Although the filing deadline for individual income tax returns for the 2019 tax year has been extended to June 1, 2020, millions of Canadians have nonetheless already filed those returns. Specifically, by May 19, 2020, the Canada Revenue Agency (CRA) had processed just over 20 million individual income tax returns filed for the 2019 tax year. Just over 13 million of those returns resulted in a refund to the taxpayer, while just over 3 million resulted in a tax balance owed by the taxpayer.
Although the filing deadline for individual income tax returns for the 2019 tax year has been extended to June 1, 2020, millions of Canadians have nonetheless already filed those returns. Specifically, by May 19, 2020, the Canada Revenue Agency (CRA) had processed just over 20 million individual income tax returns filed for the 2019 tax year. Just over 13 million of those returns resulted in a refund to the taxpayer, while just over 3 million resulted in a tax balance owed by the taxpayer.
No matter when or how a return is filed, or the outcome of the filing, all returns filed with and processed by the CRA have one thing in common — they result in the issuance of a Notice of Assessment (NOA) by the Agency, outlining the taxpayer’s income, deductions, credits, and tax payable for the 2019 tax year.
In most cases, the information contained in the NOA is the same as that provided by the taxpayer in his or her return, perhaps with a few arithmetical corrections made by the CRA. In a minority of cases, the information presented in the NOA will differ from that provided by the taxpayer in the return. Where that difference means an unanticipated refund, or a larger refund than expected, it’s a happy day for the taxpayer. In some cases, however, the NOA will inform the taxpayer that additional amounts are owed to the CRA.
When that happens, the taxpayer must figure out why, and to decide whether or not to dispute the CRA’s conclusions. Many such discrepancies are the result of an error made by the taxpayer in completing the return. A lot of information from a variety of sources is reported on even the most straightforward of returns and it’s easy to overlook, for instance, a T5 slip reporting a small amount of interest income earned. Even where tax software is used to prepare the return, errors can still occur. Such tax software relies, in the first instance, on information input by the user with respect to amounts found on T4, T5 and other information slips. No matter how good the software, it can’t account for income information which the taxpayer hasn’t provided. In other cases, the taxpayer might transpose figures when entering them, such that an income amount of $26,353 on the T4 becomes $23,653 on the tax return. Once again, the tax software has no way of knowing that the information input was incorrect, and calculates tax owing on the basis of the figures provided.
Where there is additional tax owing because of an error or omission made by the taxpayer in completing the return, and the CRA’s figures are correct, disputing the assessment doesn’t really make sense. There is, as well, a persistent tax “myth” that if a taxpayer doesn’t receive an information slip (T4 or T5, as the case might be) for income received during the year, that income doesn’t have to be reported and therefore isn’t taxable. The myth, however, is just that. All taxpayers are responsible for reporting all income received and paying tax on that income, and the fact that an information slip was lost, mislaid, or never received doesn’t change anything. The CRA receives a copy of all information slips issued to Canadian taxpayers, and its systems will cross-check to ensure that all income is accurately reported.
There are, however, instances in which the CRA and the taxpayer are in disagreement over substantive issues, and those issues most often involve claims for deductions or credits. For instance, the CRA may have disallowed an individual’s claim for a medical expense, or for a deduction claimed for a business expenditure, which the taxpayer believes to be legitimate.
Whatever the nature of the dispute, the first step is always to contact the CRA for an explanation of the reasons why the change was made. While the information provided in the NOA is a good summary of the taxpayer’s tax situation for the year, it may not provide the detail to show precisely how and why the taxpayer and the CRA disagree on the actual amount of income tax which the taxpayer must pay for the year. The first step to be taken would be a call to the Individual Income Tax Enquiries line at 1-800-959-8281, where agents have access to the taxpayer’s return and can explain any changes which were made during the assessment process. If that call doesn’t resolve the taxpayer’s questions, or there is still a disagreement, the taxpayer has to decide whether to take the next step of filing a formal objection to the Notice of Assessment.
Doing so formally advises the CRA that the taxpayer is disputing his or her tax liability for the taxation year in question. Not incidentally, the filing of an Objection also brings to a halt most efforts undertaken by the CRA to collect taxes which it considers owing for the taxation year under dispute (although, if the taxpayer is eventually found to owe the amount in dispute, interest will have accumulated in the interim). Where the taxpayer files an Objection, the CRA’s collection efforts are suspended until 90 days after the date the CRA’s decision on that Objection is sent to the taxpayer. In some cases, however, those collection efforts will not be brought to a halt, in whole or in part. Tax collection efforts by the CRA are not deferred where the amounts in dispute are those which the taxpayer was required to withhold and remit to the CRA, such as employee income tax deductions at source. As well, the CRA is required to postpone collection action on only 50% of the amount in dispute where that dispute involves a charitable donation tax credit or deduction claimed in connection with a tax shelter arrangement. As a practical matter, however, the CRA has currently suspended all of its regular collection activities as a result of the pandemic. Nonetheless, the rules outlined above still apply and will be enforced when those collection activities resume.
There is a time limit by which any Objection must be filed, albeit a reasonably generous one. Individual taxpayers must file an Objection by the later of 90 days from the mailing date of the Notice of Assessment (the date found at the top of page 1) or one year from the due date of the return which is being disputed. So, for tax returns for the 2019 tax year, the one-year deadline (which is usually, but not always, the later of those two dates) would be June 1, 2021 (or June 15, 2021 for self-employed taxpayers and their spouses). As with most things related to taxes, it’s best not to put it off. At the very least, if the taxpayer is ultimately found to owe some or all of the taxes assessed by the CRA, interest will have accrued on those taxes for the entire period since the filing due date. Certainly, if the deadline is imminent, it’s necessary to file a Notice of Objection in order to preserve the taxpayer’s appeal rights, even if discussions with the CRA are still ongoing.
Taxpayers who have registered with the CRA’s online services feature My Account can file their Notice of Objection online at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html.The taxpayer provides information with respect to the assessment being disputed and the reasons why the assessment is being disputed and submits those reasons by clicking on the Submit button at the bottom of the "Register my formal dispute — review" page. Taxpayers who are disputing their tax assessment can also upload supporting documents relating to that dispute to the CRA's website.
While filing a dispute through My Account is certainly faster than mailing hard copy of the Notice of Objection, not all taxpayers want to use that option. In particular, those who are not already registered with My Account may not wish to undertake the registration process simply in order to file a single Notice of Objection. Taxpayers who choose instead to mail hard copy of a Notice of Objection can find the most current version of the CRA’s standardized T400A Objection on the Agency’s website at https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t400a/t400a-09-18e.pdf.
Taxpayers aren’t obligated to use the CRA’s official Notice of Objection form — any communication which makes it clear that the taxpayer is objecting to his or her Notice of Assessment will do. Nonetheless, there’s no reason not to use the standardized form, and there are benefits to doing so. Using the Form T400A will make it clear to the CRA that a formal objection is being filed, will present the necessary information in a format with which the Agency is familiar, and will also mean that no required information is inadvertently omitted. It is also helpful to include a copy of the Notice of Assessment which is being disputed. Taxpayers should also consider ensuring proof of both delivery and time of delivery by sending the form in a way which provides for tracking and proof of delivery (e.g., registered mail or courier).
Taxpayers whose postal code begins with letters A to P should send their documents to the Eastern Appeals Intake Centre, while objections file by those with postal codes beginning with letters R to Y should be sent to the Western Appeals Intake Centre. The addresses for the two centres are as follows.
Chief of Appeals
Eastern Appeals Intake Centre
North Central Ontario TSO
1050 Notre Dame Avenue,
Sudbury ON P3A 5C1
Chief of Appeals
Western Appeals Intake Centre
Fraser Valley and Northern TSO, 2nd floor,
9755 King George Boulevard,
Surrey BC V3T 5E1
The CRA has posted a notice on its website indicating that, during the current pandemic, taxpayers can fax their Notices of Objection to the Appeals Eastern Intake Centre at 1-866-443-4955 or (705) 670-6649.
It’s also possible to contact either of the Appeals Intake Centres by phone or fax, and those phone and fax numbers for both can be found at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/complaints-disputes/complexity-level-processing-time.html.
The time required for the CRA to consider the objection and make its decision ranges from several weeks to several months, depending on the number and complexity of the issues involved. Eventually, however, the CRA will respond to the Objection. In the course of making its decision, the Agency may or may not contact the taxpayer for further discussions of the issues in dispute. Should the taxpayer be contacted, he or she may be asked to provide representations outlining his or her position, in writing or at a meeting. Through such representations and meetings, it may be possible for the taxpayer and the CRA to come to an agreement on the taxpayer’s tax liability. In either case, the CRA will either confirm its original assessment or change it. If the original assessment is changed, the CRA will issue a Notice of Reassessment outlining the changes. If the taxpayer continues to disagree with the CRA’s position, the next step is an appeal to the Tax Court of Canada, which must be filed within 90 days after the CRA issues its assessment or reassessment. While in many instances (generally where amounts in dispute are relatively small) taxpayers can represent themselves before the Tax Court, it is generally a good idea, once things reach this point, to consult a tax lawyer before taking that next step.
The CRA also publishes a useful pamphlet entitled Resolving Your Dispute: Objection and Appeal Rights under the Income Tax Act, and the most recent release of that publication can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p148/p148-resolving-your-dispute-objection-appeal-rights-under-income-tax-act.html.
Although we’re not even halfway through the calendar, 2020 has already been a year of significant financial upheaval and stress for millions of Canadians. The number of employed Canadians fell by one million during the month of March 2020 — and then by another two million during the month of April.
Although we’re not even halfway through the calendar, 2020 has already been a year of significant financial upheaval and stress for millions of Canadians. The number of employed Canadians fell by one million during the month of March 2020 — and then by another two million during the month of April.
While the impact of sudden unemployment, or reduced hours, was mitigated somewhat by the availability of a number of federal and provincial benefits, those benefits can, at most, cushion the financial shock for Canadians who may not know when or if they will be returning to work.
Given the circumstances, it’s very likely that the number of Canadians who won’t be able pay their tax bill this year on time and in full will be significantly increased. Where resources are scarce most Canadians will, quite reasonably, allocate those resources first to the necessities of food and shelter. Even those who have the financial resources to pay their taxes in full may be reluctant to use up limited resources on tax payments when their employment and financial future are uncertain.
In most years, the filing and payment deadline for Canadian taxpayers (other than the self-employed and their spouses) is the same day — April 30. This year, a tax balance owed for 2019 doesn’t have to be paid until September 1. However, the filing deadline for individual income tax returns for 2019 is June 1, 2020, so taxpayers who have a balance owing for 2019 will know that by the beginning of June.
While, like most creditors, the Canada Revenue Agency (CRA) would rather get paid on time and in full, its ultimate goal is to collect the full amount of taxes owed. If a tax bill can’t be paid in full out of either current resources or through private borrowing, the CRA is open to making a payment arrangement with the taxpayer, meaning that the amount will be paid over time.
There are two avenues available to taxpayers who want to propose such a payment arrangement. The first is a call to the CRA’s automated TeleArrangement service at 1-866-256-1147. When making such a call, it is necessary for the taxpayer to provide his or her social insurance number, date of birth, and the amount entered on line 15000 of the last tax return for which the taxpayer received a Notice of Assessment. (For taxpayers who are up to date on their tax filings, that will be the Notice of Assessment for the return for the 2018 tax year). The TeleArrangement Service is available Monday to Friday, from 7 a.m. to 10 p.m., Eastern time.
In ordinary times, taxpayers who would rather speak directly to a CRA employee would be able to call the Agency’s Debt Management Call Centre at 1-888-863-8657, but that Centre is currently closed due to the pandemic. Taxpayers can, however, still complete an online form (available at https://apps.cra-arc.gc.ca/ebci/iesl/showClickToTalkForm.action) requesting a callback from a CRA agent.
The CRA also provides an online tool, in the form of a Payment arrangement calculator (available at https://apps.cra-arc.gc.ca/ebci/recc/pac/prot/welcome?request_locale=en_CA), which allows the taxpayer to calculate different payment proposals, depending on his or her circumstances). That calculator includes interest charges since, no matter what payment arrangement is made, the CRA will levy interest charges on any amount of tax owed for the 2019 tax year which is not paid on or before September 1, 2020. Interest charges levied by the CRA tend to add up quickly, for two reasons. First, the interest charged by the CRA on outstanding tax amounts is, by law, higher than current commercial rates. For the second quarter of 2020 (April 1 to June 30), that rate is 6%. Second, interest charges levied by the CRA are compounded daily, meaning that each day interest is levied on the previous day’s interest charges. It is for these reasons that a taxpayer is, where at all possible, likely better off arranging private borrowing in order to pay any taxes owing by the September 1 deadline.
Finally, there is one strategy which is, in all circumstances, a bad one. Taxpayers who can’t pay their tax bill sometimes conclude that there is no point in filing if payment can’t be made. Those taxpayers are wrong. Where an amount of tax is owed and the return isn’t filed on time, there is an immediate tax penalty of 5% imposed on the outstanding tax amount — and interest charges start accruing on that penalty amount (as well as on the outstanding tax balance) immediately. For each month that the return isn’t filed, a further penalty of 1% of the outstanding tax amount is charged, to a maximum of 12 months. Higher penalty amounts are charged, for a longer period, where the taxpayer has incurred a late-filing penalty within the past three years. In a worst-case scenario, the total penalty charges can be 50% of the tax amount owed — and that doesn’t count the compound interest, which is levied on all penalty amounts as well as on all unpaid taxes. Taxpayers are at least catching something of a break this year as the CRA has, in recognition of the unusual circumstances, indicated that although returns are due on or before June 1, late-filing penalties will only be assessed where a return is not filed by the payment deadline of September 1, 2020.
In all cases, regardless of the payment or filing deadline and no matter what the circumstances or amount owed, the right answer is to file one’s tax return on time and, if payment of taxes owed can’t be made, to get in touch with the CRA as soon as possible to make a payment arrangement.
Since mid-March, the federal and provincial governments have announced the creation of numerous programs to help both individuals and Canadian businesses with the financial fallout of the current pandemic. Of those programs, none has had a more direct impact on the lives of Canadians than the Canada Emergency Response Benefit, or CERB. As of mid-May, more than 8 million Canadians have applied for the benefit, and more than $40 billion has been paid out under the CERB program.
Since mid-March, the federal and provincial governments have announced the creation of numerous programs to help both individuals and Canadian businesses with the financial fallout of the current pandemic. Of those programs, none has had a more direct impact on the lives of Canadians than the Canada Emergency Response Benefit, or CERB. As of mid-May, more than 8 million Canadians have applied for the benefit, and more than $40 billion has been paid out under the CERB program.
The basic structure of the CERB is that qualifying individuals may receive $500 per week for a maximum of 16 weeks, and there is no waiting period. In order to qualify for the CERB, an individual must:
It’s important to note that the requirement of having stopped working does not mean that an individual must be no longer employed. Those who have been laid off as a result of the pandemic, or whose hours have been reduced, may also qualify for the CERB where the other requirements are met.
In addition, while many individuals who apply for the CERB will do so because of a loss in income related to a job loss or reduction in hours, eligibility for the benefit is not limited to those circumstances. Specifically, individuals in the following situations may also be eligible to receive the CERB:
Regardless of the eligibility criteria under which they qualify, CERB recipients receive $500 per week for a maximum of 16 weeks. There is also a limit on the amount of income which a recipient of CERB can earn while receiving the benefit. Each application for the benefit covers the subsequent four weeks, and the following rules apply with respect to allowable income levels during each 4-week period.
Amounts received through the CERB program are taxable income to the recipient, but tax is not deducted from payments made. Consequently, recipients will need to set aside funds for the tax which will need to be paid on amounts received when the return for 2020 is filed next spring.
The government recommends that an application for the CERB be made online at https://www.canada.ca/en/services/benefits/ei/cerb-application.html, and applications can be made until December 2, 2020, for payment on a retroactive basis. However, those who are unable to apply online can do so by calling 1-833-966-2099. In most cases, where the recipient receives the benefit by direct deposit to a bank account, that deposit is made within about three days. Where the payment is made by cheque, that cheque is mailed to the recipient.
As might be expected in the case of a benefit for which millions of Canadians are eligible, a number of questions have arisen with respect to eligibility and the interaction between the CERB and other federal benefit programs, like Employment Insurance, as well as its application to specific groups like students, seniors, and disabled persons. The federal government has created a lengthy FAQ document dealing with such queries and questions, and that FAQ document can be found at https://www.canada.ca/en/services/benefits/ei/cerb-application/questions.html#eligibility.
Working from home isn’t really a new phenomenon — employees have been doing so for more than 25 years, ever since changes in technology made such remote work arrangements feasible. Over the past two months or so, however, millions of Canadian employees have had to adapt to working from home for the first time. And it seems that an increasing number of companies are deciding that such arrangements can and should be maintained for the longer term, even after they are no longer required for reasons of public health.
Working from home isn’t really a new phenomenon — employees have been doing so for more than 25 years, ever since changes in technology made such remote work arrangements feasible. Over the past two months or so, however, millions of Canadian employees have had to adapt to working from home for the first time. And it seems that an increasing number of companies are deciding that such arrangements can and should be maintained for the longer term, even after they are no longer required for reasons of public health.
There are a lot of advantages to working from home — no one enjoys the daily commute, which is often both expensive and time-consuming. For most Canadians, the opportunity to avoid sitting in traffic gridlock or rushing to catch the commuter train, even for part of the work week, would be a welcome change. And of course, going to an office every day involves costs in addition to the costs of just getting there and back.
A transition to a part-time or full-time work-from-home arrangement does, however, raise a number of questions. In virtually all cases, employees will need to acquire new technology or upgrade their existing technology resources, and the question of who pays for such expenditures will arise. And, while commuting costs may be reduced or even eliminated, there are other monthly costs which will increase including, usually, the cost of upgraded internet access. And, finally, the question of the tax implications of the new working from home arrangement will have to be considered.
Fortunately, Canada’s tax system already has rules in place to govern the tax treatment of expenditures and reimbursements related to home office work. Generally, employees who have a work-from-home space and who foot the bill for costs related to having that space will be entitled to deduct many of those costs when calculating their taxable income for the year. Of course, as with any tax deduction, there are conditions which must be met in order to qualify.
In order to claim a deduction for costs related to a work-from-home space, employees must meet at least one of the following conditions.
Once either of these threshold criteria is met, a broad range of costs become deductible by the employee. Specifically, a salaried employee can claim and deduct the part of specified costs that relate to his or her workspace, such as the cost of electricity, heating, and home maintenance.
Where an individual who qualifies under either of the criteria outlined above is a commission employee, an even broader range of costs become deductible. In addition to costs for electricity, heating, and home maintenance, a commission employee can also deduct a proportionate share of costs incurred for property taxes and home insurance.
There is no specific formula provided for determining the proportion of eligible costs which can be deducted for qualifying home office expenses. The employee can determine that percentage based on the square footage of the workspace as a percentage of the overall square footage of the home, or he or she can make that calculation based on the number of rooms in the house or apartment relative to the number of rooms used for work-related purposes. Whichever method is chosen, the most important consideration is that the approach taken (and the expenses claimed) be reasonable. In all cases, the Canada Revenue Agency (CRA) can ask the taxpayer to provide documentation and support for claims made.
For example, an employee who lives in a 2,000-square-foot house and uses a 200-square-foot room as a home office can (assuming that at least one of the basic threshold criteria outlined above is satisfied) claim 10% of his or her costs for electricity, heat, and home maintenance (where that maintenance involved the home work space) incurred during the tax year. If that employee works on commission, he or she can also deduct 10% of costs incurred for property taxes and home insurance.
There is one further requirement for employees who seek to deduct costs incurred in relation to a home office. Each such employee must file, with the income tax return for the year, a Form T2200. On that form, the employer must certify that the employee was required to use a portion of his or her home for work-related purposes, indicate what percentage of the employee’s duties were carried out at that home office and, finally, confirm that the employee is not being reimbursed for any home office expenses incurred. Where there is any kind of reimbursement provided, the employer must specify the type of expense reimbursed, and the amount of reimbursement. And, of course, the employee cannot claim a deduction for any expenses for which reimbursement was received.
For the 2020 tax year, there is an important exception to the rule that the employee not receive reimbursement for home office-related expenses. The federal government has indicated that, given the unusual circumstances under which most employees have recently begun teleworking, those employees will be entitled to receive up to $500 from their employers to help defray costs of setting up and using a home office. In the CRA’s words “in the context of the COVID-19 crisis, CRA is willing to accept a reimbursement of an amount not exceeding $500 for the purchase of personal computer equipment to be principally for the benefit of the employer”. Consequently, any such $500 amount will not be treated as taxable income to the employee. Although the CRA did not specify, this concession will presumably be effective only for the current tax year.
In order to claim a deduction for home office expenses, the taxpayer must clearly do some paperwork. All employees seeking to make such a claim must total the amount of bills paid over the course of the year for electricity, heat and any of the inevitable home maintenance costs. Those working on commission must also verify amounts paid for property taxes and home insurance. However, given that such efforts will produce a deduction from income for tax purposes for costs which would have been incurred in any case, it is likely that most employees would consider the return on that investment of time well worth it.
The Old Age Security program is the only aspect of Canada’s retirement income system which does not require a direct contribution from recipients of program benefits. Rather, the OAS program is funded through general tax revenues, and eligibility to receive OAS is based solely on Canadian residency. Anyone who is 65 years of age or older and has lived in Canada for at least 40 years after the age of 18 is eligible to receive the maximum benefit. For the second quarter of 2020 (April to June 2020), that maximum monthly benefit is $613.53.
The Old Age Security program is the only aspect of Canada’s retirement income system which does not require a direct contribution from recipients of program benefits. Rather, the OAS program is funded through general tax revenues, and eligibility to receive OAS is based solely on Canadian residency. Anyone who is 65 years of age or older and has lived in Canada for at least 40 years after the age of 18 is eligible to receive the maximum benefit. For the second quarter of 2020 (April to June 2020), that maximum monthly benefit is $613.53.
For many years, OAS was automatically paid to eligible recipients once they reached the age of 65. However, since July 2013 Canadians who are eligible to receive OAS benefits have been able to defer receipt of those benefits for up to five years, when they turn 70 years of age. For each month that an individual Canadian defers receipt of those benefits, the amount of benefit eventually received would increase by 0.6%. The longer the period of deferral, the greater the amount of monthly benefit eventually received. Where receipt of OAS benefits is deferred for a full 5 years, until age 70, the monthly benefit received is increased by 36%.
It can, however, be difficult to determine, on an individual basis, whether and to what extent it would make sense to defer receipt of OAS benefits. Some of the difficulty in deciding whether to defer — and for how long — lies in the fact there are no hard and fast rules, and the decision is very much an individual one. Fortunately, however, there are a number of factors which each individual can consider when making that decision.
The first such factor is how much total income will be required, at the age of 65, to finance current needs. It is also necessary to determine what other sources of income (employment income from full-time or part-time work, Canada Pension Plan retirement benefits, employer-sponsored pension plan benefits, annuity payments, and withdrawals from registered retirement savings plans (RRSPs) and registered retirement income fund (RRIFs)) are available to meet those needs, both currently and in the future, and when receipt of those income amounts can or will commence or cease. Once income needs and the sources and possible timing of each is clear, it is necessary to consider the income tax implications of the structuring and timing of those sources of income. The ultimate goal, as it is at any age, is to ensure sufficient income to finance a comfortable lifestyle while at the same time minimizing both the tax bite and the potential loss of tax credits.
In making those calculations, the following income tax thresholds and benefit cut-off figures are a starting point.
More and more, Canadians are not automatically leaving the work force at the age of 65. Those who continue to work at paid employment and whose employment income is sufficient to finance their chosen lifestyle may well prefer to defer receipt of OAS. Similarly, a taxpayer who begins receiving benefits from an employer’s pension plan when he or she turns 65, may be able to postpone receipt of OAS benefits.
Nearly all Canadians who were employed or self-employed after the age of 18 paid into the Canada Pension Plan and are eligible to receive CPP retirement benefits. While such retirement benefits can be received as early as age 60, receipt can also be deferred and received any time up to the age of 70. As is the case with OAS benefits, CPP retirement benefits increase with each month that receipt of those benefits is deferred. Taxpayers who are eligible for both OAS and CPP will need to consider the impact of accelerating or deferring the receipt of each benefit in structuring retirement income.
Taxpayers who were not members of an employer-sponsored pension plan during their working lives generally save for retirement through a registered retirement savings plan (RRSP). While taxpayers can choose to withdraw amounts from such plans at any age, they are required to collapse their RRSPs by the end of the year in which they turn 71, and to begin receiving income from those savings. There are a number of options available for structuring that income, and, whatever the option chosen (usually, converting the RRSP into a registered retirement income fund or RRIF, or purchasing an annuity) will mean that the taxpayer will begin receiving income amounts from those RRSP funds in the following year. Taxpayers who have significant retirement savings in RRSPs should, in determining when to begin receiving OAS benefits, consider that they will have an additional (taxable) income amount for each year after they turn 71.
The ability to defer receipt of OAS benefits does provide Canadians with more flexibility when it comes to structuring retirement income. The price of that flexibility is increased complexity, particularly where, as is the case for most retirees, multiple sources of income and the timing of each of those income sources must be considered, and none can be considered in isolation from the others.
Individuals who are facing that decision-making process will find some assistance on the Service Canada website. That website provides a Retirement Income Calculator, which, based on information input by the user, will calculate the amount of OAS which would be payable at different ages. The calculator will also determine, based on current RRSP savings, the monthly income amount which those RRSP funds will provide during retirement. To use the calculator, it is necessary to know the amount of Canada Pension Plan benefit which will be received, and the taxpayer can obtain that information by calling Service Canada at 1-800-277-9914.The Retirement Income Calculator can be found at https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html.
A final note — during the current pandemic, Service Canada is strongly encouraging anyone who is applying for federal government benefits — including Old Age Security — do so online, through My Service Canada Account. While in normal circumstances, individuals may be required to provide supporting documentation for their OAS application, that requirement is being temporarily waived. Such documentation may be requested at a later date, but processing of the application will now begin without it. Information on My Service Canada Account, and on how to make an online application can be found at https://www.canada.ca/en/employment-social-development/services/my-account.html.
By the time most Canadians sit down to organize their various tax slips and receipts and undertake to complete their tax return for 2019, the most significant opportunities to minimize the tax bill for the year are no longer available. Most such tax planning or saving strategies, in order to be effective for 2019, must have been implemented by the end of that calendar year. The major exception to that is, of course, the making of registered retirement savings plan (RRSP) contributions, but even that had to be done on or before March 2, 2020 in order to be deducted on the return for 2019.
By the time most Canadians sit down to organize their various tax slips and receipts and undertake to complete their tax return for 2019, the most significant opportunities to minimize the tax bill for the year are no longer available. Most such tax planning or saving strategies, in order to be effective for 2019, must have been implemented by the end of that calendar year. The major exception to that is, of course, the making of registered retirement savings plan (RRSP) contributions, but even that had to be done on or before March 2, 2020 in order to be deducted on the return for 2019.
The fact that the clock has run out on most major tax planning opportunities for 2019 doesn’t however, mean that there are no tax-saving strategies left. At this point, there are a couple of ways to minimize the tax hit for 2019 — by claiming all available deductions and credits on the return and also by making sure that those deductions and credits are claimed in the way which will give the taxpayer the most “bang for the buck”.
Everyone’s tax situation — and, therefore, their tax return — is different, of course, but millions of Canadian taxpayers make claims on their annual returns for charitable donations made. It may seem counterintuitive, or even illogical, to not claim every available deduction and credit in order to obtain the best possible tax result for the year. However, for charitable donation tax credit claims there are situations in which it makes sense to defer an available claim until a future year, or to transfer that claim to another person.
Taxpayers are entitled to make a claim on the annual tax return for charitable donations made in the current (2019) year or any of the previous five years. The reason it can sometimes makes sense not to claim a charitable donation in the year it was made arises from the way in which the charitable donations tax credit is structured to encourage higher donations.
That credit, at both the federal and provincial/territorial levels, is a two-tier credit. Federally, the first $200 in donations receives a credit of 15% of the total donation, or $30. However, donations above the $200 level receive a credit equal to 29% of the donation amount over $200.
Take, for example, a taxpayer who makes a regular contribution to a favourite charity of $100 each month, or $1,200 per year. Where he or she claims that donation on the annual return each year, that claim will result in a federal credit of $320 ($200 × 15%, + $1,000 × 29%). Where, however, the same taxpayer defers the claim to the following year and claims a total of $2,400 in donations on a single return, he or she will receive a federal credit of $668. ($200 × 15%, + $2,200 × 29%). Where the donations are accumulated and claimed once every five years, the federal credit received will be $1,712 ($200 × 15%, + $5,800 × 29%). Under each scenario, the total charitable donation made is the same, but the amount of credit received increases with each year that the claim is deferred. Since each of the provinces and territories provide a two-tier credit (at different rates, depending on the jurisdiction), the same result will be seen when calculating the provincial/territorial credit.
It's also the case that a married taxpayer can claim a credit for charitable donations made personally as well as those made by his or her spouse. Since the amount of tax credit claimable increases with the size of the annual donation it almost always makes sense to combine donations made by both spouses, in order to maximize the available credit, and to claim those donations on one return.
Since the amount of credit which may be obtained isn’t affected by the income of the taxpayer claiming it, the benefit received from the credit will be the same regardless of which spouse claims it, with one major exception. The charitable donation tax credit is a non-refundable credit, meaning that it reduces tax otherwise payable, but does not create or increase a tax refund. Consequently, it’s important, when deciding who will make the claim for combined donations, to ensure that the taxpayer making that claim has tax payable for the year of at least as much as the amount of the charitable donation tax credit. If neither spouse has sufficient tax payable for the year, then it would be better to defer the claim and make it in a future tax year.
It would be easiest, of course, to simply add up the amount of charitable donation receipts for the year and claim them all on the return of the donor. However, investing a little time to calculate the amount of donations made by both spouses, to consider who should make the claim and, finally, to determine whether the claim is best made in current year or a future one, can provide a much better overall tax result.
The past few months have been an almost perfect storm of bad financial news for Canadian retirees. The historic stock market downturn which occurred in mid-March resulted in a significant loss of value for many retirement savings portfolios, whether those savings were held in registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs). That downturn was accompanied by three consecutive interest rate cuts by the Bank of Canada, meaning that rates of return on such safe investment vehicles as guaranteed investment certificates, which were already low, became negligible.
The past few months have been an almost perfect storm of bad financial news for Canadian retirees. The historic stock market downturn which occurred in mid-March resulted in a significant loss of value for many retirement savings portfolios, whether those savings were held in registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs). That downturn was accompanied by three consecutive interest rate cuts by the Bank of Canada, meaning that rates of return on such safe investment vehicles as guaranteed investment certificates, which were already low, became negligible.
While the stock market has made a significant recovery from the lows recorded during the month of March, it is not yet at pre-downturn levels. And, while retirees who are under the age of 71 and whose retirement savings are still held in an RRSP may be able to wait out the ongoing downturn in anticipation and hope of a full market recovery, those Canadians over age 71 who hold their retirement savings in a RRIF have a more immediate problem.
That problem arises from the application of the tax rules governing required withdrawals from a RRIF. The basic rule is that every Canadian who has an RRSP must collapse that RRSP by the end of the year in which they turn 71. While there are a few options available to those individuals, most taxpayers choose to convert their RRSP into a RRIF and, by doing so, they can continue to hold the same investments within the plan. There is, however, one big difference between an RRSP and a RRIF and that is that every RRIF holder must withdraw a percentage of the balance within the RRIF by the end of each calendar year. The specific percentage is based on the age of the RRIF holder and is calculated using the value of the RRIF on January 1 of the year.
For nearly every RRIF holder in Canada, the value of their RRIF at the beginning of this calendar year was greater than it is now. Having to make their required withdrawal based on the January 1 balance would mean, in many cases, having to sell investments at loss. In addition, making the usual required withdrawal from a smaller RRIF balance would negatively impact the amount left needed to generate investment gains (and needed retirement income) in future years.
Recognizing the present and future financial cost this poses to retirees, the federal government announced, on March 18, a one-time change in the usual RRIF withdrawal rules for 2020. Basically, that change will allow RRIF holders who had not yet made their full required RRIF withdrawal for 2020 to reduce the amount of that required withdrawal by 25%. The change applies to all types of RRIFs, including Life Income Funds and other locked-in RRIFs.
Take, for example, a retiree whose RRIF has a balance of $500,000 and who would usually be required to withdraw 2% of that balance. Under normal rules that required withdrawal would be $10,000 (2% of $500,000). Following the change announced by the federal government that required withdrawal can be reduced by 25%, meaning that the minimum withdrawal for 2020 is now $7,500 ($10,000 minus 25%).
While the basic rule is straightforward, there are a few aspects of the change which require a more detailed explanation.
Many retired Canadians choose to receive required withdrawals from their RRIFs as monthly payments. Where that is the case, the taxpayer can simply opt to reduce monthly payments for the rest of 2020 to arrive at the 25% reduction, as outlined in the following example provided on the Canada Revenue Agency (CRA) website.
“The 25% reduction applies to the entire minimum amount for 2020. For instance, let’s say an individual’s 2020 RRIF minimum amount before the reduction is $12,000. If the individual received minimum amount payments on a monthly basis, they would receive $1,000 per month. Because of the economic measure, their 2020 minimum amount is reduced by 25% to $9,000 ($12,000 × 75% = $9,000). If the individual had already received $1,000 from January to April for a total of $4,000, they would only need to receive a total of $5,000 for the rest of the year to reach their new minimum amount. This means their monthly RRIF payments are reduced to $625 for the remaining 8 months (8 × $625 = $5,000).”
Variable benefits are payments made to plan members from a defined contribution pension plan or a pooled registered pension plan, in a manner similar to a RRIF. The announced change also applies to the minimum amount for individuals receiving variable benefit payments under such plans (i.e., both types of payments are also reduced by 25% for 2020 only).
More information on the federal government announcement, in the form of an FAQ document, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/registered-retirement-savings-plans-registered-retirement-income-funds-rrsps-rrifs/economic-statement-measure-annuitants-rrsp-rrif.html.
There have been so many announcements over the past couple of months with respect to temporary changes to individual and business tax obligations that keeping up with all of the new rules and altered deadlines isn’t easy. The good news is that, in all cases, individual taxpayers (both employees and the self-employed) are being provided with extended time to pay any income tax amounts for both 2019 and 2020. And, in most cases, taxpayers also have more time to file returns for the 2019 tax year.
There have been so many announcements over the past couple of months with respect to temporary changes to individual and business tax obligations that keeping up with all of the new rules and altered deadlines isn’t easy. The good news is that, in all cases, individual taxpayers (both employees and the self-employed) are being provided with extended time to pay any income tax amounts for both 2019 and 2020. And, in most cases, taxpayers also have more time to file returns for the 2019 tax year.
In an ordinary year, for most taxpayers (except the self-employed and their spouses) the filing and payment deadline is the same day — April 30. This year, both the filing and payment deadlines have been extended, but to different dates, as follows.
As all of these changes were announced part way through tax filing season, some confusion was perhaps inevitable. The CRA website indicates that some taxpayers may have received a Notice of Assessment indicating that payment of a tax balance was due on or before April 30, 2020. That is incorrect, as all individual income tax balances owed for the 2019 tax year are not due until September 1, 2020.
Although the filing deadline has been extended, it’s still a good idea to file as soon as possible. Eligibility for certain means-tested government benefits, like the Goods and Services Tax Credit or the Canada Child Benefit, is determined in part by the amount of income reported on the annual return. The upcoming benefit year for all such benefits runs from July 1, 2020 to June 30, 2021, and both eligibility for and the amount of benefit received will be determined, in part, by the amount of income reported on the income tax return for 2019. Where that return has not yet been filed by the taxpayer and processed by the CRA, no determination of benefit entitlement can be made and so any payment of benefits which would start in July 2020 will be delayed.
Millions of individual Canadians also pay income tax for the current (2020) taxation year through quarterly instalments paid throughout the year. Those instalments are usually paid on the 15th day of March, June, September, and December. This year the usual June payment deadline has been extended, and any instalment payment of tax which was normally due on that date can be paid anytime up to September 1, 2020. There has been no change announced with respect to the September 15 instalment payment deadline.
Incorporated businesses will also benefit from extended filing and payment deadlines. Where a corporation’s income tax return for 2019 was due after March 18, 2020 and before June 1, 2020, that deadline is extended to June 1, 2020. Payment deadlines for corporations were also extended, such that any income tax balances owed or instalment payments of income tax required after March 18 and before September 1, 2020 do not have to be paid until September 1, 2020.
More information on the extended payment and filing deadlines for this year can be found on the CRA website at https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/covid-19-filing-payment-dates.html.
The Canada Revenue Agency regularly carries out review activities in which taxpayers are asked to provide documentation or other information with respect to their entitlement to claimed benefits or credits.
The Canada Revenue Agency regularly carries out review activities in which taxpayers are asked to provide documentation or other information with respect to their entitlement to claimed benefits or credits.
The CRA has indicated that taxpayers who have received a letter that includes a date to respond or asks for documents do not need to respond at this time. Verification work is currently on hold and the CRA will re-contact taxpayers at a future date.
The Agency has also announced that it will generally not contact small or medium (SME) businesses to initiate any post assessment GST/HST or income tax audits during the month of April.
Finally, collection activities on new tax debts are suspended until further notice.
The federal government will be providing eligible employers who have experienced a significant decline in revenues with a wage subsidy. For purposes of the subsidy, eligible employers include individuals, taxable corporations, and partnerships consisting of eligible employers, as well as non‑profit organizations and registered charities.
The federal government will be providing eligible employers who have experienced a significant decline in revenues with a wage subsidy. For purposes of the subsidy, eligible employers include individuals, taxable corporations, and partnerships consisting of eligible employers, as well as non‑profit organizations and registered charities.
The subsidy amount for a given employee on eligible remuneration paid between March 15 and June 6, 2020 would be the greater of:
Details of the wage subsidy program, and how it will be administered, are still being developed and the most up-to-date information can be found on the Finance Canada website at https://www.canada.ca/en/department-finance/news/2020/04/the-canada-emergency-wage-subsidy.html.
Businesses which are required to make GST/HST payments or remittances which become owing on or after March 27, 2020 and before June 2020 can defer payment of those amounts.
The deferral will apply to GST/HST remittances for the February, March and April 2020 reporting periods for monthly filers; the January 1, 2020 through March 31, 2020 reporting period for quarterly filers; and for annual filers, the amounts collected and owing for their previous fiscal year and instalments of GST/HST in respect of the filer’s current fiscal year.
Where such remittances are made on or before June 30, 2020, no interest or penalties will be imposed by the Canada Revenue Agency, regardless of the original due date.
Corporations which have a tax filing due date after March 18, 2020 and before June 1, 2020 will have until June 1, 2020 to effect that filing.
In addition, where any income tax balance or instalment payment of income tax is payable after March 18 and before September 1, 2020, the deadline for making such payment is now September 1, 2020.
Individual Canadians are generally required to file their tax returns for the 2019 tax year on or before April 30, 2020. Self-employed Canadians (and their spouses) have until June 15, 2020 to file such returns. All individual Canadians, regardless of their filing deadline, must usually pay all taxes owed for 2019 by April 30, 2020.
Individual Canadians are generally required to file their tax returns for the 2019 tax year on or before April 30, 2020. Self-employed Canadians (and their spouses) have until June 15, 2020 to file such returns. All individual Canadians, regardless of their filing deadline, must usually pay all taxes owed for 2019 by April 30, 2020.
However, the filing deadline for individuals who would normally have to file by April 30 has been extended to June 1, 2020. The filing deadline for self-employed individuals and their spouses remains June 15, 2020.
The new payment deadline for all individual income tax owed for the 2019 tax year has been extended and is now September 1, 2020. No interest or penalty will be assessed where payment is made on or before September 1.
While individual taxpayers now have until June 1 to file, those who receive Canada Child Benefit or the Goods and Services Tax/Harmonized Sales Tax credit (or similar credits provided by their province of residence) should consider filing as soon as possible. The benefit year for those programs starts on July 1, 2020 and both eligibility for, and the amount of any benefit payable is based on information provided in the 2019 tax return. A delay in the filing of the 2019 return could mean a delay in receiving benefits starting in July 2020. As well, regardless of when they file, taxpayers will have until September 1 to pay any tax balance owed for 2019.
Many Canadians pay their current year (i.e. 2020) income taxes quarterly, through the income tax instalment system. Such instalment payments of tax are normally made on March 15, June 15, September 15 and December 15.
The federal government has indicated that taxpayers who would normally make an instalment payment of tax on June 15 will instead have until September 1, 2020 to make that payment. No interest or penalties will be assessed where the payment is made on or before September 1.
The federal government will be providing a one-time increase to the GST/HST tax credit, which is usually paid to qualifying individuals in January, April, July and October of each year.
Those individual Canadians who are eligible for the GST/HST credit will receive a special one-time payment in early May 2020. While precise figures have not been provided, the federal government announcement indicates that the payment will be “close to” $400 per individual and $600 for couples.
Eligible Canadian families receive a monthly non-taxable payment of the Canada Child Benefit, with the amount of that payment based on family size and income.
The federal government has announced that, for the 2019-20 benefit year only, the amount of the Canada Child Benefit will be increased by $300 per child. There is no need to make any application, as the increased payment will be added automatically to the regular May 2020 payment, which is scheduled to take place on May 20, 2020.
Canadian taxpayers are required to collapse their registered retirement savings plans (RRSPs) by the end of the year in which they turn 71. Most Canadians convert their RRSPs into registered retirement income funds (RRIFs) and they are then required to make annual withdrawals from those RRIFs.
The amount of such annual withdrawal is, by law, a specified percentage (based on the taxpayer’s age) of the balance in the RRIF as of January 1 of the year. There has been a significant decline in the markets since the beginning of this year and, consequently, many RRIF holders will have seen a corresponding decline in the value of their investments.
So that RRIF holders are not penalized by those events (by having to liquidate investments at a loss in order to make a required withdrawal) the federal government has reduced the amount of required withdrawals, for the 2020 taxation year only. Specifically, the minimum withdrawal requirement for RRIFs for 2020 has been reduced by 25%.
It’s important to note, however, that individuals who have already withdrawn more than the reduced 2020 minimum amount will not be permitted to re-contribute to their RRIFs an amount up to the 25% proposed reduction.
Finally, the changes announced also apply to the minimum amount for individuals receiving variable benefit payments under a defined contribution registered pension plan or pooled registered pension plan. Such amounts will also be reduced by 25%, for 2020 only.
As of March 30, required repayments of Canada Student Loans will be suspended for a period of 6 months, and no additional interest will accrue on unpaid amounts during that time. There is no requirement that an application be made, as the moratorium on payments during that period will be implemented automatically.
Canadians who have no source of income as a consequence of the pandemic may receive $2,000 per month, for a four month period, with that amount provided under under the Canada Emergency Response Benefit (CERB). The CERB is available to a broader group of Canadians than would normally be eligible for income replacement under the Employment Insurance system. Specifically, the CERB applies, in addition to wage earners, to contract workers and self-employed individuals who would not normally qualify for EI.
CERB will be available for Canadians who have lost their job, are sick, quarantined, or taking care of someone who is sick with COVID-19, as well as working parents who must stay home without pay to care for children who are sick or at home because of school and daycare closures. In addition, those who are still employed but are not currently receiving any income from their employer – i.e. are laid off – can qualify.
The specific requirements for an individual to receive CERB, as set out on the federal government website, are as follows:
The federal government has indicated that applications for the CERB can be made online at https://www.canada.ca/en/services/benefits/ei/cerb-application.html as of April 6. As thousands of applications are expected, applicants are asked to apply in the following order:
Payments will be made within 3-4 days by direct deposit and within10 days if sent by mail.
Detailed information on the CERB, including a list of FAQ, can be found on the federal government website at https://www.canada.ca/en/services/benefits/ei/cerb-application.html?utm_campaign=not-applicable&utm_medium=vanity-url&utm_source=canada-ca_coronavirus-cerb.
The current pandemic has changed the lives of Canadians in innumerable ways, and the tax system has not been exempt from those changes. In fact, since we are currently in what would in normal circumstances be the peak of the filing, payment and return processing season, the usual tax-related obligations which apply to both individuals and businesses have been altered or extended in a number of ways to accommodate current realities.
The current pandemic has changed the lives of Canadians in innumerable ways, and the tax system has not been exempt from those changes. In fact, since we are currently in what would in normal circumstances be the peak of the filing, payment and return processing season, the usual tax-related obligations which apply to both individuals and businesses have been altered or extended in a number of ways to accommodate current realities.
In addition to providing extensions of time with respect to filing and payment obligations, the federal government has increased a number of benefits which are delivered, at least in part, through the tax system. As well, new benefits intended to mitigate the economic impact of the pandemic have been created.
This issue of the Newsletter summarizes the changes and new programs which affect both individuals and businesses in Canada. As is the case with most things right now, each of these is subject to change as the federal government determines what is needed as the situation evolves. The information below is current to April 1, 2020 and more information on these changes and any future ones can be found on the government of Canada website at https://www.canada.ca/en/department-finance/economic-response-plan.html.
Most taxpayers sit down to do their annual tax return, or wait to hear from their tax return preparer, with some degree of trepidation. In most cases taxpayers don’t know, until their return is completed, what the “bottom line” will be, and it’s usually a case of fearing the worst while hoping for the best.
Most taxpayers sit down to do their annual tax return, or wait to hear from their tax return preparer, with some degree of trepidation. In most cases taxpayers don’t know, until their return is completed, what the “bottom line” will be, and it’s usually a case of fearing the worst while hoping for the best.
Most taxpayers are, of course, hoping for a refund – the bigger the better. A lot would be happy to find that at least nothing is owed to the Canada Revenue Agency (CRA), or that an amount owing is not significant.
The worst-case scenario, for all taxpayers, is to find out that they are faced with a large tax bill and an imminent payment deadline, and that they just don’t have the money to make the required payment by that deadline. For those who don’t have the means to pay a tax bill out of existing resources, that likely means borrowing the needed funds. And, while that will mean paying interest on the borrowing, the interest cost incurred will likely be less than that which would be levied by the CRA on the unpaid tax bill.
If a tax bill can’t be paid in full out of either current resources or available credit, the CRA is open to making a payment arrangement with the taxpayer. While, like most creditors, the CRA would rather get paid on time and in full, its ultimate goal is to collect the full amount of taxes owed. Consequently, the CRA provides taxpayers who simply can’t pay their bill for the year on time and in full with the option of paying an amount owed over time, through a payment arrangement.
There are two avenues available to taxpayers who want to propose such a payment arrangement. The first is a call to the CRA’s automated TeleArrangement service at 1-866-256-1147. When making such a call, it is necessary for the taxpayer to provide his or her social insurance number, date of birth and the amount entered on line 150 of the last tax return for which the taxpayer received a Notice of Assessment. (For taxpayers who are up to date on their tax filings, that will be the Notice of Assessment for the return for the 2018 tax year). The TeleArrangement Service is available Monday to Friday, from 7 a.m. to 10 p.m., Eastern time.
Taxpayers who would rather speak directly to a CRA employee can call the CRA’s debt management call centre at 1-888-863-8657 or can complete an online form (available at https://apps.cra-arc.gc.ca/ebci/iesl/showClickToTalkForm.action) requesting a callback from a CRA agent.
The CRA also provides on online tool, in the form of a Payment arrangement calculator (available at https://apps.cra-arc.gc.ca/ebci/recc/pac/prot/lngg?request_locale=en_CA), which allows the taxpayer to calculate different payment proposals, depending on his or her circumstances). That calculator includes interest charges since, no matter what payment arrangement is made, the CRA will levy interest charges on any amount of tax owed for the 2019 tax year which is not paid on or before April 30, 2020. Interest charges levied by the CRA tend to add up quickly, for two reasons. First, the interest charged by the CRA on outstanding tax amounts is, by law, higher than current commercial rates. The rate charged is currently 6%. Second, interest charges levied by the CRA are compounded daily, meaning that each day interest is levied on the previous day’s interest charges. It is for these reasons that a taxpayer is, where at all possible, likely better off arranging private borrowing in order to pay any taxes owing by the April 30 deadline.
Finally, there is one strategy which is, in all circumstances, a bad one. Taxpayers who can’t pay their tax bill by the deadline sometimes conclude that there is no point in filing if payment can’t be made. Those taxpayers are wrong. Where an amount of tax is owed and the return isn’t filed on time, there is an immediate tax penalty imposed of 5% of the outstanding tax amount – and interest charges start accruing on that penalty amount (as well as on the outstanding tax balance) immediately. For each month that the return isn’t filed, a further penalty of 1% of the outstanding tax amount is charged, to a maximum of 12 months. Higher penalty amounts are charged, for a longer period, where the taxpayer has incurred a late-filing penalty within the past three years. In a worst-case scenario, the total penalty charges can be 50% of the tax amount owed – and that doesn’t count the compound interest which is levied on all penalty amounts, as well as on all unpaid taxes. In all cases, no matter what the circumstances, the right answer is to file one’s tax return on time. This year, for most taxpayers, that means filing on or before Thursday April 30, 2020. For self-employed taxpayers (and their spouses) the filing deadline is Monday June 15, 2020. However, for all taxpayers the payment deadline for all 2019 income tax owed is Thursday April 30, 2020.
The Canadian tax system provides individual taxpayers with a tax credit for out-of-pocket medical and para-medical expenses incurred during the year. Given that such expenses must be incurred at some time by virtually every Canadian, that credit is among the most frequently claimed on the annual return. Unfortunately, however, the rules governing such claims are detailed, somewhat complex and frequently confusing.
The Canadian tax system provides individual taxpayers with a tax credit for out-of-pocket medical and para-medical expenses incurred during the year. Given that such expenses must be incurred at some time by virtually every Canadian, that credit is among the most frequently claimed on the annual return. Unfortunately, however, the rules governing such claims are detailed, somewhat complex and frequently confusing.
Taxpayers who wish to make a claim for the cost of medical expenses must make the following determinations. Which, if any, of the medical expenses incurred qualify for the medical expense tax credit? For what time period should the claim be made? What documentation, if any, is required to support the claim(s) being made? And, finally, which family member should make the claim?
Even the basic “formula” with respect to the amount of medical expenses which may be claimed is not straightforward. That basic rule is that a taxpayer can make a claim for qualifying medical expenses incurred in any 12-month period which ends during the taxation year, to the extent that the amount of such expenses exceeds 3% of net income or $2,352, whichever is less. Each component of that formula clearly requires some explanation.
While Canada has a publicly funded medical care system, there is nonetheless a large (and growing) number of medical and para-medical expenses which must be paid for by the individual on an out-of-pocket basis. The more common of these expenses include the costs of prescription drugs, dental care, physiotherapy, medical equipment, and ambulance transport.
However, it is not the case that all such expenses can be claimed for tax purposes, or can be claimed in all circumstances. Where an expense does qualify, additional requirements may be imposed before a claim for such expense can be made. Finally, the question of whether an expense is claimable for tax purposes, and the requirements which must be met, aren’t necessarily intuitive.
To assist taxpayers in that regard, the Canada Revenue Agency (CRA) publishes a very lengthy list of medical expenses which do qualify, together with information on any additional requirements (such as a doctor’s prescription) which must be met in order to make such claim. That listing can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/lines-33099-33199-eligible-medical-expenses-you-claim-on-your-tax-return.html.
While it might seem logical that only medical expenses incurred during 2019 could be claimed on the return for that year, the rules are actually more flexible that that. Specifically, those rules allow a claim to be made on the return for 2019 for qualifying medical expenses which are incurred in any 12-.month period which ends during 2019.
Taking advantage of that rule requires the taxpayer to identify the 12 month period ending sometime in 2019 during which the greatest amount of qualifying medical expense were incurred.
It’s sometimes the case that it makes better sense, from a tax perspective, to not make a claim in the first year that that claim is available. Take, for instance a taxpayer who must incur significant costs for dental care, with such costs being incurred between October 2019 and March 2020. In order to maximize the claim to be made, it could make sense not to make a claim for the expenses incurred in the fall of 2019 on the 2019 return, but instead to wait and make a claim on the return for 2020 for all costs incurred between October 2019 and March 2020.
There is, unfortunately, no formula or rule of thumb which can be used to determine the optimal 12-month period for a medical expense claim in all circumstances. Rather, the taxpayer must determine, on a case-by-case basis, the optimal time period in their particular circumstances. Tax return preparation software can be helpful in this regard, by running what-if scenarios to determine the optimal tax result.
It’s obvious that the number and kind of different medical expenses which might be incurred by individuals over the course of the year is virtually limitless. In all cases, the taxpayer must be prepared to support and document the nature and cost of each such expense, as well as the date on which it was incurred. For some expenses, taxpayers must meet additional requirements – most often the need for a doctor’s prescription. As well, in some cases, particular medical expenses can be claimed only by taxpayers who are also eligible for the disability tax credit. A very lengthy list of the expenses which qualify for the medical expense tax credit, and the documentation and other requirements which apply for each, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/lines-33099-33199-eligible-medical-expenses-you-claim-on-your-tax-return.html.
Medical expenses incurred by either spouse or any of their minor children can be combined and claimed on a single return. In some circumstances, medical expenses paid by the taxpayer for other relatives may also combined and included in the taxpayer’s claim.
Since only the amount of medical expenses which exceeds 3% of net income or $2,352 (whichever is less) can be claimed, it usually makes the most sense to combine family medical expenses and for a single claim for those combined expenses to be made by the lower income spouse, as long as that spouse has tax payable equal to at least the amount of the credit to be claimed.
It is readily apparent that determining, calculating, and claiming the medical expense tax credit for a particular tax year isn’t an easy or straightforward process. The CRA does publish a separate guide to the rules which govern such claims, and that Guide — RC 4065, Medical Expenses — can be found on the CRA website at https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4065/rc4065-19e.pdf.
Between now and June 15, more than 26 million income tax returns for the 2019 tax year will be filed by individual Canadian taxpayers. The vast majority of those returns will be filed by electronic means, through the website of the Canada Revenue Agency (CRA). A minority will be filed in hard copy, using the paper return, and an even smaller number will be filed using a touch-tone telephone.
Between now and June 15, more than 26 million income tax returns for the 2019 tax year will be filed by individual Canadian taxpayers. The vast majority of those returns will be filed by electronic means, through the website of the Canada Revenue Agency (CRA). A minority will be filed in hard copy, using the paper return, and an even smaller number will be filed using a touch-tone telephone.
While Canadians have a choice of method when it comes to filing their annual return, the deadline by which those returns must be submitted to the CRA isn’t a matter of choice. For the vast majority of Canadian taxpayers, the income tax return for 2019 must be filed with the CRA on or before Thursday April 30, 2020. Self-employed taxpayers (and their spouses) have a little more time, as their returns must be filed with the CRA on or before Monday June 15, 2020,
Another deadline for which there is no leeway is the date by which all taxes payable for 2019 must be paid. That date, for all taxpayers (self-employed and otherwise) is Thursday April 30, 2020. Where payment isn’t made in full on or before that date, interest charges are levied beginning on May 1.
This year, there are five possible methods by which individual taxpayers can file a return for 2019 – EFILE, NETFILE, TELEFILE, paper filing or File My Return (telephone filing). While the filing and payment deadlines are the same, regardless of the filing method used, there are rules and requirements which apply to each such method, as follows.
Based on filing statistics compiled by the CRA, E-FILE is the filing method most often utilized by Canadian taxpayers as, in 2019, just under 60% of individual income tax returns were filed using E-FILE.
There are likely a couple of reasons for that – returns filed by electronic means, through the CRA website, are processed more quickly than returns which are paper filed – a particular benefit to the taxpayer who is expecting a tax refund. As well, where a taxpayer chooses E-FILE, a third party – usually an accountant or tax return preparer – files the return on the taxpayer’s behalf. And, almost always, the E-FILE service provider also prepares the return which they are filing. Consequently taxpayers who use E-FILE don’t have to either prepare or file their own return (although, like all taxpayers, they are responsible for the information provided and claims made on that return).
The majority of Canadians who would rather have someone else deal with the intricacies of the Canadian tax system on their behalf can find information about E-FILE for 2019 tax returns on the CRA website at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/fl-nd/menu-eng.html That site will also provide a listing (searchable by postal code) of authorized E-FILE service providers across Canada, and that listing can be found at https://apps.cra-arc.gc.ca/ebci/efes/epcs/prot/ntr.action.
Taxpayers who want to enjoy the benefits of filing their tax return electronically but who are willing and able to prepare the return on their own can do so using NETFILE. There are a substantial number of Canadian taxpayers who fit that description - In 2019, just over 9 million individual income tax returns, representing 30% of such returns filed, were submitted using NETFILE.
Most returns filed by individual residents of Canada will be eligible for NETFILE, although there are some exceptions – for instance, a return for someone who declared bankruptcy in 2018 or 2019 cannot be filed using NETFILE. Information on the NETFILE service for 2019 tax returns, including eligibility requirements, can be found on the CRA website at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/netfile-impotnet/menu-eng.html.
A return can be filed using NETFILE only where it is prepared using tax return preparation software which has been approved by the CRA. While such software can be found for sale just about everywhere at this time of year, approved software which can be used free of charge is also available. A listing of free and commercial software approved for use in preparing individual tax returns for 2019 can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/netfile-overview/certified-software-netfile-program.html.
A much smaller (although still substantial) number of returns were filed in 2019 by taxpayers completing and submitting the tax return form on paper. Specifically, 3.6 million returns, representing 12% of all individual income tax returns, were paper filed.
The CRA website indicates that individuals who paper-filed their 2018 tax return will be sent a copy of the 2019 Income Tax Return and Guide package by mail. Those who do not receive such a package by mail but want to obtain hard copy of the 2019 Income Tax Return and Guide package have a few options.
First, copies of the 2019 tax return and guide package can be ordered online, at https://apps.cra-arc.gc.ca/ebci/cjcf/fpos-scfp/pub/rdr?searchKey=ncp%20, to be sent to the taxpayer by regular mail. Taxpayers can also download and print hard copy of the return and guide from the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package.html. Finally, the CRA has made a “limited” number of tax packages available at Service Canada offices and post offices across the country.
In 2019, the CRA reinstated, for some taxpayers, a tax return filing option that was previously discontinued. For several years, taxpayers with simple returns had the option of filing their returns using a touch-tone telephone. That option, now called File my Return service will be available again this year to eligible Canadians with low or fixed incomes whose situations remain unchanged from year to year, even if they have no income to report, so that they receive the benefits and credits to which they are entitled. That option is, however, available only to taxpayers who are advised by the CRA of their eligibility for the File my Return service, and those individuals will have been notified by letter during the month of February 2020.
Finally, taxpayers who are not comfortable preparing their own returns, but for whom the cost of engaging a third party to do so is a financial hardship, have another option. During tax filing season, there are a number of Community Volunteer Tax Preparation Clinics where taxpayers can have their returns prepared free of charge by volunteers. A listing of such clinics (which is regularly updated during tax filing season) can be found on the CRA website at https://www.canada.ca/en/revenue-agency/campaigns/free-tax-help.html.
The one constant in income tax is change and consequently, while Canadian taxpayers must prepare and file the same form – the T1 Income Tax and Benefit Return – every spring, that return form is never the same from one year to the next.
The one constant in income tax is change and consequently, while Canadian taxpayers must prepare and file the same form – the T1 Income Tax and Benefit Return – every spring, that return form is never the same from one year to the next.
Some of the changes are the “automatic” result of the indexing of income tax brackets and credit amounts. As the result of such indexing, basic personal credits which can be claimed by most taxpayers increase every year, as do the income brackets which determine the tax rate which applies at each level of income, as both are changed to reflect the rate of inflation.
Changes in tax credit amounts or tax bracket figures are largely invisible to the average taxpayer, as they don’t require any change to the layout or organization of the tax return form, or the process of completing it. The more significant changes are those which provide new credits or deductions to qualifying taxpayers or, conversely, eliminate such credits or deductions which taxpayers might have claimed in previous years. What follows is a listing of some of the changes which will affect a significant number of taxpayers with respect to their 2019 tax situation.
Changes to the Canada Pension Plan and Quebec Pension Plan which were implemented in 2019 meant that working Canadians contributed more to such plans in 2019 than in previous years. The silver lining to such increased contribution amounts is that the non-refundable tax credit which is claimed on the annual return for such contributions will also increase, resulting in a lower overall tax bill for the year.
As of January 1, 2019, eligible taxpayers are able to save $250 per year (to a lifetime maximum of $5,000), with such amount used to calculate the new Canada Training Credit. Savings information provided on the return will be used by the Canada Revenue Agency (CRA) to determine an individual’s Canada Training Credit Limit.
In 2020 and future years, the taxpayer may then be able to claim a Canada Training Credit equal to the lesser of his or her Canada Training Credit Limit for the year, or 50% of eligible tuition and fees paid by the taxpayer to an educational institution in Canada.
For several years, the federal government has provided a refundable tax credit – the Working Income Tax Benefit - for lower income working taxpayers. For 2019, that Benefit is replaced by the new Canada Workers Benefit (CWB). The new CWB is claimed on Schedule 6 to the annual return.
The maximum amount which an individual can withdraw from his or her registered retirement savings plan (RRSP) under the Home Buyers’ Plan (HBP) increased from $25,000 to $35,000 for withdrawals made after March 19, 2019. The HBP permits qualifying home buyers to withdraw funds from their RRSP on a tax-free basis, with such funds being re-contributed to the RRSP over several subsequent years, on a prescribed schedule.
For expenses incurred after October 16, 2018, certain cannabis products purchased for a patient for medical purposes will be considered eligible medical expenses for the medical expense tax credit.
Taxpayers who are self-employed or who claim employment expenses may be able to claim capital cost allowance on zero-emission vehicles. As of 2019, there is a temporary enhanced first-year capital cost allowance of 100% for eligible zero-emission vehicles. In order to qualify for the enhanced capital cost allowance, eligible vehicles must be acquired after March 18, 2019, and become available for use before 2024.
The changes to the income tax return which will be most apparent to taxpayers aren’t any of the substantive tax changes outlined above. Rather, it’s the layout and organization of the form which will look unfamiliar. In previous years, the return package has been comprised of the basic 4-page T1 form, together with numerous supporting Schedules, on which tax payable for the year, or various tax credit or deduction amounts were calculated, with that information then transferred to the T1 form. This year, the CRA has eliminated some of those Schedules by incorporating them into the T1. The result is that the T1 General Form is now 8 pages long.
In part as a consequence of that re-organization of the T1 form, the CRA has found it necessary to change the line numbering on the return. Each line of the return has a corresponding number by which it is identified in the Income Tax Guide. In previous versions of the T1 Form, those identifying numbers were three digit numbers, but they have now been increased to five digits. Fortunately for taxpayers trying to make their way through the new return form, in most cases the numbering change has simply meant adding two zeros to the end of the existing number – for instance line 210 on the 2018 return has become line 21000 on the 2019 form.
Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.
Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.
They can be accessed below.
Corporate:
Personal:
Sometime during the month of February, millions of Canadians will receive mail from the Canada Revenue Agency. That mail, a “Tax Instalment Reminder”, will set out the amount of instalment payments of income tax to be paid by the recipient taxpayer by March 16 and June 15 of this year.
Sometime during the month of February, millions of Canadians will receive mail from the Canada Revenue Agency. That mail, a “Tax Instalment Reminder”, will set out the amount of instalment payments of income tax to be paid by the recipient taxpayer by March 16 and June 15 of this year.
Receiving an “Instalment Reminder” from the CRA won’t be a surprise for many recipients who have paid tax by instalments during previous tax years. For others, however, the need to make tax payments by instalment is a new and unfamiliar concept. That’s because for most Canadians – certainly most Canadians who earn their income through employment – the payment of income tax throughout the year is an automatic and largely invisible process, requiring no particular action on the part of the employee/taxpayer. Federal and provincial income taxes, along with Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, are deducted from each employee’s income and the amount deposited to an employee’s bank account is the net amount remaining after such taxes, contributions and premiums are deducted and remitted on the employee’s behalf to the Canada Revenue Agency. While no one likes having to pay taxes, having those taxes paid “off the top” in such an automatic way is, relatively speaking, painless. Such is not, however, the case for the sizeable minority of Canadians who pay their income taxes by way of tax instalments
The CRA’s decision to send an Instalment Reminder to certain taxpayers isn’t an arbitrary one. Rather, an Instalment Reminder is generated when sufficient income tax has not been deducted from payments made to that taxpayer throughout the year. Put more technically, an instalment reminder will be issued by the CRA where the amount of tax which was or will be owed when filing the annual tax return is more than $3,000 in the current (2020) tax year and either of the two previous (2018 or 2019) tax years. Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income throughout the year is at least $3,000 less than their total tax owed for 2020 and either 2018 or 2019. For residents of Quebec, that threshold amount is $1,800.
Such obligation arises on a regular basis for those who are self-employed, or course, and generally for those whose income is largely derived from investments. The group of recipients of a tax instalment reminder often also includes retired Canadians, especially the newly retired, for two reasons. First, while most employees have income from only a single source – their paycheque – retirees often have multiple sources of income, including Canada Pension Plan (CPP) and Old Age Security (OAS) payments, private retirement savings and, sometimes, employer-provided pensions. And, while income tax is deducted automatically from one’s paycheque, that’s not the case for most sources of retirement income. Relatively few new retirees realize that it’s necessary to make arrangements to have tax deducted “at source” from either their government source income (like CPP or OAS payments) or private retirement income like pensions or registered retirement income fund withdrawals, and to make sure that the total amount of those deductions is sufficient to pay the total tax bill for the year. It is that group of individuals, who may be surprised and puzzled by the arrival of an unfamiliar “Instalment Reminder” from the CRA. However, no matter what kind of income a taxpayer has received, or why sufficient tax has not been deducted at source, the options open to a taxpayer who receives such an Instalment Reminder are the same.
First, the taxpayer can pay the amounts specified on the Reminder, by the March and June payment due dates. Choosing this option will mean that the taxpayer will not face any interest or penalty charges, even if the amount paid by instalments throughout the year turns out to be less than the taxes actually payable for 2020. If the total of instalment payments made during 2020 turn out to more than the taxpayer’s total tax liability for the year, he or she will of course receive a refund when the annual tax return is filed in the spring of 2021.
Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2019 tax year. Where a taxpayer’s income has not changed significantly between 2019 and 2020 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2020 will be slightly less than it was in 2019, as the result of the indexation of both income tax brackets and tax credit amounts.
Third, the taxpayer can estimate the amount of tax which he or she will owe for 2020 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease significantly from 2019 to 2020, such that his or her tax bill will also be substantially reduced, this option can make the most sense.
A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges if there is no tax payable when the return for the 2020 tax year is filed in the spring of 2021. However, should instalments paid have been late or insufficient, the CRA will impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2020 – until March 31, 2020 – is 6%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It’s also possible for the CRA to levy penalties for overdue or insufficient instalments, but that is done only where the amount of instalment interest charged for the year is more than $1,000.
Most Canadian taxpayers are understandably disinclined to pay their taxes any sooner than absolutely necessary. However, ignoring an Instalment Reminder is never in the taxpayer’s best interests. Those who don’t wish to involve themselves in the intricacies of tax calculations can simply pay the amounts specified in the Reminder. The more technical-minded (or those who want to ensure that they are paying no more than absolutely required, and are willing to take the risk of having to pay interest on any shortfall) can avail themselves of the second or third options outlined above.
To help taxpayers make a decision on how to respond to an Instalment Reminder, detailed information on the instalment payment system is available on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/making-payments-individuals/paying-your-income-tax-instalments.html.
Income tax is a big-ticket item for most retired Canadians. Especially for those who are no longer paying a mortgage, the annual tax bill may be the single biggest expenditure they are required to make each year. Fortunately, the Canadian tax system provides a number of tax deductions and credits available only to those over the age of 65 (like the age credit) or only to those receiving the kinds of income usually received by retirees (like the pension income credit), in order to help minimize that tax burden. And, in most cases, the availability of those credits is flagged, either on the income tax form which must be completed each spring or on the accompanying income tax guide.
Income tax is a big-ticket item for most retired Canadians. Especially for those who are no longer paying a mortgage, the annual tax bill may be the single biggest expenditure they are required to make each year. Fortunately, the Canadian tax system provides a number of tax deductions and credits available only to those over the age of 65 (like the age credit) or only to those receiving the kinds of income usually received by retirees (like the pension income credit), in order to help minimize that tax burden. And, in most cases, the availability of those credits is flagged, either on the income tax form which must be completed each spring or on the accompanying income tax guide.
There is, however, another income tax saving strategy which is not nearly as well known. Even more unfortunate is the fact that the benefits of that strategy (and the ease with which it can be accomplished) aren’t readily apparent from either the tax return form or the annual income tax guide. That tax saving strategy is pension income splitting and it’s likely the case that many taxpayers who could benefit aren’t familiar with the strategy, especially if they are not receiving professional tax planning or tax return preparation advice.
That’s a particularly unfortunate reality because pension income splitting has the potential to generate more tax savings among taxpayers over the age of 65 (and certainly those over the age of 71, for whom RRSP contributions are no longer possible) than just about any other tax planning strategy available to retirees. In addition, it’s one of the very few tax planning strategies which requires no expenditure of funds on the part of the taxpayer and which can be implemented after the end of the tax year, at the time the return for that tax year is filed.
When described in those terms, pension income splitting can sound like one of those “too good to be true” tax scams, but that’s not the case. Essentially, what pension income splitting offers is a government-sanctioned opportunity for Canadian residents who are married (and, usually, where recipient spouse is aged 65 or older) to make a notional reallocation of private pension income between them on their annual tax returns, and to benefit from a lower overall family tax bill as a result.
Pension income splitting, like all forms of income splitting, works because Canada has what is called a “progressive” tax system, in which the applicable tax rate goes up as income rises. For 2019, the federal tax rate applied to about the first $48,000 of taxable income is 15%, while the federal rate applied to approximately the next $48,000 of such income is 20.5%. So, an individual who has $95,000 in taxable income would pay federal tax of about $16,835: if that $95,000 was divided equally between such individual and his or her spouse, each would have $47,500 in taxable income and the total federal family tax bill would be $14,250.
The general rule with respect to pension income splitting is that a taxpayer who receives private pension income during the year is entitled to allocate up to half that income (without any dollar limit) to his or her spouse for tax purposes. In this context, private pension income means a pension received from a former employer and, where the income recipient is age 65 or older, payments from an annuity, a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF). Government source pensions, like the Canada Pension Plan or Old Age Security payments do not qualify for pension income splitting, regardless of the age of the recipient.
The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension administrator. Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032 Joint Election to Split Pension Income for 2019 with their annual tax return. That form, which is not included in the annual tax return package, can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1032.html or can be ordered by calling 1-800-959 8281.
On the T1032, the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for 2019. Since the splitting of pension income affects the income and therefore the tax liability of both spouses, the election must be made and the form filed by both spouses – an election filed by only one spouse or the other won’t suffice. In addition to filing the T1032, the spouse who is actual recipient of the pension income to be split must deduct from income the pension income amount allocated to his or her spouse. That deduction is taken on Line 21000 of his or her 2019 return. And, conversely, the spouse to whom the pension income amount is being allocated is required to add that amount to his or her income on the return, this time on Line 11600. Essentially, to benefit from pension income splitting, all that’s needed is for each spouse to file a single form with the CRA and to make a single entry on his or her 2019 tax return.
By the end of February or early March, taxpayers will have received (or downloaded) the information slips which summarize the income received from various sources during 2019. At that time, couples who might benefit from this strategy can review those information slips and calculate the extent to which they can make a dent in their overall tax bill for the year through a little judicious income splitting.
Those wishing to obtain more information on pension income splitting than is available in the 2019 General Income Tax and Benefit Guide should refer to the CRA website at http://www.cra-arc.gc.ca/pensionsplitting/, where more detailed information is available.
If there is one invariable “rule” of financial and retirement planning of which most Canadians are aware, it is the unquestioned wisdom of making regular contributions to a registered retirement savings plan (RRSP). And it is true that for several decades the RRSP was only tax-sheltered savings and investment vehicle available to most individual Canadians.
If there is one invariable “rule” of financial and retirement planning of which most Canadians are aware, it is the unquestioned wisdom of making regular contributions to a registered retirement savings plan (RRSP). And it is true that for several decades the RRSP was only tax-sheltered savings and investment vehicle available to most individual Canadians.
Eleven years ago, however, that reality changed with the introduction of Tax-Free Savings Accounts (TFSAs). Since then, taxpayers have had a choice of which savings and investment vehicle better meets their short term and long term financial objectives, and this is the time of year when most Canadians make that choice.
It should be said that there’s nothing wrong, and a lot right, with making the maximum allowable contribution to both one’s TFSA and one’s RRSP every year. However, doing both assumes the availability of a level of discretionary income that just isn’t the financial reality in which most Canadians live and plan. In addition, there are circumstances in which making a contribution to one type of plan or the other is clearly the better choice, and sometimes the only choice. Some of those circumstances are as follows.
At the other end of the age spectrum, younger Canadians whose savings goals are likely more short-term are usually better off saving through a TFSA.
The greatest tax benefit of contributing to an RRSP is realized when contributions are made when income (and therefore tax payable) is high, and the intention is to withdraw those funds when both income and the rate of tax payable on that income is lower. Where that’s not the case, saving through a TFSA can make more sense, as in the following situations.
There’s no denying that the Canadian tax system is complex, even for individuals with relatively straightforward tax and financial circumstances. As well, significant costs can follow if a taxpayer gets it wrong when filing the annual tax return. Sometimes those costs are measured in the amount of time needed to straighten out the consequences of mistakes made on the annual return; in a worst-case scenario, they can involve financial costs in the form of interest charges or even penalties levied for a failure to remit taxes payable on time or in the right amount. Whatever the reason, fewer and fewer individuals are willing to brave the annual trip through the 8 pages (as of 2019) of the federal tax return (plus a seemingly innumerable related federal schedules and provincial tax forms), and that means that the percentage of Canadians who have their return prepared by someone who has, presumably, more expertise, has continued to rise.
There’s no denying that the Canadian tax system is complex, even for individuals with relatively straightforward tax and financial circumstances. As well, significant costs can follow if a taxpayer gets it wrong when filing the annual tax return. Sometimes those costs are measured in the amount of time needed to straighten out the consequences of mistakes made on the annual return; in a worst-case scenario, they can involve financial costs in the form of interest charges or even penalties levied for a failure to remit taxes payable on time or in the right amount. Whatever the reason, fewer and fewer individuals are willing to brave the annual trip through the 8 pages (as of 2019) of the federal tax return (plus a seemingly innumerable related federal schedules and provincial tax forms), and that means that the percentage of Canadians who have their return prepared by someone who has, presumably, more expertise, has continued to rise.
Whether that someone else is a willing family member or friend, or a professional tax preparer and/or tax filing service, or an accountant, having someone else prepare the return means, in most cases, that the taxpayer will be dealing with the Canada Revenue Agency (CRA) through a representative and must provide authorization for that representative.
It sometimes comes as a surprise to taxpayers that the CRA will not – and, in fact, cannot – provide a taxpayer’s personal tax information to anyone other than that taxpayer, unless written authorization has been provided in advance, or the taxpayer him or herself is there to provide verbal authorization. While it may seem reasonable for a spouse who does the tax returns for the entire family or for an adult child completing a return for an elderly parent to be given access to information needed to complete that return, the restrictions on the release of such information are, in fact, very much in the best interests of the taxpayer. Most such requests for another individual’s personal tax information are genuine and well-intentioned, but that’s not, unfortunately, always the case.
The forum used to name and authorize a representative is the T1013 - Authorizing or Cancelling a Representative, and that form is available on the CRA website at http://www.cra-arc.gc.ca/E/pbg/tf/t1013/README.html).
The first decision which must be made by a taxpayer who is authorizing a representative is the level of authority he or she wants to grant to a representative and that, in turn, will depend on what he or she wants the representative to be able to do The T1013 form provides for two levels of authorization by a representative. Broadly speaking the first, Level 1 access provides the representative with the right to receive information while the higher Level 2 access enables the representative to make changes to the taxpayer’s account. Where a taxpayer does not specify a level of access when authorizing a representative, the CRA will automatically assign the lower Level 1 access to that representative. The specific rights granted to a representative at each level are as follows.
Where a representative has been provided by the taxpayer with Level 1 access, the CRA can disclose the following information to that representative:
A Level 1 representative is not allowed to request changes (adjustments and transfers) to the taxpayer’s account.
A representative who has been provided by the taxpayer with Level 2 access has all the powers of a Level 1 representative, as well as the right to ask for adjustments to the taxpayer’s income, deductions, non-refundable tax credits; and accounting transfers. A Level 2 representative is also able to submit a request for taxpayer relief, to file a notice of objection or an appeal on the taxpayer’s behalf and to request remittance vouchers on behalf of the taxpayer.
There are some actions which cannot be taken by either a Level 1 or a Level 2 representative. A representative authorized by the filing of a T1013, regardless of level of authorization, will not be allowed to change the taxpayer’s address, marital status, direct deposit information, or any pre-authorized debit agreement.
A taxpayer naming a representative through a T1013 must also decide whether he or she wants the representative to have online access to the taxpayer’s account, or to be able to deal with the CRA on his or her behalf only by telephone or in writing. Where the authorization provides only for the latter (no online access), the taxpayer can specify the tax years for which access is being authorized, and the level of authorization granted for each such year. Where online access is authorized, however, that access must be for all tax years, although the taxpayer can still specify the level (Level 1 or Level 2) of access to be allowed. It’s also important to note that where a taxpayer names a firm or business as the representative, he or she can also specify, by name, the individual within that firm or business to authorization is being granted. Finally, the taxpayer can also specify a date on which the authorization will expire, if he or she wishes to do so.
The CRA will be making changes to the procedures by which an individual taxpayer can authorize a representative, and current information provided on the CRA website indicates that, as of February 10, 2020, the following changes will be made.
The current T1013 form used to authorize or cancel a representative will be available until February 10, at which time it will be replaced by a new form – AUT-01, Authorize a Representative for Access by Phone and Mail.
Under the new system, there will be two different processes – one to allow a representative access by mail or phone and a second to provide a representative with online access. The new form to be used to authorize mail or phone access will be the AUT-01 Authorize a Representative for Access by Phone or Mail. Taxpayers who wish to provide a representative with online access must use an e-authorization process, which is not yet available on the CRA website. More information on the new processes can, however, be found at https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2020/changing-how-representatives-authorized.html.
It seems that T1013s already filed by taxpayers will continue to be in effect and that there will be no need for taxpayers who have filed the T1013 to file another or different form after February 10, 2020.
It is readily apparent that naming someone as your representative with the CRA, by whatever method, and even at the lowest level for a limited period of time, gives that person access to an enormous amount of personal tax and financial information. Taxpayers should be aware, when providing an authorization, exactly what they have agreed to and for what length of time. Where a taxpayer engages the services of a tax return preparation service, for instance, that service will frequently ask the taxpayer to sign an authorization enabling them to act as the taxpayer’s representative with the CRA. It’s a reasonable request, given that the tax return preparer may need to contact the CRA to obtain information – for example, from prior year returns – which is needed to prepare the tax return for the current year. Taxpayers who authorize a representative in such circumstances should, however, be careful to ensure that the authorization is limited, usually to the specific time during which the return will be prepared. Not infrequently, taxpayers have been asked to sign an authorization which does not specify any time frame and are surprised to find that such an authorization is still in effect, giving the representative the right to obtain information about that taxpayer, even years later, long after the taxpayer had finished his or her dealings with the tax return preparation service.
The need to designate a representative to deal on one’s behalf with the CRA is fairly commonplace. However, giving another person access to your personal tax information, even for a limited purpose or a limited time, is a significant step which should not be taken without some thought. Where it is determined that providing such access is necessary, careful consideration should be given to the level of access needed, the tax years for which access is required and, possibly most important, providing a date on which that authorization will expire.
The Employment Insurance premium rate for 2020 is decreased to 1.58%.
The Employment Insurance premium rate for 2020 is decreased to 1.58%.
Yearly maximum insurable earnings are set at $54,200, making the maximum employee premium $856.36.
As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2020 is therefore $1,198.90.
The Quebec Pension Plan contribution rate for employees and employers for 2020 is 5.7%, and maximum pensionable earnings are $58,700. The basic exemption is $3,500.
The Quebec Pension Plan contribution rate for employees and employers for 2020 is 5.7%, and maximum pensionable earnings are $58,700. The basic exemption is $3,500.
The maximum employee premium for the year is $3,146.40, and the maximum employer contribution is the same.
The Canada Pension Plan contribution rate for 2020 is increased to 5.25% of pensionable earnings for the year.
The Canada Pension Plan contribution rate for 2020 is increased to 5.25% of pensionable earnings for the year.
The maximum pensionable earnings for the year will be $58,700, and the basic exemption is unchanged at $3,500.
The maximum employer and employee contributions to the plan for 2020 will be $2,898.00 each, and the maximum self-employed contribution will be $5,796.
Dollar amounts on which individual non-refundable federal tax credits for 2020 are based, and the actual tax credit claimable, will be as follows:
Dollar amounts on which individual non-refundable federal tax credits for 2020 are based, and the actual tax credit claimable, will be as follows:
Credit amount Tax credit
Basic personal amount $12,298 $1844.70
Spouse or common law partner amount $12,298 $1844.70
Eligible dependant amount $12,298 $1844.70
Age amount $7,637 $1145.55
Net income threshold for erosion of credit $38,508
Canada employment amount $1,245 $186.75
Disability amount $8,576 $1286.40
Adoption expenses credit $16,563 $2,484.45
Medical expense tax credit threshold amount $2,397
The indexing factor for federal tax credits and brackets for 2019 is 1.9%. The following federal tax rates and brackets will be in effect for individuals for the 2020 tax year:
The indexing factor for federal tax credits and brackets for 2019 is 1.9%. The following federal tax rates and brackets will be in effect for individuals for the 2020 tax year:
Income level Federal tax rate
$12,298 - $48,535 15%
$48,536 - $97,069 20.5%
$97,070 - $150,473 26%
$150,474 - $214,368 29%
Above $214,368 33%
Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies. Some of the more significant dates and changes for individual taxpayers for 2020 are listed below.
Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies. Some of the more significant dates and changes for individual taxpayers for 2020 are listed below.
The RRSP current year contribution limit for the 2019 tax year is $26,500. In order to make the maximum current year contribution for 2019 (for which the contribution deadline will be Monday March 2, 2020), it will be necessary to have earned income for the 2018 taxation year of $147,222.
The TFSA contribution dollar limit for 2020 is unchanged at $6,000. The actual amount which can be contributed by a particular individual includes both the current year limit and any carryover of uncontributed or re-contribution amounts from previous taxation years.
Taxpayers can find out their 2020 contribution limit by calling the Canada Revenue Agency’s Individual Income Tax Enquires line at 1-800-959 8281. Those who have registered for the CRA’s online tax service My Account can obtain that information by logging into that service.
Millions of individual taxpayers pay income tax by quarterly instalments, which are due on the 15th day of each of March, June, September and December 2020.
The actual tax instalment due dates for 2020 are as follows:
Monday March 16, 2020
Monday June 15, 2020
Tuesday September 15, 2020
Tuesday December 15, 2020
For 2020, the income level above which Old Age Security (OAS) benefits are clawed back is $79,054.
For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2019 tax year is Thursday April 30, 2020.
Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2019 on or before Thursday April 30, 2020.
Self-employed taxpayers and their spouses must file a 2019 income tax return on or before Monday June 15, 2020.
The general corporate income tax rate will decrease from 11% to 10%, effective January 1, 2020.
The provincial education and tuition tax credits are eliminated as of the 2020 taxation year.
Indexation of personal income tax credits and income brackets is eliminated as of January 1, 2020.
The provincial Scientific Research and Experimental Development (SR&ED) tax credit is eliminated as of January 1, 2020.
The general corporate income tax rate will decrease from 11% to 10%, effective January 1, 2020.
The provincial education and tuition tax credits are eliminated as of the 2020 taxation year.
Indexation of personal income tax credits and income brackets is eliminated as of January 1, 2020.
The provincial Scientific Research and Experimental Development (SR&ED) tax credit is eliminated as of January 1, 2020.
The Newfoundland and Labrador Temporary Deficit Reduction Levy, which was in effect from 2016 to 2019, is eliminated.
The provincial small business corporate tax rate is reduced from 3.5% to 3.2%, effective as of January 1, 2020. That rate applies on the first $500,000 of active business income of eligible corporations.
The basic personal amount is increased to $10,000.
Between now and the end of February 2020, Canadians will receive a variety of receipts for expenditures made during the 2019 taxation year. Some of those expenditure receipts will support a tax deduction or credit claim to be made by the recipient on his or her 2019 tax return, while others will not. And, it’s not always easy for a taxpayer to know when such a credit or deduction is or is not available to be claimed. While the Canadian individual income tax return is only four pages long, the information on those four pages is supported by 13 supplementary federal schedules, dealing with everything from the calculation of capital gains to determining required Canada Pension Plan contributions by self-employed taxpayers.
Between now and the end of February 2020, Canadians will receive a variety of receipts for expenditures made during the 2019 taxation year. Some of those expenditure receipts will support a tax deduction or credit claim to be made by the recipient on his or her 2019 tax return, while others will not. And, it’s not always easy for a taxpayer to know when such a credit or deduction is or is not available to be claimed. While the Canadian individual income tax return is only four pages long, the information on those four pages is supported by 13 supplementary federal schedules, dealing with everything from the calculation of capital gains to determining required Canada Pension Plan contributions by self-employed taxpayers.
All of this complexity makes it easy for the majority of individuals who only deal with our tax system once a year to overlook valuable deduction and credit claims which may be available to them. One such deduction is that available for payments made during the taxation year for annual union, professional, or similar dues.
It’s particularly easy to overlook an available claim for that deduction because of where it appears on the annual return. Although there are forms used by self-employed taxpayers to claim business-related costs and forms used by employees to claim allowable employment expenses, the deduction for union or professional dues doesn’t appear on either type of form. Rather, it shows up as a single line (Line 212) on page 3 of the T1 annual return.
The general rule for claiming such a deduction is described in the annual income tax return guide as follows:
Line 212 — Claim the total of the following amounts related to your employment that you paid (or that were paid for you and reported as income) in the year:
There are, of course, limitations on the kinds of expenses which may be claimed and the circumstances in which a taxpayer is entitled to claim those expenses. The most important such restriction is that amounts paid must be those which are necessary in order for the taxpayer to obtain or maintain his or her professional standing. Every profession and trade has licensing and similar requirements which mandate that an individual maintain membership in a professional or similar association in order to practice his or her profession or trade. The costs of maintaining required membership in those organizations is deductible. The cost of maintaining membership in other, voluntary associations, even if related to one’s trade or profession, is not. So, for example, if membership in a given association does not affect professional status (e.g., the Canadian Bar Association for lawyers) dues paid to maintain that membership are not deductible. If, on the other hand, membership (and the payment of fees or dues) is necessary to maintain professional status (e.g., the applicable provincial Law Society for the lawyer) the dues paid to that organization are deductible.
As well, invoices received for annual membership costs can cover a number of different charges and levies, and not all of those costs will be deductible. The policy of the Canada Revenue Agency (CRA) is that annual membership dues do not include initiation fees, licences, special assessments, or charges for anything other than the organization’s ordinary operating costs. A taxpayer cannot claim charges for pension plans as membership dues, even if receipts received show them as dues.
Where a claim for a deduction for professional membership or union dues is made by an employee, some other considerations arise. Generally, while it’s not necessary that having a particular professional designation be a requirement of the employee’s position in order for that employee to claim a deduction for related professional dues, the CRA does require that there be some connection between the employment and the professional association in question.
In some cases, an employer is willing to cover the cost of an employee’s professional dues as part of the employee’s benefit package. Where that’s the case, and the employer’s payment of those dues does not appear on the employee’s T4 as a taxable benefit, no deduction for those costs can be claimed by the employee. Where, however, there is a taxable benefit which accrues to the employee, he or she can claim an offsetting deduction for eligible dues or fees paid, on Line 212 of the return.
General information on the deduction of professional membership fees or union dues, for both self-employed taxpayers and employees can be found on the CRA website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/212/menu-eng.html.
While Canadians benefit from a publicly funded health care system, there are nonetheless a large, and increasing, number of medical expenses which are not covered by provincial health care plans. As well, with the rise in part-time positions and contract work — the “gig” economy — an increasing number of Canadians do not enjoy coverage for such costs through employer-sponsored private insurance. In those situations, Canadians have to pay for such unavoidable expenditures, including dental care, prescription drugs, ambulance trips, and many other para-medical services, like physiotherapy, on an out-of-pocket basis.
While Canadians benefit from a publicly funded health care system, there are nonetheless a large, and increasing, number of medical expenses which are not covered by provincial health care plans. As well, with the rise in part-time positions and contract work — the “gig” economy — an increasing number of Canadians do not enjoy coverage for such costs through employer-sponsored private insurance. In those situations, Canadians have to pay for such unavoidable expenditures, including dental care, prescription drugs, ambulance trips, and many other para-medical services, like physiotherapy, on an out-of-pocket basis.
The good news, where such costs must be paid for partially or entirely by the taxpayer, is that our tax system provides a medical expense tax credit to help offset those costs. Unfortunately, the computation of such credit and, in particular, the timing of making a claim for that credit, can be confusing. In addition, the determination of what expenses qualify for the credit and which do not isn’t necessarily intuitive, nor is the determination of when it’s necessary to obtain prior authorization from a medical professional in order to ensure that the contemplated expenditure will qualify for the credit.
The basic rule is that qualifying medical expenses over 3% of the taxpayer’s net income, or $2,352, whichever is less, can be claimed for purposes of the medical expense tax credit on the taxpayer’s return for 2019. The Canada Revenue Agency (CRA) provides a lengthy list of qualifying expenditures, together with information on any requirements for a prescription or other medical authorization or documentation for a particular type of expenditure, and that list can be found on the CRA website at www.cra-arc.gc.ca/medical/#mdcl_xpns.
Put in terms that are more easily understood, the rule for 2019 is that any taxpayer whose net income is less than $78,400 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $78,400 will be limited to claiming qualifying expenses which exceed the $2,352 threshold.
The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2019 will produce the greatest amount eligible for the credit. That determination will obviously depend on the amount of medical expenses and, in particular, when those medical expenses were incurred. Consequently, there is no universal rule of thumb that can be used.
Medical expenses incurred by family members — the taxpayer, his or her spouse, dependent children who were born in 2002 or later, and certain other dependent relatives — can be added together and claimed by one member of the family. In most cases, it is best, in order to maximize the amount claimable, to make that claim on the tax return of the lower income spouse, where that spouse has tax payable for the year.
As December 31 approaches, it’s a good idea to add up the medical expenses which have been incurred during 2019, as well as those paid during 2018 and not claimed on the 2018 return. Once those totals are known, it will be easier to determine whether to make a claim for 2019 or to wait and claim 2019 expenses on the return for 2020. And, if the decision is to make a claim for 2019, knowing what medical expenses were paid, and when, will enable the taxpayer to determine the optimal 12-month period for the claim.
Finally, it’s also a good idea to look at the timing of medical expenses which will have to be paid early in 2020. Where those are significant expenses (for instance, a particularly costly medication which must be taken on an ongoing basis, or necessary dental work) it may make sense, where cash flow considerations allow, to accelerate the payment of those expenses to December 2019, so that they can be included in 2019 totals and claimed on the 2019 return.
For most Canadians, registered retirement savings plans (RRSPs) don’t become top of mind until near the end of February, as the annual contribution deadline (which, for 2019 contributions, will be March 2, 2020) approaches. When it comes to tax-free savings accounts (TFSAs), most Canadians are aware that there is no contribution deadline for such plans, so that contributions can be made at any time or even carried forward to a subsequent taxation year. Consequently, neither RRSPs nor TFSAs tend to be a priority when it comes to year-end tax planning.
For most Canadians, registered retirement savings plans (RRSPs) don’t become top of mind until near the end of February, as the annual contribution deadline (which, for 2019 contributions, will be March 2, 2020) approaches. When it comes to tax-free savings accounts (TFSAs), most Canadians are aware that there is no contribution deadline for such plans, so that contributions can be made at any time or even carried forward to a subsequent taxation year. Consequently, neither RRSPs nor TFSAs tend to be a priority when it comes to year-end tax planning.
Notwithstanding those facts, there are considerations which apply to both RRSPs and TFSAs in relation to the approach of the end of calendar year. Failing to take those considerations into account can mean the permanent loss of contribution room, a loss of flexibility when it comes to making withdrawals or having to pay more tax than necessary when funds are withdrawn. Some of those considerations are outlined below.
While most RRSP contributions to be deducted on the return for 2019 can be made anytime up to and including March 2, 2020, there is one important exception to that rule.
Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71 years of age – usually by converting the RRSP into a registered retirement income fund (RRIF) or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31st is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31st of that year.
Under Canadian tax rules, a taxpayer can make a contribution to an RRSP in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2019, the contributor can claim a deduction for that contribution on his or her return for 2019. The spouse can then withdraw that amount as early as January 1, 2022 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2020, the contributor can still claim a deduction for it on the 2019 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2023. It’s an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively new future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should the need for an unplanned withdrawal arise.
Each Canadian aged 18 and over can make an annual contribution to a TFSA – the maximum contribution for 2019 is $6,000. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.
Consequently, it makes sense, where a TFSA withdrawal is planned within the next few months, perhaps to pay for a winter vacation or to make an RRSP contribution, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA on or before December 31st, 2019 will have the amount withdrawn added to his or her TFSA contribution limit for 2020, which means it can be re-contributed as early as January 1, 2020. If the same taxpayer waits until January of 2020 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2021.
During the month of December, it is customary for employers to provide something “extra” for their employees, by way of a holiday gift, a year-end bonus or an employer-sponsored social event. And it is certainly the case that employers who provide such extras don’t intend to create a tax headache for their employees. Unfortunately, a failure to properly structure such gifts or other extras can result in unintended and unwelcome tax consequences to those employees.
During the month of December, it is customary for employers to provide something “extra” for their employees, by way of a holiday gift, a year-end bonus or an employer-sponsored social event. And it is certainly the case that employers who provide such extras don’t intend to create a tax headache for their employees. Unfortunately, a failure to properly structure such gifts or other extras can result in unintended and unwelcome tax consequences to those employees.
Trying to formulate and administer the tax rules around holiday gifts is something of a no-win situation for the Canada Revenue Agency (CRA). On an individual or even a company level, the amounts involved are usually small, or even nominal, and the range of situations which must be addressed by the applicable tax rules are virtually limitless. As a result, the cost of drafting and administering those rules can outweigh the revenue generated by the enforcement of such rules, to say nothing of the potential ill will generated by imposing tax consequences on holiday gifts and celebrations. Notwithstanding, the potential exists for employers to provide what would otherwise be taxable remuneration in the guise of holiday gifts, and it’s the responsibility of the tax authorities to ensure that such strategies are caught by the tax net.
There is, as a consequence, a detailed set of rules which outline the tax consequences of gifts and awards provided by the employer, and even in relation to annual holiday celebrations sponsored (and paid for) by an employer.
The starting point for the rules is that any gift (cash or non-cash) received by an employee from his or her employer at any time of the year is considered to constitute a taxable benefit, to be included in the employee’s income for that year. However, the CRA makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) to be received tax-free by employees, as long as such gifts are given on religious holidays such as Christmas or Hanukkah, or on the occasion of a significant life event, like a birthday, a marriage, or the birth of a child.
In sum, the CRA’s administrative policy is simply that non-cash gifts to an arm’s length employee, regardless of the number of such gifts, will not be taxable if the total fair market value of all such gifts (including goods and services tax or harmonized sales tax) to that employee is $500 or less annually. The total value over $500 annually will be a taxable benefit to the employee, and must be included on the employee’s T4 for the year, and on which income tax must be paid.
It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500 per year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of amount. For this purpose, the CRA considers anything which could be easily converted to cash as a “near-cash” gift. Even a gift or award which cannot be converted to cash will be considered to be a near-cash gift if, in the CRA’s words, it “functions as cash”. So, a gift card or gift certificate which can be used by the employee to purchase his or her choice of merchandise or services would be considered a near-cash gift, and taxable as such. It’s not hard to see that drawing a firm line between cash and non-cash gifts can be difficult. The CRA provides the following information and examples to help clarify that difference.
You give your employee tickets to an event on a specific date and time. This may not be a taxable benefit for the employee since there is no element of choice, if the other rules for gifts and awards are met.
You give your employee a voucher (which may be a ticket or a certificate) that entitles the employee to receive an item for a set value at a store. For example, you may give your employees a voucher for a turkey valued up to $30 as a Christmas gift, and for convenience, you arrange for your employees to go to a particular grocery store and exchange the voucher for a turkey. The employees can only use the voucher to receive a turkey valued up to $30 (no substitutes). Such vouchers are generally considered non-cash gifts.
A gift card or gift certificate to a movie theatre, however, is considered a near cash gift or award. With a gift card or gift certificate to a movie theatre, your employee can choose which move to see and when to see it, or they can use the card or certificate at an arcade or concession stand.
This time of year, the tax treatment of the annual employee holiday party also must be considered. The CRA’s current policy in this area is that no taxable benefit will be assessed in respect of employee attendance at an employer-provided social event, where attendance at the party was open to all employees, and the cost per employee was $150 or less (which represents an increase from the $100 ceiling for previous years). The $150 cost is meant to cover the party itself, not including any ancillary costs, such as transportation costs or overnight accommodation. Where the total cost of the event itself exceeds the $150 per person threshold, the CRA will assess the employee as having received a taxable benefit equal to the entire per person cost (i.e., not just that portion of the cost that exceeds $150.)
It may seem nearly impossible to plan for employee holiday gifts and other benefits without running afoul of one or more of the detailed rules and administrative policies surrounding the taxation of such gifts and benefits. However, designing a tax-effective plan is possible, if a few basic principles are kept in mind.
Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.
Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.
They can be accessed below.
Corporate:
Personal:
Planning for – or even thinking about – 2020 taxes when it’s not even December 2019 may seem more than a little premature. However, most Canadians will start paying their taxes for 2020 with the first paycheque they receive in January, and it’s worth taking a bit of time to make sure that things start off – and stay – on the right foot.
Planning for – or even thinking about – 2020 taxes when it’s not even December 2019 may seem more than a little premature. However, most Canadians will start paying their taxes for 2020 with the first paycheque they receive in January, and it’s worth taking a bit of time to make sure that things start off – and stay – on the right foot.
For most Canadians, (certainly for the vast majority who earn their income from employment), income tax, along with other statutory deductions like Canada Pension Plan contributions and Employment Insurance premiums, are paid periodically throughout the year by means of deductions taken from each paycheque received, with those deductions then remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by his or her employer.
Of course, each taxpayer’s situation is unique and so the employer has to have some guidance as to how much to deduct and remit on behalf of each employee. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by each employee, sometimes at the start of each year, but certainly at the time employment commences. Each employee must, in fact, complete two TD1 forms – one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer lives. Federal and provincial TD1 forms for 2020 (which have not yet been released by the CRA but, once published, will be available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms.html) list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial) which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the federal government.
While the TD1 completed by the employee at the time his or her employment commenced will have accurately reflected the credits claimable by the employee at that time, everyone’s life circumstances change. Where a baby is born, or a son or daughter starts post-secondary education, a taxpayer turns 65 years of age, or an elderly parent comes to live with his or her children, the affected taxpayer will be become eligible to claim tax credits not previously available. And, since the employer can only calculate source deductions based on information provided to it by the employee, those new credit claims won’t be reflected in the amounts deducted at source from the employee’s paycheque.
Consequently, it’s a good idea for all employees to review the TD1 form prior to the start of each taxation year and to make any changes needed to ensure that a claim is made for any and all credit amounts currently available to him or her. Doing so will ensure that the correct amount of tax is deducted at source throughout the year.
It’s often the case that a taxpayer will have available deductions which cannot be recorded on the TD1, like RRSP contributions, deductible support payments, or child care expenses. While such claims make things a little more complicated, it’s still possible to have source deductions adjusted to accurately reflect those claims, and the employee’s resulting reduced tax liability for 2020. The way to do so is to file Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1213.html), with the Agency. Once that form is filed with the CRA, they will, after verifying that the claims made are accurate, provide the employer with a Letter of Authority authorizing that employer to reduce the amount of tax being withheld at source.
Of course, as with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes time. Consequently, the sooner a T1213 for 2020 is filed with the CRA, the sooner source deductions can be adjusted, effective for all subsequent paycheques. Providing an employer with an updated TD1 for 2020 at the same time will ensure that source deductions made during 2020 will accurately reflect all of the employee’s current circumstances, and consequently his or her actual tax liability for the year.
It is also possible for some taxpayers to adjust the amount of remaining tax they will pay during 2019. While the majority of Canadians pay their taxes through source deductions, there are still millions of taxpayers who pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total liability for the year.
The final quarterly instalment for this year will be due on Monday December 16, 2019. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2019 and so will be in a position to estimate what the final tax bill for the year will be, taking into account any tax planning strategies already put in place, as well as any RRSP contributions which will be made on or before February 29, 2020. While the tax return forms to be used for the 2019 year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2018 form. Increases in tax credit amounts and tax brackets from 2018 to 2019 will mean that using the 2018 form will likely result in a slight over-estimate of tax liability for 2019.
Once an estimate of one’s tax bill for 2019 has been calculated, that figure should be compared to the total of tax instalments already made during this calendar year (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281). Depending on the result, it may then be possible to reduce the amount of the tax instalment to be paid on December 15 – and thereby free up some funds for the inevitable holiday spending!
The start of fall marks a lot of things, among them a number of runs, walks and other similar events held to raise money for a broad range of Canadian charities. And, within the next month, as the holiday season approaches, charities will launch their year-end marketing campaigns.
The start of fall marks a lot of things, among them a number of runs, walks and other similar events held to raise money for a broad range of Canadian charities. And, within the next month, as the holiday season approaches, charities will launch their year-end marketing campaigns.
Canadians have a well-deserved reputation for supporting charitable causes, through donations of both money and goods. Our tax system supports that generosity by providing a tax credit for qualifying donations made. Federally, taxpayers can claim a credit of 15% of the first $200 in donations plus 29% of donations over the $200 threshold.
In all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year – without exception.
There is, however, another reason to ensure donations are made by December 31. The credit provided by the federal government is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. Where the taxpayer making the donation has taxable income (for 2019) over $210,371, charitable donations above the $200 threshold can receive a federal tax credit of 33%.
As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2019 will received a federal credit of $88 ($200 × 15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2019 and January 2020, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2020 donation can’t be claimed until the 2020 return is filed in April 2021. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.
It’s also possible to carry forward, for up to 5 years, donations which were made in a particular tax year. So, if donations made in 2019 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 2014, 2015, 2016, 2017, or 2018 tax years can be carried forward and added to the total donations made in 2019, and the aggregate then claimed on the 2019 tax return.
When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high-income surtax – currently, Ontario and Prince Edward Island – it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.
Since the charitable donations tax credit is a two-level credit, in which the credit percentage increases once donations made in a year exceed $200, it always makes sense to aggregate donations in a single year, so as to maximize the amount of credit claimable.
Any charity seeking or receiving a donation should be able to provide a registered charitable number, and a searchable current listing of registered charities can be found on the Canada Revenue Agency website at https://apps.cra-arc.gc.ca/ebci/hacc/srch/pub/dsplyBscSrch?request_locale=en. Information on the charitable donations tax credit is available on the same website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/349/menu-eng.html.
Most Canadians expend a considerable amount of time and effort in order to put money aside for retirement. Especially in an era in which the majority of workers can’t look forward to receiving an employer-sponsored pension plan, Canadians are well aware that the bulk of their income during retirement will have to come from government sources and from their own savings efforts.
Most Canadians expend a considerable amount of time and effort in order to put money aside for retirement. Especially in an era in which the majority of workers can’t look forward to receiving an employer-sponsored pension plan, Canadians are well aware that the bulk of their income during retirement will have to come from government sources and from their own savings efforts.
One of the difficulties in saving for retirement is the near impossibility of knowing how to set a savings goal which meets the twin goals of sufficiency and attainability. As well, while many savers focus on identifying the “magic number” which will ensure a comfortable retirement, the fact is that the total amount saved is only one component of retirement financial planning. The reality is that most Canadians will receive income in retirement from at least three sources – private savings accumulated in a registered retirement savings plan (RRSP) or tax-free savings accounts (TFSAs), a Canada Pension Plan retirement pension, and Old Age Security benefits. The real question for most Canadians is how to determine the amount of annual income which all those sources of income will generate during their retirement years, and that is not a simple calculation.
Money can be withdrawn from an RRSP or TFSA at any age, a CPP retirement pension can start any time from age 60 to age 70, and Old Age Security benefits can be received as early as age 65 or as late as age 70. For both CPP and OAS, benefits will rise with each month that receipt of such benefits is deferred. Many Canadians continue to work, on a full or part-time basis, while receiving CPP and OAS benefits. As well, income from the different types of retirement income may be subject to different tax treatment, meaning that the after-tax amount received on $100 of income may vary widely, depending on the nature and source of that income.
The number of factors to consider and, especially, the complexity which results from the interaction of those factors could reasonably lead the average Canadian to conclude that it’s just not possible to make an accurate determination of the best way to structure their income in retirement, in order to ensure a reasonable income throughout their retirement years. But, help is at hand – and it’s free! That help is in the form of a Retirement Income Calculator which is available on the Government of Canada website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html.
Using that calculator, individual Canadian taxpayers can enter their personal data, including their date of birth, gender, and planned age of retirement, without the need to provide any personal identifying information. The user is then asked to provide information on income amounts which will be received from various sources, including any employer pension and Canada Pension Plan amounts and the age at which the user plans to begin receiving such income. Information is requested on the user’s period of residency in Canada, in order to determine whether he or she will be eligible to receive Old Age Security benefits and the amount of OAS benefits which will be provided at different ages. The calculator also allows the user to input the total amount of savings accumulated to date. Finally, information is requested on any other sources of income which will be available (e.g., income arising from part-time employment during retirement).
Using that data, the calculator estimates the amount of income which will be available to the individual from each source during each year of his or her retirement and generates a bar graph and a table showing those income amounts.
The real benefit of the calculator, however, lies in the user’s ability to vary the inputs – to create “what-if” scenarios in order to determine the effect any changes made will have on retirement income at various ages. Users can change the age at which they choose to receive government-sponsored retirement benefits like CPP and OAS, or can specify a different rate of return (pre or post retirement) earned on retirement savings. They can also change the period of time (i.e., life expectancy) over which retirement income will be spread. That way, the user can obtain answers to frequently asked questions like the following:
How much more will I receive if I delay receipt of Canada Pension Plan or Old Age Security benefits, or both, for one, two, or more years?
What if I work an additional year or two after age 65 before starting RRSP withdrawals?
What if I earn income from part-time employment during retirement?
What if I choose to begin receiving CPP and OAS as soon as I am eligible, but defer making RRSP withdrawals?
What if I live longer than the average life expectancy?
For each of these what-if fact scenarios, the calculator will determine the effect that particular change will have on the amount of income receivable from each different retirement income source, and will provide a summary of income for each year of retirement from all such sources under each fact scenario created by the user.
There are, of course, some factors which can’t be incorporated into any calculator because they cannot be predicted or planned for. No one can predict how long their retirement will last (although the calculator does project retirement income based on average life expectancy for individuals of the age and gender of the user). Similarly, it’s never possible to know what investment returns will be earned on retirement savings during retirement, or what the rate of inflation will be. The calculator’s ability to estimate future income data based on a number of different fact patterns does, however, allow users to create retirement income projections under both best-case and worst-case retirement income scenarios – and to plan for both.
To win elections, politicians need votes. And to run the election campaigns needed to garner those votes, those politicians need an organization, volunteers, and money — a lot of money. To wage the most recent federal election, the major political parties raised and spent millions of dollars, and their task of raising that money was undoubtedly made somewhat easier by the fact that Canadian taxpayers who donated money to political parties or candidate can obtain some tax relief from doing so.
To win elections, politicians need votes. And to run the election campaigns needed to garner those votes, those politicians need an organization, volunteers, and money — a lot of money. To wage the most recent federal election, the major political parties raised and spent millions of dollars, and their task of raising that money was undoubtedly made somewhat easier by the fact that Canadian taxpayers who donated money to political parties or candidate can obtain some tax relief from doing so.
Individuals who donated to the political party or candidate of their choice may or may not be happy with the outcome of the election, but no matter which registered party or candidate they donated to, it will be possible for them to claim a federal tax credit for those donations when they file their returns for 2019 next spring.
The credit provided under the Income Tax Act is available with respect to funds contributed to either a registered political party or to candidates running in a federal election. Contributions can be made at any time, not just during an election campaign, as long as the donation is received by an official candidate or a registered federal political party or association.
While the parties which currently hold seats in the House of Commons are, of course, the most well-known, there were in fact 21 political parties registered and in good standing with Elections Canada for purposes of the 2019 federal election. They are as follows, in alphabetical order:
Donations to any one of these registered parties, within prescribed limits, would qualify for the federal political contribution tax credit.
Official candidates can, of course, be running either as candidates for one of the registered parties or as independents. Elections Canada provides a list of confirmed candidates who ran in this year’s federal election, and that list can be found at https://www.elections.ca/content2.aspx?section=can&document=index&lang=e.
The federal political tax credit is calculated as a percentage of donations given. However, the credit percentage decreases as contributions amounts increase, and no credit at all is given for donations in excess of $1,275. The credit percentages allowed at different contribution levels are as follows:
|
Contribution amount |
Allowable tax credit |
|
$0.01 to $400.00 |
75% of the contribution |
|
$400.01 to $750.00 |
$300 + 50% of the contribution over $400 |
|
$750.01 and over
|
$475 + 33⅓% of the contribution over $750 |
The maximum credit claimable in any taxation year by a single taxpayer is $650. Once the math is worked out, it becomes clear that the maximum credit obtainable is reached once contribution levels reach $1,275.
Contribution amount Allowable tax credit
$400 × 75% = $300
$350 × 50% = $175
$525 × 33.3% = $175
$1,275 $650
Where donations exceed $1,275 in any one taxation year, no tax credit can be claimed on the “excess” donation. As well, there is no provision which allows the taxpayer to carry over any “excess” contributions to a subsequent taxation year, meaning that no credit will ever be obtainable with respect to those “excess” contributions.
Many Canadians who are committed to a particular political party or candidate volunteer their time during a nomination or election campaign – canvassing for the candidate, putting up election signs or telephoning voters to encourage them to vote for the candidate. However, in such cases, the work must be its own reward, as no income tax receipts can be issued for most such non-monetary contributions and consequently no credit can be claimed for the value of any non-monetary contribution (including volunteer hours) donated.
Where a qualifying contribution is made, an official receipt must be issued in order for the tax credit to be claimed. During an election campaign, the official agent of a candidate issues that receipt, and it must be issued between the time the candidate is officially nominated and election day. Outside an election period, any receipts are issued by the registered agent of a political party or association. A receipt must be issued, in paper or electronic format, for every contribution over $20.
The actual credit for qualifying donations made is claimed on the tax return for the year in which the contribution was made. The amount of the credit is calculated (according to the formula outlined above) on the Federal Worksheet and the amount of the actual credit entered on line 410 of Schedule 1 of the federal tax return. By the time the 2019 return is filed, of course, the election will long since have been concluded, the newly elected government will be in place in Ottawa, and the taxpayer will be in a position to assess whether it was, in fact, money well spent.
Tax-free savings accounts (TFSAs) have been around for a full decade now, having been introduced in 2009, and for most Canadians, a TFSA (along with a registered retirement savings plan (RRSP)) is now a regular part of their financial and tax planning.
Tax-free savings accounts (TFSAs) have been around for a full decade now, having been introduced in 2009, and for most Canadians, a TFSA (along with a registered retirement savings plan (RRSP)) is now a regular part of their financial and tax planning.
TFSAs are, in many ways, the inverse of RRSPs. While TFSAs do not provide the tax deduction that an RRSP contribution creates, the strength of TFSAs lies in their great flexibility and the ability they give to Canadians to save, for short-term or long-term purposes, on a tax-free basis. Every Canadian aged 18 years of age and older can contribute a specified annual amount to a TFSA ($6,000 for 2019). Funds contributed to the TFSA are not deductible from income for tax purposes, but investment income earned by those funds is not taxed, either as it accrues or on withdrawal. Where a taxpayer does not contribute to a TFSA in a particular tax year, the contribution not made can be carried forward and that contribution made in any subsequent year. As well, TFSA holders can withdraw funds from their plan at any time, free of tax, and funds withdrawn can be re-contributed, but not until the following year. Therefore, each taxpayer’s contribution limit for a particular year is that year’s statutory annual amount, plus any allowable contributions not made in previous years and carried forward, plus amounts withdrawn in any previous year but not yet re-contributed.
The amount of the allowable TFSA contribution limit for a year has been something of a moving target since 2009: what follows is a listing of the maximum allowable annual contribution limits for each year since TFSAs were introduced.
It’s readily apparent that, especially where there are carryforward amounts and/or the taxpayer has made withdrawals from a TFSA, that calculating one’s current year contribution room can be complex. At one time the Canada Revenue Agency (CRA) notified taxpayers of their current year TFSA contribution limit on the annual Notice of Assessment, but that is no longer the case. Now, the easiest way to find out one’s current year contribution limit is by calling the CRA’s Individual Income Tax Enquiries Line at 1-800-959-8281 or its automated Tax Information Phone Service (TIPS) line at 1-800-267-6999. Taxpayers who have registered for the Agency’s My Account online service can use that service to find the same information. It’s also possible to obtain from the CRA a TFSA Room Statement and a TFSA Transaction Summary, with the latter showing the contributions and withdrawals which have been made.
It is important to stay within one’s overall contribution limit because exceeding that limit — even for one day — will result in the imposition of a penalty tax. Therefore, once the taxpayer knows figures out his or her total contribution limit for 2019, it’s time to make sure that current contribution plans for the year will not put the taxpayer in an overcontribution position. Some taxpayers contribute on a regular, often monthly basis, while others are in the habit of depositing regular or irregular or periodic income receipts, like a tax refund or tax benefit amount or a bonus from their employer, into their TFSA. Either way, after finding out one’s current year contribution limit, it’s necessary to calculate how much has already been contributed in 2019. The difference between those two figures represents the balance which can be contributed before the end of the year without getting into an overcontribution position and incurring penalties. And, it’s important to remember that if withdrawals have been or will be made during 2019, those amounts cannot be re-contributed until after the end of this year.
If it’s necessary to adjust regular contributions in order not to go “offside” by the end of the year, the best time to do it is obviously before getting into that overcontribution position. As soon as a taxpayer is in an overcontribution position, however, a penalty tax of 1% per month of the excess is imposed, even if the excess funds are withdrawn before the end of the month — in other words, as explained in the Canada Revenue Agency guide to TFSAs “[I]f, at any time in a month, you have an excess TFSA amount, you are liable to a tax of 1% on your highest excess TFSA amount in that month.”
Especially where TFSA contributions are set up to occur regularly, by automatic deposit or bank transfer, it’s easy to assume that everything has been taken care of and nothing further needs to be done with respect to such arrangements. However, an “out of sight and out of mind” approach rarely makes for good financial and tax planning, and checking on the status of one’s TFSA on a periodic (at least quarterly) basis can help to ensure that everything is as it should be, and that unnecessary penalties are avoided.
One final consideration — one of the strengths of a TFSA as a savings vehicle is the ability to re-contribute funds which have been withdrawn. However, as outlined above, such re-contributions cannot be made until after the end of the calendar year in which the withdrawal was made. For that reason, taxpayers who may be contemplating a TFSA withdrawal early in 2020, perhaps in order to make an RRSP contribution, or to pay for a winter vacation, should make that withdrawal before the end of 2019. That way, should funds become available (perhaps through the tax refund generated by the RRSP contribution) it will be possible to make the re-contribution in 2020. If the withdrawal is not made until 2020, re-contribution will not be possible (without incurring a penalty) until 2021.
TFSAs are valuable savings and planning vehicles for Canadians — perhaps the most flexible such vehicle available. It’s easy, however, to get tripped up on the rules governing TFSAs, especially the rules around withdrawals and re-contributions. To help keep taxpayers from running afoul of those rules, the Canada Revenue Agency provides a lengthy and detailed publication on TFSAs, and that publication is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466/tax-free-savings-account-tfsa-guide-individuals.html.
In most cases, the need to seek out and obtain legal services (and to pay for them) is associated with life’s more unwelcome occurrences and experiences — a divorce, a dispute over a family estate, or a job loss. About the only thing that mitigates the pain of paying legal fees (apart, hopefully, from a successful resolution of the problem that created the need for legal advice) would be being able to claim a tax credit or deduction for the fees paid.
In most cases, the need to seek out and obtain legal services (and to pay for them) is associated with life’s more unwelcome occurrences and experiences — a divorce, a dispute over a family estate, or a job loss. About the only thing that mitigates the pain of paying legal fees (apart, hopefully, from a successful resolution of the problem that created the need for legal advice) would be being able to claim a tax credit or deduction for the fees paid.
Unfortunately, while there are some circumstances in which such a deduction can be claimed, those circumstances don’t usually include the routine reasons — purchasing a home, getting a divorce, establishing custody rights or seeking legal advice about making a will or managing a family estate — for which most Canadians incur legal fees. Generally, personal (as distinct from business-related) legal fees become deductible for most Canadian taxpayers only where they are incurred to recover amounts which they believe are owed to them, and where those amounts involve employment or employment-related income or, in some cases, family support obligations.
The first situation in which legal fees paid may be deductible is that of an employee seeking to collect (or to establish a right to collect) salary or wages. In all Canadian provinces and territories, employment standards laws provide that an employee who is about to lose his or her job (for reasons not involving fault on the part of the employee) is entitled to receive a specified amount of notice, or salary or wages equivalent to such notice. In many cases, however, the employee can establish a right to a period of notice (or payment in lieu) greater than the statutory minimum. The amount of notice or payment in lieu of notice which is payable can then become a matter of negotiation between the employer and its former employee, and such negotiations usually involve legal representation and consequently, legal fees. In that situation, legal fees incurred by the employee to establish a right to amounts allegedly owed by the employer are deductible by that former employee. If a court action is necessary and the Court requires the employer to reimburse its former employee for some or all of the legal fees incurred, the amount of that reimbursement must be subtracted from any deduction claimed. In other words, the former employee can claim a deduction only for legal fees which he or she was personally required to pay in order to collect wages or salary owed and for which he or she was not reimbursed.
In some situations, an employee or former employee seeks legal help in order to collect or to establish a right to collect a retiring allowance or pension benefits. In such situations, the legal fees incurred can be deducted, up to the total amount of the retiring allowance or pension income actually received for that year. Where part of the retiring allowance or pension benefits received in a particular year is contributed to an RRSP or registered pension plan, the amount contributed must be subtracted from the total amount received when calculating the maximum allowable deduction for legal fees. However, where all legal fees incurred can’t be claimed in the current year, they can be carried forward and claimed on the return for any of the seven subsequent tax years.
The rules covering the deduction of legal fees incurred where an employee claims amounts from an employer or former employer are relatively straightforward. The same, unfortunately, cannot be said for the rules governing the deductibility of legal fees paid in connection with family support obligations. Those rules have evolved over the past number of years in a somewhat piecemeal fashion. The current rules are as follows.
Legal fees incurred by either party in the course of negotiating a separation agreement or obtaining a divorce are not deductible. Such fees paid to establish child custody or visitation rights are similarly not deductible by either parent.
Where, however, one former spouse has the right to receive support payments from the other, there are circumstances in which legal fees paid in connection with that right are deductible. Specifically, legal fees paid for the following purposes will be deductible by the person receiving those support payments:
On the payment side of the support payment/receipt equation, the situation is not nearly so favourable, as a deduction for legal fees incurred will not generally not be allowed to a person paying support. More specifically, as stated in the CRA guide, a person paying support cannot claim legal fees incurred in order to “establish, negotiate or contest the amount of support payments”.
Finally, where the Canada Revenue Agency reviews or challenges income amounts, deductions or credits reported or claimed by a taxpayer for a tax year, any fees (which in this case includes accounting fees) paid for advice or assistance in dealing with the CRA’s review, assessment or reassessment, or in objecting to that assessment or reassessment, can be deducted by the taxpayer. A deduction can similarly be claimed where the taxpayer incurs such fees in relation to a dispute involving employment insurance, the Canada Pension Plan or the Quebec Pension Plan.
As the baby boom generation ages, members of that generation must switch their focus from the accumulation of retirement savings to creating a structure which will ensure a steady flow of income throughout that retirement. Those individuals face a particular deadline when their 71st birthday arrives, as they must, by December 31st of that year, collapse their RRSP and convert it into a source of retirement income.
As the baby boom generation ages, members of that generation must switch their focus from the accumulation of retirement savings to creating a structure which will ensure a steady flow of income throughout that retirement. Those individuals face a particular deadline when their 71st birthday arrives, as they must, by December 31st of that year, collapse their RRSP and convert it into a source of retirement income.
The decision to be made is an important one which, once made, can’t be undone. In addition, such decision involves a number of factors which are either unknown, or beyond the control of the individual, or both. And, to add to the pressure, the choice made will affect the individual’s finances for the remainder of his or her life
While the actual decision is a complex one, the options available to a taxpayer who must convert an RRSP are actually quite few in number — three, to be precise. They are as follows:
It’s not hard to see that the first option doesn’t have much to recommend it. Collapsing an RRSP without transferring the balance to a RRIF or purchasing an annuity means that every dollar in the RRSP will be treated as taxable income for that year. In many cases, that will mean losing nearly half of the RRSP proceeds to income tax. And, while any amount left can then be invested, tax will be payable on all investment income earned.
As a practical matter, then, the choices come down to two: a RRIF or an annuity. And, as is the case with most tax and financial planning decisions, the best choice will be driven by one’s personal financial and family circumstances, risk tolerance, cost of living, and the availability of other sources of income to meet that cost of living.
The annuity route has the great advantages of simplicity and reliability. In exchange for a lump sum amount paid by the taxpayer, the annuity issuer agrees to pay the taxpayer a specific sum of money on a periodic basis (usually once a month) for the remainder of the annuitant’s life. Annuities can also provide a guarantee period, in which the annuity payments continue for a specified time period (5 years, 10 years, etc.), even if the taxpayer dies during that time. The amount of monthly income which can be received depends, of course, on the amount paid in, but also on the gender and, especially, the age of the taxpayer. Currently, the annuity rate for each $100,000 paid to the annuity issuer by a taxpayer who is 71 years of age is about $586 per month for a male taxpayer and about $533 per month for a female taxpayer (the actual rate is set by the company which issues the annuity and will vary somewhat from company to company). Those rates do not include any guarantee period.
For taxpayers whose primary objective is to obtain a guaranteed life-long income stream without the responsibility of making any investment decisions or the need to take any investment risk, an annuity can be an attractive option. There are, however, some potential downsides to be considered. First, an annuity can never be reversed. Once the taxpayer has signed the annuity contract and transferred the funds, he or she is locked into that annuity arrangement for the remainder of his or her life, regardless of any change in circumstances that might mean an annuity is no longer suitable. Second, unless the annuity contract includes a guarantee period, there is no way of knowing how many payments the taxpayer will receive. If he or she dies within a short period of time after the annuity is put in place, there is generally no refund of amounts invested — once the initial transfer is made at the time the annuity is purchased, all funds transferred belong to the annuity company. Third, most annuity payment schedules do not keep up with inflation — while it is possible to obtain an annuity in which payments are indexed, having that feature will mean a substantially lower monthly payout amount. Finally, where the amount paid to obtain the annuity represents most or all of the taxpayer’s assets, entering into the annuity arrangement means that the taxpayer will not be leaving an estate for his or her heirs.
The second option open to taxpayers is to collapse the RRSP and transfer the entire balance to a RRIF. A RRIF operates in much the same way as an RRSP, with two major differences. First, it is not possible to contribute funds to a RRIF. Second, the taxpayer is required to withdraw an amount from his or her RRIF (and to pay tax on that amount) each year. That minimum withdrawal amount is a percentage of the outstanding balance, with that percentage figure determined by the taxpayer’s age at the beginning of the year. While the taxpayer can always withdraw more in a year or make lump sum withdrawals (and pay tax on those withdrawals), he or she cannot withdraw less than the minimum required withdrawal for his or her age group.
Where a taxpayer holds savings in a RRIF, he or she can invest those funds in the same investment vehicles as were used while the funds were held in an RRSP and those funds can continue to grow on a tax-sheltered basis, in the same way as funds in an RRSP. While the ability to continue holding investments that can grow on a tax-sheltered basis provides the taxpayer with a lot of flexibility, and the potential for growth in value, those benefits have a price in the form of investment risk. As is the case with all investments, the investments held within a RRIF can increase in value — or decrease — and the taxpayer carries the entire investment risk. When things go the way every investor wants them to, investment income is earned while the taxpayer’s underlying capital is maintained but, of course, that result is never guaranteed.
On the death of a RRIF annuitant, any funds remaining in the RRIF can pass to the annuitant’s spouse on a tax-free basis. Where there is no spouse, the remaining funds in the RRIF will be income to the RRIF annuitant in the year of death, and any balance after tax is paid will become part of his or her estate, available for distribution to beneficiaries.
While the above discussion of RRIFs versus annuities focuses on the benefits and downsides of each, it is not necessary (and in most cases not advisable) to limit the options to an either/or choice. It is possible to achieve, to a degree, the seemingly irreconcilable goals of lifetime income security and the potential for capital (and estate) growth. Combining the two alternatives — annuity and RRIF — either now or in the future can go a long way toward satisfying both objectives.
For everyone, in retirement or not, all spending is a combination of non-discretionary and discretionary items. The first category is made up mostly of expenditures for income tax, housing (whether rent or the cost of maintaining a house), food, insurance costs, and (especially for older Canadians) the cost of out-of-pocket medical expenses. The second category, discretionary expenses, includes entertainment, travel, and the cost of any hobbies or interests pursued. A strategy which utilizes a portion of RRSP savings to create a secure lifelong income stream to pay non-discretionary costs can remove the worry of outliving one’s money, while the balance of savings can be invested through a RRIF, for growth and to provide the income for non-discretionary spending.
Such a secure income stream can, of course, be created by purchasing an annuity. As well, although most taxpayers don’t necessarily think of them in that way, the Canada Pension Plan and Old Age Security have many of the attributes of an annuity, with the added benefit that both are indexed to inflation. By age 71, all taxpayers who are eligible for CPP and OAS will have begun receiving those monthly benefits. Consequently, in making the RRIF/annuity decision at that age, taxpayers should include in their calculations the extent to which CPP and OAS benefits will pay for their non-discretionary living costs.
As of September 2019, the maximum OAS benefit for most Canadians (specifically, those who have lived in Canada for 40 years after the age of 18) is about $614 per month. The amount of CPP benefits receivable by the taxpayer will vary, depending on his or her work history, but the maximum current benefit which can be received at age 65 is about $1,155. (Where receipt of either benefit is deferred past the age of 65, those amounts go up.) As a result, a single taxpayer who receives the maximum CPP and OAS benefits at age 65 will have just over $21,000 in annual income (or about $1,770 per month). And, for a married couple, of course, the combined total annual income received from CPP and OAS is just over $42,000 annually, or $3,500 per month. While $21,000 a year isn’t enough to provide a comfortable retirement, for those who go into retirement in good financial shape — meaning, generally, without any debt — it can go a long way toward meeting non-discretionary living costs. In other words, most Canadians who are facing the annuity versus RRIF decision already have a source of income which is effectively guaranteed for their lifetime and which is indexed to inflation. Taxpayers who are considering the purchase of an annuity to create the income stream required to cover non-discretionary expenses should first determine how much of those expenses can already be met by the combination of their (and their spouse’s) CPP and OAS benefits. The amount of any annuity purchase can then be set to cover off any shortfall.
While the options available to a taxpayer at age 71 with respect to the structuring of future retirement income are relatively straightforward, the number of factors to be considered in assessing those factors and making that decision are not. All of that makes for a situation in which consulting with an independent financial advisor on the right mix of choices and investments isn’t just a good idea, it’s a necessary one.
When parents separate and divorce, it is frequently the case that they are able to agree on an arrangement to share custody of their children. Such a shared-custody arrangement is often to the benefit of all concerned, especially the children of the marriage.
When parents separate and divorce, it is frequently the case that they are able to agree on an arrangement to share custody of their children. Such a shared-custody arrangement is often to the benefit of all concerned, especially the children of the marriage.
While a shared-custody arrangement usually makes the most sense from a human perspective, it can cause legal, financial, and tax complications. In particular, parents who share custody of their children must usually share, or divide, the tax deductions and benefits which can be received in respect of those children.
One of those benefits is the Canada Child Benefit (CCB) which is, in general terms, a non-taxable monthly benefit paid to parents of children who are under the age of 18.
The tax rules allow parents who share custody to also share CCB amounts. In such situations, payments made are equivalent to each eligible individual receiving one-half of the annual entitlement that they would receive if they were the only eligible parent (i.e., if the child lived with them all of the time), paid in monthly installments over the year. That has been the case since 2011, with the Canada Revenue Agency (CRA) determining who qualifies, based on an interpretation of shared parenting as meaning that a child generally lives with the parent between 40% and 60% of the time. However, recent Court decisions have altered and narrowed that policy, finding that a shared parenting arrangement requires that a child reside with a parent between 45% and 55% of the time.
In the CRA’s view, the narrower interpretation put forward into those Court decisions could result in a number of parents who share parenting time not being able to share in the benefits to which they are entitled. Consequently, new rules have been published to clarify the payment of CCB to shared-custody parents.
Those new rules provide that a shared-custody parent would be defined as one of two parents who:
The proposed changes will provide more flexibility when it comes to shared-custody parents and the receipt of tax benefits for their children and will allow the CRA to continue with its existing administrative practices with respect to such parents. While the legislation to make the announced changes has not, owing to the election call, been passed by Parliament, officials of the Department of Finance have indicated that the CRA will nonetheless be administering the CCB based on those proposed rules, which are retroactive to June 2011.
More information on the new rules can be found on the Finance Canada website at https://www.fin.gc.ca/n19/data/19-095_01-eng.asp.
Canadians are fortunate to benefit from a publicly funded health care system, in which most costs of care ranging from routine visits to a family doctor to intensive care in a hospital setting are paid for by government-sponsored health insurance.
Canadians are fortunate to benefit from a publicly funded health care system, in which most costs of care ranging from routine visits to a family doctor to intensive care in a hospital setting are paid for by government-sponsored health insurance.
While there is no doubt that most medical costs are not the financial responsibility of the individual, it is nonetheless a fact that a significant (and growing) number of medical and para-medical costs must be paid for on an out-of-pocket basis by the person incurring those costs. And those costs can, in some instances, run to thousands of dollars per year.
The costs which first come to mind are, of course, those which must be incurred for prescription medicine. While some Canadians have full or partial coverage for such costs through an employer-sponsored benefits plan, the majority of Canadians (especially those working on a part-time or contract basis) don’t. Similarly, visits to a dentist must be paid for by those who don’t have private medical insurance on an out-of-pocket basis. The same goes for services provided by any number of medical and, especially, para-medical practitioners, including physiotherapists, psychologists, and registered massage therapists.
It’s a virtual certainty that nearly all Canadians will incur one or more of those uninsured costs over the course of a year. The good news for those individuals and families is that in many instances a federal and provincial tax credit can be claimed to help offset those costs. The bad news is that the rules on determining just what expenses qualify for the credit and how and when to claim it can be complex.
First, the basics. The technical rule is that, for 2019, taxpayers can claim a tax credit for qualifying medical expenses which exceed 3% of their net income for the year or $2,352, whichever is less. That’s a confusing calculation to many Canadians, and it’s perhaps easier to think of it in these terms:
There is also some degree of flexibility in the timing of a claim made for the medical expense tax credit. Specifically, a claim made on the return for 2019 can include any qualifying medical expense incurred in any 12-month period which ends in 2019. Consequently, taxpayers can, in order to maximize the expenses claimed for the year (and so exceed the statutory thresholds outlined above) can pick any 12-month period ending during 2019.
For example, an individual might have incurred significant medical expenses in the last half of 2018 and the first half of 2019. That taxpayer would likely benefit from choosing the period July 1, 2018 to June 30, 2019, and claiming all medical expenses incurred during that period on his or her return for 2019.
There is, unfortunately, no formula or rule-of-thumb which allows a taxpayer to easily or quickly pick the time period which will provide the greatest credit amount, since that determination depends on when qualifying medical expenses were incurred. To determine the optimal period for a medical expenses tax credit claim, it’s really a matter of trial and error, or doing the computation for different time periods and choosing the one that gives the best result.
In aggregating those medical expenses, it’s also possible for families to include all qualifying expenses incurred by both spouses and by any children who were born in 2002 or later. The claim for the credit (using the total family medical expenses) can then be made by either spouse. Since the amount of the allowable expense claim increases as income decreases, it makes sense for the claim for total family medical expenses to be made by the lower-income spouse on his or her return for the year, as long as that spouse’s tax payable for the year is greater than the amount of the credit to be claimed.
Of course, the first determination which must be made when calculating a medical expense tax credit claim for the year is which expenses do or do not qualify for the credit. The number and kind of expenses which can be incurred for medical care are almost limitless in their scope and variety, and the list of qualifying and non-qualifying expenses for purposes of the credit reflects that reality.
The Canada Revenue Agency (CRA) helpfully provides a chart of the types of expenses which can qualify for the medical expense tax credit, and that chart includes other requirements which must be met in order for a particular expense to qualify. It’s well worth reviewing that chart (which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/lines-330-331-eligible-medical-expenses-you-claim-on-your-tax-return.html#mdcl_xpns) as the requirements imposed in order to qualify can be very specific and are not necessarily intuitive. For instance, to claim the cost of a walker as a medical expense, it is necessary to have a doctor’s prescription for that equipment. However, the cost of a wheelchair can be claimed with no requirement for a prescription. Finally, although the chart listing eligible medical expenses is 14 pages long, the CRA notes that such listing is “not exhaustive”. A full listing can be found in CRA Income Tax Folio S1-F1-C1, Medical Expense Tax Credit, which is available at https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-1-health-medical/income-tax-folio-s1-f1-c1-medical-expense-tax-credit.html.
The exercise of determining eligible medical expenses for all family members, calculating the optimal time period for making a medical expense tax credit claim, and determining the actual credit claimable can be a time-consuming process. However, given that such expenses are usually unavoidable, the dollar figure costs are often significant, and the effort has to be made only once a year, it is an annual effort worth making.
The Canadian tax system is a “self-assessing system” which relies heavily on the voluntary co-operation of taxpayers. Canadians are expected (in fact, in most cases, required), to complete and file a tax return each spring, reporting income from all sources, calculating the amount of tax owed, and remitting that amount to the federal government by a specified deadline.
The Canadian tax system is a “self-assessing system” which relies heavily on the voluntary co-operation of taxpayers. Canadians are expected (in fact, in most cases, required), to complete and file a tax return each spring, reporting income from all sources, calculating the amount of tax owed, and remitting that amount to the federal government by a specified deadline.
While it’s doubtful that many Canadians approach the task with any degree of enthusiasm, the fact is that millions of Canadians do sit down each spring to complete their annual tax return for the previous calendar year (or more often, they pay someone else to do it for them). Although the rate of compliance among Canadian taxpayers is very high — for the last filing season, just under 30 million individual income tax returns were filed with the Canada Revenue Agency (CRA) — there are, inevitably, those who do not file or pay on time.
There are a lot of reasons why individual Canadians don’t file their returns or pay their taxes on a timely basis, and almost all of them are based on a lack of understanding of how our tax system works, or on incorrect information about that system.
Some taxpayers don’t file because they believe that there’s no requirement to do so if they don’t owe anything and aren’t expecting a refund. While that can be true, it is also necessary to file in order to receive a number of income-tested tax credits and benefits, including the harmonized sales tax (HST) credit, the Canada Child Benefit, and a range of provincial tax credits. Those who don’t file cannot have their eligibility for such credits determined and, therefore, no credits can be paid to them. Others don’t file because they have a balance owing but don’t have the funds to pay that balance on filing. That, too, is the wrong approach, as anyone who owes taxes but doesn’t file a return by the filing deadline gets hit with an immediate penalty of at least 5% of the outstanding amount owed. In such circumstances, the right approach is to file on time and to contact the CRA in order to come to an agreement on a payment arrangement over time. Finally, there is a persistent (and completely false) tax myth that has been circulating for decades, that the federal government does not have the legal right to collect taxes, and every year some taxpayers fall victim to someone peddling that myth.
There are also a number of Canadians who file returns in which income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed. While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate isn’t high, there are a lot of such returns when measured by absolute numbers. And, although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each and every instance of non-compliance simply aren’t available, especially since in many cases the amount recovered may be less than the costs which must be incurred to recover that amount.
With all of that in mind, several years ago the CRA instituted a program intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arose from the fact that, in most cases, while such taxpayers would have to pay outstanding tax amounts owed, plus interest, they would not be subject to penalties which would normally be imposed and would, in addition, avoid the risk of criminal prosecution.
That program, the Voluntary Disclosure Program (VDP), generally fulfilled its objectives but was criticized as being a means by which those who engage in deliberate tax avoidance could escape the consequences of their actions. As a result, changes were made to the VDP in March of 2018, with the effect of narrowing the eligibility criteria for the program and imposing additional conditions on participants.
The changes made in 2018 did not alter the basic requirements for participation in the VDP, which are still as follows. To qualify for relief, an application made with respect to non-compliance with income tax filing and payment obligations must:
Under the current VDP structure, there are two separate programs for income tax disclosures — the Limited Program and the General Program — and the kind and extent of relief available depends on the track to which a particular application is assigned.
While the CRA will make a determination of whether an application should proceed under the Limited or the General Program on a case-by-case basis, there are guidelines in place. The CRA’s intention is to restrict the Limited Program to instances in which applications disclose non-compliance which appears to include intentional (as distinct from inadvertent) conduct on the part of the taxpayer. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:
Those whose applications are accepted under the Limited Program will not be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer. Interest on outstanding tax balances will be payable, however, and other penalties will be levied.
Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief, specifically for the years preceding the three most recent years of non-compliance — that is, for the years preceding the three most recent years of returns required to be filed. For example, a taxpayer who makes an application to the VDP and who has failed to file returns for the 2010 through 2017 taxation years may be provided with interest relief with respect to taxes owed for the 2010-2014 taxation years. Such relief is generally equal to 50% of interest owed (i.e., the taxpayer will be required to pay only half of the interest charges which would otherwise be levied for those years). No interest relief will, however, be provided on tax amounts owed for the three most recent (2015-2017) taxation years. Since interest charges levied by the CRA are, by law, greater than current commercial rates and interest charged is compounded daily, having interest amounts forgiven, even in part, can make a significant difference to the overall tax bill faced by the taxpayer.
In order to benefit from the VDP, taxpayers must first make an application to the program. That application must include payment of the estimated taxes owing, as a condition of participation in the VDP. Where a taxpayer is financially unable to make that tax payment, he or she can request that the CRA consider a payment arrangement.
The decision to apply to the VDP and to “come clean” about all previous tax transgressions is one which many taxpayers may well view with trepidation. Those who are unsure about whether they want to move forward with a VDP application can take advantage of the CRA’s “pre-disclosure discussion service”. As the name implies, that service allows taxpayers to participate in preliminary discussions, on an anonymous basis”, to gain some knowledge about the VDP program, the process involved and the potential relief available.
Taxpayers who decide to move forward with an application to the VDP can complete and file Form RC199, Voluntary Disclosures Program Application, which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/rc199.html. While use of this form is not mandatory — a letter will suffice — there’s really no downside to using the prescribed form, and doing so will ensure that all of the needed information is provided to the tax authorities. Once the application is received, the CRA will check to make certain that the applicant is eligible to apply and that all of the required information, documentation, and payment has been sent. The CRA will then let the taxpayer know of his or her acceptance into the VDP and the effective date of that acceptance. The next step is for the CRA to evaluate the application to ensure that the five criteria for participation in the VDP (as listed above) are satisfied and to determine the program (Limited or General) to which the application should be assigned, and the taxation year(s) for which relief is being considered. The taxpayer will be provided with that information in writing. The CRA’s advice is that taxpayers should contact them (for individual taxpayers, by calling the Individual Income Tax Enquiries line at 1-800-959-8281) if they have not heard from the CRA within four or five weeks of submitting an application.
If the decision made is that the application is not eligible for the VDP, that the necessary information, documentation, or payment was not received, that the five conditions of a valid application are not met, or that the circumstances are such that relief is not typically considered the taxpayer will also be advised in writing, with reasons, of the CRA’s decision to deny the application.
Where the decision made by the CRA is one with which the taxpayer does not agree, he or she is entitled to ask for a second review of the application. If that decision is also unfavourable, it is possible for a taxpayer to ask a court to review the decision and direct the CRA to re-consider the VDP application. However, taxpayers should be aware that the circumstances in which courts can do so are very limited and such applications to court are more often than not unsuccessful. In any case, a taxpayer who is considering a court application with respect to a decision made under the VDP should obtain legal advice before doing so.
Finally, taxpayers should recognize that the VDP Program can’t be used as a kind of “get out of jail free card” with respect to repeated failures to meet their tax filing and payment obligations. The CRA website makes it clear that the Agency expects taxpayers who have benefitted from the VDP to thereafter meet their tax obligations and a second review will be provided for the same taxpayer only in unusual situations where the circumstances are beyond the taxpayer’s control.
Detailed information on the VDP program can be found on the CRA website at https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html.