Insights

The end of summer means back to school for students of all ages. For parents of elementary and secondary school students the focus is on obtaining back to school clothes and supplies and starting the process of enrollment in after-school activities for the fall. For those already in (or starting) post-secondary education, choosing courses, finding a place to live and paying the initial bills for tuition and residence are more likely to be on the immediate agenda.

The end of summer means back to school for students of all ages. For parents of elementary and secondary school students the focus is on obtaining back to school clothes and supplies and starting the process of enrollment in after-school activities for the fall. For those already in (or starting) post-secondary education, choosing courses, finding a place to live and paying the initial bills for tuition and residence are more likely to be on the immediate agenda.

What both groups of parents and students have in common this school year, however, is that this is the first full school year which will be affected by previously announced tax changes. And, unfortunately, each of those tax changes, for students at all levels, means higher after-tax costs for education-related expenses.

For students enrolled in the public education system there is, of course, no cost to attend. Most such students are, however, enrolled in one or more after-school activities and for nearly all of those activities, there is an out-of-pocket cost that must be paid. Depending on the activity, those costs can easily amount to several hundred dollars per child over the course of the school year. In recent years, parents were able to offset those out-of-pocket costs by claiming the children’s arts credit or the children’s fitness credit, depending on the kind of activity involved. Both such credits were, however, eliminated as of the 2017 tax year. Consequently, neither credit can now be claimed for any formerly qualifying activity or program. In budgeting for the cost of any contemplated after-school activity, parents must budget on the basis that they will be paying the full cost out-of-pocket, and will not be claiming any offsetting tax credit on their tax return for 2017.

There is some good news for parents of elementary school-aged children, in that where costs are incurred for after-school care, a deduction can still be claimed for such costs. That deduction is part of the general child care expense deduction, which may be claimed (within specified limits) where child care costs are incurred in order for the parent to work, at employment or self-employment. The amount of deduction claimable depends on the age of the child and the actual amount expended, with an overall limit based on family net income. More information on claiming the child care expense deduction can be found 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.

At the post-secondary education level, students (and their parents) have benefitted for many years from an “assist” through our tax system, which provides deductions and credits for some of the many associated costs. Two of those credits are, however, no longer available to be claimed.

The biggest cost of post-secondary education is, of course, tuition, and the tax credit provided for eligible tuition costs continues to be available for the upcoming (and subsequent) academic and taxation years. 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, any credits earned can be carried forward and claimed by the student in a future year, or transferred in the current year to a spouse, parent, or grandparent.

For many years post-secondary students have also been able to claim two other federal tax credits — the education tax credit and the textbook tax credit. Both, unfortunately, have been eliminated, and so the only credit which will be claimable for the upcoming academic year by post-secondary students is the non-refundable credit for 15% of tuition costs incurred. Where the education and textbook credits have been earned but not claimed in previous years, however, they are still available to be claimed by the student as carryover credits in 2017 or later years.

The CRA publishes a very useful guide to tax measures which affect students enrolled in post-secondary education. That guide, entitled Students and Income Tax, has been updated to take account of the recent changes, and the most recent version is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/p105/README.html.

Although they aren’t usually thought of in such terms, Canadian charities, as measured by the amount of money they receive and administer, can be big businesses. However, because they collect and disperse that money in order to support and advance causes which create a public benefit, charities are accorded special status under our tax laws. Our tax system effectively subsidizes the activities of charitable organizations by providing a tax deduction or tax credit to companies and individuals that contribute to those organizations and by exempting the charities themselves from the payment of income tax.

Although they aren’t usually thought of in such terms, Canadian charities, as measured by the amount of money they receive and administer, can be big businesses. However, because they collect and disperse that money in order to support and advance causes which create a public benefit, charities are accorded special status under our tax laws. Our tax system effectively subsidizes the activities of charitable organizations by providing a tax deduction or tax credit to companies and individuals that contribute to those organizations and by exempting the charities themselves from the payment of income tax. 

In order to receive a designation as a registered charity (and consequently to be able to provide donors with a tax receipt enabling them to claim a credit or deduction), an organization is required by law to have exclusively charitable purposes. While the particular kinds of aims and objectives which may qualify an organization for certification as a registered charity vary widely, one kind of activity which cannot qualify as charitable in nature is purely political activity. An organization established solely for political purposes, or an organization that devotes more than an incidental percentage of its resources to political purposes, or whose political activities are not in furtherance of its charitable purposes, cannot qualify (or continue to qualify) as a registered charity.

Support of a particular political party or candidate is an obvious partisan political purpose, but under Canadian law as it relates to charities, the definition of political purposes is much broader. As determined by Canadian courts, political purposes are also those that seek to retain, oppose, or change the law, policy, or decision of any level of government in Canada or a foreign country. Essentially, the rules seek to ensure that any organization that has been designated as a registered charity does not extend the benefits of having that designation to cover political aims or activities, in more than an incidental way. At the extreme end, the rules seek to prevent organizations whose aims are essentially political from “masquerading” as charitable organizations in order to receive the related status and tax benefits.

The initial, general, rule is that that a charity that devotes no more than 10% of its total resources a year to allowable political activities (meaning political activities that are non-partisan and that are both connected with and subordinate to the charity’s purposes) will be operating within allowed guidelines. Smaller charities are given more leeway, and operate under the following guidelines.

• Registered charities with less than $50,000 annual income in the previous year can devote up to 20% of their resources to political activities in the current year.
• Registered charities whose annual income in the previous year was between $50,000 and $100,000 can devote up to 15% of their resources to political activities in the current year.

• Registered charities whose annual income in the previous year was between $100,000 and $200,000 can devote up to 12% of their resources to political activities in the current year.

Charities which breach these rules can face serious sanctions, up to and including temporary suspension or even revocation of their charitable status.

It’s apparent from even a brief summary that determining when a charity has engaged in political activity which must be reported can be a very subjective exercise, and the consequences of making the wrong call can be significant. The CRA recognizes that fact, and has created a number of online resources to assist charities in making that determination. Those resources, which include webinars, FAQ documents, and self-assessment tools, can all be found on the Charities webpage of the CRA website, at www.cra-arc.gc.ca/chrts-gvng/chrts/cmmnctn/pltcl-ctvts/menu-eng.html.

Most Canadians approaching retirement know that they will be able to receive retirement income from the Canada Pension Plan and Old Age Security programs. Many, however, are unaware that there is a third federal program — the Guaranteed Income Supplement (GIS) — which provides an additional monthly income amount to eligible individuals who already receive Old Age Security. That lack of knowledge is particularly unfortunate because, while there is no need for an individual to apply in order to receive an Old Age Security benefit, anyone who wishes to receive the GIS must apply to do so. (Automatic enrollment in GIS is something that is planned for future implementation, but is not yet in place.). Finally, while the OAS benefit is a standard amount for most recipients, the rules governing eligibility for GIS, and the amount which a particular individual will receive, are more complex.

Most Canadians approaching retirement know that they will be able to receive retirement income from the Canada Pension Plan and Old Age Security programs. Many, however, are unaware that there is a third federal program — the Guaranteed Income Supplement (GIS) — which provides an additional monthly income amount to eligible individuals who already receive Old Age Security. That lack of knowledge is particularly unfortunate because, while there is no need for an individual to apply in order to receive an Old Age Security benefit, anyone who wishes to receive the GIS must apply to do so. (Automatic enrollment in GIS is something that is planned for future implementation, but is not yet in place.). Finally, while the OAS benefit is a standard amount for most recipients, the rules governing eligibility for GIS, and the amount which a particular individual will receive, are more complex.

The first and most basic rule of GIS eligibility is that GIS is paid only to individuals who are already receiving the Old Age Security benefit. Canadians can begin receiving such OAS benefit at age 65, or can defer receipt of that benefit up until the age of 70. However, regardless of the age at which an individual chooses to begin collecting OAS, he or she cannot receive the GIS until that OAS benefit has started.

There is a perception that GIS benefits are available to only the lowest income seniors. While it is true that eligibility for the GIS is tied to income, the current reality is that in the first quarter of 2017, nearly 2 million Canadians, or nearly one-third of those who collect OAS, also received GIS benefits.

The basic rule is that single (or divorced or widowed) individuals who have less than $17,688 in net income for the previous year are eligible to receive at least partial GIS benefits each month. Once net income exceeds the $17,688 threshold, eligibility for GIS is completely eliminated. That figure is somewhat deceiving, however, as not all income sources are treated the same way when it comes to determining net income for purposes of assessing GIS eligibility. When determining such eligibility, the sources from which income is received is nearly as important as the amount of that income.

Generally, in calculating net income for purposes of determining GIS eligibility, the following income amounts are included:

• Canada Pension Plan or Quebec Pension Plan amounts;
• amounts received from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF);
• amounts received from a registered pension plan (i.e., an employer-sponsored pension plan); and
• investment income (interest, dividends, etc.) from all sources.

The following income amounts are not included in net income for purposes of determining GIS eligibility:

• Old Age Security amounts; and
• any withdrawals from a tax-free savings account (TFSA).

Finally, many retirees work part-time, whether out of financial need or for social reasons. In calculating net income to determine GIS eligibility, an exemption is provided for the first $3,500 in employment income earned each year — in other words, the first $3,500 in employment income earned is not included in net income for GIS eligibility purposes.

The exclusions and partial exclusions from the net income calculation for GIS purposes can mean that someone who would not seem to be eligible by reason of his or her total income may in fact be able to receive at least partial GIS benefits, as in the following example.

A single individual who is over age 65 receives the following income amounts in 2016:

• $7,200 in Canada Pension Plan retirement benefits;
• $6,840 in Old Age Security benefits;
• $6,000 of income from part-time employment;
• $5,000 in TFSA withdrawals; and
• $3,000 in RRIF withdrawals.

Total income for the year — $28,040

That total income would seem to put the individual well over the eligibility threshold for receiving even partial GIS. However, for purposes of determining such eligibility, not all of the income amounts adding up to that $28,040 in total income will be included. Specifically, the $6,840 in OAS benefits is excluded, as is the $5,000 amount withdrawn from the individual’s TFSA. As well, the first $3,500 in employment income is excluded in computing net income for this purpose. As a result, more than half of the taxpayer’s income amounts received during 2016 are excluded from the computation of net income, and that computation, for purposes of determining GIS eligibility looks like this:

• $7,200 in Canada Pension Plan retirement benefits;
• $3,000 in RRIF withdrawals;
• $2,500 in employment income (the first $3,500 in such income being exempt)

Net income for GIS eligibility purposes — $12,700

Once the adjustments required to determine GIS eligibility are made, the individual’s income is cut by more than half, and the resulting $12,700 in net income is $5,000 below the $17,688 income cut-off for GIS eligibility of $17,688.

In 2017, an individual who is single, divorced, or widowed and is eligible for a full GIS amount will receive $871.86 per month. That amount is reduced as income increases and is eliminated entirely where the individual’s net income exceeds the $17,688 cut-off.

A similar calculation is required for taxpayers who are married. The net income calculation is the same, but the cut-off amount above which GIS eligibility for both spouses is eliminated, where both spouses are receiving OAS, is $23,376. Where one of the spouses does not receive OAS, the combined income threshold for GIS eligibility is $42,384. More information on the benefit and income cut-off amounts for the current quarter (July to September 2017), as well as links to tables which will show the exact amount of GIS payable at different income levels, can be found on the Canada.ca website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html.

A final note — where individuals receive the Guaranteed Income Supplement, whether the full benefit or partial amounts, all such amounts received are non-taxable.

The Canada Revenue Agency (CRA) doesn’t publish information or statistics on the number of individual taxpayers who owe it money in the form of back taxes, interest, or penalties. Nonetheless, it’s a safe assumption that some percentage of the 28 million or so Canadians who filed a tax return this past spring either couldn’t pay their 2016 taxes when due or still owe money from past years, or both. Being unable to pay one’s bills on time and as due obviously isn’t desirable, no matter who the creditor is. There are, however, a number of reasons why owing money to the tax authorities is a particularly bad idea.

The Canada Revenue Agency (CRA) doesn’t publish information or statistics on the number of individual taxpayers who owe it money in the form of back taxes, interest, or penalties. Nonetheless, it’s a safe assumption that some percentage of the 28 million or so Canadians who filed a tax return this past spring either couldn’t pay their 2016 taxes when due or still owe money from past years, or both. Being unable to pay one’s bills on time and as due obviously isn’t desirable, no matter who the creditor is. There are, however, a number of reasons why owing money to the tax authorities is a particularly bad idea.

Those reasons start with the interest cost of carrying such debt. Even with the recent increase, interest rates remain near historic lows, but the CRA, by law, charges interest at levels higher than normal commercial rates. The interest rate charged by the CRA on overdue or insufficient tax payments is set quarterly. For the third quarter of 2017, therefore, covering the months of July, August, and September, the interest rate charged on taxes owing is 5%.

While that 5% rate is still lower by far than, for instance, the interest rate charged on many credit card balances, it is the interest calculation method used by the CRA which can really inflate the interest cost of having tax debts. Where an amount is owed to the CRA, interest charged on that amount is compounded daily, meaning that on each successive day, interest is being levied on the interest charged the day before. Not surprisingly, interest costs calculated in that way can add up quickly.

The CRA also has a very broad range of options at its disposal to compel payment, and a very long period of time in which to use them. Where a taxpayer hasn’t paid an amount owed within 30 days after he or she receives a Notice of Assessment stating the amount owed, the CRA will usually contact the taxpayer, by phone or by mail, with a request for payment. If the taxpayer does not contact the CRA to make a payment or set up a payment arrangement within 90 days after the date the Notice of Assessment was mailed, the CRA will likely resort to its other collection options.

The CRA has the right, where there are any amounts owed to the taxpayer by any other department of the federal government (for example, a goods and services tax credit amount) to, in effect, seize those amounts and apply them to the tax debt. The CRA also has the authority to intercept (or garnish) money which may be owing to the taxpayer from a third party, like an employer and, as a last resort, can direct that the taxpayer’s assets be seized and sold to satisfy the tax debt.

Of course, the CRA’s goal, like that of any other creditor, is to get the debt paid without having to resort to expensive and time-consuming administrative or legal processes.  It’s relatively rare for a tax debt to reach the stage of litigation or garnishment, as it is in everyone’s interest to resolve matters before things reach that point. And, perhaps contrary to popular belief, the CRA has some flexibility. When the amount of taxes due on filing can’t be paid, or can’t be paid in full, it’s in the taxpayer’s best interests to contact the CRA and let them know of that fact.

Not surprisingly, the CRA tries to make it easy for taxpayers to contact it to make such arrangements. Taxpayers can use the CRA’s automated TeleArrangement service at 1-866-256-1147, for which it is necessary to provide one’s social insurance number and date of birth, and the amount which appeared on line 150 from the last return for which a notice of assessment was received. TeleArrangement is available Monday to Friday, from 7 a.m. to 10 p.m., Eastern time. For those who wish to speak to an actual representative of the CRA, a toll-free telephone line (1-888-863-8657) is staffed by agents from Monday to Friday, except on statutory holidays. The taxpayer can propose a payment schedule based on his or her ability to pay, and the CRA, if it is satisfied that the inability to pay is genuine, will generally be amenable to entering into some type of payment arrangement. Entering into such a payment arrangement does not, of course, stop the interest clock from running, as interest will continue to be assessed at the current rate, and compounded daily.

The alternative to making a payment arrangement and becoming subject to the CRA’s punitive interest assessment practices is sometimes to borrow the required funds from a third party and pay the CRA in full as soon as possible. Especially where the taxpayer can provide some security — like the equity in a home — it may be possible to borrow funds at less than the 5% interest rate currently being charged by the CRA on overdue tax amounts.

One final blow: interest paid on tax debts, whether paid to the CRA or to a third party lender, is not deductible from income.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues. They can be accessed below.

Corporate:

Issue #41 Corporate

Personal:

Issue #41 Personal

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^th of this year – 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^th of this year – 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’s 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 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 largely invisible to the employee, and certainly one which operates without the need for the employee to take any steps on his or her own. When someone’s working life ends and retirement begins, it’s consequently not 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 are now moving into retirement have had only a single source of income throughout their working lives. 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 (2017) year and either of the two previous (2015 and 2016) 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 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. In many cases, a first instalment reminder is triggered where an individual who has retired within the past two years, as in the following example.

An individual retires at the end of 2015 from employment in which tax deductions were automatically taken from his or her paycheque. Beginning in January 2016, that individual’s sources of income change from a single paycheque from their employer to Canada Pension Plan and Old Age Security benefits, as well as a monthly withdrawal from a RRIF. In order for the individual to have the appropriate amounts of tax withheld from those income sources during 2016, the individual taxpayer would have to have calculated the amount of total tax liability for the year and made arrangements for the appropriate amount to be withheld from one or more of those three sources of income. For most taxpayers, especially those who are making all the various adjustments needed to move from working life into retirement, and who have never before needed to make such a calculation, that’s not a very likely scenario. Consequently, it would be very unlikely that withholdings in the correct amount (or any withholdings at all) would be made from those sources of retirement income, and very likely that more than $3,000 in tax will be owed when the return for 2016 is filed. Where the taxpayer’s income levels and withholding amounts are unchanged for 2017 and it can be expected that, once again, more than $3,000 will be owed on filing, the criteria for the instalment requirement would be met and a tax instalment reminder would be issued in August 2017, after the return for 2016 is assessed.

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 2018. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2017, 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 2016 tax year. Where a taxpayer’s income has not changed between 2016 and 2017 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2017 will be the same or slightly less than it was in 2016, owing to the indexation of tax brackets and tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will actually owe for  2017 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2016 to 2017 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.

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 2017 return is filed next spring.

Once they have resigned themselves to the reality of the tax instalment system, the remaining question that most taxpayers have is how such payments can be made. The options open to taxpayers in that regard are helpfully outlined 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.

The traditional idea of retirement – working full-time until age 65 and then leaving the workforce completely to live on government-sponsored and private sources of retirement income – has undergone a lot of changes over the past couple of decades, and Canada’s government-sponsored retirement income system has evolved in response. Generally, the changes to the Canada Pension Plan (CPP) and Old Age Security (OAS) programs have increased the flexibility of those programs and, in particular, have given individuals a greater range of choices with respect to, especially, the timing of their receipt of CPP and OAS.

The traditional idea of retirement – working full-time until age 65 and then leaving the workforce completely to live on government-sponsored and private sources of retirement income – has undergone a lot of changes over the past couple of decades, and Canada’s government-sponsored retirement income system has evolved in response. Generally, the changes to the Canada Pension Plan (CPP) and Old Age Security (OAS) programs have increased the flexibility of those programs and, in particular, have given individuals a greater range of choices with respect to, especially, the timing of their receipt of CPP and OAS.

The downside of that increased flexibility has been to make the system — and therefore the choices available to Canadians — more complex. One aspect of that complexity is the (relatively) new CPP post-retirement benefit, or PRB.

The CPP system is a contributory one, in which both the individual and his or her employer make annual contributions, with the amount of those contributions based on the employee’s income for that year. The total of contributions made between the time the individual is age 18 and the time he or she begins receiving CPP retirement benefits is used to calculate the amount of the monthly CPP retirement benefit to which that individual is entitled. An individual can begin receiving his or her CPP retirement benefit at the age of 60 or can defer receipt anytime until he or she turns 70 years of age. With each month that receipt of the benefit is deferred, the amount of that benefit increases.

It was once the case that an individual who had decided to begin receiving the CPP retirement benefit was not required (or allowed) to continue contributing to the CPP (even if he or she continued to work) and therefore had no means of increasing the benefit amount. A change made in 2012 altered that rule, such that individuals who continued to work while receiving the CPP retirement benefit could also continue to contribute to the CPP 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 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 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 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 contributions.

Where an individual makes CPP contributions while working and receiving CPP retirement benefits, the amount of any CPP post-retirement benefit 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 1st 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 will include a lump sum payment back to January. Thereafter, the PRB is paid monthly and the PRB amount is added to the individual’s CPP retirement pension 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 be concerned 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 — those aged 65 to 70 — will need to decide 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.

While Canadians typically think of taxes only in the spring when the annual return must be filed, taxes are a year-round business for the Canada Revenue Agency (CRA). The CRA is busy processing and issuing Notices of Assessment for individual tax returns during the February to June filing season. To date, in 2017, the CRA has received and processed just under 28 million individual income tax returns. That volume of returns and the CRA’s self-imposed processing turnaround goals (two to six weeks, depending on the filing method) mean that the CRA cannot possibly do an in-depth review of each return filed prior to issuing the Notice of Assessment.

While Canadians typically think of taxes only in the spring when the annual return must be filed, taxes are a year-round business for the Canada Revenue Agency (CRA). The CRA is busy processing and issuing Notices of Assessment for individual tax returns during the February to June filing season. To date, in 2017, the CRA has received and processed just under 28 million individual income tax returns. That volume of returns and the CRA’s self-imposed processing turnaround goals (two to six weeks, depending on the filing method) mean that the CRA cannot possibly do an in-depth review of each return filed prior to issuing the Notice of Assessment.

As well, for many years the CRA has been encouraging taxpayers to fulfill their filing obligations online, through one of the Agency’s e-filing services. Canadians are clearly listening, as just over 24 million (or 86%) of the returns filed this year 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 86% 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 starts in the month of August. There are two components to the review process — the Processing Review Program and the Matching Program. The former is a review of various deductions or credits claimed on returns, while the latter compares information included 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 millions of Canadian taxpayers.

While the two programs are carried out more or less concurrently, they are quite different. The Processing Review Program asks the taxpayer to provide verification or proof of deductions or credits claimed on the return, while the Matching Program deals with discrepancies between the information on the taxpayer’s return and information filed by third parties with respect to the taxpayer’s income or deductions for the year.

Of course, most taxpayers are not concerned so much with the kind or 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 a precursor to 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 returns. 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 a random basis.  

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 the receipts or other documentation (if needed) 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 CRA’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’s possible that the CRA will send a follow-up letter, or the taxpayer may be contacted by telephone, with a request from the CRA 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 (or, more recently, from the “Federal Tax Court”, which does not exist). 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. Taxpayers should be aware that payment of taxes is never requested in this way, or by either of those methods. 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. 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 them 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 Agency and the taxpayer.

The Bank of Canada’s recent decision to raise interest rates generated a lot of media attention, for the most part because while the increase itself was only one quarter of a percentage point, it was the first move made by the Bank of Canada to increase rates in the past seven years. Much of the media coverage of the rate change centered around the effect that change might or might not have on the current real estate market. One of the issues under discussion was whether this or future increases in interest rates (and therefore mortgage rates) would act as a barrier to those seeking to get into the housing market. And a phrase that was prominent in that discussion — the mortgage financing “stress test” — is likely one that is unfamiliar to most Canadians, even those who are affected by it.

The Bank of Canada’s recent decision to raise interest rates generated a lot of media attention, for the most part because while the increase itself was only one quarter of a percentage point, it was the first move made by the Bank of Canada to increase rates in the past seven years. Much of the media coverage of the rate change centered around the effect that change might or might not have on the current real estate market. One of the issues under discussion was whether this or future increases in interest rates (and therefore mortgage rates) would act as a barrier to those seeking to get into the housing market. And a phrase that was prominent in that discussion — the mortgage financing “stress test” — is likely one that is unfamiliar to most Canadians, even those who are affected by it.

When anyone seeks to borrow money, for whatever purpose, a key factor in whether they will be able to obtain a loan is, of course, their ability to repay the loan on the terms set, including the interest rate to be levied. That same consideration applies when an individual or a couple apply for approval or pre-approval of a mortgage. However, a mortgage differs from other kinds of consumer debt in a few significant ways. First, a mortgage is likely to be the largest debt any Canadian takes on in his or her lifetime. Second, a mortgage is paid off over a much longer period of time — typically 25 years — than any other type of debt. And, finally, because of that lengthy repayment period, a mortgage is the only kind of significant consumer debt in which the interest rate which will be payable over the entire life of the loan can’t be determined prior to the time the initial financing is approved.

When mortgage financing is provided to a home buyer, there are two factors, besides the amount of the loan, which determine how much the monthly mortgage payments will be. The first is the amortization period, or the length of time over which the mortgage loan will be repaid. The second is the mortgage term, which is the time period for which the interest rate for the mortgage is fixed. That term is always shorter than the amortization period – for most mortgage financing in Canada, the longest term which can be obtained is 10 years, although most mortgage terms are shorter than that. Since the interest rate for that term is fixed, both the borrower and the lender know how much the mortgage payments will be for the entire length of that term and what percentage of the borrower’s current income will be required to make those payments.

In determining whether a borrower will be able to repay the mortgage loan as required, mortgage lenders rely on two debt-to-income ratios, known as Gross Debt Service (GDS) and Total Debt Service (TDS). The two are similar, but not the same.

The GDS ratio measures how much of the would-be borrower’s income will be needed to meet his or her housing costs. For any particular mortgage borrower, GDS represents the total of mortgage payments, property taxes, heating costs, and — where applicable — one-half of condo fees. Optimally, that total figure will represent less than 35% of the would-be borrower’s income.   

Of course, most Canadians carry one or more kinds of consumer debt besides their mortgages, and so it’s necessary to determine their cost of servicing that total debt as a percentage of income. That figure is their TDS, which is the total of housing expenses (as calculated for purposes of GDS) plus any other debt repayment, including car loans, credit cards, lines of credit, and student loans. Optimally, the total amount of housing costs plus other repayment will be less than 42% of the would-be borrower’s income.

Where a would-be borrower is particularly credit-worthy (e.g., he or she has a reliable source of income and a good credit history), lenders will provide mortgage financing even where the optimal debt ratios indicated above are exceeded. However, the maximum GDS and TDS ratios allowed are, respectively, 39% and 44%.

While the GDS and TDS ratios do provide a reasonable measure of the ability of a prospective borrower to repay funds advanced to him or her, the weakness of those ratios are that they provide only a “snapshot” of the individual’s housing costs and debt repayment costs at a particular point in time and, more significantly, at current interest rates. As everyone knows, interest rates in Canada are, and have been for several years, at or near records lows and that many Canadians have taken advantage of those low rates. Specifically, as of the first quarter of 2017, the average debt load of Canadian households (including mortgage debt) stood at 167.3% of disposable income.

The combination of those two factors means that Canadian households are, on average, carrying much higher levels of debt (as a percentage of disposable income) and that the cost of carrying such debt is at or near record lows. When, as has recently proven the case, those interest rates begin to rise, such increase has the potential to put Canadian households on financial thin ice. And that possibility is what gave rise to the introduction by the federal government of the “stress test” which might equally well be called the “what-if?” test.

It’s possible to purchase a home in Canada with a down payment of 5%, where the cost of the home is $500,000 or less. Where the purchase price of the home is over $500,000, the minimum down payment is 5% for the first $500,000, and 10% for the remaining portion. However, regardless of the cost of the home, where the total down payment to be made is less than 20% of the purchase price, mortgage loan insurance is required, and such insurance is provided by a federal government agency, the Canada Mortgage and Housing Corporation (CMHC). As of the fall of 2016, all new prospective mortgage loans which must obtain mortgage loan insurance through CMHC (i.e., all those with less than 20% down payment) are subject to the new “stress test” requirement.

Basically, the stress test requires that lenders assess a would-be mortgage borrower’s ability to manage their debt, not only at current interest rates, but at the higher rates which those borrowers will certainly face sometime during the life of their mortgage. Carrying out a stress test is, in fact, something which financial planners advise clients to do as part of financial planning whenever taking on debt is contemplated. It’s simply prudent (especially where debt is longer term in nature and consequently higher payments resulting from an increase in interest rates is inevitable) to consider, not just whether the debt is manageable at current interest rates, but whether it will remain manageable where those interest rates rise by 1, 2, or 3% — or more. The “stress test” simply creates a requirement out of something that was always a good idea.

Under the stress test, for borrowers to qualify for mortgage insurance through CMHC, their GDS and TDS debt-servicing ratios must be no higher than the maximum allowable levels when calculated using the greater of the rate provided to them by their lender or the Bank of Canada’s conventional five-year posted rate. That Bank of Canada rate is typically higher than the rate that mortgage borrowers actually pay. For instance, the lowest five-year fixed rate mortgage interest rate offered by a major Canadian bank as of the end of July was 2.59%. At the same time, the Bank of Canada five-year posted rate was 4.84%.

It’s true that the application of the “stress test” as interest rates rise will cause more borrowers to be unable to qualify for a mortgage, or will require them to reduce their expectations in terms of the amount of mortgage financing for which they can qualify. But, it’s also the case that would-be borrowers who cannot “pass” a stress test are the very borrowers who would be put most at risk by an increase in interest rates. Where interest rates will be a year or two from now is something that no one — including the Bank of Canada — knows. It is undoubtedly disappointing for would-be borrowers to have to reduce their expectations with respect to the amount of mortgage financing (and therefore the “amount” of house) they can obtain. That scenario is, however, infinitely preferable to one in which they discover down the road that they can no longer afford to carry their mortgage at the higher interest rates then in effect, and are at risk of defaulting on that mortgage and potentially losing their home.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues. They can be accessed below.

Corporate:

Issue #39 Corporate

Personal:

Issue #39 Personal

At the Canada Revenue Agency (CRA), taxes are a year-round business. During the spring and early summer, the CRA is busy processing the millions of individual tax returns filed by Canadians for the previous tax year. The volume of returns filed and the Agency’s self-imposed processing turnaround goals mean that the CRA cannot possibly do an in-depth review of each return filed. Once the season of processing and assessing tax returns is for the most part complete, however, the CRA moves to the next phase of its activities – specifically, the start of its annual post-assessment tax return review process.

At the Canada Revenue Agency (CRA), taxes are a year-round business. During the spring and early summer, the CRA is busy processing the millions of individual tax returns filed by Canadians for the previous tax year. The volume of returns filed and the Agency’s self-imposed processing turnaround goals mean that the CRA cannot possibly do an in-depth review of each return filed. Once the season of processing and assessing tax returns is for the most part complete, however, the CRA moves to the next phase of its activities – specifically, the start of its annual post-assessment tax return review process.

What that means for the individual taxpayer is 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 fall by millions of Canadian taxpayers.

In 2016, Canadians filed over 28 million individual income tax returns with the CRA. The vast majority of those returns – about 24 million – were filed by electronic means (either EFILE or NETFILE), while only just over 4 million paper returns were filed. For several years, the CRA has encouraged taxpayers to take advantage of its electronic filing options, and its efforts have clearly been a success.  As the CRA has always noted, filing electronically means faster turnaround (and quicker refunds!) but, when returns are filed by electronic methods 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. There have, however, always been means by which the CRA can verify claims made by taxpayers. Where returns are paper-filed, taxpayers must usually include receipts or other documentation to prove their claims, whether those claims are for dependent tax credits, charitable donations, medical expenses, or other similar deductions and credits. For the 85% 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 starts in the month of August. There are two components to the review process – the Processing Review Program and the Matching Program. The former is a review of various deductions or credits claimed on returns, while the latter compares information included 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. The time periods during which the two programs are carried out overlap, as the peak time for the Processing Review Program is between August and December, while the Matching Program is carried out from October to March.

While the two programs are carried out more or less concurrently, they are quite different. The Processing Review Program asks the taxpayer to provide verification or proof of deductions or credits claimed on the return, while the Matching Program deals with discrepancies between the information on the taxpayer’s return and information filed by third parties with respect to the taxpayer’s income for the year.

Of course, most taxpayers are not concerned so much with the kind or 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 a precursor to an audit, but that’s not usually 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 that up to find out the reason for the discrepancy. 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, so a return which includes claims in those areas 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 a random basis.  

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 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.

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 the means by which 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 (or, more recently, from the “Federal Tax Court”, which does not exist). 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. Taxpayers should be aware that payment of taxes is never requested in this way, or by either of those methods. 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. 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 authentic 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 Agency and the taxpayer.

Having access to mobile communication is useful and practical for any number of reasons and Canadians who don’t have a cell or smart phone are likely now the exception rather than the rule. It’s also the case, however, that cell phone rates payable by Canadians are among the highest in the world, and so having an employer provide that cell phone (and pay the associated costs) is consequently a valued employment benefit. That said, Canadians who enjoy such an employment benefit should be aware that, while they may not have to pay a monthly cell phone bill, there still can be a cost in the form of a taxable benefit which must be reported on the annual return. 

Having access to mobile communication is useful and practical for any number of reasons and Canadians who don’t have a cell or smart phone are likely now the exception rather than the rule. It’s also the case, however, that cell phone rates payable by Canadians are among the highest in the world, and so having an employer provide that cell phone (and pay the associated costs) is consequently a valued employment benefit. That said, Canadians who enjoy such an employment benefit should be aware that, while they may not have to pay a monthly cell phone bill, there still can be a cost in the form of a taxable benefit which must be reported on the annual return.  

The general rule set out by the Canada Revenue Agency (CRA) is that where an employer provides his or her employee with a cell phone to be used in the course of their employment duties, the business use of that phone is not a taxable benefit to the employee. Where part of the use of the phone is personal (as it inevitably is), the value of that personal use must be included in the employee’s income as a taxable employment benefit. The employer is required to calculate the amount of that taxable benefit, based on the fair market value of the service (basically, the employer’s cost, assuming that cost reflects current market value of the service), minus any amounts reimbursed to the employer by the employee. 

While such an approach may be theoretically correct, it’s not particularly practical for every employer to make such a calculation for each and every employee to whom a cell phone is provided. The CRA’s assessing policy is therefore that an employee’s personal use of an employer-provided cell phone will not be a taxable benefit if all of the following apply:

•   the plan’s cost is reasonable;
•   the plan is a basic plan with a fixed cost; and
•   the employee’s personal use of the service does not result in charges that are more than the basic plan cost.

When an employer wants to provide cell phone service as a benefit of employment, the alternative to providing the cell phone itself is to give the employee an allowance which he or she can then use to acquire a phone and plan. While that approach gives the employee more flexibility, it’s not a great option from a tax perspective. The CRA’s assessing policy with respect to that approach is that any such allowance provided by an employer must be included on the employee’s T4 for the year and taxed as income. 

Based on the CRA’s assessing policies and criteria, it seems that the most tax-effective option for employees when it comes to employer-provided cell phones is for the employer to buy the fixed-cost plan which provides the most generous terms that can be reasonably justified by the employee’s business-related use of the phone, and for the employee to avoid running up any additional charges related to personal use (for example, for excess minutes, long distance or roaming charges) which will result in charges in excess of the basic monthly bill for that plan.

When it comes to questions around personal finance, two issues tend to dominate current discussions. The first is whether and to what extent Canadians are financially prepared for retirement, and the second is the seemingly inexorable increase in the value of residential real estate. For many retired Canadians, those two issues are very much interlinked.

When it comes to questions around personal finance, two issues tend to dominate current discussions. The first is whether and to what extent Canadians are financially prepared for retirement, and the second is the seemingly inexorable increase in the value of residential real estate. For many retired Canadians, those two issues are very much interlinked. 

Most Canadians are eligible to receive Canada Pension Plan and Old Age Security payments in retirement. While those two programs provide the “backbone” of retirement income in Canada, they are almost never enough on their own to provide for a comfortable standard of living in retirement. A generation ago, retirees could often count on income from an employer-sponsored pension plan, but now only a minority of retirees and those approaching retirement have that option. Private retirement savings, usually through registered retirement savings plans (RRSPs) are the third “leg” of Canada’s retirement income system, but once again, the amount saved by many Canadians through RRSPs falls short of what will be needed, especially where a retirement can last for twenty or more years, and when inflation over that time period is taken into account. The reality for many Canadians who are retired or approaching retirement is that their single most valuable asset is their home – or more specifically, the equity which they have built up in that home. 

In many cases, those approaching retirement opt to sell their current home – sometimes in order to move to a smaller, easier to maintain dwelling, and sometimes simply to free up the capital represented by their built-up equity. However, while selling and downsizing is the option chose by many retirees, not everyone wants to leave the family home at retirement. There are many situations in which moving and downsizing isn’t desirable or even possible. Especially for those living in smaller centres, where the types of available housing may be limited, downsizing or choosing to rent could mean having to move to another community. Moving and leaving behind friends and other social supports is difficult at any age, and especially difficult when it coincides with a major life change like retirement. As well, it’s increasingly the case that adult children “boomerang” back to the family home after finishing their education. In many cases, such adult children are unable to find long-term employment or remuneration from available employment isn’t sufficient, or sufficiently secure, for them to take on the financial obligations of their own home, even as a tenant. For a variety of reasons, then, it may be that retirees need to stay, or choose to stay, in the current family home. Where that is their choice, and the only factor creating pressure for them to sell that home is the need to free up equity to create or increase cash flow during retirement, there are other options available. 

One of those options which is currently receiving a lot of attention is the reverse mortgage. Reverse mortgages are better known, more widely used and have a much longer history in the U.S. than they do in Canada. However, such financial vehicles are now being advertised and promoted on a regular basis in the Canadian media, and it’s likely that by now most Canadians have at least heard of them.

Simply put, taking out a reverse mortgage allows individuals to obtain a sum of money based on the value of their home and the equity which they have accumulated in that home. It’s also possible, using a reverse mortgage, to structure the receipt of funds in different ways. The homeowner can choose to receive a lump sum amount, or can opt to receive a series of payments which will provide a regular income stream, or some combination of the two. And, with a reverse mortgage, no repayment of the funds advanced is required until the homeowner leaves or sells the home.

When described in those terms, a reverse mortgage can sound like the perfect solution to a cash-strapped retiree. The ability to ease cash flow worries while remaining in one’s own home with no requirement to make any payments at all can sound like the best of all possible worlds. And it’s certainly true that taking out a reverse mortgage can make sense for retirees who are house rich but cash or cash-flow poor. But, as with all financial tools, it is necessary to understand both the benefits and the potential costs and risks of getting a reverse mortgage.

The potential downsides of a reverse mortgage start with the basic costs of obtaining one. Setting up a reverse mortgage involves a number of costs for the homeowner, including the need to have one’s property appraised. There will also be closing costs, and the homeowner will be required to obtain independent legal advice, and to pay the cost of obtaining such advice.

Once the reverse mortgage is taken out, interest will, of course, be levied on all amounts provided, and will accumulate from the time the funds are first advanced. Total interest costs can add up very quickly and reach significant amounts by the time the debt is eventually to be repaid, usually out of the proceeds from the sale of the house. And, of course, every dollar of funds advanced and interest levied eats away at the amount of equity which the homeowner has built up, on a dollar-for-dollar basis.

The amount which can be obtained through a reverse mortgage is also limited to 55% of the current value of the home. And, where there is already a mortgage or other form of loan secured by the home (as is increasingly the case for retirees), the reverse mortgage lender will require that any such indebtedness must first be paid off with the funds received under the reverse mortgage.

The major benefit of a reverse mortgage for many retirees is that they are not required to make payments while living in the home, putting much less of a strain on cash flow. Offsetting that benefit, however, is the fact that the interest rate charged on a reverse mortgage is usually higher than that which would be levied under a traditional mortgage or other similar financial products. As well, under the terms of many such arrangements, a repayment penalty is levied where the homeowner moves or sells the house within three years of obtaining the reverse mortgage.

Many retirees who obtain a reverse mortgage do so with the thought that the debt will not need to be repaid until after their death, when the house will be sold. However, it’s necessary to consider the possibility that the homeowner/retiree will need to move from his or her home at some point in the future to an assisted living facility. Care in such facilities does not come cheap, and if the retiree is counting on his or her home equity to pay for such care, it’s necessary to consider the extent to which the reverse mortgage will reduce that accumulated home equity and consequently the funds available to pay for needed care.

For those who are considering whether a reverse mortgage is the right solution for them in retirement, Canada’s Financial Consumer Agency suggests getting answers from prospective lenders to the following questions:

• What are all the fees?
• Are there any penalties if you sell your home within a certain period of time?
• If you move or die, how much time will you or your estate have to pay off the loan’s balance?
• When you die, what happens if it takes your estate longer than the stated time period to fully repay the loan?
• What happens if the amount of the loan ends up being higher than your home’s value when it is time to pay the loan back?

More information on reverse mortgages in general can be found on the FCAC website at www.fcac-acfc.gc.ca/Eng/forConsumers/manage/mortgages/Pages/reverse-mortgages.aspx.

While our health care system is not without its problems, Canadians are fortunate to benefit from a publicly funded system in which individuals are not required to pay personally for the cost of necessary medical care. Generally speaking, acute care provided in a hospital setting is covered by that system, as is more routine care provided by physicians in their offices.

Canadians who, as the result of illness or accident, require care in our medical system are nonetheless often surprised to find that there is a long and ever-increasing list of expenses which are not covered by government-sponsored health care, or for which the individual is required to make at least a partial payment. In some cases, individuals will have private health care coverage to help offset those costs but for most, such costs must be paid on an out-of-pocket basis. For those who must bear such costs personally, some recovery of costs incurred is possible by claiming a medical expense tax credit on the annual return. The federal medical expense tax credit is equal to 15% of the cost of qualifying medical expenses claimed, and each of the provinces and territories also provide for a medical expense tax credit, at varying rates.

While our health care system is not without its problems, Canadians are fortunate to benefit from a publicly funded system in which individuals are not required to pay personally for the cost of necessary medical care. Generally speaking, acute care provided in a hospital setting is covered by that system, as is more routine care provided by physicians in their offices. 

Canadians who, as the result of illness or accident, require care in our medical system are nonetheless often surprised to find that there is a long and ever-increasing list of expenses which are not covered by government-sponsored health care, or for which the individual is required to make at least a partial payment. In some cases, individuals will have private health care coverage to help offset those costs but for most, such costs must be paid on an out-of-pocket basis. For those who must bear such costs personally, some recovery of costs incurred is possible by claiming a medical expense tax credit on the annual return. The federal medical expense tax credit is equal to 15% of the cost of qualifying medical expenses claimed, and each of the provinces and territories also provide for a medical expense tax credit, at varying rates. 

There are an almost limitless number and variety of such expenses and it’s not, unfortunately, possible to provide a general rule as to which such expenses qualify for the credit and which do not. As well, the rules governing the credit for qualifying expenses can seem illogical and baffling, in that some expenses require a doctor’s prescription, while others do not and seemingly similar expenses can receive very different tax treatment. For instance, in order to claim a medical expense tax credit for the cost of a “walking aid”, a prescription is required: however, no prescription is needed in order to claim the cost of a wheelchair. The list of expenses eligible for the credit provided by the Canada Revenue Agency (CRA) on its website includes 134 categories of such expenses, each with its own qualification criteria. 

That said, it is possible to outline in a general way the categories or kinds of expenses which will qualify for the medical expense tax credit. Some of the most frequently incurred out-of-pocket medical expense for which a credit can be claimed are as follows:

• payments made to a medical doctor, dentist, nurse, or certain other medical professionals or to a public or licensed private hospital (while most medical services provided by doctors are covered by public health plans, others must be paid for out-of-pocket and a credit can generally claimed for such costs);
• the cost of obtaining non-cosmetic care from a dentist or a denturist, including the cost of dentures;
• the cost of medical devices including pacemakers, hearing aids and artificial limbs;
• the cost of assistive mobility equipment and devices, including crutches, wheelchairs and walkers;
• the cost of prescription medications;
• the cost of obtaining eye care, including the cost of prescription eyeglasses or contact lenses; and
• payments made for ambulance services for transport to or from a public hospital.

Individuals who find it advisable to obtain coverage under a private health services plan in order to help with the cost of necessary medical expense will similarly be able to claim a medical expense tax credit for premiums paid for that coverage. 

Given the frequency with which Canadians claim the medical expense tax credit, it’s unfortunate that the rules governing that credit can be somewhat confusing. The first thing to note is that the credit is a non-refundable one (i.e., any medical expense tax credit claims made can reduce tax otherwise payable, but cannot create or increase a refund). For 2016, the general rule for the credit is that is that a taxpayer may claim medical expenses paid that were more than 3% of the taxpayer’s net income (the amount that appears on line 236 of the taxpayer’s tax return), or $2,237, whichever is less. That’s not a formula which is easily understood, but there is a rule of thumb. If the taxpayer’s 2016 income is more than $74,575, then that taxpayer can claim medical expenses paid which were over the $2,237 threshold. If his or her net income for 2016 is less than $74,575, then it’s necessary to calculate 3% of that net income number, and claim medical expenses which were over the 3% figure. 

As well, there is some strategy involved in structuring the medical expense claim for a particular year. Qualifying medical expenses incurred can be claimed for any 12-month period ending in the taxation year for which the claim is being made. There is, unfortunately no hard and fast rule, or even a rule of thumb, which can be used to determine just which 12-month period will produce the best tax result, as each case is different, depending on the income of the taxpayer claiming the credit, the amount of medical expenses incurred, and just when those bills were paid. The optimal claim period must be worked out each year when filing the annual tax return. 

Out-of-pocket medical expenses are a fact of life for most Canadians, and an increasingly costly one. While claiming the available tax credit for such expenses can take a bit of calculation and effort, getting at least some relief from those out-of-pocket expenses is worth that effort. The CRA provides a great deal of information on its website to help taxpayers make such claims (including a lengthy list of qualifying medical expenses), and that information can be found at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330-331/menu-eng.html#mdcl_xpn and www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f1/s1-f1-c1-eng.html.

Each spring, Canadians are required to fulfill two tax obligations. The first is the requirement to file an individual income tax return providing details of income earned, deductions and credits claimed, and the amount of income tax payable for the previous calendar year. The second such obligation is to pay any amount of income tax owed for that year which is still outstanding. And although the Canadian tax system is for the most part a voluntary self-reporting and self-assessing one, most Canadians do comply with those two obligations in a timely way.

Each spring, Canadians are required to fulfill two tax obligations. The first is the requirement to file an individual income tax return providing details of income earned, deductions and credits claimed, and the amount of income tax payable for the previous calendar year. The second such obligation is to pay any amount of income tax owed for that year which is still outstanding. And although the Canadian tax system is for the most part a voluntary self-reporting and self-assessing one, most Canadians do comply with those two obligations in a timely way.

According to Canada Revenue Agency (CRA) statistics, nearly 28 million individual income tax returns for 2015 had been filed by the end of August 2016. Despite those figures, there nonetheless remains a significant minority of taxpayers who have not yet filed a return for 2015, either out of procrastination or because they believe they owe taxes and don’t have sufficient funds available to pay those taxes. Whatever the reason, there is a financial cost attached to that non-compliance. 

For those who have still not filed for 2015, the best strategy is to file as soon as possible. No matter what one’s tax or financial situation is, it won’t be helped by not filing a return. In fact, where taxes are owed, there is an automatic penalty imposed for failure to file on time – even if the return is only one day late. The tax filing deadline for most individuals for 2015 tax returns was May 2, 2016, while self-employed taxpayers and their spouses were required to file on or before June 15, 2016. No matter which filing deadline applied, a taxpayer who failed to file by that deadline was assessed an immediate penalty of 5% of the tax amount owing. So a taxpayer who owed $1000 in taxes and didn’t file on time will have had a penalty of $50 added to his or her bill the day after the filing deadline. As well, an ongoing penalty of 1% of the taxes owed is assessed for each full month the return is late, to a maximum of 12 months. A taxpayer who doesn’t get his or her return is during that 12 month period will therefore be assessed a penalty of 17% of the amount of tax owed (in this case, $170). 

The news is worse for taxpayers who have a recent history of not filing on time. Where the CRA has assessed a late-filing penalty within the past three years, and the taxpayer fails to file on time for 2015, the failure to file penalty is increased to 10% of any taxes owed for 2015, plus 2% of that amount for each full month the return is late, to a maximum of 20 months. A bit of arithmetic will show that in a worst-case scenario, the late-filing penalty imposed can be as much as 50% of the taxes owed (in this case, $500). Clearly, any taxpayer who hasn’t yet filed his or her tax return for 2015 and owes taxes for that year should file as soon as possible, to stop the accumulation of late-filing penalties. 

While paying tax penalties isn’t anyone’s idea of a good use of their money, it’s not the end of the story. The CRA charges interest on any taxes owed, starting the day after payment was due, which was April 30, 2016 for all individual taxpayers. (Although self-employed individuals and their spouses did not have to file a return until June 15, all taxes owing for 2015 were nonetheless due and payable no later than April 30, 2016.) It also charges interest on any penalty amounts levied. And, although interest rates remain near historic lows, the CRA, by law, charges interest at levels higher than normal commercial rates. The interest rate charged by the CRA on overdue or insufficient tax payments is set quarterly. For the third quarter of 2016, covering the months of July, August, and September, the interest rate charged on taxes owing is 5%. 

While that 5% rate is still lower by far than, for instance, the interest rate charged on most credit card balances or even lines of credit, it is the interest calculation method used by the CRA which can really inflate the interest cost of incurring tax debts or penalties. Where an amount is owed to the CRA, interest charged on that amount is compounded daily, meaning that on each successive day, interest is being levied on the interest charged the day before. Not surprisingly, interest costs calculated in that way can add up quickly. 

Contrary, perhaps, to popular belief, the CRA is prepared to be flexible with respect to tax payments. When the amount of taxes owing can’t be paid, or can’t be paid in full, it’s in the taxpayer’s best interests to contact the CRA and let them know of that fact. Not surprisingly, the CRA tries to make it easy for taxpayers who owe the Agency money to enter into a payment arrangement. Such taxpayers have two options. The first is a call to the CRA’s TeleArrangement service at 1-866-256-1147. To use this service, a taxpayer will need to provide his or her social insurance number and date of birth, and the amount he or she entered on line 150 from the last return for which a notice of assessment was received. TeleArrangement is available Monday to Friday, from 7 a.m. to 10 p.m., Eastern Standard Time. Alternatively, the taxpayer can call the CRA’s debt management call centre at 1-888-863-8657 to speak to an agent. That service is available Monday to Friday (except holidays) from 7 a.m. to 11 p.m., Eastern Standard Time. 

The taxpayer can propose a payment schedule based on his or her ability to pay, and the CRA, if it is satisfied that the inability to pay is genuine, will generally be amenable to entering into some type of payment arrangement. Entering into such a payment arrangement does not, of course, stop the interest clock from running, as interest will continue to be assessed at the current rate, and compounded daily. And, one additional blow: neither interest paid on tax debts nor penalties paid to the CRA are deductible.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues. They can be accessed below.

Corporate:

Issue #37 Corporate

Personal:

Issue #37 Personal

Home renovations are big business right now in Canada, as many homeowners opt to make changes and/or additions to their current residences rather than try to find a new home in the current real estate market. And, while the cost of renovating one’s home is usually considered a personal expense which doesn’t qualify for any tax credit or deduction, starting this year there is an exception to that rule.

Home renovations are big business right now in Canada, as many homeowners opt to make changes and/or additions to their current residences rather than try to find a new home in the current real estate market. And, while the cost of renovating one’s home is usually considered a personal expense which doesn’t qualify for any tax credit or deduction, starting this year there is an exception to that rule.

For 2016 and subsequent taxation years, a non-refundable tax credit can be claimed for home renovation work done to make it easier and/or safer for a senior or disabled individual to live in their home. In most cases, such renovations are done to enable such individuals to continue to live in their existing homes, but claims for the new credit – the Home Accessibility Tax Credit, or HATC – are not limited to those individuals. Eligible family members (generally, a spouse, common-law partner or supporting relatives) of a senior or disabled person can similarly claim the HATC for qualifying renovations made.

In practical terms, those rules mean that any person who can claim the federal disability tax credit or who is over the age of 65 and who makes eligible renovations to his or her home can claim the credit. In addition, where such a person moves in with a family member because that person can no longer live on their own, eligible renovations made by the family member to their own home will similarly qualify for the credit.

The HATC can be claimed, at a rate of 15%, on up to $10,000 in qualifying renovations carried out in a year. Consequently, a taxpayer who spends the maximum amount on qualifying renovations in a year will have his or her tax bill for that year reduced by $1,500.

A number of other provisions governing the HATC program are particularly generous in nature. Where financial assistance by way of grants, forgiveable loans, or other tax credits is available from the federal or provincial governments, the HATC rules provide that such assistance, of any kind, does not reduce the amount which can be claimed for purposes of the HATC. In addition, where a homeowner receives a rebate or incentive from the vendor providing goods or services in connection with the home renovation, eligible expenses for purposes of the HATC are not reduced by the amount of such incentive or rebate. Finally, it’s almost always the case in our tax system that a particular expense can only be claimed once. The HATC is a rare exception to that rule, in that expenses which qualify for both the HATC and the medical expense tax credit can be claimed for both, in the same year.

There are, of course, rules setting out the kinds of expenses which will be eligible for the HATC. Generally, in order to qualify, home renovation expenses must be of a nature that increases a qualifying individual’s access, mobility or functioning within the home, or increases that individual’s safety within that home. As well, any changes made must be of a permanent nature, in the sense that they become a permanent part of the home. Consequently, the purchase of a portable shower seat would not qualify for the credit, but the installation of a permanent shower seat affixed to the wall or floor of a tub or shower would. On a larger scale, the cost of renovations done to add a ground floor bedroom for a senior who can no longer climb stairs (or do so safely) should also qualify for the HATC.

While the Canada Revenue Agency (CRA) website does not provide much detail on the specific types of expenses which will qualify for the HATC, it does list examples of ineligible expenses, are some of those are as follows:

• amounts paid to acquire a property that can be used independently of the qualifying renovation;
• the cost of annual, recurring, or routine repair or maintenance;
• household appliances;
• electronic home-entertainment devices;
• the cost of housekeeping, security monitoring, gardening, outdoor maintenance, or similar services;
• financing costs for the qualifying renovation; and
• renovations made primarily for the purpose of increasing or maintaining the value of the dwelling.

The HATC rules also address the question of who can carry out qualifying renovations. Such renovations performed by qualified tradespeople — electricians, plumbers, carpenters etc. — will qualify for the credit. Where an individual claiming the credit does the work himself or herself, a credit will be available for the cost of building materials, fixtures, equipment rentals etc., but no credit is claimable for the cost of labour. Finally, neither labour nor materials expenses are eligible for the HATC where otherwise eligible renovations are done by a family member.

In all cases, any expenses claimed must be supported by agreements or contracts, invoices and receipts, and such documents must include the following information:

• information that clearly identifies the vendor/contractor, their business address, and, if applicable, the GST/HST registration number;
• a description of the goods and the date when the goods were purchased;
• the date when the goods were delivered (keep your delivery slip as proof) and/or when the work or services were performed;
• a description of the work performed, including the address where the work was performed;
• the amount of the invoice; and
• proof of payment, including receipts or invoices that show that they are paid in full or are accompanied by other proof of payment, such as a credit card slip or cancelled cheque.

In order to be eligible for a claim for the HATC on the 2016 tax return, qualifying renovations must be contracted for, carried out, and paid for before the end of this calendar year. Since 2016 is the first year for which the HATC can be claimed, the forms used to make that claim are not yet available, but more information on the credit itself can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/398/398-eng.html#hwtclm.

The fact that the cost of residential real estate in Canada’s largest cities has reached unaffordable levels for most Canadians, especially young families, isn’t really news any more. What’s relatively new, however, is that significant price increases are now being seen in cities which are within daily driving range of those major cities, presumably as individuals and families move further and further out in search of affordable housing. The trade-off for moving further from work in order to be able to purchase an affordable home is, of course, the daily commute. And, while gas prices aren’t currently at the levels seen a year or two ago, commuting is never inexpensive, leading many to wonder whether our tax system provides any relief for unavoidable commuting costs incurred.

The fact that the cost of residential real estate in Canada’s largest cities has reached unaffordable levels for most Canadians, especially young families, isn’t really news any more. What’s relatively new, however, is that significant price increases are now being seen in cities which are within daily driving range of those major cities, presumably as individuals and families move further and further out in search of affordable housing. The trade-off for moving further from work in order to be able to purchase an affordable home is, of course, the daily commute. And, while gas prices aren’t currently at the levels seen a year or two ago, commuting is never inexpensive, leading many to wonder whether our tax system provides any relief for unavoidable commuting costs incurred.

The bad news for most taxpayers is that the cost of driving to work and back home, as well as the cost of most non-work driving is considered a personal expense, for which no tax deduction or credit is allowed, no matter how great the cost. The news is not, however, uniformly bad. The self-employed, of whom there are an increasing number, can claim a deduction for business-related driving expenses. There are some circumstances (outlined below) in which employees can claim driving-related costs. And, finally, for those who decide that the daily drive has just become too costly or too stressful and turn to available public transit (which includes everything from subways to suburban commuter trains to ferries) as an alternative, a tax credit is available to help offset the cost of taking that transit.

The one circumstance in which an employee can claim a deduction for driving costs incurred is where that employee is required, as part of his or her terms of employment, to use a personal vehicle for work-related travel. For instance, an employee might, as part of his or her job, be required to see clients at their own premises for the purpose of meetings or other work-related activities, and be expected to use their own vehicle to get to such meetings. If the employer is prepared to certify on a Form T2200 that the employee was ordinarily required to work away from his or her employer’s place of business or in different places, that he or she is required to pay his or her own motor vehicle expenses and that no tax-free allowance is provided by the employer for such expenses, the employee can deduct actual expenses incurred for such work-related travel, including the following:

• fuel (gasoline, propane, oil);
• maintenance and repairs;
• insurance;
• licence and registration fees;
• depreciation, in the form of capital cost allowance
• eligible interest costs paid on a loan used to buy the motor vehicle; and
• eligibleleasing costs.

In the majority of cases, a taxpayer will use the same vehicle for both personal and work-related driving. Where that’s the case, only the percentage of expenses incurred for work-related driving can be deducted and the employee must keep a record of both the total kilometres driven and the kilometres driven for work-related purposes. And, of course, receipts must be kept to document the expenses claimed.

The rules governing the taxation of employee automobile allowances and available deductions for employment-related automobile use are outlined on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/slry/mtrvhcl-eng.html.

In other circumstances, where a taxpayer has the option of taking public transit, the after-tax cost of getting to and from work each day can be reduced by claiming the public transit tax credit. That credit is offered by the federal government and by several of the provinces, and there is no limit on the amount which may be claimed. The federal credit is calculated as 15% of the cost of public transit, and while provincial credit amounts vary, an average would be around 7%. A taxpayer would therefore be able to claim a credit (and reduce taxes which would otherwise be payable for the year) by 22% of eligible public transit costs incurred during that year.

As well, the public transit tax credit isn’t limited to costs incurred for transit use to and from work. Costs incurred by either spouse and by any dependent children under the age of 19 who regularly purchase a weekly or monthly transit pass which provides for unlimited travel – for example high school or university students who use transit to get to and from school – can be aggregated and claimed on the return filed by either parent for the year. So, a family of four which incurs an average of $700 a month in transit costs (not difficult to do where an inter-city commuter pass can cost up to $400 a month and city transit passes, even for students, can cost over $100) can claim $8,400 in eligible transit costs per year, for which they would be able to reduce their tax bill for the year by just under $1,850. Details of the costs which qualify for the public transit tax credit are summarized on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/364/menu-eng.html.

No amount of tax relief is going to make driving, especially for a lengthy daily commute, an inexpensive proposition. But, that said, seeking out and claiming every possible deduction and credit available under our tax rules can at least help to minimize the pain.

For most of the year, taxpayers live quite happily without any contact with the Canada Revenue Agency (CRA). During and just following tax filing season, however, such contact is routine – tax returns must be filed, Notices of Assessment are received from the CRA and, on occasion, the CRA will contact a taxpayer seeking clarification of income amounts reported or documentation of  deductions or credits claimed on the annual return. Consequently, it wouldn’t necessarily strike taxpayers as unusual to be contacted by the CRA with a message that a tax amount is owed or, more happily, that the taxpayer is owed a refund by the Agency. Consequently, it’s the perfect time for scam artists posing as representatives of the CRA to seize the opportunity to defraud taxpayers.

For most of the year, taxpayers live quite happily without any contact with the Canada Revenue Agency (CRA). During and just following tax filing season, however, such contact is routine – tax returns must be filed, Notices of Assessment are received from the CRA and, on occasion, the CRA will contact a taxpayer seeking clarification of income amounts reported or documentation of  deductions or credits claimed on the annual return. Consequently, it wouldn’t necessarily strike taxpayers as unusual to be contacted by the CRA with a message that a tax amount is owed or, more happily, that the taxpayer is owed a refund by the Agency. Consequently, it’s the perfect time for scam artists posing as representatives of the CRA to seize the opportunity to defraud taxpayers.

Changes in technology have vastly expanded and multiplied the number of ways in which communication can take place, and tax scammers use all of them. The CRA has posted on its website examples of fraudulent communications by those claiming to be from the Agency, carried out by telephone, letter, e-mail, text, and online, and all of those can be found at www.cra-arc.gc.ca/scrty/frdprvntn/menu-eng.html.

While the communication method may vary, the message contained in that communication almost always takes one of two approaches. In the first, the taxpayer is advised that he or she is owed money by the federal government, and told that, in order to receive the funds, a form must be completed, with that form generally accessed through a link. The link leads, not to a federal government website, but to a “dummy” site closely resembling the actual CRA webpage. The taxpayer is then required, in order to have his or her “refund” processed, to provide personal and financial information which is then available to be used by the tax scammer.

The second approach, which has been particularly prevalent in the past few years, is to tell the taxpayer that he or she owes money to the CRA, and threaten him or her with dire consequences, including seizure of the taxpayer’s assets and/or imprisonment if the alleged debt is not paid immediately. Often, payment must be made by a pre-paid credit card – a payment method which is never used by the CRA. The threats used in such communications are, of course, ridiculous – there are no circumstances in which the CRA would or could seize an individual’s assets or in which anyone could be imprisoned, without prior notice and due process of law.

Where a telephone call is received from someone purporting to be from the CRA, it is perfectly reasonable for the taxpayer to request a callback number at which the caller can be reached.

Where the communication is in writing – whether by text, e-mail or letter, the taxpayer should ask themselves the following questions:

• Am I expecting additional money from the CRA?
• Does this sound too good to be true?
• Is the requester asking for information I would not include with my tax return?
• Is the requester asking for information I know the CRA already has on file for me?
• How did the requester get my email address?
• Am I confident I know who is asking for the information?
• Is there a reason that the CRA would be calling; do I have a tax balance outstanding?

E-mails which are ostensibly from the CRA should be viewed with caution, as the CRA does not communicate with taxpayers by email except in very specific circumstances, and never discusses confidential tax matters in an email. Where a taxpayer contacts the CRA to request a form or a link for specific information, a CRA agent will forward the information requested to the taxpayer’s email, but such email will be sent during the phone call. There are no other circumstances in which the CRA will send an email containing links and consequently, any other email purporting to be from the CRA and directing the recipient to click on a link to another website should be deleted. As well, the CRA notes that fraudulent e-mails containing such links can contain embedded software that can harm the recipient’s computer, or put personal information at risk.

Taxpayers who are contacted by someone purporting to be from the CRA should also remember the following. The CRA:

• will not request personal information of any kind from a taxpayer by e-mail;
• never requests information from a taxpayer about a passport, health card, or driver’s license;
• never leaves any personal information on an answering machine or asks taxpayers to leave a message with their personal information on an answering machine; and
• will not divulge taxpayer information to another person unless formal authorization is provided by the taxpayer.

It may seem that only naïve or gullible individuals could be victims of a tax scammer, but that’s not the case. Fraudulent communications sent by those purporting to be representatives of the CRA have become increasingly sophisticated and very difficult to differentiate from legitimate correspondence issued by the Agency, even by those familiar with such documents.

A taxpayer who receives what seems to be a suspicious communication should report that to the Canadian Anti-Fraud Centre online at www.antifraudcentre-centreantifraude.ca/reportincident-signalerincident/index-eng.htm, or by telephone at 1-888-495-8501. If the worst happens and an individual has been tricked into providing personal or financial information, the following course of action is suggested:

Step 1 - Contact your bank/financial institution or credit card company.

Step 2 - Contact credit bureaus and have fraud alerts placed on your credit reports.

Step 3 - Contact your local police.

Step 4 - Always report phishing. If you have responded to one of these suspicious e-mails, report it to info@antifraudcentre.ca.

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, 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.