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Objecting to your 2019 Notice of Assessment (June 2020)

Although the filing deadline for individual income tax returns for the 2019 tax year has been extended to June 1, 2020, millions of Canadians have nonetheless already filed those returns. Specifically, by May 19, 2020, the Canada Revenue Agency (CRA) had processed just over 20 million individual income tax returns filed for the 2019 tax year. Just over 13 million of those returns resulted in a refund to the taxpayer, while just over 3 million resulted in a tax balance owed by the taxpayer.

No matter when or how a return is filed, or the outcome of the filing, all returns filed with and processed by the CRA have one thing in common — they result in the issuance of a Notice of Assessment (NOA) by the Agency, outlining the taxpayer’s income, deductions, credits, and tax payable for the 2019 tax year.

In most cases, the information contained in the NOA is the same as that provided by the taxpayer in his or her return, perhaps with a few arithmetical corrections made by the CRA. In a minority of cases, the information presented in the NOA will differ from that provided by the taxpayer in the return. Where that difference means an unanticipated refund, or a larger refund than expected, it’s a happy day for the taxpayer. In some cases, however, the NOA will inform the taxpayer that additional amounts are owed to the CRA.

When that happens, the taxpayer must figure out why, and to decide whether or not to dispute the CRA’s conclusions. Many such discrepancies are the result of an error made by the taxpayer in completing the return. A lot of information from a variety of sources is reported on even the most straightforward of returns and it’s easy to overlook, for instance, a T5 slip reporting a small amount of interest income earned. Even where tax software is used to prepare the return, errors can still occur. Such tax software relies, in the first instance, on information input by the user with respect to amounts found on T4, T5 and other information slips. No matter how good the software, it can’t account for income information which the taxpayer hasn’t provided. In other cases, the taxpayer might transpose figures when entering them, such that an income amount of $26,353 on the T4 becomes $23,653 on the tax return. Once again, the tax software has no way of knowing that the information input was incorrect, and calculates tax owing on the basis of the figures provided.

Where there is additional tax owing because of an error or omission made by the taxpayer in completing the return, and the CRA’s figures are correct, disputing the assessment doesn’t really make sense. There is, as well, a persistent tax “myth” that if a taxpayer doesn’t receive an information slip (T4 or T5, as the case might be) for income received during the year, that income doesn’t have to be reported and therefore isn’t taxable. The myth, however, is just that. All taxpayers are responsible for reporting all income received and paying tax on that income, and the fact that an information slip was lost, mislaid, or never received doesn’t change anything. The CRA receives a copy of all information slips issued to Canadian taxpayers, and its systems will cross-check to ensure that all income is accurately reported.

There are, however, instances in which the CRA and the taxpayer are in disagreement over substantive issues, and those issues most often involve claims for deductions or credits. For instance, the CRA may have disallowed an individual’s claim for a medical expense, or for a deduction claimed for a business expenditure, which the taxpayer believes to be legitimate.

Whatever the nature of the dispute, the first step is always to contact the CRA for an explanation of the reasons why the change was made. While the information provided in the NOA is a good summary of the taxpayer’s tax situation for the year, it may not provide the detail to show precisely how and why the taxpayer and the CRA disagree on the actual amount of income tax which the taxpayer must pay for the year. The first step to be taken would be a call to the Individual Income Tax Enquiries line at 1-800-959-8281, where agents have access to the taxpayer’s return and can explain any changes which were made during the assessment process. If that call doesn’t resolve the taxpayer’s questions, or there is still a disagreement, the taxpayer has to decide whether to take the next step of filing a formal objection to the Notice of Assessment.

Doing so formally advises the CRA that the taxpayer is disputing his or her tax liability for the taxation year in question. Not incidentally, the filing of an Objection also brings to a halt most efforts undertaken by the CRA to collect taxes which it considers owing for the taxation year under dispute (although, if the taxpayer is eventually found to owe the amount in dispute, interest will have accumulated in the interim). Where the taxpayer files an Objection, the CRA’s collection efforts are suspended until 90 days after the date the CRA’s decision on that Objection is sent to the taxpayer. In some cases, however, those collection efforts will not be brought to a halt, in whole or in part. Tax collection efforts by the CRA are not deferred where the amounts in dispute are those which the taxpayer was required to withhold and remit to the CRA, such as employee income tax deductions at source. As well, the CRA is required to postpone collection action on only 50% of the amount in dispute where that dispute involves a charitable donation tax credit or deduction claimed in connection with a tax shelter arrangement. As a practical matter, however, the CRA has currently suspended all of its regular collection activities as a result of the pandemic. Nonetheless, the rules outlined above still apply and will be enforced when those collection activities resume.

There is a time limit by which any Objection must be filed, albeit a reasonably generous one. Individual taxpayers must file an Objection by the later of 90 days from the mailing date of the Notice of Assessment (the date found at the top of page 1) or one year from the due date of the return which is being disputed. So, for tax returns for the 2019 tax year, the one-year deadline (which is usually, but not always, the later of those two dates) would be June 1, 2021 (or June 15, 2021 for self-employed taxpayers and their spouses). As with most things related to taxes, it’s best not to put it off. At the very least, if the taxpayer is ultimately found to owe some or all of the taxes assessed by the CRA, interest will have accrued on those taxes for the entire period since the filing due date. Certainly, if the deadline is imminent, it’s necessary to file a Notice of Objection in order to preserve the taxpayer’s appeal rights, even if discussions with the CRA are still ongoing.

Taxpayers who have registered with the CRA’s online services feature My Account can file their Notice of Objection online at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html.The taxpayer provides information with respect to the assessment being disputed and the reasons why the assessment is being disputed and submits those reasons by clicking on the Submit button at the bottom of the "Register my formal dispute — review" page. Taxpayers who are disputing their tax assessment can also upload supporting documents relating to that dispute to the CRA's website.

While filing a dispute through My Account is certainly faster than mailing hard copy of the Notice of Objection, not all taxpayers want to use that option. In particular, those who are not already registered with My Account may not wish to undertake the registration process simply in order to file a single Notice of Objection. Taxpayers who choose instead to mail hard copy of a Notice of Objection can find the most current version of the CRA’s standardized T400A Objection on the Agency’s website at https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t400a/t400a-09-18e.pdf.

Taxpayers aren’t obligated to use the CRA’s official Notice of Objection form — any communication which makes it clear that the taxpayer is objecting to his or her Notice of Assessment will do. Nonetheless, there’s no reason not to use the standardized form, and there are benefits to doing so. Using the Form T400A will make it clear to the CRA that a formal objection is being filed, will present the necessary information in a format with which the Agency is familiar, and will also mean that no required information is inadvertently omitted. It is also helpful to include a copy of the Notice of Assessment which is being disputed. Taxpayers should also consider ensuring proof of both delivery and time of delivery by sending the form in a way which provides for tracking and proof of delivery (e.g., registered mail or courier).

Taxpayers whose postal code begins with letters A to P should send their documents to the Eastern Appeals Intake Centre, while objections file by those with postal codes beginning with letters R to Y should be sent to the Western Appeals Intake Centre. The addresses for the two centres are as follows.

Chief of Appeals

Eastern Appeals Intake Centre

North Central Ontario TSO

1050 Notre Dame Avenue,

Sudbury ON P3A 5C1

Chief of Appeals

Western Appeals Intake Centre

Fraser Valley and Northern TSO, 2nd floor,

9755 King George Boulevard,

Surrey BC V3T 5E1

The CRA has posted a notice on its website indicating that, during the current pandemic, taxpayers can fax their Notices of Objection to the Appeals Eastern Intake Centre at 1-866-443-4955 or (705) 670-6649.

It’s also possible to contact either of the Appeals Intake Centres by phone or fax, and those phone and fax numbers for both can be found at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/complaints-disputes/complexity-level-processing-time.html.

The time required for the CRA to consider the objection and make its decision ranges from several weeks to several months, depending on the number and complexity of the issues involved. Eventually, however, the CRA will respond to the Objection. In the course of making its decision, the Agency may or may not contact the taxpayer for further discussions of the issues in dispute. Should the taxpayer be contacted, he or she may be asked to provide representations outlining his or her position, in writing or at a meeting. Through such representations and meetings, it may be possible for the taxpayer and the CRA to come to an agreement on the taxpayer’s tax liability. In either case, the CRA will either confirm its original assessment or change it. If the original assessment is changed, the CRA will issue a Notice of Reassessment outlining the changes. If the taxpayer continues to disagree with the CRA’s position, the next step is an appeal to the Tax Court of Canada, which must be filed within 90 days after the CRA issues its assessment or reassessment. While in many instances (generally where amounts in dispute are relatively small) taxpayers can represent themselves before the Tax Court, it is generally a good idea, once things reach this point, to consult a tax lawyer before taking that next step.

The CRA also publishes a useful pamphlet entitled Resolving Your Dispute: Objection and Appeal Rights under the Income Tax Act, and the most recent release of that publication can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p148/p148-resolving-your-dispute-objection-appeal-rights-under-income-tax-act.html.

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.

What to do when you can’t pay your tax bill (June 2020)

Although we’re not even halfway through the calendar, 2020 has already been a year of significant financial upheaval and stress for millions of Canadians. The number of employed Canadians fell by one million during the month of March 2020 — and then by another two million during the month of April.

While the impact of sudden unemployment, or reduced hours, was mitigated somewhat by the availability of a number of federal and provincial benefits, those benefits can, at most, cushion the financial shock for Canadians who may not know when or if they will be returning to work.

Given the circumstances, it’s very likely that the number of Canadians who won’t be able pay their tax bill this year on time and in full will be significantly increased. Where resources are scarce most Canadians will, quite reasonably, allocate those resources first to the necessities of food and shelter. Even those who have the financial resources to pay their taxes in full may be reluctant to use up limited resources on tax payments when their employment and financial future are uncertain.

In most years, the filing and payment deadline for Canadian taxpayers (other than the self-employed and their spouses) is the same day — April 30. This year, a tax balance owed for 2019 doesn’t have to be paid until September 1. However, the filing deadline for individual income tax returns for 2019 is June 1, 2020, so taxpayers who have a balance owing for 2019 will know that by the beginning of June.

While, like most creditors, the Canada Revenue Agency (CRA) would rather get paid on time and in full, its ultimate goal is to collect the full amount of taxes owed. If a tax bill can’t be paid in full out of either current resources or through private borrowing, the CRA is open to making a payment arrangement with the taxpayer, meaning that the amount will be paid over time.

There are two avenues available to taxpayers who want to propose such a payment arrangement. The first is a call to the CRA’s automated TeleArrangement service at 1-866-256-1147. When making such a call, it is necessary for the taxpayer to provide his or her social insurance number, date of birth, and the amount entered on line 15000 of the last tax return for which the taxpayer received a Notice of Assessment. (For taxpayers who are up to date on their tax filings, that will be the Notice of Assessment for the return for the 2018 tax year). The TeleArrangement Service is available Monday to Friday, from 7 a.m. to 10 p.m., Eastern time.

In ordinary times, taxpayers who would rather speak directly to a CRA employee would be able to call the Agency’s Debt Management Call Centre at 1-888-863-8657, but that Centre is currently closed due to the pandemic. Taxpayers can, however, still complete an online form (available at https://apps.cra-arc.gc.ca/ebci/iesl/showClickToTalkForm.action) requesting a callback from a CRA agent.

The CRA also provides an online tool, in the form of a Payment arrangement calculator (available at https://apps.cra-arc.gc.ca/ebci/recc/pac/prot/welcome?request_locale=en_CA), which allows the taxpayer to calculate different payment proposals, depending on his or her circumstances). That calculator includes interest charges since, no matter what payment arrangement is made, the CRA will levy interest charges on any amount of tax owed for the 2019 tax year which is not paid on or before September 1, 2020. Interest charges levied by the CRA tend to add up quickly, for two reasons. First, the interest charged by the CRA on outstanding tax amounts is, by law, higher than current commercial rates. For the second quarter of 2020 (April 1 to June 30), that rate is 6%. Second, interest charges levied by the CRA are compounded daily, meaning that each day interest is levied on the previous day’s interest charges. It is for these reasons that a taxpayer is, where at all possible, likely better off arranging private borrowing in order to pay any taxes owing by the September 1 deadline.

Finally, there is one strategy which is, in all circumstances, a bad one. Taxpayers who can’t pay their tax bill sometimes conclude that there is no point in filing if payment can’t be made. Those taxpayers are wrong. Where an amount of tax is owed and the return isn’t filed on time, there is an immediate tax penalty of 5% imposed on the outstanding tax amount — and interest charges start accruing on that penalty amount (as well as on the outstanding tax balance) immediately. For each month that the return isn’t filed, a further penalty of 1% of the outstanding tax amount is charged, to a maximum of 12 months. Higher penalty amounts are charged, for a longer period, where the taxpayer has incurred a late-filing penalty within the past three years. In a worst-case scenario, the total penalty charges can be 50% of the tax amount owed — and that doesn’t count the compound interest, which is levied on all penalty amounts as well as on all unpaid taxes. Taxpayers are at least catching something of a break this year as the CRA has, in recognition of the unusual circumstances, indicated that although returns are due on or before June 1, late-filing penalties will only be assessed where a return is not filed by the payment deadline of September 1, 2020.

In all cases, regardless of the payment or filing deadline and no matter what the circumstances or amount owed, the right answer is to file one’s tax return on time and, if payment of taxes owed can’t be made, to get in touch with the CRA as soon as possible to make a payment arrangement.

Ins and outs of the Canada Emergency Response Benefit (June 2020)

Since mid-March, the federal and provincial governments have announced the creation of numerous programs to help both individuals and Canadian businesses with the financial fallout of the current pandemic. Of those programs, none has had a more direct impact on the lives of Canadians than the Canada Emergency Response Benefit, or CERB. As of mid-May, more than 8 million Canadians have applied for the benefit, and more than $40 billion has been paid out under the CERB program.

The basic structure of the CERB is that qualifying individuals may receive $500 per week for a maximum of 16 weeks, and there is no waiting period. In order to qualify for the CERB, an individual must:

reside in Canada and at least 15 years old;
have stopped working because of reasons related to COVID-19 or are eligible for Employment Insurance regular or sickness benefits or have exhausted their Employment Insurance regular benefits between December 29, 2019 and October 3, 2020;
have had employment and/or self-employment income of at least $5,000 in 2019 or in the 12 months prior to the date of their application; and,
have not quit their job voluntarily.

It’s important to note that the requirement of having stopped working does not mean that an individual must be no longer employed. Those who have been laid off as a result of the pandemic, or whose hours have been reduced, may also qualify for the CERB where the other requirements are met.

In addition, while many individuals who apply for the CERB will do so because of a loss in income related to a job loss or reduction in hours, eligibility for the benefit is not limited to those circumstances. Specifically, individuals in the following situations may also be eligible to receive the CERB:

those who are in quarantine or sick due to COVID-19;
those who are taking care of others because they are in quarantine or sick due to COVID-19; and/or
those who are taking care of children or other dependants because their care facility is closed due to COVID-19.

Regardless of the eligibility criteria under which they qualify, CERB recipients receive $500 per week for a maximum of 16 weeks. There is also a limit on the amount of income which a recipient of CERB can earn while receiving the benefit. Each application for the benefit covers the subsequent four weeks, and the following rules apply with respect to allowable income levels during each 4-week period.

An individual cannot have earned more than $1,000 in employment and/or self-employment income for 14 or more consecutive days within the 4-week benefit period of his or her first claim.
For subsequent claims, the claimant cannot have earned more than $1,000 in employment and/or self-employment income for the entire 4-week benefit period of the new claim.

Amounts received through the CERB program are taxable income to the recipient, but tax is not deducted from payments made. Consequently, recipients will need to set aside funds for the tax which will need to be paid on amounts received when the return for 2020 is filed next spring.

The government recommends that an application for the CERB be made online at https://www.canada.ca/en/services/benefits/ei/cerb-application.html, and applications can be made until December 2, 2020, for payment on a retroactive basis. However, those who are unable to apply online can do so by calling 1-833-966-2099. In most cases, where the recipient receives the benefit by direct deposit to a bank account, that deposit is made within about three days. Where the payment is made by cheque, that cheque is mailed to the recipient.

As might be expected in the case of a benefit for which millions of Canadians are eligible, a number of questions have arisen with respect to eligibility and the interaction between the CERB and other federal benefit programs, like Employment Insurance, as well as its application to specific groups like students, seniors, and disabled persons. The federal government has created a lengthy FAQ document dealing with such queries and questions, and that FAQ document can be found at https://www.canada.ca/en/services/benefits/ei/cerb-application/questions.html#eligibility.

The tax benefits of working from home (June 2020)

Working from home isn’t really a new phenomenon — employees have been doing so for more than 25 years, ever since changes in technology made such remote work arrangements feasible. Over the past two months or so, however, millions of Canadian employees have had to adapt to working from home for the first time. And it seems that an increasing number of companies are deciding that such arrangements can and should be maintained for the longer term, even after they are no longer required for reasons of public health.

There are a lot of advantages to working from home — no one enjoys the daily commute, which is often both expensive and time-consuming. For most Canadians, the opportunity to avoid sitting in traffic gridlock or rushing to catch the commuter train, even for part of the work week, would be a welcome change. And of course, going to an office every day involves costs in addition to the costs of just getting there and back.

A transition to a part-time or full-time work-from-home arrangement does, however, raise a number of questions. In virtually all cases, employees will need to acquire new technology or upgrade their existing technology resources, and the question of who pays for such expenditures will arise. And, while commuting costs may be reduced or even eliminated, there are other monthly costs which will increase including, usually, the cost of upgraded internet access. And, finally, the question of the tax implications of the new working from home arrangement will have to be considered.

Fortunately, Canada’s tax system already has rules in place to govern the tax treatment of expenditures and reimbursements related to home office work. Generally, employees who have a work-from-home space and who foot the bill for costs related to having that space will be entitled to deduct many of those costs when calculating their taxable income for the year. Of course, as with any tax deduction, there are conditions which must be met in order to qualify.

In order to claim a deduction for costs related to a work-from-home space, employees must meet at least one of the following conditions.

The home work space is where the individual mainly (more than 50% of the time) does his or her work; or
the individual uses the workspace only to earn his or her employment income. He or she must also use it on a regular and continuous basis for meeting clients, customers, or other people in the course of his or her employment duties.

Once either of these threshold criteria is met, a broad range of costs become deductible by the employee. Specifically, a salaried employee can claim and deduct the part of specified costs that relate to his or her workspace, such as the cost of electricity, heating, and home maintenance.

Where an individual who qualifies under either of the criteria outlined above is a commission employee, an even broader range of costs become deductible. In addition to costs for electricity, heating, and home maintenance, a commission employee can also deduct a proportionate share of costs incurred for property taxes and home insurance.

There is no specific formula provided for determining the proportion of eligible costs which can be deducted for qualifying home office expenses. The employee can determine that percentage based on the square footage of the workspace as a percentage of the overall square footage of the home, or he or she can make that calculation based on the number of rooms in the house or apartment relative to the number of rooms used for work-related purposes. Whichever method is chosen, the most important consideration is that the approach taken (and the expenses claimed) be reasonable. In all cases, the Canada Revenue Agency (CRA) can ask the taxpayer to provide documentation and support for claims made.

For example, an employee who lives in a 2,000-square-foot house and uses a 200-square-foot room as a home office can (assuming that at least one of the basic threshold criteria outlined above is satisfied) claim 10% of his or her costs for electricity, heat, and home maintenance (where that maintenance involved the home work space) incurred during the tax year. If that employee works on commission, he or she can also deduct 10% of costs incurred for property taxes and home insurance.

There is one further requirement for employees who seek to deduct costs incurred in relation to a home office. Each such employee must file, with the income tax return for the year, a Form T2200. On that form, the employer must certify that the employee was required to use a portion of his or her home for work-related purposes, indicate what percentage of the employee’s duties were carried out at that home office and, finally, confirm that the employee is not being reimbursed for any home office expenses incurred. Where there is any kind of reimbursement provided, the employer must specify the type of expense reimbursed, and the amount of reimbursement. And, of course, the employee cannot claim a deduction for any expenses for which reimbursement was received.

For the 2020 tax year, there is an important exception to the rule that the employee not receive reimbursement for home office-related expenses. The federal government has indicated that, given the unusual circumstances under which most employees have recently begun teleworking, those employees will be entitled to receive up to $500 from their employers to help defray costs of setting up and using a home office. In the CRA’s words “in the context of the COVID-19 crisis, CRA is willing to accept a reimbursement of an amount not exceeding $500 for the purchase of personal computer equipment to be principally for the benefit of the employer”. Consequently, any such $500 amount will not be treated as taxable income to the employee. Although the CRA did not specify, this concession will presumably be effective only for the current tax year.

In order to claim a deduction for home office expenses, the taxpayer must clearly do some paperwork. All employees seeking to make such a claim must total the amount of bills paid over the course of the year for electricity, heat and any of the inevitable home maintenance costs. Those working on commission must also verify amounts paid for property taxes and home insurance. However, given that such efforts will produce a deduction from income for tax purposes for costs which would have been incurred in any case, it is likely that most employees would consider the return on that investment of time well worth it.

Deciding when to begin receiving Old Age Security benefits (May 2020)

The Old Age Security program is the only aspect of Canada’s retirement income system which does not require a direct contribution from recipients of program benefits. Rather, the OAS program is funded through general tax revenues, and eligibility to receive OAS is based solely on Canadian residency. Anyone who is 65 years of age or older and has lived in Canada for at least 40 years after the age of 18 is eligible to receive the maximum benefit. For the second quarter of 2020 (April to June 2020), that maximum monthly benefit is $613.53.

For many years, OAS was automatically paid to eligible recipients once they reached the age of 65. However, since July 2013 Canadians who are eligible to receive OAS benefits have been able to defer receipt of those benefits for up to five years, when they turn 70 years of age. For each month that an individual Canadian defers receipt of those benefits, the amount of benefit eventually received would increase by 0.6%. The longer the period of deferral, the greater the amount of monthly benefit eventually received. Where receipt of OAS benefits is deferred for a full 5 years, until age 70, the monthly benefit received is increased by 36%.

It can, however, be difficult to determine, on an individual basis, whether and to what extent it would make sense to defer receipt of OAS benefits. Some of the difficulty in deciding whether to defer — and for how long — lies in the fact there are no hard and fast rules, and the decision is very much an individual one. Fortunately, however, there are a number of factors which each individual can consider when making that decision.

The first such factor is how much total income will be required, at the age of 65, to finance current needs. It is also necessary to determine what other sources of income (employment income from full-time or part-time work, Canada Pension Plan retirement benefits, employer-sponsored pension plan benefits, annuity payments, and withdrawals from registered retirement savings plans (RRSPs) and registered retirement income fund (RRIFs)) are available to meet those needs, both currently and in the future, and when receipt of those income amounts can or will commence or cease. Once income needs and the sources and possible timing of each is clear, it is necessary to consider the income tax implications of the structuring and timing of those sources of income. The ultimate goal, as it is at any age, is to ensure sufficient income to finance a comfortable lifestyle while at the same time minimizing both the tax bite and the potential loss of tax credits.

In making those calculations, the following income tax thresholds and benefit cut-off figures are a starting point.

Income in the first federal tax bracket is taxed at 15%, while income in the second bracket is taxed at 20.5%. For 2020, that second income tax bracket begins when taxable income reaches $48,535.
The Canadian tax system provides (for 2020) a non-refundable tax credit of $7,637 for taxpayers who are over the age of 65 at the end of the tax year. That amount of that credit is reduced once the taxpayer’s net income for the year exceeds $38,508.
Individuals can receive a GST/HST refundable tax credit, which is paid quarterly. For 2020, the full credit is payable to individual taxpayers whose family net income is less than $38,507.
Taxpayers who receive Old Age Security benefits and have income over a specified amount are required to repay a portion of those benefits, through a mechanism known as the “OAS recovery tax”, or clawback. For 2020, taxpayers whose prior year income was more than $79,054 will have a portion of their OAS benefit entitlement “clawed back”.

What other sources of income are currently available?

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

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

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

Does the taxpayer have private retirement savings through an RRSP?

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

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

Individuals who are facing that decision-making process will find some assistance on the Service Canada website. That website provides a Retirement Income Calculator, which, based on information input by the user, will calculate the amount of OAS which would be payable at different ages. The calculator will also determine, based on current RRSP savings, the monthly income amount which those RRSP funds will provide during retirement. To use the calculator, it is necessary to know the amount of Canada Pension Plan benefit which will be received, and the taxpayer can obtain that information by calling Service Canada at 1-800-277-9914.The Retirement Income Calculator can be found at https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html.

A final note — during the current pandemic, Service Canada is strongly encouraging anyone who is applying for federal government benefits — including Old Age Security — do so online, through My Service Canada Account. While in normal circumstances, individuals may be required to provide supporting documentation for their OAS application, that requirement is being temporarily waived. Such documentation may be requested at a later date, but processing of the application will now begin without it. Information on My Service Canada Account, and on how to make an online application can be found at https://www.canada.ca/en/employment-social-development/services/my-account.html.

Planning for 2019 charitable donation tax credit claims (May 2020)

By the time most Canadians sit down to organize their various tax slips and receipts and undertake to complete their tax return for 2019, the most significant opportunities to minimize the tax bill for the year are no longer available. Most such tax planning or saving strategies, in order to be effective for 2019, must have been implemented by the end of that calendar year. The major exception to that is, of course, the making of registered retirement savings plan (RRSP) contributions, but even that had to be done on or before March 2, 2020 in order to be deducted on the return for 2019.

The fact that the clock has run out on most major tax planning opportunities for 2019 doesn’t however, mean that there are no tax-saving strategies left. At this point, there are a couple of ways to minimize the tax hit for 2019 — by claiming all available deductions and credits on the return and also by making sure that those deductions and credits are claimed in the way which will give the taxpayer the most “bang for the buck”.

Everyone’s tax situation — and, therefore, their tax return — is different, of course, but millions of Canadian taxpayers make claims on their annual returns for charitable donations made. It may seem counterintuitive, or even illogical, to not claim every available deduction and credit in order to obtain the best possible tax result for the year. However, for charitable donation tax credit claims there are situations in which it makes sense to defer an available claim until a future year, or to transfer that claim to another person.

Taxpayers are entitled to make a claim on the annual tax return for charitable donations made in the current (2019) year or any of the previous five years. The reason it can sometimes makes sense not to claim a charitable donation in the year it was made arises from the way in which the charitable donations tax credit is structured to encourage higher donations.

That credit, at both the federal and provincial/territorial levels, is a two-tier credit. Federally, the first $200 in donations receives a credit of 15% of the total donation, or $30. However, donations above the $200 level receive a credit equal to 29% of the donation amount over $200.

Take, for example, a taxpayer who makes a regular contribution to a favourite charity of $100 each month, or $1,200 per year. Where he or she claims that donation on the annual return each year, that claim will result in a federal credit of $320 ($200 × 15%, + $1,000 × 29%). Where, however, the same taxpayer defers the claim to the following year and claims a total of $2,400 in donations on a single return, he or she will receive a federal credit of $668. ($200 × 15%, + $2,200 × 29%). Where the donations are accumulated and claimed once every five years, the federal credit received will be $1,712 ($200 × 15%, + $5,800 × 29%). Under each scenario, the total charitable donation made is the same, but the amount of credit received increases with each year that the claim is deferred. Since each of the provinces and territories provide a two-tier credit (at different rates, depending on the jurisdiction), the same result will be seen when calculating the provincial/territorial credit.

It's also the case that a married taxpayer can claim a credit for charitable donations made personally as well as those made by his or her spouse. Since the amount of tax credit claimable increases with the size of the annual donation it almost always makes sense to combine donations made by both spouses, in order to maximize the available credit, and to claim those donations on one return.

Since the amount of credit which may be obtained isn’t affected by the income of the taxpayer claiming it, the benefit received from the credit will be the same regardless of which spouse claims it, with one major exception. The charitable donation tax credit is a non-refundable credit, meaning that it reduces tax otherwise payable, but does not create or increase a tax refund. Consequently, it’s important, when deciding who will make the claim for combined donations, to ensure that the taxpayer making that claim has tax payable for the year of at least as much as the amount of the charitable donation tax credit. If neither spouse has sufficient tax payable for the year, then it would be better to defer the claim and make it in a future tax year.

It would be easiest, of course, to simply add up the amount of charitable donation receipts for the year and claim them all on the return of the donor. However, investing a little time to calculate the amount of donations made by both spouses, to consider who should make the claim and, finally, to determine whether the claim is best made in current year or a future one, can provide a much better overall tax result.

Changes to RRIF withdrawal requirements for 2020 (May 2020)

The past few months have been an almost perfect storm of bad financial news for Canadian retirees. The historic stock market downturn which occurred in mid-March resulted in a significant loss of value for many retirement savings portfolios, whether those savings were held in registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs). That downturn was accompanied by three consecutive interest rate cuts by the Bank of Canada, meaning that rates of return on such safe investment vehicles as guaranteed investment certificates, which were already low, became negligible.

While the stock market has made a significant recovery from the lows recorded during the month of March, it is not yet at pre-downturn levels. And, while retirees who are under the age of 71 and whose retirement savings are still held in an RRSP may be able to wait out the ongoing downturn in anticipation and hope of a full market recovery, those Canadians over age 71 who hold their retirement savings in a RRIF have a more immediate problem.

That problem arises from the application of the tax rules governing required withdrawals from a RRIF. The basic rule is that every Canadian who has an RRSP must collapse that RRSP by the end of the year in which they turn 71. While there are a few options available to those individuals, most taxpayers choose to convert their RRSP into a RRIF and, by doing so, they can continue to hold the same investments within the plan. There is, however, one big difference between an RRSP and a RRIF and that is that every RRIF holder must withdraw a percentage of the balance within the RRIF by the end of each calendar year. The specific percentage is based on the age of the RRIF holder and is calculated using the value of the RRIF on January 1 of the year.

For nearly every RRIF holder in Canada, the value of their RRIF at the beginning of this calendar year was greater than it is now. Having to make their required withdrawal based on the January 1 balance would mean, in many cases, having to sell investments at loss. In addition, making the usual required withdrawal from a smaller RRIF balance would negatively impact the amount left needed to generate investment gains (and needed retirement income) in future years.

Recognizing the present and future financial cost this poses to retirees, the federal government announced, on March 18, a one-time change in the usual RRIF withdrawal rules for 2020. Basically, that change will allow RRIF holders who had not yet made their full required RRIF withdrawal for 2020 to reduce the amount of that required withdrawal by 25%. The change applies to all types of RRIFs, including Life Income Funds and other locked-in RRIFs.

Take, for example, a retiree whose RRIF has a balance of $500,000 and who would usually be required to withdraw 2% of that balance. Under normal rules that required withdrawal would be $10,000 (2% of $500,000). Following the change announced by the federal government that required withdrawal can be reduced by 25%, meaning that the minimum withdrawal for 2020 is now $7,500 ($10,000 minus 25%).

While the basic rule is straightforward, there are a few aspects of the change which require a more detailed explanation.

There is no requirement that the amount of RRIF withdrawal for 2020 be reduced. A required RRIF withdrawal amount always represents the minimum withdrawal which must be made, and the RRIF holder is free to withdraw any amount at or above that minimum (while remembering that all RRIF withdrawals create taxable income in the year the withdrawal is made).
RRIF holders who made more than their reduced minimum withdrawal for 2020 before the change was made cannot re-contribute any “excess”. Continuing the above example, if the RRIF holder had withdrawn $10,000 from his or her RRIF in January of 2020 he or she cannot recontribute the “excess” of $2,500. The planholder’s RRIF withdrawal for 2020 will be $10,000 and he or she will be taxed on that amount.

Many retired Canadians choose to receive required withdrawals from their RRIFs as monthly payments. Where that is the case, the taxpayer can simply opt to reduce monthly payments for the rest of 2020 to arrive at the 25% reduction, as outlined in the following example provided on the Canada Revenue Agency (CRA) website.

“The 25% reduction applies to the entire minimum amount for 2020. For instance, let’s say an individual’s 2020 RRIF minimum amount before the reduction is $12,000. If the individual received minimum amount payments on a monthly basis, they would receive $1,000 per month. Because of the economic measure, their 2020 minimum amount is reduced by 25% to $9,000 ($12,000 × 75% = $9,000). If the individual had already received $1,000 from January to April for a total of $4,000, they would only need to receive a total of $5,000 for the rest of the year to reach their new minimum amount. This means their monthly RRIF payments are reduced to $625 for the remaining 8 months (8 × $625 = $5,000).”

Variable benefits are payments made to plan members from a defined contribution pension plan or a pooled registered pension plan, in a manner similar to a RRIF. The announced change also applies to the minimum amount for individuals receiving variable benefit payments under such plans (i.e., both types of payments are also reduced by 25% for 2020 only).

More information on the federal government announcement, in the form of an FAQ document, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/registered-retirement-savings-plans-registered-retirement-income-funds-rrsps-rrifs/economic-statement-measure-annuitants-rrsp-rrif.html.

Making sense of the new tax filing and payment deadlines (May 2020)

There have been so many announcements over the past couple of months with respect to temporary changes to individual and business tax obligations that keeping up with all of the new rules and altered deadlines isn’t easy. The good news is that, in all cases, individual taxpayers (both employees and the self-employed) are being provided with extended time to pay any income tax amounts for both 2019 and 2020. And, in most cases, taxpayers also have more time to file returns for the 2019 tax year.

In an ordinary year, for most taxpayers (except the self-employed and their spouses) the filing and payment deadline is the same day — April 30. This year, both the filing and payment deadlines have been extended, but to different dates, as follows.

Individual taxpayers (other than self-employed taxpayers and their spouses) must file a return for 2019 on or before June 1, 2020.
Self-employed taxpayers and their spouses must file their returns for the 2019 tax year on or before June 15, 2020.
For ALL individual taxpayers, the deadline for payment of 2019 income tax balances owed has been extended to September 1, 2020. In other words, although the return must be filed during the month of June, any tax balance owed from that return doesn’t have to be paid until September 1, 2020. Where the payment is made on or before that September date, the Canada Revenue Agency (CRA) will not charge interest on the amount owed.

As all of these changes were announced part way through tax filing season, some confusion was perhaps inevitable. The CRA website indicates that some taxpayers may have received a Notice of Assessment indicating that payment of a tax balance was due on or before April 30, 2020. That is incorrect, as all individual income tax balances owed for the 2019 tax year are not due until September 1, 2020.

Although the filing deadline has been extended, it’s still a good idea to file as soon as possible. Eligibility for certain means-tested government benefits, like the Goods and Services Tax Credit or the Canada Child Benefit, is determined in part by the amount of income reported on the annual return. The upcoming benefit year for all such benefits runs from July 1, 2020 to June 30, 2021, and both eligibility for and the amount of benefit received will be determined, in part, by the amount of income reported on the income tax return for 2019. Where that return has not yet been filed by the taxpayer and processed by the CRA, no determination of benefit entitlement can be made and so any payment of benefits which would start in July 2020 will be delayed.

Millions of individual Canadians also pay income tax for the current (2020) taxation year through quarterly instalments paid throughout the year. Those instalments are usually paid on the 15^th day of March, June, September, and December. This year the usual June payment deadline has been extended, and any instalment payment of tax which was normally due on that date can be paid anytime up to September 1, 2020. There has been no change announced with respect to the September 15 instalment payment deadline.

Incorporated businesses will also benefit from extended filing and payment deadlines. Where a corporation’s income tax return for 2019 was due after March 18, 2020 and before June 1, 2020, that deadline is extended to June 1, 2020. Payment deadlines for corporations were also extended, such that any income tax balances owed or instalment payments of income tax required after March 18 and before September 1, 2020 do not have to be paid until September 1, 2020.

More information on the extended payment and filing deadlines for this year can be found on the CRA website at https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/covid-19-filing-payment-dates.html.

New Quarterly Newsletters (Q1 2020)

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