New Quarterly Newsletters (May 2017)

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

Corporate:

Issue #40 Corporate

Personal:

Issue #40 Personal

Understanding the OAS “recovery tax” (May 2017)

Older taxpayers who have recently completed and filed their tax returns for 2016 may face an unpleasant surprise when that return is assessed. The unpleasant surprise may come in the form of a notification that they are subject to the Old Age Security “recovery tax” – known much more familiarly to Canadians as the OAS clawback.

The OAS clawback is a product, in part, of the way in which Canada’s government-sponsored retirement income system is structured. OAS is one of the two main components of that system – the other being the Canada Pension Plan (CPP). While many retired Canadians receive both OAS and CPP benefits, the two plans are quite different. The amount of CPP benefit received by an individual Canadian is the product of an actuarial calculation based largely on the amount of contributions made by that individual throughout his or her working life – other sources of income or the recipient’s overall income level are irrelevant. Eligibility for OAS, on the other hand, is based on the number of years of Canadian residency and the amount received is set by law. Canadians who are at least 65 years old and have lived in Canada for at least 40 years after they turned 18 are eligible for full OAS pension (the maximum OAS pension payable for the second quarter of 2017 is $578.53). Where the length of Canadian residency is less than 40 years, a pro-rated amount of OAS pension may be received.

The differences between the CPP and the OAS extend to how each program is financed. The CPP, like all contributory pension plans, is financed out of contributions made by plan members and by investment income resulting from the investment of those contributions. Although the federal government administers the CPP, no tax revenues are used to support it. OAS, on the other hand, is paid from general federal government revenues.

As the Canadian population ages, the cost of the OAS program to the federal government has continued to increase. Although there was no universal agreement on the long-term effect of those demographics on federal government finance, the federal government determined, several years ago, that it was not prepared to maintain OAS as a program of universal entitlement. The decision made was that priority would be given to seniors whose income from all other sources fell below a set threshold, and that seniors having income above that threshold would be required to repay some OAS benefits received. That repayment is the OAS “recovery tax” or clawback.

The operation of the clawback is simple in concept. An individual who has income over the threshold (which increases each year) is required to repay 15% of that income, up to the total of OAS amounts received during the year.

For 2016, the prescribed income ceiling for the OAS clawback was $73,756 and the clawback calculation looks like this for a recipient who had income for that year of $80,000.

$80,000 ˗ $73,756 = $6,244

$6,244 × 0.15 = $936.60

In this case, the OAS clawback amount for 2016 is $936.60. Where a taxpayer is subject to the OAS clawback, his or her OAS benefits for the next benefit year (which runs from July to June) will be reduced by the amount of that clawback. So, for example, a retiree who is subject to the clawback because his or her income for 2016 was greater than the clawback threshold, OAS benefits payable from July 2017 to June 2018 will be reduced. If, as in the above example, the clawback amount for 2016 was $936.60, then $78.05 ($936.60 ÷ 12) will be deducted from each OAS payment starting in July 2017.

However, it’s also possible, especially where a senior is living on investment returns from savings, or wages from part-time employment, that fluctuations in income can occur. Where the taxpayer’s income for the current year is reduced to the point that any required clawback will be significantly reduced or even eliminated, the excess amount clawed back will be returned to the taxpayer when he or she files the tax return for that year the following spring. However, it’s also possible to have the clawback reduced before then, by notifying the CRA and making a request to reduce or eliminate the deductions being taken. The way to do so is to file a prescribed form — the T1213 (OAS), Request to Reduce Old Age Security Recovery Tax at Source for Year ____, which can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1213_oas/README.html

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Making use of the Canada Revenue Agency’s Voluntary Disclosure Program (May 2017)

As just about everyone knows, individual income tax returns for the 2016 tax year must be filed, by most Canadians, and any tax balance owed must be paid by all individual Canadians, on or before May 1, 2017. And, most Canadians do file that return, and pay any tax balance owed, on or before the deadline. As of April 24, 2017, the Canada Revenue Agency (CRA) had received just over 18 million individual income tax returns for the 2016 tax year. There are, however, a significant minority of Canadians who don’t file a return, or pay taxes owed (or both) by the annual deadline. The reasons for that are as varied as the individuals involved. In some cases, taxpayers are unable to pay a tax balance owing by the deadline and they think (wrongly) that there’s no point to filing a return where taxes owed can’t be paid. They may even think that they can fly “under the radar” and escape at least the immediate notice of the tax authorities by not filing the return. In other cases, it is just procrastination – virtually no one actually likes completing their tax return, especially where there’s the possibility of a tax bill to be paid once that return is done.

One of the difficulties resulting from a failure to file a return or pay taxes owed is that it is a problem which tends to compound itself. Once the taxpayer is in arrears of filing or payment obligations, it becomes more difficult to file and pay in subsequent years, as such filing will certainly bring the previous default to light.

Taxpayers who are in arrears with respect to their filing and/or payment obligations may envision charges of tax evasion, fines, and even incarceration for their previous defaults. The CRA, on the other hand, obviously wants taxpayers to file and pay on time, but would rather not incur time and costs to chase down delinquent taxpayers, especially where the amounts involved are relatively small. The CRA’s solution to that problem is its Voluntary Disclosure Program (VDP), which allows taxpayers who are in default of their filing or payment obligations to come forward and set things right. The incentive for taxpayers to do so is that while all taxes owed will have to be paid, along with accrued interest, no fines will be levied and no criminal charges will be brought. For taxpayers who want to get out from under their self-imposed tax problems, however they came about, and to get a fresh start, it’s generally a good deal.

The range of taxpayer errors and omissions for which the CRA will accept a voluntary disclosure is quite broad, and includes errors, omissions, or defaults made relating to the following:
•failing to fulfill tax filing and payment obligations;
•failing to report taxable income received;
•claiming ineligible expenses on the tax return;
•failing to remit employees’ payroll deductions;
•failing to report an amount of GST/HST (including undisclosed liabilities or improperly claimed refunds or rebates, unpaid tax, or net tax from a previous reporting period);
•failing to file required information returns; and
•failing to report foreign income that is taxable in Canada.

There is a much shorter list of taxpayer circumstances for which a voluntary disclosure under the VDP cannot be made, but those won’t apply to most taxpayers. A VDP application can’t be made for bankruptcy returns, income tax returns with no taxes owing or with refunds expected, or taxpayer elections (in which the taxpayer chooses to have a particular tax provision apply).

Generally speaking, in order for a VDP application to be made, four circumstances must be present. The disclosure must be completely voluntary (meaning that it can’t be made after the CRA has already taken compliance action of any kind against the taxpayer, or the taxpayer is aware that such compliance or enforcement action will be taken) and must be complete – any VDP application must be in respect of all tax years where filing or payment is in arrears or an error or omission has been made, not just some of those years. In addition, the taxpayer making the disclosure must be liable to a penalty and the information to be disclosed must be at least one year overdue, but must also relate to tax years which ended within the previous 10 calendar years.

That one- year requirement means that taxpayers who are now late in filing their return for 2016 can’t apply to the VDP in respect of that return. The best advice for taxpayers who haven’t yet filed or paid for 2016 is to file and pay as soon as possible. Where the taxpayer can’t pay taxes owed, in full or in part, he or she should contact the CRA to make arrangements to pay such amounts over time. A taxpayer who hasn’t filed for 2016 and one or more previous years, can still make a VDP application in respect of any or all of those previous years within the last decade.

That application can be made in one of three ways – through the CRA’s My Account service on its website, by fax, or by regular mail. The form used for disclosures is Form RC199, Voluntary Disclosures Program (VDP) Taxpayer Agreement, which is available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/rc199/README.html Where the completed form is faxed or sent by mail, the destination address and fax number is as follows:

Voluntary Disclosures Program
Shawinigan-Sud National Verification and Collections Centre
4695 Shawinigan-Sud Boulevard
Shawinigan QC G9P 5H9
Fax: 1-888-452-8994

The CRA now handles all VDP matters through this one centralized office. It previously provided VDP fax service through one of its B.C. offices, but that service was discontinued in February 2017.

Once the CRA has received the taxpayer’s VDP application, it will review that application and respond in writing with its decision. A notice of assessment or reassessment will then be issued to the taxpayer setting out the decision and amounts owed by that taxpayer.

It’s also possible that the CRA, in the course of reviewing the VDP application, will have need of further information. That request for information will be made by means of a letter to the taxpayer, and that letter will provide both a reference number for the application and a telephone number which the taxpayer can call.

Taxpayers are understandably somewhat nervous about disclosing past tax transgressions to the tax authorities. One of the better features of the VDP program is that it gives taxpayers the right to make a “no-names” disclosure, in which all of the relevant information, excepting the taxpayer’s personal identifying information, is provided to the CRA. Once the CRA has reviewed the initial information provided by the taxpayer, it will provide a preliminary determination of whether the taxpayer’s situation qualifies for a VDP application (that is, whether the conditions outlined above are met and there is nothing in the taxpayer’s situation which would disqualify him or her from making a VDP application) and provide its opinion on the possible tax implications of the disclosure. If the taxpayer’s situation does qualify for a VDP application, then the taxpayer has 90 days in which to provide his or her personal identifying information and proceed with that VDP application. If the taxpayer doesn’t do so, the file is closed. If the taxpayer decides that he or she wishes to go forward with the voluntary disclosure, then the matter proceeds in the same way as outlined above for a “named” disclosure.

“Coming clean” with the tax authorities where tax is owing or returns haven’t been filed as required is a difficult decision to make, and the financial cost, depending on the circumstances, can be significant. However, the cost of not coming forward can be greater. Where tax is owed to the CRA it charges, by law, interest at higher than commercial rates, and such interest is compounded daily (meaning that every day interest is charged on the previous day’s interest). As well, where penalties are levied, interest is charged on unpaid penalty amounts. Making a voluntary disclosure and coming to a resolution with the CRA will allow the taxpayer to avoid both the penalties and the interest which would have accrued on such penalties, and to stop the interest clock running on the amount of any unpaid taxes.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Personal tax credits that will disappear in 2017 (May 2017)

The Canadian tax system is in a constant state of change and evolution, as new measures are introduced and existing ones are “tweaked” through a never-ending series of budgetary and other announcements. However, even by normal standards, 2017 is a year in which there are larger than usual number of tax changes affecting individual taxpayers. And, unfortunately, most of those changes involve the repeal of existing tax credits which are claimed by millions of Canadian taxpayers.

The repeal of the affected credits will show up for the first time on the individual income tax return for the 2017 tax year, to be filed in the spring of 2018. And, since the changes do, for the most part, mean the loss of existing credits, not being able to make those credit claims will mean a higher tax bill for taxpayers who have claimed them in previous years. Knowing what lies ahead, however, means that taxpayers make an accurate assessment during the year of the true after-tax cost of any contemplated expenditures and make their spending decisions in light of that knowledge.

Some of the changes for 2017 are already in place, having been implemented as of the beginning of the year, while others will take effect part way through 2017. What follows is a listing of the changes to existing tax credits which will be implemented for part or all of the 2017 tax year.

Textbook and education tax credits repealed

Post-secondary education is expensive, and for many years students and their families have been able to offset, to a degree, the costs related to obtaining that education through claims for federal non-refundable tax credits.

There are, effectively, four tax credits or deductions which have specific application to post-secondary students. The education tax credit provides a non-refundable tax credit amount of $400 per month of full-time enrolment in a qualifying educational program and $120 per month of part-time enrolment in such an educational program at a designated educational institution. The textbook tax credit provides a non-refundable tax credit amount of $65 per month of full-time enrolment in a qualifying educational program and $20 per month of part-time enrolment in such an educational program at a designated educational institution. Both such credit amounts are converted to tax credits by multiplying the total credit amount by 15%. There is also a federal tax credit claimable equal to 15% of eligible tuition fees paid during the year. Finally, students who incur interest costs for student loans received from government student loan programs can deduct the cost of those interest payments, without limit.

Effective as of January 1, 2017, the first two of those credits have been eliminated, and neither the textbook tax credit nor the education credit will be claimable for 2017 or subsequent years. Unused education and textbook credit amounts carried forward from years prior to 2017 will be available to be claimed in 2017 and subsequent years.

The claim for a tax credit for tuition amounts paid and the claim for a deduction for interest payments made on qualifying student loans are not affected.

Taxpayer should be aware, as well, that the provinces also offered tuition and education tax credits which could be used to reduce provincial tax payable. While changes similar to the federal ones have been made at the provincial level, those changes are not uniform. Some provinces have chosen to repeal both the education and tuition tax credits, effective July 1, 2017, while others have announced that only the education tax credit will be repealed, and not until 2018. Still other provinces have indicated that no change is planned to their current system of tuition and education tax credits. Consequently, taxpayers will need to determine whether and to what extent claims for provincial tuition and education tax credits remain available for 2017 in their province of residence.

Children’s fitness and arts tax credits repealed

For several years, parents have been able to claim a federal tax credit for expenditures made to enroll their children in fitness and arts-related activities. The federal government has been moving over the last couple of years to cut back on the availability of that credit, generally by reducing the amount claimable. For 2017, both the children’s arts and fitness tax credits have been repealed.

Public transit tax credit repealed

For several years, individual taxpayers have been entitled to claim a refundable federal tax credit for costs incurred in taking public transit on a regular basis. The definition of what constituted public transit was extremely broad, covering everything from buses to ferries. As well, it was possible to combine qualifying amounts incurred by all family members and claim them on a single return, maximizing the value of the credit.

However, as part of this year’s federal Budget, it was announced that the public transit tax credit would be repealed, effective as of July 1, 2017. Taxpayers who have purchased an annual transit pass for 2017 (or who might be thinking of trying to beat the deadline by purchasing monthly passes for the rest of 2017 before July 1) will not escape the effect of the repeal. The budget measures specify that the cost of transit passes attributable to public transit use which occurs after June 30, 2017 will no longer be eligible for the credit, regardless of when the expenditure for those passes is incurred.

Notwithstanding, the public transit will be claimable on the 2017 return for qualifying expenditures made for travel on public transit before July 1, 2017, and so taxpayers should keep receipts to support those claims.

Caregiver tax credits replaced

Individuals who live with or care for relatives in a variety of situations have been able to claim one or more caregiver tax credits to help offset the cost of providing such care. The number of tax credits related to caregiver activities has expanded over the years and had become a somewhat confusing patchwork of possible credit claims.

In this year’s budget, and effective as of January 1, 2017, the federal government acted to replace the current patchwork of credits with a single Canada Caregiver Credit. The new single credit, for the most part, will provide caregivers with the same tax relief as the old system did, with one major exception. Members of more than one generation of a family live under the same roof for a variety of reasons. Sometimes, a retired grandparent who lives with his or her children and grandchildren can help out with child care while the parents are at work. Sometimes, especially in more expensive real estate markets, having multiple generations under the same roof is a matter of economic necessity. Prior to 2017, where an individual lived in the same residence with a parent or grandparent who was aged 65 or older, that individual could claim a caregiver tax credit with respect to the parent or grandparent. There was no requirement that the senior parent or grandparent be disabled or infirm in any way.

As of 2017, no credit will be claimable in such situations. The new Canada Caregiver Credit will be claimable in a range of living situations and for individuals of various ages. However, the one constant requirement to qualify for that credit is that the person in respect of whom it is claimed be infirm. As stated in the federal Budget papers “The Canada Caregiver Credit will no longer be available in respect of non-infirm seniors who reside with their adult children.”

The credits outlined above are claimed by millions of taxpayer every year. And, every taxpayer who made such claims for 2016 will see an increase in his or her tax bill for 2017, when those claims will no longer be available. Planning now for that reality will enable such taxpayers to avoid an unexpected and unwelcome tax bill owed when the return for 2017 is filed next spring.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Fixing a mistake on your (already-filed) tax return (May 2017)

For the majority of Canadians, the due date for filing of an individual tax return for the 2016 tax year is May 1, 2017. (Self-employed Canadians and their spouses have until June 15, 2017 to get that return filed.) In the best of all possible worlds, the taxpayer, or his or her representative, will have prepared a return that is complete and correct, and filed it on time, and the Canada Revenue Agency (CRA) will issue a Notice of Assessment indicating that the return is “assessed as filed”, meaning that the CRA agrees with the information filed and tax result obtained by the taxpayer. While that’s the outcome everyone is hoping for, it’s a result which can be “short-circuited” in a number of ways.

Not infrequently, the taxpayer realizes, after the return is filed, that information has been inadvertently misstated, or perhaps amounts have been omitted where an information slip was received (or located) after the return was filed. In such situations, the taxpayer is often at a loss to know how to proceed, but the process for amending a return is actually quite straightforward. Occasionally, the first thought in such circumstances is that another —corrected — return should be filed, but that is not the right course of action. Instead, the taxpayer should wait until a Notice of Assessment has been received in respect of the return already filed, and then file a T1 Adjustment Request with the CRA, outlining the needed corrections.

The easiest and quickest way of requesting an adjustment is through the CRA website’s “My Account” service, but that option is available only to taxpayers who have already registered for that service. While doing so isn’t difficult (the steps involved are outlined on the website at www.cra-arc.gc.ca/myaccount/, it does take a few weeks to complete the process.

Taxpayers who don’t want to deal with the CRA through its website, or who don’t think it’s worth registering for My Account just to deal with the CRA on a single issue, can obtain a hard copy of the T1 Adjustment form from the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1-adj/README.html. Those who are unable to print the form from the website can order a copy to be sent to them by mail by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. The use of the actual form isn’t mandatory – the third option of sending a letter to the CRA is an acceptable alternative – but using the prescribed form has two benefits. First, it makes clear to the CRA that an adjustment is being requested, and secondly, filling out the form will ensure that the CRA is provided with all the information needed to process the requested adjustment. And, whether the request is made using the T1 Adjustment form or by letter, it is necessary to include any relevant documents – the information slip summarizing the income not reported, or the receipt for an expense inadvertently not claimed.

A listing of Tax Centres and their addresses can be found on the CRA website at www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html. An Adjustment request should be sent to the same Tax Centre with which the original tax return was filed. A taxpayer who isn’t sure where that is can go to www.cra-arc.gc.ca/cntct/tso-bsf-eng.html on the CRA website and select his or her location from the listing found there. The address for the correct Tax Centre will then be provided.

Where an Adjustment request is made, it will take at least a few weeks, usually longer, before the CRA responds. The Agency’s estimate is that such requests which are submitted online have a turnaround of about two weeks, while those which come in by mail take about eight weeks. Not unexpectedly, all requests which are submitted during the CRA’s peak return processing period between March and July will take longer.

Sometimes the CRA will contact the taxpayer, even before the return is assessed, to request further information, clarification, or documentation of deductions or credits claimed (e.g., receipts documenting medical expenses claimed, or child care costs). Whatever the nature of the request, the best course of action is to respond promptly, and to provide the requested documents or information. The CRA can assess only on the basis of the information with which it is provided, and it is the taxpayer’s responsibility to provide support for any deduction or credit claims made. Where a request for information or supporting documentation for a claimed deduction or credit is ignored by the taxpayer, the assessment will proceed on the basis that such support does not exist. Providing the requested information or supporting documentation can usually resolve the question to the CRA’s satisfaction, and its assessment of the taxpayer’s return can then proceed.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Determining your Canada Pension Plan entitlement

Canada Pension Plan (CPP) retirement benefits are available to virtually any Canadian who has participated in the work force and made contributions to the CPP and for most retirees, that monthly CPP benefit represents a substantial percentage of their income. Consequently, knowing what to expect in the way of CPP retirement benefits is crucial to an individual’s retirement income planning.

Unfortunately, it’s also a safe bet that most Canadians don’t know much they can expect to receive each month from the CPP – or even how to find out that amount. The relevant information is available on each individual’s Statement of Contributions, a document prepared annually by the federal government. However, while the federal government used to mail a Statement of Contributions to each contributor to the CPP annually, such statements are now automatically sent only to Canadians who are aged 59 to 65. Anyone else who wants to obtain a copy of their Statement of Contributions must take the initiative to obtain it from the federal government by making a specific request.

Such a request can be made by telephone, mail, or online, in the following ways:

• A telephone request for a Statement of Contributions is made by calling Service Canada at 1-800-277-9914;
• A paper copy of an Application for Statement of Contributions to Canada Pension Plan can be obtained online at hrsdc.gc.ca/cgi-bin/search/eforms/index.cgi?app=profile&form=isp2000&lang=e; or
• to view and print an individual’s Statement of Contributions online, from the Service Canada website, it is necessary to first request a Service Canada access code atservicecanada.gc.ca/eng/online/pac/pacinfo.shtml. That access code, which is sent to the individual by mail, can then be used to obtain online access to information about a number of federal government benefits, including CPP benefits.

It’s apparent that, whatever the method used, it takes a few weeks before a Statement is obtained.

Once the Statement of Contributions is obtained, however, the recipient will have all the information needed to determine his or her CPP entitlement.

A hard copy of the Statement of Contributions has three sections. The first outlines the individual’s name, the address that Service Canada has on file for that individual, the individual’s date of birth and the date that the Statement of Contributions was prepared. That last date is important because, as additional contributions are made in successive years by the individual to the CPP, the amount of benefits receivable will change.

The second section of the Statement outlines the contributions made by the individual to the CPP and pensionable earnings received each year since the age of 18, which is the first year that contributions can be made.  There is generally a lag time before contributions made show up on the Statement of Contributions – for instance, a Statement of Contributions issued during 2016 will likely show contributions made up until the end of 2015.

The third section of the Statement of Contributions is the one in which the amount of CPP benefits which may be received are summarized. And, while the CPP is generally thought of primarily as a source of retirement income, there are in fact three types of CPP benefits:

• retirement benefits;
• disability benefits (payable, as the name implies, to individuals who have contributed to the CPP but are no longer able to work because they have a severe and prolonged disability); and
• survivor benefits (payable to surviving relatives of a CPP contributor who has died).

The summary of retirement benefits shows, firstly, the amount of CPP benefits which would be payable to the individual if he or she were 65 years old at the time the statement was prepared (remembering that that amount can change, depending on the amount of CPP contributions made in future years).  That figure is followed by two figures. Where the individual is under age of 60, the statement will show the amount of benefit which would be receivable by the same individual if he or she chose to receive the CPP retirement benefit at the ages of 60, 65, or 70. Where the individual is already over the age of 60, the statement will show how much benefit would be receivable if payment were to start immediately, and also the amount of monthly benefit which would be receivable at age 65 and at age 70. The earlier the CPP retirement benefit is received, the lower the monthly benefit amount payable. For example, a person who is 62 years of age in 2016 and could receive a monthly CPP retirement benefit of $744 if benefits were started the following month would be eligible for a monthly benefit of $964 if receipt was deferred to the age of 65. Changes announced in recent years will increase the “gap” between those figures, as those who elect to begin receiving CPP retirement benefits before the age of 65 will see their benefits reduced to a greater degree than is currently the case.

Where an individual who has contributed to the CPP dies, his or her surviving spouse or common law partner is generally entitled to receive CPP survivor benefits. The amount of the survivor’s benefit payable is determined by both the amount of contributions made by the deceased contributor and by the age and circumstances of the surviving spouse or common-law partner. Continuing with the individual example above, a surviving spouse or partner of that individual who is aged 65 or over could receive a survivor’s pension of $578 per month. Where the surviving spouse or partner is aged 45 to 65, or is under the age of 45 but has dependent children, or is disabled, the monthly survivor benefit amount is reduced slightly to $545. Further reductions in the survivor benefit are taken where the surviving spouse or partner is under the age of 45 but does not have dependent children and is not disabled. Finally, dependent children of a CPP contributor are entitled to receive a monthly survivor’s benefit until the age of 18, or up to age 25 if they remain full-time students.

The amounts contributed by an individual to the CPP throughout his or her working life determine the amount of CPP benefits which will be payable to that individual later in life. Consequently, it is important to ensure that the contribution information on file with the federal government, as well as the personal information like birth date, address, and the like, is accurate and up-to-date. The birth date information on the CPP Statement of Contributions is the one registered on the individual’s Social Insurance Number record. If that information is incorrect, the individual should contact the Social Insurance Registration Office at 1-800-206-7218 to determine how to correct it. Where there is an error on the Statement of Contributions with respect to CPP contributions made or the amount of pensionable earnings received, it is necessary to write to the CPP, providing supporting documentation for the needed correction. The address to which such correspondence is sent can be found on the back of the Statement of Contributions form.

Finally, the federal government provides a great deal of information on its website with respect to the CPP and Canada’s retirement income system generally. A good starting point is the Service Canada website at www.esdc.gc.ca/en/cpp/index.page.

Planning for year-end charitable donations

The start of fall marks a lot of things, among them a number of runs, walks, and other similar events held to raise money for a broad range of Canadian charities. And, in a few months, as the holiday season approaches, charities will launch their year-end marketing campaigns.

Canadians have a well-deserved reputation for supporting charitable causes, through donations of both money and goods. Our tax system supports that generosity by providing a tax credit, at both the federal and provincial/territorial levels, for qualifying  donations made. Federally, taxpayers can claim a credit of 15% of the first $200 in donations plus 29% of donations over the $200 threshold. The tax credit provided by the provinces and territories works in much the same way, in that a tax credit is provided on the first $200 in donations at the lowest tax rate imposed by that province or territory, and a credit on donations above the $200 level at the province or territory’s highest tax rate. The only exceptions are the provinces of Alberta and Quebec. Alberta provides a credit of 10% on the first $200 in donations, and an enhanced credit of 21% on the balance. Quebec provides a charitable donations tax credit on the first $200 of donations at the 20% rate applicable to its middle income bracket. Donations above the $200 threshold are eligible for credit at the province’s top tax rate of 24%.

As is the case with most expenditures that benefit from favourable tax treatment, in order to make a claim for the charitable donations tax credit in a year, a donation must be made by the end of that calendar year. And, this year and next, there is an additional incentive to maximize donations made, in the form of a “First-Time Donors Super Credit”.

The name of the program is somewhat misleading, as the credit is not available just to first-time donors, but to anyone who has not claimed a charitable donations tax credit in recent years. Specifically, where neither a taxpayer nor his or her spouse has claimed a charitable donations tax credit for any year after 2007, either will be able to claim the “super credit” for donations made in 2016 or 2017.

The name “super credit”, however, is not a misnomer. While the usual federal tax credit rate for donations under and above the $200 threshold is 15% and 29% respectively, the super credit supplements the value of such credit by 25%, as shown in the following example provided on the CRA website:

An eligible first-time donor claims $700 of charitable donations in 2016, of which $300 are donations of money. The charitable donations tax credit (CDTC) and the first-time donor’s super credit (FDSC) would be calculated as follows:

• On the first $200 of charitable donations claimed, the CDTC is ($200 x 15%) = $30.
• On the donations claimed in excess of $200, the CDTC is [($700 − $200) x 29%] = $145.
• On the donations that are gifts of money, the FDSC is ($300 x 25%) = $75.
• The total of the CDTC and FDSC is $250.

There are a couple of restrictions on donations which qualify for the super credit. Only donations of money (not goods) will qualify for the super credit. As is the usual rule for charitable donations tax credit claims, the super credit can be claimed by one spouse for donations made by either, or can be shared between spouses. However the super credit is divided, it can be claimed on only $1,000 in total donations. As well, the super credit can be claimed only once.

Since the charitable donations tax credit is a two-level credit, in which the credit percentage increases once donations made in a year exceed $200, it always makes sense to aggregate donations in a single year, so as to maximize the amount of credit claimable. That advice applies especially to taxpayers who are eligible to claim the super credit, which can only be claimed once.

The super credit will be claimable only for donations made to registered charities. Any charity seeking or receiving a donation should be able to provide a registered charitable number, and a searchable current listing of registered charities can be found on the Canada Revenue Agency website atwww.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html, and information on the charitable donations tax credit and the super credit is available on the same website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/349/menu-eng.html.

Canadians household debt levels hit a record high (again)

It has become something of a dreary chorus over the past decade, as financial advisers, central bankers and even Ministers of Finance remind, warn, and even scold Canadians about the risks associated with their ever-increasing levels of household debt.

That chorus was renewed this month, as statistics issued for the second quarter (April to June) of 2016 showed that the amount of household debt held by Canadians, expressed as a percentage of disposable income, had set yet another record. At the end of that quarter, as reported by Statistics Canada, Canadians households held $1.68 in credit market debt for every dollar of disposable income.

Credit comes in many forms, of course, and it’s important to make a distinction between, in particular, secured and unsecured credit. In the first type – secured debt – the lender “secures” the debt against an asset owned by the borrower, meaning that if the debt is not repaid as agreed, the lender has the right to seize and sell the underlying asset in order to be repaid. Although any asset can serve as security for money loaned (car loans being one example), the kind of secured debt most familiar to Canadians is, of course, a mortgage. Unsecured debt, by contrast, is money provided to a borrower on no more than the strength of the borrower’s promise to repay – and the best example of that type of debt familiar to most Canadians is a credit card.

The figures released by StatsCan for the second quarter of 2016 with respect to household debt figures includes all “credit market debt”, which includes consumer credit and mortgage and non-mortgage loans. In virtually every Canadian household that has outstanding debt, the largest such debt is their mortgage, and much of the borrowing which has place in recent years has been in the form of mortgage or home equity line of credit (HELOC) borrowing, both of which are secured against the value of the home. A household which has a mortgage or a home equity line of credit therefore also has an asset – their home – which is worth more than the amount of the mortgage or HELOC and which, if necessary, be sold to pay off that mortgage or HELOC debt. There are, however, two risks to such borrowing. The first is that a downturn in the residential real estate market could mean that the value of the home drops below the amount of the mortgage or HELOC.  The second is that while the increased mortgage or HELOC debt of such households is manageable at current interest rates, those rates are at historic lows and will inevitably increase at some (unknown) point in the future.

Canadians who are carrying significant amounts of debt secured against their home do at least have the security of an asset which could be sold to pay that debt. That’s not the case for those carrying unsecured debt, and the amount of such debt is, in almost all categories, on the increase.

The credit reporting agency TransUnion recently issued a report summarizing non-mortgage debt held by Canadians during the second quarter of 2016. That report, which is available athttps://www.transunion.ca/, indicated that Canadians had reached a non-mortgage debt balance of $21,580 in the second quarter of 2016, up by just under 3% from the balance amount recorded in the second quarter of 2015.

The non-mortgage debt held by Canadians was broken down in the TransUnion report into four categories: bankcard (credit card) debt; auto loans, lines of credit, and installment loans, and the average balances held in each category were as follows:

Bankcard …………………  $3,925 (up by 2.03% year-over-year)

Auto …………………………   $19,896 (up by 3.20% year-over-year)

Lines of credit …………… $29,649 (down by 0.03% year-over-year)

Installment loans ………  $24,021 (up by 6.31% year-over-year)

It’s easy to become complacent, perhaps, when the amount of Canadian household debt, both in dollar terms and as a percentage of household net income, has increased in a series of small quarterly and annual increments, none of which may seem particularly remarkable on their own. However, a look at the longer-term trend paints a different picture.

In 1990, the amount of debt held by Canadian households as a percentage of disposable income stood at 93%. Over the next 15 years, that percentage rose by an average of 1% per year, until it stood at 108% in 2005. Five years later, in 2010, debt held by Canadian households was, on average, equal to 150% of their disposable income, meaning that such debt had risen by an average of just over 8% per year between 2005 and 2010. And, of course, as of the second quarter of 2016, that debt to disposable income percentage has reached a new high of 168%.

And, one final number which may help to put the amount of debt held by Canadian households in context: a country’s gross domestic product, or GDP, is the total value of all of the goods and services produced by that country in a given time period; for the second quarter of 2016, the amount of household debt held by Canadians exceeded, for the first time, Canada’s total GDP.

A few questions about your tax return

At the Canada Revenue Agency (CRA), taxes are a year-round business. During the spring and early summer, the CRA is busy processing the millions of individual tax returns filed by Canadians for the previous tax year. The volume of returns filed and the Agency’s self-imposed processing turnaround goals mean that the CRA cannot possibly do an in-depth review of each return filed. Once the season of processing and assessing tax returns is for the most part complete, however, the CRA moves to the next phase of its activities – specifically, the start of its annual post-assessment tax return review process.

What that means for the individual taxpayer is 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 fall by millions of Canadian taxpayers.

In 2016, Canadians filed over 28 million individual income tax returns with the CRA. The vast majority of those returns – about 24 million – were filed by electronic means (either EFILE or NETFILE), while only just over 4 million paper returns were filed. For several years, the CRA has encouraged taxpayers to take advantage of its electronic filing options, and its efforts have clearly been a success.  As the CRA has always noted, filing electronically means faster turnaround (and quicker refunds!) but, when returns are filed by electronic methods 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. There have, however, always been means by which the CRA can verify claims made by taxpayers. Where returns are paper-filed, taxpayers must usually include receipts or other documentation to prove their claims, whether those claims are for dependent tax credits, charitable donations, medical expenses, or other similar deductions and credits. For the 85% 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 starts in the month of August. There are two components to the review process – the Processing Review Program and the Matching Program. The former is a review of various deductions or credits claimed on returns, while the latter compares information included 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. The time periods during which the two programs are carried out overlap, as the peak time for the Processing Review Program is between August and December, while the Matching Program is carried out from October to March.

While the two programs are carried out more or less concurrently, they are quite different. The Processing Review Program asks the taxpayer to provide verification or proof of deductions or credits claimed on the return, while the Matching Program deals with discrepancies between the information on the taxpayer’s return and information filed by third parties with respect to the taxpayer’s income for the year.

Of course, most taxpayers are not concerned so much with the kind or 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 a precursor to an audit, but that’s not usually 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 that up to find out the reason for the discrepancy. 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, so a return which includes claims in those areas 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 a random basis.

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 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.

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 atwww.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/sbmttng-eng.html.

Regardless of the means by which 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 (or, more recently, from the “Federal Tax Court”, which does not exist). 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. Taxpayers should be aware that payment of taxes is never requested in this way, or by either of those methods. 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. 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 authentic 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 Agency and the taxpayer.