July 2015 Newsletter


 

Minimizing the cost of post-secondary education

 While for elementary and secondary school students, the summer is just beginning, post-secondary students are already halfway through their summer break between school years. And, as summer starts winding down, these post-secondary students will start thinking about choosing courses and finding a place to live during the coming academic year. Their parents’ attention will more likely be focused on the cost of that year, and the upcoming deadlines for payment of first semester tuition and housing costs.

Whether a student attends college or university, post-secondary education is expensive. Even those who cut costs as much as possible by living at home during their college or university years must still spend thousands of dollars on tuition fees and required textbooks. Where a student lives away from home, whether in residence or in rental housing off-campus, it’s realistic to budget between $15,000 and $20,000 annually for the combined cost of school and living expenses.

There are, fortunately, tax credits provided through our tax system to help offset some of the costs of post-secondary education. At the federal level, a non-refundable tax credit equal to 15% of qualifying costs can be claimed by the student. A parallel credit is claimable at the provincial or territorial level, with the available percentage credit varying, depending on the province or territory in which the student lives and files an income tax return.
There are, however, specific rules on the kinds of costs which qualify for such credit. Unfortunately, the largest cost incurred by post-secondary students each year—the cost of living in a student residence and purchasing a meal plan or the cost of renting off-campus and buying groceries—doesn’t qualify, as the student would have to have incurred costs for shelter and food in any case.

The good news, however, is that a non-refundable tax credit can be claimed for virtually all other education-related costs, including tuition, books, and most ancillary expenses (e.g., examination fees or mandatory computer service fees which are levied as part of a student’s tuition). And, where a student can’t make use of the full credit available, that credit can usually be transferred to, and claimed by, a spouse, parent, or grandparent.

After the cost of food and shelter, the largest expense faced by post-secondary students is the cost of tuition, which can range from $4,000 a year to over $15,000. No matter what the amount, students are entitled to a non-refundable federal tax credit equal to 15% of their tuition bill. A parallel provincial or territorial credit can also be claimed, with the percentage credit ranging, in 2015, from 4% 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 2015, 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 somewhat misleading, 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 income—and therefore the resulting tax payable—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.

No matter how diligently parents save for a child’s post-secondary education or how lucrative a student’s summer jobs are, today’s reality is that most students will have incurred some debt—a lot of debt in some cases—to pay the cost of post-secondary 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), the student can claim a tax credit at both the federal and provincial levels for interest paid on those loans. It’s important to remember, however, that only interest paid on loans extended under government-sponsored programs qualifies for the credit. Loans provided by private lenders (for example, through a student line of credit) do not qualify, and interest paid on any consolidated loans which include funds advanced by private-sector lenders will similarly not be eligible for the credit. In today’s low interest rate environment, a financial institution may offer (usually at the time repayment of government student loans must begin) to consolidate all of a student’s outstanding debt at a preferential interest rate. Post-secondary graduates should consider such offers carefully, as any mingling of government student loan balances with private sector lending will disqualify the student from claiming a tax credit for interest paid on that government student loan.

While the long-term benefits are undeniable, obtaining a post-secondary education has never been (and likely never will be) an inexpensive proposition. The costs involved, can, however, be kept to the minimum possible by ensuring that every tax “break” available, during both the post-secondary years and thereafter, is claimed in the most tax-efficient way possible.

 

Getting (tax) credit(s) for financing the political process

 Canadians will go to the polls for the next federal election on October 19, 2015, and the campaign by all parties to win votes in that election is already on. And, while no two election campaigns are alike, either in the way they are run or the ultimate outcome, they all have one thing in common—money. It costs a great deal of money to run a national election campaign, and each party and candidate seeking election or re-election in October has been and will be seeking contributions from individual Canadians to help them finance their campaigns. The task of raising that money is made somewhat easier by the fact that Canadian taxpayers who donate money to political parties or candidates can claim a federal tax credit for those donations.The Income Tax Act provides for a credit to be claimed by taxpayers who contribute funds, either to registered political parties or to candidates running in the federal election. Contributions can be made at any time, not just during an election campaign, as long as the donation is received by an official candidate or a registered party.

Many Canadians would undoubtedly be surprised to learn that, as of June 19, 2015, there were 17 registered political parties. They are as follows, in alphabetical order:

Animal Alliance Environment Voters Party of Canada

Bloc Québécois

Canadian Action Party

Christian Heritage Party of Canada

Communist Party of Canada

Conservative Party of Canada

Green Party of Canada

Liberal Party of Canada

Libertarian Party of Canada

Marijuana Party

Marxist-Leninist Party of Canada

New Democratic Party

Party for Accountability, Competency and Transparency

Pirate Party of Canada

Progressive Canadian Party

Rhinoceros Party

United Party of Canada

 

Limits are placed on the amount of contributions which may be made by any individual Canadian. Effective as of January 1, 2015, individuals can donate no more than:

  • $1,500 in any calendar year to each registered political party;
  • $1,500 in total in any calendar year to the various entities of each registered political party (registered associations, nomination contestants and candidates); and
  • $1,500 in total to the leadership contestants in a particular leadership contest.

Putting all of the above together, an individual could contribute, in a year in which there is both a party leadership contest and a general election, a total of $4,500 to a combination of a registered political party, a registered candidate, and a leadership contestant. However, only funds contributed to a registered political party or an official candidate are eligible for the tax credit, and dollar limits are placed on the amount of funds contributed which will be eligible for that credit.

The federal political tax credit is calculated as a percentage of donations given. However, the credit percentage decreases as contributions amounts increase, and no credit at all is given for donations in excess of $1,275. The credit percentages allowed at different contribution levels are as follows:

Contribution amount                Allowable tax credit
      $0.01 to $400   75% of the contribution
     $400.01 to $750   $300 + 50% of the contribution over $400
    $750.01 and over

 

 $475 + 33.3% of the contribution over $750

The maximum credit claimable in any taxation year by a single taxpayer is $650. Once the math is worked out, it becomes clear that the maximum credit obtainable is reached once contribution levels reach $1,275.

Contribution amount         Allowable tax credit

$400 × 75% =                                  $300

$350 × 50% =                                  $175

$525 × 33.3% =                               $175

$1,275                                           $650

While taxpayers are free, of course, to donate up to the limits imposed by law, where donations exceed $1,275 in any one taxation year, no tax credit can be claimed on the “excess” donation. As well, there is no provision which allows the taxpayer to carryover any “excess” contributions to a subsequent taxation year, meaning that no credit will ever be obtainable with respect to those “excess” contributions.

Many Canadians who are committed to a particular political party or candidate volunteer their time during a nomination or election campaign—canvassing for the candidate, putting up election signs, or telephoning voters to encourage them to vote for the candidate. However, in this case, the work must be its own reward, as no income tax receipts can be issued for such non-monetary contributions and consequently no credit can be claimed for the value of any non-monetary contribution (including volunteer hours) donated.

Where a monetary contribution is made, an official receipt must be issued in order for the tax credit to be claimed, and a receipt must be issued for every contribution over $20.

The actual credit for qualifying donations made is claimed on the tax return for the year in which the contribution was made. The amount of the credit is calculated (according to the formula outlined above) on the Federal Worksheet, and the amount of the actual credit entered on line 410 of Schedule 1 of the federal tax return. By the time the return is filed, of course, the election will be long since over, the newly elected government will be in Ottawa, and the taxpayer will be in a position to assess whether it was, in fact, money well spent.

 

Bankruptcies by seniors on the rise

 Conventional wisdom with respect to the cycle of income, debt, and savings over an individual’s lifetime is based on certain assumptions. Generally, it is assumed that Canadians in their 20s and 30s will see their financial affairs weighted far more heavily on the debt side of the equation, as they pay off student loans, buy a home (and take on a mortgage), and meet the financial demands of raising children while building a career. As those individuals move into their 40s and 50s, it’s assumed that the financial demands of raising that family will eventually decline and the mortgage will be paid off. As well, the two decades between 40 and 60 have traditionally been the peaking earning years and, as other financial obligations are reduced, some of those higher earnings can be redirected to saving for retirement. Ultimately, the cycle ends with retirement around the age of 60 or 65, with a paid-for home, no debt, and adequate savings for retirement.Some recent statistics and studies suggest that the scenario outlined above now represents more of an ideal than the current reality, especially for those nearing or in retirement. The most recent release of statistics from the Office of the Superintendent of Bankruptcy indicates that, for 2014, individuals aged 65 and older represented 10% of all insolvencies. While that statistic is unsettling in itself, what’s more worrisome is the trend. In the four years between 2010 and 2014, bankruptcy filings by seniors rose by over 20%.

The question which arises is how members of a demographic group for which assets traditionally exceeded debt (if there was any debt at all) by a wide margin finds itself declaring bankruptcy in increasing numbers.

The partial answer to that is that starting retirement while still having outstanding debts is becoming almost the norm. Statistics Canada’s figures for 2012 show that the percentage of seniors having some type of debt stood at 42.5%. For 1999, that percentage stood at 27.4%. And, given that the overall debt-to-income ratio of Canadians has risen since 2012, it is reasonable to think that that the percentage of seniors carrying some form of debt is now higher than 42.5%.

Retirees who have outstanding debt are between the proverbial rock and a hard place of fixed incomes and growing expenses. While many retirees can and do take on part-time work to supplement their income, the fact is that it’s difficult, once past the age of 65, to increase one’s income in a significant way. And, where every dollar of income is needed to meet current expenses, including debt servicing costs, it doesn’t take much to tip the balance into negative territory. And when that happens, the solution is often taking on more debt.

An analysis of debt patterns among insolvent debtors recently carried out by a national firm of trustees in bankruptcy identified seniors and pre-retirement debtors as having the highest unsecured debt load among all age groups. Specifically, insolvent individuals aged 60 and over carried an average credit card debt of just over $33,000 and average personal loan debt of just over $20,000. Older debtors are also, it seems, turning to even more costly forms of financing, as the same study showed that almost 1 in 10 debtors over the age of 60 had at least one payday loan at the time of their insolvency. Payday loan companies are willing to lend against Canada Pension Plan benefits or private pension payments, as they are viewed as secure and stable sources of income. Consequently, it’s perhaps not surprising that among seniors who had taken out payday loans, the average such debt was just over $3,500—the highest among all age groups.

There’s no single reason, of course, as to why Canadians in retirement reach the point of insolvency. While it’s clear that carrying debt into retirement increases the risk of eventual insolvency (a risk that will increase when interest rates rise), it’s more often an accumulation of factors that push individuals to the point of making a consumer proposal or declaring bankruptcy. It may be that seniors who were able to manage their debt when their source of financing was a home equity line of credit on which interest was payable at 4% find themselves needing to turn to credit cards, or even maxing out their credit cards and resorting to payday loans which charge a much, much higher rate of interest. The study examining debt patterns among insolvent debtors found that the typical insolvent debtor (across all age groups) was paying a blended interest rate of 19% or more per year on all of their debt. In other cases, unexpected expenses push individuals over the line from just managing to financial crisis.

No financial or retirement plan can guard against all of life’s eventualities, but there are some strategies which make sense for everyone. Starting retirement without debt of any kind should be a priority. Those approaching retirement who have outstanding debt (including a mortgage) should put repayment of that debt at the top of their financial to-do list. For those who are already retired with debt, there are still options. Where at all possible, repaying that debt while interest rates remain low should similarly be a priority. For those who are finding that keeping up with existing debt is becoming impossible, taking on more debt (especially forms of extremely high interest debt like payday loans) isn’t the solution. Retirees who are having trouble managing can seek help (free of charge) from one of Canada’s many non-profit credit counseling agencies. A listing of such agencies can be found at www.caccs.ca/

Finally, it’s clear from the statistics that in some cases the circumstances are such that making a consumer proposal or declaring bankruptcy is the only realistic available option. Few individuals want to be in that position, but if the alternative is living with significant ongoing financial stress with no prospect of improvement, making a consumer proposal or declaring bankruptcy, and the fresh start which follows, can be the better choice.

 

Protecting yourself from telephone tax scams

Fraud isn’t and never has been a seasonal business—every day of the year, attempts are made to cheat individuals out of their hard-earned income or savings. There are, however, times of the year when some types of scams are more prevalent and tax scams flourish during tax filing season.

For most of the year, taxpayers live quite happily without any contact with the Canada Revenue Agency (CRA). During filing season, however, such contact is routine—tax returns must be filed, Notices of Assessment are received from the CRA and, on occasion, the CRA will contact a taxpayer seeking clarification of income amounts reported or documentation of deductions or credits claimed on the annual return. Consequently, it wouldn’t necessarily strike taxpayers as unusual to be contacted by the CRA with a message that a tax amount is owed or, more happily, that the taxpayer is owed a refund. That fact makes it much easier for individuals posing as representatives of the CRA to successfully pass themselves off as such.

There are, generally, two ways in which fraud artists prey on taxpayers. First, a taxpayer may receive an e-mail telling them that they are owed money by the CRA, and asking them to click on a link in the e-mail to be connected to the CRA website. Once on that website (which of course is not the CRA’s website) they are asked to provide personal and financial data, like bank account numbers, in order to receive their money. That information is then used to defraud them. The other method of fraudulently obtaining money from taxpayer is to falsely inform them that they owe money to the CRA and that payment must be made immediately to avoid serious negative consequences.

This year it seems that the latter type of scam is more prevalent. As recently reported in the media, a large number of Canadians, in several provinces, have been contacted by telephone by someone purporting to be from the CRA. The recipient of such a call is informed that he or she owes money to the CRA, and that if payment is not made immediately (usually a wire transfer of funds or payment by pre-paid credit card is suggested), significant negative consequences will follow, including the cancellation of the taxpayer’s Canadian passport, social insurance card, or other government-issued identification.

There are several things about such a call that should alert the recipient to the fact that it’s not legitimate. First of all, if a taxpayer does in fact owe money to the CRA, he or she will be first advised of that fact by mail and not by telephone—generally in his or her Notice of Assessment for the year. Second, the CRA would never suggest that a taxpayer send funds to them by wire transfer or by using a pre-paid credit card—payment of taxes owing is made online, through the CRA website, at one’s financial institution, or by mailing of a cheque to the CRA. Finally, any suggestion that the CRA will cancel the taxpayer’s passport (or any other type of government-issued documentation) for failure to make a payment is simply ludicrous.

Where a telephone call is received from someone purporting to be from the CRA, it’s perfectly reasonable for the taxpayer to request a callback number at which the caller can be reached.

There’s almost no limit to the number and variety of scams and phishing attempts that are carried out using the CRA’s name, and new ones appear frequently. Unfortunately, many such scams including, it seems, this most recent one originate outside of Canada, limiting the ability of the CRA and law enforcement authorities to police or stop them. For the most part, the onus will fall on individual taxpayers who receive fraudulent calls or e-mails to protect themselves. The CRA suggests that, in order to avoid becoming a victim of such scams, taxpayers should keep the following general guidelines in mind.

The CRA:

  • NEVER requests information from a taxpayer about a passport, health card, or driver’s license;
  • NEVER leaves any personal information on an answering machine or asks taxpayers to leave a message with their personal information on an answering machine;
  • will not request pre-paid credit cards;
  • will not request personal information of any kind from a taxpayer by e-mail; and
  • will not divulge taxpayer information to another person unless formal authorization is provided by the taxpayer.

When in doubt, a taxpayer should ask him or herself the following.

  •          Am I expecting additional money from the CRA?
  •          Does this sound too good to be true?
  • Is the requester asking for information I would not include with my tax return?
  • Is the requester asking for information I know the CRA already has on file for me?
  • How did the requester get my email address or telephone number?
  • Am I confident I know who is asking for the information?
  • Is there a reason that the CRA would be calling (e.g., do I have a tax balance outstanding)? And, is this the first I have heard of any tax balance owing?
  • Is the person calling me willing to provide a number at which I can reach them?

A taxpayer who receives what seems to be a suspicious communication should report that by e-mail to [email protected] or can call the Canadian Anti-Fraud Centre at 1-888-495-8501. If the worst happens and an individual has been tricked into providing personal or financial information, the following steps are suggested.

Step 1 – Contact your bank/financial institution or credit card company

Step 2 – Contact your credit bureau and have fraud alerts placed on your credit reports:

Equifax Canada
Toll-free telephone: 1-800-465-7166 begin_of_the_skype_highlighting end_of_the_skype_highlighting

TransUnion Canada
Toll-free fax: 1-877-411-2611 begin_of_the_skype_highlighting end_of_the_skype_highlighting

Step 3 – Contact your local police

Step 4 – Always report phishing. If you have responded to a suspicious e-mail, report it to [email protected].

Fraud isn’t new, and it isn’t going away any time soon. However, the speed and anonymity of electronic communication, and the extent to which most people are now comfortable transacting their tax and financial affairs online or over the phone makes it easier in many ways for fraud artists to succeed. The best defence against becoming a victim of such scams is a healthy degree of caution, even skepticism, and a refusal to provide any personal or financial information and especially to make any kind of payment—whether by phone, e-mail or online—without first verifying the legitimacy of the request.