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

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

Corporate:

Issue #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.

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.

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 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.

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.

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”.

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.

At the end of the day, the most important consideration when deciding whether to take out a reverse mortgage or home equity line of credit is the need to obtain independent financial and/or legal advice. While the information provided by representatives of the institutions offering such financial products is usually accurate, financial institutions are ultimately in the business of selling those products, and are not responsible for looking out for the interests of the potential borrower. Both reverse mortgages and home equity lines of credit are significant financial and legal obligations, and the importance of obtaining unbiased advice when considering either cannot be overstated.

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.

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 next issue of The Fiscal Monitor, which is scheduled for release during the week of September 30, will summarize federal government revenues and expenditures for the month of July 2011 and the April to July period.

The Canada Pension Plan (CPP) is a cornerstone of Canada’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.

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 changes to the CPP contribution rules will undoubtedly make payroll deductions with respect to CPP more complex. The Canada Revenue Agency has, however, posted information on its Web site to help employers with the transition, and that information can be found at http://www.servicecanada.gc.ca/eng/isp/cpp/postrtrben/employers.shtml and at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/clctng/cpp-rpc/cppchng-eng.html.

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.

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.

Finally, taxpayers who have difficulty calculating their TFSA contribution room for 2011, or are unsure of just what their position for 2011 is, can review the information on TFSAs provided on the CRA Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html, or contact the CRA’s Individual Enquiries line at 1-800-959-8281 for more individualized information.

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.

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.

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.

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.

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.

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.

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.

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.

When T4s are issued at the end of February each year, it sometimes comes as a surprise to employees that something they considered to be work-related is treated as a taxable benefit, the value of which must be included in income and upon which tax must be paid. In the view of the Canada Revenue Agency (CRA), the use of employer-provided cell phones can fall into that category.

Providing a cell phone to one’s employees is, of course, about as common now as the office coffee machine. In many cases, the employer can obtain better cell phone rates through a group contract than the employees would be able to negotiate on an individual basis. However, even where having a cell phone is a requirement of one’s employment, it’s still possible that the use of that cell phone can give rise to a taxable benefit.

The CRA’s basic position on employer-provided cell phones and taxable benefits is that where an employee is provided with a cell phone or smart phone in order to help him or her carry out employment duties, there is no taxable benefit to the employee. Where, however, part of the use of that phone is personal, then a taxable benefit can arise, depending on the circumstances.

The CRA recognizes that it’s almost inevitable that an employer-provided cell phone will be used on occasion for personal calls, and the Agency is prepared to provide some latitude in this area on an administrative basis. Its assessing position is that personal use of an employer-provided cell phone will not give rise to a taxable benefit if the plan’s cost is reasonable, the plan is a basic one with a fixed cost and the employee’s personal use of the cell phone service does not result in charges that are more than the basic plan cost. All three of these criteria must be met in order to avoid having a taxable benefit assessed.

Based on those criteria, it seems that the best plan when it comes to employer-provided cell phones and the tax authorities is for the employer to buy the plan which provides the most generous airtime provision that can be reasonably justified by the employee’s business-related use of the phone, to keep the total (business and personal) use minutes under the basic airtime limit provided by the plan and not to incur any charges (i.e., long distance or roaming charges) which result in charges above and beyond the basic monthly bill.

Where those limitations aren’t followed, and the employee’s personal use of the employer-provided cell phone does result in additional charges, then the employer must treat the fair market value of those charges (less any reimbursement provided by the employee to the employer) as a taxable benefit, to be included on the employee’s T4 for the year. In the CRA’s view, it’s the employer’s responsibility to determine the percentage of business versus personal use for each employee as well as the fair market value of any taxable benefit received.

The CRA was recently asked whether a taxable benefit would arise where an employee purchased a basic cell phone service plan, which allowed for a specific number of airtime minutes each month, from the employer’s cell phone service provider, and used that phone for business use. The employee paid the monthly invoice for the plan and was then reimbursed by the employer. Any additional charges over the basic monthly cost incurred by the employee would not be reimbursed unless the employee could show that those charges were related to business use of the cell phone. The CRA confirmed that in determining whether a taxable benefit would arise in this situation, the same criteria which would apply where the employer paid the cell phone bill directly would be used – that is, no taxable benefit would arise where the plan cost was reasonable, the plan was a basic one with a fixed monthly cost and the employee’s personal use of the service did not create charges in excess of the basic monthly cost.

One of the questions addressed in the technical interpretation which is not dealt with in the CRA’s guide to taxable benefits is the question of whether a benefit could be assessed with respect to the purchase and ownership of the cell phone or smart phone itself. The answer, in most cases, was yes. Specifically, the CRA was asked whether an employee who purchased and owned the phone and was then reimbursed for the cost of that purchase by the employer would be considered to have received a taxable benefit. The CRA confirmed that a taxable benefit would be assessed in such circumstances, as the employee had received an economic benefit from the reimbursement of his cost of purchasing the phone. That taxable benefit would be equal to the amount of such reimbursement, even where the employee was required to use the phone in the course of his or her employment duties.

The technical interpretation did not shed any light on the question of whether an employee who is given a cell phone which was purchased by the employer would similarly be considered to have received a taxable benefit. However, following on the reasoning applied where the employee purchased the phone and was subsequently reimbursed by the employee for its cost, it seems likely that the CRA would consider a similar taxable benefit to have been received by the employee in those circumstances.

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.

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.

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.

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.

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.

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.

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.

It may seem like an obvious mistake to avoid, but every year some taxpayers pay unnecessary (and non-deductible) penalties and interest for no reason other than that they simply didn’t get their returns in on time. For the record, a 2010 personal tax return is late-filed if it isn’t sent to the Canada Revenue Agency (CRA) on or before May 2, 2011 or, if you or your spouse are self-employed, on or before June 15. In all cases, tax amounts owing due must be paid on or before May 2, 2011.

It may seem like an obvious mistake to avoid, but every year some taxpayers pay unnecessary (and non-deductible) penalties and interest for no reason other than that they simply didn’t get their returns in on time. For the record, a 2010 personal tax return is late-filed if it isn’t sent to the Canada Revenue Agency (CRA) on or before May 2, 2011 or, if you or your spouse are self-employed, on or before June 15. In all cases, tax amounts owing due must be paid on or before May 2, 2011.

For some taxpayers, late-filing is just a matter of not having gotten around to it—few people view preparing their tax returns as anything other than an unpleasant chore. For others, missing or mislaid information slips are to blame. In many cases, where there is tax owing and the cash just isn’t available to pay those taxes, taxpayers assume that it’s better just to put off filing until the money is available and the payment can be made. Whatever the reason, not filing on time is, in all cases, the wrong decision.

Where the reason for not filing is missing information slips (for example, T4s or T5s), the best strategy is to estimate the amount and enter that estimate on the appropriate line of the return. It’s also a good idea, in such circumstances, to attach a note for the tax authorities, explaining that the slip wasn’t received, providing them with the name and address of the person or company which should have issued it and the kind of income involved (i.e., employment income or interest income), and explaining what steps have been taken (i.e., contacting the company or the bank) to get the missing information slip. While it’s a surprisingly common misconception, it’s not the case that if an information slip wasn’t received, the income doesn’t have to be reported for tax purposes.

In any case, where taxes are owed, late-filing means an automatic penalty will be imposed equal to 5% of those outstanding taxes, plus an additional 1% for every full month following during which the return is not filed, to a maximum of 12 months (or a total of 17% of the unpaid amount). As well, interest starts being charged on those unpaid taxes the very first day they are overdue. Few taxpayers realize that the interest rate charged by the CRA is, by law, well in excess of commercial rates of interest. Specifically, the rate of interest charged by the CRA is equal to its “prescribed rate” plus 4%, and any interest charges levied are compounded daily. The rate charged by the CRA from April 1 to June 30, 2011 will be 5%.

For taxpayers who make a habit of filing late, the news is even worse. If a late-filing penalty has been charged by the CRA in any of the previous three years, and another return is late-filed, both the immediate penalty and the recurring monthly penalty are doubled to, respectively, 10% and 2% per month, to a maximum of 20 months. In the very worst-case scenario, where the taxpayer was assessed a late-filing penalty within the previous three years and the current return is more than 20 months late, the penalty assessed can reach 50% of the unpaid tax amount.

Even where a refund is expected, and there is consequently no risk of incurring late-filing penalties, it doesn’t make sense to put off filing. While the CRA pays compound daily interest (at a rate of 3% for the April to June 2011 period) on overpayments of taxes, the interest clock on such payments doesn’t start running until the latest of the following three dates: May 31, 2011, the 31^st day after the return is filed or the day after the taxes are overpaid.

So, no matter what your situation, getting your return in on time makes sense. In the worst case scenario, it can save you from paying substantial interest and penalties (now or in the future) or, where a refund is expected, can get your money into your hands more quickly, perhaps with interest added.

February is the month in which millions of Canadian taxpayers receive an Instalment Reminder from the Canada Revenue Agency (CRA). For many of the taxpayers who have received 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.

February is the month in which millions of Canadian taxpayers receive an Instalment Reminder from the Canada Revenue Agency (CRA). For many of the taxpayers who have received 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 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 (2011) and either of the two previous years (2009 or 2010). 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 2011 will specify two amounts: one to be paid by March 15, and the other due by June 15. Those amounts represent the Agency's best estimate, based on the taxpayer's return filed for the 2009 taxation year, of the net tax which will be payable by the taxpayer for 2011. 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 2011 tax year. (If the instalments paid turn out to be more than the taxpayer's net tax liability for 2011, he or she will of course receive a refund on filing.)

Second, the taxpayer can make instalment payments based on the amount of tax that was owed for the 2010 tax year. Where a taxpayer's income has not changed between 2010 and 2011 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2011 will be slightly less than it was in 2010, owing to the indexation of tax brackets and personal tax credit amounts.

Third, the taxpayer can estimate the amount of tax that he or she will owe for 2011 and can pay instalments based on that estimate. Where a taxpayer's income will decrease from 2010 to 2011 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 2011 tax year is filed in the spring of 2012. However, should instalments paid have been 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 2011—until March 31, 2011—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 is also possible for the CRA to impose penalties, but this is typically done only where the amount of instalment interest charged for the year is more than $1,000.

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

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.

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.