For almost a decade now, Canadians have been living, and borrowing, in an ultra-low interest rate environment. As of the end of April 2018, the bank rate (from which commercial interest rates are derived) stood at 1.5%. The last time that the bank rate was over 1.5% was in December of 2008. Effectively, adult Canadians who are under the age of 30 have had no experience of managing their finances in high (or even, by historical standards, ordinary) interest rate environments.

For almost a decade now, Canadians have been living, and borrowing, in an ultra-low interest rate environment. As of the end of April 2018, the bank rate (from which commercial interest rates are derived) stood at 1.5%. The last time that the bank rate was over 1.5% was in December of 2008. Effectively, adult Canadians who are under the age of 30 have had no experience of managing their finances in high (or even, by historical standards, ordinary) interest rate environments.

The prolonged period of low interest rates which followed the financial crisis of 2008-09 coincided, not surprisingly, with an explosion in the amount of debt owed by both individual Canadians and by families. In the fall of 2005, the ratio of debt to disposable income for an average Canadian family stood at 93%. In the third quarter of 2017 that ratio stood at just less than double that amount, or 171%.

For several years financial advisers and government and banking officials have been sounding warnings that the debt loads which Canadians were carrying were likely sustainable only at the extremely low interest rates then in effect. Their concern was that when, inevitably, those rates returned to historically “normal” levels the burden of repaying, or even servicing those debts, would be unsustainable.

Whether those warnings were or weren’t heeded is becoming a moot question, as the era of reliably ultra-low interest rates is effectively coming to an end. The Bank of Canada has raised interest rates three times in the past 10 months, in July and September 2017 and again in January of 2018. Prior to July 2017, the last interest rate increase took place in September of 2010. As well, as the Bank has made clear in its regular announcements on the subject, the longer-term interest rate trend is an upward one.

When talking about debt, and debt management, it’s important to remember that not all debt is created equal. Specifically, it’s necessary to draw a distinction between secured and unsecured debt. Put simply, the former is debt which is secured by the value of an underlying asset and, if the debtor fails to make payments on the debt, the lender is entitled to seize that underlying asset and sell it to satisfy any outstanding debt amount owed. The type of secured debt most familiar to Canadians is, of course, a mortgage. Unsecured debt, on the other hand, is provided solely on the strength of the borrower’s promise to repay, and credit cards are the most common example of unsecured debt owed by Canadians.

While any type of debt can cause problems for borrowers, when interest rates go up it’s usually those who are carrying unsecured debt who are the first to feel the pinch. Not only is the rate of interest payable on unsecured debt always higher than that levied on secured debt, the interest rate on unsecured debt is usually a “variable” rate, meaning that it will go up every time interest rates increase, and the monthly minimum payment required will increase proportionately. And, of course, debtors whose debt is secured by an underlying asset and who find that such debt is no longer manageable always have the “out” of selling that asset and using the proceeds to retire the outstanding balance of the loan, while those who owe unsecured debt have no such option.

It’s easy to assume from the overall figures respecting the debt load of Canadians that having an outstanding balance on one or more credit cards or lines of credit is the norm. However, an Ipsos Global News year-end poll discloses some perhaps unexpected results, with both good and bad implications. Those survey results, which can be found on the Ipsos website at https://www.ipsos.com/en-ca/news-polls/2017-year-end-debt, was done in December of 2017. It found that the average unsecured (i.e., non-mortgage) debt held by individual Canadians was $8,539.50. However, the survey also found that nearly half of Canadians (46%) had no consumer debt whatsoever. Consequently, when it comes to debt, Canadians seem to fall about evenly into one of two very distinct and different groups. The minority (by a small percentage) are free of any unsecured debt – no line of credit debt and no credit card balances. But it’s a very different picture for the other 54% who are carrying, on average, around $15,000 in unsecured debt per person. And, for 12% of those surveyed, the amount of unsecured debt owed was more than $25,000.

For anyone who is carrying outstanding unsecured debt, the obvious advice is to get the debt paid down as quickly as possible, especially when interest rates are rising. That is, however, easier said than done, especially when the interest component of the debt, and consequently the required monthly minimum payments, are steadily increasing. Between 19% and 22% of respondents in the IPSO Global News poll indicated that they were “not very comfortable” or “not at all comfortable” with their ability to meet their current monthly debt payment obligations and/or their ability to pay down their debt in a timely manner.

Even where repayment of the debt over the short term isn’t a realistic expectation, such individuals are not without options. The best strategy to be pursued by those carrying significant amounts of unsecured debt which can’t be paid off over the short-term would be to try to lower the interest rate on such debt. There are a couple of ways in which that can be done.

If the debtor owns an asset (usually a house) against which he or she can borrow, turning the debt from unsecured to secured, the interest rate payable on such borrowing will certainly be lower than the rate currently being paid. Where there is no such asset, the debtor can seek a consolidation loan from a financial institution, in which all of the outstanding debts from every source are combined into a single loan at a lower rate of interest, and a fixed repayment schedule. Much unsecured debt owed by Canadians is in the form of credit card debt, which carries some of the highest interest rates around.

If neither of those options are available, then the next step would be to try to obtain a lower credit card interest rate. If the debt is in good standing – that is, payments have been made on time and in at least the minimum amount – the credit card company may be willing to reduce the interest rate imposed, especially if it is clear that the borrower will not be able to continue to make payments at higher rates. If the credit card company is unwilling to do so, the debtor may be able to seek out better rates elsewhere. Credit card companies regularly seek to bring in new business by offering the opportunity to transfer in balances from other cards and to have those balances benefit from a very low (or even 0%) rate of interest for a period of time – usually 6 months to a year. Where a new card with a much lower interest rate can be obtained, regular payments made will reduce the outstanding balance more quickly, since less of that payment is going to meet interest charges.

Each of these options assumes a willingness and an ability on the part of the individual to make debt repayment a priority, working on his or her own. For some, that’s not easy, or even possible. As well, some individuals are already in financial difficulty - unable to make the minimum monthly required payment, or having missed payments and being pursued by collection agencies. In both those situations, obtaining help to deal with the debt repayment process is likely needed. That help is available through debt and credit counselling provided by any number of non-profit agencies. Those agencies work with individuals, and with their creditor(s), to create both a realistic budget and a manageable debt repayment schedule. More information on the credit counselling process, and a listing of such non-profit agencies can be found at http://creditcounsellingcanada.ca/.

The arrival of warmer weather signals both the start of spring and the approaching end of the school year. For many families, it also means the need to begin researching the availability of suitable child care or summer daytime or overnight camp arrangements for the summer months. There are many such options available to parents, but what each of those options have in common is a price tag – sometimes a steep one. Some options, like day camps provided by the local recreation authority or municipality can be relatively inexpensive, while the cost of others, like summer-long residential camps or elite level sports or arts camps, can run to the thousands of dollars.

The arrival of warmer weather signals both the start of spring and the approaching end of the school year. For many families, it also means the need to begin researching the availability of suitable child care or summer daytime or overnight camp arrangements for the summer months. There are many such options available to parents, but what each of those options have in common is a price tag – sometimes a steep one. Some options, like day camps provided by the local recreation authority or municipality can be relatively inexpensive, while the cost of others, like summer-long residential camps or elite level sports or arts camps, can run to the thousands of dollars.

The good news for families which must incur such expenditures is that in many cases a deduction for all or part of the costs incurred can be claimed on the tax return for the year. And, since eligible expenditures can be deducted from income on a dollar-for-dollar basis, that means that income used to pay eligible child care expenses is effectively not subject to income tax. The bad news is that some of the deductions or credits which could be claimed in recent years are no longer available.

This year, any offset provided by the tax system with respect to summer child care costs can only be claimed through the general deduction provided for child care costs. That deduction, which is not specific to summer child care costs but is available for such costs incurred year-round, allows parents who must incur child care costs in order to work (whether in employment or self-employment) or, in some cases to attend school, to deduct those costs from income, within specified limits.

The calculation process set out on Form T778, which is used to determine the amount of any allowable deduction from income for child care expenses incurred can seem quite complex. However, at the end of the day, the amount of child care expenses which can be deducted is the least of three numbers, and only one of those numbers requires a calculation. The steps involved in doing so are as follows.

First, the amount of any deduction for child care expenses is limited to two-thirds of the taxpayer’s “earned income” for the year. The income figure used to calculate the two-thirds figure is, generally, the amount shown on Line 150 of the annual tax return. Where the family incurring child care expenses is a two-income family, and both spouses are working, the claim is made by the spouse with the lower net income, and consequently his or her net income is used to determine the two-thirds of income figure.

The second figure to be determined is the amount actually paid for eligible child care costs during the year. While virtually any licensed child care arrangement will qualify, more informal arrangements may not. Specifically, no deduction is available for amounts paid to most family members to provide child care. So, it’s not possible for a working spouse to pay the stay-at-home parent to provide child care, nor is it possible to pay an older sibling who is under the age of 18 to provide such services, and to claim a deduction for those expenses incurred. As well, where a claim is made for a deduction for child care expenses on the annual return, the claimant must obtain (and be prepared to provide to the tax authorities) the social insurance number of the individual providing the care as well as a receipt showing the amounts paid, whether to an individual or an organization.

 The third figure to be determined is the one which requires some calculation. Basically, the rules governing the deduction of child care expenses impose a maximum deduction per child per year (referred to as the “basic limit”), with that basic limit dependent on the age and health of the particular child. As well, where expenses are incurred for overnight camps or boarding schools, the amount deductible for such costs is similarly capped.

For 2018, the following overall limits apply:

• $5,000 in costs per year for a child who was born from 2002 to 2011;
• $8,000 in costs per year for a child who was born in 2012 or later;
• $11,000 in costs per year for a child who was born in 2018 or earlier, for whom the disability amount can be claimed.

Similar restrictions are placed on the amount of costs which can be deducted for overnight camp or boarding school fees, and those are as follows:

• $125 per week for a child who was born from 2002 to 2011;
• $200 per week for a child who was born in 2012 or later; and
• $275 per week for a child who was born in 2018 or earlier, for whom the disability amount can be claimed.

Taking all of these figures into account, the computation of a deduction for child care expenses for a typical Canadian family would look like this.

A two-income family has two children and both parents are employed. One spouse earns $60,000 per year, while the other earns $45,000. In 2018, one child is nine years old and the other is five. Neither child is disabled. Both children are in full-day school and so, during the school year, the family pays $400 per month for each child for after-school care. During the eight weeks of summer school vacation, both of the children attend a local full-day summer camp, for which the cost is $250 per week per child.

• The first step is to determine the two-thirds of income figure. Since it is the lower-income spouse who must make the deduction claim, that figure is two-thirds of $45,000, or $30,000. Consequently, any deduction for child care expenses for the year cannot exceed $30,000.

• The second calculation is the total amount of child care expenses paid for each child:

• $400 per month for 10 months of after-school care, or $4,000
• $250 per week for eight weeks of summer camp, or $2,000.

Total child care expenses for the year for each child is therefore $6,000.

• The last step is to determine the basic limit for child care expenses for each child, as follows:

The basic limit for the five-year-old (who was born in 2012 or later) is $8,000, and so the entire $6,000 in child care expenses incurred can be deducted.

The basic limit for the nine-year-old (who was born between 2002 and 2011) is $5,000, and so only $5,000 of the $6,000 in expenses incurred can be deducted for the year.

The total deduction available for child care expenses incurred for the 2018 tax year will therefore be $5,000 plus $6,000, or $11,000. That deduction is calculated on Form T778 and the deduction amount transferred to Line 214 of the tax return filed by the lower-income spouse for 2018 year, reducing his or her taxable income from $45,000 to $34,000, and resulting in a federal tax savings of about $1,650. The same deduction is claimed as well for provincial tax purposes, and the amount of provincial tax saved will depend on the tax rates imposed by the province in which the family lives.

In previous years, parents were also able to claim two other federal tax credits – the Children’s Fitness Tax Credit and the Children’s Arts Tax Credit – in respect of qualifying costs incurred. Unfortunately, those credits were reduced as of the start of the 2016 tax year and were entirely eliminated as of the beginning of 2017. Consequently, no such credits can be claimed for formerly eligible costs which are incurred during 2018.

Parents wishing to find out more about the child care expense deduction, and perhaps to calculate the maximum deduction which will be available to them for the 2018 tax year should consult Form T778 E (17). That form, which includes detailed information on the rules governing the deduction and how to make the claim, can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t778.html.

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 and will be able to receive CPP retirement benefits as early as age 60. Earning income from employment or self-employment 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.

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 and will be able to receive CPP retirement benefits as early as age 60. Earning income from employment or self-employment 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 has made contributions during his or her working life in order to receive 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 have been Canadian residents for 40 years after the age of 18 can receive full OAS benefits, as early as age 65. As of the second quarter of 2018, those eligible for full OAS benefits receive $589.59 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 simple one. Anyone who receives OAS benefits during the year and has income for that year of more than $75,910 (for 2018) must repay a portion of those benefits. That repayment, or clawback, is administered by requiring repayment when the tax return for that year is filed the following April.

For example, an individual who receives full OAS during 2017 and has net income for the year of $82,000 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 example for the 2017 tax year:

Total OAS benefit for the year — $6,900

Total income for the year — $82,000

OAS income clawback threshold for 2017 — $74,788

Income over clawback threshold — $7,212 × 15% = $1081.80

Repayment amount required — $1081.80

The federal government becomes aware of an individual’s income for 2017 only once the tax return for that year is filed, usually by April 30 of 2018. Consequently, the required repayment amount of $1081.80 will become apparent when the return for the year is prepared, and will be included in any amount which must be paid on filing. As well, in the following benefit year (which will run from July 2018 to June 2019), OAS benefits received will be reduced by the same amount as the OAS repayment from the previous year. In the case of the above example, the monthly reduction of benefits would be $90.15 ($1081.80 divided by 12 months).

As of 2018, the OAS clawback affects only individuals who have an annual income of at least $75,000, and it’s arguable that at such income levels, the clawback requirement is unlikely to impose significant 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 taxable income approaches the six-figure mark.

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 benefits which will be received from an employer-sponsored 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 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 the required withdrawal date of age 72, 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 age 72.

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 (whether the taxpayer is under or over the age of 71), after-tax amounts received can be contributed to the taxpayer’s tax-free savings account (TFSA), 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 towards income for purposes of the OAS clawback.

Taxpayers who are married can “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 qualifying income over the OAS clawback threshold can notionally re-allocate the “excess” income to his or her spouse on the annual return. 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 annuity or an employer-sponsored pension plan. More information on the kinds of income eligible for pension income splitting, and the mechanics of the process, can be found on the Canada Revenue Agency (CRA) website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/pension-income-splitting.html.

It is not at all uncommon now for Canadians to continue to work full-time or, more commonly, part-time, past the age of 65. Where that’s the case, it may make sense to defer receipt of OAS benefits for a few years, until the individual leaves the workforce. That’s especially the case where income received from employment, together with other sources of income, pushes the taxpayer’s annual income over the OAS clawback threshold. And, where receipt of such OAS benefits is deferred, the monthly amount received will go up, meaning that the eventual OAS benefits can go further toward making up the difference when income from employment ceases.

Finally, as outlined above, where a taxpayer must repay OAS benefits on filing his or her return for the previous year, any such benefits paid in the current benefit year are automatically reduced by the same amount. That practice is based on the assumption that income will not vary significantly from year to year. Where that’s not the case, and the taxpayer‘s income for a particular year is significantly higher because of a one-time event (e.g., the taxable sale of property or investments), the taxpayer can take action to avoid having monthly OAS benefit payments reduced in the following year. To do so, he or she must file a Request to Reduce OAS Recovery Tax at Source (T1213 (OAS) E (17)), which can be found on the CRA website at https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1213_oas/t1213oas-17e.pdf. On that form, the taxpayer will provide information about his or her income sources and deductions for the current year, to show that he or she will not be subject to the OAS recovery tax for the year (or that such tax well be lower than the previous year’s). Once the Request is submitted, and it is approved by the CRA, it takes about two months for the change to be reflected in monthly benefit payments.

By the end of April 2018, more than 20 million individual income tax returns for the 2017 tax year will have been filed with the Canada Revenue Agency (CRA). And, inevitably, some of those returns will contain errors or omissions that must be corrected – last year the CRA received about 2 million requests for adjustment(s) to an already-filed return.

By the end of April 2018, more than 20 million individual income tax returns for the 2017 tax year will have been filed with the Canada Revenue Agency (CRA). And, inevitably, some of those returns will contain errors or omissions that must be corrected – last year the CRA received about 2 million requests for adjustment(s) to an already-filed return.

Most Canadians now prepare their returns (or have those returns prepared by a tax professional) using tax return preparation software. The use of such software significantly reduces the chance of making a clerical or arithmetical error, like entering an amount on the wrong line or adding a column of figures incorrectly. However, no matter how good the software, it can work only with the information that is provided to it. Sometimes taxpayers prepare and file a return, only to later receive a tax information slip that should have been included on that return. It’s also easy to make an inputting error when transposing figures from an information slip (a T4 from one’s employer, for instance) into the software. Whatever the cause, where the figures input are incorrect or information is missing, those errors or omissions will be reflected in the final (incorrect) result produced by the software.

When the error or omission is discovered in a return which has already been filed, the question is how to make things right. The first impulse of many taxpayers is to file another return, in which the complete and correct information is provided, but that’s not the right answer. There are, however, several ways in which a mistake or omission on an already-filed tax return can be corrected. And this year, taxpayers have more options than were previously available to them in doing so.

The vast majority of Canadians either file their return online, using the CRA’s NETFILE service, or engage a tax return preparer to file the return using the Agency’s EFILE service. Last year, fully 86% of individual tax returns were filed using one or the other of those methods.

This year, taxpayers who filed online, whether through NETFILE or EFILE, can advise the CRA of an error or omission in an already-filed return electronically, using the Agency’s ReFILE service. That service, which can be found at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/refile-online-t1-adjustments-efile-service-providers.html, allows taxpayers to make corrections to an already-filed return online, using the CRA website.

Essentially, taxpayers whose returns have been filed online (through NETFILE or EFILE) can file a correction to that already-filed return, using the same tax return preparation software that was used to prepare the return. Those taxpayers who used NETFILE to file their return can file an adjustment to a return for 2017 or 2016. Where the return was filed using EFILE, the EFILE service provider can file adjustments for returns filed for the 2017, 2016, or 2015 tax years.

There are limits to the ReFILE service. The online system will accept a maximum of 9 adjustments to a single return, and ReFILE cannot be used to make changes to personal information, like the taxpayer’s address or direct deposit details. There are also some types of tax matters which cannot be handled through ReFILE, like applying for a disability tax credit or child and family benefits.

It’s also possible to make a change or correction to a return using the CRA’s “My Account” service (through the “Change My Return” option), but that choice is available only to taxpayers who have already registered for the My Account service. As well, the changes/corrections which can be made using ReFILE are the same as those which can be done through My Account, without the need to become registered for My Account, a process which takes a few weeks.

Taxpayers who wish to make changes or corrections which cannot be made through ReFILE or My Account (or those who just don’t wish to use the online option) can paper-file an adjustment to their return. The paper form to be used is Form T1-ADJ E (2018), which can be found on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1-adj/README.html. Those who are unable to print the form off the website can order a copy to be sent to them by mail by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. There is no limit to the number of changes or corrections which can be made using the T1-ADJ E (2018) form.

The use of the actual T1-ADJ form isn’t mandatory – it’s also possible to file an adjustment request by sending a letter to the CRA – but using the prescribed form has two benefits. First, it makes clear to the CRA that an adjustment is being requested and two, filling out the form will ensure that the CRA is provided with all the information needed to process the requested adjustment. And, whether the request is made using the T1 Adjustment form or by letter, it’s necessary to include any relevant documents – the information slip summarizing the income not reported, or the receipt for an expense inadvertently not claimed.

Hard copy of a T1-ADJ (or a letter) is filed by sending the completed document to the appropriate Tax Center, which is the one to which the tax return was originally mailed. A listing of Tax Centres and their addresses can be found on the CRA website at www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html. A taxpayer who isn’t sure any more which Tax Centre his or her return was sent to can go to www.cra-arc.gc.ca/cntct/tso-bsf-eng.html on the CRA website and select his or her location from the listing found there. The address for the correct Tax Centre will then be provided. Similar information is also provided on the T1ADJ form.

Where a taxpayer discovers an error or omission in a return already filed, the impulse is to correct that mistake as soon as possible. However, no matter which method is used to make the correction – ReFILE, My Account, or the filing of a T1-ADJ in hard copy, it’s necessary to wait until the Notice of Assessment for the return already filed is received. Corrections to a return submitted prior to the time that return is assessed simply can’t be processed by the CRA.

Once the Notice of Assessment is received, and an adjustment request is made, it will take at least a few weeks, usually longer, before the CRA responds. The Agency’s estimate is that such requests which are submitted online have a turnaround time of about two weeks, while those which come in by mail take about eight weeks. Not unexpectedly, all requests which are submitted during the CRA’s peak return processing period between March and July will take longer.

Sometimes the CRA will contact the taxpayer, even before a return is assessed, to request further information, clarification, or documentation of deductions or credits claimed (e.g., receipts documenting medical expenses claimed, or child care costs). Whatever, the nature of the request, the best course of action is to respond promptly, and to provide the requested documents or information. The CRA can assess only on the basis of the information with which it is provided, and it is the taxpayer’s responsibility to provide support for any deduction or credit claims made. Where a request for information or supporting documentation for a claimed deduction or credit is ignored by the taxpayer, the assessment will proceed on the basis that such support does not exist. Providing the requested information or supporting documentation can usually resolve the question to the CRA’s satisfaction, and its assessment of the taxpayer’s return can then proceed.

Virtually no one looks forward to dealing with the need to file a tax return each spring, and while some of that reluctance is undoubtedly due to the complexity of our tax system, there’s another factor at work.

Many (even most) taxpayers don’t know, until they have actually completed their return for the year, whether additional taxes will be owed. And, no matter what the taxpayer’s financial circumstances, finding out that money is owed to the tax authorities is bad news.

Virtually no one looks forward to dealing with the need to file a tax return each spring, and while some of that reluctance is undoubtedly due to the complexity of our tax system, there’s another factor at work.

Many (even most) taxpayers don’t know, until they have actually completed their return for the year, whether additional taxes will be owed. And, no matter what the taxpayer’s financial circumstances, finding out that money is owed to the tax authorities is bad news.

For many taxpayers that bad news can create a real cash flow crunch.  Statistics show that a substantial number of Canadians and Canadian families live paycheque to paycheque, and so would not be in a financial position to manage an unexpected tax bill, especially where that bill is due in the next few weeks. For a number of reasons, the better approach for such taxpayers is to try to obtain the necessary funds from private sources.  For those who don’t have the means to pay a tax bill out of existing resources, that likely means borrowing the needed funds. While that means paying interest on the borrowing, the interest cost incurred will likely be less than that which would be levied by the Canada Revenue Agency (CRA). 

If a tax bill can’t be paid in full out of either current resources or available credit, the CRA is open to making a payment arrangement with the taxpayer. While the CRA would rather get paid on time and in full, its ultimate goal is to collect the full amount of taxes owed. Consequently, the CRA provides taxpayers who simply can’t pay their bill for the year on time and in full with the option of paying an amount owed over time, through a payment arrangement.

There are two avenues available to taxpayers who want to propose such a payment arrangement. The first is a call to the CRA’s 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 150 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 2016 tax year). The TeleArrangement Service is available Monday to Friday, from 7 a.m. to 10 p.m. EST.

Taxpayers who would rather speak directly to a CRA employee can call the Agency’s debt management call centre at 1-888-863-8657. That centre is open Monday to Friday from 7 a.m. to 11 p.m. EST.

No matter what payment arrangement is made, the CRA will levy interest charges on any amount of tax owed for the 2017 tax year which is not paid on or before April 30, 2018. 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 2018 (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 April 30 deadline.

Finally, there is one strategy which is, in all circumstances, a bad one. Taxpayers who can’t pay their tax bill by the deadline 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 imposed of 5% of 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. In all cases, no matter what the circumstances, the right answer is to file one’s tax return on time. This year, for most taxpayers, that means filing on or before Monday April 30, 2018. For self-employed taxpayers (and their spouses) the filing deadline is Friday June 15, 2018. However for all taxpayers, the payment deadline for all 2017 income tax owed is Monday, April 30, 2018.

The reach of Canada’s system is broad – residents of Canada are taxed on their world-wide income, and the income or capital amounts that escape the Canadian tax net are few and far between.

One of the most significant of those exceptions, particularly for individual Canadian taxpayers, is the “principal residence exemption”. Plainly put, when a Canadian taxpayer sells his or her home, the proceeds of sale are not included in his or her income for the year (and therefore not taxed), no matter how much that home has appreciated in value since it was acquired. And, of course, given the real estate market conditions that have prevailed in recent years, especially in some urban centers, the difference between the original cost of the family home and its later sale price can be very substantial.

The reach of Canada’s system is broad – residents of Canada are taxed on their world-wide income, and the income or capital amounts that escape the Canadian tax net are few and far between.

One of the most significant of those exceptions, particularly for individual Canadian taxpayers, is the “principal residence exemption”. Plainly put, when a Canadian taxpayer sells his or her home, the proceeds of sale are not included in his or her income for the year (and therefore not taxed), no matter how much that home has appreciated in value since it was acquired. And, of course, given the real estate market conditions that have prevailed in recent years, especially in some urban centers, the difference between the original cost of the family home and its later sale price can be very substantial.

There are good reasons for the favourable tax treatment that is accorded family homes (or “principal residences, in tax parlance). A home is often the largest financial asset owned by an individual or a family, and for many Canadians, home ownership forms the basis of their overall financial plan and, often, their retirement plans.

 As is always the case in tax, definitions matter. And, for purposes of the principal residence exemption, such principal residence can be any one of the following types of properties:

• house;
• cottage;
• condominium;
• apartment in an apartment building;
• apartment in a duplex; or
• a trailer, mobile home, or houseboat.

In order to claim the principal residence exemption on the sale of one’s home, of whatever description, it’s also necessary that the taxpayer own the property (alone or jointly with another person, usually a spouse), has used that property as his or her principal residence at some point during the year, and designate the property as the principal residence on the tax return for the year of sale.

The reference to a tax return may be puzzling to taxpayers who have sold homes but never made any designation on their return for the year. However, concerns about speculation in the housing market led the federal government, in 2016, to make changes which would provide it with more information with respect to properties that were changing hands and on which the principal residence exemption was being claimed. As of 2016 (and subsequent years) taxpayers who sell their homes must complete and include Schedule 3 Capital Gains (or Losses) with their return for the year of sale. And, as of the 2017 tax year, they must also file Form T2091(IND) Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). That form, which is not included in the General Income Tax Return package for 2017, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t2091ind.html.

On the T2091, the taxpayer must provide the following information:

• the address of the property;
• the year the property was acquired; and
• the amount for which the property was sold.

The taxpayer must also certify the number of years the property sold was used as a principal residence during the period of ownership. 

None of these new rules or requirements alter the basic tax treatment of the sale of a principal residence – the proceeds of sale of a property that was used throughout the period of ownership as the only principal residence of a Canadian resident remain tax-free. The only thing that has changed is the requirement to report on the sale, providing information on the number of years of ownership and the sale price, and certifying the number of those years of ownership during which the property was used as one’s principal residence.

Where the property sold was acquired after 1981 and was used during the entire period of ownership as a principal residence of a Canadian resident, the reporting requirements are relatively straightforward. There are, however, some other situations in which determining whether and to what extent monies received on the sale of one’s home will qualify for the principal residence exemption is more complex, and professional advice may be warranted.

First, prior to 1982, it was possible for each spouse in a marriage to claim the principal residence exemption. Typically, one spouse would claim the exemption on the family home, while the other spouse would claim the exemption with respect to the family cottage. The rules changed in 1982 to eliminate that practice. Consequently, where a married taxpayer is selling a property which was purchased prior to 1982 and a principal residence exemption was previously claimed on a second property which the taxpayer and his or her spouse owned, it would be prudent to obtain professional tax advice on the proper reporting of the current sale.

As well, the principal residence exemption is available only to residents of Canada. Where the person selling a principal residence was a non-resident at any time during the period of ownership, the amount of principal residence exemption claimable may be affected.

A taxpayer who sells a principal residence during the year must report that sale on Schedule 3 to the Return, and that Schedule is always filed as part of the Return, regardless of the filing method used. However, the filing requirements with respect to the T2091 form differ, depending on how the taxpayer files his or her return. Where a return is paper-filed, the T2091 must be completed, signed and filed with the return. Where the taxpayer uses any of the electronic filing requirements, the T2091 is not filed with the return, but must be kept and produced if the CRA requests it.

Finally, the requirement to report the details of the sale of a principal residence is a relatively new one. The obligation to do so is not particularly well known and there is nothing in the 2017 Income Tax Guide to alert taxpayers to that requirement. It is, therefore, entirely possible that an affected taxpayer will be unaware of such requirement and will fail to report. And, since the tax authorities have no way of knowing that a sale of a principal residence has taken place, it’s unlikely that they would ask for that information in the course of assessing the return. Such failure is, however, relatively easily remedied – the taxpayer need only (once the Notice of Assessment for the return has been received) file a T1 Adjustment in which the necessary information is provided. Generally, the CRA will accept that amendment to the return, but it does have the power to impose a penalty for the initial failure to report. That penalty is equal to $100 per month during which the reporting is late, to a maximum of $8,000.

More information on the new reporting requirements can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/principal-residence-other-real-estate/sale-your-principal-residence.html.

While everyone knows that the best results are obtained when tax and financial planning take place on an ongoing basis, the reality is that most Canadians focus on their tax situation only once a year, at tax filing time. And the harsher reality is that, by then, the opportunity to take steps which will make a significant difference in one’s tax liability for 2017 is lost.

While everyone knows that the best results are obtained when tax and financial planning take place on an ongoing basis, the reality is that most Canadians focus on their tax situation only once a year, at tax filing time. And the harsher reality is that, by then, the opportunity to take steps which will make a significant difference in one’s tax liability for 2017 is lost.

Most actions needed to reduce one’s tax payable for the 2017 tax year – making political contributions, selling investments at a loss, or paying professional or union dues which qualify for a credit or deduction – must have been taken on or before December 31, 2017. And the last such opportunity – making an RRSP contribution to be claimed on the 2017 return – vanished after the RRSP contribution deadline of March 1, 2018.

That said, all is not lost for taxpayers seeking to reduce their tax burden for 2017. There are a number of factors to consider, and a few strategies to contemplate, when completing the return for 2017. Those considerations and strategies, which generally involve the timing of claims made (or not made) on the return can make a measurable difference in the amount of tax payable for the year.

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 both medical and charitable tax credit claims, albeit for different reasons, there are situations in which it makes sense to defer an available claim until a future year, or to transfer the claim to another person.

Claiming charitable donations

Taxpayers are entitled to make a claim on the annual tax return for charitable donations made in the current (2017) 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 contributes $1,200 to a charity each 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%, plus $1000 × 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%, plus $2,200 × 29%). Where the donations are accumulated and claimed once every five years, the federal credit received will be $1,712 ($200 × 15%, plus $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.

Medical expense tax credit

Notwithstanding our publicly funded health care system, there are a great (and increasing) number of medical and para-medical expenses for which coverage is not provided and which must be paid on an out-of-pocket basis. In many instances, it’s possible to claim a medical expense tax credit for those out-of-pocket costs.

The federal credit for such expenses is 15% of allowable expenses. As is usually the case, the provinces and territories also provide a credit for the same expenses, albeit at different rates.

Many taxpayers find the rules on the calculation of a medical tax credit claim confusing, with some justification. First, there is an income threshold imposed. Eligible medical expenses are those expenses which exceed 3% of net income, or (for 2017) $2,268, whichever is less. Put in more practical terms, the rule for 2017 is that any taxpayer whose net income is less than $75,500 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $75,500 will be limited to claiming qualifying expenses which exceed the $2,268 threshold.

The other aspect of the medical expense tax credit which can be confusing is the calculation of the optimal time period. Unlike most credit claims, the medical expense tax credit can be claimed for qualifying expenses which were paid in any 12-month period ending during the tax year. While confusing, such rule is beneficial, in that it allows taxpayers to select the particular 12-month period during which medical expenses (and the resulting credit claim) is highest. The only restrictions are that the selected 12-month period must end during the calendar year for which the return is being filed and, of course, any expenses which were claimed on a previous return cannot be claimed again. 

While only expenses which exceed the $2,268/3% threshold may be claimed, it is also possible to aggregate expenses incurred within a family and make a single claim for those expenses on the return of one spouse. Specifically, the rules allow families to aggregate medical expenses incurred for each spouse and for all children born in 2000 or later. While medical expenses incurred by a single family member might not be enough to allow him or her to make claim, aggregating those expenses is very likely (especially for a family that does have private medical insurance coverage) to mean that total expenses will exceed the applicable threshold.

In determining who will make the medical tax credit claim for a family, there are two points to remember. Since total medical expenses claimable are those which exceed the 3% of net income/$2,268 threshold, whichever is less, the greatest benefit will be obtained if the spouse with the lower income makes the claim for total family medical expenses. However, the medical expense credit is a non-refundable one, meaning that it can reduce tax otherwise payable, but cannot create (or increase) a refund. Therefore, it’s necessary that the spouse making the claim have tax payable for the year of at least as much as the credit to be obtained, in order to make full use of that credit.

Finally, there are a huge number and variety of medical expenses which individuals and families may incur, and the rules governing which can be claimed and in what circumstances, are very specific. In some cases, for instance, a doctor’s prescription will be required, while in others it will not. A listing of medical expenses eligible for the credit, and any ancillary requirements, such as a prescription, can be found on the Canada Revenue Agency 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/lines-330-331-eligible-medical-expenses-you-claim-on-your-tax-return.html#mdcl_xpns.

The rules surrounding income tax are complicated and it can seem that for every rule there is an equal number of exceptions or qualifications. There is, however, one rule which applies to every individual taxpayer in Canada, regardless of location, income, or circumstances. That rule is that income tax owed for a year must be paid, in full, on or before April 30 of the following year. This year, that means that individual income taxes owed for 2017 must be remitted to the Canada Revenue Agency (CRA) on or before Monday, April 30, 2018. No exceptions and, absent extraordinary circumstances, no extensions.

The rules surrounding income tax are complicated and it can seem that for every rule there is an equal number of exceptions or qualifications. There is, however, one rule which applies to every individual taxpayer in Canada, regardless of location, income, or circumstances. That rule is that income tax owed for a year must be paid, in full, on or before April 30 of the following year. This year, that means that individual income taxes owed for 2017 must be remitted to the Canada Revenue Agency (CRA) on or before Monday, April 30, 2018. No exceptions and, absent extraordinary circumstances, no extensions.

Perhaps not surprisingly, the CRA tries to make it as easy as possible for taxpayers to remit what they owe, by providing a wide range of methods by which payment can be made. There are, in fact, no fewer than seven separate options available to individual residents of Canada in paying their taxes for the 2017 tax year. The options open to taxpayers who must make a payment to the taxman are set out below.

Pay using online banking

Millions of Canadians do most or all of their banking using the online services of their particular financial institution. The list of financial institutions through which a payment can be made to the CRA is a lengthy one (available at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-online-banking.html), and includes all of Canada’s major banks and credit unions.

The specific steps involved in making that payment will differ slightly for each financial institution, depending on how their online payment systems are configured. What’s important to remember is that the nature of the payment (i.e., current year tax return, as distinct from current year tax instalment payments) must be specified, and the taxpayer’s social insurance number must be provided, in order to ensure that the payment is credited to the correct account.

It is not necessary to access any particular CRA form in order to make an online payment of taxes through one’s financial institution.

Paying at your financial institution

For those who don’t use online banking, or simply prefer to make a payment in person, it is possible to pay a tax amount owed at the bank. Doing so, however, requires that the taxpayer have a personalized remittance form.

Since that remittance is specific to the taxpayer, it’s not possible to simply print that form from the CRA website. However, taxpayers who wish to obtain such a personalized remittance form can do so by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959 8281 and requesting that one be sent to them by mail.

Using the CRA’s My Payment

The CRA also provides an online payment service called My Payment. There is no fee charged for the service, and it’s not necessary to be registered for any of the CRA’s other online services in order to use My Payment.

What is necessary is that the taxpayer have a debit card with a VISA Debit, Debit MasterCard, or InteracOnline logo from a participating Canadian financial institution, as My Payment is set up to accept payment using only those cards. Anyone intending to use My Payment should first confirm that the amount of any payment to be made is within the daily or weekly transaction limits imposed by the particular financial institution.

A list of participating financial institutions for each type of card, and more details on this payment method, can be found at https://www.canada.ca/en/revenue-agency/services/e-services/payment-save-time-pay-online.html.

Payment by credit card

While it is possible to pay one’s taxes using a credit card, such payments can only be made through third-party service providers (that is, payments by credit card cannot be made directly to the CRA), and such third-party service providers will impose a fee for the service.

There are only two such service providers listed on the CRA website, and links to each are available at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-credit-card.html.

Payment through a service provider

There are a number of third party service providers which will accept payments and remit them on the taxpayer’s behalf to the CRA. However, the majority of such services are more oriented toward providing services to businesses, and most of those listed on the CRA website do not handle payments of individual income tax amounts owed.

The full listing of third-party service providers can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-a-service-provider.html.

Payment by pre-authorized debit

It’s possible to set up a pre-authorized debit (PAD) arrangement with the CRA, authorizing them to debit the account for an amount of taxes owed, on dates specified by the taxpayer.

Individuals who make instalment payments of tax throughout the year may already have such an arrangement in place and can certainly use that existing arrangement to arrange a PAD of any balance of taxes owed for the 2017 tax year. However, any such arrangement must be made at least five business days before the payment due date of April 30. A taxpayer who makes a payment of taxes only once a year is likely better off using another of the available payment methods.

This year, there is another option for taxpayers who have their return prepared and E-FILED by an authorized electronic filer. Such taxpayers can have that E-FILER set up a PAD agreement on their behalf in order to make a “one-time” payment for a current year tax amount owed. Details on how to make that arrangement are outlined on the CRA website at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-authorized-debit.html.

Payment by cash or debit card

It is still possible to pay one’s taxes in cash, or by using a debit card. Such payments are made, not at CRA offices, but at Canada Post outlets.

However, while a cash payment may be a low-tech option, the requirements for making a cash or debit card payment are not. In order to do so, the taxpayer will need a self-generated QR (quick response) code. Such code can be created by following a link found on the CRA website at https://www.canada.ca/en/revenue-agency/corporate/about-canada-revenue-agency-cra/pay-canada-post.html. The QR code created is provided to a clerk at a Canada Post outlet, who uses the information in the code to properly credit the payment made. Service fees are levied for this payment method.

It’s important for all taxpayers to realize that the payment deadline of April 30 requires that the CRA receive payment by that date. The Agency considers that a payment has been made only when it actually receives that payment, or the payment is received by a member of the Canadian Payments Association (which would include most Canadian financial institutions).

The majority of payment options now available to Canadians involve online transactions or the use of third party service providers. Both such methods can mean some delay in receipt of the payment by the CRA, as a result of the time required for processing of the payment by the financial institution or third party. Consequently, taxpayers who make their tax payments online or using a third-party service provider are well advised to consider that time lag in deciding when to make their payment; waiting until April 30 to do so likely isn’t a good idea.

Those who make their payment in person at a financial institution (using a personalized remittance form, as outlined above) can make their payment on April 30, as the date stamped on the remittance form is considered to be the date on which such payment is received by the CRA.

The number and variety of tax payment methods available to individual taxpayers can, in and of itself, be somewhat confusing. The CRA provides a chart on its website identifying each possible payment method, and the kinds of payments which can be made through each. That chart can be found at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/determine-your-payment-method.html.

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

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

Corporate:

Issue #43 Corporate

Personal:

Issue #43 Personal

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

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

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

Corporate:

Issue #39 Corporate

Personal:

Issue #39 Personal

For most Canadians, having to pay for legal services is an infrequent occurrence, and most Canadians would like to keep it that way. In many instances, 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 being able to claim a tax credit or deduction for the fees paid.

For most Canadians, having to pay for legal services is an infrequent occurrence, and most Canadians would like to keep it that way. In many instances, 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 being able 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 the disposition of 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 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. Where part of the retiring allowance or pension benefits received in a particular year is contributed to an RRSP or registered pension plan, the amount contributed must be subtracted from the total amount received when calculating the maximum allowable deduction for legal fees. However, where all legal fees incurred can’t be claimed in the current year, they can be carried forward and claimed on the return for any of the 7 subsequent tax years.

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.

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:

• collecting late support payments;
• establishing the amount of support payments from a current or former spouse or common-law partner;
• establishing the amount of support payments from the legal parent of that person’s child (who is not a current or former spouse or common-law partner). However, in these circumstances the deduction is allowed only where the support is payable under a court order, not simply under the terms of an agreement between the parties;
• seeking an increase in support payments; or
• seeking an order making child support amounts received non-taxable.

On the payment side of the support payment/receipt equation, the situation is not so favourable, as a deduction for legal fees incurred will not generally not be allowed to a person paying support. More specifically, as outlined on the Canada Revenue Agency (CRA) website, a person paying support cannot claim legal fees incurred in order to “establish, negotiate or contest 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.