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Davies Otwell

Jamie Golombek: Judge reminds CRA it can’t second-guess a business’s marketing strategy in this case that involved a boat

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If you’re a business owner who has incorporated your business or an incorporated professional who operates their practice through a professional corporation, it can be quite tempting to have your corporation pay for all kinds of personal expenses.

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But if those expenses aren’t legitimately incurred for the purpose of earning income, they could be non-deductible to the corporation and you could get personally assessed a shareholder benefit by the Canada Revenue Agency (CRA) for appropriating corporate funds for personal use, rather than extracting them first on a taxable basis as either a salary, bonus or dividend.

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Similarly, you can also be assessed a taxable shareholder benefit for the personal use of a corporate-owned asset. That’s exactly what happened in a recent tax case involving a Vancouver Island couple, their corporation and the use of a boat.

The sole issue in the case was the value of the personal shareholder benefit, in the 2013 and 2014 taxation years, for their personal use of a boat owned by their corporation. The boat was primarily used by the company to market its marina, fuel and provisions to boaters in the region.

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Over the course of five decades, the couple, through their corporation, developed a “successful, substantial” marina business on the island that provided a diversified range of goods and services to a large, but remote group of small communities, mostly near the water’s edge, on the islands north of Vancouver Island.

“It might not be hard to picture their region, community and commercial activities appearing in a Canadian TV documentary on a documentary channel, providing the context for a Canadian reality TV show on History channel, or providing a locale for a sequel to Corner Gas or a remake of The Beachcombers,” the judge said.

The couple operated their business together. The husband did all the steering of the boat, and his wife acted as a bookkeeper, paying suppliers and balancing bank statements. Today, the business is mostly run by the couple’s children and their families.

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The tax authority has no business telling a businessperson how to run that person’s business

Tax Court Judge

The boat at the centre of the tax dispute is a 36-foot pleasure craft. Its primary business use was to market the marina directly to boaters visiting, residing or working in the region. This was done by taking the boat out to meet boaters at all the other smaller marinas in the region, or in the bays where they were moored.

It was also used to engage with other local marinas, and their owners and operators, as well as their clients. This was typical direct personal marketing. Many of these other boaters were already users of their marina given its size and location, and those who weren’t were bona fide potential clients.

The boat was also used to travel to, attend and entertain at boat shows in British Columbia and Washington, which the couple considered key to their business and at which they rented booths for their marina.

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The couple did not own a boat before they bought the marina, have never taken the boat on any excursions, “not even short ones,” as they could not leave their daily business responsibilities during the boating season. When they did their marketing travels in the boat to other marinas and moorings, they did so mostly in the evenings, after their normal workday responsibilities.

Their marketing trips proved very successful as the marina’s mooring and fuel revenues increased each year. Their marketing was described as “creating opportunities to socialize with clients and potential clients, dining at other marinas with them, entertaining them on the … (boat), and generally chatting up boating in the region and their marina and facilities.”

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The boat was also used in other aspects of the business for incidental transportation, such as delivering parts to commercial entities in the region. Personal use of the boat was “very occasional, less than a half-dozen times.” For example, they occasionally took friends or family out for whale watching in the harbour immediately in front of the marina.

In each of the two tax years under review, the couple recorded and paid $18,000 to their corporation for their personal use of the boat. This was done in consultation with their accountant, and the couple thought that this amount was “a conservatively high amount in the circumstances.”

The court found that the personal use of the boat was minimal and in the range of five per cent. In other words, substantially all of its use as a boat was for bona fide business purposes. Even though a benefit was enjoyed by the couple’s limited personal use of the boat, it was accounted for and this amount was within range of a reasonable fair market value.

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The CRA had questioned the “marketing” activities of the couple, suggesting there was a personal element to the marketing that needed to be taken into account when valuing the personal shareholder benefit.

The judge disagreed, saying the “CRA has not been allowed by the courts to simply second-guess a business’s marketing strategy or efforts.” Citing prior jurisprudence, “The tax authority has no business telling a businessperson how to run that person’s business … A business may opt to advertise an activity in which its owner … has a keen interest or a degree of personal satisfaction. There is no reason why the expense of a particular form of advertising should be disallowed by the (CRA) solely because of the owner’s interest, satisfaction.”

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The judge said the couple’s marketing activities on the boat were “bona fide and primarily undertaken for business purposes,” and that the expenses were reasonable. The only thing left to decide was whether the couple’s personal use was properly accounted for. The judge concluded that given their personal use of the boat was in the five-per-cent range, the $18,000 they annually paid to the corporation for personal use was reasonable and no shareholder benefit ought to be assessed.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Jamie Golombek: A Federal Court of Appeal decision in June dealt with the tuition carryforward rules under some interesting circumstances

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Students are preparing to head back to school so it’s a good time to walk through the basics of the federal tuition tax credit for postsecondary education and look at an unusual recent tax case involving the tuition carryforward rules.

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The tuition tax credit for post-secondary education is a federal non-refundable credit for the cost of tuition fees (tax credits for education and textbook amounts were discontinued as of 2017). Since the credit is non-refundable, some students may find they don’t need to claim all of it to reduce their income tax to zero since their taxes owing on minimal income from part-time or summer employment may be fully offset by the enhanced basic federal tax credit ($14,398 for 2022).

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Students who don’t use their full tuition credit have a couple of options. They can either transfer the unused amounts to a spouse or partner or (grand)parent, or carry forward unclaimed amounts (including any education and textbook amounts prior to 2017) indefinitely. The individual claiming the transferred credit, such as a parent (which includes a natural parent, step-parent, adoptive parent or even a spouse’s or partner’s parent), need not be the one who paid the tuition.

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The maximum amount that can be transferred is $5,000 less the amount of tuition for the current year that is claimed on the student’s return. In addition, amounts carried forward from previous years must be used by the student before the current year’s amounts, and any carried-forward amounts that are not completely used by the student in the current year can only be claimed by the student in a subsequent year and cannot be transferred.

The case

A Federal Court of Appeal decision in June dealt with the tuition carryforward rules, albeit in a very unique set of circumstances. A former student was appealing a 2020 decision of the Tax Court that denied him the tuition carryforward credit.

The person is now a tax lawyer who lives in Calgary, having immigrated to Canada from the United States in 2012. From 2002 to 2011, he attended university on a full-time basis in the U.S., starting at the University of Pittsburgh, followed by law school at Duquesne University, and then earning his master’s degree in tax at the University of Florida.

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He paid tuition totalling a little more than US$159,000 during this period, which, using historical Canada-U.S. exchange rates, amounted to $179,000 of tuition in Canadian dollars. The universities provided him with signed copies of Canada Revenue Agency Form TL11A Tuition and Enrolment Certificate – University Outside Canada, which is used to certify eligibility for claiming tuition fees of a student attending a university outside Canada.

After immigrating to Canada, he filed Canadian income tax returns for the 2002 to 2011 tax years. All these tax returns were filed after he became a resident of Canada even though he was neither a resident of Canada nor a deemed resident of Canada from 2002 through 2011. These returns were assessed (and reassessed) by the CRA on the basis that he had no tax payable in Canada.

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When filing his 2012 Canadian tax return, which was the first year he was considered a tax resident of Canada, he claimed his unused tuition tax credits carried forward based on the tuition paid to the U.S. universities from 2002 to 2011 when he was not a Canadian resident and had no source of income in Canada.

The CRA reassessed him for his 2012 taxation year to disallow the claimed tuition tax credits and to reduce his tuition tax credit carryforward amount to zero. He appealed this reassessment to the Tax Court of Canada, which heard the case in 2020.

The issue before the court was whether he should be entitled to a tuition tax credit in each of the tax years from 2002 through 2011 because of tuition paid to universities in the U.S. in those years. These credits, he believed, resulted in him having an unused tuition tax credit balance at the end of 2011 that he could then deduct in computing his tax payable in 2012 and subsequent tax years once he became a resident in Canada.

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The question came down to whether the tax rules governing tuition and tuition carryforward credits apply to all non-residents (as he argued) or only to those non-residents who are considered taxpayers in the years for which tuition is paid and for whom that year is a taxation year (the CRA’s position).

The CRA argued that when a non-resident individual is not required to file an income tax return for a particular year, because that individual was not employed in Canada, did not carry on business in Canada and did not dispose of taxable Canadian property, that individual is simply not considered a taxpayer for purposes of the Income Tax Act, and, therefore, that year is not a taxation year of that individual.

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Consequently, the individual is neither required, nor even able, to compute their tax payable the same way a Canadian resident taxpayer would. As a result, even when a non-resident pays tuition to an eligible education institution for that year, that individual has no tuition tax credit for that year and no unused tuition tax credits at the end of that year to carry forward.

After a detailed and lengthy legal analysis, the Tax Court judge agreed, concluding that because the tuition credit rules require an individual to be a student during a taxation year to claim a tuition credit, a student is not entitled to a tuition tax credit in any year that is not a taxation year.

Put another way, because the person in question here was not considered to be a taxpayer in any of the years from 2002 to 2011, none of those years was a taxation year for him. Accordingly, he had no tuition tax credits in any of those years, and had nothing to carry forward to deduct against his tax payable in 2012.

In June 2022, a three-judge panel of the Federal Court of Appeal, in a short, three-page decision delivered from the bench, dismissed the former student’s appeal, finding the Tax Court’s 2020 decision to be correct.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Lifestyle planning should be the first step in your overall plan so you can have a good life both now and in the future

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By Julie Cazzin and Allan Norman

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Q: My spouse and I are doing some retirement planning and running some projections on future income in retirement. But we’re wondering what happens to Canada Pension Plan (CPP) and Old Age Security (OAS) payments in retirement when a spouse dies? Any info would help. — Thanks, Fernando

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FP Answers: Retirement planning often revolves around a couple living a healthy active lifestyle and then dying around age 90 or 95. But what happens when a spouse dies early or becomes disabled? Dreams die and finances change.

I’ll share two personal experiences with the hope that you can use them in your own life and planning so you never get to a point where you look back and think, “Rats! If I had only known, I would have travelled to … or retired earlier or …”

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Four years ago, my wife Caroline went out for a morning run and returned home with a brain injury and now, among other things, she can no longer drive or comfortably travel in a moving vehicle for more than 10 minutes. She can’t travel. As long as I’ve known my wife, she has always wanted to follow in her mother’s footsteps and spend her winters in Florida. She may never get to Florida again.

We could have taken more trips to Florida when she was fit and able, but we didn’t. There was always a reason to put it off until next year, or someday down the road. We lived like we had all the time in the world.

But time doesn’t stand still and the older we get, the faster time flies by. There are no do-overs, and there comes a time when we can’t do what we used to do and, eventually, we die. It’s a fact that shouldn’t be forgotten when thinking about the things you want to have and do. What’s your reason for not doing them today?

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Your planner should be helping you identify, achieve and maintain your desired lifestyle without the risk of you ever running out of money, or dying with too much money. You want to have a good life now as well as a good life in the future. This is lifestyle planning, the first step in an overall plan.

Here’s another personal example. Six years ago, I lost my mom. I asked my dad what the financial consequences were for him when mom passed. Mom’s OAS benefits stopped. There are no survivor benefits associated with OAS. My dad also lost his OAS due to the clawback tax rules.

As a couple, mom and dad were able to split their pension income. Once mom passed, dad wasn’t able to split his pension income anymore, resulting in 100 per cent of his OAS being clawed back. Mom was a stay-at-home mom and had a small CPP pension. Dad didn’t get any of her CPP pension.

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I find a lot of people are under the impression that if their spouse passes, they’ll receive 60 per cent of the other’s CPP benefits. But CPP is not like a traditional defined-benefit plan. A CPP recipient can only receive the maximum CPP. My dad was already getting the maximum CPP, so he wasn’t eligible to receive any of my mom’s CPP. He did, however, receive the one-time $2,500 CPP survivor death benefit.

The other thing dad pointed out was that the company he worked for provided a defined-benefit plan. He took a reduced pension when he retired so that if he died first, mom would continue to receive a portion of his pension. Well, mom died first and he’s still taking a reduced pension for a benefit mom will never receive.

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As for dad’s expenses, he didn’t find they dropped much. Grocery costs are a bit lower and now there is one car in the driveway rather than two. My dad’s suggestion to anyone who has lost a loved one is to stay active and continue doing things. Instead of dad taking mom to a play or an Ontario Hockey League game, he would call a friend or acquaintance to go with him.

And how’s dad doing now? About two years after my mom’s passing, he met a wonderful life companion and, at age 84, he just arrived home from a river barge cruise in Southern France. He’s staying active, and he’s back travelling again. He is living a full life and making the best use of the time he has left.

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I know most people are busy, routines are hard to change and very few people know what they want. Start by thinking about your current lifestyle. What would you like more of?  What would you like less of? Remember that life is not a rehearsal. What are you waiting for?

Allan Norman, M.Sc., CFP, CIM, RWM, provides fee-only certified financial planning services through Atlantis Financial Inc. Allan is also registered as an investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is provided as a general source of information and is not intended to be personalized investment advice.

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It’s possible that you may qualify for a minimal amount from the Guaranteed Income Supplement

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By Julie Cazzin with Brenda Hiscock

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Q: I’m a 68-year-old retired teacher with a small pension. My assets include $69,000 in registered retirement savings plans (RRSPs) and $34,000 in a tax-free savings account (TFSA), and it’s mostly in cash. I also have $150,000 to invest right now from the recent sale of a property. It’s sitting in cash in an unregistered investment account. My monthly income includes $800 from my teacher’s pension, $780 from Canada Pension Plan (CPP) and $642 from Old Age Security (OAS).

I need about $3,500 monthly to live comfortably. I own half a condo with my daughter, Madeleine, and we are mortgage free. The condo is worth $450,000 (my half is $225,000) and we plan to live here together throughout my retirement years. How should I make up the extra $1,278 monthly that I need to live comfortably? And how should I invest my RRSP, TFSA and other money so I can draw the needed money without running out? — Thanks, Cali

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FP Answers: Cali, right now, you’re earning $26,664 annually in taxable income including OAS. I’m not sure what province you are in, but you are paying the lowest possible tax rate at that level of income.

Based on these figures, it’s possible that you may qualify for a minimal amount from the Guaranteed Income Supplement (GIS) now or in the future. To qualify for the GIS, your income excluding OAS must be below $20,208 if you’re single, widowed or divorced. This benefit is proportional to your income, non-taxable and paid monthly to low-income seniors. You should check your eligibility each year.

Given that you are so close to the maximum income, the amount you may receive, if any, would be very small, and won’t change the outcomes of my calculations below in a material way.

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Cali, you have $69,000 in RRSPs as well as some unused RRSP contribution room. Unfortunately, there wouldn’t be any tax benefits for you in making RRSP contributions since they cannot be deducted against your current income sources.

If you qualify for GIS benefits at your current income level, you may consider delaying your RRIFs until age 72. Otherwise, it may be prudent to convert the RRSP to a registered retirement income fund (RRIF) this year and begin taking minimum payments. That would provide about $3,000 of annual income, topping out at about $4,000 annually for life. Some people like the comfort of a predictable income for life.

Alternatively, given the RRIF is relatively small, you may consider drawing it down over the course of the next few years, ensuring that the amount you take each year keeps your total income within the lowest tax bracket, which is $50,197 in 2022.

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You indicate that you recently sold a property and have $150,000 to invest. You should top up your TFSA to the maximum to shelter funds from tax. I’m unsure of your TFSA contribution room, as I don’t know the value of your original contribution(s) and withdrawals. But for someone who has never invested in a TFSA before, the 2022 limit is $81,500. If you are uncertain as to how much TFSA contribution room you have, you can check your “My Account” on the Canada Revenue Agency’s website or you can call 1-800-267-6999.

The remaining funds of around $100,000 can go into non-registered investments.

Your remaining monthly cash needs should be drawn from your non-registered investments until those funds are depleted, and then you can draw down the TFSA account. It is advisable to draw down your taxable account to zero while still funding the TFSA each year, because the TFSA funds grow tax free.

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I have run some numbers, and based on the information provided, using a four-per-cent rate of return and two-per-cent rate of inflation, which is the Bank of Canada’s target, your liquid funds may be depleted in your early-to-mid 80s, with a spending rate of $42,000 annually.

If you were to reduce spending to $34,000 annually, you would likely have enough liquid assets to sustain you without borrowing against your home. But at your current level of spending and using the assumptions above, you may need to begin borrowing against the home in your early 80s to sustain your lifestyle. This would also depend on your risk tolerance and investment returns. If returns were higher, your money would last longer.


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Cali, you should also prioritize an investment strategy for your cash. Consulting a good fee-for-service planner can help you come up with a portfolio and investment strategy that will suit your risk tolerance. The two of you could go through the different options available, everything from mutual funds and exchange-traded funds (ETFs) to individual stocks and bonds.

A good investment strategy to consider would be a simple, passive, low-cost approach that involves buying a solid all-in-one ETF that holds a variety of equity and fixed-income ETFs. These can be bought through a discount broker and don’t require any rebalancing, so you can invest this way yourself without an adviser for the long term. A robo-adviser is another low-fee way to passively invest with a bit more customer support than a brokerage.

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If you feel more comfortable having an adviser in charge of your investments, then the fees would range from 1.25 per cent to three per cent annually at your level of assets. It’s up to you which approach you prefer. In the end, fully understanding your investment options and your portfolio strategy will help you to have peace of mind about your future.

Brenda Hiscock is a fee-only, advice-only certified financial planner at Objective Financial Partners Inc. in Toronto.

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Jamie Golombek: Lack of appropriate records can prove problematic, as these two tax cases show

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It’s perhaps no secret that nearly all casual babysitting services are paid in cash. After all, it’s fast, easy and convenient. But the main reason a sitter may request cash for their services is that there’s no record of them having received the income, making the amounts nearly impossible to trace should the Canada Revenue Agency question the sitter’s reported income under our self-assessment, “honour” tax system.

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But the lack of appropriate records can prove problematic for some taxpayers. For example, a parent who incurs babysitting costs to enable them to earn income from employment, carry on a business or attend school may be able to claim those costs as tax-deductible child care. It would be wise for them to hang on to proof of payment should the CRA question the deductibility of those expenses.

The receipt of cash, even if reported on a return, can also be problematic for the sitter. Two recent cases dealt with babysitter claims for COVID-19-related benefits, each of which hinged on whether they could prove they earned at least $5,000 in income to qualify. Let’s take a brief look at each case.

The Alberta grandmother

The first case involved an Alberta taxpayer who immigrated to Canada from Bangladesh following the death of her husband in 2001. She lives with her son and his family, and provided babysitting services for her son’s children, for which she was paid in cash. In 2020, she applied for benefits under the Canada Recovery Benefit (CRB) program, and collected benefits for two periods in the fall of 2020.

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Subsequently, the CRA conducted a validation review for CRB eligibility and asked the taxpayer to submit documents to support her claim that she met the criteria of having a minimum earned income of $5,000 in 2019, 2020 or in the 12 months preceding the date of her benefit application.

The taxpayer submitted a letter dated Nov. 27, 2020, enclosing babysitting receipts for 2019 and 2020, as well as a partnership income statement for the 2019 tax year relative to a business in Bangladesh. The CRA, after reviewing the documents, concluded she didn’t meet the criteria. The taxpayer asked for a second review, which was conducted in February 2021, but the CRA reached the same conclusion.

The taxpayer then appealed to Federal Court, asking it to determine whether the CRA’s decision to deny her the CRB was “reasonable.” As with prior decisions, the court must decide whether the decision under review “bears the hallmarks of reasonableness — justification, transparency and intelligibility — and whether it is justified in relation to the relevant factual and legal constraints that bear on that decision.”

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The taxpayer claimed she was paid $3,500 in babysitting income in 2019, and $1,600 in 2020, which, when combined with her Bangladesh income, would exceed the $5,000 required threshold. But all payments were made in cash, and the evidence that was submitted — a combination of invoices and bank statements — “did not add up,” according to the CRA.

The CRA concluded there was insufficient documentary evidence to support the taxpayer’s claim of babysitting income. As a result, the judge found “no reviewable error” in the CRA’s decision, and thus no basis for judicial intervention.

The Quebec babysitter

The second case, which was decided last week, involved a babysitter who claimed the Canada Emergency Response Benefit (CERB) for the seven four-week periods from March 15, 2020, to Sept. 26, 2020, receiving a total of $14,000 in government benefits.

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In October 2020, the taxpayer’s file was selected for a first review of CERB eligibility. In order to be eligible, a taxpayer had to meet two criteria: income of at least $5,000 from (self)employment in 2019 or in the 12 months preceding the first CERB application, and have stopped working due to COVID-19.

The taxpayer stated he worked in 2019 as a babysitter in a private home. That year, his employer lost his job and the sitter found himself unemployed. He looked for new work, but was unsuccessful.

The reviewing CRA officer requested proof of income for the amount of self-employment income claimed, noting that the taxpayer had “no documentation supporting the invoices submitted, and no bank statement, since he was paid in cash and did not deposit the amounts paid” in a bank account.

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The CRA also had trouble with the second criterion. Although the taxpayer was working in 2019, he was terminated in 2019 after his employer lost his job. Since “there was no talk of COVID-19 in 2019,” the taxpayer cannot have lost his job due to COVID-19. The CRA agent, therefore, concluded the taxpayer was ineligible for the CERB based on the information submitted.

  1. Contributions to an FHSA will be tax deductible, but withdrawals to purchase a first home, including from any investment income or growth earned in the account, would be non-taxable, like a tax-free savings account (TFSA).

    Ottawa’s new Tax-Free First Home Savings Account is coming: What you need to know

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The taxpayer requested a second-level review, which was conducted by a different CRA officer in December 2020. That officer also concluded he was ineligible for the CERB.

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In November 2021, the taxpayer asked the Federal Court to determine whether the CRA’s decision to deny him the CERB was reasonable. The judge, after reviewing all the evidence, concluded that “the reasons given by the (CRA) agent for rejecting the CERB application are intelligible and justified in light of the evidence and the CERB legislative regime.”

As the judge cautioned, “A taxpayer who wishes payment in cash must be all the more concerned to be able to prove the payment in order to obtain a benefit under the act. It was up to the officer to assess the sufficiency of the evidence and, in this case, she was not satisfied with the evidence filed by the (taxpayer).”

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Small, seemingly insignificant purchases can be the difference between a budget that works and one that doesn’t

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We tend to put less importance on purchases that are only a few dollars: $2 here, $5 there, $20 for this fee or that and so on. However, those small purchases add up to big numbers in the big scheme of things, and can be the difference between a budget that works and one that doesn’t.

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Whether we have a monthly spending plan or not, many of our spending decisions are not actually decisions at all. Quite often, we don’t consciously think about how every individual purchase affects our bottom line. We run on autopilot with our spending, and tend to keep it running until we hit a certain dollar threshold.

That threshold looks different for everyone. It may be $10 for some, and $100 for others, but there is usually a point at which we turn off the autopilot and think a bit more intentionally about the money we are about to spend.

For example, we may think nothing of grabbing a snack when we hit the checkout at the grocery store, or even subscribing to a new streaming service with a cheap monthly fee. But when it comes to spending $150 on something, we may double check our account before tapping or clicking.

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Alternately, we may note and be very aware of these small expenses or purchases, but rationalize them: “It’s only $2,” or, “I don’t spend a lot, so this small amount is OK,” or, “I owe so much anyway, what’s a little more?” Sound familiar?

These small, seemingly insignificant purchases are what we like to call financial death by a thousand cuts. Any one small purchase or expense in and of itself won’t be enough to make or break a budget or hinder your financial goals. But add up all these small, individual spends from all areas of your life throughout the year, and they can become very significant when you consider what the money could have done for you.

Given the choice, would you rather spend $1,000 on drive-thru coffee or put $1,000 in a registered education savings plan that has government contributions and will earn, at the very least, interest?

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If you’ve ever wondered where your money goes and how those little financial cuts are injuring your budget, tracking your expenses is a great exercise. The numbers don’t lie. Tracking your expenses, even for a short time, — say, a month — will reveal your spending habits and make you aware of what you’re spending your money on, where you’re spending it and how much you’re spending.

Once you know this, you can make more informed decisions about where you want your money to go and what you want your money to do for you.

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As the saying goes, knowing is half the battle. Knowing your spending patterns and habits can go a long way toward making changes to those behaviours. Impulse, emotional or convenience buying can be some of the biggest challenges in the war against needless spending.

A great defence against impulse or emotional purchases, whether online or in person, is to leave items in your cart (or at the store if you are shopping in person). For small online purchases, leave it in the cart for 24 to 48 hours, and even longer for bigger purchases. Delaying the gratification of the impulse buy allows you to pause and intentionally determine if your purchase is a want or a need and whether you can afford it or not right now.

A little planning goes a long way when it comes to being aware and choosing how we want to consciously spend our money. Convenience isn’t just next-day delivery. Convenience costs occur when, for example, we don’t plan for dinner and end up going through the drive-thru or ordering in. It’s when we opt for pre-cut, pre-packaged foods instead of make-your-own options.

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Planning and leaving time in your schedule, even just once in a while, can ultimately boost your cost savings.

Portioning your own snacks, cutting your own veggies, sticking to a meal plan, shopping with a list and bringing lunch to work can help address those extra costs associated with convenience food purchases.

Remember these tips as you work on your spending plan:

  1. Tracking expenses shows you where you might be overspending or what areas you may be spending more on than you thought.
  2. Planning ahead, especially around drinks, meals and snacks, helps avoid convenience costs.
  3. Creating a plan, and giving every dollar coming into the household a job to do, allows you to align your spending with your financial goals.
  4. Being aware of your emotions as they relate to your spending habits can help you curb emotional and impulsive spending.

The cost of essential items is still rising, but the reality for most of us is that our incomes are not rising at the same rate. The little things do matter when it comes to our finances. And they most certainly add up.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 25 years.

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Contrary to popular opinion, drawing extra to minimize high after-death taxes might not make financial sense

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By Julie Cazzin with Allan Norman

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Q: I’ve always believed it’s best to draw down one’s registered retirement income fund (RRIF) or life income fund (LIF) to zero by about age 85 to 90 to minimize the end-of-life tax bill. But I recently wondered what the result would be if I just did the minimum withdrawal each year, let the funds grow tax free and paid the very high tax bill upon the passing of the last surviving spouse.

I was surprised. My numbers showed that the best approach is to just do the minimum withdrawals and pay the higher tax at life’s end. You’ll end up with more after-tax dollars that way. What do your numbers tell you about the two fundamentally different approaches to maximize one’s after-tax position on RRIF/LIFs? — Regards, John in Calgary

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FP Answers: John, a lot of people tell me they want to get their money out of their RRIF before they die. Often, they’ve either had a parent die and the estate paid a huge amount of tax, or they’ve been told they’ll lose 50 per cent of their RRIF to taxes when they die.

While it’s not quite 50 per cent, depending on your province, the maximum lost to tax will range from 40 per cent to 47 per cent. Still, working your whole life to save that much money, only to potentially lose almost half when you die is painful.

People focus on the final tax bill, and I understand why. We’re taxed throughout our lives: on our income, when we purchase goods and services, when we sell a second property, and so on. Tax, tax, tax — it’s everywhere. And then when we die, boom, another 40 per cent to 47 per cent is potentially gone. But is drawing more money than you need from your RRIF to support your lifestyle goals really the right thing to do?

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Drawing extra money from your RRIF, which is a tax shelter available to every working Canadian, means you have to put it somewhere if you’re not spending it. You can add it to a tax-free savings account (TFSA), which is another tax shelter, and in most cases is the usual thing to do if you don’t have non-registered investments available to top up your TFSA. You’re likely better off topping up your TFSA with non-registered money, which is not sheltered from tax, then to take it out of your RRIF.

But what if you have more than enough money to last your lifetime, your TFSA is maximized, you have non-registered investments, and you want to maximize the amount you leave to children? Then the question becomes: will paying a little extra tax today save me tax when I die, thus allowing me to leave more money to my kids?

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Let’s think about this. If you have $10,000 in a RRIF, it will compound tax sheltered until the day you die or draw it out, at which time it’s 100-per-cent taxable. Drawing $10,000 from your RRIF means being taxed at your marginal tax rate. A marginal tax rate of 30 per cent leaves you with $7,000 to invest in a non-registered account. Projecting ahead, $7,000 invested will grow to a smaller amount than $10,000 would.

In addition, you must pay tax on any ongoing earned interest, dividends or capital gains on non-registered investments, and that income may also push you into the next tax bracket or impact government benefits or credits, such as the Old Age Security (OAS) or age credit. Finally, you’ll be paying capital gains tax on the growth of your investments when you die. The taxable amount on capital gains is currently 50 per cent as opposed to 100 per cent on RRIFs.

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Taking those three items into account — a smaller investment, annual taxation and the capital gains tax at death — does it make sense to draw extra from a RRIF and invest it in a non-registered account?

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In most cases, the answer is no. The higher your marginal tax rate is, the less likely it makes sense to draw extra money from your RRIF and invest it in a non-registered account. And the more conservative your investment approach (if you invest for interest or dividend income, say), the less likely it is that drawing extra from your RRIF makes sense.

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Of course, every person’s situation is different, and we need to be careful with generalizations. John, congratulations for doing a preliminary run on the numbers yourself and not being led astray by focusing solely on RRIF taxation at death.

But do me a favour. If you have children, let them know you purposely left money in your RRIF so you could leave them more money. If you don’t, they’ll only see the tax bill and may wonder, why would dad, or his financial planner, do such a dumb thing and leave all that money in a RRIF? Seeing how thoughtful your approach was to your RRIF will leave them confident you got the most for your money — and your estate.

Allan Norman, M.Sc., CFP, CIM, RWM, provides fee-only certified financial planning services through Atlantis Financial Inc.  Allan is also registered as an investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is provided as a general source of information and is not intended to be personalized investment advice.

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Jamie Golombek: Plan gives first-time homebuyers the ability to save $40,000 tax-free towards the purchase of a home

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The federal government this week moved one step closer to launching the new Tax-Free First Home Savings Account (FHSA) with the introduction of draft legislation and a request for comments.

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The FHSA is expected to launch at some point in 2023, so here’s a guide to what we know so far to help get you prepared.

The basics

This new registered plan gives prospective first-time homebuyers the ability to save $40,000 on a tax-free basis towards the purchase of a first home in Canada. Like a registered retirement savings plan (RRSP), contributions to an FHSA will be tax deductible, but withdrawals to purchase a first home, including from any investment income or growth earned in the account, would be non-taxable, like a tax-free savings account (TFSA).

To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. You must also be a first-time homebuyer, meaning you have not owned a principal residence in which you lived at any time during the part of the calendar year before the account is opened, or at any time in the preceding four calendar years.

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The FHSA can remain open for up to 15 years or until the end of the year when you turn 71 years old. Any savings in the FHSA not used to buy a qualifying home by this time could be transferred on a tax-free basis into an RRSP or registered retirement income fund (RRIF), or withdrawn on a taxable basis.

Eligible individuals will be able to contribute $8,000 annually, up to a $40,000 lifetime contribution limit. There’s a one-per-cent per-month penalty tax for any overcontributions. The annual contribution limit will apply to those made within a particular calendar year. Unlike RRSPs, contributions made within the first 60 days of a subsequent year can’t be deducted in the current tax year.

Eligible individuals will be able to contribute $8,000 annually, up to a $40,000 lifetime contribution limit.
Eligible individuals will be able to contribute $8,000 annually, up to a $40,000 lifetime contribution limit. Photo by Getty Images/iStockphoto

The draft legislation also increased the flexibility of FHSA contributions by allowing an individual to carry forward unused portions of their annual contribution limit up to a maximum of $8,000. This means that if you contribute less than $8,000 in a given year, you can then contribute any unused amount in a future year, in addition to your annual contribution limit of $8,000 (subject to the $40,000 lifetime limit).

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For example, if you only contribute $5,000 to an FHSA in 2023, you’ll be able to contribute $11,000 in 2024 ($8,000 plus the unused $3,000 of room from 2023). Note that carry-forward amounts only start accumulating after an individual opens an FHSA for the first time.

You can have more than one FHSA, but the total amount you contribute to all your FHSAs can’t exceed your annual and lifetime contribution limits.

Like RRSP contributions, you won’t be required to claim the FHSA deduction in the tax year in which a contribution is made. The amount can be carried forward indefinitely and deducted in a later tax year, which may make sense if you expect to be in a higher tax bracket in a future year.

An FHSA is permitted to hold the same types of qualified investments that are currently allowed in a TFSA and RRSP, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.

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Withdrawals

To withdraw funds from an FHSA on a non-taxable basis, certain conditions must be met. First, you must be a first-time homebuyer at the time of withdrawal, as discussed above. You must also have a written agreement to buy or build a qualifying home before Oct. 1 of the year following the year of withdrawal, and you must intend to occupy that home as your principal place. The home must be in Canada.

If you meet the conditions, the entire balance in the FHSA can be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals. The FHSA must be closed by the end of the year following the first qualifying withdrawal and you are not permitted to have another FHSA in your lifetime.

Individuals will be able to transfer funds from one FHSA to another FHSA, or to an RRSP or a RRIF, all on a tax-free basis.

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If funds are transferred to an RRSP or RRIF, they will be taxed upon ultimate withdrawal. These transfers won’t affect RRSP contribution room, nor would they reinstate an individual’s $40,000 FHSA lifetime contribution limit.

Individuals will also be permitted to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. These transfers would not be tax deductible and will not reinstate an individual’s RRSP contribution room.

Unlike the RRSP, the FHSA holder is the only taxpayer permitted to claim deductions for contributions made to their FHSA. In other words, you can’t contribute to your spouse’s or partner’s FHSA and claim a deduction. That said, the government will permit you to give your spouse or partner the funds to make their own FHSA contribution without the normal spousal attribution rules applying.

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Death, taxes and other matters

As with TFSAs, you’ll be able to designate your spouse or common-law partner as the successor account holder, in which case, the account can maintain its tax-exempt status after death. The surviving spouse or partner would then become the new holder of the FHSA following the death of the original holder.

Inheriting an FHSA in this way won’t affect the surviving spouse’s FHSA contribution limits. If the beneficiary of an FHSA is not the deceased account holder’s spouse or partner, the funds would need to be withdrawn, paid to the beneficiary and be taxable to them.

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Like RRSPs and TFSAs, interest on money borrowed to invest in an FHSA won’t be tax deductible, and you won’t be able to pledge FHSA assets as collateral for a loan. In addition, FHSAs will not be given creditor protection under the Bankruptcy and Insolvency Act.

As a final note, the Home Buyers’ Plan, which allows first-time homebuyers to withdraw up to $35,000 from an RRSP to buy a first home, will continue to be available, but you won’t be permitted to make both an FHSA withdrawal and an HBP withdrawal for the same home purchase.

Taxpayers with comments or suggestions about the FHSA proposals are encouraged to send them to Consultation-Legislation@fin.gc.ca by Sept. 30, 2022.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Expert says they could have a comfortable retirement with a five-figure monthly after-tax income

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In a corner of the Greater Toronto Area, a couple we’ll call Terry and Mary, both 42, are raising two children, ages 13 and 14. The couple has gross income of $263,200 per year. Terry brings home $13,667 per month after tax from his job in technology while Mary, a homemaker, reinvests $1,620 per month generated by her private real estate loans. Her present returns are not included in household income.  They have a $1.4-million house with no mortgage, $603,000 in RRSPs, $223,000 in TFSAs, $496,000 in non-registered investments, $55,000 in cash, and $99,000 in RESPs. A small car with an estimated value of $13,000 pushes their net worth less a $200,000 home equity loan to $2,689,000. Terry and Mary would like to retire in ten years in 2032, when both are 52.

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Terry and Mary.

Email andrew.allentuck@gmail.com for a free Family Finance analysis

“What stands out in this case is how solid the family finances are,” Moran said. Of their monthly take-home income, $7,397 goes to savings, so their true expenses are just $6,270 per month or $75,240 per year.

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A 40-year horizon

Retirement in a decade when they are 13 years from the potential start of OAS at 65 and eight years from the earliest start of CPP at 60 is feasible. But there are hazards of extrapolating a few decades of strong investment returns into as many as four future decades of results.

Terry is the main income earner. The family’s financial future is largely in his hands. Mary has undoubted skill as an investor, but her preference is leveraged private real estate lending. Those investments tend to be illiquid and, given that she has outstanding debt backed by her own home equity, they are intrinsically speculative.

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We are assuming a net four per cent return after inflation. That rate reflects the skill of this couple in managing their money. But the fact of high returns conceals a big risk — there are no bonds in the portfolios to cushion equity declines. Nevertheless, we are using Terry ‘s preference for equity investments and Mary’s preference for making private real estate loans. It has worked for them so far.

Risk and returns

The role of bonds in their portfolio would be a backstop to equity and property declines. Many assets can be depressed as interest rates rise, but government bonds, at the least, are free of default risk and usually rise in price when stocks tumble. If Terry and Mary choose to use Government of Canada or even provincial bonds with slightly higher risks than federal debt and a little more yield, they will have very strong anchors for the rest of their portfolio. There is a cost in investing in senior bonds. That’s reduced returns compared to stocks in the long run and even negative returns of late as interest rates have risen.

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The family RESP has $99,000. If the couple doing two-year backup contributions continues to add $900 per month or $10,800 per year and attracts $2,000 from the Canada Education Savings Grant per year until the CESG maxes out at $7,200 per child, then with an assumed rate of growth of four per cent per year until each child is 17  — that’s five years for the elder child, four years for the younger — the plan will have $182,350 or $91,175 per child. That will be enough for four years of tuition and even living on campus or undergrad and post-grad tuition if they live at home.

Their TFSAs have $223,000. If they continue to add $6,000 per year each for another decade and the sum grows at four per cent after inflation, they will have $479,930. That sum, still growing at four per cent per year after inflation and spent over the following 38 years to the couple’s age 90 would provide $23,826 per year.

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Their RRSPs total $603,000. If they add the maximum $29,210 per year for a decade and it grows at four per cent per year after inflation, RRSPs will become $1,257,300 in 2022 dollars. If that sum, still growing at four per cent per year, is spent over the following 38 years, it will provide $62,420 per year.

Their $496,000 in taxable property investments growing at four per cent per year after inflation will become $734,214 in 10 years and then support payouts of $36,450 for the following 38 years.

Retirement income

Adding up the numbers, from ages 52 to 65, they would have $62,240 per year from RRSPs, $23,826 from TFSAs, and $36,450 from taxable investments. That’s a total of $122,516. Split and with no tax on TFSA cash flow, they would have $107,700 per year to spend or $8,976 per month after 15 per cent average tax. That is more than present core spending.

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At 65, they could add Terry’s $10,154 CPP (Mary will have no CPP benefit), and two $8,004 OAS benefits. That would bring the total to $148,678. With 17 per cent average tax but no tax on TFSA cash flow, they would have $127,453 per year to spend. That’s $10,600 per month.

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Our four per cent annual post-inflation growth rate reflects an expectation of higher-than-average returns based on their evident skill as investors. Nevertheless, these retirement income numbers are inherently speculative. Taxable investments consist mainly of real estate loans with risks of default and unknown future interest rates. We assume they will have paid off their HELOC but with unknown timing. Or they may carry the loans as long as the interest cost is less than the returns the loans support.

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However, using the assumed rate of growth and further assuming no defaults on their private real estate loans, the couple should have a retirement in which present spending can be maintained, Moran concludes.

Time and their demonstrated ability to generate high growth rates in their net worth should support a comfortable retirement with a five-figure monthly after-tax income. Their high savings rate is insurance for risks and potential losses intrinsic in Mary’s private mortgage lending.

Retirement stars: 4 **** out of 5

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Jamie Golombek: Looking for some extra cash this summer? You may need to look no further than the CRA’s website

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Looking for some extra cash this summer? You may need to look no further than the Canada Revenue Agency’s website.

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On Monday, the government revealed it has approximately $1.4-billion worth of cheques that have gone uncashed over the years. As of May 2022, there were an estimated 8.9 million uncashed cheques with the CRA.

You may wonder how is this possible? And what can I do to get my money?

Each year, the CRA issues millions of payments in the form of tax refunds and various government benefits. Most of these payments are issued via direct deposit, but some are still issued by cheque. Over time, some of these cheques remain uncashed for a variety of reasons, such as the taxpayer misplacing them or, perhaps, the cheque was never delivered to its recipient due to a change of address.

Beginning this month, the CRA will start notifying, via e-mail, some recipients of the Canada child benefit and its related provincial/territorial programs, GST/HST credit and Alberta Energy Tax Refund recipients of any uncashed cheques they may have.

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The average amount per uncashed cheque is $158. Approximately 25,000 e-notifications will be issued in August and another 25,000 in November, followed by another 25,000 in May 2023.

Since the CRA first launched this initiative back in 2020, it said approximately two million uncashed cheques, valued at a total of $802 million, were cashed by Canadians between Feb. 10, 2020, and May 31, 2022.

To see if you’ve got any uncashed cheques waiting for you, simply log into the CRA’s My Account where you’ll be able to see if you have any uncashed cheques dating back as far as 1998.

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Once logged in, you’ll see an option under “related services” entitled “uncashed cheques.” As government cheques never expire or become stale dated, the CRA cannot void the original cheque and reissue a new one unless you request it. The upcoming e-notifications are meant to encourage taxpayers to cash any cheques they may have in their possession.

“This money belongs to Canadians and we want to help them reclaim these funds,” Breanne Stephenson, a CRA spokesperson, said.

Of course, to ensure you never miss another payment from the CRA, it’s best to sign up for direct deposit so that your government tax refunds and benefit payments are directly deposited into your bank account. This can also be easily done through My Account.

Taxpayers who are not currently signed up for My Account or email notifications can find out if they have any uncashed cheques by calling 1-800-959-8281.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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