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

Corporate:

Issue #19 Corporate

Personal:

Issue #19 Personal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax 101 for snowbirds

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

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

Health care coverage

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

Old Age Security and Canada Pension Plan payments

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

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

Application of U.S. tax laws

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Corporate:

Issue #17 Corporate

Individual:

Issue #17 Personal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Federal

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

Alberta

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

Saskatchewan

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

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

Manitoba

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

Nova Scotia

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

New Brunswick

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

With My Account you can see information about your:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

February is the month in which millions of Canadian taxpayers receive an Instalment Reminder from the Canada Revenue Agency (CRA). For many of the taxpayers who have received such notices in the past, the reminder and the tax instalment process are familiar, although not necessarily welcome. For those who are receiving one for the first time, however, both the reminder itself and figuring out how to deal with it can be baffling.

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

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

Canadian tax rules provide that a taxpayer may be required to pay income tax by instalments where the amount of tax owing on filing is more than $3,000 in the current year (2011) and either of the two previous years (2009 or 2010). Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer's income is at least $3,000 less than their total tax liability for the current and either of the two previous years. Such instalment payments of tax are due on March 15, June 15, September 15 and December 15 of each year.

An Instalment Reminder issued by the CRA in February 2011 will specify two amounts: one to be paid by March 15, and the other due by June 15. Those amounts represent the Agency's best estimate, based on the taxpayer's return filed for the 2009 taxation year, of the net tax which will be payable by the taxpayer for 2011. The taxpayer then has the following three options.

First, the taxpayer can pay the amounts specified on the Reminder by the respective due dates of March 15 and June 15. A taxpayer who does so can be certain that he or she will not face any interest or penalty charges, even if the amount paid turns out to be less than the taxes actually payable for the 2011 tax year. (If the instalments paid turn out to be more than the taxpayer's net tax liability for 2011, he or she will of course receive a refund on filing.)

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

Third, the taxpayer can estimate the amount of tax that he or she will owe for 2011 and can pay instalments based on that estimate. Where a taxpayer's income will decrease from 2010 to 2011 and there will consequently be a reduction in tax payable, this option may be worth considering.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2011 tax year is filed in the spring of 2012. However, should instalments paid have been late or insufficient, the CRA can impose interest charges at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2011—until March 31, 2011—is 5%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day's interest. It is also possible for the CRA to impose penalties, but this is typically done only where the amount of instalment interest charged for the year is more than $1,000.

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

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

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

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

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

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

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

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

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

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

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

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

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

 Things to be dealt with by December 31, 2010

• Medical expense credit calculation

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

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

• Make charitable donations for 2010

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

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

It’s also possible to carry forward for up to five years donations which were made in a particular tax year. So, if donations made in 2010 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2005, 2006, 2007, 2008, or 2009 tax years can be carried forward and added to the total donations made in 2010, and the aggregate amount claimed on the 2010 tax return.

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

• Tax-free savings account withdrawals

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

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

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

• Spousal RRSP contributions

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

• Take a look at tax instalment amounts

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

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

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

 Things that can wait (for a bit)

• 100% deduction for computer and computer software acquisitions

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

• RRSP contribution deadline

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

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

 Things that can wait until April 2011

• Pension income splitting

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

The Canada Revenue Agency (the "CRA") has repeatedly indicated that it would not challenge the reasonableness of salaries and bonuses paid to principal shareholders/managers resident in Canada when the general practice of the corporation is to distribute the business profits of the company to its shareholders/managers in the form of bonuses or additional salary. The CRA has accepted annual bonuses of a Canadian-controlled private corporation which reduce the income of the corporation to the small business rate. The CRA will apply this policy where the shares of the corporation are held by holding companies or trusts, provided the recipients of the bonus are active in the operating business and contribute to the income-producing activities from which the remuneration is paid.

The issue is whether the CRA will extend this position to include Canadian-controlled private corporations ("CCPCs") that earn non-active business income. At the 2001 Revenue Canada Round Table of the Canadian Tax Foundation, in Question 7, the CRA indicated it would not normally challenge the reasonableness of salaries and bonuses paid out of non-active business income, provided the payer is a CCPC and the recipients are active shareholders/managers who are resident in Canada.

At the 2003 CCRA/Practitioner Round Table, in Question 4, the CRA indicated that its policy regarding bonuses may not apply to permit a bonus to be paid from the proceeds of sale of assets that are outside the normal business. The CRA may not permit an unlimited bonus to be paid out of proceeds generated from a major sale of corporate assets. This would encompass all sources of income generated from the sale, including capital gains, recapture of capital cost allowance, and income from the disposition of eligible capital properties. As a result, the deduction of bonuses out of investment income could be challenged as an unreasonable expense.

Following the 2003 CCRA/Practitioner Round Table, Technical Interpretation 2003-0046624  --  Reasonableness of Shareholder Remuneration was issued. It clarified the CRA's position at the 2003 Round Table on bonuses being paid out of the proceeds of the sale of business assets. The Technical Interpretation indicated that the CRA's position is that income generated from a major sale of business assets is not earned during the normal course of business operations, but rather is an indication of the cessation of business operations. The CRA may challenge the reasonableness of remuneration paid in this situation for the purposes of section 67 of the Act. The CRA will not generally be concerned with the situation in which there is an incidental sale of business assets that occurs during the normal course of business operations. The Technical Interpretation then provided, "we would like to emphasize that our response to Question 4 does not mean that remuneration paid from the proceeds of a major sale of business assets will necessarily be considered unreasonable for purposes of section 67 of the Act". The CRA reserved the right to question reasonableness and indicated that it would be possible to obtain an advance tax ruling. The ruling process will provide certainty to taxpayers on the taxable status of remuneration paid in situations that may be outside the scope of the policy.

In advance tax ruling 2004-0060191R3, the CRA ruled positively on the deductibility of shareholder/manager remuneration paid out of income triggered from the proceeds of sale of business assets. A corporation owned by six shareholders (only one of which was not a related party) sold its business. The assets sold included franchise rights and goodwill which were eligible capital property. As a result of the sale, an amount was included in the corporation's business income pursuant to subsection 14(1) of the Act. The corporation declared a bonus out of this income to active shareholder/managers to compensate them for their contribution towards the successful management of the corporation. The CRA ruled that section 67 and paragraphs 18(1)(a) and {18(1)(e) did not apply to prohibit the corporation from deducting the amount of the bonus in computing its business income.