Oct 10

October 2018 Newsletter

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

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

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

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

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

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

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

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

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

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

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

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

Current rules on getting mortgage financing

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

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

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

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

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

Purchase price of the home                                           Minimum required down payment

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

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

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

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

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

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

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

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

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

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

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

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

Getting tax assistance for education costs

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

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

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

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

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

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

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

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

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

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

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

Charities and political activities – new developments

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

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

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

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

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

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

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

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

“The Panel recommends that amendments:

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

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

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

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