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

Corporate:

Issue #20 Corporate

Personal:

Issue #20 Personal

While it didn’t get a lot of attention in the coverage of the 2012-13 federal Budget (brought down at the end of March), one of the budget announcements was definitely good news for the small business sector, as the EI hiring credit which had been available during 2011 was extended for another year.

One of the perennial concerns of small businesses is the number and variety of levies which they pay to governments at all levels and the effect of those payments on the bottom line. At the federal government level, businesses must pay, in addition to income tax, Canada Pension Plan contributions and Employment Insurance premiums on behalf of their employees. Where an employee earns in excess of about $50,000 per year, the employer’s share of those levies reaches almost $3,500 for the year.

In last year’s budget, the federal government proposed and implemented a “hiring credit” for small business, which provided a non-refundable credit of up to $1,000 against any increase in the employer’s EI premiums payable over the previous year’s amount. As the EI premium rate did not increase substantially on a year-over-year basis, any significant increase in an employer’s EI premiums liability for the current year over the previous one would generally arise as the result of taking on new employees. In effect, the credit covered up to the first $1,000 of EI premiums payable by the employer for new hires during the year.

As the intent of the credit was to benefit small and medium sized businesses, limits were placed on the size of the companies which could claim the credit. Specifically, the credit was available only to companies whose total EI premiums for the immediately previous year were less than $10,000.    

In this year’s budget, the federal government announced that the credit will similarly be made available during 2012 to employers whose EI premium liability during 2011 was less than $10,000. As was the case last year, the credit will cover up to the first $1,000 of any year-over-year increase (i.e., from 2011 to 2012) in the EI premiums payable by the employer.

Any such increase in premiums must be paid “up front”, when the employer business remits its source deductions in the usual way. However, there is no need to make an application for the hiring credit, as any credit will automatically be calculated by the Canada Revenue Agency (CRA) and applied as a credit on the employer’s payroll account with the Agency.  More information on the credit for 2012 can be found on the CRA Web site at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/hwpyrllwrks/stps/hrng/hcsb-2012-eng.html.

As gas prices across Canada climb past the $1.30/litre mark, and some predictions are for $1.50/litre (or higher) gas costs by the summer, consumers are looking for just about any way to reduce their cost of getting around.

For most of us, the purchase of gasoline is, for all practical purposes, a non-discretionary expense. Since the money has to be spent, the question becomes this: Does our tax system offer any relief by way of a deduction or credit for the cost of driving? The answer, as it usually is in tax, is yes … and no. The bad news for most employee taxpayers is that the cost of driving to work and back home, and the cost of most non-work driving is considered a personal expense, for which no deduction or credit is allowed, no matter how high the cost gets. The news is not, however, uniformly bad. The self-employed, of whom there are an increasing number, can claim a deduction for business-related driving expenses. As well, all taxpayers are permitted to claim a deduction for driving or travel expenses incurred for certain specific purposes, like moving to take a job or travelling to obtain medical care. And, finally, for those who decide that the daily commute has just become too costly and turn to public transit (which includes everything from subways to suburban commuter trains to ferries) as an alternative, a tax credit is available to help offset the cost of that transit.

Where employees are required, as part of their terms of employment, to use their own vehicle for work-related travel (e.g., someone who is required to visit clients at their own premises for the purpose of meetings or other work-related activities), tax relief is available for the related costs. If the employer is prepared to certify on a Form T2200 that the employee was ordinarily required to work away from his employer’s place of business or in different places, that he or she is required to pay his or her own travelling expenses and that no tax-free allowance is provided by the employer for such expenses, the employee can deduct actual expenses incurred (including the cost of gas) for such work-related travel. It goes without saying that the employee must, in order to claim that deduction, keep a record of work-related travel done as well as records of travel-related expenses incurred.

The rules governing the taxation of employee automobile allowances and available deductions for employment-related automobile use (summarized on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/slry/mtrvhcl-eng.html), can be complicated. However, given the recent run-up in the cost of gasoline, as well as the anticipated increase ahead, it’s likely worth ensuring that every possible dollar of eligible expenses incurred as a result of employment-related car use is claimed.

Our tax system also permits a deduction for driving or other travelling costs incurred where a taxpayer moves to take a job (which would include students moving to take up a summer job) as well as for travelling costs which are incurred in order for the person or a member of their family to receive medical treatment.

Where it’s necessary to move to take up employment or self-employment, the costs of that move can be deducted from income earned at the new job. When it comes to travelling costs, the taxpayer has the option of either itemizing the various costs incurred (including operating expenses such as fuel, oil, tires, license fees, insurance, maintenance, and repairs and ownership expenses such as depreciation, provincial tax, and finance charges) for the year and then claiming a pro-rated amount which reflects the percentage of kilometres driven which relate to the move. Such an approach requires a fair amount of record keeping and many taxpayers choose instead to claim the standardized per kilometer rate provided by the federal government. For 2011 (the 2012 rates will be posted on the Canada Revenue Agency Web site early in 2013), that standardized rate ranges from 49.0 cents per kilometer in Manitoba to 63.5 cents per kilometer in the Yukon Territory. Where the standardized rate is claimed, no receipts are required, but the taxpayer is required to keep a record of the number of kilometers travelled in relation to the move.

The same approach (itemized approach or standardized rate claim) applies where a taxpayer is claiming travelling expenses related to medical care. The basic rule for claiming travel expenses in such circumstances requires the taxpayer to travel at least 40 kilometres (one way) from his or her home to obtain medical services which were not available any closer to home. Where that requirement is met, the taxpayer may claim the public transportation expenses paid (for example, taxis, buses, or trains) as medical expenses. Where public transportation is not readily available, the taxpayer may be able to claim a pro-rated share of vehicle expenses (both operating expenses and ownership expenses, with receipts, as outlined above) or opt for claiming the standardized per-kilometre rate. As is the case with all medical expense claims, a claim is available only where the total amount claimable exceeds the lesser of 3% of net income or (for 2012) $2,109.
 
Finally, where a taxpayer decides that driving is just too expensive and opts instead for public transit, a tax credit for the cost of using that public transit is offered by the federal government and by several of the provinces, and there is no limit on the amount which may be claimed. The federal credit is calculated as 15% of the cost of public transit, and while provincial credit amounts vary, an average would be around 7%. A taxpayer would therefore be able to claim a credit (and reduce taxes which would otherwise be payable for the year) by 22% of eligible public transit costs incurred during that year.

The public transit tax credit isn’t limited to costs incurred for transit use to and from work. Costs incurred by either spouse and by any dependent children under the age of 19 who regularly purchase a weekly or monthly transit pass (e.g., high school or university students who use transit to get back and forth from school) can be aggregated and claimed on the return of either parent for the year. So, a family of four that incurs $600 a month in transit costs (not difficult to do where an inter-city commuter pass can cost up to $300 a month and city transit passes, even for students, can cost up to $100) can claim $7,200 in eligible transit costs per year, for which they would be able to reduce their tax bill for the year by just under $1,600.

No amount of tax relief is going to make driving, especially for a daily commute, an inexpensive proposition. But, that said, seeking out and claiming every possible deduction and credit available under our tax rules can at least help to minimize the pain.

By now, most Canadian taxpayers (except the self-employed and their spouses, who have until June 15) will have filed their 2011 income tax returns. It’s quite often the case that a taxpayer will realize, after the return is filed, that information has been inadvertently misstated, or perhaps amounts have been omitted where an information slip was received after the return was sent, or even that claims have been made for deductions or credits to which the taxpayer is not actually entitled.

In such situations, the taxpayer is often at a loss to know how to proceed, but the process for amending a return is actually straightforward. The first reaction in such circumstances is sometimes simply to file another, corrected return, but that’s not the right solution. Instead, the taxpayer should wait until a Notice of Assessment is received in respect of the return already filed, and then file a Notice of Adjustment with the Canada Revenue Agency (CRA), making the necessary corrections. A Notice of Adjustment can be filed in a number of ways. The easiest and quickest way of doing of so is through the CRA Web site’s “My Account” feature, but that option is available only to taxpayers who have registered to obtain a CRA ID and password. While doing so 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, it does take a few weeks to complete the process. Taxpayers who don’t want to deal with the CRA through the Web site, or who don’t think it’s worth registering just to deal with the Agency on a single issue can obtain hard copy of the T1 Adjustment form from the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-adj/t1-adj-11e.pdf or by calling the CRA Forms request line at 1-800-959-2221. The use of the actual form isn’t mandatory—a letter to the CRA signed by the taxpayers 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, and two, 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 who discovers that a return is incomplete or that further information is needed to properly assess the return. In such circumstances, the Agency 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.

Of all the measures announced in the 2012-13 federal Budget brought down on March 29, it was the changes to Canada’s Old Age Security (OAS) system which will likely have the greatest impact on the largest number of Canadians. Under pre-budget rules, Canadians become eligible to receive OAS the month in which they turn 65, although the first payment is actually received the following month.

Changes to the OAS system were widely expected to be included in the budget, and the announced changes were, for the most part, as predicted. Specifically, the federal government announced that the eligibility age for receipt of OAS benefits would be raised from the current age of 65 to age 67. The change will, however, be deferred until 2023 and then implemented over a six-year period between April 2023 and January 2029.

The Budget also included an unexpected announcement that OAS recipients would, effective July 1, 2013, have the option of deferring their receipt of OAS benefits for up to five years. Such an option already exists for Canada Pension Plan (CPP) benefits and, as is the case with CPP benefits, deferral of OAS benefits will mean a larger monthly amount when benefits are received.

While the announced changes are, on their face, relatively straightforward, the combination of the lengthy phase-in period and the new option to defer receipt of OAS benefits can cause some difficulty in determining just how the changes will apply in an individual situation. An explanation of how the changes will apply to different age groups follows.

Current recipients of OAS benefits

Canadians who are currently receiving OAS benefits are completely unaffected by the changes announced in the budget. Both the timing and the amount of their monthly benefits will continue without change.

Canadians born after June 30, 1948 and before April 1, 1958

Those born between these two dates will be eligible to receive OAS benefits once they turn 65—they are not affected by the increase in the eligibility age. However, as everyone in this age group will be eligible to begin receiving benefits in July 2013 or later, they will have the option of deferring receipt of those benefits for up to five years.

Where receipt of OAS benefits is deferred, the amount of the benefit increases with each month of deferral. The budget papers provide the following two examples of the effect of a short-term and a long-term deferral on the amount of OAS benefit received.

Example #1

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 #2

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).

Canadians born after March 31, 1958

This is the group of Canadians who will be affected by both the increase in the eligibility age for receipt of OAS benefits, and by the option to defer benefit receipt by up to five years. The following chart, taken from the federal Department of Finance Web site, outlines the age at which benefits may first be received by those born after March 31, 1958. It can be seen from the chart that Canadians born after January 31, 1962 will not be eligible to receive OAS benefits until they reach the age of 67.

 While this group will have receipt of their OAS benefits delayed beyond the age of 65, they will also be entitled, if they so choose, to defer receipt of the benefits for an additional period of up to five years past their eligibility date, as outlined in the examples above.

Canadians who receive OAS benefits may also be eligible to receive the Guaranteed Income Supplement (GIS), which is made available to lower-income seniors. The changes to the OAS system will also affect receipt of the GIS. Specifically, as GIS payments are tied to OAS, eligible seniors will not receive any GIS payments until payment of their OAS benefits begins.

In view of the number of Canadians who will be affected by the announced changes to the OAS system, the federal government has posted explanatory information, including an FAQ document, on its Web site, and that information can be found at http://www.servicecanada.gc.ca/eng/isp/oas/changes/index.shtml.

Canadians hear a lot about "credit ratings" and "credit reports", but it's likely only a minority of them understand what a credit rating actually is or how it's arrived at. Even fewer Canadians know how to go about finding out what their personal credit rating is, or know how their actions affect that rating, positively or negatively.

Almost every Canadian has used credit sometime in his or her lifetime, and that use of credit left a record. Although almost no one actually reads the fine print, credit applications include a provision by which the applicant gives the creditor permission to provide information about the applicant to credit reporting agencies. That information is what makes up each individual's credit report and the sum of that information, for better or for worse, results in the individual's credit score, or credit rating.

A credit rating, therefore, is simply a number which represents a summary of the status of a person's total current and past borrowings. Institutions that have granted credit provide information on an ongoing basis with respect to the current status of those borrowings to credit reporting agencies. In Canada, there are two credit reporting agencies—Equifax Canada (www.equifax-canada.ca/index.html) and TransUnion Canada (www.transunion.ca/)—to which institutions which have granted credit provide such information. Information provided includes the amount of any borrowing, the percentage of available credit (for lines of credit and credit cards) which the borrower has utilized and, of course, the payment history—whether payments have been made on time or whether the account is currently in arrears. If there have been late payments in the past, the credit report will summarize how many payments were made late and how late those payments were (under 30 days, 30 to 60 days, etc.) All of this information is compiled by the credit reporting agency and reduced to a single number—the borrower's "credit rating", which can range anywhere from 300 to 900. A higher score indicates that the individual has handled credit well in the past and is therefore considered more creditworthy and less likely to default on any borrowings. Currently, it seems that, despite carrying record levels of debt, many Canadians are doing a reasonably good job of managing that debt: overall, about 57% of Canadians have a credit score of more than 760, which is considered excellent.

There are several reasons why an individual's credit rating could fall below optimal levels. The first and most obvious, of course, is when the individual does not make payments on outstanding debts in a timely way or falls short on making the required payment amount. The more frequently such events occur, and the later the payment or payments are, the greater the negative impact on the individual's credit rating. Making multiple applications for credit (or increased credit limits), especially within a short space of time, can also negatively affect a credit rating, as the assumption is that financial difficulties are the reason behind the need for such additional credit.

There are also circumstances which can negatively affect an individual's credit rating which are less obvious. One of the measures which credit reporting agencies use in determining an individual's credit rating is the credit utilization percentage. Simply put, credit reporting agencies don't like to see situations in which an individual has borrowed close to the limit of his or her total available credit, even if the account or accounts are in good standing.

Despite claims made by some companies, there is no "quick fix" for a poor credit rating. Where an individual's credit rating has suffered because of past errors, the only way to fix that rating is by consistently making payments on time (and, where at all possible, in more than the minimum required amount), keeping the credit utilization ratio as low as possible, and not making any new applications for credit. Eventually, the credit report and the credit rating will reflect those new habits.

A credit rating and report is, of course, an important part of one's overall financial picture but it seems, of late, to have become more than that. There are no overall statistics on how often individuals are asked to provide a third party with access to their credit rating or report in connection with something other than credit applications. However, anecdotal evidence would seem to suggest that this is a growing trend, with both prospective landlords and prospective employers asking for access to such information. Whether to provide that information in such circumstances is, of course, an individual decision.

Regardless of the use to which the credit report may or may not be put, it is always in an individual's best interests to ensure that the information contained in that credit report is accurate. With millions of credit reports compiled each year, mistakes are inevitable and, if not corrected, they can be costly to the individual affected. Canadians are entitled to obtain a written copy of their credit report, free of charge, once per year and it's a good idea to review one's credit report at least that often and to contact the credit reporting agency with respect to any errors found in the report. Information on how to obtain that credit report can be found on the Web sites of the two Canadian credit reporting agencies. A credit report, along with a credit rating can also be obtained online through the agencies' Web sites, but a charge of about $25 is levied for that service.

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 program, which was originally scheduled to end on March 31, 2011, was instead extended, in the 2011 federal Budget, to be available between June 6, 2011 and March 31, 2012. The program has now (as of January 28) been brought to an early end.

The termination of the program means that no new applications for EcoENERGY grants can be made after January 27, 2012. It also, however, means a change in certain deadlines for Canadians who were already enrolled in the program as of that date. 

In order to understand the changes, a quick review of how the program operated is useful. Participants in the program were required to obtain a registration number. Once the number was obtained, an energy evaluation, which measured the energy efficiency of the home and identified possible improvements to increase that efficiency, had to be carried out, at the homeowner’s expense, by a licenced independent energy adviser. 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 homeowner then applies for the particular grant, providing the receipts for products purchased and work done.

There is no change to the process by which the grants are applied for; what has changed are some of the deadlines. The deadline for completion of any work eligible for an EcoENERGY grant is still March 31, 2012. For purposes of the program, completion would include both the purchase of eligible products or equipment, and the installation of such products or equipment in the home. However, the deadline by which the post-retrofit evaluation must be carried out and the application submitted has been extended. That deadline is now June 30, 2012.

Detailed information about the program and the changes which accompany its termination 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.

As almost everyone knows by now, federal government representatives have recently speculated that changes are in the offing for Canada’s Old Age Security (OAS) program and that those changes might mean that Canadians would have to wait an additional two years to receive OAS. The reaction to that public speculation has an air of déjà vu in that history seems, in some ways, to be repeating itself. As a previous federal government learned (to its cost), there’s just no such thing as a non-controversial change to Canada’s universal retirement benefit programs—especially when that change involves a reduction or delay in benefits received.

The huge demographic shift represented by the aging of the baby boomers is, of course, news to no one. As they have throughout their lives, the baby boomers—who are now at or quickly approaching retirement age—are having a disproportionate effect on government programs, including government retirement income programs and, consequently, on government finances. The reasoning of the federal government (not necessarily accepted in all quarters) is that, with the increased numbers of Canadians eligible to receive OAS, changes are needed to ensure that the program remains sustainable over the long term.

To follow that reasoning, some background on how government retirement income programs are financed is necessary. At the federal level, there are two such programs, the Canada Pension Plan (CPP) and the OAS Program. There are many differences between the two (outlined below), but, for purposes of government finances, the significant difference between them is that the CPP is a contributory plan, while OAS is not. Each working Canadian pays into the CPP throughout his or her working life, with that contribution matched by the employer. When the individual decides to begin receiving CPP benefits, a somewhat complicated actuarial calculation determines the amount of benefit which can be obtained, based for the most part on the amount of contributions made during the person’s working life. The OAS Program, however, is a non-contributory program. The OAS benefits, which are currently available to Canadians who have lived in Canada for at least 20 years, are paid out of the federal government’s general tax revenues. Of course, each working Canadian creates those government revenues through payment of income and other forms of tax but, unlike the CPP, there is no separate pool of funds set aside to pay OAS benefits.
Many years ago, significant increases in the amount of CPP contributions made by employees and employers were mandated by a previous government, to ensure the long-term sustainability of the program. Those efforts were successful, and today the CPP is on firm financial footing. When it comes to OAS, however, the present government’s concern is two-fold. First, as the baby boomers reach retirement, the cost to the government of providing OAS benefits to them as a group will increase sharply. Second, as the baby boomers leave the workforce and begin collecting those benefits, there will be fewer Canadians remaining in the workforce to provide the tax revenue which funds those benefits. In other words, the ratio of contributors to recipients will decrease.

There are those who argue that the federal government’s concern is either misplaced or overstated in that, while the retirement of the baby boomers will cause a spike in the cost of OAS to the federal government, that spike is a temporary one which will ease as those baby boomers pass through their retirement years and, eventually, die. However, the economics of OAS funding is, for most of us, a theoretical argument best left to economists, pundits, and the Parliamentary Budget Officer. For most Canadians, especially those nearing retirement, the important question is, how could this affect my retirement plans?

At an individual level, the OAS program differs in many respects from the CPP. First, the age at which one can begin to receive OAS benefits is fixed by law and there is no ability on the taxpayer’s part to either advance or delay that date. With the CPP, a contributor can elect to begin receiving benefits as early as age 60 or as late as age 70. The monthly benefit increases with every month past the age of 65 that receipt of benefits is deferred, and decreased for every month before that date by which receipt of benefits is accelerated. Consequently, it’s much easier to incorporate CPP benefits into an individual retirement plan. Second, the benefit amount received with OAS is fixed by law. Although the benefit may be reduced for those who have not lived in Canada for an extended period after the age of 18, the majority of OAS recipients receive the full benefit amount—currently about $500 per month. Finally, and probably most significantly with respect to the current debate, OAS represents the only universal retirement benefit available to all Canadians. Most working Canadians no longer have employer pension plan payments to look forward to in retirement. It’s not possible to receive a CPP benefit unless one has contributed to the CPP during one’s working life. And, of course, only those who have set money aside in an RRSP during their working lives will be able to count on that money in retirement. For this generation of Canadians, OAS represented the one source of retirement income that could be counted on at the traditional retirement age of 65.

Of course, $500 per month doesn’t afford anyone a reasonable standard of living anywhere in Canada. For that reason, the federal Guaranteed Income Supplement, along with a number of provincial income support programs, is currently provided to retirees whose only other source of income is OAS, in order to provide them with a basic standard of living. The question on the minds of such retirees is, of course, whether receipt of those benefits will also be delayed if the age of eligibility for OAS benefits is increased?   

Part of what is causing the confusion and concern is that no specifics have been provided—only somewhat ominous musings about a need to ensure the sustainability of the OAS system for future generations. It is possible, however, to assess the likely overall impact of the changes on taxpayers in different age groups.
First, those who are currently receiving OAS Benefits have no cause for concern. Federal government representatives have made it clear that no change is being contemplated to either the eligibility requirements or the benefit amounts for those already receiving OAS.

The next group are those over the age 50 and under 65, who are in many ways the individuals who are most “at risk” from any change which defers the receipt of OAS benefits, for two reasons. First, they all have, quite reasonably, based their retirement planning and retirement income projections on the assumption that they will begin receiving OAS benefits at the age of 65. (OAS benefits have been provided to eligible Canadians aged 65 and older since 1969.) Second, because of their age, they have a relatively short time frame in which to adjust to any change which involves a later age of eligibility for the start of such benefits. A delay in receiving OAS benefits could have multiple impacts. First, it might be necessary to bring forward the age at which one elects to begin receiving CPP benefits, with a consequent permanent reduction in the amount of those benefits. In the alternative, or as well, it might mean a need to start payments out of an RRSP sooner, or a need to increase the amount of withdrawals from the RRSP. And, as anyone who has ever done a retirement income projection will know, starting withdrawals earlier or making higher withdrawals, especially early in retirement, can have a dramatic effect on just how long those retirement savings will last.

Finally, Canadians who are currently under the age of 50 will almost certainly be affected by any changes to the OAS system, and will need to alter their retirement planning to take account of those changes. And although such Canadians may well feel shortchanged—in that their contributions made through our tax system will not provide them with the same level of benefits that older Canadians enjoy—time is on their side to a much greater degree. Unlike those older Canadians who may be affected by changes to OAS, those currently under the age of 50, and especially under the age of 40, will have the opportunity to plan around those changes.     

In the meantime, and particularly until greater details of the possible changes and, especially, a timetable for those changes is disclosed, there is really nothing that can be done in the way of planning. The “good” news is that such details will likely be forthcoming in this year’s federal budget which, according to current speculation, should be announced some time late in March.

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

The Employment Insurance premium rate for 2012 is 1.83%.

Yearly maximum insurable earnings are set at $45,900, making the maximum employee premium $839.97.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2012 is therefore $1175.96.

The Canada Pension Plan contribution rate for 2012 is unchanged at 4.95% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $50,100, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contribution for 2012 will therefore be $2,306.70, and the maximum self-employed contribution will be $4,613.40.

The general federal corporate tax rate and the rate applied to income from manufacturing and processing will be reduced from 16.50% to 15%, effective January 1, 2012.

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

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

Dollar amounts on which individual non-refundable federal tax credits for 2012 are based, and the actual tax credit claimable, will be as follows:

                                            Credit amount             Tax credit
Basic personal amount                   10,822                     1,623

Spouse or common-law partner
   amount                                    10,822*                   1,623

Child amount                                 2,191                       329

Eligible dependant amount              10,822*                   1,623

Age amount                                  6,720                     1,008

Net income threshold for
   erosion of credit                        33,884
 
Infirm dependant amount (over 18)   6,402**                   960

Net income threshold for
   erosion of credit                         6,420
              
Caregiver amount                           4,402                      660

Net income threshold for
   erosion of credit                        15,033
              
Disability amount                           7,546                    1,132

Adoption expenses credit               11,440                   1,716

Medical expense tax credit
   threshold amount                        2,109

Maximum refundable medical
   expense supplement                    1,119

Old Age Security clawback
   Income threshold                       69,562

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

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 2012.

The indexing factor for federal tax credits and brackets for 2012 is 2.8%. Consequently, the following federal tax rates and brackets will be in effect for individuals for the 2012 tax year:

Income level                           Federal tax rate

$10,822- $42,707                         15.0%

$42,708 - $85,414                        22.0%

$85,415 - $132,406                      26.0%

Above $132,406                           29.0%

There is no change in federal individual tax rates for 2012.

A number of tax changes will take effect on January 1, 2012, most of them affecting individual taxpayers. The more significant changes are listed below.

Changes to CPP contribution rules for individuals receiving retirement benefits

Changes will be made to the rules governing Canada Pension Plan contributions, effective January 1, 2012. As of that date, individuals aged 60 to 65 who are currently receiving CPP retirement benefits and who are employed will be required to resume making CPP contributions. Such individuals who are between the ages of 65 and 70 will also have CPP contributions deducted from their income, unless they file an election choosing not to make such contributions. Individuals aged 70 or older will not be required or permitted to make CPP contributions.

RRSP deduction limit increases to $22,970

The RRSP contribution limit for the 2012 tax year (for which the contribution deadline is March 1, 2013) will increase to $22,970. In order to make the maximum contribution for 2012, it will be necessary to have earned income of $127,611 for the 2011 taxation year.

Tax-free savings account contribution limit

There is no change to the TFSA contribution limit for 2012, as the annual limit remains at $5,000. 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 2012

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 September 15 and December 15, 2012 each fall on a Saturday, the payment deadline for those instalments will actually be the following Monday, September 17th and December 17th, respectively.

Reduction in federal corporate tax rates

The general corporate tax rate is reduced, effective January 1, 2012, from 16.5% to 15.0%. There is no change in any other federal corporate tax rate for 2012.

In This Issue:

• Tax Planning 
  • Remember that February 29, 2012 is the deadline for RRSP contributions for the 2011 tax year.  Consider contributing to a spousal RRSP to achieve income splitting in the future.
  • Consider applying for Canadian Education Savings Grant of up to 20% of eligible RESP contributions, to a maximum of $500 per child per year.  More information is available at the HRSDC website.
• CPP Changes - As of January 1, 2012, the rules for CPP will change.  Employed individuals under the age of 65 will now have to contribute to CPP even if they are receiving CPP benefits.  Between the ages of 65 and 70, employed individuals will have to contribute to CPP unless they elect to stop contributing.
• Old Age Security (OAS) - Apply for OAS as soon as you reach the age of 65.  Failure to apply and you could lose OAS payments because the Government only has to make retroactive payments for a maximum of 11 months.
• Cell Phone Allowances - Employees who are reimbursed for a cell phone service plan may have a taxable benefit if the allowance covers more than a basic plan and the charges related to personal use of the phone exceed the basic plan cost.

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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.