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

Corporate:

Issue #20 Corporate

Personal:

Issue #20 Personal

While it didn’t get a lot of attention in the coverage of the 2012-13 federal Budget (brought down at the end of March), one of the budget announcements was definitely good news for the small business sector, as the EI hiring credit which had been available during 2011 was extended for another year.

One of the perennial concerns of small businesses is the number and variety of levies which they pay to governments at all levels and the effect of those payments on the bottom line. At the federal government level, businesses must pay, in addition to income tax, Canada Pension Plan contributions and Employment Insurance premiums on behalf of their employees. Where an employee earns in excess of about $50,000 per year, the employer’s share of those levies reaches almost $3,500 for the year.

In last year’s budget, the federal government proposed and implemented a “hiring credit” for small business, which provided a non-refundable credit of up to $1,000 against any increase in the employer’s EI premiums payable over the previous year’s amount. As the EI premium rate did not increase substantially on a year-over-year basis, any significant increase in an employer’s EI premiums liability for the current year over the previous one would generally arise as the result of taking on new employees. In effect, the credit covered up to the first $1,000 of EI premiums payable by the employer for new hires during the year.

As the intent of the credit was to benefit small and medium sized businesses, limits were placed on the size of the companies which could claim the credit. Specifically, the credit was available only to companies whose total EI premiums for the immediately previous year were less than $10,000.    

In this year’s budget, the federal government announced that the credit will similarly be made available during 2012 to employers whose EI premium liability during 2011 was less than $10,000. As was the case last year, the credit will cover up to the first $1,000 of any year-over-year increase (i.e., from 2011 to 2012) in the EI premiums payable by the employer.

Any such increase in premiums must be paid “up front”, when the employer business remits its source deductions in the usual way. However, there is no need to make an application for the hiring credit, as any credit will automatically be calculated by the Canada Revenue Agency (CRA) and applied as a credit on the employer’s payroll account with the Agency.  More information on the credit for 2012 can be found on the CRA Web site at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/hwpyrllwrks/stps/hrng/hcsb-2012-eng.html.

As gas prices across Canada climb past the $1.30/litre mark, and some predictions are for $1.50/litre (or higher) gas costs by the summer, consumers are looking for just about any way to reduce their cost of getting around.

For most of us, the purchase of gasoline is, for all practical purposes, a non-discretionary expense. Since the money has to be spent, the question becomes this: Does our tax system offer any relief by way of a deduction or credit for the cost of driving? The answer, as it usually is in tax, is yes … and no. The bad news for most employee taxpayers is that the cost of driving to work and back home, and the cost of most non-work driving is considered a personal expense, for which no deduction or credit is allowed, no matter how high the cost gets. The news is not, however, uniformly bad. The self-employed, of whom there are an increasing number, can claim a deduction for business-related driving expenses. As well, all taxpayers are permitted to claim a deduction for driving or travel expenses incurred for certain specific purposes, like moving to take a job or travelling to obtain medical care. And, finally, for those who decide that the daily commute has just become too costly and turn to public transit (which includes everything from subways to suburban commuter trains to ferries) as an alternative, a tax credit is available to help offset the cost of that transit.

Where employees are required, as part of their terms of employment, to use their own vehicle for work-related travel (e.g., someone who is required to visit clients at their own premises for the purpose of meetings or other work-related activities), tax relief is available for the related costs. If the employer is prepared to certify on a Form T2200 that the employee was ordinarily required to work away from his employer’s place of business or in different places, that he or she is required to pay his or her own travelling expenses and that no tax-free allowance is provided by the employer for such expenses, the employee can deduct actual expenses incurred (including the cost of gas) for such work-related travel. It goes without saying that the employee must, in order to claim that deduction, keep a record of work-related travel done as well as records of travel-related expenses incurred.

The rules governing the taxation of employee automobile allowances and available deductions for employment-related automobile use (summarized on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/slry/mtrvhcl-eng.html), can be complicated. However, given the recent run-up in the cost of gasoline, as well as the anticipated increase ahead, it’s likely worth ensuring that every possible dollar of eligible expenses incurred as a result of employment-related car use is claimed.

Our tax system also permits a deduction for driving or other travelling costs incurred where a taxpayer moves to take a job (which would include students moving to take up a summer job) as well as for travelling costs which are incurred in order for the person or a member of their family to receive medical treatment.

Where it’s necessary to move to take up employment or self-employment, the costs of that move can be deducted from income earned at the new job. When it comes to travelling costs, the taxpayer has the option of either itemizing the various costs incurred (including operating expenses such as fuel, oil, tires, license fees, insurance, maintenance, and repairs and ownership expenses such as depreciation, provincial tax, and finance charges) for the year and then claiming a pro-rated amount which reflects the percentage of kilometres driven which relate to the move. Such an approach requires a fair amount of record keeping and many taxpayers choose instead to claim the standardized per kilometer rate provided by the federal government. For 2011 (the 2012 rates will be posted on the Canada Revenue Agency Web site early in 2013), that standardized rate ranges from 49.0 cents per kilometer in Manitoba to 63.5 cents per kilometer in the Yukon Territory. Where the standardized rate is claimed, no receipts are required, but the taxpayer is required to keep a record of the number of kilometers travelled in relation to the move.

The same approach (itemized approach or standardized rate claim) applies where a taxpayer is claiming travelling expenses related to medical care. The basic rule for claiming travel expenses in such circumstances requires the taxpayer to travel at least 40 kilometres (one way) from his or her home to obtain medical services which were not available any closer to home. Where that requirement is met, the taxpayer may claim the public transportation expenses paid (for example, taxis, buses, or trains) as medical expenses. Where public transportation is not readily available, the taxpayer may be able to claim a pro-rated share of vehicle expenses (both operating expenses and ownership expenses, with receipts, as outlined above) or opt for claiming the standardized per-kilometre rate. As is the case with all medical expense claims, a claim is available only where the total amount claimable exceeds the lesser of 3% of net income or (for 2012) $2,109.
 
Finally, where a taxpayer decides that driving is just too expensive and opts instead for public transit, a tax credit for the cost of using that public transit is offered by the federal government and by several of the provinces, and there is no limit on the amount which may be claimed. The federal credit is calculated as 15% of the cost of public transit, and while provincial credit amounts vary, an average would be around 7%. A taxpayer would therefore be able to claim a credit (and reduce taxes which would otherwise be payable for the year) by 22% of eligible public transit costs incurred during that year.

The public transit tax credit isn’t limited to costs incurred for transit use to and from work. Costs incurred by either spouse and by any dependent children under the age of 19 who regularly purchase a weekly or monthly transit pass (e.g., high school or university students who use transit to get back and forth from school) can be aggregated and claimed on the return of either parent for the year. So, a family of four that incurs $600 a month in transit costs (not difficult to do where an inter-city commuter pass can cost up to $300 a month and city transit passes, even for students, can cost up to $100) can claim $7,200 in eligible transit costs per year, for which they would be able to reduce their tax bill for the year by just under $1,600.

No amount of tax relief is going to make driving, especially for a daily commute, an inexpensive proposition. But, that said, seeking out and claiming every possible deduction and credit available under our tax rules can at least help to minimize the pain.

By now, most Canadian taxpayers (except the self-employed and their spouses, who have until June 15) will have filed their 2011 income tax returns. It’s quite often the case that a taxpayer will realize, after the return is filed, that information has been inadvertently misstated, or perhaps amounts have been omitted where an information slip was received after the return was sent, or even that claims have been made for deductions or credits to which the taxpayer is not actually entitled.

In such situations, the taxpayer is often at a loss to know how to proceed, but the process for amending a return is actually straightforward. The first reaction in such circumstances is sometimes simply to file another, corrected return, but that’s not the right solution. Instead, the taxpayer should wait until a Notice of Assessment is received in respect of the return already filed, and then file a Notice of Adjustment with the Canada Revenue Agency (CRA), making the necessary corrections. A Notice of Adjustment can be filed in a number of ways. The easiest and quickest way of doing of so is through the CRA Web site’s “My Account” feature, but that option is available only to taxpayers who have registered to obtain a CRA ID and password. While doing so isn’t difficult (the steps to be taken to do so are outlined on the Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html, it does take a few weeks to complete the process. Taxpayers who don’t want to deal with the CRA through the Web site, or who don’t think it’s worth registering just to deal with the Agency on a single issue can obtain hard copy of the T1 Adjustment form from the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-adj/t1-adj-11e.pdf or by calling the CRA Forms request line at 1-800-959-2221. The use of the actual form isn’t mandatory—a letter to the CRA signed by the taxpayers is an acceptable alternative—but using a standardized form has two benefits. First, it makes it 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.  Once the form or letter is completed, it should be mailed or faxed to the Tax Centre to which the original return was sent. A taxpayer who isn’t sure anymore where that was can go on the CRA Web site at  http://www.cra-arc.gc.ca/cntct/tso-bsf-eng.html and, by selecting his or her location from a drop-down menu of provinces and cities, can obtain the address of the Tax Centre (not the Tax Services Office) to which the adjustment request should be sent.

Sometimes it’s the CRA who discovers that a return is incomplete or that further information is needed to properly assess the return. In such circumstances, the Agency will contact the taxpayer even before the return is assessed, to request further information or documentation of deductions or credits claimed (for example, information on the custody of a child where one parent has claimed an equivalent to spouse deduction, or receipts documenting child care expenses claimed). In all cases, the best thing to do is respond to such requests promptly, and to provide the requested documents or information. The CRA can assess only on the basis of information with which it is provided, and where a request for information or supporting documents for a deduction or credit claimed is ignored by the taxpayer, the assessment will proceed on the basis that that such support does not exist. Providing the requested information or supporting documents can often resolve the question to the CRA’s satisfaction, and the assessment of the taxpayer’s return can then proceed.

Of all the measures announced in the 2012-13 federal Budget brought down on March 29, it was the changes to Canada’s Old Age Security (OAS) system which will likely have the greatest impact on the largest number of Canadians. Under pre-budget rules, Canadians become eligible to receive OAS the month in which they turn 65, although the first payment is actually received the following month.

Changes to the OAS system were widely expected to be included in the budget, and the announced changes were, for the most part, as predicted. Specifically, the federal government announced that the eligibility age for receipt of OAS benefits would be raised from the current age of 65 to age 67. The change will, however, be deferred until 2023 and then implemented over a six-year period between April 2023 and January 2029.

The Budget also included an unexpected announcement that OAS recipients would, effective July 1, 2013, have the option of deferring their receipt of OAS benefits for up to five years. Such an option already exists for Canada Pension Plan (CPP) benefits and, as is the case with CPP benefits, deferral of OAS benefits will mean a larger monthly amount when benefits are received.

While the announced changes are, on their face, relatively straightforward, the combination of the lengthy phase-in period and the new option to defer receipt of OAS benefits can cause some difficulty in determining just how the changes will apply in an individual situation. An explanation of how the changes will apply to different age groups follows.

Current recipients of OAS benefits

Canadians who are currently receiving OAS benefits are completely unaffected by the changes announced in the budget. Both the timing and the amount of their monthly benefits will continue without change.

Canadians born after June 30, 1948 and before April 1, 1958

Those born between these two dates will be eligible to receive OAS benefits once they turn 65—they are not affected by the increase in the eligibility age. However, as everyone in this age group will be eligible to begin receiving benefits in July 2013 or later, they will have the option of deferring receipt of those benefits for up to five years.

Where receipt of OAS benefits is deferred, the amount of the benefit increases with each month of deferral. The budget papers provide the following two examples of the effect of a short-term and a long-term deferral on the amount of OAS benefit received.

Example #1

Michael will be turning 65 in September 2013.

Instead of taking up his OAS pension at age 65, he plans to continue working a year longer and defer the pension until age 66.

When he takes up his OAS pension at age 66, his annual pension will be $6,948 instead of $6,481 (in 2012 dollars).

Example #2

Rita will be turning 65 in December 2013.

She plans to continue working as long as she can. She prefers to forgo her OAS pension for the maximum deferral period of five years so that she can have a substantially higher annual pension amount, starting at age 70.

When she takes up her OAS pension at age 70, her annual pension will be $8,814 instead of $6,481 (in 2012 dollars).

Canadians born after March 31, 1958

This is the group of Canadians who will be affected by both the increase in the eligibility age for receipt of OAS benefits, and by the option to defer benefit receipt by up to five years. The following chart, taken from the federal Department of Finance Web site, outlines the age at which benefits may first be received by those born after March 31, 1958. It can be seen from the chart that Canadians born after January 31, 1962 will not be eligible to receive OAS benefits until they reach the age of 67.

 While this group will have receipt of their OAS benefits delayed beyond the age of 65, they will also be entitled, if they so choose, to defer receipt of the benefits for an additional period of up to five years past their eligibility date, as outlined in the examples above.

Canadians who receive OAS benefits may also be eligible to receive the Guaranteed Income Supplement (GIS), which is made available to lower-income seniors. The changes to the OAS system will also affect receipt of the GIS. Specifically, as GIS payments are tied to OAS, eligible seniors will not receive any GIS payments until payment of their OAS benefits begins.

In view of the number of Canadians who will be affected by the announced changes to the OAS system, the federal government has posted explanatory information, including an FAQ document, on its Web site, and that information can be found at http://www.servicecanada.gc.ca/eng/isp/oas/changes/index.shtml.

While interest rates remain low, an increase in those rates and, therefore, in the cost of carrying a mortgage is clearly on the horizon. In addition, changes made by the federal government to mortgage lending rules for Canada Mortgage and Housing Corporation (CMHC) insured mortgages which took effect earlier this year had the effect of making it more difficult for first-time buyers, especially, to get into the real estate market. One of those changes reduced the maximum allowable amortization period for mortgages from 35 years to 30 years, meaning an increase in the required monthly payment, even if interest rates are unchanged. That change, combined with the anticipated increase in mortgage interest rates, made for a busy late winter and early spring real estate season, as first time home buyers took advantage of the opportunity to get into the market in advance of the changes. Even without these changes, spring and summer are, in any year, typically the busiest season for real estate sales and, consequently, the time when most moves take place. For any number of reasons, therefore, a lot of people will be moving this summer.

Whatever the time of year and motivation behind the purchase or sale and purchase, selling one’s home and moving qualifies as one of life’s more stressful experiences. Nonetheless, it’s an experience which most families will go through at least once. In addition to the upheaval of leaving behind a home, a school and a neighbourhood, the financial outlay associated with moving can be considerable.  While our tax system can’t do anything to help with the non-financial costs and general stress of moving, it does, in some circumstances, minimize the financial hit by providing a deduction from income for moving expenses incurred.

It’s important to know that not all moves will qualify for such tax relief. The tax rules provide that, where a taxpayer moves to be at least 40 kilometres closer to his or her place of work (for example, a taxpayer who moves from Toronto to take a job in Vancouver or Regina or Ottawa), most moving costs will be deductible from employment or business income earned at the new location. The 40-kilometre distance is measured using the shortest route normally available to the travelling public, which in most cases would mean the distance by road. And, moving to be closer to work doesn’t have to mean moving to a new company: a job transfer to another city while continuing to work for the same employer will qualify, assuming the 40-kilometre criterion is met. A deduction is also available where someone who is unemployed moves to start a new job, again assuming that all other required criteria are met.

The list of expenses which may be deducted is fairly comprehensive, but not all moving related costs are deductible. Under the Canada Revenue Agency’s (CRA) administrative policies, as outlined in their Form T1-M, Moving Expenses Deduction, the following are considered eligible moving expenses:

• traveling expenses, including vehicle expenses, meals and accommodation, to move the taxpayer and members of his or her family to their new residence (note that not all members of the household have to travel together or at the same time);
• transportation and storage costs (such as packing, hauling, in-transit storage, and insurance) for household effects, including items such as boats and trailers;
• costs for up to 15 days for meals and temporary accommodation near either the old or the new residence for the members of the household;
• lease cancellation charges (but not rent) on the old residence;
• legal fees incurred for the purchase of the new residence, together with any taxes paid for the transfer or registration of title to the new residence (but excluding GST or HST and property taxes); 
• the cost of selling the old residence, including advertising, notarial, or legal fees, real estate commissions, and any mortgage penalties paid when a mortgage is paid off before maturity; and
• the cost of changing an address on legal documents, replacing driving licences and non-commercial vehicle permits (except insurance), and utility hook-ups and disconnections.

It sometimes happens that a move to the new home has to take place before the old residence is sold. In such circumstances, the taxpayer is entitled to deduct up to $5,000 in costs incurred for the maintenance of that residence while it is vacant and efforts are being made to sell it. Specifically, costs including interest, property taxes, insurance premiums, and heat and utilities expenses paid to maintain the old residence while efforts were being made to sell it may be deducted. If any family members are still living at the old residence, or it is being rented, no deduction is available.

It may seem from the foregoing that virtually all moving-related costs will be deductible—however, there are some costs for which the CRA will not permit a deduction to be claimed, as follows:

• expenses for work done to make the old residence more saleable;
• any loss incurred on the sale of the old residence;
• expenses for job-hunting or house-hunting trips to another city (for example, costs to travel to job interviews or meet with real estate agents);
• expenses incurred to clean or repair a rental residence to meet the landlord’s standards;
• costs to replace such personal-use items as drapery and carpets; and
• mail-forwarding costs.

 To claim a deduction for any eligible costs incurred, supporting receipts must be obtained. While the receipts do not have to be filed with the return on which the related deduction is claimed, they must be kept in case the CRA wants to review them.

Anyone who has ever moved knows that there are an endless number of details to be dealt with. In some cases, the administrative burden of claiming moving-related expenses can be minimized by choosing to claim a standardized amount for certain types of expenses. Specifically, the CRA allows taxpayers to claim a fixed amount, without the need for detailed receipts, for travel and meal expenses related to a move. Using that standardized, or flat rate method, taxpayers may claim up to $17 per meal, to a maximum of $51 per day, for each person in the household. Those amounts were unchanged from 2009 to 2010, the latest year for which figures are available.

Similarly, the taxpayer can claim a set per-kilometre amount for kilometres driven in connection with the move. The per kilometre amount ranges from 46.0 cents forSaskatchewanto 60.5 cents for theYukon Territory. These rates were in effect for the 2010 taxation year—the CRA will be posting the rates for 2011 on its Web site early in 2012, in time for the tax-filing season. The per-kilometre rates allowed by the CRA for travel during 2010 are actually, in some cases, lower than those allowed for 2009.  It is in all cases the province or territory in which the travel begins which determines the applicable rate.

Any moving-related expenses can be deducted from employment or self-employment income (but not investment income or employment insurance benefits) earned at the new location. Where a move takes place late in the year, it is possible, especially where the move is a long distance one, that such expenses will exceed income earned at the new location during the calendar year. In such cases, it’s possible to carry forward the excess expenses, and deduct them from income earned in subsequent years.

Generally, these rules apply to moves made from one location to another withinCanada. While it’s possible to deduct expenses arising from moves fromCanadato another country, from another country toCanada, or between two locations outside ofCanada, the rules governing deductions in such situations are far more restrictive.

The rules governing the deduction of moving expenses are outlined in some detail on the CRA’s T1-M form. That form was updated and reissued by the CRA late in 2010, and the current version of the form can be found on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-m/t1-m-10e.pdf.  Additional information on the tax treatment of moving costs is available on the same Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/menu-eng.html.

Any questions not answered by the form or on the Web site can be directed to the CRA’s individual enquiries line at 1-800-959-8281.

When Canadians plan for retirement, the focus is usually on amassing sufficient savings to last them through their retirement years. However, keeping a handle on expenses and minimizing overall costs while still being able to enjoy a reasonable standard of living is an equally important part of retirement planning. As part of that effort to reduce living costs, most retirees try to reduce or eliminate major financial obligations before giving up their regular paycheques.

Part of minimizing one’s post-retirement financial obligations is planning to eliminate one’s debt. Theoretically, that’s something that should happen as part of the normal course of life cycle events. For younger Canadians, taking on debt, usually in the form of student loans, mortgages, and car payments, is almost unavoidable. However by the time retirement is on the horizon, decades later, most Canadians plan to have retired the mortgage and then, any other remaining debt.

While being debt-free in retirement may be the goal, it isn’t necessarily the reality anymore. Research from theUnited Statessuggests that a growing number of both retirees and those approaching retirement are struggling with debt. StatisticsCanadarecently surveyed Canadians to determine whether they are dealing with that same reality. The StatsCan survey on retirees and debt was part of a larger survey—the 2009 Canadian Financial Capability Survey (CFCS)—which provided information on the income, wealth, and debt of retired Canadians. What that survey showed was that, in 2009, one in three households where all household members age 55 and older were retired still held some form of debt. Where only one spouse was retired, that figure rose to 6 in 10 households.

The survey disclosed that, among retiree households, average debt was $60,000, and that median debt (meaning that half owed less and half owed more) was $19,000. Those figures break down as follows: one-quarter of such households owed less than $5,000: one-third owed between $5,000 and $24,999 and another quarter owed between $25,000 and $99,000. The remaining 17% of retiree households carried debt of $100,000 or more.

In assessing the significance of debt levels owed by retired Canadians, it’s important to note that, for purposes of the survey, all debt was considered equal—no distinction was drawn between long-term debt like mortgages and shorter-term debt represented by transactions like buy now/pay later offers. Consequently, where total debt is less than a few thousand dollars, it’s entirely possible that such debt comprises relatively short-term borrowings which will be paid off in a matter of weeks (for credit card balances) or months (for buy now/pay later offers). Of greater concern are the 40% of retirees who owe more than $25,000 or even more than $100,000. Given the current low interest rate environment, it’s almost a certainty that the interest cost of carrying those debts will increase over the next year or so.

Overall, the survey determined that retirees with debt have a median annual household income of $42,000, a median net worth of $295,000, and a median debt of $19,000. Within those figures, the author of the article analyzing and summarizing the survey data reached the following conclusions:

• There are no significant differences in annual income, net worth, and debt levels by the age and sex of retirees, although women have lower debt-to-income and debt-to-asset ratios than men.
• Compared with all other groups, the divorced have the lowest annual median income ($28,000) and net worth ($126,500).
• Homeowners have higher debt levels than non-homeowners, but their median income and net worth are also higher.
• Higher household income is associated with higher levels of net worth and debt, but lower debt-to-income and debt-to-asset ratios. Those with annual incomes of less than $25,000 have the highest debt-to-income and debt-to-asset ratios.
• As net worth increases so does annual income and median debt; however, only the debt-to-asset ratio falls as net worth rises.
• Those with higher median debt also tend to have higher annual incomes and net worth. However, those with high debt also have significantly higher debt-to-income and debt-to-asset ratios.

The StatsCan release summarizing the survey results in relation to debt held by retirees can be found on the Statistics Canada Web site at http://www.statcan.gc.ca/pub/75-001-x/2011002/article/11428-eng.htm.

Two quarterly newsletters have been added—one about individual issues and one about corporate issues. They can be accessed below.

Corporate:

Issue #16 Corporate

Individual:

Issue #16 Personal

By now, most Canadian taxpayers (with the exception of the self-employed and their spouses, who have until June 15) will have filed their 2010 income tax returns. Once the Canada Revenue Agency (CRA) has processed those millions of returns, over the next few weeks and months taxpayers across Canada will begin to receive Notices of Assessment for 2010. In most cases, the Notice of Assessment issued will simply confirm the information which the taxpayer provided on the return, perhaps with some minor arithmetical corrections. However, not infrequently, the Notice of Assessment will indicate that the CRA has disallowed or changed the amount of certain deductions or credits, or has included in income amounts not declared by the taxpayer on his or her return. When that happens, it’s time for the taxpayer to decide whether to dispute the CRA’s assessment of their tax situation.

Sometimes, the CRA will contact the taxpayer even before the return is assessed, to request further information or documentation of deductions or credits claimed (for example, information on the custody of a child where one parent has claimed an equivalent to spouse deduction, or receipts documenting child care expenses claimed). In all cases, the best thing to do is respond to such requests promptly, and to provide the requested documents or information. The CRA can assess only on the basis of information with which it is provided, and where a request for information or supporting documents for a deduction or credit claimed is ignored by the taxpayer, the assessment will proceed on the basis that that such support does not exist. Providing the requested information or supporting documents can often resolve the question to the CRA’s satisfaction, and the assessment of the taxpayer’s return can then proceed.

In other cases, it is the taxpayer who discovers, after the return is filed, that information has been inadvertently misstated, or perhaps amounts have been omitted where an information slip was received after the return was filed. In such situations, the taxpayer is often at a loss to know how to proceed, but the process for amending a return is actually quite straightforward. The first reaction in such circumstances is sometimes simply to file another, corrected return, but that’s not the right solution. Instead, the taxpayer should wait until a Notice of Assessment is received in respect of the return already filed, and then file a Notice of Adjustment with the CRA, making the necessary corrections. A Notice of Adjustment can be filed in a number of ways. The easiest and quickest way of doing of so is through the CRA Web site’s “My Account” feature, but that option is available only to taxpayers who have registered to obtain a CRA ID and password. While doing so isn’t difficult (the steps to be taken to do so are outlined on the Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html), it does take a few weeks to complete the process. Taxpayers who don’t want to deal with the CRA through the Web site, or who don’t think it’s worth registering just to deal with the Agency on a single issue can obtain a hard copy of the T1 Adjustment form from the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-adj/t1-adj-11e.pdf, or by calling the CRA Forms request line at 1-800-959-2221. The use of the actual form isn’t mandatory—a letter to the CRA signed by the taxpayers is an acceptable alternative—but using a standardized form has two benefits. First, it makes it clear to the CRA that an adjustment is being requested, and second, filling out the form will ensure that the CRA is provided with all the information needed to process the requested adjustment. Once the form or letter is completed, it should be mailed or faxed to the Tax Centre to which the original return was sent. A taxpayer who doesn’t remember where the original return was sent can go on the CRA Web site at http://www.cra-arc.gc.ca/cntct/tso-bsf-eng.html and, by selecting his or her location from a drop-down menu of provinces and cities, can obtain the address of the Tax Centre to which the adjustment request should be sent.

Once the CRA has issued an actual Notice of Assessment, and it indicates that the Agency’s assessment differs from the information provided by the taxpayer on the return, the first thing to consider is why the CRA does not agree with the return as filed. In some cases, it’s very simple—for instance, the CRA has included in income an amount received by the taxpayer but not reported, perhaps because the related information slip was mislaid or never received. In such cases, disputing the Notice of Assessment really doesn’t make sense. Although it’s common for taxpayers to think that if they didn’t receive an information slip, they don’t have to report the income, that’s not the case. Each taxpayer is responsible for keeping track of and reporting his or her own income, regardless of any administrative or other errors which may result in the taxpayer not receiving an information slip.

If the source of the disagreement is not as straightforward, the next step is for the taxpayer to contact the CRA to indicate that they disagree with the assessment and to provide the reasons for their disagreement. Taxpayers can visit their local Tax Services Office (TSO) (a listing of such offices is available on the CRA Web site at http://www.cra-arc.gc.ca/cntct/tso-bsf-eng.html) to meet with a CRA representative. The CRA does not provide “walk-in” service at their TSOs, and so it’s necessary to call ahead to make an appointment and to bring a copy of the return filed and the Notice of Assessment to the meeting. In many cases, a face-to-face meeting with a CRA representative, with all the relevant documents in front of you, is the quickest way to resolve a dispute.

If the situation still isn’t resolved by a meeting, it’s time for the taxpayer to consider filing an Objection. Filing such an Objection formally advises the CRA that the taxpayer is disputing his or her tax liability for the taxation year in question. Not incidentally, the filing of an Objection also brings to a halt any efforts undertaken by the CRA to collect taxes which it considers owing for the taxation year under dispute (although, if the taxpayer is eventually found to owe the amount in dispute, interest will have accumulated in the interim). The Objection must be in writing and must outline the taxpayer’s reasons for objecting to the CRA’s assessment. The CRA will also need the taxpayer’s social insurance number and the taxation year for which the assessment is being disputed must be identified. The CRA provides a standardized form—the T400A Objection (available on the Agency’s Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t400a/README.html)—and, while the use of the CRA’s form is not obligatory, it’s a good idea. Using the standardized form will make it clear to the CRA that a formal objection is being filed, will present the necessary information in a format with which the Agency is familiar and will also mean that no required information is inadvertently omitted. It’s also helpful to include a copy of the Notice of Assessment which is being disputed. Since the CRA does not always acknowledge receipt of an Objection, ensuring delivery by sending it by registered mail should be considered. The Objection should be sent to the Chief of Appeals at the taxpayer’s TSO or the Tax Center at which the return was originally filed.

There is a time limit by which any Objection must be filed, albeit a reasonably generous one. Individual taxpayers must file an Objection by the later of 90 days from the mailing date of the Notice of Assessment (the date found at the top of page 1) or one year from the due date of the return which is being disputed. So, for 2010 tax year returns, the one-year deadline (which is usually, but not always, the later of the two dates) would be April 30, 2012 (or June 15, 2012 for self-employed taxpayers and their spouses). As with most things related to taxes, it’s best not to put it off. At the very least, if the taxpayer is ultimately found to owe some or all of the taxes assessed by the CRA, interest will have accrued on those taxes for the entire period since the filing due date and, if the filing of the Objection is delayed, the CRA may well have already commenced its collection efforts.

Eventually (at least several weeks being the usual time frame) the CRA will respond to the Objection. In the course of making its decision, the Agency may or may not contact the taxpayer for further discussions of the issues in dispute. Should the taxpayer be contacted, he or she may be asked to provide representations outlining his or her position, in writing or at a meeting. Through such representations and meetings, it may be possible for the taxpayer and the CRA to come to an agreement on the taxpayer’s tax liability. In either case, the CRA will either confirm its original assessment or change it. If the original assessment is changed, the CRA will issue a Notice of Reassessment outlining the changes. If the taxpayer continues to disagree with the CRA’s position, the next step is an appeal to the Tax Court of Canada. While in many instances taxpayers are allowed by law to represent themselves before the Tax Court, it’s generally a good idea, once things reach his point, to consult a tax lawyer before taking that next step.

The CRA also publishes a useful pamphlet entitled Resolving Your Dispute: Objection and Appeal Rights under the Income Tax Act, and that publication can be found on the CRA Web site at http://www.cra-arc.gc.ca/E/pub/tg/p148/README.html.

A final note: many taxpayers, when they receive a Notice of Assessment and determine that the CRA agrees with their return as filed, consign the Notice to the nearest garbage can or recycling container. Neither is a good idea. A Notice of Assessment, in addition to outlining the CRA’s assessment of the taxpayer’s income and tax position for the year, contains useful and necessary information on the taxpayer’s RRSP current year and carryforward contribution amounts as well as information on the taxpayer’s allowable cumulative contribution limit for TFSAs. The Notice of Assessment should be treated as part of a taxpayer’s tax records, and filed away accordingly.

Unlike contributing to an RRSP or a tax-free savings account (TFSA), the idea of splitting pension income as a tax-planning strategy doesn’t get a lot of attention in the media. That’s unfortunate for a couple of reasons. First, the splitting of pension income can provide significant tax savings to those able to utilize it—generally older taxpayers who in many cases are living on a fixed income and can really benefit from the tax savings received—especially in the current low interest rate environment. Second, unless you’re getting good tax-planning advice, it’s very easy to overlook pension income splitting as a way of reducing your tax burden. The only references to pension income splitting on the annual return are two entries, one on line 116 and the other on line 210 and, unless you are already aware of the significance of those entries, there’s really nothing to alert you to it. The Income Tax and Benefit Guide provides very little in the way of explanation and no indication at all of the benefits which may be obtained. In addition, the form which must be filed to effect a pension income splitting strategy isn’t part of the standard tax return package provided to taxpayers by the Canada Revenue Agency (CRA)—taxpayers must ask for it and obtain it separately.

The general rule is that taxpayers receiving private pension income (including a pension received from former employer and, where the recipient taxpayer is over the age of 65, payments from a registered retirement savings plan or a registered retirement income fund) are entitled to split up to half that income with a spouse for tax purposes. (Government source pension income, like payments from the Canada Pension Plan or Old Age Security payments do not qualify for pension income splitting.) A number of the provinces have also indicated that they will adopt the federal rules for provincial tax purposes.

While the concept and general rules governing pension income splitting aren’t particularly complex, the splitting of pension income has some fairly wide-ranging, beneficial tax consequences for the taxpayer and his or her spouse.

The mechanics of pension income splitting are relatively simple. There is no need to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify the pension plan administrator. In addition, the decision of whether and to what extent to split pension income for tax purposes does not have to be made until the return for the year is being completed. Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032, Joint Election to Split Pension Income, with their annual tax return, and the form is available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1032/t1032-10e.pdf.

On the T1032, the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for the particular tax year. Since the splitting of pension income affects both the income and the tax liability of both spouses, the election must be made and the form filed by both spouses—an election filed by only one spouse or the other won’t do.

In addition to filing the T1032, the spouse who actually receives the pension income must deduct from income the pension income amount allocated to his or her spouse, on line 210 of his or her return for the year. And, conversely, the spouse to whom the pension income is being allocated is required to add that amount to his or her income on the return, this time on line 116.

As well as reporting the pension income “received” and claiming the corresponding deduction on lines 116 and 210, there’s a requirement that, where tax has been withheld from the income to be split, that tax must be allocated on the return for the year in the same proportion as the pension income is allocated. The formula for doing so is outlined in Part 5 of Form 1213.

Finally, taxpayers receiving private pension income can claim a non-refundable federal tax credit of up to $2,000 on their returns for the year. The actual credit claimable is equal to the amount of qualifying pension income earned or $2,000, whichever is less. The CRA has confirmed that where pension income is split, the amount of such income reported for tax purposes by each spouse will be used to determine eligibility for and the amount of any pension income credit. For example, where a taxpayer who receives $10,000 in eligible pension income for the year allocates 50% of that amount, or $5,000, to a spouse, each spouse will be able to claim the full $2,000 pension tax credit on his or her return for the year the income is reported, thereby saving an additional $300 in federal income taxes. 

The ability to split pension income between spouses has the potential to achieve real and permanent tax savings and to enhance eligibility for certain federal tax credits and benefits. And, as long as the administrative requirements outlined above are followed, pension income splitting is a win-win strategy for eligible taxpayers.

It may seem like an obvious mistake to avoid, but every year some taxpayers pay unnecessary (and non-deductible) penalties and interest for no reason other than that they simply didn’t get their returns in on time. For the record, a 2010 personal tax return is late-filed if it isn’t sent to the Canada Revenue Agency (CRA) on or before May 2, 2011 or, if you or your spouse are self-employed, on or before June 15. In all cases, tax amounts owing due must be paid on or before May 2, 2011.

For some taxpayers, late-filing is just a matter of not having gotten around to it—few people view preparing their tax returns as anything other than an unpleasant chore. For others, missing or mislaid information slips are to blame. In many cases, where there is tax owing and the cash just isn’t available to pay those taxes, taxpayers assume that it’s better just to put off filing until the money is available and the payment can be made. Whatever the reason, not filing on time is, in all cases, the wrong decision.

Where the reason for not filing is missing information slips (for example, T4s or T5s), the best strategy is to estimate the amount and enter that estimate on the appropriate line of the return. It’s also a good idea, in such circumstances, to attach a note for the tax authorities, explaining that the slip wasn’t received, providing them with the name and address of the person or company which should have issued it and the kind of income involved (i.e., employment income or interest income), and explaining what steps have been taken (i.e., contacting the company or the bank) to get the missing information slip. While it’s a surprisingly common misconception, it’s not the case that if an information slip wasn’t received, the income doesn’t have to be reported for tax purposes.

In any case, where taxes are owed, late-filing means an automatic penalty will be imposed equal to 5% of those outstanding taxes, plus an additional 1% for every full month following during which the return is not filed, to a maximum of 12 months (or a total of 17% of the unpaid amount). As well, interest starts being charged on those unpaid taxes the very first day they are overdue. Few taxpayers realize that the interest rate charged by the CRA is, by law, well in excess of commercial rates of interest. Specifically, the rate of interest charged by the CRA is equal to its “prescribed rate” plus 4%, and any interest charges levied are compounded daily. The rate charged by the CRA from April 1 to June 30, 2011 will be 5%.

For taxpayers who make a habit of filing late, the news is even worse. If a late-filing penalty has been charged by the CRA in any of the previous three years, and another return is late-filed, both the immediate penalty and the recurring monthly penalty are doubled to, respectively, 10% and 2% per month, to a maximum of 20 months. In the very worst-case scenario, where the taxpayer was assessed a late-filing penalty within the previous three years and the current return is more than 20 months late, the penalty assessed can reach 50% of the unpaid tax amount.

Even where a refund is expected, and there is consequently no risk of incurring late-filing penalties, it doesn’t make sense to put off filing. While the CRA pays compound daily interest (at a rate of 3% for the April to June 2011 period) on overpayments of taxes, the interest clock on such payments doesn’t start running until the latest of the following three dates: May 31, 2011, the 31^st day after the return is filed or the day after the taxes are overpaid.

So, no matter what your situation, getting your return in on time makes sense. In the worst case scenario, it can save you from paying substantial interest and penalties (now or in the future) or, where a refund is expected, can get your money into your hands more quickly, perhaps with interest added.

If the constant flow of television commercials reminding taxpayers of the upcoming RRSP contribution deadline wasn't enough, the arrival of the 2010 tax return form and the issuance of tax information slips must leave taxpayers in no doubt that it's that time of year again. By the end of February or early March, taxpayers will usually have received all of the information needed to prepare their 2010 income tax returns. Issuers of T4s (for employment income) and T5s (for investment income, including interest and dividends) must send such information slips to employees, shareholders, and account holders by the end of February. Self-employed taxpayers, who must calculate their own business income for the year, will certainly be in a position to do so by the end of February. Finally, retirees who receive pension income, either from a former employee or from the Canada Pension Plan or Old Age Security program, will have received T4A information slips from the pension plan administrator or the government of Canada documenting that income for 2010.

If the constant flow of television commercials reminding taxpayers of the upcoming RRSP contribution deadline wasn't enough, the arrival of the 2010 tax return form and the issuance of tax information slips must leave taxpayers in no doubt that it's that time of year again. By the end of February or early March, taxpayers will usually have received all of the information needed to prepare their 2010 income tax returns. Issuers of T4s (for employment income) and T5s (for investment income, including interest and dividends) must send such information slips to employees, shareholders, and account holders by the end of February. Self-employed taxpayers, who must calculate their own business income for the year, will certainly be in a position to do so by the end of February. Finally, retirees who receive pension income, either from a former employee or from the Canada Pension Plan or Old Age Security program, will have received T4A information slips from the pension plan administrator or the government of Canada documenting that income for 2010.

The filing deadline for individual taxpayers (other than the self-employed and their spouses, who must file by June 15, 2011) is April 30, 2011. This year, however, taxpayers have a little extra breathing room. Since the April 30, 2011 filing deadline falls on a Saturday, a return will be considered by the Canada Revenue Agency (CRA) to be filed on time if it is received, or postmarked, on the next business day. For 2011, that day would be Monday, May 2. A similar extension applies to payments owed to the CRA.

Taxpayers who are expecting a refund are, however, well-advised to file as early as possible, as required processing times increase as the filing deadline looms. A return which might have been processed (and a refund issued) within three weeks if filed in early March will likely take twice that amount of time if filed in the last week of April. Taxpayers who will have a balance owing on filing and are disinclined to send that money to the CRA any earlier than absolutely necessary can still file well in advance of the deadline, and post-date the payment. As well, where there is a balance owed on filing, it's not necessarily a good idea to file as late as possible. Should the return be delayed in any way–for instance, through a computer or server crash or a postal delay, the return could end up arriving late, meaning that late-filing penalties and interest charges will be levied. In such circumstances, it's a better idea to file earlier and simply post-date the cheque to May 2, 2011.

For all taxpayers, including the self-employed, all taxes owed for the 2010 tax year are due and payable to the CRA on or before Monday May 2, 2011. No exceptions and, barring any extraordinary circumstances, no extensions are given. Taxpayers who are not in a position to pay taxes owing by the filing deadline sometimes put off filing, reasoning that there's no point to filing if the taxes owing from the return can't be paid. While that may seem logical, it's a mistake to file late, no matter what the reason. Where a tax return is late-filed, for any reason, the CRA levies a penalty calculated as a percentage of tax owing as of the filing deadline. The penalty varies, depending on whether the taxpayer has late-filed in the past, how often, and how recently that late-filing occurred, but the minimum penalty is 5% of taxes owed, plus interest on those taxes. A taxpayer who cannot come up with the money needed to pay taxes owed on filing should file anyway, and enclose a letter to the CRA explaining the reasons for the late payment. Generally, the CRA will be willing to set up a payment plan with the taxpayer through which the tax owing can be paid over time. While it's impossible to avoid the interest charges which will be levied where taxes are paid late, a taxpayer who nonetheless files the return on time will at least avoid the late filing penalty.

It's worth noting that while the CRA can and usually does notice and correct arithmetical and clerical errors which appear in returns, the CRA does not (and cannot) ensure that taxpayers claim all the deductions, credits, and benefits available to them. It's up to the taxpayer to ensure that the annual return is completed accurately and all available deductions and credits are claimed and received–or lost.

At one time, the deadline for filing a tax return and the options for filing it were straightforward–everyone had to file by April 30, and the paper-and-pencil return was the only option. While paper filing is still an option, it's one used by a diminishing number of taxpayers every year. With each successive filing season, more and more taxpayers turn to one of the three available forms of electronic tax filing (or e-filing)–E-FILE, NETFILE or TELEFILE. Since most Canadian taxpayers are eligible to use at least one of these electronic methods, the choice is often one of personal preference.

The simplest electronic filing method is probably TELEFILE. TELEFILE is useful for those who don't have or don't want to use a computer, or who aren't interested in purchasing the software needed to use other e-filing methods, but who still want to take advantage of the faster return processing time that e-filing offers. Taxpayers whose tax situation is relatively straightforward and who are therefore eligible to use TELEFILE will receive a four digit “access code” with their return package. Even if the return package didn't include an access code, it's possible to get one (assuming that your tax situation qualifies) by calling the CRA's e-service Help Desk toll-free at 1-800-714-7257. Actually, using TELEFILE is quite straightforward, as the user is guided by a series of voice prompts and has the opportunity, at each step, to verify information entered or, if necessary, to correct it. The CRA's Web site also contains information on how to use TELEFILE, as well as the dates and hours when the service is available. This can all be found at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/tlfl/bt-eng.html.

Taxpayers who are able and willing to prepare their returns using computer software can take advantage of the CRA's NETFILE option. Each year, the Agency certifies or approves specific commercial software packages or Web applications which may then be purchased by the taxpayer and used to file a return through the CRA's Web site. As might be expected, there are encryption requirements which must be met to ensure the security of the data. The CRA's Web site contains a listing of browsers which meet those requirements, as well as a link to a listing of approved software and Web applications for the filing of 2010 returns, at http://www.netfile.gc.ca/menu-eng.html.

Both TELEFILE and NETFILE became available for the filing of 2010 tax returns as of February 14, 2011, and will continue to be available until September 30, 2011.

Finally, taxpayers who prefer to simply let someone else handle the entire tax filing process usually turn to E-FILE. E-FILERS are businesses (usually accountants or accounting firms or companies or individuals whose business is comprised solely of tax return preparation and filing) who are authorized by the CRA to electronically file tax returns for clients. Information about e-filing, and a link to a listing of authorized e-file services providers (organized by postal code), can be found on the CRA's Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/fl-nd/menu-eng.html.

No matter which filing method is chosen, it's important to make sure that any tax owed is paid by the May 2 deadline. If that deadline is missed, the interest clock starts running on May 3. And, although current interest rates are low by historical standards, taxpayers are often surprised to find that interest rates charged by the CRA are, by law, well in excess of current commercial rates. Currently (until March 31, 2011), the CRA charges interest on overdue or insufficient tax payments at a rate of 5%. And, by law, those interest charges are compounded daily, meaning that on each successive day after May 3, interest is charged on the interest levied the day before.

While no one likes paying taxes, or dealing with the administrative burden of filing a tax return, it's an annual chore that must be done eventually. Especially in light of the interest and penalty amounts which may be charged, putting it off just doesn't make sense.

For the third time in the past two and a half years, the federal Department of Finance has moved to tighten the rules which apply to mortgages backed by the Canadian Mortgage and Housing Corporation (CMHC).

To understand who will be affected by the new rules, some background is necessary. Under federal law, home purchasers whose down payment is less than 20% of the cost of the property must obtain mortgage insurance through the CMHC. That insurance, the premiums for which are paid by the homeowner, guarantees the lender that in the event of default by the homeowner the federal government will make good on any deficiency.

Over the past several years the federal government has become increasingly concerned about the amount of debt being carried by Canadian families, and much of the recent increase in that debt has been secured by borrowers' home equity. Of equal concern were the terms on which mortgages were being provided, as the amount of required down payment decreased and the time period over which the funds could be repaid (the amortization period) got steadily longer. Canadian mortgage lending practices never approached the degree of recklessness which came to characterize American mortgage lending in the past decade. Nonetheless, the federal government became concerned that Canadians were taking on more and more debt related to home purchases and were carrying that debt for unprecedented lengths of time.

In October 2008, the federal government moved to raise its minimum standards for CMHC-insured mortgages, and implemented the following changes.

• Fixing the maximum amortization period for new government-backed insured mortgages to 35 years.
• Requiring a minimum down payment of five per cent for new government-backed insured mortgages.
• Establishing a consistent minimum credit score requirement.
• Requiring the lender to make a reasonable effort to verify that the borrower could afford the loan payment.
• Introducing new loan documentation standards to ensure that there was evidence of reasonableness of property value and the borrower's sources and level of income.

In April 2010, the federal government took additional steps to impose more stringent creditworthiness requirements on borrowers, to limit the extent to which homeowners could borrow against their equity when refinancing their homes and, finally, to require that purchasers of non-owner occupied homes put down at least a 20% down payment on purchase.

The most recent in this series of changes was released on January 17, 2011, as the Minister of Finance announced that new measures would be taken to further limit both the amount of borrowing which could be undertaken by home owners on refinancing and the time period over which home borrowings could be amortized.

Prior to the October 2008 changes, some financial institutions had been offering 40 year amortizations to prospective homeowners. The maximum amortization period was reduced to 35 years by the 2008 announcement and has now been reduced again to 30 years. While the government recognizes that a shorter amortization period will, of course, mean larger monthly payments, it is concerned that amortization periods longer than 30 years increase the likelihood that Canadians will carry a mortgage into retirement—a poor financial strategy by anyone's measure.

The second change announced will further limit the extent to which homeowners can borrow against the value of their homes when refinancing a mortgage. The April 2010 changes reduced the maximum borrowing in such circumstances to 90% (down from 95%) of the home's current value. The maximum borrowing on a refinancing has now been reduced to 85% of the home's value. In announcing that change, the Department of Finance indicated that part of the purpose of the measure was to limit the “repackaging” of consumer debt into mortgages guaranteed by the federal government. Reducing the loan-to-value ratio in this way will also reduce the likelihood that homeowners who have re-financed to the maximum extent possible will be faced with a situation in which their homes will, as the result of a drop in real estate values,  be worth less than the amount they owe on them—an all-too-common situation in the United States over the past few years

Finally, the federal government will no longer provide CMHC insurance on lines of credit secured by homes, where such lines of credit do not have specific principal repayment requirements. Home equity lines of credit (HELOCs) have grown enormously in popularity over the past decade. While HELOCs are like conventional mortgages in that they are secured by the value of the property, they differ from such mortgages in two critical respects. First, homeowners are usually provided with a HELOC for a fixed maximum amount of up to 80% of the value of the home. However, the uses to which funds advanced through a HELOC can be put are not limited to home acquisition or housing-related costs. HELOCs can be (and have been) used for everything from paying off credit card balances to paying for vacations to buying big screen TVs. And, of course, every dollar borrowed through a HELOC reduces the homeowner's equity. The second major difference is that, in most cases, HELOC borrowers do not have fixed repayment obligations. While monthly payments are required, those payments can be as little as the interest amount accrued during the previous month. The homeowner can therefore continue to add to the debt represented by the HELOC while at the same time paying only the accrued interest and never reducing the principal amount owed.

It Is not hard to see how having access to large amounts of credit through a HELOC could easily lead to an unmanageable debt load for the undisciplined or unsophisticated borrower. It Is for that reason that financial institutions generally offer HELOCs only to borrowers who have a significant amount of equity in their homes and some history of being able to manage credit. Nonetheless, the fact that the federal government will no longer provide CMHC insurance for most HELOCs is a measure of its concern over the current extent (and purposes) of HELOC borrowing by Canadians.

Both the Minister of Finance and the Governor of the Bank of Canada have commented recently on the amount of debt carried by Canadian households and the impact that an increase in interest rates would have on the ability of many of those households to handle that debt load. Given that concern, it is likely that this latest round of changes restricting the ability of Canadians to tap into their home equity or to extend the period over which mortgage debt can be repaid will not be the last.

It's that time of year again, when advertisements about the wisdom of contributing to your RRSP (and usually about the benefits of borrowing to do so) fills the airwaves and Web sites. And, since the introduction of tax-free savings accounts in 2009, February is now also the month in which Canadians wrestle with the question of whether to put any available funds into an RRSP before the contribution deadline of March 1, 2011, or whether to deposit those funds instead into a TFSA.

It is important to be clear, at the outset, that it is not an either/or choice. Taxpayers can (and probably should) utilize both the RRSP and TFSA options in planning their financial affairs. Realistically, however, for most taxpayers the limitation is one of resources and cash flow, and it is often not possible to fund contributions to both an RRSP and a TFSA in the same year, let alone in the same month. That said, what are the considerations that apply in determining which savings/investment vehicle is preferable for 2011?

There are some similarities between TFSAs and RRSPs. Both allow savings to grow and compound free of current tax and for both, contributions not made in a year can be carried forward and made in any subsequent year. As well, the types of investments which can be made with RRSP or TFSA contributions are, for all intents and purposes, the same, meaning that one's choice of investment (i.e., GICs, mutual funds, bonds, etc.) should be irrelevant to the choice of RRSP vs. TFSA. However, the differences between the two savings vehicles are at least as significant as their similarities.

Perhaps most important to taxpayers, contributions made to an RRSP are deductible from income, resulting in a lower tax bill for the year of contribution and, for many taxpayers, a tax refund. Contributions to a TFSA are, on the other hand, made with after-tax funds, meaning that tax will already have been paid on the income used to make that contribution. Many taxpayers, when presented with an option that will reduce current year taxes, find that to be the most attractive choice. However, over the long-term, the tax consequences of choosing an RRSP over a TFSA can erode that benefit. When funds contributed (along with investment income earned on those funds) are withdrawn from a TFSA or an RRSP, the tax consequences are very different. Funds withdrawn from an RRSP (or a RRIF into which the RRSP has been converted) are fully taxable, without exception, at whatever tax rate applies to the taxpayer at the time of withdrawal. TFSA funds (including accumulated investment income) are withdrawn from the plan free of tax, regardless of when the withdrawal is made or the purpose to which the funds are put.  And, for taxpayers who are receiving Old Age Security benefits (or any other means-tested benefits) from the federal government, it's important to note that RRSP or RRIF funds withdrawn will be included in income for the purpose of determining eligibility for such benefits, while TFSA funds will not. Finally, while RRSP contributions for 2010 must be made by March 1, 2011, there is no similar deadline for TFSA contributions—they can be made at any time during the calendar year. Finally, when funds are withdrawn from a TFSA, the planholder can “top-up” the TFSA in any subsequent year by the amount of that withdrawal. Funds withdrawn from an RRSP cannot be re-contributed, unless the withdrawal was made as part of government-sanctioned withdrawal plans like the Home Buyers' Plan or the Lifelong Learning Plan.

The minority of working taxpayers who are members of registered pension plans will likely find the TFSA option particularly attractive. The maximum amount which can be contributed to an RRSP for the 2010 tax year is calculated as 18% of earned income for 2009, to a maximum contribution of $22,000. However, that maximum contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under the pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, making a TFSA contribution the logical alternative.

In a similar way, for taxpayers over the age of 71, the RRSP v. TFSA question is simply irrelevant. Taxpayers over that age are not eligible to make contributions to an RRSP, making TFSAs the only tax-free savings vehicle to which they can make contributions. The benefit is greatest for older taxpayers whose required RRIF withdrawals are greater than their current needs. While such RRIF withdrawals must be included in income and taxed in the year of withdrawal, transferring the funds to a TFSA will allow them to continue compounding free of tax, and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn from a TFSA will not affect the planholder's eligibility for Old Age Security benefits or for the federal age credit.

For younger taxpayers, where the savings goal is short-term—for example, a down payment on a home or paying for next year's vacation, the TFSA is clearly the better choice. While choosing to save through an RRSP will provide a deduction on that year's return and probably a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one's ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced. While the amounts involved may seem small, the loss of compounding on even a small amount over 25 or 30 years can make a significant dent in one's ability to save for retirement.

Taxpayers who are expecting their income to rise significantly within a few years—for example, students in post-secondary or professional education or training programs—can save some tax by contributing to a TFSA while they are in school and their income (and therefore their tax rate) is low, and then withdrawing the funds tax-free once they are working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted against income that would be taxed at the much higher rate, generating a tax savings. And, if a need for the funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Financial planners and tax advisers are accustomed to being asked by clients at this time of year whether it makes more sense to pay down the mortgage (or other debt) or to contribute to an RRSP. That question has become more complicated now that the TFSA option has been added to the mix. There is, however, a solution which allows you to do both. Assuming a marginal tax rate of 45%, an RRSP contribution of $11,000 will generate a tax refund of $4,950. Contribute that $11,000 (or as much as you can) to your RRSP and, when the resulting tax refund lands in your bank account, move it to a TFSA or use it to pay down the mortgage or other debt, or split it between the two.

The Canada Revenue Agency has created a section of its Web site to deal with the need for information and taxpayers' questions about TFSAs, and that information can be found at http://www.cra-arc.gc.ca/tx/tfsa-celi/menu-eng.html.

At this time of year, most taxpayers are focused on their tax obligations for the taxation year just ended on December 31, 2010—on the need to file a return for that year, on whether they will be able to come up with an RRSP contribution by March 1, the possibility that there will be taxes owed on filing (or perhaps a refund!), and if there are taxes owing, how to come up with the funds needed to pay that tax bill.

While all of those concerns are valid and pressing ones, the start of a new year is also a good time to start thinking about how to minimize the taxes that will be payable for the current year. While many tax planning strategies can be implemented at any time during the tax year, addressing tax issues at the start of the year can avoid the last minute scramble to verify expenses, locate receipts, and pull together funds for an RRSP contribution with the year-end or even the tax filing deadline for the year looming.

Many taxpayers sit down to prepare their tax returns with the hope that, at the end of the filing process, a tax refund will be forthcoming. The perception persists that a tax refund is a kind of “gift” from the federal government or that it represents “found money” which can only be obtained by filing a tax return. The reality is, in fact, the complete opposite. A tax refund is just that—the return by the federal government of taxes which have been overpaid by the taxpayer during the course of the year. And, in most cases, there is no interest paid by the federal government on that overpayment. Very few taxpayers would, if asked, willingly overpay their taxes and wait for a year, without receiving interest, to get that overpayment back. But every year, millions of taxpayers who collect a refund on filing have done just that.

Consequently, the first step in current year tax planning is to make sure that taxes aren't being overpaid. The majority of working Canadians earn income from employment and, as required by law, the employer deducts income tax from the employee's pay and remits it on the employee's behalf to the federal government. The amount deducted is based on an estimate of the employee's income tax liability for the year; the starting point for determining that liability is the TD1 form for the year. All employees, when they start a new job, must complete a TD1 (actually two TD1s, one for federal purposes and the other for the taxpayer's province or territory of residence). On that form the taxpayer specifies the personal tax credits for which he or she is eligible. Everyone gets the basic personal credit, but the taxpayer must specify which other credits (spousal or equivalent to spouse credit, tuition and education amounts, caregiver credit) he or she will be able to claim in order for the deductions made for income tax purposes to reflect those claims. Often, once an employee has completed the TD1 forms when starting employment, the assumption is made that his or her tax situation has not changed since then, and the deductions made from the employee's paycheque don't change either. However, change comes to everyone's life—a child is born or an older child goes off to university and tuition fees must be paid or an elderly parent can no longer live independently and moves in with an adult child. In some cases, the taxpayer or a spouse must cut back on work hours or even leave work to provide care for that parent. Each of these events, and many others, have tax consequences which will affect the amount of tax payable.  A taxpayer who hasn't filled out a TD1 for a few years, or whose personal circumstances have changed, should review the TD1 form (the federal form is available on the Canada Revenue Agency (CRA) Web site at http://www.cra-arc.gc.ca/E/pbg/tf/td1/td1-11e.pdf) to make sure that the form on file with the taxpayer's employer accurately reflects the taxpayer's current circumstances.

While the TD1 form captures most of the non-refundable tax credits for which an individual taxpayer might be eligible, it does not and cannot reflect the various deductible expenses that a taxpayer might incur over the course of the tax year. At this time of year the deduction which is most on everyone's mind is, of course, the RRSP contribution. Human nature being what it is, most Canadians don't think about RRSPs until the contribution deadline of March 1st is near, and most then have difficulty coming up with the funds to make a contribution on such short notice. Financial advisors continually remind Canadians that it is better, for several reasons, to contribute to one's RRSP throughout the year, rather than waiting until the last minute to do so. What most taxpayers don't realize is that it is possible to get an “assist” from our tax system to do so.

That “assist” comes from taking advantage of an administrative policy of the Canada Revenue Agency, using a form (the T1213) entitled Request to Reduce Tax Deductions at Source, available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1213/t1213-10e.pdf. Essentially, a taxpayer who will be incurring costs during the tax year that are deductible in the computation of taxable income for that year but which do not appear on the TD1 can apply, using Form T1213, to have the amount of income tax deducted from his or her paycheque reduced to take account of those costs. The biggest and most well-known of those deductions is an RRSP contribution, but it's not the only one. Taxpayers who incur child care expenses, make deductible support payments, make charitable donations, or have deductible employment expenses and can document the payment and amount of those costs can ask the CRA to authorize a reduction in the income tax deductions made from the taxpayer's gross income to reflect those costs.

The resulting increase in take-home pay can be significant. A middle-income taxpayer—one earning around $50,000 per year—will have source deductions reduced (and therefore take-home income increased) by about one-third of the amount of the deduction claimed. Where the taxpayer's income is over $80,000, that decrease in source deductions can rise to just under 40% of the amount of the expense claimed. And for a taxpayer in the highest income tax bracket (more than about $125,000), the percentage is about 45%.

Take, for example, the taxpayer in that highest income earning bracket who wants to make an RRSP contribution of $10,000. To do so, a monthly contribution of $833 throughout the year would be needed. If, however, income tax deductions at source were reduced to take account of that RRSP contribution, the taxpayer's “take-home” income would increase by $375 per month, or nearly half of the amount needed to make that monthly RRSP contribution.

Finally, many taxpayers incur expenses throughout the year for which a tax credit can be claimed on the return—public transit costs, for instance, interest payments on government student loans, or medical expenses. Whatever the expense, it is up to the taxpayer to prove that the expenditure was made and to document the amount that was paid. In many cases, the taxpayer must forgo making any claim because the receipts needed to prove that claim weren't kept or can't be found at tax filing time. It is not necessary to maintain a sophisticated filing system for such paperwork—just keeping all receipts in one place, to be sorted and organized at tax filing time, is all that is needed.

Tax planning is often thought of as a complex and time consuming process, available only to wealthy and sophisticated taxpayers. But the fact is also that a great deal of tax “planning” can be accomplished with only some straightforward paperwork and basic organization, strategies that are available to anyone who is willing to invest a little upfront time and effort.

February is the month in which millions of Canadian taxpayers receive an Instalment Reminder from the Canada Revenue Agency (CRA). For many of the taxpayers who have received such notices in the past, the reminder and the tax instalment process are familiar, although not necessarily welcome. For those who are receiving one for the first time, however, both the reminder itself and figuring out how to deal with it can be baffling.

Most Canadians, certainly those who are employed, have income tax deducted “at source”, meaning that their employer deducts an amount for income tax from their paycheques and remits it to the CRA on their behalf. However, for those who are self-employed or, frequently, those who are retired, no such deduction is automatically made from their income, and the issuance of an Instalment Reminder by the CRA may be the result.

The receipt of such a reminder may be particularly puzzling to the newly retired, who have been accustomed to having tax deducted at source from their paycheques throughout their entire working life. However, no matter what the source of one's income or the reason that tax has not been deducted at source, the options available to a taxpayer who receives such a reminder are the same.

Canadian tax rules provide that a taxpayer may be required to pay income tax by instalments where the amount of tax owing on filing is more than $3,000 in the current year (2011) and either of the two previous years (2009 or 2010). Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer's income is at least $3,000 less than their total tax liability for the current and either of the two previous years. Such instalment payments of tax are due on March 15, June 15, September 15 and December 15 of each year.

An Instalment Reminder issued by the CRA in February 2011 will specify two amounts: one to be paid by March 15, and the other due by June 15. Those amounts represent the Agency's best estimate, based on the taxpayer's return filed for the 2009 taxation year, of the net tax which will be payable by the taxpayer for 2011. The taxpayer then has the following three options.

First, the taxpayer can pay the amounts specified on the Reminder by the respective due dates of March 15 and June 15. A taxpayer who does so can be certain that he or she will not face any interest or penalty charges, even if the amount paid turns out to be less than the taxes actually payable for the 2011 tax year. (If the instalments paid turn out to be more than the taxpayer's net tax liability for 2011, he or she will of course receive a refund on filing.)

Second, the taxpayer can make instalment payments based on the amount of tax that was owed for the 2010 tax year. Where a taxpayer's income has not changed between 2010 and 2011 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2011 will be slightly less than it was in 2010, owing to the indexation of tax brackets and personal tax credit amounts.

Third, the taxpayer can estimate the amount of tax that he or she will owe for 2011 and can pay instalments based on that estimate. Where a taxpayer's income will decrease from 2010 to 2011 and there will consequently be a reduction in tax payable, this option may be worth considering.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2011 tax year is filed in the spring of 2012. However, should instalments paid have been late or insufficient, the CRA can impose interest charges at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2011—until March 31, 2011—is 5%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day's interest. It is also possible for the CRA to impose penalties, but this is typically done only where the amount of instalment interest charged for the year is more than $1,000.

Most Canadian taxpayers are understandably disinclined to pay their taxes any sooner than absolutely necessary. However, ignoring an Instalment Reminder is never in the taxpayer's best interests. Those who don't wish to involve themselves in the intricacies of tax calculations can simply pay the amounts specified in the Reminder. The more technical-minded (or those who want to ensure that they are paying no more than absolutely required, and are willing to take the risk of having to pay interest on any shortfall) can avail themselves of the second or third options outlined above.

The Employment Insurance premium rate for 2011 is 1.78%.

The Employment Insurance premium rate for 2011 is 1.78%.

Yearly maximum insurable earnings are set at $44,200, making the maximum employee premium $786.76.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2011 is therefore $1101.46.

The Canada Pension Plan contribution rate for 2011 is unchanged at 4.95% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2011 is unchanged at 4.95% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $ 48,300, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contribution for 2011 will therefore be $2,217.60, and the maximum self-employed contribution will be $4,435.20.

The general federal corporate tax rate and the rate applied to income from manufacturing and processing will be reduced from 18.00% to 16.50%, effective January 1, 2011.

The general federal corporate tax rate and the rate applied to income from manufacturing and processing will be reduced from 18.00% to 16.50%, effective January 1, 2011.

The small business tax rate remains at 11.0% and the federal small business limit is unchanged at $500,000.

The general corporate tax rate change will be pro-rated for corporations having non-calendar-year year-ends.

The time of year is approaching when many Canadian employees look forward to something “extra” from their employer—a Christmas or Hanukkah gift, a year-end bonus or an invitation to the annual employer-sponsored holiday party. While it doesn’t necessarily fit well with the holiday spirit, it’s a fact that many such gifts, or even the annual employee holiday party, may have tax consequences, sometimes in unexpected ways.

The general rule is that any gifts received by an employee from his or her employer are considered to constitute a taxable benefit, to be included in the employee’s income in the year the gift is received. However, the Canada Revenue Agency (CRA) makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) to be received tax-free by employees, as long as such gifts are given on occasions such as Christmas or Hanukkah, or following a significant life event, like a marriage or the birth of a child.

Within the last year or so, the CRA has made some significant changes to its policies around employer gifts. As the new policies took effect at the beginning of 2010, this holiday season is the first one which will be governed by those policies. Thankfully, the new policies represent a simplification of the often complex and cumbersome rules which applied for 2009 and previous years. The administration of those rules proved to be more burdensome to employers than the CRA had anticipated, and the Agency was also concerned that that employer gift and award policies were being designed simply to, in effect, circumvent the rules and thereby provide employees with tax-free remuneration.

So, for 2010 and subsequent years, the CRA’s policy with respect to employer gifts to employees is simply that non-cash gifts and non-cash awards to an arm’s length employee, regardless of the number of such gifts or awards, will not be taxable to the extent that the total value of all such gifts and awards to that employee is less than $500 annually. The total value over $500 annually will be taxable.

It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500 per year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts, and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of cost. For this purpose, the CRA considers anything which could be easily converted to cash as a “near-cash” gift, which includes such things as gift certificates. In addition, the following types of gifts are considered to result in a taxable benefit, regardless of cost:

• points that can be redeemed for air travel or other rewards;
• reimbursements from an employer to an employee for a gift or award that the employee selected, paid for, and then provided a receipt to the employer for reimbursement;
• hospitality rewards such as employer-provided team-building lunches and rewards in the nature of a thank you for doing a good job;
• disguised remuneration, such as a gift or award given as a bonus;
• gifts and awards given by closely held corporations to their shareholders or related persons; and
• manufacturer-provided gifts or awards given directly by the manufacturer to the employee of a dealer.

 This time of year, the tax treatment of the annual employee holiday party needs to be considered. For many years, there was no question but that such an occasion had no tax consequences to the employees. However, in 1998, the CRA made an extremely ill-advised decision to assess a taxable benefit in relation to an employee’s attendance at an employer-sponsored Christmas party, and that assessment was upheld by the Tax Court of Canada. The public reaction to the news that employee Christmas parties would henceforth be taxed was entirely predictable, and the CRA issued a clarification of its position. That clarification indicated that no taxable benefit would be assessed in respect of employee attendance at an employer-provided social event, where attendance at the party was open to all employees, and the cost per employee was “reasonable”. In this case, “reasonable” cost was determined by the CRA to be $100. The $100 cost is meant to cover the party itself, not including any ancillary costs, such as transportation home, taxi fare and overnight accommodation. Where the total cost of the party exceeds the $100 per person threshold, the CRA may assess the employee as having received a taxable benefit. That policy remains in effect for 2010.

For most Canadians, the Canada Pension Plan (CPP) represents a significant source of anticipated income during their retirement years—for some, perhaps even the majority of their income. As a result, changes to that Plan are of interest to just about every adult Canadian, especially those who are approaching retirement.

Retirement has changed a lot over the past few decades and especially over the past few years, as the baby boomers approach retirement age. While retirement used to be an “all-or-nothing” proposition—one either worked full-time or not at all—this is no longer the case. Many Canadians now approach retirement on a more gradual basis, shifting to a part-time schedule in anticipation of retirement, with many more intending to work on a part-time basis after their official “retirement” date.

The changes in Canadians’ retirement patterns have meant changes in how CPP benefits are calculated and structured, and some of those changes will come into effect on January 1, 2011. Generally, the changes provide an incentive to working Canadians to put off receiving CPP benefits as long as possible, and a hindrance to those who perhaps planned to begin collecting such benefits at the first opportunity. They also provide already-retired Canadians who return to the work force, on either a part-time or full-time basis, with the opportunity to increase their CCP benefits by making additional contributions to the Plan. It’s important to note, as well, who won’t be affected by the upcoming changes. Canadians who are already receiving CPP benefits, unless they plan to return to the work force in the future, won’t see any change to their current benefits or benefit entitlements as a result of these new rules.

To make sense of the changes, a bit of background is required on just how the Canada Pension Plan works. Each employed and self-employed Canadian contributes to the Canada Pension Plan during his or her working life, at a rate set by law. For 2010, that rate is 4.95% of earnings, to a maximum of $2,217. For employees, the employer contributes an equivalent amount, while the self-employed must contribute both the employer and employee portions.

For each recipient, the amount of the monthly pension is generally based on the amount of contributions made between the age of 18 and the date on which CPP benefits start to be paid, to a maximum (for 2010) of $934 per month. That pension amount is what the individual would receive if CPP pension payments started at age 65. However, Canadians who contribute to the CPP can begin to receive monthly payments from the plan as early as age 60, or can postpone receiving pension payments until as late as age 70. Where a person chooses to begin receiving payments before they turn 65, pension amounts are reduced, under current rules, by 0.5% for every month before age 65 that the individual chooses to begin receiving CPP.  Conversely, where someone chooses to put off receiving CPP payments until after the age of 65, the amount of the monthly pension is increased by 0.5% for each month that pension payments are deferred.

Changes to the CPP to be phased in between 2011 and 2016 will provide a financial incentive to delay receipt of the CPP until after age 65 and will impose a greater cost on those who choose to begin receiving the pension before that time. Specifically, the 0.5% by which the pension amount payable is increased for each month that receipt is delayed after age 65 will itself increase—to 0.57% for 2011, 0.64% for 2012 and 0.70% for 2013. On the other side of the coin, where an individual chooses to begin collecting CPP before age 65, the current reduction of 0.5% for each month before age 65 that pension payments start will also increase—to 0.52% for 2012, 0.54% for 2013, 0.56% for 2014, 0.58% for 2015, and 0.60% for 2016.  

While those percentages don’t sound like they represent much change, the cumulative effects can be significant. In 2010, an individual who chooses to put off receiving CPP payments until the age of 70 receives 30% more than he or she had would have at age 65. Once these changes are fully implemented in 2013, a person making the same choice will receive 42% more than if he or she had taken the pension at age 65. The difference is smaller for those who choose to accelerate pension payments to age 60, but is still significant. Currently, a person who elects to begin receiving payments at age 60 will receive 30% less than if they had chosen to wait until age 65. By 2016, a person making the same choice will receive 36% less than someone who waited until age 65 to begin collecting their pension.   

Some changes are also planned for how the pension receivable by each person is calculated. Under current rules, each person’s average earnings between age 18 and their retirement date (known as the “contributory period”) is totalled and then 15% of their lowest earning years are “dropped out” of the calculation. In practical terms, that meant that up to 7 years of the person’s lowest earnings were “dropped out” from the calculation of average earnings. The balance was then used to calculate CPP entitlement for that individual. Beginning with the 2012 year, the percentage of low or zero income years that are excluded from the calculation will be increased to 16% in 2013, and 17% in 2014. The effect of the change will be to increase the amount on which CPP entitlement is based, and consequently, the amount of pension receivable, subject to statutory maximums.

While CPP recipients may continue to participate in the workforce (as an increasing number of retirees do), they may not, under existing rules, contribute to the CPP. However, beginning in 2012, CPP recipients under age 65 who continue to work will be required to continue contributing to the CPP, while those who are between the ages of 65 and 70 will have the option of contributing. Any additional contributions made while receiving CPP will, of course, increase the amount of CPP which the individual receives, through the new Post-Retirement Benefit.

By now, everyone who is required to file a tax return for the 2009 tax year has likely done so, and nearly all will have received a Notice of Assessment from the Canada Revenue Agency (CRA) relating to that 2009 tax return. In most cases, those Notices of Assessment will simply confirm the income amounts reported and tax calculated by the taxpayer on the return. Some fortunate taxpayers may receive an unexpected refund. Others, however, may be surprised by a Notice of Assessment indicating that they owe more money to the CRA.

Most taxpayers, assuming that they agree with the CRA’s assessment of their tax liability, pay up promptly, if not cheerfully. However, for those who don’t, the CRA has a very broad range of options at their disposal to compel payment, and a very long period of time in which to use them. As well, interest is levied from the original due date until full payment is made, and accumulated interest costs can be significant.

The interest rate charged by the CRA on overdue or insufficient tax payments is set quarterly. For each quarter, the interest rate charged on taxes owing is equal to the average Treasury bill rate in effect during the first month of the previous quarter, plus four percent. For the fourth quarter of 2010, therefore, covering the months of October, November, and December, the interest rate charged on taxes owing is 5 percent. In addition, any interest charged by the CRA is compounded daily, meaning that on each successive day, interest is being levied on the interest charged the day before. Not surprisingly, interest costs can add up quickly.

Where a balance owing isn’t paid within 30 days of the date on the Notice of Assessment, the CRA will usually contact the taxpayer, by phone or by mail, with a second request for payment. If, following that second contact, the taxpayer does not remit the amount owed or at least contact the CRA to discuss his or her options, the Agency will send a final letter. That final letter will inform the taxpayer that legal action may be taken by the CRA if, within the next 90 days, no payment is forthcoming or at least some payment arrangement is made.

If the CRA does determine that further action is necessary to compel payment, it has a great number of options. First, it can redirect other amounts which may be owed by the federal government to the taxpayer (for example, a Canada Pension Plan payment, or goods and services tax credit) and apply that credit to the amount owed by the taxpayer. The CRA can also intercept (or garnish) money which may be owing to the taxpayer from a third party, like an employer and, as a last resort, can direct that the taxpayer’s assets be seized and sold to satisfy the tax debt.

It’s relatively rare for a tax debt to reach the stage of litigation or garnishment, as it’s in everyone’s interest to resolve matters before things reach that point. And, perhaps contrary to popular belief, the CRA has some flexibility. Where the taxpayer just doesn’t have and can’t obtain the funds required to make immediate payment in full, the CRA is generally amenable to entering into some type of payment arrangement based on the taxpayer’s ability to pay. Before such an arrangement is agreed to, the CRA will have to be satisfied that the taxpayer has exhausted all other reasonable avenues to obtain the funds. It will also be necessary for the taxpayer to disclose his or her income, living expenses, assets, and liabilities to the CRA, and to allow the CRA to verify those amounts before a payment arrangement will be entered into. And, of course, entering into a payment arrangement doesn’t stop the interest clock from running – interest continues to be assessed at the current rate, and compounded daily.

While it’s best, of course, not to get into a situation in which the CRA becomes your creditor, paying the debt off as soon as possible is the second best option. Given the CRA’s punitive interest assessment practices, a taxpayer who doesn’t have the funds needed to pay taxes owing can be better off borrowing the amount owed from a third party and paying the CRA in full as soon as possible. Especially where the taxpayer can provide some security – like in the equity in a home - it may be possible to borrow funds at considerably less than the 5% interest rate currently being charged by the CRA on overdue tax amounts.

One final blow: interest paid on tax debts, whether paid to the CRA or to a third party lender, is not deductible from income.

While it’s obviously preferable, when it comes to taxes, to file on time and to make sure the information provided to the CRA is complete and accurate (as each taxpayer certifies on the last page of his or her return), things don’t always happen that way. Taxpayers who are in financial difficulty and unable to pay their taxes may simply put off filing. More commonly, a taxpayer may discover, after filing a return for the year (or previous years), that an information slip was overlooked and a portion of income consequently not reported. Or, the taxpayer may receive an amended T4 after filing his or her return, necessitating a change in the return filed and, sometimes, an increase in tax payable. The dilemma which arises, of course, is whether to come clean with the tax authorities, or “lie low” and hope the failure to file or error or omission is never discovered.

Where the needed change is in respect of a current year return, it’s relatively simple to set things right. In such circumstances, the taxpayer needs to write to the Tax Centre to which the original return was sent, notifying them of the error and providing the correct information. It is not necessary, in fact not advisable, to send a second return containing the correct information to the CRA. Doing so is more likely to create confusion than to resolve matters. Rather, in such circumstances, the CRA provides a form to be used — the T1-ADJ. While the use of the form, which is available on the Agency’s Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-adj/t1-adj-10e.pdf, isn’t mandatory, using it does ensure that all the information required by the CRA to process the taxpayer’s request has been provided. Once the T1-ADJ is received, the corrected information should be incorporated into the taxpayer’s return and reflected on the Notice of Assessment ultimately issued by the CRA.

Where a failure to report income, or to file, or the erroneous claiming of a deduction or credit which is discovered by the taxpayer relates to a previous taxation year, the CRA provides taxpayers with another option, in the form of the Agency’s Voluntary Disclosure Program (“VDP”). As the name implies, the Program allows taxpayers to voluntarily disclose to the CRA any past errors or omissions or failures to file when required. Where the requirements of the program are met, the CRA is authorized to cancel (or “waive”) any penalties which might otherwise be assessed against the taxpayer. It’s important to note that only penalties may be forgiven, and that the taxpayer will, notwithstanding any voluntary disclosure, continue to be “on the hook” for any outstanding taxes, plus interest charges.

The CRA imposes four conditions which must be met before a disclosure will qualify under the program. They are as follows.

• The disclosure must be truly voluntary in nature – that is, it must be initiated by the taxpayer and, in particular, must not be the result of the taxpayer’s knowledge of enforcement action about to be taken by the CRA. In other words, a taxpayer who “voluntarily” discloses past transgressions after finding out that he or she is about to be audited will not qualify under the program.

• Any disclosure made by the taxpayer must be “complete”, as that term is understood by the CRA. The taxpayer is expected to provide full and accurate reporting of all previously inaccurate, incomplete, or unreported information. It’s not possible to make selective disclosure of, for instance, one tax year but not others. As well, the CRA will request documentation to verify the amounts to be disclosed. If that documentation shows that the initial disclosure contained significant errors or omissions, the disclosure will not qualify under the VDP. In such a case, the disclosed information will be processed by the CRA and the Agency will be able to apply interest and penalties to the entire outstanding amount.

• The voluntary disclosure by the taxpayer must involve at least one penalty. Since the point of the VDP is to forgive penalties while collecting outstanding taxes and interest, there would be no point to seeking penalty relief where no penalties are involved. In such cases, the relevant information should simply be disclosed to the CRA, which will process it and assess any taxes and interest owed.

• Finally, the taxpayer’s disclosure must generally include information which is at least one year past due. In other words, a disclosure could not normally be made in respect of a 2008 income tax return (which was due April 30, 2009) until May of 2010. The CRA will, in some circumstances, accept a disclosure of information which is less than one year past due, but such disclosure cannot be used by the taxpayer simply to avoid penalties. For instance, a taxpayer who fails to get his return in and his taxes paid by April 30 cannot make a “voluntary disclosure” a few days or weeks later simply in order to avoid the late-filing penalty which would otherwise be assessed.

 Finally, a taxpayer who is considering making a voluntary disclosure (and whose situation meets the four criteria required by the CRA, as outlined above) can “test the waters”, to a degree, before deciding to make full disclosure. The CRA will accept a “no-name” disclosure from a taxpayer and will discuss the taxpayer’s situation with him or her on a hypothetical basis, providing the taxpayer with information on how an actual disclosure would be handled. The CRA’s policy with respect to such no-name disclosures requires the taxpayer who makes a no-name disclosure to provide identifying information within 90 calendar days from the effective date of disclosure. During the 90-day period, the taxpayer is protected from prosecution and from the application of penalties. However if, at the end of the 90-day period the identity of the taxpayer remains unknown, the voluntary disclosure file will be closed without further contact from the CRA, and no extension of the 90-day period will be allowed to identify the taxpayer.