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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

Getting a post-secondary education – or professional training – isn’t inexpensive. Tuition costs can range from as little as $5,000 per year for undergraduate studies to as much as $40,000 in tuition for a year of professional education. And those costs don’t factor in necessary expenditures on textbooks and other ancillary costs, to say nothing of general living expenses, like rent, transportation and food.

Getting a post-secondary education – or professional training – isn’t inexpensive. Tuition costs can range from as little as $5,000 per year for undergraduate studies to as much as $40,000 in tuition for a year of professional education. And those costs don’t factor in necessary expenditures on textbooks and other ancillary costs, to say nothing of general living expenses, like rent, transportation and food.

What that means, in most cases, is that Canadians who want to pursue post-secondary education must go into debt to do so. Financing through a bank loan or line of credit is possible, but most students who need financial assistance receive that assistance through a federal government program – the Canada Student Loan (CSL) program – as well as loan or grant programs provided by the particular province or territory in which the student resides.

Using a government-sponsored loan program to finance education has a number of advantages. Under the CSL program, any loans provided do not accrue interest while the recipient student is still in school and no repayment of the loan is required during that time. However, interest starts accruing once the student has graduated and, six months after graduation, those who received loans under the CSL program are required to make arrangements for repayment. Consequently, CSL loan recipients who graduated in the spring of 2018 must now consider what arrangements they wish to make for repayment of loan amounts received.

The onus is on the loan recipient to contact the CSL center to make required arrangements for repayment, and failing to do so will not delay repayment. In such cases, the federal government, as the loan issuer, has the right to automatically withdraw loan repayments from the same bank account where the loans were originally deposited.

Loan recipients can choose between a fixed interest rate on their loan (meaning that the interest rate stays the same until the loan is fully repaid) or a variable/floating rate of interest, which will change with changes in the prime rate.

Current rules provide the following rates for Canada Student Loans issued on or after August 1, 1995:

• the fixed interest rate is prime plus 5%;
• the floating interest rate is prime plus 2.5%.

The choice of whether to select a fixed or floating interest rate is, obviously, an individual one, which must take into account the size of the loan, the time period over which the borrower expects to make full repayment and, of course, one’s views on whether interest rates will be rising or falling over that expected repayment period.

Whatever the interest rate chosen or levied, borrowers who pay that interest can claim a federal and provincial/territorial tax credit to help offset those costs. The student loan interest tax credit is a non-refundable credit, meaning that it applies to reduce any federal tax payable, but cannot create or increase a refund. That federal tax reduction is equal to 15% of the interest amount claimed (provincial and territorial amounts will differ by jurisdiction). Interest amounts eligible for the credit are those paid in the current tax year or any of the previous 5 tax years, without limit. And, finally, the student loan interest tax credit can be claimed only by the former student who received the government student loan.

These criteria require former students who are eligible for the credit to consider the following factors in deciding whether to claim the credit, and in what amount.

• Individuals who do not have tax payable for the year will not benefit from claiming the student loan interest tax credit, as there is no tax which the credit can reduce.
• Individuals who have other available tax credits which must be claimed in the year the related expense is incurred should claim those credits first, as the student loan tax credit can be carried forward and claimed in any of the five years after the interest has been paid.
• Where the individual has remaining tax payable in the current year after all other available tax credits have been claimed, the student loan interest tax credit should be claimed only to the extent necessary to reduce tax payable to zero. Any additional claim should be carried forward to a future year or years where it is needed to reduce tax payable.

There is a very important caveat. Once a student has graduated (especially from a professional training program like law or medicine), financial institutions will frequently offer to loan that student sufficient funds to allow the consolidation of all outstanding debts which were incurred to finance his or her education. Often the interest rate to be provided is a preferential one, and can even be lower than the rate which the student borrower would pay under the CSL program.

That preferential interest rate, however, has a “cost” of which most graduates are unaware. The student loan interest tax credit is available only for interest paid on government sponsored student loans. Borrowers cannot claim interest paid on any other kind of loan, even where that loan was used for financing post-secondary education. As well, no credit can be claimed for interest paid on an otherwise qualifying student loan that has been combined with any other kind of loan. If the borrower has obtained a loan from a bank or other financial institution, or has consolidated such a loan with government student loans which would otherwise qualify for the credit, none of the interest paid on that loan or consolidated loan will qualify for the student loan interest tax credit.

Consequently, borrowers who are considering a loan offer from a financial institution must include in their calculations not only the difference in interest rates, but whether any lower interest rate offered by the financial institution will compensate for the loss of any claim for the student loan interest tax credit.

When things work out after graduation in the way everyone hopes they will, the former student will have secured employment at an income sufficient to make repayment of student borrowings possible. Where that’s not the case, and the borrower cannot make repayment as required because of financial hardship, it’s possible to reduce the required monthly repayment through the Repayment Assistance Program. Details of that Program, and much more information on the Canada Student Loan Program generally can be found on the federal government website at https://www.canada.ca/en/services/jobs/education/student-financial-aid/student-loan.html.

When the Canada Pension Plan was launched in the mid-1960s, both the working lives and the retirements of Canadians looked a lot different than they do in 2018. Fifty years ago, most Canadians were able to work at a single full-time job, often held that job for most or all of their working lives and, in many cases, benefitted from an employer sponsored defined benefit pension plan which guaranteed a certain level of income in retirement.

When the Canada Pension Plan was launched in the mid-1960s, both the working lives and the retirements of Canadians looked a lot different than they do in 2018. Fifty years ago, most Canadians were able to work at a single full-time job, often held that job for most or all of their working lives and, in many cases, benefitted from an employer sponsored defined benefit pension plan which guaranteed a certain level of income in retirement.

None of those circumstances accurately describe the current reality for Canadians, either those who are approaching retirement or the younger generation seeking to find their place in the workforce. Defined benefit pension plans, at least in the private sector, simply aren’t part of workplace reality for most Canadian workers. In some cases, corporate bankruptcies have left those who did have such a pension with a reduced pension, or no pension at all. And, while some of those who are nearing retirement may have worked for a single employer for their entire working lives, there are many Canadians for whom corporate downsizing or outsourcing has meant the loss of a long-term position. And, when that happens, replacing that lost income has often meant working on contract or in short-term positions, usually for less compensation.

All of these factors have affected the ability of Canadians to accumulate private savings for retirement through registered pension plans (RPPs) and registered retirement savings plans (RRSPs) and, as a consequence, has increased the degree to which they must rely, in retirement, on government sponsored retirement income programs like the Canada Pension Plan. A few years ago the federal government took a look at the existing structure of the CPP and how well it fit with the current and future needs of retiring Canadians. The result of that review was a decision to make significant changes to the CPP, and the implementation of those changes will begin on January 1, 2019.

Although most Canadians will receive CPP retirement benefits, many are unfamiliar with how the CPP system operates. The CPP is a contributory plan, in which employees and employers each make contributions throughout the working life of the employee, starting at age 18. The amount of contributions made is calculated as 4.95% of income, but there is a maximum annual contribution amount. Effectively, the maximum allowable contribution for a year is currently reached at about $55,000 in income (known as Yearly Maximum Pensionable Earnings, or YMPE). Even where an individual’s income exceeds the YMPE, it’s not possible to make additional CPP contributions for the year. As currently structured, the CPP retirement benefit replaces about 25% of income, based on the current YMPE of $55,000. Finally, the CPP must, by law, be fully funded, meaning that any benefits paid out of the CPP must come from contributions made and income earned from the investment of those contributions.

The changes to be made to the CPP will be implemented over a five-year period, from 2019 to 2025. At the end of that implementation period, the maximum CPP benefit available to retired Canadians will have increased by about 50%. (Currently, the maximum monthly benefit is about $1,135, although the average CPP retirement benefit received is closer to $673.) As a result, by 2025, the CPP retirement benefit will replace about 33% of pre-retirement income, based on the YMPE. In addition, the YMPE will be increased. All of these increases must, of course, be funded, and that funding will come through an increase in the amount of CPP contributions required to be made by employees, employers and the self-employed. Those contribution amount increases will start in January 2019.

Each of the changes outlined above essentially maintain the current structure of the CPP and simply provide for higher contribution amounts resulting in greater CPP benefits. The second change, however, which starts in 2024, effectively provides for a separate, additional required contribution for Canadians who earn more than the YMPE. That separate contribution rate, which is expected to be 4% for both employees and employers, will be calculated as a percentage of income between the YMPE to the upper income limit for the year. That upper income limit will be implemented over a 2-year period and is expected to reach $82,700 in 2025. Individuals who are required to make the additional contribution will be entitled to claim that contribution as a deduction from income for tax purposes.

The first change which working Canadians will notice will be an increase in CPP contribution rates, as of January 1, 2019. That change will be minimal: while CPP contribution rates for 2019 have not yet been announced, the estimate provided when the CPP changes were announced indicated that such changes would mean an increase in contributions of about $6.00 a month in 2019. That increase will accelerate in subsequent years, such that the increase is about $43 per month by 2025.

All working Canadians between the ages of 18 and 65 must contribute to the CPP, and those Canadians, especially younger Canadians, will be most impacted by the upcoming changes. Canadians who remain in the work force past the age of 65 (even if they are already receiving CPP retirement benefits) have the option of continuing to contribute to the CPP up until the age of 70, and receiving increased CPP benefits as a result. After age 70 no one, even if they remain in the work force, can contribute to the CPP.

Canadians also have a choice of when to begin receiving CPP retirement benefits. Such benefits can begin at the age of 60 or can be deferred to as late as age 70. With each year that the receipt of benefits is deferred, the amount of monthly benefit increases.

The decision of when to begin receiving CPP retirement benefits and when to cease making CPP contributions is one which involves the assessment of many individual factors, including living costs in retirement, the availability of other sources of income in retirement, one’s health and employment circumstances and the cost of contributing to the CPP relative to the benefits to be received.

Starting next year, the planned changes to the CPP will be another factor to be included in that calculation.

Most Canadians deal with our tax system only once a year, when preparing the annual tax return. And, while that return – the T1 Individual Income Tax Return – may be only four pages long, the information on those four pages is supported by 13 supplementary federal schedules, dealing with everything from the calculation of the tax-free gain on the sale of a principal residence to the determination of required Canada Pension Plan contributions by self-employed taxpayers.

Most Canadians deal with our tax system only once a year, when preparing the annual tax return. And, while that return – the T1 Individual Income Tax Return – may be only four pages long, the information on those four pages is supported by 13 supplementary federal schedules, dealing with everything from the calculation of the tax-free gain on the sale of a principal residence to the determination of required Canada Pension Plan contributions by self-employed taxpayers.

All of this detail makes it easy for the majority of individuals to overlook valuable deduction and credit claims which may be available to them. And, while the Canada Revenue Agency (CRA) will correct minor arithmetical errors made on the return, it does not (and cannot) assess the taxpayer to include claims for deductions or credits which could have been made but were not.

One such often overlooked claim is the one which can be made for payments made during the taxation year for annual union, professional, or similar dues. It’s a particularly useful claim since the expenditure in question is one which the taxpayer is obliged to make in any event and, where the requisite criteria are satisfied, the amount of such payment is fully deductible from income, without limit. Put another way, the income which was earned and used to pay annual union or professional dues is, where the related deduction is claimed, income on which no tax is paid.

The deduction claimable for union and professional dues is particularly easy to overlook because of where it appears on the annual return. Although there are forms used by self-employed taxpayers to claim business-related costs, as well as forms used by employees to claim allowable employment expenses, the deduction for union or professional dues doesn’t appear on either of those forms. Rather, it shows up as a single line (Line 212) on page 3 of the T1 annual return.

The general rule for claiming such a deduction is described in the annual income tax return guide as follows:

Line 212 - Claim the total of the following amounts related to your employment that you paid (or that were paid for you and reported as income) in the year:

• annual dues for membership in a trade union or an association of public servants;
• professional board dues required under provincial or territorial law;
• professional or malpractice liability insurance premiums or professional membership dues required to keep a professional status recognized by law; and
• parity or advisory committee (or similar body) dues required under provincial or territorial law.

There are, of course, requirements which must be satisfied in or for such payments to qualify for a deduction. The most important such restriction is that amounts paid must be those which are necessary in order for the taxpayer to obtain or maintain his or her professional standing. Every profession and trade has licensing and similar requirements which mandate that an individual maintain membership in a professional or similar association in order to practice his or her profession or trade. The costs of maintaining required membership in those organizations is deductible. Most professions and trades also have one or more voluntary associations which individuals may join by choice. However, the cost of maintaining membership in those voluntary associations, even if related to one’s trade or profession, is not deductible. So, for example, if membership in a given association does not affect professional status (e.g., the Canadian Bar Association for lawyers), dues or fees paid to it are not deductible. If, on the other hand, membership is necessary to maintain professional status (e.g., the Law Society of the province in which the individual lives and practices law), required dues to it are deductible.

While all such associations levy fees as a requirement of continuing membership and the right to practice the profession, invoices received for annual membership fees can cover a number of different charges and levies, and not all of those costs will be deductible. CRA’s policy is that annual membership dues do not include initiation fees, licences, special assessments, or charges for anything other than the organization’s ordinary operating costs. An individual cannot, for instance, claim charges for pension plans as membership dues, even if receipts received show them as dues.

Where a claim for a deduction for professional membership or union dues is made, some other considerations arise. Generally, while it’s not necessary that having a particular professional designation be a requirement of the employee’s position in order for that employee to claim a deduction for related professional dues, the CRA does require that there be some connection between the employment and the professional association in question.

Take, for example, a chemical engineer who is employed by a company to sell chemical products or who is the president of a company that processes chemicals. There is sufficient connection between that person’s qualification as a chemical engineer and his or her employment duties that a deduction would be claimable for the cost of professional dues paid. On the other hand, a lawyer who is working full-time as the CEO of a furniture manufacturing and sales business does not satisfy the requirement and, accordingly, would not be entitled to deduct dues paid to maintain his or her professional status as a lawyer.

It’s not uncommon that an employer is willing to cover the cost of an employee’s professional dues as part of that employee’s benefit package. Where that’s the case, and the employer’s payment of those dues does not appear on the employee’s T4 as a taxable benefit, no deduction for those costs can be claimed by the employee. Where, however, there is a taxable benefit which accrues to the employee (and that benefit is documented on a T4A and must be reported as part of his or her employment income), the employee can claim an offsetting deduction for eligible dues or fees paid, on Line 212 of the return.

General information on the deduction of professional membership fees or union dues is available in the 2017 General Income Tax and Benefit Guide. The same information can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/212/menu-eng.html.

Anyone who has ever tried to reduce their overall personal or household debt knows that doing so, no matter how disciplined one’s approach, can seem like a one step forward, two steps back proposition. It sometimes seems that, just as measurable progress is achieved in one area (an extra payment is made on the mortgage), unexpected costs in another area (a significant car repair bill) push up the level of debt elsewhere (e.g., credit card debt).

Anyone who has ever tried to reduce their overall personal or household debt knows that doing so, no matter how disciplined one’s approach, can seem like a one step forward, two steps back proposition. It sometimes seems that, just as measurable progress is achieved in one area (an extra payment is made on the mortgage), unexpected costs in another area (a significant car repair bill) push up the level of debt elsewhere (e.g., credit card debt).

That experience is being replicated on a macro level, in the figures for household debt relative to disposable income ratios of Canadian households, as reported by Statistics Canada. Earlier this year, media reports on those statistics were able to include such phrases as “household debt ratio sees biggest drop on record” and “Canada’s household debt burden falls to two-year low”. Those phrases did accurately reflect the statistical information released by Statistics Canada in June of this year. More recently, however, the September StatsCan release led to headlines like “Canadian household debt climbs in second quarter” and “Canada’s household debt back to $1.69 for every dollar of disposable income”.

While it seems that the progress made in reducing household debt in the first quarter of 2018 (as reported in June 2018) has been undone by the latest statistics, there is a small amount of positive news — while the ratio of $1.69 of household debt per dollar of disposable income is clearly very high, it has been higher. In the third quarter of 2017, that ratio hit  $1.73.

While the statistics identify the overall quantum of household debt, the composition of that debt and the demographic characteristics of who carries that debt are probably more important, from the point of view of both individuals and the overall economy.

First, the vast majority of debt held by Canadians and Canadian households is mortgage debt – money borrowed to purchase a home. Specifically, of the $2 trillion owed by Canadians, almost 75% is in the form of mortgage debt. Consequently, no matter how much the debt, that debt is secured by an underlying asset – the property – which can, in the worst-case scenario, be sold to satisfy or retire the mortgage debt.

However, absent that worst-case scenario, the day-to-day concern is the ability to keep up with mortgage payments. As pointed out by the Governor of the Bank of Canada in a presentation made earlier this year, “what matters most is the burden of servicing debt relative to income”. Or, in other words, the percentage of household income which is needed to make the required payments of interest and principal. In that respect, the debt service ratio of Canadians has stayed within the 5 to 7% range for about the last quarter century. Canadians have, in effect, been able to carry higher levels of debt relative to income without increasing their debt service costs, because of the lower interest rates which were in place for most of the past decade.

While that is clearly good news, it is very possible that the average debt service ratio will climb in the near future, as the result of several factors. First, most of the debt held by Canadians is in the form of mortgage debt, which is long-term debt. In most cases, a mortgage is the biggest debt Canadian families ever take on, and most mortgages are paid off over at least a 25-year time span. Consequently, the management of mortgage debt in all interest rate environments is a long-term task – absent the sale of the underlying property, paying off mortgage in the short term isn’t a likely scenario. Second, the Bank of Canada has now increased interest rates five times since July 2017 (two of those increases happening in the past four months). The Bank Rate is now more than double what is was in May 2017, and each increase in that rate has been reflected in higher borrowing costs, including higher mortgage interest rates. It’s likely, however, that most mortgage holders have not yet felt the impact of those increased rates. Most mortgages are fixed-term mortgages (meaning that the rate of interest stays the same throughout the mortgage term, regardless of any increase or decrease in interest rates which take place during that time period). And the majority of the fixed-term mortgages taken out have a five-year term. Consequently, homeowners who took out a five-year fixed term mortgage prior to July 2017 have not felt the effects of the five recent interest rate hikes. However, when their current mortgage comes up for renewal, the rate of interest which they will be paying will certainly be higher than their current rate and, consequently, the cost of servicing that debt will take a bigger chunk of their household income. The concern is that that such increases in those debt servicing costs may be not be manageable and, in the worst-case scenario, could lead to an increase in mortgage default rates.  

Finally, it is important to note that all these figures represent an average of all Canadian households, and to remember that that average is made up of both households that have zero debt and those that are seriously over-leveraged. According to Bank of Canada figures, about 8% of indebted households owe 350% or more of their gross income, representing a bit more than 20% of total household debt. In other words, the degree of financial risk facing Canadian households is very much an individual calculation. Figures announcing the average rate of household debt to income ratios or debt servicing ratios, or the announcement of another increase in interest rates by the Bank of Canada shouldn’t be cause for either individual relief or despair. Rather, they should prompt a review of one’s own person debt and financial circumstances to determine whether those circumstances, and particularly the extent to which they will be impacted by future interest rate increases, is cause for concern. If so, it’s time to take steps to mitigate that future risk, before a debt problem becomes a debt crisis.

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.