Insights

Millions of Canadians receive payments each month from the federal government and for younger Canadians, especially families with children, such payments will often include the monthly Canada Child Benefit (CCB).

Millions of Canadians receive payments each month from the federal government and for younger Canadians, especially families with children, such payments will often include the monthly Canada Child Benefit (CCB).

The current (2018-19) benefit year for the CCB runs from July to June and so the first payment of the that benefit year, was received by Canadian families on July 20. For some recipients, that payment may have been in a different amount than previous months, while others may not have received any benefit payment at all.

The reasons for such occurrences are two-fold. First, the amount of CCB payable is based on a family’s net income. For the first half of the year, the amount of payment is based on income from the second previous taxation year. So, eligibility for and the amount of any CCB paid during the January to June 2018 period was based on family net income for 2016. For the July to December 2018 period, the amount of benefits which a family can receive is based on that family’s net income for the 2017 tax year.

Of course, the only means by which the federal government can determine a family’s net income for 2017 (and consequently their entitlement to CCB) is from tax returns filed for that year. Where no tax returns have yet been filed for 2017, there will have been no CCB benefit paid in July of 2018. Taxpayers who have not yet filed for 2017 but who believe that they are eligible for CCB should file as soon as possible. Once the return(s) are filed and assessed, and the family is determined to be eligible for CCB benefits during the 2018-19 benefit year, such benefits will be paid retroactively, back to July 2018.

Where a family received CCB during the first half of 2018, and there was a change in family net income between 2016 an 2017, then the amount of CCB received in July 2018 will differ (up or down, depending on whether income increased or decreased from 2016 to 2017) from that received in June.

There is an additional reason why families may see a changed CCB benefit starting in July 2018. In 2016, the federal government announced that CCB benefits would be indexed to inflation beginning in July 2020. However, that implementation date was moved up to July 2018, so benefits are fully indexed to changes in the Consumer Price Index as of that date.

Taxpayers who want to confirm that the amount of their CCB benefit for the 2018-19 benefit year is correct can go to CRA website at www.canada.ca/en/revenue-agency/services/child-family-benefits/canada-child-benefit-overview/canada-child-benefit-we-calculate-your-ccb.html, where the calculation of the CCB is outlined. Or, an explanation of the benefits received can be had by calling the Agency’s Benefits Enquiries toll-free phone line at 1-800-387-1193. The hours of service for that phone line are Monday to Friday, 9 a.m. to 5 p.m.

Achieving charitable registration status is a significant step, and a significant benefit, to any organization. The organization itself becomes exempt from income tax and, in addition, is able to issue tax receipts for donations made to it, which allow donors to claim a federal and provincial tax credit based on the amount of such donations. The ability to issue such tax receipts gives a charitable organization a measurable advantage when it comes to fundraising.

Achieving charitable registration status is a significant step, and a significant benefit, to any organization. The organization itself becomes exempt from income tax and, in addition, is able to issue tax receipts for donations made to it, which allow donors to claim a federal and provincial tax credit based on the amount of such donations. The ability to issue such tax receipts gives a charitable organization a measurable advantage when it comes to fundraising.

The other, less tangible, benefit of becoming a registered charity is that such organizations are more likely to be (correctly) perceived as legitimate charities, having undergone a degree of scrutiny by the Canada Revenue Agency (CRA) in order to obtain registered charity status, and being subject to ongoing reporting requirements in order to maintain that status.

In order to obtain and retain status as a registered charity, an organization must fulfill a number of requirements. Specifically, as outlined on the CRA website, any organization functioning as a registered charity must be resident in Canada, must be established and operated for charitable purposes, and must devote its resources (funds, personnel, and property) to charitable activities.

In relation to the requirements for “charitable purposes” and “charitable activities”, an organization must generally have purposes that include one or more of the following: the relief of poverty, the advancement of education, the advancement of religion, and other purposes that benefit the community (where such purposes have been found by the courts to be charitable in nature).

The devil, as always, is in the details, and the types of activities which charities can engage in in the pursuit of those charitable purposes has always been a subject of discussion and, often, dispute between the charitable sector and the CRA. In particular, there is something of an ongoing dispute with respect to the extent to which charities can engage in activities which are political (in a non-partisan sense) in nature. Such non-partisan political activity, while allowed, is subject to strict limits under specific provisions of the Income Tax Act and the CRA policies interpreting those provisions. The Act requires that a registered charity devote “substantially all” of its resources to charitable activities, but provides that where the charity devotes part of its resources to non-partisan political activities and those non-partisan political activities are “ancillary and incidental to its charitable activities”, the resources devoted to such activities will be considered to be used in charitable activities. As a matter of administrative policy, the CRA has taken the position that no more than 10% of a registered charity’s resources should be expended on partisan political activity or, put another way, that at least 90% of its resources should be devoted to non-political charitable activities. A recent Court decision, however, has thrown most of those rules around non-partisan political activities of charities into doubt.

The case began when, in 2016, a registered charity — Canada Without Poverty — challenged the CRA’s administrative policy limiting registered charities to using no more than 10% of their resources for political activities related to their charitable purposes. That challenge was based on the argument that the organization could not achieve its charitable purposes without engaging in political activity, and that the restrictions placed by the CRA’s policies on the extent of such activities were a violation of the right to free expression granted by the Canadian Charter of Rights and Freedoms.

The Court agreed with the charity which brought the challenge and held that the CRA’s view that a charity could spend only up to 10% of its resources on non-partisan political activities was a violation of the Charter and that the entire provision of the Income Tax Act which restricted non-partisan political activities and therefore political expression by a registered charity was also contrary to the Charter, and that there was no justification for such restriction.

The Court did emphasize that it was not speaking of partisan political activities, which remain out of bounds for registered charities. However, as the law now stands following the Court’s decision on July 16, charities are able to engage in non-partisan political activities without regard for the limits which were formerly imposed by the Income Tax Act and by the CRA’s administrative policies in enforcing that Act.

It is likely that, given the potentially significant consequences which follow from the Court’s decision, the federal government will appeal that decision to a higher Court, seeking to have it reversed. That process of appealing the Court decision is one which will take at least several months, if not longer, but it’s a process that will be closely followed by many organizations and individuals working in the charitable sector.

Sometime around the middle of August, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA), and that mail will contain unfamiliar and unwelcome news. Specifically, the enclosed form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15 of 2018 — and will helpfully identify the amounts which should be paid on each date.

Sometime around the middle of August, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA), and that mail will contain unfamiliar and unwelcome news. Specifically, the enclosed form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15 of 2018 — and will helpfully identify the amounts which should be paid on each date.

No one particularly likes receiving unexpected mail from the tax authorities and correspondence which suggests that the recipient should be making payments of tax to the CRA during the year (instead of when he or she files the return for the year next April) is likely to be both perplexing and somewhat alarming. It is fair to say that most Canadians aren’t familiar with the payment of income tax by instalments, and are therefore at a loss to know how to proceed the first time they receive an instalment reminder.

The reason that the instalment payment system is unfamiliar to most Canadians is that most of us pay income taxes during our working lives through a different system. Every Canadian employee has tax automatically deducted from his or her paycheque (“at source”), before that paycheque is issued, and that tax is remitted by the employer to the CRA, on the employee’s behalf. Such deductions and remittances accrue to the employee’s behalf, and they are credited with those remittances when filing the annual tax return for that year. It’s an efficient system, but it’s also one which is largely invisible to the employee, and certainly one which operates without the need for the employee to take any steps on his or own. When someone begins to receive income through a source other than employment (for instance, the newly self-employed or newly retired), it is consequently not particularly surprising that the individual wouldn’t know that it is now his or her responsibility to make specific arrangements for the payment of income tax.

Adding to the potential confusion, most employees who retire are accustomed to having only a single source of income. Once in retirement, however, there are likely multiple such sources of income, including Canada Pension Plan benefits and Old Age Security payments, and perhaps monthly amounts received from an employer-sponsored registered pension plan (RPP) or a registered retirement income fund (RRIF). Unless the individual so directs, none of the payors of those kinds of income will deduct income tax from the payments and remit them to the federal government on the individual’s behalf.

Canadian tax rules provide that, where the amount of tax owed when a return is filed by the taxpayer is more than $3,000 ($1,800 for Quebec residents) in the current (2018) year and either of the two previous (2016 and 2017) years, that taxpayer may be subject to the requirement 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 amount of tax payable on filing for the immediately preceding year can’t be known until the tax return for that year has been filed and assessed, and 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 for the current year.

Taxpayers who receive that first instalment reminder in August may also be puzzled by the fact that it is a “reminder” and not a “requirement” to pay. The reason for that is that those who receive it are not actually required by law to make instalment payments of tax. There are, in fact, three options open to the taxpayer who receives an instalment reminder.

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 have to pay any interest or penalty charges even if he or she does have to pay an additional amount on filing in the spring of 2019. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2018, 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 owed and paid for the 2017 tax year. Where a taxpayer’s income has not changed between 2017 and 2018 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2018 will be the same or slightly less than it was in 2017, owing to the indexation of tax brackets and tax credit amounts. Once that figure is determined, 75% of the total amount should be paid on or before September 15 and the remaining 25% paid on or before December 15.

Third, the taxpayer can estimate the amount of tax which he or she will actually owe for 2018 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2017 to 2018 and there will consequently be a reduction in tax payable, this option may be worth considering. Taxpayers who wish to pursue this approach can obtain the information needed to estimate current year taxes (federal and provincial tax brackets and rates) on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html#federal. And, as in option 2, 75% of the total tax determined to be payable for 2018 should be paid on or before September 15, and the remaining 25% paid on or before December 15 of this year.

All of this may seem like a lot of research and calculation effort, especially when one considers that many Canadians don’t even prepare their own tax returns. And those who don’t want to be bothered with the intricacies of tax calculations can pay the amounts set out in the Instalment reminder, secure in the knowledge that they will not incur any penalty or interest charges and that, should those amounts ultimately represent an overpayment of taxes, that overpayment will be recovered and refunded when the 2018 return is filed next spring.

Once they have resigned themselves to the realities of the tax instalment system, the next question that most taxpayers have is how such payments can be made. Not surprisingly, the CRA provides taxpayers with a lot of options when it comes to making instalment payments, and those options include the following:

• Visa Debit
• Online banking
• Debit card
• Pre-authorized debit (not applicable when using EFILE)
• Credit card
• At the taxpayer’s financial institution using Form INNS3, Instalment Remittance Voucher

More information on how to make instalment payments of tax can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/making-payments-individuals/paying-your-income-tax-instalments/you-pay-your-instalments.html.

Between February and July 2018, the Canada Revenue Agency (CRA) received and processed just over 28 million individual income tax returns filed for the 2017 tax year. The CRA’s self-imposed processing turnaround goal for each of those returns is to complete its assessment and to issue a Notice of Assessment within two to six weeks, depending on the filing method.

Between February and July 2018, the Canada Revenue Agency (CRA) received and processed just over 28 million individual income tax returns filed for the 2017 tax year. The CRA’s self-imposed processing turnaround goal for each of those returns is to complete its assessment and to issue a Notice of Assessment within two to six weeks, depending on the filing method.

The effort of processing those returns and issuing 28 million Notices of Assessment consumes the bulk of the CRA’s time and resources during the February to June filing season. However, the sheer volume of returns and the processing turnaround timelines mean that the CRA does not (and cannot possibly) do a manual review of the information provided in a return prior to issuing the Notice of Assessment. Rather, all returns are scanned by the Agency’s computer system and a Notice of Assessment is then issued.

In addition, the CRA has for many years been encouraging taxpayers to fulfill their filing obligations online, through one of the Agency’s electronic filing services. This year, just under 25 million (or 88%) of the returns were filed by electronic means. While e-filing means that the turnaround for processing of returns is much quicker, there is, by definition, no paper involved. The Canadian tax system has always been what is termed a “self-assessing” system, in which taxpayers report income earned and claim deductions and credits to which they believe they are entitled. Prior to the advent of e-filing there were means by which the CRA could easily verify claims made by taxpayers. Where returns were paper-filed, taxpayers were usually required to include receipts or other documentation to prove their claims, whatever those claims were for. For the 88% of returns which were filed this year by electronic means, no such paper trail exists. Consequently, the potential exists for misrepresentation of such claims (or simple reporting errors) on a large scale.

The CRA’s response to that risk is to carry out a post-assessment review process, in which the Agency asks taxpayers to back up or verify claims for credits or deductions which were made on the return filed this past spring. That post-assessment review process for tax returns for the 2017 tax year is now underway.

There are two components to the post-assessment review process — the Processing Review Program and the Matching Program, and the first component starts in the month of August. That Processing Review Program, as the name implies, is a review of various deductions or credits claimed on returns, while the Matching Program compares information reported on the taxpayer’s return with information provided to the CRA by third-party sources (like T4s filed by employers or T5s filed by banks or other financial institutions).

Being selected for review under either program means, for the individual taxpayer, the possibility of receiving unexpected correspondence from the CRA. Receiving such correspondence from the tax authorities is almost guaranteed to unsettle the recipient taxpayer, even where there’s no reason to believe that anything is wrong. But, it’s an experience which will be shared this summer and fall by about 3 million Canadian taxpayers.

A taxpayer whose return is selected as part of the Processing Review Program will be asked to provide verification or proof of deductions or credits claimed on the return -usually by way of receipts or such documentation. The Matching Program, on the other hand, involves comparison by the CRA of information received from different sources (i.e., matching up the amount of employment income reported by a taxpayer with the amount showing on the T4 slip issued by that taxpayer’s employer). Where the figures match up, there is no need for the further action by the CRA. Where they don’t, the taxpayer will likely be contacted with a request for an explanation of the discrepancy.

Of course, most taxpayers are not concerned so much with the kind of program or programs under which they are contacted as they are with why their return was singled out for review. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is the start of an audit, but that’s not necessarily the case. Returns are selected by the CRA for post-assessment review for a number of reasons. Under the Matching Program, where a taxpayer has filed a return containing information which does not agree with the corresponding information filed by, for instance, his or her employer, it’s likely that the CRA will want to follow up to find out the reason for the discrepancy. As well, Canada’s tax laws are complex and, over the years, the CRA has determined that there are areas in which taxpayers are more likely to make errors on their return. Consequently, a return which includes claims in those areas (like medical expenses, support payments and legal fees) may have an increased chance of being reviewed. Where there are deductions or credits claimed by the taxpayer which are significantly different or greater than those claimed in previous returns, that may attract the CRA’s attention. And, if the taxpayer’s return has been reviewed in previous years and, especially, if an adjustment was made following that review, subsequent reviews may be more likely. Finally, many returns are picked for post-assessment review simply on the basis of random selection.

Regardless of the reason for the follow-up, the process is the same. Taxpayers whose returns are selected for review will receive a letter from the CRA, identifying the deduction or credit for which the CRA wants documentation or the income or deduction amount about which a discrepancy seems to exist. The taxpayer will be given a reasonable period of time — usually a few weeks from the date of the letter — in which to respond to the CRA’s request. That response should be in writing, attaching, if needed, the receipts or other documentation which the CRA has requested. All correspondence from the CRA under its review programs will include a reference number, which is usually found in the top right-hand corner of the CRA’s letter. That number is the means by which the CRA tracks the particular inquiry, and should be included in the response sent to the Agency. It’s important to remember, as well, that it’s the taxpayer’s responsibility to provide proof, where requested, of any claims made on a return. Where a taxpayer does not respond to a CRA request and does not provide such proof, the Agency will proceed on the basis that the requested verification or proof does not exist, and will reassess accordingly.

Taxpayers who have registered for the CRA’s online tax program My Account (or whose representative is similarly registered for the Agency’s Represent a Client online service) can submit required documentation electronically. More information on how to do so can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/sbmttng-eng.html.

Regardless of how requested documents are submitted, it is possible that the CRA will send a follow-up letter, or the taxpayer may be contacted by telephone, with a request from the Agency for more information.

One word of caution — as most Canadians have heard by now, there is a persistent tax scam operating in which taxpayers are contacted by telephone by someone falsely claiming to be from the CRA and the perpetrators of that scam have become increasingly sophisticated in recent years. Such fraudulent callers generally indicate that a review of the taxpayer’s return shows that additional taxes are owed, and insist that immediate payment is required, by wire transfer of funds or pre-paid credit card. It is implied, or stated, that failure to make immediate payment by such means will result in arrest and imprisonment or, for recent immigrants, immediate deportation.

Taxpayers should be aware that payment of taxes is never requested in this way, or by either of those methods, and that the threat of immediate imprisonment or deportation is simply ludicrous. While the CRA can and does contact taxpayers by phone, any CRA representative will have the reference number which appeared in the CRA’s initial letter and should be prepared to quote that number to the taxpayer in order to establish that the call is an authentic one. If the caller cannot provide that number, then it’s not a call from the CRA. As well, the CRA does not correspond with taxpayers on confidential tax matters by e-mail. The only legitimate e-mail which a taxpayer might receive from the CRA is one which advises that there is a new message for that taxpayer in his or her online account with the CRA — and only taxpayers who have previously registered for the CRA’s My Account service would receive such an e-mail. Any other type of e-mail claiming to be from the CRA is not legitimate and should be deleted without opening.

Whatever the reason a particular return was selected for post-assessment review by the CRA, one thing is certain. A prompt response to the CRA’s enquiry, providing the Agency with the information or documentation requested will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the CRA and the taxpayer. To assist taxpayers in understanding the process and in responding to Agency requests, the CRA recently issued a Tax Tip summarizing its return review process, which can be found at https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2018/tax-return-reviewed.html. The CRA website also includes more detailed information on the return review process, which is available at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/review-your-tax-return-cra.html.