Shopping Spoiler Alert: Canadians Aren’t Saving Enough

In the holiday spirit yet? This news might dampen it: on Friday November 30, Statistics Canada released a report on GDP, income and expenditure for the third quarter of 2018. The big news? In 2018, Canadians have had the worst household savings rate on an annual basis since 2005, averaging only 1.4% over the past year. For the third quarter of this year, the household savings rate was a mere 0.8%; the lowest quarterly level since early in 2017.

There are broad repercussions for everyone that come with the lower household savings rates outlined in the Statistics Canada report, specifically, the impact on economic growth that is driven by consumer spending. But even more concerning are the implications to young Canadian families and their ability to financially manage an emergency situation or unexpected expense.

In fact, an October a report by the Financial Planning Standards Council indicated that 33% would fail a “financial stress test,” and face hardship should a significant unexpected expense arise. An Ipsos report from one year prior said than an unexpected expense of as little as $200 could create this situation for more than half of Canadians. Plus, they are struggling to pay down debt, too — 20% rarely (if ever) pay off their credit card balance at the end of the month.

Worse still, 31% of Canadians agree that rising interest rates push them closer to bankruptcy, and this doesn’t bode well for retirement planning. This was further highlighted in the Financial Planning Standards Council survey, which reported that 64% don’t have access to an employee savings program, and six in ten rarely maximize their annual RRSP contribution amounts.

 The money moral? As the household savings rate in Canada hits its lowest point in over a decade, and the forecast is for Canadians to have even less disposable income in the future, debt management and tax-efficient income strategies become more important than ever. it’s prudent to take them into account before the holiday shopping season!

Donation Controversy: Tax Relief for Media

Last week’s Fall Economic Statement featured updates to Canada’s economic outlook and corporate tax changes, specifically, the Capital Cost Allowance measures. However, the Finance Minister also proposed a controversial $595 million package to support Canada’s media sector, including tax breaks for those who subscribe to some online media outlets.

Speaking on November 21 to his support for journalism in Canada Morneau said, “We’ve made some investments to ensure that we continue that we have an important free press and to ensure that we have a strong and healthy democracy by protecting the vital role that independent news media play in our democracy and in our communities…”

To that end, the government will be creating an independent panel made up of members of the media, in order to implement these proposed tax-relief provisions:

  • A temporary, non-refundable 15-percent tax credit for qualifying subscribers of eligible digital news media. Dates and eligibility criteria will be determined by the panel.
  • A donations tax credit for contributions to a new category of “qualified donee” for non-profit journalism organizations. This will allow these organizations to issue receipts for donations from both individuals and corporations and open the door for foundations to provide financial support to media.
  • A refundable tax credit for qualifying news organizations that “produce a wide variety of news and information of interest to Canadians.” Specifically, the tax credit will apply to the labour costs associated with producing original content and will be open to both non-profit and for-profit news organizations. An independent panel drawn from the news industry will be established to define eligibility of the measure, which will take effect January 1, 2019.

Opposition critics have expressed concern about these measures and their impact on journalistic independence. Additional concerns relate to the creation of the panel that will define eligibility criteria, expected before the next federal budget in the spring.

The donations credit is also puzzling, considering that the March 22, 2017 federal budget removed the 25% First-Time Donor’s Super Credit, originally introduced to encourage young people to give to charity.  It cited the following reasons in the budget:   “. . .Budget 2017 confirms that the First-Time Donor’s Super Credit will be allowed to expire in 2017 as planned, due to its low take-up, small average amounts donated, and the overall generosity of existing tax assistance for charitable donations.”

It would appear the government has had a change of heart on using the overall generosity of existing tax assistance for charitable donations in the case of journalism.

Fall Economic Statement: Tax Incentives for Corporations

Canada has been in a strong economic position since 2015, but dark clouds are on the horizon as global economic growth has peaked and deficits are expected to grow. This is what Finance Minister Morneau faces as he unveiled his November 21 Fall Economic Report.

Canada’s economic growth has averaged close to 2.5% since the end of 2015 and in the last three years, the unemployment rate has fallen to 5.8%, the lowest level in 40 years, which has brought with it strong wage growth. As a result, budgetary revenues are expected to increase by 4.9% in 2018-2019, and at an average annual rate of 3.8% over the remainder of the forecast period.

Personal income tax revenues, which still are the largest line item for government intake, are projected to increase by 5.4% or $8.3 Billion in 2018-2019, which bring revenues from this source up to $161.9 Billion, rising by 4.3% annually over the rest of the forecast period “reflecting the progressive nature of the income tax system combined with projected real income gains.”

Corporate taxes are projected to increase as well, by $1.7 billion or 3.5% to $49.5 billion in 2018–19. After which they are projected to decline in 2019–20 by 7.6%, as a result of new tax measures introduced with this report. Following this and over the remainder of the projection period, corporate  tax revenues will grow again by an average annual rate of 3.9%.

On the negative side, the Fall Economic Report reveals that real GDP growth has averaged slightly less than 2% since mid-2017, and it is expected to change from a 2.0% real GDP growth rate for 2018-2019. It will drop to 1.8% over the 5-year period in the report, unchanged from the February 27, 2018 budget.

Worse, the GDP inflation rate, which is the broadest measure of economy-wide inflation, has been adjusted upwards from the February budget. This means the level of nominal GDP (the broadest measure of the tax base) will also be $9 billion higher.

On the upside, the government suggests that household spending and business investment in Canada going forward may be stronger than expected. Especially in light of the current tight labour market conditions. But there are many downside risks that still apply.

The U.S. economy could overheat due to recent significant fiscal stimulus. This in turn could induce the Federal Reserve to increase interest rates faster than markets expect. Should that happen, economic activity in the U.S. could also slow, leading to global financial turbulence driven by higher interest rates and a stronger U.S. dollar. Economic protectionism could also dampen global trading activity, which could affect the Canadian economy.

In reading the fine details of the report, there are some disturbing trends. Exports of non-energy goods, which represent roughly two-thirds of Canada’s goods export volumes have continued to perform below expectations, and have remained largely unchanged for more than a decade.

Meanwhile, Canada’s share of goods exports going to emerging economies is the lowest amongst its peers; indicative of our close trading relationship with the U.S. and what the report calls “the intense and growing global competition for growth opportunities abroad.” In short, Canada must step up to serve the growing needs of emerging economies and reduce its reliance on the U.S.

The report also makes a pitch for the oil transportation by pipeline rather than by mail. “Canadian companies are not getting a fair price for their exports. . . . pipeline transportation constraints in Western Canada means that an increasing amount of Canadian oil is being transported by rail, a development (which) has contributed to a higher discount on the Canadian price of crude oil since the end of 2017.”

Canadian crude oil prices are also vulnerable to developments in the U.S., such as increases in U.S. production, and pipeline and refinery shutdowns in the U.S. These have recently contributed to market prices for Western Canada crude oil declining to historic lows, while world benchmark oil prices remain well above those observed in 2016. The result has been a significant loss in income for Canadian oil producers.

It all means that turbulence is ahead for Canadians, who must continue to navigate a continued and challenging global economic environment and its effects on after-tax wealth accumulation.

Visit Knowledge Bureau Report for the Economic, Fiscal and Revenue Outlook for Canada, adjusted from the February 27, 2018 budget. As per the Fall Economic Report, Finance Canada November 21, 2018.

Death in the Family: Executors’ Obligations

Year-end can be a particularly difficult time for those who have lost a loved one during the year.  But it’s important to see a tax specialist when someone in the family dies, to file any tax returns that may be outstanding on time, adjust prior-filed returns, and to claim specific tax benefits that can help to pay for end-of-life costs.

Filing deadlines. The final tax return, also known as the terminal return, must be received by CRA as follows:

  • Death Occurred between January 1 to October 31: File by April 30.
  • Death Occurred between November 1 to December 31: File within six months after date of death (May 1 to June 30). Note, however, that balances due for the surviving spouse, who may file at the same time, must be paid on or before April 30 to avoid interest charges.
  • Death of a Self-employed Person: If death occurred between January 1 and December 15, file by June 15. If death occurred in the period December 16 to December 31, file six months after date of death (June 16 to June 30). Again, balances due for the surviving spouse, who may file at the same time, must be paid on or before April 30 to avoid interest charges.

Adjust Prior Returns for the Deceased: If there are outstanding returns for prior years for the deceased, the due dates above remain the same; however, Taxpayer Relief Provisions may be applied to late returns due within the last 10 years, or to amended returns previously filed in the prior 10 years, and to waive penalties and interest in hardship cases.

 Special Privileges and Relief Options: Executors who are filing final returns may take advantage of two important special privileges for deceased taxpayers that will provide additional relief:

  • Rights and Things Returns: These additional returns can be filed to claim personal amounts in full on each return – terminal and rights or things – and to split between returns and claim other benefits to the best advantage of the taxpayer on each return.
  • Election to Defer Payment: Especially because of the deemed disposition rules for capital assets on the death of a taxpayer, it is possible that a large tax liability can occur on the death of a taxpayer. It is possible to roll over assets on a tax-free basis to a surviving spouse, and to maximize the use of previously unused tax losses. But if the final result of this astute tax filing on death is still a balance due, it is possible to postpone the tax payment until the asset is actually sold and money is received. Security for the amount owning may be posted by filing form T2075 Election to Defer Payment of Income Tax, Under Subsection 159(5) of the Income Tax Act by a Deceased Taxpayer’s Legal Representative or Trustee. Although interest will be charged by the CRA as it waits for its money, this option may provide much-needed relief when high-value, low-liquidity capital assets must be disposed of to pay taxes on deemed disposition.

Missed Prior Returns: 8 Reasons to File Before Year-End

Forget to file a tax return in a previous year? It can pay handsomely to catch up before year-end. Not only can you recover tax refunds CRA may still owe you (that’s the main reason for most), but here are 8 additional reasons to file those missed returns before year-end:

  1. To receive missed benefits and credits: The GST/HST Credit, the Canada Child Benefit, the Refundable Medical Expense Supplement, or available refundable provincial tax credits provide generous tax free income sources, but to claim them you must file a tax return. Low income earners should file to receive the Working Income Tax Benefit (WITB) or apply for advance payments in the new year, when this credit will become known as the Canada Workers Benefit.
  2. To create more RRSP contribution room and carry forward deductions: This is an important opportunity to maximize your retirement income while you are reducing net and taxable income so as to pay less tax and receive more benefits.
  3. To split pension income: To take advantage of pension income splitting with your spouse you must file an annual election. This is required by April 30. Use Form T1032 to do so. Amending or revoking elections is also possible but only for up to three calendar years after the filing due date for the year in which the election applies.
  4. To harvest losses for use in reducing past or future income: The reporting of non-capital and capital losses is often missed. Non-capital losses can occur from employment, investment, self-employment and rental ventures, whereas capital losses occur when disposing of assets for less than their adjusted cost base. Generally, these losses offset other income in the current year, and then can be carried back to offset income in the previous three previous years.  To do so use  Form T1A Capital Loss Carry Back.  Unabsorbed losses still remaining can then be carried forward  20 years in the case of non-capital losses, or indefinitely in the case of capital losses.
  5. To maximize claims for students: Be sure to file missed prior returns to help with education funding:  transfer unused tuition amounts to supporting individuals, but only if the student isn’t taxable.  Students can also carry forward unclaimed tuition, education or textbook amounts from prior years into the future when income is taxable.  Student loan interest can be carried forward, too,  for up to five years.
  6. To maximize use of medical expenses and charitable donations for the disabled and their supporting individuals: File a tax return to carry forward unused charitable donations (you can do so for up to 5 years). Medical expenses can be claimed in the best 12 month period ending in a tax year.
  7. To qualify for OAS/GIS Supplement and certain provincial health care benefits: You may be missing out on the federal income supplement for low-income seniors (Guaranteed Income Supplement or GIS) or certain provincial “pharmacare” plans when you fail to file the correct application forms. The entries on your tax return are required to verify income for these purposes.
  8. To avoid interest, gross negligence or tax evasion penalties. If you owe taxes to the CRA for prior years, your catch-up efforts will help you avoid expensive penalties and interest, which is a great way to go into the new year!

Bottom Line: Catch up on your tax filings before December 31 to maximize all your tax filing rights in the 10-year period starting January 1, 2008. That 2008 tax filing year and all its refunds, carry-forward provisions and benefits will be unavailable to you – forever – if you miss this deadline.

Tax Filing Delinquency: 8 Reasons to Catch Up Before Year-End

It pays to file outstanding tax returns before year end, not only to recover refunds that CRA may still owe you, but also to avoid paying penalties and interest that would be charged for gross negligence or in some cases, tax evasion. But also, when you don’t file on time, you miss out on important tax planning opportunities that may end for you on December 31. Here are 8 important reasons to review your return before year-end.

To the first point, it makes no sense to have CRA hold onto your tax refund; you will receive no interest payment from the government as it holds onto your money. Leaving this money in their hands means that not only is it being eroded by inflation, but you are also missing out on opportunities to maximize tax-efficient investment opportunities for your retirement. You must file a return to earn unused RRSP contribution room and class capital losses incurred in a non-registered savings account.

Second, you must file a tax return to avoid penalties and interest if you owe money to the CRA when any of the following circumstances apply to you. Do file a tax return immediately if:

1. You have taxable income and must pay federal or provincial income tax in the current tax year or any of the three preceding tax years. This is the normal statute of limitations for CRA to request additional information for audit purposes. However, if CRA expects fraud, they can go back a full ten years. A tax services specialist can help you assess if it’s to your benefit to file or adjust returns, if applicable, for the full ten-year period, whether or not fraud applies. These returns or adjustments will be accepted by the CRA.
2. You have disposed of any capital property in the year, including a principal residence, which requires the filing of form T2091 Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). Failing to file a return in this situation comes with a separate “failure to file” penalty of up to $8,000.
3. You will be required to repay OAS (Old Age Security) or EI (Employment Insurance) benefits to the government.
4. You are repaying, or are required to repay, HBP (Home Buyer Plan) or LLP (Lifelong Learning Plan) amounts to your RRSP through your tax return.
5. You are required to make contributions to the CPP or are electing not to contribute.
6. You are holding offshore properties with a cost of $100,000 or more and must file form T1135 Foreign Income Verification (whether or not you file a return).
7. You received an advance on the Working Income Tax Benefit.

Paying penalties and related interest costs is extremely expensive, and a good way to erode the wealth you are otherwise trying to accumulate in your investments. Here’s why: When you owe money to the CRA, it will charge the prescribed annual rate of interest, currently 2 percent, plus 4 percent more, on top of the taxes, repayments or additional penalties owing. That’s 6 percent compounded daily, from the date the return was due. It quickly adds up to a financial quagmire.

Here is an 8th reason to file prior-missed returns: the 2008 tax year becomes statute barred after December 31, 2018. Be sure to recover potential tax refunds, create unused RRSP contribution room and log any losses available for carry overs before then.

Finance Canada Report Raises Eyebrows

Two important economic reports were released in Canada on October 19 and October 23. The former, by the Finance Department has raised eyebrows for its tax and spending increases. The second, from the Office of the Parliamentary Budget Officer, has warned about the effect of negative trade actions on Canada’s GDP.

Let’s start with the PBO’s assumptions and projections for the period 2018 to 2020:

  • Investment Climate: The U.S. Tax Cuts and Jobs Act will not have a material impact on Canada’s investment climate;
  • Interest Rate Hikes: The Bank of Canada will steadily increase its policy interest rate through early 2020.
  • Household Financial Health: as a result of interest rate hikes, households’ financial vulnerability is expected to increase as their debt-servicing capacity is further stretched.
  • Economic Growth, or Lack Thereof: real GDP in Canada is expected to advance by 2.1 per cent in 2018 and 1.8 per cent in 2019 before slowing to growth of 1.5 per cent annually, on average, over 2020 to 2023.
  • Medium Term Growth: the PBO expects that the Canadian economy to rely less on consumer spending and the housing sector (a significant contraction in residential investment and a deceleration in house prices through 2020 is projected). Rather, business investment and exports are expected to make a greater contribution to economic growth.

Finance Canada’s annual financial report, meanwhile, has raised eyebrows, particularly when it comes to debt, taxes and growth. One significant revelation from the annual financial report: the budgetary deficit is $19.0 billion against revenue increases of $20.1 billion.

The Finance Department pointed to the International Monetary Fund (IMF) report that Canada’s total government net debt-to-GDP ratio, which includes the net debt of all levels of government and the assets held in the CPP/QPP funds, is standing at 27.8 percent. This is the lowest level among G7 countries in 2017. Real GDP growth was 3.0 percent and nominal GDP grew 5.4 percent, indicating good growth results. But, as reported by the PBO, this growth rate is expected to wain significantly.

Dr. Jack Mintz, who will be speaking on the subject of economic growth and competitiveness at the Distinguished Advisor Conference, November 12 in Quebec City, gave us his thoughts on the effect of taxes on productivity and economic growth:

“With an aging population, governments will need resources to fund health, long-term care and pensions. Growth is critical since retired populations will depend on the taxes paid by workers and businesses in the future. Labour growth in Canada has fallen from 2 to 1 percent in recent years, even though migration accounts now for 70 percent of population growth. So if one wants to achieve higher growth, it will depend on productivity growth — output per worker. Governments boost productivity growth through spending on infrastructure, education and research, but less so on transfers and consumption-based programs like health. Governments can harm productivity through taxation, especially with reliance on income taxes and land transfer taxes.”

Certainly Canada is relying heavily on its income tax revenues. According to the report, federal revenues totalled $313.6 billion in 2017-18, up $20.1 billion, or 6.9 percent, from 2016-17. Indeed, the largest source of federal revenues is personal income tax, accounting for 49.0 percent. This is followed by corporate income tax revenues at 15.2 percent and GST revenues at 11.7 percent; EI premiums contributed 6.7 percent of total revenue. All of which means that people and businesses contributed close to 77 percent of all revenues to government. Other sources included other taxes and duties, non-resident taxes and income from government business activities.

Also, due to a change in the way that unfunded pension obligations are accounted for, the projected budgetary balance has been restated to $19.9 billion, and the federal debt has been restated to 32.0 percent of GDP, up from 31.0 percent.

This annual federal finance report does provide a glimpse into the future for investors and taxpayers. Simply stated, deficits happen when government spending exceeds revenues and that, in turn, increases debt.  What we are left with is a circular problem: debt increases, deficits increase, and interest costs increase, all because of higher debt. This cuts into the benefits that can be delivered to people. Worse, rising debt and deficits decrease future standards of living of our heirs, too.

at Canada’s total government net debt-to-GDP ratio, which includes the net debt of all levels of government and the assets held in the CPP/QPP funds, is standing at 27.8 percent, the lowest level among G7 countries in 2017. Real GDP growth was 3.0 percent and nominal GDP grew 5.4 percent, indicating good growth results.

Looking forward, however, things don’t appear as rosy. Because of a change in the way that unfunded pension obligations are accounted for, the projected budgetary balance has been restated to $19.9 billion, and the federal debt has been restated to 32.0 percent of GDP, up from 31.0 percent.

This annual federal finance report does provide a glimpse into the future for investors and taxpayers. Simply stated, deficits happen when government spending exceeds revenues and that, in turn, increases debt, which creates a circular problem: when debt increases, deficits increase, because interest costs rise to service a bigger debt. The problem with rising interest costs is that they cut into the benefits that can be delivered to people; worse, rising debt and deficits decrease future standards of living.



Year-End Tax Tip: Brush Up on Medical Expenses

Claiming medical expenses can be painful for most taxpayers: there are so many receipts and tiny numbers involved. But it can be worthwhile, especially if you schedule your dental and medical treatments in a tax-savvy manner before year-end.

Most people know, for example, that they can claim medical expenses for their nuclear family: mom, dad and their minor children. But did you know you can also claim for others who are dependent on you if they are resident in Canada? That includes children over 18, grandchildren, parents, grandparents, siblings, even uncles, aunts, nephews and nieces.

There are also a host of interesting costs that are deductible, provided they are unreimbursed by a medical plan. So, for example, if you are on a medical plan at work and it covers 80 percent of all these costs, you can claim the 20 percent that is not covered by the plan. Furthermore, the premiums for the private medical plan are claimable too, including those provided by an employer. Check pay stubs and Box 40 of the T4 slip for the premiums in this case.

Often forgotten claims are the unusual ones:

  • Medical marijuana or marijuana seeds, but they must be purchased from Health Canada, or a licensed person under the Marijuana Medical Access Regulations (MMAR). Costs of growing not deductible. Keep in mind, guidelines may change following legalization on October 20.
  • For people who have celiac disease, the incremental cost of acquiring gluten-free food products can be claimed, but you’ll need to compare the cost of gluten-free vs non-gluten-free food products. That person must also have a written certificate from a medical practitioner that a gluten-free diet is required. Deductible costs include the incremental cost of gluten-free bread, bagels, muffins, and cereals, rice flour and GF spices. Only the costs related to the person with celiac disease are to be used in calculating the medical expense tax credit . . . so if others consume the same food with the patient, a proration is necessary.

Generally, the costs of visiting the following medical practitioners are eligible: dentist or dental hygienist, medical doctor, optometrist, psychologist or psychoanalyst, chiropractor, naturopath, acupuncturist or dietician, to name a few.

Eligible medical treatments include: medical and dental services, eyeglasses, hearing aids and their batteries, attendant or nursing home care, ambulance fees; service dogs, guide dogs or dogs to manage severe diabetes or psychological conditions, including care and travel for training; prescribed alterations to the home to accommodate disabled persons; cost of training a person to provide care for an infirm dependant; and even tutoring services for a patient with a learning disability or mental impairment.

Remember, the claim for medical expenses is reduced by 3 percent of the claimant’s net income (or the dependant’s net income if claiming expenses for other dependants), to a maximum of $2,302 in 2018.

This maximum is reached when net income is over $76,733. Generally, that means the spouse with the lower income will get the biggest claim, but it is worth nothing if that spouse is not taxable. In those cases, carry the receipts forward for a possible future claim, as medical expenses can be claimed in the best 12-month period ending in the tax year.

That’s where year-end tax planning really comes into play. By grouping expenses left unclaimed from last year, timing your expenses for this year may provide for a bigger claim in your best 12-month period. This could be from November 1, 2017, to October 31, 2018, for example. A DFA – Tax Services Specialist can help you through the process, provided that, as a taxpayer, you’ve done your due diligence in keeping the appropriate receipts and documentation.

Tax Specialization: Soft Skills are Equally Important

There is a very bright future for the tax preparer who makes a great decision to become the Tax Services Specialist of the future. But, to offer the best advice in that regard, tax specialists must have more than precise technical skills.

To go beyond the filing of returns and move their offering to a specialized service model, advisors must be prepared to spend more time nurturing their relationships with a multi-stakeholder professional team; that is, with all the people involved in maximizing the client’s personal and financial goals, over the long term. To accomplish this, the soft skills matter.

Tax specialists must have excellent communications skills. In providing high-value advice at crucial financial times, they act as an articulate tax educator, both verbally and in writing, to take their individual client and, where required, the family as a whole, on a journey to continued financial health.

Tax specialists excel at conducting thorough interviews, not just during tax season, but by making a point of meeting the client more often: before, during and after significant lifecycle events. The result is a relationship built on trust, and a trusted advisor has the privilege of obtaining all the information required to make the most informed recommendations, even at the most difficult times in life: when there is great loss due to relationship breakdown, illness or death.

Tax specialists are also advocates for their clients. They position themselves to be the “go to” financial advisor throughout a lifetime of personal and financial events. They coach their clients always to ask themselves the following question: “Is there a tax consequence to the decision I must make?” If the answer is “yes” or “maybe,” the right action is to seek advice. In doing so, clients and advisors can improve long-term, after-tax results as joint decision-makers supported by a multi-stakeholder team. The bigger the financial decision, the more important this “pre-consultation” is.

Perhaps most important, tax specialists represent their clients with confidence and professionalism to the tax department, whether during an audit or in adjusting previously-filed returns. This is possible because they know how to research relevant tax law, understand how it is administered by CRA and what the outcomes of recent jurisprudence have been.

In fighting for their clients’ Taxpayer Rights, tax specialists are also highly adept at applying relevant tax provisions to all the previously-filed returns CRA may select for audit, thereby matching the “hindsight” CRA brings to the audit process with skillful precision. Because they are passionate about making sure their client pays only the correct amount of tax and no more, tax specialists see themselves as stewards of hard-earned family wealth. Tax efficiency, in other words, really matters.

Where do other advisors from the financial services fit in? By working with a tax specialist, financial advisors make sure there is no “tax gap” in the investment strategy and process developed for the client. By following a common strategy, tax-efficiency becomes part of the investment decision-making that occurs throughout the year. Quite possibly a tax specialist, too, this professional works alongside the tax specialist to make sure the planned-for results are achieved.

Educator, advocate and steward: that’s the three-part role of the tax services specialist. Working together with financial advisors to deliver on a Real Wealth Management strategy, this new brand of tax professional brings tremendous value in the evolving tax and financial services industry.

Coming or Going from Canada: Be Tax Compliant

With Canada’s complex tax system, tax and financial advisors who exercise additional diligence to ensure immigrants and emigrants remain tax compliant can offer valuable advice. What tax deductions, credits and filing requirements should you make sure they don’t miss?

Part-year Residency. Taxpayers who immigrate to (or emigrate from) Canada are required to file a Canadian tax return to report their world income during the period of the tax year in which they were resident in Canada. This means that immigrants (and emigrants) may be required to report income, deductions and credits from two periods: the residency period (based on the actual number of days as a resident here during the year), as well as the non-residency period on the same tax return, depending on their Canadian income sources generated before arriving (or after leaving) the country.

Asset Valuation on Immigration. Those who immigrate to Canada must determine the Fair Market Value (FMV) of their assets at time of immigration. Canada is not able to tax any accrued capital gains before this, nor will Canada recognize accrued losses in that period.

The residency period is covered under the Income Tax Act S. 114 (a). All income must be calculated in the normal manner, but only for the residency period. This requires some unusual reporting:

  • Personal amounts are, therefore, prorated according to the number of days the taxpayer was resident in Canada.
  • Provincial taxes are due to the province of residence up to the last day of residency for emigrants and the last day of the year for immigrants.
  • Generally, refundable tax credits (GSTC, CTC, and provincial credits) are not available to emigrants.

Full Claims: Deductions. All deductions normally allowable to reduce taxable income are permitted, but only for the residency period and not for the full year. Allowable deductions can include:

  • RRSP contributions made within the calendar year or the normal 60-day period after year end. Amounts may also be transferred out of an RPP, DPSP or RRIF to an RPP, RRSP or RRIF. Complete form NRTA1 Authorization for Non-Resident Tax Exemption.
  • Support payments made to an estranged spouse that are normally deductible.
  • Child care expenses
  • Carrying charges: Interest on loans incurred will continue to be tax deductible by a non-resident, but only if they offset business income. For investment loans, interest is generally deductible only to date of emigration, unless paid to maintain Taxable Canadian Property.
  • Other employment expenses
  • Clerics’ residence deduction
  • Other deductions on Line 232
  • Employee Stock Options and Shares Deduction
  • Other deductions on Line 250
  • Losses on lines 251, 252, 253
  • Capital gains deduction
  • Northern residents’ deduction

However, it must be shown that these amounts are attributable to income earned in the period of Canadian residency.

Full Claims: Non-Refundable Tax Credits. If an immigrant or emigrant is eligible for any of the following non-refundable tax credits during the residency period, those amounts can be claimed in full:

  • CPP and EI premiums paid in the residency period
  • Provincial Parental Insurance Plan Contributions
  • Canada Employment Amount
  • Home Buyers’ Amount (and in 2016/17 the Home Accessibility Tax Credit)
  • Adoption Expenses
  • The Pension Income Amount
  • Interest on Student Loan Amount
  • Tuition Amounts
  • Medical Expenses
  • Charitable Donations
  • Spousal transfers for income earned in the residency period
  • Amounts transferred from child (tuition for residency period and a prorated disability amount)

Note: Part-year residents are required to take into account S. 94.2(5)(c) with regard to interests in a foreign investment entity. Reporting on such entities will be restricted to the period of time the taxpayer was resident in Canada.

Non-residency period. S. 114(b) requires the reporting of actively earned Canadian-source income (employment or self-employment in Canada) by a non-resident, or the reporting of Taxable Canadian Property dispositions. In addition, reserves for debt forgiveness, recovery of exploration and development expenses, and recaptured depreciation from the sale of a business interest will be reported. For the non-residency period, (See S. 115) the taxpayer may deduct only the following:

  • Losses under S. 111(1) (non-capital losses, net capital losses, restricted farm losses, farm losses, limited partnership losses), that offset any income reported under S. 114(a)
  • Deductions under S. 110(1)(d) and S. 110(1)(d.1), employee stock options and benefits deduction
  • Deductions under S. 110(1)(d.2) prospectors’ and grubstakers’ shares
  • Deductions under S. 110(1)(f): certain social benefits, treaty exempt amounts and employment income from international organizations

If all or substantially all (which generally means 90 percent or more) of the non-resident’s world income is reported for the period, all deductions normally allowed to a full-time resident will be allowed to the non-resident. Otherwise, non-residents are not allowed to claim any personal amounts.

Recent Jurisprudence: Non-residents and CCTB. Thorpe v The Queen, 2007 TCC 410.
The appellant argued that because her husband was a non-resident throughout the year and at all material times, his net income should not be included in the calculation of the Canada Child Tax Benefit for the base taxation years in question. The appellant’s husband visited the Canadian home frequently, paid for a car in Canada on a monthly basis for his wife, but no other family expenses. In finding for the appellant, the court stated (at paragraph 11) that the provisions in question (122.61/122.63) should be read generously in favour of enabling the children to receive the benefit of the CCTB.

Read part one of this two-part series: “Newcomers Need Advice: Can You Explain Our Complex Tax System?”