Newsletters

Tax Alerts

Claiming a tax credit for renovation costs (October 2021)

The ongoing pandemic has, as one of its many effects, created a boom in the home renovation industry, as Canadians find themselves needing to adapt their homes to more and more varied uses.

One of those uses is multi-generational living, as older Canadians seeks to “age in place” rather than moving to a retirement home or long-term care facility. And, while home renovations for any purpose are undoubtedly expensive, renovations done to allow homeowners (or family members of homeowners) to continue to live in the family home benefit from a federal tax credit for expenses incurred.

That credit — the Home Accessibility Tax Credit, or HATC — has three features that make it particularly useful. First, the credit is available to all taxpayers who incur eligible expenses, regardless of individual or family income. Second, expenses eligible for the credit don’t have to be incurred for the benefit only of the homeowner — taxpayers who incur eligible home renovation expenses can claim the HATC where those expenses are done to increase accessibility or safety for any family member who is over the age of 65 or who is disabled and lives in the home. Finally, the HATC is a rare exception to the general rule that an expense can only be claimed once for tax purposes. Many of the expenses which are eligible for the HATC also qualify for the medical expense tax credit — and the rules permit such eligible expenses to be claimed for purposes of both credits, in the same tax year.

The rules which govern how the credit is claimed are also quite flexible. For purposes of the credit, a “qualifying individual” is a person over the age of 65, or a person of any age who can claim the disability tax credit. An “eligible individual” is a family member on whom the qualifying individual is dependent. Under the HATC any allowable credit can be split between or among eligible and qualifying individuals as they see fit.

The credit is equal to 15% of up to $10,000 in qualifying expenses per year, and that dollar limit applies even if there is more than one qualifying individual living in the home. The credit itself is non-refundable, meaning that it can reduce federal income tax otherwise payable, but cannot create or increase a refund. Consequently, from a tax planning perspective, it makes sense for the credit to be claimed only by eligible or qualifying individuals who have tax payable for the year.

The general rule for purposes of the credit is that an eligible expense is one which is done to increase accessibility of the home or the safety of a qualifying individual living in the home. As well, any renovation done must be of a permanent or “enduring” nature — an item bought that does not become a permanent part of the home is generally not eligible. As an example, a shower seat which is permanently affixed to the wall or floor in a bath or shower would qualify for the credit, while a portable seat that can be taken in and out of the shower as needed would not.

It’s apparent that the kind and number of additions and renovations which would qualify for the credit are almost innumerable, and any of those which meet the criteria outlined above will generally qualify. There are, however, specific categories of goods and services which are not eligible for the HATC. The Canada Revenue Agency (CRA) provides a listing of common expenses which do not qualify on its website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-31285-home-accessibility-expenses.html.

Most homeowners, especially where renovations are extensive, would employ professionals to make the changes. Others, however, are committed DIYers, who take on the project themselves, perhaps enlisting the help of family members. In each case, the rules on which expenses (i.e., labour and materials) qualify for the credit will differ, and those rules, as outlined on the CRA website, are as follows.

Work performed by yourself

If you do the work yourself, the eligible expenses include expenses for:

building materials
fixtures
equipment rentals
building plans
permits

However, the value of your labour or tools cannot be claimed as eligible expenses.

Work performed by a family member

Expenses are not eligible if the goods or services are provided by a person related to the qualifying or the eligible individual, unless that person is registered for goods and services tax/harmonized sales tax (GST/HST) under the Excise Tax Act. If the particular family member is registered for GST/HST and if all other conditions are met, the expenses will be eligible for the HATC.

Work performed by professionals

Generally, paid work done by professionals such as electricians, plumbers, carpenters, and architects for eligible expenses qualifies as eligible expenses.

Home renovations done to ensure all family members can access the home easily and live in it safely are generally renovations which must be done in a timely manner, for everyone’s safety and peace of mind. And, while costs for renovations (of any kind, for any purpose) generally end up being higher than planned, in this case, some financial assistance for those costs is provided through our tax system.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

When are legal fees deductible? (October 2021)

In most cases, the need to seek out and obtain legal services (and to pay for them) is associated with life’s more unwelcome occurrences and experiences — a divorce, a dispute over a family estate, or a job loss. About the only thing that mitigates the pain of paying legal fees (apart, hopefully, from a successful resolution of the problem that created the need for legal advice) would be the ability to claim a tax credit or deduction for the fees paid.

Unfortunately, while there are some circumstances in which such a deduction can be claimed, those circumstances don’t usually include the routine reasons — purchasing a home, getting a divorce, establishing custody rights, or seeking legal advice about making a will or managing a family estate — for which most Canadians incur legal fees. Generally, personal (as distinct from business-related) legal fees become deductible for most Canadian taxpayers only where they are seeking to recover amounts which they believe are owed to them, particularly where those amounts involved employment or employment-related income or, in some cases, family support obligations.

The first situation in which legal fees paid may be deductible is that of an employee seeking to collect (or to establish a right to collect) salary or wages. In all Canadian provinces and territories, employment standards laws provide that an employee who is about to lose his or her job (for reasons not involving fault on the part of the employee) is entitled to receive a specified amount of notice, or salary or wages equivalent to such notice. In many cases, however, the employee can establish a right to a period of notice (or payment in lieu) greater than the statutory minimum. The amount of notice or payment in lieu of notice which is payable can then become a matter of negotiation between the employer and its former employee, and such negotiations usually involve legal representation and consequently, legal fees. In that situation, legal fees incurred by the employee to establish a right to amounts allegedly owed by the employer are deductible by that former employee. If a court action is necessary and the Court requires the employer to reimburse its former employee for some or all of the legal fees incurred, the amount of that reimbursement must be subtracted from any deduction claimed. In other words, the former employee can claim a deduction only for legal fees which he or she was personally required to pay in order to collect wages or salary owed and for which he or she was not reimbursed.

In some situations, an employee or former employee seeks legal help in order to collect or to establish a right to collect a retiring allowance or pension benefits. In such situations, the legal fees incurred can be deducted, up to the total amount of the retiring allowance or pension income actually received for that year.

The rules covering the deduction of legal fees incurred where an employee claims amounts from an employer or former employer are relatively straightforward. The same, unfortunately, cannot be said for the rules governing the deductibility of legal fees paid in connection with family support obligations. Those rules have evolved over the past number of years in a somewhat piecemeal fashion — the current rules are as follows.

Legal fees incurred by either party in the course of negotiating a separation agreement or obtaining a divorce are not deductible. Such fees paid to establish child custody or visitation rights are similarly not deductible by either parent. As well, no fees are incurred to equalize family assets.

Where, however, one former spouse has the right to receive support payments from the other, there are circumstances in which legal fees paid in connection with that right are deductible. Specifically, legal fees paid for the following purposes will be deductible by the person receiving those support payments:

establishing the amount of support payments from their current or former spouse or common-law partner;
establishing the amount of support payments from the legal parent of their child (who is not their current or former spouse or common-law partner) where the support is payable under the terms of a court order;
seeking an increase in support payments;
defending against a reduction in support payments;
collecting late support payments; or
requesting that child support payments be non-taxable.

On the payment side of the support payment/receipt equation, the situation is not nearly so favourable, as a deduction for legal fees incurred will not generally be allowed to a person paying support. More specifically, as outlined on the Canada Revenue Agency (CRA) website, a payer of support “cannot deduct legal and accounting fees incurred to establish, negotiate, contest, reduce or terminate the amount of support payments”.

Finally, where the CRA reviews or challenges income amounts, deductions, or credits reported or claimed by a taxpayer for a tax year, any fees (which in this case includes accounting fees) paid for advice or assistance in dealing with the CRA’s review, assessment, or reassessment, or in objecting to that assessment or reassessment, can be deducted by the taxpayer. A deduction can similarly be claimed where the taxpayer incurs such fees in relation to a dispute involving employment insurance, the Canada Pension Plan, or the Quebec Pension Plan.

The approaching end of pandemic benefit programs (October 2021)

Since March of 2020, tens of millions of Canadians have received pandemic benefits. In some cases, those benefits have been received directly by individuals — typically, through the Canada Emergency Response Benefit (CERB) and, later, the Canada Recovery Benefit (CRB). In other cases, benefits have been provided to businesses, in some cases to assist them with rent payments or, in others, to subsidize employee wages.

Each of the pandemic economic assistance programs provided has been tweaked, renewed, and extended several times, and the current status of each such benefit program can be hard to remember. What follows is a summary of the major programs which are currently (as of September 2021) in place, and the dates on which those programs are currently scheduled to come to an end. Barring any changes by the newly elected federal government, most of the following programs are scheduled to end in October 2021.

Benefit programs for individuals

Canada Recovery Benefit

The CRB replaced the initial pandemic relief program, the CERB, in September of 2020.

The CRB is an income replacement benefit paid to those who are not working due to the pandemic or who have experienced a 50% reduction in income when compared to the previous year, again for pandemic-related reasons. To receive the CRB, an individual must have earned at least $5,000 in 2019, 2020, or during the previous 12 months and must not be eligible for Employment Insurance.

The amount which can be received under the CRB program depends on when an application for the benefit is made. Individuals who apply after July 17, 2021 can receive $600 for each two-week period. Those who applied prior to July 18, 2021 can receive $1,000 each subsequent two-week period.

Under current rules, the CRB is scheduled to end on October 23, 2021. However, it is possible to apply for the CRB after that date, as the rules allow applications to be made retroactively for any two-week period up to 60 days after that period has ended.

Canada Recovery Sickness Benefit

The eligibility criteria for the Canada Recovery Sickness Benefit (CRSB) are much narrower than those for the CRB and consequently the rules are much simpler.

The CRSB is paid to those who miss more than 50% of their work week because they are sick with COVID-19, because they have been advised to self-isolate due to COVID-19 or because they have a health condition which puts them at greater risk of contracting COVID-19.

The benefit of $500 per week is paid for a maximum of four weeks, and those weeks do not have to be consecutive.

Like the CRB, the CRSB program is scheduled to end on October 23, 2021, but applications for any one-week benefit period can be made up to 60 days after the end of that benefit period.

Canada Recovery Caregiving Benefit

As the name implies, the Canada Recovery Caregiving Benefit (CRCB) can be claimed by those who are unable to work because they must care for their child under 12 years old or for a family member who needs supervised care. That need for care can arise because the family member is ill, self-isolating, or at risk of serious health complications because of COVID-19, or because their school, regular program, or facility is closed or unavailable to them for pandemic-related reasons.

The CRCB is paid as a $500-per-week benefit, for a maximum of 42 weeks. Those 42 weeks are not required to be consecutive weeks.

The CRCB program is scheduled to end on October 23, 2021, but application for the benefit can be made up to 60 days after the end of a benefit period.

It’s apparent that an individual could, under the eligibility requirements, qualify for more than one of the above benefits during the same time period. However, the rules prevent such “double-dipping”, by providing that only one such pandemic benefit can be received during for a particular time period. In addition, individuals are generally not eligible for any of the above benefits for a time period during which they were receiving Employment Insurance, short-term disability benefits, or (in the province of Quebec) Quebec Parental Insurance Benefits.

More information on each of these individual pandemic benefits can be found on the government of Canada website at https://www.canada.ca/en/services/benefits/covid19-emergency-benefits.html.

Benefits for businesses

Over the past year and a half, the federal government has provided a number of rent subsidy and wage subsidy programs to enable businesses to cover their fixed costs during lockdowns and to bring back employees once it was possible to re-open. The major current programs in those areas are as follows.

Canada Emergency Wage Subsidy

The Canada Emergency Wage Subsidy or CEWS provides a subsidy on eligible salary or wages to help businesses hire and pay workers. Under the program terms, eligible employers can hire new workers, increase workers' hours, or increase wages.

The CEWS program will continue until October 23, 2021.

Canada Recovery Hiring Program

Like the CEWS, the Canada Recovery Hiring Program (CRHP), which was introduced on June 6, 2021, provides a subsidy on eligible salary or wages to help businesses hire and pay workers. Most of the eligibility criteria under the CEWS and the CRHP are the same (although the calculation of benefits differs) and, under both programs, eligible employers can hire new workers, increase workers' hours, or increase wages.

The CRHP serves many of the same purposes as the CEWS. There is an overlap period for the two programs between June 6 and October 23, 2021, and eligible employers can in fact choose which program to apply to for any eligibility period during that overlap period. The federal government provides an online calculator to enable businesses to determine which benefit is more advantageous, and that calculator can be found at https://www.canada.ca/en/revenue-agency/services/subsidy/calculate-wage-hiring-subsidies.html.

Employers can apply for the CRHP for a four-week period, and applications for support must be made again for each subsequent four-week period. An application for a specific four-week claim period can be made up to 180 days after the end of that claim period.

Unlike some other business pandemic support programs, the CRHP is scheduled to be available until November 20, 2021.

Canada Emergency Rent Subsidy

The Canada Emergency Rent Subsidy (CERS) provides a rent and mortgage subsidy for eligible expenses to qualifying businesses, charities, and non-profits. Unlike an earlier version of the commercial tenant support program, the CERS is applied for by, and paid directly to, tenants and property owners. There is no requirement for participation by landlords.

An additional 25% in rent support is available under the CERS program for businesses which were “significantly restricted” by mandatory public health orders.

The CERS program will be available until October 23, 2021. However, eligible businesses can apply for any particular claim period up to 180 days after the end of that claim period.

The programs listed above are the main pandemic benefit programs currently available to individuals and businesses. While the purpose of each program and the benefits to be obtained are relatively straightforward, there are myriad details with respect to eligibility, application processes, determination of benefits, and tax treatment of those benefits. As well, there are many other such programs offered by the federal government. Detailed information on all such pandemic relief programs can be found on the federal government website at https://www.canada.ca/en/department-finance/economic-response-plan.html#businesses.

Finally, the information summarized above with respect to pandemic benefits is current as of September 26, 2021. Extensions of such programs, or changes to program terms may be made before the programs expire. Should that occur, information on the changes will be available on the federal government website at https://www.canada.ca/en/department-finance/economic-response-plan.html#businesses.

Year-end planning for your RRSP, RRIF, and TFSA (October 2021)

Most Canadians know that the deadline for making contributions to one’s registered retirement savings plan (RRSP) comes 60 days after the end of the calendar year, around the end of February. There are, however, some circumstances in which an RRSP contribution must be (or should be) made by December 31, in order to achieve the desired tax result.

Similarly, most Canadians who have opened a registered retirement income fund (RRIF) are aware that they are required to make a withdrawal of a specified amount from that RRIF each year, with the percentage withdrawal amount based on the RRIF holder’s age — although few are aware of when and how that required withdrawal is calculated.

The rules around tax-free savings accounts (TFSAs) are more flexible, but it is nonetheless the case that advantages can be obtained (and disadvantages avoided) by carefully timing of TFSA withdrawals and recontributions based on the calendar year end.

In other words, while the basic rules with respect to contributions to and withdrawals from each of these savings plans are relatively straightforward there are, nonetheless, benefits to be received from careful consideration of the detailed rules — and some exceptions to those rules.

What follows is an outline of steps which should be considered, before the end of the 2021 calendar year, by Canadians who have an RRSP, a RRIF, and/or a TFSA.

Timing of RRSP contributions

When you are making a spousal RRSP contribution

Under Canadian tax rules, a taxpayer can make a contribution to an RRSP in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2021, the contributor can claim a deduction for that contribution on his or her return for 2021. The spouse can then withdraw that amount as early as January 1, 2024 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2022, the contributor can still claim a deduction for it on the 2021 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2025. It’s an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should an unforeseen need to withdraw funds arise.

When you are turning 71 during 2021

Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71 years of age — usually by converting the RRSP into a RRIF or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31 is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31 of that year. Once that deadline has passed, no further RRSP contributions are possible.

RRIF withdrawals for 2021

Under Canadian law, anyone who has a RRIF is required to make a minimum withdrawal from that RRIF each year. The amount of the withdrawal is calculated as a specified percentage of the balance in the RRIF at the beginning of the calendar year, with that percentage based on the age of the RRIF holder at that time.

Those RRIF holders who elect to withdraw only the required minimum amount each year will likely notice a significant increase in the amount which must be withdrawn (and taxed) in 2021 when compared to the required withdrawal from 2020. That difference is attributable, for the most part, not to increases in the value of the RRIF or the increased age of the RRIF holder, but to a temporary rule which was put in place in 2020 as part of the pandemic relief measures.

In March 2021, the stock market experienced a significant loss in value. Since required RRIF withdrawal amounts are based on the value of the RRIF at the start of the calendar year, many RRIF holders were faced with the prospect of having to make withdrawals from a portfolio whose value had declined precipitously since January 1, 2020. In recognition of that reality, required RRIF withdrawals for RRIF holders of all ages were reduced (for 2020 only) by 25%.

For 2021, the usual RRIF percentage withdrawal requirements have been reinstated. That fact, combined with the market recovery since March 2020, will mean that many RRIF holders may be surprised at the amount which they must withdraw from their RRIFs (and pay tax on) in 2021.

Take, for example, an individual who was 74 years old at the beginning of 2020 and had $500,000 in his or her RRIF on January 1, 2020. The required minimum withdrawal for 2020 (taking into account the 25% reduction) would have been $21,250.

Assume that the balance in the RRIF grew by 5% during 2020 and that the RRIF balance was therefore $525,000 on January 1, 2021. The RRIF holder (aged 75 as of January 1, 2021) will be required to withdraw a minimum of $30,555 from that RRIF for 2021, and to pay tax on that amount.

While there is no way of avoiding the requirement to withdraw a minimum amount from one’s RRIF, and to pay tax on the amount withdrawn, taxpayers who do not have immediate need of such funds can consider contributing those amounts to a TFSA. Where that is done, the funds can be invested and continue to grow, and neither the original contribution nor the investment gains will be taxable when the funds are withdrawn from the TFSA.

Planning for TFSA withdrawals and contributions

Each Canadian aged 18 and over can make an annual contribution to a TFSA — the maximum contribution for 2021 is $6,000. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.

Consequently, it makes sense, where a TFSA withdrawal is planned (or the need to make such a withdrawal might arise) within the next few months to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA before December 31, 2021 will have the amount which is withdrawn added to his or her TFSA contribution limit for 2022, which means it can be re-contributed, where finances allow, as early as January 1, 2022. If the same taxpayer waits until January of 2022 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2023.

The approach of the calendar year end doesn’t usually prompt Canadians to consider the details of making contributions to an RRSP or withdrawals from a TFSA or a RRIF. There is, however, no flexibility in the deadlines for taking such actions, and considering what steps may be needed or advisable now means one less thing to remember as the December 31 deadline nears.

Some good pandemic financial news (September 2021)

The past 18 months have been characterized by a steady stream of mostly bad news, relating to the pandemic and its harmful consequences. The human cost of the pandemic, in terms of illness and death, is paramount. But the reality is also that much economic and financial harm resulted, at an individual, community, and national level, as businesses closed and individuals lost jobs or saw their hours — and consequently their income — reduced.

However, an exception to that steady stream of economic and financial bad news came recently in the form of a Statistics Canada report on state of Canadians’ indebtedness.

The rise in personal debt over the past 15 years, as individuals and families took advantage of record low interest rates, has been a source of concern to both financial advisers and the government. One measure of the indebtedness of an individual or family is the debt-to-income ratio, which measures the amount of debt (secured and unsecured) as a percentage of household income. In 2005, the debt-to-income ratio of the average household was 93%. By the end of 2019 that ratio had climbed to more than 180%.

As well, in the two decades prior to the pandemic, credit card debt of Canadians had risen, on average, by 20.7% each year. By the beginning of 2020, the outstanding balance of credit card debt owed by Canadians had reached $90.6 billion.

As outlined in the Statistics Canada report, that picture changed dramatically from the beginning of 2020 to the start of 2021. Over that period, the outstanding balance carried on credit cards fell from $90.6 billion to $74 billion, an 18.3% decline in less than one year.

The StatsCan report, which can be found on its website at https://www150.statcan.gc.ca/n1/daily-quotidien/210823/dq210823c-eng.htm, attributes that change to two circumstances. As stated in the report “Canadian households began to see their disposable income rise during the pandemic, due in part to the limited opportunities to spend money during the lockdowns as well as the monetary support provided by governments …. to offset lost wages.” And, perhaps the best news of all is that the largest reductions in debt loads were seen in Canadians who had the lowest credit ratings.

Managing a Canada Student Loan after graduation (September 2021)

Getting a post-secondary education, especially where that education includes graduate school or professional training, is an expensive undertaking. According to Statistics Canada, the average undergraduate tuition cost for the 2020-21 academic year was $6,580. Costs for graduate programs, particularly professional training, can go much higher, reaching as much as $50,000 per year. And those costs don’t factor in necessary expenditures on textbooks and other ancillary costs, to say nothing of general living expenses, like rent, transportation, and food.

What that means, in most cases, is that Canadians who want to pursue post-secondary education must go into debt to do so. Financing through a bank loan or line of credit is possible, but most students who need financial assistance receive that assistance through a federal government program — the Canada Student Loan (CSL) program — as well as loan or grant programs provided by the particular province or territory in which the student resides.

Using a government-sponsored loan program to finance education has a number of advantages. Under the CSL program, any loans provided do not accrue interest while the recipient student is still in school and no repayment of the loan is required during that time. However, interest starts accruing once the student has graduated and, six months after graduation, those who received loans under the CSL program are required to make arrangements for repayment. Consequently, CSL loan recipients who graduated in the spring of 2021 must now consider what arrangements they wish to make for repayment of loan amounts received.

The onus is on the loan recipient to contact the CSL center to make required arrangements for repayment, and failing to do so will not delay repayment. In such cases, the federal government, as the loan issuer, has the right to automatically withdraw loan repayments from the same bank account where the loans were originally deposited.

While interest usually starts accruing as soon as the student has graduated, that’s not the case right now. As part of its pandemic relief measures, the federal government has suspended the accumulation of interest on Canada Student Loans, effective as of April 2021 and lasting until March 31, 2023. So, while graduates are still required to begin repayment of their loans no more than six months after graduation, those repayments will, at least until April 2023, not include an interest component. Once interest is levied on a loan, loan recipients can choose between a fixed interest rate on their loan (meaning that the interest rate stays the same until the loan is fully repaid) or a variable/floating rate of interest, which will change with changes in the prime rate.

The choice of whether to select a fixed or floating interest rate is, obviously, an individual one, which must take into account the size of the loan, the time period over which the borrower expects to make full repayment and, of course, one’s views on whether interest rates will be rising or falling over that expected repayment period.

Whatever the interest rate chosen or levied, borrowers who pay that interest can claim, on Line 31900 of the federal tax return, a student loan interest tax credit to help offset those costs. The student loan interest tax credit is a non-refundable credit, meaning that it applies to reduce any federal tax payable, but cannot create or increase a refund. That federal tax reduction is equal to 15% of the interest amount claimed, and interest amounts eligible for the credit are those paid in the current tax year or any of the previous five tax years, without limit. And, finally, the student loan interest tax credit can be claimed only by the former student who received the government student loan.

These criteria require former students who are eligible for the credit to consider the following factors in deciding whether to claim the credit, and in what amount.

Individuals who do not have tax payable for the year will not benefit from claiming the student loan interest tax credit, as there is no tax which the credit can reduce.
Individuals who have other available tax credits which must be claimed in the year the related expense is incurred should claim those credits first, as the student loan tax credit can be carried forward and claimed in any of the five years after the interest has been paid.
Where the individual has remaining tax payable in the current year after all other available tax credits have been claimed, the student loan interest tax credit should be claimed only to the extent necessary to reduce tax payable to zero. Any additional claim should be carried forward to a future year or years where it is needed to reduce tax payable.

There is, as well, a very important caveat. Once a student has graduated (especially from a professional training program like law or medicine), financial institutions will frequently offer to loan that student sufficient funds to allow the former student to consolidate all outstanding debts which were incurred to finance his or her education. Often the interest rate to be provided is a preferential one, and can even be lower than the rate which the student borrower would pay under the CSL program.

That preferential interest rate, however, has a “cost” of which most graduates are unaware. The student loan interest tax credit is available only for interest paid on government-sponsored student loans. Borrowers cannot claim interest paid on any other kind of loan, even where that loan was used for financing post-secondary education. As well, no credit can be claimed for interest paid on an otherwise qualifying student loan that has been combined with any other kind of loan. If the borrower has obtained a loan from a bank or other financial institution, or has consolidated such a loan with government student loans which would otherwise qualify for the credit, none of the interest paid on that loan or consolidated loan will qualify for the student loan interest tax credit.

Consequently, borrowers who are considering a loan offer from a financial institution must include in their calculations not only the difference in interest rates, but whether any lower interest rate offered by the financial institution will compensate for the loss of any claim for the student loan interest tax credit.

When things work out after graduation in the way everyone hopes they will, the former student will have secured employment at an income sufficient to make repayment of student borrowings possible. Where that’s not the case, and the borrower cannot make repayment as required because of financial hardship, it is possible to reduce the required monthly repayment through the Repayment Assistance Program. Details of that program, and much more information on the Canada Student Loan Program generally, can be found on the federal government website at https://www.canada.ca/en/services/benefits/education/student-aid/grants-loans/repay/assistance/rap.html.

Avoiding (or minimizing) the OAS clawback (September 2021)

There are a number of income sources available to Canadians in retirement. Those who participated in the work force during their adult life will have contributed to the Canada Pension Plan (CPP) and will be able to receive CPP retirement benefits as early as age 60. Earning employment or self-employment income will also have entitled those individuals to contribute to a registered retirement savings plan (RRSP). A shrinking minority of Canadians will be able to look forward to receiving benefits from an employer-sponsored pension plan.

Each of those income sources requires that an individual have made contributions during his or her working life in order to enjoy benefits in retirement; the fourth major source of retirement income for Canadians — the Old Age Security (OAS) program — does not. Entitlement to OAS is based solely on the number of years of Canadian residence, and individuals who are resident in Canada for 40 years after the age of 18 can receive full OAS benefits. As of the third quarter of 2021, those full OAS benefits are equal to $626.49 per month.

The OAS program is distinct from other sources of retirement income in another, less welcome way, in that it is the only such income source for which the federal government can require repayment by the recipient. That repayment requirement comes about through the OAS “Recovery Tax”, which is universally known as the OAS “clawback”.

While the rules governing the administration of the clawback can be confusing, the concept is a (relatively) simple one. Anyone who receives OAS benefits during the year and has income for that year of more than (for 2021) $79,845 must repay a portion of the benefits received benefits. That repayment, or clawback is administered by reducing the amount of OAS benefits which the individual receives during the next benefit year.

For example, an individual who receives full OAS during 2021 and has net income for the year of $85,000 will be subject to the clawback. He or she must repay OAS amounts received at a rate of 15 cents (or 15%) of every dollar of income over the clawback income threshold, as in the following simplified example:

Total OAS benefit for the year — $7,500

Total income for the year — $85,000

OAS income clawback threshold — $79,845

Income over clawback threshold — $5,155 × 15% = $773.25

Repayment amount required — $773.25

The federal government becomes aware of an individual’s income for 2021 only once the tax return for that year is filed, usually by April 30 of 2022. At that time, it will become apparent that $773.25 in OAS benefits received must be repaid. Consequently, in the following benefit year (which will run from July 2022 to June 2023), OAS benefits received will be reduced by $64.44 per month ($773.25 ÷ 12 months).

The OAS clawback affects only individuals who have an annual income of at least $79,845, and it’s arguable that at such income levels, the clawback requirement does not impose any real financial hardship. Nonetheless, the OAS clawback is a perpetual irritant to those affected, perhaps because of the sense that they are being penalized for being disciplined savers, or good managers of their finances during their working years, in order to ensure a financially comfortable retirement.

While any sense of grievance can’t alter the reality of the OAS clawback, there are strategies which can be put in place to either minimize or, in some cases, entirely eliminate one’s exposure to that clawback. Some of those planning considerations are better addressed earlier in life, prior to retirement, However, it’s not too late, once one is already receiving OAS, to make arrangements to avoid or minimize the clawback.

In all cases, no matter what strategy is employed, the goal is to “smooth” one’s income from year to year, so that net income for each year comes in under the OAS clawback threshold and, not incidentally, minimizes exposure to the higher federal and provincial income tax rates which apply once income exceeds around $100,000.

The starting point, for taxpayers who are approaching retirement, is to determine how much income will be received from all sources during retirement, based on CPP and OAS entitlement, any savings accrued through an RRSP and any amounts which may be received from a private pension plan. Anyone who has an RRSP must begin receiving income from that RRSP in the year after that person turns 71. However, it’s possible to begin receiving income from an RRSP at any time. Similarly, an individual who is eligible for CPP retirement benefits can begin receiving those benefits anytime between age 60 and age 70, with the amount of monthly benefit receivable increasing with each month receipt is deferred. The same calculation applies to OAS benefits, which can be received as early as age 65 or deferred up until age 70.

Once the amount of annual income is determined, strategies to smooth out that income can be put in place. Those strategies can include receiving income from an RRSP prior to age 71, so as to reduce the total amount within the RRSP and so thereby reduce the likelihood of having a large “bump” in income when required withdrawals kick in at that time.

Taxpayers are sometimes understandably reluctant to take steps which they view as depleting their RRSP savings, but receiving income from an RRSP doesn’t mean spending that income. While tax has to be paid on any withdrawals (no matter what the taxpayer’s age), the after-tax amounts can be contributed to the taxpayer’s tax-free savings account, where they can compound free of tax. And, when the taxpayer has need of those funds, in retirement, they can be withdrawn free of tax and, they won’t count as income for purposes of the OAS clawback.

Taxpayers who are married can also “even out” their income by using pension income splitting, so that neither of them has sufficient income to be affected by the clawback. Using pension income splitting, the spouse who has income over the OAS clawback threshold re-allocates the “excess” income to his or her spouse on the annual return, and that income is then considered to be income of the recipient spouse, for purposes of both income tax and the OAS clawback. To be eligible for pension income splitting, the income to be reallocated must be private pension income, which is generally income from an RRSP or registered retirement income fund (RRIF), or from an employer-sponsored pension plan.

There are two reasons why pension income splitting is a particularly attractive strategy for avoiding or minimizing the OAS clawback. First, there is no need to actually change the source or amount of income received by each spouse, as the reallocation of income is “notional”, existing only the return for the year. Second, no decision has to be made on pension income splitting until it’s time to file the return for the previous year, meaning that spouses can easily calculate exactly how much income has to be reallocated in order to avoid the clawback, and to reduce tax liability generally. More information on the kinds of income eligible for pension income splitting, and the mechanics of the process, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/pension-income-splitting.html.

Financing the political process – the political contribution tax credit (September 2021)

To win elections, politicians need votes. And to run the election campaigns needed to garner those votes, they need an organization, volunteers, and money — a lot of money. To wage the current federal election, the major political parties will need to raise and spend millions of dollars. Their task of raising that money is undoubtedly made somewhat easier by the fact that Canadian taxpayers who donate money to political parties or candidates can obtain some tax benefit from doing so.

Individuals who donate to the political party or candidate of their choice may or may not be happy with the outcome of the election, but no matter which registered party or candidate they donated to, it will be possible for them to claim a federal tax credit for those donations when they file their returns for 2021 next spring.

The credit provided under the Income Tax Act is available with respect to funds contributed to either a registered political party or to candidates running in a federal election. Contributions can be made at any time, not just during an election campaign, as long as the donation is received by an official candidate or a registered federal political party or association.

While the parties which currently hold seats in the House of Commons are, of course, the most well-known, there are in fact 20 political parties registered and in good standing with Elections Canada for purposes of the 2021 federal election. They are as follows, in alphabetical order:

Donations to any one of these registered parties, within prescribed limits, would qualify for the federal political contribution tax credit.

Official candidates can, of course, be running either as candidates for one of the registered parties or as independents. Elections Canada provides a list of confirmed candidates who are running in this year’s federal election and that information can be found on the Elections Canada website at https://www.elections.ca/scripts/vis/FindED?L=e&PAGEID=20.

The federal political tax credit is calculated as a percentage of donations given. However, the credit percentage decreases as contributions amounts increase, and no credit at all is given for donations in excess of $1,275. The credit percentages allowed at different contribution levels are as follows:

*Contribution amount*	*Allowable tax credit*
$0.01 to $400	75% of the contribution
$400.01 to $750	$300 plus 50% of the contribution over $400
$750.01 and over	$475 plus 33⅓% of the contribution over $750

The maximum credit claimable in any taxation year by a single taxpayer is $650. Once the arithmetic is worked out, it becomes clear that the maximum credit obtainable is reached once contribution levels reach $1,275.

Contribution amount Allowable tax credit

$400 × 75% = $300

$350 × 50% = $175

$525 × 33.3% = $175

$1,275 $650

Where donations exceed $1,275 in any one taxation year, no tax credit can be claimed on the “excess” donation. As well, there is no provision which allows the taxpayer to carry over any “excess” contributions to a subsequent taxation year, meaning that no credit will ever be obtainable with respect to those “excess” contributions.

Many Canadians who are committed to a particular political party or candidate volunteer their time during a nomination or election campaign — canvassing for the candidate, putting up election signs, or telephoning voters to encourage them to vote for the candidate. However, in such cases, the work must be its own reward, as no income tax receipts can be issued for most such non-monetary contributions and consequently no credit can be claimed for the value of any non-monetary contribution (including volunteer hours) donated.

Where a qualifying contribution is made, an official receipt must be issued in order for the tax credit to be claimed. A receipt must be issued, in paper or electronic format, for every contribution over $20.

The actual credit for qualifying donations made is claimed on the tax return for the year in which the contribution was made. The amount of the credit is calculated (according to the formula outlined above) on the Federal Worksheet, and the amount of the actual credit entered on line 41000 of Schedule 1 of the federal tax return. By the time the 2021 return is filed, of course, the election will long since have been concluded, the newly elected government will be in place in Ottawa, and the taxpayer will be in a position to assess whether it was, in fact, money well spent.

New Quarterly Newsletters (Q2 2021)

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