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

Corporate:

Issue #19 Corporate

Personal:

Issue #19 Personal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2012 tax year is filed in the spring of 2013. However, should instalments paid be late or insufficient, the CRA can impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2012—until March 31, 2012—is 5%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It’s also possible for the CRA to impose penalties, but this is done only where the amount of instalment interest charged for the year is more than $1,000.

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

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

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

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

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

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

In a similar way, for taxpayers over the age of 71, the RRSP v. TFSA question is simply irrelevant. Taxpayers over that age are not eligible to make contributions to an RRSP, making TFSAs the only tax-free savings vehicle to which they can make contributions. The benefit is greatest for older taxpayers whose required RRIF withdrawals are greater than their current needs. While such RRIF withdrawals must be included in income and taxed in the year of withdrawal, transferring the funds to a TFSA will allow them to continue compounding free of tax and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or for the federal age credit.

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

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

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

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

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

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

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

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

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

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

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

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

Every year, thousands of Canadians escape our winter by traveling south, usually to the U.S., for a few weeks or months, or even the whole winter. While recent fluctuations in the value of the Canadian dollar relative to the U.S. greenback might mean that a stay in the U.S. will be more expensive this year, the lure of warm temperatures and no snow will still win out for many.

The thoughts of such snowbirds, intent on escaping the Canadian winter, are typically on improving their golf game or enjoying the sunshine, and not on the tax implications of their whereabouts. Notwithstanding, there are tax consequences and costs which can result from spending an extended period of time outside of the country.

The following information pertains to Canadians who will be spending a few weeks or months south of the border on an annual vacation, and staying in a rental property or hotel. The situation changes where the actual purchase of a property located in the U.S. is contemplated, as the rules governing the purchase and ownership of such property by Canadians are complex. The 2008 mortgage lending debacle in the U.S. has put residential real estate on the market in places like Florida and Arizona at prices which can be hard to resist. A double caveat is, however, in order. Professional tax advice is a necessity whenever a purchase of real estate in another jurisdiction is being contemplated. And additional caution is warranted where the contemplated purchase is of a property which has been foreclosed on or is being sold under power of sale. There have been instances where Canadians have purchased such property in the U.S. only to later find out that the foreclosure was not properly carried out and title to the property which they have purchased is in dispute. That’s not a situation any new property owner wants to find themselves in, especially when it’s all happening in a foreign country.

Tax 101 for snowbirds

Typically, snowbirds who go south for the winter remain what is called, in tax parlance, “factual residents of Canada”. In practical terms, the income of such taxpayers is treated, for Canadian tax purposes, as though they had never left Canada. Factual residence is determined by the Canada Revenue Agency (CRA) on the basis of whether a taxpayer has maintained “residential ties” to Canada. Such residential ties could include continuing to own a home in Canada, having a spouse or dependants who remain in Canada while the snowbird is out of the country, having personal property (like a car) in Canada, and continuing to hold a Canadian driver’s licence and medical insurance.

The vast majority of snowbirds who winter down south do maintain sufficient residential ties to Canada to be considered factual residents. Consequently, when they file their tax returns for the year, they follow all the same rules as year-round Canadian residents. They report all income received during the year from both inside and outside Canada and claim all available deductions and credits. Income tax is paid to the federal government and to the province with which their residential ties are kept. Finally, snowbirds who remain factual residents of Canada remain eligible for the goods and services tax credit, which may be paid to recipients outside of Canada.

Health care coverage

One of the biggest concerns of many snowbirds is maintaining health care insurance coverage while out of the country. In all cases, the availability and degree of coverage will depend on the health care plan in effect for the province or territory of which the snowbird is a resident, and it’s necessary to confirm in advance the coverage which will be made available for out-of-Canada medical expenses. Most snowbirds end up obtaining supplementary health-care coverage, and the premiums paid for such coverage can usually be claimed as a medical expense on the Canada tax return. As well, any out-of-pocket costs incurred for eligible medical expenses while out of Canada (whether for the individual or his or her spouse) can be claimed as a medical expense on that year’s tax return.

Old Age Security and Canada Pension Plan payments

Both Old Age Security (OAS) and Canada Pension Plan (CPP) benefits can be paid to benefit recipients who are living outside Canada, and there is no change in the amount of the benefits. As well, such payments can be made by direct deposit, and in US dollars.

Both OAS and CPP benefits received will, of course, be subject to Canadian income tax and OAS payments will be subject to the OAS “recovery tax” (clawback), if the recipient’s income for the 2011 tax year is more than $67,668.

Application of U.S. tax laws

The application of U.S. tax laws to snowbirds can, unfortunately, be a good deal more complex than the equivalent Canadian laws, and any snowbird who thinks he or she may have a U.S. tax filing or payment obligation should certainly seek professional advice. That said, it is possible to summarize in a general way the basic rules which govern the application of U.S. tax laws to snowbirds.

Canadian residents who spend part of the year in the U.S. are classified as either resident aliens or non-resident aliens. Resident aliens are generally taxed in the U.S. on income from all sources worldwide and non-resident aliens are generally taxed in the U.S. only on income from U.S. sources. The classification depends, in the first instance, on the amount of time the person spends in the U.S. during a given calendar year. A person who was in the U.S. for 183 days or more (i.e., more than half the year) during the calendar year is considered to have met the “substantial presence” test and is classified as a resident alien of the U.S. At the other end of the spectrum, a person who was in the U.S. for less than 31 days during the calendar year is considered a non-resident alien. Those who fall in the middle (which would include most snowbirds who spend, for instance, the months of January and February in Florida or Arizona) may meet the substantial presence test, depending on the application of a complex formula which uses a weighted average of the number of days of residence in the current and two previous calendar years.

Recognizing that the tax consequences of spending extended periods of time south of the border will affect thousands of Canadian taxpayers, the CRA has published an information booklet on the subject, which is available on its Web site at http://www.cra-arc.gc.ca/E/pub/tg/p151/p151-10e.pdf. The Agency has also devoted a section of its Web site to issues affecting Canadians who vacation out of the country, and that information can be found at http://www.cra-arc.gc.ca/tx/nnrsdnts/sth-eng.html.
 
Even this brief summary is sufficient to illustrate the complexity of the U.S. tax laws as they may apply to snowbirds. The best advice for those whose plans include an extended stay south of the border, particularly if they are contemplating repeat visits on an annual basis, and certainly if they are contemplating the purchase of a U.S. vacation home, is to obtain professional advice in advance on the U.S. and Canadian tax consequences. Doing so can ensure that what was intended to be a relaxing vacation doesn’t end up causing a major tax headache.

At the beginning of 2012 changes will be made to the Canada Pension Plan which may affect Canadians who are both retired and currently receiving CPP retirement benefits and those who are contemplating retirement in the near future.

While the number of Canadians who could be affected by these changes is in the hundreds of thousands, there are some who don’t need to consider them. Canadians who have already retired and are receiving Canada Pension Plan benefits, but are either already age 70 or older, or have no plans to return to the work force, on either a part-time or full-time basis, can safely ignore these changes.

For most of the rest of us, some choices may have to be made, as follows.

Under current rules, it’s possible to choose to begin receiving CPP retirement benefits at any time between the ages of 60 and 70. However, once benefits start being paid, the recipient, even if he or she returns to the work force on a part-time or full-time basis, cannot contribute again to the Canada Pension Plan. As well, for Canadians less than 65 years of age, it is necessary, in order to begin receiving CPP retirement benefits, to be out of the work force, or to have significantly diminished earnings, for two months before benefits start. Both those rules are about to change.

The simplest change is the fact that it will be possible, as of January 1, 2012, to begin receiving CPP retirement benefits without any interruption in one’s working life. Where an individual chooses to stay in the work force while also receiving CPP benefits, it’s often the case that the choice is made from financial necessity. In such cases, a two-month interruption in earnings can impose a real hardship. That will no longer be the case.

The second change is that those who stay in the work force, or decide after retirement to return to the work force may, beginning January 1, 2012, also return to making CPP contributions. Where an individual who is between the ages of 60 and 65 and receiving CPP retirement benefits returns to the paid work force, he or she will be required to resume making CPP contributions—there is no choice in the matter. Where that individual is between the ages of 65 and 70, he or she will be able to choose whether or not to resume making such contributions. The decision is the employee’s, but the contributions will automatically be deducted from the employee’s pay, beginning January 1, 2012, unless he or she provides the employer with a signed Form CPT30, Election to Stop Contributing to the Canada Pension Plan, by the end of December 2011. That form is now available on the Canada Revenue Agency (CRA) Web site at http://www.cra-arc.gc.ca/E/pbg/tf/cpt30/cpt30-11e.pdf. Once completed and submitted to an employer, the form is effective as of the beginning of the following month, so the CRA Web site includes a reminder that it should not be completed or submitted until after November 30, 2011. As well, an employee who has signed and completed such a form and later has a change of heart can revoke the election, and once again start making CPP contributions, beginning in 2013.

One of the biggest decisions to make with respect to Canada Pension Plan retirement benefits is when to begin claiming and receiving such benefits. A lot of factors go into that decision—whether or not you are still in the workforce and how long you are planning to keep working, what other sources of income (i.e., private pension income, or annuity payments) are available, whether additional income is needed to meet current living costs, even one’s current state of health and family longevity history, etc. One of the biggest factors to consider, however, is the fact that the amount of pension received will depend on when one decides to start receiving it. And, the changes which are taking effect between 2011 and 2016 will make this a greater factor than it has been previously.

Before the changes, a CPP retirement pension was increased by 0.5% for each month after age 65 that the recipient delayed receiving it. Similarly, the amount receivable was decreased by 0.5% for each month before the age of 65 that recipient accelerated receiving it. For those who defer receipt, the monthly percentage increase will go from 0.6% in 2011 to 0.7% in 2013. That doesn’t sound like much, but it means that, by 2013, someone who defers receipt of their CPP pension until age 70, will receive a monthly pension amount which is 42% higher than it would have been if the same person had chosen to begin receiving that pension at age 65. The consequences are similar for those who choose to begin receiving CPP “early”. The reduction percentage will rise from 0.5% to 0.6% between 2012 and 2016. In practical terms, that means that someone who begins receiving their CPP pension in 2016 at the age of 60 will receive benefits that are 36% lower than they would have been if they had waited until age 65.

There is, of course, no right or wrong answer to the question of when it’s best to begin receiving CPP benefits, and certainly no “one size fits all” answer. In some cases, financial need may compel a person to begin receiving benefits at the earliest possible opportunity, regardless of the effect such a claim may have on the amount of those benefits. Others, who don’t necessarily need a CPP cheque to pay basic living expenses may nonetheless decide that they are willing to accept a lesser amount in order to have earlier access to those benefits and to use them to carry out —travel plans, for instance—which may not be as easy to accomplish later in life. Still others may decide to start using private retirement savings, like an RRSP, or begin receiving an employer-sponsored pension, while deferring receipt of CPP as long as possible. Whether any of these is the best course of action depends entirely on the individual’s circumstances (especially his or her financial circumstances) and their current and planned retirement lifestyle.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In 2007, the federal government introduced the EcoENERGY Retrofit program, which provided homeowners who made changes to their homes to make them more energy-efficient with grants of up to $5,000 per property to help offset the cost of those changes.

The EcoENERGY Retrofit program was scheduled to end on March 31, 2011. Instead, in the federal budget originally brought down on March 22 and re-introduced on June 6, the program was extended to be available between June 6, 2011 and March 31, 2012.

While the process for obtaining an EcoEnergy Retrofit grant is, in general, the same as it was under the “old” program, there are two changes of which homeowners need to be aware, as those changes will apply to any grant application made after June 6.

The first such change requires that a homeowner register for the program before making any changes to his or her home. Once that registration is done, an energy evaluation, which measures the energy efficiency of the home and identifies possible improvements to increase that efficiency, must be carried out, at the homeowner’s expense, by a licensed independent energy adviser. If the homeowner had already had such an energy evaluation conducted after April 2007, it is not necessary to carry out a second such evaluation. Once the energy evaluation is done, the retrofitting work can then be carried out, after which a post-retrofit energy evaluation is done to measure the effectiveness of the changes.

The second change to the program requires that, at the time the post-retrofit energy evaluation is carried out, the homeowner must provide the energy adviser with receipts for any products or equipment purchased in connection with the retrofit, in order to ensure both that those purchases were made after June 6, 2011, and were installed after a pre-retrofit energy evaluation was done.

At the time the pre-retrofit energy evaluation is carried out, the energy adviser will provide the homeowner with a report listing the changes which can be made to make the home more energy-efficient. Any such changes which are listed in the program’s Grant Table can qualify for a grant. That listing is long and detailed, but the qualifying changes generally fall into one of the following categories:

• Heating systems
• Cooling systems
• Ventilation systems
• Domestic hot water equipment
• Insulation
• Air sealing
• Windows/doors/skylights
• Water conservation

The EcoENERGY Retrofit program is intended to encourage renovation and improvements increasing the energy efficiency ofCanada’s existing housing stock. Consequently, no incentives are available for upgrades or other changes made to new homes. As well, the program does not apply to new construction, including additions made to existing homes. Generally, grants are provided to owners of existing low-rise residential properties, including single detached and attached homes (ie., row housing, duplexes, and triplexes), four-season cottages, mobile homes on a permanent foundation, and permanently-moored floating homes. Multi-unit residential buildings and mixed-use buildings may also be eligible for the grants if they meet certain criteria related to size and degree of residential use.

Homeowners who took advantage of the EcoENERGY Retrofit program during its first phase, between 2007 and 2011 may still participate in the renewed program, provided that they did not receive the maximum grant of $5,000. It’s important to note as well that the $5,000 cap applies per property and not per individual. Consequently, a property owner who owns multiple buildings (for example, a home and a cottage) may apply for grants in respect of each property, up to the $5,000 per property limit.

In addition, while the renewed program is scheduled to run from June 6, 2011 to March 31, 2012, meaning that any retrofits must be carried out and a post-retrofit evaluation done before the end of March 2012, it’s possible that the program will end prior to that date. The federal government has allocated $400 million to the renewed program, and information provided on the program Web site makes it clear that, once the program’s financial limit has been reached (i.e., $400 million worth of grants have been provided), the program will be closed to new participants, without notice.

Detailed information about the program can be found on the Web site of the Ministry of Natural Resources at http://oee.nrcan.gc.ca/residential/personal/grants.cfm?attr=0. A lengthy FAQ document is available at http://oee.nrcan.gc.ca/residential/personal/retrofit-homes/questions-answers.cfm?attr=4. If further information is required, the program office can be contacted at 1-800-622-6232.

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

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

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

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

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

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

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

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

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The Offshore Voluntary Disclosure Initiative will end on August 31, penalties are reduced to a range of 0 to 25% of the balance of all non-U.S. financial accounts and assets in 2010. (Roma Luciw [2011]. The Globe and Mail: U.S. tax crackdown hits Canadian residents, ¶9.). The full Globe and Mail article is here.

UPDATE:  The IRS has extended the deadline to SEPTEMBER 9, 2011

1. You spend less that 31 days in the US in a calendar year
   Less than 31 days in the US qualifies you as a visitor and there are no US tax obligations.
   
   
2. You spend between 31 and 183 days in the US in a calendar year
   As a general rule, if you have never spent more than 121 days in the US in any calendar year, you will have no US tax obligations. 
   
   If you have spent 122 days or more in the US in a calendar year, please refer to the IRS website for further information about the Substantive Presence Test and the possible US tax consequences of meeting this test.
   
   There are some exemptions to which days are included in the Substantive Presence Test for certain individuals.  The filing deadline for this exemption form is June 15th.  If you do not qualify for these exemptions or you do not meet the filing deadline for the US exemption form, then any day you are physically present in the US is included in your total days.  This means arrival and departure days and any days you may have made short trips of less than a day. 
   
   Even if you meet the Substantive Presence Test, you may still be treated as a non-resident if your primary residential ties are with Canada and you qualify for the Closer Connection Exception.  The filing deadline for this exception form is June 15th. 
   
   Detailed border crossing information is maintained by the US, so it is critical that you keep accurate records of your travels.
   
   
3. You spend more than 183 days in the US in a calendar year
   More than 183 days in any calendar years qualifies you as a resident alien for US tax purposes and you must file a US tax return.  You may be able to claim non-resident status if you are a dual resident; however, determining the best filing option is complicated and you should seek qualified advice.  Tax returns and elections must be filed by June 15th.

The United States Tax Laws require that all US persons file US federal income tax returns regardless of their country of residence.

Unlike Canada, the US tax system is based on citizenship rather than residency.  This means that if you meet the definition of a US person, you may have a personal, and potentially a corporate, tax filing requirement in the US.  Often the reporting requirements include filing numerous elections as well as income tax returns. 

In general, US citizens are defined as persons born in the USA, children born to a parent who is a US citizen, US green card holders and individuals meeting the Substantive Presence Test, which may apply to some Snowbirds.  Many Snowbirds plan their US visits with the ‘183 day’ limit in mind but the actual formula for calculating Substantive Presence may result in a lower allowable limit.   See 'Snowbirds' below for further details.

We want to ensure you are informed of the new and aggressive US tax compliance policies.  We have been advised by certain US tax consultants that the implications of not complying with US tax laws are potentially very severe and are likely to result, at the very least, in affected individuals’ losing their ability to enter the United States and incurring significant income tax penalties.

In February 2011, the IRS announced the creation of a voluntary disclosure program for taxpayers with unreported foreign assets.  The deadline is August 31, 2011.  There are certain important elections that
must be filed by this date in order to take advantage of the program and possibly avoid tax penalties.  
See ‘Voluntary Disclosure’ below for further details.

UPDATE:  The IRS has extended the deadline to SEPTEMBER 9, 2011

If you were born in the United States or there is any possibility that you could be considered a US person, please contact us so that we may direct you to US tax professionals to ensure you fully understand the costs and benefits of complying with the US tax laws.

In This Issue:

• CRA Letter Inititiave - Some will receive a letter about the eligibility criteria of certain deductions they have claimed on recent tax returns and that their tax returns maybe selected for audit.
• Medical Expenses - CRA has noted that in-vitro fertilization and sleep evaluation studies, as well as related travel costs, qualify as medical expenses for the medical tax credit as long as certain criteria are met.
• Social Events - There is no employee taxable benefit for social events to which all employees are invited free of charge, as long as the costs of the event do not exceed $100 per guest.
• Director Liability for GST/HST - Directors of corporations may be personally liable for un-remitted GST.  As well, if the director pays the GST and any related legal fees personally, these payments are not deductible in the corporation.
• Unclaimed Old Age Security - The Federal Tax Force noted that about 160,000 eligible seniors did not apply to receive Old Age Security
• 2012 Canada Pension Plan- Effective in 2012, if you are working in Canada between the ages of 65 and 70, you may choose to continue contributing to CPP or to opt out of further contributions.
   

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In This Issue:

• Medical Expenses - CRA notes that a dock landing gate, associated with the use of a wheelchair, is a medical expense to a dwelling of the person who lacks normal physical development or a prolonged mobility impairment.
• Disability Tax Credit (DTC) - If a taxpayer of a child uses intensive insulin management or an insulin pump with respect to Diabetes, they may qualify for the DTC.
• Scholarships for Children of Employees - If an arm's length employer provides a post-secondary scholarship, bursary or free tuition to family members of an employee under a bona fide Program, the amount may be non-taxable.
• Interest Expense - Interest costs in respect of funds borrowed to purchase common shares may be deductible on the basis that there is a reasonable expectation that they will receive dividends.
• Director Liability - Director of a corporation that failed to remit source deductions may be liable personally.
• Relationship Breakdown - It is possible that both spouses can "live apart" because of a marriage breakdown for deductible/taxable alimony purposes even if they still live under the same roof if they meet certain criteria.
• Family Income Splitting - Family income splitting may be achieved by making loans between members at the current prescribed interest rate.
• Web Tips - Cozi.com - this website is excellent for coordinating family life and schedules. 
• Pensions - Pension income facts for individuals who have reached 65 before the end of the year.

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