Newsletters

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

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

Corporate:

Issue #47 Corporate

Personal:

Issue #47 Personal

The fact that debt levels of Canadian households have been increasing over the past decade and a half can’t really be called news anymore. In particular, the ratio of debt-to-household-income, which stood at 93% in 2005, has risen steadily since then and, as of the third quarter of 2018, reached (another) new record of 177.5%. In other words, the average Canadian household owed $1.78 for every dollar of disposable (after-tax) income. (The Statistics Canada publication reporting those findings can be found on the StatsCan website at https://www150.statcan.gc.ca/n1/daily-quotidien/181214/dq181214a-eng.htm.)

The fact that debt levels of Canadian households have been increasing over the past decade and a half can’t really be called news anymore. In particular, the ratio of debt-to-household-income, which stood at 93% in 2005, has risen steadily since then and, as of the third quarter of 2018, reached (another) new record of 177.5%. In other words, the average Canadian household owed $1.78 for every dollar of disposable (after-tax) income. (The Statistics Canada publication reporting those findings can be found on the StatsCan website at https://www150.statcan.gc.ca/n1/daily-quotidien/181214/dq181214a-eng.htm.)

Repeated announcements of yet another increase in the average debt-to-household income ratio have become almost routine over the past 15 years — the latest statistics are reported in the media and concern is expressed by financial planners and, sometimes, government and banking officials, but there has not been any sustained change in consumer behavior. Starting a year and a half ago, however, something did change. Debt didn’t just get bigger, it got more expensive — five successive times. In June of 2016 the Bank Rate set by the Bank of Canada, on which financial institutions base their lending rates, was 0.75%, and had not changed in the previous two years. Starting in July 2016, that rate was increased in five separate announcements over the next 18 months and, as of January 2019, it stands at 2%.

Like most economic events, the explosive growth in the average debt of Canadian households over the past fifteen years can’t be attributed to a single cause. What’s undeniable however, is that two of the major causes of that growth in debt were first, interest rates which were the lowest on record since before the Great Depression and second, a remarkable run-up in Canadian residential real estate values. Money was cheap and, when debt was secured against home equity, it was frequently incurred in the belief that the increased amount of such debt would soon be covered, or outstripped, by an increase in the value of the underlying real estate. And, since interest rates were so low, the cost of carrying that increased debt was very manageable.

To some extent, both those circumstances have changed. Canadian real estate values are still high by historic standards and, while those values have softened in some areas of the country, there has been nothing like the “crash” in such real estate prices which happened in the late 1980s. However, the era of ultra-cheap money seems to be over, and interest rates are clearly on the increase. While it’s impossible to say how high interest rates will go, and how quickly, it’s prudent to assume at least that rates won’t be going down any time soon.

As the Bank of Canada has announced successive increases in the bank rate, financial institutions have inevitably responded by increasing the interest rates charged on all forms of borrowing. In other words, even if the amount of debt carried by Canadian families hasn’t changed in the last 18 months, the cost of carrying that debt has certainly gone up. The effect of such change is measurable: as noted by the credit reporting agency Equifax, the proportion of Canadians who pay off their credit cards in full each month has declined (as measured on a year-over-year basis) each month since August 2017.

There is no instant fix for anyone who has taken on debt and is now finding that repaying (or even servicing) that debt has become more difficult, or even impossible. There are, however, steps which can be taken to get that debt under control and even, eventually, to be become debt-free. And, there is help available through debt and credit counselling provided by any number of non-profit agencies. Those agencies work with individuals, and with their creditor(s), to create both a realistic budget and a manageable debt repayment schedule. More information on the credit counselling process, and a listing of such non-profit agencies can be found at http://creditcounsellingcanada.ca/.

Sometime during the month of February, millions of Canadians will receive mail from the Canada Revenue Agency (CRA). That mail, a “Tax Instalment Reminder”, will set out the amount of instalment payments of income tax to be paid by the recipient taxpayer by March 15 and June 17 of this year.

Sometime during the month of February, millions of Canadians will receive mail from the Canada Revenue Agency (CRA). That mail, a “Tax Instalment Reminder”, will set out the amount of instalment payments of income tax to be paid by the recipient taxpayer by March 15 and June 17 of this year.

Receiving an “Instalment Reminder” from the CRA won’t be a surprise for many recipients who have paid tax by instalments during previous tax years. For others, however, the need to make tax payments by instalment is a new and unfamiliar concept. That’s because for most Canadians — certainly most Canadians who earn their income through employment — the payment of income tax throughout the year is an automatic and largely invisible process, requiring no particular action on the part of the employee/taxpayer. Federal and provincial income taxes, along with Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, are deducted from each employee’s income and the amount deposited to an employee’s bank account is the net amount remaining after such taxes, contributions and premiums are deducted and remitted on the employee’s behalf to the CRA. While no one likes having to pay taxes, having those taxes paid “off the top” in such an automatic way is, relatively speaking, painless. Such is not, however, the case for the sizeable minority of Canadians who pay their income taxes by way of tax instalments

The CRA’s decision to send an Instalment Reminder to certain taxpayers isn’t an arbitrary one. Rather, an Instalment Reminder is generated when sufficient income tax has not been deducted from payments made to that taxpayer throughout the year. Put more technically, an instalment reminder will be issued by the CRA where the amount of tax which was or will be owed when filing the annual tax return is more than $3,000 in the current (2019) tax year and either of the two previous (2017 or 2018) tax years. Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income throughout the year is at least $3,000 less than their total tax owed for 2019 and either 2017 or 2018. For residents of Quebec, that threshold amount is $1,800.

Such obligation arises on a regular basis for those who are self-employed, or course, and generally for those whose income is largely derived from investments. The group of recipients of a tax instalment reminder often also includes retired Canadians, especially the newly retired, for two reasons. First, while most employees have income from only a single source – their paycheque – retirees often have multiple sources of income, including Canada Pension Plan (CPP) and Old Age Security (OAS) payments, private retirement savings and, sometimes, employer-provided pensions. And, while income tax is deducted automatically from one’s paycheque, that’s not the case for most sources of retirement income. Relatively few new retirees realize that it’s necessary to make arrangements to have tax deducted “at source” from either their government source income (like CPP or OAS payments) or private retirement income like pensions or registered retirement income fund withdrawals, and to make sure that the total amount of those deductions is sufficient to pay the total tax bill for the year. It is that group of individuals, who may be surprised and puzzled by the arrival of an unfamiliar “Instalment Reminder” from the CRA. However, no matter what kind of income a taxpayer has received, or why sufficient tax has not been deducted at source, the options open to a taxpayer who receives such an Instalment Reminder are the same.

First, the taxpayer can pay the amounts specified on the Reminder, by the March and June payment due dates. Choosing this option will mean that the taxpayer will not face any interest or penalty charges, even if the amount paid by instalments throughout the year turns out to be less than the taxes actually payable for 2019. If the total of instalment payments made during 2019 turn out to more than the taxpayer’s total tax liability for the year, he or she will of course receive a refund when the annual tax return is filed in the spring of 2020.

Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2018 tax year. Where a taxpayer’s income has not changed significantly between 2018 and 2019 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2019 will be slightly less than it was in 2018, as the result of the indexation of both income tax brackets and tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2019 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease significantly from 2018 to 2019, such that his or her tax bill will also be substantially reduced, this option can make the most sense.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges if there is no tax payable when the return for the 2019 tax year is filed in the spring of 2020. However, should instalments paid have been late or insufficient, the CRA will impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2019 — until March 31, 2019 — is 6%.) 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’s also possible for the CRA to levy penalties for overdue or insufficient instalments, but that is 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.

For most taxpayers, the annual deadline for making an RRSP contribution comes at a very inconvenient time. At the end of February, many Canadians are still trying to pay off the bills from holiday spending, the first income tax instalment payment is due two weeks later on March 15 and the need to pay any tax balance for the year just ended comes just 6 weeks after that, on April 30. And, while the best advice on how to avoid such a cash flow crunch is to make RRSP contributions on a regular basis throughout the year, that’s more of a goal than a reality for the majority of Canadians.

For most taxpayers, the annual deadline for making an RRSP contribution comes at a very inconvenient time. At the end of February, many Canadians are still trying to pay off the bills from holiday spending, the first income tax instalment payment is due two weeks later on March 15 and the need to pay any tax balance for the year just ended comes just 6 weeks after that, on April 30. And, while the best advice on how to avoid such a cash flow crunch is to make RRSP contributions on a regular basis throughout the year, that’s more of a goal than a reality for the majority of Canadians.

Whether convenient or not, the deadline for making RRSP contributions which can be claimed on the return for 2018 is Friday March 1, 2019. The maximum allowable current year contribution which can be made by any individual taxpayer for 2018 is 18% of that taxpayer’s earned income for the 2017 year, to a statutory maximum of $26,230.

Those are the basic rules governing RRSP contributions for the 2018 tax year. For most Canadians, however, those rules are just the starting point of the calculation, as millions of Canadian taxpayers have what is termed “additional contribution room” carried forward from previous taxation years. That additional contribution room arises because the taxpayer either did not make an RRSP contribution in each previous year, or made one which was less than his or her maximum allowable contribution for the year. For many taxpayers that additional contribution room can amount to tens of thousands of dollars, and the taxpayer is entitled to use as much or as little of that additional contribution room as he or she wishes for the current tax year.

It’s apparent from the forgoing that determining one’s maximum allowable contribution for 2018 will take a bit of research. The first step in determining one’s total (current year and carryforward) contribution room for 2018 is to consult the last Notice of Assessment which was received from the Canada Revenue Agency (CRA). Every taxpayer who filed a return for the 2017 taxation year will have received a Notice of Assessment from the CRA, and the amount of that taxpayer’s allowable RRSP contribution room for 2018 will be summarized on page 2 of that notice. Taxpayers who have discarded (or can’t find) their Notice of Assessment can obtain the same information by calling the CRA’s Telephone Information Phone Service (TIPS)  line at 1-800-267-6999. An automated service at that line will provide the required information, once the taxpayer has provided his or her social insurance number, month, and year of birth and the amount of income from his or her 2017 tax return. Those who don’t wish to use an automated service can call the CRA’s Individual Income Tax Enquiries Line at 1-800-959 8281, and speak to a client services agent, who will also request such identifying information before providing any taxpayer-specific data. Finally, for those who have registered for the CRA’s My Account service, the needed information will be available online.

One question that doesn’t often get asked by taxpayers is whether it actually makes sense to make an RRSP contribution. The wisdom of making annual contributions to one’s RRSP has become an almost unquestioned tenet of tax and retirement planning, but there are situations in which other savings vehicles — particularly the Tax-Free Savings Account, or TFSA — may be the better short-term or long-term option or even, in some cases, the only one available.

When it comes to making a contribution to one’s TFSA, the good news is the timelines and deadlines are much more flexible than those which govern RRSP contributions. A contribution to one’s TFSA can be made at any time of the year, and contributions not made during the current year can be carried forward and made in any subsequent year.

On the other hand, determining one’s total TFSA contribution room is significantly more complex than figuring out one’s allowable RRSP contribution amount, for two reasons. First, the maximum TFSA amount has changed several times (increasing and decreasing) since the program was introduced in 2009. Second, and more important, individuals who withdraw funds from a TFSA can re-contribute those funds, but not until the year following the one in which the withdrawal is made. Especially where a taxpayer has several TFSA accounts, and/or a history of making contributions, withdrawals and re-contributions, it can be difficult to determine just where that taxpayer stands with respect to his or her maximum allowable TFSA contribution for 2019.

In this case, there’s no help to be had from a Notice of Assessment, as the CRA no longer provides TFSA contribution information on that form. Information on one’s current year TFSA contribution limit can, however, be obtained from the CRA website, from the TIPS line at 1-800-267-6999 or its Individual Income Tax Enquiries line at 1-800-959-8281, as outlined above. It should be noted, however, that information on one’s 2019 TFSA contribution limit won’t be available through the TIPS line until mid-February 2019.

Determining which savings vehicle is the better option for a particular taxpayer will depend, for the most part, on the taxpayer’s current and future tax situation, the purpose for which the funds are being saved, and the taxpayer’s particular sources of retirement income.

Taxpayers who are saving toward a shorter-term goal, like next year’s vacation or even a down payment on a home should direct those savings into a TFSA. While choosing to save through an RRSP will provide a tax deduction on that year’s return and, possibly, a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP in a year or two. And, more significantly from a long-term point of view, repeatedly using an RRSP as a short-term savings vehicle will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn cannot be replaced. While the amounts involved may seem small, the loss of contribution room and the compounding of invested amounts over 25 or 30 years or more 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 (e.g., 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, allowing the funds to compound on a tax-free basis, and then withdrawing the funds tax-free once they’re 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 from income which would be taxed at that higher tax rate. And, if a need for funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Taxpayers who are currently in the work force and who are members of a registered pension plan (RPP) may find that saving through a TFSA is their only practical option. As outlined above, the starting point for calculating one’s current year contribution limit maximum amount which can be contributed to an RRSP and deducted on the tax return for 2018 is calculated as 18% of earned income for 2017. However, the maximum allowable contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under that pension plan. Where the RPP is a particularly generous one, RRSP contribution room may, as a result, be minimal, and a TFSA contribution the logical savings alternative.

Canadians aged 71 and older will find the RRSP vs. TFSA question irrelevant, as the last date on which taxpayers can make RRSP contributions is December 31^st of the year in which they turn 71. Many of those taxpayers will, however, have converted their RRSP savings to a registered retirement income fund (RRIF) and anyone who has done so is required to withdraw (and be taxed on) a specified percentage of those RRIF funds every year. Particularly where required RRIF withdrawals exceed the RRIF holder’s current cash flow needs, that income can be contributed to a TFSA. Although the RRIF withdrawals made must still be included in income for the year and taxed as such, 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 in the future from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or for the federal age credit.

RRSPs and TFSAs are the most significant tax-free or tax-deferred savings vehicles available to Canadian taxpayers, and both have a place in most financial and retirement plans. To help taxpayers to make informed choices about their savings options, the CRA provides a number of dedicated webpages about both RRSPs and TFSAs, and those can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/menu-eng.html and www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html.

Income tax is a big-ticket item for most retired Canadians. Especially for those who are no longer paying a mortgage, the annual tax bill may be the single biggest expenditure they are required to make each year. Fortunately, the Canadian tax system provides a number of tax deductions and credits available only to those over the age of 65 (like the age credit) or only to those receiving the kinds of income usually received by retirees (like the pension income credit), in order to help minimize that tax burden. And, in most cases, the availability of those credits is flagged, either on the income tax form which must be completed each spring or on the accompanying income tax guide.

Income tax is a big-ticket item for most retired Canadians. Especially for those who are no longer paying a mortgage, the annual tax bill may be the single biggest expenditure they are required to make each year. Fortunately, the Canadian tax system provides a number of tax deductions and credits available only to those over the age of 65 (like the age credit) or only to those receiving the kinds of income usually received by retirees (like the pension income credit), in order to help minimize that tax burden. And, in most cases, the availability of those credits is flagged, either on the income tax form which must be completed each spring or on the accompanying income tax guide.

There is, however, another income tax saving strategy which is not nearly as well-known. Even more unfortunate is the fact that the benefits of that strategy (and the ease with which it can be accomplished) aren’t readily apparent from either the tax return form or the annual income tax guide. That tax saving strategy is pension income splitting, and it’s likely the case that many taxpayers who could benefit aren’t familiar with the strategy, especially if they are not receiving professional tax planning or tax return preparation advice.

That’s a particularly unfortunate reality because pension income splitting has the potential to generate more tax savings among taxpayers over the age of 65 (and certainly those over the age of 71, for whom RRSP contributions are no longer possible) than just about any other tax planning strategy available to retirees. In addition, it’s one of the very few tax planning strategies which require no expenditure of funds on the part of the taxpayer, and which can be implemented after the end of the tax year, at the time the return for that tax year is filed.

When described in those terms, pension income splitting can sound like one of those “too good to be true” tax scams, but that’s not the case. Essentially, what pension income splitting offers is a government-sanctioned opportunity for Canadian residents who are married (and, usually, where recipient spouse is aged 65 or older) to make a notional reallocation of private pension income between them on their annual tax returns, and to benefit from a lower overall family tax bill as a result.

Pension income splitting, like all forms of income splitting, works because Canada has what is called a “progressive” tax system, in which the applicable tax rate goes up as income rises. For 2018, the federal tax rate applied to about the first $47,000 of taxable income is 15%, while the federal rate applied to the next $46,000 of such income is 20.5%. So, an individual who has $90,000 in taxable income would pay federal tax of about $15,900: if that $90,000 was divided equally between such individual and his or her spouse, each would have $45,000 in taxable income and the total federal family tax bill would be $13,500.

The general rule with respect to pension income splitting is that a taxpayer who receives private pension income during the year is entitled to allocate up to half that income (without any dollar limit) to his or her spouse for tax purposes. In this context, private pension income means a pension received from a former employer and, where the income recipient is age 65 or older, payments from an annuity, a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF). Government source pensions, like the Canada Pension Plan or Old Age Security payments do not qualify for pension income splitting, regardless of the age of the recipient.

The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension administrator. Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032, Joint Election to Split Pension Income for 2018, with their annual tax return. That form, which is not included in the annual tax return package, can be found on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/E/pbg/tf/t1032/README.html, or can be ordered by calling 1-800-959 8281.

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 2018. Since the splitting of pension income affects the income and therefore 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 suffice. In addition to filing the T1032, the spouse who is actual recipient of the pension income to be split must deduct from income the pension income amount allocated to his or her spouse. That deduction is taken on Line 210 of his or her 2018 return. And, conversely, the spouse to whom the pension income amount is being allocated is required to add that amount to his or her income on the return, this time on Line 116. Essentially, to benefit from pension income splitting, all that’s needed is for each spouse to file a single form with the CRA and to make a single entry on his or her 2018 tax return.

By the end of February or early March, taxpayers will have received (or downloaded) the information slips which summarize the income received from various sources during 2018. At that time, couples who might benefit from this strategy can review those information slips and calculate the extent to which they can make a dent in their overall tax bill for the year through a little judicious income splitting.

Those wishing to obtain more information on pension income splitting than is available in the 2018 General Income Tax and Benefit Guide should refer to the CRA website at www.cra-arc.gc.ca/pensionsplitting/, where more detailed information is available.

The Employment Insurance premium rate for 2019 is decreased to 1.62%.

The Employment Insurance premium rate for 2019 is decreased to 1.62%.

Yearly maximum insurable earnings are set at $53,100, making the maximum employee premium $860.22.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2019 is therefore $1204.31.

The Quebec Pension Plan contribution rate for employees and employers for 2019 is 5.55%, and maximum pensionable earnings are $57,400. The basic exemption is $3,500.

The Quebec Pension Plan contribution rate for employees and employers for 2019 is 5.55%, and maximum pensionable earnings are $57,400. The basic exemption is $3,500.

The maximum employee premium for the year is $2,991.45, and the maximum employer contribution is the same.

The Canada Pension Plan contribution rate for 2019 is increased to 5.1% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2019 is increased to 5.1% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $57,400, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2019 will be $2,748.90 each, and the maximum self-employed contribution will be $5,497.80.

Dollar amounts on which individual non-refundable federal tax credits for 2019 are based, and the actual tax credit claimable, will be as follows.

Dollar amounts on which individual non-refundable federal tax credits for 2019 are based, and the actual tax credit claimable, will be as follows.

The indexing factor for federal tax credits and brackets for 2018 is 2.2%. The following federal tax rates and brackets will be in effect for individuals for the 2019 tax year.

The indexing factor for federal tax credits and brackets for 2018 is 2.2%. The following federal tax rates and brackets will be in effect for individuals for the 2019 tax year.

Income level                           Federal tax rate

$12,069 - $47,630                         15%

$47,631 - $95,259                        20.5%

$95,260 - $147,667                        26%

$147,668 - $210,371                      29%

Above $210,371                             33%

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies. Some of the more significant dates and changes for individual taxpayers for 2019 are listed below.

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies. Some of the more significant dates and changes for individual taxpayers for 2019 are listed below.

RRSP deduction limit increased

The RRSP contribution limit for the 2018 tax year (for which the contribution deadline is Friday March 1, 2019) is $26,230. In order to make the maximum current year contribution for 2018, it will be necessary to have had earned income for the 2017 taxation year of $145,725.

The RRSP contribution limit for the 2019 tax year is $26,500. In order to make the maximum current year contribution for 2019 (for which the contribution deadline will be Monday March 2, 2020), it will be necessary to have earned income for the 2018 taxation year of $147,225.

TFSA contribution limit increased

The TFSA contribution dollar limit for 2019 is increased to $6,000. The actual amount which can be contributed by a particular individual includes both the current year limit and any carryover of uncontributed or re-contribution amounts from previous taxation years.

Taxpayers can find out their 2019 contribution limit by calling the Canada Revenue Agency’s (CRA’s) Individual Income Tax Enquires line at 1-800-959 8281. Those who have registered for the CRA’s online tax service My Account can obtain that information by logging into that service.

Individual tax instalment deadlines for 2019

Millions of individual taxpayers pay income tax by quarterly instalments, which will be due on the 15^th day of each of March, June, September, and December 2019, except where that date falls on a weekend or a statutory holiday.

The actual tax instalment due dates for 2019 are as follows:

Friday March 15, 2019

Monday June 17, 2019

Monday September 16, 2019

Monday December 16, 2019

Old Age Security income clawback threshold

The income level above which Old Age Security (OAS) benefits are clawed back is $77,580 for 2019.

Individual tax filing and payment deadlines in 2019

For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2018 tax year is Tuesday April 30, 2019.

Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2018 on or before Tuesday April 30, 2019.

Self-employed taxpayers and their spouses must file a 2018 income tax return on or before Monday June 17, 2019.

The following tax changes are in effect January 1, 2019.

The following tax changes are in effect January 1, 2019.

Federal

The small business income tax rate will be reduced from 10% to 9% effective as of January 1, 2019.

British Columbia

The province will introduce an Employer Health (payroll) Tax effective January 1, 2019.

The provincial education tax credit is eliminated as of the 2019 tax year.

Manitoba

Effective January 1, 2019, the business limit for income eligible for the provincial small business deduction will increase from $450,000 to $500,000.

The Rental Housing Construction Tax Credit is eliminated as of 2019.

Prince Edward Island

For corporation tax years ending after December 31, 2018, the small business income tax rate is reduced from 4% to 3.5%.

The basic personal credit amount is increased to $9,160.

Nova Scotia

The province introduces an Innovation Equity Tax Credit for 2019 and later years.

While there weren’t a great number of tax measures included in the 2018 Fall Economic Statement brought down by the Minister of Finance on November 21, 2018, the tax changes that were announced represented good news for Canadian businesses.

While there weren’t a great number of tax measures included in the 2018 Fall Economic Statement brought down by the Minister of Finance on November 21, 2018, the tax changes that were announced represented good news for Canadian businesses.

Perhaps most notably, several of the measures announced include tax changes which will benefit Canadian businesses of all sizes and operating in all sectors of the economy. Generally, those changes involved enhancements to the existing rules which will provide businesses with accelerated write-offs of assets which are acquired after the Budget date.

The Canadian tax system enables taxpayers to deduct (or write off) a specified percentage of the cost of newly-acquired capital property each year, through the capital cost allowance (CCA) system. In the year of acquisition, that deduction is, for most classes of assets, limited to one-half the usual percentage deduction (known as the “half-year rule”). The changes announced in the statement provide businesses with enhanced deductions under the existing capital cost allowance system – in some cases, allowing the entire cost of the property to be deducted in the year it is acquired.

The most broad-based of the changes announced in the statement – the Accelerated Investment Incentive, or AII – will effectively suspend the half-year rule for eligible property, meaning that a full CCA deduction could be taken in the year that eligible property is acquired. In addition, the allowance claimable for that year will be calculated by applying the prescribed CCA rate for that class of property to one-and-a-half times the cost of the property acquired.

For example, the combined effect of those changes is that where a property has a write-off rate of 20% per year, that write off will, under the AII, be equal to 30% of the cost of the property in the year the property is put in use. Significantly, such preferential treatment is not restricted to particular kinds or types of businesses or property. Rather, as stated in the statement, the AII will be available to “businesses of all sizes, across all sectors of the economy, that are making capital investments”. Such property, in order to be fully eligible for the AII, must be acquired and put in use by the taxpayer after November 20, 2018 and before 2024.

The second significant change will allow taxpayers to fully deduct, in the year of acquisition, the cost of machinery and equipment acquired for use in Canada primarily in the manufacturing and processing of goods for sale or lease. Such machinery and equipment, in order to qualify, must be acquired after November 20, 2018, and be available for use before 2024. The enhanced 100% deduction will be phased out for otherwise qualifying property which becomes available for use between 2023 and 2028.

Finally, clean energy equipment acquired by taxpayers in any industry already qualifies for preferential capital cost allowance treatment. That preferential treatment will be enhanced by a measure announced in the Statement which will provide a 100% deduction for such equipment which is acquired after November 20, 2018 and is available for use before 2024. Again, that enhanced deduction will be phased out where the otherwise qualifying property becomes available for use between 2023 and 2028.

While the basics of the three CCA measures announced in the Update are fairly straightforward, the application of those measures, as with any tax change, involves more detailed rules and restrictions. Those rules and restrictions are summarized in an Annex to the 2018 Fall Economic Statement, and that Annex can be found on the Finance Canada website at https://www.budget.gc.ca/fes-eea/2018/docs/statement-enonce/anx03-en.html.

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

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

When you need to make your RRSP contribution on or before December 31^st

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

Make spousal RRSP contributions before December 31

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plans (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2018, the contributor can claim a deduction for that contribution on his or her return for 2018. The spouse can then withdraw that amount as early as January 1, 2021 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2019, the contributor can still claim a deduction for it on the 2018 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2022. It’s an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should there be an unforeseen need to withdraw funds.

Accelerate any planned TFSA withdrawals into 2018

Each Canadian aged 18 and over can make an annual contribution to a Tax-Free Savings Account (TFSA) – the maximum contribution for 2018 is $5,500. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.

Consequently, it makes sense, where a TFSA withdrawal is planned within the next few months, perhaps to pay for a winter vacation or to make an RRSP contribution, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA before December 31^st, 2018 will have the amount which is withdrawn added to his or her TFSA contribution limit for 2019, which means it can be re-contributed as early as January 1, 2019. If the same taxpayer waits until January of 2019 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2020.

For individual Canadian taxpayers, the tax year ends at the same time as the calendar year. And what that means for individual Canadians is that any steps taken to reduce their tax payable for 2018 must be completed by December 31, 2018. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan contributions, which can be made any time up to and including March 1, 2019, and claimed on the return for 2018.)

For individual Canadian taxpayers, the tax year ends at the same time as the calendar year. And what that means for individual Canadians is that any steps taken to reduce their tax payable for 2018 must be completed by December 31, 2018. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan contributions, which can be made any time up to and including March 1, 2019, and claimed on the return for 2018.)

While the remaining timeframe in which tax planning strategies for 2018 can be implemented is only a few weeks, the good news is that the most readily available of those strategies don’t involve a lot of planning or complicated financial structures – in many cases, it’s just a question of considering the timing of steps which would have been taken in any event. What follows is a listing of the steps which should be considered by most Canadian taxpayers as the year-end approaches.

Charitable donations

The federal government and all of the provincial and territorial governments provide a tax credit for donations made to registered charities during the year. In all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year – there are no exceptions.

There is, however, another reason to ensure donations are made by December 31^st. The credit provided by each of the federal and provincial or territorial governments is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. Where the taxpayer making the donation has taxable income (for 2018) over $205,843, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2018 will receive a federal credit of $88 ($200 × 15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2018 and January 2019, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2019 donation can’t be claimed until the 2019 return is filed in April 2020. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.

It’s also possible to carry forward, for up to 5 years, donations which were made in a particular tax year. So, if donations made in 2018 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2013, 2014, 2015, 2016, or 2017 tax years can be carried forward and added to the total donations made in 2018, and the aggregate then claimed on the 2018 tax return.

When claiming charitable donations, it is possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high-income surtax – currently, Ontario and Prince Edward Island – it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.

Timing of medical expenses

There are an increasing number of medical expenses which are not covered by provincial health care plans, and an increasing number of Canadians who do not have private coverage for such costs through their employer. In those situations, Canadians have to pay for such unavoidable expenditures – including dental care, prescription drugs, ambulance trips, and many other para-medical services, like physiotherapy, on an out-of-pocket basis. Fortunately, where such costs must be paid for partially or entirely by the taxpayer, the medical expense tax credit is available to help offset those costs. Unfortunately, the computation of such expenses and, in particular, the timing of making a claim for the credit, can be confusing. In addition, the determination of what expenses qualify for the credit and which do not isn’t necessarily intuitive, nor is the determination of when it’s necessary to obtain prior authorization from a medical professional in order to ensure that the contemplated expenditure will qualify for the credit.

The basic rule is that qualifying medical expenses (a lengthy list of which can be found on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/medical/#mdcl_xpns) over 3% of the taxpayer’s net income, or $2,302, whichever is less, can be claimed for purposes of the medical expense tax credit on the taxpayer’s return for 2018.

Put in more practical terms, the rule for 2018 is that any taxpayer whose net income is less than $76,750 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $76,750 can claim qualifying expenses which exceed the $2,302 threshold.

The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2018 will produce the greatest amount eligible for the credit. That determination will obviously depend on when medical expenses were incurred so there is, unfortunately, no universal rule of thumb which can be used.

Medical expenses incurred by family members – the taxpayer, his or her spouse, dependent children who were born in 2001 or later, and certain other dependent relatives – can be added together and claimed by one member of the family. In most cases, it is best, in order to maximize the amount claimable, to make that claim on the tax return of the lower income spouse, where that spouse has tax payable for the year.

As December 31^st approaches, it is a good idea to add up the medical expenses which have been incurred during 2018, as well as those paid during 2017 and not claimed on the 2017 return. Once those totals are known, it will be easier to determine whether to make a claim for 2018 or to wait and claim 2018 expenses on the return for 2019. And, if the decision is to make a claim for 2018, knowing what medical expenses were paid and when will enable the taxpayer to determine the optimal 12-month waiting period for the claim.

Finally, it is a good idea to look into the timing of medical expenses which will have to be paid early in 2019. Where those are significant expenses (for instance, a particularly costly medication which must be taken on an ongoing basis), it may make sense, where possible, to accelerate the payment of those expenses to December 2018, where that means they can be included in 2018 totals and claimed on the 2018 return.

Reviewing tax instalments for 2018

Millions of Canadian taxpayers (particularly the self-employed and retired Canadians) pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total liability for the year.

The final quarterly instalment for this year will be due on Monday December 17, 2018. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2018 and so will be in a position to estimate what the final tax bill for the year will be, taking into account any tax planning strategies already put in place, as well as any RRSP contributions which will be made before March 2, 2019. While the tax return forms to be used for the 2018 year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2017 form. Increases in tax credit amounts and tax brackets from 2017 to 2018 will mean that using the 2016 form will likely result in a slight over-estimate of tax liability for 2018.

Once one’s tax bill for 2017 has been calculated, that figure should be compared to the total of tax instalments already made during 2017 (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281). Depending on the result, it may then be possible to reduce the amount of the tax instalment to be paid on December 15 – and thereby free up some funds for the inevitable holiday spending!

The holiday season is usually costly, but few Canadians are aware that those costs can include increased income tax liability resulting from holiday gifts and celebrations. It doesn’t seem entirely in the spirit of the season to have to consider possible tax consequences when attending holiday celebrations and receiving gifts; however, our tax system extends its reach into most areas of the lives of Canadians, and the holidays are no exception. Fortunately, the possible negative tax consequences are confined to a minority of fact situations and relationships, usually involving employers and employees, and are entirely avoidable with a little advance planning.

The holiday season is usually costly, but few Canadians are aware that those costs can include increased income tax liability resulting from holiday gifts and celebrations. It doesn’t seem entirely in the spirit of the season to have to consider possible tax consequences when attending holiday celebrations and receiving gifts; however, our tax system extends its reach into most areas of the lives of Canadians, and the holidays are no exception. Fortunately, the possible negative tax consequences are confined to a minority of fact situations and relationships, usually involving employers and employees, and are entirely avoidable with a little advance planning.

During the month of December, it’s customary for employers to provide something “extra” for their employees, by way of a holiday gift, a year-end bonus or an employer-sponsored social event. And it’s certainly the case that employers who provide such extras don’t intend to create a tax liability for their employees. Unfortunately, it is the case that a failure to properly structure such gifts or other extras can result in unintended and unwelcome tax consequences to those employees.

It’s even possible to feel some sympathy toward the tax authorities who have to deal with the tax treatment of employer-provided holiday gifts, as they are in something of a no-win situation. On an individual or even a company level, the amounts involved are usually nominal, and the range of situations which must be addressed by the related tax rules are virtually limitless. As a result, the cost of drafting and administering those rules can outweigh the revenue generated by the enforcement of such rules, to say nothing of the potential ill will generated by imposing tax on holiday gifts and celebrations. Notwithstanding, the potential exists for employers to provide what would otherwise be taxable remuneration in the guise of holiday gifts, and it’s the responsibility of the Canada Revenue Agency (CRA) to ensure that such situations are caught by the tax net.

There is, as a consequence, a detailed set of rules which outline the tax consequences of gifts and awards provided by the employer, and even in relation to annual holiday celebrations sponsored (and paid for) by an employer.

The starting point for the rules is that any gift (cash or non-cash) received by an employee from his or her employer at any time of the year is considered to constitute a taxable benefit, to be included in the employee’s income for that year. However, the CRA makes an administrative concession in this area, allowing an unlimited number of non-cash gifts (within a specified dollar limit) to be received tax-free by an employee over the course of the tax year.

In sum, the CRA’s administrative policy is simply that non-cash gifts to an arm’s length employee, regardless of the number of such gifts, will not be taxable if the total fair market value of all such gifts to that employee is $500 or less annually. Where the total fair market value of such gifts is more than $500, the amount over that $500 limit will be a taxable benefit to the employee, and must be included on the employee’s T4 for the year, and on which income tax must be paid.

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 the amount or frequency of the gifts. For this purpose, the CRA considers anything which could easily be converted to cash as a “near-cash” gift. Even a gift or award which cannot be converted to cash will be considered to be a near-cash gift if it, in the words of the CRA, “functions in the same way as cash”. So, a gift card or gift certificate which can be used by the employee to purchase his or her choice of merchandise or services would be considered a near-cash gift, and taxable as such.

This time of year, the tax treatment of the annual employee holiday party also must be considered. The CRA’s current policy in this area is that no taxable benefit will 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 $100 or less. The $100 cost is meant to cover the party itself, not including any ancillary costs, such as transportation home, taxi fare, or overnight accommodation. Where the total cost of the event itself exceeds the $100 per person threshold, the CRA will assess the employee as having received a taxable benefit equal to the entire per person cost (i.e., not just that portion of the cost that exceeds $100.)

It may seem nearly impossible to plan for employee holiday gifts and other benefits without running afoul of one or more of the detailed rules surrounding the taxation of such gifts and benefits. However, designing a tax-effective plan is possible, if a few basic principles are kept in mind.

• If the employer is planning to hold a holiday party, dinner or other social event, it is imperative that such event be open to all employees. Restricting attendance in any way will mean that the CRA’s concession with respect to the non-taxable status of such events does not apply. The cost of the event must, as well, be kept below $150 per person. While the CRA’s policy doesn’t specify, it seems reasonable to calculate that amount based on the number of employees invited to attend the event, rather than on the actual attendance, which can’t be accurately predicted in advance.
• Any cash or near-cash gifts should be avoided, as they will, no matter how large or small the amount, create a taxable benefit to the employee. Although gift certificates or pre-paid credit cards are a popular choice, they aren’t a tax-effective one, as they will invariably be considered by the CRA to create a taxable benefit to the employee.
• Where non-cash holiday gifts are provided to employees, gifts with a value of up to $500 can be received free of tax. The employer must be mindful of the fact that the $500 limit is a per-year and not a per-occasion limit. Where the employee receives non-cash gifts with a total value of more than $500 in any one taxation year, the portion over $500 is a taxable benefit to the employee.

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

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

Corporate:

Issue #46 Corporate

Personal:

Issue #46 Personal

The start of the calendar year also marks the beginning of the tax year for individuals and consequently most tax changes are scheduled to take effect as of January 1 of each year. However, the federal and provincial budgets are brought down in the late winter and spring, and those budgets can include announcements of tax changes which will take effect later in the year (often, but not exclusively, on July 1, being halfway through the tax year). As well, where a change in tax rates, credits, or income brackets announced in the budgets is made effective as from the beginning of the tax and calendar year, individuals will first notice that change when their payroll withholdings are adjusted starting in July.

The start of the calendar year also marks the beginning of the tax year for individuals and consequently most tax changes are scheduled to take effect as of January 1 of each year. However, the federal and provincial budgets are brought down in the late winter and spring, and those budgets can include announcements of tax changes which will take effect later in the year (often, but not exclusively, on July 1, being halfway through the tax year). As well, where a change in tax rates, credits, or income brackets announced in the budgets is made effective as from the beginning of the tax and calendar year, individuals will first notice that change when their payroll withholdings are adjusted starting in July.

What follows is a listing of significant federal and provincial tax changes which are currently scheduled to come into effect during the remainder of the 2018 tax year.

Federal

Indexation of Child Tax Benefits

In its 2016 Budget, the federal government replaced the existing Canada Child Tax Benefit with the Canada Child Benefit program. The new program provides lower and middle income Canadian families with a non-taxable monthly benefit, with the amount of that benefit dependent on family size and income.

When the CCB program was introduced, one of the terms of that program was that  benefits payable would be indexed, starting in July  2020. However, in the fall of 2017, the federal government announced that such indexation would be accelerated, such that all CCB benefits will be indexed to changes in the Consumer Price Index, starting in  July 2018.

Indexation of benefits will take place automatically starting in July, and there is no requirement or need for CCB recipients to take any action.

British Columbia

Interactive Digital Media Tax Credit extended

The B.C. Interactive Digital Media tax credit, which was scheduled to expire at the end of August, 2018, has been extended for a period of five years and so it will be available until August 31, 2023.

Manitoba

Carbon tax introduced effective September 1

Manitoba’s carbon tax will impose a $25 tax per tonne of greenhouse gas emissions beginning on September 1, 2018 and will apply to gas, liquid, and solid fuel products intended for combustion in the province.

Corporate tax credit programs extended

The Manitoba Book Publishing Tax Credit and the Cultural Industries Printing Tax Credit were both scheduled to expire on December 31, 2018. Both have been extended for one year, to December 31, 2019.

Ontario

Changes to personal income tax rates and brackets

Previously, Ontario was one of only two Canadian provinces to levy a personal income tax surtax. However, it was announced in this year’s Budget that the surtax would be eliminated, and that tax brackets and rates would be adjusted to compensate for that change.

Although the change in the rate structure is effective as of the beginning of 2018, changes to income tax source deductions which reflect that change will be implemented starting in July.

Prince Edward Island

Change to basic personal amount

In this year’s Budget, the province announced that the basic personal tax credit amount, which is claimable by all PEI residents, would be increased in two steps. The first stage of that change will see the amount for 2018 increase from $8,160 to $8,660.

Although the change is effective as of the beginning of the calendar year, it will first be reflected in payroll deductions made for provincial income tax starting in July 2018.

For several generations, reaching one’s 65^th birthday marked the transition from working life to full retirement, and, usually, receipt of a monthly employee pension, along with government-sponsored retirement benefits. That is no longer the reality. The age at which Canadians retire can now span a decade or more, and retirement is more likely to be a gradual transition than a single event.

For several generations, reaching one’s 65^th birthday marked the transition from working life to full retirement, and, usually, receipt of a monthly employee pension, along with government-sponsored retirement benefits. That is no longer the reality. The age at which Canadians retire can now span a decade or more, and retirement is more likely to be a gradual transition than a single event.

Today, Canadians can choose to begin receiving benefits from government-sponsored retirement benefit programs between the ages of 60 and 70. Canada Pension Plan retirement benefits can begin as early as age 60, and taxpayers can start collecting Old Age Security benefits at age 65. Receipt of income from either of those government- sponsored retirement income plans can also be deferred until the age of 70, but no later.

As well, the employer-sponsored pension plan is no longer available as a source of guaranteed retirement income for the majority of retirees. Instead, such retirees have (hopefully) saved for retirement through a registered retirement savings plan (RRSP). Holders of such plans are required to collapse their RRSP by the end of the year in which they turn 71 years of age. And, the decision made on what to do with the funds within that RRSP will affect the individual’s income for the remainder of his or her life.

While the actual decision is a complex one, the options available to a taxpayer who must collapse an RRSP are actually quite few in number — three, to be precise. They are as follows:

• collapse the RRSP and include all of the proceeds in income for that year;
• collapse the RRSP and transfer all proceeds to a registered retirement income fund (RRIF); and/or
• collapse the RRSP and purchase an annuity with the proceeds.

It’s not hard to see that the first option doesn’t have much to recommend it. Collapsing an RRSP without transferring the balance to a RRIF or purchasing an annuity means that every dollar in the RRSP will be treated as taxable income for that year. In most cases, that will mean losing nearly half of the RRSP proceeds to income tax. And, while any amount left can then be invested, tax will be payable on all investment income earned.

As a practical matter, then, the choices come down to two: a RRIF or an annuity. And, as is the case with most tax and financial planning decisions, the best choice will be driven by one’s personal financial and family circumstances, risk tolerance, cost of living, and the availability of other sources of income to meet that cost of living.

The annuity route has the great advantages of simplicity and reliability. In exchange for a lump sum amount paid by the taxpayer, the annuity issuer agrees to pay the taxpayer a specific sum of money, usually once a month, for the remainder of the annuitant’s life. Annuities can also provide a guarantee period, in which the annuity payments continue for a specified time period (5 years, 10 years), even if the taxpayer dies during that time. The amount of monthly income which can be received depends, of course, on the amount paid in, but also on the gender and, especially, the age of the taxpayer. Currently, annuity rates for each $100,000 paid to the annuity issuer by a taxpayer who is 70 years of age range from $579 to $643 per month for a male taxpayer and from $515 to $572 for a female taxpayer (the actual rate is set by the company which issues the annuity). Those rates do not include any guarantee period.

For taxpayers whose primary objective is to obtain a guaranteed life-long income stream without the responsibility of making any investment decisions or the need to take any investment risk, an annuity can be an attractive option. There are however, some potential downsides to be considered. First, an annuity can never be reversed. Once the taxpayer has signed the annuity contract and transferred the funds, he or she is locked into that annuity arrangement for the remainder of his or her life, regardless of any change in circumstances that might mean an annuity is no longer suitable. Second, unless the annuity contract includes a guarantee period, there is no way of knowing how many payments the taxpayer will receive. If he or she dies within a short period of time after the annuity is put in place, there is no refund of amounts invested — once the initial transfer is made at the time the annuity is purchased, all funds transferred belong to the annuity company. Third, most annuity payment schedules do not keep up with inflation — while it is possible to obtain an annuity in which payments are indexed, having that feature will mean a substantially lower monthly payout amount. Finally, where the amount paid to obtain the annuity represents most or all of the taxpayer’s assets, entering into the annuity arrangement means that the taxpayer will not be leaving an estate for his or heirs.

The second option open to taxpayers is to collapse the RRSP and transfer the entire balance to a registered retirement income fund, or RRIF. A RRIF operates in much the same way as an RRSP, with two major differences. First, it’s not possible to contribute funds to a RRIF. Second, the taxpayer is required to withdraw an amount from his or her RRIF (and to pay tax on that amount) each year. That minimum withdrawal amount is a percentage of the outstanding balance, with that percentage figure determined by the taxpayer’s age at the beginning of the year. While the taxpayer can always withdraw more in a year, or make lump sum withdrawals (and pay tax on those withdrawals), he or she cannot withdraw less than the minimum required withdrawal for his or her age group.

Where a taxpayer holds savings in a RRIF, he or she can invest those funds in the same investment vehicles as were used while the funds were held in an RRSP and those funds can continue to grow on a tax-sheltered basis, in the same way as funds in an RRSP. While the ability to continue holding investments that can grow on a tax-sheltered basis provides the taxpayer with a lot of flexibility, and the potential for growth in value, those benefits have a price in the form of investment risk. As is the case with all investments, the investments held within a RRIF can increase in value — or decrease — and the taxpayer carries the entire investment risk. When things go the way every investor wants them to, investment income is earned while the taxpayer’s underlying capital is maintained but, of course, that result is never guaranteed.

On the death of a RRIF annuitant, any funds remaining in the RRIF can pass to the annuitant’s spouse on a tax-free basis. Where there is no spouse, the remaining funds in the RRIF will be income to the RRIF annuitant in the year of death, and any balance after tax is paid will become part of his or her estate, available for distribution to beneficiaries.

While the above discussion of RRIFs versus annuities focuses on the benefits and downsides of each, it is not necessary (and in most cases not advisable) to limit the options to an either/or choice. It is possible to achieve, to a degree, the seemingly irreconcilable goals of lifetime income security and the potential for capital (and estate) growth. Combining the two alternatives — annuity and RRIF — either now or in the future, can go a long way toward satisfying both objectives.  

For everyone, in retirement or not, all spending is a combination of non-discretionary and discretionary items. The first category is made up mostly of expenditures for income tax, housing (whether rent or the cost of maintaining a house), food, insurance costs, and (especially for older Canadians) the cost of out-of-pocket medical expenses. The second category of discretionary expenses includes entertainment, travel, and the cost of any hobbies or interests pursued. A strategy which utilizes a portion of RRSP savings to create a secure lifelong income stream to cover non-discretionary costs can remove the worry of outliving one’s money, while the balance of savings can be invested through a RRIF, for growth and to provide the income for non-discretionary spending.

Such a secure income stream can, of course, be created by purchasing an annuity. As well, although most taxpayers don’t necessarily think of them in that way, the Canada Pension Plan and Old Age Security have many of the attributes of an annuity, with the added benefit that both are indexed to inflation. By age 71, all taxpayers who are eligible for CPP and OAS will have begun receiving those monthly benefits. Consequently, in making the RRIF/annuity decision at that age, taxpayers should include in their calculations the extent to which CPP and OAS benefits will pay for their non-discretionary living costs.

As of June 2018, the maximum OAS benefit for most Canadians (specifically, those who have lived in Canada for 40 years after the age of 18) is about $590 per month. The amount of CPP benefits receivable by the taxpayer will vary, depending on his or her work history, but the maximum current benefit which can be received at age 65 is about $1,050. (Where receipt of either benefit is deferred past the age of 65, those amounts go up.) As a result, a single taxpayer who receives the maximum CPP and OAS benefits at age 65 will have just under $20,000 in annual income (just over $1,600 per month). And, for a married couple, of course, the combined total annual income received from CPP and OAS can approach $40,000 annually, or $3,200 per month. While $20,000 a year isn’t enough to provide a comfortable retirement, for those who go into retirement in good financial shape — meaning, generally, without any debt — it can go a long way toward meeting non-discretionary living costs. In other words, most Canadians who are facing the annuity versus RRIF decision already have a source of income which is effectively guaranteed for their lifetime and which is indexed to inflation. Taxpayers who are considering the purchase of an annuity to create the income stream required to cover non-discretionary expenses should first determine how much of those expenses can already be met by the combination of their (and their spouse’s) CPP and OAS benefits. The amount of any annuity purchase can then be set to cover off any shortfall.

While the options available to a taxpayer at age 71 with respect to the structuring of future retirement income are relatively straightforward, the number of factors to be considered in assessing those factors and making that decision are not. All of that makes for a situation in which consulting with an independent financial adviser on the right mix of choices and investments isn’t just a good idea, it’s a necessary one.

It’s something of an article of faith among Canadians that, as temperatures rise in the spring, gas prices rise along with them. Whether that’s the case every year or not, this year statistics certainly support that conclusion. In mid-May, Statistics Canada released its monthly Consumer Price Index, which showed that gasoline prices were up by 14.2%. As of the third week of May, the per-litre cost of gas across the country ranged from 125.2 cents per litre (in Manitoba) to 148.5 cents per litre (in British Columbia). On May 23, the average price across Canada was 135.2 cents per litre, an increase of more than 25 cents per litre from last year’s average on that date.

It’s something of an article of faith among Canadians that, as temperatures rise in the spring, gas prices rise along with them. Whether that’s the case every year or not, this year statistics certainly support that conclusion. In mid-May, Statistics Canada released its monthly Consumer Price Index, which showed that gasoline prices were up by 14.2%. As of the third week of May, the per-litre cost of gas across the country ranged from 125.2 cents per litre (in Manitoba) to 148.5 cents per litre (in British Columbia). On May 23, the average price across Canada was 135.2 cents per litre, an increase of more than 25 cents per litre from last year’s average on that date.

While in some cases Canadians can reduce the impact of gas price increases by reducing the amount of driving they do, the practical reality is that, for most of us, driving a car every day can’t be avoided, and gasoline is consequently a non-discretionary expense. That’s especially true for those who must drive to work each day and, increasingly, that drive is becoming a longer and longer one, as individuals and families move further and further from their workplace location in search of affordable housing. Finally, for many Canadians a car is their only transportation option, when they live in places that are not served by public transit, or the available transit isn’t a practical daily option.

Unfortunately, for most taxpayers, there’s no relief provided by our tax system to help alleviate the cost of driving as the cost of driving to work and back home, as well as the cost of driving that isn’t work-related, is considered a personal expense for which no deduction or credit can be claimed, no matter how great the cost. That said, there are some (fairly narrow) circumstances in which employees can claim a deduction for the cost of work-related travel.

Those circumstances exist where an employee is required, as part of his or her terms of employment, to use a personal vehicle for work-related travel. For instance, an employee might, as part of his or her job, be required to see clients at their own premises for the purpose of meetings or other work-related activities and be expected to use his or her own vehicle to get to such meetings. 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 motor vehicle expenses and that no tax-free allowance was provided by the employer for such expenses, the employee can deduct actual expenses incurred for such work-related travel. Those deductible expenses include the following:

• fuel (gasoline, propane, oil);
• maintenance and repairs;
• insurance;
• license and registration fees;
• interest paid on a loan to purchase the vehicle;
• eligible leasing costs for the vehicle; and
• depreciation, in the form of capital cost allowance.

In almost all instances, a taxpayer will use the same vehicle for both personal and work-related driving. Where that’s the case, only the portion of expenses incurred for work-related driving can be deducted and the employee must keep a record of both the total kilometres driven and the kilometres driven for work-related purposes. And, of course, receipts must be kept to document all expenses incurred and claimed.

While no limits (other than the general limit of reasonableness) are placed on the amount of costs which can be deducted in the first four categories listed above, there are limits and restrictions with respect to allowable deductions for interest, eligible leasing costs, and depreciation claims. The rules governing those claims and the tax treatment of employee automobile allowances and available deductions for employment-related automobile use generally are outlined on the Canada Revenue Agency website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/slry/mtrvhcl-eng.html.

In larger urban centres, and in the nearby cities and suburbs which are served by inter-city transit, many commuters utilize that transit as a way of avoiding both the stress of a drive to work in rush hour traffic and the associated costs. And, for a time, such commuters were able to claim a tax credit to help mitigate the cost of using such transit. Unfortunately, the federal public transit tax credit was eliminated in 2017, such that it could be claimed only for costs incurred for transit use before July 1, 2017. It was not possible to carry the credit over and claim it in a subsequent taxation year, so the last claim anyone could make for the public transit tax credit was on the 2017 annual tax return.

No amount of tax relief is going to make driving, especially for a lengthy 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.