Category Archives for "Personal Income Tax"

Now’s the Time to Check Your RRSP

By Randall Orser | Personal Income Tax

I know, I know, it’s only July, I don’t want to think about tax stuff. However, now is the perfect time to check where you RRSP contributions have been for the year, and where they’ll be in 6 months. Do you have the room to put more in? Do you have some extra funds lying around? It’s not too late to think about a monthly RRSP contribution rather than that lump sum you do in January or February.

I’m going to assume you know what is an RRSP, and have hopefully checked what your contribution limit is for the year. Does your work have a pension plan? If so, how much have you contributed so far, as that comes your contribution limit. If you’ve reached your contribution limit, then what about your spouse? You can always put money into their RRSP, up to their contribution limit (they would need to be the contributor and annuitant).

Planning Opportunities

Contribute early in the year. This helps shelter income for a longer period and increases the compounding of the income in the plan. A monthly plan can also be used to help with cash flow.

Use the spousal plan (including common-law spouse) as much as possible to split the income tax upon withdrawal. Remember not to withdraw from any spousal plan until 3 years after the last contribution was made or it will be added to the income of the contributor. Note that it is the timing of the payment of contributions to a spousal RRSP that governs this recapture rule, not when (or whether) you claimed a deduction.

Make your money work for you. Consider other investments within your RRSP, such as mutual funds. Carefully consider what you invest in to maximize your return. (See schedule on page 3)

Utilize “rollovers” (special RRSP contributions). You may find yourself in a situation where you receive a payment which qualifies for special contribution treatment.

These special situations include:

· Special payments you receive on leaving employment, either in recognition of long service or as damages for loss of office. Note that years of service after 1995 no longer qualify;

· Lump-sum payments received from foreign pension plans for services performed outside Canada;

· Lump-sum payments received from a United States IRA and taxable in Canada;

· Amounts received from the RRSP or RRIF of a spouse, or in some cases, a parent or grandparent, who has died; and • The “cost amount” of shares you receive, directly or through a trust, in a special lump-sum distribution from a DPSP.

The magic of compound interest! Annual contributions of $13,500 at an average interest rate of 8% per annum made at the beginning of each year accumulate over $15,000 more interest in the first 10 years than contributions made at the end of the year. After 25 years, the difference is over $75,000!

The compounding effect of interest earned on the RRSP is clearly demonstrated above by the difference in interest rates. An investment of $13,500 per year at 6% interest per annum grows to $785,111 at the end of 25 years, while the same amount invested at 8% grows to $1,065,885.

Should You Borrow to Finance an RRSP

Interest on money borrowed to make RRSP contributions is not a deductible expense for tax purposes. If you have a choice between borrowing to make an RRSP contribution or borrowing to make another investment, you should always borrow to make the other investment. The interest paid on the investment loan may well qualify for tax deduction and thus offset the cost of borrowing.

Spousal RRSP

A spousal RRSP is an RRSP which names your spouse rather than yourself as the “annuitant” but you have made the contribution. Any amount, which you could have contributed to your own plan under your current contribution limit, can instead be contributed to your spouse’s plan. Contributions made by you to your spouse’s RRSP can be deducted from your income. Your spouse will be taxed when the funds are withdrawn subject to the 3-year rule described in Planning Opportunities above.

Once a cohabitation relationship achieves the status of a common-law marriage under the 12-month or child rule, that marriage is considered to continue until there is a marital breakdown marked by a separation of at least 90 days.

Common-law spouses are included in the definition of spouse and are, therefore, eligible for the spousal plan, although there are still some questions as to how Canada Customs and Revenue Agency will monitor the common-law relationships.

The special rules on spousal RRSPs are very beneficial. Ideally, you and your spouse should have the same amount in your RRSPs at retirement. However, when using a spousal RRSP, you should note that the contributing spouse would be taxed on any withdrawals within 3 years of the last contribution to any spousal plan.

Are You Leaving Canada?

If you leave Canada for an extended period, you must determine whether you are going to become a non-resident for income tax purposes.

If you have withdrawn funds from an RRSP under the Home Buyers’ Plan (you qualify as “first-time home buyers” could borrow up to $20,000 from an RRSP to purchase a “principal place of residence”), and become a non-resident before acquiring your Canadian home, your withdrawals will be disqualified and added to your income in the year of withdrawal. You may cure the disqualification by refunding the withdrawal and cancelling your participation in the plan.

If you have withdrawn funds from an RRSP under the Home Buyers’ Plan and become a non-resident after acquiring your Canadian home, you must repay the entire withdrawal within 60 days of becoming a non-resident. To the extent that you do not repay the amount within 60 days, the unrepaid balance will be included in your income for the period of the year in which you were still a resident of Canada and taxed accordingly.

Now is a great time to review your RRSP, and what you want to accomplish with it this year. Think about all that money you’re missing out on by not investing now, and waiting until January or February of next year. That’s a missed opportunity, and that’s just sad.

Why a Large Refund is Not Necessarily a Good Thing

By Randall Orser | Personal Income Tax

Another tax year’s been filed, and you’re excited as you’re getting a huge refund again this year. That’s great! Or, is it? A large refund is really saying you’re not managing your money as well as you probably could. Financially, getting a refund every year may be doing more harm than good. Wouldn’t you rather get that money on each pay cheque, rather than in one lump sum? Hopefully, after you read this you’ll talk to your human resources department, tax preparer, and your financial planner.

What Does That Large Refund Mean?

What you’ve basically done when you get a large refund is loan the government your funds for a whole year without any interest. Why would you do that? You probably wouldn’t loan a friend or family member money without interest, but you give it to the government. Just think of the ways you could use that large refund, even if it’s only $2,000, you could put that money into an RRSP, or TFSA. Or, invest it into non-registered investments to make some additional cash.

What Should You Do Instead?

If you’re finding that large refunds are a way of life, then you need to figure out what to do so you don’t get those large refunds. The first thing to do is talk to whomever is in charge of payroll at your work: boss, payroll preparer, human resources, etc.

Get a copy of Form TD1, Personal Tax Credits Return, and go through each section and fill in amounts that apply to you. The TD1 form used to determine the amount of tax to be deducted from your employment income or other income, such as pension income. The payroll person, or your tax preparer, can help you figure out the amount of tax exemptions for which you qualify, and fill out the form. You should do a new TD1 each year.

If you find that your tax situation has changed during the year, you can update the TD1 at any time. Many things could change during the year, such as a marriage, divorce, children aging out of credits or going off to college, which could cause either a balance owing or a large refund.

Now What?

You’ve talked to your payroll department, and made the changes to your TD1. You will start to see an increase in your pay cheque as less tax is coming off. The amount won’t be huge; however, you need to look at the overall view. This is where things can get interesting. Figure out how much extra you’re getting on each pay cheque, and setup a new direct deposit with work for that much to go into a savings account (or even a TFSA). If you can’t do that through work, then an automatic transfer into a savings (or TFSA) account will work too. Whether the amount is $20 or $100, do this each pay, and watch your savings grow.

Getting that large refund at tax time, is not necessarily a good thing, especially if you’re using to pay certain bills that come due at that time, such as property taxes. You’re much better off taking that money for yourself each pay cheque, rather than giving it to the government interest free.

Your Notice of Assessment (NOA)

By Randall Orser | Personal Income Tax

You’ve filed your taxes for the year, and now just wait for the notice of assessment to arrive. Many people just ignore this notice until the next tax year, or their mortgage comes due. Your Notice of Assessment has a lot of information in it that could help you to understand your tax filing, your carry forwards for the next year, and any issues that may have turned up with your tax filing. You should keep your notice of assessment for at least 6 years, along with your other tax filing records for that year.

The picture above of the revised notice of assessment that the Canada Revenue Agency will start sending out in February 2016. It includes four notes explaining how the notice’s contact information, account details, key information, and account summary are simplified and easy to understand. The four notes read:

  • “1. Contact info – Appears in the top left corner”
  • “2. Notice Details – Organized so you can easily identify your notice details”
  • “3. Key info – Provides your most important information and if any actions are required”
  • “4. Account summary – Provides you with a status of your account and useful tips”

The Sections of the Notice Explained

Account Summary

The account summary section on your notice shows you the result of the assessed or reassessed return. The result may be a refund, a zero balance, or a balance owing. The amount shown in the account summary also includes any outstanding balances you owe from previous returns.

The account summary may also show the result from concurrent assessments or reassessments.

When you file several consecutive-year returns at the same time, we do a concurrent assessment. For example, you file your 2011, 2012, and 2013 returns together to claim some credits that you didn’t know about before.

When you send us new information that changes your returns for several consecutive years, we do a concurrent reassessment. We reassess all your affected returns at the same time. The result appears in the account summary on the last notice of the series.

Tax assessment summary

The tax assessment summary on your notice lists the main lines on your assessed or reassessed tax return. Beside each line, you can see the amounts CRA used to calculate your balance on this return. You can compare these amounts to the ones on your return to see where CRA made changes, if any.

The summary also shows any penalty and interest we calculated on your refund or amount owing. If you have a balance owing from a previous assessment or reassessment, it will also appear here. If the amounts on any of the main lines differ from yours, see the Explanation of changes and important information section for more details about our changes.

Explanation of changes and other important information

The explanation of changes section on your notice explains in detail the changes or corrections made to your tax return. These changes are based on the information sent with your return and the information CRA has on file.

If, after reviewing your notice, you realize you have new or additional information you want to send in to change your return, see How to change your return.

If you disagree with your assessment or reassessment and want to register a formal dispute, see Complaints and disputes; you have 90 days from the date of the notice to register your dispute.

RRSP/PRPP deduction limit statement

This statement shows your deduction limit for your registered retirement savings plan (RRSP) and your pooled retirement pension plan (PRPP).

Deduction limit

Your deduction limit is the amount of RRSP/PRPP contributions you can deduct for the next year. Your deduction limit will appear on line (A) of your statement. Your statement also shows how CRA calculated your deduction limit. The calculation is based on your:

  • earned income in the previous year;
  • pension adjustments (PAs);
  • past service pension adjustments (PSPAs);
  • pension adjustment reversals (PARs); and
  • unused RRSP deduction room at the end of the previous year

When calculating your deduction limit, CRA takes into account the information you sent with your previous tax returns and the information they have on file.

Available Contribution Room

The last line of the statement gives you your available contribution room for the next year. Your available contribution room is your deduction limit minus any unused RRSP/PRPP contributions you reported in past years that you can deduct for next year. Your unused contributions appear on line (B) of your statement.

If the total RRSP/PRPP contributions, including your current and unused contributions, you claim on your return are less than your deduction limit, you have available contribution room to carry forward to the next year.

Excess Contribution

If your RRSP/PRPP contributions are more than your deduction limit, you have an excess of contributions. You may have to pay tax on this excess amount. For more information on RRSP/PRPP contribution and deduction rules, see How much can I contribute and deduct?

Other Sections You May Find on Your Notice

Home Buyers’ Plan (HBP) statement

If you participate in the Home Buyers’ Plan (HBP), you will see your HBP statement on your notice of assessment or notice of reassessment. The HBP lets you withdraw up to $25,000 in a calendar year from your RRSPs to buy or build a qualifying home for yourself or for a related person with a disability. Your statement shows your remaining balance to repay, and your minimum required repayment for the next year.

CRA calculates your balance by subtracting the following amounts from the total you withdrew from your RRSP: total repayments, cancellations, differences included in income

Your minimum required repayment is a portion of the balance you have left to repay. If you pay less than the minimum amount, you will have to include the difference as RRSP income on your return.

Lifelong Learning Plan (LLP) Statement

If you participated in the Lifelong Learning Plan (LLP), you will see a Lifelong Learning Plan Statement on your notice of assessment or notice of reassessment. The LLP lets you withdraw amounts from your RRSPs to pay for full-time training or education for you or your spouse or common-law partner. This statement shows the balance left to repay, and the minimum required repayment for the next year.

CRA calculates your balance by subtracting the following amounts from the total you withdrew from your RRSP: total repayments, cancellations, differences included in income

Your minimum required repayment is a portion of the balance you have left to repay. If you pay less than the minimum amount, you will have to include the difference as RRSP income on your return.

If your notice included a cheque

If you think the amount is correct, you can cash your cheque at any time. If you believe that the amount of your cheque is incorrect, review the information on your notice to see if there are any changes or errors. If you find a mistake in the calculation of your refund or benefits, go to How to change your return to find out how to ask for an adjustment.

The Government of Canada is switching to direct deposit. For information about direct deposit and how to sign up, see Direct deposit.

If your notice indicates you need to make a payment, you can pay via your online banking using Pay Bills; send a cheque along with the remittance portion to CRA, you may be able to make a payment at your local branch; however, many banks are no longer taking government payments.

Your notice did not include a cheque or a remittance voucher

If you received a notice with no cheque or remittance voucher, it could be because:

  • CRA calculated a zero balance on your return, so you don’t have a refund and you don’t owe any money on this return. CRA sent you the notice for your information only. Keep it for your records; or
  • you paid the amount owing at the time you filed your return, so your return should show the amount due and the amount already paid. CRA sent you the notice for your information only. Keep it for your records; or
  • CRA deposited your refund directly into your bank account. Your notice should show the amount that was deposited. Keep your notice or statement for your records

Your notice of assessment can come in pretty handy, and gives you information on your tax filing. If you are using a tax preparer, it is important to ensure they get a copy of this notice, especially if the assessment is different than what was filed. Today, CRA has instituted a way for preparers to get copies of NOAs without you having to directly give consent, but by ticking a box on the T183 Electronic Filer form.

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Child Care Expenses

By Randall Orser | Personal Income Tax

You decided to have kids, and while your taxes weren’t in the thought process at the time, you may as well benefit tax wise from them now.

What are child care expenses?

Child care expenses are amounts you or another person paid to have someone look after an eligible child so that you or the other person could:

  • earn income from employment;
  • carry on a business either alone or as an active partner;
  • attend school under the conditions identified under Educational program; or
  • carry on research or similar work, for which you or the other person received a grant.

The child must have lived with you or the other person when the expense was incurred for the expense to qualify. Usually, you can only deduct payments for services provided in Canada by a Canadian resident.

Who can claim child care expenses?

If you are the only person supporting the eligible child, you can claim child care expenses you incurred while the eligible child was living with you. Fill out parts A and B, and, if it applies, Part D of Form T778, Child Care Expenses Deduction.

There may have been another person who lived with you at any time in 2016 and at any time during the first 60 days of 2017 who was: the eligible child's parent; your spouse or common-law partner, if you are the father or the mother of the eligible child; or an individual claiming an amount for the eligible child on line 305, 306, 315, or 367 of their Schedule 1, Federal Tax.

In this situation, the person with the lower net income (including zero income) must fill out parts A and B and claim the child care expenses unless one of the situations in Part C or D applies.

If any of the situations in Part C or Part D apply, the child care expenses can be claimed by the person with the higher net income, or in part by both the person with the higher net income and the person with the lower net income. In this situation, the person with the higher net income must calculate the claim first. However, you must each fill out a separate Form T778, and fill out parts A and B, and, if it applies, parts C and D.

If both of you have equal net incomes, you have to agree on which one of you will claim the child care expenses.

If you got married or became a common-law partner in 2016, you and your spouse or common-law partner have to consider your net incomes for the whole year. Include child care expenses you both paid for the whole year.

For whom can you claim child care expenses?

Child care expenses can only be claimed for an eligible child.

An eligible child is: your or your spouse's or common-law partner's child; or a child who was dependent on you or your spouse or common-law partner, and whose net income in 2016 was $11,474 or less.

The child must have been under 16 years of age at some time in the year. However, the age limit does not apply if the child was mentally or physically infirm and dependent on you or your spouse or common-law partner.

What payments can you claim?

You can claim child care expenses that were incurred for services provided in 2016. These include payments made to:

  • caregivers providing child care services;
  • day nursery schools and daycare centres;
  • educational institutions, for the part of the fees that relate to child care services;
  • day camps and day sports schools where the primary goal of the camp is to care for children (an institution offering a sports study program is not a sports school); or
  • boarding schools, overnight sports schools, or camps where lodging is involved (read the note in Part A of Form T778, Child Care Expenses Deduction).

The above is not an exhaustive list of deductible child care expenses. For example, advertising expenses and placement agency fees incurred to locate a child care provider and mandatory registration fees may also qualify as child care expenses.

When the child care services are provided by an individual, the individual cannot be:

  • the eligible child's father or mother;
  • another person;
  • a person for whom you or another person claimed an amount on line 305, 306, 315, or 367 of Schedule 1, Federal Tax; or
  • a person under 18 years of age who is related to you.

A person is related to you if he or she is connected to you by a blood relationship, marriage or common-law partnership, or adoption. For example, your brother, sister, brother-in-law, sister-in-law, and your or your spouse's or common-law partner's child are related to you. However, your niece, nephew, aunt, and uncle are not.

What payments you cannot claim?

You cannot claim payments for:

  • medical or hospital care, clothing, or transportation costs;
  • fees that relate to education costs at an educational institution, such as tuition fees of a regular program or a sports study program; and
  • fees for leisure or recreational activities, such as tennis lessons or the annual registration for Scouts.

You cannot claim expenses for which you or another person received, or is entitled to receive, a reimbursement of the child care expenses or any other form of assistance not included in income. This includes, for example, the hiring credit for small business and small business job credit received under the Employment Insurance Act. If your employer paid the child care expenses on your behalf, you can claim the part of the expenses included in your income for the year.

Completing your tax return

Use Form T778, Child Care Expenses Deduction, to calculate your allowable amount of child care expenses. Enter on line 214 of your return the amount that you can claim.

The individual or organization who received the payments must give you a receipt showing information about the services provided. When the child care services are provided by an individual, you will need the social insurance number of the individual. The receipt can be in your name or that of your spouse or common-law partner.

You cannot carry forward unclaimed expenses to another year.

As a Student, Do I Have to File a Tax Return? 

By Randall Orser | Personal Income Tax

You’ve ventured out into the world of post-secondary education, and have a lot going on. Taxes are not something you’re thinking about, and besides, you don’t have any income, or other reason to file a return. Or do you?

Most income you receive is taxable and you have to include it on your return. However, you do not have to include your GST/HST credit, Canada child tax benefit payments, or related provincial or territorial program payments, lottery winnings, or most gifts and inheritances.

The most common forms of income are: employment income (T4 or T4A); income not showing up on a T4 (tips, gratuities); scholarships, fellowships, bursaries, study grants, and artists’ project grants (awards); net research grants; apprenticeship incentive or completion grants; RESP withdrawals; interest and other investment income.

There are other reasons to file a tax return, you may have a refund, you or your spouse may want to get the GST/HST credits, you or your spouse may qualify for child tax benefits, and more.

Tuition/Education Credits

You still need to file a tax return as you have to claim your tuition, education, and textbook amounts first on your own return, even if someone else paid your fees. The amount you must use on your own tax return is equal to the amount of credit required to reduce the taxes you owe. The calculation for this amount is included on Schedule 11.

Even if you have no tax to pay and you are transferring part of your tuition, education, and textbook amounts, file your return and a completed Schedule 11 so we can update our records with your unused tuition, education, and textbook amounts available to carry forward to other years.

If you are transferring an amount to a designated individual, only transfer the amount this person can use. This way, you can carry forward as much as possible to use in a future year.

You may transfer a maximum of $5,000, minus the amount you used to reduce your tax owing as calculated on Schedule 11. You can transfer all or some to your spouse or common-law partner (who would claim it on line 360 of his or her Schedule 2) or to your or your spouse's or common-law partner's parent or grandparent (who would claim it on line 324 of his or her Schedule 1).

Depending on their province or territory of residence, your spouse or common-law partner may have to complete Schedule (S2) to calculate their provincial or territorial transfer amounts.

Which tax package should you use?

Generally, you have to use the package for the province or territory where you resided on December 31. If you were living in a province or territory other than the one you usually reside in, use the package for your usual province or territory of residence. For example, if you usually reside in Ontario, but you were going to school in Alberta, you would use the package for Ontario.

If you resided in Quebec on December 31, use the package for residents of Quebec to calculate your federal tax only. You will also need to file a provincial income tax return for Quebec.

As you can see there are many reasons to file a tax return, even if you have no, or little, income. There are many credits you will get as a result of filing a tax return, and you don’t want to miss out on free money, now do we.

Donations and gifts – CRA

By Randall Orser | Personal Income Tax

If you or your spouse or common-law partner made a gift of money or other property to certain institutions, you may be able to claim a federal and provincial or territorial non-refundable tax credit when you file your return. Generally, you can claim all or part of this amount, up to the limit of 75% of your net income.

What is the eligible amount of my gift?

In most cases, the eligible amount of your gift is the amount shown on your charitable donation receipt.

In most cases, the eligible amount of your gift is the amount shown on your charitable donation receipt.

However, in more technical terms, the eligible amount of the gift is the amount by which the fair market value of the gifted property exceeds the amount of an advantage, if any, received or receivable for the gift.

The advantage is generally the total value of any property, service, compensation, use or any other benefit that you are entitled to as partial consideration for, or in gratitude for, the gift. The advantage may be contingent or receivable in the future, either to you or a person or partnership not dealing at arm's length with you.

Example

You donate $1,000 to the Anytown Ballet Company, which is a registered charity. In gratitude, the company provides you with three tickets to a show that are valued at $150. You are therefore considered to have received an advantage of $150. The eligible amount of the gift is $850 ($1,000 − $150).

The advantage also includes any limited-recourse debt in respect of the gift at the time it was made. For example, there may be a limited recourse debt if the property was acquired as part of a gifting arrangement that is a tax shelter. In this case, the eligible amount of the gift will be reported in box 13 of Form T5003, Statement of Tax Shelter Information. For more information on tax shelters and gifting arrangements, see Guide T4068, Guide for the Partnership Information Return (T5013 Forms).

There are situations in which the eligible amount may be deemed to be nil. For more information, see the sections called "Deemed fair market value" and "Official donation receipts" in Pamphlet P113, Gifts and Income Tax.

Disasters and Disaster Relief 

By Randall Orser | Personal Income Tax

According to Public Safety Canada, a disaster is a hazard that overwhelms a community’s ability to cope and may cause serious harm to people’s safety, health, welfare, property, or the environment. A disaster can be the result of a naturally occurring phenomenon within the geophysical or biological environment or human action, whether malicious or unintentional, including technological failures, accidents, and terrorist acts.

The Canada Revenue Agency (CRA) understands that disasters can cause great difficulties for taxpayers whose primary concerns during these times are their families, homes, businesses, and communities.

Those giving to charities in times of disasters should remember to give wisely.

Financial assistance payments from your employer or to your employee

Income tax

If an employer makes a financial assistance payment to an employee because of a disaster, is it taxable?

A financial assistance payment that an employer makes to an employee is not taxable if the person received the payment in his or her capacity as an individual and not as an employee. The CRA considers a person to have received a payment in his or her capacity as an individual when all the following conditions are met:

  • The individual was affected by a disaster (for the criteria, go to www.publicsafety.gc.ca/cdd).
  • The payment is philanthropic, to compensate the individual for personal losses or damage he or she suffered during a disaster.
  • The payment is made within a reasonable time after a disaster.
  • The payment is voluntary, reasonable, and bona fide.
  • The payment is made to an individual dealing with the company at arm’s length (for example, the individual does not control the company or is not related to a person who controls the company). See Income Tax Folio S1-F5-C1: Related persons and dealing at arm's length, for more information.
  • The payment is not made to a shareholder, a connected person (for example, a person related to a shareholder or a shareholder of a related corporation), or a person of influence (for example, an executive with power to control company decisions).
  • The payment is not based on employment factors such as performance, position, or years of service.
  • The payment is not made in exchange for past or future employment services or to compensate for loss of income.
  • The payment is not the regular salary paid to an individual who is unable to report to work because of a disaster.
  • The employer has not taken a business expense deduction for the payment.

If an employer makes a financial assistance payment to an employee who is a shareholder or an executive, is it taxable?

When a financial assistance payment is received by a shareholder, a connected person, or a person of influence, the facts must be examined to determine whether the payment was received in his or her capacity as an individual (that is, not as an employee or a shareholder). If so, it is not taxable. If the employee received the payment on the same basis as other employees, the payment is likely to be considered to have been received in his or her capacity as an individual, assuming all the other conditions listed above are met.

If an employer makes a financial assistance payment to an employee, is the payment tax-deductible?

If the financial assistance payment is made to an individual in his or her capacity as an employee, the payment is taxable and the employer can deduct it as a business expense if it is reasonable and was incurred to earn business income. The taxable portion of the payment should be reflected in the employee’s T4 information slip in Boxes 14 and 40.

If the financial assistance payment is made to an employee in his or her capacity as an individual (see above), the payment is not taxable and the employer cannot deduct it as a business expense.

The employer is not entitled to claim a charitable donation tax credit or a deduction for the payment because it is not a gift made to a registered charity or other qualified donee.

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

GST/HST will not apply to financial assistance payments that an employer makes to an employee, including an employee who is a shareholder, when the conditions, as outlined above for income tax purposes, are met and the payments are not taxable for income tax purposes. If the employer’s financial assistance payment to an employee is taxable for income tax purposes, the GST/HST does not apply to the payment since the GST/HST does not apply to salaries, wages, commissions, and other remuneration. In either case, the employer cannot claim an input tax credit for the payment.

Financial assistance payments from your government

Income tax

Is government assistance paid to an individual taxable?

Generally, a disaster relief payment that an individual receives from a government, municipality, or public authority for personal losses and expenses is not taxable and is not included in the recipient’s income for income tax purposes. This includes payments for temporary housing, clothing, and meals. As well, government compensation for loss of or damage to a personal residence does not ordinarily result in any income tax consequences.

Is government assistance paid to a business taxable?

Generally, government assistance that a business receives to help offset the cost of expenditures incurred because of a disaster can either directly reduce the amount of business expenses incurred or be included in income and the business expenses deducted when incurred in the normal manner. In either case, the business will effectively have no net income related to the assistance.

Government assistance received to help replace destroyed or damaged property will generally reduce the capital cost of that property. To the extent that the government assistance is compensation for property that has been lost or destroyed, the amount of the assistance is treated similarly to insurance proceeds so that the compensation is proceeds of disposition.

Generally, the Income Tax Act allows a business to elect to postpone recognizing a capital gain or a recaptured capital cost allowance when a former property is disposed of involuntarily and a replacement property is acquired. A replacement property must be acquired within a specified time limit (generally within 24 months of the end of the tax year in which the proceeds were receivable). A property is a replacement property for a former property only if specific conditions are met.

To ease the financial burden that might arise when a business elects to postpone recognizing a capital gain or a recaptured capital cost allowance, the CRA may accept security in lieu of payment of taxes owing until the final determination of taxes is made or the period for acquiring the replacement property has expired. For more information on posting security, see paragraph 3 of Interpretation Bulletin IT-259R4, Exchange of Property.

If the business is unable to pay or secure the tax debt arising from such a scenario, it is CRA policy to work with the business to establish a payment arrangement based on the business’s ability to pay.

The business should file its income tax return in the normal manner for the year that the proceeds are received and file its replacement property rules election within the specified time to amend the tax assessment for the year the proceeds were received and reduce the amount payable on the proceeds. In the meantime, to offer security or discuss a payment arrangement, the business can call the CRA at 1-888-863-8657.

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

In general, the provision of financial assistance by a government (or other grantor) to an individual or a business to subsidize the individual or business for losses or expenses resulting from a disaster will not be considered a supply and, therefore, the GST/HST will not apply to it, if there is no direct link between the financial assistance and a supply by the individual or business to the grantor or a third party specified by the grantor. For more information, see Technical Information Bulletin B-067, Goods and Services Tax Treatment of Grants and Subsidies.

Compensation you receive from your employer or government is, generally, not considered income in most circumstances. Any time you receive compensation for a disaster, including insurance, it’s always wise to talk to an accountant or tax preparer to ensure your non-taxable position.

Refundable vs Non-refundable Tax Credits 

By Randall Orser | Personal Income Tax

Tax credits can greatly decrease the amount of taxes you must pay. If you don’t fully understand them, you could be missing out on large cash opportunities. One aspect that often goes unexplained is the difference between refundable and non-refundable tax credits. What is the difference between the two, and how do they affect the amount of tax you owe to the government?

A tax credit is very different from a tax deduction. A deduction is a reduction in the gross income. For example, if you have a gross income of $50,000 for the year, total itemized deductions of $10,000 would make the adjusted gross income $40,000. You have the option to use the standard deduction or itemize your deductions if your total itemized deductions exceed the standard deduction. By increasing the value of your deductions, you lower your taxable income, therefore lowering the amount of total tax you owe.

Tax credits have a larger advantage. After you have calculated your total taxable income and determined how much you owe in taxes, a tax credit will be deducted from that total amount. For example, if you owe the government $3,000 and you qualify for a $1,000 tax credit, you now only owe $2,000. It is a 100% reduction in taxes owed whereas deductions reduce the taxes owed by a much smaller percentage. Basically, you want to get as many deductions and credits as possible, but credits have a larger impact.

Tax credits have nothing to do with how much money was withheld from your check each month for taxes. Don’t even think about how much money is withheld until the very end. The withheld amount also has nothing to do with whether a tax credit is refundable or not. These are two different aspects; do not confuse them.

Many people don’t know that tax credits can be either refundable or non-refundable. If they aren’t done in the right order, you could be losing money owed to you. Fortunately, the forms are set up so that you will automatically calculate them in the right order. However, understanding the difference between the two is beneficial.

First, calculate non-refundable tax credits. A non-refundable tax credit is a credit that cannot exceed your total tax owed. For example, if you owe $3,000 in taxes and your total non-refundable tax credits equal $4,000, your tax owed is $0. You cannot receive back an extra $1,000. There is no refund to the total tax you owe.

Non-refundable credits include basic personal exemption; education credits; child and dependent care credits, adoption credits, etc. Subtracting non-refundable credits first will minimize your total taxes owed.

Now you will have a new taxes-owed amount. Using the above example, you have $0 owed. Calculate your total refundable credits. These included the earned income tax credit, making work pay credit, first time home buyers credit, etc. Let’s say these come to a total of $2,000. These are refundable credits meaning you will have a result of -$2,000 tax. In other words, the government owes you $2,000.

Once you have calculated your taxes owed after subtracting all qualified credits, calculate your entire refund or taxes owed. If you get $2,000 from the government and $5,000 was withheld from your check, your total refund is $7,000. Notice that the amount withheld from your check is separate from the $2,000 refundable credit. You receive an extra $2,000 in addition to the money returned to you that was withheld for tax purposes throughout the year.

Calculating non-refundable credits before refundable credits maximizes your total credit potential. Non-refundable credits are used first, whether they bring your taxes owed down to zero or just reduce them. Refundable credits are calculated last to ensure that all possible refunds are realized. The above example is exaggerated to make the discussion easier. This amount in tax credits is not typical. It depends on what you qualify for. However, make sure you check out each credit thoroughly to ensure you get your maximum return or minimize your taxes owed as much as possible.

Taxpayer Bill of Rights

By Randall Orser | Personal Income Tax

The Canada Revenue Agency (CRA) operates on the fundamental belief that you are more likely to comply with the law if you have the information and other services that you need to meet your obligations. These obligations may include paying taxes or providing information.

CRA wants to make sure you receive all your entitlements and that you understand and can exercise your rights. They describe and define these rights in the RC17, Taxpayer Bill of Rights Guide: Understanding your rights as a taxpayer.

The Taxpayer Bill of Rights describes and defines 16 rights and builds upon the CRA's corporate values of professionalism, respect, integrity, and cooperation. It describes the treatment you are entitled to when you deal with the CRA. You can expect that the CRA will serve you with high standards of accuracy, professionalism, courteousness, and fairness. The Taxpayer Bill of Rights also sets out the CRA Commitment to Small Business to ensure their interactions with the CRA are conducted as efficiently and effectively as possible.

In addition to the 16 rights that apply to all taxpayers, the Taxpayer Bill of Rights also has a five-part Commitment to Small Business. The five commitments made to small business acknowledge their importance as the engine of growth in the Canadian economy. These commitments also complement the Government's pledge to create a competitive, dynamic, business environment in which Canadian businesses will thrive. They recognize the role the Canada Revenue Agency can play in minimizing the compliance burden, specifically the amount of paperwork involved in complying with the tax system.

The Minister of National Revenue has identified a need for greater awareness among taxpayers (particularly small businesses) about what they can expect when they deal with the CRA. This includes awareness about what their rights are, and what avenues of redress are available to them when they believe they have received inadequate service from the CRA. This was developed through interactions with taxpayers, their representatives, business groups, professional associations, and Members of Parliament, and in consultation with CRA managers and front-line employees.

It’s thought that the Taxpayer Bill of Rights will increase transparency and accountability on the part of the CRA and, as a result, improve the quality of all taxpayers' service experiences with the CRA. The more you know your rights, it’s thought that the more your compliance level will increase, and the less CRA has to check on said compliance.

Here are the 16 rights:

1. You have the right to receive entitlements and to pay no more and no less than what is required by law.

2. You have the right to service in both official languages.

3. You have the right to privacy and confidentiality.

4. You have the right to a formal review and a subsequent appeal.

5. You have the right to be treated professionally, courteously, and fairly

6. You have the right to complete, accurate, clear, and timely information

7. You have the right, unless otherwise provided by law, not to pay income tax amounts in dispute before you have had an impartial review

8. You have the right to have the law applied consistently

9. You have the right to lodge a service complaint and to be provided with an explanation of our findings

10. You have the right to have the costs of compliance taken into account when administering tax legislation

11. You have the right to expect us to be accountable

12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances

13. You have the right to expect us to publish our service standards and report annually

14. You have the right to expect us to warn you about questionable tax schemes in a timely manner

15. You have the right to be represented by a person of your choice

16. You have the right to lodge a service complaint or request a formal review without fear of reprisal

Here are the 5 commitments to business:

1. The CRA is committed to administering the tax system in a way that minimizes the costs of compliance for small businesses

2. The CRA is committed to working with all governments to streamline service, minimize cost, and reduce the compliance burden

3. The CRA is committed to providing service offerings that meet the needs of small businesses

4. The CRA is committed to conducting outreach activities that help small businesses comply with the legislation we administer

5. The CRA is committed to explaining how we conduct our business with small businesses

New Rules for Principal Residence

By Randall Orser | Personal Income Tax

In late 2016, the Liberal government decided to make changes to Canada Revenue Agency’s (CRA) reporting requirements for the sale of your principal residence. Supposedly this will improve compliance and administration of the tax system. Is this the beginning of a new way to tax you, the taxpayer? Well, probably will be though not now. Never underestimate a government to tax its citizens.

When you sell your principal residence or when you are considered to have sold it, usually you do not have to report the sale on your income tax and benefit return and you do not have to pay tax on any gain from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it.

Starting with the 2016 tax year, due by April 30th, 2017, you will be required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption. If you sell your principal residence will have to report the sale on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. Reporting will be required for sales that occur on or after January 1, 2016.

The principal residence exemption is an income tax benefit that generally provides you an exemption from tax on the capital gain realized when you sell the property that is your principal residence. Generally, the exemption applies for each year the property is designated as your principal residence.

For the sale of a principal residence in 2016 or later tax years, CRA will only allow the principal residence exemption if you report the sale and designation of principal residence in your income tax return. If you forget to make a designation of principal residence in the year of the sale, it is very important to ask the CRA to amend your income tax and benefit return for that year. Under proposed changes, the CRA will be able to accept a late designation in certain circumstances, but a penalty may apply.

The penalty is the lesser of the following amounts:

  1. $8,000; or
  2. $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA.

More information on late designations is available on the CRA website under Late, amended, or revoked elections.

The CRA will focus efforts on communicating to taxpayers and the tax community the requirement to report the sale and designation of a principal residence in the income tax return. For dispositions occurring during this communication period, including those that occur in the 2016 taxation year (generally for which the designation would be required to be made in tax filings due by late April 2017) the penalty for late-filing a principal residence designation will only be assessed in the most excessive cases.

Your Home is used for a Business or Rental

If only a part of your home is used as your principal residence and you used the other part to earn or produce income, whether your entire home qualifies as a principal residence will depend on the circumstances.

It remains the CRA’s practice to consider that the entire property retains its nature as a principal residence, where all the following conditions are met:

  • the income-producing use is secondary to the main use of the property as a residence;
  • there is no structural change to the property; and
  • no capital cost allowance (CCA) is claimed on the property.

If your situation does not meet all three of the conditions above, you may have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, if the split is reasonable. Instructions are provided in the guide T4037, Capital Gains 2016, on how to report the sale of your principal residence in this situation.

If you’ve sold your home, and it’s your principal residence, in 2016, then remember to have the information necessary to report said sale on your income tax return. Now, no gain will be attributed to said sale, however, that may change in the future.