The (after-tax) benefit of increases to the Universal Child Care Benefit
In October 2014, the federal government announced a number of changes to tax and benefit programs affecting families with young children. One such change altered the Universal Child Care Benefit (UCCB) program, effective January 1, 2015, to increase the amount of that taxable benefit for families having children under the age of 6 and to create a new benefit for those with children aged 6 to 17. The first payment of the new or increased benefit was made in July, in the form of a lump sum payment representing the accrued benefits for the first half of 2015. Since then, this being an election year, there have been claims and counter-claims about the amount of the net benefit to Canadian families of the changes to the UCCB, and about the kind of tax planning families receiving that benefit need to undertake. The existing and new tax rules which determine the overall net benefit of the changes for Canadian families are as follows.
The changes themselves are straightforward. Formerly, Canadian families having a child or children under the age of 6 received $100 per child per month. There was no UCCB payable for children aged 6 and over. Following the changes, as of the 2015 tax year, parents of children under the age of 6 receive an additional $60 per month per child. As well, parents of children aged 6 to 17 will begin receiving a new benefit of $60 per child per month. So, in effect, all qualifying families that have children under the age of 18 will, beginning in 2015, receive an additional payment of $60 per child per month, or $720 per child per year.
Since the payments made in July represented accrued benefits from the beginning of the year, payment amounts could be substantial. It’s important, however, for recipients of those payments to realize and plan for the fact that there are significant tax considerations which will only become apparent next April, when filing the tax return for 2015.
The most significant of those tax considerations comes, ironically, from a change which was announced at the same time as the announcement of increases to the UCCB, but which has gotten much less attention. That change will increase the amount of federal taxes payable by every Canadian parent who was able to claim the federal child tax credit for one or more children in previous years.
The change is the cancellation of that federal child tax credit, effective for the 2015 and subsequent tax years. That child tax credit allowed a parent to make a claim, on his or her tax return for the year, for a tax credit of $338 for each child under the age of 18. Each such credit claimed reduced the parent’s overall tax bill for the year by $338. Since there will be no child tax credit claim allowed on the return for 2015, every Canadian parent who claimed that credit in previous years will, as a result, see their federal tax bill increase by $338. per child, or just under half of the annual per child increase in the UCCB.
The second consideration for parents receiving the increased UCCB is that all UCCB amounts received represent taxable income. So, for each child in respect of whom the enhanced UCCB is received, a parent’s taxable income for the year will increase by $720. The amount of tax which will be payable on that amount will differ, of course, depending on the income of the parent receiving the UCCB, and the province in which they live. It’s possible, however, to provide some general guidelines. For a middle income parent who has total income of between $40,000 and $80,000, the federal tax rate is 22%. Provincial or territorial tax at those income levels will be, on average, around 11%. Consequently, the total tax payable on the $720 per child increase in the UCCB for 2015 will be about 33%, or one-third of that amount, or $238.
The net result of all these calculations is that a middle income parent who receives the $60 per month ($720 per year) increase in the UCCB for 2015 will pay about an additional $238 in combined federal-provincial tax for the year on that increase. As well, such parents will see their federal income tax bill increase by $338 because they can no longer claim the child tax credit. Overall, parents who wish to set aside funds to cover both these upcoming tax liabilities will need to allocate about $576 per child to do so, leaving about $144 of the $720 per child increase received in per-child UCCB payments for 2015.
When a lump sum amount is received from the government, it’s tempting for parents to think of those funds as purely disposable income, especially with back-to-school spending on the horizon. The fact, however, is that there are real tax costs associated with the package of child benefit and child tax credit changes introduced this year. Parents who recognize and plan for those costs might well avoid an unpleasant tax surprise when they file their 2015 tax returns next spring.
Tax relief available to Canadians affected by natural disasters
This summer, millions of Canadians have been affected by a series of disasters ranging from forest fires to droughts and other kinds of severe weather, and many of those Canadians have been temporarily displaced from their homes and businesses as a result.
For anyone facing circumstances which threaten their economic or physical well-being, dealing with tax obligations is, understandably, far down the list of priorities. And, while those tax obligations won’t just go away, the tax authorities can and will ensure that such individuals are not unfairly penalized when they can’t, as a result of the aforementioned disasters, meet those obligations on a timely basis.
The Canada Revenue Agency’s (CRA) ability to provide relief to taxpayers in such circumstances arises from the Agency’s Taxpayer Relief Program. That program allows the Minister to waive or cancel any interest or penalty charges that would be imposed as a consequence of the taxpayer’s failure to meet his or her tax obligations, where that failure was caused by events or circumstances outside the taxpayer’s control. While most such applications are the result of natural disasters, administrative relief can also be provided where the taxpayer is suffering from significant financial hardship. Whatever the reason for the application, it’s important to note that only interest and penalty charges can be waived. The Minister has no authority, no matter how dire the circumstances, to waive the payment of actual taxes owed.
Since the filing deadline for 2014 returns by self-employed taxpayers fell on June 15, as did the due date for the second instalment payment of income taxes for 2015, most requests for relief filed as a result of this summer’s events will likely be requests to waive the imposition of interest or penalties related to late filings or late payments. There is a specific process by which such requests are to be made. The CRA issues a prescribed form—RC4288, Request for Taxpayer Relief, which can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/rc4288/rc4288-11e.pdf. While use of the form is not mandatory—a letter to the CRA will suffice—using the prescribed form will ensure that all of the information needed by the Agency to make a decision on the request for relief is provided. For each such request, that information includes:
- the taxpayer’s name, address, and telephone number;
- the taxpayer’s social insurance number (SIN), account number, partnership number, trust account number, business number (BN), or any other identification number assigned to the taxpayer by the CRA;
- the tax year(s) or fiscal period(s) involved;
- the facts and reasons supporting that the interest or penalty were mainly caused by factors beyond the taxpayer’s control;
- an explanation of how the circumstances affected the taxpayer’s ability to meet his or her tax obligations;
- the facts and reasons supporting the inability to pay the penalties or interest assessed or charged, or to be assessed or charged;
- any relevant documentation; and
- a complete history of events including any measures that have been taken, e.g., payments and payment arrangements, and when they were taken to resolve the non-compliance.
In addition, where the relief request is based on financial hardship, the taxpayer must provide full financial disclosure, including statements of income and expenses. All relief requests are to be sent to a particular Tax Processing Centre, depending on where the taxpayer lives. A listing of the addresses of all such centres is available on the CRA website at www.cra-arc.gc.ca/gncy/cmplntsdspts/sbmtrqst-eng.html, and the same information is included on Form RC4288. The request cannot be e-mailed, as the CRA does not communicate taxpayer-specific information by e-mail.
Each relief request is assigned to a CRA official, who may, if necessary, contact the taxpayer to obtain clarification of the information provided, or to seek additional information. In any case, a determination will be made of whether the taxpayer’s request for interest or penalty relief is to be approved in full, approved in part, or denied, based on the following considerations:
- the taxpayer’s history of compliance with his or her tax obligations;
- whether or not the taxpayer knowingly allowed an arrears balance to exist upon which arrears interest has accrued;
- whether or not the taxpayer exercised a reasonable amount of care in conducting his or her tax affairs, and whether or not negligence or carelessness has been demonstrated; and
- whether or not the taxpayer acted quickly to remedy any delay or omission.
The decision made will be communicated to the taxpayer, with reasons provided where the request is only partially approved, or is denied. At the same time, the taxpayer will be given information on the options available where the CRA has made a decision with which the taxpayer does not agree.
The Minister of National Revenue has issued a news release reminding Canadians affected by this summer’s wildfires of the availability of administrative tax relief, and that news release can be found on the CRA website at http://news.gc.ca/web/article-en.do?nid=1004599&tp=1.
A mid-year check on your TFSA
Earlier this year, it was announced that the annual contribution limit to tax-free savings accounts (TFSAs) would be nearly doubled, increasing from $5,500 to $10,000, and that that increase would be effective for the 2015 and subsequent tax years.
When TFSAs were first introduced by the federal government in 2009, the annual contribution limit was $5,000. That limit stayed in place for four years before increasing to $5,500 for the 2013 and 2014 tax years. The latest increase, to $10,000, means that the total lifetime TFSA contribution limit now stands at $41,000 per taxpayer.
While Canadians have embraced TFSAs as a general savings and retirement savings vehicle, there has always been a degree of confusion about the rules governing TFSAs. That confusion usually arises because the TFSA is the only tax-sheltered savings plan which has the flexibility to permit planholders to withdraw funds from the plan and later replace them.
While the rules governing TFSAs can be complex, the basic rules are these: the TFSA program allows taxpayers to put up to $10,000 per year (as of 2015) into a TFSA. No tax deduction is permitted for any contribution made, but interest or any other kind of investment income earned by the funds held in a TFSA is not taxed as it is earned. Withdrawals can be made from a TFSA at any time, for any purpose, and funds withdrawn (including interest or other investment income earned) are not taxable. In addition, where funds are withdrawn from a TFSA, the amount of that withdrawal is added to the taxpayer’s TFSA limit for the following year. So, for instance, a taxpayer who withdraws $5000 from his or her TFSA in 2015 will be able to contribute up $15,000 to that TFSA in 2016. That $15,000 is made up of the 2016 current year contribution limit of $10,000 and $5,000 in contribution limit created by the withdrawal made in 2015 and carried forward to 2016.
With the TFSA system having been in place now for nearly 7 years, and especially with this year’s contribution limit increase, the total amount of possible contributions is becoming significant, as is the complexity of tracking contributions, withdrawals, and re-contributions made over the past several years. Many taxpayers contribute small or medium-sized amounts to their TFSA throughout the year, as those amounts become available—a tax refund, an employment bonus, or regular federal or provincial tax credit payments all frequently make their way into TFSAs. Other taxpayers set up a system in which amounts are transferred from a chequing or savings account to a TFSA on a regular basis. Some taxpayers do both. As well, it’s not at all uncommon for taxpayers to hold TFSAs at several different financial institutions, as those financial institutions compete for TFSA business by offering “incentive” rates of return in marketing campaigns. However, no matter how many TFSA accounts an individual has, his or her overall contribution limit for the year doesn’t change.
Making regular and irregular contributions to a TFSA, having multiple TFSA accounts at different financial institutions and making withdrawals from a TFSA can make it very difficult to determine where one stands in relation to one’s annual contribution limit at any given time. As well, relatively few taxpayers give much thought to that question, and even fewer know how to determine whether they are, in fact, “offside” with the contribution limit rules. However, there is an immediate cost for exceeding one’s limit, as a penalty of 1% per month or part-month is assessed for over-contributions. All of that means that, like any tax or financial planning strategy, TFSAs require regular monitoring, and right now, just over half-way through the current tax year, is a good time to carry out that “check-up”.
The first step in doing a TFSA “check-up” is determining one’s current year contribution limit. The Canada Revenue Agency (CRA) used to provide that information on each taxpayer’s Notice of Assessment, but that is no longer the case. As well, the CRA has discontinued its online Quick Access service, which used to provide that information. For those who have previously registered for the service, information on one’s 2015 TFSA contribution limit is available through the CRA’s My Account service at www.cra-arc.gc.ca/myaccount/). The CRA also offers a mobile app called “MyCRA” (available at www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/pss_fq/cnd-eng.html#hlp1), where the same information can be obtained. While both services give the taxpayer access to useful personal tax information, including one’s current year TFSA contribution limit, some set-up is required for both.
Taxpayers who don’t want to register for either of those services or who simply want information about their TFSA contribution limit more quickly can call the automated Tax Information Phone Service (TIPS) line at 1-800-267-6999. Those who would rather speak to a live person can call the CRA’s individual income tax enquiries line at 1-800-959-8281. In either case, the taxpayer should have last year’s tax return available to them before calling, as they will be asked to provide personal identifying information to satisfy the CRA’s security requirements—at a minimum, their social insurance number, date of birth, and the amount entered on line 150 of the tax return for 2014.
Once the 2015 contribution limit is known, it’s time to figure out just how much has been contributed to a TFSA during 2015, by checking the year’s total contributions from all sources to date against total contribution room for the year. Where that check shows that the taxpayer is already in an over-contribution position the best course of action is to immediately transfer funds out of the TFSA to another (non-TFSA) account. Penalties payable for over-contributions to a TFSA are calculated based on the highest excess TFSA amount in each month. While a penalty will still be assessed for all months in which the taxpayer was in an over-contribution position (even if the excess contribution position only existed for as little as one day in the particular month), withdrawing or transferring any excess amounts before the end of the current month will avoid the imposition of further penalties.
If a comparison of the contribution limit for the year to contributions to date show that there is still contribution room left for 2015, the next step would be to total up any scheduled automatic transfers which will take place during the rest of 2015 and make sure that they will not, when added to contributions that have already been made since January 1, push total contributions for the year over the allowable limit. If they will, then it’s time to make a change to the transfer schedule or transfer amounts to keep contributions within the year’s maximum allowable contribution limit.
Where there is contribution room still available for 2015, but no contributions are scheduled or anticipated, it may be time to re-think that plan. Even where one’s circumstances don’t permit the contribution of large amounts, every dollar currently sitting in other accounts which is transferred to a TFSA means less tax paid on interest or other investment income earned on those dollars. In most circumstances, there’s really no good reason not to use a TFSA to hold funds which are not needed to meet current expenses, or which are already being set aside for relatively short-term financial goal—perhaps the purchase of a new car, or next year’s vacation. The rate of interest currently being paid on bank account balances is miniscule, and perhaps the only thing worse than receiving such meager returns is losing up to half of those already small interest amounts to income tax, when that result can be easily avoided. Having one’s financial institution transfer any “excess” funds from other accounts into a TFSA will remove the tax hit on any interest or other investment income earned on those funds. And, if a need for the funds arises unexpectedly, a tax-free withdrawal of some or all of the funds in the TFSA can always be made.
After getting off to a slow start, TFSAs have become a standard part of financial and tax planning of most Canadian taxpayers, as there is no other savings vehicle which provides the TFSA’s combination of tax benefits and flexibility. Using TFSAs to the fullest extent possible, while taking care not to violate the TFSA over-contribution rules, is a win-win combination for most taxpayers.
Receiving a first instalment reminder from the CRA
This month, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA). That mail will contain an unfamiliar form—a 2015 Instalment Reminder. On that form, the CRA suggests to the recipient that he or she should make instalment payments of income tax on September 15 and December 15 2015, and will identify the amount which should be paid on each date.
Unexpected correspondence from the tax authorities is always unsettling, and correspondence which suggests that the recipient owes money to the government even more so. Someone who has never before received an instalment reminder (or, quite possibly, doesn’t even know what a tax instalment is) and who receives mail from the CRA suggesting that tax monies are owed might well be both surprised and worried. The fact is, however, tax instalments are just another way of paying tax throughout the year, rather than when the tax return for that year is filed.
The reason that most Canadians are unfamiliar with instalment payments of tax is that most of them work as employees throughout their working lives and income tax is automatically deducted from their pay “at source”. Their employer deducts an amount for income tax from their gross pay, before any paycheque is issued, and remits that amount to the CRA on their behalf. When the individual files a tax return the following spring, he or she is credited with those tax payments which were remitted to the CRA on his or her behalf throughout the year. However, for those who are self-employed or, frequently, those who are retired, no such deduction is automatically made from their income, and the issuance of an Instalment Reminder by the CRA may be the result.
Canadian tax rules provide that where the amount of tax owed when a return is filed by a taxpayer is more than $3,000 ($1,800 for Quebec residents) in the current year and either of the two previous years, that taxpayer may be required to pay income tax by instalments.
The reason that first instalment reminders are issued in August has to do with the schedule on which Canadians file their tax returns. The figure for the immediate prior year can’t be known until the tax return for that year has been received and assessed by the CRA. The tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer should receive a first instalment reminder. In many cases, a first instalment reminder is triggered where an individual has retired within the past two years.
Take, for instance, the example of an individual who retired at the end of 2013 from employment in which tax deductions were automatically taken from his or her paycheque. Beginning January 1, 2014, that individual’s sources of income changed from employment income to Canada Pension Plan and Old Age Security benefits, and monthly withdrawals from an RRSP or RRIF, or pension payments from the former employer. In order for the amounts withheld from such income to match the taxpayer’s actually tax liability for the year, the taxpayer would have to have calculated the amount of that tax liability and made arrangements for withholdings to be made from one or more of the three or four income sources, to total that overall tax liability amount. For most taxpayers, that’s not a very likely scenario. Consequently, it would be almost inevitable that correct withholdings would not be made and that tax of more than $3,000 would be owed when the 2014 tax return was filed. Where the taxpayer’s income levels and withholding amounts are unchanged for 2015, and it is expected that once again, more than $3,000 will be owed on filing the 2015 return, the criteria for the instalment requirement would be met, and a first tax instalment reminder would be issued for the taxpayer in August 2015, after the 2014 return is assessed.
There is a reason that the form received by taxpayers is entitled Instalment Reminder, as those who receive it are not actually required to make instalment payments of tax. There are, in fact, three options open to the taxpayer who receives an Instalment Reminder, each with its own benefits and risks.
First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of September 15 and December 15. A taxpayer who does so can be certain that he or she will not face any interest or penalty charges. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2015, he or she will of course receive a refund on filing.
Second, the taxpayer can make instalment payments based on the total amount of tax which was paid for the 2014 tax year. Where a taxpayer’s income has not changed between 2014 and 2015 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2015 will be the same or slightly less than it was in 2014, owing to the indexation of tax brackets and tax credit amounts. A taxpayer who chooses this option should pay 75% of the total amount owed in September 2015 and the remaining 25% in December 2015.
Third, the taxpayer can estimate the amount of tax which he or she will owe for 2015 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2014 to 2015 and there will consequently be a reduction in tax payable, this option may be worth considering. Taxpayers who wish to pursue this approach can use the tax instalment calculation tool available on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/pymnts/nstlmnts/Instalment_chart_fill-15e.pdf, or can obtain information on federal and provincial tax rates and brackets for 2015 on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html. And, once again, taxpayers who choose this option should pay 75% of the total amount owed in September 2015 and the remaining 25% in December 2015.
Many taxpayers who receive an Instalment Reminder are less than pleased about the fact that they are being asked to, as they see it, pay their taxes “early”. However, the reality is that most of them have been paying income taxes “early” throughout their working lives, by means of source deductions. Source deductions are, however, more or less invisible to the taxpayer, as they are taken before any paycheque is issued, and actually writing a cheque or making an e-payment to the CRA for taxes feels much different.
While no one actually likes paying taxes, by any method, making tax payments by instalments can actually help taxpayers, particularly those who are juggling multiple income sources for the first time, with budgeting and managing cash flow. Because most Canadians don’t have to think about setting money aside for income taxes during their working lives, they don’t always include them (or include them in sufficient amounts) when planning a budget when they first retire. There are few financial surprises more unwelcome than finding out that a large amount is owed when the tax return for the year is filed. For most, it’s an annoyance and an aggravation. For those who live on a fixed income, however, being faced with a significant bill for taxes owed on filing can create real financial hardship. Receiving an Instalment Reminder serves to give notice that if taxes are not being withheld from income amounts paid to the taxpayer throughout the year it is necessary to make some provision for those taxes, in order to avoid having to come up with the entire amount when the return for the year is filed the following spring.