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The past 18 months have been characterized by a steady stream of mostly bad news, relating to the pandemic and its harmful consequences. The human cost of the pandemic, in terms of illness and death, is paramount. But the reality is also that much economic and financial harm resulted, at an individual, community, and national level, as businesses closed and individuals lost jobs or saw their hours — and consequently their income — reduced.

The past 18 months have been characterized by a steady stream of mostly bad news, relating to the pandemic and its harmful consequences. The human cost of the pandemic, in terms of illness and death, is paramount. But the reality is also that much economic and financial harm resulted, at an individual, community, and national level, as businesses closed and individuals lost jobs or saw their hours — and consequently their income — reduced.

However, an exception to that steady stream of economic and financial bad news came recently in the form of a Statistics Canada report on state of Canadians’ indebtedness.

The rise in personal debt over the past 15 years, as individuals and families took advantage of record low interest rates, has been a source of concern to both financial advisers and the government. One measure of the indebtedness of an individual or family is the debt-to-income ratio, which measures the amount of debt (secured and unsecured) as a percentage of household income. In 2005, the debt-to-income ratio of the average household was 93%. By the end of 2019 that ratio had climbed to more than 180%.

As well, in the two decades prior to the pandemic, credit card debt of Canadians had risen, on average, by 20.7% each year. By the beginning of 2020, the outstanding balance of credit card debt owed by Canadians had reached $90.6 billion.

As outlined in the Statistics Canada report, that picture changed dramatically from the beginning of 2020 to the start of 2021. Over that period, the outstanding balance carried on credit cards fell from $90.6 billion to $74 billion, an 18.3% decline in less than one year. 

The StatsCan report, which can be found on its website at https://www150.statcan.gc.ca/n1/daily-quotidien/210823/dq210823c-eng.htm, attributes that change to two circumstances. As stated in the report “Canadian households began to see their disposable income rise during the pandemic, due in part to the limited opportunities to spend money during the lockdowns as well as the monetary support provided by governments …. to offset lost wages.” And, perhaps the best news of all is that the largest reductions in debt loads were seen in Canadians who had the lowest credit ratings.

Getting a post-secondary education, especially where that education includes graduate school or professional training, is an expensive undertaking. According to Statistics Canada, the average undergraduate tuition cost for the 2020-21 academic year was $6,580. Costs for graduate programs, particularly professional training, can go much higher, reaching as much as $50,000 per year. And those costs don’t factor in necessary expenditures on textbooks and other ancillary costs, to say nothing of general living expenses, like rent, transportation, and food.

Getting a post-secondary education, especially where that education includes graduate school or professional training, is an expensive undertaking. According to Statistics Canada, the average undergraduate tuition cost for the 2020-21 academic year was $6,580. Costs for graduate programs, particularly professional training, can go much higher, reaching as much as $50,000 per year. And those costs don’t factor in necessary expenditures on textbooks and other ancillary costs, to say nothing of general living expenses, like rent, transportation, and food.

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

Using a government-sponsored loan program to finance education has a number of advantages. Under the CSL program, any loans provided do not accrue interest while the recipient student is still in school and no repayment of the loan is required during that time. However, interest starts accruing once the student has graduated and, six months after graduation, those who received loans under the CSL program are required to make arrangements for repayment. Consequently, CSL loan recipients who graduated in the spring of 2021 must now consider what arrangements they wish to make for repayment of loan amounts received.

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

While interest usually starts accruing as soon as the student has graduated, that’s not the case right now. As part of its pandemic relief measures, the federal government has suspended the accumulation of interest on Canada Student Loans, effective as of April 2021 and lasting until March 31, 2023. So, while graduates are still required to begin repayment of their loans no more than six months after graduation, those repayments will, at least until April 2023, not include an interest component. Once interest is levied on a loan, loan recipients can choose between a fixed interest rate on their loan (meaning that the interest rate stays the same until the loan is fully repaid) or a variable/floating rate of interest, which will change with changes in the prime rate.

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

Whatever the interest rate chosen or levied, borrowers who pay that interest can claim, on Line 31900 of the federal tax return, a student loan interest tax credit to help offset those costs. The student loan interest tax credit is a non-refundable credit, meaning that it applies to reduce any federal tax payable, but cannot create or increase a refund. That federal tax reduction is equal to 15% of the interest amount claimed, and interest amounts eligible for the credit are those paid in the current tax year or any of the previous five tax years, without limit. And, finally, the student loan interest tax credit can be claimed only by the former student who received the government student loan.

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

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

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

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

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

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

There are a number of income sources available to Canadians in retirement. Those who participated in the work force during their adult life will have contributed to the Canada Pension Plan (CPP) and will be able to receive CPP retirement benefits as early as age 60. Earning employment or self-employment income will also have entitled those individuals to contribute to a registered retirement savings plan (RRSP). A shrinking minority of Canadians will be able to look forward to receiving benefits from an employer-sponsored pension plan.

There are a number of income sources available to Canadians in retirement. Those who participated in the work force during their adult life will have contributed to the Canada Pension Plan (CPP) and will be able to receive CPP retirement benefits as early as age 60. Earning employment or self-employment income will also have entitled those individuals to contribute to a registered retirement savings plan (RRSP). A shrinking minority of Canadians will be able to look forward to receiving benefits from an employer-sponsored pension plan.

Each of those income sources requires that an individual have made contributions during his or her working life in order to enjoy benefits in retirement; the fourth major source of retirement income for Canadians — the Old Age Security (OAS) program — does not. Entitlement to OAS is based solely on the number of years of Canadian residence, and individuals who are resident in Canada for 40 years after the age of 18 can receive full OAS benefits. As of the third quarter of 2021, those full OAS benefits are equal to $626.49 per month.

The OAS program is distinct from other sources of retirement income in another, less welcome way, in that it is the only such income source for which the federal government can require repayment by the recipient. That repayment requirement comes about through the OAS “Recovery Tax”, which is universally known as the OAS “clawback”.

While the rules governing the administration of the clawback can be confusing, the concept is a (relatively) simple one. Anyone who receives OAS benefits during the year and has income for that year of more than (for 2021) $79,845 must repay a portion of the benefits received benefits. That repayment, or clawback is administered by reducing the amount of OAS benefits which the individual receives during the next benefit year.

For example, an individual who receives full OAS during 2021 and has net income for the year of $85,000 will be subject to the clawback. He or she must repay OAS amounts received at a rate of 15 cents (or 15%) of every dollar of income over the clawback income threshold, as in the following simplified example:

Total OAS benefit for the year — $7,500

Total income for the year — $85,000

OAS income clawback threshold — $79,845

Income over clawback threshold — $5,155 × 15% = $773.25

Repayment amount required — $773.25

The federal government becomes aware of an individual’s income for 2021 only once the tax return for that year is filed, usually by April 30 of 2022. At that time, it will become apparent that $773.25 in OAS benefits received must be repaid. Consequently, in the following benefit year (which will run from July 2022 to June 2023), OAS benefits received will be reduced by $64.44 per month ($773.25 ÷ 12 months).

The OAS clawback affects only individuals who have an annual income of at least $79,845, and it’s arguable that at such income levels, the clawback requirement does not impose any real financial hardship. Nonetheless, the OAS clawback is a perpetual irritant to those affected, perhaps because of the sense that they are being penalized for being disciplined savers, or good managers of their finances during their working years, in order to ensure a financially comfortable retirement.

While any sense of grievance can’t alter the reality of the OAS clawback, there are strategies which can be put in place to either minimize or, in some cases, entirely eliminate one’s exposure to that clawback. Some of those planning considerations are better addressed earlier in life, prior to retirement, However, it’s not too late, once one is already receiving OAS, to make arrangements to avoid or minimize the clawback.

In all cases, no matter what strategy is employed, the goal is to “smooth” one’s income from year to year, so that net income for each year comes in under the OAS clawback threshold and, not incidentally, minimizes exposure to the higher federal and provincial income tax rates which apply once income exceeds around $100,000.

The starting point, for taxpayers who are approaching retirement, is to determine how much income will be received from all sources during retirement, based on CPP and OAS entitlement, any savings accrued through an RRSP and any amounts which may be received from a private pension plan. Anyone who has an RRSP must begin receiving income from that RRSP in the year after that person turns 71. However, it’s possible to begin receiving income from an RRSP at any time. Similarly, an individual who is eligible for CPP retirement benefits can begin receiving those benefits anytime between age 60 and age 70, with the amount of monthly benefit receivable increasing with each month receipt is deferred. The same calculation applies to OAS benefits, which can be received as early as age 65 or deferred up until age 70.

Once the amount of annual income is determined, strategies to smooth out that income can be put in place. Those strategies can include receiving income from an RRSP prior to age 71, so as to reduce the total amount within the RRSP and so thereby reduce the likelihood of having a large “bump” in income when required withdrawals kick in at that time.

Taxpayers are sometimes understandably reluctant to take steps which they view as depleting their RRSP savings, but receiving income from an RRSP doesn’t mean spending that income. While tax has to be paid on any withdrawals (no matter what the taxpayer’s age), the after-tax amounts can be contributed to the taxpayer’s tax-free savings account, where they can compound free of tax. And, when the taxpayer has need of those funds, in retirement, they can be withdrawn free of tax and, they won’t count as income for purposes of the OAS clawback.

Taxpayers who are married can also “even out” their income by using pension income splitting, so that neither of them has sufficient income to be affected by the clawback. Using pension income splitting, the spouse who has income over the OAS clawback threshold re-allocates the “excess” income to his or her spouse on the annual return, and that income is then considered to be income of the recipient spouse, for purposes of both income tax and the OAS clawback. To be eligible for pension income splitting, the income to be reallocated must be private pension income, which is generally income from an RRSP or registered retirement income fund (RRIF), or from an employer-sponsored pension plan.

There are two reasons why pension income splitting is a particularly attractive strategy for avoiding or minimizing the OAS clawback. First, there is no need to actually change the source or amount of income received by each spouse, as the reallocation of income is “notional”, existing only the return for the year. Second, no decision has to be made on pension income splitting until it’s time to file the return for the previous year, meaning that spouses can easily calculate exactly how much income has to be reallocated in order to avoid the clawback, and to reduce tax liability generally. More information on the kinds of income eligible for pension income splitting, and the mechanics of the process, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/pension-income-splitting.html.

To win elections, politicians need votes. And to run the election campaigns needed to garner those votes, they need an organization, volunteers, and money — a lot of money. To wage the current federal election, the major political parties will need to raise and spend millions of dollars. Their task of raising that money is undoubtedly made somewhat easier by the fact that Canadian taxpayers who donate money to political parties or candidates can obtain some tax benefit from doing so.

To win elections, politicians need votes. And to run the election campaigns needed to garner those votes, they need an organization, volunteers, and money — a lot of money. To wage the current federal election, the major political parties will need to raise and spend millions of dollars. Their task of raising that money is undoubtedly made somewhat easier by the fact that Canadian taxpayers who donate money to political parties or candidates can obtain some tax benefit from doing so.

Individuals who donate to the political party or candidate of their choice may or may not be happy with the outcome of the election, but no matter which registered party or candidate they donated to, it will be possible for them to claim a federal tax credit for those donations when they file their returns for 2021 next spring.

The credit provided under the Income Tax Act is available with respect to funds contributed to either a registered political party or to candidates running in a federal election. Contributions can be made at any time, not just during an election campaign, as long as the donation is received by an official candidate or a registered federal political party or association.

While the parties which currently hold seats in the House of Commons are, of course, the most well-known, there are in fact 20 political parties registered and in good standing with Elections Canada for purposes of the 2021 federal election. They are as follows, in alphabetical order:

• Animal Protection Party of Canada
• Bloc Québécois
• Canada's Fourth Front
• Canadian Nationalist Party
• Christian Heritage Party of Canada
• Communist Party of Canada
• Conservative Party of Canada
• Free Party Canada
• Green Party of Canada
• Liberal Party of Canada
• Libertarian Party of Canada
• Marijuana Party
• Marxist-Leninist Party of Canada
• Maverick Party
• National Citizens Alliance of Canada
• New Democratic Party
• Parti pour l'Indépendance du Québec
• Parti Rhinocéros Party
• People's Party of Canada
• Veterans Coalition Party of Canada

Donations to any one of these registered parties, within prescribed limits, would qualify for the federal political contribution tax credit.

Official candidates can, of course, be running either as candidates for one of the registered parties or as independents. Elections Canada provides a list of confirmed candidates who are running in this year’s federal election and that information can be found on the Elections Canada website at https://www.elections.ca/scripts/vis/FindED?L=e&PAGEID=20.

The federal political tax credit is calculated as a percentage of donations given. However, the credit percentage decreases as contributions amounts increase, and no credit at all is given for donations in excess of $1,275. The credit percentages allowed at different contribution levels are as follows:

The maximum credit claimable in any taxation year by a single taxpayer is $650. Once the arithmetic is worked out, it becomes clear that the maximum credit obtainable is reached once contribution levels reach $1,275.

Contribution amount             Allowable tax credit

$400 × 75% =                                   $300

$350 × 50% =                                   $175

$525 × 33.3% =                                $175          

$1,275                                              $650

Where donations exceed $1,275 in any one taxation year, no tax credit can be claimed on the “excess” donation. As well, there is no provision which allows the taxpayer to carry over any “excess” contributions to a subsequent taxation year, meaning that no credit will ever be obtainable with respect to those “excess” contributions.

Many Canadians who are committed to a particular political party or candidate volunteer their time during a nomination or election campaign — canvassing for the candidate, putting up election signs, or telephoning voters to encourage them to vote for the candidate. However, in such cases, the work must be its own reward, as no income tax receipts can be issued for most such non-monetary contributions and consequently no credit can be claimed for the value of any non-monetary contribution (including volunteer hours) donated.

Where a qualifying contribution is made, an official receipt must be issued in order for the tax credit to be claimed. A receipt must be issued, in paper or electronic format, for every contribution over $20.

The actual credit for qualifying donations made is claimed on the tax return for the year in which the contribution was made. The amount of the credit is calculated (according to the formula outlined above) on the Federal Worksheet, and the amount of the actual credit entered on line 41000 of Schedule 1 of the federal tax return. By the time the 2021 return is filed, of course, the election will long since have been concluded, the newly elected government will be in place in Ottawa, and the taxpayer will be in a position to assess whether it was, in fact, money well spent.

Although it’s doubtful that anyone does so with any great degree of enthusiasm, each spring millions of Canadians sit down to complete their annual tax return for the previous calendar year (or, more often, they pay someone else to do it for them).

Although it’s doubtful that anyone does so with any great degree of enthusiasm, each spring millions of Canadians sit down to complete their annual tax return for the previous calendar year (or, more often, they pay someone else to do it for them).

The Canadian tax system is a “self-assessing system” which relies heavily on that voluntary co-operation of taxpayers. Canadians are expected (in fact, in most cases, required), to complete and file a tax return each spring, reporting income from all sources, calculating the amount of tax owed and remitting that amount to the federal government by a specified deadline. Whether they do it themselves or pay someone else to do it, the rate of compliance among Canadian taxpayers is very high — between February and July 2021, just over 29 million individual income tax returns were filed with the Canada Revenue Agency (CRA). Inevitably, however, there are those who do not meet their filing or payment obligations.

There are a lot of reasons why some Canadians don’t file their returns or pay their taxes on a timely basis, and almost all of them are based on a lack of understanding of how our tax system works, or on incorrect information about that system. In addition, each year there are some Canadians who file returns in which income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed.

While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate isn’t high, there are a lot of such returns when measured by absolute numbers. And, although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each and every instance of non-compliance simply aren’t available, especially since in many cases the amount recovered may be less than the costs which must be incurred to recover that amount.

With all of that in mind, several years ago the CRA instituted a program — the Voluntary Disclosure Program (VDP) — intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arises from the fact that, in most cases, while taxpayers who participate in the VDP program have to pay outstanding tax amounts owed, plus interest, they avoid the penalties which would normally be imposed and, in addition, avoid the risk of criminal prosecution.

To qualify for relief under the VDP, an application made with respect to non-compliance with income tax filing and payment obligations must:

• be voluntary (meaning that it is done before the taxpayer becomes aware of any compliance or enforcement action by the CRA);
• be complete;
• involve the application or potential application of a penalty;
• include information that is at least one year past due; and
• include payment of the estimated tax owing.

The VDP program includes two separate “tracks” for income tax disclosures — the Limited Program and the General Program — and the kind and extent of relief available depends on the track to which a particular application is assigned.

While the CRA will ultimately make the determination of whether an application should proceed under the Limited or the General Program on a case-by-case basis, there are guidelines in place. The CRA’s intention is to restrict the Limited Program to instances in which applications disclose non-compliance which appears to include intentional (as distinct from inadvertent) conduct on the part of the taxpayer. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:

• the dollar amounts involved;
• the number of years of non-compliance;
• the sophistication of the taxpayer;
• how quickly the taxpayer acted to correct their non-compliance after becoming aware of it;
• whether there has been deliberate or wilful default or carelessness amounting to gross negligence on the part of the taxpayer; and
• whether the disclosure was made after the taxpayer became aware of the CRA’s intended specific focus on such area of taxpayer compliance.

Those whose applications are accepted under the Limited Program will not be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer. Interest on outstanding tax balances will be payable, however, and other penalties will be levied.

Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that program, no penalties will be charged and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief, specifically for the years preceding the three most recent years of non-compliance (i.e., for the years preceding the three most recent years of returns required to be filed). For example, a taxpayer who makes an application to the VDP and who has failed to file returns for the 2014 through 2019 taxation years may be provided with interest relief with respect to taxes owed for the 2014, 2015, and 2016 taxation years. Such relief is generally equal to 50% of interest owed — in other words, the taxpayer will be required to pay only half of the interest charges which would otherwise be levied for those years. No interest relief will, however, be provided on tax amounts owed for the three most recent (2017, 2018, and 2019) taxation years. Since interest charges levied by the CRA are, by law, higher than current commercial rates (for instance, the rate levied for the third quarter of 2021 is 5%) and interest charged is compounded daily, having interest amounts forgiven, even in part, can make a significant difference to the overall tax bill faced by the taxpayer.

In order to benefit from the VDP, taxpayers must first make an application to the program. That application must include payment of the estimated taxes owing, as a condition of participation in the VDP. Where a taxpayer is financially unable to make that tax payment, he or she can request that the CRA consider a payment arrangement.

The decision to apply to the VDP and to “come clean” about all previous tax transgressions is something that most taxpayers will likely consider with considerable trepidation. Those who are unsure about whether they want to move forward with a VDP application have the option of using the CRA’s “pre-disclosure discussion service”. As the name implies, that service allows taxpayers to participate in preliminary discussions with a CRA official, on an anonymous basis, to gain some knowledge about the VDP program, the process involved, and the potential relief available.

Taxpayers who decided to move forward with an application to the VDP can complete and file Form RC199, Voluntary Disclosures Program Application, which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/rc199.html. Once the application is received, the CRA will check to make certain that the applicant is eligible to apply and that all of the required information, documentation, and payment has been sent. The next step is for the CRA to evaluate the application to ensure that the criteria for participation in the VDP are satisfied and, if so, to determine the program (Limited or General) to which the application should be assigned, and the taxation year(s) for which relief is being considered. At each step the taxpayer will be provided with written notice of the CRA’s decisions. The CRA’s advice is that taxpayers should contact them (for individual taxpayers, by calling the Individual Income Tax Enquiries line at 1-800-959-8281) if more than five weeks have passed since the application was submitted and no response has yet been received.

If the decision made is that the application is not eligible for the VDP, the taxpayer will also be advised in writing, with reasons, of the CRA’s decision to deny the application.

Where the decision made by the CRA is one with which the taxpayer does not agree, he or she is entitled to ask for a second review of the application. If that decision is also unfavourable, it is possible for a taxpayer to ask a court to review the decision and to direct the CRA to re-consider the VDP application. However, a taxpayer who wishes to pursue his or her application to the extent of filing such a court application is well advised to obtain legal advice before doing so.

Finally, taxpayers should recognize that the VDP Program can’t be used as a kind of “get out of jail free card” with respect to repeated failures to meet tax filing and payment obligations. The CRA website makes it clear that they expect taxpayers who have benefitted from the VDP to thereafter meet their tax obligations, and a second review will be provided for the same taxpayer only in unusual situations where the circumstances are beyond the taxpayer’s control.

Detailed information on the VDP program can be found on the CRA website at https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html.

Canadian drivers are used to seeing gas prices rise each spring as the weather gets warmer and more people take to the road for day trips, weekends at the cottage, and annual holidays. This year, that trend is accelerated for several reasons. The first, of course, is that as pandemic restrictions ease and the economy opens up, there are more and more reasons to be on the road. As well, employees who have worked from home for the past 16 months are starting to return to the daily commute, either part-time or full-time.

Canadian drivers are used to seeing gas prices rise each spring as the weather gets warmer and more people take to the road for day trips, weekends at the cottage, and annual holidays. This year, that trend is accelerated for several reasons. The first, of course, is that as pandemic restrictions ease and the economy opens up, there are more and more reasons to be on the road. As well, employees who have worked from home for the past 16 months are starting to return to the daily commute, either part-time or full-time.

Whatever their reasons for driving this spring and summer, Canadian drivers are experiencing “sticker shock” at the gas pumps to an unprecedented degree. When states of emergency were declared last spring and virtually everyone stayed at home, gas prices in Canada dropped precipitously. In April of 2020, the average cost of gasoline was around 79 cents per litre. That price has rebounded with a vengeance and, as of the end of July 2021, the average gas price in Canada was just under $1.40 per litre — an increase of more than 75% over April of 2020. In some provinces, gas prices have hit a new record high.

While in some cases Canadians can reduce the impact of gas price increases by reducing the amount of driving they do, the practical reality is that, even for those who wish to do less driving and to thereby reduce their carbon footprint, driving less just isn’t a realistic option. While major urban centres are usually well-served by public transit, it’s a different picture outside those centres, where in many cases the public transit option is either non-existent or impractical. As well, as housing prices in major urban areas either continue to increase (or are already out of the reach of the average Canadian), individuals and families must move further from their workplaces in search of affordable housing. Doing so means a longer commute to work, and that commute must often be done by car.

For a number of reasons, then, the cost of driving is often an unavoidable, non-discretionary expense. And, as that cost increases, many wonder whether there are any deductions or credits which can be claimed to help offset that cost.

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

Those circumstances exist where an employee is required, as part of his or her terms of employment, to use a personal vehicle for work-related travel. For instance, an employee might, as part of his or her job, be required to see clients at their own premises for the purpose of meetings or other work-related activities and be expected to use his or her own vehicle to get to such meetings. If the employer is prepared to certify on a Form T2200 that the employee was ordinarily required to work away from the employer’s place of business or in different places, that he or she is required to pay his or her own motor vehicle expenses (and was not reimbursed for such expenses by the employer) and that the employer did not provide a tax-free allowance to cover such expenses, the employee can deduct actual expenses incurred for such work-related travel. Those deductible expenses include the following:

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

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

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

In larger urban centres, and in the nearby cities and suburbs which are served by inter-city transit, many commuters utilize that transit as a way of avoiding both the stress of a drive to work in rush hour traffic and the associated costs. And, for a time, such commuters were able to claim a tax credit to help mitigate the cost of using such transit. Unfortunately, the federal public transit tax credit was eliminated in 2017 and has never been reinstated.

Given current gas prices, no amount of tax relief is going to make driving, especially for a lengthy daily commute, an inexpensive proposition. But, that said, seeking out and claiming every possible deduction and credit available under our tax rules can at least help to minimize the pain.

By the time August arrives, nearly all Canadians have filed their income tax returns for the previous year, received a Notice of Assessment from the tax authorities with respect to that return, and either spent their refund or, more grudgingly, paid any balance of tax owing.

By the time August arrives, nearly all Canadians have filed their income tax returns for the previous year, received a Notice of Assessment from the tax authorities with respect to that return, and either spent their refund or, more grudgingly, paid any balance of tax owing.

It’s a surprise, therefore, when unexpected mail arrives from the Canada Revenue Agency (CRA) around the middle of August, and the information in that mail will likely be both unfamiliar and unwelcome. Specifically, the enclosed Instalment Reminder form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15 of 2021 — and will helpfully identify the amounts which should be paid on each date.

No one particularly likes receiving unexpected mail from the tax authorities and correspondence which suggests that the recipient should be making payments of tax to the CRA during the year (instead of when he or she files the return for the year next April) is likely to be both perplexing and somewhat alarming. It is fair to say that most Canadians aren’t familiar with the payment of income tax by instalments, and are therefore at a loss to know how to proceed the first time they receive an Instalment Reminder.

The reason that the instalment payment system is unfamiliar to most Canadians is that most of us pay income taxes during our working lives through a different system. Every Canadian employee has tax automatically deducted from his or her paycheque (“at source”), before that paycheque is issued, and that tax is remitted by the employer to the CRA, on the employee’s behalf. Such deductions and remittances accrue on the employee’s behalf, and they are credited with those remittances when filing the annual tax return for that year. It’s an efficient system, but it’s also one which is largely invisible to the employee, and certainly one which operates without the need for the employee to take any steps on his or her own. When someone’s working life ends and retirement begins, it’s consequently not particularly surprising that the individual wouldn’t know that it is now his or her responsibility to make specific arrangements for the payment of income tax.

Adding to the potential confusion, most employees who are now moving into retirement have had only a single source of income throughout their working lives. Once in retirement, however, there are likely multiple such sources of income, including Canada Pension Plan benefits and Old Age Security payments, and perhaps monthly amounts received from an employer-sponsored registered pension plan (RPP) or a registered retirement income fund (RRIF). Unless the individual so directs, none of the payors of those kinds of income will deduct income tax from the payments and remit them to the federal government on the individual’s behalf.

Canadian tax rules provide that, where the amount of tax owed when a return is filed by the taxpayer is more than $3,000 ($1,800 for Quebec residents) in the current (2021) year and either of the two previous (2019 and 2020) years, that taxpayer may be subject to the requirement to pay income tax by instalments.

The reason that first instalment reminders are issued in August has to do with the schedule on which Canadians file their tax returns. The amount of tax payable on filing for the immediately preceding year can’t be known until the tax return for that year has been filed and assessed, and the tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer should receive a first instalment reminder for the current year.

Taxpayers who receive that first Instalment Reminder in August may also be puzzled by the fact that it is a “reminder” and not a “requirement” to pay. The reason for that is that those who receive it are not actually required by law to make instalment payments of tax. There are, in fact, three options open to the taxpayer who receives an Instalment Reminder.

First, the taxpayer can pay the amounts specified on the reminder, by the respective due dates of September 15 and December 15. A taxpayer who does so can be certain that he or she will not have to pay any interest or penalty charges even if he or she does have to pay an additional amount on filing in the spring of 2022. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2021, he or she will of course receive a refund on filing.

Second, the taxpayer can make instalment payments based on the total amount of tax which was owed and paid for the 2020 tax year (including any balance that was owed on filing). Where a taxpayer’s income has not changed between 2020 and 2021 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2021 will be the same or slightly less than it was in 2020, owing to the indexation of tax brackets and tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will actually owe for 2021 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2020 to 2021 and there will consequently be a reduction in tax payable, this option may be worth considering. Taxpayers who wish to pursue this approach can obtain the information needed to estimate current year taxes (federal and provincial tax brackets and rates) on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html#federal.

All of this may seem like a lot of research and calculation effort, especially when one considers that many Canadians don’t even prepare their own tax returns. And those who don’t want to be bothered with the intricacies of tax calculations can pay the amounts set out in the Instalment Reminder, secure in the knowledge that they will not incur any penalty or interest charges and that, should those amounts ultimately represent an overpayment of taxes, that overpayment will be recovered and refunded when the 2021 return is filed next spring.

Once they have resigned themselves to the realities of the tax instalment system, the next question that most taxpayers have is how such payments can be made. The options open to taxpayers in that regard are helpfully outlined on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/making-payments-individuals/paying-your-income-tax-instalments/you-pay-your-instalments.html.

One or two generations ago, retirement was an event. Typically, an individual would leave the work force completely at age 65, and begin collecting Canada Pension Plan and Old Age Security benefits along with, in many cases, a pension from an employer-sponsored registered pension plan.

One or two generations ago, retirement was an event. Typically, an individual would leave the work force completely at age 65, and begin collecting Canada Pension Plan and Old Age Security benefits along with, in many cases, a pension from an employer-sponsored registered pension plan.

Much has changed in the intervening decades and one of those changes is that retirement is now more often a process than an event. Many of those who have reached the traditional retirement age of 65 are receiving CPP and OAS benefits while at the same time continuing to participate in the work force. Some stay at an existing full-time job but more commonly, such individuals take up part-time employment, out of financial need or simply from a desire to stay active and engaged in the work force.

At one time, beginning to receive CPP retirement benefits meant that, even for those who chose to remain in the work force, no further CPP contributions were allowed. In 2012 that changed, with the introduction of the CPP Post-Retirement Benefit. The availability of that benefit means that those who are aged 65 to 70 and continue to work while receiving CPP retirement benefits must decide whether or not to continue making CPP contributions. Such individuals who make the choice to continue to contribute to the Canada Pension Plan will see an increase in the amount of CPP retirement benefit they receive each month for the remainder of their lives. That increase is the CPP post-retirement benefit or PRB.

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

• Individuals who are 60 to 65 years of age and continue to work are required to continue making CPP contributions.
• Individuals who are 65 to 70 years of age and continue to work can choose not to make CPP contributions. To stop contributing, such an individual must fill out form https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/cpt30.html. A copy of that form must be given to the individual’s employer and the original sent to the Canada Revenue Agency. An individual who has more than one employer must make the same choice (to continue to contribute or to cease contributions) for all employers and must provide a copy of the CPT30 form to each employer.

A decision to stop contributing can be changed, and contributions resumed, but only one such change can be made per calendar year. To make that change, the individual must complete section D of CRA form https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/cpt30.html, give one copy of the form to his or her employer(s), and send the original to CRA

• Individuals who are over the age of 70 and are still working cannot contribute to the CPP.

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

Where an individual makes CPP contributions while working and receiving CPP retirement benefits, the amount of any CPP post-retirement benefit earned will automatically be calculated by the federal government (no application is required), and the individual will be advised of any increase in their monthly CPP retirement benefit each year. The PRB will be paid to that individual automatically the year after the contributions are made, effective January 1^st of that second year. Since the federal government doesn’t have all of the information needed to make such calculations until T4s and T4 summaries are filed by the employer by the end of February, the first PRB payment is usually made in a lump sum amount, in the month of April. That lump sum amount represents the PRB payable from January to April. Thereafter, the PRB is paid monthly and combined with the individual’s usual CPP retirement benefit in a single payment.

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

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

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

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

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

They can be accessed below.

Corporate:

Issue #56 Corporate

Personal:

Issue #56 Personal

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.

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.

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.

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.

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.

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.

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.

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.