Keep up to date with the latest new information and tips

1st Quarter 2019     2nd Quarter 2019

3rd Quarter 2019     4th Quarter 2019

1st Quarter 2018     2nd Quarter 2018

3rd Quarter 2018     4th Quarter 2018

2018 Special Edition - Tax Planning

1st quarter 2017     2nd quarter 2017

3rd quarter 2017     4th quarter 2017

4th quarter 2016     3rd quarter 2016 

2nd quarter 2016     1st quarter 2016  

1st quarter 2015     2nd quarter 2015

3rd quarter 2015     4th quarter 2015

The Employment Insurance premium rate for 2020 is decreased to 1.58%.

The Employment Insurance premium rate for 2020 is decreased to 1.58%.

Yearly maximum insurable earnings are set at $54,200, making the maximum employee premium $856.36.

As in previous years, employer premiums are 1.4 times the employee contribution. The maximum employer premium for 2020 is therefore $1,198.90.

The Quebec Pension Plan contribution rate for employees and employers for 2020 is 5.7%, and maximum pensionable earnings are $58,700. The basic exemption is $3,500.

The Quebec Pension Plan contribution rate for employees and employers for 2020 is 5.7%, and maximum pensionable earnings are $58,700. The basic exemption is $3,500.

The maximum employee premium for the year is $3,146.40, and the maximum employer contribution is the same.

The Canada Pension Plan contribution rate for 2020 is increased to 5.25% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2020 is increased to 5.25% of pensionable earnings for the year.

The maximum pensionable earnings for the year will be $58,700, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2020 will be $2,898.00 each, and the maximum self-employed contribution will be $5,796.

Dollar amounts on which individual non-refundable federal tax credits for 2020 are based, and the actual tax credit claimable, will be as follows:

Dollar amounts on which individual non-refundable federal tax credits for 2020 are based, and the actual tax credit claimable, will be as follows:

                                                                   Credit amount                        Tax credit

Basic personal amount                                       $12,298                             $1844.70

Spouse or common law partner amount              $12,298                              $1844.70                

Eligible dependant amount                                 $12,298                             $1844.70

Age amount                                                      $7,637                               $1145.55

Net income threshold for erosion of credit           $38,508

Canada employment amount                              $1,245                                $186.75

Disability amount                                              $8,576                                $1286.40

Adoption expenses credit                                  $16,563                               $2,484.45

Medical expense tax credit threshold amount      $2,397                                     

The indexing factor for federal tax credits and brackets for 2019 is 1.9%. The following federal tax rates and brackets will be in effect for individuals for the 2020 tax year:

The indexing factor for federal tax credits and brackets for 2019 is 1.9%. The following federal tax rates and brackets will be in effect for individuals for the 2020 tax year:

Income level                           Federal tax rate

$12,298 - $48,535                         15%

$48,536 - $97,069                        20.5%

$97,070 - $150,473                       26%

$150,474 - $214,368                     29%

Above $214,368                            33%

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies. Some of the more significant dates and changes for individual taxpayers for 2020 are listed below.

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies. Some of the more significant dates and changes for individual taxpayers for 2020 are listed below.

RRSP deduction limit increased

The RRSP current year contribution limit for the 2019 tax year is $26,500. In order to make the maximum current year contribution for 2019 (for which the contribution deadline will be Monday March 2, 2020), it will be necessary to have earned income for the 2018 taxation year of $147,222.

TFSA contribution limit unchanged

The TFSA contribution dollar limit for 2020 is unchanged at $6,000. The actual amount which can be contributed by a particular individual includes both the current year limit and any carryover of uncontributed or re-contribution amounts from previous taxation years.

Taxpayers can find out their 2020 contribution limit by calling the Canada Revenue Agency’s Individual Income Tax Enquires line at 1-800-959 8281. Those who have registered for the CRA’s online tax service My Account can obtain that information by logging into that service.

Individual tax instalment deadlines for 2020

Millions of individual taxpayers pay income tax by quarterly instalments, which are due on the 15^th day of each of March, June, September and December 2020.

The actual tax instalment due dates for 2020 are as follows:

Monday March 16, 2020

Monday June 15, 2020

Tuesday September 15, 2020

Tuesday December 15, 2020

Old Age Security income clawback threshold

For 2020, the income level above which Old Age Security (OAS) benefits are clawed back is $79,054.

Individual tax filing and payment deadlines in 2019

For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2019 tax year is Thursday April 30, 2020.

Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2019 on or before Thursday April 30, 2020.

Self-employed taxpayers and their spouses must file a 2019 income tax return on or before Monday June 15, 2020.

Alberta

The general corporate income tax rate will decrease from 11% to 10%, effective January 1, 2020.

The provincial education and tuition tax credits are eliminated as of the 2020 taxation year.

Indexation of personal income tax credits and income brackets is eliminated as of January 1, 2020.

The provincial Scientific Research and Experimental Development (SR&ED) tax credit is eliminated as of January 1, 2020.

Alberta

The general corporate income tax rate will decrease from 11% to 10%, effective January 1, 2020.

The provincial education and tuition tax credits are eliminated as of the 2020 taxation year.

Indexation of personal income tax credits and income brackets is eliminated as of January 1, 2020.

The provincial Scientific Research and Experimental Development (SR&ED) tax credit is eliminated as of January 1, 2020.

Newfoundland and Labrador

The Newfoundland and Labrador Temporary Deficit Reduction Levy, which was in effect from 2016 to 2019, is eliminated.

Ontario

The provincial small business corporate tax rate is reduced from 3.5% to 3.2%, effective as of January 1, 2020. That rate applies on the first $500,000 of active business income of eligible corporations.

Prince Edward Island

The basic personal amount is increased to $10,000. 

Between now and the end of February 2020, Canadians will receive a variety of receipts for expenditures made during the 2019 taxation year. Some of those expenditure receipts will support a tax deduction or credit claim to be made by the recipient on his or her 2019 tax return, while others will not. And, it’s not always easy for a taxpayer to know when such a credit or deduction is or is not available to be claimed. While the Canadian individual income tax return is only four pages long, the information on those four pages is supported by 13 supplementary federal schedules, dealing with everything from the calculation of capital gains to determining required Canada Pension Plan contributions by self-employed taxpayers.

Between now and the end of February 2020, Canadians will receive a variety of receipts for expenditures made during the 2019 taxation year. Some of those expenditure receipts will support a tax deduction or credit claim to be made by the recipient on his or her 2019 tax return, while others will not. And, it’s not always easy for a taxpayer to know when such a credit or deduction is or is not available to be claimed. While the Canadian individual income tax return is only four pages long, the information on those four pages is supported by 13 supplementary federal schedules, dealing with everything from the calculation of capital gains to determining required Canada Pension Plan contributions by self-employed taxpayers.

All of this complexity makes it easy for the majority of individuals who only deal with our tax system once a year to overlook valuable deduction and credit claims which may be available to them. One such deduction is that available for payments made during the taxation year for annual union, professional, or similar dues.

It’s particularly easy to overlook an available claim for that deduction because of where it appears on the annual return. Although there are forms used by self-employed taxpayers to claim business-related costs and forms used by employees to claim allowable employment expenses, the deduction for union or professional dues doesn’t appear on either type of form. Rather, it shows up as a single line (Line 212) on page 3 of the T1 annual return.

The general rule for claiming such a deduction is described in the annual income tax return guide as follows:

Line 212 — Claim the total of the following amounts related to your employment that you paid (or that were paid for you and reported as income) in the year:

• annual dues for membership in a trade union or an association of public servants;
• professional board dues required under provincial or territorial law;
• professional or malpractice liability insurance premiums or professional membership dues required to keep a professional status recognized by law; and
• parity or advisory committee (or similar body) dues required under provincial or territorial law.

There are, of course, limitations on the kinds of expenses which may be claimed and the circumstances in which a taxpayer is entitled to claim those expenses. The most important such restriction is that amounts paid must be those which are necessary in order for the taxpayer to obtain or maintain his or her professional standing. Every profession and trade has licensing and similar requirements which mandate that an individual maintain membership in a professional or similar association in order to practice his or her profession or trade. The costs of maintaining required membership in those organizations is deductible. The cost of maintaining membership in other, voluntary associations, even if related to one’s trade or profession, is not. So, for example, if membership in a given association does not affect professional status (e.g., the Canadian Bar Association for lawyers) dues paid to maintain that membership are not deductible. If, on the other hand, membership (and the payment of fees or dues) is necessary to maintain professional status (e.g., the applicable provincial Law Society for the lawyer) the dues paid to that organization are deductible.

As well, invoices received for annual membership costs can cover a number of different charges and levies, and not all of those costs will be deductible. The policy of the Canada Revenue Agency (CRA) is that annual membership dues do not include initiation fees, licences, special assessments, or charges for anything other than the organization’s ordinary operating costs. A taxpayer cannot claim charges for pension plans as membership dues, even if receipts received show them as dues.

Where a claim for a deduction for professional membership or union dues is made by an employee, some other considerations arise. Generally, while it’s not necessary that having a particular professional designation be a requirement of the employee’s position in order for that employee to claim a deduction for related professional dues, the CRA does require that there be some connection between the employment and the professional association in question.

In some cases, an employer is willing to cover the cost of an employee’s professional dues as part of the employee’s benefit package. Where that’s the case, and the employer’s payment of those dues does not appear on the employee’s T4 as a taxable benefit, no deduction for those costs can be claimed by the employee. Where, however, there is a taxable benefit which accrues to the employee, he or she can claim an offsetting deduction for eligible dues or fees paid, on Line 212 of the return.

General information on the deduction of professional membership fees or union dues, for both self-employed taxpayers and employees can be found on the CRA website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/212/menu-eng.html.

While Canadians benefit from a publicly funded health care system, there are nonetheless a large, and increasing, number of medical expenses which are not covered by provincial health care plans. As well, with the rise in part-time positions and contract work — the “gig” economy — an increasing number of Canadians do not enjoy coverage for such costs through employer-sponsored private insurance. In those situations, Canadians have to pay for such unavoidable expenditures, including dental care, prescription drugs, ambulance trips, and many other para-medical services, like physiotherapy, on an out-of-pocket basis.

While Canadians benefit from a publicly funded health care system, there are nonetheless a large, and increasing, number of medical expenses which are not covered by provincial health care plans. As well, with the rise in part-time positions and contract work — the “gig” economy — an increasing number of Canadians do not enjoy coverage for such costs through employer-sponsored private insurance. In those situations, Canadians have to pay for such unavoidable expenditures, including dental care, prescription drugs, ambulance trips, and many other para-medical services, like physiotherapy, on an out-of-pocket basis.

The good news, where such costs must be paid for partially or entirely by the taxpayer, is that our tax system provides a medical expense tax credit to help offset those costs. Unfortunately, the computation of such credit and, in particular, the timing of making a claim for that credit, can be confusing. In addition, the determination of what expenses qualify for the credit and which do not isn’t necessarily intuitive, nor is the determination of when it’s necessary to obtain prior authorization from a medical professional in order to ensure that the contemplated expenditure will qualify for the credit.

The basic rule is that qualifying medical expenses over 3% of the taxpayer’s net income, or $2,352, whichever is less, can be claimed for purposes of the medical expense tax credit on the taxpayer’s return for 2019. The Canada Revenue Agency (CRA) provides a lengthy list of qualifying expenditures, together with information on any requirements for a prescription or other medical authorization or documentation for a particular type of expenditure, and that list can be found on the CRA website at www.cra-arc.gc.ca/medical/#mdcl_xpns.

Put in terms that are more easily understood, the rule for 2019 is that any taxpayer whose net income is less than $78,400 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $78,400 will be limited to claiming qualifying expenses which exceed the $2,352 threshold.

The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2019 will produce the greatest amount eligible for the credit. That determination will obviously depend on the amount of medical expenses and, in particular, when those medical expenses were incurred. Consequently, there is no universal rule of thumb that can be used.

Medical expenses incurred by family members — the taxpayer, his or her spouse, dependent children who were born in 2002 or later, and certain other dependent relatives — can be added together and claimed by one member of the family. In most cases, it is best, in order to maximize the amount claimable, to make that claim on the tax return of the lower income spouse, where that spouse has tax payable for the year.

As December 31 approaches, it’s a good idea to add up the medical expenses which have been incurred during 2019, as well as those paid during 2018 and not claimed on the 2018 return. Once those totals are known, it will be easier to determine whether to make a claim for 2019 or to wait and claim 2019 expenses on the return for 2020. And, if the decision is to make a claim for 2019, knowing what medical expenses were paid, and when, will enable the taxpayer to determine the optimal 12-month period for the claim.

Finally, it’s also a good idea to look at the timing of medical expenses which will have to be paid early in 2020. Where those are significant expenses (for instance, a particularly costly medication which must be taken on an ongoing basis, or necessary dental work) it may make sense, where cash flow considerations allow, to accelerate the payment of those expenses to December 2019, so that they can be included in 2019 totals and claimed on the 2019 return.  

For most Canadians, registered retirement savings plans (RRSPs) don’t become top of mind until near the end of February, as the annual contribution deadline (which, for 2019 contributions, will be March 2, 2020) approaches. When it comes to tax-free savings accounts (TFSAs), most Canadians are aware that there is no contribution deadline for such plans, so that contributions can be made at any time or even carried forward to a subsequent taxation year. Consequently, neither RRSPs nor TFSAs tend to be a priority when it comes to year-end tax planning.

For most Canadians, registered retirement savings plans (RRSPs) don’t become top of mind until near the end of February, as the annual contribution deadline (which, for 2019 contributions, will be March 2, 2020) approaches. When it comes to tax-free savings accounts (TFSAs), most Canadians are aware that there is no contribution deadline for such plans, so that contributions can be made at any time or even carried forward to a subsequent taxation year. Consequently, neither RRSPs nor TFSAs tend to be a priority when it comes to year-end tax planning.

Notwithstanding those facts, there are considerations which apply to both RRSPs and TFSAs in relation to the approach of the end of calendar year. Failing to take those considerations into account can mean the permanent loss of contribution room, a loss of flexibility when it comes to making withdrawals or having to pay more tax than necessary when funds are withdrawn. Some of those considerations are outlined below.

When you need to make your RRSP contribution on or before December 31

While most RRSP contributions to be deducted on the return for 2019 can be made anytime up to and including March 2, 2020, there is one important exception to that rule.

Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71 years of age – usually by converting the RRSP into a registered retirement income fund (RRIF) or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31^st is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31^st of that year.

Make spousal RRSP contributions before December 31

Under Canadian tax rules, a taxpayer can make a contribution to an RRSP in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2019, the contributor can claim a deduction for that contribution on his or her return for 2019. The spouse can then withdraw that amount as early as January 1, 2022 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2020, the contributor can still claim a deduction for it on the 2019 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2023. It’s an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively new future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should the need for an unplanned withdrawal arise.

Accelerate any planned TFSA withdrawals into 2019

Each Canadian aged 18 and over can make an annual contribution to a TFSA – the maximum contribution for 2019 is $6,000. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.

Consequently, it makes sense, where a TFSA withdrawal is planned within the next few months, perhaps to pay for a winter vacation or to make an RRSP contribution, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA on or before December 31^st, 2019 will have the amount withdrawn added to his or her TFSA contribution limit for 2020, which means it can be re-contributed as early as January 1, 2020. If the same taxpayer waits until January of 2020 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2021.

During the month of December, it is customary for employers to provide something “extra” for their employees, by way of a holiday gift, a year-end bonus or an employer-sponsored social event. And it is certainly the case that employers who provide such extras don’t intend to create a tax headache for their employees. Unfortunately, a failure to properly structure such gifts or other extras can result in unintended and unwelcome tax consequences to those employees.

During the month of December, it is customary for employers to provide something “extra” for their employees, by way of a holiday gift, a year-end bonus or an employer-sponsored social event. And it is certainly the case that employers who provide such extras don’t intend to create a tax headache for their employees. Unfortunately, a failure to properly structure such gifts or other extras can result in unintended and unwelcome tax consequences to those employees.

Trying to formulate and administer the tax rules around holiday gifts is something of a no-win situation for the Canada Revenue Agency (CRA). On an individual or even a company level, the amounts involved are usually small, or even nominal, and the range of situations which must be addressed by the applicable tax rules are virtually limitless. As a result, the cost of drafting and administering those rules can outweigh the revenue generated by the enforcement of such rules, to say nothing of the potential ill will generated by imposing tax consequences on holiday gifts and celebrations. Notwithstanding, the potential exists for employers to provide what would otherwise be taxable remuneration in the guise of holiday gifts, and it’s the responsibility of the tax authorities to ensure that such strategies are caught by the tax net.

There is, as a consequence, a detailed set of rules which outline the tax consequences of gifts and awards provided by the employer, and even in relation to annual holiday celebrations sponsored (and paid for) by an employer.

The starting point for the rules is that any gift (cash or non-cash) received by an employee from his or her employer at any time of the year is considered to constitute a taxable benefit, to be included in the employee’s income for that year. However, the CRA makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) to be received tax-free by employees, as long as such gifts are given on religious holidays such as Christmas or Hanukkah, or on the occasion of a significant life event, like a birthday, a marriage, or the birth of a child.

In sum, the CRA’s administrative policy is simply that non-cash gifts to an arm’s length employee, regardless of the number of such gifts, will not be taxable if the total fair market value of all such gifts (including goods and services tax or harmonized sales tax) to that employee is $500 or less annually. The total value over $500 annually will be a taxable benefit to the employee, and must be included on the employee’s T4 for the year, and on which income tax must be paid.

It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500 per year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of amount. For this purpose, the CRA considers anything which could be easily converted to cash as a “near-cash” gift. Even a gift or award which cannot be converted to cash will be considered to be a near-cash gift if, in the CRA’s words, it “functions as cash”. So, a gift card or gift certificate which can be used by the employee to purchase his or her choice of merchandise or services would be considered a near-cash gift, and taxable as such. It’s not hard to see that drawing a firm line between cash and non-cash gifts can be difficult. The CRA provides the following information and examples to help clarify that difference.

You give your employee tickets to an event on a specific date and time. This may not be a taxable benefit for the employee since there is no element of choice, if the other rules for gifts and awards are met.

You give your employee a voucher (which may be a ticket or a certificate) that entitles the employee to receive an item for a set value at a store. For example, you may give your employees a voucher for a turkey valued up to $30 as a Christmas gift, and for convenience, you arrange for your employees to go to a particular grocery store and exchange the voucher for a turkey. The employees can only use the voucher to receive a turkey valued up to $30 (no substitutes). Such vouchers are generally considered non-cash gifts.

A gift card or gift certificate to a movie theatre, however, is considered a near cash gift or award. With a gift card or gift certificate to a movie theatre, your employee can choose which move to see and when to see it, or they can use the card or certificate at an arcade or concession stand.

This time of year, the tax treatment of the annual employee holiday party also must be considered. The CRA’s current policy in this area is that no taxable benefit will be assessed in respect of employee attendance at an employer-provided social event, where attendance at the party was open to all employees, and the cost per employee was $150 or less (which represents an increase from the $100 ceiling for previous years). The $150 cost is meant to cover the party itself, not including any ancillary costs, such as transportation costs or overnight accommodation. Where the total cost of the event itself exceeds the $150 per person threshold, the CRA will assess the employee as having received a taxable benefit equal to the entire per person cost (i.e., not just that portion of the cost that exceeds $150.)

It may seem nearly impossible to plan for employee holiday gifts and other benefits without running afoul of one or more of the detailed rules and administrative policies surrounding the taxation of such gifts and benefits. However, designing a tax-effective plan is possible, if a few basic principles are kept in mind.

• If the employer is planning to hold a holiday party, dinner, or other social event, it is imperative that such event must be open to all employees. Restricting attendance in any way will mean that the CRA’s concession with respect to the non-taxable status of such events does not apply. The cost of the event must, as well, be kept below $150 per person. While the CRA’s policy doesn’t specify, it seems reasonable to calculate that amount based on the number of employees invited to attend the event, rather than on the actual attendance, which can’t be accurately predicted in advance. 

• Any cash or near-cash gifts should be avoided, as they will, no matter how large or small the amount, create a taxable benefit to the employee. Although gift certificates or pre-paid credit cards are a popular choice, they aren’t a tax-effective one, as they will invariably be considered by the CRA to create a taxable benefit to the employee.

• Where non-cash holiday gifts are provided to employees, gifts with a value of up to $500 can be received free of tax. The employer must be mindful of the fact that the $500 limit is a per-year and not a per-occasion limit. Where the employee receives non-cash gifts with a total value of more than $500 in any one taxation year, the portion over $500 is a taxable benefit to the employee.

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

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

They can be accessed below.

Corporate:

Issue #50 Corporate

Personal:

Issue #50 Personal

Planning for – or even thinking about – 2020 taxes when it’s not even December 2019 may seem more than a little premature. However, most Canadians will start paying their taxes for 2020 with the first paycheque they receive in January, and it’s worth taking a bit of time to make sure that things start off – and stay – on the right foot.

Planning for – or even thinking about – 2020 taxes when it’s not even December 2019 may seem more than a little premature. However, most Canadians will start paying their taxes for 2020 with the first paycheque they receive in January, and it’s worth taking a bit of time to make sure that things start off – and stay – on the right foot.

For most Canadians, (certainly for the vast majority who earn their income from employment), income tax, along with other statutory deductions like Canada Pension Plan contributions and Employment Insurance premiums, are paid periodically throughout the year by means of deductions taken from each paycheque received, with those deductions then remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by his or her employer.

Of course, each taxpayer’s situation is unique and so the employer has to have some guidance as to how much to deduct and remit on behalf of each employee. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by each employee, sometimes at the start of each year, but certainly at the time employment commences. Each employee must, in fact, complete two TD1 forms – one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer lives. Federal and provincial TD1 forms for 2020 (which have not yet been released by the CRA but, once published, will be available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms.html) list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial) which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the federal government.

While the TD1 completed by the employee at the time his or her employment commenced will have accurately reflected the credits claimable by the employee at that time, everyone’s life circumstances change. Where a baby is born, or a son or daughter starts post-secondary education, a taxpayer turns 65 years of age, or an elderly parent comes to live with his or her children, the affected taxpayer will be become eligible to claim tax credits not previously available. And, since the employer can only calculate source deductions based on information provided to it by the employee, those new credit claims won’t be reflected in the amounts deducted at source from the employee’s paycheque.

Consequently, it’s a good idea for all employees to review the TD1 form prior to the start of each taxation year and to make any changes needed to ensure that a claim is made for any and all credit amounts currently available to him or her. Doing so will ensure that the correct amount of tax is deducted at source throughout the year.

It’s often the case that a taxpayer will have available deductions which cannot be recorded on the TD1, like RRSP contributions, deductible support payments, or child care expenses. While such claims make things a little more complicated, it’s still possible to have source deductions adjusted to accurately reflect those claims, and the employee’s resulting reduced tax liability for 2020. The way to do so is to file Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1213.html), with the Agency. Once that form is filed with the CRA, they will, after verifying that the claims made are accurate, provide the employer with a Letter of Authority authorizing that employer to reduce the amount of tax being withheld at source.

Of course, as with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes time. Consequently, the sooner a T1213 for 2020 is filed with the CRA, the sooner source deductions can be adjusted, effective for all subsequent paycheques. Providing an employer with an updated TD1 for 2020 at the same time will ensure that source deductions made during 2020 will accurately reflect all of the employee’s current circumstances, and consequently his or her actual tax liability for the year.

It is also possible for some taxpayers to adjust the amount of remaining tax they will pay during 2019. While the majority of Canadians pay their taxes through source deductions, there are still millions of taxpayers who pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total liability for the year.

The final quarterly instalment for this year will be due on Monday December 16, 2019. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2019 and so will be in a position to estimate what the final tax bill for the year will be, taking into account any tax planning strategies already put in place, as well as any RRSP contributions which will be made on or before February 29, 2020. While the tax return forms to be used for the 2019 year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2018 form. Increases in tax credit amounts and tax brackets from 2018 to 2019 will mean that using the 2018 form will likely result in a slight over-estimate of tax liability for 2019.

Once an estimate of one’s tax bill for 2019 has been calculated, that figure should be compared to the total of tax instalments already made during this calendar year (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281). Depending on the result, it may then be possible to reduce the amount of the tax instalment to be paid on December 15 – and thereby free up some funds for the inevitable holiday spending!

The start of fall marks a lot of things, among them a number of runs, walks and other similar events held to raise money for a broad range of Canadian charities. And, within the next month, as the holiday season approaches, charities will launch their year-end marketing campaigns.

The start of fall marks a lot of things, among them a number of runs, walks and other similar events held to raise money for a broad range of Canadian charities. And, within the next month, as the holiday season approaches, charities will launch their year-end marketing campaigns.

Canadians have a well-deserved reputation for supporting charitable causes, through donations of both money and goods. Our tax system supports that generosity by providing a tax credit for qualifying donations made. Federally, taxpayers can claim a credit of 15% of the first $200 in donations plus 29% of donations over the $200 threshold.

In all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year – without exception.

There is, however, another reason to ensure donations are made by December 31. The credit provided by the federal government is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. Where the taxpayer making the donation has taxable income (for 2019) over $210,371, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2019 will received a federal credit of $88 ($200 × 15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2019 and January 2020, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2020 donation can’t be claimed until the 2020 return is filed in April 2021. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.

It’s also possible to carry forward, for up to 5 years, donations which were made in a particular tax year. So, if donations made in 2019 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2014, 2015, 2016, 2017, or 2018 tax years can be carried forward and added to the total donations made in 2019, and the aggregate then claimed on the 2019 tax return.

When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high-income surtax – currently, Ontario and Prince Edward Island – it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.

Since the charitable donations tax credit is a two-level credit, in which the credit percentage increases once donations made in a year exceed $200, it always makes sense to aggregate donations in a single year, so as to maximize the amount of credit claimable.

Any charity seeking or receiving a donation should be able to provide a registered charitable number, and a searchable current listing of registered charities can be found on the Canada Revenue Agency website at https://apps.cra-arc.gc.ca/ebci/hacc/srch/pub/dsplyBscSrch?request_locale=en. Information on the charitable donations tax credit is available on the same website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/349/menu-eng.html.

Most Canadians expend a considerable amount of time and effort in order to put money aside for retirement. Especially in an era in which the majority of workers can’t look forward to receiving an employer-sponsored pension plan, Canadians are well aware that the bulk of their income during retirement will have to come from government sources and from their own savings efforts.

Most Canadians expend a considerable amount of time and effort in order to put money aside for retirement. Especially in an era in which the majority of workers can’t look forward to receiving an employer-sponsored pension plan, Canadians are well aware that the bulk of their income during retirement will have to come from government sources and from their own savings efforts.

One of the difficulties in saving for retirement is the near impossibility of knowing how to set a savings goal which meets the twin goals of sufficiency and attainability. As well, while many savers focus on identifying the “magic number” which will ensure a comfortable retirement, the fact is that the total amount saved is only one component of retirement financial planning. The reality is that most Canadians will receive income in retirement from at least three sources – private savings accumulated in a registered retirement savings plan (RRSP) or tax-free savings accounts (TFSAs), a Canada Pension Plan retirement pension, and Old Age Security benefits. The real question for most Canadians is how to determine the amount of annual income which all those sources of income will generate during their retirement years, and that is not a simple calculation.

Money can be withdrawn from an RRSP or TFSA at any age, a CPP retirement pension can start any time from age 60 to age 70, and Old Age Security benefits can be received as early as age 65 or as late as age 70. For both CPP and OAS, benefits will rise with each month that receipt of such benefits is deferred. Many Canadians continue to work, on a full or part-time basis, while receiving CPP and OAS benefits. As well, income from the different types of retirement income may be subject to different tax treatment, meaning that the after-tax amount received on $100 of income may vary widely, depending on the nature and source of that income.

The number of factors to consider and, especially, the complexity which results from the interaction of those factors could reasonably lead the average Canadian to conclude that it’s just not possible to make an accurate determination of the best way to structure their income in retirement, in order to ensure a reasonable income throughout their retirement years. But, help is at hand – and it’s free! That help is in the form of a Retirement Income Calculator which is available on the Government of Canada website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html.

Using that calculator, individual Canadian taxpayers can enter their personal data, including their date of birth, gender, and planned age of retirement, without the need to provide any personal identifying information. The user is then asked to provide information on income amounts which will be received from various sources, including any employer pension and Canada Pension Plan amounts and the age at which the user plans to begin receiving such income. Information is requested on the user’s period of residency in Canada, in order to determine whether he or she will be eligible to receive Old Age Security benefits and the amount of OAS benefits which will be provided at different ages. The calculator also allows the user to input the total amount of savings accumulated to date. Finally, information is requested on any other sources of income which will be available (e.g., income arising from part-time employment during retirement).

Using that data, the calculator estimates the amount of income which will be available to the individual from each source during each year of his or her retirement and generates a bar graph and a table showing those income amounts.

The real benefit of the calculator, however, lies in the user’s ability to vary the inputs – to create “what-if” scenarios in order to determine the effect any changes made will have on retirement income at various ages. Users can change the age at which they choose to receive government-sponsored retirement benefits like CPP and OAS, or can specify a different rate of return (pre or post retirement) earned on retirement savings. They can also change the period of time (i.e., life expectancy) over which retirement income will be spread. That way, the user can obtain answers to frequently asked questions like the following:

How much more will I receive if I delay receipt of Canada Pension Plan or Old Age Security benefits, or both, for one, two, or more years?

What if I work an additional year or two after age 65 before starting RRSP withdrawals?

What if I earn income from part-time employment during retirement?

What if I choose to begin receiving CPP and OAS as soon as I am eligible, but defer making RRSP withdrawals?

What if I live longer than the average life expectancy?

For each of these what-if fact scenarios, the calculator will determine the effect that particular change will have on the amount of income receivable from each different retirement income source, and will provide a summary of income for each year of retirement from all such sources under each fact scenario created by the user.

There are, of course, some factors which can’t be incorporated into any calculator because they cannot be predicted or planned for. No one can predict how long their retirement will last (although the calculator does project retirement income based on average life expectancy for individuals of the age and gender of the user). Similarly, it’s never possible to know what investment returns will be earned on retirement savings during retirement, or what the rate of inflation will be. The calculator’s ability to estimate future income data based on a number of different fact patterns does, however, allow users to create retirement income projections under both best-case and worst-case retirement income scenarios – and to plan for both.

To win elections, politicians need votes. And to run the election campaigns needed to garner those votes, those politicians need an organization, volunteers, and money — a lot of money. To wage the most recent federal election, the major political parties raised and spent millions of dollars, and their task of raising that money was undoubtedly made somewhat easier by the fact that Canadian taxpayers who donated money to political parties or candidate can obtain some tax relief from doing so.

To win elections, politicians need votes. And to run the election campaigns needed to garner those votes, those politicians need an organization, volunteers, and money — a lot of money. To wage the most recent federal election, the major political parties raised and spent millions of dollars, and their task of raising that money was undoubtedly made somewhat easier by the fact that Canadian taxpayers who donated money to political parties or candidate can obtain some tax relief from doing so.

Individuals who donated to the political party or candidate of their choice may or may not be happy with the outcome of the election, but no matter which registered party or candidate they donated to, it will be possible for them to claim a federal tax credit for those donations when they file their returns for 2019 next spring.

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

While the parties which currently hold seats in the House of Commons are, of course, the most well-known, there were in fact 21 political parties registered and in good standing with Elections Canada for purposes of the 2019 federal election. They are as follows, in alphabetical order:

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

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

Official candidates can, of course, be running either as candidates for one of the registered parties or as independents. Elections Canada provides a list of confirmed candidates who ran in this year’s federal election, and that list can be found at https://www.elections.ca/content2.aspx?section=can&document=index&lang=e.

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

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

Contribution amount       Allowable tax credit

$400 × 75% =                               $300

$350 × 50% =                               $175

$525 × 33.3% =                            $175  

$1,275                                           $650

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

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

Where a qualifying contribution is made, an official receipt must be issued in order for the tax credit to be claimed. During an election campaign, the official agent of a candidate issues that receipt, and it must be issued between the time the candidate is officially nominated and election day. Outside an election period, any receipts are issued by the registered agent of a political party or association. A receipt must be issued, in paper or electronic format, for every contribution over $20.

The actual credit for qualifying donations made is claimed on the tax return for the year in which the contribution was made. The amount of the credit is calculated (according to the formula outlined above) on the Federal Worksheet and the amount of the actual credit entered on line 410 of Schedule 1 of the federal tax return. By the time the 2019 return is filed, of course, the election will long since have been concluded, the newly elected government will be in place in Ottawa, and the taxpayer will be in a position to assess whether it was, in fact, money well spent. 

Tax-free savings accounts (TFSAs) have been around for a full decade now, having been introduced in 2009, and for most Canadians, a TFSA (along with a registered retirement savings plan (RRSP)) is now a regular part of their financial and tax planning.

Tax-free savings accounts (TFSAs) have been around for a full decade now, having been introduced in 2009, and for most Canadians, a TFSA (along with a registered retirement savings plan (RRSP)) is now a regular part of their financial and tax planning.

TFSAs are, in many ways, the inverse of RRSPs. While TFSAs do not provide the tax deduction that an RRSP contribution creates, the strength of TFSAs lies in their great flexibility and the ability they give to Canadians to save, for short-term or long-term purposes, on a tax-free basis. Every Canadian aged 18 years of age and older can contribute a specified annual amount to a TFSA ($6,000 for 2019). Funds contributed to the TFSA are not deductible from income for tax purposes, but investment income earned by those funds is not taxed, either as it accrues or on withdrawal. Where a taxpayer does not contribute to a TFSA in a particular tax year, the contribution not made can be carried forward and that contribution made in any subsequent year. As well, TFSA holders can withdraw funds from their plan at any time, free of tax, and funds withdrawn can be re-contributed, but not until the following year. Therefore, each taxpayer’s contribution limit for a particular year is that year’s statutory annual amount, plus any allowable contributions not made in previous years and carried forward, plus amounts withdrawn in any previous year but not yet re-contributed.

The amount of the allowable TFSA contribution limit for a year has been something of a moving target since 2009: what follows is a listing of the maximum allowable annual contribution limits for each year since TFSAs were introduced.

• The annual TFSA dollar limit for the years 2009, 2010, 2011, and 2012 was $5,000.
• The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
• The annual TFSA dollar limit for the year 2015 was $10,000.
• The annual TFSA dollar limit for the year 2016, 2017, and 2018 was $5,500.
• The annual TFSA dollar limit for the year 2019 is $6,000.

It’s readily apparent that, especially where there are carryforward amounts and/or the taxpayer has made withdrawals from a TFSA, that calculating one’s current year contribution room can be complex. At one time the Canada Revenue Agency (CRA) notified taxpayers of their current year TFSA contribution limit on the annual Notice of Assessment, but that is no longer the case. Now, the easiest way to find out one’s current year contribution limit is by calling the CRA’s Individual Income Tax Enquiries Line at 1-800-959-8281 or its automated Tax Information Phone Service (TIPS) line at 1-800-267-6999. Taxpayers who have registered for the Agency’s My Account online service can use that service to find the same information. It’s also possible to obtain from the CRA a TFSA Room Statement and a TFSA Transaction Summary, with the latter showing the contributions and withdrawals which have been made.

It is important to stay within one’s overall contribution limit because exceeding that limit — even for one day — will result in the imposition of a penalty tax. Therefore, once the taxpayer knows figures out his or her total contribution limit for 2019, it’s time to make sure that current contribution plans for the year will not put the taxpayer in an overcontribution position. Some taxpayers contribute on a regular, often monthly basis, while others are in the habit of depositing regular or irregular or periodic income receipts, like a tax refund or tax benefit amount or a bonus from their employer, into their TFSA. Either way, after finding out one’s current year contribution limit, it’s necessary to calculate how much has already been contributed in 2019. The difference between those two figures represents the balance which can be contributed before the end of the year without getting into an overcontribution position and incurring penalties. And, it’s important to remember that if withdrawals have been or will be made during 2019, those amounts cannot be re-contributed until after the end of this year.

If it’s necessary to adjust regular contributions in order not to go “offside” by the end of the year, the best time to do it is obviously before getting into that overcontribution position. As soon as a taxpayer is in an overcontribution position, however, a penalty tax of 1% per month of the excess is imposed, even if the excess funds are withdrawn before the end of the month — in other words, as explained in the Canada Revenue Agency guide to TFSAs “[I]f, at any time in a month, you have an excess TFSA amount, you are liable to a tax of 1% on your highest excess TFSA amount in that month.”

Especially where TFSA contributions are set up to occur regularly, by automatic deposit or bank transfer, it’s easy to assume that everything has been taken care of and nothing further needs to be done with respect to such arrangements. However, an “out of sight and out of mind” approach rarely makes for good financial and tax planning, and checking on the status of one’s TFSA on a periodic (at least quarterly) basis can help to ensure that everything is as it should be, and that unnecessary penalties are avoided.

One final consideration — one of the strengths of a TFSA as a savings vehicle is the ability to re-contribute funds which have been withdrawn. However, as outlined above, such re-contributions cannot be made until after the end of the calendar year in which the withdrawal was made. For that reason, taxpayers who may be contemplating a TFSA withdrawal early in 2020, perhaps in order to make an RRSP contribution, or to pay for a winter vacation, should make that withdrawal before the end of 2019. That way, should funds become available (perhaps through the tax refund generated by the RRSP contribution) it will be possible to make the re-contribution in 2020. If the withdrawal is not made until 2020, re-contribution will not be possible (without incurring a penalty) until 2021.

TFSAs are valuable savings and planning vehicles for Canadians — perhaps the most flexible such vehicle available. It’s easy, however, to get tripped up on the rules governing TFSAs, especially the rules around withdrawals and re-contributions. To help keep taxpayers from running afoul of those rules, the Canada Revenue Agency provides a lengthy and detailed publication on TFSAs, and that publication is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466/tax-free-savings-account-tfsa-guide-individuals.html.

As the baby boom generation ages, members of that generation must switch their focus from the accumulation of retirement savings to creating a structure which will ensure a steady flow of income throughout that retirement. Those individuals face a particular deadline when their 71^st birthday arrives, as they must, by December 31^st of that year, collapse their RRSP and convert it into a source of retirement income.

As the baby boom generation ages, members of that generation must switch their focus from the accumulation of retirement savings to creating a structure which will ensure a steady flow of income throughout that retirement. Those individuals face a particular deadline when their 71^st birthday arrives, as they must, by December 31^st of that year, collapse their RRSP and convert it into a source of retirement income.

The decision to be made is an important one which, once made, can’t be undone. In addition, such decision involves a number of factors which are either unknown, or beyond the control of the individual, or both. And, to add to the pressure, the choice made will affect the individual’s finances for the remainder of his or her life

While the actual decision is a complex one, the options available to a taxpayer who must convert an RRSP are actually quite few in number — three, to be precise. They are as follows:

• collapse the RRSP and include all of the proceeds in income for that year;
• collapse the RRSP and transfer all proceeds to a registered retirement income fund (RRIF); and/or
• collapse the RRSP and purchase an annuity with the proceeds.

It’s not hard to see that the first option doesn’t have much to recommend it. Collapsing an RRSP without transferring the balance to a RRIF or purchasing an annuity means that every dollar in the RRSP will be treated as taxable income for that year. In many cases, that will mean losing nearly half of the RRSP proceeds to income tax. And, while any amount left can then be invested, tax will be payable on all investment income earned.

As a practical matter, then, the choices come down to two: a RRIF or an annuity. And, as is the case with most tax and financial planning decisions, the best choice will be driven by one’s personal financial and family circumstances, risk tolerance, cost of living, and the availability of other sources of income to meet that cost of living.

The annuity route has the great advantages of simplicity and reliability. In exchange for a lump sum amount paid by the taxpayer, the annuity issuer agrees to pay the taxpayer a specific sum of money on a periodic basis (usually once a month) for the remainder of the annuitant’s life. Annuities can also provide a guarantee period, in which the annuity payments continue for a specified time period (5 years, 10 years, etc.), even if the taxpayer dies during that time. The amount of monthly income which can be received depends, of course, on the amount paid in, but also on the gender and, especially, the age of the taxpayer. Currently, the annuity rate for each $100,000 paid to the annuity issuer by a taxpayer who is 71 years of age is about $586 per month for a male taxpayer and about $533 per month for a female taxpayer (the actual rate is set by the company which issues the annuity and will vary somewhat from company to company). Those rates do not include any guarantee period.

For taxpayers whose primary objective is to obtain a guaranteed life-long income stream without the responsibility of making any investment decisions or the need to take any investment risk, an annuity can be an attractive option. There are, however, some potential downsides to be considered. First, an annuity can never be reversed. Once the taxpayer has signed the annuity contract and transferred the funds, he or she is locked into that annuity arrangement for the remainder of his or her life, regardless of any change in circumstances that might mean an annuity is no longer suitable. Second, unless the annuity contract includes a guarantee period, there is no way of knowing how many payments the taxpayer will receive. If he or she dies within a short period of time after the annuity is put in place, there is generally no refund of amounts invested — once the initial transfer is made at the time the annuity is purchased, all funds transferred belong to the annuity company. Third, most annuity payment schedules do not keep up with inflation — while it is possible to obtain an annuity in which payments are indexed, having that feature will mean a substantially lower monthly payout amount. Finally, where the amount paid to obtain the annuity represents most or all of the taxpayer’s assets, entering into the annuity arrangement means that the taxpayer will not be leaving an estate for his or her heirs.

The second option open to taxpayers is to collapse the RRSP and transfer the entire balance to a RRIF. A RRIF operates in much the same way as an RRSP, with two major differences. First, it is not possible to contribute funds to a RRIF. Second, the taxpayer is required to withdraw an amount from his or her RRIF (and to pay tax on that amount) each year. That minimum withdrawal amount is a percentage of the outstanding balance, with that percentage figure determined by the taxpayer’s age at the beginning of the year. While the taxpayer can always withdraw more in a year or make lump sum withdrawals (and pay tax on those withdrawals), he or she cannot withdraw less than the minimum required withdrawal for his or her age group.

Where a taxpayer holds savings in a RRIF, he or she can invest those funds in the same investment vehicles as were used while the funds were held in an RRSP and those funds can continue to grow on a tax-sheltered basis, in the same way as funds in an RRSP. While the ability to continue holding investments that can grow on a tax-sheltered basis provides the taxpayer with a lot of flexibility, and the potential for growth in value, those benefits have a price in the form of investment risk. As is the case with all investments, the investments held within a RRIF can increase in value — or decrease — and the taxpayer carries the entire investment risk. When things go the way every investor wants them to, investment income is earned while the taxpayer’s underlying capital is maintained but, of course, that result is never guaranteed.

On the death of a RRIF annuitant, any funds remaining in the RRIF can pass to the annuitant’s spouse on a tax-free basis. Where there is no spouse, the remaining funds in the RRIF will be income to the RRIF annuitant in the year of death, and any balance after tax is paid will become part of his or her estate, available for distribution to beneficiaries.

While the above discussion of RRIFs versus annuities focuses on the benefits and downsides of each, it is not necessary (and in most cases not advisable) to limit the options to an either/or choice. It is possible to achieve, to a degree, the seemingly irreconcilable goals of lifetime income security and the potential for capital (and estate) growth. Combining the two alternatives — annuity and RRIF — either now or in the future can go a long way toward satisfying both objectives.

For everyone, in retirement or not, all spending is a combination of non-discretionary and discretionary items. The first category is made up mostly of expenditures for income tax, housing (whether rent or the cost of maintaining a house), food, insurance costs, and (especially for older Canadians) the cost of out-of-pocket medical expenses. The second category, discretionary expenses, includes entertainment, travel, and the cost of any hobbies or interests pursued. A strategy which utilizes a portion of RRSP savings to create a secure lifelong income stream to pay non-discretionary costs can remove the worry of outliving one’s money, while the balance of savings can be invested through a RRIF, for growth and to provide the income for non-discretionary spending.

Such a secure income stream can, of course, be created by purchasing an annuity. As well, although most taxpayers don’t necessarily think of them in that way, the Canada Pension Plan and Old Age Security have many of the attributes of an annuity, with the added benefit that both are indexed to inflation. By age 71, all taxpayers who are eligible for CPP and OAS will have begun receiving those monthly benefits. Consequently, in making the RRIF/annuity decision at that age, taxpayers should include in their calculations the extent to which CPP and OAS benefits will pay for their non-discretionary living costs.

As of September 2019, the maximum OAS benefit for most Canadians (specifically, those who have lived in Canada for 40 years after the age of 18) is about $614 per month. The amount of CPP benefits receivable by the taxpayer will vary, depending on his or her work history, but the maximum current benefit which can be received at age 65 is about $1,155. (Where receipt of either benefit is deferred past the age of 65, those amounts go up.) As a result, a single taxpayer who receives the maximum CPP and OAS benefits at age 65 will have just over $21,000 in annual income (or about $1,770 per month). And, for a married couple, of course, the combined total annual income received from CPP and OAS is just over $42,000 annually, or $3,500 per month. While $21,000 a year isn’t enough to provide a comfortable retirement, for those who go into retirement in good financial shape — meaning, generally, without any debt — it can go a long way toward meeting non-discretionary living costs. In other words, most Canadians who are facing the annuity versus RRIF decision already have a source of income which is effectively guaranteed for their lifetime and which is indexed to inflation. Taxpayers who are considering the purchase of an annuity to create the income stream required to cover non-discretionary expenses should first determine how much of those expenses can already be met by the combination of their (and their spouse’s) CPP and OAS benefits. The amount of any annuity purchase can then be set to cover off any shortfall.

While the options available to a taxpayer at age 71 with respect to the structuring of future retirement income are relatively straightforward, the number of factors to be considered in assessing those factors and making that decision are not. All of that makes for a situation in which consulting with an independent financial advisor on the right mix of choices and investments isn’t just a good idea, it’s a necessary one.

Canadians are fortunate to benefit from a publicly funded health care system, in which most costs of care ranging from routine visits to a family doctor to intensive care in a hospital setting are paid for by government-sponsored health insurance.

Canadians are fortunate to benefit from a publicly funded health care system, in which most costs of care ranging from routine visits to a family doctor to intensive care in a hospital setting are paid for by government-sponsored health insurance.

While there is no doubt that most medical costs are not the financial responsibility of the individual, it is nonetheless a fact that a significant (and growing) number of medical and para-medical costs must be paid for on an out-of-pocket basis by the person incurring those costs. And those costs can, in some instances, run to thousands of dollars per year.

The costs which first come to mind are, of course, those which must be incurred for prescription medicine. While some Canadians have full or partial coverage for such costs through an employer-sponsored benefits plan, the majority of Canadians (especially those working on a part-time or contract basis) don’t. Similarly, visits to a dentist must be paid for by those who don’t have private medical insurance on an out-of-pocket basis. The same goes for services provided by any number of medical and, especially, para-medical practitioners, including physiotherapists, psychologists, and registered massage therapists.

It’s a virtual certainty that nearly all Canadians will incur one or more of those uninsured costs over the course of a year. The good news for those individuals and families is that in many instances a federal and provincial tax credit can be claimed to help offset those costs. The bad news is that the rules on determining just what expenses qualify for the credit and how and when to claim it can be complex.

First, the basics. The technical rule is that, for 2019, taxpayers can claim a tax credit for qualifying medical expenses which exceed 3% of their net income for the year or $2,352, whichever is less. That’s a confusing calculation to many Canadians, and it’s perhaps easier to think of it in these terms:

• For 2019, taxpayers who have income of $78,400 or less can claim all qualifying medical expenses which exceed 3% of their income for the year. As an example, someone who has $50,000 in income for 2019 can claim qualifying medical expenses over $1,500 ($50,000 × 3% = $1,500).

• For 2019, taxpayers who have income over $78,400 can claim their qualifying medical expenses which are greater than $2,352.

There is also some degree of flexibility in the timing of a claim made for the medical expense tax credit. Specifically, a claim made on the return for 2019 can include any qualifying medical expense incurred in any 12-month period which ends in 2019. Consequently, taxpayers can, in order to maximize the expenses claimed for the year (and so exceed the statutory thresholds outlined above) can pick any 12-month period ending during 2019.

For example, an individual might have incurred significant medical expenses in the last half of 2018 and the first half of 2019. That taxpayer would likely benefit from choosing the period July 1, 2018 to June 30, 2019, and claiming all medical expenses incurred during that period on his or her return for 2019.

There is, unfortunately, no formula or rule-of-thumb which allows a taxpayer to easily or quickly pick the time period which will provide the greatest credit amount, since that determination depends on when qualifying medical expenses were incurred. To determine the optimal period for a medical expenses tax credit claim, it’s really a matter of trial and error, or doing the computation for different time periods and choosing the one that gives the best result.

In aggregating those medical expenses, it’s also possible for families to include all qualifying expenses incurred by both spouses and by any children who were born in 2002 or later. The claim for the credit (using the total family medical expenses) can then be made by either spouse. Since the amount of the allowable expense claim increases as income decreases, it makes sense for the claim for total family medical expenses to be made by the lower-income spouse on his or her return for the year, as long as that spouse’s tax payable for the year is greater than the amount of the credit to be claimed.

Of course, the first determination which must be made when calculating a medical expense tax credit claim for the year is which expenses do or do not qualify for the credit. The number and kind of expenses which can be incurred for medical care are almost limitless in their scope and variety, and the list of qualifying and non-qualifying expenses for purposes of the credit reflects that reality.

The Canada Revenue Agency (CRA) helpfully provides a chart of the types of expenses which can qualify for the medical expense tax credit, and that chart includes other requirements which must be met in order for a particular expense to qualify. It’s well worth reviewing that chart (which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/lines-330-331-eligible-medical-expenses-you-claim-on-your-tax-return.html#mdcl_xpns) as the requirements imposed in order to qualify can be very specific and are not necessarily intuitive. For instance, to claim the cost of a walker as a medical expense, it is necessary to have a doctor’s prescription for that equipment. However, the cost of a wheelchair can be claimed with no requirement for a prescription. Finally, although the chart listing eligible medical expenses is 14 pages long, the CRA notes that such listing is “not exhaustive”. A full listing can be found in CRA Income Tax Folio S1-F1-C1, Medical Expense Tax Credit, which is available at https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-1-health-medical/income-tax-folio-s1-f1-c1-medical-expense-tax-credit.html.

The exercise of determining eligible medical expenses for all family members, calculating the optimal time period for making a medical expense tax credit claim, and determining the actual credit claimable can be a time-consuming process. However, given that such expenses are usually unavoidable, the dollar figure costs are often significant, and the effort has to be made only once a year, it is an annual effort worth making.

An increasing number of Canada’s baby boomers are moving into retirement with each passing year and, for most of those baby boomers, retirement looks a lot different than it did for their parents. First of all, as life expectancy continues to increase, baby boomers can expect to spend a greater proportion of their life in retirement than their parents did. Second, the financial picture for baby boomers is likely to be different. Many of their parents benefitted, in retirement, from an employer sponsored pension plan, which ensured a monthly payment of income for the remainder of their lives. Now, such pension plans and the dependable monthly income they provide are, especially for boomers who spent their working lives in the private sector, more the exception than the rule. Where, however, baby boomers have the “advantage” over their parents in retirement, it’s in the value of their homes. Increases in residential property values over the past quarter century in nearly every market in Canada have meant that for many Canadians who are retired or approaching retirement, their homes – or more specifically, the equity they have built up in those homes – represents their single most valuable asset.

An increasing number of Canada’s baby boomers are moving into retirement with each passing year and, for most of those baby boomers, retirement looks a lot different than it did for their parents. First of all, as life expectancy continues to increase, baby boomers can expect to spend a greater proportion of their life in retirement than their parents did. Second, the financial picture for baby boomers is likely to be different. Many of their parents benefitted, in retirement, from an employer sponsored pension plan, which ensured a monthly payment of income for the remainder of their lives. Now, such pension plans and the dependable monthly income they provide are, especially for boomers who spent their working lives in the private sector, more the exception than the rule. Where, however, baby boomers have the “advantage” over their parents in retirement, it’s in the value of their homes. Increases in residential property values over the past quarter century in nearly every market in Canada have meant that for many Canadians who are retired or approaching retirement, their homes – or more specifically, the equity they have built up in those homes – represents their single most valuable asset.

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

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

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

Simply put, taking out a reverse mortgage allows qualifying homeowners to obtain a sum of money based on the value of their home and the equity which they have accumulated in that home without selling that home. It’s also possible, using a reverse mortgage, to structure the receipt of funds in different ways. The homeowner can choose to receive a lump sum amount or can opt to receive a series of payments which will provide a regular income stream, or some combination of the two. And, with a reverse mortgage, no repayment of the funds advanced is required until the homeowner moves out of or sells the home.

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

The potential downsides of a reverse mortgage start with the basic costs of obtaining one. Setting up a reverse mortgage involves a number of costs for the homeowner, including the need to have one’s property appraised. There will also be closing costs, and the homeowner will be required to obtain independent legal advice, and to pay the cost of obtaining such advice.

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

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

The major benefits of a reverse mortgage for many retirees is that amounts received are not subject to tax and do not affect the borrower’s eligibility for means-tested government benefits like Old Age Security or the Guaranteed Income Supplement. And, of course, the homeowner is not required to make payments while living in the home, putting much less of a strain on cash flow. Offsetting that benefit, however, is the fact that the interest rate charged on a reverse mortgage is usually higher than that which would be levied under a traditional mortgage or other similar financial products. As well, under the terms of many such arrangements, a prepayment penalty is levied where the homeowner moves or sells the house within three years of obtaining the reverse mortgage.

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

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

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

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

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

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

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

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

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

• Individuals who are 60 to 65 years of age and continue to work are required to continue making CPP contributions.
• Individuals who are 65 to 70 years of age and continue to work can choose not to make CPP contributions. To stop contributing, such an individual must fill out Form CPT30, Election to stop contributing to the Canada Pension Plan, or revocation of a prior election. A copy of that form must be given to the individual’s employer and the original sent to the Canada Revenue Agency. An individual who has more than one employer must make the same choice (to continue to contribute or to cease contributions) for all employers and must provide a copy of the CPT30 form to each. A decision to stop contributing can be changed, and contributions resumed, but only one change can be made per calendar year. To make that change, the individual must complete section D of CRA Form CPT30, give one copy of the form to his or her employer, and send the original to CRA

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

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

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

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

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

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