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

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

Corporate:

Issue #19 Corporate

Personal:

Issue #19 Personal

A number of circumstances and developments have come together over the past few years to make working from a home office—once almost unheard of—a common fact of business life. First and foremost, of course, is the technology (particularly communications technology) which enables the home-based worker to have access to all of the information and services available to his or her in-office counterpart. Given the right technology, it’s nearly as easy for an employee working from home to send and receive e-mails through the employer’s communications network and access the people, information, and services needed to do his or her job in the same way as it would be if he or she was at the office.

A number of circumstances and developments have come together over the past few years to make working from a home office—once almost unheard of—a common fact of business life. First and foremost, of course, is the technology (particularly communications technology) which enables the home-based worker to have access to all of the information and services available to his or her in-office counterpart. Given the right technology, it’s nearly as easy for an employee working from home to send and receive e-mails through the employer’s communications network and access the people, information, and services needed to do his or her job in the same way as it would be if he or she was at the office.

While technology has made it possible to work from home on a regular basis, other developments have made the daily commute to the office, and the maintenance of large offices in major urban centres less and less appealing. The ever increasing price of gasoline has made the cost of that daily commute prohibitively expensive in some cases. As well, there is an increased awareness of the environmental cost of having most major highways clogged each morning and evening with hundreds of thousands of cars sitting in traffic gridlock. And finally, the cost of renting office space in most major Canadian cities means that most employers are at least willing to consider the cost savings which might be realized from work-at-home or telecommuting arrangements for their employees.

Along with the greater availability of work-at-home arrangements for employees, there has been a significant increase in the number of self-employed Canadians. And while not all of the self-employed work from home, it’s fairly common for those venturing into the world of self-employment for the first time to save costs by operating their business, at least initially, out of a home office.

One of the things which makes a telecommuting or work-at-home arrangement attractive, aside from avoiding the daily commute, is the tax deductions which can be claimed. While those benefits, especially for employees, are not necessarily as generous as is popularly believed, it is the case that working from home can make costs which would be incurred in any event deductible for tax purposes.

As is usually the case in tax matters, the rules differ for employed taxpayers and for the self-employed, as the latter enjoy a greater degree of latitude in the deductions which may be claimed. That said, both the employed and the self-employed must meet the same basic two-part test in order to be eligible to deduct home office expenses, and that test is as follows:

• the home office must be the place at which the taxpayer principally (defined by the Canada Revenue Agency as more than 50% of the time) performs the duties of employment or must be the taxpayer’s principal place of business: or

• the home office must be both used exclusively for the purpose of earning income from employment or from the business and must be used on a regular and continuing basis for meeting customers or clients of the employer or the business.

A self-employed taxpayer who meets these criteria is entitled to claim (on Form T2124(E) (Statement of Business Activities)) expenses such as property taxes, rent, or mortgage interest (but not mortgage principal amounts), insurance, utilities costs etc. However, such expenses are not deductible in their entirety: rather, the taxpayer must apportion the expenses based on the percentage of the total space which is used as a home office. For example, a self-employed taxpayer whose home office takes up 15% of available floor space and who incurs $2000 each year in qualifying expenses would be entitled to deduct $300 ($2,000 times 15%) in home office expenses for that year. There is one further caveat, in that the amount of home office expenses claimed in a year cannot be greater than the amount of income from the business. It’s not, in other words, possible to run a business which produces $5,000 in income for the year and to then claim $10,000 in home office expenses relating to that business. However, where home office expenses exceed business income in any given year, the excess expenses can be carried over and claimed in a subsequent year in which there is sufficient business income to offset those expenses.

Employed taxpayers who meet the two-part test set out above must meet a further condition before being eligible to claim home office expenses, as follows:

• the employer must provide the employee with a Form T2200, which indicates that the employee is required by his or her contract of employment to provide and pay for the expenses related to the home office;
• the employee must not have been reimbursed by the employer for such expenses; and
• the expenses must have been used directly in the employee’s work at home.

Once the T2200 has been issued, and the other conditions are met, an employee who is a tenant can claim a proportionate part of his or her rent. An employee who owns his or her own home can claim a proportionate percentage of utilities and maintenance costs. An employee is not, however, entitled to claim any portion of mortgage interest, property taxes, or home insurance costs paid, and cannot claim capital cost allowance.

As is the case with self-employed taxpayers, an employee’s deduction for home office expenses cannot be greater than the income from employment income for the year to which the expenses relate. And, once again, carryover to a subsequent taxation year is allowed.

One of the tax benefits which is commonly supposed to exist for the home office workers is the right to claim depreciation (or capital cost allowance (CCA), in tax parlance) on one’s home for tax purposes. For employees, however, such a claim is simply not allowed. And, while the self-employed may be entitled to claim CCA on a home, making such a claim can create a short-term benefit with long-term costs. Making a CCA claim on one’s home is likely to erode the principal residence exemption from capital gains tax which is claimable when a home is sold, and that exemption is almost always more valuable, in monetary and tax terms, than any CCA claim which might have been made.

Being able to claim home office expenses doesn’t result in the huge tax benefits that some popular tax myths claim. However, it can and does permit qualifying taxpayers to claim a portion of home ownership (or rental) expenses which would have been incurred in any case while also avoiding the dreaded daily commute, making it a win-win scenario.

As if dealing with bills from the recent holiday season and trying to come up with the funds for an RRSP contribution weren’t enough, February is also the month in which millions of Canadian taxpayers receive an Instalment Reminder from the Canada Revenue Agency (CRA). For many of those taxpayers, who have received many such notices in the past, the reminder and the tax instalment process are familiar, although not necessarily welcome. For those who are receiving one for the first time, however, both the reminder itself and figuring out how to deal with it can be baffling.

As if dealing with bills from the recent holiday season and trying to come up with the funds for an RRSP contribution weren’t enough, February is also the month in which millions of Canadian taxpayers receive an Instalment Reminder from the Canada Revenue Agency (CRA). For many of those taxpayers, who have received many such notices in the past, the reminder and the tax instalment process are familiar, although not necessarily welcome. For those who are receiving one for the first time, however, both the reminder itself and figuring out how to deal with it can be baffling.

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

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

Canadian federal tax rules provide that a taxpayer may be required to pay income tax by instalments where the amount of tax owing on filing is more than $3,000 in the current year (2012) and either of the two previous years (2010 or 2011). Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income is at least $3,000 less than their total tax liability for the current and either of the two previous years. Such instalment payments of tax are due on March 15, June 15, September 15, and December 15 of each year.

An Instalment Reminder issued by the CRA in February 2012 will specify two amounts, one to be paid by March 15 and the other due by June 15. Those amounts represent the CRA’s best estimate, based on the taxpayer’s return filed for the 2010 taxation year, of the net tax will which be payable by the taxpayer for 2012. The taxpayer then has the following three options.

First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of March 15 and June 15. A taxpayer who does so can be certain that he or she will not face any interest or penalty charges, even if the amount paid turns out to be less than the taxes actually payable for the 2012 tax year. (If the instalments paid turn out to be more than the taxpayer’s net tax liability for 2012, he or she will of course receive a refund on filing.)

Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2011 tax year. Where a taxpayer’s income has not changed between 2011 and 2012 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2012 will be slightly less than it was in 2011, owing to the indexation of tax brackets and personal tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2012 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease from 2011 to 2012 and there will consequently be a reduction in tax payable, this option may be worth considering.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges where there is no tax payable when the return for the 2012 tax year is filed in the spring of 2013. However, should instalments paid be late or insufficient, the CRA can impose interest charges, at rates which are higher than current commercial rates. (The rate charged for the first quarter of 2012—until March 31, 2012—is 5%.) As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It’s also possible for the CRA to impose penalties, but this is done only where the amount of instalment interest charged for the year is more than $1,000.

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

It’s that time of year again, when advertisements about the wisdom of contributing to your registered retirement savings plan (RRSP) fills the airwaves and Web sites. And, since the introduction of tax-free savings accounts (TFSAs) in 2009, February is now also the month in which Canadians wrestle with the question of whether to put any available funds into an RRSP before the contribution deadline of February 29, 2012, or whether to deposit those funds instead in a TFSA.

It’s that time of year again, when advertisements about the wisdom of contributing to your registered retirement savings plan (RRSP) fills the airwaves and Web sites. And, since the introduction of tax-free savings accounts (TFSAs) in 2009, February is now also the month in which Canadians wrestle with the question of whether to put any available funds into an RRSP before the contribution deadline of February 29, 2012, or whether to deposit those funds instead in a TFSA.

It’s important to be clear, at the outset, that it’s not an either/or choice. Taxpayers can (and probably should) utilize both the RRSP and TFSA options in planning their financial affairs. Realistically, however, for most taxpayers the limitation is one of resources and cash flow, and it’s often not possible to fund contributions to both an RRSP and a TFSA in the same year, let alone in the same month. That said, what are the considerations which apply in determining which savings/investment vehicle is preferable for 2012?

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

Perhaps most important to taxpayers, contributions made to an RRSP are deductible from income, resulting in a lower tax bill for the year of contribution and, for many taxpayers, a tax refund. Contributions to a TFSA are, on the other hand, made with after-tax funds, meaning that tax will already have been paid on the income used to make that contribution. Many taxpayers, when presented with an option which will reduce current year taxes, find that the most attractive choice. However, over the long-term, the tax consequences of choosing an RRSP over a TFSA can erode that benefit. When funds contributed (along with investment income earned on those funds) are withdrawn from a TFSA or an RRSP, the tax consequences are very different. Funds withdrawn from an RRSP (or a registered retirement income fund (RRIF) into which the RRSP has been converted) are fully taxable, without exception, at whatever tax rate applies to the taxpayer at the time of withdrawal. TFSA funds (including accumulated investment income) are withdrawn from the plan free of tax, regardless of when the withdrawal is made or the purpose to which the funds are put. And for taxpayers who are receiving Old Age Security benefits (or any other means-tested benefits) from the federal government, it is important to note that RRSP or RRIF funds withdrawn will be included in income for the purpose of determining eligibility for such benefits, while TFSA funds will not. Finally, while RRSP contributions for 2011 must be made by February 29, 2012, there is no similar deadline for TFSA contributions—they can be made at any time during the calendar year. Finally, when funds are withdrawn from a TFSA, the plan holder can “top up” the TFSA in any subsequent year by the amount of that withdrawal. Funds withdrawn from an RRSP cannot be re-contributed, unless the withdrawal was made as part of government-sanctioned withdrawal plans, like the Home Buyers’ Plan or the Lifelong Learning Plan.

The minority of working taxpayers who are members of registered pension plans will likely find the TFSA option particularly attractive. The maximum amount which can be contributed to an RRSP for the 2011 tax year is calculated as 18% of earned income for 2010, to a maximum contribution of $22,450. However, that maximum contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under the pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, and a TFSA contribution the logical alternative.

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

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

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

Financial planners and tax advisers are accustomed to being asked by clients at this time of year whether it makes more sense to pay down the mortgage (or other debt) or to contribute to an RRSP. That question has become more complicated now that the TFSA option has been added to the mix. There is, however, a solution which allows you to do both. Assuming a marginal tax rate of 45%, an RRSP contribution of $10,000 will generate a tax refund of $4,500. Contribute that $10,000 (or as much as you can) to your RRSP and, when the resulting tax refund lands in your bank account, move it to a TFSA or use it to pay down the mortgage or other debt, or split it between the two.

The Canada Revenue Agency has dedicated sections of its Web site to addressing the need of taxpayers for information about TFSAs and RRSPs, and those sections can be found at http://www.cra-arc.gc.ca/tx/tfsa-celi/menu-eng.html and http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/menu-eng.html, respectively.

It’s almost impossible not to have heard that the amount of debt carried by Canadian households is at an all-time high—reaching, on average, just over 150% of household income. Carrying so much debt can be relatively painless when interest rates are at historic lows, but it’s clear that rates cannot and will not remain at such levels indefinitely.

It’s almost impossible not to have heard that the amount of debt carried by Canadian households is at an all-time high—reaching, on average, just over 150% of household income. Carrying so much debt can be relatively painless when interest rates are at historic lows, but it’s clear that rates cannot and will not remain at such levels indefinitely.

Whether it’s because of the warnings issued by financial professionals and government officials, or just the sight of ever-increasing balances on the monthly credit card or line of credit statements, it seems that Canadians are starting to recognize that their debt loads have to be reduced. And—right on cue—a number of debt reduction companies have begun advertising their services, promising to do just that.

Typically, debt reduction companies promise to work or negotiate with an individual’s creditors in order to have the amount of outstanding debt reduced—a service for which the debtor will of course pay a fee. The claims made by some such companies can seem like a lifeline to debt-burdened families. For those dealing with calls from irate creditors and struggling to make minimum monthly payments on outstanding debts, the prospect of having those debts reduced by up to 70% is very compelling. When a promise to restore a good credit rating by removing past credit mistakes from the debtor’s credit history is added to the sales pitch, it can seem almost too good to be true. And that, in fact, is the title of a recent consumer alert issued by the Financial Consumer Agency of Canada (FCAC): “Debt Reduction Companies: Beware of “Too Good to be True” Offers. That alert is available on the Agency’s Web site at http://www.fcac-acfc.gc.ca/eng/resources/consumerAlerts/alerts_posting-eng.asp?postingId=393.

The alert issued by the FCAC examines some of the claims made by many debt reduction companies, and compares these claims to the reality of the situation. The first unrealistic claim is often the one made about the percentage by which an individual’s debt can be reduced. The FCAC notes that no creditor is required to negotiate with or speak to a debt reduction company, even if the debtor has paid a fee to have such a company negotiate on its behalf. And, even if the creditor is willing to deal with the debt reduction company, it is in no way obliged to reduce debt by any amount. In other words, it’s perfectly possible for the debtor to pay a fee but get nothing for it.

Another claim sometimes made by debt reduction companies is that they will protect the debtor’s credit rating or even “clean up” that rating by having information on past defaults or late payments eliminated. The reality is that, unless the information contained in a person’s credit rating is demonstrably inaccurate, there is no way to have it removed from the credit report. Listings of past transactions, like late payments or defaults, do eventually disappear from a credit report, but that happens after a specific period of time has elapsed, not because the removal of such information is requested or demanded by a third party. The FCAC alert also reviews claims made that working with a debt reduction agency won’t have any negative effect on the individual’s credit rating or score. It warns that some such companies delay making payments to creditors for a few months in the hope of getting better results from negotiations to reduce the debt amount and that, where that happens, those late payments are likely to be reported to the credit reporting agencies, further damaging the individual’s credit rating. In some cases, debt reduction companies encourage debtors to stop all direct contact with creditors, or even to sign a power of attorney, giving the company authority to make agreements by which the debtor will be bound, even if he or she had no knowledge of them at the time.

Perhaps the most egregious claim made by debt reduction companies is the strong impression given that they are approved by the Canadian government or even that they are operating as part of a federal government program. Neither is true. Neither the federal nor the provincial or territorial governments operate debt reduction companies, and there are no government sponsored programs offering this type of debt reduction. While it is the case a debt reduction company will usually need to be registered and/or licensed by its provincial or territorial government in order to operate as a business, that is simply an administrative requirement which applies to all companies operating in a particular province or territory. Licensing or registration does not in any way mean that the provincial or federal government has approved of or endorsed the company or its way of doing business, and any claims to the contrary are simply false.

Sometimes, debtors avail themselves of the services of debt reduction companies because they are under the incorrect impression that there is no other choice open to them to deal with their debts. There are, in fact, several options. Where a debtor intends to and is able to discharge existing debts, he or she could obtain a debt consolidation loan from a financial institution. The rate of interest charged on such a loan will almost certainly be lower than that being levied on outstanding credit card or payday loan company debts, and the debtor will be able to make a single payment instead of juggling the demands of multiple creditors. Where it’s not possible to obtain such a loan, or the debtor doesn’t feel able to manage the debt repayment process alone, the best course of action is to obtain the services of a reputable credit counseling agency, which can set up a debt management program for the debtor. As part of that program, the agency will contact the individual’s creditors to arrange a manageable payment plan which might include a reduction in interest rates charged. Once a program is in place, the individual makes payments to the credit counseling agency which, in turn, forwards payments to the individual’s creditors as agreed. As well, credit counseling agencies work with clients to help with budgeting and financial management skills, with the goal of avoiding a recurrence of the individual’s financial problems. Reputable credit counseling agencies exist in both the private and the not-for-profit sectors, and information on the latter can be found on the Credit Counselling Canada Web site at http://www.creditcounsellingcanada.ca/Home.aspx.

In many ways, getting out of debt has a lot in common with that perennial New Year’s resolution of many Canadians—losing some weight and getting in shape. With both, it’s human nature to want to believe that there is an easy, painless way of accomplishing the goal without a need to change existing habits, and so it’s easy to fall for persuasive sales pitches that claim to have a quick fix for the problem. In both cases, however, the reality is the opposite—results can only be obtained through some effort, but where that effort is made and existing habits altered, successful long-term results are possible.

The federal Department of Finance recently released the September issue of The Fiscal Monitor, its summary of federal revenues and expenses throughout the fiscal year. The September publication outlines the state of federal government finances for the period April to September 2011, which is the first half of the 2011-12 fiscal year.

The federal Department of Finance recently released the September issue of The Fiscal Monitor, its summary of federal revenues and expenses throughout the fiscal year. The September publication outlines the state of federal government finances for the period April to September 2011, which is the first half of the 2011-12 fiscal year.

Overall, the figures show that, for the first six months of 2011-12, there was a budgetary deficit of $13.2 billion, as compared to a deficit of $17.4 billion at the half-way point of the previous (2010-11) fiscal year. Overall, federal government revenues for the period were up, on a year-over-year basis, by $4.3 billion, to $114.4 billion. The vast majority of that revenue increase was attributable to personal income tax revenues, which rose by $4.2 billion on a year-over-year basis. Revenue from corporate income tax and non-resident income tax were also up, but accounted for a much smaller part of the overall revenue gain. Revenue from excise taxes dropped, reflecting a decrease in goods and services tax revenue.

On the expenditure side, overall program expenses were at $111.1 billion, down by $0.4 billion. Most of that decrease came from a drop in transfer payments, which were down overall by $1.1 billion. That reduction was, however, offset by an increase of $0.7 billion in costs for other program expenses and costs for public debt charges, which increased by $0.5 billion.

More details of federal government finances can be found in the September issue of The Fiscal Monitor, which is available on the Department of Finance Web site at http://www.fin.gc.ca/n11/11-121-eng.asp. The next issue of the publication, which is scheduled to be released by the Department of Finance during the week ending December 30, will summarize revenue and expenditure figures for the April to October 2011 period.

For most Canadians, December means holiday celebrations and school vacations. In the tax world, however, December 31 marks the deadline by which most tax planning and saving strategies must be put in place in order to have an impact on one’s tax liability for the 2011 tax year. What follows is a list of tax “to-do’s” that must be accomplished by the end of the calendar year—and a couple more that can wait until sometime in the first quarter of 2012.

For most Canadians, December means holiday celebrations and school vacations. In the tax world, however, December 31 marks the deadline by which most tax planning and saving strategies must be put in place in order to have an impact on one’s tax liability for the 2011 tax year. What follows is a list of tax “to-do’s” that must be accomplished by the end of the calendar year—and a couple more that can wait until sometime in the first quarter of 2012.

Things to be dealt with by December 31, 2011

• Medical expense credit calculation

When preparing their tax returns, many taxpayers find the computation of medical expenses eligible for the medical expense tax credit somewhat confusing, and that confusion is understandable. First of all, in order to be claimed, medical expenses must total more than 3% of the taxpayer’s net income for the year, or a specified threshold amount ($2,052 for 2011), whichever is less. As a rule of thumb therefore, for 2011, taxpayers who have an income from all sources of less than $68,400 can claim all qualifying medical expenses in excess of 3% of their net income for the year. For example, a taxpayer earning $45,000 could claim qualifying medical expenses over $1,350 (3% of $45,000). Where the taxpayer’s income is over $68,400, only those medical expenses over the $2,052 threshold may be claimed for credit.

Adding to the confusion, it’s possible to claim medical expenses that were paid in 2010 on the 2011 return. The actual rule is that a taxpayer can claim medical expenses (in excess of the threshold percentage, as outlined above) incurred in any 12-month period ending during the taxation year, assuming, of course, that such expenses were not claimed on a previous tax return. Here, there is no easy rule of thumb, except perhaps to say that for tax purposes the best result is obtained where significant medical expenses can be grouped together and paid within a 12-month period, rather than spreading them out, in order to maximize the claim. So, as December 31 approaches, it’s a good idea to add up the medical expenses which have been incurred during 2011, as well as those paid during 2010 and not claimed on the 2010 return. Once those totals are known, it will be easier to determine whether to make a claim for 2011 or to wait and claim 2011 expenses on the 2012 return. And, if the decision is to make a claim for calendar year 2011, knowing what medical expenses were paid when will enable the taxpayer to determine the optimal 12-month period for the claim. Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2012. It may make sense to accelerate the payment of those expenses to December 2011, where that means that they can be included in 2011 totals and claimed on the 2011 return.

• Make charitable donations for 2011

The federal and all provincial governments provide a two-level tax credit for donations made to registered charities during the year. To earn a credit for the tax year, donations must be made by the end of the calendar year. There is, however, another reason to ensure donations are made by December 31. For federal 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.

As a result of the two-level credit structure, it makes sense to aggregate donations in a single calendar year where possible. A qualifying charitable donation of $400 made in December of 2011 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 2011 and January 2012, the total credit claimed is only $60. ($200 × 15% + $200 × 15%), and the 2012 donation can’t be claimed until the 2012 return is filed in April of 2013. 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% rather than the 15% level.

It’s also possible to carry forward for up to five years donations which were made in a particular tax year. So, if donations made in 2011 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 2006, 2007, 2008, 2009, or 2010 tax years can be carried forward and added to the total donations made in 2011, and then the aggregate amount claimed on the 2011 tax return.

Finally, when claiming charitable donations, it’s 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—Ontario, Prince Edward Island, and the Yukon—it makes sense for the higher income spouse to make the claim for the total of charitable contributions made by both spouses.

• Tax-free savings account withdrawals

Each Canadian aged 18 and over can contribute up to $5,000 per year to a Tax-Free Savings Account (TFSA). Although no deduction from income is permitted for TFSA contributions, no tax is paid on any income earned by contributed amounts. In addition, amounts not contributed in a particular taxation year are carried forward and added to the taxpayer’s contribution room for the next year. Finally, where amounts are withdrawn from a plan, the withdrawn amount is added to the taxpayer’s TFSA contribution limit for the following year.

As many taxpayers have learned at their own cost, the withdrawal/recontribution rules for TFSAs are perhaps more complex than they first appear. A number of taxpayers withdrew funds from a TFSA in 2009 or 2010 and then recontributed some or all of those funds before the end of the year. In doing so, some of those taxpayers became liable for a penalty tax on overcontributions for the year. However, the Canada Revenue Agency (CRA) determined that, as taxpayers (and, it seemed, some financial institutions) were not yet completely familiar with the rules governing TFSAs, penalty tax would not necessarily be assessed. However, this represented an administrative concession only, and not a change in the actual rules, and the CRA made it clear that the administrative concession was a temporary one. Taxpayers who go “offside” with respect to excess contributions in 2011 or future years should not necessarily expect to benefit from similar administrative concessions.

So, to recap the rules: a taxpayer who contributes $5,000 to a TFSA during 2011 but withdraws $2,000 of that contribution during the year will have a $7,000 TFSA contribution limit for 2012 (made up of the usual $5,000 limit for 2011 plus the $2,000 withdrawn the previous year). Consequently, taxpayers who currently have funds in a TFSA but are planning to make a withdrawal in early 2012—perhaps to pay for a winter vacation—should think about making that withdrawal before the end of 2011, so as to preserve the option of replacing the funds in the plan during 2012. If the same taxpayer waits until January of 2012 to make the withdrawal, he or she won’t be eligible to replace the funds until 2013—and doing so during 2012 could result in the assessment of a penalty tax.

• Spousal RRSP contributions

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan 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 from a spousal RRSP 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 the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2011, the spouse can withdraw that amount as of January 1, 2014 and have it taxed in his or her hands. If the contribution isn’t made until January or February of 2012, the contributor can still claim a deduction for it on the 2011 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 2015. It’s an especially important consideration for couples approaching retirement who may plan on withdrawing funds in the relatively near future.

• Take a look at tax instalment amounts

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

The final quarterly instalment will be due on December 15, 2011. By that date, almost everyone will have a reasonably good idea of what his or her income will be for 2011 and so will be in a position to estimate what the tax bill will be for the year. While the tax return forms to be used for the 2011 tax year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2010 form. Increases in tax credit amounts and tax brackets from 2010 to 2011 will mean that using the 2010 form will result, if anything, in a slight overestimate of tax liability for 2011.

Once one’s tax bill for 2011 has been estimated, it’s possible to compare that figure with the total of tax instalments already made in 2011 and determine whether the tax instalment to be paid on December 15 can be adjusted downward.

• Make any needed taxpayer relief applications for 2001

In some situations, the Minister of National Revenue has the discretion to cancel or waive penalties and interest which have been levied on a Canadian taxpayer, or to accept elections made for tax purposes after the usual deadline for such elections. The Minister is also empowered to provide tax refunds after the usual three-year deadline for the issuance of such refunds has past, although this relief is available only for individual and testamentary trusts (trusts arising from a person’s last will and testament).

Where a taxpayer is seeking any of these kinds of discretionary relief from the Minister, the application for that relief must be made within 10 years after the end of the year to which the relief pertains. Or, more technically, relief is available, at the discretion of the Minister for any of the ten calendar years immediately preceding the year in which the request is made. Either way, December 31, 2011 marks the deadline by which taxpayer relief requests pertaining to the 2001 tax year must be made.

There is a new wrinkle in 2011 to the usual rules respecting taxpayer relief requests, resulting from a court decision made earlier this year. Simply put, as a result of that court decision, the Minister’s discretion to cancel or waive interest charges is available for any interest that accrues during the 10 years preceding the year in which the taxpayer relief request is made, regardless of the year in which the debt on which interest has been charged arose. Take, for example, a taxpayer who has a tax debt which arose as a result of an underpayment of tax for the 1999 tax year, and on which interest has continued to accrue since then. Under the usual rules, no relief would be available for either the debt or interest and penalty charges incurred on that debt, as it arose in 1999, more than 10 calendar years ago. However, as a result of this court decision, the taxpayer is now entitled to apply for relief from the interest charges which were levied in the 2001 through 2011 calendar years. No relief can be obtained for the tax debt itself, or any interest or penalty charges which were levied during 1999 or 2000, as each of those arose outside the 10 year limitation period.

Things that can wait (for a bit)

• RRSP contribution deadline

Most taxpayers are aware that the deadline for making an RRSP contribution to be claimed on the 2011 tax return falls at the end of February 2012. More precisely, the deadline is 60 days after the end of the calendar year. In most years, that means the deadline falls on March 1: however, 2012 happens to be a leap year, and so the deadline will be February 29, 2012.

Where the deadline happens to fall on a Sunday, the federal government has typically made an administrative concession by allowing contributions to be made on the next business day. However, in 2012, February 29^th is a Wednesday, so taxpayers should not anticipate receiving any kind of extension with respect to the deadline. To be eligible for deduction on the 2011 return, RRSP contributions will have to be made by midnight Wednesday, February 29, 2012.

Things that can wait until April 2011

• Pension income splitting

It’s unusual to be able to wait until tax filing time to make a decision on tax-planning strategies for the previous year. However, when it comes to pension income splitting, there’s no need to address the issue any sooner.

Splitting pension income can provide significant tax benefits to couples who are able to utilize that strategy. However, the “splitting” of such income is entirely notional—that is, there is no requirement that pension payments actually be made to the spouse who is designated to receive them for tax purposes. Rather, when filing the income tax return in the spring of 2012, a calculation can be made of how pension income can be split between two spouses to create the best tax result, and to file both returns on that basis.

Very few Canadians escape paying personal legal fees at one time or another and, depending on the situation, those fees can add up quickly. Unfortunately, while legal fees incurred in some circumstances may be deducted from income on the annual tax return, there sometimes doesn’t seem to be any rhyme or reason to what’s deductible and what’s not.

Very few Canadians escape paying personal legal fees at one time or another and, depending on the situation, those fees can add up quickly. Unfortunately, while legal fees incurred in some circumstances may be deducted from income on the annual tax return, there sometimes doesn’t seem to be any rhyme or reason to what’s deductible and what’s not.

First, the bad news: legal fees incurred in situations experienced by millions of Canadians (e.g., legal costs paid in connection with the purchase or sale of a house, or legal costs paid to obtain a divorce or to establish custody or visitation rights) are not deductible. Generally, personal (as distinct from business-related) legal fees become deductible for most taxpayers only when they are seeking to recover amounts which they believe are owed to them, particularly where those amounts involve employment or employment-related income or, in some cases, family support obligations.

While the term “legal fees” would seem to be self-explanatory, such amounts don’t always have to be paid to a lawyer to qualify as “legal fees” for the purpose of the deduction. For example, an employee whose employment is terminated could deduct amounts paid to a consultant in labour relations to negotiate a severance package on his or her behalf.

Perhaps the most common situation in which legal fees paid become deductible is that of an employee seeking to collect (or to establish a right to) salary or wages. This might involve an employee who, having been “downsized” out of a job, brings legal action alleging that the amount of notice (or compensation provided in lieu of notice) was insufficient. In that situation, legal fees incurred to establish a right to amounts allegedly owed by the employer are deductible by the former employee, even if the action brought is ultimately unsuccessful. As well, proposed changes to the law will allow a deduction for legal fees paid to collect or to establish a right to collect any amount that the taxpayer would be required to include on his or her tax return as employment income, even if that amount is not paid directly by the employer. However, in all cases any claim must be reduced by amounts awarded to the taxpayer, or by any reimbursement of legal fees received.

The rules governing the deductibility of legal fees paid in connection with the enforcement of support obligations are, unfortunately, more complex, much like the tax rules governing the taxation of support obligations generally. Nonetheless, there are some general guidelines which can be laid out.

First of all, as noted above, legal costs incurred to obtain a separation agreement or a divorce, or to establish custody or visitation rights are not deductible under any circumstances. And, at one time, the Canada Revenue Agency (CRA) took the position that such costs incurred in connection with spousal or child support obligations were similarly not deductible. In recent years, however, the Agency has relaxed its position somewhat, and legal fees paid for the following purposes will be deductible by the person receiving the payments:

• collecting late support payments;
• establishing the amount of support payments from a current or former spouse or common-law partner;
• establishing the amount of support payments from the natural parent of that person’s child (who is not a current or former spouse or common-law partner) where the support is payable under the terms of a Court order;
• trying to get an increase in support payments; or
• trying to make child support non-taxable.

 On the other side of the support equation, it is clear both from CRA policy and a number of court decisions (and re-affirmed in a CRA technical interpretation issued in April 2011) that legal costs incurred to defend against claims for support or increases in support are not deductible.

The CRA’s position on the deductibility of legal costs incurred in relation to family support matters has evolved over the years in a somewhat piecemeal fashion, and the result has been some degree of confusion over the time periods for which certain changes are effective. Anyone seeking a deduction for legal fees incurred in connection with a family support matter should obtain advice from a tax professional familiar with the facts of their particular situation.

Finally, there is one other situation in which taxpayers may deduct legal fees incurred and that is in relation to a dispute with the CRA. Specifically, fees (including accounting fees) paid for advice given or assistance rendered in relation to a tax assessment or reassessment or the filing of a Notice of Objection or a court appeal are deductible for tax purposes.

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

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

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

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

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

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

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

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