Mar 5

March Newsletter

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Deciding when to start receiving Old Age Security benefits

The Old Age Security program is the only aspect of Canada’s retirement income system which does not require a direct contribution from recipients of program benefits. Rather, the OAS program is funded through general tax revenues, and eligibility to receive OAS is based solely on Canadian residency. Anyone who is 65 years of age or older and has lived in Canada for at least 40 years after the age of 18 is eligible to receive the maximum benefit. For the first quarter of 2019 (January to March 2019), that maximum monthly benefit is $601.45.

For many years, OAS was automatically paid to eligible recipients once they reached the age of 65. However, since July 2013 Canadians who are eligible to receive OAS benefits have been able to defer receipt of those benefits for up to five years, when they turn 70 years of age. For each month that an individual Canadian defers receipt of those benefits, the amount of benefit eventually received would increase by 0.6%. The longer the period of deferral, the greater the amount of monthly benefit eventually received. Where receipt of OAS benefits is deferred for a full 5 years, until age 70, the monthly benefit received is increased by 36%.

It can, however, be difficult to determine, on an individual basis, whether and to what extent it would make sense to defer receipt of OAS benefits. Some of the difficulty in deciding whether to defer, and for how long, lies in the fact there are no hard and fast rules, and the decision is very much an individual one. Fortunately, however, there are a number of factors which each individual can consider when making that decision.

The first such factor is how much total income will be required, at the age of 65, to finance current needs. It is also necessary to determine what other sources of income (employment income from full-time or part-time work, Canada Pension Plan retirement benefits, employer-sponsored pension plan benefits, annuity payments, and withdrawals from registered retirement savings plans (RRSPs) and registered retirement income fund (RRIFs)) are available to meet those needs, both currently and in the future, and when receipt of those income amounts can or will commence or cease. Once income needs and the sources and possible timing of each is clear, it is necessary to consider the income tax implications of the structuring and timing of those sources of income. The ultimate goal, as it is at any age, is to ensure sufficient income to finance a comfortable lifestyle while at the same time minimizing both the tax bite and the potential loss of tax credits.

In making those calculations, the following income tax thresholds and benefit cut-off figures are a starting point.

  • Income in the first federal tax bracket is taxed at 15%, while income in the second bracket is taxed at 20.5%. For 2019, that second income tax bracket begins when taxable income reaches $47,630.
  • The Canadian tax system provides (for 2019) a non-refundable tax credit of $7,494 for taxpayers who are over the age of 65 at the end of the tax year. That amount of that credit is reduced once the taxpayer’s net income for the year exceeds $37,790.
  • Individuals can receive a GST/HST refundable tax credit, which is paid quarterly. For 2019, the full credit is payable to individual taxpayers whose family net income is less than $37,789.
  • Taxpayers who receive Old Age Security benefits and have income over a specified amount are required to repay a portion of those benefits, through a mechanism known as the “OAS recovery tax”, or clawback. For the July 2019 to June 2020 benefit period, taxpayers whose income for 2018 was more than $75,910 will have a portion of their OAS benefit entitlement “clawed back”.

What other sources of income are currently available?

More and more, Canadians are not automatically leaving the work force at the age of 65. Those who continue to work at paid employment and whose employment income is sufficient to finance their chosen lifestyle may well prefer to defer receipt of OAS. Similarly, a taxpayer who begins receiving benefits from an employer’s pension plan when he or she turns 65, may be able to postpone receipt of OAS benefits.

Is the taxpayer eligible for Canada Pension Plan retirement benefits, and at what age will those benefits commence?

Nearly all Canadians who were employed or self-employed after the age of 18 paid into the Canada Pension Plan and are eligible to receive CPP retirement benefits. While such retirement benefits can be received as early as age 60, receipt can also be deferred and received any time up to the age of 70. As is the case with OAS benefits, CPP retirement benefits increase with each month that receipt of those benefits is deferred. Taxpayers who are eligible for both OAS and CPP will need to consider the impact of accelerating or deferring the receipt of each benefit in structuring retirement income.

Does the taxpayer have private retirement savings through an RRSP?

Taxpayers who were not members of an employer-sponsored pension plan during their working lives generally save for retirement through a registered retirement savings plan (RRSP). While taxpayers can choose to withdraw amounts from such plans at any age, they are required to collapse their RRSPs by the end of the year in which they turn 71, and to begin receiving income from those savings. There are a number of options available for structuring that income, and, whatever the option chosen (usually, converting the RRSP into a registered retirement income fund or RRIF, or purchasing an annuity) will mean that the taxpayer will begin receiving income amounts from those RRSP funds in the following year. Taxpayers who have significant retirement savings in RRSPs should, in determining when to begin receiving OAS benefits, consider that they will have an additional (taxable) income amount for each year after they turn 71.

The ability to defer receipt of OAS benefits does provide Canadians with more flexibility when it comes to structuring retirement income. The price of that flexibility is increased complexity, particularly where, as is the case for most retirees, multiple sources of income and the timing of each of those income sources must be considered, and none can be considered in isolation from the others.

Individuals who are facing that decision-making process will find some assistance on the Service Canada website. That website provides a Retirement Income Calculator, which, based on information input by the user, will calculate the amount of OAS which would be payable at different ages. The calculator will also determine, based on current RRSP savings, the monthly income amount which those RRSP funds will provide during retirement. To use the calculator, it is necessary to know the amount of Canada Pension Plan benefit which will be received, and the taxpayer can obtain that information by calling Service Canada at 1-800 277-9914.

The Retirement Income Calculator can be found at https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html.

When and how to file this year’s tax return

Each year, the Canada Revenue Agency (CRA) publishes a statistical summary of the tax filing patterns of Canadians during the previous filing season. Those statistics for the 2018 show that the vast majority of Canadian individual income tax returns — nearly 87%, or almost 26 million returns — were filed online, using one or the other of the CRA’s web-based filing methods. The remaining 13% of returns were, for the most part, paper-filed, and a very small percentage (0.1%) were filed using the File My Return service, in which returns are filed by telephone.

Each year, the Canada Revenue Agency (CRA) publishes a statistical summary of the tax filing patterns of Canadians during the previous filing season. Those statistics for the 2018 show that the vast majority of Canadian individual income tax returns — nearly 87%, or almost 26 million returns — were filed online, using one or the other of the CRA’s web-based filing methods. The remaining 13% of returns were, for the most part, paper-filed, and a very small percentage (0.1%) were filed using the File My Return service, in which returns are filed by telephone.

Clearly, electronic filing is the overwhelming choice of Canadian taxpayers, and those who choose electronic filing this year have two choices — NETFILE and E-FILE. The first of those — NETFILE, which was used last year by just under 30% of tax filers) — involves preparing one’s return using software approved by the CRA and filing that return on the Agency’s website, using the NETFILE service. E-FILE involves having a third party file one’s return online. Almost always, the E-FILE service provider also prepares the return which they are filing. And, it seems that most Canadians want to have little to do with the preparation of their own returns, as last year 57.3% of all the individual income tax returns filed came in by E-FILE.

The majority of Canadians who would rather have someone else deal with the intricacies of the Canadian tax system on their behalf can find information about E-FILE on the CRA website at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/fl-nd/menu-eng.html. That site will also provide a listing (searchable by postal code) of authorized E-FILE service providers across Canada, and that listing can be found at https://apps.cra-arc.gc.ca/ebci/efes/epcs/prot/ntr.action.

Those who are able and willing to prepare their own tax returns and file online can use the CRA’s NETFILE service, and information on that service can be found at www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/netfile-impotnet/menu-eng.html. While there are some kinds of returns which cannot be NETFILED (for instance, a return for a non-resident of Canada, or for someone who declared bankruptcy in 2018 or 2019), the vast majority of Canadians who wish to do so will be able to NETFILE their return. As well, while it was once necessary to obtain an access code in order to NETFILE, that’s no longer the case. The CRA’s NETFILE security procedures can be satisfied by providing specific personal identifying information, including one’s social insurance number and date of birth.

A return can be filed using NETFILE only where it is prepared using tax return preparation software which has been approved by the CRA. While such software can be found for sale just about everywhere at this time of year, approved software which can be used free of charge is also available. A listing of free and commercial software approved for use in preparing individual returns for 2018 can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/netfile-overview/certified-software-netfile-program.html.

Copies of the 2018 tax return and guide package can also be ordered online, at https://apps.cra-arc.gc.ca/ebci/cjcf/fpos-scfp/pub/rdr?searchKey=ncp%20, to be sent to the taxpayer by regular mail. Taxpayers can also download and print hard copy of the return and guide from the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package.html. Finally, the CRA has made a “limited” number of tax packages available at Service Canada offices and post offices across the country.

Last year the CRA reinstated (for some taxpayers) a tax return filing option that was previously discontinued. For several years, taxpayers with simple returns had the option of filing their returns using a touch-tone telephone. That option, now called  File my Return service (FMR) will be available to eligible Canadians with low or fixed incomes whose situations remain unchanged from year to year, even if they have no income to report, so that they receive the benefits and credits to which they are entitled. The FMR option is, however, available only to taxpayers who are advised by the CRA of their eligibility, and those individuals will have been notified by letter during the month of February.

Finally, taxpayers who are not comfortable preparing their own returns, but for whom the cost of engaging a third party to do so is a financial hardship, have another option. During tax filing season, there are a number of Community Volunteer Tax Preparation Clinics where taxpayers can have their returns prepared free of charge by volunteers. A listing of such clinics (which is regularly updated during tax filing season) can be found on the CRA website at https://www.canada.ca/en/revenue-agency/campaigns/free-tax-help.html.

While there are a number of filing options available to Canadian taxpayers, there’s no element of choice when it comes to the filing and payment deadlines for 2018 tax returns. All individual Canadians must pay the balance of any taxes owed for 2018 on or before Tuesday April 30, 2018, with no exceptions and, absent very unusual circumstances, no extensions.

For the majority of Canadians, the tax return for 2018 must also be filed on or before Tuesday April 30, 2019. Self-employed taxpayers and their spouses have until Monday June 17, 2018 to file their returns for 2018 (but they too must pay any 2018 taxes owing on or before April 30, 2019).

It’s tax filing – and tax scam – season

For many years now, there has been a persistent tax scam operating in Canada in which Canadians are contacted, usually by phone, by someone who falsely identifies himself or herself as being a representative of the Canada Revenue Agency (CRA). The taxpayer is told that money — sometimes a substantial amount of money — is owed to the government. The identifier for this particular scam is that the caller insists that the money owed must be paid immediately (usually by wire transfer or pre-paid credit card) and, if payment is not made right away, significant negative consequences will follow, including immediate arrest or seizure of assets, confiscation of the taxpayer’s Canadian passport, or deportation.

For many years now, there has been a persistent tax scam operating in Canada in which Canadians are contacted, usually by phone, by someone who falsely identifies himself or herself as being a representative of the Canada Revenue Agency (CRA). The taxpayer is told that money — sometimes a substantial amount of money — is owed to the government. The identifier for this particular scam is that the caller insists that the money owed must be paid immediately (usually by wire transfer or pre-paid credit card) and, if payment is not made right away, significant negative consequences will follow, including immediate arrest or seizure of assets, confiscation of the taxpayer’s Canadian passport, or deportation.

Of course, none of those consequences are remotely possible, even in circumstances where a legitimate tax debt is owed. However, the individuals or groups perpetrating this scam have, over the years, become both increasingly sophisticated — to the point of having a call display which shows the call as coming from the CRA — and increasingly successful, and many Canadians have suffered significant financial losses as a result.

To combat this, the CRA and other authorities have provided many warnings to taxpayers on how to avoid getting cheated, such that by now almost everyone has heard of this particular tax scam. However, there has also been an unintended result, as outlined by the CRA on its website:

Scammers posing as Canada Revenue Agency (CRA) employees continue to contact Canadians, misleading them into paying false debt. These persistent scammers have created fear among people who now automatically assume that any communication from someone representing the CRA is not genuine.”

As we move into tax filing season, it is more likely that the CRA will be in touch with taxpayers for legitimate reasons. This poses two potential problems. First, there is likely to be an increase in the activity of tax scammers, who are relying on the fact that taxpayers are more likely to expect contact from the CRA during tax filing season. Second, the tax administration process can’t function efficiently if taxpayers don’t respond to legitimate communications from the CRA out of fear that such communications are just in furtherance of another tax scam.

To address this problem, the CRA has provided comprehensive information on the methods by which it does and does not contact taxpayers, and what it will and will not ask for in communications with taxpayers. That information, which is posted on the CRA website, is as follows.

Phone

The CRA may

  • verify your identity by asking for personal information such as your full name, date of birth, address, account number, or social insurance number
  • ask for details about your account, in the case of a business enquiry
  • call you to begin an audit process

The CRA will never

  • ask for information about your passport, health card, or driver’s license
  • demand immediate payment by Interac e-transfer, bitcoin, prepaid credit cards, or gift cards from retailers such as iTunes, Amazon, or others
  • use aggressive language or threaten you with arrest or sending the police
  • leave voicemails that are threatening or give personal or financial information

Email

The CRA may

  • notify you by email when a new message or a document, such as a notice of assessment or reassessment, is available for you to view in secure CRA portals such as My Account, My Business Account, or Represent a Client
  • email you a link to a CRA webpage, form, or publication that you ask for during a telephone call or a meeting with an agent (this is the only case where the CRA will send an email containing links)

The CRA will never

  • give or ask for personal or financial information by email and ask you to click on a link
  • email you a link asking you to fill in an online form with personal or financial details
  • send you an email with a link to your refund
  • demand immediate payment by Interac e-transfer, bitcoin, prepaid credit cards, or gift cards from retailers such as iTunes, Amazon, or others
  • threaten you with arrest or a prison sentence

Mail

The CRA may

  • ask for financial information such as the name of your bank and its location
  • send you a notice of assessment or reassessment
  • ask you to pay an amount you owe through any of the CRA’s payment options
  • take legal action to recover the money you owe, if you refuse to pay your debt
  • write to you to begin an audit process

The CRA will never

  • set up a meeting with you in a public place to take a payment
  • demand immediate payment by Interac e-transfer, bitcoin, prepaid credit cards, or gift cards from retailers such as iTunes, Amazon, or others
  • threaten you with arrest or a prison sentence

Text messages/instant messaging

The CRA never uses text messages or instant messaging such as Facebook Messenger or WhatsApp to communicate with taxpayers under any circumstance. If a taxpayer receives text or instant messages claiming to be from the CRA, they are scams!

Fraud isn’t new, and it isn’t going away any time soon. However, the speed and anonymity of electronic communication and the extent to which most people are now comfortable transacting their tax and financial affairs online or over the phone makes it easier in many ways for fraud artists to succeed. The best defence against becoming a victim of such scams is a healthy degree of caution, even skepticism, and a refusal to provide any personal or financial information, whether by phone, e-mail, text, or online, without first verifying the legitimacy of the request. The CRA suggests that anyone who is contacted by phone by someone claiming to be a CRA employee take the following steps:

  • Ask for or make a note of the caller’s name, phone number, and office location and tell them that you want to first verify their identity.
  • Check that the employee calling you about your taxes works for the CRA or that the CRA did contact you by calling 1-800-959-8281 for individuals or 1-800-959-5525 for businesses. If the call you received was about a government program such as Student Loans or Employment Insurance, call 1-866-864-5823.

What’s new on this year’s tax return?

While Canadian taxpayers must prepare and file the same form – the T1 Income Tax and Benefit Return – every spring, that return form is never the same from one year to the next. The one constant in tax is change, and every year taxpayers sit down to face a different tax return form than they dealt with the previous year.

While Canadian taxpayers must prepare and file the same form – the T1 Income Tax and Benefit Return – every spring, that return form is never the same from one year to the next. The one constant in tax is change, and every year taxpayers sit down to face a different tax return form than they dealt with the previous year.

First, there are “automatic” changes to the tax rules which are reflected on the return every year. The basic personal credits which can be claimed by most taxpayers increase every year, as do the income brackets which determine the tax rate which applies at each level of income, as both are changed to reflect the rate of inflation.

Changes in tax credit amounts or tax bracket figures are largely invisible to the average taxpayer, as they don’t require any change to the layout or organization of the tax return form, or the process of completing it. The more significant changes are those which provide new credits or deductions to qualifying taxpayers or, conversely, eliminate such credits or deductions which taxpayers might have claimed in previous years. What follows is a listing of such changes which taxpayers will find when completing their return for the 2018 tax year.

Climate Action Incentive

Perhaps the best news in the 2018 tax return, for taxpayers who are residents of Saskatchewan, Ontario, Manitoba, or New Brunswick, is the new Climate Action Incentive (CAI) – a refundable tax credit intended to help mitigate the impact of carbon taxes. The Incentive is extremely broad-based; it is, with few exceptions, claimable by any resident of one of those provinces who is 18 years of age or older, has a spouse or common law partner, or is a parent who lives with his or her child.

The CAI rates vary by province, with the basic incentive ranging from $128 in New Brunswick to $305 in Saskatchewan. An individual who has a spouse or common law partner, or a dependent, can claim an amount in respect of each, and a separate amount is claimable by a single parent in respect of each qualified dependent. As with the basic amount, the amounts claimable for spouses or common law partners and for qualified dependents will vary by province.

The amount of the CAI is increased for individuals who live in rural areas, where the impact of a carbon tax is likely to be greater. Such individuals can increase their basic CAI claim (as outlined above) by 10% to arrive at the total amount claimable. The definition of what constitutes “rural area” for purposes of the CAI has been defined by the tax authorities and a listing of locations in each province which do not qualify as a rural area can be found on the 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-449-climate-action-incentive/qualify-for-the-supplement.html.

Finally, the CAI is a refundable credit, meaning that it is paid to the taxpayer even where no tax is payable for the year and, finally, there are no income restrictions when it comes to eligibility – all qualifying taxpayers receive the amounts outlined above, regardless of their income for the year.

Medical expense tax credit

The list of medical and para-medical expenses for which the medical expense tax credit can be claimed is long and detailed and subject to continual revision. This year, that list has been expanded to include a variety of expenses relating to service animals specially trained to perform specific tasks for a patient with a severe mental impairment.

Unfortunately, the two changes listed above are the only ones which are likely to put money in the taxpayer’s pocket this year. The other major changes which are effective for 2018 cancel existing credits or deductions which were formerly available.

First-time donor super-credit expires

In 2013, the federal government introduced a so-called “first time donor super credit”, which allowed individuals who had not claimed a charitable donation tax credit for a specified period to claim an enhanced credit for donations made in 2013 and the subsequent four years. The first-time super donor tax credit expired at the end of 2017 and consequently no such claim can be made on the 2018 return.

Employee home relocation loan deduction eliminated

Under general tax rules, employees who receive a loan from their employer are considered to have received a taxable benefit. Prior to 2018, preferential tax treatment in the form of a deduction was provided for employees who were required to relocate for work purposes and who received a loan from their employer to assist with related expenses. However, the employee home relocation loan deduction was eliminated as of January 1, 2018.

Changes to the Return, Schedules, and Guide

It’s not news to anyone that our tax system is complex, and that complexity is reflected in the annual tax return form, and in the guide which is intended to provide assistance to taxpayers in completing that return. The income tax return is composed of a four-page return form (the T1) and a number of schedules. Each of those schedules is used to calculate a particular amount – usually a tax credit or tax deduction amount, which is then transferred to a particular line on the return form. Anyone who has ever prepared a tax return is familiar with the sometimes frustrating process of moving back and forth from the return to the schedules to the guide (and back again!), searching for the information needed to figure out just how to complete a particular line or lines of the return.

This year, the Canada Revenue Agency has made some changes in the return, the schedules, and the guide, which are intended to streamline and simplify that process. Specifically, instructions and information which are needed to complete a particular schedule have been moved from the guide and included on that schedule. As well, there are a number of schedules for which it is necessary to first complete some calculations on a worksheet. This year, such calculations, instead of being included in the guide, are incorporated with the worksheet for the particular schedule. Overall, the changes seek to gather in one place all of the information, instructions, and calculations needed to complete a particular schedule, hopefully reducing or eliminating the frustrating need to search through the entire guide for the needed information.