Claiming the Canada Child Benefit (August 2019)
Raising children is expensive and, in recognition of that fact, the federal government has, for more than half a century, provided financial assistance to parents to help with those costs. That assistance has ranged from monthly Family Allowance payments received by families during the 1960s to its current iteration, the Canada Child Benefit.
While all of the various programs providing financial assistance to families have had the same underlying purpose, the structure of those programs has evolved over the years. Generally, those changes have involved a move to a more means-tested benefit system and have, as well, recognized the additional costs which must be incurred by parents who are raising a child who has a disability. The current rules for the Canada Child Benefit (CCB) program are as follows.
The CCB is a tax-free monthly amount paid to parents of children under the age of 18. Each “benefit year” runs from July 1 to June 30, and eligibility for and the amount of benefit for which a particular family may qualify is based on both current family size, and family income for the previous year. CCB amounts are paid around the 20th of each month.
For instance, the current benefit year started on July 1, 2019 and will run until June 30, 2020. The amount of benefit payable to a particular family during the current benefit year is based, in part, on the income received by the family during the 2018 tax year. It is therefore necessary that the parents in a family have filed tax returns for the 2018 tax year, as the Canada Revenue Agency uses the figures in those returns to determine the amount of benefit for which the family is eligible. More specifically, the CRA uses the figure found on line 236 of the 2018 tax return as the income figure which determines the amount of CCB which a family can receive between July 2019 and June 2020. Where no tax returns for the previous year have been filed, no benefits can or will be paid during the current benefit year.
For a family which has a child or children under the age of 18, the following benefit amounts are payable during the current (July 1, 2019 to June 30, 2020).
- $6,639 per year ($553.25 per month) for each eligible child under the age of six, and
- $5,602 per year ($466.83 per month) for each eligible child aged 6 to 17.
The amounts set out above represent the basic benefit payable for each eligible child. Where, however, family net income for the previous year is more than $31,120, the amount of benefits payable are reduced. The benefit reduction for families of different sizes is as follows.
- For families with one eligible child, the reduction is 7% of the amount of family net income between $31,120 and $67,426, plus 3.2% of the amount of family net income over $67,426.
- For families with two eligible children: the reduction is 13.5% of the amount of family net income between $31,120 and $67,426, plus 5.7% of the amount of family net income over $67,426.
- For families with three eligible children: the reduction is 19% of the amount of family net income between $31,120 and $67,426, plus 8% of the amount of family net income over $67,426.
- For families with four or more eligible children: the reduction is 23% of the amount of family net income between $31,120 and $67,426, plus 9.5% of the amount of family net income over $67,426.
Families raising a child or children who have a disability inevitably face additional costs and such families are consequently eligible for additional amounts in the form of the Child Disability Benefit.
The basic requirements for the child disability benefit are the same as for the CCB, in that the child must be under the age of 18 and living with a parent. However, for purposes of the CDB an additional requirement is imposed, in that the child in respect of whom the CDB is claimed must be eligible for the federal disability tax credit. A child is eligible for that disability tax credit when a medical practitioner certifies, on Form T2201, Disability Tax Credit Certificate, that the child has a severe and prolonged impairment in physical or mental functions, and the Canada Revenue Agency (CRA) approves that certification.
Eligible families can, during the current (July 2019 to June 2020) benefit year, receive (in addition to the basic CCB) up to $2,832 ($236.00 per month) for each child who is eligible for the disability tax credit.
As is the case with the basic CCB, the amount of CDB which may be received is reduced as family income increases, as follows.
- For families with one child eligible for the CDB, the reduction is 3.2% of the amount of family net income over $67,426.
- For families with two or more children eligible for the CDB, the reduction is 5.7% of the amount of family net income over $67,426.
When a child is born, families must make an application for the CCB, and the process for doing so is outlined on the CRA website at https://www.canada.ca/en/revenue-agency/services/child-family-benefits/canada-child-benefit-overview/canada-child-benefit-apply.html. Once the initial application is filed and approved, parents need only to file a tax return each year in order to continue receiving that benefit.
The CRA provides comprehensive information on both the CCB and the CDB on its website at https://www.canada.ca/en/revenue-agency/services/child-family-benefits/canada-child-benefit-overview.html and also publishes a guide to that program, which can be found on the same website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4114.html.
Accessing home equity in retirement – the reverse mortgage (August 2019)
An increasing number of Canada’s baby boomers are moving into retirement with each passing year and, for most of those baby boomers, retirement looks a lot different than it did for their parents. First of all, as life expectancy continues to increase, baby boomers can expect to spend a greater proportion of their life in retirement than their parents did. Second, the financial picture for baby boomers is likely to be different. Many of their parents benefitted, in retirement, from an employer sponsored pension plan, which ensured a monthly payment of income for the remainder of their lives. Now, such pension plans and the dependable monthly income they provide are, especially for boomers who spent their working lives in the private sector, more the exception than the rule. Where, however, baby boomers have the “advantage” over their parents in retirement, it’s in the value of their homes. Increases in residential property values over the past quarter century in nearly every market in Canada have meant that for many Canadians who are retired or approaching retirement, their homes – or more specifically, the equity they have built up in those homes – represents their single most valuable asset.
While having a home which has greatly appreciated in value may provide a sense of security, what it doesn’t provide is an income. Most retired Canadians are eligible to receive Canada Pension Plan and Old Age Security payments and, 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. Most retirees also have private retirement savings, usually through registered retirement savings plans (RRSPs), but once again, the amount saved by many Canadians through RRSPs falls short of what will be needed to generate a reasonable income over their remaining lifetime, especially where a retirement can last for twenty or more years, and when inflation over that time period is taken into account. Many retired Canadians are, in effect, “house rich and cash poor”.
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 accumulated equity. However, while selling and downsizing is the option chose by many retirees, not everyone wants to leave the family home at retirement. There are many situations in which moving and downsizing isn’t desirable or even possible. Especially for those living in smaller centres, where the types of available housing may be limited, downsizing or choosing to rent could mean having to move to another community. Moving and leaving behind friends and other social supports is difficult at any age, and especially difficult when it coincides with a major life change like retirement. As well, it’s increasingly the case that adult children “boomerang” back to the family home after finishing their education. In many cases, such adult children are unable to find long-term employment or remuneration from available employment isn’t sufficient, or sufficiently secure, for them to take on the financial obligations of having their own home, even as a tenant. For a variety 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 qualifying homeowners to obtain a sum of money based on the value of their home and the equity which they have accumulated in that home without selling 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 moves out of 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 downsides of a reverse mortgage start with the basic costs of obtaining one. Setting up a reverse mortgage involves a number of costs for the homeowner, including the need to have one’s property appraised. There will also be closing costs, and the homeowner will be required to obtain independent legal advice, and to pay the cost of obtaining such advice.
Once the reverse mortgage is taken out, interest will, of course, be levied on all amounts provided, and will accumulate from the time the funds are first advanced. Total interest costs can add up very quickly and reach significant amounts by the time the debt is eventually to be repaid, usually out of the proceeds from the sale of the house. And, of course, every dollar of funds advanced and interest levied reduces 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, 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 benefits of a reverse mortgage for many retirees is that amounts received are not subject to tax and do not affect the borrower’s eligibility for means-tested government benefits like Old Age Security or the Guaranteed Income Supplement. And, of course, the homeowner is 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’s necessary to consider the extent to which the reverse mortgage will reduce that accumulated home equity and consequently the funds available to pay for needed care.
For those who are considering whether a reverse mortgage is the right solution for them in retirement, Canada’s Financial Consumer Agency suggests getting answers from prospective lenders to the following questions:
- What are all the fees?
- Are there any penalties if you sell your home within a certain period of time?
- If you move or die, how much time will you or your estate have to pay off the loan’s balance?
- When you die, what happens if it takes your estate longer than the stated time period to fully repay the loan?
- What happens if the amount of the loan ends up being higher than your home’s value when it is time to pay the loan back?
More information on reverse mortgages in general can be found on the FCAC website at https://www.canada.ca/en/financial-consumer-agency/services/mortgages/reverse-mortgages.html.
Just a few questions about your tax return …. (August 2019)
While most Canadians turn their mind to taxes only in the spring when the annual return must be filed (and then only reluctantly), 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 – this year the Agency had, by the third week of July, received and processed just under 30 million individual income tax returns filed for the 2018 tax year.
That volume of returns and the Agency’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 on-line, through one of the Agency’s e-filing services. That effort has clearly succeeded, as just under 26 million (or 89%) 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 89% 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.
At this time of year 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. However, 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, there are areas in which the CRA has determined that 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 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, 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 http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/sbmttng-eng.html.
Regardless of the means by which requested documents are submitted, it’s 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.
Whatever the reason a particular return was selected for post-assessment review by the CRA, one thing is certain. A prompt response to the CRA’s enquiry, providing the Agency with the information or documentation requested will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the Agency and the taxpayer.
Getting a tax assist for post-secondary education costs (August 2019)
As the summer starts to wind down, both students returning to their colleges and universities and those just starting their post-secondary education must focus on the details of the upcoming school year – finding a place to live, choosing courses, and perhaps most important, arranging payment of tuition and other education-related bills.
For many years post-secondary students (and their parents) have benefited from an “assist” through our tax system, which provides deductions and credits for some of the many costs associated with obtaining a post-secondary education. Unfortunately, some of the kinds of assistance which could be obtained through our tax system to help offset those costs has been eliminated in the past few years, but the following credits and deductions remain available to be claimed by post-secondary students and, in some cases, their spouses, parents, and grandparents.
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.
The charges imposed on post-secondary students under the heading of “tuition” include myriad costs which may differ, depending on the particular program, and not all of those costs will qualify as “tuition” for purposes of the tuition tax credit. The following specific amounts do, however, constitute eligible tuition fees for purposes of that credit:
- admission fees;
- charges for use of library or laboratory facilities;
- exemption fees;
- examination fees (including re-reading charges) that are integral to a program of study;
- application fees (but only if the student subsequently enrolls in the institution);
- confirmation fees;
- charges for a certificate, diploma, or degree;
- membership or seminar fees that are specifically related to an academic program and its administration;
- mandatory computer service fees; and
- academic fees.
The following charges do not, however, constitute tuition fees for purposes of the credit:
- extracurricular student social activities;
- medical expenses;
- transportation and parking;
- board and lodging;
- goods of enduring value that are to be retained by students (such as a microscope, uniform, gown, or computer);
- initiation fees or entrance fees to professional organizations including examination fees or other fees (such as evaluation fees) that are not integral to a program of study at an eligible educational institution;
- administrative penalties incurred when a student withdraws from a program or an institution;
- the cost of books (other than books, compact discs, or similar material included in the cost of a correspondence course when the student is enrolled in such a course given by an eligible educational institution in Canada); and
- courses taken for purposes of academic upgrading to allow entry into a university or college program. These courses would usually not qualify for the tuition tax credit as they are not considered to be at the post-secondary school level.
Certain ancillary fees and charges, such as health services fees and athletic fees, may also be eligible tuition fees. However, such fees and charges are limited to $250 unless the fees are required to be paid by all full-time or part-time students.
At both the federal and provincial levels, the credit acts to reduce tax otherwise payable. Where, as is often the case, a student doesn’t have tax payable for the year, credits earned can be carried forward and claimed by the student in any future tax year or transferred (within limits) in the current year to be claimed by a spouse, parent, or grandparent.
Personal and living expenses
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 to finance their education should be mindful of the rules which govern that student loan interest tax credit, since decisions made while still in school with respect to how post-secondary education will be financed can have tax repercussions down the road, after graduation. That’s because while all interest paid on a qualifying student loan 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 credit. Interest paid on loans of any kind from any financial institution will not.
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 Canada Revenue Agency 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”. In other words, where a government student loan is combined with other debt and consolidated into a borrowing of any kind from a financial institution, the interest on that government student loan is no longer eligible for the student loan interest tax credit.
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 tax credit on that borrowing in future years.
Credits withdrawn but available for carryforward
Formerly, post-secondary students were able to claim an education tax credit and the textbook tax credit. Both such credits were, unfortunately, eliminated as of the end of 2016. It’s important to remember, however, that where education and textbook credits were earned but not claimed in years before 2017 they are still available to be claimed by the student as carryover credits in any subsequent tax year.
Other credits and deductions
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, deductions for moving costs). The Canada Revenue Agency publishes a very useful guide which summarizes most of the rules around income and deductions which may apply to post-secondary students. The current version of that guide, entitled Students and Income Tax, is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/p105/README.html.
Getting a first instalment reminder from the Canada Revenue Agency (July 2019)
Sometime during the month of July several thousand Canadians will receive an unexpected, unfamiliar, and probably unwelcome piece of correspondence from the Canada Revenue Agency. That correspondence will be an Instalment Reminder advising the recipient of tax payments to be made in September and December of this year.
The reason such Reminders are sent during July has to do with how tax is collected in Canada, and when tax returns are filed. Most Canadians, and certainly all Canadians who are employees, have income taxes deducted (or withheld) from each paycheque and remitted to the federal government on their behalf. They then file a tax return for the year the following spring: if they have overpaid taxes they receive a refund and, where taxes were underpaid, they will have a balance owing.
Where, however, a taxpayer receives income from which no tax has been deducted or withheld, the federal government must have another way of collecting the tax owed on such income amounts. And, while it’s possible that such taxpayers could simply pay the full amount of taxes owed for the year when filing the annual tax return, it’s not likely that many individuals would have the financial wherewithal to do so. And, in addition, the federal government is not prepared to wait until then to receive tax amounts owed for the entire year. Instead the instalment payment system is the means by which the Canada Revenue Agency collects such tax amounts, on a quarterly basis, throughout the year.
More technically, an individual is subject to the instalment payment requirement where his or her tax owed on filing for the current year and either of the two previous years is more than $3,000. In other words, the amount of tax collected from that individual throughout the year was at least $3,000 less than the actual tax owed for that year. And, since Canadian tax returns are filed in the spring, the assessment of those returns allows the Canada Revenue Agency to identify individuals who will be subject to the instalment requirement for the current year – and it is those individuals who receive an instalment reminder this month.
Regardless of the type or amount of his or her income for the year, or the amount of any instalment payments, the options available to the recipient of an Instalment Reminder are the same. On its website, the CRA describes the three different payment options open to taxpayers, and outlines the benefits and risks of each option in different circumstances, as follows:
This option is best for you if your income, deductions, and credits stay about the same from year to year.
We will give the no-calculation option amount on the instalment reminders that we will send you. We determine the amount of your instalment payments based on the information in your latest assessed tax return.
This option is best for you if your 2019 income, deductions, and credits will be similar to your 2018 amount but significantly different from those in 2017 .
You determine the amount of your instalment payments based on the information from your tax return for the 2018 tax year. Use the Calculation chart for instalment payments for 2019 to help you calculate your total instalment amount due.
If you use the prior-year option and make the payments in full by their 2019 due dates , we will not charge instalment interest or a penalty unless the total instalment amount due you have calculated is too low. For more information, see Instalment interest and penalty charges .
This option is best for you if your 2019 income, deductions, and credits will be significantly different from those in 2018 and 2017.
You determine the amount of your instalment payments based on your estimated current-year (2019) net tax owing, any CPP contributions payable, and any voluntary EI premiums. Use the Calculation chart for instalment payments for 2019 to help you calculate your total instalment amount due.
If you use the current-year option and make the payments in full by their 2019 due dates, we will not charge instalment interest or a penalty unless the amounts you estimated when calculating your total instalment amount due were too low. For more information, see Instalment interest and penalty charges.”
Under any of these options, the dates for payment and the percentage amounts payable are summarized as follows:
No-calculation option – Pay the amount shown in box 2 of the Instalment Reminder for September 15 and December 15.
Prior-year option – Determine net taxes owed for 2018. Pay 75% of the total on September 15 and 25% on December 15.
Current-year option – Estimate current-year 2019 net tax owing. Pay 75% of the total on September 15 and 25% on December 15.
The first option – paying the amounts identified on the Instalment Reminder by the September and December deadlines – is the easiest and simplest choice. If the amounts paid represent an overpayment of taxes for 2019, the taxpayer will receive a refund of that overpayment on filing in the spring of 2020. If the amounts identified turn out be an underpayment of tax (in that they are insufficient to cover total tax owed for the year), the taxpayer will have a balance owing on filing. In no case, however, will the taxpayer be charged any interest on insufficient instalment payments.
Taxpayers who don’t wish to pay the amounts specified in the Instalment Reminder (perhaps because they believe that such amounts don’t accurately reflect their tax payable for the year) can use options 2 or 3. The only risk to doing so is that, should the instalments paid be insufficient to cover tax liability for the year, interest will be levied on the underpayments.
More details on the options available to taxpayers who receive an Instalment Reminder, and information on the instalment payment system generally, 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.html.
No one particularly likes receiving an Instalment Reminder and everyone dislikes paying taxes. It’s worth remembering, however, that the payment of income tax isn’t a choice – the only real choice is whether to pay now, or pay later. And, for most Canadians, paying taxes on a regular basis throughout the year is much more manageable than being faced with a huge tax bill when filing their return for 2019 next spring.
The CPP post-retirement benefit – deciding whether to contribute (July 2019)
A generation ago, retirement was an event. Typically, an individual would leave the work force completely at age 65 and begin collecting Canada Pension Plan and Old Age Security benefits along with, in many cases, a pension from an employer-sponsored registered pension plan.
Much has changed in the intervening decades and one of those changes is that retirement is now more often a process than an event. Many of those who have reached the traditional retirement age of 65 are receiving CPP and OAS benefits while at the same time continuing to participate in the work force. Some stay at an existing full-time job but more commonly, such individuals take up part-time employment, out of financial need or simply from a desire to stay active and engaged in the work force.
At one time, beginning to receive CPP retirement benefits meant that, even for those who chose to remain in the work force, no further CPP contributions were allowed. In 2012 that changed, with the introduction of the CPP Post-Retirement Benefit. The availability of that benefit means that those who are aged 65 to 70 and continue to work while receiving CPP retirement benefits must decide whether or not to continue making CPP contributions. Such individuals who make the choice to continue to contribute to the Canada Pension Plan will see an increase in the amount of CPP retirement benefit they received each month. That increase 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. 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 the CPT30 form 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 CRA Form CPT30, give one copy of the form to his or her employer, and send the original to CRA
- Individuals who are over the age of 70 and are still working cannot contribute to the CPP.
Overall, the effect of the rules is that CPP retirement benefit recipients who are still working and who are under aged 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 CPP 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 (no application is required), 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 that year. Since the federal government doesn’t have all of the information needed to make such calculations until T4s and T4 summaries are filed by the employer by the end of February, the first PRB payment is usually made in a lump sum amount, in the month of April. That lump sum amount represents the PRB payable from January to April. Thereafter, the PRB is paid monthly and combined with the individual’s usual CPP retirement benefit in 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 him 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.
Claiming a deduction for moving expenses (July 2019)
The most recent estimate issued by the Canadian Real Estate Association (CREA) is that close to half a million homes will be sold in Canada during 2019. Since that number doesn’t include moves from one rental accommodation to another, or the twice-a-year post-secondary student migration from home to school (and back again), it’s safe to say that well over a half a million Canadians and Canadian families will be faced with the need to plan, organize and pay for some kind of move at least once this year.
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 inevitably means 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 it’s common to refer simply to the “moving expense deduction”, as though it were available in all circumstances, the fact 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 Edmonton to Vancouver to take a new job. It’s also met where a taxpayer is transferred by his or her employer to another job in a different location and the taxpayer’s move will bring him or her at least 40 kilometres closer to the new work location. 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, without any change in work location.
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’s possible to deduct moving costs only from employment or self-employment (business) income – 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 him or herself, family members and household effects. In all cases, the moving expenses must be deducted from employment or self-employment income earned at the new location. Where the move takes place later in the year, and moving costs are significant, it’s 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 any future year.
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.
When real estate markets are slow, or a move must be made in a short time frame, 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 such deduction is available. As well, a claim for such home maintenance expenses on a vacant house can be claimed only where reasonable efforts are being made to sell the property and is not permitted 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; and
- 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 48.5 cents for Alberta to 65.0 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 2018 taxation year – the CRA will be posting the rates for 2019 on its website early in 2020, 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. The current version of that 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 (including a link to rates for standardized meal and travel cost claims) is available at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/menu-eng.html.
New information provided on First-Time Home Buyer Incentive program (July 2019)
In this year’s Budget, the federal government introduced a new program – the First-Time Home Buyer Incentive (FTHBI), to help qualifying first-time home buyers get into the housing market. Under that program the Canada Mortgage and Housing Corporation (CMHC) (an agency of the federal government) will add a specified amount to the down payment made on a home purchase by a qualifying buyer, with the effect of reducing the amount of the monthly mortgage payment required of the new home owner.
Regrettably, few details of the new program were provided in the Budget papers, and additional details have been released on a somewhat piecemeal basis since then. CMHC recently issued a press release which indicates that the FTHBI will launch (barring unforeseen circumstances) on September 2, 2019 and will be available for home purchases which close on or after November 1, 2019.
Along with that press release, CMHC did announced some additional program details and, based on that information, the structure of the program will be as follows.
Any applicant to the program must be a Canadian citizen, permanent resident or non-permanent resident who is legally entitled to work in Canada. As well, prospective borrowers must, in order to qualify, have a maximum annual qualifying income of $120,000.
As the program name implies, program participants must be first-time home buyers (or, in the case of a couple, at least one of them must be a first-time home buyer). However, the definition of first-time home buyer is somewhat more expansive than might be expected. For purposes of the FTHBI, someone will be considered a first-time home buyer if he or she meets any of the following criteria.
- The applicant has never purchased a home before.
- The applicant has gone through a breakdown of a marriage or common-law partnership (even if he or she doesn’t meet the other first-time home buyer requirements).
- In the last 4 years, the applicant did not occupy a home that was owned by the applicant or his or her current spouse or common-law partner.
The four-year clause means that even individuals (or their spouses) who have previously owned a home may qualify for the FTHBI if their period of home ownership ended within the required time frame. The required 4-year period begins on January 1 of the fourth year before the year the new home was purchased, and ends 31 days before the date of that purchase. That computation is more easily understood in the examples provided by CMHC.
- If you purchase a home on March 31, 2019, the 4-year period begins on January 1, 2015 and ends on February 28, 2019.
- If you sold your home you lived in in 2013, you may be able to participate in 2018 or if you sold the home in 2014, you may be able to participate in 2019.
What kinds of properties qualify for the FTHBI?
Generally, most types of housing will qualify for the FTBHBI. More specifically, eligible properties include 1 to 4 unit residential properties which include new construction, re-sale homes and new and re-sale mobile homes.
In order to qualify, a property must be located in Canada and must be suitable for year-round occupancy.
How much will CMHC contribute?
Under the rules which apply to all homebuyers, the minimum required down payment is 5% of the first $500,000 of the home purchase price and 10% of the portion of that purchase price over $500,000.
Where an applicant qualifies for the FTHBI, CMHC will provide additional funds to augment the applicant’s existing down payment. The amount of those additional funds is 5% or 10% of the purchase price, depending on the type of property purchased. Specifically, the incentive by property type is:
- 5% for a first-time buyer’s purchase of an existing resale home; or
- 5% for a first-time buyer’s purchase of a new or re-sale mobile/manufactured home; or
- 5% or 10% of a first-time buyer’s purchase of a newly constructed home.
The total borrowing amount (first mortgage plus incentive amount) is capped at four times the applicant’s annual income. Since the program is available only to those having an annual income of up to $120,000, the maximum total borrowing amount would therefore be $480,000.
Any funds advanced under the program will become a second mortgage on the property. No interest is charged and no regular payments (i.e. mortgage payments) are required on such funds.
What are the repayment requirements?
Participants in the program are required to repay the incentive amount after 25 years, or when the property is sold, whichever is earlier. Participants can also repay the incentive amount earlier without incurring any pre-payment penalty.
What happens when the value of the property changes?
One of the questions which arose immediately when the FTHBI was announced was how increases (or decreases) in the value of the purchased property would be handled. The short answer is that the repayment amount will be equal to the same percentage of the value of the property at the time of repayment as was originally provided to the home buyer. So, if a property owner was provided with 10% of the property value at the time of purchase, he or she must repay 10% of the value of the property at the time of repayment. Effectively, the government of Canada will share in both the upside and the downside of the property value on repayment.
The application of this rule in a situation in which the property value has increased and one in which it has dropped is illustrated in the following examples adapted from those provided by CMHC.
- Anita wants to buy a new home for $400,000. Under the First-Time Home Buyer Incentive, Anita can apply to receive $40,000 in a shared equity mortgage (10% of the cost of a new home) through the program. Years later, Anita has sold her first home for $420,000. At this time, she would now have to repay the original incentive she received as a percentage of her home’s current value. This would result in Anita repaying 10%, or $42,000 at the time of selling her house.
- John wants to buy a newly constructed house for $350,000, and he can receive a 10% incentive, or $35,000. Years later, John has decided to sell his home, but it is now worth $320,000. When he sells his house at the price of $320,000, John will have to repay the original incentive he received as a percentage of his home’s current value. This would result in John repaying 10%, or $32,000 at the time of selling his house.
There are still details of the FTBHI which have not yet been announced – in particular, details of the application process. However, individuals can sign up on the CMHC website to receive e-mails updates as future announcements are made. That sign-up is available at https://www.cmhc-schl.gc.ca/en/nhs/canada-first-time-home-buyer-incentive, and more information on the program generally can be found at https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive.cfm.
A mid-year check up on your taxes (June 2019)
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 15th 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.
Canadian households set (another) new debt record (June 2019)
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.
New assistance for first-time home buyers (June 2019)
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.
Objecting to your 2018 Notice of Assessment (June 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.
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.
New Quarterly Newsletters (May 2019)
Coming clean with the tax authorities (May 2019)
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.
Getting relief from the high cost of driving (May 2019)
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;
- 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.
When you can’t file or pay on time – the Taxpayer Relief Program (May 2019)
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.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
Fixing a mistake in your (already filed) tax return (May 2019)
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.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
Budget expands access to Home Buyers’ Plan (April 2019)
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.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
What to do when you can’t pay your tax bill (April 2019)
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.
Paying the taxman – how and when (April 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.
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.
Some last-minute tax filing strategies - the timing of medical and charitable tax credit claims (April 2019)
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.
Deciding when to start receiving Old Age Security benefits (March 2019)
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.
When and how to file this year’s tax return (March 2019)
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).
It’s tax filing – and tax scam – season (March 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.
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.
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
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
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.
What’s new on this year’s tax return? (March 2019)
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.
New Quarterly Newsletters (February 2019)
Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues. They can be accessed below.
More debt … and more interest (February 2019)
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/.
Responding to a tax instalment reminder from the CRA (February 2019)
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.
RRSPs and TFSAs — making the annual contribution (February 2019)
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 31st 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.
Taking advantage of pension income splitting (February 2019)
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.
Employment Insurance Premiums for 2019 (January 2019)
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.
Quebec Pension Plan Premiums for 2019 (January 2019)
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.
Canada Pension Plan Contributions for 2019 (January 2019)
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 $5,497.80.
Federal individual tax credits for 2019 (January 2019)
Dollar amounts on which individual non-refundable federal tax credits for 2019 are based, and the actual tax credit claimable, will be as follows.
|Credit Amount ($)||Tax Credit ($)|
|Basic personal amount||12,069||1,810.35|
|Spouse or common law partner amount||12,069||1,810.35|
|Eligible dependant amount||12,069||1,810.35|
|Net income threshold for erosion of credit||37,790|
|Canada employment amount||1,222||183.30|
|Adoption expense credit||16,255||2,438.25|
|Medical expense tax credit||2,352|
|Maximum refundable medical expense supplement||1,248|
Federal individual tax rates and brackets for 2019 (January 2019)
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%
Tax deadlines and limits for the 2019 tax year (January 2019)
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 15th 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.
Tax changes effective January 1, 2019 (January 2019)
The following tax changes are in effect January 1, 2019.
The small business income tax rate will be reduced from 10% to 9% effective as of January 1, 2019.
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.
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.
The province introduces an Innovation Equity Tax Credit for 2019 and later years.
The 2018 Fall Economic Statement – some good news for business (December 2018)
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.
Year-end planning for your RRSP and TFSA (December 2018)
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 31st, in order to achieve the desired tax result, as follows.
When you need to make your RRSP contribution on or before December 31st
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 31st is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31st 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 31st, 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.
The tax year is ending – some planning steps to take before December 31st (December 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.
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 31st. 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 31st 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 potential tax costs of holiday gifts and celebrations (December 2018)
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.
New Quarterly Newsletters (November 2018)
Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues. They can be accessed below.