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

Corporate:

Issue #24 Corporate

Personal:

Issue #24 Personal

Canadians have a well-deserved reputation for supporting charitable causes, through donations of money and goods. Our tax system supports that generosity by providing a tax credit, at both the federal and provincial/territorial levels, for donations made. Federally, taxpayers can claim a credit of 15% of the first $200 in donations plus 29% of donations over the $200 threshold. The tax credit provided by the provinces and territories works in much the same way, in that a tax credit is provided on the first $200 in donations at the lowest tax rate imposed by that province or territory, and a credit on donations above the $200 level at the province or territory’s highest tax rate. The only exceptions are the provinces of Alberta and Quebec. Alberta provides a credit of 10% on the first $200 in donations, and a credit of 21% on the balance. Quebec provides a charitable donations tax credit on the first $200 of donations at the 20% rate applicable to its middle income bracket. Donations above the $200 threshold are eligible for credit at the province’s top tax rate of 24%.

An announcement in this year’s federal Budget will provide a one-time opportunity for those who have not been particularly charitably inclined in recent years, for whatever reason, to remedy that situation and to gain some significant tax benefit for doing so.

That benefit arises from what the budget papers termed the “First-Time Donors Super- Credit”. The name is somewhat misleading, as the credit is not available just to first-time donors, but to anyone who has not claimed a charitable donations tax credit since 2007. So where no charitable donations were claimed by a taxpayer or his or her spouse on the 2008, 2009, 2010, 2011, or 2012 tax return, the one-time “super-credit” will be claimable for any such donations made after March 20, 2013 and before 2018.

Calling the new initiative a “super-credit” is not an exaggeration. While the usual federal tax credit rate for donations under and above the $200 threshold is 15% and 29% respectively, the super-credit will provide such credit at the rates of 40% (for donations under $200) and 54% (for donations over $200, to a maximum of $1,000 in donations).

There are a couple of restrictions on donations which qualify for the super-credit. Only donations of money (not goods) will qualify for the super-credit, and that super-credit can only be claimed once. That claim can be made on any tax return for the 2013, 2014, 2015, 2016, or 2017 tax years. As is the usual rule for charitable donations tax credit claims, the super-credit can be claimed solely by one spouse for donations made by either, or can be shared between spouses. However, if the super-credit is divided, it can be claimed on only $1,000 in total donations.

As is the case with any charitable donation, the super-credit will be claimable only for donations of money to registered charities. Any charity seeking or receiving a donation should be able to provide a registered charitable number, and a searchable current listing of registered charities can be found on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html.

Beginning July 1, 2013, Canadians who are 65 years of age will, for the first time, need to decide when they want to begin receiving their Old Age Security benefit.

Beginning July 1, 2013, Canadians who are 65 years of age will, for the first time, need to decide when they want to begin receiving their Old Age Security benefit.

To make sense of the change, a bit of background is required. The OAS program is one of two federal government programs which provide income to Canadians during retirement, the other such program being the Canada Pension Plan (CPP). While the CPP is funded by contributions made by Canadians and their employers during the working lives of those Canadians, the OAS is a non-contributory plan, for which benefits are paid out of federal government general revenues. Eligibility for OAS benefits is based on an individual’s age and number of years of Canadian residence. Anyone who is 65 years of age or older and has lived in Canada for at least 40 years after the age of 18 is eligible to receive the maximum benefit. As of April 2013, that maximum monthly benefit is $546.

As everyone knows by now, the Canadian population is aging and as a result, more and more Canadians will be receiving OAS benefits. In the federal government’s view, the approaching increase in the number of OAS recipients creates a risk to the long-term financial viability of the OAS system. The federal government responded with a number of changes to that system, all announced as part of the 2012 federal Budget.

At the time the changes were announced, most attention was focused on the gradual increase in the eligibility age for OAS benefits from age 65 to age 67, which will affect Canadians born on April 1, 1958 or later. Another budgetary change, however, provided that, as of July 1, 2013, Canadians eligible to receive OAS benefits would be able to defer receipt of those benefits for up to five years, when they turned 70 years of age. For each month that an individual Canadian deferred receipt of those benefits, the amount of benefit eventually received would increase by 0.6%. The longer the period of deferral, the greater the amount of monthly benefit eventually received. Where receipt of OAS benefits is deferred for a full 5 years, until age 70, the monthly benefit received is increased by 36%. The dollar figure effect of short-term and longer-term deferrals is shown in the following examples prepared by Service Canada.

Example: One-Year OAS Deferral

Michael will be turning 65 in September 2013.

Instead of taking up his OAS pension at age 65, he plans to continue working a year longer and defer the pension until age 66.

When he takes up his OAS pension at age 66, his annual pension will be $6,948 instead of $6,481 (in 2012 dollars).

Example: Five-Year OAS Deferral

Rita will be turning 65 in December 2013.

She plans to continue working as long as she can. She prefers to forgo her OAS pension for the maximum deferral period of five years so that she can have a substantially higher annual pension amount, starting at age 70.

When she takes up her OAS pension at age 70, her annual pension will be $8,814 instead of $6,481 (in 2012 dollars).

The decision of whether to defer receipt of OAS benefits and for how long is very much an individual one—there really aren’t any “one size fits all” rules. There are, however, some general considerations which are common to most taxpayers. Essentially, the first consideration in determining when to begin receiving OAS benefits requires the taxpayer who is turning 65 to consider how much total income is needed to finance current needs and the extent to which other sources of income are available to him or her to meet those needs. It’s also necessary to determine what other sources of income (Canada Pension Plan retirement benefits, employer-sponsored pension plan benefits, required RRSP withdrawals, etc.) will become available in the future and when receipt of those income amounts will commence. Once income needs and sources and the possible timing of each is clear, it’s necessary to consider the income tax implications of how receipt of those sources of income is structured. In doing so, taxpayers need to be aware of the following income tax thresholds and cut-offs.

• Income in the first federal tax bracket is taxed at 15%, while income in the second bracket is taxed at 22%. For 2013, that second income tax bracket begins at taxable income of $43,561.
• The Canadian tax system provides (for 2013) a non-refundable tax credit of $6,854 for taxpayers who are over the age of 65 at the end of the tax year. That amount of that credit is reduced once the taxpayer’s net income for the year exceeds $34,562, and disappears entirely for taxpayers with net income over $80,256.
• Individuals can receive a GST/HST refundable tax credit, which is paid quarterly. For 2013, the full credit is payable to individual taxpayers whose net income is less than $34,561.
• Taxpayers who receive Old Age Security benefits and have income over a prescribed amount are required to repay a portion of those benefits. Benefits begin to be “clawed back” when taxpayer income for 2013 is more than $70,954. Taxpayers having income of over $114,640 are not eligible for OAS and must repay any OAS benefits received.

The goal, as always, is to ensure sufficient income to finance a comfortable lifestyle while at the same time minimizing both the tax bite and the potential loss of tax credits (or the need to repay benefits received). Taxpayers who are trying to decide when to begin receiving OAS benefits could, depending on their circumstances, be affected by one or more of the following considerations.

What other sources of income are currently available?

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

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

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

Does the taxpayer have private retirement savings through an RRSP?

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

Finally, not all of the factors in deciding how to structure retirement income are based on purely financial and tax considerations. There are other, more personal issues and choices which come into play. Those include the state of one’s health at age 65 and the consequent implications for longevity, which might argue for accelerating receipt of any available income. Conversely, individuals who have a family history of longevity and who plan to continue working for as long as they can may be better off deferring receipt of retirement income where such deferral is possible.

Many Canadians put off plans, like a desire to travel, until their retirement years. Realistically, from a health standpoint, such plans are more likely to be possible earlier rather than later in retirement. Generally speaking, the early years of retirement are the most active years, and the years in which expenses for activities are likely to be highest. Having such plans might argue for accelerating income into the early retirement years, when it can be used to make those plans possible.

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

Individuals who are facing that decision- making process will find some assistance on the Service Canada Web site. That site provides a Retirement Income Calculator, which, based on information input by the user, will calculate the amount of OAS which would be payable at different ages. The calculator will also determine, based on current RRSP savings, the monthly income amount which those RRSP funds will provide during retirement. Finally, taxpayers who have a Canada Pension Plan Statement of Contributions which outlines their CPP entitlement at age 65 will be able to determine the monthly benefit which would be payable where CPP retirement benefits commence at different ages between 60 and 70.

The Retirement Income Calculator can be found at http://www.servicecanada.gc.ca/eng/isp/common/cricinfo.shtml.

As of the middle of April, the Canada Revenue Agency (CRA) had received just under 10 million individual income tax returns for the 2012 tax year. It’s a near certainty that some number of those 10 million tax filers will discover, after the return is filed, that a mistake was made—that information on some sources of income was inadvertently omitted, that figures were stated or added incorrectly, or that a deductible or creditable expense or expenses were overlooked.

As of the middle of April, the Canada Revenue Agency (CRA) had received just under 10 million individual income tax returns for the 2012 tax year. It’s a near certainty that some number of those 10 million tax filers will discover, after the return is filed, that a mistake was made—that information on some sources of income was inadvertently omitted, that figures were stated or added incorrectly, or that a deductible or creditable expense or expenses were overlooked.

Errors on a tax return can be made for any number of reasons. Those who file early may receive an information slip or receipt after the return has already been sent in. (Although filing of 2012 tax returns was possible as early as February 11, 2013, the deadline by which information slips had to be issued was not until the end of that month.) In other cases, taxpayers may simply have overlooked or misplaced one or more slips of paper, or just written or inputted a figure incorrectly.

This year, the potential for individual tax filing errors is perhaps greater than usual. As of January 2013, the CRA ceased mailing personalized income tax return packages to Canadians, and so more than the usual number of taxpayers may be scrambling at the last minute to obtain and complete a return form for 2012. Where information is gathered and returns prepared just in time to meet the filing deadline, those returns are more likely to contain filing errors. Perhaps more significantly, as of the 2012 filing season, the CRA no longer provides a simplified tax return form (the T1 Special) for taxpayers who have straightforward tax situations. Taxpayers who previously filed using a T1 Special will, therefore, have to deal with completing a tax return form which is both unfamiliar and more complex than the one they used in previous years, increasing the likelihood that an error will be made in completing that return.

Some errors made on filing are corrected by the CRA as part of their assessing process. Where an arithmetical error has been made in adding up a column of figures, the CRA’s computers will calculate the correct result. As well, in some limited instances, the CRA will identify amounts to which the taxpayer is entitled (e.g., an overpayment of Canada Pension Plan premiums) and assess on that basis. In most cases, however, the CRA must assess a return based on the information provided by the taxpayer. Where that information is incorrect, it’s up to the taxpayer to notify the CRA of the mistake and to provide corrected information.

Most taxpayers who discover that an incorrect return has been filed, are at a loss to know how to fix it. The first reaction of such taxpayers is often to file another return which contains the correct information, but that’s not the right answer. Where a taxpayer realizes that a mistake has been made on an already-filed return, the correct course of action is to wait until the return has been processed and a Notice of Assessment has been received from the CRA. Once that Notice of Assessment is received, the taxpayer can act to correct the error.

There are a couple of means by which an error made on a return can be corrected after the Notice of Assessment is received. Taxpayers who are already registered for the CRA’s online service My Account can make that change through the “Change my return” option on My Account. It’s also possible to register for My Account for the first time in order to make the correction. Registering for My Account isn’t difficult (the steps to be taken to do so are outlined on the Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html; however, it does take a few weeks to complete the process. Although the CRA does provide a more streamlined service feature for obtaining individual tax information (“Quick Access”), it is not possible to amend a tax return using that feature.

Taxpayers who don’t want to deal with the CRA through the Web site, or who don’t think it’s worth registering for My Account just to deal with the Agency on a single issue can obtain a hard copy of a T1 Adjustment form from the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-adj/t1-adj-12e.pdf or by calling the CRA’s Individual Income Tax Enquiries service at 1-800-959-8281. The use of the actual form isn’t mandatory—a letter to the CRA signed by the taxpayer is an acceptable alternative—but using a standardized form has two benefits. First, it makes it clear to the CRA that an adjustment is being requested. Secondly, filling out the form will ensure that the CRA is provided with all the information needed to process the requested adjustment. Once the form or letter is completed, it should be mailed or faxed to the Tax Centre to which the original return was sent. A taxpayer who isn’t sure anymore where that was can go on the CRA Web site at http://www.cra-arc.gc.ca/cntct/tso-bsf-eng.html and, by selecting his or her location from a drop-down menu of provinces and cities, can obtain the address of the Tax Centre (not the Tax Services Office) to which the adjustment request should be sent.

Sometimes, it’s the CRA which discovers that a return is incomplete or that further information is needed to properly assess the return. In such circumstances, the CRA will contact the taxpayer even before the return is assessed, to request further information or documentation of deductions or credits claimed (for example, information on the custody of a child where one parent has claimed an equivalent to spouse deduction, or receipts documenting child care expenses claimed). In all cases, the best thing to do is respond to such requests promptly, and to provide the requested documents or information. The CRA can assess only on the basis of information with which it is provided, and where a request for information or supporting documents for a deduction or credit claimed is ignored by the taxpayer, the assessment will proceed on the basis that that such support does not exist. Providing the requested information or supporting documents can often resolve the question to the CRA’s satisfaction, and the assessment of the taxpayer’s return can then proceed.

A little-noticed provision contained in this year’s federal budget could result in some business owners not receiving their GST/HST refunds as expected.

Virtually all businesses in Canada must register for GST/HST purposes. Excluding businesses in certain specialized sectors (like charities), all businesses which have annual taxable sales of goods and/or services (that is, sales on which harmonized sales tax (HST) or goods and services tax (GST) must be charged) totaling more than $30,000 must register their business for GST/HST purposes.

A little-noticed provision contained in this year’s federal budget could result in some business owners not receiving their GST/HST refunds as expected.

Virtually all businesses in Canada must register for GST/HST purposes. Excluding businesses in certain specialized sectors (like charities), all businesses which have annual taxable sales of goods and/or services (that is, sales on which harmonized sales tax (HST) or goods and services tax (GST) must be charged) totaling more than $30,000 must register their business for GST/HST purposes.

As part of that registration process, the business owner must provide information about the business, including the following:

• how the business is structured;
• the legal name of the business;
• the operating or trade name of the business;
• the effective date of registration;
• the full name of at least one owner, partner, or director and, where the business is a sole proprietorship, the owner’s social insurance number;
• the physical location (i.e., address) of the business; and
• the business activity and fiscal year-end of the business.

Once registration is done, businesses must file GST/HST returns on a prescribed schedule, reporting the amount of GST/HST collected and claiming input tax credits (or, for businesses using the streamline quick method, a prescribed percentage of HST or GST-included sales) on HST or GST amounts paid for supplies and services used by the business. While the information requirements for registration purposes seem fairly straightforward, there is apparently a significant amount of non-compliance with those requirements, at least in the view of the Canada Revenue Agency (CRA).

Under pre-budget rules, businesses which did not comply with the business information requirements could be assessed a penalty of $100 for such failure. In the government’s view, however, it seems that that penalty has not been a sufficient deterrent to prevent non-compliance, and it has concluded that stronger sanctions are needed.

In order to ensure such compliance, the budget provides that, where a business has failed to provide business identification information as required, the CRA will have the authority to withhold any GST/HST refunds which the business has claimed, without limit and for an indefinite period, until such time as that business brings itself into compliance with the business identification information requirements.

The budget papers indicate that “[t]he Minister of National Revenue will exercise this authority to withhold refunds in a fair and judicious manner”. However, no further details on how the provision will be administered—for instance, whether there will be a grace period during which non-compliant businesses can bring themselves into compliance, or whether any notice to affected businesses will be provided before GST/HST refunds are withheld—are contained in the budget.

There is, however, time for businesses which have not in the past complied with the rules to do so, as the new penalty provision will not take effect until the enacting legislation is passed by Parliament and completes the legislative process, which is likely to take at least several weeks. 

Many business owners are likely not sure whether they are in fact in compliance with the GST/HST business information disclosure requirements. Finding out, however, is a straightforward process—a business owner can simply call the CRA’s business enquiries line at 1-800-959-5525 to enquire as to the status of his or her account. Before doing so, it’s necessary to have at hand information on the business—at a minimum, the business number, the business owner’s social insurance number, and the business address and telephone number. As well, the business owner may possibly be asked to provide information from previous GST/HST filings for the business. Such information will be needed to satisfy the CRA’s information security requirements. Where there is business information outstanding, that information can be provided to the CRA’s client services agent, in order to bring the business into compliance with the federal government’s requirements.

The new penalty provisions will take effect when the enabling legislation receives Royal Assent, which will likely be a few months from now. Business owners would be well advised to ensure, in the meantime, that they are in compliance with all information requirements. Failing or neglecting to do so may result in a delay in receiving anticipated GST/HST refunds, something no business owner wants. 

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

 Corporate:

Issue #23 Corporate

Personal:

Issue #23 Personal

The Canada Revenue Agency (CRA) has issued a Tax Tip reminding small business owners who are eligible for the Hiring Credit for Small Business (HCSB) for 2012 that they can receive that credit when they file their 2012 T4 information return later this month.

The EI hiring credit, which was introduced for the 2011 tax year and later extended to also be available for 2012, provides small business owners with a tax credit equal to any increase in EI premiums paid by the business for 2012 over those paid for 2011. The maximum credit available is $1,000 and any amount receivable is automatically credited to the employer’s payroll account with the CRA. There is no requirement for the business owner to apply for the credit, as any available credit amount will be calculated by the CRA from the T4 information filed by the business for 2011 and 2012. For purposes of the credit, a small business owner is defined as one whose total employer EI premiums for 2011 were $10,000 or less. Employers who created a new business in 2012 may also be eligible.

The CRA’s Tax Tip also notes that eligible employers who have outstanding debt with the CRA may still receive the HCSB, but that any credit earned will first be applied to reduce that outstanding debt.

The Tax Tip issued by the CRA can be found on its Web site at http://www.cra-arc.gc.ca/nwsrm/txtps/2013/tt130123-eng.html. More detailed information on the 2012 credit can also be found on the Agency’s Web site at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/hwpyrllwrks/stps/hrng/hcsb-2012-eng.html.

It’s axiomatic that in tax, as in life, no one gets something for nothing. Or, to put it another way, if it sounds too good to be true, it probably is. When it comes to income tax, however, the benefits which can be obtained from pension income splitting are likely the closest thing to an exception to that rule. In a nutshell, pension income splitting allows married taxpayers over the age of 65, (or, for some types of income, those over the age of 60), when filing their tax returns, to divide their private pension income in a way which creates the best possible tax result, meaning the lowest possible tax bill.

Dividing income between spouses makes for a lower overall tax bill because of the way our tax system works. Canada’s tax system is what is known as a “progressive” tax system, in which the rate of tax imposed increases as income rises. In very general terms, the first $40,000 of taxable income attracts a combined federal-provincial rate of just over 20%. The next $40,000 of such income, however, is taxed at a rate of about 30%. When taxable income exceeds $125,000, the tax rate imposed can approach 50%. While those percentages and income thresholds will vary by province, provincial and territorial tax rates will, in nearly every province or territory, increase as taxable income goes up. (The one exception to that rule is the province of Alberta, which imposes a flat 10% tax rate on all individual taxable income. However, Alberta taxpayers, like those in other provinces, will still pay increasing federal rates as income rises.) Dividing income allows a greater proportion of that income to be taxed at lower rates. Of course, that means that the total tax payable (and therefore government tax revenues) will be reduced. Consequently, our tax laws include a set of rules known as the “attribution rules” which seek to prevent strategies to divide income in this way. Pension income splitting is a government-sanctioned exception to those attribution rules.

The concept of pension income splitting doesn’t get a lot of attention by comparison to registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), or even registered education savings plans (RESPs). There are no TV commercials or other media promotions for pension income splitting—in fact, the mention of such a tax-saving strategy will likely draw a blank look from most Canadians, even those who could benefit from it. Even the tax return filing guide issued annually by the Canada Revenue Agency (CRA) deals with pension income splitting only in terms of the mechanics of filing, with no reference to the benefits which can be obtained. Pension income splitting is one of those unusual tax planning strategies in which no one but the taxpayer gains a financial benefit. Consequently, unless a taxpayer is getting good tax planning or tax return preparation advice, it’s likely that he or she could overlook a significant opportunity to reduce the tax burden.

The general rule with respect to pension income splitting is that taxpayers who receive private pension income during the year are entitled to allocate up to half that income with a spouse for tax purposes. In this context private pension income means a pension received from a former employer and, where the income recipient is over the age of 65, payments from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF). Government source pensions, like payments from the Canada Pension Plan, Quebec Pension Plan or Old Age Security payments do not qualify for pension income splitting.

The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension plan administrator.

Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032(E)12, Joint Election to Split Pension Income, with their annual tax return. That form, which is not included in the general tax return package issued to Canadians by the CRA, can be found on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1032/t1032-12e.pdf.

On the T1032, the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for the particular tax year. Since the splitting of pension income affects both the income and the tax liability of both spouses, the election must be made and the form filed by both spouses—an election filed by only one spouse or the other won’t suffice. 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. That deduction is taken 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. Essentially, to benefit from pension income splitting, all that’s needed is to file a single form with the CRA and for each spouse to make a single entry on his or her tax return for the year.

The benefits of making that minimal effort can be significant. Take, for example, a couple over the age of 65 who have a combined income of $65,000, with the husband receiving $50,000 and the wife $15,000. Where, as part of his income, the husband receives $20,000 in eligible pension income (which could be income from a registered pension plan or withdrawals from an RRSP or a RRIF), he can allocate up to $10,000 of that eligible pension income to his wife. At his income level, the husband would pay about $3,000 in combined federal and provincial tax on that $10,000 of pension income. When that income is taxed instead on his wife’s return, the tax payable (since her total income is within the first, lowest tax bracket) will be about $2,000. As well, 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 reported or $2,000, whichever is less.) So, in this case, the wife who is allocated $10,000 in qualifying pension income can claim the full $2,000 pension tax credit on her return for the year the income is reported, thereby saving an additional $300 in federal income tax. Each of the provinces and territories also provides a pension income credit, in varying amounts. When that provincial or territorial credit is included in the calculation, the total tax payable on the $10,000 of eligible pension income allocated to the wife has been effectively cut by half.

Finally, in most cases, being able to claim a tax deduction or credit for a tax year requires the taxpayer to take any necessary actions before December 31st of that year. One of the best attributes of income splitting as a tax planning strategy is that it doesn’t have be addressed until it’s time to file the return for the year at the end of April. By the end of February or early March, taxpayers will have received the information slips which summarize their income for the year from various sources. At that time, couples who might benefit from this strategy can review those information slips and calculate the extent to which they can make a dent in their overall tax bill for the year through a little judicious income splitting.

While the annual return guide doesn’t provide much guidance when it comes to pension income splitting, the CRA does provide detailed information on its Web site, and that information can be found at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/menu-eng.html.

There is no change to federal corporate tax rates for 2013, meaning that the general federal corporate tax rate and the rate applied to income from manufacturing and processing will remain 15.0%.

There is no change to federal corporate tax rates for 2013, meaning that the general federal corporate tax rate and the rate applied to income from manufacturing and processing will remain 15.0%.

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

Dollar amounts on which individual non-refundable federal tax credits for 2013 are based, and the actual tax credit claimable, will be as follows:

                                                           Credit amount        Tax credit

Basic personal amount                                 11,038                1,656

Spouse or common-law partner
   amount                                                   11,038                1,656

Child amount                                               2,234                  335

Eligible dependant amount                           11,038                1,656

Age amount                                                 6,854                1,028

Net income threshold for
   erosion of credit                                       34,562
 
Infirm dependant amount (over 18)               6,530                  980

Net income threshold for                                      
   erosion of credit                                        6,548
              
Caregiver amount (for parent
  or grandparent)                                         4,490                  674

Net income threshold for                               
   erosion of credit                                      15,334

Disability amount                                        7,697                 1,155

Adoption expenses credit                            11,669                1,750

Medical expense tax credit
   threshold amount                                     2,152

Maximum refundable medical
   expense supplement                                1,142

Old Age Security clawback
   Income threshold                                    70,954

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

Credit amounts are converted to a non-refundable credit by multiplying the amount by the federal rate applicable to the lowest income bracket, which is 15.0% for 2013.

The indexing factor for federal tax credits and brackets for 2013 is 2.0%. Consequently, the following federal tax rates and brackets will be in effect for individuals for the 2013 tax year:

Income level                           Federal tax rate

$11,038 - $43,561                        15.0%

$43,562 - $87,123                        22.0%

$87,124 - $135,054                      26.0%

Above $135,054                           29.0%

There is no change in federal individual tax rates for 2013.

A number of tax changes will take effect on January 1, 2013, most of them affecting individual taxpayers. The more significant changes are listed.

A number of tax changes will take effect on January 1, 2013, most of them affecting individual taxpayers. The more significant changes are listed below.

Changes to CPP benefit rules for individuals receiving retirement benefits

Implementation of changes to the Canada Pension Plan system which were announced in 2011 will continue in 2013. Canadians can choose to receive their CPP retirement pensions at any time between the ages of 60 and 70. Where an individual chooses to begin receiving CPP before the age of 65, the monthly amount received is reduced. Conversely, where receipt of a CPP retirement benefit is deferred past the age of 65, the monthly pension amount increases. The most recent set of changes to the CPP, which are being phased in between 2011 and 2017, provide a financial incentive to delay receipt of the CPP until after age 65, and will impose a greater cost on those who choose to begin receiving the pension before that time. Specifically, the 0.5 percentage by which the pension amount payable is increased for each month that receipt is delayed after age 65 will itself increase—to 0.70% for 2013. On the other side of the coin, where an individual chooses to begin collecting CPP before age 65, the former reduction of 0.5% for each month before age 65 that pension payments start was also increased—to 0.54% for 2013, 0.56% for 2014, 0.58% for 2015, and 0.60% for 2016.

Individuals who reach the age of 60 during 2013 will need to determine, in light of these changes, whether to begin receiving CPP at that time or to defer receipt of those benefits, for up to 10 years.

RRSP deduction limit increases to $23,820

The RRSP contribution limit for the 2013 tax year (for which the contribution deadline is March 1, 2014) will increase to $23,820. In order to make the maximum contribution for 2013, it will be necessary to have had earned income for the 2012 taxation year of $132,335.

Increase in tax-free savings account contribution limit

The TFSA contribution limit for 2013 is increased for the first time since TFSAs were introduced in 2009. For 2013, that contribution limit is $5,500. Current year TFSA contributions can be made at any time during the calendar year. Where a contribution is not made during the calendar year, the contribution room is carried over and the contribution may be made in any subsequent taxation year.

Individual tax instalment deadlines for 2013

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 June 15 falls on a Saturday, and September 15 and December 15 fall on Sunday, the payment deadlines for tax instalments in 2013 will actually be March 15, June 17, September 16, and December 16.

For Canadians trying to purchase their first home, putting together the required down payment, when Canadian house prices in most markets are at record highs, is often the biggest hurdle. And, if that weren’t enough, changes made to the rules governing the financing of home ownership over the past few years have set the bar even higher.

For Canadians trying to purchase their first home, putting together the required down payment, when Canadian house prices in most markets are at record highs, is often the biggest hurdle. And, if that weren’t enough, changes made to the rules governing the financing of home ownership over the past few years have set the bar even higher.

In 2008, the federal government, concerned that borrowing by Canadians was reaching unsustainable levels and that borrowing secured by home equity was a particular problem, tightened the rules with respect to lending practices for home purchases. Notwithstanding those changes, borrowing by Canadians, when measured as a percentage of annual income, continued to increase and the federal government responded with further changes, announced in 2010 and again earlier this year.

Until the summer of 2008, it was possible to buy a home in Canada with a zero down payment (i.e., the entire cost of the home was borrowed) and to amortize repayment of that cost over up to 40 years—a time frame which put most purchasers past the traditional retirement age of 65 by the time the mortgage was paid off. The successive changes implemented by the federal government have whittled away at those practices. Borrowers are now required to have at least a 5% down payment on a residential home purchase. And, under the new rules announced earlier this year, the maximum amortization period on a residential mortgage was reduced from the then 30-year maximum to 25 years. More stringent borrowing requirements are also imposed on would-be home purchasers, in terms of the percentage of income which monthly housing-related costs (mortgage payments, property taxes, and home heating) are permitted to consume.

All of this leaves the would-be first-time home buyer further and further behind when it comes to putting together a sufficient down payment. There is however, another option available to that purchaser, and it’s one not just sanctioned, but created, by the federal government itself. That option is borrowing all or part of the down payment from one’s registered retirement savings plan (RRSP), on a tax-free and interest-free basis, under a program known as the Home Buyers’ Plan (HBP).

The HBP isn’t new, but in 2009 the federal government made some changes to enhance its usefulness. In the federal budget brought down in January 2009, it was announced that, effective for withdrawals made after January 27, 2009, the maximum permitted withdrawal from an RRSP under the HBP would be increased from $20,000 to $25,000, and the limit remains at $25,000 today.

While the rules governing HBPs can be detailed in their application, especially when it comes to any special circumstances or any contravention of those rules, the concept of the program is straightforward. A first-time home buyer who has entered into an agreement to purchase or build a home can withdraw up to $25,000 from his or her RRSP to purchase that home. The amount withdrawn is not taxed on withdrawal, as it usually would be, but must be repaid to the RRSP, without interest, over the subsequent 15 years, with the amount of each annual repayment prescribed by law. Where the first-time home buyer is married, and his or her spouse is also a first-time home buyer, the spouse can also withdraw up to $25,000 from his or her RRSP, and both withdrawals can be pooled to come up with a down payment.

There are some additional rules, as follows. The home purchased using funds borrowed under the HBP must be bought or built before October 1 of the year following the year of withdrawal. As well, the borrower (and his or her spouse, where applicable) must intend to occupy the home as the principal place of residence; the HBP is not intended to provide funds to purchase or build rental residential accommodation. There is, however, no minimum period of time that the buyer must live in the home.

The concept of a “first-time home buyer”, while seemingly self-explanatory, is in fact more flexible than it first appears. For purposes of the HBP, a first-time home buyer can actually be someone who has previously owned and lived in a home, as long as that home ownership ended more than four full calendar years prior to the time a withdrawal under the HBP is made. For instance, an individual who wishes to participate in the HBP by making a withdrawal during 2012 will be considered a first-time home buyer if he or she had not owned or occupied a home after the end of 2007, the four full required calendar years being 2008, 2009, 2010, and 2011. Where the prospective homeowner is married (including a common-law partnership), the same requirement must be met by the person’s spouse.

Whatever the amount withdrawn from the RRSP under the HBP (and there is no minimum withdrawal, only a maximum one), that amount must be repaid over the subsequent 15 years. The first repayment is required in the second year following the year of withdrawal so, in the case of the example above, where the withdrawal is made in 2012, the first repayment must be made in 2014. Each repayment is generally 1/15^th of the amount withdrawn so, a maximum withdrawal of $25,000 would mean an annual repayment amount of $1666.66. The taxpayer doesn’t have to keep track of where he or she stands with respect to the repayment schedule—each year, the Notice of Assessment received by the taxpayer after the annual return is filed will summarize the total HBP withdrawals, amounts repaid to date, the current HBP balance, and the amount of the next repayment which must be made. Such repayments are made by making a contribution to the taxpayer’s RRSP during or within 60 days after the end of the year for which the repayment is required, and designating part or all of that contribution as an HBP repayment on Schedule 7, which is filed with the tax return for that year. If the taxpayer does not make the repayment when and in the amount required, any outstanding amount is added to income for the year and taxed at the taxpayer’s top marginal rate.

Like all investment and tax-planning strategies, borrowing money from your RRSP to put together a down payment on a first home has both upsides and potential downsides. The biggest downside is the permanent loss of investment gains on the money temporarily withdrawn from the RRSP during that period of withdrawal. However, it’s also possible that the real estate purchased with the withdrawn funds will enjoy a greater increase in value over that period than would have earned by the funds had they remained in the RRSP. Like all investment and tax-planning decisions, it comes down to a personal decision based on one’s own circumstances.

The rules outlined above summarize the basic structure and operation of the Home Buyers’ Plan. However, anyone contemplating making use of the HBP will need to familiarize themselves with those rules in much greater detail, perhaps with the assistance of professional advisers. A good place to start is the guide to the HBP published by the Canada Revenue Agency, and available on their Web site at http://www.cra-arc.gc.ca/E/pub/tg/rc4135/README.html.

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By Athenea O’Bryan JD, LLB

On January 31, 2013, the Tax Court of Canada released Myrdan Investments Inc. v. The Queen and Daniel Halyk v. The Queen. These cases involve a business owner and the various business uses of his truck in the Alberta oil-patch.

Automobile audits by the Canada Revenue Agency ("CRA") are very common. Accordingly, these cases should be of particular interest to business owners who use motor vehicles for work and to their tax advisors.

Click here to view the entire blog.

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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.

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.