ZEBROSKI AND ASSOCIATES

Tax Alerts

New Quarterly Newsletters (Q2 2021)

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

Tax assistance for post-secondary education costs (July 2021)

There’s a lot that is still unknown about the upcoming 2021-22 academic year for post-secondary students. It may be that such students will be back on campus, living in residence and once again attending classes in lecture halls. Less optimistically, they may (again!) be learning online and living off campus, or still at home with their parents. Most likely, they will be experiencing some combination of the two.

Whatever the physical reality will be for post-secondary students come September, there is a financial reality which has not and will not change. Regardless of how their learning is structured, there will be tuition costs to be paid. Fortunately there are also tax credits and benefits which can be claimed to offset such costs.

The tax credits and deductions which can be claimed by post-secondary students (or their spouses, parents or grandparents) in relation to the 2021-22 academic year are summarized below.

Tuition fees

The good news is that a tax credit continues to be available for the single largest cost associated with post-secondary education — the cost of tuition. Any student who incurs more than $100 in tuition costs at an eligible post-secondary institution (which would include most Canadian universities and colleges) can still claim a non-refundable federal tax credit of 15% of such tuition costs. Many of the provinces and territories (excepting Alberta, Ontario and Saskatchewan) also provide students with an equivalent provincial or territorial credit, with the rate of such credit differing by jurisdiction.

The charges imposed on post-secondary students under the heading of “tuition” include a myriad of costs which may differ, depending on the particular program or institution, and not all of those costs will qualify as “tuition” for purposes of the tuition tax credit. The following specific amounts do, however, constitute eligible tuition fees for purposes of that credit:

admission fees
charges for use of library or laboratory facilities
exemption fees
examination fees (including re-reading charges) that are integral to a program of study

application fees (but only if the student subsequently enrolls in the institution)
confirmation fees
charges for a certificate, diploma or degree
membership or seminar fees that are specifically related to an academic program and its administration
mandatory computer service fees and
academic fees.

The following charges do not, however, constitute tuition fees for purposes of the credit:

extracurricular student social activities
medical expenses
transportation and parking
board and lodging
goods of enduring value that are to be retained by students (such as a microscope, uniform, gown, or computer)
initiation fees or entrance fees to professional organizations including examination fees or other fees (such as evaluation fees) that are not integral to a program of study at an eligible educational institution
administrative penalties incurred when a student withdraws from a program or an institution
the cost of books (other than books, compact disks or similar material included in the cost of a correspondence course when the student is enrolled in such a course given by an eligible educational institution in Canada) and
courses taken for purposes of academic upgrading to allow entry into a university or college program. These courses would usually not qualify for the tuition tax credit as they are not considered to be at the post-secondary school level.

Certain ancillary fees and charges, such as health services fees and athletic fees, may also be eligible tuition fees. However, such fees and charges are limited to $250 unless the fees are required to be paid by all full-time students or by all part-time students.

At both the federal and provincial levels, the credit acts to reduce tax otherwise payable. Where, as is often the case, a student doesn’t have tax payable for the year because his or her income isn’t high enough, credits earned can be carried forward and claimed by the student in any future tax year or transferred (within limits) in the current year to be claimed by a spouse, parent or grandparent.

Personal and living expenses

As has always been the case, living costs incurred by a post-secondary student (whether on campus or off) are characterized as personal and living expenses, for which no tax deduction or credit is allowed.

Student debt

Most post-secondary students in Canada must incur some amount of debt in order to complete their education, and repayment of that debt is typically not required until after graduation. Once repayment starts, a tax credit can be claimed for the amount of interest being paid on such debt, in some circumstances.

Students who are still in school and arranging for loans to finance their education should be mindful of the rules which govern that student loan interest tax credit, since decisions made while still in school with respect to how post-secondary education will be financed can have tax repercussions down the road, after graduation. That’s because while all interest paid on a qualifying student loan is eligible for the credit, only some types of student borrowing will qualify. Specifically, only interest paid on government-sponsored (federal or provincial) student loans will be eligible for the credit. Interest paid on loans of any kind from any financial institution will not.

It’s not uncommon (especially for students in professional programs, like law or medicine) to be offered lines of credit by a financial institution, often at advantageous or preferential interest rates. As well, financial institutions sometimes offer, once a student has graduated and begun to repay a government-sponsored student loan, to consolidate that student loan with other kinds of debt, also at advantageous interest rates. However, it should be kept in mind that interest paid on that line of credit (or any other kind of borrowing from a financial institution to finance education costs) will never be eligible for the student loan interest tax credit.

As explained in the Canada Revenue Agency (CRA) publication on the subject: “ [I]f you renegotiated your student loan with a bank or another financial institution, or included it in an arrangement to consolidate your loans, you cannot claim this interest amount”. In other words, where a government student loan is combined with other debt and consolidated into a borrowing of any kind from a financial institution, the interest on that government student loan is no longer eligible for the student loan interest tax credit.

Students who are contemplating borrowing from a financial institution rather than getting a government student loan (or considering a consolidation loan which incorporates that student loan amount) must remember, in evaluating the benefit of any preferential interest rate offered by a financial institution, to take into account the loss of the student loan interest tax credit on that borrowing in future years.

Other credits and deductions

There are, as well, a number of credits and deductions which, while not specifically education-related, are frequently claimed by post-secondary students (for instance, deductions for moving costs). The CRA publishes a very useful guide which summarizes most of the rules around income and deductions which may apply to post-secondary students. The current version of that guide, entitled Students and Income Tax, is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p105.html.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Claiming a deduction for summer child care costs (July 2021)

As Canada begins to (slowly) transition back to a pre-pandemic way of life, one of the many opportunities which did not exist last summer is once again a possibility — that of sending the kids to summer camp. In most cases, Canadian children of school age have not had the opportunity to interact with their peers on a regular basis for nearly a year and a half. At the same time, parents across Canada have been coping with a situation in which they must work from home while simultaneously helping the kids with online learning. For both kids and parents, the possibility of going to summer camp must be particularly welcome this year.

When it comes to those summer camps, there are an almost limitless number of options for parents, but what each of those choices has in common is a price tag — sometimes a steep one. Some options, like day camps provided by the local recreation authority or municipality can be relatively inexpensive, while the cost of others, like elite level sports or arts camps, can run to the thousands of dollars.

The good news for families which incur such expenditures is that in many cases a deduction for part or all of the costs incurred can be claimed on the tax return for the year. And, since eligible expenditures can be deducted from income on a dollar-for-dollar basis, that means that income used to pay eligible child care expenses is income which is effectively not subject to income tax. That benefit is provided by our tax system through the general deduction provided for child care costs. The general rule for that deduction, which is not specific to summer child care or summer camp costs but is available year round, is that parents who must incur child care costs in order to work (whether in employment or self-employment) or, in some cases to attend school, to deduct those costs from income, within specified limits. In 2021, however, an exception is provided to that requirement. For this year, the requirement that the parent be working at employment or self-employment in order to claim a deduction for child care expenses does not apply where that parent was the recipient, during 2021, of taxable federal or provincial pandemic benefits (like the Canada Emergency Response Benefit, which was received by over 8 million Canadians), Employment Insurance Benefits or Quebec Parental Insurance Benefits.

The calculation process set out on Form T778, which is used to determine the amount of any allowable deduction from income for child care expenses incurred can seem quite complex. However, at the end of the day, the amount of child care expenses which can be deducted is simply the least of those three numbers, and only one of those numbers requires a calculation. The steps involved in doing so are as follows.

First, the amount of any deduction for child care expenses is limited to two-thirds of the taxpayer’s income for the year. The income figure used to calculate the two-thirds figure is, generally, the amount shown on Line 150 of the annual tax return. Where the family incurring child care expenses is a two-income family, it is the spouse with the lower net income who must make the claim and consequently his or her net income is used to determine the two-thirds of income figure.

The second figure to be determined is the amount actually paid for eligible child care costs during the year. While virtually any licensed child care arrangement will qualify, more informal arrangements may not. Specifically, no deduction is available for amounts paid to most family members to provide child care. So, it’s not possible for a working spouse to pay the stay-at-home parent to provide child care, nor is it possible to pay an older sibling who is under the age of 18 to provide such services, and to claim a deduction for those expenses incurred. As well, where a claim is made for a deduction for child care expenses on the annual return, the claimant must obtain (and be prepared to provide to the tax authorities) the social insurance number of the individual providing the care as well as a receipt showing the amounts paid, whether to an individual or an organization.

The third figure to be determined is the one which requires some calculation. Basically, the rules governing the deduction of child care expense impose a maximum deduction per child per year (referred to as the “basic limit”), with that basic limit dependent on the age of the particular child. As well, where expenses are incurred for overnight camps or boarding schools, the amount deductible for such costs is similarly capped.

For 2021, the following overall limits apply:

$5,000 in costs per year for a child who was born in 2004 to 2013;
$8,000 in costs per year for a child who was born after 2013;
$11,000 in costs per year for a child who was born in 2020 or earlier, but for whom the disability amount can be claimed.

Similar restrictions are placed on the amount of costs which can be deducted for overnight camp or boarding school fees, and those are as follows:

$125 per week for a child who was born in 2004 to 2013;
$200 per week for a child who was born after 2013 or later; and
$275 per week for a child who was born in 2020 or earlier, but for whom the disability amount can be claimed.

Taking all of these figures into account, the computation of a deduction for summer day camp expenses for a typical Canadian family would look like this.

A two-income family has two children and both parents are employed. One spouse earns $65,000 per year, while the other earns $55,000. In 2021, one child is age 9 and the other is age 5. Neither child is disabled. During July and August, both of the children attend a local full-day summer camp, for which the cost is $300 per week per child.

The first step is to determine the two-thirds of income figure. Since it is the lower-income spouse who must make the deduction claim, that figure is two-thirds of $55,000, or $36,300. Consequently, any deduction for child care expenses for the year cannot exceed $36,300.

The second calculation is the total amount of child care expenses paid for each child:

$300 per week for eight weeks of summer camp, or $2,400.

Total child care expenses for the year for each child is therefore $2,400.

The last step is to determine the basic limit for child care expenses for each child, as follows:
the limit for the 5-year-old (who was born after 2013) is $8,000, and so the entire $2,400 in summer day camp costs incurred can be deducted.
the basic limit for the 9-year-old (who was born between 2004 and 2013) is $5,000, and so once again the entire $2,400 incurred for summer day camp costs can be deducted.

As well, since the camp is a day camp, the dollar amount cost limitations which apply with respect to overnight camps does not apply to limit the amount of expenses claimed by the family.

The total deduction available for child care expenses incurred for the 2021 tax year will therefore be $4,800. That deduction is claimed on Line 21400 of the tax return filed by the lower-income spouse for the year, reducing his or her taxable income from $55,000 to $50,200, and resulting in a federal tax savings of just under $1,000. A similar tax deduction is claimed as well for provincial tax purposes, and the amount of provincial tax saved will depend on the tax rates imposed by the province in which the family lives.

While the availability of a “subsidy” through the tax system should never be the sole determinant of what activity or camp is the best choice, there’s no denying that being able to claim a deduction for the costs involved can tip the balance toward one or choice or another, or bring a formerly unavailable option within a family’s financial reach.

Parents wishing to find out more about the child care expense deduction, and perhaps to calculate the maximum deduction which will be available to them for the 2021 tax year should consult Form T778 E (17). That form, which includes detailed information on the rules governing the deduction, can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t778.html.

Just a few questions about your tax return … (July 2021)

Between February 8 and June 21 of this year, the Canada Revenue Agency (CRA) received and processed just under 29 million individual income tax returns filed for the 2020 tax year. The sheer volume of returns and the processing turnaround timelines mean that the CRA does not (and cannot possibly) do a manual review of the information provided in a return prior to issuing the Notice of Assessment. Rather, all returns are scanned by the Agency’s computer system and a Notice of Assessment is then issued.

In addition, the CRA has, for many years, been encouraging taxpayers to fulfill their filing obligations online, through one of the Agency’s electronic filing services. This year, just over 26 million (or 91.5%) of those returns were filed by electronic means. While e-filing means that the turnaround for processing of returns is much quicker, there is, by definition, no paper involved. The Canadian tax system has always been what is termed a “self-assessing” system, in which taxpayers report income earned and claim deductions and credits to which they believe they are entitled. Prior to the advent of e-filing there were means by which the CRA could easily verify claims made by taxpayers. Where returns were paper-filed, taxpayers were usually required to include receipts or other documentation to prove their claims, whatever those claims were for. For the over 90% of returns which were filed this year by electronic means, no such paper trail exists. Consequently, the potential exists for misrepresentation of such claims (or simple reporting errors) on a large scale.

The CRA’s response to that risk is to conduct a variety of review programs, some of them before a Notice of Assessment is issued for the taxpayer’s return, and others after that Notice of Assessment has been issued and sent to the taxpayer. Regardless of the timing, in all cases the purpose of the review is to obtain from the taxpayer the information or documentation needed to support claims for deductions or credits made by the taxpayer on the return. The CRA also administers a Matching Program, in which information reported on the taxpayer’s return (both income and deductions) is compared to information provided to the CRA by third-party sources (like T4s filed by employers or T5s filed by banks or other financial institutions).

Being selected for review under either program means, for the individual taxpayer, the possibility of receiving unexpected correspondence, or a telephone call, from the CRA. Receiving such correspondence or call from the tax authorities is almost guaranteed to unsettle the recipient taxpayer, who may immediately conclude that he or she has done something very wrong and is facing a big tax bill — maybe even a tax audit. However, in the vast majority of cases, the contact is just a routine part of the Agency’s processing review mandate.

A taxpayer whose return is selected as part of a processing review program will be asked to provide verification or proof of deductions or credits claimed on the return -usually by way of receipts or similar documentation. The Matching Program, on the other hand, involves comparison by the CRA of information received from different sources (i.e., matching up the amount of employment income reported by a taxpayer with the amount showing on the T4 slip issued by that taxpayer’s employer). Where the figures match up, there is no need for the further action by the CRA. Where they don’t, the taxpayer will likely be contacted with a request for an explanation of the discrepancy.

Of course, most taxpayers are not concerned so much with the kind or program or programs under which they are contacted as they are with why their return was singled out for review or follow-up. Many taxpayers assume that it’s because there is something wrong on their return, or that the letter is the start of an audit, but that’s not necessarily the case. Returns are selected by the CRA for post-assessment review for a number of reasons. Canada’s tax laws are complex and, over the years, there are areas in which the CRA has determined that taxpayers are more likely to make errors on their return. Consequently, a return which includes claims in those areas (like dependant tax credit claims, claims for medical expenses, moving expenses or tuition tax credits) may have an increased chance of being reviewed. Where there are deductions or credits claimed by the taxpayer which are significantly different or greater than those claimed in previous returns that may attract the CRA’s attention. And, if the taxpayer’s return has been reviewed in previous years and, especially, if an adjustment was made following that review, subsequent reviews may be more likely. Finally, many returns are picked for the processing review programs simply on the basis of random selection.

Regardless of the reason for the follow-up, the process is the same. Taxpayers whose returns are selected for review will be contacted by the CRA, usually by letter, identifying the deduction or credit for which the CRA wants documentation or the income or deduction amount about which a discrepancy seems to exist. The taxpayer will be given a reasonable period of time — usually a few weeks from the date of the letter — in which to respond to the CRA’s request. That response should be in writing, attaching, if needed, the receipts or other documentation which the CRA has requested. All correspondence from the CRA under its review programs will include a reference number, which is usually found in the top right-hand corner of the CRA’s letter. That number is the means by which the CRA tracks the particular inquiry and should be included in the response sent to the Agency. It’s important to remember, as well, that it’s the taxpayer’s responsibility to provide proof, where requested, of any claims made on a return. Where a taxpayer does not respond to a CRA request or does not provide such proof, the Agency will proceed on the basis that the requested verification or proof does not exist and will assess or reassess accordingly.

Taxpayers who have registered for the CRA’s online tax program My Account (or whose representative is similarly registered for the Agency’s Represent a Client online service) can usually submit required documentation electronically. More information on how to do so can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/review-your-tax-return-cra/submitting-documents-electronically.html.

Whatever the reason a particular return was selected for post-assessment review by the CRA, one thing is certain. A prompt response to the CRA’s enquiry, providing the Agency with the information or documentation requested will, in the vast majority of cases, bring the matter to a speedy conclusion, to the satisfaction of both the Agency and the taxpayer. The CRA website also includes more detailed information on the return review process, which is available at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/review-your-tax-return-cra.html.

Creating retirement income from home equity (July 2021)

According to Statistics Canada there were, as of July 2020, just under 7 million Canadians over the age of 65. While the age at which an individual retires can vary a lot (from “Freedom 55” to those who are still working in their 70s), it’s reasonable to assume that a significant percentage of those 7 million Canadians is fully or partially retired. It’s also a reasonable assumption that retirement looks a lot different for them than it did for their parents.

First, as life expectancy continues to increase, current retirees (many of them baby boomers) can expect to spend a greater proportion of their life in retirement than their parents did. According to StatsCan figures, Canadians who are currently age 65 have an average life expectancy of about 20 years. Second, the financial picture for current retirees is likely to be different. Many of their parents benefitted, in retirement, from an employer-sponsored pension plan which ensured a monthly payment of income for the remainder of their lives. Today such pension plans, and the dependable monthly income they provide are, especially for those who spent their working lives in the private sector, more the exception than the rule. Where, however, baby boomers have the “advantage” over their parents in retirement, it’s in the value of their homes. Increases in residential property values over the past quarter century and, especially, the last decade in nearly every market in Canada have meant that for many Canadians who are retired or approaching retirement, their home — or more specifically, the equity they have built up in those homes — is their single most valuable asset.

While having a home which has greatly appreciated in value may provide a sense of security, what it doesn’t provide is an income. Most retired Canadians are eligible to receive Canada Pension Plan and Old Age Security payments and, while those two programs provide the “backbone” of retirement income in Canada, they are almost never enough on their own to provide for a comfortable life in retirement. The maximum combined CPP/OAS income for 2021 (not including federal or provincial/territorial supplements) is about $22,000 — not enough to provide more than a very basic standard of living, if that. Most retirees also have private retirement savings, usually through registered retirement savings plans (RRSPs), but once again, the amount saved by many Canadians through RRSPs falls short of what will be needed to generate a reasonable income over their remaining lifetime, especially where a retirement can last for twenty years or more, and when inflation over that time period is taken into account. Many retired Canadians are, in effect, “house rich and cash flow poor”.

In many cases, those approaching retirement opt to sell their current home — sometimes in order to move to a smaller, easier to maintain dwelling and sometimes simply to free up the capital represented by their accumulated equity. However, while selling and downsizing is the option chose by many retirees, not everyone wants to, or can, leave the family home at retirement. There are many situations in which moving and downsizing isn’t desirable or even possible. Especially for those living in smaller centres, where the types of available housing may be limited, downsizing or choosing to rent could mean having to move to another community. Moving and leaving behind friends and other social supports is difficult at any age, and especially difficult when it coincides with a major life change like retirement. As well, it’s increasingly the case, and especially over the past year, that adult children “boomerang” back to the family home after finishing their education. In many cases, such adult children are unable to find long-term employment or remuneration from available employment isn’t sufficient, or sufficiently secure, for them to take on the financial obligations of their own home, even as a tenant. Finally, in the 2021 real estate market many homeowners have found that, while it is relatively easy to sell a property, finding another one to purchase can be a lot more difficult. For a variety reasons, then, it may be that retirees need to stay, or choose to stay, in the current family home. Where that is their choice, and the only factor creating pressure for them to sell that home is the need to free up equity to create or increase cash flow during retirement, there are other options available.

One of those options which is currently receiving a lot of attention is the reverse mortgage. Reverse mortgages are better known, more widely used and have a much longer history in the U.S. than they do in Canada. However, such financial vehicles are now being advertised and promoted on a regular basis in the Canadian media, and it’s likely that by now most Canadians have at least heard of them.

Simply put, taking out a reverse mortgage allows individuals to obtain a sum of money based on the value of their home and the equity which they have accumulated in that home. It’s also possible, using a reverse mortgage, to structure the receipt of funds in different ways. The homeowner can choose to receive a lump sum amount, or can opt to receive a series of payments which will provide a regular income stream, or some combination of the two. And, with a reverse mortgage, no repayment of the funds advanced is required until the death of the homeowner, or until he or she leaves or sells the home.

When described in those terms, a reverse mortgage can sound like the perfect solution to a cash-strapped retiree. The ability to ease cash flow worries while remaining in one’s own home with no requirement to make any payments at all can sound like the best of all possible worlds. And it’s certainly true that taking out a reverse mortgage can make sense for retirees who are house rich but cash or cash-flow poor. But, as with all financial strategies, it’s necessary to understand both the benefits and the potential costs and risks of getting a reverse mortgage.

The potential downsides of a reverse mortgage start with the basic costs of obtaining one. Setting up a reverse mortgage involves a number of costs for the homeowner, including the need to have one’s property appraised, a set-up fee and interest rates which are higher than those charged for traditional mortgages. There will also be closing costs, and the homeowner will be required to obtain independent legal advice, and to pay the cost of obtaining such advice.

Once the reverse mortgage is taken out, interest will, of course, be levied on all amounts provided, and will accumulate from the time the funds are first advanced. Total interest costs can add up very quickly and reach significant amounts by the time the debt is eventually to be repaid, usually out of the proceeds from the sale of the house. And, of course, every dollar of funds advanced and interest levied eats away at the amount of equity which the homeowner has built up, on a dollar for dollar basis.

In order to obtain a reverse mortgage, the homeowner must be at least 55 years of age, and the amount which can be obtained through any reverse mortgage is limited to 55% of the current value of the home. And, where there is already a mortgage or other form of loan secured by the home (as is increasingly the case for retirees), the reverse mortgage lender will require that any such indebtedness first be paid off with the funds received from the reverse mortgage.

The major benefit of a reverse mortgage for many retirees is that they are not required to make payments while living in the home, putting much less of a strain on cash flow. Offsetting that benefit, however, is the fact that the interest rate charged on a reverse mortgage is usually higher than that which would be levied under a traditional mortgage or other similar financial products. As well, under the terms of many such arrangements, a prepayment penalty is levied where the homeowner moves or sells the house within a few years of obtaining the reverse mortgage — the exact time frame will depend on terms provided by the particular lender.

Many retirees who obtain a reverse mortgage do so with the thought that the debt will not need to be repaid until after their death, when the house will be sold. However, it’s necessary to consider the possibility that the homeowner/retiree will need to move from his or her home at some point in the future to an assisted living facility. Care in such facilities does not come cheap, and in many cases the retiree must shoulder all or a part of the cost of such care on an out-of-pocket basis. If the retiree is counting on his or her home equity to pay for such care, it’s necessary to consider the extent to which the reverse mortgage will reduce that accumulated home equity and consequently the funds available to pay for needed care.

For those who are considering whether a reverse mortgage is the right solution for them in retirement, Canada’s Financial Consumer Agency suggests getting answers from prospective lenders to the following questions:

What are all the fees?
Are there any penalties if you sell your home within a certain period of time?
If you move or die, how much time will you or your estate have to pay off the loan’s balance?
When you die, what happens if it takes your estate longer than the stated time period to fully repay the loan?
What happens if the amount of the loan ends up being higher than your home’s value when it is time to pay the loan back?

More information on reverse mortgages in general can be found on the FCAC website at https://www.canada.ca/en/financial-consumer-agency/services/mortgages/reverse-mortgages.html.

Moving expenses — what’s deductible and when (June 2021)

Pandemic notwithstanding, the Canadian real estate market is booming, in terms of both house prices and sales activity. According to Canadian Real Estate Association statistics, the number of sales in March 2021 were at the highest level ever recorded — and the MLS Home Price Index rose by 23.1% in April 2021, as measured on a year-over-year basis.

There are undoubtedly many reasons why so many Canadians are currently seeking to sell and move, including spiralling house prices, historically low mortgage interest rates and, of course, the pandemic which has allowed many to work from home and therefore contemplate living further away from the office.

Whatever their reasons, ten of thousands of Canadians will be selling their homes and moving this spring. And, whatever the reason for the move or the distance to the new location, all moves have two things in common — stress and cost. Even where the move is a desired one, moving inevitably means upheaval of one’s life and the costs can be very significant. There is not much that can diminish the stress of moving, but the associated costs can be offset somewhat by a tax deduction which may be claimed for many of those costs.

While it’s common to refer simply to the “moving expense deduction”, as though it were available in all circumstances, the fact is that there is actually no across-the-board deduction available for moving costs. In order to be tax deductible, such moving costs must be incurred in specific and relatively narrow circumstances. Our tax system allows taxpayers to claim a deduction only where the move is made to get the taxpayer closer to his or her new place of work, whether that work is a transfer, a new job, or self-employment. Specifically, moving expenses can be deducted where the move is made to bring the taxpayer at least 40 kilometres closer to his or her new place of work. That requirement is satisfied where, for instance, a taxpayer moves from Toronto to Halifax to take a new job. It’s also met where a taxpayer is transferred by his or her employer to another job in a different location and the taxpayer’s move will bring him or her at least 40 kilometres closer to the new work location. It is not met where an individual or family move up the property ladder by selling and purchasing a new home in the same town or city, without any change in work location.

As well, it’s not actually necessary to be a homeowner in order to claim moving expenses. The list of moving related expenses which may be deducted is basically the same for everyone — homeowner or tenant — who meets the 40-kilometre requirement. Students who move to take a summer job (even if that move is back to the family home) can also make a claim for moving expenses where that move meets the 40-kilometre requirement.

It's important to remember, however, that even where the 40-kilometre requirement is met, it is possible to deduct moving costs only from employment or self-employment (business) income — there is no deduction possible from other types of income, like investment income or employment insurance benefits.

The general rule is that a taxpayer can claim reasonable amounts that were paid for moving himself or herself, family members, and household effects. In all cases, the moving expenses must be deducted from employment or self-employment income earned at the new location. Where the move takes place later in the year, and moving costs are significant, it’s possible that the amount of income earned at the new location in the year of the move will be less than deductible moving expenses incurred. In such instances, those expenses can be carried over and deducted from income earned at the new location in any future year.

Within the general rule, there are a number of specific inclusions, exclusions, and limitations. The following is a list of expenses which can be claimed by the taxpayer without specific dollar figure restrictions (but subject, as always, to the overriding requirement of “reasonableness”):

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

The Canadian real estate market is currently a seller’s market, so much so that individuals who have sold their homes can then find it difficult to purchase another home in their desired location or at their desired price. Prudent would-be sellers may therefore decide to purchase before selling, in order to avoid such difficulty. In most such circumstances, the taxpayer is entitled to deduct up to $5,000 in costs incurred for the maintenance of the “old” residence while it is vacant and on the market. Specifically, costs including interest, property taxes, insurance premiums, and heat and utilities expenses paid to maintain the old residence while efforts were being made to sell it may be deducted. If any family members are still living at the old residence, or it is being rented, no such deduction is available.

It may seem from the forgoing that virtually all moving-related costs will be deductible; however, there are some costs for which the Canada Revenue Agency (CRA) will not permit a deduction to be claimed, as follows:

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

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

Anyone who has ever moved knows that there are an endless number of details to be dealt with. For some types of costs, the administrative burden of claiming moving-related expenses can be minimized by choosing to claim a standardized amount for certain types of expenses. Specifically, the CRA allows taxpayers to claim a fixed amount, without the need for detailed receipts, for travel and meal expenses related to a move. Using that standardized, or flat rate method, taxpayers may claim up to $23 per meal, to a maximum of $69 per day, for each person in the household. Similarly, the taxpayer can claim a set per-kilometre amount for kilometres driven in connection with the move. The per kilometre amount ranges from 47 cents for Alberta to 59.5 cents for the Northwest Territories. In all cases, it is the province or territory in which the travel begins that determines the applicable rate.

These standardized travel and meal expense rates are those which were in effect for the 2020 taxation year — the CRA will be posting the rates for 2021 on its website early in 2022, in time for the tax filing season.

Once eligibility for the moving expense deduction is established, the rules which govern the calculation of the available deduction are not complex, but they are very detailed. The best summary of those rules is found on the form used to claim such expenses — the T1-M. The current version of that form can be found on the CRA’s website at https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1-m/t1-m-20e.pdf, and more information (including a link to rates for standardized meal and travel cost claims) is available at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-21900-moving-expenses.html.

A mid-year tax check-up on your taxes (June 2021)

By the beginning of June, most Canadians have filed their individual income tax return for the 2020 tax year and received a Notice of Assessment (NOA) outlining their tax position for that year. Those who receive a refund will celebrate that fact or, less happily, those who receive a tax bill will pay the tax amount owed. Both groups of taxpayers are then likely to forget about taxes until it’s tax filing time again in the spring of 2022. The fact is, however, that mid-year is very good time to assess one’s tax position for the current year and is particularly a good idea for taxpayers who have received a large refund or a bill for tax owing.

Although few Canadians have this perspective, the reality is that getting either a big tax refund or having to pay a large tax bill is a sign that one’s tax affairs need attention. A refund, especially a large refund, means that the taxpayer has overpaid his or her taxes for the previous year and has essentially provided the Canada Revenue Agency (CRA) with an interest-free loan of funds that could have been put to better use in the taxpayer’s hands. The other outcome — a large bill — means that taxes have been underpaid for the previous year and could mean paying interest charges to the CRA. Either way, it’s in the taxpayer’s best interests to ensure that tax paid throughout the year is sufficient to cover his or her taxes, without overpaying or underpaying. The best-case scenario is to receive an NOA which indicates that there is neither a refund payable nor any amount owing.

All of this makes the mid-point of the tax year a good time to assess one’s current-year tax situation, make sure that everything is on track, and put in place any adjustments needed to help ensure that there are no tax surprises when filing one’s tax return for 2021 next spring. As the calendar year goes on, the opportunities to make a significant difference to one’s current year tax situation diminish.

The first step in doing that review is to get a sense of how much tax one will have to pay for 2021. By mid-year, most taxpayers will have a good sense of what their income will be for 2021. Consequently, where income hasn’t changed much, the amount of tax which was paid for 2020 (a number which can be found on Line 43500 of one’s 2020 NOA) serves as a good starting point. (In most cases, owing to increases in tax brackets and credits, the amount of tax payable by taxpayers whose income doesn’t change significantly between 2020 and 2021 will decrease slightly.)

There are two ways of paying taxes throughout the year. The majority of Canadians (including all employees) have income taxes deducted from their paycheques and remitted to the federal government on their behalf — known as source deductions. Taxpayers who do not have income tax deducted at source — which would include self-employed individuals and, frequently, retired taxpayers — make tax payments directly to the federal government (four times a year, in March, June, September, and December) through the tax instalment system.

Once a rough idea of one’s tax liability for 2021 is arrived at, it’s necessary to figure out whether income tax payments made to date, either by source deductions or instalment payments, match up with that tax liability figure, recognizing that by this point in the year, approximately one-half of 2021 taxes should already have been paid. If they haven’t, and particularly if there is a shortfall which will mean a balance owing when the tax return for 2021 is filed next spring, the taxpayer will need to take steps to remedy that.

Where the individual involved pays tax by instalments, the solution is simple. He or she can simply increase or decrease the amount of remaining instalment payments made in 2021 so that the total instalment payments made over the course of this year accurately reflect the total tax payable for the year. The only caveat in that situation is that the individual should err on the side of caution to ensure that there isn’t a shortfall in instalment payments, which could result in interest charges being levied by the CRA.

The situation is a little more complex for employees, or anyone who has tax deducted at source. Often when such individuals discover that they are overpaying taxes through source deductions, it’s because other deductions which they claim on their return for the year — for expenditures like deductible support payments, child care expenses, or contributions to a registered retirement savings plan (RRSP) — aren’t taken into account in calculating the amount of tax to deduct at source. The solution for employees who find themselves in that situation is to file a Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1213.html) with the CRA. On that form, the taxpayer identifies the amounts which will be deducted on the return for the year and, once the CRA verifies that those deductible expenditures are being made, it will authorize the taxpayer’s employer to reduce the amount of tax which is being withheld at source to take account of that deduction.

Where it’s the opposite situation and a taxpayer finds that source deductions being made will not be sufficient to cover his or her tax liability for the year (meaning a tax bill to be paid next spring) the solution is to have those source deductions increased. To do that, the employee needs to obtain a TD1A form for their province of residence for 2021, which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/td1-personal-tax-credits-returns/td1-forms-pay-received-on-january-1-later.html. On the reverse side of that Form TD1, there is a section entitled “Additional tax to be deducted”, in which the employee can direct his or her employer to deduct additional amounts at source for income tax, and can specify the dollar amount which is to be deducted from each paycheque, on a going-forward basis.

A final note: while no one likes getting a tax bill, there are taxpayers who simply like getting a tax refund and overpay their taxes through the year to create that result. Some of them view that approach as a kind of “forced” savings plan, while others simply like the idea of getting money from the tax authorities. There is nothing inherently wrong with that approach, so long as the taxpayer understands that a tax refund is simply money which was always theirs and is simply being returned to them by the CRA (without interest). Those who would rather not loan money to the CRA interest-free and who don’t want to face a tax bill each spring can avoid both scenarios by investing a couple of hours of time and a little paperwork to ensure that this year’s tax payments are on track.

Mortgage lending rules tighten effective June 1, 2021 (June 2021)

Over the past decade, the rules governing mortgage lending in Canada have been repeatedly amended, each time to impose more stringent requirements on would-be mortgage borrowers. The latest such change is to the “mortgage stress test”, which imposes income and creditworthiness requirements on would-be borrowers, with the goal of ensuring that they will be able to manage (and repay) their mortgage debt, now and in the future. The change is effective as of June 1, 2021.

As everyone knows, interest rates (and therefore mortgage lending rates) are near historic lows. Consequently, borrowing costs are minimal and those minimal borrowing costs are reflected in lower mortgage monthly payment requirements. However, interest rates will inevitably increase, in either the short or long term, and the amount of monthly mortgage payments will increase at the same time.

When an applicant seeks mortgage financing, lenders use two tests to determine the applicant’s ability to manage the borrowing sought. The first — the Gross Service Debt (GDS) — is a measure of housing costs, and includes mortgage payments, property taxes, heating, and (where applicable) condominium fees. Lenders want to see that no more than 39% of a household’s gross income is needed to meet the GDS. The second measurement, the Total Debt Service (TDS), includes housing costs plus all other debt obligations (student loans, car payments, etc.). When it comes to TDS, lenders want to see that payment of total debt obligations utilizes no more than 44% of the borrower’s gross household income.

The mortgage stress test requires would-be borrowers to meet the GDS and TDS ratios based on both the actual mortgage interest rate which the lender is providing and a notional higher rate. Where the prospective borrower has a down payment of at least 20%, he or she must meet the GDS and TDS ratios using the actual rate negotiated with the lender, plus 2%; or the notional rate set by the federal government, whichever is higher. Where the down payment is less than 20%, the prospective borrower must meet the GDS and TDS ratios using the higher of the actual lending rate or the notional rate set by the federal government.

On June 1, that notional higher rate will increase and prospective borrowers must show that they can meet the GDS and TDS ratios with an assumed notional mortgage interest rate of 5.25%. Prior to June 1, that notional higher rate was 4.79%.

When and how to dispute your 2020 Notice of Assessment (June 2021)

By now, most Canadians have filed their income tax returns for the 2020 taxation year. Specifically, by May 17, 2021, the Canada Revenue Agency (CRA) had processed just under 27 million individual income tax returns filed for 2020. Just over 16 million of those returns resulted in a refund to the taxpayer, while about 6.6 million taxpayers received a bill for additional taxes owed.

By now, most Canadians have filed their income tax returns for the 2020 taxation year. Specifically, by May 17, 2021, the Canada Revenue Agency (CRA) had processed just under 27 million individual income tax returns filed for 2020. Just over 16 million of those returns resulted in a refund to the taxpayer, while about 6.6 million taxpayers received a bill for additional taxes owed.

No matter when or how a return is filed, or the outcome of the filing, all returns filed with and processed by the CRA have one thing in common — they result in the issuance of a Notice of Assessment (NOA) by the CRA, outlining the taxpayer’s income, deductions, credits, and tax payable for the 2020 tax year.

In most taxation years, the information contained in the NOA is usually the same as that provided by the taxpayer in his or her return, perhaps with a few arithmetical corrections made by the CRA. However, it’s likely that more than the usual number of returns filed for the 2020 tax year will result in some disagreement between the taxpayer and the CRA. Millions of Canadians received pandemic-related benefits (particularly the Canada Emergency Response Benefit (CERB) during 2020 and not all benefit recipients were aware that such benefits represented taxable income which had to be reported on the return for 2020. Consequently, many such taxpayers may receive an unpleasant surprise when the information presented in the NOA differs from that provided by the taxpayer in the return, and that difference includes additional tax amounts owed. When that happens, the taxpayer has to figure out why, and to decide whether or not to dispute the CRA’s conclusions.

Quite often such discrepancies are the result of an error made by the taxpayer in completing the return. A lot of information from a variety of sources is reported on even the most straightforward of returns and it’s easy to overlook (e.g., a T5 slip reporting a small amount of interest income earned). Even where tax software is used to prepare the return, errors can still occur. Such tax software relies, in the first instance, on information input by the user with respect to taxable amounts found on T4, T5, and other information slips. No matter how good the software, it can’t account for income —like pandemic benefits — which the taxpayer hasn’t input. In other cases, the taxpayer might transpose figures when entering them, such that an income amount of $26,353 on the T4 becomes $23,653 on the tax return. Once again, the tax software has no way of knowing that the information input was incorrect and calculates tax owing based on the figures provided.

Where there is additional tax owing because of an error or omission made by the taxpayer in completing the return (including a failure to report pandemic benefits received as income), and the CRA’s figures are correct, disputing the assessment doesn’t really make sense. There is, as well, a persistent tax “myth” that if a taxpayer doesn’t receive an information slip (T4 or T5, as the case might be) for income received during the year, that income doesn’t have to be reported and therefore isn’t taxable. The myth, however, is just that. All taxpayers are responsible for reporting all income received and paying tax on that income, and the fact that an information slip was lost, mislaid, or never received doesn’t change anything. The CRA receives a copy of all information slips issued to Canadian taxpayers, and its systems will cross-check to ensure that all income is reported — and done accurately.

There are, however, instances in which the CRA and the taxpayer disagree over substantive issues, and those issues most often involve claims for deductions or credits. For instance, the CRA may have disallowed an individual’s tax credit claim for a dependant, or for a deduction claimed for moving expenses, which the taxpayer believes to be legitimate.

Whatever the nature of the dispute, the first step is always to contact the CRA for an explanation of the reasons why the change was made. While the information provided in the NOA is a good summary of the taxpayer’s tax situation for the year, it may not provide the detail needed to show precisely how and why the taxpayer and the CRA disagree on the actual amount of income tax which the taxpayer must pay for the year. The first step to be taken would be a call to the Individual Income Tax Enquiries line at 1-800-959-8281, where agents who have access to the taxpayer’s return can explain any changes which were made during the assessment process. If that call doesn’t resolve the taxpayer’s questions, or there is still a disagreement, the taxpayer must decide whether to take the next step of filing a formal objection to the NOA.

Doing so formally advises the CRA that the taxpayer is disputing his or her tax liability for the taxation year in question. Not incidentally, the filing of an Objection also halts, in most cases, collection efforts undertaken by the CRA to collect taxes which it considers owing for the taxation year under dispute (although, if the taxpayer is eventually found to owe the amount in dispute, interest will have accumulated in the interim). Where the taxpayer files an Objection, the CRA’s collection efforts are, in most cases, suspended until 90 days after the date the CRA’s decision on that Objection is sent to the taxpayer.

There is a time limit by which any Objection must be filed, albeit a reasonably generous one. Individual taxpayers must file an Objection by 90 days from the mailing date of the NOA (the date found at the top of page 1) or one year from the due date of the return which is being disputed, whichever is later. So, for tax returns for the 2020 tax year, the one-year deadline (which is usually, but not always, the later of those two dates) would be April 30, 2022 (or June 15, 2022 for self-employed taxpayers and their spouses). As with most things related to taxes, it’s best not to put it off. At the very least, if the taxpayer is ultimately found to owe some or all of the taxes assessed by the CRA, interest will have accrued on those taxes for the entire period since the filing due date. Certainly, if the deadline is imminent, it is necessary to file a Notice of Objection in order to preserve the taxpayer’s appeal rights, even if discussions with the CRA are still ongoing.

Taxpayers who have registered with the CRA’s online services feature My Account can file their Notice of Objection online at https://www.canada.ca/en/revenue-agency/services/e-services/e-services-individuals/account-individuals.html. The taxpayer provides information with respect to the assessment being disputed and the reasons why that assessment is being disputed, and submits those reasons online. Taxpayers who are disputing their tax assessment can also upload supporting documents relating to that dispute to the CRA’s website.

While filing a dispute through My Account is certainly faster than mailing hard copy of the Notice of Objection, not all taxpayers want to use that option. In particular, those who are not already registered with My Account may not wish to undertake the registration process simply in order to file a single Notice of Objection. Taxpayers who choose instead to mail hard copy of a Notice of Objection can find the most current version of the CRA’s standardized T400A Objection on the Agency’s website at https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t400a/t400a-09-18e.pdf.

Taxpayers are not obligated to use the CRA’s official Notice of Objection form — any communication which makes it clear that the taxpayer is objecting to his or her NOA will do. Nonetheless, there’s no reason not to use the standardized form, and there are benefits to doing so. Using the Form T400A will make it clear to the CRA that a formal objection is being filed, will present the necessary information in a format with which the CRA is familiar and will also mean that no required information is inadvertently omitted. It is also helpful to include a copy of the NOA which is being disputed. Taxpayers should also consider ensuring proof of both delivery and time of delivery by sending the form in a way which provides for tracking and proof of delivery (e.g., registered mail or courier).

Notices of Objection are sent to an Appeals Intake Centre, and the mailing address to which the Objection should be sent is provided on the NOA form. It’s also possible, once an Objection is filed, to call the Objection enquiries toll-free number at 1-800-959-5513 to obtain information on the current status of the Objection.

The time required for the CRA to consider the Objection and make its decision ranges from several weeks to several months, depending on the number and complexity of the issues involved. The CRA website indicates that, as of April 2021, most individual NOAs involving straightforward issues (which would comprise almost all such NOAs) are being resolved within an average of just over 3 months.

In the course of coming to its decision, the CRA may or may not contact the taxpayer for further discussions of the issues in dispute. Should the taxpayer be contacted, he or she may be asked to provide representations outlining his or her position, in writing or at a meeting. Through such representations and meetings, it may be possible for the taxpayer and the CRA to come to an agreement on the taxpayer’s tax liability. In either case, the CRA will either confirm its original assessment or change it. If the original assessment is changed, the CRA will issue a Notice of Reassessment outlining the changes. If the taxpayer continues to disagree with the CRA’s position, the next step is an appeal to the Tax Court of Canada, which must be filed within 90 days after the CRA issues its assessment or reassessment. While in many instances (generally where amounts in dispute are relatively small) taxpayers can represent themselves before the Tax Court, it’s generally a good idea, once things reach this point, to consult a tax lawyer before taking that next step.

The CRA also publishes a useful pamphlet entitled Resolving Your Dispute: Objection and Appeal Rights under the Income Tax Act, and the most recent release of that publication can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p148.html. More information on the objection process is also available on the CRA website at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/complaints-disputes/file-objection-cppei-appeal-minister/income-tax.html.