Charitable Sector Reform: CRA Lifts Suspension on Audits and Restriction on Political Activities

The nature of the charitable sector is changing in Canada. On March 7, 2019, the Minister of National Revenue issued four key recommendations for the administration of new rules relating to the political activities of charities. Some in the sector are rejoicing, but others are wondering about the long term impact of the changes.

The big news: policy development and discussions relevant to their charitable activities can now can be pursued without limitation, as long as the charitable organization operates exclusively for philanthropic purposes.

New legislation, passed on December 13, 2018, will apply retroactively to September 14, 2018 and now allows CRA to lift a suspension of audits in progress in the interim pending guidance on the implementation of these new rules. Those charities will hear from the government shortly on the status of their files. Here’s a synopsis of the recommendations for change in the charitable sector:

Charitable Purpose. CRA’s first recommendation allows charities to engage in the development of public policy and development without limitation, provided these activities are carried out exclusively for a stated charitable purpose. The CRA has developed and published a guidance document on the administration of this policy, which is open for feedback until April 23, 2019. 

Outreach Funding. Through its second recommendation, the government will provide up to $5.3 million in new funding in the period 2018-2019 to 2023-2024 to enhance charitable sector outreach, as well as education and internal education for employees. It will conduct in-person visits with registered charities to provide support that will help them meet obligations to maintain their charitable status.

Charitable Activities. Recommendation 3 discusses changes to the rules that govern the political activities of charities. With Royal Assent on December 13, 2018, the new rules explicitly allows charities to fully engage (without limitation) in political activities. However, they must further a stated charitable purpose and cannot support or oppose any political party or candidate for public office, directly or indirectly.

Jurisprudence. The government  has also decided to discontinue its appeal of the decision in Canada Without Poverty v. AG Canada case which which restricted registered charities from participating in political activities that exceed 10% of its resources. This Ontario case was overturned as the legislative provisions at issue in the litigation are no longer applicable following the above-mentioned changes. This decision is controversial to some; the reasons for which are well outlined in an article from Mark Blumberg, July 2018.

To assist with the new landscape, Recommendation 4 establishes a permanent Advisory Committee on the Charitable Sector (ACCS) to provide recommendations to the Minister of National Revenue “on important and emerging issues facing charities and qualified donees on an ongoing basis.”

The Government is also providing $3.2 million in new funding to the CRA over the 2018–2019 to 2023–2024 period to support the ACCS in strengthening the relationship between the government and the charitable sector.  

Knowledge Bureau Report is interested on your take on the matter. At its core, the issue encircles the question: which political views should be subsidized through the tax system and which should not?

You may wish to weigh in on the issue, as readers did when we asked our readers their views about changes to the charitable donations tax credit (see results of our previous poll.)   At that time, financial professionals largely indicated that they were in opposition to new donation tax credits for a new category of donees that are non-profit journalism organizations that produce a wide variety of news and information.  These organizations will be able to now issue receipts in the same manner as other registered charities.  

Meanwhile, here is a timeline issued by the government on how this charitable sector reform unfolded:

  • Fall 2016: The CRA held online and in-person consultations
  • September 2016: The Consultation Panel was established
  • May 2017: The Minister welcomed the Panel Report on the public consultations on charities and political activities and asked the CRA to suspend all action related to the remaining audits and objections under the Political Activities Audit Program
  • August 2018: Statement by the Minister of Finance and Minister of National Revenue on removing restrictions on political activities of charities
  • October 29, 2018: New legislation was tabled
  • November 21, 2018: The government announced the creation of a new permanent Advisory Committee on the Charitable Sector (ACCS) as part of Fall Economic Statement 2018
  • December 13, 2018: New legislation received Royal Assent

Knowledge Bureau Poll: High Tax Refunds Spur Controversy

Is the tax refund a good thing? It’s a question that spurred a great debate in February’s Knowledge Bureau poll when we asked tax and financial professionals whether or not the withholding taxes that lead to a tax refund should be reduced to help taxpayers save or pay down debt. Did the no side or the yes side win? You’ll be surprised by the results.

While the votes were split almost down the middle (58% no, 42% yes, from a total of 266 votes), the comments revealed that most agree about one fundamental concept: having taxpayers receive such large refunds means that the government is getting significant interest-free loans from taxpayers, and that’s not ideal.

The debate itself came down to a behavioral finance factor: taxpayers look forward to these returns and factor them into their financial planning each year, whether it’s the most strategic approach or not. So, reducing CRA tax withholdings means that many advisors have to re-align their clients’ way of thinking and their approach to money management – and they were divided on whether or not that could be effective.

Read on for more insight from February’s poll, starting with some comments from respondents who voted “no”:

Cindy outlined why having the extra cash flow monthly might be ineffective: “I wish I could say yes, but a lot of Canadians are not responsible enough to use the extra monthly cash in a beneficial way.”

Clare gave a succinct summary of why this is such a highly-debated issue: “Most prefer to have the refund, it has turned into a short-term savings account. Maybe we should encourage the CRA to pay interest on the refund. It would push the CRA to reduce the amount of taxes taken as they won’t want to pay interest, but recognize the amount as a true short-term savings account for the taxpayer.”

Joanne agreed, explaining that she’s tried to re-align her clients’ perceptions about the tax refund: “In spite of advice to the contrary, many clients still want the refund at the end of the year. Their idea of a reward at tax time or forced savings. I do, however, explain their options and the reasons.”

Mitzi-Lynne used an important example to highlight why she voted no:  “I thought about this and I don’t think it would help, except in very rare cases. My clients all want that refund at tax filing time. If the deductions were used to reduce taxes paycheque by paycheque, the bills would still pile up, the bit extra on the paycheque would be spent on trivialities, nothing would get saved and at the end of the year there would be zero refund. Typically, my clients claim the Northern Resident Deduction. They could get this benefit paycheque by paycheque by putting it on the TD1, but they kick up dust at tax time because don’t understand that they already had that benefit, (and wasted it!) and you only get it once.  I think that reducing the tax payments over the year would not benefit many people. It may be better that we try to do a bit towards saving them from themselves.”

Daniel stated that there could be repercussions if the government stops withholding too much tax: “I think the tax refund scenario is a win-win for everyone. The government gets the free use of our money for part of a year, and we get a forced savings with a lump-sum payout at the end of the year. If not withheld from paycheques, many taxpayers would spend it all as soon as they receive it anyway. And if the government didn’t get the free use of our money throughout the year, they would instead need to raise the tax rates. Would we like that any better?”

Frank said: “While a lesser refund would totally make sense, since it is the taxpayer’s money the government is working with, many people would not really benefit from it. Many taxpayers wait for that cash tax refund to make a purchase or go on vacation. All of these taxpayers who expect that refund would not save a dime during the year. Without this little bright light of the refund, they may not ever make their purchase, take their vacation, or worse, pay down debt.”

Tim explained how it may depend on the circumstances:  “I would like to know what deductions and/or credits are being claimed to generate the $1,700 refund. Is this a one-time RRSP purchase in February? If so, the CRA had use of the refund for only about two months. Even if it was monthly contributions out of your bank account and not through work, average it out over the year and, really, how much interest are you losing? Is it from a year-end charitable donation? Again, not really much interest lost. If it’s a disability credit claim for a dependent or spouse, then, yes, the TD1 should be filled out and given to your employer to reduce tax withholdings.”

Alice pointed out that reducing withholdings risks that taxpayers will owe: “I would hesitate to recommend lowering withholding taxes, as it may create owing tax at the end of the year and this is very hard for taxpayers to deal with. I always find there are employees who ask to have more tax taken off each paycheque.”

Jo agreed: “I would hesitate to recommend lowering withholding, as I have worked with too many clients who depend on the ‘Rev Can savings plan’ and for whom actually owing would be a disaster. Indeed, when doing payroll, I always find there are employees who ask to have more tax taken off each paycheque. It is easy to look at this $1,700-plus as a ‘wasted’ opportunity but — especially for those taxpayers who don’t have that much discretionary income — this is the best way for a lot of people to accumulate some savings.”

Gaetan stated: “In my 35+ years as a tax accountant, the vast majority of my clients (90%+) want to see a refund from their tax return filing. The reason for this is that they see the refund as a tax-free “bonus” part of their income. They do not see it as paying too much in income taxes. Many of my clients actually rely on a tax refund to finance their vacations, home renovations, etc. If their tax deductions are reduced at source (from their paycheques), their standard of spending will simply increase accordingly. They see their refund as a type of ‘forced’ savings tool. Even after I explain to my clients that this means the government had their hard-earned money for more than 12 months, interest-free. My clients simply want a refund every year!”

Here are some comments from those who voted “yes” – which weren’t that different from many of the “no’s,” demonstrating why this is such a complex issue to debate.

Leanor indicated how addressing this issue with business clients opens up a whole different conversation: “You are all looking at the individual taxpayer, but what about the business taxpayer, who pays monthly corporate tax on the basis of the profit of the previous year end—business becomes slow so very little profit, but you have paid monthly to the CRA. Try getting that back in a timely period after you have filed your year-end—you will no doubt expect an audit as they hate to give up money paid in two years ago. Expect an audit which is very time consuming and a great expense to the business owner. CRA would give you penalties back to each month’s corporate tax bill if it wasn’t correct by their auditors.”

Ron explained that from a professional standpoint it makes sense, but he is concerned about the impact it would have on taxpayers: “Yes I think withholdings should be reduced, but there are just so many folks out there that use their tax refund as their savings account! And they will be happy with a big refund rather than the smaller amounts they would get each month, which would then just get spent! Many treat that refund much more wisely than they would with an extra few dollars on their paycheques!”

Prith said “yes,” but added that the CRA needs to introduce a more comprehensive assessment: “We need comprehensive assessment, it would make more sense. Then, the people who know they have high medical could use those to bring down their withholding.”

Doris agreed: “There are things that bring down your tax over and above the items listed on the TD1. If that was more comprehensive, it would make more sense. Then the people who consistently tithe, or know they have high medical, could use those to bring down their withholding.”

Pat said it would help seniors, in particular: “I suggest to seniors who get a refund that they should reduce it. Better to have the money monthly. I usually tell them it is better they get to spend their money than their heirs. Also, in BC, after the age of 55 we can defer our property taxes. It really helps!”

Heather pointed out how reducing withholdings demands professional advice: “Advisors, both tax and planners, should be working with their clients to update the TD1 each year. Another value-add that gets missed too often.”

Martin outlined the challenges, and offered a solution: “Yes, withholding should be reduced a little. It’s a free loan to the government. Having said that, however, many taxpayers would not reduce debt or save it, but consider it just more cash in their pocket to be spent. They just wouldn’t have to wait until the following April to receive it. A person can already ‘reduce tax deductions at source,’ if they make arrangements to make contributions to an RRSP and have their employer fill out the form. That way, it is a forced savings.”

Thank you to everyone who weighed in on February’s highly-debated poll question! This month, we’re changing gears and asking: In your opinion, is it as difficult to envision life after retirement as it is to save for it?” Vote now!

Flip with Care: Watch Out for Principal Residence Rules

There’s nothing like a good house flipping show to get you thinking about the cash potential in your own home. The house flipper approach is to buy homes, live in them short-term while fixing them up, and then sell them; often for big profits. It sounds simple, but it’s not a foolproof strategy, because it comes with tax risks. When done often, house flipping can raise eyebrows at the CRA. Learn how to flip with care, and understand the principal residence rules that could diminish your profits, or worse.

Though the housing market has recently cooled somewhat, the deposition of real property still has the potential to be very lucrative. This is especially true if you earn one tax-exempt capital gain after another using your principle residence exemption. But it’s not a claim that’s guaranteed – there are, in fact many grey areas in the burden of proof all taxpayers have in their relationship with the CRA. It’s important to understand these ahead of tax filing season. 

In the case of the sale of your principle residence, the CRA looks at your intention at the time you purchase the home as well as how many times you made similar transactions. If you buy and sell real estate too often, the CRA may disallow your claim for the principal residence exemption. Even worse, they could disallow the capital gains treatment that comes with a 50% inclusion rate. This circumstance requires the reporting of 100% of the gain as a gross profit if they get the impression you’re in the business of buying and selling homes. 

So where is the line drawn that determines whether profits are tax-free or classified as business income? The more closely your business or occupation is related to commercial real estate transactions (i.e. if you are a real estate broker or builder), the more likely it is that any gain realized from such a transaction will not qualify for the principal residence exemption at all and be considered business income rather than a capital gain.

The courts have considered some of the following criteria on a case-by-case basis to guide us in assessing the right tax filing requirements.   

Checklist for Determining Tax Attributes of Real Estate Dispositions:

  • The taxpayer’s intention with respect to the real estate at the time of its purchase
  • Feasibility of the taxpayer’s intention
  • Geographical location and zoned use of the real estate acquired, extent to which these intentions were carried out by the taxpayer
  • Evidence that the taxpayer’s intention changed after purchase of the real estate
  • The nature of the business, profession, calling or trade of the taxpayer and associates
  • The extent to which borrowed money was used to finance the real estate acquisition and the terms of the financing (if any) arranged
  • The length of time the real estate was held by the taxpayer
  • Factors which motivated the sale of the real estate
  • Evidence that the taxpayer and/or associates had dealt extensively in real estate

Your principal residence can be a great source of wealth, especially if you can use the principal residence exemption to pocket tax free accrued gains. But a warning to potential house flippers – know the tax rules. Your principal residence exemption may be at risk if you don’t follow proper tax filing procedures. And keep this important tax fact in mind: all principal residence dispositions, whether tax exempt or not, must be reported on your personal tax return.   

Excerpted from Essential Tax Facts by Evelyn Jacks, 2018 edition. The new 2019 version is available for pre-order by calling 1.866.953.4769 now.

Don’t Miss the RRSP Contribution Deadline: March 1.

The CRA officially began accepting electronically filed tax returns this week, but you may want to slow down and observe an important tax savings opportunity before you rush to file. Contributions to your Registered Retirement Savings Plan (RRSP) for the 2018 tax year ends on March 1, 2019. Besides reducing your tax bill, you could score even bigger returns: increased refundable and non-refundable tax credits.

To contribute, you have to have contribution room, which you can calculate yourself. Earned income includes employment income, net income from a proprietorship or rental property, net research grants, disability amounts received from the Canada Pension Plan and taxable support payments received. Or you can find your contribution room on your 2018 Notice of Assessment.

Keen savers can get a head start on their 2019 RRSP now. Your 2019 maximum contribution amount is 18% of your earned income in 2018 to a dollar maximum of $26,500. Plus, any unused contribution room carried forward from 2018. The $26,500 amount is reached when 2018 earned income hits $147,222. 

Your contribution room is also reduced by your Pension Adjustment (PA); which is generated if your employer contributes to a Registered Pension Plan or Deferred Profit Sharing Plan for you. Your contribution room may also be reduced by any Past Service Pension Adjustment (PSPA). If you leave your employment and have a Pension Adjustment Reversal (PAR), your RRSP room will be increased.

As you build RRSP contribution room, any amounts that are unfunded from prior years are carried forward throughout your lifetime for use in the future so long as you are eligible to contribute to your own or your spouse’s RRSP. By the end of the year in which you turn age 71, your RRSP must be converted to a RRIF (Registered Retirement Income Fund) or an annuity, and you can no longer make contributions. 

But, unused RRSP room can still be used to your advantage even if you are age ineligible. If you have a younger spouse, you can make Spousal RRSP contributions (a contribution to a plan under which the spouse is the annuitant) and still claim the deduction on your tax return so long as the spouse is age eligible.

Your next step is to see your tax or financial advisors to help you calculate and contribute to your RRSP in the most advantageous manner.

Thought Leadership: Five Tips on Building Team Culture

For many organizations – especially those in the tax and financial services – now is the time to build team culture in advance of a busy season of client interaction. Success of the team depends on so many factors including the right skills, processes and evaluation. For leaders of the team, there are five essential steps to building team culture in good times and bad.

So just how do you build a team culture that accomplishes maximum participation towards a single vision for success and common goals, especially in times of great stress?

Here are the five steps, as discussed in Knowledge Bureau’s new certificate course,  Business Leadership, Culture, and Continuity  which is found in the MFA-Executive Business Growth Specialist program:  

  • Establish your leadership – This refers to your own role as the founder, leader and master keeper of the vision. Before you can start building an effective team, you need to develop the right kind of leadership skills yourself. This does not mean asserting authority, but rather fostering trust, honesty, integrity and transparency in your leadership style (do what you say you will do). If your employees trust your judgement, they will not only follow your lead, but also work effectively when you are not around.
  • Establish relationships with each employee – Get to know your people as individuals. This means learning their skill-sets, what motivates them, their work habits and future goals. Regular, ongoing communication on a one-to-one basis will be an effective way of achieving this. This knowledge will prove extremely valuable to you, as it allows you to match each employee’s expertise and competencies to your organizational plan, and will help increase both productivity and job satisfaction. Additionally, including your employees in decision making as much as possible instead of just delegating tasks, giving them open-ended projects where they select the process and timelines and determine the best solution, will ensure you are developing your people along with the company.
  • Build relationships between your employees – As your team begins to work together in harmony and cooperation, examine the way they work together and communicate with each other to see how you might encourage a deepening of the inter-relationships of your team members. Stronger relationships between your employees also means deeper trust and respect. If there are conflicts, try to resolve them amicably by encouraging them to understand each other’s perspective and mediate where necessary. One way to do this is to brainstorm solutions, which also helps empower them and may lead to new creative solutions to a problem.
  • Foster teamwork – Once you have established relationships with and between your employees, you will be able to focus on helping them work together effectively. Encourage your team to share information both amongst themselves and within the larger organization. Having an effective communication system and not being afraid to ask your team members how they feel can go a long way to improving teamwork. Knowing and understanding what others are working on and how they are contributing to the vision and success of the organization helps improve working relationships.

Compare countries where the leaders take the time to meet and understand each other’s culture and challenges (like the G7) with those who try to operate isolated from the rest of the world, and you will understand how better solutions come from working together toward a common goal with regular, ongoing communication.

  • Evaluate performance – You will be able to assess your team’s performance not only on a fiscal basis, but also in terms of how effectively they display and preserve the values and culture of your company. This means that you will be able to evaluate the performance of your team as a whole alongside their individual performance. While great financial KPIs (Key Performance Indicators) and positive bottom-line results are one measurement of success, the turnover rate of your employees will also provide an indicator of whether you are operating with a high-performing team. We have all seen companies that have a revolving door of employees and are constantly in a training mode, so that their ability to focus on the longer term is challenged. On the other hand, a company with a well-developed and cohesive team and employee tenure above industry averages is very valuable in a succession plan.

No matter how smart, talented, driven or passionate you are about your business, your success as a leader depends on your ability to build, inspire and sustain a team – and get results. You are accountable to that, and the stakes are high. Just consider the recent firing of the Anaheim Ducks’ coach, or the recent troubles experienced by the British and Canadian Prime Ministers who have challenges within their teams.

Thought leadership: The successful leader is one who can recruit and grow a great functional team who are motivated by the leader’s vision and plans to execute on it. There is no doubt that functional teams outperform individual greatness by a very high margin. But just as true, is that dysfunction within the team needs to be quickly recognized and nipped in the bud. That’s even more important when you know that rough waters could lie ahead.

Changes Coming to Trust Filings

The CRA has been provided funding of $79 million over a five-year period, and $15 million on an ongoing basis, to support the development of an electronic platform for processing T3 returns. The goal: to address the government’s concerns about “significant gaps” in trust filing. By the year 2021, there will be new requirements for filing trust returns, and advisors in tax and financial services will need to come up to speed on this issue.

Specifically, certain trusts (including some trusts that are not currently required to file a T3 return) will be required to file and report the identity of all trustees, beneficiaries and settlors of the trust. In addition, it will be required that trusts report the identity of each person who has the ability to exert control over trustee decisions regarding the appointment of income or capital.

This initiative was first introduced by Finance Canada, in the February 27, 2018, federal budget. The commentary noted that a trust that does not earn income or make distributions in any given year is generally not required to file an annual (T3) return of income. Rather, a trust is required to file a T3 return if the trust has tax payable or it distributes all or part of its income or capital to its beneficiaries. In the 2018 budget, there is no requirement for the trust to report the identity of all its beneficiaries.

Now, the Finance Department wants to change all that and require annual reporting for specific trusts. As a result, from 2021 forward, reporting rules will change as follows for:

  • Express trusts that are resident in Canada
  • Non-resident trusts that are currently required to file a T3 return

An express trust, as defined in the budget documents, is generally a trust created with the settlor’s express intent, usually made in writing (as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provisions of a statute).

Some trusts are not affected. According to the most recent proposals, exceptions to the additional reporting requirements apply for the following types of trusts:

  • Mutual fund trusts, segregated funds and master trusts
  • Trusts governed by registered plans (i.e., deferred profit sharing plans, pooled registered pension plans, registered disability savings plans, registered education savings plans, registered pension plans, registered retirement income funds, registered retirement savings plans, registered supplementary unemployment benefit plans and tax-free savings accounts)
  • Lawyers’ general trust accounts
  • GRE (Graduated Rate Estates) and qualified disability trusts
  • Trusts that qualify as non-profit organizations or registered charities
  • Trusts that have been in existence for less than three months or that hold less than $50,000 in assets throughout the taxation year (provided, in the latter case, that their holdings are confined to deposits, government debt obligations and listed securities)

In summary, what needs to be reported: the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability (through the trust terms or a related agreement) to exert control over trustee decisions regarding the appointment of income or capital of the trust (e.g., a protector).

Penalties effective for 2021 and subsequent taxation years. The following will be implemented for those who fail to file trust returns:

  • Late filing: $25 per day (minimum $100; maximum $2,500)
  • Additional late filing penalty: 5% of fair market value of trust assets (minimum $2,500) where the failure to file the trust return was made knowingly or due to gross negligence.

Helping Seniors: 10% Fail to Receive GIS

According to Statistics Canada*in 2016, 4.9% or 289,000 of 4.9 million seniors in Canada were living in poverty. Yet, more than one in ten seniors who are eligible for the Guaranteed Income Supplement (GIS) didn’t receive it in 2016-17. This is a big concern because, in fact, the number of seniors living in poverty is on the rise. So what’s the problem?

The Guaranteed Income Supplement (GIS) is designed to assist low-income seniors. Unfortunately, the government says many low-income seniors who could use the extra cash often don’t apply for GIS because they think they earn too much, or don’t understand the process.

The current process is that seniors who are automatically selected to receive Old Age Security are also automatically selected to receive the GIS based on their income, as reported on their last income tax return. But here is one of the problems – not all seniors file or file a return on time.

Once enrolled, seniors continue to receive the GIS so long as they file a tax return and report sufficiently low income. But, those income levels fluctuate and the eligibility ranges are not well known. They also depend on the taxpayer’s family status as shown in the table below.

The Basics on Eligibility.  The allowance is available to low-income seniors aged 60 to 64 who are married to a pensioner or are the surviving spouse of a senior. These figures are for January to March 2019 and are indexed quarterly.

Family Situation Maximum Income
(excluding OAS)
Maximum
Amount
Reduction
Rate*
Single, widowed, or divorced senior $18,240* $898.32 $1/$24
Spouse receives full OAS $24,096* $540.77 $1/$48
Spouse does not receive OAS $43,728* $898.32 $1/$96 over $4,096
Spouse receives the Allowance $43,728* $540.77 $1/$48

* Benefit reduced by one dollar or each multiple of income level shown (e.g. $1 for each $24 of income for a single senior). Note that the first $3,500 of employment income does not count.

** combined income of both spouses


Less Common GIS Situations:

  • Retiring seniors – seniors who are about to retire and anticipate a lower income in their first year of retirement may apply for the GIS based on their estimated income after their retirement date. This occurs even if they do not qualify based on income reported on their last tax return.
  • Death of a spouse – when a taxpayer’s spouse dies, their GIS is based on their own income for the year of death rather than their family income (as it was for years when they were married at the end of the year). However, even if this income level is very low, they will not automatically receive the GIS based on their income unless they apply for it.
  • RRSP meltdown – when the taxpayer reaches age 72, any RRSP balances have to be transferred to an RRIF and there are minimum withdrawal amounts annually from the RRIF. For low-income seniors, the minimum withdrawal reduces their GIS each year. 

Seniors anticipating low income in retirement and who have small RRSP balances, transfer the RRSP balance to the TFSA before they are eligible for the GIS so withdrawals can be made without affecting the GIS.

More wrinkles:  For those who are not automatically enrolled or who do not qualify based on income reported on their last tax return, an application is required. Over the coming weeks, the government will be sending out tens of thousands of letters to seniors who are receiving OAS to remind them to apply, but there is no reminder for GIS. Those that meet the eligibility criteria outlined above are encouraged to apply. 

A role for advisors. Tax and financial advisors can help by encouraging their clients to know and understand income ranges that qualify for the GIS and to complete the application forms for seniors as a public service.

Written in collaboration with Walter Harder.

Getting the New Climate Action Incentive Rebate Right

Canada now has anationwide standard for reducing carbonpollution, which means that starting in 2019, a federal “backstop” carbon pollution pricing system will apply to four provinces – Saskatchewan, Manitoba, Ontario and New Brunswick – that have not implemented their own systems. For taxpayers in these provinces, a new refundable tax rebate will be claimed on the 2018 tax return. But, like most tax provisions, it has its wrinkles.

The majority of the charges collected from a fuel tax that begins on April 1, 2019, will be returned through this rebate, called the Climate Action Incentive payments. The amounts being returned to individuals and families are calculated as follows:

PROVINCE
TAXPAYER SPOUSE/ELIGIBLE DEPENDANT QUALIFIED DEPENDANT
SK $305 $152 $76
MB $170 $85 $42
ON $154 $77 $38
NB $128 $64 $32

Payments in Subsequent Years. Climate Action Incentive payments will increase annually as fuel charges rise, until at least 2022. The exact payment amounts are to be announced annually, but for the time being are projected to be as follows:

 Saskatchewan 2020 2021 2022
First adult $452 $596 $731
Spouse $225 $297 $364
Child $113 $148 $182
Family of four $903 $1,189 $1,459


 Manitoba 2020 2021 2022
First adult $250 $328 $402
Spouse $125 $164 $201
Child $62 $81 $99
Family of four $499 $654 $801


 New Brunswick 2020 2021 2022
First adult $189 $247 $303
Spouse $94 $124 $152
Child $47 $62 $76
Family of Four $377 $495 $607


 Ontario 2020 2021 2022
First adult $226 $295 $360
Spouse $113 $147 $180
Child $56 $73 $89
Family of four $451 $588 $718

Supplement for Residents of Rural and Small Communities. In recognition of increased energy needs and reduced access to alternative transportation options, residents of rural and small communities will have their payments increased by 10 percent. To find out which areas will qualify, go to this link:

There, you should be able to find the places outside of metropolitan areas that may qualify, according to CE Summit delegate Dianne Lepage of Liberty Tax Service. She tells us that some towns don’t show up per se, but their rural municipality does. For example, Rapid City, Manitoba, is not there but the rural municipality of Oakview is. It will, in other words, take some digging to find out exactly who qualifies to get the extra payment.

Following are other criteria for the program shared by Finance Canada:

Relief for Farmers. Upfront relief from the fuel charge will be provided with exemption certificates when certain conditions are met. Specifically, a registered distributor can deliver, without the fuel charge applying, gasoline or light fuel oil (e.g., diesel), if the fuel is for use exclusively in the operation of eligible farming machinery and all, or substantially all, of the fuel is for use in the course of eligible farming activities. Farmers do not need to be registered for the purposes of this relief.

Eligible farming machinery means property that is primarily used for the purposes of farming and that is a farm truck or tractor, a vehicle not licensed to be operated on a public road, or an industrial machine or stationary or portable engine. Diversion rules to ensure that the fuel charge applies if gasoline or light fuel oil is not used as intended.

Relief for Fishers. Similar rules apply to fishers when all, or substantially all, of the fuel is for use in the course of eligible fishing activities and when certain conditions are met, one of them being that the province be prescribed for the purposed of the relief. There are currently no listed provinces that are prescribed.

Exemptions to Carbon Taxes. A full exemption from carbon pollution pricing will be granted to: diesel-fired electricity generation in remote communities, for aviation fuel in the territories, and for farmers and fishers. Partial relief from the fuel charge would also be provided for eligible commercial greenhouse operators.

Bottom line: Remind all taxpayers in these provinces to file a tax return – whether they have income or not. It will lead to a bigger tax refund!

The Tax Refund: Friend or Foe to Wealth Management?

The Statistics Canada’s Individual Income Tax Report*released on January 8, highlighted just how much Canadians are being over-taxed by the CRA. With average tax refunds coming in at $1,757 for the 2018 filing season, many taxpayers are effectively providing the government with interest-free loans of approximately $150 per month for up to 16 months before they see their refund. Just how much is that really costing you?

Consider this: $150 a month could help you take advantage of investment opportunities or pay down debt. Investing the money in a TFSA at a 5% return would earn almost $50 in interest over a 12-month period. While that may not sound like much annually, it’s significant over the long-term if that investment is allowed to grow. The earnings are tax-free along the way and when they are withdrawn, too. 

If the money was put into an RRSP, almost immediate tax savings would result, at the taxpayer’s marginal tax rates, provided the taxpayer is age-eligible and has RRSP contribution room.  A spousal RRSP opportunity may also be possible. This opportunity brings with it the possibility of reducing withholding taxes throughout the year, using Form T1213.

Likewise, if taxpayers used that $150 monthly payment to reduce debt — particularly high-interest consumer debt — instead of giving it up to the CRA in overpayment, that could make a significant financial impact. Especially when you consider that the average interest rate for credit cards in Canada is 19%, and that number continues to rise. The benefit is exponentially positive, given that interest on consumer debt is not deductible.

Many Canadians celebrate their refund cheque as though it’s free money when, in reality, money collected through over-taxation should have been theirs all along. Lacking access to it therefore has a negative impact on their financial future – making the tax refund a foe, not a friend, to financial planning goals.

To prevent these repercussions seek out the services of a certified professional in tax-efficient debt management  or a Real Wealth Manager, who can help you coordinate financial plans with tax filing priorities. It’s important to reduce CRA’s reach up-front, and control whether the correct amount of tax is being paid on a regular basis.

Consider the following implementation tips:

  • Fill out a TD1 for your employer’s payroll department, outlining tax credits and deductions you’re likely to claim. Payroll deductions can be adjusted accordingly. This often needs to be requested, as most companies don’t routinely provide these forms to new hires.
  • Update your employer on significant life changes that may impact the amount of tax to be withheld (child or spouse no longer a dependent, for example).
  • Inform your employer if you have more than one employer in the same tax year. This could affect your tax-exempt basic personal amount. Otherwise, if a new employer assumes this applies, under-taxation could occur and you’ll owe money you weren’t anticipating.
  • CRA can give approval to an employer to collect less tax in cases where employees are making RRSP contributions or claiming significant childcare costs, for example. An advisor can help you make the right moves in order to ensure only the necessary taxes are being withheld.

Advisors helping taxpayers through this process can do more than simply manage the logistics; having conversations around this issue creates an opportunity for education. It’s time to start moving the needle and help Canadians better understand the complex tax issues that impact their wealth.

The Statistics Canada Individual Income Tax Report*

What Else Is New in 2019? Auto Expense Deduction Changes

Did you check your odometer reading at the start of the year? Finance Canada confirmed its 2019 auto expense rates on December 27, but they don’t quite measure up to cover the carbon taxes that increase the cost of driving, including the increased gas prices as of January 1. Those who use passenger vehicles for business will be disappointed that their write-offs haven’t changed at all, unless a new vehicle was purchased after November 20, 2018.

Here are the tax changes:

Employer-owned cars. For those who use an employer-provided vehicle, the prescribed rate that determines the taxable benefit for the personal portion of operating expenses paid by employers will be increased to 28 cents per kilometer from 26 cents. For those employed principally in selling or leasing cars, the rate goes up to 25 cents; also a 2-cent-per-kilometer increase. However, that’s not all in terms of costs to employees with this benefit: a standby charge must be computed separately to reflect the fact that the car is available for personal use.

Employee-owned cars. For those who purchase a passenger vehicle, limits on the claims for capital cost allowance, interest costs and leasing costs will not be changed from 2018 limits. The amounts are $30,000 (plus taxes), $300 a month and $800 a month (plus taxes), respectively.

Tax-exempt allowances. The limit on tax-exempt allowances paid to employees who use their own vehicles for business purposes will increase by 3 cents to 58 cents per kilometer for the first 5,000 kilometres driven, and then to 52 cents for each additional kilometer. Those living in the Northwest Territories, Nunavut and Yukon will add 4 cents to this, making it 62 cents per kilometer for the first 5,000 kilometres, and 56 cents there over that distance.

Given that these allowances are intended to offset the costs of owning and operating the vehicle — including fuel, financing, insurance, maintenance and depreciation — the new rates may not be enough to cover the carbon taxes of 4.4 cents starting April 1 for provinces that do not have their own carbon tax regime; and that amount will be even more in other provinces that do.

Average gas prices. It turns out Manitoba has the lowest average gas prices in the country these days, according to the CAA website. As of January 2, the rates were as follows:

Province Gas Price per Litre ($)
Alberta 091.1
British Columbia 125.8
Manitoba 088.7
New Brunswick 101.6
Newfoundland and Labrador 108.5
Nova Scotia 096.1
Ontario 097.6
Prince Edward Island 095.7
Quebec 108.4
Saskatchewan 096.0