Claiming a deduction for moving expenses (June 2015)
Spring is the traditional season for real estate sales and purchases, and the spring of 2015 is proving to be no exception. In fact, the residential real estate market is particularly active this year. According to statistics compiled by the Canadian Real Estate Association (CREA), “actual (not seasonally adjusted) activity in March stood 9.5% above levels reported in March 2014 and slightly above the 10-year average for the month.”
The increase in real estate activity is likely fueled by a couple of factors. First, while interest rates continue to be at historic lows, the inevitable eventual increase in those rates (and consequently in the cost of carrying a mortgage) is always on the horizon. Second, Canadian house prices continue their seemingly inexorable rise. Again according to CREA statistics, “[T]he actual (not seasonally adjusted) national average price for homes sold in March 2015 was $439,144, up 9.4% on a year-over-year basis.” Many would-be homeowners are looking to get into the housing market while interest rates are low, and before prices rise any further.
All of this means that a great number of Canadians will be buying or selling a house this spring and summer and, inevitably, moving. Moving is a stressful and often expensive undertaking, even when the move is a desired one—buying a first home, perhaps, or taking a step up the property ladder to a second and larger home. There is not much that can diminish the stress of moving, but the associated costs can be offset somewhat by a tax deduction which may be claimed for many of those costs.
It’s important to note first of all that not all moves will qualify for a moving expense deduction. Our tax system allows taxpayers to claim a deduction only where the move is made to get the taxpayer closer to his or her new place of work, whether that work is a transfer, a new job, or self-employment. Specifically, moving expenses can be deducted where the move is made to bring the taxpayer at least 40 kilometres closer to his or her new place of work. That requirement is satisfied where, for instance, a taxpayer moves from Calgary to Vancouver to take a new job. It’s also met where a taxpayer is transferred by his or her employer to another job in a different location and the taxpayer’s move will bring him or her at 40 kilometres closer to the new work location. As well, it’s not necessary to be a homeowner in order to claim moving expenses. The list of moving-related expenses which may be deducted is the same for everyone—homeowner or tenant—who meets the 40-kilometre requirement. Students who are moving to take a summer job (even if that move is back to the family home) can also make a claim for moving expenses where that move meets the 40-kilometre requirement.
The general rule is that a taxpayer can claim reasonable amounts that were paid for moving himself or herself, family members, and household effects. In all cases, the moving expenses must be deducted from employment or self-employment income earned at the new location. Where the amount of that income earned at the new location in the year of the move is less than deductible moving expenses incurred, those expenses can be carried over and deducted from such income in future years.
Within that general rule, there are a number of specific inclusions, exclusions, and limitations. The following is a list of expenses which can be claimed by the taxpayer without specific dollar figure restrictions (but subject, as always, to the overriding requirement of “reasonableness”).
- traveling expenses, including vehicle expenses, meals and accommodation, to move the taxpayer and members of his or her family to their new residence (note that not all members of the household have to travel together or at the same time);
- transportation and storage costs (such as packing, hauling, in-transit storage, and insurance) for household effects, including items such as boats and trailers;
- costs for up to 15 days for meals and temporary accommodation near the old and the new residences for the members of the household;
- lease cancellation charges (but not rent) on the old residence;
- legal fees incurred for the purchase of the new residence, together with any taxes paid for the transfer or registration of title to the new residence (but excluding GST or HST and property taxes);
- the cost of selling the old residence, including advertising, notary or legal fees, real estate commissions, and any mortgage penalties paid when a mortgage is paid off before maturity; and
- the cost of changing an address on legal documents, replacing driving licences and non-commercial vehicle permits (except insurance), and costs related to utility hook-ups and disconnections.
It sometimes happens that a move to the new home has to take place before the old residence is sold. In such circumstances, the taxpayer is entitled to deduct up to $5,000 in costs incurred for the maintenance of that residence while it is vacant and efforts are being made to sell it. Specifically, costs including interest, property taxes, insurance premiums, and heat and utilities expenses paid to maintain the old residence while efforts were being made to sell it may be deducted. If any family members are still living at the old residence, or it is being rented, no deduction is available.
It may seem from the forgoing that virtually all moving-related costs will be deductible; however, there are some costs for which the CRA will not permit a deduction to be claimed, which are as follows:
- expenses for work done to make the old residence more saleable;
- any loss incurred on the sale of the old residence;
- expenses for job-hunting or house-hunting trips to another city (for example, costs to travel to job interviews or meet with real estate agents);
- expenses incurred to clean or repair a rental residence to meet the landlord’s standards;
- costs to replace such personal-use items as drapery and carpets; and
- mail forwarding costs.
To claim a deduction for any eligible costs incurred, supporting receipts must be obtained. While the receipts do not have to be filed with the return on which the related deduction is claimed, they must be kept in case the CRA wants to review them.
Anyone who has ever moved knows that there are many details to be dealt with. In some cases, the administrative burden of claiming moving-related expenses can be minimized by choosing to claim a standardized amount for certain types of expenses. Specifically, the CRA allows taxpayers to claim a fixed amount, without the need for detailed receipts, for travel and meal expenses related to a move. Using that standardized, or flat rate method, taxpayers may claim up to $17 per meal, to a maximum of $51 per day, for each person in the household. Similarly, the taxpayer can claim a set per-kilometre amount for kilometres driven in connection with the move. The per-kilometre amount ranges from 45.5 cents for Alberta to 64 cents for the Yukon Territory. In all cases, it is the province or territory in which the travel begins which determines the applicable rate.
These standardized travel and meal expense rates are those which were in effect for the 2014 taxation year—the CRA will be posting the rates for 2015 on its website early in 2016, in time for the tax filing season.
The rules which govern the deduction of moving expenses are not complex, but they are very detailed. The best summary of those rules is found on the form used to claim such expenses—the T1-M, which was updated and re-issued by the CRA in January of this year. The current version of the form can be found on the CRA’s website atwww.cra-arc.gc.ca/E/pbg/tf/t1-m/t1-m-14e.pdf, and more information is available at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/menu-eng.html. Details of the allowable amounts which may be claimed for standardized moving-related meal and travel expenses can be found on the same website atwww.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns248-260/255/rts-eng.html.
The full Canadian Real Estate Association report on current home sales activity can be found on the Association’s website at http://creastats.crea.ca/natl/index.htm.
Fixing a mistake on your tax return (June 2015)
According to figures posted on the Canada Revenue Agency (CRA) website, the Agency had, by April 19, 2015, received almost 16 million 2014 individual income tax returns, and had processed slightly more than 14 million of those returns. Those returns already processed represent about half of the total number of returns to be filed for the year: last year, the total number of T1 individual income tax returns filed was just over 28 million.
Most (56%) of the returns filed so far this year were EFILED, while 30% were filed using the CRA’s online filing option, NETFILE, and the remaining 14% were paper filed. Whatever the filing method, once a return is filed the CRA’s process is to do an initial review based on the information provided by the taxpayer, and to issue a Notice of Assessment to that taxpayer. In some cases, the Agency will make changes or corrections (of an arithmetical nature—the CRA does not alter a return to add credits or deductions not already claimed by the taxpayer), while in other instances the return is “assessed as filed”—that is, the CRA agrees with the information filed by the taxpayer, and no changes to the return are needed. In either case, unless the taxpayer disagrees with and wishes to dispute the Notice of Assessment issued by the CRA, his or her tax filing obligations for the year are complete.
That process of initial review by the CRA, followed by the issuance of a Notice of Assessment can, however, be “short-circuited” in a couple of ways. First, the taxpayer sometimes realizes that the already-filed return contains an error, or second, the CRA determines that its initial review of the return cannot be completed until it obtains more information or documentation from the taxpayer.
In most cases, it is the taxpayer who discovers, after the return is filed, that information has been inadvertently misstated, or perhaps amounts have been omitted where an information slip was received after the return was filed. In such situations, the taxpayer is often at a loss to know how to proceed, but the process for amending a return is actually quite straightforward. The first reaction in such circumstances is sometimes simply to file another, corrected return, but that’s not the right course of action. Instead, the taxpayer should wait until a Notice of Assessment is received in respect of the return already filed, and then file a T1 Adjustment Request with the CRA, making the necessary corrections. That request for an adjustment to an already-filed return can be done in any one of three ways, once the Notice of Assessment is received. The available methods are outlined on the CRA website, as follows.
- Use the “change my return” option found on the CRA website in My Account at www.cra-arc.gc.ca/myaccount.
- Send a completed Form T1-ADJ, T1 Adjustment Request, to the taxpayer’s tax centre.
- Send a signed letter to the taxpayer’s tax centre asking for an adjustment to the return.
The easiest and quickest way of requesting an adjustment is through the CRA website’s “My Account” feature, but that option is available only to taxpayers who have already registered for that service. While doing so isn’t difficult (the steps to be taken to do so are outlined on the website at www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/pss_fq/cnd-eng.html#hlp1a), it does take a few weeks to complete the process.
Taxpayers who don’t want to deal with the CRA through its website, or who don’t think it’s worth registering for My Account just to deal with the Agency on a single issue, can obtain hard copy of the T1 Adjustment form from the CRA website. The CRA recently updated and re-issued its T1-ADJ form, and the most recent version of the form can be found at www.cra-arc.gc.ca/E/pbg/tf/t1-adj/README.html. Taxpayers who are unable to print the form off from the website can order a copy to be sent to them by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. Information on the CRA website indicates, however, that the print version of the updated form will not be available until May 20, 2015.
The use of the actual form isn’t mandatory—the third option of sending a letter to the CRA signed by the taxpayer is an acceptable alternative—but using a standardized form has two benefits. First, it makes it clear to the CRA that an adjustment is being requested, and two, filling out the form will ensure that the CRA is provided with all the information needed to process the requested adjustment. Once the form or letter is completed, it should be mailed or faxed to the Tax Centre to which the original return was sent. A taxpayer who isn’t sure anymore where that was can go on the CRA website at www.cra-arc.gc.ca/cntct/tso-bsf-eng.html and, by selecting his or her location from a drop-down menu of provinces and cities, can obtain the address of the Tax Centre to which the adjustment request should be sent.
Sometimes the CRA will contact the taxpayer even before the return is assessed, to request further information or documentation of deductions or credits claimed (for example, information on the custody of a child where one parent has claimed an equivalent to spouse deduction, or receipts documenting child care expenses claimed). In all cases, the best thing to do is respond to such requests promptly, and to provide the requested documents or information. The CRA can assess only on the basis of the information with which it is provided, and where a request for information or supporting documents for a deduction or credit claimed is ignored by the taxpayer, the assessment will proceed on the basis that that such support does not exist. Providing the requested information or supporting documents can usually resolve the question to the CRA’s satisfaction, and the assessment of the taxpayer’s return can then proceed.
Increased TFSA contribution limit in effect for 2015 (June 2015)
There was much speculation—and more than a few hints dropped—that this year’s federal budget would include an increase in the amount which individual Canadians can contribute to a Tax-Free Savings Account (TFSA). That increase was announced as anticipated and, effective with the 2015 tax year, eligible individuals can now contribute up to $10,000 per year to a TFSA. The former limit was $5,500.
It’s useful to review the rules governing TFSAs and TFSA contributions, as those rules have led to some confusion among Canadians in the past. Any Canadian resident who is 18 years of age or older can contribute amounts, to a specified maximum, to a TFSA each year. The maximum allowable annual contribution amount is the same for everyone, regardless of age or income. Amounts contributed to a TFSA are not deductible from income in the year they are contributed, but investment gains of any kind earned on those contributions are not taxed as they accumulate. As well, no tax is payable on withdrawals made from a TFSA, whether those amounts represent original contributions or investment gains.
One of the greatest benefits of a TFSA is its flexibility, in that contributions not made in a particular year can be carried forward and made in any subsequent year. In addition, where amounts are withdrawn from a TFSA, those amounts can be re-contributed in the year following that in which the withdrawal was made.
The TFSA program came into effect in 2009, and the annual contribution limit for 2009 through 2012 was $5,000. That limit was increased to $5,500 for 2013 and 2014. Consequently, it’s possible for individuals who have not made any TFSA contributions at all, who have contributed less than the maximum amount or who have withdrawn funds and not re-contributed them to have carryforward contribution room of up to $31,000.
More information on the TFSA program generally can be found on the Canada Revenue Agency website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html.
Changes to withdrawal rules for RRIFs (June 2015)
Most Canadians, especially those nearing retirement, have saved money through a registered retirement savings plan (RRSP). For all those individuals, no matter what the size of their RRSP or what other sources of retirement income they have, the same rule applies. By the end of the year in which they turn 71, an RRSP holder must collapse that RRSP. There are, essentially, three options available to the individual at that point. First, he or she can simply collapse the plan and have all funds in that plan treated (and taxed) as income for that year. Unless the amount within the RRSP is very small, that’s obviously not a tax-efficient plan, and not a recommended one. Second, the individual can collapse the RRSP and use the funds to purchase an annuity, which will provide a (taxable) income stream for the term of the annuity. That term can be for a fixed number of years, or for the rest of the individual’s life, or some combination of the two. The advantage of an annuity is that it does provide income security for the individual. However, annuity payout rates are based on the interest rates in effect at the time the annuity is purchased, and the current low interest rate environment means that annuity rates are not currently, by historic standards, particularly generous.
The third option, and the one chosen by most taxpayers, is to convert an existing RRSP into a registered retirement income fund (RRIF). Using a RRIF has a number of advantages. Where funds accumulated within an RRSP are moved to a RRIF, those funds can be invested in the same investment vehicles (mutual funds, GICs, bonds, etc.) as they were in the RRSP. Consequently, the invested funds can continue to grow and, as with the RRSP, investment growth within a RRIF is not taxable to the holder of the RRIF.
There are, however, two significant differences between an RRSP and a RRIF. First, once the funds are transferred to a RRIF, no additional contributions can be made. Second, the holder of a RRIF is required to withdraw a specified percentage of funds held within that RRIF each year, and any amounts withdrawn are taxed as income in that year.
It is the second requirement—that of mandatory annual withdrawals—that has been criticized in recent years as too restrictive and, especially, not in step with what might be called the retirement life cycle. The average life expectancy is increasing every year, and the criticism was that the current mandatory withdrawal rules forced individuals to withdraw too much in the early years of retirement, leaving them at risk of not having enough to meet costs (especially medical costs or costs for long-term care) which are more likely to arise in later years.
The recent federal budget included an announcement of a change in those mandatory withdrawal rates. In effect, the changes reduce the required percentage withdrawal by about 2 percentage points per year until age 95, when the old and new withdrawal percentages are the same. Those old and new withdrawal percentage requirements at specified ages are as follows:
Age at start of year Existing withdrawal rate New withdrawal rate
71 7.38% 5.28%
75 7.85% 5.82%
80 8.75% 6.82%
85 10.33% 8.51%
90 13.62% 11.92%
95 and over 20.00% 20.00%
Somewhat unusually, the new rules reducing mandatory RRIF withdrawals are effective on a retroactive basis. Those rules will take effect as of the beginning of 2015, assuming that the enabling legislation is passed by Parliament.
In some cases, individuals holding RRIFs may already have made withdrawals in 2015 which exceed the new minimum withdrawal percentage, or will have done so by the end of the year. The total amount withdrawn will be taxed as income for 2015, but individuals will be allowed to re-contribute any excess amount (that is, any amount greater than the new minimum required withdrawal percentage) to their RRIF on or before February 29, 2016, and to claim a deduction for that contribution on their 2015 tax return.
Finally, it should be noted that the new withdrawal limits, like the old ones, set out the minimum amount which must be withdrawn from a RRIF each year. Holders of RRIFs who wish, for whatever reason, to withdraw more than that minimum amount remain entitled to do so, while remembering than any RRIF withdrawals will be included in income and taxed in the year of withdrawal.
More information on the RRIF changes, including a table outlining the new minimum withdrawal percentages which apply to all age groups from 71 to 95, can be found in the 2015 Federal Budget papers, available on the Finance Canada website at www.budget.gc.ca/2015/docs/plan/anx5-1-eng.html#wb-cont.