer has to come up with the entire tax amount owing for the year when the return for that year is filed the following spring.

As the summer starts to wind down, both students returning this fall to their post-secondary institutions and those just starting post-secondary education must focus on the details of the upcoming school year: finding a place to live, choosing courses, and — perhaps most important — arranging payment of tuition and other education-related bills.

As the summer starts to wind down, both students returning this fall to their post-secondary institutions and those just starting post-secondary education must focus on the details of the upcoming school year: finding a place to live, choosing courses, and — perhaps most important — arranging payment of tuition and other education-related bills.

For many years post-secondary students (and their parents) have benefited from an “assist” through our tax system, which provides deductions and credits for some of the many costs associated with obtaining a post-secondary education. Starting with the 2016-17 academic year, however, some of those deductions and credits will no longer be available.

The biggest cost of post-secondary education is, of course, tuition, and the tax credit provided for eligible tuition costs continues to be available for the upcoming (and subsequent academic and taxation years). Any student who incurs more than $100 in tuition costs at an eligible post-secondary institution (which would include most Canadian universities and colleges) can claim a non-refundable federal tax credit of 15% of such tuition costs. The provinces and territories also provide students with an equivalent provincial or territorial credit, with the rate of such credit differing by jurisdiction. At both the federal and provincial levels, the credit acts to reduce tax otherwise payable. Where, as is often the case, a student doesn’t have tax payable for the year, any credits earned can be carried forward and used in a subsequent year, or transferred, for the current year, to a spouse, parent, or grandparent.

For several years, post-secondary students have also been able to claim two other federal tax credits – the education tax credit and the textbook tax credit. Both, unfortunately, are being eliminated.

Both the education and textbook tax credits are set at a fixed amount, irrespective of any actual expenditure made by the student. For the 2016 tax year, the federal education credit is equal to $60 for each month of full-time attendance and $18 per month of part-time attendance. The amount of federal textbook tax credit claimable is $9.75 per month of full-time attendance and $3.00 per month of part-time attendance. As is the case with the tuition tax credit, the provinces and territories provide education and textbook tax credits based on the same criteria, but with the amount of the credit varying by jurisdiction. Both the federal and provincial/territorial education and textbook tax credits are non-refundable, meaning that they apply to reduce federal or provincial/territorial tax otherwise payable, but cannot create or increase a tax refund.

In this year’s federal Budget, it was announced that the federal education and textbook tax credits would be eliminated, effective as of January 1, 2017. Consequently, post-secondary students will still be able to claim those federal credits with respect to the first term of the 2016-17 school year (September to December 2016) when filing their return for 2016 in the spring of next year. However, no federal education or textbook credit will be available to be claimed for any school term which starts after December 31, 2016.

The reality for most Canadians pursuing post-secondary education is that, notwithstanding parental savings or student summer jobs, most students will have incurred some debt to pay for the cost of that education — sometimes a lot of debt. Where that debt is in the form of government-sponsored student loans (generally, loans provided under the Canada Student Loans program or the equivalent provincial program), the student can claim a tax credit for both federal and provincial tax purposes for interest paid on those loans, and that credit is unaffected by the recent changes. It’s important to remember, however, that only interest paid on loans extended under government-sponsored programs qualifies for the credit. Loans provided by private lenders (for example, through a student line of credit) do not qualify.

Most government student loans are provided on an interest-free basis while the student is in school. However, interest starts to be levied, and repayment of the principal amount of the loan must begin, usually 6 months after the student graduates. Consequently, last year’s graduates will soon have to arrange a repayment schedule for their outstanding student loans. It’s also likely that they will receive an offer or offers from financial institutions to provide financing which will allow the graduate to consolidate all education-related debts into a single loan or line of credit, usually at a preferential interest rate. While such offers can be tempting, graduates should, when determining the best structure for their education loans, remember both the fact that interest paid on private sources of financing will not qualify for any tax credit and, equally important, that any mingling of government student loan balances with private sector lending will disqualify the student from claiming a tax credit for interest paid on that government student loan. In other words, a student who takes out a line of credit or loan to consolidate all education-related debt will lose the ability to claim any federal or provincial tax credit on the portion of that debt that was originally a government student loan.

Obtaining a post-secondary education never has been — and likely never will be — an inexpensive proposition. And, while some of the tax breaks available for those who are pursuing such an education are being eliminated, it’s well worth claiming, to the maximum extent possible, those that remain. As well, students can often take advantage of tax deductions or credits which, while not specifically targeted for them, are often available for the kinds of expenditures made by students. Those kinds of claims, which would include the moving expense deduction and the tax credit for public transit costs, are summarized in the Canada Revenue Agency publication Students and Income Tax, which is available at www.cra-arc.gc.ca/E/pub/tg/p105/README.html.

For most of the year, taxpayers live quite happily without any contact with the Canada Revenue Agency (CRA). During and just following tax filing season, however, such contact is routine – tax returns must be filed, Notices of Assessment are received from the CRA and, on occasion, the CRA will contact a taxpayer seeking clarification of income amounts reported or documentation of  deductions or credits claimed on the annual return. Consequently, it wouldn’t necessarily strike taxpayers as unusual to be contacted by the CRA with a message that a tax amount is owed or, more happily, that the taxpayer is owed a refund by the Agency. Consequently, it’s the perfect time for scam artists posing as representatives of the CRA to seize the opportunity to defraud taxpayers.

For most of the year, taxpayers live quite happily without any contact with the Canada Revenue Agency (CRA). During and just following tax filing season, however, such contact is routine – tax returns must be filed, Notices of Assessment are received from the CRA and, on occasion, the CRA will contact a taxpayer seeking clarification of income amounts reported or documentation of  deductions or credits claimed on the annual return. Consequently, it wouldn’t necessarily strike taxpayers as unusual to be contacted by the CRA with a message that a tax amount is owed or, more happily, that the taxpayer is owed a refund by the Agency. Consequently, it’s the perfect time for scam artists posing as representatives of the CRA to seize the opportunity to defraud taxpayers.

Changes in technology have vastly expanded and multiplied the number of ways in which communication can take place, and tax scammers use all of them. The CRA has posted on its website examples of fraudulent communications by those claiming to be from the Agency, carried out by telephone, letter, e-mail, text, and online, and all of those can be found at www.cra-arc.gc.ca/scrty/frdprvntn/menu-eng.html.

While the communication method may vary, the message contained in that communication almost always takes one of two approaches. In the first, the taxpayer is advised that he or she is owed money by the federal government, and told that, in order to receive the funds, a form must be completed, with that form generally accessed through a link. The link leads, not to a federal government website, but to a “dummy” site closely resembling the actual CRA webpage. The taxpayer is then required, in order to have his or her “refund” processed, to provide personal and financial information which is then available to be used by the tax scammer.

The second approach, which has been particularly prevalent in the past few years, is to tell the taxpayer that he or she owes money to the CRA, and threaten him or her with dire consequences, including seizure of the taxpayer’s assets and/or imprisonment if the alleged debt is not paid immediately. Often, payment must be made by a pre-paid credit card – a payment method which is never used by the CRA. The threats used in such communications are, of course, ridiculous – there are no circumstances in which the CRA would or could seize an individual’s assets or in which anyone could be imprisoned, without prior notice and due process of law.

Where a telephone call is received from someone purporting to be from the CRA, it is perfectly reasonable for the taxpayer to request a callback number at which the caller can be reached.

Where the communication is in writing – whether by text, e-mail or letter, the taxpayer should ask themselves the following questions:

• Am I expecting additional money from the CRA?
• Does this sound too good to be true?
• Is the requester asking for information I would not include with my tax return?
• Is the requester asking for information I know the CRA already has on file for me?
• How did the requester get my email address?
• Am I confident I know who is asking for the information?
• Is there a reason that the CRA would be calling; do I have a tax balance outstanding?

E-mails which are ostensibly from the CRA should be viewed with caution, as the CRA does not communicate with taxpayers by email except in very specific circumstances, and never discusses confidential tax matters in an email. Where a taxpayer contacts the CRA to request a form or a link for specific information, a CRA agent will forward the information requested to the taxpayer’s email, but such email will be sent during the phone call. There are no other circumstances in which the CRA will send an email containing links and consequently, any other email purporting to be from the CRA and directing the recipient to click on a link to another website should be deleted. As well, the CRA notes that fraudulent e-mails containing such links can contain embedded software that can harm the recipient’s computer, or put personal information at risk.

Taxpayers who are contacted by someone purporting to be from the CRA should also remember the following. The CRA:

• will not request personal information of any kind from a taxpayer by e-mail;
• never requests information from a taxpayer about a passport, health card, or driver’s license;
• never leaves any personal information on an answering machine or asks taxpayers to leave a message with their personal information on an answering machine; and
• will not divulge taxpayer information to another person unless formal authorization is provided by the taxpayer.

It may seem that only naïve or gullible individuals could be victims of a tax scammer, but that’s not the case. Fraudulent communications sent by those purporting to be representatives of the CRA have become increasingly sophisticated and very difficult to differentiate from legitimate correspondence issued by the Agency, even by those familiar with such documents.

A taxpayer who receives what seems to be a suspicious communication should report that to the Canadian Anti-Fraud Centre online at www.antifraudcentre-centreantifraude.ca/reportincident-signalerincident/index-eng.htm, or by telephone at 1-888-495-8501. If the worst happens and an individual has been tricked into providing personal or financial information, the following course of action is suggested:

Step 1 - Contact your bank/financial institution or credit card company.

Step 2 - Contact credit bureaus and have fraud alerts placed on your credit reports.

Step 3 - Contact your local police.

Step 4 - Always report phishing. If you have responded to one of these suspicious e-mails, report it to info@antifraudcentre.ca.

Fraud isn’t new, and it isn’t going away any time soon. However, the speed and anonymity of electronic communication, and the extent to which most people are now comfortable transacting their tax and financial affairs online, makes it easier in many ways for fraud artists to succeed. The best defence against becoming a victim of such scams is a healthy degree of caution, even skepticism, and a refusal to provide any personal or financial information – whether by phone, e-mail, text or online – without first verifying the legitimacy of the request.   

By the end of June all individual taxpayers have filed their 2015 income tax returns and most will have received a Notice of Assessment outlining the Canada Revenue Agency’s (CRA’s) conclusions with respect to that taxpayer’s income and tax position for the year. In most cases, the Notice of Assessment won’t vary a great deal from the information provided by the taxpayer in his or her return. Where it does, and the change is to the taxpayer’s detriment, taxable income assessed is greater than the amount reported by the taxpayer, or a deduction or credit is denied, then the taxpayer has to decide whether to dispute the CRA’s assessment.

By the end of June all individual taxpayers have filed their 2015 income tax returns and most will have received a Notice of Assessment outlining the Canada Revenue Agency’s (CRA’s) conclusions with respect to that taxpayer’s income and tax position for the year. In most cases, the Notice of Assessment won’t vary a great deal from the information provided by the taxpayer in his or her return. Where it does, and the change is to the taxpayer’s detriment, taxable income assessed is greater than the amount reported by the taxpayer, or a deduction or credit is denied, then the taxpayer has to decide whether to dispute the CRA’s assessment.

Where the amounts in issued are significant enough and the taxpayer genuinely believes that the CRA’s assessment is in error, the next step to take is the filing of a Notice of Objection. Doing so formally advises the CRA that the taxpayer is disputing his or her tax liability for the taxation year in question. Not incidentally, the filing of an Objection also brings to a halt most efforts undertaken by the CRA to collect taxes which it considers owing for the taxation year under dispute (although, if the taxpayer is eventually found to owe the amount in dispute, interest will have accumulated in the interim).  There are two major exceptions to the deferred collection rule.  Tax collection efforts by the CRA are not deferred where the amounts in dispute are those which the taxpayer was required to withhold and remit to the CRA, such as employee income tax deductions at source. As well, the CRA is required to postpone collection action on only 50% of the amount in dispute, where that dispute involves a charitable donation tax credit or deduction claimed in connection with a tax shelter arrangement.

There is a time limit by which any Objection must be filed, albeit a reasonably generous one. Individual taxpayers must file an Objection by the later of 90 days from the mailing date of the Notice of Assessment (the date found at the top of page 1) or one year from the due date of the return which is being disputed. So, for tax returns for the 2015 tax year, the one-year deadline (which is usually, but not always, the later of those two dates) would be April 30, 2017 (or June 15, 2017 for self-employed taxpayers and their spouses).  As with most things related to taxes, it’s best not to put it off. At the very least, if the taxpayer is ultimately found to owe some or all of the taxes assessed by the CRA, interest will have accrued on those taxes for the entire period since the filing due date and, if the filing of the Objection is delayed, the CRA may well have already commenced its collection efforts. Certainly, if the deadline is imminent, it’s necessary to file a Notice of Objection in order to preserve the taxpayer’s appeal rights, even if discussions with the CRA are still ongoing.

Taxpayers who have registered with the CRA’s online services feature My Account can file their Notice of Objection online at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html.The taxpayer provides information with respect to the assessment being disputed and the reasons why the assessment is being disputed and submits those reasons by clicking on the Submit button at the bottom of the "Register my formal dispute – review" page.

Enhancements to the My Account mean that taxpayers who are disputing their tax assessment can now scan and send supporting documents relating to that dispute to the Agency. If the CRA has requested that the taxpayer provide specific documents, he or she will have been provided with a case or reference number which is used to submit the document or documents. Where that’s not the case, and the taxpayer doesn’t have a case or reference number, it is still possible to submit documents online. In either case, there are some technical requirements which must be met when scanning and sending documents to the CRA. Each file submitted must have a unique name and must be in one of a number of file formats, many of which will already be familiar to most taxpayers (e.g., .doc, .pdf, and .jpg). As well, the total size of the documents submitted can’t exceed 150 MB. Once documents are successfully submitted, the taxpayer will receive a confirmation number and a reference number.  That reference number (or the one previously provided by the CRA) can be used at any time to submit additional documents.

While filing a dispute through My Account is certainly faster than mailing hard copy of the Notice of Objection, not all taxpayers want to use that option. In particular, those who are not already registered with My Account may not wish to undertake the registration process simply in order to file a single Notice of Objection. Taxpayers who choose instead to mail a hard copy of a Notice of Objection can find the CRA’s standardized form – the T400A Objection – on the Agency’s website at www.cra-arc.gc.ca/E/pbg/tf/t400a/README.html).

Taxpayers aren’t obligated to use the CRA’s official Notice of Objection form – any communication which makes it clear that the taxpayer is objecting to his or her Notice of Assessment will do. Nonetheless, there’s no reason not to use the standardized form, and there are benefits to doing so. Using Form T400A will make it clear to the CRA that a formal objection is being filed, will present the necessary information in a format with which the Agency is familiar and will also mean that no required information is inadvertently omitted. It’s also helpful to include a copy of the Notice of Assessment which is being disputed. Taxpayers should also consider ensuring proof of both delivery and time of delivery by sending the form in a way which provides for tracking and proof of delivery (e.g., registered mail or courier). The CRA has two appeal intake centres, which are as follows:

Western Intake Centre                                              Eastern Intake Centre

Vancouver Tax Service Office                                    Sudbury Tax Service Office

9737 King George Boulevard                                     1050 Notre-Dame Avenue

PO Box 9070, Station Main                                        Sudbury ON P3A 5C1

 Surrey BC V3T 5W6

Taxpayers having a postal code starting with letters A to P should send their objection to the Eastern Intake Centre, while those with a postal code starting with the letters R to Y should send their objection to the Western Intake Centre.

Eventually (at least several weeks being the usual time frame) the CRA will respond to the Objection. In the course of making its decision, the Agency may or may not contact the taxpayer for further discussions of the issues in dispute. Should the taxpayer be contacted, he or she may be asked to provide representations outlining his or her position, in writing or at a meeting. Through such representations and meetings, it may be possible for the taxpayer and the CRA to come to an agreement on the taxpayer’s tax liability. In either case, the CRA will either confirm its original assessment or change it. If the original assessment is changed, the CRA will issue a Notice of Reassessment outlining the changes. If the taxpayer continues to disagree with the CRA’s position, the next step is an appeal to the Tax Court of Canada, which must be filed within 90 days after the CRA issues its assessment or reassessment. While in many instances (generally where amounts in dispute are relatively small) taxpayers are allowed by law to represent themselves before the Tax Court, it’s generally a good idea, once things reach this point, to consult a tax lawyer before taking that next step.

The CRA also publishes a useful pamphlet entitled Resolving Your Dispute: Objection and Appeal Rights under the Income Tax Act, and the most recent release of that publication can be found on the CRA website at www.cra-arc.gc.ca/E/pub/tg/p148/README.html.                      

By now, most Canadians are familiar with the use and the benefits of a tax-free savings account (TFSA), which have proven to be a very popular savings vehicle since they were introduced in 2009. What’s proven to be harder to do is keeping track of one’s annual TFSA contribution limit. The annual TFSA contribution limit contribution allowed by law has been something of a moving target, subject to change after change by successive governments. As well, withdrawals made from a TFSA are added to one’s annual contribution limit, but not until the following taxation year – a fact that has escaped many TFSA holders and sometimes even their financial advisers. And finally, the Canada Revenue Agency (CRA) used to provide information on a taxpayer’s current year TFSA contribution limit on the annual Notice of Assessment, but that’s no longer the case, meaning that the taxpayer has to make an extra effort to obtain that information.

By now, most Canadians are familiar with the use and the benefits of a tax-free savings account (TFSA), which have proven to be a very popular savings vehicle since they were introduced in 2009. What’s proven to be harder to do is keeping track of one’s annual TFSA contribution limit. The annual TFSA contribution limit contribution allowed by law has been something of a moving target, subject to change after change by successive governments. As well, withdrawals made from a TFSA are added to one’s annual contribution limit, but not until the following taxation year – a fact that has escaped many TFSA holders and sometimes even their financial advisers. And finally, the Canada Revenue Agency (CRA) used to provide information on a taxpayer’s current year TFSA contribution limit on the annual Notice of Assessment, but that’s no longer the case, meaning that the taxpayer has to make an extra effort to obtain that information.

The quickest starting point to determining one’s TFSA contribution limit for 2016 is to call the CRA’s Individual Income Tax Enquiries Line at 1-800-959-8281. Once that contribution limit number is known, the taxpayer will need to determine how much, if anything, has been contributed to a TFSA (or TFSAs – there is no limit to the number of plans which an individual taxpayer can have, only a limit on the amount of the overall contributions made to such plan or plans during the year) already in 2016. Some taxpayers contribute on a pre-planned, often monthly basis, while others are in the habit of depositing regular or irregular or periodic income receipts, like a tax refund or monthly tax benefit amount into their TFSA. Either way, after finding out what one’s current year contribution limit is, it’s necessary to calculate how much has already been contributed. The balance represents the amount which can be contributed before the end of 2016 without going offside and incurring an over-contribution penalty. That’s especially important this year for those who contribute on a recurring basis, often through automatic transfers from another bank account. For 2015, the maximum allowable annual TFSA contribution amount was $10,000. That limit was reduced, effective January 1, 2016, to $5,500. Consequently taxpayers who set up automatic contributions to a TFSA when the $10,000 limit was in effect may find themselves going offside where such arrangements were not changed earlier this year to reflect the new, lower annual contribution limit.

A similar calculation will need to be made for contributions to an RRSP, but in this case the information needed is easier to come by. Every taxpayer who filed a return for 2015 will be able to find the amount of their maximum RRSP contribution for 2016 on page 4 of the Notice of Assessment which they received after filing. Once that number is known, the only remaining step is to ensure that contributions already made for 2016 and those which are planned to be made on or before March 1, 2017, stay within that annual contribution limit.

Especially where, as financial advisers often counsel,  an individual makes contributions to an RRSP or TFSA (or both) throughout the year by automatic deposit or bank transfer, it’s easy to assume that everything has been taken care of and nothing further needs to be done with respect to such plans. However, an “out of sight, out of mind” approach rarely makes for good financial and tax planning, and checking on the status of one’s RRSP and TFSA on a periodic basis can help to ensure that everything remains onside, and unnecessary penalties aren’t incurred.

There has been much discussion in recent years about whether Canadians are adequately prepared for retirement and, more specifically, whether Canadians are saving enough to ensure a retirement free of undue financial stress. While the financial health of current and soon-to-be-retirees (essentially, the baby boomers) is a concern, the focus is more on the question of whether our current system is such that younger Canadians can expect to have some degree of financial security in retirement. The workplace has altered dramatically in the past quarter century and many of the retirement income options which were relied upon by previous generations – especially an employer-sponsored defined benefit pension plan – are all but unknown to private sector workers under the age of 30 or even 40.

There has been much discussion in recent years about whether Canadians are adequately prepared for retirement and, more specifically, whether Canadians are saving enough to ensure a retirement free of undue financial stress. While the financial health of current and soon-to-be-retirees (essentially, the baby boomers) is a concern, the focus is more on the question of whether our current system is such that younger Canadians can expect to have some degree of financial security in retirement. The workplace has altered dramatically in the past quarter century and many of the retirement income options which were relied upon by previous generations – especially an employer-sponsored defined benefit pension plan – are all but unknown to private sector workers under the age of 30 or even 40.

There’s no shortage of opinions on how financial security in retirement for younger Canadians can best be achieved – one school of thought argues for changes which will enhance the ability of Canadians to accumulate private savings, generally through RRSPs, while others take the position that enhancements to public pension plans, or the creation of new ones, is the solution.

Those in the latter group will be heartened by a recent announcement from the federal Department of Finance, indicating that the federal government and (most of) the provinces have reached an agreement in principle on changes which will expand and enrich the Canada Pension Plan.

A brief bit of background: virtually everyone who works in Canada, whether as a employee or in self-employment, contributes to the CPP, generally through payroll deductions. Such contributions are set at a percentage of the employee’s pensionable earnings for the year. Employers are required to match employee contributions dollar for dollar, and to remit all contributions to the federal government on the employee’s behalf. Contributions are structured such that an employee can receive a CPP retirement benefit equal to about 25% of his or her average annual pensionable earnings and, although the formula for determining entitlement is complex, the amount of CPP retirement benefit which can be received generally depends for the most part on the amount contributed during a person’s working life.  A recipient can choose to begin receiving his or her CPP pension at any time between the ages of 60 and 70, with the monthly pension benefit increasing with each year that receipt is deferred past the age of 60.

The agreement in principle reached by the federal government and 8 of the provinces calls for a number of changes, which will begin to be implemented in January 2019, and all of which are directed at increasing the amount that Canadians can receive from the CPP in retirement.

Increase in CPP maximum pensionable earnings

Under the CPP, working Canadians contributed a percentage of their income (or pensionable earnings) to their CPP “account” each year. The amount of those pensionable earnings is, however, capped by a figure known as the maximum pensionable earning amount, and contributions on income amounts over that cap are not permitted.

The maximum pensionable earning amount for 2016 is $54,900. As a result, Canadians who earn less than that amount are contributing to the CPP in an amount which should provide them with a CPP retirement benefit which equals 25% of their average annual pensionable income during their working life. However, individuals who earn more than the maximum pensionable earning ceiling in any given year cannot make contributions on the “excess”, and so their CPP benefit in retirement will fall short of the 25% income replacement goal. The proposed changes to the CPP will see the maximum pensionable earnings amount increase. That increase will be phased in between 2019 and 2025, with the expectation that maximum pensionable earnings will reach about $82,700 in 2025.

Increasing CPP income replacement

Using the current formula which aims to provide contributors with 25% of annual pensionable earnings in retirement, a contributor who earns $50,000 in pensionable earnings will receive a CPP retirement benefit of $12,000 per year. The new CPP proposals would increase that income replacement percentage to 33%, such that the same contributor earning that $50,000 in pensionable earnings would receive $16,000 in CPP retirement benefits. Of course, an increase in retirement benefits has to be financed through an increase in the annual contribution made by the employee (and an equal contribution by his or her employer) during the years of employment or self-employment. However, no details have yet been provided on just what those increased amounts will be.

Allowing deduction for “excess” CPP contributions

As the maximum pensionable earnings amount and the replacement income percentage are increased, the result will be higher contribution amounts. The CPP proposals provide that where employees must make higher contributions because of the enhanced portion of the CPP, they will be able to deduct any such additional contributions from income earned in that year. In effect, contributors will not pay tax on any income which is used to make those additional CPP contributions for the year.

It should be emphasized that the changes to the CPP which have been agreed to in principle will have absolutely no impact or effect on individuals who are retired and currently receiving CPP retirement benefits or, indeed, on those who plan to leave work and begin receiving such benefits before January 1, 2019. These changes are long-range in nature, and will have the greatest impact on those who are 20, 30, or even 40 years away from retirement. The information released to date by the Department of Finance with respect to the proposals can be found on its website at www.fin.gc.ca/n16/16-081-eng.asp.

The forest fires affecting Northern Alberta and the Canada’s Revenue Agency’s (CRA’s) offer of administrative tax relief to those affected by the fires and the resulting evacuations has highlighted a federal government program of which few taxpayers are aware – the CRA’s Taxpayer Relief Program. In a nutshell, that program offers relief from interest charges, penalties, and collection actions for those who are unable, due to circumstances outside their control, from fulfilling their tax filing and/or payment obligations.

The forest fires affecting Northern Alberta and the Canada’s Revenue Agency’s (CRA’s) offer of administrative tax relief to those affected by the fires and the resulting evacuations has highlighted a federal government program of which few taxpayers are aware – the CRA’s Taxpayer Relief Program. In a nutshell, that program offers relief from interest charges, penalties, and collection actions for those who are unable, due to circumstances outside their control, from fulfilling their tax filing and/or payment obligations.

The most publicized instances in which such relief is offered by the federal government (and, usually, by the government in the particular province affected) occur in instances of a disaster, whether natural or man-made. Those are not, however, the only circumstances in which relief can be made available. Such administrative relief can also be provided where the taxpayer has experienced serious illness or an accident, or a death in his or her immediate family, or is suffering from significant financial hardship. Whatever the reason for the application, it’s important to note that only interest and penalty charges can be waived. The Minister has no authority, no matter how dire the circumstances, to waive the payment of actual taxes owed.

Whether the inability to meet tax obligations arises from disasters affecting thousands of taxpayers or from individual circumstances, the process by which a request for relief is made is the same. The CRA issues a prescribed from – RC4288, Request for Taxpayer Relief, which can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/rc4288/README.html. While use of the form is not mandatory – a letter to the CRA will suffice – using the prescribed form will ensure that all of the information needed by the CRA to make a decision on the request for relief is provided. For each such request, that information includes:

• the taxpayer’s name, address, and telephone number;
• the taxpayer’s social insurance number (SIN), account number, partnership number, trust account number, business number (BN), or any other identification number assigned to the taxpayer by the CRA;
• the tax year(s) or fiscal period(s) involved;
• the facts and reasons supporting that the interest or penalty were mainly caused by factors beyond the taxpayer’s control;
• an explanation of how the circumstances affected the taxpayer’s ability to meet his or her tax obligations;
• the facts and reasons supporting the inability to pay the penalties or interest assessed or charged, or to be assessed or charged;
• any relevant documentation; and
• a complete history of events including any measures that have been taken (e.g., payments and payment arrangements, and when they were taken to resolve the non-compliance.

If the taxpayer’s request for relief relates to financial hardship, he or she must provide full financial disclosure, including statements of income and expenses. All relief requests are to be sent to a particular Tax Processing Centre, depending on where the taxpayer lives. A listing of the addresses of all such Centres is available on the CRA website at www.cra-arc.gc.ca/gncy/cmplntsdspts/sbmtrqst-eng.html, and the same information is included on the RC4288 form. The request cannot be e-mailed, as the CRA does not communicate taxpayer-specific information by e-mail.

Each relief request is assigned to a CRA official, who may, if necessary, contact the taxpayer to obtain clarification of the information provided, or to seek additional information. In any case, a determination will be made of whether the taxpayer’s request for interest or penalty relief is to be approved in full, approved in part, or denied, based on the following considerations:

• the taxpayer’s history of compliance with his or her tax obligations;
• whether or not the taxpayer knowingly allowed an arrears balance to exist upon which arrears interest has accrued;
• whether or not the taxpayer exercised a reasonable amount of care in conducting his or her tax affairs, and whether or not negligence or carelessness has been demonstrated; and
• whether or not the taxpayer acted quickly to remedy any delay or omission.

The decision made will be communicated to the taxpayer, with reasons provided where the request is only partially approved, or is denied. At the same time, the taxpayer will be given information on the options available where the CRA has made a decision with which the taxpayer does not agree.

More information on the Taxpayer Relief Program can be found on the CRA website at www.cra-arc.gc.ca/taxpayerrelief/.

By the beginning of June, most taxpayers have filed their annual return for the previous year and have most likely received a Notice of Assessment in respect of that return, containing the good or bad news about their tax situation for the year. At this point, most Canadians are probably happy to put taxes out of sight and out of mind until next year’s filing season rolls around. For a number of reasons, however, that’s not the best strategy.

By the beginning of June, most taxpayers have filed their annual return for the previous year and have most likely received a Notice of Assessment in respect of that return, containing the good or bad news about their tax situation for the year. At this point, most Canadians are probably happy to put taxes out of sight and out of mind until next year’s filing season rolls around. For a number of reasons, however, that’s not the best strategy.

The mid-point of the year is in fact a very good time to take a look at one’s current year tax situation, with a view to determining whether things are on track for the year or, if not, how to make things right while there’s still time to do so. There are a few basic steps which require no more than a few hours’ time to make sure of just that.

Bring tax filings up to date

It may seem obvious that there is a need to file one’s tax return each year, but every year millions of Canadians fail to do so, for a variety of reasons. Often it is because money will be owed (or is already owed from previous years) to the Canada Revenue Agency (CRA). In other cases, taxpayers who have no balance of taxes owing but also aren’t expecting a significant refund assume that completing and filing a return is just unnecessary work and aggravation. In both situations, not filing is the wrong answer, but for different reasons.

Taxpayers who owe money to the CRA but who do not file on time are automatically assessed a penalty of 5% of the outstanding amount owed, plus 1% for each complete month where the failure to file continues, for a maximum of 12 months. Such penalties double where a penalty has been assessed for a previous failure to file within the past three years, and can continue for a maximum of 20 months. Interest on any outstanding tax amount owed has also been accruing since May 3 of this year, at a rate of 5%, compounded daily. Even where a taxpayer doesn’t have the funds to make payment in full, or at all, it is in his or her best interests to file a return, explain the situation to the CRA, and agree on a payment arrangement to get the outstanding amount paid over time. Doing so will stop the late-filing penalties from accruing and will limit the amount of interest payable, as the debt is gradually paid off.

Not filing because there’s nothing owed is a mistake of a different kind. Both the federal and provincial governments provide taxpayers with a variety of refundable tax credit programs, generally administered by way of direct monthly payments to qualifying taxpayers. Unlike the tax year, the benefit year for such programs generally runs from July 1 of one year to June 30 of the following year, for good reason. Entitlement to benefits for almost all such programs is based on the taxpayer’s financial and family circumstances – starting with his or her income. In most cases, entitlement to benefits and the amount of any benefits receivable between July 1, 2016 and June 30, 2017 is based on the taxpayer’s income for 2015. Where a taxpayer has filed by the April 30 deadline, it’s possible for the federal and provincial governments to assess his or her return, determine income for 2015 and to calculate the amount of federal and provincial benefits that the taxpayer will be entitled to receive, all in time for the first such benefits to be paid when the benefit year starts in July 2016.

Where a taxpayer doesn’t file by the April 30 deadline, that process is obviously short-circuited and taxpayers who would otherwise begin receiving benefits at the start of the 2016-17 benefit year in July 2016 will be disappointed. The problem is easily solved – once a taxpayer files a return for 2015, an assessment of income and benefits entitlement for the year can be done and benefits to which the taxpayer is entitled can be provided. The later the taxpayer files, however, the longer payment of such benefits will be delayed.

Making sure source deductions are correct

Taxpayers don’t only pay taxes when they file an income tax return each spring – the majority of taxpayers who are employees pay taxes throughout the year, by means of amounts deducted from their paycheques, technically known as deductions at source.

Of course, each taxpayer’s situation is unique, and so the employer has to have some guidance as to how much to deduct and remit on behalf of each individual taxpayer. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by every employee, sometimes at the start of each tax year but certainly at the time employment commences. Each employee must in fact complete two TD1 forms – one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer resides and works. Federal and provincial TD1 forms for 2016 (which are available on the CRA website at www.cra-arc.gc.ca/menu/AFAF_T_TD-e.html#ti) list the most common statutory credits and deductions claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial), which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the government.

That said, every individual’s circumstances can change, and sometimes those changes mean a change in their tax liability for the year. Most important changes in life have tax consequences, and it’s worth making sure that one’s family and financial circumstances are accurately reflected in the deductions being made from one’s paycheque. The best way to do so is by checking the federal and provincial TD1Forms currently on file with one’s employer. Where one’s circumstances have changed such that source deductions also need to change, the easiest way to ensure that is to provide the employer with new federal and provincial TD1Forms which reflect those changed circumstances.

Where the taxpayer has available deductions which cannot be recorded on the TD1, it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect tax liability. The way to do so is to file a Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html) with the CRA. Once that form is filed with the CRA, the Agency will authorize the employer to reduce the amount of tax being withheld at source to more accurately reflect the taxpayer’s actual tax owing for the year. In most cases, taxpayers who file a Form T1213 do so because they are incurring expenditures which, while deductible for tax purposes, don’t show up on the TD1. Most commonly, those are expenditures like deductible support payments, child care expenses incurred or contributions to a registered retirement savings plan (RRSP).

As the end of the school year draws closer, and with it the start of two months of summer holidays, families who don’t have a stay-at-home parent (and likely some who do) must start thinking about how to keep the kids supervised and busy throughout the summer months. There is no shortage of options — at this time of year, advertisements for summer activities and summer camps abound — but nearly all the available options have one thing in common, and that’s a price tag. Some choices, like day camps provided by the local recreation authority can be relatively inexpensive, while the cost of others, like summer-long residential camps or elite level sports or arts camps, can run to the thousands of dollars.

As the end of the school year draws closer, and with it the start of two months of summer holidays, families who don’t have a stay-at-home parent (and likely some who do) must start thinking about how to keep the kids supervised and busy throughout the summer months. There is no shortage of options — at this time of year, advertisements for summer activities and summer camps abound — but nearly all the available options have one thing in common, and that’s a price tag. Some choices, like day camps provided by the local recreation authority can be relatively inexpensive, while the cost of others, like summer-long residential camps or elite level sports or arts camps, can run to the thousands of dollars.

In many cases, part of the cost of those activities or camps can be offset, to a degree, by claiming an associated tax deduction or tax credit. While the availability of a “subsidy” through the tax system should never be the sole determinant of what activity or camp is the best choice, there’s no denying that being able to claim a deduction or credit for the costs involved can tip the balance toward one or choice or another, or bring a formerly unavailable option within a family’s financial reach. In 2016, however, there are new considerations, as the tax rules which govern such deductions and credits have changed.

 There are, essentially, two kinds of tax measures or programs which allow parents to claim a deduction or credit (depending on the program) for the cost of obtaining summer child care: the first is the general deduction provided for child care costs and the second is specialized credits which are available for costs incurred in relation to particular types of programs or activities. As might be expected, different eligibility criteria and claim amounts are provided for each.

The deduction with the fewest restrictions is the child care expense deduction. That deduction also offers the greatest potential for tax savings (especially for parents in higher income and therefore higher tax brackets) as the amount of eligible child care expenses is claimed as a deduction from income rather than as a credit. Consequently, the taxable income of the parent claiming the deduction is reduced by the entire amount of expenses claimable. There are limits imposed on the maximum weekly cost of a residential camp (ranging from $125 to $275), as well as restrictions on the total amount of child care expenses which may be deducted in a year. However, those overall annual limits, which range from $5,000 to $11,000, depending on the age and health of the child, with an overall cap of two-thirds of the parent’s income for the year, are higher than those available under any other credit or deduction program available to help offset the cost of children’s activity programs. Two other such programs are also available.

Parents can claim the Children’s Fitness Tax Credit for activities or camps which involve a minimum degree of physical activity. Prior to 2016, parents were entitled to claim a refundable credit equal to 15% of the first $1,000 in qualifying costs per child per year. So, in other words, a camp which would have cost parents $800 per child will instead have a net cost of $680 ($800 – 15%, or $120), after the credit is claimed on the parent’s tax return for the year. For 2016, the maximum cost which can be claimed for purposes of the Children’s Fitness Tax Credit is $500 per year, regardless of the actual expenditure. Consequently, this year, where parents pay the same $800 for a camp, the refundable tax credit received will be 15% of only the first $500, or $75, leaving them with a net cost of $725.

Parents whose children’s interests run to less athletic pursuits like art, music, theatre, or writing can claim the Children’s Arts Tax Credit. The Arts Credit is very similar in structure to the Children’s Fitness Tax Credit, but has always been less generous in terms of amount. The changes made for 2016 continue that pattern. Formerly, the credit was a non-refundable 15% tax credit on up to $500 in eligible expenses per child per year. For 2016, the maximum amount claimable for purposes of the Children’s Arts Tax Credit has been reduced to $250. The credit continues to be non-refundable, meaning that it can reduce tax otherwise payable by the parent who claims it, but cannot create or increase a tax refund.

Claiming either the Arts of Fitness credit requires a minimum expenditure of $100 per child per year on qualifying activities.

Given the enormous range of activities available for children, it’s not surprising that the federal government has found it necessary to provide detailed rules on what types of activities will and won’t qualify for the two credits.

In assessing whether a particular camp or program might qualify for either of the two credits, the first thing to note is that both credits are available only in respect of fees paid for children who are under the age of 16 at the beginning of the year. In other words, the last year for which the credit can be claimed is the year in which the child turns 16, assuming that all other criteria are met. Those criteria are as follows:

• the program must last for a minimum of eight weeks or, in the case of children’s camps, must run for five consecutive days;
• the program or activity must be supervised; and
• the program or activity must be suitable for children.

The concept of “eligible activities” looms large in the determination of whether a particular cost may be claimed under either of the credits. For both credits, the rules provide a specific definition of eligible activities, and those definitions are outlined on the Canada Revenue Agency website at a www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns409-485/458-459/rgnztns-eng.html and www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/370/rgnztns-eng.html.

Often, particularly in the case of residential camps or sports or arts camps, charges are levied for such costs as accommodation, travel, or food, or parents must incur costs to outfit the child with required equipment to use at camps. Costs paid by parents for non-activity related charges, like food, travel, and accommodation do not qualify for either of the credits and must be subtracted from the total fee paid. As well, the cost of equipment purchased by parents from third-party suppliers is not a qualifying cost for purpose of the credits.

It’s easy to see that expenditures made for summer activities could qualify for both the child care expense deduction and for one or the other of the Children’s Fitness or Children’s Arts credits. It’s not, however, possible to double or triple dip when it comes to expenses related to children’s activities. Expenses which are claimed under any of the three possible categories (child care expenses, Children’s Fitness Tax Credit, and Children’s Arts Tax Credit) can be claimed only once, even if they might, by definition, qualify under more than one provision.

Where the same expenditure will qualify for both the child care expense deduction and the Children’s Fitness or Arts Tax Credit, the CRA requires that the parent first claim that amount as a child care expense. Any part of the expenditure which is not claimed as a child care expense (perhaps because the maximum limit for such expense claim has been reached) can be claimed for the Children’s Fitness or Arts Tax Credit, as long as the usual requirements for the particular credit are met.

The reduction in credit amounts claimable for 2016 is not, unfortunately, the only bad news for parents when it comes to claiming a tax credit for summer child care costs. Those reductions are, in fact, the first step in a two-stage phase-out of both the Children’s Fitness Tax Credit and the Children’s Arts Tax Credit. After 2016, both credits will be eliminated, leaving the general child care expense deduction as the only deduction or credit which can be claimed for child care costs incurred at any time of the year.

By May 23, 2016, the Canada Revenue Agency (CRA) had processed just under 26 million individual income tax returns filed for the 2015 tax year. About half of those returns (56%) resulted in a refund to the taxpayer. About 18% of returns filed and processed required payment of a tax balance by the taxpayer. Slightly over 20% were what are called “nil” returns – returns where no tax is owing and no refund claimed, but the taxpayer is filing in order to provide income information which will be used to determine his or her eligibility for tax credit payments (like the Canada Child Tax Benefit or the HST credit ).

By May 23, 2016, the Canada Revenue Agency (CRA) had processed just under 26 million individual income tax returns filed for the 2015 tax year. About half of those returns (56%) resulted in a refund to the taxpayer. About 18% of returns filed and processed required payment of a tax balance by the taxpayer. Slightly over 20% were what are called “nil” returns – returns where no tax is owing and no refund claimed, but the taxpayer is filing in order to provide income information which will be used to determine his or her eligibility for tax credit payments (like the Canada Child Tax Benefit or the HST credit ).

No matter what the outcome of the filing, all returns filed with and processed by the CRA have one thing in common – they result in the issuance of a Notice of Assessment (NOA) by the CRA, outlining the taxpayer’s income, deductions, credits, and tax payable for the 2015 tax year.

The NOA issued by the CRA to all taxpayers who file a return has undergone significant revisions, with the goal of making the information provided easier to understand. Consequently, the NOA received by taxpayers for 2015 will look very different than the one received last year. The first page of the revised NOA will explain whether the taxpayer will be receiving a refund or whether he or she has a balance owing and, in either case, the amount involved. The same information will appear in a box at the bottom of page 1, entitled Account Summary. On page 2 of the NOA, the CRA lists the most important figures resulting from their assessment, including the taxpayer’s total income, net income, taxable income, total federal and provincial non-refundable tax credits, total income tax payable, total income tax withheld at source, and the amount of any refund or balance owing. Page 3 of the NOA includes an explanation of any changes made by the CRA to the taxpayer’s return during the assessment process and provides information on unused credits which the taxpayer may have from prior years and which can be carried out and claimed in future years. On page 4 of the NOA the taxpayer will find information on his or her total RRSP contribution room (i.e., maximum allowable RRSP contribution) for 2016 and finally, page 5 provides information on how to contact the CRA with questions about the information provided on the NOA, on how to change the return filed, and on how to dispute the CRA’s assessment of the individual’s tax liability.

In most cases, the information contained in the NOA is the same as that provided by the taxpayer in his or her return, perhaps with a few arithmetical corrections made by the CRA. In a minority of cases, the information presented in the NOA will differ from that provided by the taxpayer in his or her return. Where that difference means an unanticipated refund, or a refund larger than the one expected, it’s a happy day for the taxpayer. In some cases, however, the NOA will inform the taxpayer that additional amounts are owed to the CRA.

When that happens, the taxpayer has to figure out why, and to decide whether or not to dispute the CRA’s conclusions. Many such discrepancies are the result of an error made by the taxpayer in completing the return. A lot of information from a variety of sources is reported on even the most straightforward of returns and it’s easy to overlook, for instance, a T5 slip reporting less than ten dollars in interest income earned. Even where tax software is used to prepare the return, errors can still occur. Such tax software relies, in the first instance, on information input by the user with respect to amounts found on T4, T5, and other information slips. No matter how good the software, it can’t account for income information which the taxpayer hasn’t provided. In other cases, the taxpayer might transpose figures when entering them, such that an income amount of $26,353 on the T4 becomes $23,653 on the tax return. Once again, the tax software has no way of knowing that the information input was incorrect, and calculates tax owing on the basis of the figures provided.

Where there is additional tax owing because of an error or omission made by the taxpayer in completing the return, and the CRA’s figures are correct, disputing the assessment doesn’t really make sense. There is, as well, a persistent tax “myth” that if a taxpayer doesn’t receive an information slip (T4 or T5, as the case might be) for income received during the year, that income doesn’t have to be reported and therefore isn’t taxable. The myth, however, is just that. All taxpayers are responsible for reporting all income received and paying tax on that income, and the fact that an information slip was lost  or never received doesn’t change anything. The CRA receives a copy of all information slips issued to Canadian taxpayers, and its systems will cross-check to ensure that all income is accurately reported.

There are, however, instances in which the CRA and the taxpayer are in disagreement over substantive issues, and those issues most often involve claims for deductions or credits. For instance, the CRA may have disallowed an individual’s claim for a medical expense, or for a deduction claimed for a business expenditure, which the taxpayer believes to be legitimate. When that happens, the taxpayer has to decide whether to dispute the assessment.

Before making that decision, and whatever the nature of the dispute, the first step is always to contact the CRA for an explanation of the reasons why the change was made. While the information provided in the NOA is a good summary of the taxpayer’s tax situation for the year, it may not always be clear on precisely why the taxpayer and the Agency disagree on the actual amount of income tax which the taxpayer must pay for the year. It is no longer possible to have a face-to-face meeting with a CRA representative at a Tax Services Office (TSO) to obtain such information, as in-person services were discontinued a few years ago. Taxpayers who want more information about their NOA must now call or write to the CRA. The first step to be taken would be a call to the Individual Income Tax Enquiries line at 1-800-959-8281. If that call doesn’t resolve the taxpayer’s questions, he or she can write to or fax the Tax Centre which processed their return. The name of that Tax Centre can be found in the top right hand corner of the first page of the NOA, and fax numbers and mailing addresses for the Tax Centres are available on the CRA website at www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html. Communication with a Tax Centre can only be done by fax or mail, as phone numbers for Tax Centres are not available to the public.

If the situation still isn’t resolved by these communications with the CRA, and no matter what the basis for the disagreement is — a disallowed deduction or a dispute over the amount of income for the year — the next step is the filing by the taxpayer of a Notice of Objection. The steps involved in doing so will be outlined in the July 2016 issue of this newsletter.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues. They can be accessed below.

Corporate:

Issue #36 Corporate

Personal:

Issue #36 Personal

Canada’s tax system is a self-assessing and self-reporting one, in which taxpayers are expected (and required) to provide the tax authorities with an annual summary of their income and any deductions and tax credits claimable, along with payment of any tax amount owed. Although no one really likes doing their taxes, or paying those taxes, the vast majority of Canadians nonetheless do file their returns on time, and pay up. For a significant minority, however, completing and filing the return is something that just doesn’t get done. Sometimes the cause is just procrastination, while in other cases, a taxpayer is worried that there will be a large balance owing and he or she avoids completing and filing the return for that reason.

Canada’s tax system is a self-assessing and self-reporting one, in which taxpayers are expected (and required) to provide the tax authorities with an annual summary of their income and any deductions and tax credits claimable, along with payment of any tax amount owed. Although no one really likes doing their taxes, or paying those taxes, the vast majority of Canadians nonetheless do file their returns on time, and pay up. For a significant minority, however, completing and filing the return is something that just doesn’t get done. Sometimes the cause is just procrastination, while in other cases, a taxpayer is worried that there will be a large balance owing and he or she avoids completing and filing the return for that reason.

Of course, once a taxpayer fails to file an annual return, that taxpayer is in a quandary which only gets worse over time. Filing a return in a subsequent tax year will surely draw the attention of the tax authorities to the year or years in which a return wasn’t filed. Worse, if there was a balance of taxes owed, that amount can only have gotten larger with the addition of interest charges and it’s likely that penalties will have been levied as well. Consequently, a failure to file, for whatever reason, tends to become an ongoing, multi-year problem.

Taxpayers who find themselves in a situation in which they have failed to file a return in a previous year (or who have filed a return or returns in which they failed to report income or claimed deductions or credits to which they were not entitled) do have a option other than just hoping that their failings never come to light. The Canada Revenue Agency (CRA) offers an administrative program which allows such taxpayers to “come clean” with respect to past errors or omissions, pay any back taxes owed (plus interest) while avoiding the imposition of penalties or, in the worst-case scenario, prosecution. That option is the CRA’s Voluntary Disclosure Program.

The CRA will accept a voluntary disclosure and provide relief with respect to a wide range of taxpayer errors and omissions, including the following:

• failure to fulfill obligations under the tax legislation;
• failure to report taxable income received;
• claiming of ineligible expenses on the tax return;
• failure to remit employees’ source deductions;
• failure to report an amount of GST/HST (which may include undisclosed liabilities or improperly claimed refunds or rebates or unpaid tax or net tax from a previous reporting period);
• failure to file information returns; or
• failure to report foreign-sourced income that is taxable in Canada.

There are also situations in which a voluntary disclosure cannot be made, but relatively few of those would relevant to most individual taxpayers. Individual taxpayers cannot make a voluntary disclosure with respect to bankruptcy returns or with respect to income tax returns with no taxes owing or refunds expected.

Most taxpayers are understandably nervous about taking the initiative to come clean with the CRA about past transgressions. For those taxpayers, the CRA provides the option of an anonymous or “no-name” disclosure which, in effect, allows the taxpayer to test the waters. In a no-name disclosure, the taxpayer provides the information which would usually be made available to the CRA in a voluntary disclosure, except for his or her identity. (The taxpayer must, however, provide the first three characters of his or her postal code.) Following the no-name disclosure, a VDP officer from the CRA can confirm that there is nothing set out in the information provided that may immediately disqualify the taxpayer from further consideration under the VDP. If all the required information for a complete disclosure, except for the identity of the taxpayer, has been submitted, the CRA can also, upon request, review the information provided and advise on the possible tax implications of the disclosure.

After a no-name disclosure is made, the taxpayer has 90 days to provide his or her identity. If the taxpayer decides not to disclose that identity, the file is closed. If, based on the discussions which have taken place with the CRA, the taxpayer decides to provide identifying information and continue with the disclosure, the CRA will make a decision on the submission and inform the taxpayer of that decision.

Whether the initial contact with the CRA is on a no-names basis or not, there are four conditions which the CRA imposes before it will consider a disclosure to be eligible for the VDP.

1. The disclosure made must be truly voluntary, meaning that it must take place before the taxpayer is aware of any compliance or enforcement action which the CRA is taking against him or her, including a simple “Request to File” an outstanding return or returns. That restriction also applies where the taxpayer is aware of compliance or enforcement action taken against another person (like the taxpayer’s spouse or an unrelated third party) which is related to the information the taxpayer is disclosing.
2. The disclosure must involve the application of a penalty. Since the purpose of the VDP is to allow a taxpayer to come forward and pay outstanding taxes plus interest, while still avoiding the imposition of penalties, it would make no sense to go through the VDP where no penalties are involved.
3. Any information to be disclosed must be at least one year overdue.
4. The CRA will consider a voluntary disclosure only where the taxpayer provides full information on all outstanding errors or omissions — specifically, as described by the Agency, “[t]he taxpayer must provide full and accurate facts and documentation for all taxation years or reporting periods where there was previously inaccurate, incomplete or unreported information relating to any and all tax accounts with which the taxpayer is associated.” The CRA is not interested in receiving disclosures in respect of only some but not all taxation years or only some but not all errors or omissions made on prior year returns.

Making a voluntary disclosure to the CRA is a significant step, particularly where the disclosures affect multiple taxation years, or significant sums of money are involved. However, the availability of the “no-name” disclosure process does allow taxpayers to get a sense of what their liabilities might be before they take the step of identifying themselves to the tax authorities. And, as the late filing or other penalties which can be imposed by the CRA can be substantial, the opportunity to avoid the imposition of such penalties can itself serve as an incentive to come forward.

More information on the Voluntary Disclosures Program can be found on the CRA website at www.cra-arc.gc.ca/voluntarydisclosures/.

Springtime and early summer is moving season in Canada. The real estate market is traditionally at its strongest in the spring, and spring house sales are followed by real estate closings and moves in the following late spring and early summer months. All of this means that a great number of Canadians will be buying or selling houses this spring and summer and, inevitably, moving. Moving is a stressful and often expensive undertaking, even when the move is a desired one — buying a coveted (and increasingly difficult to obtain) first home, perhaps, or taking a step up the property ladder to a second, larger home. There is not much that can diminish the stress of moving, but the financial hit can be offset somewhat by a tax deduction which may be claimed for many of those moving-related costs.

Springtime and early summer is moving season in Canada. The real estate market is traditionally at its strongest in the spring, and spring house sales are followed by real estate closings and moves in the following late spring and early summer months. All of this means that a great number of Canadians will be buying or selling houses this spring and summer and, inevitably, moving. Moving is a stressful and often expensive undertaking, even when the move is a desired one — buying a coveted (and increasingly difficult to obtain) first home, perhaps, or taking a step up the property ladder to a second, larger home. There is not much that can diminish the stress of moving, but the financial hit can be offset somewhat by a tax deduction which may be claimed for many of those moving-related costs.

It’s a somewhat common misconception that all moves will qualify for a moving expense deduction. The reality is that the deductibility of moving-related costs is actually determined by whether the move brings the taxpayer closer to his or her place of work.  Since many of those who move do so for work-related reasons, it is often the case that moving costs will be deductible; however, there are in all cases a set of criteria which must first be satisfied. Our tax system allows taxpayers to claim a deduction only where  the move is made to bring the taxpayer at least 40 kilometres closer to his or her new place of work. That requirement is satisfied where, for instance, a taxpayer moves from Calgary to Vancouver to take a new job. It’s also met where a taxpayer is transferred by his or her employer to another job in a different location and the taxpayer’s move will bring him or her at least 40 kilometres closer to the new work location.  Finally, moving expenses will be deductible where a taxpayer moves at least 40 kilometres to become self-employed by starting a new business at the new location.  As well, it’s not necessary to be a homeowner in order to claim moving expenses. The list of moving-related expenses which may be deducted is the same for everyone — homeowner or tenant — who meets the 40-kilometre requirement. Students who are moving to take a summer job (even if that move is back to the family home) can also make a claim for moving expenses where that move meets the 40-kilometre requirement.

The general rule is that a taxpayer can claim reasonable amounts that were paid for moving him or herself, family members, and household effects. In all cases, the moving expenses must be deducted from employment or self-employment income earned at the new location. Where the amount of that income earned at the new location in the year of the move is less than deductible moving expenses incurred, those expenses can be carried over and deducted from such income in future years.

Within that general rule, however, there are a number of specific inclusions, exclusions and limitations, which are not necessarily intuitive. The following is a list of expenses which can be claimed by the taxpayer without specific dollar figure restrictions (but subject, as always, to the overriding requirement of “reasonableness”).

• travel expenses, including vehicle expenses, meals and accommodation, to move the taxpayer and members of his or her family to their new residence (note that not all members of the household have to travel together or at the same time);
• transportation and storage costs (such as packing, haulage, movers, in-transit storage, and insurance) for household effects, including items such as boats and trailers;
• costs for up to 15 days for meals and temporary accommodation near the old and the new residences for the members of the household;
• lease cancellation charges (but not rent) on the old residence;
• legal fees incurred for the purchase of the new residence, together with any taxes paid for the transfer or registration of title to the new residence (but excluding GST or HST and property taxes); 
• the cost of selling the old residence, including advertising, notary or legal fees, real estate commissions, and any mortgage penalties paid when a mortgage is paid off before maturity; and
• the cost of changing an address on legal documents, replacing driving licences and non-commercial vehicle permits (except insurance), and costs related to utility hook-ups and disconnections.

Although it is not as common in the current real estate market, it can happen that a move to the new home has to take place before the old residence is sold. In such circumstances, the taxpayer is entitled to deduct up to $5,000 in costs incurred for the maintenance of that residence while it is vacant and on the market. Specifically, costs including interest, property taxes, insurance premiums and heat and utilities expenses paid to maintain the old residence while efforts were being made to sell it may be deducted. If any family members are still living at the old residence, or it is being rented, no such deductions are available.

It may seem from the forgoing that virtually all moving-related costs will be deductible — however, there are some costs for which the CRA will not permit a deduction to be claimed, as follows:

• expenses for work done to make the old residence more saleable;
• any loss incurred on the sale of the old residence;
• expenses for job-hunting or house-hunting trips to another city (e.g., costs to travel to job interviews or meet with real estate agents);
• expenses incurred to clean or repair a rental residence to meet the landlord’s standards;
• costs to replace such personal-use items as drapery and carpets; and
• mail forwarding costs.

To claim a deduction for any eligible costs incurred, supporting receipts must be obtained. While the receipts do not have to be filed with the return on which the related deduction is claimed, they must be kept in case the CRA wants to review them.

Anyone who has ever moved knows that there are an endless number of details to be dealt with. In some cases, the administrative burden of claiming moving-related expenses can be minimized by choosing to claim a standardized amount for certain types of expenses. Specifically, the CRA allows taxpayers to claim a fixed amount, without the need for detailed receipts, for travel and meal expenses related to a move. Using that standardized, or flat rate method, taxpayers may claim up to $17 per meal, to a maximum of $51 per day, for each person in the household. Similarly, the taxpayer can claim a set per-kilometre amount for kilometres driven in connection with the move. The per-kilometre amount ranges from 44.5 cents for Alberta to 61.5 cents for the Northwest Territories. In all cases, it is the province or territory in which the travel begins which determines the applicable rate.

These standardized travel and meal expense rates are those which were in effect for the 2015 taxation year — the CRA will be posting the rates for 2016 on its website early in 2017, in time for the tax filing season.

The rules which govern the deduction of moving expenses are not complex, but they are very detailed. The best summary of those rules is found on the form used to claim such expenses — the T1-M, which was updated and re-issued by the CRA in January of 2016. The current version of the form can be found on the CRA’s website at www.cra-arc.gc.ca/E/pbg/tf/t1-m/README.html, and more information is available at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/menu-eng.html. Details of the allowable amounts which may be claimed for standardized moving-related meal and travel expenses can be found on the same website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns248-260/255/rts-eng.html.

By now, most Canadian taxpayers (excepting the self-employed and their spouses, who have until June 15) will have filed their 2015 income tax returns. Once the Canada Revenue Agency (CRA) has processed those millions of returns, over the next few weeks and months, taxpayers across Canada will begin to receive Notices of Assessment for 2015. In most cases, the Notice of Assessment issued will simply confirm the information which the taxpayer provided on the return, perhaps with some minor arithmetical corrections. However, not infrequently, the Notice of Assessment will indicate that the CRA has disallowed or changed the amount of certain deductions or credits, or has included in income amounts not declared by the taxpayer on his or her return. When that happens, it’s time for the taxpayer to decide whether to dispute the CRA’s assessment of their tax situation.

By now, most Canadian taxpayers (excepting the self-employed and their spouses, who have until June 15) will have filed their 2015 income tax returns. Once the Canada Revenue Agency (CRA) has processed those millions of returns, over the next few weeks and months, taxpayers across Canada will begin to receive Notices of Assessment for 2015. In most cases, the Notice of Assessment issued will simply confirm the information which the taxpayer provided on the return, perhaps with some minor arithmetical corrections. However, not infrequently, the Notice of Assessment will indicate that the CRA has disallowed or changed the amount of certain deductions or credits, or has included in income amounts not declared by the taxpayer on his or her return. When that happens, it’s time for the taxpayer to decide whether to dispute the CRA’s assessment of their tax situation.

The CRA’s return review process, whatever the filing method used by the taxpayer, is to do an initial review based on the information provided by the taxpayer and to issue a Notice of Assessment to that taxpayer. In some cases, the Agency will make changes or corrections (of an arithmetical nature — the CRA does not alter a return to add credits or deductions not already claimed by the taxpayer) while in other instances the return is “assessed as filed” — that is, the CRA agrees with the information filed by the taxpayer, and no changes to the return are needed. In either case, unless the taxpayer disagrees with and wishes to dispute the Notice of Assessment issued by the CRA, his or her tax filing obligations for the year are complete.

That process of initial review by the CRA, followed by the issuance of a Notice of Assessment can, however, be “short-circuited” in a couple of ways. First, the taxpayer sometimes realizes that the already-filed return contains an error. Second, the CRA can determine that its initial review of the return cannot be completed until it obtains more information or documentation from the taxpayer.

In most cases, it’s the taxpayer who discovers, after the return is filed, that information has been inadvertently misstated, or perhaps amounts have been omitted where an information slip was received after the return was filed.  In such situations, the taxpayer is often at a loss to know how to proceed, but the process for amending a return is actually quite straightforward. The first reaction in such circumstances is sometimes simply to file another, corrected return, but that’s not the right course of action. Instead, the taxpayer should wait until a Notice of Assessment is received in respect of the return already filed, and then file a T1 Adjustment Request with the CRA, making the necessary corrections. That request for an adjustment to an already-filed return can be done in any one of three ways, once the Notice of Assessment is received. The available methods are outlined on the CRA website, as follows:

• use the “change my return” option found on the CRA website in My Account at www.cra.gc.ca/myaccount;
• send a completed Form T1-ADJ, T1 Adjustment Request, to the taxpayer’s tax centre; or
• send a signed letter to the taxpayer’s tax centre asking for an adjustment to the return.

The easiest and quickest way of requesting an adjustment is through the CRA website’s “My Account” feature, but that option is available only to taxpayers who have already registered for that service. While doing so isn’t difficult (the steps to be taken to do so are outlined on the website at www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/pss_fq/cnd-eng.html#hlp1a), it does take a few weeks to complete the process.

Taxpayers who don’t want to deal with the CRA through its website, or who don’t think it’s worth registering for My Account just to deal with the Agency on a single issue, can obtain a hard copy of the T1 Adjustment form from the CRA website. The most recent (2015) version of the form can be found at www.cra-arc.gc.ca/E/pbg/tf/t1-adj/README.html. Taxpayers who are unable to print the form off from the website can order a copy to be sent to them by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. The use of the actual form isn’t mandatory — the third option of sending a letter to the CRA signed by the taxpayer is an acceptable alternative — but using a standardized form has two benefits: (1) it makes it clear to the CRA that an adjustment is being requested, and (2) filling out the form will ensure that the CRA is provided with all the information needed to process the requested adjustment.  Once the form or letter is completed, it (along with any supporting documents) should be mailed to the Tax Centre to which the original return was sent. A taxpayer who isn’t sure any more where that was can go on the CRA website at  www.cra-arc.gc.ca/cntct/tso-bsf-eng.html and, by selecting his or her location from a drop-down menu of provinces and cities, can obtain the address of the Tax Centre to which the adjustment request should be sent.

Sometimes the CRA will contact the taxpayer even before the return is assessed, to request further information or documentation of deductions or credits claimed (for example, information on the custody of a child where one parent has claimed an equivalent to spouse deduction, or receipts documenting child care expenses claimed). In all cases, the best thing to do is respond to such requests promptly, and to provide the requested documents or information. The CRA can assess only on the basis of the information with which it is provided, and where a request for information or supporting documents for a deduction or credit claimed is ignored by the taxpayer, the assessment will proceed on the basis that that such support does not exist. Providing the requested information or supporting documents can usually resolve the question to the CRA’s satisfaction, and the assessment of the taxpayer’s return can then proceed.

In recent years, there has been a great deal of public discussion about the availability (and the viability) of federal income support programs for retirees. It’s not news that Canada’s population is aging, and the demands placed on government-sponsored retirement income programs will of course increase as greater numbers of Canadians reach the age at which they will be entitled to receive monthly benefit payments from those programs.

In recent years, there has been a great deal of public discussion about the availability (and the viability) of federal income support programs for retirees. It’s not news that Canada’s population is aging, and the demands placed on government-sponsored retirement income programs will of course increase as greater numbers of Canadians reach the age at which they will be entitled to receive monthly benefit payments from those programs.

There are, essentially, three federal retirement income programs which are generally available to Canadians. The first, the Canada Pension Plan (CPP), is a contributory program, meaning that individuals make contributions to their own CPP “accounts” throughout their working lives. Those contributions are matched by employers and the total of contributions made after the age of 18 is used to determine an individual’s CPP entitlement later in life. An individual who is eligible to receive the CPP retirement benefit can choose to begin receiving it anytime between age 60 and age 70, with the amount of monthly benefit increasing for each year that receipt of that benefit is deferred.

The second major retirement income program – the Old Age Security (OAS) Program – is funded from general government revenues, and no contributions from individual Canadians are required. Eligibility for the OAS benefit is determined by how long one has lived in Canada after the age of 18. Generally speaking, an individual who has been a Canadian resident for 40 years after turning 18 will receive the full OAS benefit, while a pro-rated benefit can be received by those whose period of Canadian residency is shorter.

Finally, for lower-income seniors who are eligible for OAS benefits, the federal government provides the Guaranteed Income Supplement (GIS) and Allowance. The amount of the GIS and Allowance varies, depending on whether the recipient is or is not married, and how much income the individual or couple is receiving from other sources.

The three components of the federal government retirement income programs have been subject to a number of changes over the past several years. Generally, those changes have increased the age at which individuals can begin to receive benefits (as with the OAS program) or have created an incentive for individuals to defer receipt of benefits in order to increase the amount of monthly benefit to be received (as with the CPP.). In this year’s federal Budget, more changes to federal retirement income programs were announced; however, this round of changes will generally be welcomed by retirees and soon-to-be-retirees.

Likely the most significant change announced in the recent federal Budget is the restoration of eligibility for Old Age Security benefits at age 65. For many years, Canadians who were eligible to receive benefits under the Old Age Security Program were able to start receiving those benefits when they turned 65. A measure implemented by the previous government, however, increased the age of eligibility for OAS benefits to 67, with the change to be phased in between 2023 and 2029. This year’s Budget cancels that measure. All Canadians who are eligible to receive OAS benefits will be able to begin receiving such benefits the month after they turn 65.

Changes have also been announced to the Guaranteed Income Supplement and Allowance program. The GIS and Allowance is a needs-based benefit, in which an individual’s income, or the combined income of a couple, is used to determine eligibility for and the amount of any benefit entitlement. There are many instances in which a senior couple must, for reasons beyond their control, live apart, such as when one member of a couple requires nursing home care. Inevitably, that means higher living costs for such couples. Changes will be made to current rules to ensure that couples in such circumstances will receive Guaranteed Income Supplement and Allowance benefits based on their individual incomes, which will mean higher benefits, better reflecting their increased cost of living.

Finally, the federal government announced in the Budget that a public consultation process will be held beginning later in 2016 with respect to the Canada Pension Plan.  Fewer and fewer Canadians are covered by workplace pension plans, meaning a greater degree of financial insecurity after retirement. The federal government began discussions with the provinces in December 2015 on the question of whether enhancements to the Canada Pension Plan were needed in light of current workplace realities and the fact that Canadians are living longer in retirement. The federal government’s intention is that that inter-governmental consultation, together with the upcoming public consultation process, will lead to a decision on such enhancements before the end of this year.

These changes to Canada’s retirement income system were all announced in the 2016 federal Budget, and are outlined in more detail in the Budget Papers, which can be found on the Finance Canada website at www.budget.gc.ca/2016/docs/plan/ch5-en.html#_Toc446106782.

By the time most Canadians sit down to organize their various tax slips and receipts and undertake to complete their tax return for 2015, the most significant opportunities to minimize the tax bill for the year are no longer available. Most such tax planning or saving strategies, in order to be effective for 2015, must have been implemented by the end of the calendar year. The major exception to that is, of course, the making of registered retirement savings plan (RRSP) contributions, but even that had to be done on or before February 29, 2016 in order to be deducted on the return for 2015.

By the time most Canadians sit down to organize their various tax slips and receipts and undertake to complete their tax return for 2015, the most significant opportunities to minimize the tax bill for the year are no longer available. Most such tax planning or saving strategies, in order to be effective for 2015, must have been implemented by the end of the calendar year. The major exception to that is, of course, the making of registered retirement savings plan (RRSP) contributions, but even that had to be done on or before February 29, 2016 in order to be deducted on the return for 2015.

The fact that the clock has run out on most major tax planning opportunities for 2015 doesn’t however, mean that there are no tax-saving strategies left. At this point, there are a couple of ways to minimize the tax hit for 2015 — by claiming all available deductions and credits on the return and also by making sure that those deductions and credits are claimed in the way which will give the taxpayer the most “bang for the buck”.

The Canadian tax system, and therefore the Canadian income tax return form, is complex and subject to constant revision. It’s not surprising, therefore, that it’s easy to miss out on deductions or credits which are available, or to fail to recognize that the way in which such deductions or credits are claimed can have a significant effect on how much tax is saved. Realistically, most Canadians deal with taxes only once a year, when filing the annual return, and spend as little time as possible doing so. Almost no one reads the annual tax guide thoroughly, or reviews the information on the Canada Revenue Agency’s (CRA’s) website closely, looking for opportunities for tax savings.   

Everyone’s tax situation — and, therefore, their tax return — is different, of course, but what follows is an outline of deductions and credits which are commonly claimed by Canadians, and the ways in which structuring those claims properly can maximize the tax benefit.

Splitting income within the family unit

Income splitting is likely the strategy which has the greatest potential to create tax savings within a family. Briefly stated, income splitting works because Canada has a “progressive” tax system, meaning that tax rates increase as income rises. So, a family which has a single income earner earning $100,000 per year will pay more in tax than a family in which two income earners make $50,000 each, even though total family income is the same in both cases.

Of course, every dollar of tax saved by Canadian taxpayers means one dollar less of revenue for federal and provincial governments, so the ability to split income is tightly regulated. On the 2015 tax return, there are two broadly available income splitting opportunities.

The first is the so-called “Family Tax Cut”, which allows one spouse to transfer (on paper only — no actual transfer of funds is required) up to $50,000 in taxable income to his or her spouse, and have that income taxed in the hands of the spouse. The amount of tax which can be saved through this income splitting mechanism is, however, capped at $2,000 per family per year. The Family Tax Cut is claimed on Schedule 1-A, which is provided as part of the 2015 General Income Tax and Benefit package. More information on the Family Tax Cut is available on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns409-485/423-eng.html.

Taxpayers who may be able to claim the “Family Tax Cut” should be aware that this year’s return will be their last opportunity to do so. In the recently released 2016 federal Budget, it was announced that the Family Tax Cut would be eliminated, effective as of the 2016 tax year.

The second income splitting opportunity for 2015 is available to older married Canadians who receive private pension income during the year. Those taxpayers are entitled to allocate up to half that income to a spouse for tax purposes. Unlike the Family Tax Cut, there is no absolute dollar limit or cap on the amount of income which can be transferred or the amount of tax which can be saved through pension income splitting. For purposes of pension income splitting, private pension income generally means a pension received from a former employer and, where the income recipient is over the age of 65, also includes payments from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF). Government source pensions, like payments from the Canada Pension Plan, Quebec Pension Plan, or Old Age Security payments do not qualify for pension income splitting.

The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension plan administrator.
Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032E(12) Joint Election to Split Pension Income with their annual tax return. That form, which is unfortunately not included in the general tax return package issued by the CRA, can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1032/README.html.  As well, the General Income Tax Guide provides only a minimal amount of information on pension income splitting: much more extensive and detailed information on qualifying income, mechanics, benefits, and tax results of the strategy can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/menu-eng.html.

Determining when to claim a credit for charitable deductions

Canadians who make donations to registered charities are entitled to claim a non-refundable charitable donations tax credit for those donations, for both federal and provincial/territorial tax purposes. The amount of the provincial/territorial credit will vary by jurisdiction: for 2015, the federal credit is calculated as 15% of donations up to $200, and 29% of donations over that amount.

Canadians are entitled to make a claim on the annual return for charitable donations made in the current (2015) year, or in any one of the previous five years. While it may seem counter-intuitive not to claim a contribution made during the year, in some cases a better tax result may be obtained by waiting.

For taxpayers whose total charitable donations made during 2015 amount to more than $200, the full claim should be made on the 2015 return — there is no benefit to such taxpayers in delaying the claim. Where, however, total charitable donations made during the year do not exceed that $200 threshold, it may be better to wait. For example, a taxpayer who contributes $150 to charity in a year and claims that amount on the return will receive a 15% credit. Where the same taxpayer makes a similar $150 donation in the next year and claims the entire $300 in donations on that year’s return, he or she can receive a credit of 15% on the first $200 and a higher rate on the balance of $100 in donations.

Aggregating medical expenses within a family

While many medical expenses of Canadians (doctor’s visits and hospital care) are covered by public health care plans, there is a long list of such expenses (like prescription drugs and dental care) which must be paid for out-of-pocket. For some Canadians, those costs are covered by an employer-sponsored plan, but for many others there is no public or private coverage.

What there is for such taxpayers is the ability to claim a federal tax credit equal to 15% of qualifying medical expenses. Each of the provinces and territories also offers a medical expense tax credit, with the percentage amount varying by jurisdiction.

In all cases, the credit for medical expenses can be claimed only on such expenses which exceed 3% of the taxpayer’s net income, or $2,208, whichever is less. It’s possible, however, for all medical expenses of both spouses and all children who were aged 17 and under at the end of 2015 to be combined and claimed by either spouse. So, while the medical expenses incurred by a single family member might not be enough to allow him or her to make a claim, aggregating those expenses may well mean that total expenses are enough to go over the 3% of net income/$2,208 threshold.

In structuring the medical expense claim, there are two points to remember. Since total medical expenses claimable are those which exceed 3% of net income, or $2,208 —whichever is less — the most benefit will be obtained if the spouse with the lower net income makes the claim for total family medical expenses. However, the medical expense credit is a non-refundable one, meaning that it can reduce tax payable, but cannot create or increase a refund. Therefore, it’s necessary that the spouse making the claim have tax payable for the year of at least as much as the credit to be obtained, in order to make full use of that credit.

More information on the kinds of expenses which qualify for the medical expense tax credit and on how to best structure the claim for that credit can be found on the CRA website at www.cra-arc.gc.ca/medical/.

Over the next academic and calendar year, post-secondary students will find that a number of changes are taking place with respect to the rules governing the financing side of post-secondary education. Some of those changes will be welcome, and others will not.

Over the next academic and calendar year, post-secondary students will find that a number of changes are taking place with respect to the rules governing the financing side of post-secondary education. Some of those changes will be welcome, and others will not.

First, the bad news. Under current rules, post-secondary students are eligible to claim an education credit and a textbook credit on their annual tax returns. The amounts which may be claimed for each credit are set by law, with higher amounts available to be claimed by full-time students. All such amounts claimable are then converted to tax credits at a rate of 15%. The credits are non-refundable, meaning that they can reduce tax otherwise payable but cannot create or increase a tax refund. Where the student does not have tax payable for the year, the credits can be transferred to a spouse, parent, or grandparent, or can be carried forward to be claimed in a future taxation year.

In this year’s federal Budget, it was announced that both the education and textbook tax credits are to be eliminated, effective with the 2017 tax year. Carryforwards will not be lost, however, as students who have earned such credits in previous years (or who earn them in 2016) will be able to continue to carry them forward and make a claim in future years.

The good news is that the revenue gained by the federal government in cancelling the education and textbook credits is to be used, at least in part, in order to make more welcome changes to other aspects of financing of post-secondary education.

First, the current system under which a student’s income and financial assets are assessed in order to determine a student’s eligibility for financial assistance will be replaced. The federal government proposes to introduce a flat-rate student contribution to determine eligibility for Canada Student Loans and Grants, and intends to work with the provinces to finalize the new model in time for implementation with the 2017-18 academic year. As outlined in the Budget Papers, the change is intended to allow students to work and gain labour market experience without having to worry about a reduction in their level of financial assistance.

Second, the loan repayment threshold under the Canada Student Loans Program’s Repayment Assistance Plan will be increased to better reflect minimum wages currently in place. Generally the new rules will provide that students will not have to repay their Canada Student Loan until they are earning at least $25,000 per year.

More details of the budgetary changes affecting post-secondary students can be found at www.budget.gc.ca/2016/docs/plan/ch1-en.html#_Toc446106647.

For even the most determined of procrastinators, the deadline for filing an individual income tax return for the 2015 tax year is imminent. That deadline will come on Monday May 2, 2016 for most Canadians, and on Wednesday June 15, 2016 for the self-employed and their spouses.

For even the most determined of procrastinators, the deadline for filing an individual income tax return for the 2015 tax year is imminent. That deadline will come on Monday May 2, 2016 for most Canadians, and on Wednesday June 15, 2016 for the self-employed and their spouses.

Canadian taxpayers have a choice of three methods for filing of 2015 tax returns – paper filing, NETFILING, or EFILE. For the ever-decreasing minority of taxpayers who wish to file a paper return, that option is still available, although not as easy as it was in previous years. A few years ago, the Canada Revenue Agency (CRA) ceased its long-standing practice of mailing personalized income tax return forms to Canadians. That change had two consequences. First, taxpayers who wish to use a paper form to file must now obtain one themselves, either by picking up a form and income tax guide at a Canada Post location or at a Service Canada office (a listing of such offices can be found at www.servicecanada.gc.ca/cgi-bin/sc-srch.cgi?ln=eng, or by ordering a form and guide to be sent by mail, by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. It’s also possible to print off hard copy of the tax return form from the CRA website at www.cra-arc.gc.ca/formspubs/t1gnrl/menu-eng.html.

The second, more significant, consequence of the CRA’s decision to no longer provide personalized tax returns is the loss of specialized tax forms. At one time, there were several versions of the individual income tax return, each tailored to a specific group of taxpayers. For instance, the CRA once provided a specialized form for seniors, and also a simplified form for taxpayers who had relatively straightforward tax situations. Those specialized forms are no longer available and all taxpayers must now use the lengthier and more complex T1 General return form.  

The majority of Canadian taxpayers (82%, according to the CRA) do now file their income tax returns electronically. Those wishing to do so have two options: they can file the return themselves using the CRA’s NETFILE service, or they can choose to pay someone (generally, a professional tax preparation service or a bookkeeper or accountant) to prepare and EFILE the return for them.

While EFILE is the most-used method of filing, millions of Canadians do choose to do their own returns using the NETFILE option. In order to use NETFILE, it is necessary to prepare one’s tax return using tax preparation software. While there are any number of such software packages available to purchase this time of year, taxpayers should also be aware that the necessary software can be obtained, free of charge in most cases, from the CRA website. A listing of software authorized for use in the preparation of tax returns for the 2015 tax year can be found on the CRA website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/netfile-impotnet/crtfdsftwr/menu-eng.html.

The NETFILE service for filing of returns for 2015 started on February 15, 2016 and will be available until January 20, 2017. It’s not necessary to have an access or security code in order to NETFILE a return; instead, all software programs available this year allow taxpayers to submit their returns directly to the CRA, without the need to log onto the CRA's NETFILE website. The NETFILE service is available 21 hours a day, 7 days a week, on the following schedule.

The CRA also provides a help function for anyone who encounters difficulty or problems when trying to NETFILE. The toll-free number for the e-Services help desk number is 1-800-714-7257, and their service hours are as follows.

The e-Services help desk provides assistance only with queries or problems encountered while NETFILING a return, and not with questions on how to complete the return. Taxpayers who have questions about how to complete their return (no matter which filing method they choose to use) can call the CRA’s individual income tax enquiries line at 1-800-959-8281.

While tax return forms and filing methods have changed and changed again over the years, there is one constant – the filing and payment deadlines. The usual deadline for the filing of individual income tax returns by the majority of Canadians is April 30. However, this year April 30 falls on a Saturday and so the individual income tax filing deadline is extended to Monday May 2, 2016. Self-employed taxpayers and their spouses have until June 15, 2016 to file their returns. For all taxpayers, however, where there is a tax amount still to be paid for the 2015 tax year, that amount is due and payable in its entirety on or before May 2, 2016. Where payment is not made on time and in full, the interest clock starts running on May 3, 2016. For the second quarter of 2016 (April 1 to June 30), interest is levied by the CRA at a rate of 5%. That rate is compounded daily, meaning that on each successive day, interest is levied on interest charged the day before.  

One last thing – there is a common misconception among Canadian taxpayers that if a balance is owing and the money to pay that balance isn’t available, it is better to put off filing. That is, in all circumstances, a mistake. Where a balance is owed and a return isn’t filed on time, there is an automatic penalty imposed equal to 5% of the outstanding amount owed, plus 1% per month for every full month that the return is late. Higher penalties apply where there have been late-filings for any of the past three tax years. Even where payment can’t be made, or can’t be made in full, filing on time is always the best strategy.

For several decades, Canadian families have received financial assistance from the federal government to help offset the cost of raising children, through a range of benefits and allowance programs. Those programs have taken a variety of forms, from direct payments to parents to credits provided on the annual tax return. Some amounts provided under some such programs were taxable, while others were not. The one constant throughout those decades is that such programs are in a continual state of change and revision, resulting in a sometimes confusing patchwork of entitlements.

For several decades, Canadian families have received financial assistance from the federal government to help offset the cost of raising children, through a range of benefits and allowance programs. Those programs have taken a variety of forms, from direct payments to parents to credits provided on the annual tax return. Some amounts provided under some such programs were taxable, while others were not. The one constant throughout those decades is that such programs are in a continual state of change and revision, resulting in a sometimes confusing patchwork of entitlements.

The latest iteration of child and family benefits was announced recently in the 2016 federal Budget, on March 22. There will be little time to adjust to the change, as the new Canada Child Benefit will take effect in July 2016, with existing programs eliminated as of the same month.

Those existing programs are the Canada Child Tax Benefit (CCTB) and the Universal Child Care Benefit (UCCB). The former is a non-taxable payment made monthly to Canadian families, based on family size and income. The latter, as the name suggests, is a payment made to all Canadian families having children under the age of 16, with the amount of the payment based on the age of the child or children. The full amount of the UCCB is included in income and taxed as income to the recipient parent.

Beginning July 1, both of those programs will be replaced by a single program, the Canada Child Benefit. That program will provide Canadian families who have children aged 17 or younger with a monthly benefit. The amount of benefit payable will be based on the number of children in the family, their ages, and the amount of net family income. All amounts received will be non-taxable.

Details of the new program, as outlined in the Budget Papers, are as follows.

The Canada Child Benefit will provide a maximum benefit of $6,400 per child under the age of 6 and $5,400 per child aged 6 through 17. On the portion of adjusted family net income between $30,000 and $65,000, the benefit will be phased out at a rate of 7% for a one-child family, 13.5% for a two-child family, 19% for a three-child family and 23% for larger families. Where adjusted family net income exceeds $65,000, remaining benefits will be phased out at rates of 3.2% for a one-child family, 5.7% for a two-child family, 8% for a three-child family and 9.5% for larger families, on the portion of income above $65,000.

To recognize the additional costs of caring for a child with a severe disability, Budget 2016 proposes to continue to provide an additional amount of up to $2,730 per child eligible for the disability tax credit. The phase-out of this additional amount will be made to generally align with the Canada Child Benefit. Specifically, it will be phased out at a rate of 3.2% for families with one eligible child and 5.7% for families with more than one eligible child, on adjusted family net income in excess of $65,000, effective July 1, 2016. This additional amount will be included in the Canada Child Benefit payments made to eligible families.

Entitlement to the Canada Child Benefit for the July 2016 to June 2017 benefit year will be based on adjusted family net income for the 2015 taxation year.

Families who want to determine the amount of Canada Child Benefit which they will begin receiving in July of this year can do so using an online calculator provided by the federal government and available at www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html?utm_source=CRA&utm_medium=Carousel&utm_content=Calc&utm_campaign=CAbdgt16  As well, additional details of the overall program can be found on the Finance Canada website at www.budget.gc.ca/2016/docs/tm-mf/si-rs-en.html.

There’s no denying that the Canadian tax system is complex, even for individuals with relatively straightforward tax and financial circumstances. As well, significant costs can follow if a taxpayer gets it wrong when filing the annual tax return. Sometimes those costs are measured in the amount of time needed to straighten out the consequences of mistakes made on the annual return; in a worst case scenario, they can involve financial costs in the form of interest charges or even penalties levied for a failure to remit taxes payable on time or in the right amount. Whatever the reason, fewer and fewer individuals are willing to brave the annual trip through the 488 lines of the federal tax return (plus seemingly innumerable related federal schedules and provincial tax forms), and that means that the percentage of Canadians who have their return prepared by someone who has, presumably, more expertise, has continued to rise.

There’s no denying that the Canadian tax system is complex, even for individuals with relatively straightforward tax and financial circumstances. As well, significant costs can follow if a taxpayer gets it wrong when filing the annual tax return. Sometimes those costs are measured in the amount of time needed to straighten out the consequences of mistakes made on the annual return; in a worst case scenario, they can involve financial costs in the form of interest charges or even penalties levied for a failure to remit taxes payable on time or in the right amount. Whatever the reason, fewer and fewer individuals are willing to brave the annual trip through the 488 lines of the federal tax return (plus seemingly innumerable related federal schedules and provincial tax forms), and that means that the percentage of Canadians who have their return prepared by someone who has, presumably, more expertise, has continued to rise.

Whether that someone else is a willing family member or friend, or a professional tax preparer and/or tax filing service, having someone else prepare the return means, in most cases, that the taxpayer will be dealing with the Canada Revenue Agency (CRA) through a representative.

It sometimes comes as a surprise to taxpayers that the CRA will not — and, in fact, cannot — provide a taxpayer’s personal tax information to anyone other than that taxpayer, unless written authorization has been provided in advance, or the taxpayer him or herself is there to provide verbal authorization. While it may seem reasonable for a spouse who does the tax returns for the entire family or for an adult child completing a return for an elderly parent to be given access to information needed to complete that return, the restrictions on the release of such information are, in fact, very much in the best interests of the taxpayer. Most such requests for another individual’s personal tax information are genuine and well-intentioned, but that is not always the case, unfortunately.

The CRA provides a prescribed form — the T1013(E), Authorizing or Cancelling a Representative, (available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1013/README.html) — which can be used by anyone to name any other person as their representative. It’s also possible, for those who are already registered for the CRA’s My Account service, to authorize a representative online.

No matter what the process, the first decision which must be made by a taxpayer who is authorizing a representative is the level of authority he or she wants to grant to a representative and that, in turn, will depend on what he or she wants the representative to be able to do. The CRA provides for two levels of authorization on the T1013, and broadly speaking, the first — Level 1 — provides the representative with the right to receive information, while the higher Level 2 access enables the representative to make changes to the taxpayer’s account. Where a taxpayer does not specify a level of access when authorizing a representative, the CRA will automatically assign the lower Level 1 access to that representative. The specific rights granted to a representative at each level are as follows.

Level 1 Access

Where a representative has been provided by the taxpayer with Level 1 access, the CRA can disclose the following information to that representative:

• information given on the taxpayer’s income tax return;
• adjustments to the taxpayer’s income tax return;
• information about the taxpayer’s RRSP, Home Buyers' Plan, TFSA, and Lifelong Learning Plan;
• the taxpayer’s accounting information, including balances, payment on filing, and instalments or transfers;
• information about the taxpayer’s benefits and credits (Canada child tax benefit, universal child care benefit, GST/HST credit, working income tax benefit); and
• the taxpayer’s marital status (but not information related to his or her spouse or common-law partner).

A Level 1 representative is not allowed to request changes (adjustments and transfers) to the taxpayer’s account.

Level 2 Access

A representative who has been provided by the taxpayer with Level 2 access has all the powers of a Level 1 representative, as well as the right to ask for adjustments to the taxpayer’s income, deductions, non-refundable tax credits, and accounting transfers. A Level 2 representative is also able to submit a request for taxpayer relief, and to file a notice of objection or an appeal on the taxpayer’s behalf.

There are some actions which cannot be taken by either a Level 1 or a Level 2 representative. A representative authorized by the filing of a T1013, regardless of level of authorization, will not be allowed to change the taxpayer’s address, marital status, or direct deposit information, or to authorize, view, or cancel other representatives on the taxpayer’s file.

A taxpayer naming a representative must also decide whether he or she wants the representative to have online access to the taxpayer’s account, or to be able to deal with the CRA on his or her behalf only by telephone, in person, or by mail. Where the authorization provides only for the latter (no online access), the taxpayer can specify the tax years for which access is being authorized, and the level of authorization granted for each such year. Where online access is authorized, however, that access must be for all tax years, although the taxpayer can still specify the level (Level 1 or Level 2) of access to be allowed. It’s also important to note that where a taxpayer names a firm or business (as opposed to a specific individual) as the representative, he or she is authorizing the CRA to deal with any representative from that business.  Finally, the taxpayer can also specify a date on which the authorization will expire, if he or she wishes to do so.

It is readily apparent that naming someone as your representative with the CRA, even at the lowest level for a limited period of time, gives that person access to an enormous amount of personal tax and financial information. Taxpayers should be aware, when providing an authorization, exactly what they have agreed to and for what length of time. Where a taxpayer engages the services of a tax return preparation service, for instance, that service will frequently ask the taxpayer to sign an authorization enabling them to act as the taxpayer’s representative with the CRA. It is a reasonable request, given that the tax return preparer may need to contact the CRA to obtain information (e.g., from prior year returns) which is needed to prepare the tax return for the current year. Taxpayers who authorize a representative in such circumstances should, however, be careful to ensure that the authorization is limited, usually to the specific time during which the return will be prepared. Not infrequently, taxpayers have been asked to sign an authorization which does not specify any time frame and are surprised to find that such an authorization is still in effect, giving the representative the right to obtain information about that taxpayer, even years later, long after the taxpayer had finished his or her dealings with the tax return preparation service.

The need to designate a representative to deal on one’s behalf with the CRA is fairly commonplace. However, giving another person access to your personal tax information, even for a limited purpose or a limited time, is a significant step which should not be taken without some thought. Where it is determined that providing such access is necessary, careful consideration should be given to the level of access needed, the tax years for which access is required and, possibly most important, providing a date on which that authorization will expire.

Any taxpayer told of a strategy that offered the possibility of saving hundreds or thousands of dollars in tax and increasing his or her eligibility for government benefits while requiring no advance planning, no expenditure of funds, and almost no expenditure of time could be forgiven for thinking that what was proposed was an illegal tax scam. In fact, that description applies to pension income splitting which is a government-sanctioned strategy to allow married taxpayers over the age of 65 (or, in some cases, age 60) to minimize their combined tax bill by dividing their private pension income in a way which creates the best possible tax result.

Any taxpayer told of a strategy that offered the possibility of saving hundreds or thousands of dollars in tax and increasing his or her eligibility for government benefits while requiring no advance planning, no expenditure of funds, and almost no expenditure of time could be forgiven for thinking that what was proposed was an illegal tax scam. In fact, that description applies to pension income splitting which is a government-sanctioned strategy to allow married taxpayers over the age of 65 (or, in some cases, age 60) to minimize their combined tax bill by dividing their private pension income in a way which creates the best possible tax result.

Many Canadians, even those in a position to benefit from pension income splitting, have never heard of it. That’s because the strategy gets very little coverage in the media. While Canadians are inundated during the first two months of the year with advertisements extolling the virtues of making contributions to registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs), pension income splitting is never mentioned. The reason for that is that it is one of the very few tax planning strategies in which no one but the taxpayer gains a financial benefit.

The information provided with the annual tax return form also doesn’t highlight the benefits of pension income splitting, and the form needed to carry out a pension income splitting strategy isn’t included in the General Income Tax Return package. The Guide issued by the Canada Revenue Agency (CRA) for 2015 returns does flag the pension income splitting option, in the same manner as all other deductions and credits which may be of particular relevance to seniors. However, the material on income splitting included in the Guide addresses only the mechanics of filing — which number goes where — with no significant explanation of the tax-saving benefits which can be obtained. Consequently, unless a taxpayer is getting good tax planning or tax return preparation advice, it’s likely that he or she could overlook a significant opportunity to reduce his or her tax burden.

Dividing income between spouses makes for a lower overall tax bill because of the way our tax system is structured. Canada’s tax system is what is known as a “progressive” tax system, in which the rate of tax imposed increases as income rises. In very general terms, for 2015, the first $45,000 of taxable income attracts a combined federal-provincial rate of around 25%. The next $45,000 of such income, however, is taxed at a rate of just under 35%. When taxable income exceeds about $140,000, the tax rate imposed can approach 50%. While those percentages and income thresholds will vary by province, provincial and territorial tax rates will, in every province or territory, increase as taxable income goes up. Dividing income allows a greater proportion of that income to be taxed at lower rates. Of course, that means that the total tax payable (and therefore government tax revenues) will be reduced. Consequently, our tax laws include a set of rules known as the “attribution rules” which seek to prevent strategies to divide income in this way. Pension income splitting is a government-sanctioned exception to those attribution rules.

The general rule with respect to pension income splitting is that taxpayers who receive private pension income during the year are entitled to allocate up to half that income with a spouse for tax purposes. In this context, private pension income means a pension received from a former employer and, where the income recipient is over the age of 65, also includes payments from an annuity, an RRSP, or a registered retirement income fund (RRIF). Government source pensions, like payments from the Canada Pension Plan, Quebec Pension Plan or Old Age Security payments do not qualify for pension income splitting, regardless of the age of the recipient.

The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension plan administrator.
Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032-15e, Joint Election to Split Pension Income, with their annual tax return. That form, which is not included in the annual tax return package, can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1032/README.html, or can be ordered by calling 1-800-959 8281.

On the T1032-15e, the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for the particular tax year. Since the splitting of pension income affects the income and therefore the tax liability of both spouses, the election must be made and the form filed by both spouses — an election filed by only one spouse or the other won’t suffice. In addition to filing the T1032-15e, the spouse who actually receives the pension income must deduct from income the pension income amount allocated to his or her spouse. That deduction is taken on line 210 of his or her return for the year. And, conversely, the spouse to whom the pension income is being allocated is required to add that amount to his or her income on the return, this time on line 116. Essentially, to benefit from pension income splitting, all that’s needed is to for each spouse to file a single form with the CRA and to make a single entry on his or her tax return for the year.

Generally, when taxpayers sit down to complete their income tax returns this spring, it will be too late to take any action which will reduce taxes payable for the 2015 tax year — in most cases, such actions needed to be taken before the end of the 2015 calendar year. One of the best attributes of pension income splitting as a tax planning strategy is that it doesn’t have be addressed until it’s time to file the return for 2015. By the end of February or early March, taxpayers will have received the information slips which summarize their income for the year from various sources. At that time, couples who might benefit from this strategy can review those information slips and calculate the extent to which they can make a dent in their overall tax bill for the year through a little judicious income splitting.

Those wishing to obtain more information on pension income splitting than can be found in the General Income Tax Guide should refer to the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/menu-eng.html, where detailed information is provided.

For several years, the Canada Revenue Agency (CRA) has been seeking to convince Canadian taxpayers of the benefits of filing their annual tax return online, and it seems that their efforts have been successful. Last year, over 80% of Canadian taxpayers filed their returns by electronic means. The change has been a rapid one, as nearly 40% of tax filers filed a paper return in 2011, with that number dropping to less than 20% in 2015.

For several years, the Canada Revenue Agency (CRA) has been seeking to convince Canadian taxpayers of the benefits of filing their annual tax return online, and it seems that their efforts have been successful. Last year, over 80% of Canadian taxpayers filed their returns by electronic means. The change has been a rapid one, as nearly 40% of tax filers filed a paper return in 2011, with that number dropping to less than 20% in 2015.

There are, in fact, two methods by which online filing can be accomplished — NETFILE and EFILE. The first of those — NETFILE — involves preparing one’s return using software approved by the CRA and filing that return on the Agency’s website, using the NETFILE service. The second method — EFILE — involves having a third party file one’s return online. Almost always, the EFILE service also prepares the return which they are filing.

Most Canadians do seem to prefer having someone else prepare and file their tax return, as 55% of returns filed during the 2015 filing season came in by EFILE. About one-quarter of Canadians (26%) filed using NETFILE and the balance (19%) chose to file using the traditional paper return. A fourth option — TELEFILE — which allowed Canadians to file a tax return using a touch-tone phone was discontinued by the CRA a few years ago and so is no longer available.

The majority of taxpayers who wish to have someone else prepare and file their return can find information about E-FILE on the CRA website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/fl-nd/menu-eng.html. It’s also possible to do a search on that site, using one’s postal code, to locate an approved E-FILE service provider.

The one-quarter of Canadians who are comfortable with preparing their own returns and filing them using the CRA’s NETFILE service can find information about that service on the Agency’s website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/netfile-impotnet/menu-eng.html. At one time it was necessary to have a NETFILE access code in order to NETFILE, but that is no longer the case. Taxpayers who wish to NETFILE will simply have to provide some personal identifying information including their name, social insurance number, and date of birth, in order to satisfy the CRA’s security requirements.

NETFILE can only be used where a return is prepared using tax return preparation software which has been approved by the CRA, and such software can be found for sale just about everywhere this time of year. It’s also possible to find approved software which can be used free of charge, as a listing of such software is provided on the CRA website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/netfile-impotnet/crtfdsftwr/menu-eng.html.

For the still significant minority of taxpayers who wish to file a paper return, individual income tax return packages for 2015 can be obtained at Canada Post outlets or Service Canada locations.

Each of these methods requires that the taxpayer either complete the return himself or herself, or pay a fee to have someone else do so. Taxpayers who are not comfortable preparing their own returns but for whom the cost of third-party preparation is a barrier do have another option. A number of Volunteer Tax Preparation Clinics, where volunteers prepare returns without charge, operate during tax filing season. A listing of such clinics is available on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/vlntr/clncs/menu-eng.html.

Finally, no matter who prepares the return or how it is filed, the filing and payment deadlines are the same. This year taxpayers get a bit of break, as the payment and filing deadline for the majority of Canadians falls on a weekend, and so is extended. Consequently, all individual income tax amounts payable for the 2015 tax year must be paid on or before Monday May 2, 2016. All individual taxpayers (except those who are self-employed and their spouses) must file their return for 2015 on or before Monday May 2, 2016. Self-employed taxpayers and their spouses must file on or before Wednesday June 15, 2016, but are required to pay any tax owing by the May 2, 2016 deadline. No exceptions and, absent exceptional circumstances, no extensions.

While filing a tax return is an annual event for just about every Canadian, the return that is filed, and sometimes the process of filing it, changes each year. Differences in the return itself arise from changes made in our tax laws, which occur on a regular basis. Changes to the filing process generally come about because of changes in the Canada Revenue Agency’s (CRA) administrative procedures, which themselves are usually the result of improvements in technology. The process of filing returns for 2015 includes both types of changes.

While filing a tax return is an annual event for just about every Canadian, the return that is filed, and sometimes the process of filing it, changes each year. Differences in the return itself arise from changes made in our tax laws, which occur on a regular basis. Changes to the filing process generally come about because of changes in the Canada Revenue Agency’s (CRA) administrative procedures, which themselves are usually the result of improvements in technology. The process of filing returns for 2015 includes both types of changes.

On the administrative side, the CRA has introduced a new feature which it calls “Auto-fill my return”. That feature allows certain parts of a tax filer’s return for 2015 to be automatically completed using information which the CRA already has on file. Most tax filers will know that, even though the use of tax preparation software minimizes the need to manually input a lot of figures, it is still necessary to gather a great deal of information from a number of sources in order to complete the return. Auto-fill my return, which is available only to tax filers who file online using certified tax preparation software and who are registered for the CRA’s online service My Account, automatically completes those lines of the return which include information relating to the following:

• T3, T4, and T5 slips;
• Registered retirement savings plans (RRSPs);
• Home Buyers’ Plans;
• Lifelong Learning Plans;
• Non-capital losses;
• Capital gains and losses;
• Capital gains deductions;
• Federal and provincial tuition, education, and textbook carryover amounts; and
• Instalment payments.

Changes will also be seen on the 2015 return when it comes to income to be reported and deductions and credits to be claimed. Many of those changes affect families and while some of the changes will be welcome, others may come as an unpleasant surprise.

On the good news side, families which incurred deductible child care expenses during 2015 will find that the maximum amount which can be deducted per child has increased by $1,000. Consequently, the basic limits for 2015 are $8,000 for children born in 2009 or later and $5,000 for those born from 1999 to 2008. The annual limit for child care expenses claimable for a child for whom the disability amount can be claimed is $11,000. 

Parents whose child or children are involved in fitness related activities have been able, for the past several years, to claim a non-refundable tax credit to help offset the cost of those activities. As a non-refundable credit, the credit could reduce or eliminate tax otherwise payable, but could not create or increase a refund. For 2015, however, the credit has been made refundable. Parents should also be aware that the same change has not been made to the parallel credit for qualifying arts-related activities, which remains a non-refundable credit.

On the negative side, the tax cost of recent changes to federal benefits and credits for families will become apparent. The previous federal government introduced measures which increased the amount of the Universal Child Care Benefit (UCCB) and provided a new benefit of $60 per month for children aged 6 to 17. Families eligible for the new or increased benefits received a lump sum amount last summer which included all such amounts payable for the first six months of 2015. Thereafter, the monthly amounts payable to qualifying families were increased to reflect the new or increased benefits. However, whether received as a lump sum or on a monthly basis, all such new or increased amounts are subject to tax, and that tax will have to be paid when the return for 2015 is filed.

That is not, unfortunately, the only bad tax news to be found for families on the 2015 tax return. At the same time the UCCB was increased and the new benefit introduced, the existing child tax credit was eliminated. That child tax credit allowed a parent to make a claim, on his or her tax return for the year, for a non-refundable tax credit of $338 for each child under the age of 18. Each such credit claimed reduced the parent’s overall tax bill for the year by $338. Since there will be no child tax credit claim allowed on the return for 2015, every Canadian parent who claimed that credit in previous years will, as a result, see their federal tax bill increase by $338 per child.

Another change provides a benefit to taxpayers who have pursued apprenticeships as part of their education. Students who receive funds from government student loan programs for approved post-secondary education programs have for several years been able to deduct the cost of interest paid on those loans. For 2015, a deduction for interest paid will be provided to registered Red Seal apprentices who have paid interest on a Canada Apprentice Loan.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

They can be accessed below.

Corporate:

Issue #35 Corporate

Personal:

Issue #35 Personal

The early months of the new calendar year can feel like a never-ending series of bills and other financial obligations. Credit card bills from holiday spending, or perhaps a mid-winter vacation, are due or coming due. The RRSP deadline of February 29, 2016 is approaching, and the May 2, 2016 deadline for payment of any final balance of 2015 income taxes owed is not far behind.

The early months of the new calendar year can feel like a never-ending series of bills and other financial obligations. Credit card bills from holiday spending, or perhaps a mid-winter vacation, are due or coming due. The RRSP deadline of February 29, 2016 is approaching, and the May 2, 2016 deadline for payment of any final balance of 2015 income taxes owed is not far behind.

As if that series of financial hits wasn’t enough, many Canadians must also contend with an instalment reminder received from the Canada Revenue Agency (CRA) around the middle of February. While many of those who receive such reminders are already familiar with the tax instalment process, that doesn’t make the reminder any more welcome. For others, the idea of paying taxes by instalment is unfamiliar and often puzzling.

For most Canadians, income taxes they owe are deducted by their employer from their paycheques and remitted to the CRA on their behalf. While that system is efficient, it’s also largely invisible to the individual employee/taxpayer. Consequently, taxpayers, especially the newly retired, are sometimes surprised to find that they must make arrangements to ensure that taxes are paid throughout the year, in order to avoid having a large tax balance owed when the return for 2015 is filed in the spring of 2016.

The instalment payment system is one way in which those taxes can be paid throughout the year. Generally, a taxpayer will receive an instalment reminder when deductions made at source (that is, deductions made by the payor and remitted on the individual payee’s behalf to the CRA) are not made at all (as in the case of self-employment income) or are not sufficient to cover the individual’s income tax bill for the year (as often occurs with retirees, especially the newly retired). However, no matter what kind of income one receives, or the reason that sufficient tax has not been deducted at source, the options available to a taxpayer who receives such a reminder are the same.

 Canadian federal tax rules provide that a taxpayer may be required to pay income tax by instalments where the amount of tax which was or will be owed on filing is more than $3,000 for the current year (2016) and either of the two previous years (2014 or 2015). Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income is at least $3,000 less than their total tax liability for the current and either of the two previous years. Such instalment payments of tax are then due on March 15, June 15, September 15, and December 15 of each year.

An Instalment Reminder issued by the CRA in February 2016 will specify two amounts—one to be paid by March 15, and the other to be paid by June 15. Each of these amounts represents the Agency’s best estimate, based on the taxpayer’s return filed for the 2014 taxation year, of one quarter of the net tax will which be payable by the taxpayer for 2016. The taxpayer then has the following three options.

First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of March 15 and June 15. A taxpayer who chooses this option can be certain that he or she will not face any interest or penalty charges, even if the amount paid turns out to be less than the taxes actually payable for the 2016 tax year. If the instalments paid turn out to be more than the taxpayer’s net tax liability for 2016, he or she will of course receive a refund on filing.

Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2015 tax year. Where a taxpayer’s income has not changed significantly between 2015 and 2016, and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2016 will be slightly less than it was in 2015. That reduction in tax payable results from both the lowering (from 22% to 20.5%) of a federal individual income tax rate for 2016 and from the indexation of tax brackets and personal tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2016 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease from 2015 to 2016 and there will consequently be a reduction in tax payable, this option may be worth considering.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2016 tax year is filed in the spring of 2017. However, should instalments paid have been late or insufficient, the CRA will impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2016—until March 31, 2016—is 5%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It’s also possible for the CRA to impose penalties, but this is done only where the amount of instalment interest charged for the year is more than $1,000.

Most Canadian taxpayers are understandably disinclined to pay their taxes any sooner than absolutely necessary. However, ignoring an Instalment Reminder is never in the taxpayer’s best interests. Those who don’t wish to have to involve themselves in the intricacies of tax calculations can simply pay the amounts specified in the Reminder. The more technical-minded (or those who want to ensure that they are paying no more than absolutely required, and are willing to take the risk of having to pay interest on any shortfall) can avail themselves of the second or third options outlined above.

Millions of Canadians receive Old Age Security (OAS) benefits, meaning that millions of Canadians may be subject to the OAS “recovery tax” or, as it is more commonly referred to, the clawback. Unfortunately, very few Canadians are familiar with that tax or how it works, and even fewer incorporate the possibility of having to pay the tax into their retirement income planning. There are, however, strategies which allow taxpayers to minimize or avoid the OAS clawback in retirement.

Millions of Canadians receive Old Age Security (OAS) benefits, meaning that millions of Canadians may be subject to the OAS “recovery tax” or, as it is more commonly referred to, the clawback. Unfortunately, very few Canadians are familiar with that tax or how it works, and even fewer incorporate the possibility of having to pay the tax into their retirement income planning. There are, however, strategies which allow taxpayers to minimize or avoid the OAS clawback in retirement.

For taxpayers who are not yet retired, the start of such planning (as it would be in any case) is to get a sense of what one’s income from all sources will be in retirement. Where the total amount of that income approaches the level at which the clawback could apply (for 2016, that income threshold is $73,756), it is necessary to consider some planning strategies. The overall goal of those strategies is to arrange the timing and character of income received in a way which keeps the total income figure each year below the OAS clawback threshold.

The first such strategy is to use tax-free savings accounts (TFSAs) to accumulate savings which will be tapped into in retirement. Amounts withdrawn from a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF), or paid to a taxpayer in the form of an annuity are included in the total income figure used to calculate the clawback. Withdrawals from a TFSA are not. While no deduction is available for TFSA contributions, such as can be claimed for contributions to an RRSP, it may still be advisable to contribute to a TFSA rather than an RRSP. Depending on the taxpayer’s circumstances, it’s possible that the tax payable by forgoing a current deduction may be less than the combined effect of tax payable and loss of OAS benefits (and other federal and provincial credits) which would result from withdrawing those funds from an RRSP or RRIF after retirement.

Taxpayers who may be subject to the clawback should also carefully consider the age at which they want to begin receiving OAS and Canada Pension Plan benefits. It’s now possible to defer receipt of such benefits anytime up until the time the taxpayer turns 70 and the later the start date, the higher the annual benefit. The taxpayer should consider whether that higher benefit obtained from deferring the receipt of benefits (especially when combined with required withdrawals from RRSP savings which will begin at age 71) will push total annual income over the OAS clawback income threshold.

Other strategies will come into play once the taxpayer is retired and receiving OAS. Taxpayers who are over the age of 71 must withdraw income from their retirement savings at a prescribed rate. While those withdrawals will be included in income for purposes of the clawback, they can be contributed to a TFSA if not needed to meet current expenses. Once in the TFSA, any investment income earned by the funds will be sheltered both from income tax and from being counted for purposes of the clawback.

Taxpayers who are married and have private pension income (generally meaning income from an employer pension, an RRSP or RRIF or an annuity, but not government source pension income) may benefit from pension income splitting. Such pension income splitting allows the higher income spouse to reallocate up to 50% of such private pension income to his or her spouse, on a “notional” basis, meaning that no actual transfer of funds is required. The transferred income is then taxed in the hands of the lower income spouse and counts as that spouse’s income (and not that of the transferor) for purposes of the OAS clawback.

There are a lot of considerations which go into structuring income in retirement, and everyone’s financial and tax situation is different. That said, however, the overall goal for most taxpayers will be to create a relatively level flow of income from year to year, sufficient to meet current cash flow needs and maximize eligibility for available tax credits and benefits, but below the threshold at which those credits and benefits will be eroded or clawed back.

Canadian taxpayers don’t need a calendar to know that the registered retirement savings plan (RRSP) contribution deadline is approaching — the glut of television, radio and internet ads which fill the airwaves and screens this time of year are reminder enough. And, while RRSP planning and retirement planning generally are best approached as an ongoing, year-round activity, it is true that an imminent deadline tends to focus the minds of taxpayers on such issues

Canadian taxpayers don’t need a calendar to know that the registered retirement savings plan (RRSP) contribution deadline is approaching — the glut of television, radio and internet ads which fill the airwaves and screens this time of year are reminder enough. And, while RRSP planning and retirement planning generally are best approached as an ongoing, year-round activity, it is true that an imminent deadline tends to focus the minds of taxpayers on such issues

This year, an RRSP contribution for 2015 can be made any time up to and including Monday February 29, 2016. The allowable current year contribution to be made by any individual for 2015 is equal to 18% of income earned in 2014, to a maximum contribution of $24,930. However, many if not most Canadian taxpayers have contribution “room” carried over from previous years, and such carryover amounts can also be added to the 2015 contribution amount and deducted from income for 2015 .

Every taxpayer who filed an income tax return for 2014 received a Notice of Assessment from the Canada Revenue Agency (CRA), and the total amount of one’s allowable RRSP contribution for 2015 (including any carryover amounts) can be found on page 2 of that Notice of Assessment. Taxpayers who didn’t keep or can’t find their Notice of Assessment can call the CRA individual enquiries line at 1-800-959-8281 to obtain that information. When making that call, it’s important to have a copy of the last return filed on hand, as the CRA representative who takes the call will request information from the return, as part of the Agency’s information security procedures. At a minimum, a taxpayer will be asked to provide his or her social insurance number, date of birth, and the figure which was entered on line 150 of the previous year’s tax return.

Any amount contributed to an RRSP for the 2015 tax year is deducted from income for that year and then is allowed to grow, tax-free, once it’s in the RRSP. It doesn’t matter how the funds in the RRSP are invested or what kind of investment income (interest income, dividend income, etc.) is earned by those funds— no tax is payable on such investment income as it accumulates. However, when a withdrawal is made from the RRSP, all amounts withdrawn, whether original contributions or investment income earned, are subject to tax.

While RRSPs have been around for a long time, a newer tax savings vehicle in the form of Tax Free Savings Accounts (TFSAs) became available to Canadians starting in 2009. TFSAs are, in many ways, the mirror image of RRSPs. No deduction from income is permitted for contributions made to a TFSA, but investment income earned within such a plan is not taxed as it is earned, and amounts withdrawn from a TFSA (whether original contributions or investment income earned) are received free of tax. As is the case with RRSPs, where a contribution is not made to a TFSA for a particular taxation year, the contribution amount is carried forward and may be contributed by the taxpayer in any future year. However, TFSAs have one feature which completely distinguishes them from RRSPs: where an amount is withdrawn from a TFSA, that amount is added to the taxpayer’s contribution room and may be re-contributed in any subsequent taxation year. Finally, while an RRSP contribution for 2015 must be made on or before February 29, 2016, there is no such deadline for TFSA contributions—such contributions for 2015 can be made at any time during 2015 or, given the very flexible carryforward rules which apply to such plans, at any time in the future.

There is also a new “wrinkle” to TFSA planning in 2016 since the maximum annual TFSA contribution has, for the first time, been reduced. When TFSAs were introduced in 2009, the maximum yearly contribution amount was set at $5,000. That limit was increased in 2013 and 2014, and nearly doubled for 2015. However, for 2016, the contribution limit returns to pre-2015 levels.

Overall, the list of annual contribution limits looks like this:

The annual TFSA dollar limit for the years 2009, 2010, 2011, and 2012 was $5,000.

The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.

The annual TFSA dollar limit for 2015 was $10,000.

The annual TFSA dollar limit for 2016 is $5,500.

It’s understandable, given the frequent changes in TFSA contribution limits, to say nothing of the calculations required to deal with the re-contribution of withdrawn amounts, that taxpayers would be confused about just what their total current and carryforward contribution amount limit is at any given time. Fortunately, the CRA keeps track of that information, and information on one’s current overall limit can be obtained by calling the CRA’s individual income tax enquiries line at 1-800-959-8281.

A decision about making a contribution isn’t, and shouldn’t be, an either/or choice, as it’s perfectly possible for Canadians to contribute to both an RRSP and a TFSA in the same year. The financial and cash flow limitations faced by most Canadians, however, mean that making the maximum contribution to both kinds of plans in the same year just isn’t a realistic possibility. Where that’s the case, it’s necessary to decide which kind of contribution, or combination of contributions makes the most sense. As is almost always the case in tax planning, there is no one “right” answer for everyone and no “one-size-fits-all” solution. That said, there are some general considerations which may help in determining which savings/investment vehicle is preferable for a particular individual for 2015/16.

• The minority of taxpayers working in the private sector who are members of registered pension plans (RPPs) will likely find the TFSA option particularly attractive. The maximum amount which can be contributed to an RRSP for the 2015 tax year is calculated as 18% of earned income for 2014, to a maximum contribution of $24,930. However, that maximum contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under the pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, and a TFSA contribution the logical alternative.
• For younger taxpayers, where the savings goal is short-term—for example, a down payment on a home or paying for next year’s vacation or a new car, the TFSA is clearly the better choice. While choosing to save through an RRSP will provide a deduction on that year’s return and, probably, a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced. While the amounts involved may seem small, the loss of compounding on even a small amount over 25 or 30 years can make a significant dent in one’s ability to save for retirement.
• Taxpayers who are expecting their income to rise significantly within a few years (e.g., students in post-secondary or professional education or training programs) can save some tax by contributing to a TFSA while they are in school and their income (and therefore their tax rate) is low, allowing the funds to compound on a tax-free basis, and then withdrawing the funds tax-free once they’re working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted against income which would be taxed at the much higher rate, generating a tax savings. And, if a need for funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.
• For taxpayers aged 72 and older, the RRSP vs. TFSA question is simply irrelevant, as taxpayers who are older than 71 years of age cannot make RRSP contributions. Many of those taxpayers, however, have savings accumulated in a registered retirement income fund (RRIF) and are required to withdraw a specified percentage of funds from that RRIF each year. Particularly in cases where the required RRIF withdrawals exceed the RRIF holder’s current needs, that income can be contributed to a TFSA. While the RRIF withdrawals must be included in income and taxed in the year of withdrawal, transferring the funds to a TFSA will allow them to continue compounding free of tax and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn in the future from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or for the federal age credit.
• Lower income taxpayers who are in a position to put some money aside are likely better off using a TFSA for those savings. A major benefit of saving for retirement through an RRSP results from the assumption that one’s income—and therefore one’s tax rate—will be lower after retirement than it was before, meaning that a permanent tax savings will be achieved. Where that’s not the case—where there isn’t likely to be a great difference between pre- and post-retirement income—that benefit is lost. As well, lower income taxpayers who would otherwise be eligible for means-tested government benefits like the Guaranteed Income Supplement or tax credits like the GST credit or age credit could find that making withdrawals from an RRSP pushes their income to a level which reduces or eliminates eligibility for such benefits or credits. Since monies withdrawn from a TFSA are not included in income for the purpose of determining eligibility for any government benefits or tax credits, saving through a TFSA will ensure that receipt of such benefits is not put at risk.

There are, clearly, a number of factors, both present and future, to consider when deciding which savings vehicle best suits one’s circumstances. To meet the need for information in making that determination, the CRA has dedicated sections of its website to information about both TFSAs and RRSPs. That information can be found at www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html and www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html.

As the time for the traditionally strong spring housing market approaches, the current state of Canadian real estate is on the minds of a lot of Canadians these days. It’s also a concern for Finance Canada, which has made a change to Canadian mortgage financing rules which will take effect on February 15, 2016, in time for that spring housing market.

As the time for the traditionally strong spring housing market approaches, the current state of Canadian real estate is on the minds of a lot of Canadians these days. It’s also a concern for Finance Canada, which has made a change to Canadian mortgage financing rules which will take effect on February 15, 2016, in time for that spring housing market.

For a number of reasons, Canada’s mortgage financing market never experienced the excesses which occurred in the United States, and which culminated in the mortgage and financial market meltdown in 2008-09. Nonetheless, the Canadian government was sufficiently concerned that it made a series of changes to the rules governing Canadian mortgage financing between 2008 and 2012. Those rules, all of which were aimed at ensuring that Canadians could actually afford the homes they wanted to buy, included the following:

• increasing the minimum down payment to 5%;
• decreasing the maximum amortization period to 25 years;
• limiting the maximum insurable house price to below $1 million;
• applying maximum debt service-to-income ratios; and
• applying a mortgage rate stress test for mortgages with terms of less than 5 years or variable rates.

The latest change in mortgage financing rules, announced in December 2015, is more targeted in nature. Specifically, the change affects only homes sold for more than $500,000. Since the average price of a home sold in Canada in October 2015 through the Multiple Listing Service was $453,000, this latest change will likely have the greatest impact in major metropolitan markets, particularly Toronto and Vancouver.

While the minimum down payment for purchasing a home in Canada is 5%, mortgage insurance is required where that down payment is less than 20% (The exception is homes purchased for $1 million or more, where the minimum down payment is 20%.) Such mortgage insurance is provided through a federal government agency, the Canada Mortgage and Housing Corporation, and backed by the federal government.

 The Department of Finance press release announcing the change can be found on the Finance website at www.fin.gc.ca/n15/15-088-eng.asp, and that press release includes a link to a Backgrounder providing additional details of mortgage financing rules in Canada.

Planning for 2016 taxes when the year has barely started and the filing deadline for 2015 returns is still months away may seem more than a little premature. Nonetheless, taking some time to review one’s tax situation—and perhaps putting a few strategies in place—at the beginning of the year can help avoid a cash flow crisis or other financial shock when the RRSP contribution deadline looms or it is tax filing (and tax payment) time in the spring of 2017. And, while many tax planning and tax saving strategies can be implemented throughout the tax year, getting an early start on such planning usually leads to the best results.

Planning for 2016 taxes when the year has barely started and the filing deadline for 2015 returns is still months away may seem more than a little premature. Nonetheless, taking some time to review one’s tax situation—and perhaps putting a few strategies in place—at the beginning of the year can help avoid a cash flow crisis or other financial shock when the RRSP contribution deadline looms or it is tax filing (and tax payment) time in the spring of 2017. And, while many tax planning and tax saving strategies can be implemented throughout the tax year, getting an early start on such planning usually leads to the best results.

One tax planning step that is best taken early in the year is to ensure that the right amount of tax is being paid throughout the year. Most Canadians love getting a tax refund – the bigger the better. Receiving a refund after filing the annual tax return feels like getting “free” money from the federal government. In fact, except in very narrow circumstances, the reality is the opposite—it’s the taxpayer who has provided the federal government with the interest-free use of the taxpayer’s money. Getting a tax refund often indicates a failure to plan one’s tax payments properly at the beginning of the year.

To understand why that is so, it’s necessary to understand how and when the tax authorities collect taxes from individual taxpayers. Canada’s tax system is a self-assessing one, in which individual taxpayers file an annual return at a prescribed time, usually by the end of April in the following year, reporting their income from all sources and calculating the amount of federal and provincial tax which they must pay on that income. Of course, very few taxpayers would be able to pay their entire tax bill for the year at one time and the tax authorities are equally disinclined to wait until past the end of the tax year to receive income taxes owed by Canadians. So, for most Canadians (certainly for the vast majority who receive their income from employment), income tax, along with other statutory deductions like Canada Pension Plan and Employment Insurance contributions, are paid periodically throughout the year by means of deductions taken from their paycheques, with those deductions then remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by his or her employer.

Of course, each taxpayer’s situation is unique, and so the employer has to have some guidance as to how much to deduct and remit on behalf of each individual taxpayer. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by every employee, sometimes at the start of each tax year but certainly at the time employment commences. Each employee must in fact complete two TD1 forms—one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer resides and works. Federal and provincial TD1 forms for 2016 (which are available on the CRA website at www.cra-arc.gc.ca/menu/AFAF_T_TD-e.html#ti) list the most common statutory credits and deductions claimed by taxpayers, including the basic personal credit, the spousal credit amount and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial), which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the government.

While this system makes fundamental sense, it can go awry when too much tax is withheld from the employee’s paycheque, and then returned to him or her at the end of the tax year in the form of a tax refund. Generally, this happens when the employee does not correctly indicate on the TD1 forms all of the personal tax credit amounts to which he or she is entitled. In other cases, too much tax may be withheld where the employee has deductions or credits which cannot be claimed on the TD1 forms. In either case, the amount withheld from the employee’s paycheque throughout the year will be greater than the amount of tax he or she actually owes—thereby providing the tax authorities with an interest-free loan of what is ultimately the taxpayer’s money.

Where the taxpayer simply isn’t claiming on the TD1 all of the amounts to which he or she is entitled, the solution is a simple one. Only the basic personal tax credit which all Canadian resident taxpayers are entitled is automatically taken into account in determining a taxpayer’s deductions at source—all others must be specified by the taxpayer. So, if a taxpayer is entitled to claim a particular tax credit amount, like the spousal amount or the age amount that should be identified on the TD1. Assuming that employment income is, as is the case for most Canadians, the taxpayer’s only significant source of income, claiming all amounts to which he or she is entitled on the TD1 will mean that the source deductions made will accurately reflect tax liabilities for the year. At the end of the year, the individual will have paid the taxes for which he or she is responsible, without under or overpaying.

Where the taxpayer has available deductions which cannot be recorded on the TD1, it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect tax liability. The way to do so is to file a Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html), with the CRA. Once that form is filed with the CRA, the Agency will authorize the employer to reduce the amount of tax being withheld at source to more accurately reflect the taxpayer’s actual tax owing for the year. In most cases, taxpayers who file a Form T1213 do so because they are incurring expenditures which, while deductible for tax purposes, don’t show up on the TD1. Most commonly, those are expenditures like deductible support payments or contributions to a registered retirement savings plan (RRSP).

Many taxpayers like getting a tax refund because they see it as a kind of forced savings plan, and it’s true that if your money is being held throughout the year by the tax authorities, you can’t spend it. And it’s also true that a reduction in the amount of source deductions, while it can amount to a significant sum over the course of a year, is likely to be a relatively small amount per paycheque. Even the most financially self-disciplined among us find it difficult not to spend what seems like a fairly insignificant amount of money when it’s made available to us, especially when it feels like “found” money. The solution on both counts is to have the “excess” amount represented by reduced source deductions transferred into a TFSA or, even better, an RRSP as soon as it appears in the taxpayer’s bank account.  Even $20 a week will amount, not including interest, to just over $1000 per year. And, if that $1,000 is transferred into an RRSP, then the taxpayer will have a $1,000 deduction to claim on his or her tax return for the year—and will avoid, in whole or in part, that end-of-February scramble to come up with funds for an RRSP contribution. For a taxpayer who has a marginal tax rate of 40%, a $1,000 RRSP contribution and deduction will reduce the tax bill for the year by $400.

As with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes some time—the CRA’s estimate is four to six weeks. Consequently, a T1213 filed in early January should take effect, at the latest, by the middle of February—well in time to have the required effect on one’s source deductions for 2016.

Finally, even where the employer already has a TD1 on file for the employee, it’s easy and often advisable to provide the employer with a new one at the beginning of the tax year. Everyone’s circumstances change over time—a son or daughter starts post-secondary education, or an elderly parent comes to live with his or her children—and it’s likely that many individuals become entitled to make tax credit claims which aren’t reflected on a TD1 completed years previously. And, where the employee will have deductions in 2016 which can’t be recorded on the TD1, this would be a good time to prepare and file a T1213 for the year. Doing either, or both, as the case may be, will ensure that source deductions made during 2016 accurately reflect the employee’s current circumstances and consequently his or her actual tax liability for the year.

The Employment Insurance premium rate for 2016 is 1.88%.

Yearly maximum insurable earnings are set at $50,800, making the maximum employee premium $955.04.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2016 is therefore $1337.06.

The Employment Insurance premium rate for 2016 is 1.88%.

Yearly maximum insurable earnings are set at $50,800, making the maximum employee premium $955.04.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2016 is therefore $1337.06.

The Canada Pension Plan contribution rate for 2016 is unchanged at 4.95% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2016 is unchanged at 4.95% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $54,900, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2016 will be $2,544.30 each, and the maximum self-employed contribution will be $5,088.60.

Dollar amounts on which individual non-refundable federal tax credits for 2016 are based, and the actual tax credit claimable, are contained herein.

Dollar amounts on which individual non-refundable federal tax credits for 2016 are based, and the actual tax credit claimable, will be as follows:

                                                                        Credit amount                       Tax credit

Basic personal amount                                             11,474                               1,721

Spouse or common-law partner

   amount                                                                11,474                               1,721

Eligible dependant amount                                        11,474                               1,721

Age amount                                                              7,125                               1,069

Net income threshold for

   erosion of credit                                                    35,927

Infirm dependant amount (over 18)                            6,788                               1,018

Net income threshold for                                            6,807

   erosion of credit

Caregiver amount (for parent

 or grandparent)                                                       4,667                                700

Net income threshold for                                          15,940

   erosion of credit

Disability amount                                                     8,001                               1,200

Adoption expenses credit                                         15,453                              2,318

Medical expense tax credit

   threshold amount                                                  2,237

Maximum refundable medical

   expense supplement                                             1,187

Old Age Security clawback

   Income threshold                                                 73,756

Credit amounts are converted to a non-refundable credit by multiplying the amount by the federal rate applicable to the lowest income bracket, which is 15% for 2016.

The indexing factor for federal tax credits and brackets for 2016 is 1.3%. Contained herein are the federal tax rates and brackets will be in effect for individuals for the 2016 tax year.

The indexing factor for federal tax credits and brackets for 2016 is 1.3%. The following federal tax rates and brackets will be in effect for individuals for the 2016 tax year:

Income level                           Federal tax rate

$11,327–$45,282                            15%

$45,283–$90,563                           20.5%

$90,564–$140,388                          26%

$140,389–$200,000                         29%

Above $200,000                              33%

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies.

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies. Some of the more significant dates and changes for individual taxpayers for 2016 are listed below.

RRSP deduction limit increases to $24,930

The RRSP contribution limit for the 2015 tax year (for which the contribution deadline is Monday, February 29, 2016) will increase to $24,930. In order to make the maximum current year contribution for 2015, it will be necessary to have had earned income for the 2014 taxation year of $138,500.

TFSA contribution limit for 2016 reduced

The TFSA contribution room limit for 2016 is reduced to $5,500. The actual amount which can be contributed by a particular individual includes both the current year limit and any carryover or recontribution amounts from previous taxation years.

Individual tax instalment deadlines for 2016

Millions of individual taxpayers pay income tax by quarterly instalments, which are will be due on the 15^th day of each of March, June, September, and December 2016.

Individual tax filing and payments deadlines for 2016

For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2015 tax year April 30, 2016.

Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2015 on or before April 30, 2016. As April 30, 2016 falls on a Saturday, payments and returns will actually be due this year on or before Monday, May 2, 2016. Self-employed taxpayers and their spouses must file a 2015 income tax return on or before Wednesday, June 15, 2016.

The Canadian income tax system, as it applies to individuals, operates on a calendar year basis. While there are a few exceptions (RRSP contributions and pension income splitting being the important ones), the general rule is that, in order to be effective for a particular taxation year, tax planning strategies must be implemented before the end of that year.

The Canadian income tax system, as it applies to individuals, operates on a calendar year basis. While there are a few exceptions (RRSP contributions and pension income splitting being the important ones), the general rule is that, in order to be effective for a particular taxation year, tax planning strategies must be implemented before the end of that year.

Although most taxpayers don’t give a lot of thought to their tax situation until it’s time to file the annual return, by then it’s usually too late to put any desired strategies in place. So, while individual tax returns for 2015 don’t have to be filed, at the earliest, until April 30, 2016, it’s worth taking the time now to evaluate one’s tax situation, consider possible strategies to reduce the tax bill for 2015, and execute those strategies before December 31, 2015. No one wants to be in the position of completing a tax return and discovering that money is owed to the government, while at the same time realizing that steps that could have been taken to reduce or eliminate that tax bill are no longer possible.

What follows is a list of some of the more common tax deductions and credits which are claimed by Canadian taxpayers, and the year-end considerations that apply to each.

Claiming medical expenses

While most out-of-pocket medical expenses incurred by Canadians may be claimed for purposes of the medical expense tax credit, the rules governing the computation of that credit can be confusing. The basic rule is that qualifying medical expenses (a list of which can be found on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/llwbl-eng.html) in excess of 3% of the taxpayer’s net income or $2,208—whichever is less—can be claimed for purposes of the medical expense tax credit.

Put in practical terms, the rule for 2015 is that any taxpayer whose net income is less than $73,600 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $73,600 will be limited to claiming expenses which exceed the $2,208 threshold.

The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending during 2015 will produce the greatest credit amount. That determination will obviously depend on when medical expenses were incurred, so there is, unfortunately, no universal rule of thumb.

Medical expenses incurred by all family members can be added together and claimed by one member of the family. In most cases, it is best, in order to maximize the amount claimable, to make that claim on the tax return of the lower income spouse, where that spouse has tax payable for the year.

As December 31 approaches, it is a good idea to add up the medical expenses which have been incurred during 2015, as well as those paid during 2014 and not claimed on the 2014 return. Once those totals are known, it will be easier to determine whether to make a claim for 2015 or to wait and claim 2015 expenses on the 2016 return. And, if the decision is to make a claim for calendar year 2015, knowing what medical expenses were paid when will enable the taxpayer to determine the optimal 12-month period for the claim. Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2016. It may make sense, where possible, to accelerate the payment of those expenses to December 2015, where that means that they can be included in 2015 totals and claimed on the 2015 return.

Making charitable donations

The federal and all provincial governments provide a two-level tax credit for donations made to registered charities during the year. To claim a credit in a particular tax year, donations must be made by the end of the calendar year. There is, however, another reason to ensure donations are made by December 31. For federal purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess.

As a result of the two-level credit structure, it makes sense to aggregate donations in a single calendar year where possible. A qualifying charitable donation of $400 made in December of 2015 will receive a federal credit of $88 ($200 × 15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2015 and January 2016, the total credit claimable is only $60. ($200 × 15% + $200 × 15%), and the 2016 donation can’t be claimed until the 2016 return is filed in April of 2017. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% rather than the 15% level.

It’s also possible to carry forward, for up to five years, donations which were made in a particular tax year. So, if donations made in 2015 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2010, 2011, 2012, 2013, or 2014 tax years can be carried forward and added to the total donations made in 2015, and then the aggregate amount claimed on the 2015 tax return.

When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high income surtax—Ontario, Prince Edward Island, and the Yukon—it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses.

For Canadians who have not been in the habit of making charitable donations, there is now an additional incentive to make a cash donation to charity. In the 2013 Budget, the federal government introduced a temporary (before 2018) charitable donations super-credit. That super-credit (which can be claimed only once) allows individuals who have not claimed a charitable donations tax credit for any taxation year after 2007 to claim a super-credit of 25% on up to $1,000 in cash donations made during the year. The super-credit, in combination with the regular charitable donations tax credit claimed, is therefore equal to 40% of donations under $200 and 54% of donations over the $200 threshold.

Reviewing tax instalments for 2015

Millions of Canadian taxpayers (particularly the self-employed and retired Canadians) pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total tax liability for the year.

The final quarterly instalment for this year will be due on Tuesday, December 15, 2015. By that date, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2015, and will therefore be in a position to estimate what the tax bill will be for the year, taking into account any tax planning strategies put in place. While the tax return forms to be used for the 2015 tax year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2014 form. Increases in tax credit amounts and tax brackets from 2014 to 2015 will mean that using the 2014 form will result, if anything, in a slight overestimate of tax liability for 2015.

Once one’s tax bill for 2015 has been calculated, it’s possible to compare that figure with the total of tax instalments already made for 2015 (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281) and to determine whether the tax instalment to be paid on December 15 can be adjusted downward.

Old Age Security (or OAS) is one the two main components of Canada’s government-sponsored retirement income system—the other being the Canada Pension Plan (CPP). There are also federal and provincial supplements which are available to lower-income seniors. While many retired Canadians receive both OAS and CPP benefits every month, the two plans are quite different. The only determinants of the amount of Canada Pension Plan benefits receivable are one’s contribution amount and the age at which one elects to begin receiving benefits; other sources of available income or one’s overall income level are not considered. Eligibility for OAS, on the other hand, is based on Canadian residency. Essentially, a person aged 65 and older who has lived in Canada for at least forty years after the age of 18 is eligible for full OAS benefits. Where the length of Canadian residency after age 18 is less than forty years, a partial pension is earned at the rate of 1/40th of the full monthly pension for each full year lived in Canada. OAS benefits are fully indexed to inflation.

Old Age Security (or OAS) is one the two main components of Canada’s government-sponsored retirement income system—the other being the Canada Pension Plan (CPP). There are also federal and provincial supplements which are available to lower-income seniors. While many retired Canadians receive both OAS and CPP benefits every month, the two plans are quite different. The only determinants of the amount of Canada Pension Plan benefits receivable are one’s contribution amount and the age at which one elects to begin receiving benefits; other sources of available income or one’s overall income level are not considered. Eligibility for OAS, on the other hand, is based on Canadian residency. Essentially, a person aged 65 and older who has lived in Canada for at least forty years after the age of 18 is eligible for full OAS benefits. Where the length of Canadian residency after age 18 is less than forty years, a partial pension is earned at the rate of 1/40th of the full monthly pension for each full year lived in Canada. OAS benefits are fully indexed to inflation.

The differences between the CPP and OAS extend to how each program is financed. The CPP, like all contributory pension plans, is financed out of contributions made and income earned from the investment of those contributions. OAS, on the other hand, is paid from general federal government tax revenues. And, as the Canadian population ages, the cost of OAS to the federal government has continued to increase.

Several years ago, the federal government determined that it was no longer willing to maintain OAS as a program of universal entitlement. The conclusion reached was that the priority for benefits would be Canadian seniors whose income from all sources fell below a government-determined ceiling. That change meant that many Canadians, whose residence history would otherwise qualify them for full OAS benefits, must repay some benefits received.

The mechanism through which that limitation of benefits was to be achieved was the OAS “recovery tax”. The “clawback”, as it is known to virtually everyone but the federal government, is simple in concept. Where a person receiving OAS benefits has income for the year over a prescribed ceiling, 15% of that excess is deducted from the recipient’s OAS entitlement, up to the full amount of any OAS benefit otherwise receivable. For 2015, that income ceiling is $72,809, and the clawback is calculated as follows:

If the OAS recipient’s income in 2015 is $85,000, then the repayment would be 15% of the difference between $85,000 and $72,809:

$85,000 – $72,809 = $12,191

$12,191 x 0.15 = $1828.65

In this case, the OAS recipient would have to repay $1828.65 of benefits received in 2015. Where a taxpayer is subject to the OAS clawback, amounts owed are deducted from his or her OAS payments in the following benefit year. So, for example, a retiree who is subject to the clawback because his or her income for 2015 was greater than the OAS clawback threshold of $72,809 will have his or her benefits reduced during the “recovery tax period” from July 2016 to June 2017. The deduction will be spread over those 12 monthly pension payments, and the retiree will receive an Advisory Letter informing him or her of any recovery tax deductions which will be withheld from their OAS payments.

If, as in above example, the clawback amount for 2015 is $1828.65, a deduction of approximately $153 per month would be deducted from OAS pension payments starting in July 2016.

It seems not entirely in the spirit of the upcoming holidays to be talking about potential tax liability arising from holiday gifts. And it should be noted that, in the vast majority of cases, there are no tax consequences to such gifts. Where, however, gifts are provided by an employer to employees, unintended (and unwelcome) employee tax liability can be the result.

It seems not entirely in the spirit of the upcoming holidays to be talking about potential tax liability arising from holiday gifts. And it should be noted that, in the vast majority of cases, there are no tax consequences to such gifts. Where, however, gifts are provided by an employer to employees, unintended (and unwelcome) employee tax liability can be the result.

The holiday season is the time when many employees can expect to receive something “extra” from their employer, whether by way of a cash bonus, a non-monetary gift or even an annual holiday party. And, it’s certainly possible to structure such extras in a way that doesn’t attract the unwanted attention of the taxman. To do so, however, a little advance planning is required.

The tax treatment of employer-provided gifts and awards has always been something of a headache for the revenue authorities, for a few reasons. The amounts involved on an individual, or even a company level, are usually relatively small, and the variety of situations which the rules must address are virtually limitless, meaning that the cost required to draft and administer those rules can outweigh any revenue gained from their enforcement. As well, on occasion, the enforcement of those rules—as in the now infamous case in which the Canada Revenue Agency (CRA) taxed an employee Christmas party—can create a cost to the government in ill will and potential non-compliance that can similarly outweigh the benefit of any revenue raised. However, in the aggregate, the sums involved can be considerable and, in the absence of any rules, the potential exists for employers to provide their employees, on a tax-free basis, with “gifts” or “awards” which are simply disguised remuneration. And, at the end of the day, it’s the CRA’s job to make sure that doesn’t happen.

To meet that responsibility, the CRA has formulated a detailed set of rules which outline the tax consequences of gifts and awards provided by an employer to his or her employees, both during the holiday season and at other times of the year. Those rules are subject to frequent revision; however, the current set of rules governing the tax status of such gifts and awards, which are outlined below, have been in effect since 2010.

The starting point of the rules for taxation years starting in 2010 is that any gift (cash or non-cash) received by an employee from his or her employer is considered to constitute a taxable benefit, to be included in the employee’s income in the year the gift is received. However, the CRA makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) to be received tax-free by employees, as long as such gifts are given on religious holidays such as Christmas or Hanukkah, or on the occasion of a significant life event, like a birthday, a marriage or the birth of a child.

In sum, the CRA’s policy is simply that non-cash gifts and non-cash awards to an arm’s length employee, regardless of the number of such gifts or awards, will not be taxable if the total fair market value of all such gifts and awards to that employee is $500 or less annually. The total value over $500 annually will be a taxable benefit to the employee, which must be included on the T4 for the year, and on which income tax (and Canada Pension Plan contributions) must be paid.

It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500 per year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts, and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of cost or fair market value. For this purpose, the CRA considers anything which could be easily converted to cash as a “near-cash” gift, which includes such things as gift certificates, gift cards, or points which can be redeemed for air travel or other rewards. Even a gift or award which cannot be converted to cash will be considered to be a near-cash gift if, in the words of the CRA, it “allows the employee a wide selection of choice in the item they receive”. So, a pre-paid credit card would likely be considered a “near-cash” gift, and taxable as such.

This time of year, the tax treatment of the annual employee holiday party also needs to be considered. The CRA’s current policy in this area is that no taxable benefit will be assessed in respect of employee attendance at an employer-provided social event, where attendance at the party was open to all employees, and the cost per employee was “reasonable”. In this case, “reasonable” cost is considered by the CRA to be $100 or less per person. The $100 cost is meant to cover the party itself, not including any ancillary costs, such as transportation home, taxi fare or overnight accommodation. Where the total cost of the party itself exceeds the $100 per person threshold, the CRA will assess the employee as having received a taxable benefit equal to the entire per person cost (i.e., not just that portion of the cost that exceeds $100).

It may seem nearly impossible to plan for employee holiday gifts and other benefits without running afoul of one or more of the detailed rules surrounding the taxability of such gifts and benefits. However, designing a tax-effective plan is possible, if a few basic principles are kept in mind.

• Any cash or near-cash gifts should be avoided, as they will create a taxable benefit to the employee, no matter how large or small the amount. Although gift certificates are a popular choice, they aren’t a tax-effective one, as they will invariably be considered by the CRA as taxable income of the employee.
• Where non-cash holiday gifts are provided to employees, gifts with a value of up to $500 can be received free of tax. The employer must be mindful of the fact that the $500 limit is a per-year and not a per-occasion limit. Where the employee receives non-cash gifts with a total value of more than $500 in any one taxation year, the portion over $500 is a taxable benefit to the employee.
• If the employer is planning to hold a holiday party, dinner, or other social event, it’s imperative that the event be open to all employees. Restricting attendance in any way will mean that the CRA’s rules on the non-taxable status of such events do not apply. The cost of the event must, as well, be kept below $100 per person. While the CRA’s policy doesn’t specify, it seems reasonable to calculate that amount based on the number of employees invited to attend the event, rather than on the actual attendance, which can’t be accurately predicted in advance. It’s important to remember, as well, that the employer can provide transportation home, taxi fare, or overnight accommodation without the need to include such costs in the $100 per person amount. 

Generally speaking, and absent extraordinary circumstances, the federal government issues two major economic and fiscal documents each year. The first is the federal Budget, which is usually delivered in the late winter or early spring, and outlines the government’s plans and projections with respect to federal government revenues and expenditures for the upcoming (April 1 to March 31) fiscal year, along with any new tax measures which the government intends to implement. About halfway through the fiscal year, usually during month of October, the federal government releases its Economic and Fiscal Update. As the name implies, this release updates the information announced in the federal Budget, especially with respect to revenue and expense projections, the overall state of the Canadian economy, and whether a change is required to the surplus or deficit projection provided in the Budget for the current fiscal year.

Generally speaking, and absent extraordinary circumstances, the federal government issues two major economic and fiscal documents each year. The first is the federal Budget, which is usually delivered in the late winter or early spring, and outlines the government’s plans and projections with respect to federal government revenues and expenditures for the upcoming (April 1 to March 31) fiscal year, along with any new tax measures which the government intends to implement. About halfway through the fiscal year, usually during month of October, the federal government releases its Economic and Fiscal Update. As the name implies, this release updates the information announced in the federal Budget, especially with respect to revenue and expense projections, the overall state of the Canadian economy, and whether a change is required to the surplus or deficit projection provided in the Budget for the current fiscal year.

This past year was something of an extraordinary year, in that the month during which the Economic and Fiscal Update would ordinarily been issued was largely given over to the federal election campaign. The newly elected government promised, however, that it would nonetheless be issuing an Update of Economic and Fiscal Projections for the 2015-16 fiscal year and, on November 20, 2015, it did so.

The new Minister of Finance indicated that the Update would not include or consider any of the fiscal plans or measures which the new government would be proposing or implementing, and it did not. The document stated specifically that the figures provided were “the fiscal projections inherited by this Government”, and the overall message of those projections, at least for the 2015-16 fiscal year could be summarized in six words: lower revenue, higher expenditures, no surplus.

Put more formally, the federal government’s conclusions are that revenue projections, when compared to those provided in the 2015-16 federal Budget, are lower “across the forecast horizon”. Similarly, projected expenses are higher than outlined in this year’s Budget, over the same time horizon. Although public debt charges are lower, those savings only partially offset the increase in direct program expenses, especially higher expenditures under the Employment Insurance program. The cumulative effect of those figures is that the $2.4 billion surplus originally projected for the 2015-16 fiscal year has instead become a $3 billion deficit.

On the economic side, the government noted that the Canadian economy contracted in the first half of 2015, with real GDP declining by 0.8% in the first quarter and by 0.5% in the second quarter. The government’s projections for the second half of the year are for real GDP to grow by 2.2% on average and to continue to grow at a “modest” pace in 2016. In addition, the inflation outlook has been revised downward, largely as a result of lower-than-expected crude oil prices.

The new government anticipates there will be an increased deficit of $3.9 billion for the upcoming 2016-17 fiscal year. The numbers improve somewhat for the 2017-18 and 2018-19 fiscal years, where the deficits are expected to come in at $2.4 and $1.4 billion, respectively. Finally, in 2019-20, the government expects to return to a surplus position and post a surplus of $1.7 billion. All of these figures are based on the current economic and fiscal situation, and do not include any revenue or expenditure measures to be implemented by the new government. Some of those measures will likely be announced in the 2016-17 federal Budget, to be delivered in the New Year.

The Update of Economic and Fiscal Projections 2015 document can be found on the Finance Canada website at www.budget.gc.ca/efp-peb/2015/pub/efp-peb-15-en.pdf.

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues.

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues.

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues. They can be accessed below.

Corporate:

Issue #34 Corporate

Personal:

Issue #34 Personal

The Canadian tax system is a complex one, and while there are some deductions and credits—like RRSP contributions or charitable donations—which are familiar to just about every taxpayer, others are not so well known. One of those is the deduction which can be claimed by any taxpayer who must pay union dues or professional fees or professional liability insurance premiums.

The Canadian tax system is a complex one, and while there are some deductions and credits—like RRSP contributions or charitable donations—which are familiar to just about every taxpayer, others are not so well known. One of those is the deduction which can be claimed by any taxpayer who must pay union dues or professional fees or professional liability insurance premiums.

All such claims are made on Line 212 of the annual tax return, and allow the taxpayer to deduct eligible amounts paid, in full, from their income. In effect, no tax is payable on any income amounts which are used to pay union or professional dues or insurance premiums. And, unlike other deductions, there is no dollar figure limit imposed on amounts which may be deducted for professional or union dues, or professional liability insurance.

While the definition of professional or union dues or premiums payable for professional liability insurance may seem straightforward, there can in fact be a number of different types of payments involved. In determining what does and doesn’t qualify for the deduction, it’s necessary to consider the different types of dues and premiums separately.

Professional dues and insurance premiums

Essentially, the rule for deduction of these amounts provides that dues paid are deductible only where membership in an organization is necessary for the taxpayer to maintain professional status. So, for example, dues paid by a doctor to maintain membership in the College of Physicians and Surgeons in the province (or provinces) in which he or she practices medicine are deductible: dues paid to maintain membership in the Canadian Medical Association are not.  

Where the taxpayer who is seeking a deduction for such fees is an employee, it’s necessary that there be a reasonable degree of relationship between the payment of the membership fees and the requirements of the employee’s position. Continuing with the above example, a doctor who is employed by a hospital in whatever capacity should be able to claim a deduction for dues payable. A doctor who is working outside the medical field entirely but still wishes to maintain his or her membership in the College of Physicians and Surgeons will likely not be eligible to claim a deduction for dues paid.

The deduction of professional liability insurance premiums paid is more straightforward. A professional who is paying premiums for professional liability insurance is one who is working in his or her professional capacity. Such individuals can claim a deduction for the total amount of such premiums payable for insurance coverage during the calendar year for which the tax return is being filed.

Union dues

Like professional fees, union dues can be deducted where membership in a trade union is a requirement for the taxpayer to work in his or her trade or occupation. The Canada Revenue Agency’s (CRA’s) position is that membership dues and parity or advisory committee (or similar body) dues required under provincial or territorial law qualify for the deduction.

For both types of fees, other amounts can be included in the annual levy, but many of those amounts do not qualify for a deduction. Specifically, the CRA’s view is that dues eligible for the deduction do not include initiation fees, licenses, special assessments, or charges for anything other than the organization’s ordinary operating costs. It’s also not possible to claim charges for pension plans as membership dues, even if receipts received show them as dues.

Whether the fees in question are professional fees or union dues, a deduction can be claimed by an individual only where he or she is the person paying the fees or dues. Where those amounts are paid by an employer, and not shown as taxable benefit on the T4 slip for the year, no deduction for amounts paid is claimable by the employee.

There is, unfortunately, relatively little information provided by the CRA on the subject of claiming professional or union dues. The Agency once published interpretation bulletins on the subject, but those bulletins are now archived, meaning that they have not been updated in several years. The annual income tax guide does refer to those bulletins, however, as a source of information, and they can be found at www.cra-arc.gc.ca/E/pub/tp/it103r/it103r-e.html (for union dues), and at www.cra-arc.gc.ca/E/pub/tp/it158r2/it158r2-e.html (for professional fees). To obtain the most current information, taxpayers can call the CRA’s individual income tax enquiries line at 1-800-959-8281.

Thousands of Canadians, usually retirees, spend some or all of the Canadian winter as far south of the border as possible, often in Florida or Arizona. While the declining value of the Canadian dollar has made such sojourns much more expensive, meaning that some vacation plans may have to be scaled back, many Canadians will be planning at least a short stay in a warmer place this winter.

Thousands of Canadians, usually retirees, spend some or all of the Canadian winter as far south of the border as possible, often in Florida or Arizona. While the declining value of the Canadian dollar has made such sojourns much more expensive, meaning that some vacation plans may have to be scaled back, many Canadians will be planning at least a short stay in a warmer place this winter.

 Leaving the Canadian winter behind for a few weeks or months, however, doesn’t mean leaving behind the Canadian tax system. No one gives a lot of thought to the tax implications of taking an out-of-country vacation, but the reach of our tax system is a long one, and there are financial and tax issues to consider when planning to spend an extended period of time outside the country.

For most Canadians who go south for a few weeks or even a couple of months during the winter, there aren’t typically a lot of such tax consequences. Such vacationers usually remain, as it is called in tax parlance, “factual residents of Canada”. In practical terms, the income of such taxpayers is treated, for Canadian tax purposes, as though they had never left Canada. Factual residence is determined by the Canada Revenue Agency (CRA) on the basis of whether a taxpayer has maintained “residential ties” to Canada. Such residential ties could include continuing to own a home in Canada, having a spouse or dependants who remain in Canada while the snowbird is out of the country, having personal property (like a car) in Canada, and continuing to hold a Canadian driver’s license and medical insurance.

The vast majority of snowbirds who winter down south do maintain sufficient residential ties to Canada to be considered factual residents. Consequently, when they file their tax returns for the year, they follow all the same rules as year-round Canadian residents. They report all income received during the year from both inside and outside Canada and claim all available deductions and credits. Income tax is paid to the federal government and to the province with which their residential ties are kept. Finally, snowbirds who remain factual residents of Canada remain eligible for the goods and services tax credit, which may be paid to recipients outside of Canada.

Health care coverage

One of the biggest concerns of many snowbirds is maintaining health care insurance coverage while out of the country. In all cases, the availability and degree of coverage will depend on the health care plan in effect for the province or territory of which the snowbird is a resident, so it’s not possible to provide a one-size-fits-all answer to the question of the availability and extent of out-of-country coverage. As well, the rules governing such coverage are subject to continual revision, and it’s therefore critical that anyone planning an out-of-country stay confirm in advance the current rules governing such coverage. The prudent course of action followed by most snowbirds is to obtain supplementary health-care coverage, and the premiums paid for such coverage can usually be claimed as a medical expense on the Canada tax return. As well, any out-of-pocket costs incurred for eligible medical expenses while out of Canada (whether for the individual or his or her spouse) can be claimed as a medical expense on that year’s tax return.

One note of caution with respect to private supplementary health insurance is, however, warranted. Such insurance can sometimes be obtained at the last minute over the phone or online, but that’s not necessarily the best approach. The requirements imposed on applicants for such insurance are becoming more and more difficult to fulfill, and it seems as well that insurers are scrutinizing claims much more stringently than they have in the past. In the circumstances, the best advice for those seeking to obtain travel medical insurance would be to start early, shop around, and read and complete the application forms and any other documentation provided by the insurer very thoroughly. It wouldn’t even be out of place to obtain professional advice from an independent insurance broker or a lawyer, to ensure that one’s understanding of the requirements of the application form and the terms of coverage provided by the travel medical insurance policy is correct. Taking such a step might seem extreme, but Canadians who have incurred unexpected out-of-country medical expenses for which coverage has been denied by their insurer have faced medical bills amounting to more than $100,000. For most retirees, such an occurrence would be a financial disaster, at a time of life when they can least afford it. Time taken to ensure that any coverage obtained will be available if and when it is needed is always time well spent.

Old Age Security and Canada Pension Plan payments

Both Old Age Security (OAS) and Canada Pension Plan (CPP) benefits can be paid to benefit recipients who are living outside Canada, and there is no change in the amount of the benefits. As well, such payments can be made by direct deposit, and in US dollars.

Application of US tax laws

The application of US tax laws to snowbirds can, unfortunately, be a good deal more complex than the corresponding Canadian laws. Generally speaking, snowbirds who spend only a few weeks down south in the course of a calendar year are unlikely to be caught by any US tax filing or payment obligations. Those who extend their stay for longer than that—and certainly those who spend more than half of the year in the United States—should seek professional tax advice from an adviser familiar with cross-border taxation, to make certain that they are in compliance with any applicable US tax requirements. The US Internal Revenue Service also provides a (relatively) plain-language guide to the applicable rules on its website, at www.irs.gov/Individuals/International-Taxpayers.

The CRA no longer publishes its printed guide to the tax implications of spending extended periods of time outside Canada, but a section of the CRA’s website is devoted to issues affecting Canadians who spend part of the year down south, and that information can be found at www.cra-arc.gc.ca/tx/nnrsdnts/sth-eng.html.

One of the many changes resulting from developments in Canada’s economy over the past quarter century has been the need for, more or less, continuous learning. At one time, it was possible to set a career goal, acquire the necessary training or skills for that work and make a lifelong career in that field. It’s abundantly clear that that is no longer the reality for most Canadian workers, whatever their field of work.

One of the many changes resulting from developments in Canada’s economy over the past quarter century has been the need for, more or less, continuous learning. At one time, it was possible to set a career goal, acquire the necessary training or skills for that work and make a lifelong career in that field. It’s abundantly clear that that is no longer the reality for most Canadian workers, whatever their field of work.

In some cases, skills have been acquired to work in sectors, like the manufacturing sector, which no longer employs Canadians in the numbers it once did. In other cases, changes—especially changes in technology—have created the need to learn new skills in order to continue to work and advance in one’s chosen field. Finally, today’s economy of contract positions and part-time work means that most Canadians will change jobs and career paths several times throughout their working lives, and that some of those changes will involve a move into a different field altogether.

Whatever the circumstances or the motivator, acquiring new skills or qualifications through a return to school is expensive. And, particularly in the case of an individual who no longer has a job because of a corporate downsizing or bankruptcy, or a plant closure, money for re-training can be hard to find. One source which can be tapped to raise the necessary funds, without the need to create interest-bearing debt, is one’s own retirement savings, through a government-sanctioned program known as the Lifelong Learning Plan.

The Lifelong Learning Plan, or LLP, allows Canadians to withdraw funds from their RRSPs, without paying tax on those withdrawals, where the funds will be used to further their education, or that of their spouse. (Education costs for one’s children do not qualify for the Lifelong Learning Plan.)

 Amounts withdrawn to finance education programs must be paid back to the RRSP over a period of 10 years. Any qualifying individual can withdraw up to $10,000 in a calendar year, and can continue making withdrawals until January of the fourth calendar year after the year of the first withdrawal. So, an individual who first withdraws funds under an LLP in September of 2015 can continue to make withdrawals (assuming, of course, that there are sufficient funds within the RRSP to do so) until January 2019. The maximum amount which can be withdrawn under an LLP is $20,000.

 In order to participate in an LLP, an individual must meet four qualifying criteria and must continue to fulfill those criteria throughout the four-year period during which withdrawals take place. The conditions are, however, ones which can be fairly easily met in most cases, and are as follows:

•   the taxpayer must have an RRSP;
•   the taxpayer must be a Canadian resident:
•   the taxpayer must be enrolled (or have received an offer to enroll) as a full-time student in a qualifying educational program at a designated educational institution; and
•   if the taxpayer has made an LLP withdrawal in a previous year, the repayment period has not begun.

Some of the terminology used does require explanation. For purposes of the LLP, a qualifying education program is one that lasts at least three consecutive months and requires a student to spend 10 hours or more per week on courses or work in the program. The definition of a designated educational institution would include most Canadian community colleges or universities. A taxpayer who has a question about whether a particular educational institution does or does not qualify can obtain that information by calling the Canada Revenue Agency’s (CRA’s) Individual Income Tax Enquiries line at 1-800-959-8281.

Withdrawing funds under an LLP

In order to withdraw funds from an RRSP under an LLP, the taxpayer must complete Form RC 96, Lifelong Learning Plan (LLP) Request to Withdraw Funds from an RRSP, and provide that form to his or her RRSP issuer. Assuming that the taxpayer does qualify for an LLP under the four criteria listed above, the RRSP issuer will provide the taxpayer with up to $10,000 from the RRSP, and no withholding tax will be required on amounts up to the $10,000 limit. The issuer will provide the taxpayer with a T4RSP slip showing the amount of the withdrawal, and all such LLP withdrawals must be reported on the tax return for the year. However, even though all amounts received are reported on the return, they do not count as taxable income and no income tax is payable on those amounts. The non-taxable status of such withdrawals applies, however, only to the first $10,000 withdrawn under an LLP. Amounts withdrawn in excess of the $10,000 limit are treated as regular income and taxed as such.

Making repayments to an LLP

While everyone who has an LLP must repay amounts withdrawn over a 10-year period and must repay 10% of the outstanding balance each year, the date on which those withdrawals must commence can vary. The task of figuring out what amounts must be repaid and when is made easier by the fact that everyone who withdraws funds under an LLP receives a Statement of Account each year, after they file their tax return. That Statement of Account will show total LLP withdrawals, the LLP balance, the amounts which have been repaid to date, and the amount which must be repaid in the following year.

While the rules governing when repayments must commence can be complicated, those rules are essentially as follows. The latest date on which anyone who has an LLP must commence repayment of amounts withdrawn is the fifth year after the first withdrawal. In most cases, however, repayments must start before that date. Generally, if an LLP student is not a full-time student for at least 3 months in the calendar year for two consecutive years, repayment to the LLP must start in the second of those two years. Assuming the LLP student continues to meet that requirement, repayment can be deferred until the fifth year following the year the first withdrawal is made. The CRA provides the following example of the application of the repayment rules under each scenario.

Sarah makes LLP withdrawals from 2011 to 2014. She continues her education from 2011 to 2016, and is entitled to claim the education amount as a full-time student for at least three months on her income tax and benefit return every year. Sarah’s repayment period begins in 2016, since 2016 is the fifth year after the year of her first LLP withdrawal. The due date for her first repayment is March 1, 2017, which is 60 days after the end of 2016, her first repayment year.

Joseph makes an LLP withdrawal in 2013 for a qualifying educational program he is enrolled in during the same year. He is entitled to the education amount as a full-time student for five months of 2013. Joseph completes the educational program in 2014, and he is entitled to the education amount as a full-time student for five months in 2014. He is not entitled to the education amount for 2015 or 2016. Joseph’s repayment period begins in 2016.

Deciding whether to tap into one’s RRSP in order to finance further education involves a balancing of factors. Using RRSP funds in this way means that no interest will have to be paid on funds used for education costs, unlike more traditional borrowings, including government student loans. As well, there are no tax costs to using an LLP, assuming that any withdrawals made are within statutory limits and repayments are made on schedule and in the amounts required. On the other hand, there is a “cost” in that funds withdrawn will not, during the 10 to 15-year period starting with the first withdrawal and ending with the last repayment, be earning income inside the RRSP, so the amount available in the RRSP on retirement will certainly be less. The expectation, as with all borrowings related to education, is that the costs involved will be more than offset by greater earning capacity in the future, and consequently greater ability to save for retirement.

At the end of day, the decision of whether to participate in an LLP will come down to the individual circumstances of the taxpayer involved. In making that determination, the taxpayer will need to consider the following.

•   How much has already been saved in one’s RRSP, and what percentage of the funds saved currently in the plan will be needed for the LLP?
•   What are the job prospects and average earnings in the sector or position for which the taxpayer is being re-trained? In other words, is the investment to be made in re-training or education likely to be more than offset by the earnings which will be realized as the result of that re-training?
•   Finally, for older workers, are there enough years remaining before retirement to justify the costs and time involved in re-training? If the time needed to re-train is greater than the number of working years left after the re-training is completed, it’s likely that there are better strategies than investing significant funds in re-training costs. 

Most Canadians are aware that the deadline for contributing to one’s registered retirement savings plan (RRSP) is 60 days after the calendar year end. Many also know that contributions to a tax-free savings account (TFSA) can be made at any time during the year. Consequently, when Canadians start thinking about year-end tax planning or saving strategies, RRSPs and TFSAs aren’t often top-of-mind. The fact is, however, that there are some situations in which planning strategies involving TFSAs and RRSPs have to be put in place by the end of the calendar year; some of those are outlined below.

Most Canadians are aware that the deadline for contributing to one’s registered retirement savings plan (RRSP) is 60 days after the calendar year end. Many also know that contributions to a tax-free savings account (TFSA) can be made at any time during the year. Consequently, when Canadians start thinking about year-end tax planning or saving strategies, RRSPs and TFSAs aren’t often top-of-mind. The fact is, however, that there are some situations in which planning strategies involving TFSAs and RRSPs have to be put in place by the end of the calendar year; some of those are outlined below.

Accelerate any tax-free savings account withdrawals into 2015

Each Canadian aged 18 and over can contribute up to $10,000 per year (as of 2015) to a Tax-Free Savings Account (TFSA). Where amounts are withdrawn from a TFSA, the withdrawn amount is added to the taxpayer’s TFSA contribution limit for the following year.

Consequently, it makes sense, where a TFSA withdrawal is planned within the next few months, perhaps to pay for a winter vacation or to make an RRSP contribution, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA before December 31^st, 2015 will have the amount withdrawn added to his or her TFSA contribution limit for 2016. If the same taxpayer waits until January of 2016 to make the withdrawal, he or she won’t be eligible to replace the funds until 2017.

Make spousal RRSP contributions before December 31

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals from a spousal RRSP taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2015, the contributor can claim a deduction for that contribution on his or her return for 2015. The spouse can then withdraw that amount as of January 1, 2018 and have it taxed in his or her hands. If the contribution isn’t made until January or February of 2016, the contributor can still claim a deduction for it on the 2015 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2019. It’s an especially important consideration for couples approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that’s not the case, making the contribution before the end of the calendar will ensure maximum flexibility if an unanticipated withdrawal becomes necessary.

When you need to make your RRSP contribution before December 31^st

While most RRSP contributions to be deducted on the return for 2015 can be made any time up to and including February 29, 2016, there is one important exception to that rule.

Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71—usually by converting the RRSP into a registered retirement income fund (RRIF) or purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31^st is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31^st. 

As is reported in the news at least once a month, there doesn’t seem to be an end or a limit to the inexorable rise in Canadian house prices. While the cost of housing in Vancouver and Toronto outstrips prices everywhere else, even smaller metropolitan areas are posting record increases.

As is reported in the news at least once a month, there doesn’t seem to be an end or a limit to the inexorable rise in Canadian house prices. While the cost of housing in Vancouver and Toronto outstrips prices everywhere else, even smaller metropolitan areas are posting record increases.

As with just about any economic development, there are winners and losers in this scenario. Baby boomers (and the parents of baby boomers) who purchased a home decades ago and are now looking to sell will undoubtedly realize a significant tax-free gain on that sale. The biggest losers are those who are still on the outside looking in—generally younger Canadians who are trying to break into the housing market by acquiring that first property, whether it’s a condo, townhouse, or detached home.

For most individuals or families in the market, buying real estate is a significant long-term financial commitment and right now, that financial commitment can be assumed at record low interest rates. As of the end of September, a five-year fixed-rate mortgage (the kind of mortgage taken out by two thirds of home buyers aged 18 to 34) could be obtained from major Canadian financial institutions at an interest rate of less than 3%. For most of those looking to get into the market then, the biggest hurdle isn’t likely the ongoing cost of financing, but the need to put together the required down payment. A down payment is calculated as a percentage of the purchase price of the house and so, as house prices in most Canadian markets have increased, the amount of the required down payment has risen in tandem. And, if that weren’t enough, changes made to the rules governing the financing of home ownership over the past few years have set the bar even higher.

Until the summer of 2008, it was possible to buy a home in Canada with a zero down payment (in other words, the entire cost of the home was borrowed) and to amortize repayment of that cost over up to 40 years—a time frame which would put most purchasers past the traditional retirement age of 65 by the time the mortgage was paid off. Successive changes implemented by the federal government have whittled away at those practices. Borrowers are now required to have at least a 5% down payment on a residential home purchase, and the maximum amortization period on a residential mortgage is 25 years. More stringent borrowing requirements are also imposed on would-be home purchasers, in terms of the percentage of income which monthly costs related to housing (mortgage payments, property taxes, and home heating) are permitted to consume.  

All of this leaves the would-be first time home purchaser falling further and further behind when it comes to putting together a sufficient down payment. There is, however, another option available to that first-time purchaser, and it’s one not just sanctioned but created by the federal government itself. That option is borrowing all or part of the down payment from one’s registered retirement savings plan (RRSP), on a tax and interest free basis, under a program known as the Home Buyers’ Plan (HBP).

The average house price in Canada right now, when Toronto and Vancouver are excluded from the calculation, is about $340,000. The rules governing the HBP permit each taxpayer to withdraw up to $25,000 from his or her RRSP, which would be enough to make a 7% down payment on the average home. And, if there is a silver lining to the fact that many Canadians are forced to defer their entry into the housing market, it may be that, having been in the work force for a longer period of time, they are more likely to have at least $25,000 in their RRSPs. And, as outlined below, married couples can aggregate funds from each of their RRSPs to come up with that down payment.

While the rules governing HBPs can be detailed in their application, especially when it comes to any special circumstances or any contravention of those rules, the concept of the program is straightforward. A first-time home buyer who has entered into an agreement to purchase or build a home can withdraw up to $25,000 from his or her RRSP to purchase that home. The amount withdrawn is not taxed on withdrawal, as it usually would be, but must be repaid to the RRSP, without interest, over the subsequent 15 years, with the amount of each annual repayment prescribed by law. Where the first-time home buyer is married, and his or her spouse is also a first-time home buyer, the spouse can also withdraw up to $25,000 from his or her RRSP and both withdrawals can be pooled to come up with a down payment.

There are some additional rules, as follows. The home purchased using funds borrowed under the HBP must be bought or built before October 1 of the year following the year of withdrawal. As well, the borrower (and his or her spouse, where applicable) must intend to occupy the home as the principal place of residence within one year after its purchase—the HBP is not intended to provide funds to purchase or build rental residential accommodation.

The concept of a “first-time home buyer”, while seemingly self-explanatory, is in fact more flexible than it first appears. For purposes of the HBP, a first-time home buyer can actually be someone who has previously owned and lived in a home, as long as that home ownership ended more than four full calendar years prior to the time a withdrawal under the HBP is made. For instance, an individual who wishes to participate in the HBP by making a withdrawal of funds on March 31, 2016 will be considered a first-time home buyer if he or she had not owned and occupied a home after the end of 2011, the four full calendar years being the period between January 1, 2012 to February 29, 2016. Where the prospective home owner is married (including a common-law partnership), the same requirement applies to that person’s spouse.

Whatever the amount withdrawn from the RRSP under the HBP, that amount must be repaid within a maximum of 15 years. The first repayment is required in the second year following the year of withdrawal so, in the case of the example above, where the withdrawal is made in 2016, the first repayment must be made in 2018. Each repayment is generally 1/15^th of the amount withdrawn so, a maximum withdrawal of $25,000 would mean an annual repayment amount of $1666.66. The taxpayer doesn’t have to keep track of where he or she stands with respect to the repayment schedule—each year, a Statement of Account sent to the taxpayer with his or her Notice of Assessment, after the annual return is filed. That Statement will summarize amounts repaid to date, the current HBP balance, and the amount of the next repayment which must be made. Such repayments are made by making a contribution to the taxpayer’s RRSP during or within 60 days after the end of the year for which the repayment is due, and designating part or all of that contribution as an HBP repayment on Schedule 7, which is then filed with the tax return for that year. If the taxpayer does not make the repayment when and in the amount required, any outstanding amount is added to income for the year and taxed at the taxpayer’s top marginal rate. 

Like all investment and tax planning strategies, borrowing money from your RRSP to put together a down payment on a first home has both upsides and potential downsides. The biggest downside is the permanent loss of investment gains on the money temporarily withdrawn from the RRSP during that period of withdrawal. However, it’s also possible that the real estate purchased with the withdrawn funds will enjoy a greater increase in value over that period than would have earned by the funds had they remained in the RRSP. Like all investment and tax planning decisions, it comes down to a personal decision based on one’s own circumstances.

The rules outlined above summarize the basic structure and operation of the Home Buyers’ Plan. However, anyone contemplating making use of the HBP will need to familiarize themselves with those rules in much greater detail, perhaps with the assistance of professional advisers. A good place to start is the Canada Revenue Agency website, where information on the HBP can be found at www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html.

By the time the summer is over and everyone’s back to school and work, most taxpayers have completed and forgotten about their tax obligations for the year. Returns have been filed and Notices of Assessment have been received. Income tax refunds have been spent or saved, and any amount still owing for taxes has generally been paid. For the Canada Revenue Agency (CRA), however, taxes are a year-round business, and fall marks the move from one phase of its activities to another—specifically, to the start of its annual post-assessment tax return review process.

By the time the summer is over and everyone’s back to school and work, most taxpayers have completed and forgotten about their tax obligations for the year. Returns have been filed and Notices of Assessment have been received. Income tax refunds have been spent or saved, and any amount still owing for taxes has generally been paid. For the Canada Revenue Agency (CRA), however, taxes are a year-round business, and fall marks the move from one phase of its activities to another—specifically, to the start of its annual post-assessment tax return review process.

What that means for the individual taxpayer is the possibility of receiving unexpected correspondence from the CRA. Receiving such correspondence from the tax authorities is almost guaranteed to unsettle the recipient taxpayer, even where there’s no reason to believe that anything is wrong. But, it’s an experience which will be shared this fall by millions of Canadian taxpayers.

This year, Canadians filed nearly 28 million individual income tax returns with the CRA. The vast majority of those returns—about 23 million—were filed electronically, with either EFILE or NETFILE, while only 5 million paper returns were filed. For several years, the CRA has encouraged taxpayers to take advantage of its electronic filing options, and its efforts have clearly been a success.  As the CRA has always noted, filing electronically means faster turnaround (and quicker refunds!) but, when returns are filed by electronic means there is, by definition, no paper involved. The Canadian tax system has always been what is termed a “self-assessing” system, in which taxpayers report income earned and claim deductions and credits to which they believe they are entitled. There have, however, always been means by which the CRA can verify claims made by taxpayers. Where returns are paper-filed, taxpayers must usually include receipts or other documentation to prove their claims, whether those claims are for dependent tax credits, charitable donations, medical expenses, or other similar deductions and credits. For the 82% of returns which were filed this year by electronic means, no such paper trail exists. Consequently, the potential exists for misrepresentation of such claims (or simple reporting errors) on a large scale. The CRA’s response to that risk is to carry out a post-assessment review process, in which the Agency asks taxpayers to back up or verify claims for credits or deductions which were made on the return filed this past spring.

That post-assessment review process starts in the month of August. There are two components to the review process—the Processing Review Program and the Matching Program. The former is a review of various deductions or credits claimed on returns, while the latter compares information included on the taxpayer’s return with information provided to the CRA by third-party sources, like T4s filed by employers or T5s filed by banks or other financial institutions. The time periods during which the two programs are carried out overlap, as the peak time for the Processing Review Program is between August and December, while the Matching Program is carried out from October to March.

While the two programs are carried out more or less concurrently, they are quite different. The Processing Review Program asks the taxpayer to provide verification or proof of deductions or credits claimed on the return, while the Matching Program deals with discrepancies between the information on the taxpayer’s return and information filed by third parties with respect to the taxpayer’s income for the year.

Of course, most taxpayers are not concerned so much with the kind of program or programs under which they are contacted as they are with why their return was singled out for review. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is a precursor to an audit, but that’s not usually the case. Returns are selected by the CRA for post-assessment review for a number of reasons. Under the Matching Program, where a taxpayer has filed a return containing information which does not agree with the corresponding information filed by, for instance, his or her employer, it’s likely that the CRA will want to follow that up to find out the reason for the discrepancy. Canada’s tax laws are complex and, over the years, there are areas in which the CRA has determined that taxpayers are more likely to make errors on their return, so a return which includes claims in those areas may have an increased chance of being reviewed. Where there are deductions or credits claimed by the taxpayer which are significantly different or greater than those claimed in previous returns that too may attract the CRA’s attention. And, if the taxpayer’s return has been reviewed in previous years and, especially, if an adjustment was made following that review, subsequent reviews may be more likely. Finally, many returns are picked for post-assessment review simply on a random basis.  

Regardless of the reason for the follow-up, the process is the same. Taxpayers whose returns are selected for review will receive a letter from the CRA, identifying the deduction or credit for which the CRA wants documentation or the income amount about which a discrepancy seems to exist. The taxpayer will be given a reasonable period of time—usually a few weeks from the date of the letter—in which to respond to the CRA’s request. That response should be in writing, attaching (if needed) the receipts or other documentation which the CRA has requested. All correspondence from the CRA under its review programs will include a reference number, which is usually found in the top right hand corner of the CRA’s letter. That number is the means by which the CRA tracks the particular inquiry, and should be included in the response sent to the Agency. If, after the response is received, more information is needed, the CRA will send a follow-up letter, or the taxpayer may be contacted by telephone.

One word of caution: there have been instances in which taxpayers have been contacted by telephone or e-mail by someone who claims to be a CRA representative, but is not. That person generally indicates that a review of the taxpayer’s return shows that additional taxes are owed, and suggests payment by an e-transfer of funds or other payment method. Taxpayers should be aware that the CRA never requests tax payment in this way. While the CRA can and does contact taxpayers by phone, any CRA representative will have the reference number which appeared in the CRA’s initial letter and should be prepared to quote that number to the taxpayer in order to establish that the call is an authentic one. As well, the CRA does not correspond with taxpayers by e-mail – any e-mail claiming to be from the CRA is not authentic and should be deleted without opening.

Whatever the reason a particular return was selected for post-assessment review by the CRA, one thing is certain: a prompt response to the CRA’s enquiry, providing the Agency with the information or documentation requested will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the CRA and the taxpayer.

For several years the Canada Revenue Agency (CRA) has encouraged taxpayers to begin receiving payments from the Agency by means of direct deposit to their bank accounts, rather than by receiving cheques sent through the mail. By the spring of 2016, that second option will no longer be available.

For several years the Canada Revenue Agency (CRA) has encouraged taxpayers to begin receiving payments from the Agency by means of direct deposit to their bank accounts, rather than by receiving cheques sent through the mail. By the spring of 2016, that second option will no longer be available.

In just over six months, on April 20, 2016, the CRA will be making all payments made to Canadian individuals and businesses by way of direct deposit. Many taxpayers, of course, have already arranged to have such payments deposited to their bank accounts. As well, at the beginning of 2015, the CRA began automatically direct-depositing amounts owed to individuals who had current bank account information already on file with the CRA. Anyone who does not fall into either of those two groups will have to act now to ensure that the CRA has the information needed to make direct deposit payments to their bank account after the end of this year.

Direct deposit can be arranged for any individual who receives at least one of the following kinds of payments from the CRA:

•   income tax refund;
•   goods and services tax/harmonized sales tax credit and any similar provincial and territorial payments;

• Canada child tax benefit and any similar provincial and territorial payments;
• working income tax benefit;
• universal child care benefit; or
• deemed overpayment of tax.

There are a number of ways in which a direct deposit arrangement can be set up. Canadians who have already registered for the CRA’s online service My Account can sign up for direct deposit using that feature, available at www.cra-arc.gc.ca/myaccount/. Those who are not registered for My Account can complete and send a paper copy of the Canada Direct Deposit enrolment form, which can be found on the federal government website at www.tpsgc-pwgsc.gc.ca/recgen/dd/form/can-eng.html. All such forms, when completed, are sent to the Receiver General for Canada, at the address provided on the form.

Finally, perhaps the easiest way to sign up for direct deposit is through a phone call to the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281. Taxpayers who want to pursue that option will need to provide the following information:

• social insurance number
• full name and current address, including postal code
• date of birth
• most recent income tax and benefit return and information about the most recent payments received from the CRA; and
• banking information: three-digit financial institution number, five-digit transit number, and the account number.

The last item on that list—banking information—can be confusing. While the needed information can be found in a line of figures which appears at the bottom of cheques issued to individuals by their bank or other financial institution, that line can be difficult to decipher. The best approach is likely to visit one’s financial institution, where they can provide the information needed (financial institution number, transit number, and account number) in a more comprehensible format.

The information above summarizes the steps which individuals can take to sign up for direct deposit. However, businesses are also affected by the CRA’s upcoming changeover, and the procedures which they must follow to sign up for direct deposit are slightly different.

First of all, a business which receives any of the following types of payments from the CRA can sign up for direct deposit:

•   corporation income tax refund;
•   goods and services/harmonized sales tax credit;
•   refund of excise or other duties; or
•   refund of payroll deductions.

Businesses which are already registered for the CRA’s online service My Business Account can sign up for direct deposit there. As well, where a business has provided sufficient authorization to a representative, that representative person or firm can sign up on their behalf.

If the business wishes to register for direct deposit using a paper form, that form can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/rc366/README.html. In this case, however, the completed form is sent, not to the Receiver General, but to the business’s customary Tax Centre. A listing of such centres, with mailing addresses, can be found on the CRA website at www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html.

Finally, any business can obtain more information about direct deposit by calling the CRA Business Enquiries Line at 1-800-959-5525.

Time and again, Canadians have shown that where there is a humanitarian crisis anywhere in the world, whether caused by a natural disaster or arising for reasons of politics or economics, they are prepared to extend a helping hand. In many such past instances, the federal government has indicated that it will augment the generosity of Canadians by matching donations which are made.

Time and again, Canadians have shown that where there is a humanitarian crisis anywhere in the world, whether caused by a natural disaster or arising for reasons of politics or economics, they are prepared to extend a helping hand. In many such past instances, the federal government has indicated that it will augment the generosity of Canadians by matching donations which are made.

The refugee crisis now taking place in Europe is no exception. The federal government recently announced the creation of the Syria Emergency Relief Fund, and its plans to match funds donated by Canadians for refugee relief. For every eligible dollar donated by individual Canadians to registered Canadian charities for the purpose of refugee relief, Canada will set aside one dollar for that Fund.  The Government’s contribution to the Fund will provide assistance through international and Canadian humanitarian organizations to meet humanitarian needs such as shelter, food, health, and water, as well as protection and emergency education. The maximum amount which the federal government will contribute to the Fund is $100 million.

The federal government has set certain parameters or criteria which donations must fulfill in order to qualify for the matching program. In order to qualify, donations from individual Canadians may not exceed $100,000 per individual and must be:

•          monetary in nature ( i.e., not donations of goods or services);
•          made to a registered Canadian charity that is receiving donations in response to the Syria crisis;
•          specifically earmarked for response to the Syria crisis;
•          made between September 12 and December 31, 2015; and
•          used by the registered charity receiving the donation in support of the humanitarian response to the impact of the Syria crisis.

Once a donation is made, the registered charity which receives it has until January 15, 2016 to make a declaration of that donation to the Department of Foreign Affairs, Trade and Development Canada.

Donations from a fundraising event undertaken to raise money from individuals in response to the Syria crisis can also be eligible for matching. This fundraising may be undertaken by schools, faith-based organizations, clubs, social groups, businesses, incorporated entities, or charitable organizations. There are, however, specific criteria which must be met, in order to qualify for matching. As stated on the federal government website, any donations made by corporations, governments, businesses, partnerships, schools, incorporated or non-incorporated entities, and unions from their existing resources that were not raised from individuals specifically in response to the Syria crisis are not eligible to be matched. In addition, donations to augment the amount originally raised from individuals through a fundraising activity or event are not eligible to be matched. The federal government has provided detailed information on how to make a qualifying donation, and that information can be found at www.international.gc.ca/development-developpement/humanitarian_response-situations_crises/how_to_syria-syrie_comment.aspx?lang=eng.

In the rush to help, the need to ensure that donations are made in a way that will most benefit those who need that help can sometimes be overlooked. As well, it’s an unfortunate fact that disasters sometimes bring out the worst as well as the best in people. In any such situation, a number of “instant” charities tend to spring up and begin soliciting donations for aid. Some of them are honest and well-intentioned, and others are not. However, no matter how good their intentions, if they are not already registered charities, then any donations made to them will not qualify, either for the usual charitable donations tax credit, or for any matching funds which the government of Canada has promised to provide. As well, it’s not likely that such an “instant” charity will have the resources or the infrastructure required to provide help on the scale needed by victims of the current refugee crisis.

With that in mind, there are a number of resources available to Canadians who want to ensure that they are making their charitable donations in the most effective way possible. The CRA maintains a current listing of registered charities (remembering that only donations to registered charities will qualify for the matching funds) on its website at www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html. Would-be donors can also obtain information about a charity’s current registration status by calling the CRA toll-free at 1-800-267-2384.

Canadians who donate to a registered charity for refugee relief will also be able to claim a non-refundable charitable donations tax credit. The federal credit claimable is a two-level one. A 15% credit is available for the first $200 in donations, and donations over the $200 threshold are eligible for a 29% credit. Similar credits, in varying amounts, are provided by the provinces and territories.

For most Canadians, having to pay for legal services is an infrequent occurrence, and most of us would like to keep it that way. In most instances, the need to seek out and obtain legal services (and to pay for them) is associated with life’s more unwelcome occurrences—a divorce, a death, or a job loss. About the only thing that mitigates the pain of paying legal fees (aside, hopefully, from a successful resolution of the problem that created the need for legal advice) would be being able to claim a tax credit or deduction for the fees paid.

For most Canadians, having to pay for legal services is an infrequent occurrence, and most of us would like to keep it that way. In most instances, the need to seek out and obtain legal services (and to pay for them) is associated with life’s more unwelcome occurrences—a divorce, a death, or a job loss. About the only thing that mitigates the pain of paying legal fees (aside, hopefully, from a successful resolution of the problem that created the need for legal advice) would be being able to claim a tax credit or deduction for the fees paid.

Unfortunately, while there are some circumstances in which such a deduction can be claimed, those circumstances don’t usually include the routine reasons—purchasing a home, getting a divorce, or establishing custody rights—for which most Canadians incur legal fees. Generally, personal (as distinct from business-related) legal fees become deductible for most Canadian taxpayers only where they are seeking to recover amounts which they believe are owed to them, particularly where those amounts involve employment or employment-related income or, in some cases, family support obligations.

The first situation in which legal fees paid may be deductible is that of an employee seeking to collect (or to establish a right to collect) salary or wages. In all Canadian provinces and territories, employment standards laws provide that an employee who is about to lose his or her job (for reasons not involving fault on the part of the employee) is entitled to receive a specified amount of notice, or salary or wages equivalent to such notice. In many cases, however, the employee can establish a right to a period of notice (or payment in lieu) greater than the statutory minimum. The amount of notice or payment in lieu of notice which is payable becomes a matter of negotiation between the employer and its former employee, and such negotiations usually involve legal representation and consequently, legal fees. In that situation, legal fees incurred by the employee to claim amounts owed to him or her by the employer are deductible by that former employee. If, as sometimes occurs, the matter goes to court and the court orders the employer to reimburse its former employee for some or all of the legal fees incurred, the amount of that reimbursement must be subtracted from any deduction claimed. In other words, the former employee can claim a deduction only for legal fees which he or she was personally required to pay and for which he or she was not reimbursed.

In some situations, an employee or former employee seeks legal help in order to collect or to establish a right to collect a retiring allowance or pension benefits. In such situations, the legal fees incurred can be deducted, up to the total amount of the retiring allowance or pension income actually received for that year. Where part of the retiring allowance or pension benefits received in a particular year is contributed to a registered retirement savings plan or a registered pension plan, the amount contributed must be subtracted from the total amount received when calculating the maximum allowable deduction for legal fees. However, where all legal fees incurred can’t be claimed in the current year, they can be carried forward and claimed on the return for any of the 7 subsequent tax years.

The rules covering the deduction of legal fees incurred where an employee claims amounts from an employer or former employer are relatively straightforward. The same, unfortunately, cannot be said for the rules governing the deductibility of legal fees paid in connection with family support obligations. Those rules have evolved over the past number of years in a somewhat piecemeal fashion – the current “state of play” is as follows.

Legal fees incurred by either party in the course of negotiating a separation agreement or obtaining a divorce are not deductible. Such fees paid to establish child custody or visitation rights are similarly not deductible by either parent.

Where, however, one former spouse has the right to receive support payments from the other, there are circumstances in which legal fees paid in connection with that right are deductible. Specifically, legal fees paid for the following purposes will be deductible by the person receiving those support payments:

• collecting late support payments;
• establishing the amount of support payments from a current or former spouse or common-law partner;
• seeking an increase in support payments;
• seeking an order making child support amounts received non-taxable; or
• establishing the amount of support payments from the legal parent of that person’s child (who is not a current or former spouse or common-law partner). However, in these circumstances the deduction is allowed only where the support is payable under a court order, not simply under the terms of an agreement between the parties.

On the other side of the support equation, the situation is not nearly as favourable, since a deduction for legal fees incurred in relation to support obligations will generally not be allowed to a person paying support. More specifically, as outlined on the Canada Revenue Agency (CRA) website, a person paying support cannot claim legal fees incurred in order to “establish, negotiate or contest the amount of support payments”.

Finally, where the CRA reviews or challenges income amounts, deductions or credits reported or claimed by a taxpayer, fees (which in this case includes accounting fees) paid for advice or assistance in dealing with the CRA’s review, assessment, or reassessment can be deducted by the taxpayer.

The current election campaign has once again focused the attention of Canadians, especially the baby boomers, on changes announced in 2012 to Canada’s retirement income system. One of the results of those changes is that Canadians aged 65 and over can, as of July 1, 2013, choose to defer receipt of their Old Age Security (OAS) benefits. What’s more difficult is deciding, on an individual basis, whether it makes sense to defer receipt of those benefits and, if so, for how long.

The current election campaign has once again focused the attention of Canadians, especially the baby boomers, on changes announced in 2012 to Canada’s retirement income system. One of the results of those changes is that Canadians aged 65 and over can, as of July 1, 2013, choose to defer receipt of their Old Age Security (OAS) benefits. What’s more difficult is deciding, on an individual basis, whether it makes sense to defer receipt of those benefits and, if so, for how long.

To make sense of the change, and to help with the decision, a bit of background is helpful. The OAS program is one of two federal government programs which provide income to Canadians during retirement, the other such program being the Canada Pension Plan (CPP). While the CPP is funded by contributions made by Canadians and their employers during the working lives of those Canadians, the OAS is a non-contributory plan, for which benefits are paid out of general revenues of the federal government. Eligibility for OAS benefits is based on an individual’s age and number of years of Canadian residence. Anyone who is 65 years of age or older and has lived in Canada for at least 40 years after the age of 18 is eligible to receive the maximum benefit. As of September 2015, that maximum monthly benefit is $565.

Following the changes announced in 2012, Canadians eligible to receive OAS benefits would be able to defer receipt of those benefits for up to five years, until they turn 70 years of age. For each month that an individual Canadian deferred receipt of those benefits, the amount of benefit eventually received would increase by0.6%.The longer the period of deferral, the greater the amount of monthly benefit eventually received. Where receipt of OAS benefits is deferred for a full 5 years, until age 70, the monthly benefit received is increased by 36%.

 The decision of whether to defer receipt of OAS benefits and for how long is very much an individual one—there really aren’t any “one size fits all” rules. There are, however, some general considerations which are common to most taxpayers. Essentially, the first consideration in determining when to begin receiving OAS benefits requires the taxpayer who is turning 65 to consider how much total income is needed to finance current needs and the extent to which other sources of income are available to him or her to meet those needs. It’s also necessary to determine what other sources of income (Canada Pension Plan retirement benefits, employer-sponsored pension plan benefits, required RRSP withdrawals) will become available in the future and when receipt of those income amounts will commence. Once income needs and sources and the possible timing of each is clear, it’s necessary to consider the income tax implications of how receipt of those sources of income is structured. In doing so, taxpayers need to be aware of the following income tax thresholds and cut-offs.

•   Income in the first federal tax bracket is taxed at 15%, while income in the second bracket is taxed at 22%. For 2015, that second income tax bracket begins at taxable income of $44,701.
•   The Canadian tax system provides (for 2015) a non-refundable tax credit of $7,033 for taxpayers who are over the age of 65 at the end of the tax year. That amount of that credit is reduced once the taxpayer’s net income for the year exceeds $35,466, and disappears entirely for taxpayers with net income over $82,353.
•   Individuals can receive a GST/HST refundable tax credit, which is paid quarterly. For 2015, the full credit is payable to individual taxpayers whose net income is less than $35,465.
•   Taxpayers who receive Old Age Security benefits and have income of more than at income) are required to repay a portion of those benefits. Benefits begin to be “clawed back” when taxpayer income for 2015 is more than $72,809. Taxpayers having income of over $117,954 are not eligible for OAS and must repay any OAS benefits received.

The goal, as always, is to ensure sufficient income to finance a comfortable lifestyle while at the same time minimizing both the tax bite and the potential loss of tax credits or the need to repay benefits received. Taxpayers who are trying to decide when to begin receiving OAS benefits could, depending on their circumstances, be affected by one or more of the following considerations.

What other sources of income are currently available?

More and more, Canadians are not automatically leaving the work force at the age of 65. Those who continue to work at paid employment and whose employment income is sufficient to finance their chosen lifestyle may well prefer to defer receipt of OAS. Similarly, a taxpayer who begins receiving benefits from an employer’s pension plan when he or she turns 65 may be able to postpone receipt of OAS benefits.

Is the taxpayer eligible for Canada Pension Plan retirement benefits, and at what age will those benefits commence?

Nearly all Canadians who were employed or self-employed after the age of 18 paid into the Canada Pension Plan and are eligible to receive CPP retirement benefits. While such retirement benefits can be received as early as age 60, receipt can also be deferred until the age of 70. As is now the case with OAS benefits, CPP retirement benefits increase with each month that receipt of those benefits is deferred. Taxpayers who are eligible for both OAS and CPP will need to consider the impact of accelerating or deferring the receipt of each benefit in structuring retirement income.

Does the taxpayer have private retirement savings through an RRSP?

Taxpayers who were not members of an employer-sponsored pension plan during their working lives generally save for retirement through a registered retirement savings plan (RRSP). While taxpayers can choose to withdraw amounts from such plans at any age, they are required to collapse their RRSPs by the end of the year in which they turn 71, and to begin receiving income from those savings. There are a number of options available for structuring that income, and, whatever the option chosen (usually, converting the RRSP into a registered retirement income fund or RRIF, or purchasing an annuity) will mean that the taxpayer will begin receiving income amounts from those RRSP funds in the following year. Taxpayers who have significant retirement savings in RRSPs should, in determining when to begin receiving OAS benefits, consider that they will have an additional (taxable) income amount for each year after they turn 71.

Finally, not all of the factors in deciding how to structure retirement income are based on purely financial and tax considerations. There are other, more personal issues and choices which come into play, including the state of one’s health at age 65 and the consequent implications for longevity, which might argue for accelerating receipt of any available income. Conversely, individuals who have a family history of longevity and who plan to continue working for as long as they can may be better off deferring receipt of retirement income where such deferral is possible.

Many Canadians put off plans, like a desire to travel, until their retirement years. Realistically, from a health standpoint, such plans are more likely to be possible earlier rather than later in retirement. Generally speaking, the early years of retirement are the most active years, and the years in which expenses for activities are likely to be highest. Having such plans might argue for accelerating income into the early retirement years, when it can be used to make those plans possible.

The ability to defer receipt of OAS benefits does provide Canadians with more flexibility when it comes to structuring retirement income. The price of that flexibility is increased complexity, particularly where, as is the case for most retirees, multiple sources of income and the timing of each of those income sources must be considered, and none of them can be considered in isolation from the others.

 Individuals who are facing that decision-making process will find some assistance on the Service Canada website. That website provides a Retirement Income Calculator, which, based on information input by the user, will calculate the amount of OAS which would be payable at different ages. The calculator will also determine, based on current RRSP savings, the monthly income amount which those RRSP funds can provide during retirement. Finally, taxpayers who have a Canada Pension Plan Statement of Contributions which outlines their CPP entitlement at age 65 will be able to determine the monthly benefit which would be payable where CPP retirement benefits commence at different ages between 60 and 70.

The Retirement Income Calculator can be found at http://www.servicecanada.gc.ca/eng/isp/common/cricinfo.shtml.

A number of circumstances and developments have come together to make working from home an attractive prospect for both employers and employees. Soaring house prices in major Canadian cities have driven those who work in those cities further and further afield in the search for affordable housing. Consequently, there are increasing numbers of Canadians who must travel into a major urban centre for work each day, putting already crowded highways and city streets into near-gridlock much of the time. And the summer of 2015 has been more difficult than most for commuters. In addition to the usual delays caused by the summer construction schedule, special events held in major cities have closed or narrowed the usual commuter routes. Any commuter spending hours a day just trying to get to and from work might well wonder whether it’s worth it.

A number of circumstances and developments have come together to make working from home an attractive prospect for both employers and employees. Soaring house prices in major Canadian cities have driven those who work in those cities further and further afield in the search for affordable housing. Consequently, there are increasing numbers of Canadians who must travel into a major urban centre for work each day, putting already crowded highways and city streets into near-gridlock much of the time. And the summer of 2015 has been more difficult than most for commuters. In addition to the usual delays caused by the summer construction schedule, special events held in major cities have closed or narrowed the usual commuter routes. Any commuter spending hours a day just trying to get to and from work might well wonder whether it’s worth it.

Allowing employees to work from home, at least part of the time, has direct and indirect benefits to employers, too. The ability to work from home is a prized employment “perk” for many Canadians, especially those with young families. Employers who have workplace policies which allow their employees to maintain a healthier work/life balance are more likely to retain those employees. And, having employees work from home on a regular basis raises the possibility of alternatives to traditional office arrangements, meaning that the employer can get by with leasing less expensive downtown office space.

It’s also now a fact of life that there is no longer any technological barrier to working from home. Changes in technology, particularly communications technology, over the past quarter century have enable the home-based worker to have access to all of the information and services available to his or her in-office counterpart

Along with the greater availability of work-from-home arrangements for employees, there has been a significant increase in the number of self-employed Canadians. And while not all of the self-employed work from home, it’s fairly common for those venturing into the world of self-employment for the first time to save costs by operating their business, at least initially, out of a home office.

While for most employees just the prospect of avoiding the commute one or more days a week would be enough to make a work-from-home arrangement attractive, the fact is that there are also tax benefits to be realized. While those benefits are not necessarily as generous as is popularly believed, it is the case that working from home can make costs which would be incurred in any event deductible for tax purposes.

As is usually the case in tax matters, the rules differ for employed taxpayers and for the self-employed, as the latter enjoy a greater degree of latitude in the deductions which may be claimed. That said, both the employed and the self-employed must meet the same basic two-part test in order to be eligible to deduct home office expenses, and that test is as follows:

• the home office must be the place at which the taxpayer principally (defined by the Canada Revenue Agency (CRA) as more than 50% of the time) performs the duties of employment or must be the taxpayer’s principal place of business; or 

• the home office must be both used exclusively for the purpose of earning income from employment or from the business and must be used on a regular and continuing basis for meeting customers or clients of the employer or the business.

A self-employed taxpayer who meets these criteria is entitled to claim (on Form T2125(E), Statement of Business Activities) expenses such as property taxes, rent, or mortgage interest (but not mortgage principal amounts), insurance, utilities costs, etc. However, such expenses are not deductible in their entirety; rather, the taxpayer must apportion the expenses based on the percentage of the total space which is used as a home office. For example, a self-employed taxpayer whose home office takes up 15% of available floor space and who incurs $2,000 each year in qualifying expenses would be entitled to deduct $300 ($2,000 × 15%) in home office expenses for that year. There is one further caveat, in that the amount of home office expenses claimed in a year cannot be greater than the amount of income from the business. It’s not, in other words, possible to run a business which produces $5,000 in income for the year and to then claim $10,000 in home office expenses relating to that business. However, where home office expenses exceed business income in any given year, the excess expenses can be carried over and claimed in a subsequent year in which there is sufficient business income to offset those expenses.

Employed taxpayers who meet the two-part test set out above must meet a further condition before being eligible to claim home office expenses, as follows:

• the employer must provide the employee with a Form T2200, which indicates that the employee is required by his or her contract of employment to provide and pay for the expenses related to the home office;
• the employee must not have been reimbursed by the employer for such expenses; and
• the expenses must have been used directly in the employee’s work at home.

Once the T2200 has been issued, and the other conditions are met, an employee who is a tenant can claim a proportionate part of his or her rent. An employee who owns his or her own home can claim a proportionate percentage of utilities and maintenance costs. An employee is not, however, entitled to claim any portion of mortgage interest, property taxes or home insurance costs paid and cannot claim capital cost allowance.

As is the case with self-employed taxpayers, an employee’s deduction for home office expenses cannot be greater than the income from employment income for the year to which the expenses relate. And, once again, carryover to a subsequent taxation year is allowed.

One of the tax benefits which is commonly supposed to exist for the home office workers is the right to claim depreciation (or capital cost allowance (CCA), in tax parlance) on one’s home for tax purposes. For employees, however, such a claim is simply not allowed. And, while the self-employed may be entitled to claim CCA on a home, making such a claim can create a short-term benefit with long-term costs. Making a CCA claim on one’s home is likely to erode the principal residence exemption from capital gains tax which is claimable when a home is sold, and that exemption is almost always more valuable, in monetary and tax terms, than any CCA claim which might have been made.

Being able to claim home office expenses doesn’t result in the huge tax benefits that some popular tax myths claim. However, it can and does permit qualifying taxpayers to claim a portion of home ownership (or rental) expenses which would have been incurred in any case, while also avoiding the dreaded daily commute, making it a win-win situation.

By this time of the year, most Canadian taxpayers have filed their returns for 2014 and received a Notice of Assessment with respect to those returns. Many will have received a refund, while others have received the unwelcome news that money is owed to the Canada Revenue Agency (CRA) and have paid up, however unwillingly.

By this time of the year, most Canadian taxpayers have filed their returns for 2014 and received a Notice of Assessment with respect to those returns. Many will have received a refund, while others have received the unwelcome news that money is owed to the Canada Revenue Agency (CRA) and have paid up, however unwillingly.

Although most Canadians do file their returns and pay their taxes on time (90%, according to CRA figures), a significant minority of taxpayers have not yet filed a return for 2014, either out of procrastination or because they believe they owe taxes and don’t have funds available to pay those taxes.

For those who have still not filed for 2014, the best strategy is to file as soon as possible. No matter what one’s tax situation, it won’t be helped by not filing a return. In fact, where taxes are owed, there is an automatic penalty imposed for failure to file on time—even if the return is only one day late. The tax filing deadline for most individuals is April 30 (extended by a few days this year because of an administrative error on the part of the CRA), while self-employed taxpayers and their spouses are required to file on or before June 15. No matter which filing deadline applies, a taxpayer who fails to file by that deadline is assessed an immediate penalty of 5% of the tax amount owing. So a taxpayer who owes $1000 in taxes and doesn’t file on time will have a penalty of $50 added to his or her bill the day after the filing deadline. As well, on ongoing penalty of 1% of the taxes owed is assessed for each full month the return is late, to a maximum of 12 months. A taxpayer who doesn’t get his or her return in during that 12-month period will therefore be assessed a penalty of 17% of the amount of tax owed—in this case, $170.

The news is worse for taxpayers who have a recent history of not filing on time. Where the CRA has assessed a late-filing penalty within the past three years, and the taxpayer fails to file on time for 2014, the failure to file penalty is increased to 10% of any taxes owed for 2014, plus 2% of that amount for each full month the return is late, to a maximum of 20 months. A bit of arithmetic will show that in a worst-case scenario, the late-filing penalty imposed can be as much as 50% of the taxes owed—in this case, $500. Clearly, any taxpayer who hasn’t yet filed his or her tax return for 2014 and owes taxes for that year is well-advised to file as soon as possible, to stop the accumulation of late-filing penalties.

While paying tax penalties isn’t anyone’s idea of a good use of their money, it’s not the end of the story. The CRA charges interest on any taxes owed, starting the day after payment was due—April 30, 2015, for all individual taxpayers. Although interest rates remain near historic lows, the CRA, by law, charges interest at levels higher than normal commercial rates. The interest rate charged by the CRA on overdue or insufficient tax payments is set quarterly. For each quarter, the interest rate charged on taxes owing is equal to the average treasury bill rate in effect during the first month of the previous quarter, plus four percent. For the third quarter of 2015, therefore, covering the months of July, August and September, the interest rate charged on taxes owing is 5%.

While that 5% rate is still lower by far than, for instance, the interest rate charged on most credit card balances or even lines of credit, it is the interest calculation method used by the Agency which can really inflate the interest cost of having tax debts. Where an amount is owed to the CRA, interest charged on that amount is compounded daily, meaning that on each successive day, interest is being levied on the interest charged the day before. Not surprisingly, interest costs calculated in that way can add up quickly.

Perhaps contrary to popular belief, the CRA does have some flexibility. When the amount of taxes owing can’t be paid, or can’t be paid in full, it’s in the taxpayer’s best interests to contact the CRA and let them know of that fact. Not surprisingly, the CRA tries to make it easy for taxpayers to contact them to make such arrangements by providing a toll-free telephone line (1-888-863-8657). The taxpayer can propose a payment schedule based on his or her ability to pay, and the CRA, if satisfied that the inability to pay is genuine, will generally be amenable to entering into some type of payment arrangement. Entering into such a payment arrangement does not, of course, stop the interest clock from running, as interest will continue to be assessed at the current rate, and compounded daily.

One final blow: neither interest paid on tax debts nor penalties paid to the CRA are deductible from income. 

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues.

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues. They can be accessed below.

Corporate:

Issue #33 Corporate

Personal:

Issue #33 Personal

This month, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA). That mail will contain an unfamiliar form—a 2015 Instalment Reminder. On that form, the CRA suggests to the recipient that he or she should make instalment payments of income tax on September 15 and December 15 2015, and will identify the amount which should be paid on each date.

This month, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA). That mail will contain an unfamiliar form—a 2015 Instalment Reminder. On that form, the CRA suggests to the recipient that he or she should make instalment payments of income tax on September 15 and December 15 2015, and will identify the amount which should be paid on each date.

Unexpected correspondence from the tax authorities is always unsettling, and correspondence which suggests that the recipient owes money to the government even more so. Someone who has never before received an instalment reminder (or, quite possibly, doesn’t even know what a tax instalment is) and who receives mail from the CRA suggesting that tax monies are owed might well be both surprised and worried. The fact is, however, tax instalments are just another way of paying tax throughout the year, rather than when the tax return for that year is filed.

The reason that most Canadians are unfamiliar with instalment payments of tax is that most of them work as employees throughout their working lives and income tax is automatically deducted from their pay “at source”. Their employer deducts an amount for income tax from their gross pay, before any paycheque is issued, and remits that amount to the CRA on their behalf. When the individual files a tax return the following spring, he or she is credited with those tax payments which were remitted to the CRA on his or her behalf throughout the year. However, for those who are self-employed or, frequently, those who are retired, no such deduction is automatically made from their income, and the issuance of an Instalment Reminder by the CRA may be the result.

Canadian tax rules provide that where the amount of tax owed when a return is filed by a taxpayer is more than $3,000 ($1,800 for Quebec residents) in the current year and either of the two previous years, that taxpayer may be required to pay income tax by instalments.

The reason that first instalment reminders are issued in August has to do with the schedule on which Canadians file their tax returns. The figure for the immediate prior year can’t be known until the tax return for that year has been received and assessed by the CRA. The tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer should receive a first instalment reminder. In many cases, a first instalment reminder is triggered where an individual has retired within the past two years.

Take, for instance, the example of an individual who retired at the end of 2013 from employment in which tax deductions were automatically taken from his or her paycheque. Beginning January 1, 2014, that individual’s sources of income changed from employment income to Canada Pension Plan and Old Age Security benefits, and monthly withdrawals from an RRSP or RRIF, or pension payments from the former employer. In order for the amounts withheld from such income to match the taxpayer’s actually tax liability for the year, the taxpayer would have to have calculated the amount of that tax liability and made arrangements for withholdings to be made from one or more of the three or four income sources, to total that overall tax liability amount. For most taxpayers, that’s not a very likely scenario. Consequently, it would be almost inevitable that correct withholdings would not be made and that tax of more than $3,000 would be owed when the 2014 tax return was filed. Where the taxpayer’s income levels and withholding amounts are unchanged for 2015, and it is expected that once again, more than $3,000 will be owed on filing the 2015 return, the criteria for the instalment requirement would be met, and a first tax instalment reminder would be issued for the taxpayer in August 2015, after the 2014 return is assessed.

There is a reason that the form received by taxpayers is entitled Instalment Reminder, as those who receive it are not actually required to make instalment payments of tax. There are, in fact, three options open to the taxpayer who receives an Instalment Reminder, each with its own benefits and risks.

First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of September 15 and December 15. A taxpayer who does so can be certain that he or she will not face any interest or penalty charges. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2015, he or she will of course receive a refund on filing.

Second, the taxpayer can make instalment payments based on the total amount of tax which was paid for the 2014 tax year. Where a taxpayer’s income has not changed between 2014 and 2015 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2015 will be the same or slightly less than it was in 2014, owing to the indexation of tax brackets and tax credit amounts. A taxpayer who chooses this option should pay 75% of the total amount owed in September 2015 and the remaining 25% in December 2015.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2015 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2014 to 2015 and there will consequently be a reduction in tax payable, this option may be worth considering. Taxpayers who wish to pursue this approach can use the tax instalment calculation tool available on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/pymnts/nstlmnts/Instalment_chart_fill-15e.pdf, or can obtain information on federal and provincial tax rates and brackets for 2015 on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html. And, once again, taxpayers who choose this option should pay 75% of the total amount owed in September 2015 and the remaining 25% in December 2015.

Many taxpayers who receive an Instalment Reminder are less than pleased about the fact that they are being asked to, as they see it, pay their taxes “early”. However, the reality is that most of them have been paying income taxes “early” throughout their working lives, by means of source deductions. Source deductions are, however, more or less invisible to the taxpayer, as they are taken before any paycheque is issued, and actually writing a cheque or making an e-payment to the CRA for taxes feels much different.

While no one actually likes paying taxes, by any method, making tax payments by instalments can actually help taxpayers, particularly those who are juggling multiple income sources for the first time, with budgeting and managing cash flow. Because most Canadians don’t have to think about setting money aside for income taxes during their working lives, they don’t always include them (or include them in sufficient amounts) when planning a budget when they first retire. There are few financial surprises more unwelcome than finding out that a large amount is owed when the tax return for the year is filed. For most, it’s an annoyance and an aggravation. For those who live on a fixed income, however, being faced with a significant bill for taxes owed on filing can create real financial hardship. Receiving an Instalment Reminder serves to give notice that if taxes are not being withheld from income amounts paid to the taxpayer throughout the year it is necessary to make some provision for those taxes, in order to avoid having to come up with the entire amount when the return for the year is filed the following spring. 

Earlier this year, it was announced that the annual contribution limit to tax-free savings accounts (TFSAs) would be nearly doubled, increasing from $5,500 to $10,000, and that that increase would be effective for the 2015 and subsequent tax years.

Earlier this year, it was announced that the annual contribution limit to tax-free savings accounts (TFSAs) would be nearly doubled, increasing from $5,500 to $10,000, and that that increase would be effective for the 2015 and subsequent tax years.

When TFSAs were first introduced by the federal government in 2009, the annual contribution limit was $5,000. That limit stayed in place for four years before increasing to $5,500 for the 2013 and 2014 tax years. The latest increase, to $10,000, means that the total lifetime TFSA contribution limit now stands at $41,000 per taxpayer.

While Canadians have embraced TFSAs as a general savings and retirement savings vehicle, there has always been a degree of confusion about the rules governing TFSAs. That confusion usually arises because the TFSA is the only tax-sheltered savings plan which has the flexibility to permit planholders to withdraw funds from the plan and later replace them.

While the rules governing TFSAs can be complex, the basic rules are these: the TFSA program allows taxpayers to put up to $10,000 per year (as of 2015) into a TFSA. No tax deduction is permitted for any contribution made, but interest or any other kind of investment income earned by the funds held in a TFSA is not taxed as it is earned. Withdrawals can be made from a TFSA at any time, for any purpose, and funds withdrawn (including interest or other investment income earned) are not taxable. In addition, where funds are withdrawn from a TFSA, the amount of that withdrawal is added to the taxpayer’s TFSA limit for the following year. So, for instance, a taxpayer who withdraws $5000 from his or her TFSA in 2015 will be able to contribute up $15,000 to that TFSA in 2016. That $15,000 is made up of the 2016 current year contribution limit of $10,000 and $5,000 in contribution limit created by the withdrawal made in 2015 and carried forward to 2016.

With the TFSA system having been in place now for nearly 7 years, and especially with this year’s contribution limit increase, the total amount of possible contributions is becoming significant, as is the complexity of tracking contributions, withdrawals, and re-contributions made over the past several years. Many taxpayers contribute small or medium-sized amounts to their TFSA throughout the year, as those amounts become available—a tax refund, an employment bonus, or regular federal or provincial tax credit payments all frequently make their way into TFSAs. Other taxpayers set up a system in which amounts are transferred from a chequing or savings account to a TFSA on a regular basis. Some taxpayers do both. As well, it’s not at all uncommon for taxpayers to hold TFSAs at several different financial institutions, as those financial institutions compete for TFSA business by offering “incentive” rates of return in marketing campaigns. However, no matter how many TFSA accounts an individual has, his or her overall contribution limit for the year doesn’t change.

Making regular and irregular contributions to a TFSA, having multiple TFSA accounts at different financial institutions and making withdrawals from a TFSA can make it very difficult to determine where one stands in relation to one’s annual contribution limit at any given time. As well, relatively few taxpayers give much thought to that question, and even fewer know how to determine whether they are, in fact, “offside” with the contribution limit rules. However, there is an immediate cost for exceeding one’s limit, as a penalty of 1% per month or part-month is assessed for over-contributions. All of that means that, like any tax or financial planning strategy, TFSAs require regular monitoring, and right now, just over half-way through the current tax year, is a good time to carry out that “check-up”.

The first step in doing a TFSA “check-up” is determining one’s current year contribution limit. The Canada Revenue Agency (CRA) used to provide that information on each taxpayer’s Notice of Assessment, but that is no longer the case. As well, the CRA has discontinued its online Quick Access service, which used to provide that information. For those who have previously registered for the service, information on one’s 2015 TFSA contribution limit is available through the CRA’s My Account service at www.cra-arc.gc.ca/myaccount/). The CRA also offers a mobile app called “MyCRA” (available at www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/pss_fq/cnd-eng.html#hlp1), where the same information can be obtained. While both services give the taxpayer access to useful personal tax information, including one’s current year TFSA contribution limit, some set-up is required for both.

Taxpayers who don’t want to register for either of those services or who simply want information about their TFSA contribution limit more quickly can call the automated Tax Information Phone Service (TIPS) line at 1-800-267-6999. Those who would rather speak to a live person can call the CRA’s individual income tax enquiries line at 1-800-959-8281. In either case, the taxpayer should have last year’s tax return available to them before calling, as they will be asked to provide personal identifying information to satisfy the CRA’s security requirements—at a minimum, their social insurance number, date of birth, and the amount entered on line 150 of the tax return for 2014.

Once the 2015 contribution limit is known, it’s time to figure out just how much has been contributed to a TFSA during 2015, by checking the year’s total contributions from all sources to date against total contribution room for the year. Where that check shows that the taxpayer is already in an over-contribution position the best course of action is to immediately transfer funds out of the TFSA to another (non-TFSA) account. Penalties payable for over-contributions to a TFSA are calculated based on the highest excess TFSA amount in each month. While a penalty will still be assessed for all months in which the taxpayer was in an over-contribution position (even if the excess contribution position only existed for as little as one day in the particular month), withdrawing or transferring any excess amounts before the end of the current month will avoid the imposition of further penalties.

If a comparison of the contribution limit for the year to contributions to date show that there is still contribution room left for 2015, the next step would be to total up any scheduled automatic transfers which will take place during the rest of 2015 and make sure that they will not, when added to contributions that have already been made since January 1, push total contributions for the year over the allowable limit. If they will, then it’s time to make a change to the transfer schedule or transfer amounts to keep contributions within the year’s maximum allowable contribution limit.

Where there is contribution room still available for 2015, but no contributions are scheduled or anticipated, it may be time to re-think that plan. Even where one’s circumstances don’t permit the contribution of large amounts, every dollar currently sitting in other accounts which is transferred to a TFSA means less tax paid on interest or other investment income earned on those dollars. In most circumstances, there’s really no good reason not to use a TFSA to hold funds which are not needed to meet current expenses, or which are already being set aside for relatively short-term financial goal—perhaps the purchase of a new car, or next year’s vacation. The rate of interest currently being paid on bank account balances is miniscule, and perhaps the only thing worse than receiving such meager returns is losing up to half of those already small interest amounts to income tax, when that result can be easily avoided. Having one’s financial institution transfer any “excess” funds from other accounts into a TFSA will remove the tax hit on any interest or other investment income earned on those funds. And, if a need for the funds arises unexpectedly, a tax-free withdrawal of some or all of the funds in the TFSA can always be made.

After getting off to a slow start, TFSAs have become a standard part of financial and tax planning of most Canadian taxpayers, as there is no other savings vehicle which provides the TFSA’s combination of tax benefits and flexibility. Using TFSAs to the fullest extent possible, while taking care not to violate the TFSA over-contribution rules, is a win-win combination for most taxpayers.

This summer, millions of Canadians have been affected by a series of disasters ranging from forest fires to droughts and other kinds of severe weather, and many of those Canadians have been temporarily displaced from their homes and businesses as a result.

This summer, millions of Canadians have been affected by a series of disasters ranging from forest fires to droughts and other kinds of severe weather, and many of those Canadians have been temporarily displaced from their homes and businesses as a result.

For anyone facing circumstances which threaten their economic or physical well-being, dealing with tax obligations is, understandably, far down the list of priorities. And, while those tax obligations won’t just go away, the tax authorities can and will ensure that such individuals are not unfairly penalized when they can’t, as a result of the aforementioned disasters, meet those obligations on a timely basis.

The Canada Revenue Agency’s (CRA) ability to provide relief to taxpayers in such circumstances arises from the Agency’s Taxpayer Relief Program. That program allows the Minister to waive or cancel any interest or penalty charges that would be imposed as a consequence of the taxpayer’s failure to meet his or her tax obligations, where that failure was caused by events or circumstances outside the taxpayer’s control. While most such applications are the result of natural disasters, administrative relief can also be provided where the taxpayer is suffering from significant financial hardship. Whatever the reason for the application, it’s important to note that only interest and penalty charges can be waived. The Minister has no authority, no matter how dire the circumstances, to waive the payment of actual taxes owed.

Since the filing deadline for 2014 returns by self-employed taxpayers fell on June 15, as did the due date for the second instalment payment of income taxes for 2015, most requests for relief filed as a result of this summer’s events will likely be requests to waive the imposition of interest or penalties related to late filings or late payments. There is a specific process by which such requests are to be made. The CRA issues a prescribed form—RC4288, Request for Taxpayer Relief, which can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/rc4288/rc4288-11e.pdf. While use of the form is not mandatory—a letter to the CRA will suffice—using the prescribed form will ensure that all of the information needed by the Agency to make a decision on the request for relief is provided. For each such request, that information includes:

• the taxpayer’s name, address, and telephone number;
• the taxpayer’s social insurance number (SIN), account number, partnership number, trust account number, business number (BN), or any other identification number assigned to the taxpayer by the CRA;
• the tax year(s) or fiscal period(s) involved;
• the facts and reasons supporting that the interest or penalty were mainly caused by factors beyond the taxpayer’s control;
• an explanation of how the circumstances affected the taxpayer’s ability to meet his or her tax obligations;
• the facts and reasons supporting the inability to pay the penalties or interest assessed or charged, or to be assessed or charged;
• any relevant documentation; and
• a complete history of events including any measures that have been taken, e.g., payments and payment arrangements, and when they were taken to resolve the non-compliance.

In addition, where the relief request is based on financial hardship, the taxpayer must provide full financial disclosure, including statements of income and expenses. All relief requests are to be sent to a particular Tax Processing Centre, depending on where the taxpayer lives. A listing of the addresses of all such centres is available on the CRA website at www.cra-arc.gc.ca/gncy/cmplntsdspts/sbmtrqst-eng.html, and the same information is included on Form RC4288. The request cannot be e-mailed, as the CRA does not communicate taxpayer-specific information by e-mail.

Each relief request is assigned to a CRA official, who may, if necessary, contact the taxpayer to obtain clarification of the information provided, or to seek additional information. In any case, a determination will be made of whether the taxpayer’s request for interest or penalty relief is to be approved in full, approved in part, or denied, based on the following considerations:

• the taxpayer’s history of compliance with his or her tax obligations;
• whether or not the taxpayer knowingly allowed an arrears balance to exist upon which arrears interest has accrued;
• whether or not the taxpayer exercised a reasonable amount of care in conducting his or her tax affairs, and whether or not negligence or carelessness has been demonstrated; and
• whether or not the taxpayer acted quickly to remedy any delay or omission.

The decision made will be communicated to the taxpayer, with reasons provided where the request is only partially approved, or is denied. At the same time, the taxpayer will be given information on the options available where the CRA has made a decision with which the taxpayer does not agree.

The Minister of National Revenue has issued a news release reminding Canadians affected by this summer’s wildfires of the availability of administrative tax relief, and that news release can be found on the CRA website at http://news.gc.ca/web/article-en.do?nid=1004599&tp=1.

In October 2014, the federal government announced a number of changes to tax and benefit programs affecting families with young children. One such change altered the Universal Child Care Benefit (UCCB) program, effective January 1, 2015, to increase the amount of that taxable benefit for families having children under the age of 6 and to create a new benefit for those with children aged 6 to 17. The first payment of the new or increased benefit was made in July, in the form of a lump sum payment representing the accrued benefits for the first half of 2015. Since then, this being an election year, there have been claims and counter-claims about the amount of the net benefit to Canadian families of the changes to the UCCB, and about the kind of tax planning families receiving that benefit need to undertake. The existing and new tax rules which determine the overall net benefit of the changes for Canadian families are as follows. 

In October 2014, the federal government announced a number of changes to tax and benefit programs affecting families with young children. One such change altered the Universal Child Care Benefit (UCCB) program, effective January 1, 2015, to increase the amount of that taxable benefit for families having children under the age of 6 and to create a new benefit for those with children aged 6 to 17. The first payment of the new or increased benefit was made in July, in the form of a lump sum payment representing the accrued benefits for the first half of 2015. Since then, this being an election year, there have been claims and counter-claims about the amount of the net benefit to Canadian families of the changes to the UCCB, and about the kind of tax planning families receiving that benefit need to undertake. The existing and new tax rules which determine the overall net benefit of the changes for Canadian families are as follows.

The changes themselves are straightforward. Formerly, Canadian families having a child or children under the age of 6 received $100 per child per month. There was no UCCB payable for children aged 6 and over. Following the changes, as of the 2015 tax year, parents of children under the age of 6 receive an additional $60 per month per child. As well, parents of children aged 6 to 17 will begin receiving a new benefit of $60 per child per month. So, in effect, all qualifying families that have children under the age of 18 will, beginning in 2015, receive an additional payment of $60 per child per month, or $720 per child per year.

Since the payments made in July represented accrued benefits from the beginning of the year, payment amounts could be substantial. It’s important, however, for recipients of those payments to realize and plan for the fact that there are significant tax considerations which will only become apparent next April, when filing the tax return for 2015.

The most significant of those tax considerations comes, ironically, from a change which was announced at the same time as the announcement of increases to the UCCB, but which has gotten much less attention. That change will increase the amount of federal taxes payable by every Canadian parent who was able to claim the federal child tax credit for one or more children in previous years.

The change is the cancellation of that federal child tax credit, effective for the 2015 and subsequent tax years. That child tax credit allowed a parent to make a claim, on his or her tax return for the year, for a tax credit of $338 for each child under the age of 18. Each such credit claimed reduced the parent’s overall tax bill for the year by $338. Since there will be no child tax credit claim allowed on the return for 2015, every Canadian parent who claimed that credit in previous years will, as a result, see their federal tax bill increase by $338. per child, or just under half of the annual per child increase in the UCCB.

The second consideration for parents receiving the increased UCCB is that all UCCB amounts received represent taxable income. So, for each child in respect of whom the enhanced UCCB is received, a parent’s taxable income for the year will increase by $720. The amount of tax which will be payable on that amount will differ, of course, depending on the income of the parent receiving the UCCB, and the province in which they live. It’s possible, however, to provide some general guidelines. For a middle income parent who has total income of between $40,000 and $80,000, the federal tax rate is 22%. Provincial or territorial tax at those income levels will be, on average, around 11%. Consequently, the total tax payable on the $720 per child increase in the UCCB for 2015 will be about 33%, or one-third of that amount, or $238.

The net result of all these calculations is that a middle income parent who receives the $60 per month ($720 per year) increase in the UCCB for 2015 will pay about an additional $238 in combined federal-provincial tax for the year on that increase. As well, such parents will see their federal income tax bill increase by $338 because they can no longer claim the child tax credit. Overall, parents who wish to set aside funds to cover both these upcoming tax liabilities will need to allocate about $576 per child to do so, leaving about $144 of the $720 per child increase received in per-child UCCB payments for 2015.

When a lump sum amount is received from the government, it’s tempting for parents to think of those funds as purely disposable income, especially with back-to-school spending on the horizon. The fact, however, is that there are real tax costs associated with the package of child benefit and child tax credit changes introduced this year. Parents who recognize and plan for those costs might well avoid an unpleasant tax surprise when they file their 2015 tax returns next spring.

While for elementary and secondary school students, the summer is just beginning, post-secondary students are already halfway through their summer break between school years. And, as summer starts winding down, these post-secondary students will start thinking about choosing courses and finding a place to live during the coming academic year. Their parents’ attention will more likely be focused on the cost of that year, and the upcoming deadlines for payment of first semester tuition and housing costs.

While for elementary and secondary school students, the summer is just beginning, post-secondary students are already halfway through their summer break between school years. And, as summer starts winding down, these post-secondary students will start thinking about choosing courses and finding a place to live during the coming academic year. Their parents’ attention will more likely be focused on the cost of that year, and the upcoming deadlines for payment of first semester tuition and housing costs.

Whether a student attends college or university, post-secondary education is expensive. Even those who cut costs as much as possible by living at home during their college or university years must still spend thousands of dollars on tuition fees and required textbooks. Where a student lives away from home, whether in residence or in rental housing off-campus, it’s realistic to budget between $15,000 and $20,000 annually for the combined cost of school and living expenses.

There are, fortunately, tax credits provided through our tax system to help offset some of the costs of post-secondary education. At the federal level, a non-refundable tax credit equal to 15% of qualifying costs can be claimed by the student. A parallel credit is claimable at the provincial or territorial level, with the available percentage credit varying, depending on the province or territory in which the student lives and files an income tax return.

There are, however, specific rules on the kinds of costs which qualify for such credit. Unfortunately, the largest cost incurred by post-secondary students each year—the cost of living in a student residence and purchasing a meal plan or the cost of renting off-campus and buying groceries—doesn’t qualify, as the student would have to have incurred costs for shelter and food in any case.

The good news, however, is that a non-refundable tax credit can be claimed for virtually all other education-related costs, including tuition, books, and most ancillary expenses (e.g., examination fees or mandatory computer service fees which are levied as part of a student’s tuition). And, where a student can’t make use of the full credit available, that credit can usually be transferred to, and claimed by, a spouse, parent, or grandparent.

After the cost of food and shelter, the largest expense faced by post-secondary students is the cost of tuition, which can range from $4,000 a year to over $15,000. No matter what the amount, students are entitled to a non-refundable federal tax credit equal to 15% of their tuition bill. A parallel provincial or territorial credit can also be claimed, with the percentage credit ranging, in 2015, from 4% to 11%.

Both full and part-time university students can also claim the “education tax credit”, which is calculated as a fixed amount for every month of full or part-time attendance during the tax year. For 2015, the full-time amount to be claimed on the federal tax return is $400 per month, while the part-time amount is $120 per month. The total amount claimed is then multiplied by 15% to arrive at the credit claimed on the federal tax return. As with the tuition tax credit, the provinces all offer an education tax credit, with both the amount and the conversion percentage varying by province.

The final “standard” deduction available to post-secondary students is the so-called “textbook amount”. The name is somewhat misleading, as neither eligibility for nor the amount of the credit depends on expenditures made for textbooks. Rather, the federal textbook amount is a fixed monthly amount (currently $65 for full-time and $20 for part-time students) which, like the tuition and education amounts is converted to a credit by multiplying by 15%, and which can be claimed by any student who is eligible for the education amount.

Non-refundable tax credits, like the tuition, education and textbook credits outlined above, work by reducing the tax which the individual claiming the credits would otherwise have to pay. However, post-secondary students generally have relatively low income and consequently relatively low tax bills and so may not be able to “use up” all of their available credits in a single tax year. Two solutions are possible. First, the student may transfer the unused credit to a spouse, parent, or grandparent (and it’s not necessary for the parent or grandparent to have actually paid the tuition bill in order to claim the transferred credit). Second, the student can keep the excess credit and claim it in any future tax year, when income—and therefore the resulting tax payable—will presumably be higher. There are some restrictions and limitations on the transfer of student tax credits, but generally speaking, most students should be able to transfer credits to parents or grandparents without difficulty.

No matter how diligently parents save for a child’s post-secondary education or how lucrative a student’s summer jobs are, today’s reality is that most students will have incurred some debt—a lot of debt in some cases—to pay the cost of post-secondary education. Where that debt is in the form of government-sponsored student loans (generally, loans provided under the Canada Student Loans program or the equivalent provincial program), the student can claim a tax credit at both the federal and provincial levels for interest paid on those loans. It’s important to remember, however, that only interest paid on loans extended under government-sponsored programs qualifies for the credit. Loans provided by private lenders (for example, through a student line of credit) do not qualify, and interest paid on any consolidated loans which include funds advanced by private-sector lenders will similarly not be eligible for the credit. In today’s low interest rate environment, a financial institution may offer (usually at the time repayment of government student loans must begin) to consolidate all of a student’s outstanding debt at a preferential interest rate. Post-secondary graduates should consider such offers carefully, as any mingling of government student loan balances with private sector lending will disqualify the student from claiming a tax credit for interest paid on that government student loan.

While the long-term benefits are undeniable, obtaining a post-secondary education has never been (and likely never will be) an inexpensive proposition. The costs involved, can, however, be kept to the minimum possible by ensuring that every tax “break” available, during both the post-secondary years and thereafter, is claimed in the most tax-efficient way possible. 

Canadians will go to the polls for the next federal election on October 19, 2015, and the campaign by all parties to win votes in that election is already on. And, while no two election campaigns are alike, either in the way they are run or the ultimate outcome, they all have one thing in common—money. It costs a great deal of money to run a national election campaign, and each party and candidate seeking election or re-election in October has been and will be seeking contributions from individual Canadians to help them finance their campaigns. The task of raising that money is made somewhat easier by the fact that Canadian taxpayers who donate money to political parties or candidates can claim a federal tax credit for those donations.

Canadians will go to the polls for the next federal election on October 19, 2015, and the campaign by all parties to win votes in that election is already on. And, while no two election campaigns are alike, either in the way they are run or the ultimate outcome, they all have one thing in common—money. It costs a great deal of money to run a national election campaign, and each party and candidate seeking election or re-election in October has been and will be seeking contributions from individual Canadians to help them finance their campaigns. The task of raising that money is made somewhat easier by the fact that Canadian taxpayers who donate money to political parties or candidates can claim a federal tax credit for those donations.

The Income Tax Act provides for a credit to be claimed by taxpayers who contribute funds, either to registered political parties or to candidates running in the federal election. Contributions can be made at any time, not just during an election campaign, as long as the donation is received by an official candidate or a registered party.

Many Canadians would undoubtedly be surprised to learn that, as of June 19, 2015, there were 17 registered political parties. They are as follows, in alphabetical order:

       Animal Alliance Environment Voters Party of Canada

       Bloc Québécois

       Canadian Action Party

       Christian Heritage Party of Canada

       Communist Party of Canada

       Conservative Party of Canada

       Green Party of Canada

       Liberal Party of Canada

       Libertarian Party of Canada

       Marijuana Party

       Marxist-Leninist Party of Canada

       New Democratic Party

       Party for Accountability, Competency and Transparency

       Pirate Party of Canada

       Progressive Canadian Party

       Rhinoceros Party

       United Party of Canada

Limits are placed on the amount of contributions which may be made by any individual Canadian. Effective as of January 1, 2015, individuals can donate no more than:

• $1,500 in any calendar year to each registered political party;
• $1,500 in total in any calendar year to the various entities of each registered political party (registered associations, nomination contestants and candidates); and
• $1,500 in total to the leadership contestants in a particular leadership contest.

Putting all of the above together, an individual could contribute, in a year in which there is both a party leadership contest and a general election, a total of $4,500 to a combination of a registered political party, a registered candidate, and a leadership contestant. However, only funds contributed to a registered political party or an official candidate are eligible for the tax credit, and dollar limits are placed on the amount of funds contributed which will be eligible for that credit.

The federal political tax credit is calculated as a percentage of donations given. However, the credit percentage decreases as contributions amounts increase, and no credit at all is given for donations in excess of $1,275. The credit percentages allowed at different contribution levels are as follows:

The maximum credit claimable in any taxation year by a single taxpayer is $650. Once the math is worked out, it becomes clear that the maximum credit obtainable is reached once contribution levels reach $1,275.

Contribution amount         Allowable tax credit

$400 × 75% =                                  $300

$350 × 50% =                                  $175

$525 × 33.3% =                               $175

$1,275                                           $650

While taxpayers are free, of course, to donate up to the limits imposed by law, where donations exceed $1,275 in any one taxation year, no tax credit can be claimed on the “excess” donation. As well, there is no provision which allows the taxpayer to carryover any “excess” contributions to a subsequent taxation year, meaning that no credit will ever be obtainable with respect to those “excess” contributions.

Many Canadians who are committed to a particular political party or candidate volunteer their time during a nomination or election campaign—canvassing for the candidate, putting up election signs, or telephoning voters to encourage them to vote for the candidate. However, in this case, the work must be its own reward, as no income tax receipts can be issued for such non-monetary contributions and consequently no credit can be claimed for the value of any non-monetary contribution (including volunteer hours) donated.

Where a monetary contribution is made, an official receipt must be issued in order for the tax credit to be claimed, and a receipt must be issued for every contribution over $20.

The actual credit for qualifying donations made is claimed on the tax return for the year in which the contribution was made. The amount of the credit is calculated (according to the formula outlined above) on the Federal Worksheet, and the amount of the actual credit entered on line 410 of Schedule 1 of the federal tax return. By the time the return is filed, of course, the election will be long since over, the newly elected government will be in Ottawa, and the taxpayer will be in a position to assess whether it was, in fact, money well spent.

Conventional wisdom with respect to the cycle of income, debt, and savings over an individual’s lifetime is based on certain assumptions. Generally, it is assumed that Canadians in their 20s and 30s will see their financial affairs weighted far more heavily on the debt side of the equation, as they pay off student loans, buy a home (and take on a mortgage), and meet the financial demands of raising children while building a career. As those individuals move into their 40s and 50s, it’s assumed that the financial demands of raising that family will eventually decline and the mortgage will be paid off. As well, the two decades between 40 and 60 have traditionally been the peaking earning years and, as other financial obligations are reduced, some of those higher earnings can be redirected to saving for retirement. Ultimately, the cycle ends with retirement around the age of 60 or 65, with a paid-for home, no debt, and adequate savings for retirement.

Conventional wisdom with respect to the cycle of income, debt, and savings over an individual’s lifetime is based on certain assumptions. Generally, it is assumed that Canadians in their 20s and 30s will see their financial affairs weighted far more heavily on the debt side of the equation, as they pay off student loans, buy a home (and take on a mortgage), and meet the financial demands of raising children while building a career. As those individuals move into their 40s and 50s, it’s assumed that the financial demands of raising that family will eventually decline and the mortgage will be paid off. As well, the two decades between 40 and 60 have traditionally been the peaking earning years and, as other financial obligations are reduced, some of those higher earnings can be redirected to saving for retirement. Ultimately, the cycle ends with retirement around the age of 60 or 65, with a paid-for home, no debt, and adequate savings for retirement.

Some recent statistics and studies suggest that the scenario outlined above now represents more of an ideal than the current reality, especially for those nearing or in retirement. The most recent release of statistics from the Office of the Superintendent of Bankruptcy indicates that, for 2014, individuals aged 65 and older represented 10% of all insolvencies. While that statistic is unsettling in itself, what’s more worrisome is the trend. In the four years between 2010 and 2014, bankruptcy filings by seniors rose by over 20%.

The question which arises is how members of a demographic group for which assets traditionally exceeded debt (if there was any debt at all) by a wide margin finds itself declaring bankruptcy in increasing numbers.

The partial answer to that is that starting retirement while still having outstanding debts is becoming almost the norm. Statistics Canada’s figures for 2012 show that the percentage of seniors having some type of debt stood at 42.5%. For 1999, that percentage stood at 27.4%. And, given that the overall debt-to-income ratio of Canadians has risen since 2012, it is reasonable to think that that the percentage of seniors carrying some form of debt is now higher than 42.5%.

Retirees who have outstanding debt are between the proverbial rock and a hard place of fixed incomes and growing expenses. While many retirees can and do take on part-time work to supplement their income, the fact is that it’s difficult, once past the age of 65, to increase one’s income in a significant way. And, where every dollar of income is needed to meet current expenses, including debt servicing costs, it doesn’t take much to tip the balance into negative territory. And when that happens, the solution is often taking on more debt.

An analysis of debt patterns among insolvent debtors recently carried out by a national firm of trustees in bankruptcy identified seniors and pre-retirement debtors as having the highest unsecured debt load among all age groups. Specifically, insolvent individuals aged 60 and over carried an average credit card debt of just over $33,000 and average personal loan debt of just over $20,000. Older debtors are also, it seems, turning to even more costly forms of financing, as the same study showed that almost 1 in 10 debtors over the age of 60 had at least one payday loan at the time of their insolvency. Payday loan companies are willing to lend against Canada Pension Plan benefits or private pension payments, as they are viewed as secure and stable sources of income. Consequently, it’s perhaps not surprising that among seniors who had taken out payday loans, the average such debt was just over $3,500—the highest among all age groups.

There’s no single reason, of course, as to why Canadians in retirement reach the point of insolvency. While it’s clear that carrying debt into retirement increases the risk of eventual insolvency (a risk that will increase when interest rates rise), it’s more often an accumulation of factors that push individuals to the point of making a consumer proposal or declaring bankruptcy. It may be that seniors who were able to manage their debt when their source of financing was a home equity line of credit on which interest was payable at 4% find themselves needing to turn to credit cards, or even maxing out their credit cards and resorting to payday loans which charge a much, much higher rate of interest. The study examining debt patterns among insolvent debtors found that the typical insolvent debtor (across all age groups) was paying a blended interest rate of 19% or more per year on all of their debt. In other cases, unexpected expenses push individuals over the line from just managing to financial crisis.

No financial or retirement plan can guard against all of life’s eventualities, but there are some strategies which make sense for everyone. Starting retirement without debt of any kind should be a priority. Those approaching retirement who have outstanding debt (including a mortgage) should put repayment of that debt at the top of their financial to-do list. For those who are already retired with debt, there are still options. Where at all possible, repaying that debt while interest rates remain low should similarly be a priority. For those who are finding that keeping up with existing debt is becoming impossible, taking on more debt (especially forms of extremely high interest debt like payday loans) isn’t the solution. Retirees who are having trouble managing can seek help (free of charge) from one of Canada’s many non-profit credit counseling agencies. A listing of such agencies can be found at www.caccs.ca/

Finally, it’s clear from the statistics that in some cases the circumstances are such that making a consumer proposal or declaring bankruptcy is the only realistic available option. Few individuals want to be in that position, but if the alternative is living with significant ongoing financial stress with no prospect of improvement, making a consumer proposal or declaring bankruptcy, and the fresh start which follows, can be the better choice.

Fraud isn’t and never has been a seasonal business—every day of the year, attempts are made to cheat individuals out of their hard-earned income or savings. There are, however, times of the year when some types of scams are more prevalent and tax scams flourish during tax filing season.

Fraud isn’t and never has been a seasonal business—every day of the year, attempts are made to cheat individuals out of their hard-earned income or savings. There are, however, times of the year when some types of scams are more prevalent and tax scams flourish during tax filing season.

For most of the year, taxpayers live quite happily without any contact with the Canada Revenue Agency (CRA). During filing season, however, such contact is routine—tax returns must be filed, Notices of Assessment are received from the CRA and, on occasion, the CRA will contact a taxpayer seeking clarification of income amounts reported or documentation of deductions or credits claimed on the annual return. Consequently, it wouldn’t necessarily strike taxpayers as unusual to be contacted by the CRA with a message that a tax amount is owed or, more happily, that the taxpayer is owed a refund. That fact makes it much easier for individuals posing as representatives of the CRA to successfully pass themselves off as such.

There are, generally, two ways in which fraud artists prey on taxpayers. First, a taxpayer may receive an e-mail telling them that they are owed money by the CRA, and asking them to click on a link in the e-mail to be connected to the CRA website. Once on that website (which of course is not the CRA’s website) they are asked to provide personal and financial data, like bank account numbers, in order to receive their money. That information is then used to defraud them. The other method of fraudulently obtaining money from taxpayer is to falsely inform them that they owe money to the CRA and that payment must be made immediately to avoid serious negative consequences.

This year it seems that the latter type of scam is more prevalent. As recently reported in the media, a large number of Canadians, in several provinces, have been contacted by telephone by someone purporting to be from the CRA. The recipient of such a call is informed that he or she owes money to the CRA, and that if payment is not made immediately (usually a wire transfer of funds or payment by pre-paid credit card is suggested), significant negative consequences will follow, including the cancellation of the taxpayer’s Canadian passport, social insurance card, or other government-issued identification.

There are several things about such a call that should alert the recipient to the fact that it’s not legitimate. First of all, if a taxpayer does in fact owe money to the CRA, he or she will be first advised of that fact by mail and not by telephone—generally in his or her Notice of Assessment for the year. Second, the CRA would never suggest that a taxpayer send funds to them by wire transfer or by using a pre-paid credit card—payment of taxes owing is made online, through the CRA website, at one’s financial institution, or by mailing of a cheque to the CRA. Finally, any suggestion that the CRA will cancel the taxpayer’s passport (or any other type of government-issued documentation) for failure to make a payment is simply ludicrous.

Where a telephone call is received from someone purporting to be from the CRA, it’s perfectly reasonable for the taxpayer to request a callback number at which the caller can be reached.

There’s almost no limit to the number and variety of scams and phishing attempts that are carried out using the CRA’s name, and new ones appear frequently. Unfortunately, many such scams including, it seems, this most recent one originate outside of Canada, limiting the ability of the CRA and law enforcement authorities to police or stop them. For the most part, the onus will fall on individual taxpayers who receive fraudulent calls or e-mails to protect themselves. The CRA suggests that, in order to avoid becoming a victim of such scams, taxpayers should keep the following general guidelines in mind.

The CRA:

• NEVER requests information from a taxpayer about a passport, health card, or driver’s license;
• NEVER leaves any personal information on an answering machine or asks taxpayers to leave a message with their personal information on an answering machine;
• will not request pre-paid credit cards;
• will not request personal information of any kind from a taxpayer by e-mail; and
• will not divulge taxpayer information to another person unless formal authorization is provided by the taxpayer.

When in doubt, a taxpayer should ask him or herself the following.

•          Am I expecting additional money from the CRA?
•          Does this sound too good to be true?

• Is the requester asking for information I would not include with my tax return?
• Is the requester asking for information I know the CRA already has on file for me?
• How did the requester get my email address or telephone number?
• Am I confident I know who is asking for the information?
• Is there a reason that the CRA would be calling (e.g., do I have a tax balance outstanding)? And, is this the first I have heard of any tax balance owing?
• Is the person calling me willing to provide a number at which I can reach them?

A taxpayer who receives what seems to be a suspicious communication should report that by e-mail to info@antifraudcentre.ca or can call the Canadian Anti-Fraud Centre at 1-888-495-8501. If the worst happens and an individual has been tricked into providing personal or financial information, the following steps are suggested.

Step 1 - Contact your bank/financial institution or credit card company

Step 2 - Contact your credit bureau and have fraud alerts placed on your credit reports:

Equifax Canada
Toll-free telephone: 1-800-465-7166 begin_of_the_skype_highlighting end_of_the_skype_highlighting

TransUnion Canada
Toll-free fax: 1-877-411-2611 begin_of_the_skype_highlighting end_of_the_skype_highlighting

Step 3 - Contact your local police

Step 4 - Always report phishing. If you have responded to a suspicious e-mail, report it to info@antifraudcentre.ca.

Fraud isn’t new, and it isn’t going away any time soon. However, the speed and anonymity of electronic communication, and the extent to which most people are now comfortable transacting their tax and financial affairs online or over the phone makes it easier in many ways for fraud artists to succeed. The best defence against becoming a victim of such scams is a healthy degree of caution, even skepticism, and a refusal to provide any personal or financial information and especially to make any kind of payment—whether by phone, e-mail or online—without first verifying the legitimacy of the request.

As the end of the school year draws closer, and with it the start of two months of summer holidays, families who don’t have a stay-at-home parent (and likely some who do) must start thinking about how to keep the kids supervised and busy throughout the summer months. There is no shortage of options—at this time of year, advertisements for summer activities and summer camps abound—but nearly all the available options have one thing in common, and that’s a price tag. Some choices, like day camps provided by the local recreation authority can be relatively inexpensive, while the cost of others, like summer-long residential camps or elite-level sports or arts camps, can run into the thousands of dollars.

As the end of the school year draws closer, and with it the start of two months of summer holidays, families who don’t have a stay-at-home parent (and likely some who do) must start thinking about how to keep the kids supervised and busy throughout the summer months. There is no shortage of options—at this time of year, advertisements for summer activities and summer camps abound—but nearly all the available options have one thing in common, and that’s a price tag. Some choices, like day camps provided by the local recreation authority can be relatively inexpensive, while the cost of others, like summer-long residential camps or elite-level sports or arts camps, can run into the thousands of dollars.

There is however, some help available from the tax system to help offset the cost of all those activities. While in all cases the available credits or deductions can be claimed for the cost of qualifying activities throughout the year, it’s during the summer months that the bulk of those costs are incurred.

There are, essentially, three tax measures or programs which allow parents to claim a deduction or credit (depending on the program) for the cost of obtaining summer child care but the criteria imposed and the amounts which may be claimed are different for each one.

The deduction with the fewest restrictions is the child care expense deduction. That deduction also offers the greatest potential for tax savings (especially for parents in higher tax brackets) as the amount of eligible child care expenses is claimed as a deduction from income rather than as a credit. Consequently, the taxable income of the parent claiming the deduction is reduced by the entire amount of expenses claimable. There are limits imposed on the maximum weekly cost of a residential camp (ranging from $100 to $250), as well as restrictions on the total amount of child care expenses which may be deducted in a year. However, those overall annual limits, which range from $4,000 to $10,000, depending on the age and health of the child, with an overall cap of two-thirds of the parent’s income for the year, are higher than those available under any other credit program available to help offset the cost of children’s activity programs. There are two other such programs.

Parents can also claim the Children’s Fitness Tax Credit for activities or camps which involve a minimum degree of physical activity. Parents are entitled to claim a non-refundable credit (meaning that the credit reduces tax otherwise payable, but cannot create or increase a tax refund) equal to 15% of the first $1,000 in qualifying costs per child per year. So, in other words, a camp which would have cost parents $600 per child will instead have a net cost of $510 ($600 minus 15%, or $90), after the credit is claimed on the parent’s tax return for the year.

Parents whose children’s interests run to less athletic pursuits, like art, music, theatre, or writing can claim the Children’s Arts Tax Credit. This credit is very similar in structure to the Children’s Fitness Tax Credit, but less generous. It provides a non-refundable 15% tax credit on up to $500 in eligible expenses per child per year. Claiming either the Arts of Fitness credit requires a minimum expenditure of $100 per child per year on qualifying activities.

Given the enormous range of activities available for children, it’s not surprising that the federal government has found it necessary to provide detailed rules on what types of activities will and won’t qualify for the two credits. And, while the possibility of a tax benefit should never drive the decision on which program or activity a child should be enrolled in, the availability of the credit might tip the balance between similar programs, or might make a program, camp, or activity which seemed financially out of reach more affordable.

In assessing whether a particular camp or program might qualify for either of the two credits, the first thing to note is that both credits are available only in respect of fees paid for children who are under the age of 16 at the beginning of the year. In other words, the last year for which the credit can be claimed is the year in which the child turns 16, assuming that all other criteria are met. Those criteria are as follows:

• the program must last for a minimum of 8 weeks, with at least one session per week or, in the case of children’s camps, must run for 5 consecutive days;
• the program or activity must be supervised; and
• the program or activity must be suitable for children.

Where the credit claimed is for the Children’s Fitness amount, more than 50% of activities offered must include a significant amount of qualifying physical activities or, in the case of a program, camp, or membership in which participants can choose from a variety of activities, more than 50% of those activities must include a significant amount of eligible activities or more than 50% of the available program time must be devoted to eligible activities.

Where the credit claimed is for the Children’s Arts amount the program requirements are, of course, different. To be eligible for the Arts credit, a program must:

• contribute to the development of creative skills or expertise in an artistic or cultural activity;
• provide a substantial focus on wilderness and the natural environment;

• help children develop and use particular intellectual skills;
• include structured interaction between children where supervisors teach or help children develop interpersonal skills; or
• provide enrichment or tutoring in academic subjects.

It’s clear from the forgoing that the concept of “eligible activities” looms large in the determination of whether a particular cost may be claimed under either of the credits. For both credits, the rules provide a specific definition of eligible activities, and those definitions are outlined on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/365/prgrm-eng.html and www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/370/prgrm-eng.html.

Often, particularly in the case of residential camps or sports or arts camps, charges are levied for such costs as accommodation, travel, or food, or parents must incur costs to outfit the child with required equipment to use at camps. Costs paid by parents for non-activity related charges, like food, travel, and accommodation do not qualify for either of the credits and must be subtracted from the total fee paid. As well, the cost of equipment purchased by parents from third-party suppliers is not a qualifying cost for purpose of the credits.

It’s easy to see that expenditures made for summer activities could qualify for both the child care expense deduction and for one or the other of the Children’s Fitness or Arts Tax Credit. It’s not, however, possible to double or triple dip when it comes to expenses related to children’s activities. Expenses which are claimed under any of the three possible categories (child care expenses, Children’s Fitness Tax Credit, and Children’s Arts Tax Credit) can be claimed only once, even if they might, by definition, qualify under more than one provision.

Where the same expenditure will qualify for both the child care expense deduction and the Children’s Fitness or Arts Tax Credit, the CRA requires that the parent first claim that amount as a child care expense. Any part of the expenditure which is not claimed as a child care expense (perhaps because the maximum limit for such expense claim has been reached) can be claimed for the Children’s Fitness or Arts Tax Credit, as long as the usual requirements for the particular credit are met.

While both the Children’s Fitness Tax Credit and the Children’s Art Tax Credit are relatively simple in concept, the criteria imposed for an activity to qualify and the number and variety of possible qualifying programs and activities can be confusing. To alleviate some of that confusion, for both parents and sponsoring organizations, the CRA has provided detailed information about the requirements of the Fitness Tax Credit on its website. That information can be found at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/365/menu-eng.html, and the corresponding information for the Arts Tax Credit is available at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/370/menu-eng.html.

Keeping up with reporting, remitting, and payment obligations for income taxes, goods and services, or harmonized sales tax and employee source deductions is a constant headache for many small business owners, who would rather be spending their time working to grow their businesses. Staying on top of such obligations is particularly challenging for new small business owners, to whom all such calculations, forms, and remittance deadlines represent new and unfamiliar territory.

Keeping up with reporting, remitting, and payment obligations for income taxes, goods and services, or harmonized sales tax and employee source deductions is a constant headache for many small business owners, who would rather be spending their time working to grow their businesses. Staying on top of such obligations is particularly challenging for new small business owners, to whom all such calculations, forms, and remittance deadlines represent new and unfamiliar territory.

In this year’s budget, the federal government has provided a small break for such new business owners, by making it possible for them to reduce the frequency with which remittance of source deductions must be made.

A bit of background: all employers, large or small, must withhold amounts from the gross amount payable to each employee each pay period. Those amounts represent the income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums payable by that employee on their income for that pay period. Employers must also match the amount of any CPP contribution withheld from the employee’s pay and contribute an amount equal to 1.4 times the amount of any Employment Insurance premium payable by the employee. The combined amount of employer and employee income tax, CPP and EI amounts must be remitted to the Canada Revenue Agency (CRA) on a prescribed schedule. Generally speaking, as the amount of the regular remittance increases, so too does the frequency with which such remittances must be made. Depending on the amount to be remitted, the schedule can call for quarterly, monthly, twice monthly, or weekly remittances. Generally, employers whose average remittance is less than $3,000 can remit on a quarterly basis. Those whose average remittance is between $3,000 and $25,000 must remit on a monthly basis. Those having average remittances over the $25,000 threshold must remit at least twice a month or even weekly.

Notwithstanding these rules, a special category exists for employers which have never before remitted source deductions to the federal government. Such employers are termed “new remitters” and they are required to remit source deductions on a monthly basis, no matter how much they are remitting. In other words, for this group the frequency with which remittances must be made depends not on the amount remitted, but on their status as new remitters.

Having to prepare and submit remittance forms every month can pose an administrative burden on a small business owner which is out of proportion to the amounts actually remitted. For that reason, the change announced in this year’s federal Budget will, after 2015, allow new small businesses to decrease their remittance frequency.

Beginning in 2016, employers who have withholdings of less than $1,000 per month will be eligible to remit such withholdings on a quarterly rather than a monthly basis, even if they are new remitters. Many new businesses have only a single employee and, according to information in the budget papers, the $1,000 per month withholdings threshold represents the amount of withholdings that would be required for a single employee earning a salary of up to $43,500 per year.

There are conditions attached to the option to become a quarterly rather than a monthly remitter. The quarterly remittance option remains available only as long as the employer’s required remittance amount stays below $1,000 per month. As well, any employer who takes advantage of the quarterly remittance option must maintain a perfect compliance record (i.e., withholdings must be remitted to the federal government on time and in full with each remittance). If there is a shortfall in the amount of any remittance, or any remittance deadline is missed, the new employer will lose the right to be a quarterly remitter.

As well, of course, if remittance amounts rise above the $1,000 ceiling, the employer’s remittance schedule will be re-classified according to the general rules. Generally, that would occur because the business is growing, and that’s a trade-off any new small business owner would be happy to make!

By the second week of May 2015, the Canada Revenue Agency (CRA) had processed about 22 million individual income tax returns filed for the 2014 tax year. Just under two-thirds of those returns (about 64%) resulted in a refund to the taxpayer. About 14% of returns filed and processed required payment of a tax balance by the taxpayer. Just under 20% were what are called “nil” returns – returns where no tax is owing and no refund claimed and the taxpayer is filing in order to provide income information which will be used to determine his or her eligibility for tax credit payments (like the Canada Child Tax Benefit or the HST credit).

By the second week of May 2015, the Canada Revenue Agency (CRA) had processed about 22 million individual income tax returns filed for the 2014 tax year. Just under two-thirds of those returns (about 64%) resulted in a refund to the taxpayer. About 14% of returns filed and processed required payment of a tax balance by the taxpayer. Just under 20% were what are called “nil” returns – returns where no tax is owing and no refund claimed and the taxpayer is filing in order to provide income information which will be used to determine his or her eligibility for tax credit payments (like the Canada Child Tax Benefit or the HST credit).

No matter what the outcome of the filing, all returns filed with and processed by the CRA have one thing in common—they result in the issuance of a Notice of Assessment by the Agency, outlining the taxpayer’s income, deductions, and credits and tax payable for the 2014 tax year. In most cases, the information contained in the Notice of Assessment is the same as that provided by the taxpayer in his or her return, perhaps with a few arithmetical corrections made by the CRA. In a minority of cases, the information presented in the Notice of Assessment will differ from that provided by the taxpayer in his or her return. Where that difference means an unanticipated refund, or a refund larger than the one expected, it’s a happy day for the taxpayer. In some cases, however, the Notice of Assessment will inform the taxpayer that additional amounts are owed to the CRA.

When that happens, the taxpayer has to figure out why, and to decide whether or not to dispute the CRA’s conclusions. Many such discrepancies are the result of an error made by the taxpayer in completing the return. A lot of information from a variety of sources is reported on even the most straightforward of returns and it’s easy to overlook, for instance, a T5 slip reporting less than $50 in interest income earned. Even where tax software is used to prepare the return, errors can still occur. Such tax software relies, in the first instance, on information input by the user with respect to amounts found on T4, T5, and other information slips. No matter how good the software, it can’t account for income information which the taxpayer hasn’t provided. In other cases, the taxpayer might transpose figures when entering them, such that an income amount of $17,323 on the T4 becomes $13,723 on the tax return. Once again, the tax software has no way of knowing that the information input was incorrect, and calculates tax owing on the basis of the figures provided.

Where there is additional tax owing because of an error or omission made by the taxpayer in completing the return, and the CRA’s figures are correct, disputing the assessment doesn’t really make sense. There is, as well, a persistent tax “myth” that if a taxpayer doesn’t receive an information slip (T4 or T5, as the case might be) for income received during the year, that income doesn’t have to be reported and therefore isn’t taxable. The myth, however, is just that. All taxpayers are responsible for reporting all income received and paying tax on that income, and the fact that an information slip was lost, mislaid, or never received doesn’t change anything. The CRA receives a copy of all information slips issued to Canadian taxpayers, and its systems will cross-check to ensure that all income is accurately reported.

There are, however, instances in which the CRA and the taxpayer are in disagreement over substantive issues, and those issues most often involve claims for deductions or credits. For instance, the CRA may have disallowed an individual’s claim for a moving expense, or for a deduction claimed for a business expenditure, which the taxpayer believes to be legitimate. When that happens, the taxpayer has to decide whether to dispute the assessment.

Before making that decision, and whatever the nature of the dispute, the first step is always to contact the CRA for an explanation of the reasons why the change was made, if that isn’t clear from the Notice of Assessment. It is no longer possible to have a face-to-face meeting with a CRA representative at a Tax Services Office (TSO), as such in-person services were discontinued a few years ago. Taxpayers who want information about their Notice of Assessment must now call or write to the CRA. The first step to be taken would be a call to the Individual Income Tax Enquiries line at 1-800-959-8281. If that call doesn’t resolve the taxpayer’s questions, he or she can write to or fax the Tax Centre which processed their return. The name of that Tax Centre can be found in the top right hand corner of each page of the Notice of Assessment, and fax numbers and mailing addresses for the Tax Centres are available on the CRA website at www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html. Communication with a Tax Centre can only be done by fax or mail, as phone numbers for Tax Centres are not available to the public.

If the situation still isn’t resolved by these communications with the CRA, and a dispute remains, it’s time for the taxpayer to consider filing a formal Notice of Objection. Details on how to do that, and the steps which follow, will be summarized in the next issue of this newsletter.

Most older Canadians would prefer to stay in their own homes for as long as possible—so-called “aging in place”. Staying in one’s own home throughout retirement has a number of strong points—a familiar environment in a familiar community and, most often, more privacy, independence, and autonomy. There are financial advantages, as well, to aging in place. Care provided in an assisted-living setting (whether a retirement home, a long-term care facility, or a nursing home) is expensive. And, while home ownership means expenses as well, for most retirees the biggest home-related cost—mortgage payments—are no longer a concern.

Most older Canadians would prefer to stay in their own homes for as long as possible—so-called “aging in place”. Staying in one’s own home throughout retirement has a number of strong points—a familiar environment in a familiar community and, most often, more privacy, independence, and autonomy. There are financial advantages, as well, to aging in place. Care provided in an assisted-living setting (whether a retirement home, a long-term care facility, or a nursing home) is expensive. And, while home ownership means expenses as well, for most retirees the biggest home-related cost—mortgage payments—are no longer a concern.

Individuals who can no longer live easily or safely in their own homes are faced, essentially, with two options. They can move, whether to another residence which better suits their needs or to an assisted-living facility or, if possible, they can alter their existing home to meet their current or anticipated future needs.

Beginning with the 2016 tax year, Canadians aged 65 and older and persons who qualify for the disability tax credit will be able to get some help through our tax system to help offset costs incurred for making their homes easier or safer to live in. That help will be provided through a program announced in this year’s federal Budget: the Home Accessibility Tax Credit (HATC). Although the rules governing this credit are detailed, the essence of the program is that Canadians who are aged 65 and older or who are disabled will be able to claim a 15% non-refundable tax credit for expenditures made to increase the accessibility or safety of their homes, or their mobility within those homes. The maximum expenditure which will qualify for the credit is $10,000 per dwelling. That maximum expenditure will reduce federal tax payable for the year by $1,500.

While the new credit is targeted to seniors and disabled individuals, it can also be claimed by their family members. Specifically, the HATC can be claimed by a qualifying individual’s spouse or common-law partner, or by his or her parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece, or nephew, or such relatives of the individual’s spouse or partner. As well, the credit can be split among these eligible individuals, as long as the total expenditure for which a credit is claimed is not more than the $10,000 per-dwelling limit.

The definition of what constitutes an eligible dwelling for purposes of the credit is equally broad. Essentially that definition encompasses all types of housing units, as long as the housing unit is being used by the senior or disabled person as his or her principal residence. Consequently, the HATC can be claimed for qualifying expenditures made to alter a house owned by the senior or disabled person, or units in a condominium or co-operative housing corporation.

In some cases, an elderly parent or grandparent or a person with a disability lives with another family member. In such instances, qualifying changes made to the home can qualify for the credit, as long as that home is the principal residence of the family member and the senior for whose benefit the expenditures are being made ordinarily lives there.

The number and kind of improvements and renovations which can be made to a home are, of course, almost infinite. The rules governing the HATC do not outline specific changes which will qualify—rather, the test for whether an expenditure does qualify for the credit is the general one of whether the change made makes it easier for a senior or disabled person to access the home or to have greater mobility within the home, or increases their safety within that home. The rules do, however, list a number of types of expenditures which cannot qualify for the HATC in any circumstances. That list of non-qualifying expenditures is as follows:

• expenditures made with the primary intent of improving or maintaining the value of a dwelling; 
• the cost of routine repairs and maintenance normally performed on an annual or more frequent basis;
• expenditures for household appliances and devices, such as 
  audio-visual electronics;
• payments for services such as outdoor maintenance and gardening, housekeeping or security; and
• the costs of financing a renovation (e.g., mortgage interest costs).

Home renovations, of almost any kind, aren’t cheap, and making renovations which qualify for the credit will still require an outlay of funds. However, for many seniors and disabled individuals, even small changes which aren’t prohibitively expensive, like the installation of a grab bar or shower seat in a bath, or a change to “touchless” taps, or the addition of a handrail or lighting in halls or stairs, can make a huge difference to their ability to remain living safely and comfortably in their own, familiar homes.

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues.

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues. They can be accessed below.

Corporate:

Issue #32 Corporate

Personal:

Issue #32 Personal

Spring is the traditional season for real estate sales and purchases, and the spring of 2015 is proving to be no exception. In fact, the residential real estate market is particularly active this year. According to statistics compiled by the Canadian Real Estate Association (CREA), “actual (not seasonally adjusted) activity in March stood 9.5% above levels reported in March 2014 and slightly above the 10-year average for the month.”

Spring is the traditional season for real estate sales and purchases, and the spring of 2015 is proving to be no exception. In fact, the residential real estate market is particularly active this year. According to statistics compiled by the Canadian Real Estate Association (CREA), “actual (not seasonally adjusted) activity in March stood 9.5% above levels reported in March 2014 and slightly above the 10-year average for the month.”

The increase in real estate activity is likely fueled by a couple of factors. First, while interest rates continue to be at historic lows, the inevitable eventual increase in those rates (and consequently in the cost of carrying a mortgage) is always on the horizon. Second, Canadian house prices continue their seemingly inexorable rise. Again according to CREA statistics, “[T]he actual (not seasonally adjusted) national average price for homes sold in March 2015 was $439,144, up 9.4% on a year-over-year basis.” Many would-be homeowners are looking to get into the housing market while interest rates are low, and before prices rise any further.

All of this means that a great number of Canadians will be buying or selling a house this spring and summer and, inevitably, moving. Moving is a stressful and often expensive undertaking, even when the move is a desired one—buying a first home, perhaps, or taking a step up the property ladder to a second and larger home. There is not much that can diminish the stress of moving, but the associated costs can be offset somewhat by a tax deduction which may be claimed for many of those costs.

It’s important to note first of all that not all moves will qualify for a moving expense deduction. Our tax system allows taxpayers to claim a deduction only where the move is made to get the taxpayer closer to his or her new place of work, whether that work is a transfer, a new job, or self-employment. Specifically, moving expenses can be deducted where the move is made to bring the taxpayer at least 40 kilometres closer to his or her new place of work. That requirement is satisfied where, for instance, a taxpayer moves from Calgary to Vancouver to take a new job. It’s also met where a taxpayer is transferred by his or her employer to another job in a different location and the taxpayer’s move will bring him or her at 40 kilometres closer to the new work location. As well, it’s not necessary to be a homeowner in order to claim moving expenses. The list of moving-related expenses which may be deducted is the same for everyone—homeowner or tenant—who meets the 40-kilometre requirement. Students who are moving to take a summer job (even if that move is back to the family home) can also make a claim for moving expenses where that move meets the 40-kilometre requirement.

The general rule is that a taxpayer can claim reasonable amounts that were paid for moving himself or herself, family members, and household effects. In all cases, the moving expenses must be deducted from employment or self-employment income earned at the new location. Where the amount of that income earned at the new location in the year of the move is less than deductible moving expenses incurred, those expenses can be carried over and deducted from such income in future years.

Within that general rule, there are a number of specific inclusions, exclusions, and limitations. The following is a list of expenses which can be claimed by the taxpayer without specific dollar figure restrictions (but subject, as always, to the overriding requirement of “reasonableness”).

• traveling expenses, including vehicle expenses, meals and accommodation, to move the taxpayer and members of his or her family to their new residence (note that not all members of the household have to travel together or at the same time);
• transportation and storage costs (such as packing, hauling, in-transit storage, and insurance) for household effects, including items such as boats and trailers;
• costs for up to 15 days for meals and temporary accommodation near the old and the new residences for the members of the household;
• lease cancellation charges (but not rent) on the old residence;
• legal fees incurred for the purchase of the new residence, together with any taxes paid for the transfer or registration of title to the new residence (but excluding GST or HST and property taxes);
• the cost of selling the old residence, including advertising, notary or legal fees, real estate commissions, and any mortgage penalties paid when a mortgage is paid off before maturity; and
• the cost of changing an address on legal documents, replacing driving licences and non-commercial vehicle permits (except insurance), and costs related to utility hook-ups and disconnections.

It sometimes happens that a move to the new home has to take place before the old residence is sold. In such circumstances, the taxpayer is entitled to deduct up to $5,000 in costs incurred for the maintenance of that residence while it is vacant and efforts are being made to sell it. Specifically, costs including interest, property taxes, insurance premiums, and heat and utilities expenses paid to maintain the old residence while efforts were being made to sell it may be deducted. If any family members are still living at the old residence, or it is being rented, no deduction is available.

It may seem from the forgoing that virtually all moving-related costs will be deductible; however, there are some costs for which the CRA will not permit a deduction to be claimed, which are as follows:

• expenses for work done to make the old residence more saleable;
• any loss incurred on the sale of the old residence;
• expenses for job-hunting or house-hunting trips to another city (for example, costs to travel to job interviews or meet with real estate agents);
• expenses incurred to clean or repair a rental residence to meet the landlord’s standards;
• costs to replace such personal-use items as drapery and carpets; and
• mail forwarding costs.

To claim a deduction for any eligible costs incurred, supporting receipts must be obtained. While the receipts do not have to be filed with the return on which the related deduction is claimed, they must be kept in case the CRA wants to review them.

Anyone who has ever moved knows that there are many details to be dealt with. In some cases, the administrative burden of claiming moving-related expenses can be minimized by choosing to claim a standardized amount for certain types of expenses. Specifically, the CRA allows taxpayers to claim a fixed amount, without the need for detailed receipts, for travel and meal expenses related to a move. Using that standardized, or flat rate method, taxpayers may claim up to $17 per meal, to a maximum of $51 per day, for each person in the household. Similarly, the taxpayer can claim a set per-kilometre amount for kilometres driven in connection with the move. The per-kilometre amount ranges from 45.5 cents for Alberta to 64 cents for the Yukon Territory. In all cases, it is the province or territory in which the travel begins which determines the applicable rate.

These standardized travel and meal expense rates are those which were in effect for the 2014 taxation year—the CRA will be posting the rates for 2015 on its website early in 2016, in time for the tax filing season.

The rules which govern the deduction of moving expenses are not complex, but they are very detailed. The best summary of those rules is found on the form used to claim such expenses—the T1-M, which was updated and re-issued by the CRA in January of this year. The current version of the form can be found on the CRA’s website at www.cra-arc.gc.ca/E/pbg/tf/t1-m/t1-m-14e.pdf, and more information is available at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/menu-eng.html. Details of the allowable amounts which may be claimed for standardized moving-related meal and travel expenses can be found on the same website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns248-260/255/rts-eng.html.

The full Canadian Real Estate Association report on current home sales activity can be found on the Association’s website at http://creastats.crea.ca/natl/index.htm.

According to figures posted on the Canada Revenue Agency (CRA) website, the Agency had, by April 19, 2015, received almost 16 million 2014 individual income tax returns, and had processed slightly more than 14 million of those returns. Those returns already processed represent about half of the total number of returns to be filed for the year: last year, the total number of T1 individual income tax returns filed was just over 28 million.

According to figures posted on the Canada Revenue Agency (CRA) website, the Agency had, by April 19, 2015, received almost 16 million 2014 individual income tax returns, and had processed slightly more than 14 million of those returns. Those returns already processed represent about half of the total number of returns to be filed for the year: last year, the total number of T1 individual income tax returns filed was just over 28 million.

Most (56%) of the returns filed so far this year were EFILED, while 30% were filed using the CRA’s online filing option, NETFILE, and the remaining 14% were paper filed. Whatever the filing method, once a return is filed the CRA’s process is to do an initial review based on the information provided by the taxpayer, and to issue a Notice of Assessment to that taxpayer. In some cases, the Agency will make changes or corrections (of an arithmetical nature—the CRA does not alter a return to add credits or deductions not already claimed by the taxpayer), while in other instances the return is “assessed as filed”—that is, the CRA agrees with the information filed by the taxpayer, and no changes to the return are needed. In either case, unless the taxpayer disagrees with and wishes to dispute the Notice of Assessment issued by the CRA, his or her tax filing obligations for the year are complete.

That process of initial review by the CRA, followed by the issuance of a Notice of Assessment can, however, be “short-circuited” in a couple of ways. First, the taxpayer sometimes realizes that the already-filed return contains an error, or second, the CRA determines that its initial review of the return cannot be completed until it obtains more information or documentation from the taxpayer.

In most cases, it is the taxpayer who discovers, after the return is filed, that information has been inadvertently misstated, or perhaps amounts have been omitted where an information slip was received after the return was filed. In such situations, the taxpayer is often at a loss to know how to proceed, but the process for amending a return is actually quite straightforward. The first reaction in such circumstances is sometimes simply to file another, corrected return, but that’s not the right course of action. Instead, the taxpayer should wait until a Notice of Assessment is received in respect of the return already filed, and then file a T1 Adjustment Request with the CRA, making the necessary corrections. That request for an adjustment to an already-filed return can be done in any one of three ways, once the Notice of Assessment is received. The available methods are outlined on the CRA website, as follows.

• Use the “change my return” option found on the CRA website in My Account at www.cra-arc.gc.ca/myaccount.
• Send a completed Form T1-ADJ, T1 Adjustment Request, to the taxpayer’s tax centre.
• Send a signed letter to the taxpayer’s tax centre asking for an adjustment to the return.

The easiest and quickest way of requesting an adjustment is through the CRA website’s “My Account” feature, but that option is available only to taxpayers who have already registered for that service. While doing so isn’t difficult (the steps to be taken to do so are outlined on the website at www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/pss_fq/cnd-eng.html#hlp1a), it does take a few weeks to complete the process.

Taxpayers who don’t want to deal with the CRA through its website, or who don’t think it’s worth registering for My Account just to deal with the Agency on a single issue, can obtain hard copy of the T1 Adjustment form from the CRA website. The CRA recently updated and re-issued its T1-ADJ form, and the most recent version of the form can be found at www.cra-arc.gc.ca/E/pbg/tf/t1-adj/README.html. Taxpayers who are unable to print the form off from the website can order a copy to be sent to them by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. Information on the CRA website indicates, however, that the print version of the updated form will not be available until May 20, 2015.

The use of the actual form isn’t mandatory—the third option of sending a letter to the CRA signed by the taxpayer is an acceptable alternative—but using a standardized form has two benefits. First, it makes it clear to the CRA that an adjustment is being requested, and two, filling out the form will ensure that the CRA is provided with all the information needed to process the requested adjustment. Once the form or letter is completed, it should be mailed or faxed to the Tax Centre to which the original return was sent. A taxpayer who isn’t sure anymore where that was can go on the CRA website at www.cra-arc.gc.ca/cntct/tso-bsf-eng.html and, by selecting his or her location from a drop-down menu of provinces and cities, can obtain the address of the Tax Centre to which the adjustment request should be sent.

Sometimes the CRA will contact the taxpayer even before the return is assessed, to request further information or documentation of deductions or credits claimed (for example, information on the custody of a child where one parent has claimed an equivalent to spouse deduction, or receipts documenting child care expenses claimed). In all cases, the best thing to do is respond to such requests promptly, and to provide the requested documents or information. The CRA can assess only on the basis of the information with which it is provided, and where a request for information or supporting documents for a deduction or credit claimed is ignored by the taxpayer, the assessment will proceed on the basis that that such support does not exist. Providing the requested information or supporting documents can usually resolve the question to the CRA’s satisfaction, and the assessment of the taxpayer’s return can then proceed.

There was much speculation—and more than a few hints dropped—that this year’s federal budget would include an increase in the amount which individual Canadians can contribute to a Tax-Free Savings Account (TFSA). That increase was announced as anticipated and, effective with the 2015 tax year, eligible individuals can now contribute up to $10,000 per year to a TFSA. The former limit was $5,500.

There was much speculation—and more than a few hints dropped—that this year’s federal budget would include an increase in the amount which individual Canadians can contribute to a Tax-Free Savings Account (TFSA). That increase was announced as anticipated and, effective with the 2015 tax year, eligible individuals can now contribute up to $10,000 per year to a TFSA. The former limit was $5,500.

It’s useful to review the rules governing TFSAs and TFSA contributions, as those rules have led to some confusion among Canadians in the past. Any Canadian resident who is 18 years of age or older can contribute amounts, to a specified maximum, to a TFSA each year. The maximum allowable annual contribution amount is the same for everyone, regardless of age or income. Amounts contributed to a TFSA are not deductible from income in the year they are contributed, but investment gains of any kind earned on those contributions are not taxed as they accumulate. As well, no tax is payable on withdrawals made from a TFSA, whether those amounts represent original contributions or investment gains.

One of the greatest benefits of a TFSA is its flexibility, in that contributions not made in a particular year can be carried forward and made in any subsequent year. In addition, where amounts are withdrawn from a TFSA, those amounts can be re-contributed in the year following that in which the withdrawal was made.

The TFSA program came into effect in 2009, and the annual contribution limit for 2009 through 2012 was $5,000. That limit was increased to $5,500 for 2013 and 2014. Consequently, it’s possible for individuals who have not made any TFSA contributions at all, who have contributed less than the maximum amount or who have withdrawn funds and not re-contributed them to have carryforward contribution room of up to $31,000.

More information on the TFSA program generally can be found on the Canada Revenue Agency website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html.

Most Canadians, especially those nearing retirement, have saved money through a registered retirement savings plan (RRSP). For all those individuals, no matter what the size of their RRSP or what other sources of retirement income they have, the same rule applies. By the end of the year in which they turn 71, an RRSP holder must collapse that RRSP. There are, essentially, three options available to the individual at that point. First, he or she can simply collapse the plan and have all funds in that plan treated (and taxed) as income for that year. Unless the amount within the RRSP is very small, that’s obviously not a tax-efficient plan, and not a recommended one. Second, the individual can collapse the RRSP and use the funds to purchase an annuity, which will provide a (taxable) income stream for the term of the annuity. That term can be for a fixed number of years, or for the rest of the individual’s life, or some combination of the two. The advantage of an annuity is that it does provide income security for the individual. However, annuity payout rates are based on the interest rates in effect at the time the annuity is purchased, and the current low interest rate environment means that annuity rates are not currently, by historic standards, particularly generous.

Most Canadians, especially those nearing retirement, have saved money through a registered retirement savings plan (RRSP). For all those individuals, no matter what the size of their RRSP or what other sources of retirement income they have, the same rule applies. By the end of the year in which they turn 71, an RRSP holder must collapse that RRSP. There are, essentially, three options available to the individual at that point. First, he or she can simply collapse the plan and have all funds in that plan treated (and taxed) as income for that year. Unless the amount within the RRSP is very small, that’s obviously not a tax-efficient plan, and not a recommended one. Second, the individual can collapse the RRSP and use the funds to purchase an annuity, which will provide a (taxable) income stream for the term of the annuity. That term can be for a fixed number of years, or for the rest of the individual’s life, or some combination of the two. The advantage of an annuity is that it does provide income security for the individual. However, annuity payout rates are based on the interest rates in effect at the time the annuity is purchased, and the current low interest rate environment means that annuity rates are not currently, by historic standards, particularly generous.

The third option, and the one chosen by most taxpayers, is to convert an existing RRSP into a registered retirement income fund (RRIF). Using a RRIF has a number of advantages. Where funds accumulated within an RRSP are moved to a RRIF, those funds can be invested in the same investment vehicles (mutual funds, GICs, bonds, etc.) as they were in the RRSP. Consequently, the invested funds can continue to grow and, as with the RRSP, investment growth within a RRIF is not taxable to the holder of the RRIF.

There are, however, two significant differences between an RRSP and a RRIF. First, once the funds are transferred to a RRIF, no additional contributions can be made. Second, the holder of a RRIF is required to withdraw a specified percentage of funds held within that RRIF each year, and any amounts withdrawn are taxed as income in that year.

It is the second requirement—that of mandatory annual withdrawals—that has been criticized in recent years as too restrictive and, especially, not in step with what might be called the retirement life cycle. The average life expectancy is increasing every year, and the criticism was that the current mandatory withdrawal rules forced individuals to withdraw too much in the early years of retirement, leaving them at risk of not having enough to meet costs (especially medical costs or costs for long-term care) which are more likely to arise in later years.

The recent federal budget included an announcement of a change in those mandatory withdrawal rates. In effect, the changes reduce the required percentage withdrawal by about 2 percentage points per year until age 95, when the old and new withdrawal percentages are the same. Those old and new withdrawal percentage requirements at specified ages are as follows:

Age at start of year             Existing withdrawal rate           New withdrawal rate

              71                                        7.38%                                         5.28%

              75                                        7.85%                                         5.82%

              80                                        8.75%                                         6.82%

              85                                        10.33%                                        8.51%

              90                                        13.62%                                       11.92%

       95 and over                                 20.00%                                       20.00%

Somewhat unusually, the new rules reducing mandatory RRIF withdrawals are effective on a retroactive basis. Those rules will take effect as of the beginning of 2015, assuming that the enabling legislation is passed by Parliament.

In some cases, individuals holding RRIFs may already have made withdrawals in 2015 which exceed the new minimum withdrawal percentage, or will have done so by the end of the year. The total amount withdrawn will be taxed as income for 2015, but individuals will be allowed to re-contribute any excess amount (that is, any amount greater than the new minimum required withdrawal percentage) to their RRIF on or before February 29, 2016, and to claim a deduction for that contribution on their 2015 tax return.

Finally, it should be noted that the new withdrawal limits, like the old ones, set out the minimum amount which must be withdrawn from a RRIF each year. Holders of RRIFs who wish, for whatever reason, to withdraw more than that minimum amount remain entitled to do so, while remembering than any RRIF withdrawals will be included in income and taxed in the year of withdrawal.

More information on the RRIF changes, including a table outlining the new minimum withdrawal percentages which apply to all age groups from 71 to 95, can be found in the 2015 Federal Budget papers, available on the Finance Canada website at www.budget.gc.ca/2015/docs/plan/anx5-1-eng.html#wb-cont.

An old but still valid axiom of tax planning is that the best year-end tax planning starts on January 1^st. The concept of year-end tax planning as a year-round activity may indeed be the ideal, but it’s certainly not the reality for most Canadian taxpayers. Some may be alerted to the need to think about current-year taxes by the approach of the calendar year end, while others have their memories jogged by an imminent RRSP contribution deadline. For many (if not most) Canadians, however, taxes aren’t thought of until it’s time to complete the annual tax return. But, even for those taxpayers, options to reduce the annual tax bill are still available, through careful completion of that return.

An old but still valid axiom of tax planning is that the best year-end tax planning starts on January 1^st. The concept of year-end tax planning as a year-round activity may indeed be the ideal, but it’s certainly not the reality for most Canadian taxpayers. Some may be alerted to the need to think about current-year taxes by the approach of the calendar year end, while others have their memories jogged by an imminent RRSP contribution deadline. For many (if not most) Canadians, however, taxes aren’t thought of until it’s time to complete the annual tax return. But, even for those taxpayers, options to reduce the annual tax bill are still available, through careful completion of that return.

The available options will, of course, depend on the family and financial circumstances of the individual taxpayer; what follows is a listing of the last-minute tax saving strategies likely to be of use to many Canadians.

Splitting income within the family unit

Income splitting is likely the strategy which has the greatest potential to create tax savings within a family. Briefly stated, income splitting works because Canada has a “progressive” tax system, meaning that tax rates increase as income rises. So, a family which has a single income earner earning $100,000 per year will pay more in tax than a family in which two income earners make $50,000 each, even though total family income is the same in both cases.

Of course, every dollar of tax saved by Canadian taxpayers means one dollar less of revenue for federal and provincial governments, so the ability to split income is tightly regulated. On the 2014 tax return, there are two broadly available income splitting opportunities.

The first is the so-called “Family Tax Cut”, which allows one spouse to transfer, on paper only (no actual transfer of funds is required), up to $50,000 in taxable income to his or her spouse, and have that income taxed in the hands of the spouse. The amount of tax which can be saved through this income splitting mechanism is, however, capped at $2,000 per family per year. The Family Tax Cut is claimed on Schedule 1-A, which is provided as part of the 2014 General Income Tax and Benefit package. More information on the Family Tax Cut is available on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns409-485/423-eng.html.

The second such income splitting opportunity for 2014 is available to older married or common-law Canadians who receive private pension income during the year. Those taxpayers are entitled to allocate up to half of that income to a spouse or common-law spouse for tax purposes. Unlike the Family Tax Cut, there is no absolute dollar limit or cap on the amount of income which can be transferred or the amount of tax which can be saved through pension income splitting. For purposes of pension income splitting, private pension income generally means a pension received from a former employer and, where the income recipient is over the age of 65, also includes payments from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF). Government source pensions, like payments from the Canada Pension Plan or Quebec Pension Plan, or Old Age Security payments do not qualify for pension income splitting.

The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension plan administrator.

Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032E(12), Joint Election to Split Pension Income,with their annual tax return. That form, which is unfortunately not included in the general tax return package issued by the CRA, can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1032/t1032-14e.pdf. As well, the General Income Tax Guide provides only a minimal amount of information on pension income splitting; much more extensive and detailed information on qualifying income, mechanics, benefits, and tax results of the strategy can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/menu-eng.html.

Determining when to claim a credit for charitable deductions

Canadians who make donations to registered charities are entitled to claim a non-refundable charitable donations tax credit for those donations, for both federal and provincial/territorial tax purposes. The amount of the provincial/territorial credit will vary by jurisdiction: the federal credit is calculated as 15% of donations up to $200, and 29% of donations over that amount.

Canadians are entitled to make a claim on the annual return for charitable donations made in the current (2014) year, or in any one of the previous five years. While it may seem counter-intuitive not to claim a contribution made during the year, in some cases a better tax result may be obtained by waiting.

For taxpayers whose total charitable donations made during 2014 are more than $200, the full claim should be made on the 2014 return – there is no benefit to such taxpayers in delaying the claim. Where, however, total charitable donations made during the year do not exceed that $200 threshold, it may be better to wait. For example, a taxpayer who contributes $150 to charity in a year and claims that amount on the return will receive a 15% credit. Where the same taxpayer makes a similar $150 donation in the next year and claims the entire $300 in donations on that year’s return, he or she will receive a credit of 15% on the first $200 and 29% on the balance of $100 in donations.

Aggregating medical expenses within a family

While many medical expenses of Canadians (doctor’s visits and hospital care) are covered by public health care plans, there is a long list of such expenses (like prescription drugs and dental care) which must be paid for out of pocket. For some Canadians, those costs are covered by an employer-sponsored plan, but for many others there is no public or private coverage.

What there is for such taxpayers is the ability to claim a federal tax credit equal to 15% of qualifying medical expenses. Each of the provinces and territories also offers a medical expense tax credit, with the percentage amount varying by jurisdiction.

In all cases, the credit for medical expenses can be claimed only on such expenses which exceed 3% of the taxpayer’s net income, or $2,171, whichever is less. It’s possible, however, for all medical expenses of both spouses and all children who were 17 years of age and under at the end of 2014 to be combined and claimed by either spouse. So, while the medical expenses incurred by a single family member might not be enough to allow him or her to make a claim, aggregating those expenses may well mean that total expenses are enough to go over the 3% of net income/$2,171 threshold.

In structuring the medical expense claim, there are two points to remember. Since total medical expenses claimable are those which exceed 3% of net income or $2171, whichever is less, the most benefit will be obtained if the spouse with the lower net income makes the claim for total family medical expenses. However, the medical expense credit is a non-refundable one, meaning that it can reduce tax payable, but cannot create or increase a refund. Therefore, it’s necessary that the spouse making the claim have tax payable for the year of at least as much as the credit to be obtained, in order to make full use of that credit.

More information on the kinds of expenses which qualify for the medical expense tax credit and on how to best structure the claim for that credit can be found on the CRA website at www.cra-arc.gc.ca/medical/.

Two reports released recently by Statistics Canada and by Canadian credit reporting agency TransUnion indicate that Canadians continue to rack up household and personal debt, but also that they might, perhaps, be getting better at managing that debt load.

Two reports released recently by Statistics Canada and by Canadian credit reporting agency TransUnion indicate that Canadians continue to rack up household and personal debt, but also that they might, perhaps, be getting better at managing that debt load.

Statistics Canada reports periodically on the amount of household debt that Canadians are carrying, measured as percentage of family disposable income. That percentage has been on an upward trajectory for several years, and the measurement for the fourth quarter of 2014 was no exception. StatsCan reported that credit-market debt, including mortgages, consumer credit, and non-mortgage loans, grew to 163.3% of disposable income. The 163.3% figure, which represents a new high in the debt-to-disposable-income ratio, means that, on average, Canadian families are carrying $1.63 in debt for every dollar of disposable income. The StatsCan report is available on the Agency’s website at www.statcan.gc.ca/daily-quotidien/150312/dq150312a-eng.htm.

The debt-to-disposable-income percentage is an important measure of the indebtedness of Canadians, but it is a relative measure, rather than one expressed in absolute figures, and it measures debt on a household rather than an individual basis. The information presented in the TransUnion report takes a slightly different approach. First, the numbers reported by TransUnion summarize individual rather than family indebtedness, and in absolute dollar figures, rather than as a percentage of income. Second, and more important, the debt figures included in the TransUnion report include only non-mortgage debt, which would typically mean credit cards, lines of credit and installment loans.

The distinction between the two kinds of debt is an important one. Except in rare circumstances, the amount of mortgage debt owed by an individual or family is less than the value of the property. Should it become difficult or impossible to continue to carry that mortgage, the option to sell and pay off the mortgage debt is always there. Lines of credit and credit cards, however, are unsecured debt, backed only by the borrower’s promise to repay.

Many installment loans also represent unsecured debts. While automobile loans are also typically structured as installment loans and the vehicle purchased is security for the debt, the reality is that vehicles depreciate quickly. Consequently, the value of the vehicle is very likely to be less than the outstanding balance of the loan quite soon after it is purchased, especially where there is no down payment and the total amount of the purchase is financed. As well, the time period over which automobile purchase loans are now provided has become longer and longer in recent years. While it used to be typical to pay off a car loan over 36 or 48 months, such loans are now available for a period of up to 7 years, meaning that the value of the automobile purchased will be less than the outstanding amount of the loan that much sooner.

The TransUnion report, a summary of which can be found on the company’s website at http://newsroom.transunion.com/transunion-low-interest-rate-environment-fuels-rise-in-canadian-debt-level/, shows that the average consumer debt carried by individual Canadians rose from $20,945 in the last quarter of 2013 to $21,428 in the last quarter of 2014, an increase of 2.3%. That’s not good news, but both the composition of that debt and the ability of Canadians to manage it have changed, for the better.

Balances owed on lines of credit showed the biggest increase over the year, rising 4.4% from $29,273 to $30,554. Average installment loan debt levels also increased, by 2.4%, from $21,665 to $22,187. However, balances in the category of debt that carries the highest interest rate—unsecured debt (i.e., credit cards)—have dropped, albeit marginally, from $3,738 to $3,659. Those figures seem to indicate that, while Canadians continue to rack up personal debt, they are managing that debt better by using lower interest rate products like lines of credit or installment loans, rather than high-interest credit cards.

The idea that Canadians may be getting better at managing personal debt is supported by a sharp drop in the delinquency (late payment) rate on some credit products. The 90-day delinquency rate for lines of credit dropped by nearly 13% from 2013 to 2014. Similarly, installment loan delinquency rates dropped over the same period by more than 12%.

The biggest risks when it comes to managing unsecured personal debt are, of course, a change in interest rates which increases the cost of repaying or even servicing that debt and/or a loss of income which undermines the debtor’s ability to keep up with payments. The TransUnion report indicates that “both consumer debt and delinquency performance usually lag behind general economic conditions”. The effects of the recent sharp decline in oil prices and possible future increases in interest rates both pose risks to Canadians’ continuing management of their personal debt loads.

Like the rest of the world, the Canada Revenue Agency (CRA) has moved in recent years to dealing with its client group—the Canadian taxpayer—online, through the Agency’s website. To do so, the CRA has steadily expanded its roster of online services, while at the same time reducing or eliminating the in-person, telephone, or paper service options it once provided.

Like the rest of the world, the Canada Revenue Agency (CRA) has moved in recent years to dealing with its client group—the Canadian taxpayer—online, through the Agency’s website. To do so, the CRA has steadily expanded its roster of online services, while at the same time reducing or eliminating the in-person, telephone, or paper service options it once provided.

Over the past few months, the CRA has once again altered its list of online services for individuals. In some cases, the changes represent a new service while, in others, an existing service has been discontinued or altered.

The main gateway to obtain personal tax information and to carry out tax-related tasks on the CRA website is My Account, which can be found on the CRA website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html. In order to obtain access to the services provided through My Account, a taxpayer must register online and request a CRA security code. That security code is then sent to the taxpayer, by regular mail, at the address the CRA has on record for him or her. Once the taxpayer has that information, he or she uses the security code to log into My Account.

When registering, a taxpayer can choose to use one of two methods for logging into My Account. Such logins can be done using a CRA ID and personal password, or the taxpayer can choose to log in using the same sign-in information (ID and password) which he or she already uses to do online banking at a Canadian financial institution. Choosing the second option means that the taxpayer needs to keep track of only one ID and password for both My Account and online banking. However, not all Canadian financial institutions have agreed to become “sign-in partners”—the list of those which currently provide that service are as follows.

• BMO Financial Group
• CHOICE REWARDS MasterCard
• Scotiabank
• Tangerine
• TD Bank Group

 Until February of 2015, the CRA also provided an online service called Quick Access. As the name implies, Quick Access provided taxpayers with access to personal tax information without the need to register for My Account and wait for a CRA security code to arrive by mail. In order to use Quick Access, a taxpayer was required to provide his or her social insurance number, date of birth, and some information from a previously filed tax return.

The Quick Access service was discontinued as of February 6, 2015. The CRA still does provide a kind of immediate access to personal tax information; however, to obtain that access, a taxpayer must register for My Account. The process works in this way:

1. A taxpayer must first go online and register for My Account.
2. The CRA will send the taxpayer a CRA security code by regular mail, and the process of completing the registration process for My Account will be as outlined above.

However, while the taxpayer is waiting for the CRA security code to arrive, he or she will have access to a limited amount of tax information, similar to the information that was once available through Quick Access. That information includes the following:

The last change made recently to the CRA’s online services has to do with e-mail communication between the Agency and taxpayers. This marks a change for the CRA which, until now, has never communicated with taxpayers by e-mail, as e-mail is not viewed as sufficiently secure.

Taxpayers who have registered for My Account can now, however, register for online mail by providing the CRA with their e-mail address. Once a taxpayer has registered for online mail, certain correspondence from the CRA will no longer be printed and mailed to the taxpayer. Instead, an email notification will sent to the email address provided by the taxpayer when new mail is available for him or her to view in My Account. For security reasons, this email notification will not contain any links to the CRA website. Currently, the only types of correspondence which will be eligible for online mail and e-mail notification are Notices of Assessment and Notices of Reassessment. The CRA expects, however, that additional types of correspondence will join that list in the future.

A word of warning: the new online mail service is the only instance in which the CRA will be communicating with a taxpayer by e-mail. That’s an important fact to remember, as many attempted taxpayer frauds are perpetrated through a purported e-mail from the CRA, usually asking for personal financial or tax information and asking the recipient to use a link to what is represented to be the CRA’s website, but is not. Such e-mails are never from the CRA and should be deleted without responding. The only legitimate e-mail a taxpayer will receive from the CRA will be a notification that new correspondence is available to be viewed in My Account. Such e-mails will be received only by taxpayers who have registered for My Account and for online mail, and those e-mails will never contain links to any other site.

Taxpayers who want to sign up for online mail can do so on the CRA website through My Account or can call the CRA’s individual income tax enquiries line at 1-800-959-8281. Finally, taxpayers will notice a new entry on page 1 of the General Income Tax and Benefit Return. That entry, which appears just below the box for personal identification information, allows a taxpayer who is registered for My Account to provide the CRA with the e-mail address at which he or she wishes to be contacted.

More information about the new online mail option can be found on the CRA website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/nlnml-eng.html, and on pages 10 and 60 of the 2015 General Income Tax and Benefit Guide.

For even the most determined of procrastinators, the deadline for filing an individual income tax return for the 2014 tax year is imminent. That deadline will come on Thursday, April 30 for most Canadians, and on Monday, June 15 for the self-employed and their spouses.

For even the most determined of procrastinators, the deadline for filing an individual income tax return for the 2014 tax year is imminent. That deadline will come on Thursday, April 30 for most Canadians, and on Monday, June 15 for the self-employed and their spouses.

Canadian taxpayers have a choice of three methods for filing of 2014 tax returns—paper filing, NETFILING, or EFILE. For the minority of taxpayers who wish to file a paper return, that option is still available, although not as easy as it was in previous years. A few years ago, the Canada Revenue Agency (CRA) ceased its long-standing practice of mailing personalized income tax return forms to Canadians. That change had two consequences. First, taxpayers who wish to use a paper form to file must now obtain one themselves, either by picking up a form and income tax guide at a Canada Post location or at a Service Canada office (a listing of such offices can be found at www.servicecanada.gc.ca/cgi-bin/sc-srch.cgi?ln=eng, or by ordering a form and guide to be sent by mail, by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. It’s also possible to print off hard copy of the tax return form from the CRA website at www.cra-arc.gc.ca/formspubs/t1gnrl/menu-eng.html.

The second, more significant consequence of the CRA’s decision to no longer provide personalized tax returns is the loss of specialized tax forms. At one time, there were several versions of the individual income tax return, each tailored to a specific group of taxpayers. For instance, the CRA once provided a specialized form for seniors, and also a simplified form for taxpayers who had relatively straightforward tax situations. Those specialized forms are no longer available, and all taxpayers must now use the lengthier and more complex T1 General return form.  

At one time, the CRA also offered taxpayers the choice of filing a return by telephone—known as TELEFILE—but that service has also been discontinued.

The majority of Canadian taxpayers now file their income tax returns electronically. Those wishing to do so have two options: they can file the return themselves using the CRA’s NETFILE service, or they can choose to pay someone (generally, a professional tax preparation service, or a bookkeeper or accountant) to prepare and EFILE the return for them.

While EFILE is the most-used method of filing, millions of Canadians choose to do their own returns using the NETFILE option. In order to use NETFILE, it’s necessary to prepare one’s tax return using tax preparation software. While there are any number of such software packages available to purchase this time of year, taxpayers should also be aware that the necessary software can be obtained, free of charge in most cases, from the CRA website. A listing of such software authorized for use in the preparation of 2014 tax returns can be found on the CRA website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/netfile-impotnet/crtfdsftwr/menu-eng.html.

The NETFILE service for filing of returns for 2014 started on February 9, 2015 and will be available until January 15, 2016. It’s not necessary to have an access or security code in order to NETFILE a return; instead, all software programs available this year allow taxpayers to submit their returns directly to the CRA, without the need to log onto the CRA's NETFILE website. The NETFILE service is available 21 hours a day, 7 days a week, on the following schedule. 

The CRA also provides a help function for anyone who encounters difficulty or problems when trying to NETFILE. The toll-free number for the e-Services help desk number is 1-800-714-7257, and their service hours are as follows.

The e-Services help desk provides assistance only with queries or problems encountered while NETFILING a return, and not with questions on how to complete the return. Taxpayers who have questions about how to complete their return (no matter which filing method they choose to use) can call the CRA’s individual income tax enquiries line at 1-800-959-8281.

While tax return forms and filing methods have changed and changed again over the years, there is one constant—the filing and payment deadlines. For the majority of Canadians, individual income tax returns for the 2014 tax year must be filed with the CRA on or before April 30, 2015, while self-employed taxpayers and their spouses have until June 15, 2015 to file their returns. For all taxpayers, however, where there is a tax amount still to be paid for the 2014 tax year, that amount is due and payable in its entirety on or before April 30, 2015.

Canadians whose adult memories reach back a quarter century to the early 1990s will likely remember a series of television ads picturing middle-aged individuals or couples enjoying life in an idyllic setting, the result of having retired at the age of 55. The concept of that a financially comfortable retirement could be achieved before the traditional retirement age of 65 was a relatively novel one, and for working Canadians of that generation, the term “Freedom 55” came to represent an ideal.

Canadians whose adult memories reach back a quarter century to the early 1990s will likely remember a series of television ads picturing middle-aged individuals or couples enjoying life in an idyllic setting, the result of having retired at the age of 55. The concept of that a financially comfortable retirement could be achieved before the traditional retirement age of 65 was a relatively novel one, and for working Canadians of that generation, the term “Freedom 55” came to represent an ideal.

Of course, subsequent economic and financial market events have made the idea of a comfortable, financially secure retirement at the age 55 just that—an ideal that relatively few can actually achieve. It seems, however, that many Canadians apparently now view even leaving the work force for full retirement at the traditional age of 65 as an unlikely prospect.

In 2008, Sun Life Financial started surveying Canadians for what they called their “unretirement index”. Simply put, Canadians were asked whether they expected, at the age of 66, to be retired, or whether they would still be working, either full-time or part-time. The survey is conducted for the most part with a group of 3,000 working Canadians ranging in age from 30 to 65 years, with weighting used to ensure that the demographics of that group reflected the Canadian adult population as a whole, according to census data.

Given the number of financial crises and changes which have affected Canadians since 2008, it’s not surprising that the data coming out of that survey has changed over the intervening seven years, and the results mirror what has been happening in the financial markets and the economy as a whole. This, year, however, marks a watershed in the survey results.

In 2009, (before, it seems, the full impact of the collapse of financial markets had hit retirement savings portfolios), more than half (55%) of those surveyed expected to be retired by the age of 66. The following year, with many retirement savings portfolios decimated by the market collapse, and the “Great Recession” underway, that figure was halved, as only 28% of Canadians questioned felt confident that they would be able to retire by age 66. The percentage of those anticipating retirement by that age stayed relatively level throughout 2011, 2012, and 2013, although the group which expected to still be working full-time at that age rose after 2011. By 2012 and 2013, the two figures were statistically tied, with about 27 or 28% of those surveyed expecting full retirement by age 66 and another 26 or 27% expecting to be working full-time.

For the first time, however, in this year’s survey, a larger percentage of respondents indicated that they expected to still be working full-time at age 66 (32%) than the percentage (27%) which were looking forward to retirement by that time. It’s noteworthy, as well, that those who expect to still be working past the traditional retirement age of 65 believe that will be their reality despite the fact that they will have reached the age at which they can receive full Canada Pension Plan and Old Age Security benefits, as well as, potentially, the Guaranteed Income Supplement.

The results of the survey may also, however, show a change in how Canadians are defining or approaching retirement. Survey respondents who planned to be working past the traditional retirement age of 65 were asked for their reasons for continuing to work. While a majority (59%) of that group indicated that they would continue to work out of financial necessity, a significant number (41%) answered that staying in the work force was their own choice, with some of those choosing to work part-time. Those responses may indicate that retirement is being seen less as an either/or proposition—full-time work or full-time leisure—and more as a gradual transition from one to the other.

The Sun Life Canadian Unretirement Index Report for 2015 can be found on the company’s website at http://cdn.sunlife.com/static/canada/sunlifeca/About%20us/Canadian%20Unretirement%20Index/Unretirement%20Index%20tool/2015_Sun_Life_Canadian_Unretirement_Index_Report_en.pdf.

As our tax system has become more and more complex, the number of individuals willing to brave the annual trip through 485 lines of the tax return and a 68-page tax guide on their own is declining. Consequently, the percentage of Canadians who have their return prepared by someone else with, presumably, more expertise has continued to increase.

As our tax system has become more and more complex, the number of individuals willing to brave the annual trip through 485 lines of the tax return and a 68-page tax guide on their own is declining. Consequently, the percentage of Canadians who have their return prepared by someone else with, presumably, more expertise has continued to increase.

Whether that someone else is a willing family member or friend, or a professional tax preparer and/or tax-filing service, having someone else prepare the return means, in most cases, that the taxpayer will be dealing with the Canada Revenue Agency (CRA) through a representative.

It sometimes comes as a surprise to taxpayers that the CRA will not—and, in fact, cannot—provide a taxpayer’s personal tax information to anyone other than that taxpayer, unless written authorization has been provided in advance, or the taxpayer himself or herself is there to provide verbal authorization. While it may seem reasonable for a spouse who does the tax returns for the entire family or for an adult child completing a return for an elderly parent to be given access to information needed to complete that return, the restrictions on the release of such information are, in fact, very much in the best interests of the taxpayer. Most such requests for another individual’s personal tax information are genuine and well-intentioned, but that’s not, unfortunately, always the case.

The CRA provides a prescribed form—the T1013(E), Authorizing or Cancelling a Representative (available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1013/README.html)—which can be used by anyone to name any other person as their representative.

The first decision which must be made by a taxpayer who is authorizing a representative through a T1013 is the level of authority he or she wants to grant to a representative and that, in turn, will depend on what he or she wants the representative to be able to do. The CRA provides for two levels of authorization on the T1013, and broadly speaking, the first (Level 1) provides the representative with the right to receive information while the higher (Level 2) access enables the representative to make changes to the taxpayer’s account. The specific rights granted to a representative at each level are as follows.

Where a representative has been provided by the taxpayer with Level 1 access, the CRA can disclose the following information to that representative:

• information given on the taxpayer’s income tax return;
• adjustments to the taxpayer’s income tax return;
• information about the taxpayer’s RRSP, Home Buyers' Plan, TFSA, and Lifelong Learning Plan;
• the taxpayer’s accounting information, including balances, payment on filing, and instalments or transfers;
• information about the taxpayer’s benefits and credits (Canada child tax benefit, universal child care benefit, GST/HST credit, working income tax benefit); and
• the taxpayer’s marital status (but not information related to his or her spouse or common-law partner).

A Level 1 representative is not allowed to request changes (adjustments and transfers) to the taxpayer’s account.

A representative who has been provided by the taxpayer with Level 2 access has all the powers of a Level 1 representative, as well as the right to ask for adjustments to the taxpayer’s income, deductions, non-refundable tax credits; and accounting transfers. A Level 2 representative is also able to submit a request for taxpayer relief, and to file a notice of objection or an appeal on the taxpayer’s behalf.

There are some actions which cannot be taken by either a Level 1 or a Level 2 representative. A representative, regardless of level of authorization, will not be allowed to change the taxpayer’s address, marital status, or direct deposit information, or to authorize, view, or cancel other representatives on the taxpayer’s file.

A taxpayer naming a representative must also decide whether he or she wants the representative to have online access to the taxpayer’s account, or to be able to deal with the CRA on his or her behalf only by telephone, in person, or by mail. Where the authorization provides only for the latter (no online access), the taxpayer can specify the tax years for which access is being authorized, and the level of authorization granted for each such year. Where online access is authorized, however, that access must be for all tax years, although the taxpayer can still specify the level (Level 1 or Level 2) of access to be allowed. Finally, the taxpayer can also specify a date on which the authorization will expire, if he or she wishes to do so.

It is readily apparent that naming someone as your representative with the CRA, even at the lowest level for a limited period of time, gives that person access to an enormous amount of personal tax and financial information. Taxpayers should be aware, when providing authorization, exactly what they have agreed to and for what length of time. Where a taxpayer engages the services of a tax return preparation service, for instance, that service will frequently ask the taxpayer to sign an authorization enabling them to act as the taxpayer’s representative with the CRA. It’s a reasonable request, given that the tax return preparer may need to contact the CRA to obtain information (e.g., from prior year returns) which is needed to prepare the tax return for the current year. Taxpayers who authorize a representative in such circumstances should, however, be careful to ensure that the authorization is limited, usually to the specific time during which the return will be prepared. Not infrequently, taxpayers have been asked to sign an authorization which does not specify any time frame and are surprised to find that such an authorization is still in effect, giving the representative the right to obtain information about that taxpayer, even years later, long after the taxpayer had finished his or her dealings with the tax return preparation service.

The need to designate a representative to deal on one’s behalf with the CRA is fairly commonplace. However, giving another person access to your personal tax information, even for a limited purpose or a limited time, is a significant step which should not be taken without some thought. Where it is determined that providing such access is necessary, careful consideration should be given to the level of access needed, the tax years for which access is required and, possibly most important, providing a date on which that authorization will expire.

Spring is, of course, income tax return filing season in Canada, and over the next four months millions of Canadians will file a return for the 2014 tax year. The filing deadline for this year is Thursday, April 30 for most taxpayers, and Monday June 15 for self-employed taxpayers and their spouses.

Spring is, of course, income tax return filing season in Canada, and over the next four months millions of Canadians will file a return for the 2014 tax year. The filing deadline for this year is Thursday, April 30 for most taxpayers, and Monday June 15 for self-employed taxpayers and their spouses.

For most Canadians, doing their taxes is an annual chore which is best gotten out of the way as soon as possible. For many others, however, completing and filing the return is something that just doesn’t get done. Sometimes the cause is just procrastination (no one really likes doing their taxes), while in other cases, a taxpayer is worried that there will be a large balance owing, and avoids completing and filing the return for that reason.

Of course, once a taxpayer fails to file an annual return, the problem starts to compound itself. Filing a return in a subsequent tax year will surely draw the attention of the tax authorities to the year or years in which a return wasn’t filed. Worse, if there was a balance of taxes owed, that amount can only have gotten larger with the addition of interest charges, and it is likely that penalties will have been levied as well. Consequently, a failure to file, for whatever reason, tends to become an ongoing, multi-year problem.

Taxpayers who find themselves in a situation in which they have failed to file a return in a previous year (or who have filed a return or returns in which they failed to report income or claimed deductions or credits to which they were not entitled) do have a option other than just hoping that it never comes to light. The Canada Revenue Agency (CRA) offers an administrative program which allows such taxpayers to “come clean” with respect to past errors or omissions, pay any back taxes owed (plus interest) while avoiding the imposition of penalties or, in the worst-case scenario, prosecution. That option is the CRA’s Voluntary Disclosure Program (VDP).

The CRA will accept a voluntary disclosure and provide relief with respect to a wide range of taxpayer errors and omissions, including the following:

• failure to fulfill obligations under the tax legislation;
• failure to report taxable income received;
• claiming of ineligible expenses on the tax return;
• failure to remit employees’ source deductions;
• failure to report an amount of GST/HST (which may include undisclosed liabilities or improperly claimed refunds or rebates or unpaid tax or net tax from a previous reporting period);
• failure to file information returns; or
• failure to report foreign-sourced income that is taxable in Canada.

There are also situations in which a voluntary disclosure cannot be made, but relatively few of those would be relevant to most individual taxpayers. Individual taxpayers cannot make a voluntary disclosure with respect to bankruptcy returns or with respect to income tax returns with no taxes owing or refunds expected.

Most taxpayers are understandably nervous about taking the initiative to come clean with the CRA about past transgressions. For those taxpayers, the CRA provides the option of an anonymous or “no-name” disclosure which, in effect, allows the taxpayer to test the waters. In a no-name disclosure, the taxpayer provides all of the information which would usually be made available to the CRA in a voluntary disclosure, except his or her identity. (The taxpayer must, however, provide the first three characters of his or her postal code.) Following the no-name disclosure, a VDP officer from the CRA canconfirm that there is nothing set out in the information provided that may immediately disqualify the taxpayer from further consideration under the VDP. If all the required information for a complete disclosure, except for the identity of the taxpayer, has been submitted, the CRA can also review the information provided and advise on the possible tax implications of the disclosure.

After a no-name disclosure is made, the taxpayer has 90 days to provide his or her identity. If the taxpayer decides not to disclose that identity, the file is closed. If, based on the discussions which have taken place with the CRA, the taxpayer decides to provide identifying information and continue with the disclosure, the CRA will make a decision on the submission and inform the taxpayer of that decision.

Whether the initial contact with the CRA is on a no-name basis or not, there are four conditions which the CRA imposes before it will consider a disclosure to be eligible for the VDP.

First, the disclosure made must be truly voluntary, meaning that it must take place before the taxpayer is aware of any compliance or enforcement action which the CRA is taking against him or her, including a simple “Request to File” an outstanding return or returns. That restriction also applies where the taxpayer is aware of compliance or enforcement action taken against another person (like the taxpayer’s spouse or an unrelated third party) which is related to the information the taxpayer is disclosing.

Second, the disclosure must involve the application of a penalty. Since the purpose of the VDP is to allow a taxpayer to come forward and pay outstanding taxes plus interest, while still avoiding the imposition of penalties, it would make no sense to go through the VDP where no penalties are involved.

Third, any information to be disclosed must be at least one year overdue. So, for example, a taxpayer could not now make a voluntary disclosure of a failure to file a return for 2013, since that return was due less than a year ago (April 30 or June 15, 2014). He or she could, however, make a voluntary disclosure of a failure to file a return for 2012 or any previous year.

Finally, the CRA will consider a voluntary disclosure only where the taxpayer provides full information on all outstanding errors or omissions—specifically, as described by the Agency, “[t]he taxpayer must provide full and accurate facts and documentation for all taxation years or reporting periods where there was previously inaccurate, incomplete or unreported information relating to any and all tax accounts with which the taxpayer is associated.” The CRA is not interested in receiving disclosures in respect of only some but not all taxation years or only some but not all errors or omissions made on prior year returns.

Making a voluntary disclosure to the CRA is a significant step, particularly where the disclosures affect multiple taxation years, or significant sums of money are involved. However, the availability of the “no-name” disclosure process does allow taxpayers to get a sense of what their liabilities might be before they take the step of identifying themselves to the tax authorities. And, as the late filing or other penalties which can be imposed by the CRA can be substantial, the opportunity to avoid the imposition of such penalties can itself serve as an incentive to come forward.

More information on the Voluntary Disclosures Program can be found on the CRA website at www.cra-arc.gc.ca/voluntarydisclosures/.

Every annual tax filing season brings with it a number of changes to the annual return. In some years those changes are broad-based, affecting large numbers of taxpayers, while in others the changes are more targeted, and of interest to only specific groups within the overall population.

Every annual tax filing season brings with it a number of changes to the annual return. In some years those changes are broad-based, affecting large numbers of taxpayers, while in others the changes are more targeted, and of interest to only specific groups within the overall population.

The changes which will be found this year on the individual income tax return for 2014 fall into both categories. The largest single group which will notice changes to the return (and, in many cases, changes to their tax liability for 2014) are families with young children. Other changes are more narrowly focused, affecting individuals who are eligible to claim the disability tax credit, or those who act as emergency services or search and rescue volunteers.

Each of the following measures are effective as of the 2014 tax year, and can be claimed on the return to be filed this spring.

Family tax cut

While the federal government refers to this measure as a tax “cut”, it is more accurately described as an income splitting opportunity which is available to families who have children under the age of 18. Such families can transfer (on paper only—no actual transfer of income is required) up to $50,000 in taxable income from one spouse to the other and have that income taxed in the hands of the recipient spouse. Such a transfer will be of most benefit where there is a significant disparity between the incomes of the two spouses (e.g., where one spouse works outside the home but the other does not). And, in all cases, the amount of the tax savings which can be realized by the transfer of income is capped at $2,000 per family per year.

Adoption expenses tax credit

Canadian families who adopt children can incur significant costs in the course of arranging and finalizing an adoption, particularly for international adoptions. Such families are entitled to claim a non-refundable tax credit to help offset the costs involved in such adoptions—including the costs of necessary travel.

The credit is calculated as 15% of eligible expenses and, before 2014, the amount of such eligible expenses for purposes of the credit was limited to $11,669 per child. For 2014 and subsequent tax years that limit has been increased to $15,000 per child, meaning that adoptive parents who are able to make the maximum claim will reduce their federal taxes by $2,250 (15% of $15,000).

Children’s fitness tax credit

For several years, the federal government has provided a non-refundable childrens’ fitness tax credit to help reduce the net cost to parents of enrolling their children in sports or fitness-related activities. Since the credit was introduced, the maximum amount claimable per child per year has been $500. For 2014 and subsequent years, that amount has been increased to $1,000, meaning that parents who claim the maximum amount will reduce their federal taxes by $150.

Medical expense claims by disabled taxpayers

Canadians whose daily activities are made significantly more difficult because of a disability may be entitled to claim a disability tax credit (DTC). For those taxpayers who are eligible for the DTC, the list of medical expenses which they can claim for purposes of the medical expense tax credit has been expanded. For 2014 and subsequent tax years, amounts paid as salary to a person who designs a personalized therapy plan can be claimed as a medical expense for purposes of the medical expense tax credit.

Volunteer firefighters, emergency services volunteers, and search and rescue volunteers

Special tax treatment, including tax credits and income exemptions, are provided to individuals who work as volunteer firefighters, emergency services volunteers or search and rescue volunteers. The rules on how those credits and income exemptions interact have changed for 2014, and the new rules are as follows.

Individuals who are volunteer firefighters or search and rescue volunteers (and who meet the requirements with respect to the number of hours of eligible service provided during the year) can claim an amount of $3,000 per year. That amount is converted to a 15% non-refundable tax credit, meaning that federal taxes for the year are reduced by $450.

Emergency services workers, including volunteer firefighters, volunteer search and rescue workers, and volunteer ambulance technicians who receive honoraria or nominal payments from a municipality or other public agency for their work are entitled to exclude the first $1,000 of such payment from income. In other words, only remuneration over $1,000 must be reported as income for tax purposes.

It is not possible to claim both the $3,000 amount and the $1,000 income exemption. The choice is the taxpayer’s, and individuals who are eligible for both must determine which claim provides a better tax result in their circumstances. As well, an individual who provides services as both a volunteer firefighter and a search and rescue volunteer can claim only one $3,000 amount for a tax year. However, hours put in at either type of work can usually be counted for purposes of accumulating the minimum number of hours needed to make that single claim.

Applying for the GST/HST credit

Taxpayers will notice that, for the first time, there is no box on page 1 of the individual income tax return which must be checked in order to apply for the Goods and Services/Harmonized Sales Tax credit. Such an application is no longer required, as the Canada Revenue Agency (CRA) will automatically assess eligibility for the credit based on the information provided in the return, and will then notify those who are eligible to receive the credit. For married or common-law couples, only one spouse can receive the credit, and the credit will be paid to the person whose return is assessed first.

Mineral exploration tax credit

Eligibility for the mineral exploration tax credit for 2014 has been extended to flow-through share agreements entered into before April 2015.

The final change for 2014 returns isn’t on the return itself, but may be of interest to taxpayers who want to find out the status of a return already filed. Taxpayers who provide the CRA with an e-mail address, either on their tax return or online, can receive an e-mail notification when their 2014 notice of assessment or re-assessment is available online on the CRA website. More information about the e-mail notification process is available at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/nlnml-eng.html.

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues.

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues. They can be accessed below.

Corporate:

Issue #31 Corporate

Personal:

Issue #31 Personal

Canadian taxpayers don’t need a calendar to know that the registered retirement savings plan (RRSP) contribution deadline is approaching—the glut of television, radio, and internet ads which fill the airwaves and computer screens this time of year are reminder enough. And, while RRSP planning and retirement planning generally are best approached as an ongoing, year-round activity, it is true that an imminent deadline tends to focus the minds of taxpayers on such issues.

Canadian taxpayers don’t need a calendar to know that the registered retirement savings plan (RRSP) contribution deadline is approaching—the glut of television, radio, and internet ads which fill the airwaves and computer screens this time of year are reminder enough. And, while RRSP planning and retirement planning generally are best approached as an ongoing, year-round activity, it is true that an imminent deadline tends to focus the minds of taxpayers on such issues.

This year, the deadline for contributions to an RRSP which can be deducted on the 2014 tax return is Monday March 2, 2015. (While the deadline is technically 60 days after the calendar year-end, or March 1, the federal government has invariably extended that deadline by one day when March 1 falls on a Sunday, as it does this year.)

There’s not a lot that’s new with respect to the rules governing RRSP contributions for 2014. The maximum allowable contribution for the year is 18% of earned income for 2013, or $24,270, whichever is less. Many if not most Canadians, however, have unused RRSP contribution room, the result of having made less than the maximum allowable contribution in previous years. Consequently, almost everyone’s RRSP contribution limit for 2014 will be much higher than the $24,270 statutory amount.

There are a number of ways to find out one’s actual maximum allowable contribution for 2014. Taxpayers who have kept the Notice of Assessment from their 2013 tax return will find that information on page 1 of the Notice. The information is also available online, using the Canada Revenue Agency’s (CRA) “Quick Access” feature at www.cra-arc.gc.ca/quickaccess/. It’s not necessary to pre-register to use Quick Access, but taxpayers wishing to do so must provide their social insurance number, date of birth, and the amount entered on line 150 of their 2013 tax return. Finally, taxpayers can call the CRA’s Tax Information Phone Service at 1-800-267-6999. In order to obtain RRSP contribution information (or any personal tax information) over the phone, the taxpayer must provide his or her date of birth and social insurance number, along with the figure reported on line 150 of the 2013 tax return, in order to fulfill the CRA’s security requirements.

Once the contribution limit for 2014 is determined, the taxpayer is free to make a contribution of any amount up to that limit and to then deduct that contribution amount on the return for 2014. Taxpayers who make a contribution in the first two months of 2015 also have the option of deducting some or all of that contribution on the return for 2015, to the extent that it was not claimed on the 2014 return.

More information on making an RRSP contribution for 2014, and the RRSP system generally is available on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/menu-eng.html.

The announcement of a change in our tax laws to permit income splitting within families in order to reduce the overall family tax burden has received a lot of attention in the media of late. What’s not as well known is the fact that older Canadian taxpayers have in fact been able for several years to benefit from a similar income splitting strategy. Generally speaking, the opportunity to split pension income is available to couples who are 65 and over, and are receiving income from either RRSP/RRIF savings or from an employer-sponsored pension plan.

The announcement of a change in our tax laws to permit income splitting within families in order to reduce the overall family tax burden has received a lot of attention in the media of late. What’s not as well known is the fact that older Canadian taxpayers have in fact been able for several years to benefit from a similar income splitting strategy. Generally speaking, the opportunity to split pension income is available to couples who are 65 and over, and are receiving income from either RRSP/RRIF savings or from an employer-sponsored pension plan.

The reason that many Canadians, even those that can benefit from it, have never heard of pension income splitting is that it gets virtually no coverage in the media. While Canadians are inundated during the first two months of the year with advertisements extolling the virtues of making contributions to registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), or even registered education savings plans (RESPs), pension income splitting is never mentioned. There are no TV commercials or other media promotions for pension income splitting, as it is one of the few tax-planning strategies in which no one but the taxpayer gains a financial benefit.

The information provided with the annual tax return form also doesn’t highlight the benefits of pension income splitting, and the form needed to carry out a pension income splitting strategy isn’t included in the General Income Tax Return package. The guide issued by the CRA for 2014 returns does flag the pension income splitting option, in the same manner as all other deductions and credits which may be of particular relevance to seniors. However, the material on income splitting included in the guide addresses only the mechanics of filing, with no explanation of the tax-saving benefits which can be obtained. Consequently, unless a taxpayer is getting good tax-planning or tax return preparation advice, it’s likely that he or she could overlook a significant opportunity to reduce his or her tax burden.

The scarcity of information on the benefits of pension income splitting is particularly unfortunate in that the strategy is one of the few exceptions to the rule that if something sounds too good to be true, it probably is. What pension income splitting offers is the opportunity to save tax without any expenditure of time or money, or any need to pre-plan. In a nutshell, pension income splitting allows married taxpayers 65 years of age and over, (or, for some types of income, those over the age of 60), when filing their tax returns, to divide their private pension income in a way which creates the best possible tax result, meaning the lowest possible tax bill.

Dividing income between spouses makes for a lower overall tax bill because of the way our tax system is structured. Canada’s tax system is what is known as a “progressive” tax system, in which the rate of tax imposed increases as income rises. In very general terms, for 2014, the first $44,000 of taxable income attracts a combined federal-provincial rate of around 25%. The next $44,000 of such income, however, is taxed at a rate of just under 35%. When taxable income exceeds $136,000, the tax rate imposed can approach 50%. While those percentages and income thresholds will vary by province, provincial and territorial tax rates will, in nearly every province or territory, increase as taxable income goes up. (The one exception to that rule is the province of Alberta, which imposes a flat 10% tax rate on all individual taxable income. However, Alberta taxpayers, like those in other provinces, will still pay increasing federal rates as income rises.) Dividing income allows a greater proportion of that income to be taxed at lower rates. Of course, that means that the total tax payable (and therefore government tax revenues) will be reduced. Consequently, our tax laws include a set of rules known as the “attribution rules” which seek to prevent strategies to divide income in this way. Pension income splitting is a government-sanctioned exception to those attribution rules.

The general rule with respect to pension income splitting is that taxpayers who receive private pension income during the year are entitled to allocate up to half that income with a spouse for tax purposes. In this context, private pension income means a pension received from a former employer and, where the income recipient is over the age of 65, payments from an annuity, a registered retirement savings plan (RRSP), or a registered retirement income fund (RRIF). Government source pensions, like payments from the Canada Pension Plan, Quebec Pension Plan, or Old Age Security payments do not qualify for pension income splitting.

The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension plan administrator.

Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032(E)12, Joint Election to Split Pension Income, with their annual tax return. That form can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1032/t1032-12e.pdf, or can be ordered by calling 1-800-959 8281.

On the T1032, the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for the particular tax year. Since the splitting of pension income affects both the income and the tax liability of both spouses, the election must be made and the form filed by both spouses—an election filed by only one spouse or the other won’t suffice. In addition to filing the T1032, the spouse who actually receives the pension income must deduct from income the pension income amount allocated to his or her spouse. That deduction is taken on line 210 of his or her return for the year. And, conversely, the spouse to whom the pension income is being allocated is required to add that amount to his or her income on the return, this time on line 116. Essentially, to benefit from pension income splitting, all that’s needed is to for each spouse to file a single form with the CRA and to make a single entry on his or her tax return for the year.

Generally, when taxpayers sit down to complete their income tax returns this spring, it will be too late to take any action which will reduce taxes payable for the 2014 tax year—in most cases, such actions needed to be taken before the end of the 2014 calendar year (or, for RRSP contributions, by March 2, 2015). One of the best attributes of income splitting as a tax-planning strategy is that it doesn’t have be addressed until it’s time to file the return for 2014. By the end of February or early March, taxpayers will have received the information slips which summarize their income for the year from various sources. At that time, couples who might benefit from this strategy can review those information slips and calculate the extent to which they can make a dent in their overall tax bill for the year through a little judicious income splitting.

Those wishing to obtain information on pension income splitting beyond what is found in the General Income Tax Guide should refer to the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/menu-eng.html, where detailed information is provided.

The early months of the new calendar year can feel like a never-ending series of bills and other financial obligations. Credit card bills from holiday spending, or perhaps a mid-winter vacation, are due or coming due. The RRSP deadline of March 2, 2015 is approaching, and the April 30, 2015 deadline for payment of 2014 taxes owed is not far behind.

The early months of the new calendar year can feel like a never-ending series of bills and other financial obligations. Credit card bills from holiday spending, or perhaps a mid-winter vacation, are due or coming due. The RRSP deadline of March 2, 2015 is approaching, and the April 30, 2015 deadline for payment of 2014 taxes owed is not far behind.

As if that series of financial hits weren’t enough, many Canadians must also contend with an instalment reminder received from the Canada Revenue Agency (CRA) around the middle of February. While many Canadians who receive such reminders are already familiar with the tax instalment process, that doesn’t make the reminder any more welcome. For others, especially the newly retired, or perhaps the newly self-employed, who have been accustomed throughout their entire working life to having tax deducted from their paycheque and then remitted to the CRA on their behalf, the idea of paying taxes by instalment is unfamiliar and puzzling.

For most Canadians, income taxes owed are deducted by their employer from their paycheques and remitted to the CRA on their behalf. While that system is efficient, it’s also largely invisible to the individual employee/taxpayer. Consequently, taxpayers, especially the newly retired, are sometimes surprised to find that they must make arrangements to ensure that taxes are paid throughout the year, in order to avoid having a large tax balance owed when the return for 2015 is filed in the spring of 2016.

The instalment payment system is one way in which those taxes can be paid throughout the year. Generally, a taxpayer will receive an instalment reminder process when deductions made at source (that is, deductions made by the payor and remitted on the individual payee’s behalf to the CRA) are not made at all (as in the case of self-employment income) or are not sufficient to cover the individual’s income tax bill for the year (as often occurs with retirees, especially the newly retired). However, no matter what kind of income one receives, or the reason that sufficient tax has not been deducted at source, the options available to a taxpayer who receives such a reminder are identical.

Canadian federal tax rules provide that a taxpayer may be required to pay income tax by instalments where the amount of tax owing on filing is more than $3,000 in the current year (2015) and either of the two previous years (2013 or 2014). Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income is at least $3,000 less than their total tax liability for the current and either of the two previous years. Such instalment payments of tax are then due on March 15, June 15, September 15, and December 15 of each year.

An Instalment Reminder issued by the CRA in February 2015 will specify two amounts, one to be paid by March 15 and the other due by June 15. Each of those amounts represent the CRA’s best estimate, based on the taxpayer’s return filed for the 2013 taxation year, of one quarter of the net tax will which be payable by the taxpayer for 2015. The taxpayer then has the following three options.

First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of March 15 and June 15. (As March 15 falls on a Sunday this year, the March instalment payment will be considered paid on time if it is paid by the following Monday, March 16.) A taxpayer who chooses this option can be certain that he or she will not face any interest or penalty charges, even if the amount paid turns out to be less than the taxes actually payable for the 2015 tax year. If the instalments paid turn out to be more than the taxpayer’s net tax liability for 2015, he or she will of course receive a refund on filing.

Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2014 tax year. Where a taxpayer’s income has not changed between 2014 and 2015 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2015 will be slightly less than it was in 2014, owing to the indexation of tax brackets and personal tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2015 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease from 2014 to 2015 and there will consequently be a reduction in tax payable, this option may be worth considering.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2015 tax year is filed in the spring of 2016. However, should instalments paid have been late or insufficient, the CRA will impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2015—until March 31, 2015—is 5%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It’s also possible for the CRA to impose penalties, but this is done only where the amount of instalment interest charged for the year is more than $1,000.

Most Canadian taxpayers are understandably disinclined to pay their taxes any sooner than absolutely necessary. However, ignoring an Instalment Reminder is never in the taxpayer’s best interests. Those who don’t wish to have to involve themselves in the intricacies of tax calculations can simply pay the amounts specified in the Reminder. The more technical-minded (or those who want to ensure that they are paying no more than absolutely required, and are willing to take the risk of having to pay interest on any shortfall) can avail themselves of the second or third options outlined above.

As everyone knows—even those who aren’t parents—raising children is expensive. Even though basic needs like education and health care are publicly funded, there is still a never-ending list of discretionary and non-discretionary costs to be paid.

As everyone knows—even those who aren’t parents—raising children is expensive. Even though basic needs like education and health care are publicly funded, there is still a never-ending list of discretionary and non-discretionary costs to be paid.

For many decades, parents of school-aged children have been provided with government assistance with the cost of raising children, whether through direct monthly payments or through tax deductions or credits claimed on the annual tax return. It can be difficult to keep track of just what benefits are available at a given time, however, since the system of payments, deductions, and credits is subject to continual review and revision. Some significant changes are being phased in over 2014 and 2015, ranging from an increase in amounts claimable by parents for everyday costs like fees for children’s sports activities, to higher monthly benefit amounts for existing child benefits, to a new income-splitting mechanism for families. Those changes also, however, include the elimination of some currently available tax benefits for families.

Changes on the 2014 tax return

Parents will first notice the changes when they sit down to complete their 2014 income tax return. For several years, parents have been able to claim a non-refundable 15% tax credit to help offset the cost of enrolling children in organized sports activities. In previous years, the maximum per-child cost which could be claimed for purposes of the credit was $500. For 2014, that maximum has increased to $1,000 per child.

There is a parallel 15% non-refundable credit which can be claimed for the cost of enrolling children in organized programs involving artistic or cultural activities. The maximum amount claimable for purposes of that credit has not, however, been increased, and remains at $500 per child per year for 2014.

The major change for families on the 2014 return is the ability to split income within a family group—the so-called “Family Tax Cut”. As is the case with all income splitting strategies, tax is saved by transferring income from a higher earning individual (one spouse) to an individual with a lower income (the other spouse). Since federal and most provincial tax rates rise as income increases, having that income taxed in the hands of the lower-income spouse means an overall reduction in the family’s tax bill.

The new income splitting strategy is available to families who have children under the age of 18 at the end of 2014. Eligible spouses can make a notional transfer (that is, a paper transfer—there is no need for any actual transfer of income) of up to $50,000 of taxable income from one spouse to the other, on the annual tax return. However, any tax savings realized by that notional transfer are capped at $2,000 per family per year.

In order to claim the benefit, both spouses must file an income tax return for 2014, and both must complete Schedule 1A. That schedule is included in the standard tax package, which is available on the Canada Revenue Agency website at www.cra-arc.gc.ca/formspubs/t1gnrl/menu-eng.html.

Changes to child benefit payments for 2015

Since 2006, the federal government has provided the Universal Child Care Benefit (UCCB) to eligible Canadian families. The taxable monthly benefit is provided to such families who have children under the age of 6, and is set at $100 per month per child.

Starting in 2015, the monthly UCCB benefit for children under age 6 is increased to $160 per month, and the program is expanded to provide a new benefit of $60 per month for children aged 6 through 17. All such benefits remain taxable.

There is an offset to the increased UCCB to be paid to Canadian families, although that offset will not be apparent until tax returns for 2015 are filed in the spring of 2016. Currently, parents are able to claim a non-refundable Child Tax Credit for each child under the age of 18. For 2014, that credit reduces federal tax by $338 (or $647 for a child in respect of whom the family caregiver amount is claimed). Beginning with 2015, concurrent with the changes to the UCCB, the Child Tax Credit is eliminated, and will not therefore be available to be claimed on the individual tax return for 2015.

Finally, although the UCCB changes take effect as of January 1, 2015, parents who receive the UCCB will not see any increase in benefits until later this year. A “balloon” payment will be made in July to cover the benefit increase for the January to June 2015 period. As of August 2015, the increased UCCB will be paid on a monthly basis, in the same way as the current benefit.

A listing of the federal tax and benefit changes which will affect families in 2015 can be found on the federal government website at www.fin.gc.ca/n14/14-184-eng.asp.

Planning for 2015 taxes even before the New Year is rung in may seem more than a little premature. Nonetheless, taking some time to review one’s tax situation—and perhaps putting a few strategies in place—at the beginning of the year can help avoid a cash flow crisis or other financial shock when the RRSP contribution deadline looms or it is tax filing (and tax payment) time in the spring of 2016. And, while many tax-planning and tax-saving strategies can be implemented throughout the tax year, getting an early start on such planning usually leads to the best results.

Planning for 2015 taxes even before the New Year is rung in may seem more than a little premature. Nonetheless, taking some time to review one’s tax situation—and perhaps putting a few strategies in place—at the beginning of the year can help avoid a cash flow crisis or other financial shock when the RRSP contribution deadline looms or it is tax filing (and tax payment) time in the spring of 2016. And, while many tax-planning and tax-saving strategies can be implemented throughout the tax year, getting an early start on such planning usually leads to the best results.

The first tax-planning step that can be taken is to ensure that the right amount of tax is being paid throughout the year. Most Canadians love getting a tax refund—the bigger the better. Receiving a refund after filing the annual tax return feels like getting “free” money from the federal government. In fact, except in very narrow circumstances, the reality is the opposite – it’s the taxpayer who has provided the federal government with the interest-free use of the taxpayer’s money. Getting a tax refund often indicates a failure to plan one’s tax payments properly at the beginning of the year.

To understand why that is so, it’s necessary to understand how and when the tax authorities collect taxes from individual taxpayers. Canada’s tax system is a self-assessing one, in which individual taxpayers file an annual return at a prescribed time, usually by the end of April in the following year, reporting their income from all sources and calculating the amount of federal and provincial tax which they must pay on that income. Of course, very few taxpayers would be able to pay their entire tax bill for the year at one time and the tax authorities are equally disinclined to wait until past the end of the tax year to receive income taxes owed by Canadians. So, for most Canadians (certainly for the vast majority who receive their income from employment), income tax, along with other statutory deductions like Canada Pension Plan and Employment Insurance contributions, are paid periodically throughout the year by means of deductions taken from their paycheques, with those deductions then remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by his or her employer.

Of course, each taxpayer’s situation is unique, and so the employer has to have some guidance as to how much to deduct and remit on behalf of each individual taxpayer. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by every employee, sometimes at the start of each tax year but certainly at the time employment commences. Each employee must in fact complete two TD1 forms—one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer resides and works. Federal and provincial TD1 forms for 2015 (which are available on the CRA website at www.cra-arc.gc.ca/menu/AFAF_T_TD-e.html#ti) list the most common statutory credits and deductions claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial), which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the government.

While this system makes fundamental sense, it can go awry when too much tax is withheld from the employee’s paycheque, and then returned to him or her at the end of the tax year in the form of a tax refund. Generally, this happens when the employee does not correctly indicate on the TD1 forms all of the personal tax credit amounts to which he or she is entitled. In other cases, too much tax may be withheld where the employee has deductions or credits which cannot be claimed on the TD1 forms. In either case, the amount withheld from the employee’s paycheque throughout the year will be greater than the amount of tax he or she actually owes—thereby providing the tax authorities with an interest-free loan of what is ultimately the taxpayer’s money.

Where the taxpayer simply isn’t claiming on the TD1 all of the amounts to which he or she is entitled, the solution is a simple one. Only the basic personal tax credit to which all Canadian resident taxpayers are entitled is automatically taken into account in determining a taxpayer’s deductions at source—all others must be specified by the taxpayer. So, if a taxpayer is entitled to claim a particular tax credit amount, like the spousal amount or the age amount, it should be identified on the TD1. Assuming that employment income is, as is the case for most Canadians, the taxpayer’s only significant source of income, claiming all amounts to which he or she is entitled on the TD1 will mean that the source deductions made will accurately reflect tax liabilities for the year. At the end of the year, the individual will have paid the taxes for which he or she is responsible, without underpaying or overpaying.

Where the taxpayer has available deductions which cannot be recorded on the TD1, it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect tax liability. The way to do so is to file a Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1213/t1213-12e.pdf) with the CRA. Once that form is filed with the CRA, the Agency will authorize the employer to reduce the amount of tax being withheld at source to more accurately reflect the taxpayer’s actual tax owing for the year. In most cases, taxpayers who file a Form T1213 do so because they are incurring expenditures which, while deductible for tax purposes, don’t show up on the TD1. Most commonly, those are expenditures like deductible support payments or contributions to a registered retirement savings plan (RRSP).

Many taxpayers like getting a tax refund because they see it as a kind of forced savings plan, and it’s true that if your money is being held throughout the year by the tax authorities, you can’t spend it. And it’s also true that a reduction in the amount of source deductions, while it can amount to a significant sum over the course of a year, is likely to be a relatively small amount per paycheque. Even the most financially self-disciplined among us find it difficult not to spend what seems like a fairly insignificant amount of money when it’s made available to us, especially when it feels like “found” money. The solution on both counts is to have the “excess” amount represented by reduced source deductions transferred into a TFSA or, even better, an RRSP as soon as it appears in the taxpayer’s bank account. Even $20 a week will amount, not including interest, to just over $1000 per year. And, if that $1,000 is transferred into an RRSP, then the taxpayer will have a $1,000 deduction to claim on his or her tax return for the year—and will avoid, in whole or in part, that end-of-February scramble to come up with funds for an RRSP contribution. For a taxpayer who has a top marginal tax rate of 40%, a $1,000 RRSP contribution and deduction will reduce the tax bill for the year by $400.

As with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes some time—the CRA’s estimate is four to six weeks. Consequently, a T1213 filed in late December or even early January should take effect, at the latest, by the middle of February—well in time to have the required effect on one’s source deductions for 2015.

Finally, even where the employer already has a TD1 on file for the employee, it’s easy and often advisable to provide the employer with a new one at the beginning of the tax year. Everyone’s circumstances change over time (e.g., a son or daughter starts post-secondary education, or an elderly parent comes to live with his or her children) and it’s likely that many individuals become entitled to make tax credit claims which aren’t reflected on a TD1 completed years previously. And, where the employee will have deductions in 2015 which can’t be recorded on the TD1, this would be a good time to prepare and file a T1213 for the year. Doing either (or both, as the case may be) will ensure that source deductions made during 2015 accurately reflect the employee’s current circumstances and consequently his or her actual tax liability for the year.

The Employment Insurance premium rate for 2015 is 1.88%.

The Employment Insurance premium rate for 2015 is 1.88%.

Yearly maximum insurable earnings are set at $49,500, making the maximum employee premium $930.60.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2015 is therefore $1302.84.

The Canada Pension Plan contribution rate for 2015 is unchanged at 4.95% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2015 is unchanged at 4.95% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $53,600, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2015 will be $2,479.95 each, and the maximum self-employed contribution will be $4,959.90.

Dollar amounts on which individual non-refundable federal tax credits for 2015 are based, and the actual tax credit claimable, will be as follows:

Dollar amounts on which individual non-refundable federal tax credits for 2015 are based, and the actual tax credit claimable, will be as follows:

                                                                                Credit amount ($)             Tax credit ($)

Basic personal amount                                                   11,327                                1,699

Spouse or common-law partner amount                          11,327                                1,699

Eligible dependant amount                                             11,327                                1,699

 Age amount                                                                  7,033                                 1,055

Net income threshold for erosion of credit                       35,466

Infirm dependant amount (over 18)                                 6,700                                 1,005

Net income threshold for erosion of credit                        6,720

Caregiver amount (for parent or grandparent)                 4,608                                    691

Net income threshold for erosion of credit                      15,735

Disability amount                                                          7,899                                  1,185

Adoption expenses credit                                              15,255                                 2,288

Medical expense tax credit threshold amount                   2,208

Maximum refundable medical expense supplement          1,172

Old Age Security clawback income threshold                 72,809

Credit amounts are converted to a non-refundable credit by multiplying the amount by the federal rate applicable to the lowest income bracket, which is 15.0% for 2015.

The indexing factor for federal tax credits and brackets for 2015 is 1.7%. Consequently, the following federal tax rates and brackets will be in effect for individuals for the 2015 tax year.

The indexing factor for federal tax credits and brackets for 2015 is 1.7%. Consequently, the following federal tax rates and brackets will be in effect for individuals for the 2015 tax year:

Income level                           Federal tax rate

$11,327 - $44,701                           15.0%

$44,702 - $89,401                           22.0%

$89,402 - $138,586                         26.0%

Above $138,586                              29.0%

There is no change in federal individual tax rates for 2015.

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax-planning strategies. Some of the more significant dates and changes for individual taxpayers for 2015 are listed herein.

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax-planning strategies. Some of the more significant dates and changes for individual taxpayers for 2015 are listed below.

RRSP deduction limit increases to $24,270

The RRSP contribution limit for the 2014 tax year (for which the contribution deadline is Monday, March 2, 2015) will increase to $24,270. In order to make the maximum contribution for 2014, it will be necessary to have had earned income for the 2013 taxation year of $134,834.

TFSA contribution limit for 2015

The TFSA contribution room limit for 2015 is unchanged at $5,500. The actual amount which can be contributed by a particular individual includes both the current year limit and any carryover or re-contribution amounts from previous taxation years.

Individual tax instalment deadlines for 2015

Millions of individual taxpayers pay income tax by quarterly instalments, which are usually due on the 15^th day of each of March, June, September, and December. As March 15 falls on a Sunday, the payment deadlines for tax instalments in 2015 will actually be March 16^th, June 15^th, September 15^th, and December 15^th.

Individual tax filing and payments deadlines for 2015

For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2014 tax year is Thursday, April 30, 2015.

Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2014 on or before April 30, 2015. Self-employed taxpayers and their spouses must file a 2014 income tax return on or before Monday, June 15, 2015.