When the pandemic struck in March of 2020 and public health lockdowns were imposed, virtually all Canadian employees were required to work from home, most for the first time.

When the pandemic struck in March of 2020 and public health lockdowns were imposed, virtually all Canadian employees were required to work from home, most for the first time.

In the nearly four years since then, the work landscape has shifted, as many employees continue to work entirely from home, some have returned to the office full-time, and many, perhaps most, now utilize some kind of hybrid arrangement, dividing their work week between their employer’s work site and a home office.

As the necessity and availability of work-from-home arrangements changed (and changed again) over the past four years, the tax rules governing deductions which could be claimed for home office expenses changed (and changed again) to meet those realities.

Employees who work from home have always been able to claim a tax deduction for costs related to a home office. Under the tax rules in place prior to 2020, a claim for a deduction for home office expenses was available only where employees met a number of criteria and could provide the tax authorities with an itemized accounting of eligible home office expenses incurred, as well as attestation from their employer of the terms of the work-from-home arrangement – known as the “detailed” method. However, when work-from-home arrangements became essentially mandatory in 2020, the federal government greatly simplified the rules governing those claims, to provide for a temporary flat-rate method which eliminated the requirement for documentation of home office costs. That flat-rate method was available (with some variations) during 2020, 2021 and 2022, but cannot be used for home office expenses claims for 2023.

For 2023, the “detailed method” for claiming home office expenses will be the only method under which such costs may be deducted for tax purposes. What follows is a summary of the current rules outlined on the Canada Revenue Agency (CRA) website with respect to claims for home office expense deductions using the detailed method which will apply to such claims during 2023.

In order to claim a deduction for costs related to a work from home space using the detailed method, an employee must meet at least one of the following conditions.

• The employee worked from home during the year as a consequence of the pandemic (including employees who were given a choice and elected to work from home); or
• The employee was required by their employer to work from home during the year (this can be just a verbal or written agreement between employer and employee).

In addition, at least one of the following criteria must also be satisfied in order to claim work from home costs under the detailed method.

• The work at home space is where the individual mainly (more than 50% of the time) did their work for a period of at least four consecutive weeks during the year; or
• The individual uses the workspace only to earn their employment income. They must also use it on a regular and continuous basis for meeting clients, customers, or other people in the course of their employment duties.

Once these threshold criteria are met, a broad range of costs become deductible by the employee. Specifically, a salaried employee can claim and deduct the part of specified costs that relate to their work from home space, such as rent, utilities costs like electricity, heating, water (or the portion of a condo fee attributable to such utilities costs), home maintenance and minor repair costs, and internet access (but not internet connection) fees.

Once total expenses are tallied, the taxpayer must determine the percentage of those expenses which can be deducted as home office expenses, and the CRA provides detailed information on its website of how such determination is made. Generally, the employee determines that percentage based on the square footage of the workspace as a percentage of the overall square footage of the home. Where the workspace is not a separate room but is a shared space like a dining room, the employee must also calculate the number of hours for which that space is dedicated to work from home activities. Detailed information on how to make those calculations (including an online calculator) can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-22900-other-employment-expenses/work-space-home-expenses/work-space-use.html. In all cases, the CRA can ask the taxpayer to provide documentation and support for claims made using the detailed method.

There is one further requirement for employees who seek to deduct costs incurred in relation to a home office using the detailed method. Each such employee must obtain either a T2200S Declaration of Conditions of Employment for Working at Home Due to COVID-19 - Canada.ca or T2200 Declaration of Conditions of Employment - Canada.ca. On those forms, the employer must certify the work from home arrangement and confirm that the employee is required to pay their own home office expenses and is not being reimbursed for any such expenses incurred. Where there is any kind of reimbursement provided, the employer must specify the type of expense reimbursed, and the amount of reimbursement. And, of course, the employee cannot claim a deduction for any expenses for which reimbursement was received.

For the many taxpayers who were able to avail themselves of the simplified method for claiming a deduction for home office expenses in 2020, 2021, or 2022, the upcoming filing season for returns for 2023 may be the first time they encounter the rules and requirements which govern claims for home office expenses using the traditional detailed method. It would, therefore, be advisable to do some upfront planning to determine whether a deduction claim can be made for 2023 and to ensure that any record keeping needed to support that deduction is done before tax filing season arrives a few months from now.

The day-to-day financial impact of increases in interest rates over the past 18 months, together with higher costs for nearly all goods and services, means that for most Canadians maximizing take-home income isn’t just desirable, it’s a necessity. And the best way to make sure that take-home pay is maximized is to ensure that deductions taken from that paycheque – especially deductions for income tax – are no greater than required.

The day-to-day financial impact of increases in interest rates over the past 18 months, together with higher costs for nearly all goods and services, means that for most Canadians maximizing take-home income isn’t just desirable, it’s a necessity. And the best way to make sure that take-home pay is maximized is to ensure that deductions taken from that paycheque – especially deductions for income tax – are no greater than required.

For most Canadians, (certainly for the vast majority who earn their income from employment), income tax, along with other statutory deductions like Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, is paid periodically throughout the year by means of deductions taken from each paycheque received, with those deductions then remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by their employer. Eventually, the taxpayer files a tax return for the year. Where things work as intended, the total amount of income tax deducted from the taxpayer’s paycheques throughout the year is very close to the amount of tax they owe for that tax year. Where the amounts withheld for income tax are greater than the taxpayer’s total tax payable for the year, they receive a tax refund. Most taxpayers like receiving such a tax refund, but the fact is that receiving a refund means that the taxpayer has overpaid taxes throughout the year, and essentially provided the tax authorities with an interest-free loan of monies which could have been paid to the taxpayer by their employer throughout the year.

The amount of tax deducted by employers and remitted to the federal government on the employee’s behalf isn’t arbitrary – rather, it’s based on information provided to that employer by the employee. That information is provided on a TD1 form, which is completed and signed by each employee, sometimes at the start of each year, but certainly at the time employment commences. Each employee must, in fact, complete two TD1 forms – one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer lives. Federal and provincial TD1 forms for 2024 (which have not yet been released by the CRA but, once published, will be available on the Agency’s website at https://www.canada.ca/en/revenue-agency/services/forms-publications/td1-personal-tax-credits-returns/td1-forms-pay-received-on-january-1-later.html) list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding together all amounts claimed on each TD1 form gives the Total Claim Amounts (one federal, one provincial) which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on their behalf to the federal government.

While the TD1 completed by the employee at the time their employment commenced will have accurately reflected the credits claimable by the employee at that time, everyone’s life circumstances change. Where a baby is born or a child starts post-secondary education, there is a separation or a divorce, a taxpayer turns 65 years of age, or an elderly parent comes to live with their children, the affected taxpayer(s) will often become eligible to claim tax credits not previously available. And, since the employer can only calculate source deductions based on information provided to it by the employee, those new credit claims won’t be reflected in the amounts deducted at source from the employee’s paycheque.

Consequently, it’s a good idea for all employees to review the TD1 form prior to the start of each taxation year and to make any changes needed to ensure that a claim is made for any and all credit amounts currently available to them. Doing so will ensure that the correct amount of tax is deducted at source throughout the year.

As well, it’s often the case that a taxpayer will have available deductions for expenditures like Registered Retirement Savings Plan or First-Time Homeowner Savings Plan contributions, deductible support payments, or child care expenses, none of which can be recorded on the TD1 but all of which reduce the taxpayer’s tax owing for the year. While such claims make things a little more complicated, it’s still possible to have source deductions adjusted to accurately reflect those claims and the employee’s resulting reduced tax liability for 2024. The way to do so is to file Form T1213 – Request to Reduce Tax Deductions at Source (available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1213.html) with the CRA. Once that form is filed with the CRA, the Agency will, after verifying that the claims made are accurate, provide the employer with a Letter of Authority authorizing that employer to reduce the amount of tax being withheld from the employee’s paycheque – and thereby increasing the employee’s take-home income. 

Of course, as with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes time. While a T1213 can be filed with the CRA at any time of the year, the sooner it’s done, the sooner source deductions can be adjusted, effective for all subsequent paycheques. Providing an employer with an updated TD1 for 2024 as soon as possible, along with filing a T1213 with the CRA where circumstances warrant, will ensure that source deductions made starting January 1, 2024 will accurately reflect all of the employee’s current circumstances, and consequently their actual tax liability for the year. Taking those steps can mean increased take-home income for the employee, making it easier to meet day to day expenses in 2024.

Canadians have a well-deserved reputation for supporting charitable causes, through donations of both money and goods. Our tax system supports that generosity by providing a tax credit for qualifying donations made and, in all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year.

Canadians have a well-deserved reputation for supporting charitable causes, through donations of both money and goods. Our tax system supports that generosity by providing a tax credit for qualifying donations made and, in all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year.

There is, however, another reason to ensure donations are made by December 31. The credit provided by the federal government is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. Where the taxpayer making the donation has taxable income (for 2023) over $235,675, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2023 will receive a federal credit of $88.00 ($200 times 15% plus $200 times 29%). If the same amount is donated, but the donation is split equally between December 2023 and January 2024, the total credit claimable is only $60.00 ($200 times 15% plus $200 times 15%), and the 2024 donation can’t be claimed until the 2024 return is filed in April of 2025. And, of course, the larger the donation made in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.

It’s also possible to carry forward, for up to five years, donations which were made in a particular tax year. So, if donations made in 2023 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2018, 2019, 2020, 2021, or 2022 tax years can be carried forward and added to the total donations made in 2023, and the aggregate then claimed on the 2023 tax return.

When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high-income surtax – currently, Ontario and Prince Edward Island – it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.

Regardless of when a charitable donation is made, would-be donors are well advised to carefully consider the charities to which they donate. It’s an unfortunate reality that while most organizations seeking charitable donations are legitimate, the charitable sector attracts its share of scammers and fraudsters whose only aim is to personally profit from the generosity of others. Such charitable donation frauds arise, in particular, whenever there are world events like wars, famines, or natural disasters and people are particularly motivated to help. After every such event a flurry of “instant” charities spring to life, seeking donations which may or may not actually be used as represented. And, while some of the individuals or organizations who seek to raise funds in response to particular events may actually be well intentioned, the reality is that they are unlikely to have either the infrastructure or the experience needed to actually carry out their stated or intended aims. And others, of course, are simply scammers seeking to capitalize on the desire of Canadians to help in response to disaster.

There are two ways to ensure that one’s charitable dollar is actually utilized as intended. The first is to donate only to large international charities which have been in existence for some time and which have both expertise and experience in utilizing charitable donations in an efficient and effective way. However, where a donor is deciding whether to make a donation to a newer or less-well-known charity, it’s relatively easy to find information about that charity on the website of the Canada Revenue Agency.

Only donations made to registered charities can be claimed for purposes of the charitable donations tax credit. The Canada Revenue Agency maintains on its website a listing of all such registered charities, and that listing (which is searchable) can be found at https://apps.cra-arc.gc.ca/ebci/hacc/srch/pub/dsplyBscSrch?request_locale=en. That webpage will also provide information on the charity’s activities, including the date on which it became a registered charity, the countries in which it operates, the nature of its charitable activities, and details of its revenues and expenses, all of which can help a would-be donor to determine whether or not to make a donation.

Detailed information on calculating and claiming a charitable donations tax credit is available on the same website at Giving to charity: Information for donors - Canada.ca.

The 10-fold increase in interest rates since March of 2022 has affected Canadians in almost every area of their financial lives, as individuals and families struggle to cope with the every-increasing bite that interest costs take out of their budgets.

The 10-fold increase in interest rates since March of 2022 has affected Canadians in almost every area of their financial lives, as individuals and families struggle to cope with the every-increasing bite that interest costs take out of their budgets.

Probably no group has been more affected by increased interest costs than homeowners who have a mortgage on their family home and must find room in their budget to make ever-increasing payments on that mortgage.

There are basically two types of mortgages held by Canadians. The first is a fixed rate mortgage in which, as the name implies, the rate of interest payable is set for a fixed term of, usually, one to five years. The required monthly payment is also set for the entire term and will not change, meaning that such homeowners are not affected by any change in interest rates during the current term of their mortgage. They will, however, have to renew that mortgage at the end of the current term, at whatever interest rates are then in effect.

The other major type of mortgage financing is a variable rate mortgage, in which the interest rate payable on the mortgage amount goes up with every interest rate increase announced by the Bank of Canada and passed on to consumers by Canadian financial institutions. Homeowners who have a variable rate mortgage can have one of two types of repayment arrangements. The Financial Consumer Agency of Canada explains the two types of payment arrangements in this way:

Adjustable payments with a variable interest rate

With adjustable payments, the amount of the required mortgage payment changes if the interest rate changes. A set amount of each payment applies to the principal amount of the mortgage (the loan amount), while the interest rate portion changes as interest rates change.

Fixed payments with a variable interest rate

With fixed payments, although the rate of interest payable changes as interest rates change, the amount of the required mortgage payment stays the same.

However, when interest rates change, the allocation of that fixed payment between principal and interest also changes. If the interest rate goes up, more of the payment goes towards the interest, and less to the principal. If the interest rate goes down, more of the payment goes towards the principal.

Where interest rates increase substantially, as they have done over the past year and half, homeowners who have a variable interest rate mortgage with fixed payments are at risk of reaching the point at which their payments no longer cover even the required interest payment. In other words, although they are making payments on time and in the required set amount, their overall mortgage principal is increasing every month, as interest amounts which have not been paid are added to that mortgage principal – a situation known as negative amortization. 

Finally, while holders of fixed rate mortgages (in which the interest rate does not change during the term of the mortgage) are currently sheltered from the impact of increased interest rates, they are unlikely to remain in that position much longer. According to the Bank of Canada, almost all borrowers will see an increase in mortgage interest costs over the next three years, and the Bank’s data suggests that holders of fixed rate mortgages will see their payments increase by between 20% and 25% at their next renewal. 

Looking at the current pressures being experienced by holders of variable rate mortgages, as well as the impact that mortgage renewals will have in the near future on holders of fixed rate mortgages, the Financial Consumer Agency of Canada (FCAC – a federal agency whose responsibilities include protecting the rights and interests of consumers of financial products and services and supervising federally regulated financial entities, such as banks) determined that new measures were needed to address both current and upcoming risks. Those measures outline the expectations of the FCAC with respect to mortgage lending practices by federally regulated financial institutions (which would include all major lenders – a full listing can be found at https://www.osfi-bsif.gc.ca/Eng/wt-ow/Pages/wwr-er.aspx?sAll= 1), in situations in which homeowners can be characterized as “consumers at risk” with respect to their mortgage payment obligations. For purposes of the new guidelines, “consumers at risk” means those who have variable rate mortgages and whose payments (or the portion of their payments allocated to interest charges) have increased materially, or who may be facing negative amortization, or those who have fixed rate mortgages which will be up for renewal in the near future and who are also facing a material increase in payments.

Where a homeowner is facing a material increase in mortgage payments, or negative amortization, the FCAC’s expectation is that the financial institution holding that mortgage will provide temporary mortgage relief in the following specific ways:

• waiving prepayment penalties where such a homeowner makes a lump sum payment to avoid negative amortization, or sells their principal residence;
• waiving, for a limited period, internal fees or costs which would otherwise be charged when mortgage relief measures are activated: and
• ensuring, for a limited time, that where mortgage relief measures result in negative amortization no interest is charged on interest which has been added to mortgage principal.

Where homeowners fall short or fall behind in meeting their mortgage payment obligations, the longer-term financial repercussions – in the form of higher interest rates charged on future borrowings, or a negative impact on the homeowner’s credit rating, or both – can be significant. The new guidelines address both of those risks, as follows:

• at the time of mortgage renewal, the homeowner should not be offered a less advantageous interest rate based on the homeowner’s inability to adjust his or her mortgage agreement, or to qualify with other lenders; and
• where mortgage relief measures are provided, and the new arrangements include the ability to make a late payment or be delinquent on the mortgage generally, those late payments or that delinquency should not be reflected on the homeowner’s credit report.

Where homeowners run into difficulty with paying their mortgage, one of the relief measures which can be provided is to extend the time period over which the mortgage must be repaid – the amortization period. While an extension of the amortization period will mean lower payments, those lower payments also mean that more interest will be paid over the life of the mortgage and, of course, that it will take longer before the homeowner is mortgage-free.

Extension of the amortization period of a mortgage is one of the relief measures set out in the new guidelines. However, those guidelines also impose specific steps to be taken by the financial institution which provides the extended amortization. Any such extension must be for the shortest period possible, and the financial institution is expected to work with the homeowner to develop a plan which:

• ensures that the total amortization period is reasonable;
• includes information about options to restore the amortization to its original period; and
• includes an assessment and communication of the potential long-term, negative financial implications of the change in the amortization period.

Finally, where any mortgage relief measures are provided, the onus is on the financial institution to provide specific information to the homeowner before implementing any such measures. That information must include:

• the outstanding amount owing on the original credit agreement for the mortgage before the mortgage relief measures take effect;
• the impact of the mortgage relief measures on the total cost of servicing the mortgage, in dollar figures, as well as the remaining amortization (or repayment) period after the relief measures take effect;
• the new payment amount, due date, and frequency;
• the new interest rate and type (that is, fixed or variable); and
• the date on which the changes will take effect.

The new guidelines expect financial institutions to proactively monitor their clients to permit early identification of signs of financial stress, and to proactively contact consumers at risk regarding possible mortgage relief measures. However, consumers who are at risk of falling into default on their mortgage obligations are well-advised to also be proactive in contacting their financial institution where mortgage relief is needed – armed with knowledge of the kinds of relief which can be provided, and on what terms.

Detailed information on the new mortgage relief guidelines is available on the federal government website at https://www.canada.ca/en/financial-consumer-agency/services/industry/commissioner-guidance/mortgage-loans-exceptional-circumstances.html.

While our health care system is currently struggling with a number of significant problems, Canadians are nonetheless fortunate to have a publicly funded health care system, in which most major medical expenses are covered by government health care plans. Notwithstanding, there is a large (and growing) number of medical and para-medical costs – including dental care, prescription drugs, physiotherapy, ambulance trips, and many others – which must be paid for on an out-of-pocket basis by the individual. In some cases, such costs are covered by private insurance, usually provided by an employer, but not everyone benefits from private health care coverage. Self-employed individuals, those working on contract, or those whose income comes from several part-time jobs do not usually have access to such private insurance coverage. Fortunately for those individuals, our tax system acts to help cushion the blow by providing a medical expense tax credit to help offset out-of-pocket medical and para-medical costs which must be incurred.

While our health care system is currently struggling with a number of significant problems, Canadians are nonetheless fortunate to have a publicly funded health care system, in which most major medical expenses are covered by government health care plans. Notwithstanding, there is a large (and growing) number of medical and para-medical costs – including dental care, prescription drugs, physiotherapy, ambulance trips, and many others – which must be paid for on an out-of-pocket basis by the individual. In some cases, such costs are covered by private insurance, usually provided by an employer, but not everyone benefits from private health care coverage. Self-employed individuals, those working on contract, or those whose income comes from several part-time jobs do not usually have access to such private insurance coverage. Fortunately for those individuals, our tax system acts to help cushion the blow by providing a medical expense tax credit to help offset out-of-pocket medical and para-medical costs which must be incurred.

The bad news for such individuals is that while a tax credit is available, the computation of eligible expenses and, in particular, determining when a claim for the credit should be made can be confusing. In addition, the determination of which expenses qualify for the credit and which do not isn’t necessarily intuitive, nor is the determination of when it’s necessary to obtain prior authorization from a medical professional in order to ensure that the planned expenditure will qualify for the credit. For instance, in order to claim the medical expense tax credit for the cost of a cane or a walker, it is necessary to obtain a prescription for that cane or walker from a medical professional. However, where costs are incurred to purchase a wheelchair, those costs are eligible for the medical expense credit, with no requirement that a prescription of any kind be obtained.

The basic rule is that the total cost of qualifying medical expenses (a lengthy list of which can be found on the Canada Revenue Agency 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/lines-33099-33199-eligible-medical-expenses-you-claim-on-your-tax-return.html) which exceed 3% of the taxpayer’s net income, or $2,635, whichever is less, can be claimed for purposes of the medical expense tax credit on the taxpayer’s return for 2023.

Put in more practical terms, the rule for 2023 is that any taxpayer whose net income is less than $87,835 will be entitled to claim medical expenses that are greater than 3% of their net income for the year. Those having income of $87,835 or more will be limited to claiming qualifying expenses which exceed the $2,635 threshold.

The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2023 will produce the greatest amount eligible for the credit. That determination will obviously depend on when medical expenses were incurred so there is, unfortunately, no universal rule of thumb which can be used.

Medical expenses incurred by family members – the taxpayer, their spouse, and children who are under the age of 18 at the end of 2023, as well as certain other dependent relatives – can be added together and claimed by one member of the family. In most cases, it’s best, in order to maximize the amount claimable, to make that claim on the tax return of the lower-income spouse, where that spouse has tax payable for the year equal to at least the amount of the medical expense tax credit to be claimed.

As the end of the calendar year approaches, it’s a good idea to add up the medical expenses which have been incurred during 2023, as well as those paid during 2022 and not claimed on the 2022 return. Once those totals are known, it will be easier to determine whether to make a claim for 2023 or to wait and claim 2023 expenses on the return for 2024. And, if the decision is to make a claim for 2023, knowing what medical expenses were paid, and when, will enable the taxpayer to determine the optimal 12-month period for that claim.

Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2024. Where those are significant expenses (for instance, a particularly costly medication which must be taken on an ongoing basis, or some expensive dental work) it may make sense, where possible, to accelerate the payment of those expenses to November or December 2023, where that means they can be included in 2023 totals and claimed on the return for this year.

One or two generations ago, retirement was an event. Typically, an individual would leave the work force completely at age 65 and begin collecting Canada Pension Plan (CPP) and Old Age Security (OAS) benefits along with, in many cases, a pension from an employer-sponsored registered pension plan.

One or two generations ago, retirement was an event. Typically, an individual would leave the work force completely at age 65 and begin collecting Canada Pension Plan (CPP) and Old Age Security (OAS) benefits along with, in many cases, a pension from an employer-sponsored registered pension plan.

Transitioning into retirement is now much more of a process than an event – often a complex process involving decisions around both finances (present and future) and one’s desired way of life. It’s now the case that almost every individual’s retirement plans look a little different than anyone else’s. Some will take a traditional retirement of moving from a full-time job into not working at all, while others may stay working full-time past the traditional retirement age of 65. Still others will leave full-time employment but continue to work part-time, either out of financial need (especially over the past couple of years) or simply from a desire to stay active and engaged in the work force.

The flexible nature of retirement plans is reflected in changes made over the past decade to Canada’s government-run retirement income programs, particularly the Canada Pension Plan. It’s possible to begin receiving CPP benefits as early as age 60 and as late as age 70, with the amount of benefit increasing with each month that receipt of benefits is deferred. Many Canadians now choose to begin receiving their CPP retirement benefits while continuing to participate in the work force, part-time or full-time.

 At one time, beginning to receive CPP retirement benefits meant that, even for those who chose to remain in the work force, no further CPP contributions were allowed. That changed in 2012 with the introduction of the CPP Post-Retirement Benefit. The availability of that benefit means that those who are aged 65 to 70 and continue to work while receiving CPP retirement benefits must decide whether or not to continue making CPP contributions. Such individuals who make the choice to continue to contribute to the Canada Pension Plan will see an increase in the amount of CPP retirement benefit they receive each month for the remainder of their lives. That increase 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 (https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/cpt30.html). A copy of that form must be given to the individual’s employer and the original sent to the Canada Revenue Agency. 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 the CPT30 form to each employer.
  
  A decision to stop contributing can be changed, and contributions resumed, but only one such change can be made per calendar year. To make that change, the individual must complete section D of CRA Form CPT30, give one copy of the form to their employer(s), and send the original to the CRA.

• Individuals who are over the age of 70 and are still working cannot contribute to the CPP.

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

Individuals who are currently considering whether to continue contributing the CPP will now have to take into consideration changes being made to CPP contribution rules beginning January 1, 2024.

The basic structure of the CPP provides that anyone who is over the age of 18 and earns more than $3,500 per year must make CPP contributions equal to 5.95% of their income between $3,500 and a specified income ceiling. That income ceiling is known as the Year’s Maximum Pensionable Earnings and is set at $66,600 for 2023.

Beginning in 2024, however, there will be two levels of required CPP contributions. Individuals who have annual income of less than the YMPE (likely to be around $70,000 for 2024) will continue to make CPP contributions of 5.95% of earnings between $3,500 and $70,000.  However, those whose earnings exceed that $70,000 income ceiling must pay 4% of those additional earnings, up to a second earnings ceiling. That second earnings ceiling – to be called the Year’s Additional Maximum Pensionable Earnings, or YAMPE – is likely be around $80,000 for 2024.

The effect of the upcoming changes is that individuals who will have income of more than around $70,000 during 2024 must pay an additional CPP contribution of 4% of their income between $70,000 and $80,000 (in addition to the 5.95% contribution to be made on income between $3,500 and $70,000). The increased contribution will, of course, be reflected in the amount of PRB the individual receives; however, each individual will have to consider how much he or she will have to pay in additional CPP contributions and whether those increased costs are justified by the amount of any increase in future benefits. It’s important to note, as well, that anyone who chooses to continue making CPP contributions will be subject to both levels of CPP contribution requirements – it is not possible to “opt out” of making second-level CPP contributions.

Where an individual does choose to continue making 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 (no application is required), and the individual will be advised of any increase in their monthly CPP retirement benefit each year. The PRB will be paid to that individual automatically the year after the contributions are made, effective January 1 of that second year. Since the federal government doesn’t have all of the information needed to make such calculations until T4s and T4 summaries are filed by the employer by the end of February, the first PRB payment is usually made in a lump sum amount, in the month of April. That lump sum amount represents the PRB payable from January to April. Thereafter, the PRB is paid monthly and combined with the individual’s usual CPP retirement benefit in a single payment.

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

Individuals in the middle group – aged 65 to 70 – will need to make a decision about whether it makes sense in their individual circumstances (and considering the possible impact of the additional contribution requirements which will take effect in 2024) to continue making contributions to the CPP.  To assist in that decision, the Canada Revenue Agency provides a very helpful online calculator which enables individuals to obtain an estimate of the amount of PRB which they will receive. That calculator is available on the CRA website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html.

As well, while every situation is different, there are some general rules of thumb which will be useful in determining whether or not to continue making contributions to the CPP. Generally speaking, continuing to contribute makes the most sense for individuals whose current CPP retirement pension is significantly less than the maximum allowable benefit (which is, for 2023, $1,306.57 per month), as making such contributions will mean an increase in the individual’s CPP retirement benefit each month for the rest of their life. Conversely, for individuals who are already receiving the maximum CPP retirement benefit, or even close to it, there is likely insufficient benefit to be derived from continuing to contribute (especially for those who will be subject to the additional contribution amount requirements beginning in 2024, or who are self-employed and must therefore pay both the employer and employee contribution amounts). 

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

Most Canadians know that the deadline for making contributions to one’s registered retirement savings plan (RRSP) comes 60 days after the end of the calendar year, around the end of February. There are, however, some circumstances in which an RRSP contribution must be (or should be) made by December 31 in order to achieve the desired tax result.

Most Canadians know that the deadline for making contributions to one’s registered retirement savings plan (RRSP) comes 60 days after the end of the calendar year, around the end of February. There are, however, some circumstances in which an RRSP contribution must be (or should be) made by December 31 in order to achieve the desired tax result. 

Similarly, most Canadians who have opened a registered retirement income fund (RRIF) are aware that they are required to make a withdrawal of a specified amount from that RRIF each year, with the percentage withdrawal amount based on the RRIF holder’s age – although few are aware of when and how that required withdrawal is calculated. 

The rules around TFSAs are more flexible, but it is nonetheless the case that advantages can be obtained (and disadvantages avoided) by carefully timing TFSA withdrawals and recontributions based on the calendar year end.

Finally, beginning in 2023, taxpayers have an additional opportunity to save on a tax-assisted basis, through the new First Home Savings Account (FHSA). While saving through an FHSA is possible only for those who have not owned a home in the current or any of the four previous years, the FHSA offers qualifying taxpayers the opportunity to reduce taxes payable to an extent not available through other government-sanctioned tax saving or deferral programs.

While the basic rules with respect to contributions to and withdrawals from each of these tax-assisted savings plans are relatively straightforward, there are nonetheless benefits to be obtained from careful consideration of the detailed rules – and some exceptions from those rules. What follows is an outline of steps which should be considered, before the end of the 2023 calendar year, by Canadians who have an RRSP, RRIF, TFSA, or FHSA – or maybe all four.

Timing of RRSP contributions

• When you are making a spousal RRSP contribution

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2023, the contributor can claim a deduction for that contribution on his or her return for 2023. The spouse can then withdraw that amount as early as January 1, 2026 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2024, the contributor can still claim a deduction for it on the 2023 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2027. It’s an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should  an unforeseen need to withdraw funds arise.

• When you are turning 71 during 2023

Every Canadian who has an RRSP must collapse that plan by the end of the year in which they turn 71 years of age – usually by converting the RRSP into a registered retirement income fund (RRIF) or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that they have sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31 is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31 of that year. Once that deadline has passed, no further RRSP contributions are possible.

RRIF withdrawals for 2023

Under Canadian law, anyone who has an RRIF is required to make a minimum withdrawal from that RRIF each year. The amount of the withdrawal is calculated as a specified percentage of the balance in the RRIF at the beginning of the calendar year, with that percentage based on the age of the RRIF holder at that time.

Taxpayers who have no immediate need of funds held within an RRIF are often reluctant to make a withdrawal and pay the tax on those amounts, especially where the value of investments held in an RRIF has declined. While there is no way of avoiding the requirement to withdraw that minimum amount from one’s RRIF, and to pay tax on the amount withdrawn, such taxpayers can consider contributing those amounts to a tax-free savings account (TFSA). Where that is done, the funds can be invested and continue to grow, and neither the original contribution nor the investment gains will be taxable when the funds are withdrawn from the TFSA.

Planning for TFSA withdrawals and contributions

Each Canadian aged 18 and over can make an annual contribution to a tax-free savings account (TFSA) – the maximum contribution for 2023 is $6,500. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.

Consequently, it makes sense, where a TFSA withdrawal is planned (or the need to make such a withdrawal might arise within the next few months), to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from their TFSA on or before December 31, 2023 will have the amount which is withdrawn added to their TFSA contribution limit for 2024, which means it can be re-contributed, where finances allow, as early as January 1, 2024. If the same taxpayer waits until January of 2024 to make the withdrawal, they won’t be eligible to recontribute the funds withdrawn until 2025.

Contributing to an FHSA

The First Home Savings Account (FHSA) program, which became available to taxpayers beginning in 2023, offers qualifying taxpayers significant tax benefits. The FHSA program allows taxpayers who do not currently own a home (and did not own a home in any of 2019, 2020, 2021, or 2022) to contribute up to $8,000 per year to an FHSA. Each qualifying taxpayer can contribute up to a lifetime total of $40,000 to an FHSA.

Contributions made to an FHSA are deductible from income, and investment income earned by funds inside an FHSA is not taxed as earned. Finally, where funds are withdrawn to purchase a home, both the original contributions made and investment income earned are received by the taxpayer free of tax.

The ability to contribute up to $8,000 per year to an FHSA does not depend on the taxpayer’s income, and contributions not made in a calendar year can (subject to a maximum of $8,000 in carryforward amounts, and to the $40,000 lifetime limit) be carried forward and made in a future tax year.

Where an individual has opened and contributed to an FHSA, he or she has up to 15 years to withdraw those funds tax-free and use them to purchase a home. However, taxpayers who have an FHSA also have the option to transfer funds from that FHSA plan to their RRSP (and vice-versa), without immediate tax consequences.

For taxpayers who qualify, the new FHSA program offers an unparalleled degree of flexibility to save on a tax-free or tax-deferred basis. Details on the FHSA program can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html.

The approach of the calendar year end doesn’t usually prompt Canadians to consider the details of making contributions to an RRSP or FHSA, or withdrawals from a TFSA or an RRIF. There is, however, no flexibility in the deadlines for taking such actions, and considering what steps may be needed or advisable now means one less thing to remember as the December 31 deadline nears.

During the pandemic, temporary financial assistance was provided to Canadian small businesses through a number of grant and loan programs initiated by the federal government. One of the largest of those programs was the Canada Emergency Business Account (CEBA) program, which ran from April 2020 to June 2021, and provided a total of approximately $50 billion in loan financing to just under a million small businesses.

During the pandemic, temporary financial assistance was provided to Canadian small businesses through a number of grant and loan programs initiated by the federal government. One of the largest of those programs was the Canada Emergency Business Account (CEBA) program, which ran from April 2020 to June 2021, and provided a total of approximately $50 billion in loan financing to just under a million small businesses.

Under CEBA program terms, qualifying small businesses could receive up to $60,000 in loans, with forgiveness of up to one-third of outstanding loan amounts provided where those CEBA loans were repaid by a specified deadline. The original deadline for repayment of loans under the CEBA program was the end of 2022, but that deadline was extended to December 31, 2023. On September 14, 2023, the federal government announced that further relieving changes would be made with respect to CEBA loan repayment schedules. Those changes include an extension of the repayment deadline, as well as a new extended deadline for businesses which opt to refinance their CEBA loan(s). The deadlines and repayment terms for CEBA loans, as outlined in the federal government Backgrounder, are now as follows.

• The repayment deadline for CEBA loans to qualify for partial loan forgiveness of up to 33 per cent is being extended to January 18, 2024.
• For CEBA loan holders who make a refinancing application with the financial institution that provided their CEBA loan by January 18, 2024, the repayment deadline to qualify for partial loan forgiveness now includes a refinancing extension until March 28, 2024.
• As of January 19, 2024, outstanding loans, including those that are captured by the refinancing extension, will convert to three-year term loans, subject to interest of five per cent per year, with the term loan repayment date extended by an additional year from December 31, 2025 to December 31, 2026. In other words, small businesses and not-for-profits will automatically have access to a three-year, low-interest loan of up to $60,000 if they have not repaid or refinanced their loan, providing those who are unable to secure refinancing or generate enough cashflow to repay their loans by the forgiveness deadline an additional year to continue repayment at a low borrowing cost.

Small businesses which repay their CEBA loans on or before the new deadline of January 18, 2024 (or March 28, 2024 if a refinancing application is submitted prior to January 18, 2024 at the financial institution that provided their CEBA loan), will still be eligible for partial loan forgiveness. Where a business benefits from loan forgiveness, any forgiven amount will be treated as income, which must be reported on the tax return file by the business, and on which tax must be paid.

Details of the current rules respecting CEBA loan repayments and forgiveness are outlined in the September14 Backgrounder, which is available at https://www.canada.ca/en/department-finance/news/2023/09/canada-emergency-business-account-government-extends-repayment-and-partial-loan-forgiveness-deadlines.html, and on the CEBA program webpage, which can be found at https://ceba-cuec.ca/.

By anyone’s measure, obtaining a post-secondary education is an expensive undertaking. Tuition and other school-related costs are just the start of the bills which must be paid. Whether the student obtains a place in a university residence or finds a place to live off campus, students (and their parents) must also budget for the cost of residence and meal plan fees, or rent and groceries. The total cost of a single year of university or college attendance away from home can easily reach $30,000 – and can significantly exceed that amount where the student is enrolled in a specialized academic program leading to a professional designation.

By anyone’s measure, obtaining a post-secondary education is an expensive undertaking. Tuition and other school-related costs are just the start of the bills which must be paid. Whether the student obtains a place in a university residence or finds a place to live off campus, students (and their parents) must also budget for the cost of residence and meal plan fees, or rent and groceries. The total cost of a single year of university or college attendance away from home can easily reach $30,000 – and can significantly exceed that amount where the student is enrolled in a specialized academic program leading to a professional designation.

Adding to the financial hit, government support for post-secondary education through our tax system has been cut back in recent years. While students can still claim a tax credit for the cost of tuition, two other related tax credits – the education tax credit and the textbook tax credit – were eliminated by both the federal government and several of the provinces in recent years.

While there are still government-sponsored loan and grant programs which post-secondary students can access, the reality is that most families will shoulder the main financial burden of post-secondary education for their children. And many families do so through a Registered Education Savings Plan, or RESP.

An RESP enables parents (or grandparents) to save for a child or grandchild’s post-secondary education on a tax-assisted basis. While parents or grandparents who contribute to an RESP cannot deduct contributions made from income, investment income earned by those contributed funds is not taxed as it is earned. And, where RESP contributions start early, those funds can compound, through untaxed investment earnings, for more than a decade.

The other significant tax benefit of an RESP comes into play when the beneficiary, now a student enrolled in post-secondary education, withdraws funds to pay for his or her education. All such qualifying withdrawals made, whether of original contributions or investment income earned, are taxed in the hands of the student beneficiary. And, because most students have little or no income, it’s often the case that no tax is payable on amounts withdrawn.

A change announced in the 2023-24 federal budget will enhance the available tax savings. The amount which a student can withdraw from an RESP is subject to limits and, as noted in the budget, those limits have not changed in 25 years, clearly not keeping pace with increases in either the cost of living or the cost of post-secondary education.

To address that gap, the amount which a student can withdraw from an RESP has been increased, effective as of the budget date of March 28, 2023. Those changes are as follows:

• Students who are enrolled full-time (defined as a program lasting at least three weeks and requiring at least 10 hours per week of courses or other program work) can now withdraw up to $8,000 in respect of the first 13 consecutive weeks of enrollment in a 12-month period. (The previous limit was $5,000.)
• Students who are enrolled part-time (defined as a program lasting at least three consecutive weeks and requiring at least 12 hours per month of courses in the program) can now withdraw up to $4,000 per 13-week period. (The previous limit was $2,500.)

The tax impact of the change can mean that a post-secondary student who lives at home during the summer, is able to find full-time employment at minimum wage during that time, and who withdraws the full $8,000 from his or her RESP, could cover about half the costs to be incurred for the upcoming school year out of income on which no federal tax is payable.

Assume that such a student is paid $15.00 per hour, working 35 hours a week for the 16 weeks between academic years. That work will generate $8,400 in income. The RESP withdrawal of $8,000 will bring the student’s total income for the year to $16,400. For federal tax purposes, every taxpayer can earn up to $13,521 (for 2023) in annual income before any federal tax is payable. The student can, as well, claim a federal tax credit for tuition amounts paid, which will eliminate federal tax on the remaining $2,879 of income.

Despite the best efforts of students and their parents to save for post-secondary education and to offset the costs of that education through summer jobs, the reality is that most post-secondary students do have to borrow money at some point during their post-secondary education years. The lowest-cost source of such borrowing is government student loan programs, and changes which take effect as of the 2023-24 academic year have also been made with respect to such borrowings.

All Canada Student Loan (CSL) borrowings are subject to a weekly limit and where a student borrows funds through the CSL program, no repayment of those borrowings is required until six months after the student graduates. As announced in this year’s federal budget, and effective as of August 1, 2023, the limit on borrowings through the Canada Student Loan program was increased from $210 to $300 per week of study. Finally, effective as of April 1, 2023, all loans received through the CSL program are interest free.

More information on the budgetary changes to the Canada Student Loan program and on changes to the rules governing Registered Education Savings Plans can be found on the federal government website at https://www.canada.ca/en/employment-social-development/corporate/notices/budget-student-aid.html and at https://www.budget.canada.ca/2023/report-rapport/tm-mf-en.html#a3.

The Old Age Security (OAS) program is the only aspect of Canada’s retirement income system which does not require a direct contribution from recipients of program benefits. Rather, the OAS program is funded through general tax revenues, and eligibility to receive OAS is based solely on Canadian residency. Anyone who is 65 years of age or older and has lived in Canada for at least 40 years after the age of 18 is eligible to receive the maximum benefit. For the third quarter of 2023 (July to September), that maximum monthly benefit for recipients under the age of 75 is $698.60, while benefit recipients aged 75 and older can receive up to $768.46 per month. The monthly benefit for all recipients will increase by 1.3% during the fourth quarter (October to December) of 2023.

The Old Age Security (OAS) program is the only aspect of Canada’s retirement income system which does not require a direct contribution from recipients of program benefits. Rather, the OAS program is funded through general tax revenues, and eligibility to receive OAS is based solely on Canadian residency. Anyone who is 65 years of age or older and has lived in Canada for at least 40 years after the age of 18 is eligible to receive the maximum benefit. For the third quarter of 2023 (July to September), that maximum monthly benefit for recipients under the age of 75 is $698.60, while benefit recipients aged 75 and older can receive up to $768.46 per month. The monthly benefit for all recipients will increase by 1.3% during the fourth quarter (October to December) of 2023. 

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

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

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

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

• Income in the first federal tax bracket is taxed at 15%, while income in the second bracket is taxed at 20.5%. For 2023, that second income tax bracket begins when taxable income reaches $53,359.
• The Canadian tax system provides (for 2023) a non-refundable tax credit of $8,396 for taxpayers who are age 65 or older at the end of the tax year. The amount of that credit is reduced once the taxpayer’s net income for the year exceeds $42,335.
• Individuals can receive a GST/HST refundable tax credit, which is paid quarterly. For 2023, the full credit is payable to individual taxpayers whose family net income is less than $42,335.
• Taxpayers who receive Old Age Security benefits and have income over a specified amount are required to repay a portion of those benefits, through a mechanism known as the “OAS recovery tax”, or clawback. Taxpayers whose income for 2023 is more than $86,912 will have a portion of their future OAS benefits “clawed back”.

What other sources of income are currently available?

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

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

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

Does the taxpayer have private retirement savings through an RRSP?

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

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

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

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

When the pandemic began in the spring of 2020, it wasn’t long before it became apparent that the increasing threat was to both public health and to the economy. In response to the economic threat, the federal government launched a wide range of support programs for both individuals and businesses. Some of those programs were structured as outright grants to replace income lost when workplaces and businesses shut down, while others were structured as loans, to be repaid when the pandemic ended and the economic fortunes of recipients had (hopefully) improved.

When the pandemic began in the spring of 2020, it wasn’t long before it became apparent that the increasing threat was to both public health and to the economy. In response to the economic threat, the federal government launched a wide range of support programs for both individuals and businesses. Some of those programs were structured as outright grants to replace income lost when workplaces and businesses shut down, while others were structured as loans, to be repaid when the pandemic ended and the economic fortunes of recipients had (hopefully) improved.

One of the largest support programs for businesses was the Canada Emergency Business Account (CEBA). Under the CEBA program, the federal government initially provided eligible businesses with a non-interest-bearing loan of up to $40,000. In December of 2020 the program was expanded and such eligible businesses were able to receive up to an additional $20,000, also structured as a non-interest-bearing loan. While the federal government was the source of the funding, all such loans were administered through Canadian financial institutions.

The popularity of the CEBA program can be measured in statistics issued by Statistics Canada. Almost 1 million (898,271) businesses were approved for initial CEBA loans, and nearly 600,000 (571,851) were approved for additional borrowing under the CEBA expansion. In total, $49.2 billion in CEBA loans were provided.

While the funds provided through the CEBA program were undoubtedly a lifeline for many businesses, that financing was always structured as an interest-free loan which would, ultimately, have to be repaid. That repayment deadline is December 31, 2023.  

While the Canada Revenue Agency has made it clear that the December 31 repayment deadline is not subject to negotiation, there is some relief to be provided to businesses which borrowed under the CEBA program. Those borrowers who repay their loans, at least in part, by December 31, 2023 can have some portion of those loan amounts forgiven.

The computation of the loan amount to be forgiven is somewhat complex and depends on the amount originally borrowed and the amount repaid by the December 31, 2023 deadline. The federal government provides the following information (and examples) on its website.

“All applicants that meet CEBA eligibility criteria will have the following terms of forgiveness:

If you borrowed $40,000 or less:
Repaying the outstanding balance of the loan (other than the amount available to be forgiven) on or before December 31, 2023 will result in loan forgiveness of 25 percent (up to $10,000).

• Example 1:
  Maximum Amount Borrowed: $40,000
  Amount Repaid By December 31, 2023: $30,000
  Available Forgiveness: $10,000

• Example 2:
  Maximum Amount Borrowed: $20,000
  Amount Repaid By December 31, 2023: $15,000
  Available Forgiveness: $5,000

• Example 3:
  Maximum Amount Borrowed: $40,000
  Amount Repaid By December 31, 2023: $25,000
  Available Forgiveness: $0

If you borrowed more than $40,000 and up to $60,000:
If you received a $40,000 loan and subsequently received the $20,000 expansion, the terms of your forgiveness have changed and are described here.

Repaying the outstanding balance of the loan (other than the amount available to be forgiven) on or before December 31, 2023 will result in a single tranche of loan forgiveness up to $20,000 based on a blended rate:

• 25 percent on the first $40,000; plus
• 50 percent on amounts above $40,000 and up to $60,000.

For clarity, the portion of forgiveness based on a rate of 25% and the portion of forgiveness based on a rate of 50% are combined into a single tranche of forgiveness, which is only available if all other amounts outstanding are repaid by December 31, 2023. For example, if $60,000 is borrowed, no forgiveness is available unless $40,000 is repaid.

• Example 4:
  Maximum Amount Borrowed: $60,000
  Amount Repaid By December 31, 2023: $40,000
  Available Forgiveness: $20,000 ($40,000 x 25% + $20,000 x 50%)

• Example 5:
  Maximum Amount Borrowed: $50,000
  Amount Repaid By December 31, 2023: $35,000
  Available Forgiveness: $15,000 ($40,000 x 25% + $10,000 x 50%)

• Example 6:
  Maximum Amount Borrowed: $60,000
  Amount Repaid By December 31, 2023: $35,000
  Available Forgiveness: $0

If you fully repaid your original $40,000 loan, claimed forgiveness, and thereafter received the $20,000 expansion:
Repaying the outstanding balance of the $20,000 expansion (other than the amount available to be forgiven) on or before December 31, 2023 will result in loan forgiveness of 50 percent (up to $10,000).

• Example 7:
  Maximum amount Borrowed: $20,000
  Amount Repaid By December 31, 2023: $10,000
  Available Forgiveness: $10,000

• Example 8:
  Maximum amount Borrowed: $20,000
  Amount Repaid By December 31, 2023: $8,000
  Available Forgiveness: $0”

Where a business benefits from loan forgiveness, any forgiven amount will be treated as income, which must be reported on the tax return filed by the business and on which tax must be paid.

Any loan amounts which are not repaid by December 31, 2023 and are not forgiven will be subject to interest starting January 1, 2024, at a rate of 5%. As well, if a loan remains outstanding after the end of 2023, only interest payments will be required until the full principal loan amount outstanding is due on December 31, 2025.

As the repayment deadline for CEBA loans approaches, a number of financial institutions have begun advertising refinancing products for businesses with outstanding CEBA loans, to enable such businesses to meet the December 31, 2023 repayment deadline (and so qualify for any available partial or complete CEBA loan forgiveness). The federal government notes on its website that it does not offer and is not affiliated with any such refinancing products for CEBA loans.

For an individual business which does not have the funds needed to repay CEBA loans by the end of 2023, the question of whether to pursue such refinancing isn’t a straightforward one, as there are a number of factors to consider. Ultimately, each business will have to consider, and evaluate, the loss of any possible loan forgiveness where a CEBA loan is not repaid by the end of 2023, the amount of interest (at a rate of 5%) which will be levied during 2024 and 2025 on outstanding CEBA loan amounts, the amount of tax which would be payable on any forgiven portion of a CEBA loan, and finally, the amount of interest costs which will be payable where CEBA loans are refinanced through a private lender in order for the business to meet the December 31, 2023 repayment deadline.

The federal government has posted detailed information on the repayment obligations of businesses under the CEBA program, and that information is available at https://ceba-cuec.ca/. In addition, businesses which have CEBA loans can obtain information specific to their circumstances from the CEBA Call Centre, which can be reached at 1-888-324-4201, Monday to Friday from 9 a.m. to 6 p.m. Eastern Time.

The Canadian tax system is a “self-assessing system” which relies heavily on the voluntary co-operation of taxpayers. Canadians are expected (in fact, in most cases, required) to complete and file a tax return each spring, reporting income from all sources, calculating the amount of tax owed, and remitting that amount to the federal government on or before April 30. And while it’s doubtful that anyone does so with any great degree of enthusiasm, each spring tens of millions of Canadians do sit down to complete that return (or, more often, they pay someone else to do it for them).

The Canadian tax system is a “self-assessing system” which relies heavily on the voluntary co-operation of taxpayers. Canadians are expected (in fact, in most cases, required) to complete and file a tax return each spring, reporting income from all sources, calculating the amount of tax owed, and remitting that amount to the federal government on or before April 30. And while it’s doubtful that anyone does so with any great degree of enthusiasm, each spring tens of millions of Canadians do sit down to complete that return (or, more often, they pay someone else to do it for them).

Whether they do it themselves or have the return prepared for them, the rate of compliance among Canadian taxpayers is very high – between February 6 and August 27, 2023, just under 31 million individual income tax returns were filed with the Canada Revenue Agency. Inevitably, however, there are those who do not meet their filing or payment obligations.

There are a lot of reasons why some Canadians don’t file their returns, or don’t file returns which are accurate and complete, or don’t pay their taxes on a timely basis. Sometimes, that failure to timely file is based on a lack of understanding of how our tax system works, or on incorrect information about that system. In other instances, taxpayers simply don’t have the funds needed to pay the amount of tax owing and decide (incorrectly) that if they can’t pay their tax bill, in whole or in part, the best course of action is to not file a return. Finally, each year there are some Canadians who file returns in which (inadvertently or purposefully) income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed.

While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate, isn’t high, there are a lot of such returns when measured by absolute numbers. And although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each and every instance of non-compliance simply aren’t available, especially since in many cases the amount recovered may be less than the costs which must be incurred to recover that amount.

With all of that in mind, several years ago the Canada Revenue Agency (CRA) instituted a program – the Voluntary Disclosure Program (VDP) – intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arises from the fact that, in most cases, while taxpayers who participate in the VDP program have to pay outstanding tax amounts owed, plus some interest, they can avoid some other interest charges, some penalties which would normally be imposed, and the risk of criminal prosecution.

To qualify for relief under the VDP, an application made with respect to non-compliance with income tax filing and payment obligations must:

• be voluntary (meaning that it is done before the CRA initiates any enforcement action related to the information to be disclosed);
• be complete;
• involve the application or potential application of a penalty;
• include information that is at least one year past due; and
• include payment of the estimated tax owing.

The VDP program includes two separate “tracks” for income tax disclosures – the Limited Program and the General Program – and the kind and extent of relief available depends on the track to which a particular application is assigned.

While the CRA will ultimately make the determination of whether an application should proceed under the Limited or the General Program on a case-by-case basis, there are guidelines in place. The CRA’s intention is to restrict the Limited Program to instances in which applications disclose non-compliance which appears to include intentional (as distinct from inadvertent) conduct on the part of the taxpayer or a degree of carelessness which amounts to gross negligence. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:

• the dollar amounts involved;
• the number of years of non-compliance;
• the sophistication of the taxpayer;
• how quickly the taxpayer acted to correct their non-compliance after becoming aware of it;
• whether there has been deliberate or wilful default or carelessness amounting to gross negligence on the part of the taxpayer; and
• whether the disclosure was made after the taxpayer became aware of the CRA’s intended specific focus on that particular area of taxpayer compliance.

Those whose applications are accepted under the Limited Program will be required to pay outstanding tax balances owed, plus interest, and will be subject to penalties. They will not, however, be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer.

Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief, specifically for the years preceding the three most recent years of non-compliance – that is, for the years preceding the three most recent years of returns required to be filed. For example, a taxpayer who makes an application to the VDP and who has failed to file returns for the 2016 through 2021 taxation years may be provided with interest relief with respect to taxes owed for the 2016, 2017, and 2018 taxation years. Such relief is generally equal to 50% of interest owed – in other words, the taxpayer will be required to pay only half of the interest charges which would otherwise be levied for those years. No interest relief will, however, be provided on tax amounts owed for the three most recent (2019, 2020, and 2021) taxation years. Since interest charges levied by the CRA are, by law, higher than current commercial rates (for instance, the rate levied for the third quarter of 2023 is 9%) and interest charged is compounded daily, having interest amounts forgiven, even in part, can make a significant difference to the overall tax bill faced by the taxpayer.

In order to benefit from the VDP, taxpayers must first make an application to the Program. That application must include payment of the estimated taxes owing, as a condition of participation in the VDP. Where a taxpayer is financially unable to make that tax payment, he or she can request that the CRA consider a payment arrangement.

The decision to apply to the VDP and to “come clean” about all previous tax transgressions is something that most taxpayers will likely consider with considerable trepidation. Those who are unsure about whether they want to move forward with a VDP application have the option of using the CRA’s “pre-disclosure discussion service”. As the name implies, that service allows taxpayers to participate in preliminary discussions with a CRA official, on an anonymous basis, to gain some knowledge about the VDP program, the process involved, and the potential relief available.

Taxpayers who decided to move forward with an application to the VDP can complete a Form RC199 Voluntary Disclosures Program Application, which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/rc199.html. Once the application is received, the CRA will check to make certain that the applicant is eligible to apply and that all of the required information and documentation and the payment have been sent. The next step is for the CRA to evaluate the application to ensure that the criteria for participation in the VDP are satisfied and, if so, to determine the program (Limited or General) to which the application should be assigned, and the taxation year(s) for which relief is being considered. At each step the taxpayer will be provided with written notice of the CRA’s decisions. The CRA’s advice is that taxpayers should contact them (for individual taxpayers, by calling the Individual Income Tax Enquiries line at 1-800-959-8281) if more than five weeks have passed since the application was submitted and no response has yet been received.

If the decision made is that the application is not eligible for the VDP, the taxpayer will also be advised in writing, with reasons, of the CRA’s decision to deny the application.

Where the decision made by the Agency is one with which the taxpayer does not agree, they are entitled to ask for a second review of the application. If that decision is also unfavourable, it is possible for a taxpayer to ask the Federal Court to review the decision and to direct the CRA to re-consider the VDP application. However, a taxpayer who wishes to pursue his or her application to the extent of filing such a Federal Court application is well advised to obtain legal advice before doing so.

Finally, taxpayers should recognize that the VDP Program can’t be used as a kind of “get out of jail free card” with respect to repeated failures to meet tax filing and payment obligations. The CRA website makes it clear that the Agency expects taxpayers who have benefitted from the VDP to thereafter meet their tax obligations, and a second review will be provided for the same taxpayer only in situations where the second application relates to a different matter than the first, and where the circumstances giving rise to the second application were beyond the taxpayer’s control.

Detailed information on the VDP program can be found on the CRA website at: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html.

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 #65 Corporate

Personal:

Issue #65 Personal

While the way in which post-secondary learning is delivered may have changed and changed again over the past three and a half years, as the pandemic waxed and waned and finally ended, the financial realities of post-secondary education have not. Regardless of how post-secondary learning is structured and delivered, it is expensive. There will be tuition bills, of course, but also the need to find housing and pay rent in what is, in most college or university locations, a very tight and very expensive rental market. Those who choose to live in residence and are able to secure a place will also face bills for accommodation and, usually, a meal plan.

While the way in which post-secondary learning is delivered may have changed and changed again over the past three and a half years, as the pandemic waxed and waned and finally ended, the financial realities of post-secondary education have not. Regardless of how post-secondary learning is structured and delivered, it is expensive. There will be tuition bills, of course, but also the need to find housing and pay rent in what is, in most college or university locations, a very tight and very expensive rental market. Those who choose to live in residence and are able to secure a place will also face bills for accommodation and, usually, a meal plan.

Fortunately for students (and their parents), there are tax credits and benefits which can be claimed to offset such costs: the credits and benefits which can be claimed by post-secondary students (or their spouses, parents, or grandparents) in relation to the 2023-24 academic year are summarized below.

Tuition fees

A federal tax credit continues to be available for the single largest cost associated with post-secondary education – the cost of tuition. Any student who incurs more than $100 in tuition costs at an eligible post-secondary institution (which would include most Canadian universities and colleges) can still claim a non-refundable federal tax credit of 15% of such tuition costs. Many of the provinces and territories (excepting Alberta, Ontario, and Saskatchewan) also provide students with an equivalent provincial or territorial credit, with the rate of such credit differing by jurisdiction.

The charges imposed on post-secondary students under the heading of “tuition” include a myriad of costs which may differ, depending on the particular program or institution, and not all of those costs will qualify as “tuition” for purposes of the tuition tax credit. The following specific amounts do, however, constitute eligible tuition fees for purposes of the tuition tax credit:

• Admission fees;
• Charges for use of library or laboratory facilities;
• Exemption fees;
• Examination fees (including re-reading charges) that are integral to a program of    study;
• Application fees (but only if the student subsequently enrolls in the institution);
• Confirmation fees;
• Charges for a certificate, diploma, or degree;
• Membership or seminar fees that are specifically related to an academic program and its administration;
• Mandatory computer service fees; and
• Academic fees.

The following charges, however, do not constitute tuition fees for purposes of the credit:

• Extracurricular student social activities;
• Medical expenses;
• Transportation and parking;
• Board and lodging;
• Goods of enduring value that are to be retained by students (such as a microscope, uniform, gown, or computer);
• Initiation fees or entrance fees to professional organizations including examination fees or other fees (such as evaluation fees) that are not integral to a program of study at an eligible educational institution;
• Administrative penalties incurred when a student withdraws from a program or an institution;
• The cost of books (other than books, compact disks, or similar material included in the cost of a correspondence course when the student is enrolled in such a course given by an eligible educational institution in Canada);
• Courses taken for purposes of academic upgrading to allow entry into a university or college program. These courses would usually not qualify for the tuition tax credit as they are not considered to be at the post-secondary school level.

Certain ancillary fees and charges, such as health services fees and athletic fees, may also be eligible tuition fees. However, such fees and charges are limited to $250 unless the fees are required to be paid by all full-time students or by all part-time students.

At both the federal and provincial levels, the credit acts to reduce tax otherwise payable. Where, as is often the case, a student doesn’t have tax payable for the year because his or her income isn’t high enough, credits earned can be carried forward and claimed by the student in any future tax year or transferred (within limits) in the current year to be claimed by a spouse, parent, or grandparent.

Rent, food, and other personal and living expenses

Unfortunately, although housing and food costs will take up a big portion of each student’s budget, there is not (and never has been) a tax deduction or credit which is claimable for such costs. In all cases, living costs incurred by a post-secondary student (whether on campus or off) are characterized as personal and living expenses, for which no tax deduction or credit is allowed.

Student debt

Most post-secondary students in Canada must incur some amount of debt in order to complete their education, and repayment of that debt is typically not required until after graduation. Once repayment starts, a 15% federal tax credit can be claimed for the amount of interest being paid on such debt, in some circumstances.

Students who are still in school and arranging for loans to finance their education should be mindful of the rules which govern that student loan interest tax credit, since decisions made while still in school with respect to how post-secondary education will be financed can have tax repercussions down the road, after graduation. That’s because while interest paid on a qualifying student loan is eligible for the credit, only some types of student borrowing will qualify for that credit. Specifically, only interest paid on government-sponsored (federal or provincial) student loans will be eligible for the credit. Interest paid on loans of any kind from any financial institution will not.

It’s not uncommon (especially for students in professional programs, like law or medicine) to be offered lines of credit by a financial institution, often at advantageous or preferential interest rates. As well, financial institutions sometimes offer, once a student has graduated and begun to repay a government-sponsored student loan, to consolidate that student loan with other kinds of debt, also at advantageous interest rates. However, it should be kept in mind that interest paid on that line of credit (or any other kind of borrowing from a financial institution to finance education costs) will never be eligible for the student loan interest tax credit.

As explained in the Canada Revenue Agency publication on the subject: “ [I]f you renegotiated your student loan with a bank or another financial institution, or included it in an arrangement to consolidate your loans, you cannot claim this interest amount”. In other words, where a government student loan is combined with other debt and consolidated into a borrowing of any kind from a financial institution, the interest on that government student loan is no longer eligible for the student loan interest tax credit.

Students who are contemplating borrowing from a financial institution rather than getting a government student loan (or considering a consolidation loan which incorporates that student loan amount) must remember, in evaluating the benefit of any preferential interest rate offered by a financial institution, to take into account the loss of the student loan interest tax credit on that borrowing in future years.

Other credits and deductions

While the available student-specific deductions and credits are more limited than they were in previous taxation years, there are nonetheless a number of credits and deductions which, while not specifically education-related, are frequently claimed by post-secondary student (for instance, deductions for moving costs). The Canada Revenue Agency publishes a very useful guide which summarizes most of the rules around income and deductions which may apply to post-secondary students. The current version of that guide, entitled Students and Income Tax, is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p105.html. That guide was last revised in January of 2023 and the references in it are to the 2022 taxation year. It is, however, safe to assume that the same rules will apply for 2023.

The scarcity of affordable housing in just about every Canadian community can’t be news to anyone anymore. Whether it’s in relation to rental housing or the purchase of a first home, the opportunity to secure affordable, long-term housing has become more and more elusive, especially for younger Canadians.

The scarcity of affordable housing in just about every Canadian community can’t be news to anyone anymore. Whether it’s in relation to rental housing or the purchase of a first home, the opportunity to secure affordable, long-term housing has become more and more elusive, especially for younger Canadians.

In early 2022, as part of its 2022-23 budget, the federal government announced the creation of a new tax measure intended to assist Canadians in their efforts to purchase a first home. And while that new program – the First Home Savings Account (FHSA) – isn’t a solution for all of the difficulties faced by those seeking to purchase that first home, it can provide some significant financial assistance in that effort. As the name implies, the FHSA allows first time home buyers (starting in 2023) to save on a tax-assisted basis (within prescribed limits) toward such a purchase.

Contributing to an FHSA

Under the program terms, any resident of Canada who is at least 18 years of age (but under the age of 71 at the end of the current year) and who has not lived in a home which he or she owns in any of the current or four previous calendar years can open an FHSA and contribute to that plan annually. Planholders can contribute up to $8,000 per year to their plan, regardless of their income. The $8,000 per year contribution must be made by the end of the calendar year, but planholders will be permitted to carry forward unused portions of their annual contribution limit, to a maximum of $8,000. For example, an individual who contributes $6,000 to an FHSA in 2023 would be allowed to contribute $10,000 in 2024 (representing $8,000 in contributions for 2024 plus $2,000 in remaining contributions from 2023). Regardless of the schedule on which contributions are made, there is a lifetime limit of $40,000 in contributions for each individual.

The real benefit of the FHSA program lies in the tax treatment of contributions and income earned by those contributions. Individuals who contribute any amount in a year can deduct that amount from income, in the same manner as a registered retirement savings plan (RRSP) contribution. And while funds are held within the FHSA, they can be held in cash, or can be invested in a broad range of investment vehicles. Specifically, such funds can be invested in mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates (GICs). Regardless of the investment vehicle chosen, interest, dividends, or any other type of investment income earned by those funds grows on a tax-free basis – that is, such investment income is not taxed as it is earned. 

Most significantly, when the planholder withdraws funds from the FHSA to purchase a first home, those withdrawal amounts – representing both original contributions and investment income earned by those contributions – are not taxed.

In sum, contributions made to an FHSA are deductible from income, investment income earned on those funds is not taxed as it is earned, and, where either original contributions made or investment income earned is withdrawn from an FHSA to purchase a first home, no tax is payable on such withdrawn amounts. For the taxpayer, it’s a win-win-win.

Withdrawing funds from an FHSA

Given the generous tax treatment accorded contributions to an FHSA, there are inevitably some qualifications and restrictions placed on the use of the plans. First, amounts withdrawn from an FHSA can be received tax-free only if such withdrawals are “qualifying withdrawals”, meaning that the funds are used to make a qualifying home purchase. In order for a withdrawal to be a “qualifying withdrawal”, the planholder must have a written agreement to buy or build a home located in Canada. That home must be acquired, or construction of the home must be completed, before October 1 of the next year. In addition, the planholder must intend to occupy that home within a year after buying or building it.

Amounts withdrawn from an FHSA and used for any other purpose are not qualifying withdrawals and the funds withdrawn are fully taxable in the year the withdrawal is made.

While Canadians who open an FHSA and make contributions to it are certainly hoping to be able to purchase a home, there are any number of reasons why their plans could change. Fortunately, the rules governing FHSAs provide planholders with a great deal of flexibility when it comes to the disposition of funds saved within an FHSA, in that  planholders can transfer all funds held within their FHSA to an RRSP or to a registered retirement income fund (RRIF) on a tax-free basis. Significantly, the amount which is transferred from an FHSA to an RRSP would not reduce or be limited by the individual’s RRSP contribution room. However, transfers made to an RRSP in these circumstances do not replenish FHSA contribution room – in other words, each eligible individual gets only one opportunity to save for the purchase of a first home using an FHSA. And, of course, any amounts transferred from an FHSA to an RRSP or RRIF will be taxable on withdrawal from those plans, in the same way as any other RRSP or RRIF withdrawal.

The ability to transfer funds between plans can also work in the other direction. Individuals who have managed to accumulate funds within an RRSP will be allowed to transfer such funds to an FHSA (subject to the $8,000 annual and $40,000 lifetime contribution limits). While no deduction is permitted for funds transferred from an RRSP to an FHSA, that transfer does take place on a tax-free basis. Transfers made to an RRSP in these circumstances do not, however, replenish RRSP contribution room.

Older taxpayers who open an FHSA should be aware that it is not possible to transfer funds from an RRIF to an FHSA.

Closing an FHSA

Individuals who open an FHSA have 15 years from the date the plan is opened to use the funds for a qualifying home purchase. (Taxpayers must also close their FHSA by the end of the year in which they turn 71.)  While these rules do place some pressure on planholders with respect to the timing of their home purchase, there is some flexibility. Specifically, planholders who have not made a qualifying home purchase within the required 15-year time frame (or by the end of the year in which they turn 71) must then close the FHSA plan, but can still transfer funds held in the FHSA to their RRSP or RRIF, on a tax-free basis.

The FHSA is a significant new tax planning tool, and Canadians who are in a position to take advantage of its terms should certainly consider doing so. The federal government has posted information on the FHSA program on its website, and that information is available at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html.

By mid to late summer, almost every Canadian has filed his or her income tax return for the previous year and has received the Notice of Assessment issued by the Canada Revenue Agency (CRA) with respect to that tax filing. Most taxpayers, therefore, would consider that their annual filing and payment obligations are done and behind them for another year.

By mid to late summer, almost every Canadian has filed his or her income tax return for the previous year and has received the Notice of Assessment issued by the Canada Revenue Agency (CRA) with respect to that tax filing. Most taxpayers, therefore, would consider that their annual filing and payment obligations are done and behind them for another year.

It can, therefore, be a little surprising to receive a communication from the CRA at this time of year, and more than a little unsettling to find out that the Agency has some further questions about the tax return that the taxpayer thought was already completed. Notwithstanding, that’s an experience that millions of taxpayers will have over the next few weeks and months.

Between February 6and July 23 of this year, the CRA received and processed almost 31 million individual income tax returns filed for the 2022 tax year and issued a Notice of Assessment in respect of each one of those returns. The sheer volume of returns and the processing turnaround timelines mean that the CRA does not (and could not possibly) do a manual review of the information provided in a return prior to issuing the Notice of Assessment. Rather, all returns are scanned by the Agency’s computer system and a Notice of Assessment is then issued.

In addition, the CRA has, for many years, been encouraging taxpayers to fulfill their filing obligations online, through one of the Agency’s electronic filing services. This year, just over 28 million (or 92.6%) of individual returns for 2022 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 nearly 93% 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 conduct a wide range of review programs, some of them carried out before a Notice of Assessment is issued for the taxpayer’s return, and others after that Notice of Assessment has been issued and sent to the taxpayer. Regardless of the timing, in all cases the purpose of the review is to obtain from the taxpayer the information or documentation needed to support claims for deductions or credits made by the taxpayer on the return. The CRA also administers a Matching Program, in which information reported on the taxpayer’s return (both income and deductions) is compared to 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, or a telephone call, from the CRA. Receiving such correspondence or such a call from the tax authorities is almost guaranteed to unsettle the recipient taxpayer, who may immediately conclude that he or she has done something very wrong and is facing a big tax bill. However, in the vast majority of cases, the contact is just a routine part of the Agency’s processing review mandate.

Where the initial contact from the CRA to the taxpayer is done by telephone, it’s important that the taxpayer verify the identity of the person claiming to be a representative of the Agency. As virtually everyone knows by now, fraudulent or “scam” calls purporting to be from the CRA have become commonplace. To assist taxpayers in confirming that any telephone contact received is a legitimate one, the CRA has provided information on how to respond to such a call, and that information can be found on the CRA website at https://www.canada.ca/en/revenue-agency/corporate/security/protect-yourself-against-fraud/expect-cra-contacts.html

A taxpayer whose return is selected as part of a processing review program will be asked to provide verification or proof of deductions or credits claimed on the return – usually by way of receipts or similar documentation. Or, where figures which appear on an information slip – for instance, the amount of employment income earned – don’t match up with the amount of employment income reported by the taxpayer, he or she will be contacted to provide an explanation of the discrepancy.

Of course, most taxpayers are not concerned so much with the kind of program or programs under which they are contacted as they are with why their return was singled out for review or follow-up. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is the start of a tax audit process, but that’s not necessarily the case. Returns are selected by the CRA for pre- or post-assessment review for a number of reasons. Canada’s tax laws are complex and, over the years, there are areas in which the CRA has determined that taxpayers are more likely to make errors on their return. Consequently, a return which includes claims in those areas (like dependant tax credit claims, claims for medical expenses, moving expenses, or tuition tax credits) 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 the processing review programs simply on the basis of random selection.  

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

Taxpayers who have registered for the CRA’s online tax program My Account (or whose representative is similarly registered for the Agency’s Represent a Client online service) can usually submit required documentation electronically. More information on how to do so can be found on the CRA website at Submitting documents online – Pre-assessment Review, Processing Review and Request Verification Programs - Canada.ca.

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. The CRA website also includes more detailed information on the return review process, which is available at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/review-your-tax-return-cra.html.

Between 2009 and early 2022, Canadians lived (and borrowed) in an ultra-low interest rate environment. Between January 2009 and March 2022, the bank rate (from which commercial interest rates are determined) was (except, briefly, in the fall of 2018) never higher than 1.50% – and was almost always lower than that. Effectively, adult Canadians who are now under the age of 35 have had no experience of managing their finances in high – or even, by historical standards, ordinary – interest rate environments.

Between 2009 and early 2022, Canadians lived (and borrowed) in an ultra-low interest rate environment. Between January 2009 and March 2022, the bank rate (from which commercial interest rates are determined) was (except, briefly, in the fall of 2018) never higher than 1.50% – and was almost always lower than that. Effectively, adult Canadians who are now under the age of 35 have had no experience of managing their finances in high – or even, by historical standards, ordinary – interest rate environments.

That prolonged period of low interest rates (which coincided, not surprisingly, with an explosion in the amount of debt taken on by Canadians) came to an abrupt halt in the spring of 2022. The Bank of Canada increased interest rates in March of 2022, and followed that up with nine further interest rate increases between March 2022 and July 2023. As a result of those increases the bank rate has, over that 16-month period, gone from .25% to 5.00% – a twenty-fold increase – and commercial interest rates on all credit products have increased commensurately.

Unfortunately, it isn’t likely that Canadians can anticipate any interest rate relief in the short-term. The Bank of Canada has made it clear in its public announcements that it is committed to reducing the rate of inflation to the Bank’s 2% core inflation rate target, and that one of its major tools to effect that reduction is increases in interest rates. In its latest press release on the subject issued on July 12, 2023, the Bank’s projection was that “inflation is forecast to hover around 3% for the next year before gradually declining to 2% in the middle of 2025.”

The impact of the recent rapid increase in interest rates on average Canadians can’t really be overstated. A common measure of individual indebtedness is the ratio of debt to disposable income – in other words, the percentage represented by the amount of debt relative to the debtor’s annual income. In the first quarter of 2023, the ratio of debt to disposable income for an average Canadian family stood at p-184.5%. In other words, on average, the debt load carried by Canadians is now just under twice their annual disposable income.

Of course, what matters most to individuals is not necessarily the size of the debt they are carrying, but the cost of servicing that debt – the amount of the monthly credit card, line of credit, or mortgage payments – all of which will, of course, increase as interest rates go up. For several years, financial advisors and government and banking officials have been sounding warnings that the debt loads which Canadians were carrying were likely sustainable only at the extremely low interest rates then in effect. Their concern was that when, inevitably, those rates returned to historically “normal” levels the burden of repaying, or even servicing, those debts would be unsustainable. And that time has come.

Given that those are the unavoidable current and future realities, it’s necessary to consider what strategies are available to Canadians who are carrying substantial amounts of debt on how to manage the upcoming months and possibly years of increased interest charges.

In considering available strategies, it’s important to draw a distinction between secured and unsecured debt. Put simply, the former is debt which is secured by the value of an underlying asset and, if the debtor fails to make payments on the debt, the lender is entitled to seize that underlying asset and sell it to satisfy any outstanding debt amount owed. The types of secured debt most familiar to Canadians are, of course, a mortgage or a car loan. Unsecured debt, on the other hand, is provided solely on the strength of the borrower’s promise to repay, and credit cards are most common example of unsecured debt owed by Canadians.

While any type of debt can cause problems for borrowers, when interest rates go up it’s usually those who are carrying unsecured debt who are the first to feel the pinch. Not only is the rate of interest payable on unsecured debt higher than that imposed on secured debt, the interest rate on such unsecured debt is usually a “variable” rate, meaning that it will go up with every increase in the bank rate. And, of course, debtors whose debt is secured by an underlying asset and who find that carrying that debt is no longer manageable always have the option of selling that asset and using the proceeds to retire the outstanding balance of the loan – an option that isn’t available when it comes to unsecured debt.

For those who are carrying outstanding debt, the obvious advice is to get the debt paid down as quickly as possible. That is, however, easier said than done, especially when the interest component of the debt is increasing.

Even where repayment of the debt over the short-term isn’t a realistic expectation, such individuals do, however, have some options, as outlined below.

Liquidating assets

Because interest rates have been so low in recent years, it’s become relatively common to carry debt even when the debtor has sufficient assets to pay off that debt. In many cases, individuals have borrowed money for the purpose of investing it, on the assumption that the interest payable would be less than the investment gains earned. That may no longer be a valid assumption. Where someone who is carrying unsecured debt has an asset or assets that can be sold, it makes sense to first consider whether it makes sense to use the proceeds from the sale of such assets to clear the debt.

Paying off debt from savings

While tapping into retirement savings should be a last resort, individuals carrying unsecured debt could consider using funds held in a tax-free savings account or just in a savings account to pay off or pay down the debt, and thereby reduce or eliminate carrying charges on that debt.

Reducing the interest rate payable

Where there are not sufficient assets available to eliminate unsecured debt, the next step would be to consider trying to lower the rate of interest being charged on that debt. Much unsecured debt owed by Canadians is in the form of credit card debt, which carries some of the highest interest rates around. Often debt carried on credit cards can be consolidated into a single bank loan or line of credit at a lower rate of interest.

Fixing the interest rate payable

If a lower interest rate can’t be obtained, then debtors would be well advised to at least try and prevent future rate increases by fixing the interest rate currently in place. While no one can claim to be able to predict future interest rates with certainty, the Bank of Canada has clearly signaled that interest rates are likely to continue rising. If the debt is in good standing – that is, payments have been made on time and in at least the minimum amount required – it may be possible to transfer the amount owed, either to another credit card with a fixed rate of interest, or to a personal loan with both a fixed rate of interest and a fixed repayment schedule.

Looking for an interest rate holiday

It’s not uncommon for credit card companies, in order to get new customers, to offer an “interest holiday”. Essentially, the offer is that if a debtor transfers an outstanding balance from another card to a new card issued by the soliciting company (or even to a card already held by the debtor), that debt will be interest-free or at a very low rate of interest for a fixed period – usually about six to nine months.

There is a cost associated with such offers – usually around 1% to 3% of the amount transferred. And, of course, such a course of action offers no more than a temporary reprieve from high interest rate charges, but it can be enough to provide the debtor with a little breathing room while more long term or permanent solutions are sought.

Those who are already in financial difficulty in relation to their outstanding debts – unable to make the minimum monthly required payment, or missing payments – require a different approach. Such individuals can obtain debt/credit counselling through any number of non-profit agencies, who can work with them, and with their creditor(s), to create a manageable repayment schedule. More information on the credit counselling process, and a listing of such non-profit agencies can be found at http://creditcounsellingcanada.ca/.

The age at which Canadians retire and begin deriving income from government and private pensions and private retirement savings has become something of a moving target. At one time, reaching one’s 65^th birthday marked the transition from working life to full retirement, and, usually, receipt of a monthly employee pension, along with government-sponsored retirement benefits. That is no longer the unvarying reality. The age at which Canadians retire can now span a decade or more, and retirement is more likely to be a gradual transition than a single event.

The age at which Canadians retire and begin deriving income from government and private pensions and private retirement savings has become something of a moving target. At one time, reaching one’s 65^th birthday marked the transition from working life to full retirement, and, usually, receipt of a monthly employee pension, along with government-sponsored retirement benefits. That is no longer the unvarying reality. The age at which Canadians retire can now span a decade or more, and retirement is more likely to be a gradual transition than a single event.

Today, Canadians can choose to begin receiving benefits from government-sponsored retirement benefit programs between the ages of 60 and 70. Canada Pension Plan retirement benefits can begin as early as age 60, and taxpayers can start collecting Old Age Security benefits at age 65. Receipt of income from either of those government sponsored retirement income plans can also be deferred until the age of 70.

There is, however, one retirement income “deadline” which is not flexible and must be adhered to by every Canadian who has saved for retirement through a registered retirement savings plan (RRSP). All holders of such plans are required to close out their RRSP by the end of the calendar year in which they turn 71 years of age – no exceptions and no extensions. The decision which must be made on how to do so is a very big one, as the course of action chosen will affect the individual’s income for the remainder of his or her life.

While the actual decision is a complex one, the options available to a taxpayer who must collapse an RRSP are actually quite few in number – three, to be precise. They are as follows:

• collapse the RRSP and include all of the proceeds in income for that year;
• collapse the RRSP and transfer all proceeds to a registered retirement income fund (RRIF); and/or
• collapse the RRSP and purchase an annuity with the proceeds.

It’s not hard to see that the first option doesn’t have much to recommend it. Collapsing an RRSP without transferring the balance to an RRIF or purchasing an annuity means that every dollar in the RRSP will be treated as taxable income for that year. In some cases, where a substantial six-figure amount has been saved in the RRSP, that can mean losing nearly half of the RRSP proceeds to income tax. And, while any balance of proceeds left can then be invested, tax will be payable on all investment income earned.

As a practical matter, then, the choices come down to two: an RRIF or an annuity. And, as is the case with most tax and financial planning decisions, the best choice will be driven by one’s personal financial and family circumstances, risk tolerance, cost of living, and the availability of other sources of income to meet such living costs.

The annuity route has the great advantages of simplicity and reliability. In exchange for a lump sum amount paid by the taxpayer, the issuer of that annuity agrees to pay the taxpayer a specific sum of money, usually once a month, for the remainder of his or her life. Annuities can also provide a guarantee period, in which the annuity payments continue for a specified time period (five years, 10 years), even if the taxpayer dies during that time. The amount of monthly income which can be received depends, of course, on the amount paid in, but also on the gender and, especially, the age of the taxpayer.

The other factor influencing the amount of income which can be received from an annuity is current interest rates. For many years, interest rates have been so low that an annuity purchase had very little to recommend it. Over the past 14 months, however, the Bank of Canada has raised interest rates several times, and annuity payment rates have risen as a result. Currently, annuity rates for each $100,000 paid to the annuity issuer by a taxpayer who is 70 years of age range from $636 to $672 per month for a male taxpayer and from $588 to $621 for a female taxpayer (the actual rate is set by the company which issues the annuity). Those rates do not include any guarantee period.

For taxpayers whose primary objective is to obtain a guaranteed life-long income stream without the responsibility of making any investment decisions or the need to take any investment risk, an annuity can be an attractive option. There are, however, some potential downsides to be considered. First, an annuity can never be reversed. Once the taxpayer has signed the annuity contract and transferred the funds, he or she is locked into that annuity arrangement for the remainder of his or her life, regardless of any change in circumstances that might mean an annuity is no longer suitable. Second, unless the annuity contract includes a guarantee period, there is no way of knowing how many payments the taxpayer will receive. If he or she dies within a short period of time after the annuity is put in place, there is no refund of amounts invested – once the initial transfer is made at the time the annuity is purchased, all funds transferred belong to the annuity company. Third, most annuity payment schedules do not keep up with inflation – while it is possible to obtain an annuity in which payments are indexed, having that feature will mean a substantially lower monthly payout amount. Finally, where the amount paid to obtain the annuity represents most or all of the taxpayer’s assets, entering into the annuity arrangement means that the taxpayer will not be leaving an estate for his or heirs.

The second option open to taxpayers is to collapse the RRSP and transfer the entire balance to a registered retirement income fund, or RRIF. An RRIF operates in much the same way as an RRSP, with two major differences. First, it’s not possible to contribute funds to an RRIF. Second, the taxpayer is required to withdraw an amount from his or her RRIF (and to pay tax on that amount) each year. That minimum withdrawal amount is a percentage of the outstanding balance, with that percentage figure determined by the taxpayer’s age at the beginning of the year. While the taxpayer can always withdraw more in a year (and pay tax on that withdrawal), he or she cannot withdraw less than the minimum required withdrawal for his or her age group.

Where a taxpayer holds savings in an RRIF, he or she can invest those funds in the same investment vehicles as were used while the funds were held in an RRSP. And, as with an RRSP, investment income earned by funds held inside an RRIF are not taxed as they are earned. While the ability to continue holding investments that can grow on a tax-sheltered basis provides the taxpayer with a lot of flexibility, that flexibility has a price in the form of investment risk. As is the case with all investments, the investments held within an RRIF can increase in value – or decrease – and the taxpayer carries the entire investment risk. When things go the way every investor wants them to, investment income is earned while the taxpayer’s underlying capital is maintained, but that result is never guaranteed.

On the death of an RRIF annuitant, any funds remaining in the RRIF can pass to the annuitant’s spouse on a tax-free basis. Where there is no spouse, the remaining funds in the RRIF will be income to the RRIF annuitant in the year of death, and any balance will become part of his or her estate.

While the above discussion of RRIFs versus annuities focuses on the benefits and downsides of each, it’s not necessary, and in most cases not advisable, to limit the options to an either/or choice. It is possible to achieve, to a degree, the seemingly irreconcilable goals of lifetime income security and capital (and estate) growth. Combining the two alternatives – annuity and RRIF – either now or in the future can go a long way toward satisfying both objectives.

For everyone, in retirement or not, spending is a combination of non-discretionary and discretionary items. The first category is made up mostly of expenditures for income tax, housing (whether rent or the cost of maintaining a house), food, insurance costs, and (especially for older Canadians) the cost of out-of-pocket medical expenses. The second category of discretionary expenses includes entertainment, travel, and the cost of any hobbies or interests pursued. A strategy which utilizes a portion of RRSP savings to create a secure lifelong income stream to cover non-discretionary costs can remove the worry of outliving one’s money, while the balance of savings can be invested for growth and to provide the income for discretionary spending.

Such a secure income stream can, of course, be created by purchasing an annuity. As well, although most taxpayers don’t think of them in that way, the Canada Pension Plan and Old Age Security have many of the attributes of an annuity, with the added benefit that both are indexed to inflation. By age 71, all taxpayers who are eligible for CPP and OAS will have begun receiving those monthly benefits. Consequently, in making the RRIF/annuity decision at that age, taxpayers should include in their calculations the extent to which CPP and OAS benefits will pay for their non-discretionary living costs.

As of July 2023, the maximum OAS benefit for most Canadians (specifically, those who have lived in Canada for 40 years after the age of 18) is about $699 per month. The amount of CPP benefits receivable by the taxpayer will vary, depending on his or her work history, but the maximum current benefit which can be received at age 65 is about $1,306. As a result, a single taxpayer who receives the maximum CPP and OAS benefits at age 65 will have just over $24,000 in annual income (about $2005 per month). And, for a married couple, of course, the total annual income received from CPP and OAS can be about $48,000 annually, or $4,010 per month. While $24,000 a year isn’t usually enough to provide a comfortable retirement, for those who go into retirement in good financial shape – meaning, generally, without any debt – it can go a long way toward meeting non-discretionary living costs. In other words, most Canadians who are facing the annuity versus RRIF decision already have a source of income which is effectively guaranteed for their lifetime and which is indexed to inflation. Taxpayers who are considering the purchase of an annuity to create the income stream required to cover non-discretionary expenses should first determine how much of those expenses can already be met by the combination of their (and their spouse’s) CPP and OAS benefits. The amount of any annuity purchase can then be set to cover off any shortfall.

While the options available to a taxpayer at age 71 with respect to the structuring of future retirement income are relatively straightforward, the number of factors to be considered in assessing those factors and making that decision are not. All of that makes for a situation in which consulting with an independent financial advisor on the right mix of choices and investments isn’t just a good idea, it’s a necessary one.

By the time summer arrives, nearly all Canadians have filed their income tax returns for the previous year, have received a Notice of Assessment from the tax authorities with respect to that return and have either spent their tax refund or, more grudgingly, paid any balance of tax owing.

By the time summer arrives, nearly all Canadians have filed their income tax returns for the previous year, have received a Notice of Assessment from the tax authorities with respect to that return and have either spent their tax refund or, more grudgingly, paid any balance of tax owing.

It’s a surprise, therefore, when unexpected mail arrives from the Canada Revenue Agency (usually in mid- to late July), and the information in that mail will likely be both unfamiliar and unwelcome. Specifically, the enclosed Instalment Reminder form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15 of 2023 – 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 income tax for 2023 to the CRA during the year (instead of when he or she files the return for 2023 in April 2024) 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 that the instalment payment system is unfamiliar to most Canadians is that most of us pay income taxes during our working lives through a different system. Every Canadian employee has tax automatically deducted from his or her paycheque (“at source”), before that paycheque is issued, and that tax is remitted by the employer to the CRA on the employee’s behalf. Such deductions and remittances accrue to the employee’s benefit, and they are credited with those remittances when filing the annual tax return for that year. It’s an efficient system, but it’s also one which is largely invisible to the employee, and certainly one which operates without the need for the employee to take any steps on his or her own.

Where an individual is no longer an employee – for instance, he or she starts a business and becomes self-employed, or retires and begins to receive retirement income from various government and non-government sources – such deductions and remittances are no longer automatically made. However, 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 Québec residents) in the current (2023) year and either of the two previous (2021 and 2022) years, that taxpayer may be subject to the requirement to pay income tax by instalments.

The reason that first Instalment Reminders are issued in August has to do with the schedule on which Canadians file their tax returns. The amount of tax payable on filing for the immediately preceding year can’t be known until the tax return for that year has been filed and assessed, and the tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer should receive a first Instalment Reminder for the current year

Taxpayers who receive that first Instalment Reminder in July 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 2024. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2023, 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 2022 tax year (including any balance that was owed on filing). If a taxpayer’s income has not changed between 2022 and 2023 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2023 will be slightly less than it was in 2022, 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 2023 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2022 to 2023 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 Canada Revenue Agency 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 return for 2023 is filed next spring.

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

At a time when Canadian households are coping simultaneously with ongoing inflation, especially food inflation, as well as interest rates which are at their highest point in decades, every dollar of income counts. And where that income can be obtained with minimal effort, and received tax-free, then it’s a win-win for the recipient.

At a time when Canadian households are coping simultaneously with ongoing inflation, especially food inflation, as well as interest rates which are at their highest point in decades, every dollar of income counts. And where that income can be obtained with minimal effort, and received tax-free, then it’s a win-win for the recipient.

Those attributes describe the basic child and family benefits paid by the federal government to eligible Canadians every month of the year. However, a substantial number of eligible recipients don’t receive benefits to which they are entitled simply because they haven’t claimed them, leaving potentially hundreds or thousands of dollars in tax-free income “on the table” each year. As well, many Canadians who do receive such benefits but who then fail to claim them annually can see their benefit payments stop, even though they remain eligible to receive those benefits.

While there are quite a number of such benefits, the process of “claiming” each of them is the same – simply filing a tax return each year. Eligibility for some (but not all) of the obtainable benefits and/or the amount of benefit obtainable is based, in part, on the income of the recipient. When each Canadian files a tax return, the Canada Revenue Agency determines, based on the information provided in the return, which benefits the taxpayer is entitled to and in what amounts. Where the amount of a taxpayer’s income is relevant to the determination of eligibility, the income figure used is that from the previous year. In other words, a taxpayer’s eligibility for benefits during the 2023-24 benefit year is based on his or her income for 2022. And that information was provided to the Canada Revenue Agency on the tax returns for 2022 which were filed by taxpayers earlier this year.

Once the CRA receives the needed income information (usually by April 30, 2023) and the Agency determines a taxpayer’s benefit eligibility, those benefits are paid to eligible recipients throughout the 2023-24 benefit year, which starts on July 1, 2023 and ends on June 30, 2024.

It should be noted, as well, that while the federal government refers to these benefits under the umbrella term “child and family benefits”, it’s wrong to conclude that benefits are only available to parents and/or married individuals. Of the five benefit programs outlined below which will be in place during the upcoming benefit year, only the Canada Child Benefit program requires that a taxpayer be a parent, and none of the benefit programs require that a taxpayer be married or in a common-law relationship.

GST/HST Credit

The GST/HST credit is a non-taxable amount paid four times a year (on the 5^th of July, October, January, and April) to low- and middle-income individuals and families, to help offset the goods and services tax/harmonized sales tax (GST/HST) that they pay. Generally, the credit is available to Canadian residents who meet any one of the following criteria:

• aged 19 yearsof age or older;
• have or had a spouse or common law partner; or
• are or were a parent and live (or lived) with their child.

The amount of benefit which may be received is determined by both family size and income level. For the upcoming (July 2023 to June 2024) benefit year, the maximum annual GST/HST benefit is as follows:

• $496 if you are single;
• $650 if you are married or have a common-law partner; and
• $171 for each child under the age of 19.

The CRA website includes a chart showing the amount of GST/HST benefit which is provided at different income levels, to individuals and to families of different sizes and compositions. That chart can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/child-family-benefits/goods-services-tax-harmonized-sales-tax-gst-hst-credit/goods-services-tax-harmonised-sales-tax-credit-payments-chart.html.

Eligibility for the GST/HST credit for the 2023-24 benefit year is determined automatically by the CRA for each taxpayer who filed a return for 2022. There is, therefore, no need to indicate on the return that the taxpayer is applying for the GST/HST credit.

Climate Action Incentive Payment

Unlike the other three credits which are based, at least in part, on household income, the Climate Action Incentive Payment (CAIP) is a flat rate non-taxable credit paid to residents of the provinces of Ontario, Manitoba, Alberta, Saskatchewan, Nova Scotia, New Brunswick, Newfoundland and Labrador, and Prince Edward Island. The purpose of the CAIP is to help offset the financial impact of the federal carbon tax.

In addition to living in one of these provinces, recipients must also satisfy the same eligibility criteria as for the GST/HST credit, in that they must be Canadian residents who are at least 19 years of age, or have or had a spouse or common law partner, or are or were a parent and lives or lived with their child.

The amount of CAIP which an individual can receive varies, depending on his or her province of residence. Information on the amount of CAIP which may be received in each province can be found on the CRA website at Climate action incentive payment - Canada.ca.

The CAIP (for all provinces) includes a rural supplement of 10% of the base amount for residents of small and rural communities. While there is no need to apply for the CAIP when filing a tax return, individuals who may be eligible for the rural supplement need to ensure that they complete and file a Schedule 14 indicating their eligibility for the supplement when they file their return for 2022. That requirement does not apply to residents of Prince Edward Island, where all CAIP recipients are eligible for the rural supplement.

When it was first introduced, the CAIP was claimed on the individual income tax return and paid as part of the tax refund process. Now, however, the CAIP is paid in quarterly instalments. During the 2023-24 benefit year, residents of Ontario, Alberta, Manitoba, and Saskatchewan will receive four quarterly payments, on the 15^th day of April, July, October, and January.

Since the federal fuel charge will only come into effect as of July 1, 2023 in Newfoundland and Labrador, Nova Scotia, and Prince Edward Island, residents of those provinces will receive three quarterly payments of the CAIP during the 2023-24 benefit year (in July 2023, October 2023, and January 2024) and four payments in subsequent benefit years. New Brunswick residents will receive a double payment in October 2023 (to cover the July and October payments) and a single payment in January 2024.

More information on the CAIP can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/child-family-benefits/cai-payment.html.

Canada Workers Benefit

The Canada Workers Benefit (CWB) is a refundable tax credit paid to lower-income Canadian residents who are aged 19 or older or are married or have a common-law spouse or child with whom they live, and who have “working income” earned from employment or self-employment.

The amount of CWB which an individual or family can receive depends on marital status and net income. The basic amounts payable, and the net income levels at which eligibility for that basic benefit is eroded, are as follows.

• $1,428 for single individuals
  The single individual benefit is reduced if adjusted net income is more than $23,495. No basic amount is payable if the applicant’s adjusted net income is more than $33,015.
• $2,461 for families 
  The family benefit amount is reduced if adjusted family net income is more than $26,805. No basic amount is payable where adjusted family net income is more than $43,212.

In order to apply for the CWB, a recipient must file his or her tax return electronically or, if filing a paper return, must complete and file a Schedule 6 with that tax return. In previous years, taxpayers were required to apply for advance payment of the CWB;  however, effective as of July 2023, CWB recipients who were eligible for the benefit in 2022 will automatically begin receiving quarterly advance payments of their CWB for 2023.

More detailed information on the CWB can be found at https://www.canada.ca/en/revenue-agency/services/child-family-benefits/canada-workers-benefit.html.

Canada Child Benefit

The Canada child benefit (CCB) is a tax-free monthly payment made to eligible families to help with the cost of raising children under 18 years of age. The CCB is paid to the parent who is primarily responsible for the care and upbringing of the child or children, and the amount varies with the age and number of children.

The CCB is also a means-tested benefit, and the benefit amount which may be received is reduced as family net income increases. CCB amounts paid during the 2023-24 benefit year are based on family net income for 2022.

The maximum amounts payable for the benefit year running from July 2023 to June 2024 are as follows.

For each child:

• under 6 years of age: $7,437 per year ($619.75 per month)
• 6 to 17 years of age: $6,275 per year ($522.91 per month)

Where family net income for 2022 is less than $34,863, recipients will receive the maximum amount outlined above for 2023-24, with no reductions.

Individuals and families who may be eligible for the CCB will have their eligibility automatically assessed when they file their tax return for 2022: there is no requirement to file a particular schedule or other application. More information on the CCB is available on the federal government website at https://www.canada.ca/en/revenue-agency/services/child-family-benefits/canada-child-benefit-overview.html.

“Grocery Rebate”

As every Canadian who has purchased food in the past year knows, the cost of groceries has been steadily increasing, as the inflation rate for food costs has consistently outpaced the general rate of inflation. To address that situation, the federal government announced, as part of the 2023-24 federal budget, that eligible Canadians would receive a “grocery rebate”, which will be paid on July 5, 2023.

The term “grocery rebate” is something of a misnomer, since the amount of the rebate is not specifically tied to the cost of groceries, nor is there any requirement that amounts received be spent on groceries. Rather, the “grocery rebate” is simply a one-time payment to be made to Canadians who were eligible for and received a GST/HST tax credit payment in January of 2023, and the amount of the “grocery rebate” will be double the amount received of the January 2023 GST/HST tax credit payment. So, for example, an individual who received a GST/HST tax credit payment amount of $89.00 in January 2023 will receive (on July 5, 2023) a “grocery rebate” of $178.00.

More information on the “grocery rebate” can be found on the federal government website at https://www.canada.ca/en/revenue-agency/services/child-family-benefits/goods-services-tax-harmonized-sales-tax-gst-hst-credit/grocery-rebate.html.

While the number and variety of federal child and family benefits, and the varying eligibility criteria for each, can be confusing, the necessary determinations and calculations are done by the federal government. The only step which need be taken by an individual is the filing of an annual tax return. Taxpayers who wish to find information on the benefits for which they may be eligible can refer to the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/child-family-benefits.html, where detailed information on each such benefit, the eligibility criteria and amounts which may be received are summarized.

With the worst days of the pandemic behind us, more and more Canadian families have returned to their usual schedule, with kids back in attendance at school and parents back at work at the office, on either a full-time or a part-time basis. While a return to the normal routine is likely welcome, the need to go to the office for at least part of the week means that parents must make arrangements for summer child care.

With the worst days of the pandemic behind us, more and more Canadian families have returned to their usual schedule, with kids back in attendance at school and parents back at work at the office, on either a full-time or a part-time basis. While a return to the normal routine is likely welcome, the need to go to the office for at least part of the week means that parents must make arrangements for summer child care.

Parents needing to arrange such care don’t lack for options. There are an almost limitless number of choices, but what each of those choices has in common is a price tag – sometimes a steep one. Some options, like day camps provided by the local recreation authority or municipality, can be relatively inexpensive, while the cost of others, like elite-level residential sports or arts camps, can run to the thousands of dollars.

The good news for families which incur such expenditures is that in many cases a deduction for part or all of the costs incurred can be claimed on the tax return for the year. And, since eligible expenditures can be deducted from income on a dollar-for-dollar basis, that means that income used to pay eligible child care expenses is income which is effectively not subject to income tax. That benefit is provided by our tax system through the general deduction provided for child care costs. The general rule for the deduction (which is not specific to summer child care or summer camp costs but is available for qualifying child care expenses throughout the year) is that parents who must incur child care costs in order to work (whether in employment or self-employment), or in some cases to attend school, can deduct those costs from income, within specified limits

The amount of any available child care deduction is calculated on Form T778, and that calculation can seem forbiddingly complex. However, at the end of the day, the amount of child care expenses which can be deducted is simply the least of three figures, and only one of those figures requires a calculation. The steps involved in determining the amount of available child care expense deduction are as follows.

First, the amount of any deduction for child care expenses is limited to two-thirds of the taxpayer’s net income for the year. The income figure used to calculate the two-thirds figure is, generally, the amount shown on Line 23600 of the annual tax return. Where the family incurring child care expenses is a two-income family, it is the spouse with the lower net income who must make the claim and consequently it is his or her net income which is used to provide that two-thirds of income figure.

The second figure to be determined is the amount actually paid for eligible child care costs during the year. While virtually any licenced child care arrangement will qualify, some more informal arrangements may not. Specifically, no deduction is available for amounts paid to most family members to provide child care. So, it’s not possible for a working spouse to pay the stay-at-home parent to provide child care, nor is it possible to pay an older sibling who is under the age of 18 to provide such services, and to claim a deduction for those expenses incurred. As well, where a claim is made for a deduction for child care expenses on the annual return, the claimant must obtain (and be prepared to provide to the tax authorities) the social insurance number of the individual providing the care as well as a receipt showing the amounts paid, whether to an individual or an organization.

The third figure to be determined is the one which requires some calculation. Basically, the rules governing the deduction of child care expense impose a maximum deduction per child per year (referred to as the “basic limit”), with that basic limit dependent on the age of the particular child. As well, where expenses are incurred for overnight camps or boarding schools, the amount deductible for such costs is similarly capped.

For 2023, the following overall limits apply:

• $5,000 in costs per year for a child who was born in 2007 to 2016;
• $8,000 in costs per year for a child who was born after 2016;
• $11,000 in costs per year for a child who was born in 2023 or earlier, but for whom the disability amount can be claimed.

Similar restrictions are placed on the amount of costs which can be deducted for overnight camp or boarding school fees, and those are as follows:

• $125 per week for a child who was born in 2007 to 2016;
• $200 per week for a child who was born after 2016; and
• $275 per week for a child who was born in 2023 or earlier, but for whom the disability amount can be claimed.

Taking all of these figures into account, the computation of a deduction for summer day camp expenses for a typical Canadian family would look like this.

A two-income family has two children and both parents are employed. One spouse earns $65,000 per year, while the other earns $55,000. In 2023, one child is age 9 and the other is age 5. Neither child is disabled. During July and August, both of the children attend a local full-day summer camp, for which the cost is $300 per week per child.

• The first step is to determine the two-thirds of income figure. Since it is the lower-income spouse who must make the deduction claim, that figure is two-thirds of $55,000, or $36,630. Consequently, any deduction for child care expenses for the year cannot exceed $36,630.
• The second calculation is the total amount of child care expenses paid for each child:
  $300 per week for eight weeks of summer camp, or $2,400.
  Total child care expenses for each child are therefore $2,400.
• The last step is to determine the basic limit for child care expenses for each child, as follows:
  • the limit for the 5-year-old (who was born after 2016) is $8,000, and so the entire $2,400 in summer day camp costs incurred can be deducted.
  • the basic limit for the 9-year-old (who was born between 2007 and 2016) is $5,000, and so once again the entire $2,400 incurred for summer day camp costs can be deducted.

As well, since the camp is a day camp, the dollar amount cost limitations which apply with respect to overnight camps does not apply to limit the amount of expenses claimed by the family.

The total deduction available for child care expenses incurred for the 2023 tax year will therefore be $4,800. That deduction is claimed on Line 21400 of the tax return filed by the lower-income spouse for the year, reducing his or her taxable income from $55,000 to $50,200, and resulting in a federal tax savings of about $1,000. A similar tax deduction is claimed as well for provincial tax purposes, and the amount of provincial tax saved will depend on the tax rates imposed by the province in which the family lives.

While the availability of a “subsidy” through the tax system should never be the sole determinant of what activity or camp is the best choice, there’s no denying that being able to claim a deduction for the costs involved can tip the balance toward one or choice or another, or can bring a formerly unavailable option within a family’s financial reach.

Parents wishing to find out more about the child care expense deduction, and perhaps to calculate the maximum deduction which will be available to them for the 2023 tax year, should consult Form T778-22e. The form which is currently on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t778.html is from the 2022 tax year, and consequently the age limits must be adjusted by one year for child care expense claims for 2023. The form does, however, provide a detailed explanation of the rules governing the child care expense deduction, and those rules continue to apply for the 2023 tax year.

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 #64 Corporate

Personal:

Issue #64 Personal

The purchase of a first home is a milestone in anyone’s life, for many reasons. A home purchase is likely the largest single financial transaction most Canadians will enter into in their lives, and having the ability to buy one’s own home has traditionally been perceived as a marker of financial success and stability.

The purchase of a first home is a milestone in anyone’s life, for many reasons. A home purchase is likely the largest single financial transaction most Canadians will enter into in their lives, and having the ability to buy one’s own home has traditionally been perceived as a marker of financial success and stability.

While there are many intangible benefits to owning a home, home ownership also provides some very tangible and significant financial advantages. Specifically, it provides the opportunity to accumulate wealth through increases in home equity, and to realize that wealth on a truly tax-free basis.

Most Canadians who purchase a home do so by making a down payment and borrowing the remainder of the purchase price of the home from a financial institution. That borrowing – the home mortgage – is paid off, with interest, usually over a 25- or 30-year period, at the end of which the homeowner owns the property outright. And, in virtually all instances, the value of that property is likely to be many times more than the original purchase price. In many locations in Canada, a home purchased in 1998 for $200,000 could have, by 2023, a market value of $1,000,000.

The real benefit of such asset growth, however, is found in the way such increases in value are treated for tax purposes. The Canadian tax system is a very comprehensive one, and there are very few sources of income or investment gains which escape the tax net. Home ownership is one of those few exceptions.

Under Canadian tax rules, where an asset is sold, the increase in the value of that asset over its original purchase price is treated as a capital gain, 50% of which must be included in taxable income and taxed as such. However, where a family home is sold, any increase in value (that is, any gain) is exempt from tax, regardless of the amount of such gain. Continuing the above example, a homeowner who paid $200,000 for a home in 1998 and sells that home in 2023 for $1,000,000 has a gain of $800,000. Assuming that the property was lived in and used as a home (a “principal residence” in tax parlance) for the entire 23 years of ownership, the full $800,000 gain can be received tax-free. If that gain were treated as a capital gain, and taxed as such, approximately $200,000 of the gain would have to be paid in capital gains tax.

The tax-free status of gains made on the sale of a family home is known, for tax purposes, as the principal residence exemption (PRE) and has been available to Canadians since 1972. And, for nearly 45 years after that, there were no changes made to the rules governing the availability of the exemption, or the reporting requirements for claiming it. In the last eight years, however, and especially in 2023, the rules with respect to the exemption have been tightened.

The need for changes arose out of a perceived change in the way the housing market operated, resulting from unprecedented increases in the price of residential properties over a relatively short period of time. While there are have always been individuals or companies who purchased properties with the intent of reselling them, perhaps after undertaking renovations, most purchases of residential real estate were made by individuals or families intending to live in them. However, it became possible, over the past 10 or 15 years, to purchase a property and re-sell it relatively soon thereafter for a very substantial profit. And, where the PRE was claimed on that sale, the entire profit would be received tax-free.

These changes in the housing market led to what the federal government perceived as a situation in which housing was being bought and sold as a commodity rather than for its traditional purpose of providing a home, and that the principal residence exemption was being used to avoid the payment of profits made from the “flipping” of properties in a way that was never intended. A secondary effect of such “commodification” of residential real estate was to drive up the price of properties, putting home ownership further and further out of the reach of the average Canadian.

For both these reasons, the federal government moved, in 2016 and again in 2023, to make changes to ensure that the principal residence exemption was being used for its intended purpose, and only by those who were entitled to claim it.

The first such change, which took effect as of January 1, 2016, was an administrative measure which required taxpayers, for the first time, to report any transaction for which the PRE was being claimed. Beginning with the 2016 tax year, individuals who are claiming the PRE for a property sale which took place during the year are required to complete Schedule 3 on their tax return for the year, confirming that fact and indicating the tax years for which the exemption is being claimed.

It’s important to note that the new requirement to report any claims for the PRE does not in any way change the rules respecting either eligibility for the exemption or the tax treatment of amounts received on the sale of a principal residence. What it does, however, is provide the tax authorities with information which could flag claims for the PRE which those tax authorities view as requiring further investigation. For instance, where an individual claims the principal residence exemption on two sales of residential property within a three-year period, it’s very likely that the tax authorities will want further information to determine whether either or both such transactions fit within the ambit of the rules governing the PRE.

In fact, as reported in the media, the Canada Revenue Agency has sent out “educational letters” to several hundred taxpayers who have claimed the PRE in circumstances which the CRA believes merit further investigation. Those letters suggest that taxpayers contact the CRA to provide an explanation for their use of the PRE, or to amend their return(s) if necessary.

These CRA enforcement activities are unlikely to affect taxpayers who sell a principal residence perhaps two or three times during their lifetime: the CRA’s efforts are directed at those who may be repeatedly using the PRE to shelter income or capital gains which should be reported as (and taxed as) income. Nonetheless, it remains the case that anyone claiming the PRE in any year after 2015 must file a Schedule 3 with their return for the year, certifying that fact, in order to be able to benefit from it.

The second change made by the federal government with respect to the PRE was much more substantive, and aimed directly at those who, in the government’s view, are misusing the PRE. That change, which is effective as of 2023, provides that anyone who sells a property which they have owned for less than 12 months would be considered to be “flipping” properties. Where that is the case, 100% of any gain made on the sale of the property would be included in income and taxed as business income. In other words, not only would the seller of the property not be eligible for the PRE, the gains made on the sale of the property would not be treated as a capital gain (only half of which is included in income for tax purposes) but as business income, the entirety of which is included in income and taxed as such.

The difference in the tax result is best illustrated using the example above. An individual who purchases a property for $200,000 and sells that property for $1,000,000 has a gain of $800,000. The result of the different possible tax treatments of that gain is as follows:

• Where the sale is fully eligible for the principal residence exemption, the total tax payable on the gain is $0;
• Where the gain is treated as a capital gain, the total tax payable on that gain is about $200,000; and
• Where the property sale takes place after 2022 and the property was owned for less than 12 months, the new rule will apply, and the total tax payable on the gain will be about $400,000.

Of course, while most Canadians who purchase a home to live in as a principal residence don’t intend to sell within a year of purchase, life’s circumstances can sometimes dictate a different outcome. Consequently, exemptions from the new tax consequences of selling within 12 months of purchase will be provide for Canadians who sell their home due to specified life events, such as a death, disability, the birth of a child, a new job, or a divorce. 

The changes made to the PRE rules in 2016 and 2023 don’t change the fact that home ownership remains one of the very best tax savings and wealth building strategies available to Canadians. Those who buy intending to live in the property as a family home are unlikely to be affected by the 2023 rule changes, and compliance with the new reporting requirements introduced in 2016 will ensure that they make the most of the tax saving possibilities available to them.

More information on the rules governing the sale of a principal residence and claiming the exemption can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate/sale-your-principal-residence.html  and https://www.budget.canada.ca/2022/report-rapport/chap1-en.html#2022-4.

Many, if not most, taxpayers think of tax planning as a year-end exercise to be carried out in the last few weeks of the year, with a view to taking the steps needed to minimize the tax bill for the current year. And it’s true that almost all strategies needed to both minimize the tax hit for the year and to ensure that there won’t be a big tax bill come next April must be taken by December 31 of the current calendar year(the making of registered retirement savings plan (RRSP) contributions being the notable exception). Nonetheless, there’s a lot to recommend carrying out a mid-year review of one’s tax situation for the current year. Doing that review mid-year, instead of waiting until December, gives the taxpayer the chance to make sure that everything is on track and to put into place any adjustments needed to help ensure that there are no tax surprises when the income tax return for 2023 is filed next spring. As well, while the deadline for implementing most tax saving strategies may be December 31, the window of opportunity to make a significant difference to one’s current-year tax situation does narrow as the calendar year progresses.

Many, if not most, taxpayers think of tax planning as a year-end exercise to be carried out in the last few weeks of the year, with a view to taking the steps needed to minimize the tax bill for the current year. And it’s true that almost all strategies needed to both minimize the tax hit for the year and to ensure that there won’t be a big tax bill come next April must be taken by December 31 of the current calendar year(the making of registered retirement savings plan (RRSP) contributions being the notable exception). Nonetheless, there’s a lot to recommend carrying out a mid-year review of one’s tax situation for the current year. Doing that review mid-year, instead of waiting until December, gives the taxpayer the chance to make sure that everything is on track and to put into place any adjustments needed to help ensure that there are no tax surprises when the income tax return for 2023 is filed next spring. As well, while the deadline for implementing most tax saving strategies may be December 31, the window of opportunity to make a significant difference to one’s current-year tax situation does narrow as the calendar year progresses.

By the middle of June, most Canadians will have filed their individual income tax return for the 2022 tax year and received a Notice of Assessment outlining their tax position for that year. Those who receive a refund will celebrate that fact; less happily, those who receive a tax bill will pay the amount owed, however reluctantly. Although few Canadians have this perspective, the reality is that getting either a big tax refund or having to pay a large tax bill is a sign that one’s tax affairs need attention. A refund, especially a large refund, means that the taxpayer has overpaid his or her taxes for the previous year and has essentially provided the Canada Revenue Agency with an interest-free loan of funds that could have been put to better use in the taxpayer’s hands. The other outcome – a large bill – means that taxes have been underpaid for the previous year and could mean paying interest charges to the CRA. Either way, it’s in the taxpayer’s best interests to ensure that tax paid throughout the year is sufficient to cover his or her taxes, without overpaying or underpaying. The best-case scenario is to file a tax return and receive a Notice of Assessment which indicates that there is neither a substantial refund payable nor any significant amount owing.

For most Canadians, income and available deductions and credits don’t vary substantially from one year to the next. Where that’s the case, the amount of tax owed by the taxpayer for 2022 (a figure that can be found on Line 43500 of the Notice of Assessment) is likely to be very close to one’s tax liability for 2023.

After determining the amount of one’s tax liability for 2022, the next step in doing a review is to get a sense of how much tax has already been paid for the 2023 tax year. There are two ways of paying taxes throughout the year. The majority of Canadians (including all employees) have income taxes deducted from their paycheques and remitted to the federal government on their behalf – known as source deductions. Taxpayers who do not have income tax deducted at source – which would include self-employed individuals and, frequently, retired taxpayers – make tax payments directly to the federal government (four times a year, in March, June, September, and December) through the tax instalment system.

Using the tax payable figure for 2022 as a guide, it’s necessary to figure out whether income tax payments made to date, either by source deductions or instalment payments, match up with that tax liability figure, recognizing that by this point in the year, approximately one-half of taxes for 2023 should already have been paid. If they haven’t, and particularly if there is a significant shortfall which will mean a large balance owing when the tax return for 2023 is filed next spring, the taxpayer will need to take steps to remedy that.

Where the individual involved pays tax by instalments, the solution is simple. He or she can simply increase or decrease the amount of remaining instalment payments made in 2023 so that the total instalment payments made over the course of this year accurately reflect the total tax payable for the year. The only caveat in that situation is that the individual should err on the side of caution to ensure that there isn’t a shortfall in instalment payments, which could result in interest charges being levied by the CRA.

The situation is a little more complex for employees, or anyone who has tax deducted at source. Often when such individuals discover that they are overpaying taxes through source deductions, it’s because other deductions which they claim on their return for the year – for expenditures like deductible support payments, child care expenses, or contributions to an RRSP – aren’t taken into account in calculating the amount of tax to deduct at source. The solution for employees who find themselves in that situation is to file a Form T1213 – Request to Reduce Tax Deductions at Source, which is available on the CRA website at T1213 Request to Reduce Tax Deductions at Source - Canada.ca. On that form, the taxpayer identifies the amounts which will be deducted on the return for the year and, once the CRA verifies that those deductible expenditures are being made, it will authorize the taxpayer’s employer to reduce the amount of tax which is being withheld at source to take account of that deduction.

Where it’s the opposite situation and a taxpayer finds that source deductions being made will not be sufficient to cover his or her tax liability for the year (meaning a tax bill to be paid next spring), the solution is to have those source deductions increased. To do that, the employee needs to obtain a federal TD1 form for 2023, which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/td1-personal-tax-credits-returns/td1-forms-pay-received-on-january-1-later.html. On the reverse side of that Form TD1, there is a section entitled “Additional tax to be deducted”, in which the employee can direct his or her employer to deduct additional amounts at source for income tax, and can specify the dollar amount which is to be deducted from each paycheque, on a go-forward basis.

Alternatively, the taxpayer who is looking at a large tax bill on filing the 2023 return can take steps to bring down that bill by creating or increasing available deductions. The most widely available strategy which will provide the greatest tax savings is an RRSP contribution, which reduces taxable income on a dollar-for-dollar basis. And while it’s difficult for most taxpayers to come up with such a contribution at the last minute, starting mid-year to transfer a set amount from each paycheque received between June of 2023 and February of 2024 to one’s RRSP can result in a substantial contribution deduction and a resulting reduction in the tax bill for the year.

No one particularly likes thinking about taxes, at any time of year, but ignoring the issue definitely won’t make it go away. The investment of a few hours of time now, and putting in place any needed adjustments, can mean avoiding a nasty surprise in the form of a large balance owing when the return for 2023 is completed next spring.

Canada’s retirement income system is made up of two public retirement income programs – the Old Age Security program and the Canada Pension Plan – as well as the opportunity to accumulate private retirement savings on a tax-assisted basis, through registered pension plans or registered retirement savings plans.

Canada’s retirement income system is made up of two public retirement income programs – the Old Age Security program and the Canada Pension Plan – as well as the opportunity to accumulate private retirement savings on a tax-assisted basis, through registered pension plans or registered retirement savings plans.

While the purpose of both public retirement income programs is to ensure that Canadians have a basic level of income in retirement, the two plans are very different with respect to funding, eligibility requirements, and benefit amounts.

The Old Age Security (OAS) program, which is funded out of general tax revenues, provides a set amount of income each month to Canadians who are age 65 or older and who have lived in Canada for 40 years or more since the age of 18. (A reduced and pro-rated benefit amount is available to those who have lived in Canada for a shorter period of time). The current maximum monthly OAS benefit (which is adjusted for inflation at the beginning of each calendar quarter) is $691.00 ($760.10 for those aged 75 or older). Where an OAS recipient of any age has income of more than around $86,000, the amount of OAS benefit which he or she can receive is reduced.

By comparison, the Canada Pension Plan (CPP) is funded entirely from mandatory contributions made by every person over the age of 18 who earns more than a minimum amount ($3,500 per year). If that person is an employee, he or she pays half the required contribution and the employer pays the other half. If the individual is self-employed, he or she must make the entire contribution. In all cases, the amount contributed is a percentage of earnings to a specified maximum earnings amount known as the Yearly Maximum Pensionable Earnings, or YMPE, which is currently $66,600.

As early as age 60, or as late as age 70, the individual contributor can apply to begin receiving a monthly CPP retirement benefit. The actual amount of the benefit is different for each individual, as it is arrived at using a formula based on the total amount of contributions made during the individual contributor’s working life. The current maximum monthly benefit is $1306.57. Once an individual begins receiving a CPP retirement benefit, monthly payments of that benefit continue for the rest of the individual’s life and, unlike OAS, is never reduced in any way.

The result of the way in which the CPP is funded means that, unlike the OAS program, the CPP must be entirely self-financed – that is, all benefits paid must come out of the pool of capital created by contributions made by individual Canadian workers and the gains made by investing those amounts.

Several years ago, it was recognized that, for a range of reasons, many Canadian families were not accumulating sufficient savings to ensure adequate income in retirement. In 2016, federal government statistics indicated that 24 per cent of families (1.1 million families) nearing retirement age were at risk of not having adequate income in retirement to maintain their standard of living. The federal and provincial governments determined that the best response to that reality was to make changes to the Canada Pension Plan, in order to increase the extent to which CPP retirement benefits would replace working income.

Those changes to the CPP began in 2019, when the required annual contribution to the CPP rose from 4.95% to 5.1% of earnings. That contribution percentage was increased each year thereafter, such that it now (for 2023) stands at 5.95% of earnings over $3,500.

The second, more consequential, change is that, effective as of January 1, 2024, higher income earners will be required to make a new, additional contribution to the CPP. The change affects only individuals who earn more than the YMPE (currently $66,600).

In effect, there will be two levels of CPP contributions beginning in 2024. There is no change to the current contribution structure for those with annual income of less than the YMPE: such individuals will continue to contribute 5.95% of earnings in excess of $3,500 yearly, and the maximum annual contribution will be 5.95% of the YMPE.   However, those whose income exceeds the YMPE for the year will pay 4% of those additional earnings (to be known as second CPP contributions), up to the second earnings ceiling – to be called the Year’s Additional Maximum Pensionable Earnings, or YAMPE.

The practical effect of the upcoming changes is best illustrated by example, as follows:

Sarah earns $85,000 in 2024. Her CPP contribution requirements will be as follows:

• Assume that the YMPE for 2024 is $67,700.
• The basic exemption for the year remains $3,500, meaning that Sarah must pay CPP contributions of 5.95% of $64,200 ($67,700 minus $3,500).
• Her first level CPP contributions for the year will therefore be $3,819.90 ($64,200 times 5.95%), and her employer will contribute an equal amount.

Since Sarah’s income for 2024 is more than the YMPE, she will be required to make second CPP contributions, which are calculated as follows:

• Assume that the YAMPE for 2024 is $72,400.
• Sarah must therefore pay second CPP contributions on $4,700 ($72,400 minus $67,700). Second level CPP contributions are set at 4.0%, so Sarah must pay 4.0% of $4,700, or $188.
• Once again, her employer will contribute an equal amount.

Sarah’s total CPP contributions for 2024 will therefore be $4,007.90.

While it’s important for those who will be affected by the upcoming changes to the CPP contribution structure to be aware of what’s coming, they are not changes for which any financial or tax planning is required – the requirement to make additional contributions (where it applies) is mandatory and will be done automatically. And, while no one really likes to see additional deductions being taken from their paycheque, it may be some comfort to consider that such deductions are really a way to increase one’s chances of not having to stay longer in the work force because of a lack of retirement savings, and being able to look forward to a more financially comfortable retirement.

More information on the upcoming changes to the CPP can be found on the federal government website at https://www.canada.ca/en/revenue-agency/news/2023/05/the-canada-pension-plan-enhancement--businesses-individuals-and-self-employed-what-it-means-for-you.html.

Sales of residential real estate across Canada are, after a slowdown in 2022, once again on the rise. Back-to-back increases in sales figures during February and March 2023 were followed by a double digit increase in such sales during the month of April. Those figures mean that tens of thousands of Canadians will be closing home sales transactions and moving this spring and summer. And, whatever the reason for the move or the distance to the new location, all moves have two things in common – stress and cost. Even where the move is a desired one – from an apartment to a first home, or moving to take one’s dream job, any move inevitably means upheaval of one’s life, and the costs (especially for a long-distance move) can be very significant. There is not much that can diminish the stress of moving, but the associated costs can be offset somewhat by a tax deduction which may be claimed for many of those costs.

Sales of residential real estate across Canada are, after a slowdown in 2022, once again on the rise. Back-to-back increases in sales figures during February and March 2023 were followed by a double digit increase in such sales during the month of April. Those figures mean that tens of thousands of Canadians will be closing home sales transactions and moving this spring and summer. And, whatever the reason for the move or the distance to the new location, all moves have two things in common – stress and cost. Even where the move is a desired one – from an apartment to a first home, or moving to take one’s dream job, any move inevitably means upheaval of one’s life, and the costs (especially for a long-distance move) can be very significant. There is not much that can diminish the stress of moving, but the associated costs can be offset somewhat by a tax deduction which may be claimed for many of those costs.

While it’s common to refer simply to the “moving expense deduction”, as though it were available in all circumstances, the fact is that there is actually no across-the-board deduction available for moving costs. In order to be deductible from income for tax purposes, such moving costs must be incurred in specific and relatively narrow circumstances. Our tax system allows taxpayers to claim a deduction only where the move is made to get the taxpayer closer to his or her new place of work, whether that work is a transfer, a new job, or starting a business. Specifically, moving expenses can be deducted where the move is made to bring the taxpayer at least 40 kilometres closer to his or her new place of work. That requirement is satisfied where, for instance, a taxpayer moves from Ottawa to Calgary to take a new job. It’s also met where a taxpayer is transferred by his or her employer to another job in a different location and the taxpayer’s move will bring him or her at least 40 kilometres closer to the new work location. The requirement is not met where an individual or family move up the property ladder by selling and purchasing a new home (or buying a first home) in the same town or city where they currently live, without any change in work location.

As well, it’s not actually necessary to be a homeowner in order to claim moving expenses. The list of moving related expenses which may be deducted is basically the same for everyone – homeowner or tenant – who meets the 40-kilometre requirement. Students who move to take a summer job (even if that move is back to the family home) can also make a claim for moving expenses where that move meets the 40-kilometre requirement.

It's important to remember, however, that even where the 40-kilometre requirement is met, it’s possible to deduct moving costs only from employment or self-employment (business) income – no deduction is allowed from other sources of income, like investment income or employment insurance benefits.

The general rule is that a taxpayer can claim most reasonable amounts that were paid for moving themself, family members, and household effects. In all cases, the moving expenses can only be deducted from employment or self-employment income which is earned at the new location. Where the move takes place later in the year, and moving costs are significant, it’s possible that the amount of income earned at the new location in the year of the move will be less than deductible moving expenses incurred. In such instances, those expenses can be carried over and deducted from employment or self-employment income earned at the new location in any future year.

Within the general rule, there are a number of specific inclusions, exclusions, and limitations. The following is a list of expenses which can be claimed by the taxpayer without specific dollar figure restrictions (but subject, as always, to the overriding requirement of “reasonableness”):

• Traveling expenses, including vehicle expenses, meals, and accommodation, to move the taxpayer and members of their family to the new residence (note that not all members of the household have to travel together or at the same time);
• Transportation and storage costs (such as packing, hauling, movers, in-transit storage, and insurance) for household effects, including such items as boats and trailers;
• Costs for up to 15 days for meals and temporary accommodation near the old and the new residences for the taxpayer and members of the household;
• Lease cancellation charges (but not rent) on the old residence;
• Legal or notary fees incurred for the purchase of the new residence, together with any taxes paid for the transfer or registration of title to the new residence (excluding GST or HST); 
• The cost of selling the old residence, including advertising, notary or legal fees, real estate commissions, and any mortgage penalties paid when a mortgage is paid off before maturity; and
• The cost of changing an address on legal documents, replacing driving licences and non-commercial vehicle permits (except insurance), and costs related to utility hook-ups and disconnections.

Every homeowner who is moving must decide whether to sell their current home before purchasing the new one, or to secure a new home first, and then put their current home on the market. Those who decide on the second approach are entitled to deduct up to $5,000 in costs incurred for the maintenance of the “old” residence while it is vacant and it is on the market. Specifically, costs including interest, property taxes, insurance premiums, and heat and utilities expenses paid to maintain the old residence while efforts were being made to sell it may be deducted. If any family members are still living at the old residence, or it is being rented, no such deduction is available.

It may seem from the forgoing that virtually all moving-related costs will be deductible – however, there are some costs for which the Canada Revenue Agency (CRA) will not permit a deduction to be claimed, as follows:

• Expenses for work done to make the old residence more saleable;
• Any loss incurred on the sale of the old residence;
• Expenses for job-hunting or house-hunting trips to another city (for example, costs to travel to job interviews or meet with real estate agents);
• Expenses incurred to clean or repair a rental residence to meet the landlord’s standards;
• Costs to replace such personal-use items as drapery and carpets;
• Mail forwarding costs; and
• Mortgage default insurance.

To claim a deduction for any eligible costs incurred, supporting receipts must be obtained. While the receipts do not have to be filed with the return on which the related deduction is claimed, they must be kept in case the CRA wants to review them.

Anyone who has ever moved knows that there are an endless number of details to be dealt with. For some types of costs, the administrative burden of claiming moving-related expenses can be minimized by choosing to claim a standardized amount, rather than the actual amount of expense incurrred. Specifically, the CRA allows taxpayers to claim a fixed amount, without the need for detailed receipts, for travel and meal expenses related to a move. Using that standardized, or flat rate method, taxpayers may claim up to $23 per meal, to a maximum of $69 per day, for each person in the household. Similarly, the taxpayer can claim a set per-kilometre amount for kilometres driven in connection with the move. The per-kilometre amount ranges from 55.0 cents for Alberta and Saskatchewan to 67.5 cents for the Northwest Territories. In all cases, it is the province or territory in which the travel begins which determines the applicable rate.

These standardized travel and meal expense rates are those which were in effect for the 2022 taxation year – the CRA will be posting the rates for 2023 on its website early in 2024, in time for the tax filing season.

Once eligibility for the moving expense deduction is established, the rules which govern the calculation of the available deduction are not complex, but they are very detailed. The best summary of those rules is found on the form used to claim such expenses – the T1-M. The current version of that form can be found on the CRA’s website at Moving Expenses Deduction. (canada.ca) and more information (including a link to rates for standardized meal and travel cost claims) is available at Line 21900 – Moving expenses – Canada.ca.

Of the 17 million individual income tax returns for the 2022 tax year filed with the Canada Revenue Agency (CRA) by the middle of April 2023, no two were identical. Each return contained its own particular combination of types and amounts of income reported and deductions and credits claimed. There is, however, one thing which every one of those returns has in common: For each and every one, the CRA will review the return filed, determine whether it is in agreement with the information contained therein, and, finally, issue a Notice of Assessment (NOA) to the taxpayer summarizing the Agency’s conclusions with respect to the taxpayer’s tax situation for the 2022 tax year.

Of the 17 million individual income tax returns for the 2022 tax year filed with the Canada Revenue Agency (CRA) by the middle of April 2023, no two were identical. Each return contained its own particular combination of types and amounts of income reported and deductions and credits claimed. There is, however, one thing which every one of those returns has in common: For each and every one, the CRA will review the return filed, determine whether it is in agreement with the information contained therein, and, finally, issue a Notice of Assessment (NOA) to the taxpayer summarizing the Agency’s conclusions with respect to the taxpayer’s tax situation for the 2022 tax year.

When all goes as it should, the information contained in the NOA is the same as that provided by the taxpayer in his or her return. In a minority of cases, however, the information presented in the NOA will differ from that provided by the taxpayer in his or her return. Where that difference means an unanticipated refund, or a refund larger than the one expected, it’s a good day for the taxpayer. In some cases, however, the NOA will inform the taxpayer that additional amounts are owed to the CRA. When that happens, the taxpayer has to figure out why, and to decide whether or not to dispute the CRA’s conclusions.

Many such discrepancies are the result of an error made by the taxpayer in completing the return. A lot of information from a variety of sources is reported on even the most straightforward of returns and it’s easy to overlook some of that information. Especially where the taxpayer has multiple sources of income – for instance, individuals who are working in the gig economy and may work under a succession of contracts during the year, or have multiple sources of income at any given time – it’s easy to omit one or more small amounts of income when completing the tax return for the year. Equally, newly retired individuals who are used to having only one source of income – their paycheques – may now be receiving Canada Pension Plan benefits, Old Age Security amounts, pension income, and, possibly, withdrawals from a registered retirement savings plan or registered retirement income fund, making it more difficult to keep track of everything.

Most Canadian taxpayers now use tax return preparation software to complete and file their returns. While such software essentially eliminates the risk of arithmetical error, the process isn’t foolproof. Such tax software relies, in the first instance, on information input by the user. No matter how good the software, it can’t account for income information which the taxpayer hasn’t provided. In other cases, the taxpayer can easily transpose figures when entering them, such that an income amount of $39,257 on the T4 becomes $32,957 on the tax return. Once again, the tax software has no way of knowing that the information input was incorrect and will calculate tax owing on the basis of the figures provided.

Where there is additional tax owing because of an error or omission made by the taxpayer in completing the return, and the CRA’s figures are correct, disputing the assessment doesn’t really make sense. There is as well a tax myth which says that if a taxpayer doesn’t receive an information slip (T4 or T5, as the case might be) for income received during the year, that income doesn’t have to be reported and therefore isn’t taxable. That is not the case, and never has been. All taxpayers are responsible for reporting all income received and paying tax on that income, and the fact that an information slip was lost, mislaid, or never received doesn’t change anything. The CRA receives a copy of all information slips issued to Canadian taxpayers, and its systems will cross-check to ensure that all income is accurately reported.

There are, however, instances in which the CRA and the taxpayer are in disagreement over substantive issues, and those issues most often involve claims for deductions or credits. For instance, the CRA may have disallowed an individual’s claim for a medical expense, or for a deduction claimed for a business expenditure, and the taxpayer believes in good faith that the credit or deduction claim is legitimate. 

Whatever the nature of the dispute, the first step is always to contact the CRA for an explanation of the reasons why the change was made. While the information provided in the NOA is a good summary of the taxpayer’s tax situation for the year, it may not always be clear on precisely how and why the taxpayer and the Agency disagree on the actual amount of income tax which the taxpayer must pay for the year. The first step to take would be a call to the Individual Income Tax Enquiries line at 1-800-959-8281, where agents who have access to the taxpayer’s return can explain any changes which were made during the assessment process. If that call doesn’t resolve the taxpayer’s questions, or there is still a disagreement, the taxpayer has to decide whether to take the next step of filing a Notice of Objection to the NOA.

Doing so formally advises the CRA that the taxpayer is disputing his or her tax liability for the taxation year in question. Not incidentally, the filing of an Objection also brings to a halt most efforts undertaken by the CRA to collect taxes which it considers owing for the taxation year under dispute (although, if the taxpayer is eventually found to owe the amount in dispute, interest will have accumulated in the interim). Where the taxpayer files an Objection, the CRA’s collection efforts are, in most cases, suspended until 90 days after the date the CRA’s decision on that Objection is sent to the taxpayer.

There is a time limit by which any Objection must be filed, albeit a reasonably generous one. Individual taxpayers must file an Objection by the later of 90 days from the mailing date of the Notice of Assessment (the date found at the top of page 1) or one year from the due date of the return which is being disputed. So, for tax returns for the 2022 tax year, the one-year deadline (which is usually, but not always, the later of those two dates) would be April 30, 2024 (or June 15, 2024 for self-employed taxpayers and their spouses). As with most things related to taxes, it’s best not to put it off. At the very least, if the taxpayer is ultimately found to owe some or all of the taxes assessed by the CRA, interest will have accrued on those taxes for the entire period since the filing due date and, if the filing of the Objection is delayed, the CRA may well have already commenced its collection efforts. Certainly, if the deadline is imminent, it’s necessary to file a Notice of Objection in order to preserve the taxpayer’s appeal rights, even if discussions with the CRA are still ongoing.

Taxpayers who have registered with the CRA’s online services feature My Account can file their Notice of Objection online at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/account-individuals.html. The taxpayer provides information with respect to the assessment being disputed, together with the reasons why the assessment is being disputed, and submits that information online. Taxpayers who are disputing their tax assessment can also scan and send supporting documents relating to that dispute to the Agency.

While filing a dispute through My Account is certainly faster than mailing hard copy of the Notice of Objection, not all taxpayers want to use that option. In particular, those who are not already registered with My Account may not wish to undertake the registration process simply in order to file a single Notice of Objection. Taxpayers who choose instead to file their objection using hard copy of a Notice of Objection form can find the most current version of the CRA’s standardized T400A Objection on the Agency’s website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t400a.html.

Taxpayers aren’t obligated to use the CRA’s official Notice of Objection form – any communication which makes it clear that the taxpayer is objecting to his or her Notice of Assessment will do. Nonetheless, there’s no reason not to use the standardized form, and there are benefits to doing so. Using the T400A form will make it clear to the CRA that a formal objection is being filed, will present the necessary information in a format with which the Agency is familiar, and will also mean that no required information is inadvertently omitted. It’s also helpful to include a copy of the Notice of Assessment which is being disputed. Taxpayers should also consider ensuring proof of both delivery and time of delivery by sending the form or letter to the Appeals Intake Center in a way which provides for tracking and proof of delivery. The mailing address and fax numbers for the Appeals Intake Centre can be found on the CRA website at File an objection – Income tax - Canada.ca.

It’s also possible to contact the CRA at its objection enquires phone line in order to get information about the status of one’s appeal. The toll-free telephone number for calls from within Canada to that line is 1-800-959-5513.

In the course of making its decision, the Agency may or may not contact the taxpayer for further discussions of the issues in dispute. Should the taxpayer be contacted, he or she may be asked to provide representations outlining his or her position, in writing or at a meeting. Through such representations and meetings, it may be possible for the taxpayer and the CRA to come to an agreement on the taxpayer’s tax liability. In either case, the CRA will either confirm its original assessment or change it. If the original assessment is changed, the CRA will issue a Notice of Reassessment outlining the changes.

Information on objections and appeal rights can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/complaints-disputes.html?utm_campaign=not-applicable&utm_medium=vanity-url&utm_source=canada-ca_cra-complaints-disputes. The CRA also publishes a useful pamphlet entitled Resolving Your Dispute: Objection and Appeal Rights under the Income Tax Act, and the most recent release of that publication can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p148/p148-resolving-your-dispute-objection-appeal-rights-under-income-tax-act.html.

The fact that Canadian households and families have been living with a significant amount of financial stress for the past year or so isn’t really news. Eight interest rate hikes in the past 14 months, together with double digit inflationary increases in the price of food and energy, have combined to squeeze family finances from all directions.

The fact that Canadian households and families have been living with a significant amount of financial stress for the past year or so isn’t really news. Eight interest rate hikes in the past 14 months, together with double digit inflationary increases in the price of food and energy, have combined to squeeze family finances from all directions.

It’s also not surprising that the financial pressures experienced by Canadians are now starting to show up in the statistics documenting debt levels, credit payment behaviour, and insolvencies. As reported by Equifax Canada in their Quarterly Credit Trends Report for the fourth quarter of 2022 (available at https://www.consumer.equifax.ca/about-equifax/press-releases/-/blogs/economic-headwinds-impacting-debt-levels-and-credit-payment-behaviour?), total consumer debt during that quarter rose by 6.2% when compared to the same quarter in 2021, as Canadians turned increasingly to the use of credit to meet their day-to-day financial obligations. It’s apparent as well from the statistics that some of those Canadians are having difficulty managing that increased debt. When statistics for December 2022 are compared to those for December 2021, they show that over 300,000 more consumers were carrying an unpaid balance on their credit cards from one month to the next, rather than paying the full balance off at the end of each billing cycle. As well, during the fourth quarter of 2022, the 90+ day volume delinquency rate for credit cards and auto loans rose by 23% and 11% respectively.

When individuals or families need to turn to credit to meet day-to-day financial obligations and then have difficulty repaying or even servicing that debt, the worst case scenario is insolvency. And it is the case that an increasing number of Canadians are reaching the point at which they see their available options narrow to the point that they must consider making a consumer proposal or even declaring bankruptcy. The Statistics Canada report on insolvency statistics for individuals for the month of January 2023 (https://ised-isde.canada.ca/site/office-superintendent-bankruptcy/en/statistics-and-research/insolvency-statistics-canada-january-2023) shows that in every province there was a double digit percentage increase between January 2022 and January 2023 in the number of individuals who made a consumer proposal. In some provinces, the number of such proposals made by individuals nearly doubled over that 12-month period.

Neither individuals who are struggling with debt nor their creditors want to see things reach a point at which the debtor is insolvent. Individuals or families who are unable to manage their current debt load should be aware that there are viable options open to them – and equally, that there are courses of action which should be avoided.

Where an individual or a family feels overwhelmed by debt, it’s inevitable that they will be vulnerable to approaches which promise to make the problem go away – and even to provide funds to repay existing debt. The website of the Financial Consumer Agency of Canada (an agency of the federal government)  at https://www.canada.ca/en/financial-consumer-agency/services/debt.html  and https://www.canada.ca/en/financial-consumer-agency/services/debt/debt-settlement-company.html contains a warning about using the services of such “debt settlement companies”, making the following points:

• Companies or agencies can’t guarantee they will solve your debt problems.
• Companies or agencies can’t quickly and easily fix your credit score.
• Companies should not (as they sometimes do) encourage you to take out a high-interest loan to pay off your debts.
• Companies and agencies may misrepresent services they offer as being part of a government program.

These warnings are based on the fact that debt settlement companies are for-profit businesses, not service providers. They collect fees from consumers who are in financial difficulty, sometimes making unrealistic commitments with respect to what they can accomplish. For instance, while such companies may promise to negotiate with creditors in order to reduce any amount owed, or the interest rate payable on existing debt, the fact is that creditors are not obliged to speak to or negotiate with a debt settlement company with respect to another person’s debts. Debt settlement companies may promise to “fix” a poor credit rating or credit report, but they have no actual power to do so. And the fees paid to such companies will almost certainly have to be paid, whether or not they can actually produce the results they promise.

That reality does not, however, mean that there is no help for individuals and families seeking to find their way out of debt. In almost every community of any size, there will be a credit counselling agency which can assist consumers with debt management and debt repayment and, equally important, will help the individual or family to establish financial management practices (like setting up a realistic family budget) to ensure their future financial stability.

Such credit counselling agencies operate on a not-for-profit basis and provide their services at little or no cost to individuals or families for their services. Each such agency is a member of Credit Counselling Canada (to be a member of Credit Counselling Canada, an agency must be accredited and must operate only on a not-for-profit or charitable basis), and a listing of their member agencies and locations can be found on the Credit Counselling Canada website at https://creditcounsellingcanada.ca/locate-a-counsellor/?cc=ON. An outline of the kinds of services which are provided by such agencies is available on the same website at https://creditcounsellingcanada.ca/.

The vast majority of Canadians view completing and filing their annual tax return as an unwelcome chore, and generally breathe a sigh of relief when it’s done for another year. When things go entirely as planned and hoped, the taxpayer will have prepared a return that is complete and correct, and filed it on time, and the Canada Revenue Agency (CRA) will issue a Notice of Assessment indicating that the return is “assessed as filed”, meaning that the CRA agrees with the information filed and tax result obtained by the taxpayer. While that’s the outcome everyone is hoping for, it’s a result which can be derailed in any number of ways.

The vast majority of Canadians view completing and filing their annual tax return as an unwelcome chore, and generally breathe a sigh of relief when it’s done for another year. When things go entirely as planned and hoped, the taxpayer will have prepared a return that is complete and correct, and filed it on time, and the Canada Revenue Agency (CRA) will issue a Notice of Assessment indicating that the return is “assessed as filed”, meaning that the CRA agrees with the information filed and tax result obtained by the taxpayer. While that’s the outcome everyone is hoping for, it’s a result which can be derailed in any number of ways.

Over 94% of the returns which had been filed for the 2022 tax year by mid-April 2023 were filed through online filing methods (NETFILE or EFILE), meaning that they were prepared using tax return preparation software. The use of such software significantly reduces the chance of making a clerical or arithmetic error, like entering an amount on the wrong line or adding a column of figures incorrectly. However, no matter how good the software is, it can work only with the information that is provided to it. Sometimes taxpayers prepare and file a return, only to later receive a tax information slip that should have been included on that return. It’s also easy to make an inputting error when transposing figures from an information slip (for example, a T4 slip from one’s employer) into the software, such that $73,246 in income becomes $72,346. Whatever the cause, where the figures input are incorrect or information is missing, those errors or omissions will be reflected in the final (incorrect) result produced by the software.

In other cases, a receipt for something like a charitable donation may be overlooked when the taxpayer is completing the return, or may be received after the return has already been filed. Whatever the cause or reason for the error or omission in an already filed return, the question which immediately arises is how to make things right. And, no matter what the reason for the error or omission, the course of action to be followed by the taxpayer is the same.

The first impulse of many taxpayers when a mistake or omission is discovered is to file another return, in which the complete and correct information is provided, but that’s not the right answer. There are, however, several ways in which a mistake or omission on an already filed tax return can be corrected, including online options.

As well the right response (although it seems counterintuitive) is, at least initially, to do nothing. The taxpayer must wait until the CRA has issued a Notice of Assessment with respect to the incorrect return already filed, for the very good reason that the return as filed isn’t in the CRA’s system until then. Once the Notice of Assessment is issued, however, there are three options available to the taxpayer to make the necessary correction.

Taxpayers who are registered for the CRA’s online service “My Account” can avail themselves of the Agency’s online “Change My Return” feature at Change my return: online adjustments for income tax and benefits returns - Canada.ca. The process is quite straightforward – using a drop-down menu, the taxpayer chooses the tax year for which he or she wants to make a change on the return and can then search for the line number on which the change is needed.  A “new amount” box will appear, into which the correct amount is input. A summary page will then show the old and new numbers and, if the taxpayer is satisfied that the information is correct, he or she clicks on “Submit Changes”. A confirmation number for the changes made is then provided. The CRA will then process the information and issue a new Notice of Assessment which reflects the changes made.

Taxpayers who are not registered for My Account but who have filed their tax return using one of the Agency’s electronic filing services (whether NETFILE or EFILE) can make a correction on their return by using the Agency’s ReFILE service. Like the Change my Return feature, the ReFILE service (available at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/refile-online-t1-adjustments-efile-service-providers.html) enables taxpayers to make corrections to an already filed return online, on the CRA website.

Essentially, taxpayers whose returns have been filed online (through NETFILE or EFILE) can make a correction using the same tax return preparation software that was used to prepare the return. Those taxpayers who used NETFILE to file their 2022 tax return can file an adjustment to a return filed for the 2019, 2020, 2021, and 2022 tax years. Where the return was filed using EFILE, the EFILE service provider can similarly file adjustments for returns filed for the 2019, 2020, 2021. or 2022 tax years.

There are limits to the ReFILE service. Regardless of who is using the service (i.e., the taxpayer or an EFILE service provider) the online system will accept a maximum of nine adjustments to a single return, and ReFILE cannot be used to make changes to personal information, like the taxpayer’s address or direct deposit details. There are also some types of tax matters which cannot be handled through ReFILE, like applying for a disability tax credit or child and family benefits.

While using the CRA’s online services, whether through ReFILE or Change my Return, is certainly the fastest way to make a correction on an already-filed return, taxpayers who don’t wish to use an online method do still have a paper option. The paper form to be used is Form T1-ADJ E (20), which can be found on the CRA website at T1-ADJ T1 Adjustment Request - Canada.ca. There is no limit to the number of changes or corrections which can be made using the T1-ADJ E (20) form.

A hard copy of a T1-ADJ(20) (or a letter) is filed by sending the completed document to the appropriate Tax Center, which is the one with which the tax return was originally filed. A listing of Tax Centres and their addresses can be found on the reverse of the TD-ADJ (20) form. As well, the taxpayer can go to https://www.canada.ca/en/revenue-agency/corporate/contact-information/tax-services-offices-tax-centres.html on the CRA website and select their location from the drop-down menu found there. The address for the correct Tax Centre will then be provided. 

Where a taxpayer discovers an error or omission in a return already filed, the impulse is to correct that mistake as soon as possible. However, it’s important to remember that no matter which method is used to make the correction – ReFILE, My Account. or the filing of a T1-ADJ in hard copy – it’s necessary to wait until the Notice of Assessment for the return already filed is received.  Corrections to a return submitted prior to the time that return is assessed simply can’t be processed by the Agency.

Once the Notice of Assessment is received, and an adjustment request is made, it will take at least a few weeks, usually longer, before the CRA responds. The CRA generally aims to respond to online requests within two weeks and to paper-filed requests within eight weeks.

There are a number of income sources available to Canadians in retirement. Those who participated in the work force during their adult life will have contributed to the Canada Pension Plan and will be able to receive CPP retirement benefits as early as age 60. Earning employment or self-employment income will also have entitled those individuals to contribute to a registered retirement savings plan (RRSP). A shrinking minority of Canadians will be able to look forward to receiving benefits from an employer-sponsored pension plan.

There are a number of income sources available to Canadians in retirement. Those who participated in the work force during their adult life will have contributed to the Canada Pension Plan and will be able to receive CPP retirement benefits as early as age 60. Earning employment or self-employment income will also have entitled those individuals to contribute to a registered retirement savings plan (RRSP). A shrinking minority of Canadians will be able to look forward to receiving benefits from an employer-sponsored pension plan.

Each of those income sources requires that an individual have made contributions during his or her working life in order to enjoy benefits in retirement. The fourth major source of retirement income for Canadians – the Old Age Security program – does not. Entitlement to OAS is based solely on the number of years of Canadian residence, and individuals who are resident in Canada for 40 years after the age of 18 can receive full OAS benefits. As of the first quarter of 2023, the full OAS benefit for individuals under the age of 75 is $687.56 per month.

The OAS program is distinct from other sources of retirement income in another, less welcome way, in that it is the only such income source for which the federal government can require repayment by the recipient. That repayment requirement comes about through the OAS “Recovery Tax”, which is universally known as the OAS “clawback”.

While the rules governing the administration of the clawback can be confusing, the concept is a (relatively) simple one. Anyone who received OAS benefits during 2022 and had income for that year of more than $81,761 must repay a portion of the benefits received. That repayment, or clawback, is administered by reducing the amount of OAS benefits which the individual receives during the next benefit year.

For example, an individual who receives full OAS during 2022 and has net income for the year of $95,000 will be subject to the clawback. He or she must repay OAS amounts received at a rate of 15 cents (or 15%) of every dollar of income over the clawback income threshold, as in the following simplified example:

Total OAS benefit for the year: $8,200

Total income for the year: $95,000

OAS income clawback threshold: $81,761

Income over clawback threshold: $13,239 times 15% = $1,985.85

Repayment amount required: $1,985.85

The federal government becomes aware of an individual’s income for 2022 only once the tax return for that year is filed, usually by May 1, 2023.  At that time, it will become apparent that $1,985.85 in OAS benefits received must be repaid. Consequently, in the following benefit year (which will run from July 2023 to June 2024), OAS benefits received will be reduced by $165.48 per month ($1,985 divided by 12 months).

The OAS clawback affects only individuals who have an annual income of at least $81,761, and it’s arguable that at such income levels, the clawback requirement does not impose any real financial hardship. Nonetheless, the OAS clawback is a perpetual irritant to those affected, perhaps because of the sense that they are being penalized for being disciplined savers, or good managers of their finances during their working years, in order to ensure a financially comfortable retirement.

While any sense of grievance can’t alter the reality of the OAS clawback, there are strategies which can be put in place to either minimize or, in some cases, entirely eliminate one’s exposure to that clawback. Some of those planning considerations are better addressed earlier in life, prior to retirement, However, it’s not too late, once one is already receiving OAS, to make arrangements to avoid or minimize the clawback.

In all cases, no matter what strategy is employed, the goal is to “smooth” one’s income from year to year, so that net income for each year comes in under the OAS clawback threshold and, not incidentally, minimizes exposure to the higher federal and provincial income tax rates which apply once income exceeds around $100,000.

The starting point, for taxpayers who are approaching retirement, is to determine how much income will be received from all sources during retirement, based on CPP and OAS entitlement, any savings accrued through an RRSP, and any amounts which may be received from a private pension plan. Anyone who has an RRSP must begin receiving income from that RRSP in the year after that person turns 71. However, it’s possible to begin receiving income from an RRSP at any time. Similarly, an individual who is eligible for CPP retirement benefits can begin receiving those benefits anytime between age 60 and age 70, with the amount of monthly benefit receivable increasing with each month receipt is deferred. The same calculation applies to OAS benefits, which can be received as early as age 65 or deferred up until age 70.

Once the amount of annual income is determined, strategies to smooth out that income can be put in place. Those strategies can include receiving income from an RRSP prior to age 71, so as to reduce the total amount within the RRSP and so thereby reduce the likelihood of having a large “bump” in income when required withdrawals kick in at that time.

Taxpayers are sometimes understandably reluctant to take steps which they view as depleting their RRSP savings, but receiving income from an RRSP doesn’t mean spending that income. While tax has to be paid on any withdrawals (no matter what the taxpayer’s age), the after-tax amounts can be contributed to the taxpayer’s tax-free savings account (TFSA), where they can compound free of tax. And, when the taxpayer has need of those funds, in retirement, they can be withdrawn free of tax and, they won’t count as income for purposes of the OAS clawback.

Taxpayers who are married can also “even out” their income by using pension income splitting, so that neither of them has sufficient income to be affected by the clawback.  Using pension income splitting, the spouse who has income over the OAS clawback threshold re-allocates the “excess” income to his or her spouse on the annual return, and that income is then considered to be income of the recipient spouse, for purposes of both income tax and the OAS clawback. To be eligible for pension income splitting, the income to be reallocated must be private pension income, which is generally income from an RRSP or registered retirement income fund (RRIF), or from an employer-sponsored pension plan.

There are two reasons why pension income splitting is a particularly attractive strategy for avoiding or minimizing the OAS clawback. First, there is no need to actually change the source or amount of income received by each spouse, as the reallocation of income is “notional”, existing only in the return for the year. Second, no decision has to be made on pension income splitting until it’s time to file the return for the previous year, meaning that spouses can easily calculate exactly how much income has to be reallocated in order to avoid the clawback, and to reduce tax liability generally. More information on the kinds of income eligible for pension income splitting, and the mechanics of the process, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/pension-income-splitting.html.

Detailed information on the OAS clawback  is available at https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/repayment.html.

Fortunately for the Canadian taxpayer, most individual income tax returns filed result in the payment of a tax refund to the tax filer. Notwithstanding, a significant number of taxpayers find, on completing the annual tax return, that money is owed to the Canada Revenue Agency. Of the returns for the 2022 tax year that were filed between mid-February and mid-March this year, over half a million taxpayers found themselves in that position. It’s likely, as well, that those who owe money on filing aren’t eager to file early, and so the number of taxpayers who must pay a tax balance for 2022 will almost certainly increase significantly between now and the payment deadline of May 1, 2023.

Fortunately for the Canadian taxpayer, most individual income tax returns filed result in the payment of a tax refund to the tax filer. Notwithstanding, a significant number of taxpayers find, on completing the annual tax return, that money is owed to the Canada Revenue Agency. Of the returns for the 2022 tax year that were filed between mid-February and mid-March this year, over half a million taxpayers found themselves in that position. It’s likely, as well, that those who owe money on filing aren’t eager to file early, and so the number of taxpayers who must pay a tax balance for 2022 will almost certainly increase significantly between now and the payment deadline of May 1, 2023.

While receiving a refund is the best possible outcome, the worst-case scenario for all taxpayers is to find out that they are faced with a large tax bill and an imminent payment deadline, and that they just don’t have the money to make the required payment by that deadline. Right now, many Canadians are already living with significant financial constraints, as they cope with both inflationary increases in the cost of household goods (especially groceries) and the impact of eight successive increases in interest rates since this time last year.

For the many Canadians who don’t have the means to pay a tax bill out of existing resources, that can mean borrowing the needed funds.  And, while that will mean paying interest on the borrowing, the interest cost incurred will likely be less than that which would be levied by the Canada Revenue Agency on the unpaid tax bill. 

Where, however, a tax bill can’t be paid in full out of either current resources or available credit, the Canada Revenue Agency is open to making a payment arrangement with the taxpayer. While, like most creditors, the CRA would rather get paid on time and in full, its ultimate goal is to collect the full amount of taxes owed. Consequently, the Agency provides taxpayers who simply can’t pay their bill for the year on time and in full with the option of paying an amount owed over time, through a payment arrangement.

There are two avenues available to taxpayers who want to propose a payment arrangement with the CRA. The first is a call to the Agency’s automated TeleArrangement service at 1-866-256-1147. When making such a call, it is necessary for the taxpayer to provide his or her social insurance number, date of birth, and the amount entered on line 15000 of the last tax return for which the taxpayer received a Notice of Assessment. For taxpayers who are up to date on their tax filings, that will be the Notice of Assessment for the return for the 2021 tax year. The TeleArrangement Service is available Monday to Friday, from 7 a.m. to 10 p.m., Eastern time.

Taxpayers who would rather speak directly to a CRA employee can call the Agency’s debt management call centre at 1-888-863-8657 or can complete an online form (available at https://apps.cra-arc.gc.ca/ebci/iesl/showClickToTalkForm.action) requesting a callback from a CRA agent.

No matter what payment arrangement is made, the CRA will levy interest charges on any amount of tax owed for the 2022 tax year which is not paid on or before May 1, 2023. Interest charges levied by the CRA tend to add up quickly, for two reasons. First, the interest rate charged by the CRA on outstanding tax amounts is, by law, higher than current commercial rates – the rate which will be charged from April 1 to June 30, 2023 is 9.0%. Second, interest charges levied by the CRA are compounded daily, meaning that each day interest is levied on the previous day’s interest charges. It is for these reasons that a taxpayer is, where at all possible, likely better off arranging private borrowing in order to pay any taxes owing by the May 1 deadline.

Finally, regardless of the taxpayer’s financial circumstances, there is one strategy which is always ill-advised. Taxpayers who can’t pay their tax bill by the deadline sometimes conclude that there is no point in filing if payment can’t be made. Those taxpayers are wrong. Where an amount of tax is owed and the return isn’t filed on time, there is an immediate tax penalty imposed of 5% of the outstanding tax amount – and interest charges start accruing on that penalty amount (as well as on the outstanding tax balance) immediately. For each full month that the return isn’t filed, a further penalty of 1% of the outstanding tax amount is charged, to a maximum of 12 months. Higher penalty amounts are charged, for a longer period, where the taxpayer has incurred a late-filing penalty within the past three years. In all cases, no matter what the circumstances, the right answer is to file one’s tax return on time. This year, for most taxpayers, that means filing on or before Monday May 1, 2023. For self-employed taxpayers (and their spouses) the filing deadline is Thursday June 15, 2023. However, for all taxpayers, the payment deadline for all 2022 income tax amounts owed is Monday May 1, 2023.

Detailed information on the options available to taxpayers who can’t pay their taxes on time and in full can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/payments-cra/individual-payments.html.

Most Canadians live their lives with only very infrequent contact with the tax authorities and are generally happy to keep it that way. Sometime between mid-February and the end of April (or June 15 for self-employed taxpayers and their spouses) a return must be filed by the taxpayer and a Notice of Assessment is then issued by the Canada Revenue Agency (CRA). In most cases, the taxpayer will receive a tax refund by direct deposit to his or her bank account, while in a minority of cases the taxpayer will have to pay a tax amount owing on or before May 1, 2023.

Most Canadians live their lives with only very infrequent contact with the tax authorities and are generally happy to keep it that way. Sometime between mid-February and the end of April (or June 15 for self-employed taxpayers and their spouses) a return must be filed by the taxpayer and a Notice of Assessment is then issued by the Canada Revenue Agency (CRA). In most cases, the taxpayer will receive a tax refund by direct deposit to his or her bank account, while in a minority of cases the taxpayer will have to pay a tax amount owing on or before May 1, 2023.

Sometimes, however, the process does not play out in quite that way. In some cases, the CRA will have questions about information reported on the taxpayer’s return – perhaps an income amount reported does not match up with the amount reported to the CRA by the payor of that income. In other cases, the taxpayer may have claimed a deduction or credit, and the CRA wants the taxpayer to provide them with the receipt or other documentation to support that deduction or credit claim. In both cases, the CRA may contact the taxpayer to resolve the discrepancy or to obtain the information needed to finish processing the taxpayer’s return. In some cases, that contact will occur before the CRA issues the Notice of Assessment with respect to the taxpayer’s return, while in others it will not take place until after the Notice of Assessment has been issued.

While no one particularly likes hearing from the tax authorities, it is critical that the taxpayer respond to any enquiry from the CRA. Failing to do so will mean, at a minimum, that the processing of one’s tax return will be delayed; or worse, a claim made on the return will be denied because the taxpayer has not responded to requests to provide the CRA with supporting documentation.

The problem which arises for the taxpayer is determining whether a communication received is in fact a legitimate request from the CRA or is part of a scam, phishing, or fraud attempt. Scams in which fraud artists claim to be from the CRA have become ubiquitous over the past decade or so, to the point that almost everyone has (or knows someone who has) received a fraudulent communication purporting to be from the tax authorities and requesting information from the taxpayer.

In an effort to address this issue, the CRA recently posted on its website a guide to how to distinguish legitimate queries received from the Agency from scams or phishing attempts. The Agency’s goal is two-fold: the first, of course, is to help taxpayers avoid becoming yet another victim of such frauds, and the second is to prevent situations in which taxpayers ignore legitimate communications from the Agency, having dismissed them as just another phishing attempt.

To help taxpayers verify that a contact is legitimately from the CRA, the Agency utilizes a number of strategies and security measures. First, any initial contact from the CRA will be by way of letter or phone call. The CRA does not send or receive emails pertaining to confidential individual tax matters. It also does not contact taxpayers by text message or on any social media sites. Taxpayers who have not signed up for the CRA service My Account will receive a letter from the CRA by regular mail, or will receive a phone call. Those who have signed up for My Account will be able to access any letters or electronic communication from the Agency on the CRA website, but only after signing into My Account. My Account, like all of the CRA’s sign-in services, now requires multi-factor authentication.

Where an unsolicited contact from the CRA to an individual taxpayer is by telephone, it can be difficult to determine whether that unfamiliar voice on the telephone is in fact a CRA employee. Any legitimate CRA employee will identify themself when they contact a taxpayer and will provide that taxpayer with their name and phone number to call them back, if needed. (Taxpayers should be aware that relying on call display to verify the source of the call is not a good idea, as scammers have been able to manipulate that technology to display what looks very much like, or even the same as, a legitimate CRA phone number.)

The Agency suggests that where there is any doubt about the identity of a caller claiming to be from the CRA, taxpayers consider taking the following steps to ensure that they are, in fact, speaking to a CRA employee.

1. Tell the caller you would like to first verify their identity.
2. Request and make a note of their:

• name,
• phone number, and
• office location.

Not infrequently, a taxpayer will contact the CRA through one of its individual or business tax help lines, which are answered by call center agents. Each of those telephone services offers an automated callback service – when wait times reach a certain threshold, the taxpayer is given the option of receiving a callback rather than continuing to wait on hold. Where the taxpayer chooses the callback option, he or she is provided with a randomized four-digit confirmation number. The CRA call center agent who returns the taxpayer’s call will repeat that number, so that the taxpayer can be certain that it is a CRA employee who is calling.

Finally, there are some actions which, if taken by anyone purporting to be from the CRA, should lead the taxpayer to immediately end the telephone call, including the following:  

• the caller does not give you proof of working for the CRA, for example, their name and office location;
• the caller pressures you to act now, uses aggressive language, or issues threats of arrest or sending law enforcement;
• the caller asks you to pay with prepaid credit cards, gift cards, cryptocurrency, or some other unusual form of payment;
• the caller asks for information you would not enter on your return or that is not related to money you owe the CRA, for example, a credit card number;
• the caller recommends that you apply for benefits:
  • do not provide information to callers offering to apply for benefits on your behalf;
  • you can apply for benefits directly on Government of Canada websites or by phone.

In addition, a CRA representative will never:

• demand immediate payment from the taxpayer by any of the following methods:
  • Interac e-transfer,
  • Cryptocurrency (Bitcoin),
  • Prepaid credit cards,
  • Gift card from retailers such as iTunes, Amazon, or others;
• ask the taxpayer for a fee to speak with a contact centre agent;
• set up a meeting in a public place to take a payment from the taxpayer;
• use aggressive language or threaten the taxpayer with arrest, deportation, or sending the police;
• leave voicemails that are threatening to the taxpayer, or that include the taxpayer’s personal or financial information; or
• send an email or text message with a link to the taxpayer’s refund.

While scams and frauds and their perpetrators have been around for literally centuries, changes in technology mean that most taxpayers are now accustomed to and at ease with conducting much of their personal and financial lives online, making it much easier to carry out such deceptions. And even newer technology, like artificial intelligence, poses additional threats for the future. In such an environment, the taxpayer’s best protection is to take whatever steps are needed to verify the legitimacy of any unsolicited contact received with respect to matters of tax or personal finances. Doing so is no longer just prudent, it’s a necessity.

It is an axiom of tax planning that the best year-end tax planning begins on January 1. And while it’s true that opportunities to make a significant dent in one’s tax payable for the year diminish as the calendar year winds down, it’s not the case that the time frame for taking advantage of such opportunities has passed.

It is an axiom of tax planning that the best year-end tax planning begins on January 1. And while it’s true that opportunities to make a significant dent in one’s tax payable for the year diminish as the calendar year winds down, it’s not the case that the time frame for taking advantage of such opportunities has passed.

Most tax planning strategies, in order to affect one’s tax liability for the year, must be put in place prior to December 31. The one major exception to that rule is contributions made to one’s registered retirement savings plan (RRSP), but even that must be done within 60 days after the end of the calendar year.

At this point there are a couple of ways to minimize the tax hit for 2022 – by claiming all available deductions and credits on the return, and also by making sure that those deductions and credits are structured and claimed in the way which will give the taxpayer the greatest tax benefit. It would seem logical to claim every possible deduction, to the maximum extent possible, but that’s not in fact always the best approach. It is counterintuitive, but sometimes the best overall tax result can be obtained by deferring tax deduction or credit claims to a future year, or by transferring them to another family member.

Two of the mostly widely available opportunities to do so involve claims for tax credits involving medical expenses incurred and charitable donations made. What follows is an outline of how those medical and charitable donation expense and credit claims can be structured to reduce tax payable for 2022, and in some cases, for future years.

Charitable donations

Taxpayers are entitled to make a claim on the annual tax return for charitable donations made in the current (2022) year or any of the previous five years. The reason it can sometimes makes sense not to claim a charitable donation in the year it was made arises from the way in which the charitable donations tax credit is structured to encourage higher donations.

That credit, at both the federal and provincial/territorial levels, is a two-tier credit. Federally, the first $200 in donations receives a credit of 15% of the total donation, or $30. However, donations above the $200 level receive a credit equal to 29% of the donation amount over $200.

Take, for example, a taxpayer who makes a regular contribution to a favourite charity of $100 each month, or $1,200 per year. Where he or she claims that donation on the annual return each year, that claim will result in a federal credit of $320 ($200 times 15%, plus $1,000 times 29%). Where, however, the same taxpayer defers the claim to the following year and claims a total of $2,400 in donations on a single return, he or she will receive a federal credit of $668. ($200 times 15%, plus $2,200 times 29%). Where the donations are accumulated and claimed once every five years, the federal credit received will be $1,712 ($200 times 15%, plus $5,800 times 29%). Under each scenario, the total charitable donation made is the same, but the amount of credit received increases with each year that the claim is deferred. Since each of the provinces and territories provide a two-tier credit (at varying rates, depending on the jurisdiction), the same result will be seen when calculating the provincial/territorial credit.

It's important to note as well that charitable donations made by either spouse can be combined and claimed on the return for one of those spouses, thereby increasing the amount of charitable donations available to claim and possibly the amount of credit which can be received.

Medical expenses

Notwithstanding our publicly funded health care system, there are a great (and increasing) number of medical and para-medical expenses for which coverage is not provided and which must be paid on an out-of-pocket basis. In many instances, it’s possible to claim a medical expense tax credit for those out-of-pocket costs.

The federal credit for such expenses is 15% of allowable expenses. As is usually the case, the provinces and territories also provide a credit for the same expenses, at varying rates.

Many taxpayers, with some justification, find the rules on the calculation of a medical tax credit claim confusing. First, there is an income threshold imposed. Medical expenses eligible for the credit are qualifying expenses which exceed 3% of net income, or (for 2022) $2,497, whichever is less. Put more practically, for 2022 taxpayers who have net income of $83,250 or more can claim medical expenses incurred over $2,497. Those with lower incomes can claim medical expenses which exceed 3% of that lower net income. For instance, a taxpayer having $35,000 in net income could claim qualifying medical expenses incurred over $1,050 (3% of $35,000).

The other aspect of the medical expense tax credit which can be confusing is the calculation of the optimal time period. Unlike most tax credit claims, the medical expense tax credit can be claimed for qualifying expenses which were paid in any 12-month period ending during the tax year. While confusing, this rule is beneficial, in that it allows taxpayers to select the particular 12-month period during which medical expenses (and therefore the resulting credit claim) is highest. The only restrictions are that the selected 12-month period must end during the calendar year for which the return is being filed and, of course, any expenses which were claimed on a previous return cannot be claimed again. 

While only expenses which exceed the $2,497 / 3% threshold may be claimed, it’s also possible to aggregate expenses incurred within a family and make a single claim for those expenses on the return of one spouse. Specifically, the rules allow families to aggregate medical expenses incurred for each spouse and for all children born in 2005 or later. While medical expenses incurred by a single family member might not be enough to allow him or her to make a claim, aggregating those expenses is very likely (especially for a family that does not have private medical insurance coverage) to mean that total expenses will exceed the applicable threshold.

In determining who will make the medical tax credit claim for a family, there are two points to remember. Since total medical expenses claimable are those which exceed the 3% of net income / $2,497 threshold, whichever is less, the greatest benefit will be obtained if the spouse with the lower net income makes the claim for total family medical expenses. However, the medical expense credit is a non-refundable one, meaning that it can reduce tax otherwise payable, but cannot create (or increase) a refund. Therefore, it’s necessary that the spouse making the claim have tax payable for the year of at least as much as the credit to be obtained, in order to make full use of that credit.

Finally, there are a huge number and variety of medical expenses which individuals and families may incur, and the rules governing which can be claimed and in what circumstances are very specific. In some cases, for instance, a doctor’s prescription will be required, while in others it will not. The very long list of medical expenses eligible for the credit, and any ancillary requirements, such as a prescription, can be found on the Canada Revenue Agency 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/lines-33099-33199-eligible-medical-expenses-you-claim-on-your-tax-return.html.

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 #63 Corporate

Personal:

Issue #63 Personal

Most Canadians deal with our tax system only once a year, when it’s time to complete and file the annual tax return. That return form – the T1 Individual Income Tax Return – is eight single-spaced pages long, and includes dozens of possible income inclusions, deductions, and credits, any one of which may or may not be relevant to a particular taxpayer’s situation. In addition, the tax return package includes numerous additional schedules, and one or more of those schedules must often be completed in order to make a claim for a particular deduction or credit on the T1 return itself.

Most Canadians deal with our tax system only once a year, when it’s time to complete and file the annual tax return. That return form – the T1 Individual Income Tax Return – is eight single-spaced pages long, and includes dozens of possible income inclusions, deductions, and credits, any one of which may or may not be relevant to a particular taxpayer’s situation. In addition, the tax return package includes numerous additional schedules, and one or more of those schedules must often be completed in order to make a claim for a particular deduction or credit on the T1 return itself.

All of this detail makes it easy for the majority of individuals to overlook valuable deduction and credit claims which may be available to them. And, while the Canada Revenue Agency (CRA) will correct minor arithmetical errors made on the return, it does not (and cannot) assess the taxpayer to include claims for deductions or credits which could have been made but were not.

One such often-overlooked claim is the one which can be made for payments made during the taxation year for annual union, professional, or similar dues. It’s a particularly beneficial claim since the expenditure in question is one which the taxpayer is obliged to make in any event and, where the requisite criteria are satisfied, the amount of such payment is fully deductible from income, without limit. Put another way, the income which was earned and used to pay annual union or professional dues is, where the related deduction is claimed, income on which no tax must be paid.

The deduction claimable for union and professional dues is particularly easy to overlook because of where it appears on the annual return. Although there are forms used by professionals and other self-employed taxpayers to claim business-related costs, as well as forms used by employees to claim allowable employment expenses, the deduction for union or professional dues doesn’t appear on either of those forms. Rather, it shows up as a single line (Line 21200) on page 4 of the T1 annual return.

The general rule for claiming such a deduction is described in the annual income tax return guide as follows:

Line 21200 – Annual union, professional, or like dues

Claim the total of the following amounts that you paid (or that were paid for you and reported as income) in the year related to your employment:

  - annual dues for membership in a trade union or an association of public servants
  - professional board dues required under provincial or territorial law
  - professional or malpractice liability insurance premiums or professional membership        dues required to keep a professional status recognized by law
  - parity or advisory committee (or similar body) dues required under provincial or     territorial law

There are, of course, requirements which must be satisfied in order for such payments to qualify for a deduction. The most important such restriction is that amounts paid must be those which are necessary in order for the taxpayer to obtain or maintain their professional standing. Every profession and trade has licensing and similar requirements which mandate that an individual maintain membership in a professional or similar association in order to practice their profession or trade. The costs of maintaining required membership in those organizations is deductible. Most professions and trades also have one or more voluntary associations which individuals may join by choice. However, the cost of maintaining membership in those voluntary associations, even if related to one’s trade or profession, is not deductible. So, for example, if membership in a given association does not affect professional status (e.g., the Canadian Bar Association for lawyers), dues or fees paid to it are not deductible. If, on the other hand, membership is necessary to maintain professional status (e.g., the Law Society of the province in which the individual lives and practices law), required dues paid to it are deductible.

While all such associations levy fees as a requirement of continuing membership and the right to practice the profession, invoices received for annual membership fees can cover a number of different charges and levies, and not all of those costs will be deductible. The CRA’s policy is that annual membership dues do not include initiation fees, licences, special assessments, or charges for anything other than the organization’s ordinary operating costs. An individual cannot, for instance, claim charges for pension plans as membership dues, even if receipts received show them as dues.

Where a claim for a deduction for professional membership or union dues is made, some other considerations arise. Generally, while it’s not necessary that having a particular professional designation be a requirement of the employee’s position in order for that employee to claim a deduction for related professional dues, the CRA does require that there be some connection between the employment and the professional association in question.

Take, for example, a chemical engineer who is employed by a company to sell chemical products or who is the president of a company that processes chemicals. There is sufficient connection between that person’s qualification as a chemical engineer and their employment duties that a deduction would be claimable for the cost of professional dues paid. On the other hand, a lawyer who is working full-time as the CEO of a furniture manufacturing and sales business does not satisfy the requirement and, accordingly, would not be entitled to deduct dues paid to maintain their professional status as a lawyer. 

It’s not uncommon for an employer to be willing to cover the cost of an employee’s professional dues as part of that employee’s benefit package. Where that is the case, and the employer’s payment of those dues does not appear on the employee’s T4 as a taxable benefit, no deduction for those costs can be claimed by the employee. Where, however, there is a taxable benefit which accrues to the employee (and that benefit is documented on a T4A and must be reported as part of the employee’s employment income), the employee can claim an offsetting deduction for eligible dues or fees paid on Line 21200 of the return.

General information on the deduction of professional membership fees or union dues is available in the 2022 General Income Tax and Benefit Guide. The same information can be found on the Canada Revenue Agency website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/212/menu-eng.html.

For many years, the Canada Revenue Agency (CRA) has been encouraging Canadian taxpayers to file their returns online, through the CRA’s website. And that message has clearly been heard, as the most recent statistics show that just under 92% of returns filed in 2022 were filed using one or the other of the CRA’s web-based filing methods. Those filing statistics also show that, even with the availability of tax software which greatly simplifies tax return preparation, most Canadians still don’t want to undertake that return preparation on their own. Of all returns filed, by any method, nearly 60% were filed using EFILE – meaning that the taxpayer paid someone else to prepare their return and file it electronically.

For many years, the Canada Revenue Agency (CRA) has been encouraging Canadian taxpayers to file their returns online, through the CRA’s website. And that message has clearly been heard, as the most recent statistics show that just under 92% of returns filed in 2022 were filed using one or the other of the CRA’s web-based filing methods. Those filing statistics also show that, even with the availability of tax software which greatly simplifies tax return preparation, most Canadians still don’t want to undertake that return preparation on their own. Of all returns filed, by any method, nearly 60% were filed using EFILE – meaning that the taxpayer paid someone else to prepare their return and file it electronically.

Notwithstanding the fact that the vast preponderance of returns are filed electronically, there are still other filing methods which are available and are used by taxpayers in substantial numbers. Last year, just over 2.6 million taxpayers filed a paper return, and a much smaller number (just under 53,000) filed a return over the phone.

Clearly, electronic filing is the overwhelming choice of Canadian taxpayers, and one of the greatest advantages of electronic filing is the speed at which returns filed by one of the CRA’s online methods can be processed. Generally, such returns are processed and a Notice of Assessment issued within two weeks (as compared to the anticipated eight-week processing time for paper-filed returns). Given that the majority of returns result in the payment of a refund, and that the average refund amount in 2022 was $2,093, it’s not hard to see why the vast majority of taxpayers have embraced electronic filing.

This filing season, as in past years, those who choose electronic filing have two choices – NETFILE and EFILE. The first of those – NETFILE (used last year by just under 33% of tax filers) – involves preparing one’s return using software approved by the CRA and filing that return on the Agency’s website, using the NETFILE service. The second method – EFILE – involves having a third party file one’s return online. Almost always, the EFILE service provider also prepares the return which they are filing.

The majority of Canadians who would rather have someone else deal with the intricacies of the Canadian tax system on their behalf can find information about EFILE on the CRA website at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/efile-individuals.html. This site also provides a listing (searchable by postal code) of authorized EFILE service providers across Canada, which can be found at https://apps.cra-arc.gc.ca/ebci/efes/epcs/prot/ntr.action.

Those who are able and willing to prepare their own tax returns and file online can use the CRA’s NETFILE service (which is available as of February 20, 2023); information on this service can be found at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/netfile-impotnet/menu-eng.html. While there are some kinds of returns which cannot be filed using NETFILE (for instance, a return for a non-resident of Canada, or for someone who declared bankruptcy in 2022), the vast majority of Canadians who wish to do so will be able to NETFILE their return.

At one time, it was necessary to obtain and provide an access code in order to NETFILE. While such a code is no longer a requirement, the CRA has provided tax filers with a taxpayer-specific code which can be included with the return for 2022. That eight-character alpha-numeric code is found (in very small type) in the top right hand corner of the first page of the 2021 Notice of Assessment, just under the Date Issued line for that Notice of Assessment. Including the code with your return is not mandatory:  however, you will be able to use information from the 2022 return when confirming your identity with the CRA only if the code was provided on that return.

A return can be filed using NETFILE only where it is prepared using tax return preparation software which has been approved by the CRA. While such software can be found for sale just about everywhere at this time of year, approved software which can be used free of charge, or for a nominal charge, is also available. A listing of free and commercial software approved for use in preparing individual returns for 2022 can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/netfile-overview/certified-software-netfile-program.html.

Taxpayers who want to obtain a hard copy of the tax return and guide package for 2022 can order that package online at https://apps.cra-arc.gc.ca/ebci/cjcf/fpos-scfp/pub/rdr?searchKey=ncp%20, to be sent to the taxpayer by regular mail. Taxpayers can also download and print a hard copy of the return and guide from the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package.html. Finally, the CRA will have sent, by regular mail, a hard copy of the 2022 tax return and guide package to anyone who paper-filed a return for 2021. That package should have arrived by February 20, 2023; taxpayers who should have received such a package but did not can call the CRA Individual Income Tax Enquiries line at 1 800 959 8281 to follow up and, if necessary, to request that a package be sent by mail.

A minority of taxpayers will have the option of filing their returns using a touch-tone telephone. That option, called File my Return service, will be available to eligible lower-income Canadians whose returns are relatively simple and whose tax situation remains relatively unchanged from year to year. For such taxpayers, it is important to file, even if there is no income to report, so that they receive the benefits and credits to which they are entitled. The telephone filing option is, however, available only to taxpayers who are advised by the CRA of their eligibility for the File my Return service; letters advising those individuals of their eligibility were sent out by the CRA in mid-February 2023. Like NETFILE, the File my Return service was available for the filing of 2022 tax returns beginning Monday February 20, 2023.

Finally, taxpayers who are not comfortable preparing their own returns, but for whom the cost of engaging a third party to do so is a financial hardship, have another option. During tax filing season, there are a number of Community Volunteer Tax Preparation Clinics where taxpayers can have their returns prepared free of charge by volunteers.  Once again this year, the services of such clinics are provided through a number of options, including drop-ins, in-person appointments, and telephone or virtual meetings.  A listing of the available clinics (which is updated regularly throughout the filing season) and their method of operation this tax season can be found on the CRA website at https://www.canada.ca/en/revenue-agency/campaigns/free-tax-help.html.

While there are a number of return preparation and filing options available to Canadian taxpayers, there’s no element of choice when it comes to the filing and payment deadlines for tax returns for 2022. The deadline for payment of any balance of taxes owed for 2022 is April 30, 2023. As April 30 falls on a Sunday this year, the CRA has announced that payments of 2022 taxes owed will be considered to have been made on time if they are made on or before Monday May 1, 2023. There are no exceptions to this deadline and, absent very unusual circumstances, no extensions are possible. Not surprisingly, the CRA makes it as easy as possible for Canadians to pay their taxes, offering no fewer than a dozen possible payment methods. Those methods are listed, and the available methods of payment explained, on the CRA website at https://www.canada.ca/en/revenue-agency/services/payments-cra/individual-payments/make-payment.html.

For the majority of Canadians, the income tax return for 2022 must also be filed on or before April 30. Here again, the CRA has, as a matter of administrative policy, extended that deadline to provide that returns will be considered filed on time if they are filed on or before Monday May 1, 2023. Self-employed taxpayers and their spouses have until Thursday June 15, 2023 to file their returns for 2022 (but they too must pay any balance of 2022 taxes owing on or before May 1, 2023).

The obligation to complete and file a tax return – and to pay any balance of taxes owed – recurs each spring with what probably seems to many taxpayers to be annoying regularity. That said, however, the T1 General tax return form which must be completed and filed each year by individual Canadian taxpayers is never exactly the same from one year to the next.

The obligation to complete and file a tax return – and to pay any balance of taxes owed – recurs each spring with what probably seems to many taxpayers to be annoying regularity. That said, however, the T1 General tax return form which must be completed and filed each year by individual Canadian taxpayers is never exactly the same from one year to the next.

Some of the changes found in each year’s T1 are the result of the indexing of many aspects of our tax system, as income brackets and tax credit amounts are increased to reflect the rate of inflation during the previous year. Other changes, however, arise from the introduction by the federal government of new deductions or credits, changes to the existing rules which govern the availability and amount of such deductions or credits, and, inevitably, the end of some tax credit programs.

This year, most of the changes to be found on the return for 2022 are of a targeted nature, affecting taxpayers who claim specific types of deductions or credits based on their personal or family circumstances. What follows is a summary of those changes which taxpayers will find on the return for 2022, as outlined by the Canada Revenue Agency (CRA) in its Guide to the 2022 return form.

First Time Home Buyer’s Tax Credit

The purchase of one’s first home is a milestone in anyone’s life, but also likely (especially in recent years) one of the most difficult milestones to accomplish. Assistance in that process is provided through the federal government’s First Time Home Buyers’ Tax Credit (FTHBTC).

As the name implies, the FTHBTC is a tax credit available to first-time home buyers in Canada. The “first-time home buyer” criterion is, however, somewhat misleading, in that the credit can be claimed by anyone who did not own a home in Canada during the current year or any of the previous four years. For 2022, then, anyone who was not a homeowner during 2018, 2019, 2020, 2021, or 2022, but then purchased a home in 2022, may qualify as a first-time home buyer for purposes of the credit.

Those who qualify and who purchase a qualifying home (which includes most kinds of housing in Canada, including detached, semi-detached, and condominium properties) could, for 2021 and previous tax years, claim a non-refundable tax credit of $750. For 2022 and subsequent years, the amount of that tax credit is doubled, to $1,500.

The non-refundable nature of the credit means that it can only be used to reduce federal tax otherwise payable, and cannot create or increase a tax refund. However, where a home has been purchased by two spouses, the total credit claim can be split, in any proportion, between the two of them.

Detailed information on the First Time Home Buyers’ Tax Credit for 2022 is available on the CRA website at  https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-31270-home-buyers-amount.html.

Home Accessibility Tax Credit

Most Canadians want to “age in place” – that is, to remain in the family home for as long as possible. In many cases, as homeowners age, changes to the layout or facilities in their homes must be made for the home to continue to be both safe and convenient. That often means renovations, which can range in cost from hundreds to tens of thousands of dollars. Some of that cost can be offset by claiming the federal Home Accessibility Tax Credit (HATC), and the amount of expenditure eligible for that credit has doubled for 2022.

The criteria which determine the eligibility of a particular expense are extremely broad, as any “home renovation or alteration expenses of an enduring nature that allow a qualifying individual to gain access to, or to be mobile or functional within the eligible dwelling or reduce the risk of harm to the qualifying individual within the dwelling or in gaining access to the dwelling” can qualify for the credit. And, for purposes of the credit, a qualifying individual is anyone who is over the age of 65 or who is eligible to claim the disability tax credit.

The range of expenses which qualify for the HATC can be anything from grab bars installed in a shower or bath, to a staircase chairlift or a full-scale renovation done to permit an individual to live on one floor of a dwelling. The HATC is particularly flexible in that it may be claimed by other family members who live in the same dwelling as the senior or disabled individual, where qualifying expenses are incurred for changes to that dwelling.

The actual amount of the HATC which can be claimed is 15% of qualifying expenses incurred. Prior to 2022, the maximum amount of expenses which could be claimed for purposes of the HATC in a particular calendar year was $10,000. For 2022 and subsequent years, that amount is doubled, to $20,000, meaning that the maximum credit which can be obtained is $3,000.

The HATC is a non-refundable credit (meaning that it can only reduce federal tax otherwise payable, and cannot create or increase a refund), but claims for the HATC in a year can be split among individuals who are eligible to claim the credit, in any proportions.

More information on the HATC for 2022 can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-31285-home-accessibility-expenses.html

Claims for the Disability Tax Credit

Canadians whose lives are significantly restricted by disability or ill health may be able to claim the Disability Tax Credit (DTC). The rules governing eligibility for the credit are detailed and sometimes complex and an individual must, in order to claim the credit, obtain certification from the CRA with respect to their eligibility. The credit is a significant one, in that a claim for the DTC will, for 2022, reduce federal tax payable by $1330.50.

One of the criteria which applies to determine whether an individual will be eligible for the DTC is the need to undergo what is termed “life-sustaining” therapy for a specified amount of time each week. A change to the tax rules provides that an individual who is diagnosed with type 1 diabetes is automatically considered to be someone who has met the requirement for “life-sustaining” therapy; such individuals could, therefore qualify for the DTC.

Taxpayers who may be affected by this change should note that obtaining authorization from the CRA to claim the DTC is lengthy process and that, without such authorization in place, any claim for the DTC on the annual return will be disallowed. It will not, therefore, be possible for a person with type 1 diabetes to claim the DTC on the return for 2022 unless they have already received authorization from the CRA as a person who qualifies for that credit. Such individuals would, however, be well advised to begin the process of receiving such authorization, so as to enable a claim for the DTC on the return for 2023 to be filed next spring. Detailed information on how to do so can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/segments/tax-credits-deductions-persons-disabilities/disability-tax-credit.html.

Medical Expense Tax Credit

While our publicly-funded health care system covers many types of medical expenses incurred by Canadians, there is nonetheless a long (and growing) list of expenses which must be paid on an out-of-pocket basis. Where that’s the case, a medical expense tax credit (METC) can be claimed on the annual return to help offset the impact of medical expenses incurred, where such expenses are deemed to be eligible for that credit.

One of the most costly medical procedures which is not always covered by government health care plans is treatment for infertility and/or surrogacy arrangements. Beginning with the 2022 tax year, such expenses are considered to be qualified expenses for purpose of the medical expense tax credit. Or, as described by the CRA:

… the list of eligible medical expenses has been expanded to include amounts paid to fertility clinics and donor banks in Canada to obtain donor sperm or ova to enable the conception of a child by the individual, the individual’s spouse or common-law partner, or a surrogate mother on behalf of the individual. In addition, certain expenses incurred in Canada for a surrogate or donor are considered medical expenses of the individual.

Individuals who have incurred such expenses and intend to make a claim for the METC should remember that there is a limit on the amount of expenses which can be claimed. As is the case for all medical expenses claimed for purpose of the METC, any claim is limited to the amount of eligible expenses incurred which, for 2022, exceeds either 3% of the taxpayer’s net income for the year or $2,479, whichever is less.

Information on the types of expenses related to infertility treatment and surrogacy which may now be claimed as medical expenses can be found on the CRA website in an extensive listing of eligible medical expense, 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/lines-33099-33199-eligible-medical-expenses-you-claim-on-your-tax-return/details-medical-expenses.html#frtlty.

As the pandemic dragged on into 2022, many employees continued to work from home for pandemic-related reasons. And probably at least as many employees reached an agreement with their employer that they would be able to continue to work from home for least some part of each work week, on a permanent basis. And, as was the case in 2020 and 2021, all of those workers may be entitled to claim a deduction on their 2022 tax return for expenses incurred to work from home.

As the pandemic dragged on into 2022, many employees continued to work from home for pandemic-related reasons. And probably at least as many employees reached an agreement with their employer that they would be able to continue to work from home for least some part of each work week, on a permanent basis. And, as was the case in 2020 and 2021, all of those workers may be entitled to claim a deduction on their 2022 tax return for expenses incurred to work from home.

Employees who work from home have always, assuming the requisite criteria are satisfied, been able to claim a portion of household expenses incurred. Doing so required the employee to obtain certification from the employer of the work-from-home arrangement, calculate household expenses incurred, determine the portion of such expenses which were attributable to the home office, and claim that amount on the annual return. Beginning in 2020, however, the Canada Revenue Agency (CRA), recognizing the greatly increased number of taxpayers who would be claiming home office expenses for the first time, relaxed the rules governing eligibility for claiming a deduction for home office expenses, and also introduced a new, temporary “flat rate” method of calculating the deduction for such expenses. The CRA has indicated that those more flexible rules, including the flat rate method, will continue to be allowed for the 2022 tax year.

Although the flat rate method is widely available, taxpayers who wish to do so and who qualify are still entitled to use the pre-existing detailed method under which actual eligible expenses incurred during the year are tallied and a percentage of those expenses claimed on the 2022 tax return. Given that the maximum deduction which can be claimed for the 2022 tax year using the flat rate method is just $500, taxpayers who worked from home for an extended period of time and who are willing to make the effort to retain and organize records for home office expenses, and to calculate the available deduction, will likely be rewarded with a better tax result.

Using the flat rate method

Although the flat rate method of claiming work from home expenses isn’t likely to produce the most beneficial tax result for the taxpayer, it has the undeniable advantage of greater simplicity.

In order to claim a deduction for costs related to a work-from-home space using the flat rate method, the following conditions must be met.

• The employee worked from home during 2022 as a consequence of the pandemic (including employees who were given a choice and elected to work from home); and
• The employee worked from home for more than 50% of the time for a period of at least four consecutive weeks during 2022.

In addition, the expenses claimed by the employee must be directly related to their work, and the employee must not have been fully reimbursed for such expenses by their employer. Where the employer reimburses only a portion of such expenses, the employee may still make a claim under the flat rate method, assuming the other criteria are met.

A taxpayer who meets all of the criteria for using the flat rate method can claim $2 for each day they worked from home during the four-consecutive-week qualifying period. They can then claim $2 per day for any additional days of working from home during the year. However, there is an overall cap on the amount of home office expenses which can be claimed under the flat rate method. For 2022, the maximum which can be claimed is $500. There is no requirement that the employee obtain a T2200 or a T2200S from the employer in order to make a flat rate claim, and no requirement that the employee keep or provide receipts for any costs incurred.

Using the detailed method

In order to claim a deduction for costs related to a work-from-home space using the detailed method, an employee must have worked from home for at least 50% of the time, during at least four consecutive weeks during 2022 as a consequence of the pandemic (including employees who were given a choice and elected to work from home).

Where work-from-home costs are claimed using the detailed method, the taxpayer ‘s employer must provide a signed a Form T2200S – Declaration of Conditions of Employment for Working at Home Due to Covid-19 or Form T2200 – Declaration of Conditions of Employment, certifying the work from home arrangement and the fact that the employee paid the costs relating to such arrangement.

Where there is any kind of reimbursement provided by the employer, the employer must specify the type of expense reimbursed, and the amount of reimbursement. And, of course, the employee cannot claim a deduction for any expenses for which reimbursement was received. Finally, the employee must keep all documents (invoices etc.) supporting their claim for work-from-home expenses. While those documents do not have to be filed with the return for 2022, the CRA has the right to ask for them in order to verify the claims by the taxpayer.

Once these threshold criteria are met, a broad range of costs becomes deductible by the employee. Specifically, a salaried employee can claim and deduct the part of specified costs that relate to their workspace, such as rent; utilities costs like electricity, heating, and water (or the portion of a condo fee attributable to such utilities costs); home maintenance and minor repair costs; and internet access (but not internet connection) fees.

Once total expenses are tallied, the taxpayer must determine the percentage of those expenses which can be deducted as home office expenses; the CRA provides detailed information on its website of how such determination is made. Generally, the employee determines the percentage based on the square footage of the workspace as a percentage of the overall square footage of the home. Where the workspace is not a separate room but is a shared space like a dining room, the employee must also calculate the number of hours for which that space is dedicated to work-from-home activities. Detailed information on how to make those calculations (including an online calculator) can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-22900-other-employment-expenses/work-space-home-expenses/work-space-use.html.

Planning ahead for 2023

Employees who are now working from home at least part of the time as a permanent working arrangement will, of course, be able to claim eligible home office expenses in 2023 and future tax years. The rules governing such claims will, however, change beginning in 2023, and employees who wish to make such a claim for 2023 should be aware of and planning for those changes now.

Essentially, the federal government has determined that, starting with the 2023 tax year, the more flexible rules which governed the deduction of expenses related to working from home (including the flat rate method) during 2020, 2021, and 2022 are no longer needed and therefore will no longer be available. Employees who wish to claim home office expenses for 2023 will need to qualify under the “traditional” rules which governed such expense claims prior to 2020.

Those rules require that the employee meet the following criteria in order to claim home office expenses:

• The employee was required by his or her employer to work from home during the year; and
• The work at home space is where the individual mainly (more than 50% of the time) did their work during the year; or
• The individual uses the workspace only to earn their employment income. They must also use it on a regular and continuous basis for meeting clients, customers, or other people in the course of their employment duties.

The employee must also obtain from their employer a completed and signed Form T2200 – Declaration of Conditions of Employment, certifying the work from home arrangement and the fact that the employee is responsible for paying the costs associated with such arrangement.

Employees who can qualify to claim a deduction under the rules for 2023 will need to retain the records needed to calculate such deduction using the detailed method (the only one available for 2023). At this point, all that’s required is to set aside things such as property tax and utility bills, receipts for purchases of office supplies, etc., to be used next spring when completing the return for 2023 and claiming a deduction for such expenses.  

While calculating the expenses which qualify for a home office expense deduction on the return for 2022 isn’t particularly complicated, the eligibility criteria for the deduction and determining the percentage of expenses eligible for that deduction can be detailed, especially as the range of work-from-home arrangements and work-from-home workspaces is almost limitless. The CRA has provided on its website a very helpful summary of both the general rules for claiming home office expenses for 2022, as well as guidance with respect to particular situations – for example, where two spouses share the same home office space. That information and guidance (including an FAQ document) can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-22900-other-employment-expenses/work-space-home-expenses.html.

Just about a year ago, in the 2022-23 budget, the federal government announced a number of measures to help Canadians who are trying to put together a down payment for the purchase a first home. The most significant of those measures was the Tax-Free First Home Savings Account (FHSA) which, as the name implies, allows first time home buyers to save on a tax-assisted basis (within prescribed limits) toward such a purchase.

Just about a year ago, in the 2022-23 budget, the federal government announced a number of measures to help Canadians who are trying to put together a down payment for the purchase a first home. The most significant of those measures was the Tax-Free First Home Savings Account (FHSA) which, as the name implies, allows first time home buyers to save on a tax-assisted basis (within prescribed limits) toward such a purchase.

The FHSA is available to eligible taxpayers starting in the current (2023) tax year. Due to the administrative requirements of putting the new FHSA in place, it will not actually be possible to open such a plan until April 1, 2023. Notwithstanding, Finance Canada has indicated that, for the 2023 tax year, full year contribution limits will apply, regardless of when a new plan is opened during the year.

Contributing to an FHSA

Under the program terms, any resident of Canada who is at least 18 years of age and who has not lived in a home which he or she owns in any of the current or four previous years can open an FHSA and contribute to that plan annually. Planholders will be able to contribute up to $8,000 per year to their plan, regardless of their income for that year. The $8,000 per year contribution must be made by the end of the calendar year, but planholders will be permitted to carry forward unused portions of their annual contribution limit, to a maximum of $8,000. For example, an individual who contributes $4,000 to an FHSA in 2023 would be allowed to contribute $12,000 in 2024 (representing $8,000 in contribution for 2024 plus $4,000 remaining from 2023). Regardless of the schedule on which contributions are made, there is a lifetime limit of $40,000 in contributions for each individual.

The real benefit of the FHSA program lies in the tax treatment of contributions. Individuals who contribute any amount in a year can deduct that amount from income, in the same manner as a registered retirement savings plan (RRSP) contribution. And, as with an RRSP, an individual is not required to claim a deduction for a contribution made during the year – he or she can make that contribution to an FHSA during a particular year, but wait to deduct that amount from income in a future year. When the planholder withdraws funds from the FHSA to purchase a first home, those withdrawal amounts – representing both original contributions and investment income earned by those contributions – are not taxed.

While funds are held within the FHSA, they can be held in cash, or can be invested in a broad range of investment vehicles. Specifically, such funds can be invested in mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates (GICs). Regardless of the investment vehicle chosen, interest, dividends, or any other type of investment income earned by those funds grows on a tax-free basis – that is, such investment income is not taxed as it is earned. 

Withdrawing funds from an FHSA

Given the generous tax treatment accorded contributions to a FHSA, there are inevitably some qualifications and restrictions placed on the use the plans. First, amounts withdrawn from a FHSA can be received tax free only if such withdrawals are “qualifying withdrawals”, meaning that the funds are used to make a qualifying home purchase. In order for a withdrawal to be a “qualifying withdrawal”, the planholder must have a written agreement to buy or build a home (which must be located in Canada) before October 1 of the next year. In addition, the planholder must intend to occupy that home within a year after buying or building it.

Amounts withdrawn from an FHSA and used for any other purpose are not qualifying withdrawals and the funds withdrawn are fully taxable in the year the withdrawal is made.

While Canadians who open an FHSA and make contributions to it are certainly hoping to be able to purchase a home, there are any number of reasons why their plans could change. Fortunately, the rules governing FHSAs provide planholders with a great deal of flexibility when it comes to the disposition of funds saved within an FHSA, in that  planholders can transfer all funds held within their FHSA to an RRSP or to a registered retirement income fund (RRIF) on a tax-free basis. Significantly, the amount which is transferred from an FHSA to an RRSP would not reduce or be limited by the individual’s RRSP contribution room. However, transfers made to an RRSP in these circumstances do not replenish FHSA contribution room – in other words, each eligible individual gets only one opportunity to save for the purchase of a first home using a FHSA. And, of course, any amounts transferred from an FHSA to an RRSP or RRIF will be taxable on withdrawal, in the same way as any other RRSP or RRIF withdrawal.

The ability to transfer funds between plans also works in the other direction. Individuals who have managed to accumulate funds within an RRSP will be allowed to transfer such funds to an FHSA (subject to the $8,000 annual and $40,000 lifetime contribution limits). While no deduction is permitted for funds transferred from an RRSP to an FHSA, that transfer does take place on a tax-free basis. Transfers made to an RRSP in these circumstances do not, however, replenish RRSP contribution room.

Closing an FHSA

Individuals who open an FHSA have 15 years from the date the plan is opened to use the funds for a qualifying home purchase. (Taxpayers must also close their FHSA by the end of the year in which they turn 71.)  While these rules do place some pressure on planholders with respect to the timing of their home purchase, there is some flexibility. Specifically, planholders who have not made a qualifying home purchase within the required 15-year time frame must then close the FHSA plan, but can still transfer funds held in the FHSA to their RRSP or RRIF, on a tax-free basis.

Finally, the FHSA program is complementary to the existing Home Buyers’ Plan (HBP). Under the HBP, an individual can withdraw up to $35,000 from his or her RRSP and use those funds for the purchase of a first home. Any such funds withdrawn must then be repaid to the RRSP over the next 15 years. The HBP will continue to be available to Canadians – however, an individual will not be permitted to make both an FHSA withdrawal and an HBP withdrawal in respect of the same qualifying home purchase.

The most recent information issued by Finance Canada with respect to the FHSA program can be found on its website at https://www.canada.ca/en/department-finance/news/2022/08/design-of-the-tax-free-first-home-savings-account.

For most taxpayers, the first few months of the year are a seemingly unending series of bills and payment deadlines. During January and February, many Canadians are still trying to pay off the bills from holiday spending. The first income tax instalment payment of 2023 is due on March 15 and the need to pay any tax balance for the 2022 tax year comes just six weeks after that, on May 1. Added to all of that, the deadline for making an RRSP contribution for 2022 falls on March 1, 2023.

For most taxpayers, the first few months of the year are a seemingly unending series of bills and payment deadlines. During January and February, many Canadians are still trying to pay off the bills from holiday spending. The first income tax instalment payment of 2023 is due on March 15 and the need to pay any tax balance for the 2022 tax year comes just six weeks after that, on May 1. Added to all of that, the deadline for making an RRSP contribution for 2022 falls on March 1, 2023.

The best advice on how to avoid a cash flow crunch, at least as it relates to the RRSP deadline, is to make RRSP contributions on a regular basis throughout the year. While that may be the preferred approach, it’s likely more a dream than a reality for most Canadians who have, over the past year, faced a cash flow crunch resulting from increased costs for everything from food to mortgage payments.

Notwithstanding that discouraging financial reality, Canadians who wish to deduct an RRSP contribution on their income tax return for 2022 are required to make that contribution on or before March 1, 2023. The maximum allowable current year contribution which can be made by any individual taxpayer for 2022 is 18% of that taxpayer’s earned income for the 2021 tax year, to a statutory maximum of $29,210.

Those are the basic rules governing RRSP contributions for the 2022 tax year. For most Canadians, however, those rules are just the starting point of the calculation, as millions of Canadian taxpayers have what is termed “additional contribution room” carried forward from previous taxation years. That additional contribution room arises because the taxpayer either did not make an RRSP contribution in each previous year or made one which was less than his or her maximum allowable contribution for the year. For many taxpayers that additional contribution room can amount to tens of thousands of dollars, and the taxpayer is entitled to use as much or as little of that additional contribution room as he or she wishes for the current tax year.

It’s apparent from the forgoing that determining one’s maximum allowable contribution for 2022 will take a bit of research. The first step in determining one’s total (current year and carryforward) contribution room for 2022 is to consult the last Notice of Assessment which was received from the Canada Revenue Agency (CRA). Every taxpayer who filed a return for the 2021 taxation year will have received a Notice of Assessment from the CRA, and the amount of that taxpayer’s allowable RRSP contribution room for 2022 will be summarized on page three of that Notice. Taxpayers who have discarded (or can’t find) their Notice of Assessment can obtain the same information by calling the CRA’s Telephone Information Phone Service (TIPS)  line at 1-800-267-6999. An automated service at that line will provide the required information, once the taxpayer has provided his or her social insurance number, month and year of birth and the amount of income from his or her 2021 tax return. Those who don’t wish to use an automated service can call the CRA’s Individual Income Tax Enquiries Line at 1-800-959 8281 and speak to a client services agent, who will also request such identifying information before providing any taxpayer-specific data. Finally, for those who have registered for the CRA’s My Account service, the needed information will be available online.

One question that doesn’t often get asked by taxpayers is whether it actually makes sense to make an RRSP contribution. The wisdom of making annual contributions to one’s RRSP has become an almost unquestioned tenet of tax and retirement planning, but there are situations in which other savings vehicles – particularly the Tax-Free Savings Account, or TFSA – may be the better short- or long-term option or even, in some cases, the only one available.

When it comes to making a contribution to one’s TFSA, the good news is the timelines and deadlines are much more flexible than those which govern RRSP contributions. A contribution to one’s TFSA can be made at any time of the year, and contributions not made during the current year can be carried forward and made in any subsequent year.

On the other hand, determining one’s total TFSA contribution room is significantly more complex than figuring out one’s allowable RRSP contribution amount, for two reasons. First, the maximum TFSA contribution amount has changed several times (increasing and decreasing) since the program was introduced in 2009. Second, and more important, individuals who withdraw funds from a TFSA can re-contribute those funds, but not until the year following the one in which the withdrawal is made. Especially where a taxpayer has several TFSA accounts, and/or a history of making contributions, withdrawals and re-contributions, it can be difficult to determine just where that taxpayer stands with respect to his or her current maximum allowable TFSA contribution amount.

In this case, there’s no help to be had from a Notice of Assessment, as the Canada Revenue Agency does not provide TFSA contribution information on that form. Information on one’s current year TFSA contribution limit can, however, be obtained from the CRA website, from the TIPS line at 1-800 267 6999 or its Individual Income Tax Enquiries line at 1-800-959 8281, as outlined above. It should be noted, however, that information on one’s current (i.e., 2023) TFSA contribution limit won’t be available through the TIPS line until mid-February 2023.

Determining which savings vehicle is the better option for a particular taxpayer will depend, for the most part, on the taxpayer’s current and future tax situation, the purpose for which the funds are being saved, and the taxpayer’s particular sources of retirement income.

Taxpayers who are saving toward a shorter-term goal, like next year’s vacation, should direct those savings into a TFSA. While choosing to save through an RRSP will provide a tax deduction on that year’s return and, possibly, a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP in a year or two. And, more significantly from a long-term point of view, repeatedly using an RRSP as a short-term savings vehicle will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn cannot be replaced. While the amounts involved may seem small, the loss of contribution room and the compounding of invested amounts over 25 or 30 years or more can make a significant dent in one’s ability to save for retirement.

Taxpayers who are saving toward the purchase of a first home will likely be better off contributing such savings to a First Home Savings Account (FHSA). While the FHSA is not available to taxpayers until the 2023 tax year (and so can’t create any tax savings for 2022) there are two benefits to waiting to open an FHSA and contributing to it in 2023. First, contributions to an FHSA are deductible from income in the same way as RRSP contributions. More significantly, however, amounts withdrawn from an FHSA for the purchase of a first home are received tax-free, resulting in a permanent tax savings that can’t be achieved through contributing to either an RRSP or a TFSA.

Taxpayers who are expecting their income to rise significantly within a few years – for example students in post-secondary or professional education or training programs – can save some tax by contributing to a TFSA while they are in school and their income (and therefore their tax rate) is low, allowing the funds to compound on a tax-free basis, and then withdrawing the funds tax-free once they’re working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted from income which would be taxed at that higher tax rate. And, if a need for funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Canadians aged 71 and older will find the RRSP vs. TFSA question irrelevant, as the last date on which taxpayers can make RRSP contributions is December 31 of the year in which they turn 71. Many of those taxpayers will, however, have converted their RRSP savings to a registered retirement income fund (RRIF) and anyone who has done so is required to withdraw (and be taxed on) a specified percentage of those RRIF funds every year. Particularly where required RRIF withdrawals exceed the RRIF holder’s current cash flow needs, that “excess” income can be contributed to a TFSA. Although the RRIF withdrawals made must still be included in income for the year and taxed as such, transferring the funds to a TFSA will allow them to continue compounding free of tax and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn in the future from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or for the federal age credit.

RRSPs and TFSAs (together with the new FHSA) are the most significant tax-free or tax-deferred savings vehicles available to Canadian taxpayers, and each has a place in most financial and retirement plans. To help taxpayers to make informed choices about their savings options, the Canada Revenue Agency provides a number of dedicated webpages about both RRSPs and TFSAs which can be found on the CRA website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/menu-eng.html and http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html.

Sometime during the month of February, millions of Canadians will receive mail from the Canada Revenue Agency. That mail, a “Tax Instalment Reminder”, will set out the amount of instalment payments of income tax to be paid by the recipient taxpayer by March 15 and June 15 of this year.

Sometime during the month of February, millions of Canadians will receive mail from the Canada Revenue Agency. That mail, a “Tax Instalment Reminder”, will set out the amount of instalment payments of income tax to be paid by the recipient taxpayer by March 15 and June 15 of this year.

Receiving an “Instalment Reminder” from the CRA won’t be a surprise for many recipients who have paid tax by instalments during previous tax years. For others, however, the need to make tax payments by instalment is a new and unfamiliar concept. That’s because for most Canadians – certainly most Canadians who earn their income through employment – the payment of income tax throughout the year is an automatic and largely invisible process, requiring no particular action on the part of the employee/taxpayer. Federal and provincial income taxes, along with Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, are deducted from each employee’s income and the amount deposited to an employee’s bank account is the net amount remaining after such taxes, contributions, and premiums are deducted and remitted on the employee’s behalf to the Canada Revenue Agency. While no one likes having to pay taxes, having those taxes paid “off the top” in such an automatic way is, relatively speaking, painless. Such is not, however, the case for the sizeable minority of Canadians who pay their income taxes by way of tax instalments

The CRA’s decision to send an Instalment Reminder to certain taxpayers isn’t an arbitrary one. Rather, an Instalment Reminder is generated when sufficient income tax has not been deducted from payments made to that taxpayer throughout the year. Put more technically, an Instalment Reminder will be issued by the CRA where the amount of tax which was or will be owed when filing the annual tax return is more than $3,000 in the current (2023) tax year and either of the two previous (2021 or 2022) tax years. Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income throughout the year is at least $3,000 less than their total tax owed for 2023 and either 2021 or 2022. For residents of Québec, that threshold amount is $1,800.

Such obligation arises on a regular basis for those who are self-employed, of course, and generally for those whose income is largely derived from investments. The group of recipients of a Tax Instalment Reminder often also includes retired Canadians, especially the newly retired, for two reasons. First, while most employees have income from only a single source – their paycheque – retirees often have multiple sources of income, including CPP and Old Age Security (OAS) payments, private retirement savings, and, sometimes, employer-provided pensions. And while income tax is deducted automatically from one’s paycheque, that’s not the case for most sources of retirement income. Relatively few new retirees realize that it’s necessary to make arrangements to have tax deducted “at source” from either their government source income (like CPP or OAS payments) or private retirement income like pensions or registered retirement income fund withdrawals, and to make sure that the total amount of those deductions is sufficient to pay the total tax bill for the year. It is that group of individuals who may be surprised and puzzled by the arrival of an unfamiliar “Instalment Reminder” from the CRA. However, no matter what kind of income a taxpayer has received, or why sufficient tax has not been deducted at source, the options open to a taxpayer who receives such an Instalment Reminder are the same.

First, the taxpayer can pay the amounts specified on the Instalment Reminder by the March and June payment due dates. Choosing this option will mean that the taxpayer will not face any interest or penalty charges, even if the amount paid by instalments throughout the year turns out to be less than the taxes actually payable for 2023. If the total of instalment payments made during 2023 turn out to be more than the taxpayer’s total tax liability for the year, he or she will of course receive a refund when the annual tax return is filed in the spring of 2024.

Second, the taxpayer can make instalment payments based on the amount of tax which was payable for the 2022 tax year (which will, of course, be known once the return for 2022 is completed). Where a taxpayer’s income has not changed significantly between 2022 and 2023 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2023 will be slightly less than it was in 2022, as the result of the indexation of both income tax brackets and tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2023 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease significantly from 2022 to 2023, such that his or her tax bill will also be substantially reduced, this option can make the most sense.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges if there is no additional tax payable when the return for the 2023 tax year is filed in the spring of 2024. However, should instalments paid have been late or insufficient, the CRA will impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2023 – until March 31, 2023 – is 8%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It’s also possible for the CRA to levy penalties for overdue or insufficient instalments, but that is done only where the amount of instalment interest charged for the year is more than $1,000.

Most Canadian taxpayers are understandably disinclined to pay their taxes any sooner than absolutely necessary. However, ignoring an Instalment Reminder is never in the taxpayer’s best interests. Those who don’t wish to involve themselves in the intricacies of tax calculations can simply pay the amounts specified in the Reminder. The more technical-minded (or those who want to ensure that they are paying no more than absolutely required, and are willing to take the risk of having to pay interest on any shortfall) can avail themselves of the second or third options outlined above.

Detailed information on the instalment payment system for 2023, and the calculation and payment options available to taxpayers, can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/payments-cra/individual-payments/income-tax-instalments.html.

2022 was a year of almost unrelenting bad financial news for Canadians, but perhaps no group was more affected by those changes than retirees who rely on income from unindexed pensions and from returns on invested savings. Most such retirees saw the value of their investments decline, as the S&P/TSX Composite Index dropped by over 8% during 2022. At the same time retirees had to cope with inflationary increases in the cost of most goods, including double digit percentage increases in the cost of food. Those who owned their own homes saw the value of those homes drop, on average, by 12% between December 2021 and December 2022. And, finally, retirees who carried debt were likely to be paying significantly more interest on that debt by the end of 2022 than they were at the beginning of the year.

2022 was a year of almost unrelenting bad financial news for Canadians, but perhaps no group was more affected by those changes than retirees who rely on income from unindexed pensions and from returns on invested savings. Most such retirees saw the value of their investments decline, as the S&P/TSX Composite Index dropped by over 8% during 2022. At the same time retirees had to cope with inflationary increases in the cost of most goods, including double digit percentage increases in the cost of food. Those who owned their own homes saw the value of those homes drop, on average, by 12% between December 2021 and December 2022. And, finally, retirees who carried debt were likely to be paying significantly more interest on that debt by the end of 2022 than they were at the beginning of the year.

With the 2022 calendar year behind us, those retirees must now prepare to file their tax returns for that year and face the prospect of having a tax bill to pay. Income tax is a big-ticket item for most retired Canadians and, especially for those who are no longer paying a mortgage, the annual tax bill may be the single biggest expenditure they are required to make each year. Fortunately, there is some good news for such retirees, as the Canadian tax system provides a number of tax deductions and credits available only to those over the age of 65 (like the age credit) or only to those receiving the kinds of income usually received by retirees (like the pension income credit), in order to help minimize that tax burden. What follows is an outline of the most common such deductions and credits which may be claimed by those over 65.

Most tax savings strategies (like charitable contributions) require an expenditure on the part of the taxpayer and must be completed prior to the end of the tax year. That’s not the case with any of the following tax saving credits, which simply need to be claimed on the annual return to filed in the spring of 2023.

Age credit

All Canadians who were age 65 or older at the end of 2022 can claim the age credit on their tax return for the year. For 2022, that credit amount is $7,898 which, when converted to a tax credit, reduces federal tax by $1,184.70.

While the age credit can be claimed by anyone aged 65 or older, the amount of credit claimable is reduced where the taxpayer’s income for 2022 was more than $39,826. Where that is the case, the available credit is reduced by 15% for each dollar of income over that $39,826 threshold amount.

Pension income credit

Most Canadians who are aged 65 or older receive income some kind of private pension income which would qualify for the pension income credit. For purposes of that credit, amounts received from an employer-sponsored pension plan qualify, but so too do amounts received from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF). Amounts received from government-sponsored retirement income plans (like the Canada Pension Plan or Old Age Security) do not, however, qualify.

Where the taxpayer receives amounts that qualify as pension income for purposes of the pension income credit, the first $2,000 of such income is effectively exempt from federal tax. In addition, unlike the age credit, the total income of the taxpayer does not limit a claim for the pension income credit in any way.

Disability tax credit

It’s not necessary to be over the age of 65 in order to claim the disability tax credit, but many taxpayers who are in that age group may be able to qualify. The DTC cannot be claimed on the annual tax return, however, unless an individual has previously been approved by the Canada Revenue Agency as someone who meets the required criteria.

In order to be approved as someone eligible to claim the disability tax credit, an individual must generally have significant loss of function in specified activities necessary for daily life, like vision or mobility. The process for being approved as eligible for the disability tax credit is not a quick one and so is unlikely to be claimable for 2022 by anyone who has not already been approved by the CRA.

However, taxpayers who believe that they may qualify should consider starting the process of applying for such approval. That process generally starts with an individual’s health care provider, who can complete the necessary form detailing the extent of the individual’s loss of function. While the process takes months, starting now could mean, where the application is approved, that the DTC can be claimed on the return for 2023.

The DTC is a significant credit, as the credit amount for 2022 is $8,870, and the reduction in federal tax payable is $1,330.50.  

Pension income splitting

The credits listed above are generally flagged on the annual return form or in the tax guide. There is, however, another income tax saving strategy available to older Canadians, but it is not nearly as well known and, unfortunately, isn’t readily apparent from either the tax return form or the annual income tax guide. That tax saving strategy is pension income splitting and it’s likely the case that many taxpayers who could benefit aren’t familiar with the strategy, especially if they are not receiving professional tax planning or tax return preparation advice.

That’s a particularly unfortunate reality because pension income splitting has the potential to generate more tax savings among taxpayers over the age of 65 (and certainly those over the age of 71, for whom RRSP contributions are no longer possible) than just about any other tax planning strategy available to older Canadians. And, unlike most tax saving strategies, pension income splitting does not require any expenditure of funds or any advance planning on the part of the taxpayer.

When described in those terms, pension income splitting can sound like one of those “too good to be true” tax scams, but that’s not the case. Essentially, what pension income splitting offers is a government-sanctioned opportunity for Canadian residents who are married (and, usually, where one spouse is aged 65 or older) to make a notional reallocation of private pension income between them on their annual tax returns, and to benefit from a lower overall family tax bill as a result.

Pension income splitting, like all forms of income splitting, works because Canada has what is called a “progressive” tax system, in which the applicable tax rate goes up as income rises. For 2022, the federal tax rate applied to about the first $50,000 of taxable income is 15%, while the federal rate applied to approximately the next $50,000 of such income is 20.5%. So, an individual who has $100,000 in taxable income would pay federal tax of about $17,750: if that $100,000 was divided equally between such individual and his or her spouse, each would have $50,000 in taxable income and federal tax payable of $7,500 each. The total federal family tax bill would be $15,000, meaning a permanent federal tax savings of $2,750.

The general rule with respect to pension income splitting is that a taxpayer who receives private pension income during the year is entitled to allocate up to half that income (without any dollar limit) to his or her spouse for tax purposes. In this context, private pension income means a pension received from a former employer and, where the income recipient is age 65 or older, payments from an annuity, an RRSP, or an RRIF. Government source pensions, like the Canada Pension Plan, Quebec Pension Plan, or Old Age Security payments do not qualify for pension income splitting, regardless of the age of the recipient.

The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension administrator. Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032, Joint Election to Split Pension Income, with their annual tax return. That form for the 2022 tax year, which is not included in the annual tax return package, can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1032.html or can be ordered by calling 1-800-959 8281.

On the T1032, the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for 2022. Since the splitting of pension income affects the income and therefore the tax liability of both spouses, the election must be made and the form filed by both spouses – an election filed by only one spouse or the other won’t suffice. In addition to filing the T1032, the spouse who is actual recipient of the pension income to be split must deduct from income the pension income amount allocated to his or her spouse. That deduction is taken on Line 21000 of their 2022 return. And, conversely, the spouse to whom the pension income amount is being allocated is required to add that amount to their income on the return, this time on Line 11600. Essentially, to benefit from pension income splitting, all that’s needed is for each spouse to file a single form with the CRA and to make a single entry on their 2022 tax return.

By the end of February or early March, taxpayers will have received (or downloaded) the information slips which summarize the income received from various sources during 2022. At that time, couples who might benefit from this strategy can review those information slips and calculate the extent to which they can make a dent in their overall tax bill for the year through pension income splitting.

Those wishing to obtain more information on pension income splitting than is available in the 2022 General Income Tax and Benefit Guide should refer to the CRA website at http://www.cra-arc.gc.ca/pensionsplitting/, where more detailed information is available.

The Employment Insurance premium rate for 2023 is set at 1.63%.

The Employment Insurance premium rate for 2023 is set at 1.63%.

Yearly maximum insurable earnings are set at $61,500, making the maximum employee premium $1,002.45.

As in previous years, employer premiums are 1.4 times the employee premium. The maximum employer premium for 2023 is therefore $1,403.43.

The Québec Pension Plan contribution rate for 2023 is set at 6.40% of pensionable earnings for the year.

The Québec Pension Plan contribution rate for 2023 is set at 6.40% of pensionable earnings for the year.

Maximum pensionable earnings for the year will be $66,600, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2023 will be $4,038.40 each.

The Canada Pension Plan contribution rate for 2023 is set at 5.95% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2023 is set at 5.95% of pensionable earnings for the year.

Maximum pensionable earnings for the year will be $66,600, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2023 will be $3,754.45 each, and the maximum self-employed contribution will be $7,508.90.

Dollar amounts on which individual non-refundable federal tax credits for 2023 are based, and the actual tax credit claimable, will be as follows:

Dollar amounts on which individual non-refundable federal tax credits for 2023 are based, and the actual tax credit claimable, will be as follows:

                                                                         Credit amount                    Tax credit

Basic personal amount*                                            $15,000                          $2,250

Spouse or common-law partner amount                     $15,000                          $2,250

Eligible dependant amount*                                       $15,000                         $2,250

Age amount                                                              $8,396                           $1,259.40

Net income threshold for erosion of age credit             $42,335

Canada employment amount                                      $1,368                          $205.20 

Disability amount                                                       $9,428                          $1,414.20

Adoption expenses credit                                            $18,210                        $2,731.50

Medical expense tax credit income threshold amount    $2,635

*For taxpayers having net income for the year of more than $165,430, amounts claimable for the basic personal amount, the spousal amount and the eligible dependant amount for 2023 may differ.

The indexing factor for federal tax credits and brackets for 2023 is 6.3%. The following federal tax rates and brackets will be in effect for individuals for the 2023 tax year.

The indexing factor for federal tax credits and brackets for 2023 is 6.3%. The following federal tax rates and brackets will be in effect for individuals for the 2023 tax year.

Income level                                     Federal tax rate

$15,000 - $53,359                                  15.0%

$53,360 - $106,717                                 20.5%

$106,718 - $165,430                               26.0%

$165,431 - $235,675                               29.0%

Over $235,675                                         33.0%

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax saving and planning strategies. Some of the more significant dates and changes for individual taxpayers for 2023 are listed below.

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax saving and planning strategies. Some of the more significant dates and changes for individual taxpayers for 2023 are listed below.

RRSP deduction limit and contribution deadline

The RRSP current year contribution limit for the 2022 tax year is $29,210. In order to make the maximum current year contribution for 2022 (for which the contribution deadline will be Wednesday March 1, 2023), it will be necessary to have earned income for the 2021 taxation year of $162,275.

Tax-free savings account contribution limit

The tax-free savings account (TFSA) contribution limit for 2023 is increased to $6,500. The actual amount which can be contributed by a particular individual includes both the current year limit and any carryover of uncontributed or re-contribution amounts from previous taxation years.

Taxpayers can find out their personal 2023 TFSA contribution limit by calling the Canada Revenue Agency’s Individual Income Tax Enquiries line at 1-800-959-8281. Those who have registered for the CRA’s online tax service My Account can obtain that information by logging into My Account.

Individual tax instalment deadlines for 2023

Millions of individual taxpayers pay income tax by quarterly instalments, which are due on the 15^th of March, June, September and December 2023.

The actual tax instalment due dates for 2023 are as follows:

• Wednesday March 15, 2023
• Thursday June 15, 2023
• Friday September 15, 2023
• Friday December 15, 2023

Old Age Security income clawback threshold

For 2023, the income level above which Old Age Security (OAS) benefits are clawed back is $86,912.

Individual tax filing and payment deadlines in 2023

For all individual taxpayers, including those who are self-employed, the deadline for payment of any balance of 2022 taxes owed is Monday May 1, 2023.

Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2022 on or before Monday May 1, 2023.

Self-employed taxpayers and their spouses must file a 2022 income tax return on or before Thursday June 15, 2023.

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 #62 Corporate

Personal:

Issue #62 Personal

Canada’s retirement income system is often referred to as a three-part system. Individuals earning income from employment or self-employment can contribute to a registered retirement savings plan (RRSP) and withdraw funds from that plan in retirement. A much smaller (and shrinking) group of Canadians will receive income in retirement from an employer-sponsored pension plan. Finally, there are two government sponsored retirement income programs. Under the first, Canadian retirees who participated in the paid work force during their adult life will have contributed to the Canada Pension Plan (CPP) and will be able to receive CPP retirement benefits as early as age 60.

Canada’s retirement income system is often referred to as a three-part system. Individuals earning income from employment or self-employment can contribute to a registered retirement savings plan (RRSP) and withdraw funds from that plan in retirement. A much smaller (and shrinking) group of Canadians will receive income in retirement from an employer-sponsored pension plan. Finally, there are two government sponsored retirement income programs. Under the first, Canadian retirees who participated in the paid work force during their adult life will have contributed to the Canada Pension Plan (CPP) and will be able to receive CPP retirement benefits as early as age 60.

The second federal government retirement income program – the Old Age Security (OAS) program – is different from all other retirement income programs in that it does not require an individual to make contributions to the program during his or her working life in order to receive benefits in retirement. Rather, entitlement to OAS is based on the number of years of Canadian residence, and individuals who are resident in Canada for 40 years after the age of 18 can receive full OAS benefits. As of the fourth quarter of 2022, those full OAS benefits are equal to $685.50 per month.

The OAS program is distinct from other sources of retirement income in another, less welcome way, in that it is the only retirement income source for which the federal government can require repayment by the recipient. That repayment requirement comes about through the OAS “Recovery Tax”, which is universally known as the OAS “clawback”.

While the rules governing the administration of the clawback can be confusing, the concept is a (relatively) simple one. Anyone who receives OAS benefits during the year and has income for that year of more than (for 2022) $81,761 must repay a portion of the OAS benefits received. That repayment, or clawback, is administered by reducing the amount of OAS benefits which the individual receives during the next benefit year.

Since the OAS clawback affects only individuals who have an annual income for 2022 of at least $81,761, it’s arguable that at such income levels, the clawback requirement does not impose any real financial hardship. Nonetheless, the OAS clawback is a perpetual irritant to those affected, perhaps because of the sense that they are being penalized for being disciplined savers, or good managers of their finances during their working years, in order to ensure a financially comfortable retirement.

While any sense of grievance can’t alter the reality of the OAS clawback, there are strategies which can be put in place to either minimize or, in some cases, entirely eliminate one’s exposure to that clawback. Some of those planning considerations are better addressed earlier in life, prior to retirement, However, it’s not too late, once one is already receiving OAS, to make arrangements to avoid or minimize the clawback.

In all cases, no matter what strategy is employed, the goal is to “smooth” one’s income from year to year, so that net income for each year comes in under the OAS clawback threshold and, not incidentally, minimizes exposure to the higher federal and provincial income tax rates which apply once taxable income exceeds around $100,000.

The starting point, for taxpayers who are approaching retirement, is to determine how much income will be received from all sources during retirement, based on CPP and OAS entitlement, any savings accrued through an RRSP, and any amounts which may be received from an employer-sponsored pension plan. Anyone who has an RRSP must, by the end of the year in which they turn 71, convert that plan into a registered retirement income fund (RRIF) or purchase an annuity. Under either scenario, the taxpayer will begin receiving income from the RRIF or the annuity in the following year. However, it’s possible to begin receiving income from an RRSP or an RRIF at any time. Similarly, an individual who is eligible for CPP retirement benefits can begin receiving those benefits anytime between age 60 and age 70, with the amount of monthly benefit receivable increasing with each month receipt is deferred. The same calculation applies to OAS benefits, which can be received as early as age 65 or deferred up until age 70.

Once the amount of annual income is determined, strategies to smooth out that income can be put in place. One of those strategies is to withdraw income from an RRSP or an RRIF prior to age 71, so as to reduce the total amount within the RRSP or RRIF and so thereby reduce the likelihood of having a large “bump” in income when required withdrawals kick in at that time.

Taxpayers are sometimes understandably reluctant to take steps which they view as depleting their retirement savings, but receiving income from an RRSP or an RRIF doesn’t have to mean spending that income. While tax has to be paid on any withdrawals (no matter what the taxpayer’s age), the after-tax amounts can be contributed to the taxpayer’s tax-free savings account (TFSA), where they can earn investment income free of tax. And, when the taxpayer has need of those funds, in retirement, they can be withdrawn free of tax and won’t count as income for purposes of the OAS clawback or any other tax credits or benefits.

Taxpayers who are married can also “even out” their income by using pension income splitting, so that neither of them has sufficient income to be affected by the clawback. Using pension income splitting, the spouse who has income which exceeds the OAS clawback threshold re-allocates the “excess” income to his or her spouse on the annual return, and that income is then considered to be income of the recipient spouse, for purposes of both income tax and the OAS clawback. To be eligible for pension income splitting, the income to be reallocated must be private pension income, which is generally income from an RRSP, RRIF, or annuity, or from an employer-sponsored pension plan.

There are two reasons why pension income splitting is a particularly attractive strategy for avoiding or minimizing the OAS clawback. First, there is no need to actually change the source or amount of income received by each spouse, as the reallocation of income is “notional”, existing only on the return for the year. Second, no decision has to be made on pension income splitting until it’s time to file the return for the previous year, meaning that spouses can easily calculate exactly how much income has to be reallocated in order to avoid the clawback, and to reduce tax liability generally. More information on the kinds of income eligible for pension income splitting, and the mechanics of the process, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/pension-income-splitting.html.

As the pandemic continues to wane, traditional employer-sponsored holiday social events have once again become a reality – although, as in all aspects of pandemic life, such events will likely be a hybrid of “virtual” and in-person functions.

As the pandemic continues to wane, traditional employer-sponsored holiday social events have once again become a reality – although, as in all aspects of pandemic life, such events will likely be a hybrid of “virtual” and in-person functions.

In addition to restoring the annual holiday social event employers may, given the current difficulties in attracting and retaining employees, have an added incentive to show their appreciation to current employees by means of a holiday gift or bonus.

What such employers certainly don’t want to do is to create a tax headache for their employees. Unfortunately, it’s also the case that a failure to properly structure such gifts or other extras like holiday parties can result in unintended and unwelcome tax consequences to those employees. And this year, recognizing the ways in which holiday-related employer gifts and employer-sponsored social events have changed over the past three years, the Canada Revenue Agency (CRA) has responded by updating its policies to address those new realities.

Trying to formulate and administer the tax rules around holiday gifts and celebrations is something of a no-win situation for the CRA. On an individual or even a company level, the amounts involved are usually small, or even nominal, and the range of situations which must be addressed by the related tax rules are virtually limitless. As a result, the cost of drafting and administering those rules can outweigh the revenue generated by the enforcement of such rules, to say nothing of the potential ill-will generated by imposing tax consequences on holiday gifts or parties. Nonetheless, the potential exists for employers to provide what would otherwise be taxable remuneration in the guise of holiday gifts, and it’s the responsibility of the tax authorities to ensure that such situations don’t slip through the tax net.

The starting point for the CRA’s rules is that any gift (cash or non-cash) received by an employee from his or her employer at any time of the year is considered to constitute a taxable benefit, to be included in the employee’s income for that year.

The CRA does, however, make some administrative concessions in this area, allowing non-cash gifts (within a specified annual dollar limit) to be received tax-free by employees, as long as such gifts are given on significant dates or events, like religious holidays such as Christmas or Hanukkah, or on the occasion of a birthday, a marriage, or the birth of a child.

In sum, the CRA’s administrative policy is simply that such non-cash gifts to an arm’s length employee, regardless of the number of such gifts, will not be taxable if the total fair market value of all such gifts (including goods and services tax or harmonized sales tax) to that employee is $500 or less annually. The total value over $500 annually will be a taxable benefit to the employee and must be included on the employee’s T4 for the year, and on which income tax must be paid.

It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500-per-year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts, and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of amount. For this purpose, the CRA considers both currency and cheques to be cash. As well, in situations in which an employee selects and purchases something, submits a receipt to the employer and receives reimbursement for that purchase, that employee is considered to have received a cash gift, in the amount of the purchase/reimbursement.

Other instances of gifts made to employees are not so clear cut, as even a gift or award which cannot be converted to cash can be considered by the CRA to be a near-cash gift. Drawing a firm line between cash/near-cash gifts and non-cash gifts can be difficult, and the CRA provides the following information to help clarify that difference.

Examples of a near-cash gift or award

• Something easily converted to cash, such as bonds, securities, or precious metals;
• Gift cards (with the exception outlined below);
• A prepaid card issued by a financial institution that can be used to pay for purchases; and
• Digital currency which is electronic money (i.e., cryptocurrencies not issued by a government or central bank).

Under the CRA’s previous policy, gift cards were considered to be near-cash gifts and fully taxable to the employee who received one, but the CRA has now carved out an exception to that policy. Specifically, effective as of the 2022 tax year, a gift card that meets all of the following criteria will be treated as a non-cash gift, and subject to the usual rules governing non-cash gifts:

• the card comes with money already on it and can only be used to purchase goods or services from a single retailer or group of retailers identified on the card;
• the terms and conditions of the gift card clearly state that amounts on the card cannot be converted into cash; and
• the employer keeps a log to record details of the gift card information including the date, the employee’s name and the reason for providing the gift card, as well as the type and amount of the gift card.

It may seem nearly impossible to plan for employee holiday gifts without running afoul of one or more of the detailed rules and administrative policies surrounding the taxation of such gifts and benefits. However, designing a tax-effective plan is possible, if the following rules are kept in mind.

Cash or near-cash gifts should be avoided, as they will, no matter how large or small the amount, almost always create a taxable benefit to the employee. The sole exception to that rule is the exception carved out by the CRA which now (for 2022 and subsequent tax years) treats gift certificates as non-cash gifts, but only where such gift certificates meet the criteria listed above.

Where non-cash holiday gifts are provided to employees, gifts with a value of up to $500 can be received free of tax. The employer must be mindful of the fact that the $500 limit is a per-year and not a per-occasion limit. Where the employee receives non-cash gifts with a total value of more than $500 in any one taxation year, the portion over $500 is a taxable benefit to the employee.

In addition to the new rules governing employee gifts, the tax treatment of employer sponsored holiday social events has changed under the CRA’s new policies. While the basic policy which determines whether an event does or does not create a taxable benefit to employees is essentially the same, there is some difference in the way virtual and in-person events are treated for tax purposes.

The general and long-standing rule is that a holiday social event does not create a taxable benefit to employees where the event is open to all employees and the per-person cost of the event is below a specified threshold.

For 2022, an employer-sponsored social event which is in-person or is a combination of in-person and virtual attendance will not create a taxable benefit for employees if the per-person cost is less than $150. Ancillary costs such as transportation home, taxi fare, and overnight accommodation for attendees are not included in the total cost limit for the event. As well, where gift cards are provided to employees who are attending “virtually”, such gift cards must meet the criteria listed above which allows the characterization of such gift cards as a non-cash gift.

Where an employer-sponsored social event is entirely virtual in nature, different limits apply. Those limits are as follows.

• where a virtual social event includes meals, beverages, and delivery services, the event will not be a taxable benefit to employees if the total cost is $50 per employee or less.
• where a virtual social event includes meals, beverages, delivery services, and entertainment, the event will not be a taxable benefit to employees if the total cost is $100 per employee or less.

Finally, employers should note that where the per employee dollar limits outlined above are exceeded, the entire per-employee cost of the event is treated as a taxable benefit – not just the amount by which the per-employee cost exceeds those prescribed dollar limits. And, finally, in order to benefit from those prescribed limits, employers are restricted to holding six or fewer employer-paid social events each year.

The range and variety of social events and employee gifts which can be provided by an employer to its employees is almost limitless, and where the government seeks to draft rules to govern the tax treatment of such a range of possibilities, complexity is inevitable. The best advice to be given to employers in the circumstances is to consider carefully the kinds of gifts which are given and to be mindful of the dollar amount limits imposed on non-cash gifts and employer-paid social gatherings. After all, at the end of the day, a gift which results in unintended and unwanted tax consequences is unlikely to engender much holiday spirit or goodwill on the part of the employee who receives it.

The worst of the COVID-19 pandemic which began almost three years ago is now (hopefully) behind us. That doesn’t mean, however, that Canadians aren’t still dealing with the unwelcome consequences of the pandemic, in a number of ways.

The worst of the COVID-19 pandemic which began almost three years ago is now (hopefully) behind us. That doesn’t mean, however, that Canadians aren’t still dealing with the unwelcome consequences of the pandemic, in a number of ways.

One of those long-term consequences relates to pandemic benefits which were paid by the federal government and received by individuals across Canada for income support . Those individual pandemic benefit programs ended several months ago, in May of 2022, and the federal government continues to seek repayment of such benefits by individuals who were either not entitled to receive them, or who received benefits in amounts greater than they were eligible for.

It's not at all surprising that overpayments of individual pandemic benefits took place, for a number of reasons. While there were undoubtedly individuals who deliberately made fraudulent claims for benefits to which they knew they were not entitled, it’s likely that most instances of benefit overpayments arose for other reasons. The first such reason is the sheer number of Canadians who received such benefits. According to Statistics Canada, more than two thirds of adult Canadians benefited from at least one pandemic relief program in 2020 alone. As well, in the first six months of the pandemic (March to September 2020) a single program – the Canada Emergency Response Benefit (CERB) – provided income to over one quarter of Canadian adults. Second, as the pandemic continued, the CERB was replaced by, in turn, the Canada Recovery Benefit, the Canada Recovery Caregiving Benefit, the Canada Recovery Sickness Benefit, and the Canada Worker Lockdown benefit. Given that each of these programs had its own eligibility criteria and benefit periods, confusion and error over eligibility for benefits at any particular time wasn’t just likely, it was almost inevitable. Third, the largest individual pandemic benefit program – the CERB – was administered simultaneously by two different federal government entities – the Canada Revenue Agency (CRA) and Employment and Social Development Canada. Consequently, there were possibly instances in which an individual claimed and received amounts from both entities, not understanding that the same benefit was incorrectly being paid twice. As well, eligibility for pandemic benefits depended, in some instances, on whether an individual was already receiving Employment Insurance benefits, leading to more confusion. And, finally, especially in the early days of the pandemic, individuals who applied for pandemic benefits self-certified their eligibility as part of the online application process. In the interests of getting such benefits into the hands of suddenly unemployed Canadians as quickly as possible, there was no further verification process carried out to determine whether recipients were, in fact, entitled to the benefits claimed and paid.

Regardless of the reasons why an overpayment of benefits occurred, such overpayments must now be repaid. However, in light of the factors outlined above, the federal government has made two decisions with respect to such required repayments. The first such decision is only individuals who received an overpayment of benefits through intentional fraud will face “additional” unspecified consequences – likely in the form of interest and penalties, or even legal consequences. The second decision is that while individuals who received benefit overpayments through innocent error or misunderstanding will be required to repay any overpayment of benefits, there will be no interest charges levied on any of the amounts which they must repay.

The list of benefit programs for which repayment of overpayments will be required is as follows.

• Canada Emergency Response Benefit;
• Canada Emergency Student Benefit;
• Canada Recovery Benefit;
• Canada Recovery Caregiving Benefit;
• Canada Recovery Sickness Benefit;
• Canada Worker Lockdown Benefit.

There are, as well, tax consequences to both receipt and repayment of benefits. Benefits paid under each of these programs constituted taxable income to the recipient and would have been included on a T4A slip issued by the federal government for the tax year in which the benefits were received. Those amounts would have been reported as income on the tax return for that year, and income tax paid on those amounts by the benefit recipient.

Where benefit amounts received in previous years (and on which income tax was paid) are repaid to the federal government, the person who made those repayments is entitled to claim a deduction for the repayment amount on his or her tax return.

Where a repayment is made between January 1, 2021 and December 31, 2022, the taxpayer can choose which tax year to claim that deduction from income or can split the deduction between tax years, whichever gives the best tax result. Where a repayment is made after the end of 2022, however, the deduction can be claimed only in the year that the repayment is made.

The specific rules with respect to deductions claimed for repayments made during 2021 and 2022 are as follows.

For benefit repayments made in 2021, the taxpayer may:

• claim the deduction on the 2021 tax return;
• claim the deduction on the 2020 tax return if he or she received the amount in 2020;
• split the deduction between the 2020 and 2021 tax returns if he or she received the amount in 2020.

For benefit repayments made in 2022, the taxpayer may:

• claim the deduction on the 2022 tax return;
• claim the deduction on the tax return for the year he or she received the benefit (2020 or 2021);
• split the deduction between tax returns.

In January of 2023, the Canada Revenue Agency will be issuing a new form – Form T1B Request to Deduct Federal COVID-19 Benefits Repayment in a Prior Year – which will make it easier for taxpayers to claim a repayment made in 2022 as a deduction on a tax return for a prior tax year.

Not surprisingly, the federal government is making it as easy as possible for Canadians to repay benefit overpayments, by providing them with multiple options when it comes to making such repayments. Repayments can be paid online, on the website of the CRA or the taxpayer’s financial institution. Payments can also be sent by mail, in the form of a cheque or money order (not cash), and any such cheque or money order should be made payable to the Receiver General of Canada. Additionally, repayments can be made at a Canada Post location, using a debit card, with cash, or by using a QR code, which can be downloaded from the CRA website.

Given current economic conditions and the length of time which has passed since some of these benefit payments were made, there will likely be many instances in which benefit recipients will be unable to make immediate repayment in full. In such circumstances, the CRA is willing to receive such repayments over time, under the terms of a payment arrangement with the taxpayer. Once again, no interest charges will be levied on outstanding repayment obligations.

The CRA recently posted on its website detailed information on its current COVID-19 benefit repayment policies and procedures. That information can be found at https://www.canada.ca/en/revenue-agency/services/payments-cra/individual-payments/repay-covid-benefits.html.

For individual Canadian taxpayers, the tax year ends at the same time as the calendar year. And what that means for individual Canadians is that any steps taken to reduce their tax payable for 2022 must be completed by December 31, 2022. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan (RRSP) contributions. With some exceptions, such contributions can be made any time up to and including March 1, 2023, and claimed on the return for 2022.)

For individual Canadian taxpayers, the tax year ends at the same time as the calendar year. And what that means for individual Canadians is that any steps taken to reduce their tax payable for 2022 must be completed by December 31, 2022. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan (RRSP) contributions. With some exceptions, such contributions can be made any time up to and including March 1, 2023, and claimed on the return for 2022.)

While the remaining time frame in which most tax planning strategies for 2022 can be implemented is only a few weeks, the good news is that the most readily available of those strategies don’t involve a lot of planning or complicated financial structures – in many cases, it’s just a question of considering the timing of steps which would have been taken in any event. What follows is a listing of some of the steps which should be considered by most Canadian taxpayers as the year-end approaches.

Charitable donations

The federal government and each of the provincial and territorial governments provide a tax credit for donations made to registered charities during the year. In all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year – there are no exceptions.

There is, however, another reason to ensure donations are made by December 31. The credit provided by each of the federal, provincial, and territorial governments is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. For the minority of taxpayers who have taxable income (for 2022) over $221,708, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2022 will receive a federal credit of $88.00 (($200 × 15%) + ($200 × 29%)). If the same amount is donated, but the donation is split equally between December 2022 and January 2023, the total credit claimable is only $60.00 (($200 × 15%) + ($200 × 15%)), and the 2023 donation can’t be claimed until the 2023 return is filed in April 2024. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.

It’s also possible to carry forward, for up to five years, donations which were made in a particular tax year. So, if donations made in 2022 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying it forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2017, 2018, 2019, 2020, or 2021 tax years can be carried forward and added to the total donations made in 2022, and the aggregate then claimed on the 2022 tax return.

When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high-income surtax – currently, Ontario and Prince Edward Island – it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.

Making a final RRSP contribution

Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71 years of age – usually by converting the RRSP into a registered retirement income fund (RRIF) or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31 is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31 of that year. Once that deadline has passed, no further RRSP contributions are possible.

Taxpayer requests for penalty or interest relief

Taxpayers are entitled to request relief from the Canada Revenue Agency (CRA) for interest or penalty charges which the CRA has levied, and those who want to do so must send their request within 10 years from the end of the calendar year or fiscal period concerned. The CRA may also cancel interest and penalties that accrued within 10 calendar years of the year the taxpayer relief request is made, regardless of the tax year or reporting period in which the debt originated.

This year’s deadline applies to taxpayer relief requests for:

• the 2012 tax year;
• any reporting period that ended during the 2012 calendar year; and
• any interest and penalties that accrued during the 2012 calendar year for any tax year or reporting period.

All such requests for relief must be submitted on or before December 31, 2022.

Reviewing tax instalments for 2022

Millions of Canadian taxpayers (particularly self-employed and retired Canadians) pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total liability for the year.

The final quarterly instalment for this year will be due on Thursday December 15, 2022. By that time, almost everyone will have a reasonably good idea of what their income and deductions will be for 2022 and so will be in a position to estimate what the final tax bill for the year will be, taking into account any tax planning strategies already put in place, as well as any RRSP contributions which will be made on or before March 1, 2023. While the tax return forms to be used for the 2022 year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2021 form. Increases in tax credit amounts and tax brackets from 2021 to 2022 will mean that using the 2021 form will likely result in a slight over-estimate of tax liability for 2022.

Once one’s tax bill for 2022 has been calculated, that figure should be compared to the total of tax instalments already made during 2022 (that figure can be obtained by checking one’s online tax account on the CRA website, or by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281). Depending on the result, it may then be possible to reduce the amount of the tax instalment to be paid on December 15 – and thereby free up some additional funds for the inevitable holiday spending!

For most Canadians, tax planning for a year that hasn’t even started yet may seem too remote to even be considered. However, most Canadians will start paying their taxes for 2023 with the first paycheque they receive in January of 2023, less than two months from now. And, of course, with inflation running at over 7% and interest rates having nearly doubled in the last eight months, managing cash flow and maximizing take-home (after tax) income is a priority for everyone right now.

For most Canadians, tax planning for a year that hasn’t even started yet may seem too remote to even be considered. However, most Canadians will start paying their taxes for 2023 with the first paycheque they receive in January of 2023, less than two months from now. And, of course, with inflation running at over 7% and interest rates having nearly doubled in the last eight months, managing cash flow and maximizing take-home (after tax) income is a priority for everyone right now.

For most Canadians (certainly for the vast majority who earn their income from employment), income tax, along with other statutory deductions like Canada Pension Plan contributions and Employment Insurance premiums, are paid periodically throughout the year by means of deductions taken from each paycheque received, with those deductions then remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by his or her employer.

Of course, each taxpayer’s situation is unique and so the employer has to have some guidance as to how much to deduct and remit on behalf of each employee. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by each employee, sometimes at the start of each year, but certainly at the time employment commences. Each employee must, in fact, complete two TD1 forms – one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer lives. Federal and provincial TD1 forms for 2023 (which have not yet been released by the CRA but, once published, will be available on the Agency’s website at https://www.canada.ca/en/revenue-agency/services/forms-publications/td1-personal-tax-credits-returns/td1-forms-pay-received-on-january-1-later.html) list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial) which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the federal government.

While the TD1 completed by the employee at the time his or her employment commenced will have accurately reflected the credits claimable by the employee at that time, everyone’s life circumstances change. Where a baby is born or a son or daughter starts post-secondary education, there is a separation or a divorce, a taxpayer turns 65 years of age, or an elderly parent comes to live with his or her children, the affected taxpayer(s) will often become eligible to claim tax credits not previously available. And, since the employer can only calculate source deductions based on information provided to it by the employee, those new credit claims won’t be reflected in the amounts deducted at source from the employee’s paycheque.

Consequently, it’s a good idea for all employees to review the TD1 form prior to the start of each taxation year and to make any changes needed to ensure that a claim is made for any and all credit amounts currently available to him or her. Doing so will ensure that the correct amount of tax is deducted at source throughout the year.

As well, it’s often the case that a taxpayer will have available deductions which cannot be recorded on the TD1, like RRSP contributions, deductible support payments, or child care expenses. While such claims make things a little more complicated, it’s still possible to have source deductions adjusted to accurately reflect those claims, and the employee’s resulting reduced tax liability for 2023. The way to do so is to file Form T1213 – Request to Reduce Tax Deductions at Source (available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1213.html) with the Agency. Once that form is filed with the CRA, the CRA will, after verifying that the claims made are accurate, provide the employer with a Letter of Authority authorizing that employer to reduce the amount of tax being withheld from the employee’s paycheque – and thereby increasing the employee’s take-home income. 

Of course, as with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes time. While a T1213 can be filed with the CRA at any time of the year, the sooner it’s done, the sooner source deductions can be adjusted, effective for all subsequent paycheques. Providing an employer with an updated TD1 for 2023 as soon as possible, along with filing the T1213 with the CRA where circumstances warrant, will ensure that source deductions made starting January 1, 2023 will accurately reflect all of the employee’s current circumstances, and consequently his or her actual tax liability for the year – and, potentially, provide the employee with a little more cash flow to meet day to day expenses.

Over the past three years, the structure of work-from-home arrangements for employees has been a constantly changing landscape. In 2020, almost all employees who could work from home were required to do so, as most workplaces were closed under pandemic public health lockdown rules. As the pandemic eased (slightly) in 2021, employees began, in some cases, to return to the workplace on a part-time or full-time basis. That trend has continued in 2022, although in most cases employees are now working from home by agreement with their employer, rather than because of the requirements of a public health mandate.

Over the past three years, the structure of work-from-home arrangements for employees has been a constantly changing landscape. In 2020, almost all employees who could work from home were required to do so, as most workplaces were closed under pandemic public health lockdown rules. As the pandemic eased (slightly) in 2021, employees began, in some cases, to return to the workplace on a part-time or full-time basis. That trend has continued in 2022, although in most cases employees are now working from home by agreement with their employer, rather than because of the requirements of a public health mandate.

As the necessity and availability of work-from-home arrangements changed over the past three years, so too did the tax rules under which employees could claim a deduction for home office related costs. Under the tax rules in place prior to 2020, such a deduction was available only where employees met a number of criteria and could provide the tax authorities with an itemized accounting of eligible home office expenses incurred, as well as attestation from their employer of the terms of the work-from-home arrangement. In 2020, however, the federal government, recognizing that millions of Canadians would be claiming home office expense deductions for the first time, simplified the rules to provide for a standardized deduction claim for eligible employees who were working from home because of the pandemic.

The standardized deduction is still available to be claimed by individual employees who worked from home during 2022. However, the eligibility criteria for claiming the standardized deduction (which is the same test which applied in 2020 and 2021) may be more difficult for employees to meet in 2022, as work-from-home arrangements have evolved.

The standardized claim for home office expenses which was introduced in 2020 allows employees to claim a deduction of $2 per day for each day that the employee worked from home. There is no requirement to document expenses incurred and no need to provide verification from an employer that the work from home arrangement was required of the employee. However, in order to be eligible for the standardized deduction for 2022, the following criteria must be satisfied:

• an employee must have worked from home during the year due to the COVID-19 pandemic: and
• the work from home arrangement must have lasted for at least four consecutive weeks, with the employee working from home at least 50% of the time during those four consecutive weeks.

It may well be that many employees who continued to work from home during 2022 for at least part of the time will not be able to fit themselves into the eligibility criteria for claiming the standardized deduction, because their work arrangements throughout the year had them in the office for more than 50% of the time (i.e. three days week in the office, two days working from home), or because any time period when they did work more than 50% of the time from home did not last at least four consecutive weeks. In such cases, the employee should consider whether he or she can make a claim for a home office expense deduction using the detailed method which was in place prior to 2020 and continues to be available for 2022. And, while the record keeping requirements to claim such a deduction under the detailed method will be more onerous, using that detailed method can often produce a bigger expense claim and therefore a better tax result for the taxpayer.

In order to claim a deduction for costs related to a work from home space using the detailed method, an employee must meet at least one of the following conditions.

• The employee worked from home during 2022 as a consequence of the pandemic (including employees who were given a choice and elected to work from home); or
• the employee was required by his or her employer to work from home during 2022 (this can be just a verbal or written agreement between employer and employee).

In addition, at least one of the following criteria must also be satisfied in order to claim work from home costs under the detailed method:

• The work from home space is where the individual mainly (more than 50% of the time) did his or her work for a period of at least four consecutive weeks during 2022; or
• The individual uses the workspace only to earn his or her employment income. He or she must also use it on a regular and continuous basis for meeting clients, customers, or other people in the course of his or her employment duties.

Once these threshold criteria are met, a broad range of costs become deductible by the employee. Specifically, a salaried employee can claim and deduct the part of specified costs that relate to his or her work from home space, such as rent, utilities costs like electricity, heating, water (or the portion of a condo fee attributable to such utilities costs), home maintenance and minor repair costs, and internet access (but not internet connection) fees.

Once total expenses are tallied, the taxpayer must determine the percentage of those expenses which can be deducted as home office expenses, and the CRA provides detailed information on its website of how such determination is made. Generally, the employee determines that percentage based on the square footage of the workspace as a percentage of the overall square footage of the home. Where the workspace is not a separate room but is a shared space like a dining room, the employee must also calculate the number of hours for which that space is dedicated to work from home activities. Detailed information on how to make those calculations (including an online calculator) can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-22900-other-employment-expenses/work-space-home-expenses/work-space-use.html.

 In all cases, the CRA can ask the taxpayer to provide documentation and support for claims made using the detailed method.

There is one further requirement for employees who seek to deduct costs incurred in relation to a home office using the detailed method. Each such employee must obtain either a T2200S Declaration of Conditions of Employment for Working at Home Due to COVID-19 - Canada.ca or T2200 Declaration of Conditions of Employment - Canada.ca. On those forms, the employer must certify the work from home arrangement and confirm that the employee is required to pay his or her own home office expenses and is not being reimbursed for any such expenses incurred. Where there is any kind of reimbursement provided, the employer must specify the type of expense reimbursed, and the amount of reimbursement. And, of course, the employee cannot claim a deduction for any expenses for which reimbursement was received.

For the many taxpayers who claimed the standardized home office expense deduction in 2020 and 2021, the filing season for returns for 2022 may be the first time they encounter the rules and requirements which govern claims for home office expenses using the detailed method. It would, therefore, be advisable to do some upfront planning to determine what kind of deduction claim (standardized vs. detailed) they may be able to make for 2022, and to ensure that any record keeping needed to support that deduction is done before tax filing season arrives a few months from now.

The majority of Canadians who are not members of an employer-sponsored defined benefit registered pension plan save for retirement through a registered retirement savings plan (RRSP). For those Canadians who have accumulated retirement savings in an RRSP, the year in which they turn 71 is decision time. By the end of that year, all RRSPs must be closed, and the RRSP holder must decide whether to transfer his or her accrued savings into a registered retirement income fund (RRIF), or purchase an annuity, or both. (It’s also possible to collapse the RRSP and include all RRSP amounts in income for that year, but such a course of action is rarely advisable from a tax perspective).

The majority of Canadians who are not members of an employer-sponsored defined benefit registered pension plan save for retirement through a registered retirement savings plan (RRSP). For those Canadians who have accumulated retirement savings in an RRSP, the year in which they turn 71 is decision time. By the end of that year, all RRSPs must be closed, and the RRSP holder must decide whether to transfer his or her accrued savings into a registered retirement income fund (RRIF), or purchase an annuity, or both. (It’s also possible to collapse the RRSP and include all RRSP amounts in income for that year, but such a course of action is rarely advisable from a tax perspective).

Most RRSP holders choose to transfer funds held in an RRSP to an RRIF, and that transfer can be done on a tax-free basis. In addition, investment returns on funds transferred to the RRIF can continue to accrue tax-free. The RRIF holder is, however, required to withdraw a minimum amount each year (based on the RRIF holder’s age and the amount in the RRIF at the start of the year), and that withdrawn amount is taxed as income.

Where the RRSP holder chooses to purchase an annuity, he or she pays a specified lump sum amount to the annuity issuer, usually an insurance company, in exchange for which he or she is guaranteed an annual income of a specified amount for the remainder of his or her life. That income, too, is taxable to the annuity holder.

While each of the available options (RRIF and annuity) has upsides and downsides, the main underlying consideration is the same for both. And that is how to generate enough income to have a comfortable retirement, while still ensuring that savings accrued will last the remainder of one’s life. How, in other words, to avoid the dismal prospect of outliving one’s savings, or spending too much early in retirement and being left with insufficient income to meet one’s expenses late in life? And, of course, it’s impossible to find a definitive answer to that question, since none of us knows what the future holds, in terms of either health or longevity.

Typically, expenses are higher early in retirement, when retirees are likely to be healthier and more active, and retirement plans may include travel and the pursuit of hobbies and interests. However, while such activities and their associated costs likely dwindle as retirees age, other types of expenses come into play – especially expenses related to the need to pay for medical costs, household and personal services, and ultimately, personal and/or medical care in an assisted living facility. The prospect of such future costs can make retirees reluctant to spend accrued savings (or annuity income), out of concern that such funds will be needed in the future to pay for care.

The worry about reaching an age where some degree of care is required (and must be paid for) is an entirely realistic one for retirees. According to Statistics Canada’s figures, the average Canadian who has reached the age of 75 has a life expectancy of another 12 years. And, since that figure represents an average, a significant number of 75-year-olds can expect to live longer than that. Again according to StatsCan figures, there were, in 2021, over 860,000 Canadians aged 85 or older.

With all of these demographic and financial realities in mind, the federal government announced, in 2019, the availability of a new kind of annuity – the advanced life deferred annuity or ALDA. As is the case with all annuities, the annuity issuer agrees, in exchange for receiving a specified lump sum amount, to provide an annual income of a specified amount to the annuitant. The difference, however, is while an ALDA can be taken out at any time, payments under the ALDA can be deferred to as late as the end of the year in which the annuitant turns 85.

For example, a retiree who turns 71 in 2022 and who has accumulated $500,000 in retirement savings could transfer $400,000 from his or her RRSP to an RRIF, and use the remaining $100,000 to purchase an ALDA, under which payments would begin at age 85. The retiree now has the security of knowing that the $400,000 held in the RRIF (plus any additional amounts earned from investment returns) doesn’t need to last for the unknown number of years in his or her remaining life, but instead for a specified period of time (in this case, 14 years), at which time the income stream from the ALDA will begin, and will augment or replace the income from the RRIF.

There is a limit on the amount which can be used to purchase an ALDA. That limit is 25% of the amount held in an individual’s RRSP or RRIF, to a lifetime maximum of (for 2022) $160,000. Taking the example outlined above, the retiree who has accumulated $500,000 in RRSP savings would be using 20% of that amount (or $100,000) to purchase the ALDA, and would be safely under the $160,000 lifetime limit.

While the security provided by such a retirement income structure would certainly be welcome to most retirees, the obvious concern where payments under an annuity are deferred is the possibility that the annuitant won’t live long enough to collect those payments, and that the funds expended to purchase the ALDA will effectively be wasted. There are two options to address that (legitimate) concern. First, an ALDA can be structured as a “joint-life” contract, under which payments will be made to the surviving annuitant (most often the spouse of the ALDA purchaser) for the remainder of his or her life. It’s also possible to structure the ALDA to provide for a lump sum death benefit to be paid to a beneficiary or beneficiaries (for example, the annuitant’s children) on the death of the annuitant.

Being able to have certainty of income for one’s very old age is a major benefit of purchasing an ALDA. There is, however, another benefit to be obtained, and that is income and tax deferral.

As outlined above, individuals who hold savings in an RRSP must collapse that RRSP by the end of the year in which they turn 71 and, in most instances, such individuals open an RRIF and transfer funds held in the RRSP to that RRIF. Once funds are held in an RRIF a specified percentage of those funds must be paid out in each year to the RRIF holder. All such withdrawals constitute taxable income to the holder of the RRIF, and count as income which determines that RRIF holder’s eligibility for certain tax credits and benefits, like the age credit, Old Age Security benefits, and the GST/HST tax credit. Even if the RRIF holder does not actually need the total amount which must be withdrawn, there is no option to withdraw a lesser amount, and all funds withdrawn are treated as taxable income which determine eligibility for tax credits and benefits – with no exceptions.

Where an RRIF holder purchases an ALDA, the amount used for that purchase is no longer included in the total balance on which the required RRIF withdrawal percentage is calculated. Continuing the above example, if the RRIF holder used $100,000 of his or her retirement savings to purchase the ALDA, the amount which he or she would subsequently be required to withdraw from the RRIF each year would be calculated as a percentage of the remaining $400,000 – not the $500,000 which was held in the RRIF prior to the purchase of the ALDA. Both the RRIF holder’s income and his or her tax payable will therefore be lower, and the loss of partial or full eligibility for tax credits and benefits will be less likely.

As is the case with most annuities, the terms of an ALDA (purchase amount, single vs. joint annuity, existence of a death benefit, age at which the income stream begins) are up to the ALDA purchaser and the issuer, as long as the basic tax rules governing such plans are adhered to. Everyone’s financial, health, and tax circumstances are different and, as is the case with any retirement income plan, those particular circumstances will drive the decisions made on the best retirement income structure for that individual. Purchasing an ALDA may be the right approach for some retirees, but not for others –  but for everyone, having that option adds another element of flexibility to retirement income planning.

More information on ALDAs can be found on the federal government website at https://www.budget.gc.ca/2019/docs/tm-mf/si-is-en.html#advanced-life-deferred-annuities.

While the current state of the Canadian health care system is not without its problems, Canadians are nonetheless fortunate to have a publicly-funded health care system, in which most major medical expenses are covered by provincial health care plans. Notwithstanding, there is a large (and growing) number of medical and para-medical costs – including dental care, prescription drugs, physiotherapy, ambulance trips, and many others - which must be paid for on an out-of-pocket basis by the individual. In some cases, such costs are covered by private insurance, usually provided by an employer, but not everyone benefits from private health care coverage. Self-employed individuals, those working on contract, or those whose income comes from several part-time jobs do not usually have access to such private insurance coverage. Fortunately for those individuals, our tax system acts to help cushion the blow by providing a medical expense tax credit to help offset out-of-pocket medical and para-medical costs which must be incurred.

While the current state of the Canadian health care system is not without its problems, Canadians are nonetheless fortunate to have a publicly-funded health care system, in which most major medical expenses are covered by provincial health care plans. Notwithstanding, there is a large (and growing) number of medical and para-medical costs – including dental care, prescription drugs, physiotherapy, ambulance trips, and many others - which must be paid for on an out-of-pocket basis by the individual. In some cases, such costs are covered by private insurance, usually provided by an employer, but not everyone benefits from private health care coverage. Self-employed individuals, those working on contract, or those whose income comes from several part-time jobs do not usually have access to such private insurance coverage. Fortunately for those individuals, our tax system acts to help cushion the blow by providing a medical expense tax credit to help offset out-of-pocket medical and para-medical costs which must be incurred.

The bad news for such individuals is that while a tax credit is available, the computation of eligible expenses and, in particular, determining when a claim for the credit should be made can be confusing. In addition, the determination of which expenses qualify for the credit and which do not isn’t necessarily intuitive, nor is the determination of when it’s necessary to obtain prior authorization from a medical professional in order to ensure that the planned expenditure will qualify for the credit. For instance, in order to claim the medical expense tax credit for the cost of a walker, it is necessary to obtain a prescription for that walker from a medical professional. Where costs are incurred to purchase a wheelchair, those costs are eligible for the medical expense credit with no requirement that a prescription of any kind be obtained.

The basic rule is that qualifying medical expenses (a lengthy list of which can be found on the Canada Revenue Agency 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/lines-33099-33199-eligible-medical-expenses-you-claim-on-your-tax-return.html) over 3% of the taxpayer’s net income, or $2,479, whichever is less, can be claimed for purposes of the medical expense tax credit on the taxpayer’s return for 2022.

Put in more practical terms, the rule for 2022 is that any taxpayer whose net income is less than $82,635 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income of $82,635 or more will be limited to claiming qualifying expenses which exceed the $2,479 threshold.

The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2022 will produce the greatest amount eligible for the credit. That determination will obviously depend on when medical expenses were incurred so there is, unfortunately, no universal rule of thumb which can be used.

Medical expenses incurred by family members – the taxpayer, his or her spouse, children who were born in 2005 or later, and certain other dependent relatives – can be added together and claimed by one member of the family. In most cases, it’s best, in order to maximize the amount claimable, to make that claim on the tax return of the lower-income spouse, where that spouse has tax payable for the year.

As the end of the calendar year approaches, it’s a good idea to add up the medical expenses which have been incurred during 2022, as well as those paid during 2021 and not claimed on the 2021 return. Once those totals are known, it will be easier to determine whether to make a claim for 2022 or to wait and claim 2022 expenses on the return for 2023. And, if the decision is to make a claim for 2022, knowing what medical expenses were paid, and when, will enable the taxpayer to determine the optimal 12-month period for that claim.

Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2023. Where those are significant expenses (for instance, a particularly costly medication which must be taken on an ongoing basis, or some expensive dental work) it may make sense, where possible, to accelerate the payment of those expenses to November or December 2022, where that means they can be included in 2022 totals and claimed on the 2022 return.

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 #61 Corporate

Personal:

Issue #61 Personal

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.

Corporate:

Issue #60 Corporate

Personal:

Issue #60 Personal

The fact that Canada is in the middle of a housing crisis isn’t really news to anyone. Whether it’s having difficulty finding an affordable apartment or putting together enough money for a down payment, or coping with ever increasing mortgage interest rates and mortgage payments, housing availability and affordability is a concern for Canadians across all age groups.

The fact that Canada is in the middle of a housing crisis isn’t really news to anyone. Whether it’s having difficulty finding an affordable apartment or putting together enough money for a down payment, or coping with ever increasing mortgage interest rates and mortgage payments, housing availability and affordability is a concern for Canadians across all age groups.

That reality led the federal government to propose a number of measures to address the housing needs of Canadians. One of those measures – the Multi-Generational Home Renovation Tax Credit – will take effect in 2023.

As the name implies, the Multi-Generational Home Renovation Tax Credit will provide assistance through the tax system for costs incurred to create additional living space which will allow an elderly (over 65) or disabled adult relative to live with family, while at the same time having their own self-contained living space.

Take, for example a couple in their late 50s whose children have all moved out of the family home to live on their own, and so now have a home that is too big for just the two of them. Many Canadians in that “sandwich generation” also have parents in their 80s who don’t want (or need) to move into an assisted living facility but could nonetheless benefit from having family nearby to provide them with help with some aspects of day-to-day independent living. The new tax credit program provides the opportunity for that empty nester couple to stay in their family home and renovate that home to provide living space for all family members, and to do so on a tax-assisted basis.

Similarly, parents of disabled adult children who are not capable of fully independent living often have great difficulty in finding appropriate (and affordable) residential facilities in which those adult children can live. In such cases, being able to provide a self-contained living space for those disabled adult children within their existing home, while still being able to provide the necessary degree of supervision, would provide an additional option for such families.

The phrase which usually comes to mind when describing such living arrangements is a “granny flat”, which implies a separate, smaller structure on the same property as the existing home. While that is certainly an available option under this program, it’s not the only one. The new tax credit will be available for “renovations, alterations or additions” to an existing dwelling which results in the creation of a “secondary housing unit” for the elderly or disabled relative. The only requirement is that the new housing unit to be used by the qualifying relative must be self-contained, having a private entrance, kitchen, bathroom facilities, and sleeping area. So, renovations eligible for the new credit would include a separate, smaller housing unit on the same property, an addition built on to the existing home, or simply renovations made to the existing home without changing the size of that home. As long as the requirement of being a self-contained housing unit having a separate entrance, kitchen, bathroom, and sleeping area is met, the configuration of the renovated/newly constructed space is entirely up the individuals doing that renovation or construction.

Regardless of the configuration of the changes, it's readily apparent that the cost of carrying out such renovations or construction will be substantial. Consequently, the refundable tax credit which can be claimed under the new program will be equal to 15% of eligible renovation/construction expenses incurred, to a maximum of $50,000 in such expenses. In other words, a refundable tax credit of $7,500 can be claimed where $50,000 or more in eligible expenses are incurred. Where expenses incurred are less than that amount, the refundable tax credit claimable will be 15% of actual expenses incurred. Regardless of amount, all expense claims must be supported by receipts.

The range of such expenses which will qualify for the credit is broad, and includes the cost of labour and professional services, building materials, fixtures, and equipment rentals and permits. Costs incurred for furniture or appliances for the new premises do not qualify for the credit, nor do any costs (i.e., interest costs) of financing the renovation or new construction.

The new credit will be available for the 2023 and subsequent tax years, so only work performed and paid for and/or goods acquired after the end of 2022 will be eligible for the credit. An eligible renovation/construction is considered to be completed when the work passes a final inspection, and the tax credit is then claimed for the taxation year in which the project is completed.

The information above outlines the general framework of the new tax credit program; as with all such programs, there are detailed requirements which must be fulfilled. Those details can be found in the budget announcement of the Multi-Generational Home Renovation Tax Credit, which is available on the Finance Canada website at https://budget.gc.ca/2022/report-rapport/tm-mf-en.html#a2. The federal government has also recently carried out a consultation process with respect to this credit and other 2022 budget measures, and that consultation process ended on September 30, 2022. Any changes to the program terms arising from that consultation process should be made available on the Finance Canada website prior to the program implementation date of January 1, 2023.

The Canadian tax system is a “self-assessing system” which relies heavily on the voluntary co-operation of taxpayers. Canadians are expected (in fact, in most cases, required) to complete and file a tax return each spring, reporting income from all sources, calculating the amount of tax owed, and remitting that amount to the federal government by a specified deadline. And, although the rate of compliance among Canadian taxpayers is very high – more than 30 million individual income tax returns for the 2021 tax year were filed with the Canada Revenue Agency between early February and mid-September of 2022 – there are, inevitably, those who do not either file or pay on time.

The Canadian tax system is a “self-assessing system” which relies heavily on the voluntary co-operation of taxpayers. Canadians are expected (in fact, in most cases, required) to complete and file a tax return each spring, reporting income from all sources, calculating the amount of tax owed, and remitting that amount to the federal government by a specified deadline. And, although the rate of compliance among Canadian taxpayers is very high – more than 30 million individual income tax returns for the 2021 tax year were filed with the Canada Revenue Agency between early February and mid-September of 2022 – there are, inevitably, those who do not either file or pay on time.

There are a lot of reasons why some Canadians don’t file their returns or pay their taxes on a timely basis, and almost all of them are based on a lack of understanding of how our tax system works, or on incorrect information about that system. In addition, each year there are some Canadians who file returns in which income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed.

While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate, isn’t high, there are a lot of such returns when measured by absolute numbers. And, although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each and every instance of non-compliance simply aren’t available, especially since in many cases the amount recovered may be less than the costs which must be incurred to recover that amount.

With all of that in mind, several years ago the Canada Revenue Agency instituted a program – the Voluntary Disclosure Program, or VDP –  intended to encourage non-compliant taxpayers to come forward and get their tax affairs straightened out. The incentive to do so arises from the fact that, in most cases, while taxpayers who participate in the VDP program have to pay outstanding tax amounts owed, plus interest, they avoid the penalties which would normally be imposed and, in addition, avoid the risk of criminal prosecution. And, in some circumstances, even required interest payments can be reduced.

To qualify for relief under the VDP, an application made with respect to non-compliance with income tax filing and payment obligations must:

• be voluntary (meaning that it is done before the taxpayer becomes aware of any compliance or enforcement action by the CRA);
• be complete;
• involve the application or potential application of a penalty;
• include information that is at least one year past due; and
• include payment of the estimated tax owing.

The VDP program includes two separate “tracks” for income tax disclosures – the Limited Program and the General Program – and the kind and extent of relief available depends on the track to which a particular application is assigned.

While the Canada Revenue Agency will ultimately make the determination of whether an application should proceed under the Limited or the General Program on a case-by-case basis, there are guidelines in place. The CRA’s intention is to restrict the harsher Limited Program to instances in which applications disclose non-compliance which appears to include intentional (as distinct from inadvertent) conduct on the part of the taxpayer. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:

• the dollar amounts involved;
• the number of years of non-compliance;
• the sophistication of the taxpayer;
• how quickly the taxpayer acted to correct their non-compliance after becoming aware of it;
• whether there has been deliberate or wilful default or carelessness amounting to gross negligence on the part of the taxpayer; and
• whether the disclosure was made after the taxpayer became aware of the CRA’s intended specific focus on such area of taxpayer compliance.

Those whose applications are accepted under the Limited Program will not be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer. Interest on outstanding tax balances will be payable, however, and other penalties will be levied.

Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief, specifically for the years preceding the three most recent years of non-compliance – that is, for the years preceding the three most recent years of returns required to be filed, or to be corrected. For example, a taxpayer who makes an application to the VDP in 2022 with respect to his or her failure to file returns for the 2016 through 2020 taxation years may be provided with interest relief with respect to taxes owed for the 2016, 2017, and 2018 taxation years. Such relief is generally equal to 50% of interest owed – in other words, the taxpayer will be required to pay only half of the interest charges which would otherwise be levied for those years. No interest relief will, however, be provided on tax amounts owed for the 2019 and 2020 taxation years. Since interest charges levied by the CRA are, by law, higher than current commercial rates (for instance, the rate levied for the fourth quarter of 2022 is 7%) and interest charged is compounded daily, having interest amounts forgiven, even in part, can make a significant difference to the overall tax bill faced by the taxpayer.

In order to benefit from the VDP, taxpayers must first make an application to the Program. That application must include payment of the estimated taxes owing, as a condition of participation in the VDP. Where a taxpayer is financially unable to make that tax payment, he or she can request that the CRA consider a payment arrangement.

The decision to apply to the VDP and to “come clean” about all previous tax transgressions is something that most taxpayers will likely consider with considerable trepidation. Those who are unsure about whether they want to move forward with a VDP application have the option of using the CRA’s “pre-disclosure discussion service”. As the name implies, that service allows taxpayers, or their representatives, to participate in preliminary discussions with a CRA official, on an anonymous basis, to gain some knowledge about the VDP program, the process involved, and the potential relief available.

Taxpayers who decide to move forward with an application to the VDP can complete a file Form RC199 Voluntary Disclosures Program Application, which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/rc199.html. Once the application is received, the CRA will check to make certain that the applicant is eligible to apply and that all of the required information, documentation, and payment has been sent. The next step is for the CRA to evaluate the application to ensure that the criteria for participation in the VDP are satisfied and, if so, to determine the program (Limited or General) to which the application should be assigned, and the taxation year(s) for which relief is being considered. If the decision made is that the application is not eligible for the VDP, the taxpayer will also be advised in writing, with reasons, of the CRA’s decision to deny the application. Individual taxpayers can also check on the status of their application by calling the Individual Income Tax Enquiries line at 1-800-959-8281.

Finally, taxpayers should recognize that the VDP Program can’t be used as a kind of “get out of jail free card” with respect to repeated failures to meet tax filing and payment obligations. The CRA website makes it clear that the Agency expects taxpayers who have benefitted from the VDP to thereafter meet their tax obligations, and a second review will be provided for the same taxpayer only in unusual situations where the circumstances are beyond the taxpayer’s control.

Detailed information on the VDP program can be found on the CRA website at https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html.

Most Canadians know that the deadline for making contributions to one’s registered retirement savings plan (RRSP) comes 60 days after the end of the calendar year, around the end of February. There are, however, some circumstances in which an RRSP contribution must (or should) be made by December 31, in order to achieve the desired tax result.

Most Canadians know that the deadline for making contributions to one’s registered retirement savings plan (RRSP) comes 60 days after the end of the calendar year, around the end of February. There are, however, some circumstances in which an RRSP contribution must (or should) be made by December 31, in order to achieve the desired tax result. 

Similarly, most Canadians who have opened a registered retirement income fund (RRIF) are aware that they are required to make a withdrawal of a specified amount from that RRIF each year, with the percentage withdrawal amount based on the RRIF holder’s age – although few are aware of when and how that required withdrawal is calculated. 

The rules around tax-free savings accounts (TFSAs) are more flexible, but it is nonetheless the case that advantages can be obtained (and disadvantages avoided) by carefully timing TFSA withdrawals and recontributions based on the calendar year end.

In other words, while the basic rules with respect to contributions to and withdrawals from each of these savings plans are relatively straightforward, there are nonetheless benefits to be received from careful consideration of the detailed rules – and some exceptions from those rules.

What follows is an outline of steps which should be considered, before the end of the 2022 calendar year, by Canadians who have an RRSP, an RRIF, and/or a TFSA – or maybe all three.

Timing of RRSP contributions

When you are making a spousal RRSP contribution

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2022, the contributor can claim a deduction for that contribution on his or her return for 2022. The spouse can then withdraw that amount as early as January 1, 2025 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2023, the contributor can still claim a deduction for it on the 2022 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2026. This is an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should an unforeseen need to withdraw funds arise.

When you are turning 71 during 2022

Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71 years of age – usually by converting the RRSP into an RRIF or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31 is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31 of that year. Once that deadline has passed, no further RRSP contributions are possible.

RRIF withdrawals for 2022

Under Canadian law, anyone who has a registered retirement income fund (RRIF) is required to make a minimum withdrawal from that RRIF each year. The amount of the withdrawal is calculated as a specified percentage of the balance in the RRIF at the beginning of the calendar year, with that percentage based on the age of the RRIF holder at that time.

During the second quarter of 2022, the Toronto Stock Exchange experienced a significant loss in value – down by 13.9%. Since required RRIF withdrawal amounts are based on the value of the RRIF at the start of the calendar year, many RRIF holders will, unfortunately, be faced with the prospect of having to make withdrawals from a portfolio whose value has declined since the beginning of 2022. While there is no way of avoiding the requirement to withdraw that minimum amount from one’s RRIF, and to pay tax on the amount withdrawn, taxpayers who do not have immediate need of such funds can consider contributing those amounts to a TFSA. Where that is done, the funds can be invested and continue to grow, and neither the original contribution nor the investment gains will be taxable when the funds are withdrawn from the TFSA.

Planning for TFSA withdrawals and contributions

Each Canadian aged 18 and over can make an annual contribution to a tax-free savings account (TFSA) – the maximum contribution for 2022 is $6,000. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.

Consequently, it makes sense, where a TFSA withdrawal is planned (or the need to make such a withdrawal might arise) within the next few months, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA on or before December 31, 2022 will have the amount which is withdrawn added to his or her TFSA contribution limit for 2023, which means it can be re-contributed, where finances allow, as early as January 1, 2023. If the same taxpayer waits until January of 2023 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2024.

The approach of the calendar year end doesn’t usually prompt Canadians to consider the details of making contributions to an RRSP or withdrawals from a TFSA or a RRIF. There is, however, no flexibility in the deadlines for taking such actions, and considering what steps may be needed or advisable now means one less thing to remember as the December 31 deadline nears.

Since early 2022, the finances of Canadian households have been hit with what Statistics Canada has called a “trifecta of market challenges”, which increasingly stretched and squeezed the efforts of Canadians to maintain their financial stability during the second quarter (April 1 to June 30) of this year.

Since early 2022, the finances of Canadian households have been hit with what Statistics Canada has called a “trifecta of market challenges”, which increasingly stretched and squeezed the efforts of Canadians to maintain their financial stability during the second quarter (April 1 to June 30) of this year.

The Toronto Stock Exchange, which had risen steadily over the past two years, dropped by 13.8% during the second quarter of 2022. Conversely, interest rates have increased significantly this year, as has the rate of inflation. In early March 2022, the Bank Rate (from which all other commercial interest rates are derived) stood at .50%. As of June 30, 2022, that Bank Rate had risen by 1.25%, from .50% to 1.75%. Inflation followed a similar course, with year-over-year increases in the overall Consumer Price Index hitting 6.8%, 7.7%, and 8.1% in, respectively, April, May, and June 2022. Even more problematic is that in each of those months increases in the cost of many non-discretionary spending items – particularly food – were significantly higher than the overall rate of inflation.

Given the combined effect of each of these changes, it’s clear that Canadian households are under significant financial pressure. For many Canadians, increases in the cost of living have negatively impacted how far their disposable income can stretch, while they are coping at the same time with increased costs for making at least the minimum required payments on their debts. The extent of that financial pressure and the measures which Canadian households are taking to respond to it are made clear by a recent series of reports on the current state of Canadian household finances. Two of those reports were issued by major credit rating agencies – Equifax Canada and TransUnion – while the third was a report by Statistics Canada on the state of Canadian household finances.

While the reports come from separate sources, they all tell the same story, which can be summed up by a headline in the StatsCan report – “Household borrowing reaches near record pace”. One of the measures by which StatsCan measures household debt is the ratio of such debt as a percentage of household disposable income. In the second quarter of 2022, that figure was 182% – in other words, Canadian households owed, on average, $182 for every $100 of household disposable income.

The actual debt amounts behind that percentage figure are outlined in the Equifax and TransUnion reports. Consumer debt can be divided into a number of categories, including credit cards, personal loans, lines of credit, and mortgages. The TransUnion report compared average balances in each of those categories from the second quarter of 2021 to the second quarter of 2022. In all categories, average individual balances were higher in 2022: specifically, mortgage balances had increased by 9.5% (to $333,788), credit card balances had increased by 10.9% (to $3,825), and balances owing on personal loans had increased by 20.3%. In the second quarter of 2022, the average amount owed per individual consumer in the personal loans category (which does not include automobile loans or lines of credit) was $56,723.

Significantly, increases in spending and debt levels were also apparent when comparing the first and second quarters of 2022. According to the Equifax report, credit card balances rose by 6.4% in the April to June period, as compared to the first three months of 2022.

Given all of those figures, it seems that Canadian households are relying more and more on credit – whether through increased use of credit cards or taking out personal loans – to meet increased day-to-day costs. And even though those increases (in inflation and interest rates) have only really begun to bite over the past six months or so, the impact of increased debt levels is already becoming apparent. Again according to the Equifax report, consumer insolvency rose during the second quarter to the highest levels since the start of the pandemic. Many individuals who can no longer manage their debt obligations end up by making what is called a “consumer proposal” in which creditors are asked to accept payment of less than the total debt owed, in order to allow the debtor to discharge those debt obligations. During the second quarter of 2022, the number of such consumer proposals made, when compared to same period in 2021, rose by just under 21%.

While all of these figures show the financial stress which most Canadian households are feeling, perhaps the most significant figure is one which cannot be accounted for in the second quarter reports. During the second quarter of this year, the Bank Rate increased from .50% to 1.75%. During the third quarter (which ends on September 30), that Bank Rate increased by another 1.75%, to 3.50%. In other words, the Bank Rate, on which interest rates payable by consumers are based, has doubled since the end of the second quarter. The effects of that change will undoubtedly become apparent when consumer financial reports for the third quarter of 2022 are issued later this year.

While no individual Canadian or household can do much to affect interest rates or the rate of inflation, that doesn’t mean that there is no help available for those who are struggling with current financial realities. Credit Counselling Canada, a non-profit organization, can provide individuals and families with assistance with budgeting and managing debt obligations including, where necessary, reaching arrangements with creditors to re-structure existing debt and re-payment obligations. The Agency’s website, which outlines their services and provides additional contact information for credit counsellors in each Canadian province and territory, can be found at https://creditcounsellingcanada.ca/.

The Equifax and TransUnion reports for the second quarter of 2022 can be found online at https://www.consumer.equifax.ca/about-equifax/press-releases/-/blogs/financial-stress-mounts-credit-card-demand-and-debt-rise and at https://newsroom.transunion.ca/high-interest-rate-and-inflation-challenges-create-financial-stress-for-a-segment-of-vulnerable-canadian-borrowers/, and the Statistics Canada release is available on the Agency’s website at The Daily — National balance sheet and financial flow accounts, second quarter 2022 (statcan.gc.ca).

One of the most valuable tax and investment strategies available to Canadians is home ownership. While the real estate market can (and does) go and up down, home ownership has proven to be, over the long term, a reliable way of building net worth.

One of the most valuable tax and investment strategies available to Canadians is home ownership. While the real estate market can (and does) go and up down, home ownership has proven to be, over the long term, a reliable way of building net worth.

The value of home ownership as a wealth-building tool is significantly increased by the tax rules which apply when a homeowner sells his or her home. Essentially, where an owner-occupied home is sold, the gain realized on that home which would, under ordinary tax rules, be included in income is instead received tax-free.

For example, a homeowner who purchased his or her home in 2000 for $200,000 and sells it in 2022 for $800,000 will earn a gain of $600,000. Half of that amount, or $300,000 would, under ordinary tax rules, constitute a taxable capital gain, on which the amount of combined federal-provincial tax could be close to $150,000. However, because of a tax rule known as the principal residence exemption, the entire gain realized is not included in income, and no tax is payable on that $600,000 amount.

It's not hard to see that being able to claim the principal residence exemption on the sale of a residential property is a huge benefit – so much so that the federal government has become concerned that individuals who are “flipping” residential real estate are claiming tax benefits to which they are not entitled on the income earned from such sales, including making claims for the principal residence exemption.

The federal government has chosen to address this situation with a change which was announced in the 2022 federal Budget and which will take effect for residential property sales which take place on or after January 1, 2023. The proposed new “deeming” rule will provide that, where an individual sells a residential property within 365 days of acquiring it, that property will be considered a “flipped property” and profits realized will be treated as business income and will be fully taxable, unless the sale takes place in relation to one or more enumerated “life events” or circumstances. In effect, the rule seems to place the onus on the taxpayer who sells a residential property within one year after purchase to show that his or her reasons for selling within one year of purchase either fall under one of the exempted “life event” circumstances or, if not, that the facts are such that he or she is nonetheless entitled to claim the principal residence exemption on any gain realized from the sale.

The new rule will not apply where a taxpayer sells a property within 365 days of acquiring it, and the sale of that property can reasonably be considered to have occurred due to, or in anticipation of, one or more of the following events:

• Death: the death of the taxpayer or a related person.
• Household addition: one or more persons related to the taxpayer joining the taxpayer’s household or the taxpayer joining the household of a related person’s household (e.g., birth of a child, adoption, care of an elderly parent).
• Separation: the breakdown of a marriage or common-law partnership, where the taxpayer has been living separate and apart from their spouse or common-law partner for a period of at least 90 days prior to the disposition.
• Personal safety: a threat to the personal safety of the taxpayer or a related person, such as the threat of domestic violence.
• Disability or illness: the taxpayer or a related person suffering from a serious disability or illness.
• Employment change: a change in employment for the taxpayer or their spouse or common-law partner.
• Involuntary termination: the employment of the taxpayer or their spouse or common-law partner is terminated by their employer;
• Insolvency: insolvency of the taxpayer.
• Involuntary disposition: the expropriation or the destruction of the taxpayer’s property.

The list of taxpayer circumstances in which the new rule will not apply to a sale within one year is undeniably broad; however, many of the criteria used to determine eligibility for an exemption from the new rule are, in some instances, quite subjective. A sale within 365 days of purchase which is the result of “serious disability or illness” would be exempt from the new rule, but it’s not clear what criteria would be applied to determine what constitutes a serious illness or disability, or who would make that determination.

It's clear that the federal government’s target for the new deeming rule is individuals who buy residential properties intending to sell quickly for a profit and not individuals and families who, for any number of reasons, decide to sell within a year of buying their home. However, the net for the new rule has been cast very broadly and it’s unclear how that new rule, as currently drafted, will be efficiently administered in a way which achieves the government’s objectives, without overreach. Fortunately, the federal government will, prior to enacting this new rule four months from now, in January 2023, be carrying out a consultation process in which these or any other issues may be raised. Any interested taxpayer can contribute to that consultation process, which will continue until September 30, 2022. More information on how to participate can be found on the Finance Canada website at Government delivering on Budget 2022 commitments to Canadians - Canada.ca.

Transitioning into retirement is a complex process, one which involves decisions around finances (present and future) as