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

Corporate:

Issue #19 Corporate

Personal:

Issue #19 Personal

A number of circumstances and developments have come together over the past few years to make working from a home office—once almost unheard of—a common fact of business life. First and foremost, of course, is the technology (particularly communications technology) which enables the home-based worker to have access to all of the information and services available to his or her in-office counterpart. Given the right technology, it’s nearly as easy for an employee working from home to send and receive e-mails through the employer’s communications network and access the people, information, and services needed to do his or her job in the same way as it would be if he or she was at the office.

While technology has made it possible to work from home on a regular basis, other developments have made the daily commute to the office, and the maintenance of large offices in major urban centres less and less appealing. The ever increasing price of gasoline has made the cost of that daily commute prohibitively expensive in some cases. As well, there is an increased awareness of the environmental cost of having most major highways clogged each morning and evening with hundreds of thousands of cars sitting in traffic gridlock. And finally, the cost of renting office space in most major Canadian cities means that most employers are at least willing to consider the cost savings which might be realized from work-at-home or telecommuting arrangements for their employees.

Along with the greater availability of work-at-home arrangements for employees, there has been a significant increase in the number of self-employed Canadians. And while not all of the self-employed work from home, it’s fairly common for those venturing into the world of self-employment for the first time to save costs by operating their business, at least initially, out of a home office.

One of the things which makes a telecommuting or work-at-home arrangement attractive, aside from avoiding the daily commute, is the tax deductions which can be claimed. While those benefits, especially for employees, are not necessarily as generous as is popularly believed, it is the case that working from home can make costs which would be incurred in any event deductible for tax purposes.

As is usually the case in tax matters, the rules differ for employed taxpayers and for the self-employed, as the latter enjoy a greater degree of latitude in the deductions which may be claimed. That said, both the employed and the self-employed must meet the same basic two-part test in order to be eligible to deduct home office expenses, and that test is as follows:

• the home office must be the place at which the taxpayer principally (defined by the Canada Revenue Agency as more than 50% of the time) performs the duties of employment or must be the taxpayer’s principal place of business: or

• the home office must be both used exclusively for the purpose of earning income from employment or from the business and must be used on a regular and continuing basis for meeting customers or clients of the employer or the business.

A self-employed taxpayer who meets these criteria is entitled to claim (on Form T2124(E) (Statement of Business Activities)) expenses such as property taxes, rent, or mortgage interest (but not mortgage principal amounts), insurance, utilities costs etc. However, such expenses are not deductible in their entirety: rather, the taxpayer must apportion the expenses based on the percentage of the total space which is used as a home office. For example, a self-employed taxpayer whose home office takes up 15% of available floor space and who incurs $2000 each year in qualifying expenses would be entitled to deduct $300 ($2,000 times 15%) in home office expenses for that year. There is one further caveat, in that the amount of home office expenses claimed in a year cannot be greater than the amount of income from the business. It’s not, in other words, possible to run a business which produces $5,000 in income for the year and to then claim $10,000 in home office expenses relating to that business. However, where home office expenses exceed business income in any given year, the excess expenses can be carried over and claimed in a subsequent year in which there is sufficient business income to offset those expenses.

Employed taxpayers who meet the two-part test set out above must meet a further condition before being eligible to claim home office expenses, as follows:

• the employer must provide the employee with a Form T2200, which indicates that the employee is required by his or her contract of employment to provide and pay for the expenses related to the home office;
• the employee must not have been reimbursed by the employer for such expenses; and
• the expenses must have been used directly in the employee’s work at home.

Once the T2200 has been issued, and the other conditions are met, an employee who is a tenant can claim a proportionate part of his or her rent. An employee who owns his or her own home can claim a proportionate percentage of utilities and maintenance costs. An employee is not, however, entitled to claim any portion of mortgage interest, property taxes, or home insurance costs paid, and cannot claim capital cost allowance.

As is the case with self-employed taxpayers, an employee’s deduction for home office expenses cannot be greater than the income from employment income for the year to which the expenses relate. And, once again, carryover to a subsequent taxation year is allowed.

One of the tax benefits which is commonly supposed to exist for the home office workers is the right to claim depreciation (or capital cost allowance (CCA), in tax parlance) on one’s home for tax purposes. For employees, however, such a claim is simply not allowed. And, while the self-employed may be entitled to claim CCA on a home, making such a claim can create a short-term benefit with long-term costs. Making a CCA claim on one’s home is likely to erode the principal residence exemption from capital gains tax which is claimable when a home is sold, and that exemption is almost always more valuable, in monetary and tax terms, than any CCA claim which might have been made.

Being able to claim home office expenses doesn’t result in the huge tax benefits that some popular tax myths claim. However, it can and does permit qualifying taxpayers to claim a portion of home ownership (or rental) expenses which would have been incurred in any case while also avoiding the dreaded daily commute, making it a win-win scenario.

As if dealing with bills from the recent holiday season and trying to come up with the funds for an RRSP contribution weren’t enough, February is also the month in which millions of Canadian taxpayers receive an Instalment Reminder from the Canada Revenue Agency (CRA). For many of those taxpayers, who have received many such notices in the past, the reminder and the tax instalment process are familiar, although not necessarily welcome. For those who are receiving one for the first time, however, both the reminder itself and figuring out how to deal with it can be baffling.

Most Canadians, certainly those who are employed, have income tax deducted “at source”, meaning that their employer deducts an amount for income tax from their paycheques and remits it to the CRA on their behalf. However, for those who are self-employed or, frequently, those who are retired, no such deduction is automatically made from their income, and the issuance of an Instalment Reminder by the CRA may be the result.

The receipt of such a Reminder may be particularly puzzling to the newly retired, who have been accustomed to having tax deducted at source from their paycheques throughout their entire working life. However, no matter what the source of one’s income or the reason that tax has not been deducted at source, the options available to a taxpayer who receives such a reminder are the same.

Canadian federal tax rules provide that a taxpayer may be required to pay income tax by instalments where the amount of tax owing on filing is more than $3,000 in the current year (2012) and either of the two previous years (2010 or 2011). Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income is at least $3,000 less than their total tax liability for the current and either of the two previous years. Such instalment payments of tax are due on March 15, June 15, September 15, and December 15 of each year.

An Instalment Reminder issued by the CRA in February 2012 will specify two amounts, one to be paid by March 15 and the other due by June 15. Those amounts represent the CRA’s best estimate, based on the taxpayer’s return filed for the 2010 taxation year, of the net tax will which be payable by the taxpayer for 2012. The taxpayer then has the following three options.

First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of March 15 and June 15. A taxpayer who does so can be certain that he or she will not face any interest or penalty charges, even if the amount paid turns out to be less than the taxes actually payable for the 2012 tax year. (If the instalments paid turn out to be more than the taxpayer’s net tax liability for 2012, he or she will of course receive a refund on filing.)

Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2011 tax year. Where a taxpayer’s income has not changed between 2011 and 2012 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2012 will be slightly less than it was in 2011, owing to the indexation of tax brackets and personal tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2012 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease from 2011 to 2012 and there will consequently be a reduction in tax payable, this option may be worth considering.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2012 tax year is filed in the spring of 2013. However, should instalments paid be late or insufficient, the CRA can impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2012—until March 31, 2012—is 5%.) 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 impose penalties, but this 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 have 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.

It’s that time of year again, when advertisements about the wisdom of contributing to your registered retirement savings plan (RRSP) fills the airwaves and Web sites. And, since the introduction of tax-free savings accounts (TFSAs) in 2009, February is now also the month in which Canadians wrestle with the question of whether to put any available funds into an RRSP before the contribution deadline of February 29, 2012, or whether to deposit those funds instead in a TFSA.

It’s important to be clear, at the outset, that it’s not an either/or choice. Taxpayers can (and probably should) utilize both the RRSP and TFSA options in planning their financial affairs. Realistically, however, for most taxpayers the limitation is one of resources and cash flow, and it’s often not possible to fund contributions to both an RRSP and a TFSA in the same year, let alone in the same month. That said, what are the considerations which apply in determining which savings/investment vehicle is preferable for 2012?

There are some similarities between TFSAs and RRSPs. Both allow savings to grow and compound free of current tax, and for both, contributions not made in a year can be carried forward and made in any subsequent year. As well, the types of investments which can be made with RRSP or TFSA contributions are, for all intents and purposes, the same, meaning that one’s choice of investment (i.e., guaranteed investment certificates (GICs), mutual funds, bonds, etc.) should be irrelevant to the choice of RRSP vs. TFSA. However, the differences between the two savings vehicles are at least as significant as their similarities.

Perhaps most important to taxpayers, contributions made to an RRSP are deductible from income, resulting in a lower tax bill for the year of contribution and, for many taxpayers, a tax refund. Contributions to a TFSA are, on the other hand, made with after-tax funds, meaning that tax will already have been paid on the income used to make that contribution. Many taxpayers, when presented with an option which will reduce current year taxes, find that the most attractive choice. However, over the long-term, the tax consequences of choosing an RRSP over a TFSA can erode that benefit. When funds contributed (along with investment income earned on those funds) are withdrawn from a TFSA or an RRSP, the tax consequences are very different. Funds withdrawn from an RRSP (or a registered retirement income fund (RRIF) into which the RRSP has been converted) are fully taxable, without exception, at whatever tax rate applies to the taxpayer at the time of withdrawal. TFSA funds (including accumulated investment income) are withdrawn from the plan free of tax, regardless of when the withdrawal is made or the purpose to which the funds are put. And for taxpayers who are receiving Old Age Security benefits (or any other means-tested benefits) from the federal government, it is important to note that RRSP or RRIF funds withdrawn will be included in income for the purpose of determining eligibility for such benefits, while TFSA funds will not. Finally, while RRSP contributions for 2011 must be made by February 29, 2012, there is no similar deadline for TFSA contributions—they can be made at any time during the calendar year. Finally, when funds are withdrawn from a TFSA, the plan holder can “top up” the TFSA in any subsequent year by the amount of that withdrawal. Funds withdrawn from an RRSP cannot be re-contributed, unless the withdrawal was made as part of government-sanctioned withdrawal plans, like the Home Buyers’ Plan or the Lifelong Learning Plan.

The minority of working taxpayers who are members of registered pension plans will likely find the TFSA option particularly attractive. The maximum amount which can be contributed to an RRSP for the 2011 tax year is calculated as 18% of earned income for 2010, to a maximum contribution of $22,450. However, that maximum contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under the pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, and a TFSA contribution the logical alternative.

In a similar way, for taxpayers over the age of 71, the RRSP v. TFSA question is simply irrelevant. Taxpayers over that age are not eligible to make contributions to an RRSP, making TFSAs the only tax-free savings vehicle to which they can make contributions. The benefit is greatest for older taxpayers whose required RRIF withdrawals are greater than their current needs. While such RRIF withdrawals must be included in income and taxed in the year of withdrawal, 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 from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or for the federal age credit.

For younger taxpayers, where the savings goal is short-term (e.g., a down payment on a home or paying for next year’s vacation), the TFSA is clearly the better choice. While choosing to save through an RRSP will provide a deduction on that year’s return and probably a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced. While the amounts involved may seem small, the loss of compounding on even a small amount over 25 or 30 years can make a significant dent in one’s ability to save for retirement.

Taxpayers who are expecting their income to rise significantly within a few years (e.g., 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, 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 against income which would be taxed at the much higher rate, generating a tax savings. And, if a need for the funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Financial planners and tax advisers are accustomed to being asked by clients at this time of year whether it makes more sense to pay down the mortgage (or other debt) or to contribute to an RRSP. That question has become more complicated now that the TFSA option has been added to the mix. There is, however, a solution which allows you to do both. Assuming a marginal tax rate of 45%, an RRSP contribution of $10,000 will generate a tax refund of $4,500. Contribute that $10,000 (or as much as you can) to your RRSP and, when the resulting tax refund lands in your bank account, move it to a TFSA or use it to pay down the mortgage or other debt, or split it between the two.

The Canada Revenue Agency has dedicated sections of its Web site to addressing the need of taxpayers for information about TFSAs and RRSPs, and those sections can be found at http://www.cra-arc.gc.ca/tx/tfsa-celi/menu-eng.html and http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/menu-eng.html, respectively.

It’s almost impossible not to have heard that the amount of debt carried by Canadian households is at an all-time high—reaching, on average, just over 150% of household income. Carrying so much debt can be relatively painless when interest rates are at historic lows, but it’s clear that rates cannot and will not remain at such levels indefinitely.

Whether it’s because of the warnings issued by financial professionals and government officials, or just the sight of ever-increasing balances on the monthly credit card or line of credit statements, it seems that Canadians are starting to recognize that their debt loads have to be reduced. And—right on cue—a number of debt reduction companies have begun advertising their services, promising to do just that.

Typically, debt reduction companies promise to work or negotiate with an individual’s creditors in order to have the amount of outstanding debt reduced—a service for which the debtor will of course pay a fee. The claims made by some such companies can seem like a lifeline to debt-burdened families. For those dealing with calls from irate creditors and struggling to make minimum monthly payments on outstanding debts, the prospect of having those debts reduced by up to 70% is very compelling. When a promise to restore a good credit rating by removing past credit mistakes from the debtor’s credit history is added to the sales pitch, it can seem almost too good to be true. And that, in fact, is the title of a recent consumer alert issued by the Financial Consumer Agency of Canada (FCAC): “Debt Reduction Companies: Beware of “Too Good to be True” Offers. That alert is available on the Agency’s Web site at http://www.fcac-acfc.gc.ca/eng/resources/consumerAlerts/alerts_posting-eng.asp?postingId=393.

The alert issued by the FCAC examines some of the claims made by many debt reduction companies, and compares these claims to the reality of the situation. The first unrealistic claim is often the one made about the percentage by which an individual’s debt can be reduced. The FCAC notes that no creditor is required to negotiate with or speak to a debt reduction company, even if the debtor has paid a fee to have such a company negotiate on its behalf. And, even if the creditor is willing to deal with the debt reduction company, it is in no way obliged to reduce debt by any amount. In other words, it’s perfectly possible for the debtor to pay a fee but get nothing for it.

Another claim sometimes made by debt reduction companies is that they will protect the debtor’s credit rating or even “clean up” that rating by having information on past defaults or late payments eliminated. The reality is that, unless the information contained in a person’s credit rating is demonstrably inaccurate, there is no way to have it removed from the credit report. Listings of past transactions, like late payments or defaults, do eventually disappear from a credit report, but that happens after a specific period of time has elapsed, not because the removal of such information is requested or demanded by a third party. The FCAC alert also reviews claims made that working with a debt reduction agency won’t have any negative effect on the individual’s credit rating or score. It warns that some such companies delay making payments to creditors for a few months in the hope of getting better results from negotiations to reduce the debt amount and that, where that happens, those late payments are likely to be reported to the credit reporting agencies, further damaging the individual’s credit rating. In some cases, debt reduction companies encourage debtors to stop all direct contact with creditors, or even to sign a power of attorney, giving the company authority to make agreements by which the debtor will be bound, even if he or she had no knowledge of them at the time.

Perhaps the most egregious claim made by debt reduction companies is the strong impression given that they are approved by the Canadian government or even that they are operating as part of a federal government program. Neither is true. Neither the federal nor the provincial or territorial governments operate debt reduction companies, and there are no government sponsored programs offering this type of debt reduction. While it is the case a debt reduction company will usually need to be registered and/or licensed by its provincial or territorial government in order to operate as a business, that is simply an administrative requirement which applies to all companies operating in a particular province or territory. Licensing or registration does not in any way mean that the provincial or federal government has approved of or endorsed the company or its way of doing business, and any claims to the contrary are simply false.

Sometimes, debtors avail themselves of the services of debt reduction companies because they are under the incorrect impression that there is no other choice open to them to deal with their debts. There are, in fact, several options. Where a debtor intends to and is able to discharge existing debts, he or she could obtain a debt consolidation loan from a financial institution. The rate of interest charged on such a loan will almost certainly be lower than that being levied on outstanding credit card or payday loan company debts, and the debtor will be able to make a single payment instead of juggling the demands of multiple creditors. Where it’s not possible to obtain such a loan, or the debtor doesn’t feel able to manage the debt repayment process alone, the best course of action is to obtain the services of a reputable credit counseling agency, which can set up a debt management program for the debtor. As part of that program, the agency will contact the individual’s creditors to arrange a manageable payment plan which might include a reduction in interest rates charged. Once a program is in place, the individual makes payments to the credit counseling agency which, in turn, forwards payments to the individual’s creditors as agreed. As well, credit counseling agencies work with clients to help with budgeting and financial management skills, with the goal of avoiding a recurrence of the individual’s financial problems. Reputable credit counseling agencies exist in both the private and the not-for-profit sectors, and information on the latter can be found on the Credit Counselling Canada Web site at http://www.creditcounsellingcanada.ca/Home.aspx.

In many ways, getting out of debt has a lot in common with that perennial New Year’s resolution of many Canadians—losing some weight and getting in shape. With both, it’s human nature to want to believe that there is an easy, painless way of accomplishing the goal without a need to change existing habits, and so it’s easy to fall for persuasive sales pitches that claim to have a quick fix for the problem. In both cases, however, the reality is the opposite—results can only be obtained through some effort, but where that effort is made and existing habits altered, successful long-term results are possible.

Just about everyone is familiar with the concept of a mortgage. Money is borrowed, usually from a bank or other financial institution, in order to purchase a home. That money (now known as mortgage principal), plus interest, is paid back, usually over the next couple of decades, until the home is owned “free and clear”.

While reverse mortgages have been available for some time inCanada(and even longer in theU.S.), most Canadians aren’t that familiar with them. However, reverse mortgages are being widely promoted to the baby boomers and, for a variety of reasons, are likely to gain greater traction in the Canadian marketplace in the next few years.

A number of circumstances have combined to make many Canadian retirees, in effect, house-rich and cash- or savings-poor. Fewer and fewer Canadians are members of employer-sponsored pension plans and consequently fewer and fewer Canadians can look forward to receiving monthly payments from such a pension plan throughout retirement. Fewer still will have access to the gold standard of pension plans—a defined benefit plan which is indexed to inflation. Retirees and near-retirees who aren’t members of pension plans but have saved diligently for retirement through vehicles like registered retirement savings plans have likely seen the value of their portfolios slashed in recent years as the result of stock market declines and financial crises. Even those who invested more conservatively, in GICs or government bonds, haven’t actually lost money but have for several years been receiving a virtual pittance in terms of interest returns on those investments. For both groups, the likely result is that the retirement nest egg which they had counted on to provide them with a steady source of retirement income is much smaller than they had anticipated. Finally, especially over the past year, inflation has made purchases of both food and energy—completely non-discretionary expenditures for every Canadian—more and more expensive. Over the past five or ten years, it seems that the only kind of asset which has steadily continued to increase in value is residential real estate.

Most Canadians spend a good portion of their working lives paying off their mortgages, with the goal of being mortgage-free at retirement. Once the mortgage is paid off, the value of the mortgage-free home usually makes up a significant portion, if not the majority, of the homeowner’s overall net worth. For homes which were purchased decades ago, particularly those located in large urban centers like Toronto or Vancouver, the increase in value since the original purchase can amount to more than half a million or even a million dollars.

The traditional approach, once children are no longer living at home and retirement approaches, has been to sell the family home and “downsize”, freeing up the equity in the home to provide a source of retirement income. However, there are many situations in which moving and downsizing isn’t desirable or even possible. Especially for those living in smaller centres, where the types of available housing may be limited, downsizing could mean having to move to another community. Moving and leaving behind friends and other social supports is difficult at any age, and especially difficult when it coincides with a major life change like retirement. Or, it may be that the current family home is very well-suited to retirement life and that the only reason to sell that home is the need to free up equity. For a lot of reasons, where there are no financial constraints, many people would simply prefer to “stay put” for as long as possible.  

Enter the reverse mortgage. Essentially, a reverse mortgage allows homeowners to obtain cash representing a portion (usually up to 40%) of the market value of the home without having to actually sell the home and move. Interest is charged, of course, on the funds loaned, but the homeowners are not required to make any payments, of either interest or principal, while they live in the home. Instead, interest is compounded and added to the original loan amount, and the total becomes payable when the house is sold or the homeowner dies.

For retirees living in what seems to be a perpetual cash flow crunch, a reverse mortgage can sound like the ideal solution. However, there are some potential downsides or risks to keep in mind.

First, there are costs associated with taking out a reverse mortgage, and those costs are generally borne by the homeowner. An appraisal must be done on the home to determine its current market value, the homeowner taking out the reverse mortgage must obtain (and pay for) independent legal advice and the company providing the reverse mortgage will typically levy administrative, legal, and closing costs. All in all, the cost of taking out a reverse mortgage can run close to $3,000.

Second, since no payments of either interest or principal are being made, the amount owed can increase much more rapidly and eventually be much greater than most people realize. Where, for instance, a homeowner takes out a reverse mortgage of $150,000 at 6.0%, and makes no payments of interest or principal, the amount owing after 10 years will be more than $250,000, or close to double the original amount. The same compounding effect which allows savings to grow over time is working in this case against the borrower.

Finally, reverse mortgages are structured so as to be repayable when the homeowner dies or the home is sold. As is the case with conventional mortgages, “breaking” a reverse mortgage by paying if off early usually means paying an interest differential and/or penalties, both of which can be substantial.

There are, as well, other ways in which homeowners can access the equity in their homes without needing to sell. In many cases, homeowners who would qualify for a reverse mortgage would also be able to obtain a home equity line of credit from a bank or other financial institution.

Like a reverse mortgage, a home equity line of credit is based on the amount of equity which the homeowner has, and amounts up to a specified percentage of that equity are made available to the homeowner. The major advantage of a home equity line of credit, when compared to a reverse mortgage, lies in its flexibility. Funds made available through a reverse mortgage are usually provided in a lump sum when the reverse mortgage is taken out, and the interest clock starts running on that lump sum immediately. With a home equity line of credit, the homeowner is provided with access to funds up to a certain amount. The homeowner can then access those funds as needed, with interest payable only on the amount of borrowings outstanding at the particular time. As well, payments can be made to reduce the amount of outstanding borrowings at any time, without penalty.

The one major disadvantage of a home equity line of credit for cash-strapped borrowers is that, unlike a reverse mortgage, payments on a home equity line of credit must be made, usually monthly. Those payments are usually equal to the amount of interest levied on the current balance during the previous month, and there is generally no requirement to pay down principal, unless the homeowner wishes to do so. However, it is likely that the interest rate levied on a home equity line of credit (usually around the prime rate of interest) will be lower than the rate levied on a reverse mortgage made for the same property.

In the final analysis, the choice between a home equity line of credit and a reverse mortgage comes down to the individual homeowner’s circumstances, including the following considerations.

• Can the homeowner manage monthly interest payments? If the cash flow situation is such that it just isn’t possible to make those payments, no matter what the amount, then a home equity line of credit isn’t a solution.
• Are the funds obtained through the reverse mortgage or home equity line of credit to be used to pay an immediate large expense, or used to augment existing sources of income in order to meet day-to-day living expenses? If the former—for instance, if extensive renovations or repairs must be carried out on the home immediately in order for the homeowner to continue living there, then the lump sum obtained through a reverse mortgage will be put to immediate use. If however, the home owner is in a situation in which current income falls short of living expenses—for instance, funds are needed to enable the homeowner to pay increased annual property taxes—it probably doesn’t make sense to borrow (and start paying interest on) a large sum of money which isn’t currently needed. In such a situation, it would make more sense for the homeowner to take out a home equity line of credit and borrow from it only to the extent necessary to meet his or her living expenses as they become payable, and paying interest only on the amount borrowed to date.
• Is relief from the cash flow crunch which is making borrowing necessary likely to be available from another source any time in the near future? If, for instance, someone over the age of 60 has been downsized and is unable to find a new job, but will start receiving a substantial pension within the next couple of years, it would make more sense to use a more flexible home equity line of credit to bridge the gap, instead of getting locked into a long-term reverse mortgage.
• Finally, the age of the homeowner and his or her long-term plans for staying or moving should be considered. As can be seen from the example outlined above, the amount owing on a reverse mortgage can increase very quickly indeed. A couple in their early 60s who plan to live in the house for another 20 years or so could see most or all of their equity wiped out by the accumulating interest costs of a reverse mortgage. At the other end of the age spectrum, a homeowner in his or her mid-80s is, realistically, not likely to be living in the home for an extended period of time, meaning that the interest costs of a reverse mortgage will not have an opportunity to accumulate and compound to the same extent.

The Canada Pension Plan (CPP) is a cornerstone ofCanada’s retirement income structure. The Plan is financed by way of contributions made during the working life of each Canadian, and the amount of CPP retirement pension received is calculated using an actuarial formula based on those contributions. While the CPP is well-funded and on a sound financial footing, the demands made on the Plan over the next couple of decades will be unprecedented, as the number of CPP recipients increases, both in absolute terms and in relation to the number of contributors who are still in the workforce. Recognizing that reality, the federal government has made a number of changes in recent years to the rules governing CPP contributions and benefits, and the latest set of such changes will take effect in January 2012.

In order to ensure that the required contributions are made to the CPP by each employee, Canadian employers are required to deduct such contribution amounts from their employees’ paycheques and to remit those contributions on the employees’ behalf to the federal government. Employers are also required to match the contributions made by each employee, dollar for dollar, and to remit those amounts at the same time. For 2011, the employee and employer contribution amount is 4.95% each of the employee’s pensionable earnings, to a maximum contribution by each of $2,218. For the self-employed, who must pay both the employer and employee portions of CPP, the total is $4436.

Canadians are entitled to begin receiving Canada Pension Plan retirement benefits as early as age 60 or as late as age 70. Where receipt of the benefit is deferred until a later date, the amount of the monthly benefit received increases. However, it’s not uncommon these days for Canadians to work past the age of 60 or to return to work—usually on a part-time basis—after retirement. Under current rules, once an individual begins to receive a CPP retirement pension, he or she does not contribute again to the Plan, even if the decision is made to return to the work force on a part-time or full-time basis. Technically, an employer is required to stop deducting CPP contributions from an employee’s pensionable earnings when the employee:

• is at least 60 years of age but under the age of 70; and
• provides proof that he or she is receiving a Canada Pension Plan or Quebec Pension Plan retirement pension.

And, of course, where the employee is not making CPP contributions, no matching contributions are required from the employer.

The federal government has decided that, beginning in January 2012, CPP recipients who are between the ages of 60 and 65 and who return to the work force will be required to once again make CPP contributions. Where a CPP recipient is between the ages of 65 and 70, he or she will be allowed to choose whether or not to contribute to the CPP, and will have the right to change his or her mind at a later date. The overall effect of these changes on employers is that, as of January 1, 2012, employers will be required to deduct CPP contributions from pensionable earnings of workers who are:

• 60 to 65 years of age;
• 65 to 70 years of age, unless the employee files an election with the CRA and his/her employer to stop paying CPP contributions (using form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election); or

• 65 to 70 years of age, if the employee revokes his/her election to stop paying CPP contributions in 2013 or later.

For employers, these new rules will have two significant consequences. First, employers will now be required to withhold and remit CPP contributions on behalf of employees aged 60 to 65 who are currently receiving CPP retirement pension. And, of course, where an employee is making CPP contributions, there is a corollary obligation on the part of the employer to make matching contributions. Second, employers will need to determine the CPP contributor status of each employee who is aged 65 to 70 and is receiving CPP retirement benefits. Employer payroll systems will have to be amended to take account of the choice (to contribute or not to contribute) made by each employee aged 65 and older. The onus is on the employee to advise the employer in December 2011 (the new form for doing so, the CPT30, will be available in November 2011) that he or she does not wish to begin making CPP contributions in January 2012. Where no such election is made, the employer is required to begin deducting and remitting CPP contributions on behalf of the employee and, of course, to match those contributions, as of that date. As well, it is possible for an employee who has elected to not make CPP contributions to later revoke that election (but only once per calendar year), a choice which will then require the employer to once again deduct, remit, and match the employee’s CPP contributions.  

Finally, where employees are between the ages of 65 and 70, but have not yet begun to receive CPP retirement benefits, there is no change to the requirement that the employer deduct, remit and match CPP contributions for those employees. The rules for employees over the age of 70 have also not changed: there is no obligation on the employer’s part to deduct or remit CPP contributions for those employees, regardless of their circumstances.

Since they became available on January 1, 2009, Tax-free Savings Accounts (TFSAs) have proven to be extremely popular with Canadians. TFSAs offer Canadians aged 18 and older an opportunity to save and invest on a tax-free basis, without any restrictions on when amounts saved can be withdrawn or the uses to which accumulated funds can be put.

There has also, unfortunately, been a measure of confusion about the mechanics of how TFSAs work among both the Canadian public and, in some cases, the financial institutions which offer and administer the plans. That confusion led to a situation in 2009 in which a number of Canadians had inadvertently overcontributed to their TFSAs, and then received assessments which included a penalty tax. The Canada Revenue Agency (CRA) eventually agreed to provide relief from such penalties on an administrative basis, where the overcontribution was clearly inadvertent and there had not been any effort to obtain an undeserved tax advantage. The confusion also led to the CRA’s Taxpayers’ Ombudsman to look into the situation and the results, a report entitled “Knowing the Rules” was recently released. Most of the Ombudsman’s report dealt with the need for the CRA to more clearly explain and publicize the rules governing TFSA contributions, withdrawals, and transfers. The Minister of National Revenue recently issued a news release indicating the measures which the CRA would be taking to respond to the Ombudsman’s recommendations. Those measures include updating the CRA’s Web site content on TFSAs, issuing Tax Tips as needed, providing community newspaper articles on the subject, and holding webinars for financial institutions.

While all of those changes will be welcome, the question of how much can be contributed to an individual’s TFSA for this year is likely already on the minds of Canadian taxpayers. The deadline for a current year contribution is December 31^st of the taxation year and that date is now less than four months away. As well, many Canadians who have a TFSA savings account may be in habit of depositing any “extra” money like a tax refund or a federal or provincial tax credit cheque into that account throughout the year, as those amounts are received. Without a clear understanding of what one’s limit is for the year, it’s easy to go “offside” without even realizing it.   

The easiest way to find out one’s contribution limit for 2011 is by taking a look at the Notice of Assessment received from the CRA for the 2010 tax return filed earlier this year. However, many taxpayers don’t keep or file their Notice of Assessment, although it’s a good idea to do so, for many reasons. If that’s the case, it’s possible to find out one’s 2011 TFSA limit by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. For those with internet access, information on TFSA contribution room can be obtained by going to the CRA’s Quick Access service on its Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/qckccss/menu-eng.html. In both cases, it will be necessary to provide some personal information, including figures from previously filed tax returns, for security reasons.

It’s also fairly easy to calculate one’s contribution room for 2011. Each Canadian over the age of 18 can contribute up to $5,000 per year, beginning in 2009. If no contribution, or less than the maximum contribution, is made in a year, the “shortfall” is added to the following year’s contribution. So, a taxpayer who has never contributed to a TFSA would have $15,000 of contribution room for 2011, made up of $5,000 of contribution room for each of 2009, 2010, and 2011.

One of the features of a TFSA which makes it such an attractive savings vehicle is its flexibility. That flexibility is most apparent when it comes to withdrawals made from a TFSA. Where funds are withdrawn (and there are no limits on the amount of withdrawals or any restrictions on the use to which the funds withdrawn can be put), the amount of that withdrawal can be recontributed, but not until the following year. Many of the taxpayers who inadvertently went offside with respect to the TFSA rules did so because of a misunderstanding of the withdrawal/recontribution rules. In many cases, taxpayers made a withdrawal from their TFSAs early in a taxation year and then recontributed the withdrawn amount later in the year, in the mistaken belief that recontribution at any time was permitted.

The withdrawal/recontribution rules are perhaps most easily understood by means of an example: the following straightforward illustration of the rules is taken from the CRA Web site.

In 2009, Sarah contributed $5,000 to her TFSA. In 2010, she makes another $5,000 contribution to her TFSA. Later that year, she withdraws $3,000 for a trip. Unfortunately, her plans change and she cannot go. Since Sarah already contributed the maximum to her TFSA earlier in the year, she has no TFSA contribution room left. If she wishes to re-contribute part or all of the $3,000, she will have to wait until the beginning of 2011 to do so. If she re-contributes before 2011, she will have an excess amount in her TFSA and will be charged a monthly tax of 1% on the highest excess TFSA amount for each month that an excess exists in the account. The $3,000 will be added to her TFSA contribution room at the beginning of 2011.   

As the example suggests, the cost of overcontributing to a TFSA can be steep—a penalty tax equal to 1% of the excess contribution is levied during each month that the taxpayer is in an overcontribution position. So, in the above example, if Sarah recontributed the $3,000 in June 2010 and left the funds there through the end of the year, she would be assessed a penalty tax of $210, almost certainly eliminating any interest earned during the year on her $3,000 overcontribution.

Another area that has given taxpayers difficulties is that of transfers between institutions. As is the case with registered retirement savings plans, it’s possible to open a TFSA at virtually any financial institution in Canada, and quite often incentive interest rates or bonuses will be offered to attract TFSA deposits. Consequently, it wouldn’t be unusual for a taxpayer who has TFSA funds on deposit at one institution to decide that a better deal is available at a different financial institution. Where a taxpayer moves funds from a TFSA at one financial institution to a TFSA at another such institution, there is no impact on the taxpayer’s current year contribution room, as long as the transfer is what is known as a “qualifying transfer”, meaning a transfer done directly between those two financial institutions. Such transfers can, however, take a bit of time to execute and the taxpayer may well feel that it would be faster and easier to simply withdraw the funds from the TFSA at the first financial institution and then deposit them him or herself into the TFSA at the second one. However, that course of action has some unwelcome consequences. Where a taxpayer withdraws funds from one TFSA and then contributes that amount to another TFSA, the subsequent contribution will be considered a new contribution that will reduce, and may even exceed, the taxpayer’s TFSA contribution room for the year. And, of course, where TFSA contribution room is exceeded, the result will be the imposition of a penalty tax.

The following example of how the qualifying transfer rules work is also taken from the CRA Web site:

On January 5, 2011 Don contributed $5,000 to his TFSA in Bank "A" leaving him with an unused TFSA contribution room of zero.

In July, he received his TFSA statement from Bank "A" which indicated there was only a minimal growth ($25) from his investment. Don decided to consult with other financial institutions to see if they offered a better rate of return for his TFSA investment. Don found a better rate offered at another financial institution and decided to transfer his TFSA account to Bank "B".

In order for Don's contribution to the Bank "B" TFSA to be considered a qualifying transfer, Bank "A" must make a direct transfer of funds to Bank "B" to ensure that there would be no tax consequences.

If, instead, Don goes into Bank "A", withdraws the amount in his TFSA and walks into Bank "B" to open a new TFSA with a contribution of $5,025, the contribution will be treated as an ordinary contribution and because his unused TFSA contribution room is already zero, he will have an excess TFSA amount of $5,025 and will therefore be subject to a 1% per month tax on excess TFSA amount for as long as the excess TFSA amount exists. The withdrawal from Bank "A" will be added back to his contribution room at the beginning of 2012.

If Don left his contribution to Bank "B" in his TFSA for the remainder of the year, his penalty tax would be calculated as follows:

• Highest excess TFSA amount per month from July to December = $5,025.
• Tax = 1% per month on the highest excess amount = $5,025 x 1% x 6 months, which is $301.50.

When it provided administrative relief from the penalty tax to taxpayers who had made inadvertent overcontributions to a TFSA, the CRA made it clear that the relief was being provided on the understanding that taxpayers might not be familiar with the new rules. The Agency was equally clear that no such concessions would be forthcoming. With that in mind, taxpayers should consider the following.

• If regular or periodic contributions have been or are being made to a TFSA throughout the year, it’s a good idea to take the time to calculate one’s 2011 contribution room, to ensure that the limit won’t be exceeded. If that’s already happened, the best course of action is to withdraw the excess funds immediately, as a penalty tax will be assessed for every month or part month that those excess amounts remain in a TFSA.
• If TFSA funds have been moved from one financial institution to another, and that transfer was effected by means of a withdrawal and deposit, rather than a direct bank-to-bank transfer, remember that those funds will be counted as a current year contribution. If the withdrawal/recontribution has resulted in an excess contribution for the year, those excess funds should be withdrawn as soon as possible.
• Those who are considering making a withdrawal from a TFSA within the next 6 months or so, perhaps to pay for a winter vacation or to make a 2011 RRSP contribution, should consider making that withdrawal before the end of the calendar year. TFSA funds which are withdrawn before the end of 2011 can be re-contributed beginning January 1, 2012. Where funds are withdrawn after December 31, 2011 and during 2012, no re-contribution of those funds will be allowed until January 2013 at the earliest. Even if a re-contribution isn’t necessarily planned, accelerating the withdrawal into 2011 will provide the taxpayer with increased flexibility should a re-contribution become possible. As well, since there are no tax consequences to withdrawing funds from a TFSA, it doesn’t matter, from an income tax perspective, whether that withdrawal is done in 2011 or 2012.

Very few Canadians escape paying personal legal fees at one time or another and, depending on the situation, those fees can add up quickly. Unfortunately, while legal fees incurred in some circumstances may be deducted from income on the annual tax return, there sometimes doesn’t seem to be any rhyme or reason to what’s deductible and what’s not.

First, the bad news: legal fees incurred in situations experienced by millions of Canadians (e.g., legal costs paid in connection with the purchase or sale of a house, or legal costs paid to obtain a divorce or to establish custody or visitation rights) are not deductible. Generally, personal (as distinct from business-related) legal fees become deductible for most taxpayers only when they are seeking to recover amounts which they believe are owed to them, particularly where those amounts involve employment or employment-related income or, in some cases, family support obligations.

While the term “legal fees” would seem to be self-explanatory, such amounts don’t always have to be paid to a lawyer to qualify as “legal fees” for the purpose of the deduction. For example, an employee whose employment is terminated could deduct amounts paid to a consultant in labour relations to negotiate a severance package on his or her behalf.

Perhaps the most common situation in which legal fees paid become deductible is that of an employee seeking to collect (or to establish a right to) salary or wages. This might involve an employee who, having been “downsized” out of a job, brings legal action alleging that the amount of notice (or compensation provided in lieu of notice) was insufficient. In that situation, legal fees incurred to establish a right to amounts allegedly owed by the employer are deductible by the former employee, even if the action brought is ultimately unsuccessful. As well, proposed changes to the law will allow a deduction for legal fees paid to collect or to establish a right to collect any amount that the taxpayer would be required to include on his or her tax return as employment income, even if that amount is not paid directly by the employer. However, in all cases any claim must be reduced by amounts awarded to the taxpayer, or by any reimbursement of legal fees received.

The rules governing the deductibility of legal fees paid in connection with the enforcement of support obligations are, unfortunately, more complex, much like the tax rules governing the taxation of support obligations generally. Nonetheless, there are some general guidelines which can be laid out.

First of all, as noted above, legal costs incurred to obtain a separation agreement or a divorce, or to establish custody or visitation rights are not deductible under any circumstances. And, at one time, the Canada Revenue Agency (CRA) took the position that such costs incurred in connection with spousal or child support obligations were similarly not deductible. In recent years, however, the Agency has relaxed its position somewhat, and legal fees paid for the following purposes will be deductible by the person receiving the payments:

• collecting late support payments;
• establishing the amount of support payments from a current or former spouse or common-law partner;
• establishing the amount of support payments from the natural parent of that person’s child (who is not a current or former spouse or common-law partner) where the support is payable under the terms of a Court order;
• trying to get an increase in support payments; or
• trying to make child support non-taxable.

 On the other side of the support equation, it is clear both from CRA policy and a number of court decisions (and re-affirmed in a CRA technical interpretation issued in April 2011) that legal costs incurred to defend against claims for support or increases in support are not deductible.

The CRA’s position on the deductibility of legal costs incurred in relation to family support matters has evolved over the years in a somewhat piecemeal fashion, and the result has been some degree of confusion over the time periods for which certain changes are effective. Anyone seeking a deduction for legal fees incurred in connection with a family support matter should obtain advice from a tax professional familiar with the facts of their particular situation.

Finally, there is one other situation in which taxpayers may deduct legal fees incurred and that is in relation to a dispute with the CRA. Specifically, fees (including accounting fees) paid for advice given or assistance rendered in relation to a tax assessment or reassessment or the filing of a Notice of Objection or a court appeal are deductible for tax purposes.

Earlier this year, Canadians filed about 27 million tax returns in about a three month period between March and June, and the Canada Revenue Agency (CRA) was required to process and issue a Notice of Assessment for every one of those returns. About two-thirds of those returns were e-filed—filed by electronic means like NETFILE, EFILE OR TELEFILE—meaning that the CRA did not receive any receipts or other documentation to support claims for deductions or credits made on the taxpayer’s return. As well, the CRA sets time frames for itself within which it attempts to have all returns reviewed and processed and a Notice of Assessment provided to the taxpayer. Those time frames range from 2 weeks, in the case of e-filed returns, to 4–6 weeks for paper-filed returns. The need to review and process so many returns within such a compressed time period obviously means that it’s impossible for the CRA to examine every return in minute detail and to verify the accuracy of each and every deduction and credit claimed. And that’s why many Canadians find an unexpected letter from the CRA in the mailbox at this time of year.

Receiving unexpected correspondence from the tax authorities is almost guaranteed to be unsettling for the taxpayer who receives it. But, in most cases, it’s nothing more than the CRA fulfilling its administrative responsibilities with respect to the assessment of tax returns.Canada’s tax system is a self-assessing one, in which taxpayers use a standardized form to provide the revenue authorities with a summary of their income and allowable deductions and credits for the year, calculate tax owed on the resulting taxable income, and remit that amount to the CRA. It’s a system that relies heavily on the voluntary and honest participation of taxpayers.

When it comes to the reporting of income for tax purposes, the CRA is usually able to verify amounts by cross-checking the amount of income reported by the taxpayer against a T4 slip issued by the taxpayer’s employer, or a T5 slip issued by a financial institution for interest income paid to a client. A copy of each such slip is filed with the CRA, making verification of amounts reported relatively easy. When it comes to allowable deductions and credits, however, the verification process is more difficult. In many cases, taxpayers are allowed to claim credits or deductions (for example, federal tax deductions for child care expenses or provincial tax credits for rent or property taxes paid) without being required to provide the CRA with the related receipts documenting the expenditure. And, of course, those who file electronically file no receipts at all.

It’s clearly impossible to contact everyone who files electronically, let alone all those who file a tax return. Instead, the CRA employs a number of review programs in which some taxpayers are contacted either before or, more likely, after their returns have been filed and assessed, and asked to provide additional information, documentation, or receipts in order to support claims made on that return

While it’s stressful, even where everything is in order, to have one’s return selected for such review, in the vast majority of cases a request for additional information or documentation is simply that and no more than that. Taxpayers often wonder why their particular return was singled out for review (and how they could have avoided it!), but in many cases the return was simply selected at random. That said, it’s also true that there are some events or circumstances which increase the likelihood that the CRA will request further verification of claims made on a return. As a general rule, where a current year return contains information which is significantly at variance with that filed in previous years (for example, a significant increase in the amount of medical expenses claimed), the chances that the taxpayer will be contacted for more information increase. Similarly, a change in the taxpayer’s personal circumstances which alter the tax deductions or credits for which he or she is eligible may generate a query from the CRA. For instance, a recently separated or divorced parent who claims the eligible dependant credit for the first time may be asked to substantiate the fact that there has been a separation or divorce and that he or she has custody and care of the child for whom the credit is being claimed. And, of course, where the income reported on a return doesn’t match the number on a T4 slip (you say you earned $38,000 during the year, but the T4 slip issued by your employer puts your income at $42,000), the CRA is going to want to know why.

In the vast majority of cases, claims made and information reported on a return are accurate and legitimate and, once the CRA is provided with the requested information or documentation, the matter will be at an end. Problems arise, however, where taxpayers either don’t have the documentation requested (because they have lost, have destroyed, or haven’t kept the related receipts) or because they simply elect to ignore the letter from the CRA in the hope, perhaps, that the Agency will forget all about it. Unfortunately for such taxpayers, either approach will eventually end with the return being reassessed to disallow the deduction claimed, and the resulting increased tax bill. The onus is always on the taxpayer to provide proof of eligibility for any deductions or credits claimed, and the CRA has the legal right to ask for such proof and to disallow deductions or credits where that proof is not forthcoming.

Typically, where the CRA asks a taxpayer for information or documentation, it will also indicate a deadline (usually within 30 days) by which the information or documentation must be provided. That information or documentation can be provided by fax or by regular mail (the CRA does not deal with taxpayers on confidential tax matters through e-mail, for security and privacy reasons), and the letter will include a toll-free fax number which can be used. It’s always advisable to keep copies of any correspondence with the CRA and, especially, to keep copies of any receipts sent to the Agency. (Note that where the CRA has asked for receipts, cancelled cheques or cheque images or invoices are not acceptable substitutes.) Any letters sent to the CRA should include the social insurance number of the taxpayer and the Reference Number which will appear in the the CRA’s original letter. As well, the letter will include a toll-free telephone number at which the taxpayer can contact a CRA representative for any needed clarification. Finally, if the reply is mailed to the CRA, it’s not a bad idea to send it by a means (either through Canada Post or one of the private courier services) which will allow the taxpayer to verify receipt by the Agency, and the date on which it was received.

A final practical point: each year, the CRA sends review requests to many taxpayers who never receive the letter because the address which the CRA has for those taxpayers is out of date. Sometimes, such taxpayers first learn of the review query when a letter finally catches up to them informing them that they owe additional tax as a result of their failure to respond to earlier CRA correspondence. It’s a particular problem for post-secondary students who may file a return in March or April while living at one address and then move shortly thereafter, when the school year ends. For them, the best course of action is to use a more permanent address—usually, their parents’ home address—as the address they have on file with the CRA. In all cases, however, it’s up to individual taxpayers to keep the CRA informed of a current address at which they can be reached.

The vast majority of requests for information issued by the CRA are generated simply as part of their standard review programs and don’t mean that there is anything “wrong” with the taxpayer’s return. Responding to the CRA’s request in a timely fashion with the requested information or documentation (and keeping copies of both) will, in nearly all cases, bring the matter to a satisfactory conclusion for both the taxpayer and the CRA.

Our tax system provides a federal non-refundable tax credit for taxpayers who have what is termed a “prolonged and severe impairment in physical or mental functions”. The federal credit is a substantial one—for 2011, the amount on which the credit is based is $7,341, meaning the credit itself is equal to just over $1,100. When a taxpayer is entitled to claim the disability tax credit and that credit is combined with the basic personal credit to which virtually all Canadian taxpayers are entitled, the taxpayer would be able to receive (for 2011) nearly $18,000 in income for the year with no federal tax liability.

While being able to claim the disability tax credit can make a huge difference to the standard of living available to disabled persons, who typically must manage on a lower than average income, there are additional consequences to being able to make that claim. Disabled taxpayers are generally eligible for a number of tax programs (such as Registered Disability Savings Plans), and the requirements of other tax credit programs (like the education and textbook tax credits or the Home Buyer’s Plan) may be altered or relaxed in ways which recognize the special circumstances of disabled taxpayers. In almost all cases, eligibility for those programs or altered requirements requires that the taxpayer qualify for the disability tax credit. In other words, where a taxpayer applies to the Canada Revenue for a determination of his or her eligibility for the disability tax credit, there’s a lot riding on the outcome of that decision.

That being the case, it’s unfortunate that the process of obtaining a Disability Tax Credit certificate, which certifies that the taxpayer may claim the disability tax credit, isn’t always straightforward or easy, even for those who qualify. To start with, it’s necessary to have a medical practitioner who is very familiar with both the taxpayer’s medical condition and history and also his or her day-to-day living arrangements to complete a lengthy (nine-page) form, outlining in detail both the individual’s medical condition and how his or her disability affects day-to-day living. That form (Form T2201) is structured in such a way that the medical practitioner is required to answer only “yes” or “no” to questions which contain words or phrases (such as “inordinately”, “significantly”, or “markedly”) whose meaning can be very subjective. As well, the requirements for eligibility for a disability tax credit certificate are very precise, and the medical practitioners who are completing these forms are not typically familiar with those requirements.

Until recently, the real difficulty for taxpayers who were denied eligibility for a Disability Tax Credit certificate was that there was no way to directly appeal from that denial. Where eligibility was denied, the taxpayer had no option but to file his or her next income tax return and then object to the Notice of Assessment which was issued by the Canada Revenue Agency (CRA) in respect of that return. However, that process contained a kind of Catch-22. Often, because income was low, a return filed by a disabled taxpayer would be assessed as having no tax owing—what is known in tax terminology as a “nil assessment”. The Catch-22 arose because, under our tax law, no appeal is possible from a nil assessment, leaving the taxpayer with no means to appeal from or dispute the decision which found that he or she was not entitled to a Disability Tax Credit certificate.

Recognizing the injustice inherent in that situation, the federal government has recently changed the rules to provide taxpayers with the right to object where the CRA determines that they are not eligible for a disability tax credit. That change will be effective for the 2010 and subsequent taxation years.

As a matter of procedure, anyone who wishes to object to a denial of eligibility for the credit must do so by the later of two dates: 90 days after the notice denying eligibility is mailed by the CRA, or one year after the due date for the tax year in question. Take, for example, a taxpayer who submits an application for a Disability Tax Credit certificate in June 2011 and to whom the CRA mails the notice denying eligibility in October 2011. That taxpayer will have until April 30, 2013 (one year after the 2011 filing due date of April 30, 2012) to appeal against the CRA’s determination. The form to be used in appealing against the CRA’s determination is the usual Notice of Objection form—T400A, which is available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t400a/README.html.

Special rules—and special time limits—will apply to taxpayers who applied for the certificate in 2008, 2009, or 2010 and who were denied but were unable to appeal. Those taxpayers can now appeal directly against the CRA’s original decision to deny eligibility, but have only 180 days after June 26, 2011 (the day on which the enacting legislation received Royal Assent) to do so.

The CRA has posted a Q&A document about the new appeal rights on its Web site, and that document can be found at http://www.cra-arc.gc.ca/gncy/bdgt/2011dtc-ciph-eng.html.

As summer reaches its midpoint, students who are about to start their post-secondary education as well as those returning for a second, third, or fourth year of university or college will be gearing up over the next few weeks for the upcoming year. And while students are likely to be preoccupied with choosing courses, majors, or residences, or finding a place to live off-campus, their parents are more likely to be focused on tuition bills, residence costs, and the price of textbooks—and how to pay for it all.

Many current post-secondary students are likely the children of baby boomer parents. For the baby boomers, the cost of post-secondary education was, in many cases, offset by generous student loans on which no interest was payable while they remained in school, as well as by government student grants which didn’t need to be repaid at all. While both the federal and provincial governments continue to provide student loans, receiving outright government grants just isn’t the reality for post-secondary students in 2011. As well, the cost of post-secondary education has risen sharply over the past few years, at the same time as government funding of post-secondary educational institutions has, in many cases, diminished. For a student who lives away from home while attending university, the reality is that the combination of tuition, books and residence will cost at least $15,000-$20,000 per year, even for general undergrad studies. And, for students undertaking studies leading to a professional degree like law, medicine or dentistry, that amount may barely cover the cost of tuition.

The good news is that, apparently in recognition of the fact that students and their parents are being asked to shoulder an ever-increasing share of the ever-increasing cost of post-secondary education, the federal government has put in place or enhanced a number of tax “breaks” for post-secondary students.

While the rules governing eligibility for and the amount of those “breaks” can be detailed, students generally can claim a non-refundable tax credit for tuition (but not residence) bills, an “education amount” based on the number of months they attended school during the tax year and a “textbook amount” which, despite its name, has nothing to do with any cost incurred for textbooks. As well, many of the expenses which may be claimed by taxpayers generally, such as moving costs and the cost of public transit, are equally available to students.

Aside from the cost of residence (which is not, in any case, deductible or creditable for tax purposes), the largest single expense for most students is tuition fees, which can range from around $5,000 to over $15,000, depending on the school and the program. No matter what the amount, students are entitled to a federal tax credit (which reduces their tax otherwise payable) equal to 15% of their tuition bill. Each province also provides a non-refundable tax credit for tuition paid, with the percentage amount ranging from 5% to 11%.

Both full and part-time university students can also claim the “education tax credit”, which is calculated as a fixed amount for every month of full or part-time attendance during the tax year. For 2011, the full time amount to be claimed on the federal tax return is $400 per month, while the part-time amount is $120 per month. The total amount claimed is then multiplied by 15% to arrive at the credit claimed on the federal tax return. As with the tuition tax credit, the provinces all offer an education tax credit, with both the amount and the conversion percentage varying by province.

The final “standard” deduction available to post-secondary students is the so-called textbook amount. The name is something of a misnomer, as neither eligibility for nor the amount of the credit depends on expenditures made for textbooks. Rather, the federal textbook amount is a fixed monthly amount (currently $65 for full-time and $20 for part-time students) which, like the tuition and education amounts is converted to a credit by multiplying by 15%, and which can be claimed by any student who is eligible for the education amount.

Non-refundable tax credits, like the tuition, education, and textbook credits outlined above, work by reducing the tax which the individual claiming the credits would otherwise have to pay. However, post-secondary students generally have relatively low income—and consequently relatively low tax bills—and so may not be able to “use up” all of their available credits in a single tax year. Two solutions are possible. First, the student may transfer the unused credit to a spouse, parent, or grandparent (and it’s not necessary for the parent or grandparent to have actually paid the tuition bill in order to claim the transferred credit). Second, the student can keep the excess credit and claim it in any future tax year, when his or her income and tax bill will presumably be higher. There are some restrictions and limitations on the transfer of student tax credits, but generally speaking, most students should be able to transfer credits to parents or grandparents without difficulty.

The three credits outlined above (tuition, education, and textbook) are the credits which are specifically claimable by students. There are however, other credits which, while available to taxpayers generally, are frequently claimed by post-secondary students. The first is the moving expense. Most students move at least twice a year during the course of their post-secondary careers, and some of those moving expenses are deductible from income earned by the student. Specifically, where students move to take a summer job, any moving costs incurred are deductible from income earned at that summer job, as long as the student’s new home is at least 40 kilometres closer to the job location than the place they’re moving from. It doesn’t matter if the student is simply moving back home for the summer – the moving expense deduction is available as long as the 40-kilometre requirement is met. As well, students who move for purposes of a co-op term can also deduct moving expenses from income earned during the co-op term, assuming once again that the 40-kilometre requirement is satisfied.

Finally most students, out of necessity, use public transit, especially when they live off-campus. Where those students purchase monthly (or longer) public transit passes, they can claim a credit for the total annual cost of those passes, without any dollar amount limit, on the tax return for the year. The cost of weekly passes can also qualify for the credit, assuming that those passes are purchased on a regular basis. As with the tuition, education, and textbook credits, the cost of transit passes is converted to a federal credit by multiplying by 15%. A parallel credit is offered by most of the provinces, with the conversion rate varying from province to province. And, as with the tuition, education, and textbook credit amounts, a parent can claim the cost of transit passes purchased by or for the student, assuming that student is under the age of 19 at the end of the year.

It’s almost inevitable, notwithstanding savings, part-time and summer jobs, and all of the tax “breaks” offered to post-secondary students, that most students will end up incurring some debt in order to pay for their education. Where that debt is in the form of government-sponsored student loans (generally, loans provided under the Canada Student Loans program or the equivalent provincial program), interest paid on those loans after graduation can qualify for a tax credit, at both the federal and provincial levels. It is important to remember, however, that only interest paid on loans extended under government-sponsored programs qualifies for the credit. Loans provided by private lenders (e.g., through a student line of credit) do not qualify, and interest paid on any consolidated loans which include funds advanced by private-sector lenders will similarly not be eligible for the credit.

The number of tax credits, deductions and benefits available to post-secondary students, and the rules governing the calculation, transfer and carry-over of those credits can be confusing. The Canada Revenue Agency Guide P105, Students and Income Tax, which is usually updated annually, is an excellent source of information, providing answers to most of the questions which arise in this area. A current version of that guide, which was last updated in December of 2010, is available on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/E/pub/tg/p105/README.html.

When T4s are issued at the end of February each year, it sometimes comes as a surprise to employees that something they considered to be work-related is treated as a taxable benefit, the value of which must be included in income and upon which tax must be paid. In the view of the Canada Revenue Agency (CRA), the use of employer-provided cell phones can fall into that category.

Providing a cell phone to one’s employees is, of course, about as common now as the office coffee machine. In many cases, the employer can obtain better cell phone rates through a group contract than the employees would be able to negotiate on an individual basis. However, even where having a cell phone is a requirement of one’s employment, it’s still possible that the use of that cell phone can give rise to a taxable benefit.

The CRA’s basic position on employer-provided cell phones and taxable benefits is that where an employee is provided with a cell phone or smart phone in order to help him or her carry out employment duties, there is no taxable benefit to the employee. Where, however, part of the use of that phone is personal, then a taxable benefit can arise, depending on the circumstances.

The CRA recognizes that it’s almost inevitable that an employer-provided cell phone will be used on occasion for personal calls, and the Agency is prepared to provide some latitude in this area on an administrative basis. Its assessing position is that personal use of an employer-provided cell phone will not give rise to a taxable benefit if the plan’s cost is reasonable, the plan is a basic one with a fixed cost and the employee’s personal use of the cell phone service does not result in charges that are more than the basic plan cost. All three of these criteria must be met in order to avoid having a taxable benefit assessed.

Based on those criteria, it seems that the best plan when it comes to employer-provided cell phones and the tax authorities is for the employer to buy the plan which provides the most generous airtime provision that can be reasonably justified by the employee’s business-related use of the phone, to keep the total (business and personal) use minutes under the basic airtime limit provided by the plan and not to incur any charges (i.e., long distance or roaming charges) which result in charges above and beyond the basic monthly bill.

Where those limitations aren’t followed, and the employee’s personal use of the employer-provided cell phone does result in additional charges, then the employer must treat the fair market value of those charges (less any reimbursement provided by the employee to the employer) as a taxable benefit, to be included on the employee’s T4 for the year. In the CRA’s view, it’s the employer’s responsibility to determine the percentage of business versus personal use for each employee as well as the fair market value of any taxable benefit received.

The CRA was recently asked whether a taxable benefit would arise where an employee purchased a basic cell phone service plan, which allowed for a specific number of airtime minutes each month, from the employer’s cell phone service provider, and used that phone for business use. The employee paid the monthly invoice for the plan and was then reimbursed by the employer. Any additional charges over the basic monthly cost incurred by the employee would not be reimbursed unless the employee could show that those charges were related to business use of the cell phone. The CRA confirmed that in determining whether a taxable benefit would arise in this situation, the same criteria which would apply where the employer paid the cell phone bill directly would be used – that is, no taxable benefit would arise where the plan cost was reasonable, the plan was a basic one with a fixed monthly cost and the employee’s personal use of the service did not create charges in excess of the basic monthly cost.

One of the questions addressed in the technical interpretation which is not dealt with in the CRA’s guide to taxable benefits is the question of whether a benefit could be assessed with respect to the purchase and ownership of the cell phone or smart phone itself. The answer, in most cases, was yes. Specifically, the CRA was asked whether an employee who purchased and owned the phone and was then reimbursed for the cost of that purchase by the employer would be considered to have received a taxable benefit. The CRA confirmed that a taxable benefit would be assessed in such circumstances, as the employee had received an economic benefit from the reimbursement of his cost of purchasing the phone. That taxable benefit would be equal to the amount of such reimbursement, even where the employee was required to use the phone in the course of his or her employment duties.

In an effort to stimulate hiring by small businesses, the federal government proposed, as part of this year’s budget, a new hiring credit for small business (HCSB) to take effect for 2011. That proposal, along with the rest of the budget provisions, has now been passed by Parliament.

Under Canada’s employment insurance (EI) system, EI premiums must be deducted from an employee’s pay and remitted on a regular basis to the federal government. The employer is also required to pay EI premiums, with the employer contribution equivalent to 1.4 times the amount levied on the employee. So, for every dollar in EI premiums paid by employees, the employer must contribute $1.40.

The new HCSB is available to businesses whose total employer EI premiums during the 2010 calendar year were $10,000 or less, and whose employer EI premium payments increased from 2010 to 2011. The credit itself is calculated as the difference between employer EI premiums paid in 2010 and those paid in 2011. Essentially, the federal government will pay, through the credit, any increase in premiums paid by the employer in 2011, to a maximum of $1,000. The actual amount of credit received by a particular employer will be calculated by the Canada Revenue Agency (CRA) when the employer files its 2011 T4 information return, usually early in 2012. In any case, the 2011 T4 information return must, in order to be used to calculate any credit, be filed before January 1, 2015.  

A couple of administrative notes: where an employer meets all of the criteria for the HCSB outlined above, but also owes money to the CRA, the amount of any credit will be applied by the Agency towards that outstanding debt. As well, employers are not permitted to reduce their EI premium remittances during 2011 by the amount of any credit which they expect to receive. All EI premium amounts owing must be remitted to the federal government throughout 2011 on the usual schedule, with any credit amount to which the employer is entitled calculated and paid when the 2011 T4 information return is filed in early 2012.

Neither the Department of Finance nor the CRA has issued much detailed information with respect to the administration of the HCSB, but the CRA has posted a Q&A document on its Web site, and that document can be found at http://www.cra-arc.gc.ca/gncy/bdgt/2011/qa17-eng.html.

Where taxpayers are obliged to incur expenses in relation to medical treatment which are not covered by our government-sponsored health insurance systems, a credit against tax otherwise payable may be allowed to help offset the impact of those expenses. The credit is limited—for 2011, a credit may be claimed on the federal tax return for qualifying medical expenses which total more than the lesser of $2,024 or 3% of the taxpayer’s net income for the year. The federal credit is equal to 15% of such qualifying expenses, while the percentage credit provided for the purposes of provincial or territorial tax will vary depending on the taxpayer’s province or territory of residence.

The most common medical expenses for which a credit is claimed are usually prescription drug or dental expenses for which the taxpayer does not have private medical insurance. However, the listing of eligible expenses is long and detailed and subject to constant revision by the tax authorities.

The Canada Revenue Agency (CRA) was recently asked if the purchase of an Apple iPad to be used by a special needs child as a communications aid would be eligible for the medical expense tax credit. The question wasn’t as far-fetched as it might initially seem. The use of computer technology, particularly communications technology, has permeated just about every aspect of modern life, and the use of such technology in medicine is part of that. There are, in fact, a number of devices using some form of communications technology which currently qualify for the medical expense tax credit. Those devices include electronic speech synthesizers to aid mute individuals to communicate using a portable keyboard, voice recognition software, optical scanners or similar devices for use by blind individuals to enable them to read print and synthetic speech systems that enable the blind to use computers.

Unfortunately for the individual who had asked whether the purchase of an iPad for the specified purpose would be eligible for the medical expense tax credit, the answer was no. And, unfortunately for others—whether tax professionals or other individuals dealing with the same or similar disabilities, the response provided by the CRA was more in the nature of a conclusion than an explanation or an analysis. The CRA acknowledged that the cost of a device or equipment could qualify as a medical expense provided that certain conditions were met. Generally, those conditions require that the device or equipment be prescribed by a medical practitioner and that it must be included in the list of such devices set out in the Income Tax Regulations. Finally, the use of the device must meet any conditions which are prescribed by the regulations with respect to its use or the reason for its acquisition. The CRA also acknowledged that a Bliss symbol board or similar device designed to help an individual who has a speech impairment to communicate could qualify for the medical expense tax credit. But, the CRA’s view was that “an Apple iPad for use by special needs patients to communicate more effectively would not qualify under this provision or any other provision in the Act or Regulations”. The CRA did not address the question of whether there were aspects of the iPad or its capabilities which rendered it unsuitable for the medical expense credit, or whether, for instance, the development of certain specialized communication capabilities or apps for the device could remedy any such deficiencies.

While interest rates remain low, an increase in those rates and, therefore, in the cost of carrying a mortgage is clearly on the horizon. In addition, changes made by the federal government to mortgage lending rules for Canada Mortgage and Housing Corporation (CMHC) insured mortgages which took effect earlier this year had the effect of making it more difficult for first-time buyers, especially, to get into the real estate market. One of those changes reduced the maximum allowable amortization period for mortgages from 35 years to 30 years, meaning an increase in the required monthly payment, even if interest rates are unchanged. That change, combined with the anticipated increase in mortgage interest rates, made for a busy late winter and early spring real estate season, as first time home buyers took advantage of the opportunity to get into the market in advance of the changes. Even without these changes, spring and summer are, in any year, typically the busiest season for real estate sales and, consequently, the time when most moves take place. For any number of reasons, therefore, a lot of people will be moving this summer.

Whatever the time of year and motivation behind the purchase or sale and purchase, selling one’s home and moving qualifies as one of life’s more stressful experiences. Nonetheless, it’s an experience which most families will go through at least once. In addition to the upheaval of leaving behind a home, a school and a neighbourhood, the financial outlay associated with moving can be considerable.  While our tax system can’t do anything to help with the non-financial costs and general stress of moving, it does, in some circumstances, minimize the financial hit by providing a deduction from income for moving expenses incurred.

It’s important to know that not all moves will qualify for such tax relief. The tax rules provide that, where a taxpayer moves to be at least 40 kilometres closer to his or her place of work (for example, a taxpayer who moves from Toronto to take a job in Vancouver or Regina or Ottawa), most moving costs will be deductible from employment or business income earned at the new location. The 40-kilometre distance is measured using the shortest route normally available to the travelling public, which in most cases would mean the distance by road. And, moving to be closer to work doesn’t have to mean moving to a new company: a job transfer to another city while continuing to work for the same employer will qualify, assuming the 40-kilometre criterion is met. A deduction is also available where someone who is unemployed moves to start a new job, again assuming that all other required criteria are met.

The list of expenses which may be deducted is fairly comprehensive, but not all moving related costs are deductible. Under the Canada Revenue Agency’s (CRA) administrative policies, as outlined in their Form T1-M, Moving Expenses Deduction, the following are considered eligible moving expenses:

• traveling expenses, including vehicle expenses, meals and accommodation, to move the taxpayer and members of his or her family to their 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, in-transit storage, and insurance) for household effects, including items such as boats and trailers;
• costs for up to 15 days for meals and temporary accommodation near either the old or the new residence for the members of the household;
• lease cancellation charges (but not rent) on the old residence;
• legal 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 (but excluding GST or HST and property taxes); 
• the cost of selling the old residence, including advertising, notarial, 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 utility hook-ups and disconnections.

It sometimes happens that a move to the new home has to take place before the old residence is sold. In such circumstances, the taxpayer is entitled to deduct up to $5,000 in costs incurred for the maintenance of that residence while it is vacant and efforts are being made to sell it. 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 deduction is available.

It may seem from the foregoing that virtually all moving-related costs will be deductible—however, there are some costs for which the 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; and
• mail-forwarding costs.

 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. In some cases, the administrative burden of claiming moving-related expenses can be minimized by choosing to claim a standardized amount for certain types of expenses. 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 $17 per meal, to a maximum of $51 per day, for each person in the household. Those amounts were unchanged from 2009 to 2010, the latest year for which figures are available.

Similarly, the taxpayer can claim a set per-kilometre amount for kilometres driven in connection with the move. The per kilometre amount ranges from 46.0 cents forSaskatchewanto 60.5 cents for theYukon Territory. These rates were in effect for the 2010 taxation year—the CRA will be posting the rates for 2011 on its Web site early in 2012, in time for the tax-filing season. The per-kilometre rates allowed by the CRA for travel during 2010 are actually, in some cases, lower than those allowed for 2009.  It is in all cases the province or territory in which the travel begins which determines the applicable rate.

Any moving-related expenses can be deducted from employment or self-employment income (but not investment income or employment insurance benefits) earned at the new location. Where a move takes place late in the year, it is possible, especially where the move is a long distance one, that such expenses will exceed income earned at the new location during the calendar year. In such cases, it’s possible to carry forward the excess expenses, and deduct them from income earned in subsequent years.

Generally, these rules apply to moves made from one location to another withinCanada. While it’s possible to deduct expenses arising from moves fromCanadato another country, from another country toCanada, or between two locations outside ofCanada, the rules governing deductions in such situations are far more restrictive.

The rules governing the deduction of moving expenses are outlined in some detail on the CRA’s T1-M form. That form was updated and reissued by the CRA late in 2010, and the current version of the form can be found on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-m/t1-m-10e.pdf.  Additional information on the tax treatment of moving costs is available on the same Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/menu-eng.html.

Any questions not answered by the form or on the Web site can be directed to the CRA’s individual enquiries line at 1-800-959-8281.

Unlike contributing to an RRSP or a tax-free savings account (TFSA), the idea of splitting pension income as a tax-planning strategy doesn’t get a lot of attention in the media. That’s unfortunate for a couple of reasons. First, the splitting of pension income can provide significant tax savings to those able to utilize it—generally older taxpayers who in many cases are living on a fixed income and can really benefit from the tax savings received—especially in the current low interest rate environment. Second, unless you’re getting good tax-planning advice, it’s very easy to overlook pension income splitting as a way of reducing your tax burden. The only references to pension income splitting on the annual return are two entries, one on line 116 and the other on line 210 and, unless you are already aware of the significance of those entries, there’s really nothing to alert you to it. The Income Tax and Benefit Guide provides very little in the way of explanation and no indication at all of the benefits which may be obtained. In addition, the form which must be filed to effect a pension income splitting strategy isn’t part of the standard tax return package provided to taxpayers by the Canada Revenue Agency (CRA)—taxpayers must ask for it and obtain it separately.

The general rule is that taxpayers receiving private pension income (including a pension received from former employer and, where the recipient taxpayer is over the age of 65, payments from a registered retirement savings plan or a registered retirement income fund) are entitled to split up to half that income with a spouse for tax purposes. (Government source pension income, like payments from the Canada Pension Plan or Old Age Security payments do not qualify for pension income splitting.) A number of the provinces have also indicated that they will adopt the federal rules for provincial tax purposes.

While the concept and general rules governing pension income splitting aren’t particularly complex, the splitting of pension income has some fairly wide-ranging, beneficial tax consequences for the taxpayer and his or her spouse.

The mechanics of pension income splitting are relatively simple. There is no need to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify the pension plan administrator. In addition, the decision of whether and to what extent to split pension income for tax purposes does not have to be made until the return for the year is being completed. 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, and the form is available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1032/t1032-10e.pdf.

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 the particular tax year. Since the splitting of pension income affects both the income and 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 do.

In addition to filing the T1032, the spouse who actually receives the pension income must deduct from income the pension income amount allocated to his or her spouse, on line 210 of his or her return for the year. And, conversely, the spouse to whom the pension income is being allocated is required to add that amount to his or her income on the return, this time on line 116.

As well as reporting the pension income “received” and claiming the corresponding deduction on lines 116 and 210, there’s a requirement that, where tax has been withheld from the income to be split, that tax must be allocated on the return for the year in the same proportion as the pension income is allocated. The formula for doing so is outlined in Part 5 of Form 1213.

Finally, taxpayers receiving private pension income can claim a non-refundable federal tax credit of up to $2,000 on their returns for the year. The actual credit claimable is equal to the amount of qualifying pension income earned or $2,000, whichever is less. The CRA has confirmed that where pension income is split, the amount of such income reported for tax purposes by each spouse will be used to determine eligibility for and the amount of any pension income credit. For example, where a taxpayer who receives $10,000 in eligible pension income for the year allocates 50% of that amount, or $5,000, to a spouse, each spouse will be able to claim the full $2,000 pension tax credit on his or her return for the year the income is reported, thereby saving an additional $300 in federal income taxes. 

The ability to split pension income between spouses has the potential to achieve real and permanent tax savings and to enhance eligibility for certain federal tax credits and benefits. And, as long as the administrative requirements outlined above are followed, pension income splitting is a win-win strategy for eligible taxpayers.

General tax rules allow individuals to deduct most costs associated with a move to a new residence where that move is undertaken to start a new job or attend school full-time, provided that the location of the new residence is at least 40 kilometres closer than the old one to the new place of employment or the school. In order to qualify for the deduction, of course, the moving costs must be paid for by the individual claiming them. Normally, moving costs which are eligible for the deduction are claimed in the year the move is made, but can only be claimed against income earned at the new location. Where the deductible moving costs exceed the amount of such income, any excess costs may be carried forward and deducted from income earned in the following year at the new location.

General tax rules allow individuals to deduct most costs associated with a move to a new residence where that move is undertaken to start a new job or attend school full-time, provided that the location of the new residence is at least 40 kilometres closer than the old one to the new place of employment or the school. In order to qualify for the deduction, of course, the moving costs must be paid for by the individual claiming them. Normally, moving costs which are eligible for the deduction are claimed in the year the move is made, but can only be claimed against income earned at the new location. Where the deductible moving costs exceed the amount of such income, any excess costs may be carried forward and deducted from income earned in the following year at the new location.

In many cases, however, where a taxpayer is moving to take up a new position, his or her new employer will cover the costs of making that move as part of the employment offer. Whether the employer pays the costs up front or reimburses the new employee for costs already incurred and paid, the result is the same from a tax perspective–any employer-paid moving costs cannot be deducted by the employee.

The CRA was recently asked to consider a situation in which an individual employee moved to take a new position and his costs of moving were paid by his new employer. A provision of the employment agreement, however, provided that he would be required to repay a pro-rated portion of those amounts to the employer should he leave his employment within a five-year period following the move. The individual did in fact resign his position within that five-year period and, as required by the employment agreement, repaid his now former employer for a portion of those moving costs. The question put to the CRA was whether, in the circumstances, the employee could now claim a deduction for the moving costs which he was required to repay.

There is no provision in the Income Tax Act to allow moving expenses to be carried back and claimed in a previous year. In the circumstances, the CRA's view was that the taxpayer could claim a deduction for the moving expenses in the year that the payment was made, but that such deduction was limited to the amount of employment income earned at the new work location in that year. In other words, where an employee repays an employer for otherwise eligible moving expenses in respect of a move that occurred in a previous year, a deduction may be claimed on the employee's tax return for such expenses in the year of payment, but only to the extent of employment or self-employment income earned at the new work location in that year. The expenses cannot, however, be carried back and claimed in any previous year.

The CRA's technical interpretation indicated, finally, that where more than three years (i.e., the normal reassessment period) had passed since the payment was made, the taxpayer should request an adjustment to his return for the year of payment using the CRA's taxpayer relief provisions. However, such requests are limited to ten calendar years preceding the year in which the request is made.

The Canada Revenue Agency (CRA) has devoted significant resources over the past couple of decades to ensuring that Canadians can deal with the Agency on personal tax matters through its Web site, while still protecting taxpayer confidentiality. Most Canadians are by now aware that they can file their returns electronically, and in 2010 more than 13 million tax returns were filed that way. What many taxpayers likely aren't aware of is that it's possible to do nearly all your business (not just filing of returns) with the CRA online through their Web site at www.cra-arc.gc.ca, and that recent changes have been made to how that online access is obtained.

The Canada Revenue Agency (CRA) has devoted significant resources over the past couple of decades to ensuring that Canadians can deal with the Agency on personal tax matters through its Web site, while still protecting taxpayer confidentiality. Most Canadians are by now aware that they can file their returns electronically, and in 2010 more than 13 million tax returns were filed that way. What many taxpayers likely aren't aware of is that it's possible to do nearly all your business (not just filing of returns) with the CRA online through their Web site at www.cra-arc.gc.ca, and that recent changes have been made to how that online access is obtained.

The “gold standard” of personal tax information access on the CRA Web site is a feature called My Account, available at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html. Taxpayers who register for My Account can obtain and do just about anything online that could be done by phone or letter or at a CRA Tax Services Office.

With My Account you can see information about your:

• tax refund or balance owing;
• direct deposit;
• RRSP, Home Buyers' Plan, and Lifelong Learning Plan;
• Tax-Free Savings Account;
• NETFILE access code;
• tax returns and carryover amounts;
• tax information slips–T4A(P), T4A(OAS) and T4E
• disability tax credit;
• account balance and payments on filing;
• instalments;
• Canada Child Tax Benefit and related provincial and territorial programs payments, account balance, and statement of account;
• GST/HST credit and related provincial programs payments, account balance, and statement of account;
• Universal Child Care Benefit payments, account balance, and statement of account;
• children for which you are the primary care giver;
• Working Income Tax Benefit advanced payments;
• pre-authorized payment plan;
• authorized representative; and
• addresses and telephone numbers.

With My Account you can also manage your personal income tax and benefit account online by:

• changing your return(s);
• changing your address or telephone numbers;
• applying for child benefits;
• arranging your direct deposit;
• authorizing your representative;
• setting up a payment plan; and
• formally disputing your assessment or determination.

Not surprisingly, making such an enormous amount of personal tax information available online creates a need for security to protect that information. Until recently, in order to gain access to My Account, taxpayers were required to obtain a Government of Canada “E-pass”, which enabled the holder to deal with most government departments and agencies, including the CRA, through their various Web sites.

In the fall of 2010, the CRA replaced the Government of Canada E-pass with a new process which is specific to the Agency. While the process is not markedly different than that used to obtain an E-pass, registration with the CRA will allow access to only the CRA Web site, and not the Web sites of other government departments or agencies.

Registration under the new process starts on the CRA Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html.The taxpayer registering must provide his or her social insurance number, date of birth, current postal code, and specific information from a previous tax return filed with the CRA. He or she must then create a CRA ID and password and select and answer a number of security questions.  The CRA will then send a security code to the taxpayer by regular mail. Once the security code is received, it is necessary to once again go onto the CRA Web site, where the user ID and password will be activiated by entering that security code. Once all that is done and registration is complete, the taxpayer will be able to access personal information or transact business with the CRA simply by logging in with the user ID and password.

Taxpayers who have previously obtained a Government of Canada E-pass can no longer use that E-pass to gain access to CRA login services. Instead, they will be able to create a CRA user ID and password online and login using that ID and password.

Many taxpayers, however, don't necessarily want to go through the entire process of getting access to My Account, especially if they are infrequent users of the Web site, or just need a particular piece of information in a hurry (e.g., finding out their RRSP deduction limit on the last day a contribution can be made). Recognizing that reality, the Agency created something called Quick Access. As its name implies, Quick Access is a streamlined process that doesn't require the taxpayer to register, or create an ID or password. And, while the kinds of information available through Quick Access are much more limited than those available through My Account, they tend to be the kinds of information that taxpayers look for most frequently.

Quick Access is available on the CRA Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/qckccss/menu-eng.html. Using it, a taxpayer can find out the status of a tax return which has been filed (i.e., whether a return delivered or sent by mail has been received, whether the return has been assessed yet, and whether a Notice of Assessment and refund cheque are on their way), whether he or she is eligible for particular federal government benefits (e.g., Child Tax Benefit, Goods and Services Tax Credit, etc.), what the taxpayer's RRSP and TFSA contribution limits are for the year, and finally, the taxpayer's current NETFILE access code.

In order to satisfy the Agency's legitimate security requirements, taxpayers must provide specific information before they can gain access to the data available on Quick Access. Specifically, you must provide your social insurance number and your date of birth. You will also be asked for your total income (the number which appears on line 150 of your tax return) for a specified filing year. Note that it's the number which you reported on line 150 of the return that must be entered, not the line 150 amount which appears on the Notice of Assessment for the year, where those two figures are different. Once that information is entered and verified by the CRA's computers, all of the Quick Access data will be displayed on the screen.

The CRA has devoted substantial resources over a number of years to making personal tax information available to taxpayers online. For those who aren't comfortable with the online environment (or who would rather speak directly to a live CRA representative), the CRA continues to maintain its individual enquiries line at 1-800-959-8281.

It's that time of year again, when advertisements about the wisdom of contributing to your RRSP (and usually about the benefits of borrowing to do so) fills the airwaves and Web sites. And, since the introduction of tax-free savings accounts in 2009, February is now also the month in which Canadians wrestle with the question of whether to put any available funds into an RRSP before the contribution deadline of March 1, 2011, or whether to deposit those funds instead into a TFSA.

It is important to be clear, at the outset, that it is not an either/or choice. Taxpayers can (and probably should) utilize both the RRSP and TFSA options in planning their financial affairs. Realistically, however, for most taxpayers the limitation is one of resources and cash flow, and it is often not possible to fund contributions to both an RRSP and a TFSA in the same year, let alone in the same month. That said, what are the considerations that apply in determining which savings/investment vehicle is preferable for 2011?

There are some similarities between TFSAs and RRSPs. Both allow savings to grow and compound free of current tax and for both, contributions not made in a year can be carried forward and made in any subsequent year. As well, the types of investments which can be made with RRSP or TFSA contributions are, for all intents and purposes, the same, meaning that one's choice of investment (i.e., GICs, mutual funds, bonds, etc.) should be irrelevant to the choice of RRSP vs. TFSA. However, the differences between the two savings vehicles are at least as significant as their similarities.

Perhaps most important to taxpayers, contributions made to an RRSP are deductible from income, resulting in a lower tax bill for the year of contribution and, for many taxpayers, a tax refund. Contributions to a TFSA are, on the other hand, made with after-tax funds, meaning that tax will already have been paid on the income used to make that contribution. Many taxpayers, when presented with an option that will reduce current year taxes, find that to be the most attractive choice. However, over the long-term, the tax consequences of choosing an RRSP over a TFSA can erode that benefit. When funds contributed (along with investment income earned on those funds) are withdrawn from a TFSA or an RRSP, the tax consequences are very different. Funds withdrawn from an RRSP (or a RRIF into which the RRSP has been converted) are fully taxable, without exception, at whatever tax rate applies to the taxpayer at the time of withdrawal. TFSA funds (including accumulated investment income) are withdrawn from the plan free of tax, regardless of when the withdrawal is made or the purpose to which the funds are put.  And, for taxpayers who are receiving Old Age Security benefits (or any other means-tested benefits) from the federal government, it's important to note that RRSP or RRIF funds withdrawn will be included in income for the purpose of determining eligibility for such benefits, while TFSA funds will not. Finally, while RRSP contributions for 2010 must be made by March 1, 2011, there is no similar deadline for TFSA contributions—they can be made at any time during the calendar year. Finally, when funds are withdrawn from a TFSA, the planholder can “top-up” the TFSA in any subsequent year by the amount of that withdrawal. Funds withdrawn from an RRSP cannot be re-contributed, unless the withdrawal was made as part of government-sanctioned withdrawal plans like the Home Buyers' Plan or the Lifelong Learning Plan.

The minority of working taxpayers who are members of registered pension plans will likely find the TFSA option particularly attractive. The maximum amount which can be contributed to an RRSP for the 2010 tax year is calculated as 18% of earned income for 2009, to a maximum contribution of $22,000. However, that maximum contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under the pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, making a TFSA contribution the logical alternative.

In a similar way, for taxpayers over the age of 71, the RRSP v. TFSA question is simply irrelevant. Taxpayers over that age are not eligible to make contributions to an RRSP, making TFSAs the only tax-free savings vehicle to which they can make contributions. The benefit is greatest for older taxpayers whose required RRIF withdrawals are greater than their current needs. While such RRIF withdrawals must be included in income and taxed in the year of withdrawal, 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 from a TFSA will not affect the planholder's eligibility for Old Age Security benefits or for the federal age credit.

For younger taxpayers, where the savings goal is short-term—for example, a down payment on a home or paying for next year's vacation, the TFSA is clearly the better choice. While choosing to save through an RRSP will provide a deduction on that year's return and probably a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one's ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced. While the amounts involved may seem small, the loss of compounding on even a small amount over 25 or 30 years can make a significant dent in one's ability to save for retirement.

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, and then withdrawing the funds tax-free once they are 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 against income that would be taxed at the much higher rate, generating a tax savings. And, if a need for the funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Financial planners and tax advisers are accustomed to being asked by clients at this time of year whether it makes more sense to pay down the mortgage (or other debt) or to contribute to an RRSP. That question has become more complicated now that the TFSA option has been added to the mix. There is, however, a solution which allows you to do both. Assuming a marginal tax rate of 45%, an RRSP contribution of $11,000 will generate a tax refund of $4,950. Contribute that $11,000 (or as much as you can) to your RRSP and, when the resulting tax refund lands in your bank account, move it to a TFSA or use it to pay down the mortgage or other debt, or split it between the two.

The Canada Revenue Agency has created a section of its Web site to deal with the need for information and taxpayers' questions about TFSAs, and that information can be found at http://www.cra-arc.gc.ca/tx/tfsa-celi/menu-eng.html.

February is the month in which millions of Canadian taxpayers receive an Instalment Reminder from the Canada Revenue Agency (CRA). For many of the taxpayers who have received such notices in the past, the reminder and the tax instalment process are familiar, although not necessarily welcome. For those who are receiving one for the first time, however, both the reminder itself and figuring out how to deal with it can be baffling.

Most Canadians, certainly those who are employed, have income tax deducted “at source”, meaning that their employer deducts an amount for income tax from their paycheques and remits it to the CRA on their behalf. However, for those who are self-employed or, frequently, those who are retired, no such deduction is automatically made from their income, and the issuance of an Instalment Reminder by the CRA may be the result.

The receipt of such a reminder may be particularly puzzling to the newly retired, who have been accustomed to having tax deducted at source from their paycheques throughout their entire working life. However, no matter what the source of one's income or the reason that tax has not been deducted at source, the options available to a taxpayer who receives such a reminder are the same.

Canadian tax rules provide that a taxpayer may be required to pay income tax by instalments where the amount of tax owing on filing is more than $3,000 in the current year (2011) and either of the two previous years (2009 or 2010). Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer's income is at least $3,000 less than their total tax liability for the current and either of the two previous years. Such instalment payments of tax are due on March 15, June 15, September 15 and December 15 of each year.

An Instalment Reminder issued by the CRA in February 2011 will specify two amounts: one to be paid by March 15, and the other due by June 15. Those amounts represent the Agency's best estimate, based on the taxpayer's return filed for the 2009 taxation year, of the net tax which will be payable by the taxpayer for 2011. The taxpayer then has the following three options.

First, the taxpayer can pay the amounts specified on the Reminder by the respective due dates of March 15 and June 15. A taxpayer who does so can be certain that he or she will not face any interest or penalty charges, even if the amount paid turns out to be less than the taxes actually payable for the 2011 tax year. (If the instalments paid turn out to be more than the taxpayer's net tax liability for 2011, he or she will of course receive a refund on filing.)

Second, the taxpayer can make instalment payments based on the amount of tax that was owed for the 2010 tax year. Where a taxpayer's income has not changed between 2010 and 2011 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2011 will be slightly less than it was in 2010, owing to the indexation of tax brackets and personal tax credit amounts.

Third, the taxpayer can estimate the amount of tax that he or she will owe for 2011 and can pay instalments based on that estimate. Where a taxpayer's income will decrease from 2010 to 2011 and there will consequently be a reduction in tax payable, this option may be worth considering.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2011 tax year is filed in the spring of 2012. However, should instalments paid have been late or insufficient, the CRA can impose interest charges at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2011—until March 31, 2011—is 5%.) 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 is also possible for the CRA to impose penalties, but this is typically 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.

The general federal corporate tax rate and the rate applied to income from manufacturing and processing will be reduced from 18.00% to 16.50%, effective January 1, 2011.

The general federal corporate tax rate and the rate applied to income from manufacturing and processing will be reduced from 18.00% to 16.50%, effective January 1, 2011.

The small business tax rate remains at 11.0% and the federal small business limit is unchanged at $500,000.

The general corporate tax rate change will be pro-rated for corporations having non-calendar-year year-ends.

Dollar amounts on which individual non-refundable federal tax credits for 2011 are based, and the actual tax credit claimable, will be as follows.

Dollar amounts on which individual non-refundable federal tax credits for 2011 are based, and the actual tax credit claimable, will be as follows:

*The spousal and eligible dependant amounts are reduced by any net income for the year of the spouse or eligible dependant.

Credit amounts are converted to a non-refundable credit by multiplying the amount by the federal rate applicable to the lowest income bracket, which is 15.0% for 2011.

Day trading remains alive and well in Canada notwithstanding the roller-coaster markets. Indeed, it is the very volatility of markets that attracts day traders who think they can reap profits by quick "in and out" forays.

The main focus of day traders from a tax perspective seems to be whether their profits are on income or capital accounts and whether they can guarantee capital treatment through the subsection 39(4) election. But a recent ruling letter from the Canada Revenue Agency confirms that there is a tax planning option available to day traders: incorporation of the operation while treating income as being from active business.

While the ruling letter was replete with the usual caveats ("depends on the facts"), it in effect ruled that where the traditional tests of an active business applied, a corporation carrying on day trading would be considered to be generating active business income.

The tests as set include:

Ÿ  Frequency of transaction: a history of extensive buying and selling of securities or a quick turnover.

Ÿ  Knowledge of the securities market: The taxpayer has some knowledge of or experience in the securities markets.

Ÿ  Security transactions form a part of the taxpayer's ordinary business.

Ÿ  Time spent: A substantial part of the taxpayer's time is spent studying the securities market and investigating potential purchases.

Ÿ  Financing: Security purchases are financed primarily on margin or some form of debt.

Ÿ  In the case of shares, their nature -- normally speculative in nature or of a non-dividend type.

These tests are taken from Interpretation Bulletin 479R and of course not every one of them must be met to be considered carrying on an active business.

There are some attractive aspects to setting up a company and carrying on active business, providing of course that the activities generate a reasonable flow of income and providing you are prepared to leave part of that income in the company.

 What are the benefits?

Ÿ  The company will be taxed at preferential rates on its first $500,000 of active income, subject to the association rules. The actual rate depends on the province, but ranges from a high of about 19% in Quebec to a low of 13.5% in British Columbia (Ontario is at 16%). But note that the value of the low rate is lost to the extent that funds are paid out of the company, as they will be subject to tax in the hands of the recipient.

Ÿ  It is easy to arrange to split income by having a spouse as a director, officer, employee or shareholder.

Ÿ  Earning funds within a corporation allows flexibility as to how the funds are withdrawn (salary, bonus, dividends and perhaps interest) and the timing of the withdrawal ... allowing a deferral of recognition.

Ÿ  The shares of the company may be eligible for the $750,000 capital gains deduction.

 Against these key benefits are some offsetting issues:

Ÿ  The company will have to keep a separate set of books

Ÿ  File its own tax returns and generally keep records.

Ÿ  The cost of incorporating and maintaining corporate status, accounting fees and perhaps legal fees.

 Generally, I do not recommend incorporation where the business is likely to be short term, where there may be losses without income against which to offset them, and where the owner-operator "needs" all the annual income for his or her living expenses.

Incorporating a day-trading operation is certainly not for everyone but for those who meet the criteria, it may be an attractive option, especially if capital gains treatment is not available to you now and if you believe that the rates on active business income are likely to drop, not rise, over the next few years, as well as the ability of deferring tax where you are currently at the top marginal rate.