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

Corporate:

Issue #19 Corporate

Personal:

Issue #19 Personal

A number of circumstances and developments have come together over the past few years to make working from a home office—once almost unheard of—a common fact of business life. First and foremost, of course, is the technology (particularly communications technology) which enables the home-based worker to have access to all of the information and services available to his or her in-office counterpart. Given the right technology, it’s nearly as easy for an employee working from home to send and receive e-mails through the employer’s communications network and access the people, information, and services needed to do his or her job in the same way as it would be if he or she was at the office.

While technology has made it possible to work from home on a regular basis, other developments have made the daily commute to the office, and the maintenance of large offices in major urban centres less and less appealing. The ever increasing price of gasoline has made the cost of that daily commute prohibitively expensive in some cases. As well, there is an increased awareness of the environmental cost of having most major highways clogged each morning and evening with hundreds of thousands of cars sitting in traffic gridlock. And finally, the cost of renting office space in most major Canadian cities means that most employers are at least willing to consider the cost savings which might be realized from work-at-home or telecommuting arrangements for their employees.

Along with the greater availability of work-at-home arrangements for employees, there has been a significant increase in the number of self-employed Canadians. And while not all of the self-employed work from home, it’s fairly common for those venturing into the world of self-employment for the first time to save costs by operating their business, at least initially, out of a home office.

One of the things which makes a telecommuting or work-at-home arrangement attractive, aside from avoiding the daily commute, is the tax deductions which can be claimed. While those benefits, especially for employees, are not necessarily as generous as is popularly believed, it is the case that working from home can make costs which would be incurred in any event deductible for tax purposes.

As is usually the case in tax matters, the rules differ for employed taxpayers and for the self-employed, as the latter enjoy a greater degree of latitude in the deductions which may be claimed. That said, both the employed and the self-employed must meet the same basic two-part test in order to be eligible to deduct home office expenses, and that test is as follows:

• the home office must be the place at which the taxpayer principally (defined by the Canada Revenue Agency as more than 50% of the time) performs the duties of employment or must be the taxpayer’s principal place of business: or

• the home office must be both used exclusively for the purpose of earning income from employment or from the business and must be used on a regular and continuing basis for meeting customers or clients of the employer or the business.

A self-employed taxpayer who meets these criteria is entitled to claim (on Form T2124(E) (Statement of Business Activities)) expenses such as property taxes, rent, or mortgage interest (but not mortgage principal amounts), insurance, utilities costs etc. However, such expenses are not deductible in their entirety: rather, the taxpayer must apportion the expenses based on the percentage of the total space which is used as a home office. For example, a self-employed taxpayer whose home office takes up 15% of available floor space and who incurs $2000 each year in qualifying expenses would be entitled to deduct $300 ($2,000 times 15%) in home office expenses for that year. There is one further caveat, in that the amount of home office expenses claimed in a year cannot be greater than the amount of income from the business. It’s not, in other words, possible to run a business which produces $5,000 in income for the year and to then claim $10,000 in home office expenses relating to that business. However, where home office expenses exceed business income in any given year, the excess expenses can be carried over and claimed in a subsequent year in which there is sufficient business income to offset those expenses.

Employed taxpayers who meet the two-part test set out above must meet a further condition before being eligible to claim home office expenses, as follows:

• the employer must provide the employee with a Form T2200, which indicates that the employee is required by his or her contract of employment to provide and pay for the expenses related to the home office;
• the employee must not have been reimbursed by the employer for such expenses; and
• the expenses must have been used directly in the employee’s work at home.

Once the T2200 has been issued, and the other conditions are met, an employee who is a tenant can claim a proportionate part of his or her rent. An employee who owns his or her own home can claim a proportionate percentage of utilities and maintenance costs. An employee is not, however, entitled to claim any portion of mortgage interest, property taxes, or home insurance costs paid, and cannot claim capital cost allowance.

As is the case with self-employed taxpayers, an employee’s deduction for home office expenses cannot be greater than the income from employment income for the year to which the expenses relate. And, once again, carryover to a subsequent taxation year is allowed.

One of the tax benefits which is commonly supposed to exist for the home office workers is the right to claim depreciation (or capital cost allowance (CCA), in tax parlance) on one’s home for tax purposes. For employees, however, such a claim is simply not allowed. And, while the self-employed may be entitled to claim CCA on a home, making such a claim can create a short-term benefit with long-term costs. Making a CCA claim on one’s home is likely to erode the principal residence exemption from capital gains tax which is claimable when a home is sold, and that exemption is almost always more valuable, in monetary and tax terms, than any CCA claim which might have been made.

Being able to claim home office expenses doesn’t result in the huge tax benefits that some popular tax myths claim. However, it can and does permit qualifying taxpayers to claim a portion of home ownership (or rental) expenses which would have been incurred in any case while also avoiding the dreaded daily commute, making it a win-win scenario.

As if dealing with bills from the recent holiday season and trying to come up with the funds for an RRSP contribution weren’t enough, February is also the month in which millions of Canadian taxpayers receive an Instalment Reminder from the Canada Revenue Agency (CRA). For many of those taxpayers, who have received many such notices in the past, the reminder and the tax instalment process are familiar, although not necessarily welcome. For those who are receiving one for the first time, however, both the reminder itself and figuring out how to deal with it can be baffling.

Most Canadians, certainly those who are employed, have income tax deducted “at source”, meaning that their employer deducts an amount for income tax from their paycheques and remits it to the CRA on their behalf. However, for those who are self-employed or, frequently, those who are retired, no such deduction is automatically made from their income, and the issuance of an Instalment Reminder by the CRA may be the result.

The receipt of such a Reminder may be particularly puzzling to the newly retired, who have been accustomed to having tax deducted at source from their paycheques throughout their entire working life. However, no matter what the source of one’s income or the reason that tax has not been deducted at source, the options available to a taxpayer who receives such a reminder are the same.

Canadian federal tax rules provide that a taxpayer may be required to pay income tax by instalments where the amount of tax owing on filing is more than $3,000 in the current year (2012) and either of the two previous years (2010 or 2011). Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income is at least $3,000 less than their total tax liability for the current and either of the two previous years. Such instalment payments of tax are due on March 15, June 15, September 15, and December 15 of each year.

An Instalment Reminder issued by the CRA in February 2012 will specify two amounts, one to be paid by March 15 and the other due by June 15. Those amounts represent the CRA’s best estimate, based on the taxpayer’s return filed for the 2010 taxation year, of the net tax will which be payable by the taxpayer for 2012. The taxpayer then has the following three options.

First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of March 15 and June 15. A taxpayer who does so can be certain that he or she will not face any interest or penalty charges, even if the amount paid turns out to be less than the taxes actually payable for the 2012 tax year. (If the instalments paid turn out to be more than the taxpayer’s net tax liability for 2012, he or she will of course receive a refund on filing.)

Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2011 tax year. Where a taxpayer’s income has not changed between 2011 and 2012 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2012 will be slightly less than it was in 2011, owing to the indexation of tax brackets and personal tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2012 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease from 2011 to 2012 and there will consequently be a reduction in tax payable, this option may be worth considering.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2012 tax year is filed in the spring of 2013. However, should instalments paid be late or insufficient, the CRA can impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2012—until March 31, 2012—is 5%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It’s also possible for the CRA to impose penalties, but this is done only where the amount of instalment interest charged for the year is more than $1,000.

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

It’s that time of year again, when advertisements about the wisdom of contributing to your registered retirement savings plan (RRSP) fills the airwaves and Web sites. And, since the introduction of tax-free savings accounts (TFSAs) in 2009, February is now also the month in which Canadians wrestle with the question of whether to put any available funds into an RRSP before the contribution deadline of February 29, 2012, or whether to deposit those funds instead in a TFSA.

It’s important to be clear, at the outset, that it’s not an either/or choice. Taxpayers can (and probably should) utilize both the RRSP and TFSA options in planning their financial affairs. Realistically, however, for most taxpayers the limitation is one of resources and cash flow, and it’s often not possible to fund contributions to both an RRSP and a TFSA in the same year, let alone in the same month. That said, what are the considerations which apply in determining which savings/investment vehicle is preferable for 2012?

There are some similarities between TFSAs and RRSPs. Both allow savings to grow and compound free of current tax, and for both, contributions not made in a year can be carried forward and made in any subsequent year. As well, the types of investments which can be made with RRSP or TFSA contributions are, for all intents and purposes, the same, meaning that one’s choice of investment (i.e., guaranteed investment certificates (GICs), mutual funds, bonds, etc.) should be irrelevant to the choice of RRSP vs. TFSA. However, the differences between the two savings vehicles are at least as significant as their similarities.

Perhaps most important to taxpayers, contributions made to an RRSP are deductible from income, resulting in a lower tax bill for the year of contribution and, for many taxpayers, a tax refund. Contributions to a TFSA are, on the other hand, made with after-tax funds, meaning that tax will already have been paid on the income used to make that contribution. Many taxpayers, when presented with an option which will reduce current year taxes, find that the most attractive choice. However, over the long-term, the tax consequences of choosing an RRSP over a TFSA can erode that benefit. When funds contributed (along with investment income earned on those funds) are withdrawn from a TFSA or an RRSP, the tax consequences are very different. Funds withdrawn from an RRSP (or a registered retirement income fund (RRIF) into which the RRSP has been converted) are fully taxable, without exception, at whatever tax rate applies to the taxpayer at the time of withdrawal. TFSA funds (including accumulated investment income) are withdrawn from the plan free of tax, regardless of when the withdrawal is made or the purpose to which the funds are put. And for taxpayers who are receiving Old Age Security benefits (or any other means-tested benefits) from the federal government, it is important to note that RRSP or RRIF funds withdrawn will be included in income for the purpose of determining eligibility for such benefits, while TFSA funds will not. Finally, while RRSP contributions for 2011 must be made by February 29, 2012, there is no similar deadline for TFSA contributions—they can be made at any time during the calendar year. Finally, when funds are withdrawn from a TFSA, the plan holder can “top up” the TFSA in any subsequent year by the amount of that withdrawal. Funds withdrawn from an RRSP cannot be re-contributed, unless the withdrawal was made as part of government-sanctioned withdrawal plans, like the Home Buyers’ Plan or the Lifelong Learning Plan.

The minority of working taxpayers who are members of registered pension plans will likely find the TFSA option particularly attractive. The maximum amount which can be contributed to an RRSP for the 2011 tax year is calculated as 18% of earned income for 2010, to a maximum contribution of $22,450. However, that maximum contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under the pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, and a TFSA contribution the logical alternative.

In a similar way, for taxpayers over the age of 71, the RRSP v. TFSA question is simply irrelevant. Taxpayers over that age are not eligible to make contributions to an RRSP, making TFSAs the only tax-free savings vehicle to which they can make contributions. The benefit is greatest for older taxpayers whose required RRIF withdrawals are greater than their current needs. While such RRIF withdrawals must be included in income and taxed in the year of withdrawal, transferring the funds to a TFSA will allow them to continue compounding free of tax and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or for the federal age credit.

For younger taxpayers, where the savings goal is short-term (e.g., a down payment on a home or paying for next year’s vacation), the TFSA is clearly the better choice. While choosing to save through an RRSP will provide a deduction on that year’s return and probably a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced. While the amounts involved may seem small, the loss of compounding on even a small amount over 25 or 30 years can make a significant dent in one’s ability to save for retirement.

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

Financial planners and tax advisers are accustomed to being asked by clients at this time of year whether it makes more sense to pay down the mortgage (or other debt) or to contribute to an RRSP. That question has become more complicated now that the TFSA option has been added to the mix. There is, however, a solution which allows you to do both. Assuming a marginal tax rate of 45%, an RRSP contribution of $10,000 will generate a tax refund of $4,500. Contribute that $10,000 (or as much as you can) to your RRSP and, when the resulting tax refund lands in your bank account, move it to a TFSA or use it to pay down the mortgage or other debt, or split it between the two.

The Canada Revenue Agency has dedicated sections of its Web site to addressing the need of taxpayers for information about TFSAs and RRSPs, and those sections can be found at http://www.cra-arc.gc.ca/tx/tfsa-celi/menu-eng.html and http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/menu-eng.html, respectively.

It’s almost impossible not to have heard that the amount of debt carried by Canadian households is at an all-time high—reaching, on average, just over 150% of household income. Carrying so much debt can be relatively painless when interest rates are at historic lows, but it’s clear that rates cannot and will not remain at such levels indefinitely.

Whether it’s because of the warnings issued by financial professionals and government officials, or just the sight of ever-increasing balances on the monthly credit card or line of credit statements, it seems that Canadians are starting to recognize that their debt loads have to be reduced. And—right on cue—a number of debt reduction companies have begun advertising their services, promising to do just that.

Typically, debt reduction companies promise to work or negotiate with an individual’s creditors in order to have the amount of outstanding debt reduced—a service for which the debtor will of course pay a fee. The claims made by some such companies can seem like a lifeline to debt-burdened families. For those dealing with calls from irate creditors and struggling to make minimum monthly payments on outstanding debts, the prospect of having those debts reduced by up to 70% is very compelling. When a promise to restore a good credit rating by removing past credit mistakes from the debtor’s credit history is added to the sales pitch, it can seem almost too good to be true. And that, in fact, is the title of a recent consumer alert issued by the Financial Consumer Agency of Canada (FCAC): “Debt Reduction Companies: Beware of “Too Good to be True” Offers. That alert is available on the Agency’s Web site at http://www.fcac-acfc.gc.ca/eng/resources/consumerAlerts/alerts_posting-eng.asp?postingId=393.

The alert issued by the FCAC examines some of the claims made by many debt reduction companies, and compares these claims to the reality of the situation. The first unrealistic claim is often the one made about the percentage by which an individual’s debt can be reduced. The FCAC notes that no creditor is required to negotiate with or speak to a debt reduction company, even if the debtor has paid a fee to have such a company negotiate on its behalf. And, even if the creditor is willing to deal with the debt reduction company, it is in no way obliged to reduce debt by any amount. In other words, it’s perfectly possible for the debtor to pay a fee but get nothing for it.

Another claim sometimes made by debt reduction companies is that they will protect the debtor’s credit rating or even “clean up” that rating by having information on past defaults or late payments eliminated. The reality is that, unless the information contained in a person’s credit rating is demonstrably inaccurate, there is no way to have it removed from the credit report. Listings of past transactions, like late payments or defaults, do eventually disappear from a credit report, but that happens after a specific period of time has elapsed, not because the removal of such information is requested or demanded by a third party. The FCAC alert also reviews claims made that working with a debt reduction agency won’t have any negative effect on the individual’s credit rating or score. It warns that some such companies delay making payments to creditors for a few months in the hope of getting better results from negotiations to reduce the debt amount and that, where that happens, those late payments are likely to be reported to the credit reporting agencies, further damaging the individual’s credit rating. In some cases, debt reduction companies encourage debtors to stop all direct contact with creditors, or even to sign a power of attorney, giving the company authority to make agreements by which the debtor will be bound, even if he or she had no knowledge of them at the time.

Perhaps the most egregious claim made by debt reduction companies is the strong impression given that they are approved by the Canadian government or even that they are operating as part of a federal government program. Neither is true. Neither the federal nor the provincial or territorial governments operate debt reduction companies, and there are no government sponsored programs offering this type of debt reduction. While it is the case a debt reduction company will usually need to be registered and/or licensed by its provincial or territorial government in order to operate as a business, that is simply an administrative requirement which applies to all companies operating in a particular province or territory. Licensing or registration does not in any way mean that the provincial or federal government has approved of or endorsed the company or its way of doing business, and any claims to the contrary are simply false.

Sometimes, debtors avail themselves of the services of debt reduction companies because they are under the incorrect impression that there is no other choice open to them to deal with their debts. There are, in fact, several options. Where a debtor intends to and is able to discharge existing debts, he or she could obtain a debt consolidation loan from a financial institution. The rate of interest charged on such a loan will almost certainly be lower than that being levied on outstanding credit card or payday loan company debts, and the debtor will be able to make a single payment instead of juggling the demands of multiple creditors. Where it’s not possible to obtain such a loan, or the debtor doesn’t feel able to manage the debt repayment process alone, the best course of action is to obtain the services of a reputable credit counseling agency, which can set up a debt management program for the debtor. As part of that program, the agency will contact the individual’s creditors to arrange a manageable payment plan which might include a reduction in interest rates charged. Once a program is in place, the individual makes payments to the credit counseling agency which, in turn, forwards payments to the individual’s creditors as agreed. As well, credit counseling agencies work with clients to help with budgeting and financial management skills, with the goal of avoiding a recurrence of the individual’s financial problems. Reputable credit counseling agencies exist in both the private and the not-for-profit sectors, and information on the latter can be found on the Credit Counselling Canada Web site at http://www.creditcounsellingcanada.ca/Home.aspx.

In many ways, getting out of debt has a lot in common with that perennial New Year’s resolution of many Canadians—losing some weight and getting in shape. With both, it’s human nature to want to believe that there is an easy, painless way of accomplishing the goal without a need to change existing habits, and so it’s easy to fall for persuasive sales pitches that claim to have a quick fix for the problem. In both cases, however, the reality is the opposite—results can only be obtained through some effort, but where that effort is made and existing habits altered, successful long-term results are possible.

Two quarterly newsletters have been added—one about individual issues, and one about corporate issues. They can be accessed below.

Corporate:

Issue #18 Corporate

Personal:

Issue #18 Personal

Every year, thousands of Canadians escape our winter by traveling south, usually to the U.S., for a few weeks or months, or even the whole winter. While recent fluctuations in the value of the Canadian dollar relative to the U.S. greenback might mean that a stay in the U.S. will be more expensive this year, the lure of warm temperatures and no snow will still win out for many.

The thoughts of such snowbirds, intent on escaping the Canadian winter, are typically on improving their golf game or enjoying the sunshine, and not on the tax implications of their whereabouts. Notwithstanding, there are tax consequences and costs which can result from spending an extended period of time outside of the country.

The following information pertains to Canadians who will be spending a few weeks or months south of the border on an annual vacation, and staying in a rental property or hotel. The situation changes where the actual purchase of a property located in the U.S. is contemplated, as the rules governing the purchase and ownership of such property by Canadians are complex. The 2008 mortgage lending debacle in the U.S. has put residential real estate on the market in places like Florida and Arizona at prices which can be hard to resist. A double caveat is, however, in order. Professional tax advice is a necessity whenever a purchase of real estate in another jurisdiction is being contemplated. And additional caution is warranted where the contemplated purchase is of a property which has been foreclosed on or is being sold under power of sale. There have been instances where Canadians have purchased such property in the U.S. only to later find out that the foreclosure was not properly carried out and title to the property which they have purchased is in dispute. That’s not a situation any new property owner wants to find themselves in, especially when it’s all happening in a foreign country.

Tax 101 for snowbirds

Typically, snowbirds who go south for the winter remain what is called, in tax parlance, “factual residents of Canada”. In practical terms, the income of such taxpayers is treated, for Canadian tax purposes, as though they had never left Canada. Factual residence is determined by the Canada Revenue Agency (CRA) on the basis of whether a taxpayer has maintained “residential ties” to Canada. Such residential ties could include continuing to own a home in Canada, having a spouse or dependants who remain in Canada while the snowbird is out of the country, having personal property (like a car) in Canada, and continuing to hold a Canadian driver’s licence and medical insurance.

The vast majority of snowbirds who winter down south do maintain sufficient residential ties to Canada to be considered factual residents. Consequently, when they file their tax returns for the year, they follow all the same rules as year-round Canadian residents. They report all income received during the year from both inside and outside Canada and claim all available deductions and credits. Income tax is paid to the federal government and to the province with which their residential ties are kept. Finally, snowbirds who remain factual residents of Canada remain eligible for the goods and services tax credit, which may be paid to recipients outside of Canada.

Health care coverage

One of the biggest concerns of many snowbirds is maintaining health care insurance coverage while out of the country. In all cases, the availability and degree of coverage will depend on the health care plan in effect for the province or territory of which the snowbird is a resident, and it’s necessary to confirm in advance the coverage which will be made available for out-of-Canada medical expenses. Most snowbirds end up obtaining supplementary health-care coverage, and the premiums paid for such coverage can usually be claimed as a medical expense on the Canada tax return. As well, any out-of-pocket costs incurred for eligible medical expenses while out of Canada (whether for the individual or his or her spouse) can be claimed as a medical expense on that year’s tax return.

Old Age Security and Canada Pension Plan payments

Both Old Age Security (OAS) and Canada Pension Plan (CPP) benefits can be paid to benefit recipients who are living outside Canada, and there is no change in the amount of the benefits. As well, such payments can be made by direct deposit, and in US dollars.

Both OAS and CPP benefits received will, of course, be subject to Canadian income tax and OAS payments will be subject to the OAS “recovery tax” (clawback), if the recipient’s income for the 2011 tax year is more than $67,668.

Application of U.S. tax laws

The application of U.S. tax laws to snowbirds can, unfortunately, be a good deal more complex than the equivalent Canadian laws, and any snowbird who thinks he or she may have a U.S. tax filing or payment obligation should certainly seek professional advice. That said, it is possible to summarize in a general way the basic rules which govern the application of U.S. tax laws to snowbirds.

Canadian residents who spend part of the year in the U.S. are classified as either resident aliens or non-resident aliens. Resident aliens are generally taxed in the U.S. on income from all sources worldwide and non-resident aliens are generally taxed in the U.S. only on income from U.S. sources. The classification depends, in the first instance, on the amount of time the person spends in the U.S. during a given calendar year. A person who was in the U.S. for 183 days or more (i.e., more than half the year) during the calendar year is considered to have met the “substantial presence” test and is classified as a resident alien of the U.S. At the other end of the spectrum, a person who was in the U.S. for less than 31 days during the calendar year is considered a non-resident alien. Those who fall in the middle (which would include most snowbirds who spend, for instance, the months of January and February in Florida or Arizona) may meet the substantial presence test, depending on the application of a complex formula which uses a weighted average of the number of days of residence in the current and two previous calendar years.

Recognizing that the tax consequences of spending extended periods of time south of the border will affect thousands of Canadian taxpayers, the CRA has published an information booklet on the subject, which is available on its Web site at http://www.cra-arc.gc.ca/E/pub/tg/p151/p151-10e.pdf. The Agency has also devoted a section of its Web site to issues affecting Canadians who vacation out of the country, and that information can be found at http://www.cra-arc.gc.ca/tx/nnrsdnts/sth-eng.html.
 
Even this brief summary is sufficient to illustrate the complexity of the U.S. tax laws as they may apply to snowbirds. The best advice for those whose plans include an extended stay south of the border, particularly if they are contemplating repeat visits on an annual basis, and certainly if they are contemplating the purchase of a U.S. vacation home, is to obtain professional advice in advance on the U.S. and Canadian tax consequences. Doing so can ensure that what was intended to be a relaxing vacation doesn’t end up causing a major tax headache.

Since 2008, the federal government has permitted families which have children with severe disabilities to save for the future support of those children on a tax-assisted basis. The vehicle through which families can do so has been the registered disability savings plan (RDSP).

RDSPs, which can be established for any Canadian resident individual who is under the age of 60 and who is eligible for the disability tax credit (DTC), are similar in many ways to registered education savings plans (RESPs). As is the case with RESPs, contributions made to an RDSP (to a lifetime maximum of $200,000 per beneficiary) are not deductible by the contributor for tax purposes, but such funds are not taxed in the hands of the beneficiary when they are eventually paid out. Investment income earned on contributions made is not taxed as is it accumulated, but is included in the beneficiary’s income in the year in which it is paid out. Payments from an RDSP must commence by the end of the year in which the beneficiary turns 60 years of age.

Savings accumulated in an RDSP are supplemented, in many cases, by grant amounts provided by the federal government. There are two types of federal grants available: the first, Canada Disability Savings Grants (CDSGs), are provided to families which make RDSP contributions in a year, at matching rates of 100, 200, or 300 per cent, depending on the beneficiary’s family income and the amount contributed. There is a maximum lifetime CDSG limit of $70,000. Lower income families may also receive up to $1,000 each year in the form of Canada Disability Savings Bonds (CDSBs), to a lifetime limit of $20,000.

In order to ensure that savings contributed to and accumulated in RDSPs do not have the effect of eroding the beneficiary’s eligibility for other government benefits like Old Age Security or the Goods and Services Tax Credit, amounts paid out of an RDSP are not included for the purpose of determining eligibility for such benefits.

The federal government announced recently that it is undertaking a review of the RDSP program, to ensure that it is meeting the objectives for which it was originally created. In addition, it will address some specific issues or problems which have become apparent as the program was introduced and administered over the past three years. Some of those specific issues, as identified in the Department of Finance backgrounder, are as follows.

• When a beneficiary has attained the age of majority and is not able to enter into a contract, current rules effectively limit potential plan holders to the beneficiary’s legal representative. While those rules help ensure that the beneficiary’s interests are protected, it does prevent some individuals from becoming plan holders. Specifically, adults with disabilities who are unable, by reason of their disability, from entering into a contract, have encountered problems in establishing RDSPs. The review will seek to find an appropriate approach to addressing such legal representation issues.
• Some parents have noted that the ability to transfer funds from an RESP to an RDSP would increase the potential of such plans, and the review will examine whether it would be appropriate to allow the rollover of funds from an RESP to and RDSP and on what terms.
• Current rules provide that, where amounts are paid out of an RDSP, any CDSGs and CDSBs paid into the plan during the preceding 10 years must be repaid to the federal government. The review will examine whether this rule is too inflexible, and whether exceptions should be provided for in specific circumstances.
• Where an individual ceases to be eligible for the DTC, any RDSP of which that individual is the beneficiary must be wound up by the end of the following year. The review will examine whether greater flexibility is needed in this area, particularly where an individual’s medical circumstances are such that he or she may once again become eligible for the DTC in a future year. 

As part of the review, the federal government is seeking input from any interested stakeholders. Submissions may be made by e-mail or by regular mail, and the deadline for such submissions is December 16, 2011.

More information about RDSPs and about the review process can be found in the federal government press release, which is available at http://www.fin.gc.ca/n11/11-103-eng.asp, and the backgrounder on the subject, which can be found at http://www.fin.gc.ca/activty/consult/rdsp-reei-eng.asp.

At first glance, the idea of working to reduce your tax refund would strike most taxpayers as, at the very least, exceedingly poor tax planning advice. Most Canadian taxpayers view receiving a refund after filing their annual tax returns as getting “free” money from the federal government. In fact, except in very narrow circumstances, the reality is the opposite—it’s the taxpayer who has provided the federal government with the interest-free use of the taxpayer’s money.

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

Of course, each taxpayer’s situation is unique, and so the employer has to have some guidance as to how much to deduct and remit on behalf of each individual taxpayer. That guidance is provided by the employee/taxpayer in the form of a TD1 form which is completed and signed by every employee, sometimes at the start of each tax year but certainly at the time employment commences. The TD1 form (which is available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/td1/td1-11e.pdf) lists the most common statutory credits and deductions claimed by taxpayers, including the basic personal credit, the spousal credit amount, the child amount, and the age amount. Adding all amounts claimed together gives the Total Claim Amount, which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the federal government.

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

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

Where the taxpayer has available deductions which cannot be recorded on the TD1, it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect tax liability. The way to do so is to file a Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1213/t1213-11e.pdf) with the CRA. Once that form is filed with the CRA, the Agency will authorize the employer to reduce the amount of tax being withheld at source to more accurately reflect the taxpayer’s actual tax owing for the year. In most cases, taxpayers who file a Form 1213 do so because they are incurring expenditures which, while deductible for tax purposes, don’t show up on the TD1. Most commonly, those are expenditures like deductible support payments or contributions to a registered retirement savings plan (RRSP).

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

By this time of the year, most Canadians have a fairly accurate idea of what their total income will be for the year and so are able to do at least a rough calculation of how much income tax they must pay. While tax rates do, of course, vary by province and territory, a rough idea of one’s tax liability for the year can be determined by adding together 25% of the first $40,000 in income plus 33% of the next $40,000 in income. (A listing of the actual tax rates imposed by the federal government and by each province and territory for 2011 can be found on the CRA Web site at http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html.) If the amount of tax being withheld at source on a yearly basis exceeds that estimated amount, and there is no significant source of income other than one’s regular paycheque, taxes are probably being over-withheld, and consideration should be given to having those source deductions adjusted. If you’re having trouble determining just how much tax has been withheld from your paycheque over the course of the year (the information should be available on your pay stub or equivalent statement of salary and deductions), your company’s human resources department, or the bookkeeper who prepares the payroll, should be able to help.

As with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes some time—the CRA’s estimate is four to eight weeks. While it probably doesn’t make sense to make that change for the rest of 2011, taxpayers should at this point in the year be looking ahead to 2012. Even where the employer already has a TD1 on file for the employee, it’s easy to provide the employer with a new one for 2012. And, where the employee has deductions (or will have deductions in 2012) which can’t be recorded on the TD1, this would be a good time to prepare and file a T1213 for 2012. Doing either, or both, as the case may be, will ensure that source deductions made during 2012 accurately reflect the employee’s circumstances and his or her actual tax liability for the year.

At the beginning of 2012 changes will be made to the Canada Pension Plan which may affect Canadians who are both retired and currently receiving CPP retirement benefits and those who are contemplating retirement in the near future.

While the number of Canadians who could be affected by these changes is in the hundreds of thousands, there are some who don’t need to consider them. Canadians who have already retired and are receiving Canada Pension Plan benefits, but are either already age 70 or older, or have no plans to return to the work force, on either a part-time or full-time basis, can safely ignore these changes.

For most of the rest of us, some choices may have to be made, as follows.

Under current rules, it’s possible to choose to begin receiving CPP retirement benefits at any time between the ages of 60 and 70. However, once benefits start being paid, the recipient, even if he or she returns to the work force on a part-time or full-time basis, cannot contribute again to the Canada Pension Plan. As well, for Canadians less than 65 years of age, it is necessary, in order to begin receiving CPP retirement benefits, to be out of the work force, or to have significantly diminished earnings, for two months before benefits start. Both those rules are about to change.

The simplest change is the fact that it will be possible, as of January 1, 2012, to begin receiving CPP retirement benefits without any interruption in one’s working life. Where an individual chooses to stay in the work force while also receiving CPP benefits, it’s often the case that the choice is made from financial necessity. In such cases, a two-month interruption in earnings can impose a real hardship. That will no longer be the case.

The second change is that those who stay in the work force, or decide after retirement to return to the work force may, beginning January 1, 2012, also return to making CPP contributions. Where an individual who is between the ages of 60 and 65 and receiving CPP retirement benefits returns to the paid work force, he or she will be required to resume making CPP contributions—there is no choice in the matter. Where that individual is between the ages of 65 and 70, he or she will be able to choose whether or not to resume making such contributions. The decision is the employee’s, but the contributions will automatically be deducted from the employee’s pay, beginning January 1, 2012, unless he or she provides the employer with a signed Form CPT30, Election to Stop Contributing to the Canada Pension Plan, by the end of December 2011. That form is now available on the Canada Revenue Agency (CRA) Web site at http://www.cra-arc.gc.ca/E/pbg/tf/cpt30/cpt30-11e.pdf. Once completed and submitted to an employer, the form is effective as of the beginning of the following month, so the CRA Web site includes a reminder that it should not be completed or submitted until after November 30, 2011. As well, an employee who has signed and completed such a form and later has a change of heart can revoke the election, and once again start making CPP contributions, beginning in 2013.

One of the biggest decisions to make with respect to Canada Pension Plan retirement benefits is when to begin claiming and receiving such benefits. A lot of factors go into that decision—whether or not you are still in the workforce and how long you are planning to keep working, what other sources of income (i.e., private pension income, or annuity payments) are available, whether additional income is needed to meet current living costs, even one’s current state of health and family longevity history, etc. One of the biggest factors to consider, however, is the fact that the amount of pension received will depend on when one decides to start receiving it. And, the changes which are taking effect between 2011 and 2016 will make this a greater factor than it has been previously.

Before the changes, a CPP retirement pension was increased by 0.5% for each month after age 65 that the recipient delayed receiving it. Similarly, the amount receivable was decreased by 0.5% for each month before the age of 65 that recipient accelerated receiving it. For those who defer receipt, the monthly percentage increase will go from 0.6% in 2011 to 0.7% in 2013. That doesn’t sound like much, but it means that, by 2013, someone who defers receipt of their CPP pension until age 70, will receive a monthly pension amount which is 42% higher than it would have been if the same person had chosen to begin receiving that pension at age 65. The consequences are similar for those who choose to begin receiving CPP “early”. The reduction percentage will rise from 0.5% to 0.6% between 2012 and 2016. In practical terms, that means that someone who begins receiving their CPP pension in 2016 at the age of 60 will receive benefits that are 36% lower than they would have been if they had waited until age 65.

There is, of course, no right or wrong answer to the question of when it’s best to begin receiving CPP benefits, and certainly no “one size fits all” answer. In some cases, financial need may compel a person to begin receiving benefits at the earliest possible opportunity, regardless of the effect such a claim may have on the amount of those benefits. Others, who don’t necessarily need a CPP cheque to pay basic living expenses may nonetheless decide that they are willing to accept a lesser amount in order to have earlier access to those benefits and to use them to carry out —travel plans, for instance—which may not be as easy to accomplish later in life. Still others may decide to start using private retirement savings, like an RRSP, or begin receiving an employer-sponsored pension, while deferring receipt of CPP as long as possible. Whether any of these is the best course of action depends entirely on the individual’s circumstances (especially his or her financial circumstances) and their current and planned retirement lifestyle.

Just about everyone is familiar with the concept of a mortgage. Money is borrowed, usually from a bank or other financial institution, in order to purchase a home. That money (now known as mortgage principal), plus interest, is paid back, usually over the next couple of decades, until the home is owned “free and clear”.

While reverse mortgages have been available for some time inCanada(and even longer in theU.S.), most Canadians aren’t that familiar with them. However, reverse mortgages are being widely promoted to the baby boomers and, for a variety of reasons, are likely to gain greater traction in the Canadian marketplace in the next few years.

A number of circumstances have combined to make many Canadian retirees, in effect, house-rich and cash- or savings-poor. Fewer and fewer Canadians are members of employer-sponsored pension plans and consequently fewer and fewer Canadians can look forward to receiving monthly payments from such a pension plan throughout retirement. Fewer still will have access to the gold standard of pension plans—a defined benefit plan which is indexed to inflation. Retirees and near-retirees who aren’t members of pension plans but have saved diligently for retirement through vehicles like registered retirement savings plans have likely seen the value of their portfolios slashed in recent years as the result of stock market declines and financial crises. Even those who invested more conservatively, in GICs or government bonds, haven’t actually lost money but have for several years been receiving a virtual pittance in terms of interest returns on those investments. For both groups, the likely result is that the retirement nest egg which they had counted on to provide them with a steady source of retirement income is much smaller than they had anticipated. Finally, especially over the past year, inflation has made purchases of both food and energy—completely non-discretionary expenditures for every Canadian—more and more expensive. Over the past five or ten years, it seems that the only kind of asset which has steadily continued to increase in value is residential real estate.

Most Canadians spend a good portion of their working lives paying off their mortgages, with the goal of being mortgage-free at retirement. Once the mortgage is paid off, the value of the mortgage-free home usually makes up a significant portion, if not the majority, of the homeowner’s overall net worth. For homes which were purchased decades ago, particularly those located in large urban centers like Toronto or Vancouver, the increase in value since the original purchase can amount to more than half a million or even a million dollars.

The traditional approach, once children are no longer living at home and retirement approaches, has been to sell the family home and “downsize”, freeing up the equity in the home to provide a source of retirement income. However, 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 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. Or, it may be that the current family home is very well-suited to retirement life and that the only reason to sell that home is the need to free up equity. For a lot of reasons, where there are no financial constraints, many people would simply prefer to “stay put” for as long as possible.  

Enter the reverse mortgage. Essentially, a reverse mortgage allows homeowners to obtain cash representing a portion (usually up to 40%) of the market value of the home without having to actually sell the home and move. Interest is charged, of course, on the funds loaned, but the homeowners are not required to make any payments, of either interest or principal, while they live in the home. Instead, interest is compounded and added to the original loan amount, and the total becomes payable when the house is sold or the homeowner dies.

For retirees living in what seems to be a perpetual cash flow crunch, a reverse mortgage can sound like the ideal solution. However, there are some potential downsides or risks to keep in mind.

First, there are costs associated with taking out a reverse mortgage, and those costs are generally borne by the homeowner. An appraisal must be done on the home to determine its current market value, the homeowner taking out the reverse mortgage must obtain (and pay for) independent legal advice and the company providing the reverse mortgage will typically levy administrative, legal, and closing costs. All in all, the cost of taking out a reverse mortgage can run close to $3,000.

Second, since no payments of either interest or principal are being made, the amount owed can increase much more rapidly and eventually be much greater than most people realize. Where, for instance, a homeowner takes out a reverse mortgage of $150,000 at 6.0%, and makes no payments of interest or principal, the amount owing after 10 years will be more than $250,000, or close to double the original amount. The same compounding effect which allows savings to grow over time is working in this case against the borrower.

Finally, reverse mortgages are structured so as to be repayable when the homeowner dies or the home is sold. As is the case with conventional mortgages, “breaking” a reverse mortgage by paying if off early usually means paying an interest differential and/or penalties, both of which can be substantial.

There are, as well, other ways in which homeowners can access the equity in their homes without needing to sell. In many cases, homeowners who would qualify for a reverse mortgage would also be able to obtain a home equity line of credit from a bank or other financial institution.

Like a reverse mortgage, a home equity line of credit is based on the amount of equity which the homeowner has, and amounts up to a specified percentage of that equity are made available to the homeowner. The major advantage of a home equity line of credit, when compared to a reverse mortgage, lies in its flexibility. Funds made available through a reverse mortgage are usually provided in a lump sum when the reverse mortgage is taken out, and the interest clock starts running on that lump sum immediately. With a home equity line of credit, the homeowner is provided with access to funds up to a certain amount. The homeowner can then access those funds as needed, with interest payable only on the amount of borrowings outstanding at the particular time. As well, payments can be made to reduce the amount of outstanding borrowings at any time, without penalty.

The one major disadvantage of a home equity line of credit for cash-strapped borrowers is that, unlike a reverse mortgage, payments on a home equity line of credit must be made, usually monthly. Those payments are usually equal to the amount of interest levied on the current balance during the previous month, and there is generally no requirement to pay down principal, unless the homeowner wishes to do so. However, it is likely that the interest rate levied on a home equity line of credit (usually around the prime rate of interest) will be lower than the rate levied on a reverse mortgage made for the same property.

In the final analysis, the choice between a home equity line of credit and a reverse mortgage comes down to the individual homeowner’s circumstances, including the following considerations.

• Can the homeowner manage monthly interest payments? If the cash flow situation is such that it just isn’t possible to make those payments, no matter what the amount, then a home equity line of credit isn’t a solution.
• Are the funds obtained through the reverse mortgage or home equity line of credit to be used to pay an immediate large expense, or used to augment existing sources of income in order to meet day-to-day living expenses? If the former—for instance, if extensive renovations or repairs must be carried out on the home immediately in order for the homeowner to continue living there, then the lump sum obtained through a reverse mortgage will be put to immediate use. If however, the home owner is in a situation in which current income falls short of living expenses—for instance, funds are needed to enable the homeowner to pay increased annual property taxes—it probably doesn’t make sense to borrow (and start paying interest on) a large sum of money which isn’t currently needed. In such a situation, it would make more sense for the homeowner to take out a home equity line of credit and borrow from it only to the extent necessary to meet his or her living expenses as they become payable, and paying interest only on the amount borrowed to date.
• Is relief from the cash flow crunch which is making borrowing necessary likely to be available from another source any time in the near future? If, for instance, someone over the age of 60 has been downsized and is unable to find a new job, but will start receiving a substantial pension within the next couple of years, it would make more sense to use a more flexible home equity line of credit to bridge the gap, instead of getting locked into a long-term reverse mortgage.
• Finally, the age of the homeowner and his or her long-term plans for staying or moving should be considered. As can be seen from the example outlined above, the amount owing on a reverse mortgage can increase very quickly indeed. A couple in their early 60s who plan to live in the house for another 20 years or so could see most or all of their equity wiped out by the accumulating interest costs of a reverse mortgage. At the other end of the age spectrum, a homeowner in his or her mid-80s is, realistically, not likely to be living in the home for an extended period of time, meaning that the interest costs of a reverse mortgage will not have an opportunity to accumulate and compound to the same extent.

The fiscal year of the federal government runs from April 1 to March 31. Consequently, the financial results posted for the April to June period provide the first real indicator of the state of federal government finances for the current fiscal year.

Those results are reported in the Department of Finance publication, The Fiscal Monitor, and the Department has now released the figures for the first quarter of the 2011-12 fiscal year. Those figures show that, while there was a deficit for the quarter of $5.5 billion, that deficit was nearly two billion less than the $7.2 billion deficit recorded for the same period in fiscal 2010-11.

The improved results were attributable for the most part to increases in government revenue, especially revenue from personal income tax. For the quarter, personal income tax revenues were up by $2.1 billion on a year-over-year basis. While corporate tax revenues were also up, the increase in such revenues was much smaller, at $0.6 billion.

Increases in other revenue sources were even smaller, with non-resident income tax revenues increasing by $0.2 billion, and energy taxes and customs import duties up by $15 million and $26 million, respectively. Overall, revenue from excise taxes and duties were down by $0.7 billion, a result attributed by the Department of Finance mainly to decreases in GST revenues.

On the expenditure side of the balance sheet, the federal government recorded expenditures of $55 billion, which represented a small year-over-year increase of $0.2 billion. The bulk of that increase arose from major transfers to other levels of government, which increased by $0.9 billion. That expenditure was offset by a decrease of the same amount in “other transfer payments”, which, in the Department’s view, reflected a decline in infrastructure transfers, consistent with the wind-down ofCanada’s Economic Action Plan. A relatively small increase of $40 million was recorded in the category of major transfers to persons, which would include elderly benefits, EI benefits, and children’s benefits.

Each issue of The Fiscal Monitor, in addition to summarizing revenues and expenditures for the period, also outlines in some detail the federal government’s borrowings. That information, along with more details of the revenue and expenditure picture for the month of June 2011 and the April to June period, can be found in latest issue of The Fiscal Monitor, available on the Department of Finance Web site at http://www.fin.gc.ca/fiscmon-revfin/2011-06-eng.asp.

The Canada Pension Plan (CPP) is a cornerstone ofCanada’s retirement income structure. The Plan is financed by way of contributions made during the working life of each Canadian, and the amount of CPP retirement pension received is calculated using an actuarial formula based on those contributions. While the CPP is well-funded and on a sound financial footing, the demands made on the Plan over the next couple of decades will be unprecedented, as the number of CPP recipients increases, both in absolute terms and in relation to the number of contributors who are still in the workforce. Recognizing that reality, the federal government has made a number of changes in recent years to the rules governing CPP contributions and benefits, and the latest set of such changes will take effect in January 2012.

In order to ensure that the required contributions are made to the CPP by each employee, Canadian employers are required to deduct such contribution amounts from their employees’ paycheques and to remit those contributions on the employees’ behalf to the federal government. Employers are also required to match the contributions made by each employee, dollar for dollar, and to remit those amounts at the same time. For 2011, the employee and employer contribution amount is 4.95% each of the employee’s pensionable earnings, to a maximum contribution by each of $2,218. For the self-employed, who must pay both the employer and employee portions of CPP, the total is $4436.

Canadians are entitled to begin receiving Canada Pension Plan retirement benefits as early as age 60 or as late as age 70. Where receipt of the benefit is deferred until a later date, the amount of the monthly benefit received increases. However, it’s not uncommon these days for Canadians to work past the age of 60 or to return to work—usually on a part-time basis—after retirement. Under current rules, once an individual begins to receive a CPP retirement pension, he or she does not contribute again to the Plan, even if the decision is made to return to the work force on a part-time or full-time basis. Technically, an employer is required to stop deducting CPP contributions from an employee’s pensionable earnings when the employee:

• is at least 60 years of age but under the age of 70; and
• provides proof that he or she is receiving a Canada Pension Plan or Quebec Pension Plan retirement pension.

And, of course, where the employee is not making CPP contributions, no matching contributions are required from the employer.

The federal government has decided that, beginning in January 2012, CPP recipients who are between the ages of 60 and 65 and who return to the work force will be required to once again make CPP contributions. Where a CPP recipient is between the ages of 65 and 70, he or she will be allowed to choose whether or not to contribute to the CPP, and will have the right to change his or her mind at a later date. The overall effect of these changes on employers is that, as of January 1, 2012, employers will be required to deduct CPP contributions from pensionable earnings of workers who are:

• 60 to 65 years of age;
• 65 to 70 years of age, unless the employee files an election with the CRA and his/her employer to stop paying CPP contributions (using form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election); or

• 65 to 70 years of age, if the employee revokes his/her election to stop paying CPP contributions in 2013 or later.

For employers, these new rules will have two significant consequences. First, employers will now be required to withhold and remit CPP contributions on behalf of employees aged 60 to 65 who are currently receiving CPP retirement pension. And, of course, where an employee is making CPP contributions, there is a corollary obligation on the part of the employer to make matching contributions. Second, employers will need to determine the CPP contributor status of each employee who is aged 65 to 70 and is receiving CPP retirement benefits. Employer payroll systems will have to be amended to take account of the choice (to contribute or not to contribute) made by each employee aged 65 and older. The onus is on the employee to advise the employer in December 2011 (the new form for doing so, the CPT30, will be available in November 2011) that he or she does not wish to begin making CPP contributions in January 2012. Where no such election is made, the employer is required to begin deducting and remitting CPP contributions on behalf of the employee and, of course, to match those contributions, as of that date. As well, it is possible for an employee who has elected to not make CPP contributions to later revoke that election (but only once per calendar year), a choice which will then require the employer to once again deduct, remit, and match the employee’s CPP contributions.  

Finally, where employees are between the ages of 65 and 70, but have not yet begun to receive CPP retirement benefits, there is no change to the requirement that the employer deduct, remit and match CPP contributions for those employees. The rules for employees over the age of 70 have also not changed: there is no obligation on the employer’s part to deduct or remit CPP contributions for those employees, regardless of their circumstances.

The year 2011 may be notable in Canadian history as the year of elections. In addition to the general federal election which was held in May 2011, no fewer than 6 of Canada’s 10 provinces—Newfoundland and Labrador, Prince Edward Island, Ontario, Manitoba, Saskatchewan and British Columbia, and all of its three territories (the Northwest Territories, Nunavut, and the Yukon Territory) —will be holding provincial/territorial or municipal elections during the last quarter of 2011. As well, the party which currently forms the federal Official Opposition is holding a leadership contest, as are at least two other parties at the provincial level.

There are many differences between federal and provincial or municipal politics and election campaigns, and still more differences between election campaigns and leadership contests, but the one overriding similarity is that all parties and all candidates, at all levels, need money to run their campaigns. There are, however, limits placed on the amount of contributions which may be made by any one individual Canadian. The following are the current limits imposed:

• no more than $1,100 in any calendar year to each registered political party;
• no more than $1,100 in total in any calendar year to the various entities of each registered political party (registered associations, nomination contestants, and candidates);
• no more than $1,100 to each independent or unaffiliated candidate for a particular election; and
• no more than $1,100 in total to the leadership contestants in a particular leadership contest.

Note that the first two limits outlined above are imposed per calendar year, and not per election. Consequently, in a year like 2011, when there are elections being held at three levels of government—federal, provincial or territorial, and municipal—the political donation dollar is likely to be stretched very thin indeed.

Our tax system provides an incentive to encourage Canadians to participate in the political financing process by means of a tax credit for qualifying contributions made. However, while it’s possible for an individual Canadian to donate up to a total of $4,400 in a given calendar year under the rules outlined above, it’s not possible to claim a tax credit for that entire amount. Rather, a federal tax credit, calculated as outlined below, may be claimed only on the first $1,275 in contributions to federally registered political parties or candidates who have been nominated to run in a federal election. The calculation of the credit is as follows:  

• 75% of the first $400 of contributions, 50% of the next $350 of contributions, and 33.3% of the next $525 of contributions, for a maximum credit of $650, reached on total contributions of $1,275.

Taxpayers who make qualifying contributions to a political party or election candidate who is running for election to a provincial legislature can also claim a non-refundable tax credit for provincial tax purposes. While each of the provinces and territories provide for such a credit, which reduces provincial or territorial tax otherwise payable, both the terms and the amount of the credit are different in each jurisdiction. The following is an outline of the amount of tax credit which may be claimed in those jurisdictions which are holding provincial or territorial elections this fall.

Newfoundland and Labrador, Prince Edward Island

• 75% of the first $100 of contributions, 50% of the next $450 of contributions, and 33.3% of the next $600 of contributions, to a maximum credit of $500, reached on total contributions of $1,150

Ontario

• 75% of the first $372 of contributions, 50% of the next $868 of contributions, and 33.3% of the next $1,581 of contributions, to a maximum credit of $1,240, reached on total contributions of $2,821

Manitoba

• 75% of the first $400 of contributions, 50% of the next $350 of contributions, and $33.3% of the next $525 of contributions, to a maximum credit of $650, reached on total contributions of $1,275

Saskatchewan

• 75% of the first $400 of contributions, 50% of the next $350 of contributions, and 33.3% of the next $525 of contributions, to a maximum tax credit of $650, reached on total contributions of $1,275

Northwest Territories

• 100% of the first $100 of contributions, 50% of next $800 of contributions, to a maximum credit of $500, reached on total contributions of $900

Yukon Territory

• 75% of the first $100 of contributions, 50% of the next $450 of contributions, and 33.33% of the next $600 of contributions, to a maximum credit of $500, reached on total contributions of $1150

It’s readily apparent that there are significant differences in the amount of credit provided at different contribution levels, depending on the province. It’s also the case that different rules can apply with respect to the types of contributions which will be eligible for that provincial or territorial tax credit—most allow a credit for contributions made to registered political parties, to constituency associations, and to candidates for election to the legislature—but those criteria are not universal across all provinces and territories. Anyone who is considering making a contribution with the expectation of receiving a provincial tax credit in respect of that contribution would be well-advised to check with the government authority which administers elections in their province or territory to confirm that their planned contribution will be eligible for that credit.

In all cases, both federal and provincial/territorial tax credits for qualifying political contributions made at any time during 2011 will be claimed on the 2011 personal income tax return, to be filed in the spring of 2012.

Since they became available on January 1, 2009, Tax-free Savings Accounts (TFSAs) have proven to be extremely popular with Canadians. TFSAs offer Canadians aged 18 and older an opportunity to save and invest on a tax-free basis, without any restrictions on when amounts saved can be withdrawn or the uses to which accumulated funds can be put.

There has also, unfortunately, been a measure of confusion about the mechanics of how TFSAs work among both the Canadian public and, in some cases, the financial institutions which offer and administer the plans. That confusion led to a situation in 2009 in which a number of Canadians had inadvertently overcontributed to their TFSAs, and then received assessments which included a penalty tax. The Canada Revenue Agency (CRA) eventually agreed to provide relief from such penalties on an administrative basis, where the overcontribution was clearly inadvertent and there had not been any effort to obtain an undeserved tax advantage. The confusion also led to the CRA’s Taxpayers’ Ombudsman to look into the situation and the results, a report entitled “Knowing the Rules” was recently released. Most of the Ombudsman’s report dealt with the need for the CRA to more clearly explain and publicize the rules governing TFSA contributions, withdrawals, and transfers. The Minister of National Revenue recently issued a news release indicating the measures which the CRA would be taking to respond to the Ombudsman’s recommendations. Those measures include updating the CRA’s Web site content on TFSAs, issuing Tax Tips as needed, providing community newspaper articles on the subject, and holding webinars for financial institutions.

While all of those changes will be welcome, the question of how much can be contributed to an individual’s TFSA for this year is likely already on the minds of Canadian taxpayers. The deadline for a current year contribution is December 31^st of the taxation year and that date is now less than four months away. As well, many Canadians who have a TFSA savings account may be in habit of depositing any “extra” money like a tax refund or a federal or provincial tax credit cheque into that account throughout the year, as those amounts are received. Without a clear understanding of what one’s limit is for the year, it’s easy to go “offside” without even realizing it.   

The easiest way to find out one’s contribution limit for 2011 is by taking a look at the Notice of Assessment received from the CRA for the 2010 tax return filed earlier this year. However, many taxpayers don’t keep or file their Notice of Assessment, although it’s a good idea to do so, for many reasons. If that’s the case, it’s possible to find out one’s 2011 TFSA limit by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. For those with internet access, information on TFSA contribution room can be obtained by going to the CRA’s Quick Access service on its Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/qckccss/menu-eng.html. In both cases, it will be necessary to provide some personal information, including figures from previously filed tax returns, for security reasons.

It’s also fairly easy to calculate one’s contribution room for 2011. Each Canadian over the age of 18 can contribute up to $5,000 per year, beginning in 2009. If no contribution, or less than the maximum contribution, is made in a year, the “shortfall” is added to the following year’s contribution. So, a taxpayer who has never contributed to a TFSA would have $15,000 of contribution room for 2011, made up of $5,000 of contribution room for each of 2009, 2010, and 2011.

One of the features of a TFSA which makes it such an attractive savings vehicle is its flexibility. That flexibility is most apparent when it comes to withdrawals made from a TFSA. Where funds are withdrawn (and there are no limits on the amount of withdrawals or any restrictions on the use to which the funds withdrawn can be put), the amount of that withdrawal can be recontributed, but not until the following year. Many of the taxpayers who inadvertently went offside with respect to the TFSA rules did so because of a misunderstanding of the withdrawal/recontribution rules. In many cases, taxpayers made a withdrawal from their TFSAs early in a taxation year and then recontributed the withdrawn amount later in the year, in the mistaken belief that recontribution at any time was permitted.

The withdrawal/recontribution rules are perhaps most easily understood by means of an example: the following straightforward illustration of the rules is taken from the CRA Web site.

In 2009, Sarah contributed $5,000 to her TFSA. In 2010, she makes another $5,000 contribution to her TFSA. Later that year, she withdraws $3,000 for a trip. Unfortunately, her plans change and she cannot go. Since Sarah already contributed the maximum to her TFSA earlier in the year, she has no TFSA contribution room left. If she wishes to re-contribute part or all of the $3,000, she will have to wait until the beginning of 2011 to do so. If she re-contributes before 2011, she will have an excess amount in her TFSA and will be charged a monthly tax of 1% on the highest excess TFSA amount for each month that an excess exists in the account. The $3,000 will be added to her TFSA contribution room at the beginning of 2011.   

As the example suggests, the cost of overcontributing to a TFSA can be steep—a penalty tax equal to 1% of the excess contribution is levied during each month that the taxpayer is in an overcontribution position. So, in the above example, if Sarah recontributed the $3,000 in June 2010 and left the funds there through the end of the year, she would be assessed a penalty tax of $210, almost certainly eliminating any interest earned during the year on her $3,000 overcontribution.

Another area that has given taxpayers difficulties is that of transfers between institutions. As is the case with registered retirement savings plans, it’s possible to open a TFSA at virtually any financial institution in Canada, and quite often incentive interest rates or bonuses will be offered to attract TFSA deposits. Consequently, it wouldn’t be unusual for a taxpayer who has TFSA funds on deposit at one institution to decide that a better deal is available at a different financial institution. Where a taxpayer moves funds from a TFSA at one financial institution to a TFSA at another such institution, there is no impact on the taxpayer’s current year contribution room, as long as the transfer is what is known as a “qualifying transfer”, meaning a transfer done directly between those two financial institutions. Such transfers can, however, take a bit of time to execute and the taxpayer may well feel that it would be faster and easier to simply withdraw the funds from the TFSA at the first financial institution and then deposit them him or herself into the TFSA at the second one. However, that course of action has some unwelcome consequences. Where a taxpayer withdraws funds from one TFSA and then contributes that amount to another TFSA, the subsequent contribution will be considered a new contribution that will reduce, and may even exceed, the taxpayer’s TFSA contribution room for the year. And, of course, where TFSA contribution room is exceeded, the result will be the imposition of a penalty tax.

The following example of how the qualifying transfer rules work is also taken from the CRA Web site:

On January 5, 2011 Don contributed $5,000 to his TFSA in Bank "A" leaving him with an unused TFSA contribution room of zero.

In July, he received his TFSA statement from Bank "A" which indicated there was only a minimal growth ($25) from his investment. Don decided to consult with other financial institutions to see if they offered a better rate of return for his TFSA investment. Don found a better rate offered at another financial institution and decided to transfer his TFSA account to Bank "B".

In order for Don's contribution to the Bank "B" TFSA to be considered a qualifying transfer, Bank "A" must make a direct transfer of funds to Bank "B" to ensure that there would be no tax consequences.

If, instead, Don goes into Bank "A", withdraws the amount in his TFSA and walks into Bank "B" to open a new TFSA with a contribution of $5,025, the contribution will be treated as an ordinary contribution and because his unused TFSA contribution room is already zero, he will have an excess TFSA amount of $5,025 and will therefore be subject to a 1% per month tax on excess TFSA amount for as long as the excess TFSA amount exists. The withdrawal from Bank "A" will be added back to his contribution room at the beginning of 2012.

If Don left his contribution to Bank "B" in his TFSA for the remainder of the year, his penalty tax would be calculated as follows:

• Highest excess TFSA amount per month from July to December = $5,025.
• Tax = 1% per month on the highest excess amount = $5,025 x 1% x 6 months, which is $301.50.

When it provided administrative relief from the penalty tax to taxpayers who had made inadvertent overcontributions to a TFSA, the CRA made it clear that the relief was being provided on the understanding that taxpayers might not be familiar with the new rules. The Agency was equally clear that no such concessions would be forthcoming. With that in mind, taxpayers should consider the following.

• If regular or periodic contributions have been or are being made to a TFSA throughout the year, it’s a good idea to take the time to calculate one’s 2011 contribution room, to ensure that the limit won’t be exceeded. If that’s already happened, the best course of action is to withdraw the excess funds immediately, as a penalty tax will be assessed for every month or part month that those excess amounts remain in a TFSA.
• If TFSA funds have been moved from one financial institution to another, and that transfer was effected by means of a withdrawal and deposit, rather than a direct bank-to-bank transfer, remember that those funds will be counted as a current year contribution. If the withdrawal/recontribution has resulted in an excess contribution for the year, those excess funds should be withdrawn as soon as possible.
• Those who are considering making a withdrawal from a TFSA within the next 6 months or so, perhaps to pay for a winter vacation or to make a 2011 RRSP contribution, should consider making that withdrawal before the end of the calendar year. TFSA funds which are withdrawn before the end of 2011 can be re-contributed beginning January 1, 2012. Where funds are withdrawn after December 31, 2011 and during 2012, no re-contribution of those funds will be allowed until January 2013 at the earliest. Even if a re-contribution isn’t necessarily planned, accelerating the withdrawal into 2011 will provide the taxpayer with increased flexibility should a re-contribution become possible. As well, since there are no tax consequences to withdrawing funds from a TFSA, it doesn’t matter, from an income tax perspective, whether that withdrawal is done in 2011 or 2012.

Very few Canadians escape paying personal legal fees at one time or another and, depending on the situation, those fees can add up quickly. Unfortunately, while legal fees incurred in some circumstances may be deducted from income on the annual tax return, there sometimes doesn’t seem to be any rhyme or reason to what’s deductible and what’s not.

First, the bad news: legal fees incurred in situations experienced by millions of Canadians (e.g., legal costs paid in connection with the purchase or sale of a house, or legal costs paid to obtain a divorce or to establish custody or visitation rights) are not deductible. Generally, personal (as distinct from business-related) legal fees become deductible for most taxpayers only when they are seeking to recover amounts which they believe are owed to them, particularly where those amounts involve employment or employment-related income or, in some cases, family support obligations.

While the term “legal fees” would seem to be self-explanatory, such amounts don’t always have to be paid to a lawyer to qualify as “legal fees” for the purpose of the deduction. For example, an employee whose employment is terminated could deduct amounts paid to a consultant in labour relations to negotiate a severance package on his or her behalf.

Perhaps the most common situation in which legal fees paid become deductible is that of an employee seeking to collect (or to establish a right to) salary or wages. This might involve an employee who, having been “downsized” out of a job, brings legal action alleging that the amount of notice (or compensation provided in lieu of notice) was insufficient. In that situation, legal fees incurred to establish a right to amounts allegedly owed by the employer are deductible by the former employee, even if the action brought is ultimately unsuccessful. As well, proposed changes to the law will allow a deduction for legal fees paid to collect or to establish a right to collect any amount that the taxpayer would be required to include on his or her tax return as employment income, even if that amount is not paid directly by the employer. However, in all cases any claim must be reduced by amounts awarded to the taxpayer, or by any reimbursement of legal fees received.

The rules governing the deductibility of legal fees paid in connection with the enforcement of support obligations are, unfortunately, more complex, much like the tax rules governing the taxation of support obligations generally. Nonetheless, there are some general guidelines which can be laid out.

First of all, as noted above, legal costs incurred to obtain a separation agreement or a divorce, or to establish custody or visitation rights are not deductible under any circumstances. And, at one time, the Canada Revenue Agency (CRA) took the position that such costs incurred in connection with spousal or child support obligations were similarly not deductible. In recent years, however, the Agency has relaxed its position somewhat, and legal fees paid for the following purposes will be deductible by the person receiving the payments:

• collecting late support payments;
• establishing the amount of support payments from a current or former spouse or common-law partner;
• establishing the amount of support payments from the natural parent of that person’s child (who is not a current or former spouse or common-law partner) where the support is payable under the terms of a Court order;
• trying to get an increase in support payments; or
• trying to make child support non-taxable.

 On the other side of the support equation, it is clear both from CRA policy and a number of court decisions (and re-affirmed in a CRA technical interpretation issued in April 2011) that legal costs incurred to defend against claims for support or increases in support are not deductible.

The CRA’s position on the deductibility of legal costs incurred in relation to family support matters has evolved over the years in a somewhat piecemeal fashion, and the result has been some degree of confusion over the time periods for which certain changes are effective. Anyone seeking a deduction for legal fees incurred in connection with a family support matter should obtain advice from a tax professional familiar with the facts of their particular situation.

Finally, there is one other situation in which taxpayers may deduct legal fees incurred and that is in relation to a dispute with the CRA. Specifically, fees (including accounting fees) paid for advice given or assistance rendered in relation to a tax assessment or reassessment or the filing of a Notice of Objection or a court appeal are deductible for tax purposes.

Earlier this year, Canadians filed about 27 million tax returns in about a three month period between March and June, and the Canada Revenue Agency (CRA) was required to process and issue a Notice of Assessment for every one of those returns. About two-thirds of those returns were e-filed—filed by electronic means like NETFILE, EFILE OR TELEFILE—meaning that the CRA did not receive any receipts or other documentation to support claims for deductions or credits made on the taxpayer’s return. As well, the CRA sets time frames for itself within which it attempts to have all returns reviewed and processed and a Notice of Assessment provided to the taxpayer. Those time frames range from 2 weeks, in the case of e-filed returns, to 4–6 weeks for paper-filed returns. The need to review and process so many returns within such a compressed time period obviously means that it’s impossible for the CRA to examine every return in minute detail and to verify the accuracy of each and every deduction and credit claimed. And that’s why many Canadians find an unexpected letter from the CRA in the mailbox at this time of year.

Receiving unexpected correspondence from the tax authorities is almost guaranteed to be unsettling for the taxpayer who receives it. But, in most cases, it’s nothing more than the CRA fulfilling its administrative responsibilities with respect to the assessment of tax returns.Canada’s tax system is a self-assessing one, in which taxpayers use a standardized form to provide the revenue authorities with a summary of their income and allowable deductions and credits for the year, calculate tax owed on the resulting taxable income, and remit that amount to the CRA. It’s a system that relies heavily on the voluntary and honest participation of taxpayers.

When it comes to the reporting of income for tax purposes, the CRA is usually able to verify amounts by cross-checking the amount of income reported by the taxpayer against a T4 slip issued by the taxpayer’s employer, or a T5 slip issued by a financial institution for interest income paid to a client. A copy of each such slip is filed with the CRA, making verification of amounts reported relatively easy. When it comes to allowable deductions and credits, however, the verification process is more difficult. In many cases, taxpayers are allowed to claim credits or deductions (for example, federal tax deductions for child care expenses or provincial tax credits for rent or property taxes paid) without being required to provide the CRA with the related receipts documenting the expenditure. And, of course, those who file electronically file no receipts at all.

It’s clearly impossible to contact everyone who files electronically, let alone all those who file a tax return. Instead, the CRA employs a number of review programs in which some taxpayers are contacted either before or, more likely, after their returns have been filed and assessed, and asked to provide additional information, documentation, or receipts in order to support claims made on that return

While it’s stressful, even where everything is in order, to have one’s return selected for such review, in the vast majority of cases a request for additional information or documentation is simply that and no more than that. Taxpayers often wonder why their particular return was singled out for review (and how they could have avoided it!), but in many cases the return was simply selected at random. That said, it’s also true that there are some events or circumstances which increase the likelihood that the CRA will request further verification of claims made on a return. As a general rule, where a current year return contains information which is significantly at variance with that filed in previous years (for example, a significant increase in the amount of medical expenses claimed), the chances that the taxpayer will be contacted for more information increase. Similarly, a change in the taxpayer’s personal circumstances which alter the tax deductions or credits for which he or she is eligible may generate a query from the CRA. For instance, a recently separated or divorced parent who claims the eligible dependant credit for the first time may be asked to substantiate the fact that there has been a separation or divorce and that he or she has custody and care of the child for whom the credit is being claimed. And, of course, where the income reported on a return doesn’t match the number on a T4 slip (you say you earned $38,000 during the year, but the T4 slip issued by your employer puts your income at $42,000), the CRA is going to want to know why.

In the vast majority of cases, claims made and information reported on a return are accurate and legitimate and, once the CRA is provided with the requested information or documentation, the matter will be at an end. Problems arise, however, where taxpayers either don’t have the documentation requested (because they have lost, have destroyed, or haven’t kept the related receipts) or because they simply elect to ignore the letter from the CRA in the hope, perhaps, that the Agency will forget all about it. Unfortunately for such taxpayers, either approach will eventually end with the return being reassessed to disallow the deduction claimed, and the resulting increased tax bill. The onus is always on the taxpayer to provide proof of eligibility for any deductions or credits claimed, and the CRA has the legal right to ask for such proof and to disallow deductions or credits where that proof is not forthcoming.

Typically, where the CRA asks a taxpayer for information or documentation, it will also indicate a deadline (usually within 30 days) by which the information or documentation must be provided. That information or documentation can be provided by fax or by regular mail (the CRA does not deal with taxpayers on confidential tax matters through e-mail, for security and privacy reasons), and the letter will include a toll-free fax number which can be used. It’s always advisable to keep copies of any correspondence with the CRA and, especially, to keep copies of any receipts sent to the Agency. (Note that where the CRA has asked for receipts, cancelled cheques or cheque images or invoices are not acceptable substitutes.) Any letters sent to the CRA should include the social insurance number of the taxpayer and the Reference Number which will appear in the the CRA’s original letter. As well, the letter will include a toll-free telephone number at which the taxpayer can contact a CRA representative for any needed clarification. Finally, if the reply is mailed to the CRA, it’s not a bad idea to send it by a means (either through Canada Post or one of the private courier services) which will allow the taxpayer to verify receipt by the Agency, and the date on which it was received.

A final practical point: each year, the CRA sends review requests to many taxpayers who never receive the letter because the address which the CRA has for those taxpayers is out of date. Sometimes, such taxpayers first learn of the review query when a letter finally catches up to them informing them that they owe additional tax as a result of their failure to respond to earlier CRA correspondence. It’s a particular problem for post-secondary students who may file a return in March or April while living at one address and then move shortly thereafter, when the school year ends. For them, the best course of action is to use a more permanent address—usually, their parents’ home address—as the address they have on file with the CRA. In all cases, however, it’s up to individual taxpayers to keep the CRA informed of a current address at which they can be reached.

The vast majority of requests for information issued by the CRA are generated simply as part of their standard review programs and don’t mean that there is anything “wrong” with the taxpayer’s return. Responding to the CRA’s request in a timely fashion with the requested information or documentation (and keeping copies of both) will, in nearly all cases, bring the matter to a satisfactory conclusion for both the taxpayer and the CRA.

Two quarterly newsletters have been added—one about individual issues and one about corporate issues. They can be accessed below.

Corporate:

Issue #17 Corporate

Individual:

Issue #17 Personal

Our tax system provides a federal non-refundable tax credit for taxpayers who have what is termed a “prolonged and severe impairment in physical or mental functions”. The federal credit is a substantial one—for 2011, the amount on which the credit is based is $7,341, meaning the credit itself is equal to just over $1,100. When a taxpayer is entitled to claim the disability tax credit and that credit is combined with the basic personal credit to which virtually all Canadian taxpayers are entitled, the taxpayer would be able to receive (for 2011) nearly $18,000 in income for the year with no federal tax liability.

While being able to claim the disability tax credit can make a huge difference to the standard of living available to disabled persons, who typically must manage on a lower than average income, there are additional consequences to being able to make that claim. Disabled taxpayers are generally eligible for a number of tax programs (such as Registered Disability Savings Plans), and the requirements of other tax credit programs (like the education and textbook tax credits or the Home Buyer’s Plan) may be altered or relaxed in ways which recognize the special circumstances of disabled taxpayers. In almost all cases, eligibility for those programs or altered requirements requires that the taxpayer qualify for the disability tax credit. In other words, where a taxpayer applies to the Canada Revenue for a determination of his or her eligibility for the disability tax credit, there’s a lot riding on the outcome of that decision.

That being the case, it’s unfortunate that the process of obtaining a Disability Tax Credit certificate, which certifies that the taxpayer may claim the disability tax credit, isn’t always straightforward or easy, even for those who qualify. To start with, it’s necessary to have a medical practitioner who is very familiar with both the taxpayer’s medical condition and history and also his or her day-to-day living arrangements to complete a lengthy (nine-page) form, outlining in detail both the individual’s medical condition and how his or her disability affects day-to-day living. That form (Form T2201) is structured in such a way that the medical practitioner is required to answer only “yes” or “no” to questions which contain words or phrases (such as “inordinately”, “significantly”, or “markedly”) whose meaning can be very subjective. As well, the requirements for eligibility for a disability tax credit certificate are very precise, and the medical practitioners who are completing these forms are not typically familiar with those requirements.

Until recently, the real difficulty for taxpayers who were denied eligibility for a Disability Tax Credit certificate was that there was no way to directly appeal from that denial. Where eligibility was denied, the taxpayer had no option but to file his or her next income tax return and then object to the Notice of Assessment which was issued by the Canada Revenue Agency (CRA) in respect of that return. However, that process contained a kind of Catch-22. Often, because income was low, a return filed by a disabled taxpayer would be assessed as having no tax owing—what is known in tax terminology as a “nil assessment”. The Catch-22 arose because, under our tax law, no appeal is possible from a nil assessment, leaving the taxpayer with no means to appeal from or dispute the decision which found that he or she was not entitled to a Disability Tax Credit certificate.

Recognizing the injustice inherent in that situation, the federal government has recently changed the rules to provide taxpayers with the right to object where the CRA determines that they are not eligible for a disability tax credit. That change will be effective for the 2010 and subsequent taxation years.

As a matter of procedure, anyone who wishes to object to a denial of eligibility for the credit must do so by the later of two dates: 90 days after the notice denying eligibility is mailed by the CRA, or one year after the due date for the tax year in question. Take, for example, a taxpayer who submits an application for a Disability Tax Credit certificate in June 2011 and to whom the CRA mails the notice denying eligibility in October 2011. That taxpayer will have until April 30, 2013 (one year after the 2011 filing due date of April 30, 2012) to appeal against the CRA’s determination. The form to be used in appealing against the CRA’s determination is the usual Notice of Objection form—T400A, which is available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t400a/README.html.

Special rules—and special time limits—will apply to taxpayers who applied for the certificate in 2008, 2009, or 2010 and who were denied but were unable to appeal. Those taxpayers can now appeal directly against the CRA’s original decision to deny eligibility, but have only 180 days after June 26, 2011 (the day on which the enacting legislation received Royal Assent) to do so.

The CRA has posted a Q&A document about the new appeal rights on its Web site, and that document can be found at http://www.cra-arc.gc.ca/gncy/bdgt/2011dtc-ciph-eng.html.

As summer reaches its midpoint, students who are about to start their post-secondary education as well as those returning for a second, third, or fourth year of university or college will be gearing up over the next few weeks for the upcoming year. And while students are likely to be preoccupied with choosing courses, majors, or residences, or finding a place to live off-campus, their parents are more likely to be focused on tuition bills, residence costs, and the price of textbooks—and how to pay for it all.

Many current post-secondary students are likely the children of baby boomer parents. For the baby boomers, the cost of post-secondary education was, in many cases, offset by generous student loans on which no interest was payable while they remained in school, as well as by government student grants which didn’t need to be repaid at all. While both the federal and provincial governments continue to provide student loans, receiving outright government grants just isn’t the reality for post-secondary students in 2011. As well, the cost of post-secondary education has risen sharply over the past few years, at the same time as government funding of post-secondary educational institutions has, in many cases, diminished. For a student who lives away from home while attending university, the reality is that the combination of tuition, books and residence will cost at least $15,000-$20,000 per year, even for general undergrad studies. And, for students undertaking studies leading to a professional degree like law, medicine or dentistry, that amount may barely cover the cost of tuition.

The good news is that, apparently in recognition of the fact that students and their parents are being asked to shoulder an ever-increasing share of the ever-increasing cost of post-secondary education, the federal government has put in place or enhanced a number of tax “breaks” for post-secondary students.

While the rules governing eligibility for and the amount of those “breaks” can be detailed, students generally can claim a non-refundable tax credit for tuition (but not residence) bills, an “education amount” based on the number of months they attended school during the tax year and a “textbook amount” which, despite its name, has nothing to do with any cost incurred for textbooks. As well, many of the expenses which may be claimed by taxpayers generally, such as moving costs and the cost of public transit, are equally available to students.

Aside from the cost of residence (which is not, in any case, deductible or creditable for tax purposes), the largest single expense for most students is tuition fees, which can range from around $5,000 to over $15,000, depending on the school and the program. No matter what the amount, students are entitled to a federal tax credit (which reduces their tax otherwise payable) equal to 15% of their tuition bill. Each province also provides a non-refundable tax credit for tuition paid, with the percentage amount ranging from 5% to 11%.

Both full and part-time university students can also claim the “education tax credit”, which is calculated as a fixed amount for every month of full or part-time attendance during the tax year. For 2011, the full time amount to be claimed on the federal tax return is $400 per month, while the part-time amount is $120 per month. The total amount claimed is then multiplied by 15% to arrive at the credit claimed on the federal tax return. As with the tuition tax credit, the provinces all offer an education tax credit, with both the amount and the conversion percentage varying by province.

The final “standard” deduction available to post-secondary students is the so-called textbook amount. The name is something of a misnomer, as neither eligibility for nor the amount of the credit depends on expenditures made for textbooks. Rather, the federal textbook amount is a fixed monthly amount (currently $65 for full-time and $20 for part-time students) which, like the tuition and education amounts is converted to a credit by multiplying by 15%, and which can be claimed by any student who is eligible for the education amount.

Non-refundable tax credits, like the tuition, education, and textbook credits outlined above, work by reducing the tax which the individual claiming the credits would otherwise have to pay. However, post-secondary students generally have relatively low income—and consequently relatively low tax bills—and so may not be able to “use up” all of their available credits in a single tax year. Two solutions are possible. First, the student may transfer the unused credit to a spouse, parent, or grandparent (and it’s not necessary for the parent or grandparent to have actually paid the tuition bill in order to claim the transferred credit). Second, the student can keep the excess credit and claim it in any future tax year, when his or her income and tax bill will presumably be higher. There are some restrictions and limitations on the transfer of student tax credits, but generally speaking, most students should be able to transfer credits to parents or grandparents without difficulty.

The three credits outlined above (tuition, education, and textbook) are the credits which are specifically claimable by students. There are however, other credits which, while available to taxpayers generally, are frequently claimed by post-secondary students. The first is the moving expense. Most students move at least twice a year during the course of their post-secondary careers, and some of those moving expenses are deductible from income earned by the student. Specifically, where students move to take a summer job, any moving costs incurred are deductible from income earned at that summer job, as long as the student’s new home is at least 40 kilometres closer to the job location than the place they’re moving from. It doesn’t matter if the student is simply moving back home for the summer – the moving expense deduction is available as long as the 40-kilometre requirement is met. As well, students who move for purposes of a co-op term can also deduct moving expenses from income earned during the co-op term, assuming once again that the 40-kilometre requirement is satisfied.

Finally most students, out of necessity, use public transit, especially when they live off-campus. Where those students purchase monthly (or longer) public transit passes, they can claim a credit for the total annual cost of those passes, without any dollar amount limit, on the tax return for the year. The cost of weekly passes can also qualify for the credit, assuming that those passes are purchased on a regular basis. As with the tuition, education, and textbook credits, the cost of transit passes is converted to a federal credit by multiplying by 15%. A parallel credit is offered by most of the provinces, with the conversion rate varying from province to province. And, as with the tuition, education, and textbook credit amounts, a parent can claim the cost of transit passes purchased by or for the student, assuming that student is under the age of 19 at the end of the year.

It’s almost inevitable, notwithstanding savings, part-time and summer jobs, and all of the tax “breaks” offered to post-secondary students, that most students will end up incurring some debt in order to pay for their education. Where that debt is in the form of government-sponsored student loans (generally, loans provided under the Canada Student Loans program or the equivalent provincial program), interest paid on those loans after graduation can qualify for a tax credit, at both the federal and provincial levels. It is important to remember, however, that only interest paid on loans extended under government-sponsored programs qualifies for the credit. Loans provided by private lenders (e.g., through a student line of credit) do not qualify, and interest paid on any consolidated loans which include funds advanced by private-sector lenders will similarly not be eligible for the credit.

The number of tax credits, deductions and benefits available to post-secondary students, and the rules governing the calculation, transfer and carry-over of those credits can be confusing. The Canada Revenue Agency Guide P105, Students and Income Tax, which is usually updated annually, is an excellent source of information, providing answers to most of the questions which arise in this area. A current version of that guide, which was last updated in December of 2010, is available on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/E/pub/tg/p105/README.html.

The subject of retirement funding is on a lot of minds these days. The first of the baby boomers, born in 1945, hit the traditional retirement age of 65 in 2010, and that milestone has pushed to the forefront the question of how financially prepared Canadians are for retirement.

Traditionally, retirement at the age of 65 was marked by receipt of the first of (hopefully) many monthly cheques from the pension plan into which the new retiree had contributed for decades. But that’s not today’s reality. Many employed Canadians do not, in fact, belong to a pension plan and many more who do have seen those plans significantly altered over the past couple of decades.

To understand the changes, a bit of background is required. Private retirement savings (distinct from government programs like Canada Pension Plan or Old Age Security) come in two basic forms—registered retirement savings plans (RRSPs) and registered pension plans (RPPs). An RRSP can be set up by any working Canadian taxpayer, and a tax deduction claimed for contributions made to that plan. Under current laws, however, only an employer can create an RPP for its employees. Deductions are made from an employee’s salary or wages and contributed to the pension plan in his or her name. The employer also makes a contribution to the plan on behalf of each employee. Those contributions are combined and invested to create the pool of capital which will be used down the road to provide a retirement pension for the employee.

Within the general category of RPPs, however, there are two very different types of plans. Both are funded by means of employer and employee contributions, but there the similarity ends. The first type of plan, the increasingly rare “defined benefit” plan, is now mainly the prerogative of public sector employees. Under a defined benefit plan, the employee is guaranteed pension benefits at a specified level (sometimes also indexed to inflation). Where plan assets, for whatever reason, fall short of the amount necessary to provide benefits at that level, the employer is responsible for making up any shortfall. Under the second type of RPP, the “defined contribution plan”, there is no guarantee with respect to the amount of pension benefit which will be available to the employee. Employee contributions and employer contributions are combined and invested over the employee’s working life and the total amount accrued is available to the employee when he or she retires, to structure in the way he or she chooses to provide a stream of retirement income.

While it is clearly better to belong to a defined benefit plan than a defined contribution plan (and many Canadians have seen their defined benefit plans converted to defined contribution plans or group RRSPs over the past decade or so), the concern which has arisen over the past few years is for those Canadians who don’t have access to a pension plan of any kind. Those Canadians can, of course, contribute to an RRSP, but statistics show that most Canadians are simply not contributing to RRSPs and therefore not accumulating retirement savings in amounts sufficient to provide for a comfortable retirement.

The federal and provincial governments have concluded that part of the solution to this problem lies with a new vehicle for retirement savings known as Pooled Registered Pension Plans (PRPPs).

What PRPPs represent, essentially, is an opportunity for Canadians who do not currently have access to an employer-sponsored RPP to join a pooled defined contribution plan with others in the same position. There are many reasons why an individual might not have access to a employer-sponsored RPP. The self-employed, of course, immediately come to mind, but even Canadians who are employed by a company may not have the option. Setting up and administering a registered plan, and managing the investment of funds in such a plan is an expensive, time-consuming and specialized undertaking. Many small companies do not have the expertise or resources to do so and the cost of retaining professionals to manage an employee pension plan is not cost-effective where the number of employees is small. The idea behind PRPPs is that a third party administrator would take on most of the responsibility that employers usually bear with respect to RPPs, but would do so for not one but for many employers and self-employed taxpayers who would pool their contributions into, and share the costs of, a single plan.

Finance officials from the federal and provincial governments met at the end of 2010 to consider the possible structure of PRPPs. Following that meeting, a backgrounder outlining the framework for such plans was issued, from which the following details are taken:

• There will be two classes of members eligible to participate in PRPPs. Employed members will include employees of an employer who chooses to offer a PRPP and individual members will include the self-employed and employees of an employer who does not offer a PRPP. While investments will be common across all members, there will be some administrative and regulatory differences between the two classes of members.
• Where an employer chooses to provide a PRPP, the employees of that employer may be enrolled in the plan. Individual members will make their own choice as to whether to join a PRPP. Where an employer does provide a PRPP, employees can be enrolled in that Plan at any point during their employment, not just when they are first hired.
• An employer who chooses to provide a PRPP will be responsible for selecting the particular Plan in which his or her employees will be enrolled and for effecting that enrollment. The employer will determine the level of employee contributions and will be responsible for collecting and remitting those contributions.
•  Employers may—but are not required to—make direct employer contributions to the PRPP on behalf of the employees, as is done in a traditional RPP.
• Member benefits under PRPPs will be portable—that is, employees will be able to move their assets under the Plan to another Plan when they change employers, or they may elect to stay with the same Plan, despite changing employers. There will be some restrictions on portability, but fewer such restrictions will apply to individual members.
• There will be “locking-in” provisions with respect to employer contributions to a PRPP, similar to those which apply under current pension standards legislation. As is currently the case, some jurisdictions may permit withdrawal of employer contributions under specified circumstances, which usually include financial hardship.
• PRPPs will be administered, and funds invested, by a third-party administrator, which will generally be a regulated financial institution. While assets invested under a PRPP will be pooled for investment purposes, each plan participant will have a personal account and will receive annual statements which outline investment performance, costs and fees, and the amount of contributions made (broken down between employer and employee), as well as an illustration of the level of retirement income which could be generated through the purchase of an annuity, given the member’s existing plan assets.

As is the case with any defined contribution pension plan, the plan participant will have access to an amount at the time of retirement, comprising his or her own contributions, employer contributions (where applicable), and amounts generated by the investment of those contributions. The plan participant will then need to decide how to structure or invest that amount in order to create a stream of retirement income.

Most aspects of pensions, including the rules governing their creation and administration, and the investment decisions involved in managing them, are complex. The goal of PRPPs is to provide Canadians, largely the self-employed and employees of small and medium sized companies, with access to the expertise needed to set up and administer such plans, on a cost-effective basis.

More information on PRPPs can be found on the federal government Web site at http://www.fin.gc.ca/activty/pubs/pension/prpp-irpac-eng.asp. The Minister of State for Finance is currently engaged in a consultation process with affected stakeholders across Canada with respect to PRPPs and more information will undoubtedly be forthcoming at the end of that consultation process.

In 2007, the federal government introduced the EcoENERGY Retrofit program, which provided homeowners who made changes to their homes to make them more energy-efficient with grants of up to $5,000 per property to help offset the cost of those changes.

The EcoENERGY Retrofit program was scheduled to end on March 31, 2011. Instead, in the federal budget originally brought down on March 22 and re-introduced on June 6, the program was extended to be available between June 6, 2011 and March 31, 2012.

While the process for obtaining an EcoEnergy Retrofit grant is, in general, the same as it was under the “old” program, there are two changes of which homeowners need to be aware, as those changes will apply to any grant application made after June 6.

The first such change requires that a homeowner register for the program before making any changes to his or her home. Once that registration is done, an energy evaluation, which measures the energy efficiency of the home and identifies possible improvements to increase that efficiency, must be carried out, at the homeowner’s expense, by a licensed independent energy adviser. If the homeowner had already had such an energy evaluation conducted after April 2007, it is not necessary to carry out a second such evaluation. Once the energy evaluation is done, the retrofitting work can then be carried out, after which a post-retrofit energy evaluation is done to measure the effectiveness of the changes.

The second change to the program requires that, at the time the post-retrofit energy evaluation is carried out, the homeowner must provide the energy adviser with receipts for any products or equipment purchased in connection with the retrofit, in order to ensure both that those purchases were made after June 6, 2011, and were installed after a pre-retrofit energy evaluation was done.

At the time the pre-retrofit energy evaluation is carried out, the energy adviser will provide the homeowner with a report listing the changes which can be made to make the home more energy-efficient. Any such changes which are listed in the program’s Grant Table can qualify for a grant. That listing is long and detailed, but the qualifying changes generally fall into one of the following categories:

• Heating systems
• Cooling systems
• Ventilation systems
• Domestic hot water equipment
• Insulation
• Air sealing
• Windows/doors/skylights
• Water conservation

The EcoENERGY Retrofit program is intended to encourage renovation and improvements increasing the energy efficiency ofCanada’s existing housing stock. Consequently, no incentives are available for upgrades or other changes made to new homes. As well, the program does not apply to new construction, including additions made to existing homes. Generally, grants are provided to owners of existing low-rise residential properties, including single detached and attached homes (ie., row housing, duplexes, and triplexes), four-season cottages, mobile homes on a permanent foundation, and permanently-moored floating homes. Multi-unit residential buildings and mixed-use buildings may also be eligible for the grants if they meet certain criteria related to size and degree of residential use.

Homeowners who took advantage of the EcoENERGY Retrofit program during its first phase, between 2007 and 2011 may still participate in the renewed program, provided that they did not receive the maximum grant of $5,000. It’s important to note as well that the $5,000 cap applies per property and not per individual. Consequently, a property owner who owns multiple buildings (for example, a home and a cottage) may apply for grants in respect of each property, up to the $5,000 per property limit.

In addition, while the renewed program is scheduled to run from June 6, 2011 to March 31, 2012, meaning that any retrofits must be carried out and a post-retrofit evaluation done before the end of March 2012, it’s possible that the program will end prior to that date. The federal government has allocated $400 million to the renewed program, and information provided on the program Web site makes it clear that, once the program’s financial limit has been reached (i.e., $400 million worth of grants have been provided), the program will be closed to new participants, without notice.

Detailed information about the program can be found on the Web site of the Ministry of Natural Resources at http://oee.nrcan.gc.ca/residential/personal/grants.cfm?attr=0. A lengthy FAQ document is available at http://oee.nrcan.gc.ca/residential/personal/retrofit-homes/questions-answers.cfm?attr=4. If further information is required, the program office can be contacted at 1-800-622-6232.

In an effort to stimulate hiring by small businesses, the federal government proposed, as part of this year’s budget, a new hiring credit for small business (HCSB) to take effect for 2011. That proposal, along with the rest of the budget provisions, has now been passed by Parliament.

Under Canada’s employment insurance (EI) system, EI premiums must be deducted from an employee’s pay and remitted on a regular basis to the federal government. The employer is also required to pay EI premiums, with the employer contribution equivalent to 1.4 times the amount levied on the employee. So, for every dollar in EI premiums paid by employees, the employer must contribute $1.40.

The new HCSB is available to businesses whose total employer EI premiums during the 2010 calendar year were $10,000 or less, and whose employer EI premium payments increased from 2010 to 2011. The credit itself is calculated as the difference between employer EI premiums paid in 2010 and those paid in 2011. Essentially, the federal government will pay, through the credit, any increase in premiums paid by the employer in 2011, to a maximum of $1,000. The actual amount of credit received by a particular employer will be calculated by the Canada Revenue Agency (CRA) when the employer files its 2011 T4 information return, usually early in 2012. In any case, the 2011 T4 information return must, in order to be used to calculate any credit, be filed before January 1, 2015.  

A couple of administrative notes: where an employer meets all of the criteria for the HCSB outlined above, but also owes money to the CRA, the amount of any credit will be applied by the Agency towards that outstanding debt. As well, employers are not permitted to reduce their EI premium remittances during 2011 by the amount of any credit which they expect to receive. All EI premium amounts owing must be remitted to the federal government throughout 2011 on the usual schedule, with any credit amount to which the employer is entitled calculated and paid when the 2011 T4 information return is filed in early 2012.

Neither the Department of Finance nor the CRA has issued much detailed information with respect to the administration of the HCSB, but the CRA has posted a Q&A document on its Web site, and that document can be found at http://www.cra-arc.gc.ca/gncy/bdgt/2011/qa17-eng.html.

Each year, at the beginning of July, a number of tax changes, at both the federal and provincial levels, are implemented. In some cases, the changes are those announced in the current year federal or provincial budget to take effect as of July 1. In other cases, those budgets included changes to individual tax rates or credits which were retroactive to the beginning of the year, and adjustments are made to employee source deductions beginning in July to take account of those changes. Finally, in some cases, the “benefit year” for a federal or provincial program begins on July 1, and benefit amounts are changed as of that date. What follows is a listing of changes at the federal and provincial levels which will either take effect on July 1 or be reflected on employee paycheques for the first time as of that date.

Federal

The new benefit year starts for Canada Child Tax Benefit purposes, and benefit rates will rise across the board. The basic benefit rate will increase to $1,367 annually, while the National Child Benefit Supplement received by lower income families will increase to $2,118 per year, for a first child. Finally, the Child Disability Amount will be raised to $2,504 annually. The income level at which both the basic benefit and the Child Disability benefit begin to be eroded is set at $41,544.

Alberta

The province of Alberta provides lower-income working families in the province with an Employment Tax Credit, for which payments are made twice a year, in January and July. Each July, the payment amounts are increased to take account of inflation. The rates payable beginning with the July 2011 payment, as announced in this year’s provincial budget, are as follows: $702 for one child, $1,341 for two children, $1,724 for three children, and $1,852 for four or more children. The income level at which the credit starts to phase out will also rise, to $34,280. Details of the credit can be found on the Alberta government Web site at http://www.finance.alberta.ca/business/tax_rebates/alberta_family_employment_taxcredit.html.

Saskatchewan

Employees in the province will see a small increase in their take-home pay as of July 1. In this year’s budget, the credit amounts on which the personal, spousal, and dependent child credits are based were increased, effective as of July 1, 2011. The personal and spousal credits were each increased by $1,000, while the dependent child credit was increased by $500. Employee source deductions made after June 30 for income taxes will be adjusted to reflect those changes.

As of July 1, the province’s small business tax rate will be reduced from 4.5% to 2.0%. The small business tax rate applies to qualifying income below the current small business income threshold of $500,000. That threshold is unchanged, and it is expected that the rate change will be pro-rated for companies whose fiscal year straddles the July 1 implementation date.

Manitoba

Increases in the provincial basic personal and spousal credit amounts were announced in the 2011 Manitoba Budget, with both amounts increasing from $8,134 to $8,384. Employee source deductions for income tax will be adjusted after July 1 to take account of those changes, meaning a small increase in take-home pay.

Nova Scotia

As part of the 2011-12 Nova Scotia Budget, it was announced that, effective as from January 1, 2011, the province’s basic personal credit was increased from $8,231 to $8,481, and the spousal credit was increased from $6,989 to $7,201. Both changes will be reflected in employee source deductions after June 30.

New Brunswick

High-income New Brunswick residents will see their source deductions for income tax increased as of July 1. In this year’s budget it was announced that the provincial tax rate applied on income over $120,796 was to be increased, effective with the 2011 tax year, from 12.7% to 14.3%. Since source deductions were made at the former 12.7% rate for the first half of the year, income tax will be withheld at a rate of 15.9% for the balance of the year, in order to make up for the resulting shortfall.

While all Canadians are eligible for heath care funded through our tax dollars and administered by the provincial governments, not all health care expenses are covered by such government plans. There are, in fact, a great number of expenses, most notably prescription drug and dental costs, which must be paid for by the individual.

For many Canadians, that gap in coverage has been filled by employer-sponsored private health services plans, the premiums for which are paid in full by the employer or shared between employer and employee. And, since the benefits under such plans were not taxable as employment income, it was a win-win situation for the employee.

While it’s possible to provide such coverage on a group basis for much less than the cost would be for an individual seeking similar insurance, the costs are still significant. And, as with all health care related costs, the bill continues to go up as Canada’s population ages. The result, in some cases, has been the termination or discontinuance by employers of such private health services plans.

Where a plan is cancelled, an employer will, in some instances, provide the affected employees (or retirees) with a lump sum payment intended to be used for future health care expenses. The Canada Revenue Agency (CRA) was of the opinion that, since the lump sum amounts paid could be considered to be advance reimbursements of medical expenses, they were not taxable to the employee and did not therefore need to be included in the employee’s income for the year on a T4 or T4A. Unfortunately, the CRA has now reconsidered and changed that policy.

The announcement of that change came in the recent (June 6) federal budget. While the announcement did not indicate the reasons behind the change in policy, the effect is clear. Beginning with the 2012 taxation year, lump sum amounts paid upon the cancellation of a private health services plan will be fully taxable to the employee in the year the amount is received. Employers will be required to include any such amounts on a T4A and to withhold tax from the payment in the usual manner required for any taxable payments made to employees.

Where an employee must pay out-of-pocket for his or her own medical expenses, a medical expense tax credit may, in some circumstances, be claimed on the annual tax return. Such a claim can be made for medical expenses where the amount of those expenses are greater than either 3% of the taxpayer’s net income for the year, or a specified amount, whichever is less. For 2011, that specified amount is $2,052.  

Where an employee has received (after 2011) a taxable lump sum amount as the result of the termination of a private health services plan, the CRA acknowledges that the employee is entitled to claim a medical expense tax credit for medical expenses paid out of that taxable lump sum amount, as those expenses are incurred. Where, however, the employee has received such a lump sum amount on a non-taxable basis (before 2012), the CRA expects that the employee will not seek to claim the medical expense tax credit until such time as his or her cumulative medical expenses since the termination of the plan exceed the lump sum amount received. The CRA did not indicate how it expects to track or monitor such claims and amounts.

Finally, in some circumstances, payments received after 2011 will remain non-taxable to the employee. In employer insolvency situations, employees may not receive amounts due to them for some period of time. Consequently, if a payment made as a result of the termination of a private health services plan is received by an employee in 2012 or later years, and that payment came about because of an employer insolvency which arose prior to 2012, the CRA will treat the receipt by the employee as non-taxable.

The CRA has, clearly, provided a window of opportunity for employers and employees before the new rules take effect on January 1, 2012. While no one wants to see a private health services plan terminated, where such a termination is already in the works, it will be to the benefit of both employer and employees to effect that termination (and make any related lump sum payments) before the end of this year.

As June arrives and the end of the school year is in sight, families that do not have a stay-at-home parent have to make plans for keeping the kids busy and supervised over their summer vacation. There is no shortage of options—at this time of year, advertisements for summer camps and summer activities abound—but nearly all the available options have one thing in common, and that’s a price tag. Some choices, like day camps provided by the local recreation authority can be relatively inexpensive, while the cost of others, like summer-long residential camps or elite-level sports or arts camps, can run into the thousands of dollars.

Whatever the cost, all parents would welcome some assistance with meeting those costs. Until recently, the only tax “break” which could be claimed to help offset such costs was the general child care expense deduction. In 2007, however, the federal government introduced the Children’s Fitness Tax Credit. While the child care deduction is available (within set parameters) for most child care arrangements, the Children’s Fitness Tax Credit may be claimed only for activities or camps which involve a minimum degree of physical activity. Specifically, when claiming the Credit, parents are entitled to claim a non-refundable credit equal to 15% of the first $500 in qualifying costs per child per year. So, in other words, a camp which would have cost parents $500 per child will instead have a net cost of $425 ($500 minus 15%, or $75.), after the credit is claimed on the parent’s tax return for the year.

Parents whose children’s interests run to less active pursuits, like art, music, theatre, or writing may have felt, with some justification, that such activities were getting short shrift from our tax system. Perhaps in response to the perceived inequity, the federal government introduced, as part of the 2011 Budget, the Children’s Arts Tax Credit. Very similar in structure to the Children’s Fitness Tax Credit, the Arts Credit provides, beginning with the 2011 tax year, a non-refundable 15% tax credit on up to $500 in eligible expenses per child per year.

Given the enormous range of activities available for children, it’s not surprising that the federal government has found it necessary to provide detailed rules on what types of activities will and will not qualify for the two credits. And, while the possibility of a tax benefit should never drive the decision on which program or activity a child should be enrolled in, the availability of the credit might tip the balance between similar programs, or might make a program, camp, or activity which seemed financially out of reach more feasible.

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

• the program must last for a minimum of 8 weeks, with at least one session per week or, in the case of children’s camps, must run for 5 consecutive days;

• the program or activity must be supervised;

• the program or activity must be suitable for children; and

• more than 50% of activities offered must include a significant amount of eligible activities or, in the case of a program, camp, or membership in which participants can choose from a variety of activities, more than 50% of those activities must include a significant amount of eligible activities or more than 50% of the available program time must be devoted to eligible activities.

 It’s clear from the foregoing that the concept of “eligible activities” looms large in the determination of whether a particular cost may be claimed under either of the credits. For both credits, the rules provide a specific definition of eligible activities, as follows:

For purposes of the Children’s Fitness Tax Credit, eligible activities are limited to those that require a significant amount of physical activity that contributes to cardiorespiratory endurance, plus one or more of: muscular strength, muscular endurance, flexibility, and balance.

Information provided on the Canada Revenue Agency (CRA) Web site indicates that “[p]hysical activity includes strenuous games like hockey or soccer, activities such as golf lessons, horse-back riding, sailing and bowling as well as others that require a similar level of physical activity.”

Similar rules are provided for the purpose of defining eligibility for the Children’s Arts Tax Credit. Those rules are quite broad and extend to activities like academic tutoring or the development of interpersonal skills. As outlined in the Federal Budget Papers, to be eligible for the credit, such activities must:

• contribute to the development of creative skills or expertise in an artistic or cultural activity (creative skills or expertise involve a child’s ability to improve dexterity or co-ordination, or acquire and apply knowledge in the pursuit of artistic or cultural activities and artistic and cultural activities include the literary arts, visual arts, performing arts, music, media, languages, customs and heritage);

• provide a substantial focus on wilderness and the natural environment;

• help children develop and use particular intellectual skills;

• include structured interaction among children where supervisors teach or help children develop interpersonal skills; or

• provide enrichment or tutoring in academic subjects. 

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

Qualifying child care expenses are claimed as a deduction from income, rather than a credit, meaning that the entire amount of qualifying expenses is effectively not taxed as income in the hands of the parents. There are limits imposed on the maximum weekly cost of a residential camp (ranging from $100 to $250), as well as restrictions on the total amount of child care expenses which may be deducted in a year. However, the overall annual limits, which range from $4,000 to $10,000, depending on the age and health of the child, with an overall cap of two-thirds of the parent’s income for the year, are much higher than the allowable amount for the Children’s Fitness or Arts Tax Credit. It is not, however, possible to double or triple dip when it comes to expenses related to children’s activities. Expenses which are claimed under any of the three possible categories (child care expenses, Children’s Fitness Tax Credit, and Children’s Arts Tax Credit) can be claimed only once, even if they might, by definition, qualify under more than one provision.\

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

While both the Children’s Fitness Tax Credit and the Children’s Art Tax Credit are relatively simple in concept, the criteria imposed for an activity to qualify and the number and variety of possible qualifying programs and activities can be confusing. The alleviate some of that confusion, for both parents and sponsoring organizations, the CRA has provided detailed information about the requirements of the Fitness Tax Credit on its Web site. That information can be found at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/365/menu-eng.html.

There is, as yet, no corresponding section on the CRA Web site dealing with the Children’s Art Credit, since the legislation enacting that credit has not yet been passed by Parliament. The credit was announced as part of the Federal Budget brought down on March 22 by Minister of Finance Jim Flaherty but not passed prior to the general election. The Minister has announced, however, that the same budgetary provisions will be re-introduced on June 6 and it is expected that the budget will be passed and its provisions, including the Children’s Art Tax Credit, implemented as planned.

Where taxpayers are obliged to incur expenses in relation to medical treatment which are not covered by our government-sponsored health insurance systems, a credit against tax otherwise payable may be allowed to help offset the impact of those expenses. The credit is limited—for 2011, a credit may be claimed on the federal tax return for qualifying medical expenses which total more than the lesser of $2,024 or 3% of the taxpayer’s net income for the year. The federal credit is equal to 15% of such qualifying expenses, while the percentage credit provided for the purposes of provincial or territorial tax will vary depending on the taxpayer’s province or territory of residence.

The most common medical expenses for which a credit is claimed are usually prescription drug or dental expenses for which the taxpayer does not have private medical insurance. However, the listing of eligible expenses is long and detailed and subject to constant revision by the tax authorities.

The Canada Revenue Agency (CRA) was recently asked if the purchase of an Apple iPad to be used by a special needs child as a communications aid would be eligible for the medical expense tax credit. The question wasn’t as far-fetched as it might initially seem. The use of computer technology, particularly communications technology, has permeated just about every aspect of modern life, and the use of such technology in medicine is part of that. There are, in fact, a number of devices using some form of communications technology which currently qualify for the medical expense tax credit. Those devices include electronic speech synthesizers to aid mute individuals to communicate using a portable keyboard, voice recognition software, optical scanners or similar devices for use by blind individuals to enable them to read print and synthetic speech systems that enable the blind to use computers.

Unfortunately for the individual who had asked whether the purchase of an iPad for the specified purpose would be eligible for the medical expense tax credit, the answer was no. And, unfortunately for others—whether tax professionals or other individuals dealing with the same or similar disabilities, the response provided by the CRA was more in the nature of a conclusion than an explanation or an analysis. The CRA acknowledged that the cost of a device or equipment could qualify as a medical expense provided that certain conditions were met. Generally, those conditions require that the device or equipment be prescribed by a medical practitioner and that it must be included in the list of such devices set out in the Income Tax Regulations. Finally, the use of the device must meet any conditions which are prescribed by the regulations with respect to its use or the reason for its acquisition. The CRA also acknowledged that a Bliss symbol board or similar device designed to help an individual who has a speech impairment to communicate could qualify for the medical expense tax credit. But, the CRA’s view was that “an Apple iPad for use by special needs patients to communicate more effectively would not qualify under this provision or any other provision in the Act or Regulations”. The CRA did not address the question of whether there were aspects of the iPad or its capabilities which rendered it unsuitable for the medical expense credit, or whether, for instance, the development of certain specialized communication capabilities or apps for the device could remedy any such deficiencies.

While interest rates remain low, an increase in those rates and, therefore, in the cost of carrying a mortgage is clearly on the horizon. In addition, changes made by the federal government to mortgage lending rules for Canada Mortgage and Housing Corporation (CMHC) insured mortgages which took effect earlier this year had the effect of making it more difficult for first-time buyers, especially, to get into the real estate market. One of those changes reduced the maximum allowable amortization period for mortgages from 35 years to 30 years, meaning an increase in the required monthly payment, even if interest rates are unchanged. That change, combined with the anticipated increase in mortgage interest rates, made for a busy late winter and early spring real estate season, as first time home buyers took advantage of the opportunity to get into the market in advance of the changes. Even without these changes, spring and summer are, in any year, typically the busiest season for real estate sales and, consequently, the time when most moves take place. For any number of reasons, therefore, a lot of people will be moving this summer.

Whatever the time of year and motivation behind the purchase or sale and purchase, selling one’s home and moving qualifies as one of life’s more stressful experiences. Nonetheless, it’s an experience which most families will go through at least once. In addition to the upheaval of leaving behind a home, a school and a neighbourhood, the financial outlay associated with moving can be considerable.  While our tax system can’t do anything to help with the non-financial costs and general stress of moving, it does, in some circumstances, minimize the financial hit by providing a deduction from income for moving expenses incurred.

It’s important to know that not all moves will qualify for such tax relief. The tax rules provide that, where a taxpayer moves to be at least 40 kilometres closer to his or her place of work (for example, a taxpayer who moves from Toronto to take a job in Vancouver or Regina or Ottawa), most moving costs will be deductible from employment or business income earned at the new location. The 40-kilometre distance is measured using the shortest route normally available to the travelling public, which in most cases would mean the distance by road. And, moving to be closer to work doesn’t have to mean moving to a new company: a job transfer to another city while continuing to work for the same employer will qualify, assuming the 40-kilometre criterion is met. A deduction is also available where someone who is unemployed moves to start a new job, again assuming that all other required criteria are met.

The list of expenses which may be deducted is fairly comprehensive, but not all moving related costs are deductible. Under the Canada Revenue Agency’s (CRA) administrative policies, as outlined in their Form T1-M, Moving Expenses Deduction, the following are considered eligible moving expenses:

• traveling expenses, including vehicle expenses, meals and accommodation, to move the taxpayer and members of his or her family to their new residence (note that not all members of the household have to travel together or at the same time);
• transportation and storage costs (such as packing, hauling, in-transit storage, and insurance) for household effects, including items such as boats and trailers;
• costs for up to 15 days for meals and temporary accommodation near either the old or the new residence for the members of the household;
• lease cancellation charges (but not rent) on the old residence;
• legal fees incurred for the purchase of the new residence, together with any taxes paid for the transfer or registration of title to the new residence (but excluding GST or HST and property taxes); 
• the cost of selling the old residence, including advertising, notarial, 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 utility hook-ups and disconnections.

It sometimes happens that a move to the new home has to take place before the old residence is sold. In such circumstances, the taxpayer is entitled to deduct up to $5,000 in costs incurred for the maintenance of that residence while it is vacant and efforts are being made to sell it. Specifically, costs including interest, property taxes, insurance premiums, and heat and utilities expenses paid to maintain the old residence while efforts were being made to sell it may be deducted. If any family members are still living at the old residence, or it is being rented, no deduction is available.

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

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

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

Anyone who has ever moved knows that there are 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. Those amounts were unchanged from 2009 to 2010, the latest year for which figures are available.

Similarly, the taxpayer can claim a set per-kilometre amount for kilometres driven in connection with the move. The per kilometre amount ranges from 46.0 cents forSaskatchewanto 60.5 cents for theYukon Territory. These rates were in effect for the 2010 taxation year—the CRA will be posting the rates for 2011 on its Web site early in 2012, in time for the tax-filing season. The per-kilometre rates allowed by the CRA for travel during 2010 are actually, in some cases, lower than those allowed for 2009.  It is in all cases the province or territory in which the travel begins which determines the applicable rate.

Any moving-related expenses can be deducted from employment or self-employment income (but not investment income or employment insurance benefits) earned at the new location. Where a move takes place late in the year, it is possible, especially where the move is a long distance one, that such expenses will exceed income earned at the new location during the calendar year. In such cases, it’s possible to carry forward the excess expenses, and deduct them from income earned in subsequent years.

Generally, these rules apply to moves made from one location to another withinCanada. While it’s possible to deduct expenses arising from moves fromCanadato another country, from another country toCanada, or between two locations outside ofCanada, the rules governing deductions in such situations are far more restrictive.

The rules governing the deduction of moving expenses are outlined in some detail on the CRA’s T1-M form. That form was updated and reissued by the CRA late in 2010, and the current version of the form can be found on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-m/t1-m-10e.pdf.  Additional information on the tax treatment of moving costs is available on the same Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/menu-eng.html.

Any questions not answered by the form or on the Web site can be directed to the CRA’s individual enquiries line at 1-800-959-8281.

When Canadians plan for retirement, the focus is usually on amassing sufficient savings to last them through their retirement years. However, keeping a handle on expenses and minimizing overall costs while still being able to enjoy a reasonable standard of living is an equally important part of retirement planning. As part of that effort to reduce living costs, most retirees try to reduce or eliminate major financial obligations before giving up their regular paycheques.

Part of minimizing one’s post-retirement financial obligations is planning to eliminate one’s debt. Theoretically, that’s something that should happen as part of the normal course of life cycle events. For younger Canadians, taking on debt, usually in the form of student loans, mortgages, and car payments, is almost unavoidable. However by the time retirement is on the horizon, decades later, most Canadians plan to have retired the mortgage and then, any other remaining debt.

While being debt-free in retirement may be the goal, it isn’t necessarily the reality anymore. Research from theUnited Statessuggests that a growing number of both retirees and those approaching retirement are struggling with debt. StatisticsCanadarecently surveyed Canadians to determine whether they are dealing with that same reality. The StatsCan survey on retirees and debt was part of a larger survey—the 2009 Canadian Financial Capability Survey (CFCS)—which provided information on the income, wealth, and debt of retired Canadians. What that survey showed was that, in 2009, one in three households where all household members age 55 and older were retired still held some form of debt. Where only one spouse was retired, that figure rose to 6 in 10 households.

The survey disclosed that, among retiree households, average debt was $60,000, and that median debt (meaning that half owed less and half owed more) was $19,000. Those figures break down as follows: one-quarter of such households owed less than $5,000: one-third owed between $5,000 and $24,999 and another quarter owed between $25,000 and $99,000. The remaining 17% of retiree households carried debt of $100,000 or more.

In assessing the significance of debt levels owed by retired Canadians, it’s important to note that, for purposes of the survey, all debt was considered equal—no distinction was drawn between long-term debt like mortgages and shorter-term debt represented by transactions like buy now/pay later offers. Consequently, where total debt is less than a few thousand dollars, it’s entirely possible that such debt comprises relatively short-term borrowings which will be paid off in a matter of weeks (for credit card balances) or months (for buy now/pay later offers). Of greater concern are the 40% of retirees who owe more than $25,000 or even more than $100,000. Given the current low interest rate environment, it’s almost a certainty that the interest cost of carrying those debts will increase over the next year or so.

Overall, the survey determined that retirees with debt have a median annual household income of $42,000, a median net worth of $295,000, and a median debt of $19,000. Within those figures, the author of the article analyzing and summarizing the survey data reached the following conclusions:

• There are no significant differences in annual income, net worth, and debt levels by the age and sex of retirees, although women have lower debt-to-income and debt-to-asset ratios than men.
• Compared with all other groups, the divorced have the lowest annual median income ($28,000) and net worth ($126,500).
• Homeowners have higher debt levels than non-homeowners, but their median income and net worth are also higher.
• Higher household income is associated with higher levels of net worth and debt, but lower debt-to-income and debt-to-asset ratios. Those with annual incomes of less than $25,000 have the highest debt-to-income and debt-to-asset ratios.
• As net worth increases so does annual income and median debt; however, only the debt-to-asset ratio falls as net worth rises.
• Those with higher median debt also tend to have higher annual incomes and net worth. However, those with high debt also have significantly higher debt-to-income and debt-to-asset ratios.

The StatsCan release summarizing the survey results in relation to debt held by retirees can be found on the Statistics Canada Web site at http://www.statcan.gc.ca/pub/75-001-x/2011002/article/11428-eng.htm.

Two quarterly newsletters have been added—one about individual issues and one about corporate issues. They can be accessed below.

Corporate:

Issue #16 Corporate

Individual:

Issue #16 Personal

As gas prices across Canada look to set new records, the cost of getting to work (or getting just about anywhere) is likely a topic of conversation in nearly every home and workplace in Canada. Consumers are looking for just about any way to reduce their cost of getting around.

Does the tax system offer any relief? Yes … and no. The bad news for most employed taxpayers is that the cost of driving to work and back home, and the cost of any non-work driving is considered a personal expense, for which no deduction or credit is allowed, no matter how high the cost gets. The news for employees is not, however, all bad. Those who have a commuting alternative in the form of public transit (which includes everything from subways to suburban commuter trains to ferries) can both minimize their expenditures at the gas pump and claim the cost of travel on those transit systems on their tax returns for the year.

A tax credit for the cost of using public transit is offered by the federal government and by several of the provinces, and there is no limit on the amount which may be claimed. The federal credit is calculated as 15% of the cost of public transit, and while provincial credit amounts vary, an average would be around 7%. A taxpayer would therefore be able to claim a credit (and reduce taxes which would otherwise be payable for the year) by 22% of eligible public transit costs incurred during that year.

The public transit tax credit isn’t limited to costs incurred for transit use to and from work. Costs incurred by either spouse and by any dependent children under the age of 19 who regularly purchase a weekly or monthly transit pass—for example high school or university students who use transit to get back and forth from school—can be aggregated and claimed on the return of either parent for the year. So, a family of four which incurs $600 a month in transit costs (not difficult to do where an inter-city commuter pass can cost up to $300 a month and city transit passes, even for students, can cost up to $100) can claim $7,200 in eligible transit costs per year, for which they would be able to reduce their tax bill for the year by just under $1,600.

Where public transit isn’t a viable option and employees are required, as part of their terms of employment, to use their own vehicle for work-related travel—for example, someone who is required to visit clients at their own premises for the purpose of meetings or other work-related activities—tax relief is available for the related costs. 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 travelling expenses, and that no tax-free allowance is provided by the employer for such expenses, the employee can deduct actual expenses incurred (including the cost of gas) for such work-related travel. It goes without saying that the employee must, in order to claim that deduction, keep a record of work-related travel done as well as records of travel-related expenses incurred.

The rules governing the taxation of employee automobile allowances and available deductions for employment-related automobile use can be complicated. But, given the recent run-up in the cost of gasoline, it’s likely worth ensuring that every possible dollar of eligible expenses incurred as a result of employment-related car use is claimed.

It’s no secret that Canadians have, over the past decade or so, taken on an unprecedented level of personal and family debt. An extraordinarily low interest rate environment, the increased availability of credit through a variety of sources and credit vehicles and a generally more “relaxed” attitude toward debt have all combined to make personal debt—sometimes substantial personal debt—more the rule than the exception.

It’s no secret that Canadians have, over the past decade or so, taken on an unprecedented level of personal and family debt. An extraordinarily low interest rate environment, the increased availability of credit through a variety of sources and credit vehicles and a generally more “relaxed” attitude toward debt have all combined to make personal debt—sometimes substantial personal debt—more the rule than the exception.

The first cautions about the level of debt of Canadian families started being heard about five and a half years ago when Statistics Canada reported (at http://www.statcan.gc.ca/daily-quotidien/050916/dq050916a-eng.htm) that, in the second quarter of 2005, the average debt of Canadian households was greater than their annual disposable income. Specifically, Canadian households owed $1.08 for every dollar of disposable income.

Since that time, and particularly in the past year, a number of financial authorities, including the Bank of Canada and the Office of the Superintendent of Bankruptcy have issued statements warning of the dangers of excessive household debt. Specifically, the concern is that Canadians have, in a low interest rate environment, taken on substantial amounts of debt which cannot be sustained over the long term. Or, as put by the Bank of Canada: “Ordinary times will eventually return and, with them, more normal interest rates and costs of borrowing. It is the responsibility of households to ensure that in the future, they can service the debts they take on today”.

In February 2011, the Vanier Institute of the Family issued its annual report on The Current State of Canadian Family Finances (available on the Institute’s Web site at http://www.vifamily.ca/node/783), and that report contained figures which indicate that the level of Canadian household debt has reached two new unwelcome benchmarks. Specifically, the Institute’s report indicated that, for 2010, the average debt of Canadian families as a percentage of disposable income, had reached 150%. In other words, the average debt load of Canadian households as a percentage of disposable income has increased by nearly 50% (from 108% to 150%) over the course of the last five years. Notably, it had taken 15 years for that percentage to increase from 93% (in 1990) to 108% (in 2005). And, according to the Vanier Institute, under current trends, that “ratio could easily reach 160% within the next two years”.

In addition to the increase in debt as a percentage of disposable income, the Institute reported that, for the first time, the average debt load of Canadian families surpassed the $100,000 figure. While that number is significant in and of itself, what will likely prove to be of greater significance over the next few years is the composition of that debt.

While debt comes in an increasingly varied number of forms, there are, essentially, only two basic types of personal debt—secured and unsecured. In the former, the lender “secures” the debt against an asset owned by the borrower, meaning that if the debt is not repaid on time, the lender has the right to seize and sell the underlying asset in order to be repaid. The kind of secured debt most familiar to Canadians is, of course, a mortgage. The mortgage lender loans money to a borrower for the purchase of a house, but retains the right to seize and sell that house if the mortgage is not repaid as required. Unsecured debt, by contrast, is money provided to a borrower on no more than the strength of the borrower’s promise to repay—and the best example of that type of debt familiar to most Canadians is a credit card.

From a borrower’s perspective, the biggest difference between the two types of debts is how “exposed” the borrower is. With secured debt, the borrower has an asset whose value nearly always exceeds the amount of the debt. And, in the event that a borrower can no longer meet his or her loan obligations, the option of selling the underlying asset and repaying the debt from the proceeds of sale is always there. However, with unsecured debt, the borrower is in a much more tenuous position. Borrowers who encounter difficulty in repaying unsecured debt have no ready underlying asset which they can sell in order to rid themselves of the debt. Absent a windfall in the form of an (unlikely) lottery win, or an inheritance, unsecured debt must be repaid from current cash flow, meaning that there must either be an increase in income, or funds must be reallocated from other household expenditures. It is just this circumstance which underlies the current concern among financial authorities. And, as the Vanier Institute figures show, there is reason for that concern.

While most reports on the debt owed by Canadian families focus on the overall total debt figure, the Vanier Institute report goes one step further and breaks down the total debt load of Canadian households into its component parts. As noted, the total average outstanding debt of Canadian households (for the third quarter of 2010) now stands at just over $100,000. According to the Vanier Institute report, about $63,000 of that debt is composed of mortgage debt, meaning that, on average, the amount of debt held by Canadian households in what the Vanier Institute describes as “consumer credit/loans” (which would presumable include credit card debt, unsecured lines of credit and personal loans generally) is just over $36,000. At the current prime rate of 3%, the monthly interest cost alone (without any repayment of principal) of servicing such a debt is $90. And of course, almost no unsecured debt is provided at an interest rate as low as prime. More typically, the interest rate charged on credit card debt can range anywhere from 12% (meaning a monthly interest cost of $360.) to above 25%. The concern expressed by the Bank of Canada and the Office of the Superintendent of Bankruptcy is for what will happen should that interest cost of household indebtedness double in amount—or more.

While no one knows how quickly rates will increase or to what extent, an increase in rates in the near term is very likely. And, while most Canadians are aware that current interest rates are low, very few are likely aware of just how seldom rates have been at such low levels. The Bank of Canada maintains a record of interest rates levied on various types of debt instruments over the past 75 years—since 1935. Those figures show that, since 1935, the prime rate has been less than the current rate of 3.0% during only one time period—from March 2009 to August 2010.

As well, it’s not likely that many Canadians under the age of 45 can actually remember what it’s like to carry a significant debt load in a high interest rate environment—and what can happen when carrying that debt load becomes unsustainable. In mid-1990, the prime rate reached 14.75%, which seems very high until it is compared to the almost unimaginable 22.75% rate in effect a decade earlier in August 1981. If similar interest rates were charged on the $36,000 of consumer debt which represents the Canadian household average, the monthly interest cost alone would reach $443 (at 14.75%) or $683 (at 22.75%)—an amount that simply couldn’t be accommodated by most family budgets, which are already being squeezed by higher food and energy costs. Significant increases in the cost of non-discretionary expenditures like food and energy, when combined with higher carrying costs on existing indebtedness could create a “perfect storm” of financial pressures sufficient to push many families into bankruptcy.

It’s a gloomy scenario, to be sure—but not an unavoidable one. For families carrying significant debt, especially unsecured debt, the best option is to pay off that debt while interest rates remain low, starting with the debt carrying the highest interest rate. However, while that may be the best option, it’s not a terribly realistic one. For many Canadian families, paying off personal debt within a short time frame is just not possible, especially in the face of inflationary pressure on other household expenditures. Where paying off personal debt off in the near term isn’t possible, the next best option is to fix the interest rate levied on that debt while rates are still relatively low. A consolidation loan (at a lower, fixed rate of interest) may be possible or, where there is significant equity in the family home, it may be possible to roll the debt into the existing mortgage at a much lower rate of interest—and to fix that rate of interest at current rates for the next few years.

While the combination of inflation and rising interest rates is an unnerving one for families carrying significant personal debt, it is possible to take steps to mitigate, to some degree, the impact of those changes. The time for doing so, however, is growing shorter.

Homeowners looking for mortgage financing or re-financing may face more stringent requirements from their lending institutions following implementation of the latest federal government changes on April 18, 2011.

In the fall of 2008, the spring of 2010, and again in January of 2011, the federal government announced changes to the rules which govern mortgage financing and refinancing in Canada. In March of this year, the changes which shortened the maximum amortization period from 35 to 30 years and limited re-financing to 85% of a home’s value (down from 90%) took effect.

Implementation of a further change was deferred until April 18, 2011. As of that date, the federal government no longer provides government-backed insurance for most home equity lines of credit (HELOCs). Typically, a HELOC is a lending arrangement under which funds are made available to a homeowner, to a maximum of 80% of the value of the home. Unlike conventional mortgages, HELOCs are non-amortizing; while monthly payments are required, those payments can usually be as little as the interest accrued during the previous month and the homeowner therefore is not required to make any payments against principal.

It is that interest-only payment feature of HELOCs which has resulted in the decision to withdraw government-backed insurance. The federal government announcement (available on the Department of Finance Web site at http://www.fin.gc.ca/n11/data/11-003_1-eng.asp) summarized the change as follows: “[I]f a loan or a segment of a multi-segment loan is in the form of a revolving line of credit that does not amortize over time, it will no longer be eligible for government-backed insurance. However, with established scheduled principal and interest payments, a loan will continue to be eligible for government-backed insurance, provided it meets the underwriting standards set by the mortgage insurer.”

In effect, the change removes the “safety net” for financial institutions which provide non-amortizing HELOC financing to homeowners, in that the financial institution will no longer be able to recover any losses incurred on such financing through government-backed insurance. Given that, the likely response by lenders will be to impose more stringent income and solvency requirements on would-be borrowers.

By the time most Canadians sit down to gather together information slips and receipts to prepare their 2010 tax return, any opportunities to minimize tax payable for the year are, for the most part, gone. Most tax-planning or tax-saving strategies, in order to be effective for 2010, would have to have been put in place by the end of that calendar year. The major exception to that rule is, of course, registered retirement savings plan (RRSP) contributions, but even those had to have been made by March 1, 2011 in order to be claimed on the 2010 return.

Notwithstanding, all is not lost by tax return filing time, as there are some tax-planning strategies (more properly described as tax-filing strategies) which can still minimize the tax bite for the current year or future ones. What follows is an outline of some of the tax-filing strategies which are available to many, if not most, Canadian taxpayers.

Figuring out what to claim

It would seem to make intuitive sense to claim whatever eligible costs you have incurred during the year in order to minimize your tax bill or increase your refund. But, in some areas, “giving away” your deductions to other family members or deferring the claim until a future year can actually give you a much better tax result than just automatically claiming whatever amounts are available as those costs are incurred.

Taxpayers who are married enjoy some advantages in this area. By law, medical expenses incurred within a family (that is, by each spouse or by their children) can be claimed by either spouse. As well, charitable donations made by married individuals can be claimed by the person who made the donation or by his or her spouse. The ability to transfer or combine the amounts matters because, in the case of medical expenses, amounts claimable must pass certain income thresholds and, in the case of charitable donations, the credit percentage rises as donation amounts increase. Finally, costs incurred by members of a family for public transit use can be combined to ensure that they are claimed by the family member or members who can make the best use of them for tax purposes.

Medical expense claims

Under Canadian tax law, a 15% federal tax credit (as well as a provincial credit, the amount of which varies, depending on the taxpayer’s province of residence) may be claimed for qualifying medical expenses over a specified income threshold. Federally, for 2010, that threshold is equal to the lesser of $2,024 or 3% of net income. Consequently, it makes sense to maximize the amount of claimable expenses by having one member of the family make the claim for qualifying expenses incurred by all family members, and for the person claiming to be the lower-income spouse.

 It is also possible to plan around the timing of medical expenses. Medical expenses claimed on a tax return can be any qualifying expenses incurred in any 12-month period which ended during the tax year. So, it makes sense to pick the 12-month period which maximizes the amount of expenses. Take, for instance, a family whose medical expenses were not out of the ordinary during 2010 but who incurred significant medical expenses (perhaps for unexpected dental care costs or prescription drug expenses) in the first two months of 2011. When filing the return for 2010, it might make sense to defer the claim for medical expenses paid during 2010, where that claim might only produce a small credit or no credit at all, and the medical expenses incurred during calendar 2010 would be “wasted” from a tax point of view. When the 2011 return is filed at this time next year, claiming all medical expenses incurred between March 1, 2010 and February 28, 2011 might produce a better tax result. Because each case is different, in terms of when medical expenses are incurred, and the income of the taxpayer or taxpayers for different tax years, there are no real rules of thumb which can determine when it makes sense to defer a medical claim. In all cases, it’s a matter of doing the calculations to determine which claim period produces the best tax result.

Claiming charitable donations

Our tax system provides a credit, at both the federal and provincial levels, for all charitable donations made. Unlike the medical expense claim, the income of the taxpayer plays no part in determining the availability or amount of such a claim. However, our tax system does reward more generous donors, in that the percentage amount of the credit increases as donation levels rise. Specifically, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation amount, while donations over $200 qualify for the same non-refundable tax credit at the rate of 29%.

As noted above, charitable donations made by an individual can be claimed by that individual or by his or her spouse. Since the credit percentage increases as donation levels rise, it only makes sense to combine the donations made by both spouses and claim them on one return. Since the available credit is unaffected by income level, it doesn’t matter which spouse makes the claim, with one caveat. Since the credit is non-refundable, it should only be claimed by a taxpayer who has an actual tax liability for the year.

Taxpayers also have some flexibility in timing the claiming of their charitable deduction contributions. Contributions made can be claimed in the year they are made or in any of the five successive taxation years. So, it will usually make sense, where donation amounts for a single year do not exceed the $200 threshold, to wait and aggregate donations made in two or more years, in order to maximize the credit claimable.

Public transit tax credit

Millions of Canadians use public transit every day to get to and from work or school, and the cost of such public transit use can run to hundreds of dollars each month. In order to encourage the use of public transit, the federal government provides a non-refundable tax credit to taxpayers who purchase monthly (or longer) transit passes throughout the year. The cost of shorter duration passes may also qualify for the credit if they are for a minimum 5-day period and enough of them are purchased to provide the purchaser with 20 days of unlimited travel each month.

The credit itself is equal to 15% of the amount of eligible public transit costs incurred, with no limit on that amount. So, a taxpayer who purchased a $250 monthly commuter train pass each month for the entire year could claim a credit of $450. ($250 ×12 ×15%) and reduce his or her federal taxes by that amount.

The full potential of the public transit tax credit, however, is realized when eligible public transit costs incurred by members of a family are combined. Many users of public transit are high school or university students, who use transit for reasons of economy. However, for most such students, their income for the year is unlikely to be high enough (over about $10,000 for 2010) to result in a federal tax liability. Since the public transit credit is a non-refundable one, meaning that it can only reduce federal tax otherwise payable and can’t create or increase a refund, it’s of no use to someone who doesn’t pay federal tax. And, since the credit can’t be carried over, but must be claimed in the year the qualifying expense is incurred, any potential credit in the hands of someone who isn’t taxable for federal purposes would simply be lost.

Recognizing this reality, the federal tax rules governing the public transit tax credit permit all eligible costs incurred by a taxpayer, his or her spouse, and any of their children who are under the age of 19 (which would in many cases include children at university) to be combined and claimed on either spouse’s return, as follows. If the taxpayer in the example above spent $3,000 ($250 per month) for eligible public transit costs, his or her spouse spent a like amount, and each of their two teenage children incurred $100 per month in eligible public transit costs, then the total claim would be as follows:

Taxpayer - $3,000

Spouse - $3,000

Teenage child - $1,200

Teenage child - $1,200

TOTAL - $8,400 ×15% = $1,260

It doesn’t matter which spouse claims the total eligible public transit costs of $8,400, as the total credit will remain $1,260, no matter who makes the claim. What matters is that the person making the claim has at least $1,260 in federal tax payable after all other non-refundable credits (e.g., personal credit) are claimed, so that that credit can be fully utilized.

As the tax filing deadline gets closer and closer, it’s true that the chances to make any really significant changes to one’s tax liability for the year diminish. But, nonetheless, paying close attention to the details when filing can produce a better bottom line result—and an incentive to start planning earlier next year!

Unlike contributing to an RRSP or a tax-free savings account (TFSA), the idea of splitting pension income as a tax-planning strategy doesn’t get a lot of attention in the media. That’s unfortunate for a couple of reasons. First, the splitting of pension income can provide significant tax savings to those able to utilize it—generally older taxpayers who in many cases are living on a fixed income and can really benefit from the tax savings received—especially in the current low interest rate environment. Second, unless you’re getting good tax-planning advice, it’s very easy to overlook pension income splitting as a way of reducing your tax burden. The only references to pension income splitting on the annual return are two entries, one on line 116 and the other on line 210 and, unless you are already aware of the significance of those entries, there’s really nothing to alert you to it. The Income Tax and Benefit Guide provides very little in the way of explanation and no indication at all of the benefits which may be obtained. In addition, the form which must be filed to effect a pension income splitting strategy isn’t part of the standard tax return package provided to taxpayers by the Canada Revenue Agency (CRA)—taxpayers must ask for it and obtain it separately.

The general rule is that taxpayers receiving private pension income (including a pension received from former employer and, where the recipient taxpayer is over the age of 65, payments from a registered retirement savings plan or a registered retirement income fund) are entitled to split up to half that income with a spouse for tax purposes. (Government source pension income, like payments from the Canada Pension Plan or Old Age Security payments do not qualify for pension income splitting.) A number of the provinces have also indicated that they will adopt the federal rules for provincial tax purposes.

While the concept and general rules governing pension income splitting aren’t particularly complex, the splitting of pension income has some fairly wide-ranging, beneficial tax consequences for the taxpayer and his or her spouse.

The mechanics of pension income splitting are relatively simple. There is no need to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify the pension plan administrator. In addition, the decision of whether and to what extent to split pension income for tax purposes does not have to be made until the return for the year is being completed. Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032, Joint Election to Split Pension Income, with their annual tax return, and the form is available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1032/t1032-10e.pdf.

On the T1032, the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for the particular tax year. Since the splitting of pension income affects both the income and the tax liability of both spouses, the election must be made and the form filed by both spouses—an election filed by only one spouse or the other won’t do.

In addition to filing the T1032, the spouse who actually receives the pension income must deduct from income the pension income amount allocated to his or her spouse, on line 210 of his or her return for the year. And, conversely, the spouse to whom the pension income is being allocated is required to add that amount to his or her income on the return, this time on line 116.

As well as reporting the pension income “received” and claiming the corresponding deduction on lines 116 and 210, there’s a requirement that, where tax has been withheld from the income to be split, that tax must be allocated on the return for the year in the same proportion as the pension income is allocated. The formula for doing so is outlined in Part 5 of Form 1213.

Finally, taxpayers receiving private pension income can claim a non-refundable federal tax credit of up to $2,000 on their returns for the year. The actual credit claimable is equal to the amount of qualifying pension income earned or $2,000, whichever is less. The CRA has confirmed that where pension income is split, the amount of such income reported for tax purposes by each spouse will be used to determine eligibility for and the amount of any pension income credit. For example, where a taxpayer who receives $10,000 in eligible pension income for the year allocates 50% of that amount, or $5,000, to a spouse, each spouse will be able to claim the full $2,000 pension tax credit on his or her return for the year the income is reported, thereby saving an additional $300 in federal income taxes. 

The ability to split pension income between spouses has the potential to achieve real and permanent tax savings and to enhance eligibility for certain federal tax credits and benefits. And, as long as the administrative requirements outlined above are followed, pension income splitting is a win-win strategy for eligible taxpayers.

General tax rules allow individuals to deduct most costs associated with a move to a new residence where that move is undertaken to start a new job or attend school full-time, provided that the location of the new residence is at least 40 kilometres closer than the old one to the new place of employment or the school. In order to qualify for the deduction, of course, the moving costs must be paid for by the individual claiming them. Normally, moving costs which are eligible for the deduction are claimed in the year the move is made, but can only be claimed against income earned at the new location. Where the deductible moving costs exceed the amount of such income, any excess costs may be carried forward and deducted from income earned in the following year at the new location.

General tax rules allow individuals to deduct most costs associated with a move to a new residence where that move is undertaken to start a new job or attend school full-time, provided that the location of the new residence is at least 40 kilometres closer than the old one to the new place of employment or the school. In order to qualify for the deduction, of course, the moving costs must be paid for by the individual claiming them. Normally, moving costs which are eligible for the deduction are claimed in the year the move is made, but can only be claimed against income earned at the new location. Where the deductible moving costs exceed the amount of such income, any excess costs may be carried forward and deducted from income earned in the following year at the new location.

In many cases, however, where a taxpayer is moving to take up a new position, his or her new employer will cover the costs of making that move as part of the employment offer. Whether the employer pays the costs up front or reimburses the new employee for costs already incurred and paid, the result is the same from a tax perspective–any employer-paid moving costs cannot be deducted by the employee.

The CRA was recently asked to consider a situation in which an individual employee moved to take a new position and his costs of moving were paid by his new employer. A provision of the employment agreement, however, provided that he would be required to repay a pro-rated portion of those amounts to the employer should he leave his employment within a five-year period following the move. The individual did in fact resign his position within that five-year period and, as required by the employment agreement, repaid his now former employer for a portion of those moving costs. The question put to the CRA was whether, in the circumstances, the employee could now claim a deduction for the moving costs which he was required to repay.

There is no provision in the Income Tax Act to allow moving expenses to be carried back and claimed in a previous year. In the circumstances, the CRA's view was that the taxpayer could claim a deduction for the moving expenses in the year that the payment was made, but that such deduction was limited to the amount of employment income earned at the new work location in that year. In other words, where an employee repays an employer for otherwise eligible moving expenses in respect of a move that occurred in a previous year, a deduction may be claimed on the employee's tax return for such expenses in the year of payment, but only to the extent of employment or self-employment income earned at the new work location in that year. The expenses cannot, however, be carried back and claimed in any previous year.

The CRA's technical interpretation indicated, finally, that where more than three years (i.e., the normal reassessment period) had passed since the payment was made, the taxpayer should request an adjustment to his return for the year of payment using the CRA's taxpayer relief provisions. However, such requests are limited to ten calendar years preceding the year in which the request is made.

The Canada Revenue Agency (CRA) has devoted significant resources over the past couple of decades to ensuring that Canadians can deal with the Agency on personal tax matters through its Web site, while still protecting taxpayer confidentiality. Most Canadians are by now aware that they can file their returns electronically, and in 2010 more than 13 million tax returns were filed that way. What many taxpayers likely aren't aware of is that it's possible to do nearly all your business (not just filing of returns) with the CRA online through their Web site at www.cra-arc.gc.ca, and that recent changes have been made to how that online access is obtained.

The Canada Revenue Agency (CRA) has devoted significant resources over the past couple of decades to ensuring that Canadians can deal with the Agency on personal tax matters through its Web site, while still protecting taxpayer confidentiality. Most Canadians are by now aware that they can file their returns electronically, and in 2010 more than 13 million tax returns were filed that way. What many taxpayers likely aren't aware of is that it's possible to do nearly all your business (not just filing of returns) with the CRA online through their Web site at www.cra-arc.gc.ca, and that recent changes have been made to how that online access is obtained.

The “gold standard” of personal tax information access on the CRA Web site is a feature called My Account, available at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html. Taxpayers who register for My Account can obtain and do just about anything online that could be done by phone or letter or at a CRA Tax Services Office.

With My Account you can see information about your:

• tax refund or balance owing;
• direct deposit;
• RRSP, Home Buyers' Plan, and Lifelong Learning Plan;
• Tax-Free Savings Account;
• NETFILE access code;
• tax returns and carryover amounts;
• tax information slips–T4A(P), T4A(OAS) and T4E
• disability tax credit;
• account balance and payments on filing;
• instalments;
• Canada Child Tax Benefit and related provincial and territorial programs payments, account balance, and statement of account;
• GST/HST credit and related provincial programs payments, account balance, and statement of account;
• Universal Child Care Benefit payments, account balance, and statement of account;
• children for which you are the primary care giver;
• Working Income Tax Benefit advanced payments;
• pre-authorized payment plan;
• authorized representative; and
• addresses and telephone numbers.

With My Account you can also manage your personal income tax and benefit account online by:

• changing your return(s);
• changing your address or telephone numbers;
• applying for child benefits;
• arranging your direct deposit;
• authorizing your representative;
• setting up a payment plan; and
• formally disputing your assessment or determination.

Not surprisingly, making such an enormous amount of personal tax information available online creates a need for security to protect that information. Until recently, in order to gain access to My Account, taxpayers were required to obtain a Government of Canada “E-pass”, which enabled the holder to deal with most government departments and agencies, including the CRA, through their various Web sites.

In the fall of 2010, the CRA replaced the Government of Canada E-pass with a new process which is specific to the Agency. While the process is not markedly different than that used to obtain an E-pass, registration with the CRA will allow access to only the CRA Web site, and not the Web sites of other government departments or agencies.

Registration under the new process starts on the CRA Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html.The taxpayer registering must provide his or her social insurance number, date of birth, current postal code, and specific information from a previous tax return filed with the CRA. He or she must then create a CRA ID and password and select and answer a number of security questions.  The CRA will then send a security code to the taxpayer by regular mail. Once the security code is received, it is necessary to once again go onto the CRA Web site, where the user ID and password will be activiated by entering that security code. Once all that is done and registration is complete, the taxpayer will be able to access personal information or transact business with the CRA simply by logging in with the user ID and password.

Taxpayers who have previously obtained a Government of Canada E-pass can no longer use that E-pass to gain access to CRA login services. Instead, they will be able to create a CRA user ID and password online and login using that ID and password.

Many taxpayers, however, don't necessarily want to go through the entire process of getting access to My Account, especially if they are infrequent users of the Web site, or just need a particular piece of information in a hurry (e.g., finding out their RRSP deduction limit on the last day a contribution can be made). Recognizing that reality, the Agency created something called Quick Access. As its name implies, Quick Access is a streamlined process that doesn't require the taxpayer to register, or create an ID or password. And, while the kinds of information available through Quick Access are much more limited than those available through My Account, they tend to be the kinds of information that taxpayers look for most frequently.

Quick Access is available on the CRA Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/qckccss/menu-eng.html. Using it, a taxpayer can find out the status of a tax return which has been filed (i.e., whether a return delivered or sent by mail has been received, whether the return has been assessed yet, and whether a Notice of Assessment and refund cheque are on their way), whether he or she is eligible for particular federal government benefits (e.g., Child Tax Benefit, Goods and Services Tax Credit, etc.), what the taxpayer's RRSP and TFSA contribution limits are for the year, and finally, the taxpayer's current NETFILE access code.

In order to satisfy the Agency's legitimate security requirements, taxpayers must provide specific information before they can gain access to the data available on Quick Access. Specifically, you must provide your social insurance number and your date of birth. You will also be asked for your total income (the number which appears on line 150 of your tax return) for a specified filing year. Note that it's the number which you reported on line 150 of the return that must be entered, not the line 150 amount which appears on the Notice of Assessment for the year, where those two figures are different. Once that information is entered and verified by the CRA's computers, all of the Quick Access data will be displayed on the screen.

The CRA has devoted substantial resources over a number of years to making personal tax information available to taxpayers online. For those who aren't comfortable with the online environment (or who would rather speak directly to a live CRA representative), the CRA continues to maintain its individual enquiries line at 1-800-959-8281.

For the third time in the past two and a half years, the federal Department of Finance has moved to tighten the rules which apply to mortgages backed by the Canadian Mortgage and Housing Corporation (CMHC).

To understand who will be affected by the new rules, some background is necessary. Under federal law, home purchasers whose down payment is less than 20% of the cost of the property must obtain mortgage insurance through the CMHC. That insurance, the premiums for which are paid by the homeowner, guarantees the lender that in the event of default by the homeowner the federal government will make good on any deficiency.

Over the past several years the federal government has become increasingly concerned about the amount of debt being carried by Canadian families, and much of the recent increase in that debt has been secured by borrowers' home equity. Of equal concern were the terms on which mortgages were being provided, as the amount of required down payment decreased and the time period over which the funds could be repaid (the amortization period) got steadily longer. Canadian mortgage lending practices never approached the degree of recklessness which came to characterize American mortgage lending in the past decade. Nonetheless, the federal government became concerned that Canadians were taking on more and more debt related to home purchases and were carrying that debt for unprecedented lengths of time.

In October 2008, the federal government moved to raise its minimum standards for CMHC-insured mortgages, and implemented the following changes.

• Fixing the maximum amortization period for new government-backed insured mortgages to 35 years.
• Requiring a minimum down payment of five per cent for new government-backed insured mortgages.
• Establishing a consistent minimum credit score requirement.
• Requiring the lender to make a reasonable effort to verify that the borrower could afford the loan payment.
• Introducing new loan documentation standards to ensure that there was evidence of reasonableness of property value and the borrower's sources and level of income.

In April 2010, the federal government took additional steps to impose more stringent creditworthiness requirements on borrowers, to limit the extent to which homeowners could borrow against their equity when refinancing their homes and, finally, to require that purchasers of non-owner occupied homes put down at least a 20% down payment on purchase.

The most recent in this series of changes was released on January 17, 2011, as the Minister of Finance announced that new measures would be taken to further limit both the amount of borrowing which could be undertaken by home owners on refinancing and the time period over which home borrowings could be amortized.

Prior to the October 2008 changes, some financial institutions had been offering 40 year amortizations to prospective homeowners. The maximum amortization period was reduced to 35 years by the 2008 announcement and has now been reduced again to 30 years. While the government recognizes that a shorter amortization period will, of course, mean larger monthly payments, it is concerned that amortization periods longer than 30 years increase the likelihood that Canadians will carry a mortgage into retirement—a poor financial strategy by anyone's measure.

The second change announced will further limit the extent to which homeowners can borrow against the value of their homes when refinancing a mortgage. The April 2010 changes reduced the maximum borrowing in such circumstances to 90% (down from 95%) of the home's current value. The maximum borrowing on a refinancing has now been reduced to 85% of the home's value. In announcing that change, the Department of Finance indicated that part of the purpose of the measure was to limit the “repackaging” of consumer debt into mortgages guaranteed by the federal government. Reducing the loan-to-value ratio in this way will also reduce the likelihood that homeowners who have re-financed to the maximum extent possible will be faced with a situation in which their homes will, as the result of a drop in real estate values,  be worth less than the amount they owe on them—an all-too-common situation in the United States over the past few years

Finally, the federal government will no longer provide CMHC insurance on lines of credit secured by homes, where such lines of credit do not have specific principal repayment requirements. Home equity lines of credit (HELOCs) have grown enormously in popularity over the past decade. While HELOCs are like conventional mortgages in that they are secured by the value of the property, they differ from such mortgages in two critical respects. First, homeowners are usually provided with a HELOC for a fixed maximum amount of up to 80% of the value of the home. However, the uses to which funds advanced through a HELOC can be put are not limited to home acquisition or housing-related costs. HELOCs can be (and have been) used for everything from paying off credit card balances to paying for vacations to buying big screen TVs. And, of course, every dollar borrowed through a HELOC reduces the homeowner's equity. The second major difference is that, in most cases, HELOC borrowers do not have fixed repayment obligations. While monthly payments are required, those payments can be as little as the interest amount accrued during the previous month. The homeowner can therefore continue to add to the debt represented by the HELOC while at the same time paying only the accrued interest and never reducing the principal amount owed.

It Is not hard to see how having access to large amounts of credit through a HELOC could easily lead to an unmanageable debt load for the undisciplined or unsophisticated borrower. It Is for that reason that financial institutions generally offer HELOCs only to borrowers who have a significant amount of equity in their homes and some history of being able to manage credit. Nonetheless, the fact that the federal government will no longer provide CMHC insurance for most HELOCs is a measure of its concern over the current extent (and purposes) of HELOC borrowing by Canadians.

Both the Minister of Finance and the Governor of the Bank of Canada have commented recently on the amount of debt carried by Canadian households and the impact that an increase in interest rates would have on the ability of many of those households to handle that debt load. Given that concern, it is likely that this latest round of changes restricting the ability of Canadians to tap into their home equity or to extend the period over which mortgage debt can be repaid will not be the last.

It's that time of year again, when advertisements about the wisdom of contributing to your RRSP (and usually about the benefits of borrowing to do so) fills the airwaves and Web sites. And, since the introduction of tax-free savings accounts in 2009, February is now also the month in which Canadians wrestle with the question of whether to put any available funds into an RRSP before the contribution deadline of March 1, 2011, or whether to deposit those funds instead into a TFSA.

It is important to be clear, at the outset, that it is not an either/or choice. Taxpayers can (and probably should) utilize both the RRSP and TFSA options in planning their financial affairs. Realistically, however, for most taxpayers the limitation is one of resources and cash flow, and it is often not possible to fund contributions to both an RRSP and a TFSA in the same year, let alone in the same month. That said, what are the considerations that apply in determining which savings/investment vehicle is preferable for 2011?

There are some similarities between TFSAs and RRSPs. Both allow savings to grow and compound free of current tax and for both, contributions not made in a year can be carried forward and made in any subsequent year. As well, the types of investments which can be made with RRSP or TFSA contributions are, for all intents and purposes, the same, meaning that one's choice of investment (i.e., GICs, mutual funds, bonds, etc.) should be irrelevant to the choice of RRSP vs. TFSA. However, the differences between the two savings vehicles are at least as significant as their similarities.

Perhaps most important to taxpayers, contributions made to an RRSP are deductible from income, resulting in a lower tax bill for the year of contribution and, for many taxpayers, a tax refund. Contributions to a TFSA are, on the other hand, made with after-tax funds, meaning that tax will already have been paid on the income used to make that contribution. Many taxpayers, when presented with an option that will reduce current year taxes, find that to be the most attractive choice. However, over the long-term, the tax consequences of choosing an RRSP over a TFSA can erode that benefit. When funds contributed (along with investment income earned on those funds) are withdrawn from a TFSA or an RRSP, the tax consequences are very different. Funds withdrawn from an RRSP (or a RRIF into which the RRSP has been converted) are fully taxable, without exception, at whatever tax rate applies to the taxpayer at the time of withdrawal. TFSA funds (including accumulated investment income) are withdrawn from the plan free of tax, regardless of when the withdrawal is made or the purpose to which the funds are put.  And, for taxpayers who are receiving Old Age Security benefits (or any other means-tested benefits) from the federal government, it's important to note that RRSP or RRIF funds withdrawn will be included in income for the purpose of determining eligibility for such benefits, while TFSA funds will not. Finally, while RRSP contributions for 2010 must be made by March 1, 2011, there is no similar deadline for TFSA contributions—they can be made at any time during the calendar year. Finally, when funds are withdrawn from a TFSA, the planholder can “top-up” the TFSA in any subsequent year by the amount of that withdrawal. Funds withdrawn from an RRSP cannot be re-contributed, unless the withdrawal was made as part of government-sanctioned withdrawal plans like the Home Buyers' Plan or the Lifelong Learning Plan.

The minority of working taxpayers who are members of registered pension plans will likely find the TFSA option particularly attractive. The maximum amount which can be contributed to an RRSP for the 2010 tax year is calculated as 18% of earned income for 2009, to a maximum contribution of $22,000. However, that maximum contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under the pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, making a TFSA contribution the logical alternative.

In a similar way, for taxpayers over the age of 71, the RRSP v. TFSA question is simply irrelevant. Taxpayers over that age are not eligible to make contributions to an RRSP, making TFSAs the only tax-free savings vehicle to which they can make contributions. The benefit is greatest for older taxpayers whose required RRIF withdrawals are greater than their current needs. While such RRIF withdrawals must be included in income and taxed in the year of withdrawal, transferring the funds to a TFSA will allow them to continue compounding free of tax, and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn from a TFSA will not affect the planholder's eligibility for Old Age Security benefits or for the federal age credit.

For younger taxpayers, where the savings goal is short-term—for example, a down payment on a home or paying for next year's vacation, the TFSA is clearly the better choice. While choosing to save through an RRSP will provide a deduction on that year's return and probably a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one's ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced. While the amounts involved may seem small, the loss of compounding on even a small amount over 25 or 30 years can make a significant dent in one's ability to save for retirement.

Taxpayers who are expecting their income to rise significantly within a few years—for example, 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, and then withdrawing the funds tax-free once they are working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted against income that would be taxed at the much higher rate, generating a tax savings. And, if a need for the funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Financial planners and tax advisers are accustomed to being asked by clients at this time of year whether it makes more sense to pay down the mortgage (or other debt) or to contribute to an RRSP. That question has become more complicated now that the TFSA option has been added to the mix. There is, however, a solution which allows you to do both. Assuming a marginal tax rate of 45%, an RRSP contribution of $11,000 will generate a tax refund of $4,950. Contribute that $11,000 (or as much as you can) to your RRSP and, when the resulting tax refund lands in your bank account, move it to a TFSA or use it to pay down the mortgage or other debt, or split it between the two.

The Canada Revenue Agency has created a section of its Web site to deal with the need for information and taxpayers' questions about TFSAs, and that information can be found at http://www.cra-arc.gc.ca/tx/tfsa-celi/menu-eng.html.

At this time of year, most taxpayers are focused on their tax obligations for the taxation year just ended on December 31, 2010—on the need to file a return for that year, on whether they will be able to come up with an RRSP contribution by March 1, the possibility that there will be taxes owed on filing (or perhaps a refund!), and if there are taxes owing, how to come up with the funds needed to pay that tax bill.

While all of those concerns are valid and pressing ones, the start of a new year is also a good time to start thinking about how to minimize the taxes that will be payable for the current year. While many tax planning strategies can be implemented at any time during the tax year, addressing tax issues at the start of the year can avoid the last minute scramble to verify expenses, locate receipts, and pull together funds for an RRSP contribution with the year-end or even the tax filing deadline for the year looming.

Many taxpayers sit down to prepare their tax returns with the hope that, at the end of the filing process, a tax refund will be forthcoming. The perception persists that a tax refund is a kind of “gift” from the federal government or that it represents “found money” which can only be obtained by filing a tax return. The reality is, in fact, the complete opposite. A tax refund is just that—the return by the federal government of taxes which have been overpaid by the taxpayer during the course of the year. And, in most cases, there is no interest paid by the federal government on that overpayment. Very few taxpayers would, if asked, willingly overpay their taxes and wait for a year, without receiving interest, to get that overpayment back. But every year, millions of taxpayers who collect a refund on filing have done just that.

Consequently, the first step in current year tax planning is to make sure that taxes aren't being overpaid. The majority of working Canadians earn income from employment and, as required by law, the employer deducts income tax from the employee's pay and remits it on the employee's behalf to the federal government. The amount deducted is based on an estimate of the employee's income tax liability for the year; the starting point for determining that liability is the TD1 form for the year. All employees, when they start a new job, must complete a TD1 (actually two TD1s, one for federal purposes and the other for the taxpayer's province or territory of residence). On that form the taxpayer specifies the personal tax credits for which he or she is eligible. Everyone gets the basic personal credit, but the taxpayer must specify which other credits (spousal or equivalent to spouse credit, tuition and education amounts, caregiver credit) he or she will be able to claim in order for the deductions made for income tax purposes to reflect those claims. Often, once an employee has completed the TD1 forms when starting employment, the assumption is made that his or her tax situation has not changed since then, and the deductions made from the employee's paycheque don't change either. However, change comes to everyone's life—a child is born or an older child goes off to university and tuition fees must be paid or an elderly parent can no longer live independently and moves in with an adult child. In some cases, the taxpayer or a spouse must cut back on work hours or even leave work to provide care for that parent. Each of these events, and many others, have tax consequences which will affect the amount of tax payable.  A taxpayer who hasn't filled out a TD1 for a few years, or whose personal circumstances have changed, should review the TD1 form (the federal form is available on the Canada Revenue Agency (CRA) Web site at http://www.cra-arc.gc.ca/E/pbg/tf/td1/td1-11e.pdf) to make sure that the form on file with the taxpayer's employer accurately reflects the taxpayer's current circumstances.

While the TD1 form captures most of the non-refundable tax credits for which an individual taxpayer might be eligible, it does not and cannot reflect the various deductible expenses that a taxpayer might incur over the course of the tax year. At this time of year the deduction which is most on everyone's mind is, of course, the RRSP contribution. Human nature being what it is, most Canadians don't think about RRSPs until the contribution deadline of March 1st is near, and most then have difficulty coming up with the funds to make a contribution on such short notice. Financial advisors continually remind Canadians that it is better, for several reasons, to contribute to one's RRSP throughout the year, rather than waiting until the last minute to do so. What most taxpayers don't realize is that it is possible to get an “assist” from our tax system to do so.

That “assist” comes from taking advantage of an administrative policy of the Canada Revenue Agency, using a form (the T1213) entitled Request to Reduce Tax Deductions at Source, available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1213/t1213-10e.pdf. Essentially, a taxpayer who will be incurring costs during the tax year that are deductible in the computation of taxable income for that year but which do not appear on the TD1 can apply, using Form T1213, to have the amount of income tax deducted from his or her paycheque reduced to take account of those costs. The biggest and most well-known of those deductions is an RRSP contribution, but it's not the only one. Taxpayers who incur child care expenses, make deductible support payments, make charitable donations, or have deductible employment expenses and can document the payment and amount of those costs can ask the CRA to authorize a reduction in the income tax deductions made from the taxpayer's gross income to reflect those costs.

The resulting increase in take-home pay can be significant. A middle-income taxpayer—one earning around $50,000 per year—will have source deductions reduced (and therefore take-home income increased) by about one-third of the amount of the deduction claimed. Where the taxpayer's income is over $80,000, that decrease in source deductions can rise to just under 40% of the amount of the expense claimed. And for a taxpayer in the highest income tax bracket (more than about $125,000), the percentage is about 45%.

Take, for example, the taxpayer in that highest income earning bracket who wants to make an RRSP contribution of $10,000. To do so, a monthly contribution of $833 throughout the year would be needed. If, however, income tax deductions at source were reduced to take account of that RRSP contribution, the taxpayer's “take-home” income would increase by $375 per month, or nearly half of the amount needed to make that monthly RRSP contribution.

Finally, many taxpayers incur expenses throughout the year for which a tax credit can be claimed on the return—public transit costs, for instance, interest payments on government student loans, or medical expenses. Whatever the expense, it is up to the taxpayer to prove that the expenditure was made and to document the amount that was paid. In many cases, the taxpayer must forgo making any claim because the receipts needed to prove that claim weren't kept or can't be found at tax filing time. It is not necessary to maintain a sophisticated filing system for such paperwork—just keeping all receipts in one place, to be sorted and organized at tax filing time, is all that is needed.

Tax planning is often thought of as a complex and time consuming process, available only to wealthy and sophisticated taxpayers. But the fact is also that a great deal of tax “planning” can be accomplished with only some straightforward paperwork and basic organization, strategies that are available to anyone who is willing to invest a little upfront time and effort.

Two quarterly newsletters have been added—one about individual issues and one about corporate issues. They can be accessed below.

Corporate:

Issue #15 Corporate

Individual:

Issue #15 Personal

The Employment Insurance premium rate for 2011 is 1.78%.

The Employment Insurance premium rate for 2011 is 1.78%.

Yearly maximum insurable earnings are set at $44,200, making the maximum employee premium $786.76.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2011 is therefore $1101.46.

The Canada Pension Plan contribution rate for 2011 is unchanged at 4.95% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2011 is unchanged at 4.95% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $ 48,300, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contribution for 2011 will therefore be $2,217.60, and the maximum self-employed contribution will be $4,435.20.

The general federal corporate tax rate and the rate applied to income from manufacturing and processing will be reduced from 18.00% to 16.50%, effective January 1, 2011.

The general federal corporate tax rate and the rate applied to income from manufacturing and processing will be reduced from 18.00% to 16.50%, effective January 1, 2011.

The small business tax rate remains at 11.0% and the federal small business limit is unchanged at $500,000.

The general corporate tax rate change will be pro-rated for corporations having non-calendar-year year-ends.

Dollar amounts on which individual non-refundable federal tax credits for 2011 are based, and the actual tax credit claimable, will be as follows.

Dollar amounts on which individual non-refundable federal tax credits for 2011 are based, and the actual tax credit claimable, will be as follows:

*The spousal and eligible dependant amounts are reduced by any net income for the year of the spouse or eligible dependant.

Credit amounts are converted to a non-refundable credit by multiplying the amount by the federal rate applicable to the lowest income bracket, which is 15.0% for 2011.

The indexing factor for federal tax credits and brackets for 2011 is 1.4%. Consequently, the following federal tax rates and brackets will be in effect for individuals for the 2011 tax year.

The indexing factor for federal tax credits and brackets for 2011 is 1.4%. Consequently, the following federal tax rates and brackets will be in effect for individuals for the 2011 tax year:

There is no change in federal individual tax rates for 2011.

A number of tax changes will take effect on January 1, 2011, most of them affecting individual taxpayers.

A number of tax changes will take effect on January 1, 2011, most of them affecting individual taxpayers. The more significant changes are listed below.

• RRSP deduction limit increases to $22,450

The RRSP contribution limit for the 2011 tax year (for which the contribution deadline is February 29, 2012) will increase to $22,450. In order to make the maximum contribution for 2011, it will be necessary to have had earned income for the 2010 taxation year of $124,722.

• Tax-free savings account contribution limit

There is no change to the TFSA contribution limit for 2011, as the annual limit remains at $5,000. Current-year TFSA contributions can be made at any time during the calendar year. Where a contribution is not made during the calendar year, the contribution room is carried over and the contribution may be made in any subsequent taxation year.

• Individual tax instalment deadlines for 2011

Millions of individual taxpayers pay income tax by quarterly instalments, which are usually due on the 15th day of each of March, June, September and December. As each of those dates in 2011 falls on a regular business day, the 15th of each of those months will be the actually payment deadline.

• Reduction in federal corporate tax rates

The general corporate tax rate is reduced, effective January 1, 2011, from 18.0% to 16.5%. There is no change in any other federal corporate tax rate for 2011.

The time of year is approaching when many Canadian employees look forward to something “extra” from their employer—a Christmas or Hanukkah gift, a year-end bonus or an invitation to the annual employer-sponsored holiday party. While it doesn’t necessarily fit well with the holiday spirit, it’s a fact that many such gifts, or even the annual employee holiday party, may have tax consequences, sometimes in unexpected ways.

The general rule is that any gifts received by an employee from his or her employer are considered to constitute a taxable benefit, to be included in the employee’s income in the year the gift is received. However, the Canada Revenue Agency (CRA) makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) to be received tax-free by employees, as long as such gifts are given on occasions such as Christmas or Hanukkah, or following a significant life event, like a marriage or the birth of a child.

Within the last year or so, the CRA has made some significant changes to its policies around employer gifts. As the new policies took effect at the beginning of 2010, this holiday season is the first one which will be governed by those policies. Thankfully, the new policies represent a simplification of the often complex and cumbersome rules which applied for 2009 and previous years. The administration of those rules proved to be more burdensome to employers than the CRA had anticipated, and the Agency was also concerned that that employer gift and award policies were being designed simply to, in effect, circumvent the rules and thereby provide employees with tax-free remuneration.

So, for 2010 and subsequent years, the CRA’s policy with respect to employer gifts to employees is simply that non-cash gifts and non-cash awards to an arm’s length employee, regardless of the number of such gifts or awards, will not be taxable to the extent that the total value of all such gifts and awards to that employee is less than $500 annually. The total value over $500 annually will be taxable.

It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500 per year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts, and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of cost. For this purpose, the CRA considers anything which could be easily converted to cash as a “near-cash” gift, which includes such things as gift certificates. In addition, the following types of gifts are considered to result in a taxable benefit, regardless of cost:

• points that can be redeemed for air travel or other rewards;
• reimbursements from an employer to an employee for a gift or award that the employee selected, paid for, and then provided a receipt to the employer for reimbursement;
• hospitality rewards such as employer-provided team-building lunches and rewards in the nature of a thank you for doing a good job;
• disguised remuneration, such as a gift or award given as a bonus;
• gifts and awards given by closely held corporations to their shareholders or related persons; and
• manufacturer-provided gifts or awards given directly by the manufacturer to the employee of a dealer.

 This time of year, the tax treatment of the annual employee holiday party needs to be considered. For many years, there was no question but that such an occasion had no tax consequences to the employees. However, in 1998, the CRA made an extremely ill-advised decision to assess a taxable benefit in relation to an employee’s attendance at an employer-sponsored Christmas party, and that assessment was upheld by the Tax Court of Canada. The public reaction to the news that employee Christmas parties would henceforth be taxed was entirely predictable, and the CRA issued a clarification of its position. That clarification indicated that no taxable benefit would be assessed in respect of employee attendance at an employer-provided social event, where attendance at the party was open to all employees, and the cost per employee was “reasonable”. In this case, “reasonable” cost was determined by the CRA to be $100. The $100 cost is meant to cover the party itself, not including any ancillary costs, such as transportation home, taxi fare and overnight accommodation. Where the total cost of the party exceeds the $100 per person threshold, the CRA may assess the employee as having received a taxable benefit. That policy remains in effect for 2010.

For most Canadians, December means holiday celebrations and school vacations. In the tax world, however, December 31 marks the deadline by which most tax planning and saving strategies must be put in place in order to have an impact on one’s tax liability for the 2010 tax year. What follows is a list of tax “to do’s” that must be accomplished by the end of the calendar year—and a few more that can wait until sometime in the first quarter of 2011.

 Things to be dealt with by December 31, 2010

• Medical expense credit calculation

When preparing their tax returns, many taxpayers find the computation of medical expenses eligible for the medical expense tax credit somewhat confusing, and that confusion is understandable. First of all, medical expenses, in order to be claimed, must total more than 3% of the taxpayer’s net income for the year, or a specified threshold amount ($2,024 for 2010), whichever is less. As a rule of thumb therefore, for 2010, taxpayers who have an income from all sources of less than $67,465 can claim all qualifying medical expenses in excess of 3% of their net income for the year. For example, a taxpayer earning $45,000 could claim qualifying medical expenses over $1,350 (3% of $45,000). Where the taxpayer’s income is over $67,465, only those medical expenses over the $2,024 threshold may be claimed for credit.

Adding to the confusion, it’s possible to claim on the 2010 return medical expenses which were paid in 2009. The actual rule is that a taxpayer can claim medical expenses (in excess of the threshold percentage, as outlined above) incurred in any 12-month period ending during the taxation year, assuming, of course, that such expenses were not claimed on a previous tax return. Here there is no easy rule of thumb, except perhaps to say that for tax purposes the best result is obtained where significant medical expenses can be grouped together and paid within a 12-month period, rather than spreading them out, in order to maximize the claim. So, as December 31 approaches, it’s a good idea to add up the medical expenses which have been incurred during 2010, as well as those paid during 2009 and not claimed on the 2009 return. Once those totals are known, it will be easier to determine whether to make a claim for 2010 or to wait and claim 2010 expenses on the 2011 return. And, if the decision is to make a claim for calendar year 2010, knowing what medical expenses were paid when will enable the taxpayer to determine the optimal 12-month period for the claim. Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2011. It may make sense to accelerate the payment of those expenses to December 2010, which would allow them to be included in 2010 totals and claimed on the 2010 return.

• Make charitable donations for 2010

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

As a result of the two-level credit structure, it makes sense to aggregate donations in a single calendar year where possible. A qualifying charitable donation of $400 made in December of 2010 will receive a federal credit of $88 ($200 x 15% + $200 x 29%). If the same amount is donated, but the donation is split equally between December 2010 and January 2011, the total credit claimed is only $60 ($200 x 15% + $200 x 15%), and the 2011 donation can’t be claimed until the 2010 return is filed in April of 2012. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% rather than the 15% level.

It’s also possible to carry forward for up to five years donations which were made in a particular tax year. So, if donations made in 2010 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 2005, 2006, 2007, 2008, or 2009 tax years can be carried forward and added to the total donations made in 2010, and the aggregate amount claimed on the 2010 tax return.

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

• Tax-free savings account withdrawals

Each Canadian aged 18 and over can contribute up to $5,000 per year to a Tax-Free Savings Account (TFSA). Although no deduction from income is permitted for TFSA contributions, no tax is paid on any income earned by contributed amounts. In addition, amounts not contributed in a particular taxation year are carried forward and added to the taxpayer’s contribution room for the next year. Finally, where amounts are withdrawn from a plan, the withdrawn amount is added to the taxpayer’s TFSA contribution limit for the following year.

As many taxpayers learned to their cost during 2010, the withdrawal/recontribution rules are perhaps more complex than they first appear to be. A number of taxpayers withdrew funds from a TFSA in 2009 and then recontributed some or all of those funds before the end of the year. In doing so, some of those taxpayers became liable for a penalty tax on overcontributions for the year. Fortunately for them, the Canada Revenue Agency (CRA) determined that, as 2009 was the first year that the program was in place and taxpayers (and in some cases, it seemed, financial institutions) might have been confused about how the rules would apply, penalty tax would not necessarily be assessed. However, the CRA made it clear that this administrative concession would apply only for the 2009 taxation year and that taxpayers who went “offside” with respect to excess contributions in future years should expect to have the penalty tax provisions applied. 

So, to recap the rules: a taxpayer who contributes $5,000 to a TFSA during 2010 but withdraws $2,000 of that contribution during the year will have a $7,000 TFSA contribution limit for 2011 (made up of the usual $5,000 limit for 2011 plus the $2,000 withdrawn the previous year).  Consequently, taxpayers who currently have funds in a TFSA but are planning to make a withdrawal in early 2011—perhaps to pay for a winter vacation—should think about making that withdrawal before the end of 2010, so as to preserve the option of replacing the funds in the plan during 2011. If the same taxpayer waits until January of 2011 to make the withdrawal, he or she won’t be eligible to replace the funds until 2012—and doing so during 2011 could result in the assessment of a penalty tax.

• Spousal RRSP contributions

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a presumably lower tax rate. However, the benefit of having withdrawals from a spousal RRSP taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2010, the spouse can withdraw that amount as of January 1, 2013 and have it taxed in his or her hands. If the contribution isn’t made until January or February of 2011, the contributor can still claim a deduction for it on the 2010 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 2014. It’s an especially important consideration for couples approaching retirement who may plan on withdrawing funds in the relatively near future.

• Take a look at tax instalment amounts

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

The final quarterly instalment will be due on December 15, 2010. By that date, almost everyone will have a reasonably good idea of what his or her income will be for 2010 and so will be in a position to estimate what the tax bill will be for the year. While the tax return forms to be used for the 2010 tax year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2009 form. Increases in tax credit amounts and tax brackets from 2009 to 2010 will mean that using the 2009 form will result, if anything, in a slight overestimate of tax liability for 2010.

Once one’s tax bill for 2010 has been estimated, it’s possible to compare that figure with the total of tax instalments already made in 2010 and determine whether the tax instalment to be paid on December 15 can be adjusted downward.

 Things that can wait (for a bit)

• 100% deduction for computer and computer software acquisitions

The 2009 federal budget included an announcement of an enhanced deduction for businesses acquiring computer hardware or systems software. The enhanced deduction was actually structured as a special capital cost allowance class for qualifying acquisitions, which could then be depreciated at a rate of 100% per year. The “half-year” rule which limits any deduction to one half the usual amount in the year of acquisition would also not apply to acquisitions of assets which qualified for this special class. In order to qualify for the deduction, acquisitions had to be acquired after January 27, 2009 and before February 2011. That window is now coming to an end, and in order to take advantage of the 100% deduction, any acquisitions of qualifying assets must be done by the end of January 2011. Note that where the purchase is made in January 2011, the deduction must be taken on the 2011 tax return. In order to take advantage of the deduction for 2010, the purchase needs to be made by the end of this calendar year.

• RRSP contribution deadline

Most taxpayers are aware that the deadline for making an RRSP contribution to be claimed on the 2010 tax return falls at the end of February 2011. More precisely, the deadline is 60 days after the end of the calendar year which, in 2011, will be March 1.

Where the March 1 deadline happens to fall on a Sunday, the federal government has typically made an administrative concession by allowing contributions to be made on the next business day of March 2. However, in 2011, March 1 is a Tuesday, so taxpayers should not anticipate receiving any kind of extension with respect to the deadline. To be eligible for deduction on the 2010 return, RRSP contributions will have to be made by midnight Tuesday, March 1, 2011.

 Things that can wait until April 2011

• Pension income splitting

It’s unusual to be able to wait until tax filing time to make a decision on tax-planning strategies for the previous year. However, when it comes to pension income splitting, there’s no need to address the issue any sooner.

For most Canadians, the Canada Pension Plan (CPP) represents a significant source of anticipated income during their retirement years—for some, perhaps even the majority of their income. As a result, changes to that Plan are of interest to just about every adult Canadian, especially those who are approaching retirement.

Retirement has changed a lot over the past few decades and especially over the past few years, as the baby boomers approach retirement age. While retirement used to be an “all-or-nothing” proposition—one either worked full-time or not at all—this is no longer the case. Many Canadians now approach retirement on a more gradual basis, shifting to a part-time schedule in anticipation of retirement, with many more intending to work on a part-time basis after their official “retirement” date.

The changes in Canadians’ retirement patterns have meant changes in how CPP benefits are calculated and structured, and some of those changes will come into effect on January 1, 2011. Generally, the changes provide an incentive to working Canadians to put off receiving CPP benefits as long as possible, and a hindrance to those who perhaps planned to begin collecting such benefits at the first opportunity. They also provide already-retired Canadians who return to the work force, on either a part-time or full-time basis, with the opportunity to increase their CCP benefits by making additional contributions to the Plan. It’s important to note, as well, who won’t be affected by the upcoming changes. Canadians who are already receiving CPP benefits, unless they plan to return to the work force in the future, won’t see any change to their current benefits or benefit entitlements as a result of these new rules.

To make sense of the changes, a bit of background is required on just how the Canada Pension Plan works. Each employed and self-employed Canadian contributes to the Canada Pension Plan during his or her working life, at a rate set by law. For 2010, that rate is 4.95% of earnings, to a maximum of $2,217. For employees, the employer contributes an equivalent amount, while the self-employed must contribute both the employer and employee portions.

For each recipient, the amount of the monthly pension is generally based on the amount of contributions made between the age of 18 and the date on which CPP benefits start to be paid, to a maximum (for 2010) of $934 per month. That pension amount is what the individual would receive if CPP pension payments started at age 65. However, Canadians who contribute to the CPP can begin to receive monthly payments from the plan as early as age 60, or can postpone receiving pension payments until as late as age 70. Where a person chooses to begin receiving payments before they turn 65, pension amounts are reduced, under current rules, by 0.5% for every month before age 65 that the individual chooses to begin receiving CPP.  Conversely, where someone chooses to put off receiving CPP payments until after the age of 65, the amount of the monthly pension is increased by 0.5% for each month that pension payments are deferred.

Changes to the CPP to be phased in between 2011 and 2016 will provide a financial incentive to delay receipt of the CPP until after age 65 and will impose a greater cost on those who choose to begin receiving the pension before that time. Specifically, the 0.5% by which the pension amount payable is increased for each month that receipt is delayed after age 65 will itself increase—to 0.57% for 2011, 0.64% for 2012 and 0.70% for 2013. On the other side of the coin, where an individual chooses to begin collecting CPP before age 65, the current reduction of 0.5% for each month before age 65 that pension payments start will also increase—to 0.52% for 2012, 0.54% for 2013, 0.56% for 2014, 0.58% for 2015, and 0.60% for 2016.  

While those percentages don’t sound like they represent much change, the cumulative effects can be significant. In 2010, an individual who chooses to put off receiving CPP payments until the age of 70 receives 30% more than he or she had would have at age 65. Once these changes are fully implemented in 2013, a person making the same choice will receive 42% more than if he or she had taken the pension at age 65. The difference is smaller for those who choose to accelerate pension payments to age 60, but is still significant. Currently, a person who elects to begin receiving payments at age 60 will receive 30% less than if they had chosen to wait until age 65. By 2016, a person making the same choice will receive 36% less than someone who waited until age 65 to begin collecting their pension.   

Some changes are also planned for how the pension receivable by each person is calculated. Under current rules, each person’s average earnings between age 18 and their retirement date (known as the “contributory period”) is totalled and then 15% of their lowest earning years are “dropped out” of the calculation. In practical terms, that meant that up to 7 years of the person’s lowest earnings were “dropped out” from the calculation of average earnings. The balance was then used to calculate CPP entitlement for that individual. Beginning with the 2012 year, the percentage of low or zero income years that are excluded from the calculation will be increased to 16% in 2013, and 17% in 2014. The effect of the change will be to increase the amount on which CPP entitlement is based, and consequently, the amount of pension receivable, subject to statutory maximums.

While CPP recipients may continue to participate in the workforce (as an increasing number of retirees do), they may not, under existing rules, contribute to the CPP. However, beginning in 2012, CPP recipients under age 65 who continue to work will be required to continue contributing to the CPP, while those who are between the ages of 65 and 70 will have the option of contributing. Any additional contributions made while receiving CPP will, of course, increase the amount of CPP which the individual receives, through the new Post-Retirement Benefit.

Two quarterly newsletters have been added, one about individual issues and one about corporate issues. They can be accessed below.

Corporate:

http://www.cchsitebuilder.com/newsletters/custom/Issue14_Corporate.pdf.

Individual:

http://www.cchsitebuilder.com/newsletters/custom/Issue14_Personal.pdf.

The exponential growth of the Internet over the past fifteen years has been accompanied by a similar explosion in internet-based purchases and sales of goods and services, commonly referred to under the all-inclusive rubric of “e-commerce”.

It’s probably safe to say that most Canadians who have internet access have carried out or at least considered online purchases or sales. It’s equally safe to assume that the vast majority were oblivious to any possible tax consequences which might have arisen from their online transactions. The same can’t, however, be said for Canada’s tax authorities, who are very much aware of the potential revenue loss resulting from the non-reporting of taxable online transactions.

Some basic background: the tax rules applied to e-commerce are no different than those applied to more traditional purchases and sales of goods and services – in other words, there are no special tax rules regulating or governing e-commerce. Under Canadian tax rules, Canadian residents are subject to tax on all of their worldwide income, from all sources, and are required to report such income on their annual tax returns. Where a taxpayer’s income is documented on the T4 slip issued by his or her employer, ensuring that that taxpayer reports all such taxable income poses no difficulty for the Canada Revenue Agency (CRA). Where income payments are irregular, or arise from multiple sources, including online sources, ensuring that all taxable income is reported is a much more difficult proposition.

That said, not all online income is taxable. Where the internet is used periodically to sell personal property, like used textbooks or furniture, or sports equipment that has been outgrown, there’s usually no obligation to report the income from such transactions. Where, however, those periodic transactions become regular events structured to create a profit, things change. More technically, business income (including online business income) arises where an activity is carried on for a profit or with the reasonable expectation of making a profit. If the parent who sold his family’s outgrown sports equipment online offered to do the same each year for every player in the league, and collected a percentage fee or charge for each completed online sale, then the income created by those fees would arguably represent income reportable on the annual tax return.

Once it’s been determined that an online business is being carried on, the reporting obligations which arise are the same as those applying to any business operating in Canada. Specifically, an online business must file a tax return, register the business and its accounts (that is, income tax, GST/HST, and employer and import/export accounts, where applicable), collect and remit goods and services tax/harmonized sales tax, and keep records of business activities.

All of that aside, however, the practical question which comes to mind is how the CRA could possibly track the millions of online transactions which could give rise to a tax liability for Canadian taxpayers over the course of a taxation year. The short answer is that it doesn’t need to: instead the Agency has sought and obtained access to the records maintained by companies which administer the online marketplace.

Acting under powers provided to it in the Income Tax Act, the CRA requested, a few years ago, that one of the largest online sales companies, eBay Canada, provide it with the names and addresses of any Canadian users (individual or corporate) who were, as measured by the dollar value of their annual sales, engaged in significant e-commerce activities through eBay. Although the company resisted the CRA’s request, the courts eventually determined that the CRA was within its rights to request such information and that eBay Canada was compelled to provide it. The fact that the information was stored in a server owned by the parent company and located outside Canada’s territorial boundaries was not a bar to the Minister’s request, when the reality was that the information was “readily and instantaneously available to those within the group of eBay entities in a variety of places”. It’s clear that the CRA is going to pursue the matter of online income, and it’s likely that Canadians who regularly earn income through online services like eBay are going to be on the Agency’s radar screen.

So, what are the options for Canadians who have been earning taxable income online? The first, of course, is to start reporting that income on the annual return. As we’re coming up to the end of the taxation year, there’s still an opportunity to report any income earned during 2010 on a timely basis – that is, on the annual return to be filed in the spring of 2011. For those who have unreported online income from previous years, the situation’s a little more complicated, but there are options other than simply waiting for the CRA to catch up with them. Under the Agency’s Voluntary Disclosure Program, taxpayers who have unreported income from prior years can make a full disclosure to the Agency, pay any taxes owing, plus interest, and avoid any penalties or prosecution. It’s important to note, however, that a voluntary disclosure can be made only before any audit or investigation has been undertaken by the CRA – once they’ve contacted you, it’s too late. For those who are interested, the mechanics and contact details of the Voluntary Disclosure Program are available on the CRA’s Web site at http://www.cra-arc.gc.ca/gncy/nvstgtns/vdp-eng.html.

The online marketplace continues to grow by leaps and bounds, and it’s clear that the CRA is concerned about the potential revenue loss from unreported online income. The CRA has demonstrated its willingness to use all methods at its disposal to track and tax such income, and the Courts appear to be in agreement with the CRA’s views and methods in this area. The CRA now has a portion of its Web site devoted to issues surrounding e-commerce activities, and that information can be found at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/cmm/menu-eng.html.

The Agency has also indicated that it is preparing and hopes to soon release two new publications dealing with the taxation of e-commerce. It seems that while it may have been possible in the past to fly under the CRA’s radar screen when it came to online income, this is no longer the reality for Canadian taxpayers.

Mention the words “OAS recovery tax” to most Canadians and you’ll likely get a blank look in return – even from those who actually pay the tax. Talk about the OAS “clawback”, however, and you’ll probably get a much stronger reaction, especially from those whose retirement income is reduced each month by that clawback.

 Old Age Security (or OAS) is one the two main components of Canada’s government-sponsored retirement income system – the other being the Canada Pension Plan (CPP). (There are also federal and provincial supplements which are available to lower-income seniors.) While many Canadians over the age of 65 receive both OAS and CPP benefits every month, the two plans are quite different. In order to receive CPP benefits, it is necessary to have paid into the CPP during one’s working life, as virtually all employees (as well as the self-employed) do. It is possible to begin collecting CPP benefits as early as age 60 (OAS benefits begin, in all cases, at age 65), and the amount of monthly CPP benefit received is based on a complex formula which measures the amount of contributions made over the taxpayer’s working life, with some adjustments. For 2010, the maximum monthly benefit payable is $934.17. The only determinants of the amount of benefits receivable are one’s contribution amount and the age at which one elects to begin receiving benefits – other sources of available income or one’s overall income level are not considered.

 Eligibility for OAS, on the other hand, is based on Canadian residency. Essentially, a person aged 65 and older who has lived in Canada for at least forty years after the age of 18 is eligible for full OAS benefits. Where the length of Canadian residency after age 18 is less than forty years, a partial pension is earned at the rate of 1/40th of the full monthly pension for each full year lived in Canada. OAS benefits are fully indexed to inflation, and the maximum monthly benefit payable in the last quarter of 2010 is $521.62.

 The differences between the CPP and OAS extend to how each program is financed. The CPP, like all contributory pension plans, is financed out of contributions made and income earned from the investment of those contributions. OAS, on the other hand, is paid from general federal government tax revenues. And, as the Canadian population ages, the cost of OAS to the federal government has continued to increase.

 Several years ago, the federal government determined that it was no longer willing to maintain OAS as a program of universal entitlement. The conclusion reached was that the priority for benefits would be Canadian seniors whose income from all sources fell below a government-determined ceiling. And the result of that determination was the OAS “recovery tax”, or clawback.

 The clawback, as it known to virtually everyone but the federal government, is simple in concept. Where a person receiving OAS benefits has income for the year over the prescribed ceiling, 15% of that excess is deducted from the amount of OAS to which he or she would otherwise be entitled, up to the full amount of any OAS benefit otherwise payable. For 2010, that income ceiling is $66,733, and the clawback is calculated as shown in the following example.

If the OAS recipient’s income in 2010 was $80,000, then the repayment would be 15 percent of the difference between $80,000 and $66,733:

$80,000 - $66,733 = $13,267

$13,267 x 0.15 =$1990.05

In this case, the OAS recipient would have to repay $1990.05 of benefits received for 2010. In all cases, the amount of any required repayment is capped by the amount of OAS actually paid to the taxpayer during the year – one cannot be asked to repay benefits which were never received.  

In the year that a taxpayer turns 65 and begins to receive OAS, even if his or her income for the year will be greater than the allowable ceiling, the full amount of OAS benefits, without taking into account any clawback, will be paid. However, when that taxpayer files a tax return for the year during tax filing season the following spring, the bottom line will likely be an unpleasant surprise. When completing the return, the taxpayer must declare all OAS benefits received on line 113. The calculation of any required repayment is done on the federal worksheet which accompanies the return and it essentially determines 15% of the taxpayer’s income over the income ceiling. That figure is carried over to lines 235 and 422 of the return as a required social benefits repayment amount. In the very worst case scenario, where a taxpayer had received the maximum OAS benefit for a full twelve months and was subject to a full clawback, the repayment amount could be as much as just over $6,000.

 Of course, the federal government generally prefers to collect any tax owing from taxpayers throughout the year rather than at tax filing time. Each year, the federal government will estimate, based on prior year income amounts, the amount of any clawback which may be payable for the current year, and will deduct an amount from the OAS monthly benefit otherwise payable, such that the amount of the clawback is paid on an onging basis. Of course, it’s also possible that a taxpayer’s income can fluctuate from year to year. That’s unlikely to be the case for a taxpayer whose income is derived from a private pension plan or an annuity, but where a taxpayer is living on investment returns from a registered retirement income fund, or wages from part-time employment, fluctuations in income are quite possible. In such circumstances, and especially where the taxpayer’s income is reduced to the point that any clawback amount is significantly reduced or even eliminated, the Canada Revenue Agency (CRA) should be notified and a request made to reduce or eliminate the tax deduction being made. The means for doing so is a prescribed form, the Request to Reduce Old Age Security Recovery Tax at Source for Year ____, which is available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1213_oas/t1213oas-10e.pdf.

That form, once completed, is sent to the CRA and the taxpayer is notified, in four to eight weeks, of whether the Agency has approved the request.  

Unlike contributing to a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA), the idea of splitting pension income to reduce taxes doesn’t get a lot of attention in the media. That’s unfortunate for a couple of reasons. First, the splitting of pension income can provide significant tax savings to those able to utilize it (generally, older taxpayers who in many cases are living on a fixed income and can really benefit from the tax savings received). Second, unless you’re getting good tax-planning advice, it’s very easy to overlook pension income splitting as a way of reducing your tax burden. The only references to pension income splitting on the annual return are two entries—one on line 116 and the other on line 210 and, unless you are already aware of the significance of those entries, there’s really nothing to alert you to it. In addition, the form which must be filed to affect a pension income splitting strategy isn’t part of the standard tax return package provided to taxpayers by the Canada Revenue Agency (CRA)—taxpayers must obtain it separately.

The ability to split pension income has been available for a few years now, having first been announced by the Department of Finance in the fall of 2006. The general rule is that taxpayers receiving private pension income (including a pension received from former employer and, where the recipient taxpayer is over the age of 65, payments from a registered retirement savings plan or a registered retirement income fund) are entitled to allocate (or “split”) up to half that income with a spouse for tax purposes. (Government source pension income, like payments from the Canada Pension Plan or Old Age Security payments do not qualify for pension income splitting). Since then, a number of provinces have indicated that they will adopt the federal proposals for provincial tax purposes.

While the concept and general rules governing pension income splitting aren’t particularly complex, the splitting of pension income has some fairly wide-ranging, beneficial tax consequences for the taxpayer and his or her spouse.

How to elect to split pension income

The mechanics of pension income splitting are relatively simple. There is no need to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify the pension plan administrator. In addition, the decision of whether and to what extent to split pension income for tax purposes does not have to be made until the return for the year is filed (for 2010 returns, the spring of 2011). Taxpayers who wish to split eligible pension income received by either of them must file Form T1032, Joint Election to Split Pension Income, with their annual tax return. The form is available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1032/t1032-09e.pdf. On the T1032, the taxpayer receiving the private pension income and the spouse with whom part of that income is to be split must make a joint election to be filed with their respective tax returns for the particular tax year. Since the splitting of pension income affects both the income and the tax liability of both spouses, the election must be made and the form filed by both spouses—an election filed by only one spouse or the other won’t do.

In addition to filing the T1032, the spouse who actually receives the pension income must deduct from income the pension income amount allocated to his or her spouse, on line 210 of his or her return for the year. And, conversely, the spouse to whom the pension income is being allocated is required to add that amount to his or her income on the return, this time on line 116.

As well as reporting the pension income “received” and claiming the corollary deduction on lines 116 and 210, there’s a requirement that, where tax has been withheld from the income to be split, that tax must be allocated on the return for the year in the same proportion as the pension income is allocated. The formula for doing so is outlined in Step 5 of Form T1032.

 Effect of pension income splitting on eligibility for other federal credits and benefits

Eligibility for a number of federal tax credits and benefits is based, in whole or in part, on a taxpayer’s net income or on family net income. Once pension income is split, the net income of the pension recipient spouse will be reduced while the net income of the spouse with whom the income is split increases. Consequently, where eligibility for a particular federal tax credit (the GST/HST, for example) is based on family net income, splitting of pension income will have no impact on either eligibility or amount received, since overall family net income is unchanged. Where a tax credit or benefit is calculated based on one individual’s net income, however, the splitting of pension income can create real benefits.

For couples over the age of 65, the ability to minimize or eliminate any clawback of Old Age Security Benefits through pension income splitting can be significant. Most Canadians are eligible to receive such benefits, which can reach about $500 per month, after they turn 65 years of age. However, taxpayers who have net income of more than about $66,750 (for 2010, with the amount indexed annually) have their benefits reduced or “clawed back”. The clawback rate is 15% of net income over the threshold amount of $66,750. Taxpayers having income of more than about $107,000 receive no benefits at all.

As an example of the benefits which can be realized, take the situation of the couple where one spouse has annual retirement income of $85,000, from various sources, including eligible pension income, and the other has no private retirement income at all, only Canada Pension Plan and Old Age Security benefits.  At those income levels, the lower income spouse would have full OAS entitlement, but the spouse with the higher income would lose about half of OAS benefits. If eligible pension income is split such that both spouses have income below $66,750, both would enjoy full OAS entitlement, amounting to about $12,000 for the year. Absent pension income splitting, the couples’ total OAS entitlement for year would have been just over $9,000.

Finally, taxpayers receiving private pension income can claim a non-refundable federal tax credit of up to $2,000 on their returns for the year. The actual credit claimable is equal to the amount of qualifying pension income earned or $2,000, whichever is less. The CRA has confirmed that where pension income is split, the amount of such income reported for tax purposes by each spouse will be used to determine eligibility for and the amount of any pension income credit. For example, where a taxpayer who receives $10,000 in eligible pension income for the year allocates 50% of that amount, or $5,000, to a spouse, both spouses will be able to claim the full $2,000 pension tax credit on their return for the year the income is reported. 

The ability to split pension income between spouses has the potential to achieve real and permanent tax savings and to enhance eligibility for certain federal tax credits and benefits. And as long as the administrative requirements outlined above are followed, pension income splitting is a win-win opportunity for eligible taxpayers.

 The CRA has made an effort to provide information to taxpayers who might qualify for such pension income splitting, as well as tax information of interest to taxpayers over the age of 65 generally, through its Web site. That information, which includes links to relevant government forms and publications, can be found on the Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/menu-eng.html.

When it comes to income tax filing requirements, partnerships occupy something of a middle ground between individuals and corporations. Partnerships themselves do not file an income tax return, but the income earned by the partnership is allocated among the partners and reported by each partner on his or her individual tax return for the year.

Some partnerships do, however, have an obligation to file what are known as “partnership information returns”, using Form T5013, and it is the rules governing which partnerships must file such returns which are now about to change.

The existing partnership information return filing requirements came into effect in 1989, when the Income Tax Regulations were amended to require all partnerships to file an information return for each fiscal year of the partnership. However, the Canada Revenue Agency (CRA) determined that, as an administrative policy, filing would not be required by small partnerships, which were for this purpose defined generally as partnerships with fewer than 6 members. Such partnerships have therefore been exempted, in most cases, from the information filing requirements.

The CRA has now determined that the partnership information return filing requirement should be based not on the number of partners, but on the amount of business activity and level of assets held by the partnership. Consequently, effective for partnership fiscal years ending after 2010, the rules regarding partnership information return filings will undergo significant revision. As of January 1, 2011, the test for whether a partnership is obliged to file a T5013 will be based generally on the amount of partnership revenue for the year or the value of the partnership’s assets at the end of the year.

Effective for partnership fiscal years ending on or after January 1, 2011, a partnership that carries on business in Canada, or a Canadian partnership which has Canadian or foreign operations or investments, must file a T5013 for each fiscal period if, at the end of that fiscal period, the partnership has an absolute value of revenues plus an absolute value of expenses of more than $2 million, or has more than $5 million in assets.

 The new rules, with their references to “absolute values” of revenue and expenses, require some explanation. Essentially, a partnership must take, from financial statement amounts, revenues received for the year prior to netting out of expenses. Similarly, the calculation of expenses for the year must include both current costs and capital costs (i.e. depreciation). The two figures are added together, with the total determining whether the partnership has exceeded the $2 million threshold and must therefore file a partnership information return for the fiscal period.

The CRA provides the following numerical example of how to calculate revenue and expenses for purposes of the new requirements.

Revenues $1,500,000

Cost of goods sold $850,000

Gross profit $650,000

Expenses $400,000

Net profit $250,000

Cost of goods sold

850,000

Net profit

$250,000

Absolute value of revenues

$1,500,000

Absolute value of expenses

- Cost of goods sold

$850,000

- Expenses

$400,000

$1,250,000

Absolute value of revenues plus expenses

$2,750,000

Even if the partnership is not caught by the new requirements on the basis of revenue and expenses for the year, it may still be subject to those requirements where total partnership assets at the end of the year exceed $5 million. For purposes of that calculation, the CRA has indicated that the cost figure of all assets, both tangible and intangible, without taking into account the depreciated amount, should be used to determine whether partnership assets exceed the $5 million threshold.

The new filing requirement will also be imposed where, at any time in the partnership’s fiscal period, the following circumstances exist:

• the partnership is a tiered partnership (that is, it has another partnership as a partner or is itself a partner in another partnership);
• the partnership has a corporation or a trust as a partner; or
• the partnership invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership.

Finally, the Minister of National Revenue can also, even in the absence of the listed circumstances, request that a partnership file an information return for a particular fiscal period.

The current form T5013 will, of course, require significant revision in order to accommodate the new reporting requirements. The CRA release indicates that the form is currently being updated and revised and will be posted on the CRA Web site when it is available. In the meantime, taxpayers wishing more information about the new reporting and filing requirements can find that information at www.cra.gc.ca/partnership.

While it’s obviously preferable, when it comes to taxes, to file on time and to make sure the information provided to the CRA is complete and accurate (as each taxpayer certifies on the last page of his or her return), things don’t always happen that way. Taxpayers who are in financial difficulty and unable to pay their taxes may simply put off filing. More commonly, a taxpayer may discover, after filing a return for the year (or previous years), that an information slip was overlooked and a portion of income consequently not reported. Or, the taxpayer may receive an amended T4 after filing his or her return, necessitating a change in the return filed and, sometimes, an increase in tax payable. The dilemma which arises, of course, is whether to come clean with the tax authorities, or “lie low” and hope the failure to file or error or omission is never discovered.

Where the needed change is in respect of a current year return, it’s relatively simple to set things right. In such circumstances, the taxpayer needs to write to the Tax Centre to which the original return was sent, notifying them of the error and providing the correct information. It is not necessary, in fact not advisable, to send a second return containing the correct information to the CRA. Doing so is more likely to create confusion than to resolve matters. Rather, in such circumstances, the CRA provides a form to be used — the T1-ADJ. While the use of the form, which is available on the Agency’s Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-adj/t1-adj-10e.pdf, isn’t mandatory, using it does ensure that all the information required by the CRA to process the taxpayer’s request has been provided. Once the T1-ADJ is received, the corrected information should be incorporated into the taxpayer’s return and reflected on the Notice of Assessment ultimately issued by the CRA.

Where a failure to report income, or to file, or the erroneous claiming of a deduction or credit which is discovered by the taxpayer relates to a previous taxation year, the CRA provides taxpayers with another option, in the form of the Agency’s Voluntary Disclosure Program (“VDP”). As the name implies, the Program allows taxpayers to voluntarily disclose to the CRA any past errors or omissions or failures to file when required. Where the requirements of the program are met, the CRA is authorized to cancel (or “waive”) any penalties which might otherwise be assessed against the taxpayer. It’s important to note that only penalties may be forgiven, and that the taxpayer will, notwithstanding any voluntary disclosure, continue to be “on the hook” for any outstanding taxes, plus interest charges.

The CRA imposes four conditions which must be met before a disclosure will qualify under the program. They are as follows.

• The disclosure must be truly voluntary in nature – that is, it must be initiated by the taxpayer and, in particular, must not be the result of the taxpayer’s knowledge of enforcement action about to be taken by the CRA. In other words, a taxpayer who “voluntarily” discloses past transgressions after finding out that he or she is about to be audited will not qualify under the program.

• Any disclosure made by the taxpayer must be “complete”, as that term is understood by the CRA. The taxpayer is expected to provide full and accurate reporting of all previously inaccurate, incomplete, or unreported information. It’s not possible to make selective disclosure of, for instance, one tax year but not others. As well, the CRA will request documentation to verify the amounts to be disclosed. If that documentation shows that the initial disclosure contained significant errors or omissions, the disclosure will not qualify under the VDP. In such a case, the disclosed information will be processed by the CRA and the Agency will be able to apply interest and penalties to the entire outstanding amount.

• The voluntary disclosure by the taxpayer must involve at least one penalty. Since the point of the VDP is to forgive penalties while collecting outstanding taxes and interest, there would be no point to seeking penalty relief where no penalties are involved. In such cases, the relevant information should simply be disclosed to the CRA, which will process it and assess any taxes and interest owed.

• Finally, the taxpayer’s disclosure must generally include information which is at least one year past due. In other words, a disclosure could not normally be made in respect of a 2008 income tax return (which was due April 30, 2009) until May of 2010. The CRA will, in some circumstances, accept a disclosure of information which is less than one year past due, but such disclosure cannot be used by the taxpayer simply to avoid penalties. For instance, a taxpayer who fails to get his return in and his taxes paid by April 30 cannot make a “voluntary disclosure” a few days or weeks later simply in order to avoid the late-filing penalty which would otherwise be assessed.

 Finally, a taxpayer who is considering making a voluntary disclosure (and whose situation meets the four criteria required by the CRA, as outlined above) can “test the waters”, to a degree, before deciding to make full disclosure. The CRA will accept a “no-name” disclosure from a taxpayer and will discuss the taxpayer’s situation with him or her on a hypothetical basis, providing the taxpayer with information on how an actual disclosure would be handled. The CRA’s policy with respect to such no-name disclosures requires the taxpayer who makes a no-name disclosure to provide identifying information within 90 calendar days from the effective date of disclosure. During the 90-day period, the taxpayer is protected from prosecution and from the application of penalties. However if, at the end of the 90-day period the identity of the taxpayer remains unknown, the voluntary disclosure file will be closed without further contact from the CRA, and no extension of the 90-day period will be allowed to identify the taxpayer.

As the halfway point of summer is reached, students who are about to return to (or start) college or university will be gearing up for the upcoming year. And while students are likely to be preoccupied with choosing courses, majors, and residences, or finding a place to live off-campus, their parents are more likely to be focused on tuition bills, residence costs, and the price of textbooks — and how to pay for it all.

While post-secondary education is never inexpensive, and the cost of such an education continues to rise, there are a number of tax “breaks” or credits available to post-secondary students (and their parents).

While the rules governing eligibility for, and the amount of, those “breaks” can be detailed, students generally can claim a non-refundable tax credit for tuition (but not residence) bills, an “education amount” based on the number of months they attended school during the tax year, and a “textbook amount”, which, despite its name, has nothing to do with any cost incurred for textbooks. As well, many of the expenses which may be claimed by taxpayers generally, such as moving costs and the cost of public transit, are equally available to students.

Aside from the cost of residence (which is not, in any case, deductible or creditable for tax purposes), the largest single expense for most students is tuition fees, which can range from around $5,000 to over $15,000 per year, depending on the school and the program. No matter what the amount, students are entitled to a federal tax credit (which reduces their tax otherwise payable) equal to 15% of their tuition bill. Each province also provides a non-refundable tax credit for tuition paid, with the percentage amount ranging from 5% to 11%.

Both full and part-time university students can also claim the “education tax credit”, which is calculated as a fixed amount for every month of full- or part-time attendance during the tax year. For 2010, the full-time amount to be claimed on the federal tax return is $400 per month, while the part-time amount is $120 per month. The total amount claimed is then multiplied by 15% to arrive at the credit claimed on the federal tax return. As with the tuition tax credit, the provinces all offer an education tax credit, with both the amount and the conversion percentage varying by province.

The final “standard” deduction available to post-secondary students is the so-called textbook amount. The name is something of a misnomer, as neither eligibility for nor the amount of the credit depends on expenditures made for textbooks. Rather, the federal textbook amount is a fixed monthly amount (currently $65 for full-time and $20 for part-time students) which, like the tuition and education amounts, is converted to a credit by multiplying by 15%, and which can be claimed by any student who is eligible for the education amount.

Non-refundable tax credits, like the tuition, education, and textbook credits outlined above, work by reducing the tax which the individual claiming the credits would otherwise have to pay. However, post-secondary students usually have relatively low incomes, and consequently relatively low tax bills, and so may not be able to “use up” all of their available credits in a single tax year. Two solutions are possible. First, the student may transfer the unused credit to a spouse, parent, or grandparent (and it’s not necessary for the parent or grandparent to have actually paid the tuition bill in order to claim the transferred credit). Second, the student can keep the excess credit and claim it in any future tax year, when his or her income and tax bill will presumably be higher. There are some restrictions and limitations on the transfer of student tax credits, but, generally speaking, most students should be able to transfer credits to parents or grandparents without difficulty.

The three credits outlined above (tuition, education, and textbook) are the credits which are specifically claimable by students. There are, however, other credits which, while available to taxpayers generally, are frequently claimed by post-secondary students. The first is the moving expense. Most students move at least twice a year during the course of their post-secondary careers, and some of those moving expenses are deductible from income earned by the student. Specifically, where students move to take a summer job, any moving costs incurred are deductible from income earned at that summer job, as long as the student’s new home is at least 40 kilometres closer to the job location than the place they’re moving from. It doesn’t matter if the student is simply moving back home for the summer — the moving expense deduction is available as long as the 40-kilometre requirement is met and there is income earned at the new location, from which those moving expenses can be deducted. As well, students who move for purposes of a co-op term can deduct moving expenses from income earned during the co-op term, assuming once again that the 40-kilometre requirement is satisfied.

Finally, most students, of necessity, use public transit, especially when they live off-campus. Where those students purchase monthly (or longer) public transit passes, they can claim a credit for the total annual cost of those passes, without any dollar amount limit, on the tax return for the year. The cost of weekly passes can also qualify for the credit, assuming that those passes are purchased on a regular basis. As with the tuition, education, and textbook credits, the cost of transit passes is converted to a federal credit by multiplying by 15%. A parallel credit is offered by most of the provinces, with the conversion rate varying from province to province. And, as with the tuition, education, and textbook credit amounts, a parent can claim the cost of transit passes purchased by or for the student, assuming that student is under the age of 19 at the end of the year.

It is reasonable and realistic to assume that the cost of a year of undergraduate post-secondary education, once tuition, residence, textbooks, and numerous incidental expenses are taken into account, will amount to between $15,000 and $20,000. It’s almost inevitable, notwithstanding savings, part-time and summer jobs, and all of the tax “breaks” offered to post-secondary students, that most students end up incurring some debt in order to pay for their education. Where that debt is in the form of government-sponsored student loans (generally, loans provided under the Canada Student Loans program or an equivalent provincial program), interest paid on those loans after graduation can qualify for a tax credit, at both the federal and provincial levels. It’s important to remember, however, that only interest paid on loans extended under government-sponsored programs qualifies for the credit. Loans provided by private lenders (for example, through a student line of credit) do not qualify, and interest paid on any consolidated loans which include funds advanced by private-sector lenders will similarly not be eligible for the credit.

The number of tax credits, deductions, and benefits available to post-secondary students, and the rules governing the calculation, transfer, and carry-over of those credits can be confusing. The Canada Revenue Agency guide “Students and Income Tax”, which is usually updated annually, is an excellent source of information and provides answers to most of the questions which arise in this area. A current version of that guide is available on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/E/pub/tg/p105/p105-e.html.

Many, if not most, small business owners incur vehicle expenses in relation to their businesses and often, the vehicle used is one which is also used for personal travel. Where motor vehicle expenses are incurred for business purposes, a deduction from income may be claimed. However, the need for detailed documentation of such expenses can be a barrier to making such a claim, as few small business owners have the time or inclination to spend a lot of time or energy on paperwork.

 The federal government has indicated in recent years that it recognizes that the administrative and paperwork burden on small business owners, in a variety of areas, can be onerous or even excessive. It has made a number of changes to reduce that paperwork burden, and the most recent of those changes involves the need for documentation of claims for business-related motor vehicle expenses.

 Under current rules, business owners are required, in order to claim business-related motor vehicle expenses, to keep a detailed logbook recording business travel – the purpose of the travel, the mileage involved, and the costs incurred (with supporting receipts). The need to document every business use of a motor vehicle in such a manner has likely led many business owners to conclude that the deduction is just not worth the trouble. 

 The change recently announced by the Minister of National Revenue will allow small business owners to reduce that paperwork burden significantly, through the use of a “sample logbook”. Under the new rules, a business owner must first keep a detailed logbook for a 12-month period starting in 2009 or later – the “base year”. Once that base year logbook has been kept, the business owner will be entitled, in subsequent years, to maintain a logbook only for a “sample year period” of at least 3 months during the year. The business use of the motor vehicle in each subsequent year will then be calculated by multiplying the business use as determined in the base year by the ratio of the sample period and base year period.

There are some restrictions on the use of the “sample logbook” system – in order to continue to use this system, business use of a motor vehicle must not vary a great deal from year to year. Specifically, the sample logbook will be acceptable to the Canada Revenue Agency (CRA) as a record-keeping method, as long as the distances travelled and the business use of the vehicle during the three-month sample period is within 10 percentage points of the corresponding figures for the same three-month period in the base year, and the calculated annual business use of the vehicle in a subsequent year does not go up or down by more than 10 percentage points in comparison to the base year.

While all that sounds confusing, the CRA has provided an example of how the new system will work, as follows:

 An individual has completed a logbook for a full 12-month period, which showed a business use percentage in each quarter of 52/46/39/67 and an annual business use of the vehicle as 49%. In a subsequent year, a logbook was maintained for a three-month sample period during April, May and June, which showed the business use as 51%. In the base year, the percentage of business use of the vehicle for the months April, May and June was 46%. The business use of the vehicle would be calculated as follows:

 In this case, the CRA would accept, in the absence of contradictory evidence, the calculated annual business use of the vehicle for the subsequent year as 54%. (I.e., the calculated annual business use is within 10% of the annual business use in the base year – it is not lower than 39% or higher than 59%.) 

Finally, the CRA release notes that the logbook kept by the business owner for the 12-month base year must be retained for a period of six years from the end of the tax year for which it is last used to established business use.

A number of factors converged to make the real estate market of the spring of 2010 one of the busiest in recent memory. House prices have been on the rise for some time, interest rates (and therefore mortgage rates) are expected to increase in the second half of this year, and more stringent rules on qualifying for mortgages took effect in April 2010. In addition, both Ontario and British Columbia are moving to a harmonized sales tax effective July 1, 2010, meaning that there will be increased tax payable on a number of services associated with buying or selling a home. As well, springtime is, in any year, typically the busiest season for real estate sales and consequently the time when most moves take place. Whatever the time of year and whatever the motivation behind the sale, selling one’s home and moving qualifies as one of life’s more stressful experiences. Nonetheless, it’s an experience which most families will go through at least once. In addition to the upheaval of leaving behind a home, a school, and a neighbourhood, the financial outlay associated with moving can be considerable.  While our tax system can’t do anything to help with the non-financial costs of moving, it does, in some circumstances, minimize the financial hit by providing a deduction from income for moving expenses incurred.

It’s important to know that not all moves will qualify for such tax relief. The tax rules provide that, where a taxpayer moves to be at least 40 kilometres closer to his or her place or work (for example, a taxpayer who moves from Toronto to take a job in Vancouver or Regina), most moving costs will be deductible from employment or business income earned at the new location. The 40 kilometre distance is measured using the shortest route normally available to the travelling public, which in most cases would mean the distance by road. And, moving to be closer to work doesn’t have to mean moving to a new company: a job transfer to another city while continuing to work for the same employer will qualify, assuming the 40-kilometre criterion is met.

The list of expenses which may be deducted is fairly comprehensive, but not all moving related costs are deductible. Under the Canada Revenue Agency’s (CRA’s) administrative policies, as outlined in their Form T1-M, Moving Expenses Deduction (available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-m/t1-m-09e.pdf the following are considered eligible moving expenses:

• traveling expenses, including vehicle expenses, meals and accommodation, to move the taxpayer and members of his or her family to their new residence (note that not all members of the household have to travel together or at the same time);
• transportation and storage costs (such as packing, hauling, in-transit storage, and insurance) for household effects, including items such as boats and trailers;
• costs for up to 15 days for meals and temporary accommodation near either the old or the new residence for the members of the household;
• lease cancellation charges (but not rent) on the old residence;
• legal fees incurred for the purchase of the new residence, together with any taxes paid for the transfer or registration of title to the new residence (but excluding GST or HST and property taxes; 
• the cost of selling the old residence, including advertising, notarial 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 utility hook-ups and disconnections.

 It sometimes happens that a move to the new home has to take place before the old residence is sold. In such circumstances, the taxpayer is entitled to deduct up to $5,000 in costs incurred for the maintenance of that residence while it is vacant and efforts are being made to sell it. Specifically, costs including interest, property taxes, insurance premiums, and heat and utilities expenses paid in relation to that residence may be deducted.

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

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

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

Anyone who has ever moved knows that there are 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 47.5 cents for Saskatchewan to 61.0 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 rates were in effect for the 2009 taxation year; the CRA will be posting the rates for 2010 on its Web site early in 2011, in time for the tax filing season.

Any moving-related expenses can be deducted from employment or self-employment income (but not investment income or employment insurance benefits) earned at the new location. Where a move takes place late in the year, it’s possible, especially where the move is a long distance one, that such expenses will exceed income earned at the new location during the calendar year. In such cases, it’s possible to carry forward the excess expenses, and deduct them from income earned in subsequent years.

Generally, these rules apply to moves made from one location to another within Canada. While it’s possible to deduct expenses arising from moves from Canada to another country, from another country to Canada, or between two locations outside of Canada, the rules governing deductions in such situations are far more restrictive.

The rules governing the deduction of moving expenses are outlined in some detail on the CRA’s T1-M form, and on the CRA Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/menu-eng.html.

Any questions not answered by this article or on the Web site can be directed to the CRA’s individual inquiries line at 1-800-959-8281.

Two quarterly newsletters have been added, one about individual issues and one about corporate issues. They can be accessed below.

Corporate:

http://www.cchsitebuilder.com/newsletters/custom/Issue13_Corporate.pdf.

Individual:

http://www.cchsitebuilder.com/newsletters/custom/Issue13_Personal.pdf.

When businesses, especially small businesses, run into difficulty with the Canada Revenue Agency (CRA), it's often over the issue of source deductions, and it's not hard to see why. Almost all businesses, except for the very smallest owner-managed operations, have employees from whose pay the employer is required to deduct income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums, and then remit those amounts (plus any required employer contribution) to the CRA on a regular basis, by specified deadlines. Those deadlines have been the subject of considerable revision over the past few years, and there are now no fewer than four different categories of "remitters", each with its own specific deadlines and remittance requirements. And, since the penalties for a failure to remit on a timely basis can be significant, it's worth knowing how the rules apply to one's own business in order to stay "on-side" with the CRA with respect to source deductions.

Generally speaking, the larger a business, and therefore generally the larger its payroll, the more frequently remittances will be required. At the other end of the spectrum, the smallest businesses may be able to remit withheld amounts on a quarterly basis, or only four times in each calendar year.

The question of what category your business falls into is determined by something called the "Annual Monthly Withholding Amount", or AMWA. The AMWA is determined by adding up all the CPP, EI, and income tax amounts your business had to remit to the CRA for its payroll accounts two calendar years previously. That amount is then divided by the total by the number of months (maximum 12) that the business had to make payments in that year.The resulting number determines which category of remitter the business falls into and the remittance deadlines which will apply. The various categories and their respective deadlines are as follows.

Where the AMWA of a business in either of the two previous calendar years is less than $3,000 and the business has what the CRA terms a "perfect compliance record", remittances can be made on a quarterly basis. For these purposes, the CRA considers a compliance record to be perfect when all required remittances, including income tax, goods and services tax, CPP, and EI, as well as T4 filings for the previous 12 months have been made on a timely basis. Where those two requirements have been met, remittances of income tax, CPP, and EI can be made every three months throughout the calendar year.

Where a business's AMWA exceeds the $3,000 threshold, but is less than $15,000, the business becomes, in CRA terms, a "regular remitter", and is required to forward all source deductions to the CRA by the 15th of the month following the one in which the amounts were withheld. So, in other words, amounts withheld from employees during the month of May 2010 must be remitted to the CRA on or before June 15.

• For remuneration paid before the 16^th day of the month, by the 25^th of the same month.
• For remuneration paid after the 15^th day of the month but before the first day of the following month, by the 10^th day of the following month

The very largest group of employers - those which had a total AMWA of $50,000 or more two calendar years ago, must make remittances up to several times during each month, depending on their payroll schedule, as outlined below.

Amounts withheld from remuneration paid any time during the month are due by the third working day (not counting Saturdays, Sundays, or holidays) after the end of the following periods:

• from the 1st through the 7th day of the month;
• from the 8th through the 14th day of the month;
• from the 15th through the 21st day of the month;
• from the 22nd through the last day of the month.

It is relatively easy to see how an employer could run afoul of these rules, either through misunderstanding the rules or simply through inadvertence. Unfortunately, whatever the reason, the penalties which may be applied are the same and, since such penalties are calculated as a percentage of the amount owed, they can be significant. Where amounts are properly withheld from an employee's pay, but aren't remitted to the CRA on a timely basis, the following graduated penalty amounts are levied.

• 3% if the amount is one to three days late;
• 5% if it is four or five days late;
• 7% if it is six or seven days late; and
• 10% if it is more than seven days late or if no amount is remitted.

As an administrative concession, the CRA generally applies this penalty only to the part of the amount the employer failed to remit that is more than $500. Even so, an employer who was required to remit $8,000 by June 15 but was 8 days late in making that remittance will face a penalty of $750.

Of course, as with any overdue payment to the CRA interest charges, on both the original remittance requirement and on any penalty assessed, will be levied. The current (until June 30, 2010) rate applied to such amounts is 5%.

While the requirement to withhold income tax, CPP, and EI amounts at source, and to remit those amounts at regular intervals to the CRA, can be a time-consuming administrative chore, the penalties which can otherwise be incurred make that effort a necessary one. And, should all else fail, an employer who has been assessed a penalty by the Agency but believes that that penalty should not have been levied can appeal to the Minister of National Revenue to have the penalty waived. The process for doing so is outlined on the CRA Web site at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/hwpyrllwrks/pnlty/frnss-eng.html. The CRA also provides a wealth of information about employers' payroll responsibilities generally, and that information can be found at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/menu-eng.html.

As spring arrives and the end of the school year approaches, thoughts of parents turn to the question of how to keep the kids busy and supervised over the summer months. In two-income families, that usually means some kind of organized care or activity, often a summer camp. That summer camp may be a day camp near the family home, or a residential camp further away. The number and variety of such camps is nearly limitless, but the one thing they all have in common is a price tag attached. Some, especially day camps provided by the local recreation authority can be relatively inexpensive, while the cost of others, like summer-long residential camps or elite-level sports camps, can run into the thousands of dollars.

In all cases, parents would welcome some assistance with the cost of enrolling the kids in summer activities; in some cases, the federal government is prepared to provide that assistance, in the form of both the regular deduction for child care expenses and the Children's Fitness Tax Credit. While the former is available for most child care arrangements, the latter may be claimed only for day or residential camps which involve a minimum degree of physical activity. Specifically, when claiming the Children's Fitness Tax Credit, parents are entitled to claim a non-refundable credit equal to 15% of the first $500 in qualifying costs per child per year. So, in other words, a camp which would have cost parents $500 per child will instead have a net cost of $425 ($500 minus 15%, or $75.), after the credit is claimed on the parent's tax return for the year.

Given the enormous range of activities available for children, it's not surprising that the federal government has found it necessary to provide detailed rules on what types of activities will and won't qualify for the credit. And, while the possibility of a tax benefit should never drive the decision on which program or activity a child should be enrolled in, the availability of the credit might tip the balance between similar programs, or might make a program, camp, or activity which seemed financially out of reach more feasible.

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

• the program must last for a minimum of 8 weeks, with at least one session per week or, in the case of children's camps, must run for 5 consecutive days; 
• the program or activity must be supervised;
• the program or activity must be suitable for children; and
• the program activities must include a significant amount of physical activity that contributes to cardiorespiratory endurance, plus one of more of: muscular strength, muscular endurance, flexibility, or balance. In the case of a program, camp, or membership in which participants can choose from a variety of activities, more than 50% of those activities must include a significant amount of physical activity, or more than 50% of the available program time must be devoted to activities that include a significant amount of physical activity.

Programs or camps which do not meet either of the 50% tests are not entirely disqualified from qualifying for the credit. In such cases, the sponsoring organization can issue a receipt for a pro-rated amount, which represents the percentage of activities offered to children that include a significant amount of physical activity, or the percentage of program time that is allocated to such activities.

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

Parents whose children's interests gravitate towards less active pursuits, like art, music, or writing, may wonder whether they will, as a consequence, have to bear the entire cost of such summer activities, without the benefit of assistance from our tax system. While the cost of such activities isn't likely to be eligible for the Children's Fitness Tax Credit, it may well qualify for the regular child care deduction, assuming that all necessary criteria are satisfied. Qualifying child care expenses are claimed as a deduction from income, rather than a credit, meaning that the entire amount of qualifying expenses is effectively not taxed as income in the hands of the parents. There are limits imposed on the maximum weekly cost of a residential camp (ranging from $100 to $250), as well as restrictions on the total amount of child care expenses which may be deducted in a year. However, the overall annual limits, which range from $4,000 to $10,000, depending on the age and health of the child, with an overall cap of two-thirds of the parent's income for the year, are much higher than the allowable amount for the Children's Fitness Tax Credit.

It's possible that the same expenditure will qualify for both the child care expense deduction and the Children's Fitness Tax Credit. In such cases, the parent must first claim that amount as a child care expense. Any part of the expenditure which is not claimed as a child care expense (perhaps because the maximum limit for such expense claim has been reached) can be claimed for the Children's Fitness Tax Credit as long as the usual requirements for that Credit are met.

Finally, although the focus at this time of year is on summer activities, parents incur costs year-round to enable their children to take advantage of after-school or recreational activities, particularly sports activities. Those costs can similarly qualify for the credit (subject, as always, to the $500 per year per child limit), as long as the physical activity requirements are met. In the case of activities undertaken during the school year, qualifying programs must run for a minimum of 8 weeks and take place at least once a week. It's common for parents, once the school year begins in September, to enroll their children in activities which will run for several months, or even throughout the school year. Where parents incur qualifying costs in, for instance, September of 2010 for activities that will run until the end of the 2010-11 school year, those qualifying costs may be claimed for the credit on the parent's tax return for the 2010 tax year.

Two quarterly newsletters have been added, one about individual issues and one about corporate issues. They can be accessed below.

Corporate:

http://www.cchsitebuilder.com/newsletters/custom/Issue12_Corporate.pdf.

Individual:

http://www.cchsitebuilder.com/newsletters/custom/Issue12_Personal.pdf.

There are a number of real and perceived benefits to becoming self-employed, including greater access to tax deductions for work-related expenses, the possibility of incorporating the business and taking advantage of small business tax rates, and, generally, a greater degree of freedom and control over one's work environment. Offsetting those real advantages, however, is the inescapable fact that becoming self-employed means giving up both the protection of both employment standards legislation and much of the social safety net that employed Canadians can take for granted. For the self-employed, there are no paid statutory holidays, no paid vacation, no statutory right to receive notice or compensation in lieu when employment is terminated, and no access to income replacement programs such as employment insurance. Generally speaking, for the self-employed, time off work, whatever the reason, means time without income.

The federal government has recently moved to remedy some of that imbalance by proposing to allow self-employed Canadians to opt into part of the federal Employment Insurance (EI) program. The EI program provides benefits to Canadian workers who are temporarily out of the workforce in a number of situations. The best known of those, of course, are regular benefits, which provide a percentage of wages, to a specified maximum, to workers who have lost their jobs while they search for new employment. There are also, however, what are termed "special" benefits, which are available in particular circumstances, and it is those benefits to which the self-employed may now opt to have access.

There are four types of special benefits, as follows:

• maternity benefits (15 weeks maximum) are available to birth mothers and cover the period surrounding birth (a claim can start up to eight weeks before the expected birth date);
• parental/adoptive benefits (35 weeks maximum) are available to biological or adoptive parents while they are caring for a newborn or newly adopted child, and may be taken by either parent or shared between them (if parents opt to share these benefits, only one waiting period must be served);
• sickness benefits (15 weeks maximum), which may be paid to a person who is unable to work because of sickness, injury, or quarantine; and
• compassionate care benefits (six weeks maximum), which may be paid to persons who have to be away from work temporarily to provide care or support to a family member who is gravely ill with a significant risk of death.

Under the proposed legislation, self-employed individuals will be able, beginning January 1, 2010, to opt into the EI program for the purpose of these special benefits. Only special benefits are covered by this new initiative, and the self-employed will continue to be ineligible for regular (job loss) EI benefits.

To opt into the program, a self-employed person must have earned at least $6,000 from self-employment in the preceding calendar year. Therefore, someone who wants to opt into the program beginning in January 2010 must have earned at least $6,000 from self-employment during 2009. In addition, no benefits can be received until at least one year after the individual has opted in. So a self-employed taxpayer who earned at least $6,000 from self-employment during 2009 and chooses to opt into the program in January of 2010 would not be eligible to receive benefits of any kind until January 2011.

The EI program is funded by contributions made by employees through payroll deductions, with the maximum deduction for 2009 being $731.79. Employers are also required to contribute to the program, with their contribution being 1.4 times the employee portion. Where a self-employed person wants to opt into the EI program, he or she will be assessed for the employee portion ($731.79) of premiums but will not be required to pay the employer portion, in recognition of the fact that there will be only partial access to EI benefits.

Once they are part of the EI system, self-employed individuals will have the choice of opting out at the end of any tax year, as long as they have never claimed and collected EI benefits. Once a self-employed taxpayer makes a claim for and receives benefits, however, he or she will be required to contribute EI premiums on income from self-employment for as long are he or she is self-employed.

The decision on whether to opt into the EI system is likely to be determined for the most part by the personal circumstances of each self-employed taxpayer. In all cases, the cost of premiums, especially over several years or even decades of self-employment, will have to be weighed against both the likelihood of ever needing to make a claim for benefits and the question of whether the amount of benefits that can be received will exceed the cost of making those premium payments. 

Since the unofficial start of the current recession last fall, hundreds of thousands of jobs have been lost across Canada, and the only employment category to show consistent signs of growth this year is that of self-employment. While some intrepid individuals may be choosing to start a business in less than ideal economic conditions, many of the newly self employed are likely former employees who have turned to self-employment when a job search hasn't produced a job offer. For most of them, self-employment will be a new experience.

There are a many differences between working for someone else and being self-employed. While there are downsides to self-employment - no paid vacation, statutory holidays, or sick days; no extended health care coverage; no administrative or technical support supplied (and paid for) by the employer; and, if the business should fail, no severance payments or eligibility for Employment Insurance - the benefits, from a purely tax point of view, can be significant.

First of all, it's important to note that the tax rates and income tax brackets that apply to individual taxpayers are the same, whether income is received from an employer or generated by self-employment. There are no special tax rates or brackets for self-employed individuals, and all of the rules regarding eligibility for personal tax credits are the same, whether you're an employee or self-employed. That said, it's also true that self-employed taxpayers have access to a much broader range of deductions from income than employees do, and in some cases, deductions are available for costs that the taxpayer is already incurring and would continue to incur in any case.

The general rule when calculating income from self-employment is that income from all sources earned during the year is totalled, and then money expended to earn that income is deducted to arrive at net business income for the year. Unlike employment income, where the types of available deductions are specifically identified and enumerated by the tax authorities, a deduction can generally be taken from self-employment income for any reasonable costs that are incurred in order to earn that income. And, while the list isn't comprehensive, the Canada Revenue Agency (CRA) income tax form on which business income is calculated (the T2125, available on the CRA's Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t2125/README.html) lists such costs as salaries, office expenses, legal and accounting fees, telephone and utilities, travel costs, and advertising as possible deductions in the computation of net business income for the year.

Former employees who choose to become self-employed often start out by working out of their home, saving the cost of office rent at least until the business is on a firmer financial footing. Where a business is being operated from a home office, a further set of deductions becomes available to the taxpayer in the calculation of income from that business. Essentially, the business owner will be able to deduct a percentage of most operating costs of the home, such as heat, hydro, property taxes, telephone, and mortgage interest (but not mortgage principal) costs. The percentage of costs deductible is generally equal to the proportion that the home office is of the square footage of the entire house. So, where the size of the home office represents 15% of the square footage of the entire home, and the allowable operating costs of the home for the year are $5,000, a deduction of $750 ($5,000 times 15%) can be claimed on the T2125 for the year.

Self-employed taxpayers who pay a salary to someone else working in the business can also deduct that salary from their income from the business. In many cases where a new business has an employee, that employee is another family member - for example, a spouse who takes phone calls, books appointments, prepares billings, and helps out generally in an administrative capacity. And as long as the family member/employee has the skills to do that work, is actually doing it, and is receiving compensation comparable to what would be paid to an unrelated party, the policy of the CRA is to allow a deduction for the salary paid to him or her.

There's a lot involved in the decision to start a business and join the ranks of the self-employed. From a tax perspective, what's outlined here is just an overview of some of the bigger differences between receiving a salary and earning income from your own business. The first step to be taken by taxpayers who decide to take the leap into self-employment should be to consult a lawyer or accountant who can provide the expertise needed on how to set the business up properly and operate it in compliance with all the applicable federal and provincial laws, leaving the new business owner free to focus on growing the business itself. 

Many employers provide employees who are required to work overtime with a meal or an allowance to enable the employee to purchase a meal, on the theory that, absent the need to work overtime, the employee wouldn't have had to incur such a cost. For its part, and for the same reasons, the Canada Revenue Agency has generally been prepared to treat the provision of a meal or a meal allowance as a non-taxable benefit to the employee. The rule has been that where an employee is required to work three or more hours of overtime immediately after his or her scheduled hours of work and that overtime was "infrequent and occasional" in nature, which was interpreted to mean fewer than three times a week, then any meal or meal allowance provided to the employee was a non-taxable benefit.

Recently, the CRA has become concerned that the somewhat flexible nature of the criteria that determine the taxable or non-taxable nature of the employee benefit when it comes to overtime meal allowances can lead to inconsistent and inequitable results. As a consequence, the Agency has determined that it is necessary to impose, for the 2009 and subsequent tax years, more-specific rules on what constitutes a reasonable overtime meal allowance and when and to what extent such allowances can be provided on a non-taxable basis.

Specifically, for 2009 and later years, the assessing policy of the CRA will be that no taxable benefit arises where:

• the value of the meal or meal allowance is reasonable, and for such purposes a value of up to $17 will generally be considered reasonable;

• the employee works two or more hours of overtime right before or after his or her scheduled hours of work; and

• the overtime worked is infrequent and occasional in nature. Fewer than three times a week will generally be considered infrequent or occasional. The CRA is also prepared to consider overtime worked to be infrequent or occasional where an allowance is provided three or more times a week on an occasional basis to meet workload demands. Such workload demands would include major repairs or periodic financial reporting.

Where employees are required to work overtime, the employer frequently provides, in addition to a meal allowance, transportation home for employees - for instance, an employer-paid cab chit. Also effective for 2009 and later years, the CRA will continue to treat such employer-paid travel as a non-taxable benefit where "allowances paid for travel within the municipality or metropolitan area are paid primarily for the benefit of the employer", in that the principal objective of the benefit is "to ensure that the employee's duties are undertaken in a more efficient manner during the course of a work shift, and where allowances paid are not indicative of an alternate form of remuneration".

While the CRA's objective in amending its assessing policy with respect to overtime meal and travel allowances was to bring more certainty and consistency to the area, it is not clear that that objective will be attained. While it will be relatively simple for the Agency to enforce the $17/meal allowance limit, monitoring and ensuring compliance with the other criteria, with respect to the number of hours and the frequency of overtime, as well as the criteria imposed for overtime travel allowances, seem likely to pose as many assessing difficulties as the current rules do. Nevertheless, these are now the assessing criteria that the CRA will be using for 2009 and later years, and employers will need be cognizant of them in designing and administering their employee overtime-benefit policies.

The CRA's new policies in this are outlined in detail in its publication Income Tax Technical News, No. 40, available at http://www.cra-arc.gc.ca/E/pub/tp/itnews-40/itnews40-e.pdf.

Very few Canadians escape paying personal legal fees at one time or another, and depending on the situation, those fees can add up quickly. Unfortunately, while legal fees incurred in some circumstances may be deducted from income on the annual tax return, there sometimes doesn't seem to be any rhyme or reason to what's deductible and when.

First, the bad news. Legal fees incurred in situations experienced by millions of Canadians - for example, legal costs paid in connection with the purchase or sale of a house, or legal costs paid to obtain a divorce or to establish custody or visitation rights - are not deductible. Generally, personal (as distinct from business-related) legal fees become deductible for most taxpayers only when they are seeking to recover amounts that they believe are owed to them, particularly where those amounts involve employment or employment-related income or, in some cases, family support obligations.

While the term "legal fees" would seem to be self-explanatory, in fact such amounts don't always have to be paid to a lawyer to qualify as "legal fees" for the purpose of the deduction. For example, an employee whose employment is terminated could deduct amounts paid to a consultant in labour relations to negotiate a severance package on his or her behalf.

Perhaps the most common situation in which legal fees paid become deductible is that of an employee seeking to collect (or to establish a right to) salary or wages. This might involve an employee who, having been "downsized" out of a job, brings legal action alleging that the amount of notice (or compensation provided in lieu of notice) was insufficient. In that situation, legal fees incurred to establish a right to amounts allegedly owed by the employer are deductible by the former employee.

While legal fees incurred in order to establish a right to such income are deductible, there are limits on the amount of the deduction. In effect, the deduction claimed for the year for legal fees can't be more than the amount received in the year to which the legal fees incurred relate.

The rules governing the deductibility of legal fees paid in connection with the enforcement of support obligations are, unfortunately, more complex, much like the tax rules governing the taxation of support obligations generally. Nonetheless, there are some general guidelines that can be laid out.

First of all, as noted above, legal costs incurred to obtain a separation agreement or a divorce, or to establish custody or visitation rights, are not deductible under any circumstances. And at one time, the Canada Revenue Agency took the position that such costs incurred in connection with spousal or child support obligations were similarly not deductible. In recent years, however, the Agency has relaxed its position somewhat, and legal fees paid for the following purposes will be deductible by the person receiving the payments:

• to collect late support payments;
• to establish the amount of support payments from a current or former spouse or common-law partner;
• to establish the amount of support payments from the legal parent of that person's child (who is not a current or former spouse or common-law partner) where the support is payable under the terms of a court order;
• to try to get an increase in support payments; or
• to try to make child support non-taxable.

On the other side of the support equation, it is clear both from CRA policy and a number of court decisions that legal costs incurred to defend against claims for support or increases in support are not deductible.

The CRA's position on the deductibility of legal costs incurred in relation to family support matters has evolved over the years in a somewhat piecemeal fashion, and the result has been some degree of confusion over the time periods for which certain changes are effective. Anyone seeking a deduction for legal fees incurred in connection with a family support matter should obtain advice from a tax professional familiar with the facts of the particular situation.

Finally, there is one other situation in which taxpayers may deduct legal fees incurred, and that is in relation to a dispute with the CRA itself. Specifically, fees (including accounting fees) paid for advice given or assistance rendered in relation to a tax assessment or reassessment or the filing of a Notice of Objection or a court appeal are deductible by the taxpayer in the year in which they are paid.

Canadians benefit from a health care system in which most medical costs are covered through public insurance, which is funded by tax revenues. In recent years, however, advances in medical technology and an aging population have put considerable financial strain on that system, and provincial governments have responded, in part, by "delisting" some services, meaning that an individual who receives those services must pay for them out-of-pocket.

Where a "delisted" service rendered by a medical practitioner is paid for directly by the patient, the costs involved are generally eligible for the medical expense tax credit and can be claimed at tax filing time on the annual return (subject, as always, to the income threshold limitations imposed for the medical expense credit generally). The list of uninsured services that are not covered by a provincial medical plan is, however, long and varied, and some medical facilities or practitioners have taken to charging their patients a "block" fee, usually on an annual basis, to cover the costs of any uninsured services the patient may receive during the year. The Canada Revenue Agency (CRA) was asked for its views on how such block fees would be assessed for purposes of the medical expense tax credit, and their response was qualified good news for many taxpayers.

The situation considered by the CRA involved a medical facility that gave its patients the option of paying for services not covered by the provincial health insurance plan either on a pay-per-service basis or by signing up for the facility's "extended plan". Under that plan, the client would pay what the CRA characterized as a "relatively modest annual fee" (or block fee) for unlimited use of a specified list of services for the year.

The CRA characterized the block fee paid to be a medical service, as that term is defined in the Income Tax Act, and concluded that, as such, it would be eligible for the medical expense tax credit. It's worth noting, however, that the Agency did not indicate that all similar block fees paidby taxpayers would receive similar favourable treatment. Rather, it reviewed the services that the block fee in question would cover and based its favourable response on two facts. First, it concluded that the fee related "almost entirely" to eligible medical services, and second, it determined that those eligible medical services were likely to be rendered to the "vast majority" of plan members.

The CRA's response raises a number of questions for taxpayers. First, it seems clear that a block fee paid for coverage of what would be eligible medical expenses if billed on a fee-for-service basis should be eligible for the federal medical expense tax credit and can be claimed as such on the annual return. Where, however, the services covered include those that would not, on their own, qualify for the medical expense credit, the CRA's position is not as clear. The CRA's views of the tax treatment of the block fee considered in the technical interpretation was clearly based on an examination of the specific terms of the plan; however, it isn't possible, on a practical basis, for the CRA to review the details of each and every block fee payment for which a medical expense tax credit is claimed. Publications issued by the CRA with respect to the medical expense tax credit do not yet address the tax treatment of block fees. However, the imposition of such fees is likely to increase in frequency over the next several years, and the CRA's general assessing position is likely to become clearer over time.

As summer comes to an end and the cold weather looms, many Canadians will begin thinking of a vacation in the sun sometime during the winter or even, in the case of "snowbirds", of spending the entire winter in a warmer, sunnier place. Whether a planned vacation is short or long, most Canadians who are leaving the country purchase medical travel insurance to ensure coverage of unexpected medical expenses while down south. In many cases, the cost of that insurance will constitute a qualifying medical expense eligible for a tax credit on the taxpayer's Canadian return for the year. However, a technical interpretation issued by the Canada Revenue Agency indicates that, when it comes to the medical expense tax credit, not all medical travel insurance is created equal.

The general rule is that the cost of medical travel insurance will qualify as a medical expense if the cost is a premium, contribution or other consideration paid for coverage under a private health services plan. Such coverage must be in respect of hospital care or expense or medical care or expense which normally would otherwise have qualified as a medical expense under the provisions of the Income Tax Act. Where, however, a medical travel insurance policy, in addition to providing medical expenses coverage, provides coverage for additional benefits that would not qualify as medical expenses, such as a providing for a death benefit, the CRA takes the position that the entire amount of premiums paid to acquire the policy would not qualify as a medical expense. It would seem, therefore, that even if the premiums payable in respect of the non-qualifying benefit could be segregated out or were paid separately, the existence of the non-medical benefit would "taint" the entire policy such that even the otherwise qualifying premiums would be disallowed as an eligible medical expense.

It goes without saying that it's important, when obtaining insurance coverage of any kind, to read to "fine print" so as to be aware of the various inclusions, exclusions and limitations which may apply. Given the CRA's administrative policy with respect to limitations on the availability of the medical expense credit, taxpayers would also be well advised to review any prospective policy from the point of view of the tax treatment of premiums paid. Where the availability of a medical expense tax credit for premiums paid is important, and benefits beyond strictly medical expense coverage are desired, it would seem prudent to arrange for such additional benefits under a separate policy. That way, the often substantial premiums which may be levied for coverage for medical costs can remain eligible for the medical expense tax credit on that year's return.

While the majority of Canadian employees still travel to the office at the beginning of each working day, there has been a huge increase over the past decade or so in the number of Canadian who work, on a part-time or a full-time basis, from a home office. Such an arrangement can work to everyone's benefit: the worker is spared the cost and aggravation of the daily commute and, where a significant number of employees work at least part-time from home, the employer's costs of maintaining office space, usually in expensive urban markets, can go down.

As working from a home office has become more common, a certain degree of mythology has also grown up around the tax treatment of expenses related to maintaining a home office. In the most optimistic (and unrealistic) of such scenarios, virtually all household expenses, including the mortgage, are transformed into tax deductions, reducing one's tax liability to miniscule amounts. It goes almost without saying that such is not the case. Deductions are certainly available, but the tax rules governing what's deductible and when are specific and detailed.

It's important, when dealing with the question of the deductibility of home office expenses, to distinguish between deductions claimed by employees and those claimed by the self-employed. As is almost always the case in such matters, the self-employed enjoy a greater degree of latitude in the deductions which may be claimed. That said, both the employed and the self-employed must meet the same basic two-part test in order to be eligible to deduct home office expenses, and that test is as follows:

• the home office must be the place at which the taxpayer principally performs the duties of employment or must be the taxpayer's principal place of business: or

• the home office must be both used exclusively for the purpose of earning income from employment or from the business and must be used on a regular and continuing basis for meeting customers or clients of the employer or the business.

A self-employed taxpayer who meets these criteria is entitled to claim (on Form T2124(E) (Statement of Business Activities)) expenses such as property taxes, rent or mortgage interest (but not mortgage principal amounts), insurance, utilities costs etc. However, such expenses are not deductible in their entirety: rather, the taxpayer must apportion the expenses based on the percentage of the total space which is used as a home office. For example, a self-employed taxpayer whose home office takes up 20% of available floor space and who incurs $1000 each year in qualifying expenses would be entitled to deduct $200 ($1,000 times 20%) in home office expenses for that year. There is one further caveat, in that the amount of home office expenses claimed in a year cannot be greater than the amount of income from the business. It's not, in other words, possible to run a business which produces $5,000 in income for the year and to then claim $10,000 in home office expenses relating to that business. However, where home office expenses exceed business income in any given year, the excess expenses can be carried over and claimed in a subsequent year in which there is sufficient business income to offset those expenses.

One of the benefits which is commonly supposed to exist for home office workers is the right to claim depreciation (or capital cost allowance (CCA), in tax parlance) on one's home for tax purposes. For employees, however, such a claim is simply not allowed. And , while the self-employed may be entitled to claim CCA on a home, making such a claim can create short-term benefits with longer term costs. Making a CCA claim on one's home is likely to erode the principal residence exemption from capital gains tax which is claimable when a home is sold, and that exemption is almost always more valuable than any CCA claim which might have been made.

Employed taxpayers who meet the two-part test set out above must meet a further condition before being eligible to claim home office expenses, as follows:

• the employer must provide the employee with a form T2200, which indicates that the employee is required by his or her contract of employment to provide and pay for the expenses related to the home office;

• the employee must not have been reimbursed by the employer for such expenses; and

• the expenses incurred are incurred solely for the purpose of earning income from an office or employment.

Once the T2200 has been issued, and the other conditions are met, an employee who is a tenant can claim a proportionate part of his or her rent. An employee who owns his or her own home can claim a proportionate percentage of utilities, cleaning costs and minor repairs (but not improvements). An employee is not entitled to claim any portion of property taxes, insurance or mortgage interest paid.

Slightly more latitude is provided to commission employees who work from home and own their home. Such employees may claim, in addition to the costs outlined above for employees, a portion of property taxes and insurance paid on the home. Mortgage interest and capital cost allowance remain non-deductible.

As is the case with self-employed taxpayers, an employee's deduction for home office expenses cannot be greater than the income from employment income for the year to which the expenses relate. And, once again, carryover to a subsequent taxation year is allowed.

While the deduction of home office expenses isn't the huge tax benefit that popular tax mythology would sometimes suggest it is, it can, assuming that the legal requirements are met and proper records kept, provide some tax relief on expenditures which would likely have to be incurred in any case by the taxpayer.

Last month's issue of this Newsletter outlined the general duties and responsibilities of corporate directors toward the corporation and its shareholders. This month's article will review the circumstances in which directors may face personal liability for failure to discharge those duties in the required manner.

A director's potential liability for his or her conduct arises from, generally, two sources. Canadian federal and provincial corporations' legislation provides shareholders of a corporation with the right to bring an action against the directors of that corporation, either in the name of the corporation or, more commonly, on behalf of the shareholders (usually minority shareholders) of that corporation. Where a director is found by the courts to have breached his or her duties as outlined in the corporations' legislation, the director can be held liable for that breach, and the court can impose a variety of consequences.

The other source of potential liability for a director arises from regulatory legislation. Such regulatory legislation is enacted in a variety of areas, including securities law, environmental statutes, employment standards legislation and others. A director's liability under such legislation can arise either through his or her own failure to take specific actions or through the director's failure to ensure that the corporation complies with applicable legislation (for example, the failure to pay employees' wages which are due to them).

One of the most common situations in which directors face personal liability arise where a corporation fails to remit amounts which are owed to the federal government. This occurs most frequently with "source deductions", amounts which are deducted from employee's wages for the payment of Employment Insurance premiums, Canada Pension Plan deductions and, most significantly, income tax payments, and which must be forwarded to the federal government on a fixed schedule. Unfortunately, where a company encounters a cash flow crunch, such source deductions are sometimes seen as a ready source of needed cash, and the funds are diverted to use within the business. In virtually all cases, the intent is to replace the funds when the cash flow crisis eases, but in many cases that time never comes, or the company is called to account before it makes good. Where that occurs, the Income Tax Act provides that the company's directors may be held liable, along with the company, for the company's failure to remit the required funds.

Fortunately for directors, there are limits on their potential liability. No one is required to be perfect, and directors who take all reasonable steps to ensure compliance by the corporation and its management have a defence to most situations of potential personal liability. Ultimately, of course, a director who believes that a corporation is not meeting its responsibilities or that management is not being honest or forthcoming with respect to corporate activities has the option of resigning. Once the director has resigned, and has communicated that resignation to the company, he or she is not generally responsible for subsequent actions or omissions on the part of the corporation or its board.

The responsibilities of being a corporate director should never be undertaken lightly, and recent corporate scandals have demonstrated just how severe the consequences may be where directors fail to meet their statutory responsibilities. Anyone contemplating taking on a postion as a corporate director (no matter how small the company involved) should take care to familiarize him or herself with the duties to undertaken, and should ensure that they possess both the time and skills needed to discharge those duties.  

The popular view of corporate directors has tended in the past to be that of a fortunate few collecting generous stipends for nominal work requiring only attendance at a few meetings a year, during which decisions made by company management would be rubber-stamped.

If that was ever the reality of the corporate director's role, those days are gone. Over the past several years, there has been a steady parade of corporate scandals in the U.S. and, to a lesser extent, in Canada, which often ended with corporate executives subjected to heavy fines or imprisonment, and the corporation's directors facing uncomfortable scrutiny as to their own activities and degree of diligence in overseeing management decisions. Those events have given a new prominence to the whole issue of corporate governance, and the director's role in that process.

Corporate directors do, in fact, play an important role in corporate governance and are held to strict standards of conduct with respect to their responsibilities to the company, under both corporate law and the Income Tax Act and other taxation statutes. It's important to note that companies can be incorporated under either provincial or federal corporations laws, and that it is the statute applicable in the jurisdiction of incorporation which will govern the corporation's affairs and the responsibilities of its directors. That said, the wording contained in the provisions of most such statutes with respect to a director's responsibilities tends to be very similar.

While the duties of directors to the corporation manifest themselves in many ways, virtually all of their duties can be gathered under two general headings. First, the director owes what is termed a "fiduciary duty" to the corporation - a duty to act honestly and in good faith with a view to the best interests of the corporation. Second, the director is required, in the exercise of his or her responsibilities, to exercise the degree of care, skill and diligence that would be expected of a reasonably prudent person in the circumstances. Finally, the duties owed by the directors are to the corporation (the assumption being that the interests of the corporation are synonomous with the interests of its shareholders) and not to the corporate officers or senior managers of the company.

That said, no one, including a director, is required to be perfect. Directors are required to make decisions and take actions on the basis of the best information available to them at the time. Directors who make such decisions honestly, prudently and in good faith, and without any conflict of interest, will not face liability even if, over the long run and with the benefit of hindsight, the decision made turns out to have been the wrong one for the corporation.

The fiduciary duty placed on a director requires him or her to avoid conflicts of interest and to place the interests of the company ahead of his or her personal interests. No director is allowed to profit at the expense of the corporation. In practical terms, this means that a director who learns, through his position as a director, of a business opportunity which the company is pursuing or in which it is interested may not seek to obtain that opportunity for himself. Directors who have done so have successfully sued by the company and ultimately ordered by the courts to account for any profits received as a result of pursuing that opportunity and to "disgorge" those profits to the company.

The director's duty of due diligence means, in practical terms, that the director is required to apply the skills which he or she brings to the position of director, to ensure that the business of the corporation is carried out in accordance with the law and with sound business practices. At a minimum, the director is required to attend directors' meetings, to read materials provided to them in connection with matters to be discussed at such meetings and to follow up with senior management where there are any concerns. Increasingly, directors are also being expected to ensure that there are systems put in place within the corporation to provide them with the information needed to carry out their responsibilities.

Where directors either fail to carry out their statutory responsibilities with respect to their supervisory role in the governance of the corporation or they breach their

fiduciary responsibilities to the corporation generally, liability may result, and that liability may include financial penalties assessed against the director personally. Part 2 of this article will examine the circumstances in which directors may face such liability, and the penalties which may be imposed in such circumstances.

Most business people (and for that matter, most individuals) view the subject of record keeping with about the same enthusiasm as they view budgets or tax return preparation - as a dreary obligation to be put off until it can't be ignored any longer. Notwithstanding, anyone who is required to file a tax return or who is engaged in carrying on a business is required by law to maintain "adequate" records, as that term is defined by the Canada Revenue Agency (CRA).

What records are required?

In most cases, the CRA doesn't actually specify just what records anyone needs to keep. Rather, the CRA's requirements are expressed in terms of the standards that the records kept must meet. Specifically, the Agency requires that records kept be "reliable and complete", provide the individual or business with the correct information needed to allow that person or business to satisfy their tax obligations, and be supported by source documents to verify the information contained in the records. As well, additional record keeping obligations are imposed on corporations and trusts. Corporations are required to keep the records of directors' and shareholders' meetings, as well as a share register documenting both the ownership of corporate shares and any transfers of those shares. Trusts are required to have a copy of a testator's will, if there is one, together with a listing of trust assets and liabilities as well as any books of account and records of any transfers of trust property.

Taxpayers are frequently surprised, when there is an error or omission in a tax return which they have paid a third party to prepare, to find that they remain responsible for any such errors or omissions. A similar rule applies to record keeping, in that both individuals and businesses are responsible for meeting the CRA's requirements with respect to record keeping, even where those records are prepared or maintained by a third party, like a bookkeeper, accountant, payroll company or internet transaction manager. The obligation actually goes even further, in that taxpayers or businesses are held responsible for third party changes (such as software or hardware upgrades or conversions) which might affect their records.

How long do I have to keep tax records?

The question of how long financial records, including income tax records, have to be maintained frequently arises. In most cases, the answer is six years from the end of the tax year to which they relate. In other words, the CRA requires that tax records for the 2005 individual tax year be kept until the end of 2012. For corporations which have a fiscal year which ends at any time other than December 31, most records must be kept for a period of six years after the end of the fiscal year.

While a retention period of six years is the general rule, there are numerous exceptions. For individuals, the most important of those exceptions relate to tax years for which a return is late-filed or for which a notice of objection or appeal has been filed. In such circumstances, records should be kept for the six-year period following the date on which the return was actually filed. Where a notice of objection was filed, records should be maintained until the notice of objection or appeal is disposed of and the time for filing any further appeal has expired, or until six years after the end of the tax year in question, whichever is later.

Where corporations are concerned, a number of factors can change or extend the time period for records retention, including corporate amalgamations or mergers and corporate dissolutions.

What if I keep my records in electronic format?

It is now the case that most businesses, and many individuals, keep tax and financial records in an electronic format of one kind or another. The use of such electronic format does not alter the six year retention requirement, but it does create some additional requirements with respect to the CRA's continued ability to access the information contained in those records.

The CRA requires that where records are kept by electronic means, the system utilized must have the capacity to produce and retain sufficient details to allow the taxpayer to determine tax obligations and entitlements. As well, any computerized records must be maintained by a system capable of producing records that are accessible to CRA officials and readable by CRA software. Any electronic records created must be maintained in an electronically readable format even where the original electronic source documents have been transferred to another medium (such as microfilm) or paper back-ups are kept. Finally, the CRA requires that the taxpayer maintain back-up records at all times, and that such back-ups be stored at a secure location, preferably off-site. Should the records be destroyed, it is the taxpayer's responsibility to recreate them, presumably using back-ups, within a reasonable period of time.

Where are records to be kept?

The CRA requires that all records, whether they are in paper or electronic format, be retained in Canada. When it comes to electronic records, records which are kept outside Canada (for example, on a server located in another country) and accessed electronically from Canada are not considered by the CRA to meet the "in Canada" requirement. The Agency does provide some latitude, in that where electronic records are maintained outside Canada, it will accept "true" copies of those records which are made available to the CRA in an electronically readable and useable format and which contain sufficient details to support tax returns filed with the Agency.

While the Income Tax Act does provide for penalties for a taxpayer's failure to maintain adequate records, a more frequent consequence of poor record keeping is the loss of deductions where expenses claimed cannot be supported by documentation. Receipts for many types of expenses claimed by individual taxpayers (such as child care expenses) do not need to be filed with the return, but must be retained in case the CRA later wants to verify the claim. And, of course, where tax returns are filed electronically (by telephone or computer) all supporting documentation remains in the hands of the taxpayer. No matter how a tax return is filed, the onus remains on the taxpayer to prove entitlement to any tax deduction or credit claimed, with adequate documentation. Failure to come up with the necessary documentation when it is requested by the CRA, either on a random spot check or as part of an audit, will undoubtedly result in loss of the related deduction. In the long run, while creating and maintaining complete tax records is undoubtedly a chore, doing so can save a lot of expense and aggravation down the road.

The CRA has summarized its policies on record keeping for tax purposes in a recently updated guide, which is available on its website at http://www.cra-arc.gc.ca/E/pub/tg/5000-g/5000g-09e.pdf

Each year, millions of Canadian taxpayers claim a non-refundable federal and provincial tax credit for out-of-pocket medical expenses. Many medical expenses are, of course, covered by provincial government health care plans, including most medical services provided by one's physician and, should the need arise, hospital care. For many taxpayers, the basic government plan is supplemented by private health care insurance, purchased privately or made available as part of an employer's benefit package. Such plans typically extend coverage to expenses not covered under government plans, including dental care, prescription drugs and vision care.

The rapid increase over the past several years in both cost pressures and user demands on government health care plans have led to the "delisting" of many previously covered expenses. As a result, many taxpayers now pay directly for health care services which were formerly covered by the public health care system, and seek to claim a medical expense tax credit for such costs.

The Canada Revenue Agency's (CRA's) answer to the question of whether direct payment for medical services will qualify for the medical expense tax credit has been a qualified "yes". However, whether the CRA will accept such costs as a qualifying medical expense rests on the nature of the services rendered and the qualifications of the person providing them. The CRA's general position is that a "qualifying medical expense", as defined in the Income Tax Act, includes an amount paid "to a medical practitioner ... in respect of medical ... services". The CRA therefore takes the general view that payments for services other than specific medical services rendered by a qualified practitioner cannot be claimed as a medical expense, and that services rendered must relate to an existing medical condition or illness.

The CRA has been asked whether a medical expense credit would be allowed for costs incurred in the following situations.

Membership fees charged by a private medical clinic

In this case, a membership fee was charged by a private medical clinic that allowed the individual access to private medical services when such services were required. The fee did not relate to any existing condition that the individual had and, where private medical services were provided, a fee over and above the membership fee was charged. In some cases, that additional fee was covered by the applicable provincial health services plan, while in others, the individual was responsible for payment.

The CRA concluded that the membership fee charged by the clinic did not qualify as a medical expense, as it was not attributable to any particular medical service provided to the individual but rather was for the availability of the services if they were required.

Fees paid to corporation for access to para-medical services

Another situation considered by the CRA was that of a fee paid to a corporation that agreed to p