December 11

December 2018 Newsletter

The 2018 Fall Economic Statement – some good news for business

While there weren’t a great number of tax measures included in the 2018 Fall Economic Statement brought down by the Minister of Finance on November 21, 2018, the tax changes that were announced represented good news for Canadian businesses.

Perhaps most notably, several of the measures announced include tax changes which will benefit Canadian businesses of all sizes and operating in all sectors of the economy. Generally, those changes involved enhancements to the existing rules which will provide businesses with accelerated write-offs of assets which are acquired after the Budget date.

The Canadian tax system enables taxpayers to deduct (or write off) a specified percentage of the cost of newly-acquired capital property each year, through the capital cost allowance (CCA) system. In the year of acquisition, that deduction is, for most classes of assets, limited to one-half the usual percentage deduction (known as the “half-year rule”). The changes announced in the statement provide businesses with enhanced deductions under the existing capital cost allowance system – in some cases, allowing the entire cost of the property to be deducted in the year it is acquired.

The most broad-based of the changes announced in the statement – the Accelerated Investment Incentive, or AII – will effectively suspend the half-year rule for eligible property, meaning that a full CCA deduction could be taken in the year that eligible property is acquired. In addition, the allowance claimable for that year will be calculated by applying the prescribed CCA rate for that class of property to one-and-a-half times the cost of the property acquired.

For example, the combined effect of those changes is that where a property has a write-off rate of 20% per year, that write off will, under the AII, be equal to 30% of the cost of the property in the year the property is put in use. Significantly, such preferential treatment is not restricted to particular kinds or types of businesses or property. Rather, as stated in the statement, the AII will be available to “businesses of all sizes, across all sectors of the economy, that are making capital investments”. Such property, in order to be fully eligible for the AII, must be acquired and put in use by the taxpayer after November 20, 2018 and before 2024.

The second significant change will allow taxpayers to fully deduct, in the year of acquisition, the cost of machinery and equipment acquired for use in Canada primarily in the manufacturing and processing of goods for sale or lease. Such machinery and equipment, in order to qualify, must be acquired after November 20, 2018, and be available for use before 2024. The enhanced 100% deduction will be phased out for otherwise qualifying property which becomes available for use between 2023 and 2028.

Finally, clean energy equipment acquired by taxpayers in any industry already qualifies for preferential capital cost allowance treatment. That preferential treatment will be enhanced by a measure announced in the Statement which will provide a 100% deduction for such equipment which is acquired after November 20, 2018 and is available for use before 2024. Again, that enhanced deduction will be phased out where the otherwise qualifying property becomes available for use between 2023 and 2028.

While the basics of the three CCA measures announced in the Update are fairly straightforward, the application of those measures, as with any tax change, involves more detailed rules and restrictions. Those rules and restrictions are summarized in an Annex to the 2018 Fall Economic Statement, and that Annex can be found on the Finance Canada website at https://www.budget.gc.ca/fes-eea/2018/docs/statement-enonce/anx03-en.html.

Year-end planning for your RRSP and TFSA

Most Canadians know that the deadline for making contributions to one’s registered retirement savings plan (RRSP) comes after the end of the calendar year, around the end of February. There are, however, some instances an RRSP contribution must be (or should be) made by December 31st, in order to achieve the desired tax result, as follows.

When you need to make your RRSP contribution on or before December 31st

Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71 years of age – usually by converting the RRSP into a registered retirement income fund (RRIF) or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31st is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31st of that year. Once that deadline has passed, no further RRSP contribution is possible.

Make spousal RRSP contributions before December 31

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plans (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2018, the contributor can claim a deduction for that contribution on his or her return for 2018. The spouse can then withdraw that amount as early as January 1, 2021 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2019, the contributor can still claim a deduction for it on the 2018 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2022. It’s an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should there be an unforeseen need to withdraw funds.

Accelerate any planned TFSA withdrawals into 2018

Each Canadian aged 18 and over can make an annual contribution to a Tax-Free Savings Account (TFSA) – the maximum contribution for 2018 is $5,500. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.

Consequently, it makes sense, where a TFSA withdrawal is planned within the next few months, perhaps to pay for a winter vacation or to make an RRSP contribution, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA before December 31st, 2018 will have the amount which is withdrawn added to his or her TFSA contribution limit for 2019, which means it can be re-contributed as early as January 1, 2019. If the same taxpayer waits until January of 2019 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2020.

The tax year is ending – some planning steps to take before December 31st

For individual Canadian taxpayers, the tax year ends at the same time as the calendar year. And what that means for individual Canadians is that any steps taken to reduce their tax payable for 2018 must be completed by December 31, 2018. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan contributions, which can be made any time up to and including March 1, 2019, and claimed on the return for 2018.)

While the remaining timeframe in which tax planning strategies for 2018 can be implemented is only a few weeks, the good news is that the most readily available of those strategies don’t involve a lot of planning or complicated financial structures – in many cases, it’s just a question of considering the timing of steps which would have been taken in any event. What follows is a listing of the steps which should be considered by most Canadian taxpayers as the year-end approaches.

Charitable donations

The federal government and all of the provincial and territorial governments provide a tax credit for donations made to registered charities during the year. In all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year – there are no exceptions.

There is, however, another reason to ensure donations are made by December 31st. The credit provided by each of the federal and provincial or territorial governments is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. Where the taxpayer making the donation has taxable income (for 2018) over $205,843, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2018 will receive a federal credit of $88 ($200 × 15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2018 and January 2019, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2019 donation can’t be claimed until the 2019 return is filed in April 2020. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.

It’s also possible to carry forward, for up to 5 years, donations which were made in a particular tax year. So, if donations made in 2018 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 2013, 2014, 2015, 2016, or 2017 tax years can be carried forward and added to the total donations made in 2018, and the aggregate then claimed on the 2018 tax return.

When claiming charitable donations, it is possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high-income surtax – currently, Ontario and Prince Edward Island – it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.

Timing of medical expenses

There are an increasing number of medical expenses which are not covered by provincial health care plans, and an increasing number of Canadians who do not have private coverage for such costs through their employer. In those situations, Canadians have to pay for such unavoidable expenditures – including dental care, prescription drugs, ambulance trips, and many other para-medical services, like physiotherapy, on an out-of-pocket basis. Fortunately, where such costs must be paid for partially or entirely by the taxpayer, the medical expense tax credit is available to help offset those costs. Unfortunately, the computation of such expenses and, in particular, the timing of making a claim for the credit, can be confusing. In addition, the determination of what expenses qualify for the credit and which do not isn’t necessarily intuitive, nor is the determination of when it’s necessary to obtain prior authorization from a medical professional in order to ensure that the contemplated expenditure will qualify for the credit.

The basic rule is that qualifying medical expenses (a lengthy list of which can be found on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/medical/#mdcl_xpns) over 3% of the taxpayer’s net income, or $2,302, whichever is less, can be claimed for purposes of the medical expense tax credit on the taxpayer’s return for 2018.

Put in more practical terms, the rule for 2018 is that any taxpayer whose net income is less than $76,750 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $76,750 can claim qualifying expenses which exceed the $2,302 threshold.

The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2018 will produce the greatest amount eligible for the credit. That determination will obviously depend on when medical expenses were incurred so there is, unfortunately, no universal rule of thumb which can be used.

Medical expenses incurred by family members – the taxpayer, his or her spouse, dependent children who were born in 2001 or later, and certain other dependent relatives – can be added together and claimed by one member of the family. In most cases, it is best, in order to maximize the amount claimable, to make that claim on the tax return of the lower income spouse, where that spouse has tax payable for the year.

As December 31st approaches, it is a good idea to add up the medical expenses which have been incurred during 2018, as well as those paid during 2017 and not claimed on the 2017 return. Once those totals are known, it will be easier to determine whether to make a claim for 2018 or to wait and claim 2018 expenses on the return for 2019. And, if the decision is to make a claim for 2018, knowing what medical expenses were paid and when will enable the taxpayer to determine the optimal 12-month waiting period for the claim.

Finally, it is a good idea to look into the timing of medical expenses which will have to be paid early in 2019. Where those are significant expenses (for instance, a particularly costly medication which must be taken on an ongoing basis), it may make sense, where possible, to accelerate the payment of those expenses to December 2018, where that means they can be included in 2018 totals and claimed on the 2018 return.

Reviewing tax instalments for 2018

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 liability for the year.

The final quarterly instalment for this year will be due on Monday December 17, 2018. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2018 and so will be in a position to estimate what the final tax bill for the year will be, taking into account any tax planning strategies already put in place, as well as any RRSP contributions which will be made before March 2, 2019. While the tax return forms to be used for the 2018 year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2017 form. Increases in tax credit amounts and tax brackets from 2017 to 2018 will mean that using the 2016 form will likely result in a slight over-estimate of tax liability for 2018.

Once one’s tax bill for 2017 has been calculated, that figure should be compared to the total of tax instalments already made during 2017 (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281). Depending on the result, it may then be possible to reduce the amount of the tax instalment to be paid on December 15 – and thereby free up some funds for the inevitable holiday spending!

The potential tax costs of holiday gifts and celebrations

The holiday season is usually costly, but few Canadians are aware that those costs can include increased income tax liability resulting from holiday gifts and celebrations. It doesn’t seem entirely in the spirit of the season to have to consider possible tax consequences when attending holiday celebrations and receiving gifts; however, our tax system extends its reach into most areas of the lives of Canadians, and the holidays are no exception. Fortunately, the possible negative tax consequences are confined to a minority of fact situations and relationships, usually involving employers and employees, and are entirely avoidable with a little advance planning.

During the month of December, it’s customary for employers to provide something “extra” for their employees, by way of a holiday gift, a year-end bonus or an employer-sponsored social event. And it’s certainly the case that employers who provide such extras don’t intend to create a tax liability for their employees. Unfortunately, it is the case that a failure to properly structure such gifts or other extras can result in unintended and unwelcome tax consequences to those employees.

It’s even possible to feel some sympathy toward the tax authorities who have to deal with the tax treatment of employer-provided holiday gifts, as they are in something of a no-win situation. On an individual or even a company level, the amounts involved are usually nominal, and the range of situations which must be addressed by the related tax rules are virtually limitless. As a result, the cost of drafting and administering those rules can outweigh the revenue generated by the enforcement of such rules, to say nothing of the potential ill will generated by imposing tax on holiday gifts and celebrations. Notwithstanding, the potential exists for employers to provide what would otherwise be taxable remuneration in the guise of holiday gifts, and it’s the responsibility of the Canada Revenue Agency (CRA) to ensure that such situations are caught by the tax net.

There is, as a consequence, a detailed set of rules which outline the tax consequences of gifts and awards provided by the employer, and even in relation to annual holiday celebrations sponsored (and paid for) by an employer.

The starting point for the rules is that any gift (cash or non-cash) received by an employee from his or her employer at any time of the year is considered to constitute a taxable benefit, to be included in the employee’s income for that year. However, the CRA makes an administrative concession in this area, allowing an unlimited number of non-cash gifts (within a specified dollar limit) to be received tax-free by an employee over the course of the tax year.

In sum, the CRA’s administrative policy is simply that non-cash gifts to an arm’s length employee, regardless of the number of such gifts, will not be taxable if the total fair market value of all such gifts to that employee is $500 or less annually. Where the total fair market value of such gifts is more than $500, the amount over that $500 limit will be a taxable benefit to the employee, and must be included on the employee’s T4 for the year, and on which income tax must be paid.

It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500 per year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of the amount or frequency of the gifts. For this purpose, the CRA considers anything which could easily be converted to cash as a “near-cash” gift. Even a gift or award which cannot be converted to cash will be considered to be a near-cash gift if it, in the words of the CRA, “functions in the same way as cash”. So, a gift card or gift certificate which can be used by the employee to purchase his or her choice of merchandise or services would be considered a near-cash gift, and taxable as such.

This time of year, the tax treatment of the annual employee holiday party also must be considered. The CRA’s current policy in this area is that no taxable benefit will be assessed in respect of employee attendance at an employer-provided social event, where attendance at the party was open to all employees, and the cost per employee was $100 or less. The $100 cost is meant to cover the party itself, not including any ancillary costs, such as transportation home, taxi fare, or overnight accommodation. Where the total cost of the event itself exceeds the $100 per person threshold, the CRA will assess the employee as having received a taxable benefit equal to the entire per person cost (i.e., not just that portion of the cost that exceeds $100.)

It may seem nearly impossible to plan for employee holiday gifts and other benefits without running afoul of one or more of the detailed rules surrounding the taxation of such gifts and benefits. However, designing a tax-effective plan is possible, if a few basic principles are kept in mind.

  • If the employer is planning to hold a holiday party, dinner or other social event, it is imperative that such event be open to all employees. Restricting attendance in any way will mean that the CRA’s concession with respect to the non-taxable status of such events does not apply. The cost of the event must, as well, be kept below $150 per person. While the CRA’s policy doesn’t specify, it seems reasonable to calculate that amount based on the number of employees invited to attend the event, rather than on the actual attendance, which can’t be accurately predicted in advance.
  • Any cash or near-cash gifts should be avoided, as they will, no matter how large or small the amount, create a taxable benefit to the employee. Although gift certificates or pre-paid credit cards are a popular choice, they aren’t a tax-effective one, as they will invariably be considered by the CRA to create a taxable benefit to the employee.
  • Where non-cash holiday gifts are provided to employees, gifts with a value of up to $500 can be received free of tax. The employer must be mindful of the fact that the $500 limit is a per-year and not a per-occasion limit. Where the employee receives non-cash gifts with a total value of more than $500 in any one taxation year, the portion over $500 is a taxable benefit to the employee.
October 10

October 2018 Newsletter

Whether (and when) to stop contributing to the Canada Pension Plan

When the Canada Pension Plan was put in place on January 1,1966, it was a relatively simple retirement savings model. Working Canadians started making contributions to the CPP when they turned 18 years of age and continued making those contributions throughout their working life. Those who had contributed could start receiving CPP on retirement, usually at the age of 65. Once an individual was receiving retirement benefits, he or she was not required (or allowed) to make further contributions to the CPP. The CPP retirement benefit for which that individual was eligible therefore could not increase (except for inflationary increases) after that point.

Retirement looks a lot different in 2018 than it did it 1966, and the Canada Pension Plan has evolved and changed to recognize those differences. What that means for the average Canadian is much more flexibility in determining how to structure both their contributions to the CPP and the receipt of CPP retirement benefits.

While greater flexibility in retirement income planning is always a good thing, having more choices brings with it the need to determine which choices are the right ones in one’s particular circumstances. And, when it comes to CPP, many Canadians must make a decision on when it makes sense to keep making CPP contributions.

The need to make that choice arises where a decision is made to continue to stay in the work force, whether part time or full time, even after beginning to receive CPP retirement benefits. While it has always been possible to work while receiving such benefits, it was, until 2012, not possible to make CPP contributions related to that work. A change made in that year, however, allowed individuals who continued to work while receiving the CPP retirement benefit to also continue to contribute to the Canada Pension Plan and, as a result, increase the amount of CPP retirement benefit they received each month. That benefit is the CPP Post-Retirement Benefit or PRB.

The rules governing the PRB differ, depending on the age of the taxpayer. In a nutshell, an individual who has chosen to begin receiving the CPP retirement benefit but who continues to work will be subject to the following rules:

  • Individuals who are 60 to 65 years of age and continue to work are required to continue making CPP contributions.
  • Individuals who are 65 to 70 years of age and continue to work can choose not to make CPP contributions. To stop contributing, such an individual must fill out Form CPT30, Election to stop contributing to the Canada Pension Plan, or revocation of a prior election. A copy of that form must be given to the individual’s employer, and the original sent to the Canada Revenue Agency (CRA). An individual who has more than one employer must make the same choice (to continue to contribute or to cease contributions) for all employers and must provide a copy of Form CPT30 to each.
  • A decision to stop contributing can be changed, and contributions resumed, but only one change can be made per calendar year. To make that change, the individual must complete section D of Form CPT30, give one copy of the form to his or her employer, and send the original to the CRA.
  • Individuals who are over the age of 70 and are still working cannot contribute to the CPP.

Overall, the effect of these new rules is that CPP retirement benefit recipients who are still working and who are under age 65, as well as those who are between 65 and 70 and choose not to opt out, will continue to make contributions to the CPP system and will continue, therefore, to earn new credits under that system. As a result, the amount of retirement benefits which they are entitled to will increase with each year’s additional contributions.

Where an individual makes CPP contributions while working and receiving CPP retirement benefits, the amount of any CPP PRB earned will automatically be calculated by the federal government, and the individual will be advised of any increase in that monthly CPP retirement benefit each year. The PRB will be paid to that individual automatically the year after the contributions are made, effective January 1 of every year. Since the federal government needs information about employer contributions made, the first annual payment of the PRB is usually issued in early April and includes a lump sum amount representing benefits back to January of that year. Thereafter, the PRB is paid monthly and the PRB amount is added to the individual’s CPP retirement benefit amount and issued as a single payment.

While the rules governing the PRB can seem complex (and certainly the actuarial calculations are), the individual doesn’t have to concern himself or herself with those technical details. For CPP retirement benefit recipients who are under age 65 or over 70, there is no decision to be made. For the former, CPP contributions will be automatically deducted from their paycheques and for the latter, no such contributions are allowed.

Individuals in the middle group — aged 65 to 70 — will need to make a decision about whether it makes sense, in their individual circumstances, to continue making contributions to the CPP. Some assistance in making that decision is provided on the federal government website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-post-retirement/benefit-amount.html, which shows the calculations which would apply for individuals of different ages and income levels.

More information on the PRB generally is also available on that website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-post-retirement.html.

Current rules on getting mortgage financing

For all but a very fortunate few, buying a home means having to obtain financing for the portion of the purchase price not covered by a down payment. For most buyers, especially first-time buyers, that means taking out a conventional mortgage from a financial institution.

For all but a very fortunate few, buying a home means having to obtain financing for the portion of the purchase price not covered by a down payment. For most buyers, especially first-time buyers, that means taking out a conventional mortgage from a financial institution.

The rules governing eligibility or such home financing have been in somewhat a state of flux over the past ten years. For a number of reasons, mortgage and home equity borrowing practices never reached the unsustainable levels recorded south of the border, and Canada was spared the catastrophic housing crash which occurred in the U.S. in 2008 and 2009. However, in the years after the financial crisis which followed that housing crash, interest rates hit historic lows. Those ultra-low rates, in combination with rising real estate values, resulted in a record level of borrowing as first-time buyers took advantage of the low rates to purchase more home than they might otherwise have been able to afford, and existing homeowners borrowed against their ever-increasing home equity.

Canadian government and banking officials were sufficiently concerned with the level of borrowing, and the potential exposure of borrowers, that several sets of changes were made between 2008 and 2017 to tighten home financing and mortgage lending rules. What follows is an outline of the rules which now apply to prospective purchasers of residential property across Canada.

The first such rule requires prospective buyers to put down a minimum down payment, which is set at a percentage of the property cost. The applicable percentage depends on the cost of the property to be acquired, as follows:

Purchase price of the home                                           Minimum required down payment

$500,000 or less                                                              5% of the purchase price

$500,000 to $999,999                                                 5% of the first $500,000; and 10% of the portion of the purchase price over $500,000

$1,000,000 or more                                                        20% of the purchase price

Whatever the purchase price of the home, where the down payment made is less than 20% of that purchase (or, put another way, the mortgage amount is greater than 80% of the purchase price), that mortgage is characterized as a high-ratio mortgage. In that case, additional requirements are imposed.

Basically, where a mortgage is a high ratio mortgage, the prospective home owner must obtain (and pay for) mortgage default insurance, usually through the Canada Mortgage and Housing Corporation (CMHC). Such insurance means that, should the home owner default on the mortgage, CMCH will pay the remaining outstanding balance of that mortgage to the financial institution which provided the mortgage financing. CMHC mortgage loan insurance premiums range from 0.6% to 4.50% of the amount of the mortgage, depending on the size of the down payment (although mortgage default insurance is not available where the purchase price of a home is $1,000,000 or more). Home buyers who take mortgage default insurance can pay those premiums upfront, or can add them to the mortgage amount and pay them over the life of that mortgage.

Prospective home buyers, having put together funds for a down payment, are often most concerned about whether they will be able to qualify for a mortgage. Those concerns are often well-founded, as the rules which govern such qualifications have recently become more stringent.

Everyone who applies for a mortgage (whether or not that mortgage is a high-ratio mortgage) from a federally-regulated financial institution (which includes all of the major Canadian banks), must pass a “stress test”. That test, which measures the borrower’s debt repayment obligations as a percentage of income, is intended to ensure that the applicant will be able to meet his or her mortgage payment obligations, both at the current low rates, and in the almost certain event that those rates will increase.

In making that determination, lenders use two measures — the gross debt service (GDS) and total debt service (TDS) ratios. GDS is essentially a measure of the borrower’s cost of housing, including mortgage payments, property tax payments, the cost of heating and, in the case of condominium purchasers, 50% of condo fees. In all cases, the total of such costs should not be more than 32% of the applicant’s gross income. The TDS represents all of the applicant’s debt servicing costs, including both housing costs and the cost of servicing credit card, student loan, car loan, line of credit, and other debt. When it comes to TDS, lenders want total debt servicing costs to be less than 40% of the applicant’s gross income.

Essentially, then, in applying the stress test, lenders look at the total housing cost and total debt servicing costs which the applicant will have if the mortgage is approved, to see whether the GDS and TDS ratios fall within the acceptable percentage limits.

Lenders are now required to run that stress test using the higher of two rates, as shown below, and the applicant must, using the GDS and TDS ratios, qualify at the higher rate.

The Bank of Canada’s current conventional 5-year mortgage rate is 5.34%.

The need to qualify for a mortgage at a rate higher than current rates, and higher than the mortgage interest rate which is actually being provided will undoubtedly affect prospective borrowers. In some cases, borrowers may have to “downsize” their home purchase budget to accommodate the new rules while in other instances, those hoping to get into the housing market may be forced to wait until they can accumulate a large down payment so as to reduce the amount of mortgage financing needed.  In all cases, however, the intent of the new rules is to ensure that, once the home purchase is made, the new homeowners will be in a position to meet the financial obligations that home ownership involves, over both the short and the long term.

Getting tax assistance for education costs

The month of September marks both the end of summer and the beginning of the new school year for millions of Canadian children, teenagers, and young adults. And, whatever the age of the student or the grade level to which he or she is returning, there will inevitably be costs which must be incurred in relation to the return to school. Those costs can range from a few hundred dollars for school supplies for grade school and high school students to thousands (or tens of thousands) of dollars for the cost of post-secondary or professional education.

The month of September marks both the end of summer and the beginning of the new school year for millions of Canadian children, teenagers, and young adults. And, whatever the age of the student or the grade level to which he or she is returning, there will inevitably be costs which must be incurred in relation to the return to school. Those costs can range from a few hundred dollars for school supplies for grade school and high school students to thousands (or tens of thousands) of dollars for the cost of post-secondary or professional education.

Unfortunately for those students (and their parents!) the kinds of assistance which can be obtained through our tax system to help offset those costs has been eroded over the past few years, as previously available tax credits were withdrawn.

At the grade school and high school levels, there are really no credits or deductions which can be claimed for education-related costs. Formerly, two tax credits (the fitness credit and the arts credit) were available to help offset the cost of extra-curricular activities for children under the age of 16, but both such credits were cancelled as of the end of 2016.

Parents who work outside the home and consequently need to arrange for and pay for after-school care for their children can, however, deduct the costs of that care, within specified limits. Those limits are based on the age of the child and the amount of family income for the year. Details of that child care tax deduction are outlined on the Canada Revenue Agency (CRA) website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-214-child-care-expenses.html.

Once children reach an age to pursue post-secondary education, costs escalate. In recognition of that fact, post-secondary students (and their parents) have benefited for many years from an “assist” through our tax system, which provides deductions and credits for some of the many associated costs. However, two of those credits are also not available for 2018 or subsequent years.

For many years post-secondary students were able to claim the education tax credit and the textbook tax credit. Both, unfortunately, were eliminated as of the end of 2016. It’s important to remember, however, that where education and textbook credits have been earned but not claimed in years before 2017, however, they are still available to be claimed by the student as carryover credits in 2017, 2018, or later years.

The good news is that a tax credit continues to be available for the single largest cost associated with post-secondary education — the cost of tuition. Any student who incurs more than $100 in tuition costs at an eligible post-secondary institution (which would include most Canadian universities and colleges) can still claim a non-refundable federal tax credit of 15% of such tuition costs. The provinces and territories also provide students with an equivalent provincial or territorial credit, with the rate of such credit differing by jurisdiction. At both the federal and provincial levels, the credit acts to reduce tax otherwise payable. Where a student doesn’t have tax payable for the year, as is often the case, credits earned can be carried forward and claimed by the student in a future year, or transferred (within limits) in the current year to a spouse, parent, or grandparent.

While the cost of living, whether in a student residence or off campus, can be significant, there is no federal deduction or credit provided for such expenses. Such costs are characterized as personal and living expenses, for which no tax deduction or credit has ever been allowed.

Most post-secondary students in Canada must incur some amount of debt in order to complete their education, and repayment of that debt is typically not required until after graduation. Once repayment starts, a tax credit can be claimed for the amount of interest being paid on such debt, in some circumstances. Students who are still in school and arranging for loans should, however, be mindful of the rules which govern that student loan interest tax credit. While all interest paid on a qualifying student is eligible for the credit, only some types of student borrowing will qualify. Specifically, only interest paid on government-sponsored (federal or provincial) student loans will be eligible for the deduction. It’s not uncommon (especially for students in professional programs, like law or medicine) to be offered lines of credit by a financial institution, often at advantageous or preferential interest rates. As well, financial institutions sometimes offer, once a student has graduated and begun to repay a government-sponsored student loan, to consolidate that student loan with other kinds of debt, also at advantageous interest rates. However, it should be kept in mind that interest paid on that line of credit (or any other kind of borrowing from a financial institution to finance education costs) will never be eligible for the student loan interest tax credit. As explained in the CRA publication on the subject, “ [I]f you renegotiated your student loan with a bank or another financial institution, or included it in an arrangement to consolidate your loans, you cannot claim this interest amount”. Students who are contemplating borrowing from a financial institution rather than getting a government student loan (or considering a consolidation loan which incorporates that student loan amount) must remember, in evaluating the benefit of any preferential interest rate offered by a financial institution, to take into account the loss of the student loan interest deduction on that borrowing in future years.

There are, as well, a number of credits and deductions which, while not specifically education-related, are frequently claimed by post-secondary students (for instance, moving expense deductions). The CRA publishes a very useful guide that summarizes most of the income rules which may apply to post-secondary students. That guide, entitled Students and Income Tax, was updated in August 2018 to include recent changes, and that current version is now available on the CRA website at www.cra-arc.gc.ca/E/pub/tg/p105/README.html.

Charities and political activities – new developments

The administrative policy of the Canada Revenue Agency (CRA) with respect to charities has been that no more than 10% of a registered charity’s resources can be allocated to non-partisan political activity. Where the CRA views a charity as having exceeded that threshold it may impose sanctions, up to and including revocation of a charity’s charitable registration status.

The administrative policy of the Canada Revenue Agency (CRA) with respect to charities has been that no more than 10% of a registered charity’s resources can be allocated to non-partisan political activity. Where the CRA views a charity as having exceeded that threshold it may impose sanctions, up to and including revocation of a charity’s charitable registration status.

Earlier this year, an Ontario court decision effectively struck down the rules limiting the involvement of charities in non-partisan political activity, including the CRA’s 10% ceiling rule, declaring those rules to be invalid and of no effect. That change was effective as of the date of the Court’s ruling, which was July 16, 2018.

Needless to say, that Court decision created considerable uncertainty in the charitable sector with respect to the current or future involvement by charities in any non-partisan political activities. The CRA has now made two announcements intended to alleviate that uncertainty.

First, the CRA has announced that it will be appealing the Court’s decision, which it believes contains “significant errors of law”. The hearing and decision in that appeal is at least several months away.

The CRA has, however, also announced that changes will be made, not just to its policy with respect to the permitted political activities of charities, but to the Income Tax Act provisions governing the permitted activities of registered charities. According to the CRA’s press release, which can be found on its website at https://www.canada.ca/en/revenue-agency/news/2018/08/statement-by-the-minister-of-national-revenue-and-minister-of-finance-on-the-governments-commitment-to-clarifying-the-rules-governing-the-political.html, the planned changes will allow charities to pursue their charitable purposes by engaging in non-partisan political activities and in the development of public policy. Charities will still be required to have exclusively charitable purposes, and restrictions against partisan political activities will remain.

Significantly, the CRA will implement the planned changes through amendments to the Income Tax Act, with the intention of introducing amending legislation in the fall of 2018. Consequently, the new rules governing political activities of charities will be, not simply administrative policy on the part of the CRA, but legal requirements under the Income Tax Act. As well, the planned legislative changes will apply retroactively, including to the audits and objections of registered charities which are currently suspended. Such suspensions will be lifted when the planned legislation is passed by Parliament.

The CRA’s announcement of the planned changes did not include a detailed outline of the planned changes. However, the Agency did indicate in its press release that such changes would be “consistent with” Recommendation #3 found in the report of the Agency’s Consultation Panel on the Political Activities of Charities. That Recommendation is as follows:

“The Panel recommends that amendments:

  1. retain the current legal requirement that charities must be constituted and operated exclusively for charitable purposes, and that political purposes are not charitable purposes;
  2. fully support the engagement of charities in non-partisan public policy dialogue and development in furtherance of charitable purposes, retiring the term “political activities” which tends to be understood in common parlance as partisan and is therefore confusing, and clearly articulating the meaning of “public policy dialogue and development” to include: providing information, research, opinions, advocacy, mobilizing others, representation, providing forums and convening discussions; and
  3. retain the prohibition on charities’ engaging in “partisan political activities” with the inclusion of “elected officials” (i.e. charities may not directly support “a political party, elected official or candidate for public office”) and the removal of the prohibition on “indirect” support, given its subjectivity.”

The full Report of the Panel is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/resources-charities-donors/resources-charities-about-political-activities/report-consultation-panel-on-political-activities-charities.html.

There is an important caveat: the CRA has indicated that its planned legislative amendments would be “consistent with” the Panel Recommendation, and not that they would reflect that Recommendation in every respect. Consequently, the content of the amendments may well differ in one or more ways from the Panel Recommendation.

The CRA has indicated as well that, once the legislative amendments are in place, it will be providing ”supporting guidance”, in collaboration with the charitable sector, presumably through plain language publications outlining both the legislative changes and how the CRA intends to implement and administer those changes going forward. Stay tuned.

September 7

September 2018 Newsletter

New Quarterly Newsletters

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

Corporate:

Issue #45 Corporate

Personal:

Issue #45 Personal

Changes to Canada Child Benefit payments for 2018-19

Millions of Canadians receive payments each month from the federal government and for younger Canadians, especially families with children, such payments will often include the monthly Canada Child Benefit (CCB).

Millions of Canadians receive payments each month from the federal government and for younger Canadians, especially families with children, such payments will often include the monthly Canada Child Benefit (CCB).

The current (2018-19) benefit year for the CCB runs from July to June and so the first payment of the that benefit year, was received by Canadian families on July 20. For some recipients, that payment may have been in a different amount than previous months, while others may not have received any benefit payment at all.

The reasons for such occurrences are two-fold. First, the amount of CCB payable is based on a family’s net income. For the first half of the year, the amount of payment is based on income from the second previous taxation year. So, eligibility for and the amount of any CCB paid during the January to June 2018 period was based on family net income for 2016. For the July to December 2018 period, the amount of benefits which a family can receive is based on that family’s net income for the 2017 tax year.

Of course, the only means by which the federal government can determine a family’s net income for 2017 (and consequently their entitlement to CCB) is from tax returns filed for that year. Where no tax returns have yet been filed for 2017, there will have been no CCB benefit paid in July of 2018. Taxpayers who have not yet filed for 2017 but who believe that they are eligible for CCB should file as soon as possible. Once the return(s) are filed and assessed, and the family is determined to be eligible for CCB benefits during the 2018-19 benefit year, such benefits will be paid retroactively, back to July 2018.

Where a family received CCB during the first half of 2018, and there was a change in family net income between 2016 an 2017, then the amount of CCB received in July 2018 will differ (up or down, depending on whether income increased or decreased from 2016 to 2017) from that received in June.

There is an additional reason why families may see a changed CCB benefit starting in July 2018. In 2016, the federal government announced that CCB benefits would be indexed to inflation beginning in July 2020. However, that implementation date was moved up to July 2018, so benefits are fully indexed to changes in the Consumer Price Index as of that date.

Taxpayers who want to confirm that the amount of their CCB benefit for the 2018-19 benefit year is correct can go to CRA website at www.canada.ca/en/revenue-agency/services/child-family-benefits/canada-child-benefit-overview/canada-child-benefit-we-calculate-your-ccb.html, where the calculation of the CCB is outlined. Or, an explanation of the benefits received can be had by calling the Agency’s Benefits Enquiries toll-free phone line at 1-800-387-1193. The hours of service for that phone line are Monday to Friday, 9 a.m. to 5 p.m.

An end to restrictions on political activities of charities?

Achieving charitable registration status is a significant step, and a significant benefit, to any organization. The organization itself becomes exempt from income tax and, in addition, is able to issue tax receipts for donations made to it, which allow donors to claim a federal and provincial tax credit based on the amount of such donations. The ability to issue such tax receipts gives a charitable organization a measurable advantage when it comes to fundraising.

Achieving charitable registration status is a significant step, and a significant benefit, to any organization. The organization itself becomes exempt from income tax and, in addition, is able to issue tax receipts for donations made to it, which allow donors to claim a federal and provincial tax credit based on the amount of such donations. The ability to issue such tax receipts gives a charitable organization a measurable advantage when it comes to fundraising.

The other, less tangible, benefit of becoming a registered charity is that such organizations are more likely to be (correctly) perceived as legitimate charities, having undergone a degree of scrutiny by the Canada Revenue Agency (CRA) in order to obtain registered charity status, and being subject to ongoing reporting requirements in order to maintain that status.

In order to obtain and retain status as a registered charity, an organization must fulfill a number of requirements. Specifically, as outlined on the CRA website, any organization functioning as a registered charity must be resident in Canada, must be established and operated for charitable purposes, and must devote its resources (funds, personnel, and property) to charitable activities.

In relation to the requirements for “charitable purposes” and “charitable activities”, an organization must generally have purposes that include one or more of the following: the relief of poverty, the advancement of education, the advancement of religion, and other purposes that benefit the community (where such purposes have been found by the courts to be charitable in nature).

The devil, as always, is in the details, and the types of activities which charities can engage in in the pursuit of those charitable purposes has always been a subject of discussion and, often, dispute between the charitable sector and the CRA. In particular, there is something of an ongoing dispute with respect to the extent to which charities can engage in activities which are political (in a non-partisan sense) in nature. Such non-partisan political activity, while allowed, is subject to strict limits under specific provisions of the Income Tax Act and the CRA policies interpreting those provisions. The Act requires that a registered charity devote “substantially all” of its resources to charitable activities, but provides that where the charity devotes part of its resources to non-partisan political activities and those non-partisan political activities are “ancillary and incidental to its charitable activities”, the resources devoted to such activities will be considered to be used in charitable activities. As a matter of administrative policy, the CRA has taken the position that no more than 10% of a registered charity’s resources should be expended on partisan political activity or, put another way, that at least 90% of its resources should be devoted to non-political charitable activities. A recent Court decision, however, has thrown most of those rules around non-partisan political activities of charities into doubt.

The case began when, in 2016, a registered charity — Canada Without Poverty — challenged the CRA’s administrative policy limiting registered charities to using no more than 10% of their resources for political activities related to their charitable purposes. That challenge was based on the argument that the organization could not achieve its charitable purposes without engaging in political activity, and that the restrictions placed by the CRA’s policies on the extent of such activities were a violation of the right to free expression granted by the Canadian Charter of Rights and Freedoms.

The Court agreed with the charity which brought the challenge and held that the CRA’s view that a charity could spend only up to 10% of its resources on non-partisan political activities was a violation of the Charter and that the entire provision of the Income Tax Act which restricted non-partisan political activities and therefore political expression by a registered charity was also contrary to the Charter, and that there was no justification for such restriction.

The Court did emphasize that it was not speaking of partisan political activities, which remain out of bounds for registered charities. However, as the law now stands following the Court’s decision on July 16, charities are able to engage in non-partisan political activities without regard for the limits which were formerly imposed by the Income Tax Act and by the CRA’s administrative policies in enforcing that Act.

It is likely that, given the potentially significant consequences which follow from the Court’s decision, the federal government will appeal that decision to a higher Court, seeking to have it reversed. That process of appealing the Court decision is one which will take at least several months, if not longer, but it’s a process that will be closely followed by many organizations and individuals working in the charitable sector.

Receiving a first instalment reminder from the Canada Revenue Agency

Sometime around the middle of August, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA), and that mail will contain unfamiliar and unwelcome news. Specifically, the enclosed form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15 of 2018 — and will helpfully identify the amounts which should be paid on each date.

Sometime around the middle of August, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA), and that mail will contain unfamiliar and unwelcome news. Specifically, the enclosed form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15 of 2018 — and will helpfully identify the amounts which should be paid on each date.

No one particularly likes receiving unexpected mail from the tax authorities and correspondence which suggests that the recipient should be making payments of tax to the CRA during the year (instead of when he or she files the return for the year next April) is likely to be both perplexing and somewhat alarming. It is fair to say that most Canadians aren’t familiar with the payment of income tax by instalments, and are therefore at a loss to know how to proceed the first time they receive an instalment reminder.

The reason that the instalment payment system is unfamiliar to most Canadians is that most of us pay income taxes during our working lives through a different system. Every Canadian employee has tax automatically deducted from his or her paycheque (“at source”), before that paycheque is issued, and that tax is remitted by the employer to the CRA, on the employee’s behalf. Such deductions and remittances accrue to the employee’s behalf, and they are credited with those remittances when filing the annual tax return for that year. It’s an efficient system, but it’s also one which is largely invisible to the employee, and certainly one which operates without the need for the employee to take any steps on his or own. When someone begins to receive income through a source other than employment (for instance, the newly self-employed or newly retired), it is consequently not particularly surprising that the individual wouldn’t know that it is now his or her responsibility to make specific arrangements for the payment of income tax.

Adding to the potential confusion, most employees who retire are accustomed to having only a single source of income. Once in retirement, however, there are likely multiple such sources of income, including Canada Pension Plan benefits and Old Age Security payments, and perhaps monthly amounts received from an employer-sponsored registered pension plan (RPP) or a registered retirement income fund (RRIF). Unless the individual so directs, none of the payors of those kinds of income will deduct income tax from the payments and remit them to the federal government on the individual’s behalf.

Canadian tax rules provide that, where the amount of tax owed when a return is filed by the taxpayer is more than $3,000 ($1,800 for Quebec residents) in the current (2018) year and either of the two previous (2016 and 2017) years, that taxpayer may be subject to the requirement to pay income tax by instalments.

The reason that first instalment reminders are issued in August has to do with the schedule on which Canadians file their tax returns. The amount of tax payable on filing for the immediately preceding year can’t be known until the tax return for that year has been filed and assessed, and the tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer should receive a first instalment reminder for the current year.

Taxpayers who receive that first instalment reminder in August may also be puzzled by the fact that it is a “reminder” and not a “requirement” to pay. The reason for that is that those who receive it are not actually required by law to make instalment payments of tax. There are, in fact, three options open to the taxpayer who receives an instalment reminder.

First, the taxpayer can pay the amounts specified on the reminder, by the respective due dates of September 15 and December 15. A taxpayer who does so can be certain that he or she will not have to pay any interest or penalty charges even if he or she does have to pay an additional amount on filing in the spring of 2019. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2018, he or she will of course receive a refund on filing.

Second, the taxpayer can make instalment payments based on the total amount of tax which was owed and paid for the 2017 tax year. Where a taxpayer’s income has not changed between 2017 and 2018 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2018 will be the same or slightly less than it was in 2017, owing to the indexation of tax brackets and tax credit amounts. Once that figure is determined, 75% of the total amount should be paid on or before September 15 and the remaining 25% paid on or before December 15.

Third, the taxpayer can estimate the amount of tax which he or she will actually owe for 2018 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2017 to 2018 and there will consequently be a reduction in tax payable, this option may be worth considering. Taxpayers who wish to pursue this approach can obtain the information needed to estimate current year taxes (federal and provincial tax brackets and rates) on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html#federal. And, as in option 2, 75% of the total tax determined to be payable for 2018 should be paid on or before September 15, and the remaining 25% paid on or before December 15 of this year.

All of this may seem like a lot of research and calculation effort, especially when one considers that many Canadians don’t even prepare their own tax returns. And those who don’t want to be bothered with the intricacies of tax calculations can pay the amounts set out in the Instalment reminder, secure in the knowledge that they will not incur any penalty or interest charges and that, should those amounts ultimately represent an overpayment of taxes, that overpayment will be recovered and refunded when the 2018 return is filed next spring.

Once they have resigned themselves to the realities of the tax instalment system, the next question that most taxpayers have is how such payments can be made. Not surprisingly, the CRA provides taxpayers with a lot of options when it comes to making instalment payments, and those options include the following:

  • Visa Debit
  • Online banking
  • Debit card
  • Pre-authorized debit (not applicable when using EFILE)
  • Credit card
  • At the taxpayer’s financial institution using Form INNS3, Instalment Remittance Voucher

More information on how to make instalment payments of tax can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/making-payments-individuals/paying-your-income-tax-instalments/you-pay-your-instalments.html.

When the taxman has a few questions …

Between February and July 2018, the Canada Revenue Agency (CRA) received and processed just over 28 million individual income tax returns filed for the 2017 tax year. The CRA’s self-imposed processing turnaround goal for each of those returns is to complete its assessment and to issue a Notice of Assessment within two to six weeks, depending on the filing method.

Between February and July 2018, the Canada Revenue Agency (CRA) received and processed just over 28 million individual income tax returns filed for the 2017 tax year. The CRA’s self-imposed processing turnaround goal for each of those returns is to complete its assessment and to issue a Notice of Assessment within two to six weeks, depending on the filing method.

The effort of processing those returns and issuing 28 million Notices of Assessment consumes the bulk of the CRA’s time and resources during the February to June filing season. However, the sheer volume of returns and the processing turnaround timelines mean that the CRA does not (and cannot possibly) do a manual review of the information provided in a return prior to issuing the Notice of Assessment. Rather, all returns are scanned by the Agency’s computer system and a Notice of Assessment is then issued.

In addition, the CRA has for many years been encouraging taxpayers to fulfill their filing obligations online, through one of the Agency’s electronic filing services. This year, just under 25 million (or 88%) of the returns were filed by electronic means. While e-filing means that the turnaround for processing of returns is much quicker, there is, by definition, no paper involved. The Canadian tax system has always been what is termed a “self-assessing” system, in which taxpayers report income earned and claim deductions and credits to which they believe they are entitled. Prior to the advent of e-filing there were means by which the CRA could easily verify claims made by taxpayers. Where returns were paper-filed, taxpayers were usually required to include receipts or other documentation to prove their claims, whatever those claims were for. For the 88% of returns which were filed this year by electronic means, no such paper trail exists. Consequently, the potential exists for misrepresentation of such claims (or simple reporting errors) on a large scale.

The CRA’s response to that risk is to carry out a post-assessment review process, in which the Agency asks taxpayers to back up or verify claims for credits or deductions which were made on the return filed this past spring. That post-assessment review process for tax returns for the 2017 tax year is now underway.

There are two components to the post-assessment review process — the Processing Review Program and the Matching Program, and the first component starts in the month of August. That Processing Review Program, as the name implies, is a review of various deductions or credits claimed on returns, while the Matching Program compares information reported on the taxpayer’s return with information provided to the CRA by third-party sources (like T4s filed by employers or T5s filed by banks or other financial institutions).

Being selected for review under either program means, for the individual taxpayer, the possibility of receiving unexpected correspondence from the CRA. Receiving such correspondence from the tax authorities is almost guaranteed to unsettle the recipient taxpayer, even where there’s no reason to believe that anything is wrong. But, it’s an experience which will be shared this summer and fall by about 3 million Canadian taxpayers.

A taxpayer whose return is selected as part of the Processing Review Program will be asked to provide verification or proof of deductions or credits claimed on the return -usually by way of receipts or such documentation. The Matching Program, on the other hand, involves comparison by the CRA of information received from different sources (i.e., matching up the amount of employment income reported by a taxpayer with the amount showing on the T4 slip issued by that taxpayer’s employer). Where the figures match up, there is no need for the further action by the CRA. Where they don’t, the taxpayer will likely be contacted with a request for an explanation of the discrepancy.

Of course, most taxpayers are not concerned so much with the kind of program or programs under which they are contacted as they are with why their return was singled out for review. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is the start of an audit, but that’s not necessarily the case. Returns are selected by the CRA for post-assessment review for a number of reasons. Under the Matching Program, where a taxpayer has filed a return containing information which does not agree with the corresponding information filed by, for instance, his or her employer, it’s likely that the CRA will want to follow up to find out the reason for the discrepancy. As well, Canada’s tax laws are complex and, over the years, the CRA has determined that there are areas in which taxpayers are more likely to make errors on their return. Consequently, a return which includes claims in those areas (like medical expenses, support payments and legal fees) may have an increased chance of being reviewed. Where there are deductions or credits claimed by the taxpayer which are significantly different or greater than those claimed in previous returns, that may attract the CRA’s attention. And, if the taxpayer’s return has been reviewed in previous years and, especially, if an adjustment was made following that review, subsequent reviews may be more likely. Finally, many returns are picked for post-assessment review simply on the basis of random selection.

Regardless of the reason for the follow-up, the process is the same. Taxpayers whose returns are selected for review will receive a letter from the CRA, identifying the deduction or credit for which the CRA wants documentation or the income or deduction amount about which a discrepancy seems to exist. The taxpayer will be given a reasonable period of time — usually a few weeks from the date of the letter — in which to respond to the CRA’s request. That response should be in writing, attaching, if needed, the receipts or other documentation which the CRA has requested. All correspondence from the CRA under its review programs will include a reference number, which is usually found in the top right-hand corner of the CRA’s letter. That number is the means by which the CRA tracks the particular inquiry, and should be included in the response sent to the Agency. It’s important to remember, as well, that it’s the taxpayer’s responsibility to provide proof, where requested, of any claims made on a return. Where a taxpayer does not respond to a CRA request and does not provide such proof, the Agency will proceed on the basis that the requested verification or proof does not exist, and will reassess accordingly.

Taxpayers who have registered for the CRA’s online tax program My Account (or whose representative is similarly registered for the Agency’s Represent a Client online service) can submit required documentation electronically. More information on how to do so can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/sbmttng-eng.html.

Regardless of how requested documents are submitted, it is possible that the CRA will send a follow-up letter, or the taxpayer may be contacted by telephone, with a request from the Agency for more information.

One word of caution — as most Canadians have heard by now, there is a persistent tax scam operating in which taxpayers are contacted by telephone by someone falsely claiming to be from the CRA and the perpetrators of that scam have become increasingly sophisticated in recent years. Such fraudulent callers generally indicate that a review of the taxpayer’s return shows that additional taxes are owed, and insist that immediate payment is required, by wire transfer of funds or pre-paid credit card. It is implied, or stated, that failure to make immediate payment by such means will result in arrest and imprisonment or, for recent immigrants, immediate deportation.

Taxpayers should be aware that payment of taxes is never requested in this way, or by either of those methods, and that the threat of immediate imprisonment or deportation is simply ludicrous. While the CRA can and does contact taxpayers by phone, any CRA representative will have the reference number which appeared in the CRA’s initial letter and should be prepared to quote that number to the taxpayer in order to establish that the call is an authentic one. If the caller cannot provide that number, then it’s not a call from the CRA. As well, the CRA does not correspond with taxpayers on confidential tax matters by e-mail. The only legitimate e-mail which a taxpayer might receive from the CRA is one which advises that there is a new message for that taxpayer in his or her online account with the CRA — and only taxpayers who have previously registered for the CRA’s My Account service would receive such an e-mail. Any other type of e-mail claiming to be from the CRA is not legitimate and should be deleted without opening.

Whatever the reason a particular return was selected for post-assessment review by the CRA, one thing is certain. A prompt response to the CRA’s enquiry, providing the Agency with the information or documentation requested will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the CRA and the taxpayer. To assist taxpayers in understanding the process and in responding to Agency requests, the CRA recently issued a Tax Tip summarizing its return review process, which can be found at https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2018/tax-return-reviewed.html. The CRA website also includes more detailed information on the return review process, which is available at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/review-your-tax-return-cra.html.

June 27

June 2018 Newsletter

When you are turning 71 – the big RRSP decision

For several generations, reaching one’s 65th birthday marked the transition from working life to full retirement, and, usually, receipt of a monthly employee pension, along with government-sponsored retirement benefits. That is no longer the reality. The age at which Canadians retire can now span a decade or more, and retirement is more likely to be a gradual transition than a single event.

Today, Canadians can choose to begin receiving benefits from government-sponsored retirement benefit programs between the ages of 60 and 70. Canada Pension Plan retirement benefits can begin as early as age 60, and taxpayers can start collecting Old Age Security benefits at age 65. Receipt of income from either of those government- sponsored retirement income plans can also be deferred until the age of 70, but no later.

As well, the employer-sponsored pension plan is no longer available as a source of guaranteed retirement income for the majority of retirees. Instead, such retirees have (hopefully) saved for retirement through a registered retirement savings plan (RRSP). Holders of such plans are required to collapse their RRSP by the end of the year in which they turn 71 years of age. And, the decision made on what to do with the funds within that RRSP will affect the individual’s income for the remainder of his or her life.

While the actual decision is a complex one, the options available to a taxpayer who must collapse an RRSP are actually quite few in number — three, to be precise. They are as follows:

  • collapse the RRSP and include all of the proceeds in income for that year;
  • collapse the RRSP and transfer all proceeds to a registered retirement income fund (RRIF); and/or
  • collapse the RRSP and purchase an annuity with the proceeds.

It’s not hard to see that the first option doesn’t have much to recommend it. Collapsing an RRSP without transferring the balance to a RRIF or purchasing an annuity means that every dollar in the RRSP will be treated as taxable income for that year. In most cases, that will mean losing nearly half of the RRSP proceeds to income tax. And, while any amount left can then be invested, tax will be payable on all investment income earned.

As a practical matter, then, the choices come down to two: a RRIF or an annuity. And, as is the case with most tax and financial planning decisions, the best choice will be driven by one’s personal financial and family circumstances, risk tolerance, cost of living, and the availability of other sources of income to meet that cost of living.

The annuity route has the great advantages of simplicity and reliability. In exchange for a lump sum amount paid by the taxpayer, the annuity issuer agrees to pay the taxpayer a specific sum of money, usually once a month, for the remainder of the annuitant’s life. Annuities can also provide a guarantee period, in which the annuity payments continue for a specified time period (5 years, 10 years), even if the taxpayer dies during that time. The amount of monthly income which can be received depends, of course, on the amount paid in, but also on the gender and, especially, the age of the taxpayer. Currently, annuity rates for each $100,000 paid to the annuity issuer by a taxpayer who is 70 years of age range from $579 to $643 per month for a male taxpayer and from $515 to $572 for a female taxpayer (the actual rate is set by the company which issues the annuity). Those rates do not include any guarantee period.

For taxpayers whose primary objective is to obtain a guaranteed life-long income stream without the responsibility of making any investment decisions or the need to take any investment risk, an annuity can be an attractive option. There are however, some potential downsides to be considered. First, an annuity can never be reversed. Once the taxpayer has signed the annuity contract and transferred the funds, he or she is locked into that annuity arrangement for the remainder of his or her life, regardless of any change in circumstances that might mean an annuity is no longer suitable. Second, unless the annuity contract includes a guarantee period, there is no way of knowing how many payments the taxpayer will receive. If he or she dies within a short period of time after the annuity is put in place, there is no refund of amounts invested — once the initial transfer is made at the time the annuity is purchased, all funds transferred belong to the annuity company. Third, most annuity payment schedules do not keep up with inflation — while it is possible to obtain an annuity in which payments are indexed, having that feature will mean a substantially lower monthly payout amount. Finally, where the amount paid to obtain the annuity represents most or all of the taxpayer’s assets, entering into the annuity arrangement means that the taxpayer will not be leaving an estate for his or heirs.

The second option open to taxpayers is to collapse the RRSP and transfer the entire balance to a registered retirement income fund, or RRIF. A RRIF operates in much the same way as an RRSP, with two major differences. First, it’s not possible to contribute funds to a RRIF. Second, the taxpayer is required to withdraw an amount from his or her RRIF (and to pay tax on that amount) each year. That minimum withdrawal amount is a percentage of the outstanding balance, with that percentage figure determined by the taxpayer’s age at the beginning of the year. While the taxpayer can always withdraw more in a year, or make lump sum withdrawals (and pay tax on those withdrawals), he or she cannot withdraw less than the minimum required withdrawal for his or her age group.

Where a taxpayer holds savings in a RRIF, he or she can invest those funds in the same investment vehicles as were used while the funds were held in an RRSP and those funds can continue to grow on a tax-sheltered basis, in the same way as funds in an RRSP. While the ability to continue holding investments that can grow on a tax-sheltered basis provides the taxpayer with a lot of flexibility, and the potential for growth in value, those benefits have a price in the form of investment risk. As is the case with all investments, the investments held within a RRIF can increase in value — or decrease — and the taxpayer carries the entire investment risk. When things go the way every investor wants them to, investment income is earned while the taxpayer’s underlying capital is maintained but, of course, that result is never guaranteed.

On the death of a RRIF annuitant, any funds remaining in the RRIF can pass to the annuitant’s spouse on a tax-free basis. Where there is no spouse, the remaining funds in the RRIF will be income to the RRIF annuitant in the year of death, and any balance after tax is paid will become part of his or her estate, available for distribution to beneficiaries.

While the above discussion of RRIFs versus annuities focuses on the benefits and downsides of each, it is not necessary (and in most cases not advisable) to limit the options to an either/or choice. It is possible to achieve, to a degree, the seemingly irreconcilable goals of lifetime income security and the potential for capital (and estate) growth. Combining the two alternatives — annuity and RRIF — either now or in the future, can go a long way toward satisfying both objectives.

For everyone, in retirement or not, all spending is a combination of non-discretionary and discretionary items. The first category is made up mostly of expenditures for income tax, housing (whether rent or the cost of maintaining a house), food, insurance costs, and (especially for older Canadians) the cost of out-of-pocket medical expenses. The second category of discretionary expenses includes entertainment, travel, and the cost of any hobbies or interests pursued. A strategy which utilizes a portion of RRSP savings to create a secure lifelong income stream to cover non-discretionary costs can remove the worry of outliving one’s money, while the balance of savings can be invested through a RRIF, for growth and to provide the income for non-discretionary spending.

Such a secure income stream can, of course, be created by purchasing an annuity. As well, although most taxpayers don’t necessarily think of them in that way, the Canada Pension Plan and Old Age Security have many of the attributes of an annuity, with the added benefit that both are indexed to inflation. By age 71, all taxpayers who are eligible for CPP and OAS will have begun receiving those monthly benefits. Consequently, in making the RRIF/annuity decision at that age, taxpayers should include in their calculations the extent to which CPP and OAS benefits will pay for their non-discretionary living costs.

As of June 2018, the maximum OAS benefit for most Canadians (specifically, those who have lived in Canada for 40 years after the age of 18) is about $590 per month. The amount of CPP benefits receivable by the taxpayer will vary, depending on his or her work history, but the maximum current benefit which can be received at age 65 is about $1,050. (Where receipt of either benefit is deferred past the age of 65, those amounts go up.) As a result, a single taxpayer who receives the maximum CPP and OAS benefits at age 65 will have just under $20,000 in annual income (just over $1,600 per month). And, for a married couple, of course, the combined total annual income received from CPP and OAS can approach $40,000 annually, or $3,200 per month. While $20,000 a year isn’t enough to provide a comfortable retirement, for those who go into retirement in good financial shape — meaning, generally, without any debt — it can go a long way toward meeting non-discretionary living costs. In other words, most Canadians who are facing the annuity versus RRIF decision already have a source of income which is effectively guaranteed for their lifetime and which is indexed to inflation. Taxpayers who are considering the purchase of an annuity to create the income stream required to cover non-discretionary expenses should first determine how much of those expenses can already be met by the combination of their (and their spouse’s) CPP and OAS benefits. The amount of any annuity purchase can then be set to cover off any shortfall.

While the options available to a taxpayer at age 71 with respect to the structuring of future retirement income are relatively straightforward, the number of factors to be considered in assessing those factors and making that decision are not. All of that makes for a situation in which consulting with an independent financial adviser on the right mix of choices and investments isn’t just a good idea, it’s a necessary one.

Getting tax relief for the cost of getting around

It’s something of an article of faith among Canadians that, as temperatures rise in the spring, gas prices rise along with them. Whether that’s the case every year or not, this year statistics certainly support that conclusion. In mid-May, Statistics Canada released its monthly Consumer Price Index, which showed that gasoline prices were up by 14.2%. As of the third week of May, the per-litre cost of gas across the country ranged from 125.2 cents per litre (in Manitoba) to 148.5 cents per litre (in British Columbia). On May 23, the average price across Canada was 135.2 cents per litre, an increase of more than 25 cents per litre from last year’s average on that date.

While in some cases Canadians can reduce the impact of gas price increases by reducing the amount of driving they do, the practical reality is that, for most of us, driving a car every day can’t be avoided, and gasoline is consequently a non-discretionary expense. That’s especially true for those who must drive to work each day and, increasingly, that drive is becoming a longer and longer one, as individuals and families move further and further from their workplace location in search of affordable housing. Finally, for many Canadians a car is their only transportation option, when they live in places that are not served by public transit, or the available transit isn’t a practical daily option.

Unfortunately, for most taxpayers, there’s no relief provided by our tax system to help alleviate the cost of driving as the cost of driving to work and back home, as well as the cost of driving that isn’t work-related, is considered a personal expense for which no deduction or credit can be claimed, no matter how great the cost. That said, there are some (fairly narrow) circumstances in which employees can claim a deduction for the cost of work-related travel.

Those circumstances exist where an employee is required, as part of his or her terms of employment, to use a personal vehicle for work-related travel. For instance, an employee might, as part of his or her job, be required to see clients at their own premises for the purpose of meetings or other work-related activities and be expected to use his or her own vehicle to get to such meetings. If the employer is prepared to certify on a Form T2200 that the employee was ordinarily required to work away from his employer’s place of business or in different places, that he or she is required to pay his or her own motor vehicle expenses and that no tax-free allowance was provided by the employer for such expenses, the employee can deduct actual expenses incurred for such work-related travel. Those deductible expenses include the following:

  • fuel (gasoline, propane, oil);
  • maintenance and repairs;
  • insurance;
  • license and registration fees;
  • interest paid on a loan to purchase the vehicle;
  • eligible leasing costs for the vehicle; and
  • depreciation, in the form of capital cost allowance.

In almost all instances, a taxpayer will use the same vehicle for both personal and work-related driving. Where that’s the case, only the portion of expenses incurred for work-related driving can be deducted and the employee must keep a record of both the total kilometres driven and the kilometres driven for work-related purposes. And, of course, receipts must be kept to document all expenses incurred and claimed.

While no limits (other than the general limit of reasonableness) are placed on the amount of costs which can be deducted in the first four categories listed above, there are limits and restrictions with respect to allowable deductions for interest, eligible leasing costs, and depreciation claims. The rules governing those claims and the tax treatment of employee automobile allowances and available deductions for employment-related automobile use generally are outlined on the Canada Revenue Agency website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/slry/mtrvhcl-eng.html.

In larger urban centres, and in the nearby cities and suburbs which are served by inter-city transit, many commuters utilize that transit as a way of avoiding both the stress of a drive to work in rush hour traffic and the associated costs. And, for a time, such commuters were able to claim a tax credit to help mitigate the cost of using such transit. Unfortunately, the federal public transit tax credit was eliminated in 2017, such that it could be claimed only for costs incurred for transit use before July 1, 2017. It was not possible to carry the credit over and claim it in a subsequent taxation year, so the last claim anyone could make for the public transit tax credit was on the 2017 annual tax return.

No amount of tax relief is going to make driving, especially for a lengthy daily commute, an inexpensive proposition. But, that said, seeking out and claiming every possible deduction and credit available under our tax rules can at least help to minimize the pain.

Deciphering your Notice of Assessment

By the middle of May 2018, the Canada Revenue Agency (CRA) had processed just over 26 million individual income tax returns filed for the 2017 tax year. Just over 14 million of those returns resulted in a refund to the taxpayer, while about 5.5 million returns filed and processed required payment of a tax balance by the taxpayer. Finally, about 4.4 million returns were what are called “nil” returns — returns where no tax is owing and no refund claimed, but the taxpayer is filing in order to provide income information which will be used to determine his or her eligibility for tax credit payments (like the federal Canada Child Benefit or the HST credit ).

No matter what the outcome of the filing, all returns filed with and processed by the CRA have one thing in common: they result in the issuance of a Notice of Assessment (NOA) by the Agency, outlining the taxpayer’s income, deductions, credits, and tax payable for the 2017 tax year, whether the taxpayer will be receiving a refund or whether he or she has a balance owing and, in either case, the amount involved. The amount of any refund or tax payable will appear in a box at the bottom of page 1, under the heading “Account Summary”. On page 2 of the NOA, the CRA lists the most important figures resulting from their assessment, including the taxpayer’s total income, net income, taxable income, total federal and provincial non-refundable tax credits, total income tax payable, total income tax withheld at source and the amount of any refund or balance owing. Page 2 also includes an explanation of any changes made by the CRA to the taxpayer’s return during the assessment process and provides information on unused credits (like tuition and education credits) which the taxpayer had earned and can carry forward and claim in future years. On page 3 of the NOA, the taxpayer will find information on his or her total RRSP contribution room (i.e., maximum allowable RRSP contribution) for 2018. Finally, page 4 provides information on how to contact the CRA with questions about the information provided on the NOA, on how to change the return filed and on how to dispute the CRA’s assessment of the individual’s tax liability.

In most cases, the information contained in the Notice of Assessment is the same as that provided by the taxpayer in his or her return, perhaps with a few arithmetical corrections made by the CRA. In a minority of cases, the information presented in the Notice of Assessment will differ from that provided by the taxpayer in his or her return. Where that difference means an unanticipated refund, or a refund larger than the one expected, it’s a good day for the taxpayer. In some cases, however, the Notice of Assessment will inform the taxpayer of an unexpected amount of tax owed.

When that happens, the taxpayer must figure out why, and to decide whether or not to dispute the CRA’s conclusions. Many such discrepancies are the result of an error made by the taxpayer in completing the return. A lot of information from a variety of sources is reported on even the most straightforward of returns and it’s easy to overlook, for instance, a T5 slip reporting less than fifty dollars in interest income earned. Even though most returns are now prepared using tax software (for 2017 returns, over 87% of returns were prepared using such software) which minimizes the chance of arithmetical errors, mistakes can still occur. Such tax software relies, in the first instance, on information input by the user with respect to amounts found on T4, T5, and other information slips. No matter how good the software, it can’t account for income information which the taxpayer hasn’t included in the inputs. In other cases, the taxpayer might transpose figures when entering them, such that an income amount of $18,456 on the T4 becomes $14,856 on the tax return. Once again, the tax software has no way of knowing that the information input was incorrect and will calculate tax owing on the basis of the figures provided.

Where there is additional tax owing because of an error or omission made by the taxpayer in completing the return, and the CRA’s figures are correct, disputing the assessment doesn’t really make sense. There is, as well, a persistent tax “myth” that if a taxpayer doesn’t receive an information slip (T4 or T5, as the case might be) for income received during the year, that income doesn’t have to be reported and therefore isn’t taxable. The myth, however, is just that. All taxpayers are responsible for reporting all income received and paying tax on that income, and the fact that an information slip was lost, mislaid, or never received doesn’t change anything. The CRA receives a copy of all information slips issued to Canadian taxpayers, and its systems will cross-check to ensure that all income is accurately reported.

There are, however, instances in which the CRA and the taxpayer are in disagreement over substantive issues, and those issues most often involve claims for deductions or credits. For instance, the CRA may have disallowed an individual’s claim for a medical expense, or for a deduction claimed for a business expenditure, which the taxpayer believes to be legitimate. When that happens, the taxpayer must decide whether to dispute the assessment.

Before making that decision, and whatever the nature of the dispute, the first step is always to contact the CRA for an explanation of the reasons why the change was made. While the information provided in the NOA is a good summary of the taxpayer’s tax situation for the year, it may not always be clear to the taxpayer precisely why there is an increase in the amount of tax which he or she must pay for the year. It is no longer possible to have a face-to-face meeting with a CRA representative at a Tax Services Office to obtain such information, as in-person services were discontinued a few years ago. Taxpayers who want more information about their Notice of Assessment must now call or write to the CRA. The first step to be taken would be a call to the Individual Income Tax Enquiries line at 1-800-959-8281, to obtain more detailed information. If that call doesn’t resolve the taxpayer’s questions, he or she can write to or fax the Tax Centre which processed the return. The name of that Tax Centre can be found in the top left hand corner of the first page of the Notice of Assessment, and fax numbers and mailing addresses for the Tax Centres are available on the CRA website at www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html. Communication with a Tax Centre can only be done by fax or mail, as phone numbers for Tax Centres are not available to the public.

Claiming a deduction for moving expenses 

While the Canadian real estate market seems, by all accounts, to have retreated from the record pace it was setting in 2017, there is still plenty of activity. According the statistics released by the Canadian Real Estate Association (CREA), more than 35,000 homes were sold across Canada in the month of April alone. And that means that an equal number of households will be moving in the upcoming months.

Individuals and families move for any number of reasons, and those moves can be local or long distance. Whatever the reason for the move, or the distance to the new location, all moves have two things in common — stress and cost. Even where the move is a desired one — moving to attend university, or because of the purchase of a first home — moving represents the upheaval of one’s life and, where the move is for a long distance, or involves a large family home, the costs can be very significant. 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.

While its common to refer simply to the “moving expense deduction”, as though it were available in all circumstances, the reality is that there is no general deduction available for moving costs. In order to be tax deductible, such moving costs must be incurred in specific and relatively narrow circumstances. 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 Toronto to Ottawa 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 least 40 kilometres closer to the new work location. It’s not met where an individual or family move up the property ladder by selling and purchasing a new home in the same town or city.

It’s not, as well, actually necessary to be a homeowner in order to claim moving expenses. The list of moving-related expenses which may be deducted is basically 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.

It’s important to remember, however, that even where the 40-kilometre requirement is met, it is possible to deduct moving costs only from employment or self-employment (business) income earned at the new location — there is no deduction possible from other types of income, like investment income or employment insurance benefits.

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 move takes place later in the year, and moving costs are significant, it is possible that the amount of income earned at the new location in the year of the move will be less than deductible moving expenses incurred. In such instances, those expenses can be carried over and deducted from income earned at the new location in future years.

Within the 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, movers, in-transit storage, and insurance) for household effects, including such items as boats and trailers;
  • costs for up to 15 days for meals and temporary accommodation near the old and the new residences for the taxpayer and members of the household;
  • lease cancellation charges (but not rent) on the old residence;
  • legal or notary 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 (excluding GST or HST);
  • 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 takes place before the old residence is sold. In most 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. As well, a claim for such home maintenance expenses is not allowed where the taxpayer delayed selling, for investment purposes or until the real estate market improved.

It may seem from the forgoing that virtually all moving-related costs will be deductible; however, there are some costs for which the Canada Revenue Agency (CRA) will not permit a deduction to be claimed, 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;
  • mail forwarding costs; and
  • mortgage default insurance.

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 an endless number of 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 cents for Alberta to 60.5 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 2017 taxation year — the CRA will be posting the rates for 2018 on its website early in 2019, in time for the tax filing season.

Once eligibility for the moving expense deduction is established, the rules which govern the calculation of the available deduction 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 at https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1-m/t1-m-17e.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 at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns248-260/255/rts-eng.html.