Two quarterly newsletters have beed—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 #41 Corporate

Personal:

Issue #41 Personal

Sometime around the middle of August, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA), and that mail will contain unfamiliar and unwelcome news. Specifically, the enclosed form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15^th of this year – and will helpfully identify the amounts which should be paid on each date.

Sometime around the middle of August, millions of Canadians will receive unexpected mail from the Canada Revenue Agency (CRA), and that mail will contain unfamiliar and unwelcome news. Specifically, the enclosed form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15^th of this year – and will helpfully identify the amounts which should be paid on each date.

No one particularly likes receiving unexpected mail from the tax authorities, and correspondence which suggests that the recipient should be making payments of tax to the CRA during the year (instead of when he or she files the return for the year next April) is likely to be both perplexing and somewhat alarming. It’s fair to say that most Canadians aren’t familiar with the payment of income tax by instalments, and are therefore at a loss to know how to proceed the first time they receive an Instalment Reminder.

The reason the instalment payment system is unfamiliar to most Canadians is that most of us pay income taxes during our working lives through a different system. Every Canadian employee has tax automatically deducted from his or her paycheque (“at source”), before that paycheque is issued, and that tax is remitted, by the employer to the CRA, on the employee’s behalf. Such deductions and remittances accrue to the employee’s behalf, and they are credited with those remittances when filing the annual tax return for that year. It’s an efficient system, but it’s also one largely invisible to the employee, and certainly one which operates without the need for the employee to take any steps on his or her own. When someone’s working life ends and retirement begins, it’s consequently not surprising that the individual wouldn’t know that it is now his or her responsibility to make specific arrangements for the payment of income tax. 

Adding to the potential confusion, most employees who are now moving into retirement have had only a single source of income throughout their working lives. Once in retirement, however, there are likely multiple such sources of income, including Canada Pension Plan benefits and Old Age Security payments, and perhaps monthly amounts received from an employer-sponsored registered pension plan (RPP) or a registered retirement income fund (RRIF). Unless the individual so directs, none of the payors of those kinds of income will deduct income tax from the payments and remit them to the federal government on the individual’s behalf. 

Canadian tax rules provide that, where the amount of tax owed when a return is filed by the taxpayer is more than $3,000 ($1,800 for Quebec residents) in the current (2017) year and either of the two previous (2015 and 2016) years, that taxpayer may be required to pay income tax by instalments.

The reason that first instalment reminders are issued in August has to do with the schedule on which Canadians file their tax returns. The amount of tax payable on filing for the immediately preceding year can’t be known until the tax return for that year has been filed and assessed, and the tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer should receive a first instalment reminder for the current year. In many cases, a first instalment reminder is triggered where an individual who has retired within the past two years, as in the following example.

An individual retires at the end of 2015 from employment in which tax deductions were automatically taken from his or her paycheque. Beginning in January 2016, that individual’s sources of income change from a single paycheque from their employer to Canada Pension Plan and Old Age Security benefits, as well as a monthly withdrawal from a RRIF. In order for the individual to have the appropriate amounts of tax withheld from those income sources during 2016, the individual taxpayer would have to have calculated the amount of total tax liability for the year and made arrangements for the appropriate amount to be withheld from one or more of those three sources of income. For most taxpayers, especially those who are making all the various adjustments needed to move from working life into retirement, and who have never before needed to make such a calculation, that’s not a very likely scenario. Consequently, it would be very unlikely that withholdings in the correct amount (or any withholdings at all) would be made from those sources of retirement income, and very likely that more than $3,000 in tax will be owed when the return for 2016 is filed. Where the taxpayer’s income levels and withholding amounts are unchanged for 2017 and it can be expected that, once again, more than $3,000 will be owed on filing, the criteria for the instalment requirement would be met and a tax instalment reminder would be issued in August 2017, after the return for 2016 is assessed.

Taxpayers who receive that first Instalment Reminder in August may also be puzzled by the fact that it is a “Reminder” and not a “Requirement” to pay. The reason for that is that those who receive it are not actually required by law to make instalment payments of tax. There are, in fact, three options open to the taxpayer who receives an Instalment Reminder.

First, the taxpayer can pay the amounts specified on the reminder, by the respective due dates of September 15 and December 15. A taxpayer who does so can be certain that he or she will not have to pay any interest or penalty charges even if he or she does have to pay an additional amount on filing in the spring of 2018. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2017, he or she will of course receive a refund on filing.

Second, the taxpayer can make instalment payments based on the total amount of tax which was owed and paid for the 2016 tax year. Where a taxpayer’s income has not changed between 2016 and 2017 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2017 will be the same or slightly less than it was in 2016, owing to the indexation of tax brackets and tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will actually owe for  2017 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2016 to 2017 and there will consequently be a reduction in tax payable, this option may be worth considering. Taxpayers who wish to pursue this approach can obtain the information needed to estimate current year taxes (federal and provincial tax brackets and rates) on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html#federal.

All of this may seem like a lot of research and calculation effort, especially when one considers that many Canadians don’t even prepare their own tax returns. And those who don’t want to be bothered with the intricacies of tax calculations can pay the amounts set out in the Instalment Reminder, secure in the knowledge that they will not incur any penalty or interest charges and that, should those amounts ultimately represent an overpayment of taxes, that overpayment will be recovered and refunded when the 2017 return is filed next spring.

Once they have resigned themselves to the reality of the tax instalment system, the remaining question that most taxpayers have is how such payments can be made. The options open to taxpayers in that regard are helpfully outlined on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/making-payments-individuals/paying-your-income-tax-instalments/you-pay-your-instalments.html.

The traditional idea of retirement – working full-time until age 65 and then leaving the workforce completely to live on government-sponsored and private sources of retirement income – has undergone a lot of changes over the past couple of decades, and Canada’s government-sponsored retirement income system has evolved in response. Generally, the changes to the Canada Pension Plan (CPP) and Old Age Security (OAS) programs have increased the flexibility of those programs and, in particular, have given individuals a greater range of choices with respect to, especially, the timing of their receipt of CPP and OAS.

The traditional idea of retirement – working full-time until age 65 and then leaving the workforce completely to live on government-sponsored and private sources of retirement income – has undergone a lot of changes over the past couple of decades, and Canada’s government-sponsored retirement income system has evolved in response. Generally, the changes to the Canada Pension Plan (CPP) and Old Age Security (OAS) programs have increased the flexibility of those programs and, in particular, have given individuals a greater range of choices with respect to, especially, the timing of their receipt of CPP and OAS.

The downside of that increased flexibility has been to make the system — and therefore the choices available to Canadians — more complex. One aspect of that complexity is the (relatively) new CPP post-retirement benefit, or PRB.

The CPP system is a contributory one, in which both the individual and his or her employer make annual contributions, with the amount of those contributions based on the employee’s income for that year. The total of contributions made between the time the individual is age 18 and the time he or she begins receiving CPP retirement benefits is used to calculate the amount of the monthly CPP retirement benefit to which that individual is entitled. An individual can begin receiving his or her CPP retirement benefit at the age of 60 or can defer receipt anytime until he or she turns 70 years of age. With each month that receipt of the benefit is deferred, the amount of that benefit increases.

It was once the case that an individual who had decided to begin receiving the CPP retirement benefit was not required (or allowed) to continue contributing to the CPP (even if he or she continued to work) and therefore had no means of increasing the benefit amount. A change made in 2012 altered that rule, such that individuals who continued to work while receiving the CPP retirement benefit could also continue to contribute to the CPP and, as a result, increase the amount of CPP retirement benefit they received each month. That benefit is the CPP post-retirement benefit or PRB.

The rules governing the PRB differ, depending on the age of the taxpayer. In a nutshell, an individual who has chosen to begin receiving the CPP retirement benefit but who continues to work will be subject to the following rules:

• Individuals who are 60 to 65 years of age and continue to work are required to continue making CPP contributions.
• Individuals who are 65 to 70 years of age and continue to work can choose not to make CPP contributions. To stop contributing, such an individual must fill out Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election. A copy of that form must be given to the individual’s employer and the original sent to the Canada Revenue Agency (CRA). An individual who has more than one employer must make the same choice (to continue to contribute or to cease contributions) for all employers and must provide a copy of Form CPT30 to each.

A decision to stop contributing can be changed, and contributions resumed, but only one change can be made per calendar year. To make that change, the individual must complete section D of Form CPT30, give one copy of the form to his or her employer, and send the original to the CRA.

• Individuals over the age of 70 and are still working cannot contribute to the CPP.

Overall, the effect of these new rules is that CPP retirement benefit recipients who are still working and under age 65, as well as those who are between 65 and 70 and choose not to opt out, will continue to make contributions to the CPP system and continue therefore to earn new credits under that system. As a result, the amount of retirement benefits which they are entitled to will increase with each year’s contributions.

Where an individual makes CPP contributions while working and receiving CPP retirement benefits, the amount of any CPP post-retirement benefit earned will automatically be calculated by the federal government, and the individual will be advised of any increase in that monthly CPP retirement benefit each year. The PRB will be paid to that individual automatically the year after the contributions are made, effective January 1st of every year. Since the federal government needs information about employer contributions made, the first annual payment of the PRB is usually issued in early April and will include a lump sum payment back to January. Thereafter, the PRB is paid monthly and the PRB amount is added to the individual’s CPP retirement pension and issued as a single payment.

While the rules governing the PRB can seem complex (and certainly the actuarial calculations are), the individual doesn’t have to be concerned with those technical details. For CPP retirement benefit recipients who are under age 65 or over 70, there is no decision to be made. For the former, CPP contributions will be automatically deducted from their paycheques and for the latter, no such contributions are allowed.

Individuals in the middle group — those aged 65 to 70 — will need to decide whether it makes sense, in their individual circumstances, to continue making contributions to the CPP. Some assistance in making that decision is provided on the federal government website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-post-retirement/benefit-amount.html, which shows the calculations which would apply for individuals of different ages and income levels. 

More information on the PRB generally is also available on that website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-post-retirement.html.

While Canadians typically think of taxes only in the spring when the annual return must be filed, taxes are a year-round business for the Canada Revenue Agency (CRA). The CRA is busy processing and issuing Notices of Assessment for individual tax returns during the February to June filing season. To date, in 2017, the CRA has received and processed just under 28 million individual income tax returns. That volume of returns and the CRA’s self-imposed processing turnaround goals (two to six weeks, depending on the filing method) mean that the CRA cannot possibly do an in-depth review of each return filed prior to issuing the Notice of Assessment.

While Canadians typically think of taxes only in the spring when the annual return must be filed, taxes are a year-round business for the Canada Revenue Agency (CRA). The CRA is busy processing and issuing Notices of Assessment for individual tax returns during the February to June filing season. To date, in 2017, the CRA has received and processed just under 28 million individual income tax returns. That volume of returns and the CRA’s self-imposed processing turnaround goals (two to six weeks, depending on the filing method) mean that the CRA cannot possibly do an in-depth review of each return filed prior to issuing the Notice of Assessment.

As well, for many years the CRA has been encouraging taxpayers to fulfill their filing obligations online, through one of the Agency’s e-filing services. Canadians are clearly listening, as just over 24 million (or 86%) of the returns filed this year were filed by electronic means. While e-filing means that the turnaround for processing of returns is much quicker, there is, by definition, no paper involved. The Canadian tax system has always been what is termed a “self-assessing” system, in which taxpayers report income earned and claim deductions and credits to which they believe they are entitled. Prior to the advent of e-filing there were means by which the CRA could easily verify claims made by taxpayers. Where returns were paper-filed, taxpayers were usually required to include receipts or other documentation to prove their claims, whatever those claims were for. For the 86% of returns which were filed this year by electronic means, no such paper trail exists. Consequently, the potential exists for misrepresentation of such claims (or simple reporting errors) on a large scale. The CRA’s response to that risk is to carry out a post-assessment review process, in which the Agency asks taxpayers to back up or verify claims for credits or deductions which were made on the return filed this past spring.

That post-assessment review process starts in the month of August. There are two components to the review process — the Processing Review Program and the Matching Program. The former is a review of various deductions or credits claimed on returns, while the latter compares information included on the taxpayer’s return with information provided to the CRA by third-party sources, like T4s filed by employers or T5s filed by banks or other financial institutions.

Being selected for review under either program means, for the individual taxpayer, the possibility of receiving unexpected correspondence from the CRA. Receiving such correspondence from the tax authorities is almost guaranteed to unsettle the recipient taxpayer, even where there’s no reason to believe that anything is wrong. But, it’s an experience which will be shared this summer and fall by millions of Canadian taxpayers.

While the two programs are carried out more or less concurrently, they are quite different. The Processing Review Program asks the taxpayer to provide verification or proof of deductions or credits claimed on the return, while the Matching Program deals with discrepancies between the information on the taxpayer’s return and information filed by third parties with respect to the taxpayer’s income or deductions for the year.

Of course, most taxpayers are not concerned so much with the kind or program or programs under which they are contacted as they are with why their return was singled out for review. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is a precursor to an audit, but that’s not necessarily the case. Returns are selected by the CRA for post-assessment review for a number of reasons. Under the Matching Program, where a taxpayer has filed a return containing information which does not agree with the corresponding information filed by, for instance, his or her employer, it’s likely that the CRA will want to follow up to find out the reason for the discrepancy. As well, Canada’s tax laws are complex and, over the years, the CRA has determined that there are areas in which taxpayers are more likely to make errors on their returns. Consequently, a return which includes claims in those areas (like medical expenses, support payments, and legal fees) may have an increased chance of being reviewed. Where there are deductions or credits claimed by the taxpayer which are significantly different or greater than those claimed in previous returns, that may attract the CRA’s attention. And, if the taxpayer’s return has been reviewed in previous years and, especially, if an adjustment was made following that review, subsequent reviews may be more likely. Finally, many returns are picked for post-assessment review simply on a random basis.  

Regardless of the reason for the follow-up, the process is the same. Taxpayers whose returns are selected for review will receive a letter from the CRA, identifying the deduction or credit for which the CRA wants documentation or the income or deduction amount about which a discrepancy seems to exist. The taxpayer will be given a reasonable period of time — usually a few weeks from the date of the letter — in which to respond to the CRA’s request. That response should be in writing, attaching the receipts or other documentation (if needed) which the CRA has requested. All correspondence from the CRA under its review programs will include a reference number, which is usually found in the top right hand corner of the CRA’s letter. That number is the means by which the CRA tracks the particular inquiry, and should be included in the response sent to the Agency. It’s important to remember, as well, that it’s the taxpayer’s responsibility to provide proof, where requested, of any claims made on a return. Where a taxpayer does not respond to a CRA request and does not provide such proof, the Agency will proceed on the basis that the requested verification or proof does not exist, and will reassess accordingly.

Taxpayers who have registered for the CRA’s online tax program My Account (or whose representative is similarly registered for the CRA’s Represent a Client online service) can submit required documentation electronically. More information on how to do so can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/sbmttng-eng.html.

Regardless of how requested documents are submitted, it’s possible that the CRA will send a follow-up letter, or the taxpayer may be contacted by telephone, with a request from the CRA for more information.

One word of caution — as most Canadians have heard by now, there is a persistent tax scam operating in which taxpayers are contacted by telephone by someone falsely claiming to be from the CRA (or, more recently, from the “Federal Tax Court”, which does not exist). Such fraudulent callers generally indicate that a review of the taxpayer’s return shows that additional taxes are owed, and insist that immediate payment is required, by wire transfer of funds or pre-paid credit card. Taxpayers should be aware that payment of taxes is never requested in this way, or by either of those methods. While the CRA can and does contact taxpayers by phone, any CRA representative will have the reference number which appeared in the CRA’s initial letter and should be prepared to quote that number to the taxpayer in order to establish that the call is an authentic one. As well, the CRA does not correspond with taxpayers on confidential tax matters by e-mail. The only legitimate e-mail which a taxpayer might receive from the CRA is one which advises that there is a new message for that taxpayer in his or her online account with the CRA — and only taxpayers who have previously registered for the CRA’s My Account service would receive such an e-mail. Any other type of e-mail claiming to be from the CRA is not legitimate and should be deleted without opening.

Whatever the reason a particular return was selected for post-assessment review by the CRA, one thing is certain. A prompt response to the CRA’s enquiry, providing them with the information or documentation requested will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the Agency and the taxpayer.

The Bank of Canada’s recent decision to raise interest rates generated a lot of media attention, for the most part because while the increase itself was only one quarter of a percentage point, it was the first move made by the Bank of Canada to increase rates in the past seven years. Much of the media coverage of the rate change centered around the effect that change might or might not have on the current real estate market. One of the issues under discussion was whether this or future increases in interest rates (and therefore mortgage rates) would act as a barrier to those seeking to get into the housing market. And a phrase that was prominent in that discussion — the mortgage financing “stress test” — is likely one that is unfamiliar to most Canadians, even those who are affected by it.

The Bank of Canada’s recent decision to raise interest rates generated a lot of media attention, for the most part because while the increase itself was only one quarter of a percentage point, it was the first move made by the Bank of Canada to increase rates in the past seven years. Much of the media coverage of the rate change centered around the effect that change might or might not have on the current real estate market. One of the issues under discussion was whether this or future increases in interest rates (and therefore mortgage rates) would act as a barrier to those seeking to get into the housing market. And a phrase that was prominent in that discussion — the mortgage financing “stress test” — is likely one that is unfamiliar to most Canadians, even those who are affected by it.

When anyone seeks to borrow money, for whatever purpose, a key factor in whether they will be able to obtain a loan is, of course, their ability to repay the loan on the terms set, including the interest rate to be levied. That same consideration applies when an individual or a couple apply for approval or pre-approval of a mortgage. However, a mortgage differs from other kinds of consumer debt in a few significant ways. First, a mortgage is likely to be the largest debt any Canadian takes on in his or her lifetime. Second, a mortgage is paid off over a much longer period of time — typically 25 years — than any other type of debt. And, finally, because of that lengthy repayment period, a mortgage is the only kind of significant consumer debt in which the interest rate which will be payable over the entire life of the loan can’t be determined prior to the time the initial financing is approved.

When mortgage financing is provided to a home buyer, there are two factors, besides the amount of the loan, which determine how much the monthly mortgage payments will be. The first is the amortization period, or the length of time over which the mortgage loan will be repaid. The second is the mortgage term, which is the time period for which the interest rate for the mortgage is fixed. That term is always shorter than the amortization period – for most mortgage financing in Canada, the longest term which can be obtained is 10 years, although most mortgage terms are shorter than that. Since the interest rate for that term is fixed, both the borrower and the lender know how much the mortgage payments will be for the entire length of that term and what percentage of the borrower’s current income will be required to make those payments.

In determining whether a borrower will be able to repay the mortgage loan as required, mortgage lenders rely on two debt-to-income ratios, known as Gross Debt Service (GDS) and Total Debt Service (TDS). The two are similar, but not the same.

The GDS ratio measures how much of the would-be borrower’s income will be needed to meet his or her housing costs. For any particular mortgage borrower, GDS represents the total of mortgage payments, property taxes, heating costs, and — where applicable — one-half of condo fees. Optimally, that total figure will represent less than 35% of the would-be borrower’s income.   

Of course, most Canadians carry one or more kinds of consumer debt besides their mortgages, and so it’s necessary to determine their cost of servicing that total debt as a percentage of income. That figure is their TDS, which is the total of housing expenses (as calculated for purposes of GDS) plus any other debt repayment, including car loans, credit cards, lines of credit, and student loans. Optimally, the total amount of housing costs plus other repayment will be less than 42% of the would-be borrower’s income.

Where a would-be borrower is particularly credit-worthy (e.g., he or she has a reliable source of income and a good credit history), lenders will provide mortgage financing even where the optimal debt ratios indicated above are exceeded. However, the maximum GDS and TDS ratios allowed are, respectively, 39% and 44%.

While the GDS and TDS ratios do provide a reasonable measure of the ability of a prospective borrower to repay funds advanced to him or her, the weakness of those ratios are that they provide only a “snapshot” of the individual’s housing costs and debt repayment costs at a particular point in time and, more significantly, at current interest rates. As everyone knows, interest rates in Canada are, and have been for several years, at or near records lows and that many Canadians have taken advantage of those low rates. Specifically, as of the first quarter of 2017, the average debt load of Canadian households (including mortgage debt) stood at 167.3% of disposable income.

The combination of those two factors means that Canadian households are, on average, carrying much higher levels of debt (as a percentage of disposable income) and that the cost of carrying such debt is at or near record lows. When, as has recently proven the case, those interest rates begin to rise, such increase has the potential to put Canadian households on financial thin ice. And that possibility is what gave rise to the introduction by the federal government of the “stress test” which might equally well be called the “what-if?” test.

It’s possible to purchase a home in Canada with a down payment of 5%, where the cost of the home is $500,000 or less. Where the purchase price of the home is over $500,000, the minimum down payment is 5% for the first $500,000, and 10% for the remaining portion. However, regardless of the cost of the home, where the total down payment to be made is less than 20% of the purchase price, mortgage loan insurance is required, and such insurance is provided by a federal government agency, the Canada Mortgage and Housing Corporation (CMHC). As of the fall of 2016, all new prospective mortgage loans which must obtain mortgage loan insurance through CMHC (i.e., all those with less than 20% down payment) are subject to the new “stress test” requirement.

Basically, the stress test requires that lenders assess a would-be mortgage borrower’s ability to manage their debt, not only at current interest rates, but at the higher rates which those borrowers will certainly face sometime during the life of their mortgage. Carrying out a stress test is, in fact, something which financial planners advise clients to do as part of financial planning whenever taking on debt is contemplated. It’s simply prudent (especially where debt is longer term in nature and consequently higher payments resulting from an increase in interest rates is inevitable) to consider, not just whether the debt is manageable at current interest rates, but whether it will remain manageable where those interest rates rise by 1, 2, or 3% — or more. The “stress test” simply creates a requirement out of something that was always a good idea.

Under the stress test, for borrowers to qualify for mortgage insurance through CMHC, their GDS and TDS debt-servicing ratios must be no higher than the maximum allowable levels when calculated using the greater of the rate provided to them by their lender or the Bank of Canada’s conventional five-year posted rate. That Bank of Canada rate is typically higher than the rate that mortgage borrowers actually pay. For instance, the lowest five-year fixed rate mortgage interest rate offered by a major Canadian bank as of the end of July was 2.59%. At the same time, the Bank of Canada five-year posted rate was 4.84%.

It’s true that the application of the “stress test” as interest rates rise will cause more borrowers to be unable to qualify for a mortgage, or will require them to reduce their expectations in terms of the amount of mortgage financing for which they can qualify. But, it’s also the case that would-be borrowers who cannot “pass” a stress test are the very borrowers who would be put most at risk by an increase in interest rates. Where interest rates will be a year or two from now is something that no one — including the Bank of Canada — knows. It is undoubtedly disappointing for would-be borrowers to have to reduce their expectations with respect to the amount of mortgage financing (and therefore the “amount” of house) they can obtain. That scenario is, however, infinitely preferable to one in which they discover down the road that they can no longer afford to carry their mortgage at the higher interest rates then in effect, and are at risk of defaulting on that mortgage and potentially losing their home.

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

Planning for 2015 taxes even before the New Year is rung in may seem more than a little premature. Nonetheless, taking some time to review one’s tax situation—and perhaps putting a few strategies in place—at the beginning of the year can help avoid a cash flow crisis or other financial shock when the RRSP contribution deadline looms or it is tax filing (and tax payment) time in the spring of 2016. And, while many tax-planning and tax-saving strategies can be implemented throughout the tax year, getting an early start on such planning usually leads to the best results.

Planning for 2015 taxes even before the New Year is rung in may seem more than a little premature. Nonetheless, taking some time to review one’s tax situation—and perhaps putting a few strategies in place—at the beginning of the year can help avoid a cash flow crisis or other financial shock when the RRSP contribution deadline looms or it is tax filing (and tax payment) time in the spring of 2016. And, while many tax-planning and tax-saving strategies can be implemented throughout the tax year, getting an early start on such planning usually leads to the best results.

The first tax-planning step that can be taken is to ensure that the right amount of tax is being paid throughout the year. Most Canadians love getting a tax refund—the bigger the better. Receiving a refund after filing the annual tax return feels like getting “free” money from the federal government. In fact, except in very narrow circumstances, the reality is the opposite – it’s the taxpayer who has provided the federal government with the interest-free use of the taxpayer’s money. Getting a tax refund often indicates a failure to plan one’s tax payments properly at the beginning of the year.

To understand why that is so, it’s necessary to understand how and when the tax authorities collect taxes from individual taxpayers. Canada’s tax system is a self-assessing one, in which individual taxpayers file an annual return at a prescribed time, usually by the end of April in the following year, reporting their income from all sources and calculating the amount of federal and provincial tax which they must pay on that income. Of course, very few taxpayers would be able to pay their entire tax bill for the year at one time and the tax authorities are equally disinclined to wait until past the end of the tax year to receive income taxes owed by Canadians. So, for most Canadians (certainly for the vast majority who receive their income from employment), income tax, along with other statutory deductions like Canada Pension Plan and Employment Insurance contributions, are paid periodically throughout the year by means of deductions taken from their paycheques, with those deductions then remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by his or her employer.

Of course, each taxpayer’s situation is unique, and so the employer has to have some guidance as to how much to deduct and remit on behalf of each individual taxpayer. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by every employee, sometimes at the start of each tax year but certainly at the time employment commences. Each employee must in fact complete two TD1 forms—one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer resides and works. Federal and provincial TD1 forms for 2015 (which are available on the CRA website at www.cra-arc.gc.ca/menu/AFAF_T_TD-e.html#ti) list the most common statutory credits and deductions claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial), which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the government.

While this system makes fundamental sense, it can go awry when too much tax is withheld from the employee’s paycheque, and then returned to him or her at the end of the tax year in the form of a tax refund. Generally, this happens when the employee does not correctly indicate on the TD1 forms all of the personal tax credit amounts to which he or she is entitled. In other cases, too much tax may be withheld where the employee has deductions or credits which cannot be claimed on the TD1 forms. In either case, the amount withheld from the employee’s paycheque throughout the year will be greater than the amount of tax he or she actually owes—thereby providing the tax authorities with an interest-free loan of what is ultimately the taxpayer’s money.

Where the taxpayer simply isn’t claiming on the TD1 all of the amounts to which he or she is entitled, the solution is a simple one. Only the basic personal tax credit to which all Canadian resident taxpayers are entitled is automatically taken into account in determining a taxpayer’s deductions at source—all others must be specified by the taxpayer. So, if a taxpayer is entitled to claim a particular tax credit amount, like the spousal amount or the age amount, it should be identified on the TD1. Assuming that employment income is, as is the case for most Canadians, the taxpayer’s only significant source of income, claiming all amounts to which he or she is entitled on the TD1 will mean that the source deductions made will accurately reflect tax liabilities for the year. At the end of the year, the individual will have paid the taxes for which he or she is responsible, without underpaying or overpaying.

Where the taxpayer has available deductions which cannot be recorded on the TD1, it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect tax liability. The way to do so is to file a Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website at www.cra-arc.gc.ca/E/pbg/tf/t1213/t1213-12e.pdf) with the CRA. Once that form is filed with the CRA, the Agency will authorize the employer to reduce the amount of tax being withheld at source to more accurately reflect the taxpayer’s actual tax owing for the year. In most cases, taxpayers who file a Form T1213 do so because they are incurring expenditures which, while deductible for tax purposes, don’t show up on the TD1. Most commonly, those are expenditures like deductible support payments or contributions to a registered retirement savings plan (RRSP).

Many taxpayers like getting a tax refund because they see it as a kind of forced savings plan, and it’s true that if your money is being held throughout the year by the tax authorities, you can’t spend it. And it’s also true that a reduction in the amount of source deductions, while it can amount to a significant sum over the course of a year, is likely to be a relatively small amount per paycheque. Even the most financially self-disciplined among us find it difficult not to spend what seems like a fairly insignificant amount of money when it’s made available to us, especially when it feels like “found” money. The solution on both counts is to have the “excess” amount represented by reduced source deductions transferred into a TFSA or, even better, an RRSP as soon as it appears in the taxpayer’s bank account. Even $20 a week will amount, not including interest, to just over $1000 per year. And, if that $1,000 is transferred into an RRSP, then the taxpayer will have a $1,000 deduction to claim on his or her tax return for the year—and will avoid, in whole or in part, that end-of-February scramble to come up with funds for an RRSP contribution. For a taxpayer who has a top marginal tax rate of 40%, a $1,000 RRSP contribution and deduction will reduce the tax bill for the year by $400.

As with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes some time—the CRA’s estimate is four to six weeks. Consequently, a T1213 filed in late December or even early January should take effect, at the latest, by the middle of February—well in time to have the required effect on one’s source deductions for 2015.

Finally, even where the employer already has a TD1 on file for the employee, it’s easy and often advisable to provide the employer with a new one at the beginning of the tax year. Everyone’s circumstances change over time (e.g., a son or daughter starts post-secondary education, or an elderly parent comes to live with his or her children) and it’s likely that many individuals become entitled to make tax credit claims which aren’t reflected on a TD1 completed years previously. And, where the employee will have deductions in 2015 which can’t be recorded on the TD1, this would be a good time to prepare and file a T1213 for the year. Doing either (or both, as the case may be) will ensure that source deductions made during 2015 accurately reflect the employee’s current circumstances and consequently his or her actual tax liability for the year.

The Employment Insurance premium rate for 2015 is 1.88%.

The Employment Insurance premium rate for 2015 is 1.88%.

Yearly maximum insurable earnings are set at $49,500, making the maximum employee premium $930.60.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2015 is therefore $1302.84.

The Canada Pension Plan contribution rate for 2015 is unchanged at 4.95% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2015 is unchanged at 4.95% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $53,600, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2015 will be $2,479.95 each, and the maximum self-employed contribution will be $4,959.90.

Dollar amounts on which individual non-refundable federal tax credits for 2015 are based, and the actual tax credit claimable, will be as follows:

Dollar amounts on which individual non-refundable federal tax credits for 2015 are based, and the actual tax credit claimable, will be as follows:

                                                                                Credit amount ($)             Tax credit ($)

Basic personal amount                                                   11,327                                1,699

Spouse or common-law partner amount                          11,327                                1,699

Eligible dependant amount                                             11,327                                1,699

 Age amount                                                                  7,033                                 1,055

Net income threshold for erosion of credit                       35,466

Infirm dependant amount (over 18)                                 6,700                                 1,005

Net income threshold for erosion of credit                        6,720

Caregiver amount (for parent or grandparent)                 4,608                                    691

Net income threshold for erosion of credit                      15,735

Disability amount                                                          7,899                                  1,185

Adoption expenses credit                                              15,255                                 2,288

Medical expense tax credit threshold amount                   2,208

Maximum refundable medical expense supplement          1,172

Old Age Security clawback income threshold                 72,809

Credit amounts are converted to a non-refundable credit by multiplying the amount by the federal rate applicable to the lowest income bracket, which is 15.0% for 2015.

The indexing factor for federal tax credits and brackets for 2015 is 1.7%. Consequently, the following federal tax rates and brackets will be in effect for individuals for the 2015 tax year.

The indexing factor for federal tax credits and brackets for 2015 is 1.7%. Consequently, the following federal tax rates and brackets will be in effect for individuals for the 2015 tax year:

Income level                           Federal tax rate

$11,327 - $44,701                           15.0%

$44,702 - $89,401                           22.0%

$89,402 - $138,586                         26.0%

Above $138,586                              29.0%

There is no change in federal individual tax rates for 2015.

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax-planning strategies. Some of the more significant dates and changes for individual taxpayers for 2015 are listed herein.

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax-planning strategies. Some of the more significant dates and changes for individual taxpayers for 2015 are listed below.

RRSP deduction limit increases to $24,270

The RRSP contribution limit for the 2014 tax year (for which the contribution deadline is Monday, March 2, 2015) will increase to $24,270. In order to make the maximum contribution for 2014, it will be necessary to have had earned income for the 2013 taxation year of $134,834.

TFSA contribution limit for 2015

The TFSA contribution room limit for 2015 is unchanged at $5,500. The actual amount which can be contributed by a particular individual includes both the current year limit and any carryover or re-contribution amounts from previous taxation years.

Individual tax instalment deadlines for 2015

Millions of individual taxpayers pay income tax by quarterly instalments, which are usually due on the 15^th day of each of March, June, September, and December. As March 15 falls on a Sunday, the payment deadlines for tax instalments in 2015 will actually be March 16^th, June 15^th, September 15^th, and December 15^th.

Individual tax filing and payments deadlines for 2015

For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2014 tax year is Thursday, April 30, 2015.

Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2014 on or before April 30, 2015. Self-employed taxpayers and their spouses must file a 2014 income tax return on or before Monday, June 15, 2015.