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When the Canada Pension Plan was put in place on January 1,1966, it was a relatively simple retirement savings model. Working Canadians started making contributions to the CPP when they turned 18 years of age and continued making those contributions throughout their working life. Those who had contributed could start receiving CPP on retirement, usually at the age of 65. Once an individual was receiving retirement benefits, he or she was not required (or allowed) to make further contributions to the CPP. The CPP retirement benefit for which that individual was eligible therefore could not increase (except for inflationary increases) after that point.

When the Canada Pension Plan was put in place on January 1,1966, it was a relatively simple retirement savings model. Working Canadians started making contributions to the CPP when they turned 18 years of age and continued making those contributions throughout their working life. Those who had contributed could start receiving CPP on retirement, usually at the age of 65. Once an individual was receiving retirement benefits, he or she was not required (or allowed) to make further contributions to the CPP. The CPP retirement benefit for which that individual was eligible therefore could not increase (except for inflationary increases) after that point.

Retirement looks a lot different now than it did it 1966, and the Canada Pension Plan has evolved and changed to recognize those differences. What that means for the average Canadian is much more flexibility in determining how to structure both their contributions to the CPP and their receipt of CPP retirement benefits.

While greater flexibility in retirement income planning is always a good thing, having that flexibility comes at a price of greater complexity when it comes to determining which choices are the right ones in one’s particular circumstances. And one of the decisions which must be made, when it comes to CPP, is whether and when it might made sense to stop making CPP contributions.

The need to make that choice arises where a decision is made to continue to stay in the work force, whether on a part-time or full-time basis, even after beginning to receive CPP retirement benefits. While it has always been possible to work while receiving such benefits, it was, until 2012, not possible to make CPP contributions related to that work. A change made in that year, however, allowed individuals who continued to work while receiving the CPP retirement benefit to also continue to contribute to the Canada Pension Plan and, as a result, increase the amount of CPP retirement benefit they received each month. That benefit is the CPP Post-Retirement Benefit or PRB.

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

• Individuals who are 60 to 65 years of age and continue to work are required to continue making CPP contributions.
• Individuals who are 65 to 70 years of age and continue to work can choose not to make CPP contributions. To stop contributing, such an individual must fill out Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election, which can be found at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/cpt30.html.
• A copy of that form must be given to the individual’s employer and the original sent to the Canada Revenue Agency (CRA). An individual who has more than one employer must make the same choice (to continue to contribute or to cease contributions) for all employers and must provide a copy of Form CPT30 to each.
• A decision to stop contributing can be changed, and contributions resumed. To make that change, the individual must complete section D of Form CPT30, give one copy of the form to his or her employer, and send the original to the CRA
• Individuals who are over the age of 70 and are still working cannot contribute to the CPP.

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

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

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

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

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

Just over a decade ago, it was possible to buy a home in Canada with no down payment — financing 100% of the purchase price — and extending the repayment period for that borrowing over a 40-year period.

Just over a decade ago, it was possible to buy a home in Canada with no down payment — financing 100% of the purchase price — and extending the repayment period for that borrowing over a 40-year period.

A lot has changed since then and one of those changes has been a steady tightening of the rules governing mortgage financing in Canada, especially for mortgages guaranteed by the Canada Mortgage and Housing Corporation (CMHC). The latest such set of changes will take effect on July 1, 2020.

To understand those changes, a bit of background is required. When Canadians buy a home, they must provide a percentage of the purchase price as a down payment. Where the purchase price of the home is $500,000 or less, the minimum down payment is 5%. However, where the down payment made on such a home is less than 20% of the purchase price, there is a requirement to obtain mortgage default insurance. While there are private companies which provide such insurance, in many cases the insurer is CMHC.

Although the borrower/home purchaser pays the premiums on the mortgage default insurance issued by CMHC, it’s actually the lender (usually a bank or other financial institution) who is protected. Essentially, CMHC guarantees that if the homebuyer defaults on his or her mortgage obligations, the Agency will step in to limit any losses incurred by the lender.

Like all insurance providers, CMHC imposes requirements on those who apply for mortgage default insurance and it is those requirements which will change on July 1 (effective for any new applications made on or after that date).

As of July 1, the following new requirements will apply.

New limits on the amount of non-mortgage debt which prospective homeowners can carry

Most Canadians carry debt in some form besides their mortgage debt (car loans, credit cards, lines of credit, etc.), and that non-mortgage debt is factored into the determination of the credit-worthiness of the mortgage insurance applicant. There are two measurements used — Gross Debt Service (GDS) and Total Debt Service (TDS). The first (the GDS) is a measure of housing costs, and includes mortgage payments, property taxes, heating and, where applicable, condominium fees. The second measurement (the TDS) includes housing costs plus all other debt-related payments. In each case, the total amount of debt-servicing obligations is measured as a percentage of gross household income.

The changes which take effect on July 1 will place more stringent limits on the amount of both housing and non-housing debt costs which applicants can have. Prior to July 1, CMHC requirements were that GDS and TDS for an applicant should be no more than 39% and 44% respectively — that is, GDS of no more than 39% of gross household income and TDS of no more than 44% of gross household income. For new applications made after June 30, those numbers will tighten, and applicants will be required to have GDS and TDS ratios of no more than 35% and 42%, respectively. In other words, housing costs which make up the GDS must be no more than 35% of gross household income and total debt servicing obligations which make up the TDS must be no more than 42% of gross household income.

A requirement that at least one of the prospective homeowners have a credit score of at least 680

Most Canadians are familiar with credit scores, which are widely used in assessing the credit-worthiness of an individual. Briefly, a credit score is a measure of both the amount of debt currently held by an individual and the individual’s past history in managing credit. A credit score can range from 300 to 900.

Previously, CMHC had required that applicants for mortgage default insurance have a credit score of at least 600. After June 30, that requirement will increase, as at least one member of the household will need to have a credit score of at least 680 to meet the CMHC’s requirements.

Changes to the rules around borrowing to obtain a down payment

While mortgage insurance applicants have been required to have a down payment of at least 5% (where the purchase price of the home is $500,000 or less) there have, to date, been no restrictions on how that down payment can be obtained. On July 1, for those seeking CMHC mortgage insurance, that will change.

Optimally, a down payment comes from the savings of the prospective home purchasers. However, it is not uncommon for that down payment to be obtained from other sources, including private borrowings (often from parents) or borrowings from other sources like lines of credit or even credit cards. Regardless of the source of the funds, CMHC was prepared to treat the borrowed down payment funds as an asset of the prospective home buyers. However, that policy will change and the new rule will be that where the down payment arises from borrowed funds (whatever their source) CMHC will no longer consider those funds to be an asset of the applicant — or, as set out in the CMHC announcement of the changes “[n]on-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.”

While Canadians had an extended time this year to file their income tax returns for the 2019 tax year, the extended filing deadlines (June 1 for the majority of Canadians, and June 15 for self-employed individuals and their spouses) have passed and returns should be filed.

While Canadians had an extended time this year to file their income tax returns for the 2019 tax year, the extended filing deadlines (June 1 for the majority of Canadians, and June 15 for self-employed individuals and their spouses) have passed and returns should be filed.

In most cases, the taxpayer files a return and then waits for a Notice of Assessment from the Canada Revenue Agency (CRA) letting them know whether the tax authorities are in agreement with the taxpayer’s information on his or her tax situation. And, in most of those cases the CRA will issue a Notice of Assessment indicating that the return is “assessed as filed”, meaning that the CRA does agree with the information filed and tax result obtained by the taxpayer. While that’s the outcome everyone is hoping for, it’s a result which can go “off the rails” in any number of ways.

By the third week of June 2020, over 27 million individual income tax returns for the 2019 tax year had been filed with the CRA. And, inevitably, some of those returns contain errors or omissions that must be corrected — in 2019 the CRA received about 2 million requests for adjustment(s) to an already filed return.

Just over 90% of the returns which have already been filed for the 2019 tax year were filed through online filing methods, meaning that they were prepared using tax return preparation software. The use of such software significantly reduces the chance of making a clerical or arithmetic error, like entering an amount on the wrong line or adding a column of figures incorrectly. However, no matter how good the software, it can work only with the information that is provided to it. Sometimes taxpayers prepare and file a return, only to later receive a tax information slip that should have been included on that return. It’s also easy to make an inputting error when transposing figures from an information slip (a T4 from one’s employer, for instance) into the software, such that $49,505 in income becomes $45,905. Whatever the cause, where the figures input are incorrect or information is missing, those errors or omissions will be reflected in the final (incorrect) result produced by the software.

When the error or omission is discovered in a return which has already been filed, the question which immediately arises is how to make things right. The first impulse of many taxpayers is to file another return, in which the complete and correct information is provided, but that’s not the right answer. There are, however, several ways in which a mistake or omission on an already filed tax return can be corrected, including online options.

A few years ago the CRA introduced a new service called ReFILE, which allows taxpayers who filed their returns online (whether through NETFILE or EFILE) to advise the CRA electronically of an error or omission made in an already-filed return. The ReFILE service, which can be found at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/refile-online-t1-adjustments-efile-service-providers.html, allows taxpayers to make such corrections online, on the CRA website.

Essentially, a taxpayer is able to file a correction to an already-filed return, using the same tax return preparation software that was used to prepare the return. Whether the return was filed using NETFILE or EFILE, adjustments for returns can be filed used ReFILE for any of the 2016, 2017, 2018, or 2019 taxation years.

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

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

Taxpayers who wish to make changes or corrections which cannot be made through ReFILE or My Account (or those who just don’t wish to use the online option) can paper-file an adjustment to their return. The paper form to be used is Form T1-ADJ E, which can be found on the CRA website at https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1-adj/t1-adj-08-18e.pdf. Those who are unable to print the form off the website can order a copy to be sent to them by mail by calling the CRA’s individual income tax enquiries line at 1-800-959-8281. There is no limit to the number of changes or corrections which can be made using Form T1-ADJ E.

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

Hard copy of a T1-ADJ E (or a letter) is filed by sending the completed document to the appropriate Tax Center, which is the one with which the tax return was originally filed. A listing of Tax Centres, and their addresses, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/corporate/contact-information/tax-centres.html. A taxpayer who isn’t sure any more which Tax Centre his or her return was filed with can go to https://www.canada.ca/en/revenue-agency/corporate/contact-information/tax-services-offices-tax-centres.html on the CRA website and select his or her location from the listing found there. The address for the correct Tax Centre will then be provided. Similar information is also provided on page 2 of the T1ADJ form.

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

Once the Notice of Assessment is received, and an adjustment request is made, it will take at least a few weeks, usually longer, before the CRA responds. The Agency’s usual estimate is that such requests which are submitted online have a turnaround time of about two weeks, while those which come in by mail take about eight weeks. However, the CRA has indicated, in a notice posted on its website, that it is experiencing “significant” delays this year in the processing of both paper-filed T1 tax returns and paper-filed T1 ADJ E requests. The notice did not indicate how long this delay might last.

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

While the standard (and accurate) advice is that tax and financial planning are best approached as activities to be carried on throughout the year, it’s also the case that a mid-year tax and financial checkup makes good sense, and that’s especially the case this year.

While the standard (and accurate) advice is that tax and financial planning are best approached as activities to be carried on throughout the year, it’s also the case that a mid-year tax and financial checkup makes good sense, and that’s especially the case this year.

For most Canadians, 2020 has been a year of financial uncertainty and, in many cases, significant financial stress. Millions of Canadians became suddenly unemployed when pandemic-related states of emergency were declared in mid-March and businesses closed. Many others lost income when schools closed and they needed to stay home to care for their children. By June 21, 2020, the federal government had processed over 18 million applications for the Canada Emergency Response Benefit (CERB), the $500 per week benefit which was paid (and in some cases continues to be paid) to those who suffered a pandemic-related loss of income. Of those who received CERB benefits, some may be returning to work in the near future, while others may have no idea when (or whether) their former positions will become available to them again.

All of this makes for significant financial uncertainly. And while much of the near financial future for most Canadians may still be uncertain, it’s nonetheless both possible and advisable to take stock of one’s financial and tax position to date, especially in relation to the financial and tax changes resulting from the pandemic. The first step this year should be an assessment of how the financial consequences of the pandemic have affected one’s tax position for 2020.

Tax considerations for CERB recipients

Most of the millions of Canadians who received CERB benefits are likely unaware that such benefits represent taxable income for 2020 and that no income tax was deducted from benefits paid. That tax will have to be paid when the return for 2020 is filed in the spring of 2021.

The standard CERB benefit is $500 per week and such benefits may be received for a maximum of 24 weeks. Canadians who collect CERB for the maximum allowable 24-week period will therefore be paid $12,000. For those with incomes up to about $50,000 the federal tax rate levied on CERB amounts received will be 15%. Where a taxpayer’s income for this year is between $50,000 and $100,000 the applicable federal tax rate is 20.5%. Each province will also impose tax on CERB amounts, with the rate varying by province. A listing of federal, provincial, and territorial tax rates for 2020 can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html#provincial.

While no one likes to find out that a tax amount is owed when the annual tax return is filed, that will be especially unwelcome news to those who are already dealing with income loss from unemployment. The best course of action to avoid that scenario is to start now to make provision for the taxes which will be owed on CERB amounts received.

The simplest way to do so, of course, is to begin to set aside funds which will be needed to pay the tax bill next spring. However, as with most savings goals, it’s easier to make such a commitment than to fulfill it.

Taxpayers who have returned to work and are once again receiving a paycheque have another option — they can have the amount of tax withheld from that paycheque increased to cover the tax which will be payable on CERB amounts received. Usually, the employee can simply request that his or her employer increase the amount of tax withheld from each paycheque and remitted to the federal government on the employee’s behalf.

In some cases, taxpayers won’t be able to fulfill their tax obligations from current income sources and will have to dip into savings. Generally speaking, where there is a choice, it is best to use funds that are held in non-registered savings plans, like a savings account. Where such funds aren’t available, a withdrawal from a Tax-Free Savings Account is the next best option. Amounts withdrawn from a TFSA will not be included in taxable income and, where the withdrawal is made before the end of 2020, the amount withdrawn can be replaced, where finances allow, in 2021. Taking funds out of a registered retirement savings plan should be a last resort, as any amount withdrawn will be added to income and will itself increase the tax bill for the year and, unlike a TFSA, amounts withdrawn from an RRSP cannot be replaced. Borrowing to pay taxes owed is an option, but taxpayers should be aware that interest paid on money borrowed for that purpose is not deductible.

Considerations for retirees

For those who are already retired, or those close to retirement, watching the value of their retirement savings take a sharp drop during the month of March was more than a little stressful. Recognizing the disproportionate effect that the market downturn had on such taxpayers, the federal government made some changes, for this year only, to help cushion the blow.

The changes announced affect those taxpayers over the age of 71 who have a Registered Retirement Income Fund (RRIF). The usual rules governing such RRIFs require that holders withdraw a specified percentage of the balance in the RRIF each year, with the required percentage based on the taxpayer’s age.

The difficulty which arose was that the rules require that the RRIF balance used to calculate the required withdrawal is the balance as of the beginning of the calendar year. For nearly every RRIF holder in Canada, that balance was much higher at the beginning of 2020 than it is now, so that the required withdrawal would represent a disproportionate share of RRIF. As well, where it was necessary to sell investments in order to make the withdrawal, those investments would have to be sold at a diminished, post-downturn value.

In recognition of all of these circumstances, the federal government announced that the required RRIF withdrawal would be reduced, for 2020 only, to 75% of the usual amount. For example, where a taxpayer would normally be required to withdraw $2,000 from his or her RRIF in 2020, the required withdrawal will now be $1,500.

There is no particular rule for when a taxpayer must make the required annual withdrawal from his or her RRIF. While some RRIF holders make that withdrawal at the beginning of the calendar year, others opt for monthly withdrawals throughout the year and still others wait until the last minute and make the required withdrawal at year end.

The rule change will have different impacts depending on how a particular taxpayer’s withdrawal is structured for this year. Perhaps most important, for those who made their full required 2020 withdrawal before the rule change was announced in March, it’s not possible to recontribute the “excess” 25%. Those who withdraw in equal monthly amounts throughout the year and who wish to reduce their 2020 withdrawal by the allowable 25% can take steps to adjust that monthly withdrawal to reflect the reduced amount and, of course, those who withdraw at the end of year can similarly change their planned withdrawal.

It’s important to remember two points: first, there is no requirement that RRIF holders alter their withdrawal amounts for 2020. The option to reduce the usual required withdrawal by 25% is just that — an option. Those whose cash flow requirements can accommodate a reduced withdrawal can take advantage of the available option while others who may need the funds to meet living expenses can make the full withdrawal as originally planned. Second, in all cases any withdrawals made from a RRIF are taxable income to the RRIF holder. Examples of how the change will apply can be found on the federal government website at https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/registered-retirement-savings-plans-registered-retirement-income-funds-rrsps-rrifs/economic-statement-measure-annuitants-rrsp-rrif.html.

Finally, there is another bit of good tax news for retirees this year. In July, all Canadians who currently receive Old Age Security benefits will receive an additional one-time payment of $300 to help offset additional costs they may have incurred as the result of the pandemic. Those OAS recipients who also qualify for the Guaranteed Income Supplement will receive a one-time payment of $500. While OAS amounts received are usually included in taxable income, this one-time supplement of $300 or $500 will be tax-free.

Although we’re just halfway through the calendar year, 2020 has already been a very stressful year for many Canadians from a financial perspective. Planning now to take account of changed financial and tax circumstances arising from the current situation will help ensure that those stresses don’t included an unexpected tax headache.

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.