Monthly Archive: February 2017

Maintain Liquidity by Minimizing Credit Risk

Liquidity is critical to the viability of any business, regardless of the industry where it operates.


Shore up Listless Collection Practices

When your business is confronted with some past due accounts, there are several ways to help encourage payment of bills. The first step, of course, is to be sure the invoice contains the due date. Providing incentives for prompt payment will also help. You can offer discounts for payments received before the due date and you can charge interest on late payments. If you apply penalties on overdue accounts, be sure the amounts you charge fall within the provisions of the Criminal Code and the federal Interest Act. When a customer does miss a due date, prompt and courteous contact will generally produce results. This can be done by telephone, mail or fax. Document all your collection attempts by sending written notices and keeping copies. It is important to respond rapidly in case the customer does clear the account so that unnecessary delays in shipping are avoided. Your company’s credit department and the accounts receivable bookkeeper should maintain close communication.

The most extreme method to obtain payment is to stop providing goods or services until you receive full payment. But be cautious. This could damage your company’s relationship with an important customer who provides you with significant business. If it becomes clear that you are not going to be paid, you have three main choices:

1. Write-off the account if you determine that it is not worth spending more time and money trying to collect it.

2. Hire a collection agency. You will have to pay a fee or a percentage of the amount collected. Meet with the agency to discuss its procedures and confirm that the collector will not incur any costs of start litigation without your permission.

3. Take legal action. This is no guarantee of being paid, so before you start litigation try to determine the likelihood of collection. Assess whether the individual has sufficient assets to cover the debt and legal fees.

Simply put, liquidity is the ability of your enterprise to meet its financial obligations, usually with cash on hand or by converting assets to cash. It also entails making sure your business has the financial ability to continue providing goods and services without heavy discounting and collecting your receivables timely with minimal write downs and write offs.

One way to avoid sliding into a liquidity crunch is not to extend credit to customers with little creditworthiness. Your enterprise’s liquidity and survival depends on a steady inflow from timely collected receivables.

Accomplishing that requires taking cautious steps before extending credit and staying on top of collection procedures. (See right-hand box for ways to encourage credit customers to pay on or before the invoice’s due date.)

Credit policies and procedures, however, do not always ensure the cash flow to sustain a business. Without a steady stream of revenue from sales, your business runs the risk of illiquidity and therefore being unable to pay its own debts.

When a customer asks for credit, be sure that the application requires:

1. The names, addresses and phone numbers of at least three companies the applicant has had credit dealings with.

2. The applicant’s bank accounts with branch addresses and account numbers.

With this information, you can start taking action. The next steps are critical to helping ensure your customers stay on track with their payments:

  • Call the applicants’ banks to ask if they are a good credit risk.
  • Verify the applicant’s bill-paying history with the business references.
  • Run a credit check with one of the two main rating agencies in Canada, Equifax Canada and TransUnion Canada.

Staying in Control of Receivables

Of course once you’ve granted credit to a customer, your job is just beginning. Your company’s collections manager needs to constantly monitor receivables and closely monitor slow-paying accounts. Part of that process involves balancing the benefits of extending credit, which will boost sales on paper, against the costs of carrying receivables and perhaps being unable to collect them.

There are tools to help you stay in control. Three of the most critical are:

1. Receivables Ratio. You should hold receivables for the shortest time possible. This boosts the timeliness of payments and maximizes the accounts receivable turnover ratio, or the rate at which you are collecting bills during a given period. To determine the ratio, divide net credit sales by average accounts receivable.

2. Aging Schedule. This gives you a bird’s eye view of your receivables and the due dates. It’s a straightforward way of understanding your collection efforts and highlighting overdue bills. The accounts receivable aging schedule typically includes the name of the creditor, the total due, and the amounts due in the current month, the previous month, the preceding two months and more than 60 days.

3. Average Collection Period. One of the most important measurements is the average number of days it takes to collect a bill. This is the length of time it takes to convert sales into cash and underscores the relationship between accounts receivable and cash flow.

The longer the collection period, the more you invest in accounts receivable. And a long collection period means less cash available for your company’s own needs. Remember your firm isn’t the banker so stop acting as if you are. It will only add to your financial problems if you continue doing so.

To calculate the collection period, divide the number of days in the year by the accounts receivables turnover ratio. Or you can take the average accounts receivable and divide that by the average daily sales (net credit sales/days in a year).

The average collection period is commonly used to compare your success at accounts receivable management to that of your industry peers. It can also be used to analyze your collection efforts across various time periods, and determine how well your customers are doing paying their bills when compared with your credit terms.

These are just some of the tools that let will assist you in controlling and monitoring accounts receivables. Your accountant can help you implement the use of these tools and interpret other ratios, reports and measurements involving credits and collections.

The U.S. Patriot Act and Canadian Data Security

Mention hosting data remotely to most people, and you will hear expressions of various concerns, such as:

  • Data might be inaccessible at times due to Internet failure;
  • Unauthorized people might see the information; orGovernment agencies could gain access to your personal or business data.

lores_DOJ_US_Department_Justice_Seal_Logo_goldAdd the U.S. Patriot Act to the mix and the reactions and anxiety are likely to become even stronger. Many companies and individuals fear that the American law gives the U.S. federal government sweeping powers to look at any data at any time for any reason. Before making a decision to embrace a cloud computing solution that involves hosting data in the U.S., you should separate myth from reality.

First, it is critical to be aware that today’s information technologies make it easy for organizations and individuals to exchange information quickly around the globe. This transborder data flow is becoming increasingly popular as both companies and governments take advantage of outsourcing.

In today’s global economy, suppliers can be located anywhere. Even if a domestic supplier is chosen, it may have offices located in other countries. When a supplier is hired to administer personal information and any parts of its operations, including subcontractors, are outside of Australia, the laws of the other countries may be applicable to information stored or electronically accessible in the foreign country. If a company located in the United States or with U.S. connections is hired, then the U.S. Patriot Act may be applicable.

That legislation primarily extended to anti-terrorism the provisions that originally were used simply to deal with typical criminal investigations. The law permits U.S. law enforcement officials to seek a court order giving them access to the records of a company or individual, sometimes without the suspect’s knowledge. Any organization with a presence in the U.S. or controlled by a U.S. business may be subject to these court orders and compelled to comply with the warrant.

In some circumstances, the law may have made it easier for the U.S. government to gain access to personal data. It did not, however, “fundamentally alter the right of the government to that data in those circumstances,” according to an article written by Jeff Bullwinkel, Associate General Counsel and Director of Legal & Corporate Affairs, Microsoft Australia. In other words, the U.S. government has long had the ability to seek access to personal information in pursuit of legal investigations.

How does the U.S. Patriot Act affect American government access to information that is stored outside of the U.S.? If the data is under the control of a U.S.-headquartered company, the government can use the law just as if the information were stored inside the U.S. If the company is not an American company the U.S. Patriot Act does not apply, although there still are ways the U.S. can gain access to the information it is seeking.

The U.S. has long had many cross-jurisdictional agreements that allow law-enforcement agencies in one country to gain access to data stored in another country. Government agencies in every country at some time have legitimate needs to access information to enforce their nation’s laws. Increasingly, that information is stored in foreign jurisdictions. While different laws and international agreements help facilitate access to this data, both domestic and some foreign laws maintain strong protections.

Deciding where to store your data has become increasingly complex as the options have expanded from storing data on a computer you or your business directly controls to sending the information into the cloud and storing it on some server remotely located anywhere on the globe. Wherever you decide to store information, be certain that appropriate measures are in place to protect that data from unauthorised access.

Take the time to become informed about the pros and cons of the many places and methods available for storing data. Consult with your advisers to learn how various laws may or may not protect your information and then make an informed decision that is within your comfort zone.

Tax Credits to Help You Enjoy Your Golden Years

021617_Thinkstock_136978354_lores_KWIf you’re an older taxpayer, you’re eligible for a wide range of tax breaks, some of which aren’t available to others.

Here’s a list of tax breaks for senior taxpayers to consider as we head into tax season.

Age amount. This non-refundable tax credit is available to individuals who were, at the end of 2016, aged 65 or older. The federal age amount for 2016 is $7,125. If your net income is $83,427 or greater, you aren’t entitled to the credit. If your net income is less than $35,927, you get the full amount. If you earn between those two amounts, you’re entitled to $7,125 minus 15% of the amount of your income that exceeds $35,427.

Pension income amount. If you’re no longer working, you may claim up to $2,000 in a non-refundable tax credit if you have eligible pension income. Eligible income includes pension or annuity income you received as payments for a pension or superannuation plan or from payments you receive from a Registered Retirement Savings Plans (RRSP).

Pension splitting. If you’re married or have a common-law partner, you may shift pension income from one partner to lower the tax liability of the family. If your spouse or partner earns less than you, he or she will likely have a lower tax rate. You can transfer up to 50% of your eligible pension income to your spouse or partner.

The extent to which pension income splitting is beneficial depends on the marginal tax bracket of you and your spouse or common-law partner, as well as the amount of qualifying income that can be split.

The pension income must satisfy certain criteria to qualify for splitting. If you’re 65 years of age or older, eligible pension income includes lifetime annuity payments under a registered pension plan (RPP), an RRSP, or a deferred profit sharing plan (DPSP) and payments from a Registered Retirement Income Fund (RRIF).

If you’re younger than 65, eligible pension income includes lifetime annuity payments under an RPP and certain other payments received as a result of the death of your spouse or common-law partner. Eligible pension income doesn’t include payments under the Canada Pension Plan (CPP) or Old Age Security (OAS) payments.

Pension income can also be split in the year of death, but there are special rules that apply depending on whether the pension income recipient or transferee has passed away. Consult with your tax advisor.

Medical expenses. These expenses can be significant for anyone, particularly as you get older. You can claim eligible medical expenses if you or your spouse or common-law partner:

  • Paid for the medical expenses in any 12-month period ending in 2016, and
  • Didn’t claim them in 2015.

Generally, you can claim all eligible amounts paid, even if they weren’t paid in Canada.

You may claim only the part of the expenses that you (or someone else) haven’t been — and won’t be — reimbursed for. However, the expense can be claimed if the reimbursement is included in your or someone else’s income and the reimbursement wasn’t deducted anywhere else on your income tax and benefit return. Generally, total eligible medical expenses must first be reduced by 3% of your net income or $1,813, whichever is less.

You also may aggregate medical expenses between you and your spouse and dependent children. When aggregated, one taxpayer reports the sum of the eligible expenses and receives the credit as long as the total expenses exceed 3% of that person’s net income, or $2,237. Your tax advisor can help you determine which spouse should use the aggregate medical expenses to claim the tax credit.

The credit covers a wide range of medical expenses, including prescription medications, and the amounts you pay to your doctors. If you have a doctor’s prescription due to certain conditions, you may get a tax break for air conditioning, bathroom aids and similar devices. When you list your medical expenses, you must be able to account for each cost with documentation, so keep your receipts.

Disability amount. Taxpayers, their spouses, common-law partners or dependents with severe and prolonged physical or mental impairments may be eligible for the disability tax credit (DTC). To determine eligibility, they must complete Form T2201, Disability Tax Credit Certificate and have it certified by a medical practitioner.

Caregiver amount. If, at any time in 2016, you (either alone or with another person) maintained a dwelling where you and one or more of your dependants lived, you may be able to claim a maximum amount of $4,667 ($6,788 if he or she is eligible for the family caregiver amount) for each dependant.

Each dependant must have met all of the following criteria:

  • Have been 18 years of age or older,
  • Earned net income of less than $20,607 ($22,728 if he or she was eligible for the family caregiver amount), and
  • Have been dependent on you, or was born in 1951 or earlier if he or she is your (or your spouse’s or common-law partner’s) parent or grandparent.

Family caregiver amount. This credit, which differs from the caregiver amount, is an additional tax credit of up to $2,121 that can be claimed for one or more of the following amounts:

  • The spouse or common-law partner amount,
  • The amount for an eligible dependant,
  • The caregiver amount.

The impaired dependant must be 18 years of age or older. An individual under 18 may also qualify if the impairment is prolonged and indefinite and requires greater care than other children of the same age. This credit can be claimed for each impaired dependant. You may be able to claim this credit for more than one eligible dependant.

Spouse or common-law partner amount. You may claim this if at any time in the year you supported your spouse or common-law partner and his or her net income was generally less than $11,474.

Transferred amounts. You may choose to have some of your tax credits transferred to your spouse. Once your tax liability is reduced to, you can then transfer any additional tax credits to your spouse. Your spouse may do the same for you.

Home accessibility tax credit. If you made changes to your home to improve your quality of life, you may claim up to $10,000 in home improvement expenses. Among the expenses you can claim are: wheelchair ramps, walk-in bathtubs or wheel-in showers, widening of doors, non-slip bathroom flooring, ergonomic, easy-to-use, door locks and hands-free water taps. Relatives who support a related senior may also be eligible for this credit.

Goods and services tax/harmonized sales tax (GST/HST) credit. This tax-free quarterly payment helps you offset all or part of the GST or HST you pay. To receive this credit, you must file an income tax and benefit return every year, even if you didn’t earn income. If you have a spouse or common-law partner, only one of you can receive the credit. The credit will be paid to the person whose return is assessed first.

Public transit amount. You may be able to claim the cost of monthly or annual public transit passes for travel within Canada in 2016.

Consult with your tax advisor to determine any credits, deductions and benefits for which you’re eligible.

Add an Ingredient to Your Wealth-Planning Mix

Tax Free Savings Accounts (TFSA) can not only help you to save, they can help you minimize your taxes and plan your estate.


Benefits and Drawbacks

In a Nutshell

There are many benefit to owning a Tax-Free Savings account, including:

1. Tax-free compounded growth and withdrawals. Contributions are made with after-tax money.

2. Withdrawals that won’t affect income-tested benefits such as the child tax benefit, GST credit, age credit, or Old Age Security payments or supplements;

3. No upper age or lifetime limit for contributions. If you don’t contribute for 25 years and then receive a $100,000 inheritance, you could conceivably shield that entire amount from taxes.

4. Unused contribution room is carried forward indefinitely and withdrawals can be replaced later without penalty or having to create additional contribution room. Unlike an RRSP, withdrawals will be added back to accrued contribution room.

5. You don’t need earnings to make annual contributions.

The accounts present some drawbacks that should be considered:

1. Interest paid to borrow money to contribute to a TFSA isn’t tax deductible;

2. Over-contributions are subject to a penalty of one per cent a month, the same as RRSPs, and

3. Capital gains (or losses) accrued in a TFSA won’t be available to offset gains/losses outside it.

Contribution limits will be calculated on the annual Notice of Assessment you receive from Canada Revenue Agency (CRA).

Canadians aged 18 and older may invest in a TFSA. The accounts are mirror images of Registered Retirement Savings Plans (RRSPs) — contributions are made with after-tax dollars, rather than pre-tax money, but withdrawals are tax-free.

Withdrawals add contribution room matching the amount taken out. In contrast, when you withdraw money from your RRSP you lose contribution room. In other words, if you withdraw $4,000 from your RRSP, $4,000 of your contribution room is lost forever.

Generally, the same investments eligible for RRSPs are eligible for TFSAs. So you can hold a number of income-earning holdings in the account, including equities, bonds, mutual funds, savings accounts, and term deposits. (See right-hand box for a closer look at the benefits of TFSAs.)

However, the point of the TFSAs is not to replace registered plans. In fact, all things being equal, the two plans are a wash.

There generally would be no advantage to either a TFSA or RRSP, although both can provide a better rate of return compared with unregistered savings. The only difference is that with an RRSP you receive an initial tax deduction, which leaves you with more pre-tax dollars to compound over the years. The after-tax TFSA contributions mean you essentially have less money to grow.

Ideally, you would have both accounts and maximize their uses. Then you would have the flexibility to choose annually whether to pay tax on withdrawals from a registered plan. In some years you may want to keep taxable income low to minimize benefit clawbacks and in other years you may want some taxable income to account for losses.

Here are several ways to use the savings accounts that you should discuss with your accountant:

1. Shelter Investment Income: Generally, TFSAs will work best with fixed income investments. But if you consider yourself a very good trader, you could trade stocks within the TFSA and profits will be tax-free. But CRA does not like active trade in TFSA accounts.  If you are actively trading in your TFSAs account, CRA can assess tax to TFSAs in respect of income earned from carrying on securities trading business inside the TFSA.

But, be wary. Capital gains inside a TFSA are tax-free, so you cannot claim a capital loss to offset other capital gains nor can you carry it forward. So if you own any laggard stocks, they would generally be wasted in a TFSA, while in a conventional investment account you can apply losses against taxable capital gains.

Generally, high-income investors with extensive investments in non-registered plans might want to keep interest-paying investments in a TFSA and stocks outside. If you have small holdings outside a registered plan, you could consolidate into a TFSA. That could save you significant tax liabilities when you withdraw the money.

“In-kind” transfers from taxable plans to TFSAs would trigger capital gains. If such transfers were deemed a sale, you would be liable for capital gains taxes.

Similar to RRSPs, there is no limit on foreign content, potentially making the accounts a good place to park foreign investments that pay dividends or interest. Under conventional non-registered accounts, foreign dividends are considered income and are taxed at the full rate. They are not eligible for the dividend tax credit. In a TFSA those dividends would be tax free.

If you happen to favour leveraged investing you can benefit by using a TFSA as collateral for low-interest investment loans. However, avoid using borrowed money to invest in a TFSA; the interest costs won’t be deductible as they are in a conventional investment account.

2. Retirement Planning: You may want to melt down your RRSP as you approach 65 years of age, pay a little tax while you are in a low tax bracket, and move the proceeds into TFSAs in order to minimize future clawbacks of Old Age Security benefits.

In the year you turn 71, when you must convert your RRSP into an Registered Retirement Income Fund (RRIF) or an annuity, you could pay tax on the minimum RRIF payments and then move $5,500 of the remaining money into your TFSA each year, sheltering that income from taxes for the remainder of your life. The advantage here is maintaining tax-sheltered savings for emergencies or estate planning.

TFSAs could also supplement RRSPs if you have maxed out your contribution room and still want to continue putting aside money for later years.

3. Estate Planning: TFSAs will make it easy to bequeath large tax-free nest eggs. The amounts could total $1 million or more over 40 years of savings. TFSA holders can name spouses or common-law partners as beneficiaries and rollover the proceeds tax-free to them upon their death.

4. Income Splitting: As with spousal RRSPs, spouses or common-law partners can contribute to their partner’s TFSA. And when it comes to income splitting for taxes, attribution rules will not apply to income earned in a TFSA.

5. Pension Plans: Some specialists suggest that low-income earners may choose TFSAs instead of employer-sponsored pension plans because the latter will generate taxes in retirement, while the former will not.

The Fundamental Implication: TFSAs offer you an additional choice on how to manage your savings and investments. Consult with your professional advisor for the best ways to use this new account to maximize your wealth.

Safe Tax Shelters Aren’t Just for the Rich and Famous

021017_Thinkstock_477753770_KWIf you’re a high income taxpayer, you likely want ways to shelter your money from the tax collector.

Well, it’s the annual season to contribute to one of the perfectly legal tax shelters the federal government offers. That shelter, of course, is the Registered Retirement Savings Plan (RRSP), and the deadline for getting your 2016 contribution is March 1. Another useful government tax shelter is the Tax-Free Savings Plan (TFSA).

Both plans are simply containers in which you can hold various eligible investment products, such as GICs, mutual funds and even individual stocks and bonds. Other tax-shelter possibilities are spousal loans and universal life insurance. More on those later.

RRSP contributions are, of course, tax deductible and generally most Canadians take the deductions during their working lives when they’re in a higher tax brackets and take withdrawals after retirement when their tax liabilities are lower.

Maxing Out Registered Plans

Many high-net-worth investors, however, max out their RRSP and TFSA contribution room quickly. But they make the most of the accounts by wisely splitting their investments between registered and non-registered plans.

For example, income from bonds and GICs is taxed at the highest rate. So it makes sense to keep these inside a registered, tax-deferred account. On the other hand, stocks and dividends fare better in non-registered accounts, as capital gains on shares and dividends from Canadian corporation are taxed at a lower rate.

But there are limits to how much you can put into to your RRSP. Most people can contribute 18% of their earned income to an RRSP. But that doesn’t work for high earners. For example, if you earned $350,000 last year, in theory you could contribute $63,000. But the contribution limit for 2016 is $25,370, plus any leftover contribution room from previous years. (The limit is 26,010 for 2017).

And of course, your spouse or common-law partner can open a plan to increase the investments and income stashed away tax free. However, contributions you make to a spousal or common-law partner RRSP reduce your deduction limit. The total amount you can deduct for contributions you make to your RRSP, or your spouse’s or common-law partner’s RRSP, cannot be more than your personal limit.

Contribution Limits

For TFSAs, the annual contribution limit is $5,500 for 2017, and the maximum cumulative contribution allowance since the accounts began is $52,000. So if you haven’t opened an account, you could contribute that amount this year and keep earning tax-deferred income. In each successive year, just contribute more. The amount is indexed to inflation.

Again, if you’re married or have a common-law partner, those amounts double. TFSA contributions can’t be deducted, but the income earned within the plan is never taxed.

Spousal Loans

Another way to shelter from tax is to lend your spouse an investment loan. You lend your spouse or common-law partner money and charge the prescribed rate of interest, currently 1% (don’t gift money because any income earned on the money will be attributed back to you and taxed in your hands). The interest rate can be locked in indefinitely at the time you set up the loan.

Your spouse or common-law partner takes the money, invests it, earns income on it, pays you the interest and then pays tax on the balance of the income at his or her lower rates. Therefore, you’ll save tax as a couple. Your spouse will have to actually pay you the interest every year by January 30 for the prior year’s interest charge.

When a Spousal Loan Makes Sense

This tactic makes sense, particularly if:

1. You lend a significant amount (thing in terms of hundreds of thousands of dollars),

2. The difference between your marginal tax rates is great, and

3. You’re investing for income.

It may also make sense if you’re expecting significant capital gains.

Universal Life Insurance

You also can shelter significant amounts of non-registered money if you take out a Universal Life Insurance Policy. The amounts have been reduced somewhat starting January 1, 2017, but not on polices taken out before 2017.

Here is the strategy. A Universal Life Insurance policy allows you to add additional investments into funds (stock, bond, global, domestic, etc.). These investments are tax sheltered if they’re held within a life insurance policy.

Savings Feature

Universal life insurance has a savings feature that can be allocated into various active and passive investment options that grow tax-free. Fees tend to be higher than non-insurance solutions, so fees and tax savings need to be compared. Whole life insurance invests some of your premiums on a tax-free basis by the insurance company into unique asset classes, such as private placement bonds, residential and commercial mortgages, private equity and policy loans to other policyholders. Commissions are generally high up-front, so a whole life policy shouldn’t be a short-term commitment.

The amount you can hold depends on a number of factors. While there can be some drawbacks to investing in an insurance policy, for those holding significant non-registered assets, the tax shelter may outweigh any drawbacks.

However, you need to access the funds in a tax efficient way.

Multiple Beneficiaries

The key is to set up a joint policy with multiple people insured — so you might have a policy with you and your spouse and your parents. In some cases, if any one of the three or four people has an insurable event, it allows you to withdraw the accumulated investments funds with no tax implications. So, just like a TFSA, there was tax sheltered growth and no tax to withdraw funds.

Your advisor can provide more details on this complex situation.

Of course, these aren’t the only tax shelters out there. But beware of illegal mass marketed gifting tax shelter arrangements. These include schemes where taxpayers receive a charitable donation receipt with a higher value than what they paid. This can typically be four or five times their out-of-pocket cost. On its website, Canada Revenue Agency (CRA) says it “audits every mass-marketed tax shelter arrangement and no arrangement has been found to comply with the Income Tax Act.”

There’s a major distinction between tax avoidance (where you take advantage of the rules to minimize your tax bill) and tax evasion (where you try to hide income or break the law). The first is perfectly legal, while the second obviously isn’t.

Cautionary Steps

If you’re considering entering into a tax shelter arrangement, get some advice from your tax advisor. Among Here are some steps the CRA recommends taking to help protect yourself and your money:

1. Know who you’re dealing with. Request and read the prospectus or offering memorandum and any other documents available in respect of the investment.

2. Pay particular attention to any statements or professional opinions in the documents that explain the income tax consequences of the investment. These opinions may tell you about potential problems.

3. Don’t rely on verbal assurances from the promoter or others.Get them in writing.

4. Ask the promoter for a copy of any advance income tax ruling provided by the CRA with respect of the investment. Read the ruling and any exceptions.

Be Wary of the CRA

Individual taxpayers should be aware that the CRA could normally reassess returns up to three years after the date of assessment. The fact that tax shelter investements were accepted on initial assessment shouldn’t be interpreted as acceptance of the claim by the CRA. It may take more than one year to complete a tax shelter audit.

Consult with your advisor about maximizing your RRSP and TFSA contributions before thinking about other tax shelters.

Major Life Events Can Affect Your Taxes and Finances

012717_Thinkstock_493335588_lores_KWAs you gear up for tax season, it’s a good time to reflect on any major life changes you’ve recently experienced. Passing through the various stages of life may have an effect on your taxes and finances.

If you’re getting married, just got divorced, welcomed a new child into the family or dealt with the death of a loved one, you may need to take action to claim tax benefits and keep the Canada Revenue Agency (CRA) up-to-date about your situation.

Marital Status Change

Let the CRA know if you get married, enter into a common-law partnership, separate, divorce or were recently widowed. It’s important to inform the CRA about changes in your marital status to make sure you receive the right amount in benefits and credit payments. When your marital status changes, the CRA will recalculate your benefits and credits based on:

  • Your updated family net income,
  • The number of children you have in your care and their ages, and
  • The province or territory where you live.

Your benefit payments will be adjusted the month after the month your status changes.

There are various ways to contact the CRA:

  • Use the “change my marital status” service found in My Account on the CRA website,
  • Select marital status in the MyBenefits CRA or MyCRA mobile apps,
  • Call 1-800-387-1193 if you are a benefit recipient, or
  • Send in a completed Form RC65, Marital Status Change.

If you change your name, contact the CRA as soon as possible at 1-800-959-8281 so the agency can update your records.

Note: The CRA doesn’t accept name changes by email or over the Internet.

If you get divorced during the year and you’re entitled to Canada Child Benefit payments, the goods and services tax/harmonized sales tax (GST/HST) credit, or the working income tax benefit (WITB) advance payments, let the CRA know by the end of the month after the month of your divorce.

Note: If you separate from your spouse or you’re making or receiving support payments after a divorce, ask your tax advisor about the tax implications.

If you just got married, your tax situation will change in several ways:

Spouse or common-law partner amount. Did you make the majority of the household income this year? If at any time in the year you supported your spouse (or common-law partner) and his or her net income was less than $11,474 in 2016, you can claim up to that amount. If you also claimed the family caregiver amount, your spouse or common-law partner’s net income must be less than $13,595.

A spousal RRSP. Once married, you can contribute to an RRSP for your spouse to save for retirement. However, contributions you make to a spousal account reduce your RRSP deduction limit. The total amount you can deduct for contributions you make to your RRSP or your spouse’s or common-law partner’s RRSP cannot be more than your RRSP deduction limit. If you cannot contribute to your RRSP because of your age, you can still contribute to your spouse’s (or common-law partner’s) RRSP until the end of the year he or she turns 71. Ask your tax advisor how much you can contribute and deduct.

Want to name your spouse as a representative? You can authorize your spouse (or common-law partner) as your representative for income tax matters. Do this online using the My Account feature.

Having a Baby or Adopting a Child

If you welcomed a new child into your family recently or you have a baby on the way, you may be entitled to credits and benefits (see the box at the bottom of this article). To qualify:

File an Automated Benefits Application (ABA). When registering a newborn’s birth, you can consent to use the ABA, which allows you to automatically apply for child tax benefits at the same time. If you give your consent on the provincial/territorial birth registration form, you don’t have to reapply for your child’s benefits by using the CRA online service or filing the form listed below.

Use the My Account feature. You can also apply to receive Canada child and family benefits by using the “apply for child benefits” service or by downloading and mailing Form RC66, Canada Child Benefits Application to your tax centre.

If you adopt a child under 18 years of age, you can also claim an amount for eligible expenses related to the adoption. The maximum 2016 amount for each child is $15,453.

After the Death of a Loved One

The CRA reminds families of these considerations after a loved one has passed away.

A final tax return. The legal representative of a deceased individual must report all of the person’s income from January 1 of the year of death up to, and including, the date of death.

Ask your tax advisor for details on benefits. Deductions and credits can be claimed on the tax return for a deceased person. With certain strategies, such as splitting amounts between tax returns or claiming them against specific kinds of income, some of the deceased person’s taxes may be reduced or eliminated.

Payments for GST/HST. Sometimes, the deceased will receive a GST/HST credit payment after death. In this case, you should return the payment to the tax centre serving your area and notify the CRA of the date of death.

Don’t worry about installments. If an individual who must pay tax by installments dies during the year, installment payments due on or after the date of death don’t have to be made.

Dealing with the Canada Child Benefit. If a recipient of this benefit dies, call the CRA at 1-800-959-8281, or complete Form RC4111 Request for the Canada Revenue Agency to Update Records as soon as possible to report the date of death. If the deceased person’s spouse (or common-law partner) is the child’s parent, the CRA will usually transfer the payments to that individual. If anyone other than the parent is now primarily responsible for the child, that person must apply for the child’s benefits. If the deceased is an eligible child, the parents’ entitlement to the benefit stops the month after the date of death.

Deemed disposition of property. The tax treatment of capital property is complex. Consult your tax advisor for information.

Don’t Forget Your Estate Plan

As you can see, major life events can have an impact on your taxes so discuss them thoroughly with your tax advisor. In addition, keep in mind that changes in your financial situation or your family structure should also be triggers for reviewing your estate plan. Marriages, divorces, births and deaths are just some of the reasons why you may want to update your will.

Child and Family Benefits

Here’s a brief explanation of eight tax and financial benefits available to families:

Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit. These benefits were replaced by the tax-free Canada Child Benefit as of July 1, 2016. Talk with your tax advisor, as it’s possible you qualify for the replaced benefits for previous year. The CRA uses information from your income tax and benefit return to calculate how much your CCB payments will be. To get the CCB, you have to file your return every year, even if you didn’t have income during the year. If you have a spouse or common-law partner, he or she also has to file a return every year.

GST/HST credit. Low or modest-income families can receive this tax-free quarterly payment to offset some GST/HST. To receive it, they must file income tax and benefit returns every year, even if they have no income to declare.

Provincial and territorial benefits. Most provinces and territories have child and family benefit and credit programs that come with the CCTB and GST/HST credit. Ask your tax advisor about yours.

Working income tax benefit. Working low-income families can claim this refundable tax credit. Your tax advisor can explain the eligibility criteria.

Disability tax benefits for family members. Canada provides tax credits and benefits for adults and children under the age of 18 who meet certain conditions. Ask your tax advisor for details.

Registered Education Savings Plan (RESP). An RESP is a contract between you and a promoter that allows you to make contributions toward future education expenses of a named beneficiary of the plan. Generally, if you change beneficiaries, the CRA treats the contributions for the former beneficiary as if they had been made for the new beneficiary on the date they were originally made. If the new beneficiary already has an RESP, this may create an excess contribution. There are exceptions to this rule, so talk with your advisor.

Death of a Loved One: Filing the Final Tax Return

020317_Thinkstock_491359394_lores_KWDealing with the death of loved ones is difficult, and that may be compounded by having to figure out how to handle their taxes after they’re gone.

Canada doesn’t have an inheritance tax. Instead, Canada Revenue Agency (CRA) treats the estate as a sale, unless the estate is inherited by the surviving spouse or common-law partner, where certain exceptions are possible. This means that the estate pays the taxes owed to the government, rather than the beneficiaries paying. By the time the estate is settled, the beneficiaries shouldn’t have to worry about taxes.

Legal Representation

When someone passes away, that person’s legal representative (executor or estate administrator) has to file a final income tax return and take care of many other tasks. This article can help you understand what to expect during the process.

The representative:

1. Advises the CRA, Revenu Québec (if appropriate) and Service Canada of the date of death.

2. Arranges transfers to a survivor, if applicable, of any of the following benefit and credit payments:

  • Goods and services tax/harmonized sales tax (GST/HST) credit,
  • Working income tax benefit advance payments, or
  • Canada child benefit

If the death occurred between January 1 and October 3, 2016, the deadline for filing the final return and paying any tax owing is May 1 this year, as the usual April 30 falls on a Sunday. If the death occurred between November 1 and December 31, 2016, the deadline is six months after the date of the death.

Determining Total Income

The representative must determine the deceased person’s income from all sources from January 1 of the year of death up to, and including, the date of death. The representative will probably need previous tax returns and may have to contact employers, banks, trust companies, stock brokers and pension plan managers. The final return can’t be submitted through NETFILE.

Tax returns must be filed for any years that the person didn’t file before the year of death. If an individual who pays tax by installments dies during the year, payments due on or after the date of death don’t have to be paid.

In some cases, cheques may arrive for the deceased person. You may have to return certain cheques, but payment will definitely have to be stopped for the Canada Child Benefit, the GST/HST/QST credit and other benefit cheques if applicable. Employee vacation pay is considered income for the deceased and unused sick leave is considered income for the estate or the beneficiary.

Taxes and Debts First

Like all other debts, income tax has to be paid by the estate first before beneficiaries can inherit. This is part of settling the estate. The notice of assessment for the deceased individual’s tax return is one of the documents the legal representative needs in order to get a clearance certificate and distribute property from the estate.

A clearance certificate officially states that all amounts for which the deceased is liable to the CRA have been paid — or that the CRA accepted security for the payment. If the representative doesn’t get a clearance certificate, he or she can be liable for any amount owed.

The certificate covers all tax years to the date of death. It isn’t a clearance for any amounts a trust owes. If there’s a trust, a separate clearance certificate is needed.

Account and Asset Transfers

In terms of transfers, any non-registered capital property may be transferred to the deceased taxpayer’s spouse or common-law partner.

If there are registered assets such as Registered Retirement Savings Plans (RRSP) or Registered Retirement Income Funds (RRIF), the deceased person is deemed to have received the fair market value of the plan’s assets immediately prior to death. This amount must be included in the income of the deceased unless the spouse or common-law partner or a dependent child or grandchild is entitled to the funds.

If an individual or individuals are designated as beneficiaries, the proceeds from the plan will be taxable in their hands in the year they receive the money unless it’s transferred into their own tax-deferred plans. If no one is a designated beneficiary, the plan’s value may still be taxable in the hands of family members or others if they’re beneficiaries of the estate. In addition, proceeds in the RRSP may also be able to be rolled over to a Registered Disability Savings Plans for the benefit of a financially dependent infirm child or grandchild.

Other rules apply if death occurred after the plans matured and began paying out annuities.

If the value of investments in a registered plan declines between the date of death and the time of final distribution to the beneficiaries, that decrease may be carried back and deducted against any income from the registered plans that was included on the final return. For this to happen, the plan:

1. Must be wound up by the end of the year following the year of death, and

2. Must have held no investments other than qualifying investments during the post-death period.

If the deceased individual had a Tax-Free Savings Account (TFSA), tax implications may vary. The account holder can name a spouse or common-law partner as the successor holder. In that case, the spouse or partner becomes the new holder, keeping the account’s tax-exempt status. This won’t affect the TFSA contribution room of the spouse.

If some other person is named as beneficiary, the account will no longer be a TFSA. Whether or not a beneficiary can be named in a TFSA contract depends on provincial legislation. The legal representative will determine what applies in your case.

Assets with named beneficiaries such as life insurance policies or RRSPs are usually excluded in determining the value of an estate for purposes of probate. It’s likely that a TFSA with a named beneficiary would also be excluded from probate. Again, this depends on provincial legislation.

If no successor holder is named for the TFSA, the proceeds of the account become part of the estate. Any proceeds from the account that a surviving spouse or common-law partner receives can be used to make an exempt contribution to the survivor’s TFSA without affecting the contribution room of the survivor, provided:

  • It’s done before the end of the first calendar year after death, and
  • It’s designated as an exempt contribution in the survivor’s income tax return for the year of the contribution.

If there’s no spouse or common-law partner named as successor holder, the TFSA won’t lose its tax-exempt status until the earlier of:

1. The time it’s completely paid out to beneficiaries and no longer exists, or

2. The end of the first calendar year after death.

Any payments to beneficiaries, including during this exempt period, will be taxable to them to the extent that the payments include income or capital gains earned after the death of the holder.

Final Word

Representatives may also use optional tax returns to declare certain types of income. Also, by claiming certain amounts more than once, splitting them between returns or claiming them against certain kinds of income, representatives may be able to reduce or eliminate the deceased’s tax payable. Contact your tax advisor for more information in your situation.

A Tax-Saving Strategy for Seniors

If you earn income eligible for the Pension Income Tax Credit, you or your spouse or common-law partner may cut your total tax bill by using an income splitting strategy.


Tax Planning Points

Increasing your spouse’s income above a certain level or reducing your income below a certain level will result in a claw-back of OAS.

Increasing your spouse’s income to more than a certain government set level will trim the old age amount tax credit. Talk to your financial advisor

If your spouse is under 65, income from RRIFs, RRSP annuities, and other annuities do not qualify for the pension amount tax credit, while payments from pension plans do.

Under pension splitting guidelines, you may transfer as much as 50 per cent of the qualifying income to the tax return of a lower-income spouse or common-law partner. This allows a greater portion of family income to be taxed at a lower rate and generates a higher level of after-tax income.

Pension splitting sidesteps attribution rules, where transferred assets are generally attributed back to, and taxed in the hands of, the person making the transfer.

Who Is Eligible

Ottawa allows spouses or common-law partners to shift as much as 50 per cent of eligible pension income to the other as long as they:

  • Are married or in a common-law relationship in the year they choose to split the income;
  • Reside in Canada on December 31 or at the time of death; or
  • In the case of bankruptcy, reside in Canada on December 31 of the calendar year in which the tax year (pre- or post-bankruptcy) ends.

In addition, they cannot be living apart at the end of the year and cannot have been living separately for more than 90 days during the year because their relationship broke down. You may split income if you are living apart for medical, educational or business reasons.

The Effects of Pension Income Splitting

1. Spouses or partners who qualify for the pension income tax credit may claim the first $2,000 of qualifying income. Tax withheld from the pension, remitted to Canada Revenue Agency (CRA), and reported on the T4A slip, is also transferred to your spouse, in proportion to the amount of pension you transfer.

2. If the transferred income is taxable income from pension plans and superannuation plans, your spouse will be able to claim the pension income amount. If the income is the taxable portion of annuities, RRSP annuities and RRIF payments, your spouse must be older than 65 to claim the pension income amount of $2,000.

3. Pension income splitting will not affect tax credits such as the child tax benefit, the GST/HST credit, Canada Child Tax Benefit and related provincial or territorial benefits. However, the new tax benefit may affect individual tax credits, such as the age amount credit and the OAS claw-back.

4. If your spouse or partner is in a lower tax bracket than you, transferring pension income to your spouse will result in a lower combined tax bill, and may also result in a lower OAS claw-back. For low income seniors, it may boost your tax credit due to the age amount.

What Is Eligible

If you are age 65 years or older, the income that qualifies is the same as the income that is eligible for the Pension Income Tax Credit, which is available on as much as $2,000 of certain forms of pension income. This includes the total of:

1. Income from a Registered Pension Plan (RPP);

2. Annuities from a Registered Retirement Savings Plan (RRSP);

3. Payments from a Registered Retirement Income Fund (RRIF); and

4. The taxable portion of annuities from a superannuation or pension fund or plan.

For individuals under the age of 65, qualifying income comprises money from pension plans and superannuation plans, including foreign pensions.

Payments from RRSPs do not qualify, so if you are older than 65 and plan to withdraw money from your plan, talk to your tax accountant about the possibility of converting the RRSP to either an RRIF or an RRSP annuity. (There is no age restriction for the spouse or common -law partner who receives the income allocation.)

Other income that does not qualify includes payments from the Canada or Quebec Pension Plan, Old Age Security (OAS) payments, and Guaranteed Income Supplements (GIS).

The allocated pension income is treated as income of the lower-income spouse for all purposes under federal income tax rules. In effect, some couples may now receive a second pension tax credit where previously only one was available. In addition, splitting pension income could mean higher Old Age Security entitlements for some couples.

For those individuals eligible to split their pension with their spouse or partner, the degree of benefit will likely vary noticeably, so talk to your tax accountant to ensure that you are making the right decision and that you take the maximum benefits allowable.

Guarding Against Age Bias

With some rare exceptions, actions in the workplace based solely on an employee’s age are discriminatory and violate portions of these human rights laws in Canada: the Charter of Rights and Freedoms, the Human Rights Act and provincial and territorial statutes.

The Supreme Court of Canada has defined discrimination as: “A distinction whether intentional or not but based


Testing for Undue Hardship

   There is an exception that allows some discriminatory actions if the cost of accommodating an employee would present an undue hardship for the company.

When making a determination of undue hardship, businesses should consider three primary factors: health, safety and cost. A company has to provide hard evidence that accommodation would cost too much or impose health and safety concerns.

The Supreme Court of Canada has listed other factors that may be considered, including:

  • The type of work performed.
  • Size of the workforce.
  • Interchangeability of job duties.
  • A financial ability to accommodate.
  • The impact on a collective agreement.
  • The influence on employee morale.

These factors and their importance vary from case to case. For example, a large corporation or a federal agency would likely find it hard to prove undue hardship on the basis of cost alone. Such organizations usually have the budget, size and flexibility to accommodate special needs at a lower cost. Among the factors considered when determining financial costs are:

  • The employer’s size and financial situation.
  • An ability to amortize costs or mitigate the hardship in some other way.
  • The number of people the accommodation would benefit.
  • The possibility of phasing-in major accommodations.
  • The availability of special budgets, reserve funds or external sources of funding, such as government funding or tax incentives.

Factors Not to Consider Include:

  • Customer or public preference based on prejudice or stereotyping.
  • Discriminatory objections, such as other employees’ objections to accommodations based on prejudice or attitudes inconsistent with human rights values.
  • Threatened grievances by other employees.

on grounds relating to personal characteristics . . . which has the effect of imposing burdens, obligations or disadvantages on [an] individual or group not imposed upon others or which withholds or limits access to opportunities, benefits and advantages available to other members of society.” (Andrews v. Law Society of British Columbia)

To help avoid charges of age bias, a company must keep the workplace free from discrimination and support the needs of older employees. To help protect your business from potential legal liability, get professional legal help setting up a policy.

According to the Ontario Human Rights Commission, here are some of the actions that could generally be considered to involve age discrimination:

  • Limiting or withholding transfers, promotions and training based on an employee’s age.
  • Using subjective criteria that could indicate ageism in determining whether to retain or terminate an employee.
  • Refusing to assign an older employee to certain jobs or requiring an undesired transfer.
  • Linking performance evaluations to age by either subjecting older employees to more scrutiny or evaluating based on a perception that a person will soon retire.
  • Failing to recall someone from a layoff because of age.
  • Targeting older workers during a downsizing, reorganization or amalgamation.
  • Letting an employee go because the person is eligible for pensions.
  • Retaliating or threatening retaliation against any individual who is the alleged victim of age discrimination, files a complaint or testifies in a discrimination complaint.
  • Failing to accommodate older workers unless that would create undue hardship for your company. (See right-hand box for how to gauge undue hardship).

Age discrimination can also be found in the recruitment and hiring process, so it’s prudent to take the side of caution and avoid:

  • Direct or indirect statements relating to age in job advertisements.
  • Age-related questions in job applications other than to determine that a candidate is old enough to hold a full-time position.
  • Interview questions relating to age unless: the job is aimed specifically at persons 65 years of age or older; the hiring organization is a special interest group serving a particular age group; age is a bona fide occupational requirement of the job; or the question is necessary to determine eligibility for a special program to promote age equality.
  • Statements about your company’s need to “rejuvenate” its work force.
  • Comments while evaluating candidates that refer to the applicant’s appearance, adaptability, or ability to be trained based on age, or concerns that the applicant will be too costly to hire because of age.
  • Evidence that there is a pattern of preference for hiring younger workers. For example, if a significantly younger candidate is hired whose qualifications are no better than an older candidate for the same job, or a candidate is turned away due to a perceived “lack of career potential” or experience that was too “diversified” or “specialized.”

Certain types of differential acts are not generally considered discriminatory when based on age, such as:

  • Legal restrictions on child employment.
  • Affirmative action programs for older workers.
  • Retirement plans based on minimum age plus years of service.
  • Policies aimed at easing the transition into retirement.

(In a future article we will look at whether mandatory retirement is discriminatory.)