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.

The federal Department of Finance recently released the September issue of The Fiscal Monitor, its summary of federal revenues and expenses throughout the fiscal year. The September publication outlines the state of federal government finances for the period April to September 2011, which is the first half of the 2011-12 fiscal year.

The federal Department of Finance recently released the September issue of The Fiscal Monitor, its summary of federal revenues and expenses throughout the fiscal year. The September publication outlines the state of federal government finances for the period April to September 2011, which is the first half of the 2011-12 fiscal year.

Overall, the figures show that, for the first six months of 2011-12, there was a budgetary deficit of $13.2 billion, as compared to a deficit of $17.4 billion at the half-way point of the previous (2010-11) fiscal year. Overall, federal government revenues for the period were up, on a year-over-year basis, by $4.3 billion, to $114.4 billion. The vast majority of that revenue increase was attributable to personal income tax revenues, which rose by $4.2 billion on a year-over-year basis. Revenue from corporate income tax and non-resident income tax were also up, but accounted for a much smaller part of the overall revenue gain. Revenue from excise taxes dropped, reflecting a decrease in goods and services tax revenue.

On the expenditure side, overall program expenses were at $111.1 billion, down by $0.4 billion. Most of that decrease came from a drop in transfer payments, which were down overall by $1.1 billion. That reduction was, however, offset by an increase of $0.7 billion in costs for other program expenses and costs for public debt charges, which increased by $0.5 billion.

More details of federal government finances can be found in the September issue of The Fiscal Monitor, which is available on the Department of Finance Web site at http://www.fin.gc.ca/n11/11-121-eng.asp. The next issue of the publication, which is scheduled to be released by the Department of Finance during the week ending December 30, will summarize revenue and expenditure figures for the April to October 2011 period.

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

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

The tax treatment of employer-provided gifts and awards has always been something of a headache for the revenue authorities, for a few reasons. The amounts involved on an individual, or even a company level, are usually relatively small, and the variety of situations which the rules must address are virtually limitless, meaning that the cost required to draft and administer those rules can outweigh any revenue gain which results from their enforcement. As well, on occasion, the enforcement of those rules—as in the infamous case in which the Canada Revenue Agency (CRA) taxed an employee Christmas party—can create a cost to the government in ill will and potential non-compliance that can similarly outweigh the benefit of any revenue raised. However, in the aggregate, the sums involved can be considerable and, in the absence of any rules, the potential exists for employers to provide their employees, on a tax-free basis, with “gifts” or “awards” which are simply disguised remuneration.

In 2009, the CRA made some significant changes to its policies around employer gifts, and those changes are in effect for 2010 and subsequent years. For the most part, the revised rules represent a simplification of the often complex and cumbersome rules which applied for 2009 and previous years, and which had proved to be more burdensome to employers than the CRA had anticipated.

The general rule for 2011 is that any gifts (cash or non-cash) received by an employee from his or her employer are considered to constitute a taxable benefit, to be included in the employee’s income in the year the gift is received. However, the CRA makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) to be received by employees, tax-free, as long as such gifts are given on occasions such as Christmas or Hanukkah, or following a significant life event, like a marriage or the birth of a child.

In sum, the CRA’s policy is simply that non-cash gifts and non-cash awards to an arm’s length employee, regardless of the number of such gifts or awards, will not be taxable to the extent that the total value of all such gifts and awards to that employee is less than $500 annually. The total value over $500 annually will be taxable.

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

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

 At this time of year, the tax treatment of the annual employee holiday party needs to be considered. For many years, there was no question but that such an occasion had no tax consequences to the employees. However, in 1998, the CRA made an extremely ill-advised decision to assess a taxable benefit in relation to an employee’s attendance at an employer-sponsored Christmas party, and that assessment was upheld by the Tax Court of Canada. The public reaction to the news that employee Christmas parties would henceforth be taxed was entirely predictable, and the CRA issued a clarification of its position. That clarification indicated that no taxable benefit would be assessed in respect of employee attendance at an employer-provided social event, where attendance at the party was open to all employees, and the cost per employee was “reasonable”. In this case, “reasonable” cost was determined by the CRA to be $100. The $100 cost is meant to cover the party itself, not including any ancillary costs, such as transportation home, taxi fare, and overnight accommodation. Where the total cost of the party exceeds the $100 per person threshold, the CRA may assess the employee as having received a taxable benefit equal to the entire per person cost (i.e., not just that portion of the cost that exceeds $100). That policy remains in effect for 2011.

It may not seem very festive to consider tax benefits and costs when planning holiday gifts and parties. However, especially given that the taxable or non-taxable status of holiday gifts has been subject to change in recent years, it’s important to take those rules into account when planning any holiday gifts for employees. At the end of the day, an employer gift that results in an increased tax bill for the employee isn’t likely to generate much goodwill or holiday spirit.

It would likely surprise many Canadians to find out that two-thirds of Canadian workers do not have access to an employer-sponsored pension plan (according to information compiled in 2007). That statistic would include both defined benefit and defined contribution pension plans.

It would likely surprise many Canadians to find out that two-thirds of Canadian workers do not have access to an employer-sponsored pension plan (according to information compiled in 2007). That statistic would include both defined benefit and defined contribution pension plans.

Employees who are not able to save for retirement through an employer-sponsored plan are not, of course, without other options. All such employees are able to contribute to an individual registered retirement savings plan (RRSP), and allowable contribution amounts to such RRSPs have increased in recent years. As well, it has been possible for several years to carry forward RRSP contribution room, such that contributions not made in a particular taxation year can be made (and deducted from income) in any subsequent year. For 2011, the maximum current year contribution amount is 18% of earned income for 2010, to a maximum contribution (without any carryforwards) of $22,450.

Notwithstanding the availability of the RRSP option, Canadians aren’t saving for retirement in the amounts which will likely be needed to provide them with a reasonable standard of living during that retirement. While many Canadians do contribute to their RRSPs each year, the amount contributed is, in many cases, significantly less than the individual’s current year contribution room. As well, many Canadians have a significant RRSP contribution carryforward amount, indicating a pattern of contributing less than the allowable maximum in previous years.

The large number of Canadians who do not have access to a registered pension plan, along with the less than optimal RRSP contribution rate led the federal government to the conclusion that a new retirement savings vehicle was needed—and the choice made was Pooled Registered Pension Plans. The legislation to implement the federal portion of such plans was recently introduced by the federal government, and the press release announcing the introduction of the legislation is available on the Department of Finance Web site at http://www.fin.gc.ca/n11/11-119-eng.asp.

The Department of Finance press release notes that provincial enabling legislation will be required before the PRPP system can be fully implemented. As well, the current legislation deals with the creation of such plans, but not the tax rules which will apply to them. Those tax rules, which will apply to both federal and provincial plans, are currently being developed by the Department of Finance and will be released in draft form for comment in the near future.

PRPPs are, in effect, defined contribution pension plans in which the contributions made by employees are pooled, not just for all employees of a particular employer, but for many employers. The costs and administrative burden of creating and administering a registered pension plan are significant, and many small employers are unable or unwilling to take on that burden. Pooling contributions from multiple employers under a single manager or administrator will, it is hoped, allow those management and administrative services to benefit from economies of scale and to be delivered at a lower cost per employer.

PPRPs do, however, differ in two significant respects from traditional registered pension plans. First, employees will be able to decide on an individual basis whether to enroll in a plan provided by their employer. Currently, where an employer provides a registered pension plan, employees of that employer are required to participate in the plan as a condition of employment. The rules governing PPRPs provide that employees will be similarly automatically enrolled in such plans, but they will have the choice of filing an election to opt out. Second, employers who provide registered pension plans contribute to such plans on behalf of each employee. With a PPRP, however, the employer may have the right not to participate in the plan, at its discretion.

PRPPs are not without their critics. During the consultation period which preceded the introduction of the legislation, it was suggested that the same goals could be achieved by increasing the amount of required contributions to the Canada Pension Plan, which of course has its own existing management and investment structure. However, the government concluded that an expansion of the CPP would require higher CPP contributions from employees, employers and the self-employed and that such an increase was not advisable during the current period of economic recovery. Whether the right choice was made will become clearer as PRPPs are rolled out and Canadians do or do not choose to take advantage of this new retirement savings option.

For most Canadians, December means holiday celebrations and school vacations. In the tax world, however, December 31 marks the deadline by which most tax planning and saving strategies must be put in place in order to have an impact on one’s tax liability for the 2011 tax year. What follows is a list of tax “to-do’s” that must be accomplished by the end of the calendar year—and a couple more that can wait until sometime in the first quarter of 2012.

For most Canadians, December means holiday celebrations and school vacations. In the tax world, however, December 31 marks the deadline by which most tax planning and saving strategies must be put in place in order to have an impact on one’s tax liability for the 2011 tax year. What follows is a list of tax “to-do’s” that must be accomplished by the end of the calendar year—and a couple more that can wait until sometime in the first quarter of 2012.

Things to be dealt with by December 31, 2011

• Medical expense credit calculation

When preparing their tax returns, many taxpayers find the computation of medical expenses eligible for the medical expense tax credit somewhat confusing, and that confusion is understandable. First of all, in order to be claimed, medical expenses must total more than 3% of the taxpayer’s net income for the year, or a specified threshold amount ($2,052 for 2011), whichever is less. As a rule of thumb therefore, for 2011, taxpayers who have an income from all sources of less than $68,400 can claim all qualifying medical expenses in excess of 3% of their net income for the year. For example, a taxpayer earning $45,000 could claim qualifying medical expenses over $1,350 (3% of $45,000). Where the taxpayer’s income is over $68,400, only those medical expenses over the $2,052 threshold may be claimed for credit.

Adding to the confusion, it’s possible to claim medical expenses that were paid in 2010 on the 2011 return. The actual rule is that a taxpayer can claim medical expenses (in excess of the threshold percentage, as outlined above) incurred in any 12-month period ending during the taxation year, assuming, of course, that such expenses were not claimed on a previous tax return. Here, there is no easy rule of thumb, except perhaps to say that for tax purposes the best result is obtained where significant medical expenses can be grouped together and paid within a 12-month period, rather than spreading them out, in order to maximize the claim. So, as December 31 approaches, it’s a good idea to add up the medical expenses which have been incurred during 2011, as well as those paid during 2010 and not claimed on the 2010 return. Once those totals are known, it will be easier to determine whether to make a claim for 2011 or to wait and claim 2011 expenses on the 2012 return. And, if the decision is to make a claim for calendar year 2011, knowing what medical expenses were paid when will enable the taxpayer to determine the optimal 12-month period for the claim. Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2012. It may make sense to accelerate the payment of those expenses to December 2011, where that means that they can be included in 2011 totals and claimed on the 2011 return.

• Make charitable donations for 2011

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

As a result of the two-level credit structure, it makes sense to aggregate donations in a single calendar year where possible. A qualifying charitable donation of $400 made in December of 2011 will receive a federal credit of $88 ($200 × 15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2011 and January 2012, the total credit claimed is only $60. ($200 × 15% + $200 × 15%), and the 2012 donation can’t be claimed until the 2012 return is filed in April of 2013. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% rather than the 15% level.

It’s also possible to carry forward for up to five years donations which were made in a particular tax year. So, if donations made in 2011 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2006, 2007, 2008, 2009, or 2010 tax years can be carried forward and added to the total donations made in 2011, and then the aggregate amount claimed on the 2011 tax return.

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

• Tax-free savings account withdrawals

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

As many taxpayers have learned at their own cost, the withdrawal/recontribution rules for TFSAs are perhaps more complex than they first appear. A number of taxpayers withdrew funds from a TFSA in 2009 or 2010 and then recontributed some or all of those funds before the end of the year. In doing so, some of those taxpayers became liable for a penalty tax on overcontributions for the year. However, the Canada Revenue Agency (CRA) determined that, as taxpayers (and, it seemed, some financial institutions) were not yet completely familiar with the rules governing TFSAs, penalty tax would not necessarily be assessed. However, this represented an administrative concession only, and not a change in the actual rules, and the CRA made it clear that the administrative concession was a temporary one. Taxpayers who go “offside” with respect to excess contributions in 2011 or future years should not necessarily expect to benefit from similar administrative concessions.

So, to recap the rules: a taxpayer who contributes $5,000 to a TFSA during 2011 but withdraws $2,000 of that contribution during the year will have a $7,000 TFSA contribution limit for 2012 (made up of the usual $5,000 limit for 2011 plus the $2,000 withdrawn the previous year). Consequently, taxpayers who currently have funds in a TFSA but are planning to make a withdrawal in early 2012—perhaps to pay for a winter vacation—should think about making that withdrawal before the end of 2011, so as to preserve the option of replacing the funds in the plan during 2012. If the same taxpayer waits until January of 2012 to make the withdrawal, he or she won’t be eligible to replace the funds until 2013—and doing so during 2012 could result in the assessment of a penalty tax.

• Spousal RRSP contributions

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a presumably lower tax rate. However, the benefit of having withdrawals from a spousal RRSP taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2011, the spouse can withdraw that amount as of January 1, 2014 and have it taxed in his or her hands. If the contribution isn’t made until January or February of 2012, the contributor can still claim a deduction for it on the 2011 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 2015. It’s an especially important consideration for couples approaching retirement who may plan on withdrawing funds in the relatively near future.

• Take a look at tax instalment amounts

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

The final quarterly instalment will be due on December 15, 2011. By that date, almost everyone will have a reasonably good idea of what his or her income will be for 2011 and so will be in a position to estimate what the tax bill will be for the year. While the tax return forms to be used for the 2011 tax year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2010 form. Increases in tax credit amounts and tax brackets from 2010 to 2011 will mean that using the 2010 form will result, if anything, in a slight overestimate of tax liability for 2011.

Once one’s tax bill for 2011 has been estimated, it’s possible to compare that figure with the total of tax instalments already made in 2011 and determine whether the tax instalment to be paid on December 15 can be adjusted downward.

• Make any needed taxpayer relief applications for 2001

In some situations, the Minister of National Revenue has the discretion to cancel or waive penalties and interest which have been levied on a Canadian taxpayer, or to accept elections made for tax purposes after the usual deadline for such elections. The Minister is also empowered to provide tax refunds after the usual three-year deadline for the issuance of such refunds has past, although this relief is available only for individual and testamentary trusts (trusts arising from a person’s last will and testament).

Where a taxpayer is seeking any of these kinds of discretionary relief from the Minister, the application for that relief must be made within 10 years after the end of the year to which the relief pertains. Or, more technically, relief is available, at the discretion of the Minister for any of the ten calendar years immediately preceding the year in which the request is made. Either way, December 31, 2011 marks the deadline by which taxpayer relief requests pertaining to the 2001 tax year must be made.

There is a new wrinkle in 2011 to the usual rules respecting taxpayer relief requests, resulting from a court decision made earlier this year. Simply put, as a result of that court decision, the Minister’s discretion to cancel or waive interest charges is available for any interest that accrues during the 10 years preceding the year in which the taxpayer relief request is made, regardless of the year in which the debt on which interest has been charged arose. Take, for example, a taxpayer who has a tax debt which arose as a result of an underpayment of tax for the 1999 tax year, and on which interest has continued to accrue since then. Under the usual rules, no relief would be available for either the debt or interest and penalty charges incurred on that debt, as it arose in 1999, more than 10 calendar years ago. However, as a result of this court decision, the taxpayer is now entitled to apply for relief from the interest charges which were levied in the 2001 through 2011 calendar years. No relief can be obtained for the tax debt itself, or any interest or penalty charges which were levied during 1999 or 2000, as each of those arose outside the 10 year limitation period.

Things that can wait (for a bit)

• RRSP contribution deadline

Most taxpayers are aware that the deadline for making an RRSP contribution to be claimed on the 2011 tax return falls at the end of February 2012. More precisely, the deadline is 60 days after the end of the calendar year. In most years, that means the deadline falls on March 1: however, 2012 happens to be a leap year, and so the deadline will be February 29, 2012.

Where the deadline happens to fall on a Sunday, the federal government has typically made an administrative concession by allowing contributions to be made on the next business day. However, in 2012, February 29^th is a Wednesday, so taxpayers should not anticipate receiving any kind of extension with respect to the deadline. To be eligible for deduction on the 2011 return, RRSP contributions will have to be made by midnight Wednesday, February 29, 2012.

Things that can wait until April 2011

• Pension income splitting

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

Splitting pension income can provide significant tax benefits to couples who are able to utilize that strategy. However, the “splitting” of such income is entirely notional—that is, there is no requirement that pension payments actually be made to the spouse who is designated to receive them for tax purposes. Rather, when filing the income tax return in the spring of 2012, a calculation can be made of how pension income can be split between two spouses to create the best tax result, and to file both returns on that basis.

Two quarterly newsletters have been added—one about personal 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 #18 Corporate

Personal:

Issue #18 Personal

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

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

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

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

Tax 101 for snowbirds

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

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

Health care coverage

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

Old Age Security and Canada Pension Plan payments

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

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

Application of U.S. tax laws

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Canadians have a well-deserved reputation for responding with generosity to assist those affected by natural disasters, and the current humanitarian crisis in East Africa is no exception. To supplement that generosity, the federal government has announced that, for every eligible dollar donated by individual Canadians to registered Canadian charities for the purpose of famine relief, Canada will set aside one dollar for the East Africa Drought Relief Fund. Those matching funds will then be allocated by the Canadian International Development Agency (CIDA) to established Canadian and international humanitarian organizations, to provide needed assistance for those most affected by the drought. There is no limit on the amount of matching dollars which the federal government will contribute to the relief fund.

Canadians have a well-deserved reputation for responding with generosity to assist those affected by natural disasters, and the current humanitarian crisis inEast Africais no exception. To supplement that generosity, the federal government has announced that, for every eligible dollar donated by individual Canadians to registered Canadian charities for the purpose of famine relief,Canadawill set aside one dollar for the East Africa Drought Relief Fund. Those matching funds will then be allocated by the Canadian International Development Agency (CIDA) to established Canadian and international humanitarian organizations, to provide needed assistance for those most affected by the drought. There is no limit on the amount of matching dollars which the federal government will contribute to the relief fund.

The federal government has set certain parameters or criteria which donations must fulfill in order to qualify for the matching program. In order to qualify, a donation must be:

• made by an individual Canadian;
• monetary (i.e., not a donation of goods or services), and not exceeding $100,000 per individual;
• made to a registered Canadian charity that is receiving donations in response to the drought inEast Africa;
• specifically earmarked by such organizations for the purpose of responding to the drought; and
• made between July 6 and September 16, 2011.

Once a donation is made, the registered charity which receives it has until September 30, 2011 to make a declaration to CIDA. That declaration will specify the amount of eligible donations received, and the federal government will then set aside an equivalent amount for the Drought Relief Fund.

In the rush to help, the need to ensure that donations are made in a way that will most benefit those who need that help can sometimes be overlooked. As well, it’s an unfortunate fact that disasters sometimes bring out the worst as well as the best in people. In any such situation, a number of “instant” charities tend to spring up and begin soliciting donations for aid. Some of them are honest and well-intentioned and others are not. However, no matter how good their intentions, if they are not already registered charities (and most very likely are not—obtaining registration as a charity is not an overnight process), then any donations made to them will not qualify, either for the usual charitable donations tax credit, or for any matching funds which the government of Canada has promised to provide. As well, it’s not likely that such an “instant” charity will have the resources or the infrastructure required to provide help on the scale needed by victims of theEast Africafamine.

With that in mind, there are a number of resources available to Canadians who want to ensure that they are making their charitable donations in the most effective way possible. General information about making charitable donations can be found on the Canada Revenue Agency (CRA) Web site at http://www.cra-arc.gc.ca/chrts-gvng/chrts/drghtrlffnd-eng.html. As well, the CRA maintains a listing of registered charities (remembering that only donations to registered charities will qualify for the matching funds) on its Web site at http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html. It’s also possible to verify a charity’s registration status by calling the CRA toll-free at 1-800-267-2384.

Canadians who donate to a registered charity for famine relief will also be able to claim a non-refundable charitable donations tax credit. The federal credit claimable is a two-level one. A 15% credit is available for the first $200 in donations, and donations over the $200 threshold are eligible for a 29% credit. Similar credits, in varying amounts, are provided by the provinces and territories.

Since the percentage amount of the credit rises as charitable donations increase, it may be advisable, where charitable donations made in a single year don’t exceed the $200 threshold, to defer making the claim. Charitable donations can be claimed in the tax year they are made or in any of the five subsequent tax years. Consequently, it’s possible to accumulate charitable donations for up to six years and claim them on a single return, thereby maximizing the amount of non-refundable credit received.

Canadians who are considering making a donation for famine relief in East Africa can find more information about the East Africa Drought Relief Fund and the humanitarian crisis in general on the CIDA Web site at http://www.acdi-cida.gc.ca/acdi-cida/ACDI-CIDA.nsf/eng/ANN-71910150-JQF.

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.