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Most Canadians have now filed their individual income tax return for the 2018 tax year and received a Notice of Assessment outlining their tax position for that year. Those who receive a refund will celebrate that fact or, less happily, those who receive a tax bill will pay up the tax amount owed. Both groups of taxpayers are then likely to forget about taxes until it’s tax filing time again in the spring of 2020. The fact is, however, that mid-year is very good time to assess one’s tax position for the current year and is particularly a good idea for taxpayers who have received a large refund or a bill for tax owing.

Most Canadians have now filed their individual income tax return for the 2018 tax year and received a Notice of Assessment outlining their tax position for that year. Those who receive a refund will celebrate that fact or, less happily, those who receive a tax bill will pay up the tax amount owed. Both groups of taxpayers are then likely to forget about taxes until it’s tax filing time again in the spring of 2020. The fact is, however, that mid-year is very good time to assess one’s tax position for the current year and is particularly a good idea for taxpayers who have received a large refund or a bill for tax owing.

Although few Canadians have this perspective, the reality is that getting either a big tax refund or having to pay a large tax bill is a sign that one’s tax affairs need attention. A refund, especially a large refund, means that the taxpayer has overpaid his or her taxes for the previous year and has essentially provided the Canada Revenue Agency (CRA) with an interest-free loan of funds that could have been put to better use in the taxpayer’s hands. The other outcome — a large bill — means that taxes have been underpaid for the previous year and could mean paying interest charges to the CRA. Either way, it’s in the taxpayer’s best interests to ensure that tax paid throughout the year is sufficient to cover his or her taxes, without overpaying or underpaying. The best-case scenario is to complete one’s tax return and to then receive a Notice of Assessment which indicates that there is neither a refund payable nor any amount owing.

All of this makes the mid-point of the tax year a good time to make sure that everything is on track, and put in place any adjustments needed to help ensure that there are no tax surprises when filing one’s tax return for 2019 next spring. And, as the calendar year goes on, the opportunities to make a significant difference to one’s current year tax situation diminish.

The first step in doing that review is to get a sense of how much tax one will have to pay for 2019. The income of most taxpayers doesn’t change significantly from year to year and, by mid-year, most taxpayers will have a good sense of what their income will be for 2019. Consequently, where income hasn’t changed much, the amount of tax which was paid for 2018 (a number which can be found on Line 435 of the Summary on page 3 of one’s 2018 Notice of Assessment) serves as a good starting point. (In most cases, owing to increases in tax brackets and credits, the amount of tax payable by taxpayers whose income doesn’t change significantly between 2018 and 2019 will decrease slightly.)

There are two ways of paying taxes throughout the year. The majority of Canadians (including all employees) have income taxes deducted from their paycheques and remitted to the federal government on their behalf — known as source deductions. Taxpayers who do not have income tax deducted at source — which would include self-employed individuals and, frequently, retired taxpayers — make tax payments directly to the federal government (four times a year, on the 15^th of March, June, September, and December) through the tax instalment system.

Once a rough idea of one’s tax liability for 2019 is arrived at, it’s necessary to figure out whether income tax payments made to date, either by source deductions or instalment payments, match up with that tax liability figure, recognizing that by this point in the year, approximately one-half of 2019 taxes should already have been paid. If they haven’t, and particularly if there is a shortfall which will mean a balance owing when the tax return for 2019 is filed next spring, the taxpayer will need to take steps to remedy that.

Where the individual involved pays tax by instalments, the solution is simple. He or she can simply increase or decrease the amount of remaining instalment payments made in 2019 so that the total instalment payments made over the course of 2019 accurately reflect the total tax payable for the year. The only caveat in that situation is that the individual should err on the side of caution to ensure that there isn’t a shortfall in instalment payments, which could result in interest charges being levied by the CRA.

The situation is a little more complex for employees, or for anyone who has tax deducted at source. Often when such individuals discover that they are overpaying taxes through source deductions, it’s because other deductions which they claim on their return for the year — for expenditures like  deductible support payments, child care expenses or contributions to a registered retirement savings plan (RRSP) — aren’t taken into account in calculating the amount of tax to deduct at source. The solution for employees who find themselves in that situation is to file a Form T1213, Request to Reduce Tax Deductions at Source, which is available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html with the Agency. On that form, the taxpayer identifies the additional amounts which will be deducted on the return for the year and, once the CRA verifies that those deductible expenditures are being made, it will authorize the taxpayer’s employer to reduce the amount of tax which is being withheld at source, so as to reflect the reduced tax payable for the year by the employee/taxpayer.

Where it’s the opposite situation and a taxpayer finds that source deductions being made will not be sufficient to cover his or her tax liability for the year (meaning a tax bill to be paid next spring) the solution is to have those source deductions increased. To do that, the employee needs to obtain a TD1A form for their province of residence for 2019, which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/td1-personal-tax-credits-returns/td1-forms-pay-received-on-january-1-later.html. On the reverse side of that Form TD1, there is a section entitled “Additional tax to be deducted”, in which the employee can direct his or her employer to deduct additional amounts at source for income tax, and can specify the dollar amount which is to be deducted from each paycheque, on a go-forward basis.

A final note — while no one likes getting a tax bill, there are taxpayers who simply like getting a tax refund and overpay their taxes through the year to create that result. Some of them view that approach as a kind of “forced” savings plan, while others simply like the idea of getting an annual cheque or direct deposit from the tax authorities. There is nothing inherently wrong with that approach, so long as the taxpayer understands that a tax refund is simply money which was always theirs and is simply being returned to them by the CRA (without interest).  Those who would rather not loan money to the CRA interest-free and who don’t want to face a tax bill each spring can avoid both scenarios by investing a couple of hours of time and a little paperwork to ensure that this year’s tax payments are on track.  

It’s the financial “achievement” no one wants to have, but Canadians keep setting new records when it comes to the size of their household debt. And, as of the last quarter of 2018, they did so again.

The most recent release of “Mortgage and Consumer Credit Trends” issued by the Canada Mortgage and Housing Corporation shows that the debt-to-income ratio of Canadians reached 178.5% as of the fourth quarter of 2018. In other words, Canadian households were carrying, on average, $1.78 in debt for every $1 of household income. Just fifteen years previously, in 2005, Canadians held less than $1 of debt for every dollar of household income — the debt to household income ratio was then 93%.

It’s the financial “achievement” no one wants to have, but Canadians keep setting new records when it comes to the size of their household debt. And, as of the last quarter of 2018, they did so again.

The most recent release of “Mortgage and Consumer Credit Trends” issued by the Canada Mortgage and Housing Corporation shows that the debt-to-income ratio of Canadians reached 178.5% as of the fourth quarter of 2018. In other words, Canadian households were carrying, on average, $1.78 in debt for every $1 of household income. Just fifteen years previously, in 2005, Canadians held less than $1 of debt for every dollar of household income — the debt to household income ratio was then 93%.  

The figures published by CMHC for 2018 are of particular interest, as new rules designed to rein in excessive mortgage lending took effect in April of that year. It’s not surprising, then, that the figures show that mortgage activity during the year slowed. Of greater concern is the fact that non-mortgage borrowing by mortgage holders has accelerated, as average balances for credit cards and lines of credit held by such mortgage-holders grew at a faster pace in 2018 than they had in 2017. That trend was particularly apparent when it came to mortgage holders in Toronto and Vancouver, the two most expensive housing markets in the country.

The other group for whom the debt statistics are notable are those aged 55 and older. The CMHC report notes that the share of mortgage holders aged 55 or older continued to grow during 2018. In addition, mortgage delinquency rates for those aged 65 and older have been increasing — that age group has had, since late 2015, the highest mortgage delinquency rate.

For most Canadians, the size of their overall debt load is, on a day-to-day basis, likekly less significant than the monthly cost of servicing that debt out of current cash flow. Unfortunately, the news in that respect was also not good. As reported by CMHC “average monthly obligations per consumer increased by 4.5% in the fourth quarter of 2018 compared to a year earlier. Over the same period average disposable income rose by 2.5%. Therefore, for the average Canadian, the monthly obligation burden has increased from last year relative to their income”. That’s especially not good news for older Canadians, many of whom are retired or semi-retired, with limited ability to generate the additional income to meet higher debt-servicing costs.

If there is good news in the CMHC report, it’s that despite high levels, loan delinquency rates, including mortgage delinquency rates, remain low. It seems that, despite ever-increasing debt loads, most Canadians are still managing to keep their lines of credit, car loans, and credit cards in good standing.

The full CMCH report can be found on the Agency’s website at https://www.cmhc-schl.gc.ca/en/housing-observer-online/2019-housing-observer/mortgage-consumer-credit-trends-q4-2018.

It would be entirely reasonable for Canadians seeking to buy their first home to feel that the odds are very much against them, for a number of reasons. Many of them, especially those in their twenties and thirties, must put together an income from short-term contracts and/or multiple part-time jobs, making it almost impossible to have any certainty of income, over either the short or the long term. Mortgage lenders are understandably reluctant to lend to those who don’t know what their income will be for the current year, much less for future years. As well, increases in home prices over the last decade mean that the average home price in Canada is now $470,000, meaning that a minimum 5% downpayment is just under $25,000, and those who can put together such a down payment will be carrying a mortgage of just under $450,000. The interest rate levied on that mortgage has steadily increased over the past 18 months, with changes in the bank rate. Finally, as of April 2018, the federal government imposed a new mortgage “stress test”, which requires prospective borrowers to qualify for a mortgage at rates in excess of current rates. All in all, there is a “perfect storm” of factors in place which keep younger Canadians from attaining that elusive first step on the property ladder.

It would be entirely reasonable for Canadians seeking to buy their first home to feel that the odds are very much against them, for a number of reasons. Many of them, especially those in their twenties and thirties, must put together an income from short-term contracts and/or multiple part-time jobs, making it almost impossible to have any certainty of income, over either the short or the long term. Mortgage lenders are understandably reluctant to lend to those who don’t know what their income will be for the current year, much less for future years. As well, increases in home prices over the last decade mean that the average home price in Canada is now $470,000, meaning that a minimum 5% downpayment is just under $25,000, and those who can put together such a down payment will be carrying a mortgage of just under $450,000. The interest rate levied on that mortgage has steadily increased over the past 18 months, with changes in the bank rate. Finally, as of April 2018, the federal government imposed a new mortgage “stress test”, which requires prospective borrowers to qualify for a mortgage at rates in excess of current rates. All in all, there is a “perfect storm” of factors in place which keep younger Canadians from attaining that elusive first step on the property ladder.

That reality led the federal government, in this year’s Budget, to announce a new program intended to help first-time home buyers, of (relatively) modest means, to purchase their first home. Under that program — the First-Time Home Buyer Incentive — a portion of the mortgage principal amount on the purchase of a first home can be financed through a shared equity mortgage with the Canada Mortgage and Housing Corporation. Essentially, CMHC will assume responsibility for a portion of the mortgage and the homeowner will not be required to make payments on that CMHC portion. The CMHC portion will be 5% for purchases of existing properties and 10% on purchases of newly built homes. An example provided by CMHC illustrates the calculation, as follows.

A borrower purchases a new $400,000 home with a 5% down payment and a 10% CMHC shared equity mortgage ($40,000). The borrower’s total mortgage size would be reduced from $380,000 to $340,000, reducing monthly mortgage costs by as much as $228.

There are, of course, limitations and criteria which apply to those seeking to take advantage of the new program. First, it is available only to those who are first-time home buyers and who have total household income of less than $120,000 per year. As well, in order to qualify for the shared equity program, the total mortgage amount (including the shared equity portion) cannot be more than four times the purchaser’s annual household income. Since the upper income limit to qualify for the program is $120,000, a qualifying mortgage therefore cannot be, in total, more than $480,000, and so the maximum home purchase price (assuming a 5% down payment) is, as confirmed by CMHC, $505,000.

The Budget papers did not, unfortunately, provide much detail with respect to exactly how the new incentive will operate. CMHC has since issued a press release outlining some additional details and that press release is available at https://www.cmhc-schl.gc.ca/en/media-newsroom/making-housing-more-affordable-first-time-home-buyer-incentive. There are however, still a number of questions remaining and a number of details to be worked out. In addition, CMHC has indicated that it will need to consult with lenders before the program can be up and running. The remaining details should, however, be available in the not-too-distant future, as CMHC has indicated that it expects the First Time Home Buyer Incentive program to be operational in September of 2019.

By May 20, 2019, the Canada Revenue Agency (CRA) had processed just over 27 million individual income tax returns filed for the 2018 tax year. Just under 17 million of those returns resulted in a refund to the taxpayer, while about 5.5 million resulted in the required payment of a tax balance by the taxpayer.

By May 20, 2019, the Canada Revenue Agency (CRA) had processed just over 27 million individual income tax returns filed for the 2018 tax year. Just under 17 million of those returns resulted in a refund to the taxpayer, while about 5.5 million resulted in the required payment of a tax balance by the taxpayer.

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 Agency, outlining the taxpayer’s income, deductions, credits, and tax payable for the 2018 tax year.

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 the return.

Where that difference means an unanticipated refund, or a larger refund than 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 a small amount of 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, 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 medical expense, or for a deduction claimed for a business expenditure, which the taxpayer believes to be legitimate. 

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 provide the detail to show precisely how and why the taxpayer and the CRA disagree on the actual amount of income tax which the taxpayer must pay for the year. The first step to be taken would be a call to the Individual Income Tax Enquiries line at 1-800-959-8281, where agents who have access to the taxpayer’s return can explain any changes which were made during the assessment process. If that call doesn’t resolve the taxpayer’s questions, or there is still a disagreement, the taxpayer has to decide whether to take the next step of filing a formal objection to the Notice of Assessment.

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).  Where the taxpayer files an Objection, the CRA’s collection efforts are suspended until 90 days after the date the CRA’s decision on that Objection is sent to the taxpayer. In some cases, however, those collection efforts will not be brought to a halt, in whole or in part. 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 2018 tax year, the one-year deadline (which is usually, but not always, the later of those two dates) would be April 30, 2020 (or June 15, 2020 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 is 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. Taxpayers who are disputing their tax assessment can also upload supporting documents relating to that dispute to the Agency’s website.

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 hard copy of a Notice of Objection can find the most current version of the CRA’s standardized T400A Objection (which was updated and re-issued in July 2018) on the Agency’s website at https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t400a/t400a-09-18e.pdf.

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 the T400A form 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 CRA is familiar, and will also mean that no required information is inadvertently omitted. It is 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).

Taxpayers whose postal code begins with letters A to P should send their documents to the Eastern Appeals Intake Centre, while objections file by those with postal codes beginning with letters R to Y should be sent to the Western Appeals Intake Centre. The addresses for the two centres are as follows.

Chief of Appeals

Eastern Appeals Intake Centre

North Central Ontario TSO

1050 Notre Dame Avenue,

Sudbury ON P3A 5C1

Chief of Appeals

Western Appeals Intake Centre

Fraser Valley and Northern TSO, 2nd floor,

9755 King George Boulevard,

Surrey BC V3T 5E1

It’s also possible to contact either of the Appeals Intake Centres by phone or fax, and the numbers for both can be found at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/complaints-disputes/complexity-level-processing-time.html.

The time required for the CRA to consider the objection and make its decision ranges from several weeks to several months, depending on the number and complexity of the issues involved. Eventually, however, the CRA will respond to the objection. In the course of making its decision, the CRA 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 can represent themselves before the Tax Court, it is 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 http://www.cra-arc.gc.ca/E/pub/tg/p148/README.html.      

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 #48 Corporate

Personal:

Issue #48 Personal

Although virtually no one looks forward to the task, the vast majority of Canadians do file their tax returns, and pay any taxes owed, by the applicable tax payment and filing deadlines each spring. There is, however, a significant minority of Canadians who do not file or pay on a timely basis and, for some, that’s a situation which can go on for years.

Although virtually no one looks forward to the task, the vast majority of Canadians do file their tax returns, and pay any taxes owed, by the applicable tax payment and filing deadlines each spring. There is, however, a significant minority of Canadians who do not file or pay on a timely basis and, for some, that’s a situation which can go on for years.

Part of the problem, of course, is that once a taxpayer is behind on his or her filing or payment of taxes, the problem snowballs. A taxpayer who has already failed to file a tax return may be reluctant to file the subsequent year’s return, for fear of bringing the matter to the attention of the tax authorities. And, of course, where taxes aren’t paid in a particular year, it’s that much more difficult to come up with enough money the next year to pay the bill covering taxes owed for two years.

The reasons why some taxpayers don’t file or pay on time are many. Some don’t file because they believe that there’s no reason to do so if they don’t owe anything and aren’t expecting a refund. While that can be true, it is also the case that it is necessary to file in order to receive a number of income-tested tax credits and benefits, including the HST credit, the Canada child benefit, and a range of provincial tax credits. Those who don’t file can’t have their eligibility for such credits determined and so no credits can be paid to them. Others don’t file because they have a balance owing but don’t have the funds to pay that balance on filing. That, too, is the wrong approach, as anyone who owes taxes but doesn’t file a return by the filing deadline gets hit with an immediate penalty of at least 5% of the outstanding amount owed. In such circumstances, the right approach is to file on time and to contact the Canada Revenue Agency (CRA) in order to come to an agreement on a payment arrangement over time. Finally, there is a persistent (and completely false) tax myth that has been circulating for decades, that the federal government does not have the legal right to collect taxes and every year some taxpayers fall victim to someone peddling that myth.

There are also a number of Canadians who file returns in which income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed. While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate isn’t high, there are a lot of such returns when measured by absolute numbers. And, although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each and every instance of non-compliance simply aren’t available, especially since in many cases the amount recovered may be less than the costs which must be incurred to recover it.

With all of that in mind, several years ago the CRA instituted a program — the Voluntary Disclosure Program (VDP) — intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arose from the fact that, in most cases, such taxpayers would have to pay outstanding tax amounts owed, plus interest, but would avoid the payment of penalties and the risk of criminal prosecution.

In 2018 changes were made to the VDP which narrowed the eligibility criteria and imposed additional conditions on participants. The requirements for participation in the VDP, and the procedure to be followed to pursue it, are now as follows.

To qualify for relief, an application must:

• be voluntary (meaning that it is done before the taxpayer becomes aware of any compliance or enforcement action by the CRA);
• be complete;
• involve the application or potential application of a penalty; and
• include information that is at least one year past due.

Applications made for disclosure under the VDP are assigned to one of two tracks — the Limited Program or the General Program, and that determination, which is made on a case-by-case basis, will affect the kind of relief provided and the extent of that relief. The intention, however, is to restrict the Limited Program to instances in which applications disclose non-compliance that appears to include intentional conduct on the part of the taxpayer. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:

• the dollar amounts involved;
• the number of years of non-compliance;
• the sophistication of the taxpayer;
• whether efforts were made to avoid detection through the use of offshore vehicles or other means; and
• whether disclosure is made following a CRA statement regarding its intended specific focus of compliance or the issuance by the Agency of broad-based correspondence about a particular compliance issue.

Those whose applications are accepted under the Limited Program will not be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer. Interest on outstanding tax balances will be payable, however, and other penalties will be levied.

Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief (usually 50% of the interest assessed), specifically for the years preceding the three most recent years of returns required to be filed. However, full interest charges are assessed for the three most recent years of returns required to be filed.

There is also now a requirement that taxpayers who make an application under the VDP pay the estimated taxes owing as a condition of qualifying for the Program. Where the taxpayer is financially unable to do so, he or she can request that the CRA consider a payment arrangement.

As well, the CRA previously offered what was termed a “no-names disclosure”. That option is no longer provided, but has been replaced by a “pre-disclosure discussion” service. That service will still allow a taxpayer to discuss his or her tax affairs with a representative of the CRA on an anonymous basis, but such discussion is not binding on either party, and does not constitute acceptance into the VDP or preclude the Agency from initiating an audit or referring the case for criminal prosecution.

The CRA provides detailed information on its website with respect to the VDP, covering both the criteria for participation, the kind(s) of relief which may be provided, and the procedure involved in seeking that relief. All of that information can be found on the CRA website at https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html and https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-income-tax-overview.html.

As every Canadian driver knows, gas prices seem to rise every spring, seemingly in lockstep with the warmer weather. This year, that annual trend has been given an extra push by the implementation of federal and provincial carbon taxes. As of the end of April, gas prices ranged from $1.19 to $1.56 per litre, depending on the province, and most forecasts call for those prices to increase over the summer.

As every Canadian driver knows, gas prices seem to rise every spring, seemingly in lockstep with the warmer weather. This year, that annual trend has been given an extra push by the implementation of federal and provincial carbon taxes. As of the end of April, gas prices ranged from $1.19 to $1.56 per litre, depending on the province, and most forecasts call for those prices to increase over the summer.

While in some cases Canadians can reduce the impact of gas price increases by reducing the amount of driving they do, the practical reality is that, even for those who wish to do less driving and to thereby reduce their carbon footprint, driving less just isn’t a realistic option. While major urban centres are usually well-served by public transit, it is a different picture outside those centres, where in many cases the public transit option is either non-existent or impractical. As well, as housing prices in major urban areas either continue to increase (or are already out of the reach for the average Canadian), individuals and families must move further from their workplaces in search of affordable housing. Doing so means a longer commute to work, and that commute must often be done by car.

For a number of reasons, then, the cost of driving is often an unavoidable, non-discretionary expense. And, as that cost increases, many wonder whether there are any deductions or credits which can be claimed to help offset that cost.

Unfortunately, for most taxpayers, there’s no relief provided by our tax system to help alleviate the cost of driving as the cost of driving to work and back home, as well as the cost of driving that isn’t work related, is considered a personal expense for which no deduction or credit can be claimed, no matter how great the cost. That said, there are some (fairly narrow) circumstances in which employees can claim a deduction for the cost of work-related travel.

Those circumstances exist where an 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 his or her 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 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 was provided by the employer for such expenses, the employee can deduct actual expenses incurred for such work-related travel. Those deductible expenses include the following:

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

In almost all instances, a taxpayer will use the same vehicle for both personal and work-related driving. Where that’s the case, only the portion 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 in order to document all expenses incurred and claimed.

While no limits (other than the general limit of reasonableness) are placed on the amount of costs which can be deducted in the first four categories listed above, there are limits and restrictions with respect to allowable deductions for interest, eligible leasing costs and depreciation claims. The rules governing those claims and the tax treatment of employee automobile allowances and available deductions for employment-related automobile use generally are outlined on the Canada Revenue Agency website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/slry/mtrvhcl-eng.html.

In larger urban centres, and in the nearby cities and suburbs which are served by inter-city transit, many commuters utilize that transit as a way of avoiding both the stress of a drive to work in rush hour traffic and the associated costs. And, for a time, such commuters were able to claim a tax credit to help mitigate the cost of using such transit. Unfortunately, the federal public transit tax credit was eliminated in 2017 and has never been reinstated.

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.

The deadline for payment of all individual income taxes owed for the 2018 tax year was April 30, 2019. For all individuals except the self-employed and their spouses, that date was also the filing deadline for tax returns for the 2018 tax year. (The self-employed and their spouses have until June 17, 2019 to file.)

The deadline for payment of all individual income taxes owed for the 2018 tax year was April 30, 2019. For all individuals except the self-employed and their spouses, that date was also the filing deadline for tax returns for the 2018 tax year. (The self-employed and their spouses have until June 17, 2019 to file.)

Most Canadians file and pay on time, but there are exceptions. In some cases, the failure to file or pay by the deadline is a deliberate choice on the part of the taxpayer but such failure can also occur for reasons or circumstances which are outside of the taxpayer’s control. And, in such circumstances, there is relief available from the interest and penalty charges which would usually be levied.

That relief is provided through the Taxpayer Relief Program offered by the Canada Revenue Agency (CRA). Under that program, the revenue authorities can waive any interest and penalty charges that would ordinarily result from a failure to file or pay on time. The basic criteria for such relief is that the taxpayer’s failure to file or pay on time was caused by or was the result of circumstances that were beyond the control of the taxpayer, and so prevented them from complying with their tax obligations.

The circumstances which will justify relief can be personal in nature and specific to the taxpayer or can be the result of events affecting a large number of individuals. For the past few years those large-scale events have been, for the most part, recurring weather or climate related disasters. Whether it was forest fires in the Western provinces or spring floods in Central Canada and the Maritimes, taxpayers in virtually every province have been affected, and often displaced, by such weather events. As well, such events typically take place during the spring and summer months, which coincides with the deadlines for tax filing and payment.

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, in many instances, such individuals don’t in any case have access to their tax records or such records have been destroyed. This year, as in previous years, the federal government has issued a press release reminding individuals affected by this spring’s floods that they can apply for relief under the Taxpayer Relief Program, to ensure that they are not unfairly penalized when they can’t meet their tax obligations on a timely basis. That press release can be found at https://www.canada.ca/en/revenue-agency/news/2019/04/government-of-canada-offers-taxpayer-relief-to-canadians-affected-by-flooding.html.

Where the failure to meet tax obligations arises from unavoidable personal circumstances, those circumstances can include anything from personal or family illness or death to financial hardship. It’s important to note that, whatever the reason for the application, 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. It’s also the case that, regardless of the reason for the application for relief, the process is the same.

 The CRA issues a prescribed from – RC4288, Request for Taxpayer Relief, which can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/rc4288.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 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 the view that the interest or penalties 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 (such as doctor’s certificates, death certificates, or insurance documents); 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. In order to provide full financial disclosure, the CRA recommends that taxpayers use Form RC376, Taxpayer Relief Request — Statement of Income and Expenses and Assets and Liabilities for Individuals. That form is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/rc376.html.

All relief requests are to be sent to a particular Tax Centre or Tax Services Office, depending on the taxpayer’s province of residence. A listing of the addresses of all such Centres and Offices 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.

Finally, when a natural or man-made disaster occurs, individuals living in the immediate area are clearly those most affected, but they are not the only ones. The press release issued recently by the CRA noted that first responders who work to help in such circumstances may also seek relief under the program, where such work has meant that they were unable to meet their tax filing and/or payment obligations.

For the majority of Canadians, the due date for filing of an individual tax return for the 2018 tax year was Tuesday April 30, 2019. (Self-employed Canadians and their spouses have until Monday June 17, 2019 to get their return filed.) In the best of all possible worlds, the taxpayer, or his or her representative, will have prepared a return that is complete and correct, and filed it on time, and the Canada Revenue Agency (CRA) will issue a Notice of Assessment indicating that the return is “assessed as filed”, meaning that the CRA agrees with the information filed and tax result obtained by the taxpayer. While that’s the outcome everyone is hoping for, it’s a result which can go “off the rails” in any number of ways.

For the majority of Canadians, the due date for filing of an individual tax return for the 2018 tax year was Tuesday April 30, 2019. (Self-employed Canadians and their spouses have until Monday June 17, 2019 to get their return filed.) In the best of all possible worlds, the taxpayer, or his or her representative, will have prepared a return that is complete and correct, and filed it on time, and the Canada Revenue Agency (CRA) will issue a Notice of Assessment indicating that the return is “assessed as filed”, meaning that the CRA agrees with the information filed and tax result obtained by the taxpayer. While that’s the outcome everyone is hoping for, it’s a result which can go “off the rails” in any number of ways.

By the third week of April 2019, over 18 million individual income tax returns for the 2018 tax year had been filed with the CRA. And, inevitably, some of those returns contain errors or omissions that must be corrected — in 2017 the CRA received about 2 million requests for adjustment(s) to an already-filed return.

Over 90% of the returns which have already been filed for the 2018 tax year were filed through online filing methods, meaning that they were prepared using tax return preparation software. The use of such software significantly reduces the chance of making a clerical or arithmetic error, like entering an amount on the wrong line or adding a column of figures incorrectly. However, no matter how good the software, it can work only with the information that is provided to it. Sometimes taxpayers prepare and file a return, only to later receive a tax information slip that should have been included on that return. It’s also easy to make an inputting error when transposing figures from an information slip (a T4 from one’s employer, for instance) into the software, such that $49,505 in income becomes $45,905. Whatever the cause, where the figures input are incorrect or information is missing, those errors or omissions will be reflected in the final (incorrect) result produced by the software.

When the error or omission is discovered in a return which has already been filed, the question which immediately arises is how to make things right. The first impulse of many taxpayers is to file another return, in which the complete and correct information is provided, but that’s not the right answer. There are, however, several ways in which a mistake or omission on an already-filed tax return can be corrected, including online options.

Starting last year, taxpayers who filed online, whether through NETFILE or EFILE, are able to advise the CRA of an error or omission in an already-filed return electronically, using the Agency’s ReFILE service. That service, which can be found at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/refile-online-t1-adjustments-efile-service-providers.html, allows taxpayers to make corrections to an already-filed return online, using the CRA website.

Essentially, taxpayers whose returns have been filed online (through NETFILE or EFILE) can file a correction to that already-filed return, using the same tax return preparation software that was used to prepare the return. Those taxpayers who used NETFILE to file their return can file an adjustment to a returns filed for the 2016, 2017, or 2018 tax years. Where the return was filed using EFILE, the EFILE service provider can file adjustments for returns filed for the 2015, 2016, 2017, or 2018 tax years.

There are limits to the ReFILE service. The online system will accept a maximum of 9 adjustments to a single return, and ReFILE cannot be used to make changes to personal information, like the taxpayer’s address or direct deposit details. There are also some types of tax matters which cannot be handled through ReFILE, like applying for a disability tax credit or child and family benefits.

It is also possible to make a change or correction to a return using the CRA’s “My Account” service (through the “Change My Return” feature), but that choice is available only to taxpayers who have already registered for the My Account service. As well, the changes/corrections which can be made using ReFILE are the same as those which can be done through My Account, without the need to become registered for My Account, a process which takes a few weeks.

Taxpayers who wish to make changes or corrections which cannot be made through ReFILE or My Account (or those who just don’t wish to use the online option) can paper-file an adjustment to their return. The paper form to be used is Form T1-ADJ E (2018), which can be found on the CRA website at http://www.cra-arc.gc.ca/E/pbg/tf/t1-adj/README.html. Those who are unable to print the form off the website can order a copy to be sent to them by mail by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. There is no limit to the number of changes or corrections which can be made using the T1-ADJ E (2018) form.

The use of the actual T1-ADJ form isn’t mandatory – it is also possible to file an adjustment request by sending a letter to the CRA – but using the prescribed form has two benefits. First, it makes clear to the CRA that an adjustment is being requested, and second, filling out the form will ensure that the CRA is provided with all the information needed to process the requested adjustment. Whether the request is made using the T1 Adjustment form or by letter, it is necessary to include any relevant documents – the information slip summarizing the income not reported, or the receipt for an expense inadvertently not claimed.

A hard copy of a T1-ADJ (or a letter) is filed by sending the completed document to the appropriate Tax Center, which is the one with which the tax return was originally filed. A listing of Tax Centres and their addresses can be found on the CRA website at www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html. A taxpayer who isn’t sure any more which Tax Centre his or her return was filed with can go to www.cra-arc.gc.ca/cntct/tso-bsf-eng.html on the CRA website and select his or her location from the listing found there. The address for the correct Tax Centre will then be provided. Similar information is also provided on page 2 of the T1ADJ form.

Where a taxpayer discovers an error or omission in a return already filed, the impulse is to correct that mistake as soon as possible. However, no matter which method is used to make the correction – ReFILE, My Account, or the filing of a T1-ADJ in hard copy, it is necessary to wait until the Notice of Assessment for the return already filed is received. Corrections to a return submitted prior to the time that return is assessed simply cannot be processed by the Agency.

Once the Notice of Assessment is received, and an adjustment request is made, it will take at least a few weeks, usually longer, before the CRA responds. The Agency’s estimate is that such requests which are submitted online have a turnaround time of about two weeks, while those which come in by mail take about eight weeks. Not unexpectedly, all requests which are submitted during the CRA’s peak return processing period between March and July will take longer.

Sometimes the CRA will contact the taxpayer, even before a return is assessed, to request further information, clarification or documentation of deductions or credits claimed (for example, receipts documenting medical expenses claimed, or child care costs). Whatever the nature of the request, the best course of action is to respond 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 it is the taxpayer’s responsibility to provide support for any deduction or credit claims made. Where a request for information or supporting documentation for a claimed deduction or credit is ignored by the taxpayer, the assessment will proceed on the basis that such support does not exist. Providing the requested information or supporting documentation can usually resolve the question to the CRA’s satisfaction, and its assessment of the taxpayer’s return can then be completed.

Both changes in the job market and increases in real estate prices over at least the past decade have made the goal of home ownership an elusive or even impossible one for many Canadians, especially younger Canadians.

Both changes in the job market and increases in real estate prices over at least the past decade have made the goal of home ownership an elusive or even impossible one for many Canadians, especially younger Canadians.

There is no single solution for the multiple factors which prevent many Canadians from getting that first toehold on the “property ladder”. However, changes announced in this year’s federal Budget seek to make it a bit easier to become a first-time home owner.

Those changes involved the expansion of an existing program — the Home Buyers’ Plan, which allows first-time home buyers to use funds withdrawn from their registered retirement savings plans (RRSPs) to make part or all of a down payment on a home purchase. Any such amounts can be withdrawn tax-free, but must then be re-contributed or repaid to the RRSP in prescribed amounts, and on a prescribed schedule, over the next 15 years.

While access to the HBP is limited to first-time home buyers, the definition of that term is more expansive than it might seem. Under the HBP rules, a first-time home buyer is someone who has not owned and lived in a home either in the current year or any of the four previous years. Where that person is married, his or her spouse must also meet the same criteria.

Where an individual and his or her spouse meet the HBP criteria, each could withdraw up to $25,000 from his or her RRSP and use those funds for a down payment. The Budget measures propose to increase the maximum amount which can be withdrawn from an RRSP under the HBP from $25,000 to $35,000.  Consequently, a couple can now withdraw up to $70,000 under the HBP, as the change is effective for withdrawals made under the HBP after the Budget date of March 19, 2019.

One further change to the HBP program was announced in the Budget, and that change applies where a marriage or common-law partnership breaks down.  When spouses separate, it is often the case that one or both of them must purchase another home. The Budget measures propose to extend access to the HBP for individuals who are in that situation, regardless of whether they meet the definition of first-time home buyer.

Where a former spouse purchases a new residence using the HBP, any previous place of residence must, in most instances, be disposed of within two years after the end of the year in which the HBP withdrawal is made.

The change providing increased access to the HBP on the breakdown of a marriage or common law partnership is effective for HBP withdrawals made after the end of 2019.

More details of the rules governing the HBP can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html.

Most taxpayers sit down to do their annual tax return, or wait to hear from their tax return preparer, with some degree of trepidation. In most cases taxpayers don’t know, until their return is completed, what the “bottom line” will be, and it’s usually a case of hoping for the best and fearing the worst.

Most taxpayers sit down to do their annual tax return, or wait to hear from their tax return preparer, with some degree of trepidation. In most cases taxpayers don’t know, until their return is completed, what the “bottom line” will be, and it’s usually a case of hoping for the best and fearing the worst.

Most taxpayers are, of course, hoping for a refund — the bigger the better. A lot would be happy to find that at least nothing is owed to the Canada Revenue Agency (CRA), or that an amount owing is not significant.

The worst-case scenario, for all taxpayers, is to find out that they are faced with a large tax bill and an imminent payment deadline, and that they just don’t have the money to make the required payment by that deadline. For those who don’t have the means to pay a tax bill out of existing resources, that likely means borrowing the needed funds.  And while that will mean paying interest on the borrowing, the interest cost incurred will likely be less than that which would be levied by the CRA on the unpaid tax bill. 

If a tax bill can’t be paid in full out of either current resources or available credit, the CRA is open to making a payment arrangement with the taxpayer. While, like most creditors, the CRA would rather get paid on time and in full, its ultimate goal is to collect the full amount of taxes owed. Consequently, the Agency provides taxpayers who simply can’t pay their bill for the year on time and in full with the option of paying an amount owed over time, through a payment arrangement.

There are two avenues available to taxpayers who want to propose such a payment arrangement. The first is a call to the CRA’s automated TeleArrangement service at 1-866-256-1147. When making such a call, it is necessary for the taxpayer to provide his or her social insurance number, date of birth, and the amount entered on line 150 of the last tax return for which the taxpayer received a Notice of Assessment. (For taxpayers who are up to date on their tax filings, that will be the Notice of Assessment for the return for the 2017 tax year). The TeleArrangement Service is available Monday to Friday, from 7 a.m. to 10 p.m., Eastern time.

Taxpayers who would rather speak directly to a CRA employee can call the Agency’s debt management call centre at 1-888-863-8657 or can complete an online form (available at https://apps.cra-arc.gc.ca/ebci/iesl/showClickToTalkForm.action) requesting a callback from a CRA agent.

The CRA also provides on online tool, in the form of a payment arrangement calculator (available at https://apps.cra-arc.gc.ca/ebci/recc/pac/prot/lngg?request_locale=en_CA), which allows the taxpayer to calculate different payment proposals, depending on his or her circumstances). That calculator includes interest charges since, no matter what payment arrangement is made, the CRA will levy interest charges on any amount of tax owed for the 2018 tax year which is not paid on or before April 30, 2019. Interest charges levied by the CRA tend to add up quickly, for two reasons. First, the interest charged by the CRA on outstanding tax amounts is, by law, higher than current commercial rates. For the second quarter of 2019 (April 1 to June 30), that rate is 6%. Second, interest charges levied by the CRA are compounded daily, meaning that each day’s interest is levied on the previous day’s interest charges. It is for these reasons that a taxpayer is, where at all possible, likely better off arranging private borrowing in order to pay any taxes owing by the April 30 deadline.

Finally, there is one strategy which is, in all circumstances, a bad one. Taxpayers who can’t pay their tax bill by the deadline sometimes conclude that there is no point in filing if payment can’t be made. Those taxpayers are wrong. Where an amount of tax is owed and the return isn’t filed on time, there is an immediate tax penalty imposed of 5% of the outstanding tax amount — and interest charges start accruing on that penalty amount (as well as on the outstanding tax balance) immediately. For each month that the return isn’t filed, a further penalty of 1% of the outstanding tax amount is charged, to a maximum of 12 months. Higher penalty amounts are charged, for a longer period, where the taxpayer has incurred a late-filing penalty within the past three years. In a worst-case scenario, the total penalty charges can be 50% of the tax amount owed — and that doesn’t count the compound interest which is levied on all penalty amounts, as well as on all unpaid taxes. In all cases, no matter what the circumstances, the right answer is to file one’s tax return on time. This year, for most taxpayers, that means filing on or before Tuesday April 30, 2019. For self-employed taxpayers (and their spouses) the filing deadline is Monday June 17, 2019. However for all taxpayers, the payment deadline for all 2018 income tax owed is Tuesday April 30, 2019.

Our tax system is, for the most part, a mystery to individual Canadians. The rules surrounding income tax are complicated and it can seem that for every rule there is an equal number of exceptions or qualifications. There is, however, one rule which applies to every individual taxpayer in Canada, regardless of location, income, or circumstances, and of which most Canadians are aware. That rule is that income tax owed for a year must be paid, in full, on or before April 30 of the following year. This year, that means that individual income taxes owed for 2018 must be remitted to the Canada Revenue Agency (CRA) on or before Tuesday, April 30, 2019 — no exceptions and, absent extraordinary circumstances, no extensions.

Our tax system is, for the most part, a mystery to individual Canadians. The rules surrounding income tax are complicated and it can seem that for every rule there is an equal number of exceptions or qualifications. There is, however, one rule which applies to every individual taxpayer in Canada, regardless of location, income, or circumstances, and of which most Canadians are aware. That rule is that income tax owed for a year must be paid, in full, on or before April 30 of the following year. This year, that means that individual income taxes owed for 2018 must be remitted to the Canada Revenue Agency (CRA) on or before Tuesday, April 30, 2019 — no exceptions and, absent extraordinary circumstances, no extensions.

It is very much in the CRA’s interests to make paying taxes as simple and as straightforward as it can be and so the Agency offers individual taxpayers a wide range of choices when it comes making that payment. There are, in fact, no fewer than seven separate options available to individual residents of Canada in paying their taxes for the 2018 tax year. The options open to taxpayers who must make a payment to the taxman are set out below.

Pay using online banking

Millions of Canadians transact most or all of their banking using the online services of their particular financial institution. The list of financial institutions through which a payment can be made to the CRA is a lengthy one (available at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-online-banking.html), and includes all of Canada’s major banks and credit unions.

The specific steps involved in making that payment will differ slightly for each financial institution, depending on how their online payment systems are configured. What’s important to remember is that the nature of the payment (i.e., current year tax return, as distinct from current year tax instalment payments) must be specified, and the taxpayer’s social insurance number must be provided, in order to ensure that the payment is credited to the correct account, for the correct taxation year.

It is not necessary to access any particular CRA form in order to make an online payment of taxes through one’s financial institution website.

Paying at your financial institution

For those who don’t use online banking, or simply prefer to make a payment in person, it’s possible to pay a tax amount owed at the bank. Doing so, however, requires that the taxpayer have a personalized remittance form.

Since that remittance is specific to the taxpayer, it’s not possible to simply print that form from the CRA website. However, taxpayers who wish to obtain such a personalized remittance form can do so by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959 8281 and requesting that one be sent to them by mail.

Using the CRA’s My Payment

The CRA also provides an online payment service called My Payment. There is no fee charged for the service, and it’s not necessary to be registered for any of the CRA’s other online services in order to use My Payment.

What is necessary is that the taxpayer have a debit card with a VISA Debit, Debit MasterCard, or InteracOnline logo from a participating Canadian financial institution, as My Payment is set up to accept payment using only those cards. Anyone intending to use My Payment should first confirm that the amount of any payment to be made is within the daily or weekly transaction limits imposed by the particular financial institution.

More details on this payment method can be found at https://www.canada.ca/en/revenue-agency/services/e-services/payment-save-time-pay-online.html.

Payment by credit card

While it’s possible to pay one’s taxes using a credit card, such payments can only be made through third-party service providers (that is, payments by credit card cannot be made directly to the CRA), and such third-party service providers will impose a fee for the service.

There are only two such service providers listed on the CRA website, and links to each such service are available at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-credit-card.html.

Payment through a service provider

There are a number of third-party service providers which will accept payments and remit them on the taxpayer’s behalf to the CRA. However, the majority of such services are more oriented toward providing services to businesses, and most of those listed on the CRA website do not handle payments of individual income tax amounts owed.

The full listing of third-party service providers, and the types of payments they handle, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-a-service-provider.html.

Payment by pre-authorized debit

It’s possible to set up a pre-authorized debit (PAD) arrangement with the CRA, authorizing the Agency to debit one’s bank account for an amount of taxes owed, on dates specified by the taxpayer.

Individuals who make instalment payments of tax throughout the year may already have such an arrangement in place and can certainly use that existing arrangement to arrange a PAD of any balance of taxes owed for the 2018 tax year. However, any PAD arrangement must be made at least five business days before the payment due date of April 30. A taxpayer who makes a payment of taxes only once a year is likely better off using another of the available payment methods.

There is also another option for taxpayers who have their return prepared and E-FILED by an authorized electronic filer. Such taxpayers can have that E-FILER set up a PAD agreement on their behalf in order to make a one-time payment for a current-year tax amount owed. Such an arrangement is only for the payment of a current-year tax balance and can’t be used for other payments like instalment payments of tax. Details on how to set up a pre-authorized debit arrangement, whether for a single payment or for recurring payments, are outlined on the CRA website at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-authorized-debit.html.

Payment by cash or debit card

It is still possible to pay one’s taxes in cash, or by using a debit card. Such payments are made, not at CRA offices, but at Canada Post outlets.

However, while a cash payment may be a low-tech option, the requirements for making a cash or debit card payment are not. In order to do so, the taxpayer will need a self-generated QR (quick response) code. Such code can be created by following a link found on the CRA website at https://www.canada.ca/en/revenue-agency/corporate/about-canada-revenue-agency-cra/pay-canada-post.html. The QR code created is provided to a clerk at a Canada Post outlet, who uses the information in the code to properly credit the payment made. Service fees are levied for this payment method.

It’s important for all taxpayers to realize that the payment deadline of April 30 requires that the CRA receive payment by that date. The Agency considers that a payment has been made only when it actually receives that payment, or the payment is received by a member of the Canadian Payments Association (which would include most Canadian financial institutions).

The majority of payment options now available to Canadians involve online transactions or the use of third-party service providers. Both such methods can mean some delay in receipt of the payment by the CRA, as a result of the time required for processing of the payment by the financial institution or third party. Consequently, taxpayers who make their tax payments online or using a third-party service provider are well-advised to consider that time lag in deciding when to make their payment – waiting until April 30, especially late in the day, to do so  isn’t a good idea.

Those who make their payment in person at a financial institution (using a personalized remittance form, as outlined above) can make their payment on April 30, as the date stamped on the remittance form is considered to be the date on which such payment is received by the CRA.

By the time most Canadians sit down to organize their various tax slips and receipts and undertake to complete their tax return for 2018, 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 2018, must have been implemented by the end of that 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 March 1, 2019 in order to be deducted on the return for 2018.

By the time most Canadians sit down to organize their various tax slips and receipts and undertake to complete their tax return for 2018, 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 2018, must have been implemented by the end of that 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 March 1, 2019 in order to be deducted on the return for 2018.

However, the fact that the clock has run out on most major tax planning opportunities for 2018 doesn’t mean that there are no tax-saving strategies left. At this point, there are a couple of ways to minimize the tax hit for 2018 — 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”.

Everyone’s tax situation (and therefore their tax return) is different, of course, but most taxpayers make claims on their annual returns for medical expenses incurred and/or charitable donations made. It may seem counterintuitive, or even illogical, to not claim every available deduction and credit in order to obtain the best possible tax result for the year. However, for both medical and charitable tax credit claims, albeit for different reasons, there are situations in which it makes sense to defer an available claim until a future year, or to transfer the claim to another person.

Claiming charitable donations

Taxpayers are entitled to make a claim on the annual tax return for charitable donations made in the current (2018) year or any of the previous five years. The reason it can sometimes makes sense not to claim a charitable donation in the year it was made arises from the way in which the charitable donations tax credit is structured to encourage higher donations.

That credit, at both the federal and provincial/territorial levels, is a two-tier credit. Federally, the first $200 in donations receives a credit of 15% of the total donation, or $30. However, donations above the $200 level receive a credit equal to 29% of the donation amount over $200.

Take, for example, a taxpayer who makes a regular contribution to a favourite charity of $100 each month, or $1,200 per year. Where he or she claims that donation on the annual return each year, that claim will result in a federal credit of $320 ($200 × 15%, plus $1,000 × 29%). Where, however, the same taxpayer defers the claim to the following year and claims a total of $2,400 in donations on a single return, he or she will receive a federal credit of $668. ($200 × 15%, plus $2,200 × 29%). Where the donations are accumulated and claimed once every five years, the federal credit received will be $1,712 ($200 × 15%, plus $5,800 × 29%). Under each scenario, the total charitable donation made is the same, but the amount of credit received increases with each year that the claim is deferred. Since each of the provinces and territories provide a two-tier credit (at different rates, depending on the jurisdiction), the same result will be seen when calculating the provincial/territorial credit.

Medical expense tax credit

Notwithstanding our publicly funded health care system, there are a great (and increasing) number of medical and para-medical expenses for which coverage is not provided and which must be paid on an out-of-pocket basis. In many instances, it’s possible to claim a medical expense tax credit for those out-of-pocket costs.

The federal credit for such expenses is 15% of allowable expenses. As is usually the case, the provinces and territories also provide a credit for the same expenses, albeit at different rates.

Many taxpayers find the rules on the calculation of a medical tax credit claim confusing, with some justification. First, there is an income threshold imposed. Eligible medical expenses are those expenses which exceed 3% of net income, or (for 2018) $2,302, whichever is less. Put more practically, for 2018 taxpayers who have net income of $76,750 or less can claim medical expenses incurred over $2,302. Those with higher incomes can claim medical expenses which exceed 3% of that higher net income.

The other aspect of the medical expense tax credit which can be confusing is the calculation of the optimal time period. Unlike most credit claims, the medical expense tax credit can be claimed for qualifying expenses which were paid in any 12-month period ending during the tax year. While confusing, this rule is beneficial, in that it allows taxpayers to select the particular 12-month period during which medical expenses (and the resulting credit claim) is highest. The only restrictions are that the selected 12-month period must end during the calendar year for which the return is being filed and, of course, any expenses which were claimed on a previous return cannot be claimed again. 

While only expenses which exceed the $2,302/3% threshold may be claimed, it’s also possible to aggregate expenses incurred within a family and make a single claim for those expenses on the return of one spouse. Specifically, the rules allow families to aggregate medical expenses incurred for each spouse and for all children born in 2001 or later. While medical expenses incurred by a single family member might not be enough to allow him or her to make a claim, aggregating those expenses is very likely (especially for a family that does not have private medical insurance coverage) to mean that total expenses will exceed the applicable threshold.

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 the 3% of net income/$2,302 threshold, whichever is less, the greatest benefit will be obtained if the spouse with the lower 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 otherwise 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.

Finally, there are a huge number and variety of medical expenses which individuals and families may incur, and the rules governing which can be claimed and in what circumstances, are very specific. In some cases, for instance, a doctor’s prescription will be required, while in others it will not. A listing of medical expenses eligible for the credit, and any ancillary requirements, such as a prescription, can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/lines-330-331-eligible-medical-expenses-you-claim-on-your-tax-return.html#mdcl_xpns.

The Old Age Security program is the only aspect of Canada’s retirement income system which does not require a direct contribution from recipients of program benefits. Rather, the OAS program is funded through general tax revenues, and eligibility to receive OAS is based solely on Canadian residency. 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. For the first quarter of 2019 (January to March 2019), that maximum monthly benefit is $601.45. 

The Old Age Security program is the only aspect of Canada’s retirement income system which does not require a direct contribution from recipients of program benefits. Rather, the OAS program is funded through general tax revenues, and eligibility to receive OAS is based solely on Canadian residency. 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. For the first quarter of 2019 (January to March 2019), that maximum monthly benefit is $601.45. 

For many years, OAS was automatically paid to eligible recipients once they reached the age of 65. However, since July 2013 Canadians who are eligible to receive OAS benefits have been able to defer receipt of those benefits for up to five years, when they turn 70 years of age. For each month that an individual Canadian defers receipt of those benefits, the amount of benefit eventually received would increase by 0.6%. 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%.

It can, however, be difficult to determine, on an individual basis, whether and to what extent it would make sense to defer receipt of OAS benefits. Some of the difficulty in deciding whether to defer, and for how long, lies in the fact there are no hard and fast rules, and the decision is very much an individual one. Fortunately, however, there are a number of factors which each individual can consider when making that decision.

The first such factor is how much total income will be required, at the age of 65, to finance current needs. It is also necessary to determine what other sources of income (employment income from full-time or part-time work, Canada Pension Plan retirement benefits, employer-sponsored pension plan benefits, annuity payments, and withdrawals from registered retirement savings plans (RRSPs) and registered retirement income fund (RRIFs)) are available to meet those needs, both currently and in the future, and when receipt of those income amounts can or will commence or cease. Once income needs and the sources and possible timing of each is clear, it is necessary to consider the income tax implications of the structuring and timing of those sources of income. The ultimate goal, as it is at any age, 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.

In making those calculations, the following income tax thresholds and benefit cut-off figures are a starting point.

• Income in the first federal tax bracket is taxed at 15%, while income in the second bracket is taxed at 20.5%. For 2019, that second income tax bracket begins when taxable income reaches $47,630.
• The Canadian tax system provides (for 2019) a non-refundable tax credit of $7,494 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 $37,790.
• Individuals can receive a GST/HST refundable tax credit, which is paid quarterly. For 2019, the full credit is payable to individual taxpayers whose family net income is less than $37,789.
• Taxpayers who receive Old Age Security benefits and have income over a specified amount are required to repay a portion of those benefits, through a mechanism known as the “OAS recovery tax”, or clawback. For the July 2019 to June 2020 benefit period, taxpayers whose income for 2018 was more than $75,910 will have a portion of their OAS benefit entitlement “clawed back”.

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 and received any time up to the age of 70. As is 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.

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 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 will provide during retirement. To use the calculator, it is necessary to know the amount of Canada Pension Plan benefit which will be received, and the taxpayer can obtain that information by calling Service Canada at 1-800 277-9914.

The Retirement Income Calculator can be found at https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html.

Each year, the Canada Revenue Agency (CRA) publishes a statistical summary of the tax filing patterns of Canadians during the previous filing season. Those statistics for the 2018 show that the vast majority of Canadian individual income tax returns — nearly 87%, or almost 26 million returns — were filed online, using one or the other of the CRA’s web-based filing methods. The remaining 13% of returns were, for the most part, paper-filed, and a very small percentage (0.1%) were filed using the File My Return service, in which returns are filed by telephone.

Each year, the Canada Revenue Agency (CRA) publishes a statistical summary of the tax filing patterns of Canadians during the previous filing season. Those statistics for the 2018 show that the vast majority of Canadian individual income tax returns — nearly 87%, or almost 26 million returns — were filed online, using one or the other of the CRA’s web-based filing methods. The remaining 13% of returns were, for the most part, paper-filed, and a very small percentage (0.1%) were filed using the File My Return service, in which returns are filed by telephone.

Clearly, electronic filing is the overwhelming choice of Canadian taxpayers, and those who choose electronic filing this year have two choices — NETFILE and E-FILE. The first of those — NETFILE, which was used last year by just under 30% of tax filers) — involves preparing one’s return using software approved by the CRA and filing that return on the Agency’s website, using the NETFILE service. E-FILE involves having a third party file one’s return online. Almost always, the E-FILE service provider also prepares the return which they are filing. And, it seems that most Canadians want to have little to do with the preparation of their own returns, as last year 57.3% of all the individual income tax returns filed came in by E-FILE. 

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, and that listing can be found at https://apps.cra-arc.gc.ca/ebci/efes/epcs/prot/ntr.action.

Those who are able and willing to prepare their own tax returns and file 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 non-resident of Canada, or for someone who declared bankruptcy in 2018 or 2019), 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’s no longer the case. The CRA’s NETFILE security procedures can be satisfied by providing specific personal identifying information, including one’s social insurance number and date of birth.

A return can be filed using NETFILE only where it 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 at this time of year, approved software which can be used free of charge is also available. A listing of free and commercial software approved for use in preparing individual returns for 2018 can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/netfile-overview/certified-software-netfile-program.html.

Copies of the 2018 tax return and guide package can also be ordered online, at https://apps.cra-arc.gc.ca/ebci/cjcf/fpos-scfp/pub/rdr?searchKey=ncp%20, to be sent to the taxpayer by regular mail. Taxpayers can also download and print hard copy of the return and guide from the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package.html. Finally, the CRA has made a “limited” number of tax packages available at Service Canada offices and post offices across the country.

Last year the CRA reinstated (for some taxpayers) a tax return filing option that was previously discontinued. For several years, taxpayers with simple returns had the option of filing their returns using a touch-tone telephone. That option, now called  File my Return service (FMR) will be available to eligible Canadians with low or fixed incomes whose situations remain unchanged from year to year, even if they have no income to report, so that they receive the benefits and credits to which they are entitled. The FMR option is, however, available only to taxpayers who are advised by the CRA of their eligibility, and those individuals will have been notified by letter during the month of February.

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, there are 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 https://www.canada.ca/en/revenue-agency/campaigns/free-tax-help.html.

While there are a number of filing options available to Canadian taxpayers, there’s no element of choice when it comes to the filing and payment deadlines for 2018 tax returns. All individual Canadians must pay the balance of any taxes owed for 2018 on or before Tuesday April 30, 2018, with no exceptions and, absent very unusual circumstances, no extensions.

For the majority of Canadians, the tax return for 2018 must also be filed on or before Tuesday April 30, 2019. Self-employed taxpayers and their spouses have until Monday June 17, 2018 to file their returns for 2018 (but they too must pay any 2018 taxes owing on or before April 30, 2019).

For many years now, there has been a persistent tax scam operating in Canada in which Canadians are contacted, usually by phone, by someone who falsely identifies himself or herself as being a representative of the Canada Revenue Agency (CRA). The taxpayer is told that money — sometimes a substantial amount of money — is owed to the government. The identifier for this particular scam is that the caller insists that the money owed must be paid immediately (usually by wire transfer or pre-paid credit card) and, if payment is not made right away, significant negative consequences will follow, including immediate arrest or seizure of assets, confiscation of the taxpayer’s Canadian passport, or deportation.

For many years now, there has been a persistent tax scam operating in Canada in which Canadians are contacted, usually by phone, by someone who falsely identifies himself or herself as being a representative of the Canada Revenue Agency (CRA). The taxpayer is told that money — sometimes a substantial amount of money — is owed to the government. The identifier for this particular scam is that the caller insists that the money owed must be paid immediately (usually by wire transfer or pre-paid credit card) and, if payment is not made right away, significant negative consequences will follow, including immediate arrest or seizure of assets, confiscation of the taxpayer’s Canadian passport, or deportation.

Of course, none of those consequences are remotely possible, even in circumstances where a legitimate tax debt is owed. However, the individuals or groups perpetrating this scam have, over the years, become both increasingly sophisticated — to the point of having a call display which shows the call as coming from the CRA — and increasingly successful, and many Canadians have suffered significant financial losses as a result.

To combat this, the CRA and other authorities have provided many warnings to taxpayers on how to avoid getting cheated, such that by now almost everyone has heard of this particular tax scam. However, there has also been an unintended result, as outlined by the CRA on its website:

“Scammers posing as Canada Revenue Agency (CRA) employees continue to contact Canadians, misleading them into paying false debt. These persistent scammers have created fear among people who now automatically assume that any communication from someone representing the CRA is not genuine.”

As we move into tax filing season, it is more likely that the CRA will be in touch with taxpayers for legitimate reasons. This poses two potential problems. First, there is likely to be an increase in the activity of tax scammers, who are relying on the fact that taxpayers are more likely to expect contact from the CRA during tax filing season. Second, the tax administration process can’t function efficiently if taxpayers don’t respond to legitimate communications from the CRA out of fear that such communications are just in furtherance of another tax scam.

To address this problem, the CRA has provided comprehensive information on the methods by which it does and does not contact taxpayers, and what it will and will not ask for in communications with taxpayers. That information, which is posted on the CRA website, is as follows.

Phone

The CRA may

• verify your identity by asking for personal information such as your full name, date of birth, address, account number, or social insurance number
• ask for details about your account, in the case of a business enquiry
• call you to begin an audit process

The CRA will never

• ask for information about your passport, health card, or driver's license
• demand immediate payment by Interac e-transfer, bitcoin, prepaid credit cards, or gift cards from retailers such as iTunes, Amazon, or others
• use aggressive language or threaten you with arrest or sending the police
• leave voicemails that are threatening or give personal or financial information

Email

The CRA may

• notify you by email when a new message or a document, such as a notice of assessment or reassessment, is available for you to view in secure CRA portals such as My Account, My Business Account, or Represent a Client
• email you a link to a CRA webpage, form, or publication that you ask for during a telephone call or a meeting with an agent (this is the only case where the CRA will send an email containing links)

The CRA will never

• give or ask for personal or financial information by email and ask you to click on a link
• email you a link asking you to fill in an online form with personal or financial details
• send you an email with a link to your refund
• demand immediate payment by Interac e-transfer, bitcoin, prepaid credit cards, or gift cards from retailers such as iTunes, Amazon, or others
• threaten you with arrest or a prison sentence

Mail

The CRA may

• ask for financial information such as the name of your bank and its location
• send you a notice of assessment or reassessment
• ask you to pay an amount you owe through any of the CRA's payment options
• take legal action to recover the money you owe, if you refuse to pay your debt
• write to you to begin an audit process

The CRA will never

• set up a meeting with you in a public place to take a payment
• demand immediate payment by Interac e-transfer, bitcoin, prepaid credit cards, or gift cards from retailers such as iTunes, Amazon, or others
• threaten you with arrest or a prison sentence

Text messages/instant messaging

The CRA never uses text messages or instant messaging such as Facebook Messenger or WhatsApp to communicate with taxpayers under any circumstance. If a taxpayer receives text or instant messages claiming to be from the CRA, they are scams!

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, whether by phone, e-mail, text, or online, without first verifying the legitimacy of the request. The CRA suggests that anyone who is contacted by phone by someone claiming to be a CRA employee take the following steps:

• Ask for or make a note of the caller's name, phone number, and office location and tell them that you want to first verify their identity.

• Check that the employee calling you about your taxes works for the CRA or that the CRA did contact you by calling 1-800-959-8281 for individuals or 1-800-959-5525 for businesses. If the call you received was about a government program such as Student Loans or Employment Insurance, call 1-866-864-5823.

While Canadian taxpayers must prepare and file the same form – the T1 Income Tax and Benefit Return – every spring, that return form is never the same from one year to the next. The one constant in tax is change, and every year taxpayers sit down to face a different tax return form than they dealt with the previous year.

While Canadian taxpayers must prepare and file the same form – the T1 Income Tax and Benefit Return – every spring, that return form is never the same from one year to the next. The one constant in tax is change, and every year taxpayers sit down to face a different tax return form than they dealt with the previous year.

First, there are “automatic” changes to the tax rules which are reflected on the return every year. The basic personal credits which can be claimed by most taxpayers increase every year, as do the income brackets which determine the tax rate which applies at each level of income, as both are changed to reflect the rate of inflation.

Changes in tax credit amounts or tax bracket figures are largely invisible to the average taxpayer, as they don’t require any change to the layout or organization of the tax return form, or the process of completing it. The more significant changes are those which provide new credits or deductions to qualifying taxpayers or, conversely, eliminate such credits or deductions which taxpayers might have claimed in previous years. What follows is a listing of such changes which taxpayers will find when completing their return for the 2018 tax year.

Climate Action Incentive

Perhaps the best news in the 2018 tax return, for taxpayers who are residents of Saskatchewan, Ontario, Manitoba, or New Brunswick, is the new Climate Action Incentive (CAI) – a refundable tax credit intended to help mitigate the impact of carbon taxes. The Incentive is extremely broad-based; it is, with few exceptions, claimable by any resident of one of those provinces who is 18 years of age or older, has a spouse or common law partner, or is a parent who lives with his or her child.

The CAI rates vary by province, with the basic incentive ranging from $128 in New Brunswick to $305 in Saskatchewan. An individual who has a spouse or common law partner, or a dependant, can claim an amount in respect of each, and a separate amount is claimable by a single parent in respect of each qualified dependant. As with the basic amount, the amounts claimable for spouses or common law partners and for qualified dependants will vary by province.

The amount of the CAI is increased for individuals who live in rural areas, where the impact of a carbon tax is likely to be greater. Such individuals can increase their basic CAI claim (as outlined above) by 10% to arrive at the total amount claimable. The definition of what constitutes “rural area” for purposes of the CAI has been defined by the tax authorities and a listing of locations in each province which do not qualify as a rural area can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-449-climate-action-incentive/qualify-for-the-supplement.html.

Finally, the CAI is a refundable credit, meaning that it is paid to the taxpayer even where no tax is payable for the year and, finally, there are no income restrictions when it comes to eligibility – all qualifying taxpayers receive the amounts outlined above, regardless of their income for the year.

Medical expense tax credit

The list of medical and para-medical expenses for which the medical expense tax credit can be claimed is long and detailed and subject to continual revision. This year, that list has been expanded to include a variety of expenses relating to service animals specially trained to perform specific tasks for a patient with a severe mental impairment.

Unfortunately, the two changes listed above are the only ones which are likely to put money in the taxpayer’s pocket this year. The other major changes which are effective for 2018 cancel existing credits or deductions which were formerly available.

First-time donor super-credit expires

In 2013, the federal government introduced a so-called “first time donor super credit”, which allowed individuals who had not claimed a charitable donation tax credit for a specified period to claim an enhanced credit for donations made in 2013 and the subsequent four years. The first-time super donor tax credit expired at the end of 2017 and consequently no such claim can be made on the 2018 return.

Employee home relocation loan deduction eliminated

Under general tax rules, employees who receive a loan from their employer are considered to have received a taxable benefit. Prior to 2018, preferential tax treatment in the form of a deduction was provided for employees who were required to relocate for work purposes and who received a loan from their employer to assist with related expenses. However, the employee home relocation loan deduction was eliminated as of January 1, 2018.

Changes to the Return, Schedules, and Guide

It’s not news to anyone that our tax system is complex, and that complexity is reflected in the annual tax return form, and in the guide which is intended to provide assistance to taxpayers in completing that return. The income tax return is composed of a four-page return form (the T1) and a number of schedules. Each of those schedules is used to calculate a particular amount – usually a tax credit or tax deduction amount, which is then transferred to a particular line on the return form. Anyone who has ever prepared a tax return is familiar with the sometimes frustrating process of moving back and forth from the return to the schedules to the guide (and back again!), searching for the information needed to figure out just how to complete a particular line or lines of the return.

This year, the Canada Revenue Agency has made some changes in the return, the schedules, and the guide, which are intended to streamline and simplify that process. Specifically, instructions and information which are needed to complete a particular schedule have been moved from the guide and included on that schedule. As well, there are a number of schedules for which it is necessary to first complete some calculations on a worksheet. This year, such calculations, instead of being included in the guide, are incorporated with the worksheet for the particular schedule. Overall, the changes seek to gather in one place all of the information, instructions, and calculations needed to complete a particular schedule, hopefully reducing or eliminating the frustrating need to search through the entire guide for the needed information.

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 #47 Corporate

Personal:

Issue #47 Personal

The fact that debt levels of Canadian households have been increasing over the past decade and a half can’t really be called news anymore. In particular, the ratio of debt-to-household-income, which stood at 93% in 2005, has risen steadily since then and, as of the third quarter of 2018, reached (another) new record of 177.5%. In other words, the average Canadian household owed $1.78 for every dollar of disposable (after-tax) income. (The Statistics Canada publication reporting those findings can be found on the StatsCan website at https://www150.statcan.gc.ca/n1/daily-quotidien/181214/dq181214a-eng.htm.)

The fact that debt levels of Canadian households have been increasing over the past decade and a half can’t really be called news anymore. In particular, the ratio of debt-to-household-income, which stood at 93% in 2005, has risen steadily since then and, as of the third quarter of 2018, reached (another) new record of 177.5%. In other words, the average Canadian household owed $1.78 for every dollar of disposable (after-tax) income. (The Statistics Canada publication reporting those findings can be found on the StatsCan website at https://www150.statcan.gc.ca/n1/daily-quotidien/181214/dq181214a-eng.htm.)

Repeated announcements of yet another increase in the average debt-to-household income ratio have become almost routine over the past 15 years — the latest statistics are reported in the media and concern is expressed by financial planners and, sometimes, government and banking officials, but there has not been any sustained change in consumer behavior. Starting a year and a half ago, however, something did change. Debt didn’t just get bigger, it got more expensive — five successive times. In June of 2016 the Bank Rate set by the Bank of Canada, on which financial institutions base their lending rates, was 0.75%, and had not changed in the previous two years. Starting in July 2016, that rate was increased in five separate announcements over the next 18 months and, as of January 2019, it stands at 2%.

Like most economic events, the explosive growth in the average debt of Canadian households over the past fifteen years can’t be attributed to a single cause. What’s undeniable however, is that two of the major causes of that growth in debt were first, interest rates which were the lowest on record since before the Great Depression and second, a remarkable run-up in Canadian residential real estate values. Money was cheap and, when debt was secured against home equity, it was frequently incurred in the belief that the increased amount of such debt would soon be covered, or outstripped, by an increase in the value of the underlying real estate. And, since interest rates were so low, the cost of carrying that increased debt was very manageable.

To some extent, both those circumstances have changed. Canadian real estate values are still high by historic standards and, while those values have softened in some areas of the country, there has been nothing like the “crash” in such real estate prices which happened in the late 1980s. However, the era of ultra-cheap money seems to be over, and interest rates are clearly on the increase. While it’s impossible to say how high interest rates will go, and how quickly, it’s prudent to assume at least that rates won’t be going down any time soon.

As the Bank of Canada has announced successive increases in the bank rate, financial institutions have inevitably responded by increasing the interest rates charged on all forms of borrowing. In other words, even if the amount of debt carried by Canadian families hasn’t changed in the last 18 months, the cost of carrying that debt has certainly gone up. The effect of such change is measurable: as noted by the credit reporting agency Equifax, the proportion of Canadians who pay off their credit cards in full each month has declined (as measured on a year-over-year basis) each month since August 2017.

There is no instant fix for anyone who has taken on debt and is now finding that repaying (or even servicing) that debt has become more difficult, or even impossible. There are, however, steps which can be taken to get that debt under control and even, eventually, to be become debt-free. And, there is help available through debt and credit counselling provided by any number of non-profit agencies. Those agencies work with individuals, and with their creditor(s), to create both a realistic budget and a manageable debt repayment schedule. More information on the credit counselling process, and a listing of such non-profit agencies can be found at http://creditcounsellingcanada.ca/.

Sometime during the month of February, millions of Canadians will receive mail from the Canada Revenue Agency (CRA). That mail, a “Tax Instalment Reminder”, will set out the amount of instalment payments of income tax to be paid by the recipient taxpayer by March 15 and June 17 of this year.

Sometime during the month of February, millions of Canadians will receive mail from the Canada Revenue Agency (CRA). That mail, a “Tax Instalment Reminder”, will set out the amount of instalment payments of income tax to be paid by the recipient taxpayer by March 15 and June 17 of this year.

Receiving an “Instalment Reminder” from the CRA won’t be a surprise for many recipients who have paid tax by instalments during previous tax years. For others, however, the need to make tax payments by instalment is a new and unfamiliar concept. That’s because 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/taxpayer. 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 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

The CRA’s decision to send an Instalment Reminder to certain taxpayers isn’t an arbitrary one. Rather, an Instalment Reminder is generated when sufficient income tax has not been deducted from payments made to that taxpayer throughout the year. Put more technically, an instalment reminder will 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 (2019) tax year and either of the two previous (2017 or 2018) tax years. Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income throughout the year is at least $3,000 less than their total tax owed for 2019 and either 2017 or 2018. For residents of Quebec, that threshold amount is $1,800.

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, for two reasons. First, while most employees have income from only a single source – their paycheque – retirees often have multiple sources of income, including Canada Pension Plan (CPP) and Old Age Security (OAS) payments, private retirement savings and, sometimes, employer-provided pensions. And, while income tax is deducted automatically from one’s paycheque, that’s not the case for most sources of retirement income. Relatively few new retirees realize that it’s necessary to make arrangements to have tax deducted “at source” from either their government source income (like CPP or OAS payments) or private retirement income like pensions or registered retirement income fund withdrawals, and to make sure that the total amount of those deductions is sufficient to pay the total tax bill for the year. 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 2019. If the total of instalment payments made during 2019 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 2020.

Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2018 tax year. Where a taxpayer’s income has not changed significantly between 2018 and 2019 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2019 will be slightly less than it was in 2018, 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 2019 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease significantly from 2018 to 2019, 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 2019 tax year is filed in the spring of 2020. 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 2019 — until March 31, 2019 — is 6%.) 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.

For most taxpayers, the annual deadline for making an RRSP contribution comes at a very inconvenient time. At the end of February, many Canadians are still trying to pay off the bills from holiday spending, the first income tax instalment payment is due two weeks later on March 15 and the need to pay any tax balance for the year just ended comes just 6 weeks after that, on April 30. And, while the best advice on how to avoid such a cash flow crunch is to make RRSP contributions on a regular basis throughout the year, that’s more of a goal than a reality for the majority of Canadians.

For most taxpayers, the annual deadline for making an RRSP contribution comes at a very inconvenient time. At the end of February, many Canadians are still trying to pay off the bills from holiday spending, the first income tax instalment payment is due two weeks later on March 15 and the need to pay any tax balance for the year just ended comes just 6 weeks after that, on April 30. And, while the best advice on how to avoid such a cash flow crunch is to make RRSP contributions on a regular basis throughout the year, that’s more of a goal than a reality for the majority of Canadians.

Whether convenient or not, the deadline for making RRSP contributions which can be claimed on the return for 2018 is Friday March 1, 2019. The maximum allowable current year contribution which can be made by any individual taxpayer for 2018 is 18% of that taxpayer’s earned income for the 2017 year, to a statutory maximum of $26,230.

Those are the basic rules governing RRSP contributions for the 2018 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 than 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 2018 will take a bit of research. The first step in determining one’s total (current year and carryforward) contribution room for 2018 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 2017 taxation year will have received a Notice of Assessment from the CRA, and the amount of that taxpayer’s allowable RRSP contribution room for 2018 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 Telephone Information Phone Service (TIPS)  line at 1-800-267-6999. 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 2017 tax return. Those who don’t wish to use an automated service can call the CRA’s Individual Income Tax Enquiries Line at 1-800-959 8281, and 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-term or long-term option or even, in some cases, the only one available.

When it comes to making a contribution to one’s TFSA, the good news is the timelines and deadlines are much more flexible than those which govern RRSP contributions. A contribution to one’s TFSA can be made at any time of the year, and contributions not made during the current year can be carried forward and made in any subsequent year.

On the other hand, determining one’s total TFSA contribution room is significantly more complex than figuring out one’s allowable RRSP contribution amount, for two reasons. First, the maximum TFSA amount has changed several times (increasing and decreasing) since the program was introduced in 2009. Second, and more important, individuals who withdraw funds from a TFSA can re-contribute those funds, but not until the year following the one in which the withdrawal is made. Especially where a taxpayer has several TFSA accounts, and/or a history of making contributions, withdrawals and re-contributions, it can be difficult to determine just where that taxpayer stands with respect to his or her maximum allowable TFSA contribution for 2019.

In this case, there’s no help to be had from a Notice of Assessment, as the CRA no longer provides TFSA contribution information on that form. Information on one’s current year TFSA contribution limit can, however, be obtained from the CRA website, from the TIPS line at 1-800-267-6999 or its Individual Income Tax Enquiries line at 1-800-959-8281, as outlined above. It should be noted, however, that information on one’s 2019 TFSA contribution limit won’t be available through the TIPS line until mid-February 2019.

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

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 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, if a need for funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Taxpayers who are currently in the work force 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 and deducted on the tax return for 2018 is calculated as 18% of earned income for 2017. 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 tax-free or tax-deferred 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.

Income tax is a big-ticket item for most retired Canadians. Especially for those who are no longer paying a mortgage, the annual tax bill may be the single biggest expenditure they are required to make each year. Fortunately, 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), in order to help minimize that tax burden. And, in most cases, the availability of those credits is flagged, either on the income tax form which must be completed each spring or on the accompanying income tax guide.

Income tax is a big-ticket item for most retired Canadians. Especially for those who are no longer paying a mortgage, the annual tax bill may be the single biggest expenditure they are required to make each year. Fortunately, 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), in order to help minimize that tax burden. And, in most cases, the availability of those credits is flagged, either on the income tax form which must be completed each spring or on the accompanying income tax guide.

There is, however, another income tax saving strategy which is not nearly as well-known. Even more unfortunate is the fact that the benefits of that strategy (and the ease with which it can be accomplished) aren’t readily apparent from either the tax return form or the annual income tax guide. That tax saving strategy is pension income splitting, and it’s likely the case that many taxpayers who could benefit aren’t familiar with the strategy, especially if they are not receiving 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.

When described in those terms, pension income splitting can sound like one of those “too good to be true” tax scams, but that’s not the case. Essentially, what pension income splitting offers is a government-sanctioned opportunity for Canadian residents who are married (and, usually, where recipient spouse is aged 65 or older) 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 2018, the federal tax rate applied to about the first $47,000 of taxable income is 15%, while the federal rate applied to the next $46,000 of such income is 20.5%. So, an individual who has $90,000 in taxable income would pay federal tax of about $15,900: if that $90,000 was divided equally between such individual and his or her spouse, each would have $45,000 in taxable income and the total federal family tax bill would be $13,500.

The general rule with respect to pension income splitting is that a taxpayer who receives private pension income during the year is entitled to allocate up to half that income (without any dollar limit) to his or her spouse for tax purposes. In this context, private pension income means a pension received from a former employer and, where the income recipient is age 65 or older, 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 2018, 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 2018. 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 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 2018 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 or her 2018 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 2018. 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 2018 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.

The Employment Insurance premium rate for 2019 is decreased to 1.62%.

The Employment Insurance premium rate for 2019 is decreased to 1.62%.

Yearly maximum insurable earnings are set at $53,100, making the maximum employee premium $860.22.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2019 is therefore $1204.31.

The Quebec Pension Plan contribution rate for employees and employers for 2019 is 5.55%, and maximum pensionable earnings are $57,400. The basic exemption is $3,500.

The Quebec Pension Plan contribution rate for employees and employers for 2019 is 5.55%, and maximum pensionable earnings are $57,400. The basic exemption is $3,500.

The maximum employee premium for the year is $2,991.45, and the maximum employer contribution is the same.

The Canada Pension Plan contribution rate for 2019 is increased to 5.1% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2019 is increased to 5.1% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $57,400, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2019 will be $2,748.90 each, and the maximum self-employed contribution will be $5,497.80.

Dollar amounts on which individual non-refundable federal tax credits for 2019 are based, and the actual tax credit claimable, will be as follows.

Dollar amounts on which individual non-refundable federal tax credits for 2019 are based, and the actual tax credit claimable, will be as follows.

The indexing factor for federal tax credits and brackets for 2018 is 2.2%. The following federal tax rates and brackets will be in effect for individuals for the 2019 tax year.

The indexing factor for federal tax credits and brackets for 2018 is 2.2%. The following federal tax rates and brackets will be in effect for individuals for the 2019 tax year.

Income level                           Federal tax rate

$12,069 - $47,630                         15%

$47,631 - $95,259                        20.5%

$95,260 - $147,667                        26%

$147,668 - $210,371                      29%

Above $210,371                             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. Some of the more significant dates and changes for individual taxpayers for 2019 are listed below.

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 2019 are listed below.

RRSP deduction limit increased

The RRSP contribution limit for the 2018 tax year (for which the contribution deadline is Friday March 1, 2019) is $26,230. In order to make the maximum current year contribution for 2018, it will be necessary to have had earned income for the 2017 taxation year of $145,725.

The RRSP contribution limit for the 2019 tax year is $26,500. In order to make the maximum current year contribution for 2019 (for which the contribution deadline will be Monday March 2, 2020), it will be necessary to have earned income for the 2018 taxation year of $147,225.

TFSA contribution limit increased

The TFSA contribution dollar limit for 2019 is increased to $6,000. The actual amount which can be contributed by a particular individual includes both the current year limit and any carryover of uncontributed or re-contribution amounts from previous taxation years.

Taxpayers can find out their 2019 contribution limit by calling the Canada Revenue Agency’s (CRA’s) Individual Income Tax Enquires line at 1-800-959 8281. Those who have registered for the CRA’s online tax service My Account can obtain that information by logging into that service.

Individual tax instalment deadlines for 2019

Millions of individual taxpayers pay income tax by quarterly instalments, which will be due on the 15^th day of each of March, June, September, and December 2019, except where that date falls on a weekend or a statutory holiday.

The actual tax instalment due dates for 2019 are as follows:

Friday March 15, 2019

Monday June 17, 2019

Monday September 16, 2019

Monday December 16, 2019

Old Age Security income clawback threshold

The income level above which Old Age Security (OAS) benefits are clawed back is $77,580 for 2019.

Individual tax filing and payment deadlines in 2019

For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2018 tax year is Tuesday April 30, 2019.

Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2018 on or before Tuesday April 30, 2019.

Self-employed taxpayers and their spouses must file a 2018 income tax return on or before Monday June 17, 2019.

The following tax changes are in effect January 1, 2019.

The following tax changes are in effect January 1, 2019.

Federal

The small business income tax rate will be reduced from 10% to 9% effective as of January 1, 2019.

British Columbia

The province will introduce an Employer Health (payroll) Tax effective January 1, 2019.

The provincial education tax credit is eliminated as of the 2019 tax year.

Manitoba

Effective January 1, 2019, the business limit for income eligible for the provincial small business deduction will increase from $450,000 to $500,000.

The Rental Housing Construction Tax Credit is eliminated as of 2019.

Prince Edward Island

For corporation tax years ending after December 31, 2018, the small business income tax rate is reduced from 4% to 3.5%.

The basic personal credit amount is increased to $9,160.

Nova Scotia

The province introduces an Innovation Equity Tax Credit for 2019 and later years.

While there weren’t a great number of tax measures included in the 2018 Fall Economic Statement brought down by the Minister of Finance on November 21, 2018, the tax changes that were announced represented good news for Canadian businesses.

While there weren’t a great number of tax measures included in the 2018 Fall Economic Statement brought down by the Minister of Finance on November 21, 2018, the tax changes that were announced represented good news for Canadian businesses.

Perhaps most notably, several of the measures announced include tax changes which will benefit Canadian businesses of all sizes and operating in all sectors of the economy. Generally, those changes involved enhancements to the existing rules which will provide businesses with accelerated write-offs of assets which are acquired after the Budget date.

The Canadian tax system enables taxpayers to deduct (or write off) a specified percentage of the cost of newly-acquired capital property each year, through the capital cost allowance (CCA) system. In the year of acquisition, that deduction is, for most classes of assets, limited to one-half the usual percentage deduction (known as the “half-year rule”). The changes announced in the statement provide businesses with enhanced deductions under the existing capital cost allowance system – in some cases, allowing the entire cost of the property to be deducted in the year it is acquired.

The most broad-based of the changes announced in the statement – the Accelerated Investment Incentive, or AII – will effectively suspend the half-year rule for eligible property, meaning that a full CCA deduction could be taken in the year that eligible property is acquired. In addition, the allowance claimable for that year will be calculated by applying the prescribed CCA rate for that class of property to one-and-a-half times the cost of the property acquired.

For example, the combined effect of those changes is that where a property has a write-off rate of 20% per year, that write off will, under the AII, be equal to 30% of the cost of the property in the year the property is put in use. Significantly, such preferential treatment is not restricted to particular kinds or types of businesses or property. Rather, as stated in the statement, the AII will be available to “businesses of all sizes, across all sectors of the economy, that are making capital investments”. Such property, in order to be fully eligible for the AII, must be acquired and put in use by the taxpayer after November 20, 2018 and before 2024.

The second significant change will allow taxpayers to fully deduct, in the year of acquisition, the cost of machinery and equipment acquired for use in Canada primarily in the manufacturing and processing of goods for sale or lease. Such machinery and equipment, in order to qualify, must be acquired after November 20, 2018, and be available for use before 2024. The enhanced 100% deduction will be phased out for otherwise qualifying property which becomes available for use between 2023 and 2028.

Finally, clean energy equipment acquired by taxpayers in any industry already qualifies for preferential capital cost allowance treatment. That preferential treatment will be enhanced by a measure announced in the Statement which will provide a 100% deduction for such equipment which is acquired after November 20, 2018 and is available for use before 2024. Again, that enhanced deduction will be phased out where the otherwise qualifying property becomes available for use between 2023 and 2028.

While the basics of the three CCA measures announced in the Update are fairly straightforward, the application of those measures, as with any tax change, involves more detailed rules and restrictions. Those rules and restrictions are summarized in an Annex to the 2018 Fall Economic Statement, and that Annex can be found on the Finance Canada website at https://www.budget.gc.ca/fes-eea/2018/docs/statement-enonce/anx03-en.html.

Most Canadians know that the deadline for making contributions to one’s registered retirement savings plan (RRSP) comes after the end of the calendar year, around the end of February. There are, however, some instances an RRSP contribution must be (or should be) made by December 31^st, in order to achieve the desired tax result, as follows.

Most Canadians know that the deadline for making contributions to one’s registered retirement savings plan (RRSP) comes after the end of the calendar year, around the end of February. There are, however, some instances an RRSP contribution must be (or should be) made by December 31^st, in order to achieve the desired tax result, as follows.

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

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 by 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 of that year. Once that deadline has passed, no further RRSP contribution is possible.

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 2018, the contributor can claim a deduction for that contribution on his or her return for 2018. The spouse can then withdraw that amount as early as January 1, 2021 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2019, the contributor can still claim a deduction for it on the 2018 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2022. It’s an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should there be an unforeseen need to withdraw funds.

Accelerate any planned TFSA withdrawals into 2018

Each Canadian aged 18 and over can make an annual contribution to a Tax-Free Savings Account (TFSA) – the maximum contribution for 2018 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^st, 2018 will have the amount which is withdrawn added to his or her TFSA contribution limit for 2019, which means it can be re-contributed as early as January 1, 2019. If the same taxpayer waits until January of 2019 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2020.

For individual Canadian taxpayers, the tax year ends at the same time as the calendar year. And what that means for individual Canadians is that any steps taken to reduce their tax payable for 2018 must be completed by December 31, 2018. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan contributions, which can be made any time up to and including March 1, 2019, and claimed on the return for 2018.)

For individual Canadian taxpayers, the tax year ends at the same time as the calendar year. And what that means for individual Canadians is that any steps taken to reduce their tax payable for 2018 must be completed by December 31, 2018. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan contributions, which can be made any time up to and including March 1, 2019, and claimed on the return for 2018.)

While the remaining timeframe in which tax planning strategies for 2018 can be implemented is only a few weeks, the good news is that the most readily available of those strategies don’t involve a lot of planning or complicated financial structures – in many cases, it’s just a question of considering the timing of steps which would have been taken in any event. What follows is a listing of the steps which should be considered by most Canadian taxpayers as the year-end approaches.

Charitable donations

The federal government and all of the provincial and territorial governments provide a tax credit for donations made to registered charities during the year. In all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year – there are no exceptions.

There is, however, another reason to ensure donations are made by December 31^st. The credit provided by each of the federal and provincial or territorial governments is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. 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. Where the taxpayer making the donation has taxable income (for 2018) over $205,843, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2018 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 2018 and January 2019, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2019 donation can’t be claimed until the 2019 return is filed in April 2020. 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 5 years, donations which were made in a particular tax year. So, if donations made in 2018 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 2013, 2014, 2015, 2016, or 2017 tax years can be carried forward and added to the total donations made in 2018, and the aggregate then claimed on the 2018 tax return.

When claiming charitable donations, it is 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. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.

Timing of medical expenses

There are an increasing number of medical expenses which are not covered by provincial health care plans, and an increasing number of Canadians who do not have private coverage for such costs through their employer. In those situations, Canadians have to pay for such unavoidable expenditures – including dental care, prescription drugs, ambulance trips, and many other para-medical services, like physiotherapy, on an out-of-pocket basis. Fortunately, where such costs must be paid for partially or entirely by the taxpayer, the medical expense tax credit is available to help offset those costs. Unfortunately, the computation of such expenses and, in particular, the timing of making a claim for the credit, can be confusing. In addition, the determination of what expenses qualify for the credit and which do not isn’t necessarily intuitive, nor is the determination of when it’s necessary to obtain prior authorization from a medical professional in order to ensure that the contemplated expenditure will qualify for the credit.

The basic rule is that qualifying medical expenses (a lengthy list of which can be found on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/medical/#mdcl_xpns) over 3% of the taxpayer’s net income, or $2,302, whichever is less, can be claimed for purposes of the medical expense tax credit on the taxpayer’s return for 2018.

Put in more practical terms, the rule for 2018 is that any taxpayer whose net income is less than $76,750 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 $76,750 can claim qualifying expenses which exceed the $2,302 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 2018 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 2001 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^st approaches, it is a good idea to add up the medical expenses which have been incurred during 2018, as well as those paid during 2017 and not claimed on the 2017 return. Once those totals are known, it will be easier to determine whether to make a claim for 2018 or to wait and claim 2018 expenses on the return for 2019. And, if the decision is to make a claim for 2018, knowing what medical expenses were paid and when 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 2019. Where those are significant expenses (for instance, a particularly costly medication which must be taken on an ongoing basis), it may make sense, where possible, to accelerate the payment of those expenses to December 2018, where that means they can be included in 2018 totals and claimed on the 2018 return.

Reviewing tax instalments for 2018

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 Monday December 17, 2018. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2018 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, 2019. While the tax return forms to be used for the 2018 year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2017 form. Increases in tax credit amounts and tax brackets from 2017 to 2018 will mean that using the 2016 form will likely result in a slight over-estimate of tax liability for 2018.

Once one’s tax bill for 2017 has been calculated, that figure should be compared to the total of tax instalments already made during 2017 (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281). Depending on the result, it may then be possible to reduce the amount of the tax instalment to be paid on December 15 – and thereby free up some funds for the inevitable holiday spending!

The holiday season is usually costly, but few Canadians are aware that those costs can include increased income tax liability resulting from holiday gifts and celebrations. It doesn’t seem entirely in the spirit of the season to have to consider possible tax consequences when attending holiday celebrations and receiving gifts; however, our tax system extends its reach into most areas of the lives of Canadians, and the holidays are no exception. Fortunately, the possible negative tax consequences are confined to a minority of fact situations and relationships, usually involving employers and employees, and are entirely avoidable with a little advance planning.

The holiday season is usually costly, but few Canadians are aware that those costs can include increased income tax liability resulting from holiday gifts and celebrations. It doesn’t seem entirely in the spirit of the season to have to consider possible tax consequences when attending holiday celebrations and receiving gifts; however, our tax system extends its reach into most areas of the lives of Canadians, and the holidays are no exception. Fortunately, the possible negative tax consequences are confined to a minority of fact situations and relationships, usually involving employers and employees, and are entirely avoidable with a little advance planning.

During the month of December, it’s 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.

It’s even possible to feel some sympathy toward the tax authorities who have to deal with the tax treatment of employer-provided holiday gifts, as they are in 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 provide what would otherwise be taxable remuneration in the guise of 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 an unlimited number of non-cash gifts (within a specified dollar limit) to be received tax-free by an employee over the course of the tax year.

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. Where the total fair market value of such gifts is more than $500, the amount over that $500 limit 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 the amount or frequency of the gifts. For this purpose, the CRA considers anything which could easily be 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 it, in the words of the CRA, “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 event be 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 $150 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.
• 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.

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 #46 Corporate

Personal:

Issue #46 Personal

As the days get shorter and the temperature drops, many Canadians start thinking about spending a few days or weeks (or even longer) of the upcoming winter somewhere warmer. For some, that means going south for the holidays, while for others a January or February escape from winter has more appeal. And some Canadians, generally “snowbird” seniors who have retired, will spend most of the winter in a warmer climate.

As the days get shorter and the temperature drops, many Canadians start thinking about spending a few days or weeks (or even longer) of the upcoming winter somewhere warmer. For some, that means going south for the holidays, while for others a January or February escape from winter has more appeal. And some Canadians, generally “snowbird” seniors who have retired, will spend most of the winter in a warmer climate.

Whatever the timing and wherever the destination, one aspect of the planning of an out-of-country trip is the need to obtain travel medical insurance. No one, of course, wants to think of becoming sick or injured while on holiday, but the reality is that illness and accidents can happen anywhere. And when they do, the last thing anyone wants to have to think about is to how (or whether) they will be able to pay for necessary care or treatment.

Most provincial and territorial plans do make some provision for the payment of out-of-country medical expenses (with the extent of coverage differing by province or territory), but such coverage, where it exists, is usually limited to emergency care in the case of life-threatening illness or accident. The coverage provided by provincial and territorial health care plans can never be relied upon to provide payment of most out-of-country medical expenses and must always be supplemented by additional travel medical insurance coverage arranged (and paid for) by the individual.

The bottom line is that everyone who travels outside of Canada — without exception — needs to obtain travel medical insurance before leaving. And while the terms of that insurance and certainly the cost of obtaining it will vary greatly, depending on the age and health of the person to be insured, and the length of time for which insurance is required, there are some considerations which are common to everyone. At a minimum, everyone needs to consider the following.

• Does the policy cover medical expenses which are incurred as the result of a pre-existing condition? Are there exceptions, and what are they? Where there are coverage exclusions in a travel medical insurance policy, they are most likely to relate to medical conditions from which the applicant already suffers — and those, of course, are also the ones which are most likely to mean incurring out-of-country medical expenses. As well, it’s important to ensure that the extent of the coverage in all circumstances is clearly understood. For instance, in some policies, conditions that are considered minor are still covered, even if they were pre-existing conditions. However, any change in treatment or medication for that condition which occurs within a specified period of time prior to travel can mean that the condition is no longer considered as “minor” and so it will no longer be covered under the terms of the policy.

• For what length of time is coverage available? All travel medical insurance policies are stated to be effective for a specified number of days with the cost, of course, increasing with the length of the coverage period. As an individual grows older, he or she may find that the period of time for which their insurer will provide out-of-country medical insurance coverage becomes shorter and shorter. It is critical to make sure that the insurer will provide coverage for the entire length of the out-of-country stay. If coverage for the whole period can’t be obtained, or obtained at an affordable rate, the period of travel might have to be shortened.

• If the individual requires medical care within the policy coverage period, but the need for that care extends past the end of that period, how long will the coverage continue? For instance, if an individual is insured for a 60-day period, but has an accident or illness on day 58 of that period and care is required past the 60-day expiry date of the policy, for what period of time will the insurer continue to cover consequential medical costs incurred?

• What kind of medical history is required on the policy application form? At one time, applicants were required to provide information about any medical tests, diagnoses, or treatments which had taken place within a realistic, relatively short time frame — typically 90, 120, or 180 days — prior to the application date. More recently, however, some applications for travel medical insurance ask the applicant to provide their entire lifetime medical history — something which would be difficult for most people and is virtually impossible for anyone over the age of 50. And it seems that insurers will examine that medical history requirement to determine whether claims will be paid. There have been instances reported in the media in which coverage was denied on the basis that an individual’s application was incomplete or inaccurate, because some detail of his or her medical history was omitted, even where that detail was unknown to the applicant and unrelated to the medical event for which a claim was made.

• It’s critical to determine whether, in the event that out-of-country costs for medical care must be incurred, the terms of the policy provide that the insurer will pay such costs directly to the provider at the time care is provided, or whether the insured will be required to pay those costs up front and then seek reimbursement from the insurer? Where costs are small (e.g., a visit to a walk-in clinic for a minor matter) having to pay those costs out of pocket and receive reimbursement later isn’t usually a problem. Where, however, the medical event is a serious one — a heart attack or stroke, for example — costs can quickly run to the tens of thousands of dollars for specialized hospital care. Many retirees would find it difficult, if not impossible, to come up with that amount of money out of pocket on short notice.

It may seem that obtaining affordable travel medical insurance for which the underwriting requirements are realistic and which can be relied upon to provide coverage when needed is all but impossible. It is true that 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, especially where an extended out-of-country stay is planned, 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. And, put more positively, ensuring that the necessary insurance coverage is in place allows the traveler to focus on what’s most important — enjoying his or her vacation!

The daily commute to and from work is, generally, everybody’s least favourite part of the work day. In recent years that commute has gotten longer and longer as many Canadians, especially those working in large urban centers, have moved further and further away from their workplaces in search of affordable family housing.

The daily commute to and from work is, generally, everybody’s least favourite part of the work day. In recent years that commute has gotten longer and longer as many Canadians, especially those working in large urban centers, have moved further and further away from their workplaces in search of affordable family housing.

The good news for such employees is that 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. And, such deductions, in varying forms, can be available whether an individual is an employee working on salary, or a commission employee.

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 his or her employment duties.

Once either of these threshold criteria 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, such as the cost of electricity, heating and home maintenance.

Where an individual who qualifies under either of 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.

There is no specific formula for determining the proportion of eligible costs which can be deducted for qualifying home office expenses. The employee can determine that percentage based on the square footage of the workspace as a percentage of the overall square footage of the home or he or she can make that calculation based on the number of rooms in the house relative the number of rooms used for work-related purposes. Whichever method is chosen, the most important consideration is that the approach taken (and the expenses claimed) be reasonable. In all cases, 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 (where that maintenance involved the home work space) 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. Each such employee must file, with the income tax return for the year, a Form T2200. 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, confirm that the employee is not being reimbursed for any home office expenses incurred. Where there is any kind of reimbursement provided, 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 is likely that most employees would consider the return on that investment of time well worth it.

Tax scams have been around, probably, for about as long as Canada has had a tax system. They also have a tendency to proliferate at certain times of the year — often during tax return filing and assessment season, when it wouldn’t necessarily strike taxpayers as unusual to receive a communication purporting to be from the Canada Revenue Agency (CRA), with a message regarding that person’s taxes — whether in relation to a tax refund or an amount of tax owing.

Tax scams have been around, probably, for about as long as Canada has had a tax system. They also have a tendency to proliferate at certain times of the year — often during tax return filing and assessment season, when it wouldn’t necessarily strike taxpayers as unusual to receive a communication purporting to be from the Canada Revenue Agency (CRA), with a message regarding that person’s taxes — whether in relation to a tax refund or an amount of tax owing.

Most tax scams operate in one of two ways. In one, the taxpayer is promised money, in the form of a tax refund or credit, and required to log into or click on a link to a (fraudulent) website in order to collect the monies allegedly owed to them. The link leads, not to a federal government website, but to a “dummy” site very closely resembling the actual CRA website. The taxpayer must then, in order to have his or her “refund” processed, provide personal and financial information which can then be used by the tax scammer.

The other kind of scam informs the taxpayer, usually by a telephone call, that he or she owes money to the government, and that payment must be made forthwith. A failure to pay, the taxpayer is told, will mean damage to his or her credit rating, seizure of his or her assets, cancellation of his or her passport and/or social insurance card or other government-issued identification, deportation, or imprisonment. Further, such payment must be made only by bitcoin, wire transfer, or pre-paid credit card. This type of fraud has become so ubiquitous, in fact, that many businesses which provide money-transfer services post warnings on their premises to would-be users of the need to be aware of the fraud risk. And, needless to say, both the demand and the destination to which that money is sent are fraudulent, having nothing to do with any government department or authority.

The latter approach has been used very successfully in recent years to cheat Canadian taxpayers — often those who are particularly vulnerable by reason of age, infirmity, or lack of familiarity with Canadian laws. Recent media reports indicate that 60,000 Canadian taxpayers have made complaints about receiving such calls, and that more than $10,000,000 has been paid by victims of this particular scheme.

What’s even more concerning is that the perpetrators of the scam are becoming more sophisticated. Software used now has the ability to show, on call display, a false phone number that appears to be Canadian in origin — showing, for instance, an area code which would indicate that the call is originating from the Ottawa area. Consequently, it would be easy for the recipient of such a call to be reassured that the call was indeed originating from the CRA’s head office in Ottawa.

While Canadians are contacted every day by would-be fraud artists, there also seems to be something about a (purported) communication from the tax authorities which makes people especially vulnerable. Perhaps it is the fact that most Canadians are unfamiliar with the workings of a system with which they interact, in most cases, only once a year. It’s also possible that they are apprehensive about the real (or rumoured) powers of the CRA or the federal government to cause them grief, and therefore suggestible. Whatever the reason, it’s often the case that even those who would normally be able to discern that what they are being told doesn’t make sense seem to suspend their disbelief when dealing (by phone or by e-mail) with someone who purports to represent the tax authorities.

There are, in fact, several things about such a phone call that should alert the recipient to the fact that it’s not legitimate. First of all, if a taxpayer does owe money to the CRA, he or she will be first advised of that fact by mail and never by telephone — generally in his or her Notice of Assessment for a tax return filed. Second, the CRA would never suggest or require that a taxpayer send funds to the Agency by bitcoin, wire transfer, or by using a prepaid credit card. Any payment of money owed to the CRA is made online, through the CRA website, through the taxpayer’s financial institution (in person or online), or by mailing a cheque to the Agency. Finally, any suggestion that the CRA would (or could) cancel a taxpayer’s passport or other government issued ID for failure to make payment is simply ludicrous.

There is 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, which appear frequently, are usually identified on the CRA website at www.cra-arc.gc.ca/scrty/frdprvntn/menu-eng.html. Unfortunately, many such scams originate outside Canada, limiting the ability of the CRA and law enforcement authorities to monitor or stop them. For the most part, therefore, the onus will fall on individual taxpayers to protect themselves, through a healthy degree of caution, and even skepticism.

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 will never:

• send an e-mail asking the taxpayer to divulge personal or financial information;
• ask for personal information of any kind by email or text message;

• request payment by prepaid credit cards;
• give taxpayer information to another person, unless formal authorization is provided by the taxpayer; or
• leave personal information on an answering machine.

When in doubt, a taxpayer should ask him or herself the following:

• Did I sign up to receive online mail through My Account, My Business Account, or Represent a Client?
• Did I provide my email address on my income tax and benefit return to receive mail online?
• Am I expecting more money from the CRA?
• Does this sound too good to be true?
• Is the requester asking for information I would not provide in my tax return?
• Is the requester asking for information I know the CRA already has on file for me?

In all instances, the recipient of a call which purports to be from the CRA should hang up and call the CRA Individual Income Tax Enquiries line at 1-800-959-8281. Service agents at that line will be able to access the taxpayer’s tax records and provide information on whether the taxpayer does indeed owe any funds to the CRA. As well, taxpayers who receive what seems to be a suspicious communication should report that by the calling Canadian Anti-Fraud Centre at 1-888-495-8501.

If the worst has already happened, and the taxpayer has been scammed, the Anti-Fraud Center has the following advice.

Step 1: Gather all information about the fraud. This includes documents, receipts, copies of emails, and/or text messages.

Step 2: Report the incident to local law enforcement. This ensures that police in that jurisdiction are aware of what scams are targeting their residents and businesses. Keep a log of all your calls and record all file or occurrence numbers.

Step 3: Contact the Canadian Anti-Fraud Centre toll free at 1-888-495-8501 or through the Fraud Reporting System (FRS).

Step 4: Report the incident to the financial institution where the money was sent (e.g., money service business such as Western Union or MoneyGram, bank or credit union, credit card company, or internet payment service provider).

Step 5: If the fraud took place online through Facebook, eBay, a classified ad site such as Kijiji, or a dating website, be sure to report the incident directly to the website. These details can be found under "report abuse" or "report an ad."

Step 6: Victims of identity fraud should place flags on all their accounts and report to both credit bureaus, Equifax and TransUnion.

Finally, the Centre also warns that victims of fraud are often targeted a second or third time with the promise of recovering money previously lost. Their advice is never to send money to recover money. Where money has been sent, especially by bitcoin, the chances of recovering it are virtually nil.

Ironically, the extent to which most individuals are now comfortable transacting their tax and financial affairs online or over the phone, and the speed and anonymity of such transactions has made it easier in many ways for fraud artists to succeed. As always, the best defence against becoming a victim of such fraud artists is by refusing to provide personal or financial information, and especially never to make any kind of payment, whether by phone, e-mail or online, without first verifying the legitimacy of the request by contacting the CRA directly.

Or, as stated succinctly in a recent federal government statement on the subject: ”[O]ne point needs to be made crystal clear: anyone purporting to represent CRA to ask for money over the phone is a fraud.”

Tax-free savings accounts (TFSAs) have been around for nearly a decade now, having been introduced in 2009, and for most Canadians, a TFSA is now a regular part of their financial and tax planning strategies.

Tax-free savings accounts (TFSAs) have been around for nearly a decade now, having been introduced in 2009, and for most Canadians, a TFSA is now a regular part of their financial and tax planning strategies.

While TFSAs do not provide the tax deduction that an RRSP contribution creates, the strength of TFSAs lies in their great flexibility and the ability they give to Canadians to save, for short-term or long-term purposes, on a tax-free basis. Every Canadian aged 18 years of age and older can contribute a specified annual amount to a TFSA ($5,500 for 2018). Funds contributed to the TFSA are not deductible from income for tax purposes, but investment income earned by those funds is not taxed, either as it accrues or on withdrawal. Where a taxpayer does not contribute to a TFSA in a particular tax year, the contribution not made can be carried forward and that contribution made in any subsequent year. As well, TFSA holders can withdraw funds from their plan at any time, free of tax, and funds withdrawn can be re-contributed, but not until the following year. Therefore, each taxpayer’s contribution limit for a particular year is that year’s statutory annual amount, plus any allowable contributions not made in previous years and carried forward, plus amounts withdrawn in any previous year but not yet re-contributed.

The amount of the allowable TFSA contribution limit for a year has been something of a moving target since 2009: what follows is a listing of the maximum allowable annual contribution limits for each year since TFSAs were introduced.

• 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 the year 2015 was $10,000
• The annual TFSA dollar limit for the years 2016, 2017, and 2018 was $5,500

It’s readily apparent that, especially where there are carryforward amounts and/or the taxpayer has made withdrawals from a TFSA, calculating one’s current year contribution room can be complex. At one time the Canada Revenue Agency (CRA) notified taxpayers of their current-year TFSA contribution limit on the annual Notice of Assessment, but that is no longer the case. Now, the easiest way to find out one’s current year contribution limit is by calling the CRA’s Individual Income Tax Enquiries Line at 1-800-959-8281 or its automated Tax Information Phone Service (TIPS) line at 1-800-267-6999. Taxpayers who have registered for the Agency’s My Account online service can use that service to find the same information. It’s also possible to obtain from the CRA a TFSA Room Statement and a TFSA Transaction Summary, with the latter showing the contributions and withdrawals which have been made.

It’s important to stay within one’s overall contribution limit because exceeding that limit — even for one day — will result in the imposition of a penalty tax. Therefore, once a person figures out his or her total contribution limit for 2018, it is time to make sure that current contribution plans for the year will not put the taxpayer in an overcontribution position. Some taxpayers contribute on a regular, often monthly basis, while others are in the habit of depositing regular or irregular or periodic income receipts — like a tax refund, tax benefit amount, or a bonus from their employer — into their TFSA. Either way, after finding out one’s current year contribution limit, it is necessary to calculate how much has already been contributed in 2018. The difference between those two figures represents the balance which can be contributed before the end of the year without getting into an overcontribution position and incurring penalties. And it’s important to remember that if withdrawals have been or will be made during 2018, those amounts cannot be re-contributed until after the end of this year.

If it’s necessary to adjust regular contributions in order not to go “offside” by the end of the year, the best time to do it is obviously before getting into that overcontribution position. As soon as a taxpayer is in an overcontribution position, however, a penalty tax of 1% per month of the excess is imposed, even if the excess funds are withdrawn before the end of the month (i.e., as explained in the CRA guide to TFSAs, “[I]f, at any time in a month, you have an excess TFSA amount, you are liable to a tax of 1% on your highest excess TFSA amount in that month”).

Especially where TFSA contributions are set up to occur regularly, 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 arrangements. However, an “out of sight and out of mind” approach rarely makes for good financial and tax planning, and checking on the status of one’s TFSA on a periodic (at least quarterly) basis can help to ensure that everything is as it should be, and that unnecessary penalties are avoided.

One final consideration — one of the strengths of a TFSA as a savings vehicle is the ability to re-contribute funds which have been withdrawn. However, as outlined above, such re-contributions cannot be made until after the end of the calendar year in which the withdrawal was made. For that reason, taxpayers who may be contemplating a TFSA withdrawal early in 2019, perhaps in order to make an RRSP contribution, or to pay for a winter vacation, should make that withdrawal before the end of 2018. That way, should funds become available (perhaps through the tax refund generated by the RRSP contribution) it will be possible to make the re-contribution in 2019. If the withdrawal is not made until 2019, re-contribution will not be possible (without incurring a penalty) until 2020.

TFSAs are valuable savings and planning vehicles for Canadians — perhaps the most flexible such vehicles available. It’s easy, however, to get tripped up on the rules governing TFSAs, especially the rules around withdrawals and re-contributions. To help keep taxpayers from running afoul of those rules, the CRA provides a lengthy and detailed publication on TFSAs, and that publication is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466/tax-free-savings-account-tfsa-guide-individuals.html.

When the Canada Pension Plan was put in place on January 1,1966, it was a relatively simple retirement savings model. Working Canadians started making contributions to the CPP when they turned 18 years of age and continued making those contributions throughout their working life. Those who had contributed could start receiving CPP on retirement, usually at the age of 65. Once an individual was receiving retirement benefits, he or she was not required (or allowed) to make further contributions to the CPP. The CPP retirement benefit for which that individual was eligible therefore could not increase (except for inflationary increases) after that point.

When the Canada Pension Plan was put in place on January 1,1966, it was a relatively simple retirement savings model. Working Canadians started making contributions to the CPP when they turned 18 years of age and continued making those contributions throughout their working life. Those who had contributed could start receiving CPP on retirement, usually at the age of 65. Once an individual was receiving retirement benefits, he or she was not required (or allowed) to make further contributions to the CPP. The CPP retirement benefit for which that individual was eligible therefore could not increase (except for inflationary increases) after that point.

Retirement looks a lot different in 2018 than it did it 1966, and the Canada Pension Plan has evolved and changed to recognize those differences. What that means for the average Canadian is much more flexibility in determining how to structure both their contributions to the CPP and the receipt of CPP retirement benefits.

While greater flexibility in retirement income planning is always a good thing, having more choices brings with it the need to determine which choices are the right ones in one’s particular circumstances. And, when it comes to CPP, many Canadians must make a decision on when it makes sense to keep making CPP contributions.

The need to make that choice arises where a decision is made to continue to stay in the work force, whether part time or full time, even after beginning to receive CPP retirement benefits. While it has always been possible to work while receiving such benefits, it was, until 2012, not possible to make CPP contributions related to that work. A change made in that year, however, allowed individuals who continued to work while receiving the CPP retirement benefit to also continue to contribute to the Canada Pension Plan 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 who are 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 who are 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 will 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 additional contributions.

Where an individual makes CPP contributions while working and receiving CPP retirement benefits, the amount of any CPP PRB 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 1 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 includes a lump sum amount representing benefits back to January of that year. Thereafter, the PRB is paid monthly and the PRB amount is added to the individual’s CPP retirement benefit amount 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 concern himself or herself 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 — aged 65 to 70 — will need to make a decision about 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.

For all but a very fortunate few, buying a home means having to obtain financing for the portion of the purchase price not covered by a down payment. For most buyers, especially first-time buyers, that means taking out a conventional mortgage from a financial institution.

For all but a very fortunate few, buying a home means having to obtain financing for the portion of the purchase price not covered by a down payment. For most buyers, especially first-time buyers, that means taking out a conventional mortgage from a financial institution.

The rules governing eligibility or such home financing have been in somewhat a state of flux over the past ten years. For a number of reasons, mortgage and home equity borrowing practices never reached the unsustainable levels recorded south of the border, and Canada was spared the catastrophic housing crash which occurred in the U.S. in 2008 and 2009. However, in the years after the financial crisis which followed that housing crash, interest rates hit historic lows. Those ultra-low rates, in combination with rising real estate values, resulted in a record level of borrowing as first-time buyers took advantage of the low rates to purchase more home than they might otherwise have been able to afford, and existing homeowners borrowed against their ever-increasing home equity.

Canadian government and banking officials were sufficiently concerned with the level of borrowing, and the potential exposure of borrowers, that several sets of changes were made between 2008 and 2017 to tighten home financing and mortgage lending rules. What follows is an outline of the rules which now apply to prospective purchasers of residential property across Canada.

The first such rule requires prospective buyers to put down a minimum down payment, which is set at a percentage of the property cost. The applicable percentage depends on the cost of the property to be acquired, as follows:

Purchase price of the home                                           Minimum required down payment

$500,000 or less                                                              5% of the purchase price

$500,000 to $999,999                                                      5% of the first $500,000; and 10% of the portion of the                                                                                                  purchase price over $500,000

$1,000,000 or more                                                          20% of the purchase price

Whatever the purchase price of the home, where the down payment made is less than 20% of that purchase (or, put another way, the mortgage amount is greater than 80% of the purchase price), that mortgage is characterized as a high-ratio mortgage. In that case, additional requirements are imposed.

Basically, where a mortgage is a high ratio mortgage, the prospective home owner must obtain (and pay for) mortgage default insurance, usually through the Canada Mortgage and Housing Corporation (CMHC). Such insurance means that, should the home owner default on the mortgage, CMCH will pay the remaining outstanding balance of that mortgage to the financial institution which provided the mortgage financing. CMHC mortgage loan insurance premiums range from 0.6% to 4.50% of the amount of the mortgage, depending on the size of the down payment (although mortgage default insurance is not available where the purchase price of a home is $1,000,000 or more). Home buyers who take mortgage default insurance can pay those premiums upfront, or can add them to the mortgage amount and pay them over the life of that mortgage.

Prospective home buyers, having put together funds for a down payment, are often most concerned about whether they will be able to qualify for a mortgage. Those concerns are often well-founded, as the rules which govern such qualifications have recently become more stringent.

Everyone who applies for a mortgage (whether or not that mortgage is a high-ratio mortgage) from a federally-regulated financial institution (which includes all of the major Canadian banks), must pass a “stress test”. That test, which measures the borrower’s debt repayment obligations as a percentage of income, is intended to ensure that the applicant will be able to meet his or her mortgage payment obligations, both at the current low rates, and in the almost certain event that those rates will increase.

In making that determination, lenders use two measures — the gross debt service (GDS) and total debt service (TDS) ratios. GDS is essentially a measure of the borrower’s cost of housing, including mortgage payments, property tax payments, the cost of heating and, in the case of condominium purchasers, 50% of condo fees. In all cases, the total of such costs should not be more than 32% of the applicant’s gross income. The TDS represents all of the applicant’s debt servicing costs, including both housing costs and the cost of servicing credit card, student loan, car loan, line of credit, and other debt. When it comes to TDS, lenders want total debt servicing costs to be less than 40% of the applicant’s gross income.

Essentially, then, in applying the stress test, lenders look at the total housing cost and total debt servicing costs which the applicant will have if the mortgage is approved, to see whether the GDS and TDS ratios fall within the acceptable percentage limits.

Lenders are now required to run that stress test using the higher of two rates, as shown below, and the applicant must, using the GDS and TDS ratios, qualify at the higher rate.

• Where the mortgage will be a high ratio mortgage (down payment of less than 20%), the bank must use the higher of the Bank of Canada’s conventional five-year mortgage rate, or the mortgage interest rate which the applicant will be paying.
• Where the mortgage is not a high ratio mortgage, the bank must use the higher of the Bank of Canada’s conventional five-year mortgage rate and the interest rate which the applicant will be paying, plus 2%.

The Bank of Canada’s current conventional 5-year mortgage rate is 5.34%.

The need to qualify for a mortgage at a rate higher than current rates, and higher than the mortgage interest rate which is actually being provided will undoubtedly affect prospective borrowers. In some cases, borrowers may have to “downsize” their home purchase budget to accommodate the new rules while in other instances, those hoping to get into the housing market may be forced to wait until they can accumulate a large down payment so as to reduce the amount of mortgage financing needed.  In all cases, however, the intent of the new rules is to ensure that, once the home purchase is made, the new homeowners will be in a position to meet the financial obligations that home ownership involves, over both the short and the long term.

The month of September marks both the end of summer and the beginning of the new school year for millions of Canadian children, teenagers, and young adults. And, whatever the age of the student or the grade level to which he or she is returning, there will inevitably be costs which must be incurred in relation to the return to school. Those costs can range from a few hundred dollars for school supplies for grade school and high school students to thousands (or tens of thousands) of dollars for the cost of post-secondary or professional education.

The month of September marks both the end of summer and the beginning of the new school year for millions of Canadian children, teenagers, and young adults. And, whatever the age of the student or the grade level to which he or she is returning, there will inevitably be costs which must be incurred in relation to the return to school. Those costs can range from a few hundred dollars for school supplies for grade school and high school students to thousands (or tens of thousands) of dollars for the cost of post-secondary or professional education.  

Unfortunately for those students (and their parents!) the kinds of assistance which can be obtained through our tax system to help offset those costs has been eroded over the past few years, as previously available tax credits were withdrawn.

At the grade school and high school levels, there are really no credits or deductions which can be claimed for education-related costs. Formerly, two tax credits (the fitness credit and the arts credit) were available to help offset the cost of extra-curricular activities for children under the age of 16, but both such credits were cancelled as of the end of 2016.

Parents who work outside the home and consequently need to arrange for and pay for after-school care for their children can, however, deduct the costs of that care, within specified limits. Those limits are based on the age of the child and the amount of family income for the year. Details of that child care tax deduction are outlined on the Canada Revenue Agency (CRA) website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-214-child-care-expenses.html.

Once children reach an age to pursue post-secondary education, costs escalate. In recognition of that fact, post-secondary students (and their parents) have benefited for many years from an “assist” through our tax system, which provides deductions and credits for some of the many associated costs. However, two of those credits are also not available for 2018 or subsequent years.

For many years post-secondary students were able to claim the education tax credit and the textbook tax credit. Both, unfortunately, were eliminated as of the end of 2016. It’s important to remember, however, that where education and textbook credits have been earned but not claimed in years before 2017, however, they are still available to be claimed by the student as carryover credits in 2017, 2018, or later years.

The good news is that a tax credit continues to be available for the single largest cost associated with post-secondary education — the cost of tuition. 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 still 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 a student doesn’t have tax payable for the year, as is often the case, credits earned can be carried forward and claimed by the student in a future year, or transferred (within limits) in the current year to a spouse, parent, or grandparent.

While the cost of living, whether in a student residence or off campus, can be significant, there is no federal deduction or credit provided for such expenses. Such costs are characterized as personal and living expenses, for which no tax deduction or credit has ever been allowed.

Most post-secondary students in Canada must incur some amount of debt in order to complete their education, and repayment of that debt is typically not required until after graduation. Once repayment starts, a tax credit can be claimed for the amount of interest being paid on such debt, in some circumstances. Students who are still in school and arranging for loans should, however, be mindful of the rules which govern that student loan interest tax credit. While all interest paid on a qualifying student is eligible for the credit, only some types of student borrowing will qualify. Specifically, only interest paid on government-sponsored (federal or provincial) student loans will be eligible for the deduction. It’s not uncommon (especially for students in professional programs, like law or medicine) to be offered lines of credit by a financial institution, often at advantageous or preferential interest rates. As well, financial institutions sometimes offer, once a student has graduated and begun to repay a government-sponsored student loan, to consolidate that student loan with other kinds of debt, also at advantageous interest rates. However, it should be kept in mind that interest paid on that line of credit (or any other kind of borrowing from a financial institution to finance education costs) will never be eligible for the student loan interest tax credit. As explained in the CRA publication on the subject, “ [I]f you renegotiated your student loan with a bank or another financial institution, or included it in an arrangement to consolidate your loans, you cannot claim this interest amount”. Students who are contemplating borrowing from a financial institution rather than getting a government student loan (or considering a consolidation loan which incorporates that student loan amount) must remember, in evaluating the benefit of any preferential interest rate offered by a financial institution, to take into account the loss of the student loan interest deduction on that borrowing in future years.

There are, as well, a number of credits and deductions which, while not specifically education-related, are frequently claimed by post-secondary students (for instance, moving expense deductions). The CRA publishes a very useful guide that summarizes most of the income rules which may apply to post-secondary students. That guide, entitled Students and Income Tax, was updated in August 2018 to include recent changes, and that current version is now available on the CRA website at www.cra-arc.gc.ca/E/pub/tg/p105/README.html.

The administrative policy of the Canada Revenue Agency (CRA) with respect to charities has been that no more than 10% of a registered charity’s resources can be allocated to non-partisan political activity. Where the CRA views a charity as having exceeded that threshold it may impose sanctions, up to and including revocation of a charity’s charitable registration status.

The administrative policy of the Canada Revenue Agency (CRA) with respect to charities has been that no more than 10% of a registered charity’s resources can be allocated to non-partisan political activity. Where the CRA views a charity as having exceeded that threshold it may impose sanctions, up to and including revocation of a charity’s charitable registration status.

Earlier this year, an Ontario court decision effectively struck down the rules limiting the involvement of charities in non-partisan political activity, including the CRA’s 10% ceiling rule, declaring those rules to be invalid and of no effect. That change was effective as of the date of the Court’s ruling, which was July 16, 2018.

Needless to say, that Court decision created considerable uncertainty in the charitable sector with respect to the current or future involvement by charities in any non-partisan political activities. The CRA has now made two announcements intended to alleviate that uncertainty.

First, the CRA has announced that it will be appealing the Court’s decision, which it believes contains “significant errors of law”. The hearing and decision in that appeal is at least several months away.

The CRA has, however, also announced that changes will be made, not just to its policy with respect to the permitted political activities of charities, but to the Income Tax Act provisions governing the permitted activities of registered charities. According to the CRA’s press release, which can be found on its website at https://www.canada.ca/en/revenue-agency/news/2018/08/statement-by-the-minister-of-national-revenue-and-minister-of-finance-on-the-governments-commitment-to-clarifying-the-rules-governing-the-political.html, the planned changes will allow charities to pursue their charitable purposes by engaging in non-partisan political activities and in the development of public policy. Charities will still be required to have exclusively charitable purposes, and restrictions against partisan political activities will remain.

Significantly, the CRA will implement the planned changes through amendments to the Income Tax Act, with the intention of introducing amending legislation in the fall of 2018. Consequently, the new rules governing political activities of charities will be, not simply administrative policy on the part of the CRA, but legal requirements under the Income Tax Act. As well, the planned legislative changes will apply retroactively, including to the audits and objections of registered charities which are currently suspended. Such suspensions will be lifted when the planned legislation is passed by Parliament.

The CRA’s announcement of the planned changes did not include a detailed outline of the planned changes. However, the Agency did indicate in its press release that such changes would be “consistent with” Recommendation #3 found in the report of the Agency’s Consultation Panel on the Political Activities of Charities. That Recommendation is as follows:

 “The Panel recommends that amendments:

1. retain the current legal requirement that charities must be constituted and operated exclusively for charitable purposes, and that political purposes are not charitable purposes;
2. fully support the engagement of charities in non-partisan public policy dialogue and development in furtherance of charitable purposes, retiring the term “political activities” which tends to be understood in common parlance as partisan and is therefore confusing, and clearly articulating the meaning of “public policy dialogue and development” to include: providing information, research, opinions, advocacy, mobilizing others, representation, providing forums and convening discussions; and
3. retain the prohibition on charities’ engaging in “partisan political activities” with the inclusion of “elected officials” (i.e. charities may not directly support “a political party, elected official or candidate for public office”) and the removal of the prohibition on “indirect” support, given its subjectivity.”

The full Report of the Panel is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/resources-charities-donors/resources-charities-about-political-activities/report-consultation-panel-on-political-activities-charities.html.

There is an important caveat: the CRA has indicated that its planned legislative amendments would be “consistent with” the Panel Recommendation, and not that they would reflect that Recommendation in every respect. Consequently, the content of the amendments may well differ in one or more ways from the Panel Recommendation.

The CRA has indicated as well that, once the legislative amendments are in place, it will be providing ”supporting guidance”, in collaboration with the charitable sector, presumably through plain language publications outlining both the legislative changes and how the CRA intends to implement and administer those changes going forward. Stay tuned.

Millions of Canadians receive payments each month from the federal government and for younger Canadians, especially families with children, such payments will often include the monthly Canada Child Benefit (CCB).

Millions of Canadians receive payments each month from the federal government and for younger Canadians, especially families with children, such payments will often include the monthly Canada Child Benefit (CCB).

The current (2018-19) benefit year for the CCB runs from July to June and so the first payment of the that benefit year, was received by Canadian families on July 20. For some recipients, that payment may have been in a different amount than previous months, while others may not have received any benefit payment at all.

The reasons for such occurrences are two-fold. First, the amount of CCB payable is based on a family’s net income. For the first half of the year, the amount of payment is based on income from the second previous taxation year. So, eligibility for and the amount of any CCB paid during the January to June 2018 period was based on family net income for 2016. For the July to December 2018 period, the amount of benefits which a family can receive is based on that family’s net income for the 2017 tax year.

Of course, the only means by which the federal government can determine a family’s net income for 2017 (and consequently their entitlement to CCB) is from tax returns filed for that year. Where no tax returns have yet been filed for 2017, there will have been no CCB benefit paid in July of 2018. Taxpayers who have not yet filed for 2017 but who believe that they are eligible for CCB should file as soon as possible. Once the return(s) are filed and assessed, and the family is determined to be eligible for CCB benefits during the 2018-19 benefit year, such benefits will be paid retroactively, back to July 2018.

Where a family received CCB during the first half of 2018, and there was a change in family net income between 2016 an 2017, then the amount of CCB received in July 2018 will differ (up or down, depending on whether income increased or decreased from 2016 to 2017) from that received in June.

There is an additional reason why families may see a changed CCB benefit starting in July 2018. In 2016, the federal government announced that CCB benefits would be indexed to inflation beginning in July 2020. However, that implementation date was moved up to July 2018, so benefits are fully indexed to changes in the Consumer Price Index as of that date.

Taxpayers who want to confirm that the amount of their CCB benefit for the 2018-19 benefit year is correct can go to CRA website at www.canada.ca/en/revenue-agency/services/child-family-benefits/canada-child-benefit-overview/canada-child-benefit-we-calculate-your-ccb.html, where the calculation of the CCB is outlined. Or, an explanation of the benefits received can be had by calling the Agency’s Benefits Enquiries toll-free phone line at 1-800-387-1193. The hours of service for that phone line are Monday to Friday, 9 a.m. to 5 p.m.

Achieving charitable registration status is a significant step, and a significant benefit, to any organization. The organization itself becomes exempt from income tax and, in addition, is able to issue tax receipts for donations made to it, which allow donors to claim a federal and provincial tax credit based on the amount of such donations. The ability to issue such tax receipts gives a charitable organization a measurable advantage when it comes to fundraising.

Achieving charitable registration status is a significant step, and a significant benefit, to any organization. The organization itself becomes exempt from income tax and, in addition, is able to issue tax receipts for donations made to it, which allow donors to claim a federal and provincial tax credit based on the amount of such donations. The ability to issue such tax receipts gives a charitable organization a measurable advantage when it comes to fundraising.

The other, less tangible, benefit of becoming a registered charity is that such organizations are more likely to be (correctly) perceived as legitimate charities, having undergone a degree of scrutiny by the Canada Revenue Agency (CRA) in order to obtain registered charity status, and being subject to ongoing reporting requirements in order to maintain that status.

In order to obtain and retain status as a registered charity, an organization must fulfill a number of requirements. Specifically, as outlined on the CRA website, any organization functioning as a registered charity must be resident in Canada, must be established and operated for charitable purposes, and must devote its resources (funds, personnel, and property) to charitable activities.

In relation to the requirements for “charitable purposes” and “charitable activities”, an organization must generally have purposes that include one or more of the following: the relief of poverty, the advancement of education, the advancement of religion, and other purposes that benefit the community (where such purposes have been found by the courts to be charitable in nature).

The devil, as always, is in the details, and the types of activities which charities can engage in in the pursuit of those charitable purposes has always been a subject of discussion and, often, dispute between the charitable sector and the CRA. In particular, there is something of an ongoing dispute with respect to the extent to which charities can engage in activities which are political (in a non-partisan sense) in nature. Such non-partisan political activity, while allowed, is subject to strict limits under specific provisions of the Income Tax Act and the CRA policies interpreting those provisions. The Act requires that a registered charity devote “substantially all” of its resources to charitable activities, but provides that where the charity devotes part of its resources to non-partisan political activities and those non-partisan political activities are “ancillary and incidental to its charitable activities”, the resources devoted to such activities will be considered to be used in charitable activities. As a matter of administrative policy, the CRA has taken the position that no more than 10% of a registered charity’s resources should be expended on partisan political activity or, put another way, that at least 90% of its resources should be devoted to non-political charitable activities. A recent Court decision, however, has thrown most of those rules around non-partisan political activities of charities into doubt.

The case began when, in 2016, a registered charity — Canada Without Poverty — challenged the CRA’s administrative policy limiting registered charities to using no more than 10% of their resources for political activities related to their charitable purposes. That challenge was based on the argument that the organization could not achieve its charitable purposes without engaging in political activity, and that the restrictions placed by the CRA’s policies on the extent of such activities were a violation of the right to free expression granted by the Canadian Charter of Rights and Freedoms.

The Court agreed with the charity which brought the challenge and held that the CRA’s view that a charity could spend only up to 10% of its resources on non-partisan political activities was a violation of the Charter and that the entire provision of the Income Tax Act which restricted non-partisan political activities and therefore political expression by a registered charity was also contrary to the Charter, and that there was no justification for such restriction.

The Court did emphasize that it was not speaking of partisan political activities, which remain out of bounds for registered charities. However, as the law now stands following the Court’s decision on July 16, charities are able to engage in non-partisan political activities without regard for the limits which were formerly imposed by the Income Tax Act and by the CRA’s administrative policies in enforcing that Act.

It is likely that, given the potentially significant consequences which follow from the Court’s decision, the federal government will appeal that decision to a higher Court, seeking to have it reversed. That process of appealing the Court decision is one which will take at least several months, if not longer, but it’s a process that will be closely followed by many organizations and individuals working in the charitable sector.

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 of 2018 — 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 of 2018 — 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 is 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 that 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 which is largely invisible to the employee, and certainly one which operates without the need for the employee to take any steps on his or own. When someone begins to receive income through a source other than employment (for instance, the newly self-employed or newly retired), it is consequently not particularly 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 retire are accustomed to having only a single source of income. 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 (2018) year and either of the two previous (2016 and 2017) years, that taxpayer may be subject to the requirement 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.

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 2019. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2018, 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 2017 tax year. Where a taxpayer’s income has not changed between 2017 and 2018 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2018 will be the same or slightly less than it was in 2017, owing to the indexation of tax brackets and tax credit amounts. Once that figure is determined, 75% of the total amount should be paid on or before September 15 and the remaining 25% paid on or before December 15.

Third, the taxpayer can estimate the amount of tax which he or she will actually owe for 2018 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2017 to 2018 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. And, as in option 2, 75% of the total tax determined to be payable for 2018 should be paid on or before September 15, and the remaining 25% paid on or before December 15 of this year.

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 2018 return is filed next spring.

Once they have resigned themselves to the realities of the tax instalment system, the next question that most taxpayers have is how such payments can be made. Not surprisingly, the CRA provides taxpayers with a lot of options when it comes to making instalment payments, and those options include the following:

• Visa Debit
• Online banking
• Debit card
• Pre-authorized debit (not applicable when using EFILE)
• Credit card
• At the taxpayer’s financial institution using Form INNS3, Instalment Remittance Voucher

More information on how to make instalment payments of tax can be found 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.

Between February and July 2018, the Canada Revenue Agency (CRA) received and processed just over 28 million individual income tax returns filed for the 2017 tax year. The CRA’s self-imposed processing turnaround goal for each of those returns is to complete its assessment and to issue a Notice of Assessment within two to six weeks, depending on the filing method.

Between February and July 2018, the Canada Revenue Agency (CRA) received and processed just over 28 million individual income tax returns filed for the 2017 tax year. The CRA’s self-imposed processing turnaround goal for each of those returns is to complete its assessment and to issue a Notice of Assessment within two to six weeks, depending on the filing method.

The effort of processing those returns and issuing 28 million Notices of Assessment consumes the bulk of the CRA’s time and resources during the February to June filing season. However, the sheer volume of returns and the processing turnaround timelines mean that the CRA does not (and cannot possibly) do a manual review of the information provided in a return prior to issuing the Notice of Assessment. Rather, all returns are scanned by the Agency’s computer system and a Notice of Assessment is then issued.

In addition, the CRA has for many years been encouraging taxpayers to fulfill their filing obligations online, through one of the Agency’s electronic filing services. This year, just under 25 million (or 88%) of the returns 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 88% 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 for tax returns for the 2017 tax year is now underway.

There are two components to the post-assessment review process — the Processing Review Program and the Matching Program, and the first component starts in the month of August. That Processing Review Program, as the name implies, is a review of various deductions or credits claimed on returns, while the Matching Program compares information reported 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 about 3 million Canadian taxpayers.

A taxpayer whose return is selected as part of the Processing Review Program will be asked to provide verification or proof of deductions or credits claimed on the return -usually by way of receipts or such documentation. The Matching Program, on the other hand, involves comparison by the CRA of information received from different sources (i.e., matching up the amount of employment income reported by a taxpayer with the amount showing on the T4 slip issued by that taxpayer’s employer). Where the figures match up, there is no need for the further action by the CRA. Where they don’t, the taxpayer will likely be contacted with a request for an explanation of the discrepancy.

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 the start of 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 return. 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 the basis of random selection.

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, 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. 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 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 how 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 and the perpetrators of that scam have become increasingly sophisticated in recent years. 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. It is implied, or stated, that failure to make immediate payment by such means will result in arrest and imprisonment or, for recent immigrants, immediate deportation.

Taxpayers should be aware that payment of taxes is never requested in this way, or by either of those methods, and that the threat of immediate imprisonment or deportation is simply ludicrous. 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. If the caller cannot provide that number, then it’s not a call from the CRA. 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 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. To assist taxpayers in understanding the process and in responding to Agency requests, the CRA recently issued a Tax Tip summarizing its return review process, which can be found at https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2018/tax-return-reviewed.html. The CRA website also includes more detailed information on the return review process, which is available at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/review-your-tax-return-cra.html.

The start of the calendar year also marks the beginning of the tax year for individuals and consequently most tax changes are scheduled to take effect as of January 1 of each year. However, the federal and provincial budgets are brought down in the late winter and spring, and those budgets can include announcements of tax changes which will take effect later in the year (often, but not exclusively, on July 1, being halfway through the tax year). As well, where a change in tax rates, credits, or income brackets announced in the budgets is made effective as from the beginning of the tax and calendar year, individuals will first notice that change when their payroll withholdings are adjusted starting in July.

The start of the calendar year also marks the beginning of the tax year for individuals and consequently most tax changes are scheduled to take effect as of January 1 of each year. However, the federal and provincial budgets are brought down in the late winter and spring, and those budgets can include announcements of tax changes which will take effect later in the year (often, but not exclusively, on July 1, being halfway through the tax year). As well, where a change in tax rates, credits, or income brackets announced in the budgets is made effective as from the beginning of the tax and calendar year, individuals will first notice that change when their payroll withholdings are adjusted starting in July.

What follows is a listing of significant federal and provincial tax changes which are currently scheduled to come into effect during the remainder of the 2018 tax year.

Federal

Indexation of Child Tax Benefits

In its 2016 Budget, the federal government replaced the existing Canada Child Tax Benefit with the Canada Child Benefit program. The new program provides lower and middle income Canadian families with a non-taxable monthly benefit, with the amount of that benefit dependent on family size and income.

When the CCB program was introduced, one of the terms of that program was that  benefits payable would be indexed, starting in July  2020. However, in the fall of 2017, the federal government announced that such indexation would be accelerated, such that all CCB benefits will be indexed to changes in the Consumer Price Index, starting in  July 2018.

Indexation of benefits will take place automatically starting in July, and there is no requirement or need for CCB recipients to take any action.

British Columbia

Interactive Digital Media Tax Credit extended

The B.C. Interactive Digital Media tax credit, which was scheduled to expire at the end of August, 2018, has been extended for a period of five years and so it will be available until August 31, 2023.

Manitoba

Carbon tax introduced effective September 1

Manitoba’s carbon tax will impose a $25 tax per tonne of greenhouse gas emissions beginning on September 1, 2018 and will apply to gas, liquid, and solid fuel products intended for combustion in the province.

Corporate tax credit programs extended

The Manitoba Book Publishing Tax Credit and the Cultural Industries Printing Tax Credit were both scheduled to expire on December 31, 2018. Both have been extended for one year, to December 31, 2019.

Ontario

Changes to personal income tax rates and brackets

Previously, Ontario was one of only two Canadian provinces to levy a personal income tax surtax. However, it was announced in this year’s Budget that the surtax would be eliminated, and that tax brackets and rates would be adjusted to compensate for that change.

Although the change in the rate structure is effective as of the beginning of 2018, changes to income tax source deductions which reflect that change will be implemented starting in July.

Prince Edward Island

Change to basic personal amount

In this year’s Budget, the province announced that the basic personal tax credit amount, which is claimable by all PEI residents, would be increased in two steps. The first stage of that change will see the amount for 2018 increase from $8,160 to $8,660.

Although the change is effective as of the beginning of the calendar year, it will first be reflected in payroll deductions made for provincial income tax starting in July 2018.

It shouldn’t be news to anyone that severe weather events are becoming more and more common. And, although Canada is known for its winters, it’s usually spring and summer that bring the kinds of weather-related disasters that can force Canadians to leave (or even lose) their homes and which can upend their lives for days, weeks, or even months.

For the past few years, spring floods have been succeeded by summer droughts and forest fires, and the timing of those events unfortunately coincides with the time of year during which most individual tax filing and payment deadlines fall. The filing deadline for 2017 returns for most taxpayers fell on April 30, 2018, which was also the deadline for final payment of all individual taxes owed for 2017. Self-employed individuals and their spouses were required to file a return for 2017 by June 15, 2018. Finally, for taxpayers who pay individual income tax by instalment, the due date for the second instalment payment of income taxes for 2018 was also June 15.

It shouldn’t be news to anyone that severe weather events are becoming more and more common. And, although Canada is known for its winters, it’s usually spring and summer that bring the kinds of weather-related disasters that can force Canadians to leave (or even lose) their homes and which can upend their lives for days, weeks, or even months.

For the past few years, spring floods have been succeeded by summer droughts and forest fires, and the timing of those events unfortunately coincides with the time of year during which most individual tax filing and payment deadlines fall. The filing deadline for 2017 returns for most taxpayers fell on April 30, 2018, which was also the deadline for final payment of all individual taxes owed for 2017. Self-employed individuals and their spouses were required to file a return for 2017 by June 15, 2018. Finally, for taxpayers who pay individual income tax by instalment, the due date for the second instalment payment of income taxes for 2018 was also June 15.

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, meet those obligations on a timely basis.  

The ability of the Canada Revenue Agency (CRA) to provide relief to taxpayers in such circumstances arises from their 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 is 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.

Most requests for relief filed will likely be requests to waive the imposition of interest or penalties related to one or more late filings or late payments in connection with one or more of these deadlines. 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 https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/rc4288.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 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. In order to provide full financial disclosure, the CRA recommends that taxpayers use Form RC376, Taxpayer Relief Request — Statement of Income and Expenses and Assets and Liabilities for Individuals. That form is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/rc376.html.

All relief requests are to be sent to a particular tax centre or Tax Services office, depending on the taxpayer’s province of residence. A listing of the addresses of all such centres and offices 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.

When natural or man-made disaster occurs, individuals living in the affected areas are clearly those most affected, but they are not the only ones. This spring, the CRA issued a news release reminding taxpayers of the availability of the Taxpayer Relief Program. It noted in that release that first responders who work to help in such circumstances may also seek relief under the Program, where such work has meant that they were unable to meet their tax filing and/or payment obligations. That press release can be found on the CRA website at https://www.canada.ca/en/revenue-agency/news/2018/05/government-of-canada-offers-taxpayer-relief-to-canadians-affected-by-flooding.html.

Most Canadians, understandably, think about taxes only when such thoughts can’t be avoided — once or twice a year. The first such time is, of course, when the annual return must be filed at the end of April (or mid-June for the self-employed). And some, but not all, taxpayers turn their minds to taxes when the annual RRSP contribution deadline rolls around.

Most Canadians, understandably, think about taxes only when such thoughts can’t be avoided — once or twice a year. The first such time is, of course, when the annual return must be filed at the end of April (or mid-June for the self-employed). And some, but not all, taxpayers turn their minds to taxes when the annual RRSP contribution deadline rolls around.

The unfortunate reality, however is that most often taxpayers who are sitting down to prepare their annual return, or waiting to hear the results from someone else’s preparation of that return, have no idea of what the bottom line is going to be. Everyone, of course, hopes for a big tax refund, or at least not to have a big tax bill to pay. But the fact is that the refund or tax payable figure which appears at the bottom of page 4 of one’s tax return shouldn’t be — and doesn’t have to be — a surprise, and it’s not necessary to be a tax professional to acquire that knowledge. A few steps taken during the year can eliminate any disappointments or unpleasant surprises at tax filing time — and mid-year is a good time to take those steps, for several reasons.

By the end of June, all Canadians should have filed a return for the previous tax year, and most will have received the Notice of Assessment which summarizes their tax situation for that year — income, deductions, credits, and tax payable. July also marks the halfway point for the payment of income tax by individual taxpayers for the current taxation year. Employees will have made six months of payments toward their income tax bill for the year, through deductions at source from each paycheque, and taxpayers who pay their income tax by instalment will already have made two of the four tax instalment payments due during 2018. Finally, the federal government and most of the provinces provide refundable tax credit or benefit programs to eligible taxpayers, and those programs are generally administered by means of monthly or quarterly payments to recipients. The current benefit year for most such programs runs from July 2018 to June 2019.

All of this makes the month of July a good time to assess one’s current year tax situation, make sure that everything is on track, and put in place any adjustments needed to help ensure that there are no unpleasant tax surprises when filing one’s tax return for 2018 next spring. As the calendar year goes on, the opportunities to make a significant difference to one’s current year tax and benefit situation diminish.

For the majority of individual taxpayers there are two basic steps involved in a mid-year tax checkup. First, all tax filing obligations, if not yet done, should be brought up-to-date. Second, it’s necessary to ensure that tax payment obligations for the current tax year are on track to be met, and to make any required adjustments if they are not.

For all taxpayers, the due date for filing of the return for 2017 has passed and any return not yet filed is now late. Many taxpayers know that filing on time is important in order to avoid late-filing penalties and interest charges. Most do not, however, realize that a failure to file, even where no tax is owed, will mean losing access, at least temporarily, to federal and provincial refundable tax credits which are paid  monthly or quarterly to eligible taxpayers.

Eligibility for a number of such credits (the GST/HST credit and the Canada Child Benefit, for instance) are based, in part, on the taxpayer’s income and, of course, that income is determined from the annual tax return. The month of July 2018 marks the beginning of the 2018-19 benefit year for such credits, and benefits paid for that 2018-19 year are based on the taxpayer’s income for 2017. Where a taxpayer hasn’t filed a return for 2017, the federal government can’t determine whether the taxpayer is eligible for any benefits and, if so, what the amount of those benefits will be. Consequently, any payment of such benefits will cease as of July 2018. Once the return is filed and assessed, payment of credits owed can be made retroactively, but there will be a delay. 

Once the return for 2017 has been filed and a Notice of Assessment for that year has been issued by the Canada Revenue Agency and received by the taxpayer, the next step can be taken. In the best-case scenario, there will have been little or no tax owed on filing and little or nothing by way of a refund. While many taxpayers view a big tax refund as “found money”, the reality is that in most cases a large tax refund means that the taxpayer has overpaid their taxes during the year, and thereby provided the government with an interest-free loan. (No interest is paid on overpayments of tax by the taxpayer prior to the return filing date). In the opposite scenario – a large tax balance owed on filing, the converse is true and generally the taxpayer has paid insufficient tax, whether by way of deductions at source or by tax instalments, through the year. Either way, it’s in the taxpayer’s best interests to make sure that that scenario doesn’t repeat itself for 2018.

To do that, the taxpayer has to come up with a reasonably good estimate of the amount of tax which will be owed for 2018. Most taxpayers, especially employees, will know by mid-year what their total income will be for 2018. Taxpayers whose income hasn’t changed much from 2017 to 2018 can get a good sense of what their tax liability for 2018 will be simply by using the 2017 income tax return form for their province of residence to make that calculation - using, of course, their anticipated income for 2018. (In arriving at that income amount, it’s important to remember to include, in addition to employment income, any other income receipts – for instance, interest received or withdrawal(s) from an RRSP.) If anything, a calculation done using a return form from 2017 will slightly overstate the taxpayer’s tax liability for 2018, owing to the indexation of tax brackets and tax credit amounts. For those who wish to be more precise in their calculation, information on the tax rate brackets and credit amounts which apply for 2018 can be found on the Canada Revenue Agency website at http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html#previousyears.

Once a rough idea of one’s tax liability for 2018 is arrived at, it’s necessary to figure out whether income tax payments made to date, either by source deductions or instalment payments, match up with that tax liability figure, recognizing that by this point in the year, approximately one-half of 2018 taxes should already have been paid. If they haven’t, and particularly if there is a shortfall which will mean a balance owing when the tax return for 2018 is filed next spring, the taxpayer will need to take steps to remedy that. Employees can arrange to have the amount of tax withheld at source from each paycheque increased to make up for the shortfall, while those who pay by instalment can increase the amount of the instalment payments to be made in September and/or December to close the gap.

It’s also possible, especially where a taxpayer is making expenditures which will result in one of more large deductions from income for 2018 (for example, for child care expenses, deductible support payments or an RRSP contribution) to find that taxes are being overpaid. Employees who find themselves in that situation can file a FormT1213 – Request to Reduce Tax Deductions at Source, which is available on the CRA website at http://www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html with the Agency. On that form, the taxpayer identifies the amounts which will be deducted on the return for the year and, once the CRA verifies that those deductible expenditures are being made, it will authorize the taxpayer’s employer to reduce the amount of tax which is being withheld at source to take account of that deduction. For taxpayers who pay tax by instalments, the process is a simpler one – such taxpayers can simply adjust the amount of instalment payments made in September and/or December to reflect their actual tax liability for 2018.

Most taxpayers, once the return for the past year is filed and assessed, are disinclined to deal with tax matters again before it is absolutely required. Notwithstanding, the investment of a couple of hours of time half way through the year, to make sure that one’s current year tax payments are in order, can help avoid a big tax bill next spring.

By the end of June, all individual taxpayers have filed their 2017 income tax returns and most will have received a Notice of Assessment outlining the Canada Revenue Agency’s (CRA’s) conclusions with respect to their 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 — the amount of income assessed is greater than that reported by the taxpayer, or a deduction or credit is denied — then the taxpayer must decide whether to dispute the CRA’s assessment.

By the end of June, all individual taxpayers have filed their 2017 income tax returns and most will have received a Notice of Assessment outlining the Canada Revenue Agency’s (CRA’s) conclusions with respect to their 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 — the amount of income assessed is greater than that reported by the taxpayer, or a deduction or credit is denied — then the taxpayer must decide whether to dispute the CRA’s assessment.

The first step is always to contact the CRA to find out, if it’s not clear from the Notice of Assessment, where the discrepancy lies and what caused it. The quickest way to get that information is through a call to the CRA’s Individual Income Tax Enquires line at 1-800-959-8281. When that call is made, it’s necessary to have a copy of the return filed and the Notice of Assessment on hand. Those documents will have the information needed to satisfy the CRA’s information security requirements, and will also make it easier to communicate the nature of the problem (and any explanation of that problem).

Where, however, the explanations provided don’t satisfy the taxpayer, where the amounts in issue are significant, or where 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).  Where the taxpayer files an Objection, the CRA’s collection efforts are suspended until 90 days after the date the CRA’s decision on that Objection is sent to the taxpayer. In some cases, however, those collection efforts will not be brought to a halt, in whole or in part. 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 2017 tax year, the one-year deadline (which is usually, but not always, the later of those two dates) would be April 30, 2019 (or June 15, 2019 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.

Taxpayers who are disputing their tax assessment can 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 — like .doc, .pdf. and jpg. — will already be familiar to most taxpayers. 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 hard copy of a Notice of Objection can find the most current version of the CRA’s standardized T400A, Objection (which was updated and re-issued in June 2018), on the CRA’s website at https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t400a/t400a-18e.pdf.

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 the T400A form 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.

It’s also possible to contact either of the Intake Centres by phone or fax, at the following numbers.

Eastern Intake Centre

Toll Free Public Enquiries Line: 1-866-242-3161 (English), 1-866-276-0969 (French)
Local Public Enquiries Line: 705-671-0238 (English), 705-677-7764 (French)
Fax: 1-866-443-4955, Local: 705-671-0388

Western Intake Centre

Public Enquiries Line: 1-800-959-5513
Fax: 1-866-489-6832, Local: 604-587-2672

Any follow-up by phone or fax should be to the Centre to which the Objection was sent.

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 is 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.         

For several generations, reaching one’s 65^th birthday marked the transition from working life to full retirement, and, usually, receipt of a monthly employee pension, along with government-sponsored retirement benefits. That is no longer the reality. The age at which Canadians retire can now span a decade or more, and retirement is more likely to be a gradual transition than a single event.

For several generations, reaching one’s 65^th birthday marked the transition from working life to full retirement, and, usually, receipt of a monthly employee pension, along with government-sponsored retirement benefits. That is no longer the reality. The age at which Canadians retire can now span a decade or more, and retirement is more likely to be a gradual transition than a single event.

Today, Canadians can choose to begin receiving benefits from government-sponsored retirement benefit programs between the ages of 60 and 70. Canada Pension Plan retirement benefits can begin as early as age 60, and taxpayers can start collecting Old Age Security benefits at age 65. Receipt of income from either of those government- sponsored retirement income plans can also be deferred until the age of 70, but no later.

As well, the employer-sponsored pension plan is no longer available as a source of guaranteed retirement income for the majority of retirees. Instead, such retirees have (hopefully) saved for retirement through a registered retirement savings plan (RRSP). Holders of such plans are required to collapse their RRSP by the end of the year in which they turn 71 years of age. And, the decision made on what to do with the funds within that RRSP will affect the individual’s income for the remainder of his or her life.

While the actual decision is a complex one, the options available to a taxpayer who must collapse an RRSP are actually quite few in number — three, to be precise. They are as follows:

• collapse the RRSP and include all of the proceeds in income for that year;
• collapse the RRSP and transfer all proceeds to a registered retirement income fund (RRIF); and/or
• collapse the RRSP and purchase an annuity with the proceeds.

It’s not hard to see that the first option doesn’t have much to recommend it. Collapsing an RRSP without transferring the balance to a RRIF or purchasing an annuity means that every dollar in the RRSP will be treated as taxable income for that year. In most cases, that will mean losing nearly half of the RRSP proceeds to income tax. And, while any amount left can then be invested, tax will be payable on all investment income earned.

As a practical matter, then, the choices come down to two: a RRIF or an annuity. And, as is the case with most tax and financial planning decisions, the best choice will be driven by one’s personal financial and family circumstances, risk tolerance, cost of living, and the availability of other sources of income to meet that cost of living.

The annuity route has the great advantages of simplicity and reliability. In exchange for a lump sum amount paid by the taxpayer, the annuity issuer agrees to pay the taxpayer a specific sum of money, usually once a month, for the remainder of the annuitant’s life. Annuities can also provide a guarantee period, in which the annuity payments continue for a specified time period (5 years, 10 years), even if the taxpayer dies during that time. The amount of monthly income which can be received depends, of course, on the amount paid in, but also on the gender and, especially, the age of the taxpayer. Currently, annuity rates for each $100,000 paid to the annuity issuer by a taxpayer who is 70 years of age range from $579 to $643 per month for a male taxpayer and from $515 to $572 for a female taxpayer (the actual rate is set by the company which issues the annuity). Those rates do not include any guarantee period.

For taxpayers whose primary objective is to obtain a guaranteed life-long income stream without the responsibility of making any investment decisions or the need to take any investment risk, an annuity can be an attractive option. There are however, some potential downsides to be considered. First, an annuity can never be reversed. Once the taxpayer has signed the annuity contract and transferred the funds, he or she is locked into that annuity arrangement for the remainder of his or her life, regardless of any change in circumstances that might mean an annuity is no longer suitable. Second, unless the annuity contract includes a guarantee period, there is no way of knowing how many payments the taxpayer will receive. If he or she dies within a short period of time after the annuity is put in place, there is no refund of amounts invested — once the initial transfer is made at the time the annuity is purchased, all funds transferred belong to the annuity company. Third, most annuity payment schedules do not keep up with inflation — while it is possible to obtain an annuity in which payments are indexed, having that feature will mean a substantially lower monthly payout amount. Finally, where the amount paid to obtain the annuity represents most or all of the taxpayer’s assets, entering into the annuity arrangement means that the taxpayer will not be leaving an estate for his or heirs.

The second option open to taxpayers is to collapse the RRSP and transfer the entire balance to a registered retirement income fund, or RRIF. A RRIF operates in much the same way as an RRSP, with two major differences. First, it’s not possible to contribute funds to a RRIF. Second, the taxpayer is required to withdraw an amount from his or her RRIF (and to pay tax on that amount) each year. That minimum withdrawal amount is a percentage of the outstanding balance, with that percentage figure determined by the taxpayer’s age at the beginning of the year. While the taxpayer can always withdraw more in a year, or make lump sum withdrawals (and pay tax on those withdrawals), he or she cannot withdraw less than the minimum required withdrawal for his or her age group.

Where a taxpayer holds savings in a RRIF, he or she can invest those funds in the same investment vehicles as were used while the funds were held in an RRSP and those funds can continue to grow on a tax-sheltered basis, in the same way as funds in an RRSP. While the ability to continue holding investments that can grow on a tax-sheltered basis provides the taxpayer with a lot of flexibility, and the potential for growth in value, those benefits have a price in the form of investment risk. As is the case with all investments, the investments held within a RRIF can increase in value — or decrease — and the taxpayer carries the entire investment risk. When things go the way every investor wants them to, investment income is earned while the taxpayer’s underlying capital is maintained but, of course, that result is never guaranteed.

On the death of a RRIF annuitant, any funds remaining in the RRIF can pass to the annuitant’s spouse on a tax-free basis. Where there is no spouse, the remaining funds in the RRIF will be income to the RRIF annuitant in the year of death, and any balance after tax is paid will become part of his or her estate, available for distribution to beneficiaries.

While the above discussion of RRIFs versus annuities focuses on the benefits and downsides of each, it is not necessary (and in most cases not advisable) to limit the options to an either/or choice. It is possible to achieve, to a degree, the seemingly irreconcilable goals of lifetime income security and the potential for capital (and estate) growth. Combining the two alternatives — annuity and RRIF — either now or in the future, can go a long way toward satisfying both objectives.  

For everyone, in retirement or not, all spending is a combination of non-discretionary and discretionary items. The first category is made up mostly of expenditures for income tax, housing (whether rent or the cost of maintaining a house), food, insurance costs, and (especially for older Canadians) the cost of out-of-pocket medical expenses. The second category of discretionary expenses includes entertainment, travel, and the cost of any hobbies or interests pursued. A strategy which utilizes a portion of RRSP savings to create a secure lifelong income stream to cover non-discretionary costs can remove the worry of outliving one’s money, while the balance of savings can be invested through a RRIF, for growth and to provide the income for non-discretionary spending.

Such a secure income stream can, of course, be created by purchasing an annuity. As well, although most taxpayers don’t necessarily think of them in that way, the Canada Pension Plan and Old Age Security have many of the attributes of an annuity, with the added benefit that both are indexed to inflation. By age 71, all taxpayers who are eligible for CPP and OAS will have begun receiving those monthly benefits. Consequently, in making the RRIF/annuity decision at that age, taxpayers should include in their calculations the extent to which CPP and OAS benefits will pay for their non-discretionary living costs.

As of June 2018, the maximum OAS benefit for most Canadians (specifically, those who have lived in Canada for 40 years after the age of 18) is about $590 per month. The amount of CPP benefits receivable by the taxpayer will vary, depending on his or her work history, but the maximum current benefit which can be received at age 65 is about $1,050. (Where receipt of either benefit is deferred past the age of 65, those amounts go up.) As a result, a single taxpayer who receives the maximum CPP and OAS benefits at age 65 will have just under $20,000 in annual income (just over $1,600 per month). And, for a married couple, of course, the combined total annual income received from CPP and OAS can approach $40,000 annually, or $3,200 per month. While $20,000 a year isn’t enough to provide a comfortable retirement, for those who go into retirement in good financial shape — meaning, generally, without any debt — it can go a long way toward meeting non-discretionary living costs. In other words, most Canadians who are facing the annuity versus RRIF decision already have a source of income which is effectively guaranteed for their lifetime and which is indexed to inflation. Taxpayers who are considering the purchase of an annuity to create the income stream required to cover non-discretionary expenses should first determine how much of those expenses can already be met by the combination of their (and their spouse’s) CPP and OAS benefits. The amount of any annuity purchase can then be set to cover off any shortfall.

While the options available to a taxpayer at age 71 with respect to the structuring of future retirement income are relatively straightforward, the number of factors to be considered in assessing those factors and making that decision are not. All of that makes for a situation in which consulting with an independent financial adviser on the right mix of choices and investments isn’t just a good idea, it’s a necessary one.

It’s something of an article of faith among Canadians that, as temperatures rise in the spring, gas prices rise along with them. Whether that’s the case every year or not, this year statistics certainly support that conclusion. In mid-May, Statistics Canada released its monthly Consumer Price Index, which showed that gasoline prices were up by 14.2%. As of the third week of May, the per-litre cost of gas across the country ranged from 125.2 cents per litre (in Manitoba) to 148.5 cents per litre (in British Columbia). On May 23, the average price across Canada was 135.2 cents per litre, an increase of more than 25 cents per litre from last year’s average on that date.

It’s something of an article of faith among Canadians that, as temperatures rise in the spring, gas prices rise along with them. Whether that’s the case every year or not, this year statistics certainly support that conclusion. In mid-May, Statistics Canada released its monthly Consumer Price Index, which showed that gasoline prices were up by 14.2%. As of the third week of May, the per-litre cost of gas across the country ranged from 125.2 cents per litre (in Manitoba) to 148.5 cents per litre (in British Columbia). On May 23, the average price across Canada was 135.2 cents per litre, an increase of more than 25 cents per litre from last year’s average on that date.

While in some cases Canadians can reduce the impact of gas price increases by reducing the amount of driving they do, the practical reality is that, for most of us, driving a car every day can’t be avoided, and gasoline is consequently a non-discretionary expense. That’s especially true for those who must drive to work each day and, increasingly, that drive is becoming a longer and longer one, as individuals and families move further and further from their workplace location in search of affordable housing. Finally, for many Canadians a car is their only transportation option, when they live in places that are not served by public transit, or the available transit isn’t a practical daily option.

Unfortunately, for most taxpayers, there’s no relief provided by our tax system to help alleviate the cost of driving as the cost of driving to work and back home, as well as the cost of driving that isn’t work-related, is considered a personal expense for which no deduction or credit can be claimed, no matter how great the cost. That said, there are some (fairly narrow) circumstances in which employees can claim a deduction for the cost of work-related travel.

Those circumstances exist where an 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 his or her 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 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 was provided by the employer for such expenses, the employee can deduct actual expenses incurred for such work-related travel. Those deductible expenses include the following:

• fuel (gasoline, propane, oil);
• maintenance and repairs;
• insurance;
• license and registration fees;
• interest paid on a loan to purchase the vehicle;
• eligible leasing costs for the vehicle; and
• depreciation, in the form of capital cost allowance.

In almost all instances, a taxpayer will use the same vehicle for both personal and work-related driving. Where that’s the case, only the portion 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 all expenses incurred and claimed.

While no limits (other than the general limit of reasonableness) are placed on the amount of costs which can be deducted in the first four categories listed above, there are limits and restrictions with respect to allowable deductions for interest, eligible leasing costs, and depreciation claims. The rules governing those claims and the tax treatment of employee automobile allowances and available deductions for employment-related automobile use generally are outlined on the Canada Revenue Agency website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/slry/mtrvhcl-eng.html.

In larger urban centres, and in the nearby cities and suburbs which are served by inter-city transit, many commuters utilize that transit as a way of avoiding both the stress of a drive to work in rush hour traffic and the associated costs. And, for a time, such commuters were able to claim a tax credit to help mitigate the cost of using such transit. Unfortunately, the federal public transit tax credit was eliminated in 2017, such that it could be claimed only for costs incurred for transit use before July 1, 2017. It was not possible to carry the credit over and claim it in a subsequent taxation year, so the last claim anyone could make for the public transit tax credit was on the 2017 annual tax return.

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 middle of May 2018, the Canada Revenue Agency (CRA) had processed just over 26 million individual income tax returns filed for the 2017 tax year. Just over 14 million of those returns resulted in a refund to the taxpayer, while about 5.5 million returns filed and processed required payment of a tax balance by the taxpayer. Finally, about 4.4 million returns 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 federal Canada Child Benefit or the HST credit )

By the middle of May 2018, the Canada Revenue Agency (CRA) had processed just over 26 million individual income tax returns filed for the 2017 tax year. Just over 14 million of those returns resulted in a refund to the taxpayer, while about 5.5 million returns filed and processed required payment of a tax balance by the taxpayer. Finally, about 4.4 million returns 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 federal Canada Child 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 Agency, outlining the taxpayer’s income, deductions, credits, and tax payable for the 2017 tax year, 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 amount of any refund or tax payable will appear in a box at the bottom of page 1, under the heading “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 2 also 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 (like tuition and education credits) which the taxpayer had earned and can carry forward and claim in future years. On page 3 of the NOA, the taxpayer will find information on his or her total RRSP contribution room (i.e., maximum allowable RRSP contribution) for 2018. Finally, page 4 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 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 good day for the taxpayer. In some cases, however, the Notice of Assessment will inform the taxpayer of an unexpected amount of tax owed.

When that happens, the taxpayer must 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 fifty dollars in interest income earned. Even though most returns are now prepared using tax software (for 2017 returns, over 87% of returns were prepared using such software) which minimizes the chance of arithmetical errors, mistakes 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 included in the inputs. In other cases, the taxpayer might transpose figures when entering them, such that an income amount of $18,456 on the T4 becomes $14,856 on the tax return. Once again, the tax software has no way of knowing that the information input was incorrect and will calculate 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 medical expense, or for a deduction claimed for a business expenditure, which the taxpayer believes to be legitimate. When that happens, the taxpayer must 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 to the taxpayer precisely why there is an increase in the amount of tax which he or she 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 to obtain such information, as in-person services were discontinued a few years ago. Taxpayers who want more 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, to obtain more detailed information. If that call doesn’t resolve the taxpayer’s questions, he or she can write to or fax the Tax Centre which processed the return. The name of that Tax Centre can be found in the top left hand corner of the first 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.

While the Canadian real estate market seems, by all accounts, to have retreated from the record pace it was setting in 2017, there is still plenty of activity. According the statistics released by the Canadian Real Estate Association (CREA), more than 35,000 homes were sold across Canada in the month of April alone. And that means that an equal number of households will be moving in the upcoming months.

While the Canadian real estate market seems, by all accounts, to have retreated from the record pace it was setting in 2017, there is still plenty of activity. According the statistics released by the Canadian Real Estate Association (CREA), more than 35,000 homes were sold across Canada in the month of April alone. And that means that an equal number of households will be moving in the upcoming months.

Individuals and families move for any number of reasons, and those moves can be local or long distance. Whatever the reason for the move, or the distance to the new location, all moves have two things in common — stress and cost. Even where the move is a desired one — moving to attend university, or because of the purchase of a first home — moving represents the upheaval of one’s life and, where the move is for a long distance, or involves a large family home, the costs can be very significant. 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.

While its common to refer simply to the “moving expense deduction”, as though it were available in all circumstances, the reality is that there is no general deduction available for moving costs. In order to be tax deductible, such moving costs must be incurred in specific and relatively narrow circumstances. 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 Toronto to Ottawa 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. It’s not met where an individual or family move up the property ladder by selling and purchasing a new home in the same town or city.

It’s not, as well, actually necessary to be a homeowner in order to claim moving expenses. The list of moving-related expenses which may be deducted is basically 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.

It's important to remember, however, that even where the 40-kilometre requirement is met, it is possible to deduct moving costs only from employment or self-employment (business) income earned at the new location — there is no deduction possible from other types of income, like investment income or employment insurance benefits.

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 move takes place later in the year, and moving costs are significant, it is possible that the amount of income earned at the new location in the year of the move will be less than deductible moving expenses incurred. In such instances, those expenses can be carried over and deducted from income earned at the new location in future years.

Within the 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, movers, in-transit storage, and insurance) for household effects, including such items as boats and trailers;
• costs for up to 15 days for meals and temporary accommodation near the old and the new residences for the taxpayer and members of the household;
• lease cancellation charges (but not rent) on the old residence;
• legal or notary 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 (excluding GST or HST);
• 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 takes place before the old residence is sold. In most 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. As well, a claim for such home maintenance expenses is not allowed where the taxpayer delayed selling, for investment purposes or until the real estate market improved.

It may seem from the forgoing that virtually all moving-related costs will be deductible; however, there are some costs for which the Canada Revenue Agency (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 (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;
• mail forwarding costs; and
• mortgage default insurance.

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 45 cents for Alberta to 60.5 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 2017 taxation year — the CRA will be posting the rates for 2018 on its website early in 2019, in time for the tax filing season.

Once eligibility for the moving expense deduction is established, the rules which govern the calculation of the available deduction 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 https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1-m/t1-m-17e.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.

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 #44 Corporate

Personal:

Issue #44 Personal

For almost a decade now, Canadians have been living, and borrowing, in an ultra-low interest rate environment. As of the end of April 2018, the bank rate (from which commercial interest rates are derived) stood at 1.5%. The last time that the bank rate was over 1.5% was in December of 2008. Effectively, adult Canadians who are under the age of 30 have had no experience of managing their finances in high (or even, by historical standards, ordinary) interest rate environments.

For almost a decade now, Canadians have been living, and borrowing, in an ultra-low interest rate environment. As of the end of April 2018, the bank rate (from which commercial interest rates are derived) stood at 1.5%. The last time that the bank rate was over 1.5% was in December of 2008. Effectively, adult Canadians who are under the age of 30 have had no experience of managing their finances in high (or even, by historical standards, ordinary) interest rate environments.

The prolonged period of low interest rates which followed the financial crisis of 2008-09 coincided, not surprisingly, with an explosion in the amount of debt owed by both individual Canadians and by families. In the fall of 2005, the ratio of debt to disposable income for an average Canadian family stood at 93%. In the third quarter of 2017 that ratio stood at just less than double that amount, or 171%.

For several years financial advisers and government and banking officials have been sounding warnings that the debt loads which Canadians were carrying were likely sustainable only at the extremely low interest rates then in effect. Their concern was that when, inevitably, those rates returned to historically “normal” levels the burden of repaying, or even servicing those debts, would be unsustainable.

Whether those warnings were or weren’t heeded is becoming a moot question, as the era of reliably ultra-low interest rates is effectively coming to an end. The Bank of Canada has raised interest rates three times in the past 10 months, in July and September 2017 and again in January of 2018. Prior to July 2017, the last interest rate increase took place in September of 2010. As well, as the Bank has made clear in its regular announcements on the subject, the longer-term interest rate trend is an upward one.

When talking about debt, and debt management, it’s important to remember that not all debt is created equal. Specifically, it’s necessary to draw a distinction between secured and unsecured debt. Put simply, the former is debt which is secured by the value of an underlying asset and, if the debtor fails to make payments on the debt, the lender is entitled to seize that underlying asset and sell it to satisfy any outstanding debt amount owed. The type of secured debt most familiar to Canadians is, of course, a mortgage. Unsecured debt, on the other hand, is provided solely on the strength of the borrower’s promise to repay, and credit cards are the most common example of unsecured debt owed by Canadians.

While any type of debt can cause problems for borrowers, when interest rates go up it’s usually those who are carrying unsecured debt who are the first to feel the pinch. Not only is the rate of interest payable on unsecured debt always higher than that levied on secured debt, the interest rate on unsecured debt is usually a “variable” rate, meaning that it will go up every time interest rates increase, and the monthly minimum payment required will increase proportionately. And, of course, debtors whose debt is secured by an underlying asset and who find that such debt is no longer manageable always have the “out” of selling that asset and using the proceeds to retire the outstanding balance of the loan, while those who owe unsecured debt have no such option.

It’s easy to assume from the overall figures respecting the debt load of Canadians that having an outstanding balance on one or more credit cards or lines of credit is the norm. However, an Ipsos Global News year-end poll discloses some perhaps unexpected results, with both good and bad implications. Those survey results, which can be found on the Ipsos website at https://www.ipsos.com/en-ca/news-polls/2017-year-end-debt, was done in December of 2017. It found that the average unsecured (i.e., non-mortgage) debt held by individual Canadians was $8,539.50. However, the survey also found that nearly half of Canadians (46%) had no consumer debt whatsoever. Consequently, when it comes to debt, Canadians seem to fall about evenly into one of two very distinct and different groups. The minority (by a small percentage) are free of any unsecured debt – no line of credit debt and no credit card balances. But it’s a very different picture for the other 54% who are carrying, on average, around $15,000 in unsecured debt per person. And, for 12% of those surveyed, the amount of unsecured debt owed was more than $25,000.

For anyone who is carrying outstanding unsecured debt, the obvious advice is to get the debt paid down as quickly as possible, especially when interest rates are rising. That is, however, easier said than done, especially when the interest component of the debt, and consequently the required monthly minimum payments, are steadily increasing. Between 19% and 22% of respondents in the IPSO Global News poll indicated that they were “not very comfortable” or “not at all comfortable” with their ability to meet their current monthly debt payment obligations and/or their ability to pay down their debt in a timely manner.

Even where repayment of the debt over the short term isn’t a realistic expectation, such individuals are not without options. The best strategy to be pursued by those carrying significant amounts of unsecured debt which can’t be paid off over the short-term would be to try to lower the interest rate on such debt. There are a couple of ways in which that can be done.

If the debtor owns an asset (usually a house) against which he or she can borrow, turning the debt from unsecured to secured, the interest rate payable on such borrowing will certainly be lower than the rate currently being paid. Where there is no such asset, the debtor can seek a consolidation loan from a financial institution, in which all of the outstanding debts from every source are combined into a single loan at a lower rate of interest, and a fixed repayment schedule. Much unsecured debt owed by Canadians is in the form of credit card debt, which carries some of the highest interest rates around.

If neither of those options are available, then the next step would be to try to obtain a lower credit card interest rate. If the debt is in good standing – that is, payments have been made on time and in at least the minimum amount – the credit card company may be willing to reduce the interest rate imposed, especially if it is clear that the borrower will not be able to continue to make payments at higher rates. If the credit card company is unwilling to do so, the debtor may be able to seek out better rates elsewhere. Credit card companies regularly seek to bring in new business by offering the opportunity to transfer in balances from other cards and to have those balances benefit from a very low (or even 0%) rate of interest for a period of time – usually 6 months to a year. Where a new card with a much lower interest rate can be obtained, regular payments made will reduce the outstanding balance more quickly, since less of that payment is going to meet interest charges.

Each of these options assumes a willingness and an ability on the part of the individual to make debt repayment a priority, working on his or her own. For some, that’s not easy, or even possible. As well, some individuals are already in financial difficulty - unable to make the minimum monthly required payment, or having missed payments and being pursued by collection agencies. In both those situations, obtaining help to deal with the debt repayment process is likely needed. That help is available through debt and credit counselling provided by any number of non-profit agencies. Those agencies work with individuals, and with their creditor(s), to create both a realistic budget and a manageable debt repayment schedule. More information on the credit counselling process, and a listing of such non-profit agencies can be found at http://creditcounsellingcanada.ca/.

The arrival of warmer weather signals both the start of spring and the approaching end of the school year. For many families, it also means the need to begin researching the availability of suitable child care or summer daytime or overnight camp arrangements for the summer months. There are many such options available to parents, but what each of those options have in common is a price tag – sometimes a steep one. Some options, like day camps provided by the local recreation authority or municipality 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.

The arrival of warmer weather signals both the start of spring and the approaching end of the school year. For many families, it also means the need to begin researching the availability of suitable child care or summer daytime or overnight camp arrangements for the summer months. There are many such options available to parents, but what each of those options have in common is a price tag – sometimes a steep one. Some options, like day camps provided by the local recreation authority or municipality 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.

The good news for families which must incur such expenditures is that in many cases a deduction for all or part of the costs incurred can be claimed on the tax return for the year. And, since eligible expenditures can be deducted from income on a dollar-for-dollar basis, that means that income used to pay eligible child care expenses is effectively not subject to income tax. The bad news is that some of the deductions or credits which could be claimed in recent years are no longer available.

This year, any offset provided by the tax system with respect to summer child care costs can only be claimed through the general deduction provided for child care costs. That deduction, which is not specific to summer child care costs but is available for such costs incurred year-round, allows parents who must incur child care costs in order to work (whether in employment or self-employment) or, in some cases to attend school, to deduct those costs from income, within specified limits.

The calculation process set out on Form T778, which is used to determine the amount of any allowable deduction from income for child care expenses incurred can seem quite complex. However, at the end of the day, the amount of child care expenses which can be deducted is the least of three numbers, and only one of those numbers requires a calculation. The steps involved in doing so are as follows.

First, the amount of any deduction for child care expenses is limited to two-thirds of the taxpayer’s “earned income” for the year. The income figure used to calculate the two-thirds figure is, generally, the amount shown on Line 150 of the annual tax return. Where the family incurring child care expenses is a two-income family, and both spouses are working, the claim is made by the spouse with the lower net income, and consequently his or her net income is used to determine the two-thirds of income figure.

The second figure to be determined is the amount actually paid for eligible child care costs during the year. While virtually any licensed child care arrangement will qualify, more informal arrangements may not. Specifically, no deduction is available for amounts paid to most family members to provide child care. So, it’s not possible for a working spouse to pay the stay-at-home parent to provide child care, nor is it possible to pay an older sibling who is under the age of 18 to provide such services, and to claim a deduction for those expenses incurred. As well, where a claim is made for a deduction for child care expenses on the annual return, the claimant must obtain (and be prepared to provide to the tax authorities) the social insurance number of the individual providing the care as well as a receipt showing the amounts paid, whether to an individual or an organization.

 The third figure to be determined is the one which requires some calculation. Basically, the rules governing the deduction of child care expenses impose a maximum deduction per child per year (referred to as the “basic limit”), with that basic limit dependent on the age and health of the particular child. As well, where expenses are incurred for overnight camps or boarding schools, the amount deductible for such costs is similarly capped.

For 2018, the following overall limits apply:

• $5,000 in costs per year for a child who was born from 2002 to 2011;
• $8,000 in costs per year for a child who was born in 2012 or later;
• $11,000 in costs per year for a child who was born in 2018 or earlier, for whom the disability amount can be claimed.

Similar restrictions are placed on the amount of costs which can be deducted for overnight camp or boarding school fees, and those are as follows:

• $125 per week for a child who was born from 2002 to 2011;
• $200 per week for a child who was born in 2012 or later; and
• $275 per week for a child who was born in 2018 or earlier, for whom the disability amount can be claimed.

Taking all of these figures into account, the computation of a deduction for child care expenses for a typical Canadian family would look like this.

A two-income family has two children and both parents are employed. One spouse earns $60,000 per year, while the other earns $45,000. In 2018, one child is nine years old and the other is five. Neither child is disabled. Both children are in full-day school and so, during the school year, the family pays $400 per month for each child for after-school care. During the eight weeks of summer school vacation, both of the children attend a local full-day summer camp, for which the cost is $250 per week per child.

• The first step is to determine the two-thirds of income figure. Since it is the lower-income spouse who must make the deduction claim, that figure is two-thirds of $45,000, or $30,000. Consequently, any deduction for child care expenses for the year cannot exceed $30,000.

• The second calculation is the total amount of child care expenses paid for each child:

• $400 per month for 10 months of after-school care, or $4,000
• $250 per week for eight weeks of summer camp, or $2,000.

Total child care expenses for the year for each child is therefore $6,000.

• The last step is to determine the basic limit for child care expenses for each child, as follows:

The basic limit for the five-year-old (who was born in 2012 or later) is $8,000, and so the entire $6,000 in child care expenses incurred can be deducted.

The basic limit for the nine-year-old (who was born between 2002 and 2011) is $5,000, and so only $5,000 of the $6,000 in expenses incurred can be deducted for the year.

The total deduction available for child care expenses incurred for the 2018 tax year will therefore be $5,000 plus $6,000, or $11,000. That deduction is calculated on Form T778 and the deduction amount transferred to Line 214 of the tax return filed by the lower-income spouse for 2018 year, reducing his or her taxable income from $45,000 to $34,000, and resulting in a federal tax savings of about $1,650. The same deduction is claimed as well for provincial tax purposes, and the amount of provincial tax saved will depend on the tax rates imposed by the province in which the family lives.

In previous years, parents were also able to claim two other federal tax credits – the Children’s Fitness Tax Credit and the Children’s Arts Tax Credit – in respect of qualifying costs incurred. Unfortunately, those credits were reduced as of the start of the 2016 tax year and were entirely eliminated as of the beginning of 2017. Consequently, no such credits can be claimed for formerly eligible costs which are incurred during 2018.

Parents wishing to find out more about the child care expense deduction, and perhaps to calculate the maximum deduction which will be available to them for the 2018 tax year should consult Form T778 E (17). That form, which includes detailed information on the rules governing the deduction and how to make the claim, can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t778.html.

There are a number of income sources available to Canadians in retirement. Those who participated in the work force during their adult life will have contributed to the Canada Pension Plan and will be able to receive CPP retirement benefits as early as age 60. Earning income from employment or self-employment will also have entitled those individuals to contribute to a registered retirement savings plan (RRSP). A shrinking minority of Canadians will be able to look forward to receiving benefits from an employer-sponsored pension plan.

There are a number of income sources available to Canadians in retirement. Those who participated in the work force during their adult life will have contributed to the Canada Pension Plan and will be able to receive CPP retirement benefits as early as age 60. Earning income from employment or self-employment will also have entitled those individuals to contribute to a registered retirement savings plan (RRSP). A shrinking minority of Canadians will be able to look forward to receiving benefits from an employer-sponsored pension plan.

Each of those income sources requires that an individual has made contributions during his or her working life in order to receive benefits in retirement. The fourth major source of retirement income for Canadians – the Old Age Security (OAS) program – does not. Entitlement to OAS is based solely on the number of years of Canadian residence, and individuals who have been Canadian residents for 40 years after the age of 18 can receive full OAS benefits, as early as age 65. As of the second quarter of 2018, those eligible for full OAS benefits receive $589.59 per month.

The OAS program is distinct from other sources of retirement income in another, less welcome way, in that it is the only such income source for which the federal government can require repayment by the recipient. That repayment requirement comes about through the OAS “Recovery Tax”, which is universally known as the OAS “clawback”.

While the rules governing the administration of the clawback can be confusing, the concept is a simple one. Anyone who receives OAS benefits during the year and has income for that year of more than $75,910 (for 2018) must repay a portion of those benefits. That repayment, or clawback, is administered by requiring repayment when the tax return for that year is filed the following April.

For example, an individual who receives full OAS during 2017 and has net income for the year of $82,000 will be subject to the clawback. He or she must repay OAS amounts received at a rate of 15 cents (or 15%) of every dollar of income over the clawback income threshold, as in the following example for the 2017 tax year:

Total OAS benefit for the year — $6,900

Total income for the year — $82,000

OAS income clawback threshold for 2017 — $74,788

Income over clawback threshold — $7,212 × 15% = $1081.80

Repayment amount required — $1081.80

The federal government becomes aware of an individual’s income for 2017 only once the tax return for that year is filed, usually by April 30 of 2018. Consequently, the required repayment amount of $1081.80 will become apparent when the return for the year is prepared, and will be included in any amount which must be paid on filing. As well, in the following benefit year (which will run from July 2018 to June 2019), OAS benefits received will be reduced by the same amount as the OAS repayment from the previous year. In the case of the above example, the monthly reduction of benefits would be $90.15 ($1081.80 divided by 12 months).

As of 2018, the OAS clawback affects only individuals who have an annual income of at least $75,000, and it’s arguable that at such income levels, the clawback requirement is unlikely to impose significant financial hardship. Nonetheless, the OAS clawback is a perpetual irritant to those affected, perhaps because of the sense that they are being penalized for being disciplined savers, or good managers of their finances during their working years, in order to ensure a financially comfortable retirement.

While any sense of grievance can’t alter the reality of the OAS clawback, there are strategies which can be put in place to either minimize or, in some cases, entirely eliminate one’s exposure to that clawback. Some of those planning considerations are better addressed earlier in life, prior to retirement: however, it’s not too late, once one is already receiving OAS, to make arrangements to avoid or minimize the clawback.

In all cases, no matter what strategy is employed, the goal is to “smooth” one’s income from year to year, so that net income for each year comes in under the OAS clawback threshold and, not incidentally, minimizes exposure to the higher federal and provincial income tax rates which apply once taxable income approaches the six-figure mark.

The starting point, for taxpayers who are approaching retirement, is to determine how much income will be received from all sources during retirement, based on CPP and OAS entitlement, any savings accrued through an RRSP and any benefits which will be received from an employer-sponsored pension plan.

Anyone who has an RRSP must begin receiving income from that RRSP in the year after that person turns 71. However, it’s possible to begin receiving income from an RRSP at any time. Similarly, an individual who is eligible for CPP retirement benefits can begin receiving those benefits anytime between age 60 and 70, with the amount of monthly benefit receivable increasing with each month receipt is deferred. The same calculation applies to OAS benefits, which can be received as early as age 65 or deferred up until age 70.

Once the amount of annual income is determined, strategies to smooth out that income can be put in place. Those strategies can include receiving income from an RRSP prior to the required withdrawal date of age 72, so as to reduce the total amount within the RRSP and so thereby reduce the likelihood of having a large “bump” in income when required withdrawals kick in at age 72.

Taxpayers are sometimes understandably reluctant to take steps which they view as depleting their RRSP savings, but receiving income from an RRSP doesn’t mean spending that income. While tax has to be paid on any withdrawals (whether the taxpayer is under or over the age of 71), after-tax amounts received can be contributed to the taxpayer’s tax-free savings account (TFSA), where they can compound free of tax. And, when the taxpayer has need of those funds, in retirement, they can be withdrawn free of tax, and they won’t count towards income for purposes of the OAS clawback.

Taxpayers who are married can “even out” their income by using pension income splitting, so that neither of them has sufficient income to be affected by the clawback. Using pension income splitting, the spouse who has qualifying income over the OAS clawback threshold can notionally re-allocate the “excess” income to his or her spouse on the annual return. That income is then considered to be income of the recipient spouse, for purposes of both income tax and the OAS clawback. To be eligible for pension income splitting, the income to be reallocated must be private pension income, which is generally income from an RRSP or registered retirement income fund (RRIF), or from an annuity or an employer-sponsored pension plan. More information on the kinds of income eligible for pension income splitting, and the mechanics of the process, can be found on the Canada Revenue Agency (CRA) website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/pension-income-splitting.html.

It is not at all uncommon now for Canadians to continue to work full-time or, more commonly, part-time, past the age of 65. Where that’s the case, it may make sense to defer receipt of OAS benefits for a few years, until the individual leaves the workforce. That’s especially the case where income received from employment, together with other sources of income, pushes the taxpayer’s annual income over the OAS clawback threshold. And, where receipt of such OAS benefits is deferred, the monthly amount received will go up, meaning that the eventual OAS benefits can go further toward making up the difference when income from employment ceases.

Finally, as outlined above, where a taxpayer must repay OAS benefits on filing his or her return for the previous year, any such benefits paid in the current benefit year are automatically reduced by the same amount. That practice is based on the assumption that income will not vary significantly from year to year. Where that’s not the case, and the taxpayer‘s income for a particular year is significantly higher because of a one-time event (e.g., the taxable sale of property or investments), the taxpayer can take action to avoid having monthly OAS benefit payments reduced in the following year. To do so, he or she must file a Request to Reduce OAS Recovery Tax at Source (T1213 (OAS) E (17)), which can be found on the CRA website at https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1213_oas/t1213oas-17e.pdf. On that form, the taxpayer will provide information about his or her income sources and deductions for the current year, to show that he or she will not be subject to the OAS recovery tax for the year (or that such tax well be lower than the previous year’s). Once the Request is submitted, and it is approved by the CRA, it takes about two months for the change to be reflected in monthly benefit payments.

By the end of April 2018, more than 20 million individual income tax returns for the 2017 tax year will have been filed with the Canada Revenue Agency (CRA). And, inevitably, some of those returns will contain errors or omissions that must be corrected – last year the CRA received about 2 million requests for adjustment(s) to an already-filed return.

By the end of April 2018, more than 20 million individual income tax returns for the 2017 tax year will have been filed with the Canada Revenue Agency (CRA). And, inevitably, some of those returns will contain errors or omissions that must be corrected – last year the CRA received about 2 million requests for adjustment(s) to an already-filed return.

Most Canadians now prepare their returns (or have those returns prepared by a tax professional) using tax return preparation software. The use of such software significantly reduces the chance of making a clerical or arithmetical error, like entering an amount on the wrong line or adding a column of figures incorrectly. However, no matter how good the software, it can work only with the information that is provided to it. Sometimes taxpayers prepare and file a return, only to later receive a tax information slip that should have been included on that return. It’s also easy to make an inputting error when transposing figures from an information slip (a T4 from one’s employer, for instance) into the software. Whatever the cause, where the figures input are incorrect or information is missing, those errors or omissions will be reflected in the final (incorrect) result produced by the software.

When the error or omission is discovered in a return which has already been filed, the question is how to make things right. The first impulse of many taxpayers is to file another return, in which the complete and correct information is provided, but that’s not the right answer. There are, however, several ways in which a mistake or omission on an already-filed tax return can be corrected. And this year, taxpayers have more options than were previously available to them in doing so.

The vast majority of Canadians either file their return online, using the CRA’s NETFILE service, or engage a tax return preparer to file the return using the Agency’s EFILE service. Last year, fully 86% of individual tax returns were filed using one or the other of those methods.

This year, taxpayers who filed online, whether through NETFILE or EFILE, can advise the CRA of an error or omission in an already-filed return electronically, using the Agency’s ReFILE service. That service, which can be found at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/refile-online-t1-adjustments-efile-service-providers.html, allows taxpayers to make corrections to an already-filed return online, using the CRA website.

Essentially, taxpayers whose returns have been filed online (through NETFILE or EFILE) can file a correction to that already-filed return, using the same tax return preparation software that was used to prepare the return. Those taxpayers who used NETFILE to file their return can file an adjustment to a return for 2017 or 2016. Where the return was filed using EFILE, the EFILE service provider can file adjustments for returns filed for the 2017, 2016, or 2015 tax years.

There are limits to the ReFILE service. The online system will accept a maximum of 9 adjustments to a single return, and ReFILE cannot be used to make changes to personal information, like the taxpayer’s address or direct deposit details. There are also some types of tax matters which cannot be handled through ReFILE, like applying for a disability tax credit or child and family benefits.

It’s also possible to make a change or correction to a return using the CRA’s “My Account” service (through the “Change My Return” option), but that choice is available only to taxpayers who have already registered for the My Account service. As well, the changes/corrections which can be made using ReFILE are the same as those which can be done through My Account, without the need to become registered for My Account, a process which takes a few weeks.

Taxpayers who wish to make changes or corrections which cannot be made through ReFILE or My Account (or those who just don’t wish to use the online option) can paper-file an adjustment to their return. The paper form to be used is Form T1-ADJ E (2018), which can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1-adj/README.html. Those who are unable to print the form off the website can order a copy to be sent to them by mail by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. There is no limit to the number of changes or corrections which can be made using the T1-ADJ E (2018) form.

The use of the actual T1-ADJ form isn’t mandatory – it’s also possible to file an adjustment request by sending a letter to the CRA – but using the prescribed form has two benefits. First, it makes 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. And, whether the request is made using the T1 Adjustment form or by letter, it’s necessary to include any relevant documents – the information slip summarizing the income not reported, or the receipt for an expense inadvertently not claimed.

Hard copy of a T1-ADJ (or a letter) is filed by sending the completed document to the appropriate Tax Center, which is the one to which the tax return was originally mailed. A listing of Tax Centres and their addresses can be found on the CRA website at www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html. A taxpayer who isn’t sure any more which Tax Centre his or her return was sent to can go to www.cra-arc.gc.ca/cntct/tso-bsf-eng.html on the CRA website and select his or her location from the listing found there. The address for the correct Tax Centre will then be provided. Similar information is also provided on the T1ADJ form.

Where a taxpayer discovers an error or omission in a return already filed, the impulse is to correct that mistake as soon as possible. However, no matter which method is used to make the correction – ReFILE, My Account, or the filing of a T1-ADJ in hard copy, it’s necessary to wait until the Notice of Assessment for the return already filed is received. Corrections to a return submitted prior to the time that return is assessed simply can’t be processed by the CRA.

Once the Notice of Assessment is received, and an adjustment request is made, it will take at least a few weeks, usually longer, before the CRA responds. The Agency’s estimate is that such requests which are submitted online have a turnaround time of about two weeks, while those which come in by mail take about eight weeks. Not unexpectedly, all requests which are submitted during the CRA’s peak return processing period between March and July will take longer.

Sometimes the CRA will contact the taxpayer, even before a return is assessed, to request further information, clarification, or documentation of deductions or credits claimed (e.g., receipts documenting medical expenses claimed, or child care costs). Whatever, the nature of the request, the best course of action is to respond 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 it is the taxpayer’s responsibility to provide support for any deduction or credit claims made. Where a request for information or supporting documentation for a claimed deduction or credit is ignored by the taxpayer, the assessment will proceed on the basis that such support does not exist. Providing the requested information or supporting documentation can usually resolve the question to the CRA’s satisfaction, and its assessment of the taxpayer’s return can then proceed.

Virtually no one looks forward to dealing with the need to file a tax return each spring, and while some of that reluctance is undoubtedly due to the complexity of our tax system, there’s another factor at work.

Many (even most) taxpayers don’t know, until they have actually completed their return for the year, whether additional taxes will be owed. And, no matter what the taxpayer’s financial circumstances, finding out that money is owed to the tax authorities is bad news.

Virtually no one looks forward to dealing with the need to file a tax return each spring, and while some of that reluctance is undoubtedly due to the complexity of our tax system, there’s another factor at work.

Many (even most) taxpayers don’t know, until they have actually completed their return for the year, whether additional taxes will be owed. And, no matter what the taxpayer’s financial circumstances, finding out that money is owed to the tax authorities is bad news.

For many taxpayers that bad news can create a real cash flow crunch.  Statistics show that a substantial number of Canadians and Canadian families live paycheque to paycheque, and so would not be in a financial position to manage an unexpected tax bill, especially where that bill is due in the next few weeks. For a number of reasons, the better approach for such taxpayers is to try to obtain the necessary funds from private sources.  For those who don’t have the means to pay a tax bill out of existing resources, that likely means borrowing the needed funds. While that means paying interest on the borrowing, the interest cost incurred will likely be less than that which would be levied by the Canada Revenue Agency (CRA). 

If a tax bill can’t be paid in full out of either current resources or available credit, the CRA is open to making a payment arrangement with the taxpayer. While the CRA would rather get paid on time and in full, its ultimate goal is to collect the full amount of taxes owed. Consequently, the CRA provides taxpayers who simply can’t pay their bill for the year on time and in full with the option of paying an amount owed over time, through a payment arrangement.

There are two avenues available to taxpayers who want to propose such a payment arrangement. The first is a call to the CRA’s TeleArrangement service at 1-866-256-1147. When making such a call, it is necessary for the taxpayer to provide his or her social insurance number, date of birth, and the amount entered on line 150 of the last tax return for which the taxpayer received a Notice of Assessment. (For taxpayers who are up to date on their tax filings, that will be the Notice of Assessment for the return for the 2016 tax year). The TeleArrangement Service is available Monday to Friday, from 7 a.m. to 10 p.m. EST.

Taxpayers who would rather speak directly to a CRA employee can call the Agency’s debt management call centre at 1-888-863-8657. That centre is open Monday to Friday from 7 a.m. to 11 p.m. EST.

No matter what payment arrangement is made, the CRA will levy interest charges on any amount of tax owed for the 2017 tax year which is not paid on or before April 30, 2018. Interest charges levied by the CRA tend to add up quickly, for two reasons. First, the interest charged by the CRA on outstanding tax amounts is, by law, higher than current commercial rates. For the second quarter of 2018 (April 1 to June 30), that rate is 6%. Second, interest charges levied by the CRA are compounded daily, meaning that each day interest is levied on the previous day’s interest charges. It is for these reasons that a taxpayer is, where at all possible, likely better off arranging private borrowing in order to pay any taxes owing by the April 30 deadline.

Finally, there is one strategy which is, in all circumstances, a bad one. Taxpayers who can’t pay their tax bill by the deadline sometimes conclude that there is no point in filing if payment can’t be made. Those taxpayers are wrong. Where an amount of tax is owed and the return isn’t filed on time, there is an immediate tax penalty imposed of 5% of the outstanding tax amount – and interest charges start accruing on that penalty amount (as well as on the outstanding tax balance) immediately. For each month that the return isn’t filed, a further penalty of 1% of the outstanding tax amount is charged, to a maximum of 12 months. Higher penalty amounts are charged, for a longer period, where the taxpayer has incurred a late-filing penalty within the past three years. In a worst-case scenario, the total penalty charges can be 50% of the tax amount owed – and that doesn’t count the compound interest which is levied on all penalty amounts. In all cases, no matter what the circumstances, the right answer is to file one’s tax return on time. This year, for most taxpayers, that means filing on or before Monday April 30, 2018. For self-employed taxpayers (and their spouses) the filing deadline is Friday June 15, 2018. However for all taxpayers, the payment deadline for all 2017 income tax owed is Monday, April 30, 2018.

The reach of Canada’s system is broad – residents of Canada are taxed on their world-wide income, and the income or capital amounts that escape the Canadian tax net are few and far between.

One of the most significant of those exceptions, particularly for individual Canadian taxpayers, is the “principal residence exemption”. Plainly put, when a Canadian taxpayer sells his or her home, the proceeds of sale are not included in his or her income for the year (and therefore not taxed), no matter how much that home has appreciated in value since it was acquired. And, of course, given the real estate market conditions that have prevailed in recent years, especially in some urban centers, the difference between the original cost of the family home and its later sale price can be very substantial.

The reach of Canada’s system is broad – residents of Canada are taxed on their world-wide income, and the income or capital amounts that escape the Canadian tax net are few and far between.

One of the most significant of those exceptions, particularly for individual Canadian taxpayers, is the “principal residence exemption”. Plainly put, when a Canadian taxpayer sells his or her home, the proceeds of sale are not included in his or her income for the year (and therefore not taxed), no matter how much that home has appreciated in value since it was acquired. And, of course, given the real estate market conditions that have prevailed in recent years, especially in some urban centers, the difference between the original cost of the family home and its later sale price can be very substantial.

There are good reasons for the favourable tax treatment that is accorded family homes (or “principal residences, in tax parlance). A home is often the largest financial asset owned by an individual or a family, and for many Canadians, home ownership forms the basis of their overall financial plan and, often, their retirement plans.

 As is always the case in tax, definitions matter. And, for purposes of the principal residence exemption, such principal residence can be any one of the following types of properties:

• house;
• cottage;
• condominium;
• apartment in an apartment building;
• apartment in a duplex; or
• a trailer, mobile home, or houseboat.

In order to claim the principal residence exemption on the sale of one’s home, of whatever description, it’s also necessary that the taxpayer own the property (alone or jointly with another person, usually a spouse), has used that property as his or her principal residence at some point during the year, and designate the property as the principal residence on the tax return for the year of sale.

The reference to a tax return may be puzzling to taxpayers who have sold homes but never made any designation on their return for the year. However, concerns about speculation in the housing market led the federal government, in 2016, to make changes which would provide it with more information with respect to properties that were changing hands and on which the principal residence exemption was being claimed. As of 2016 (and subsequent years) taxpayers who sell their homes must complete and include Schedule 3 Capital Gains (or Losses) with their return for the year of sale. And, as of the 2017 tax year, they must also file Form T2091(IND) Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). That form, which is not included in the General Income Tax Return package for 2017, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t2091ind.html.

On the T2091, the taxpayer must provide the following information:

• the address of the property;
• the year the property was acquired; and
• the amount for which the property was sold.

The taxpayer must also certify the number of years the property sold was used as a principal residence during the period of ownership. 

None of these new rules or requirements alter the basic tax treatment of the sale of a principal residence – the proceeds of sale of a property that was used throughout the period of ownership as the only principal residence of a Canadian resident remain tax-free. The only thing that has changed is the requirement to report on the sale, providing information on the number of years of ownership and the sale price, and certifying the number of those years of ownership during which the property was used as one’s principal residence.

Where the property sold was acquired after 1981 and was used during the entire period of ownership as a principal residence of a Canadian resident, the reporting requirements are relatively straightforward. There are, however, some other situations in which determining whether and to what extent monies received on the sale of one’s home will qualify for the principal residence exemption is more complex, and professional advice may be warranted.

First, prior to 1982, it was possible for each spouse in a marriage to claim the principal residence exemption. Typically, one spouse would claim the exemption on the family home, while the other spouse would claim the exemption with respect to the family cottage. The rules changed in 1982 to eliminate that practice. Consequently, where a married taxpayer is selling a property which was purchased prior to 1982 and a principal residence exemption was previously claimed on a second property which the taxpayer and his or her spouse owned, it would be prudent to obtain professional tax advice on the proper reporting of the current sale.

As well, the principal residence exemption is available only to residents of Canada. Where the person selling a principal residence was a non-resident at any time during the period of ownership, the amount of principal residence exemption claimable may be affected.

A taxpayer who sells a principal residence during the year must report that sale on Schedule 3 to the Return, and that Schedule is always filed as part of the Return, regardless of the filing method used. However, the filing requirements with respect to the T2091 form differ, depending on how the taxpayer files his or her return. Where a return is paper-filed, the T2091 must be completed, signed and filed with the return. Where the taxpayer uses any of the electronic filing requirements, the T2091 is not filed with the return, but must be kept and produced if the CRA requests it.

Finally, the requirement to report the details of the sale of a principal residence is a relatively new one. The obligation to do so is not particularly well known and there is nothing in the 2017 Income Tax Guide to alert taxpayers to that requirement. It is, therefore, entirely possible that an affected taxpayer will be unaware of such requirement and will fail to report. And, since the tax authorities have no way of knowing that a sale of a principal residence has taken place, it’s unlikely that they would ask for that information in the course of assessing the return. Such failure is, however, relatively easily remedied – the taxpayer need only (once the Notice of Assessment for the return has been received) file a T1 Adjustment in which the necessary information is provided. Generally, the CRA will accept that amendment to the return, but it does have the power to impose a penalty for the initial failure to report. That penalty is equal to $100 per month during which the reporting is late, to a maximum of $8,000.

More information on the new reporting requirements can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/principal-residence-other-real-estate/sale-your-principal-residence.html.

While everyone knows that the best results are obtained when tax and financial planning take place on an ongoing basis, the reality is that most Canadians focus on their tax situation only once a year, at tax filing time. And the harsher reality is that, by then, the opportunity to take steps which will make a significant difference in one’s tax liability for 2017 is lost.

While everyone knows that the best results are obtained when tax and financial planning take place on an ongoing basis, the reality is that most Canadians focus on their tax situation only once a year, at tax filing time. And the harsher reality is that, by then, the opportunity to take steps which will make a significant difference in one’s tax liability for 2017 is lost.

Most actions needed to reduce one’s tax payable for the 2017 tax year – making political contributions, selling investments at a loss, or paying professional or union dues which qualify for a credit or deduction – must have been taken on or before December 31, 2017. And the last such opportunity – making an RRSP contribution to be claimed on the 2017 return – vanished after the RRSP contribution deadline of March 1, 2018.

That said, all is not lost for taxpayers seeking to reduce their tax burden for 2017. There are a number of factors to consider, and a few strategies to contemplate, when completing the return for 2017. Those considerations and strategies, which generally involve the timing of claims made (or not made) on the return can make a measurable difference in the amount of tax payable for the year.

It may seem counterintuitive, or even illogical, to not claim every available deduction and credit in order to obtain the best possible tax result for the year. However, for both medical and charitable tax credit claims, albeit for different reasons, there are situations in which it makes sense to defer an available claim until a future year, or to transfer the claim to another person.

Claiming charitable donations

Taxpayers are entitled to make a claim on the annual tax return for charitable donations made in the current (2017) year or any of the previous five years. The reason it can sometimes makes sense not to claim a charitable donation in the year it was made arises from the way in which the charitable donations tax credit is structured to encourage higher donations.

That credit, at both the federal and provincial/territorial levels, is a two-tier credit. Federally, the first $200 in donations receives a credit of 15% of the total donation, or $30. However, donations above the $200 level receive a credit equal to 29% of the donation amount over $200.

Take, for example, a taxpayer who contributes $1,200 to a charity each year. Where he or she claims that donation on the annual return each year, that claim will result in a federal credit of $320 ($200 × 15%, plus $1000 × 29%). Where, however, the same taxpayer defers the claim to the following year and claims a total of $2,400 in donations on a single return, he or she will receive a federal credit of $668. ($200 × 15%, plus $2,200 × 29%). Where the donations are accumulated and claimed once every five years, the federal credit received will be $1,712 ($200 × 15%, plus $5,800 × 29%). Under each scenario, the total charitable donation made is the same, but the amount of credit received increases with each year that the claim is deferred. Since each of the provinces and territories provide a two-tier credit (at different rates, depending on the jurisdiction), the same result will be seen when calculating the provincial/territorial credit.

Medical expense tax credit

Notwithstanding our publicly funded health care system, there are a great (and increasing) number of medical and para-medical expenses for which coverage is not provided and which must be paid on an out-of-pocket basis. In many instances, it’s possible to claim a medical expense tax credit for those out-of-pocket costs.

The federal credit for such expenses is 15% of allowable expenses. As is usually the case, the provinces and territories also provide a credit for the same expenses, albeit at different rates.

Many taxpayers find the rules on the calculation of a medical tax credit claim confusing, with some justification. First, there is an income threshold imposed. Eligible medical expenses are those expenses which exceed 3% of net income, or (for 2017) $2,268, whichever is less. Put in more practical terms, the rule for 2017 is that any taxpayer whose net income is less than $75,500 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 $75,500 will be limited to claiming qualifying expenses which exceed the $2,268 threshold.

The other aspect of the medical expense tax credit which can be confusing is the calculation of the optimal time period. Unlike most credit claims, the medical expense tax credit can be claimed for qualifying expenses which were paid in any 12-month period ending during the tax year. While confusing, such rule is beneficial, in that it allows taxpayers to select the particular 12-month period during which medical expenses (and the resulting credit claim) is highest. The only restrictions are that the selected 12-month period must end during the calendar year for which the return is being filed and, of course, any expenses which were claimed on a previous return cannot be claimed again. 

While only expenses which exceed the $2,268/3% threshold may be claimed, it is also possible to aggregate expenses incurred within a family and make a single claim for those expenses on the return of one spouse. Specifically, the rules allow families to aggregate medical expenses incurred for each spouse and for all children born in 2000 or later. While medical expenses incurred by a single family member might not be enough to allow him or her to make claim, aggregating those expenses is very likely (especially for a family that does have private medical insurance coverage) to mean that total expenses will exceed the applicable threshold.

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 the 3% of net income/$2,268 threshold, whichever is less, the greatest benefit will be obtained if the spouse with the lower 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 otherwise 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.

Finally, there are a huge number and variety of medical expenses which individuals and families may incur, and the rules governing which can be claimed and in what circumstances, are very specific. In some cases, for instance, a doctor’s prescription will be required, while in others it will not. A listing of medical expenses eligible for the credit, and any ancillary requirements, such as a prescription, can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/lines-330-331-eligible-medical-expenses-you-claim-on-your-tax-return.html#mdcl_xpns.

The rules surrounding income tax are complicated and it can seem that for every rule there is an equal number of exceptions or qualifications. There is, however, one rule which applies to every individual taxpayer in Canada, regardless of location, income, or circumstances. That rule is that income tax owed for a year must be paid, in full, on or before April 30 of the following year. This year, that means that individual income taxes owed for 2017 must be remitted to the Canada Revenue Agency (CRA) on or before Monday, April 30, 2018. No exceptions and, absent extraordinary circumstances, no extensions.

The rules surrounding income tax are complicated and it can seem that for every rule there is an equal number of exceptions or qualifications. There is, however, one rule which applies to every individual taxpayer in Canada, regardless of location, income, or circumstances. That rule is that income tax owed for a year must be paid, in full, on or before April 30 of the following year. This year, that means that individual income taxes owed for 2017 must be remitted to the Canada Revenue Agency (CRA) on or before Monday, April 30, 2018. No exceptions and, absent extraordinary circumstances, no extensions.

Perhaps not surprisingly, the CRA tries to make it as easy as possible for taxpayers to remit what they owe, by providing a wide range of methods by which payment can be made. There are, in fact, no fewer than seven separate options available to individual residents of Canada in paying their taxes for the 2017 tax year. The options open to taxpayers who must make a payment to the taxman are set out below.

Pay using online banking

Millions of Canadians do most or all of their banking using the online services of their particular financial institution. The list of financial institutions through which a payment can be made to the CRA is a lengthy one (available at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-online-banking.html), and includes all of Canada’s major banks and credit unions.

The specific steps involved in making that payment will differ slightly for each financial institution, depending on how their online payment systems are configured. What’s important to remember is that the nature of the payment (i.e., current year tax return, as distinct from current year tax instalment payments) must be specified, and the taxpayer’s social insurance number must be provided, in order to ensure that the payment is credited to the correct account.

It is not necessary to access any particular CRA form in order to make an online payment of taxes through one’s financial institution.

Paying at your financial institution

For those who don’t use online banking, or simply prefer to make a payment in person, it is possible to pay a tax amount owed at the bank. Doing so, however, requires that the taxpayer have a personalized remittance form.

Since that remittance is specific to the taxpayer, it’s not possible to simply print that form from the CRA website. However, taxpayers who wish to obtain such a personalized remittance form can do so by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959 8281 and requesting that one be sent to them by mail.

Using the CRA’s My Payment

The CRA also provides an online payment service called My Payment. There is no fee charged for the service, and it’s not necessary to be registered for any of the CRA’s other online services in order to use My Payment.

What is necessary is that the taxpayer have a debit card with a VISA Debit, Debit MasterCard, or InteracOnline logo from a participating Canadian financial institution, as My Payment is set up to accept payment using only those cards. Anyone intending to use My Payment should first confirm that the amount of any payment to be made is within the daily or weekly transaction limits imposed by the particular financial institution.

A list of participating financial institutions for each type of card, and more details on this payment method, can be found at https://www.canada.ca/en/revenue-agency/services/e-services/payment-save-time-pay-online.html.

Payment by credit card

While it is possible to pay one’s taxes using a credit card, such payments can only be made through third-party service providers (that is, payments by credit card cannot be made directly to the CRA), and such third-party service providers will impose a fee for the service.

There are only two such service providers listed on the CRA website, and links to each are available at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-credit-card.html.

Payment through a service provider

There are a number of third party service providers which will accept payments and remit them on the taxpayer’s behalf to the CRA. However, the majority of such services are more oriented toward providing services to businesses, and most of those listed on the CRA website do not handle payments of individual income tax amounts owed.

The full listing of third-party service providers can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-a-service-provider.html.

Payment by pre-authorized debit

It’s possible to set up a pre-authorized debit (PAD) arrangement with the CRA, authorizing them to debit the account for an amount of taxes owed, on dates specified by the taxpayer.

Individuals who make instalment payments of tax throughout the year may already have such an arrangement in place and can certainly use that existing arrangement to arrange a PAD of any balance of taxes owed for the 2017 tax year. However, any such arrangement must be made at least five business days before the payment due date of April 30. A taxpayer who makes a payment of taxes only once a year is likely better off using another of the available payment methods.

This year, there is another option for taxpayers who have their return prepared and E-FILED by an authorized electronic filer. Such taxpayers can have that E-FILER set up a PAD agreement on their behalf in order to make a “one-time” payment for a current year tax amount owed. Details on how to make that arrangement are outlined on the CRA website at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-authorized-debit.html.

Payment by cash or debit card

It is still possible to pay one’s taxes in cash, or by using a debit card. Such payments are made, not at CRA offices, but at Canada Post outlets.

However, while a cash payment may be a low-tech option, the requirements for making a cash or debit card payment are not. In order to do so, the taxpayer will need a self-generated QR (quick response) code. Such code can be created by following a link found on the CRA website at https://www.canada.ca/en/revenue-agency/corporate/about-canada-revenue-agency-cra/pay-canada-post.html. The QR code created is provided to a clerk at a Canada Post outlet, who uses the information in the code to properly credit the payment made. Service fees are levied for this payment method.

It’s important for all taxpayers to realize that the payment deadline of April 30 requires that the CRA receive payment by that date. The Agency considers that a payment has been made only when it actually receives that payment, or the payment is received by a member of the Canadian Payments Association (which would include most Canadian financial institutions).

The majority of payment options now available to Canadians involve online transactions or the use of third party service providers. Both such methods can mean some delay in receipt of the payment by the CRA, as a result of the time required for processing of the payment by the financial institution or third party. Consequently, taxpayers who make their tax payments online or using a third-party service provider are well advised to consider that time lag in deciding when to make their payment; waiting until April 30 to do so likely isn’t a good idea.

Those who make their payment in person at a financial institution (using a personalized remittance form, as outlined above) can make their payment on April 30, as the date stamped on the remittance form is considered to be the date on which such payment is received by the CRA.

The number and variety of tax payment methods available to individual taxpayers can, in and of itself, be somewhat confusing. The CRA provides a chart on its website identifying each possible payment method, and the kinds of payments which can be made through each. That chart can be found at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/determine-your-payment-method.html.

One of the smaller frustrations of dealing with the federal government is that personal information provided by an individual to any one government department is not shared with or communicated with other branches of the government. The intention behind that policy is a good one – it’s there to protect the privacy of the individual. However, it also means that a single individual must contact potentially several government departments, or log on to several websites in order to, for instance, arrange for direct deposit, or to provide updated information – like a change in bank account information.

One of the smaller frustrations of dealing with the federal government is that personal information provided by an individual to any one government department is not shared with or communicated with other branches of the government. The intention behind that policy is a good one – it’s there to protect the privacy of the individual. However, it also means that a single individual must contact potentially several government departments, or log on to several websites in order to, for instance, arrange for direct deposit, or to provide updated information – like a change in bank account information.

In recognition of that reality, the federal government has announced that it will be integrating some of the services which it provides to individual Canadians, to make such services more seamless and user-friendly. Those changes will affect the two agencies of the federal government which administer many of the most common taxpayer benefit or payment programs — the Canada Revenue Agency (CRA), which issues tax refunds, tax credit payments (like the harmonized sales tax credit), and monthly payments of the Canada Child Benefit, and Economic and Social Development Canada (ESDC), which administers the Canada Pension Plan and Old Age Security programs. Currently, any interaction with respect to benefits or payments made by the CRA can be done only with the CRA, while dealings with respect to programs administered by ESDC must be done through Service Canada.  

The new approach – appropriately named “Tell Us Once”, seeks to co-ordinate the separate systems of those two agencies to streamline necessary interactions with each of them.

The first change, the “Linked Accounts” service, will allow individuals who choose to deal with the federal government using online services to access both the CRA’s My Account service and the ESDC’s My Service Canada Account with a single login. Effectively, individuals will be able to access and update their personal information and undertake a full range of transactions on both sites in one single, secure login session.

The second change involves the federal government’s Direct Deposit service. Millions of Canadians receive money on a regular monthly basis from the federal government, whether in the form of the Canada Child Benefit, Old Age Security or Guaranteed Income Supplement benefits or Canada Pension Plan payments. Others receive quarterly payments of tax credits like the harmonized sales tax credit or similar provincial benefits which are administered by the federal government. Still others receive an annual payment in the form of a tax refund.

Whatever the purpose of the payment, or the frequency with which it is received, it makes sense in all cases to have such funds deposited directly in the recipient individual’s bank account. The federal government has promoted that direct deposit service for several years, noting — correctly — that payments by direct deposit to the individual’s bank account happen faster and are more securely than any other form of payment.

A single individual (especially one over the age of 65) is quite likely to be receiving payments or benefits from both ESDC (like CPP and OAS benefits) and from the CRA (like the HST tax credit and any available provincial tax credits, or an annual tax refund).

The second initiative announced by the CRA, the Direct Deposit Sharing Initiative, seeks to make it easier for individuals to manage direct deposit of all such payments. The change will allow CPP recipients to provide their direct deposit information (or any changes to that information) to the CRA or to Service Canada and have their information updated (with the permission of the individual) for purposes of all benefit and credit programs administered by both agencies. That information sharing will take place regardless of whether the new information is provided through online federal government services, by telephone, in person, or on paper. Links with information on each of those methods can be found in the federal government press release at https://www.canada.ca/en/revenue-agency/news/2018/02/the_government_ofcanadaislaunchingatellusonceapproachforonlinedi.html.

The early months of the new calendar year can feel like a never-ending series of bills and other financial obligations, especially tax-related financial obligations. Credit card bills from holiday spending, or perhaps a mid-winter vacation, arrive in mid to late January. RRSP contributions to be claimed on the 2017 return must be made on or before March 1, 2018. And, finally, the April 30, 2018 deadline for payment of any final balance of 2017 income taxes looms.

The early months of the new calendar year can feel like a never-ending series of bills and other financial obligations, especially tax-related financial obligations. Credit card bills from holiday spending, or perhaps a mid-winter vacation, arrive in mid to late January. RRSP contributions to be claimed on the 2017 return must be made on or before March 1, 2018. And, finally, the April 30, 2018 deadline for payment of any final balance of 2017 income taxes looms.

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 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. The result often is that taxpayers, especially the newly retired, are surprised to find that they must make arrangements to ensure that their taxes are paid throughout the year, in order to avoid having a large tax balance owed when the return for 2018 is filed in the spring of 2019.

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 an instalment 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 (2018) and either of the two previous years (2016 or 2017). 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. This year, such instalment payments of tax are due and payable on March 15, June 15, September 17, and December 17.

An Instalment Reminder issued by the CRA in February 2018 will identify 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 2016 taxation year, of one quarter of the net tax will which be payable by the taxpayer for 2018. 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 2018 tax year. If the total instalments paid turn out to be more than the taxpayer’s actual tax liability for 2018, 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 2017 tax year. By March 15, 2018, taxpayers will have received all the information needed to determine their tax payable for the previous year and so will be able to calculate how much tax they must pay for 2017. Where a taxpayer’s income has not changed significantly between 2017 and 2018 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2018 will actually be slightly less than it was in 2017. That reduction in tax payable results from the fact that both income tax brackets (on which the tax rate payable is based) and tax credit amounts are both indexed to inflation, and so increase from one year to the next.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2018 and can pay instalments based on that estimate. Where a taxpayer’s taxable income will decrease from 2017 to 2018, whether through an actual reduction in income or higher than usual deductions, 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 2018 tax year is filed in the spring of 2019. 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 levied is set quarterly, and the current rate, charged for the first quarter of 2018 – until March 31, 2018 – 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.

Last year, 85 percent of individual income tax returns filed were prepared and submitted online using one or the other of the Canada Revenue Agency’s (CRA) web-based tax filing services. There’s every reason to expect that the same percentages will apply this year, but there are some other options available to Canadian taxpayers.

Last year, 85 percent of individual income tax returns filed were prepared and submitted online using one or the other of the Canada Revenue Agency’s (CRA) web-based tax filing services. There’s every reason to expect that the same percentages will apply this year, but there are some other options available to Canadian taxpayers.

That majority of taxpayers who choose to file online have two choices – 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. Almost always, the E-FILE service provider also prepares the return which they are filing.

It seems most Canadians want to have little to do with the preparation of their own returns, as last year more than half (56 percent) of all the individual income tax returns filed came in by E-FILE. About half that number (29 percent) were filed using NETFILE.

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 http://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 http://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 (e.g., a return for someone who went bankrupt in 2017), 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’s no longer the case. The CRA’s NETFILE security procedures can be satisfied by providing specific personal identifying information, including one’s 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 free and commercial software approved for use in preparing individual returns for 2017 can be found on the CRA website at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/netfile-impotnet/crtfdsftwr/menu-eng.html

While most taxpayers will choose one or the other of the two available online filing options, it is still possible to file a paper return. This year, in fact, the CRA is making that option a bit easier, in that it has mailed hard copy of the 2017 tax return package to taxpayers who paper-filed their return last year.

For those who didn’t paper-file last year, but still want to obtain hard copy of the 2017 return and guide, there are several ways to do so. The CRA has created a dedicated phone line from which such a package can be ordered, and the number for that line is 1-855-330-3305. It’s also possible to download and print hard copy of the return and guide from the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package.html. Finally, the CRA makes tax packages available at Service Canada offices and post offices across the country, although the Agency has indicated that, in future years, such general distribution of tax packages will not be provided.

Finally, the CRA has reinstated, for some taxpayers, a tax return filing option that was previously discontinued. For several years, taxpayers with simple returns had the option of filing their returns using a touchtone telephone. That option is back, but only for a selected group of taxpayers who would have received notice of their eligibility from the CRA, sometime during the month of February. It’s not possible, at least this year, for those who were not part of that selection process to opt for the telephone filing option.

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, there are 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 http://www.cra-arc.gc.ca/tx/ndvdls/vlntr/clncs/menu-eng.html.

While there are a number of filing options available to Canadian taxpayers, there’s no element of choice when it comes to the filing and payment deadlines for 2017 tax returns. All individual Canadians must pay the balance of any taxes owed for 2017 on or before Monday April 30, 2018 – with no exceptions and, absent very unusual circumstances, no extensions.

For the majority of Canadians, the tax return for 2017 must also be filed on or before Monday April 30, 2018. Self-employed taxpayers and their spouses have until Friday June 15, 2018 to file their returns for 2017 (but they too must pay any 2017 taxes owing on or before April 30).

While the obligation to file a T1 tax return form is an annual one, the process of completing that form and calculating tax payable is never exactly the same year to year. Change is the one constant in tax, as the federal and provincial governments are continually in the process of “fine-tuning” the tax system by eliminating some existing deductions and credits, changing others and, sometimes, implementing new ones.

While the obligation to file a T1 tax return form is an annual one, the process of completing that form and calculating tax payable is never exactly the same year to year. Change is the one constant in tax, as the federal and provincial governments are continually in the process of “fine-tuning” the tax system by eliminating some existing deductions and credits, changing others and, sometimes, implementing new ones.

This year, there are a number of changes on the annual return which, unfortunately, involve the elimination of some very common credits which were previously available to, and claimed by, millions of taxpayers. All such changes were, of course, effective either at the beginning of, or sometime during the 2017 tax year, but most taxpayers will not become aware of them until they sit down to complete and file the annual return this spring.

What follows is an outline of the changes to individual tax credits which will impact taxpayers when filing their annual return this year.

Textbook and education tax credits repealed

For many years, post-secondary students (and their parents) have been able to offset, to a degree, the cost of post-secondary education through claims for federal and provincial non-refundable tax credits.

There were, prior to 2017, four such credits or deductions which were commonly claimed by post-secondary students, as follows:

• the education tax credit, which was claimed by students who were enrolled, either part-time or full-time, in post-secondary education;
• the textbook tax credit, which also provided a non-refundable tax credit to full-time and part-time post-secondary students;
• the tuition tax credit, which provided post-secondary students with a federal tax credit equal to 15% of eligible tuition amounts paid; and
• a deduction from income for interest amounts paid on eligible student loans. Such loans were generally those obtained through provincial or federal government student loan programs.

Both the education and textbook tax credits have been eliminated as of the 2017 tax year. Consequently, neither credit could be earned by post-secondary students in 2017 and so there is no current-year claim to be made for such credits on the annual return to be filed this spring. However, education and textbook tax credits which were earned prior to 2017 and were not claimed either in the year they were earned or any subsequent year can still be carried forward and claimed on the student’s return for 2017 or following years.

The two other tax benefits claimable by post-secondary students continue, however, to be available. For 2017, qualifying students can claim a federal tax credit equal to 15% of tuition fees paid, and students who took on student loans under a government-sponsored student loan program are entitled to deduct interest payments made in connection with those loans. Both the tuition tax credit and the student loan interest deduction are claimable by qualifying students on the return for the 2017 tax year.

Taxpayers should be aware, as well, that the provinces also offered tuition and education tax credits which could be used to reduce provincial tax payable. While changes similar to the federal ones have been made at the provincial level, those changes are not uniform. Some provinces have chosen to repeal both the education and tuition tax credits, effective July 1, 2017, while others have announced that only the education tax credit will be repealed, and not until 2018. Still other provinces have indicated that no change is planned to their current system of tuition and education tax credits. Consequently, taxpayers will need to determine whether and to what extent claims for provincial tuition and education tax credits remain available for 2017 in their province of residence. That information will be available in the General Income Tax Return Guide for the particular taxpayer’s province of residence. Those guides can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package.html.

Children’s fitness and arts tax credits repealed

For a number of years, parents were able to claim a federal tax credit for expenditures made to enroll their children in fitness and arts-related activities. The availability and amount of those credits has been gradually reduced over the past few years and all such credits were eliminated as of January 1, 2017. Consequently, no current-year claim for either the children’s arts or fitness tax credits can be made on the 2017 return and it’s not possible to carry over and claim such credits earned but not claimed in previous years.

Public transit tax credit repealed

Prior to 2017, individual taxpayers were entitled to claim a non-refundable federal tax credit for costs incurred in taking public transit on a regular basis. The definition of what constituted public transit was extremely broad, covering everything from buses to ferries. As well, it was possible to combine qualifying amounts incurred by family members and claim them on a single return, thereby maximizing the value of the credit.

That public transit tax credit was eliminated, effective as of July 1, 2017. However, since the repeal took place part way through the year, the computation of any available credit to be claimed on the return for 2017 is somewhat complicated. Effectively, the credit is not available for costs incurred for public transit use which took place after June 30, 2017. In other words, even if the expense was incurred prior to July 1, no credit is claimable if the associated travel takes place after June 30. So, for instance, taxpayers who purchased an annual transit pass for 2017 (or those who purchased several monthly passes before July 1 for travel after that date) will not escape the effect of the repeal. Only costs incurred for travel which took place in the first half of the year will qualify for a credit to be claimed on the 2017 return.

Taxpayers should retain receipts for such expenditures, in the event the Canada Revenue Agency wishes to verify that any claim made was a valid one. While that has always been the case, it’s a particularly good idea this year, in view of the mid-year withdrawal of the credit and the transitional rules governing the change.

Caregiver tax credits replaced

Individuals who live with or care for relatives in a variety of situations have been able to claim one or more caregiver tax credits to help offset the cost of providing such care. The number of tax credits related to caregiver activities had expanded over the years and had become a somewhat confusing patchwork of possible credit claims.

Effective as of January 1, 2017, that former patchwork of credits was replaced, for the most part, by a single Canada Caregiver Credit. The new single credit will generally provide caregivers with the same tax relief as the old system did, with one significant exception.

Prior to 2017, where an individual lived in the same residence with a parent or grandparent who was age 65 or older, that individual could claim a caregiver tax credit with respect to the parent or grandparent. There was no requirement that the senior parent or grandparent be disabled or infirm in any way.

As of 2017, no caregiver credit will be claimable in such situations. While the new Canada Caregiver Credit (which is claimed on Line 307 of the return) is claimable in a range of living situations and for individuals of various ages, the one constant requirement to qualify for that credit is that the person in respect of whom it is claimed be dependent by reason of infirmity. As indicated in this year’s Income Tax Guide “You cannot claim an amount on line 307 for dependants who do not have an impairment in physical or mental functions, including a parent or grandparent who was 65 years of age or older.” The requirements for claiming the new Canada Caregiver Credit are set out on page 47 of the General Income Tax Guide for 2017 returns.

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 #43 Corporate

Personal:

Issue #43 Personal

If there is one invariable “rule” of financial and retirement planning of which most Canadians are aware, it is the unquestioned wisdom of making regular contributions to a registered retirement savings plan (RRSP). And it is true that for several decades the RRSP was only tax-sheltered savings and investment vehicle available to most individual Canadians.

If there is one invariable “rule” of financial and retirement planning of which most Canadians are aware, it is the unquestioned wisdom of making regular contributions to a registered retirement savings plan (RRSP). And it is true that for several decades the RRSP was only tax-sheltered savings and investment vehicle available to most individual Canadians.

In 2009, however, that reality changed with the introduction of Tax-Free Savings Accounts (TFSAs). Since then, taxpayers have had a choice of which savings and investment vehicle better meets their short-term and long-term financial objectives, and this is the time of year when most Canadians make that choice.

It should be said that there’s nothing wrong, and a lot right, with making the maximum allowable contribution to both one’s TFSA and one’s RRSP every year. However, doing both assumes the availability of a level of discretionary income that just isn’t the financial reality in which most Canadians live and plan. In addition, there are circumstances in which making a contribution to one type of plan or the other is clearly the better choice, and sometimes the only choice. Some of those circumstances are explained below.

For Canadians over the age of 71, there is no choice. All individual Canadians must collapse their RRSPs by the end of the year in which they turn 71, and no RRSP contributions can be made after that time. A TFSA is the only tax-sheltered savings vehicle to which taxpayers over age 71 can contribute. Many of those taxpayers, however, have transferred their RRSP savings to a registered retirement income fund (RRIF) and are required to withdraw a specified percentage of funds from that RRIF each year. For taxpayers who are in the fortunate position of having such income in excess of current cash flow needs, that excess can be contributed to a TFSA. While the RRIF withdrawals must still 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.

The minority of working taxpayers who are members of registered pension plans (RPPs) will also likely find savings through a TFSA the better or even the only option. The maximum amount which can be contributed to an RRSP in a given year is generally 18% of the previous year’s income. However, any allowable contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under their pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, or even non-existent, and a TFSA contribution the logical alternative.

At the other end of the age spectrum, younger Canadians whose savings goals are likely more short-term are usually better off saving through a TFSA.

Where savings are being accumulated for an expenditure which is likely to occur within the next five years (e.g., putting together money for a new car or for wedding costs), the TFSA is clearly the better choice. Taxpayers in that situation are sometimes tempted to make an RRSP contribution instead, in order to get a tax refund, and then to withdraw the funds when the planned expenditure is to be made. However, while choosing that option will provide a deduction on this 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.

The greatest tax benefit of contributing to an RRSP is realized when contributions are made when income (and therefore tax payable) is high, and the intention is to withdraw those funds when both income and the rate of tax payable on that income is lower. Where that’s not the case, saving through a TFSA can make more sense, as in the following situations.

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.

Lower income taxpayers, for whom there isn’t likely to be a great difference between pre- and post-retirement income are likely better off saving through a TFSA. That’s especially the case where those taxpayers may be eligible in retirement for means-tested government benefits like the Guaranteed Income Supplement or tax credits like the GST credit or age credit. Withdrawals made from an RRSP during retirement will be included in income for purposes of determining eligibility for such benefits or credits, and lower-income taxpayers could find that an RRSP withdrawal has pushed their income to a level which reduces or eliminates their eligibility. On the other hand, monies withdrawn from a TFSA are not included in income for the purpose of determining eligibility for any government benefits or tax credits, so saving through a TFSA will ensure that receipt of such benefits is not put at risk.

One of the perennial New Year’s resolutions made by many individuals is a commitment to keep on a budget, spend less, save more, deal with any outstanding debt and, generally, to better manage their financial affairs. Fortunately, for those taxpayers (and for everyone else) the start of the new calendar year is also the start of a new tax year and with that, a fresh opportunity to contribute to one’s registered retirement savings plan (RRSP) and tax-free savings account (TFSA). What follows is an outline of the contribution limits and deadlines for both types of plans which will apply for the 2018 tax and calendar year.

One of the perennial New Year’s resolutions made by many individuals is a commitment to keep on a budget, spend less, save more, deal with any outstanding debt and, generally, to better manage their financial affairs. Fortunately, for those taxpayers (and for everyone else) the start of the new calendar year is also the start of a new tax year and with that, a fresh opportunity to contribute to one’s registered retirement savings plan (RRSP) and tax-free savings account (TFSA). What follows is an outline of the contribution limits and deadlines for both types of plans which will apply for the 2018 tax and calendar year.

RRSPs are, of course, top of mind for most taxpayers at this time of year. By now, making an RRSP contribution is the last opportunity most taxpayers will have to make a difference to their tax payable for the 2017 tax year. This year, any RRSP contribution which will be claimed on the 2017 tax return filed later this spring must be made on or before Thursday March 1, 2018.

While the contribution deadline is the same for everyone, the maximum allowable contribution amount is not. For every taxpayer, the calculation of how much can be contributed for 2017 starts with looking up one’s income for the 2016 tax year. The maximum current year contribution for 2017 is 18% of that 2016 income figure, to a specified maximum. So, a taxpayer who earned $50,000 in 2016 has a current year contribution limit for 2017 of $9,000 ($50,000 × 18%).  In any event, current year RRSP contributions for 2017 are subject to an overall limit of $26,010, regardless of how much the taxpayer earned in 2016.

Good intentions notwithstanding, very few Canadian taxpayers make their maximum allowable RRSP contribution each year. However, where the maximum contribution isn’t   made in a year, any “shortfall” is carried forward and can be contributed in any future year. As can be imagined, calculating the amount of any carryforward, plus any current year allowable contribution amount can become complex, and fortunately the Canada Revenue Agency (CRA) keeps track of that number for each Canadian taxpayer. That calculation, which shows the total maximum contribution which can be made by the taxpayer for 2017, can be found on page 3 of the Notice of Assessment for the taxpayer’s 2016 return. Taxpayers who didn’t keep (or can’t find) their Notice of Assessment for 2016 can obtain the same information online, through the CRA’s My Account service. In order to use that service, it is necessary to register for it, or to be registered for online banking at any of the major Canadian financial institutions. Taxpayers can use their online banking ID and password on the CRA site to log into the My Account feature and access personal tax information, including their allowable RRSP contribution. And, finally, there’s a third alternative — a call to the CRA’s Tax Information Phone Service (TIPS) line at 1-800-267 6999, or to the Individual Income Tax Enquiries Line at 1-800-959-8281, will enable taxpayers to obtain the same information.

When it comes to making a contribution to one’s TFSA, the good news is the timelines and deadlines are much more flexible than those which govern RRSP contributions. A contribution to one’s TFSA can be made at any time of the year, and contributions not made during the current year can be carried forward and made in any subsequent year.

However, determining one’s total TFSA contribution room is significantly more complex than figuring out one’s allowable RRSP contribution amount, for two reasons. First, the maximum TFSA amount has changed several times (increasing and decreasing) since the program was introduced in 2009. Second, and more important, individuals who withdraw funds from a TFSA can re-contribute those funds, but not until the year following the one in which the withdrawal is made. Especially where a taxpayer has several TFSA accounts, and/or a history of making contributions, withdrawals, and re-contributions, it can be difficult to determine just where that taxpayer stands with respect to his or her maximum allowable TFSA contribution for 2017.

In this case, there’s no help to be had from a Notice of Assessment, as the CRA no longer provides TFSA contribution information on that form. Information on one’s current year TFSA contribution limit can, however, be obtained from the CRA website, from the TIPS line at 1-800-267-6999 or its Individual Income Tax Enquiries line at 1-800-959- 8281, as outlined above. It should be noted, however, that information on one’s current year TFSA contribution limit won’t be available through the TIPS line until mid-February.

Any taxpayer hearing of a tax planning opportunity that offered the possibility of saving hundreds or even thousands of dollars in tax while at the same time 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 being proposed was an illegal tax scam. In fact, that description applies to pension income splitting which, far from being a tax scam, 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 hearing of a tax planning opportunity that offered the possibility of saving hundreds or even thousands of dollars in tax while at the same time 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 being proposed was an illegal tax scam. In fact, that description applies to pension income splitting which, far from being a tax scam, 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 who are in a position to benefit from pension income splitting, have never heard of it. In large part, 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 issued by the Canada Revenue Agency (CRA) 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 — it has to be ordered from the CRA or downloaded from the Agency’s website. The Income Tax and Benefit Guide issued by the CRA for 2017 returns does flag the pension income splitting option, in the same manner as all other tax tips on deductions and credits which may be claimed in particular circumstances. 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 eligible taxpayers are getting good tax planning or tax return preparation advice, it’s likely that they could overlook a significant opportunity to reduce their overall 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 levied as income rises. In very general terms, for 2017, the first $46,000 of taxable income attracts a combined federal-provincial rate of around 25%. The next $46,000 of such income, however, is taxed at a rate of just under 35%. When taxable income exceeds $142,000, 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. 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, 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 or his or her spouse.

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)17, Joint Election to Split Pension Income for 2017, with their annual tax return. That form can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1032.html, or can be ordered by calling 1-800-959 8281.

On the T1032(E), 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(E), 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 is 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 2017 tax year — in most cases, such actions needed to be taken before the end of the 2017 calendar year (or, for RRSP contributions, by March 1, 2018). 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 2017. 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 what 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.

Although it’s doubtful that anyone does so with any great degree of enthusiasm, each spring millions of Canadians sit down to complete their annual tax return for the previous calendar year or, more often, they pay someone else to do it for them. Although the rate of compliance among Canadian taxpayers is very high — for the last filing season, just under 30 million individual income tax returns were filed with the Canada Revenue Agency (CRA) — there are, inevitably, those who do not.

Although it’s doubtful that anyone does so with any great degree of enthusiasm, each spring millions of Canadians sit down to complete their annual tax return for the previous calendar year or, more often, they pay someone else to do it for them. Although the rate of compliance among Canadian taxpayers is very high — for the last filing season, just under 30 million individual income tax returns were filed with the Canada Revenue Agency (CRA) — there are, inevitably, those who do not.

There are a lot of reasons why individual Canadians don’t file their returns or pay their taxes on a timely basis, and almost all of them are based on a lack of understanding of how our tax system works, or on incorrect information about that system.

Some taxpayers don’t file because they believe that there’s no reason to do so if they don’t owe anything and aren’t expecting a refund. While that can be true, it’s also the case that it’s necessary to file in order to receive a number of income-tested tax credits and benefits, including the HST credit, the Canada child benefit and a range of provincial tax credits. Those who don’t file can’t have their eligibility for such credits determined and so no credits can be paid to them. Others don’t file because they have a balance owing but don’t have the funds to pay that balance on filing. That, too, is the wrong approach, as anyone who owes taxes but doesn’t file a return by the filing deadline gets hit with an immediate penalty of at least 5% of the outstanding amount owed. In such circumstances, the right approach is to file on time and to contact the CRA in order to come to an agreement on a payment arrangement over time. Finally, there is a persistent (and completely false) tax myth that has been circulating for decades, that the federal government does not have the legal right to collect taxes and every year some taxpayers fall victim to someone peddling that myth.

There are also a number of Canadians who file returns in which income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed. While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate isn’t high, there are a lot of such returns when measured by absolute numbers. And, although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each and every instance of non-compliance simply aren’t available, especially since, in many cases, the amount recovered may be less than cost of recovering it.

With all of that in mind, several years ago the CRA instituted a program intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arose from the fact that, in most cases, such taxpayers would have to pay outstanding tax amounts owed, plus interest, but would avoid the payment of penalties and the risk of criminal prosecution.

That program, the Voluntary Disclosure Program, has generally fulfilled its objectives but has been a target for criticism as being a means by which those who engage in deliberate tax avoidance can escape the consequences of their actions. The CRA recently announced that changes would be made to the Voluntary Disclosure Program, beginning on March 1, 2018, and that those changes would narrow the eligibility criteria for the program and impose additional conditions on participants, to avoid such effects.

To start, the basic requirements for participation in the VDP as of March 1, 2018 include the following. To qualify for relief, an application must:

• be voluntary (meaning that it is done before the taxpayer becomes aware of any compliance or enforcement action by the CRA);
• be complete;
• involve the application or potential application of a penalty and, for GST/HST application, the application or potential application of a penalty or interest; and
• include information that is at least one year past due for income tax applications and, for GST/HST applications, at least one reporting period past due.

The basic change which will come into effect after February 2018 is that two tracks will be created for income tax disclosures — the Limited Program and the General Program.  The determination of whether an application should proceed under the Limited or the General Program will be made on a case-by-case basis. The intention, however, is to restrict the Limited Program to instances in which applications disclose non-compliance which appears to include intentional conduct on the part of the taxpayer. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:

• the dollar amounts involved;
• the number of years of non-compliance; and
• the sophistication of the taxpayer.

Those whose applications are accepted under the Limited Program will not be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer. Interest on outstanding tax balances will be payable, however, and other penalties will be levied.

Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief, specifically for the years preceding the three most recent years of returns required to be filed. 

There are, as well, other changes to the administration of the Voluntary Disclosure Program. The most important of those, from a taxpayer’s point of view, are the following.

As of March 1, 2018, taxpayers who make an application under the VDP must pay the estimated taxes owing as a condition of qualifying for the Program. Where the taxpayer is financially unable to do so, he or she can request that the CRA consider a payment arrangement. Formerly, there was no requirement to pay outstanding taxes owed as a condition of participating in the VDP.

As well, taxpayers could formerly “test the waters” with respect to making a voluntary disclosure by making an anonymous (termed a “no-names disclosure”) disclosure and receiving an opinion on the likely outcome. That option will be discontinued after February 2018, and replaced by a “pre-disclosure discussion” service. That new service will still allow a taxpayer to discuss his or her tax affairs with a representative of the CRA on an anonymous basis, but such discussion will not constitute acceptance into the VDP.

The CRA has issued both a press release and a more detailed backgrounder outlining the upcoming changes to the Voluntary Disclosure Program, and those documents can be found on the federal government website at https://www.canada.ca/en/revenue-agency/news/2017/12/minister_lebouthillierannouncestighteningofthevoluntarydisclosur.html and https://www.canada.ca/en/revenue-agency/news/2017/12/backgrounder_-_voluntarydisclosuresprogram.html.

The Employment Insurance premium rate for 2018 is 1.66%.

The Employment Insurance premium rate for 2018 is 1.66%.

Yearly maximum insurable earnings are set at $51,700, making the maximum employee premium $858.22.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2018 is therefore $1,201.51.

The Quebec Pension Plan contribution rate for employees for 2018 is 5.4%.

The Quebec Pension Plan contribution rate for employees for 2018 is 5.4%.

The maximum employee premium for the year is $2,829.60, and the employer contribution is equal to the employee contribution.

The Canada Pension Plan contribution rate for 2018 is unchanged at 4.95% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2018 is unchanged at 4.95% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $55,900, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2018 will be $2,593.80 each, and the maximum self-employed contribution will be $5,187.60.

Dollar amounts on which individual non-refundable federal tax credits for 2018 are based, and the actual tax credit claimable, will be as follows:

Dollar amounts on which individual non-refundable federal tax credits for 2018 are based, and the actual tax credit claimable, will be as follows:

The indexing factor for federal tax credits and brackets for 2018 is 1.5%. The following federal tax rates and brackets will be in effect for individuals for the 2018 tax year.

The indexing factor for federal tax credits and brackets for 2018 is 1.5%. The following federal tax rates and brackets will be in effect for individuals for the 2018 tax year.

Income level                 Federal tax rate

$11,809 - $46,605                          15%

$46,606 - $93,208                        20.5%

$93,209 - $144,489                        26%

$144,490 - $205,842                      29%

Above $205,842                             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. Some of the more significant dates and changes for individual taxpayers for 2018 are listed below.

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 2018 are listed below.

RRSP deduction limit increases

The RRSP contribution limit for the 2017 tax year (for which the contribution deadline is Thursday March 1, 2018) is $26,010. In order to make the maximum current year contribution for 2017, it will be necessary to have had earned income for the 2016 taxation year of $144,500.

The RRSP contribution limit for the 2018 tax year is $26,230. In order to make the maximum current year contribution for 2018, it will be necessary to have earned income for the 2017 taxation year of $145,725.

TFSA contribution limit unchanged

The TFSA contribution room limit for 2018 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 of re-contribution amounts from previous taxation years.

Keeping track of TFSA contribution room can be complicated, especially where taxpayers have made withdrawals from their TFSA plans. Taxpayers can find out their 2018 contribution limit by calling the Canada Revenue Agency’s Individual Income Tax Enquires line at 1-800-959 8281. Those who have registered for the CRA’s online tax service My Account can obtain that information by logging in to that service.

Individual tax instalment deadlines for 2018

Millions of individual taxpayers pay income tax by quarterly instalments, which will be due on the 15^th day of each of March, June, September, and December 2018, except where that date falls on a weekend or statutory holiday.

The actual tax instalment due dates for 2018 are as follows:

• Thursday March 15, 2018
• Friday June 15, 2018
• Monday September 17, 2018
• Monday December 17, 2018

Individual tax filing and payment deadlines in 2018

For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2017 tax year is Monday, April 30, 2018.

Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2017 on or before Monday April 30, 2018.

Self-employed taxpayers and their spouses must file a 2017 income tax return on or before Friday June 15, 2018.

The federal government and each of the provinces (with the exception of Saskatchewan for 2018) and territories provide for indexing of individual income tax brackets and credit amounts. Changes other than indexation which will take effect for 2018 are listed below.

The federal government and each of the provinces (with the exception of Saskatchewan for 2018) and territories provide for indexing of individual income tax brackets and credit amounts. Changes other than indexation which will take effect for 2018 are listed below.

British Columbia

Beginning in 2018, taxable income exceeding $150,000 will be subject to a personal income tax rate of 16.8%.

Nova Scotia

Beginning with the 2018 taxation year, the basic personal amount will increase by $3,000 from $8,481 to $11,481. The full $3,000 increase will be available to individuals who have taxable income of $25,000 or less. The $3,000 increase will be reduced by 6% of taxable income that is more than $25,000. Individuals who have taxable income of $75,000 or more will not receive any increase.

Saskatchewan

Starting for the 2018 taxation year, indexing of components of Saskatchewan’s personal income tax system will be temporarily suspended.

For the 2018 taxation year, the labour-sponsored venture capital tax credit rate will be reduced from 20% to 17.5% of the cost of the investment.

Planning for – or even thinking about – 2018 taxes when it’s not even mid-December 2017 may seem more than a little premature. However, most Canadians will start paying their taxes for 2018 with the first paycheque they receive in January, and it’s 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 – 2018 taxes when it’s not even mid-December 2017 may seem more than a little premature. However, most Canadians will start paying their taxes for 2018 with the first paycheque they receive in January, and it’s 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 2018 (which were recently posted on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms.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 federal government.

While the TD1 completed by the employee at the time his or her employment commenced will have accurately reflected the credits claimable by the employee at that time, everyone’s life circumstances change. Where a baby is born, or a son or daughter starts post-secondary education, a taxpayer turns 65 years of age, 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’s 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, like 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 2018. The way to do so is to file Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1213.html) with the CRA. 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 2018 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 2018 at the same time will ensure that source deductions made during 2018 will accurately reflect all of the employee’s current circumstances, and consequently his or her actual tax liability for the year.

For most Canadians, registered retirement savings plans (RRSPs) don’t become top of mind until near the end of February, as the annual contribution deadline approaches. When it comes to tax-free savings accounts (TFSAs), most Canadians are aware that there is no contribution deadline for such plans, so that contributions can be made at any time. Consequently, neither RRSPs nor TFSAs tend to be a priority when it comes to year-end tax planning.

For most Canadians, registered retirement savings plans (RRSPs) don’t become top of mind until near the end of February, as the annual contribution deadline approaches. When it comes to tax-free savings accounts (TFSAs), most Canadians are aware that there is no contribution deadline for such plans, so that contributions can be made at any time. Consequently, neither RRSPs nor TFSAs tend to be a priority when it comes to year-end tax planning.

Notwithstanding those facts, there are considerations which apply to both RRSPs and TFSAs in relation to the approach of the end of calendar year. Failing to take those considerations into account can mean the permanent loss of contribution room, a loss of flexibility when it comes to making withdrawals, or having to pay more tax than required when funds are withdrawn. Some of those considerations are outlined below.

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

While most RRSP contributions, in order to be deducted on the return for 2017, can be made anytime up to and including March 1, 2018, 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 by 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 of that year.

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 2017, the contributor can claim a deduction for that contribution on his or her return for 2017. The spouse can then withdraw that amount as early as January 1, 2020 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2018, the contributor can still claim a deduction for it on the 2017 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2021. 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.

Accelerate any planned TFSA withdrawals into 2017

Each Canadian aged 18 and over can make an annual contribution to a Tax-Free Savings Account (TFSA) – the maximum contribution for 2017 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^st, 2017 will have the amount withdrawn added to his or her TFSA contribution limit for 2018, which means it can be re-contributed as early as January 1, 2018. If the same taxpayer waits until January of 2018 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2019.

As the 2017 calendar year winds down, the window of opportunity to take steps to reduce one’s tax bill for the 2017 tax year is closing. As a general rule, tax planning or tax saving strategies must be undertaken and completed by December 31^st, in order to make a difference to one’s tax liability for 2017. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan contributions. Such contributions can be made any time up to and including March 1, 2018, and claimed on the return for 2017.)

As the 2017 calendar year winds down, the window of opportunity to take steps to reduce one’s tax bill for the 2017 tax year is closing. As a general rule, tax planning or tax saving strategies must be undertaken and completed by December 31^st, in order to make a difference to one’s tax liability for 2017. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan contributions. Such contributions can be made any time up to and including March 1, 2018, and claimed on the return for 2017.)

While the remaining time frame in which tax planning strategies for 2017 can be implemented is only a few weeks, the good news is that the most readily available of those strategies don’t involve a lot of planning or complicated financial structures – in many cases, it’s just a question of considering the timing of expenditures which would have been made in any case. Below is a list of the most common such opportunities available to individual Canadians.

Charitable donations

The federal government and all of the provincial and territorial governments provide a tax credit for donations made to registered charities during the year. In all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year – there are no exceptions.

There is, however, another reason to ensure donations are made by December 31^st. The credit provided by each of the federal, provincial, and territorial governments is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. 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. Where the taxpayer making the donation has taxable income (for 2017) over $202,800, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2017 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 2017 and January 2018, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2018 donation can’t be claimed until the 2018 return is filed in April 2019. 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 5 years, donations which were made in a particular tax year. So, if donations made in 2017 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 2012, 2013, 2014, 2015, or 2016 tax years can be carried forward and added to the total donations made in 2017, and the aggregate then claimed on the 2017 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. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.

This year, there is an additional last-chance incentive for Canadians who have not been in the habit of making charitable donations to make a cash donation to a registered charity. In the 2013 Budget, the federal government introduced a temporary 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. This year (2017) is the last year for which the super-credit can be claimed, and only in respect of qualifying donations made before the end of the year.

Timing of medical expenses

There are an increasing number of medical expenses which are not covered by provincial health care plans, and an increasing number of Canadians who do not have private coverage for such costs through their employer. In those situations, Canadians have to pay for such unavoidable expenditures – including dental care, prescription drugs, ambulance trips, and many other para-medical services, like physiotherapy, on an  out-of-pocket basis. Fortunately, where such costs must be paid for partially or entirely by the taxpayer, the medical expense tax credit is available to help offset those costs. Unfortunately, the computation of such expenses and, in particular, the timing of making a claim for the credit, can be confusing. In addition, the determination of which expenses qualify for the credit and which expenses do not isn’t necessarily intuitive, nor is the determination of when it’s necessary to obtain prior authorization from a medical professional in order to ensure that the contemplated expenditure will qualify for the credit.

The basic rule is that qualifying medical expenses (a lengthy list of which can be found on the Canada Revenue Agency (CRA) website at http://www.cra-arc.gc.ca/medical/#mdcl_xpns) over 3% of the taxpayer’s net income, or $2,268, whichever is less, can be claimed for purposes of the medical expense tax credit on the taxpayer’s return for 2017.

Put in more practical terms, the rule for 2017 is that any taxpayer whose net income is less than $75,500 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 $75,500 will be limited to claiming qualifying expenses which exceed the $2,268 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 2017 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 2000 or later, and certain other dependent relatives – can be added together and claimed by one member of the family. In most cases, it’s 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^st approaches, it’s a good idea to add up the medical expenses which have been incurred during 2017, as well as those paid during 2016 and not claimed on the 2016 return. Once those totals are known, it will be easier to determine whether to make a claim for 2017 or to wait and claim 2017 expenses on the return for 2018. And, if the decision is to make a claim for 2017, knowing what medical expenses were paid and when, will enable the taxpayer to determine the optimal 12-month waiting 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 2018. Where those are significant expenses (for instance, a particularly costly medication which must be taken on an ongoing basis) it may make sense, where possible, to accelerate the payment of those expenses to December 2017, where that means they can be included in 2017 totals and claimed on the 2017 return.  

Reviewing tax instalments for 2017

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 Friday December 15, 2017. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2017 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, 2018. While the tax return forms to be used for the 2017 year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2016 form. Increases in tax credit amounts and tax brackets from 2016 to 2017 will mean that using the 2016 form will likely result in a slight over-estimate of tax liability for 2017.

Once one’s tax bill for 2017 has been calculated, that figure should be compared to the total of tax instalments already made during 2017 (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281). Depending on the result, it may then be possible to reduce the amount of the tax instalment to be paid on December 15 – and thereby free up some funds for the inevitable holiday spending!

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 state of the Canadian real estate market, and whether real estate values are headed up or down in 2018.  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 state of the Canadian real estate market, and whether real estate values are headed up or down in 2018.  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 chosen 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’s necessary to understand both the benefits and the potential costs and risks of getting a reverse mortgage.

The potential downside of a reverse mortgage starts 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.

In order to obtain a reverse mortgage, the homeowner must be at least 55 years of age, and the amount which can be obtained through any reverse mortgage is 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 first be paid off with the funds received from 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 prepayment 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 in many cases the retiree must shoulder all or a part of the cost of such care on an out-of-pocket basis. If the retiree is counting on his or her home equity to pay for such care, it is 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, the Financial Consumer Agency of Canada (FCAC) 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 https://www.canada.ca/en/financial-consumer-agency/services/mortgages/reverse-mortgages.html.

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 #42 Corporate

Personal:

Issue #42 Personal

Just about any financial or investment transaction can now be carried out online, and many Canadians conduct most or all of their financial affairs in an online environment, whether through their financial institution’s web-based banking and investment services or by using mobile apps. The shift to managing one’s financial matters online has extended to dealing with income tax matters, and that’s a trend which has been both aided and encouraged by the Canada Revenue Agency (CRA).

Just about any financial or investment transaction can now be carried out online, and many Canadians conduct most or all of their financial affairs in an online environment, whether through their financial institution’s web-based banking and investment services or by using mobile apps. The shift to managing one’s financial matters online has extended to dealing with income tax matters, and that’s a trend which has been both aided and encouraged by the Canada Revenue Agency (CRA).

The CRA’s most notable success in encouraging Canadians into the online tax world has been in relation to the filing of the annual tax return. Motivated, perhaps, by the prospect of quicker processing turnaround and faster receipt of tax refunds, Canadians have taken to online filing of returns in droves. For the latest filing year, 2016, over 24 million individual income tax returns (or 86% of total returns filed) were filed using electronic methods.

Clearly most Canadians have embraced the fact that filing the annual return now requires a keyboard and mouse and not paper and pencil. The ability to file the annual return online is, however, only the tip of the iceberg when it comes to online services, as there is an enormously wide range of CRA services and personal tax information which can be accessed online.

The starting point for all such information and services is the CRA’s website. That website was for many years found at www.cra.gc.ca, but federal government websites were reorganized this year, and the CRA website is now subsumed with the general Government of Canada website, and found at https://www.canada.ca/en/services/taxes.html.

General (i.e., non-taxpayer specific) information is organized on that site within a number of subject categories, including income tax, goods and service tax and harmonized sales tax, savings and pension plans, payroll issues, and child and family benefits. A drop-down menu under each heading provides a listing of topics within each category and each of those in turn addresses specific questions related to that topic.

While a broad range of general tax information is available through the CRA site, dealing with one’s personal tax matters requires that a taxpayer register for the CRA’s My Account service. Using that service, it’s possible to carry just about any tax-related transaction and to obtain personal (i.e., taxpayer specific) information about one’s tax history and current tax status. As might be expected with a tool which provides such broad access to confidential tax information, there are extensive security measures which must be fulfilled in order to obtain such access.

The good news is that taxpayers who are already registered (i.e., have a user ID and password) for online banking services at a number of Canadian financial institutions can use that same ID and password for purposes of the CRA’s My Account. The current list of such Canadian financial institutions (known as “Sign-In Partners”) is as follows:

• Affinity Credit Union
• BMO Financial Group
• CHOICE REWARDS MasterCard
• CIBC Canadian Imperial Bank of Commerce
• Desjardins Group
• National Bank of Canada
• RBC Royal Bank
• Scotiabank
• Tangerine
• TD Bank Group

The process is a relatively straightforward one, although a bit time-consuming. Users log-in using the “Sign-in Partner” feature on the My Account website to start the registration process. They will then receive a CRA security code, usually by mail. The next time the individual signs into My Account, he or she will use that security code to complete registration for My Account and will then have full access to the My Account range of services. On subsequent log-ins, only the Sign-in Partner user ID and password will be required.

For those who don’t use online banking, or who bank with an institution that is not one of the Sign-In Partners, the process is much the same, except that it will be necessary to create a user ID and password, and to provide security questions and answers. That process starts on the My Account home page at https://www.canada.ca/en/revenue-agency/services/e-services/cra-login-services/cra-user-password-help-faqs/registration-process-access-cra-login-services.html#hlp1.

Once on that page, registration is a two-step process, as follows:

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. 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 your security questions and answers. You can also decide if you want a persistent cookie added to your computer, so you can access CRA Login Services using that same computer later without being asked for more identification.

After step one of the registration process is completed, the taxpayer will have access to a limited amount of personal tax information on My Account. That information includes viewing the status (received/in process/assessed) of an already filed tax return, viewing Notices of Assessment or Reassessment, and finding out one’s registered retirement savings plan (RRSP) or tax-free savings account (TFSA) contribution limits.

Once step one of the registration process is done, the CRA will send a security code to the taxpayer. Since the security code is sent by regular mail, a wait time of a few weeks is likely.

Step 2 – Enter the CRA security code

Once the security code is received, the taxpayer can access his or her account by returning to My Account for Individuals, selecting "CRA login," and entering his or her CRA user ID and password. The user will be prompted to enter the CRA security code, after which he or she will have full access to all My Account services. On the next and subsequent log-ins, only the CRA ID and password will be required.

The number and variety of tax services which are available through My Account number in the dozens: a full listing of the available services can be found at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/account-individuals/about-account.html. General information about My Account, including hours of service, is available at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/account-individuals.html.

As the days shorten and temperatures drop into the single digits, the thoughts of many Canadians turn to the idea of spending at least some part of the upcoming Canadian winter somewhere much warmer — most often, in one of the southern US states. And, while the less than robust state of the Canadian dollar relative to US currency has required Canadians to downsize some of those plans, it is still the case that thousands of Canadian “snowbirds” fly south during the worst of the Canadian winter.

As the days shorten and temperatures drop into the single digits, the thoughts of many Canadians turn to the idea of spending at least some part of the upcoming Canadian winter somewhere much warmer — most often, in one of the southern US states. And, while the less than robust state of the Canadian dollar relative to US currency has required Canadians to downsize some of those plans, it is still the case that thousands of Canadian “snowbirds” fly south during the worst of the Canadian winter.

Wherever they are going, and however long they are staying, it’s safe to say that the thoughts of those snowbirds are on enjoying the warm weather and the sunshine, and that the potential financial consequences or income tax issues raised by their trip down south are not top-of-mind.

There is, however, one issue which every single person who travels out of the country — to any jurisdiction, for any length of time — must take care of, and that’s the need to obtain travel medical insurance. There are no circumstances in which it makes sense to leave Canada without such insurance in place: it is, in a word, foolish to leave Canada without ensuring that travel medical insurance in securely in place.

A lucky few (and increasingly fewer) individual Canadians may already have the needed coverage through their employer or, for retirees, their former employers. For those who don’t (or those who do but wish to augment such coverage), the solution is to obtain private travel medical insurance coverage. There is no shortage of companies offering 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 three 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 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, it’s important to be very clear on the requirements for information — particularly medical history — which must be disclosed as part of the application, in terms of both detail and time period. It was formerly the case that applicants for travel medical insurance were required to provide details of their medical history for the previous 12 or perhaps 24 months. However, those requirements have changed for some policies or some insurers, and it’s sometimes the case that an applicant is required to provide information ranging across his or her entire lifetime medical history. For any kind of insurance, coverage can be denied where the information provided on the application form is not accurate and complete, and insurers have denied coverage where medical history information was omitted, even if that information wasn’t even known to the applicant. In light of that, and given the potentially ruinous financial consequences of a denial of coverage, it’s not at all a bad idea to have an insurance broker or even a lawyer review one’s application for a travel medical insurance policy to make sure that there will be no unpleasant surprises when and if a claim for coverage is made.

• Third, 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 or a stroke — 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 likely 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 US 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 are the case, 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.

It has been nearly a decade now since the mortgage lending debacle in the United States caused a meltdown in real estate markets, which led in turn to a general crisis in the financial markets and eventually to the Great Recession of 2008-2009.

While no country was immune from the effects of that economic downturn, Canada did not experience the broad-based mortgage lending and real estate crash which occurred in the U.S. There were a number of reasons for that, but chief among them was likely the different regulatory environment of our banking system and in our mortgage lending practices.

It has been nearly a decade now since the mortgage lending debacle in the United States caused a meltdown in real estate markets, which led in turn to a general crisis in the financial markets and eventually to the Great Recession of 2008-2009.

While no country was immune from the effects of that economic downturn, Canada did not experience the broad-based mortgage lending and real estate crash which occurred in the U.S. There were a number of reasons for that, but chief among them was likely the different regulatory environment of our banking system and in our mortgage lending practices.

Even though Canada was spared the worst of the mortgage lending/real estate crisis, that crisis did lead Canadian financial and mortgage regulators to take a hard look at the state of mortgage lending in Canada. What they saw led them to make several sets of changes to mortgage lending requirements over the past decade. Without exception, those changes have tightened mortgage lending practices by mandating larger down payments, reducing allowable maximum amortization periods and requiring borrowers to meet increasingly stringent credit-worthiness requirements.

Part of the reason for increased concern on the part of financial regulators has been the combined effect, over the past decade, of a steady rise in real estate values and historically low interest rates on the amount of debt held by Canadian families. While residential real estate values have been on a steady upward trajectory, the actual cost of carrying the associated debt (i.e., the mortgage) was, starting around 2009, lower than it had been for decades. In effect, home purchasers could buy more at a lower debt-servicing cost. As well, there was significant growth in the use of a formerly little-known financing vehicle — the home equity line of credit, or HELOC — which allowed current homeowners to borrow against the accumulated equity in their home. (Between 2000 and 2010, HELOCs grew from just over 10% of non-mortgage consumer debt to nearly 40% of such debt.) An environment where residential real estate values continued to rise provided most homeowners with ever-increasing amounts of equity against which they could borrow. And, quite often, it was possible to make interest-only payments on such amounts borrowed through a HELOC, with no requirement to repay principal. The combined result of these and other developments was that, by the second quarter of 2017, the debt held by the average Canadian household had reached 168% of annual household disposable income. In 2005, that percentage was 108%.

In the face of all of these developments, and in light of the two interest rate increases which have been announced by the Bank of Canada in 2017, it was determined that further measures were needed to regulate the mortgage financing market.

When assessing the credit-worthiness of a would-be mortgage borrower, a financial institution looks at the percentage of household income that will be required to make the scheduled mortgage payments. There are, in fact, two ratios that are utilized to determine a would-be mortgage borrower’s “fitness” to borrow – the Total Debt Service (TDS) ratio and the Gross Debt Service (GDS) ratio. While each measures the amount of debt servicing and housing costs slightly differently, both seek to determine whether the prospective borrower can realistically manage the repayment of his or her mortgage debt, based on his or her income, the carrying costs (mortgage payments, including principal and interest, property taxes, and heating costs) for the property to be acquired, and the amount of any other existing debt which must be serviced.

Under the most recent set of changes announced by the Office of the Superintendent of Financial Institutions (OSFI), which will take effect on January 1, 2018, lenders will continue to utilize the TDS and GDS ratios to determine a borrower’s qualifications to borrow. However, would-be borrowers will have to satisfy those ratios, not based just on the mortgage financing interest rate which will apply to the mortgage for which they applied, but on the higher of two “theoretical” rates as well. In effect, borrowers will have to qualify based both on their contractual mortgage rate and on two “what-if” scenarios, intended to measure the borrower’s ability to absorb a future interest rate increase. Most significantly, the new rules will apply to every person who applies for a mortgage on the acquisition of a property, regardless of the size of their down payment. (Renewals of existing mortgages are not affected by the new rules.)

As of January 1, 2018, anyone seeking mortgage financing on an acquisition of residential real estate will have to qualify for that mortgage at the greater of the contractual mortgage rate plus 2% or the five-year benchmark rate published by the Bank of Canada. That five-year benchmark rate is typically higher than current mortgage financing rates provided by Canadian financial institutions.

At the end of October, the lowest interest rate obtainable for a 5-year fixed rate mortgage from a major Canadian financial institution was 3%. By contrast, the Bank of Canada five-year benchmark rate for the same time period was 4.89%. Consequently, a buyer seeking mortgage financing approval under the new rules would be subject to the following calculation:

Contractual mortgage rate — 3%

Contractual mortgage rate plus 2% — 5%

Bank of Canada 5-year benchmark rate — 4.89%

The highest of these three numbers — 5% — is the rate which must be used, under the new rules, to determine the buyer’s eligibility for financing. In other words, any financial institution which might provide financing must assess creditworthiness (using the TDS and GDS ratios) based on a mortgage financing rate of 5%.

Using a rate which is higher than the contract mortgage rate to determine eligibility will clearly mean that the amount of mortgage financing available to a prospective buyer will, in all situations, be reduced. Buyers subject to the new rules will have, in effect, the choice of “downsizing” their expectations in relation to the purchase price (and therefore the size of the mortgage) of the property they wish to acquire, or of accumulating a larger down payment in order to reduce the amount of mortgage financing for which they need to qualify under these new rules.

There’s been a lot of debate on the merits of the upcoming rule changes, and the possible effect of those changes on the Canadian real estate market. That debate won’t likely be resolved any time soon. What is certain, however is everyone involved in a real estate transaction — agent, buyer, seller, and lender — is going to have to adjust to a new reality come January 1.

The fiscal cycle of the federal government follows a predictable annual path. Each spring, the Minister of Finance brings down a budget outlining the government’s revenues and expenditures and its surplus or deficit projections for the fiscal year which runs from April 1 to March 31. That budget also includes the announcement of any changes to the tax system which the government wishes to implement.

The fiscal cycle of the federal government follows a predictable annual path. Each spring, the Minister of Finance brings down a budget outlining the government’s revenues and expenditures and its surplus or deficit projections for the fiscal year which runs from April 1 to March 31. That budget also includes the announcement of any changes to the tax system which the government wishes to implement.

In the fall, the Minister of Finance announces the Economic and Fiscal Update which, as the name implies, provides an update of the government’s finances approximately halfway through the current fiscal year. Sometimes, as was the case this year, the Update includes announcements of additional tax changes.

The 2017-18 Economic and Fiscal Update brought down by the Minister of Finance on October 24, 2017 included a better than expected deficit picture for upcoming fiscal years. That improved fiscal picture allowed the Minister to announce a number of relieving tax measures. While the measures are few, they will affect a great number of corporations and individuals, whether through lower tax rates or increased taxpayer benefits. Those changes are as follows.

• Effective as of January 1, 2018, the small business tax rate will be reduced to 10%. A year later, on January 1, 2019, that rate will be reduced again, to 9%.

• Lower and middle income Canadian families are eligible to receive the Canada Child Benefit (CCB) — a non-taxable monthly benefit paid by the federal government. The amount of CCB received depends on the size of the family and the family’s net income. While there has been no change to benefit amounts, the Minister indicated that previously announced plans to provide annual cost-of-living changes to those benefits would be brought forward and implemented effective July 1, 2018. As of that date, the amount of benefits payable and the income thresholds which determine eligibility will both be indexed to inflation.

The full 2016-17 Economic and Fiscal Update can be found on the Finance Canada website at www.budget.gc.ca/fes-eea/2017/docs/statement-enonce/toc-tdm-en.html.

The baby boom generation, which is now in or near retirement, has always been able to factor receiving Old Age Security benefits, once they turn 65, into their retirement income plans. While receipt of such benefits can be still be assumed by the vast majority of Canadian retirees, the age at which such income will commence is no longer a fixed number. Rather, retirees are now faced with a choice about when they want those benefits to start. For the past four years, Canadians have had the option of deferring receipt of their Old Age Security benefits, for months or for years past the age of 65, and that election to defer continues to be available. The difficulty that can arise is how to determine, on an individual basis, whether it makes sense to defer receipt of OAS benefits and, if so, for how long. It’s a consequential choice and decision, since any election made to defer is irrevocable.

The baby boom generation, which is now in or near retirement, has always been able to factor receiving Old Age Security benefits, once they turn 65, into their retirement income plans. While receipt of such benefits can be still be assumed by the vast majority of Canadian retirees, the age at which such income will commence is no longer a fixed number. Rather, retirees are now faced with a choice about when they want those benefits to start. For the past four years, Canadians have had the option of deferring receipt of their Old Age Security benefits, for months or for years past the age of 65, and that election to defer continues to be available. The difficulty that can arise is how to determine, on an individual basis, whether it makes sense to defer receipt of OAS benefits and, if so, for how long. It’s a consequential choice and decision, since any election made to defer is irrevocable.

To make sense of the change, a bit of background is needed. The OAS program is one of the 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 federal government general revenues. 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. Those who were born on or before July 1, 1952 and who lived in Canada on July 1, 1977 can also receive full benefits. For the third quarter of 2017 (July to September 2017), that maximum monthly benefit is $583.74.

Under the rules now in place, Canadians who are eligible to receive OAS benefits can defer receipt of those benefits for up to five years, when they turn 70 years of age. For each month that an individual Canadian defers receipt of those benefits, the amount of benefit eventually received would increase by 0.6%. 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.

The first consideration in determining when to begin receiving OAS benefits is how much total income will be required, at the age of 65, to finance current needs. It’s also necessary to determine what other sources of income (Canada Pension Plan retirement benefits, employer-sponsored pension plan benefits, annuity payments, and withdrawals from registered retirement savings plans (RRSPs) and registered retirement income fund (RRIFs)) are available to meet those needs, both currently and in the future, and when receipt of those income amounts can or 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 the structuring and timing of those sources of income. 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 20.5%. For 2017, that second income tax bracket begins when taxable income reaches $45,916.
• The Canadian tax system provides (for 2017) a non-refundable tax credit of $7,225 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 $36,430, and disappears entirely for taxpayers with net income over $84,597.
• Individuals can receive a GST/HST refundable tax credit, which is paid quarterly. For 2017, the full credit is payable to individual taxpayers whose family net income is less than $36,429.
• Taxpayers who receive Old Age Security benefits and have income over a specified amount are required to repay a portion of those benefits, through a mechanism known as the “OAS recovery tax”, or clawback. For the July 2017 to June 2018 benefit period, taxpayers whose income for 2016 was more than $73,756 will have a portion of their OAS benefit entitlement “clawed-back”. OAS entitlement for that time period is entirely eliminated where taxpayer income for 2016 was more than $119,615.

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 OAS 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 and received any time up to the age of 70. As is 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. Those include 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. The early years of retirement are usually the most active ones, and consequently are the years in which expenses for activities are likely to be highest. Having plans for significant expenditures in the early retirement years might argue for accelerating income into those years, when it can be used to make those plans a reality.

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 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 will 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 https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html.

The fact that Canadian households are carrying a significant amount of debt — in fact, debt loads which seem to continually set new records — isn’t really news anymore. For several years, both private sector financial advisers and federal government banking and finance officials have warned of the risks being taken by Canadians who took advantage of historically low interest rates by continuing to increase their secured and unsecured debt.

The fact that Canadian households are carrying a significant amount of debt — in fact, debt loads which seem to continually set new records — isn’t really news anymore. For several years, both private sector financial advisers and federal government banking and finance officials have warned of the risks being taken by Canadians who took advantage of historically low interest rates by continuing to increase their secured and unsecured debt.

The risks most commonly cited by those advising a greater degree of borrowing restraint was the impact that an increase in interest rates would have on the ability of those debtors to repay — or even service — the debt which they had accumulated. As well, to the extent that such borrowings were secured by home equity, the risk was that a downturn in the real estate market could put those borrowers at risk, or even in a negative equity position, where the amount still owing on their home-related borrowings was greater than the value of their home.

Both of those circumstances have started to materialize in the last two calendar quarters. The Canada-wide real estate market is not in a downturn. However, the expectation among borrowers that real estate values in major urban markets would simply continue to increase without limit has been tempered, somewhat, by the drop in real estate sales in the Greater Toronto Area since the spring of this year. While real estate prices in that market are still up, as measured on a year-over-year basis, they have declined, overall, from the highs recorded in the winter and early spring of 2017.

The long-anticipated increase in interest rates has finally occurred as well, as on July 12 and again on September 6, 2017, the Bank of Canada raised the bank rate for the first time since September 2010. Predictably, financial institutions responded by increasing their mortgage and other loan interest rates. The Bank’s next interest rate announcement, which is scheduled for October 25 may, or may not, include a further increase.

The end of June, just prior to the Bank’s first interest rate increase, marked the end of second quarter of 2017. And, as is usually the case, a number of government and non-government organizations issued statistics and analysis of the current state of Canadian consumer debt. Given the timing, those figures will create a kind of benchmark against which future statistical summaries will be compared, as they create a “snapshot” of the state of Canadian consumer debt taken just as interest rates began to rise, at the end of the ultra-low interest rate environment which began in 2009, and as the ultra-hot real estate market started to cool down.

And the news is … good and bad. The figure which is mostly often quoted in discussions of consumer debt is the debt to disposable income ratio which is published by Statistics Canada. As of the end of June, that ratio stood at $1.68, meaning that the average Canadian household carried $1.68 in debt for each $1.00 of disposable (after-tax) income.

While it’s easy to see that an increasing debt-to disposable income ratio means that Canadians are taking on more debt, that ratio is still a somewhat abstract concept. What is striking, however, is the growth of that ratio over the past quarter century and, especially, since 2005.

In 1990, that percentage stood at 93%, meaning that the debt load of the average Canadian household was 93% of disposable income. By 2005, the debt-to-disposable ratio had risen to 108%. In other words, it took 15 years for the percentage to increase from 93% (in 1990) to 108% (in 2005). From that point, the debt to disposable income ratio accelerated dramatically, as it rose from 108% in 2005 to 150% just five years later, in 2010. The ratio now stands, as of the second quarter of 2017, at 168%.

The StatsCanada figure captures all forms of debt, secured and unsecured, meaning that it includes mortgages, car loans, installment loans of all kinds, lines of credit, and credit card debt. There are a couple of significant differences between secured and unsecured debt — secured debt, by definition, is secured against an asset, so that in the event the borrower goes into default, the lender can seize the asset in payment of the secured debt. The value of that asset is always, at the time of borrowing, greater than the amount borrowed. Unsecured debt, by contrast, is provided on no more than the borrower’s promise to repay. Not surprisingly then, the debt rate levied on unsecured borrowings is always higher than secured debt borrowings.

For both those reasons, it’s more likely that borrowers, when faced with an interest rate increase which bumps up their cost of borrowing, will get into difficulty with unsecured debt. And, as of the second quarter of 2017, the average unsecured debt (strictly speaking, “non-mortgage debt”, but in most cases, the non-mortgage debt of Canadians is unsecured debt) owed by individual Canadians was for the first time, over $22,000.

That figure — $22,154 average debt load per individual borrower — appeared in a summary issued by TransUnion, one of the two major credit reporting agencies in Canada. The summary also outlines the average balance per borrower by the kind of debt incurred, as follows:

Bank card (credit card) ………… $4,069

Automobile …………………………… $20,447

Line of Credit ………………………… $30,108

Installment Loan …………………… $25,455

And, as recently reported by the Financial Consumer Agency of Canada, recent trends in secured debt patterns may also give rise to concern going forward.

One of the fastest growing consumer credit products in Canada is the home equity line of credit (HELOC). A HELOC is similar to a mortgage, in that the debt is secured against the homeowner’s equity in the property. However, under a HELOC, a lender agrees to provide credit to a borrower, not for a fixed amount, but up to a maximum amount, based on the value of the property. Once the HELOC is in place, the available funds can be used for any purpose, whether that purpose is related to home ownership or not. And, while monthly payments are required, the borrower can usually, if he or she wishes, pay only the interest amount which has accrued since the last payment, without reducing the principal at all.

A report issued by the FCAC in June of this year includes the following statistics related to HELOC borrowing.

• The number of households that have a HELOC and a mortgage secured against their home has increased by nearly 40 percent since 2011.
• 40 percent of consumers do not make regular payments toward their HELOC principal.
• 25 percent of consumers pay only the interest or make the minimum payment.
• Most consumers do not repay their HELOC in full until they sell their home.

If there is good news in the figures summarizing the ever-increasing debt load of Canadians, from all sources, it’s in the fact that borrowers are still managing to keep payment of those debts in good standing. In fact, delinquency rates (meaning debts on which payments are more than 90 days late) are, for the most part, down during the second quarter of this year, as measured on both a quarter-over-quarter and year-over-year basis. Whether that trend will continue or be reversed as the impact of the recent interest rate increases takes hold remains to be seen.

For most Canadians, having to pay for legal services is an infrequent occurrence, and most Canadians would like to keep it that way. In many instances, the need to seek out and obtain legal services (and to pay for them) is associated with life’s more unwelcome occurrences and experiences — a divorce, a dispute over a family estate, or a job loss. About the only thing that mitigates the pain of paying legal fees (apart, 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 Canadians would like to keep it that way. In many instances, the need to seek out and obtain legal services (and to pay for them) is associated with life’s more unwelcome occurrences and experiences — a divorce, a dispute over a family estate, or a job loss. About the only thing that mitigates the pain of paying legal fees (apart, 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, establishing custody rights, or seeking legal advice about the disposition of a family estate — 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 involved 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 can then become 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 establish a right to amounts allegedly owed by the employer are deductible by that former employee. If a court action is necessary and the Court requires 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 an RRSP or 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 rules are 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;
• 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;
• seeking an increase in support payments; or
• seeking an order making child support amounts received non-taxable.

On the payment side of the support payment/receipt equation, the situation is not so favourable, as a deduction for legal fees incurred will not 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 for a tax year, any fees (which in this case includes accounting fees) paid for advice or assistance in dealing with the CRA’s review, assessment or reassessment, or in objecting to that assessment or reassessment, can be deducted by the taxpayer. A deduction can similarly be claimed where the taxpayer incurs such fees in relation to a dispute involving employment insurance, the Canada Pension Plan or the Quebec Pension Plan.

News about another successful cyberattack, on government or on a private company, in a single country or worldwide, is now almost routine. What such events usually have in common is a desire by the hackers who perpetrate the attacks to profit by it — either by demanding payment from the entity whose systems have been compromised, or by obtaining confidential personal information (especially identifying or financial information) about individuals, which the hackers can then use fraudulently or sell to others who wish to do so.

News about another successful cyberattack, on government or on a private company, in a single country or worldwide, is now almost routine. What such events usually have in common is a desire by the hackers who perpetrate the attacks to profit by it — either by demanding payment from the entity whose systems have been compromised, or by obtaining confidential personal information (especially identifying or financial information) about individuals, which the hackers can then use fraudulently or sell to others who wish to do so.

In September of this year, the credit reporting firm Equifax announced that it had been subject to such a successful cyberattack, and that attack was especially concerning, both because of the nature of the information Equifax holds, and because of the number of Canadians affected.

Most Canadian adults have used credit at one time or another. Whenever an individual obtains and uses credit — whether through a credit card, line of credit, car loan, or otherwise, the financial institution which provided the credit provides information about that credit use to a credit reporting agency like Equifax. The information provided includes the original amount of the debt, the payment history, whether any payments were made late, and the current balance. The file held by the credit reporting agency also includes personal identifying information about the individual, which can include the individual’s social insurance number (SIN). Such information is accumulated throughout the individual’s financial life and is used by credit-granting institutions to assess an individual’s creditworthiness whenever he or she makes an application for credit.

It’s readily apparent that credit rating agencies have a great deal of personal and financial information about individuals and it was that information which was compromised in the cyberattack on Equifax which took place between mid-May and July 2017. Equifax has confirmed that personal and financial information of about 100,000 Canadians had been accessed in the cyberattack. (That number is subject to change and increase, as the investigation continues.) The information accessed included individuals’ names, addresses, credit card numbers, and – most ominously – SINs.

Equifax has committed to contacting, by mail (not e-mail or phone), the 100,000 Canadians whose personal information has been compromised. It will also be providing such individuals with credit monitoring and identity theft protection for a period of 12 months, at no charge. Individuals who are not contacted but have questions can contact Equifax at 1-866-699-5712 or by email at EquifaxCanadaInquiry@equifax.com.

Anyone whose personal and financial information is stolen, whatever the circumstances, has good reason to be concerned. And, given the number of instances in which Canadians routinely provide such personal and financial information, online or otherwise, the chances of being affected by an information security breach continue to increase.

As a practical matter, there is really nothing individual Canadians can do to ensure that companies, institutions and governments which have and hold their personal information are not subject to a cyberattack or other information breach. What Canadians can (and should) do is to restrict the personal and financial information which they provide to others to that which is required by law or absolutely necessary in the particular circumstances. And there are a number of steps which individuals can take to protect the personal identifying and financial information which they do disclose, and so minimize the risks that such information will misused or that they will become victims of identity theft.

Perhaps the most important of those steps is the need to protect one’s SIN. Having someone else’s SIN (especially if the person’s name and date of birth is also known) can give an unauthorized person significant access to additional information about that person, and can even allow them to impersonate that person, especially online, where bona fides can often be established simply by providing requested personal identifying information.

The circumstances in which Canadians are legally required to provide their SIN are relatively few and far between — it must be included on the annual tax return, of course, and must be provided to financial institutions where the individual holds an interest-bearing account, a registered retirement savings plan, a registered education savings plan, or a tax-free savings account. There are not many other instances in which providing one’s SIN is required. Notwithstanding, SINs are sometimes treated as a kind of all-purpose identifier, and individuals are frequently asked for that number in situations where it has no possible relevance – for instance, in an application to rent an apartment or a credit card application. It is both legal and prudent to refuse to provide one’s SIN in situations where there is no legal requirement to disclose that information.

For every form and application, financial or otherwise, which is completed by an individual both online or in hard copy, there are usually fields which are required to be completed and some which are not. There is no reason to provide such optional information which, isn’t actually needed for purposes of the form or application being completed. While the optional requested information may seem innocuous, it’s always preferable to have less rather than more personal identifying information in the public domain.

Online shopping is now ubiquitous and, of course, purchasing anything online requires an individual to provide a method of payment, which is usually a credit card number. The major online shopping sites have security protocols in place, but the reality is that providing one’s credit card number online will always carry a risk. There are, however, ways to minimize that risk. Individuals who shop online on a regular basis might consider obtaining a credit card which is used only for online shopping, and which has a relatively low credit limit. That way, should the credit card number fall into the wrong hands, the amount which can be fraudulently charged to that card will be minimal, and the card itself can be cancelled immediately, once the breach is discovered.

For those who wish to obtain personal information about someone else for fraudulent purposes, all forms of social media are, of course, a gold mine. Everyone has heard of the need to exercise caution with respect to the personal information disclosed on social media. What many don’t recognize is the need to consider the totality of information that is being “shared” on all social media platforms in the aggregate, not just on a single site like Facebook, Twitter, or Instagram, or in a single post on any of those sites. Anyone seeking to collect personal information about an individual for identity theft or other fraudulent purposes will certainly put together information from all available sources. And, while a single piece of information disclosed in passing, or in isolation, may not seem to pose a risk, it doesn’t take much information to create that risk. For instance, no one would post their bank account number on social media. But, someone who posts on Facebook about their frustration with a particular interaction with their (named) financial institution has created an opportunity for someone to approach them (weeks or months later) with fraudulent intent, purporting to be from that financial institution and asking them, for instance, to confirm their bank account number as part of the bank’s regular fraud prevention program. And too often, recipients of such approaches don’t consider that the caller might have obtained information about who they bank with from a months-old social media post. Such fraudulent approaches rely on the fact that most recipients don’t think to verify the authenticity of the call or the caller.

Not disclosing one’s SIN unless legally required to do so, and taking care when online shopping or in posting on social media are only some of the precautions which can be taken to protect one’s personal information. There are many others, and there’s a lot of information available on how to protect yourself and what to do if your personal or financial information falls into the wrong hands. The following websites are a good place to start: www.rcmp-grc.gc.ca/scams-fraudes/id-theft-vol-eng.htm and https://www.getcybersafe.gc.ca/cnt/prtct-yrslf/prtctn-dntty/index-eng.aspx.

The end of summer means back to school for students of all ages. For parents of elementary and secondary school students the focus is on obtaining back to school clothes and supplies and starting the process of enrollment in after-school activities for the fall. For those already in (or starting) post-secondary education, choosing courses, finding a place to live and paying the initial bills for tuition and residence are more likely to be on the immediate agenda.

The end of summer means back to school for students of all ages. For parents of elementary and secondary school students the focus is on obtaining back to school clothes and supplies and starting the process of enrollment in after-school activities for the fall. For those already in (or starting) post-secondary education, choosing courses, finding a place to live and paying the initial bills for tuition and residence are more likely to be on the immediate agenda.

What both groups of parents and students have in common this school year, however, is that this is the first full school year which will be affected by previously announced tax changes. And, unfortunately, each of those tax changes, for students at all levels, means higher after-tax costs for education-related expenses.

For students enrolled in the public education system there is, of course, no cost to attend. Most such students are, however, enrolled in one or more after-school activities and for nearly all of those activities, there is an out-of-pocket cost that must be paid. Depending on the activity, those costs can easily amount to several hundred dollars per child over the course of the school year. In recent years, parents were able to offset those out-of-pocket costs by claiming the children’s arts credit or the children’s fitness credit, depending on the kind of activity involved. Both such credits were, however, eliminated as of the 2017 tax year. Consequently, neither credit can now be claimed for any formerly qualifying activity or program. In budgeting for the cost of any contemplated after-school activity, parents must budget on the basis that they will be paying the full cost out-of-pocket, and will not be claiming any offsetting tax credit on their tax return for 2017.

There is some good news for parents of elementary school-aged children, in that where costs are incurred for after-school care, a deduction can still be claimed for such costs. That deduction is part of the general child care expense deduction, which may be claimed (within specified limits) where child care costs are incurred in order for the parent to work, at employment or self-employment. The amount of deduction claimable depends on the age of the child and the actual amount expended, with an overall limit based on family net income. More information on claiming the child care expense deduction can be found on the Canada Revenue Agency (CRA) website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-214-child-care-expenses.html.

At the post-secondary education level, students (and their parents) have benefitted for many years from an “assist” through our tax system, which provides deductions and credits for some of the many associated costs. Two of those credits are, however, no longer available to be claimed.

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 still 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 a student doesn’t have tax payable for the year, as is often the case, any credits earned can be carried forward and claimed by the student in a future year, or transferred in the current year to a spouse, parent, or grandparent.

For many 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, have been eliminated, and so the only credit which will be claimable for the upcoming academic year by post-secondary students is the non-refundable credit for 15% of tuition costs incurred. Where the education and textbook credits have been earned but not claimed in previous years, however, they are still available to be claimed by the student as carryover credits in 2017 or later years.

The CRA publishes a very useful guide to tax measures which affect students enrolled in post-secondary education. That guide, entitled Students and Income Tax, has been updated to take account of the recent changes, and the most recent version is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/p105/README.html.

Although they aren’t usually thought of in such terms, Canadian charities, as measured by the amount of money they receive and administer, can be big businesses. However, because they collect and disperse that money in order to support and advance causes which create a public benefit, charities are accorded special status under our tax laws. Our tax system effectively subsidizes the activities of charitable organizations by providing a tax deduction or tax credit to companies and individuals that contribute to those organizations and by exempting the charities themselves from the payment of income tax.

Although they aren’t usually thought of in such terms, Canadian charities, as measured by the amount of money they receive and administer, can be big businesses. However, because they collect and disperse that money in order to support and advance causes which create a public benefit, charities are accorded special status under our tax laws. Our tax system effectively subsidizes the activities of charitable organizations by providing a tax deduction or tax credit to companies and individuals that contribute to those organizations and by exempting the charities themselves from the payment of income tax. 

In order to receive a designation as a registered charity (and consequently to be able to provide donors with a tax receipt enabling them to claim a credit or deduction), an organization is required by law to have exclusively charitable purposes. While the particular kinds of aims and objectives which may qualify an organization for certification as a registered charity vary widely, one kind of activity which cannot qualify as charitable in nature is purely political activity. An organization established solely for political purposes, or an organization that devotes more than an incidental percentage of its resources to political purposes, or whose political activities are not in furtherance of its charitable purposes, cannot qualify (or continue to qualify) as a registered charity.

Support of a particular political party or candidate is an obvious partisan political purpose, but under Canadian law as it relates to charities, the definition of political purposes is much broader. As determined by Canadian courts, political purposes are also those that seek to retain, oppose, or change the law, policy, or decision of any level of government in Canada or a foreign country. Essentially, the rules seek to ensure that any organization that has been designated as a registered charity does not extend the benefits of having that designation to cover political aims or activities, in more than an incidental way. At the extreme end, the rules seek to prevent organizations whose aims are essentially political from “masquerading” as charitable organizations in order to receive the related status and tax benefits.

The initial, general, rule is that that a charity that devotes no more than 10% of its total resources a year to allowable political activities (meaning political activities that are non-partisan and that are both connected with and subordinate to the charity’s purposes) will be operating within allowed guidelines. Smaller charities are given more leeway, and operate under the following guidelines.

• Registered charities with less than $50,000 annual income in the previous year can devote up to 20% of their resources to political activities in the current year.
• Registered charities whose annual income in the previous year was between $50,000 and $100,000 can devote up to 15% of their resources to political activities in the current year.

• Registered charities whose annual income in the previous year was between $100,000 and $200,000 can devote up to 12% of their resources to political activities in the current year.

Charities which breach these rules can face serious sanctions, up to and including temporary suspension or even revocation of their charitable status.

It’s apparent from even a brief summary that determining when a charity has engaged in political activity which must be reported can be a very subjective exercise, and the consequences of making the wrong call can be significant. The CRA recognizes that fact, and has created a number of online resources to assist charities in making that determination. Those resources, which include webinars, FAQ documents, and self-assessment tools, can all be found on the Charities webpage of the CRA website, at www.cra-arc.gc.ca/chrts-gvng/chrts/cmmnctn/pltcl-ctvts/menu-eng.html.

Most Canadians approaching retirement know that they will be able to receive retirement income from the Canada Pension Plan and Old Age Security programs. Many, however, are unaware that there is a third federal program — the Guaranteed Income Supplement (GIS) — which provides an additional monthly income amount to eligible individuals who already receive Old Age Security. That lack of knowledge is particularly unfortunate because, while there is no need for an individual to apply in order to receive an Old Age Security benefit, anyone who wishes to receive the GIS must apply to do so. (Automatic enrollment in GIS is something that is planned for future implementation, but is not yet in place.). Finally, while the OAS benefit is a standard amount for most recipients, the rules governing eligibility for GIS, and the amount which a particular individual will receive, are more complex.

Most Canadians approaching retirement know that they will be able to receive retirement income from the Canada Pension Plan and Old Age Security programs. Many, however, are unaware that there is a third federal program — the Guaranteed Income Supplement (GIS) — which provides an additional monthly income amount to eligible individuals who already receive Old Age Security. That lack of knowledge is particularly unfortunate because, while there is no need for an individual to apply in order to receive an Old Age Security benefit, anyone who wishes to receive the GIS must apply to do so. (Automatic enrollment in GIS is something that is planned for future implementation, but is not yet in place.). Finally, while the OAS benefit is a standard amount for most recipients, the rules governing eligibility for GIS, and the amount which a particular individual will receive, are more complex.

The first and most basic rule of GIS eligibility is that GIS is paid only to individuals who are already receiving the Old Age Security benefit. Canadians can begin receiving such OAS benefit at age 65, or can defer receipt of that benefit up until the age of 70. However, regardless of the age at which an individual chooses to begin collecting OAS, he or she cannot receive the GIS until that OAS benefit has started.

There is a perception that GIS benefits are available to only the lowest income seniors. While it is true that eligibility for the GIS is tied to income, the current reality is that in the first quarter of 2017, nearly 2 million Canadians, or nearly one-third of those who collect OAS, also received GIS benefits.

The basic rule is that single (or divorced or widowed) individuals who have less than $17,688 in net income for the previous year are eligible to receive at least partial GIS benefits each month. Once net income exceeds the $17,688 threshold, eligibility for GIS is completely eliminated. That figure is somewhat deceiving, however, as not all income sources are treated the same way when it comes to determining net income for purposes of assessing GIS eligibility. When determining such eligibility, the sources from which income is received is nearly as important as the amount of that income.

Generally, in calculating net income for purposes of determining GIS eligibility, the following income amounts are included:

• Canada Pension Plan or Quebec Pension Plan amounts;
• amounts received from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF);
• amounts received from a registered pension plan (i.e., an employer-sponsored pension plan); and
• investment income (interest, dividends, etc.) from all sources.

The following income amounts are not included in net income for purposes of determining GIS eligibility:

• Old Age Security amounts; and
• any withdrawals from a tax-free savings account (TFSA).

Finally, many retirees work part-time, whether out of financial need or for social reasons. In calculating net income to determine GIS eligibility, an exemption is provided for the first $3,500 in employment income earned each year — in other words, the first $3,500 in employment income earned is not included in net income for GIS eligibility purposes.

The exclusions and partial exclusions from the net income calculation for GIS purposes can mean that someone who would not seem to be eligible by reason of his or her total income may in fact be able to receive at least partial GIS benefits, as in the following example.

A single individual who is over age 65 receives the following income amounts in 2016:

• $7,200 in Canada Pension Plan retirement benefits;
• $6,840 in Old Age Security benefits;
• $6,000 of income from part-time employment;
• $5,000 in TFSA withdrawals; and
• $3,000 in RRIF withdrawals.

Total income for the year — $28,040

That total income would seem to put the individual well over the eligibility threshold for receiving even partial GIS. However, for purposes of determining such eligibility, not all of the income amounts adding up to that $28,040 in total income will be included. Specifically, the $6,840 in OAS benefits is excluded, as is the $5,000 amount withdrawn from the individual’s TFSA. As well, the first $3,500 in employment income is excluded in computing net income for this purpose. As a result, more than half of the taxpayer’s income amounts received during 2016 are excluded from the computation of net income, and that computation, for purposes of determining GIS eligibility looks like this:

• $7,200 in Canada Pension Plan retirement benefits;
• $3,000 in RRIF withdrawals;
• $2,500 in employment income (the first $3,500 in such income being exempt)

Net income for GIS eligibility purposes — $12,700

Once the adjustments required to determine GIS eligibility are made, the individual’s income is cut by more than half, and the resulting $12,700 in net income is $5,000 below the $17,688 income cut-off for GIS eligibility of $17,688.

In 2017, an individual who is single, divorced, or widowed and is eligible for a full GIS amount will receive $871.86 per month. That amount is reduced as income increases and is eliminated entirely where the individual’s net income exceeds the $17,688 cut-off.

A similar calculation is required for taxpayers who are married. The net income calculation is the same, but the cut-off amount above which GIS eligibility for both spouses is eliminated, where both spouses are receiving OAS, is $23,376. Where one of the spouses does not receive OAS, the combined income threshold for GIS eligibility is $42,384. More information on the benefit and income cut-off amounts for the current quarter (July to September 2017), as well as links to tables which will show the exact amount of GIS payable at different income levels, can be found on the Canada.ca website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html.

A final note — where individuals receive the Guaranteed Income Supplement, whether the full benefit or partial amounts, all such amounts received are non-taxable.

The Canada Revenue Agency (CRA) doesn’t publish information or statistics on the number of individual taxpayers who owe it money in the form of back taxes, interest, or penalties. Nonetheless, it’s a safe assumption that some percentage of the 28 million or so Canadians who filed a tax return this past spring either couldn’t pay their 2016 taxes when due or still owe money from past years, or both. Being unable to pay one’s bills on time and as due obviously isn’t desirable, no matter who the creditor is. There are, however, a number of reasons why owing money to the tax authorities is a particularly bad idea.

The Canada Revenue Agency (CRA) doesn’t publish information or statistics on the number of individual taxpayers who owe it money in the form of back taxes, interest, or penalties. Nonetheless, it’s a safe assumption that some percentage of the 28 million or so Canadians who filed a tax return this past spring either couldn’t pay their 2016 taxes when due or still owe money from past years, or both. Being unable to pay one’s bills on time and as due obviously isn’t desirable, no matter who the creditor is. There are, however, a number of reasons why owing money to the tax authorities is a particularly bad idea.

Those reasons start with the interest cost of carrying such debt. Even with the recent increase, interest rates remain near historic lows, but 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 2017, 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 many credit card balances, it is the interest calculation method used by the CRA 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.

The CRA also has a very broad range of options at its disposal to compel payment, and a very long period of time in which to use them. Where a taxpayer hasn’t paid an amount owed within 30 days after he or she receives a Notice of Assessment stating the amount owed, the CRA will usually contact the taxpayer, by phone or by mail, with a request for payment. If the taxpayer does not contact the CRA to make a payment or set up a payment arrangement within 90 days after the date the Notice of Assessment was mailed, the CRA will likely resort to its other collection options.

The CRA has the right, where there are any amounts owed to the taxpayer by any other department of the federal government (for example, a goods and services tax credit amount) to, in effect, seize those amounts and apply them to the tax debt. The CRA also has the authority to intercept (or garnish) money which may be owing to the taxpayer from a third party, like an employer and, as a last resort, can direct that the taxpayer’s assets be seized and sold to satisfy the tax debt.

Of course, the CRA’s goal, like that of any other creditor, is to get the debt paid without having to resort to expensive and time-consuming administrative or legal processes.  It’s relatively rare for a tax debt to reach the stage of litigation or garnishment, as it is in everyone’s interest to resolve matters before things reach that point. And, perhaps contrary to popular belief, the CRA has some flexibility. When the amount of taxes due on filing 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 it to make such arrangements. Taxpayers can use the CRA’s automated TeleArrangement service at 1-866-256-1147, for which it is necessary to provide one’s social insurance number and date of birth, and the amount which appeared 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 time. For those who wish to speak to an actual representative of the CRA, a toll-free telephone line (1-888-863-8657) is staffed by agents from Monday to Friday, except on statutory holidays. 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.

The alternative to making a payment arrangement and becoming subject to the CRA’s punitive interest assessment practices is sometimes to borrow the required funds from a third party and pay the CRA in full as soon as possible. Especially where the taxpayer can provide some security — like the equity in a home — it may be possible to borrow funds at less than the 5% interest rate currently being charged by the CRA on overdue tax amounts.

One final blow: interest paid on tax debts, whether paid to the CRA or to a third party lender, is not deductible from income.

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 #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.

Tax-free savings accounts (TFSAs) have been part of the Canadian tax system now for nearly a decade, and millions of Canadians utilize them as a savings vehicle, whether for short-term or long-term purposes.

Of all of the tax-deferral or tax-savings plans available to Canadians, TFSAs undoubtedly provide the greatest flexibility, as the TFSA rules allow taxpayers to both carryover allowable contribution room to future years and to re-contribute amounts withdrawn. However, that very flexibility (especially the ability to re-contribute previous withdrawals) also has the potential to cause taxpayers to run afoul of the rules by getting into an inadvertent overcontribution position, resulting in the imposition of penalty taxes.

Tax-free savings accounts (TFSAs) have been part of the Canadian tax system now for nearly a decade, and millions of Canadians utilize them as a savings vehicle, whether for short-term or long-term purposes.

Of all of the tax-deferral or tax-savings plans available to Canadians, TFSAs undoubtedly provide the greatest flexibility, as the TFSA rules allow taxpayers to both carryover allowable contribution room to future years and to re-contribute amounts withdrawn. However, that very flexibility (especially the ability to re-contribute previous withdrawals) also has the potential to cause taxpayers to run afoul of the rules by getting into an inadvertent overcontribution position, resulting in the imposition of penalty taxes.

A brief recap of the TFSA rules: every Canadian aged 18 years of age and older can contribute a specified annual amount to a TFSA ($5,500 for 2017). Funds contributed to the TFSA are not deductible from income, but investment income earned by those funds is not taxed, either as it accrues or on withdrawal. Where a taxpayer does not contribute to a TFSA in a particular tax year, the contribution not made can be carried forward and that contribution made in any subsequent year. As well, TFSA holders can withdraw funds from their plan at any time, free of tax, and funds withdrawn can be re-contributed, but not until the following year. Therefore, each taxpayer’s contribution limit for a particular year is that year’s specified annual amount, plus any allowable contributions not made in previous years and carried forward, plus amounts withdrawn in any previous year but not yet re-contributed. Where, however, a taxpayer contributes more than maximum allowable contribution during a taxation year, a penalty tax of 1% per month of the excess is imposed.

It’s apparent that, especially where there are carryforward amounts and/or there have been withdrawals from a TFSA, calculating one’s current year contribution room can be complex. At one time the Canada Revenue Agency notified taxpayers of their current year TFSA contribution limit on the annual Notice of Assessment, but that is no longer the case. Now, the easiest way to find out one’s current year contribution limit is by calling the CRA’s Individual Income Tax Enquiries Line at 1-800-959-8281 or its automated Tax Information Phone Service (TIPS) line at 1-800-267-6999. Taxpayers who have registered for the Agency’s My Account online service can use that service to find the same information.

Once the taxpayer knows his or her contribution limit for 2017, it’s time to make sure that current contribution plans for the year will not put the taxpayer in an overcontribution position. Some taxpayers contribute on a regular, often monthly basis, while others are in the habit of depositing regular or irregular or periodic income receipts, like a tax refund or tax benefit amount, into their TFSA. Either way, after finding out one’s current year contribution limit, it’s necessary to calculate how much has already been contributed in 2017. The difference between those two figures represents the balance which can be contributed before the end of the year without getting into an overcontribution position and incurring penalties. And, it’s important to remember that if withdrawals have been or will be made during 2017, those amounts cannot be re-contributed until after the end of this year.

If it’s necessary to adjust regular contributions in order not to go “offside” by the end of the year, the best time to do it is obviously before getting into that overcontribution position. As soon as a taxpayer is in an overcontribution position, the 1% penalty tax is imposed for that month, even if the excess funds are withdrawn before the end of the month -  in other words, as explained in the Canada Revenue Agency guide to TFSAs “[I]f, at any time in a month, you have an excess TFSA amount, you are liable to a tax of 1% on your highest excess TFSA amount in that month.”

Especially where TFSA contributions are set up to occur regularly, 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 arrangements. However, an “out of sight and out of mind” approach rarely makes for good financial and tax planning, and checking on the status of one’s TFSA on a periodic (at least quarterly) basis can help to ensure that everything is as it should be, and that unnecessary penalties are avoided.

As the Canada Revenue Agency (CRA) notes on its website, new tax scams are devised every single day of the week. And, despite the cautionary tales which appear frequently in the media and the warnings posted by the CRA on its website, Canadians continue, with regularity, to fall victim to each new (and old) tax scam and tax fraud.

As the Canada Revenue Agency (CRA) notes on its website, new tax scams are devised every single day of the week. And, despite the cautionary tales which appear frequently in the media and the warnings posted by the CRA on its website, Canadians continue, with regularity, to fall victim to each new (and old) tax scam and tax fraud.

While Canadians are contacted every day by would-be fraud artists, there seems to be something about a (purported) communication from the tax authorities which makes people especially vulnerable. Perhaps it is the fact that most Canadians are unfamiliar with the workings of a system with which they interact, in most cases, only once a year. It’s also possible that they are apprehensive about the real (or rumoured) powers of the CRA or the federal government to cause them grief, and therefore suggestible. Whatever the reason, it’s often the case that even those who would normally be able to discern that what they are being told doesn’t make sense seem to suspend their disbelief when dealing (by phone or by e-mail) with someone who they believe represents the CRA.

While tax scams are a year-round activity, such scams flourish during the spring and early summer. Tax returns are filed in the spring and the CRA then issues a Notice of Assessment to each tax filer. 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 receive, at this time of the year, a communication purporting to be from the CRA, with a message regarding that person’s taxes.

Generally, there are two ways in which fraud artists prey on taxpayers, In the first, the taxpayer is contacted by e-mail and advised that he or she is owed money by the federal government. In order to receive the money owed, the taxpayer must click on a link in that e-mail. The link leads, not to a federal government website, but to a “dummy” site closely resembling the actual CRA website. The taxpayer must then, in order to have his or her “refund” processed, provide personal and financial information which can then be used by the tax scammer.

The second approach, and one which has been used with great success over the past few years, is to falsely inform the taxpayer (this time, usually by telephone) that he or she owes money to the CRA and that immediate payment must be made. A failure to pay, the taxpayer is told, will mean seizure of his or her assets, cancellation of his or her passport and/or social insurance card or other government-issued identification, deportation, or imprisonment. Further, such payment must be made only by wire transfer or pre-paid credit card. This type of fraud has become so ubiquitous, in fact, that many businesses which provide money-transfer services post warnings on their premises to would-be users of the need to be aware of the fraud risk.

There are, in fact, several things about such a phone call that should alert the recipient to the fact that it’s not legitimate. First of all, if a taxpayer does owe money to the CRA, he or she will be first advised of that fact by mail and never by telephone – generally in his or her Notice of Assessment for a tax return filed. Second, the CRA would never suggest or require that a taxpayer send funds to the Agency by wire transfer or by using a prepaid credit card.  Any payment of money owed to the CRA is made online, through the CRA website, through the taxpayer’s financial institution (in person or online), or by mailing a cheque to the Agency. Finally, any suggestion that the CRA would (or could) cancel a taxpayer’s passport or other government issued ID for failure to make payment is simply ludicrous.

There is 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, which appear frequently, are usually identified on the CRA website at www.cra-arc.gc.ca/scrty/frdprvntn/menu-eng.html. Unfortunately, many such scams originate outside Canada, limiting the ability of the CRA and law enforcement authorities to monitor or stop them. For the most part, therefore, the onus will fall on individual taxpayers to protect themselves, through a healthy degree of caution and even skepticism.

The CRA suggest that, in order to avoid becoming a victim of such scams, taxpayers should keep the following general guidelines in mind.

The CRA will never:

• ask for personal information of any kind by email or text message;
• request payment by prepaid credit cards;
• give taxpayer information to another person, unless formal authorization is provided by the taxpayer; or
• leave personal information on an answering machine.

When in doubt, a taxpayer should ask himself or herself the following:

• Did I sign up to receive online mail through My Account, My Business Account, or Represent a Client?
• Did I provide my email address on my income tax and benefit return to receive mail online?
• Am I expecting more money from the CRA?
• Does this sound too good to be true?
• Is the requester asking for information I would not provide in my tax return?
• Is the requester asking for information I know the CRA already has on file for me?

Telephone scammers will often leave a voice mail with a phone number at which the taxpayer can reach them. Instead of calling that number, the taxpayer should call the CRA Individual Income Tax Enquiries line at 1-800-959-8281. Service agents at that line will be able to access the taxpayer’s tax records and provide information on whether the taxpayer does indeed owe any funds to the CRA. As well, taxpayers who receive what seems to be a suspicious communication should report that by e-mail to info@antifraudcentre.ca – or they can call the Canadian Anti-Fraud Centre at 1-888-495-8501.

If the worst has already happened, and the taxpayer has been scammed, the Anti-Fraud Center has the following advice.

Step 1: Gather all information about the fraud. This includes documents, receipts, and copies of emails and/or text messages.

Step 2: Report the incident to local law enforcement. This ensures that police in that jurisdiction are aware of what scams are targeting their residents and businesses. Keep a log of all your calls and record all file or occurrence numbers.

Step 3: Contact the Canadian Anti-Fraud Centre toll free at 1-888-495-8501 or through the Fraud Reporting System (FRS).

Step 4: Report the incident to the financial institution where the money was sent (e.g., money service business such as Western Union or MoneyGram, bank or credit union, credit card company, or internet payment service provider).

Step 5: Victims of identity fraud should place flags on all their accounts and report to both credit bureaus, Equifax and TransUnion.

Finally, the Centre also warns that victims of fraud are often targeted a second or third time with the promise of recovering money previously lost. Their advice is never to send money to recover money.

Ironically, the extent to which most individuals are now comfortable transacting their tax and financial affairs online or over the phone, and the speed and anonymity of such transactions has made it easier in many ways for fraud artists to succeed in their scam attempts. As ever, the best defence against becoming a victim of such fraud artists is by refusing to provide personal or financial information, and especially never to make any kind of payment, whether by phone, e-mail, or online, without first verifying the legitimacy of the request.

The variety of amounts and kinds of income, deductions taken, and credits claimed on individual income tax returns filed by Canadians each spring is almost limitless. Each of those returns, however, has one thing in common, and that is that each will be assessed by the Canada Revenue Agency (CRA), which will then issue a Notice of Assessment summarizing the Agency’s conclusions with respect to the information filed by the taxpayer. Most important, from the taxpayer’s point of view, the CRA will communicate the amount of federal and provincial tax it believes the taxpayer is required to pay for the tax year just passed.

The variety of amounts and kinds of income, deductions taken, and credits claimed on individual income tax returns filed by Canadians each spring is almost limitless. Each of those returns, however, has one thing in common, and that is that each will be assessed by the Canada Revenue Agency (CRA), which will then issue a Notice of Assessment summarizing the Agency’s conclusions with respect to the information filed by the taxpayer. Most important, from the taxpayer’s point of view, the CRA will communicate the amount of federal and provincial tax it believes the taxpayer is required to pay for the tax year just passed.

In the majority of cases, the return filed by the taxpayer is “assessed as filed” (i.e., the CRA agrees (perhaps with a few arithmetical corrections, or a small overpayment of Canada Pension Plan contributions or Employment Insurance premiums) with the taxpayer’s summary of his or her income and tax situation for the year), and no further action is required by either the CRA or the taxpayer. Sometimes, the Notice of Assessment will show an unexpected refund payable, and when that’s the case it’s a happy day for the taxpayer. In a minority of cases, however, the Notice of Assessment will inform the taxpayer that additional tax amounts are owed to the CRA. When that happens, the taxpayer has to decide whether to just pay up, or to dispute the CRA’s conclusions.

In all cases, the first step is for the taxpayer to determine just how the discrepancy arose. In many cases, the cause is an inputting error made by the taxpayer in preparing the return. Even though the vast majority of taxpayers now prepare the annual tax return using tax return preparation software, errors can still occur. Most often, those errors are made when the tax filer inputs the income and deduction figures which the software will use in computing tax payable for the year. No matter how good the software, it cannot compensate for inaccurate or missing information (e.g., from a T4 or T5 slip). And, since all such information slips are filed with the CRA, in addition to being provided to the taxpayer, it’s likely that the Agency’s systems will pick up on the discrepancy.

It obviously makes no sense to dispute an assessment where the error in reporting is the taxpayer’s and the CRA’s figures are correct. In this regard, it’s also worth repeating that the persistent tax “myth” that says taxpayers aren’t responsible for paying tax on income if they haven’t received an information slip for that income is untrue and always has been. Taxpayers are responsible for keeping track of and reporting all income received, and the fact that an information slip was never received or was lost doesn’t change that fact.

Sometimes the issues which have led the CRA and taxpayer to reach different conclusions are more substantive, often arising out of deductions or credits claimed by the taxpayer to which the CRA believes that taxpayer is not entitled. Where the disagreement is a substantive one, the taxpayer has to decide whether to formally challenge the Notice of Assessment issued by the CRA. Before making that decision, however, 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 Notice of Assessment is a good summary of the taxpayer’s tax situation for the year, it may not always be clear from that summary precisely why the taxpayer and the CRA disagree on the amount of tax payable for the year. At one time it was possible for the taxpayer to have a face-to-face meeting with a representative of the CRA at the taxpayer’s Tax Services Office, but such in-person services were discontinued a few years ago, and taxpayers who want more 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 the return. The name of that tax centre can be found in the top left hand corner of the first page of the Notice of Assessment, and the address and fax number of each such tax centre is available on the CRA website at www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html#summ. Communication with a Tax Centre by phone isn’t possible, as phone numbers for Tax Centres are not available to the public.

If communication with the Individual Enquiries line and with the Tax Centre isn’t sufficient for resolving the differences, and the taxpayer wishes to pursue the matter, the next step is the filing of a Notice of Objection, which formally starts the appeal process with the CRA. The process of pursuing that appeal process will be summarized in the next issue of this newsletter.

By now, halfway through the 2017 tax year, almost all Canadian individual taxpayers will have filed their income tax return for 2016, and most will have received the Notice of Assessment which summarizes their tax situation for that year – income, deductions, credits, and tax payable.

By now, halfway through the 2017 tax year, almost all Canadian individual taxpayers will have filed their income tax return for 2016, and most will have received the Notice of Assessment which summarizes their tax situation for that year – income, deductions, credits, and tax payable.

July also marks the halfway point for the payment of income tax by individual taxpayers for the current taxation year. Employees will have made six months of payments toward their income tax bill for the year, through deductions at source from each paycheque, and taxpayers who pay their income tax by instalment will already have made two of the four tax instalment payments due during 2017.

All of this makes the month of July a good time to assess one’s current year tax situation, make sure that everything is on track, and put in place any adjustments needed to help ensure that there are no unpleasant tax surprises when filing one’s tax return for 2017 next spring. While those steps can be taken at any time before December 31 (or March 1, 2018 for registered retirement savings plans (RRSP) contributions) and still be effective for this taxation year, the reality is that an earlier start means more flexibility. As the calendar year goes on, the opportunities to make a significant difference to one’s current year tax and benefit situation diminish.

For the majority of individual taxpayers there are two basic steps involved in a mid-year tax checkup. First, all tax filing obligations, if not yet done, should be brought up-to-date. Second, it’s necessary to ensure that tax payment obligations for the current tax year are on track to be met, and to make any required adjustments if they are not.

For all taxpayers, the due date for filing of the return for 2016 has passed and any return not yet filed is now late. Most taxpayers know that filing on time is important in order to avoid late-filing penalties and interest charges. Many of them don’t realize, however, that a failure to file, even where no tax is owed, will mean losing access, at least temporarily, to federal and provincial refundable tax credits that are paid monthly to eligible taxpayers.

Eligibility for a number of such credits (the GST/HST credit and the Canada Child Benefit, for instance) are based, in part, on the taxpayer’s income and, of course, that income is determined from the annual tax return. The month of July 2017 marks the beginning of the 2017-18 benefit year for such credits, and benefits paid for that 2017-18 year are based on the taxpayer’s income for 2016. Where a taxpayer hasn’t filed a return for 2016, the federal government can’t determine whether the taxpayer is eligible for any benefits and, if so, what the amount of those benefits will be. Consequently, any payment of such benefits will cease as of July 2017. Once the return is filed and assessed, payment of credits owed can be made retroactively, but there will be a delay. 

Once the return for 2016 has been filed and a Notice of Assessment for that year has been issued by the Canada Revenue Agency and received by the taxpayer, the next step can be taken. In the best-case scenario, there will have been little or no tax owed on filing and little or nothing in the way of a refund. While many taxpayers view a big tax refund as “found money”, the reality is that in most cases a large tax refund means that the taxpayer has overpaid their taxes during the year, and thereby provided the government with an interest-free loan. (No interest is paid on overpayments of tax by the taxpayer prior to the return filing date). In the opposite scenario – a large tax balance owed on filing, the converse is true and generally the taxpayer has paid insufficient tax, whether by way of deductions at source or by tax instalments, through the year. Either way, it’s in the taxpayer’s best interests to make sure that that scenario doesn’t repeat itself for 2017.

To do that, the taxpayer has to come up with a reasonably good estimate of the amount of tax which will be owed for 2017. Most taxpayers, especially employees, will know by mid-year what their total income will be for 2017. Taxpayers whose income hasn’t changed much from 2016 to 2017 can get a good sense of what their tax liability for 2017 will be simply by using the 2016 income tax return form for their province of residence to make that calculation – using, of course, their anticipated income for 2017. (In arriving at that income amount, it’s important to remember to include, in addition to employment income, any other income receipts – e.g., interest received or withdrawal(s) from an RRSP.) If anything, a calculation done using a return form from 2016 will slightly overstate the taxpayer’s tax liability for 2017, owing to the indexation of tax brackets and tax credit amounts. For those who wish to be more precise in their calculation, information on the tax rate brackets and credit amounts which apply for 2017 can be found on the Canada Revenue Agency website at www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html#previousyears. There is no change in federal rates for 2017 and, among the provinces, only Saskatchewan has changed its individual income tax rates for 2017.

It’s worth noting that, this year, there are two caveats to using that 2016 federal return to estimate taxes which will be owed for 2017. In this year’s federal Budget, the system of federal tax credits available to caregivers was significantly revised, and any taxpayer who claimed one of the caregiver tax credits in previous years will need to determine whether he or she is still eligible to do so in 2017. Generally, in situations where a parent who is not infirm lives with his or her adult child, that adult child will likely not be able to claim a caregiver tax credit for 2017 and so tax payable for 2017 should be calculated without including a claim for that credit. More information the impact of the changes to the caregiver tax credit can be found on the CRA website at www.cra-arc.gc.ca/gncy/bdgt/2017/qa01-eng.html.

The other change made this year to federal tax credits is the elimination, as of July 2017, of the public transit tax credit. Taxpayers who claimed that credit for previous years need to take account of the fact that any credit claimable for 2017 will (assuming that the amount of the expenditure for public transit doesn’t change significantly) be approximately half of such claim made in previous years.

Once a rough idea of one’s tax liability for 2017 is arrived at, it’s necessary to figure out whether income tax payments made to date, either by source deductions or instalment payments, match up with that tax liability figure, recognizing that by this point in the year, approximately one-half of 2017 taxes should already have been paid. If they have not, and particularly if there is a shortfall which will mean a balance owing when the tax return for 2017 is filed next spring, the taxpayer will need to take steps to remedy that. Employees can arrange to have the amount of tax withheld at source from each paycheque increased to make up for the shortfall, while those who pay by instalment can increase the amount of the instalment payments to be made in September and/or December to close the gap.

It’s also possible, especially where a taxpayer is making expenditures which will result in one of more large deductions from income for 2017 (for example, for child care expenses, deductible support payments, or an RRSP contribution) to find that taxes are being overpaid. Employees who find themselves in that situation can file a Form T1213, Request to Reduce Tax Deductions at Source, which is available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html with the Agency. On that form, the taxpayer identifies the amounts which will be deducted on the return for the year and, once the CRA verifies that those deductible expenditures are being made, it will authorize the taxpayer’s employer to reduce the amount of tax which is being withheld at source to take account of that deduction. For taxpayers who pay tax by instalments, the process is a simpler one; such taxpayers can simply adjust the amount of instalment payments made in September and/or December to reflect their actual tax liability for 2017.

Most taxpayers, once the return for the past year is filed and assessed, are disinclined to deal with tax matters again before it is absolutely required. Notwithstanding, the investment of a couple of hours of time half way through the year to make sure that one’s current year tax payments are in order, can help avoid a big tax bill next spring.   

In recent years, it seems that the arrival of spring has coincided with a natural or man-made disaster somewhere in Canada. Spring is also, of course, tax return preparation and filing season for most Canadian taxpayers, but it’s likely taxes were the last thing on the minds of families and individuals affected by this spring’s floods. And, in most cases, those families and individuals will not be penalized for failing, in such circumstances, to fulfill their tax obligations in a timely way.

In recent years, it seems that the arrival of spring has coincided with a natural or man-made disaster somewhere in Canada. Spring is also, of course, tax return preparation and filing season for most Canadian taxpayers, but it’s likely taxes were the last thing on the minds of families and individuals affected by this spring’s floods. And, in most cases, those families and individuals will not be penalized for failing, in such circumstances, to fulfill their tax obligations in a timely way.

As it usually does when a natural disaster occurs, the Canada Revenue Agency (CRA) issued a press release reminding affected taxpayers that they could seek relief from any interest and penalties which might otherwise be imposed as the result of late filing or payment of taxes. Such relief is provided under the federal Taxpayer Relief Program and, although natural disasters are the most publicized instances in which the Program is utilized, it is in fact available to all Canadian taxpayers in a variety of circumstances.

The one commonality to all those circumstances is that the taxpayer has been prevented, due to circumstances beyond the individual’s control, and through no fault of his or her own, from meeting his or her tax obligations. Taxpayers who are eligible for the Program can have any interest and penalty charges which would otherwise be imposed for such failure waived. But, it’s important to note that it is only interest and penalty charges which are waived – the Minister has no authority, no matter how dire the taxpayer’s circumstances, to waive the payment of actual taxes owed.

The circumstances in which the Taxpayer Relief Program might apply range from a natural (or man-made) disaster, personal or family illness or death, or significant financial hardship. No matter what the reason for the need for relief, the process by which a request for such relief is made is the same.

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/README.html, and which can be used to file an application for relief. While use of the prescribed form isn’t mandatory – a letter to the CRA will suffice – using that prescribed form will ensure that all of the required information is included and that it is clear to the CRA that a request for relief is being made. For each request filed, the following information must be provided:

• 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 other identification number assigned by the CRA;
• the tax year(s) or fiscal period(s) involved;
• the nature of the costs for which relief is requested, whether interest or penalty charges, or both, and the amounts involved;
• the facts or reasons supporting the belief that the imposition of interest or penalty charges 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;
• any relevant documents; and
• a complete history of events, including any measures taken (for instance, payments and payment arrangements) to resolve the non-compliance, and when they were taken.

If the reasons for the taxpayer’s inability to meet his or her tax obligations include financial hardship, the taxpayer must make a full financial disclosure, including statements of income and expenses. There is a form provided by the CRA  – Form RC376, Taxpayer Relief Request – Statement of Income and Expenses and Assets and Liabilities for Individuals, which can be used in such circumstances. That form can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/rc376/README.html.

All relief requests must be sent to the Tax Processing Center which serves the area 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 that listing is also included as part of Form RC4288. Taxpayers who have registered for the CRA’s online service My Account can submit their relief request online.

Once received, 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. Once all the needed information is submitted, a determination will be made of whether the taxpayer’s request for interest and/or penalty relief is to be approved in full, approved in part, or denied. That determination will take into account the following factors:

• 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 the taxpayer acted quickly to remedy any delay or omission.

Where the decision is made that full relief will be provided, that decision will be communicated to the taxpayer, without reasons. Where, however, the decision is to deny relief, or allow such relief only in part, the taxpayer will be given the reasons for such decision. Along with those reasons, the taxpayer will receive information on his or her options where the CRA has made a decision with which he or she does not agree.

More detailed information on the CRA’s Taxpayer Relief Program can be found on the Agency’s website at www.cra-arc.gc.ca/gncy/cmplntsdspts/cnclwvpnlty/menu-eng.html.

For many years, post-secondary students have financed their educations in part through private savings and often in part through government student loans, which are generally interest-free while the student is in school. As well, the bulk of costs incurred to attend post-secondary education (or to finance it) have been eligible for a tax deduction or credit, at both the federal and provincial/territorial levels. Beginning in 2017, however, changes to that regime at both the federal level and in some provinces will mean changes to the way students (and their parents) pay for post-secondary education.  

For many years, post-secondary students have financed their educations in part through private savings and often in part through government student loans, which are generally interest-free while the student is in school. As well, the bulk of costs incurred to attend post-secondary education (or to finance it) have been eligible for a tax deduction or credit, at both the federal and provincial/territorial levels. Beginning in 2017, however, changes to that regime at both the federal level and in some provinces will mean changes to the way students (and their parents) pay for post-secondary education.  

Generally speaking, some (but not all) provincial governments are moving away from the system of tax breaks for education costs which are currently in place, in favour of a system of more generous direct financial assistance in the form of loans and grants. The availability and amount of those loans and grants are often tied to family income. And, to add to the potential confusion, the federal and provincial changes take effect at various times through 2017 and into 2018. The changes made at the federal level are relatively minor in dollar terms, but they have the broadest impact, as they affect post-secondary students across Canada, regardless of their province of residence or where they attend school.

Federal rules in place prior to 2017 allowed post-secondary students to claim a non-refundable tax credit (non-refundable meaning that the credit can reduce federal tax otherwise payable, but cannot create or increase a refund) for tuition fees paid. Two other federal non-refundable credits were also claimable, but those credits do not require any expenditure on the part of the student. An education tax credit of $60 per month of full-time attendance and $18 per month of part-time attendance in post-secondary education could be claimed. As well, as “textbook tax credit” of  $9.75 per month for full-time students and $3 per month for part-time students was claimable. Although the latter credit was called the “textbook tax credit” there was not, in fact, any requirement that the student have purchased textbooks, nor was the amount of the credit tied to any expenditure made on textbooks. Tuition, education, and textbook tax credits were claimable by the student himself or herself in the year in which they were incurred, or could be transferred to a spouse, parent, or grandparent. Where all such credits were not utilized during that year, they could be carried forward to a future year, in which they were claimable only by the student – carryforward credits could not be transferred to any other person. Finally, where students incurred debt under a government (federal or provincial) student loan program, the interest paid on such debt was deductible from the student’s income, without limit.

The federal Budget brought down in March 2016 made changes to these rules. The federal changes announced in that Budget were effective as of January 1, 2017, meaning that the former set of rules applied for purposes of the first (September to December 2016) term of the 2016-17 academic year, while the second (January to April 2017) term of that academic year is governed by the new rules.

Those rules will eliminate both the education and textbook tax credits and so, when post-secondary students file their return for 2017 next spring, such credits will not appear on the return form. Students will still be entitled to claim a tax credit for eligible tuition amounts paid, and the deduction for interest paid on government students loans is also unaffected by the changes.

Most post-secondary students do not, of course, have much income. Generally, their income for the year consists of amounts earned from a summer job and, perhaps, some income from part-time work during the school year. All of the tax credits related to post-secondary education costs are non-refundable credits, and students who don’t earn enough to have tax payable don’t claim any such credits earned during the year. Consequently, many if not most post-secondary students graduate with a significant amount of accumulated credits which can be claimed after graduation, when income is (hopefully) higher. The good news for such students is that the elimination of the education and textbook credits does not affect the ability to carry forward credits earned before 2017. In other words, tuition, education and textbook tax credits earned in 2016 and prior years can be claimed by the student in any subsequent year, without limit.

Before 2017, the tuition and education tax credits were available to post-secondary students at both the federal and provincial levels. The provinces have, however, in their 2016 and 2017 Budgets, taken some of the same steps as the federal government. The changes at the provincial level are not, however, uniform, and they do not take effect at the same time. What follows is a summary of the changes which have been announced by the provinces.

Ontario

The Ontario government announced, as part of its 2016 Budget, that it would be eliminating the provincial tuition and education tax credits, effective as of the fall of 2017.

The implementation date for those two changes is as follows: Ontario students will be able to claim the tuition tax credit for eligible tuition fees paid in respect of studies up to and including September 4, 2017, and would be able to claim the education tax credit for months of study before September 2017. (Ontario does not offer a textbook tax credit.) Consequently, students will be able to claim the tuition and education tax e credits for the January to April semester of the 2016-17 academic year, as well as for any qualifying programs taken during the summer of 2017. Note that it is the date of the studies and not the date of payment which determines eligibility for the credit – consequently, paying tuition for the fall 2017 (September-December 2017) term prior to September 4 will not enable the student to claim a tuition tax credit for that amount.

The Ontario changes also affect the ability of taxpayers to carry forward tuition and education credits earned prior to September 2017. Specifically, tax filers who are resident in Ontario on December 31, 2017, and have unused tuition and education tax credits available for carryforward, would be able to claim them in future years. Tax filers who move to Ontario from other provinces after December 31, 2017, would no longer be able to claim their accumulated tuition and education tax credits in Ontario.

New Brunswick

Changes announced in 2016 eliminated the provincial education and tuition income tax credits effective as of January 1, 2017, and no new tuition or education tax credits may be accumulated for the 2017 or future taxation years for provincial income tax purposes. However, any unused tuition and education credit amounts from years prior to 2017 will still be available to be claimed directly by the student in 2017 and subsequent taxation years.

The province of New Brunswick does not offer a textbook tax credit.

Saskatchewan

The province of Saskatchewan announced, as part of its 2017 Budget, that the provincial tuition and education tax credits would be eliminated as of July 1, 2017. However, unused amounts carried forward from previous taxation years will remain available to be claimed.

The province of Saskatchewan does not offer a textbook tax credit.

British Columbia

In its 2017 Budget, the province announced that the provincial education tax credit would be retained for the 2017 tax year, but would be eliminated effective as of January 1, 2018. Unused education amounts carried forward from previous years remain available to be claimed after 2017.

No changes were announced with respect to the provincial tuition tax credit. The province of British Columbia does not offer a textbook tax credit.

Manitoba

In its 2017 Budget, the Manitoba government announced that the provincial education and tuition tax credits would be retained.

Prince Edward Island

The province confirmed, as part of its 2017-18 Budget, that no changes would be made to provincial tax credits claimable by post-secondary students. Consequently, the tuition tax credit and the education tax credit continue to be available for provincial tax purposes. Prince Edward Island does not offer a textbook tax credit.

Many of the provincial changes to the tax treatment of post-secondary education costs have been made concurrently with enhancements to loan and grant programs administered by those provinces for post-secondary students. In some cases, and often dependent on family income, those grant programs can cover much of a student’s tuition costs.

Deciding which university or college to attend – whether close to home or in another province – is, of course, about much more than just the relative costs involved, and the tax treatment of those costs. However, it’s also undeniable that getting a post-secondary education means making a big financial commitment and, often, incurring significant debt. Students and their parents should be aware that there are new rules and programs, both federally and in many provinces, that will affect that financial commitment.

If spring is the season for real estate sales in Canada, then summer is the time when all those real estate buyers and sellers pack up their belongings and move to their newly purchased homes. And, while buying a new home and making that move is usually something home buyers are doing by choice, that doesn’t make the actual process of moving any less stressful or costly.

If spring is the season for real estate sales in Canada, then summer is the time when all those real estate buyers and sellers pack up their belongings and move to their newly purchased homes. And, while buying a new home and making that move is usually something home buyers are doing by choice, that doesn’t make the actual process of moving any less stressful or costly.

Many Canadians are aware that a tax claim of some kind can be made in respect of costs incurred in relation to a move, but few are aware that such tax claims can be made only in specific circumstances, or that there are detailed (and sometimes counter-intuitive) rules which govern what expenses can be claimed, and in what amounts.

The starting point in determining whether tax relief will be available for moving costs is an assessment of the reason for the move. The applicable tax rule is that eligible moving expenses will be deductible only where the move is made in order to bring the taxpayer at least 40 kilometres closer to his or her new work location. Put another way, a moving expense deduction will be available where the distance from the new home to the taxpayer’s new work location is at least 40 kilometres less than the distance from the former home to that new work location.   

Where that requirement is met, the taxpayer can claim a deduction (meaning that costs claimed reduce the taxpayer’s taxable income) for eligible costs incurred, but that deduction can be made only from income earned at the new location. So, a taxpayer who makes an eligible move at the beginning of October can deduct eligible moving costs only from income earned at the new location between the date of the move and December 31^st, which is the end of the tax and calendar year. Moving is expensive and there may well be situations, particularly where the move is a long distance one, where costs incurred are greater than income earned at the new location during the year of the move. In such circumstances, the taxpayer can carry forward any moving costs not claimed for that year and deduct them from income earned in that new work location in the following taxation year(s).

The kind and variety of expenses which are involved in moving can seem almost limitless, and the Canada Revenue Agency (CRA) has formulated a set of detailed rules which govern which moving-related expenses can or cannot be deducted.

The general rule is that a taxpayer can claim reasonable costs for expenses incurred in the following categories.

• Transportation and storage costs — Taxpayers can claim transportation and storage costs (such as packing, hauling, movers, in-transit storage, and insurance) for household effects, including items such as boats and trailers.

• Temporary living expenses — Costs incurred for a maximum of 15 days for meals and temporary accommodation near the old and the new residence for the taxpayer and members of his or her household can be claimed.

• The cost of cancelling a lease — Taxpayers can claim the cost of cancelling the lease for their old residence. However, it’s not possible to claim rental payments for any period prior to the cancellation of that lease, whether or not the taxpayer occupied the residence during this period.

• Incidental costs related to the move — Taxpayers can claim the cost of changing their address on legal documents, replacing driver’s licences and non-commercial vehicle permits (not including insurance), and the cost of utility hook-ups and disconnections.

• Costs to maintain the old residence when vacant — Taxpayers can claim up to $5,000 in costs for interest, property taxes, insurance premiums, and the cost of heating and utilities expenses paid to maintain their old residence when it was vacant after they moved, and during a period when reasonable efforts were being made to sell that residence. The costs must have been incurred when the old residence was not ordinarily occupied by the taxpayer or any of his or her family members, and cannot be claimed for a time period during which the old residence was rented.

• Costs involved in selling the old residence — Taxpayers can claim the cost of selling their old residence, including advertising, notary or legal fees, real estate commissions, and mortgage penalties incurred when the mortgage was paid off prior to maturity.

There is an equally long list of moving related expenses for which the CRA will not allow a deduction to be claimed, and those are as follows:

• expenses for work done to make the taxpayer’s old residence more saleable;
• any loss from the sale of the former home;
• travel expenses for house-hunting trips before the move;
• the value of items movers refused to take, such as plants, frozen food, ammunition, paint, and cleaning products;
• travel expenses for job hunting in another city;
• expenses to clean or repair a rented residence to meet the landlord's standards;
• expenses to replace personal-use items such as toolsheds, firewood, drapes, and carpets;
• mail-forwarding costs (such as with Canada Post);
• costs of transformers or adaptors for household appliances;
• costs incurred in the sale of the old residence if the taxpayer delayed selling for investment purposes or until the real estate market improved; and
• mortgage default insurance.

In most cases, taxpayers drive themselves and their families to the new location and the travel costs incurred in doing so qualify for the moving expense deduction. The range of costs which are included in “travel costs” for this purpose are quite broad, and include vehicle expenses and the cost of meals for the taxpayer and his or her family. In this area, taxpayers can choose one of two available methods for calculating those costs. Those who are willing to do so can obtain and keep receipts for each eligible travel cost incurred in the course of making the trip to their new home, and can claim the total amount paid. Those who don’t want the headache of accumulating and tallying dozens of receipts can use the “simplified method” provided by the CRA. That method allows taxpayers to claim vehicle and meal expenses based on a flat rate for each. The vehicle expense claim is a per-kilometer rate amount, with a specific rate set for each province. Where the move is an inter-provincial one, the applicable rate is always the one for the province from which the travel begins. The meal expense rate is, however, the same, regardless of the taxpayer’s province of residence.

The allowable flat-rate claims for both travel costs and meal costs are outlined on the CRA website at www.cra-arc.gc.ca/travelcosts/. And, as the CRA notes on that website, while taxpayers who claim the flat rate do not have to provide detailed receipts, the Agency does require that they provide “some documentation” to support their claim.

Even when a move represents a positive, desired change, there’s no escaping the fact that moving is disruptive, stressful, and expensive for everyone concerned. The tax system can’t do anything to lessen the stress of relocation, but it can and does mitigate the financial costs involved for taxpayers whose are entitled to claim a deduction from income for such costs.

Once they’ve completed and filed their 2016 tax return, most Canadians give a sigh of relief that the dreaded annual chore is done, and that income taxes will be out of sight and out of mind until the next filing deadline rolls around.

If all goes as planned, that is how events will unfold. In the best case scenario, the Canada Revenue Agency (CRA) will issue a Notice of Assessment which indicates that the Agency agrees with the taxpayer’s summary of his or her income, deductions, credits, and taxes payable for the past year, and that it has no further questions or concerns. And, for the vast majority of Canadians, that is exactly how things will unfold. For many others, however, there will be a few more questions to be answered or steps to be taken before the tax filing and assessment process for the year is finally completed.

Once they’ve completed and filed their 2016 tax return, most Canadians give a sigh of relief that the dreaded annual chore is done, and that income taxes will be out of sight and out of mind until the next filing deadline rolls around.

If all goes as planned, that is how events will unfold. In the best case scenario, the Canada Revenue Agency (CRA) will issue a Notice of Assessment which indicates that the Agency agrees with the taxpayer’s summary of his or her income, deductions, credits, and taxes payable for the past year, and that it has no further questions or concerns. And, for the vast majority of Canadians, that is exactly how things will unfold. For many others, however, there will be a few more questions to be answered or steps to be taken before the tax filing and assessment process for the year is finally completed.

The first indication that a taxpayer may have that there is more to be done is the receipt of a letter from the CRA. Despite what most taxpayers think, the arrival of such a letter doesn’t mean that the Agency necessarily doubts the information the taxpayer provided on his or her return, or that claims made for deductions or credits on that return are going to be denied. Most often, such communication from the CRA is part of the Agency’s standard return review process. This year, between mid-February and late May, the Agency received over 26 million individual income tax returns. For several years, the CRA has encouraged taxpayers to file their returns online, and Canadians have clearly received the message. This year, nearly 23 million of those 26 million returns were filed online

There are, clearly, a lot of advantages to online filing. It’s much quicker and taxpayers can use tax return preparation software which does much of the calculation work, once the required figures are input. What online filing lacks, by definition, is a paper trail. While the CRA will have received copies of T-slips documenting employment income, pension income, or investment income received by taxpayers, claims made by taxpayers for child care expenses incurred or medical costs paid during the year are received by the CRA without any form of documentation. And, while the returns filed by most Canadians are accurate and complete, there will inevitably be exceptions, whether inadvertent or deliberate. The CRA clearly can’t seek out and review documentation for every deduction claimed on every return filed, but it does carry out its return review process as a way of minimizing those exceptions. Often, a letter received as part of the return review process will simply ask the taxpayer to provide documentation, by way of receipts, for amounts (like medical expenses or child care costs) claimed on the return.

In other cases, the CRA will contact a taxpayer before issuing a Notice of Assessment where figures reported on the return don’t match those which appear on information slips filed by employers, pension plans, or financial institutions. Quite often, this is the result of an input error by the taxpayer, who has received $32,546 in pension income but inadvertently enters that amount as $32,456 in completing the return. While tax return preparation software correctly calculates the tax payable by an individual, it does so based on the figures with which it is provided and any input error will be incorporated into its calculations.

Queries issued by the CRA before a Notice of Assessment is issued for a particular return are part of what is known as the Agency’s Pre-Assessment Review Program.  And, at this stage, most such queries are raised either on a random basis, or to clarify what seems to be an obvious error or inconsistency which appears in the information provided on the taxpayer’s return. Such queries are not, contrary to what most taxpayers think, a clear sign that the  taxpayer involved is going to be audited in the near future.

What is the case, however, is that where the CRA asks a taxpayer for confirmation or  clarification of information provided on his or her return, the taxpayer is required to respond. In most cases, providing a prompt response is also in the taxpayer’s best interests. While taxpayers aren’t required to provide receipts or other documentation when they file their returns, the CRA does have the right to ask for such documentation.

Where a request for documentation is received from the Agency, the taxpayer should follow the following instructions in responding:

• include the reference number found at the upper right corner of the CRA’s letter;
• send the reply to the address in that letter within the time frame indicated; and
• provide all receipts and/or other documents requested.

Finally, it should be noted that the Agency can only assess on the basis of the information with which it is provided. Where a taxpayer ignores the CRA’s request for documentation of an amount claimed by way of credit or deduction, the CRA is entitled to and will assess on the basis that such documentation does not exist, and the taxpayer’s claim will be denied.

Deux infolettres trimestrielles ont été ajoutées - l’une traite de sujets concernant les particuliers et l’autre, de sujets concernant les sociétés.

Deux infolettres trimestrielles ont été ajoutées - l’une traite de sujets concernant les particuliers et l’autre, de sujets concernant les sociétés. Ces infolettres peuvent être consultées ci-dessous.

Sociétés :

Numéro 40 - Sociétés

Particuliers :

Numéro 40 - Particuliers

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 #40 Corporate

Personal:

Issue #40 Personal

Older taxpayers who have recently completed and filed their tax returns for 2016 may face an unpleasant surprise when that return is assessed. The unpleasant surprise may come in the form of a notification that they are subject to the Old Age Security “recovery tax” – known much more familiarly to Canadians as the OAS clawback.

Older taxpayers who have recently completed and filed their tax returns for 2016 may face an unpleasant surprise when that return is assessed. The unpleasant surprise may come in the form of a notification that they are subject to the Old Age Security “recovery tax” – known much more familiarly to Canadians as the OAS clawback.

The OAS clawback is a product, in part, of the way in which Canada’s government-sponsored retirement income system is structured. OAS is one of the two main components of that system – the other being the Canada Pension Plan (CPP). While many retired Canadians receive both OAS and CPP benefits, the two plans are quite different. The amount of CPP benefit received by an individual Canadian is the product of an actuarial calculation based largely on the amount of contributions made by that individual throughout his or her working life – other sources of income or the recipient’s overall income level are irrelevant. Eligibility for OAS, on the other hand, is based on the number of years of Canadian residency and the amount received is set by law. Canadians who are at least 65 years old and have lived in Canada for at least 40 years after they turned 18 are eligible for full OAS pension (the maximum OAS pension payable for the second quarter of 2017 is $578.53). Where the length of Canadian residency is less than 40 years, a pro-rated amount of OAS pension may be received.

The differences between the CPP and the OAS extend to how each program is financed. The CPP, like all contributory pension plans, is financed out of contributions made by plan members and by investment income resulting from the investment of those contributions. Although the federal government administers the CPP, no tax revenues are used to support it. OAS, on the other hand, is paid from general federal government revenues.

As the Canadian population ages, the cost of the OAS program to the federal government has continued to increase. Although there was no universal agreement on the long-term effect of those demographics on federal government finance, the federal government determined, several years ago, that it was not prepared to maintain OAS as a program of universal entitlement. The decision made was that priority would be given to seniors whose income from all other sources fell below a set threshold, and that seniors having income above that threshold would be required to repay some OAS benefits received. That repayment is the OAS “recovery tax” or clawback.

The operation of the clawback is simple in concept. An individual who has income over the threshold (which increases each year) is required to repay 15% of that income, up to the total of OAS amounts received during the year.

For 2016, the prescribed income ceiling for the OAS clawback was $73,756 and the clawback calculation looks like this for a recipient who had income for that year of $80,000.

$80,000 ˗ $73,756 = $6,244

$6,244 × 0.15 = $936.60

In this case, the OAS clawback amount for 2016 is $936.60. Where a taxpayer is subject to the OAS clawback, his or her OAS benefits for the next benefit year (which runs from July to June) will be reduced by the amount of that clawback. So, for example, a retiree who is subject to the clawback because his or her income for 2016 was greater than the clawback threshold, OAS benefits payable from July 2017 to June 2018 will be reduced. If, as in the above example, the clawback amount for 2016 was $936.60, then $78.05 ($936.60 ÷ 12) will be deducted from each OAS payment starting in July 2017.

However, it’s also possible, especially where a senior is living on investment returns from savings, or wages from part-time employment, that fluctuations in income can occur. Where the taxpayer’s income for the current year is reduced to the point that any required clawback will be significantly reduced or even eliminated, the excess amount clawed back will be returned to the taxpayer when he or she files the tax return for that year the following spring. However, it’s also possible to have the clawback reduced before then, by notifying the CRA and making a request to reduce or eliminate the deductions being taken. The way to do so is to file a prescribed form — the T1213 (OAS), Request to Reduce Old Age Security Recovery Tax at Source for Year ____, which can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1213_oas/README.html.

As just about everyone knows, individual income tax returns for the 2016 tax year must be filed, by most Canadians, and any tax balance owed must be paid by all individual Canadians, on or before May 1, 2017. And, most Canadians do file that return, and pay any tax balance owed, on or before the deadline. As of April 24, 2017, the Canada Revenue Agency (CRA) had received just over 18 million individual income tax returns for the 2016 tax year. There are, however, a significant minority of Canadians who don’t file a return, or pay taxes owed (or both) by the annual deadline. The reasons for that are as varied as the individuals involved. In some cases, taxpayers are unable to pay a tax balance owing by the deadline and they think (wrongly) that there’s no point to filing a return where taxes owed can’t be paid. They may even think that they can fly “under the radar” and escape at least the immediate notice of the tax authorities by not filing the return. In other cases, it is just procrastination – virtually no one actually likes completing their tax return, especially where there’s the possibility of a tax bill to be paid once that return is done.

As just about everyone knows, individual income tax returns for the 2016 tax year must be filed, by most Canadians, and any tax balance owed must be paid by all individual Canadians, on or before May 1, 2017. And, most Canadians do file that return, and pay any tax balance owed, on or before the deadline. As of April 24, 2017, the Canada Revenue Agency (CRA) had received just over 18 million individual income tax returns for the 2016 tax year. There are, however, a significant minority of Canadians who don’t file a return, or pay taxes owed (or both) by the annual deadline. The reasons for that are as varied as the individuals involved. In some cases, taxpayers are unable to pay a tax balance owing by the deadline and they think (wrongly) that there’s no point to filing a return where taxes owed can’t be paid. They may even think that they can fly “under the radar” and escape at least the immediate notice of the tax authorities by not filing the return. In other cases, it is just procrastination – virtually no one actually likes completing their tax return, especially where there’s the possibility of a tax bill to be paid once that return is done.

One of the difficulties resulting from a failure to file a return or pay taxes owed is that it is a problem which tends to compound itself. Once the taxpayer is in arrears of filing or payment obligations, it becomes more difficult to file and pay in subsequent years, as such filing will certainly bring the previous default to light.

Taxpayers who are in arrears with respect to their filing and/or payment obligations may envision charges of tax evasion, fines, and even incarceration for their previous defaults. The CRA, on the other hand, obviously wants taxpayers to file and pay on time, but would rather not incur time and costs to chase down delinquent taxpayers, especially where the amounts involved are relatively small. The CRA’s solution to that problem is its Voluntary Disclosure Program (VDP), which allows taxpayers who are in default of their filing or payment obligations to come forward and set things right. The incentive for taxpayers to do so is that while all taxes owed will have to be paid, along with accrued interest, no fines will be levied and no criminal charges will be brought. For taxpayers who want to get out from under their self-imposed tax problems, however they came about, and to get a fresh start, it’s generally a good deal.

The range of taxpayer errors and omissions for which the CRA will accept a voluntary disclosure is quite broad, and includes errors, omissions, or defaults made relating to the following:

• failing to fulfill tax filing and payment obligations;
• failing to report taxable income received;
• claiming ineligible expenses on the tax return;
• failing to remit employees’ payroll deductions;
• failing to report an amount of GST/HST (including undisclosed liabilities or improperly claimed refunds or rebates, unpaid tax, or net tax from a previous reporting period);
• failing to file required information returns; and
• failing to report foreign income that is taxable in Canada.

There is a much shorter list of taxpayer circumstances for which a voluntary disclosure under the VDP cannot be made, but those won’t apply to most taxpayers. A VDP application can’t be made for bankruptcy returns, income tax returns with no taxes owing or with refunds expected, or taxpayer elections (in which the taxpayer chooses to have a particular tax provision apply).

Generally speaking, in order for a VDP application to be made, four circumstances must be present. The disclosure must be completely voluntary (meaning that it can't be made after the CRA has already taken compliance action of any kind against the taxpayer, or the taxpayer is aware that such compliance or enforcement action will be taken) and must be complete – any VDP application must be in respect of all tax years where filing or payment is in arrears or an error or omission has been made, not just some of those years. In addition, the taxpayer making the disclosure must be liable to a penalty and the information to be disclosed must be at least one year overdue, but must also relate to tax years which ended within the previous 10 calendar years.

That one- year requirement means that taxpayers who are now late in filing their return for 2016 can’t apply to the VDP in respect of that return. The best advice for taxpayers who haven’t yet filed or paid for 2016 is to file and pay as soon as possible. Where the taxpayer can’t pay taxes owed, in full or in part, he or she should contact the CRA to make arrangements to pay such amounts over time. A taxpayer who hasn’t filed for 2016 and one or more previous years, can still make a VDP application in respect of any or all of those previous years within the last decade.

That application can be made in one of three ways – through the CRA’s My Account service on its website, by fax, or by regular mail. The form used for disclosures is Form RC199, Voluntary Disclosures Program (VDP) Taxpayer Agreement, which is available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/rc199/README.html. Where the completed form is faxed or sent by mail, the destination address and fax number is as follows:

Voluntary Disclosures Program
Shawinigan-Sud National Verification and Collections Centre 
4695 Shawinigan-Sud Boulevard
Shawinigan QC  G9P 5H9
Fax: 1-888-452-8994

The CRA now handles all VDP matters through this one centralized office. It previously provided VDP fax service through one of its B.C. offices, but that service was discontinued in February 2017.

Once the CRA has received the taxpayer’s VDP application, it will review that application and respond in writing with its decision. A notice of assessment or reassessment will then be issued to the taxpayer setting out the decision and amounts owed by that taxpayer.

It’s also possible that the CRA, in the course of reviewing the VDP application, will have need of further information. That request for information will be made by means of a letter to the taxpayer, and that letter will provide both a reference number for the application and a telephone number which the taxpayer can call.

Taxpayers are understandably somewhat nervous about disclosing past tax transgressions to the tax authorities. One of the better features of the VDP program is that it gives taxpayers the right to make a “no-names” disclosure, in which all of the relevant information, excepting the taxpayer’s personal identifying information, is provided to the CRA. Once the CRA has reviewed the initial information provided by the taxpayer, it will provide a preliminary determination of whether the taxpayer’s situation qualifies for a VDP application (that is, whether the conditions outlined above are met and there is nothing in the taxpayer’s situation which would disqualify him or her from making a VDP application) and provide its opinion on the possible tax implications of the disclosure. If the taxpayer’s situation does qualify for a VDP application, then the taxpayer has 90 days in which to provide his or her personal identifying information and proceed with that VDP application. If the taxpayer doesn’t do so, the file is closed. If the taxpayer decides that he or she wishes to go forward with the voluntary disclosure, then the matter proceeds in the same way as outlined above for a “named” disclosure.

“Coming clean” with the tax authorities where tax is owing or returns haven’t been filed as required is a difficult decision to make, and the financial cost, depending on the circumstances, can be significant. However, the cost of not coming forward can be greater. Where tax is owed to the CRA it charges, by law, interest at higher than commercial rates, and such interest is compounded daily (meaning that every day interest is charged on the previous day’s interest). As well, where penalties are levied, interest is charged on unpaid penalty amounts. Making a voluntary disclosure and coming to a resolution with the CRA will allow the taxpayer to avoid both the penalties and the interest which would have accrued on such penalties, and to stop the interest clock running on the amount of any unpaid taxes.

The Canadian tax system is in a constant state of change and evolution, as new measures are introduced and existing ones are “tweaked” through a never-ending series of budgetary and other announcements. However, even by normal standards, 2017 is a year in which there are larger than usual number of tax changes affecting individual taxpayers. And, unfortunately, most of those changes involve the repeal of existing tax credits which are claimed by millions of Canadian taxpayers.

The Canadian tax system is in a constant state of change and evolution, as new measures are introduced and existing ones are “tweaked” through a never-ending series of budgetary and other announcements. However, even by normal standards, 2017 is a year in which there are larger than usual number of tax changes affecting individual taxpayers. And, unfortunately, most of those changes involve the repeal of existing tax credits which are claimed by millions of Canadian taxpayers.

The repeal of the affected credits will show up for the first time on the individual income tax return for the 2017 tax year, to be filed in the spring of 2018. And, since the changes do, for the most part, mean the loss of existing credits, not being able to make those credit claims will mean a higher tax bill for taxpayers who have claimed them in previous years. Knowing what lies ahead, however, means that taxpayers make an accurate assessment during the year of the true after-tax cost of any contemplated expenditures and make their spending decisions in light of that knowledge.

Some of the changes for 2017 are already in place, having been implemented as of the beginning of the year, while others will take effect part way through 2017. What follows is a listing of the changes to existing tax credits which will be implemented for part or all of the 2017 tax year.

Textbook and education tax credits repealed

Post-secondary education is expensive, and for many years students and their families have been able to offset, to a degree, the costs related to obtaining that education through claims for federal non-refundable tax credits.

There are, effectively, four tax credits or deductions which have specific application to post-secondary students. The education tax credit provides a non-refundable tax credit amount of $400 per month of full-time enrolment in a qualifying educational program and $120 per month of part-time enrolment in such an educational program at a designated educational institution. The textbook tax credit provides a non-refundable tax credit amount of $65 per month of full-time enrolment in a qualifying educational program and $20 per month of part-time enrolment in such an educational program at a designated educational institution. Both such credit amounts are converted to tax credits by multiplying the total credit amount by 15%. There is also a federal tax credit claimable equal to 15% of eligible tuition fees paid during the year. Finally, students who incur interest costs for student loans received from government student loan programs can deduct the cost of those interest payments, without limit.

Effective as of January 1, 2017, the first two of those credits have been eliminated, and neither the textbook tax credit nor the education credit will be claimable for 2017 or subsequent years. Unused education and textbook credit amounts carried forward from years prior to 2017 will be available to be claimed in 2017 and subsequent years.

The claim for a tax credit for tuition amounts paid and the claim for a deduction for interest payments made on qualifying student loans are not affected.

Taxpayer should be aware, as well, that the provinces also offered tuition and education tax credits which could be used to reduce provincial tax payable. While changes similar to the federal ones have been made at the provincial level, those changes are not uniform. Some provinces have chosen to repeal both the education and tuition tax credits, effective July 1, 2017, while others have announced that only the education tax credit will be repealed, and not until 2018. Still other provinces have indicated that no change is planned to their current system of tuition and education tax credits. Consequently, taxpayers will need to determine whether and to what extent claims for provincial tuition and education tax credits remain available for 2017 in their province of residence.

Children’s fitness and arts tax credits repealed

For several years, parents have been able to claim a federal tax credit for expenditures made to enroll their children in fitness and arts-related activities. The federal government has been moving over the last couple of years to cut back on the availability of that credit, generally by reducing the amount claimable. For 2017, both the children’s arts and fitness tax credits have been repealed.

Public transit tax credit repealed

For several years, individual taxpayers have been entitled to claim a refundable federal tax credit for costs incurred in taking public transit on a regular basis. The definition of what constituted public transit was extremely broad, covering everything from buses to ferries. As well, it was possible to combine qualifying amounts incurred by all family members and claim them on a single return, maximizing the value of the credit.

However, as part of this year’s federal Budget, it was announced that the public transit tax credit would be repealed, effective as of July 1, 2017. Taxpayers who have purchased an annual transit pass for 2017 (or who might be thinking of trying to beat the deadline by purchasing monthly passes for the rest of 2017 before July 1) will not escape the effect of the repeal. The budget measures specify that the cost of transit passes attributable to public transit use which occurs after June 30, 2017 will no longer be eligible for the credit, regardless of when the expenditure for those passes is incurred.

Notwithstanding, the public transit will be claimable on the 2017 return for qualifying expenditures made for travel on public transit before July 1, 2017, and so taxpayers should keep receipts to support those claims.

 Caregiver tax credits replaced

Individuals who live with or care for relatives in a variety of situations have been able to claim one or more caregiver tax credits to help offset the cost of providing such care. The number of tax credits related to caregiver activities has expanded over the years and had become a somewhat confusing patchwork of possible credit claims.

In this year’s budget, and effective as of January 1, 2017, the federal government acted to replace the current patchwork of credits with a single Canada Caregiver Credit. The new single credit, for the most part, will provide caregivers with the same tax relief as the old system did, with one major exception. Members of more than one generation of a family live under the same roof for a variety of reasons. Sometimes, a retired grandparent who lives with his or her children and grandchildren can help out with child care while the parents are at work. Sometimes, especially in more expensive real estate markets, having multiple generations under the same roof is a matter of economic necessity. Prior to 2017, where an individual lived in the same residence with a parent or grandparent who was aged 65 or older, that individual could claim a caregiver tax credit with respect to the parent or grandparent. There was no requirement that the senior parent or grandparent be disabled or infirm in any way.

As of 2017, no credit will be claimable in such situations. The new Canada Caregiver Credit will be claimable in a range of living situations and for individuals of various ages. However, the one constant requirement to qualify for that credit is that the person in respect of whom it is claimed be infirm. As stated in the federal Budget papers “The Canada Caregiver Credit will no longer be available in respect of non-infirm seniors who reside with their adult children.”

The credits outlined above are claimed by millions of taxpayer every year. And, every taxpayer who made such claims for 2016 will see an increase in his or her tax bill for 2017, when those claims will no longer be available. Planning now for that reality will enable such taxpayers to avoid an unexpected and unwelcome tax bill owed when the return for 2017 is filed next spring.

For the majority of Canadians, the due date for filing of an individual tax return for the 2016 tax year is May 1, 2017. (Self-employed Canadians and their spouses have until June 15, 2017 to get that return filed.) In the best of all possible worlds, the taxpayer, or his or her representative, will have prepared a return that is complete and correct, and filed it on time, and the Canada Revenue Agency (CRA) will issue a Notice of Assessment indicating that the return is “assessed as filed”, meaning that the CRA agrees with the information filed and tax result obtained by the taxpayer. While that’s the outcome everyone is hoping for, it’s a result which can be “short-circuited” in a number of ways.

For the majority of Canadians, the due date for filing of an individual tax return for the 2016 tax year is May 1, 2017. (Self-employed Canadians and their spouses have until June 15, 2017 to get that return filed.) In the best of all possible worlds, the taxpayer, or his or her representative, will have prepared a return that is complete and correct, and filed it on time, and the Canada Revenue Agency (CRA) will issue a Notice of Assessment indicating that the return is “assessed as filed”, meaning that the CRA agrees with the information filed and tax result obtained by the taxpayer. While that’s the outcome everyone is hoping for, it’s a result which can be “short-circuited” in a number of ways.

Not infrequently, the taxpayer realizes, after the return is filed, that information has been inadvertently misstated, or perhaps amounts have been omitted where an information slip was received (or located) 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. Occasionally, the first thought in such circumstances is that another —corrected — return should be filed, but that is not the right course of action. Instead, the taxpayer should wait until a Notice of Assessment has been received in respect of the return already filed, and then file a T1 Adjustment Request with the CRA, outlining the needed corrections.

The easiest and quickest way of requesting an adjustment is through the CRA website’s “My Account” service, but that option is available only to taxpayers who have already registered for that service. While doing so isn’t difficult (the steps involved are outlined on the website at www.cra-arc.gc.ca/myaccount/, 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 CRA on a single issue, can obtain a hard copy of the T1 Adjustment form from the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1-adj/README.html. Those who are unable to print the form from the website can order a copy to be sent to them by mail 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 is an acceptable alternative – but using the prescribed form has two benefits. First, it makes clear to the CRA that an adjustment is being requested, and secondly, filling out the form will ensure that the CRA is provided with all the information needed to process the requested adjustment. And, whether the request is made using the T1 Adjustment form or by letter, it is necessary to include any relevant documents – the information slip summarizing the income not reported, or the receipt for an expense inadvertently not claimed.

A listing of Tax Centres and their addresses can be found on the CRA website at www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html. An Adjustment request should be sent to the same Tax Centre with which the original tax return was filed. A taxpayer who isn’t sure where that is can go to www.cra-arc.gc.ca/cntct/tso-bsf-eng.html on the CRA website and select his or her location from the listing found there. The address for the correct Tax Centre will then be provided.

Where an Adjustment request is made, it will take at least a few weeks, usually longer, before the CRA responds. The Agency’s estimate is that such requests which are submitted online have a turnaround of about two weeks, while those which come in by mail take about eight weeks. Not unexpectedly, all requests which are submitted during the CRA’s peak return processing period between March and July will take longer.

Sometimes the CRA will contact the taxpayer, even before the return is assessed, to request further information, clarification, or documentation of deductions or credits claimed (e.g., receipts documenting medical expenses claimed, or child care costs). Whatever the nature of the request, the best course of action is to respond 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 it is the taxpayer’s responsibility to provide support for any deduction or credit claims made. Where a request for information or supporting documentation for a claimed deduction or credit is ignored by the taxpayer, the assessment will proceed on the basis that such support does not exist. Providing the requested information or supporting documentation can usually resolve the question to the CRA’s satisfaction, and its assessment of the taxpayer’s return can then proceed.

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