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

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.

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.

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 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.

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.

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

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

Corporate:

http://www.cchsitebuilder.com/newsletters/custom/Issue12_Corporate.pdf.

Individual:

http://www.cchsitebuilder.com/newsletters/custom/Issue12_Personal.pdf.

Next to complaining about the weather, renovating and improving one's home is probably the great Canadian pastime. So perhaps it shouldn't have been a surprise when the home renovation tax credit (HRTC), introduced by the federal government as part of its 2009 Budget, proved to be the most popular tax credit program announced in recent memory. However, like all good things, the HRTC must come to an end, and that end happens on January 31, 2010.

Next to complaining about the weather, renovating and improving one's home is probably the great Canadian pastime. So perhaps it shouldn't have been a surprise when the home renovation tax credit (HRTC), introduced by the federal government as part of its 2009 Budget, proved to be the most popular tax credit program announced in recent memory. However, like all good things, the HRTC must come to an end, and that end happens on January 31, 2010.

To recap, the HRTC provides homeowners with a 15% non-refundable federal credit for up to $9,000 of qualifying expenditures (more technically, the credit is available for expenditures between $1,000 and $10,000, as the first $1,000 doesn't qualify) made between January 27, 2009 and February 1, 2010. The non-refundable nature of the credit is important - claiming the credit will reduce one's federal tax otherwise payable but cannot create or increase a tax refund. And the credit can be claimed only on one's 2009 federal income tax return. There have been some misconceptions and misunderstandings in this regard - there are stories of taxpayers who, having made an eligible purchase at their local home supply store, expected that they would receive their credit in the form of a discount when paying for their purchase. Others undertook some renovation activity and planned to finance remaining work to be done out of the tax refund that they thought their initial work would generate. Neither is the case.

The terms of the HRTC do, however, provide taxpayers who didn't get around to making their eligible purchases or doing their eligible renovations until after the end of 2009 with something of a break. Generally, for tax purposes, an expenditure must be incurred during the calendar year in order to be claimed for tax purposes on that year's return (RRSP contributions being the big exception). However, such is not the case with expenditures eligible for the HRTC. As long as the eligible expenditure is made before February 1, 2010 (as outlined below), it can be claimed on the taxpayer's return for the 2009 tax year.

Notwithstanding this, the rules surrounding the phase-out of the HRTC are likely to give rise to some confusion among taxpayers about just what qualifies and what doesn't. The rule, as outlined on the Canada Revenue Agency Web site, is as follows: eligible expenses for goods acquired before February 1, 2010, even if they are installed after January 2010, will still qualify. If an eligible expense involves work performed by a contractor or a third party and the work is not completed by the end of the eligible period (that is, before February 1, 2010), only the portion that is completed before February 1, 2010 will qualify, even if a payment has been made.

The success of the HRTC and its benefits to the building, contracting, and retail home supply sectors have resulted in some speculation that the federal government might just extend the credit in the 2010 federal Budget, to be brought down on March 4, 2010. And while that's not something that can or should be counted on, it's certainly something that can be hoped for.

The popularity of personal finance columns, magazines, and television shows dealing with how Canadians make and spend their money reveals an enduring human fascination with how everyone else is doing - about how you "measure up" by comparison.

The popularity of personal finance columns, magazines, and television shows dealing with how Canadians make and spend their money reveals an enduring human fascination with how everyone else is doing - about how you "measure up" by comparison.

While anecdotal evidence of Canadians' spending habits is interesting, Statistics Canada has gathered the actual numbers. When those numbers were tallied and analyzed, they showed that Canadian households, across all expenditure brackets and all provinces and territories, spent an average of $71,364 in 2008. It won't surprise anyone to learn that, on average, the single largest expenditure for a Canadian household was for personal taxes - an average of just under $15,000, or about 21% of all expenses. The cost of shelter - whether in the form of rent or mortgage payments - ran a close second, at just over $14,000, or just under 20%. The cost of transportation was the third-largest expense for the average Canadian household, at just under $10,000. That amount breaks down, on average, to almost $9,000 on private transportation and just over $1,000 on public transit. The cost of food for the average household stood at almost $7,500 for the year, and all other categories of expenditures came in, on average, at less than $5,000 for the year.

Averages can, of course, be misleading, and an examination of expenditure patterns by income level discloses some very different allocations of household resources. For purposes of their analysis, StatsCan divided the population into five income brackets, or quintiles. Those in the lowest quintile, whose total expenditure for the year was just under $23,000, used nearly 60% of that total expenditure to pay for food, shelter, and transportation. By contrast, households in the highest quintile, which spent just over $146,000 during the year, used about 37% of that amount to pay for such necessities. However, owing to the progressive nature of our tax system, for those in the highest income quintile, personal taxes amounted to almost 30% of their costs for the year, compared to 2.8% for those in the lowest quintile.

A more detailed analysis of StatsCan's figures discloses some interesting quirks in the spending habits of Canadians. For instance, the difficulties currently being experienced by publishers of print media might be explained at least in part by the fact that Canadian households spent, on average, just $250 on reading materials and "other printed matter" during the year - $10 less than they spent on lottery tickets and other "games of chance".

Whatever one may think of the way in which Canadians allocate their resources and the choices they make, we do seem to be a consistent lot. As part of the study, StatsCan provided equivalent numbers for the 2004 through 2007 years. Overall expenditures have risen, of course, from an average of $62,464 in 2004 to $71,364 in 2008, but the pattern of expenditures hasn't changed much at all. For 2004, as in 2008, personal taxes, food, shelter, and transportation consumed the largest percentage of household expenditures. Despite the fact that the expenditure figures had increased in all categories, for both 2004 and 2008 such costs amounted, on average, to about 64% of total household expenditures.

The StatsCan analysis, which also includes breakdowns of household expenditures by province and household type, is available free of charge on the Agency's Web site at http://www.statcan.gc.ca/pub/62-202-x/62-202-x2007000-eng.pdf.

February is usually the month in which Canadians wrestle with the question of whether and in what amount to make an RRSP contribution before the contribution deadline, which falls this year on Monday, March 1, 2010. The introduction of tax-free savings accounts (TFSAs) as part of the 2008 federal Budget gave taxpayers an additional choice, beginning with 2009, when it came to tax-assisted savings, and this year, for the first time, both options also involve the possibility of contributing carryforward amounts.

February is usually the month in which Canadians wrestle with the question of whether and in what amount to make an RRSP contribution before the contribution deadline, which falls this year on Monday, March 1, 2010. The introduction of tax-free savings accounts (TFSAs) as part of the 2008 federal Budget gave taxpayers an additional choice, beginning with 2009, when it came to tax-assisted savings,  and this year, for the first time, both options also involve the possibility of contributing carryforward amounts.

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 (particularly given the lingering effects of the recession that began in the fall of 2008), let alone in the same month. That said, what are the considerations that apply in determining which savings/investment vehicle is preferable for 2010?

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 that 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 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 an 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 income for the purpose of determining eligibility for such benefits, while TFSA funds will not be. Finally, while RRSP contributions for 2009 must be made by March 1, 2010, 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.

The minority of working taxpayers who are members of registered pension plans will likely find the TFSA option particularly attractive. The maximum amount that can be contributed to an RRSP for the 2009 tax year is calculated as 18% of earned income for 2008, to a maximum contribution of $21,000. 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, and a TFSA contribution may be 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. In fact, the federal government estimated, when it introduced TFSAs, that, based on current savings patterns, half of the savings that will be realized through the use of TFSAs will be received by seniors.

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 that 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'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 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. 

Similarly, taxpayers who experienced a temporary drop in income during 2009 - perhaps through job loss or even a short-term layoff or reduction in hours resulting from the recession - may not be likely to gain a great deal from the tax deduction provided by an RRSP contribution. In such circumstances, the taxpayer would likely be better off contributing available funds to a TFSA for the short term to benefit from the tax-sheltered growth of those funds inside the plan. When the taxpayer's income is back to pre-recession levels - perhaps at this time next year or the year after - consideration can be given to withdrawing the funds from the TFSA and contributing them to an RRSP to offset the tax payable on that higher income.

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 that 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.

 

Canadians have the reputation of giving generously where need exists, and that reputation has been confirmed once again by the response shown by the Canadian public to the recent earthquake in Haiti. The Canadian government has indicated, as well, that it will match the generosity shown by the Canadian public dollar for dollar, without limit. However, to ensure that the maximum benefit results from their donations, and specifically that the donations will qualify for the matching government funds, donors should be aware of the specific conditions that must be met, which are as follows.

Canadians have the reputation of giving generously where need exists, and that reputation has been confirmed once again by the response shown by the Canadian public to the recent earthquake in Haiti. The Canadian government has indicated, as well, that it will match the generosity shown by the Canadian public dollar for dollar, without limit. However, to ensure that the maximum benefit results from their donations, and specifically that the donations will qualify for the matching government funds, donors should be aware of the specific conditions that must be met, which are as follows.

For every dollar that Canadians contribute between January 12 and February 12, 2010 to a registered charity responding to the Haiti earthquake, the government of Canada will put one dollar into the Haiti Earthquake Relief Fund. To be counted for this purpose, donations must be:

• monetary, up to $100,000;
• made by an individual Canadian (corporate donations do not qualify);
• made to a registered charity that is receiving donations in response to the January 12 earthquake in Haiti; and
• specifically earmarked by such organizations for the purpose of responding to the earthquake.

Any registered charity will have, and should be able to provide a potential donor with, the charity's charitable registration number. It's an unfortunate but inescapable fact that events such as the recent earthquake bring out the worst as well as the best in people, and, as with every such event, there will be those who seek to use the disaster for personal gain. In addition, there may be ad hoc organizations that, while well-intentioned, lack the infrastructure or means to put donations to real use. A donor who has any doubts about the legitimacy of an individual or organization that claims to be a registered charity and is seeking to raise funds for earthquake relief can verify the organization's charitable registration status by calling the Charities Directorate of the Canada Revenue Agency at 1-800-267-2384. That toll-free telephone service is available weekdays from 8 a.m. to 8 p.m. Eastern Time, Monday to Friday, and right now, as a temporary measure, is also available on weekends, from 9 a.m. to 5 p.m. Eastern Time.

In addition to the relief efforts undertaken by the large registered charities, many community-based organizations have organized fundraising drives or events to aid in those efforts. Amounts raised by such organizations will similarly qualify for the government matching program, within the following parameters. Eligible donations will:

• include amounts from fundraising events undertaken to raise money from individuals in response to the January 12 earthquake in Haiti. This fundraising may be undertaken by school authorities, faith-based organizations, clubs, social groups, businesses, incorporated entities, or registered charities;
• exclude any donations by corporations, governments, businesses, partnerships, schools, incorporated or non-incorporated entities, and unions from their existing resources that were not raised from individuals specifically in response to the January 12 earthquake in Haiti;
• ensure no double-counting of donations (i.e., donations collected by a registered charity and given to another such organization should be declared only once to CIDA); and
• exclude donations that were made by corporations, governments, incorporated entities, registered charities, unions, or government bodies (provincial, territorial, or municipal) to augment amounts raised in a fundraising activity or event.

Individuals who donate funds to a registered charity for earthquake relief will be able to receive a charitable donation receipt enabling them to claim a tax credit for the amount donated. It's important to note that only a registered charity is allowed by law to issue such an official donation receipt. Where a charitable donation receipt is received, annual donations (for all purposes, as long as they are made to a registered charity) of up to $200 can receive a federal tax credit equal to 15% of those donations. Where the amount donated exceeds the $200 threshold, a federal tax credit of 29% can be claimed on the "excess" amount. Each of the provinces and territories also provides a tax credit for charitable donations, with the amount varying by province or territory.

Although taxpayers will be filing their income tax returns within the next couple of months, it will not be possible to claim earthquake relief donations on those returns, as all such donations will have been made during the 2010 tax year. The one exception to that rule will be for Quebec residents who file a Quebec tax return, as the province has announced that qualifying donations made between January 12 and February 28, 2010 can be claimed on the Quebec tax return for the 2009 tax year. There has, to date, been no equivalent announcement from the federal government. Taxpayers filing only a federal return will, however, be able to claim a credit for donated amounts on the 2010 return to be filed in the spring of 2011 or, under the usual rules applying to charitable donations, will be able to carry them forward and claim them in any one of the five subsequent taxation years.

More information about the federal government's Haiti Earthquake Relief Fund can be found on the federal government Web site at http://www.international.gc.ca/humanitarian-humanitaire/earthquake_seisme_haiti_help_aide.aspx.
 

The Canada Pension Plan contribution rate for 2010 is unchanged at 4.95% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2010 is unchanged, at 4.95% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $47,200, and the basic exemption is unchanged, at $3,500.

The maximum employer and employee contribution for 2010 will therefore be $2,163.15, and the maximum self-employed contribution will be $4,326.30.

The general federal corporate tax rate and the rate applied to income from manufacturing and processing will be reduced from 19% to 18%, effective January 1, 2010.

The general federal corporate tax rate and the rate applied to income from manufacturing and processing will be reduced from 19% to 18%, effective January 1, 2010.

The small business tax rate remains at 11%, and the federal small business limit is unchanged at $500,000.

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

Dollar amounts on which individual non-refundable federal tax credits for 2010 are based, and the actual tax credit claimable, will be as follows:

Dollar amounts on which individual non-refundable federal tax credits for 2010 are based, and the actual tax credit claimable, will be as follows:

	Credit amount	Tax credit
Basic personal amount	10,382	1,557
Spouse or common-law partner amount	10,382*	1,557
Child amount	2,101	315
Eligible dependant amount	10,382*	1,557
Age amount	6,446	967
Net income threshold for erosion of credit	32,506
Infirm dependant amount (over 18)	4,223	633
Net income threshold for erosion of credit	5,992
Caregiver amount	4,223	633
Net income threshold for erosion of credit	14,422
Disability amount	7,239	1,086
Medical expense tax credit threshold amount	2,024
Maximum refundable medical expense supplement	1,074
Old Age Security clawback Income threshold	66,733

The indexing factor for federal tax credits and brackets for 2010 is 0.6%. Consequently, the following federal tax rates and brackets will be in effect for individuals for the 2010 tax year:

The indexing factor for federal tax credits and brackets for 2010 is 0.6%. Consequently, the following federal tax rates and brackets will be in effect for individuals for the 2010 tax year:

  Income level Federal tax rate

$10,382 - $40,970  15%
$40,971 - $81,941   22%
$81,942 - $127,021  26%
Above $127,021  29%

There is no change in federal individual tax rates for 2010.

A number of tax changes will take effect on January 1, 2010, most of them affecting individual taxpayers. The more significant changes are listed below.

A number of tax changes will take effect on January 1, 2010, most of them affecting individual taxpayers. The more significant changes are listed below.

RRSP deduction limit increases to $22,000

The RRSP contribution limit for the 2010 tax year (for which the deadline is March 1, 2010) will increase to $22,000. In order to make the maximum contribution for 2010, it will be necessary to have earned income for the 2009 taxation year of $122,222.

Individual tax instalment deadlines for 2010

Millions of individual taxpayers pay income tax by quarterly instalments, which are usually due on the 15th day of each of March, June, September, and December. As each of those dates in 2010 falls on a regular business day, the 15th of each of those months will be the actually payment deadline.

Reduction in federal corporate tax rates

The general corporate tax rate is reduced, effective January 1, 2010, to 18%. There is no change in any other federal corporate tax for 2010.

The time of year is approaching when many Canadian employees look forward to something "extra" from their employer - a Christmas or Hanukkah gift, a year-end bonus, or an invitation to the annual employer-sponsored holiday party. While it doesn't necessarily fit well with the holiday spirit, it's a fact that many such gifts, or even the annual employee holiday party, may have tax consequences, and the tax rules governing employer gifts can be surprisingly complex.

The time of year is approaching when many Canadian employees look forward to something "extra" from their employer - a Christmas or Hanukkah gift, a year-end bonus, or an invitation to the annual employer-sponsored holiday party. While it doesn't necessarily fit well with the holiday spirit, it's a fact that many such gifts, or even the annual employee holiday party, may have tax consequences, and the tax rules governing employer gifts can be surprisingly complex.

The starting point is the general rule that all gifts given by an employer to its employees are considered to constitute a taxable benefit. However, the CRA makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) per employee per year to be tax free, as long as such gifts are given on occasions such as Christmas or Hanukkah, or following a significant life event, like a marriage or the birth of a child.

Under the rules that will now apply to 2009 and previous years, the CRA's administrative concession allows for two non-cash gifts (within a specified dollar limit) per employee per year to be tax-free. If an employee is given a non-cash gift or award for any other reason than the "special occasion" events outlined above, this policy does not apply, and the employer is required to include the fair market value of the gift or award in the employee's income.

The CRA's policy limits the cost of tax-free, special-occasion gifts to $500 (including taxes). Therefore, if a single non-cash gift is given and the total cost is more than $500, the employee is required to include the fair market value of the entire gift in taxable income. If the total cost of more than one non-cash gift given to an employee in a year is more than $500, the employer is allowed to choose which of the gifts is to be excluded from the employee's income, as long as the total cost of the excluded gifts is not more than $500. The fair market value of the remaining gifts must be included in the employee's income. If the employer gave more than one non-cash gift per year, and the total cost was $500 or less, the employer is allowed to exclude the cost of any two of the gifts from the employee's income. The employer is then required to include the fair market value of the remaining gifts in the employee's income.

The current year is, thankfully, the last one that such cumbersome calculations will be required. Not surprisingly, the administration of the rules proved to be more burdensome to employers than the CRA had anticipated, and the Agency was concerned as well that that employer-gift-and-award policies were being designed simply to provide employees with tax-free remuneration. Therefore, earlier this year, the Agency announced a new, more straightforward policy with respect to non-cash gifts from employers to employees. Effective as of January 1, 2010, non-cash gifts and non-cash awards to an arm's length employee, regardless of number, will not be taxable to the extent that the total value of all such gifts and awards to that employee is less than $500 annually. The total value over $500 annually will be taxable.

It is important to remember the "non-cash" criterion imposed by the CRA, as the $500 per year administrative concession, under either the old or the new rules, does not apply to what the CRA terms "cash or near-cash" gifts, and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of cost. For this purpose, the CRA considers anything that could be easily converted to cash as a "near-cash" gift, which includes such things as gift certificates. In addition, the following types of gifts are considered to be taxable benefits, regardless of cost:

• points that can be redeemed for air travel or other rewards;

• reimbursements from an employer to an employee for a gift or award that the employee selected and paid for, and for which the employee then provided a receipt to the employer for reimbursement;

• hospitality rewards, such as employer-provided team-building lunches and rewards in the nature of a thank you for doing a good job;

• disguised remuneration, such as a gift or award given as a bonus;

• gifts and awards given by closely held corporations to their shareholders or related persons; and

• manufacturer-provided gifts or awards given directly by the manufacturer to the employee of a dealer.

The annual employee holiday party falls into a separate category altogether. For many years, there was no question but that such an occasion had no tax consequences to the employees. However, in 1998, the CRA made an ill-advised decision to assess a taxable benefit of $200 in relation to an employee's attendance at an employer-sponsored Christmas party, and that assessment was upheld by the Tax Court of Canada. The public reaction to the news that employee Christmas parties would henceforth be taxed was entirely predictable, and the CRA issued a clarification of its position. That clarification indicated that no taxable benefit would be assessed in respect of employee attendance at an employer-provided social event where attendance at the party was open to all employees and where the cost per employee was "reasonable". In this case, a "reasonable" cost was determined by the CRA to be $100. The $100 cost is meant to cover the party itself, not including any ancillary costs, such as transportation home, taxi fare, and overnight accommodation. Where the total cost of the party exceeds the $100 per person threshold, the CRA may assess the employee as having received a taxable benefit.

It may not seem entirely in the spirit of the season to consider tax benefits and costs when planning holiday gifts and parties. However, an employer who inadvertently increases an employee's tax bill for the year as a result of a lack of planning around holiday gifts or invitations may end up looking less like Santa and more like Scrooge.

For most Canadians, December means holiday celebrations and school vacations. In the tax world, however, December 31 marks the deadline by which most tax-planning and saving strategies must be put in place in order to have an impact on one's tax liability for the 2009 tax year. What follows is a list of tax "to-do's" that must be accomplished by the end of the calendar year - and a few more that can wait until early in 2010.

For most Canadians, December means holiday celebrations and school vacations. In the tax world, however, December 31 marks the deadline by which most tax-planning and saving strategies must be put in place in order to have an impact on one's tax liability for the 2009 tax year. What follows is a list of tax "to-do's" that must be accomplished by the end of the calendar year - and a few more that can wait until early in 2010.

Things to be dealt with by December 31, 2009

Medical expense credit calculation

When preparing their tax returns, many taxpayers find the computation of medical expenses eligible for the medical expense tax credit somewhat confusing, and that confusion is understandable. First of all, medical expenses, in order to be claimed, must total more than 3% of the taxpayer's net income for the year, or a specified threshold amount ($2,011 for 2009), whichever is less. As a rule of thumb, therefore, for 2009, taxpayers who have an income from all sources of less than $67,033 can claim all qualifying medical expenses in excess of 3% of their net income for the year. For example, a taxpayer earning $45,000 could claim qualifying medical expenses over $1350 (3% of $45,000). Where the taxpayer's income is over $67,033, only those medical expenses over the $2,011 threshold may be claimed for credit.

Adding to the confusion, it is possible to claim on the 2009 return medical expenses that were paid in 2008. The actual rule is that a taxpayer can claim medical expenses (in excess of the threshold percentage, as outlined above) incurred in any 12-month period ending during the taxation year, assuming, of course, that such expenses were not claimed on a previous tax return. Here there is no easy rule of thumb, except perhaps to say that for tax purposes, the best result is obtained where significant medical expenses can be grouped together and paid within a 12-month period, rather than spreading them out, in order to maximize the claim. So, as December 31 approaches, it's a good idea to add up the medical expenses incurred during 2009, as well as those paid during 2008 and not claimed on the 2008 return. Once those totals are known, it will be easier to determine whether to make a claim for 2009 or to wait and claim 2009 expenses on the 2010 return. And if the decision is to make a claim for calendar year 2009, knowing what medical expenses were paid when will enable the taxpayer to determine the optimal 12-month period for the claim. Finally, it's a good idea to look into the timing of medical expenses that will have to be paid early in 2010. It may make sense to accelerate the payment of those expenses to December 2009 where that means that they can be included in 2009 totals and claimed on the 2009 return.

Make charitable donations for 2009

The federal and all provincial governments provide a two-level tax credit for donations made to registered charities during the year. To earn a credit for the tax year, donations must be made by the end of the calendar year. There is, however, another reason to ensure that donations are made by December 31: For federal purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year that exceed the $200 threshold is, however, calculated as 29% of the excess.

As a result of the two-level credit structure, it makes sense to aggregate donations in a single calendar year where possible. A qualifying charitable donation of $400 made in December 2009 will receive a federal credit of $88 ($200 times 15% plus $200 times 29%). If the same amount is donated, but the donation is split equally between December 2009 and January 2010, the total credit claimed is only $60 ($200 times 15% plus $200 times 15%), and the 2010 donation can't be claimed until the 2010 return is filed in April 2011. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation that will receive credit at the 29%, rather than the 15% level.

It's also possible to carry forward, for up to five years, donations that were made in a particular tax year. So if donations made in 2009 don't reach the $200 level, it's usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2004, 2005, 2006, 2007, or 2008 tax years can be carried forward and added to the total donations made in 2009 and, then, the aggregate amount claimed on the 2009 tax return.

Finally, when claiming charitable donations, it's possible to combine donations made by oneself and one's spouse and claim them on a single return. Generally, and especially in provinces and territories that impose a high income surtax - Ontario, Nova Scotia, Prince Edward Island, and the Yukon - it makes sense for the higher-income spouse to make the claim for the total of charitable contributions made by both spouses.

TFSA withdrawals

2009 is the first year in which taxpayers can make contributions to a Tax-Free Savings Account (TFSA), and every taxpayer is subject to a $5,000 annual limit for contributions. One of the benefits of TFSAs is that, where amounts are withdrawn from a plan, the withdrawn amount is added to the taxpayer's TFSA contribution limit for the following year. So, for example, a taxpayer who contributes $5,000 to a TFSA during 2009 but withdraws $2,000 of that contribution during the year will have a $7,000 TFSA contribution limit for 2010 (made up of the usual $5,000 limit for 2010 plus the $2,000 withdrawn the previous year). Consequently, taxpayers who currently have funds in a TFSA but are planning to make a withdrawal in early 2010 - perhaps to pay for a winter vacation - should think about making that withdrawal before the end of 2009, so as to preserve the option of replacing the funds in the plan during 2010. If the same taxpayer waits until January 2010 to make the withdrawal, he or she wouldn't be eligible to replace the funds until 2011.

Spousal RRSP contributions

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan in his or her spouse's name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse's income, at a presumably lower tax rate. However, the benefit of having withdrawals from a spousal RRSP taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December 2009, the spouse can withdraw that amount as of January 1, 2012 and have it taxed in his or her hands. If the contribution isn't made until January or February of 2010, the contributor can still claim a deduction for it on the 2009 tax return, but the amount won't be eligible to be taxed in the spouse's hands on withdrawal until January 2013. It's an especially important consideration for couples approaching retirement, who may plan on withdrawing funds in the relatively near future.

Take a look at tax instalment amounts

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

The final quarterly instalment will be due on December 15, 2009. By that date, almost everyone will have a reasonably good idea of what his or her income will be for 2009 and, therefore, will be in a position to estimate what the tax bill will be for the year. While the tax return forms to be used for the 2009 tax year haven't yet been released by the Canada Revenue Agency, it's possible to arrive at an estimate by using the 2008 form. Increases in tax credit amounts and tax brackets from 2008 to 2009 mean that using the 2008 form will result, if anything, in a slight overestimate of tax liability for 2009.

Once one's tax bill for 2009 has been estimated, it's possible to compare that figure with the total of tax instalments already made in 2009 and determine whether the tax instalment to be paid on December 15 can be adjusted downward

Things that can wait (for a bit)

Home renovation tax credit

In the 2009 Budget, the federal government introduced what proved to be an enormously popular program - the federal home renovation tax credit. Essentially, taxpayers who incur costs of between $1,000 and $10,000 for eligible renovations and improvements to their homes can claim a 15% federal credit on their 2009 tax return, to a maximum credit of $1,350. The program is, however, a temporary one, and only eligible expenses incurred between the budget date of January 27, 2009 and February 1, 2010 may be claimed for the credit. Unusually, the rules provide that even where the eligible expense is incurred after the end of the calendar year, it can still be claimed on the 2009 tax return.

The existence of a cut-off date inevitably raises questions as to how otherwise eligible projects that straddle that date will be treated. The Canada Revenue Agency has indicated on its Web site, at http://www.cra-arc.gc.ca/tx/ndvdls/sgmnts/hmwnr/hrtc/menu-eng.html, that the following rules will apply: Eligible expenses for goods acquired between January 27, 2009 and February 1, 2010, even if they are installed after January 2010, will still qualify. If an eligible expense involves work performed by a contractor or a third party, and the work is not completed by the end of the eligible period, only the portion that is completed before February 1, 2010 will qualify, even if a payment is made. Expenses incurred pursuant to an agreement that was entered into before January 28, 2009 will not be eligible for the credit.

RRSP contribution deadline

Most taxpayers are aware that the deadline for making an RRSP contribution to be claimed on the 2009 tax return falls at the end of February 2010. More precisely, the deadline is 60 days after the end of the calendar year, which, in 2010, will be March 1.

Where the March 1 deadline happens to fall on a Sunday, the federal government has typically made an administrative concession by allowing contributions to be made on the next business day of March 2. However, in 2010, March 1 is a Monday, so taxpayers should not anticipate receiving any kind of extension with respect to the deadline. To be eligible for deduction on the 2009 return, RRSP contributions will have to be made by midnight on Monday March 1, 2010.

There are a number of real and perceived benefits to becoming self-employed, including greater access to tax deductions for work-related expenses, the possibility of incorporating the business and taking advantage of small business tax rates, and, generally, a greater degree of freedom and control over one's work environment. Offsetting those real advantages, however, is the inescapable fact that becoming self-employed means giving up both the protection of both employment standards legislation and much of the social safety net that employed Canadians can take for granted. For the self-employed, there are no paid statutory holidays, no paid vacation, no statutory right to receive notice or compensation in lieu when employment is terminated, and no access to income replacement programs such as employment insurance. Generally speaking, for the self-employed, time off work, whatever the reason, means time without income.

There are a number of real and perceived benefits to becoming self-employed, including greater access to tax deductions for work-related expenses, the possibility of incorporating the business and taking advantage of small business tax rates, and, generally, a greater degree of freedom and control over one's work environment. Offsetting those real advantages, however, is the inescapable fact that becoming self-employed means giving up both the protection of both employment standards legislation and much of the social safety net that employed Canadians can take for granted. For the self-employed, there are no paid statutory holidays, no paid vacation, no statutory right to receive notice or compensation in lieu when employment is terminated, and no access to income replacement programs such as employment insurance. Generally speaking, for the self-employed, time off work, whatever the reason, means time without income.

The federal government has recently moved to remedy some of that imbalance by proposing to allow self-employed Canadians to opt into part of the federal Employment Insurance (EI) program. The EI program provides benefits to Canadian workers who are temporarily out of the workforce in a number of situations. The best known of those, of course, are regular benefits, which provide a percentage of wages, to a specified maximum, to workers who have lost their jobs while they search for new employment. There are also, however, what are termed "special" benefits, which are available in particular circumstances, and it is those benefits to which the self-employed may now opt to have access.

There are four types of special benefits, as follows:

• maternity benefits (15 weeks maximum) are available to birth mothers and cover the period surrounding birth (a claim can start up to eight weeks before the expected birth date);
• parental/adoptive benefits (35 weeks maximum) are available to biological or adoptive parents while they are caring for a newborn or newly adopted child, and may be taken by either parent or shared between them (if parents opt to share these benefits, only one waiting period must be served);
• sickness benefits (15 weeks maximum), which may be paid to a person who is unable to work because of sickness, injury, or quarantine; and
• compassionate care benefits (six weeks maximum), which may be paid to persons who have to be away from work temporarily to provide care or support to a family member who is gravely ill with a significant risk of death.

Under the proposed legislation, self-employed individuals will be able, beginning January 1, 2010, to opt into the EI program for the purpose of these special benefits. Only special benefits are covered by this new initiative, and the self-employed will continue to be ineligible for regular (job loss) EI benefits.

To opt into the program, a self-employed person must have earned at least $6,000 from self-employment in the preceding calendar year. Therefore, someone who wants to opt into the program beginning in January 2010 must have earned at least $6,000 from self-employment during 2009. In addition, no benefits can be received until at least one year after the individual has opted in. So a self-employed taxpayer who earned at least $6,000 from self-employment during 2009 and chooses to opt into the program in January of 2010 would not be eligible to receive benefits of any kind until January 2011.

The EI program is funded by contributions made by employees through payroll deductions, with the maximum deduction for 2009 being $731.79. Employers are also required to contribute to the program, with their contribution being 1.4 times the employee portion. Where a self-employed person wants to opt into the EI program, he or she will be assessed for the employee portion ($731.79) of premiums but will not be required to pay the employer portion, in recognition of the fact that there will be only partial access to EI benefits.

Once they are part of the EI system, self-employed individuals will have the choice of opting out at the end of any tax year, as long as they have never claimed and collected EI benefits. Once a self-employed taxpayer makes a claim for and receives benefits, however, he or she will be required to contribute EI premiums on income from self-employment for as long are he or she is self-employed.

The decision on whether to opt into the EI system is likely to be determined for the most part by the personal circumstances of each self-employed taxpayer. In all cases, the cost of premiums, especially over several years or even decades of self-employment, will have to be weighed against both the likelihood of ever needing to make a claim for benefits and the question of whether the amount of benefits that can be received will exceed the cost of making those premium payments. 

In early October, the Minister of National Revenue announced that a new service would be made available on the Canada Revenue Agency Web site. That new service would allow Canadian taxpayers, both individuals and corporations, to make payments to the CRA directly from a Canadian bank account using the Agency's website. And while finding new and better ways to pay your taxes doesn't sound all that exciting, there are benefits to the taxpayer from using the new service.

In early October, the Minister of National Revenue announced that a new service would be made available on the Canada Revenue Agency Web site. That new service would allow Canadian taxpayers, both individuals and corporations, to make payments to the CRA directly from a Canadian bank account using the Agency's website. And while finding new and better ways to pay your taxes doesn't sound all that exciting, there are benefits to the taxpayer from using the new service.

First, the basics. The new service, now called My Payment, is available to any Canadian taxpayer who has online banking capabilities through one of the major Canadian banks. At the time of the announcement, BMO Bank of Montreal, Scotiabank, RBC Royal Bank, and TD Canada Trust were all signed on to the new system, and it's likely that other financial institutions will be joining that list. A partial list of the types of payments that can be made through My Payment is set out below.

Individual income tax

• Balance owing / arrears
• Instalment
• Payment on filing

Child and Family Benefits Payment

• Canada Child and Family Benefits and related provincial / territorial programs
• GST/HST Credit and related provincial programs
• Universal Child Care Benefit (UCCB)
• Alberta Family Employment Tax Credit (AFETC)

Goods and services tax/harmonized sales tax (GST/HST)

• Payment on filing
• Interim
• Amount owing
• Balance due

Payroll deductions

• Regular remittance
• Quarterly remittance
• Accelerated threshold-1 remittance
• Accelerated threshold-2 remittance
• Balance owing remittance
• Arrears / penalty / interest remittance
• Pensionable Insurable Earnings Review (PIER)

Corporation income tax

• Payment on filing
• Interim
• Amount owing
• Balance due

To use My Payment, the taxpayer logs onto the My Payment page on the CRA Web site (found at http://www.cra-arc.gc.ca/esrvc-srvce/tx/mypymnt/menu-eng.html) and follows the prompts through the process. The FAQ document issued by the CRA indicates that the taxpayer will not be asked to enter any financial information, card numbers, or log-in information on the site, as the payment is completed through the taxpayer's existing online banking service. As well, the CRA will not levy any charge for making tax or other payments through its Web site, although, of course, any service charges normally associated with making online payments may be levied by the financial institution.

It is, of course, already possible to make payments to the CRA through online banking with one's financial institution. However, there is an advantage, especially for businesses, to making such payments directly to the Agency through its Web site. As noted in the CRA's Q&A document, it's generally not possible, when making payments through a financial institution's online banking, to make payments to the CRA business accounts (i.e., payroll accounts or corporation income tax accounts) from a personal bank account - usually, a corporate account is required. That barrier will be removed when payments are made through My Payment.

Where payments are made using My Payment, the taxpayer can print a receipt for his or her records to show that the payment was made on that date. Generally, payments made before 11:30 p.m. local time will be credited to the taxpayer's account on that business day. Where a payment is made after 11:30 p.m. or on a weekend or statutory holiday, the payment will be credited to the taxpayer's CRA account on the first following business day. The My Payment service is available across Canada 21 hours a day, with the actual hours varying by time zone. A listing of service hours can be found on the CRA Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/mypymnt/hrs-eng.html.

Finally, it's not necessary, in order to use My Payment, that the taxpayer be signed up for any of the CRA's other online services. The Agency provides a great number of such services for both individuals and businesses, and for some of them, it's necessary to have a government of Canada E-pass. That's not the case with My Payment - any taxpayer who has online banking capability with one of the participating financial institutions listed above already has access to My Payment.

Earlier this year, Canadians filed over 22 million individual tax returns in about a three-month period between March and June, and every one of those returns was processed and assessed by the Canada Revenue Agency. The CRA's goal is to have each paper-filed return processed and a Notice of Assessment mailed out to the taxpayer within four to six weeks. For e-filed, net-filed, or tele-filed returns, the Agency's self-imposed deadline is reduced to two weeks. Working within such time frames, it's obviously 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 Canada Revenue Agency in the mailbox at this time of year.

Earlier this year, Canadians filed over 22 million individual tax returns in about a three-month period between March and June, and every one of those returns was processed and assessed by the Canada Revenue Agency. The CRA's goal is to have each paper-filed return processed and a Notice of Assessment mailed out to the taxpayer within four to six weeks. For e-filed, net-filed, or tele-filed returns, the Agency's self-imposed deadline is reduced to two weeks. Working within such time frames, it's obviously 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 Canada Revenue Agency 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 Canada Revenue Agency. In many ways, 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, or - beginning with the 2010 filing season - claims for the popular home renovation tax credit) without being required to provide the CRA with the related receipts documenting the expenditure.

The recent trend, encouraged by the CRA, toward electronic filing of tax returns has made the verification process considerably more difficult. Each year, millions of taxpayers file their tax returns over the telephone or via the Internet. (The CRA estimates that, for the 2009 filing season, over 14 million taxpayers chose to file their returns electronically.) Of course, when a return is filed through electronic means, no paper changes hands, which means that there are no receipts provided to the CRA to substantiate claims made by taxpayers for any deductions or credits.

It's clearly impossible to contact everyone who files a tax return electronically, let alone all tax-filers. 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. Most of those review programs are carried out between the months of September and February.

While it's unsettling, 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. 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 that 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 that 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 that alters 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 (for example, if you say you earned $28,000 during the year, but the T4 slip issued by your employer puts your income at $33,000), 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 haven't kept, have lost, or have destroyed 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 that 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, it will not consider cancelled cheques or cheque images, or invoices, as acceptable substitutes.) Any letters sent to the CRA should include the social insurance number of the taxpayer and the Reference Number that will appear in the top right-hand corner of 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, it's not a bad idea to send the reply by a means (either through Canada Post or one of the private courier services) that will allow the taxpayer to verify that the reply has indeed been received by the Agency, and the date on which it arrived.

A final practical point: Each year, the CRA sends review requests to many taxpayers who never receive the letter because the address that 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. 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 Agency.

Formulating and administering rules to deal with employee taxable benefits has always posed something of a problem for the tax authorities. While the amounts involved are usually quite small on an individual taxpayer basis, the total revenue earned or forgone by the government can be significant, given the millions of taxpayers who receive such benefits. As well, even where amounts are small, receiving an employment benefit on a tax-free basis is something that most employees particularly enjoy, and a change in the rules that renders a formerly tax-free benefit taxable can create significant ill will and potential non-compliance among the taxpaying public. And finally, since benefit structures can and do vary widely among employers, it's always a chore for the tax authorities to create and administer rules that capture the intended targets, without casting the tax net wider than they meant to.

Formulating and administering rules to deal with employee taxable benefits has always posed something of a problem for the tax authorities. While the amounts involved are usually quite small on an individual taxpayer basis, the total revenue earned or forgone by the government can be significant, given the millions of taxpayers who receive such benefits. As well, even where amounts are small, receiving an employment benefit on a tax-free basis is something that most employees particularly enjoy, and a change in the rules that renders a formerly tax-free benefit taxable can create significant ill will and potential non-compliance among the taxpaying public. And finally, since benefit structures can and do vary widely among employers, it's always a chore for the tax authorities to create and administer rules that capture the intended targets, without casting the tax net wider than they meant to.

Earlier this year, in Income Tax Technical News No. 40 (available on the CRA Web site at http://www.cra-arc.gc.ca/E/pub/tp/itnews-40/itnews40-e.pdf), the Agency once again outlined a set of revisions to the tax rules governing a number of popular employee benefits. One of the changes that will affect a fairly large number of taxpayers concerns the tax treatment of what the CRA terms "loyalty programs". The best known of such loyalty programs are, of course, frequent flyer points, but the CRA's policy applies to all programs in which points are accumulated as the result of purchases, which can then be exchanged or redeemed for other goods and services, including gift certificates. Employees can accumulate points where they use personal (i.e., not the company's) credit cards to pay for business-related travel or other business-related expenses, and are then reimbursed by the employer for those business-related expenditures.

For several years, the CRA's policy on the accumulation and use of points by an employee in such circumstances has been that it is the responsibility of the employee to determine and include in income the fair market value of any benefits received. The extent to which employees actually followed the CRA's policy (or were even aware of it) is, of course, open to debate, but the requirement to self-assess and include such benefits in income did exist. (Where the employee received points resulting from the use of a company credit card, it was and remains the responsibility of the employer to include and report the value of those benefits on the employee's T4 for the year during which the points are redeemed.)

The CRA has come to recognize that employees often face "significant difficulties" in tracking, identifying, and valuing the benefits attributable to points acquired through the use of a personal credit card for business expenses and has determined that a change in policy is required. Effective for the 2009 and subsequent tax years, points accumulated by way of business-related use of credit cards will no longer be required to be included in an employee's income, assuming the following three criteria are met:

• the points are not converted to cash;
• the plan or arrangement is not indicative of an alternate form of remuneration; and
• the plan or arrangement is not for tax avoidance purposes. 

The second and third of these criteria are, of course, a matter of interpretation or opinion, and the CRA has provided the following examples to demonstrate when it will consider that a taxable benefit has been received:

• where business travel and other expenses are charged to a company credit card and the bills are paid by the employer, but the employee is allowed to redeem the related points for personal use; and
• where an employee uses a personal credit card wherever possible to pay for business-related expenses, including those of co-workers, and is then reimbursed for such costs by the employer.

In the first example, the employer would be required to include and report the value of the benefits on the employee's T4 slip for the year, while in the second example, it would be the employee's responsibility to self-assess and include in income the value of any points received as a result of the business use of his or her credit card. In the CRA's view, the second example represents an alternate form of remuneration received by the employee, thus running afoul of the second of its criteria.

There will always, of course, be disputes between taxpayers and the CRA as to just when the line has been crossed such as to render an otherwise non-taxable benefit taxable. However, it's likely that, under the Agency's new policy, where an employee uses a personal credit card for business-related expenses, is reimbursed for those expenses by the employer, and then "cashes in" the points generated to receive a benefit (other than cash) the employee will be on safe ground in assuming that such a benefit has been received free of tax. 

Unlike contributing to a registered retirement savings plan (RRSP) or claiming the new home renovation tax credit, the idea of splitting pension income to reduce taxes 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, and those are generally older taxpayers, who in many cases are living on a fixed income and can really benefit from the tax savings received. Second, unless you're receiving 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. In addition, the form that must be filed to effect a pension income-splitting strategy isn't part of the standard tax return package provided to taxpayers by the CRA - taxpayers must obtain it separately.

Unlike contributing to a registered retirement savings plan (RRSP) or claiming the new home renovation tax credit, the idea of splitting pension income to reduce taxes 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, and those are generally older taxpayers, who in many cases are living on a fixed income and can really benefit from the tax savings received. Second, unless you're receiving 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. In addition, the form that must be filed to effect a pension income-splitting strategy isn't part of the standard tax return package provided to taxpayers by the CRA - taxpayers must obtain it separately.

The ability to split pension income has been available for a few years now, having first been announced by the Department of Finance in the fall of 2006. The general rule is that taxpayers receiving private pension income (including a pension received from a 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, beginning with the 2007 tax year, 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). Since then, a number of provinces have indicated that they will adopt the federal proposals 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.

How to elect to split pension income

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 filed (for 2009 returns, the spring of 2010). Taxpayers who wish to split eligible pension income received by either of them must 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/t1032-09e.pdf. On the T1032, the taxpayer receiving the private pension income and the spouse with whom part of 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 corollary 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.

Effect of pension income splitting on eligibility for other federal credits and benefits

Eligibility for a number of federal tax credits and benefits is based, in whole or in part, on a taxpayer's net income or on family net income. Once pension income is split, the net income of the pension recipient spouse will be reduced while the net income of the spouse with whom the income is split increases. Consequently, where eligibility for a particular federal tax credit (the GST/HST, for example) is based on family net income, splitting of pension income will have no impact on either eligibility or amount received, since overall family net income is unchanged. Where, however, a tax credit or benefit is calculated based on one individual's net income, the splitting of pension income can create real benefits.

For couples over the age of 65, the ability to minimize or eliminate any clawback of Old Age Security Benefits through pension income splitting can be significant. Most Canadians are eligible to receive such benefits, which can reach about $500 per month, after they turn 65 years of age. However, taxpayers who have net income of more than about $66,000 (for 2009, with the amount indexed annually) have their benefits reduced, or "clawed back". The clawback rate is 15 per cent of net income over the threshold amount of $66,000. Taxpayers having income of more than about $105,000 receive no benefits at all.

As an example of the benefits that can be realized, take the situation of the couple where one spouse has annual retirement income of $85,000, from various sources, including eligible pension income, and the other has no private retirement income at all, only Canada Pension Plan and Old Age Security benefits. At those income levels, the lower income spouse would have full OAS entitlement, but the spouse with the higher income would lose just under half of OAS benefits. If eligible pension income is split such that both spouses have income below $66,000, both would enjoy full OAS entitlement, amounting to about $12,000 for the year. Absent pension income splitting, the couples' total OAS entitlement for year would have been just over $9,000.

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 per cent of that amount, or $5,000, to a spouse, both spouses will be able to claim the full $2,000 pension tax credit on their return for the year the income is reported.

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 opportunity for eligible taxpayers.

The CRA has made an effort to provide information to taxpayers who might qualify for such pension income splitting, as well as tax information of interest to taxpayers over the age of 65 generally, through its Web site. That information, which includes links to relevant government forms and publications, can be found on the Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/menu-eng.html.

Having the use of an employer-owned or leased automobile is a very popular and very common employee "perk". However, the enjoyment of such an automobile means that a taxable benefit must be included on the employee's T4 come tax time, and the rules for calculating the amount of that benefit have a well-deserved reputation for being both complicated and subject to frequent revision.

Having the use of an employer-owned or leased automobile is a very popular and very common employee "perk". However, the enjoyment of such an automobile means that a taxable benefit must be included on the employee's T4 come tax time, and the rules for calculating the amount of that benefit have a well-deserved reputation for being both complicated and subject to frequent revision.

The Canada Revenue Agency has made at least part of that process easier with the Automobile Benefits On-Line Calculator, which can be found at http://www.cra-arc.gc.ca/ebci/rhac/welcome.do.

The calculator is available for the 2003 and later taxation years. To use the calculator, the user inputs the cost of the vehicle (purchase or monthly leasing cost), states whether the employee has reimbursed the employer for the portion of operating costs related to personal use and indicates whether the employee has filed written notice electing to use the alternative method of calculating the operating cost benefit (one-half of standby charge), in a series of yes/no boxes. The user must then provide the total number of kilometers driven during the year, and a breakdown of those kilometers between business and personal use. The number of days during the year during which the vehicle was available must be shown and, finally, the user must enter the amounts of any reimbursements received by the employer from the employee with respect to operating costs or standby charges. Once the information is entered, clicking on "calculate" will produce the following summary of the taxable benefit to be assessed.

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Submitted data:
Employer's name (optional)
Employee's name (optional)
Year	2005
Cost of employer-owned automobile	25,000.00
Monthly leasing cost	0.00
Average cost of selling or leasing automobiles in the year	0.00
Total kilometers driven	7500
Business use kilometers	4500

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Calculated results:
Number of 30 day periods automobile available	12
Percent of business use	60
Standby charge	899.82
Operating costs benefit	600.00
Deemed operating cost benefit	0.00
Total automobile benefits	1,499.82
Less: Employee reimbursements	0.00
Automobile benefits to employee or shareholder (report this amount on the individual's T4 or T4A supplementary)	1,499.82

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You may need to remit Goods and Services Tax (GST) / Harmonized Sales Tax (HST) on the calculated benefit. For information, see Chapter 4 of the Employer's Guide Taxable Benefits.

Note that while there are fields on the Calculator in which the employer and employee names can be entered, those fields are not mandatory.

While the on-line Automobile benefits calculator will undoubtedly be of assistance to employers in quantifying taxable benefits amounts which must then be entered on a T4 slip, it also has potential has a tax-planning tool. Employees (or prospective employees) of an employer who offers "cafeteria-style" benefits can use the calculator to determine just what the tax "cost" of driving the company car will be.

It's likely that hundreds of thousands of Canadian families have one or more lines of credit, and in many cases the family's line of credit is secured by the equity in the family home - generally referred to as a home equity line of credit, or HELOC. With interest rates continuing to be at historic lows and the stock market once again making gains, many of those taxpayers may once again be tempted to use that HELOC as a source of investment funds. Where both spouses have access to the HELOC, questions can arise as to the allocation for tax purposes of investment gains and/or interest deductions on such HELOC funds used for investment purposes.

It's likely that hundreds of thousands of Canadian families have one or more lines of credit, and in many cases the family's line of credit is secured by the equity in the family home - generally referred to as a home equity line of credit, or HELOC. With interest rates continuing to be at historic lows and the stock market once again making gains, many of those taxpayers may once again be tempted to use that HELOC as a source of investment funds. Where both spouses have access to the HELOC, questions can arise as to the allocation for tax purposes of investment gains and/or interest deductions on such HELOC funds used for investment purposes.

The Canada Revenue Agency was recently asked about the application of the tax rules where one spouse contributed the bulk of funds needed to purchase a home, a joint line of credit (HELOC) was obtained and secured by the equity in that home, and the other spouse then planned to borrow against the HELOC to obtain funds that were invested in the investing spouse's name.

The Canadian Income Tax Act contains a relatively complex set of rules, known as the attribution rules, that generally seek to prevent related taxpayers, including spouses, from transferring or loaning property between them in order to reduce the tax payable on any investment returns or capital gains earned on the transferred property. The question put to the CRA was whether, on the facts outlined above, the fact that one spouse had contributed most of the capital needed to buy the home (thereby creating the home equity that was used as security for the HELOC) would result in the application of the attribution rules when the non-contributing spouse subsequently used HELOC funds to invest and earn investment income. 

The CRA's basic response was that the fact that one spouse had made a disproportionate contribution to the acquisition of the property on which the HELOC was secured would not result in the automatic application of the attribution rules. The reasoning behind its conclusion is that the basic rule with respect to spousal attribution requires that there be a "transfer or loan" between spouses. In the Agency's view, where one spouse does not contribute any funds to the purchase of a property, but ownership is jointly registered to both spouses, there has been a transfer of property from one spouse to the other at the time of purchase. However, the provision of collateral (in the form of home equity) for a loan does not, in the CRA's view, constitute a loan or transfer of property. Therefore, the fact that the joint HELOC was secured by the family home for which one spouse contributed most of the capital would not, in and of itself, result in the application of the attribution rules.

While the CRA's response was qualified good news for taxpayers, the Agency did also say that with respect to the actual use of the joint HELOC as a source of investment funds, it was a question of fact whether the attribution rules would apply. It went on to give examples of circumstances in which investment of funds borrowed from the HELOC could attract the application of the attribution rules - for example, where the contributing taxpayer borrowed funds and used them to buy a portfolio of income-producing investments in the name of the other spouse, or where the contributing taxpayer paid or was obligated to pay any portion of principal or interest with respect to funds borrowed by the spouse from the HELOC. The Agency also invoked the spectre of the possible application of the general anti-avoidance rule. In other words, each borrowing, investment, and repayment arrangement would have to be structured very carefully both to ensure strict compliance with the specific requirements of the attribution rules and to stay clear of any anti-avoidance rules that the CRA might view to be applicable in the circumstances.

It seems clear that while the creation of a joint HELOC in the basic circumstances outlined above would not run afoul of the attribution rules, the CRA will examine very closely any arrangements that involve the use of such funds for investment purposes by spouses, and will invoke the attribution rules where it can. Taxpayers who are considering utilizing such arrangements will need to be painstaking in ensuring that each spouse's borrowings, repayments, and repayment obligations are kept entirely separate and that documentation is thorough and detailed. They would also be well advised to consult with a tax professional prior to implementing any such arrangement.

In families where both parents work outside of the home, obtaining and paying for reliable child care is a year-round concern, and it only increases as the school year draws to a close. At that time, the thoughts of parents turn to the question of how to keep the kids busy and supervised over the summer months. In many cases, the answer to that question is a summer camp - either a day camp near the family home or a residential camp further away. The number and variety of such camps is nearly limitless, but the one thing that they all have in common is a price tag attached. Some, especially day camps provided by the local recreation authority, can be relatively inexpensive, while the cost of others, such as summer-long residential camps or elite-level sports camps, can run to the thousands of dollars.

In families where both parents work outside of the home, obtaining and paying for reliable child care is a year-round concern, and it only increases as the school year draws to a close. At that time, the thoughts of parents turn to the question of how to keep the kids busy and supervised over the summer months. In many cases, the answer to that question is a summer camp - either a day camp near the family home or a residential camp further away. The number and variety of such camps is nearly limitless, but the one thing that they all have in common is a price tag attached. Some, especially day camps provided by the local recreation authority, can be relatively inexpensive, while the cost of others, such as summer-long residential camps or elite-level sports camps, can run to the thousands of dollars.

In all cases, parents would welcome some assistance with the cost of enrolling the kids in summer activities, and in some cases, the federal government is prepared to provide that assistance, in the form of both the regular deduction for child care expenses and the Children's Fitness Tax Credit. While the former is available for most child care arrangements, the latter may be claimed only for day or residential camps that involve a minimum degree of physical activity. Specifically, parents are entitled to claim a non-refundable credit equal to 15% of the first $500 in qualifying costs per child per year. So, in other words, a camp that would have cost parents $500 per child will instead have a net cost of $425 ($500 minus 15%, or $75) after the credit is claimed on the parent's tax return for the year.

Given the enormous range of activities available for children, it's not surprising that the federal government has found it necessary to provide detailed rules on what types of activities will and won't qualify for the credit. And while the possibility of a tax benefit should never drive the decision on which program or activity a child should be enrolled in, the availability of the credit might tip the balance between similar programs or might make a program, camp, or activity that seemed financially out of reach more feasible.

In assessing whether a particular camp or program might qualify for the credit, the first thing to note is that the credit is available only in respect of fees paid for children who are under the age of 16 at the beginning of the year. In other words, the last year for which the credit can be claimed is the year in which the child turns 16, assuming that all other criteria are met. Those criteria are as follows:

• the program must last for a minimum of eight weeks with at least one session per week or, in the case of children's camps, must run for five consecutive days;
• the program or activity must be supervised;
• the program or activity must be suitable for children; and
• the program activities must include a significant amount of physical activity that contributes to cardiorespiratory endurance, plus one or more of muscular strength, muscular endurance, flexibility, or balance. In the case of a program, camp, or membership in which participants can choose from a variety of activities, more than 50% of those activities must include a significant amount of physical activity, or more than 50% of the available program time must be devoted to activities that include a significant amount of physical activity.

Programs or camps that meet neither of the 50% tests are not entirely disqualified from qualifying for the credit. In such cases, the sponsoring organization may issue a receipt for a prorated amount, which represents the percentage of activities offered to children that include a significant amount of physical activity or the percentage of program time that is allocated to such activities.

Often, particularly in the case of residential camps or sports camps, charges are levied for such costs as accommodation, travel, or food, or parents must incur costs to outfit the child with required equipment to use at camps. Costs paid by parents for non-activity related charges, such as food, travel, and accommodation, do not qualify for the credit and must be subtracted from the total fee paid. As well, the cost of equipment purchased by parents from third-party suppliers is not a qualifying cost for purposes of the credit.

Parents whose children's interests run more to less active pursuits, such as art or music or writing, may wonder whether they will, as a consequence, have to bear the entire cost of such summer activities, without the benefit of assistance from our tax system. While the cost of such activities isn't likely to be eligible for the Children's Fitness Tax Credit, it may well qualify for the regular child care deduction, assuming that all necessary criteria are satisfied. Qualifying child care expenses are claimed as a deduction from income, rather than as a credit, meaning that the entire amount of qualifying expenses is effectively not taxed as income in the hands of the parents. There are limits imposed on the maximum weekly cost of a residential camp (ranging from $100 to $250), as well as restrictions on the total amount of child care expenses that may be deducted in a year. However, the overall annual limits, which range from $4,000 to $10,000, depending on the age and health of the child, with an overall cap of two-thirds of the parent's income for the year, are much higher than the allowable amount for the Children's Fitness Tax Credit.

It's possible that the same expenditure will qualify for both the child care expense deduction and the Children's Fitness Tax Credit. In such cases, the parent must first claim that amount as a child care expense. Any part of the expenditure that is not claimed as a child care expense (perhaps because the maximum limit for such expense claim has been reached) can be claimed for the Children's Fitness Tax Credit as long as the usual requirements for that Credit are met.

Finally, although the focus at this time of year is on summer activities, parents incur costs throughout the year to enable their children to take advantage of after-school or recreational activities, particularly sports activities. Those costs can similarly qualify for the credit (subject, as always, to the $500 per year per child limit) as long as the physical activity requirements are met. In the case of activities undertaken during the school year, qualifying programs must run for a minimum of eight weeks and take place at least once a week. It's common for parents, once the school year begins in September, to enroll their children in activities that will run for several months, or even throughout the school year. The CRA has indicated that, where parents incur qualifying costs in, for instance, September 2009 for activities that will run until the end of the 2009-10 school year, all those qualifying costs may be claimed for the credit on the parent's tax return for the 2009 tax year.

While the Children's Fitness Tax Credit is relatively simple in concept, the criteria imposed to qualify and the number and variety of possible qualifying programs and activities can be confusing. To alleviate some of that confusion, for both parents and sponsoring organizations, the CRA has provided a number of fact sheets and background information about the credit on its Web site. That information can be found at http://www.cra-arc.gc.ca/whtsnw/fitness-eng.html, and http://www.cra-arc.gc.ca/whtsnw/chcklst-eng.html.

Since the unofficial start of the current recession last fall, hundreds of thousands of jobs have been lost across Canada, and the only employment category to show consistent signs of growth this year is that of self-employment. While some intrepid individuals may be choosing to start a business in less than ideal economic conditions, many of the newly self employed are likely former employees who have turned to self-employment when a job search hasn't produced a job offer. For most of them, self-employment will be a new experience.

Since the unofficial start of the current recession last fall, hundreds of thousands of jobs have been lost across Canada, and the only employment category to show consistent signs of growth this year is that of self-employment. While some intrepid individuals may be choosing to start a business in less than ideal economic conditions, many of the newly self employed are likely former employees who have turned to self-employment when a job search hasn't produced a job offer. For most of them, self-employment will be a new experience.

There are a many differences between working for someone else and being self-employed. While there are downsides to self-employment - no paid vacation, statutory holidays, or sick days; no extended health care coverage; no administrative or technical support supplied (and paid for) by the employer; and, if the business should fail, no severance payments or eligibility for Employment Insurance - the benefits, from a purely tax point of view, can be significant.

First of all, it's important to note that the tax rates and income tax brackets that apply to individual taxpayers are the same, whether income is received from an employer or generated by self-employment. There are no special tax rates or brackets for self-employed individuals, and all of the rules regarding eligibility for personal tax credits are the same, whether you're an employee or self-employed. That said, it's also true that self-employed taxpayers have access to a much broader range of deductions from income than employees do, and in some cases, deductions are available for costs that the taxpayer is already incurring and would continue to incur in any case.

The general rule when calculating income from self-employment is that income from all sources earned during the year is totalled, and then money expended to earn that income is deducted to arrive at net business income for the year. Unlike employment income, where the types of available deductions are specifically identified and enumerated by the tax authorities, a deduction can generally be taken from self-employment income for any reasonable costs that are incurred in order to earn that income. And, while the list isn't comprehensive, the Canada Revenue Agency (CRA) income tax form on which business income is calculated (the T2125, available on the CRA's Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t2125/README.html) lists such costs as salaries, office expenses, legal and accounting fees, telephone and utilities, travel costs, and advertising as possible deductions in the computation of net business income for the year.

Former employees who choose to become self-employed often start out by working out of their home, saving the cost of office rent at least until the business is on a firmer financial footing. Where a business is being operated from a home office, a further set of deductions becomes available to the taxpayer in the calculation of income from that business. Essentially, the business owner will be able to deduct a percentage of most operating costs of the home, such as heat, hydro, property taxes, telephone, and mortgage interest (but not mortgage principal) costs. The percentage of costs deductible is generally equal to the proportion that the home office is of the square footage of the entire house. So, where the size of the home office represents 15% of the square footage of the entire home, and the allowable operating costs of the home for the year are $5,000, a deduction of $750 ($5,000 times 15%) can be claimed on the T2125 for the year.

Self-employed taxpayers who pay a salary to someone else working in the business can also deduct that salary from their income from the business. In many cases where a new business has an employee, that employee is another family member - for example, a spouse who takes phone calls, books appointments, prepares billings, and helps out generally in an administrative capacity. And as long as the family member/employee has the skills to do that work, is actually doing it, and is receiving compensation comparable to what would be paid to an unrelated party, the policy of the CRA is to allow a deduction for the salary paid to him or her.

There's a lot involved in the decision to start a business and join the ranks of the self-employed. From a tax perspective, what's outlined here is just an overview of some of the bigger differences between receiving a salary and earning income from your own business. The first step to be taken by taxpayers who decide to take the leap into self-employment should be to consult a lawyer or accountant who can provide the expertise needed on how to set the business up properly and operate it in compliance with all the applicable federal and provincial laws, leaving the new business owner free to focus on growing the business itself. 

Many employers provide employees who are required to work overtime with a meal or an allowance to enable the employee to purchase a meal, on the theory that, absent the need to work overtime, the employee wouldn't have had to incur such a cost. For its part, and for the same reasons, the Canada Revenue Agency has generally been prepared to treat the provision of a meal or a meal allowance as a non-taxable benefit to the employee. The rule has been that where an employee is required to work three or more hours of overtime immediately after his or her scheduled hours of work and that overtime was "infrequent and occasional" in nature, which was interpreted to mean fewer than three times a week, then any meal or meal allowance provided to the employee was a non-taxable benefit.

Many employers provide employees who are required to work overtime with a meal or an allowance to enable the employee to purchase a meal, on the theory that, absent the need to work overtime, the employee wouldn't have had to incur such a cost. For its part, and for the same reasons, the Canada Revenue Agency has generally been prepared to treat the provision of a meal or a meal allowance as a non-taxable benefit to the employee. The rule has been that where an employee is required to work three or more hours of overtime immediately after his or her scheduled hours of work and that overtime was "infrequent and occasional" in nature, which was interpreted to mean fewer than three times a week, then any meal or meal allowance provided to the employee was a non-taxable benefit.

Recently, the CRA has become concerned that the somewhat flexible nature of the criteria that determine the taxable or non-taxable nature of the employee benefit when it comes to overtime meal allowances can lead to inconsistent and inequitable results. As a consequence, the Agency has determined that it is necessary to impose, for the 2009 and subsequent tax years, more-specific rules on what constitutes a reasonable overtime meal allowance and when and to what extent such allowances can be provided on a non-taxable basis.

Specifically, for 2009 and later years, the assessing policy of the CRA will be that no taxable benefit arises where:

• the value of the meal or meal allowance is reasonable, and for such purposes a value of up to $17 will generally be considered reasonable;

• the employee works two or more hours of overtime right before or after his or her scheduled hours of work; and

• the overtime worked is infrequent and occasional in nature. Fewer than three times a week will generally be considered infrequent or occasional. The CRA is also prepared to consider overtime worked to be infrequent or occasional where an allowance is provided three or more times a week on an occasional basis to meet workload demands. Such workload demands would include major repairs or periodic financial reporting.

Where employees are required to work overtime, the employer frequently provides, in addition to a meal allowance, transportation home for employees - for instance, an employer-paid cab chit. Also effective for 2009 and later years, the CRA will continue to treat such employer-paid travel as a non-taxable benefit where "allowances paid for travel within the municipality or metropolitan area are paid primarily for the benefit of the employer", in that the principal objective of the benefit is "to ensure that the employee's duties are undertaken in a more efficient manner during the course of a work shift, and where allowances paid are not indicative of an alternate form of remuneration".

While the CRA's objective in amending its assessing policy with respect to overtime meal and travel allowances was to bring more certainty and consistency to the area, it is not clear that that objective will be attained. While it will be relatively simple for the Agency to enforce the $17/meal allowance limit, monitoring and ensuring compliance with the other criteria, with respect to the number of hours and the frequency of overtime, as well as the criteria imposed for overtime travel allowances, seem likely to pose as many assessing difficulties as the current rules do. Nevertheless, these are now the assessing criteria that the CRA will be using for 2009 and later years, and employers will need be cognizant of them in designing and administering their employee overtime-benefit policies.

The CRA's new policies in this are outlined in detail in its publication Income Tax Technical News, No. 40, available at http://www.cra-arc.gc.ca/E/pub/tp/itnews-40/itnews40-e.pdf.

The current economic recession and the collapse of credit markets that precipitated it have given both consumers and governments reason to take a closer look both at how credit is used on an individual and family level and at the rules governing the provision and administration of credit, particularly credit cards. As a result of that kind of review, the federal government has come out with a series of regulatory measures designed, in its words, to "ensure that consumers have access to credit on terms that are fair and transparent".

The current economic recession and the collapse of credit markets that precipitated it have given both consumers and governments reason to take a closer look both at how credit is used on an individual and family level and at the rules governing the provision and administration of credit, particularly credit cards. As a result of that kind of review, the federal government has come out with a series of regulatory measures designed, in its words, to "ensure that consumers have access to credit on terms that are fair and transparent".

The new regulations focus on two areas: the first relates to disclosure by credit card issuers to consumers of information with respect to their cost of borrowing, interest rates charged, and the length of time that it will take consumers who are making only the minimum payment to actually pay off their balance, while the second area of change deals with how interest is calculated, how payments are allocated, and how and when credit card limits may be increased.

The two major changes in the areas of interest and payment calculation and allocation that are likely to have the biggest impact on the cost of borrowing for consumers are as follows:

Requirement for minimum 21-day grace period 

Most credit card users know that, once they make a purchase using their card, there is an interest-free "grace period", and if the amount representing the purchase is paid before the end of that grace period (known as the due date), no interest is charged. What many consumers don't realize, however, is that where a balance is carried over from the previous month, and a new purchase is made, then interest may be charged not just on the balance carried forward but on the new purchase, even if the full amount is paid by the due date - in other words, there is no grace period for new purchases where an existing balance is carried over from the previous month. The new regulations would require credit card issuers to provide a minimum 21-day grace period on all new purchases, whether or not there is an existing balance on the card.

To explain how the new rules would apply, the Department of Finance provided the following example in its Backgrounder on the changes.

Tom pays his monthly balance in full as a rule. In April, he paid part of his balance during the course of the billing period, but he missed the deadline to pay the remaining balance, and carried a balance of $300 into May. On May 5, Tom made a new purchase of $50. He paid his outstanding balance of $350 in full by the due date shown on his statement (June 19). Here's how the existing two different grace-period methods would affect him.

If Tom's credit card issuer uses Method 1, he will have to pay interest only on the $300 carried over from April. He will get an interest-free period on his new purchase of $50, because he paid his balance in full by the due date of June 19.

If Tom's credit card issuer uses Method 2, he will have to pay interest on the $300 carried over from April and on the new purchase of $50, because he carried a balance over from April.

The regulations will ensure that all credit card issuers use Method 1 for the application of grace periods.

Allocation of payments in favour of the consumer

It is common for credit card issuers to apply different interest rates to different amounts on the same card, depending on whether the amount owed relates to a new purchase, a cash advance, or a balance transfer. Under the current practice, where a consumer makes a payment on the card, that payment is often applied to the amount with the lowest interest rate. The new regulations, however, will require that payments made in excess of the minimum payment required be allocated in the way that most benefits consumers. Two different allocation methods will be permitted under the new rules, and once again, the Department of Finance explained those allocation methods through the use of an example:

Christian obtained a credit card and transferred a balance of $1,000 with an interest rate of 2%. He made $600 in purchases with his new card at an interest rate of 15%. When he receives his statement at the end of the month, he makes a payment of $800.

Under the new rules, the card issuer can either allocate the $800 first to the balance with the highest interest rate, i.e. purchases, and the remaining amount to the balance transfer or, alternatively, it can allocate the $800 proportionally, i.e. $300 for purchases and $500 for the balance transfer. In both cases, this will lead to lower interest charges for Christian.

Finally, when a credit card is issued by a financial institution, it comes with a credit limit, which sets out the maximum amount that a consumer can charge to the card. However, it has been the practice of many institutions, particularly where the balance on the card is near or at that limit, to increase the limit. The unfortunate reality is that too many consumers have found themselves further in debt than they ever thought possible, as they continued to take advantage of an ever-increasing limit on their card or cards. However, such automatic credit limit increases will no longer be permitted. Where a card issuer wants to increase the limit on a card already held by an individual, it must now obtain the express consent of that person. Specifically, the issuer must either contact the consumer directly or include a message about the proposed increase in the monthly card statement. In either case, it would be up to the cardholder to contact the credit card company to confirm that the credit limit increase was desired. If that express consent is not given, then the credit card limit cannot be increased.

These proposed new regulations are outlined in a press release issued by the Department of Finance, which can be found on the Department's Web site at http://www.fin.gc.ca/n08/09-048-eng.asp, and further details are provided in the Backgrounder to the release, which is available at http://www.fin.gc.ca/n08/data/09-048_1-eng.asp.

While for millions of elementary and high school students the school year has just ended, those about to start their post-secondary education and 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 focussed on tuition bills, residence costs, and the price of textbooks - and how to pay for it all.

While for millions of elementary and high school students the school year has just ended, those about to start their post-secondary education and 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 focussed on tuition bills, residence costs, and the price of textbooks - and how to pay for it all.

The bad news for families with one (or more) children in post-secondary education is that the cost of that education has risen sharply over the past few years, as government funding of post-secondary educational institutions has diminished. 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 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 that 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%  to11%.

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 2009, 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) that, 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 that 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 that are specifically claimable by students. There are however, other credits that, 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, 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 is reasonable and realistic to assume that the cost of a year of undergraduate post-secondary education, once tuition, residence, textbooks, and numerous incidental expenses are taken into account, will amount to between $15,000 and $20,000. It is 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 (for example, through a student line of credit) do not qualify, and interest paid on any consolidated loans that 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 carryover of those credits, can be confusing. The Canada Revenue Agency guide "Students and Income Tax", which is usually updated annually, is an excellent source of information and provides answers to most of the questions that arise in this area. A current version of that guide is available on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/E/pub/tg/p105/README.html.

 

The taxation of employee gifts has always been something of a headache for Canadian revenue authorities. On the one hand, the amounts involved for each employee are rarely large, so the revenue received or forgone in relation to their taxation is insignificant in the larger scheme of the Canadian tax system. On the other hand, the number of taxpayers who receive gifts or awards from an employer during the course of a tax year can number in the millions, so that even those small amounts, when multiplied by that large number of taxpayers, can add up. Finally, the number of ways in which a employee gift or award program can be structured is virtually limitless, and the CRA has had some difficulty over the years in formulating a set of rules that will cover most situations in a common-sense way, without incurring administrative costs that outstrip the revenue generated or risking non-compliance as a result of taxpayer resentment of rules that are perceived as petty or punitive in nature. Recently, the CRA deemed it necessary to go back to the drawing board with respect to the rules governing the taxation of employee gifts, and the Agency has now announced new rules, which will take effect for 2010 and later years.

The taxation of employee gifts has always been something of a headache for Canadian revenue authorities. On the one hand, the amounts involved for each employee are rarely large, so the revenue received or forgone in relation to their taxation is insignificant in the larger scheme of the Canadian tax system. On the other hand, the number of taxpayers who receive gifts or awards from an employer during the course of a tax year can number in the millions, so that even those small amounts, when multiplied by that large number of taxpayers, can add up. Finally, the number of ways in which a employee gift or award program can be structured is virtually limitless, and the CRA has had some difficulty over the years in formulating a set of rules that will cover most situations in a common-sense way, without incurring administrative costs that outstrip the revenue generated or risking non-compliance as a result of taxpayer resentment of rules that are perceived as petty or punitive in nature. Recently, the CRA deemed it necessary to go back to the drawing board with respect to the rules governing the taxation of employee gifts, and the Agency has now announced new rules, which will take effect for 2010 and later years.

The starting point is the general rule that all gifts given by an employer to its employees are considered to constitute a taxable benefit. However, under the rules that will now apply to 2009 and previous years, the CRA made an administrative concession, allowing two non-cash gifts (within a specified dollar limit) per employee per year, tax free, as long as such gifts were given on occasions such as Christmas or Hanukkah, or following a significant life event, such as a marriage or the birth of a child. If an employee was given a non-cash gift or award for any other reason, this policy did not apply and the employer was required to include the fair market value of the gift or award in the employee's income.

The CRA's policy limited the cost of tax-free special-occasion gifts to $500 (including taxes). Therefore, if a single non-cash gift was given and the total cost was more than $500, the employee was required to include the fair market value of the entire gift in taxable income. If the total cost of the non-cash gifts given to an employee in a year was more than $500, the employer was allowed to choose which of the gifts was to be excluded from the employee's income as long as the total cost of the excluded gifts was not more than $500. The fair market value of the remaining gifts had to be included in the employee's income. If the employer gave more than one non-cash gift per year and the total cost was $500 or less, the employer was allowed to exclude the cost of any two of the gifts from the employee's income. The employer was then required to include the fair market value of the remaining gifts in the employee's income.

In addition, the "non-cash" criterion imposed by the CRA, as part of the two-gift/$500 administrative concession, did not apply to what the CRA termed "cash or near-cash" gifts, and all such gifts were considered to be a taxable benefit and included in income for tax purposes, regardless of cost. For this purpose, the CRA considered anything that could be easily converted to cash as a "near-cash" gift, which included such items as gift certificates. In addition, the following types of gifts were considered to be taxable benefits, regardless of cost:

• points that could be redeemed for air travel or other rewards;

• reimbursements from an employer to an employee for a gift or award that the employee selected, paid for, and then provided a receipt to the employer for reimbursement;

• hospitality rewards, such as employer-provided team-building lunches and rewards in the nature of a thank you for doing a good job;

• disguised remuneration, such as a gift or award given as a bonus;

• gifts and awards given by closely held corporations to their shareholders or related persons; and

• manufacturer-provided gifts or awards given directly by the manufacturer to the employee of a dealer.

In 2007, the CRA began a review of its policies relating to taxable benefits provided to employees and the related administrative costs to employers. As a result of that review, the Agency has determined that changes were needed to the rules governing employee gifts. In its view, the former rules, which were intended to recognize common business practices and remove from employers the administrative burden of determining the fair market value of small gifts and awards, had not met its objectives, at least with respect to the administrative burden shouldered by employers. In addition, the CRA was concerned that gift and award policies were being designed simply to provide employees with tax-free remuneration. As a consequence of those concerns, the CRA has formulated the following new policy:

• Non-cash gifts and non-cash awards to an arm's length employee, regardless of number, will not be taxable to the extent that the total value of all non-cash gifts and awards to that employee is less than $500 annually. The total value over $500 annually will be taxable.

• A separate non-cash long-service/anniversary award provided to an employee may also qualify for non-taxable status to the extent its total value is $500 or less. Once again, the value over $500 will be taxable. In order to qualify, the anniversary award cannot be for less than five years of service or for five years since the last long-service award had been provided to the employee. For the purposes of applying the $500 thresholds, the annual gifts and awards threshold and the long-service/anniversary awards threshold are separate. In other words, a shortfall in value under one policy cannot be used to offset an excess value of the other.

• The employer gift and award policy will not apply to non-arm's length employees (e.g., relative of proprietor, shareholders of closely held corporations) or related persons of the non-arm's length employee.

• Items of an immaterial or nominal value, such as coffee, tea, T-shirts with employer logos, mugs, plaques, trophies, etc., will not be considered a taxable benefit to employees. The CRA has not imposed any defined monetary threshold that determines an immaterial amount, but it indicated that factors that may be taken into account include the value, frequency, and administrative practicability of accounting for nominal benefits.

Finally, the CRA's administrative policies as to the qualifying nature of gifts and awards will not change. For example, performance-related rewards (e.g., sales targets) or cash and near-cash awards (e.g., gift certificates), as listed above, will continue to fall outside the administrative policy and will be required to be included in the taxable income of the employee who receives them.

A summary of the CRA's new policies on employee gifts and awards can be found on the Agency's Web site at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/gfts/nwplcy2010-eng.html.

Spring is typically the busiest season for real estate sales and, consequently, the time when most moves take place. Selling one's home and moving qualifies as one of life's more stressful experiences, but it's an experience that 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 of moving, it does, in some circumstances, minimize the financial hit by providing a deduction from income for moving expenses incurred.

Spring is typically the busiest season for real estate sales and, consequently, the time when most moves take place. Selling one's home and moving qualifies as one of life's more stressful experiences, but it's an experience that 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 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 or work (for example, a taxpayer who moves from Toronto to take a job in Regina), 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 traveling public, which in most cases would mean the distance by road. Also, 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.

The list of expenses that may be deducted is fairly comprehensive, but not all moving related costs are deductible. Under the Canada Revenue Agency's administrative policies, as outlined in its Form T1-M, Moving Expenses Deduction (available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-m/t1-m-09e.pdf), 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; 

• 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, especially where, as is now the case, the real estate market is slow, 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 related to 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 utility expenses paid in relation to that residence may be deducted.

It may seem from the foregoing that virtually all moving-related costs will be deductible; however, there are some costs that the CRA will not allow to be deducted, as follows:

• expenses for work done to make the old residence more saleable (i.e., home-staging costs, furniture or art rental charges, cleaning costs, etc.);

• any loss incurred on the sale of the old residence;

• expenses for job- 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. Similarly, the taxpayer can claim a set per-kilometre amount for kilometres driven in connection with the move. The per-kilometre amount ranges from 49.5 cents for Saskatchewan to 66 cents for the Yukon Territory. In all cases, it is the province or territory in which the travel begins that determines the applicable rate. These rates were in effect for the 2008 taxation year - the CRA will be posting the rates for 2009 on its Web site early in 2010, in time for the tax-filing season.

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's 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 within Canada. While it's possible to deduct expenses arising from moves from Canada to another country, from another country to Canada, or between two locations outside of Canada, 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, and any questions not answered by that form can be directed to the CRA's individual enquiries line at 1-800-959-8281.

As the name implies, savings held within a registered retirement savings plan (RRSP) are intended to be held for the long term and used to finance, at least in part, a comfortable retirement. In most cases, Canadians who have money saved in an RRSP view withdrawing money from the plan as something to be avoided unless and until all other possible options have been exhausted. Generally speaking, taxpayers, especially older taxpayers, dip into an RRSP only where it's necessary to deal with a financial crisis, such as a pending foreclosure or a possible bankruptcy.

As the name implies, savings held within a registered retirement savings plan (RRSP) are intended to be held for the long term  and used to finance, at least in part, a comfortable retirement. In most cases, Canadians who have money saved in an RRSP view withdrawing money from the plan as something to be avoided unless and until all other possible options have been exhausted. Generally speaking, taxpayers, especially older taxpayers, dip into an RRSP only where it's necessary to deal with a financial crisis, such as a pending foreclosure or a possible bankruptcy.

The fact that taxpayers contemplating a withdrawal of funds from their RRSPs are generally in some kind of financial distress makes them especially vulnerable to promoters of fraudulent schemes relating to such withdrawals. All withdrawals made from an RRSP, other than as part of government-sanctioned programs, such as a Home Buyer's Plan or a Lifelong Learning Plan, are subject to tax in the year in which the funds are received, regardless of the reason for the withdrawal or the purpose to which the funds will be put. Promoters of fraudulent RRSP withdrawal schemes usually promote those schemes on the basis that their plan will allow funds to be legally withdrawn free of income tax, thus maximizing the amount that the taxpayer will actually receive. Alternatively, they promise that the taxpayer can obtain, prior to retirement, access to a "locked-in" RRSP, something which is not generally permitted.

Consumer financial frauds flourish during difficult economic times, and RRSP withdrawal scams are no exception. The Canada Revenue Agency (CRA) recently issued a notice warning taxpayers that it was seeing an increasing number of "questionable" RRSP and registered retirement income fund (RRIF) withdrawal schemes. In the CRA's experience, promoters of such funds were seen to be operating in most Canadian provinces, and taxpayers who had been persuaded to participate in the schemes were located throughout the country.

The typical structure of such a scheme involves having the owner of a self-directed RRSP purchase a particular investment through a specified trustee. That investment usually takes the form of shares of a private company or an interest in mortgages, and the value attributed to the shares or the mortgage is usually inflated far beyond its actual worth. The taxpayer is then promised that he or she will be able to borrow back the invested funds through a low-interest or interest-free loan, and of course, there will be no income tax payable on the entire transaction.

The CRA's warning to taxpayers notes that the promotions used for many of these schemes appear entirely legitimate and professional, even to the extent of providing potential "investors" with opinion letters from professionals indicating that the promised tax benefits are indeed available. However, the more likely outcome of the scheme is a reassessment by the CRA of the taxpayer and the inclusion of the invested or withdrawn amount in the taxpayer's income for the year. In the worst-case scenario, which has unfortunately occurred many times, the outcome of the scheme is that both the promoter and the taxpayer's retirement savings disappear, leaving the taxpayer out of pocket and facing a tax assessment in relation to funds that he or she no longer possesses.

A few years ago, a taxpayer challenged a CRA assessment that had included in her income for the year an amount withdrawn and lost through an RRSP scam, and the challenge eventually went to court. The Tax Court held that, while it was sympathetic to the taxpayer's plight and believed that it was entirely possible that she had been the innocent victim of a professional swindle, it could not overturn the CRA's assessment, which was correct in law. If a similar case were to come before the Court today, it would undoubtedly reach the same conclusion.

The CRA's most recent warning to taxpayers on the subject of RRSP withdrawal scams can be found on the Agency's Web site at http://www.cra-arc.gc.ca/nwsrm/lrts/2009/l090317-eng.html, and a more detailed outline of RRSP withdrawal scams generally is available at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/schms/menu-eng.html.

With hundreds of thousands of jobs having been lost in Canada over the past six months or so, a lot of people are currently out of work, either on a temporary layoff or on a more long-term basis, as the result of a business downsizing or closure. The loss of a job, whether on a temporary or a permanent basis, has an impact that goes far beyond the financial hit, but finances are typically the most immediate concern of the newly unemployed. Finances, of course, involve taxes, and many people who file a return this month for the 2008 tax year will be including amounts received as a consequence of being out of work during that year.

With hundreds of thousands of jobs having been lost in Canada over the past six months or so, a lot of people are currently out of work, either on a temporary layoff or on a more long-term basis, as the result of a business downsizing or closure. The loss of a job, whether on a temporary or a permanent basis, has an impact that goes far beyond the financial hit, but finances are typically the most immediate concern of the newly unemployed. Finances, of course, involve taxes, and many people who file a return this month for the 2008 tax year will be including amounts received as a consequence of being out of work during that year.

Those who become unemployed usually have two or three short- or medium-term sources of income. The first is the lump sum usually received by an employee at the time of termination, representing accrued vacation pay and/or a severance amount. The second, medium-term source of income for those who qualify is employment insurance received from the federal government. In some cases, former employees may also qualify for supplemental unemployment benefits (SUB), usually through a SUB plan negotiated as part of a collective agreement. When the period of unemployment is protracted, and those sources of funds run out, it's usually necessary to draw on any available short-term savings to meet expenses and, eventually, to withdraw funds from long-term savings, often from retirement savings accounts. Unfortunately, with the exception of short-term savings, each of these sources of income is included in income and taxed as received at the generally applicable tax rate. In other words, there is no tax exemption or break provided for income received by the unemployed, nor are they eligible for any reduced or preferential tax rates while they are unemployed.

Employment insurance benefits are paid by the federal government on a biweekly basis, representing about 55% of the employee's former wages, up to a current statutory maximum of about $450 in benefits per week. All employment insurance benefits received must be reported as income on line 119 of the income tax return. The federal government will deduct income tax payable from the benefit amount, but as outlined below, that deduction may not accurately represent the recipient's tax bill for the year. Those who are eligible to receive supplemental unemployment (SUB) benefits must also report those benefits as "other income" on line 130 of the return.

At least, there are generally no tax consequences where savings are withdrawn from a source that is not a registered plan (such as a registered retirement savings plan (RRSP), a registered retirement income fund (RRIF), or a registered education savings plan (RESP)). So funds withdrawn from bank savings accounts, GICs, or Canada Savings Bonds cashed in are not considered taxable income when liquidated. Where the source of income is a GIC or some type of bond, there will be tax payable on any income received that represents interest on the original investment, but the invested amount itself is not taxed when returned to the taxpayer. And where taxpayers who set up a tax-free savings account early in 2009 find that they need to withdraw funds from that account later in the year, for whatever reason, neither the funds withdrawn nor any investment income earned on those funds is taxable.

The lump sum often received by an employee at the time of termination usually represents accrued vacation pay and, often, a severance amount. Both types of payments must be included in income and taxed at the recipient's usual rates.

In some cases, a severance amount, particularly where the employee is departing because he or she has accepted a buyout or early retirement package, can be very substantial. Substantial severance amounts may also be paid to long-term non-unionized employees, who may receive the equivalent of several months' income as part of a severance agreement with the employer. Many Canadian taxpayers have thousands of dollars of carryforward room in their RRSPs, and severance amounts received that are not needed to meet current expenses can be contributed to the RRSP within the limits of any carryforward amount. In some cases, for longer-term employees, some of the severance payment received can be characterized as a retiring allowance and contributed to the former employee's RRSP on that basis. The amount that may be contributed as a retiring allowance depends on the length of the employee's time with the employer and when that employment began. Whatever the basis for the RRSP contribution, no tax will be payable on amounts received that are contributed to the RRSP during the year or within 60 days after year end. In all cases, taxpayers who are in a position to receive substantial severance amounts, for whatever reason, should consult with professional advisors to determine the most tax-effective way to structure those payments.

While it is almost always a last resort, those who are out of work for a lengthy period may have to withdraw funds from their retirement savings - generally from an RRSP. As would be the case with any withdrawal from an RRSP, the amounts withdrawn are taxed in the year of withdrawal. Where withdrawals are made, tax will be deducted from the amount withdrawn, at a fixed percentage rate. That percentage rate, which ranges from 5% to 20%, rises as the withdrawal amount increases.

Most employees are accustomed to having income taxes deducted from their paycheques by their employer and remitted to the Canada Revenue Agency on their behalf. The amount deducted and remitted is based on an estimate of the employee's total tax liability for the year, and assuming that the employee's salary is his or her only source of income, the amount withheld usually represents a fairly accurate estimate of the ultimate tax payable for the year. If you're unemployed, though, you might have several sources of income over the course of the tax year (as outlined above), and it is easy, in those circumstances, for any withholdings not to reflect the actual tax liability for the year. The worst-case scenario in such circumstances is to discover, when it is time to file a return for the year, that a substantial amount of tax is owed - this is the last thing anyone trying to meet expenses on a reduced income needs. Consequently, it is advisable for anyone who is receiving income from multiple sources (including, but not limited to, those who are unemployed) to make sure either that the amounts being withheld from those income sources are sufficient to cover the tax bill for the year or that funds are being set aside to make the tax payment on filing as required. As a very general rule of thumb, those whose income for the year will be less than about $40,000 will pay federal tax at a rate of 15%. The rate of provincial tax payable will, of course, depend on the province in which the taxpayer is living: a listing of provincial individual tax rates for 2009 can be found on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html.

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 when.

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 when.

First, the bad news. Legal fees incurred in situations experienced by millions of Canadians - for example, 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 that 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, in fact 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.

While legal fees incurred in order to establish a right to such income are deductible, there are limits on the amount of the deduction. In effect, the deduction claimed for the year for legal fees can't be more than the amount received in the year to which the legal fees incurred relate.

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 that 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 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:

• to collect late support payments;
• to establish the amount of support payments from a current or former spouse or common-law partner;
• to establish the amount of support payments from the legal 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;
• to try to get an increase in support payments; or
• to try 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 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 the 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 itself. 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 by the taxpayer in the year in which they are paid.

No sensible tax advisor would suggest starting your tax planning for the year when you sit down to complete your return. The standard advice correctly holds that the best year-end tax planning begins on January 1 of the tax year. However, all is not lost by tax-return filing time, as there are some tax planning strategies (more properly described as tax filing strategies) that can still minimize the tax bite for the current year or future ones.

No sensible tax advisor would suggest starting your tax planning for the year when you sit down to complete your return. The standard advice correctly holds that the best year-end tax planning begins on January 1 of the tax year. However, all is not lost by tax-return filing time, as there are some tax planning strategies (more properly described as tax filing strategies) that can still minimize the tax bite for the current year or future ones.

File on time

It may seem obvious, but every year some taxpayers pay unnecessary (and non-deductible) penalties and interest for no reason other than that they simply didn't get their returns in on time. For the record, a personal tax return is late-filed if it isn't sent to the CRA on or before April 30 or, if you or your spouse are self-employed, on or before June 15. In all cases, amounts due must be paid on or before April 30.

For some taxpayers, late-filing is just a matter of not having gotten around to it - few people view preparing their tax returns as anything other than an unpleasant chore. For others, missing or mislaid information slips are to blame. In many cases, where there is tax owing and the cash just isn't available to pay those taxes, taxpayers assume that it's better just to put off filing until the money is available and the payment can be made. Whatever the reason, not filing on time is, in all cases, the wrong decision.

Where taxes are owed, late-filing means that an automatic penalty will be imposed equal to 5% of those outstanding taxes, plus an additional 1% for every full month following during which the return is not filed, to a maximum of 12 months (or a total of 17% of the unpaid amount). As well, interest starts being charged on those unpaid taxes on the very first day that they are overdue. Few taxpayers realize that the interest rate charged by the Canada Revenue Agency is, by law, well in excess of commercial rates of interest. Specifically, the rate of interest charged by the CRA is equal to its "prescribed rate" plus 4%, and any interest charges levied are compounded daily. The rate charged by the CRA from April to June 2009 will be 5%.

For taxpayers who make a habit of filing late, the news is even worse. If a late-filing penalty has been charged by the CRA in any of the previous three years, and another return is late-filed, both the immediate penalty and the recurring monthly penalty are doubled to, respectively, 10% and 2% per month, to a maximum of 20 months. In the very worst-case scenario, where the taxpayer was assessed a late-filing penalty within the previous three years, the current return is more than 20 months late, and the Minister has issued a formal "demand to file", the penalty assessed can reach 50% of the unpaid tax amount.

Even where a refund is expected, and there is, consequently, no risk of incurring late-filing penalties, it doesn't make sense to put off filing. While the CRA pays compound daily interest (at a rate of 3% for the April to June 2009 period) on overpayments of taxes, the interest clock on such payments doesn't start running until the latest of the following three dates: May 31, 2009; the 31st day after the return is filed; or the day after the taxes are overpaid.

So, no matter what your situation, getting your return in on time makes sense. In the worst-case scenario, it can save you from paying substantial interest and penalties (now or in the future) or, where a refund is expected, can get your money into your hands more quickly, perhaps with interest added.

Figuring out what to claim

It would seem to make intuitive sense to claim whatever eligible costs you have incurred during the year in order to minimize your tax bill or increase your refund. But in some areas, "giving away" your deductions to other family members or deferring the claim until a future year can actually give you a much better tax result than just automatically claiming whatever amounts are available as those costs are incurred.

Taxpayers who are married enjoy some advantages in this area. By law, medical expenses incurred within a family (that is, by each spouse or by their children) can be claimed by either spouse. As well, charitable donations made by married individuals can be claimed by the person who made the donation or by his or her spouse. The ability to transfer or combine the amounts matters because, in the case of medical expenses, amounts claimable must pass certain income thresholds, and in the case of charitable donations, the credit percentage rises as donation amounts increase.

Medical expense claims

Under Canadian tax law, a 15% federal tax credit (as well as a provincial credit, the amount of which varies, depending on the taxpayer's province of residence) may be claimed for qualifying medical expenses over a specified income threshold. Federally, for 2008, that threshold is equal to the lesser of $1,962 and 3% of net income. Consequently, it makes sense to maximize the amount of claimable expenses by having by one member of the family make the claim for qualifying expenses incurred by all family members and for the person claiming to be the lower-income spouse.

It is also possible to plan around the timing of medical expenses. Medical expenses claimed on a tax return can be any qualifying expenses incurred in any 12-month period that ended during the tax year. So it makes sense to pick the 12-month period that maximizes the amount of expenses. Take, for instance, a family whose medical expenses were not out of the ordinary during 2008 but who incurred significant medical expenses (perhaps for unexpected dental or vision care costs or prescription drug expenses) in the first two months of 2009. When filing the return for 2008, it might make sense to defer the claim for medical expenses paid during 2008, where that claim might only produce a small credit or no credit at all, and the medical expenses incurred during calendar 2008 would be "wasted" from a tax point of view. When the 2009 return is filed at this time next year, claiming all medical expenses incurred between March 1, 2008 and February 28, 2009 might produce a better tax result. Because each case is different, in terms of when medical expenses are incurred, and the income of the taxpayer or taxpayers for different tax years, there are no real rules of thumb that can determine when it makes sense to defer a medical claim. In all cases, it is a matter of doing the calculations to determine which claim period produces the best tax result.

Claiming charitable donations

Our tax system provides a credit, at both the federal and provincial levels, for all charitable donations made. Unlike with the medical expense claim, the income of the taxpayer plays no part in determining the availability or amount of such a claim. However, our tax system does reward more generous donors, in that the percentage amount of the credit increases as donation levels rise. Specifically, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation amount, while donations over $200 qualify for the same non-refundable tax credit at the rate of 29%.

As noted above, charitable donations made by an individual can be claimed by that individual or by his or her spouse. Since the credit percentage increases as donation levels rise, it only makes sense to combine the donations made by both spouses and claim them on one return. Since the available credit is unaffected by income level, it doesn't matter which spouse makes the claim, with one caveat. Since the credit is non-refundable, it should be claimed only by a taxpayer who has an actual tax liability for the year.

Taxpayers also have some flexibility in timing the claiming of their charitable deduction contributions. Contributions made can be claimed in the year that they are made or in any of the five successive taxation years. Therefore, it will usually make sense, where donation amounts for a single year do not exceed the $200 threshold, to wait and aggregate donations made in two or more years, in order to maximize the credit claimable.

As the tax filing deadline gets closer and closer, it's true that the chances to make any really significant changes to one's tax liability for the year diminish. Nonetheless, paying close attention to the details when filing can produce a better bottom line result - and an incentive to start planning earlier next year!

It is a sad but inescapable reality that the number of personal bankruptcies taking place in Canada has risen dramatically over the past year or so, and current economic news gives every indication that that trend will continue. A Statistics Canada report issued in December 2008 showed that for that month, the number of consumer (as opposed to business) bankruptcies rose by just over 50% on a year-over-year basis. The increase was particularly dramatic in the province of Alberta, where the number of individuals declaring personal bankruptcy more than doubled on a year-over-year basis. The only province where the number of consumer bankruptcies actually went down during the same period was Newfoundland and Labrador.

It is a sad but inescapable reality that the number of personal bankruptcies taking place in Canada has risen dramatically over the past year or so, and current economic news gives every indication that that trend will continue. A Statistics Canada report issued in December 2008 showed that for that month, the number of consumer (as opposed to business) bankruptcies rose by just over 50% on a year-over-year basis. The increase was particularly dramatic in the province of Alberta, where the number of individuals declaring personal bankruptcy more than doubled on a year-over-year basis. The only province where the number of consumer bankruptcies actually went down during the same period was Newfoundland and Labrador.

A declaration of personal bankruptcy, and the events leading to that declaration, affect the life of the person involved (and, in many cases, that person's family) in any number of ways, which could include the loss of a home, the loss of retirement savings, and, in many cases, a negative impact on one's future ability to access credit. And as with almost every other significant financial event in one's life, there are tax consequences to declaring bankruptcy. What follows is a general outline of how one's tax and tax-filing obligations are affected by a declaration of personal bankruptcy.

Most Canadians, fortunately, have never had reason to become familiar with what happens when bankruptcy is declared. In very general terms, control of the bankrupt person's assets are turned over to a trustee in bankruptcy, who oversees the distribution of those assets to the various creditors who come forward to make a claim on them. When that distribution of assets is complete, a process that generally takes no more than a year, the bankrupt individual is discharged from bankruptcy and has a fresh start.

Generally, where a bankruptcy occurs, the taxpayer's income or loss for the year of bankruptcy is divided into three portions, which must be reported on three separate tax returns. The trustee is responsible for the filing of one of those returns, while others remain the responsibility of the bankrupt taxpayer.

Take, for example, a taxpayer who declares bankruptcy on June 1, 2009, and is then discharged from bankruptcy on December 31, 2009. The filing obligations for such a taxpayer for the 2009 tax year will be as follows.

First, when bankruptcy is declared, the taxpayer is deemed to have a year end that occurred the day before the declaration of bankruptcy. So, in this case, the taxpayer will be deemed to have had a year end on May 31 and must file a tax return for the period of January 1, 2009, to May 31, 2009. That return will be due on or before April 30, 2010. In completing the return for the January-to-May period, the taxpayer can claim pension income credits, CPP/EI premium contribution credits, medical expense credits, tuition and education credits, and student loan interest credits which related to income received or expenditures made during that period. So, where student loan interest was paid or medical expenses incurred in any of those months, the taxpayer is entitled to claim credit for those costs on the return filed for the period. The tax credit for charitable donations made during the pre-bankruptcy period is also claimed on this return. Slightly different rules apply, however, when it comes to claiming "status" credits, such as the basic personal amount, the age amount, or the disability credit. Such credit amounts must be prorated, based on the proportion that the number of days in the tax year which fell before the date of bankruptcy is of the total number of days in the year.

The trustee in bankruptcy must also file a return, which accounts for the trustee's dealings with the bankrupt individual's property during the period of bankruptcy, and that return must be filed by the end of March in the following year.

Finally, the bankrupt individual must also file a return for the period from the date of bankruptcy to the end of the tax year. In the example outlined above, that would cover the period from June 1 to December 31, 2009. That return must, in effect, report any income for the period that was not reported on the trustee's return; for example, employment income earned during the period following the declaration of bankruptcy.

The requirement for multiple returns that must be filed where a taxpayer declares bankruptcy, and the rules that govern whether and to what extent certain credits or deductions can be claimed on each of those returns, can be complex and confusing. However, a taxpayer who has declared bankruptcy will already be working with a trustee and, in all likelihood, a lawyer, both of whom should be familiar with the rules governing such filings. Relying on their expertise should allow the taxpayer to comply fully with all such requirements and to emerge from bankruptcy with all obligations satisfied and ready to make a new start.

For most Canadians, the purchase of a home represents the single biggest financial obligation of a lifetime. And for all but a fortunate few, purchasing a home means taking on a mortgage and, with it, decades of interest payments that will eventually total far more than the original cost of the home. It's not surprising, then, that Canadian taxpayers have repeatedly turned their minds to ways to minimize that unavoidable interest cost, at least on an after-tax basis.

For most Canadians, the purchase of a home represents the single biggest financial obligation of a lifetime. And for all but a fortunate few, purchasing a home means taking on a mortgage and, with it, decades of interest payments that will eventually total far more than the original cost of the home. It's not surprising, then, that Canadian taxpayers have repeatedly turned their minds to ways to minimize that unavoidable interest cost, at least on an after-tax basis.

Under Canadian tax law, interest is deductible for tax purposes only if it is paid on money borrowed to earn business or property income. Interest on loans to finance personal expenditures, such as a house, car, boat, vacation, or home improvements, is not deductible, with some specified exceptions, such as interest paid on government-sponsored student loans. As a consequence, most of the tax planning around home mortgage interest has been directed toward "converting" non-deductible home mortgage interest into deductible interest incurred for business or investment purposes. There have been some taxpayer victories along the way, but a recent Supreme Court of Canada decision may have signalled the end of the road for such tax planning strategies.

A little background: In the mid-1990s, a taxpayer by the name of Singleton, who was a partner in a law firm, withdrew funds from his partnership capital account and used those funds to purchase a house. He then borrowed funds to replace the money in the capital account and claimed an interest deduction for that borrowing. The Canada Revenue Agency denied the deduction, arguing that the overall purpose of the series of transactions was to purchase the house, so the related interest costs were not deductible. The taxpayer appealed, and eventually, the Supreme Court of Canada determined that the use to which the borrowed funds were put (that is, to replenish the taxpayer's capital account at his partnership) was sufficient to make interest paid on those funds deductible. It seemed that, with proper planning and the right structure, home mortgage interest deductibility could effectively be achieved.

A decade or so later, a couple by the name of Lipson carried out a somewhat similar transaction, in which the wife borrowed funds to purchase shares in her husband's investment company. The husband then used those funds to purchase a family home. A mortgage was then taken out on the family home and the monies used to repay the original share purchase loan. Since both the original loan and the mortgage had an investment purpose (i.e., they were related to the purchase of shares), and not a personal one, the taxpayers claimed a deduction for the interest paid on both. That interest deduction was denied by the Canada Revenue Agency, and, as in Singleton, the taxpayer appealed against the assessment. However, in this case, both the Tax Court of Canada and the Federal Court of Appeal found in favour of the CRA's position and denied the interest deduction. The taxpayer appealed to the Supreme Court of Canada, which recently decided that the lower courts were correct in denying the interest deduction to the taxpayer.

The Supreme Court of Canada's decision in Lipson v. Canada (available at http://scc.lexum.umontreal.ca/en/2009/2009scc1/2009scc1.html) was a narrow one, with four of the justices finding against the taxpayer while three others disagreed, holding that the interest deduction should have been allowed. As is often the case where the Court is split, the decision doesn't provide taxpayers or their advisors with firm guidance on the question of what now does or doesn't constitute allowable tax planning with respect to home mortgage interest deductibility. In denying the deduction, the majority of the Court relied upon the general anti-avoidance rule (GAAR) and looked at the overall result of the series of transactions carried out by the taxpayers to determine that the result obtained was a violation of that rule and should not be allowed. While similar planning had been employed in the Singleton case, the application of the GAAR to Singleton's plan had not been argued before the Court, so the result in Singleton was essentially irrelevant to the determination of the Lipsons' situation.

Whether the SCC decision in Lipson has driven the final nail in the coffin of home mortgage interest deductibility strategies is difficult to say. There's virtually no limit to the ingenuity of Canadian taxpayers and their advisors, and it's very likely that the courts will be called upon to consider this issue again. However, it's clear that, following the decision in Lipson, the possible application of the GAAR will play a part in any future case. It seems that any taxpayer who seeks to arrange his or her affairs to effectively make home mortgage interest deductible will face an uphill battle in claiming that interest deduction. 

Companies have to file a lot of different kinds of documents with all levels of government. That "paper burden" has been made somewhat easier in recent years by the availability of electronic filing options, especially when it came to filing information and income tax returns with the Canada Revenue Agency. However, up until now, the use of electronic filing methods has, for all but the largest corporations, been a matter of choice, not obligation. Following a proposal announced in this year's Budget, that is about to change.

Companies have to file a lot of different kinds of documents with all levels of government. That "paper burden" has been made somewhat easier in recent years by the availability of electronic filing options, especially when it came to filing information and income tax returns with the Canada Revenue Agency. However, up until now, the use of electronic filing methods has, for all but the largest corporations, been a matter of choice, not obligation. Following a proposal announced in this year's Budget, that is about to change.

Every corporation in Canada is required to file an annual income tax return with the CRA. Every corporation with even a single employee must file a T4 information return, outlining the amounts paid to that employee (or those employees) and taxable benefits provided, together with amounts withheld at source for income tax, Canada Pension Plan, and Employment Insurance. While those are by no means the only filing obligations imposed on corporations, they are the most common obligations that will be affected by this year's Budget proposal.

Under current rules, there is a requirement that corporations file their T4 information returns electronically, but only where the number of employees (and therefore the number of T4s) is greater than 500. The Budget proposal provides that where current rules require a particular type of corporate information return to be filed electronically, the number of returns that may be filed before the electronic filing requirement applies will be reduced from 500 to 50. Consequently, while only a small minority of corporations (StatsCan figures show that, in 2005, only 0.1 per cent of Canadian businesses had more than 500 employees) were formerly required to file their information returns electronically, that requirement will be extended to apply, after 2009, to all companies filing more than 50 of any particular kind of information return. In particular, companies having more than 50 employees will have to file their T4 information returns electronically.

All Canadian corporations, regardless of size, are required to file an annual income tax return, even if no tax is payable or the company operated at a loss. While many companies already utilize the electronic filing option, the CRA is about to make that mandatory for larger companies. Specifically, where a company has gross revenue of more than $1 million for the year, the tax return for that year must be filed electronically. The new requirement applies to returns filed for corporate tax years ending after 2009.

Recognizing that the need to file a corporate income tax return electronically for the first time will likely require some adjustment to corporate bookkeeping and accounting practices, and perhaps investments in new software, the CRA will be providing affected corporations with a "grace period" when it comes to penalties. Although the new requirement will apply to corporate taxation years ending after 2009, no penalties for a failure to comply will be imposed before 2011.

While the new electronic filing requirement for income tax returns applies, for now, only to fairly sizable companies (i.e., those that have gross revenues of more than $1 million), there cannot be much doubt that the CRA is moving in the direction of expanding electronic filing requirements to include smaller companies. Even those companies that are not immediately affected by this year's Budget proposals would likely be well advised to recognize that dealing with the CRA electronically will likely be part of their not-too-distant future and to prepare accordingly. 

Everyone knows that post-secondary education costs a lot of money, and most parents know that the most tax-effective way to save for that education is through a Registered Education Savings Plan ("RESP"). While at one time the rules governing RESPs could be somewhat rigid in their application, the federal government has taken a number of steps over the past several years to relax those rules, in order to increase their flexibility and, by doing so, to make it easier for families to save for post-secondary education. The most recent set of changes was announced in this year's federal Budget and is already in place for 2008.

Everyone knows that post-secondary education costs a lot of money, and most parents know that the most tax-effective way to save for that education is through a Registered Education Savings Plan ("RESP"). While at one time the rules governing RESPs could be somewhat rigid in their application, the federal government has taken a number of steps over the past several years to relax those rules, in order to increase their flexibility and, by doing so, to make it easier for families to save for post-secondary education. The most recent set of changes was announced in this year's federal Budget and is already in place for 2008.

In general, the changes announced this year extend many of the time-frame deadlines that apply to RESPs. Perhaps the most important change for most families is the 10-year extension provided for both the number of available contribution years and the contribution age limit for beneficiaries of a family plan.

Both those limits have been extended from 21 years to 31 years. In other words, contributions to an individual RESP can be made for up to 31 years after the plan is set up, and for family plans, contributions can be made for any plan beneficiary who is under the age of 31. While most parents are understandably hoping to be finished financing post-secondary education by the time their child reaches his or her 30s, the extension does enable parents to continue to contributing to an RESP for a child still working toward a first or second university degree. Parents who set up an RESP when a child was born can now continue to make contributions through the undergraduate years and even through graduate school or professional education, while continuing to enjoy the benefits of tax-sheltered growth of those funds inside the RESP.

In 2007, the federal government also amended the RESP rules by replacing the annual contribution limits formerly in place with a lifetime contribution limit of $50,000 per beneficiary. The extended time now available for contributions will enable many families who might not have been able to make annual contributions in earlier years to make fuller use of the $50,000 lifetime limit.

Changes have also been made to the age and time limits with respect to RESP beneficiaries who are eligible for the federal disability tax credit (DTC). The overall changes are summarized in the following chart, which appeared in the Explanatory Notes issued as part of this year's federal Budget.

Proposed Changes to RESP Time Limits
Time Limit	Current	Proposed
Number of contribution years after plan entered into	21 years For DTC beneficiary plans, 25 years	31 years For DTC beneficiary plans, 35 years
Deadline for plan termination	Year that includes the 25th anniversary of the plan For DTC beneficiary plans, year that includes the 30th anniversary of the plan	Year that includes the 35th anniversary of the plan For DTC beneficiary plans, year that includes the 40th anniversary of the plan
Contribution age limit for family plan	No contributions for beneficiary who is 21 years of age or older	No contributions for beneficiary who is 31 years of age or older

These changes will apply for the 2008 and subsequent taxation years.