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:
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.
