Monthly Archive: February 2018

2017-18 Economic and Fiscal Update

Economic-and-Fiscal

The fiscal cycle of the federal government follows a predictable annual path. Each spring, the Minister of Finance brings down a budget outlining the government’s revenues and expenditures and its surplus or deficit projections for the fiscal year which runs from April 1 to March 31. That budget also includes the announcement of any changes to the tax system which the government wishes to implement.

In the fall, the Minister of Finance announces the Economic and Fiscal Update which, as the name implies, provides an update of the government’s finances approximately halfway through the current fiscal year. Sometimes, as was the case this year, the Update includes announcements of additional tax changes.

The 2017-18 Economic and Fiscal Update brought down by the Minister of Finance on October 24, 2017 included a better than expected deficit picture for upcoming fiscal years. That improved fiscal picture allowed the Minister to announce a number of relieving tax measures. While the measures are few, they will affect a great number of corporations and individuals, whether through lower tax rates or increased taxpayer benefits. Those changes are as follows.

Effective as of January 1, 2018, the small business tax rate will be reduced to 10%. A year later, on January 1, 2019, that rate will be reduced again, to 9%.

Lower and middle income Canadian families are eligible to receive the Canada Child Benefit (CCB) — a non-taxable monthly benefit paid by the federal government. The amount of CCB received depends on the size of the family and the family’s net income. While there has been no change to benefit amounts, the Minister indicated that previously announced plans to provide annual cost-of-living changes to those benefits would be brought forward and implemented effective July 1, 2018. As of that date, the amount of benefits payable and the income thresholds which determine eligibility will both be indexed to inflation.

The full 2016-17 Economic and Fiscal Update can be found on the Finance Canada website at www.budget.gc.ca/fes-eea/2017/docs/statement-enonce/toc-tdm-en.html.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact your Segal advisor for more information on these topics how it pertains to your specific tax or financial situation.

RRSP and TFSA rules for 2018

rrsp-tfsa-web

One of the perennial New Year’s resolutions made by many individuals is a commitment to keep on a budget, spend less, save more, deal with any outstanding debt and, generally, to better manage their financial affairs. The start of the new calendar year is also the start of a new tax year and with that, a fresh opportunity to contribute to one’s registered retirement savings plan (RRSP) and tax-free savings account (TFSA). What follows is an outline of the contribution limits and deadlines for both types of plans which will apply for the 2018 tax and calendar year.

RRSPs are, top of mind for most taxpayers at this time of year; making an RRSP contribution is the last opportunity most taxpayers will have to make a difference to their tax payable for the 2017 tax year. This year, any RRSP contribution which will be claimed on the 2017 tax return filed later this spring must be made on or before Thursday March 1, 2018.

While the contribution deadline is the same for everyone, the maximum allowable contribution amount is not. For every taxpayer, the calculation of how much can be contributed for 2017 starts with looking up one’s income for the 2016 tax year. The maximum current year contribution for 2017 is 18% of that 2016 income figure, to a specified maximum. So, a taxpayer who earned $50,000 in 2016 has a current year contribution limit for 2017 of $9,000 ($50,000 × 18%).  In any event, current year RRSP contributions for 2017 are subject to an overall limit of $26,010, regardless of how much the taxpayer earned in 2016.

Good intentions notwithstanding, very few Canadian taxpayers make their maximum allowable RRSP contribution each year. However, where the maximum contribution isn’t made in a year, any “shortfall” is carried forward and can be contributed in any future year. Calculating the amount of any carryforward, plus any current year allowable contribution amount can become complex, and fortunately the Canada Revenue Agency (CRA) keeps track of that number for each Canadian taxpayer. That calculation, which shows the total maximum contribution which can be made by the taxpayer for 2017, can be found on page 3 of the Notice of Assessment for the taxpayer’s 2016 return.

When it comes to making a contribution to one’s TFSA, the good news is the timelines and deadlines are much more flexible than those which govern RRSP contributions. A contribution to one’s TFSA can be made at any time of the year, and contributions not made during the current year can be carried forward and made in any subsequent year.

However, determining one’s total TFSA contribution room is significantly more complex than figuring out one’s allowable RRSP contribution amount, for two reasons. First, the maximum TFSA amount has changed several times (increasing and decreasing) since the program was introduced in 2009. Second, and more important, individuals who withdraw funds from a TFSA can re-contribute those funds, but not until the year following the one in which the withdrawal is made. Especially where a taxpayer has several TFSA accounts, and/or a history of making contributions, withdrawals, and re-contributions, it can be difficult to determine just where that taxpayer stands with respect to his or her maximum allowable TFSA contribution for 2017.

2018 Limits and Deadlines for RRSP and TFSA

RRSP deduction limit increases

The maximum RRSP contribution limit for the 2017 tax year is $26,010. To make the maximum current year contribution for 2017, it will be necessary to have had earned income for the 2016 taxation year of $144,500. Deadline for 2017 contributions is Thursday March 1,2018

The RRSP contribution limit for the 2018 tax year is $26,230. To make the maximum current year contribution for 2018, it will be necessary to have earned income for the 2017 taxation year of $145,725.

TFSA contribution limit unchanged

The TFSA contribution room limit for 2018 is unchanged at $5,500. The actual amount which can be contributed by an individual includes both the current year limit and any carryover of re-contribution amounts from previous taxation years.

Keeping track of TFSA contribution room can be complicated, especially where taxpayers have made withdrawals from their TFSA plans.

Taxpayers can obtain RRSP and TFSA information online, through the CRA’s My Account service or by calling their Segal advisor.

Pension Income Splitting — Getting Something for Nothing

pension

Any taxpayer hearing of a tax planning opportunity that offered the possibility of saving hundreds or even thousands of dollars in tax while at the same time increasing his or her eligibility for government benefits, while requiring no advance planning, no expenditure of funds or substantial investment of time could be forgiven for thinking that what was being proposed was an illegal tax scam. In fact, that description applies to pension income splitting which, far from being a tax scam, is a government-sanctioned strategy to allow married taxpayers over the age of 65 (or, in some cases, age 60) to minimize their combined tax bill by dividing their private pension income in a way which creates the best possible tax result.

Many Canadians, even those who can benefit from pension income splitting, have never heard of it. In large part, that’s because the strategy gets very little coverage in the media. While Canadians are inundated during the first two months of the year with advertisements extolling the virtues of making contributions to registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs), pension income splitting is never mentioned. The reason for that is that it is one of the very few tax planning strategies in which only the taxpayer gains a financial benefit.

The information provided with the annual tax return form issued by the Canada Revenue Agency (CRA) also doesn’t highlight the benefits of pension income splitting, and the form needed to carry out a pension income splitting strategy isn’t included in the General Income Tax Return package — it must be ordered from the CRA or downloaded from the Agency’s website. The Income Tax and Benefit Guide issued by the CRA for 2017 returns does flag the pension income splitting option, in the same manner as all other tax tips on deductions and credits which may be claimed.  However, the material on income splitting included in the Guide addresses only the mechanics of filing — which number goes where — with no significant explanation of the tax-saving benefits which can be obtained. Consequently, unless eligible taxpayers are getting good tax planning or tax return preparation advice, it’s likely that they could overlook a significant opportunity to reduce their overall tax burden.

Dividing income between spouses makes for a lower overall tax bill because of the way our tax system is structured. Canada’s tax system is what is known as a “progressive” tax system, in which the rate of tax levied as income rises. In very general terms, for 2017, the first $46,000 of taxable income attracts a combined federal-provincial rate of around 25%. The next $46,000 of such income, however, is taxed at a rate of just under 35%. When taxable income exceeds $142,000, the tax rate imposed can approach 50%. While those percentages and income thresholds will vary by province, provincial and territorial tax rates will, in nearly every province or territory, increase as taxable income goes up. (The one exception to that rule is the province of Alberta, which imposes a flat 10% tax rate on all individual taxable income. However, Alberta taxpayers, like those in other provinces, will still pay increasing federal rates as income rises.) Dividing income allows a greater proportion of that income to be taxed at lower rates. Of course, that means that the total tax payable (and therefore government tax revenues) will be reduced. Consequently, our tax laws include a set of rules known as the “attribution rules” which seek to prevent strategies to divide income in this way. Pension income splitting is a government-sanctioned exception to those attribution rules.

The general rule with respect to pension income splitting is that taxpayers who receive private pension income during the year are entitled to allocate up to half that income with a spouse for tax purposes. In this context, private pension income means a pension received from a former employer and, where the income recipient is over the age of 65, payments from an annuity, an RRSP, or a registered retirement income fund (RRIF). Government source pensions, like payments from the Canada Pension Plan, Quebec Pension Plan, or Old Age Security payments do not qualify for pension income splitting, regardless of the age of the recipient or his or her spouse.

The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension plan administrator.

Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032(E)17, Joint Election to Split Pension Income for 2017, with their annual tax return. If you are filing electronically, retain a copy of the completed form should the CRA request a copy.

On the T1032(E), the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for the tax year. Since the splitting of pension income affects both the income and the tax liability of both spouses, the election must be made and the form filed by both spouses — an election filed by only one spouse or the other won’t suffice. In addition to filing the T1032(E), the spouse who receives the pension income must deduct from income the pension income amount allocated to his or her spouse. That deduction is taken on line 210 of his or her return for the year. And, conversely, the spouse to whom the pension income is being allocated is required to add that amount to his or her income on the return, this time on line 116. Essentially, to benefit from pension income splitting, all that is needed is to for each spouse to file a single form with the CRA and to make a single entry on his or her tax return for the year.

Generally, when taxpayers sit down to complete their income tax returns this spring, it will be too late to take any action which will reduce taxes payable for the 2017 tax year — in most cases, such actions needed to be taken before the end of the 2017 calendar year (or, for RRSP contributions, by March 1, 2018). One of the best attributes of income splitting as a tax planning strategy is that it doesn’t have be addressed until it’s time to file the return for 2017. By the end of February or early March, taxpayers will have received the information slips which summarize their income for the year from various sources. At that time, couples who might benefit from this strategy can review those information slips and calculate the extent to which they can make a dent in their overall tax bill for the year through a little judicious income splitting.

Individual tax instalment deadlines for 2018

deadline

Millions of individual taxpayers pay income tax by quarterly instalments, which will be due on the 15th day of each of March, June, September, and December 2018, except where that date falls on a weekend or statutory holiday.

Tax instalment due dates for 2018 are as follows:

  • Thursday March 15, 2018
  • Friday June 15, 2018
  • Monday September 17, 2018
  • Monday December 17, 2018

Individual tax filing and payment deadlines in 2018

  • For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2017 tax year is Monday, April 30, 2018.
  • Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2017 on or before Monday April 30, 2018.
  • Self-employed taxpayers and their spouses must file a 2017 income tax return on or before Friday June 15, 2018.

Looking ahead to 2018

2018

For most Canadians, 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 remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by their employer.

Each taxpayer’s situation is unique and so the employer must 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 minimally at the time employment commences. Each employee must, complete two TD1 forms – one for federal tax purposes and the other for provincial tax. Federal and provincial TD1 forms for 2018 list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount.

While the TD1 completed by the employee will have accurately reflected the credits claimable, everyone’s life circumstances change. Where a baby is born, or a child starts post-secondary education, a taxpayer turns 65 years of age, or an elderly parent comes to live with their 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.

It is 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 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.

Where the taxpayer has available deductions, which cannot be recorded on the TD1, like RRSP contributions, deductible support payments or child care expenses, it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect the employee’s tax liability for 2018. The way to do so is to file Form T1213, Request to Reduce Tax Deductions at Source Once that form is filed with the CRA, the Agency 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 2018 is filed with the CRA, the sooner source deductions can be adjusted, effective for all paycheques subsequently issued in that year. Providing an employer with an updated TD1 for 2018 at the same time will ensure that source deductions made during 2018 will accurately reflect all of the employee’s current circumstances, and consequently his or her actual tax liability for the year.

Changes Coming to the Voluntary Disclosure Program

mortgage-stress

Although it’s doubtful that anyone does so with any great degree of enthusiasm, each spring millions of Canadians sit down to prepare for the completion of their annual tax return or, more often, engage a professional accountant to do it for them.  Although the rate of compliance among Canadian taxpayers is very high — for the last filing season, just under 30 million individual income tax returns were filed with the Canada Revenue Agency (CRA) — there are, inevitably, those who do not.

There are a lot of reasons why individual Canadians don’t file their returns or pay their taxes on a timely basis, and almost all of them are based on a lack of understanding of how our tax system works, or on incorrect information about that system.

Some taxpayers don’t file because they believe that there’s no reason to do so if they don’t owe anything and aren’t expecting a refund. While that can be true, it’s also the case that it’s necessary to file to receive income-tested tax credits and benefits, including the HST credit, the Canada child benefit and a range of provincial tax credits. Those who don’t file can’t have their eligibility for such credits determined and so no credits can be paid to them. Others don’t file because they have a balance owing but don’t have the funds to pay that balance on filing. That, too, is the wrong approach, as anyone who owes taxes but doesn’t file a return by the filing deadline gets hit with an immediate penalty of at least 5% of the outstanding amount owed. In such circumstances, the right approach is to file on time and to contact the CRA to come to an agreement on a payment arrangement over time. Finally, there is a persistent (and completely false) tax myth that has been circulating for decades, that the federal government does not have the legal right to collect taxes and every year some taxpayers fall victim to someone peddling that myth.

There are also some Canadians who file returns in which income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed. While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate isn’t high, there are a lot of such returns when measured by absolute numbers. And, although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each instance of non-compliance simply aren’t available, especially since, in many cases, the amount recovered may be less than cost of recovering it.

With all of that in mind, several years ago the CRA instituted a program intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arose from the fact that, in most cases, such taxpayers would have to pay outstanding tax amounts owed, plus interest, but would avoid the payment of penalties and the risk of criminal prosecution.

That program, the Voluntary Disclosure Program, has generally fulfilled its objectives but has been a target for criticism as being a means by which those who engage in deliberate tax avoidance can escape the consequences of their actions. The CRA recently announced that changes would be made to the Voluntary Disclosure Program, beginning on March 1, 2018, and that those changes would narrow the eligibility criteria for the program and impose additional conditions on participants, to avoid such effects.

To start, the basic requirements for participation in the VDP as of March 1, 2018 include the following. To qualify for relief, an application must:

  • Be voluntary (meaning that it is done before the taxpayer becomes aware of any compliance or enforcement action by the CRA);
  • Be complete;
  • Involve the application or potential application of a penalty and, for GST/HST application, the application or potential application of a penalty or interest; and
  • Include information that is at least one year past due for income tax applications and, for GST/HST applications, at least one reporting period past due.

The basic change which will come into effect after February 2018 is that two tracks will be created for income tax disclosures — the Limited Program and the General Program.  The determination of whether an application should proceed under the Limited or the General Program will be made on a case-by-case basis. The intention, however, is to restrict the Limited Program to instances in which applications disclose non-compliance which appears to include intentional conduct on the part of the taxpayer. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:

  • the dollar amounts involved;
  • the number of years of non-compliance; and
  • the sophistication of the taxpayer.

Those whose applications are accepted under the Limited Program will not be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer. Interest on outstanding tax balances will be payable, however, and other penalties will be levied.

Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged, and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief, specifically for the years preceding the three most recent years of returns required to be filed.

There are, as well, other changes to the administration of the Voluntary Disclosure Program. The most important of those, from a taxpayer’s point of view, are the following.

As of March 1, 2018, taxpayers who make an application under the VDP must pay the estimated taxes owing as a condition of qualifying for the Program. Where the taxpayer is financially unable to do so, he or she can request that the CRA consider a payment arrangement. Formerly, there was no requirement to pay outstanding taxes owed as a condition of participating in the VDP.

As well, taxpayers could formerly “test the waters” with respect to making a voluntary disclosure by making an anonymous (termed a “no-names disclosure”) disclosure and receiving an opinion on the likely outcome. That option will be discontinued after February 2018 and replaced by a “pre-disclosure discussion” service. That new service will still allow a taxpayer to discuss his or her tax affairs with a representative of the CRA on an anonymous basis, but such discussion will not constitute acceptance into the VDP.