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Tax Alerts

Tax Briefing(s)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dollar amounts on which individual non-refundable federal tax credits for 2012 are based, and the actual tax credit claimable, will be as follows:

Credit amount Tax credit
Basic personal amount 10,822 1,623

Spouse or common-law partner
amount 10,822* 1,623

Child amount 2,191 329

Eligible dependant amount 10,822* 1,623

Age amount 6,720 1,008

Net income threshold for
erosion of credit 33,884

Infirm dependant amount (over 18) 6,402** 960

Net income threshold for
   erosion of credit                         6,420

Caregiver amount                           4,402                      660

Net income threshold for
   erosion of credit                        15,033

Disability amount                           7,546                    1,132

Adoption expenses credit 11,440 1,716

Medical expense tax credit
threshold amount 2,109

Maximum refundable medical
expense supplement 1,119

Old Age Security clawback
Income threshold 69,562

*The spousal and eligible dependant amounts are reduced by any net income for the year of the spouse or eligible dependant.
**Includes family caregiver amount.

Credit amounts are converted to a non-refundable credit by multiplying the amount by the federal rate applicable to the lowest income bracket, which is 15.0% for 2012.

A number of tax changes will take effect on January 1, 2012, most of them affecting individual taxpayers. The more significant changes are listed below.

Changes to CPP contribution rules for individuals receiving retirement benefits

Changes will be made to the rules governing Canada Pension Plan contributions, effective January 1, 2012. As of that date, individuals aged 60 to 65 who are currently receiving CPP retirement benefits and who are employed will be required to resume making CPP contributions. Such individuals who are between the ages of 65 and 70 will also have CPP contributions deducted from their income, unless they file an election choosing not to make such contributions. Individuals aged 70 or older will not be required or permitted to make CPP contributions.

RRSP deduction limit increases to $22,970

The RRSP contribution limit for the 2012 tax year (for which the contribution deadline is March 1, 2013) will increase to $22,970. In order to make the maximum contribution for 2012, it will be necessary to have earned income of $127,611 for the 2011 taxation year.

Tax-free savings account contribution limit

There is no change to the TFSA contribution limit for 2012, as the annual limit remains at $5,000. Current year TFSA contributions can be made at any time during the calendar year. Where a contribution is not made during the calendar year, the contribution room is carried over and the contribution may be made in any subsequent taxation year.

Individual tax instalment deadlines for 2012

Millions of individual taxpayers pay income tax by quarterly instalments, which are usually due on the 15th day of each of March, June, September, and December. As September 15 and December 15, 2012 each fall on a Saturday, the payment deadline for those instalments will actually be the following Monday, September 17th and December 17th, respectively.

Reduction in federal corporate tax rates

The general corporate tax rate is reduced, effective January 1, 2012, from 16.5% to 15.0%. There is no change in any other federal corporate tax rate for 2012.

Every year, thousands of Canadians escape our winter by traveling south, usually to the U.S., for a few weeks or months, or even the whole winter. While recent fluctuations in the value of the Canadian dollar relative to the U.S. greenback might mean that a stay in the U.S. will be more expensive this year, the lure of warm temperatures and no snow will still win out for many.

The thoughts of such snowbirds, intent on escaping the Canadian winter, are typically on improving their golf game or enjoying the sunshine, and not on the tax implications of their whereabouts. Notwithstanding, there are tax consequences and costs which can result from spending an extended period of time outside of the country.

The following information pertains to Canadians who will be spending a few weeks or months south of the border on an annual vacation, and staying in a rental property or hotel. The situation changes where the actual purchase of a property located in the U.S. is contemplated, as the rules governing the purchase and ownership of such property by Canadians are complex. The 2008 mortgage lending debacle in the U.S. has put residential real estate on the market in places like Florida and Arizona at prices which can be hard to resist. A double caveat is, however, in order. Professional tax advice is a necessity whenever a purchase of real estate in another jurisdiction is being contemplated. And additional caution is warranted where the contemplated purchase is of a property which has been foreclosed on or is being sold under power of sale. There have been instances where Canadians have purchased such property in the U.S. only to later find out that the foreclosure was not properly carried out and title to the property which they have purchased is in dispute. That’s not a situation any new property owner wants to find themselves in, especially when it’s all happening in a foreign country.

Tax 101 for snowbirds

Typically, snowbirds who go south for the winter remain what is called, in tax parlance, “factual residents of Canada”. In practical terms, the income of such taxpayers is treated, for Canadian tax purposes, as though they had never left Canada. Factual residence is determined by the Canada Revenue Agency (CRA) on the basis of whether a taxpayer has maintained “residential ties” to Canada. Such residential ties could include continuing to own a home in Canada, having a spouse or dependants who remain in Canada while the snowbird is out of the country, having personal property (like a car) in Canada, and continuing to hold a Canadian driver’s licence and medical insurance.

The vast majority of snowbirds who winter down south do maintain sufficient residential ties to Canada to be considered factual residents. Consequently, when they file their tax returns for the year, they follow all the same rules as year-round Canadian residents. They report all income received during the year from both inside and outside Canada and claim all available deductions and credits. Income tax is paid to the federal government and to the province with which their residential ties are kept. Finally, snowbirds who remain factual residents of Canada remain eligible for the goods and services tax credit, which may be paid to recipients outside of Canada.

Health care coverage

One of the biggest concerns of many snowbirds is maintaining health care insurance coverage while out of the country. In all cases, the availability and degree of coverage will depend on the health care plan in effect for the province or territory of which the snowbird is a resident, and it’s necessary to confirm in advance the coverage which will be made available for out-of-Canada medical expenses. Most snowbirds end up obtaining supplementary health-care coverage, and the premiums paid for such coverage can usually be claimed as a medical expense on the Canada tax return. As well, any out-of-pocket costs incurred for eligible medical expenses while out of Canada (whether for the individual or his or her spouse) can be claimed as a medical expense on that year’s tax return.

Old Age Security and Canada Pension Plan payments

Both Old Age Security (OAS) and Canada Pension Plan (CPP) benefits can be paid to benefit recipients who are living outside Canada, and there is no change in the amount of the benefits. As well, such payments can be made by direct deposit, and in US dollars.

Both OAS and CPP benefits received will, of course, be subject to Canadian income tax and OAS payments will be subject to the OAS “recovery tax” (clawback), if the recipient’s income for the 2011 tax year is more than $67,668.

Application of U.S. tax laws

The application of U.S. tax laws to snowbirds can, unfortunately, be a good deal more complex than the equivalent Canadian laws, and any snowbird who thinks he or she may have a U.S. tax filing or payment obligation should certainly seek professional advice. That said, it is possible to summarize in a general way the basic rules which govern the application of U.S. tax laws to snowbirds.

Canadian residents who spend part of the year in the U.S. are classified as either resident aliens or non-resident aliens. Resident aliens are generally taxed in the U.S. on income from all sources worldwide and non-resident aliens are generally taxed in the U.S. only on income from U.S. sources. The classification depends, in the first instance, on the amount of time the person spends in the U.S. during a given calendar year. A person who was in the U.S. for 183 days or more (i.e., more than half the year) during the calendar year is considered to have met the “substantial presence” test and is classified as a resident alien of the U.S. At the other end of the spectrum, a person who was in the U.S. for less than 31 days during the calendar year is considered a non-resident alien. Those who fall in the middle (which would include most snowbirds who spend, for instance, the months of January and February in Florida or Arizona) may meet the substantial presence test, depending on the application of a complex formula which uses a weighted average of the number of days of residence in the current and two previous calendar years.

Recognizing that the tax consequences of spending extended periods of time south of the border will affect thousands of Canadian taxpayers, the CRA has published an information booklet on the subject, which is available on its Web site at http://www.cra-arc.gc.ca/E/pub/tg/p151/p151-10e.pdf. The Agency has also devoted a section of its Web site to issues affecting Canadians who vacation out of the country, and that information can be found at http://www.cra-arc.gc.ca/tx/nnrsdnts/sth-eng.html.

Even this brief summary is sufficient to illustrate the complexity of the U.S. tax laws as they may apply to snowbirds. The best advice for those whose plans include an extended stay south of the border, particularly if they are contemplating repeat visits on an annual basis, and certainly if they are contemplating the purchase of a U.S. vacation home, is to obtain professional advice in advance on the U.S. and Canadian tax consequences. Doing so can ensure that what was intended to be a relaxing vacation doesn’t end up causing a major tax headache.

At the beginning of 2012 changes will be made to the Canada Pension Plan which may affect Canadians who are both retired and currently receiving CPP retirement benefits and those who are contemplating retirement in the near future.

While the number of Canadians who could be affected by these changes is in the hundreds of thousands, there are some who don’t need to consider them. Canadians who have already retired and are receiving Canada Pension Plan benefits, but are either already age 70 or older, or have no plans to return to the work force, on either a part-time or full-time basis, can safely ignore these changes.

For most of the rest of us, some choices may have to be made, as follows.

Under current rules, it’s possible to choose to begin receiving CPP retirement benefits at any time between the ages of 60 and 70. However, once benefits start being paid, the recipient, even if he or she returns to the work force on a part-time or full-time basis, cannot contribute again to the Canada Pension Plan. As well, for Canadians less than 65 years of age, it is necessary, in order to begin receiving CPP retirement benefits, to be out of the work force, or to have significantly diminished earnings, for two months before benefits start. Both those rules are about to change.

The simplest change is the fact that it will be possible, as of January 1, 2012, to begin receiving CPP retirement benefits without any interruption in one’s working life. Where an individual chooses to stay in the work force while also receiving CPP benefits, it’s often the case that the choice is made from financial necessity. In such cases, a two-month interruption in earnings can impose a real hardship. That will no longer be the case.

The second change is that those who stay in the work force, or decide after retirement to return to the work force may, beginning January 1, 2012, also return to making CPP contributions. Where an individual who is between the ages of 60 and 65 and receiving CPP retirement benefits returns to the paid work force, he or she will be required to resume making CPP contributions—there is no choice in the matter. Where that individual is between the ages of 65 and 70, he or she will be able to choose whether or not to resume making such contributions. The decision is the employee’s, but the contributions will automatically be deducted from the employee’s pay, beginning January 1, 2012, unless he or she provides the employer with a signed Form CPT30, Election to Stop Contributing to the Canada Pension Plan, by the end of December 2011. That form is now available on the Canada Revenue Agency (CRA) Web site at http://www.cra-arc.gc.ca/E/pbg/tf/cpt30/cpt30-11e.pdf. Once completed and submitted to an employer, the form is effective as of the beginning of the following month, so the CRA Web site includes a reminder that it should not be completed or submitted until after November 30, 2011. As well, an employee who has signed and completed such a form and later has a change of heart can revoke the election, and once again start making CPP contributions, beginning in 2013.

One of the biggest decisions to make with respect to Canada Pension Plan retirement benefits is when to begin claiming and receiving such benefits. A lot of factors go into that decision—whether or not you are still in the workforce and how long you are planning to keep working, what other sources of income (i.e., private pension income, or annuity payments) are available, whether additional income is needed to meet current living costs, even one’s current state of health and family longevity history, etc. One of the biggest factors to consider, however, is the fact that the amount of pension received will depend on when one decides to start receiving it. And, the changes which are taking effect between 2011 and 2016 will make this a greater factor than it has been previously.

Before the changes, a CPP retirement pension was increased by 0.5% for each month after age 65 that the recipient delayed receiving it. Similarly, the amount receivable was decreased by 0.5% for each month before the age of 65 that recipient accelerated receiving it. For those who defer receipt, the monthly percentage increase will go from 0.6% in 2011 to 0.7% in 2013. That doesn’t sound like much, but it means that, by 2013, someone who defers receipt of their CPP pension until age 70, will receive a monthly pension amount which is 42% higher than it would have been if the same person had chosen to begin receiving that pension at age 65. The consequences are similar for those who choose to begin receiving CPP “early”. The reduction percentage will rise from 0.5% to 0.6% between 2012 and 2016. In practical terms, that means that someone who begins receiving their CPP pension in 2016 at the age of 60 will receive benefits that are 36% lower than they would have been if they had waited until age 65.

There is, of course, no right or wrong answer to the question of when it’s best to begin receiving CPP benefits, and certainly no “one size fits all” answer. In some cases, financial need may compel a person to begin receiving benefits at the earliest possible opportunity, regardless of the effect such a claim may have on the amount of those benefits. Others, who don’t necessarily need a CPP cheque to pay basic living expenses may nonetheless decide that they are willing to accept a lesser amount in order to have earlier access to those benefits and to use them to carry out —travel plans, for instance—which may not be as easy to accomplish later in life. Still others may decide to start using private retirement savings, like an RRSP, or begin receiving an employer-sponsored pension, while deferring receipt of CPP as long as possible. Whether any of these is the best course of action depends entirely on the individual’s circumstances (especially his or her financial circumstances) and their current and planned retirement lifestyle.

Just about everyone is familiar with the concept of a mortgage. Money is borrowed, usually from a bank or other financial institution, in order to purchase a home. That money (now known as mortgage principal), plus interest, is paid back, usually over the next couple of decades, until the home is owned “free and clear”.

While reverse mortgages have been available for some time inCanada(and even longer in theU.S.), most Canadians aren’t that familiar with them. However, reverse mortgages are being widely promoted to the baby boomers and, for a variety of reasons, are likely to gain greater traction in the Canadian marketplace in the next few years.

A number of circumstances have combined to make many Canadian retirees, in effect, house-rich and cash- or savings-poor. Fewer and fewer Canadians are members of employer-sponsored pension plans and consequently fewer and fewer Canadians can look forward to receiving monthly payments from such a pension plan throughout retirement. Fewer still will have access to the gold standard of pension plans—a defined benefit plan which is indexed to inflation. Retirees and near-retirees who aren’t members of pension plans but have saved diligently for retirement through vehicles like registered retirement savings plans have likely seen the value of their portfolios slashed in recent years as the result of stock market declines and financial crises. Even those who invested more conservatively, in GICs or government bonds, haven’t actually lost money but have for several years been receiving a virtual pittance in terms of interest returns on those investments. For both groups, the likely result is that the retirement nest egg which they had counted on to provide them with a steady source of retirement income is much smaller than they had anticipated. Finally, especially over the past year, inflation has made purchases of both food and energy—completely non-discretionary expenditures for every Canadian—more and more expensive. Over the past five or ten years, it seems that the only kind of asset which has steadily continued to increase in value is residential real estate.

Most Canadians spend a good portion of their working lives paying off their mortgages, with the goal of being mortgage-free at retirement. Once the mortgage is paid off, the value of the mortgage-free home usually makes up a significant portion, if not the majority, of the homeowner’s overall net worth. For homes which were purchased decades ago, particularly those located in large urban centers like Toronto or Vancouver, the increase in value since the original purchase can amount to more than half a million or even a million dollars.

The traditional approach, once children are no longer living at home and retirement approaches, has been to sell the family home and “downsize”, freeing up the equity in the home to provide a source of retirement income. However, 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 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. Or, it may be that the current family home is very well-suited to retirement life and that the only reason to sell that home is the need to free up equity. For a lot of reasons, where there are no financial constraints, many people would simply prefer to “stay put” for as long as possible.

Enter the reverse mortgage. Essentially, a reverse mortgage allows homeowners to obtain cash representing a portion (usually up to 40%) of the market value of the home without having to actually sell the home and move. Interest is charged, of course, on the funds loaned, but the homeowners are not required to make any payments, of either interest or principal, while they live in the home. Instead, interest is compounded and added to the original loan amount, and the total becomes payable when the house is sold or the homeowner dies.

For retirees living in what seems to be a perpetual cash flow crunch, a reverse mortgage can sound like the ideal solution. However, there are some potential downsides or risks to keep in mind.

First, there are costs associated with taking out a reverse mortgage, and those costs are generally borne by the homeowner. An appraisal must be done on the home to determine its current market value, the homeowner taking out the reverse mortgage must obtain (and pay for) independent legal advice and the company providing the reverse mortgage will typically levy administrative, legal, and closing costs. All in all, the cost of taking out a reverse mortgage can run close to $3,000.

Second, since no payments of either interest or principal are being made, the amount owed can increase much more rapidly and eventually be much greater than most people realize. Where, for instance, a homeowner takes out a reverse mortgage of $150,000 at 6.0%, and makes no payments of interest or principal, the amount owing after 10 years will be more than $250,000, or close to double the original amount. The same compounding effect which allows savings to grow over time is working in this case against the borrower.

Finally, reverse mortgages are structured so as to be repayable when the homeowner dies or the home is sold. As is the case with conventional mortgages, “breaking” a reverse mortgage by paying if off early usually means paying an interest differential and/or penalties, both of which can be substantial.

There are, as well, other ways in which homeowners can access the equity in their homes without needing to sell. In many cases, homeowners who would qualify for a reverse mortgage would also be able to obtain a home equity line of credit from a bank or other financial institution.

Like a reverse mortgage, a home equity line of credit is based on the amount of equity which the homeowner has, and amounts up to a specified percentage of that equity are made available to the homeowner. The major advantage of a home equity line of credit, when compared to a reverse mortgage, lies in its flexibility. Funds made available through a reverse mortgage are usually provided in a lump sum when the reverse mortgage is taken out, and the interest clock starts running on that lump sum immediately. With a home equity line of credit, the homeowner is provided with access to funds up to a certain amount. The homeowner can then access those funds as needed, with interest payable only on the amount of borrowings outstanding at the particular time. As well, payments can be made to reduce the amount of outstanding borrowings at any time, without penalty.

The one major disadvantage of a home equity line of credit for cash-strapped borrowers is that, unlike a reverse mortgage, payments on a home equity line of credit must be made, usually monthly. Those payments are usually equal to the amount of interest levied on the current balance during the previous month, and there is generally no requirement to pay down principal, unless the homeowner wishes to do so. However, it is likely that the interest rate levied on a home equity line of credit (usually around the prime rate of interest) will be lower than the rate levied on a reverse mortgage made for the same property.

In the final analysis, the choice between a home equity line of credit and a reverse mortgage comes down to the individual homeowner’s circumstances, including the following considerations.

Can the homeowner manage monthly interest payments? If the cash flow situation is such that it just isn’t possible to make those payments, no matter what the amount, then a home equity line of credit isn’t a solution.
Are the funds obtained through the reverse mortgage or home equity line of credit to be used to pay an immediate large expense, or used to augment existing sources of income in order to meet day-to-day living expenses? If the former—for instance, if extensive renovations or repairs must be carried out on the home immediately in order for the homeowner to continue living there, then the lump sum obtained through a reverse mortgage will be put to immediate use. If however, the home owner is in a situation in which current income falls short of living expenses—for instance, funds are needed to enable the homeowner to pay increased annual property taxes—it probably doesn’t make sense to borrow (and start paying interest on) a large sum of money which isn’t currently needed. In such a situation, it would make more sense for the homeowner to take out a home equity line of credit and borrow from it only to the extent necessary to meet his or her living expenses as they become payable, and paying interest only on the amount borrowed to date.
Is relief from the cash flow crunch which is making borrowing necessary likely to be available from another source any time in the near future? If, for instance, someone over the age of 60 has been downsized and is unable to find a new job, but will start receiving a substantial pension within the next couple of years, it would make more sense to use a more flexible home equity line of credit to bridge the gap, instead of getting locked into a long-term reverse mortgage.
Finally, the age of the homeowner and his or her long-term plans for staying or moving should be considered. As can be seen from the example outlined above, the amount owing on a reverse mortgage can increase very quickly indeed. A couple in their early 60s who plan to live in the house for another 20 years or so could see most or all of their equity wiped out by the accumulating interest costs of a reverse mortgage. At the other end of the age spectrum, a homeowner in his or her mid-80s is, realistically, not likely to be living in the home for an extended period of time, meaning that the interest costs of a reverse mortgage will not have an opportunity to accumulate and compound to the same extent.

At the end of the day, the most important consideration when deciding whether to take out a reverse mortgage or home equity line of credit is the need to obtain independent financial and/or legal advice. While the information provided by representatives of the institutions offering such financial products is usually accurate, financial institutions are ultimately in the business of selling those products, and are not responsible for looking out for the interests of the potential borrower. Both reverse mortgages and home equity lines of credit are significant financial and legal obligations, and the importance of obtaining unbiased advice when considering either cannot be overstated.

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

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

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

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

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

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

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

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

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

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

As summer reaches its midpoint, students who are about to start their post-secondary education as well as those returning for a second, third, or fourth year of university or college will be gearing up over the next few weeks for the upcoming year. And while students are likely to be preoccupied with choosing courses, majors, or residences, or finding a place to live off-campus, their parents are more likely to be focused on tuition bills, residence costs, and the price of textbooks—and how to pay for it all.

Many current post-secondary students are likely the children of baby boomer parents. For the baby boomers, the cost of post-secondary education was, in many cases, offset by generous student loans on which no interest was payable while they remained in school, as well as by government student grants which didn’t need to be repaid at all. While both the federal and provincial governments continue to provide student loans, receiving outright government grants just isn’t the reality for post-secondary students in 2011. As well, the cost of post-secondary education has risen sharply over the past few years, at the same time as government funding of post-secondary educational institutions has, in many cases, diminished. For a student who lives away from home while attending university, the reality is that the combination of tuition, books and residence will cost at least $15,000-$20,000 per year, even for general undergrad studies. And, for students undertaking studies leading to a professional degree like law, medicine or dentistry, that amount may barely cover the cost of tuition.

The good news is that, apparently in recognition of the fact that students and their parents are being asked to shoulder an ever-increasing share of the ever-increasing cost of post-secondary education, the federal government has put in place or enhanced a number of tax “breaks” for post-secondary students.

While the rules governing eligibility for and the amount of those “breaks” can be detailed, students generally can claim a non-refundable tax credit for tuition (but not residence) bills, an “education amount” based on the number of months they attended school during the tax year and a “textbook amount” which, despite its name, has nothing to do with any cost incurred for textbooks. As well, many of the expenses which may be claimed by taxpayers generally, such as moving costs and the cost of public transit, are equally available to students.

Aside from the cost of residence (which is not, in any case, deductible or creditable for tax purposes), the largest single expense for most students is tuition fees, which can range from around $5,000 to over $15,000, depending on the school and the program. No matter what the amount, students are entitled to a federal tax credit (which reduces their tax otherwise payable) equal to 15% of their tuition bill. Each province also provides a non-refundable tax credit for tuition paid, with the percentage amount ranging from 5% to 11%.

Both full and part-time university students can also claim the “education tax credit”, which is calculated as a fixed amount for every month of full or part-time attendance during the tax year. For 2011, the full time amount to be claimed on the federal tax return is $400 per month, while the part-time amount is $120 per month. The total amount claimed is then multiplied by 15% to arrive at the credit claimed on the federal tax return. As with the tuition tax credit, the provinces all offer an education tax credit, with both the amount and the conversion percentage varying by province.

The final “standard” deduction available to post-secondary students is the so-called textbook amount. The name is something of a misnomer, as neither eligibility for nor the amount of the credit depends on expenditures made for textbooks. Rather, the federal textbook amount is a fixed monthly amount (currently $65 for full-time and $20 for part-time students) which, like the tuition and education amounts is converted to a credit by multiplying by 15%, and which can be claimed by any student who is eligible for the education amount.

Non-refundable tax credits, like the tuition, education, and textbook credits outlined above, work by reducing the tax which the individual claiming the credits would otherwise have to pay. However, post-secondary students generally have relatively low income—and consequently relatively low tax bills—and so may not be able to “use up” all of their available credits in a single tax year. Two solutions are possible. First, the student may transfer the unused credit to a spouse, parent, or grandparent (and it’s not necessary for the parent or grandparent to have actually paid the tuition bill in order to claim the transferred credit). Second, the student can keep the excess credit and claim it in any future tax year, when his or her income and tax bill will presumably be higher. There are some restrictions and limitations on the transfer of student tax credits, but generally speaking, most students should be able to transfer credits to parents or grandparents without difficulty.

The three credits outlined above (tuition, education, and textbook) are the credits which are specifically claimable by students. There are however, other credits which, while available to taxpayers generally, are frequently claimed by post-secondary students. The first is the moving expense. Most students move at least twice a year during the course of their post-secondary careers, and some of those moving expenses are deductible from income earned by the student. Specifically, where students move to take a summer job, any moving costs incurred are deductible from income earned at that summer job, as long as the student’s new home is at least 40 kilometres closer to the job location than the place they’re moving from. It doesn’t matter if the student is simply moving back home for the summer – the moving expense deduction is available as long as the 40-kilometre requirement is met. As well, students who move for purposes of a co-op term can also deduct moving expenses from income earned during the co-op term, assuming once again that the 40-kilometre requirement is satisfied.

Finally most students, out of necessity, use public transit, especially when they live off-campus. Where those students purchase monthly (or longer) public transit passes, they can claim a credit for the total annual cost of those passes, without any dollar amount limit, on the tax return for the year. The cost of weekly passes can also qualify for the credit, assuming that those passes are purchased on a regular basis. As with the tuition, education, and textbook credits, the cost of transit passes is converted to a federal credit by multiplying by 15%. A parallel credit is offered by most of the provinces, with the conversion rate varying from province to province. And, as with the tuition, education, and textbook credit amounts, a parent can claim the cost of transit passes purchased by or for the student, assuming that student is under the age of 19 at the end of the year.

It’s almost inevitable, notwithstanding savings, part-time and summer jobs, and all of the tax “breaks” offered to post-secondary students, that most students will end up incurring some debt in order to pay for their education. Where that debt is in the form of government-sponsored student loans (generally, loans provided under the Canada Student Loans program or the equivalent provincial program), interest paid on those loans after graduation can qualify for a tax credit, at both the federal and provincial levels. It is important to remember, however, that only interest paid on loans extended under government-sponsored programs qualifies for the credit. Loans provided by private lenders (e.g., through a student line of credit) do not qualify, and interest paid on any consolidated loans which include funds advanced by private-sector lenders will similarly not be eligible for the credit.

The number of tax credits, deductions and benefits available to post-secondary students, and the rules governing the calculation, transfer and carry-over of those credits can be confusing. The Canada Revenue Agency Guide P105, Students and Income Tax, which is usually updated annually, is an excellent source of information, providing answers to most of the questions which arise in this area. A current version of that guide, which was last updated in December of 2010, is available on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/E/pub/tg/p105/README.html.

When T4s are issued at the end of February each year, it sometimes comes as a surprise to employees that something they considered to be work-related is treated as a taxable benefit, the value of which must be included in income and upon which tax must be paid. In the view of the Canada Revenue Agency (CRA), the use of employer-provided cell phones can fall into that category.

Providing a cell phone to one’s employees is, of course, about as common now as the office coffee machine. In many cases, the employer can obtain better cell phone rates through a group contract than the employees would be able to negotiate on an individual basis. However, even where having a cell phone is a requirement of one’s employment, it’s still possible that the use of that cell phone can give rise to a taxable benefit.

The CRA’s basic position on employer-provided cell phones and taxable benefits is that where an employee is provided with a cell phone or smart phone in order to help him or her carry out employment duties, there is no taxable benefit to the employee. Where, however, part of the use of that phone is personal, then a taxable benefit can arise, depending on the circumstances.

The CRA recognizes that it’s almost inevitable that an employer-provided cell phone will be used on occasion for personal calls, and the Agency is prepared to provide some latitude in this area on an administrative basis. Its assessing position is that personal use of an employer-provided cell phone will not give rise to a taxable benefit if the plan’s cost is reasonable, the plan is a basic one with a fixed cost and the employee’s personal use of the cell phone service does not result in charges that are more than the basic plan cost. All three of these criteria must be met in order to avoid having a taxable benefit assessed.

Based on those criteria, it seems that the best plan when it comes to employer-provided cell phones and the tax authorities is for the employer to buy the plan which provides the most generous airtime provision that can be reasonably justified by the employee’s business-related use of the phone, to keep the total (business and personal) use minutes under the basic airtime limit provided by the plan and not to incur any charges (i.e., long distance or roaming charges) which result in charges above and beyond the basic monthly bill.

Where those limitations aren’t followed, and the employee’s personal use of the employer-provided cell phone does result in additional charges, then the employer must treat the fair market value of those charges (less any reimbursement provided by the employee to the employer) as a taxable benefit, to be included on the employee’s T4 for the year. In the CRA’s view, it’s the employer’s responsibility to determine the percentage of business versus personal use for each employee as well as the fair market value of any taxable benefit received.

The CRA was recently asked whether a taxable benefit would arise where an employee purchased a basic cell phone service plan, which allowed for a specific number of airtime minutes each month, from the employer’s cell phone service provider, and used that phone for business use. The employee paid the monthly invoice for the plan and was then reimbursed by the employer. Any additional charges over the basic monthly cost incurred by the employee would not be reimbursed unless the employee could show that those charges were related to business use of the cell phone. The CRA confirmed that in determining whether a taxable benefit would arise in this situation, the same criteria which would apply where the employer paid the cell phone bill directly would be used – that is, no taxable benefit would arise where the plan cost was reasonable, the plan was a basic one with a fixed monthly cost and the employee’s personal use of the service did not create charges in excess of the basic monthly cost.

One of the questions addressed in the technical interpretation which is not dealt with in the CRA’s guide to taxable benefits is the question of whether a benefit could be assessed with respect to the purchase and ownership of the cell phone or smart phone itself. The answer, in most cases, was yes. Specifically, the CRA was asked whether an employee who purchased and owned the phone and was then reimbursed for the cost of that purchase by the employer would be considered to have received a taxable benefit. The CRA confirmed that a taxable benefit would be assessed in such circumstances, as the employee had received an economic benefit from the reimbursement of his cost of purchasing the phone. That taxable benefit would be equal to the amount of such reimbursement, even where the employee was required to use the phone in the course of his or her employment duties.

The technical interpretation did not shed any light on the question of whether an employee who is given a cell phone which was purchased by the employer would similarly be considered to have received a taxable benefit. However, following on the reasoning applied where the employee purchased the phone and was subsequently reimbursed by the employee for its cost, it seems likely that the CRA would consider a similar taxable benefit to have been received by the employee in those circumstances.

While interest rates remain low, an increase in those rates and, therefore, in the cost of carrying a mortgage is clearly on the horizon. In addition, changes made by the federal government to mortgage lending rules for Canada Mortgage and Housing Corporation (CMHC) insured mortgages which took effect earlier this year had the effect of making it more difficult for first-time buyers, especially, to get into the real estate market. One of those changes reduced the maximum allowable amortization period for mortgages from 35 years to 30 years, meaning an increase in the required monthly payment, even if interest rates are unchanged. That change, combined with the anticipated increase in mortgage interest rates, made for a busy late winter and early spring real estate season, as first time home buyers took advantage of the opportunity to get into the market in advance of the changes. Even without these changes, spring and summer are, in any year, typically the busiest season for real estate sales and, consequently, the time when most moves take place. For any number of reasons, therefore, a lot of people will be moving this summer.

Whatever the time of year and motivation behind the purchase or sale and purchase, selling one’s home and moving qualifies as one of life’s more stressful experiences. Nonetheless, it’s an experience which most families will go through at least once. In addition to the upheaval of leaving behind a home, a school and a neighbourhood, the financial outlay associated with moving can be considerable. While our tax system can’t do anything to help with the non-financial costs and general stress of moving, it does, in some circumstances, minimize the financial hit by providing a deduction from income for moving expenses incurred.

It’s important to know that not all moves will qualify for such tax relief. The tax rules provide that, where a taxpayer moves to be at least 40 kilometres closer to his or her place of work (for example, a taxpayer who moves from Toronto to take a job in Vancouver or Regina or Ottawa), most moving costs will be deductible from employment or business income earned at the new location. The 40-kilometre distance is measured using the shortest route normally available to the travelling public, which in most cases would mean the distance by road. And, moving to be closer to work doesn’t have to mean moving to a new company: a job transfer to another city while continuing to work for the same employer will qualify, assuming the 40-kilometre criterion is met. A deduction is also available where someone who is unemployed moves to start a new job, again assuming that all other required criteria are met.

The list of expenses which may be deducted is fairly comprehensive, but not all moving related costs are deductible. Under the Canada Revenue Agency’s (CRA) administrative policies, as outlined in their Form T1-M, Moving Expenses Deduction, the following are considered eligible moving expenses:

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, in-transit storage, and insurance) for household effects, including items such as boats and trailers;
costs for up to 15 days for meals and temporary accommodation near either the old or the new residence for the members of the household;
lease cancellation charges (but not rent) on the old residence;
legal 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 (but excluding GST or HST and property taxes);
the cost of selling the old residence, including advertising, notarial, 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 utility hook-ups and disconnections.

It sometimes happens that a move to the new home has to take place before the old residence is sold. In such circumstances, the taxpayer is entitled to deduct up to $5,000 in costs incurred for the maintenance of that residence while it is vacant and efforts are being made to sell it. 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 deduction is available.

It may seem from the foregoing that virtually all moving-related costs will be deductible—however, there are some costs for which the 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; and
mail-forwarding costs.

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. In some cases, 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 $17 per meal, to a maximum of $51 per day, for each person in the household. Those amounts were unchanged from 2009 to 2010, the latest year for which figures are available.

Similarly, the taxpayer can claim a set per-kilometre amount for kilometres driven in connection with the move. The per kilometre amount ranges from 46.0 cents forSaskatchewanto 60.5 cents for theYukon Territory. These rates were in effect for the 2010 taxation year—the CRA will be posting the rates for 2011 on its Web site early in 2012, in time for the tax-filing season. The per-kilometre rates allowed by the CRA for travel during 2010 are actually, in some cases, lower than those allowed for 2009. It is in all cases the province or territory in which the travel begins which determines the applicable rate.

Any moving-related expenses can be deducted from employment or self-employment income (but not investment income or employment insurance benefits) earned at the new location. Where a move takes place late in the year, it is possible, especially where the move is a long distance one, that such expenses will exceed income earned at the new location during the calendar year. In such cases, it’s possible to carry forward the excess expenses, and deduct them from income earned in subsequent years.

Generally, these rules apply to moves made from one location to another withinCanada. While it’s possible to deduct expenses arising from moves fromCanadato another country, from another country toCanada, or between two locations outside ofCanada, the rules governing deductions in such situations are far more restrictive.

The rules governing the deduction of moving expenses are outlined in some detail on the CRA’s T1-M form. That form was updated and reissued by the CRA late in 2010, and the current version of the form can be found on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-m/t1-m-10e.pdf. Additional information on the tax treatment of moving costs is available on the same Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/menu-eng.html.

Any questions not answered by the form or on the Web site can be directed to the CRA’s individual enquiries line at 1-800-959-8281.